As soon as the economy ‘opened’ in the year 1991, the adventurous investors hot piled the focused arrears in with flush of investment. In this hush lesser fortunate hilly areas and infertile lands were left behind. To ensure a proper wealth distribution and uplift of these abandoned states, the governments (both Central and States) announced investment based incentives to encourage establishment of industries in these areas.The incentives were polished with heavy fiscal incentives in the form of exceptions from excise duty, sales tax, electricity duties, other subsidies linked with local employment etc. The investors were lulled into establishing set-ups in the specified areas against the reciprocal of these promises.
On 01st July 2017 sense got captivated, the promises were tangled at the mercy of the government mercenaries. A notion was circulated to the investors to forget about their investment, forget about the promises that were made to them and settle for the peanuts that the faulty machinery might just work out. One of the investor, Hero Motocorp Limited[1]was not happy and brought its plight before the judiciary calling invocation of doctrine of promissory estoppel but was unable to impress the Delhi High Court.
With the background above the present article in Part A examines the controversy over continuation/ grandfathering of investment based incentives upon implementation of Goods and Services Tax (GST) and the corners of promissory estoppel as possible recourse to re-gain lost incentives. Part B encapsulates some other aspects that are relevant in the context on investment based exemptions (“investment exemptions”).
Part A
1. Doctrine of Promissory Estoppel
The doctrine of Promissory Estoppel [PE] is a shield against the injustice. Although named estoppel, the doctrine is rather based on principle of ‘equity’ to mitigate the rigor of rigid law. It aims at relieving the victim of arbitrary abuse of discretion and pin down public authorities to act honestly and in good faith. Perusing celebrated authorities in the regard, Indo-Afghan Agencies Ltd.[2], Motiram Padampat Sugar Mills[3], Kasinka Trading[4], the principle can be explained as
where the one party [public authority] has by his words or conduct made to the other a clear and unequivocal promise which is intended to create legal relations or affect a legal relationship to arise in the future, knowing or intending that it would be acted upon by the other party to whom the promise is made and it is in fact so acted upon by the other party, the promise would be binding on the party making it and he would not be entitled to go back upon it, except where the equity in the public interest so demands.
In the realm of taxation laws also, significant jurisprudence has been developed by the Hon’ble Courts over the years. The theme of the discussion is area based exemptions, which are driven from the Industrial Development Policies formulated by the State Governments in consonance with Central Government (collectively referred to as “the governments”) in order to attract investment in the respective areas.
Invocation of PE in the context of area based exemptions
The Ministry of Commerce & Industry (DIPP) vide office memorandum dated 07 January 2003 announced new industrial policy for the state of Uttaranchal and Himachal Pradesh. The policy announced that new industrial units and existing units on their substantial expansion set up in the specified areas in the states would be entitled to host of fiscal benefits including 100% outright exemption from central excise duty for 10 years from the date of commencement of commercial production. The ensuing notification under the central excise law followed suit[5].
The investors who would have otherwise established industry at more economical places got convinced by these policies in the hope of recouping (inflating) their margins, changed their positions and shift their prospective operations in these areas.Having come so far, if the government is to be allowed to go back and withdraw the exemptions before the sunset period, would cause injustice of acute nature. To reverse this injustice, the Courts have time and again invoked PE and directed the governments to act upon the promises, see Bajaj Auto Ltd. vs UOI[6], Gillete India Ltd. vs UOI[7].
Perusing the countless of jurisprudence available on this subject, it is authoritative to say that doctrine of PE would be invokable for continuation of area based exemptions even after implementation of GST, unless the discontinuation could be couched by the exceptions to PE.
Exceptions to PE
While PE is a sufficient recourse, the Court at times have also excused the governments from continuation of exemptions, where the equity suffice [financial crunch of government], public interest [justifiable change of policy, unscrupulous investors], promise made by the executive against the law [often misconstrued as PE against legislature]. The subsequent paragraphs examine, whether the discontinuation of investment exemptions could be pleaded based on exceptions of PE.
