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1 IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.       705   OF 2013   (Arising out of SLP(C) No. 25464 of 2011)

STATE OF HARYANA & ANR.             ...Appellants  

VERSUS

M/S POLAR INDUSTRIES LTD.           ...Respondent

O R D E R

1. Delay condoned.

2. Leave granted.  

3. This  appeal  is  directed  against  the  judgment  and  order  

passed by the High Court of Punjab and Haryana in C.W.P. No.  

2545 of 1997 dated 31.03.2010.  

4. The  State  Government  in  exercise  of  its  powers  under  

Section 13–B of the Haryana General Sales Tax Act, 1973 (“the  

Act”  for  short),  has  promulgated  an  exemption  scheme,  inter  

alia, granting certain exemptions to the industries which are  

set up in the specified areas in the State of Haryana.  For the  

purpose of granting exemption from payment of sales tax under  

Section 13-B of the Act, the legislature has incorporated Rule  

28-B providing conditions for availing exemption from payment of  

sales tax to eligible industrial units.  We will advert to these  

provisions once over again after noticing the facts of the case

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2 in nutshell.  

5. The respondent company is a public limited company engaged  

in the business of manufacturing electrical motors, fans, etc.  

The industry was granted Eligibility Certificate on 25.1.1993  

and  was  granted  Sales  Tax  Exemption  Certificate  in  the  

prescribed form on 28.01.1994.  The exemption that was granted  

was for the period 20.04.1991 to 19.04.1996 and the same was  

subject  to  a  ceiling  of  Rs.2,22,50,000/-.   The  Eligibility  

Certificate  provides  certain  conditions  which  requires  to  be  

complied by the respondent company in order to take benefit of  

the exemption granted.  Clause 3 of the Certificate provides  

that the unit shall remain in production for a period of not  

less than six years after availing the benefits.  Clause 4 of  

the said Certificate envisages that the Certificate shall cease  

to be operative with effect from the date the unit reaches the  

ceiling  of  deferred/exempted  amount  of  tax  prescribed  in  the  

Eligibility Certificate.  Clause 7 is relevant for the purpose  

of this case, and therefore it is extracted and reads as under:-  

“(7) The eligibility certificate can be cancelled on  contravention of any condition mentioned herein above  or in Rule 28-A after affording an opportunity to the  party of being heard.”

6. Since  the  Assessing  Authority  was  of  the  view  that  the  

assessee/respondent company has violated/breached the conditions  

incorporated in the Eligibility Certificate, the said authority

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3 had issued a show cause notice dated 30.12.1996,  inter alia,  

directing  the  respondent  to  show  cause  why  the  Eligibility  

Certificate granted earlier should not be cancelled and the tax  

for the assessment years 1991-92, 1992-93, 1993-94, 1994-95 and  

1995-96  (upto  7.9.1995)  should  not  be  demanded  and  collected  

with interest and penalty.  In the show cause notice so issued,  

the  Assessing  Authority  had  specifically  noticed  that  the  

respondent industry has contravened Rule 28A(11)(a)(ii) of the  

Rules.   

7. After receipt of the reply to the show cause notice issued,  

the Assessing Authority has passed the order dated 31.1.1997 by  

confirming the show cause notice issued earlier.  In the order  

passed, the Assessing Authority has stated that the respondent  

industry has availed tax exemption from 20.04.1991 to 07.09.1995  

for Rs.2,21,87,594/- but made sales outside the State of Haryana  

by way of transfer of goods manufactured by it and therefore,  

the industry has contravened the provisions of Rule 28A(11)(a)

(ii) of the Rules.  

8. Being aggrieved by the order so passed, the assessee had  

filed  Writ  Petition  before  the  High  Court,  numbered  as  Writ  

Petition  No.  2545  of  1997.   In  the  petition  so  filed,  the  

assessee had sought for two reliefs, firstly, to strike down  

explanation to Rule 28A(2)(n)(i), explanation to Rule 28A(2)(n)

(ii) and Rule 28(ii) (a) and (b) and secondly, to quash the

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4 order of assessment dated 31.01.1997, primarily on the ground  

that  no  tax  can  be  imposed  on  the  goods  transferred  by  the  

respondent company to its godown outside the State of Haryana by  

way of transfer of consignment of goods manufactured by it. The  

Court,  while  considering  the  issue  that  fell  for  its  

consideration and decision has come to the conclusion that the  

State is imposing tax on the inter-State sales transaction or  

branch transfers which is impermissible in view of the specific  

bar under the Constitution of India and Central Sales Tax Act  

and accordingly has allowed the petition and has set aside the  

order of assessment passed by the Assessing Authority.  However,  

the  High  Court  has  not  adverted  to  the  vires  of  Rules  

Explanation to Rule 28A(2)(n)(i), Explanation to Rule 28A(2)(n)

(ii) and Rule 28A(2)(ii)(a) and (b) of the Rules.

