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2016 (2) TMI 6 - KARNATAKA HIGH COURT

2016 (2) TMI 6 - KARNATAKA HIGH COURT - TMI - Doctrine of promissory estoppel - Tax Incentive scheme during the sales tax regime to be continued under VAT regime or not - It is contented that the appellants had made its establishment based on the promises made by the Government of Karnataka to extend certain benefits to the assessee including the tax benefits which was in fact implemented and acted upon by issuing two different notifications dated 1.8.1998 under the KST regime in respect of infr .....

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fit agreed upon, on the pretext that it has no powers under KVAT Act to extend such exemption. The terms agreed in the FWA amounts to promissory estoppel. - It is settled law that the doctrine of promissory estoppel being an equitable doctrine, it must yield when the equity so requires.

At this juncture, it is significant to note that admittedly, Appellant Company No.4 is not an affiliate of the appellant company No.1. As per the terms of FWA, the benefit of tax exemption is available .....

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ifications under section 5(1) of the KVAT Act on the sale of goods to/by the appellants No.1 to 3 in terms of Framework Agreement dated: 03.04.1997. - Decided party in favor of assessee. - Writ Appeal Nos. 268 & 294-436 of 2015 - Dated:- 16-12-2015 - Vineet Saran And S. Sujatha, JJ. For the Appellants : Sri K P Kumar, Senior Counsel For Sri Suryanarayana T, Adv For the Respondent : Sri K M Shivayogiswamy, Govt Adv JUDGMENT In these appeals, the appellants are questioning the order dated 12.12.20 .....

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short) inter-alia challenging the re-assessment orders for the tax periods April 2005 to March 2009 and the consequent demand notices issued by the prescribed authority. 3. The appellants sought exemption from levy of value added tax as envisaged in the framework agreement, (hereinafter referred to as 'the FWA' for short), dated 3.4.1997 entered into by the respondent No.1 with appellant No.1. 4. The learned single Judge vide impugned order, disposed of the aforesaid writ petitions obser .....

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haust the remedy available under the law. 5. Being aggrieved by the said Judgment and order passed by the learned single Judge, the appellants have filed these appeals. 6. Sri. K. P. Kumar, learned senior counsel appearing for the appellants contended that Article 12.1 of the FWA dated 3.4.1997 entered into between the Government of Karnataka and the appellants provides for reduction and elimination of state and local taxes, which reads thus: "12.1 Reduction and Elimination of State and Loc .....

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mmon facilities in the Townships shall be exempt from all state and local Assessments. 12.1.2 All assessments that otherwise may be due with respect to any residential housing contemplated in the Townships shall be deferred until such time as each such residential housing or part thereof is sold to public on prorata basis at the same rate as was originally would have been. 12.1.3 The minimum invoice value for application of the entry tax waiver shall be ₹ 2,500,000, on a single invoice bas .....

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rnataka has issued the Notification dated 1.8.1998 exercising the powers conferred under section 8-A of the Karnataka Sales Tax Act, 1957, (hereinafter referred to as 'the KST Act' for short), exempting the tax payable by the dealer under section 5 of the KST Act on the sale of machinery and equipments worth more than ₹ 1 crore in each individual sale invoice and on the sale of construction material worth more than ₹ 25 lakhs in each sale invoice effected to a dealer undertak .....

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ct on turnover relating to transfer of property in goods involved in execution of works contract to a dealer undertaking infrastructure project in terms of the Government Order dated 26.12.1997. This exemption provided by the Government of Karnataka was extended from time to time till 13.1.2005. It is contended that subsequent to the KVAT Act coming into force from 1.4.2005, despite making several representations requesting the appellants to honour the exemption clause i.e., exemption promise in .....

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d appellant Nos.2 and 3 on the basis of the inducements in the FWA to execute the project, by borrowing necessary loans, and therefore unilateral withdrawal of the exemptions in the FWA is contrary to the doctrine of promissory estoppel. In other words, having led the appellants to believe by virtue of the FWA as well as subsequent exemption granted until 2005 that the project was exempted from value added tax and other taxes, appellants invested huge sums of money in the project with the expect .....

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997. The FWA envisaged total exemption from all taxes i.e., exemption of payment of value added tax on purchases as well as on sales and is clear from the conduct of the respondent No.1 from the years 1999 to 2005 when the appellants, including the sub-contractors, were granted complete exemption from payment of all taxes and having bestowed the total exemptions from taxes from the year 1999 to 2005, the respondent No.1 not only recognized its obligations under the FWA to also give effect to it, .....

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7.12.2011 only provides for reimbursement of the net value added tax paid/value added tax recovered by the appellant No.3 from the appellant No.2 in respect of works relating to Bangalore Mysore Infrastructure Corridor Project (BMIC). 10. Learned counsel further submitted that the appellants are primarily not challenging the reassessment orders in view of the FWA, exempting the appellants from payment of taxes. The learned single Judge, driving the appellants to approach the respondent No.1 for .....

