SCA/14422/2005 1 ORDER IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION No. 14422 of 2005 With SPECIAL CIVIL APPLICATION No. 14424 of 2005 With SPECIAL CIVIL APPLICATION No. 15033 of 2005 To SPECIAL CIVIL APPLICATION No. 15051 of 2005 With SPECIAL CIVIL APPLICATION No. 15068 of 2005 With SPECIAL CIVIL APPLICATION No. 15070 of 2005 With CIVIL APPLICATION No. 6880 of 2005 In SPECIAL CIVIL APPLICATION No. 14422 of 2005 With CIVIL APPLICATION No. 6881 of 2005 In SPECIAL CIVIL APPLICATION No. 14424 of 2005 With CIVIL APPLICATION No. 10247 of 2005 In SPECIAL CIVIL APPLICATION No. 14422 of 2005 With CIVIL APPLICATION No. 10249 of 2005 In SPECIAL CIVIL APPLICATION No. 14424 of 2005 With CIVIL APPLICATION No. 10250 of 2005 In SPECIAL CIVIL APPLICATION No. 15068 of 2005 With CIVIL APPLICATION No. 10252 of 2005 In SPECIAL CIVIL APPLICATION No. 15070 of 2005 ========================================================= ESSAR STEEL LIMITED & 1 - Petitioner(s) Versus STATE OF GUJARAT & 2 - Respondent(s) ======================================================== Appearance : MR KS NANAVATI and MR MIHIR H. JOSHI, Sr. ADVOCATES with MR KEYUR GANDHI, FOR NANAVATI ASSOCIATES for Petitioner(s) : 1 - 2. MR KAMAL B TRIVEDI, ADVOCATE GENERAL with MS. SANGITA VISHEN, AGP for Respondent(s) : 1-3. ========================================================= SCA/14422/2005 2 ORDER CORAM : HONOURABLE MR.JUSTICE M.S.SHAH and HONOURABLE MR.JUSTICE SHARAD D.DAVE Date : 28/03/2006 ORAL ORDER (Per : HONOURABLE MR.JUSTICE M.S.SHAH) All these petitions are filed by the same public limited Company - Essar Steel Ltd. and its Director for challenging the assessment orders and revisional orders passed by the authorities under the Gujarat Sales-tax Act, 1969 (hereinafter referred to as “the Act”) in so far as the authorities have taken the view that the petitioner-Company had illegally availed of the benefits of exemption under the Pioneer Unit Status Incentive Scheme and the Prestigious Unit Status Incentive Scheme. 2. The petitions were initially filed against show cause notices issued by the authorities - (i) calling upon the petitioner-Company to show cause why the assessment orders passed in favour of the petitioner – Company for the years 1995-96, 1996-97, 1997-98 and 2000-01 should not be revised by the Commissioner of Sales-tax in suo motu revision under Section 67 of the Act, SCA/14422/2005 3 ORDER (ii) calling upon the petitioner- Company to show cause why the assessment orders passed by the Assessing Officer in favour of the petitioner-Company for the years 1998-99 and 1999-2000 should not be taken up under Section 50 of the Act for withdrawing the benefits of exemption availed of by the petitioner -Company for the relevant years. (iii)calling upon the petitioner- Company to show cause why the petitioner- Company should not be denied the benefit of exemption for the years 2001-02 to 2004-05. This Court (Coram: Hon'ble Mr Justice RS Garg & Hon'ble Mr Justice KM Mehta) entertained the petitions by issuing notice and granted ad-interim protection, subject to the condition that the petitioner- company deposits Rs.75 crores. The petitioner- Company complied with the said condition, but during pendency of the petitions, the Commissioner of Sales-tax passed orders dated 22.7.2005 against the petitioner -Company for the years 1995-96, 1996-97, 1997-98 and 2000-01 and also imposed the penalty of one and half times the amount of tax levied. Similarly the Deputy Commissioner of Sales-tax (Corporate Cell) passed orders dated 16.7.2005 under Section 50 of the Act holding that the petitioner- Company had illegally availed the benefits of tax exemption under the incentive schemes SCA/14422/2005 4 ORDER and imposed the penalty of one and half times the tax levied. The petitioners accordingly amended the petitions for challenging the said orders. The following order was passed on 6.10.2005 :- “So far as filing of the appeals are concerned, the petitioners are free to file the appeals before the appropriate forum and they would also be free to file necessary applications for extension of time and seeking exemption or partial exemption from the deposit before this Court. Put up on 18th October, 2005 for further consideration. Sd/- [R.S. Garg, J.