Indian Oil Corporation’s Battle Over Entry Tax: Supreme Court Ruling Explained

The dispute over the imposition of Entry Tax on petroleum products sold by Indian Oil Corporation Limited (IOCL) in Bihar reached the Supreme Court, raising key questions on tax set-offs, retrospective taxation, and the interpretation of the Bihar Tax on Entry of Goods into Local Areas for Consumption, Use, or Sale Therein Act, 1993 (Entry Tax Act). The judgment provides clarity on the applicability of tax set-offs and affirms the state’s authority to levy Entry Tax.

Background of the Case

Indian Oil Corporation Limited (IOCL) has a marketing division in Bihar, with branches in Barauni and Patna, through which it sells petroleum products such as High-Speed Diesel (HSD) and Petrol. The dispute arose when the Bihar government demanded Entry Tax from IOCL but refused to allow a set-off of Value Added Tax (VAT) against this tax.

IOCL imports crude oil from outside Bihar, processes it at its refinery, and then transports refined petroleum products to Patna via a dedicated pipeline. These products are either:

Sold to other Oil Marketing Companies (OMCs), such as Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL), which then distribute the fuel through their own retail networks.
Sold directly to local retailers and petroleum outlets in Patna.

Initially, IOCL was allowed to set off VAT against Entry Tax. However, after audit objections raised by the Bihar Accountant General, the state government disallowed these set-offs for transactions dating back to 2008-09, leading to a tax demand of Rs. 1,683.03 crores.

Key Legal Issues

The Supreme Court had to consider five key legal issues raised in the appeals:

Whether the second proviso to Section 3(2) of the Entry Tax Act was unconstitutional.
Whether interest could be charged for the late payment of Entry Tax.
Whether Entry Tax was applicable when goods entered a local area but were subsequently sold outside that area.
Whether assessments could be reopened based on audit objections.
Whether the assessment under Section 33 of the VAT Act could be conducted beyond four years.

Arguments of IOCL

IOCL, represented by senior counsel Arvind Datar, argued that the Bihar Entry Tax Act was designed to ensure VAT collection. Since VAT was levied at a later stage when BPCL and HPCL sold the products to retailers, IOCL contended that a set-off should be allowed.

Key points raised by IOCL:

The set-off was granted until 2014, demonstrating that both the government and IOCL understood it to be legitimate.
The retrospective withdrawal of the set-off was unfair and imposed an unjustified financial burden.
A significant portion of sales made by BPCL and HPCL occurred outside Patna and should not attract Entry Tax.
If the Supreme Court ruled against IOCL, it should at least direct the tax tribunal to reassess how much of the Rs. 1,683.03 crore tax demand was valid.

Arguments of the Bihar Government

The Bihar government, represented by senior counsel S. Ganesh, defended the tax demand, arguing:

The set-off was never guaranteed by law; it was a benefit provided at the state’s discretion.
Entry Tax and VAT were two separate taxes, and the government was not obligated to allow one to be set off against the other.
IOCL was not eligible for a VAT set-off because it did not pay VAT when selling to BPCL and HPCL—the tax liability arose at the retail level.
Article 14 (Equality before Law) did not apply, as the taxation scheme was rational and non-discriminatory.

Supreme Court’s Ruling

The Supreme Court ruled in favor of the Bihar government, holding that IOCL was not entitled to a VAT set-off under the second proviso to Section 3(2) of the Entry Tax Act.

Key findings:

The Entry Tax set-off provision was “assessee-based,” not “goods-based.” Since IOCL did not pay VAT on the sale to BPCL and HPCL, it could not claim a set-off.
VAT and Entry Tax were separate taxes under different constitutional provisions, and their linkage was a matter of policy, not entitlement.
There was no clear and hostile discrimination against IOCL that would make the tax unconstitutional under Article 14.
The retrospective withdrawal of the set-off was legally valid, as tax laws can have retrospective effect.
The reopening of assessments based on audit objections was permitted.
Interest for delayed tax payment could not be charged because the state had no substantive legal provision for interest under the Entry Tax Act.

Reassessment Ordered

The Court did, however, grant partial relief to IOCL by directing the tax tribunal to reassess how much of the Rs. 1,683.03 crore demand was valid. It noted that sales made outside Patna should not attract Entry Tax, and IOCL was allowed to submit additional documentation proving such sales.

The Supreme Court stated:

“We feel that Shri Datar is right in asking that we give an opportunity to the Appellant to produce all relevant documentary material, which would show that a large amount of the demand for these years (of Rs.1,683.03 crores), would be liable to be done away with as Entry Tax would not be leviable on these transactions at all.”

The Court directed the tax tribunal to expeditiously determine how much of the demand was valid and held that IOCL’s tax payments would remain stayed until the tribunal’s decision.

Conclusion

The ruling underscores the Supreme Court’s stance on tax set-offs and the validity of retrospective taxation. It affirms the Bihar government’s power to impose Entry Tax while clarifying that set-offs are a policy decision, not a legal right. The decision also highlights the need for businesses to carefully assess their tax liabilities, as benefits provided by governments can be revoked retroactively.

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Download Judgment: Indian Oil Corporati vs State of Bihar & Anr Supreme Court of India Judgment Dated 14-11-2017.pdf

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