Introduction
Plainly speaking ‘Goods and Service Tax Laws’ does not permit credit of ‘Krishi Kalyan Cess’ (hereinafter referred to as “KKC”) to be availed in new GST regime. The question of not providing the benefits of credit of KKC is further sustained by the Judgment of Assistant Commissioner of CGST & Central Excise, Chennai v Sutherland Global Services (P.) Ltd., [2020] 120 taxmann.com 295 (Madras), wherein it was held that CENVAT credit or Input Tax Credit under the GST Regime is a concession and a facility, thus not a vested right. Even if one were to rank such a right of CENVAT credit on the pedestal of a statutory right, even that right can be curtailed and regulated by conditions for availing such right. It is clear from the Scheme of Section 140 of the CGST/SGST Act, that the transition and carry forward of the Input Tax Credit of the taxes and duties paid under the earlier Indirect Tax Regimes is subject to conditions and specifications given in Section 140 of the Act, unless otherwise specifically provided otherwise. Such carry forward or set off could not be claimed on the basis of any implied intention or so called vested right theory. The unutilised ‘Education Cess’ and ‘Secondary & Higher Education Cess’ in the hands of the Assessee had become dead CENVAT Credit claim in the year 2015 itself with these levies dropped by the Finance Act 2015 and therefore, there is no question of it being claimed as a right to be carried forward and set off after 1st July, 2017 against Output GST Liability.
But the question arises – whether the taxpayer was aware that a change in law would happen or when it happen and the substantive right provided to it would be taken away. The Hon’ble High Court has stated that dead claim could not be claimed. Therefore, there is no denial that existence of claim was there, but due to legal complexities it could not be claimed.
Doctrine of Legitimate Expectation
In our Article we would like to analyse the situation under the “Doctrine of Legitimate Expectation”. As per the Judgment of Hon’ble Supreme Court in the case of Bannari Amman Sugars Ltd. Vs. Commercial Tax Officer and others reported in MANU/SC/0994/2004: 2005 (1) SCC-625, wherein it was observed that 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 practice. The doctrine of legitimate expectation has an important place in the developing law of judicial review. It is 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 stand 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. The doctrine does not give scope to claim relief straightway from the administrative authorities as no crystallised right as such is involved. The protection of such legitimate expectation does not require the fulfilment 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.
In the present situation, Krishi Kalyan Cess was denied to the tax payers and were not allowed to take the Credit in the new GST Regime due to bar imposed by Section 140 of the CGST Act, 2017. But the question arises that whether a taxpayer who have availed credit during pre-GST regime should have known that Central Goods and Service Tax, 2017 and corresponding State Acts would be enacted and the tax payer would be barred from claiming it. Therefore, as per ‘Doctrine of Legitimate Expectation’, the taxpayers are having the right to claim the Credit pertaining to ‘Krishi Kalyan Cess’.
Reference is invited to the decision in the case of National Buildings Construction Corporation Vs. S. Raghunathan and others, MANU/SC/0550/1998: (1998) 7 SCC 66, wherein the Hon’ble Supreme Court held that:
“18. The doctrine of “legitimate expectation” has its genesis in the field of administrative law. The Government and its departments, in administering the affairs of the country, are expected to honour their statements of policy or intention and treat the citizens with full personal consideration without any iota of abuse of discretion. The policy statements cannot be disregarded unfairly or applied selectively. Unfairness in the form of unreasonableness is akin to violation of natural justice. It was in this context that the doctrine of “legitimate expectation” was evolved which has today become a source of substantive as well as procedural rights. But claims based on “legitimate expectation” have been held to require reliance on representations and resulting detriment to the claimant in the same way as claims based on promissory estoppel.”
In MRF Limited, Kottayam Vs. Assistant Commissioner (Assessment), Sales Tax and Others, MANU/SC/4217/2006: 2006 (8) SCC 702, the Hon’ble Supreme Court has held as below:
“38. 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.”