} Sd/- [K.M. Mehta, J.]” Without prejudice to their rights and contentions in the petitions, the petitioner- Company filed appeals against the orders of the Dy. Commissioner of Sales-tax and revisions against the orders of the Sales-tax Commissioner in order to save limitation. 3. The facts leading to filing of this group of petitions are as under:- 3.1 The Government of Gujarat declared a Composite Sales-tax Incentive Scheme, 1987 for pioneer units. Under the Scheme, an eligible unit was entitled to purchase free of tax raw materials, processing materials, consumable stores etc. for the SCA/14422/2005 5 ORDER purpose of use in the manufacture of goods, and the goods manufactured were allowed to enjoy the benefits by way of sales-tax exemption or deferment under Entry 118 under Section 49(2) of the Act, subject to ceilings described in the annexure depending on the investments made by the pioneer unit. 3.2 As per the eligibility certificate granted on 16.7.1991 and amended on 26.12.2000, the petitioner- Company was granted exemption limit of Rs.237.59 crores for the period from 1.8.1990 to 31.7.2004. The Company commenced commercial production of its pioneer unit (Unit No.1) manufacturing Hot Briquetted Iron (HBI) from 1.8.1990. 3.3 The petitioner- Company also set up another unit i.e. Unit No.2 at the Company's Hazira plant for commercial production of Hot Rolled Coils (HRC) wherein HBI was an intermediate product. For manufacturing HRC in unit No.2, the petitioner used HBI manufactured in unit No.1 as well as in unit No.2. Under the Scheme for Special Incentives to Prestigious Units issued by the State Government on 26.7.1991, the petitioner – Company was also granted eligibility certificate dated 15.12.1993 (which was subsequently amended) for availing of exemption under Entry 255 of the Scheme for Prestigious Units in respect of unit No.2 for the period from 22.2.1993 to 21.2.2007 for an amount of Rs.2050 crores. SCA/14422/2005 6 ORDER 3.4 The commercial production of unit No.2 manufacturing HRC commenced in 1995-96. The petitioner- Company purchased Naptha and natural gas for the purpose of generating electricity for use in the HRC plant (unit No.2). The said inputs were converted into equivalent units of electricity at the power plant of Essar Power Ltd. situated next to the factory of the petitioner and such units of electricity were used for manufacturing HRC. The petitioner availed of exemption from payment of purchase tax on the aforesaid purchase of raw materials by submitting the prescribed forms. The petitioner also availed of Modvat/Cenvat credit on the excise duty paid on Naptha and natural gas which was considered to be input used in the manufacture of the final product for excise purposes also. The petitioner disclosed in the sales-tax returns that HBI manufactured in unit No.1 was transferred to unit No.2 by way of unit transfer for using the HBI in manufacturing HRC in unit No.2. 3.5 On 14.11.2000, the State Government issued the notification amending Entry 255 and incorporating a condition that the raw materials must be used in the factory of production for manufacturing goods for sale within the State of Gujarat. 3.6 On 24.7.2001, the officers of the Sales-tax SCA/14422/2005 7 ORDER Department checked both the manufacturing units of the petitioner – Company and on the basis of the said checking issued notices mainly raising the following objections:- (i) Under Entry 118 exemption from payment of purchase tax on the purchase of raw materials for unit No.1 was granted on the condition that the product manufactured with such raw materials was to be sold within the State of Gujarat. Unit No.1 used raw materials without paying purchase tax and did not sell its finished product (HBI) within the State of Gujarat, but transferred the same to unit No.2 of the petitioner – Company and, therefore, there was a breach of condition. (ii) Naptha and natural gas purchased