Commissioner of Income Tax-II vs. Hycons Infrastructure (India) Ltd.

WP(C) 411/2013 BEFORE HON’BLE THE CHIEF JUSTICE (ACTING) MR. K. SREEDHAR RAO HON’BLE MR. JUSTICE UJJAL BHUYAN JUDGEMENT AND ORDER [ O R A L ] (K Sreedhar Rao, CJ (Actg.) The material facts concerning the litigation are set out hereunder in a brief and laconic manner. 2. The Government of India, by official memorandum, dated 24-12-1997, formu lated a new Industrial Policy declaring total exemption of Central Excise Duty i n the Northeastern region for a period of 10 years. The silent object of the sai d policy is to stimulate development of industries in the Northeastern region, w hich continued to be the backward region. Therefore, in order to boost and stimu late industrial activity in the Northeastern region, the policy was formulated. The significant concessions offered in the policy are in the nature of fiscal in centives to the new industrial units and their substantial expansions. The Claus e C of the policy reads thus: FISCAL INCENTIVES TO NEW INDUSTRAIL UNITS AND THEIR SUBSTANTIAL EXPANSION. i. Government has approved for converting the growth centers and IIDs into a tot al Tax Free Zone for the next 10 years. All industrial activity in these zones w ould be free from Income Tax, Excise for a period of 10 years from the commencem ent of production. State Government would be requested to grant exemptions in re spect of Sales Tax and Municipal Tax. ii. Industries located in the growth centers would also be given Capital Investm ent Subsidy at the rate of 15% of their investment in plant and machinery, subje ct to a maximum ceiling of Rs.30.0 lakhs. 3. Pursuant to the said policy, dated 08-07-1997, a notification is issued by the Central Government, under Section 5A (1) of Central Excise Act, 1944 (in short, ’Act of 1944’) and under Section 3 (3) of the Additional Duties of Excise (Goods of Special Importance) Act, 1957 (in short, ’Act of 1957’), wherein the nature of industries and the areas, which are entitled to benefits are specified . The Industrial Policy of 1997 came to be expired by 23-12-1997. The Government of India, again, issued another Industrial Policy on 01-04-2007 reiterating the same terms and conditions of the earlier Industrial Policy, dated 24-12-1997. A notification, dated 24-12-1997, under Section 5A(1) of the Act of 1944 and unde r Section 3(3) of the Act of 1957 was issued. Both the policies and the notifica tions issued, pursuant to the Industrial Policies envisaged 100% exemption of ex cise duty on the products manufactured in the Northeastern region. The Governmen t of India issued separate modified notifications under Section 5A of the Act of 1944 and under Section 3 of the Act of 1957, whereunder the concessions of exem ption of 100% excise duty was modified and limited to the extent of value additi on with varying rates of exemption of the central excise duty. 4. The respondents, in WA No. 243 of 2009 and WA No. 230 of 2009, aggrieved by the modified notifications, which withdrew the concessions earlier offered i n the previous Industrial Policy and the notifications issued pursuant thereto, challenged the validity of the modified notifications as being bad in law. The l earned Single Judge upheld the contention of the respondents and struck down the modified notifications, dated 27-03-2008, which were issued in respect of both the Industrial Policies. 5. The State aggrieved by the said judgment and order, has filed the two ap peals. The other petitioners, who are also aggrieved by the modified notificatio ns, have filed writ petitions challenging the validity of the said modified noti fications. Since the question involved in the said writ petitions and the questi on involved in the writ appeals being substantially one and the same, the writ p etitions have been clubbed along with the writ appeals for consideration. 6. Elaborate and enlightened arguments were canvassed by the Senior counsel

