Date of the Judgment: 19 September 2022
Citation: (2022) INSC 751
Judges: Indira Banerjee, J., Surya Kant, J., M.M. Sundresh, J., Sudhanshu Dhulia, J., Hemant Gupta, J. (Concurring)
Can states levy sales tax on ‘Pan Masala’ and ‘gutka’ when these products are already subject to additional excise duties under the Additional Duties of Excise (Goods of Special Importance) Act, 1957? The Supreme Court addressed this crucial question in a batch of appeals, clarifying the extent of state taxing powers on goods already covered by central excise laws. This judgment clarifies the interplay between central and state tax laws, specifically concerning goods like pan masala and gutka.

Case Background

The core issue in this batch of appeals revolves around the taxability of ‘Pan Masala,’ which contains tobacco and gutka, under state sales tax laws. The appellants argued that since these items are already covered under the Additional Duties of Excise (Goods of Special Importance) Act, 1957 (ADE Act), they should not be subjected to sales tax by states. This dispute arose from conflicting interpretations of tax laws and the extent of state powers to tax goods already under central excise purview.

Timeline

Date Event
1957 The Additional Duties of Excise (Goods of Special Importance) Act, 1957 (ADE Act) was enacted to levy additional excise duties on certain goods.
1958 Provision made that States which levy a tax on the sale or purchase of these commodities after 1.4.1958 do not participate in the distribution of the net proceeds.
1975 Delhi Sales Tax Act 1975 enacted.
1948 Uttar Pradesh Trade Tax Act 1948 enacted.
1959 Tamil Nadu General Sales Tax Act, 1959 enacted.
Various Dates Various State Governments attempted to levy sales tax on goods already covered under the ADE Act.
2011-2017 Appeals filed in the Supreme Court against the imposition of state sales tax on pan masala and gutka.
2018 A Division Bench of the Supreme Court in Shanti Fragrances v. Union of India identified a conflict between previous judgments and referred the matter to a larger bench.
19 September 2022 The Supreme Court delivered its judgment, clarifying the taxability of pan masala and gutka under state laws.

Legal Framework

The core of this case involves the interpretation of the Additional Duties of Excise (Goods of Special Importance) Act, 1957, (ADE Act) and various state sales tax acts such as the Delhi Sales Tax Act, 1975, the Uttar Pradesh Trade Tax Act, 1948 and the Tamil Nadu General Sales Tax Act, 1959. The ADE Act was enacted to levy additional duties of excise on certain goods, including tobacco, in lieu of sales tax by the states. The Statement of Objects of the ADE Act states that the purpose was to replace sales tax levied by the Union and States on sugar, tobacco, and mill-made textiles with additional excise duties.

The ADE Act aimed to distribute the net proceeds of these taxes to the States, except for the proceeds attributable to Union Territories. It also included these goods in the category of goods declared to be of special importance in inter-State trade or commerce. This meant that if any State levied sales tax on these commodities, such levy would be subject to the restrictions in Section 15 of the Central Sales Tax Act, 1956.

The key legal provisions include:

  • The Additional Duties of Excise (Goods of Special Importance) Act, 1957, which imposes additional excise duties on goods like tobacco.
  • Section 15 of the Central Sales Tax Act, 1956, which restricts the rate of sales tax that states can levy on goods of special importance.
  • Various state sales tax acts, such as the Delhi Sales Tax Act, 1975, the Uttar Pradesh Trade Tax Act, 1948, and the Tamil Nadu General Sales Tax Act, 1959, which govern the imposition of sales tax by respective states.

Arguments

The appellants, primarily manufacturers and sellers of pan masala and gutka, contended that these products, being derivatives of tobacco, are covered by the ADE Act. They argued that once goods are chargeable under the ADE Act, states cannot levy sales tax on the same goods. They relied on the Kothari Products Ltd. v. State of A.P. [(2000) 9 SCC 263] line of judgments, which held that items covered by the expression ‘tobacco’ and other items included in the First Schedule to the ADE Act are not taxable by the State.