2. GST, the policy changer or an overused misconception
The doctrine of PE ensures that ‘equity’ is positioned, which can also be ensured by discontinuation of promise (exemptions), where the policy is so changed that continuation of exemptions would be inequitable in public interest. Therefore, where the policy change is necessary to ensure discontinuation, it would be justified for the Court to not invoke PE against the government. However at the same it would not be suffice for the government to plead ‘mere policy change’ to counter invocation of PE, but it would have demonstrate that policy ensures equity.
Whether the implementation of GST qualify as policy change of the overwhelming degree that public interest would reside with discontinuation of area based exemptions, is a complicated question. The Delhi High Court in Hero Motocorp case supraagreeing that the GST is a qualifying policy change for non-invocation of PE relied upon various reports[8] [1] these exemptions are difficult to administer and prone to misuse [2] they result in subterfuges which make the tax administration needlessly clumsy and complex and run counter to declared policy of simplifying the tax system [3] the exemptions caused deterrent impact on adjacent states.
It appears that the Court succumbed to accept GST by virtue of new tax structure, merging of indirect taxes and the mechanism of ITC of state taxes that were earlier part of the State and Central Legislations,is a policy change justifying public interest. The correctness of such observations of Court is questionable, considering below paragraphs;
Difficulty in administration
Resounding stress was given to government’s difficulty in administration of area based exemptions. However, it is unceremonious for the government to argue that the scheme didn’t achieved had the sought after results. For the failure of its own machinery, a State cannot punish the bona fide investors. Acceptance of such a logic by a Court of law can shake not only the credibility of the Government as an executive, but also the Courts as the protectors of the rights and legitimate expectations of fair decision by every person in this country [Herbo Foundation Pvt. Ltd. vs UOI[9]]. Hence, mere government’s difficulty in administration cannot justify public interest in rescission of the exemptions.
No public interest in discontinuation of exemptions
Mere change in policy and tax structure wrapped up as a policy change is not sufficient to exonerate the Government from the liability, the Government should demonstrate what precisely is the changed policy and also its reason and justification so the Court can judge for itself which way the public interest lies and what the equity of the case demands[10]. Effective test could be examination that public interest vis-à-vis investment exemptions relates back to what was the public interest in the first place when such exemptions were accorded[11], if that public interest has lost its relevance, it is justifiable to withdraw the exemption in public interest. Interestingly through-out the tenure of the government has not been able to justify public interest quainvestment exemptions, except the cases where unscrupulous persons were involved[12]. Therefore even for a moment, GST is assumed as policy change of overwhelming degree, still it does not ipso facto succeeds the test of public interest.
Suitable bargains to exonerate discontinuation
The US jurisprudence has assimilated the ‘bargain principle’ as a potential exception to PE[13]. GST [assuming a policy change] may be justified in public interest, where the lost incentives are bargained in the form of other suitable incentives in modified form or otherwise[14]. Had the government not introduced the budgetary support, the government’s chances of exonerating itself from PE before the writ Courts would have been smaller than pen’s tip. Regardless of how much one may call budgetary support scheme (BSS) as a measure of ‘goodwill’ and regardless of what made the Delhi Court in assenting to the same, it is an argument without conviction and without wisdom in as much as BSS is made available only to those investorswhose sunset period quainvestment exemption had not expired, establishing a clear linkage.
To conclude, if by the application of BSS, the investors are able to substantially recoup the originally envisaged policy benefits, they should rest their case there. However, the investors in whose case the rewards under BSS are substantially evaporated as compare to the benefits flowing on account of exemption route, it would be equitable for them to call for invocation of PE, considering the bargains have been reduced to arbitrary limits.
