Court’s Decision
In a significant ruling, the Supreme Court allowed a batch of appeals and writ petitions challenging the retrospective application of CBEC Circular No. 15/2015-Cus. dated 28.02.2015. The Court held that the said Circular, which purported to deny exemption benefits under Notification No. 34/2011-Cus. dated 13.01.2011 to vehicles imported under the Transfer of Residence Rules, could not be applied retrospectively.
The Court categorically held:
“A circular cannot override or detract from the provisions of the statute or notifications issued thereunder.”
It struck down the demands of customs duty and penalties imposed by the authorities based on retrospective application of the Circular, thereby granting relief to the appellants and writ petitioners.
Facts
The appellants were individuals or entities who had imported goods, including vehicles, under the Transfer of Residence (ToR) facility upon returning to India after a long stay abroad. They claimed exemption from customs duty under Notification No. 34/2011-Cus. dated 13.01.2011, which granted concessional duty on goods brought under ToR.
For several years, such imports were allowed exemption under this notification, and customs authorities were clearing such goods without contest.
However, by Circular No. 15/2015-Cus. dated 28.02.2015, the CBEC clarified that the exemption was not applicable to motor vehicles imported under ToR. Subsequently, customs authorities began issuing demand notices even for past imports and initiated recovery proceedings with penalties.
The affected importers approached High Courts and later the Supreme Court, challenging both the Circular and the retrospective demands.
Issues
- Can an administrative circular be applied retrospectively to deny a benefit already accrued under a statutory notification?
- Does Circular No. 15/2015-Cus. override or curtail the scope of Notification No. 34/2011-Cus. dated 13.01.2011?
- Were the customs authorities justified in raising demands and imposing penalties based on the Circular for transactions preceding its issuance?
- What is the legal status of clarificatory circulars in tax jurisprudence in India?
Petitioners’ Arguments
- Prospective Operation Only: The petitioners argued that the CBEC Circular, being administrative in nature, could only operate prospectively. Applying it to past transactions amounted to retrospective law-making, which is impermissible unless specifically provided by statute.
- No Exclusion in Notification: The text of Notification No. 34/2011-Cus. did not exclude vehicles. Hence, the benefit was validly claimed at the time of import. The Circular could not retrospectively amend or reinterpret the notification.
- Settled Law: The petitioners relied on case law establishing that administrative circulars cannot override statutory notifications or alter legal rights retrospectively.
- Violation of Article 14 and Natural Justice: Demands raised retrospectively affected legitimate expectations of importers and violated principles of fairness.
Respondents’ Arguments
- Clarificatory Nature: The customs department claimed that the Circular was only clarificatory and merely stated what was implicit in the notification, namely that vehicles were not intended to be covered.
- Binding Nature: The Circular was issued by the CBEC under its powers and was binding on field officers. It did not introduce new law but clarified existing interpretation.
- Suppression and Misdeclaration: The department accused some importers of not disclosing the nature of goods (vehicles), alleging misrepresentation to claim exemption.
Analysis of the Law
The Court began by examining the legal character of administrative circulars and their relation to statutory notifications. It reaffirmed the principle that:
“An administrative circular, however clarificatory it may claim to be, cannot operate to restrict or expand the scope of a notification unless the parent statute permits it.”
It noted that the exemption notification in question did not specifically exclude vehicles. Thus, until the date of the Circular, the benefit was rightly available.
The Court distinguished between three key instruments:
- Statutory Enactments – binding and of the highest authority.
- Notifications under Statute – subordinate legislation, but binding unless ultra vires.
- Administrative Circulars – binding on tax officers but not on assessees or the Courts.
The Supreme Court found that the 2015 CBEC Circular attempted to alter the scope of the exemption retrospectively by reading in a limitation that was not part of the original notification.
“When the language of the notification is plain, the addition or deletion of a category of goods cannot be done by circular. It requires amendment of the notification.”
The Court reiterated that the power to tax must be exercised strictly within the confines of the law and upheld the supremacy of statute and judicial precedent over circulars.
Precedent Analysis
The Court extensively relied on earlier landmark decisions:
- Dhiren Chemical Industries (2002) 2 SCC 127:
Circulars are binding only on the department and not on courts or assessees. - Suchitra Components Ltd. (2007) 7 SCC 387:
If there is ambiguity in the notification, the benefit should go to the assessee. - Paper Products Ltd. v. Commissioner of Central Excise (1999) 7 SCC 84:
Clarificatory circulars cannot be retrospective unless the law so permits. - B.C. Srinivasa Setty (1981) 2 SCC 460:
If the machinery for computing a tax is absent or unworkable, the charge itself fails. - Bharat Sanchar Nigam Ltd. v. Union of India (2006) 3 SCC 1:
Distinguished between different aspects of a composite transaction and clarified rules for taxation in such scenarios.
The Court harmonised these precedents to reinforce the principle that executive instructions cannot overreach statutory instruments.
Court’s Reasoning
- No Express Retrospective Language: The Circular was silent on retrospective effect. Therefore, it could not be applied to past transactions.
- Legitimate Expectation: Importers who had availed benefit under a valid notification had a legitimate expectation that their transactions would not be re-opened later.
- Separation of Powers: Allowing retrospective effect to a Circular would allow the Executive to perform a legislative function, which is impermissible.
- Violation of Natural Justice: The importers were not given any notice or opportunity of hearing before raising demands and penalties based on a new interpretation.
Conclusion
The Supreme Court allowed the appeals and writ petitions and held:
- The CBEC Circular dated 28.02.2015 has no retrospective application.
- The benefit of exemption under Notification No. 34/2011-Cus. dated 13.01.2011 was validly available to importers prior to 28.02.2015.
- The customs department was not justified in raising retrospective demands or imposing penalties.
- The interpretation of taxing entries and exemptions must follow the rule of strict construction.
- The supremacy of statute and judicial interpretation prevails over administrative circulars.
Implications
- Protection Against Retrospective Taxation: Importers and assessees cannot be burdened with retrospective demands based on administrative circulars.
- Limitation on Executive Power: Reinforces judicial scrutiny of executive overreach through circulars that go beyond statutory mandates.
- Strengthens Rule of Law: Ensures consistency, predictability, and fairness in tax administration, especially concerning exemptions.
- Impact on Tax Administration: The ruling serves as a caution for revenue authorities while issuing circulars and demanding taxes.
- Reaffirms Binding Nature of Statute Over Circulars: Validates long-standing principle that circulars are only explanatory and not legislative.