AI Drafter 
TaxTMI 
TaxTMI 
2023 (5) TMI 326
X X X X Extracts X X X X
X X X X Extracts X X X X
....Mr. Dhruv Agrawal, Sr. Adv. Mr. Nalin Talwar, Adv. Mr. Praveen Kumar, AOR Mr. Nishit Agrawal, Adv. Ms. Sunaina Kumar, Adv. Ms. Kanishka Mittal, Adv. For the Respondent : Mr. Mukesh Kumar Maroria, AOR Mr. M. Yogesh Kanna, AOR Mr. R K Raizada, Sr. Adv. Mr. Bhakti Vardhan Singh, AOR Mr. Ankit, Adv. Mr. Sabarish Subramanian, AOR Mr. Vishnu Unnikrishnan, Adv. Mr. C Kranthi Kumar, Adv. Mr. Naman Dwivedi, Adv. Mr. Danish Saifi, Adv. Mr. R. Nedumaran, AOR Mr. Gurmeet Singh Makker, AOR JUDGMENT S. RAVINDRA BHAT, J. 1. This judgment will dispose of appeals arising from judgments of three High Courts, on the question of taxability of pan masala or gutka/gutkha Which is spelt differently in regional contexts as 'gutka' or 'gutkha' or 'guhtka', For convenience, this is hereafter referred to uniformly as 'gutkha', under state enactments. The appellants unsuccessfully argued that state legislatures were not empowered to levy sales tax on those articles, in view of the provision in the Constitution enabling the Union to levy additional duties of excise, and further that in any case, the rate of state tax cannot exceed the limit prescribed by the Central Sales Tax Act, 1956. Brief Fa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Entry 2404.39); snuff (Entry 2404.49); and snuff of tobacco (Entry 2404.50). The entry in relation to chewing tobacco was amended w.e.f. 1993-94. 6. By Finance Act, 1995, 'Pan Masala' was brought under the Heading 21.06. In the year 1995, the Fourth Schedule was amended, and the relevant Clause (8) in Chapter 21 read as follows: "(8) in Chapter 21, - (i) for NOTE 3, the following NOTE shall be substituted, namely: '3. In this Chapter, 'Pan Masala' means any preparation containing betel nuts and any one or more of the following ingredients, namely lime, katha (catechu) and tobacco, whether or not containing any other ingredients, such as cardamom, copra and menthol'. Clause (10) in Chapter XXIV reads as follows: (i) for NOTE 2, for the figures and word '24.02, 24.03 and 24.04', the figures and word '24.01, 24.02, 24.03 and 24.04' shall be substituted." Clause (9) in Chapter XXI reads as follows: "(i) for Heading Nos. 21.06 and 21.07 and the entries relating thereto, the following shall be inserted, namely: 21.06 2106.00 'Pan Masala' 50%" Finance (No. 2) Act, 1996, aga....
X X X X Extracts X X X X
X X X X Extracts X X X X
....883/2007 (DHC). 7. In this batch of appeals, the grievance is in respect of five judgments of the Delhi High Court, on the interpretation of the DST Act. The earliest judgment was delivered in relation to the appeal by M/s Shanti Fragrances; the subsequent judgments have reiterated the ruling in that case. 8. Section 3 of the DST Act imposes local sales tax on every dealer whose turnover exceeds the limit specified in a notification, and who is registered or is liable to pay tax under the CST Act, on all sales effected on or after the commencement of the DST Act. Section 3(6) reads as follows: "no dealer who deals exclusively on one or more classes of goods specified in the Third Schedule shall be liable to pay any tax under this Act." Section 7 of the DST reads as follows: "7. Tax Free Goods (1) No tax shall be payable under this Act on the sale of goods specified in the Third Schedule subject to the conditions and exceptions, if any, set out therein. (2) The Substituted for "The Administrator may, with the previous approval of the Central Government and" by Notification No. F4(120)/94 -Fin.(G)/2137 to 2145 dated 02.03.1998 [Lieutenant ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... stems of the tobacco plant, but does not include any part of a tobacco plant while still attached to the earth." 13. Chapter Note 6 reads as follows: "In this Chapter, "Pan Masala containing tobacco", commonly known as 'Gutka' or by any other name, means any preparation containing betel nuts and tobacco and any one or more of the following ingredients, namely: (i) lime; and (ii) kattha (catechu), whether or not containing any other ingredients, such as cardamom, copra and menthol." Chapter 24 includes Heading No. 2404.49, which reads as under: "Pan Masala containing tobacco" 14. The appellants had urged before the High Court that "gutkha" is "tobacco" and relied on Kothari Products Ltd. v. Government of A.P (2000) 9 SCC 263 [hereafter 'Kothari Products Ltd.'] and State of Orissa v. Radheshyam Gudakhu Factory 1988 (68) STC 92 (SC); (2018) 11 SCC 505 [hereafter 'Radheshyam Gudakhu Factory']. This court in Radheshyam Gudakhu Factory (supra), noted that "tobacco" in Section 2(c) of the ADE Act means goods in Entry 9 of the First Schedule to the CET Act which is as follows: "'Tobacco' means any form of tobacco, wh....