Supreme Court clarifies tax exemptions for manufacturing units: State of Gujarat vs. Arcelor Mittal Nippon Steel India Limited (21 January 2022)

Date of the Judgment: 21 January 2022

Citation: (2022) INSC 44

Judges: M.R. Shah, J. and Sanjiv Khanna, J.

Can a company claim tax exemptions on raw materials when those materials are not directly used by the company but are instead transferred to another entity for processing? The Supreme Court of India recently addressed this question in a case involving the State of Gujarat and Arcelor Mittal Nippon Steel India Limited. The core issue was whether a manufacturing unit could avail tax exemptions on raw materials when those materials were not directly used by the unit but were transferred to another entity for processing. The Supreme Court, in this judgment, clarified the conditions for availing tax exemptions on raw materials for manufacturing units under the Gujarat Sales Tax Act, 1969. The judgment was delivered by a two-judge bench comprising Justice M.R. Shah and Justice Sanjiv Khanna.

Case Background

Arcelor Mittal Nippon Steel India Limited (formerly Essar Steel Ltd.) had two manufacturing units in Hazira, Gujarat. Unit No. 1 produced Hot Briquetted Iron (HBI), and Unit No. 2 manufactured Hot Rolled Coil (HRC). The company was registered under both the Gujarat Sales Tax Act, 1969, and the Central Sales Tax Act, 1956. Unit No. 1 was eligible for incentives from 01 August 1990 to 31 July 2004, up to a limit of Rs. 237.59 crores, following a resolution on 07 May 1986. The Government of Gujarat announced a scheme on 26 July 1991, offering special incentives to attract investments in core sector industries. Essar Steel Ltd. invested approximately Rs. 5000 crores for manufacturing HRC in Unit No. 2. This unit was granted a sales tax exemption under Entry No. 255(2) of a notification dated 05 March 1992, for the period from 22 February 1993 to 21 February 2007, up to a maximum of Rs. 2050 crores. This exemption covered purchase tax on raw materials like Naphtha and Natural Gas. The applicable purchase tax at the time was 16% on Naphtha and 20% on Natural Gas. The exemption was specifically for steel manufacturing units, excluding electricity-generating entities.

The original Entry No. 255(2) dated 05 March 1992 required that the eligible units use the purchased goods within Gujarat as raw materials. However, Essar Steel Ltd. sold the Natural Gas and Naphtha to Essar Power Limited (EPL), another company, which used these materials to generate electricity. This electricity was then sold back to Essar Steel Ltd. for use in manufacturing HRC. The Sales Tax Department conducted a surprise visit in July 2001 and later issued a notice on 30 June 2002, questioning the breach of declaration given in Form No. 26. The Assessing Officer initially ruled that no tax was due, but the Deputy Commissioner of Sales Tax issued a notice on 30 May 2005, demanding Rs. 480.99 crores in purchase tax and penalties. The Joint Commissioner imposed purchase tax for the years 1998-1999 and 1999-2000 but set aside the tax for the period until 14 November 2000. The Gujarat Value Added Tax Tribunal allowed the appeals of Essar Steel Ltd., stating that the company was not liable for any tax, interest, or penalty. The High Court of Gujarat upheld this order, leading to the State of Gujarat filing appeals before the Supreme Court.

Timeline

Course of Proceedings

The Sales Tax Department initially raised a dispute regarding the breach of declaration given in Form No.26 by Essar Steel Ltd. for transferring Naphtha/Natural Gas to EPL for electricity generation. The Assessing Officer initially held that no tax was due. However, the Deputy Commissioner of Sales Tax initiated a levy of purchase tax of Rs. 480.99 crores, along with a penalty for the period 1995-1996 to 2005-2006. The High Court restrained the authorities from enforcing the assessment orders, subject to Essar Steel Ltd. depositing 50% of the tax dues. The Joint Commissioner, the first Appellate Authority, imposed purchase tax for the years 1998-1999 and 1999-2000 but set aside the tax for the period until 14 November 2000. The Tribunal allowed the second appeals of Essar Steel Ltd., stating that the company was not liable to pay any tax, interest, or penalty. The High Court dismissed the State’s appeals, mainly on the ground of promissory estoppel, observing that Essar Steel Ltd. had not violated any conditions under the original Entry No. 255(2) dated 05 March 1992. The State of Gujarat then appealed to the Supreme Court.