, Dr. Ashok Saraf, Dr. BP Todi, Mr. GN Sahewalla and Mr. CS Lodha, counsel for t he petitioners and they submitted the following grounds in support of the judgme nt of the learned Single Judge: (a) The Government of India, by virtue of the two Industrial Policies of 199 7 and of 2007, had declared complete exemption from payment of excise duty on th e products produced in the North-eastern region as a public policy to stimulate the economic development in the North-eastern region. The petitioners in the wri t petitions and the respondents in the appeal inspired by the concessions offere d by the Industrial Policy, have made substantial and heavy investments. In fact , the first Industrial Policy of the year 1997, operated successfully. The Gover nment felt that a further extension of the said concession will boost the indust rial activity in the North-eastern region. Therefore, the second Industrial Poli cy of 2007, on similar line, was published for a further period of 10 years. The Government in the year 2008 abruptly modified the rates of concession by the mo dified notifications, which is contrary to the terms of the Industrial Policy. T he State cannot issue notifications contrary to the Industrial Policy in view of the judgment of the Supreme Court in Suprabhat Steel Ltd. and others -vs- State of Bihar and others, reported in (1999) 1 SCC 31. (b) The State having held out a solemn promise to the investors to invest in the North-eastern region, declared concessions. Reposing faith in the promise, the investors have invested substantial sums of money in the North-eastern region. T he abrupt withdrawal of concessions by the modified notifications, in question, is impermissible in view of the doctrine of promissory estoppel enunciated by th e Supreme Court in Motilal Padampat Sugar Mills Co. Ltd -vs- State of Uttar Prad esh and others, reported in (1979) 2 SCC 409, which applies to the facts of the cases. (c) Although the State, under Section 5A (1) of the Act of 1944, is invested wit h the power to curtail the concessions by modified notifications, but nonetheles s such notifications should be in public interest. The Supreme Court, in Motilal Padampat Sugar Mills Co. Ltd (supra) has laid down that promissory estoppel is an equitable doctrine and yielded when equity so requires. When the public inter est would be prejudiced, the doctrine of promissory estoppel cannot be invoked; however, it is observed that the Government cannot claim exemption from the liab ility to carry out the promise on some indefinite and undisclosed ground of nece ssicity or expediency. The Government cannot be the sole judge of its liability and repudiate it on an ex party appraisement of the circumstances. If the Govern ment wants to resist the liability, it would have to disclose the facts and circ umstances. If the Government wants to resist the liability, it would be for the Court to decide if it is inequitable to enforce the liability against the Govern ment. 7. In the instant case, the Government has not come up with any credible ma terial to disable the petitioners and the respondents in the appeals to invoke t he doctrine of promissory estoppel. The report of the Directorate General of Cen tral Excise Intelligence (DGCEI) relied on by the State, points out only 41 case s of fraudulent availment of the benefit in Kutcch, J&K, H.P., Assam, Meghalaya, Arunachal and Sikkim. The statistical details of the industries in the said ar eas and the result of the investigation is furnished as Annexure-A to the said r eport. For convenient reference, the said Annexure-A is extracted hereunder: ANNEXURE-A Sl. No. Name of the unit Place Duty invoked Modus operandi Remarks 1. Welspun Stahl Rohren Kutcch No refund was claimed by the party Fraudulent availment of Notification No. 39/2001-CE dated 31-07-2001 without bei ng entitled for the exemption. Following detection of the case the unit withdrew their application for availment of exemption. CC has sanctioned prosecution aga inst the unit. 2. GPT Steel Industries Ltd. Kutcch No refund was claimed by the par ty Fraudulent availment of Notification No. 39/2001-CE dated 31-07-2001 wit hout being entitled for the exemption. Following detection of the case the unit withdrew their application for availment of exemption.