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... heads. It was open for the state to levy tax in accordance with the Sales Tax Act; what was needed was to test the legislative competence of the state in levying the tax. It was urged that Entry No. 22 in Third Schedule is a general entry, and Entry No. 46, in the First Schedule is a specific entry. The revenue relied on this court's ruling in Commissioner, Sales Tax, U.P. v. Agra Belting Works [1987] 3 SCR 93: (1987) 3 SCC 140 [hereafter 'Agra Belting Works'], where the Court pointed out that if a notification under a provision In that case, Section 4 - as in Section 7 of the DST Act in the present case grants exemption from tax, and later, a subsequent notification (under another provision) prescribes the rate of tax, the intention is to withdraw the exemption and impose the levy at the rate prescribed in the later notification. The court held that since the power to grant exemption and variation of the rate of tax is with the State, there is no compulsion in the statute that a separate notification recalling exemption is a pre-condition for imposing tax at any rate. The revenue also relied on two cases that followed the ratio in Agra Belting Works (supra) - Sale Tax Officer, Se....
X X X X Extracts X X X X
X X X X Extracts X X X X
....04-09/2002 (Madras HC) 20. In the appeals by Dharampal Satyapal and Kothari Products, a common judgment of the Madras High Court has been challenged. The appellants had urged that gutkha, was a preparation containing not only tobacco, but also betel nut, katechu, lime, flavours, permitted spices, saffron, and that tobacco is its essential character in relation to the dominant object of the user. The percentage of tobacco varies from 7% to 15%. The appellants were aggrieved by the inclusion of the goods as 'Pan Masala' (by whatever name called) - containing betel nuts, that is to say, nut of areca, katechu broken and perfumed, and lime or menthol or sandal oils or cardamom or tobacco or any one or more of these ingredients at Sl. No. 2 of Part-J of the First Schedule read with Section 3(2) of the TNGST Act. The period of dispute is from October, 2000 - February, 2001. The appellants urged - much like in the Delhi cases, that if the goods fell within the description of Sl. No. 1(iv)(d) of the Third Schedule of the TNGST Act, they are exempt from tax by virtue of Section 8. Once the goods are exempted by enumeration under the Third Schedule, Section 8 of the State Act opera....
X X X X Extracts X X X X
X X X X Extracts X X X X
....a. It was, therefore, held that pan masala is different from chewing tobacco or even tobacco. The court also ruled - that applying the General Rules for Interpretation under the CET Act, it was discernible that "pan masala containing tobacco" provides the most specific description for the goods in question, even if tobacco is one of the ingredients in the goods, since the description of pan masala in Heading 21.06 describes the goods more specifically, it had to be preferred, without going into Rule 3(b). What therefore, was held was that the amendment, brought into force from 2001, to the effect that chewing tobacco did not include and never included pan masala containing tobacco, and but for the inclusion of 'pan masala containing tobacco' in Chapter 24 (Heading 2404.49) with effect from 2001, they were goods separately covered under another class altogether, i.e. Heading number 21.06. The Allahabad judgments: P.J. Aromatics CA No. 10374-10379/2014, against impugned judgments dated 12.03.2014 in STR No. 1281-82/2004, and 11.04.2014 in STR No. 789-792/2004 (Allahabad HC), Sarin & Sarin CA No. 8617/2014, against impugned judgment dated 25.04.2014 in TTR No. 91/2005 (Allahabad HC....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... decisions, as well as the judgment of this court, in Kothari Products Ltd. (supra) and held that in view of the specific provision in the APGST Act, the High Court held that gutkha (gudaku), an entry under the First Schedule to the ADE Act, was exempted from tax under the APGST Act. The High Court further held that there was no provision corresponding to the APGST Act in the UPTT Act and that the earlier notification (of 1985), was much wider and included tobacco products like gutkha, and pan masala containing tobacco which were exempted by virtue of Section 4(1) and by not with reference to any statute like the CET Act, etc. Therefore, it was ruled that the contention that something was included in the CET Act, would stand exempted from tax was not correct, unless the State Act contained a specific provision to that effect. Appellants' contentions 29. Mr. Dhruv Agarwal, learned senior counsel appearing in the Delhi cases urged that the heading of Section 7(1) of the DST Act is "Tax free goods" and it uses the phrase "no tax shall be payable". In view of Entry 22 of Schedule III read with Section 7(1), gutkha was "tax free goods" and as per specific mandate of Section 7(1) "....