Interpretation of exemption notifications

It is a basic rule of interpretation, colloquially termed as the 'literal rule', that words of a provision must be given ordinary or natural meaning unless a statute explicitly defines some of its terms otherwise. However in some cases, courts depart from ordinary meaning of words, when normal meaning of words does not lead to the desired results or in case of specific situations. In a number of cases the literal rule is departed and instead the provision is sought to be understood bearing in mind the intentions of the authority for introducing the said provision, which can be termed as the 'purposive construction rule'. In the context of interpretation of exemption notifications, the law is fairly well-settled in terms of a large number of decisions on the subject which purport to employ 'strict construction rule' to determine eligibility of a claim for exemption. Indian Supreme Court in a recent judgement in the case of Coastal Paper Ltd V. CCF, Vishakhapatnam1 has seemingly departed from this settled legal position and thus reignited the debate as to whether an exemption notification can be construed bearing the intent of granting such exemption.
Prior to this judgement, it was well-established principle that exemption notification being a beneficial piece of legislation must be construed strictly and in order to avail such benefit an assessee must strictly qualify the eligibility clause. Thus placing this decision in the context of statutory interpretation is crucial. It is intended to analyse the recent judgement of Supreme Court in the case of Coastal Paper (Supra) which has allowed purposive construction of statute departing from previous settled position.
Relevant facts of the case In order to encourage production of paper by use of non-conventional raw material, the government of India issued Notification No 22/94-C.F, dated 1-3-1994 which assumed concessional rate of duty at 5% for "paper and paperboard or articles made from non-conventional material". The condition which was contained in the said notification that needed to be fulfilled in order to avail the benefit stood read as under:
"If such paper and paperboard or articles made there from have been manufactured, starting from the stage of pulp, in a factory, and such pulp contains not less than 75 percent by weight of pulp made from materials other than bamboo, hard woods, soft woods, reeds (other than sarkanda) or rags"
Thus, for the purpose of aforesaid notification, for manufacture of paper, the pulp used should contain not less than 75% by weight of pulp made from materials other than bamboo, hand woods, soft woods, reeds (other than sarkanda) or rags.
The assessee in the said case was manufacturing paper out of pulp of waste gunny bags/jute waste and claimed the aforesaid exemption to pay concessional rate of excise duty on the ground that waste gunny bags or jute waste does not fall in any of the materials mentioned in the notification. The revenue, on the other hand, had taken the position that the pulp of waste gunny bags/jute waste is nothing but pulp of 'rags' and the notification, particularly, disentitles the benefit. The question, therefore, for the consideration of court was as to whether pulp of waste gunny bags/jute waste is to be treated as the pulp made from the material 'rags'. The Commissioner while granting relief to the assessee resorted to the purposive construction. The tax tribunal reversed the order of the Commissioner by holding that old gunny bags waste is nothing but 'rags' and paper made of such material is clearly disentitled for the benefit of the notification.
In these circumstances, the issue addressed by the court was eligibility of the assessee to claim the exemption notification. The court specifically noted that if one has to look into the ordinary meaning, of the expression 'rags' and on that basis construe the notification in question, the assessee would not be entitled to the concessional rate of excise duty inasmuch as the waste of gunny bags or jute bags would be called 'rags' in ordinary sense of the term. Thus, the court declared that upon application of the literal rule the claim for exemption would not survive. Ordinarily, to apply strict construction of exemption notifications, the inquiry would have been closed and the claim for exemption would have been denied. However, the court preferred to reject the literal rule and declined to dismiss the claim by declaring that the case cannot be decided on such simplistic overtones. The court held that the expression 'rags' appearing in the notification has to be construed having regard to the attendant circumstances, the context as well as the purpose for which this term did appear in the notification. The court thus, applied the purposive construction rule to determine eligibility of exemption claim. The court also extended credence to this rule of interpretation, that it is necessary to go behind the objective for which notification is issued in order to determine the correctness of the claim for exemption.
In order to determine the underlying intent and purpose of the exemption contained in the notification, the court noted the following attendant circumstances:
-- Firstly, all the excluded materials, namely, bamboo, hard woods, soft woods, and reeds are conventional raw materials. These are the materials which have direct bearing on cutting of trees and in turn on environment. Therefore, 'rags' has to be read ejusdem generis and only those materials were intended to be excluded which have direct bearing on environment.
