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CASE NO.: Appeal (civil)  4342 of 2007

PETITIONER: State of Orissa & Ors

RESPONDENT: M/s. Tata Sponge Iron Ltd

DATE OF JUDGMENT: 18/09/2007

BENCH: S.B. Sinha & Harjit Singh Bedi

JUDGMENT: J U D G M E N T  

CIVIL APPEAL NO.  4342            OF 2007 [Arising out of  SLP (Civil) No. 4659 of 2007]

S.B. SINHA, J :          1.      Leave granted.   2.      Interpretation of an exemption notification in regard to payment of  sales tax is involved in this appeal which arises out of a judgment and order  dated 9.8.2006 passed by the High Court of Orissa in O.J.C. No. 2213 of  2001.

3.     Before embarking upon the said question, we may notice the basic  fact of the matter.   

       Respondent herein which is a large industrial unit had set up a Sponge  Iron Factory at Bileipada, Joda in the district of Keonjhar, Orissa.   Indisputably, it is classified as a large scale industry in terms of Industrial  Policy Resolution (IPR), 1980 adopted by the State.  In or about 1989, IPR  was adopted for existing industries classified under IPR, 1980 wherein  benefits for exemption from payment of sales tax on finished products were  to be granted subject to the terms and conditions laid down therein including  repayment of loan availed under IPR, 1980.  Before the benefits of the said  IPR could be obtained by the respondent, the Government of Orissa  announced IPR, 1992 in terms whereof the existing industrial units could  obtain exemption or deferment of sales tax on finished products and capital  investment subsidy provided it had undergone an expansion/ modernization/  diversification of its unit.   

       For our purpose, we may only notice paragraphs 7.4 and 7.5 of IPR,  1992 which are in the following terms:

       "7.4    Exemption / Deferment of Sales Tax  on raw materials, spare parts, and finished  products of small, medium large scale and Pioneer  Industrial Units.

       New Small, medium & Large scale  industrial units including, pioneer units will be  eligible for exemption of sales tax on raw  materials, spare parts, & finished products for a  period of 5 years subject to a ceiling of 100 per  cent of fixed capital investment if the unit is  located in zone-A 75 per cent. If located in zone \026 B and 60 per cent if located in  zone-C.  New medium and large industrial units

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may also opt to defer payment of sales tax on their  finished products for a period of 5 years subject to  a maximum of 100 per cent of fixed capital  investment if the unit is located in zone-A 75 per  cent if located in zone-B and 60 per cent if located  in zone-C from the date of commercial production.   Deferred amounts in respect of each year will be  repaid in full after the expiry of the period of  deferment annually.  Period of exemption /  deferent allowed for different zones shall be  extended by two years for Pioneer units.  However,  defaulters of OSFC/IPI COL dues shall be eligible  only after they clear such dues.

7.5     Exemption / Modernization /  Diversification.                 The incentive by way of exemption or  deferment of sales tax on finished products shall be  available for expansion / modernization /  diversification of existing units taken up after the  effective date subject to a limit of 60 per cent of  the additional capital investment in plant and  machinery only in zone-C, 75 per cent in zone-B  and 100 per cent in zone-A provided that such  expansion / modernization / diversification has  been undertaken on the basis of separate project  report duly appraised by the financial institutions  and provided further that subject to the provisions  of the Sales Tax Act, the benefit of exemption /  deferment shall not have the effect of reducing the  sales tax paid by the unit prior to commencement  of the expansion / modernization / diversification  programmes.  In other words, the benefit shall be  applicable to incremental sales."

4.      Respondent contended that in view of paragraph 7.5 of IPR, 1992 it  was entitled to the benefit of deferment of payment of sales tax on finished  products in respect of incremental sale over and above the immediate  preceding year as it existed prior to expansion of the industrial unit upto a  limit of Rs. 49.45 crores being 75% of the fixed capital investment in the  plant and machinery.  It was furthermore claimed to be entitled to capital  investment subsidy.  As the said benefits were denied to the respondent, it  filed a writ petition before the High Court of Orissa, Cuttack which was  marked as O.J.C. No. 2213 of 2001.