3. No PE against the legislature, but where’s the legislature?
The exception of non-invocation of PE against legislature is enshrined to exonerate the government from promise, where such promise was an un-authorized action (of a sub-ordinate officer) or statutory declared prohibited. The contours of this exception of PE [as they may be identified as potential tests for examining whether PE is invokable under GST qua investment exemptions] could be gathered from Supreme Court’s verdict in UOI vs Godfrey Phillips Ltd.[15];
(I) PE is applicable against the government in the exercise of its governmental, public or executive, functions and doctrine of executive necessity or freedom of future executive action cannot be invoked to defeat the applicability of the PE
(II) However there can be no PE against the Legislature in the exercise of its legislative functions nor can the Government or public authority be debarred by PE from enforcing a statutory prohibition
(III) PE cannot be used to compel the Government or a public authority to carry out a representation or promise which is contrary to law or which was outside the authority or power of the officer of the Government or of the public authority to make
Juxtaposing the above tests to evaluate continuation of investment exemptions under GST;
(I) Public function
The investment exemptions emanated from government’s public function in the form of Industrial policy formulated by its branches. The industrial policies such as the one formulated vide memo dated 07 January 2003 is executive exercise of the policy formulation principles enshrined under Article 39 (c) of the Constitution of India (COI), see K.M. Refineries vs State of Maharashtra[16]. The object of industrial policy is to ensure equal distribution of wealth and means of production. Therefore having made a representation as part of the public function, the PE principle should be applicable if the government backs out of its representation.
(II) No PE against Legislature
Before averting to what the Delhi High Court observed in Hero Motocorp casesupra it is apposite to ascertain what act constitute act against legislature. The two remarks in the phrase [1] no PE against legislature or [2] no PE in enforcement of statutory prohibition are co-terminus. The first indicate that something not provided (or prohibited) in the legislature cannot be sought by a party citing PE, while the other indicates that any enforcement action of public authority (in pursuance of prohibition in legislature) is also not subject to PE.Succeeding paragraphs examines, if there is any prohibition in the Central Goods and Services Tax Act, 2017 (“the Act”) to discount PE;
Section 11 prohibition
Section 11 of the Act is the source of all exemptions in GST. By no stretch of means, Section 11 ibidcast any prohibition on exemption, and the government [in public interest] can always notify area based exemptions. If the government intended adopt to the proposition that investment exemptions are prohibited (as prompted by multiple reports, citing the infrastructure of GST), it would have specifically adopted propositions by eliminating investment exemptions from the purview of Section 11 ibid.
In Manuelsons Hotels vs State of Kerala[17], the Supreme Court had held that non exercise of powers under Section 3A of the Kerala Building Tax Act, 1975, when such exemption was represented, calls for invocation of PE, especially during the period when Section 3A was in force before its repeal.
When the Act explicitly possess power to exempt, it is inconceivable that act against legislature could come into defense of the government in not to continue the investment exemptions.Merely because the exemptions are not thought after obviously cannot make them legislation prohibited.
Proviso to Section 174 (2) (c)
In Hero Motocorp case, the Delhi High Court while ended up distinguishing Manuelsons Hotels case supra, also pre-supposed the proviso to be a legislative act of prohibition of continuation of investment exemptions. Relevant parts extracted below;
174. (2) The repeal of the said Acts and the amendment of the Finance Act, 1994 (hereafter referred to as “such amendment” or “amended Act”, as the case may be) to the extent mentioned in the sub-section (1) or section 173 shall not—
(c) affect any right, privilege, obligation, or liability acquired, accrued or incurred under the amended Act or repealed Acts or orders under such repealed or amended Acts:
Provided that any tax exemption granted as an incentive against investment through a notification shall not continue as privilege if the said notification is rescinded on or after the appointed day;
Perusing the proviso to Section 174 (2) (c) ibid carefully, the observations of High Court appears to be erroneous in as much as
- Proviso makes no reference to the absolute prohibition of granting an investment exemptions,
- All the proviso does is, to state that investment exemptions shall no longer be a privilege, if the notifications are rescinded. Think for a second, isn’t the privileges are extinguished as soon as they are withdrawn, so what difference would it make to state the obvious through the proviso? Considering the withdrawal of privileges is always prospective, proviso can obviously not be rendered applicable retrospective, refer Bajaj Auto Ltd and Gillete India Ltd. supra.