  9.   We have heard Shri R. P. Bhatt, learned senior counsel for  

the  Appellant  and  Shri  Praveen  Kumar,  learned  counsel  for  

respondent company.  Shri Bhatt would reiterate the submissions  

that was made before the High Court and would further contend  

that sales effected by way of branch transfers or consignment  

sales outside the State of Haryana is taken only for the purpose  

of quantifying “notional tax liability” and not for any other  

purpose and further would contend that since the assessee has  

violated/breached  conditions  stipulated  in  the  exemption  

certificate and Rule 28A of the Rules and in particular Rule 28

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5 A (2)(ii)(b) of the Rules, the Assessing Authority has cancelled  

the Eligibility Certificate granted earlier and has directed the  

assessee to pay tax with interest for the period in question.  

In aid of this submission, the learned senior counsel has taken  

us through the relevant portions of the Eligibility Certificate,  

Section 13-B of the Act, which authorises the State Government  

to grant exemption and the relevant Rule, namely Rule 28A of the  

Rules.

10.  Section 6 is the charging provision.  Section 13-B of the  

Act authorises the State Government, if it is satisfied that it  

is  necessary  or  expedient  so  to  do  in  the  interest  of  an  

industry, may, by issuing a notification exempt any class or  

persons from the payment of tax under the Act on the purchase or  

sale  of  any  goods  subject  to  certain  conditions  as  may  be  

specified in the notification.  For the purpose of Section 13B  

and Section 25A of the Act, the State Government has framed Rule  

28A of the Rules, which provides for computation of the quantum  

of tax incentive available to a dealer in view of eligibility  

certificate issued by the department. In order to regulate the  

exemption scheme the concept of “Notional Sales Tax Liability”  

is  incorporated  vide  Clause  (n)  of  Rule  28-A  (2)(n)  of  the  

Rules. The said clause reads:

“(i) amount of tax payable on the sales of finished  products  of  the  eligible  industrial  unit  under  the  local sales tax law but for an exemption computed at  the maximum rates specified under the local sales tax

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6 law as applicable from time to time; and  

Explanation-  The  sales  made  on  consignment  basis  within the State of Haryana or branch transfer within  the State of Haryana shall also be deemed to be sales  made within the State and liable to tax;

(ii) amount of tax payable under the Central Sales Tax  Act, 1956, on the sales of finished products of the  eligible industrial unit made in the course of inter- State trade or commerce computed at the rate of tax  applicable to such sales as if these were made against  certificate in form C on the basis that the sales are  eligible to tax under the said Act.

Explanation- The branch transfers or consignment sales  outside the State of Haryana shall be deemed to the  sale in the course of inter-State trade or commerce.

Note – The expression and terms, if any appearing in  this rule not defined above shall unless the context  otherwise requires carry the same meaning as assigned  to them under the Act and the rules made thereunder.”

11. Rule 28-A(2)(n) includes within its ambit the sales which  

were otherwise exigible to sales tax,  namely, local sales and  

inter-State sales and secondly, the Rule also includes branch  

transfers or consignment sales outside the State and sales made  

on consignment basis or branch transfers within the State by  

treating  them  as  deemed  sales,  which  two  transactions  were  

otherwise  not  exigible  to  sales  tax  for  any  other  unit  not  

availing  exemption.   Alternatively,  it  can  be  stated  that  

Notional Sales Tax Liability as defined in Rule 28(A)(2)(n), as  

a condition for grant of exemption.

12. The benefit of tax exemption/ deferment under Rule 28A of  

the Rules shall be subject to condition prescribed under Sub-

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7 rule 11(a) of the Rules.  The said rule reads:

“(a) The benefit of tax-exemption/deferment under this  rule  shall  be  subject  to  the  condition  that  the  beneficiary industrial unit after having availed of  the benefit -

(i) shall continue its production atleast for the next  five years not below the level of average production  for the preceding five year; and  

(ii) shall not make sales outside the State for next  five years by way of transfer of consignment of goods  manufactured by it.

