2010 (12) TMI 237 - HC - Central Excise

Tax free zone - Exemption of units located in J&K - Modification in exemption scheme Held that - The industrial units were so established on the promise extended to them by the Government to provide the incentive of 100% exemption from payment of excise duty on finished goods and in lieu of this, the petitioners have altered their position by establishing the industrial units within the specified areas in the State This incentive was provided in the nature of l00% exemption from payment of excise duty for a specified period. The amendment made vide impugned notifications, has to be considered in the context of the original industrial policy which was formulated in terms of which incentive was provided for inviting the entrepreneurs to make investment in the State in specified areas. - in the present case, the exemption granted by the Government was not an exemption simplicitor but an exemption granted in pursuance to a promise extended to the investors on the basis of a policy resolution and notification issued pursuant there to dt. 14th of Nov 2002. Principles of promissory estoppel - , it clearly emerges that a promise was extended by the State Government to the petitioner Units by way of an incentive in the shape of 100% exemption from payment of excise duty and acting upon the said promise, the petitioners established their units within the specified areas in the State of J&K and have altered their position. Unilateral withdrawal of that promise is barred by the principle of equitable promissory estoppel. Misuse of exemption - the plea of revenue that some unscrupulous manufacturers were involved in bogus production for the purpose of claiming maximum exemption from the payment of excise duty, cannot be generalized but has to be case specific. The same, therefore, cannot be treated to be in the public interest as projected by the respondents. This is because there has been no individual identification of such bogus manufacturers and the action of respondents vide impugned notifications would prejudice the rights of those genuine manufacturers who on the promise of the State, have altered their position and are involved in fair ndustrial activities. Notification no. 19/2008 CE dated 27-3-2008 shall stand quashed. The petitioner-units shall continue to avail the benefit of exemption from payment of excise duty as provided in terms of the notification No.56/2002-CE dt. 14th of Nov 02. The respondent-State, however, shall be at liberty to take appropriate action in .accordance with the relevant rules against those unscrupulous manufacturers who are involved in illegal activities of alleged bogus production.

Issues Involved:
1. Promise of exemption from excise duty by the Central Government.
2. Investors' reliance on the promise and alteration of their position.
3. Nature of the exemption granted-whether it was an incentive.
4. Applicability of the doctrine of promissory estoppel.
5. Public interest in withdrawing the exemption.
6. Mechanism of the exemption-whether it was granted by way of refund.

Detailed Analysis:

Issue 1: Promise of Exemption from Excise Duty by the Central Government
The Central Government, in collaboration with the State Government of Jammu and Kashmir, issued a notification on 14th November 2002, promising 100% exemption from payment of excise duty on specified goods manufactured in specified areas within the state. This was part of an industrial policy aimed at boosting industrial activity and addressing unemployment in the state.

Issue 2: Investors' Reliance on the Promise and Alteration of Their Position
Investors, lured by the promise of excise duty exemption, established industrial units in the specified areas of Jammu and Kashmir, incurring significant costs and altering their positions. The petitioners contended that they invested substantial amounts based on the promise of a ten-year excise duty exemption, which was a critical factor in their decision to set up operations in the state.

Issue 3: Nature of the Exemption Granted-Whether it was an Incentive
The court determined that the exemption granted was not a mere exemption simplicitor but an incentive offered to attract investors to set up industrial units in the specified areas. This incentive was part of a policy resolution that extended a clear promise to the investors, making the state bound by the promise.

Issue 4: Applicability of the Doctrine of Promissory Estoppel
The doctrine of promissory estoppel was applicable in this case. The court held that the state could not unilaterally withdraw the promise of excise duty exemption, as the investors had acted upon the promise and altered their positions. The principle underlying this doctrine is that the state is bound by the promises it extends to its subjects, and it cannot resile from such promises unless overriding public interest necessitates it.

Issue 5: Public Interest in Withdrawing the Exemption
The respondents argued that the withdrawal of the exemption was in public interest due to misuse by unscrupulous manufacturers. However, the court found that the allegations of misuse were generalized and not case-specific. The court emphasized that any decision to withdraw the promise must be supported by concrete evidence of public interest, which was lacking in this case. Therefore, the court concluded that there was no supervening public interest justifying the withdrawal of the exemption.

Issue 6: Mechanism of the Exemption-Whether it was Granted by Way of Refund
The exemption was granted by way of a refund mechanism, where the excise duty paid by the manufacturers was refunded. The court rejected the respondents' argument that the exemption and refund were distinct concepts, affirming that the benefit was effectively an exemption from excise duty.

Conclusion:
The court allowed the petitions, quashing the impugned notifications (Nos. 19/2008-CE dated 27th March 2008, and 34/2008-CE dated 10th June 2008) and directed that the petitioner-units continue to avail the benefit of excise duty exemption as provided in the original notification (No. 56/2002-CE dated 14th November 2002). The state was granted liberty to take appropriate action against unscrupulous manufacturers involved in illegal activities.

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