M/S. Ivrcl Drn Infra Jv vs. Commissioner Of Central Tax

Briefly stated the facts giving rise to the present petitions are as under:-

1 The petitioner in W.P.No.8067/2025 is a manufacturer and trader of submersible pumps and accessories. It is contended by the Petitioner that it was regularly filing returns under the relevant statutory provisions, from time to time as prescribed under the respective laws and has discharged its tax liabilities. The petitioner was awarded contracts / work orders by Governmental institutions for supply and installation of the pump sets for use in irrigation under Ganga Kalyana scheme. During the Financial Year (FY) 2015-16, the petitioner supplied pumps and accessories towards the above work orders and remitted applicable VAT. The petitioner reported the above transaction as sale of goods in the monthly as well as annual returns filed under the provisions of Karnataka VAT Act and remitted the applicable VAT. Further, on the same basis income tax was also assessed and returns were HC-KAR

2 Thereafter it is contended that, the SCN was adjudicated and Order-in-Original bearing No. 07/ADC/BNW/2022-23/BNM dated 17.06.2022 and having Digital Identification No.(‘DIN’) 20220657YX00005075C4 was passed. The said order was HC-KAR

Heard learned Senior Counsel for the petitioners and learned ASG for the respondent and perused the material on record.

In addition to reiterating the various contentions urged in the petition and referring to the material on record, learned Senior counsel for the petitioners submitted that the impugned orders are without juri iction, inasmuch as they attempt to tax sale of goods HC-KAR

Per contra, learned ASG for the respondents would reiterate the various contentions urged in the statement of objections and submits that the petitioner is not entitled to the exemption as they cannot be called a municipality and though, they HC-KAR

I have given my anxious consideration to the rival submissions and perused the material on record.

The following points arise for consideration in the present petition are as under:

Before adverting to the rival contentions of the parties, it is profitable to extract the relevant provisions of the Finance Act, 2012 and Service Tax Rules which are as under; HC-KAR

1 It is a matter of record and an undisputed fact that under the Finance Act, 1994, Section 65B (44) defines the phrase ‘service’, which inter alia excludes the activity of ‘sale of goods’ and ‘transactions referred to in Article 366(29A) of the Constitution’, from the scope of service; further, in terms of Section 66E(h) of the Finance Act, 2012, service portion in the execution of works contract is considered as declared services. In terms of these provisions, service tax could be levied only on the service portion of the works contract and for this purpose Rule 2A(i) of the Service Tax (Determination of Value) Rules, 2006, specifically provide for exclusion of value of goods transferred. This mechanism is to ensure that the value of goods is not taxed, which is in the HC-KAR

2 The Apex Court in the case of BSNL vs UOI – 2006 (3) SCC 1, held as under:

This does not however allow State to entrench upon the Union List and tax services by including the cost of such service in the value of the goods. Even in those composite contracts which are by legal fiction deemed to be divisible under Art. 366(29A), the value of the goods involved in the execution of the whole transaction cannot be assessed to sales tax. As was said in Larsen & Toubro v. Union of India (supra) :- "The cost of establishment of the contractor which is relatable to supply of labour and services cannot be included in the value of the goods involved in the execution of a contract and the cost of establishment which is relatable to supply of materials involved in the execution of the works contract only can be included in the value of the goods".

For the same reason the Centre cannot include the value of the SIM cards, if they are found ultimately to be goods, in the cost of the service. As was held by us in Gujarat Ambuja Cements Ltd. v. Union of India (2005) 4 SCC 214, 228. "This mutual exclusivity which has been reflected in Article 246(1) means that taxing entries must be construed so as to maintain exclusivity. Although generally speaking, a liberal interpretation must be given to taxing entries, this would not bring within its purview a tax on subject-matter which a fair reading of the entry does not cover. If in substance, the statute is not referable to a field given to the State, the Court will not by any principle of interpretation allow a statute not covered by it to intrude upon this field." HC-KAR

3 A perusal of the material on record indicates that the petitioner in W.P.No.29162/2025 is involved in executing a works contract of providing lift irrigation works to Karnataka Neeravari Nigam Ltd., the scope of the work involves survey, investigation, design and construction of civil works of intake fore bay, pump house, etc. for a lift irrigation project with attendant electrical works including operation and maintenance for 5 years on a turnkey basis and has paid sales tax in the execution of the project. This indicates that the scope of works involved in the subject works contract falls outside the purview of service tax as they are sale of goods and are wholly exempted from payment of service tax.

4 A perusal of the material on record would indicate that the petitioner in W.P.No.8067/2025 has furnished records to prove that they have paid sales tax on the sale value and service tax on the service value through invoices and returns submitted which have been completely ignored by the respondents - authorities even after the same was remanded by this Court for proper verification. Further, the petitioners have also submitted reconciliation between the ST3 returns, VAT returns and the HC-KAR

5 In the light of the aforementioned facts, circumstances, and law laid down by the Apex Court and this Court, I am of the considered view that the scope of works contract was wholly exempted from payment of service tax and in the case wherein there was involvement of service, the material on record indicates payment of service tax. Point No.1 is accordingly answered in favour of the petitioners.

Before adverting to the rival contentions of the parties, it would be profitable to extract the relevant portions of the Exemption Notification No.25/2012 dated 20.6.2012, which reads as under;

8 In the case of The Commissioner BDA vs State of Karnataka - 2005 SCC Online Kar 652, this Court held as under:

A look at the objects and reasons to the Seventy Third and Seventy Fourth Amendment, would reveal that though Panchayat Raj Institutions have been in existence for a long time, it was observed that these institutions were not able to acquire the status and dignity of viable and responsive peoples bodies due to a number of reasons. Similarly local bodies had become week and ineffective on account of variety of reasons. The reasons so identified are, absence of or failure to hold regular elections, prolonged supersessions, insufficient representations of weaker sections like Schedule Castes, Schedule Tribes and women, inadequate devolution of powers, and lack of financial resources. It is to remedy this malady Chapter IX and IXA was added to the Constitution.

The development plan referred to in the said Chapters is not for carrying out building, engineering or other operations in or over or under land or the making of any material change in any building or land. It is a plan for economic development and social justice for the whole area comprised in the Panchayat HC-KAR

Therefore, the legislative intent was to give additional powers to Panchayats and Municipalities. That is achieved by enacting Part IX and IXA and Schedule XI and XII. Then power is conferred Page: 373 on the State Legislature under Article 243-G and 243-W to make laws in respect of matters listed in Schedule XI and XII. The provisions contained in Part IX and IXA may be in conflict with the existing laws in respect of Panchayats and Municipalities or the existing law may not be sufficient to achieve the object of the amendment. Therefore, in Article 243-N and 243-ZF “non obstante clause”, namely “notwithstanding anything in this part” is employed to give overriding effect to the provisions contained in Part IX and XA, over any provision of any law relating to Panchayats and Municipalities in force in a State immediately before the commencement of the Seventy Third and Seventy Fourth Amendment respectively. An opportunity was given to the State Legislatures to bring the aforesaid existing law in conformity with the constitutional provisions, within a period of one year from the commencement of the aforesaid parts, failing which the inconsistent provisions in the law relating to Panchayats and Municipalities cease to exist. Therefore, the legislative intent is manifest and expressed in clear words, without leaving any scope for interpretation by the Courts. HC-KAR

9 A perusal of the material on record would indicate that the objectives and the scope of the work involved in the lift irrigation project is a task which is meant for social purpose and involves activities which for social development and therefore, the said project falls within the activities which are entrusted to municipalities and therefore, would very well be entitled to the exemption under the notification.

10 It is important to mention here that exemption Notifications, while being interpreted strictly, should also be interpreted in a manner that they become workable so that the purpose of the exemption is conserved, catena of judgments by the Apex Court and this Court have held unlike charging provision, construction of an exemption Notification has to be tested on different touchstone. In fact, an exemption provision is like an exception and on normal principle of construction or interpretation of statutes it is construed strictly either because of legislative intention or on economic justification of inequitable burden or progressive approach of fiscal provisions intended to augment state revenue, however, once exception or exemption is applicable, no rule or principle requires it to be construed strictly. HC-KAR

11 A liberal and strict construction of an exemption provision is to be invoked at different stages of its interpretation. When the question is whether a subject falls in the notification or in the exemption clause then it being in nature of exception is to be construed strictly and against the subject, but once ambiguity about applicability is lifted and the subject falls in the notification, then it calls for a wider and liberal construction.

12 In the case of Mangalore & Chemicals Fertilizers Ltd. v Deputy Commissioner - 1991 (55) ELT 437, the Apex Court held as under;

On June 30, 1969, State Government issued a notification in exercise of powers referable to Section 8-A of the Act providing certain incentives to entrepreneurs starting new industries in the State, pursuant to State's HC-KAR

The clause in the said Notification of 1969 relevant for the present purpose reads: (SCC p. 571, para 1) (1) Sales Tax.— A cash refund will be allowed on all sales tax paid by a new industry on raw material purchased by it for the first 5 (five) years from the date of the industry goes into production, eligibility to the concessions being determined on the basis of a certificate to be issued by the Department of Industries and Commerce.”

This was followed by a further Notification dated August 11, 1975 envisaging certain modified procedures for effectuating the reliefs contemplated by the earlier exemption Notification of June 30, 1969. The relevant portions of the Preamble and the body of the notification say: Preamble: “… The Commissioner of Commercial Taxes has suggested that New Industries covered by the above scheme might be permitted to adjust the refunds to which they would be eligible against the sales tax payable by them. ORDER In partial modification of the government order cited (2) above, government are pleased to prescribe the following procedure for claiming refund of sales tax by new industries. HC-KAR

The new industries intending to take advantage of the system of adjustment shall apply to the Deputy Commissioner of Commercial Taxes (Administration) of the Division concerned through the assessing authority. The application must contain the following particulars: (i) Name and address of the new industry; (ii) Date of commencement of the industry; (iii) Reference number of the certificate issued by the Director of Industries and Commerce, Bangalore; (iv) Year for which the permission to withhold tax amount is related; (v) The description of finished products in which the materials are used.

The Deputy Commissioner of Commercial Taxes (Administration) of the concerned Division, after scrutinising the application filed by the new industry and after satisfying himself that the industry is covered by the scheme sanctioned in G.O. No. OI 58 FMI 69 dated June 30, 1969 will permit the industry to withhold the amount of tax payable on raw materials purchased and used in the manufacture of goods.

(Omitted as unnecessary)

The new industry may apply for permission at any time during the year subject to its renewal every subsequent year. Until permission of renewal is granted by the Deputy Commissioner of Commercial Taxes, the new industry should not be allowed to adjust the refunds. At the end of the assessment year, particulars should be HC-KAR

(Omitted as unnecessary).

(Omitted as unnecessary).

(Omitted as unnecessary).”

Appellant, it is not in dispute, had the necessary eligibility under the original exemption Notification of 1969. The controversy is confined only to the question of the manner of effectuating the refund of sales tax that appellant, admittedly, was entitled to.

Some particulars as to the application made by the appellant for grant of permission might, perhaps, be necessary here. For the assessment year 1976-77, the appellant made such an application to the Deputy Commissioner of Sales Tax (Administration) on November 10, 1976 for adjustment of the refunds against sales tax due. This permission was granted with retrospective effect from May 1, 1976, validating the adjustments which the appellant had made during the interregnum.

However, for the three subsequent years viz., 1977- 78, 1978-79 and 1979-80, similar applications which were made on March 29, 1977, March 20, 1978 and March 8, 1979, respectively, remained undisposed of. In the meanwhile, in anticipation of the permission appellant adjusted the refund against tax payable for these years HC-KAR

There is, as set out earlier, no dispute that the appellant was entitled to the benefit of the Notification dated June 30, 1969. There is also no dispute that the refunds were eligible to be adjusted against sales tax payable for respective years. The only controversy is whether the appellant, not having actually secured the “prior permission” would be entitled to adjustment having regard to the words of the Notification of August 11, 1975, that “until permission of renewal is granted by the Deputy Commissioner of Commercial Taxes, the new industry should not be allowed to adjust the refunds”. The contention virtually means this: “No doubt you were eligible and entitled to make the adjustments. There was also no impediment in law to grant you such permission. But see language of clause 5. Since we did not give you the permission you cannot be permitted to adjust.” Is this the effect of the law?

