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CASE NO.: Appeal (civil)  1610 of 2006

PETITIONER: MRF Ltd., Kottayam                                       

RESPONDENT: Assistant Commissioner (Assessment)Sales Tax & Ors.                                      

DATE OF JUDGMENT: 21/09/2006

BENCH: ASHOK BHAN & MARKANDEY KATJU

JUDGMENT: J U D G M E N T

BHAN, J.

       The writ petitioner in the High Court has filed this appeal  against the order passed by the Division Bench of the High  Court of Kerala.  The Division Bench by the impugned order  has affirmed the decision of the Single Judge in dismissing the  writ petition filed by the appellant herein (hereinafter referred  to as the "MRF").  

FACTS

       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 Vadavathoor.   

       The 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 promotion.   

       Acting 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/diversification.

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       On 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:-   

"(a)    SRO No. 1729/93 \026 In exercise of the  powers conferred by Section 10 of the Kerala  General Sales Tax Act, 1968, (Act 15 of 1963)  and in supersession of the notifications  mentioned in the Schedule the Government of  Kerala having considered it necessary in public  interest so to do hereby make the following tax  exemption to industrial units and/or reduction  in the rate of tax payable on the sale or  purchase, as the case may be, of goods by  such industrial units, subject to the conditions  and restrictions specified herein namely:-  \005\005\005\005\005   \005\005\005\005\005\005        \005\005\005\005\005..   \005\005\005\005\005  \005\005\005\005\005\005        \005\005\005\005\005..

(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         \005\005\005\005..      \005\005\005\005.       \005\005\005\005        \005\005\005 \005..  \005\005\005\005..      \005\005\005\005.       \005\005\005\005        \005\005\005\005.. (c)     10. Conditions and Restrictions -         (i)     \005\005\005\005..      \005\005\005\005.       \005\005\005\005        \005 \005\005\005..                   \005\005\005\005..      \005\005\005\005.       \005\005\005\005        \005 \005\005\005..           (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 diversification.                 \005\005\005\005..      \005\005\005\005.       \005\005\005\005        \005 \005\005\005..                   \005\005\005\005..      \005\005\005\005.       \005\005\005\005        \005 \005\005\005..   10.     (b) Eligibility certificate for medium and large  scale industries assisted by the Kerala State

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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 \026 For the purposes of  this notification,  (i)             \005\005\005\005..      \005\005\005\005.       \005\005\005\005        \005 \005\005\005..                   \005\005\005\005..      \005\005\005\005.       \005\005\005\005        \005 \005\005\005..   (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 products.   

       On 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

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pursuant to the expansion of the existing facility.   

       Pursuant 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 products.   

       In accordance with the provisions of SRO No. 1729/93  the eligibility certificate evidencing the MRF’s 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 \026 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  29.12.2003.   

       On 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.)

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       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  Commissioner’s letter/order stating that:-

"Ref:   1. This Office Notice dated 17.1.2000. 2. Reply No. M.199/SGMK/A1204/4.2.2000.

       Referring 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 withdrawn.  

       Assistant 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 MRF.   

       MRF 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.  

