G.F. Couto, J.
1 The constitutional validity of the Central Excise Notification No. 203/87 dated September 9, 1987, is being challenged in this Writ Petition under Article 226 of the Constitution by the petitioners, who therefore, seek a Certiorari quashing it and a Mandamus directing the respondents to continue the benefit of MODVAT Rules to Areated waters manufactured by the first petitioners, and in any event; to permit them to take the credit in respect of inputs lying in stock with them which were purchased on or before October 1, 1987.
2. The first petitioners, a Company incorporated under the Companies Act, 1956, are engaged in the manufacture of Aerated waters and soft drinks under various trade names, in their factory situated at Arlem, Goa and use therefore, several items as raw material, as well as bottles and metal crowns, purchased in the open market.
3. The excise duty payable under the Central Excises and Salt Act, 1944 (for Short, ' the Act'). prior to its amendment made on March 1, 1986, was levied and collected at the rates set forth in its First schedule Aerated waters were falling under its Items I-D and therefore, the first petitioners were to pay the excise duty under the said Item and in addition, excise duty on the raw materials bottles and metal crowns purchased by them in the open market. As under the Act, there was a levy on all the goods, this has a casceding effect of excise duties upon the raw materials and components (inputs) in respect of the value of the final product, for the value of the final product was necessarily enhanced by the excise duties paid upon the inputs. Apparently, in order to alleviate this casceding effect, some measures had been taken under the provisions of the Act and the Central Excise Rules, 1944, in the form of Set-off Procedure and Proforma Credit Scheme, inter alia, Notification No. 201/79 dated June 4, 1979, was issued exempting from excise duty on the final product to the extent of duty paid upon raw material falling under Item 68 and Rule 56-A provided for the Proforma Credit Scheme enabling a manufacturer to take credit of duty already paid upon raw materials and components while discharging his duty liability upon the finished products, the Scheme being however restricted to the raw materials or components which fell under the same Tariff Item as the finished excisable products.
4. It seems that these measures did not alleviate appreciably the said casceding effect, and the Central Government, therefore, proposed to examine whether the Value Added Tax (VAT) system followed in the Western Countries under which the tax is paid only the added value of the final product could be adopted in India. The Indirect Taxation Enquiry Committee (The Jha Committee) indeed considered the question of adopting the VAT system in India and recommended a modified system known as MANVAT. However, the technical Study Group on Central Excise Tariff appointed by the Finance Ministry after analysing the existing measures, preferred to expand the existing Proforma Credit Scheme rather than fully implement the MANVAT system and hence, recommended the extended Profoma Credit Scheme together with the MANVAT to a limited group of products as a solution to the problem.
5. Thereafter, in December, 1985, the Central Government announced Long Term Fiscal Policy, including a proposal to introduce a modified system of VAT, Known as MODVAT, and in March, 1986, in his Budget Speech in Support of the Finance Bill, 1986, the Finance Minister announced the introduction of the MODVAT scheme, clarifying however that, in view of its novelty, the said Scheme was being implemented in a phased manner, with effect from 1st March, 1986, covering at the initial stage, 37 specified Chapters of the Excise Tariff Act. The Aerated waters were not covered at this initial phase or stage.
6. In the meanwhile, the Act was amended with effect from March 1, 1986, deleting its First Schedule and making all excisable goods subject to duty at the rates provided in the Scheduled to the new Central Excise Tariff Act, 1985, Aerated waters falling under its Chapter 22, and further, Rules 57-A to 57-I were introduced in the Central Excise Rules also with effect from the same dates. Thereafter, in exercise of its powers under rules 57-A the Central Government issued the Notification No. 177/86-CE dated March 1, 1986, notifying the finished goods to which the MODVAT Scheme would be applicable, namely, goods falling under 37 Chapters of the Excise Tariff. Chapter 22 under which Aerated Waters fall was not however included and on the contrary, the Central Government rescinded on March 1, 1986, the Notification No. 201/79. But later on, Notification No. 325/86-CE dated May 27, 1986, was published exempting Aerated Waters falling under Heading No. 22.02 of the Schedule to the Central Excise Tariff Act, 1985, from so much of duty of excise leviable thereon under the Central Excises and Salt Act as equivalent to the duty excise leviable thereon, which is specified in the Schedule already paid on the flavouring essences and concentrates used in the manufacture of Aerated waters.
7. Then, in his Budget Speech in support of the Finance Bill 1987, the Prime Minister stated that the MODVAT Scheme introduced in 1986-87 Budget which was already covering 38 Chapters of the Excise Tariff, was being extended to all the remaining Chapters, except, those relating to textiles tobacco and petroleum sectors and on March 1, 1987, Notification No. 83/87- CE was issued amending the Notification No. 177/86-CE, the effect of the amendment being that the MODVAT Scheme was extended, inter alia to Aerated Waters falling under Chapter 22. However, a fresh Notification, being the Central Excise Notification No. 203/87 dated September 9, 1987, was issued further amending the Notification No. 177/86-CE and withdrawing thereby the MODVAT benefits to the Aerated waters from October 1, 1987.
