Strict construction of SAD exemption denied tax on sample clearances where goods were not exempt from VAT or sales tax.

Strict construction of the exemption notification controlled liability to special additional duty on sample clearances from a 100% export-oriented undertaking into the domestic tariff area. The proviso applied only where the goods were exempt from sales tax or VAT, and not where they were merely excluded from taxable turnover. As the samples were not shown to be exempt goods under the Uttar Pradesh VAT law, the condition for denial of exemption was not met. SAD was therefore not payable, and the exemption remained available.

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Issues: Whether additional duty of customs (SAD) was payable on clearances of samples from a 100% export oriented undertaking into the domestic tariff area where no VAT or sales tax was paid, and whether the exemption notification could be denied on the footing that such samples were not exempt goods but only excluded from taxable turnover.

Analysis: The exemption under Notification No. 23/2003-CE, as amended by Notification No. 22/2006-CE, required a strict construction. The proviso applied where goods cleared into the domestic tariff area were exempt from payment of sales tax or VAT, and the Court held that the expression could not be expanded by reference to context beyond the language used. The clearances in question were samples and were not shown to be exempt goods under the U P VAT Act, 2008; they were treated as outside the taxable turnover under Section 7 of that Act. Since the proviso referred to exempt goods and not merely to goods not forming part of taxable turnover, the condition for inclusion of SAD was not satisfied. The larger bench view relied upon in the impugned order was held inapplicable on the facts.

Conclusion: SAD was not payable on the sample clearances, and the assessee was entitled to the exemption.

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