Godrej Consumer Products Limited v. Union of India & Others: Denial of GST Budgetary Support to Units Not Availing Excise Exemption Immediately Before 1st July 2017 — High Court of J&K and Ladakh Upholds Strict Interpretation of Eligibility Criteria

 Sections Involved

  • Article 14 — Constitution of India (Right to Equality)
  • Article 19(1)(g) — Constitution of India (Right to carry on trade or profession)
  • Articles 265 & 300A — Constitution of India (Tax only by authority of law; Right to Property)
  • Article 269A — Constitution of India (Levy and collection of GST in course of inter-state trade)
  • Article 270 — Constitution of India (Distribution of taxes between Union and States)
  • Article 279A — Constitution of India (GST Council)
  • Section 5A(1) — Central Excise Act, 1944 (Power to grant exemption from duty)
  • Section 10 — Central Goods and Services Tax Act, 2017 (Composition Scheme)
  • Section 49 — Central Goods and Services Tax Act, 2017 (Payment of tax, interest, penalty and other amounts)
  • Section 174(2)(c) — Central Goods and Services Tax Act, 2017 (Savings clause and proviso relating to exemption notifications post appointed day)
  • Section 20 — Integrated Goods and Services Tax Act, 2017 (Application of provisions of CGST Act)
  • Notification No. 56/2002-CE dated 14th November 2002 — Central Excise Area-Based Exemption Notification for J&K
  • Notification No. 57/2002-CE dated 14th November 2002 — Central Excise Exemption Notification
  • Notification No. 01/2010-CE dated 6th February 2010 — Central Excise Exemption for Substantial Expansion
  • Notification No. 21/2017-CE dated 18th July 2017 — Rescission of erstwhile Central Excise Exemption Notifications
  • DIPP Notification No. F.No. 10(1)/2017-DBA-II/NER dated 5th October 2017 — Scheme of Budgetary Support under GST Regime
  • SRO 519 & 521 dated 21st December 2017 — J&K Reimbursement of Central Taxes Scheme
  • Circular No. 1060/9/2017-CX dated 27th November 2017 — Procedure for disbursal of Budgetary Support

 

Facts of the Case

The Petitioner, Godrej Consumer Products Limited — a leading Fast-Moving Consumer Goods (FMCG) company engaged in the manufacture of household insecticides, personal care and home products — operated two manufacturing units in the erstwhile State of Jammu & Kashmir:

  1. Unit at Chak Pratap Singh, National Highway-1A, Hatli Morh, Kathua (J&K)
  2. Unit at SIDCO Industrial Complex, Lane-3, Phase-II, Bari Brahmana, Samba

The Kathua Unit had commenced commercial production in 2005–06 and was availing Central Excise area-based exemption under Notification No. 56/2002-CE dated 14th November 2002, which entitled eligible units to exemption for a period of ten years from the date of commencement of commercial production or from the date of publication of the notification, whichever was later. For the Petitioner's Kathua Unit, the benefit under Notification No. 56/2002-CE, having commenced production on 10th February 2007, was accordingly valid only up to 9th February 2017.

Pursuant to the New Industrial Policy for Jammu & Kashmir introduced in June 2002, the Central Government issued Notification No. 01/2010-CE dated 6th February 2010 to enable manufacturers to set up new units or undertake substantial expansion at a later date and avail Central Excise exemption benefits. The Petitioner averred that this notification contained no sunset clause, thereby offering existing units the option to undertake substantial expansion at any time without limitation.

Relying on this policy framework, the Petitioner undertook steps for substantial expansion of the Kathua Unit, and the District Industries Centre (DIC) granted the necessary permission vide letter dated 13th October 2016. The Petitioner also took substantial steps towards establishing its new unit at Bari Brahmana, with all necessary approvals secured prior to the rollout of GST on 1st July 2017.

With the introduction of the GST regime effective 1st July 2017, the Central Government rescinded the erstwhile excise exemption notifications, including Notification Nos. 56/2002-CE and 01/2010-CE, vide Notification No. 21/2017-CE dated 18th July 2017.