8. Petitioner assail the constitutional validity of the Central Excise Notification No. 203/87 dated September 9, 1987 mainly, on two grounds. They indeed contend that (1) the said Notification is his by the doctrine of promissory estoppel inasmuch as the respondents having made a representation as regards the introduction of the MODVAT Scheme and implemented it, causing the petitioners to act on it, could not resile from such promise, and (2) the Notification is violative of the principle of equality enshrined in Article 14 of the Constitution as it discriminates against Aerated waters without disclosing any sound reasons therefore. Alternatively, petitioners claim that, in any event, the said Notification has no retrospective application and hence, the benefit of the MODVAT Scheme should not be withdrawn as regards the inputs purchased by them and on their stock on or before October 1, 1987.
9. The doctrine of promissory estoppel is guided by the principles of justice, fair play and good conscience. It was evolved by equity. Its aim is to prevent injustice and it neither falls in the realm of contract nor in the realm of estoppel proper. It debars one, who has made a clear promise intending to create legal relations knowing or intending that it would be acted upon, from receding or resiling from such promise, if the party to whom the promise was made had, in fact acted on it, for such receding or resiling would be inequitable and unjust, as observed by the Supreme Court in M.P. Sugar Mills v. State of U.P., : [1979]118ITR326(SC) Bhagwati, J, (as he then was) speaking for the Court, has indeed expounded the doctrine of promissory estoppel in the following words :
'The true principle of promissory estoppel, therefore, seems to be that where one party has by his words or conduct made to the other a clear and unequivocal promise which is intended to create legal relations or affect a legal relationship to arise in the future. Knowing or intending that it would be acted upon by the other party to whom the promise is made and it is in fact so acted upon by the other party, the promise would be binding on the party making it and he would not be entitled to go back upon it, if it would be inequitable to allow him to do so having regard to the dealings which have taken place between the parties, and this would be so irrespective whether there is any pre existing relationship between the parties or not.'
Promissory estoppel does not require to attract its applicability that the promisee, acting in reliance of the promise, suffers or would suffer a detriment. It merely requires that the promisee should have altered his position relying on the promise, a view that has been expressed by the Supreme Court in the same case by observing as follows :-
'We do not think that in order to invoke the doctrine of promissory estoppel it is necessary for the promisee to show that he suffered detriment as a result of acting in reliance on the promise. But we may make it clear that if by detriment we mean in justice to the promisee which would result if the promisor were to recede from his promise, then detriment would certainly come in as a necessary ingredient. The detriment in such a case is not some prejudice suffered by the promisee by acting on the promise, but the prejudice which would be caused to the promisee, if the promisor were allowed to go back on the promise.'
promissory estoppel is not also confined to the private relations of the citizens only. It applies as well to the Government actions, and the Government cannot claim to be exempted from the liability to carry out its promise as the Court further observed after quoting from the Indo Afghan Agencies case A.I.R. 1968 S.C. 718.
'The law may, therefore, now be taken to be settled as a result of this decision, that where the Government makes a promise knowing or intending that it would be acted on by the promisee and in fact, the promisee, acting in reliance on it, alters his position. The Government would be held bound by the promise and the promise would be enforceable aginst the Government at the instance of the promise, notwithstanding that there is no consideration for the promise and the promise is not recorded in the form of a formal contract as required by Art. 299 of the Constitution.'
However, it was added, that though the Government cannot claim such exemption from liability to carry out its promise on some indefinite and undisclosed ground of necessity or expediency or on a mere claim of change of policy, the promissory estoppel being a doctrine of equity, the Court would exonerate the Government from that liability if satisfied, on proper and adequate material, that overriding public interest requires that the Government should be free to act unfettered by the promise.
10. The doctrine of promissory estoppel so laid down in M.P. Sugar Mills' case was reiterated by the Supreme Court in Godrej Philips India Ltd's case : [1986]158ITR574(SC) and once again, it was made clear the the doctrine of promissory estoppel is applicable against the Government in exercise of its governmental, public or executive functions and that the doctrine of executive necessity or freedom of future executive action cannot be invoked to defeat the applicability of the doctrine of promissory estoppel. It was also re-affirmed that there can be no promissory estoppel against the Legislature in the exercise of its legislative functions nor can the Government or a public authority be debarred by promissory estoppel from enforcing a statutory prohibition. Equally true is, the Supreme Court added, that promissory estoppel cannot be used to compel the Government or a public authority to carry out a representation or promise which is contrary to law or which is outside the authority or power of the office of the Government or of the public authority to make. Similarly, in Bakul Oil Industries' case, : [1987]165ITR6(SC) and in Pournemi Oil Mills' case, : [1987]165ITR57(SC) the Supreme court held that the doctrine of promissory estoppel is applicable to subordinate legislations, such as exemption notifications and orders made in exercise of powers conferred by a Statute, a view that naturally was followed by this High Court in Coat Tyres of India Ltd' case 1987(31) E.L.T. 322 and in Bharat Commerce and Industries Ltd's case : 1987(32)ELT40(Bom) , by holding that the doctrine of promissory estoppel is available against the Government even in exercising powers conferred on it by a statute, it issues subordinate legislations and further that to defeat the plea of promissory estoppel, as observed in M.P. Sugar Mills case, the Government must satisfy the Court on the strength of germane material, that it should not act upon its representation.
