Supreme Court on Area-Based Exemption Under GST: No Promissory Estoppel – Hero MotoCorp [2022 INSC 1100]

Area based exemption GST – Supreme Court ruling explained with headnote, key holdings, important paragraphs and FAQs.

The Supreme Court held that the Union of India cannot be compelled, on the basis of promissory estoppel, to continue the 100% area-based excise duty exemption promised by the Office Memorandum of 7 January 2003 for units in Uttarakhand and Himachal Pradesh after the CGST Act, 2017 came into force. The proviso to Section 174(2)(c) of the CGST Act states that a tax exemption granted as an incentive against investment through a notification shall not continue as a privilege if the notification is rescinded, and Notification No. 21/2017 rescinded those exemptions. Holding the Union to the 2003 promise would therefore operate estoppel against the legislature, which the Court held is impermissible. No mandamus could issue for 100% reimbursement of CGST instead of the 58% given under the Budgetary Support Scheme, and the Central Government cannot be directed to exercise its Section 11 exemption power in a particular way. The appeals were dismissed, but the Court recognised a legitimate expectation and permitted the units to make representations to the State Governments and the GST Council for reimbursement out of the States' 42% devolution share (paras 29–31, 54–58, 64, 71–81).

Headnote

Goods and Services Tax — Transition — Area-based excise exemption — Promissory estoppel against legislature — Budgetary support at 58% of CGST — Central Goods and Services Tax Act, 2017, Ss. 11, 174(2)(c) proviso — Notification No. 21/2017 dated 18.07.2017 — Central Excise Act, 1944, S. 5A — Constitution of India, Arts. 226, 246A, 269A, 279A

Hero MotoCorp (Haridwar unit, production from 07.04.2008) and Sun Pharma Laboratories (units from 2009 and 2014) enjoyed 100% excise duty exemption for 10 years under Office Memoranda of 2003 and the 2003 exemption notifications; after GST from 01.07.2017 the exemption notifications were rescinded and the Budgetary Support Scheme of 05.10.2017 refunded only 58% of CGST and 29% of IGST; the Delhi and Sikkim High Courts dismissed their writ petitions seeking 100% reimbursement — Held, (i) the proviso to Section 174(2)(c) of the CGST Act specifically provides that a tax exemption granted as an incentive against investment through a notification shall not continue as a privilege if rescinded on or after the appointed day, and the 2003 benefit stood rescinded by Notification No. 21/2017; (ii) a consistent line of authority, including two Constitution Benches and a four-Judge Bench, holds there can be no promissory estoppel against the legislature in the exercise of its legislative functions, and accepting the appellants' plea would make the proviso redundant and otiose; (iii) an exemption may in any case be withdrawn in larger public interest or upon change of the statutory regime; (iv) no statutory duty is cast on the Union to refund 100% of CGST, so mandamus cannot issue, and the Central Government cannot be directed to exercise its discretion under Section 11 in a particular manner; (v) the appellants nevertheless have a legitimate expectation, and may represent to the State Governments and the GST Council for reimbursement from the States' share of devolution; appeals dismissed subject to observations in paras 72–80.

(Paras 26–31, 54–58, 61, 64, 70–81)

Judgment Intelligence

Key Holdings

• Under the proviso to Section 174(2)(c) of the CGST Act, any tax exemption granted as an incentive against investment through a notification does not continue as a privilege once the notification is rescinded on or after the appointed day; the 2003 area-based benefit stood rescinded by Notification No. 21/2017 (paras 29–30).
• There can be no promissory estoppel against the legislature in the exercise of its legislative functions; this is the common thread running through Ramanatha Pillai, Gwalior Rayon, Ram Kumar, Motilal Padampat, Jit Ram Shiv Kumar and Godfrey Philips (para 54).
• Enforcing the 2003 Office Memorandum against the statutory proviso would make the proviso redundant and otiose and would operate estoppel against Parliament's legislative functions (para 55).
• Even on change of policy in public interest, or on change in the statutory regime by introduction of GST, the Union cannot be held bound by the 2003 representation (paras 56–58).
• A writ of mandamus for 100% reimbursement of CGST cannot issue because no duty is cast on the Union to refund 100% of CGST (paras 59–64).
• The discretion under Section 11 of the CGST Act is exercised on the recommendations of the GST Council; a mandamus cannot direct its exercise in a particular manner, and the choice between exemption and budgetary refund is a policy matter (para 71).
• The appellants have a legitimate expectation that their claim deserves consideration; they may represent to the State Governments and the GST Council, who are requested to consider reimbursement out of the States' devolution share expeditiously (paras 72–80).

