Facts of the Case

The lead petitioner, Star Cement Ltd., along with several similarly situated industrial units in the North Eastern Region, approached the Gauhati High Court challenging the curtailment of fiscal incentives earlier available under the North East Industrial and Investment Promotion Policy, 2007 (NEIIPP, 2007) and the corresponding Central Excise exemption framework.

The Government of India had earlier announced industrial incentive policies for the North Eastern Region to promote industrialisation and investment. Under the 1997 Industrial Policy Resolution, a package of fiscal incentives and concessions was provided, including the concept of tax-free zones and Central Excise benefits for eligible industrial units.

Thereafter, the Government introduced NEIIPP, 2007, under which 100% excise duty exemption on finished products manufactured in the North Eastern Region was continued, subject to the prescribed eligibility conditions. To implement the policy, Notification No. 20/2007-CE dated 25.04.2007 was issued, providing excise duty exemption/refund benefits to qualifying new industrial units and units undertaking substantial expansion.

The petitioners claimed that, relying upon the representations and incentives contained in NEIIPP, 2007 and the exemption notification, they had altered their position and made substantial investments in their industrial units.

With the introduction of the GST regime from 01.07.2017, the earlier indirect tax structure underwent a fundamental statutory change. Subsequently, Notification No. 21/2017-CE dated 18.07.2017 rescinded various area-based exemption notifications.

The Central Government thereafter introduced the Scheme of Budgetary Support dated 05.10.2017 for eligible industrial units located in Jammu & Kashmir, Uttarakhand, Himachal Pradesh and the North Eastern States including Sikkim, for the residual period of the earlier incentive schemes.

However, the budgetary support was restricted broadly to the Central Government’s retained share of taxes and was calculated with reference to:

  • 58% of Central Tax paid through debit in the cash ledger after utilisation of eligible Input Tax Credit; and
  • 29% of Integrated Tax paid through debit in the cash ledger after utilisation of eligible Input Tax Credit,

subject to the conditions of the Scheme.

The petitioners contended that this mechanism substantially curtailed the earlier promised benefit of full exemption and therefore challenged the Budgetary Support Scheme as being contrary to NEIIPP, 2007, the doctrine of promissory estoppel, and the principle of legitimate expectation.

Issues Involved

  1. Whether the Central Government was bound to continue the benefit equivalent to the earlier 100% Central Excise exemption for the residual eligibility period after implementation of GST.
  2. Whether the Budgetary Support Scheme dated 05.10.2017 unlawfully curtailed the fiscal benefits promised under NEIIPP, 2007 and Notification No. 20/2007-CE.
  3. Whether the doctrine of promissory estoppel prevented the Government from reducing or restructuring the fiscal incentives after the introduction of GST.
  4. Whether eligible industrial units had a legitimate expectation that the full fiscal benefits promised under the earlier Industrial Policy would continue for the entire residual period.
  5. Whether the proviso to Section 174(2)(c) of the CGST Act, 2017 prevented continuation of a tax exemption granted as an investment incentive where the relevant exemption notification had been rescinded.
  6. Whether a writ of mandamus could be issued directing the Government to provide reimbursement equivalent to 100% of the earlier excise exemption.

Petitioners’ Arguments

The petitioners argued that the Government had made a clear and unequivocal promise under NEIIPP, 2007 and through Notification No. 20/2007-CE dated 25.04.2007 to provide fiscal benefits, including 100% Central Excise duty exemption, to qualifying industrial units.

They submitted that, acting upon such governmental representations, they had made substantial investments and, in several cases, undertaken substantial expansion of existing industrial units. Therefore, the Government was bound by the doctrine of promissory estoppel and could not subsequently resile from its promise.

The petitioners further contended that:

  • NEIIPP, 2007 had not been withdrawn merely because GST was introduced;
  • the underlying policy promise continued to subsist;
  • the Budgetary Support Scheme granted only a restricted reimbursement and did not provide the complete economic benefit promised earlier;
  • the restriction of support to the Central Government’s retained share of CGST/IGST materially reduced the incentive;
  • a change in the tax regime could not justify denial of the promised benefit for the residual period;
  • the Government could not induce industries to invest substantial capital and thereafter curtail the promised fiscal benefits;
  • legitimate expectation arose from the policy representation and the conduct of the Government; and
  • the curtailment of benefits was arbitrary and contrary to the principles governing fair State action.

Reliance was placed on the doctrine of promissory estoppel as developed in several decisions, including Motilal Padampat Sugar Mills Co. Ltd. vs State of Uttar Pradesh, to contend that a governmental promise intended to be acted upon could be enforced where the promisee had altered its position.