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               Mr. F.S. Nariman, learned senior counsel appearing  for the appellant has submitted that the High Court has erred  on facts as well as in law in dismissing the appeal filed by the  appellant.  It is contended by him that the Division Bench of  the High Court has erroneously  stated that "there is no  factual foundation" for the plea of promissory estoppel.  The  averments of the writ petition clearly show that the plea of  promissory estoppel and legitimate expectation has been  specifically taken in the writ petition.  Further, the finding of  the High Court that "there is nothing to show that the  petitioner MRF had effected huge investments" is also factually  incorrect.  This is evident from the MOU dated 6.10.1993  between MRF and the State Government; the addendum dated  10.4.1996 to the MOU entered into between MRF and the  State Government wherein it is admitted by the State of Kerala  that the goods like tyres, flaps, pre-cured tread rubber etc.    were manufactured by the appellant under diversified facilities  pursuant to the expansion of the existing facilities; the  eligibility certificate dated 10.11.1997 as well as the exemption  order dated 30.6.1988 wherein it is stated that the appellant  had invested Rs. 74,12,77,529/-.  That the High Court is  further erred in holding that the notification being statutory  and "no plea of estoppel will lie against a statutory  notification".  The doctrine of promissory estoppel has been  repeatedly applied in the courts in India including the  Supreme Court in respect to statutory notification.  In support  of this submission he cited case laws as well.  It is further  submitted that plea of promissory estoppel is in the nature of  an equitable plea and must be determined in the facts and  circumstances of each case.  That the principle underlying  legitimate expectation is based on Article 14.  Any action taken  by the State which goes against the rule of fairness is liable to  be struck down.  Any administrative or executive action of the  State which is arbitrary or unjust cannot be sustained as it  violates Article 14 of the Constitution of India.  It is also  contended that in any event the State Government did not  have the power to make a retrospective amendment to SRO  1729/93 affecting the rights already accrued to the appellant  under the said notification.  It is further contended by him  that the High Court has misconstrued and misunderstood the  true purpose and meaning of the Notifications bearing No.  SRO 1729/93, SRO 38/98 and SRO 1092/99.  Lastly, it is  contended that in any event it is well settled principle that the  authorities under the Act could not sit in judgment over or  ignore the order granting exemption from payment of sales tax  by the highest tax authority, i.e., the Board of Revenue,  especially when the order passed by the Board of Revenue  granting exemption to the appellant has never been amended  or withdrawn.

       As against this Shri T.L.V. Iyer, learned senior counsel  appearing for the State of Kerala has contended that having  regards to the facts of the case, no question of promissory  estoppel, legitimate expectation or violation of Article 14 of the  Constitution of India can arise.  SRO 1729/93 itself has  specifically provided that the state will have the power to add  to the negative list.  The appellant was therefore well aware  that the benefit of SRO 1729/93 was a precarious one liable to  be cancelled or varied at any time.  In addition, Section 10(3)  of the Act also enables the State to withdraw or cancel any  exemption though prospectively.  Therefore, according to him,  there has been no arbitrary action on the part of the State in  issuing SRO 38/98 with prospective effect.  It was well within  their powers under Section 10(3) as well as under clause (g) of  the negative list in SRO 1729/93.  Referring to the decisions of

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this Court in Kasinka Trading  Vs. Union of India,  1995 (1)  SCC 274 and Sales Tax Officer Vs. Shree Durga Oil Mills,  1998 (1) SCC 572 it is contended that where public interest is  involved, no rule of promissory estoppel can bind the  Government.  That the promissory estoppel does not operate  against a statute.   That in view of the defeasible nature of the  right granted by SRO 1729/93, no right came to vested in the  appellant by reason thereof to justify the invocation of the  principle of promissory estoppel; nor could they have any  legitimate expectation that the exemption would be continued.   That SRO 38/98 was issued in public interest.  Elaborating  the submission, it is contended by him that SRO 38/98 was  issued to clarify the doubt which had arisen with reference to  compound rubber in SRO 1729/93.  A comparison of SRO  1729/93 and SRO 38/98 will show that the making of  compound rubber was not "manufacture" even under SRO  1729/93;  nevertheless, the state has granted the exemption  till after the doubt was clarified on 15.1.1998 by SRO 38/98.   Since no right could have vested in the appellant because of  the precarious nature of the exemption granted by SRO  1729/93, it cannot be said that SRO 38/98 has taken away  any vested right, more particularly because it is made  expressly prospective.   Regarding the Board of Revenue order  dated 30.6.1998 it is submitted that the same has to be read  in conjunction with SRO 1729/93 as amended by SRO 38/98.   That the Board of revenue could not have granted a benefit  which was not otherwise available to the appellant under the  prevailing notifications.  

       According to him, so far as SRO 1092/99 is concerned, it  did not confer any new right.  It only preserved the existing  right.  By the said order what the Government did was to  change the industrial policy and to do away with exemptions  which were otherwise being given to new/existing industrial  units, which was taken away w.e.f. 1.1.2000.  At the same  time, the units which had been set up pursuant to the  incentives granted by the earlier notifications had to be  protected and accordingly it was provided that such units will  continue to enjoy the incentives for their full term.   

