MAY 10, 2021

By Jigar Doshi, Founding Partner & Nirali Gada, Manager, TMSL

Background

TAXATION laws are exceedingly complex and difficult to interpret. To address this challenge, the general rules of interpretation are used. Moreover, the internal aids of construction of statue are also available to ease the process of interpreting a taxation statute.

Every now and then, the judiciary system needs to refer these rules to reach a conclusive decision in case of equivocal and ambiguous provisions of law. However, there are also instances when even if the law is clear, the parties i.e., the revenue or taxpayer interpret these laws differently, each in their own favor. This is when the significance of these rules is proven.

In one such case, the Delhi High Court (HC) resolved a tussle between the Director General of Foreign Trade (DGFT) and the assessee by interpreting the benefit of Service Export from India Scheme (SEIS) under the Foreign Trade Policy (FTP) in detail.

Notably, SEIS benefit, formerly known as SFIS benefit was the highlight of FTP 2015-20 which has now been extended for a few more months looking at the current wave of Covid-19. There are certain conditions which needs to be satisfied in order to claim the said benefit. A list of eligible services and service providers providing services in notified markets has been provided. Similarly, a list of ineligible service categories is also stipulated in the FTP. Eligible services when exported from India are entitled for duty credit scrips at prescribed rates.

Issue under Consideration

- In the case of Ericsson Global Services P. Ltd. vs UOI - 2021-TIOL-998-HC-DEL-CUS, a writ petition was filed with the HC. The petition was clubbed with two other petitioners who had similar grievances.

- The facts were that the petitioners were engaged in provision of engineering services and management consultancy services to telecom sector. They applied for claiming duty credit scrips under SEIS believing that they fulfill all necessary conditions.

- However, their claim was rejected by the regional authority on the grounds that the nature of services provided by the petitioners are ineligible for SEIS. This rejection was supported by the instruction dated 22 May 2019 issued by DGFT.

- The said instruction directed that all services whether engineering or management consulting, in the telecom sector would not be eligible for SEIS.

- The petitioners challenged the validity of instruction issued by DGFT dated 22 May 2019 and also the rejection order rejecting their SEIS claims.

- The contention of the petitioners is that the instructions are contrary to the FTP. This is because the FTP denies SEIS benefit to "service providers in telecom sector". This ineligibility covers all service providers in telecom sector; not all service providers providing services to telecom sector.

- The revenue's preliminary contention was that the present writ is unmaintainable for the reason that the petitioner has an alternate efficacious remedy in the form of appeal.

- The revenue's contention was that the petition the nature of services provided by the petitioners would fall under CPC code 752 and 754 i.e. telecommunication services and telecommunication related services as against 8672 (as claimed by petitioners) i.e. 'engineering services for telecommunication and broadcasting services'.

- The revenue also contended that the instruction under question is merely a clarificatory document. The FTP is clear that such services are ineligible for availing benefits under SEIS. The category 'service providers in telecom sector' is very clear in itself and would encompass all service providers in the telecom sector.

Held

- The HC deliberated over the provisions of the Foreign Trade (Development and Regulation) Act, 1992 to arrive at the conclusion that it is the prerogative of the Central Government to formulate the FTP and the provisions thereunder; the DGFT's function is only to carry out the policy and not amend the FTP.

- The HC held that the rejection order passed by the DGFT is solely based on the impugned instruction. Now, if the revenue wants to add the grounds of classification of services under CPC codes before this court, they cannot do so. Hence, the court confined its discussion to whether all services in telecom sector are ineligible for SEIS benefit.

- The HC referred to FTP 2009-14, the appendices thereunder and definitions given in TRAI, 1997 to conclude that 'service providers in telecom sector' meant and included only the service providers of services mentioned in the appendix. Even though the FTP 2015-20 does not have any such appendices, there is no reason that a different interpretation should be adopted.