-- Secondly, earlier notifications granting similar exemption to paper made from unconventional raw material specifically granted exemption to paper manufactured out of pulp made from jute, jute waste and of gunny bags waste. Thus, gunny bags or jute bags are normally considered as unconventional raw material for manufacturer of paper.
-- Thirdly, the court examined as to whether the intention behind the notification, could be to exclude jute, jute waste and old gunny bags waste. The court also noted the Finance Minister's speech while introducing the Finance Bill, 1984 which indicated that the government itself distinguished between jute bags/gunny bags and rags and the exemption.
The court accordingly held that the object and purpose of the notification appears to be that exemption benefit must be granted to appear manufactured out of jute bags/ bunny bags. Accordingly, the court allowed the benefit to the assessee. To fortify its approach, the court referred and relied upon an earlier judgement in the case of H.M.M Limited v. Collectorate of Central Excise, New Delhi,2 wherein it was held that the benefit of notifications and that one does not have to go only by the language employed therein.
The principle for interpretation of exemption notifications is more or less settled now where the test normally employed is one of strict construction. Here, it is important to refer to the judgement of the court in another case.3 This case laid down the mechanism to be adopted for interpretation of an exemption notification issued under a fiscal enactment in the following terms:
"A provision especially a fiscal statue providing for an exemption, concession or exception has to be construed strictly. An exemption notification has to be interpreted in the light of the words employee by it and not on any other basis. A person who claims exemption or concession must establish clearly that is covered by the provision(s) concerned and, in case of doubt or ambiguity, the benefit of it must go the State"
The court, thus, declared that purposive construction has no place in interpretation of exemption notification inasmuch as the test to be applied is one of strict construction. The court, therefore, in unambiguous terms had laid down that a person who claims exemption or concession must establish clearly that he is covered by the provisions(s) concerned and, in case of doubt or ambiguity, the benefit of it must go to the Statue and not to the assessee, this aspect is important for the rule of purposive construction is often employed to the benefit of the assessee.4 In the present judgement of Wood Papers Ltd while explaining the nature of the exemption notification and the manner in which it should be interpreted the Court observed that:
"Literally 'exemption' is freedom from liability, tax or duty, fiscal it may assume varying shapes, specially, in a growing economy. In fact, an exemption provision is like an exception and on normal principle of construction or interpretation of statues it is construed strictly either because of legislative intention or on economic justification of inequitable burden of progressive approach of fiscal provision intended to augment State revenue. But once exception or exemption becomes applicable no rule or principle requires it to be construed strictly. Truly speaking, liberal and strict construction of an exemption provision is toe invoked at different stages of interpreting it. When the question is whether a subject falls in the notification or in the exemption clause then it being in the nature of exception is to be construed strictly and against the subject but once ambiguity or doubt about applicability is lifted and the subject falls in the notification then full play should be given to it and it calls for a wider and liberal construction.
By adopting the purposive construction rule the court has specifically departed from the series of cases endorsing the strict construction rule, reignited the debate as to the applicable principle for interpretation of exemption notification. Since varying ruling exist endorsing different and rather divergent rules of construction, the application of this decision may ignite further disputes albeit to the benefit of the assessee. It is possible that these varying approaches of stator may eventually turn in favour of assessee.5 In this case the court declared that where a fiscal provision is "susceptible to two interoperations, the interpretations which favours the subject, is to be applied".6
(The writer is an advocate and is currently working as an associate with Azim-ud-Din Law Associates Karachi)
1. [Civil Appal No 4908 of 2005, decision dated July 21, 2015] [2015 (322) E.L.T 153 (S.C)] 2. 1996 (87) E.L.T 593 (S.C) 3. Commissioner of Central Excise, New Delhi v. Hari Chand Shri Gopal & Ors. [2010 (260) E.L.T 3 (S.C)] 4. Another noteworthy judgement on this issue is the judgement in the case of Union of India v. Wood Papers Limited 1990 (47) E.L.T 500 (S.S). 5. See also CIT v. Vatika Township P. Ltd, (2014) 367 ITR 466 (SC)
6. See also Government of Sindh v Muhammad Shafi, PLD 2015 SC 380.