The sales tax already paid by the appellant on the raw materials procured by it is the subject matter of the refunds. The sales tax against which the refund is sought to be adjusted is the sales tax payable by appellant on the sales of goods manufactured by it. If the contention of the Revenue is correct, the position is that while the appellant is entitled to the refund it cannot, however, adjust the same against current dues of the particular year but should pay the tax working out its refunds separately. The HC-KAR

What emerges from the undisputed facts is that appellant was entitled to the benefit of these adjustments in the respective years. It had done and carried out all that was necessary for it to do and carry out in that behalf. The grant of permission remained pending on account of certain outstanding inter-departmental issues as to which of the departments — the Department of Sales Tax or the Department of Industries — should absorb the financial impact of these concessions. Correspondence indicates that on account of these questions, internal to administration, the request for permission to adjust was not processed. On March 27, 1979, the Deputy Commissioner of Commercial Taxes wrote to the appellant to say that the orders on appellant's application for permission would be passed only on receipt of the clarification from the government on these matters.

While the matter stood thus, on January 9, 1980, the Commercial Tax Officer of the concerned juri iction issued three demand notices demanding payment of the sales tax. He said prior permission to adjust “had not been HC-KAR

The contentions in the High Court was somewhat different from those urged before us. Before the High Court the Revenue asserted that the very conditions of eligibility for entitlement to these concessions stood modified under a subsequent Notification of January 12, 1977 and that appellant did not satisfy the altered conditions of eligibility. The question, therefore, was whether entrepreneurs who had commenced their ventures prior to January 12, 1977, could be held to be governed by the terms of the later Notification of January 12, 1977. This question, in principle, had been settled by a decision of this Court in Assistant Commissioner of Commercial Taxes (Asst.), Dharwar v. Dharmendra Trading Co. [(1988) 3 SCC 570 : 1988 SCC (Tax) 432] The question that arose there pertained to another condition stipulated in the same Notification of January 12, 1977. This Court held that industries established prior to that date were not governed by those altered conditions. Though in the present case the altered condition set up against appellant was a different one, on the principle decided in Dharmendra Trading Company case [(1988) 3 HC-KAR

Shri Narasimhamurthy with his usual fairness said that he found it difficult to support the approach of the High Court to the question. The main point on which the case turned is thus settled in favour of the appellant.

But a subsidiary question arose whether the grant of permission for adjustment could at all be made after the period to which such adjustment related had itself expired. On this, the High Court said: “… But under Ex. B, the 1975 notification, a clear procedure was provided in order to claim the benefit of refund on the sales tax paid on raw materials purchased by the industrialists. The industrialists claiming the benefit had to secure the prior permission of the assessing authority to withhold the tax subject to the government's permission. In other words, prior permission was a condition precedent. In the instant case, Mr Kumar was not able to satisfy us, permission had indeed been granted. On the other hand, he fairly conceded that though an application was made, no permission was actually granted to withhold the payment. Therefore, in view of the 1975 notification prescribing the procedure for claiming the benefit under 1969 notification as at Ex. A, HC-KAR

Shri Harish Salve urged that indisputably the permission for the three years had been sought well before the commencement of the respective years but had been withheld for reasons which were demonstrably extraneous. Learned counsel emphasised that the basic eligibility was conditioned by the Notification of June 30, 1969, which required a certificate from the Department of Industries and Commerce. Both the eligibility and the fact that there was such certification from the Department of Industries were not disputed. Indeed, the requirement of the annual permission for adjustment envisaged by the Notification of August 11, 1975 was, says counsel, merely procedural as clause 3 of the notification stipulated that if the conditions were satisfied — there was no dispute they were — the Deputy Commissioner “will permit” the adjustment. Counsel says that if, in these circumstances, the Deputy Commissioner withheld the permission law treats that as done which ought to have been done.

Shri Narasimhamurthy, however, sought to contend that the requirement of the prior permission was held — and rightly — by the High Court to be a ‘condition precedent’ and that non-satisfaction of that condition precedent, whatever be the reason for the non- HC-KAR

Learned counsel submitted that the point was not whether there was any justification for delaying the permission; but, more importantly, whether appellant at the relevant point of time had such prior permission or not and that if, in the meanwhile, the period itself expired, no relief was possible as, quite obviously, the requirements of ‘prior permission’ became impossible of compliance.

Shri Narasimhamurthy relied on the following observations of this Court in Kedarnath Jute HC-KAR

We have given our careful consideration to these submissions. We are afraid the stand of the Revenue suffers from certain basic fallacies, besides being wholly technical. In Kedarnath case [(1965) 3 SCR 626, 628-30 : AIR 1966 SC 12 : (1965) 16 STC 607] , the question for consideration was whether the requirement of the declaration under the proviso to Section 5(2)(a)(ii) of the Bengal Finance (Sales Tax) Act, 1941, could be established by evidence aliunde. The Court said that the intention of the legislature was to grant exemption only upon the satisfaction of the substantive condition of the provision and the condition in the proviso was held to be of substance embodying considerations of policy. Shri HC-KAR

In Kedarnath case [(1965) 3 SCR 626, 628-30 : AIR 1966 SC 12 : (1965) 16 STC 607] itself this Court HC-KAR

Such is not the scope or intendment of the provisions concerned here. The main exemption is under the 1969 notification. The subsequent notification which contains condition of prior permission clearly envisages a procedure to give effect to the exemption. A distinction between the provisions of statute which are of substantive character and were built in with certain specific objectives of policy on the one hand and those which are merely procedural and technical in their nature on the other must be kept clearly distinguished. What we have here is a pure technicality. Clause 3 of the notification leaves no discretion to the Deputy Commissioner to refuse the HC-KAR

Francis Bennion in his Statutory Interpretation, (1984 edn.) says at page 683: “Unnecessary technicality: Modern courts seek to cut down technicalities attendant upon a statutory procedure where these cannot be shown to be necessary to the fulfillment of the purposes of the legislation.”

Shri Narasimhamurthy again relied on certain observations in CCE v. Parle Exports (P) Ltd. [(1989) 1 SCC 345 : 1989 SCC (Tax) 84] , in support of strict construction of a provision concerning exemptions. There is support of judicial opinion to the view that exemptions from taxation have a tendency to increase the burden on the other unexempted class of tax payers and should be construed against the subject in case of ambiguity. It is an equally well known principle that a person who claims an HC-KAR

It appears to us that the view taken of the matter by the High Court does not acknowledge the essential distinction between what was a matter of form and what was one of substance. There was no other disentitling circumstance which would justify the refusal of the permission. Appellant did not have prior permission HC-KAR

In Sun Export case [Sun Export Corpn. v. Collector of Customs, (1997) 6 SCC 564] , a three-Judge Bench 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. Such a rule was doubted [Commr. of Customs v. Dilip Kumar, (2018) 9 SCC 40] when this appeal was placed before a Bench of two Judges. The matter then went before a three-Judge Bench consisting one of us (Ranjan Gogoi, J.). The three-Judge Bench having noticed [Commr. of Customs v. Dilip Kumar, (2018) 9 SCC 38] the unsatisfactory state of law as it stands today, opined that the dicta in Sun Export case [Sun Export Corpn. v. Collector of Customs, (1997) 6 SCC 564] , requires reconsideration and that is how the matter has been placed before this Constitution Bench.

Few facts necessary, to appreciate the issue involved are as follows — the respondents imported a consignment of Vitamin E50 powder (feed grade) under Bill of Entry No. 8207, dated 19-8-1999. They claimed the benefit of concessional rate of duty at 5%, instead of standard 30%, as per Customs Notification No. 20 of 1999 and classified the product under Chapter 2309.90 which admittedly pertains to prawn feed. HC-KAR

When the appeal was placed, as noticed earlier, before a Bench of two Judges, the ruling in Sun Export case [Sun Export Corpn. v. Collector of Customs, (1997) 6 SCC 564] was doubted, observing as follows: (Dilip Kumar case [Commr. of Customs v. Dilip Kumar, (2018) 9 SCC 40] , SCC p. 47, paras 11-12) HC-KAR

Further, we also feel that in view of the catena of judgments of this Court which have held that an exemption notification has to be strictly construed (that is, if the person claiming exemption does not fall strictly within the letter of the notification, he cannot claim exemption), have also been ignored by this Court in Sun Export Corpn. case [Sun Export Corpn. v. Collector of Customs, (1997) 6 SCC 564] in para 13 thereof. Apart from this, the view of this Court in para 13 that it is well settled that if two views are possible, one favourable to the assessee in matters of taxation has to be preferred is unexceptionable. However, this Court was not concerned in that case with the charging section of a taxation statute. It was concerned with the interpretation of an exemption notification which, as has been stated above, would require the exactly opposite test to be fulfilled.”

Further this Court found that the subsequent judgment in Collector of Customs & Central Excise v. Surendra Cotton Oil Mills & Fertilizers Co. [Collector of Customs & Central Excise v. Surendra Cotton Oil Mills & Fertilizers Co., (2001) 1 SCC 578] (hereinafter referred to as “Surendra Cotton Oil Mills case”, for brevity), distinguished Sun Export case [Sun Export Corpn. v. Collector of Customs, (1997) 6 SCC 564] , which mandated this Court to take a relook at the proposition laid down by the earlier cases in the following manner: (Dilip Kumar case [Commr. of Customs v. Dilip Kumar, (2018) 9 SCC 40] , SCC pp. 47-48, paras 13-14 & 17) HC-KAR

In our opinion, this Court did not adequately deal with why Sun Export Corpn. case [Sun Export Corpn. v. Collector of Customs, (1997) 6 SCC 564] , which is a binding decision of a three-Judge Bench, should not be followed, apart from a specious distinction between “ingredients” and “supplements” which is logically speaking a distinction without a difference. ***

This being the unsatisfactory state of law as it stands today, we feel that this matter should be placed before Hon'ble the Chief Justice of India to constitute an appropriate Bench to resolve the doubts pointed out by us in the body of this order.” (emphasis supplied)

We feel that the reference to Surendra Cotton Oil Mills case [Collector of Customs & Central Excise v. Surendra Cotton Oil Mills & Fertilizers Co., (2001) 1 SCC 578] , may not be necessary as the distinction was drawn on a factual footing, which this Court may not concern itself with, as we are only concerned with the principle of law. With this, the Division Bench was of the tentative view that the opinion expressed in Sun Export case [Sun Export Corpn. v. Collector of Customs, (1997) 6 SCC 564] would require reconsideration, as the proposition laid down therein was unsatisfactory, and therefore placed before the Chief Justice of India for constituting an appropriate Bench. HC-KAR

When the matter was placed before a three-Judge Bench presided over by one of us (Ranjan Gogoi, J.), the Bench reiterated [Commr. of Customs v. Dilip Kumar, (2018) 9 SCC 38] the view for reconsideration of Sun Export case [Sun Export Corpn. v. Collector of Customs, (1997) 6 SCC 564] and again placed the matter, before Hon'ble the Chief Justice of India for constitution of an appropriate Bench, considering the fact that Sun Export case [Sun Export Corpn. v. Collector of Customs, (1997) 6 SCC 564] was decided by a Bench comprising of three learned Judges of this Court. Hence, this matter came to be placed before this Bench of five Judges with the following observations: (Dilip Kumar case [Commr. of Customs v. Dilip Kumar, (2018) 9 SCC 38] , SCC p. 39, paras 4-6) “4. In para 13 of the order of this Court in Sun case [Sun Export Corpn. v. Collector of Customs, (1997) 6 SCC 564] , views have been expressed with regard to the interpretation of an exemption notification to support the conclusion reached. The same may require a reconsideration.

That apart, in the referral order it has been noticed that Sun case [Sun Export Corpn. v. Collector of Customs, (1997) 6 SCC 564] has been distinguished in Collector of Customs & Central Excise v. Surendra Cotton Oil Mills & Fertilizers Co. [Collector of Customs & Central Excise v. Surendra Cotton Oil Mills & Fertilizers Co., (2001) 1 SCC 578] . The basis on which the said distinction has been drawn needs to be further pursued.