(b) In case the unit violates any of the conditions  laid down in clause (a), it shall be liable to make,  in addition to the full amount of tax-benefit availed  of  by  it  during  the  period  of  exemption/deferment,  payment of interest chargeable under the Act as if no  tax exemption/ deferment was ever available to it;

Provided that the provisions of this clause shall not  come into play if the loss in production is explained  to the satisfaction of the Deputy Excise and Taxation  Commissioner  concerned  as  being  due  to  the  reasons  beyond the control of the units:

Provided further that a unit shall not be called upon  to pay sum under this clause without having been given  reasonable opportunity of being heard.”  

13. If  there  is  a  violation  of  any  one  of  the  conditions  

stipulated in Sub Rule 11(i) and (ii), the Sales Tax Authorities  

are at liberty to cancel the Exemption Certificate issued under  

the scheme and call upon the assessee to make payment of the  

exemption availed with interest thereon.

14. Having noticed the relevant rules, we will revert back to  

the facts in the present case.  The assessee-company had availed

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8 benefit of the sales tax exemption under the Exemption Scheme  

issued by the State Government.  The Eligibility Certificate for  

sales  tax  exemption  provides  for  certain  conditions  which  

requires to be complied by the assessee-company to take benefit  

of  exemption  under  the  Scheme.   The  Condition  No.  7  of  the  

Eligibility  Certificate  provides  that  the  certificate  can  be  

cancelled if there is contravention of any condition mentioned  

in the certificate or Rule 28-A, after affording an opportunity  

to the party of being heard.  In the show cause notice it is  

specifically alleged that the assessee had dispatched goods on  

consignment basis during the assessment period 1995-1996, 1996-

1997 and 1997-1998 and therefore the assessee has breached Rule  

28-A of the Rules and in particular Sub-rule 11(a)(ii) of the  

Rules, which prescribes that the benefit of tax exemption shall  

be subject to the condition that the assessee having availed the  

benefit of tax exemption shall not make sales outside the State  

for next five years by way of transfer or consignment of goods  

manufactured by it.  Since the assessee did not dispute the  

specific contravention pointed out by the assessing authority  

after cancelling the exemption certificate issued has quantified  

the tax liability and the interest payable thereon.  The order  

so passed, in our view, is in consonance with the scheme of  

exemption  notified  by  the  State  Government  and  also  in  

accordance with the rules prescribed under Section 13B of the  

Act.

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9

15. The High Court while allowing the petition filed by the  

assessee  has  proceeded  on  a  wrong  assumption,  that,  the  

assessing authority has levied tax on inter-State sales and on  

consignment transfer and accordingly has quashed the assessment  

order  passed  by  the  assessing  authority.   In  view  of  our  

conclusion stated earlier, we cannot sustain the judgment and  

order passed by the High Court.  Accordingly, we allow this  

appeal and set aside the impugned order.

16. We are informed by learned counsel for the parties that in  

the light of the judgment and order passed by the High Court,  

the assessing authority has completed the assessments for the  

period in question.  Since we have set aside the judgment and  

order of the High Court, we direct the assessing authority to  

pass fresh assessment order for the periods in dispute after  

affording opportunity of hearing to the assessee.  

Ordered accordingly.

.......................J. (H.L. DATTU)

.......................J. (RANJAN GOGOI)

NEW DELHI; JANUARY 23, 2013.

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10 IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.708 OF 2013 (@ SPECIAL LEAVE PETITION(CIVIL)NO.25465 OF 2011)  

STATE OF HARYANA & ANR. APPELLANTS

VERSUS

RUBBER RECLAIM CO. OF INDIA RESPONDENT

WITH C.A.NO. 700 OF 2013 @ S.L.P.(C)NO.25459/2011

C.A.NO. 703  OF 2013 @ S.L.P.(C)NO.25458/2011

AND WITH C.A.NO. 710 OF 2013 @ S.L.P.(C)NO.25466/2011

O R D E R

C.A.No.708 of 2013 @ SLP (C )No.25465 of 2011

1. Delay condoned.

2. Leave granted.

3. The facts in extenso need not be noticed by us. Suffice it  

to state that the appellants are before us aggrieved by the  

judgment  and  order  passed  by  the  High  Court  of  Punjab  and  

Haryana at Chandigarh in Civil Writ Petition No.6688 of 1999  

(O&M), dated 31.03.2010. By the impugned judgment and order, the  

High Court has set aside the order of assessment passed by the  

assessing authority, wherein the assessee was directed to refund  

the amount which was availed by way of tax exemption/deferment  

of tax under the exemption scheme.

