By Anandh Venkataramani
Often the dispute when interpreting notifications under tax laws, particularly indirect taxes, is whether the procedural conditions prescribed in the notification is to be strictly complied with, or whether substantial compliance would be sufficient to avail the benefit accorded therein. If strict compliance is required, then the procedure, as prescribed, has to be followed to the letter, with no derogation whatsoever. If strict compliance is not required, then as long as the ‘spirit of the conditions’ is complied with, then the assessee would be entitled to the benefit. In other words, if the assessee has satisfied the essence of the (substantive) conditions of the notification, even if the procedure laid down in the notification is not followed in the manner prescribed, the notification will apply. It is therefore pivotal to identify the conditions as either requiring strict or substantial compliance.
The first step is to understand the object sought to be achieved by a particular notification, i.e., the essential object of the notification [See Commissioner of C. Ex., Shillong v. North Eastern Tobacco Co. Ltd. - 2002 (146) ELT 490 (SC) at Para 9]. For instance, in an area based exemption, the primary object is to provide impetus for industrial expansion in certain areas which often lack infrastructure, and to build the economy in such areas. It is imperative that if the essential or primary requirement itself is not satisfied, then the notification would not apply at all. If the notification relates to manufacturing units or service providers situated in a certain area, or applies to an assessee carrying out a very specific activity, then unless the manufacturing unit or service provider is situated in that specified area, or does the specific activity, as the case may be, the notification will not be applicable. The focus here, however, is on the procedural conditions set out in a notification, and whether they require strict or substantial compliance.
It has been held that when requirements which are the ‘substance’ or ‘essence’ of the notification are fulfilled absolutely, without any dispute, then the improper/non-fulfillment of a procedure that follows, should not disentitle the assessee from the benefit of the notification [refer CC (Imports) v. Tullow India Operations Ltd. - 2005 (189) ELT 401 (SC), Compack Pvt. Ltd. v. CCE - 2005 (189) ELT 3 (SC), CCE, Shillong v. North Eastern Tobacco Co. Ltd. (supra), & Thermax Ltd. v. CC - 1992 (61) ELT 352 (SC)].
However, at times, confusion may be created by the wordings of the procedural conditions, as to whether they form the essence or substance of the notification. The usage of the term ‘shall’ indicates a mandate, and mandates, unless specifically provided otherwise, expect strict compliance. The Supreme Court held that whether a provision is mandatory or directory is not dependent on the use of the words ‘shall’ or ‘may’. The provision must be read in the text and context thereof and the question is to be answered having regard to the purpose and objective it seeks to achieve. A procedural provision may not be held to be mandatory if thereby no prejudice is caused and if reading it as directory does not do violence to the language of the notification [see P.T. Rajan v. T.P.M. Sahir and Ors. AIR - 2003 SC 4603; (2003) 8 SCC 498 at para 46 & 50 and CCE v. M.P.V. & Engg. Industries - 2003 (153) ELT 485 (SC) at para 11].
This takes us back to identifying the basic purpose and essence of the notification and ascertaining whether reading the procedure as only directory would cause prejudice to the essence. The stringency and mandatory nature must be justified by the purpose intended to be served. The mere fact that it is statutory does not matter one way or the other [see Mangalore Chemicals & Fertilizers Ltd. v. Deputy Commissioner - 1991 (55) ELT 437 (SC) at para 11].
In the case of CCE, New Delhi v. Hari Chand Shri Gopal - 2010 (260) ELT 3 (SC), the 5 judge bench while discussing the construction of exemption notifications held that a distinction between provisions of statute which are of substantive character and were built in with certain specific objectives of policy, on the one hand, and those which are merely procedural and technical in their nature, on the other, must be kept clearly distinguished. The Court further held that if the requirements are procedural or directory in that they are not of the “essence” of the thing to be done, but are given with a view to the orderly conduct of business, they may be fulfilled by substantial, if not strict compliance [paras 23-24]. In the same case, the Court denied the benefit of a notification to the assessee on the ground of non-fulfillment of procedural conditions. However, there is no dichotomy or contradiction in the judgment. The Court was seized with the issue of compliance with the procedures laid out in Chapter X of the erstwhile Central Excise Rules, 1944, and held that the procedures prescribed therein related to the substance and essence of what was sought to be achieved in Chapter X. The case provides an illustration of circumstances where procedural conditions become mandatory and where substantial compliance would be insufficient, and also lays down extensive guidelines to clarify the issue.
In summation, the crucial factor in determining the nature of a procedural condition as requiring strict or substantial compliance, is whether the procedure itself is, or forms part of, the essence of the notification, and whether treating the same as directory would defeat the purpose of the notification. However, one must be cautious and mindful of the fact that merely because a procedure may be directory, its compliance, substantial or strict, is never dispensed with.