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vernment of Karnataka to extend certain benefits to the assessee including the tax benefits which was in fact implemented and acted upon by issuing two different notifications dated 1.8.1998 under the KST regime in respect of infrastructure project. Having implemented the said FWA, the Government of Karnataka was bound to extend the same, even in the VAT regime. 13. It is further contended that it is the obligation on the part of the Government to honour the promises assured by the FWA and the s .....

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xes. The stance of the Government now taken would attract payment of tax by the assessee-company from its pocket as the assessee has not collected output tax, besides attracting the levy of penalty and interest which would be detrimental to the interest of the company. The Department initiating the proceedings against the company after issuing the Government Order dated 7.12.2011 belatedly would amount to breach of terms and conditions of the FWA and fastening the tax liability on the assessee-c .....

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of FWA and suddenly after the lapse of 6 years, after the KVAT Act coming into force, the Government of Karnataka issuing the Government Order extending the benefit of reimbursement of net tax, not extending the benefit of exemption of tax, would damage the entire business prospects of the company, burdening the assessee with huge tax liabilities with the interest and penalty, not due to any default on behalf of the assessee-company. 14. Learned senior counsel, in support of his contention, plac .....

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overnment of Karnataka shall extend or make available to the company and its affiliates in connection with the project, certain concessions, incentives and holidays in respect of the state and local taxes, duties. The Government of Karnataka had assured the appellantcompany and its affiliates only to extend the reduction and elimination of state and local taxes. The learned counsel would refer to the definition clause of 'Affiliate' as defined under Article 1.2 of FWA. 'Affiliate' .....

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affiliates. As per the definition of 'affiliate', the person directly or indirectly should have beneficial equity interest at least of 10% including a subsidiary as defined under section 4 of the Companies Act of India. The contractors and subcontractors working under the appellant company, are the assessees having no beneficial equity interest and are not falling within the definition of 'Affiliate' as per Clause 1.2, thus, are not entitled for any benefit flowing out from the F .....

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te of the assessee-company and is not entitled for any tax concession or tax holiday or incentive as provided under clause 1.2 of the FWA. 17. The main arguments advanced by the learned counsel appearing for the State is that under the KST regime, a general notification dated 1.8.1998 was issued by the Government of Karnataka exercising the powers under section 8-A of the KST Act exempting the tax payable by a dealer under section 5 of the KST Act on the sale of machinery and equipments worth mo .....

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cation. Another Notification No. HD.35.CSL.98[2] Bangalore dated 1.8.1998 was issued by the Government of Karnataka exercising the powers under section 8-A of the KST Act exempting the tax payable by a dealer, that is a contractor or a sub-contractor under sections 5-B, 6-B and 17[6] of the KST Act on turnover relating to transfer of property in goods involved in execution of works contract to a dealer undertaking an infrastructure project in terms of the Government Order dated 26.12.1997. These .....

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s drawn to the provisions of sections 5[1] and 5[2] of the KVAT Act, to emphasize that, section 5[1] of the KVAT Act provides for exemption only in respect of the goods and not to any class of persons and section 5[2] of the KVAT Act provides for exempting the new industrial units. 19. According to the learned counsel, the assesseecompany is entitled to tax benefit as per section 5[2] of the KVAT Act i.e., the Government of Karnataka can only reimburse or refund the net tax paid by the assesseec .....

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tax benefit/incentives/holidays, the exemption cannot be extended as provided under the KST regime, since no specific provision is available under the KVAT Act as that of the KST Act. In the absence of any power conferred on the Government of Karnataka to extend exemption under the KVAT Act, the Government of Karnataka, in its wisdom, has taken a policy decision to reimburse the net value added tax paid by the assessee-company and the value added tax paid on purchase of goods made from local reg .....

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ar. We have also perused the terms and conditions of FWA along with the provisions of the KST Act and KVAT Act. 23. Sections 5(1) and 5(2) of the KVAT Act reads thus: "5 Exemption of tax: (1) Goods specified in the First Schedule and any other goods as may be specified by a notification by the State Government shall be exempt from the tax payable under this Act [subject to such restrictions and conditions as may be specified in the notification]. (2) [Notwithstanding anything contained in t .....

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y way of refund of tax collected on purchases or sales made by such industrial unit). 24. Section 8-A of KST Act reads thus: "8-A. Power of State Government to notify exemptions and reductions of tax. (1) The State Government may, by notification, make an exemption, or reduction in rate, in respect of any tax payable under this Act, (a) on the sale or purchase of any specified goods or class of goods, at all points in the series of sales by successive dealers; or (b) by any specified class .....

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le and any other goods as may be specified by the State can be exempted from payment of tax. Section 5(2) of the KVAT Act provides for granting exemption to an industrial unit providing the tax benefit of reimbursement of the net tax paid by a new industrial unit. However, the learned Government Advocate has vehemently contended that Section 5(2) of the KVAT Act is attracted in the present case, the assessee-Company being a new industrial unit. We are not inclined to accept this argument advance .....

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s for the infrastructure project in terms of Government Order dated 26.12.1997. It is also made clear in the notification dated 1.8.1998 that the dealer undertaking an infrastructure project shall obtain and produce a certificate issued by the Infrastructure Development Department of Government of Karnataka or its authorized nominee certifying that the project is recognized by the Infrastructure Development Department in terms of the Government Order No.IDD/1UIP/97-Bangalore dated 26.12.1997. Th .....