Brief Facts

Following a statement by the Prime Minister during a visit to Uttaranchal in March 2002, the Government of India issued the O.M. of 7 January 2003 granting new industrial units, and existing units on substantial expansion, in Uttaranchal and Himachal Pradesh 100% outright excise duty exemption for 10 years from commencement of commercial production, along with income tax benefits. Notification No. 50/2003-C.E. dated 10 June 2003 implemented this under Section 5A(1) of the Central Excise Act, 1944 (paras 6.1–6.2). Hero MotoCorp's Haridwar motorcycle unit began production on 7 April 2008 and availed the exemption until 1 July 2017. Sun Pharma's units (production from 20 April 2009 and 14 April 2014) enjoyed full refund of excise duty under a notification dated 25 June 2003 issued pursuant to an O.M. dated 17 February 2003. After GST, both benefits were reduced to 58% through the Budgetary Support Policy (paras 6.3–6.4).

The 101st Constitutional Amendment introduced GST, and the CGST, IGST and State GST Acts followed (paras 6.5–6.6). Notification No. 21/2017-CE dated 18 July 2017, issued with reference to Section 174(2)(c) of the CGST Act, rescinded the investment-incentive exemption notifications from the appointed day (para 6.7). On the GST Council's resolution of 30 September 2016 that continued incentives would be administered by budgetary reimbursement, the Centre notified the Budgetary Support Scheme on 5 October 2017, refunding the Central share fixed at 58% of CGST and 29% of IGST (paras 6.8–6.9). Hero MotoCorp's writ petition was dismissed by the Delhi High Court on 2 March 2020 and Sun Pharma's by the Sikkim High Court on 5 February 2021 (paras 3–4, 6.10).

Issue (paras 2, 31)

1. Whether the Union of India can be directed to adhere to the representation made in the O.M. of 2003 even after the enactment of the CGST Act, 2017?
2. Whether, despite a subsequent statute specifically providing for rescinding benefits granted under an earlier statute, the Union can be compelled to stand by its earlier representation, that is, whether promissory estoppel can operate against a statute?
3. Whether a writ of mandamus can issue directing the Union to reimburse 100% of CGST instead of 58%, or to exercise its exemption power under Section 11 of the CGST Act?

Court's Findings

Effect of Section 174(2)(c) proviso: The Court accepted that the 2003 O.M. contained an unequivocal promise of 100% exemption (para 26). However, while Section 174(2)(c) saves rights and privileges under the repealed Acts, its proviso is "clear and specific" that a tax exemption granted as an incentive against investment through a notification shall not continue as a privilege if the notification is rescinded on or after the appointed day. Since Notification No. 21/2017 rescinded the area-based exemption notifications, the 2003 benefit stood rescinded (paras 28–30).

No estoppel against the legislature: Surveying Indo-Afghan Agencies, Century Spinning, Ramanatha Pillai, Gwalior Rayon, Ram Kumar, Bihar Eastern Gangetic Fishermen, Motilal Padampat, Jit Ram Shiv Kumar, Godfrey Philips and Express Newspapers, the Court found some discord on estoppel against executive action but a consistent view that no promissory estoppel operates against the legislature in the exercise of its legislative functions (paras 33–54). Accepting the appellants' contention would render the proviso to Section 174(2)(c) redundant and permit estoppel against Parliament's legislative functions; the estoppel claim was rejected (para 55).

