Supreme Court Upholds Government’s Power to Amend Customs Notifications: Union of India vs. A.B.P. Pvt. Ltd. (2023)

Introduction

Date of the Judgment: 12 May 2023

Citation: 2023 INSC 525

Judges: S. Ravindra Bhat, J. and Dipankar Datta, J.

Can the government change its mind about tax exemptions? The Supreme Court of India recently addressed this question in a case concerning customs duty on imported printing machines. This case explores the extent of the government’s power to amend or withdraw notifications that grant exemptions, and how much the courts can interfere in such decisions.

The core issue revolves around a company, ABP Pvt. Ltd., that imported printing machinery expecting a concessional customs duty rate. However, the government later amended the notification, increasing the duty. The company challenged this amendment, arguing it was not in the public interest. The Supreme Court had to decide whether the government’s action was justified and within its powers.

The judgment was authored by Justice S. Ravindra Bhat, with Justice Dipankar Datta concurring. This was a unanimous decision of the two-judge bench.

Case Background

In October 2003, ABP Pvt. Ltd. (referred to as “the assessee” or “respondent”) imported a high-speed cold-set web offset printing machine, along with its necessary parts and accessories. The assessee sought an exemption from customs duty based on a notification issued on May 28, 2003 (“First Notification”). This notification allowed a concessional duty rate of 5% on the import of high-speed cold-set web offset rotary printing machines with a minimum speed of 70,000 copies per hour.

Relying on the First Notification, the assessee opened an irrevocable letter of credit to purchase the imported machine. However, on November 11, 2003, the government issued another notification (“Amended Notification”) which changed the criteria for the concessional rate. The Amended Notification restricted the benefit to “High Speed Cold-set Web Offset Rotary Double Width Four Plate Wide Printing Machine with a minimum speed of 70,000 copies per hour.”

As a result, when the assessee filed a Bill of Entry on February 9, 2004, they were no longer eligible for the 5% concessional rate. Instead, they were required to pay a customs duty of 39.2%, amounting to ₹1,92,54,318. The assessee then filed a writ petition before the Calcutta High Court, challenging the Amended Notification and seeking a declaration that it was invalid.

The assessee sought a declaration that the Amended Notification was ultra vires Section 25(1) of the Customs Act 1962, and therefore, should be withdrawn. An interim order was passed on March 18, 2004, directing the release of the machinery provisionally upon payment of the concessional rate, against a bank guarantee for the differential amount of ₹1,67,98,410.

Timeline

Course of Proceedings

Initially, a single judge of the Calcutta High Court set aside the Amended Notification on December 5, 2005. The court reasoned that there was no valid basis to differentiate between the two types of printing machines for granting the exemption. The court directed that the assessee be granted the benefit of the concessional rate.

The Union of India appealed this decision to a Division Bench of the High Court. The Union argued that its power to grant exemptions also included the power to modify or alter them. It further contended that the matter involved economic policy, which was the exclusive domain of the legislature.

The Division Bench upheld the single judge’s decision, noting that the imported machine was not manufactured in India. It also observed that the Union had not shown any representation from domestic manufacturers questioning the exemption. The High Court relied on the Supreme Court’s decision in Indian Express Newspapers v. Union of India, stating that government actions under Section 25(1) of the Customs Act, 1962, were subject to judicial review and must be exercised reasonably and in the public interest. The High Court concluded that there was no intelligible differentia between the two types of machines, and thus, no public interest was served by the amended notification.

Legal Framework

The case primarily revolves around Section 25(1) of the Customs Act, 1962, which empowers the Central Government to grant exemptions from customs duty. The section states:

“If the Central Government is satisfied that it is necessary in the public interest so to do, it may, by notification in the Official Gazette, exempt generally either absolutely or subject to such conditions (to be fulfilled before or after clearance) as may be specified in the notification, goods of any specified description from the whole or any part of the customs duty leviable thereon.”

The court also considered Section 21 of the General Clauses Act, 1897, which states:

“Where, by any (Central Act) or Regulations, a power to ( issue notifications) orders, rules, or bye-laws is conferred, then that power includes a power, exercisable in the like manner and subject to the like sanction and condition (if any), to add to, amend, vary or rescind any (notifications), orders, rules or bye-laws so (issued).”

This section clarifies that the power to issue a notification includes the power to amend or rescind it. The interplay between these two sections is central to the case, as it defines the extent of the government’s power to both grant and withdraw exemptions.

The Supreme Court also examined the principle of “public interest” as a guiding factor in the exercise of powers under Section 25(1) of the Customs Act, 1962. This principle is rooted in the constitutional framework, which requires all government actions to be reasonable, fair, and in the interest of the public.

