Challenging the Indian Revenue Authorities: The Binding Value of Circulars Issued in Violation of Taxing Statutes

Priya Urs seeks to characterise and evaluate the varied positions of law that have been adopted by the Judiciary in its interpretation of the binding value of circulars issued by the CBEC and the CBDT under several taxing statutes. Further she address the questions posed above,- and ultimately offer a critique of the approach adopted by the Supreme Court of India in capturing some perceivable degree of certainty as to the nature of circulars issued, and their binding effect upon administering bodies, assessees and adjudicatory authorities respectively.

Introduction

The implementation of taxing provisions must be in accordance with law, implying conformity not only with statutory provisions, but also with the overarching constitutional requirement that taxes recovered from the public must have the force of the authority of the law. In this view, the power conferred upon administrative authorities, particularly in the context of the orders, instructions and directions issued by those established under taxing statutes, is of great consequence. While the need to define with clarity the powers conferred upon the Central Board of Excise and Customs, or the Central Board of Direct Taxes, is undisputed, this determination becomes all the more crucial in light of the objective of ensuring certainty to tax-payers.

The issuance of circulars, intended to clarify ambiguities in statutory provisions and provide greater ease of administration, has raised a whole host of questions about the manner in which, and extent to which, they shall be given effect. Statutes conferring this power upon administering authorities are clear that circulars shall be binding on all persons participating in their implementation. Do these circulars continue to have effect when they reach beyond the limits of statutory provisions, or come into direct conflict with them? Will these instructions bind the State? Will they bind the assessee? If so, will they have binding effect under all circumstances, or are courts and quasi-judicial authorities permitted the discretion to deviate from them? The Judiciary has wrestled with these concerns for a considerable period of time, resulting in a chaotic, inconsistent collection of Supreme Court decisions, each adopting varied hues of interpretation.

What Purposes Do Orders, Instructions and Directions of the CBEC and the CBDT Serve?

Statutory provisions conferring power upon the Central Board of Excise and Customs (CBEC) and the Central Board of Direct Taxes (CBDT) to issue orders, instructions and directions, have created a considerable stir in determining whether, and to what extent, these circulars shall be binding. An analysis of the value of these circulars necessarily involves a preliminary understanding of the purposes they are intended to serve.

The CBEC, constituted under the Central Boards of Revenue Act, 1963, has been accorded the power to issue orders, instructions and directions by the provisions of the Central Excise Act, 1944 and the Customs Act, 1962. Section 37-B of the former confers this power on the CBEC 'for the purpose of uniformity in the classification of excisable goods or with respect to levy of duties of excise on such goods' . Similarly, Section 151-A confers on the CBEC similar functions in the context of customs. In the context of income tax, as well, the Income Tax Act, 1961 makes provision for a similar power to be exercised by the CBDT. Section 119 confers a more general objective for the use of this power, for 'the proper administration of this Act'.

Thus, it is intended that these provisions shall aid in preventing discrimination among assessees and ensuring uniformity in the application of these statutes. They require that all officers employed in the execution of these statutes shall observe and follow any orders, instructions and directions so issued. For the purposes of assessing the binding value of orders, instructions and directions under these provisions, it must be kept in mind that these provisions are in pari materia with one another.

Perhaps the clearest exposition of the law on this point has been rendered by the Supreme Court in Ranadey Micronutrients , wherein Barucha, J. looked into the classification of micronutrients, to determine whether the assessee, a manufacturer of micronutrients, was exempt under the CBEC notification exempting 'other fertilisers'. The Revenue contended that the notification, not having been issued in reference to Section 37-B, was not statutory but advisory in nature. Rejecting this argument in holding that the notification was indeed statutory, the Court observed:

'The whole objective of such circulars is to adopt a uniform practice and to inform the trade as to how a particular product will be treated for the purposes of Excise duty. It does not lie in the mouth of the Revenue to repudiate a circular issued by the Board on the basis that it is inconsistent with a statutory provision. Consistency and discipline are of far greater importance than the winning or losing of court proceedings.'

