NOVEMBER 13, 2023

By Abhijit Saha

THERE are many exemption notifications which do not mention that they are clarificatory and/or have retrospective effect. However, the essence of the notification suggests that it should be clarificatory in nature and hence should have retrospective effect.

Let me give few illustrations:

1) Service provided by Branch Office in India to Head Office in a Foreign Country -Export of Service is defined under Section 2(6) of the IGST Act 2017. As per Section 2(6) (v) of the IGST Act, 2017, the above service does not qualify as export. Government Vide Entry 10F of Notification 15/2018 -Integrated Tax (Rate) dated 26July 2018 has exempted the above service. The exemption notification did not mention that it is clarificatory in nature. Since the said service does not qualify as export, Department issued demand for payment of GST for the period from 1 July 2017 to 25 July 2018 .

2) Insurance service for specified scheme was exempted vide Sr. No. 35 of the Notification No. 12/2017 – C.T. (Rate) dated 28 June 2017. Re-insurance service was exempted vide Notification 2/2018 – CT Rate dated 25 January 2018. The exemption notification did not mention that it is clarificatory in nature. Hence Department issued demand for Re-insurance Service from the period 1 July 2017 to 24 January 2018 .

Strictly speaking as per the wording of the notification, it does not have retrospective effect. Hon'ble Supreme Court, Five Member Bench in the case of Commissioner of Customs (Import), Mumbai Vs Dilip Kumar [2018-TIOL-302-SC-CUS-CB] held:

"(1) Exemption notification should be interpreted strictly; the burden of proving applicability would be on the assessee to show that his case comes within the parameters of the exemption clause or exemption notification.

(2) When there is ambiguity in exemption notification which is subject to strict interpretation, the benefit of such ambiguity cannot be claimed by the subject/assessee and it must be interpreted in favour of the revenue. "

In the case of Government of Kerala Vs Mother Superior Adoration Convent  [2021-TIOL-156-SC-MISC] two-member bench of the Supreme Court with reference to the decision of the Five Member Bench in Dilip Kumar case observed:

"23. It may be noticed that the 5-Judge Bench judgment did not refer to the line of authority which made a distinction between exemption provisions generally and exemption provisions which have a beneficial purpose. We cannot agree with Shri Gupta's contention that sub-silentio the line of judgments qua beneficial exemptions has been done away with by this 5-Judge Bench. It is well settled that a decision is only an authority for what it decides and not what may logically follow from it (see Quinn v. Lea them [1901] AC 495 as followed in State of Orissa v. Sudhansu Sekhar Misra (1968) 2 SCR 154 at 162,163)

24. This being the case, it is obvious that the beneficial purpose of the exemption contained in Section 3(1)(b) must be given full effect to, the line of authority being applicable to the facts of these cases being the line of authority which deals with beneficial exemptions as opposed to exemptions generally in tax statutes. This being the case, a literal formalistic interpretation of the statute at hand is to be eschewed. We must first ask ourselves what is the object sought to be achieved by the provision and construe the statute in accord with such object. And on the assumption that any ambiguity arises in such construction, such ambiguity must be in favour of that which is exempted. "

In view of the above, it may be submitted that there are two types of exemption. (a) General exemption and(b) exemption which has a beneficial and objective purpose. Supreme Court in the case of Commr. Of Customs (Preventive) vs. M. Ambalal & Co. - 2010-TIOL-111-SC-CUS made a clear distinction between exemptions which are to be strictly interpreted as opposed to beneficial exemptions having as their purpose – encouragement or promotion of certain activities. This case felicitously observed:

"16. It is settled law that the notification has to be read as a whole. If any of the conditions laid down in the notification is not fulfilled, the party is not entitled to the benefit of that notification. The rule regarding exemption is that exemptions should generally be strictly interpreted but beneficial exemptions having their purpose as encouragement or promotion of certain activities should be liberally interpreted. This composite rule is not stated in any particular judgement in so many words. In fact, majority of judgement emphasise that exemptions are to be strictly interpreted while some of them insist that exemptions in fiscal statutes are to be liberally interpreted giving an apparent impression that they are contradictory to each other. But this is only apparent. A close scrutiny will reveal that there is no real contradiction amongst the judgements at all. The synthesis of the views is quite clearly that the general rule is strict interpretation while special rule in the case of beneficial and promotional exemption is liberal interpretation. The two go very well with each other because they relate to two different sets of circumstances."

While construing an exemption in a sales tax statute, the Hon'ble Supreme Court in CST vs. Amara Raja Batteries Ltd. [2009 (8) SCC 209] held:

"21. An exemption notification should be given a literally (sic literal) meaning. Recourse to other principles canons of interpretation of statute should be resorted to only in the event the same give rise to anomaly or absurdity. The exemption notification must be construed having regard to the purpose and object it seeks to achieve. The Government sought for increase in industrial development in the state. Such a benevolent act on the part of the state, unless there exists any statutory interdict, should be given full effect (See Vadilal Chemicals Ltd. vs. State of A.P. - 2005-TIOL-100-SC-CT"

In conclusion, it is submitted that the Department should appreciate the legislative intent for giving exemption and should not merely interpret the exemption notification strictly as per the wording of the notification. Whether the notification is prospective or retrospective, whether it is clarificatory or not has to be understood from the point of view of the purpose and object such exemption notification seeks to achieve. It is a settled position of law that the exemption notification should be construed strictly as per the wording of the notification. However, there is an exception to that settled position of law.If the exemption notification is a beneficial exemption having their purpose as encouragement or promotion of certain activities, then it should be liberally interpreted.

(The views expressed are strictly personal.)