5.      By reason of the impugned judgment, a Division Bench of the Orissa  High Court allowed the said writ petition directing:

"1.             Opposite party No.2 \026 The Director of  Industries, Orissa is directed to reconsider the  petitioner’s application for re-evaluation of its  investment for expansion of the unit and determine  afresh, the extent to which the petitioner is entitled  to the sales tax incentives and also to make  necessary amendment to the eligibility certificate  granted by it in accordance with the IPR, 1992. 2.              The stipulation of a ’time period’ in  the certificate of eligibility granted to the petitioner  in Form No.II-A under Annexure-4 to the writ  petition is declared ultra vires the IPR, 1992 and  shall have no effect.  Necessary amended  "Eligibility Certificate" in terms of directions in  Paragraphs 1 & 2, be issued to the petitioner,  within two months from the date of

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communication of this judgment. 3.              After issue of the revised eligibility  certificate as directed above, the petitioner  company is directed to produce the same before  the Sales Tax Officer, Keonjhar Circle, who on  receipt of the same along with the revised returns  that may be filed by the petitioner as a  consequence of revision of the eligibility  certificate, shall pass appropriate order of  assessment and direct refund of excess tax  deposited on ascertainment of the assertion of the  petitioner that it has not collected sales tax from  the purchasers but had paid the same from its own  re-source, within a period of two months from the  date of production of the "Revised Eligibility  Certificate". 4.              Opposite part No.1 is directed to  reconsider the petitioner-company’s application for  grant of capital investment subsidy in terms of the  direction contained herein and release the "Capital  Investment Subsidy" as is due to the petitioner  within a period of two months from the date of  communication of this order."

6.      Mr. Vikas Singh, learned Additional Solicitor General appearing on  behalf of the appellant, restricted his submissions only in regard to the  exemption for payment of sales tax.  The learned counsel submitted that  although no period for obtaining the benefit thereof had been fixed in the  original policy, the operational guidelines issued in that behalf will clearly  point out that the said benefit was to be granted for a period of five years in  case of new industries and for a period of seven years in case of pioneer  industries.  In this behalf, our attention has been drawn to paragraph 5 of  operational guidelines in respect of grant of sales tax concession under IPR,  1992, which reads as under:

       "The Sales Tax exemption / deferment  certificate for raw material, spare parts and  finished products shall be issued for a period of 5/7  year at a time.  The Director of Industries Orissa  and Director of H & CI can however, inspect the  unit and withdraw the certificate in case of non- fulfillment of the conditions.  The beneficiary unit  should also maintain necessary records and  registers for this purpose as may be prescribed by  the Director of Industries, Orissa."

       It was pointed out that the purported operational guidelines had been  circulated by reason of a circular letter dated 8.02.1993 by the Government  of Orissa to all concerned which is in the following terms:

       "I am directed to enclose herewith a set of  "operational guidelines" relating to Sales Tax  concessions admissible under Industrial Policy  Resolution 1992 (IPR 1992) effective from 1.8.92  for your information and necessary action.         You are requested kindly to bring it to the  notice of all concerned for proper implementation  of the provisions of IPR 1992"

       The learned Additional Solicitor General would submit that the  respondent herein made expansion of its undertaking in the year 1997 and it  having asked the benefit in terms of IPR, 1992 for a period of five years only  as would be evident from its application filed in prescribed Form II-A dated

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26.05.1999 which is in the following terms:

       "This certificate is issued for 5 (five) years  of its commercial production or expansion /  modernization / diversification and is valid from  the date of 7.9.98 to 6.9.2003.";

it is estopped and precluded from contending otherwise, and, thus, it cannot  be permitted to change its stand by seeking an amendment therefor as has  been sought to be done by its letter dated 7.04.2000 and, thus, it was rightly  rejected by the Government of Orissa in terms of its letter dated 17.05.2000.   

