Reading a Taxing Statute: the Rules of Interpretation

Held. An exemption notification must be construed strictly, and any ambiguity in it must be resolved in favour of the revenue and against the assessee, who must bring himself squarely within the four corners of the notification; the contrary line of authority was overruled. The Court preserved the distinction that ambiguity in a charging provision is resolved in favour of the assessee.

Why it matters here. It reverses what every older commentary says, and it is the single most likely place on this paper for a candidate to reproduce superseded law. It also means the two limbs of strict construction now point in opposite directions, which is exactly the point an examiner is testing when the topic is set.

3. Machinery provisions are construed to make the machinery work

A provision which merely provides the means of computing, assessing or collecting a tax validly imposed is not construed with the same rigour as the charge. If a machinery provision is capable of two readings, the court prefers the one which makes the scheme workable rather than the one which defeats a levy Parliament has plainly imposed. Sections 17, 18, 28 and 47 of the Customs Act are machinery in this sense.

4. A deeming provision is carried to its logical conclusion, but no further

Where the Act deems a state of affairs, the court must imagine as real the consequences which flow inevitably from it. Section 72 of the Customs Act deems goods left in a warehouse beyond the permitted period to have been improperly removed, and Kesoram Rayon v. Collector of Customs, (1996) 5 SCC 576, works out the consequence for the rate of duty. But a deeming provision is not extended beyond the purpose for which it was created.

5. The preventive provisions are construed to advance their object

The Act's second character is regulatory, and provisions directed at smuggling are not read as if they were charging sections. The reversal of burden in section 123, the presumption of culpable mental state in section 138A and the admissibility rules in section 138B exist to make enforcement possible against conduct which is by nature concealed, and they are construed to serve that end while remaining subject to constitutional limits.

6. Common parlance and the commercial sense of a word

Where a tariff entry uses a word not defined in the Act, it is understood in the sense in which people conversant with the subject matter attribute to it, that is the trade or commercial meaning, rather than a scientific or technical one, unless the entry itself is framed in technical terms. This is the rule that decides most classification disputes and it belongs with [Classifying Goods: the First Schedule and Its General Rules], where the statutory Rules of Interpretation take over.

7. Interpretation in customs is subordinate to the Rules in the First Schedule

A distinctive feature of customs law is that the principal interpretative rules are themselves statutory. The First Schedule to the Customs Tariff Act carries the General Rules for the Interpretation of the Import Tariff, and Section and Chapter Notes have statutory force. So a classification argument runs first through those Rules and Notes, and only then through the general canons.

Distinctions the topic turns on

Worked example

Sahyadri Foods Ltd imports a machine described in the invoice as an "industrial food dehydrator". The tariff has a heading for "machinery for the treatment of materials by a process involving a change of temperature" at 7.5 per cent, and another for "other machinery for the food industry" at 10 per cent. A notification exempts "machinery for the preservation of agricultural produce" from basic customs duty.

The classification question is answered by the statutory Rules first. One does not begin with dictionaries or trade evidence but with the General Rules for the Interpretation of the Import Tariff in the First Schedule and the relevant Section and Chapter Notes, which may direct the article to one heading and exclude the other. Only if the Rules and Notes leave the matter open does the common parlance test operate, asking what those conversant with the trade call the machine.

The exemption question is now answered against Sahyadri if there is doubt. If it is genuinely uncertain whether a dehydrator is "machinery for the preservation of agricultural produce", Dilip Kumar requires the ambiguity to be resolved in favour of the revenue, and Sahyadri must show it falls squarely within the notification. Before 2018 the benefit of the doubt would have gone the other way, and that difference is the whole point of the example.

But notice the asymmetry working in Sahyadri's favour on the other issue. If the ambiguity were in the charging entry itself, that is if neither heading clearly covered the machine, the doubt would be resolved in Sahyadri's favour, because the state must show clearly that it has taxed. So the same consignment can attract a strict construction that helps the importer on classification and one that hurts him on exemption.

What it does NOT mean

It does not mean a taxing statute is read narrowly in every direction. Strictness cuts towards the subject on the charge and against him on the exemption, and machinery provisions are read to work.

It does not mean equity has a place in construing the charge. There is no equity about a tax; one reads the words. A hardship argument is an argument for exemption, not for construction.

It does not mean Dilip Kumar abolished the rule that doubt in a charging provision favours the assessee. The Court preserved it expressly, and an answer which says the assessee now loses every doubt has overstated the decision.

And it does not mean the general canons decide a classification dispute. In customs, the statutory General Rules of Interpretation and the Section and Chapter Notes come first.

Quick revision

• Why strict: Article 265 permits a tax only by authority of law, so the words must clearly cover the transaction; the court supplies nothing by implication.
• Charging provisions: ambiguity resolved in favour of the assessee. Applies to section 12 of the Customs Act with the definitions in section 2, and to section 2 of the Customs Tariff Act with the Schedules.
• Exemption provisions: ambiguity resolved in favour of the revenue, and the claimant must fall squarely within the four corners of the notification. Commissioner of Customs v. Dilip Kumar and Company, (2018) 9 SCC 1, Constitution Bench of five judges, overruling the contrary line. Every pre-2018 textbook states the opposite.
• Machinery provisions are construed to make the scheme workable, because they serve a charge already validly imposed: sections 17, 18, 28 and 47.
• Deeming provisions are carried to their logical conclusion but no further; section 72 and Kesoram Rayon, (1996) 5 SCC 576.
• Preventive provisions are construed to advance the object of suppressing smuggling: sections 123, 138A and 138B.
• Common parlance: an undefined tariff word bears its trade or commercial meaning, not a scientific one, unless the entry is technical.
• In customs the interpretative rules are statutory: the General Rules for the Interpretation of the Import Tariff and the Section and Chapter Notes in the First Schedule come before the general canons.

