TaxTMI 
TaxTMI 
1997 (7) TMI 633
X X X X Extracts X X X X
X X X X Extracts X X X X
....ax Act, 1963. There are two alternative prayers; the first being that in the event of its being held by this Court that the first respondent, Government of Kerala, is entitled to levy and collect luxury tax on cigarettes, the second respondent, Union of India, is not entitled to levy and collect additional excise duty on cigarettes and the second being that the first respondent in the event of its being held by this Court is entitled to levy and collect luxury tax on tobacco at 5 per cent, then the first respondent is not entitled to its proportionate share of additional excise duty collected by the second respondent under the provisions of the Additional Duties of Excise (Goods of Special Importance) Act, 1957 (for short, "the 1957 Act"). 2.. The petitioners are M/s. I.T.C. Limited, M/s. Hallmark Tobacco Co. Ltd. and M/s. Shyam Agencies owned by Krishna Consumer Products Pvt. Ltd. They are dealers carrying on business and trade in manufacture, production, distribution and sale of cigarettes. They are aggrieved by the levy of luxury tax on cigarettes at 5 per cent on manufacturers and importers of cigarettes. The said tax has been imposed for the first time by the Kerala Finance....
X X X X Extracts X X X X
X X X X Extracts X X X X
...."stockist" and paid into the Government treasury.The word "stockist" is defined in clause (k) of section 2 as below : "(k) 'stockist' means a person who, for the purpose of business, manufactures, produces, brings or causes to be brought in the State a commodity included in the Schedule or to whom such commodity is despatched from any place outside the State for supply within the State or who supplies such commodity within the State, whether by way of sale or otherwise." In substance a person who for the purpose of business, manufactures, produces, brings or causes to be brought in the State cigarette or to whom it is despatched from any place outside the State for supply within the State or who supplies cigarette within the State, whether by way of sale or otherwise is called "stockist".Sub-section (3) provides that where a luxury tax is collected by a stockist at the point of first supply in the State whether by way of sale or otherwise, no luxury tax under this Act shall be collected at any successive point of supply. That means, what is authorised by sub-section (3) is single point levy at the point of first supply within the State. 4.. What is apparent from the above ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as well as inter-State. When the Government of India imposed its Central excise duty on tobacco with effect from April 1, 1943 the provincial Governments which were levying duties on tobacco under special Acts were persuaded to give up their taxes and were compensated for the revenue forgone. However, after independence the problem of taxation by the States and levy of excise duty by the Centre on tobacco has become an acute problem. The report of the Taxation Enquiry Commission appointed by the Ministry of Finance, Government of India, April, 1953 reveals that in certain States tobacco and tobacco manufacturers were made liable to the general sales tax and in a few States chewing tobacco were exempted ; while in some States higher duties were levied on cigars, cheroots and pipe tobacco. The Commission expressed its concern on the fact that tobacco and tobacco products were subjected to a very high level of taxation by the States as well as by the Centre and observed in the report that: "The need is obvious for ensuring proper co-ordination between the different taxes on tobacco levied by the Central Government, the States and the local authorities." Pursuant to the above ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....arliament by law to be of special importance in inter-State trade or commerce would necessarily be required to conform to such restrictions and conditions in accordance with the system of levy, rates and other incidents of the tax as Parliament may by law specify. Consequently since Parliament has by law specified that the amount of levy shall be a single point levy and the rate of tax be not more than a maximum of 4 per cent, no State law imposing a tax on the sale or purchase of any goods declared by Parliament by law to be special importance to inter-State trade or commerce can impose a tax in excess of 4 per cent or other than at a single point [article 286(3) read with section 15(a) of the CST Act, 1956]. (v) A tax on the sale or purchase of goods includes a tax on the supply in any manner whatsoever of goods, being food or other article for human consumption or any drink where such supply or service is for cash or other valuable consideration and such supply of any goods shall be deemed to be a sale of those goods by the person making a supply or purchase of those goods by the persons to whom such supply is made [article 366(29A)(f)]. 