- It is trite law that exemptions under the legislature are extendable and withdraw-able, by the government in ‘public interest’. However whether the withdrawal of investment notification with effect from 01st July 2017 by virtue of Notification No. 21/2017-CE dated 18 July 2017 in public interest was in ‘public interest’ or was it implied repeal by virtue of Section 174 (1) of the Act? Or is that for 17 days it was implied repealed, then it became a publically interested rescission? Or is that the PE could be invoked for 17 days?
- The insertion of proviso itself is hostile, arbitrary and is otherwise amenable to challenge under Article 19 of the COI.
- The proviso takes away privilege, not the right of the investors, therefore proviso has not application what-so-ever qua the investors who had already acquired the right by the erstwhile representation by the government [more on this in latter section].
The proviso to Section 174 (2) (c) ibidis enthusiastically interested, however in no case could said to be a legislative prohibition so as to enable the government to discontinue the investment exemptions under GST. It is worthwhile to refer to decision of Madras High Court in Ruby Overseas vs JDGFT[18] wherein was observed that where there is no ‘statutory prohibition’ as to withdrawal of already issued NOC in the EXIM, then in the absence of such prohibition, it cannot be said that the continuation thereof would be against the legislature (para 13).
That said, it is suffice to say that, continuation of investment exemptions (raw form or modified form), doesn’t qualify as against the legislature exception of PE, and the judgment of Delhi High Court should be called for review on this count.
(III) Compelling government to carry out the promise
This exception is built on the premise that, the Court cannot compel the public authorities to do carry out representation or promise which is contrary to the law. This exception is in continuation of the larger exception that PE cannot operate against the legislature. However at the same time this exception doesn’t fetter the power of the writ Courts to compel the governments to make suitable methodologies/ rules when the act is not proven to be against the legislature.
Illustratively, in Manuelsons casesupra, the Court held that even non issuance of exemption notification, despite such exemption not being against the legislature is arbitrary when the government was required to do so against the representation it made. At more than one occasions, the Courts have exercised their discretion and compelled the government to formulate rules/ methods to issue necessary instruction/ notifications to carry out the order, see State of Punjab vs Nestle India Limited[19].
Consequently, even this exception of PE doesn’t make against the legislature ground any stronger for the government. It is important that prayers should always be incorporated in the petitions before the court to compel the government to issue notifications.
4. Right versus privilege in the context of proviso to Section 174 (2) (c)
It is a common trend in the Act, where the legislature has tried to impose revenue’s authority over the shadows of the past, be it putting conditions on transitional credits or giving unlimited powers to the mercenaries for recovering demands emanating at any stage. The impression of all transitional provisions and savings and repeal provisions is that while ‘benefits’ of investors are perceived as concession, their liabilities however as absolute rigor.
Coming to the point, while Section 174 (2) (c) ibid saves the rights, privileges, obligations and liabilities of repealed Acts, but the proviso thereto alienate ‘privilege’ available in the form of tax exemption granted as an incentive against investment from its purview. Captured from the minutes 2nd Council Meeting minutes, it appears that the members were cognizant of the fact that investors would push for the fiscal incentives promised to them against their investments.
The proviso adopted the common trend and pushed the tax exemptions against investment as a sort of privilege and tried to convey that the revenue would not grant the incentives with absolute certainty. The Delhi High Court in Hero Motocorp case supra succumb to the thought process of the government that investment exemptions are mere ‘privilege’, whose suppression was therefore justified in guise of proviso [see para 25]. With due respect, it appears that the hot heads might have used the incorrect word – ‘privilege’. For the investors seeking PE, it can be explored by them to contend that the investment exemptions qualifies as ‘right’ and not ‘privilege’, and therefore not suppressed by proviso.