Arguments

Arguments of the Union of India (Appellant):

• The Union argued that the High Court’s order challenged the fundamental powers of the government to issue notifications under Section 25(1) of the Customs Act, 1962. They contended that such interference could have serious implications on the government’s exercise of power in the future.
• The Union submitted that the assessee could not claim concessions or exemptions as a matter of right, as these fell within the policy domain of the government.
• The government argued that the commodities granted exemption under the Amended Notification related to technological advancement and modernization of the industrial sector, thus embodying “public interest”.
• The Union relied on Section 21 of the General Clauses Act, 1897, arguing that the power to issue a notification includes the power to withdraw or amend it.
• The Union stated that the exclusion of single-width two-plate machines from the exemption was justified as these were manufactured in India. The concession was intended for cold-set web offset rotary double-width four-plate wide printing machines with a minimum speed of 70,000 copies per hour.
• The Union argued that representations from domestic manufacturers of single-width two-plate machines (with a speed of 50,000 copies per hour) necessitated the exclusion of such machines from the scope of concessions.

Arguments of A.B.P. Pvt. Ltd. (Respondent):

• The assessee argued that the Union could not withdraw or amend the First Notification without sufficient justification. The reasons provided by the revenue for withdrawing the exemption must be “relevant” and “sufficient” to the exercise of power in “public interest”. They cited the Supreme Court’s decision in Kasinka Trading & Anr. v. Union of India.
• The assessee contended that the government’s power under Section 25(1) of the Customs Act, 1962, is not unrestricted. The government is obligated to examine the issue in light of “public interest”. They relied on Indian Express Newspapers v. Union of India, arguing that the power to grant exemptions is not a delegated power to tax but a power expressly conferred under the Act, thus making principles of administrative law applicable.
• The assessee argued that the government failed to establish what “public interest” necessitated the reduction in the extent of exemption. They cited Dai-ichi Karkaria Limited v. Union of India & Ors. and MRF Ltd. v. Commissioner of Sales Tax, arguing that the government failed to justify why the concessional rate was confined to double-width four-plate machines and not extended to single-width two-plate machines with the same minimum speed.
• The assessee stated that the machines they imported were neither manufactured nor sold in India. The argument that the Amended Notification was due to representations from domestic manufacturers was invalid, as the imported machine was purchased from a foreign country.
• The assessee invoked the principle of promissory estoppel, arguing that the government should not resile from its promise without providing a reasonable opportunity to restore the status quo ante. They cited Shrijee Sales Corporation v. Union of India and Bannari Amman Sugars Ltd v. CTO, arguing that they had paid advances through an irrevocable letter of credit before the Amended Notification, making it impossible to revoke the letter of credit.

Innovativeness of the argument: The assessee innovatively used the principle of promissory estoppel, arguing that the government should not resile from its promise without providing a reasonable opportunity to restore the status quo ante, especially since they had already made financial commitments based on the initial notification.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the main issues that the court addressed were:

1. Whether the government has the power to amend or withdraw an exemption notification issued under Section 25(1) of the Customs Act, 1962.
2. Whether the reasons given by the government for amending the notification were valid and in the public interest.
3. Whether the High Court was correct in setting aside the Amended Notification.
4. Whether the principle of promissory estoppel applies in this case.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

The Court also considered the following legal provisions:

• Section 25(1) of the Customs Act, 1962: This section grants the Central Government the power to issue notifications to exempt goods from customs duty in the public interest.
• Section 21 of the General Clauses Act, 1897: This section provides that the power to issue a notification includes the power to amend, vary, or rescind it.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Indian Express Newspapers v. Union of India [CITATION]: The Court reiterated the principle that government actions under Section 25(1) of the Customs Act, 1962, are subject to judicial review and must be exercised reasonably and in furtherance of public interest. However, the Court clarified that it should not delve into the merits of the policy decision.
• Kasinka Trading & Anr. v. Union of India [CITATION]: The Court used this case to emphasize that reasons for withdrawing an exemption must be relevant and in the public interest. However, it also highlighted that the government has the freedom to determine priorities in the matter of utilization of finances.
• Dai-ichi Karkaria Limited v. Union of India & Ors. [CITATION]: The Court distinguished this case, noting that in Dai-ichi Karkaria, the executive had not taken all relevant factors into account while reducing the exemption. In the present case, the Court found the reasons for the amendment to be valid.
• MRF Ltd. v. Commissioner of Sales Tax [CITATION]: The Court distinguished this case, stating that it concerned retrospective withdrawal of benefits, whereas the present case involved a prospective amendment.
• Shrijee Sales Corporation v. Union of India [CITATION]: The Court referred to this case to acknowledge that the government has the right to resile from its promise but must give a reasonable opportunity to restore the status quo ante. However, it clarified that promissory estoppel does not apply against legislative power.
• Bannari Amman Sugars Ltd v. CTO [CITATION]: The Court cited this case to reiterate that no vested right is acquired by a person who is granted a concession, and that such concessions can be withdrawn at any time.
• M.M Nagalingam Nadar Sons v. State of Kerela [CITATION]: The Court referred to this case in the context of the decision in MRF Ltd. v. Commissioner of Sales Tax, to highlight the principle that retrospective withdrawal of exemptions is not permissible.
• Mahabir Vegetable Oils (P) Ltd. v. State of Haryana [CITATION]: The Court distinguished this case, stating that it concerned retrospective withdrawal of benefits, whereas the present case involved a prospective amendment.
• Prashanti Medical Services & Research Foundation v. Union of India [CITATION]: The Court relied on this case to clarify that the plea of promissory estoppel is not available against the exercise of legislative power and that no vested right accrues to an assessee in the matter of grant of any tax concession.
• Vivek Narayan Sharma (Demonetisation Case-5 J.) v. Union of India [CITATION]: The Court cited this case to emphasize that the courts should not undertake a foray into the merits, demerits, sufficiency or lack thereof, success in realising the objectives, etc. of an economic policy.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle that the government has the authority to make economic policy decisions, including granting and withdrawing tax exemptions, and that the courts should not interfere in such matters unless there is a clear case of illegality, mala fides, or arbitrariness. The Court emphasized that the “indigenous angle” was a relevant factor in the government’s decision to amend the notification. It also highlighted that the courts should not conduct a merits review of economic measures.

The court recognized the government’s power to amend or withdraw notifications, and it stressed that the reasons given by the government were germane to the matter. The court also made it clear that the principle of promissory estoppel does not apply against legislative power.

The court’s reasoning was heavily influenced by the need to maintain a balance between the government’s economic policy prerogatives and the need for judicial oversight to ensure that the government acts reasonably and in the public interest. The Court emphasized that while judicial review is necessary, it should not extend to a merits-based assessment of the economic policy itself.

Decision

The Supreme Court allowed the appeal filed by the Union of India and set aside the judgment of the High Court. The Court held that the Amended Notification issued by the government was valid and within its powers. The Court emphasized that the government has the power to amend or withdraw exemption notifications and that the courts should not interfere with economic policy decisions unless there is a clear case of illegality, mala fides, or arbitrariness.

The Court also clarified that the principle of promissory estoppel does not apply against the exercise of legislative power and that no vested right accrues to an assessee in the matter of grant of any tax concession.

Key Takeaways

The key takeaways from the Supreme Court’s judgment in Union of India vs. A.B.P. Pvt. Ltd. are:

• Government’s Power to Amend Notifications: The government has the power to amend or withdraw exemption notifications issued under Section 25(1) of the Customs Act, 1962. This power is derived from Section 21 of the General Clauses Act, 1897.
• Judicial Restraint in Economic Policy: Courts should exercise restraint in reviewing economic policy decisions made by the government. The courts should not delve into the merits of such policies unless there is a clear case of illegality, mala fides, or arbitrariness.
• Public Interest: While the government must act in the public interest, the courts should not substitute their judgment for that of the executive on what constitutes public interest in economic matters.
• Indigenous Angle: The “indigenous angle” is a relevant factor for the government to consider when granting or withdrawing exemptions. The government can promote domestic manufacturing through its policies.
• Promissory Estoppel: The principle of promissory estoppel does not apply against the exercise of legislative power. No vested right accrues to an assessee in the matter of grant of any tax concession.
• Prospective Amendment: A prospective amendment to a notification is permissible, and the government is not bound to continue the exemptions originally granted.

Flowchart of Decision

Conclusion

The Supreme Court’s judgment in Union of India vs. A.B.P. Pvt. Ltd. reinforces the principle that the government has the authority to make economic policy decisions and that courts should not interfere in such matters unless there is a clear case of illegality, mala fides, or arbitrariness. The judgment provides clarity on the government’s power to amend or withdraw exemption notifications, the relevance of the “indigenous angle” in such decisions, and the limitations of the principle of promissory estoppel in the context of legislative power.

This judgment is significant for businesses and policymakers alike. It highlights the need for businesses to be aware that tax concessions are not guaranteed and can be withdrawn or amended by the government. It also underscores the importance of judicial restraint in matters of economic policy and the need for courts to respect the government’s authority to make such decisions.

The case serves as a reminder of the delicate balance between the government’s economic policy prerogatives and the need for judicial oversight to ensure that the government acts reasonably and in the public interest. The judgment provides a framework for understanding the extent of the government’s powers in granting and withdrawing tax exemptions and the limits of judicial review in such matters.