       The said letter dated 17.05.2000 reads as under:

       "Paragraph 7.4 and 7.5 (Part II) of IPR’92  are co-related.  Though paragraph 7.5 is silent  about the period of sales tax benefit, it refers to the  previous paragraph of 7.4.  Moreover, while  considering to extend the S.T. benefit, one has to  go by the provisions of paragraph 6.1 (part-II) of  the IPR’92 which states as follows: "Subject to operational guidelines / instructions  and procedure, sales tax incentives shall be  allowed after the unit has gone into commercial  production and from the date of commercial  production."         In the operational guidelines, issued to  Industries Deptt. vide Letter No.4068 dtd. 8.2.93  under the IPR’92 the period of exemption /  deferment for E/M/D has been clearly mentioned  as 5 years.  Accordingly the Director of Industries,  Orissa has issued eligibility certificate for a period  of 5 years w.e.f.7.9.98 to 6.9.2003.         I trust that the above clarification will  remove your doubt."  

7.      Mr. A.K. Ganguli, learned senior counsel appearing on behalf of the  respondent, on the other hand, submitted that the exemption benefit was  limited to the finished products and not to the raw-materials and, thus, there  is no infirmity in the impugned judgment.   

8.      The High Court passed the impugned judgment inter alia on the  premise that operational guidelines being in the nature of a subordinate sub- delegated legislation, the same was required to be in consonance with the  IPR and by reason thereof no other or further condition could have been  stipulated so as to prevail over the policy decision itself holding:

"...If we accept the contention advanced by the  learned Counsel for the Revenue that the  ’operational guidelines’ provide a "limitation" or  "time period" for sales tax incentives, it would  tantamount to accepting a principle that by sub- delegated legislation, a delegatee may also  effectively amend or supplant legislation, which it  is clearly incompetent to do.  On a reading of the  said ’operational guidelines’ and the terms thereof  would clearly indicate that the stipulations  regarding time period find mention in Clause-5 of  the ’operational guidelines’.  It would be clear that  the said stipulation would relate only to those  industries covered under Para 7.3 and 7.4 of the  IPR 1992 and would be limited to apply to those  industries only to which "time periods" have been  stipulated in the IPR itself and not to the industries  / activities covered under Paragraphs \026 7.2 and 7.5.  

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Since the petitioner’s industry is covered in the  EMD category under Para-7.5 of the IPR 1992  read with Entry No.44 of SRO No.1091 of 1992,  Clause 5 of the ’operational guidelines’ cannot be  said to apply to it.  We are of the view that Clause- 5 of the ’operational guidelines’ and stipulation in  the Eligibility Form (the eligibility certificate), to  the extent that it provides for a period of time is  not in consonance with the IPR, 1992, is clearly  without jurisdiction / without sanction of law and  is also ultra vires to the IPR 1992.         (c)     The operational guideline and / or  instructions were made for administration of  incentive contained in the Policy and not for the  purpose of imposing any new stipulation and / or  conditions alien to and /or not in consonance with  the passing of the 1992 Policy.  Such a  stipulation  cannot be in law be read into and allowed to  operate since it would frustrate the very objective  sought to be achieved by the 1992 Policy  Declaration."

       It was furthermore held:

       "Drawing an analogy from the aforesaid  principles of law, we are of the view that for the  incentive under paragraph 7.5 read with entry  No.44 as notified in S.R.O No. 1019 of 1992,  exemption of tax did not provide any period of  limitation.  Neither the IPR, 1992 nor the Finance  Department Notification in SRO No.1019 of 1992  provided any stipulation as to how long the  exemption from sales tax would remain in force  and therefore, the position that emerges therefrom,  is that, such exemption granted under the  Notification was to remain operative till the  industry utilizes / exhausts the incentive granted to  it.  The petitioner is entitled to such benefit till  such time such exemption is allowed to remain in  force without being withdrawn by the subsequent  notification.  It is important to point out here that  no such notification withdrawing such exemption  has been brought to our notice in course of  hearing."

9.      Indisputably, pursuant to or in furtherance of the aforementioned IPR,  1992, the State Government amended the provisions of the Orissa Sales Tax  Act.  Section 6 of the said Act reads as under:

"6.    Tax Free Goods \026 The State Government  may, by notification, subject to such conditions  and exceptions, if any, exempt from tax the sale or  purchase of any goods, or class of goods and  likewise withdraw any such exemption."