11. Does this doctrine of promissory estoppel operate and is it attracted in the facts of this case against the respondents? Answering this question in the affirmative, petitioners contended that a clear representation was made by the Central Government that the MODVAT system was being adopted, following such representation/Promise with its implementation, first as regards 37 Chapters of the Schedule to the Central Tariff Act, 1985, and thereafter, to all other Chapters except to petroleum, tobacco and textile products. Petitioners acted upon such representation inasmuch as the Scheme being optional under Rule 57-G. Petitioners voluntarily adopted it. Hence, the doctrine of promissory estoppel is fully attracted and applicable in this case, especially when the benefit of the MODVAT having been extended to Aerated Waters, was withdrawn by the first respondents without any reasons, germane or otherwise being assigned.
12. Elaborating the above contentions, Mr. Setalwad, the learned Counsel appearing for the petitioners, submitted that the Central Government had proposed to examine whether the Value Added Tax (VAT) system followed in the Western countries could be adopted in India with a view to solving the problem arising out of the casceding effect of the excise duties upon inputs on the value of the final products and had therefore, appointed the Jha Commission. A modified system of the VAT system, called MANVAT, was recommended by the said Commission, but it found no favour with the Technical Study Group on Central Excise appointed by the Finance Ministry, and therefore, it was suggested an extended proforma Credit Scheme together with the MANVAT to a limited group of products. This was followed by the announcement, in December, 1985, of the Long Term fiscal Policy in which the purpose to introduce a modified system of VAT, referred to as MODVAT, was expressed, and consistent with such purpose, the Finance Minister announced in March, 1986, during his Budget Speech in support of the Finance Bill, 1986, the introduction of the MODVAT system in a phased manner with effect from March 1, 1986, and covering at that initial stage only the Items failing under 37 Chapters of the Schedule to the Excise Tariff Act, 1985, among which Aerated Waters found no place. The Act was amended, also with effect from March 1, 1986 by deleting its First Schedule and by making all the excisable goods subject to duty as prescribed in the Schedule to the new Central Excise Tariff Act, 1985, and in addition, Rules 57-A to 57-I were introduced in the Central Excise Rules, 1944. Then the Notification No. 177/86 C.E. dated March 1, 1986, notifying the goods falling under the 37 Chapters to which the MODVAT scheme was applicable was issued, and the Notification No. 201/79- C.E. was rescinded. Thereafter, Notification No. 325/86-C.E. dated May 27, 1986, was published exempting Aerated waters from as much excise duty as already paid on essences and concentrates used in its manufacture. Then, also consistent with the announcement made by the Finance Minister in March, 1986. The Prime Minister, in his Budget Speech in support of the Finance Bill 1987, stated in unequivocal terms that the MODVAT system introduced in 1986-87 Budget which was already covering 38 Chapters of the Excise Tariff Act was being extended to all the remaining Chapters, except to petroleum, tobacco and textile products, and accordingly, Notification No. 83/87- C.E. dated March 1, 1987, was made amending the Notification No. 177/86-C.E. and inter alia, extending the MODVAT scheme to the goods falling under Chapter 22, i.e. to Aerated waters amongst others. The above facts and in particular, the announcement of the Long Term Fiscal Policy in December, 1985. The Budget speeches made, respectively, by the Finance-Minister and the Prime Minister in support of the Finance Bills of 1986 and 1987 and the making of the Notifications No. 177/86 C.E. and No. 83/87-C.E. not only, according to the learned Counsel, amount and constitute a clear, positive and unequivocal representation made by the Government as regards the introduction of the MODVAT system for a period of 5 years from March, 1986, but also indicate its implementation. The petitioners, the argument proceeded, accepted and opted for the said system and therefore altered their position on account of the representation above referred to. The doctrine of promissory estoppel thus applies in all fours and is attracted in this case. The first respondents could not, therefore, have issued the impugned Notification No. 203/87- C.E. excluding from the benefits of the MODVAT system the inputs and final products falling under Chapters 22.01 and 22.02 which pertain to Aerated waters.