Legal Framework

The case revolves around the interpretation of Entry No. 255(2) of a notification issued under Section 49(2) of the Gujarat Sales Tax Act, 1969. The original Entry No. 255(2), dated 05 March 1992, provided an exemption from purchase tax on raw materials, processing materials, consumable stores, or packing materials if the eligible unit furnished a certificate in Form No. 26. This form declared that the goods were to be used within the State of Gujarat as raw materials in manufacturing goods for sale. Condition 6 of this entry specified that the eligible unit must actually use the purchased goods within Gujarat for manufacturing goods for sale. The relevant portion of the notification reads:

“The eligible unit shall actually use the goods purchased within the State of Gujarat as raw materials, processing materials or consumable stores in the manufacture of goods for sale within the State of Gujarat or outside the State of Gujarat or as packing materials in the packing of the goods so manufactured.”

Subsequent amendments to Entry No. 255(2) were made on 14 November 2000 and 16 January 2002. The amendment on 14 November 2000, specified that the goods should be used in the industrial unit for which the eligibility certificate was obtained. The amendment on 16 January 2002, allowed the eligible unit to claim exemption even if the goods were used in manufacturing goods for dispatch to another unit within or outside the State. These amendments changed the requirement from use “within the State of Gujarat” to use “in its industrial unit” and later allowed for dispatch to other units. The Form No. 26 was also amended to reflect these changes. The relevant portion of the amended entry reads:

“(1) [in the industrial unit for which the eligibility certificate has been obtained] in the manufacture of goods for sale (2) [within the State or outside the State of Gujarat or for dispatch either to its another unit or division situated within the State for use in the manufacture of other goods for sale by such another unit or division, or to its another unit or division situated outside the State for use in the manufacture of other goods]”

The legal framework also includes Section 45 of the Gujarat Sales Tax Act, 1969, which deals with penalties for non-payment of tax. Sub-sections (5) and (6) of Section 45 provide for penalties when the difference between the tax paid and the tax assessed is more than 25%. The penalty can be up to one and a half times the difference. The relevant portion of the Section reads:

“there shall be levied on such dealer a penalty not exceeding one and one-half times the difference”

Arguments

Appellant (State of Gujarat):

• The State argued that the notification dated 05 March 1992, was the parent notification, and subsequent notifications were either clarificatory or expanded the scope of the exemption. These notifications did not take away any rights conferred under the parent notification.
• According to the original notification and Form No. 26, the exemption was available only if the eligible unit used the raw materials for manufacturing goods in that same unit. The raw materials had to be used by Essar Steel Ltd. in its steel unit for manufacturing steel.
• If the interpretation of the High Court and the Tribunal was accepted, eligible units could transfer raw materials to ineligible entities after availing the exemption. This would defeat the purpose of granting exemptions only to eligible units.
• The State emphasized that power-generating companies were specifically excluded from the list of eligible units. Essar Steel Ltd. sold the raw materials to Essar Power Limited (EPL), which was a power-generating company, thus passing on the benefit of exemption to an ineligible entity.
• The State contended that the provisions of an exemption notification must be construed strictly, and any ambiguity should be interpreted in favor of the Revenue. They cited the Supreme Court’s decisions in Commissioner of Customs (Import), Mumbai vs. Dilip Kumar and Company and Others, (2018) 9 SCC 1 and Union of India and Anr. Etc. Etc. vs. V.V.F. Limited and Another, Etc. Etc., (2020) SCC Online SC 378.
• The State argued that the subsequent notification dated 14 November 2000, was clarificatory and did not modify the basic conditions of the original notification. This notification clarified that the exemption was available only if the unit consumed the raw materials for manufacturing goods in the same unit.
• The State also argued that the principle of promissory estoppel should not apply, as the government has the power to vary or withdraw exemptions. They cited the Supreme Court’s decisions in Union of India and Anr. Etc. Etc. vs. V.V.F. Limited and Another, Etc. Etc. (supra) and Kothari Industrial Corporation Limited vs. Tamil Nadu Electricity Board and Anr., (2016) 4 SCC 134.
• The State argued that every assessment year is independent, and any wrongly granted benefit in earlier years can be corrected in subsequent years.
• The State submitted that Essar Steel Ltd. was liable to pay a penalty under Section 45(5) of the Gujarat Sales Tax Act, 1969, for contravening the provisions of the Act.

