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The Supreme Court, in its combined verdict in Hero MotoCorp vs Union of India and Sun Pharma vs Union of India, has clarified that the doctrine of promissory estoppel does not apply to the government’s actions taken in larger public interest.
The doctrine says that if an unmet promise causes financial injury to the other party, the promiser should compensate the other party.
The Hero MotoCorp and Sun Pharma cases relate to a government notification of 2003 that gave a 10-year excise duty exemption to companies that set up manufacturing units in specified ‘backward states’ including Uttaranchal (now Uttarakhand), Himachal Pradesh and Sikkim — provided the units were established within 10 years of the notification. The incentive took effect from the date of commencement of production.
Many companies set up units in Uttarakhand and Himachal Pradesh; two-wheeler manufacturer Hero MotoCorp and Sun Pharma set up plants in Haridwar. Hero MotoCorp’s unit commenced commercial production on April 7, 2008, so it was entitled to claim the incentive until 2018.
Along the way came the Goods and Services Tax, on July 1, 2017. The excise duty waiver scheme was scrapped and eligible units would get only “58 per cent reimbursement” from the union budget.
Hero MotoCorp and Sun Pharma challenged this ‘breach of promise’ before the High Court of Delhi and the High Court of Sikkim, respectively, and lost. The matter escalated to the apex court.
The Supreme Court bench, comprising judges BR Gavai and BV Nagaratna, heard the arguments of advocates S Ganesh (for Hero MotoCorp), V Sridharan (Sun Pharma), and N Venkatraman, Additional Solicitor General for the government, and said that the promissory estoppel would not apply in cases where a government acted in larger public interest.
It said: “This court, in a catena of judgments, including two Constitution bench judgments, a four-judge bench judgment and various judgments of learned three judges, has consistently held that promissory estoppel would not apply against the exercise of legislative powers of the State.”
Holding that “it is more than settled that this court cannot interfere in policy matters of the government unless such policy is found to be palpably arbitrary and irrational”, the judges noted that “undoubtedly, in the present case, there is no duty cast on the Union to refund 100 per cent of CGST.”
‘Request’ to states
However, the court agreed that Hero and Sun had a case. It said: “Though we have held that the appellants’ claim based on promissory estoppel is without substance, we find that this is not a case wherein it can be said that the appellants’ claim is wholly without any substance.
“Though the appellants may not have a claim in law, we find that they do have a legitimate expectation that their claim deserves due consideration.
“We, therefore, permit the appellants to make representations to the respective state governments as well as to the GST Council.
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