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High Court quashes TN order on sales tax incentives

Our Bureau

CHENNAI, June 11

THE Madras High Court has quashed a Tamil Nadu Government Order which introduced fresh conditions for industrial units to be eligible for sales tax incentives.

The court was disposing of writ petitions filed by Madras Cements Ltd and Chettinad Cement Corporation Ltd against the order of the Commercial Taxes Department dated February 7, 2000, which would have deprived them of sales tax incentives for their capac ity expansion projects.

Mr Justice S. Jagadeesan of the Madras High Court said the conditions imposed in Government Order (GO Ms. No. 26, Commercial Taxes Department dated February 7, 2000) were arbitrary and could not be sustained.

In the order under question, issued by the Commercial Taxes Department, the Government imposed the condition that the existing industrial units undertaking expansion ought to have acquired the plant, machinery and equipment on or before January 23, 2000 in order to avail themselves of the sales tax-based incentives and that they should commence commercial production before January 22, 2001.

The two companies had appealed against the GO as they contended that it was arbitrary, unconstitutional and ultra vires and sought a direction to the Government to recognise that the petitioners were entitled to a total waiver of sales tax/deferral of sa les tax as a new industry in the pipeline as envisaged in an earlier order issued on January 23, 2000.

Both Chettinad Cement Corporation and Madras Cements were increasing capacity by one million tonne per annum each and were eligible for the concessions as they came under the industries in the pipeline category.

For the two companies, quashing of the GO means that they are eligible for interest-free sales tax loans of Rs 300 crore each for seven years or 14 years depending on whether they had opted for waiver or deferral. Company sources say that their cash-flow positions will be much better when compared to the concessions not being available to them.

The Tamil Nadu Government issued an order on January 23, 2000 in which it decided not to grant any new incentive based on sales tax for industries from January 1, 2000, following a decision by all the States to this effect. In the same order, the Governm ent made it clear that existing commitments made in respect of the industries which had come in would be continued for the period of their eligibility. Moreover, industries in the pipeline would be entitled for incentives if they fulfilled certain condit ions. This was modified in the order dated February 7.

The petitioners argued that their projects could not be considered as mere expansion and, instead, had to be considered as new units, and the authorities ought to have extended the sales tax concessions as per the January 23 order. The petitioners also a rgued that any condition that was to be imposed could be a prospective one and not a retrospective one. The February 7 GO was with a clear intention to deprive the petitioners of the benefits of the January 23 GO, they said.

The Government argued that the petitioners themselves had stated in their applications before financial institutions that the proposed units were expansions of the existing units. The Government also contended that imposing conditions for granting conces sion was a matter of policy for the State Government, and hence the policy decisions of the Government were not justiciable.

However, Mr Justice Jagadeesan said that: ``When once the Government Order is based on the policy to deprive a particular individual of the benefit, which they are entitled to, then, it is always open to the court to consider as to the genuineness of the policy of the State Government.''

The judge also noted that despite directions to the respondents (Secretary, Commercial Taxes; SIPCOT; and Commissioner of Commercial Taxes) to produce the relevant files including the note file to find out what transpired in the minds of the authorities, this had not been done. The court had to draw an adverse inference against the State and conclude that there was no reasonable cause for imposing the fresh conditions in the February 7 order, the Judge said.

He said that when the petitioners had to commence commercial production on or before January 22, 2001, there was no reason for compelling them to purchase the machinery a year earlier to the commencement of production. Moreover, any condition that was im posed under the GO in question (dated February 7, 2000) could only be prospective in nature enabling the beneficiaries to comply with the conditions that was contemplated by the Government.

``It is not open to the Government to fix a date for the purchase of machineries at an earlier point of time than the date of the Government Order. In that case, the condition imposed will be of retroactive nature. Unless the beneficiaries are known or a ware that such conditions ought to have been complied with at the earlier point of time, one cannot expect the beneficiary to comply with those conditions in advance,'' the judge said.

The judge also did not accept the respondents' argument that the February 7 GO was only an explanation of the January 23 order and that no new conditions had been imposed. A perusal of the two orders revealed a new policy making and made a distinction be tween a `new unit' and an `existing unit.' The distinctions were necessarily to be set aside especially when there was no nexus for the imposition of the conditions for purchase of machinery along with the object that was to be achieved by the Government .