Facts of the Case

The Gauhati High Court considered a batch of writ petitions filed by industrial units operating in the North Eastern Region, with Star Cement Ltd. vs Union of India & Ors. as the lead matter. The connected petitioners included industrial undertakings engaged in various manufacturing activities and claiming benefits under the North East Industrial and Investment Promotion Policy, 2007 (“NEIIPP, 2007”) and the corresponding area-based Central Excise exemption framework.

The Government of India had earlier announced industrial incentive policies for the North Eastern Region to encourage industrial development and investment. Under NEIIPP, 2007 and Notification No. 20/2007-CE dated 25.04.2007, eligible industrial units were granted specified Central Excise Duty benefits for the prescribed period, subject to applicable conditions.

According to the petitioners, relying upon the governmental policy and fiscal incentives, they had established new industrial units or undertaken substantial expansion of existing units by making substantial investments and altering their economic position.

Following the introduction of the GST regime with effect from 01.07.2017, the earlier indirect tax structure underwent a fundamental change. Area-based Central Excise exemption notifications, including Notification No. 20/2007-CE, were affected by the transition to GST.

The Central Government thereafter introduced the Scheme of Budgetary Support through Notification No. F.No.10(1)/2017-DBA-II/NER dated 05.10.2017 for eligible manufacturing units situated in specified States, including the North Eastern States and Sikkim, for the residual period of their earlier eligibility.

Under the Budgetary Support Scheme, the support was limited, inter alia, to:

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

The petitioners contended that this mechanism substantially curtailed the fiscal benefits earlier promised under NEIIPP, 2007 and Notification No. 20/2007-CE. They therefore challenged the Budgetary Support Scheme principally on the grounds of promissory estoppel, legitimate expectation, lack of jurisdiction, arbitrariness and inconsistency with the earlier industrial policy assurances.

Issues Involved

The principal issues before the Gauhati High Court were:

  1. Whether Notification No. F.No.10(1)/2017-DBA-II/NER dated 05.10.2017, introducing the GST Budgetary Support Scheme, unlawfully curtailed the fiscal benefits promised under NEIIPP, 2007 and Notification No. 20/2007-CE dated 25.04.2007.
  2. Whether the Central Government was bound by the doctrine of promissory estoppel to continue the earlier level of fiscal benefit for the entire promised eligibility period despite the introduction of GST.
  3. Whether the petitioners had a legally enforceable legitimate expectation that the earlier benefits would continue without reduction during the residual eligibility period.
  4. Whether Section 174(2)(c) of the CGST Act, 2017 preserved the petitioners’ earlier tax exemption benefits after the relevant exemption notification stood rescinded.
  5. Whether the Budgetary Support Scheme was contrary to Articles 14 and 279A of the Constitution of India.
  6. Whether the High Court, in exercise of jurisdiction under Article 226 of the Constitution, could direct continuation or reimbursement equivalent to the earlier Central Excise exemption.
  7. Whether the controversy stood governed by the Supreme Court’s decision in Hero MotoCorp Limited vs Union of India, Civil Appeal No. 7405 of 2022, decided on 17.10.2022, along with the connected matter involving Sun Pharma Laboratories Limited.

Petitioners’ Arguments

The petitioners argued that the Government had made a clear and definite promise under NEIIPP, 2007 and Notification No. 20/2007-CE dated 25.04.2007 regarding fiscal incentives for the prescribed period.

They submitted that, acting upon such governmental representations, they had materially altered their position by making substantial investments, establishing industrial units and undertaking substantial expansion. Consequently, the Government could not resile from its promise by introducing a Budgetary Support Scheme that allegedly provided a substantially reduced benefit.

The petitioners contended that the reduction of the earlier benefit through the 05.10.2017 Scheme violated the doctrine of promissory estoppel.

It was further argued that the petitioners possessed a legitimate expectation that the promised fiscal incentives would remain available throughout the unexpired or residual eligibility period.

The petitioners maintained that the introduction of GST should not defeat commitments already made under the industrial policy framework, particularly where investments had been undertaken in reliance upon those commitments.

They also relied upon Section 174 of the CGST Act, 2017 and advanced arguments concerning preservation of accrued rights, privileges and benefits arising under the pre-GST regime.