by unit No.2 without payment of purchase tax were not used by unit No.2 but were tansferred to Essar Power Ltd., another Company, which generated electricity, and supply of electricity by Essar Power Ltd. to unit No.2 of the petitioner – Company for the purpose of manufacturing HRC was not sufficient compliance with the condition requiring unit No.2 to use Naptha and natural gas for the purpose of manufacturing HRC. SCA/14422/2005 8 ORDER 3.7 On 26.11.2001, the petitioner – Company made detailed submissions and representations to the Commissioner of Sales-tax in respect to the queries raised and contended that the raw materials were purchased by the petitioner – Company for manufacturing HBI in unit No.1 and such HBI was transferred to unit No.2 for manufacturing HRC within the State of Gujarat and that such finished product HRC manufactured in unit No.2 was sold by the petitioner -Company within the State of Gujarat and that unit Nos.1 and 2 were parts of the same legal entity being the petitioner – Company and that, therefore, there was no breach of Entry 118. As regards the use of Naptha and natural gas purchased by the petitioner – Company for the benefit of unit No.2, it was stated that Naptha and natural gas were used for getting electricity generated by Essar Power Ltd. and that use of such electricity by unit No.2 was an integral part of the process of manufacturing HRC in unit No.2; that the benefit of exemption was availed of only for that part of Naptha and natural gas which was used by Essar Power Ltd. for supplying electricity to the petitioner – Company and that no exemption was claimed on the Naptha and natural gas used by Essar Power Ltd. for generating electricity for GEB which was one of the conditions permitting Essar Power Ltd. to generate electricity through captive power plant for the petitioner- SCA/14422/2005 9 ORDER Company. 3.8 On 13.6.2002, the Sales-tax Officer, Surat issued notice under Section 50 of the Act demanding Rs.71.48 crores on the ground that exemption was wrongly availed of by unit No.1 which transferred HBI to unit No.2 instead of selling the same. Similarly, the Sales-tax Officer, Surat demanded Rs.199.73 crores on the ground that unit No.2 had wrongly availed of exemption on purchase of Naptha and natural gas used for generating electricity outside the factory of production. Both these demands pertain to the years 1996-97 to 2000-01. 3.9 On 16.8.2002, the Commissioner of Sales-tax, who got initiated the inquiry after the aforesaid visit/ checking of the Sales-tax Officer on 24.7.2001, communicated to the Sales Tax Officer that the petitioner had not committed any breach of the conditions of exemption by undertaking inter-unit transfer of HBI (from unit No.1 to unit No.2) or by getting the raw materials (Naptha and natural gas) converted into electricity outside its factory of production before bringing it back in the form of equivalent units of electricity for use in the manufacture of the final product. 3.10 On 31.3.2003, the Sales-tax Officer, Surat, who had issued the aforesaid notice dated 13.6.2002 SCA/14422/2005 10 ORDER under Section 50 of the Act, completed the assessment proceedings in respect of unit No.2 for assessment year 1998-99 without raising any demand in respect of the purported breach. The same officer also passed assessment order for the same year for unit No.1. Similar assessment orders were passed for unit Nos.1 and 2 for assessment years 1999-2000. 3.11 On 31.3.2005, the Sales-tax Officer, Surat passed assessment order in respect of unit No.2 for the year 2000-01 and after referring to the aforesaid communication/order dated 16.8.2002 of the Sales-tax Commissioner dropped the demand raised in the earlier notice dated 13.6.2002. Similar orders were passed in respect of unit No.1 for assessment years 1995-96, 1996-97, 1997-98 and 2000-01. On 27.2.2005, similar assessment orders were passed in respect of unit No.2 for assessment years 1995-96, 1996-97 and 1997-98. 