sical receipt of any inputs. 20. Shiv Giri Metal Indst. J&K 0.43 Cenvat credit has been fraudulen tly availed by the buyers on the basis of invoices issued by these companies wit hout physical receipt of any inputs. 21. Shree Sita Ram Castings J&K 0.16 Cenvat credit has been fraudulen tly availed by the buyers on the basis of invoices issued by these companies wit hout physical receipt of any inputs. 22. Shree Vaishno Devi Metals Pvt. Ltd. J&K 3.12 Cenvat credit ha s been fraudulently availed by the buyers on the basis of invoices issued by the se companies without physical receipt of any inputs. 23. V.M.I. Industries J&K 1.31 Cenvat credit has been fraudulen tly availed by the buyers on the basis of invoices issued by these companies wit hout physical receipt of any inputs. 24. Vaishno Metal & Allied Industries J&K 3.51 Cenvat credit ha s been fraudulently availed by the buyers on the basis of invoices issued by the se companies without physical receipt of any inputs. 25. Viraj Inds., Jammu J&K 2.34 Cenvat credit has been fraudulen tly availed by the buyers on the basis of invoices issued by these companies wit hout physical receipt of any inputs. 26. Him Valves & Regulators (P) Ltd. H.P. 0.37 Cenvat credit ha s been fraudulently availed by the buyers on the basis of invoices issued by the se companies without physical receipt of any inputs. 27. Swastik Wires H.P. 0.37 Cenvat credit has been fraudulently avai led by the buyers on the basis of invoices issued by these companies without phy sical receipt of any inputs. 28. Koolminit Manufacturing Company, Industrial, Gouripur, Dlaubri, Assam. Assam 0.95 The unit showed bogus production and issued bogus invoices. Over valuation of products. SCN issued. Case pending adjudication. 29. Ishan Technologies Pvt. Ltd., Bymihat, Meghalaya Meghalaya 9.98 The unit showed bogus production and issued bogus invoices. Overvaluatio n of products. SCN issued. Case pending adjudication. 30. Khushi Aromatic, Cinamara, Jorhat, Assam Assam 4.34 Over-valuation o f goods sold to their related unit situated in non-exempted area; thus facilitat ing availment of excess Cenvat credit. SCN issued. Case pending adjudication. 31. Dharampal Satyapat Limited, Bamunimaidan, Guwahati, Assam Assam 0.23 Over-valuation of goods sold to their related unit situated in non-exemp ted area; thus facilitating availment of excess Cenvat credit. SCN issued. Dema nd confirmed. 32. Shree Sai Rolling Mills (India) Ltd., Rangsakona, Bymihat, Meghalaya Meghalaya 1.00 Bogus sale of goods to their related unit situated in no n-exempted area; thus facilitating availment of inadmissible Cevat credit. SCN is likely to be issued soon. 33. Trishul Hitech Industries, EPIP, Bymihat, Meghalaya Meghalaya 0.68 Bogus sale of goods to their related unit situated in non-exempted area; thus fa cilitating availment of inadmissible Cevat credit. SCN is likely to be issu ed soon. 34. Satyam Ispat, NH 52A, Banderdewa, Arunachal Pradesh Arunachal Prades h 0.31 Bogus sale of goods to their related unit situated in non-exempt ed area; thus facilitating availment of inadmissible Cevat credit. SCN is l ikely to be issued soon. 35. Satya Megha Ispat (P) Ltd., Tamiulkuchi, Bymihat. Meghalaya 0.08 Bogus sale of goods to their related unit situated in non-exempted area; thus facilitating availment of inadmissible Cevat credit. SCN is likely to be i ssued soon. 36. Foto Industries, Meghalaya & M/S Photo Film Industries, Pondicherry Meghalaya 8.66 Goods claimed to have been manufactured at the Meghalays factory of M/S Foto Industries, Meghalaya were, in fact, being produced at thei r sister concern, namely, M/S Photo Film Ind, Pondicherry from where the goods w ere cleared without payment of duty to their customers. Case settled under settl

ement commission. Entire duty alongwith interest has been realized. 37. M/S Matiz Metals Pvt. Ltd. Meghalaya 19.57 The unin has sho wn bogus purchase of raw materials availing Cenvat credit, bogus production and fraudulently issued invoices showing clearance of excisable goods in order to fa cilitate the buyers to avail Cenvat credit. One SCN to the party and 58 SCN’ s to various manufacturers who have availed cenvat credit on the strength of inv oices issued by the party have been served. Commissioner, Central Excise, Adjudi cation, Mumbai has been appointed as common adjudicator. Case pending adjudicati on. 38. M/S Jindal Drugs Limited Jammu 44.26 Clearance of raw materia l (Crude Mentha Oil) without manufacturing excisable goods and by misdeclaring i t as finished goods (Deterpinated/ fractionated Mentha Oil) and wrongly claiming benefit of area based exemption and irregularly passing on a Cenvat credit to t he purchaser. Goods are further exported by M/S Jindal Drugs Limited as merchant exporter claiming rebate of duty paid. SCN has been issued. Case is pen ding adjudication. The party has deposited Rs. 2.00 crores during investigation. 39. M/S Sharp Menthol India Limited, Delhi New Delhi 25.00 Clearanc e of raw material (Crude Mentha Oil) without manufacturing excisable goods and b y misdeclaring it as finished goods (Deterpinated/ fractionated Mentha Oil) and wrongly claiming benefit of area based exemption and irregularly passing on a Ce nvat credit to the purchaser. Goods are further exported by M/S Jindal Drugs Lim ited as merchant exporter claiming rebate of duty paid. Investigating is under p rocess. 