Similarly, the objectives behind empowering the CBDT to issue circulars under Section 119 of the Income Tax Act, 1961, have been highlighted in Uco Bank, wherein the Apex Court has stated:

'The power is given for the purpose of just, proper and efficient management of the work of assessment and in public interest. It is a beneficial power given to the Board for proper administration of fiscal law so that undue hardship may not be caused to the assessee and the fiscal laws may be correctly applied.'

Thus, the purposes behind the issuance of circulars bring to light their supplementary character, suggesting that the extent to which this power shall be utilised by administrative authorities must be confined to the objectives stated in relevant statutes.

The Binding Value of Circulars: Implications for the Revenue

Perhaps the earliest case to deal with circulars that contradict the provisions of the statute under which they are issued was Bengal Iron, where the Supreme Court was required to consider the effect of clarifications issued by the Central and State Government regarding the scope of the term 'cast iron' under the Andhra Pradesh General Sales Tax Act, 1957. In construing Section 42 of the Act, the Court stated that orders issued thereunder to remove difficulties are statutory in nature. This implies that any clarifications issued cannot be used to remove the levy imposed by the statute, but only to give effect to the provisions of the Act.

An earlier case decided by the Supreme Court which dealt with the binding value of circulars on the Revenue was that of K.P. Varghese . The assessee had entered into a bona fide transaction for the sale of a house, earning no profit, as it was a related party transaction. Despite the fact that there had been no underestimation of its value, the Revenue sought to tax the assessee on the basis of the fair market value of the house. The assessee argued on the basis of a circular issued by the CBDT, stating that the purpose of using fair market value in certain circumstances was to prevent tax evasion through the understatement of the full value of consideration on the transfer of a capital asset. It came to the notice of the CBDT that several Income Tax Officers were, in violation of Section 119 of the Income Tax Act, 1961, taxing bona fide transactions based on their fair market value. Thus, it became necessary for the Board to issue another circular, clarifying that Board circulars shall be binding on all Officers in view of the decisions of the Supreme Court in Navnitlal Javeri and Ellerman Lines . In view of these decisions, the Division Bench in this case held the circulars to be binding on the Revenue, even if they deviate from the statute, holding that fair market value must only be used in cases where consideration has been understated.

Other cases, including Ranadey Micronutrients (discussed earlier) have also reiterated that it is not open to the Revenue to argue against circulars issued by it: ' It cannot but urge the point of view made binding by the...circular'. Similarly, in Mahavir Aluminium , the Supreme Court held the CBEC circular exempting agricultural mechanical appliances from the payment of duty to be binding on the Board.

The most recent case that deals with the question of whether circulars issued by the CBEC shall be binding on the Department is India Cements . The Supreme Court, in 2011, held that circulars issued for the purpose of providing sales tax deferral (to increase the production levels of industries in the State of Tamil Nadu) that are not contrary to the provisions of the Tamil Nadu General Sales Tax Act, 1959 would be binding on the Department. In the instant case, the circular did not conflict with either the statute or the scheme contemplated thereunder, and the question of whether they shall be binding was thus inconsequential.

While the relevant provisions of various taxing statutes all suggest that circulars issued by taxing authorities shall be binding on Department authorities, arguments are made that the extent to which these instructions and directions shall be binding must be restricted in certain circumstances. Thus, the assessee can challenge the issuance of circulars, and adjudicatory authorities are also afforded the flexibility to use their independent interpretations which may deviate from Department circulars. These aspects shall be discussed in Parts III and IV, respectively.

The Differential Implications of Circulars Beneficial to the Assessee

While the position regarding the binding nature of circulars upon the Revenue is well-settled, a related question that arises for consideration is whether circulars shall be binding on assessees. While the Board cannot issue circulars which impose on the assessee a burden greater than that contemplated by the statute, the strict application of the law or its procedures can be reduced by the issuance of a circular. Moreover, when a circular benefitting the assessee has been issued, it is not open to the Department to argue against the contents of such circular.

