Capacity-Based Cess Violates Article 14: Karnataka High Court Strikes Down HSNS Cess Levy On Pan Masala
The Court upheld Parliament’s competence to enact a cess law, but held that the levy framework could not survive because it taxed presumed production from pouch-packing machine capacity instead of actual quantity manufactured.
Justice M. Nagaprasanna, Karnataka High Court
The Karnataka High Court has held that a cess imposed on Pan Masala manufacturers on the basis of assumed pouch-packing machine capacity, rather than actual quantity manufactured, is unreasonable, vague and violative of Article 14 of the Constitution.
The Court was hearing a batch of petitions filed by Pan Masala manufacturers and allied entities challenging the constitutional validity of the Health Security and National Security Cess Act, 2025, the Health Security and National Security Cess Rules, 2026, and consequential notifications issued for levy, computation and collection of cess.
A Bench of Justice M. Nagaprasanna upheld the Union’s legislative power to enact a cess law, but struck down the manner in which the levy was structured, holding:
“The power of the Union Government to promulgate a law to levy cess is upheld. The manner in which the Act and the Rules levy the cess is held to be unreasonable and vague, as it is based on assumption of quantity manufactured instead of actual quantity manufactured, failing the tenets of Article 14 of the Constitution of India and to that extent, the Act is held to be unconstitutional. Consequently, the Rules are also held to be unconstitutional.”
Senior Advocate G. Shivadass appeared for the petitioners, while Additional Solicitor General N. Venkataraman appeared for the respondents.
Background
The petitioners were business entities engaged in the manufacture and supply of Pan Masala, packed in pouches through pouch-packing machines and sold at retail sale price.
They challenged the cess regime on the ground that the levy was not based on actual manufacture or supply, but on installed machine capacity and deemed production. The petitioners also argued that once Pan Masala was already subjected to GST, Parliament could not invoke a separate cess mechanism in the manner done under the impugned Act and Rules.
The Union defended the framework by contending that the levy was not GST, that Parliament had power under Article 246(1) read with Entry 97 of List I, and that the regime was intended to address public health and national security concerns.
Court’s Observations
The Court first examined the nature of the levy and noted that the statutory scheme did not tax the actual production of Pan Masala, but the machines used for manufacture and their capacity.
The Court observed: “Section 4 of the Act imposes levy on machines installed or other processes undertaken by them for the manufacture or production of specified goods referred to in Schedule-I at the rates specified in Schedule-II which is computed in the manner provided under Section 5. Therefore, the levy is not on the product but on the machines used for the purpose of the product and the capacity that the machine would generate.”
The Court found that the cess framework treated machines with materially different capacities alike. It noted that a machine producing far fewer pouches per minute was subjected to the same cess as a machine at the higher end of the bracket.
The Court stated: “If one has a machinery that can produce 500 pouches per minute, it is the same cess even if the said machine produces 250 pouches per minute. Further, even if the machinery produces 100 pouches per minute it is the same cess, as Schedule II of the Act clearly indicates that all the manufacturers who produce up to 500 pouches per minute are required to pay similar duty.”
The Court added: “Therefore, there is no rationale in imposition of cess in the said manner.”
The Court also found fault with Rule 15, which permitted abatement only where manufacturing activity remained suspended continuously for fifteen days. It held that genuine shorter interruptions could occur due to machinery breakdown, lack of raw materials, labour shortage or maintenance.
The Court noted: “Such circumstances may not necessarily continue beyond fifteen days. However, even in such cases, the petitioners are still liable to pay cess, thereby incurring further losses in addition to those already suffered on account of the suspension of manufacturing activity. The Rule, therefore, operates arbitrarily and is violative of Article 14 of the Constitution of India.”
Rejecting the Union’s submission that newer machines were now of higher capacity, the Court held that later purchases or market changes could not justify a levy that failed to scrutinise each machine.
The Court observed: “The subsequent sale of machines on the increased capacity and purchase of new machines with higher capacity, by some of the petitioners, cannot be viewed as a ground to levy cess, as every machinery will have to come under scrutiny. Therefore, the Act ought to have been drawn on some other rationale and not from the fact that machines have to produce 500 pouches per minute.”
However, the Court rejected the petitioners’ broader challenge to Parliament’s competence. It held that the cess was not GST because its taxable event was ownership or possession of an installed machine, not supply of goods or services.
The Court held: “The taxable event in terms of the impugned Act being the ownership or possession of the installed machine and not on the supply of goods and services which is a taxable event under the GST, Article 246A is not applicable. The impugned cess is also not a surcharge as obtaining under Article 271.”
The Court further observed that Entry 97 of List I vested Parliament with residuary power to legislate on matters not enumerated in List II or List III, including taxes not mentioned in either list.
Conclusion
Allowing the petitions in part, the Court upheld the Union Government’s power to enact a cess law, but held that the impugned manner of levy failed Article 14. It struck down the Act to that extent, declared the Rules unconstitutional, and obliterated the consequential notifications.
The Court, however, clarified that its ruling would not prevent the revenue from bringing in a fresh law consistent with the observations made in the judgment.
Cause Title: Dhariwal Industries Pvt. Ltd. v. Union of India
Appearances
Petitioners: Senior Advocate G. Shivadass with Advocates Prashanth Shivadass, Rishab J., Sampath Keludeppa Mutthalageri, Sneha Suresh and Tarikar Praveen
Respondents: Additional Solicitor General N. Venkataraman with Senior Standing Counsel Aravind V. Chavan