Circulars vs. Statutes: The Tug-of-War Between Clarity and Conflict

The enactment of a law is a meticulous process, beginning with the drafting of provisions to establish a framework for governance and compliance. However, the practical application of these laws often uncovers ambiguities or challenges that require further clarity. To address such issues, authorities issue various subordinate legislations, such as rules, regulations, notifications, circulars, instructions, and orders, as a means to interpret or explain the law, ensuring uniformity in its implementation.

Since this article specifically focuses on circulars, it’s important to highlight their role within the broader legal framework. While circulars play a vital role in bridging gaps and providing guidance to stakeholders, they are ultimately subordinate to the statute. Circulars cannot create new obligations or impose conditions beyond what the law explicitly provides.

This balance between statutes and circulars is fundamental to a robust legal system, ensuring that legislative intent takes precedence and protecting taxpayers from arbitrary interpretations or administrative overreach.

Nature and Purpose of Circulars

Circulars are not specifically defined under any law, but their meaning can be derived from various sources. According to the Cambridge Dictionary, a circular refers to a printed announcement, advertisement, or letter that is sent to many people at the same time or a letter or notice given to a large number of people. Similarly, the Oxford Learner’s Dictionaries defines a circular as using an idea or a statement to prove something that is then used to validate the idea or statement at the beginning.

In the legal context, a circular is an official written communication issued by government or regulatory authorities to clarify, interpret, or provide guidance on specific provisions of the law. These documents serve as internal instructions, addressing ambiguities, mistakes, or gaps in existing laws. Although circulars are not laws themselves, they are based on the statutory framework. When certain aspects of a statute are unclear or require further explanation, circulars are issued to provide clarity, ensuring uniform interpretation and preventing misinterpretations.

In the context of the Goods and Services Tax (GST) Law, Section 168 of the CGST Act, 2017, grants the Central Board of Indirect Taxes and Customs (CBIC) the authority to issue orders, instructions, or directions for ensuring uniformity in the implementation of the Act. This authority has been effectively exercised in several instances, such as clarifying procedural matters or resolving interpretative issues, thereby streamlining compliance and fostering consistency across jurisdictions. Specifically, it states:

"(1) The CBIC may, if it considers it necessary or expedient so to do for the purpose of uniformity in the implementation of this Act, issue such orders, instructions or directions to the central tax officers as it may deem fit, and thereupon all such officers and all other persons employed in the implementation of this Act shall observe and follow such orders, instructions or directions."

This provision empowers the CBIC to issue, inter alia, circulars that, while not laws themselves, serve as guidance for tax officers and other relevant parties to ensure the consistent application of the GST Act across the country. These circulars aim to clarify legal ambiguities, outline procedures, and provide detailed instructions, thereby reducing inconsistencies or disputes.

For instance, Circular No. 1/1/2017 dated 26th June 2017 addressed the proper officer for provisions related to Registration and Composition levy under the CGST Act, 2017. It clarified procedural and administrative matters, ensuring uniformity during the early stages of GST implementation.

The Binding Nature of Circulars: Judicial Perspective

While we have established the fundamental distinction between circulars and statutes, the practical implications of this distinction often arise in legal challenges. The question then becomes: to what extent do circulars hold authority, especially when they conflict with statutory provisions? This leads us to explore the binding nature of circulars, as understood through judicial perspectives.

Circulars vs. Statutes

Courts have examined the role of circulars in several landmark cases, providing clarity on their binding nature. The general principle that emerges is that circulars cannot override statutory provisions. For instance, in Commissioner of Central Excise, Bolpur Vs. Ratan Melting & Wire Industries [2008(10)LCX0001], the Supreme Court affirmed that circulars contrary to statutory provisions are inoperative. This ruling underscores how the judiciary protects legislative intent, preventing administrative overreach and maintaining legal integrity. While circulars serve as interpretative tools, they cannot alter the law itself, ensuring that the statutory framework remains supreme.

A similar stance was taken in Chromotolab And Biotech Solutions vs. Union Of India [2022(10)LCX0075], the High Court inter-alia clarified that the procedure evolved in Circular dated 15.11.2017 cannot operate as delimiting condition on the applicability of statutory provisions

Additionally, In J.K. Lakshmi Cement Ltd. Vs. Commercial Tax Officer, Pali [2018(01)LCX0032], the Supreme Court held that the circular cannot alter the statutory provisions to the detriment to the assessee.

Further, in Dilip Kr. Ghosh Vs. Chairman, wherein it was held that circular cannot override the Rules occupying the field and if there is a clash between the Rule and the Circular, the Circular has to be treated as non est.

Binding Nature on Administrative Authorities

Although circulars are subordinate to statutes, they hold binding authority over administrative authorities. Tax officers and government officials must adhere to instructions issued through circulars, as long as these instructions align with the law. Circulars are typically clarificatory in nature and are binding only on departmental officers, who cannot take a position that contradicts the circular, provided it aligns with statutory provisions.

The binding nature of circulars on the Department has been clearly established through several judgments:

➣ Collector Of Central Excise vs. Dhiren Chemical Industries [2002(02)LCX0149]:

The Apex Court held that regardless of the interpretation placed by it on that phrase, if there were circulars which had been issued by the Central Board of Excise and Customs which placed a different interpretation upon that phrase, that interpretation would be binding on the Revenue.