3.12 In the meantime, however, the following demand notices came to be issued by Dy. Commissioner of Sales-tax (Corporate Cell-II), Ahmedabad - (i) 4.2.2005 : calling upon unit No.1 to pay an amount of Rs.91.55 crores for the period 1995-96 to 2004-05 (second quarter) on account of breach of the condition of exemption due to transfer of HBI being sold SCA/14422/2005 11 ORDER by unit No.1. (The petitioner submitted its reply dated 23.2.2005 as per the previous stand and relying on the order dated 16.8.2002 of the Sales-tax Commissioner). (ii) 30.5.2005 : The Dy. Commissioner of Sales- tax (Corporate Cell-II), Ahmedabad issued notice to unit No.2 under Section 50 of the Act demanding an amount of Rs.480.99 crores as the amount of exemption wrongly availed of by the petitioner in respect of purchases of Naptha and natural gas for the period from 1996-97 to 2004-05. (iii)1.6.2005 : calling upon the petitioner – Company to show cause why interest at the statutory rate and penalty at the rate of 150% of the sales-tax / purchase tax should not be recovered from the petitioner for the period from 1995-96 to 2004-05. (iv) 12.7.2005 : The Sales-tax Commissioner issued notices for revision under Section 67 of the Act to unit No.2 seeking to revise assessment orders for assessment years 1995- 96, 1996-97, 1997-97 and 2000-01 on the ground that the petitioner had wrongly availed of the exemption by converting Naptha and natural gas into electricity SCA/14422/2005 12 ORDER outside the factory of production. Similar notices for the same years were also issued to unit No.1 for revision of assessment orders. 4. The petitioners filed the present petitions on 14.7.2005 challenging the notice dated 4.2.2005 in respect of unit No.1 and notice dated 30.5.2005 in respect of unit No.2 as being wholly without jurisdiction and without authority of law. The petitioners also submitted written submissions to the Dy. Commissioner of Sales-tax stating that the same were being submitted without prejudice to the contentions raised in the petitions filed before this Court. The petitioner requested for a decision on jurisdiction and limitation as preliminary issues and also for personal hearing. On 15.7.2005, the Commissioner of Sales-tax cancelled decision dated 16.8.2002 as illegal and void-ab-initio i.e. with retrospective effect. On 16.7.2005, the Dy. Commissioner of Sales-tax (Corporate Cell-II), Ahmedabad passed separate orders in respect of unit No.1 and unit No.2 confirming demand of sales-tax and levying penalty of 150% for the years 1998-99, 1999-2000 and for the years 2001- 02 to 2004-05. In reply to the notices dated 12.7.2005 SCA/14422/2005 13 ORDER issued by the Commissioner of Sales-tax for revision of the assessment orders already passed for the years 1995-96 to 1997-98 and 2000-01, the petitioner submitted reply dated 18.7.2005 submitting that the petitioner had challenged the orders passed by the Dy. Commissioner taking the similar view and that the petitions were pending before this Court. On 19.7.2005, the Commissioner of Sales-tax issued notices for penalty against unit Nos.1 and 2 in the revision proceedings. On 20.7.2005, the petitioner again reiterated its request for keeping the proceedings pending till determination of the issues raised in the writ petition. On 21.7.2005, the petitioner also filed two Special Civil Applications before this Court challenging the notices dated 12.7.2005 and 19.7.2005 issued by the Sales-tax Commissioner and referred to hereinabove. On 22.7.2005, the Sales-tax Commissioner passed orders under Section 67 of the Act revising the assessment orders for the years 1995-96 to 1997-98 and 2000-01 and imposing penalty at the rate of 150%. 