Public interest and change of regime: Relying on Kasinka Trading, Shrijee Sales, Mahaveer Oil Industries, Shree Sidhbali Steels, Kanak Exports and Unicorn Industries, the Court reiterated that an exemption, even one for a stated period, can be withdrawn if withdrawal is in public interest. Both on that ground and because of the change in the statutory regime by GST, the Union could not be held bound by the 2003 O.M. (paras 56–58).

No mandamus; Section 11 is discretionary: A mandamus requires a legal duty and a corresponding legal right (Bihar Eastern Gangetic Fishermen, K.S. Jagannathan, Bharat Forge). There is no duty on the Union to refund 100% of CGST (paras 59–64). Section 11 vests a discretion in the Central Government to be exercised on GST Council recommendations; whether to exempt or to provide budgetary refunds is policy, interfered with only if palpably arbitrary and irrational. The 58% refund was a decision to partly honour the 2003 representation (para 71). The authorities cited by the appellants did not deal with a change in law disabling the State from honouring a representation (paras 66–70).

Legitimate expectation and the GST Council route: The appellants set up units relying on a policy that gave effect to the Prime Minister's statement; though they may have no claim in law, they have a legitimate expectation that their claim deserves consideration (paras 72–73). The GST Council minutes of 30 September 2016 record that the Centre would reimburse only out of its 58% share and that States would need to correspondingly reimburse units out of their devolution; Jammu & Kashmir had already notified reimbursement of the remaining 42% (paras 74–78). As a constitutional body that can recommend special provisions for North Eastern and Himalayan States, the GST Council should consider appropriate recommendations to the States (para 79).

Final Outcome / Directions (paras 79–83)

• The appellants are permitted to make representations to the respective State Governments and to the GST Council (para 80).
• The State Governments and the GST Council are requested to consider such representations expeditiously, in line with the observation that States should consider correspondingly reimbursing such units out of their share of devolution (paras 79–80).
• The appeals are dismissed, save and except the observations in paras 72 to 80 (para 81).
• Pending applications disposed of; no order as to costs (paras 82–83).

Legal Principle

Promissory estoppel cannot be pleaded against the legislature in the exercise of its legislative functions. Where Parliament, through the proviso to Section 174(2)(c) of the CGST Act, has provided that investment-linked tax exemptions granted by notification will not survive as privileges once rescinded, an earlier executive promise of a fixed-period exemption cannot be enforced against the Union; doing so would nullify the statutory proviso. A change of policy in public interest, or a change in the statutory regime, also justifies withdrawal of an incentive. Mandamus lies only to enforce a legal duty, so there is no writ to compel 100% reimbursement of CGST or a particular exercise of the Section 11 exemption power, though the State's earlier promise may found a legitimate expectation warranting consideration by the GST Council and State Governments (paras 54–58, 61, 64, 71–73).

Precedents Relied Upon

• State of Kerala v. Gwalior Rayon Silk Manufacturing (Wvg.) Co. Ltd., (1973) 2 SCC 713 – Relied upon · Discussed at paras 38–39: an agreement of the Government cannot preclude legislation; no equitable estoppel against legislative power used for public good.
• M. Ramanatha Pillai v. State of Kerala, (1973) 2 SCC 650 – Relied upon · Discussed at paras 36–37: estoppel will not generally be applied against the State in its governmental, public or sovereign capacity, save to prevent fraud or manifest injustice.
• Motilal Padampat Sugar Mills Co. Ltd. v. State of Uttar Pradesh, (1979) 2 SCC 409 – Referred to · Discussed at paras 43, 51: though the promise was enforced on facts, no promissory estoppel lies against the exercise of legislative power.
• M/s Jit Ram Shiv Kumar v. State of Haryana, (1981) 1 SCC 11; Union of India v. Godfrey Philips India Ltd., (1985) 4 SCC 369; Express Newspapers Pvt. Ltd. v. Union of India, (1986) 1 SCC 133 – Referred to · Discussed at paras 44–54: despite discord on executive estoppel, all hold there can be no estoppel against the legislature.
• Union of India v. Indo-Afghan Agencies Ltd., (1968) 2 SCR 366 – Distinguished · Discussed at paras 33–34: concerned arbitrary reduction under an export scheme, not withdrawal of a benefit by subsequent legislation.
• Union of India v. Unicorn Industries, (2019) 10 SCC 575 – Relied upon · Discussed at para 57: an exemption, even for a stated period, can be withdrawn in public interest.
• The Bihar Eastern Gangetic Fishermen Co-operative Society Ltd. v. Sipahi Singh, (1977) 4 SCC 145 – Relied upon · Discussed at paras 41–42, 60: no estoppel against sovereign legislative and executive functions; mandamus requires a statutory duty.
• State of Bihar v. Suprabhat Steel Ltd., (1999) 1 SCC 31; MRF Ltd., Kottayam v. Asstt. Commissioner (Assessment) Sales Tax, (2006) 8 SCC 702; Video Electronics Pvt. Ltd. v. State of Punjab, (1990) 3 SCC 87 – Distinguished · Discussed at paras 66–70: none dealt with a change in law disabling the State from honouring its representation.

Important Paragraphs of the Judgment

Para 29: "…the proviso thereto is clear and specific. It specifically provides that any tax exemption granted as an incentive against investment through a notification shall not continue as a privilege if the said notification is rescinded on or after the appointed day."

Para 54: "…a common thread in all these judgments that could be noticed is that all these judgments consistently hold that there can be no estoppel against the legislature in the exercise of its legislative functions."

Para 55: "If the contention as raised by the appellants is to be accepted, it would make the provisions under the proviso to Section 174(2)(c) of the CGST Act redundant and otiose."

Para 64: "Undoubtedly, in the present case, there is no duty cast on the Union to refund 100% of CGST. As such, we find that the relief as sought cannot be granted."

Para 73: "Though the appellants may not have a claim in law, we find that they do have a legitimate expectation that their claim deserves due consideration."

What the Ruling Means: Practical Impact

• Legacy area-based exemptions ended with GST: Units in the Himalayan and North Eastern States that enjoyed fixed-period excise exemptions under investment-incentive notifications cannot claim their continuation as of right after 1 July 2017 because of the proviso to Section 174(2)(c) (paras 29–30, 55).
• 58% budgetary support upheld: The Central Government's decision to refund only its 58% share of CGST (and 29% of IGST) is a policy choice, not open to mandamus for 100% refund (paras 6.9, 64, 71).
• Remaining relief lies with States and the GST Council: Affected units may seek reimbursement of the States' 42% devolution share through representations to State Governments and the GST Council, as Jammu & Kashmir had done (paras 78–80).
• Limits of promissory estoppel in tax: Taxpayers relying on incentive promises should note that promissory estoppel does not survive a statutory override and yields to public interest withdrawal (paras 54–58).

Frequently Asked Questions

What did the 2003 Office Memorandum promise?

For Uttaranchal and Himachal Pradesh, new industrial units and existing units on substantial expansion would get 100% outright excise duty exemption for 10 years from commencement of commercial production, plus income tax exemptions (para 6.1).

Why could the exemption not continue under GST?

The proviso to Section 174(2)(c) of the CGST Act provides that an investment-linked tax exemption granted through a notification does not continue as a privilege if the notification is rescinded on or after the appointed day, and Notification No. 21/2017 dated 18 July 2017 rescinded those exemptions (paras 28–30).

Can promissory estoppel be pleaded against the GST law?

No. The Court held there can be no promissory estoppel against the legislature in the exercise of its legislative functions, and accepting the plea would make the proviso to Section 174(2)(c) redundant (paras 54–55).

Can the Court direct 100% CGST reimbursement or an exemption under Section 11?

No. There is no duty on the Union to refund 100% of CGST, and Section 11 confers a discretion exercisable on GST Council recommendations that cannot be directed to be exercised in a particular manner (paras 64, 71).

Did the appellants get any relief?

Their appeals were dismissed, but the Court found a legitimate expectation and permitted them to represent to the State Governments and the GST Council, requesting expeditious consideration of reimbursement from the States' devolution share (paras 72–81).

Judgment Copy

Judgment PDF: 2022 INSC 1100 – M/s Hero MotoCorp Ltd. v. Union of India (official copy, sci.gov.in)

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