Supreme Court settles Sales Tax Exemption dispute after Madhya Pradesh Reorganisation: State of Madhya Pradesh vs. Lafarge Dealers Association (2019) INSC 707 (09 July 2019)

Date of the Judgment: 09 July 2019
Citation: (2019) INSC 707
Judges: Ranjan Gogoi, CJI, S. Abdul Nazeer, J., Sanjiv Khanna, J.
Can the benefit of sales tax exemption granted to industrial units in the erstwhile state of Madhya Pradesh continue to be availed in the newly formed states of Madhya Pradesh and Chhattisgarh after the bifurcation? The Supreme Court addressed this crucial question in a batch of appeals concerning the interpretation of the Madhya Pradesh Reorganisation Act, 2000, and its impact on tax exemptions. The court clarified that the exemption would be limited to the boundaries of the state where the industrial unit is located. This judgment was delivered by a three-judge bench comprising Chief Justice Ranjan Gogoi, Justice S. Abdul Nazeer, and Justice Sanjiv Khanna, with the majority opinion authored by Justice Sanjiv Khanna.

Case Background

Prior to November 1, 2000, the State of Madhya Pradesh had a unified structure. To encourage investment and boost industrial output, the state government had introduced a policy on February 19, 1991, offering sales tax exemptions to industrial units with fixed assets exceeding Rs. 100 crores. The exemption was equivalent to the capital investment in fixed assets and was valid for 11 years from the start of commercial production or until the exempted tax reached the limit of the capital investment. Several private parties, who are the respondents in this appeal, were granted certificates of eligibility for this exemption by the Directorate of Industries in the unified State of Madhya Pradesh.

On November 1, 2000, the State of Madhya Pradesh was bifurcated into two separate states: the reorganised State of Madhya Pradesh and the new State of Chhattisgarh, as per the Madhya Pradesh Reorganisation Act, 2000. Consequently, the industrial units that had been granted exemptions were now located either in the reorganised State of Madhya Pradesh or the new State of Chhattisgarh.

The central issue before the Supreme Court was whether these industrial units, after the bifurcation, could continue to enjoy the sales tax exemption in the other state for inter-state transactions. Specifically, could a unit located in Madhya Pradesh claim exemption for sales to Chhattisgarh, and vice versa?

Timeline:

Course of Proceedings

The appeals before the Supreme Court arose from conflicting judgments of the High Court of Madhya Pradesh. Some benches of the High Court had held that the sales tax exemption would be restricted to the boundaries of the state where the unit was located. They reasoned that after the bifurcation, trade between the two states would be inter-state, not intra-state. Other benches, relying on the Supreme Court’s decision in Commissioner of Commercial Taxes, Ranchi and Another v. Swarn Rekha Cokes and Coals Pvt. Ltd. and Others [(2004) 6 SCC 689], had taken a contrary view. They held that the exemption would continue to apply in both states due to legal fictions created by Sections 78 and 79 of the Reorganisation Act, which treated the two states as one for sales tax purposes.

A Division Bench of the Supreme Court, noting that certain facts and legal provisions had not been considered in the Swarn Rekha case, referred the matter to a larger bench for consideration.

Legal Framework

The Supreme Court examined several key sections of the Madhya Pradesh Reorganisation Act, 2000:

• Section 2(e): Defines “existing State of Madhya Pradesh” as the state before the appointed day (November 1, 2000).
• Section 2(f): Defines “law” to include any enactment, ordinance, regulation, order, bye-law, rule, scheme, notification, or other instrument having the force of law in the existing State of Madhya Pradesh.
• Section 2(j): Defines “successor State” as either the State of Madhya Pradesh or Chhattisgarh.
• Section 2(k): Defines “transferred territory” as the territory transferred from Madhya Pradesh to Chhattisgarh.
• Section 3: Specifies the territories of the existing State of Madhya Pradesh that would form the new State of Chhattisgarh.
• Section 4: States that the State of Madhya Pradesh would comprise the territories of the existing state, except those specified in Section 3.
• Section 5: Amends the First Schedule to the Constitution to include Chhattisgarh as a new state.
• Section 78: States that the reorganisation would not change the territories to which any law applied before the appointed day. It also states that territorial references to the State of Madhya Pradesh in any law shall be construed as meaning the territories within the existing State of Madhya Pradesh before the appointed day.
• Section 79: Empowers the appropriate government to adapt laws within two years of the appointed day.
• Section 80: Allows courts, tribunals, or authorities to construe laws to facilitate their application to the new states.
• Section 85: Gives the Reorganisation Act overriding effect over any inconsistent laws.
• Section 86: Empowers the President to remove difficulties in implementing the Act.