Anticipating the rollout of a similar benefit scheme under the GST regime, the Petitioner commenced commercial production from the Coil-11 Unit on 27th September 2017. Subsequently, the Government of India issued DIPP Notification dated 5th October 2017 announcing the Scheme of Budgetary Support under the GST Regime for eligible manufacturing units in J&K, Uttarakhand, Himachal Pradesh, and North Eastern States, providing reimbursement equivalent to 58% of the CGST paid (after utilization of input tax credit) and 29% of IGST paid.

The Petitioner filed an application dated 28th February 2018 for registration as an eligible unit and issuance of a Unique ID (UID) number — a prerequisite to availing budgetary support under the scheme.

This application was rejected vide Order dated 20th August 2018 passed by the Assistant Commissioner, Central GST Division, Samba, on the ground that the Petitioner's unit was not an "Eligible Unit" as defined under Para 4.1 of the DIPP Notification, since the unit was not availing any of the prescribed exemption notifications immediately before 1st July 2017 and had declared its date of commencement of commercial production as 25th September 2017 — which post-dated the GST implementation date.

The Petitioner also challenged the SRO 519 & SRO 521 dated 21st December 2017, issued by the Government of Jammu & Kashmir under the J&K Reimbursement of Central Taxes for Promotion of Industries Scheme, which mirrored the Central scheme and similarly restricted its benefit to units availing 58% reimbursement under the Central scheme.

 

Issues Involved

  1. Whether the definition of "Eligible Unit" under Para 4.1 of the DIPP Notification dated 5th October 2017, which restricts eligibility to units availing the erstwhile Central Excise exemption immediately before 1st July 2017, is violative of Article 14 of the Constitution of India?
  2. Whether the Notification No. 21/2017-CE dated 18th July 2017 rescinding the erstwhile excise exemption notifications was issued without legal authority, given that Section 5A(1) of the Central Excise Act stood repealed effective 1st July 2017 by virtue of Section 174 of the CGST Act, 2017?
  3. Whether the Proviso to Section 174(2)(c) of the CGST Act, 2017 is illegal, unconstitutional, and inconsistent with the main provision of Section 174, to the extent it grants power to issue notifications even after the appointed day, and restricts certain classes of assessees from availing tax exemption granted as an incentive for investment on or after 1st July 2017?
  4. Whether the Petitioner is entitled to the protection of the doctrines of promissory estoppel and legitimate expectation on account of substantial investment made and steps taken prior to 1st July 2017 in reliance upon the erstwhile exemption notifications?
  5. Whether the Order dated 20th August 2018 rejecting the Petitioner's application for Unique ID was perverse, illegal, and contrary to the admitted facts of the case?
  6. Whether the impugned Notifications and the Rescinding Notification are violative of Articles 265 and 300A of the Constitution of India?

 Petitioner's Arguments

1. Eligibility Under Notification No. 01/2010-CE: The Petitioner contended that it was eligible to avail benefits under Notification No. 01/2010-CE as all substantial steps for expansion of the Kathua Unit had been completed and the DIC had granted the necessary permissions on 13th October 2016, well before the GST rollout. For the Bari Brahmana Unit, all substantial steps and necessary approvals were secured prior to 1st July 2017. Accordingly, the Petitioner's eligibility under the erstwhile notifications had crystalized before the GST appointed day.

2. Contradictory Language in the DIPP Notification: The Petitioner argued that Para 4.1 of the DIPP Notification, which restricts eligibility to units availing exemption immediately before 1st July 2017, is contradictory to the introductory paragraph of the same notification, which states that budgetary support is available to units eligible for drawing benefits under the earlier excise duty exemption schemes. The harmonious construction of the notification ought to encompass units that were entitled to avail the benefit, even if they had not physically commenced availing it before 1st July 2017.

