The Supreme Court bench comprising of Justices M. R. Shah and Sanjiv Khanna quashed and set aside the impugned common order passed by the Gujarat High Court and the Tribunal of quashing and setting aside the demand of purchase tax. The Court also restored the order passed by the Assessing Officer of imposing a penalty on Arcelor Mittal Nippon Steel India Limited.

Arcelor Mittal Nippon Steel India Limited, the Respondent in the matter, is a company involved in the manufacture and sale of Hot Briquetted Iron and Hot Rolled Coil. The Government of Gujarat announced a scheme under which a prestigious unit was eligible for incentives up to 90% of the fixed capital investment pursuant to which the Respondent invested approximately Rs. 5000 crores for Hot Rolled Coil. The exemption was provided as per Entry 255 of the notification issued by the Government of Gujarat under section 49(2) of the Gujarat Sales Tax Act, 1969. The Respondent was given a Sales Tax exemption for a period from 22.02.1993 to 21.02.2007 up to a maximum monetary limit of Rs. 2050 crores on fulfilling certain conditions.

The exemption granted to the Respondent was exemption from the payment of purchase tax on raw material for Naphtha and Natural Gas. This exemption had been made available to steel manufacturing units and the units/entities engaged in generating electricity were specifically excluded from this exemption by placing them in the list of industries "Not Eligible" for this incentive. One of the conditions required the eligible units to use the goods purchased within the State of Gujarat as raw materials.

The Government amended the notification once in 2000 where it was provided that the goods were to be actually used by the eligible units as raw materials, processing materials, or consumable stores in its industrial units for which it has obtained the eligibility certificate and again in 2002 which provided that the eligible units, who claim exemption from purchase tax on the purchase of the goods even if the goods are used as raw materials, processing materials or consumable stores in its industrial units for which it has obtained the eligibility certificate in the manufacturing of goods for dispatch to its another unit or division situated within the State of Gujarat or outside the State of Gujarat for use in the manufacture of other goods for sale by such other unit. Under these notifications, one of the main requirements was that the eligible unit furnishes to the selling dealer a Form 26 certificate.

The Naphtha and Natural Gas purchased by the Respondent - Essar Steel Limited and were sold to Essar Power Limited and they utilized it for the purpose of manufacturing electricity which Essar Steel purchased from Essar Power. It is the case of Respondent Essar Steel that the electricity generated by Essar Power was used for the purpose of manufacturing HRC in its industrial unit.

The officers of Sales Tax conducted a surprise visit at the premises of Essar Steel in the month of July 2001. A notice was issued by the Sales Tax Officer calling for certain information including details of branch transfers, deemed exports, transfer of finished goods, etc. The Sales Tax Department thereafter raised a dispute regarding the breach of the declaration given in Form 26 on the ground that the goods so purchased were transferred to Essar Power which was then used for the manufacture of HRC. A notice was issued on 30.06.2002 by the Sales Tax Officer calling upon the ESL to give clarification in respect of the purported breach of conditions of exemptions, including the transfer of Naphtha/Natural Gas to EPL for generation of electricity.

Subsequently, a notice dated 30.05.2005 came to be issued by the Deputy Commissioner of Sales Tax for initiating levy of purchase tax of Rs.480.99 crores and for levying penalty for the period 1995-1996 to 2005-2006 on the ground that the respondent – Essar Steel has contravened the provisions of the Act, more particularly, Entry No.255 and availed the exemption wrongly. Essar Steel filed a writ petition before the High Court challenging the notice issued by the Deputy Commissioner. The High Court restrained the departmental authorities from implementing or enforcing the assessment orders subject to the condition that in respect of Unit No.2, the respondent – ESL should deposit 50% of the tax dues within the time stipulated in the order. The assessment orders by the Deputy Commissioner of Sales Tax came to be challenged by way of appeals before the Joint Commissioner which imposed purchase tax. Being aggrieved appeals were made to the Tribunal which held that the respondent is not liable to pay any tax interest or penalty on the disputed transactions and dismissed the cross-objections of the State.

The State approached the High Court as being tax appeal and the High Court in its impugned judgment dismissed the said appeals mainly on the ground of promissory estoppel and observed that the Respondent – ESL has not violated any of the conditions provided under the original Entry No.255(2). The State feeling aggrieved by the orders approached the Supreme Court

The issues dealt with by the Supreme Court were - (i) Whether Essar Steel Ltd. was 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? (ii) 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 stipulated as per the first notification dated 05.03.1992? (iii) 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? (iv) Whether there was any breach of the declaration filed by the respondent as per Form No.26? (v) 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?

The Apex Court while considering the issues opined, "It is settled law that the notification has to be read as a whole. If any of the conditions laid down in the notification is not fulfilled, the party is not entitled to the benefit of that notification. An exception and/or an exempting provision in a taxing statute should be construed strictly and it is not open to the court to ignore the conditions prescribed in industrial policy and the exemption notifications."

Thus the Court observed in this regard, "The intention of the State to provide the incentive under the incentive policy was to give benefit of exemption from payment of purchase tax was to the specific class of industries and, more particularly, as per the list of 'eligible industries'. Exemption was not available to the industries listed in the 'ineligible' industries."

The Bench observed, "The rules of promissory estoppel and estoppel by conduct may not be applied to alter or amend the specific terms and against statutory provisions. All the terms and conditions contained in the exemption notification shall prevail and the person claiming the exemption has to fulfil and satisfy all the eligibility criteria/conditions mentioned in the exemption notification."

The Court while quashing the previous orders of the High Court and Tribunal observed, "The submission on behalf of the respondent – assessee that as in the earlier assessment years benefit of exemption was granted to the respondent and, therefore, in the subsequent assessment years also, despite the fact that it is found that the respondent was/is not eligible for the benefit of exemption under the original Notification/Entry No.255(2) cannot be accepted. If such a submission is accepted in that case it will be perpetuating the illegality and granting the benefit of exemption to 'ineligible industry', who did not fulfill and/or comply with the eligibility criteria/conditions mentioned in the exemption notification." It was also observed by the court in case of levy of penalty that, "if the difference of tax paid and tax leviable/assessed is more than twenty five percent, in that case, the dealer shall be deemed to have failed to pay the tax to the extent of the difference between the amount so assessed/re-assessed and the amount paid and, in that case, there shall be levied on such dealer a penalty not extending one and one-half times the difference as per sub-section (5)."