Introduction
There are a number of cases wherein the issue about validity of retrospective amendment in Fiscal Statues has been dealt with. One such situation arose under the Maharashtra Value Added Tax Act, 2002 (MVAT Act).
The background is that the State of Maharashtra has notified incentive schemes, popularly known as Package Scheme of Incentives (PSI). The schemes were notified from time to time in about 5 years interval.
A similar scheme was announced in the year 1993. Normally, the original unit coming up in the notified backward area is eligible for the benefits of such scheme/s. However, the Government also granted such benefits for expansion of units subject to compliance of certain requirements about minimum capital investment/increase in productions etc.
These units were issued Eligibility Certificate by the Implementing Agency like District Industries Centre and for sales tax purpose the Entitlement Certificate was issued by the Sales Tax Department. Based on such Entitlement Certificate, the eligible units were entitled to enjoy sales tax benefits by way of exemption from payment of tax or were given an option to have deferment facility, whereby they could collect the tax and pay the same to the Government after certain number of years as per the Scheme. The units had the option to choose the method, i.e. either exemption or deferment, for enjoying the benefits.
Pro-rata Method for Expansion
The issue arose where the unit was already holding Entitlement Certificate as an Original Unit (Existing Unit) and it was also granted further Entitlement Certificate for Expansion. The understanding of the Expansion Unit was that they were entitled to avail the benefit of Scheme for all the production of the unit, i.e. production relating to the Existing Unit as well as the Expansion.
However, the approach of the Sales Tax Department was that the Expansion unit can enjoy the benefit to the extent of ratio of Expansion. In other words, it was contemplated by theDepartment that out of the full production, only pro-rata production relating to the Expansion could enjoy PSI benefit. They clarified pro -rata method to work out such turnover by way of a circular. As per the said circular, unit can take benefit in proportion of capital increase to the total capital or production increase to the total production.
The issue was contested by the dealers since 2001 and in case of Pee Vee Textiles (App. No. 48 and others of 2000 dated 17.3.2001) MST Tribunal held that even in case of Expansion, the unit is entitled to enjoy benefit for the full production and the monetary limits should be adjusted accordingly. The issue was further contested before the Hon. Bombay High Court. The Hon. Bombay High Court in the case of Commissioner of Sales Tax vs. Pee Vee Textile (26 VST 281)(Bom) confirmed the decision of the Tribunal. The said judgment of the Hon. Bombay High Court was further confirmed by the Hon. Supreme Court in July 2009.
Retrospective Amendment
On this background, certain amendments were brought in the MVAT Act, in August 2009, by way of an Ordinance. Section 93 of the MVAT Act, 2002 was amended and other amendments were made providing the ratio method for pro-rata working in case of Expansion. Impliedly, the said amendment was effective from 01-04-2005. The period under BST Act was not touched and it remained governed by the above judgments of the High Court and Supreme Court. However, under VAT period effect was given from 01-04-2005.
Since the operation of the amendment was retrospective, it was challenged before the Hon. High Court on the ground of Constitutional Validity. Amongst others, following were the main contentions of the petitioners:
– There was no amendment in the original PSI and the changes are only in the Act which is not permissible.
– The retrospective amendment can be justified only when it is meant for removing the defect shown by the judiciary.
– The retrospective amendment will affect units harshly, since they have already enjoyed the benefits and now have no opportunity to pass on the burden to the buyers and the ultimate customers.
– There was conscious decision by the government from time to time not to implement the pro-rata method. The non-implimentation of section 41BB under BST Act and section 93 in the MVAT Act by not prescribing Rules for pro-rata method was stressed upon. It was shown that even the Rule for pro-rata method proposed in the draft Rules was withdrawn while publishing the Final Rules in 2005.
On behalf of government the submissions were as under:
– That there was intention to provide benefits on pro-rata method.
– There is no vested right to enjoy windfall benefits.
– In Pee Vee Textiles, the Hon. High Court confirmed the judgment of the Tribunal on the ground that inspite of having powers u/s. 41BB to provide pro -rata method, the same is not implemented by prescribing Rules. The legislature has now corrected the said position by the above retrospective amendment. Thus it is for curing the lacuna.
Judgment of the High Court in the case of Jindal Poly Films and Others (W.P.No.313 of 2010 and others dt. 10-10-2013).
After considering the arguments of both the sides, the Hon. High Court referred to a number of judgments about retrospective amendment in the Act. And the Hon. High Court observed that there is ample power for retrospective provision except that it should be reasonable. Like, if the levy is a surprise then it can be considered as invalid.
In particular facts of the above case, Hon. High Court felt that the amendment is not a surprise amendment, but it is to cure the basis of the judgment in the case of Pee Vee Textile. In a nutshell, the Hon. High Court has observed as under:
“32. Essentially, the issue before the Court is as to whether the validating legislation has cured the vice that was noted in the judgment of this Court. Alternately, whether the same judgment could have been rendered despite the amended provisions of the law. The judgment of the Division Bench in Pee Vee Textiles noted that the legislative intent embodied in Section 41BB of the Bombay Sales Tax Act, 1959 could not be effectuated in the absence of rules framed by the State Government prescribing the ratio for the grant of proportionate incentives. This anomaly has been corrected by the state legislature by the enactment of the Maharashtra Act 22 of 2009. The fact that a draft rule which had been formulated at an anterior point in time had not been converted into an operative piece of subordinate legislation cannot possibly override the power of the state legislature to enact legislation which falls within its legislative competence. There can be no estoppel against the legislature. It is legitimately open to the legislature to enact validating legislation with retrospective effect to cure a deficiency which was noted in the judgment of the Court as a result of which the legislative intent of granting incentives pro-rata could not be effectuated. The legislature has stepped in to cure the deficiency. The validating legislation and the amendment lay down the manner in which proportionate incentives would be computed. Such a course of action is legitimately open and cannot be regarded as being arbitrary or as violative of Articles 14 or 19(1)(g) of the Constitution. The principle of allowing pro-rata incentives subserves the object of the legislation. If the legislature has, as in the present case, determined that the purpose of the Package Schemes of Incentives should or would be achieved by allowing incentives to be computed on a proportional basis, that legislative assessment cannot be regarded as unconstitutional.”
The Hon. High Court accordingly upheld the retrospective validity and also justified levy of interest. However, the levy of penalty was held to be invalid for the period prior to the amendment. Accordingly, the Hon. High Court disposed of the petitions.