Having considered the matter at some length, we are of the tentative view, that the opinion expressed inSun case [Sun Export Corpn. v. Collector of Customs, (1997) 6 SCC 564] may require a reconsideration. Being a coordinate Bench, we believe we ought not to proceed any further in the matter. Hence, we direct the Registry to lay the papers before the Hon'ble the Chief Justice of India for appropriate orders.” (emphasis supplied) HC-KAR

The learned Additional Solicitor General, Ms Pinky Anand, submits that a tax exemption statute or notification needs to be strictly interpreted. According to her, strict interpretation is literal rule of interpretation, which means that the Court has to apply the provision reading the language therein and no interpretation is required if the language is clear. In the event of any ambiguity, according to her, the benefit has to be given to the Revenue and that such ambiguity in tax exemption provision must not be interpreted to benefit the assessee who fails to demonstrate without any doubt that such assessee is covered by the tax exemption notification. She elaborated her arguments by relying on various judgments and contends that the ratio in Sun Export case [Sun Export Corpn. v. Collector of Customs, (1997) 6 SCC 564] , which was doubted in Surendra Cotton Oil Mills case [Collector of Customs & Central Excise v. Surendra Cotton Oil Mills & Fertilizers Co., (2001) 1 SCC 578] , is not correct law. On merits of the case, she submitted that the artificial distinction created by Surendra Cotton Oil Mills case [Collector of Customs & Central Excise v. Surendra Cotton Oil Mills & Fertilizers Co., (2001) 1 SCC 578] , in distinguishing the ingredients from supplements is not sound and may not be accepted by the Court.

Per contra, among others, Mr Somnath Shukla, learned counsel appearing on behalf of the respondents would submit that the ratio and observations in Sun Export case [Sun Export Corpn. v. Collector of Customs, (1997) 6 SCC 564] have to be considered holistically without giving any narrow meaning to the conclusion arrived therein. The rule of strict interpretation HC-KAR

Sun Export case [Sun Export Corpn. v. Collector of Customs, (1997) 6 SCC 564] was a case against the judgment [Glindia Ltd. v. Union of India, 1988 SCC OnLine Bom 614 : (1988) 36 ELT 479] of the High Court of Judicature, Bombay. It was concerned with the interpretation of tax exemption notification, being Notification No. 234/1982-CE, dated 1-11- 1982, issued by the Central Government under sub-section (1) of Section 25 of the Customs Act. The High Court considered the issue whether Vitamin AD-3 mix (feed grade)/animal feed supplement could be included under the head “animal feed, including compound livestock feed”. The Bombay High Court decided, in the affirmative, in favour of the assessee. The case then landed in this Court, which was persuaded to expand the meaning of “animal feed” in the light of subsequent notification issued in 1984, which largely expanded the scope of exemption to the effect that “animal feed, including compound HC-KAR

The relevant portion in Sun Export case [Sun Export Corpn. v. Collector of Customs, (1997) 6 SCC 564] , reads as follows: (SCC pp. 569-70, para 13) “13. We are in agreement with the above view expressed by the Bombay High Court. No doubt it was contended on behalf of the Revenue that the contrary view taken by the Tribunal has been challenged in this Court which was rejected in limine at the admission stage. We do not think that dismissal at the admission stage can be relied upon as a binding precedent. Even assuming that there are two views possible, it is well settled that one favourable to the assessee in matters of taxation has to be preferred.” (emphasis supplied)

There cannot be any doubt that the ratio in Sun Export case [Sun Export Corpn. v. Collector of Customs, (1997) 6 SCC 564] that, if two views are possible in interpreting the exemption notification, the one favourable to the assessee in the matter of taxation has to be preferred. This principle created confusion and resulted in unsatisfactory state of law. In spite of a catena of judgments of this Court, which took the contra view, holding that an exemption notification must be strictly construed, and if a person claiming exemption does not fall strictly within the description of the notification otherwise then he cannot claim exemption.

About three years after Sun Export case [Sun Export Corpn. v. Collector of Customs, (1997) 6 SCC 564] , in the HC-KAR

We may, here itself notice that the distinction in interpreting a taxing provision (charging provision) and in the matter of interpretation of exemption notification is too obvious to require any elaboration. Nonetheless, in a nutshell, we may mention that, as observed in Surendra Cotton Oil Mills case [Collector of Customs & Central Excise v. Surendra Cotton Oil Mills & Fertilizers Co., (2001) 1 SCC 578] , in the matter of interpretation of charging section of a taxation statute, strict rule of interpretation is mandatory and if there are two views possible in the matter of interpretation of a HC-KAR

We may passingly, albeit, briefly reiterate the general principles of interpretation, which were also adverted to by both the counsel. In his treatise, Principles of Statutory Interpretation, Justice G.P. Singh lucidly pointed out the importance of construction of statutes in a modern State as under: “Legislation in modern State is actuated with some policy to curb some public evil or to effectuate some public benefit. The legislation is primarily directed to the problems before the legislature based on information derived from past and present experience. It may also be designed by use of general words to cover similar problems arising in future. But, from the very nature of things, it is impossible to anticipate fully the varied situations arising in future in which the application of the legislation in hand may be called for, and, words chosen to communicate such indefinite “referents” are bound to be, in many cases lacking in clarity and precision and thus giving rise to controversial questions of construction.”

An Act of Parliament/Legislature cannot foresee all types of situations and all types of consequences. It is for the HC-KAR

In doing so, the principles of interpretation have been evolved in common law. It has also been the practice for the appropriate legislative body to enact the Interpretation Acts or the General Clauses Act. In all the Acts and Regulations, made either by Parliament or Legislature, the words and phrases as defined in the General Clauses Act and the principles of interpretation laid down in the General Clauses Act are to be necessarily kept in view. If while interpreting a statutory law, any doubt arises as to the meaning to be assigned to a word or a phrase or a clause used in an enactment and such word, phrase or clause is not specifically defined, it is legitimate and indeed mandatory to fall back on the General Clauses Act. Notwithstanding this, we should remember that when there is repugnancy or conflict as to the subject or context between the General Clauses Act and a statutory provision which falls for interpretation, the Court must necessarily refer to the provisions of the statute.

The purpose of interpretation is essentially to know the intention of the legislature. Whether the legislature intended to apply the law in a given case; whether the legislature intended to exclude operation of law in a given case; whether the HC-KAR

The long title, the preamble, the heading, the marginal note, punctuation, illustrations, definitions or dictionary clause, a proviso to a section, explanation, examples, a schedule to the Act, etc., are internal aids to construction. The external aids to construction are parliamentary debates, history leading to the legislation, other statutes which have a bearing, dictionaries, thesaurus.

It is well accepted that a statute must be construed according to the intention of the legislature and the courts should act upon the true intention of the legislation while applying law and while interpreting law. If a statutory provision is open to more than one meaning, the Court has to choose the interpretation which represents the intention of the legislature. In this connection, the following observations made by this Court in District Mining Officer v. TISCO [District Mining Officer v. TISCO, (2001) 7 SCC 358] , may be noticed: (SCC pp. 382-83, para 18) “18. … A statute is an edict of the legislature and in construing a statute, it is necessary, to seek the intention of its maker. A statute has to be construed according to the intent of them that make it and the duty of the court is to act upon the true intention of the legislature. If a statutory provision is open to more than one interpretation the court has to choose that HC-KAR

The relevant portion in Sun Export case [Sun Export Corpn. v. Collector of Customs, (1997) 6 SCC 564] , reads as follows: (SCC pp. 569-70, para 13) “13. We are in agreement with the above view expressed by the Bombay High Court. No doubt it was contended on behalf of the Revenue that the contrary view taken by the Tribunal has been challenged in this Court which was rejected in limine at the admission stage. We do not think that dismissal at the admission stage can be relied upon as a binding precedent. Even assuming that there are two views HC-KAR

There cannot be any doubt that the ratio in Sun Export case [Sun Export Corpn. v. Collector of Customs, (1997) 6 SCC 564] that, if two views are possible in interpreting the exemption notification, the one favourable to the assessee in the matter of taxation has to be preferred. This principle created confusion and resulted in unsatisfactory state of law. In spite of a catena of judgments of this Court, which took the contra view, holding that an exemption notification must be strictly construed, and if a person claiming exemption does not fall strictly within the description of the notification otherwise then he cannot claim exemption.

About three years after Sun Export case [Sun Export Corpn. v. Collector of Customs, (1997) 6 SCC 564] , in the year 2000, this Court in Surendra Cotton Oil Mills case [Collector of Customs & Central Excise v. Surendra Cotton Oil Mills & Fertilizers Co., (2001) 1 SCC 578] , expressed reservations as to the soundness of the dicta in Sun Export case [Sun Export Corpn. v. Collector of Customs, (1997) 6 SCC 564] , observing that Sun Export case [Sun Export Corpn. v. Collector of Customs, (1997) 6 SCC 564] ignored the catena of judgments of this Court expressing contra view. This Court prima facie came to the conclusion with regard to the principle that when two views are possible, one favourable to the assessee in matters of taxation has to be preferred, is unexceptionable when interpreting the charging section of a taxation statute, but the opposite HC-KAR

We may, here itself notice that the distinction in interpreting a taxing provision (charging provision) and in the matter of interpretation of exemption notification is too obvious to require any elaboration. Nonetheless, in a nutshell, we may mention that, as observed in Surendra Cotton Oil Mills case [Collector of Customs & Central Excise v. Surendra Cotton Oil Mills & Fertilizers Co., (2001) 1 SCC 578] , in the matter of interpretation of charging section of a taxation statute, strict rule of interpretation is mandatory and if there are two views possible in the matter of interpretation of a charging section, the one favourable to the assessee need to be applied. There is, however, confusion in the matter of interpretation of exemption notification published under taxation statutes and in this area also, the decisions are galore [ See: Sun Export Corpn. v. Collector of Customs, (1997) 6 SCC 564; CCE v. Abhi Chemicals and Pharmaceuticals (P) Ltd., (2005) 3 SCC 541; CCE v. Parle Exports (P) Ltd., (1989) 1 SCC 345 : 1989 SCC (Tax) 84; Commr. of Customs v. Konkan Synthetic Fibres, (2012) 6 SCC 339; Collector of Customs v. Swastic Woollens (P) Ltd., 1988 Supp SCC 796 : 1989 SCC (Tax) 67; Commr. of Customs v. Reliance Petroleum Ltd., (2008) 7 SCC 220.] . HC-KAR

We may passingly, albeit, briefly reiterate the general principles of interpretation, which were also adverted to by both the counsel. In his treatise, Principles of Statutory Interpretation, Justice G.P. Singh lucidly pointed out the importance of construction of statutes in a modern State as under: “Legislation in modern State is actuated with some policy to curb some public evil or to effectuate some public benefit. The legislation is primarily directed to the problems before the legislature based on information derived from past and present experience. It may also be designed by use of general words to cover similar problems arising in future. But, from the very nature of things, it is impossible to anticipate fully the varied situations arising in future in which the application of the legislation in hand may be called for, and, words chosen to communicate such indefinite “referents” are bound to be, in many cases lacking in clarity and precision and thus giving rise to controversial questions of construction.”

An Act of Parliament/Legislature cannot foresee all types of situations and all types of consequences. It is for the Court to see whether a particular case falls within the broad principles of law enacted by the legislature. Here, the principles of interpretation of statutes come in handy. In spite of the fact that experts in the field assist in drafting the Acts and Rules, there are many occasions where the language used and the phrases employed in the statute are not perfect. Therefore, Judges and courts need to interpret the words.

In doing so, the principles of interpretation have been evolved in common law. It has also been the practice for the appropriate legislative body to enact the Interpretation Acts or the General Clauses Act. In all the Acts and Regulations, made either by Parliament or Legislature, the words and HC-KAR

The purpose of interpretation is essentially to know the intention of the legislature. Whether the legislature intended to apply the law in a given case; whether the legislature intended to exclude operation of law in a given case; whether the legislature intended to give discretion to enforcing authority or to adjudicating agency to apply the law, are essentially questions to which answers can be sought only by knowing the intention of the legislation. Apart from the general principles of interpretation of statutes, there are certain internal aids and external aids which are tools for interpreting the statutes.