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ive of any presumed intention of the Legislature in amending the First Schedule, as long as the Entry in the Third Schedule remained unamended, there was not subject to levy. 32. It was urged that so far as the other line of judgments mentioned are concerned, Agra Belting Works (supra) was a majority judgment of two judges and one judge expressed a dissenting opinion. In that case there were no 'tax free goods' under the statute as in the present case. Instead, that was a case of an Exemption Notification where there was another Notification providing the rate. In the judgment, the combined effect of two Notifications was considered. This court relied on Agra Belting Works (supra) in Dealing Dairy Products (supra), and relied on both these cases, when deciding Krishna Kumar Kabra (supra). In all the three cases, there was no issue relating to 'tax free goods' as in the present case. 33. It was next submitted that Entry 22 of the Third Schedule of the DST Act amounts to a 'Legislation by way of Incorporation' so far as it includes a specific provision from the CEA defining 'tobacco' for the purposes of formulating provisions under the DST Act. The Lt. Governor ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... taxed as an 'unclassified item' or what can be termed as a 'residuary entry'. Thus, the question posed was whether the pan masala containing tobacco i.e., "gutkha" is taxable as declared goods under Entry 14(ix) of the CST Act or as an unclassified item or in the residuary entry. 37. It was submitted that "Pan masala containing tobacco" is a chewing tobacco for several reasons. One, the entry has to be read as widely as possible and any form of "chewing tobacco" including any of its preparations will form part of that entry. Two, gutkha is essentially a preparation of chewing tobacco and what makes it distinct from plain Pan masala are its essential characteristics i.e., tobacco (which is in gutkha). Three, it is a settled principle of classification that it is not a percentage of a particular item in the commodity which will determine the nature of product. Four, undisputedly "gutkha" is sold by the appellant PJ Aromatics under a brand name "Jeet". Therefore, it was urged that it will fall in entry 2404.41 which is specifically covered under Section 14(ix). 38. It was further argued that Entry 21.06 of the CET Act has no relevance for the present purpose when notifications ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ad to be in terms of the changing definitions of tobacco under the Central enactments; reliance was placed on decisions reported as State of Madhya Pradesh v. M.V. Narsimhan [1976] 1 SCR 6: (1975) 2 SCC 377; Nagpur Improvement Trust v. Vasantrao [2002] Supp (2) SCR 636: (2002) 7 SCC 657, and U.P. Avas Evam Vikas Parishad v. Jainul Islam & Anr. [1998] 1 SCR 254: (1998) 2 SCC 467 for the proposition that in the present case, the definition of tobacco cannot be said to be an instance of legislation by incorporation, but rather, that it is a case of legislation by reference. Therefore, changes in the statute will automatically be reflected in the previous law. 44. It was urged that "Pan Masala containing tobacco" and "chewing tobacco" are not identical. They undoubtedly were included under the same heading. However, they were not one commodity. It was argued that the amendment with effect from 2001 that "chewing tobacco" does not include, and never included "Pan Masala containing tobacco" and but for the inclusion of "Pan Masala containing tobacco" in Chapter 24 and sub-heading 2404.49 with effect from 2001, it would have been goods covered by Heading 21.06. The General Rules for In....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ncluding preparations commonly known as khara masala, kimam, dokta, zarda, sukha and surti. 47. Parliament Act 22 of 1995, substituted Note-3 to Chapter 21 of the CET Act. "Pan Masala" was described as "any preparation containing betel nuts and any one or more of the following ingredients, viz., lime, katha, katechu or tobacco, whether or not containing any other ingredients such as cardamom, copra and menthol". The primary ingredient of pan masala therefore, is betel nut, which could be mixed with other ingredients in combination or in isolation. This position prevailed as on 01.03.1988. In 1995, the definition underwent a change. Betel nuts remained the essential ingredient along with "lime, katha or tobacco" together, or separately. Whether the product contained cardamom, copra, and menthol or not was irrelevant: yet one of the three ingredients (lime, katha and tobacco), had to be found in the preparation known as 'pan masala'. By Parliament Act 33 of 1996, the description to Chapter Heading 24.04 and sub-headings under it were re-numbered. The description of goods was reclassified. There was no change in Chapter 21; Heading 21.06 continued to be only 'pan masala....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r the ADE Act. The High Court held, interpreting the CET Act that each chapter contained a table, specifying against the description of "goods" in each sub-heading and the rates at which both basic duty as well as additional duty are levied. Chapter 21 deals with "Miscellaneous Edible Preparations". Note 3 to that chapter states that in that chapter "pan masala" meant any preparations containing betel nuts and any one or more of ingredients, namely, lime, katha (catechu) and tobacco, whether or not containing any other ingredients, such as cardamom, copra and menthol. It was held that "chewing tobacco and preparations containing chewing tobacco" is comprehensive enough to take in its fold gutkha which contains 7% chewing tobacco. The court then ruled that having regard to the ingredients of gutkha, it fell within the meaning of "pan masala" and was covered by heading 21.60 and subjected to basic duty of Central Excise, but no additional duty. Chapter 24 deals with "tobacco and manufactured tobacco substitutes, etc.". The court held that there was no reference to "gutkha" as such in any one of the headings and sub-headings of that chapter. 