SC orders Essar Oil to pay Rs 6.3K cr sales tax to Gujarat

* The payout is almost 80% of the companys market capitalisation of Rs 7,934 crore

Dismissing an argument by Essar Oil that it had failed to start production from its refinery in Gujarat due to an Act of God,the Supreme Court (SC) on Tuesday directed the Ruia-owned company to pay about Rs 6,300 crore in sales tax to the government. A bench led by Justice Asok Kumar Ganguly observed that the company cannot benefit from a government exemption scheme despite not launching production during the scheduled qualifying period from the refinery at Vadinar.

Companies are eligible for a tax benefit up to 125 per cent of investment in a project as per the 1995-2000 New Capital Incentive Policy scheme of the state. The states Industries Department had moved the SC after Essar Oil won the case in the Gujarat High Court in April 2008.

Essar Oil shares plunged by 7.85 per cent to Rs 58.10 on the BSE on Tuesday following the SC verdict. The payout to the state is almost 80 per cent of Essar Oils current market capitalisation of Rs 7,934 crore. It had posted a net profit of Rs 654 crore in fiscal 2010-11 and a loss of Rs 166 crore in the quarter ended September 2011.

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In the Supreme Court,Essar had contended that its project had failed to take off start during the required period because of an Act of God a cyclone that hit the Gujarat coast in 1998. The refinery had started operating only in 2006. The Vadinar refinery is also the subject of an arbitration process in which the company is claiming about Rs 3,020 crore from United India Insurance. The company argued that it had provided for the tax payment in case it lost the case.

According to the company,investment in the plant was about $5 billion and its 2010-11 turnover was $10 billion. The company has availed of approximately Rs 6,300 crore of sales tax benefit as of December 2011 which was to be paid in deferred instalments. The company will provide further information in the matter after studying the judgment passed by the Honble Supreme Court, the company said in a statement to the stock exchanges.

While setting aside the Gujarat High Court order of granting concession to the company,the SC observed in the order that the principle that in case of ambiguity,a taxing statute should be construed in favour of the assessee,does not apply to the construction of an exception or an exempting provision,as the same has to be construed strictly.

Essar had initially applied under the new investment policy in August 1995 for its refinery project with a projected investment of Rs 5,544 crore. The company initially claimed of starting from the first quarter of 1998 but could not launch till four years later. In April 2002,it told the government that considerable time was lost in reassessment and construction could begin in June 2002,and production by November 2004 and asked for an extension. Environmental clearances held up the project and the company could not start the plant until 2006.

No act of God

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* The Supreme Court observed that a company cannot benefit from exemption despite not launching production during the qualifying period

* Essar had contended that it had failed to start its oil production project on account of a cyclone in 1998,which it said was an act of God