The long title, the preamble, the heading, the marginal note, punctuation, illustrations, definitions or dictionary clause, a proviso to a section, explanation, examples, a schedule to the Act, etc., are internal aids to construction. The external aids to construction are parliamentary debates, history leading HC-KAR

It is well accepted that a statute must be construed according to the intention of the legislature and the courts should act upon the true intention of the legislation while applying law and while interpreting law. If a statutory provision is open to more than one meaning, the Court has to choose the interpretation which represents the intention of the legislature. In this connection, the following observations made by this Court in District Mining Officer v. TISCO [District Mining Officer v. TISCO, (2001) 7 SCC 358] , may be noticed: (SCC pp. 382-83, para 18) “18. … A statute is an edict of the legislature and in construing a statute, it is necessary, to seek the intention of its maker. A statute has to be construed according to the intent of them that make it and the duty of the court is to act upon the true intention of the legislature. If a statutory provision is open to more than one interpretation the court has to choose that interpretation which represents the true intention of the legislature. This task very often raises difficulties because of various reasons, inasmuch as the words used may not be scientific symbols having any precise or definite meaning and the language may be an imperfect medium to convey one's thought or that the assembly of legislatures consisting of persons of various shades of opinion purport to convey a meaning which may be obscure. It is impossible even for the most imaginative legislature to forestall exhaustively situations and circumstances that may emerge after enacting a statute where its application may be called for. Nonetheless, the function of the courts is only to expound and not to legislate. Legislation in a modern State is actuated with some policy to curb some public evil or to effectuate some public benefit. The legislation is primarily directed to the problems before the legislature based on information derived from past and present experience. It may also be designed by use of general words to cover similar problems arising in future. But, from the very HC-KAR

It was further observed: “In all tax matters one has to interpret the taxation statute strictly. Simply because one class of legal entities is given a benefit which is specifically stated in the Act, does not mean that the benefit can be extended to legal entities not referred to in the Act as there is no equity in matters of taxation….”

Yet again, it was observed: “It may thus be taken as a maxim of tax law, which although not to be overstressed ought not to be forgotten that, ‘the subject is not to be taxed unless the words of the taxing statute unambiguously impose the tax [on] him’, (Russell v. Scott [Russell v. Scott, 1948 AC 422 : (1948) 2 All ER 1 (HL)] , AC p. 433). The proper course in construing revenue Acts is to give a fair and reasonable construction to their language without leaning to one side or the other but keeping in mind that no tax can be imposed without words clearly showing an intention to lay the burden and that equitable construction of the words is not permissible [Ormond Investment Co. v. Betts [Ormond Investment Co. v. Betts, 1928 AC 143 (HL)] ]. Considerations of hardship, injustice or anomalies do not play any useful role in construing taxing statutes unless there be some real ambiguity [Mapp v. Oram [Mapp v. Oram, 1970 AC 362 : (1969) 3 WLR 557 : (1969) 3 All ER 215 (HL)] ]. It has also been said that if taxing provision is ‘so wanting in clarity that no meaning is reasonably clear, the courts will be unable to regard it as of any effect [IRC v. Ross HC-KAR

Further elaborating on this aspect, the learned author stated as follows: “Therefore, if the words used are ambiguous and reasonable open to two interpretations benefit of interpretation is given to the subject [Central India Spg. and Wvg. & Mfg. Co. Ltd. v. Municipal Committee, Wardha [Central India Spg. and Wvg. & Mfg. Co. Ltd. v. Municipal Committee, Wardha, AIR 1958 SC 341] ]. If the legislature fails to express itself clearly and the taxpayer escapes by not being brought within the letter of the law, no question of unjustness as such arises [CIT v. Jalgaon Electric Supply Co. Ltd. [CIT v. Jalgaon Electric Supply Co. Ltd., AIR 1960 SC 1182] ]. But equitable considerations are not relevant in construing a taxing statute, [CIT v. Central India Industries Ltd. [CIT v. Central India Industries Ltd., (1972) 3 SCC 311 : AIR 1972 SC 397] ], and similarly logic or reason cannot be of much avail in interpreting a taxing statute [Azam Jah Bahadur v. Expenditure Tax Officer [Azam Jah Bahadur v. Expenditure Tax Officer, (1971) 3 SCC 621 : AIR 1972 SC 2319] ]. It is well settled that in the field of taxation, hardship or equity has no role to play in determining eligibility to tax and it is for the legislature to determine the same [Kapil Mohan v. CIT [Kapil Mohan v. CIT, (1999) 1 SCC 430 : AIR 1999 SC 573] ]. Similarly, hardship or equity is not relevant in interpreting provisions imposing stamp duty, which is a tax, and the court should not concern itself with the intention of the legislature when the language expressing such intention is plain and unambiguous [State of M.P. v. Rakesh Kohli [State of M.P. v. Rakesh Kohli, (2012) 6 SCC 312 : (2012) 3 SCC (Civ) 481] ]. But just as reliance upon equity does not avail an assessee, so it does not avail the Revenue.”

The passages extracted above, were quoted with approval by this Court in at least two decisions being CIT v. Kasturi and Sons Ltd. [CIT v. Kasturi and Sons Ltd., (1999) 3 SCC 346] and State of W.B. v. Kesoram HC-KAR

Now coming to the other aspect, as we presently discuss, even with regard to exemption clauses or exemption notifications issued under a taxing statute, this Court in some cases has taken the view that the ambiguity in an exemption notification should be construed in favour of the subject. In subsequent cases, this Court diluted the principle saying that mandatory requirements of exemption clause should be interpreted strictly and the directory conditions of such exemption notification can be condoned if there is sufficient compliance with the main requirements. This, however, did not in any manner tinker with the view that an ambiguous exemption clause should be interpreted favouring the Revenue. Here again this Court applied different tests when HC-KAR

With the above understanding the stage is now set to consider the core issue. In the event of ambiguity in an exemption notification, should the benefit of such ambiguity go to the subject/assessee or should such ambiguity be construed in favour of the Revenue, denying the benefit of exemption to the subject/assessee? There are a catena of case laws in this area of interpretation of an exemption notification, which we need to consider herein. IRC v. James Forrest [IRC v. James Forrest, (1890) LR 15 AC 334 (HL)] is a case which does not discuss the interpretative test to be applied to exemption clauses in a taxation statute—however, it was observed that: (AC p. 338) ‘… it would be unreasonable to suppose that an exemption was wide as practicable to make the tax inoperative, that it cannot be assumed to have been in the mind of the legislature’ and that exemption ‘from taxation to some extent increased the burden on other members of the community’. (AC p. 340) Though this is a dissenting view of Lord Halsbury, LC, in subsequent decisions this has been quoted vividly to support the conclusion that any vagueness in the exemption clauses must go to the benefit of the Revenue. Be that as it is, in our country, at least from 1955, there appears to be a consistent view that if the words in a taxing statute (not exemption clause) are ambiguous and open to two interpretations, the benefit of interpretation is HC-KAR

The first case with which we need to concern ourselves is in Union of India v. CTO [Union of India v. CTO, AIR 1956 SC 202] . It may be noted that this case was dealt with by five learned Judges of this Court resulting in two different opinions; one by the then Chief Justice of India, S.R. Das for the majority, and Justice B.P. Sinha (as his Lordship then was) rendering minority view. The question before this Court was whether the sale of goods made by one private mill to the Government of India, Ministry of Industries and Supplies were to be deducted as taxable turnover of the mill for the exemption given under Section 5 of the Bengal Finance (Sales Tax) Act, 1941 (Bengal Act VI of 1941). The exemption under Section 5(2)(a)(iii) of the Bengal Finance (Sales Tax) Act, 1941 provided for exemption “to sales to the Indian Stores Department, the Supply Department of the Government of India, and any railway or water transport administration”.(AIR p. 203, para 3)

The majority was of the view that the Government of India, Ministry of Industries and Supplies was not similar to HC-KAR

The Court while repelling the aforesaid interpretation, reasoned as under: (CTO case [Union of India v. CTO, AIR 1956 SC 202] , AIR p. 207, para 18) “18. … We are unable to accept this line of reasoning. This interpretation will unduly narrow the scope and ambit of the exemption by limiting it to sales of only those goods as, at the date of the Act, used to be sold to those two departments and sales of other goods even to those two departments, however necessary for the prosecution of the war, would not get benefit of the exemption. Such could not possibly be the intention of the legislature as expressed by the language used by it in framing the section.”

The aforesaid placitum is suggestive of the fact that the Courts utilised the rule of strict interpretation in order to HC-KAR

On the contrary, the minority opinion of B.P. Sinha, J. (as his Lordship then was) provided a purposive interpretation for Section 5(2)(a)(iii) of the Act, which is clear from the following passage: (CTO case [Union of India v. CTO, AIR 1956 SC 202] , AIR p. 210, para 24) “24. … The judgment under appeal is based chiefly on the consideration that the exemption clause in question does not in terms refer to the newly created department which now goes by the name of the Ministry of Industry and Supply. But this department insofar as it deals with industry, is not concerned with the main purchasing activities of the Government of India. The exemption was granted in respect of the purchasing activity of the Government of India and that function continues to be assigned to the Supply Department which has now become a wing of the newly created department of the Government. The question therefore arises whether in those circumstances the Government of India could claim the benefit of the exemption. The High Court in answering that question in the negative has gone upon mere nomenclature. It has emphasised the change in the name and overlooked the substance of the matter.”

The minority construed “strict interpretation” to be an interpretation wherein least number of “determinates in terms of quantity” would fall under the exemption. The minority referred to an old English case of IRC v. James Forrest [IRC v. James Forrest, (1890) LR 15 AC 334 (HL)] . It HC-KAR

The Court was of the opinion that the strict interpretation provided by the majority was uncalled for as there was no additional burden on others by giving such exemptions. The relevant observations are as follows: (CTO case [Union of India v. CTO, AIR 1956 SC 202] , AIR pp. 211- 12, para 27) “27. … The High Court referred to the observations of Lord Halsbury in IRC v. James Forrest [IRC v. James Forrest, (1890) LR 15 AC 334 (HL)] , to the effect that exemptions from taxation should be strictly construed because otherwise the burden of taxation will fall on other members of the community. Those observations, in my opinion, have no relevance to the facts and circumstances of the present controversy, because we know that the exemption was granted to the Government of India in the department dealing with purchase of certain commodities and articles without reference to quantity. As already pointed out, the Indian Stores Department was concerned with purchase of stores for public services on behalf of all Central Departments of Government and Local Government, etc., and the Government of Bengal as then constituted was one of the Provinces of India which have been receiving subsidies and subventions to make up the deficit in their budgets. As a matter of fact, as stated on behalf of the Bengal Government the concession was granted in order to enable business communities within the Province of Bengal to compete on favourable terms with others, outside Bengal in the matter of supplying the needs of the Government. Hence, there is no question of liberal construction of the exemption resulting in throwing a greater burden on other citizens. On the other hand, the larger the sales in the Province of Bengal as it used to be, the greater the benefit to the business community doing business within that Province. It was therefore stated at the Bar that though HC-KAR

In Hansraj Gordhandas v. CCE [Hansraj Gordhandas v. CCE and Customs, AIR 1970 SC 755 : (1969) 2 SCR 253] [hereinafter referred to as “Hansraj Gordhandas case”, for brevity], wherein this Court was called upon to interpret an exemption notification issued under the Central Excise Act. It would be relevant to understand the factual context which gave rise to the aforesaid case before the Court. The appellant was the sole proprietor who used to procure cotton from a cooperative society during the relevant period. The society had agreed to carry out the weaving work for the appellant on payment of fixed weaving charges at Re. 0.19 np. per yard which included expenses the society would have to incur in transporting the aforesaid cotton fabric. In the years 1959 and 1960, the Government issued an exemption notification which exempted cotton fabrics produced by any cooperative society formed of owners of cotton power looms, registered on or before 31-3-1961. The question before the Court was whether the appellant who got the cotton fabric produced from one of the registered cooperative societies was also covered under the aforesaid notification. It may be of some significance that the Revenue tried to interpret the aforesaid exemption by relying on the purposive interpretation HC-KAR

The relevant observations are: (Hansraj case [Hansraj Gordhandas v. CCE and Customs, AIR 1970 SC 755 : (1969) 2 SCR 253] , AIR p. 759, para 5) “5. … It is well established that in a taxing statute there is no room for any intendment but regard must be had to the clear meaning of the words. The entire matter is governed wholly by the language of the notification. If the taxpayer is within the plain terms of the exemption it cannot be denied its benefit by calling in aid any supposed intention of the exempting authority. If such intention can be gathered from the construction of the words of the notification or by necessary implication therefrom, the matter is different, but that is not the case here. In this connection we may refer to the observations of Lord Watson in Salomon v. A. Salomon & Co. Ltd. [Salomon v. A. Salomon & Co. Ltd., 1897 AC 22 (HL)] : (AC p. 38) ‘ “Intention of the legislature” is a common but very slippery phrase, which, popularly understood may signify anything from intention embodied in positive enactment to speculative opinion as to what the legislature probably would have meant, HC-KAR

In the judgment of the two learned Judges in Union of India v. Wood Papers Ltd. [Union of India v. Wood Papers Ltd., (1990) 4 SCC 256 : 1990 SCC (Tax) 422] (hereinafter referred to as “Wood Papers Ltd. case”, for brevity), a distinction between stage of finding out the eligibility to seek exemption and stage of applying the nature of exemption was made. Relying on the decision in CCE v. Parle Exports (P) Ltd. [CCE v. Parle Exports (P) Ltd., (1989) 1 SCC 345 : 1989 SCC (Tax) 84] , it was held: (Wood Papers Ltd. case [Union of India v. Wood Papers Ltd., (1990) 4 SCC 256 : 1990 SCC (Tax) 422] , SCC p. 262, para 6) HC-KAR

In Mangalore Chemicals and Fertilisers Ltd. v. CCT [Mangalore Chemicals and Fertilisers Ltd. v. CCT, 1992 Supp (1) SCC 21] (hereinafter referred to as “Mangalore Chemicals case”, for brevity), the facts of the case were that the State Government issued a Notification in exercise of power under Section 8-A of the Karnataka Sales Tax Act, 1957, providing certain incentives to entrepreneurs starting HC-KAR

This Court while accepting the interpretation provided by the appellant, observed on the aspect of strict construction of a provision concerning exemptions as follows: (Mangalore Chemicals case [Mangalore Chemicals and Fertilisers Ltd. v. CCT, 1992 Supp (1) SCC 21] , SCC p. 31, para 24) “24. … There is support of judicial opinion to the view that exemptions from taxation have a tendency to increase the burden on the other unexempted class of taxpayers and should be construed against the subject in case of ambiguity. It is an equally well-known principle that a person who claims HC-KAR

Three important aspects which come out of the discussion are the recognition of horizontal equity by this Court as a consideration for application of strict interpretation, subjugation of strict interpretation to the plain meaning rule and interpretation in favour of exclusion in light of ambiguity.