40. M/S SPM Industries Jammu To be quantified Procurement of f ake bills of raw materials and showing huge production out of this without actua lly doing any production. Issued invoices only without actually sending the good s in order to facilitate the buyers of invoices to fraudulently avail Cenvat cre dit. Under investigation. 41. M/S Bio Veda Technologies Pvt. Ltd. Guwahati 0.29 The unit has shown bogus production and fraudulently issued bogus invoices against which inadmissible refund of duty was claimed. SCN issued. Case pending adjudic ation. 8. On the basis of the above materials, it is argued that in respect of Nor th-eastern area, there is not even a single case of detection of fraudulent avai lment of benefit. The cases of bogus production, overvaluation, bogus sale of go ods and fraudulent import of goods by the industries from its sister concerned o f other area, which has no exemption, has been alleged. But except 2/3 cases, in rest of the cases, the adjudication is pending. The report of the DGCEI, has gi ven the following reasons in support of the impugned modified notifications: 8. To sum up, in order to minimize misuse of area based excise duty exempti on applicable to J&K, North East and Kutch areas (by way of bogus production, bo gus purchases of input, purchase of input against non duty paid invoices, overva luation etc), following proposals are submitted for modification of existing sch eme. i) To provide that refund of excise duty would be allowed only to the exten t of duty payable on the value addition made by the units in these areas ii) The quantum of value addition may be determined by fixing an all industr y ratio based on CENVAT Credit and PLA (Cash) ration for non-POL items with an o ption to assessee to get the ratio fixed based on actual financial data from aud ited profit and loss account. 9. It is submitted that the above said fraudulent and dishonest acts of che ating by the industries, if any, can very well be verified at the time of refund and also by periodical inspections, the Department can detect the acts of cheat ing, if any, indulged by the industries. There are investigatory and regulatory mechanism envisaged under the Central Excise Act, which can effectively take car e of the above instances of malfeasance and misfeasance. Merely because there ar e strong instances of misuse, it would not be a valid ground to call it in publi c interest to partially withdraw the concessions.

(i) Reporting of bogus production by mere issuance of sales invoice without actu al production of goods and supply/clearance of excisable goods. This would resul t in availment of CENVAT credit by buyers of such excisable goods in other parts of the country without actual production being carried out and in absence of ac tual receipt of goods.

(ii) Reporting of bogus production by such units in these areas where actual pro duction takes place elsewhere in the country.

(iii) Overvaluation of goods resulting in availment of excess of credit by buyer . Goods are supplied by manufacturers, importers to these units without issuance o f sales invoice and these are backed by bogus sales invoice issued by traders wh o do not undertake actual supply of goods. The actual supplier of these goods is sued bogus duty paid invoices to other manufacturers who take credit based on su ch invoices without receipt of goods. To elaborate the above modus operandi, I b eg to give the following illustration: 1. It was submitted on the basis of illustrations set out in the Affidavit in Re ply that the same are general illustrations of misuse of exemption, which exempt ion was meant to be available to genuine manufacturers. That units in the Kutch region were wanting to pay maximum amount of duty in cash so that refund of the entire amount can be claimed. A study was undertaken to verify this aspect and f ind out percentage of excise duty paid in cash as well as percentage of excise d uty paid by utilizing CENVAT credit by similar units located elsewhere when comp ared with units situated in the notified area availing exemption. That the units in the specified area were paying high percentage of duty in cash when compared to payment of duty on an all India basis in relation to manufacture of similar goods. The Government therefore realized that purpose of exemption was being def eated, exemption being available only in respect of genuine manufacturing activi ties carried out in specified areas. That the policy manifesting the intention o f the Government was to grant excise duty exemption only to actual value additio n made in the specified areas. Hence the exercise of powers under Section 5A of the Act. 2. It was submitted that as a result of the modification the manufacturers are r equired to pay duty on the full value of goods manufactured and cleared in the s ame manner as per existing scheme, but refund would be granted only to the exten t of duty paid on the actual value addition according to the percentages fixed i n the Notification, or as may be fixed as a special case as provided in the Noti

