MAY 02, 2020

By Anay Banhatti, Partner, DMD Advocates

He who is punished is never he who performed the deed. He is always the scapegoat - Friedrich Nietzsche

ON 22 April, the Supreme Court has passed its judgment and order in Union of India & anr. v. VVF Ltd. & anr. - 2020-TIOL-83-SC-CX-LB allowing the Revenue appeals from decisions of different High Courts ¹, where the High Courts had set aside the notifications amending certain area based exemption notifications issued under the Central Excise Act, 1944, curtailing the refund of Central Excise duty only to the extent of duty payable on value addition; on the ground that the said amendments are hit by the doctrine of promissory estoppel.

The Supreme Court decision which explains the purport of 'promissory estoppel' in the context of area-based exemption notifications, could also potentially impact the pending litigations challenging the amendments to area-based incentives, before different Courts.

Background

The Central Government and various State Governments, have from time to time, introduced area based incentive schemes, generally with the objective to attract investments, bring about development of infrastructure and generate employment; so as to provide an economic stimulus to certain areas which are less industrially developed (for example, North-Eastern States, Himachal Pradesh, Jammu and Kashmir, etc.) or areas impacted by natural calamities (as was in the case of Kutch region in Gujarat which was devastated by an earthquake in 2001).

The fiscal incentives provided by the Central Government includes Central Excise duty benefits which are in the form of exemptions (which could also be implemented through refund of duties in cash) on goods manufactured and cleared by the eligible units for a certain period, subject to the conditions and procedures, as are set out in the relevant Central Excise exemption notifications. The State Governments also provide incentives to the eligible units in respect of State levies.

It is in anticipation of such fiscal incentives, several companies set up their manufacturing units in such areas, although having to incur substantial additional costs towards freight, storage, etc. and factor in certain locational disadvantages; and therefore, where the Government makes any subsequent changes or amendments to such notifications, which potentially curtail any anticipated benefit, such amendments have been the subject matter of challenge in writ proceedings, primarily on the ground that such amendments are in breach of promissory estoppel.

Illustratively, such amendments include restriction of benefit to certain specific activities by the eligible unit or in manner of computation of benefit, as in the present case.

The 'Promissory Estoppel' argument

The doctrine of promissory estoppel is well defined by catena of decisions of the Supreme Court ² ; and in plain words, would cover a situation where the Government makes a promise knowing or intending that it would be acted on by the promisee and, in fact, the promisee, acting in reliance on it, alters his position, in which case the Government would be held bound by the promise. On one hand, to invoke the doctrine of promissory estoppel it is for the promisee to show that he has altered his position in relying upon the promise. Whereas, on the other hand, for the Government to be absolved from its promise, either performance of the promise should be in breach of law, or the Government should be able to show that the public interest in the Government acting otherwise than in accordance of the promise is so overwhelming that it would be inequitable for the Government to act as per the promise.

In establishing a case for overwhelming public interest, the Court is required to insist on a highly rigorous standard of proof on part of the Government in the discharge of this burden.

Supreme Court's decision

In the VVF Ltd. case (Supra), the Supreme Court was deciding the appeals filed by the Revenue from different High Court orders in writ petitions challenging certain notifications amending different area-based exemption notifications.

The Government issued Notification No. 39/2001-CE dated 31 July 2001 granting exemption to goods cleared from new industrial units set up in Kutch district of Gujarat before a specified cut-off date, from so much of Central Excise duty as was equivalent to amount of duty paid in cash / through personal ledger account (PLA) which exemption was by way of refund of duty, and was available for a period of five years from the commencement of commercial production. The said original notification, was amended from time to time to clarify certain matters as also to add/ amend the conditions and procedures for availing the exemption. In 2003 ³, an amendment was made requiring the manufacturer to first utilize the entire CENVAT Credit prior to making payment of duty in cash. Subsequently the original notification was amended by Notification No. 16/2008 - CE dated 27 March 2008 which restricted the refund to the duty payable on value addition undertaken in manufacture of the goods by the eligible unit, which Notification went on to prescribe a notional rate of value addition (ranging from 15% to 51% of total Central Excise duty payable based on the classification of the goods manufactured, 34% being the rate for goods manufactured by the petitioners before the Gujarat High Court); and a process was prescribed for fixing special rate of value addition on case-to-case basis. Thereafter, based on representation by manufacturing units, vide Notification No. 33/2008 dated 10 June 2008 and Notification No. 51/2008 dated 3 October 2008, the deemed value addition rates were revised, with 75% in respect of the goods manufactured by the petitioners. The said amending notifications restricting the refund of duty correlated to value addition and prescribing / amending the notional rate of value addition as a percentage of duty paid on manufacture, were the subject matter of challenge in petitions filed before the Gujarat High Court. It was the petitioners' case that pursuant to the amending notifications, the incentives available to them stood significantly reduced, and such amending notifications were therefore in breach of doctrine of promissory estoppel.