51. It was held by the Full Bench that p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....404.11 at the rate of 5% and Gudaku not bearing a brand name is subject to tax at nil rate under Entry 2404.12. The Schedule to the Central Excise Act also makes the same distinction between Gudaku bearing a brand name and Gudaku not bearing a brand name under the sub-Heading, "Other manufactured tobacco and manufactured tobacco substitutes; homogenised or 'reconstituted' tobacco; tobacco extracts and essences". 4. Clearly, therefore, gutka is a tobacco that is covered by an entry in the First Schedule to the said Additional Duties of Excise Act and the branded gutka that the appellants manufacture is liable to tax thereunder. Gutka, therefore, is 'goods' covered by the Explanation to the Fourth Schedule to the State Sales Tax Act and, therefore, covered by the exemption contained in Section 8 thereof. The Schedule to the State Act could, therefore, not have been amended by including gutka as a kind of pan masala in entry 194 of its First Schedule. It must, therefore, be held that the inclusion of gutka in the said entry 194 in the manner in which it is done is bad in law and is struck down. The appellants will be entitled to all consequential benefits." ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... sales tax under Section 4 would be exigible to tax by virtue of subsequent notification under Section 3-A specifying the rate of sales tax for any specific item of the class of goods earlier exempted under Section 4. There being no conflict, the reference to Constitution Bench is incompetent." 55. The above holding, that there is no conflict between the Agra Belting Works (supra) line of cases, and the Kothari Products Ltd. (supra) line of cases, therefore, concludes the question urged with respect to efficacy or validity of notifications introducing as entries in a schedule(s) and subjecting them to tax, when those articles are part of the statute or are exempted from taxation. The assessees' contentions therefore, fail on this point. 56. Turning next to the question of whether pan masala was an exempted item, being "tobacco", it is noticeable that pan masala was expressly mentioned in Chapter 21 for the first time, in 1995 in the CET Act. Note 3 defined 'Pan Masala' as "any preparation containing betel nuts and any one or more of the following ingredients, namely lime, katha (catechu) and tobacco, whether or not containing any other ingredients". However, at the sa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e oil and cake also for purposes of the levy. The categories of unmanufactured tobacco enumerated in the entry in the Schedule include "stalks" but not "seeds". This also indicates that seeds are not intended to be included. In other words, the omission of the word "seeds" from the second part of the definition casts its shadow on the first part as well. Indeed it rather looks as if the second part of the definition is intended to restrict rather than expand the scope of the first part. Thirdly, it is to be noticed that the first part of definition is somewhat restrictively worded..." 58. In P. Kasilingam v. PSG College of Technology [1995] 2 SCR 1061 this court followed the same principle, i.e., that "includes" used in conjunction with some words, expands the natural import of the term, to the extent it incorporates those words: "The word "includes", when used, enlarges the meaning of the expression defined so as to comprehend not only such things as they signify according to their natural import but also those things which the clause declares that they shall include. The words "means and includes", on the other hand, indicate "an exhaustive explanation of the meaning ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e or finished (or falling to be classified as complete or, finished by virtue of this rule), presented unassembled or disassembled. (b) Any reference in a heading to a material or substance shall be taken to include a reference to mixtures or combinations of that material or substance with other materials or substances. Any reference to goods of a given material or substance shall be taken to include a reference to goods consisting wholly or partly of such material or substance. The classification of goods consisting of more than one material or substance shall be according to the principles of rule 3. 3. When by application of rule 2(b) or for any other reason, goods are, prima facie, classifiable under two or more headings, classification shall be effected as follows: - (a) the heading which provides the most specific description shall be preferred to headings providing a more general description. However, when two or more headings each refer to part only of the materials or substances contained in mixed or composite goods or to part only of the items in a set put up for retail sale, those headings are to be regarded as equally specific in relation to t....