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11 4. The respondent company is a private limited company.  It is  

engaged in the business of manufacturing re-claimed rubber.  The  

company has its manufacturing plant in the specified place as  

notified by the State of Haryana.

5. Under Section 13B of Haryana General Sales Tax Act, 1973,  

(“the  Act”  for  short)  the  Government  is  empowered  to  exempt  

certain class of industries from payment of taxes under the Act  

for a specified period.  Accordingly, a scheme of exemption from  

sales tax was introduced by the State Government with effect  

from 01.04.1998, in the interest of industrial development in  

the State.  The scheme of exemption as notified is subject to  

such conditions as may be prescribed under Rule-28A of Haryana  

General Sales Tax Rules, 1975 (“Rules, 1975” for short).  The  

Rule deals in detail with the matters relating to the Grant of  

exemption to industries established in the notified area.

6. Pursuant to the scheme of exemption so issued, on a request  

made by the respondent-industry, the District Industries Centre,  

Sonepat  had  granted  the  “Eligibility  Exemption  Certificate”,  

inter alia, exempting the respondent from payment of tax for the  

period  01.04.1992  to  31.03.1997,  subject  to  the  conditions  

prescribed under Rule 28-A of the Rules, 1975.  The quantum of  

benefit quantified based on notional sales tax liability was at  

Rs.68,00,000/- (Sixty Eight Lakhs Only).

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12 7. Since the respondent had contravened the provisions of Rule  

28-A of the Rules, the assessing authority had issued a Show  

Cause Notice to the respondent, inter alia, directing it to show  

cause,  why  the  exemption  availed  by  the  respondent-industry  

should not be asked to be refunded with interest thereon. On  

receipt of the reply, the assessing authority has completed the  

assessment.  Aggrieved  by  the  orders  of  assessment,  the  

respondent-industry  was  before  the  High  Court,  inter  alia,  

questioning the  vires of Rule 28-A of the Rules, 1975 and the  

order of assessment passed by the assessing authority.

8. The High Court has disposed of the Writ Petition primarily  

on the ground that the assessing authority has imposed tax on  

the inter-state sales or the branch transfers and this in the  

view  of  Court  could  not  have  been  done  by  the  assessing  

authority  in  view  of  the  prohibition  contained  both  under  

Constitution and also under the provision of Central Sales Tax  

Act.  Accordingly  has  set  aside  the  orders  passed  by  the  

assessing authority. However, the High Court has not gone into  

the vires of Rule 28-A of the Rules, 1975.  

9. Rule 28-A of the Rules, 1975 is framed under Sections 13B  

and 25-A of the Act. Rule 28-A deals with computation of the  

quantum  of  tax  incentive  available  to  a  dealer  in  view  of  

eligibility certificate is issued by the department. In order to  

regulate the exemption scheme the concept of “Notional Sales Tax

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13 Liability” is incorporated vide Clause (n) of Rule 28-A (2)(n)  

of the Rules,1975. The said clause reads:

“(i) amount of tax payable on the sales of finished  products  of  the  eligible  industrial  unit  under  the  local sales tax law but for an exemption computed at  the maximum rates specified under the local sales tax  law as applicable from time to time; and  

Explanation-  The  sales  made  on  consignment  basis  within the State of Haryana or branch transfer within  the State of Haryana shall also be deemed to be sales  made within the State and liable to tax;

(ii) amount of tax payable under the Central Sales Tax  Act, 1956, on the sales of finished products of the  eligible industrial unit made in the course of inter- State trade or commerce computed at the rate of tax  applicable to such sales as if these were made against  certificate in form C on the basis that the sales are  eligible to tax under the said Act.

Explanation- The branch transfers or consignment sales  outside the State of Haryana shall be deemed to the  sale in the course of inter-State trade or commerce.

Note – The expression and terms, if any appearing in  this rule not defined above shall unless the context  otherwise requires carry the same meaning as assigned  to them under the Act and the rules mad thereunder.”

10. Rule 28-A(2)(n) includes within its ambit the sales which  

were otherwise exigible to sales tax,  namely, local sales and  

inter-State sales and secondly, the Rule also includes branch  

transfers or consignment sales outside the State and sales made  

on consignment basis or branch transfers within the State by  

treating  them  as  deemed  sales,  which  two  transactions  were  

otherwise  not  exigible  to  sales  tax  for  any  other  unit  not  

availing  exemption.   Alternatively,  it  can  be  stated  that

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14 Notional Sales Tax Liability as defined in Rule 28(A)(2)(n), as  

a condition for grant of exemption.