7. On behalf of the third respondent a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uxuries (Hotels and Restaurants) Tax Act and Gujarat Tax on Luxuries (Hotels and Lodging Houses) Act came up for consideration before the Constitution Bench of the Supreme Court in Express Hotels Private Ltd.'s case [1989] 74 STC 157; AIR 1989 SC 1949. That was a case where the luxury tax was imposed on the services for lodging provided at the hotels. There the court observed: "The concept of a tax on 'luxuries' in entry 62, List II, cannot be limited merely to tax things tangible and corporeal in their aspect as 'luxuries'." It also observed: "The entry encompasses all the manifestations or emanations, the notion of 'luxuries' can fairly and reasonably be said to comprehend and the element of extravagance or indulgence that differentiates 'luxury' from 'necessity' cannot be confined to goods and articles. There can be elements of extravagance or indulgence in the quality of services and activities." Therefore the impugned Act is not void for want of legislative competence of the State. 9.. The prime point argued by Mr. Anil Diwan, learned Senior Counsel for the writ petitioners is that the provisions contained in the impugned Act violate article 301 of the Constitution....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e between goods so imported and goods so manufactured or produced; and (b) impose such reasonable restrictions on the freedom of trade, commerce or intercourse with or within that State as may be required in the public interest: Provided that no Bill or amendment for the purposes of clause (b) shall be introduced or moved in the Legislature of a State without the previous sanction of the President." In the draft Constitution, these articles were contained in articles 274A, 274B, 274C and 274D respectively. In order to understand the width and amplitude of the freedom of trade enshrined in Part XIII it would be apt to know as to how the members of the Constituent Assembly reacted to these draft articles. While moving these draft articles Dr. B.R. Ambedkar in his speech before the Constituent Assembly said: "I should also like to say that according to the provisions contained in this Part it is not the intention to make trade and commerce absolutely free, that is to say, deprive both Parliament as well as the States of any power to depart from the fundamental provision that trade and commerce shall be free throughout India. The freedom of trade and commerce has been m....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e shall have the power to make any law giving, or authorising the giving of any preference to one State over another, or making, or authorising the making of, any discrimination between one State and another by virtue of any entry relating to trade and commerce in any of the Lists in the Seventh Schedule. Clause (2) of article 303 further provides that the provisions contained in clause (1) shall not prevent the Parliament from making any law giving or authorising the giving of any preference or making or authorising the making of any discrimination if it is declared by such law that it is necessary to do so for the purpose of dealing with a situation arising from scarcity of goods in any part of the territory of India. Article 304 provides that notwithstanding anything in article 301 or article 303, the Legislature of a State may by law impose on goods imported from other States or the Union territories any tax to which similar goods manufactured or produced in that State are subjected so however as not to discriminate between goods so imported and goods so manufactured or produced and impose such reasonable restrictions on the freedom of trade, commerce and intercourse with or wi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t of 1935, and whatever else it may or may not include, it certainly includes movement of trade which is of the very essence of all trade and is its integral part. If the transport or the movement of goods is taxed solely on the basis that the goods are thus carried or transported that directly affects the freedom of trade as contemplated by article 301. (5) Restrictions freedom from which is guaranteed by article 301, would be such restrictions as directly and immediately restrict or impede the free-flow or movement of trade. Taxes may and do amount to restrictions, but it is only such taxes as directly and immediately restrict trade that would fall within the purview of article 301. 14.. In the year 1962, the Constitution Bench of the Supreme Court consisting of seven Judges in Automobile Transport's case AIR 1962 SC 1406 explained the earlier five-Judge decision in Atiabari Tea Co.'s case AIR 1961 SC 232 in paragraph 17 thus: "We have, therefore, come to the conclusion that neither the widest interpretation nor the narrow interpretations canvassed before us are acceptable. The interpretation which was accepted by the majority in the Atiabari Tea Co. case [1961] 1....