How Can Judicial Intervention in Thorny Economic Issues Be Fine-Tuned?

The Wire, August 03, 2020

By Pradeep S. Mehta and Kapil Gupta

The Supreme Court of India is increasingly adjudicating issues of economic significance and thus the interface between law and economics is more relevant than ever before. Quite often, the apex court takes an extreme position of stopping a particular activity, a move that is akin to cutting off the head to cure a headache.

Over the past few years, this has sparked intense debate, with one senior Supreme Court lawyer even wondering whether the apex court was responsible for India’s economic slowdown. In this regard, innovative remedies can be explored by the judiciary which will both penalise the wrongdoers but not disturb economic activity.

In the Shivshakti Sugars Limited vs. Shree Renuka Sugar Limited & Ors case, the apex court made a significant point that while interpreting a particular provision, its economic effect should be kept in purview. Similarly, when a case presents with a possibility of two approaches and if the law permits discretion to the court, then in such a scenario, the court shall lean towards a position that promotes the economic interests of the nation. In all its decision-making process, the court shall avoid an outcome that can have an adverse impact on employment, growth of infrastructure, economy or revenue of the state.

These observations are directed towards an approach embedded in informed decision-making by the judiciary as well as balancing the economic interest of the stakeholders. Thus, it is also pertinent to highlight innovative approaches to adjudicating a remedy that could effectively supplement the economic outlook of the apex court.

An interesting case study

To this end, the ideation and process behind creating a Consumer Welfare Fund (CWF) is an interesting case study.

The CWF was created through an amendment in 1991 to the Central Excise and Salt Act, 1944, where the refund claim on customs and excise duty that is not-refundable to the manufacturers, etc. were to be credited into the CWF. The fund is used to provide financial assistance to promote consumer welfare and strengthen consumer movement in India.

Before the Central Excise and Salt Act was amended in 1991, excise duty with an all-inclusive price was paid on excisable goods by the customers. Manufacturers were eligible for a refund, if any such goods were non-excisable or if duties were erroneously paid due to wrong classification or valuation of excisable goods. However, the refund that was allowed to the manufacturers were retained by them instead of returning it to the consumers from whom the duties were collected through the price at the time of sale. This led to the unjust enrichment of manufacturers.

The controversy sparked off when the Central Board of Excise and Customs sent out instructions on March 21, 1990, directing the collectors to sanction refund claim in super-session to departmental instructions dated November 18, 1998, and November 10, 1989.

Few public-spirited citizens informed some members of parliament with regard to this matter. The MPs highlighted this issue before the then Minister of Finance, who requested a comprehensive enquiry on all aspects relating to refund of central excise duties. As a result, the then speaker of the Lok Sabha referred the issue to the Public Accounts Committee (PAC), which deliberated on the issue in their 22nd Report (Ninth Lok Sabha) on Refunds of Central Excise Duties.

The PAC heard the matter and pulled up the government on assurances made by successive governments in bringing suitable provisions to deny refunds in cases of unjust enrichment. This had been pending necessary amendments since 1969. In pursuance of the recommendations made by the PAC, the Central Excises and Customs Laws (Amendment) Bill, 1991 was introduced by Manmohan Singh, the then finance minister, on August 12, 1991, and was finally passed by the Parliament on September 18, 1991.

Challenged in the Supreme Court

The manufacturers challenged this amendment before the Supreme Court in Mafatlal Industries Ltd. and Others vs. Union of India ((1997) 5 SCC 536) case stating that it violates Article 265 of the constitution of India and Section 72 of the Indian Contract Act, 1872.

The apex court, on the government retaining the un-refundable excise and customs duties for public purpose under the CWF, noted that “the Preamble and the aforesaid articles do demand that where duty cannot be refunded to real person who have borne the burden, for one or the other reason, it is but appropriate that the said amounts are retained by the State for being used for public good.” ((1997) 5 SCC 536).

The money that is credited to the CWF is managed by the Department of Consumer Affairs, Government of India to provide financial assistance for promoting and protecting the welfare of consumers, generating consumer awareness and strengthening the consumer movement in the country particularly in the rural areas, with special emphasis on women’s participation.

Not stopping at the refund of excess excise levies into the CWF, the government also passed an order directing that all fines and penalties levied by the National Consumer Disputes Redressal Commission under the Consumer Protection Act, 1986 will also be credited to the CWF. The principle was the same that if any compensation awarded by the NCDRC against a business cannot be passed on to consumers who are large in number and cannot be identified as such, should be credited to the CWF.

A good example of remedy

The genesis of CWF and its contribution to the public good is a model example of a remedy that can be appropriately institutionalised by the Supreme Court and the government in cases where instead of disrupting the industries by invalidating their activities, demand penalty or levy from the said industries and direct the monies to rectify the wrong and promote public good. At the same time allowing the industries to continue with their operations unless the same were barred due to any other statute in force.

For example, in the case of 2G spectrum licences rather than cancelling the same and upsetting the sector and the economy, each of the licensees could have been asked to pay a penalty to the exchequer which would have compensated the government for the loss of revenue due to malevolent grant of licences. Surely, the total sum need not have been Rs. 1,76,000 crores as that was a heroic sum assumed to be the loss by the CAG and termed notional.

On the other hand in cases like the coal allocation case, instead of cancelling the allocations made over a period of two decades, the court could have instituted an experts committee, comprising of lawyers, economists and chartered accountants, to examine merits of each allocation and those that involved corruption or favouritism could have been asked to compensate the losses occurred to the exchequer by way of penalty. In the case of national highways, when trees are to be destroyed by the developer or the builder, they are required to either replant them or plant a higher number of new trees elsewhere to compensate for the deforestation. The road works are not stopped.

A similar approach is used in the US, where settlement money is distributed for welfare and educational activities through a special fund, if the parties cannot be identified for compensation or when after all identified parties have been compensated, the settlement amount still has uncollected residual funds. This is governed by the principle called ‘cy pres’, which literally means next best use. ‘Cy pres’ is recognised as an equitable remedy.

With a similar outlook in India, courts could avoid significant economic disruption by penalising the perpetrator and compensating the society appropriately. India cannot afford to deflect or take a step back in strengthening its economic growth story and potential, for it is in the country’s best interest to move forward economically.

Pradeep S Mehta and Kapil Gupta work for CUTS International, a global public policy research and advocacy group

This news item can also be viewed at: