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The doctrine of promissory estoppel is a rule of equity. It provides that when a party with the intent of creating a legal relationship makes a promise to another party and such party acts based on such promise, the promisor will be bound by its word.
The concept of promissory estoppel is well developed in India and has been frequently invoked by the Supreme Court and various High Courts even against assurances given by the government.
On April 24, a three-judge Bench of the Supreme Court in Union of India v. VVF Ltd and Ors (VVF), passed a decision with far-reaching consequences for the doctrine of promissory estoppel. Before we analyze these consequences, it will be beneficial to understand the factual background of the case.
After the Gujarat earthquake, the Centre issued a notification in July 2001 (Exemption Notification) and exempted industrial units set up in Kutch district prior to March 2003 from the levy of excise duty to the extent such liability was paid in cash. Basis this incentive, several manufacturers set up their industries in Kutch district (including the respondents herein). This benefit was available for a period of five years from the date of commencement.
This position was altered by a March 2008 notification (Amendment Notification) which restricted excise refund with reference to the value addition, which was notionally fixed as 34% (allowable up to 75%) of the value of the commodity manufactured instead of the amount paid in cash.
The Gujarat High Court upheld the challenge to the Amendment Notification and held it to be in breach of promissory estoppel.
Similar area-based excise duty exemptions were introduced in Sikkim and Assam, and were subsequently amended, which resulted in a decrease in refund of excise duty. Such notifications were also challenged before the Sikkim and Gauhati High Courts, and the same were struck down as being in violation of promissory estoppel.
However, the Supreme Court reversed such orders and held that while promissory estoppel is a principle of equity, ‘public interest’ is a higher equity. If the government is of the view that ‘public interest’ is served by amending the Exemption Notification due to misuse by certain manufacturers, then the Court cannot intervene, and such supervening public interest would prevail over promissory estoppel.
In a major relief for manufacturers, the Court held that this decision would not affect any refund already granted prior to the Amending Notification and such refunds are not to be reopened.
However, the ratio laid down in this case has opened a new page in jurisprudence relating to promissory estoppel by holding that even misuse of an exemption is sufficient to rescind a promise in ‘public interest’.
This gives us a good opportunity to analyze the law relating to promissory estoppel till date and the possible aftereffects of VVF.
Prior to Union of India v. Anglo (Indo)-Afghan Agencies Ltd, the consistent view was that no estoppel would apply against the government in matters of operation of a statute. In Anglo-Afghan, the Centre had issued an export promotion scheme allowing an exporter to import raw materials equal to the declared value of goods exported by him. An exporter made exports of Rs 5 lakh. However, the Textile Commissioner allowed imports of only Rs. 1.99 lakh.
At three-Judge Bench of the Supreme Court held that the decision of the Textile Commissioner was contrary to the doctrine of promissory estoppel and no ground was presented for exempting the government from the equity arising out of the acts done. Further, the doctrine of executive necessity was held to be inapplicable.
In Century Spinning and Mfg. Co. v. Ulhasnagar Municipality, the Court held that when the municipality had agreed to exempt existing industrial concerns in an area from the levy of octroi duty for seven years, its subsequent action of charging octroi was barred by promissory estoppel since a private party had acted on such assurance to his prejudice.
Subsequently, in MP Sugar Mills v. State of Uttar Pradesh, the Court held that the government could not retract on its assurance to not charge sales tax for a period of three years and was bound by the assurance given by it. Merely because the petitioner was a profitable concern was insufficient to rescind on a promise. All that is necessary is that the promisee altered its position relying on such promise even if no prejudice caused to him, the Court held.
It was observed that the government would be exempted if it shows any facts which transpired after such a promise and an overriding ‘public interest’ required it to not fulfil its promise. Such public interest must be so supervening and so overwhelming that it would be inequitable to hold the government to fulfil its promise.
Following MP Sugar Mills, the Court held in State of Punjab v. Nestle India Ltd that the assurances given by the state government in various newspapers and speeches that it would abolish purchase tax on milk had to be followed by an exemption notification, and that it was not open to the State Government to go back on its assurance.
Further, in MRF Ltd v. Assistant Commissioner Sales Tax, the Court struck down the levy of sales tax on sale of compound rubber when an exemption for 7 years was granted to MRF on fulfilment of conditions.
As discussed, the doctrine of promissory estoppel was subject to certain exceptions, most notably, that of public interest. An example of that would be change in circumstances.
In Kasinka Trading and Another v. Union of India, the Court held that the levy of import duty on PVC resin despite exempting the same for 15 years was upheld since due to a fall in international prices. In such a case, it was held that it was in public interest to withdraw the exemption and prevent manifest injustice.