       The finding recorded by the High Court that "there is no  factual foundation" for the plea of promissory estoppel are  contrary to the averments made in the writ petition filed in the  High Court.  The averments made in the writ petition clearly  show that the promissory estoppel and legitimate expectation  have been specifically pleaded.   Paras 3, 4, 6 and grounds (D)  and (F) of the writ petition clearly demonstrate that the  appellant had taken the plea of promissory estoppel against  the State as well as legitimate expectation in its favour.  In  para 3  of the writ petition it was pleaded that the appellant  acting on the promises, assurances and undertaking made by  the State of Kerala had invested more than Rs. 90 crores and  carried out substantial expansion of its existing industrial  unit.  In Ground (F) of the writ petition the appellant has  clearly stated that "the respondents  are barred by the rule  and principle of promissory estoppel to deprive or deny  exemption to the petitioner from tax on the purchase turnover  or rubber used in the manufacture of compound rubber in any  manner."  Further, in the same paragraph it was pleaded by  the appellant that "respondents are barred and precluded from  taking any such proceedings by virtue of the principle of  promissory estoppel as well as legitimate expectation."  The  finding recorded by the High Court that the appellant had not  taken the plea of promissory estoppel being contrary to the  facts of the case is set aside.  

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The finding recorded by the Division Bench that there  was nothing to show that the MRF had effected huge  investments is also factually incorrect.  The MOU dated  6.10.1993 between MRF and the State Government and the  addendum dated 10.4.1996 to the MOU dated 6.10.1993  clearly show that the appellant had made huge investment.   The eligibility certificate dated 10.11.1997 issued under SRO  1729/93 by the Director of Industries and Commerce after  investigation specified the details of the capital investment  made by the appellant and the capacities added to the MRF to  the tune of Rs. 74,12,77,529/-.  The exemption Order dated  30.6.1998 also issued under SRO 1729/93 by the Board of  Revenue again specifically stated the capacities added and the  total amount of eligible investment made by the MRF.   According to the exemption certificate the appellant had made  additional fixed capital investment on expansion-cum- diversification to the tune of Rs. 74,12,77,529/- and its  annual installed capacity increased  manifolds.  The difference  of the annual installed capacity before and after expansion- cum-diversification as shown in the order granting exemption   as under:

Sl.No. Items Before expansion- cum-diversification After expansion- cum-diversification 1. Compound rubber 33984 MT 77760 MT 2. Tubes   5640 MT 11400 MT 3. Repair materials    876 MT  1620 MT 4. Tread rubber  5040 MT  8100 MT 5. Tyres

636000 Nos. 6. Flaps

780000 Nos. 7. Precured tread rubber

10440 MT

In exemption order dated 30.6.1998 the appellant was  found eligible for sales tax exemption to the tune of Rs.  74,12,77,529/- for the period of 7 years from 30.12.1996 to  29.12.2003.  The finding thus recorded by the High Court that  the appellant had not made any investment is erroneous in  the teeth of the facts, enumerated above.  The appellant had

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made additional fixed capital investment on expansion-cum- diversification entitling him to seek exemption under SRO  1729/93.  

       On a co-joint reading of SRO 1729/93, SRO 38/98 and  SRO 1092/99 the intention of the Government does not seem  to take away the benefits of exemption in respect of  manufactured products including compound rubber after  15.1.1998 (the date on which SRO 38/98 was issued) where  commercial production had commenced prior to that date.  By  virtue of the certificate of eligibility and by virtue of the  exemption order granted pursuant to SRO 1729/93 dated  3.11.1993, MRF Ltd. had acquired the right to avail of tax  exemption for a fixed period of 7 years from 30.12.1996 to  29.12.2003, in respect of products manufactured from raw  rubber, including compound rubber.  In the eligibility  certificate and in the exemption order the date of  commencement of commercial production of all manufactured  products, including compound rubber is stated to be  30.12.1996.  The Government had itself recognized that the  benefit of tax exemption for the fixed period of 7 years would  remain available to the units which have fulfilled the  prescribed conditions, and have obtained the eligibility  certificate etc. and have commenced commercial production  before the date of any amendment to SRO 1729/93.  This had  been stated by the State of Kerala in its counter affidavit  before the High Court.  The relevant portion of which reads:

"As per letter No. 21002/B2/GD dated  28.08.93 the Government had clarified  that the eligibility of an industrial unit for  exemption has to be decided with  reference to the notification existing on  the date of commencement of commercial  production.  The petitioner had  commenced commercial production  under the expansion/diversification and  modernization programme on  30.12.1996."