We will now consider another Constitution Bench decision in CCE v. Hari Chand Shri Gopal [CCE v. Hari Chand Shri Gopal, (2011) 1 SCC 236] (hereinafter referred as “Hari Chand case”, for brevity). We need not refer to the facts of the case which gave rise to the questions for consideration before the Constitutional Bench. K.S. Radhakrishnan, J., who wrote the unanimous opinion for the Constitution Bench, framed the question viz. whether manufacturer of a specified final product falling under the Schedule to the Central Excise Tariff Act, 1985 is eligible to get the benefit of exemption of remission of excise duty on specified intermediate goods as per the Central Government Notification dated 11-8-1994, if captively consumed for the manufacture of final product on the ground that the records kept by it at the recipient end would indicate its “intended use” and “substantial compliance” with procedure HC-KAR

The Constitution Bench then considered the doctrine of substantial compliance and “intended use”. The relevant portions of the observations in paras 31 to 34 are in the following terms: (Hari Chand case [CCE v. Hari Chand Shri Gopal, (2011) 1 SCC 236] , SCC pp. 247-48) “31. Of course, some of the provisions of an exemption notification may be directory in nature and some are mandatory in nature. A distinction between the provisions of a statute which are of substantive character and were built in with certain specific objectives of policy, on the one hand, and those which are merely procedural and technical in their nature, on the other, must be kept clearly distinguished. … Doctrine of substantial compliance and “intended use”

The doctrine of substantial compliance is a judicial invention, equitable in nature, designed to avoid hardship in cases where a party does all that can reasonably be expected of it, but failed or faulted in some minor or inconsequent aspects which cannot be described as the “essence” or the “substance” of the requirements. Like the concept of “reasonableness”, the acceptance or otherwise of a plea of “substantial compliance” depends upon the facts and circumstances of each case and the purpose and object to be achieved and the context of the prerequisites which are essential to achieve the object and purpose of the rule or the regulation. Such a defence cannot be pleaded if a clear statutory prerequisite which effectuates the object and the purpose of the statute has not been met. Certainly, it means that the Court should determine whether the statute has been followed sufficiently so as to carry out the intent for which the statute was enacted and not a mirror image type of strict compliance. Substantial compliance means ‘actual compliance in respect to the substance essential to every reasonable objective of the statute’ and the Court should determine whether the statute has been followed sufficiently so as to carry out the intent of the statute and accomplish the reasonable objectives for which it was passed.

A fiscal statute generally seeks to preserve the need to comply strictly with regulatory requirements that are important, especially when a party seeks the benefits of an exemption clause that are important. Substantial compliance with an enactment is insisted, where mandatory and directory HC-KAR

The test for determining the applicability of the substantial compliance doctrine has been the subject of a myriad of cases and quite often, the critical question to be examined is whether the requirements relate to the “substance” or “essence” of the statute, if so, strict adherence to those requirements is a precondition to give effect to that doctrine. On the other hand, if the requirements are procedural or directory in that they are not of the “essence” of the thing to be done but are given with a view to the orderly conduct of business, they may be fulfilled by substantial, if not strict compliance. In other words, a mere attempted compliance may not be sufficient, but actual compliance with those factors which are considered as essential.”

After considering the various authorities, some of which are adverted to above, we are compelled to observe how true it is to say that there exists unsatisfactory state of law in relation to interpretation of exemption clauses. Various Benches which decided the question of interpretation of taxing statute on one hand and exemption notification on the other, have broadly assumed (we are justified to say this) that the position is well settled in the interpretation of a taxing statute: It is the law that any ambiguity in a taxing statute should enure to the benefit of the subject/assessee, but any ambiguity in the exemption clause of exemption notification must be conferred HC-KAR

After thoroughly examining the various precedents some of which were cited before us and after giving our anxious consideration, we would be more than justified to conclude and also compelled to hold that every taxing statute including, charging, computation and exemption clause (at the threshold stage) should be interpreted strictly. Further, in case of ambiguity in charging provisions, the benefit must necessarily go in favour of subject/assessee, but the same is not true for an exemption notification wherein the benefit of ambiguity must be strictly interpreted in favour of the Revenue/State.

In Govind Saran Ganga Saran v. CST [Govind Saran Ganga Saran v. CST1985 Supp SCC 205 : 1985 SCC (Tax) 447] , this Court pointed out three components of a taxing HC-KAR

There is abundant jurisprudential justification for this. In the governance of rule of law by a written Constitution, there is no implied power of taxation. The tax power must be specifically conferred and it should be strictly in accordance with the power so endowed by the Constitution itself. It is for this reason that the courts insist upon strict compliance before a State demands and extracts money from its citizens towards various taxes. Any ambiguity in a taxation provision, therefore, is interpreted in favour of the subject/assessee. The statement of law that ambiguity in a taxation statute should be interpreted strictly and in the event of ambiguity the benefit should go to the subject/assessee may warrant visualising different situations. For instance, if there is ambiguity in the subject of tax, that is to say, who are the persons or things liable to pay tax, and whether the Revenue has established conditions before raising and justifying a demand. Similar is the case in roping all persons within the tax net, in which event the State is to prove the liability of the persons, as may arise within the HC-KAR

In Hansraj Gordhandas case [Hansraj Gordhandas v. CCE and Customs, AIR 1970 SC 755 : (1969) 2 SCR 253] , the Constitutional Bench unanimously pointed out that an exemption from taxation is to be allowed based wholly by the language of the notification and exemption cannot be gathered by necessary implication or by construction of words; in other words, one has to look to the language alone and the object and purpose for granting exemption is irrelevant and immaterial.

In Parle Exports case [CCE v. Parle Exports (P) Ltd., (1989) 1 SCC 345 : 1989 SCC (Tax) 84] , a Bench of two HC-KAR

In the above passage, no doubt this Court observed that: (Parle Exports case [CCE v. Parle Exports (P) Ltd., (1989) 1 SCC 345 : 1989 SCC (Tax) 84] , SCC p. 357, para 17) “17. when two views of a notification are possible, it should be construed in favour of the subject as notification is part of a fiscal enactment.” This observation may appear to support the view that ambiguity in a notification for exemption must be interpreted to benefit the subject/assessee. A careful reading of the entire para, as extracted hereinabove would, however, suggest that an exception to the general rule of tax has to be construed strictly against those who invoke for their benefit. This was explained in a subsequent decision in Wood Papers Ltd. case [Union of India v. Wood Papers Ltd., (1990) 4 SCC 256 : 1990 SCC (Tax) 422] . In para 6, it was observed as follows: (SCC p. 262) “6. … In CCE v. Parle Exports (P) Ltd. [CCE v. Parle Exports (P) Ltd., (1989) 1 SCC 345 : 1989 SCC (Tax) 84] , this Court while accepting that exemption clause should be construed liberally applied rigorous test for determining if expensive items like Gold Spot base or Limca base or Thums Up base were covered in the expression food products and food preparations used in Item No. 68 of First Schedule of Central Excises and Salt Act and held ‘that it should not be in consonance with spirit and the reason of law to give exemption for non-alcoholic beverage basis under the notification in question’. Rationale or ratio is same. Do not HC-KAR

The above decision, which is also a decision of a two- Judge Bench of this Court, for the first time took a view that liberal and strict construction of exemption provisions are to be invoked at different stages of interpreting it. The question whether a subject falls in the notification or in the exemption clause, has to be strictly construed. When once the ambiguity or doubt is resolved by interpreting the applicability of exemption clause strictly, the Court may construe the notification by giving full play bestowing wider and liberal construction. The ratio of Parle Exports case [CCE v. Parle Exports (P) Ltd., (1989) 1 SCC 345 : 1989 SCC (Tax) 84] deduced as follows: (Wood Papers Ltd. case [Union of India v. Wood Papers Ltd., (1990) 4 SCC 256 : 1990 SCC (Tax) 422] , SCC p. 262, para 6) “6. … Do not extend or widen the ambit at stage of applicability. But once that hurdle is crossed, construe it liberally.”

We do not find any strong and compelling reasons to differ, taking a contra view, from this. We respectfully record our concurrence to this view which has been subsequently, elaborated by the Constitution Bench in Hari Chand case [CCE v. Hari Chand Shri Gopal, (2011) 1 SCC 236] .

The next authority, which needs to be referred is Mangalore Chemicals [Mangalore Chemicals and Fertilisers Ltd. v. CCT, 1992 Supp (1) SCC 21] . As we have already HC-KAR

The ratio in Mangalore Chemicals case [Mangalore Chemicals and Fertilisers Ltd. v. CCT, 1992 Supp (1) SCC 21] was approved by a three-Judge Bench in Novopan India Ltd. v. CCE [Novopan India Ltd. v. CCE, 1994 Supp (3) SCC 606] . In this case, probably for the first time, the question was posed as to whether the benefit of an exemption notification should go to the subject/assessee when there is ambiguity. The three-Judge Bench, in the background of English and Indian cases, in para 16, unanimously held as follows: (SCC p. 614) “16. We are, however, of the opinion that, on principle, the decision of this Court in Mangalore Chemicals [Mangalore Chemicals and Fertilisers Ltd. v. CCT, 1992 Supp (1) SCC 21] — and in Union of India v. Wood Papers Ltd. [Union of India v. Wood Papers Ltd., (1990) 4 SCC 256 : 1990 SCC (Tax) 422] , referred to therein — represents the correct view of law. The principle that in case of ambiguity, a taxing statute should be construed in favour of the assessee — assuming that the said principle is good and sound — does not apply to the construction of an exception or an exempting provision, they have to be construed strictly. A person invoking an exception or an exemption provision to relieve him of the tax liability must establish clearly that he is covered by the said provision. In case of doubt or ambiguity, benefit of it must go to the State.” HC-KAR

In TISCO Ltd. v. State of Jharkhand [TISCO Ltd. v. State of Jharkhand, (2005) 4 SCC 272] , which is another two-Judge Bench decision, this Court laid down that eligibility clause in relation to exemption notification must be given strict meaning and in para 44, it was further held: (SCC pp. 289-290) “44. The principle that in the event a provision of fiscal statute is obscure such construction which favours the assessee may be adopted, would have no application to construction of an exemption notification, as in such a case it is for the assessee to show that he comes within the purview of exemption (see Novopan India Ltd. v. CCE [Novopan India Ltd. v. CCE, 1994 Supp (3) SCC 606] ).”

In Hari Chand case [CCE v. Hari Chand Shri Gopal, (2011) 1 SCC 236] , as already discussed, the question was whether a person claiming exemption is required to comply with the procedure strictly to avail the benefit. The question posed and decided was indeed different. The said decision, which we have already discussed supra, however, indicates that while construing an exemption notification, the Court has to distinguish the conditions which require strict compliance, the non-compliance of which would render the assessee ineligible to claim exemption and those which require substantial compliance to be entitled for exemption. We are pointing out this aspect to dispel any doubt about the legal position as explored in this decision.