In Navnitlal Javeri, a Constitution Bench of the Supreme Court addressed the question of whether a circular issued by the Board of Revenue, granting an exemption from income tax on genuine loans advanced by companies to their shareholders, would be binding on the Board, notwithstanding that its contents violated the parent statute. Section 2(6A) of the Income Tax Act, 1922 made no distinction between bona fide transactions and devices used for tax avoidance (by providing shareholders tax-free loans instead of taxable dividends). The Court held that since the circular was conferring a benefit upon assessees and diluting the stringent requirements of the Act, the Board was required to comply with its own instructions, and could not itself contend that the circular could not be enforced.

The decision in Navnitlal Javeri was affirmed by the Division Bench in Ellerman Lines, in which the impugned notification laid down the principles to be followed in assessing the Indian income of foreign shipping companies. Accordingly, Ellerman Lines, a British shipping company, was by the said notification assessed by way of a certificate issued by U.K. authorities (declaring the income of the company), allowing an investment allowance which had been recognised by the Revenue in India as equivalent to the development rebate made available under the Income Tax Act, 1922. Interestingly, the Court recognised the difficulties faced by shipping companies in complying strictly with the income tax provisions of various countries in which they operate, and, as a result, considered the notification, waiving strict compliance with the requirements of the Act, to be valid and binding on the Revenue.

A Full Bench in Uco Bank considered the effect of a certain circular issued under Section 119 of the Income Tax Act, 1961 exempting from income the interest payable on 'sticky loans', whose recovery is doubtful and has not been included in the profit and loss account of the assessee. It stated:

'Such instructions may be by way of relaxation of any of the provisions of the sections specified there or otherwise. The Board thus has power, inter alia, to tone down the rigour of the law and ensure a fair enforcement of its provisions, by issuing circulars in exercise of its statutory powers under Section 119 of the Income-tax Act which are binding on the authorities in the administration of the Act. Under Section 119(2)(a), however, the circulars as contemplated therein cannot be adverse to the assesses.'

It is now well-established that circulars issued by the CBEC or the CBDT do not bind assessees. Thus, the assessee has the right to challenge the correctness of a circular before a quasi-judicial authority constituted under the relevant statute. At this juncture, before proceeding to Part IV, it is important to accentuate the distinction between the decision of a quasi-judicial authority in a specific assessment, and that taken by the authorities by issuing a circular.

Are Circulars Binding on Courts and Tribunals?

• Dhiren Chemicals: Self-Effacement by the Judiciary?

As discussed earlier, Bengal Iron precluded the conferment of any real power on the Executive in the context of circulars issuable under the provisions of a taxing statute. In fact, by limiting the scope of power of the relevant authorities to issue circulars, the Apex Court made clear that circulars issued by the Government would have no binding value when construed by the Judiciary. Notifications issued by the Government are, in the opinion of the Court in this case, mere understandings of statutory provisions, and cannot be used to usurp the jurisdiction of the courts in interpreting statutory provisions. Thus, Bengal Iron suggests that quasi-judicial authorities shall be bound only by 'law', which does not include administrative instructions, opinions, clarifications and circulars. Nevertheless, the same Court in Kirloskar Oil Engines held that while trade notices issued by the CBEC generally have no binding value, in the absence of other evidence, the court must consider trade notices in deciding disputes.

The argument that CBEC circulars shall not bind adjudicatory authorities was raised in Paper Products, wherein the orders of the Customs Excise and Gold (Control) Appellate Tribunal (CEGAT) were challenged by an assessee who argued that the circulars exempting certain products of the printing industry include his products of manufacture. The Revenue argued that the impugned circulars, though binding on the Department, would not bind the CEGAT. The Supreme Court, in deciding that the circulars were binding on the Department, ultimately held that the Department does not have the option of making arguments contrary to the impugned circulars. Unfortunately, it did not actually address this validity of the Revenue's contention.