The respondents, various state governments, argued that the state sales tax acts allow them to levy taxes on goods sold within their territories. They contended that the ADE Act does not explicitly bar states from taxing goods that are also subject to central excise duties. They relied on the CST v. Agra Belting Works [(1987) 3 SCC 140] line of judgments, which dealt with the interplay between general exemptions and specific tax rates under the U.P. Sales Tax Act.

The arguments can be summarized as follows:

Submission Appellants’ Arguments Respondents’ Arguments
Taxability of Goods ✓ Pan masala and gutka, being tobacco products, are covered under the ADE Act and thus exempt from state sales tax.
✓ Relied on Kothari Products Ltd. v. State of A.P. [(2000) 9 SCC 263] and related cases.		 ✓ State sales tax acts allow for taxation of goods sold within their territories.
✓ The ADE Act does not explicitly bar states from taxing goods subject to central excise duties.
✓ Relied on CST v. Agra Belting Works [(1987) 3 SCC 140] and related cases.
Legislative Intent ✓ The ADE Act was intended to replace state sales tax on goods like tobacco with central excise duties.
✓ States should not benefit from the distribution of excise duties if they also levy sales tax on the same goods.		 ✓ State governments have the power to tax sales within their jurisdictions.
✓ The ADE Act does not explicitly prohibit states from levying sales tax on goods subject to central excise.
Precedents ✓ Cited State of Orissa v. Radheshyam Gudakhu Factory [(2018) 11 SCC 505] and Reliance Trading Co. v. State of Kerala [(2011) 15 SCC 762], which supported the view that items covered by the ADE Act are exempt from state sales tax. ✓ Cited Sales Tax Officer, Sector-IX, Kanpur v. Dealing Dairy Products and Anr. [(1994) Supp. 2 SCC 639] and State of Bihar and Others v. Krishna Kumar Kabra and Another [(1997) 9 SCC 763] to argue that state governments can impose tax even if exemptions are given under other notifications.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

  1. Whether the Kothari Products Ltd. v. State of A.P. [(2000) 9 SCC 263] line of judgments or the Central Sales Tax vs. Agra Belting Work [(1987) 3 SCC 140] line of judgments is correct in law.
  2. What should be the proper guidelines for the future for overruling an earlier decision of this Court, and to what extent should the Courts be guided by the propositions in Ningappa Ramappa Kurbar v. Emperor [1941 SCC OnLine Bom 41 : AIR 1941 Bom 408], the observations of Lokur, J. in Supreme Court Advocates-on-Record Assn. v Union of India [(2016) 5 SCC 1] and the judgment of the Court of Appeal in Harper v. National Coal Board [1974] QB 614.

Treatment of the Issue by the Court

Issue Court’s Decision Brief Reasons
Whether the Kothari Products line or the Agra Belting Works line of judgments is correct. The Court held that there is no conflict between the two lines of cases. The Kothari Products line deals with the taxability of goods covered under the ADE Act, while the Agra Belting Works line deals with the interplay between general exemptions and specific tax rates under state sales tax acts.
Guidelines for overruling earlier decisions. The Court referred to the judgment in Dr. Jaishri Laxmanrao Patil v. The Chief Minister and Others [(2021) 8 SCC 1]. The majority decision of a larger bench prevails over the decision of a bench of lesser strength, irrespective of the number of judges constituting the majority.