Respondent (Arcelor Mittal Nippon Steel India Limited):

• The Respondent argued that there were concurrent findings by the Tribunal and the High Court that Essar Steel Ltd. was eligible for exemption under the original Entry No. 255(2) dated 05 March 1992.
• The respondent submitted that the investment was made in Unit No. 1 pursuant to the Resolution dated 07 May 1986 and in Unit No. 2, pursuant to the Scheme for Special Incentives to Prestigious Units, 1990-95 (Modified). The respondent was entitled to incentives during the eligible period from 22 February 1993 to 21 February 2007.
• The respondent argued that it was always intended to install a captive power plant, but a separate power plant was commissioned by Essar Power Limited (EPL) due to the requirements of the State. The Natural Gas and Naphtha purchased by Essar Steel Ltd. were converted into electricity by EPL and used as an input for manufacturing HRC.
• The respondent contended that it was eligible for exemption under the original notification, which stated that the goods purchased must be used anywhere within the State of Gujarat. The conditions did not restrict the use of goods to the eligible unit.
• When the goods were transferred to EPL within Gujarat for conversion to electricity, the conditions of the original notification were satisfied. The Scheme did not require the goods to be used in the same form in which they were purchased.
• The respondent relied on the Supreme Court’s decision in Assistant Commissioner (CT) LTU and Anr. vs. Amara Raja Batteries Limited, (2009) 8 SCC 209, arguing that a liberal approach should be adopted when determining the scope of incentives.
• The respondent argued that the State did not raise any objection or levy any tax liability before the second notification. The Commissioner of Sales Tax had also confirmed that there was no breach by the respondent.
• The respondent argued that the subsequent notifications were not applicable to it, and the original eligibility condition could not be amended. The second notification changed the requirement from use within the State of Gujarat to within the industrial unit.
• The respondent contended that the amendments were prospective and applicable only to industries set up after 14 November 2000. The first notification granted incentives for a fixed period, and the State was estopped from amending the conditions.
• The respondent argued that it had not breached the declaration in Form No. 26, as the Natural Gas and Naphtha were used for generating electricity, which was ultimately used in the eligible unit.
• The respondent contended that the demand for purchase tax was barred by the principle of promissory estoppel and legitimate expectation. The respondent had made huge investments based on the State’s assurance of incentives.
• The respondent further argued that the imposition of penalty was illegal, as it had not breached any conditions. The penalty was imposed mechanically without any application of mind. They relied on the decisions of this Court in Hindustan Steel Ltd. vs. State of Orissa, (1969) 2 SCC 627 and Excel Crop Care Limited vs. Competition Commission of India and Anr., (2017) 8 SCC 47.

The innovativeness of the argument by the respondent lies in its interpretation of the original notification, arguing that the use of goods anywhere within the State of Gujarat was sufficient, and that the conversion of raw materials into electricity before use did not constitute a breach of the conditions.

Submissions of Parties

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether the respondent -dealer-assessee – Essar Steel Ltd. (erstwhile) was/is entitled to the exemption from payment of the purchase tax as per the original Entry No.255(2) vide F.D.’s notification dated 05.03.1992?
2. Whether subsequent amended Entry No.255(2) issued vide Notifications dated 14.11.2000 and 16.01.2002 in any way alters or amends the basic requirements/conditions stipulated as per the first notification dated 05.03.1992?
3. Whether the subsequent amended Entry vide Government Notifications dated 14.11.2000 and 16.01.2002 in any way takes away the right of the respondent to avail the exemption under the first/parent Entry No.255(2) issued vide Notification dated 05.03.1992?
4. Whether there was any breach of the declaration filed by the respondent as per Form No.26?
5. Whether in the facts and circumstances of the case, the demand of the purchase tax on and after 14.11.2000 was hit by the principle of promissory estoppel?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court held that Essar Steel Ltd. was not entitled to the exemption from payment of purchase tax under the original Entry No. 255(2) dated 05 March 1992. The Court reasoned that Essar Steel Ltd. did not fulfill the eligibility criteria by not using the raw materials itself and instead transferring them to Essar Power Limited (EPL). This transfer was a violation of the condition that the eligible unit must actually use the purchased goods. The Court also found that Essar Steel Ltd. had breached the declaration in Form No. 26 by not using the raw materials as declared.

The Court rejected the argument that the subsequent amendments to Entry No. 255(2) took away any rights of the respondent. It held that the amendments were either clarificatory or expanded the scope of eligibility without changing the basic requirement of actual use by the eligible unit. The Court also rejected the argument that the demand of purchase tax was hit by the principle of promissory estoppel. It held that the principle did not apply as Essar Steel Ltd. did not fulfill the eligibility criteria, and there was no clear promise of exemption under the given circumstances. The Court also stated that the doctrine of promissory estoppel is not applicable in taxing matters.

The Supreme Court restored the order passed by the Assessing Officer levying the demand of purchase tax and imposing the penalty. The Court also set aside the orders of the High Court and the Tribunal, which had quashed the demand and penalty. The court reasoned that the penalty was justified under Section 45 of the Gujarat Sales Tax Act, 1969, as the difference between the tax paid and the tax assessed was more than 25%.

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

The Court relied on Commissioner of Customs (Import), Mumbai vs. Dilip Kumar and Company and Others, (2018) 9 SCC 1 and Union of India and Anr. Etc. Etc. vs. V.V.F. Limited and Another, Etc. Etc., (2020) SCC Online SC 378 to emphasize the strict interpretation of exemption notifications. The Court distinguished Assistant Commissioner (CT) LTU and Anr. vs. Amara Raja Batteries Limited, (2009) 8 SCC 209, stating that it did not apply in this case. The Court also cited Commissioner of Central Excise, Bangalore – 1 vs. Bal Pharma Limited, Bangalore and Ors., (2011) 2 SSC 620 to clarify that the doctrine of promissory estoppel is not applicable in taxing matters. The Court rejected the respondent’s reliance on Hindustan Steel Ltd. vs. State of Orissa, (1969) 2 SCC 627 and Excel Crop Care Limited vs. Competition Commission of India and Anr., (2017) 8 SCC 47, stating that the penalty was justified in this case.

The Court held that the respondent was not entitled to the exemption under the original Entry No. 255(2) dated 05 March 1992, because the respondent did not fulfill the eligibility criteria and breached the declaration in Form No. 26. The Court also held that the subsequent amendments were not in conflict with the first/parent notification/Entry No.255(2).

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• Strict Interpretation of Exemption Notifications: The Court emphasized that exemption notifications must be interpreted strictly, and the conditions for availing the exemption must be fulfilled precisely. This principle was crucial in determining that Essar Steel Ltd. did not meet the requirements for the exemption.
• Actual Use Requirement: The Court focused on the condition that the eligible unit must actually use the purchased raw materials. The transfer of raw materials to EPL for electricity generation was seen as a violation of this condition.
• Ineligibility of Power Generating Companies: The Court noted that power-generating companies like EPL were specifically excluded from the list of eligible industries for tax exemptions. The indirect benefit of the exemption to EPL through the transfer of raw materials was not permissible.
• Breach of Declaration in Form No. 26: The Court found that Essar Steel Ltd. had breached the declaration in Form No. 26, which stated that the raw materials were to be used by the unit itself. The transfer of raw materials to EPL was a violation of this declaration.
• Rejection of Promissory Estoppel: The Court rejected the argument based on promissory estoppel, holding that it does not apply in tax matters, especially when the eligibility criteria are not met. The Court emphasized that tax exemptions are concessions and do not create a legally enforceable right.
• Clarificatory Nature of Amendments: The Court viewed the subsequent amendments to the notification as either clarificatory or expanding the scope of eligibility without changing the fundamental condition of actual use by the eligible unit. This interpretation was crucial in rejecting the respondent’s argument that the amendments took away the rights granted under the original notification.
• Penalties for Non-Compliance: The Court upheld the penalties imposed on Essar Steel Ltd., as the difference between the tax paid and the tax assessed was more than 25%. This was in accordance with Section 45 of the Gujarat Sales Tax Act, 1969.