         In any case the doubt, if any,  was set at rest by the  Government itself when, in Gazette Notification SRO 1092/99  dated 31.12.1999, it was stated that the benefit of exemption  under SRO 1729/93 would not be available after 1.1.2000  with a saving clause, reproduced earlier, to the effect that  industrial unit which had been sanctioned  exemption/deferment as per notification SRO 1729/93 before  the 1st day of January, 2000 shall continue to enjoy the  concession for the full period covered by the order of  exemption/deferment.

       The Division Bench misread SRO 1092/99.  The High  Court had recorded the following finding in regard to this in  para 14 of the judgment, which reads:

"But it has been specifically stated that in  the case of units which have already  commenced commercial production or  taken upon effective steps to set up  industrial units prior to 1.1.2000 will be  allowed benefit of exemption or deferment  granted as per notification SRO 1729/93.   Petitioner therefore would get only the  benefits available under SRO 1729/93

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and nothing more and nothing less.  Ext.  P-5 in our view would not come to the  rescue of the petitioner even by the  application of clause 2 of SRO 1092/99.   We reiterate the order passed by the  Board of Revenue cannot override the  statutory notification issued by the  Government."    

The observations made by the High Court that clause (2)  of SRO 1092/99 would not come to the rescue of the appellant  is wrong. It is clearly stated in clause (2) of SRO 1092/99 that  the industrial unit which had commenced production before  the 1st day of January, 2000 shall continue to enjoy the  concession for the full period covered by the order of  exemption/deferment. SRO 1092/99 has not been withdrawn  or modified till this date.

        In any case MRF’s accrued right to exemption was not  taken away or in any way affected by the amending  notification SRO 38/98; which merely applied to those units  which were established or expanded after 15.1.1998.   If ann  industrial unit had been set up prior to 15.1.1998 and had  also commenced commercial production prior to 15.1.1998  then the amending notification SRO 38/98 would have no  retrospective application at all.   The notification SRO 38/98 is  prospective in operation which is evident by its mere reading  as it specifically mentioned therein that:

"notification shall be deemed to have  come into force with effect from the 1st  day of January, 1998."

The provisions of the Act or notification are always  prospective in operation unless the express language renders  it otherwise making it effective with retrospective effect.  This  Court in S.L. Srinivasa Jute Twine Mills (P) Ltd. Vs. Union  of India & Anr., 2006 (2) SCC 740, has held that it is a settled  principle of interpretation that:

"retrospective  operation is not taken to  be intended unless that intention is  manifested by express words or necessary  implication; there is a subordinate rule to  the effect that a statute or a section in it  is not to be construed so as to have larger  retrospective  operation than its language  renders necessary."

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

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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." (See Delhi Cloth &  General Mills Co. Ltd. v. CIT, AIR 1927 PC  242 at p. 244).

"Every statute, it has been said", observed  Lopes, L.J.,

"which takes away or impairs vested  rights acquired under existing laws, or  creates a new obligation or imposes a  new duty, or attaches a new disability in  respect of transactions already past,  must be presumed to be intended not to  have a retrospective effect." (See Amireddi  Raja Gopala Rao v. Amireddi  Sitharamamma, 1965 (3) SCR 122).

As a logical corollary of the general rule, that  retrospective operation is not taken to be  intended unless that intention is manifested  by express words or necessary implication,  there is a subordinate rule to the effect that a  statute or a section in it is not to be construed  so as to have larger retrospective operation  than its language renders necessary. (See Reid  v. Reid (1886) 31 Ch D 402). In other words  close attention must be paid to the language of  the statutory provision for determining the  scope of the retrospectivity intended by  Parliament. (See Union of India v. Raghubir  Singh, 1989 (2) SCC 754). The above position  has been highlighted in Principles of Statutory  Interpretation by Justice G.P. Singh. (10th  Edition, 2006 at pp 474 and 475).

