Supreme Court Rules that Tax Exemption Benefits Granted Under Package Scheme of Incentives Cannot Be Retrospectively Revoked: Holds That Amendments to Section 8(5) of CST Act Apply Only Prospectively and Do Not Nullify Vested Rights

Court’s Decision

The Supreme Court dismissed the appeals filed by the State of Maharashtra, upholding the decision of the High Court. It ruled that tax exemption benefits granted under the Package Scheme of Incentives, 1993 (PSI 1993) could not be retrospectively withdrawn by invoking the amended provisions of Section 8(5) of the Central Sales Tax Act (CST Act) introduced by the Finance Act, 2002. The Court clarified that the amendments applied prospectively and did not nullify vested rights arising from certificates issued before the amendment.

Facts

1. Introduction of PSI 1993: The Maharashtra Government introduced the PSI 1993 to encourage the establishment of industries in backward areas. The scheme provided various incentives, including full or partial tax exemptions under the Bombay Sales Tax Act (BST Act) and the CST Act.
2. Eligibility Certificates Issued: The respondent company was issued an Eligibility Certificate (20.02.1998) and an Entitlement Certificate (24.03.1998) under PSI 1993. These certificates allowed exemptions up to ₹273.54 crores or until 2012, whichever was earlier, without conditions such as submitting Forms ‘C’ or ‘D’.
3. Amendment to CST Act (2002): The Finance Act, 2002, amended Section 8(5) of the CST Act, making exemptions subject to compliance with Section 8(4), which required submission of Forms ‘C’ and ‘D’ for inter-State trade.
4. Revised Tax Demands: In 2009, the State issued circulars and revised tax demands for assessment years 2002-2003 to 2004-2005. The demands claimed that the respondent company had failed to comply with the conditions introduced by the 2002 amendment.
5. High Court Ruling: The High Court quashed the circulars and demands, holding that the State could not retrospectively impose conditions or revoke rights accrued before the 2002 amendment.

Issues

1. Retrospective Effect: Could the amendment to Section 8(5) of the CST Act, which introduced conditions for tax exemptions, be applied retrospectively to nullify exemptions granted under PSI 1993?
2. Substantive Rights: Did the respondent’s entitlement to tax exemption create vested rights that could not be withdrawn without explicit statutory authority?

Petitioner’s Arguments (State of Maharashtra)

1. The amendment to Section 8(5) required compliance with Section 8(4), including submission of Forms ‘C’ and ‘D’, for tax exemptions on inter-State sales.
2. The respondent’s failure to comply with the amended conditions invalidated its entitlement to exemptions.
3. The exemption benefits should not be absolute and needed to align with the new statutory framework.

Respondent’s Arguments (Taxpayer/Company)

1. The tax exemptions granted under PSI 1993 created substantive rights under the Eligibility and Entitlement Certificates issued in 1998, which could not be revoked by a subsequent amendment.
2. The amendment to Section 8(5) was prospective and did not apply to exemptions granted prior to its enforcement in 2002.
3. The State could not impose retrospective conditions or revise assessments without first revoking the certificates or providing notice and an opportunity for a hearing.

Analysis of the Law

1. Original Section 8(5): Before the 2002 amendment, Section 8(5) allowed States to grant full or partial tax exemptions without conditions. This provided absolute discretion to States to exempt inter-State sales from tax in public interest.
2. Amended Section 8(5): The Finance Act, 2002, amended Section 8(5) to require compliance with Section 8(4), mandating submission of Forms ‘C’ and ‘D’ for tax exemption. This change restricted the State’s power to grant unconditional exemptions.
3. Prospective Application of Laws: The Court emphasized that laws are presumed to apply prospectively unless expressly stated otherwise. The amended Section 8(5) did not include language indicating retrospective application.
4. Vested Rights: The respondent’s entitlement to tax exemptions constituted a substantive right, established by the Eligibility and Entitlement Certificates. Such rights could not be nullified by subsequent amendments unless the statute explicitly provided for it.

Precedent Analysis

1. MRF Ltd. v. Asst. Commissioner (2006): The Court held that once a tax exemption is granted for a specified period, it cannot be arbitrarily withdrawn, as it creates vested rights.
2. Southern Petrochemical Industries Co. Ltd. v. Electricity Inspector (2007): The Court ruled that tax exemption rights, once accrued, could not be unilaterally withdrawn unless explicitly allowed by the statute.
3. S.L. Srinivasa Jute Twine Mills (P) Ltd. v. Union of India (2006): This case reinforced the principle that amendments affecting vested rights are presumed to apply prospectively unless explicitly stated otherwise.

Court’s Reasoning

1. Substantive Rights Cannot Be Revoked: The Court noted that the respondent was granted tax exemption benefits under the unamended Section 8(5), which were unconditional. These benefits created vested rights that could not be unilaterally revoked.
2. Prospective Effect of Amendment: The Court clarified that the amendment to Section 8(5) was prospective and did not nullify exemptions granted prior to its enforcement in 2002.
3. Fairness and Notice: The State failed to revoke the respondent’s certificates or provide notice before issuing revised demands. This action violated the principles of natural justice and fairness.
4. No Retrospective Language: The amended provision lacked any language indicating that it applied retrospectively to invalidate previously granted exemptions.

Conclusion

The Supreme Court held that the tax exemptions granted to the respondent under PSI 1993 could not be retrospectively revoked by the 2002 amendment to Section 8(5) of the CST Act. It dismissed the State’s appeals and affirmed the High Court’s decision quashing the trade circulars and revised tax demands.

Implications

This judgment reinforces the legal principle that vested rights cannot be unilaterally revoked by retrospective application of amendments unless explicitly authorized by statute. It provides legal certainty to industries availing tax benefits, ensuring that government schemes retain their reliability and integrity for industrial development.

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