fication. In the written submissions filed by the Counsel the effect of modifica tion is stated in the following words: \The effect of modification is as follows: (i) It is submitted that genuine manufacturers would not at all be affected inas much as they would be getting the refund of same amount under the present modifi cation as also in the proposed scheme. (ii) Unscrupulous manufacturers reporting bogus production was resorting to fict itious purchase of inputs on the strength of invoices which are not duty paid in voices would be getting excise duty refund equivalent only to the duty paid on a ctual value addition made by such manufacturers who have industries in these spe cified areas. (iii) The excise duty exemption would be available only to the extent of actual value addition made in these areas and not for the value of raw materials manufa ctured in other part of the country, which are received by the units in these ar eas without cover of duty paying invoices\. 3. The methodology of calculating value addition has also been explained in part 3 of written submissions. In support of the submissions made as regards the exe rcise of legislative power and Courts not being entitled to question policy deci sion as well as on inapplicability of principle of promissory estoppel . 25. Thus, the scheme which emerges on a plain reading of Section 38A of the Ac t is that even in a case where a Rule, Notification, etc. is amended, etc., unle ss the amending Rule, Notification, etc. specifically denotes a contrary intenti on, everything that has taken place under the Rule, Notification, etc. prior to amendment shall continue to its logical end. This provision is not only a saving provision, but is a provision which correspondingly obligates both the person w ho was a beneficiary under the existing Rule, Notification, etc. and the authori ty under the existing Rule, Notification, etc. to continue to comply with the re quirements of the Rule, Notification, etc. as it existed even after amendment on ce the parties have duly done anything or suffered under the existing Rule, Noti fication, etc. An Assessee, who is required to act in a particular manner as spe cified by the Rule, Notification, etc. as existing before the amendment, is obli ged in law to act accordingly, and correspondingly the authority is equally obli ged in law to act as if the amendment had not taken place, such act on part of t he authority being not only in relation to collection of revenue and other atten dant provisions like penalty, etc., but also in relation to the entitlements of an Assessee. This provision, namely, Section 38A of the Act incorporates in the statute the principle of a completed contract between the parties, whereunder th e parties are obliged to fulfil their respective part of the concluded contract, and in case of failure, the Court may step in and direct the defaulting party t o specifically perform his part of the promise. To put it differently, one may s ay that the principle of promissory estoppel, as normally understood, has been i ncorporated in the statute. 26. Hence, neither by virtue of powers under Section 5A of the Act, nor by virtu e of operation of Section 38A of the Act can the Respondent authority be permitt ed to resile from the promise statutorily made by way of notification issued und er Section 5A(1) of the Act, being Original Notification No. 39 of 2001 dated 31 -7-2001. The Petitioner had acted as required by the Original Notification and w hen the Original Notification with attendant circumstances is read in context th e subsequent notifications dated 27-3-2008 and 10-6-2008 do not indicate any int ention to the contrary, that is contrary to the object, intent and purpose of th e Original Notification. Thus by operation of law, namely, provisions of Section 38A of the Act, more particularly Clauses (b) and (c) of the said section read together, it is not possible to uphold the action of the Respondents in issuing subsequent Notifications dated 27-3-2008 and 10-6-2008. 32. Thus when one considers the entire scheme as a whole it is more than abundan tly clear that there is hardly any scope for misuse of the scheme. Furthermore, the period of the scheme is a self limiting one and only those manufacturers who have complied with the requirements of the Original Notification are entitled t o the benefit. The said manufacturers therefore cannot be called upon to make pa yment of duty and seek a smaller amount of refund under the scheme considering t