In Hindustan Aeronautics Ltd., however, a conclusive decision on this point was made. A government-owned company aggrieved by the Revenue's disallowance of certain deductions for its manufacture of aeroplanes filed a revision petition before the Commissioner of Income Tax. Since the order disallowing the deduction had been made the subject of a separate appeal before the Appellate Tribunal, the Commissioner dismissed the petition. This decision was challenged by the assessee, who used Navnitlal Javeri and Ellerman Lines to argue that the circular requiring the Commissioner to examine the revision of the assessee on merits would bind him. The Revenue, on the other hand, argued that while it is unquestionable that circulars shall be binding on the Revenue, the Judiciary cannot direct that a circular shall be given effect to rather than the Supreme Court or High Courts' interpretation of the law in question. The Division Bench agreed with the Revenue's contention that a circular shall not bind adjudicatory authorities.

In 2002, this decision was effectively overruled by a Constitution Bench requested in Dhiren Chemicals. Here, a notification had been issued by the CBEC exempting certain products from excise duty, where duty was 'already paid' on the raw materials used in their manufacture, thus preventing the payment of double duty. The construction of this exemption had, for some time, been the subject of controversy, raising the question of whether imported raw materials which are either not liable to excise duty, or have the benefit of nil duty payable, shall be included within the ambit of this notification. The CBEC had, consequently, issued a number of circulars clarifying that the benefit shall not apply unless excise duty had actually been paid on the raw materials utilised. On the other hand, a Full Bench of the Supreme Court had already, in Usha Martin, decided that the notification would apply even when a nil rate of duty was applicable. Thus, the Court in Dhiren Chemicals was required to choose whether to follow the precedent set by its Full Bench earlier, or the interpretation rendered by the CBEC circular issued in this regard. The Court ultimately held:

'We need to make it clear that, regardless of the interpretation that we have placed on the said phrase, if there are circulars which have been issued by the Central Board of Excise and Customs which place a different interpretation upon the said phrase, that interpretation will be binding upon the Revenue.'

This decision was the first to reflect a marked shift in the Judiciary's perspective on the extent to which circulars issued by the CBEC shall be binding. In effect, by holding the Department strictly to the position adopted by it in the circulars it issues, the Court unwittingly weakened the impact of its own decisions by disregarding the interpretation of the Full Bench in Usha Martin in favour of the interpretation rendered by the CBEC in the impugned circulars.

This precedent-setting statement, negating the impact of the decision rendered by a weaker bench earlier in Hindustan Aeronautics Ltd., was subsequently followed in 2004 in Maruti Foam, when the Supreme Court reaffirmed that CBEC circulars shall be binding notwithstanding their conflict with the judgment rendered in Usha Martin.

• Re-Interpreting Dhiren Chemicals: An Expression of Judicial Discontent

Perhaps the strongest criticism against the ominous direction in which the Supreme Court was veering as a result of the weighty precedent set by Dhiren Chemicals, was leveled by Venkatarama Reddi, J. in his concurring opinion in Indian Oil in 2004. Though restricted to obiter dicta, he raised grave concerns about the deficiency in reasoning in the decision of the Constitution Bench in Dhiren Chemicals

'Can it be said that even after the law is declared by the Supreme Court the adjudicating authority should still give effect to the Circular issued by the Board ignoring the legal position laid down by this Court? Even after the legal position is settled by the highest Court of the land, should the customs authority continue to give primacy to the circular of the Board? ... These are the questions which puzzle me and these are the conclusions which follow if the observations of this Court in the two cases of Dhiren Chemicals Industries are taken to their logical conclusion.'

Venkatarama Reddi, J. explained that, contrary to the position laid down in Dhiren Chemicals, the need to issue circulars is felt only in the case of ambiguity, where there is no authoritative pronouncement laid down by the Judiciary. Where these conditions have not been fulfilled, 'the very basis and substratum of the circular disappears'. This is, perhaps, because the very objective sought to be achieved by allowing either the CBEC or the CBDT to issue circulars, i.e. to ensure uniformity in the application of taxing statutes, is deemed unnecessary when the Higher Judiciary has authoritatively laid down the law on the point. It is submitted that this view is in conformity with Article 141 of the Constitution of India, 1950, which declares that Supreme Court decisions shall bind all courts, and consequently binding on all tribunals and other authorities as well.

