Taxation Law

Commissioner of Customs (Import), Mumbai v. M/s Dilip Kumar & Company

AIR 2018 SC 3606; (2018) 9 SCC 1

Citation: AIR 2018 SC 3606; (2018) 9 SCC 1
Court: Supreme Court of India
Date: 30 July 2018
Bench: Five-judge Constitution Bench

Facts

M/s Dilip Kumar & Company imported Vitamin-E 50 powder of feed grade in August 1999.
The importer classified the product under the customs heading relating to animal or prawn feed.
On this basis, it claimed the benefit of Customs Notification No. 20/1999, under which the applicable customs duty was only 5% instead of the normal rate of 30%.
The Customs Department rejected the claim.
According to the Department, the imported product was merely a chemical ingredient used in preparing animal feed and was not itself animal feed or prawn feed.
The Department consequently classified it under Chapter 29, which attracted the ordinary customs duty.
The Commissioner of Customs (Appeals) allowed the importer’s claim, and CESTAT affirmed that decision.
These authorities relied substantially on Sun Export Corporation v. Collector of Customs, where ambiguity in an exemption notification had been resolved in favour of the assessee.
Because several earlier judgments had taken conflicting approaches, the matter was referred to a five-judge Constitution Bench.

Issue

When a tax exemption notification is ambiguous, should the ambiguity be resolved:
in favour of the assessee claiming exemption; or
in favour of the Revenue?
Whether the rule laid down in Sun Export Corporation was correct.

Rule

A distinction must be drawn between a charging provision and an exemption provision.
The Revenue must establish through clear statutory language that a person is liable to tax.
Therefore, ambiguity in a charging provision is ordinarily resolved in favour of the taxpayer.
An exemption, however, removes a person or transaction from an otherwise applicable tax liability.
The person claiming the exemption bears the burden of showing that the case clearly falls within the exemption.
At the threshold stage, an exemption clause or notification must be interpreted strictly.
Mandatory conditions must be strictly satisfied, though substantial compliance may sometimes be sufficient for merely procedural or directory conditions.

Application

The Court explained that taxation and exemption involve two different inquiries.
First, the Revenue must show that the charging provision clearly covers the taxpayer. The Court cannot create liability through implication, equity or presumed legislative intention.
However, once the taxpayer is otherwise liable, the taxpayer cannot escape that liability merely by showing that an exemption provision is capable of two possible meanings.
An exemption is a special benefit granted to a limited class. Granting an exemption to one class may increase the burden borne by taxpayers who remain outside that class.
Therefore, the person claiming the benefit must establish that the goods, person or transaction squarely satisfies the description used in the exemption.
The Court rejected the reasoning in Sun Export, under which an unclear exemption could be interpreted in favour of the assessee.
It emphasised that a court must not enlarge the words of an exemption merely because granting the benefit appears fair, reasonable or consistent with the supposed object of the notification.
In this case, the controversy was whether Vitamin-E powder used as an ingredient could be treated as animal or prawn feed itself.
The importer could not automatically receive the benefit merely because the notification was capable of a broader interpretation.
It first had to prove that the imported product clearly came within the exempted description.
Importantly, the Constitution Bench decided the rule of interpretation. It did not finally determine the product classification or decide conclusively whether the importer was entitled to the 5% rate.
After answering the reference, it directed that the appeal be placed before an appropriate Bench for decision on the merits.

Held

The Constitution Bench held that an exemption notification must ordinarily be interpreted strictly.
The burden lies on the assessee to prove that the case falls within the exemption.
Where an ordinary exemption notification remains genuinely ambiguous, the benefit of that ambiguity goes to the Revenue, not the assessee.
The rule in Sun Export Corporation, insofar as it directed ambiguity in exemption provisions to be resolved in favour of the assessee, was overruled.
The Court clarified that strict interpretation is especially relevant at the eligibility stage—whether the taxpayer enters the exemption at all.
Once eligibility is clearly established, the exemption may be given its full legitimate operation.
The individual customs appeal was sent for determination on merits under this interpretative rule.