10.     Indisputably, again pursuant to or in furtherance of the  aforementioned provision, the Finance Department of the State of Orissa had  issued notification bearing SRO No. 1091 of 1992 dated 23.09.1992 and  inserted Entry 44 in terms whereof the respondent became entitled to  exemption.  Entry 44 of the said notification reads as under:

"44.    Sale of finished products of an existing  industrial unit, located in Orissa i.e. an industrial  unit which has gone into production before 1st  August, 1992, and which has undertaken

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expansion / modernization / diversification of the  said unit after the 1st day of August, 1992 on the  basis of separate project report duly appraised by  the financial institution, and a certificate to this  effect that is, regarding expansion / modernization  / diversification of the unit is produced from the  concerned General Manager, Project Manager,  District Industries; Centre in case of Small Scale  Units and a certificate in Form E (92) is produced  from the Director of Industries, Orissa in case of  Medium, Large and pioneer Units.         The exemption of sales tax shall be limited  to 60 per cent of the additional capital investment,  in plant and machinery only in Zone-C, 75 per cent  of the additional capital investment in plant and  machinery only in Zone-B and 100 per cent of  additional capital investment in plant and  machinery only in Zone-A. Explanation \026I:- Additional capital investment in  plant and machinery means additional investment  of 50 per cent of more of the undepreciated book  value of fixed capital investment of an existing  unit in acquisition of plant and machinery for  expanding / modernization / diversifying the  production of the said unit.   Provided that the benefit of exemption is  admissible only on the incremental sales arising  out of such expansion / modernization and  diversification. Provided further that no exemption as indicated  above shall be allowed to the following categories  of industries, namely: 1.      Rice Hullers and Rice Mills. 2.      Flour Mills including manufacture of  Besan, Pulse Mill and chuda mills. 3-47 .................................................................." 5.              Further, the eligibility certificate  granted for sales tax concession on sale of  finished products categorically states that  exemption may be available as per Finance  Department Notification No. SRO 1091 of  1992 as amended from time to time up to a  ceiling amount of: 1.      100% of the additional capital  investment in plant and machineries  being located in                ......Zone-’A’ 2.      75%     -do-                    .......Zone-’B’ 3.      60%    -do-                     ........Zone-’C’                          

11.     It is not in dispute that in the said entry, during which the same would  remain operative, no period far less the period of five or seven years had  been mentioned.  The only limitation prescribed thereby was that only 75%  of the additional capital investment in Zone B would be allowed where the  unit of the respondent is situate.   

12.     In terms of Clause 5 of IPR, 1992, the respondent became entitled to  exemption from payment of sales tax on finished products for an amount of  Rs. 49.45 crores being 75% of Rs. 63.95 crores invested in plant and  machinery.

13.     We may notice that the Finance Department of the State of Orissa  passed a consequential order in IPR, 1992 bearing SRO No. 1091 of 1992  dated 23.09.1992 which was given effect from 1.08.1992.

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       A bare perusal of the said notification would clearly show that  whenever the period upto which the exemption, could be obtained was  required to be stated had specifically been done therein, as for example Sl.  Nos. 30A, 41, 42A and 43A etc.  We may, furthermore, notice that against  the Entry 44, however, what is mentioned is the extent to which such  exemption would be granted.  No period during which such exemption is to  be obtained was stated.  In other words, no period of limitation was fixed  thereby.

14.     In view of the clear legal provision as also the aforementioned  notification dated 23.09.1992, there cannot be any doubt whatsoever that the  exemption in respect of deferment of sales tax having been provided for  under the Orissa Sales Tax Act as also the notification issued thereunder, the  High Court, in our opinion, is correct in taking its view.   

15.     It is furthermore a well settled principle of law that an exemption  notification must be liberally construed. [See Commissioner of Customs  (Imports), Mumbai v. Tullow India Operations Ltd., (2005) 13 SCC 789,  Tata Iron & Steel Co. Ltd. v. State of Jharkhand and Others, (2005) 4 SCC  272, Government of India and Ors. v. Indian Tobacco Association, (2005) 7  SCC 396, Commnr. Of Central Excise, Raipur v. Hira Cement, JT 2006 (2)  SC 369. and P.R. Prabhakar v. Commnr. of Income Tax, Coimbatore, 2006  (7) SCALE 191].  The said principle, therefore, applies in all fours in the  present case.

16.     For the reasons aforementioned, there is no merit in this appeal which  is dismissed accordingly with costs.  Counsel’s fee assessed at Rs. 25,000/-.