The Bombay High Court has affirmed that a State Government cannot evade its binding promise of tax exemption to SEZ developers merely because a local body failed to amend municipal rules. In a significant ruling, the Court held that when the State makes a clear, policy-based commitment to investors and they act in reliance on it, the doctrine of promissory estoppel compels the State to honor that promise - even if the implementing agency defaults.
Background & Facts
The Dispute
The petitioner, EON Kharadi Infrastructure Pvt. Ltd., was approved as a developer of an IT/ITES Special Economic Zone (SEZ) at Kharadi, Pune. The State of Maharashtra, through its SEZ Policy dated 12.10.2001, explicitly promised developers exemption from all State and local taxes, including octroi. The petitioner invested substantial capital based on this assurance and paid octroi to the Pune Municipal Corporation (PMC) between 2005 and 2011 under protest. Despite repeated requests, the PMC refused to grant exemption, citing absence of amended rules. The petitioner sought refund of Rs.6,69,91,584/- paid as octroi, along with interest at 18% per annum.
Key Facts
- The State of Maharashtra issued its SEZ Policy on 12.10.2001, Resolution No.SEZ2001/(152)/IND-2, Clause (6) of which stated: "Developers of SEZs... will be exempted from all State and local taxes and levies, including... Octroi."
- The policy further provided: "If due to tax system constraints, it is not advisable to grant direct exemption... the State taxes paid would be fully reimbursed."
- The petitioner was granted formal approval by the Central Government on 27.01.2006 and notified under the SEZ Act, 2005 on 28.09.2006.
- The petitioner paid octroi to PMC from 2005 to 2011, totaling Rs.6,69,91,584/-.
- The petitioner wrote to PMC and the State Government on 31.05.2007 and 22.12.2007 seeking exemption.
- On 18.07.2007, the State’s Urban Development Department directed PMC to propose amendments to the Maharashtra Municipal Corporations Act (MMC Act) to implement the exemption.
- PMC’s Law Committee recommended amendment on 13.08.2008; the General Body deleted the subject on 23.06.2009.
- On 21.07.2012, PMC formally refused exemption, directing the petitioner to continue paying octroi.
- The petitioner filed the writ petition on 20.05.2013.
- The State Government, in its affidavit dated 27.11.2017, admitted: "the Applicant EON Kharadi Infrastructure Pvt. Ltd., is entitled to Octroi exemption."
- Octroi was abolished in Maharashtra w.e.f. 01.04.2013, replaced by Local Body Tax.
Procedural History
- 12.10.2001: State of Maharashtra issues SEZ Policy with octroi exemption promise.
- 27.01.2006: Central Government approves petitioner’s SEZ proposal.
- 28.09.2006: Notification issued under SEZ Act, 2005.
- 18.07.2007: State Government directs PMC to propose amendment to MMC Act.
- 23.06.2009: PMC General Body deletes proposal to amend octroi rules.
- 21.07.2012: PMC issues final refusal of octroi exemption.
- 20.05.2013: Writ Petition No.5275 of 2013 filed before Bombay High Court.
- 06.04.2017, 27.11.2017, 09.03.2026: Three affidavits filed by State Government.
- 12.03.2026: Judgment reserved.
- 07.04.2026: Judgment pronounced.
The Parties' Positions
Petitioner: Argued that the State’s policy created a binding promise under promissory estoppel. Relied on Manuelsons Hotels Private Limited v. State of Kerala and statutory powers under Sections 450A, 456, and 456A of the MMC Act to compel State action. Asserted that it acted to its detriment by investing based on the promise.
Respondents (State & PMC): Contended that octroi is a statutory levy under the MMC Act and can only be exempted by rule amendment. Argued that PMC, not the State, collected and retained the funds. Claimed that the State’s 2007 letter was sufficient action and that promissory estoppel cannot override statutory provisions. PMC asserted that no amendment was passed and thus no legal basis for refund exists.
Relief Sought
The petitioner sought:
- A direction to grant refund of octroi amounting to Rs.6,69,91,584/-
- Interest at 18% per annum from the date of payment until realization
- Directions to frame rules for future SEZ octroi exemption
- A declaration that the State’s policy is binding and enforceable
The Legal Issue
The central question was whether the State of Maharashtra could be compelled to refund octroi paid by an SEZ developer under its own policy, when the local body (PMC) failed to amend municipal rules, and whether the doctrine of promissory estoppel overrides statutory formalities in such cases.