Reference is also invited to the Judgment of UP Power Corporation Limited. vs. Sant Steel and Alloys, MANU/SC/4602/2007, wherein it was held as under:
“20. In this 21st century, when there is global economy, the question of faith is very important. The Government offers certain benefits to attract the entrepreneurs and the entrepreneurs act on those beneficial offers. Thereafter, the Government withdraws those benefits. This will seriously affect the credibility of the Government and would show the short-sightedness of governance. therefore, in order to keep the faith of the people, the Government or its instrumentality should abide by their commitments. In this context, the action taken by the appellant Corporation in revoking the benefits given to the entrepreneurs in the hill areas will sadly reflect their credibility and people will not take the word of the Government. That will shake the faith of the people in the governance, therefore, in order to keep the faith and maintain good governance it is necessary that whatever representation is made by the Government or its instrumentality which induces the other party to act, the Government should not be permitted to withdraw from that. This is a matter of faith.”
Therefore, on the above perusal it is clear that the Government should not step back from its promises made as the question of faith is very important in the developing economy like India.
Provisions of Finance Act
The imposition of cess had always brought a series of litigation on the issue whether the “cess” could be treated as “duty of excise” or “tax”. On this issue the first landmark decision was Barnagore Jute Factory Co. v Inspector of Central Excise 1992(57) ELT 3 (SC), in which it was held by Hon’ble Supreme Court that the imposition of “Cess” is a “duty of excise”. After this there have been a lot of litigation in considering whether different kinds of Cess like Rubber Cess, Automobile Cess, Education Cess and Sugar Cess will be a “duty of excise” or “tax” with respect to availability of Cenvat Credit under the Cenvat Credit Rules, 2004 and for granting rebate under Rule 18 of the Central Excise Rules, 2002. There has been consistency in the Judicial Pronouncements regarding this issue in which it has been held that the “cess” will be a “duty of excise”.
Section 161 of the Finance Act, 2016 first time has bought ‘Krishi Kalyan Cess’ into existence. The relevant extract is as under:
- (1) This Chapter shall come into force on the 1st day of June, 2016.
(2) There shall be levied and collected in accordance with the provisions of this Chapter, a cess to be called the Krishi Kalyan Cess, as service tax on all or any of the taxable services at the rate of 0.5 per cent on the value of such services for the purposes of financing and promoting initiatives to improve agriculture or for any other purpose relating thereto.
(3) The Krishi Kalyan Cess leviable under sub-section (2) shall be in addition to any cess or service tax leviable on such taxable services under Chapter V of the Finance Act, 1994, or under any other law for the time being in force.
(4) The proceeds of the Krishi Kalyan Cess levied under sub-section (2) shall first be credited to the Consolidated Fund of India and the Central Government may, after due appropriation made by Parliament by law in this behalf, utilise such sums of money of the Krishi Kalyan Cess for such purposes specified in sub-section (2), as it may consider necessary.
(5) The provisions of Chapter V of the Finance Act, 1994 and the rules made thereunder, including those relating to refunds and exemptions from tax, interest and imposition of penalty shall, as far as may be, apply in relation to the levy and collection of the Krishi Kalyan Cess on taxable services, as they apply in relation to the levy and collection of tax on such taxable services under the said Chapter or the rules made thereunder, as the case may be.
The reading of the Section 161 of the Finance Act, 2016 clearly shows that the levy and collection of the Krishi Kalyan Cess will be as Service Tax. Then, according to section 161, the provisions of Chapter V of Finance Act, 1994 relating to levy refunds, exemptions would also apply to the levy and collection on Krishi Kalyan Cess. The main point which have to be taken into consideration is that in the history of provisions for levy of different Cess the Legislature in every provision has made it clear that the “Cess” would be levied and collected as “duty of excise” on manufacture and when it is regarding service then the levy and collection would be as “tax” (service tax).
DOCTRINE OF PROMISSORY ESTOPPEL
The doctrine of promissory estoppel was crystallised in the decision in the case of Motilal Padampat Sugar Mills Co. Ltd. v. State of Uttar Pradesh and Ors., AIR 1979 SC 621, where the Supreme Court was dealing with the Petitioner who was engaged in the business of manufacturing and sale of sugar. The Petitioner sought to enforce an assurance given by the State Government that it would be given a partial concession in sales tax, if it sets up a new vanaspati unit. On the basis of the said assurance, the Petitioner informed the Government that it intended to set up a manufacturing unit for vanaspati and the Director of Industries had confirmed that there would be no sales tax that would be levied for a period of three years on the finished product. The assurance as given vide letter dated 14th October 1968, reads as under: “there will be no sales tax for three years on the finished product of your proposed Vanaspati factory from the date it gets power connection for commencing production.”
The said assurance was repeatedly confirmed to the Petitioner on several other occasions as well, and on one specific occasion, the then Chief Secretary of the Government, who was also the Advisor to the Governor, stated in a letter dated 22nd December 1968 that the Petitioner could “go ahead with the arrangements for setting up the factory”. Subsequently however, the State Government had second thoughts on the exemption and a meeting was called with the Petitioner. In the meeting, the Petitioner’s representative took the stand that it had already been given an exemption from sales tax as per the correspondences that it had received from the officers of the State Government. However, finally vide a letter dated 20th January, 1970, the Government went back on its policy and only partial concession in sales tax was to be given for a period of three years. The question, therefore, raised in this case by the Petitioner was whether the assurance that was given for exemption from payment of full sales tax for a period of three years could be enforced by invoking the doctrine of promissory estoppel, against the Government. The Supreme Court relied upon various judgments from the UK as also the older precedents in India, and held that the said doctrine of promissory estoppel was an equitable doctrine, also called as equitable estoppel, quasi estoppel or new estoppel. The Supreme Court held:
- No pre-existing relationship between the parties is required for enforcement of such promise or an assurance.
- If one of the parties had made, through its words or conduct, a clear and unequivocal promise intending to create legal relations, the said doctrine of promissory estoppel could be invoked.
- If the person has acted on the strength of such promise, then the promise would be binding.
The observations of the Supreme Court, speaking through Justice P.N. Bhagwati, read as under: “The true principle of promissory estoppel, therefore seems to be that where one party has by his words or conduct made to the other a clear and unequivocal promise which is intended to create legal relations or affect a legal relationship to arise in the future, knowing or intending that it would be acted upon by the other party to whom the promise is made and it is in fact so acted upon by the other party, the promise would be binding on the party making it and he would not be entitled to go back upon it, if it would be inequitable to allow him to do so having regard to the dealings which have taken place between the parties, and this would be so irrespective whether there is any pre-existing relationship between the parties or not.”
Thereafter, the Supreme Court considered the case of Union of India v. Indo-Afghan Agencies, [1968] 2 SCR 366, wherein under a Foreign Export Promotion Scheme, the exporter was entitled to import raw material equivalent to 100% FOV value of export. In the said case, the doctrine of executive necessity to resile from a promise was negated by the Supreme Court. The Supreme Court in Motilal Padampat (supra) then observed that if the Government makes a promise intending that it would be acted upon, and a person alters his position, the Government would be held to be bound by the promise. The Supreme Court held:
“36. The law may, therefore, now be taken to be settled as a result of this decision that where the Government makes a promise knowing or intending that it would be acted on by the promisees and, in fact, the promisee, acting in reliance on it, alters his position, the Government would be held bound by the promise and the promise would be enforceable against the Government at the instance of the promisees, notwithstanding that there is no consideration for the promise and the promise is not recorded in the form of a formal contract as required by Article 299 of the Constitution.”
There was a time when the doctrine of executive necessity was regarded as sufficient justification for the Government to repudiate even its contractual obligations, but let it be said to the eternal glory of this Court, this doctrine was emphatically negatived in the Indo-Afghan Agencies case and the supremacy of the rule of law was established. It was laid down by this Court that the Government cannot claim to be immune from the applicability of the rule of promissory estoppel and repudiate a promise made by it on the ground that such promise may fetter its future executive action. If the Government does not want its freedom of executive action to be hampered or restricted, the Government need not make a promise knowing or intending that it would be acted on by the promisee and the promisee would alter his position relying upon it. But if the Government makes such a promise and the promisee acts in reliance upon it and alters his position, there is no reason why the Government should not be compelled to make good such promise like any other private individual. The law cannot acquire legitimacy and gain social acceptance unless it accords with the moral values of the society and the constant endeavour of the Courts and the legislatures must, therefore, be to close the gap between law and morality and bring about as near an approximation between the two as possible. The doctrine of promissory estoppel is a significant judicial contribution in that direction.”
