Supreme Court Upholds GST Compensation Cess Act: Union of India vs. Hind Energy and Coal Benefication (2018)

LEGAL ISSUE: Whether the Goods and Services Tax (Compensation to States) Act, 2017 is constitutionally valid and within the legislative competence of the Parliament.

CASE TYPE: Tax Law, Constitutional Law

Case Name: Union of India & Anr. vs. Hind Energy and Coal Benefication (India) Ltd. and other connected matters

Judgment Date: 03 October 2018

Date of the Judgment: 03 October 2018

Citation: (2018) INSC 868

Judges: A.K. Sikri, J., Ashok Bhushan, J.

Can the Parliament levy a cess to compensate states for revenue loss due to the implementation of Goods and Services Tax (GST)? The Supreme Court of India addressed this critical question in a batch of cases, including appeals filed by the Union of India against interim orders of the Delhi High Court. The core issue revolved around the constitutional validity of the Goods and Services Tax (Compensation to States) Act, 2017, and whether it was within the legislative competence of the Parliament to enact such a law. The Supreme Court, in a detailed judgment, upheld the validity of the Act. The bench comprised Justices A.K. Sikri and Ashok Bhushan, with the judgment authored by Justice Ashok Bhushan.

Case Background

Mohit Mineral Pvt. Ltd., a company trading in imported and Indian coal, challenged the Goods and Services Tax (Compensation to States) Act, 2017, and the rules framed under it. The company argued that the Act lacked legislative competence and was unconstitutional. The Finance Act, 2010, had imposed a Clean Energy Cess on coal production, which was repealed by the Taxation Laws (Amendment) Act, 2017, after the introduction of GST. Mohit Minerals sought a set-off of the Clean Energy Cess against the GST Compensation Cess. The Delhi High Court, in an interim order dated 25.08.2017, held that there was a prima facie case regarding the lack of legislative competence of the Parliament to enact the Compensation to States Act, 2017. The High Court provided interim relief to the petitioner, stating that no further payment was required on coal stocks where Clean Energy Cess had already been paid. However, for stocks where no Clean Energy Cess was paid, any payment under the impugned Act would be subject to the outcome of the writ petition.

Similarly, Hind Energy and Coal Benefication (India) Ltd. also challenged the Act, and the Delhi High Court passed an interim order on 08.09.2017, similar to the one passed on 25.08.2017. The Supreme Court stayed the High Court’s interim orders and transferred the writ petitions to itself for final hearing.

Timeline

Course of Proceedings

The Delhi High Court passed interim orders in two separate writ petitions filed by Mohit Mineral Pvt. Ltd. and Hind Energy and Coal Benefication (India) Ltd. The High Court observed a prima facie case regarding the lack of legislative competence of the Parliament to enact the Goods and Services Tax (Compensation to States) Act, 2017. The High Court granted partial ad interim relief, stating that additional levy on coal stocks where Clean Energy Cess had already been paid was not required. The Supreme Court, upon hearing the Special Leave Petitions (SLPs) filed by the Union of India, stayed the interim orders of the High Court. The Supreme Court, on the request of the Attorney General, transferred Writ Petition (C) No.7459 of 2017 to itself to be heard along with the SLP.

Legal Framework

The core of the legal framework lies in the Constitution of India, particularly Part XII dealing with Finance, and the amendments introduced by the Constitution (One Hundred and First Amendment) Act, 2016. Article 246A grants concurrent powers to the Parliament and State Legislatures to make laws on GST. Article 269A deals with the levy and collection of GST in the course of inter-state trade or commerce. Article 270 outlines the distribution of taxes between the Union and the States. Section 18 of the Constitution (One Hundred and First Amendment) Act, 2016, empowers the Parliament to make laws for compensating states for revenue loss due to GST implementation.

The Goods and Services Tax (Compensation to States) Act, 2017, was enacted to provide compensation to states for revenue loss due to GST. Section 8 of the Act provides for the levy and collection of cess on intra-state and inter-state supplies of goods and services. The Taxation Laws (Amendment) Act, 2017, repealed the Finance Act, 2010, which levied the Clean Energy Cess.

Relevant constitutional provisions include:

• Article 246A: Special provision with respect to goods and services tax.
• Article 269A: Levy and Collection of goods and services tax in course of inter-State trade or commerce.
• Article 270: Taxes levied and distributed between the Union and the States.