3. Violation of Article 14: The Petitioner submitted that the impugned notifications created an arbitrary and unreasonable classification by granting budgetary support to units availing exemption on 30th June 2017, while excluding units like the Petitioner which had undertaken substantial expansion and had a vested entitlement to exemption but had not yet commenced production before the GST rollout date. This classification lacked any intelligible differentia having a nexus with the object sought to be achieved, thereby violating Article 14 of the Constitution.

4. Rescinding Notification Issued Without Legal Authority: The Petitioner argued that Notification No. 21/2017-CE was issued on 18th July 2017 purportedly in exercise of powers under Section 5A(1) of the Central Excise Act, a provision which had already been repealed with effect from 1st July 2017 under Section 174 of the CGST Act. Consequently, the rescinding notification had no legal foundation and was violative of Articles 265 and 300A of the Constitution.

5. Proviso to Section 174(2)(c) Challenged: The Petitioner challenged the constitutional validity of the Proviso to Section 174(2)(c) of the CGST Act, contending that it illegally restricts the class of assessees from availing tax exemptions granted as investment incentives on or after 1st July 2017 and that such restriction is inconsistent with the main provision of Section 174.

6. Promissory Estoppel and Legitimate Expectation: The Petitioner urged that having made substantial investments in expansion relying upon the assurance of continued tax incentives held out by the Government under the erstwhile policy framework, it was entitled to invoke the doctrines of promissory estoppel and legitimate expectation to compel the Government to honour its commitment or ensure continuity of equivalent benefits under the GST regime.

7. Perversity of Impugned Order: The Petitioner contended that the rejection order dated 20th August 2018 passed by Respondent No. 8 was passed in a summary manner, without proper appreciation of admitted facts, and by wrongly applying the eligibility criteria under Para 4.1 of the DIPP Notification.

Case Laws Relied Upon by Petitioner:

  • Geldhof Auto and Gas Industries Ltd v. Union of India, 2010 SCC Online Bom 2124
  • State of Bihar v. Suprabhat Steel Limited, (1999) 1 SCC 31
  • Lloyds Electric and Engineering Limited v. State of Himachal Pradesh, (2016) 1 SCC 560
  • State of Jharkhand v. Tata Cummins Ltd., (2006) 4 SCC 57
  • Bajaj Tempo Ltd v. Commissioner of Income Tax, (1993) 3 SCC 78
  • Vadilal Chemicals Ltd v. State of A.P., (2005) 6 SCC 292

 

Respondents' Arguments

1. Petitioner Not Availing Exemption Immediately Before 1st July 2017: The Respondents contended that the Petitioner's Kathua Unit was availing the benefit under Notification No. 56/2002-CE from the date of commencement of commercial production i.e. 10th February 2007, and was accordingly entitled to the benefit for a period of ten years only, i.e., up to 9th February 2017. After this date, the Petitioner was no longer eligible to avail the benefit under any exemption notification. No application for further expansion of the unit was pending with the Department as of the GST implementation date.

2. Petitioner's Declared Date of Commencement as Post-GST: The Respondents pointed out that in its own application for issuance of Unique ID, the Petitioner had declared the date of commencement of commercial production as 25th September 2017 — a date after the GST rollout. Since the Petitioner was not availing any of the prescribed exemption notifications on or immediately before 1st July 2017, it plainly fell outside the definition of "Eligible Unit" under Para 4.1 of the DIPP Notification.

3. Misdirection in Application: The Respondents contended that the Petitioner had misdirected in its application for Unique ID by claiming that it was availing Notification No. 01/2010-CE up to 30th June 2017, whereas the factual position was that the Petitioner was working under Notification No. 56/2002-CE and that benefit had expired on 9th February 2017 itself. The Petitioner was not working under Notification No. 01/2010-CE at any point prior to 1st July 2017.

4. Policy Decision Beyond Judicial Review: The Respondents submitted that withdrawal of exemption in the public interest is a matter of policy, and courts would not bind the Government to its policy decisions for all times to come, particularly when the Government was satisfied that a change in policy was necessary in public interest. In support, the Respondents relied upon the Supreme Court's judgment in Union of India v. V.V.F. Industries, (2020) 20 SCC 57.