he purpose of granting exemption. One of the purposes that is apparently discern ible is to ensure that during gestation period a new industrial unit is able to recoup the capital outlay involved in setting up a new industrial unit so as to ensure that the new unit does not face cash crunch during the initial period and circulating capital is available to such new unit. 115. It appears that the doctrine of promissory estoppel and its scope and ambit is by now well settled and the same can be summarised as under: (1) The doctrine of promissory estoppel is to be treated as a preserved right, b ut such right is subject to the limitation that - (2) Such promise or the representation made must be given under the authority of law and in consonance with the statute and not unauthorisedly or in contraventi on to any statutory provision on the principle that there cannot be any estoppel against the statute. (3) Such cannot be permitted to be invoked against the overwhelming public inter est. (4) The Legislature or the Parliament has power for diluting its effect retrospe ctively by enacting any law. 117. If the record produced on behalf of the Central Government is considered, i t appears that none is concerning to the object which was at the time of formula tion of the policy or achievement of the said object. On the aspects of public i nterest, the ground as sought to be canvassed is that the duty paid in such area where incentive provided was higher in comparison to the other places and it wa s orally contended by the learned Additional Solicitor General that such would s how that the exemption policy was being misused or there were manipulations for getting the refund. The contention considered in either way may at the most attr act for initiation of the action in accordance with law against the industry con cerned, if there is manipulation or abuse of the policy. Even if it is considere d that some units had misused or had abused the policy, the same can hardly be s aid to be a valid ground for withdrawing the benefit conferred upon the bona fid e industrial units. Further, there is no satisfactory material demonstrated for such purpose. Even if such contention is considered for the sake of examination, it can hardly be termed as overwhelming public interest on the part of the Cent ral Government to prejudice the rights of the new entrepreneurs who have altered their position by establishing industries based on such incentive. Further, as observed by the Apex Court in the above referred judgment in the case of Power C orporation Ltd. and Anr. (supra), such ground cannot be uphold as sustained. 11. The reference is also made to paragraphs No. 21, 22 & 28 of the decisio n of the High Court of Sikkim in Unicorn Industries -vs- Union of India, reporte d in 2013 (289) E.L.T. 117 (Sikkim), wherein it was observed as under: 21. The power reserved by the Government namely, the Government reserves the ri ght to modify any part of the policy in public interest, therefore, may, in gene ral, be correct and work out only where such superior or larger public interest warrants to do so. When such a contention arises, the Court is under obligation to examine as to whether such an exercise is within the scope and extent of powe r available under Section 5A of the Act. While examining so, the fact that the p ower under Section 5A of the Act is essentially a power to grant exemption in re lation to duty of excise which is otherwise leviable under other provisions of t he Act cannot be disregarded. Therefore, in exercise of such power under Section 5A of the Act, the authority cannot be permitted to take recourse to the princi ples applicable for determining whether duty is correctly levied or not. 22. From any angle, once power under Section 5A of the Act has been exercised an d exemption granted, a larger/superior public interest has to be shown for curta iling/modifying/ withdrawing an exemption already granted and in such eventualit y, the onus shall be on the Revenue and the same cannot be discharged by merely referring to the contention that the petitioners/assessees are claiming the exem ption on bogus ground, in surmise. 28. In a case where the State invited new industries by offering concessional po wer tariff and thereafter withdrew the same on the ground that there was power t heft on a large scale the Apex Court in case of U.P. Power Corporation Limited ( supra), after detailed analysis of the law on the subject, struck down the actio

n of the State by invoking principle of promissory estoppel and in the process s tated: 20. In this 21st century, when there is global economy, the question of faith i s very important. Government offers certain benefits to attract the entrepreneur s and the entrepreneurs act on those beneficial offers. Thereafter, the Governme nt withdraws those benefits. This will seriously affect the credibility of the G overnment and would show the shortsightedness of the governance. Therefore, in o rder to keep the faith of the people, the Government or its instrumentality shou ld abide by their commitments. In this context, the action taken by the appellan t-Corporation in revoking the benefits given to the entrepreneurs in the hill ar eas will sadly reflect their credibility and people will not take the word of th e Government. That will shake the faith of the people in the governance. Therefo re, 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 withdr aw from that. This is a matter of faith. 12. It is argued that in view of the above decisions and the decisions of th e Apex Court referred to therein, the view taken by the learned Single Judge is sound and proper and does not call for any interference. 13. Per contra, Mr. R Dubey, the Standing Counsel for the appellant and the counsel for the respondents in the writ petitions strenuously submitted that the modified notifications are issued because of the instances of misuse of the con cessions. A thorough inquiry was held by the Directorate General of Central Exci se Intelligence (DGCEI), the Ministry of Finance also devoted its attention to t he problem of misuse. 