13. It is undisputable, in view of the material placed before us, that a positive clear and unequivocal representation was made by the first respondents that the MODVAT scheme or system was being introduced excluding however from its ambit due to the complex problems inherent to such goods, petroleum, tobacco and textile products. The announcement of the Long Term Fiscal Policy and the above mentioned Budget speeches made by the Finance Minister and the Prime Minister leave no margin for doubts in this regard. An unequivocal and firm representation was certainly made by the Central Government as regards the introduction of the MODVAT scheme and such representation was undoubtedly intended to create legal relations or to affect legal relationships arising in future, knowing or intending that it would be acted upon. Mr. Khandeparkar, the learned Counsel appearing for the respondents, while fairly admitting that a representation to that effect was undoubtedly made, however, contended that such representation was not that the benefit of the MODVAT would be extended to Aerated Waters on a continuous and permanent basis as wrongly claimed by the petitioners. On the contrary, it is clear that the said scheme was in an experimental stage and therefore, it cannot be said that the Central Government had represented that the benefit of the MODVAT system once given could not be withdrawn for all time or at least for a period of 5 years as alleged by the petitioners. But there is no merit in this submission. We already mentioned that the Central Government announced in December, 1985, its Long Term Fiscal Policy in compliance with the commitment made to move towards a Long Term Fiscal Policy in the Budget Speech for the year 1985-86. In its paragraph 1.1, it is said that the long term Fiscal Policy is co-terminous with the Plan and in paragraph 1.13, that the same long term fiscal policy is intended to serve as as an effective vehicle for strengthening the operational linkages between the fiscal and financial objectives of the Seventh Plan and the annual budgeting exercises to be conducted during the Plan period. It is further stated that the Long Term Fiscal Policy will serve as a bridge between the 5 years financial targets of the Seventh Plan and the annual budgets by providing an indicative yearwise financial framework for Fiscal Policy. Then, paragraphs 6.9 to 6.14 speak of the MODVAT system, clarifying in paragraph 6.12 that the basic approach would be to move towards an extension of the then existing system of Proforma Credit to all excisable commodities with the exception of a few, like petroleum, tobacco and textile products and that the programme would be implemented in a phased manner over a period of years. A link has thus been established between the introduction of the MODVAT system and the Seventh plan and therefore, this leads to the irresistible conclusion that the introduction of the MODVAT was, at least, for the period of the said Plan. The above contention of Mr. Khandeparkar has, therefore, no substance, being also pertinent to record that the Central Government not only made the above mentioned representation, but also proceeded to implement it by first publishing the Notification No. 77/86-CE. and then, amending it by Notification No. 83/87- C. E. so as to extend the benefit of MODVAT to the Chapters of the Schedule to the Excise Tariff Act, 1985, which had been left out initially, excepting however from it, the petroleum, tobacco and textile products.
14. But, though it is true that the Central Government made the above representation as regards the introduction of the MODVAT system, no less true is that the material brought on record by the petitioners is not at all sufficient to establish that they had acted on such representation. The burden to show that they had acted on the aforesaid Government's representation and that had, therefore, altered their position was, undoubtedly, on them, for one who takes shelter under the doctrine of promissory estoppel has not only to establish with proper and adequate material that a clear and unequivocal representation or promise which is intended to create legal relations or affect a relationship to arise in future was made, but also that the party to whom the representation/promise was made had acted upon it. We get sustenance for the above view in the decision of the Supreme Court in Bakul Cashew Co. v. Sales Tax Officer, : [1986]159ITR565(SC) . This burden was not at all discharged by the petitioners, as except for a bare submission made in the course of the arguments that they altered their position by opting gor the MODVAT Scheme Which, according to them, provides for instant credit and a bare averment in ground (i) of the petition that they 'acted in pursuance and reliance on the extension of the MODVAT Scheme by Notification No. 83 of 1987 and planned their entire scheme of production, finance, etc., on the basis of the MODVAT being available,' the petitioners did not care to place before us sufficient material, and for that matter any material, to establish that they acted upon the representation of the Central Government and have thereby altered their position.
15. We have seen that the doctrine of promissory estoppel requires two basic conditions to operate : there should be, in fact, a promise/representation which is intended to create legal relations or affect a legal relationship to arise in future with the Knowledge or intention that it will be acted upon by the promisee, and further it is necessary that the promisee acting on the promise, alters his position. Petitioners failed to establish this second requirement, viz. that they altered their position by acting upon the Government's representation in respect of the MODVAT scheme. Thus, their first challenge based on the doctrine of promissory estoppel fails.
16. This takes us to the petitioners next ground, namely, that the impugned Notification is violative of Article 14 of the Constitution. In this regard, Mr. Setalvad contended that not only the classification made by the first respondents distinguishing Aereted Waters from the other excisable goods except petroleum, tobacco and textile products falling under the several Chapters of the schedule to the Excise Tariff Act, 1985 is not permissible inasmuch as it is not founded is an intelligible differentia and in addition it has no nexus with the objective sought to be achieved by the notification, but also it further violates Article 14 in that it arbitrarily discriminates against the Aerated waters, for no reason, leave alone any sound reason, was assigned to exclude such goods from the earlier given benefits of the MODVAT system.