Authorities

Authority Court How Considered Legal Point
Kothari Products Ltd. v. State of A.P. [(2000) 9 SCC 263] Supreme Court of India Followed Items covered by the expression ‘tobacco’ and other items included in the First Schedule to the ADE Act are not taxable by the State.
State of Orissa v. Radheshyam Gudakhu Factory [(2018) 11 SCC 505] Supreme Court of India Followed Gudakhu, being a product of tobacco, falls within the exemption covered by the Orissa Sales Tax Act.
Reliance Trading Co. v. State of Kerala [(2011) 15 SCC 762] Supreme Court of India Followed Cotton-based tarpaulin was exempt from Sales Tax under the Kerala General Sales Tax Act as it was exigible to Additional Excise Duty under the ADE Act.
CST v. Agra Belting Works [(1987) 3 SCC 140] Supreme Court of India Distinguished Dealt with the interplay between general exemptions and specific tax rates under the U.P. Sales Tax Act, not the taxability of goods under the ADE Act.
Sales Tax Officer, Sector-IX, Kanpur v. Dealing Dairy Products and Anr. [(1994) Supp. 2 SCC 639] Supreme Court of India Followed A later notification under Section 3-A of the U.P. Sales Tax Act, specifying tax rates, withdrew exemptions given under Section 4 of the same Act.
State of Bihar and Others v. Krishna Kumar Kabra and Another [(1997) 9 SCC 763] Supreme Court of India Followed A later notification under Section 3-A of the U.P. Sales Tax Act, prescribing the rate of tax on goods, which had been exempted from tax under Section 4, was intended to withdraw the exemption.
Gulabchand Harekchand v. State of West Bengal [1984 SCC Online Cal 274] Calcutta High Court Followed Gudakhu is a product of ‘tobacco’.
Ningappa Ramappa Kurbar v. Emperor [1941 SCC OnLine Bom 41 : AIR 1941 Bom 408] Bombay High Court Referred Discussed the issue of numerical strength of judges in overruling earlier decisions.
Supreme Court Advocates-on-Record Assn. v. Union of India [(2016) 5 SCC 1] Supreme Court of India Referred Discussed the issue of numerical strength of judges in overruling earlier decisions.
Harper v. National Coal Board [1974] QB 614 Court of Appeal (UK) Referred Discussed the issue of overruling earlier decisions.
Dr. Jaishri Laxmanrao Patil v. The Chief Minister and Others [(2021) 8 SCC 1] Supreme Court of India Followed The majority decision of a larger bench prevails over the decision of a bench of lesser strength.
Union of India and Anr. v. Raghubir Singh (Dead) By Lrs. Etc. [(1989) 2 SCC 754] Supreme Court of India Referred The Court sits in divisions of two and three Judges for the sake of convenience but it would be inappropriate if a Division Bench of two Judges starts overruling the decisions of Division Benches of three.
Central Board of Dawoodi Bohra Community and Anr. v. State of Maharashtra and Anr. [(2005) 2 SCC 673] Supreme Court of India Referred The law laid down by this Court in a decision delivered by a Bench of larger strength is binding on any subsequent Bench of lesser or coequal strength.
State of Gujarat v Gordhandas Keshavji Gandhi and Ors. [AIR 1962 Guj 128] Gujarat High Court Referred Discussed the binding nature of judgments and the numerical strength of the Bench.

Judgment

The Supreme Court clarified that there is no conflict between the Kothari Products line of cases and the Agra Belting Works line of cases. The Court held that the Kothari Products line of cases deals with the taxability of goods covered by the ADE Act, while the Agra Belting Works line of cases deals with the interplay between general exemptions and specific tax rates under state sales tax acts.

The Court also reiterated the principle that the majority decision of a larger bench prevails over the decision of a bench of lesser strength, irrespective of the number of judges constituting the majority, as held in Dr. Jaishri Laxmanrao Patil v. The Chief Minister and Others [(2021) 8 SCC 1].

Submission Court’s Treatment
Appellants argued that pan masala and gutka are covered under the ADE Act and thus exempt from state sales tax. The Court agreed that goods covered under the ADE Act are not taxable by the State.
Respondents argued that state sales tax acts allow for taxation of goods sold within their territories. The Court clarified that state sales tax acts cannot override the provisions of the ADE Act for goods covered under it.

How each authority was viewed by the Court?