Respondents’ Arguments

The Union of India and GST authorities opposed the writ petitions and contended that fiscal policy and tax exemptions are matters of legislative and executive policy, particularly where overriding considerations of public interest and a fundamental statutory restructuring are involved.

The respondents argued that:

  • the introduction of GST constituted a major change in the constitutional and statutory indirect tax regime;
  • there can be no estoppel against legislation or a statutory mandate;
  • the Government is entitled to alter fiscal policy in public interest;
  • promissory estoppel cannot compel the Government to act contrary to law;
  • an exemption cannot continue as an enforceable privilege where the governing exemption notification has been rescinded;
  • Section 174(2)(c) of the CGST Act, 2017, particularly its proviso, expressly addresses tax exemptions granted as investment incentives;
  • the earlier area-based Central Excise exemptions became ineffective after the transition to GST and rescission of the relevant notifications;
  • the Budgetary Support Scheme represented a policy mechanism for providing limited support during the residual period and did not create a right to 100% reimbursement; and
  • in the absence of a sustainable challenge to the rescission of the exemption notification or to the validity of the relevant statutory provision, the plea of promissory estoppel could not succeed.

The respondents relied upon principles recognised in cases such as Shrijee Sales Corporation vs Union of India, emphasising that public interest may override individual equity and that the Government may modify fiscal policy when justified by broader statutory or public considerations.

Court Order / Findings

The Gauhati High Court found that the controversy was squarely covered by the recent authoritative judgment of the Supreme Court of India in Hero MotoCorp Limited vs Union of India, Civil Appeal No. 7405 of 2022, decided on 17.10.2022, along with the connected matter concerning Sun Pharma Laboratories Limited.

The High Court noted the Supreme Court’s conclusion that:

  • there is no estoppel against the legislature in the exercise of legislative functions;
  • the withdrawal of exemption notifications following the introduction of GST operated within the statutory framework;
  • accepting a claim that the earlier exemption must necessarily continue would undermine the statutory effect of the proviso to Section 174(2)(c);
  • where an exemption notification granted as an investment incentive is rescinded, the earlier tax exemption does not continue automatically as a privilege;
  • promissory estoppel cannot compel continuation of a fiscal benefit contrary to the changed statutory regime;
  • no legal duty was cast upon the Union Government to refund 100% of CGST merely because the industrial units had previously enjoyed an excise exemption; and
  • a writ of mandamus could not be issued in the absence of a corresponding enforceable public duty to provide 100% reimbursement.

The Gauhati High Court accordingly held that nothing further remained to be independently decided, because the issues raised in the writ petitions were squarely covered by the Supreme Court’s judgment in Hero MotoCorp Limited vs Union of India.

Consequently, the writ petitions were dismissed/closed in terms of the Supreme Court’s ruling, with no order as to costs. Pending interlocutory applications, if any, were also disposed of.

Important Clarification

The High Court made an important distinction between an enforceable legal right to continuation of 100% exemption and a legitimate expectation deserving governmental consideration.

Although the petitioners could not legally compel the Union Government to continue or reimburse the full 100% benefit of the earlier Central Excise exemption after the statutory transition to GST, the Supreme Court in Hero MotoCorp Limited vs Union of India had recognised that affected industrial units could still possess a legitimate expectation that their grievances deserved due consideration.

Accordingly, following the Supreme Court’s approach, the Gauhati High Court granted the petitioners liberty to submit representations before the respective State Government and the GST Council, provided such representations were made in terms of the findings and observations contained in the Supreme Court’s judgment dated 17.10.2022.

Thus, the judgment does not recognise an automatic or vested right to 100% GST reimbursement. It preserves only the opportunity to seek policy-level consideration through appropriate representations.

Sections / Constitutional Provisions Involved

Section 174(2)(c), CGST Act, 2017: Central provision governing the effect of repeal and savings, including the crucial proviso concerning tax exemptions granted as incentives against investment where the relevant notification is rescinded.

Section 49(1), CGST Act, 2017: Relevant to payment of tax through the electronic cash ledger and the computation mechanism under the Budgetary Support Scheme.

Section 20, IGST Act, 2017: Relevant to the application of specified CGST provisions in the integrated tax framework and the Budgetary Support computation.

Article 14 of the Constitution of India: Invoked in relation to arbitrariness, fairness of State action and legitimate expectation.

Article 226 of the Constitution of India: Source of the High Court’s writ jurisdiction under which the petitioners sought relief.

Article 279A of the Constitution of India: Relevant to the constitutional framework and functioning of the GST Council.

Constitution (One Hundred and First Amendment) Act, 2016: Relevant to the introduction and constitutional architecture of GST.

Link to download the order -https://mytaxexpert.co.in/uploads/1783403935_1293compressed.pdf

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