Promissory Estoppel Can't Be Invoked For Enforcement Of Promise Contrary To Law: Kerala HC Sets Aside Order Allowing 10-Yrs VAT Exemption To SEZ Unit

The Kerala High Court recently reversed a judgment passed by a single judge bench allowing a ten-year VAT exemption claimed by  SEZ unit relying on the Kerala Industrial Policy 2009, applying the principle of promissory estoppel as per the ratio of Nestle India Ltd. and Llyod Electric and Engineering Ltd.

A Division Bench of Justice S. V. Bhatti and Justice Basant Balaji opined that the rule of promissory estoppel cannot be invoked for the enforcement of a promise contrary to law or outside the authority or power of the government or person making that promise. 

The petitioner without establishing a statutory/vested/ constitutional right cannot be given the benefit of tax incentive by applying the ratio of Nestle India Ltd. and Llyod Electric and Engineering Ltd. cases.

The State had preferred the instant writ appeal challenging the order passed by a single judge bench allowing the petitioner-company a ten-year VAT exemption. 

The petitioner-company is situated in Special Economic Zone (SEZ) and at the time of the establishment of the industry, there was no policy or tax incentives. However, after the establishment and commencement of production, a policy was declared and an exemption notification was issued under Section 10 of the Sales Tax Act, which empowers the government to issue exemptions from payment of sales taxes by the industries established in an SEZ and this was extended to existing industries and the writ petitioner as well. The KVAT Act did not contain a similar exemption from the payment of value-added tax.

The petitioner-company in bona fide belief believed that the replacement of the Sales Tax Act with KVAT did not affect the policy extending tax incentives. However, their claim was turned down. The State further released an amended SEZ policy on incentives to different categories of industries located in SEZs, which holds that industrial enterprises in the SEZs alone are exempted from the tax being collected under STA including VTA for 10 years from the date on which it started functioning.

Based on the policy, it was stated that changes would be made to the existing notification and a new notification will be issued, however, no such notification was issued by the government extending tax incentives. in this background, the petitioner claimed a declaratory relief. The declaratory relief traces the entitlement, therefore, to the Principle of Promissory Estoppel.

Special Government Pleader Mohammed Rafiq appearing for the State argued that in the absence of a specific provision under the VAT Act, or permissible exemption notification thereunder the sales of the petitioner-company to DTA attract VAT, is illegal and impermissible. 

On the other hand, Advocate Abraham Joseph Markos appearing for the company laid emphasis that the state is bound by the principles of Promissory Estoppel, and the authorities are barred by the said principles from imposing any tax on the DTA sales by units in the SEZs. 

The Division Bench while considering the issue looked into the evolution of the principle of promissory estoppel right from Motilal Pdampat Sugar Mills Co. Ltd. to Agustan Textile and the mutations it had undergone through interpretations over decades.

In Sharma Transport v. Govt. of A.P., the court had held that the rule of 'promissory estoppel' can be invoked only when it is shown that there was a declaration or promise made which induced the party to whom the promise was made to alter its position to its disadvantage. The doctrine of 'promissory estoppel' has been evolved by the Courts on the principle of equity, to avoid injustice.

Furthermore, in Ashok Kumar Maheshwari v. State of U.P., the court held that the rule of 'promissory estoppel' cannot be invoked for the enforcement of a promise contrary to law or outside the authority or power of the Government or the person making that promise.

Referring to a number of previous Apex Court decisions on the principle of promissory estoppel, the court accepted the contention of the appellant that in the absence of power conferred on the government to grant exemption in the VAT regime, no plea of promissory estoppel can be set up on the basis of a policy declared by the government. 

Accordingly, the judgment of the Single Judge was set aside and the appeal was allowed holding that the declaratory relief granted therein has the effect of being contrary to the discretion of the Legislature and against the Statute.

Case Title: Government of Kerala V. Waves Electronic (P) Ltd. 

Citation: 2022 LiveLaw (Ker) 348

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