Ambiguity in tax exemption notification to be interpreted in favour of state: SC overturns Sun Export

A Constitution Bench of the Supreme Court has ruled that ambiguity in a tax exemption notification must be interpreted in favour of the revenue department, and not the assessee..In doing so, the Bench of Justices Ranjan Gogoi, NV Ramana, R Banumathi, Mohan M Shantanagoudar and Abdul Nazeer overruled a decision of the Supreme Court in Sun Export Corporation, Bombay v. Collector of Customs, Bombay..The Constitution Bench in the present case – Commissioner of Customs (Import) Mumbai v. M/S Dilip Kumar and Company & Ors – was set up to examine the correctness of the Sun Export verdict passed in 1997..In the Sun Export case, a three-judge Bench had ruled that an ambiguity in a tax exemption provision or notification must be interpreted so as to favour the assessee claiming the benefit of such exemption..The main issue before the five-judge Bench was:.“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?”.The facts of the present case are that the respondents imported prawn feed in 1999, after which they claimed the benefit of concessional rate of duty at 5%, instead of standard 30%, as per the Customs Notification No. 20/1999. They relied on the ratio in Sun Export case and claimed the benefit of exemption..However, the benefit was denied to the respondents on the plea of the revenue department that the goods under import contained chemical ingredients for animal feed and not animal feed/prawn feed..The Assistant Commissioner of Customs accepted the plea of the department to deny the concessional rate, while the Commissioner of Customs (Appeals) reversed the order, holding that the Sun Export case was applicable. The Customs, Excise and Service Tax Tribunal (CESTAT) then upheld the order. Therefore, the present appeal was filed in the Supreme Court..The matter initially came up before a two-judge Bench, which referred the matter to three-judge Bench. The latter Bench, after noting the unsatisfactory state of law on the subject, opined that the Sun Export case requires reconsideration. This is how the matter eventually came before the Constitution Bench..Appearing for the Centre, Additional Solicitor General Pinky Anand argued that a tax exemption statute or notification needs to be strictly interpreted. The Bench found merit in this argument, stating,.“…it is well settled that in a taxation statute, there is no room for any intendment; that regard must be had to the clear meaning of the words and that the matter should be governed wholly by the language of the notification. Equity has no place in interpretation of a tax statute. Strictly one has to look to the language used; there is no room for searching intendment nor drawing any presumption.”.The Bench went on to note that any ambiguity in a taxing statute should be interpreted in favour of the subject/assessee, but any ambiguity in the exemption clause of exemption notification must be conferred in favour of the revenue department..After going through a spate of judgments on the subject matter, the Court eventually held the following:.“1) Exemption notification should be interpreted strictly; the burden of proving applicability would be on the assessee to show that his case comes within the parameters of the exemption clause or exemption notification..(2) When there is ambiguity in exemption notification which is subject to strict interpretation, the benefit of such ambiguity cannot be claimed by the subject/assessee and it must be interpreted in favour of the revenue..(3) The ratio in Sun Export case (supra) is not correct and all the decisions which took similar view as in Sun Export Case (supra) stands overruled.”.Having overruled the Sun Export case, the Court directed that the present appeal be placed before an appropriate Bench for adjudication on merits..Read the judgment: