Case: MRF Ltd., Kottayam Vs. Assistant Commissioner Sales Tax and Ors

MRF is a company incorporated under the Companies Act, 1956 and its registered office is at 124, Greams Road, Chennai. One of its industrial units is located at Vadavathoor near Kottayam in the State of Kerala. MRF is engaged in the manufacture of automotive tyres, tubes, compound rubber, tread rubber, flaps, pre-cured tread rubber etc. at its industrial unit at VadavathoorThe Government of Kerala has from time to time declared and introduced several incentives to promote industrial growth and expansion in the State of Kerala by granting exemptions, concessions or reduction in sales tax, electricity duty and electricity tariff etc. to new industries as well as to existing industrial units undertaking substantial expansion, diversification or modernization. Accordingly, the Government of Kerala has been issuing notifications from time to time to give effect to its declared policy for industrial promotionActing on the incentives, concessions and benefits held out by the Government of Kerala, MRF approached the Government of Kerala with its proposal to make substantial expansion and diversification of its industrial unit at Vadavathoor. A Memorandum of Understanding was entered between MRF and the State of Kerala on 6.10.1993, which provided that the MRF had decided to make substantial investment of Rs.50 crores for expansion/diversification of its existing industrial unit at Kottayam for the manufacture of various products and that the immediate plan of MRF was to expand in the compound rubber manufacture and diversity into new products like tyres, pre-cured tread rubber, flaps etc. The said Memorandum of Understanding expressly provided that MRF shall be entitled to tax exemptions available for existing industries undertaking expansion/diversificationOn 3.11.1993 Government of Kerala issued a Notification SRO No. 1729/93 (relevant parts extracted below) in exercise of its powers under Section 10 of Kerala General Sales Tax Act. 1963 (for short "the Act") providing for tax exemption to industrial units going in for expansion/diversification/modernization in the State of Kerala:-(b)5. In the case of Existing Medium and Large Scale Industrial Units which undertake diversification, expansion or modernization on or after the 1st April, 1993, there shall be an exemption for a period of seven years from the date on which such diversification, expansion or modernization has been completed(a) In respect of the tax payable under the Kerala General Sales Tax Act, 1963-(i) On the turnover of sale of goods, manufactured in excess of full rated capacity of the unit prevailing immediately prior to such diversification, expansion or modernization, and sold by them within the State; and(ii) On the turnover of goods taxable at the point of last purchase in the State, which are used by such units for manufacturing the goods referred to in sub clause (i) above for sale within the State or inter-State; and(c)10. Conditions and Restrictions -(iv) In the case of Existing, Medium and Large Scale Industrial Units, other than Public Sector undertakings, which undertake expansion, modernization or diversification, the aggregate exemption in respect of sales tax, purchase tax, surcharge and central sales tax shall not exceed 100% of the additional fixed capital investment made for such expansion, modernization or diversification10.(b) Eligibility certificate for medium and large scale industries assisted by the Kerala State Industrial Development Corporation or the Kerala Financial Corporation will be issued by the Corporation which render assistance and in other cases by the Director of Industries and Commerce, on application by such units, and orders of exemption will be issued by the Secretary, Board of Revenue (Taxes), Thiruvananthapuram(c). Eligibility certificate and orders on exemption will be issued by the authorities mentioned in Sub-clause (b) above, if the unit is eligible for exemption or deferment of taxes and the unit satisfies the conditions for the exemptions or deferment of taxes(d). The eligibility certificate referred to in Sub-Clause (b) above shall contain the date of commencement of commercial production and the monetary limit of exemption the unit is eligible for. The eligibility certificate issued in respect of existing medium and large-scale industrial units which undertake expansion, modernization or diversification shall also contain the date of commencement as well as the date of completion of such expansion, modernization or diversification(d) 11. Explanation - For the purposes of this notification,(ix) Manufacture shall mean the use of raw materials and production of goods commercially different from the raw materials used but shall not include mere packing of goods, polishing, cleaning, grading, drying, blending or mixing different varieties of the same goods, sawing, garbling, processing one form of goods into another form of the same goods by mixing with chemicals or gas, fumigation or any other process applied for preserving the goods; in good condition or for easy transportation. The process of producing desiccated coconut out of coconut shall be deemed to be manufacture for the purpose of this notification."With the object to ensure that the State of Kerala would get the relevant proportion of excise duty, i.e., about 40% of the excise duty paid within the State, amended SRO No. 1729/93 by issuing SRO No. 271/96 dated 13.3.1996 requiring the manufacturer claiming tax exemption under SRO No. 1729/93 to pay central excise duty in the State of Kerala on its manufactured productsOn 10.4.1996 an addendum to the Memorandum of Understanding dated 6.10.1993 was executed between MRF and Government of Kerala which specifically confirmed that MRF Limited, a tyre manufacturing company within the State is entitled to tax incentives and exemptions provided under SRO No. 1729/93 dated 3.11.1993 as amended by SRO No. 271/96 dated 13.3.1996 in respect of rubber based goods like tyres, flaps, pre-cured tread rubber etc. manufactured under diversified facilities and rubber based goods manufactured pursuant to the expansion of the existing facilityPursuant to the Memorandum of Understanding entered into between MRF and the State of Kerala and the SRO No. 1729/93 the MRF invested Rs.80 crores and carried out substantial expansion of its existing industrial unit and set up new unit for manufacture of diversified productsIn accordance with the provisions of SRO No. 1729/93 the eligibility certificate evidencing the MRFs entitlement to the exemption and benefits was to be issued by the Director of Industries and Commerce, Government of Kerala. MRF applied for the said eligibility certificate and the Director of Industries and Commerce, inspected the factory and verified the manufacturing process of goods for which expansion and diversification was undertaken by the MRF. After considering the application and all relevant facts and materials, and, on being satisfied that the MRF was entitled to the exemption, concessions and benefits under SRO No. 1729/93 issued the eligibility certificate on 10.11.1997. Eligibility certificate in Form 4 set out the details of fixed capital investment of MRF of the aggregate amount of Rs.74,12,77,528.51. MRF commenced its production on 31.12.1996. Director of Industries and Commerce forwarded the eligibility certificate and his report to the Board of Revenue for its consideration for issuance of certificate of exemption. The Board of Revenue vide exemption order No. C 4/40588/97/Tx - MRF dated 30.6.1998 having found the MRF eligible for sales tax exemption under SRO No. 1729/93 granted tax exemption of 7 years in the aggregate amount of Rs.74,12,77,529.00 specifying the period of exemption to be from 30.12.1996 to 29.12.2003On 15.1.1998 the Government of Kerala issued SRO No.38/98 (read with SRO No. 491/98) amending SRO No. 1729/93 by adding new sub-clause (h) to clause 11 (ix) which provided that certain processes shall not be deemed to be manufacture for the purpose of SRO No. 1729/93. Sub-clause (h) reads as under:-"(h) Conversion of rubber latex into centrifugal latex, raw rubber sheet, ammoniated latex, crepe rubber, crumb rubber, or any other item falling under entry 110 of the First Schedule to the Kerala General Sales Tax Act, 1963 or treating the raw rubber in any form with chemicals to form a compound of rubber by whatever name called."By notification SRO No. 1092/99 dated 31.12.1999 the State of Kerala modified SRO No. 1729/93 so as to withdraw tax exemption with effect from 1.1.2000 but with a proviso that:-"2. Industrial Unit which had been sanctioned exemption/deferment as per notification SRO No. 1729/93 before 1st day of January, 2000 shall continue to enjoy the concession for the full period covered by the order of exemption/deferment." [Emphasis supplied](This notification has not been withdrawn or modified till date.)Assistant Commissioner (Assessment) issued a notice on 17.1.2000 proposing to levy purchase tax on the footing that exemption under SRO No. 1729/93 dated 3.11.1993 was not available with effect from 15.1.1998 by reason of amendment by SRO No. 38/98 dated 15.1.1998 and stated:-"Thus you have filed incorrect returns and evaded payment of tax due. You are therefore directed to show cause why action should not be initiated to assess provisionally and u/s 45A for the offence of filing incorrect returns, within 7 days of receipt of this notice. You are also given an opportunity to be heard in person on that day, or at 11 a.m. on 27.1.2000."MRF sent its reply to the above said notice on 14.2.2000 pointing out that MRF has already completed expansion/diversification and had commenced commercial production on 30.12.1996 and was thereafter entitled to tax exemption for the full period of 7 years with effect from 31.12.1996 to 29.12.2003. The proceedings initiated by the Assistant Commissioner were dropped by Assistant Commissioners letter/order stating that:-"Ref: 1. This Office Notice dated 17.1.20002. Reply No. M.199/SGMK/A1204/4.2.2000Referring to the above I am to inform that further action in this matter is dropped as the expansion has been completed on 30.12.96."This order was never revoked or withdrawnAssistant Commissioner of Sales Tax, Kottayam issued another set of notices dated 19.12.2001 proposing to impose penalty under Section 45A of the Act for availing of purchase tax exemption under SRO No. 1729/93 and for not paying the purchase tax. MRF sent its reply on 10.1.2002 raising its objection regarding the jurisdiction of the Assistant Commissioner of Sales Tax to issue such notice in view of the earlier order passed by the Assistant Commissioner dropping the proceedings initiated and in view of the eligibility certificate issued by the Director of Industries and Commerce and the exemption order passed by the Board of Revenue (Taxes). The Assistant Commissioner vide order dated 17.1.2002 rejected the objections raised by the MRFMRF thereafter filed Writ Petition No. 3343 of 2000 in the High Court of Kerala challenging the aforesaid notices issued as being contrary to the eligibility certificate and exemption order. It was prayed in the writ petition that a writ of mandamus be issued to the respondents, restraining them from taking any proceedings against MRF contrary to the eligibility certificate dated 10.11.1997 issued by the Director of Industries and Commerce and exemption order issued by the Secretary, Board of Revenue dated 30.6.1998. The Single Judge before whom the writ petition came up for hearing dismissed the same and remanded the matter back to the Sales Tax Authorities. Being aggrieved, the MRF filed the writ appeal which has been dismissed by the order impugned in this appeal.

Reasoning:
In the aforesaid case, the Employees Provident Fund Act (as amended in 1988) provided that the Act would not apply "to a newly set up establishment for a period of three years from the date on which such establishment is set up." Section 16 (1)(d) was deleted by the Amending Act w.e.f. 22.9.1997 and the question was whether the initial exemption from application of the Act would continue for the full period of three years from the date of its establishment, even beyond 22.9.1997. Rejecting the contention, as pointed out earlier, it was held that retrospective operation is not taken to be intended unless that intention of the Legislature is projected by express words or necessary implication. Setting aside the order of the High Court it was held:"18. It is a cardinal principle of construction that every statute is prima facie prospective unless it is expressly or by necessary implication made to have retrospective operation. (See Keshvan Madhavan Memon v. State of Bombay, 1951 SCR 228 ). But the rule in general is applicable where the object of the statute is to affect vested rights or to impose new burdens or to impair existing obligations. Unless there are words in the statute sufficient to show the intention of the Legislature to affect existing rights, it is deemed to be prospective only nova constitutio futuris formam imponere debet non praeteritis. In the words of Lord Blansburg, "provisions which touch a right in existence at the passing of the statute are not to be applied retrospectively in the absence of express enactment or necessary intendment."High Court in its judgment has recorded a finding that the notifications being statutory "no plea of estoppel will lie against a statutory notification". This finding of the High Court is erroneous. The doctrine of promissory estoppel has been repeatedly applied by this Court to statutory notificationsIn Kasinka Tradings case (supra) and Rom Industries Vs. State of Jammu & Kashmir, 2005 (7) SCC 348, on which reliance has been placed by the learned counsel for the respondent do not disturb the settled position in law that where a right has already accrued, for instance, the right to exemption of tax for a fixed period and the conditions for that exemption have been fulfilled, then the withdrawal of the exemption during that fixed period cannot effect the already accrued right. Of course, overriding public interest would prevail over a plea based on promissory estoppel, but in the present case there is not even a whisper of any overriding public interest or equity. Notification SRO 38/98 was an amendment and not a clarification of SRO 1729/93 and was expressly made prospective w.e.f. 15.1.1998Besides, a plea of promissory estoppel is in the nature of an equitable plea and must be determined in the facts and circumstances of each case where it is raisedMRF made a huge investment in the State of Kerala under a promise held to it that it would be granted exemption from payment of sales tax for a period of seven years. It was granted the eligibility certificate. The exemption order had also been passed. It is not open to or permissible for the State Government to seek to deprive MRF of the benefit of tax exemption in respect of its substantial investment in expansion in respect of compound rubber when the State Government had enjoyed the benefit from the investment made by the MRF in the form of industrial development in the State, contribution to labour and employment and also a huge benefit to the State exchequer in the form of the States share, i.e. 40% of the Central Excise duty paid on compound rubber of Rs. 177 crores within the State of Kerala. The impugned action on the part of the State Government is highly unfair, unreasonable, arbitrary and, therefore, the same is violative of Article 14 of the Constitution of India. The action of the State cannot be permitted to operate if it is arbitrary or unreasonable. This Court in E.P. Royappa Vs. State of Tamil Nadu, 1974 (4) SCC 3 , observed that where an act is arbitrary, it is implicit in it that it is unequal both according to political logic and constitutional law and is therefore violative of Article 14. Equity that arises in favour of a party as a result of a representation made by the State is founded on the basic concept of "justice and fair play". The attempt to take away the said benefit of exemption with effect from 15.1.1998 and thereby deprive MRF of the benefit of exemption for more than 5 years out of a total period of 7 years, in our opinion, is highly arbitrary, unjust and unreasonable and deserves to be quashed. In any event the State Government has no power to make a retrospective amendment to SRO 1729/93 affecting rights already accrued to MRF thereunder. Section 10 of the Act provides the power to the Government to grant exemption and reduction in rate of taxBefore this Court the State of Kerala did not dispute the above finding (See 2000(9) SCC 286) where the States appeal was dismissed. That Section 10(3) of the Kerala General Sales Tax Act did not confer the power to withdraw an exemption with retrospective effect was not challenged by the State Government and accordingly the finding regarding the meaning and effect of Section 10(3) of the Act has become final. In any event, the appeal preferred by the State of Kerala was dismissed and the judgment of the High Court has therefore become final. Accordingly, it was held that Section 10(3) does not confer the power to withdraw an exemption with retrospective effect. Effect of this is that the amendment notification SRO 38/98 has to be read so as not to take away or disturb any manufacturers pre-existing accrued right of exemption for a period of 7 years. If SRO 38/98 is construed as now contended by the respondent, then the inevitable consequence would be that SRO 38/98 would itself be rendered ultra vires Section 10(3) of the Act, and therefore, illegal, bad in law and null and voidWe do not agree with the submission made by the learned counsel for the respondent/State that subsequent notification was classificatory in nature. That it only removed the doubt which had arisen with reference to "compound rubber" in the SRO 1729/93. Making of "compound rubber" had been accepted to be "manufacture" in the Memorandum of Undertaking entered between MRF and the Government on 6.10.1993 and the addendum dated 10.4.1996 to the Memorandum of Undertaking dated 6.10.1993. It is further recognized in the eligibility certificate issued by the Director of Industries and Commerce after investigation and due verification and the exemption certificate issued by the Board of Revenue.