The court also considered the Adaptation of Laws Order, 2000, which extended the laws of Madhya Pradesh to Chhattisgarh, with modifications such as substituting “Chhattisgarh” for “Madhya Pradesh.”

The Supreme Court also examined Article 286 of the Constitution of India, which restricts states from imposing taxes on sales or purchases that take place outside the state, or in the course of import or export.

Arguments

Arguments by the Private Parties/Assessees:

• The Reorganisation Act did not negate the benefit of exemption already granted in the unified State of Madhya Pradesh.
• The term “law” includes the exemption notification and the certificate of eligibility for exemption from tax.
• Sections 78 and 79 of the Reorganisation Act create a legal fiction that the laws of the unified state continue to apply to both successor states.
• The Adaptation of Laws Order, 2000, supports the view that the exemption should continue to apply in both states.
• Section 80 empowers the court to interpret laws to facilitate their application to the new states.
• Section 85 gives the Reorganisation Act overriding effect, meaning the exemption notification should be interpreted as if the unified state had not been bifurcated.

Arguments by the State of Madhya Pradesh and State of Chhattisgarh:

• With the creation of the new State of Chhattisgarh, trade between the two states became inter-state, not intra-state.
• The Sales Tax Act applies within the territorial confines of each state.
• Units in one state can only enjoy exemption for intra-state trade within that state, not for inter-state trade with the other state.
• The legal fiction in Sections 78 and 79 does not mean that the two states are treated as one for sales tax purposes.

Submissions of the Parties

Issues Framed by the Supreme Court

The core issue before the Supreme Court was:

1. Whether industrial units granted sales tax exemptions in the unified State of Madhya Pradesh could continue to avail the benefit of such exemption or deferment after the bifurcation in both the states, irrespective of their location in one of the two states, for inter-state transactions.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

The court also considered the following legal provisions:

Judgment

How each authority was viewed by the Court?

• The Supreme Court overruled the ratio in Swarn Rekha Cokes and Coals Pvt. Ltd. [(2004) 6 SCC 689], stating that the legal fiction created by the Reorganisation Act does not extend to treating the two states as one for sales tax purposes.
• The Supreme Court referred to State of Punjab v. Balbir Singh, Sher Singh v. Financial Commr. of Planning and Dhayanand v. Union of India to support the principle that administrative orders of the erstwhile state continue to be in force until modified by successor states.
• The Supreme Court referred to B. S. Goraya vs. U.T. of Chandigarh [(2007) 6 SCC 397] to support the principle that deeming provisions must be interpreted for the purpose they are created and not extended beyond that.
• The Supreme Court referred to Ranjan Sinha and Another v. Ajay Kumar Vishwakarma and Others [(2017) 14 SCC 774] to support the principle that reorganisation of states does not mean the new state starts with a clean slate.
• The Supreme Court referred to M.P.V. Sundararamier & Co. v. State of Andhra Pradesh and Another [AIR 1958 SC 468] to support the principle that states are separate entities and laws of one state cannot apply to another.
• The Supreme Court referred to Sri Peera Mohammad Mahamood Saheb v. The State of Andhra Pradesh [1960 (11) STC 456] to support the principle that laws of the erstwhile state continue to apply in the new state but within its territorial confines.

What weighed in the mind of the Court?

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

• Constitutional Mandate: The court emphasized that the creation of two separate states, each with its own legislature and executive, is a constitutional reality that cannot be ignored.
• Territorial Limits: The court held that the sales tax laws of each state apply within their respective territorial limits. The deeming fiction in Section 78 of the Reorganisation Act does not extend to treating the two states as one for sales tax purposes.
• Inter-State Trade: The court clarified that trade between the two states is inter-state, not intra-state, and therefore subject to the relevant laws governing inter-state transactions.
• Limited Scope of Legal Fiction: The court held that the deeming fiction in Section 78 of the Reorganisation Act is limited to ensuring continuity of laws in the new states and does not extend to treating the two states as one entity for tax purposes.

