In a judgment which could impact most public sector companies, the Bombay High Court has ruled that public sector undertakings are entitled for pre-exemptions in certain taxes, as they come under special provisions. The court also said that as the companies are state-owned, they are capable of paying any liability at any point of time.

The judgement came during a case between Central Excise and Service Tax Appellate Tribunal and the Rashtriya Chemical & Fertilizer, when the latter was denied exemptions for duty free procurement of naptha with the former alleging that the company diverted naptha for manufacturing other chemicals along with fertilizers.

The CESTAT denied tax exemption to the company on the grounds that the naptha is being used for making chemicals. Tax holiday is given when naphtha is used to manufacture fertilizers .

While, Rashtriya Chemical, maker of fertilizer brands including Sujala and Microla, argued that it is a public sector company and also according to Companies Act, is eligible for complete waiver of any pre-deposit, the company also argued that as it is a government of India undertaking, its insolvency is beyond doubt, hence the regulators should not judge the company like other private companies.

The divisional bench of Justice DY Chandrachud and Justice Anup Mohta setting aside the tribunal ruling, ordered that the Rashtriya Chemical will be entitle to dispensation of the requirement of pre-deposit. According to lawyers, the order will have wider implications as all PSUs will now be entitled for such pre-exemptions in such duties.

According to lawyers, "With this ruling, more PSUs can seek pre-exemptions in taxes wherever this would be applicable as the order establishes the fact that sovereign entities can be excepted pre-tax on the ground that they are capable enough to pay any such liability arises at any point of time."

Senior advocate Arshad Hidayatulla and HG Dharmadhikari were representing the RCFL, while Pradeep Jetly and Jitendra Mishra argued for the CESTAT. (Economic Times)