The SC tells governments that scrapping incentives abruptly would shake business confidence. |
State governments vie with each other to attract industries to their territories. One familiar method is by offering concessions in power tariff, taxes and other charges. However, the same governments have often taken back such incentives, either due to a revenue crunch or because they are firmly in the saddle after an election. This upsets the industries which had invested huge amounts acting on the governments' promise. They now have the additional burden of litigating with the government. There have been a surfeit of such cases this year, and last week the court again delivered a lengthy judgement on this problem (UP Power Corporation Ltd vs Sant Steels & Alloys Ltd). |
The court emphasised that this was not a healthy phenomenon. It said: "In the twenty-first century, when there is global economy, the question of faith is very important. The government offers certain benefits to attract 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." |
The case had an air of déjà vu about it. Fifteen years ago, the UP government offered 33 per cent rebate on energy bills to new industrial units established in hilly areas. Many companies accepted the offer and made massive investments in the underdeveloped higher regions in the state. The jolt came seven years later. The new government cut the rebate by half. The industries rushed to the Allahabad high court, calling the government action arbitrary and against the well-known principles of promissory estoppel and legitimate expectations. The high court asked the power corporation to restore the rebate to the original level. The appeal of the corporation was also rejected by the Supreme Court. |
The arguments on both sides also traversed the familiar path. The corporation maintained that it reduced the rebate in public interest, it has the power to do so, it was only introducing new tariff and the agreement between it and the industries permitted such revision. On the other hand, the companies argued that the government could not renege on its promises after they had made substantial investments; its action flew in the face of the accepted principles of promissory estoppel and legitimate expectations. The concession given was a vested right and it could be revoked only by the same statute by which it was made; not by a mere notification. |
There are innumerable judgements to support both points of view, and several of them were recalled in the latest judgement. Ultimately, the court stated that the answers to the questions thrown up in such disputes would largely depend upon the facts of each case. But it emphasised that the general principle is that once the government offers such inducements and the industries act on them, "such an act cannot be fair and reasonable". It has been held in earlier judgments (Pawan Alloys case, 1997) that the doctrine of promissory estoppel could be invoked even against the government, except under a few circumstances. For instance, the offer can be withdrawn in public interest, if no one is put to any adverse consequences which cannot be rectified. |
A serious question which was raised in this case is whether the government, which granted the concession under a statute, could revoke it by a notification or 'delegated legislation'. The answer given by the court is significant. It said: "A distinction has to be made between the delegated legislation and the primary legislation. So far as the primary legislation is concerned, if the Act is passed by the state legislature and denies the benefit by the primary legislation, then no estoppel can be applied against that Act." But so far as delegated legislation is concerned, where delegated authorities pass certain notifications in exercise of the delegated authority, they are not capable of being revoked at any time. Moreover, the statute cannot make the revocation retrospective but for exceptional reasons. |
What the power corporation did was "highly against public morality", according to the Supreme Court. It further remarked that "we fail to understand why the corporation which allowed other parties to act on its representation could resile and leave the citizens in the lurch." The state cannot be permitted to act in such arbitrary fashion; it is against the principle of promissory estoppel which is based on public morality. These are resounding words which the governments, whether at the Centre or in the states, should take seriously if business confidence is to be nurtured in these crucial days. |
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