17. The Scope and ambit of Article 14 of the Constitution is well known. We may, however, recall using the words of the Supreme Court in Ajay Hasia v. Khalid Mujib Sohravardi and others, : (1981)ILLJ103SC that :
'It is sufficient to state that the content and reach of Article 14 must not be confused with the doctrine of classification. Unfortunately, in the early stages of the evolution of our constitutional law, Article 14 came to be identified with the doctrine of classification because the view taken was that that Article forbids discrimination and there would be no discrimination where the classification making the differentia fulfils two conditions, namely, (i) that the classification is founded on an intelligible differentia which distinguishes persons or things that are grouped together from others left out of the group; and (ii) that differentia has a rational relation to the object sought to be achieved by the impugned legislative or executive action. It was for the first time in E.P. Royappa v. State of Tamil Nadu, : (1974)ILLJ172SC , that this Court laid bare a new dimension of Article 14 and pointed out that Article has highly activist magnitude and it embodies a guarantee against arbitrariness.'
That Article 14 strikes at arbitrariness in State action and ensures fairness and equality of treatment was re-affirmed in Maneka Gandhi's case, : [1978]2SCR621 with the further observation that the principle of reasonableness which legally and philosophically is an essential part of equality or non-arbitrariness, pervade Article 14 like a brooding ominipresence. It was further reiterated in Ramana Dayaram Shetty v. The International Airport Authority of India and others, : (1979)IILLJ217SC in view of the above decisions and as observed by the Supreme Court in Ajay Hasia's case (supra), it must therefore, now be taken to be will settled that 'what Article 14 strikes at is arbitrariness because an action that is arbitrary, must necessarily involve negation of equality. The doctrine of classification which is evolved by the courts is not paraphrase of Article 14 nor is it the objective and end of that Article. It is merely a judicial formula for determining whether the legislative or executive action in question is arbitrary and therefore, constituting denial of equality. If the classification is not reasonable and does not satisfy the two conditions referred to above, the impugned legislative or executive action would plainly be arbitrary and the guarantee of equality under Article 14 would be breached. Wherever therefore, there is arbitrariness in State action whether it be of the legislature or of the executive or of an 'authority' under Article 12, Article 14 immediately springs into action and strikes down such State action. In fact, the concept of reasonableness and non-arbitrariness pervades the entire constitutional scheme and is a golden thread which runs through the whole of the fabric of the Constitution'.
18. We may, therefore, proceed to consider the merits of the petitioners' challenge, keeping in mind the law as above laid down by the Supreme Court as regards the scope and the ambit of Artice 14. Mr. Setalwad has, in this connection urged that the Long Term Fiscal Policy paper as well as the Budget speeches above referred to, delivered by the Finance Minister and by the Prime Minister, clearly show that the first respondents had made for the purpose of the application of the MODVAT Scheme, a broad classification, distinguishing the petroleum, tobacco and textile products in view of the complex problems involving them from all other excisable goods falling under the various Chapters, of the schedule to the Central Excise Tariff Act. That classification has a rational nexus with the objective to be achieved with the MODVAT system and is therefore, entirely valid and permissible. However, a fresh classification made by issuing the impugned Notification No. 203/87 C.E. is clearly bad and impermissible inasmuch as on one hand, there is for the purposes of MODVAT Scheme, no intelligible differentia distinguishing the goods falling under Items 22.01 and 22.02 of the Schedule to the Central Excise Tariff Act from the other goods falling under other Chapters which had been grouped together with Aerated Waters to justify and warrant a classification taking such items from the said group, the classification having in addition no rational nexus with the objective of the scheme, and on the other, is arbitrary in that it discriminates against the Aerated Waters depriving them, without any reason, of the benefits of the same Scheme.
19. We find however great difficulty in accepting those contentions though it is no doubt true that at the first glance, it may appear from the Long Term Fiscal Policy paper and the above referred to Budget Speeches made by the Finance Minister and by the Prime Minister in support of the Finance Bill of the years 1986 and 1987 that the first respondents had, in fact, made a broad classification for the purposes of the application of MODVAT system distinguishing the petroleum, tobacco and textile products from all other products falling under any of the Chapters of the Schedule to the Central Excise Tariff Act. However, this prima facie conclusion cannot be accepted at its face value without considering some other relevant aspect, and an overall view of the matter indicates that no firm classification was made but, on the contrary, a tentative, flexible and dynamic classification was made which obviously was not meant to be static and immutable but was bound to change at any time, considering the revenue implications and the lesson gained from experience. In this regard it is pertinent to make a reference to what is stated in the Long Term Fiscal Policy paper. In its paragraph 1.1, it is clearly stated that a commitment has been given to move towards a Long Term Fiscal Policy conterminus with the Plan in the Budget speech for the Financial Year 1985-86. Then, in paragraph 6.1, it is stated that the proposed reforms in the structure of customs and excise duties were designed to promote their primacy of the basic objectives of economic growth, equity simplicity and built-in revenue raising capacity and further that these reforms were intended to serve as vehicles for progressively moving from discretionary quantitative restrictions and physical controls to fiscal instruments in managing the economy. Paragraph 6.2 states that the basic thrust of the reforms of the Central Excise would be to greatly simplify the existing multitude of rates and exemptions to undertake major strides in relieving the taxation of inputs in production and to rationalise several special schemes such as those for small scale units and for duty drawbacks. In paragraph 6.3 a reference is made to the excise duties in existence at the relevant time and in paragraph 6.4 it is said that the multiplicity of forms in which excise duties are levied complicates the structure, making it difficult to assess the final burden and requires elaborate accounting and monitoring. It further says that it was proposed to simplify the structure by merging the various excise duties into a single basic rate and retaining only the cases as separate levies earmarked for specific purposes. Then, in paragraph 6.9 to 6.14 the paper deals with the MODVAT system. Paragraph 6.9 states that taxation of inputs generally distorts the productions structure and results in casceding of taxes and makes it very difficult to asses the distributions of the tax burden across different sections of society. In its turn, paragraph 6.10 states that the most comprehensive and the oretically appealing way of providing set-offs for taxation of inputs is to adopt Value Added Taxation (VAT) in place of the existing system of Domestic Indirect Taxes, but a number of formidable practical considerations, including the problems of incorporating the sales taxes of States into a Centrally administered VAT, was militating against such a solution. Then, in paragraph 6.11, it is noted that nevertheless, considerable progress could be made towards relieving inputs of taxation without adopting a full-fledged VAT and that some movement in that direction had already taken place. Paragraph 6.12 speaks of the intention to greatly expand the scope of the provisions for set-offs for excise and countervailing duties paid on inputs, with a view to coming as close to a generalised set-off for excise(and countervailing duty) taxation of inputs as it was administratively feasible. It further points out that the basic approach to it would be to move towards an extending of the existing system of Proforma Credit to all excisable commodities with exception of a few like petroleum, tobacco and textile products. The programme would amount to a modified system of VAT, being called MODVAT, to be implemented in a phased manner over a period of years taking due account of the revenue implications, the need to revise administrative procedures and the lessons from experience gained in the early stages of the reform. And finally in paragraph 6.13 it is emphasized that the MODVAT programme is intended to be broadly revenue neutral and that it is not proposed to use MODVAT to give substantial net reliefs on excise and further that the loss of duty on inputs would be recouped through higher excise taxation on final products.
The above portions of Long Term Fiscal Policy paper clearly indicate that the intendment in adopting the MODVAT Scheme was not to give an exception of the excise duty or a concession in that respect, but merely to simplify the system of collection of the excise duty which was in existence. It further discloses that great difficulties existed in the implementation of the VAT System and, therefore, a modified system known as MODVAT was intended to be implemented as an experimental measure.
MODVAT was to be implemented thus in stages and though the final intention was to extend it to all the excisable commodities with exception of a few, like petroleum, tobacco and textile products, nonetheless, the im plementations, thereof was to be made in a phased manner taking due account of the revenue implications, the need to revise administrative procedures and the lessons from experience gained in the early stages of the reform. It is also seen that the MODVAT scheme was intended to be broadly revenue neutral, meaning by that, that no substantial net reliefs on excise would be available nor loss of duty on inputs as the same would be recouped through higher excise taxation on final products. Thus, the effect of the above statements made in the Long Term fiscal Policy paper is clear. The MODVAT system merely constitutes a revised form of collection of the excise duty. It does not constitute an exemption of duty or concession in that respect. Petroleum, tobacco and textile products were excluded from the scheme in view of the inherent problems involving them and though the scheme was intended to be extended to all other commodities, the extension of the MODVAT to other products was to be made in stages, subject to variations dictated by lessons gained from experience. This being the case, the broad classification distinguishing the petroleum, tobacco and textile products from all other excisable commodities cannot be said to be a final classification for the purposes of the implementation of the MODVAT scheme. On the contrary, it is apparent that the said classification was a tentative and most flexible one which was bound to be modified keeping in mind the lessons gained from experience as well as revenue implications.
20. That apart, we must also keep in mind that we are concerned with the taxation law in this case. No doubt, taxation law cannot claim immunity from the equality clause of the constitution and as such, the taxation statute cannot also be arbitrary or oppressive, but as the Supreme Court observed in Khandige Sham Bhat's Case, A.I.R. 1963 S.C. 591 at the same time, the Court cannot meticulously scrutinise the impact of its burden on different persons or interests and whether the adopted method is capricious, arbitrary, fanciful or clearly unjust. The State has undoubtedly a wide discretion in selecting persons and objects it will tax and this aspect has to be considered in deciding whether a taxation law violates Article 14 as discriminatory. Taxation law, as held in K.T. Moopil Nair's case, : [1961]3SCR77 , surely must also pass the test of Article 14, but is not open to attack on the ground that it taxes some persons or objects and not others, for, as observed in M/s. East India Tobacco Co.'s case A.I.R. 1962 S.C. 1732, it is only when the law operates within its range of selection and cannot be justified on the basis of any valid classification that such attack is permissible. Tax laws, the Supreme Court also observed in T.G. Venkataraman v. State of Madras, : (1967)IILLJ246SC , reiterating the view earlier taken in M. Venugopala Ravi Verma Rajah v. Union of India, : [1969]74ITR49(SC) , are aimed at dealing with complex problems of infinite variety necessitating adjustment of several desperate elements. It was observed that :-
'The courts accordingly admit, subject to adherenct to the fundamental principles of the doctrine of equality, a larger play to legislative discretion in the matter of classification. The power classify may be exercised so as to adjust the system of tauation in all proper and reasonable ways : The Legislature may select persons properties transactions and objects and apply different methods and even rates for tax, if the Legislature does so reasonably...If the classification is rational, the Legislature is free to choose obects of taxation, impose different rates, exempt classes of property from taxation, subject different classes of property to tax in different ways and adopt different modes of assessment. A taxing statute may contravence Art. 14 of the Constitution if it seeks to impose on the same class of property persons, transactions or occupations similarly situate incidence of taxation, which leads to obvious inequality.'
It was further held that it is for the Legislature to determine to the objects on which tax shall be levied, and the rates thereof and the Court will not strike down an Act as denying the equal protection merely because other objects could have been, but are not, taxed by the Legislature. The view was again re affirmed by the supreme Court in M/s. Jaipur Hosiery Mills Pvt. Ltd. v. The State of Rajasthan and others, : [1997]1SCR396 , Anant Mills v. State of Gujarat, : [1975]3SCR220 and Income-tax Officer, Shillong v. N.T.R. Rymbai A.I.R. 1976 S.C. 670, and therefore, it is well settled that although taxation law is not an exception to the doctrine of Article 14, when it is challenged on the ground of being discriminatory, it has always to be borne in mind that in matters of taxation, the legislature has a very large freedom in matters of classification as long as it adheres to the fundamental principles underlying the said doctrine and as such, it is only when it operates unequally within the range of its selection and cannot be justified on the basis of valid classification, that there will be a violation of Article 14 of the Constitution.
21. The MODVAT Scheme was introduced, as it was seen, experimentally and was sought to be implemented in a phased manner over a period of years, taking into account the revenue implications, the need to revise administrative procedures and the lessons from experience gained in the early stages of the reform. Its aim and objective is to simplity the Central excise tax collection, being broadly revenue neutral. Therefore, any classification made for implementation of the MODVAT Scheme is always subject to the revenue implications and lessons learnt from experience in the early stages. Differentiation is not always discriminatory, the Supreme Court held in Ajay Kumar v. Union of India A.I.R. 1984 S.C. 1130, and if there is a rational nexus on the basis of which differentiation has been made with the object sought to be achieved by a particular provision, then such differentiation is not discriminatory and does not violate the principles of Articles 14 of the Constitution. The classification made in the impugned Notification was therefore, in the circumstances, perfectly valid as motivated by the revenue implications and the lessons gained from experience. It had a rational nexus with the objective to be achieved by the MODVAT system and hence, it could not be said to violate the principles of Article 14 of the Constitution.
22. The learned Counsel for the petitioners however, placing reliance in P.J. Irani v. State of Madras, : [1962]2SCR169 , further contended, as already mentioned, that the withdrawal of the benefits of the MODVAT system was unreasonably and arbitrarily done as no reasons therefore, were assigned, being as such violative or Article 14. We find no force in this contention, for such reasons are patent and sprout from the very experimental introduction of the MODVAT system in a phased manner and subject to lessons gained from experience as well as the revenue implications. We may also point out that the MODVAT system neither grants an exemption from the excise duty nor does it give a concession. In any event, a concession being not a matter of right, its withdrawal is permissible as observed by the Supreme Court in I.C. Corporation v. Commercial Tax Officer, Hubli, : [1975]2SCR345 and in addition, it is pertinent to note that the petitioners failed to establish that they had been treated unequally, although it was for them so to do, as it flows from the decision of the Supreme Court in Ajay Kumar Mukherjee v. Legal Board of Barpata, : [1965]3SCR47 .
23. It thus, necessarily, follows that the petitioners second challenge to the impugned Notification, namely, that the said Notification infringes Article 14 of the Constitution has also, for the reasons herein before adumbrated no merit.
24. Having thus disposed of the main contentions of the petitioners, we come now to the last limb of their case. Mr. Setalwad has indeed contended that in any event, the impugned Notification does not obviously have restrospective effect and therefore, the petitioners are entitled to take the credit in respect of the inputs purchased by them on or before October 1, 1987, and are lying in stock with them. He urged that the effect of the MODVAT Scheme is to give instant credit to the duties paid on the inputs and consequently, the right to such credit s immediate and is instantly accrued. The impugned Notification was issued on September 9, 1987, but with effect from October, 1, 1987. It necessarily follows, he argued, that the benefits of the MODVAT system had occurred instantly to the petitioners upto September 30, 1987, and therefore, the instant credits accrued to them upto that particular date cannot be taken away from the petitioner under the guise that the impugned Notification is attracted. That would amount to restrospective application of the said Notification though it, in terms, says to be prospective in nature. The learned Counsel placed reliance in support of the above submission in Union of India v. Kirloskar Brothers Ltd., Dewas : 1978(2)ELT690(MP) ; Cannanore Spg. and Wvg. Mills v.Customs Collector, Cochin, : 1978(2)ELT375(SC) and Collector of Central Excise, Bangalore v. Wipro Information Technology .