Right-privilege distinction
The terms ‘right’ and ‘privilege’ remains linguistically different be in the context of clause (c) of Section 174 (2) ibidand also in the context of other codified laws however they are not water-tight compartments and the interpretation keeps on lurking on borderline. The expressions were often differentiated by the historic courts for the application of natural justice in judicial/ administrative proceedings[20]. While the contextual debates remained omnipresent, the courts never seem to disagree that both the concepts are different.
The best way to differentiate the words is by hypothesizing;
- While “right” is an entitlement which is drawn from the common law/ natural law/ fundamental rights of constitutional code, and cannot be taken away without following due process of law
- The “privilege” on the other hand is ‘given’ by codified law and can be taken away by the administrator with no absolute enjoyment by the donee
The Hon’ble Supreme Court in DGFT vs Kanak Exports[21] had an occasion to consider whether export incentives against export performances qualifies as privilege or vested right. There were two types of exporters [1] the mischievous ones who had exploited the EXIM policy by circular transactions and [2] the othersmall bunch who had genuine export performances. The DGFT by way of retrospective amendments in respective notifications had curtailed the export incentives for both type of exporters. Both the exporters pleaded before the Court that DGFT couldn’t have taken away their vested right in as much as they had satisfied the requisite export performance. The Court with all its wisdom had brilliant observations;
- ‘As is’ nature of incentive: The incentive scheme is in the nature of concession which is a privilege. It is trite law that such exemptions, concessions or incentives can be withdrawn any time [para 101]. This observation appears to indicate the ‘as is’ nature of tax exemptions.
- When incentive become vested right: Para 128 vindicates the universal conclusion of court that ones the exporters achieves target exports stipulated in the policy, they acquires ‘vested rights’ that cannot be snatched by making retrospective amendments by government. At the same time the exporters who had misused the provisions of policy, have no such vested right when the taken away retrospectively by the government
It can be discerned from the above that while stipulations based incentives/ exemptions are de jure concessions or privilege, however when the investors changes their positions by acting upon the stipulations prompted by the government, they acquire ‘vested right’ in those privileges, which cannot be taken away unless by force of public interest.
It follows therefrom the investors who had acted upon the promise made by the government(s) and had changed their positions with the reciprocal tax exemptions had acquired vested right. Section 174 (2) (c) ibid explicitly saves ‘rights’ and ‘privileges’ acquired under the existing laws, however the proviso thereof only curtails ‘the privileges’, therefore the proviso shouldn’t come in force for enforcement of those rights.
The revenue authorities are bound to take shelter to proviso to Section 174 (2) (c) ibid to defend the discontinuation of investment exemption and it would be for the investor’s counsel to persuade the Court, without which the Court might just bandwagon with Delhi High Court as in Hero Motocorp Ltd. supra.
5. PE has no application for the unscrupulous assessee
The public interest exception of invocation of PE has another interesting sub-set where the withdrawal/ discontinuation/ curtailment of investment exceptions by the government owing to misuse by the unscrupulous assesse, is accepted by the Courts. In PTR Exports (Madras) Pvt. Ltd. vs UOI[22], the Supreme Court had held that change in policy owing to existence of unscrupulous exporters is within the powers of the executive and legislature and held that PE is not invokable in such case.
In the landmark decision in case of Kanak Exports vs DGFT[23], the Supreme Court categorically distinguished revision in policy benefits between unscrupulous exporters and genuine exporters and invoked PE only in the case of latter. The Larger Bench of Supreme Court again reiterated this position in UOI vs VVF Limited[24]. It is worthwhile that the decision in VVF Limited do not completely cover the case of all assessee availing area based exemption, the genuine assessee feeling aggrieved by the change in exemptions should distinguish their case.Truly, this exception is exception for all laws with no link with implementation of GST.
Based on above paragraphs, it can be argued with authority that the investment exemptions should have been continued or grandfathered with substantial proportions. The Delhi High Court’s observation in Hero Motocorp case is bound to give fire to the disputes, but will surely come up for review with the expectation that next time, the Court(s) would adopt more holistic approach.
