2005 (1) TMI 391 - SC - VAT / Sales Tax

State Governments cannot levy luxury tax on tobacco products under entry 62 of List II

Godfrey Phillips India Ltd. and another Versus State of UP. and others (and other writ petitions and appeals)

SC held that State Governments cannot levy luxury tax on tobacco and tobacco products under entry 62 of List II. The Court interpreted 'luxuries' using ... Challenged the imposition and levy of a luxury tax on tobacco and tobacco products by treating them as 'luxuries' within the meaning of the word in entry 62 of List II - exclusive power of State Legislatures to make laws with respect to 'Taxes on luxuries, including taxes on entertainments, amusements, betting and gambling' - Unjust enrichment - interpretation of the word 'luxuries' of entry 62, List II - maxim of noscitur a sociis - HELD THAT:- In the present context the general meaning of 'luxury' has been explained or clarified and must be understood in a sense analogous to that of the less general words such as entertainments, amusements, gambling and betting, which are clubbed with it. This principle of interpretation known as 'noscitur a sociis' has received approval in Rainbow Steels Ltd. v. Commissioner of Sales Tax [1981 (1) TMI 213 - SUPREME COURT], although doubted in its indiscriminate application in State of Bombay v. Hospital Mazdoor Sabha [1960 (1) TMI 32 - SUPREME COURT]. Read entry 62, List II as including articles of luxury cannot allow all these constitutional restrictions to be by- passed allowing States to levy tax on the supply of goods by describing them as luxury goods. As has been rightly contended by Mr. Parasaran appearing for the Union of India, the supply of luxury is nothing but the supply of goods since the goods themselves constitute the luxury. So even if tobacco is an article of luxury, a tax on its supply is within the exclusive competence of the State but subject to the constitutional curbs prescribed under article 286 read with sections 14 and 15 of the Central Sales Tax Act, 1956, and most importantly the ADE Act of 1957 under which no sales tax can be levied on tobacco at all if the State was to take the benefits under that Act. Given the language of entry 62 and the legislative history we hold that entry 62 of List II does not permit the levy of tax on goods or articles. In our judgment, the word 'luxuries' in the entry refers to activities of indulgence, enjoyment or pleasure. Inasmuch as none of the impugned statutes seek to tax any activity and admittedly seek to tax goods described as luxury goods, they must be and are declared to be legislatively incompetent. It was stated on behalf of the State Governments that after obtaining interim orders from this Court against recovery of luxury tax, the appellants continued to charge such tax from consumers/ customers. It is alleged that they did not pay such tax to respective State Governments. It was, therefore, submitted that if the appellants are allowed to retain the amounts collected by them towards luxury tax from consumers, it would amount to 'unjust enrichment' by them. In our opinion, the submission is well-founded and deserves to be upheld. If the appellants have collected any amount towards luxury tax from consumers/customers after obtaining interim orders from this Court, they will pay the said amounts to the respective State Governments. In view of our opinion on the scope of entry 62, List II, we do not think it necessary to answer the other issues raised in these appeals which are left open. Issues Involved:1. Legislative competence of States to levy luxury tax on tobacco and tobacco products under Entry 62 of List II.2. Constitutional validity of the Uttar Pradesh Tax on Luxuries Act, 1995.3. Constitutional validity of the Andhra Pradesh Tax on Luxuries Act, 1987.4. Constitutional validity of the West Bengal Tax on Luxuries Act, 1994.5. Interpretation and scope of Entry 62 of List II in the Seventh Schedule to the Constitution.6. Impact of Article 301 on the imposition of luxury tax.7. Alleged unjust enrichment by assessees.Detailed Analysis:1. Legislative Competence of States to Levy Luxury Tax on Tobacco and Tobacco Products under Entry 62 of List II:The primary question was whether the States could levy a luxury tax on tobacco and tobacco products under Entry 62 of List II, which pertains to 'Taxes on luxuries, including taxes on entertainments, amusements, betting and gambling.' The assessees argued that the word 'luxuries' should be interpreted as an activity or service rather than goods. The States contended that 'luxuries' included goods and services, and thus, they had the legislative competence to tax tobacco as a luxury item.2. Constitutional Validity of the Uttar Pradesh Tax on Luxuries Act, 1995:The U.P. Act levied a luxury tax on the supply of tobacco by a tobacconist. The High Court of Allahabad initially upheld the Act's legislative competence but struck it down for violating Article 301 of the Constitution, which guarantees freedom of trade and commerce. The High Court held that the tax impeded free trade and commerce and was not saved by Article 304(b) as no Presidential assent was obtained. The Supreme Court affirmed the High Court's decision that the tax was legislatively incompetent under Entry 62 of List II.3. Constitutional Validity of the Andhra Pradesh Tax on Luxuries Act, 1987:The A.P. Act was similar to the U.P. Act and levied a luxury tax on the supply of tobacco products. The A.P. High Court upheld the Act's validity, stating that it was a tax on the supply of luxury goods and not a sales tax. The Supreme Court, however, found that the tax on the supply of tobacco was not within the ambit of Entry 62 of List II, thus rendering the Act legislatively incompetent.4. Constitutional Validity of the West Bengal Tax on Luxuries Act, 1994:The W.B. Act defined luxuries as commodities for enjoyment over and above the necessities of life and levied a tax on the stock of such luxuries. The West Bengal Taxation Tribunal and the Calcutta High Court upheld the Act's validity. However, the Supreme Court found that the Act's provisions taxing goods as luxuries were not within the scope of Entry 62 of List II, thus declaring the Act legislatively incompetent.5. Interpretation and Scope of Entry 62 of List II in the Seventh Schedule to the Constitution:The Court examined the meaning of 'luxuries' in Entry 62 of List II. It concluded that 'luxuries' referred to activities of indulgence, enjoyment, or pleasure and not to goods or articles. The Court applied the principle of 'noscitur a sociis' to interpret 'luxuries' in the context of 'entertainments, amusements, betting and gambling,' all of which are activities. The Court held that Entry 62 did not permit the levy of tax on goods or articles.6. Impact of Article 301 on the Imposition of Luxury Tax:The Court noted that the imposition of luxury tax on tobacco impeded the freedom of trade and commerce guaranteed by Article 301. Since no Presidential assent was obtained under Article 304(b), the tax was unconstitutional. The Court emphasized that the States could not bypass constitutional restrictions on sales tax by labeling it as a luxury tax.7. Alleged Unjust Enrichment by Assessees:The Court addressed the issue of unjust enrichment, noting that if the assessees collected luxury tax from consumers after obtaining interim orders, they must pay the collected amounts to the respective State Governments. This was to prevent the assessees from unjustly enriching themselves at the expense of consumers.Conclusion:The Supreme Court declared the impugned luxury tax Acts of U.P., A.P., and W.B. legislatively incompetent under Entry 62 of List II, as the entry did not cover goods or articles. The Court struck down the Acts but did not order a refund of taxes already paid. It directed that any amounts collected by the assessees as luxury tax from consumers be paid to the respective State Governments. The Court left other issues raised in the appeals open for future consideration.