The nature of interpretative rule to be applied for interpreting an exemption notification was litigated recently  by the Constitutional Bench in Commissioner of Customs (Imports), Mumbai v. M/s. Dilip Kumar And Company & Ors (“Dilip Kumar”). The bench was primarily set up to examine the correctness of Sun Export Corporation, Bombay v. Collector of Customs, Bombay (“Sun Export”) wherein, the Three-judge Bench ruled that an ambiguity in a tax exemption provision must be interpreted to favor the assessee claiming the benefit of such exemption. The said ruling was in contradiction to a catena of judgments that expressly held that an exemption provision/notification must be strictly construed in favor of revenue as against the assessee.

The present Judgment overruled the ratio of Sun Export Case while holding that ambiguity in exemption notification which is subject to strict interpretation must be interpreted in favor of the Revenue. The court also ruled that the burden of proving applicability (satisfactory fulfilment of eligibility criteria) would be on the assessee to show that his case comes within the parameters of the exemption clause/ notification.

FACTS OF THE CASE

The Respondent imported a consignment of Vitamin- E50 Powder (feed grade) and based on the Sun Export case claimed the benefit of concessional rate of duty at 5%, instead of standard 30%, as per Custom Notification No. 20/1999 by classifying the product as pertaining to prawn feed. However, the benefit of Custom Notification No. 20/1999 was denied to the respondent on the plea of the Department that the goods under import contained chemical ingredients for animal feed and not animal feed/prawn feed. The Department approached the Custom, Excise and Service Tax Tribunal (CESTAT) which affirmed the Order of Commissioner of Customs (Appeals) holding that the Sun Export case was applicable. Department thereby, being aggrieved by the CESTAT judgment, invoked the Appellate jurisdiction of the Supreme Court.

ISSUES RAISED

Petitioner contended that tax exemption must be strictly interpreted and that, in the event of any ambiguity, the benefit of ambiguity has to be accorded to the revenue. Additionally, it was argued that such ambiguity must not be interpreted to benefit the assessee who fails to demonstrate that such assessee is covered by the Tax Exemption.  In response thereto, it was argued by the respondent that rules of strict interpretation  should be limited to the eligibility conditions of exemption notification and not the subsequent grant thereof.

ANALYSIS

At the outset, it is important to acknowledge the difference between the interpretations of the charging section of the taxing statute vis-à-vis interpretation of the Exemption clause/notification. The cardinal rule of interpretation of taxing statute is that the taxing power must be restricted to the imposition of tax on specified person/persons in certain circumstances which are expressly provided for by the statute and that any ambiguity is to be resolved in favor of the assessee. The rationale of Interpreting taxing statute in favor of assessee stems from Article 265 of the Indian Constitution which controls the taxing power of the state. The Judgment affirming the dissimilarity between exemption notification and charging provision held that the fetters of Article 265 does not control the interpretation of the exemption provision/notification. Consequently,  the requirement of adopting interpretation favorable to the assessee does not necessarily follow in the interpretation of the exemption. The Court ruled that the power to grant exemption is an independent power that does not trace its origin to nor is a delegative power under the power to impose tax.  This independent and autonomous existence of the power coupled with the inequitable nature of burden imposed by such exemption was held by Court to be sufficient reason to adopt a distinct scheme of interpretation for Exemption provision/Notification as against interpretation of the charging section of the taxing statute.

1. STRICT AND LITERAL INTERPRETATION: CENTRAL ROLE OF LEGISLATIVE INTENT AND OBJECT  

The debate over the nature of strict interpretation of exemption notification concerns the amount of leeway that is available to the courts to realign the ambiguity with the ‘object’ of the statute. The court opined that the purpose of interpretation is to ‘know’ the intention of the legislature and to see whether a particular case falls within the broad principles of law enacted by the legislature. The court thereby ruled that if a statutory provision is open to more than one meaning, the court has to choose the interpretation which best represents the intention of the legislature. The significance of the judgment lies in the fact that it locates literal, strict, and purposive interpretation on a continuum wherein the court is to choose the interpretation which best represents the intention of the legislature. Quoting Salmond, the Court observed that Strict Interpretation distinctly means either literal or narrow interpretation and that what may be the narrowest interpretation does not necessarily would be the most literal interpretation of the provision and vice versa. The narrowest interpretation approach to strict interpretation was held in Union of India v. The Commercial Tax Officer, West Bengal, and Ors., like the one wherein the least number of “determinates in terms of quantity” would fall under the exemption. The judgment holds that equating strict interpretation with the literal rule is inappropriate and would result in ignoring ‘apparent legislative intent’ of the statute. It is pertinent to note that the judgment neither defines nor attempts to explain the ambit or indicia of what may be construed as “apparent legislative intent”. While it is apparent that legislative intent would be circumscribed by the text of the statute, the judgment failed to clearly delineate the nature of “essential inferences” to be drawn from the interpretation of the statute/notification in question. The ruling offers little guidance for future litigation as to what meaning the court must derive when it is presented with competing conceptions of “essential inferences”. The central role of “object” and “apparent legislative intent” coupled with broadening of strict interpretation posits greater leeway for the Courts to interpret the applicability of the statute in the event of ambiguity as to its applicability in a particular case.

1. INTERPRETATION IN FAVOUR OF REVENUE: QUESTION OF PROCEDURAL REQUIREMENTS.

The most controversial aspect of this judgment relates to implications of the judgment upon the liberal interpretation of procedural requirements and fulfilment thereof for a grant of the exemption to the assessee. In Union of India v. Wood Papers Limited, it was ruled that once the question of whether assessee falls within the exemption has been settled, any subsequent ambiguity may be construed in a wider and liberal manner in favor of the assessee. The question of whether a person claiming the exemption is required to strictly comply with the procedure to avail the benefit was admittedly different and was discussed in Commissioner of Central Excise, New Delhi v. Hari Chand Shri Gopal (“Hari Chand”). Herein the Court ruled that while construing an exemption notification, the court has to distinguish the conditions which require strict compliance (mandatory requirement of eligibility criteria) and those conditions which require mere substantial compliance. In Para 51 of the Judgment, the Court reconciled the present case with Hari Chand qua strict and substantial compliance of condition while noting that “while considering an exemption notification, the distinction cannot be ignored.” It was expressly stated that the scope of present reference merely concerns a scenario wherein the benefit of such ambiguity cannot be extended to the assessee on the principle that ambiguity must receive a construction favoring the assessee. The present judgment does not hold the liberal construction of procedural requirements as determined by the Hari Chand case to be inconsistent with the principle of the strict interpretation of ambiguity in Exemption Notification in favor of Revenue. In Para 27 of the Judgment, the Court holds that the principle of strict interpretation of mandatory requirement and condonation of directory conditions in light of “sufficient compliance” did not “tinker” with the view than an ambiguous exemption should be interpreted favoring the revenue. Inevitably, in absence of an ex-ante determination of what can be construed as procedural conditions of exemption provision/notification, the strict interpretation settling ambiguity in favor of revenue would result in exemption being conditional upon strict compliance of all conditions whether directory or mandatory incorporated in the notification.

CONCLUSION

While the judgment streamlined conflicting pronouncements and effectively laid down the scheme of interpretation to be followed for interpreting exemption notification/provision; the questions as to strict interpretation of the procedural requirement for the grant of exemption continue to persist. The key here would be a reconciliation of the present judgment with the existing pronouncement on the liberal interpretation of procedural requirements. While the power to classify certain provisions as a procedural requirement and interpreting them liberally in favor of assessee remains with the Court, a strict interpretation settling ambiguity in favor of revenue at the threshold stage may restrict the grant of exemptions to the exemptees.

-Ankur Mishra