The Court’s decision was driven by a commitment to the strict application of tax laws and the principle that tax exemptions must be interpreted narrowly. The Court also emphasized the importance of fulfilling the conditions specified in the exemption notifications and declarations.

Ratio Decidendi

The ratio decidendi of the judgment is that an eligible manufacturing unit cannot claim tax exemptions on raw materials if those materials are not directly used by the unit but are transferred to another entity, even if the final product is used by the eligible unit. The key elements of the ratio decidendi are:

• Strict Interpretation of Exemption Notifications: Exemption notifications must be interpreted strictly, and any ambiguity should be interpreted in favor of the Revenue.
• Actual Use Requirement: The condition of actual use by the eligible unit is paramount, and any transfer of raw materials to another entity for processing violates this condition.
• Ineligibility of Power Generating Companies: Power-generating companies are generally excluded from the list of eligible industries for tax exemptions, and the indirect benefit of the exemption to such entities is not permissible.
• Breach of Declaration: Any deviation from the declaration given in Form No. 26 regarding the use of raw materials constitutes a breach of the conditions for exemption.
• Non-Applicability of Promissory Estoppel: The principle of promissory estoppel is not applicable in tax matters, especially when the eligibility criteria are not met.
• Clarificatory Nature of Amendments: Subsequent amendments to exemption notifications can be clarificatory or expand the scope of eligibility without altering the fundamental conditions.

The judgment clarifies that tax exemptions are a matter of strict compliance and that any deviation from the stated conditions can result in the denial of the exemption. The judgment also underscores the importance of adhering to the declarations given in Form No. 26 and the need for a clear and direct link between the raw materials purchased and their use by the eligible unit.

Obiter Dicta

While the main focus of the judgment was on the interpretation of Entry No. 255(2) and the eligibility criteria for tax exemptions, there are some obiter dicta in the judgment that provide additional context and guidance:

• Tax Exemptions as Concessions: The Court reiterated that tax exemptions are concessions granted by the government and do not create a legally enforceable right. This principle is important in understanding the limits of the government’s obligation to continue with tax exemptions.
• Strict Compliance with Conditions: The Court emphasized that taxpayers must strictly comply with the conditions specified in the exemption notifications and declarations. Any deviation from these conditions can result in the denial of the exemption.
• Role of Subsequent Notifications: The Court clarified that subsequent notifications can either be clarificatory or expand the scope of eligibility without altering the fundamental conditions of the original notification. This interpretation provides guidance on how to understand the relationship between different notifications.
• Penalties for Non-Compliance: The Court upheld the penalties imposed on Essar Steel Ltd., emphasizing that taxpayers must comply with the tax laws and that non-compliance can result in penalties. This obiter dictum underscores the importance of adherence to tax regulations.
• No Relaxation of Rules: The Court made it clear that there should be no relaxation of rules when it comes to claiming tax exemptions. The eligible unit must fulfil all conditions for claiming the exemption.

These obiter dicta provide additional guidance on the interpretation and application of tax laws and the importance of strict compliance with the conditions for availing tax exemptions. They also emphasize the government’s power to vary or withdraw tax exemptions and the need for taxpayers to adhere to the tax regulations.

Flowchart of the Case

Conclusion

In conclusion, the Supreme Court’s judgment in State of Gujarat vs. Arcelor Mittal Nippon Steel India Limited (2022) clarifies the conditions for availing tax exemptions on raw materials for manufacturing units under the Gujarat Sales Tax Act, 1969. The Court emphasized the importance of strict compliance with the conditions specified in the exemption notifications and declarations. The judgment has significant implications for manufacturing units seeking tax exemptions and highlights the need for a clear and direct link between the raw materials purchased and their use by the eligible unit. The decision reinforces the principle that tax exemptions are concessions and should be interpreted strictly, with any ambiguity resolved in favor of the Revenue. The Court’s decision also clarifies that the principle of promissory estoppel does not apply in tax matters, especially when the eligibility criteria are not met. This case serves as a reminder that taxpayers must adhere to the tax laws and that non-compliance can result in penalties.