Supreme Court Upholds Purchase Tax on Essar Steel: State of Gujarat vs. Arcelor Mittal Nippon Steel India Limited (21 January 2022)

LEGAL ISSUE: Whether an eligible industrial unit is entitled to tax exemptions when it transfers raw materials to another unit for processing, instead of using them directly.

CASE TYPE: Tax Law

Case Name: State of Gujarat vs. Arcelor Mittal Nippon Steel India Limited

Judgment Date: 21 January 2022

Date of the Judgment: 21 January 2022
Citation: 2022 INSC 832
Judges: M.R. Shah, J. and Sanjiv Khanna, J. (authored by M.R. Shah, J.)

Can a company claim tax exemptions on raw materials when those materials are not directly used in their own manufacturing process but are instead transferred to another company for processing? The Supreme Court of India recently addressed this complex question in a tax dispute involving Essar Steel Ltd. (now Arcelor Mittal Nippon Steel India Limited) and the State of Gujarat. The core issue revolved around whether Essar Steel was eligible for purchase tax exemptions when it transferred raw materials to Essar Power Limited for electricity generation, which was then used in Essar Steel’s manufacturing process. This judgment clarifies the conditions required for availing tax exemptions on raw materials under the Gujarat Sales Tax Act, 1969.

Case Background

The case involves a dispute over tax exemptions claimed by Essar Steel Ltd. (now Arcelor Mittal Nippon Steel India Limited) for its manufacturing units in Hazira, Gujarat. Essar Steel was engaged in manufacturing Hot Briquetted Iron (HBI) and Hot Rolled Coil (HRC). The company had two units. Unit 1 was certified for incentives from 01 August 1990 to 31 July 2004, with a monetary limit of Rs. 237.59 crores. Unit 2 was granted sales tax exemption from 22 February 1993 to 21 February 2007, up to a maximum monetary limit of Rs. 2050 crores.

The State of Gujarat had introduced a scheme in 1991 to attract investments in core sector industries, offering incentives up to 90% of fixed capital investment. Essar Steel invested approximately Rs. 5000 crores for manufacturing HRC in Unit 2. The company was granted exemptions under Entry 255(2) of a notification issued under Section 49(2) of the Gujarat Sales Tax Act, 1969. This exemption covered purchase tax on raw materials like Naphtha and Natural Gas. However, the exemption was subject to certain conditions, including the requirement that the purchased goods be used by the eligible unit within the State of Gujarat as raw materials.

Essar Steel purchased Naphtha and Natural Gas, claiming tax exemptions, but instead of using these directly in its manufacturing process, it sold them to Essar Power Limited (EPL), another company. EPL used these materials to generate electricity, which it then sold back to Essar Steel for use in its manufacturing unit. The Sales Tax Department raised a dispute, arguing that Essar Steel had violated the conditions of the exemption by transferring the raw materials to EPL instead of using them directly.

Timeline:

Course of Proceedings

Initially, the Sales Tax Officer did not find any tax due from Essar Steel for the assessment years 1995-1996 to 1997-1998 and 2000-2001. However, the Deputy Commissioner of Sales Tax later issued a notice for levying purchase tax and penalty for the period 1995-1996 to 2005-2006, arguing that Essar Steel had wrongly availed the exemption.

Essar Steel challenged this notice in the High Court, which restrained the authorities from enforcing the assessment orders, subject to the condition that Essar Steel deposit 50% of the tax dues. The Joint Commissioner, the first appellate authority, imposed purchase tax for the years 1998-1999 and 1999-2000 but accepted that till the amendment of Entry No. 255 on 14 November 2000, there was no breach of conditions if the purchased goods were used anywhere in Gujarat.

Both Essar Steel and the State Government appealed to the Gujarat Value Added Tax Tribunal. The Tribunal allowed Essar Steel’s appeals, holding that the company was not liable to pay any tax, interest, or penalty. The State then appealed to the High Court of Gujarat, which dismissed the appeals, citing promissory estoppel and observing that Essar Steel had not violated any conditions of the original Entry No. 255(2).

Legal Framework

The core of the dispute lies in the interpretation of Entry No. 255(2) of the notification issued under Section 49(2) of the Gujarat Sales Tax Act, 1969, and its subsequent amendments.

The original Entry No. 255(2), dated 05 March 1992, stated that an eligible unit could claim exemption from purchase tax if it furnished a certificate in Form 26, declaring that the goods purchased would be used within the State of Gujarat as raw materials, processing materials, or consumable stores in the manufacture of goods for sale. Condition 6 of the original entry required that the eligible unit “shall actually use the goods purchased within the State of Gujarat.”

The entry was amended on 14 November 2000, stipulating that the goods should be used in the industrial unit for which the eligibility certificate was obtained. The amendment also changed the declaration in Form 26, replacing “within the State of Gujarat” with “in the industrial unit for which the eligibility certificate has been obtained.”

A further amendment on 16 January 2002 allowed the eligible unit to claim exemption even if the goods were used in the manufacturing of goods dispatched to another unit within or outside the State for further manufacturing.

The Supreme Court also referred to Section 45 of the Gujarat Sales Tax Act, 1969, which deals with the assessment of tax and the imposition of penalties for non-payment or underpayment of tax. Sub-sections (5) and (6) of Section 45 provide for penalties if the difference between the tax paid and the tax assessed exceeds twenty-five percent.

Arguments

Arguments by the State of Gujarat:

• The State argued that the original notification dated 05 March 1992, was the parent notification, and subsequent notifications were merely clarificatory or expanding the scope of the exemption.
• The State contended that the exemption was available only if the eligible unit itself used the raw materials for manufacturing goods in the same unit. The raw materials (Naphtha and Natural Gas) were to be used by Essar Steel Ltd. in its steel unit for manufacturing steel only.
• The State submitted that accepting the interpretation of the High Court and Tribunal would mean that an eligible unit could transfer the raw materials to any other unit, even if that unit was not eligible for the exemption.
• The State emphasized that power generating companies were specifically excluded from the list of eligible units. Essar Steel transferred the raw materials to Essar Power Limited (EPL), a power generating company, which was not eligible for exemption.
• The State argued that Essar Steel, by transferring the raw materials to EPL, indirectly passed on the benefit of the exemption to an ineligible entity.
• The State relied on the principle that exemption notifications must be strictly construed and that any ambiguity should be interpreted in favor of the revenue.
• The State argued that the subsequent notification dated 14 November 2000, was clarificatory and did not alter the basic conditions of the original notification.
• The State submitted that the principle of promissory estoppel was not applicable as the State was empowered to vary or withdraw exemptions.
• The State contended that each assessment year was independent and that any incorrect benefits given in earlier years could be corrected in subsequent years.
• The State argued that Essar Steel was liable to pay a penalty under Section 45(5) of the Act due to the contravention of the exemption conditions.

Arguments by Arcelor Mittal Nippon Steel India Limited (formerly Essar Steel Ltd.):

• Essar Steel argued that it was eligible for exemption under the original Entry No. 255(2) dated 05 March 1992.
• Essar Steel contended that the subsequent amendments to Entry No. 255(2) were not applicable to it.
• Essar Steel submitted that it had made eligible investments and was entitled to incentives as per the government scheme.
• Essar Steel stated that it had always intended to install a captive power plant, but due to the State’s requirements, a separate plant was commissioned by EPL.
• Essar Steel argued that the Natural Gas and Naphtha were converted into electricity by EPL and used as an input for manufacturing HRC, which satisfied the conditions of the original notification.
• Essar Steel submitted that the original notification did not restrict the use of goods to the eligible unit, but allowed use anywhere within the State of Gujarat.
• Essar Steel relied on the principle that while interpreting provisions for incentives, a strict interpretation should be made to determine eligibility, but a liberal approach should be adopted when determining the scope of the incentives.
• Essar Steel argued that the amendments to the notification were not applicable to industries set up before 14 November 2000.
• Essar Steel submitted that it had not breached the conditions of the original notification and that there was no diversion of fuel.
• Essar Steel argued that the demand for purchase tax was barred by the principle of promissory estoppel and legitimate expectation.
• Essar Steel contended that the imposition of penalty was illegal, as it had not breached any conditions.

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:

Cases:

• Commissioner of Customs (Import), Mumbai Vs. Dilip Kumar and Company and Others, (2018) 9 SCC 1: The Court referred to this case to reiterate that provisions of an exemption notification are to be construed strictly.
• Union of India and Anr. Etc. Etc. Vs. V.V.F. Limited and Another, Etc. Etc., (2020) SCC Online SC 378: This case was cited to emphasize that provisions of an exemption notification are to be construed strictly and that any amendment being only clarificatory in nature, applies to all entities uniformly from the date of the original notification.
• Bengaluru Development Authority Vs. Sudhakar Hegde and Ors., (2020) 15 SCC 63: This case was cited to support the view that a clarificatory amendment applies uniformly from the date of the original notification.
• Kothari Industrial Corporation Limited Vs. Tamil Nadu Electricity Board and Anr., (2016) 4 SCC 134: This case was cited to support the view that a tax exemption granted under a statutory provision is a concession, which does not create any legally enforceable right against the Government.
• Assistant Commissioner (CT) LTU and Anr. Vs. Amara Raja Batteries Limited, (2009) 8 SCC 209: This case was referred to by the respondent, but the court did not find it applicable.
• Hindustan Steel Ltd. Vs. State of Orissa, (1969) 2 SCC 627: This case was cited to emphasize that the imposition of penalty is the result of a quasi-criminal adjudication.
• Excel Crop Care Limited Vs. Competition Commission of India and Anr., (2017) 8 SCC 47: This case was cited to emphasize that the imposition of penalty is the result of a quasi-criminal adjudication.
• Commissioner of Central Excise, Bangalore – 1 Vs. Bal Pharma Limited, Bangalore and Ors., (2011) 2 SSC 620: This case was cited to support the view that the doctrine of promissory estoppel is not applicable in tax matters.