5. The amounts of tax levied, interest demanded and penalty imposed on the petitioner – Company for unit Nos.1 and 2 are set out in the charts produced by the Revenue at the hearing. The charts are also to be treated as Annexures I and II to this judgment, for unit Nos. 1 and 2 respectively. SCA/14422/2005 14 ORDER SUBMISSIONS OF THE COMPANY ON MERITS OF LEVY OF TAX ON UNIT I. 6.1 As far as unit No.1 is concerned, Mr KS Nanavati, learned counsel for the petitioner Company has submitted that it was the Essar Steel Limited which was granted the benefit of exemption under the Pioneer Status Incentive Scheme as per the eligibility certificate dated 16.7.1991. The question of earmarking the said benefits to unit No.1 or unit No.2 did not arise because when the Company was granted the benefit of Pioneer Status, only one unit was in existence. The scheme intended to confer on the Company the benefit of exemption from payment of purchase tax on raw materials purchased for manufacturing whatever product the unit ultimately manufactured and sold within the State of Gujarat and the Company was accordingly manufacturing HBI from the raw materials purchased without payment of tax and the Company was also selling the HBI within the State of Gujarat. However, when the Company set up its additional plant or unit No. 2, the HBI manufactured in unit No.1 was being sent to unit No.2 as raw material for manufacturing HRC and HRC was admittedly being sold within the State of Gujarat. 6.2 It is vehemently submitted by Mr Nanavati that the Company is a legal entity and merely because for the convenience of manufacturing purposes, there are two units and HBI manufactured in one unit is sent to the other unit as raw material for SCA/14422/2005 15 ORDER manufacturing HRC, it cannot be considered as sale, but it has to be considered as unit transfer and in any case since the Company sold HRC within the State of Gujarat, the conditions of exemption in Entry 118 were satisfied. 6.3 There was no breach of any of the provisions of Entry 118 of which the petitioner been claiming and getting the benefit without any demur from the revenue. In fact, pursuant to the search carried on 24.7.2001, a show cause notice under Section 50 of the Act came to be issued on 13.6.2002. In response to the said notice, the petitioner had already given its detailed replies to the Commissioner on 26.11.2001 and on other dates and it was in view of the said replies that the department was satisfied and the Commissioner of Sales-tax communicated his decision dated 16.8.2002 in favour of the petitioner on the basis of which the Assessing Officer passed assessment orders on 31.3.2005 for the assessment years 1995-96, 1996-97, 1997-98 and 2000-01 and although there is no direct reference to the said letter dated 16.8.2002, the Assessing Officer also took the same view in the assessment orders dated 31.3.2003 and 31.3.2004 for the assessment years 1998-99 and 1999-2000. 6.4 As far as unit No. 1 is concerned, it is vehemently submitted that the so-called notice dated 4.2.2005 is not merely a notice under Section 50 of the Act, but straightaway the demand calling upon the SCA/14422/2005 16 ORDER petitioner Company to pay the amounts of tax and penalty demanded therein without giving the petitioner any opportunity of being heard. The notice dated 4.2.2005 is also without jurisdiction as the Commissioner had already exercised the powers under Section 50 of the Act while passing the order dated 16.8.2002 and the Assessing Officer or the authority issuing notice was bound by the said decision. Even otherwise, the notice is time barred since the department was aware of the procedure followed by the petitioner since 1995-96. Once the notice issued on the basis of the purported breach detected on 24.7.2001 was not pursued, issuance of subsequent notice on 4.2.2005 must also be construed as vitiated by unreasonable delay. OTHER CONTENTIONS FOR UNIT No.1 AND UNIT No.2 7.1 The order dated 16.8.2002 in favour of the petitioner which was relied upon by the Assessing Officer as recently as on 31.3.2005 for unit No. 1 and as recently as on 27.5.2005 for unit No. 2 could not have been cancelled or withdrawn without giving the petitioner a show cause notice and a reasonable opportunity of being heard. 