The incentive, granted by means of a refund of the duty paid in cash/PLA, was available for the period of five years from the commencement of commercial production, subject to procedures, certifications, associated rules and regulations. Where the investment in new industry was more than INR 20 Crores, this incentive would purportedly be unlimited inasmuch as the entire duty paid in cash was refundable without any upper cap in terms of the aforesaid Exemption Notification.

Various amendments were made to the Exemption Notification for clarifications, extensions etc. The important amendments were Notification 16/2008-CE dated 27 March 2008^[4]; Notification 33/2008-CE dated 10 June 2008; and Notification 51/2008-CE dated 3 October 2008^[5] (collectively called Value Addition Notifications). These Value Added Notifications were issued because the Revenue authorities claimed that mass scale tax evasion started taking place where duties paid in cash by units were inordinately high as compared to other units in India; research indicated that the units were  engaging in fraudulent invoicing to show clearance in goods; and the notifications were issued to protect the Revenue and were only a modification to give effect to the real intention of the Government (which was a refund of tax paid on value addition) and not withdrawal of the incentive scheme in toto.

These Value Addition Notifications were challenged by the Respondents (the original petitioners before the Gujarat High Court) on the grounds that since they had made an investment in Kutch in excess of INR 20 crores, under the aegis of the original Exemption Notification, they were entitled to refund of the full value of Excise duty paid in cash and that the Value Added Notifications snatched the quantum of incentives available to them and reduced them to only 34% of the total duty paid.

This changed the entire basis of the incentive exemptions and had the effect of substantially reducing the entitlement of refund and further the incentives were curtailed midway before the expiry of the originally notified five-year period. Hence there was a breach of the principle of promissory estoppel.

The Division Bench of the High Court held that the notifications impugned before the High Courts and the incentive scheme were hit by the doctrine of promissory estoppel. The notifications were held to be retrospective and not retroactive and were quashed. The incentives, as originally envisaged by the Exemption Notification, were reinstated and the differential amount was directed to be refunded to the respondent petitioners.

In similar cases, in the High Courts of Sikkim and Guwahati, industrial policy offered by the Government were modified/ clarified by notification to the extent of allowing refund only on value addition basis was challenged. These notifications were also quashed by the respective High Courts by applying estoppel. The Supreme Court in its judgement in the VVF Case has disposed of the appeals filed by the Union challenging these decisions by upholding in favour that promissory estoppel cannot be invoked in the abstract and the courts are bound to consider all aspects including the objective of public good.

The Supreme Court held that the purpose of the original scheme was not to give benefit of refund of the Excise duty paid on the goods manufactured only on paper and so notifications were issued clarifying the modalities of refund i.e. only the extent of duty payable on the actual value addition made by the manufacturers. This was in consonance with the incentive scheme, intention of the Government and further in the nature of larger public interest to protect the interest of Revenue. Since, these notifications provide the manner and method of calculating the amount of refund of duty paid on actual manufacture, the same can apply retrospectively and cannot be hit by the doctrine of estoppel.

Accordingly, the appeal of the Union was allowed.

Do state incentive schemes face danger of being overrun?

Various state governments provide incentives to stimulate industrial development, which are dependent on the computation of taxes paid. Upon introduction of Goods and Service tax (GST), it has become necessary for the state governments to alter various pre-GST incentives in operation to bring them in conformity with GST laws.

In the recent judgement of K.M. Refineries^[6], the taxpayer invoked the doctrine of promissory estoppel and contended that post the introduction of GST, the Government was trying to reduce incentives promised under an incentive scheme that was launched prior to the introduction of the GST. The High Court held that the Petitioner acted upon the promise of the State Government and made additional investments in setting up industrial units in rural areas. Hence, the doctrine of Promissory Estoppel applies and the benefits promised in the pre-GST regime cannot be curtailed. The High Court accordingly directed the state government to undertake required modifications within the scheme in line with the GST law without reducing or restricting any benefits promised to the petitioner.

In trying to bring about such alterations, is it possible that a state government could inadvertently overstep the limits of modification and end up introducing restrictions with respect to release of incentives? Can the decision of the Supreme Court not to apply the doctrine of promissory estoppel have an impact on incentive schemes offered by various governments, if such notifications are not issued judiciously by the State?

The State may reduce the quantum of indirect tax benefit proposed under these schemes and then argue that mere issuance of policy does not give rise to promissory estoppel till all procedural compliances are completed or could retreat to the defence of issuance of clarification or intent to protect public policy.

The case of M/s Motilal Padampat Sugar Mills v. State of U.P.^[7]  is a trendsetter regarding the application of the doctrine of promissory estoppel against the Government. In this case, the petitioner’s challenge to the non-grant of sales tax exemption, where an industry was set up in Uttar Pradesh, based on a representation made by the Government, was upheld by the Supreme Court. The Court held that the Government was bound by its promise as the petitioner had acted in reliance of the same in the representation.

Similar decisions were upheld in the cases of SVA Steel Rolling Mills Limited^[8], Manuelsons Hotels Private Limited^[9] etc. The underlying thread in all these cases was if the promisee had committed no breach and was entitled to the incentives promised through any incentive scheme, which he had relied upon to make significant investments to set up industry, the principle of promissory estoppel prevents the Government from rolling back any promise made through such incentive scheme.

The Apex Court in its earlier judgements generally upheld that the doctrine of promissory estoppel is applicable except in the cases involving exigent public purposes. Introduction of any restriction therefore needs to be balanced at all times against such protection of public interest. As has been held by the Supreme Court in the decision in Motilal Padampat (supra), only when the Government is able to show that public interest would be prejudiced if the Government were forced to fulfil its promise, such promise will not be enforced against the Government and no remedy shall lie with the promisee.

Placing reliance on the said principle, the Supreme Court in the recent case of Union of India v Unicorn Industries^[10], held that since withdrawal of tax exemption on pan masala (with or without tobacco) is in larger public interest, the doctrine of promissory estoppel could not be invoked.

Relying of the judgement of Kanak Exports^[11], the court held that incentives or concessions are privileges conferred by the Government which can be withdrawn or curtailed in public interest.

Thus, when there is a modification to notified incentive policy, which may bring about a reduction in the quantum of indirect tax benefit applicable to the investor, it must be clearly established that such modification is necessary as a clarification to the implementation process and is actually a mechanism to ensure policy compliance vis-à-vis  changes in indirect tax law. In the alternative, any modification must be shown in the strictest sense to be for public good, or proven to be a deterrent to protect revenue interests (in cases where large-scale fraud is suspected). These tests must be concretely enforced and where a challenge is made on the ground of promissory estoppel, the State must make a clear foundation in their arguments along with supporting documents that the doctrine is resisted only on the above grounds.

The passing of this challenge has to be set in stone and on no account should the State be allowed to wriggle out or resile its promise merely by taking recourse to the present decision of the Supreme Court. The principle in law in case of estoppel remains unchanged and the State cannot claim immunity from the applicability of the rule of promissory estoppel merely on the ground that such promise is a fetter on its executive action.

Footnote

[1] Civil Appeal Nos. 2256-2263 of 2020

[2] Special Civil Application Nos. 5909/2008, 6300/2008, 6298/2008, 6299/2008, 5907/2008,8468/2008, 6334/2008 and 6562/2008

[3] Notification 39/2001-CE dated 31.07.2001

[4] The benefit of refund would be granted with reference to the value addition, which was notionally fixed at 34% for the commodity manufactured

[5] Revised the deemed value addition at 75% in respect of the products manufactured without any option of applying for a special rate

[6] M/s K.M. Refineries and Infraspace v State of Maharashtra and Other, Writ Petition 2209 of 2018

[7] 1979 SCC (2) 409

[8] SVA Steel Rerolling Mills Limited v State of Kerala and others [(2014) 4 SCC 186]

[9] Manuelsons Hotel Private Limited v State of Kerala, [(2016) 6 SCC 766]

[10] Union of India v Ms. Unicorn Industries [Civil Appeal No. 7432 OF 2019]

[11] DGFT v Kanak Exports, 2015 VIL 174 (SC)

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