As already concluded in paras 53 to 55 and 63, above, we may reiterate that we are only concerned in this case with a situation where there is ambiguity in an exemption notification or exemption clause, in which event the benefit of such ambiguity cannot be extended to the subject/assessee by applying the principle that an obscure and/or ambiguity or HC-KAR

To sum up, we answer the reference holding as under:

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.

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.

The ratio in Sun Export case [Sun Export Corpn. v. Collector of Customs, (1997) 6 SCC 564] is not correct and all the decisions which took similar view as in Sun Export case [Sun Export Corpn. v. Collector of Customs, (1997) 6 SCC 564] stand overruled.

The instant civil appeal may now be placed before the appropriate Bench for considering the case on merits after obtaining orders from the Hon'ble Chief Justice of India.

14 In the present case, it can be said that once the objective of the exemption is to encourage economic development and foster social development, a liberal interpretation to the wordings of the Notification should be given to include lift irrigation as part of exemption as the project fulfills the objective of economic HC-KAR

15 A perusal of the material on record would indicate that in W.P.No.29162/2025, the relevant tax has been demanded by the respondents for the FY 2015-16 and 2016-17. Similarly, in W.P.No.8067/2025, it can be seen that the SCN was issued on 27.4.2021 invoking the powers to issue SCN in the extended period on the ground that the assessee has suppressed the value of the taxable services.

16 In this regard, it would be profitable to extract the relevant provisions of Finance Act and Service Tax rules;

Returns 1(1) Every assessee shall submit a half-yearly return in Form `ST-3' or `ST-3A 11[ or ST-3C]', as the case may be, along with a copy of the Form TR-6, in triplicate for the months covered in the half-yearly return. (2) Every assessee shall submit the half-yearly return by the 25th of the month following the particular half-year. HC-KAR

1Recovery of service tax not levied or paid or short-levied or short-paid or erroneously refunded (1) Where any service tax has not been levied or paid or has been short-levied or short-paid or erroneously refunded, the 2[Central Excise Officer] may, within 17[ thirty months ] from the relevant date, serve notice on the person chargeable with the service tax which has not been levied or paid or which has been short-levied or short-paid or the person to whom such tax refund has erroneously been made, requiring him to show cause why he should not pay the amount specified in the notice: PROVIDED that where any service tax has not been levied or paid or has been short-levied or short-paid or erroneously refunded by reason of- (a) fraud; or (b) collusion; or (c) wilful mis-statement; or (d) suppression of facts; or (e) contravention of any of the provisions of this Chapter or of the rules made thereunder with intent to evade payment of service tax, HC-KAR

17 The provisions of the Finance Act, 1994, make it clear that returns are to be filed within a specified period as contemplated in Section 70 read with Rule 7 of the Service Tax Rules, 1994. Rule 7 makes it mandatory to file returns by the 25th of the month following the end of every six months. In other words, for the period April 2015 to September 2015, returns ought to be filed by October 25th, 2015 and for the period October 2015 to March 2016, by April 25th 2016. Section 73 makes it mandatory to issue show cause notices within a period of 30 months of these dates in normal cases which gets extended to 5 years in cases of collusion, suppression, willful misstatement or fraud with intention to evade taxes. In the case of NCS Pearson vs UOI - (2025) 9 TMI 1205, this Court held as under:

A perusal of the material on record will indicate that 2nd respondent has issued the Impugned Show cause Notice dated 12.02.2024 under Section 74 of the CGST Act seeking to demand GST on supply of Type-III Tests upon alleging that the petitioner, being clearly aware of its GST HC-KAR

Before adverting to the rival contentions, it is necessary to extract Section 74 of the CGST Act, which reads as under: Section 74. Determination of tax pertaining to the period up to Financial Year 2023-24 not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised by reason of fraud or any willful- misstatement or suppression of facts.- (1) Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded or where input tax credit has been wrongly availed or utilised by reason of fraud, or any wilful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has HC-KAR

A plain reading of Explanation 2 to Section 74 will indicate that the sine qua non for an allegation of 'wilful suppression' under Section 74 of the CGST Act, to be made out is the non-declaration of facts or information which an Assessee is required to declare in its return or any other document furnished under the Act etc., or a failure on the part of the Assessee to furnish information sought by a Proper Officer in writing. It is the specific contention of the petitioner that the impugned Show-cause Notice dated 12.02.2024 issued under Section 74 of the CGST Act, by 2nd respondent on the ground of 'wilful suppression' is illegal and arbitrary being manifestly violative of the law for want of satisfaction of the juri ictional fact of Section 74 of the CGST Act and that the impugned show cause notice is wholly without juri iction or authority of law as the foundational juri ictional facts to trigger / invoke Section 74 of the CGST Act i.e., existence of wilful suppression to evade / avoid payment of GST in relation to Type – III tests has not been satisfied by the respondents and the impugned show cause notice deserves to be quashed.

In this context, it is an undisputed fact borne out from the material on record that Revenue Department had participated in the proceedings before the AAR and the proceedings before the AAAR in relation to the very issue of the classification and taxability of supply of Type-III tests as OIDAR under GST Laws. It follows there from that Revenue had in its knowledge the entire gamut of transactions of supply of Type-III Tests by the petitioner, as a result of which, HC-KAR

In fact, at the very inception, i.e., on 10.01.2020, the petitioner had filed an application before the AAR seeking a ruling on the classification and taxability of Type-II and Type-III tests as supplied by it as OIDAR services and the petitioner had sought the aforesaid Authority's ruling on the questions hereunder: (i) Whether the service provided for Type-II Tests is classifiable as an OIDAR service? (ii) If the Type-II Tests provided by the petitioner do not qualify as OIDAR services, whether the petitioner is liable to pay GST on the supply of such services to non-taxable online recipients in India? (iii) Whether the service provided for Type-III Tests is classifiable as an OIDAR service? (iv) If the Type-III Tests provided by the petitioner do not qualify as OIDAR services, whether the petitioner is liable to pay GST on the supply of such services to non-taxable online recipients in India?

Before the AAR, petitioner described the modalities of the tests in detail and further laid down descriptive grounds to buttress its contention that the tests in HC-KAR

It is an undisputed fact that in relation to the findings of the AAR that Type-III Tests were not classifiable as OIDAR services, an appeal dated 27.08.2020 against such Ruling of the AAR was carried by the Revenue/Department to the AAAR, wherein they spelled out the modalities and the granular details of the transaction of supply of Type-III Tests by the petitioner which clearly establishes that the entire gamut of supply of Type-III Tests by the petitioner, along with knowledge of the modalities, methodology and manner thereof, was well within the knowledge of the Revenue/Department and its juri ictional officer/concerned officer. Further, the AAAR allowed the appeal of the HC-KAR

The aforesaid undisputed facts and circumstances lead to the sole/unmistakable

The aforesaid proceedings before the AAR and AAAR in relation to the classification and taxability of Type-III Tests are as hereunder: Sl.No. Date Event Particulars 1 10.01.2020 Application filed before Petitioner the before the Ruling sought the on classification and taxability of Type-II and Type- HC-KAR

2020

The material on record also indicates that in the absence of anything to establish that the petitioner had failed to furnish information sought by the Revenue Authorities, the very invocation of Section 74 of the CGST Act on grounds of wilful suppression is erroneous and illegal; on the other hand, petitioner had furnished all relevant information/details as sought by the 2nd respondent in relation to the supply of Type- I, Type-II and Type-III tests to non-taxable recipients In India and the GST paid thereon as and when such information was sought by such Revenue authorities during 2021-22 itself as can be seen from the communications, correspondence etc., detailed in paragraph-82 of the memorandum of writ petition, thereby establishing that the petitioner cannot be said to be guilty of having deliberately, consciously or wilfully HC-KAR

As stated supra, it is the specific contention of the petitioner that the impugned SCN dated 12.02.2024 issued under Section 74 of the CGST Act, by the 2nd respondent on the ground of 'wilful suppression' is illegal and arbitrary being manifestly violative of the law for want of satisfaction of the juri ictional fact of Section 74 of the CGST Act and that the impugned show cause notice is wholly without juri iction or authority of law as the foundational juri ictional facts to trigger / invoke Section 74 of the CGST Act i.e., existence of wilful suppression to evade / avoid payment of GST in relation to Type – III tests has not been satisfied by the Swaminathan & Sons - (2007) 8 SCC 559, the Apex Court held as under: Juri ictional fact

The learned counsel for the appellant company submitted that the fact as to “paid-up share capital” of rupees one HC-KAR

Stated simply, the fact or facts upon which the juri iction of a court, a tribunal or an authority depends can be said to be a “juri ictional fact”. If the juri ictional fact exists, a court, tribunal or authority has juri iction to decide other issues. If such fact does not exist, a court, tribunal or authority cannot act. It is also well settled that a court or a tribunal cannot wrongly assume existence of juri ictional fact and proceed to decide a matter. The underlying principle is that by erroneously assuming existence of a juri ictional fact, a subordinate court or an inferior tribunal cannot confer upon itself juri iction which it otherwise does not posses.

In Halsbury's Laws of England (4th Edn.), Vol. 1, Para 55, p. 61; Reissue, Vol. 1(1), Para 68, pp. 114-15, it has been stated: “Where the juri iction of a tribunal is dependent on the existence of a particular state of affairs, that state of affairs may be described as preliminary to, or collateral to the merits of, the issue. If, at the inception of an inquiry by an inferior tribunal, a challenge is made to its juri iction, the tribunal has to make up its mind whether to act or not and can give a ruling on the preliminary or collateral issue; but that ruling is not conclusive.” HC-KAR

But there is distinction between “juri ictional fact” and “adjudicatory fact” which cannot be ignored. An “adjudicatory fact” is a “fact in issue” and can be determined by a court, tribunal or authority on “merits”, on the basis of evidence adduced by the parties. It is no doubt true that it is very difficult to distinguish “juri ictional fact” and “fact in issue” or “adjudicatory fact”. Nonetheless the difference between the two cannot be overlooked.

In Halsbury's Laws of England (4th Edn.), Vol. 1, Para 55, p. 61; Reissue, Vol. 1(1), Para 68, pp. 114-15, it is stated: “There is often great difficulty in determining whether a matter is collateral to the merits or goes to the merits. The distinction may still be important; for an erroneous decision on the merits of the case will be unimpeachable unless an error of law is apparent on the face of the record of the determination or unless a right of appeal lies to a court in respect of the matter alleged to have been erroneously determined. An error of law or fact on an issue collateral to the merits may be impugned on an application for an order of certiorari to quash the decision or in any other appropriate form of proceedings, including indirect or collateral proceedings. Affidavit evidence is admissible on a disputed issue of juri ictional fact, although the superior courts are reluctant to make an independent determination of an issue of fact on which there was a conflict of evidence before the inferior tribunal or which has been found by an inspector after a local inquiry.”

In R. v. Fulham, Hammersmith and Kensington Rent Tribunal, ex p Philippe [(1950) 2 All ER 211 (DC)] it was held that the question whether premium for renewal of tenancy was or was not paid was a juri ictional fact and, therefore, was held to be a condition precedent for the lawful exercise of juri iction by a Rent Tribunal. In Brittain v. Kinnaird [(1819) 1 B&B 432 : (1814-23) All ER Rep 593] however, the factum as to possession of a “boat” HC-KAR

Likewise, the fact whether the petitioner was an “adult” in adoption proceedings was not held to be a “juri ictional fact” (Eversole v. Smith [159 SW 2nd 35] ).

In Chaube Jagdish Prasad v. Ganga Prasad Chaturvedi [AIR 1959 SC 492 : 1959 Supp (1) SCR 733] , the question was whether the landlord was entitled to enhancement of rent. Under the Act, he was not entitled to such rent unless a “new construction” had been made after 30-6-1946. It was held by this Court that the question whether construction was new or not was a “juri ictional fact” and if the court wrongly decided the said fact and thereby conferred juri iction not vested in it, the High Court could interfere with the order. The Court stated (at AIR p. 498, para 21) that “once it had the power it could determine whether the question of the date of construction was rightly or wrongly decided”. (See also Arun Kumar v. Union of India [(2007) 1 SCC 732] .)

