Governments must keep their promises on incentive schemes if they want to attract investments.
The frequency with which state governments offer incentives to industries to set up new units is matched only by the regularity with which such promises are broken. So it would seem from the stream of judgements delivered by the Supreme Court on this subject in recent times. Very often, a new government flush with election victory wants to attract more industries to the state and later finds the incentives hurt the revenue beyond the original estimates. Or perhaps a new bureaucrat who loves strict construction of the terms of the notifications has taken over. Or it could be what is called in court language extraneous considerations, which means corruption in plain English. Whatever the cause may be, the well-meaning industry is put to a lot of hardship by the change of tune of the government.
Very few firms are capable of fighting a debilitating battle with the government. But those who have fought, have won their cases, as in the case of MRF Ltd vs Assistant Commissioner, decided by the Supreme Court recently. Two benches of the Kerala High Court had gone against the tyre manufacturer, but it won its case at the apex court.
The story is familiar. The Kerala government introduced several incentives to promote industrial growth and expansion like reduction in sales tax and electricity tariff. These were done by issuing notifications from time to time. Acting on the incentives, concessions and benefits held out by the state government, MRF invested Rs 70 crore for expansion of its unit in Kottayam.
After about four years, new notifications were issued by the state government, which apparently took away the concessions offered earlier. Notices were issued to the company for evasion of tax as well as penalties. The company moved the high court. Both the single-judge bench and the division bench dismissed its petitions. So the company moved the Supreme Court which accepted its contentions.
One of the points stressed by the company was promissory estoppel, by which the state government could not go back on its words when the company had acted upon it. The state government contended that no rule of promissory estoppel can bind the government when public interest is involved. The principle also did not operate against legislation. Therefore, the company should have known that the benefit it had received was a precarious one, liable to be cancelled or varied at any time.
The state government and the Kerala High Court were wrong, said the Supreme Court. A judgement of the Supreme Court, considering a similar dispute from Kerala dating back to 1986, had considered the binding nature of such promises. In that case, Pournami Oil Mills vs State of Kerala, the Supreme Court said: If in consideration of the concession made available, promoters of any small-scale concerns have set up their industries within the state of Kerala, they would certainly be entitled to plead the rule of estoppel in their favour when the state purports to act differently.
Another leading judgement on this question is Shri Bakul Oil Industries vs State of Gujarat (1987). The Supreme Court said in that judgement: If the government grants exemption to a new industry and if on the basis of the representation made by the government an industry is established in order to avail of the benefit of exemption, it may then follow that the new industry can legitimately raise a grievance that the exemption could not be withdrawn except by means of legislation having regard to the fact that promissory estoppel cannot be claimed against a statute.
The same principle has been reiterated in Pawan Alloys & Casting Pvt Ltd vs UP State Electricity Board in 1997. The Supreme Court asserted that the state could be made subject to the equitable doctrine of promissory estoppel in cases where because of its representation, the party claiming estoppel had changed its position. Early this year, the court pointed out in Mahabir Vegetable Oils Ltd vs State of Haryana that it is beyond cavil that the doctrine of promissory estoppel operates even in the legislative field. In State of Punjab vs Nestle India Ltd (2004), the Supreme Court dealt with a dispute under the Customs Act. Even in customs law, it said that withdrawal of benefits should not be arbitrary or unreasonable.
Therefore, the law is amply clear on the subject. However, the state governments tend to take a wrong view due to ignorance or arrogance. The number of appeals from different high courts indicate that they are also not sure of the law, despite several Supreme Court pronouncements on this subject. One thing which the industries can do is to draft the memorandum of understanding with the government more carefully, leaving no scope for the latter to eat its words at a later stage.