Amongst the few clear defenses available to a private party aggrieved by a Government renegading on its promise, the doctrine of promissory estoppel is the most prominent and time-tested defense. Arising from the common law principle, the doctrine over the decades has been used in almost all branches of law, including taxation. The doctrine of promissory estoppel has repeatedly come to the rescue of industries aggrieved by unilateral revocation of governmental commitments, involving investment benefits, tax incentives, rebates, remissions, etc.
The two well adverted exceptions to the doctrine of promissory estoppel are that the promise is prohibited by law; and/ or the promise is against "public interest". As far as prohibition in law as a defense against rescinding a governmental promise is concerned, there appears to be no dispute. The threshold of scrutiny is low as one merely needs to show that the promise is in teeth of a statute and hence, cannot be executed. It is the defense of public interest, which is subjective and contextual, especially in matters involving taxation. Indisputably, "public interest" is difficult to define as its implication and meaning varies upon context, situation and subject.
It is perhaps for this reason that in matters of taxation, a defense of public interest against promissory estoppel calls for greater judicial scrutiny and wisdom from the Bench. The Indian courts indeed have exercised due care while examining the defense of public interest in taxation matters. A relook of the cases on this issue shows that in matters involving investment benefits, tax benefits, etc. courts have usually repelled argument of public interest in the absence of any credible evidence and have usually granted relief to the aggrieved parties. For decades, the position in law has by and large been settled without any deviation.
All of these changed with the ruling of a 3-judge bench of the Hon'ble Supreme Court in a batch of matters known as VVF Industries (2020). The case arose in interesting facts wherein the Government, announced various incentive schemes with an adverted aim of industrialization and generation of employment in North-East and Kutch. These incentive schemes primarily offered refund of entire Excise duty paid by new industrial units in cash on manufacture of the finished goods for a specified period from the commencement of commercial production subject to certain conditions. However, in 2008, in a volte-face, the Government sought to restrict the refund of the entire Excise duty paid in cash only to the "value addition" undertaken on products manufactured in such units. This restriction was brought by amending the earlier notifications retrospectively from the date of commencement of the earlier notifications. Such amendment was ostensibly undertaken to arrest rising instances of bogus refund claims by unscrupulous players in public interest.
The amendment impacted hundreds of investors who successfully challenged them before jurisdictional High Courts. All the High Courts unanimously quashed the amendments on the basis that having declared such incentives and luring investors to invest in these States, any alteration in the incentive package to the detriment of the investors will be in teeth of the doctrine of promissory estoppel.
When the matter reached Supreme Court, it held that promissory estoppel will not be applicable if the change in the stand of the Government is on account of public policy or in public interest. The judgement essentially hinges on whether Revenues' argument of "public interest" outweighs the vested right of aggrieved investors. The Revenue justified the retrospective restriction on the ground of misuse by unscrupulous manufacturers while the investors pleaded that having acted upon the incentive package by making heavy investments, now, if the benefits of refund were allowed to be curtailed retrospectively, due to instances of misuse by some, it would severely impair them financially. Nevertheless, the Supreme Court chose misuse of the benefits as a fit ground in public interest to validate the retrospective amendments by the Government by holding such amendments to be clarificatory, while ignoring that the claim of misuse by the Revenue was never supported by an affidavit and was just a bald statement.
By equating misuse with public interest, the Government is bringing in uncertainty in policy making which compromises the larger interest of development of backward areas. In the process, it is diluting the principles of promissory estoppel. In taxation, to allow misuse by few to outweigh the vested right of several investors, when it does not involve public health or national security, seems unreasonable. Such roll back of policies have severe financial implications on investors who have lived up to their commitment of investment in backward areas and have helped in generating employment opportunities.
Although, a similar issue of revocation of incentives in the context of Industrial Policy of Jammu & Kashmir is pending before the Supreme Court which may be heard soon and perhaps will be a window of opportunity to relook at the impact of VVF Industries, however the fact remains that the ghost of VVF Industries lingers around. It is expected that the Supreme Court, as they have done in the past, will eventually consider VVF Industries and will put to rest the controversy.
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