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of the Delhi High Court in Amrit Banaspati Co. Ltd. v. Union of India 1973 Tax LR 2546 the Supreme Court in Amrit Banaspati Co. Ltd. v. Union of India AIR 1995 SC 1340, discussed the law on this subject which has some relevance in the present context has been summarised as below: "Suffice it to say that it is only when the intra-State or inter-State movement of the persons or goods are impeded directly and immediately as distinct from creating some indirect or inconsequential impediment, by any legislative or executive action, infringement of the freedom envisaged by article 301 can arise. Without anything more, a tax law, per se, may not impair the said freedom. At the same time, it should be stated that a fiscal measure is not outside the purview of article 301 of the Constitution." (Emphasis* supplied) 16.. The Supreme Court in Buxa Dooars Tea Co. Ltd. v. State of West Bengal [1989] 74 STC 447; [1989] 179 ITR 91; AIR 1989 SC 2015 while dealing with the validity of the cess in respect of tea estate under the West Bengal Rural Employment and Production Act, 1976 observed: "Now, for determining the true nature of the legislation, whether it is a legislation in respect ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....riate to elicit the nature of the impugned levy and the manner as to how transactions are effected. An analysis of the provisions of section 4A read with the Schedule and section 2(k) brings forth the following features: (1) The luxury tax is payable on cigarettes at the rate of 5 per cent on the total value of the goods despatched or supplied. (2) It is leviable at the point of supply on the goods involved in business or trade. (3) The tax is payable by the person who uses or consumes the cigarettes. (4) The tax shall be collected by the stockist and paid within such time into the Government treasury. (5) Once the tax is collected by the stockist at the point of first supply in the State, no tax shall be collected at any successive point of supply. (6) The primary liability to pay tax is on the "stockist ", who receives the supply. (7) The stockist is a person who is engaged in the business or trade. (8) For the purpose of business a stockist may manufacture, produce or bring or cause to be brought in the State cigarette. (9) A "stockist" may be a person to whom cigarette is despatched from any place outside the State for supply within the State. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... It cannot be disputed that the subject of the levy, the nature of which defines the quality of the levy, must not be confused with the measure of liability, that is to say, the quantum of the tax. There is a plenitude of case law supporting that principle, among the cases being Union of India v. Bombay Tyre International Ltd. [1986] 59 Comp Cas 460 (SC); [1984] 1 SCR 347; AIR 1984 SC 420." There is no scope for argument in the present case that the impugned levy though impedes the free-flow of cigarette and its movement inter-State and intraState, it is a consequence of an indirect or remote effect of the levy, which does not contravene article 301 because the requirement provided under article 304(b) is not complied with in this case. 21.. In A.B. Abdul Kadir's case AIR 1976 SC 182 the validity of the Kerala Luxury Tax on Tobacco (Validation) Act was challenged on the ground that the provisions of the Act contravened article 301 and were not protected by article 304 of the Constitution. The Supreme Court on this question agreed with the finding of the High Court that the levy directly impedes the free-flow of trade and as such is violative of article 301 of the Cons....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... J. said in Cape Brandy Syndicate v. Inland Revenue Commissioner [1921] 1 KB 64. "In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used." In order to say that the impugned Act is a compensatory measure it must be seen what is imposed is a fee and not a tax. The distinction between tax and fee is evident from the following passage laid down by Colley: "A charge fixed by statute for the service to be performed by an officer, where the charge has no relation to the value of the services performed and where the amount collected eventually finds its way into the treasury of the branch of the Government whose officer or officers collect the charge is not a fee but a tax." Therefore, it is arduous to entertain a plea what is authorised under the provisions of the impugned Act is a fee and hence it is compensatory in nature. A cursory reading of the impugned provisions will demonstrate that they are not provisions intended to regulate the trade or business in c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....State of Madras v. N.K. Nataraja Mudaliar [1968] 22 STC 376 (SC); AIR 1969 SC 147 as to the scope of article 301 declared: "This article is couched in terms of the widest amplitude; trade, commerce and intercourse are thereby declared free and unhampered throughout the territory of India. The freedom of trade so declared is against the imposition of barriers or obstructions within the State as well as inter-State; all restrictions which directly and immediately affect the movement of trade are declared by article 301 to be ineffective." It further observed in paragraph 14 (page 388 of 22 STC) as to the variety of factors on which flow of trade depends for its free movement: "The flow of trade does not necessarily depend upon the rates of sales tax; it depends upon a variety of factors, such as the source of supply, place of consumption, existence of trade channels, the rates of freight, trading facilities, availability of efficient transport and other facilities for carrying on trade. Instances can easily be imagined of cases in which notwithstanding the lower rate of tax in a particular part of the country goods may be purchased from another part, where a higher rate of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ferred payment or other valuable consideration, and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made." What is involved here is a "deemed sale" of any goods and it takes place when the supply, by way of or as part of any service or in any other manner whatsoever of goods, being food or any other article for human consumption where such supply or service is for cash, deferred payment or other valuable consideration. Such transfer, delivery and supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and purchase of those goods by the person to whom such transfer, delivery or supply is made. This entry explains the ambit of the expression "sale or purchase of goods" in article 286 and entry 54 of List II and amplifies it by fiction. 28.. When the provisions contained in the impugned Act are tested within the extended definition given to the words "sale or purchase of goods" contained in clause (29A) of article 366, it is plausible ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ale or purchase of goods.-(1) No law of a State shall impose, or authorise the imposition of, a tax on the sale or purchase of goods where such sale or purchase takes place- (a) outside the State; or (b) in the course of the import of the goods into, or export of the goods out of, the territory of India. (2) Parliament may by law formulate principles for determining when a sale or purchase of goods takes place in any of the ways mentioned in clause (1). (3) Any law of a State shall, in so far as it imposes, or authorises the imposition of,- (a) a tax on the sale or purchase of goods declared by Parliament by law to be of special importance in inter-State trade or commerce, or (b) a tax on the sale or purchase of goods, being a tax of the nature referred to in sub-clause (b), sub-clause (c) or sub-clause (d) of clause (29A) of article 366, be subject to such restrictions and conditions in regard to the system of levy, rates and other incidents of the tax as Parliament may by law specify." The argument advanced on behalf of the petitioners is that the impugned levy is a tax on the sale or purchase of goods and it must be necessarily conform to the provisio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....subject. Whilst considering the constitutional amendment, Parliament considered it to be in the public interest that there should be a uniform rate of tax on the goods declared by Parliament to be of special importance. Chapter II of the Central Sales Tax Act formulates principles for determining when a sale or purchase of goods takes place in the course of inter-State trade or commerce in or outside a State or in the course of import or export. Chapter IV deals with goods of special importance in inter-State trade or commerce. By section 14 of the Central Sales Tax Act, the Parliament has declared the goods of special importance in the inter-State trade and commerce. The tobacco is included in entry (ix) of section 14, which runs thus: "(ix) unmanufactured tobacco and tobacco refuse covered under sub-heading No. 2401.00, cigars and cheroots of tobacco covered under heading No. 24.02, cigarettes and cigarillos of tobacco covered under sub-heading Nos. 2403.11 and 2403.21 and other manufactured tobacco covered under sub-heading Nos. 2404.11, 2404.12, 2404.13, 2404.19, 2404.21, 2404.29, 2404.31, 2404.39, 2404.41, 2404.50 and 2404.60 of the Schedule to the Central Excise Tariff Act....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Parliament at a rate higher than the rate specified in section 15(a) of the Central Sales Tax Act. It may be so, but this Court cannot attach total invalidity though it contravenes section 15(a) of the Central Sales Tax Act because the enactment of the impugned Act is specifically authorised under entry 62 of List II. When the power of the Legislature to enact the law is admitted, then it has power to adopt any mode or any manner as it thinks appropriate. The Legislature cannot be compelled to confine the levy only in one form and in one rate. The wisdom of the Legislature is paramount as to the social life of the community and its economic necessities. 34.. However, the impact of the levy is totally different when it is viewed within the framework of the guarantee of freedom of trade, commerce and intercourse declared under article 301 of the Constitution. Section 4A of the impugned Act in substance and form imposes a levy of tax at the rate of 5 per cent on the despatch of cigarettes for supply made in the course of inter-State trade and commerce which is declared to be free. In other words, it is an imposition of tax direct on the movement of goods at the rate higher than 4 p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the financial year in respect of tobacco after deducting a sum equal to 2.192 per cent of the said proceeds as being attributable to the Union territories, as set out against it in column 2. Item 2 of Schedule II is as follows: 2.. Tobacco-During the financial year commencing on the 1st day of April, 1984 there shall be paid to each of the States specified in column 1 of the Table below such percentage of the net proceeds of additional duties levied and collected during that financial year in respect of tobacco, after deducting therefrom a sum equal to 2.192 per cent of the said proceeds as being attributable to Union territories, as is set out against it in column 2: Provided that if during that financial year there is levied and collected in any State a tax on the sale or purchase of tobacco by or under any law of that State, no sums shall be payable to that State under this paragraph in respect of that financial year, unless the Central Government by special order otherwise directs. The argument is that during the relevant financial years the excise duty on tobacco has been collected by virtue of section 4 of the 1957 Act and therefore the State is precluded from col....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed item of tobacco is invalid. If it is a levy of tax directly on sale or purchase of cigarettes it may be possible to argue that such levy contravenes the provisions of those Acts. But the impugned Act as well as the Kerala General Sales Tax Act and the 1957 Act derive sanction from specific legislative entries under Lists I and II of the Seventh Schedule. 39.. What is submitted is the levy of excise duty in the guise of "luxury tax" on manufacture of cigarettes is really colourable and the impugned tax is consequently unconstitutional. The 1957 Act is a legislation under entry 84 of List I. As aforesaid the levy of luxury tax is under entry 62 of List II. When the exercise of power by the Parliament and State Legislature is specifically under the related legislative entries this Court cannot assume such powers are misused or misapplied in order to increase the revenue.It is not the function of this Court to restrain the Legislatures from exercising their legitimate legislative powers on the specified subjects. The contention in this regard is rejected. 40.. It is argued that the cigarette manufacture is an industry which was at all relevant times and continues at present to....
X X X X Extracts X X X X
X X X X Extracts X X X X
....td. v. State of Karnataka (1985) Supp SCC 476 considered the validity of the Karnataka Agricultural Produce Marketing (Regulation) Act, 1966. The Supreme Court in the above case observed in paragraph 28 as follows: "Thus, it would appear that in view of the recent decisions, once the Centre takes over an industry under entry 52 of List I and passes an Act to regulate the legislation, the State Legislature ceases to have any jurisdiction to legislate in that field and if it does so, that legislation would be ultra vires the powers of the State Legislature." Therefore the Supreme Court has struck down that part of the Karnataka Act which took in itself the power to levy market fee on tobacco or its products. The court further said: "Even if the products may be sold in the markets in Karnataka or near about the same place situated in that State, the power to levy fees will not belong to that State; it will remain with Centre which would regulate the sale and purchase of tobacco. It may be reiterated at the risk of repetition that an application for registration with the Tobacco Board was made by the Karnataka Government which was, however, rejected by the Board.This indirectl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....conflict with the power conferred by the Coal Mines Nationalisation Act on the Union Government to regulate and develop the coal mines so as to ensure rational and scientific utilisation of coal resources. The paramount purpose behind the declaration contained in section 2 of the Mines and Minerals (Regulation and Development) Act, 1957 is not in any manner defeated by the legitimate exercise of taxing power under section 69(d) of the Act of 1973." What is required to be examined in the present case is whether the State law has substantially transgressed on the field occupied by the law of Parliament. The subject-matter of the impugned Act namely, the levy of tax on cigarette is different from the subject of the enactment under the Industries (Development and Regulation) Act, 1951 and the Tobacco Board Act. Both these Central enactments do not deal with the levy of tax on tobacco or cigarette. The following observation of the Supreme Court in Tika Ramji v. State of Uttar Pradesh AIR 1956 SC 676 is relevant in the present context: "If the two fields were different and the Central legislation did not intend at all to cover that field, the field was clear for the operation of St....