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State of Gujarat vs Arcelor Mittal Nippon Steel India Limited

Civil Appeal · 2022 INSC 83Decided 21 Jan 2022
Civil Appeal Nos. 7710-7714 of 2021
M.R. Shah · Sanjiv Khanna

Background

The respondent (formerly Essar Steel Ltd., now Arcelor Mittal Nippon Steel India Ltd.) ran a steel plant in Gujarat that had been granted a sales-tax exemption on raw materials like Naphtha and Natural Gas under a state incentive scheme, on condition that it actually use those raw materials itself in manufacturing. Instead, the company sold the tax-exempt Naphtha and Natural Gas to a sister company, Essar Power Ltd. (EPL), which used them to generate electricity that it then sold back to Essar Steel, even though power-generating units were expressly excluded from the exemption scheme. The Gujarat Sales Tax Tribunal and the Gujarat High Court both ruled in the company's favour, holding the exemption still applied and that demanding tax now would violate "promissory estoppel." The State of Gujarat appealed to the Supreme Court.

Decision Breakdown

The Supreme Court held that the company had breached the core condition of the exemption, actually using the raw material itself, by diverting it to an ineligible unit (the power company) and violating its own declaration (Form 26) to that effect. Because of this violation, the exemption was never validly available, so there was no "promise" by the government that could give rise to promissory estoppel; in any case, the Court noted that promissory estoppel generally does not restrain tax authorities from correctly assessing tax due under the law. The Court also upheld the penalty imposed by the tax authorities, calling the diversion of raw materials to an ineligible company a case of "deliberate violation." The High Court and Tribunal orders quashing the tax demand and penalty were set aside, and the original tax and penalty demand was restored.

Lesson Learnt

A tax exemption granted on specific conditions (such as using purchased goods only for one's own manufacturing) is forfeited if those conditions are breached, even indirectly through a related company, and a business cannot invoke "promissory estoppel" to escape tax liability when it was never truly entitled to the exemption in the first place.

Official source (sci.gov.in)View Judgment (PDF)

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