                       Xxx                     xxx

20.  Above being the legal position, the  judgments of the High Court are indefensible  and are set aside. The appellants shall be  entitled to the protection as had accrued to

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them prior to the amendment in 1997 for the  period of 3 years starting from the date the  establishment was set up irrespective of repeal  of the provision for such infancy protection."

        The view that SRO 38/98 did not affect MRF’s pre- existing and accrued right to enjoy tax exemption from the full  period of 7 years w.e.f. 30.12.1996 to 29.12.2003  was  accepted and recognized by the assessing authority himself  which can be seen from the order of the assessing authority  dated 1.3.2000  whereby the proposal to deny tax exemption  was  "dropped as the expansion has been completed on  30.12.1996".  This order was passed in respect of notice dated  17.1.2000 issued to the appellant whereby the proposal to  continue tax was dropped.  This order has been reproduced in  the earlier part of the judgment.   

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  notifications.  Reference may be made to Pournami Oil Mills  Vs. State of Kerala, 1986 (Supp.) SCC 728.  In the said case  the Government of Kerala by an order dated 11.4.1979 invited  small scale units to set up their industries in the State of  Kerala and with a view to boost industrialization, exemption  from sales tax and purchase tax was extended as a concession  for a period of five years, which was to run from the date of  commencement of production.  By a subsequent notification  dated 29.9.1980, published on Gazette on 21.10.1980,  the  State of Kerala withdrew the exemption relating to the  purchase tax and confined the exemption from sales tax to the  limit specified in the proviso of the said notification.  While  quashing the subsequent notification, it was observed:

"If in response to such an order and in  consideration of the concession made  available, promoters of any small-scale  concern 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 of  Kerala purports to act differently. Several  decisions of this Court were cited in  support of the stand of the appellants  that in similar circumstances the plea of  estoppel can be and has been applied and  the leading authority on this point is the  case of M.P. Sugar Mills v. State of U.P..  On the other hand, reliance has been  placed on behalf of the State on a  judgment of this Court in Bakul Cashew  Co. v. Sales Tax Officer, Quilon, 1986 (2)  SCC 365. In Bakul Company’s (supra)  case this Court found that there was no  clear material to show any definite or  certain promise had been made by the  Minister to the concerned persons and  there was no clear material also in  support of the stand that the parties had  altered their position by acting upon the  representations and suffered any  prejudice. On facts, therefore, no case for

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raising the plea of estoppel was held to  have been made out.  This Court  proceeded on the footing that the  notification granting exemption  retrospectively was not in accordance  with Section 10 of the State Sales Tax Act  as it then stood, as there was no power to  grant exemption retrospectively. By an  amendment that power has been  subsequently conferred. In these appeals  there is no question of retrospective  exemption. We also find that no reference  was made by the High Court to the  decision in M.P. Sugar Mills’ case, 1979  (2) SCC 409. In our view, to the facts of  the present case, the ratio of M.P. Sugar  Mills’ case directly applies and the plea of  estoppel is unanswerable.

         Xxx                           xxxx

\005Such exemption would continue for the  full period of five years from the date they  started production. New industries set up  after 21.10.1980 obviously would not be  entitled to that benefit as they had  noticed of the curtailment in the  exemption before they came to set up  their industries."                                                         [Emphasis supplied]

This decision was followed by a three-Judge Bench in the  case of State of Bihar Vs. Usha Martin Industries Ltd., 1987  (Supp.) SCC 710 where it was stated that the matter stands  concluded by the decision in Pournami Oils Mill’s case  (supra).  In Shri Bakul Oil Industries Vs. State of Gujarat,   AIR 1987 SC 142, it was observed in para 11:

" \005..The exemption granted by the  Government, as already stated, was only  by way of concession for encouraging  entrepreneurs to start industries in rural  and undeveloped areas and as such it  was always open to the State Government  to withdraw or revoke the concession. We  must, however, observe that the power of  revocation or withdrawal would be  subject to one limitation viz. the power  cannot be exercised in violation of the  rule of Promissory Estoppel. In other  words, the Government can withdraw an  exemption granted by it earlier if such  withdrawal could be done without  offending the rule of Promissory Estoppel  and depriving an industry entitled to  claim exemption from payment of tax  under the said rule. 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 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

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having regard to the fact that Promissory  Estoppel cannot be claimed against a  statute\005".  

Answering the question as to whether the Board is  restrained from withdrawing the rebate prematurely before the  completion of three/five years period by virtue of doctrine of  promissory estoppel, this Court in Pawan Alloys & Casting  Pvt. Ltd. Vs. U.P. State Electricity Board,  1997 (7) SCC  251,  held:

"10.  It is now well settled by a series of  decisions of this Court that the State  authorities as well as its limbs like the  Board covered by the sweep of Article 12  of the Constitution of India being treated  as ’State’ within the meaning of the said  Article, can be made subject to the  equitable doctrine of promissory estoppel  in cases where because of their  representation the party claiming  estoppel has changed its position and if  such an estoppel does not fly in the face  of any statutory prohibition, absence of  power and authority of the promisor and  is otherwise not opposed to public  interest, and also when equity in favour  of the promisee does not outweigh equity  in favour of the promisor entitling the  latter to legally get out of the promise.

        Xxx                            xxxx

24.     \005..We, therefore, agree with the  finding of the High Court on Issue No. 1  that by these notifications the Board had  clearly held out a promise to these new  industries and as these new industries  had admittedly got established in the  region where the Board was operating,  acting on such promise, the same in  equity would bind the Board. Such a  promise was not contrary to any  statutory provision but on the contrary  was in compliance with the directions  issued under Section 78A of the Act.  These new industries which got attracted  to this region relying upon the promise  had altered their position irretrievably.  They had spent "large amounts of money  for establishing the infrastructure, had  entered into agreements with the Board  for supply of electricity and, therefore,  had necessarily altered their position  relying on these representations thinking  that they would be assured of at least  three years’ period guaranteeing rebate of  10% on the total bill of electricity to be  consumed by them as infancy benefit so  that they could effectively compete with  the old industries operating in the field  and their products could effectively  compete with their products. On these

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well-established facts the Board can  certainly be pinned down to its promise  on the doctrine of promissory estoppel."

[Emphasis supplied]

        In a recent judgment in the case of Mahabir Vegetable  Oils (P) Ltd. Vs. State of Haryana, 2006 (3) SCC 620,  this  Court in para 25 observed that "it is beyond any cavil that the  doctrine of promissory estoppel operates even in the legislative  field."  This was in connection with a statutory notification  under the Haryana General sales Tax Act.   

In Kasinka Trading’s 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. 15.1.1998.

       Besides, 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 raised.  In the case of  Rom Industries (supra) the deciding factor was that the  exemption notification in question had been itself held to be  unconstitutional in an earlier case as violative of Articles 301  and 304 of the Constitution of India and, therefore, could not  form the basis of any right. The observation made in para 8 of  that judgment have to be read in that context.   Besides, the  State Government in that case had no option except to  withdraw the notification.  It is so observed in that judgment  in para 9:

"\005The State Government, in view of the  decision of this Court had no other option  but to place edible oils in the Negative  List.  The questions whether Shree  Mahavir Oil Mills, 1996 (11) SCC 39  has  been rightly decided or not and whether it  is in conflict with the principles  enunciated in Video Electronics,  1990 (3)  SCC 87, are moot.  But while the decision  stands, the State Government is bound to  comply with it."    