➣ Ranadey Micronutrients v. Collector of Central Excise [1996(09)LCX0009]:

The Apex Court stated that the main purpose of circulars is to ensure uniform practices and to guide businesses on how certain products will be treated for excise duty. The Court made it clear that the Revenue cannot reject a circular issued by the Board just because it is inconsistent with a statutory provision. The Court also stressed that maintaining consistency and discipline is more important than winning or losing a case. Additionally, the Revenue is not allowed to make arguments that go against a binding circular issued by the Board.

➣ Paper Products Ltd. vs. Commissioner Of Central Excise [1999(08)LCX0250]:

The Hon’ble Supreme Court held that circulars issued by the Board are binding on the Department, and the Department cannot challenge their correctness, even if they conflict with statutory provisions. The judgment further bars the Department from filing an appeal against the correctness of binding nature of such circulars. Thus, any action by the Department must strictly align with the circular in force at the relevant time.

➣ Zenith Rubber Ltd. vs. Commissioner of Central Excise, Delhi [2001(08)LCX0448]:

The Court clarified that circulars issued by the Department are binding on the Department, and the Department cannot argue against those circulars.

In this regard, the Board issued a Circular No. 1006/13/2015-CX dated 21.09.2015, wherein it clarified that Board Circulars contrary to the judgements of Hon’ble Supreme Court become non-est in law and should not be followed. Reference of such circulars should be made to the Board so that further action of rescinding these circulars can be expeditiously taken up. Board may also initiate such action suo-moto.

In a landmark judgement of Hindustan Aeronautics Ltd. vs. Commr. Of Income Tax, Bangalore [2000(05)LCX0281], the Apex Court held that the circulars or instructions given by the Board are no doubt binding in law on the authorities under the Act but when the Supreme Court or the High Court has declared the law on the question arising for consideration it will not be open to a Court to direct that a circular should be given effect to and not the view expressed in a decision of the Supreme Court or the High Court.

In Bengal Iron Corporation Vs Commercial Tax Officer [1993(04)LCX0026], the Apex Court held that even the interpretation contained in the administrative instructions is not binding on Courts. The Court observed that so far as clarifications or Circulars issued by the Central Government and/or State Government are concerned, they represent merely their understanding of the statutory provisions. They are not binding upon the Courts. The understanding of the Government, whether in favour or against the assessee is nothing more than its understanding and opinion. It is doubtful whether such clarification and circulars bind the quasi-judicial functioning of the authorities under the Act. While acting in a quasi-judicial capacity, they are bound by law and not by any administrative instructions, opinions, clarifications or circulars. The law is what is declared by the Supreme Court and the High Court - to wit, it is for the Supreme Court and the High Court to declare what does a particular provision of the statute says and not for the executive. Of course, the Parliament/Legislature never speaks or explains what does a provision enacted by it means.

Retrospective or Prospective Application of Circulars

Circulars should clarify ambiguities without enhancing liability. Beneficial circulars apply retrospectively, while oppressive ones apply prospectively. This principle was upheld in the case of Suchitra Components Ltd. Vs. Commissioner Of Central Excise, Guntur [2007(01)LCX0001], Hon’ble Supreme Court relied on the decision held in the case of Commissioner of Central Excise, Bangalore vs. Commissioner of Central Excise, Bangalore [2006(11)LCX0010]that a beneficial Circular must be applied retrospectively by the assessee while oppressive circular must be applied prospectively. Thus, when the circular is against the assessee, they have right to claim enforcement of the same prospectively.

The question arises whether a Circular is binding on the assessee. As evident from the above, the assessee has the discretion to follow the orders, instructions, and directions if they are beneficial. If a Circular is not advantageous, the assessee may opt not to adhere to it or challenge its issuance.

Can Circulars Impose Liabilities?

The key question arises: Can a circular impose liability on the assessee? According to judicial decisions, circulars cannot impose new liabilities. They are intended solely to clarify the law without exceeding the legislative framework. As seen in the landmark case of Mahakaushal Builders Welfare Association vs. Superintendent of Central Excise & Customs, Jabalpur [2006(03)LCX0286], the Hon’ble High Court of Madhya Pradesh unequivocally held:

“if the petitioners are not liable to pay tax, under the law relating to service tax, the impugned circular cannot create liability for payment of service tax.”

…………..emphasis supplied

This judgment underscores the principle that circulars lack the authority to impose liabilities beyond the provisions of the law. They are strictly confined to the statutory framework.

Conclusion

The dynamic interplay between statutes and circulars highlights the critical balance needed for effective governance and compliance. While circulars serve as valuable tools to clarify legal ambiguities, ensure uniform application, and guide stakeholders, they remain subordinate to statutes and judicial pronouncements. Statutory provisions and legislative intent must always prevail in cases of conflict.

Judicial pronouncements have consistently emphasized the binding nature of circulars on administrative authorities to maintain consistency and discipline in administration. However, courts and quasi-judicial bodies are not bound by circulars and rely on statutory interpretation to uphold the rule of law.

Ultimately, circulars must be seen as complementary aids to the statute, not as instruments that override or expand legal obligations. By respecting their limitations and adhering to the legislative framework, circulars can effectively support the legal system while ensuring clarity, uniformity, and fairness for all stakeholders.

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.