[The author is an Associate, Tax Practice, Lakshmikumaran & Sridharan, New Delhi]
Often the dispute when interpreting notifications under tax laws, particularly indirect taxes, is whether the procedural conditions prescribed in the notification is to be strictly complied with, or whether substantial compliance would be sufficient to avail the benefit accorded therein. If strict compliance is required, then the procedure, as prescribed, has to be followed to the letter, with no derogation whatsoever. If strict compliance is not required, then as long as the ‘spirit of the conditions’ is complied with, then the assessee would be entitled to the benefit. In other words, if the assessee has satisfied the essence of the (substantive) conditions of the notification, even if the procedure laid down in the notification is not followed in the manner prescribed, the notification will apply. It is therefore pivotal to identify the conditions as either requiring strict or substantial compliance.
The first step is to understand the object sought to be achieved by a particular notification, i.e., the essential object of the notification [See Commissioner of C. Ex., Shillong v. North Eastern Tobacco Co. Ltd. - 2002 (146) ELT 490 (SC) at Para 9]. For instance, in an area based exemption, the primary object is to provide impetus for industrial expansion in certain areas which often lack infrastructure, and to build the economy in such areas. It is imperative that if the essential or primary requirement itself is not satisfied, then the notification would not apply at all. If the notification relates to manufacturing units or service providers situated in a certain area, or applies to an assessee carrying out a very specific activity, then unless the manufacturing unit or service provider is situated in that specified area, or does the specific activity, as the case may be, the notification will not be applicable. The focus here, however, is on the procedural conditions set out in a notification, and whether they require strict or substantial compliance.
It has been held that when requirements which are the ‘substance’ or ‘essence’ of the notification are fulfilled absolutely, without any dispute, then the improper/non-fulfillment of a procedure that follows, should not disentitle the assessee from the benefit of the notification [refer CC (Imports) v. Tullow India Operations Ltd. - 2005 (189) ELT 401 (SC), Compack Pvt. Ltd. v. CCE - 2005 (189) ELT 3 (SC), CCE, Shillong v. North Eastern Tobacco Co. Ltd. (supra), & Thermax Ltd. v. CC - 1992 (61) ELT 352 (SC)].
However, at times, confusion may be created by the wordings of the procedural conditions, as to whether they form the essence or substance of the notification. The usage of the term ‘shall’ indicates a mandate, and mandates, unless specifically provided otherwise, expect strict compliance. The Supreme Court held that whether a provision is mandatory or directory is not dependent on the use of the words ‘shall’ or ‘may’. The provision must be read in the text and context thereof and the question is to be answered having regard to the purpose and objective it seeks to achieve. A procedural provision may not be held to be mandatory if thereby no prejudice is caused and if reading it as directory does not do violence to the language of the notification [see P.T. Rajan v. T.P.M. Sahir and Ors. AIR - 2003 SC 4603; (2003) 8 SCC 498 at para 46 & 50 and CCE v. M.P.V. & Engg. Industries - 2003 (153) ELT 485 (SC) at para 11].
This takes us back to identifying the basic purpose and essence of the notification and ascertaining whether reading the procedure as only directory would cause prejudice to the essence. The stringency and mandatory nature must be justified by the purpose intended to be served. The mere fact that it is statutory does not matter one way or the other [see Mangalore Chemicals & Fertilizers Ltd. v. Deputy Commissioner - 1991 (55) ELT 437 (SC) at para 11].
In the case of CCE, New Delhi v. Hari Chand Shri Gopal - 2010 (260) ELT 3 (SC), the 5 judge bench while discussing the construction of exemption notifications held that a distinction between provisions of statute which are of substantive character and were built in with certain specific objectives of policy, on the one hand, and those which are merely procedural and technical in their nature, on the other, must be kept clearly distinguished. The Court further held that if the requirements are procedural or directory in that they are not of the “essence” of the thing to be done, but are given with a view to the orderly conduct of business, they may be fulfilled by substantial, if not strict compliance [paras 23-24]. In the same case, the Court denied the benefit of a notification to the assessee on the ground of non-fulfillment of procedural conditions. However, there is no dichotomy or contradiction in the judgment. The Court was seized with the issue of compliance with the procedures laid out in Chapter X of the erstwhile Central Excise Rules, 1944, and held that the procedures prescribed therein related to the substance and essence of what was sought to be achieved in Chapter X. The case provides an illustration of circumstances where procedural conditions become mandatory and where substantial compliance would be insufficient, and also lays down extensive guidelines to clarify the issue.
In summation, the crucial factor in determining the nature of a procedural condition as requiring strict or substantial compliance, is whether the procedure itself is, or forms part of, the essence of the notification, and whether treating the same as directory would defeat the purpose of the notification. However, one must be cautious and mindful of the fact that merely because a procedure may be directory, its compliance, substantial or strict, is never dispensed with.
[The author is an Associate, Tax Practice, Lakshmikumaran & Sridharan, New Delhi]