23 July 2014

Legal status of clarifications through Budget instructions of CBEC

In this year’s budget, i.e. Budget 2014-15, the Joint Secretary, Tax Research Unit [JS (TRU)-I], Central Board of Excise & Customs [‘CBEC’ or ‘Board’], has sought to clarify the legal position involving interpretation of certain Customs and Central Excise notifications through an annexure to his covering letter [see end note 1] addressed to the Chief Commissioners and Commissioners of Customs and/or Central Excise. These clarifications, though beneficial to the assessees, have not been backed up with any specific statutory backing and the legal question which has arisen with respect to this mode of clarification is whether they would be binding on the department or not.

In order to appreciate this question better, let us first understand some basic facts about the budgetary process. The provisions contained in the Finance Bill are explained in simple terms through a pink coloured document called Memorandum or the Pink Book which is part of the budget documents presented to the Parliament on the day of the Annual Budget.

The Customs, Central Excise and Service Tax notifications for grant of exemptions and changes in rules are issued under delegated powers of the Central Government and they neither form part of the Finance Bill nor a part of such budget documents. However, the Finance Minister’s Budget Speech incorporates the changes made through these notifications and hence there is normally a mention in the FM’s Speech that the notifications giving effect to the changes he mentioned will be laid on the Table of the House in due course.

As part of the budget exercise, the Tax Research Unit (TRU) of the Central Board of Excise & Customs (CBEC or ‘the Board’) issues a separate document called the Explanatory Notes, to explain the changes in the rates of Customs and Central Excise duties effected through such notifications in simple terms. The Joint Secretary (TRU) also issues a covering letter addressed to the Chief Commissioners and Commissioners inter alia explaining the salient features of the budget, thanking them for their inputs, discussing the budget day restrictions (which are no longer in force now) and also calling for certain price data and/or post-budget reports from them. The letter is increasingly being used to clarify the legal position on certain matters and in this year’s budget a full annexure has been introduced for such clarifications as already mentioned above.

The Customs and Central Excise notifications usually become effective from the midnight of the budget day. It may be recalled that the Budget used to be presented earlier [see end note 2] at 5 pm which meant that by the time the FM’s Speech was over, it would be about 7 pm and the industry had only about five hours to get adjusted to the changes effected through these notifications. Hence the industry used to eagerly await the Explanatory Notes as being the only lucid documents which could perhaps help them to understand the complex changes waiting to hit them in just about 5 hours later.

Neither the Explanatory Notes nor the JS (TRU)’s letter have a statutory backing and it would appear they may lack statutory force as well. As a matter of abundant caution, the JS(TRU) also usually takes care to mention in his covering letter that only the provisions of the Finance Bill and the notifications have legal force. In this year’s budget, the JS (TRU)-I’s letter goes even further to record [see end note 3] that the Annexes provide only a summary of the changes made and should not be used in any quasi-judicial or judicial proceedings, where only the relevant legal texts need to be referred to.

It is important to note here that the said JS (TRU)’s letter cannot be said to be a Board’s circular [see end note 4] or a Board’s order issued under Section 37B of the Central Excise Act, 1944 or Section 151A of the Customs Act, 1962. The Board has been granted statutory powers under Section 37B of the Central Excise Act, 1944 to issue orders, instructions and directions to the Central Excise Officers for the purpose of uniformity in the classification of excisable goods and with respect to levy of duties of excise on such goods. But the last time it issued an order under these powers was in 2007! Corresponding powers in respect of the levy of customs duties has been granted to the Board under Section 151A of the Customs Act, 1962.

So the question which arises for consideration is whether the clarification given only through JS (TRU)’s letter and with no other statutory backing, would bind the department or not, particularly when such instructions themselves present a caveat about their non-binding nature. What happens if a departmental formation ignores such clarification and say raises a demand on an assessee? In fact, this is not without precedence.

It is observed that even the statutory backed Board’s circulars and Section 37B orders have been a subject matter of extensive dispute by the department’s own officers. The Supreme Court [see end note 5], while allowing a revenue appeal that the circulars cannot be given primary over the judicial decisions, has upheld the departmental right to dispute a Board’s circular. The Supreme Court has also categorically held that “a circular which is contrary to the statutory provisions has really no existence in law”. Hence it would appear that the clarification issued through a mere JS (TRU)’s letter which admittedly has no legal force, is even more liable to dispute and litigation.

The avowed policy of the Government is to usher in a stable and predictable taxation regime which is also a commitment made by the Finance Minister in his Budget 2014-15 Speech. The issue is whether the Board’s practices follow this policy directive or not. Surely the issue of clarifications through mere non-binding letters does not enable a movement in this direction. Hence there may be a case for the Board to revisit its practices and the powers under which it issues instructions particularly where they are beneficial to the assessees, so that they bind the departmental officers and bring certainty to the tax regime at least to this limited extent.

[The author is a Director, Lakshmikumaran & Sridharan, New Delhi]

End Notes:

  1. Refer Annex-III to letter D.O.F.No.334/15/2014-TRU dated 10th July, 2014 issued by Joint Secretary (TRU)-I, Tax Research Unit, Central Board of Excise & Customs, available at http://indiabudget.nic.in/ub2014-15/cen/JSTRUI10072014DO.pdf
  2. However, since 1999 the General Budget is being presented at 11 A.M. on the last working day of February. Refer http://www.parliamentofindia.nic.in/ls/intro/p4.htm. Also refer para 2 of FM’s Budget 1999-2000 Speech at http://indiabudget.nic.in/ub1999-2000/bs/bs1.htm
  3. Para 2.1 of JS (TRU)-I’s letter, ibid.
  4. Rule 31 of the Central Excise Rules, 2002 read with Section 37(2)(xx) of the Central Excise Act, 1944 empowers the Board, the Chief Commissioner of the Commissioner to issue written instructions providing for any incidental or supplemental matters, consistent with the provisions of the said Act and Rules.
  5. A 5-Judge Constitutional Bench of the Supreme Court In the case of Commissioner v. Ratan Melting & Wire Industries [2008 (231) ELT 22 (SC)] held that the earlier decision in the case of Kalyani Packaging Industry v. Union of India [2004 (6) SCC 719] expounded the correct position of law.

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