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Reneging on promises

M J Antony | September 08, 2004

State governments are quick to announce incentives to attract industries. However, after some time, some tend to lose their enthusiasm for several reasons. A new government may have taken over or the financial crunch may have become unbearable, for instance.

As a result, these governments go back on their word, inventing different pretexts to wriggle out of the commitment. The case of TISCO vs State of Jharkhand, decided by the Supreme Court recently, is a case in point.

The Bihar government had evolved an industrial policy in 1995 to attract investors. One of the incentives offered was sales tax exemption for eight years.

TISCO, which was manufacturing hot-rolled products, approached the government and offered to set up a cold rolling mill in Jamshedpur, investing about Rs 2,000 crore (Rs 20 billion).

In 1999, the government assured the company that it would be given exemptions from central and Bihar sales tax. Thus, commercial production started in 2000.

The same year, Jamshedpur became part of the new state Jharkhand, which had been carved out of Bihar.

Under the new dispensation, the commissioner of commercial taxes found that the hot-rolled product and the cold-rolled product were the same and, therefore, the company was not entitled to the exemption.

When the dispute landed in the high court, it ordered a new inquiry by the commissioner. The company appealed to the Supreme Court. The apex court set aside the high court order, stating that a new inquiry would only amount to harassment to the company. The new state government was directed to give the promised tax benefits to the company.

In several earlier cases also, income tax relief to attract new industries was the bone of contention. The governments disputed that the units seeking tax benefits were new.

In Textiles Machinery Corporation vs Commissioner of IT (1977), the Supreme Court laid down that the true test was not whether the new unit connoted expansion of the existing business but whether it was a new and identifiable undertaking. This principle was reiterated in Bajaj Tempo vs Commissioner of IT (1992).

In some other cases, a promise of concessional electricity tariff was the point of dispute. In Hitech Electrothermics Ltd vs State of Kerala (2003), the electricity board could not supply power to the new unit for five years and it could not operate.

The government denied the tariff benefit because the unit delayed its production. The high court accepted the state's argument.

On appeal, the Supreme Court held that a company that had set up an industrial unit on the promise that it would be given electricity rebates, could not be denied the benefit because of delays caused by the electricity board.

The Supreme Court judgement's last year in State of Gujarat vs Saurashstra Cement also dealt with the promise of power rebate.

In 1997, the Supreme Court ruled in Pawan Alloys vs UPSEB that the government could be bound by its promise, except under a few circumstances, such as if no one is put to any adverse consequences or when the industry can restore its earlier position by getting sufficient advance notice by the government.

In Sales Tax Officer vs Shree Durga Oil Mills, the Supreme Court ruled that the government could change policy resolutions if there was overwhelming public interest.

This view was reiterated in Shrijee Sales Corporation vs Union of India. Incidentally, it is not just the state governments that backtrack on their promises. In Municipal Commissioner vs Century (1995), it was a local authority that disappointed the industry.

In spite of all these cases of relationships gone sour, if the investors are still ready to put in huge sums, it should be attributed to the spirit of enterprise or, to put it cynically, the triumph of hope over experience.

But there is need for a code of conduct in this area. The governments should not suffer from amnesia, nor should a new political party coming to power try to get its pound of flesh from the industrialists. The judiciary can, of course, enforce the principle of promissory estoppel against the government, but the disputes should not be carried that far.

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