Similarly, in petitions before the Sikkim High Court and Guwahati High Court, notifications amending the relevant area-based exemption notifications, to modify the manner of computing the refund of Central Excise duty based on the extent of the value addition by the eligible unit, were impugned.

Although, the manufacturer-assessees won the first leg of the battle before the High Courts, with all the High Courts having quashed the impugned amending notifications for reason of breach of promissory estoppel; the Supreme Court has in VVF Ltd. case (Supra) set aside the High Court orders and allowed all the Revenue appeals.

The gist of the findings of the Supreme Court is as follows:

(i) Promissory estoppel cannot be invoked in the abstract and the Courts are bound to consider all aspects including the objective to be achieved and the public good at large.

(ii) The object of granting refund was to refund the Central Excise duty paid on genuine manufacturing activities; and the intention of the Government would not have been that irrespective of the actual manufacturing, and even if the goods are not actually manufactured but are manufactured on paper, there shall be refund of the Central Excise duty.

(iii) The object of the amending notifications was the prevention of tax evasion; and they were issued in the public interest. In this regard the Court has recognized that the Government had issued the amending notifications after noticing that the provision of granting refund of cash paid portion of duty and consequential eligibility of credit to the buyers of such excisable goods, had prompted certain unscrupulous manufacturers to indulge in different types of tax evasion tactics, which practices were revealed based on cases booked by the Excise Department and representations received from industry associations.

(iv) The amending notifications were clarificatory in nature to remove doubts in the earlier notifications; they cannot be said to take away the benefits/ rights granted under the earlier notifications; and will operate retrospectively.

(v) The amending notifications are not hit by the doctrine of promissory estoppel.

(vi) The Central Excise duty already refunded prior to issuance of the amending notifications would not be impacted by this order. However, pending refund applications will be decided as per the amending notifications, in accordance with the law.

Analysis and Author's comments

The Court has placed immense weightage on the misuse of the area-based exemption notifications by certain unscrupulous manufacturers to hold that the objective of the amending notifications was to prevent tax evasion, thereby satisfying the public interest exclusion from applicability of the doctrine of promissory estoppel.

With all due respect, a question that arises for consideration is whether the actions of unscrupulous manufacturers can be a valid basis for restricting the benefit for bona fide industrial units, who qualify as eligible units, and have made significant investments in the specific areas under promise of certain fiscal incentives from the Government. Such an approach followed by the Court, resulting in curtailment of benefits to bona fide industrial units, may arguably not be the intended consequence of the supervening 'public interest'.

With there being no specific findings in the Supreme Court order or in the High Court orders to the effect that the specific petitioners before the High Courts were engaged in the misuse of the exemption notification; it is relevant to note that, both, the Gujarat High Court and the Guwahati High Court, on examination of details in relation to instances of misuse brought on record by the Excise Department, had stated that the instances of misuse were by a small proportion of the total industrial units claiming area based incentives, and of those, in most of the cases, the adjudication proceedings were pending; thereby there being no confirmed findings in relation to misuse.

It cannot be said that any person should be permitted to misuse / abuse the benefits and concessions provided by the Government, and more so at the cost of the exchequer. However, this is also to be seen in the context of the fact that the area-based exemption notifications come with appropriate 'checks and balances', to ensure that the benefits are claimed by eligible units and the refunds are granted after appropriate verification by the relevant authorities. Furthermore, even if there are cases of misuse of exemption / refunds, then under the Central Excise Act there is an appropriate machinery in place for recovery of any erroneous refunds, along with recovery of interest and penalties, which can be put in play where there is misuse/ abuse of incentives by individual units. In a way, the Government's argument that the said notifications are being misused/ abused by industrial units, casts a doubt on its own instrumentalities who have granted certificates to genuine manufacturers in relation to being an eligible unit, or having made prescribed investments; or who have granted refunds post verification.

The underlying object or intention of the Government as recognized by the Court in providing the area-based incentives, and in light of which the Court has considered the object and the clarificatory nature of the amending notifications; is to provide the Central excise duty exemption / refund in respect of genuine manufacturing activities carried out in the concerned areas. The area-based exemption notifications as originally issued provided refund of Central Excise duties paid in cash, after utilization of the CENVAT Credit. Where genuine manufacturing units are set-up in the areas concerned after making the prescribed level of investments, and the refund of Central Excise duty paid in cash in respect of the manufacturing activities carried out in the unit, is provided to such units subject to verification by the relevant authorities as per the 'checks and balances' prescribed in the notifications; it can arguably be stated that, the object of the Government in incentivizing the genuine manufacturing activities would have still been satisfied.

The Supreme Court, has held the amending notifications to be clarificatory, to remove doubts in the original notifications, and to apply retrospectively. Such findings would render moot the point that the amending notifications have brought about a substantial departure from the notifications as originally issued, in the manner of computing the Central Excise duty refunds. The notifications as originally issued did not correlate the refunds to the 'value addition' (that also on a notional basis) and the refund of the Central Excise duty paid in cash (as originally stipulated) would not necessarily be equal to the refund of duty payment on value addition; and as claimed by the petitioners, could be significantly more. Further, the Supreme Court has on earlier occasions ⁴, in deciding whether or not an amendment is clarificatory considered relevant whether the law prior to the amendment was vague or ambiguous, which may not be the case with there being no doubt in the method prescribed for computation of the Central Excuse duty refunds under the original notifications, and as the Government had sanctioned refunds based on the prescribed computation.

Although, the Court has clarified that the order will not impact the Central Excise duty refunded prior to the amending notifications impugned before the High Courts; the order would have significant financial implications for the industry, as the Department would seek to recover / restrict the refund amounts, in the following situations:

- Where the refund applications are pending adjudication, in which case the refund amounts would be recalibrated as per the amending notifications as the Court has held such amendments to be clarificatory in nature and to operate retrospectively.

- Where the refunds are granted after issuance of the amending notifications, but where the limitation period under the law has not lapsed; thereby enabling the Department to seek to recover the refunds in accordance with the law.

This decision of the Supreme Court is likely to impact pending litigations before different Courts, where the assessees have challenged the amendments to the area-based incentives on the doctrine of promissory estoppel. Illustratively, it could impact the pending proceedings where amendments to area-based exemption notifications restricting benefits to units engaged in only the peripheral activities in the nature of packing, re-packing, labelling, etc. are challenged.

Further, with the relevant provisions under Central Excise Act, and now under the GST law, specifically stating 'public interest' to be the basis for issuance of any exemption notifications and amendments thereto; and with the Revenue routinely claiming public interest exclusion to support any changes to the area-based incentives, this decision can potentially be a tool in the hands of the Revenue to further its public interest ground.

Concluding remarks:

The Supreme Court in the case of U.P Power Corporation Ltd. ⁵ whilst examining the general principles of applicability of the doctrine of promissory estoppel, recognized that in 21st century, when there is global economy, the question of faith is very important; and in order to keep faith of the people the Government or its instrumentality should abide by their commitments.

(Article penned with assistance of Ameya Pant, Associate DMD Advocates. The views expressed are strictly personal.)

¹Hon'ble Gujarat High Court in SAL Steel Ltd. v. Union of India - 2010-TIOL-112-HC-AHM-CX and Euro Ceramics Ltd. v. Union of India [2017 (354) ELT 23 (Guj)]; Hon'ble Sikkim High Court in Unicorn Industries v. Union of India - 2013-TIOL-438-HC-SIKKIM-CX and in Sun Pharma Laboratories Ltd. v. Union of India - 2017-TIOL-2539-HC-SIKKIM-CX; Hon'ble Guwahati High Court in Union of India v. Kamakhya Cosmetics and Pharmaceuticals [2015 (320) ELT 216 (Gau)]

²Shree Sidhbali Steels Ltd. v. State of UP (2011) 3 SCC 193; Union of India v. Godfrey Phillips India Ltd. - 2002-TIOL-384-SC-CX-LB; Motilal Padampat Sugar Mills Co. Ltd. v. State of UP and ors - 2002-TIOL-1041-SC-CT;

³Notification No. 65/2003 - C.E. dated 6 August 2003

⁴Union of India v. Martin Lottery Agencies Ltd. - 2009-TIOL-60-SC-ST; Sedco Forex International Drill Inc. v. Commissioner of Income-tax - 2005-TIOL-145-SC-IT.

⁵ (2008) 2 SCC 777