The Supreme Court held that the long-pending reference on the legislative competence of State Legislatures to impose a surcharge, additional tax, levy or cess computed on the basis of a validly levied sales or purchase tax had been rendered infructuous, and reaffirmed that S. Kodar v. State of Kerala was correctly decided and continued to be good law.

The Court had reserved its judgment on 22 September in a long-pending reference concerning the legislative competence of State Legislatures to impose a surcharge, additional tax, levy or cess computed on the basis of a validly levied sales or purchase tax.

The seven-Judge Bench headed by Chief Justice Surya Kant held that the 1999 reference in Arjun Flour Mills v. State of Odisha did not survive for adjudication, as the relevant constitutional entry and State enactments had since been substituted or replaced.

The Court held that no subsisting decision conflicted with Kodar, which treated an additional tax or surcharge computed as a percentage of sales tax payable as an enhancement of the rate of sales tax falling within Entry 54 of List II.

The Bench comprising Chief Justice Surya Kant, Justice K.V. Viswanathan, Justice S.V. N. Bhatti, Justice Joymalya Bagchi, Justice N.V. Anjaria, Justice Arun Palli and Justice V. Mohana held, "The reference is answered as having been rendered infructuous. The question of the legislative competence of the State Legislatures to levy the impugned surcharge shall be governed by the law declared in S. Kodar. The questions as to (a) the validity of Section 30AA of the Punjab General Sales Tax Act, 1954 in so far as it requires industry units otherwise exempted from sales tax to pay the surcharge, and (b) whether the proceeds of the cess levied under the Punjab Social Security Act, 2000 could be credited directly to the Punjab Social Security Fund without first forming part of the Consolidated Fund of the State under Article 266 of the Constitution, are left open."

"Nothing stated in this order shall be perceived as an expression of opinion on these questions. All other contentions of the parties in the individual matters, including those relating to the assessments, review of levy and the consequential relief, are also left open. The Registry is directed to list the lead matter and the connected matters before the appropriate regular Bench for disposal on their individual merits, in accordance with the observations made hereinabove and after taking requisite directions from the Hon’ble Chief Justice", the Court directed.

Chief Justice Kant pronounced that judgment on behalf of himself, Justice S.V. N. Bhatti, Justice Joymalya Bagchi, Justice N.V. Anjaria, Justice Arun Palli and Justice V. Mohana. Justice K.V. Viswanathan gave a concurring opinion. 

The main issue was with respect to the legislative competence of a state legislature to levy a tax on the sale or purchase of goods under entry 54 of list 2 of the 7th schedule to the Constitution on sale tax payable by a dealer rather than directly on his turnover.

The Court dealt with the entire case law, starting from India Cements, then Kodar. It also dealt with the statutory scheme of the Orissa Act and the Punjab Act, then the Punjab Social Security Act of 2000. Then it also dealt with the constitutional framework on taxation, the new regime which ultimately came with GST and how those Acts and statutes have now become redundant.

The Court observed, "The reference arose out of a perceived conflict between Hoechst Pharmaceuticals and India Cement, and that was enlarged by an order dated 6th October 1999 on account of the need to consider S. Kodar. The decision in India Cement was concerned with cess on royalty in a field covered by the MMDR Act. It did not hold that a levy computed as a percentage of another tax is, for that reason, beyond the competence of the legislature, and, in principle, such a levy, as an increment to any existing tax, is to be judged in the same way as the tax. The premise of India Cement, namely that royalty is a tax, has been overruled by Mineral Area Development Authority."

The Court held that there was, therefore, no subsisting decision of the Court which is in conflict with S. Kodar.

It also clarified that S. Kodar squarely holds that an additional tax or surcharge computed as a percentage of the sales tax payable is an enhancement of the rate of sales tax and a tax on the sale or purchase of goods within Entry 54 of List II as it then stood.

"That decision continues to hold the field. The constitutional entry and the State enactments under which the impugned levies were imposed have since been substituted or replaced, and the question referred is of no prospective significance. Consequently, the question referred does not survive for adjudication by a seven-Judge Bench, and the reference has been rendered academic", it added.

Justice Viswanathan's View

Justice Viswanathan highlighted that the preliminary question was raised as to whether at all the reference was warranted and, in any event, whether there was any life left in the reference. He added that since the reference is pivoted on the holdings in Hoechst and India Cements, there was a need to examine the said judgments also, in light of the march of law thereafter. 

He opined, "What is important to notice is that Hoechst followed Kodar and is in consonance with Kodar. There is no conflict between Kodar and Hoechst. Certain additional contentions peculiar to manufacturers and producers of drugs were also discussed, since arguments based on the Essential Commodities Act were advanced...As would be clear from the discussion, India Cements concerned the question whether royalty was a tax and whether cess on royalty could have been imposed by the State Legislature. The competing entries which were concerned in that case were Entry 54 of List I and Entries 23, 45, 46 and 49 of List II. In S. Kodar, the entry concerned was only Entry 54 of List II, which was only subject to Entry 92A of List I, which dealt with tax on sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter-State trade or commerce."

He added that there was no issue with regard to Entry 92A being engaged. The only other aspect on the issue of competence of the State Legislature in Kodar was that the levy was in the nature of a tax on income, since there was a prohibition on pass-through. 

"In Hoechst, the only other entry which was engaged along with Entry 54 of List II was Entry 33 of List III, which dealt with essential commodities. India Cements was a case where mining lessees sought to vest the power of levy of cess on royalty in the Union Legislature by contending that royalty was a tax. India Cements involved qualitatively different issues, and the said case could not have been brought in by the reference to try and make inroads into Kodar", he said.

He then discussed India Cements. It observed that the case concerned the question whether royalty was a tax and whether a cess on royalty could have been imposed by the State Legislature. The competing entries in that case were Entry 54 of List I and Entries 23, 45, 46 and 49 of List II. In Kodar, the only entry involved was Entry 54 of List II, which was subject only to Entry 92A of List I, dealing with tax on the sale or purchase of goods, other than newspapers, in the course of inter-State trade or commerce.

No issue arose with regard to Entry 92A being engaged. The only other challenge to the competence of the State Legislature in Kodar was that the levy was in the nature of a tax on income, since there was a prohibition on pass-through. That argument was repelled.

He added, "The concession in Hoechst did not detract from the detailed discussion and holdings on the aspect of legislative competence. There is no conflict between Kodar and Hoechst. India Cements, which was also the basis for the reference in Kodar, had really no bearing, considering that the genre of the dispute involved there was totally different. The legislative entries were different, and the principles of law that engaged the Court were completely different. No other argument challenging the correctness of the finding in Kodar was made. For the reasons stated above, it is held that Kodar has been correctly decided, continues to be good law and needs no reconsideration."

He noted that no other argument challenging the correctness of the finding in Kodar was made. For the reasons stated, it was held that Kodar was correctly decided, continued to be good law and required no reconsideration.

The Court directed that the appeals were placed before the Chief Justice for reference to the appropriate Bench. The matter relating to the Punjab Social Security Act was also placed before the Chief Justice, since there was consensus at the Bar that the issue need not be debated before a Bench of seven Judges. The reference was answered accordingly.

Cause Title: Arjun Flour Mills v. State of Odisha and Ors. [Civil Appeal No(s). 8763/1994]

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