A controversy has arouse when the five member bench (constitutional bench) of honorable supreme court in the matter of Collector v. Dhiren Chemical Industries [2007 -TMI - 1709 - SUPREME COURT OF INDIA] dated 12-12-2001] held that:

           "9. We need to made it clear that, regardless of the interpretation that we have placed on the said phrase, if there are circulars which have been issued by the Central Board of Excise and Customs which place a different interpretation upon the said phrase, that interpretation will be binding upon the Revenue."

This issue has been discussed and debated between the various sections of intellectuals, but it the Supreme Court only, which has clarified the scope of above ruling. A two member bench of Supreme Court in the matter of Kalyani Packaging Industry v. Union of India [2009 -TMI - 33063 - SUPREME COURT OF INDIA] held that:

            "6.  We have noticed that Para 9 of Dhiren Chemical's case is being misunderstood. It therefore becomes necessary to clarify Para 9 of Dhiren Chemical's case. One of us (Variava, J.) was a party to the Judgment of the Dhiren Chemical's case and knows what was the intention in incorporating Para 9. It must be remembered that law laid down by this Court is law of the land. The law so laid down is binding on all Courts/Tribunals and Bodies. It is clear that circulars of the Board cannot prevail over the law laid down by this Court. However, it was pointed out that during hearing of Dhiren Chemical's case because of circulars of the Board in many cases the Department had granted benefits of exemption Notifications. It was submitted that on the interpretation now given by this Court in Dhiren Chemical's case, the Revenue was likely to reopen cases. Thus Para 9 was incorporated to ensure that cases where benefits of exemption Notification had already been granted, the Revenue would remain bound. The purpose was to see that such cases were not reopened. However, this did not mean that even in cases where Revenue/Department had already contended that the benefit of an exemption Notification was not available, and the matter was sub-judice before a Court or a Tribunal, the Court or Tribunal would also give effect to circulars of the Board in preference to a decision of the Constitution Bench of this Court. Where as a result of dispute the matter is sub-judice a Court/Tribunal is, after Dhiren Chemical's case, bound to interpret as set out in that judgment. To hold otherwise and to interpret in the manner suggested would mean that Courts/Tribunals have to ignore a judgment of this Court and follow circulars of the Board. That was not what was meant by Para 9 of Dhiren Chemical's case"

The decision in the matter of Kalyani Packaging Industries confirmed by the five member bench (constitution bench) of honorable Supreme court in the matter of  COMMISSIONER OF C. EX., BOLPUR Versus RATAN MELTING & WIRE INDUSTRIES [2008 -TMI - 31136 - SUPREME COURT OF INDIA]by holding that:

           "7.  As noted in the order of reference the correct position vis-a-vis the observations in para 11 of Dhiren Chemical's case (supra) has been stated in Kalyani's case (supra). If the submissions of learned counsel for the assessee are accepted, it would mean that there is no scope for filing an appeal. In that case, there is no question of a decision of this Court on the point being rendered. Obviously, the assessee will not file an appeal questioning the view expressed vis-a-vis the circular. It has to be the revenue authority who has to question that. To lay content with the circular would mean that the valuable right of challenge would be denied to him and there would be no scope for adjudication by the High Court or the Supreme Court. That would be against very concept of majesty of law declared by this Court and the binding effect in terms of Article 141 of the Constitution"

Now, again the honorable supreme court in the matter of Commissioner of Central Excise Versus M/s. Hindoostan Spinning & Wvg. M. Ltd. & Anr. [2009 -TMI - 33062 - SUPREME COURT OF INDIA] has affirmed the views that department can challenge the validity and authenticity of a circular / clarification. Assessee can not challenge the department if department is ignoring the circular / clarification and following the statutory provisions.

Based on the above, it may be concluded that:

A circular or clarification if against the statutory provisions and / or law decided by the courts but in favor of revenue:	Department follows the contents of circular. But, assessee can challenge it. It is upon the courts to decide the issue.
A circular or clarification if against the statutory provisions and / or law decided by the courts but in favor of assessee:	Department challenge the validity of circular / clarification. But, assessee attempts to pursue the department to follow the circular / clarification. It is upon the courts to decide the issue.
A circular or clarification in accordance with the statutory provisions and / or law laid down by the courts.	An ideal situation

 

Authority of Board circulars: administrative circulars cannot override binding court law and may be challenged in court. Whether departmental authorities may challenge the authority and validity of a Board circular or clarification turns on the relationship between administrative instructions and judicially declared law. Authority of Board circulars is subject to Article 141 principles: circulars cannot prevail over binding decisions of the Supreme Court, and courts and tribunals must follow the law as laid down by the Court. If a circular conflicts with statute or precedent, either the department or the assessee may challenge it and courts will decide the issue.