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ses/assurance made by the FWA? 27. In pursuance to the FWA dated 3.4.1997, though general notifications were issued under the KST Act exempting the tax payable by a dealer on the sale of machinery, equipments and construction material to a dealer undertaking an infrastructure project within the State, no such exemption notification was issued under the KVAT Act on a wrong assumption that no such power is vested with the State Government to issue exemption notification to a dealer or class of per .....

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ion 5[2] of the KVAT Act. It is an admitted fact that the appellant No.1 has set up its establishment subsequent to the FWA dated 3.4.1997 on the assurance of certain benefits which were to be extended to the appellant No.1 and its affiliates. 28. It is the specific case of the Revenue that State Government is not empowered to grant exemption or reduction in rate in respect of any tax payable under the KVAT Act on the sale or purchase of any specified goods by any specified class of dealers. A r .....

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tax payable by a dealer on the sale of machinery and equipments and on the sale of construction material to a dealer undertaking an infrastructure project. The exemption that was granted under the KST regime by issuing notifications under section 8-A of the KST Act is in respect of the goods i.e., machinery, equipments and construction material, granting of exemption is subject to the sale effected to a dealer undertaking an infrastructure project. Such power of granting exemption is very well .....

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exemption of tax on the goods, subject to certain restrictions and conditions. 29. An identical issue was before the Hon'ble Apex Court in the case of the "ORIENT WEAVING MILLS PRIVATE LIMITED cited supra, which examined the constitutional validity of Rule 8(1) of Central Excise Rules 1944. Rule 8(1) of Central Excise Rules, 1944 reads thus: Rule 8 - Power to authorize exemption from duty in special cases: "(1) The Central Government may from time to time, by notification in the Of .....

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pt certain classes of persons and not classes of goods from the excise duty, the exemption if any, could have been granted in respect of any particular specified variety of cotton fabrics and not with reference to the person producing the same variety of those fabrics. In that context it is held thus: "9. It was next contended that even if it were held that R.8 is valid and constitutional, the notifications are bad in so far as they exempt certain classes of persons and not classes of goods .....

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roducing such goods. The exemption also is with reference to such goods as come within the description of excisable goods. The respondent No. 5 has been exempted from payment of excise duty in respect of goods produced by the weavers. It has not been exempted from the payment of a personal tax, like Income Tax. The exemption must, therefore, have reference to the same kind of tax which would otherwise have been leviable but for the exemption. From the notifications set out above, it is manifest .....

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e. The vires of the Statute, as already indicated, has not been questioned." Thus, it was held that Rule 8(1) of the Central Excise Rules, 1944, does not suffer from the vice of excessive delegation of power to exempt nor the notifications were bad in so far as they exempt certain classes of persons from the excise duty. 30. In the light of the said Judgment, we are of the considered opinion that the State is empowered to issue exemption notification to the appellant company on the sale of .....

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ot rely on a representation made without complying with the procedure prescribed by the relevant statute, but a citizen may and can compel the Government to do so if the factors necessary for founding a plea of promissory estoppel are established. Such a proposition would not "fall foul of our constitutional scheme and public interest". On the other hand, as was observed in Motilal Padampat Sugar Mills. case and approved in the subsequent decisions: "It is indeed the pride of cons .....

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n the case of Nestle India Limited (supra), the facts before the Apex Court was relating to the provisions of Punjab General Sales Tax Act, 1948 wherein, the Government's decision to abolish purchase tax on milk was considered in the light of the Chief Minister, Council of Ministers and the Finance Department's decision to abolish purchase tax on milk with effect from 01.04.1996, the sales tax authorities having taken the consequential action of issuing circulars, consequently, the milk .....

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e of Doctrine of Promissory Estoppel. Thus, it is held that the Government having assured the exemption of purchase tax on milk for the upliftment of milk producers, it would, in the circumstances, be inequitable to allow the State Government to resile from its decision to exempt purchase tax on milk and demand purchase tax with retrospective effect from 01.04.1996 so that the respondents cannot in any event readjust the expenditure already made. This Judgment is squarely applicable to the facts .....

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the Government Order dated 7.12.2011. There is no bar under the scheme of the KVAT Act to deny the benefit of exemption as extended under the KST Act. It is only in the circumstances, where the promise or assurance made is contrary to law or is outside the authority or power of the Government or the statute, such promise or assurance cannot be enforced. In the event of there being no statutory prohibition, issuing the exemption notification under section 5[1] of the KVAT Act on the sale of goods .....

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the present case. 35. At this juncture, it is significant to note that admittedly, Appellant Company No.4 is not an affiliate of the appellant company No.1. As per the terms of FWA, the benefit of tax exemption is available only to the appellant company, and its affiliates. The Notification NO.FD 35 CSL 98(11) Bangalore dated 01.08.1998 was issued exercising the powers conferred under section 8-A of the KST Act exempting the tax payable by a contractor or subcontractor on the turnover relating .....

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