Promissory estoppel and tax exemption: project beneficiaries obtained relief, but a non-affiliate subcontractor was denied coverage.

A State promise of tax exemption for a project may be enforceable through promissory estoppel where the assessees altered their position in reliance on that assurance and the statute permits exemption by notification subject to conditions. On that basis, the covered project entities were treated as entitled to exemption under the Karnataka Value Added Tax Act, 2003, and the State was required to issue the necessary notifications. The benefit was not extended to a subcontractor who was not within the contractual class of affiliates, because the Framework Agreement limited the concession to the company and its affiliates. The result was tax relief for the covered entities, but denial of the exemption claim for the non-affiliate.

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Issues: (i) Whether the appellants No.1 to 3 were entitled to exemption from tax under the Karnataka Value Added Tax Act, 2003 on the basis of the Framework Agreement and the earlier exemption regime under the Karnataka Sales Tax Act, 1957; (ii) Whether appellant No.4, being a subcontractor and not an affiliate of appellant No.1, was entitled to the same exemption.

Issue (i): Whether the appellants No.1 to 3 were entitled to exemption from tax under the Karnataka Value Added Tax Act, 2003 on the basis of the Framework Agreement and the earlier exemption regime under the Karnataka Sales Tax Act, 1957.

Analysis: The exemption promised in the Framework Agreement was held to relate to the project goods and the infrastructure undertaking, and the earlier notifications under the Karnataka Sales Tax Act, 1957 showed that the State had in fact extended tax concessions for the project. The Court held that section 5(1) of the Karnataka Value Added Tax Act, 2003 empowered the State to exempt specified goods by notification subject to conditions, and that the State could not avoid its contractual assurance by treating the matter as outside its power. The plea based on section 5(2) was rejected because the assessee was not a new industrial unit. The doctrine of promissory estoppel was applied, as the appellants had altered their position on the basis of the State's promise.

Conclusion: The appellants No.1 to 3 were held entitled to exemption, and the State was directed to issue appropriate exemption notifications under section 5(1) of the Karnataka Value Added Tax Act, 2003.

Issue (ii): Whether appellant No.4, being a subcontractor and not an affiliate of appellant No.1, was entitled to the same exemption.

Analysis: The Framework Agreement confined the tax benefit to the company and its affiliates. Appellant No.4 was not shown to be an affiliate, and the general notification under the Karnataka Sales Tax Act, 1957 could not be extended under the Framework Agreement to a non-affiliate as of right. The Court therefore declined to direct any exemption in its favour.

Conclusion: Appellant No.4 was held not entitled to exemption under the Framework Agreement.

Final Conclusion: The judgment granted tax relief to appellants No.1 to 3 and required fresh assessment in accordance with the exemption direction, while denying the claim of appellant No.4 and leaving it to pursue the statutory appellate remedy.

Ratio Decidendi: Where the State has made an enforceable promise of tax exemption for a project and the statute permits exemption by notification subject to conditions, promissory estoppel can compel the State to honour that promise for covered beneficiaries, but the benefit cannot be extended beyond the contractual class of eligible entities.

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