Machine-capacity cess must reflect relevant taxable incidence and avoid arbitrary equal treatment of materially unequal manufacturing capacities.

Parliament's residuary taxing power under Article 246(1) read with Entry 97 of List I supports a cess on the ownership, possession or operation of pan masala manufacturing machines or processes, as the levy is not characterised as GST or a surcharge. The notes further identify an Article 14 concern with a machine-capacity-based levy that applies the same cess across broad capacity bands despite materially different productive capacities and actual output. A fifteen-day minimum abatement threshold may also deny relief for genuine short-term non-operation without a proportionate basis. Any such cess must therefore be linked to the relevant taxable incidence and operate on a non-arbitrary basis.

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Issues: (i) Whether Parliament possessed legislative competence to enact a cess on machines or processes used for manufacture of pan masala; (ii) Whether the machine-capacity-based cess levy and the fifteen-day minimum period for abatement were arbitrary and violative of Article 14 of the Constitution of India.

Issue (i): Whether Parliament possessed legislative competence to enact a cess on machines or processes used for manufacture of pan masala.

Analysis: The cess was levied on ownership, possession or operation of machines and processes, rather than on the supply of goods or services. It was therefore neither a goods and services tax under Article 246A nor a surcharge under Article 271. Parliament retained exclusive residuary power under Article 246(1) read with Entry 97 of List I to legislate on a tax not enumerated in Lists II and III.

Conclusion: Parliament has legislative competence to enact a law imposing the cess. This issue is against the assessee.

Issue (ii): Whether the machine-capacity-based cess levy and the fifteen-day minimum period for abatement were arbitrary and violative of Article 14 of the Constitution of India.

Analysis: The levy imposed the same cess on machines within a broad capacity band irrespective of their actual production, thereby treating manufacturers with materially different productive capacities alike. The cess could exceed the total retail value of the output in the illustrated cases. Rule 15 denied abatement for genuine non-operation lasting less than fifteen continuous days, solely on an anti-evasion presumption, without accounting for machinery breakdown, shortage of inputs or labour, or maintenance. The classification and abatement threshold lacked a rational basis proportionate to the levy.

Conclusion: The capacity-based manner of levy and the related abatement regime are arbitrary and violate Article 14; the Act, Rules and consequential notifications are unconstitutional to that extent. This issue is in favour of the assessee.

Final Conclusion: The Union's authority to enact a cess law remains intact, but any future levy must conform to the equality guarantee and be founded on a non-arbitrary basis linked to the relevant taxable incidence.

Ratio Decidendi: A fiscal levy that treats materially unequal productive capacities identically on assumed output, and denies relief for genuine short-term non-operation through an arbitrary threshold, violates Article 14 notwithstanding Parliament's legislative competence to impose the cess.

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