The petitioners accordingly sought quashing of the Notification dated 05.10.2017 insofar as it curtailed the benefits allegedly promised under NEIIPP, 2007 and Notification No. 20/2007-CE, together with directions for extension of the full promised benefit.

Respondents’ Arguments

The respondents opposed the writ petitions and submitted that the pre-GST taxation system had been fundamentally replaced by the GST regime from 01.07.2017.

They argued that GST constituted a new indirect tax framework and that there was no direct one-to-one correlation between the erstwhile Central Excise Duty and the taxes imposed under GST.

According to the respondents, the earlier Central Excise exemptions became ineffective or nugatory upon transition to the GST regime and rescission of the relevant exemption notifications.

The respondents maintained that the Budgetary Support Scheme was introduced to mitigate hardship faced by eligible industrial units and represented a policy-based support mechanism rather than continuation of the earlier tax exemption.

It was argued that an exemption from tax did not constitute an immutable vested right and remained subject to modification, withdrawal or rescission in accordance with law and public interest.

The respondents further relied upon Section 174(2)(c) of the CGST Act, 2017, contending that the statutory framework expressly addressed tax exemptions granted as investment incentives and that, once the relevant exemption notification was rescinded, the petitioners could not claim continuation of the earlier privilege.

They submitted that the plea of promissory estoppel could not override statutory provisions or prevent legislative and policy changes brought about through the GST framework.

The respondents also contended that there was no violation of Article 14 because the petitioners had not been singled out for discriminatory treatment and the Budgetary Support Scheme applied uniformly to eligible industrial units satisfying the prescribed criteria.

Court Order / Findings

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

The High Court noted that the Supreme Court had authoritatively dealt with substantially similar questions concerning the transition from pre-GST area-based fiscal incentives to the GST Budgetary Support framework.

The Court observed that the Supreme Court had dismissed the appeals in the Hero MotoCorp Limited and Sun Pharma Laboratories Limited matters.

Accordingly, the Gauhati High Court held that nothing further remained to be independently decided in the batch of writ petitions, since the issues raised were squarely covered by the Supreme Court’s authoritative findings.

The writ petitions were therefore dismissed and closed in terms of the Supreme Court judgment.

However, the High Court granted the petitioners similar 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 judgment in Hero MotoCorp Limited.

No order as to costs was passed. Pending interlocutory applications, if any, were also disposed of.

Important Clarification

The judgment is particularly important because the dismissal of the writ petitions did not mean that the industrial units were left without any avenue whatsoever.

The Gauhati High Court specifically recognised the significance of the Supreme Court’s finding in Hero MotoCorp Limited that, although the appellants might not possess an enforceable claim in law for the relief sought, they nevertheless had a legitimate expectation that their claims deserved due consideration.

Therefore, the distinction emerging from the judgment is significant:

  • A claim for continuation of the earlier fiscal benefit may not automatically be legally enforceable after the restructuring of the tax regime and rescission of the earlier exemption framework.
  • The doctrine of promissory estoppel cannot operate contrary to a statutory mandate.
  • Nevertheless, affected industrial units may possess a legitimate expectation that their grievances should receive proper consideration from the competent Government authorities.
  • Representations may therefore be submitted before the concerned State Government and the GST Council in accordance with the Supreme Court’s observations.

Sections and Constitutional Provisions Involved

Section 174(2)(c), CGST Act, 2017: Central provision concerning the effect of repeal and savings, particularly relevant to rights, privileges, obligations and the statutory treatment of tax exemptions granted as investment incentives.

Section 49(1), CGST Act, 2017: Relevant to deposits made towards tax, interest, penalty, fee or other amounts and the electronic cash ledger mechanism referred to under the Budgetary Support Scheme.

Section 20, IGST Act, 2017: Relevant to the application of specified provisions of the CGST Act to integrated tax matters.

Section 5A, Central Excise Act, 1944: Relevant to the Central Government’s power concerning exemption from Central Excise Duty and the pre-GST exemption notification framework.

Article 14, Constitution of India: Invoked in relation to allegations of arbitrariness and unequal treatment.

Article 226, Constitution of India: Source of the Gauhati High Court’s writ jurisdiction.

Article 279A, Constitution of India: Relevant to the constitutional framework, constitution and functions of the GST Council

Link to download the order -https://mytaxexpert.co.in/uploads/1783404433_1296compressed.pdf

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