Supreme Court upholds retrospective amendment of area based exemption notifications

The Hon’ble Supreme Court, vide its judgement dated 22 April 2020, in the case of Union of India and Another v M/s V V F Limited and Another (Civil Appeal Nos 2256-2263 of 2020) and other connected appeals, has upheld the validity of the notifications issued under the Central Excise Act, 1944 (Excise Act), which retrospectively amended the area based exemption schemes notified in relation to certain areas within Gujarat and the North Eastern region.

Background

In pursuance of its objective of economic upliftment, specifically for earthquake hit regions of Gujarat and backward areas of the north eastern states, the Union Government (Government) had introduced incentive schemes for new industries located in such areas. One such scheme, effected through several notifications (Original Notifications) issued under the Excise Act, provided for exemption from excise duty levied on manufactured goods, for a period ranging from five to ten years from the date of commencement of commercial production.

Subsequently, during the pendency of the exemption period, the Government issued notifications (Amending Notifications) revising the criteria for exemption retrospectively. In terms of the Amending Notifications, the amount of exemption available to an eligible taxpayer unit was reduced to only such portion of excise duty as was attributable to the value addition made by such units. Further, even the value addition was pre-determined following a statistical analysis of production patterns. Being aggrieved with the impact of Amending Notifications, the eligible taxpayer units approached the jurisdictional High Courts challenging the Amending Notifications. Each of the jurisdictional High Courts had quashed the Amending Notifications for being violative of the doctrine of promissory estoppel as it resulted in withdrawal of incentives promised by the State.

Decision of the Supreme Court

The Government assailed the decision of the respective High Courts inter alia on following grounds:

§	The Amending Notifications were clarificatory as they explain the manner for computation of maximum concession thereunder. As such, the Amending Notifications do not take away the promised incentives.
§	The Government has powers to withdraw, rescind, revoke, or modify the exemptions in exercise of statutory powers. The concessions allowed under the Original Notifications were being abused by several manufacturers which were sought to be contained by the Amending Notifications.
§	The Amending Notifications issued by the Government were clarificatory in nature and were issued in public and revenue interest. As such the doctrine of promissory estoppel does not apply if the change in Government’s position is on account of public policy.

On the contrary, the taxpayers contended that the restriction on the exemption was retrospective and not retroactive. It was submitted that the Government was bound to give effect to the exemptions promised in the Original Notifications since the taxpayers had irrevocably altered their position by relying on the promise. The taxpayers had invested huge amounts in otherwise backward areas which had an incremental cost impact on operations. It was also contended that the concept of “value addition” was newly introduced and that mere misuse of exemption by a few manufacturers was no reason to restrict the exemptions.

Examining the validity of the retrospective changes introduced by the Amending Notifications and also the applicability of the doctrine of promissory estoppel thereto, the Supreme Court observed the following:

§	The Original Notifications merely suspended the levy and collection of excise duty, whether wholly or partially, for a specified period, in “public interest”. The exemptions under the Original Notifications were susceptible to being revoked, modified, or subject to conditions.
§	Public interest was an equity superior to individual equity and the principle would apply equally to cases wherein a promise has been made for a specific period.
§	The genesis of the incentive scheme of the industrial policy was to provide exemptions only to actual value addition taking place in the industrially backward regions and that the Amending Notifications were in consonance with the policy.
§	The doctrine of promissory estoppel does not apply in case of a change in position or for reasons of public policy and interest.

Thus, allowing the appeals filed by the Government, the Hon’ble Supreme Court held as under:

§	The Amending Notifications were merely clarificatory and did not take away any vested rights conferred by the Original Notifications. Accordingly, the Amending Notifications were not hit by the doctrine of promissory estoppel.
§	It was clarified that the judgement would not impact the amounts already refunded prior to issuance of the Amending Notifications but the pending refund applications would be decided in accordance with the provisions of the Amending Notifications.

Comments

A perusal of the above judgement evidences that the Hon’ble Supreme Court relied on the fact that the Amending Notifications were introduced to prevent misuse of the exemption introduced under the Original Notifications. While the above clearly reflects that the change in policy was triggered on account of subsequent facts, the Supreme Court still concluded the Amending Notifications to be clarificatory and hence applicable retrospectively to all taxpayers.

It is pertinent to note that relying on its above inference, the Hon’ble Supreme Court rejected the application of doctrine of promissory estoppel. To this end, the Court also justified its stance on the ground that the Amending Notifications triggered the change in public policy in the larger public interest.

In our view, the application of doctrine of promissory estoppel is contextual and has to be tested basis the facts and circumstances of each case. While the present decision may be used by the revenue authorities across the length and breadth of the country to justify retrospective denial of exemption, the courts will need to assess each case on its own merits as was done by the Hon’ble Supreme Court in the present case.

Lastly, it may also be relevant to highlight that the Hon’ble Supreme Court has extended immunity to those refunds which have been allowed and granted prior to the issuance of the Amending Notifications. Given that the Hon’ble Supreme Court, during the pendency of the case had directed the revenue to partially refund differential duties subject to furnishing bonds / bank guarantees by the assessees, it is likely that such taxpayers will now be exposed to demands.

-           Abhishek A Rastogi (Partner), Ayush Mehrotra (Partner), Anjali Krishnan (Senior Associate) and Abhishek Naik (Associate)

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