2016 (2) TMI 6 - HC - VAT and Sales Tax

Court sets aside Government Order, upholds promissory estoppel, clarifies subcontractor rights.

Nandi Infrastructure Corridor Enterprise Ltd, Nandi Economic Corridor Enterprises Ltd, Nandi Engineering Ltd, M/s Sree Ramulu Reddy And Co. Versus The State Of Karnataka, The Deputy Commissioner Of Commercial Taxes (Internal Audit & Inspection)

The court allowed the appeals in part, setting aside the Government Order dated 7.12.2011 and directing the State to issue appropriate exemption ... 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 infrastructure project. Having implemented the said FWA, the Government of Karnataka was bound to extend the same, even in the VAT regime. - Challenge to the re-assessment orders - seeking exemption from the whole of the tax payable by the first to third appellants and their subcontractors - Karnataka Value Added Tax Act, 2003 (KVAT) Held that:- the State is empowered to issue exemption notification to the appellant company on the sale of goods and cannot deny extending the exemption benefit 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 only to the appellant company, and its affiliates. - We cannot direct the State Government to issue any notification exempting the nonaffiliates of the appellant company from the tax payable under the provisions of the KVAT Act in terms of FWA. The fourth appellant, if aggrieved by any assessment/reassessment order, has to take recourse of statutory appeal available under the KVAT Act. Writ Appeals are allowed in part. - State Government is directed to issue appropriate exemption notifications 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. Issues Involved:1. Legality of the Government Order dated 7.12.2011.2. Applicability of the Framework Agreement (FWA) dated 3.4.1997.3. Doctrine of Promissory Estoppel.4. Tax exemption under the Karnataka Value Added Tax Act, 2003 (KVAT Act).5. Rights of subcontractors and affiliates under the FWA.6. Validity of reassessment orders and demand notices.Detailed Analysis:1. Legality of the Government Order dated 7.12.2011:The appellants challenged the Government Order dated 7.12.2011, which provided for reimbursement of the net VAT paid rather than granting an outright exemption. The court found that this order did not align with the assurances given in the FWA, which promised total exemption from taxes. The court set aside the Government Order, directing the State to issue appropriate exemption notifications under Section 5(1) of the KVAT Act.2. Applicability of the Framework Agreement (FWA) dated 3.4.1997:The FWA between the Government of Karnataka and the appellants provided for the reduction and elimination of state and local taxes. The court noted that the FWA included specific clauses that granted tax exemptions to the appellants and their affiliates. The court emphasized that the State was bound by these terms and could not unilaterally withdraw the exemptions without valid reasons.3. Doctrine of Promissory Estoppel:The appellants argued that the State's withdrawal of tax exemptions violated the doctrine of promissory estoppel. The court agreed, stating that the State had led the appellants to believe in the tax exemptions, which influenced their significant financial investments in the project. The court held that the State could not resile from its promises without demonstrating a supervening public interest, which was not evident in this case.4. Tax Exemption under the Karnataka Value Added Tax Act, 2003 (KVAT Act):The court examined Sections 5(1) and 5(2) of the KVAT Act and concluded that the State had the power to grant tax exemptions under Section 5(1). The court rejected the State's argument that it could only provide reimbursement under Section 5(2). The court directed the State to issue exemption notifications for the sale of goods to/by the appellants as per the FWA.5. Rights of Subcontractors and Affiliates under the FWA:The court clarified that the tax exemptions under the FWA were intended for the appellants and their affiliates, as defined in the agreement. Subcontractors who were not affiliates did not qualify for these exemptions. The court negated the arguments of appellant No.4, who was not an affiliate, and directed them to seek statutory remedies under the KVAT Act.6. Validity of Reassessment Orders and Demand Notices:The court set aside the reassessment orders and demand notices issued to appellants No.2 and 3, remanding the cases back to the prescribed authority for reassessment in light of the court's observations. The court upheld the challenge by appellant No.4, directing them to pursue statutory appeals.Conclusion:The court allowed the appeals in part, setting aside the Government Order dated 7.12.2011 and directing the State to issue appropriate exemption notifications under the KVAT Act. The court upheld the doctrine of promissory estoppel, ensuring that the State honored its commitments under the FWA. The court clarified the rights of affiliates and subcontractors, providing a clear directive for reassessment and statutory appeals where applicable.