Part B discusses some other aspects that are relevant in the context of investment exemptions
Part B
6. Curious orders of courts
The doctrine of promissory estoppel substantially secures the interest of justice, however at times due the phases of transitions (like for obvious GST) or on account of various other reasons, the Courts ends up passing orders that are hard to implement, more often than not virtual impracticable. One reason for such virtual failures could be the failure of the petitioners to propose ways to recover benefits upon invocation of PE, so that Court take cognizance of the matter and the practicable orders are issued.
In one of the orders passed post implementation of GST, the Hon’ble Chhattisgarh High Court invoked PE against non-remittance of capital cost infrastructure subsidy by the State. As the luck had it, the investment subsidy rules of 2004 had maximum cap on the basis of commercial tax/ central sales tax paid by the petitioner over the 9 year period. The Court directed that the claim be remitted to the petitioner by adjustment/ set off of arrears of tax liability[25] or tax liability of current/ future assessment years.
God bless, if the petitioner happened to have arrears of sales tax liability, because if not, the order is practically un-implementable. Assuming the taxpayer pre-supposes that future tax liability also covers the future GST assessment also, then also since GST returns do not permit him to declare zero tax in the state tax portion, he would be forced to pay SGST. Once SGST is paid, the state tax authorities are accustomed to not to refund the GST, on the narrowest interpretation of the order that tax liability[26] as per the High Court only pertains to sales tax.
It is therefore important for the petitioners who approach the courts to also propose some methods for quantification as well as implementation of the scheme, which takes care of the practical hurdles that the petitioners may pop up.
7. Whether refund based incentives are affected by proviso?
Another method of granting investment based incentives is by way of refund/ adjustment of the taxes paid by the investors. Various states along with excise duty scheme implemented in Jammu and Kashmir had adopted this method of granting benefits, majorly because this ensured that the funds released were limited to the tax funds received.
The state of Rajasthan had deployed a unique method of providing incentive by way of allowing adjustment in subsequent tax period’s VAT liability, calculated based on preceding tax period’s VAT liability. The circle would go on and on. Consider for a moment that the government succeeds in their argument that proviso to Section 174 (2) (c) ibidputs a stop to investment exemptions, then whether such proviso could influence the incentives granted by way of refund also?
The Supreme Court in Assistant Commissioner of Sales Tax vs Dharmendra Trading Company[27] in the context of refund based incentive held that substance of the concession should be seen and not merely certain words used out of context. Although the benefit regarding sales tax granted to the new industries was by way of refunds of sales tax paid, it was in effect, the benefit granted is in the nature of an exemption from the payment of the sales tax or reduction in the sales tax liability.
While most of the states have announced methodologies to grandfather the erstwhile refund based incentives [Jammu & Kashmir, Madhya Pradesh, Maharashtra] it would be remarkable if some state end up not grandfathering under the garb of proviso to Section 174 (2) (c) ibid.
8. Reduction in quantum of incentives
It is one thing for the state to agree upon continuation of the area based incentives, and it’s another thing to dispute with the quantification thereof. Rajasthan Industrial Policy, 2014 (“the RIPS”) which already had the most horrific calculation methodology for calculation of the incentives went shambles when it came to quantification of the refunds under GST.
For the starters, the refund under GST was restricted to the output SGST portion paid by Electronic Cash Ledger by the applicant. It is beyond explanation that the state of Rajasthan is not consumption centric, such that most of the output of the industries established was on account of inter-state sales. The inter-state supplies being amenable to IGST, evaporated substantially all the tax reimbursement for these industries. The question then stems for discussion is, whether PE could be invoke vis-à-vis quantification of incentive.
The answer again lies in the public interest quotient of PE. The governments are empowered with shrewd freedom to reduce the quantum of benefit originally envisaged incentives subject to intelligence i.e. all reductions that satisfies the public interest by way of studies of misuse by unscrupulous buyers etc. In Reckitt Benckiser vs UOI[28], the High Court of J&K had held that restriction of exemption on value addition without the back-end justifying studies as to why such exemptions were restricted was impermissible, particularly when subsequent amendment provided for determination of exemption based on special rates.
