Supreme Court settles interpretation of tax exemption notifications: Commissioner of Customs vs. Dilip Kumar (30 July 2018)

Date of the Judgment: 30 July 2018
Citation: (2018) INSC 645
Judges: N.V. Ramana, J., Ranjan Gogoi, J., R. Banumathi, J., Mohan M. Shantanagoudar, J., S. Abdul Nazeer, J.
The Supreme Court of India addressed a critical question regarding the interpretation of tax exemption notifications. When there is a lack of clarity in the language of a tax exemption, should the benefit of that ambiguity go to the taxpayer, or should it favor the government? This judgment clarifies the legal principles that apply when interpreting such notifications, impacting how businesses and individuals can claim exemptions. The five-judge Constitution Bench, with the opinion authored by Justice N.V. Ramana, settled the law on this issue.

Case Background

The case arose from the import of Vitamin-E50 powder (feed grade) by the respondents. They sought a concessional customs duty rate of 5%, claiming it was prawn feed under Customs Notification No. 20/1999. The customs department, however, classified the product under Chapter 29, which attracts a standard 30% duty, arguing that it was a chemical ingredient for animal feed, not animal feed itself. The Assistant Commissioner of Customs initially denied the concessional rate, distinguishing the case from the previous ruling in Sun Export Corporation. The Commissioner of Customs (Appeals) reversed this decision, applying the Sun Export Corporation precedent. The Customs, Excise and Service Tax Tribunal (CESTAT) upheld the Commissioner’s decision, leading the department to appeal to the Supreme Court.

Timeline

Course of Proceedings

Initially, a two-judge bench of the Supreme Court doubted the correctness of the ruling in Sun Export Corporation, which favored the assessee in cases of ambiguity in tax exemption notifications. The bench noted that subsequent notifications had expanded the scope of exemptions, making it difficult to consider them merely clarificatory. The bench also highlighted that the Sun Export Corporation judgment had seemingly ignored a series of judgments that required strict construction of exemption notifications. The matter was then referred to a three-judge bench, which also reiterated the need for reconsideration of the Sun Export Corporation ruling. Given that the Sun Export Corporation case was decided by a three-judge bench, the matter was ultimately placed before a five-judge Constitution Bench for final resolution.

Legal Framework

The core of the legal framework in this case revolves around the interpretation of tax exemption notifications, specifically under the Customs Act. The case examines how courts should interpret ambiguities in these notifications. Article 265 of the Constitution of India states that “No tax shall be levied or collected except by authority of law.” This implies that any tax must be explicitly authorized by law, and the state cannot impose taxes arbitrarily. The judgment also references the General Clauses Act, which provides general rules for the interpretation of statutes. The Supreme Court emphasizes that the intention of the legislature is paramount in statutory interpretation.

Arguments

Appellant (Revenue) Arguments:

• The Additional Solicitor General, Ms. Pinky Anand, argued that tax exemption statutes or notifications must be interpreted strictly.
• She contended that strict interpretation means applying the literal rule, where clear language requires no further interpretation.
• In case of ambiguity, the benefit should go to the revenue, not the assessee, who must clearly demonstrate their eligibility for exemption.
• She argued that the distinction between “ingredients” and “supplements” made in Surendra Cotton Oil Mills Case is not sound.

Respondent Arguments:

• Mr. Somnath Shukla, on behalf of the respondents, argued that the observations in Sun Export Case should be considered holistically.
• He submitted that strict interpretation should not be applied abstractly but in relation to the Customs Tariff Entry.
• He argued that if the Customs Tariff Entry is interpreted broadly, the same should be adopted for interpreting the exemption notification.
• He contended that strict interpretation should be limited to the eligibility conditions of an exemption notification, and benefits should be conferred liberally.
• He argued that “prawn feed supplements” should be included under “prawn feed.”

Innovativeness of the argument: The respondent’s argument that strict interpretation should be limited to eligibility conditions and that the benefit of exemption should be conferred liberally is an innovative approach.

Issues Framed by the Supreme Court

The core issue before the Supreme Court was:

1. What is the interpretative rule to be applied while interpreting a tax exemption provision/notification when there is an ambiguity as to its applicability with reference to the entitlement of the assessee or the rate of tax to be applied?