Legal Provisions:

• Section 49(2) of the Gujarat Sales Tax Act, 1969: This section empowers the Government to issue notifications granting exemptions from sales tax.
• Section 45 of the Gujarat Sales Tax Act, 1969: This section deals with the assessment of tax and the imposition of penalties for non-payment or underpayment of tax.

Judgment

The Supreme Court allowed the appeals filed by the State of Gujarat and set aside the judgments of the High Court and the Tribunal. The Court held that Essar Steel was not entitled to the tax exemption under the original Entry No. 255(2) dated 05 March 1992, as it had violated the conditions for exemption. The court restored the order of the Assessing Officer levying the purchase tax and imposing the penalty.

How each authority was viewed by the Court?

• Commissioner of Customs (Import), Mumbai Vs. Dilip Kumar and Company and Others, (2018) 9 SCC 1*: The Court used this case to emphasize that exemption notifications must be interpreted strictly.
• Union of India and Anr. Etc. Etc. Vs. V.V.F. Limited and Another, Etc. Etc., (2020) SCC Online SC 378*: The Court relied on this case to support its view that exemption notifications should be construed strictly and that clarificatory amendments apply from the date of the original notification.
• Bengaluru Development Authority Vs. Sudhakar Hegde and Ors., (2020) 15 SCC 63*: The Court used this case to support its view that a clarificatory amendment applies uniformly from the date of the original notification.
• Kothari Industrial Corporation Limited Vs. Tamil Nadu Electricity Board and Anr., (2016) 4 SCC 134*: The Court relied on this case to support its view that a tax exemption is a concession and does not create a legally enforceable right against the Government.
• Assistant Commissioner (CT) LTU and Anr. Vs. Amara Raja Batteries Limited, (2009) 8 SCC 209*: The Court did not find this case applicable to the facts of the present case.
• Hindustan Steel Ltd. Vs. State of Orissa, (1969) 2 SCC 627*: The Court used this case to emphasize that the imposition of penalty is the result of a quasi-criminal adjudication.
• Excel Crop Care Limited Vs. Competition Commission of India and Anr., (2017) 8 SCC 47*: The Court used this case to emphasize that the imposition of penalty is the result of a quasi-criminal adjudication.
• Commissioner of Central Excise, Bangalore – 1 Vs. Bal Pharma Limited, Bangalore and Ors., (2011) 2 SSC 620*: The Court relied on this case to support its view that the doctrine of promissory estoppel is not applicable in tax matters.

What weighed in the mind of the Court?

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

• The Court emphasized the need for strict interpretation of exemption notifications. It held that the conditions for availing the exemption must be strictly adhered to.
• The Court found that Essar Steel had violated the conditions of the original notification by transferring the raw materials to Essar Power Limited (EPL) instead of using them directly in its manufacturing process.
• The Court noted that EPL was not an eligible entity for the tax exemption, and by transferring the raw materials to EPL, Essar Steel had indirectly passed on the benefit of the exemption to an ineligible entity.
• The Court held that the subsequent amendments to the notification were clarificatory and did not alter the basic requirement that the eligible unit must use the raw materials.
• The Court rejected the argument that the principle of promissory estoppel was applicable in this case, as Essar Steel had not fulfilled the conditions for exemption.
• The Court emphasized that each assessment year is independent and that any incorrect benefits given in earlier years could be corrected in subsequent years.

Fact:Law Ratio

The Supreme Court’s reasoning was primarily based on legal interpretations of the exemption notifications and the relevant provisions of the Gujarat Sales Tax Act, 1969. While the factual aspects of the case were considered, the legal principles weighed more heavily in the Court’s decision.

Logical Reasoning:

Conclusion:

The Supreme Court’s judgment in the case of State of Gujarat vs. Arcelor Mittal Nippon Steel India Limited clarifies the conditions for availing tax exemptions on raw materials under the Gujarat Sales Tax Act, 1969. The Court emphasized that exemption notifications must be strictly interpreted and that the eligible unit must directly use the raw materials in its manufacturing process. The judgment underscores the principle that tax exemptions are a concession granted by the State and must be availed only in strict compliance with the stipulated conditions.

This case serves as a reminder that companies seeking tax benefits must ensure that they adhere to the conditions of the exemption notifications and cannot circumvent them by indirect means. The judgment also reinforces the principle that the State is empowered to vary or withdraw exemptions and that the doctrine of promissory estoppel is not applicable in tax matters.