But, in Roshan Lal Mehra v. Ishwar Dass [AIR 1962 SC 646 : (1962) 2 SCR 947] this Court held that the Rent Controller had juri iction to fix standard rent for new construction made after 24-3-1947. The question was as to when the construction was made. The Rent Controller recorded a finding of fact that the construction was put up after 24-3-1947. The finding was confirmed by the District Judge. But the High Court interfered in revision. HC-KAR

Setting aside the decision of the High Court, this Court stated: (Roshan Lal Mehra case [AIR 1962 SC 646 : (1962) 2 SCR 947] , AIR p. 659, para 17) “17. … It is clear from the orders of the Rent Controller and of the District Judge in appeal that the question whether the second floor was newly constructed or not was really a question of fact, though undoubtedly a juri ictional fact on which depended the power of the Rent Controller to take action under Section 7-A. If the Rent Controller had wrongly decided the fact and assumed juri iction where he had none, the matter would be open to reconsideration in revision. The High Court did not, however, go into the evidence, nor did it say that the finding was not justified by the evidence on record. The High Court referred merely to certain submissions made on behalf of the landlord and then expressed the opinion that what was done to the second floor was mere improvement and not a new construction. We think that the High Court was in error in interfering with the finding of fact by the Rent Controller and the District Judge, in support of which finding there was clear and abundant evidence which had been carefully considered and accepted by both the Rent Controller and the District Judge.”

It is thus clear that for assumption of juri iction by a Officer - AIR 1973 SC 1362, the Apex Court held as under:

Aggrieved by that order the appellant went up in appeal to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner rejected the appeal on the ground that the same was not maintainable. He took the view that an appeal lay only under Section 30(1-A). But, before such an appeal can be entertained the appellant must satisfy two conditions, namely, (1) he had deducted the tax due from the non-resident in accordance HC-KAR

In the case of ITW Signode India Ltd. vs. Collector of Central Excise (2004) 3 SCC 48, the Apex Court held as under: Limitation

Having answered the reference, we are of the opinion that this Court in the peculiar facts and circumstances of this case, at this stage need not go into the question as to whether the processes undertaken by the appellant would amount to manufacture or whether the classification of goods under Sub-Heading 7308.90 is correct, in view of the fact that the question as regards limitation and availability of MODVAT had not been considered.

It is not in dispute that in terms of Section 11-A, a show-cause notice for short-levy could have been issued only within six months from the relevant date. Only in the event such short-levy was imposed on account of fraud, collusion, wilful misstatement or suppression of facts with an intent to evade payment of duty on the part of the manufacturer, the extended period of limitation of five years could be invoked. HC-KAR

The appellant herein in para 15 of reply dated 2-6-1987 categorically stated that such classification has been made to the knowledge of the Department. It was contended: “On the contrary, all the processes were carried out openly and they themselves had come up for detailed consideration and eventually the decision was taken under the Assistant Collector's order dated 14-7-1983 after due application of mind and it would, therefore, be incredible to allege as is sought to be done that the Department was not in a position to get first-hand knowledge of the various processes adopted.” The appellant had further contended: “We deny each and every allegation contained in the show-cause notice. We submit that from the legal point of view the classification cannot be changed as proposed in the show-cause notice, nor does the factual position warrant modification of the classification. When Heading/Sub-Heading 7211.31 is specific (cold-rolled strips), the goods cannot be consigned to Sub-Heading 7308.90 which is not specific and is a residuary item. As long as the subject goods were not classifiable under TI 68 when it existed, they cannot attract the corresponding Sub- Heading 7308. 90. We also submit that Rule 9(2) cited in the show-cause notice is not applicable since there was no clandestine clearance.”

It is, therefore, evident that the contention of the appellant was that Rule 9(2) cited in the show- cause notice was not applicable. But, unfortunately, despite the same it had not been adverted to by the Tribunal. We must notice that the appellant herein succeeded before the Appellate Collector. The Revenue went up in appeal. The Tribunal was, therefore, bound to take the aforementioned question HC-KAR

Such an extended period of limitation can be invoked only if a positive act of fraud etc. on the part of the assessee is found. Such a positive act must be in contradistinction to mere inaction like non- taking of licence etc. It has to be pleaded and established. (See Padmini Products [(1989) 4 SCC 275 : 1989 SCC (Tax) 616 : (1989) 43 ELT 195] , P&B Pharmaceuticals Ltd. [(2003) 3 SCC 599 : (2003) 153 ELT 14] and Pushpam Pharmaceuticals Co. [1995 Supp (3) SCC 462 : (1995) 78 ELT 401] )

Even in Easland Combines [(2003) 3 SCC 410 : (2003) 152 ELT 39] this Court held : (SCC pp. 424-25, para 31) “31. It is settled law that for invoking the extended period of limitation duty should not have been paid, short-levied or short-paid or erroneously refunded because of either fraud, collusion, wilful misstatement, suppression of facts or contravention of any provision or rules. This Court has held that these ingredients postulate a positive act and, therefore, mere failure to pay duty and/or take out a licence which is not due to any fraud, collusion or wilful misstatement or suppression of fact or HC-KAR

The question of limitation involves a question of juri iction. The finding of fact on the question of juri iction would be a juri ictional fact. Such a juri ictional question is to be determined having regard to both fact and law involved therein. The Tribunal, in our opinion, committed a manifest error in not determining the said question, particularly, when in the absence of any finding of fact that such short-levy of excise duty related to any positive act on the part of the appellant by way of fraud, collusion, wilful misstatement or suppression of facts, the extended period of limitation could not have been invoked and in that view of the matter no show-cause notice in terms of Rule 10 could have been issued.

In the instant case, a perusal of the material on record will indicate that the 2nd respondent has decided the juri ictional facts in relation to the alleged wilful suppression by the petitioner erroneously/incorrectly by attempting to vest itself with the juri iction under Section 74 of the CGST Act and saddle a GST liability upon the petitioner for the period under dispute, which is impermissible in law and consequently, the very issuance of the impugned SCN dated 12.02.2024 under Section 74 of the CGST Act is illegal and violative of Article 265 of the Constitution inasmuch as the impugned SCN seeks to realize monies from the petitioner HC-KAR

The impugned SCN also fails to consider and appreciate that the issue of classification of Type-III Tests had not attained finality on account of W.P.No.3555/2021 preferred by the petitioner against the order of the AAAR pending adjudication before the Division Bench of this Court, in which there is an interim order in favour of the petitioner as stated supra; despite the sub-judice nature of the issue of classification and taxability of Type-III Tests pending before this Court, and interim orders having been granted in favour of the petitioner, the 2nd respondent has issued the impugned SCN relating to Type-III Tests, even though this very issue/question relating to classification and taxability of such supply of service was pending consideration of this Court and the impugned SCN deserves to be quashed on this score also.

A perusal of the impugned SCN will indicate that Section 74 of the CGST Act cannot be invoked in cases involving the mere omission to pay tax or the mere omission to give correct information, without there being any intention to evade tax; the allegations of wilful suppression of appropriate GST not being paid and the failure of the petitioner to mention the value of services correctly in the GSTR-5A returns and failing to apply the correct GST rate, ignores the fact that the very mens rea element of consciously or deliberately suppressing information/details for the purpose of evading the payment of tax which forms the HC-KAR

Now so far as fraud and collusion are concerned, it is evident that the requisite intent, i.e., intent to evade duty is built into these very words. So far as misstatement or suppression of facts are concerned, they are clearly qualified by the word ‘wilful’ preceding the words “misstatement or suppression of facts” which means with intent to evade duty. The next set of words “contravention of any of the provisions of this Act or rules” are again qualified by the immediately following words “with intent to evade payment of duty”. It is, therefore, not correct to say that there can be a suppression or misstatement of fact, which is not wilful and yet constitutes a permissible ground for the purpose of the proviso to Section 11-A. Misstatement or suppression of fact must be wilful. HC-KAR

In the case of Eastland Combines vs. CCE - (2003) 3 SCC 410, the Apex Court held that wilful suppression postulates a positive act and that a mere failure to pay duty which is not due to any suppression of facts is not sufficient to attract the extended period of limitation and that the mere default or failure of the assessee to pay duty, without the existence of any intent to wilfully suppress information/details in itself would attract the extended period of limitation as hereunder:

It is settled law that for invoking the extended period of limitation duty should not have been paid, short-levied or short-paid or erroneously refunded because of either fraud, collusion, wilful misstatement, suppression of facts or contravention of any provision or rules. This Court has held that these ingredients postulate a positive act and, therefore, mere failure to pay duty and/or take out a licence which is not due to any fraud, collusion or wilful misstatement or suppression of fact or contravention of any provision is not sufficient to attract the extended period of limitation.

Similarly, in the case of Anand Nishikawa Co. Ltd. vs. Commissioner of Central Excise Meerut - (2005) 7 SCC 749, the Apex Court held that a mere failure to declare does not amount to wilful suppression as hereunder:

In Tata Iron & Steel Co. Ltd. v. Union of India [(1988) 3 SCC 403 : 1988 SCC (L&S) 381 : (1988) 35 ELT 605] this Court held that when the classification list continued to have been approved regularly by the Department, it could not be said that the manufacturer was guilty of “suppression of facts”. As noted herein earlier, we have also concluded that the classification lists supplied by the appellant were duly approved from time to time regularly by the Excise Authorities and only in the year 1995, the HC-KAR

Relying on the aforesaid observations of this Court in the case of Pushpam Pharmaceuticals Co. v. CCE [1995 Supp (3) SCC 462] we find that “suppression of facts” can have only one meaning that the correct information was not disclosed deliberately to evade payment of duty. When facts were known to both the parties, the omission by one to do what he might have done and not that he must have done, would not render it suppression. It is settled law that mere failure to declare does not amount to wilful suppression. There must be some positive act from the side of the assessee to find HC-KAR

So also, in Continental Foundation Joint Venture vs. Commissioner of Central Excise, Chandigarh -(2007) 216 ELT 177 (SC), it was held by the Apex Court that mere omission to give correct information is not suppression of facts, unless it was deliberate to stop the payment of duty and that when the facts are known to both the parties, omission by one party to do what he might have done would not render it to be suppression as hereunder:

The expression “suppression” has been used in the proviso to Section 11-A of the Act accompanied by very strong words as “fraud” or “collusion” and, therefore, has to be construed strictly. Mere omission to give correct information is not suppression of facts unless it was deliberate to stop (sic evade) the payment of duty. Suppression means failure to disclose full information with the intent to evade payment of duty. When the facts are known to both the parties, omission by one party to do what he might have done would not render it HC-KAR

As stated earlier, though the respondents allege in the impugned SCN that the petitioner failed to mention the value of services correctly in the GSTR - 5A returns and apply the correct GST rate on the consideration received, the mere omission to mention the value of services correctly in the returns and/or apply the correct GST rate would not be tantamount to wilful suppression, in light of the principles laid down in the aforesaid judgments, particularly when the respondents-Revenue had in their knowledge the complete gamut of transactions of supply of Type-III tests by the petitioner, thereby leading to the sole conclusion that an intention to evade payment of tax could in no manner be imputed or attributable to the petitioner and the impugned SCN deserves to be quashed.