Arguments Presented
For the Petitioner
The petitioner relied on Manuelsons Hotels Private Limited v. State of Kerala to argue that when the government makes a clear, unambiguous promise inducing detrimental reliance, it cannot resile from it. Counsel emphasized that Clause (6) of the 2001 SEZ Policy was a binding commitment, not a mere aspiration. He cited Sections 450A, 456, and 456A of the MMC Act, which empower the State to issue policy directions and make rules even if the Corporation fails to act. He argued that the State’s inaction after 2007 constituted a breach of its duty under the SEZ Act, 2005, particularly Section 50 and Rule 5(5)(a), which mandated the State to ensure exemption from local taxes.
For the Respondent
The State and PMC contended that octroi is a statutory levy under the MMC Act and can only be exempted by formal rule amendment. They argued that the State’s 2007 letter to PMC was sufficient and that the failure to amend rules lay entirely with PMC. They relied on Municipal Corporation of Greater Bombay v. Bombay Tyres International Ltd. to assert that refund claims must follow statutory timelines and that promissory estoppel cannot override statutory provisions. The State further argued that it never received the octroi funds and thus could not refund them.
The Court's Analysis
The Court undertook a rigorous analysis of the State’s 2001 SEZ Policy, the SEZ Act, 2005, and the statutory framework under the MMC Act. It held that Clause (6) of the Policy was not a vague aspiration but a clear, unqualified promise: "Developers... will be exempted from all State and local taxes and levies, including Octroi."
"This clause makes a definite promise that the developers will be exempted from octroi. This clause is in furtherance with the objective of this policy mentioned in the preamble and, therefore, it was the duty of the State Government to ensure that the Petitioner, who was an approved developer of the SEZ got benefit of exemption from levying the octroi."
The Court rejected the State’s argument that the refund clause applied only to State taxes, noting that octroi was explicitly listed as a local tax subject to exemption. It emphasized that the SEZ Act, 2005, under Section 50 and Rule 5(5)(a), imposed a statutory duty on the State to ensure exemption from local levies.
The Court acknowledged that the PMC could not be directed to refund octroi due to absence of amended rules. However, it held that the State’s inaction after 2007 - when it directed PMC to amend rules but took no further steps for over five years - constituted a failure to discharge its statutory and policy obligations.
"The State Government could have taken steps under these powers to ensure that their own policy... was properly implemented... But even that was not done."
The Court applied Manuelsons Hotels and held that the petitioner had altered its position to its detriment by investing in the SEZ based on the State’s promise. The State’s own affidavit admitted entitlement to exemption, making its later refusal legally untenable. The Court found no public interest justification for denying the refund, noting that upholding the promise would encourage future investment.
The Court distinguished Municipal Corporation of Greater Bombay by noting that the present case involved a State policy backed by statutory duty, not merely a claim for refund under a repealed tax regime.
The Verdict
The petitioner succeeded. The Court held that while the Pune Municipal Corporation is not liable to refund octroi due to absence of statutory exemption, the State of Maharashtra is bound by its own policy and statutory obligations. The State must refund the octroi amount of Rs.6,69,91,584/- paid by the petitioner between 2005 and 2011, with interest at 6% per annum from the date of each payment until realization. The State shall complete this process within six months of the judgment. The petitioner must submit a detailed claim of amounts paid. All other reliefs, including rule framing, are dismissed as octroi has been abolished.
What This Means For Similar Cases
Promissory Estoppel Overrides Administrative Inaction
- Practitioners may now invoke promissory estoppel against State Governments that make binding policy promises to investors, even if implementing agencies fail to act.
- The burden shifts to the State to prove that public interest would be harmed by honoring the promise - mere financial inconvenience to local bodies is insufficient.
State’s Statutory Duty Cannot Be Evaded by Delegation
- Where a State has statutory powers under laws like the MMC Act (Sections 450A, 456, 456A) to issue directions or make rules, its failure to act after directing a local body constitutes a breach of duty.
- The State cannot claim immunity from liability simply because a municipal corporation failed to amend rules.
SEZ Policy Compliance Is Legally Enforceable
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SEZ policies issued under central and state frameworks, especially when incorporated into statutory schemes like the SEZ Act, 2005, create enforceable rights.
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Developers should document all correspondence and rely on policy clauses as binding commitments, not mere guidelines.
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Always demand written confirmation of policy entitlement from the State, not just the local body.
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Where local bodies stall, initiate legal action against the State, not the municipality.
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Interest at 6% per annum is now a likely benchmark for delayed refunds in policy-based tax exemption cases.