In Sales Tax Officer v. Durga Oil Mills, the reversal of exemption was held to be justifiable since the State of Orissa was suffering from a financial crunch.
If the promise made was contrary to law, even then promissory estoppel would not apply. In Narinder Chand v. Union Territory of Himachal Pradesh, the Supreme Court held that no estoppel was available against the government when a promise was made that no sales tax would be levied on Indian made foreign liquor since it was contrary to the relevant sales tax law in force.
Thus, the instances when ‘public interest’ was held to override any promise made by the government was when the subsequent factual position could not have been envisaged by the government, or were so overwhelming, or when the assurance given was contrary to law.
Coming back to VVF, the only reason to deny full refund of excise duty was that certain cases of misuse were discovered by the department. It is submitted that cases of misuse of any exemption are not a new phenomenon.
The Central Excise Act, 1944 contains sufficient provisions including Section 11A to investigate any misuse and erroneous refund of excise duty. In fact, the Directorate General of Central Excise Intelligence was specifically set up to detect evasion of excise duty or misuse of any facility extended by the government. Thus, the reasons cited by the government were clearly foreseeable and existing provisions of the law were enough to cater to such a situation. This specific submission was raised by the manufacturers as well.
However, the Court chose to remain silent on it, and did not give any observations on the fact that the manufacturers had specifically chosen Kutch district to set up their units despite higher logistics cost compared to any location in Maharashtra.
We may recall that in MP Sugar Mills, the Court held that promissory estoppel is applicable as soon as any person can demonstrate that he altered his position based on a promise made by the government.
However, neither did the Court in VVF comment on MP Sugar Mills nor did the government substantiate how the misuse by certain manufacturers made it inequitable to fulfil its promises despite the existing legal machinery to investigate and prevent misuse. The denial of full benefit even to scrupulous manufacturers appears to be a case of throwing the baby out with the bathwater.
In Union of India v. Unicorn Industries, the Court refused to apply promissory estoppel and upheld the withdrawal of a similar area-based excise exemption notification granted to tobacco industries before its scheduled time in public interest. since tobacco was unhealthy and health of individuals must be protected in ‘public interest’. Surely the ill-effects of tobacco were known at the time of granting such an exemption in 2003.
The recent trends in the applicability of promissory estoppel show a departure from the accepted view taken in Anglo Afghan (Supra) and MP Sugar Mills (Supra) which compelled fulfilment of promises by the government unless any supervening and unforeseen developments were shown. The multiple writ petitions filed on the issue of budgetary support also may be adversely affected by VVF.
It is notable that the Delhi High Court in Hero Motocorp Ltd v. Union of India dismissed a writ petition to direct the respondents to grant complete exemption from Goods and Services Tax for the residual period of the 10-year area-based exemption granted in the pre-GST period. It was specifically held that promissory estoppel is inapplicable in such a case.
The author is conscious that ‘public interest’ has always been an exception to promissory estoppel. However, it is a worrying trend that the reasons given by the government in VVF and Unicorn were accepted by the Court even when such reasons cited could be handled otherwise or were known beforehand.
However, the VVF decision itself might have given a way out of this predicament. The Court held at Para 14.3 that the Amendment Notification was only clarificatory in nature, since the intention of the government was to exempt only actual value addition. Thus, the Court held that the amendment operated retrospectively from introduction of the Exemption Notification and there was no promise to refund the entire excise duty paid in cash and promissory estoppel was inapplicable.
This observation may be used to argue that VVF does not disturb the view taken in MP Sugar Mills and misuse by unscrupulous manufacturers is not a reason to take away an incentive from scrupulous manufacturers.
On the other hand, the Court examined the intent behind the promise to determine whether any promissory estoppel was applicable and did not restrict itself to the plain language of the Exemption Notification which clearly granted refund to excise duty paid in cash. This leaves the applicability of promissory estoppel in an even greater nebulous state and may result in uncertainty in the minds of investors.
Interestingly, the Exemption Notification was in the aftermath of the Gujarat Earthquake, which had devastating consequences on the local economy around the Kutch region. We are amidst an even greater disaster, namely COVID-19, which has already had a debilitating impact on the Indian economy. It is natural that investors will look at the government for tax breaks and incentives to stimulate growth.
However, any fear of a rollback and new trends emerging from the courts would always play on the minds of investors. It is advisable that the government formulates a policy while keeping in mind exigencies which may arise in the future to avoid any chilling effect on investments.
The author is an Advocate at PDS Legal Advocates and Solicitors.