In the case of Commissioner, Central Excise and Customs vs. Reliance Industries Ltd., - 2023 SCC OnLine SC 767, the Apex Court held as under:-

In Pushpam Pharmaceuticals Co. v. CCE [Pushpam Pharmaceuticals Co. v. CCE, 1995 Supp (3) SCC 462] , this Court, while dealing with a similar fact circumstance wherein the extended period of limitation under the abovementioned proviso had been invoked, held that since the expression “suppression of facts” is used in the company of terms such as fraud, collusion and wilful misstatement, it cannot therefore HC-KAR

Similarly, in CCE v. Chemphar Drugs & Liniments [CCE v. Chemphar Drugs & Liniments, (1989) 2 SCC 127 : 1989 SCC (Tax) 245] , this Court, while dealing with a similar situation of invocation of extended period of limitation under Section 11-A of the Act, this Court held as under : (SCC p. 131, para 9) “9. … In order to make the demand for duty sustainable beyond a period of six months and up to a period of 5 years in view of the proviso to sub-section (1) of Section 11-A of the Act, it has to be established that the duty of excise has not been levied or paid or short-levied or short-paid, or erroneously refunded by reasons of either fraud or collusion or wilful misstatement or suppression of facts or contravention of any provision of the Act or Rules made thereunder, with intent to evade payment of duty. Something positive other than mere inaction or failure on the part of the manufacturer or producer or conscious or deliberate withholding of information when the manufacturer knew otherwise, is required before it is saddled with any liability, before (sic beyond) the period of six months. Whether in a particular set of facts and circumstances there was any fraud or collusion or wilful misstatement or suppression or contravention of any provision of any Act, is a question of fact depending upon the facts and circumstances of a particular case. The Tribunal came to the conclusion that the facts referred to hereinbefore do not warrant any inference of fraud. The assessee declared the goods on the basis of their belief of the interpretation of the provisions of the law that the exempted goods were not required to be included and these did not include the value of the exempted goods which they manufactured at the relevant time. The Tribunal found that the explanation was plausible, and also noted that the Department had full knowledge of the facts about manufacture of all the goods manufactured by the respondent when the declaration was filed by the HC-KAR

We also find no merits in the other argument urged by the learned counsel for the Revenue that the Tribunal's order in IFGL Refractories [IFGL Refractories Ltd. v. CCE, 2000 SCC OnLine CEGAT 1771 : (2001) 134 ELT 230] could not have constituted a valid basis for the belief entertained by the assessee in view of the fact that the relevant valuation provisions had undergone amendments in the year 2000. The argument of the Revenue's counsel was that in view of the amendments to Section 4 and Rule 6 of the Valuation Rules the ratio of the Tribunal's decision in IFGL case [IFGL Refractories Ltd. v. CCE, 2000 SCC OnLine CEGAT 1771 : (2001) 134 ELT 230] was no longer relevant for the period under consideration in these appeals. We have no hesitation in rejecting this contention for two independent reasons. Firstly, this contention too has not been urged in the civil appeal filed by the Revenue and has been urged only during the course of the hearing before this Court. On this count alone the contention deserves to be ignored. Secondly, we also find this contention to be diametrically opposite to what the Revenue itself has been contending on merits right from the show-cause notice till the appeal filed before this Court.

On merits, the Revenue's case throughout had been that the issue of valuation is covered against the assessee by the judgment of this Court in IFGL Refractories [CCE v. IFGL Refractories Ltd., (2005) 6 SCC 713] . Even in the order of CESTAT under challenge the Tribunal has proceeded on the basis that the principle of valuation laid down by this Court in IFGL Refractories [CCE v. IFGL Refractories Ltd., (2005) 6 SCC 713] holds good and remains valid even under the amended valuation provisions for the period post July 2000. We therefore find it strange that for the HC-KAR

We are in full agreement with the finding of the Tribunal that during the period in dispute it was holding a bona fide belief that it was correctly discharging its duty liability. The mere fact that the belief was ultimately found to be wrong by the judgment of this Court does not render such belief of the assessee a mala fide belief particularly when such a belief was emanating from the view taken by a Division Bench of the Tribunal. We note that the issue of valuation involved in this particular matter is indeed one where two plausible views could co-exist. In such cases of disputes of interpretation of legal provisions, it would be totally unjustified to invoke the extended period of limitation by considering the assessee's view to be lacking bona fides. In any scheme of self- assessment it becomes the responsibility of the assessee to determine his liability of duty correctly. This determination is required to be made on the basis of his own judgment and in a bona fide manner.

In the instant case, as stated supra, in the light of pendency of W.P.No.3555/2021 preferred by the petitioner before this Court assailing the order of the AAAR, the very issue/question relating to classification of Type-III tests supplied by the petitioner as OIDAR services, remains in a significant state of flux inasmuch as at the very initial stage of the litigation, the AAR vide its order dated 22.05.2020 held that Type-III tests were outside the purview of OIDAR services which was reversed by the AAAR, thereby indicating that the HC-KAR

The respondents placed reliance upon the decision of the Gujarat High Court in Commissioner of Central Excise vs. Neminath Fabrics Pvt. Ltd., -2010 (256) ELT 369 (Guj.) to justify the invocation of the extended period of limitation under Section 74 of the CGST Act by submitting that the concept of knowledge cannot be an appropriate defence; in this context, it is relevant to state that the said judgment is circumscribed and applicable only to cases wherein 'suppression' is established or admitted as can be seen from the relevant portion of the judgment as hereunder:

The Proviso comes into play only when suppression etc. is established or stands admitted. It would differ from a case where fraud, etc. are merely alleged and are disputed by an assessee. Hence, by no stretch of imagination the concept of knowledge can be read into the provisions because that would tantamount to rendering the defined term "relevant date" nugatory and such an interpretation is not permissible." HC-KAR

The aforesaid judgment in Neminath’s case supra was considered by the CESTAT in Amway India Enterprises Pvt. Ltd. vs. Commissioner of Central Excise, New Delhi - 2017 (3) GSTL 69 (Tri.-Del), wherein it was held as under:

The show cause notice in this case has been issued by the Department alleging 'wilful and intentional suppression' of facts by the appellant. It is trite in law that the suppression (intentional and deliberate) can never be said to exist when material and relevant fact forming the basis of the demand were already within the knowledge of the department. Accordingly, the pre conditions for applicability of the proviso to Section 73(1) ibid cannot be said to be made and in such eventuality, the extended period of limitation cannot be invoked and the demand to be confined to the normal period of one year.

On a collective reading of the decisions cited by both the counsels, it is clear that the consistent position of law with regard to applicability of the proviso to Section 73(1)/Section 11A ibid has been that suppression cannot be established where material facts were within the knowledge of the Revenue. Accordingly, where there is no suppression, the pre- condition for applicability of proviso to Section 73(1) cannot be said to be met and hence, extended period of limitation contemplated therein cannot be invoked. On the contrary, where the ingredients for invoking proviso to Section 73(1) are established or admitted and thus the pre-conditions for applicability of such proviso stands satisfied, and only in such cases, the period of 5 years is required to be computed from the date when the evasion came to the knowledge of the Department."

In the instant case, the material on record clearly indicates the allegation of suppression made by the respondents are neither admitted nor established and on the other hand, the same are seriously/specifically disputed and HC-KAR

The aforesaid discussion clearly establishes that the impugned Show Cause Notice dated 12.02.2024 issued under Section 74 of the CGST Act, by the 2nd respondent is illegal and arbitrary being manifestly violative of the law for want of satisfaction of the juri ictional facts contemplated in Section 74 of the CGST Act and that the impugned show cause notice is wholly without juri iction or authority of law as the foundational juri ictional facts to trigger / invoke Section 74 of the CGST Act i.e., existence of wilful suppression to evade / avoid payment of GST in relation to Type – III tests has not been satisfied by the respondents and the impugned show cause notice deserves to be quashed. HC-KAR

Insofar as the various other contentions, claims and reliefs urged and sought for by the petitioner are concerned, having regard to the findings recorded hereinbefore that the impugned SCN is illegal, arbitrary and without juri iction or authority of law and is contrary to law and the provisions contained in Section 74 of the CGST Act and that the same deserves to be quashed, I deem it just and appropriate not to deal with all other claims, contentions, reliefs, issues, questions etc., which are hereby kept/left open to be decided in an appropriate case and no opinion is expressed on the same in the present order.

In the result, I pass the following: ORDER (i) Petition is hereby partly allowed. (ii) The impugned Show Cause Notice at Annexure-A dated 12.02.2024 issued by the 2nd respondent under Section 74 of the CGST Act, 2017 is hereby quashed; (iii) All other claims, contentions, reliefs, issues, questions etc., urged by both sides are hereby kept / left open to be decided in an appropriate case and no opinion is expressed on the same in the present order.

18 So also, in the case of Cosmic Dye Chemical vs. Collector of Central Excise, Bombay - (1995) 6 SCC 117, the Apex Court held as under-

Now so far as fraud and collusion are concerned, it is evident that the requisite intent, i.e., intent to evade duty is built into these very words. So far as misstatement or HC-KAR

19 In the case of Eastland Combines vs. CCE - (2003) 3 SCC 410, the Apex Court held that wilful suppression postulates a positive act and that a mere failure to pay duty which is not due to any suppression of facts is not sufficient to attract the extended period of limitation and that the mere default or failure of the assessee to pay duty, without the existence of any intent to wilfully suppress information/details in itself would attract the extended period of limitation as hereunder:

It is settled law that for invoking the extended period of limitation duty should not have been paid, short-levied or short-paid or erroneously refunded because of either fraud, collusion, wilful misstatement, suppression of facts or contravention of any provision or rules. This Court has held that these ingredients postulate a positive act and, therefore, mere failure to pay duty and/or take out a licence which is not due to any fraud, collusion or wilful HC-KAR

20 So also, in the case of Anand Nishikawa Co. Ltd. vs. Commissioner of Central Excise Meerut - (2005) 7 SCC 749, the Apex Court held as hereunder:

In Tata Iron & Steel Co. Ltd. v. Union of India [(1988) 3 SCC 403 : 1988 SCC (L&S) 381 : (1988) 35 ELT 605] this Court held that when the classification list continued to have been approved regularly by the Department, it could not be said that the manufacturer was guilty of “suppression of facts”. As noted herein earlier, we have also concluded that the classification lists supplied by the appellant were duly approved from time to time regularly by the Excise Authorities and only in the year 1995, the Department found that there was “suppression of facts” in the matter of post-forming manufacturing process of the products in question. Furthermore, in view of our discussion made herein earlier, that the Department has had the opportunities to inspect the products of the appellant from time to time and, in fact, had inspected the products of the appellant. Classification lists supplied by the appellant were duly approved and in view of the admitted fact that the flow- chart of manufacturing process submitted to the Superintendent of Central Excise on 17-5-1990 clearly mentioned the fact of post-forming process on the rubber, HC-KAR

Relying on the aforesaid observations of this Court in the case of Pushpam Pharmaceuticals Co. v. CCE [1995 Supp (3) SCC 462] we find that “suppression of facts” can have only one meaning that the correct information was not disclosed deliberately to evade payment of duty. When facts were known to both the parties, the omission by one to do what he might have done and not that he must have done, would not render it suppression. It is settled law that mere failure to declare does not amount to wilful suppression. There must be some positive act from the side of the assessee to find wilful suppression. Therefore, in view of our findings HC-KAR

21 In Continental Foundation Joint Venture vs. Commissioner of Central Excise, Chandigarh -(2007) 216 ELT 177 (SC), the Apex Court held as hereunder:

The expression “suppression” has been used in the proviso to Section 11-A of the Act accompanied by very strong words as “fraud” or “collusion” and, therefore, has to be construed strictly. Mere omission to give correct information is not suppression of facts unless it was HC-KAR

22 It is pertinent to note that laying claim to an exemption is purely interpretational in nature and cannot be a matter of suppression of facts or fraud or collusion or wilful misstatement with intention to evade payment of taxes. Therefore, in light of the abovementioned law, facts and circumstances I am of the view that proviso to Section 73 of the Finance Act 1994 could not have been invoked as there has been no wilful misstatement or suppression of facts, the period for issuing show cause notices being 30 months from the date of the relevant returns only, the impugned notice has been issued on 27.4.2021, way beyond the prescribed period of 30 months and therefore, is clearly barred by time. HC-KAR

23 Insofar as the petitioner in W.P.No.8067/2025 is concerned, it is to be noted that only based on income tax statement in Form 26AS, the show cause notice was issued alleging suppression, which proceedings were set aside in the earlier order of this Court in W.P.No.17591/2022 dated 03.07.2024 and remanded the matter back for fresh consideration. Therefore, subsequent to remand, the only question that remained is, whether the value of pumps on which sales tax/VAT has been paid can be included in the value of taxable services, which has already been answered by me earlier. Therefore, the question of invoking extended period clearly did not arise as the ingredients of fraud, collusion, misstatement or misrepresentation or suppression of facts with intention to evade really does not arise. Therefore, the extended period could not have been invoked. Point No.3 is accordingly answered in favour of the petitioners.

In view of the aforesaid discussions, I am of the considered opinion that the impugned orders are illegal, arbitrary and without juri iction or authority of law and the same are contrary to the aforesaid Notifications as well as the provisions HC-KAR

In the result, I pass the following; ORDER (i) W.P.No.29162/2025 is hereby allowed. (ii) The impugned Order-in-Original No. 53/ST/COMMR/2023-24 at Annexure-A dated 14.03.2024 passed by the respondent is hereby set aside. (iii) W.P.No.8067/2025 is hereby allowed. (iv) The impugned Order-in-Original No.48/ADC/BNW/2023- 24/BNW at Annexure-A dated 23.12.2024 passed by the 1st respondent is hereby set aside. (v) The impugned Show cause notice No. 117/2021 having Digital Identification No. (‘DIN’) 20210457YX0000000FEB at Annexure-B dated 27.04.2021, issued by the 1st respondent is hereby quashed. (S.R.KRISHNA KUMAR) JUDGE