#NSRathnam&Sons – 𝐀𝐚𝐝𝐫𝐢𝐤𝐚𝐚 𝐋𝐞𝐠𝐚𝐥 𝐒𝐞𝐫𝐯𝐢𝐜𝐞𝐬 (𝐀𝐋𝐒)

Aadrikaa Legal Services (ALS) – IDT Tax I Arbitration I Litigation

Date: 01.07.2026

Supreme Court Strikes Down Discriminatory Excise Exemption

This Short Article has been prepared & written by Advocate Ravi Shekhar Jha-Delhi High Court, New Delhi. The views expressed are based on his interpretation of the law. He can be reached at his email id intelconsul@gmail.com .

The Supreme Court of India delivered a significant judgment in the case of Union of India & Ors. vs. M/s N.S. Rathnam & Sons, addressing the validity and fairness of government notifications related to excise duty exemptions on iron and steel scrap obtained from ship breaking activities. This article provides a detailed analysis of the case, the legal issues involved, the arguments presented, and the implications of the Court’s decision.

Background of the Case

M/s N.S. Rathnam & Sons, engaged in ship breaking, imported a vessel for dismantling and paid customs and additional duties as assessed by the authorities. Upon breaking the ship, the resulting iron and steel scrap was subject to excise duty. The government had issued several notifications over time, granting varying degrees of excise duty exemption based on the rate at which customs duty was paid on the imported ship.

Key Notifications

Notification No. 146/86-CE (01.03.1986): Provided partial excise duty exemption if customs duty was paid at Rs. 1,400 per Light Displacement Tonnage (LDT) or if the ship was imported before 28.02.1986 with appropriate additional duty paid.
Notification No. 386/86-CE (20.08.1986): Granted full excise duty exemption under similar conditions.
Notification Nos. 102/87-CE and 103/87-CE (27.03.1987): Reintroduced partial and full exemptions, but only for those who paid customs duty at Rs. 1,400 per LDT, excluding those who paid at a lower rate as permitted by law.

Legal Challenge

N.S. Rathnam & Sons challenged the validity of the 1987 notifications, arguing that restricting full excise duty exemption only to those who paid customs duty at Rs. 1,400 per LDT was arbitrary and violated Article 14 of the Constitution (right to equality). They contended that both categories of importers—those who paid at Rs. 1,400 per LDT and those who paid at a lower rate—should be treated equally, as both paid customs duty as per the law.

Court Proceedings and Arguments

The Single Judge of the High Court dismissed the writ petition, holding that the government had discretion in granting exemptions.
On appeal, the Division Bench of the High Court found the notifications discriminatory, holding that there was no rational basis for treating two categories of importers differently when both paid customs duty under the law.
The Union of India appealed to the Supreme Court, arguing that exemption policies were a matter of government discretion and policy.

Supreme Court’s Analysis

The Supreme Court examined whether the notifications created an unreasonable classification between importers who paid customs duty at different rates, despite both being permitted under the Customs Tariff Act. The Court emphasized:

Equality Before Law: Article 14 prohibits arbitrary discrimination. If two groups are similarly situated, they must be treated equally unless there is a reasonable and rational basis for differentiation.
Taxation and Classification: While the government has wide latitude in taxation matters, any classification must have an intelligible differentia and a rational nexus to the objective.
No Rational Basis: The Court found no justification for granting full exemption only to those who paid at Rs. 1,400 per LDT, especially when the law allowed payment at lower rates. Both groups imported the same goods and paid customs duty as per statutory provisions.

The Judgment

The Supreme Court upheld the High Court’s decision, declaring the notifications discriminatory. However, it modified the order to ensure fairness:

Exemption Entitlement: N.S. Rathnam & Sons (and similarly situated importers) are entitled to the excise duty exemption.
Adjustment for Duty Paid: The exemption applies after accounting for the customs duty already paid. Any balance (difference between Rs. 1,400 per LDT and the actual duty paid) would be subject to excise duty.

Implications of the Ruling

Reinforcement of Equality: The judgment reinforces the principle that government notifications, especially in taxation, must not create arbitrary or unreasonable classifications.
Guidance for Policy Makers: When granting exemptions, authorities must ensure that similarly situated entities are treated equally unless a clear, rational basis exists for differentiation.
Impact on Ship Breaking Industry: The decision provided relief to importers who paid customs duty at rates lower than Rs. 1,400 per LDT, ensuring they are not unfairly denied excise exemptions.

Conclusion

The Supreme Court’s ruling in the N.S. Rathnam & Sons case is a landmark in the interpretation of equality in taxation and government policy. It underscores the judiciary’s role in scrutinizing administrative actions for fairness and rationality, ensuring that the rights of businesses and individuals are protected against arbitrary state action.

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