States cannot back out of promised incentives after industries invest money: Supreme Court

The Supreme Court recently held that State governments cannot take a U-turn on industrial incentives after companies have invested money based on the promises made by the government under investment policies [IFGL Refractories Vs Orissa State Financial Corporation].

A Bench of Justices JB Pardiwala and R Mahadevan invoked the doctrines of legitimate expectation and promissory estoppel to ensure that such commitments are honoured.

The Court allowed the appeal filed by IFGL Refractories Ltd. and set aside a 2018 judgment of the Orissa High Court which had upheld the State’s refusal to disburse sanctioned subsidies under the Odisha Industrial Policy of 1989.

"The appellant company is entitled to the disbursement of sanctioned subsidies. We have held that a clear and unequivocal representation was made by the respondent authorities..... appellant company having legitimate expectation that sanctioned subsidies would be disbursed, and acting upon the same set up and continued the production in the MM Plant unit by incurring substantial expenses pursuant to such promises and assurances," the Court said.

The case arose from Odisha’s Industrial Policy of 1989 which came into force on December 1, 1989 with the objective of promoting new industrial units while supporting existing industries.

Relying on the policy, Indo Flogates Ltd. set up the Magneco Metrel Plant at Kalunga Industrial Estate, Rourkela. The first capital investment was made on February 1, 1992, after which applications for incentives were submitted.

State authorities treated the plant as a separate new industrial unit and recommended it for subsidies.

In 1999, Indo Flogates amalgamated with IFGL Refractories Ltd. Despite this, the State sanctioned capital investment subsidy of ₹10 lakh and DG set subsidy of ₹1.14 lakh in April 2003 and assured disbursement.

However, in October 2008, the State refused to release the funds, claiming that the companies had already availed maximum benefits under earlier industrial policies. This rejection was upheld by the Orissa High Court in 2018.

After examining the 1989 policy, the Supreme Court held that an industrial unit qualifies as “new” if investment is made on or after December 1, 1989.

“If an industrial unit makes any investments in fixed capital on or after 01.12.1989 for the manufacturing and processing of items as mentioned in Annexure-1, then such an industrial unit can be said to be a new industrial unit,” the Court said.

It rejected the State’s argument that the MM Plant was merely an expansion of earlier units. The Court noted that expansion, modernisation or diversification would apply only if clause 2.2 of the policy was attracted— something not supported by the records.

“There being nothing on record to prove contrary, we are of the view that MM Plant should be treated as a new industrial unit only,” the Bench ruled.

Crucially, the Court held that investments were made on the strength of the incentives promised under the policy, giving rise to a legitimate expectation that the State would honour its commitment.

"On the strength of the incentives made available to a new industrial unit and having regard to the objectives underlying the industrial policy of 1989, Indo Flogates invested funds for the establishment of the MM Plant unit," the judgment stated.

Invoking constitutional principles, the Court criticised the State’s conduct in strong terms.

"This litigation is a fine specimen of the bureaucratic lethargy. It is this bureaucratic lethargy which gave rise to this long drawn litigation. This Court in many of its decisions has reminded various State Governments that if the object of formulating the industrial policy is to encourage investment, employment and growth, the bureaucratic lethargy of the State apparatus is clearly a factor which will discourage entrepreneurship."

Further, the Court held that the State must abandon the colonial conception of itself as a sovereign dispensing benefits at its absolute discretion.

"Policies formulated and representations made by the State generate legitimate expectations that it will act in accordance with what it proclaims in the public domain," the Bench underlined.

The Bench held that refusal to disburse sanctioned subsidies violated Article 14 of the Constitution.

The Court concluded that the High Court erred in holding that benefits under the policy could be availed only once, noting that no such restriction existed in the 1989 policy.

Hence, it allowed the appeal and directed that the sanctioned subsidies be disbursed to IFGL Refractories Ltd.

IFGL was represented by Senior Advocate Nakul Dewan and advocates Pradhuman Gohil, Taruna Singh Gohil, Alapati Sahithya Krishna, Hetvi Ketan Patel, Rushabh Kapadia, Siddharth Singh, Rohan Andrew Naik and Sathvik Chandrashekar.

The State was represented by advocates Soumyajit Pani Vinodh Kanna B, Gaurav Khanna , Natasha Sahrawat, Rudraksh Pandey, Gautam Barnwal, Deepali Bhanot and Alisha Roy.

[Read Judgment]