- The impugned instruction was held to be ultra vires the FTP due to the reason that it sought to impose fresh restrictions on the eligibility of service providers entitled to the benefit of SEIS, which can tantamount to amending the policy.

- On the point raised by the revenue regarding alternative remedy being available, the court noted the rejection orders are premised on the instruction issued by DGFT. When an order is issued by a higher authority, the remedy of appeal becomes redundant and otiose.

- The HC set aside the said instruction and the orders passed by the DGFT and directed the revenue to consider the claims of the petitioners afresh.

Author's take

Para 3 of FTP 2015-20, cites the objective of SEIS scheme as 'The objective of schemes under this chapter is to provide rewards to exporters to offset infrastructural inefficiencies and associated costs involved and to provide exporters a level playing field.'

Further, vide Public Notice 45/2015-20 dated 5 December 2017, the DGFT prescribed the ineligible categories of services for the purpose of claiming SEIS. One such category is 'Service providers in telecom sector'. The entire discussion in the present case revolves around the interpretation of the said category. The Delhi HC discussed the interpretational issue more from facts and legislative perspective. However, we want to extend this discussion to the rules of interpretation and the judiciary's approach on similar issues in the past.

The ineligibility to a benefit restricts taxpayers from availing such benefit which is bestowed upon them by the legislator. As per the general rules of interpreting taxation statues which are drafted to levy and collect taxes from taxpayers, such statues should be interpreted beneficially and liberally in favour of the taxpayers. Moreover, words or terms in a statue should be construed generally. This means restrictive interpretation should be adopted only when the legislature intends so, and the same is indicated by the words used in provisions.

In the case of Bajaj Tempo Ltd. v/s. CIT - 2002-TIOL-763-SC-IT, the Court had held 'a provision in a taxing statute granting incentives for promoting growth and development should be construed liberally; and since a provision for promoting economic growth has to be interpreted liberally the restriction on it too has to be construed so as to advance the objective of the provision and not to frustrate it'.

Further, in the case of State of Uttar Pradesh vs Kores (India) Limited (AIR 1977 SC 132), the question before the Supreme Court was whether carbon paper was paper as mentioned in a notification issued under Sales Tax Act, 1948. The SC held that the term paper should be understood in its popular sense. As per the ordinary and natural meaning, it is used for writing, printing or packaging purposes. The context of the Act and the notification issued therein does not indicate any other meaning. Therefore, carbon paper was not held to be 'paper' for the purpose of applicability of notification.

Taxing statues generally encompass incentives, benefits and exemptions to a priority sector which the Government wants to boost. In the current case, vide the scheme of SEIS the Government's intent is to boost service exports from India. However, the ineligible list includes service providers not eligible for the said benefit. This list contains the entry 'service providers in telecom sector'. If one has to interpret the category in light of the above discussion, it would be - all service providers providing telecom services. It appears difficult to extend this restriction of ineligibility to service providers providing services to telecom sector. If the Central Government wanted to include such providers in the ineligible list, the category would have read as - Services provided by and to telecom service providers, which is not the case.

Therefore, Delhi HC can be applauded for having enunciated an extremely tricky judgment. The instruction given by DGFT in so far as it extends the ineligibility to service providers providing engineering and management consultancy services to telecom sector does seem outside the line. Moreover, it is apparent that the instructions issued by DGFT are an internal guideline for the department. Therefore, the HC's observation that to the extent the instruction imposes a new restriction, such imposition can be termed as an amendment to the FTP, which goes beyond the power of DGFT appears correct.

It is most certain that the revenue would knock the doors of SC by filing an appeal. This is because there are multiple claims that would be filed by other service providers whose claim would have been rejected basis the same instruction. Needless to say, the revenue stakes are high in the current case. An already economically reeling Government would leave no stone unturned to get this judgment reversed; more so, since SEIS is a benefit which is an out-of-pocket expense for the Government. Therefore, it would be interesting to observe the trajectory that this case will take.

[The views expressed are strictly personal.]