A recent decision of the Supreme Court, in Commissioner of Central Excise Vs Ratan Melting and Wire Industries (2008-TIOL-194-SC), has laid down the legal position in relation to circulars issued by the Central Board of Excise and Customs (CBEC). In many ways, this decision overturns the commonly held view, now understood to be incorrect, that board circulars in relation to a particular matter would prevail over court decisions.
The genesis of the debate was the decision of the Supreme Court in Collector Vs Dhiren Chemicals Industries (2002-TIOL-83-SC), which was passed in the year 2001. In this decision, the court had occasion to deal with an exemption notification which was applicable to the goods manufactured by the assessee. The court came to the conclusion, based on an analysis of the legal position in relation to the exemption, that the benefit of the exemption would not be available to the assessee. However, in para 9 of that decision, the Supreme Court held that regardless of the interpretation that it had taken, as a result of which the benefit of the exemption was denied to the assessee, if there was a circular issued by the CBEC which placed a different interpretation on the exemption notification, such an interpretation would be binding on Revenue. This part of the decision in Dhiren Chemicals was understood to mean that board circulars on a particular matter were binding on Revenue in all situations and that Revenue was estopped from going contrary to such circulars issued by the board.
Apart from the fact that Dhiren Chemicals held to the above effect, as understood in the manner described above, several other decisions of the court had held that an assessee was, in any event, not bound by circulars issued by the board and could always invoke the legal remedies available to him in order to controvert any such circular. Thus, the combined effect of these two commonly understood positions in law was that while an assessee was always able to legally challenge board circulars, the revenue authorities were precluded from denying the benefits of the board circulars, regardless of the legal position on the matter.
In a subsequent decision, in Kalyani Packaging Industry Vs Union of India (2004(168)ELT-145), a two-member Bench of the Supreme Court held that it was incorrect to interpret Dhiren Chemicals as was sought to be done by the appellant in the case, in order to argue that the interpretation given with regard to the particular matter via a board circular would prevail over the interpretation given by the courts. It was argued, correctly, by the appellant in that case that the decision of the Supreme Court in Collector of Central Excise, Meerut Vs Maruti Foam Pvt Ltd. (2004(164ELT-394)) was indeed to this effect that board circulars would prevail over court decisions. The two-member Bench in Kalyani Packaging did not agree with this contention and held that the relevant observations in Dhiren Chemicals, which gave rise to such arguments, did not in fact support such arguments at all. The court held that the observations in Dhiren Chemicals were meant to address situations where Revenue, having granted the benefit of the exemption notification in terms of the board circular on the point, could subsequently turn around and repudiate the benefit so granted, through a legal challenge in the courts, based on the court decision which may have held that the board circular on the matter was incorrect and that the exemption was not available in a particular situation. In other words, the Supreme Court, in Kalyani Packaging, held that if the department had allowed the benefit to an assessee, based on the board circular, it could not thereafter repudiate the benefit based on the court decision on the matter.
This decision in Kalyani Packaging was rendered by a two-member Bench of the Supreme Court whereas the decision in Dhiren Chemicals was rendered by a five-member Bench. The view in Kalyani was moreover arguably just one view. Indeed, Maruti Foam as was pointed out by the appellant in Kalyani Packaging, was to the contrary. There was also another decision of the Supreme Court in Commissioner of Central Excise Vs. Indian Oil Corporation (2004(3)SCC488) which had held similarly to Maruti Foam. There was thus clearly a difference of views in the Supreme Court, as to the correct legal position as a result of Dhiren Chemicals.
Consequently, a two-member Bench of the Supreme Court in Commissioner of Central Excise Vs Ratan Melting and Wire Industries (2005-TIOL-41-SC), noticed this unsettled position subsequent to Dhiren Chemicals and recommended that the matter be referred to a Larger Bench. The matter was thereafter accordingly so referred and we now recently have the decision of the Larger Bench in Commissioner of Central Excise Vs. Ratan Melting and Wire Industries (2008-TIOL-194-SC). In this decision, the view expressed earlier in Kalyani Packaging has been upheld and the court has come to the clear finding that there can be no bar on the ability of the courts to interpret statutes. The Supreme Court held that it was for the courts to interpret law and not for the executive to do so.
Consequently, board circulars cannot be binding on the Courts. Such circulars merely represent the view of the executive in relation to a particular statute. The courts are always able to interpret the law and come to a conclusion contrary to that laid down by the board through its circulars. Accordingly, the Supreme Court, in Ratan Melting, interpreted Dhiren Chemicals in the manner that was done in Kalyani Packaging. The Supreme Court went on to hold that both the assessee as well as the department had the ability to contest a board circular. Any other interpretation would mean that a circular granting a benefit could never be adjudicated by the High Court or Supreme Court since the assessee would not obviously litigate against a beneficial circular and the department was estopped from going against its own circular.
To summarise, the present position in law, as a result of the recent decision in Ratan Melting, is that both the Department as well as the assessee can exercise their legal rights to challenge a circular issued by the board. Dhiren Chemicals will thus need to be read down in the manner done in Kalyani and in Ratan Melting and will only have a limited applicability henceforth.
The author is Leader, Indirect Tax Practice, PricewaterhouseCoopers