        In Kasinka Tading ’s case (supra),  the notification in  question was a customs exemption Notification for a fixed  period.  The judgments in Pournami Oils Mills’s case (supra)  and Shri Bakul Oil Industries’s case (supra) were  distinguished in the said case on the ground that the  notifications in those cases were incentive notifications.  It was  observed in para 27:

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"  Again in Bakul Oil Industries (supra) it  was the incentive to set up industries in a  conforming area that the exemption had  been granted and the Court held that the  Government could withdraw an  exemption granted by it earlier only if  such withdrawal could be made without  offending the rule of promissory estoppel  and without depriving an industry  entitled to claim exemption for the entire  specified period for which exemption had  been promised to it at the time of giving  incentive. Both these cases therefore  cannot advance the case of the appellant  and are distinguishable on facts because  the exemption notification under Section  25 of the Act which was issued in this  case did not hold out any incentive for  setting up of any industry to use PVC  resins and on the other hand had been  issued in exercise of the statutory  powers, in public interest and  subsequently withdrawn in exercise of  the same powers again in public interest.  In our opinion, no justifiable prejudice  was caused to the appellants in the  absence of any unequivocal promise by  the Government not to act and review its  policy even if the necessity warranted and  the "public interest" so demanded. Thus,  in the facts and circumstances of these  cases, the appellants cannot invoke the  doctrine of promissory estoppel to  question the withdrawal notification  issued under Section 25 of the and Act."

[Emphasis supplied]

The decision in Kasinka Trading (supra) has been  distinguished in the later decision by this Court in State of  Punjab Vs. Nestle India Ltd., 2004 (6) SCC 465, on the  ground of the inherent nature of an exemption notification  issued under Section 25 of the Customs Act.  Even in respect  of a notification under Section 25 of the Customs Act this  Court has taken the view that the withdrawal even of such a   notification must not be "arbitrary" or "unreasonable" (see Dai- Ichi Karkaria Ltd. Vs. Union of India, 2000 (4) SCC 57).

       The principle underlying legitimate expectation which is  based on Article 14 and the rule of fairness has been re-stated  by this Court in Bannari Amman Sugars Ltd. Vs.  Commercial Tax Officer, 2005 (1) SCC 625.  It was observed  in paras 8 & 9:

" A person may have a ’legitimate  expectation’ of being treated in a certain  way by an administrative authority even  though he has no legal right in private  law to receive such treatment. The  expectation may arise either from a  representation or promise made by the  authority, including an implied  representation, or from consistent past

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practice. The doctrine of legitimate  expectation has an important place in the  developing law of judicial review. It is,  however, not necessary to explore the  doctrine in this case, it is enough merely  to note that a legitimate expectation can  provide a sufficient interest to enable one  who cannot point to the existence of a  substantive right to obtain the leave of  the court to apply for judicial review. It is  generally agreed that ’legitimate  expectation’ gives the applicant sufficient  locus standi for judicial review and that  the doctrine of legitimate expectation to  be confined mostly to right of a fair  hearing before a decision which results in  negativing a promise or withdrawing an  undertaking is taken. The doctrine does  not give scope to claim relief straightway  from the administrative authorities as no  crystallized right as such is involved. The  protection of such legitimate expectation  does not require the fulfillment of the  expectation where an overriding public  interest requires otherwise. In other  words, where a person’s legitimate  expectation is not fulfilled by taking a  particular decision then the decision  maker should justify the denial of such  expectation by showing some overriding  public interest. (See Union of India and  Ors. v. Hindustan Development  Corporation and Ors. (AIR 1994 SC 988).

9.      While the discretion to change the  policy in exercise of the executive power,  when not trammelled by any statute or  rule is wide enough, what is imperative  and implicit in terms of Article 14 is that  a change in policy must be made fairly  and should not give the impression that it  was so done arbitrarily or by any ulterior  criteria. The wide sweep of Article 14 and  the requirement of every State action  qualifying for its validity on this  touchstone irrespective of the field of  activity of the State is an accepted tenet.  The basic requirement of Article 14 is  fairness in action by the State, and non- arbitrariness in essence and substance is  the heart beat of fair play. Actions are  amenable, in the panorama of judicial  review only to the extent that the State  must act validly for discernible reasons,  not whimsically for any ulterior purpose.  The meaning and true import and  concept of arbitrariness is more easily  visualized than precisely defined. A  question whether the impugned action is  arbitrary or not is to be ultimately  answered on the facts and circumstances  of a given case. A basic and obvious test  to apply in such cases is to see whether  there is any discernible principle  emerging from the impugned action and if

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so, does it really satisfy the test of  reasonableness."                                                         [Emphasis supplied]

       MRF 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 State’s 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 tax.   Section 10 reads: "10. Power of Government to grant  exemption and reduction in rate of tax.--(1)  The Government may, if they consider it  necessary in the public interest, by notification  in the Gazette, make an exemption or  reduction in rate, either prospectively or  retrospectively in respect of any tax payable  under this Act, (i) on the sale or purchase of any specified  goods or class of goods, at all points or at a  specified point or points in the series of sales  or purchases by successive dealers, or (ii) by any specified class of persons in regard  to the whole or any part of their turnover. (2) Any exemption from tax, or reduction in the  rate of tax, notified under Sub-section (1),-- (a) may extend to the whole State or to any  specified area or areas therein, (b) may be subject to such restrictions and  conditions as may be specified in the  notification. (3) The Government may by notification in the  Gazette, cancel or vary any notification issued  under Sub-section (1).

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Under Section 10(1) of the Act the State Government has  the power to make an exemption or reduction in rate either  prospectively or retrospectively in respect of any tax payable  under this Act.  However, the power of Government under  Section 10(3) by notification in the Gazette to cancel or vary  any notification issued under Section 10(3) cannot be  exercised retrospectively.  This is the view taken by the Kerala  High Court in M.M. Nagalingam Nadar Sons Vs. State of  Kerala, 1993 (91) STC 61, where the learned Single Judge of  the High Court has stated as under:

" Power is thus given under sub-section  (1) to make an exemption or reduction in  rate either prospectively or retrospectively  in respect of any tax payable under the  Act.  Sub-section (3) enables the  Government to cancel or vary any such  notification issued under sub-section (1).   Significantly, sub-section (3) is silent  about retorpsectivity for any notification  issued under it.  Thus while sub-section  (1) authorizes the grant of an exemption  or reduction in rate with retrospective   effect in respect of any tax payable under  the Act, sub-section (3) does not provide  for any cancellation or variation  retrospectively.  In issuing notifications  under Section 10, the Government is  exercising only delegated powers.  While  the legislature has plenary powers to  Legislate prospectively and  retrospectively, a delegated authority like  the Government acting under the powers  conferred on it by the enactment  concerned, can exercise only those  powers which are specifically conferred.   Therefore, if it is intended to confer on  the Government a power to  cancel/withdraw/vary an exemption or  reduction in rate of tax, with retrospective  effect, such a power has to be specifically  conferred, and in the absence of any such  specific conferment of power in sub- section (3) of Section 10, the Government  cannot issue notifications there under  affecting a vested right or imposing an  obligation to act retrospectively.  I have  already mentioned that this provision is  significantly silent on such a power.   Equally, the Government has also no  power to levy a tax with retrospective  effect.  The retrospective cancellation/  withdrawal of an exemption or a  reduction in rate tantamounts to levy of a  tax, or tax at a higher rate from a date in  the past, for which the Government has  no power under sub-section (3)."   

                                               [Emphasis supplied]

This judgment of the learned Single Judge was approved  by a Division Bench of the Kerala High Court in Dy.  Commissioner (Law), Board of Revenue (Taxes) Vs. MRF  Ltd., 1998 (109) STC 306, by observing thus:

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"We are in full agreement with the view  taken by the learned Single Judge in  M.M. Nagalingam Nadar Sons vs. State of  Kerala, 1993 (91) STC 61 (Ker) that  Government has no power under Section  10(3) of the Act to issue a notification  with retrospective  effect."

  Before this Court the State of Kerala did not dispute  the above finding (See 2000(9) SCC 286)  where the State’s  appeal was dismissed.  That Section 10(3) of the Keral 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 manufacturer’s 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 void.

We 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.  

For the reasons stated above, the appeal is accepted,  order of the High Court is set aside.   Writ of mandamus is  issued restraining the respondents from taking any  proceedings against MRF Ltd. contrary to or inconsistent with  the eligibility certificate dated 10.1.1997 and the exemption  order dated 10.6.1998.  Parties shall bear their own costs.