Clarifying on the legal interpretation of benefit of tax exemptions, the Supreme Court has held that a company can’t automatically extend a tax exemption meant for a particular industry for its subsidiaries. The 2-judge bench of Justice MR Shah and Justice Sanjiv Khanna set aside a May 2016 Gujarat High Court order and upheld the state’s sales tax department’s levy of Rs. 480 crores as purchase tax on Essar Steel. However, the tax demand has already been extinguished as ArcelorMittal Nippon Steel has taken over Essar Steel.

Gujarat government had moved the top court claiming that though Essar Steel bought Naphtha and natural gas at lower rates as per the sales tax exemption scheme between 1993 to 2007, it didn’t use the raw material which was as it is diverted to Essar Power. The state government alleged that any diversion of raw material disqualified Essar Steel from benefiting from the tax break.

Noting that Essar Steel had furnished false information in court, the apex court clarified that power producers weren’t eligible for the tax exemption, and held that an exemption given as incentive to Essar Steel couldn’t be transferred to Essar Power. The court ruled that while an exemption must be liberally construed, the beneficiary must fall within its ambit, making it amply clear that the doctrine of “promissory estoppel” can’t be applied in tax cases.