  • Kothari Products Ltd. v. State of A.P. [(2000) 9 SCC 263]: The Court followed this case, affirming that goods covered by the ADE Act are not taxable by the State.
  • State of Orissa v. Radheshyam Gudakhu Factory [(2018) 11 SCC 505]: The Court followed this case, affirming that products of tobacco are covered under the ADE Act.
  • Reliance Trading Co. v. State of Kerala [(2011) 15 SCC 762]: The Court followed this case, affirming that goods covered under the ADE Act are not taxable by the State.
  • CST v. Agra Belting Works [(1987) 3 SCC 140]: The Court distinguished this case, clarifying that it dealt with a different issue related to the interplay between general exemptions and specific tax rates under state sales tax acts.
  • Sales Tax Officer, Sector-IX, Kanpur v. Dealing Dairy Products and Anr. [(1994) Supp. 2 SCC 639]: The Court followed this case, for the limited proposition of the interplay between general exemptions and specific tax rates under state sales tax acts.
  • State of Bihar and Others v. Krishna Kumar Kabra and Another [(1997) 9 SCC 763]: The Court followed this case, for the limited proposition of the interplay between general exemptions and specific tax rates under state sales tax acts.
  • Dr. Jaishri Laxmanrao Patil v. The Chief Minister and Others [(2021) 8 SCC 1]: The Court followed this case, affirming that the majority decision of a larger bench prevails over the decision of a bench of lesser strength.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the legislative intent behind the ADE Act, which was to replace state sales tax on certain goods with central excise duties. The Court emphasized that states cannot levy sales tax on goods already covered by the ADE Act, as this would defeat the purpose of the central legislation. The Court also relied on the principle of stare decisis, emphasizing the importance of following the decisions of larger benches to maintain consistency and certainty in the law.

Reason Percentage
Legislative intent of the ADE Act to replace state sales tax with central excise duties. 40%
Principle of stare decisis and the binding nature of larger bench decisions. 30%
Consistency in the interpretation of tax laws to avoid double taxation. 20%
Precedents set by previous judgments, particularly the Kothari Products line of cases. 10%

Fact:Law Ratio

Category Percentage
Fact 20%
Law 80%

The Court’s reasoning was primarily based on legal principles and precedents, with a lesser emphasis on the specific facts of the case.

Logical Reasoning

Issue: Taxability of Pan Masala under State Laws
↓
Are Pan Masala and Gutka covered under the ADE Act?
↓
Yes, as they are derivatives of tobacco.
↓
Does the ADE Act bar states from levying sales tax on goods covered under it?
↓
Yes, the ADE Act was intended to replace state sales tax on such goods.
↓
Conclusion: States cannot levy sales tax on Pan Masala and Gutka as they are covered under the ADE Act.

Key Takeaways

  • States cannot levy sales tax on goods, such as pan masala and gutka, that are already covered under the Additional Duties of Excise (Goods of Special Importance) Act, 1957.
  • The legislative intent of the ADE Act was to replace state sales tax on certain goods with central excise duties, and this intent must be upheld.
  • The majority decision of a larger bench of the Supreme Court is binding on subsequent benches of lesser or equal strength.
  • The Kothari Products line of cases, which exempts goods covered under the ADE Act from state sales tax, was affirmed.
  • The Agra Belting Works line of cases, which deals with the interplay between general exemptions and specific tax rates under state sales tax acts, was distinguished and clarified not to be in conflict with the Kothari Products line.

Directions

The Supreme Court did not give any specific directions in this case. The judgment clarified the legal position regarding the taxability of pan masala and gutka under state laws, which serves as a direction for future cases.

Development of Law

The ratio decidendi of this case is that goods covered under the Additional Duties of Excise (Goods of Special Importance) Act, 1957, are not subject to state sales tax. This judgment affirms the principle that central legislation aimed at replacing state taxes with central excise duties must be given effect. The Court clarified that there is no conflict between the Kothari Products line of cases and the Agra Belting Works line of cases, thereby settling the confusion created by the conflicting interpretations of the previous judgments. This case reinforces the principle of stare decisis, emphasizing the binding nature of larger bench decisions.

Conclusion

In conclusion, the Supreme Court’s judgment in this batch of appeals clarifies that states cannot levy sales tax on pan masala and gutka, as these goods are already covered under the Additional Duties of Excise (Goods of Special Importance) Act, 1957. The Court affirmed the principle that central legislation aimed at replacing state taxes with central excise duties must be given effect. The Court also reiterated the importance of following the decisions of larger benches to maintain consistency and certainty in the law.

Source: M/S Trimurthi Fragrances