5. Budgetary Support Scheme as a Measure of Goodwill: The Respondents emphasized that the Budgetary Support Scheme was introduced purely as a measure of goodwill and had no legal relation to the erstwhile exemption notifications. The scheme was specifically designed for and limited to units which were actually availing the erstwhile exemption benefits and were required to transition to the GST regime without the benefit of tax exemption. The scheme was not intended to extend benefits to units which had not yet commenced production under the erstwhile notifications.

6. Constitutional Validity of GST Council's Decisions: The Respondents relied on Article 279A to justify the GST Council's decision dated 30th September 2016 that exemptions from payment of indirect tax under any existing scheme would not continue under the GST regime, and that it was left to the Central and State Governments to notify budgetary support schemes for concerned units.

 

Court's Order / Findings

1. Scheme of Budgetary Support — Nature and Scope: The Court undertook a detailed analysis of the DIPP Notification dated 5th October 2017 and noted that the scheme was introduced as a measure of goodwill, exclusively for units which were eligible for drawing benefits under the earlier excise duty exemption/refund schemes. The scheme expressly has no relation to the erstwhile schemes and came into operation with effect from 1st July 2017 for eligible units as defined in Para 4.1, valid until 30th June 2027.

2. Definition of "Eligible Unit" — Strict Construction: The Court held that under Para 4.1 of the DIPP Notification, an "Eligible Unit" means a unit which:

  • Was eligible before 1st July 2017 to avail ab-initio exemption or exemption by way of refund under the specified notifications; and
  • Was actually availing the said exemption immediately before 1st July 2017.

Both conditions are conjunctive and mandatory. The Court found that the Petitioner's unit was not availing any of the prescribed exemption notifications immediately before 1st July 2017 — its exemption under Notification No. 56/2002-CE had already expired on 9th February 2017, and it had commenced commercial production of the expanded/new unit only on 25th September 2017, a date posterior to the GST appointed day.

3. Rejection Order Upheld: The Court upheld the Order dated 20th August 2018 passed by the Assistant Commissioner, finding it to be self-explanatory, legally correct, and consistent with the terms of the DIPP Notification. The Order had correctly concluded that the Petitioner's declared date of commercial production (25th September 2017) fell outside the scheme's eligibility criteria, and that the Petitioner had made a misdeclaration in claiming to have been availing Notification No. 01/2010-CE up to 30th June 2017.

4. No Violation of Article 14: The Court rejected the argument of violation of Article 14, holding that the impugned notifications are lucid and unambiguous. The classification of eligible units on the basis of actual availing of exemption immediately before 1st July 2017 is a clear, identifiable, and rational basis for differentiation, and courts cannot substitute their judgment for that of the legislature or executive on economic and fiscal policy matters.

5. Promissory Estoppel and Legitimate Expectation — Rejected: The Court decisively rejected the Petitioner's invocation of the doctrines of promissory estoppel and legitimate expectation, holding:

The doctrine of promissory estoppel cannot be invoked in the abstract; courts must consider all aspects, including the objective to be achieved and the public good at large. Doctrine of promissory estoppel must yield when equity so demands, if it would be inequitable to hold the Government to its promise having regard to the facts and circumstances. — Para 12.1–12.2

Relying on Kasinka Trading v. Union of India, (1995) 1 SCC 274, the Court reiterated that withdrawal of exemption "in public interest" is a matter of policy and courts would not bind the Government to its policy decision for all times.

Relying further on Union of India v. V.V.F. Ltd, (2020) 20 SCC 57, the Court held that an authority which has the power to issue a notification has the undoubted power to rescind or modify the same. Promissory estoppel cannot be invoked where public interest warrants a change in policy, and the doctrine cannot be used to compel the Government to act contrary to law or to enforce a promise made contrary to statutory provisions.