While it is true that public interest is the brain for every vis-à-vis the quantum of incentives, it is however difficult to say with authority that the Court would compel the governments to restore the equal amount of benefits under GST that were earlier envisaged, especially seeing the case of Rajasthan government which under the RIPS had clear intention of granting incentives only to the extent of tax received funds.
9. Denial of policy incentives against the policy directives
Another aid that may put the investorsin advantages position in invocation of PE is the evolving jurisprudence on securing the rights of the persons driven by the state’s policy directives formulated under Chapter IV of the COI.
The Olga Tellis & Ors vs Bombay Municipal Corporation[29] was a path breaking judgment, the Supreme Court emphasized that the principles contained in Directive principles of state policy must be regarded as equally fundamental in the understanding and interpretation of meaning and content of fundamental rights. In Bodhisattwa Gautam vs Ms. Subhra Chakraborty[30], the directives were raised from their static and unenforceable concept to a level as high as the fundamental rights.
A masterpiece came when the Apex Court in Bandhua Mukti Morcha vs UOI[31] laid out loud and clear that although the directive principles of State Policy contained in clauses impugned policy directives of Chapter IV are not enforceable in a court of law[32] i.e. it may not be possible to compel the State through the judicial process to make provision by statutory enactment or but where legislation is already enacted by the State in this regard, the State can certainly be obligated to ensure observance of such legislation for inaction on the part of the State in securing implementation of such legislation would amount to denial of the fundamental rights in Chapter III of the COI.
The area based exemptions are traceable to the policy directives contained in Article 39 (c) of the COI in pursuance of which the state is to ensure “the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment”. When a policy is formulated and subsequently legislated, the subsequent denial would definitely hurt the right to do business of the investor, who had acted in accordance with such policy directives. In essence it could be argued that, backing out on the policy directives under Article 39 (c) violates Article 19 (1) (g) of COI, similarly was so observed by Bombay High Court in K.M. Refineries supra.
10. Doctrine of legitimate expectation [LE]
The doctrine of LE is another principle of equity, which often runs parallel to doctrine of PE, but is obviously different. The concept arises out of a ‘reasonable expectation’ of being treated in a way by an administrative authority even though the person who has such an expectation has no right in law to receive the benefits so expected. The expectation may arise from an [1] express promise or [2] consistent course of practice or procedure which the person claiming the benefit may reasonable expect to continue[33].
The doctrine of LE has two aspects [1] procedural which relates to expectation of hearing before a decision is made and [2] substantive which relates to expectation of obtaining a favorable decision. The exceptions of LE are quite similar to that of PE viz. it should not be against the legislature, equity flowing form public interest adjustment, change in policy justifying public interest to name the key ones.
When the state had expressly promised the policy incentive, the investors had changed their positions, invested humungous amount of capital, therefore had obtained legitimate expectation that the benefits/ promises would be fulfilled by the state.
At the same time it is worthwhile to observe that the report on 11th Five Year Plan which was referred in Hero Motocorp case had suggested that for providing necessary support for balanced regional development, area based exemptions can be replaced with direct investment linked cash subsidy. Quite astonishing that the government preferred to blindly inclined towards elimination of area based exemptions, however when it came to grandfathering the same, the cash substitute wasn’t even given a thought. The investors could easily contend lack of fairness at behest of government while pleading doctrine of LE.
The states which abruptly eliminated other policy incentives with no substitute merely on the backing of transition to GST, epitomize the lack of fairness and is the acute case where LE could be invoked.
It would not be exaggeration to say that, the investment exemptions accounted much more for the investors than what the mediocre approach which the fiscal department shown. While it is true that the scheme didn’t achieved its long term objectives, but surely in short term, the incentives inducedthe industrial set ups in barren lands. It was long known that GST would bring an end to these exemptions, however the industries do expected a fair transition. The transition in many cases has been chaotic, and the affected are bound to litigate. After the development in Hero Motocorpcase it would be difficult for the similarly placed investors to convince the court, and it is important for them to make their case the strongest possible.
