2015 (8) TMI 97 - SC - Central Excise

Levy of duty of excise on iron and steel scrap which was obtained by breaking the ship - exemption to particular class of assessees - Benefit of exemption Notification 102/87-CE and 103/87-CE - whether the two categories are identical or there is a reasonable classification based on intelligible differentia which has nexus with some objective that is sought to be achieved - Held that - If the government fails to support its action of classification on the touchstone of the principle whether the classification is reasonable having an intelligible differentia and a rational basis germane to the purpose the classification has to be held as arbitrary and discriminatory. - Decision in the case of Sube Singh v. State of Haryana 2001 (8) TMI 1374 - SUPREME COURT followed. It has been accepted without dispute that taxation laws must also pass the test of Article 14 of the Constitution of India. It has been laid down in a large number of decisions of this Court that a taxation statute for the reasons of functional expediency and even otherwise can pick and choose to tax some. Importantly there is a rider operating on this wide power to tax and even discriminate in taxation that the classification thus chosen must be reasonable. The extent of reasonability of any taxation statute lies in its efficiency to achieve the object sought to be achieved by the statute. Thus the classification must bear a nexus with the object sought to be achieved. Two Notifications both dated 27.03.1987 pertain to same goods namely those falling under Heading 72.15 and 73.09 of the second Schedule to the Act. Customs duty is leviable on these goods under Section 3 of the Customs Tariff Act. The said duty can be paid under any of the two methods. When two methods are permissible under the statutory scheme itself obviously option is that of the assessee to choose in all those methods to pay the custom duty. Duty thus paid is to be naturally treated as validly paid. Merely because with the adoption of one particular method the duty that becomes payable is lesser would not mean that two such persons belong to different categories. The important factors for the purposes of parity are same in the instant case viz. the goods are same; they fall under the same Heading and the custom duty is leviable as per the Act which has been paid. Therefore the impugned Notification giving exemption only to those persons who paid a particular amount of duty namely Rs. 1, 400/- per LDT would not mean that such persons belong to a different category and would be entitled to exemption and not other persons like the respondent herein who paid the duty on the same goods under the same Act but on the formula which he opted and which is permissible which rate of duty comes to Rs. 1, 035/- per LDT. Thus while upholding the view taken by the High Court we modify the same only to the extent that the respondent herein shall also be entitled to the benefit of the exemption Notification subject to the condition that the duty already paid by the respondent herein on LDT would be taken into account and only the balance out of it would be subject to excise duty. - Decided against the revenue.

Summary

Issues Involved:
1. Validity of Notifications Nos. 102/87-CE and 103/87-CE dated 27.03.1987.
2. Alleged violation of Article 14 of the Constitution.
3. Discrimination between two categories of importers.
4. Judicial review of exemption notifications.
5. Reasonableness and fairness of classification in taxation.

Detailed Analysis:

1. Validity of Notifications Nos. 102/87-CE and 103/87-CE dated 27.03.1987:
The respondent challenged the validity of Notifications Nos. 102/87-CE and 103/87-CE, which provided excise duty exemptions for iron and steel scrap obtained by breaking ships, contingent on the customs duty paid. Notification No. 102/87-CE provided partial exemption if customs duty was paid at Rs. 1,035/- per Light Displacement Tonnage (LDT) and additional duty under Section 3 of the Customs Tariff Act. Notification No. 103/87-CE granted full exemption if customs duty was paid at Rs. 1,400/- per LDT. The respondent, who paid customs duty at Rs. 1,035/- per LDT, claimed this distinction was arbitrary.

2. Alleged Violation of Article 14 of the Constitution:
The respondent argued that the notifications created an arbitrary distinction between two categories of importers who paid customs duty under different methods permitted by the Customs Tariff Act, 1975. The Division Bench of the High Court agreed, stating that both categories of importers paid the duty as leviable under the Customs Tariff Act, and the differentiation lacked a rational basis, thus violating Article 14 of the Constitution.

3. Discrimination Between Two Categories of Importers:
The Division Bench found that the notifications resulted in discriminatory treatment by granting full exemption only to those who paid customs duty at Rs. 1,400/- per LDT while excluding those who paid at a lesser rate. The court held that such differentiation was arbitrary and had no rational nexus with the object sought to be achieved, which was to avoid double taxation.

4. Judicial Review of Exemption Notifications:
The Supreme Court acknowledged the government's wide discretion in granting, modifying, or withdrawing exemptions. However, it emphasized that such discretion must not result in invidious discrimination. The court noted that judicial review is permissible to ensure that notifications do not violate the equality clause enshrined in Article 14.

5. Reasonableness and Fairness of Classification in Taxation:
The court reiterated that while the government has wide latitude in taxation matters, any classification must be reasonable, based on intelligible differentia, and have a rational relation to the object sought to be achieved. In this case, the court found that the two categories of importers were similarly situated, and the differentiation based on the amount of customs duty paid was not justified. The court highlighted that the government failed to provide a cogent explanation for the withdrawal of the exemption for those who paid customs duty at Rs. 1,035/- per LDT.

Conclusion:
The Supreme Court upheld the High Court's decision, finding that the notifications were discriminatory and violated Article 14. The court modified the High Court's judgment to the extent that the respondent would be entitled to the benefit of the exemption notification, provided that the duty already paid by the respondent on LDT is taken into account, and only the balance would be subject to excise duty. The appeal was disposed of accordingly, with no order as to costs.