14. The counsel has referred to the findings of the inquiry and the report, which is produced in support of the affidavit before the learned Single Judge. I t is reported that there are about 587 units enjoying the facility of exemption in J&K, Northeast, Sikkim and Kutcch and a sum of Rs. 2,427 crores has been dole d out as complete exemption of excise duty to these units. The material portion of the report referred to by the counsel for the State are extracted hereunder f or convenient reference: 3.1. Misuse of Exemption Scheme: DGCL have booked large number of cases of misuse of exemption scheme by units in J&K, North-East etc. Some of the industry associations, namely, All India Zinc Manufacturers Association, Federation of Southern India Manufacturers scale evas ion by units in these areas, which have adversely affected units in other parts of the country. Analysis of cases booked by DGCEL and as per representations of the Associations following types of misuse have been noticed: i) Reporting of bogus production, issue of bogus sales invoices by the manu factures in these areas and availment of CENVAT Credit by buyers in another part of the country without receipt of goods; ii) Overvaluation of goods and availing excess credit by the buyer; iii) Reporting of bogus production by units in these areas, whereas actual pr oduction takes place at other unit of same manufacturer in another part of the c ountry; iv) Purchase of inputs on non-duty paid invoice (invoices issued by traders) , even though goods are duty paid. The duty paid invoices are sold in the market to other manufacturers for availing CENVAT Credit on such invoices without rece ipt of goods. The DGCEL has booked involving duty evasion of Rs.178 Crores for above t ypes of cases. 3.2 Problem of Zinc Oxide manufacturers: The All India Zinc Oxide manufacturers Association has represented an in teresting problem. They manufacture zinc oxide and zinc dross is their main inpu t. As per a Supreme Court judgment, the zinc dross is not an excisable product. Therefore, the zinc oxide manufacturers in other part of the country are require d to pay almost full duty in cash as no CENVAT Credit is available to them on th e zinc dross. But units manufacturing zinc oxide in J&K even though they pay sam e amount of duty, get refund of full duty and also recover the duty amount from

customers and this results in making the produce of other units totally uncompet itive. This is explained with the following data: Cost of Zinc dross - Rs.160 per kg Value addition to make Zinc Oxide - Rs.13 per kg Excise duty - Rs. 27 per kg Hence, a manufacturer in J&K is able to get excise duty exemption of Rs. 27 per kg, as against value addition of Rs.13 per kg and their product becomes c heaper by Rs.27/- per kg and this has badly hit the units in other parts of the country. 3.3. Evidences of trend of misuse across the industry: As discussed above, the units in these areas prefer to pay maximum amoun t in cash, as it is available as refund to them in the next month. Further, when ever they show bogus production and bogus sale, they also show bogus purchases b y getting purchase invoices of traders. Further, even if their purchases are gen uine, they may like to purchase against non-excise duty paid invoices as it redu ces their cost of purchase. By adopting all such modus-operandi, the units in th ese areas avail less CENVAT Credit and pay maximum amount in cash. 3.4 From the above analysis, it is very clear that almost all the industry s ectors in these areas are paying maximum duty through PLA and difference with al l India ration is quite alarming. The above analysis coupled with the details of cases booked by DGCEL and representation of industry associations further prove that there appears to be a general tendency to bring raw materials on non-duty paid invoices or to show bogus production or bogus purchase to maximize payment of duty in cash. In fact, when other units in the country avails CENVAT Credit o f say 68% of total duty (32% in PLA), there cannot be any plausible reasons to a vail credit to say 24% (76% in PLA) by units in these areas. This analysis clear ly brings out a fact that misuse of excise duty concessions is rampant and it is across the industry. 4.1. It can be argued that above discussed misuses are on account of administ rative failure to tackle evasion. However, when the trend of evasion is seen acr oss the industry, such misuse cannot be handled with any amount of enforcement a nd the only available option is to think of modifying the scheme itself. Moreove r, investigation of such cases is very time consuming as each purchase and sale transaction along with transport records, which involve a large number of partie s at different part of the country, is required to be investigated. 15. It is argued that specific instances of misuse were detected and cases h ave been booked. The Personal Ledger Account (PLA) referred to in the report is as follows: Description of Goods Total duty paid in 2006-07 by units in specified areas PLA (cash) % to total duty All India % of PLA to total duty PLA CENVAT Credit Total 1. Iron and Steel 488 230 718 68 27 2. Copper 224 8 232 96 14 3. Aluminium Rods/Wires 50 18 68 74 33 4. Tyres 118 73 191 62 39 5. Cosmetics 170 33 203 84 53 6. Misc. Chemicals 266 28 294 90 31 7. Soap Detergent 117 73 190 64 47 8. Article of plastic 48 12 60 80 22 9. DG sets 15 24 39 39 29 10. Medicines 132 27 159 83 26 Total of 10 products groups 1628 526 2154 76 32 Total of 440 Units paying more than 50% duty in PLA 2108 673 2781 76 32 (All India Non-POL items) Total of 587 Units in these areas 2427 16. The percentage of excise duty paid in the exempted areas is highest when compared to similar industries in the area where there is no exemption as per t