25. The above views were, however, strongly opposed by Mr. Handeparkar. He first contended that no action has yet been taken by the respondents to discontinue the benefits of MODVAT system to the petitioners as regards the inputs already used by them in the manufacture of Aerated waters upto September 30, 1987. and therefore, it is not open to the petitioners to challenge an hypothetical action that the respondents might, or might not take. Secondly, the benefit of the MODVAT Scheme accrues only as regards inputs when they are used in or in relation to the manufacture of the final products as can be seen from Rule 57-A Therefore, no credits had accrued to the petitioners on the inputs purchased by them before October 1, 1987, but had not been used in the manufacture of Aerated waters upon September 30, 1987.
26. No doubt , in Cannanore Spg. and Wvg. Mill case (Supra), the Supreme Court has observed that the rule-making authority had not been invested with the power under the Central Excises and Salt Act to make rules with retrospective effective and that in Kirloskar Brothers' case (above), it has been observed that excise duty being a tax on manufacture or production, the material time for liability of excise duty will be the date of the manufacture of production and therefore, if a Notification withdrawing the exemption came into effect from a particular date, it will have no restrospective operation and the excisable goods which were in stock till that particular date would be exempt from excise duty. Similar appears to be the view taken in Wipro Information Technology case . But, these authorities appear to be of no help to the case at hand. As rightly pointed out by Mr. Handeparkar, one has to bear in mind in the first place, that the respondents had not taken yet any action withdrawing the benefits of the MODVAT system as regards the inputs purchased by the petitioners and utilized by them upto 30th September, 1987, and on the other, it appears that, in any event, the petitioners are not entitled to the benefits of the MODVAT Scheme as regards inputs purchased by them before October 1, 1987, but not yet utilized in the manufacture of Aerated waters. This being the case, Mr. Khandeparkar is quite right in his submission that no relief can be granted to the petitioners in this regard. The petitioners on one hand had not shown that the respondents had taken or would take away the benefits of the MODVAT in respect of inputs purchased by them upto 30th September, 1987, and therefore, one cannot say whether or not any action in that direction at all be taken, and on the other, as also rightly pointed out by Mr. Kandeparkar, the provision of Rule 57-A sets the matter at rest. It indeed provides that the excise duty paid under the Central Excise and Salt Act and the Finance Act, 1985, as well as the additional duty under the Customs Tariff Act, 1975, paid on inputs shall be allowed as credit when used in or in relation to the manufacture of the final products and that credit of duty so allowed shall be utilized for payment of duty leviable on the final product. Undoubtedly as observed in the commentary to the Central Excise Act by Acharya shuklendra, Vol. 2, page 1367, the MODVAT Scheme provides for instant credit, but the aforesaid provision of Rule 57-A makes it clear and beyond doubt that such credit is accured only on the inputs which are actually used in the final products and not on the inputs purchase but not yet utilized. Thus, in our view, though undoubted, the petitioners will be entitled to get the benefits of the MODVAT Scheme in respect of the inputs purchased by them and utilised in the manufacture of Aerated Waters upto September 30, 1987, no less true is that they will not be entitled to the said benefits on inputs purchased by them upon 30th September, 1987, but not utilized on that date, as the impugned Notification had taken away from them the said benefits with effect form October 1, 1987.
27. It can thus be seen that none of the challenges of the petitioners against the impugned Notification No. 203/87-CE stands scrutiny. Therefore, for the foregoing reasons, the petition is, obviously liable to be dismissed. Before parting with this case, we may however mention that it is the case of the petitioners themselves that, as a result of the credit utilized by the first petitioners by the application of the MODVAT system, the value of their final a product had been reduced to the extent of 5 paise per bottle, either of Sodas or of flavoured Aerated Waters. It is further their case, that the rate of the excise duty on Sodas was raised by 15 paise per bottle and by 20 paise as regards each bottle of flavoured Aerated waters, with effect from 1st March, 1987. Petitioners, as also averred by them had accordingly raised the prices of their products to cover the increase in excise duty and other consequential increase in local levies, but, with the withdrawal of the benefit of the MODVAT, they had not reduced accordingly the prices of their final products, as otherwise was only to be expected.
28. The result, therefore, is that this petition fails and is consequently dismissed with costs. The rule is accordingly, discharged.
29. Petitioners make through their learned counsel, an oral application for leave to appeal to the Supreme Court. Leave rejected, since we decided the case by applying the law as laid down by the Supreme Court to the facts of the case and as such, no substantial questions of law of general importance arise, in our view.