Judgment Update | Doctrine of Promissory Estoppel not applicable against Central Government on reduction of area-based excise duty exemption
This is to apprise you regarding recent decision of Larger Bench (3 members) of Supreme Court in the case of UOI v. V.V.F Limited, 2020 (4) TMI 669 – SC. Vide this decision, the Court has upheld the curtailment of benefit of refund of full excise duty initially granted to units in Gujarat and North Eastern States. The relevant facts of the leading case (VVF Limited), decision taken and our analysis, is outlined hereunder:
Gujarat State Government issued an Incentive Scheme, 2001 encouraging setting up of new industries in the State. Basis this Scheme, the Central Government issued Notification No.39/2001 – CE dated July 31, 2001 (‘Exemption Notification’) under Section 5A of the Central Excise Act, 1944 (‘Excise Act’). Under the Exemption Notification, exemption by way of refund of full excise duty paid through cash, was granted.
Subsequently, Notification No. 16/2008 – CE dated March 27, 2008 (‘Amendment Notification’) was issued and refund of excise duty was reduced to the extent of value addition notionally fixed for various product categories.
The taxpayers challenged the Amendment Notification (and similar other Notifications) invoking Doctrine of Promissory Estoppel in so far as it reduced benefit from 100% of excise duty paid in cash to percentage of value addition. Various High Courts accepted the taxpayers’ plea and granted 100% refund. The revenue challenged these judgments before the Supreme Court.
The Supreme Court has decided the issue against the taxpayer and upheld the validity of Amendment Notification on the following grounds:
- The object of issuing the Amendment Notification was prevention of tax evasion by fraudulent taxpayers whose conduct was contrary to the intent of genuine industrialization sought to be achieved.
- Doctrine of Promissory Estoppel is not applicable as the Government made the amendment in ‘public interest’ which overrides individual equity. The Government can always modify the promised benefits for supervening public interest.
The Court held that Amendment Notification was clarificatory in nature as it aimed to clarify that the refund of excise duty shall be allowed on actual value addition basis. The Court clarified that cases wherein refund has been granted prior to challenge of the Amendment Notifications before the respective High Courts, shall not be recovered basis the instant decision. However, pending refund claims should be adjudicated basis the Amendment Notification and in accordance with law.
The decision of Supreme Court upholding the validity of Amendment Notification is incorrect for the following reasons:
- Taxpayers acted on an unequivocal promise made by the Government and made huge investments. Accordingly, an amendment curtailing the benefit before expiry of stipulated period, is against the Doctrine of Promissory Estoppel.
- The reasoning that Amendment Notification was issued in public interest and thus, Doctrine of Promissory Estoppel is not applicable, is perverse. The so called ‘public interest’ of curbing the revenue losses incurred due to certain fraudulent taxpayers, was clear failure of the Government machinery to prevent misuse. The Government always had appropriate statutory remedies under the Excise Act to deal with such fraudulent acts. The Amendment Notification sought to punish genuine taxpayers more than the fraudulent ones which is unreasonable.
- The Court went beyond the pleadings in holding amendment to be clarificatory in nature and thus retrospective. The decision that amendment should be considered as retrospective, is bad in law.
- This decision will have limited relevance under GST regime wherein the Budgetary Support Scheme has substantially curtailed the benefit available to taxpayers under erstwhile regime. [Refer to our update NITYA’s Insight | Issue 105 | Judgment update | Reduction in tax incentives under GST regime, issue of promissory estoppel]. The revenue may rely on this decision to justify the reduction of benefit. The taxpayers can distinguish the applicability of this decision on the ground of absence of public interest and that there was no fraudulent availment of benefit which triggered reduction of benefit.