11. The benefit of tax exemption/ deferment under Rule 28A of  

the Rules, 1975 shall be subject to condition prescribed under  

Sub-rule 11(a) of the Rules, 1975.  The said rule reads:

“(a) The benefit of tax-exemption/deferment under this  rule  shall  be  subject  to  the  condition  that  the  beneficiary industrial unit after having availed of  the benefit -

(i) shall continue its production atleast for the next  five years not below the level of average production  for the preceding five year; and  

(ii) shall not make sales outside the State for next  five years by way of transfer of consignment of goods  manufactured by it.

(b) In case the unit violates any of the conditions  laid down in clause (a), it shall be liable to make,  in addition to the full amount of tax-benefit availed  of  by  it  during  the  period  of  exemption/deferment,  payment of interest chargeable under the Act as if no  tax exemption/ deferment was ever available to it;

Provided that the provisions of this clause shall not  come into play if the loss in production is explained  to the satisfaction of the Deputy Excise and Taxation  Commissioner  concerned  as  being  due  to  the  reasons  beyond the control of the units:

Provided further that a unit shall not be called upon  to pay sum under this clause without having been given  reasonable opportunity of being heard.”  

12. If  there  is  a  violation  of  anyone  of  the  conditions  

stipulated in Sub Rule 11(i) and (ii), the sales tax authorities  

are at liberty to cancel the exemption certificate issued under

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15 the scheme and call upon the assessee to make payment of the  

exemption availed with interest thereon.

13. Having noticed the relevant rules, we will revert back to  

the facts in the present case.  The assessee-company had availed  

benefit of the sales tax exemption under the Exemption Scheme  

issued by the State Government.  The Eligibility Certificate for  

sales  tax  exemption  provides  for  certain  conditions  which  

requires to be complied by the assessee-company to take benefit  

of  exemption  under  the  Scheme.   The  Condition  No.  7  of  the  

Eligibility  Certificate  provides  that  the  certificate  can  be  

cancelled if there is contravention of any condition mentioned  

in the certificate or Rule 28-A, after affording an opportunity  

to the party of being heard.  In the show cause notice it is  

specifically alleged that the assessee had dispatched good on  

consignment basis during the assessment period 1995-1996, 1996-

1997 and 1997-1998 and therefore the assessee has breached Rule  

28-A of the Rules, 1975 and in particular Sub-rule 11(a)(ii) of  

the  Rules,  1975,  which  prescribes  that  the  benefit  of  tax  

exemption shall be subject to the condition that the assessee  

having availed the benefit of tax exemption shall not make sales  

outside the State for next five years by way of transfer or  

consignment of goods manufactured by it.  Since the assessee did  

not  dispute  the  specific  contravention  pointed  out  by  the  

assessing authority after cancelling the exemption certificate

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16 issued has quantified the tax liability and the interest payable  

thereon.  The order so passed, in our view, is in consonance  

with the scheme of exemption notified by the State Government  

and also in accordance with the rules prescribed under Section  

13B of the Act.

14. The High Court while allowing the petition filed by the  

assessee  has  proceeded  on  a  wrong  assumption,  that,  the  

assessing authority has levied tax on inter-state sales and on  

consignment transfer and accordingly has quashed the assessment  

order  passed  by  the  assessing  authority.   In  view  of  our  

conclusion stated earlier, we cannot sustain the judgment and  

order passed by the High Court.  Accordingly, we allow this  

appeal and set aside the impugned order.

 15. We are informed by learned counsel for the parties that in  

the light of the judgment and order passed by the High Court,  

the assessing authority has completed the assessments for the  

period in question.  Since we have set aside the judgment and  

order of the High Court, we direct the assessing authority to  

pass fresh assessment order for the periods in dispute after  

affording opportunity of hearing to the assessee.  

C.A.NO. 700  OF 2013 @ S.L.P.(C)NO.25459/2011,  C.A.NO. 703  OF 2013 @ S.L.P.(C)NO.25458/2011 AND WITH C.A.NO.710  OF 2013 @ S.L.P.(C)NO.25466/2011:

Page 17

17

1. Delay condoned.

2. Leave granted.

3. In view of the order passed in Civil Appeal @ Special  

Leave  Petition (C) No. 25465 of 2011, these appeals are also  

disposed of on the same terms, leaving the parties to bear their  

respective costs.

.......................J. (H.L. DATTU)

.......................J. (RANJAN GOGOI)

NEW DELHI; JANUARY 23, 2013.