Tax Exemption for Tea Blending: Supreme Court rules on withdrawal of benefits in K.B. Tea Product Pvt. Ltd. vs. Commercial Tax Officer (2023)

Case Background

The case revolves around M/s. K.B. Tea Product Pvt. Ltd. and other similar appellants who had set up small-scale industrial units for blending tea in West Bengal. Initially, the Bengal Finance (Sales Tax) Act, 1941, included “blending of any goods” within the definition of “manufacture.” This was later replaced by the West Bengal Sales Tax Act, 1994, which initially omitted “blending of any goods” but continued to include “blending of tea” in the definition of “manufacture” under Section 2(17). This inclusion allowed new small-scale industrial units engaged in tea blending to avail tax exemptions under Section 39 of the Act, 1994.

Relying on these provisions and the West Bengal Incentive Scheme, 1999, the appellants established their tea blending units and obtained eligibility certificates for sales tax exemptions. However, the West Bengal Finance Act, 2001, amended Section 2(17) of the Act, 1994, with effect from August 1, 2001, omitting “blending of tea” from the definition of “manufacture.” Consequently, the appellants’ tax exemptions were revoked, and their eligibility certificates were modified. This action led to the present appeals before the Supreme Court.

Timeline

Legal Framework

The primary legal provisions at play in this case are:

• Section 2(dd) of the Bengal Finance (Sales Tax) Act, 1941: This section defined “manufacture” to include “blending of any goods.”
• Section 2(17) of the West Bengal Sales Tax Act, 1994: As initially enacted, this section defined “manufacture” to include “blending of tea.” It was later amended to remove “blending of tea” from the definition. The relevant part of the section is:
  
  “manufacture” means any process –
  (i) whereby any goods become a new and different article; or
  (ii) which brings into existence a new or different article having a distinctive name, character or use; or
  (iii) by which goods are assembled, mixed, blended or otherwise processed, provided that blending of tea shall be deemed to be manufacture.
• Section 39 of the West Bengal Sales Tax Act, 1994: This section provides for a tax holiday for new small-scale industrial units, stating:
  
  “39. Tax holiday for new small-scale industrial units- (1) Subject to such conditions and restrictions as may be prescribed, no tax shall be payable by a dealer for such period as may be prescribed in respect of his sales of goods manufactured by him in his newly set up small-scale industrial unit situated in the prescribed area, and in calculating his taxable turnover of sales under sub-section (3) of section 17, that part of his gross turnover of sales which represents the turnover of sales of such goods shall be deducted from his gross turnover of sales under sub-clause (viii) of clause (a) of sub-section (3) of that section.”
• Rule 52 of the West Bengal Sales Tax Rules, 1995: This rule, along with Section 39 of the Act, 1994, provided the framework for tax holidays for new small-scale industrial units.

The core of the dispute lies in the interpretation of “manufacture” and whether the state could retroactively alter the definition to withdraw benefits previously granted.

Arguments

Appellants’ Arguments:

• The appellants argued that the State of West Bengal had induced them to set up new industrial units with the promise of tax benefits. Once these benefits were granted, they could not be withdrawn by a subsequent amendment.
• They contended that their rights were crystallized when they received the eligibility certificate. The state could only rescind these benefits for an overriding public interest, which was not demonstrated in this case.
• The appellants invoked the doctrine of legitimate expectation, arguing that the amendment to Section 2(17) of the Act, 1994, was arbitrary and without any accompanying public interest.
• They argued that the state’s action failed the test of reason and relevance, as no explanation was provided for rescinding the benefits.
• The appellants had altered their position by investing substantial amounts and procuring loans to avail the benefits under the scheme. Therefore, the state could not take away such benefits without an overriding public interest.
• They relied on cases such as Manuelsons Hotels Private Limited vs. State of Kerala & Ors. [(2016) 6 SCC 766], MRF Ltd., Kottayam vs. Assistant Commissioner (Assessment) Sales Tax & Ors. [(2006) 8 SCC 702], and Motilal Padampat Sugar Mills Co. Ltd. vs. State of Uttar Pradesh & Ors. [(1979) 2 SCC 409] to support their arguments on legitimate expectation and promissory estoppel.
• They also cited State of Jharkhand & Ors. vs. Brahmputra Metallics Ltd., Ranchi & Anr. [Civil Appeal Nos. 3860-3862 of 2020] and Dai-ichi Karkaria Ltd. vs. Union of India & Ors. [(2000) 4 SCC 57] to further support their claim.

State’s Arguments:

• The state argued that the appellants were granted a tax holiday under Section 39 of the Act, 1994, because “blending of tea” was included in the definition of “manufacture” under Section 2(17) of the Act, 1994.
• With the amendment to Section 2(17) of the Act, 1994, effective from August 1, 2001, “blending of tea” was omitted from the definition of “manufacture.” Consequently, the appellants ceased to be manufacturers and were no longer eligible for the tax exemption.
• The state contended that when the legislature excluded “tea blending” from the definition of “manufacture,” it could no longer be regarded as a manufacturing activity entitled to exemption under Section 39 of the Act, 1994.
• The state argued that this was not a case of “vested right” but an “existing right,” which could be taken away. There could be no legitimate expectation against a statute.
• Granting or withdrawing exemptions was a policy decision, and no one could claim it as a matter of right.
• The state argued that the withdrawal of the exemption was prospective and not retrospective.
• The state relied on the decision of the Supreme Court in Directorate of Film Festivals & Ors. vs. Gaurav Ashwin Jain & Ors. [(2007) 4 SCC 737] to support their argument that policy decisions are not subject to judicial review.

Issues Framed by the Supreme Court

The Supreme Court framed the following key issue for consideration:

1. Whether despite Section 2(17) of the West Bengal Sales Tax Act, 1994, which came to be amended w.e.f. 01.08.2001 vide West Bengal Finance Act, 2001, omitting “tea blending” from the definition of “manufacture”, still the appellants shall be entitled to the exemption from payment of sales tax?

Treatment of the Issue by the Court

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

Authorities

The following authorities were considered by the court:

Judgment

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

How each authority was viewed by the Court?

• Section 2(17) of the West Bengal Sales Tax Act, 1994: The majority opinion focused on the amendment of this section, which led to the exclusion of “blending of tea” from the definition of “manufacture”, thereby removing the basis for the tax exemption. The dissenting opinion emphasized the initial inclusion of “blending of tea” as creating a legitimate expectation.
• Section 39 of the West Bengal Sales Tax Act, 1994: The majority opinion highlighted that this section provides tax exemption only to manufacturers. Since the appellants ceased to be manufacturers, they were no longer eligible for the exemption.
• Manuelsons Hotels Private Limited vs. State of Kerala & Ors. [(2016) 6 SCC 766], MRF Ltd., Kottayam vs. Assistant Commissioner (Assessment) Sales Tax & Ors. [(2006) 8 SCC 702], and Motilal Padampat Sugar Mills Co. Ltd. vs. State of Uttar Pradesh & Ors. [(1979) 2 SCC 409]: The majority opinion stated that these decisions were not applicable to the facts of the case. The dissenting opinion relied on these cases to support the doctrine of legitimate expectation.
• State of Jharkhand & Ors. vs. Brahmputra Metallics Ltd., Ranchi & Anr. [Civil Appeal Nos. 3860-3862 of 2020] and Dai-ichi Karkaria Ltd. vs. Union of India & Ors. [(2000) 4 SCC 57]: The majority opinion did not find these cases applicable. The dissenting opinion used these cases to bolster the claim of legitimate expectation.
• Directorate of Film Festivals & Ors. vs. Gaurav Ashwin Jain & Ors. [(2007) 4 SCC 737]: The majority opinion relied on this case to support the argument that policy decisions are not subject to judicial review. The dissenting opinion did not find this case applicable.
• Sub-Committee on Judicial Accountability vs. Union Of India and Ors. [(1991) 4 SCC 699]: The dissenting opinion cited this case to underscore the importance of rule of law.
• State Of Kerala & Ors. vs. K.G. Madhavan Pillai & Ors. [(1988) 4 SCC 669]: The dissenting opinion used this case to introduce the doctrine of legitimate expectation in Indian jurisprudence.
• Navjyoti Coop. Group Housing Society & Ors. vs. Union Of India & Ors. [(1992) 4 SCC 477]: The dissenting opinion relied on this case to expand the scope of legitimate expectation.
• Food Corporation Of India vs. Kamdhenu Cattle Feed Industries [(1993) 1 SCC 71]: The dissenting opinion cited this case to highlight the duty of public authorities to act reasonably.
• M.P.Oil Extraction & Anr. vs. State Of M.P. & Ors. [(1997) 7 SCC 592]: The dissenting opinion used this case to emphasize that legitimate expectation is a substantive right.
• Howrah Municipal Corporation & Ors. vs. Ganges Rope Company Ltd. & Ors. [(2004) 1 SCC 663] and Madras City Wine Merchants Association & Anr. vs. State Of Tamil Nadu & Anr. [(1994) 5 SCC 509]: The dissenting opinion cited these cases to show the limitations of legitimate expectation.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the amendment to Section 2(17) of the West Bengal Sales Tax Act, 1994. The majority opinion focused on the literal interpretation of the amended law, stating that once “tea blending” was removed from the definition of “manufacture,” the appellants ceased to be manufacturers and were no longer eligible for the tax exemption. The court emphasized that tax exemptions are a matter of policy, and the state has the right to withdraw them. The court also held that there can be no promissory estoppel against a statute.

The dissenting opinion, however, focused on the doctrine of legitimate expectation, stating that the state had created a legitimate expectation in the appellants by initially including “tea blending” in the definition of “manufacture” and granting tax exemptions. The dissenting judge argued that the state had not provided sufficient public interest justification for withdrawing the exemption, and therefore, the appellants were entitled to the benefit for the promised period.

Fact:Law Ratio

Logical Reasoning:

The majority opinion rejected the appellants’ claim based on legitimate expectation and promissory estoppel, stating that these principles cannot override a statute. The court held that the state has the power to amend laws and withdraw benefits, and such actions are not subject to judicial review unless they are arbitrary. The dissenting opinion, however, emphasized that the state must act fairly and reasonably, and the doctrine of legitimate expectation should be upheld in the absence of an overriding public interest.

The majority opinion reasoned that the definition of “manufacture” was amended by the legislature, and the court could not interfere with this policy decision. The court also noted that the withdrawal of the exemption was prospective and not retrospective. The dissenting opinion argued that the state’s action was arbitrary and violated the principles of natural justice.

The majority opinion stated, “So long as the appellants continue to be the manufacturers as per Section 2(17) of the Act, 1994 prevailing prior to 01.08.2001, the appellants can be said to be entitled to the benefit of exemption from payment of sales tax as manufacturers being in the activity of “tea blending”. The moment, “tea blending” activity ceases to be the manufacturing activity, on and from that day, the appellants shall not be entitled to the exemption from payment of sales tax.”

The dissenting opinion stated, “In such a circumstance, the legitimate expectation created in the minds of the appellants, must be protected, and the benefits given originally must be made applicable to the appellants herein for the period promised by the respondent authority.”

The majority opinion also stated, “There cannot be any promissory estoppel against the statute as per the settled position of law. As rightly observed and held by the High Court, this is not a case of “vested right” but a case of “existing right”, which can be varied or modified and/or withdrawn.”

Key Takeaways

• Policy Decisions: The Supreme Court affirmed that the state has the power to make policy decisions, including amending laws and withdrawing tax exemptions.
• No Promissory Estoppel Against Statute: The court reiterated that the doctrine of promissory estoppel cannot be invoked against a statute.
• Existing vs. Vested Rights: The court distinguished between existing rights and vested rights, holding that existing rights can be modified or withdrawn.
• Legitimate Expectation: The dissenting opinion underscored the importance of the doctrine of legitimate expectation and the need for the state to act fairly and reasonably.
• Public Interest: The dissenting opinion emphasized that any withdrawal of benefits must be justified by an overriding public interest.
• Impact on Businesses: Businesses should be aware that tax exemptions can be withdrawn by the state, and they should not rely solely on tax benefits when making investment decisions.
• Interpretation of Statutes: The majority opinion highlighted the importance of a literal interpretation of statutes, while the dissenting opinion focused on the spirit and intent of the law.