Treatment of the Issue by the Court

Authorities

Cases Relied Upon by the Court:

• Sun Export Corporation, Bombay v. Collector of Customs, Bombay, (1997) 6 SCC 564: The court noted that this case held that an ambiguity in a tax exemption provision must be interpreted in favor of the assessee, which was the point of contention in the present case. (Supreme Court of India)
• Collector of Customs and Central Excise, Guntur and Ors. v. Surendra Cotton Oil Mills and Fertilizers Co. and Ors., 2001 (1) SCC 578: This case distinguished the Sun Export case, stating that “animal feed” could include “animal feed supplements,” but ingredients of animal feed could not be included in “animal feed.” (Supreme Court of India)
• Commissioner of Inland Revenue vs. James Forrest, [(1890) 15 AC 334 (HL)]: This case was cited to support the conclusion that any vagueness in exemption clauses must go to the benefit of the revenue. (House of Lords)
• Union of India v. The Commercial Tax Officer, West Bengal and Ors., AIR 1956 SC 202: This case discussed the interpretation of an exemption clause and highlighted the importance of strict interpretation. (Supreme Court of India)
• Hansraj Gordhandas v. H.H. Dave, Asst. Collector of Central Excise & Customs, Surat and Ors., AIR 1970 SC 755: This case held that a taxing legislation should be interpreted wholly by the language of the notification, and the intention of the exempting authority is irrelevant. (Supreme Court of India)
• Union of India v. Wood Papers Limited, (1990) 4 SCC 256: This case distinguished between the stage of finding eligibility to seek exemption and the stage of applying the nature of exemption, stating that the former should be strict, and the latter, liberal. (Supreme Court of India)
• Mangalore Chemicals & Fertilizers Ltd. vs. Dy. Commissioner of Commercial Taxes, (1992) Supp. 1 SCC 21: This case discussed the strict construction of provisions concerning exemptions, stating that if the words are plain and clear, there is no need for interpretation. (Supreme Court of India)
• Commissioner of Central Excise, New Delhi v. Hari Chand Shri Gopal, (2011) 1 SCC 236: This Constitution Bench decision reiterated the settled principles regarding the construction of exemption clauses and the mandatory requirements to be complied with. (Supreme Court of India)
• Govind Saran Ganga Saran v. Commissioner of Sales Tax, 1985 Supp (SCC) 205: This case pointed out the three components of a taxing statute: subject of the tax, person liable to pay tax, and the rate at which the tax is to be levied. (Supreme Court of India)
• Mathuram Agrawal v. Sate of Madhya Pradesh, (1999) 8 SCC 667: This case stated that if there is ambiguity in understanding any of the components of a taxing statute, no tax can be levied. (Supreme Court of India)
• Indian Banks’ Association vs. Devkala Consultancy Service, (2004) 4 JT 587: This case also stated that if there is ambiguity in understanding any of the components of a taxing statute, no tax can be levied. (Supreme Court of India)
• Consumer Online Foundation vs. Union of India, (2011) 5 SCC 360: This case also stated that if there is ambiguity in understanding any of the components of a taxing statute, no tax can be levied. (Supreme Court of India)
• Collector of Central Excise vs. Parle Exports (P) Ltd., (1989) 1 SCC 345: This case held that when two views of a notification are possible, it should be construed in favor of the subject. (Supreme Court of India)
• Novopan India Ltd. v. Collector of Central Excise and Customs, 1994 Supp (3) SCC 606: This case held that an exemption provision has to be construed strictly and that in case of ambiguity, the benefit must go to the State. (Supreme Court of India)
• Tata Iron & Steel Co. Ltd. v. State of Jharkhand, (2005) 4 SCC 272: This case stated that the eligibility clause in relation to an exemption notification must be given strict meaning. (Supreme Court of India)

Legal Provisions Considered by the Court:

• Section 25 of the Customs Act: This section allows the Central Government to grant exemptions from customs duty.
• Article 265 of the Constitution of India: This article states that no tax can be levied or collected except by authority of law.
• The General Clauses Act: Provides general rules for the interpretation of statutes.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

The Supreme Court explicitly overruled the ratio in Sun Export Corporation [CITATION: (1997) 6 SCC 564]*, stating that it was not correct. The Court held that all decisions that took a similar view as in the Sun Export Corporation case were also overruled. The Court followed the principles laid down in Hansraj Gordhandas [CITATION: AIR 1970 SC 755]*, Wood Papers Limited [CITATION: (1990) 4 SCC 256]*, Mangalore Chemicals [CITATION: (1992) Supp. 1 SCC 21]*, and Hari Chand Shri Gopal [CITATION: (2011) 1 SCC 236]* cases. The Court distinguished Surendra Cotton Oil Mills [CITATION: 2001 (1) SCC 578]* on facts.