This opinion, challenging the position taken by the Constitution Bench in Dhiren Chemicals, raises an important question: 'Even after the reason and rationale underlying the circular disappears, is it obligatory to continue to follow the circular?' What has been suggested by Venkatarama Reddi, J. is that Section 151-A of the Customs Act, 1962 (in pari materia with Section 119 of the Income Tax Act, 1961 and Section 37-B of the Central Excise Act, 1944) must be read down in order to conform with decisions of the Supreme Court, ensuring, thus, that the Customs Authority, in exercising its authority under this provision, does not violate its constitutional mandate under Articles 141 and 144 of the Constitution.

It is submitted that this exposition, though not authoritative, is in accordance both with the constitutional mandate under Article 141, as well as the objectives sought to be achieved by the issuance of circulars by relevant authorities under relevant taxing statutes. What makes Dhiren Chemicals hugely problematic is this: while quasi-judicial authorities are required to conform to administrative circulars (ignoring precedent laid down by the Supreme Court), upon appeal, the decision of such authorities will automatically be overturned by the Judiciary. This is certainly not the mechanism contemplated by the conferment of this authority on the CBEC or the CBDT.

Interestingly, in Indian Oil, the Court observed that the relevant precedent with respect to its own facts and circumstances could not be authoritative, as the earlier case was passed ex parte, and thus had no precedent value. Further, the decision was 'not so categorical and clear as to strike at the root of the Circular in its application to the facts of the present case'. Thus, unfortunately, the opinion in Indian Oil has had no authoritative impact in influencing subsequent cases.

Yet again, however, the correctness of the decision in Dhiren Chemicals fell for consideration in Kalyani Packaging, wherein the court looked into the intention behind the position of law reflected by the impugned judgment, in order to rectify the manner in which it was subsequently interpreted in cases like Maruti Foam. Here, the court clarified that, in the circumstances of Dhiren Chemicals, it was necessary for the court to bind the Revenue by its circulars, as individual exemption notifications had already been issued thereunder. If the court had not decided in this manner, practically, it would have been possible for the Revenue to reopen cases in which the benefit of such exemptions had been conferred upon assessees. It was for this limited purpose of preventing the reopening of cases that the Court held the impugned circulars to be binding. Upon this construction, Kalyani Packaging has emphasized that Dhiren Chemicals sets no precedent to suggest that even where the benefit of exemption notifications has not been conferred upon an assessee, the circular shall be binding notwithstanding the pendency of a determination by the courts.

This position has been clarified in Ratan Melting and Wire Industries, where a Full Bench of the Apex Court, argreeing with the interpretation of Dhiren Chemicals in Indian Oil and Kalyani Packaging, referred the matter for clarification by a Constitution Bench.

'So far as the clarifications/circulars issued...are concerned they represent merely their understanding of the statutory provisions. They are not binding upon the Court. It is for the Court to declare what the particular provision of statute says and it is not for the Executive. Looked at from another angle, a circular which is contrary to the statutory provisions has really no existence in law.'

In this way, the Court went on to affirm the interpretation of Dhiren Chemicals as stated in Kalyani Packaging. However, it is both surprising and a disappointment that the Bench did not make even a passing reference to the decision in Hindustan Aeronautics Ltd., or to the extremely valuable observations made by way of obiter dicta in Indian Oil. Perhaps these references would have lent greater clarity, not just in interpreting the judgment in Dhiren Chemicals, but also to the broader demand for defining the scope of these circulars. Nevertheless, subsequent cases, including Hindoostan Spinning and Weaving Mills have, in light of the clarification offered by the five judges in Ratan Melting and Wire Industries, decided matters in accordance with this decision. The most recent decision of the Supreme Court of India in the context of this discussion is India Cements, decided in 2011, which has already been discussed in Part II. Here, the court reiterated the position laid down by Ratan Wire and Melting Industries, following from Kalyani Packaging.