6. Exemption Notifications — Strict Construction: The Court emphatically reiterated the settled legal principle that exemption notifications are to be strictly construed. The beneficiary must squarely fall within the ambit of the exemption and fulfil all conditions prescribed thereunder. Any ambiguity in an exemption notification must be resolved in favour of the Revenue, not the assessee.

Relying on:

  • Krishi Upaj Mandi Samiti v. CCE, (2022) 5 SCC 62
  • Commissioner of Customs, Bangalore v. GE B Ltd, (2016) 15 SCC 733
  • Commissioner of Customs (Preventive) Mumbai v. M. Ambalal and Company, (2011) 2 SCC 74
  • Commr. of Customs v. Dilip Kumar & Co., (2018) 9 SCC 1

The Court held that while in the case of ambiguity in a charging provision, the benefit goes to the assessee, in the case of an exemption notification, the benefit of ambiguity must be construed strictly in favour of the Revenue.

7. Fiscal Policy — Non-Interference: The Court underscored that courts do not interfere with fiscal policy when the Government acts in public interest and no fraud or mala fides is alleged or established. The Government must be left free to determine priorities in utilisation of finances and to act in public interest while issuing, modifying, or withdrawing exemption notifications.

Relying on R.K. Garg v. Union of India, (1981) 4 SCC 675, the Court observed that economic legislation is essentially empiric in character and courts must adjudge its constitutionality by the generality of its provisions, not by crudities, inequities, or possibilities of abuse.

8. Circular No. 1060/9/2017-CX — No Independent Legal Effect: The Court held that the impugned Circular dated 27th November 2017 is merely an elucidation of the main DIPP Notification and does not prescribe fresh or new terms and conditions for granting budgetary support. Accordingly, no interference was warranted with the said Circular.

 

Important Clarifications

  1. The condition under Para 4.1 is conjunctive: A unit must both (a) have been eligible before 1st July 2017 to avail exemption, and (b) have been actually availing the said exemption immediately before 1st July 2017. Mere eligibility or entitlement, without actual availing, does not satisfy the criteria.
  2. Substantial expansion steps alone are insufficient: Undertaking steps for substantial expansion and securing DIC permissions prior to 1st July 2017 does not render a unit an "Eligible Unit" under the Budgetary Support Scheme if commercial production under the expanded capacity had not commenced and exemption had not been availed before 1st July 2017.
  3. GST Budgetary Support Scheme is a goodwill measure, not a successor right: The scheme is not a continuation of, or a substitute for, the erstwhile Central Excise exemption notifications. It is an independent measure of goodwill with its own distinct eligibility criteria and bears no legal relation to the erstwhile notifications.
  4. Rescinding notification — legal backing confirmed: The Court, proceeding on the basis that the rescinding notification and the budgetary support scheme formed part of a coherent policy framework, did not independently adjudicate the constitutional challenge to the rescinding notification, effectively treating the policy framework as valid in its entirety.
  5. Exemption notifications — no liberal construction: Unlike charging provisions in a fiscal statute, exemption notifications must be construed strictly. The court cannot expand the scope of an exemption notification by purposive or liberal interpretation in the absence of genuine ambiguity. If the conditions of the notification are not fulfilled, the party is not entitled to its benefit, irrespective of how compelling the circumstances may appear.
  6. Promissory estoppel yields to public interest: The doctrine of promissory estoppel operates subject to the qualification that it cannot prevail where equity demands otherwise and where holding the Government to its promise would be contrary to public interest or contrary to law.

 

Disposition

Both writ petitions — OWP No. 638/2018 and OWP No. 639/2018 — were dismissed as being devoid of merit. All interim directions were vacated.

Pronounced on: 30th December 2022 Coram: Hon'ble Mr. Justice Tashi Rabstan & Hon'ble Mr. Justice Mohan Lal High Court of Jammu & Kashmir and Ladakh at Jammu

 

Reportable: Yes | Speaking Order: Yes

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