How to interpret exemption notifications - Dr Sanjiv Agarwal - Article published in Business Advisor, dated November 25, 2016 - http://www.magzter.com/IN/Shrinikethan/Business-Advisor/Business/

1. Volume XVII Part 4 November 25, 2016 8 Business Advisor
How to interpret exemption notifications
Dr Sanjiv Agarwal
The charge of service tax is based upon rendition of
taxable services and its valuation as per statutory
provisions and valuation rules. The valuation in many
cases is subject to exemption – full or partial. Central
Government may grant exemption from service tax
(partial or full) in public interest by issuing exemption
notifications under section 93 of the Finance Act,
1994. Such exemptions may be plain exemption or
conditional.
Exemptions are governed by the exemptions notifications notified in that
respect. While most of the notifications are prospective and applicable from
the date of issuance of notifications, if specifically specified, such exemption
may also apply retrospectively.
The following principles of interpreting any exemption notification based on
judicial pronouncements are relevant:–
(a) Substantial conditions of an exemption notification should be construed
strictly.
(b) Procedural conditions of an exemption notification may be construed
liberally and benefit allowed, if otherwise entitled to.
(c) If there are more than one exemption notifications, assessee has an
option to choose one which is more beneficial to him. Department
cannot force any notification on the assessee to follow.
(d) Where exemption is allowed, adjudication should not prescribe its own
conditions or presumptions, more so when legislative intention is clear.
While most of the notifications are prospective and applicable
from the date of issuance of notifications, if specifically
specified, such exemption may also apply retrospectively.

2. Volume XVII Part 4 November 25, 2016 9 Business Advisor
(e) Notification would apply only to current taxes.
(f) Clarificatory notifications restoring or clarifying the benefit are generally
clarificatory in nature and may have a retrospective application.
(g) Benefit of Notification, if otherwise available, cannot be denied on the
sole ground that the same is claimed belatedly.
(h) Definitions contained in an exemption notification have application only
for the purpose of that notification.
(i) Notification has to be read as a whole and literally.
(j) Exemption notifications are issued under delegated legislative power,
they have full statutory force.
(k) Assessee claiming exemption has to prove the eligibility for exemption
contained in the notification.
(l) There is no exemption by implication or by a logical deduction.
(m) A person invoking exemption provision to relieve him from the tax
liability must establish clearly that he is covered by it and in case of
doubt, benefit of it must go to the state.
(n) The principle that specific provision will override general provision will
not be applicable to provision in the nature of exemption or concession.
(o) Assessee is entitled to the benefit of that exemption notification which
gives him greater relief regardless of the fact that the later notification is
general in its terms and other notification is more specific to the goods.
(p) Interpretation of an exemption notification depends upon its nature and
extent, and terminology used in the notification has an important role to
play.
Benefit of Notification, if otherwise available, cannot be
denied on the sole ground that the same is claimed belatedly.

3. Volume XVII Part 4 November 25, 2016 10 Business Advisor
(q) Where exemption notification ex facie applies, there is no reason as to
why the purpose thereof would be limited by giving a strict construction
thereto.
(r) The purpose for which the exemption was granted must be considered
in its entirety – the purpose of exemption cannot be lost sight of.
(s) Ambiguity in exemption notification will be resolved in favour of
revenue.
(t) Exemption has to be granted by Government and not through judicial
interpretation or by implication or by reading words into the notification
which are not there.
(u) If any of the conditions in the notification are not fulfilled, the party is
not entitled to be benefit of that notification.
(v) The fact that the assessee has alternative recourse to avoiding rigour
cannot be criteria for interpretation of exemption notification.
(w) Use of expression „in relation to‟ in subject matter of exemption would
imply that exemption is wide in its amplitude and scope.
(x) Exemption notifications are of no relevance to interpretation of
legislative provisions
(y) Choice between liberal and strict interpretation arise only in case of
doubt in legislative intention manifest on the statutory language.
(z) To ascertain applicability of exemption notification, it has to be
construed strictly. Thereafter, a liberal approach can be adopted for
granting benefit.
(za) Harmonious construction of statute and exemption notification has to
be made when expressions used does not convey a clear and
Exemption has to be granted by Government and not through
judicial interpretation or by implication or by reading words
into the notification which are not there.

4. Volume XVII Part 4 November 25, 2016 11 Business Advisor
unambiguous interpretation.
(zb) Onus lies on the assessee to show that his case falls within the
exemption notification and is unambiguously covered by it.
(zc) While construing an exemption notification, if two interpretations are
possible, one which favours the revenue is to be resorted to.
(zd) Nature of exemption is that of concession. Right to enjoy concession can
be taken away in exercise of very power under which it was granted.
(ze) If there is no liability to duty, question of exemption does not arise at all.
(zf) When there is substantial compliance with the provisions, benefit cannot
be denied to assessee.
(zg) If duty is exempt, cess on duty is also exempt.
In Bharat Diagnostic Centre v. CC (2014) 307 ELT 632 (SC), it was held that
to ascertain the applicability of an exemption notification, it has to be
construed strictly, thereafter, liberal approach can be adopted within
particulars of the notification.
In Kothari Petro Chemicals Ltd. v. Union of India (2015) 316 ELT 17; (2015)
49 GST 156; (2014) 52 Taxamman.com 343 (Madras), it was held that
exemption notifications are always to be construed strictly. Just as nobody
can be brought within the purview of an exemption notification, by way of
interpretation, it is also not permissible to deny the benefit of the
Notification to someone whom, even according to the Government of India
was entitled to the benefit.
In CCE, New Delhi v. Hari Chand Shri Gopal (2010) 260 ELT 3 (SC), it was
held that exemption applications are to be construed strictly and narrowly
[Also see: Principal Commissioner of Service Tax, Delhi –I v. TT Ltd. (2016) 45
STR 25 (Delhi)].
In Principal Commissioner of Service Tax v. R.R. Global Enterprises Pvt. Ltd.
(2016) 45 STR 5 (AP), the issue was exemption and refund of service tax paid
on transport of goods from inland depot to port of export in relation to
export of goods under Notification No. 41/2007-ST which granted
unconditional refund for service tax paid on such service. It was held that
exemption notification is a creation of statute and must be construed
strictly. Once a full-fledged system is put in place, for the exercise of
discretion, the compliance with the requirements of such a system alone will

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remove any kind of arbitrary exercise of power. Courts have to interpret
notification in such a way that discretion is reduced to minimum. If
availability of exemption is dependent on fulfillment of any condition(s), it
cannot be waived as mere procedural. However, insignificant requirements,
like endorsement of application, are prescribed merely for orderly conduct of
business and can be waived off. What can be condoned is that which is not
the essence of the thing to be done, but that which is prescribed for orderly
conduct of business [Also see: Union of India v. Commercial Tax Officer AIR
1956 SC 202].
In Collector of Customs (Preventive) v. Malwa Industries Ltd., (2009) 12 SCC
735; 2009 (235) E.L.T. 214 (S.C.), it was held that an exemption notification
should be read literally. A person claiming benefit of an exemption
notification must show that he satisfies the eligibility criteria. Once,
however, if it is found that the exemption notification is applicable to the
case of the assessee, the same should be construed liberally.
In Cargill India Pvt. Ltd. v. Union of India (2013) 288 ELT 209 (Gujarat), it was
held that exemption notification has to be strictly followed.
In Posco India Delhi Steel Processing Ltd v. CC, Kandla (2012) 285 ELT 410
(Cestat, Ahmedabad), it was held that intention behind the notification need
not be examined while extending the benefit, since the notification has to be
interpreted on the basis of the words used therein not taking into account
the intention.
While interpreting an exemption notification, non-compliance of conditions
attached to the said notification would render the availment of exemption
nugatory [Refer Union of India v. Bharat Aluminums Company (2011) 263
ELT 48 (Chhattisgarh), CCE, Ghaziabad v. Radha Products Pvt Ltd (2012) 260
ELT 98 (Cestat, New Delhi)].
In Andhra Pradesh Tourism Development Corporation Ltd. v. CCE, Hyderabad
(2012) 28 STR 595; 35 STT 636 (Cestat, Bangalore), it was held that it could
not be based on provisions of exemption Notification, and in case of
inconsistency between the two, statutory provisions would prevail.
In JMC Projects (India) Ltd. v. CCE, Hyderabad-II (2013) 297 ELT 269 (Cestat,
Bangalore), it was held that the benefit of notification cannot be denied if
benefit is available to other assessees who are also manufacturing
structural components at sites proximate to construction site, brought to
the construction site and used in the construction of flyover/ tunnel/
viaduct.

6. Volume XVII Part 4 November 25, 2016 13 Business Advisor
In Mangalore Chemicals & Fertilisers Ltd. (1991) 55 E.L.T. 437 (S.C.) and
Thermax Private Ltd. v. CC (1992) 61 E.L.T. 352 (SC), apex court had held
that when there is substantial compliance with the provisions, benefit
cannot be denied to an assessee.
The condition, the fulfilment of which depends partly on the person and
partly on the outside agency, cannot be held to be a mandatory condition. It
has to be treated as a directory condition and its substantial compliance
would be sufficient to earn the benefit for which such condition is
prescribed. This view was upheld in the case of Indian Farmers Fertilisers
Cooperative Ltd. v. Union of India (1995) 75 ELT 218 (Gujarat).
The above decision also echoes the view that the substantial compliance or
satisfaction of the spirit of a procedural requirement is sufficient to claim
the benefit. The same view has been followed in subsequent decisions like
Ford India v. CCE (2011) 272 E.L.T. 353 (Madras) and Jays Engineering India
Ltd. v. CCE (2009) 246 ELT 317 (Cestat, Mumbai).
In Arvind Ltd v. CCE (2016) 334 ELT 146 (Cestat, Ahmedabad), it was held
that when two unconditional exemption notifications, one fully exempting
goods and other granting partial exemption, are available to assessee at the
same time, he has choice to opt for notification more beneficial to him and
that provisions of Section 5A(1A) of Central Excise Act, are not applicable in
such cases. Tribunal relied on judgments of Apex Court in (1997) 92 E.L.T.
13 (S.C.) and 2007 (209) E.L.T. 321 (S.C.) in this regard. Gujarat High Court
has admitted the appeal against the said order.
In Balkrishna Industries Ltd v. Union of India (2016) 334 ELT 440 (Bombay),
it was observed that nature of exemption is that of concession. It is
concession granted by Government that beneficiaries are not required to pay
tax/ duty they were otherwise statutorily liable to pay. Recipient of
concession have no legally enforceable right against Government for grant of
such concession, save and except to enjoy benefits thereof during period of
its grant. Right to enjoy concession can be taken away in exercise of very
power under which it was granted. High Court in its jurisdiction under
Article 226 of Constitution of India cannot direct Government to grant
exemption, and especially so if it was not granted earlier.
In view of the above, it is to be borne in mind that to test the eligibility of
exemption notification, assessee must take note of the aforementioned
principles of interpreting the exemption notifications.
(Dr Sanjiv Agarwal is Partner, Agarwal Sanjiv & Company, Jaipur.)