Test yourself

1. State the rules of interpretation applicable to customs law, with the leading authority on exemptions. The starting principle is that a taxing statute is construed strictly, because Article 265 permits a tax only by authority of law and the state must therefore find its authority in the words used. From that single reason two rules follow which point in opposite directions. Ambiguity in a charging provision is resolved in favour of the assessee: nothing is read in and nothing implied, and if the words do not clearly bring the transaction within the charge the subject is not taxed, however clearly he may be within the spirit of the levy. Ambiguity in an exemption is resolved in favour of the revenue, because an exemption is a departure from a charge Parliament has validly imposed, and the person invoking it must bring himself squarely within its four corners.

The authority on the second rule is Commissioner of Customs v. Dilip Kumar and Company, (2018) 9 SCC 1, in which a Constitution Bench of five judges resolved conflicting lines of decisions and held that an exemption notification must be construed strictly and any ambiguity in it resolved in favour of the revenue, expressly overruling the line which had allowed the benefit of doubt to the subject, while preserving the rule that ambiguity in a charging provision favours the assessee.

Three further rules complete the answer. Machinery provisions, such as sections 17, 18, 28 and 47 of the Customs Act, are construed so as to make the scheme workable, since they serve a charge already imposed. A deeming provision, such as section 72, is carried to its logical conclusion but not beyond, which is how Kesoram Rayon v. Collector of Customs, (1996) 5 SCC 576, fixed the rate for goods overstaying a warehouse. And the preventive provisions, sections 123, 138A and 138B among them, are construed to advance their object of suppressing smuggling. Distinctively in customs, the principal interpretative rules are themselves statutory: the General Rules for the Interpretation of the Import Tariff and the Section and Chapter Notes in the First Schedule take precedence over the general canons, and an undefined tariff word bears its trade meaning rather than a scientific one.

2. Why is it not inconsistent to construe the charge in favour of the subject and the exemption against him? Because both rules are consequences of the same reason rather than two competing policies. The reason is that a tax is imposed only by authority of law, so the party asserting a departure from the ordinary position must find clear words for it. At the charging stage it is the state which asserts the departure, since in the absence of a statute the subject's property is his own; if the charging words are ambiguous, the state has not established the authority Article 265 requires, and the doubt is resolved against it. At the exemption stage the charge has already been validly imposed and the ordinary position is that duty is payable; it is now the subject who asserts the departure, and he must show clear words entitling him to it. The direction in which strictness cuts therefore follows from who is claiming to displace the general rule, which is why Dilip Kumar could lay down the exemption rule while expressly preserving the charging rule.

3. What is the practical significance of the fact that the interpretative rules in customs are statutory? It changes the order of argument in every classification dispute. In most fields, an ambiguous statutory word is approached through the general canons of construction and, in fiscal matters, through the common parlance test, which asks what people conversant with the subject matter understand by the word. In customs, the First Schedule to the Customs Tariff Act 1975 carries the General Rules for the Interpretation of the Import Tariff, and the Section and Chapter Notes have statutory force. Those Rules and Notes are part of the law and therefore bind before any judge-made canon is reached: they direct how an incomplete or unassembled article is classified, how mixtures and composite goods are treated, and how a conflict between competing headings is resolved.

The consequence is that an argument beginning from trade evidence is starting in the wrong place. One must first ask whether a Section or Chapter Note excludes the article from a heading or directs it to another, and then apply the General Rules in their prescribed sequence. Only if the statutory material leaves the question genuinely open does the common parlance test operate, and only after that do the general presumptions about strictness come into play. An answer which reverses that order has misunderstood how customs classification works.

4. Priya's client claims the benefit of an exemption notification whose wording is capable of two readings, one of which covers his goods. How should she advise him? That the doubt will be resolved against him. Since Commissioner of Customs v. Dilip Kumar and Company, (2018) 9 SCC 1, an exemption notification is construed strictly and any ambiguity in it is resolved in favour of the revenue and against the assessee, who must bring himself squarely within the four corners of the notification rather than showing merely that one available reading would accommodate him. Priya should therefore advise that the claim is unlikely to succeed on the strength of an equally available reading alone, and that the client's case must be that the notification on its proper construction covers the goods, not that it is capable of covering them.

She should also identify what is not affected. If the difficulty is instead that the tariff entry charging the goods is itself ambiguous, so that it is unclear whether the goods fall under the charged heading at all, the ambiguity is resolved in his favour, because Dilip Kumar preserved that rule. And she should check the statutory material first: a Section or Chapter Note, or one of the General Rules for the Interpretation of the Import Tariff, may settle the classification and remove the need to rely on the notification at all.