Fact:Law Ratio

Logical Reasoning

The Supreme Court rejected the argument that the two states should be treated as one for sales tax purposes, stating that this would be contrary to the Constitution and the Reorganisation Act. The court emphasized that the creation of a new political state must be given full legal effect.

The court observed that the deeming fiction in Section 78 of the Reorganisation Act does not extend to treating the two states as one for sales tax purposes. The court said:

“The deeming fiction incorporated for the purpose of second part of Section 78 does not postulate and state that the territories which were earlier part of the State of Madhya Pradesh but now form part of the State of Chhattisgarh would continue to remain part of the reorganised State of Madhya Pradesh or should be treated as part and parcel of the other state. This is not what is postulated in Section 78.”

The court further clarified:

“The enactments or the laws in force in the unified State of Madhya Pradesh would continue to apply to the two states, not as one or the same enactment or law, but as two separate enactments or laws as applicable to two different states.”

The court also stated:

“The sale transactions which were hitherto intra-state sales being within the unified State of Bihar, would become inter-state transactions once the two new States had come into existence. Provisions do not stipulate that such transactions would continue to be treated as intra-state transactions notwithstanding creation of the new State.”

The court clarified that the ratio in Swarn Rekha Cokes and Coals Pvt. Ltd. was incorrect in holding that the two states should be treated as one for tax purposes.

The court, however, left open the question of whether inter-state transactions were entitled to any benefit under the exemption clauses, allowing the private parties to raise this issue before the appropriate authorities. The court also allowed the private parties/assessee to challenge the adjudication orders in accordance with law and if required, by filing application under Section 14 of the Limitation Act, 1963, or other applicable provisions of the state enactments for exclusion of time during which the proceedings have remained pending before the High Court and this Court. In such cases, it would be appropriate for the authorities to exclude such time period as the court was overruling the ratio laid down in paragraphs 29 and 30 in Swarn Rekha Cokes and Coals Pvt. Ltd.

Key Takeaways

• Sales tax exemptions granted in the unified State of Madhya Pradesh are limited to the territorial boundaries of the state where the industrial unit is located after the bifurcation.
• Trade between the reorganised State of Madhya Pradesh and the new State of Chhattisgarh is considered inter-state, not intra-state.
• The legal fiction created by the Reorganisation Act ensures continuity of laws but does not treat the two states as one for tax purposes.
• The Supreme Court has overruled the ratio in Swarn Rekha Cokes and Coals Pvt. Ltd., which had held that the two states should be treated as one for tax purposes.
• Industrial units can claim exemption only for intra-state sales within their respective states.

Directions

The Supreme Court allowed the appeals filed by the State of Madhya Pradesh and the State of Chhattisgarh and dismissed the appeals filed by the private parties/assessees. The court also allowed the private parties/assessees to challenge the adjudication orders in accordance with law and if required, by filing application under Section 14 of the Limitation Act, 1963, or other applicable provisions of the state enactments for exclusion of time during which the proceedings have remained pending before the High Court and this Court. In such cases, it would be appropriate for the authorities to exclude such time period as the court was overruling the ratio laid down in paragraphs 29 and 30 in Swarn Rekha Cokes and Coals Pvt. Ltd.

Development of Law

The Supreme Court has clarified that the legal fiction created by the Reorganisation Act is limited to ensuring continuity of laws in the new states and does not extend to treating the two states as one entity for tax purposes. The ratio decidendi of the case is that the sales tax exemptions granted in the unified State of Madhya Pradesh are limited to the territorial boundaries of the state where the industrial unit is located after the bifurcation. This decision overturns the previous interpretation in Swarn Rekha Cokes and Coals Pvt. Ltd., which had treated the two states as one for tax purposes. This judgment establishes that the creation of a new political state must be given full legal effect, and inter-state trade between the two states is subject to the relevant laws governing such transactions.

Conclusion

The Supreme Court’s judgment in State of Madhya Pradesh vs. Lafarge Dealers Association clarifies the legal position regarding sales tax exemptions after the bifurcation of Madhya Pradesh. The court has held that the exemptions are limited to the boundaries of the state where the industrial unit is located, and inter-state transactions between the two states are not eligible for the exemption. This decision sets aside the previous interpretation in Swarn Rekha Cokes and Coals Pvt. Ltd., and provides much-needed clarity on the application of tax laws in the context of state reorganisation.