The Supreme Court held that exemption notifications should be interpreted strictly. It clarified that when there is ambiguity in an exemption notification, the benefit of such ambiguity cannot be claimed by the assessee, and it must be interpreted in favor of the revenue. The Court emphasized that the burden of proving applicability of an exemption lies on the assessee.

What weighed in the mind of the Court?

The Supreme Court’s decision was heavily influenced by the need to maintain fiscal discipline and ensure that tax exemptions are not liberally granted without clear legal basis. The Court emphasized that tax exemptions are a departure from the general rule of taxation and should not be extended beyond their clear and explicit terms. The Court also highlighted the importance of the rule of law and the principle that taxes should be levied and collected only by authority of law.

The court’s reasoning was primarily based on legal principles and precedents, with a minor consideration of the factual aspects of the case.

The Court considered the alternative interpretation that ambiguities in exemption notifications should be interpreted in favor of the assessee, as per the overruled Sun Export Corporation case. However, the Court rejected this interpretation, stating that it was not in line with the principles of strict interpretation and the need to protect the revenue. The Court emphasized that tax exemptions are a departure from the general rule of taxation and should not be extended beyond their clear and explicit terms.

The Supreme Court concluded that exemption notifications must be interpreted strictly. If there is any ambiguity, the benefit of that ambiguity must go to the revenue, not the assessee. The Court explicitly overruled the Sun Export Corporation case, which had held that ambiguities in exemption notifications should be interpreted in favor of the assessee.

The Court’s decision was based on the following reasons:

• Tax exemptions are a departure from the general rule of taxation and should be interpreted strictly.
• The burden of proving eligibility for an exemption lies on the assessee.
• Ambiguities in exemption notifications should be interpreted in favor of the revenue to protect the fiscal interests of the state.
• The principle that ambiguities in tax laws should be interpreted in favor of the assessee applies only to charging provisions, not to exemption notifications.

The judgment was unanimous, with all five judges concurring on the decision and the reasoning.

The Court’s reasoning was based on the principle that exemptions are a departure from the general rule of taxation and should not be extended beyond their clear and explicit terms. The court also emphasized that the burden of proving eligibility for an exemption lies on the assessee. The Court’s decision has significant implications for future cases involving tax exemptions. It reinforces the principle of strict interpretation and clarifies that the benefit of any ambiguity in an exemption notification must go to the revenue.

The Court did not introduce any new doctrines or legal principles but rather clarified the existing legal framework and overruled the previous position.

Key Takeaways

• Tax exemption notifications must be interpreted strictly.
• The burden of proving eligibility for an exemption is on the assessee.
• In case of ambiguity, the benefit goes to the revenue, not the assessee.
• The principle of interpreting tax laws in favor of the assessee does not apply to exemption notifications.
• Businesses and individuals must ensure they meet all conditions for claiming exemptions.

This judgment will likely lead to more cautious claims for tax exemptions and increased scrutiny by tax authorities. It sets a precedent for future cases, emphasizing the importance of clear and unambiguous language in exemption notifications.

Directions

The Supreme Court directed that the instant civil appeal be placed before an appropriate bench for considering the case on merits, after obtaining orders from the Hon’ble Chief Justice of India.

Development of Law

The ratio decidendi of this case is that tax exemption notifications must be interpreted strictly, and any ambiguity should be resolved in favor of the revenue, not the assessee. This decision overrules the previous position of law as held in the Sun Export Corporation case.

Conclusion

The Supreme Court’s judgment in Commissioner of Customs vs. Dilip Kumar clarifies the rules for interpreting tax exemption notifications. The Court has settled the law by holding that such notifications must be interpreted strictly, and any ambiguity must be resolved in favor of the revenue. This decision overrules the previous position that favored the assessee in cases of ambiguity and sets a clear precedent for future cases, emphasizing the need for precise and unambiguous language in exemption notifications.