Concluding Remarks

The catena of judicial pronouncements that have defined and redefined the extent to which circulars issued by either the CBEC or the CBDT shall be binding, and upon whom, has resulted in a considerable degree of uncertainty. Did the Constitution Bench in Dhiren Chemicals really suggest that circulars issued by the CBEC would be binding notwithstanding the existence of an authoritative judicial pronouncement to the contrary? These decisions handed down by the Supreme Court have created a stir, not just because of the disconcerting extent to which the binding value of circulars has been stretched, but also, and more importantly, because of the fact that circulars that blatantly contradict statutory provisions have been given binding effect, displacing the authoritative pronouncements of the Higher Judiciary. What makes this hugely problematic is the obvious erosion of the constitutionally-mandated effect of Supreme Court declarations under Article 141.

Appeasing these concerns and reinstating the precarious position in which Dhiren Chemicals placed the Apex Court, the reference to the Constitution Bench in Ratan Wire and Melting Industries was, unsurprisingly, received with a considerably warm welcome. The question that remains to be asked, however, is this: does the judgment in Ratan Wire and Melting Industries really provide the certainty demanded by this continuing, fifty-year long debate?Undoubtedly, this decision has played a huge role in clarifying Dhiren Chemicals, however, it is submitted that the judgment in Ratan Wire and Melting Industries is deficient in a number of ways, which shall be discussed presently.

The rather obvious conclusion that a circular issued contrary to statutory provisions has 'really no existence in law' has not been emphasised to any substantial extent in any of these decisions, no more than a passing reference in Ratan Wire and Melting Industries. Delegated legislation in the field of administrative law, generally, allows Parliament or State Legislatures to delegate their rule-making powers to the Executive in a limited way. This requires that the purpose, incidence and rate of tax must ordinarily be laid down by the taxing statute; the delegation of the power to administrative authorities will be upheld if the policy of the taxing statute has been clearly provided for. Moreover, the exercise of this power by the administration can be questioned on the ground that it does not conform to the governing statute. In the context of tax law, in particular, Article 265 of the Constitution specifies that taxes shall not be levied or collected without the authority of law. This implies that circulars issued cannot contradict the statutes from which they derive their legitimacy.

None of these areas have been explored by the Bench in Ratan Wire and Melting Industries, which, instead, chose to buttress its decision entirely on a creative (and hardly conclusive) interpretation of the alleged intention behind the decision in Dhiren Chemicals. Thus, the way in which the Supreme Court has, in these decisions, acted in a 'self-effacing' manner and has displayed indifference towards the separation of powers between the Executive and the Judiciary is a cause for serious discomfort.

Further, since any decision rendered by the Constitution Bench in Ratan Wire and Melting Industries would be authoritative enough to clarify any ambiguity in Dhiren Chemicals, would it not have been prudent for it to have laid down with greater emphasis, and defined with more clarity, the allegedly misconstrued position in Dhiren Chemicals? Instead, the Court chose to look into the intention behind the judgment in the earlier case, based largely on the fact that Variava, J. had been a party to the judgments in both Dhiren Chemicals ('and knows what was the intention in incorporating Para 9' ) and Kalyani Packaging, on which the Bench in Ratan Wire and Melting Industries relies heavily.

Venkatarama Reddi, J., in Indian Oil, had expressed his exasperation at the fact that 'a common thread does not run through the decisions of this Court'. It is submitted that his plea that the scope of circulars issued by the CBEC and the CBDT be circumscribed conclusively by a Constitution Bench (with a view to rectify the ambiguities that arose out of the decision in Dhiren Chemicals) has not been adequately addressed in Ratan Wire and Melting Industries. While it has certainly been effective in reversing the ominous direction in which the courts were headed after Dhiren Chemicals, the reasoning offered is weak, and fails to sufficiently confine the binding value of circulars to its constitutionally and statutorily defined mandate. Nevertheless, these decisions have played a vital role in defining, authoritatively, the scope of the power conferred upon various taxing authorities in their implementation of various taxing statutes, confining the exercise of this power to the purposes incorporated into these provisions.