Further, the Supreme Court also carved the applicable exception to the doctrine of promissory estoppel to the effect that, if it is inequitable to the hold the Government to its promise in larger public interest and if the same is established by the Government, then the Court would not do so.
The Supreme Court, importantly, also observed in the case of Motilal Padampat Sugar Mills Co. (supra) on the facts of the case that the assurance and representation given to the Petitioner was confirmed by the Chief Secretary of the Government, who was also the Advisor to the Governor, and it could not be accepted that the said officer’s statement had no authority, and could not bind the Government, or that the said representation was not made on behalf of the Government. The observations of the Supreme Court in this regard are as under:
48……It was faintly contended before us on behalf of the State that this representation was not binding on the Government, but we cannot countenance this argument, because, in the first place, the averment in the writ petition that the 4th respondent made this representation on behalf of the Government was not denied by the State in the affidavit in reply filed on its behalf, and secondly, it is difficult to accept the contention that the 4th respondent, who was at the material time the Chief Secretary to the Government and also advisor to the Governor who was discharging the functions of the Government during the President’s Rule, had no authority to bind the Government. We must, therefore, proceed on the basis that this representation made by the 4th respondent was a representation within the scope of his authority and was binding on the Government. Now, there can be no doubt that this representation was made by the Government knowing or intending that it would be acted on by the appellant, because the appellant had made it clear that it was only on account of the exemption from sales tax promised by the Government that the appellant had decided to set up the factory for manufacture of vanaspati at Kanpur. The appellant, in fact, relying on this representation of the Government, borrowed moneys from various financial institutions, purchased plant and machinery from M/s. De Smith (India) Pvt. Ltd., Bombay and set up a vanaspati factory at Kanpur. The facts necessary for invoking the doctrine of promissory estoppel were, therefore, clearly present and the Government was bound to carry out the representation and exempt the appellant from sales tax in respect of sales of vanaspati effected by it in Uttar Pradesh for a period of three years from the date of commencement of the production.
Accordingly, the Supreme Court, finally concluded, on the facts of the case, that the State Government was bound to abide by the representation that it had made to the Appellant, for exemption of Sales Tax for a period of three years, by applying the doctrine of promissory estoppel.
Conclusion
As discussed above, the tax-payers are having legitimate right and claim over the credit pertains to ‘Krishi Kalyan Cess’. Suppose any litigation arises in future for Credit of Krishi Kalyan Cess, then the doctrine of “legitimate expectation” and “promissory estoppel” must be presented as it was not argued before the Hon’ble Madras High Court in the matter of Sutherland Global Services (supra).
Further, the doctrine of “legitimate expectation” and “promissory estoppel” has great role in the newly developed GST law, during the formation of the GST law or before it has been presented at different forums including the Parliament of India a clear promise was made by the Government that seamless flow of credit would be available in the chain of transactions resulting in removal of cascading effect of tax on tax thus reducing the price of the goods and services for ultimate consumers within India as well as making the export competitive. It was also promised that the law of GST would be simple and easy to comply making the dream come true for the taxpayers. The intricate provisions of GST law especially the allowability of Input Tax Credit needs to be thoroughly analysed in the light of the doctrine of “legitimate expectation” and “promissory estoppel” as per the declarations made by the Government in the Parliament of India as perceived by the citizens of this country especially the taxpayers.
It is also relevant to state herein that in the time of the programmes like “Make in India” and “Aatmanirbhar Bharat”, the Government should not step back from the rights and privileges already provided to its citizens including foreign investors, as it could hamper the concept of “Ease of doing business”.
Disclaimer: Pursuant to the Bar Council of India rules, we are not permitted to solicit work and advertise. You, the reader acknowledges that there has been no advertisement, personal communication, solicitation, invitation or inducement of any sort whatsoever from us or any of our members to solicit any work through this article. The information provided in this article is solely available at your request and is for informational purposes only, it should not be interpreted as soliciting or advisement. We are not liable for any consequence of any action taken by the reader relying on material/ information provided in the article. In cases where the reader has any legal issues, he/she must in all cases seek independent legal advice. Any information obtained or materials used from this article is completely at the reader’s volition and any transmission, receiptor use of the contents of this article would not create any lawyer-client relationship.
© 1981-2026 Sharnam Legal, All rights reserved