Apologies for the grammar Manish Sachdeva masachdeva@outlook.com
[1]W.P.(C) 505/2020 & CM APPL. 1328/2020
[2]1968 AIR 718, 1968 SCR (2) 366
[3] 1979 AIR 621, 1979 SCR (2) 641
[4]1995 AIR 874 SC
[5]Notification No. 50/2003-CE dated 10 June 2003
[6]2017 (350) E.L.T. 230 (Uttarakhand) – Appeal admitted in Union of India v. Bajaj Auto Limited – 2017 (350) E.L.T. A63 (S.C.)
[7]2009 (235) E.L.T. 5 (H.P.) – Appeal Admitted in 2017 (354) ELT A161 (SC)
[8]GST Task Force report dated 15 December 2009, The Prime Minister’s Economic Advisory Council’ statement, Draft of “An Approach to the 11th Five Year Plan”
[9]2010 (261) E.L.T. 98 (Gau.)
[10] Motiram Padampat Sugar Mills supra, also refer Monnet Sugar Limited vs UOI AIR 2006 All 200
[11]Dispensing with the levy or payment of tax is a serious matter. It is done only with a view to promote a countervailing public interest ITC Bhadrachalam Paperborads & … vs Mandal Revenue Officer JT 1996 (8) 67
[12]Sai Steel Limited vs UOI 2010 (260) ELT 185 (Guj.), para 115, 116
[13] The consideration requisite to enforceability of a promise has often been described as consisting of either a benefit to the promisor or a detriment to the promisee that in either case must have been bargained for in exchange for the promise. C. C. LANGDELL, A SUMMARY OF THE LAW OF CONTRACTS 81 (2d ed. 1880)
[14] Malana Power Co. Ltd. vs DGFT (Policy) 2017 (345) E.L.T. 606 (Del.) –the Delhi High Court exonerated discontinuation of TED benefits on capital goods supplied to power projects in as much as alternative remedy in the form of drawback was available, hence not invoking PE
[15]AIR 1986 SC 806
[16]WRIT PETITION NO. 2209 OF 2018 (Bom.)
[17]Civil Appeal No. 2480 of 2008
[18]2018 (361) E.L.T. 209 (Mad.)
[19](2004) 6 SCC 465
[20]The courts started off with inapplicability of process of natural justice approach on the ‘privileges’, because they are not ‘rights’ [see Nukada Ali], the absolute denial thereof [see CK Achutan], slowly started to debate over [see Punnan Thomas] and finally accepted that process of natural justice is also applicable over ‘privileges’ [see Erusian Equipment and Chemicals Ltd.].
[21]2015 (326) E.L.T. 26 (S.C.)
[22]1996 (86) E.L.T. 3 (S.C.)
[23]2015 (326) E.L.T. 26 (S.C.)
[24] 2020-TIOL-83-SC-CX-LB
[25] The funny thing is the subsidy rules under the later policies cap the investment subsidies by threshold with no mention of taxes paid by the investors
[26] Tax liability is subject to its own interpretation whether sales tax, entry tax or what not
[27]1988 AIR 1247, 1988 SCR (3) 946
[28]2011 (269) E.L.T. 194 (J&K)
[29]AIR 1986 SC 180, 1985 3 SCC 545
[30]Air 1996 SC 922, 1996 AIR SCW 325
[31]1984 AIR 802, 1984 SCR (2) 67
[32]Article 37 Application of the principles contained in this Part The provisions contained in this Part shall not be enforceable by any court, but the principles therein laid down are nevertheless fundamental in the governance of the country and it shall be the duty of the State to apply these principles in making laws
[33]UOI vs Lt. Col. P.K. Choudhary 2016 4 SCC 236
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