he PLA (supra). The difference in percentage is shown so high that sometimes it is three times higher the duty is paid in the areas where exemption is granted. Such a collection of revenue was found to be on account of the reasons that bogu s production, overvaluation, procurement of raw material without invoice etc. Ke eping in view of the recommendations found in the report, the Cabinet found that grant of indiscriminate exemption will lead to misuse. In order to prevent such malpractice, the formula of value addition has been introduced in granting part ial concessions to the industries, which enjoy exemptions under Section 5A of th e Act of 1944. 17. Mr. Dubey, Standing Counsel, Central Excise Department, submitted that t he doctrine of promissory estoppel invoked by the opponents is untenable. There have been instances of gross misuse. In a superior public interest, in order to avoid dishonest loss caused to the public revenue, the modified notifications ha ve been brought into force with a sincere object of helping the industrialist on the one hand and also to protect the revenue of the State on the other. Hence, argued that the modified notifications in the context of the report of the Direc torate General of Central Excise Intelligence (DGCEI) cannot be assailed as done arbitrarily and without public interest. 18. On stern consideration of the rival submissions made at the Bar, it beco mes very essential for this Court to determine whether there is prompting of pub lic interest involved in the modified notifications. 19. The State does not dispute the Industrial Policies of 1997 and 2007 and also the grant of concession pursuant to the said notifications. However, the di spute revolves round the justification for issuing the modified notifications, i n question. It is to be seen whether any superior public interest is evident, wh ich prompted the Government to issue the modified notifications. The counsel for the State mainly relies upon the report of the Directorate General of Central E xcise Intelligence (DGCEI) and the Annexure-A, as extracted (supra), which gives the details of malfeasance and misfeasance committed by some of the industries, in question, in J&K, Northeast and Sikkim. The instances of misuse noticed in t he inquiry are hardly consists of about 41 cases and most of the cases, as per A nnexure-A, are still under adjudication, it is not finally decided whether the i ndustries concerned in the Northeastern region are guilty of any misuse. The arg ument that because of the misuse, the concession had to be withdrawn does not ap pear to be tenable, on deeper scrutiny of the materials placed before the Court. It is not as if that the State and the Department does not have any mechanism o r machinery for detecting malpractice of bogus production by diligent periodical inspection. 20. Where the goods do not carry MRP, with reference to the marginal cost an d the prevalent market price of similar goods in comparison to the market price of similar goods, the malpractice of over valuation can be detected at the time of refund. 21. With regard to the allegation of importing of goods from the sister unit s from some other area to the exempted area, the same could also be easily detec ted because, under the VAT Act, the transit permits have to be taken if false tr ansit permit has been taken for transfer of consignment from one unit to the sis ter unit in the exempted area, in such cases, it could be easily detected as a c ase of malpractice. That apart, the transit of goods is well regulated under the VAT Act, and the transit passes, documents of title of goods consigned have to be taken and that at every check post, there would be a check. It is not that ea sy for an industrialist to flout the law and import the goods for the purpose of evading Central Excise duty as alleged. 22. The scheme of the policy and the notifications insist that there should be payment of the excise duty and thereafter, they should apply for refund. The Department, at the time of refund, can very well thoroughly scrutinize all these aspects regarding misuse and malpractice alleged. Therefore, the allegation tha t for the instances of malpractice stated above, there has to be a partial withd rawal of concessions, does not appear to be justifiable ground. The observations made by the Gujarat High Court in this regard, as extracted above, also take a similar opinion and we do not see any good reason to differ with that opinion.