Facts of the Case

The Gauhati High Court considered a large batch of connected writ petitions raising common questions concerning the discontinuance of area-based Central Excise incentives after the introduction of the GST regime and the substitution of the earlier exemption framework by a Budgetary Support Scheme.

The lead petitioner, Star Cement Ltd., was engaged in the manufacture, sale and supply of cement and had an industrial unit in Assam. The petitioners in the connected matters comprised various industrial undertakings engaged in manufacturing activities in the North-Eastern Region.

The petitioners had established new industrial units or undertaken substantial expansion and modernisation in reliance upon industrial incentive policies, particularly the North East Industrial and Investment Promotion Policy, 2007 (NEIIPP, 2007), and the corresponding exemption notifications issued under the Central Excise regime. Their case was that the policy framework promised eligible industrial units substantial fiscal incentives, including 100% exemption/refund of Central Excise Duty for the stipulated period, subject to fulfilment of prescribed conditions.

Following the introduction of GST with effect from 01 July 2017, the earlier Central Excise exemption notifications were rescinded. The Government thereafter introduced a Budgetary Support Scheme for eligible units, under which support was calculated broadly with reference to specified portions of the Central and Integrated GST components rather than continuation of the earlier 100% Central Excise exemption benefit.

The petitioners contended that they had made substantial investments and altered their economic position on the strength of the governmental promises contained in the industrial policies and exemption framework. According to them, reduction of the fiscal benefit after implementation of GST defeated the legitimate basis on which investments had been made.

The central dispute therefore concerned whether the petitioners could insist upon continuation or equivalent reimbursement of the earlier incentive benefit for the unexpired period, notwithstanding the transition to GST and the statutory effect of Section 174(2)(c) of the CGST Act, 2017.

Issues Involved

  1. Whether industrial units that had invested or substantially expanded pursuant to NEIIPP, 2007 and the earlier Central Excise exemption notifications possessed an enforceable right to continuation of the promised fiscal benefits for the remaining eligibility period.
  2. Whether withdrawal or rescission of the area-based exemption notifications upon introduction of GST could be challenged on the principles of promissory estoppel.
  3. Whether the petitioners had acquired any protected right or privilege under the repealed Central Excise regime within the meaning of Section 174(2)(c) of the CGST Act, 2017.
  4. Whether the proviso to Section 174(2)(c), dealing with tax exemptions granted as incentives against investment and rescinded on or after the appointed day, prevented continuation of such exemption as a privilege.
  5. Whether the Budgetary Support Scheme, providing support broadly at the prescribed percentage of CGST and IGST components, unlawfully curtailed the earlier incentive promised to eligible industrial units.
  6. Whether a writ of mandamus could be issued directing the Union Government to reimburse or refund 100% of CGST or an equivalent fiscal benefit for the balance incentive period.
  7. Whether the petitioners could rely upon the doctrine of legitimate expectation, even where an enforceable legal claim for continuation of the earlier tax exemption was unavailable.
  8. Whether the controversy stood governed by the Supreme Court’s decision in Hero Motocorp Ltd. vs Union of India, decided on 17 October 2022.

Petitioners’ Arguments

The petitioners argued that the Government had announced industrial policies to encourage investment in the North-Eastern Region and had made clear and unequivocal representations concerning fiscal incentives. Acting upon those representations, industrial units were established, substantial capital investments were made, and existing units undertook expansion and modernisation.

It was submitted that the petitioners had materially altered their position in reliance upon the governmental promise. Consequently, the Government could not withdraw or substantially reduce the promised benefit during the subsistence of the eligibility period.

The petitioners maintained that the industrial policy, particularly NEIIPP, 2007, contemplated benefits including 100% exemption from Central Excise Duty for eligible units for the prescribed period. According to them, replacing that benefit with limited Budgetary Support effectively reduced the incentive and frustrated the investment framework on which industrial decisions had been taken.

They invoked the doctrine of promissory estoppel, contending that the State could not resile from a representation that had induced substantial investment and irreversible alteration of position.

The petitioners further relied upon legitimate expectation, arguing that consistent governmental policies and specific incentive representations created a reasonable expectation that the promised fiscal support would remain available throughout the eligibility period.

It was also argued that Section 174 of the CGST Act preserved accrued rights and privileges arising under the repealed enactments. Since the petitioners had undertaken investment, expansion or modernisation before repeal and had become eligible under the earlier framework, they contended that the benefit constituted an accrued or protected entitlement.

The petitioners also questioned the manner in which Budgetary Support was computed. They referred to the prescribed reimbursement mechanism involving 58% of CGST and 29% of IGST, and argued that the interaction of the scheme with the input tax credit utilisation mechanism under Sections 49 and 49A could further reduce the effective support available to eligible units.

The petitioners further relied upon constitutional provisions concerning GST, including Articles 246A and 279A, while questioning the legality and rationality of the post-GST incentive arrangement.

Respondents’ Arguments

The Union authorities opposed the writ petitions and contended that withdrawal of an exemption in public interest constituted a matter of fiscal and economic policy.

It was argued that courts ordinarily do not compel the Government to maintain a fiscal policy indefinitely, particularly where policy modification is undertaken in public interest and no fraud, mala fides or legally impermissible conduct is established.

The respondents submitted that the doctrine of promissory estoppel could not compel the Government to act contrary to statute. A representation or policy could not override an express legislative provision.

Specific reliance was placed upon Section 174(2)(c) of the CGST Act, 2017. The respondents argued that the statutory framework expressly addressed tax exemptions granted as incentives against investment and that, where the relevant exemption notification was rescinded, the exemption could not continue as a privilege merely by invoking the saving provision.

The respondents further submitted that the petitioners had not successfully displaced the statutory consequence of rescission and could not use promissory estoppel to defeat the express mandate of Parliament.

It was also argued that no statutory duty existed requiring the Union of India to reimburse 100% of CGST for the remainder of the earlier incentive period. In the absence of a corresponding statutory duty and enforceable legal right, a writ of mandamus directing full reimbursement could not be issued.

Court Order / Findings

The Gauhati High Court found that the controversy was squarely covered by the very recent decision of the Supreme Court in Hero Motocorp Ltd. vs Union of India, Civil Appeal No. 7405 of 2022, decided on 17 October 2022.

The High Court noted the Supreme Court’s authoritative findings concerning the transition from the earlier area-based Central Excise exemption regime to GST and the effect of Section 174(2)(c) of the CGST Act.

The Court recognised the governing principle that promissory estoppel cannot operate against an express statutory mandate. Where Parliament has enacted a specific provision governing the continuation of tax incentives after repeal and rescission of exemption notifications, equitable doctrines cannot be employed to render that provision redundant or ineffective.

The Court also took note of the principle that a writ of mandamus requiring 100% reimbursement could not be issued in the absence of a statutory duty cast upon the Union Government to grant such reimbursement.

However, following the Supreme Court’s approach in Hero Motocorp, the High Court recognised an important distinction between an enforceable claim in law and a claim founded upon legitimate expectation.

The High Court observed that although the industrial units might not possess an enforceable legal claim to continuation of the earlier benefit in the form demanded, their claims could nevertheless deserve due consideration because of the legitimate expectations arising from the earlier industrial incentive framework.

Accordingly, the Court held that nothing further remained to be independently decided because the issues were squarely governed by the Supreme Court judgment in Hero Motocorp.

The writ petitions were therefore dismissed/closed in terms of the Supreme Court ruling, with liberty granted to the petitioners to submit appropriate representations before the concerned State Government and the GST Council, provided such representations were made in accordance with the findings and observations contained in Hero Motocorp.

The Court directed that the matter stood concluded on those terms and made no order as to costs. Pending interlocutory applications, if any, were also disposed of.

Important Clarification

The judgment draws a critical distinction between:

(a) an enforceable legal right to continuation of 100% tax exemption or equivalent reimbursement; and

(b) a legitimate expectation that the Government and the GST Council should duly consider the hardship and investment-based claims of industrial units.

The High Court did not direct automatic continuation of the pre-GST 100% Central Excise exemption. It also did not direct the Union Government to reimburse 100% of CGST for the unexpired incentive period.

Instead, applying the Supreme Court’s ruling in Hero Motocorp, the Court held that the petitioners could pursue representations before the appropriate State Government and the GST Council for due consideration.

Therefore, the judgment should not be understood as granting an automatic refund, reimbursement or revival of the rescinded exemption notification. The operative relief was limited to the liberty to seek consideration through representations consistent with the Supreme Court’s observations.

Sections and Constitutional Provisions Involved

  • Section 174(1), CGST Act, 2017 — Repeal provisions consequent upon introduction of GST.
  • Section 174(2)(c), CGST Act, 2017 — Saving of rights, privileges, obligations and liabilities, subject to the statutory treatment of investment-linked tax exemptions.
  • Proviso to Section 174(2)(c), CGST Act, 2017 — Central to the dispute concerning continuation of tax exemptions granted as incentives against investment where the exemption notification is rescinded.
  • Sections 49 and 49A, CGST Act, 2017 — Relevant to utilisation of input tax credit and the petitioners’ challenge concerning the effective computation of Budgetary Support.
  • Section 5A, Central Excise Act, 1944 — Statutory basis of exemption notifications under the former Central Excise regime.
  • Article 14, Constitution of India — Equality and challenge to alleged arbitrariness.
  • Article 19(1)(g), Constitution of India — Freedom to practise any profession or carry on occupation, trade or business.
  • Article 226, Constitution of India — High Court’s writ jurisdiction and the requirements governing issuance of mandamus.
  • Article 246A, Constitution of India — Legislative power concerning GST.
  • Article 279A, Constitution of India — Constitutional framework of the GST Council.

Link to download the order -https://mytaxexpert.co.in/uploads/1783401993_1282compressed.pdf

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