7.2 It is also submitted that the proceedings under Section 50 cannot be initiated unless reassessing or revisional authority had reasons to believe that any turnover of sales or turnover of purchase of any goods chargeable to tax under the Act SCA/14422/2005 17 ORDER had escaped assessment or has been under-assessed or assessed at the lower rate. Strong reliance is placed on the decision of the Apex Court in Calcutta Discount, (1961) 41 ITR 191 in support of the contention that where the notice is issued by the authority without any objective material for arriving at such satisfaction, the Court would issue a writ of prohibition under Article 226 of the Constitution. 7.3 As regards assessment years 1995-96, 1996-97 and 1997-98, it is submitted that the notices were issued by the Commissioner under Section 67 of the Act on 12.7.2005 and within a period of ten days, not only the final revisional orders were passed, but when the petitioner raised objections on 12.7.2005, the Commissioner issued notices for penalty on 19.7.2005 and passed the orders of penalty on 22.7.2005 i.e. within a period of just three days. It is, therefore, submitted that the orders of penalty are passed in terrorem. 7.4 It is also submitted that once the assessment orders were passed for the years 1998-99 and 1999-2000, no separate orders could have been passed under Section 50 of the Act on 16.7.2005. As regards the orders dated 16.7.2005 passed under Section 50 of the Act by the Deputy Commissioner, Corporate Cell for the years 1998-99 and 1999-2000, it is submitted that the jurisdictional Assessing Officer was the Sales-tax SCA/14422/2005 18 ORDER Commissioner and, therefore, the Deputy Sales-tax Commissioner, Corporate Cell had no jurisdiction to pass the orders under Section 50 of the Act. 7.5 As far as the assessment years 2001-02, 2002-03, 2003-04 and 2004-05 are concerned, it is submitted that the orders passed on 16.7.2005 were also without jurisdiction as they were passed pursuant to the notices issued on 4.2.2005 for unit No. 1 and 30.5.2003 for unit No. 2 whereas the delegation in favour of the Deputy Commissioner, Corporate Cell came to be made on 14.6.2005 and that too only for the years 1995-96 to 2000-01. It is, therefore, submitted that the said delegation could not have breathed life into still born show cause notices dated 4.2.2005 and 30.5.2005. 7.6 In any case, there could not have been any notice under Section 50 of the Act for the AY 2001-02 onwards because even as per the department's case the so-called breach was allegedly detected on 24.7.2001 and, therefore, atleast after 24.7.2001 there could not have been any question of invocation of Section 50. CONTENTIONS AGAINST ORDER OF PENALTY 8. As regards the orders of penalty, it is submitted that as per the settled legal position, particularly the principles enunciated in the case of SCA/14422/2005 19 ORDER Hindustan Steel Ltd. vs. State of Orissa, AIR 1970 SC 253, the department could not have imposed penalty assuming that the tax liability was involved, merely because it is lawful to do. As held by the Hon'ble Supreme Court, the penalty could not be imposed unless elements of culpability are involved. Apart from the fact that the decision dated 16.8.2002 of the Commissioner was in favour of the petitioner Company, the petitioner has never carried out any clandestine activity. All the material regarding purchase of raw materials, finished products, separate turn over of both the units and all other details were always furnished and the department has also not been able to show that the petitioner has done anything clandestinely to evade payment of sales-tax or to avail of the benefits of the two incentive schemes. CONTENTIONS ON MERITS REGARDING UNIT No.2 9. As far as unit No.2 is concerned, on merits of the matter, it is submitted that the purchase of Naphtha and natural gas for generation of electricity was in order to ensure that the electricity is made available for heating the raw material for the purpose of manufacturing HRC. Strong reliance is placed on the decisions in case of Tata Oil Mills Co. Ltd. vs. Collector of Central Excise, (1989) SCC 541, Indian Farmers Fertilizer Co-op. Ltd. vs. Collector of Central Excise, Ahmedabad, (1996) 5 SCC 488 and Unichem Laboratories Ltd. vs. Collector of Central Excise, (2002) 7 SCC 145 in support of the SCA/14422/2005 20 ORDER proposition that electricity