Relevant provisions of the Constitution (One Hundred and First Amendment) Act, 2016 include:

• Section 18: Compensation to States for loss of revenue on account of introduction of goods and services tax.

Relevant provisions of the Goods and Services Tax (Compensation to States) Act, 2017 include:

• Section 8: Levy and collection of cess.

Arguments

The petitioner, Mohit Mineral Pvt. Ltd., argued that the Constitution (One Hundred and First Amendment) Act, 2016, aimed to consolidate indirect taxes, including cesses and surcharges, into the GST. The Taxation Laws (Amendment) Act, 2017, repealed various cesses, including the Clean Energy Cess. The petitioner contended that the Compensation to States Act, 2017, was repugnant to the constitutional amendment and lacked legislative competence. It was argued that Section 18 of the Constitution (One Hundred and First Amendment) Act, 2016, only empowered the Parliament to make laws for compensation, not to levy a cess. Further, the petitioner argued that levying both GST and Compensation Cess on the same transaction amounted to double taxation. The petitioner also sought a set-off of the Clean Energy Cess already paid against the GST Compensation Cess.

The Union of India, represented by the Attorney General, argued that a cess is a special kind of tax, and the power to levy it flows from the power to levy the main tax, i.e., GST, under Article 246A. The Union also contended that the Clean Energy Cess and GST Compensation Cess are levied on different transactions for different purposes. The Clean Energy Cess was a duty of excise on coal production, while the GST Compensation Cess is on the supply of goods and services. The Union argued that the High Court erred in holding that credit of Clean Energy Cess should be allowed for paying GST Compensation Cess, as credit provisions are a policy decision of the Executive.

The arguments can be summarized as follows:

Innovativeness of the argument: The petitioner’s argument that the cess is a form of double taxation and violates the spirit of the GST regime by not subsuming all indirect taxes is a novel approach.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether the Compensation to States Act, 2017, is beyond the legislative competence of Parliament?
2. Whether the Compensation to States Act, 2017, violates the Constitution (One Hundred and First Amendment) Act, 2016, and is against its objective?
3. Whether the Compensation to States Act, 2017, is a colourable legislation?
4. Whether the levy of Compensation to States Cess and GST on the same taxing event is permissible in law?
5. Whether, based on the Clean Energy Cess paid by the petitioner till 30th June 2017, the petitioner is entitled to a set-off in the payment of Compensation to States Cess?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Court considered the following authorities:

The Court also considered the following legal provisions:

• Article 246A of the Constitution of India
• Article 248 of the Constitution of India
• Article 269A of the Constitution of India
• Article 270 of the Constitution of India
• Section 18 of the Constitution (One Hundred and First Amendment) Act, 2016
• Section 8 of the Goods and Services Tax (Compensation to States) Act, 2017
• Section 83(3) and 83(6) of the Finance Act, 2010
• Entry 97 of List I of the Seventh Schedule of the Constitution of India

Judgment

The Supreme Court held that the Compensation to States Act, 2017, is within the legislative competence of the Parliament. The Court rejected the argument that the Act violated the Constitution (One Hundred and First Amendment) Act, 2016, or that it was a colourable legislation. The Court also held that the levy of the Compensation to States Cess and GST on the same taxing event is permissible, as they are separate and distinct imposts. The Court further held that the petitioners were not entitled to a set-off of the Clean Energy Cess paid against the GST Compensation Cess.

The following authorities were viewed by the Court as follows:

• Shinde Brothers Etc. Vs. Deputy Commissioner, Raichur & Others Etc., AIR 1967 SC 1512: Definition of cess approved.
• India Cement Ltd. & Others Vs. State of Tamil Nadu & Others, (1990) 1 SCC 12: Definition of cess approved.
• Vijayalashmi Rice Mill & Others Vs. Commercial Tax Officers, Palakol & Others, (2006) 6 SCC 763: Meaning of cess reiterated.
• Union of India Vs. Harbhajan Singh Dhillon, (1971) 2 SCC 779: Test for legislative competence applied.
• Hoechst Pharmaceuticals Ltd. & Others Vs. State of Bihar & Others, (1983) 4 SCC 45: Principle that taxation is a distinct matter for legislative competence reiterated.
• M.P.V. Sundararamier & Co. Vs. State of A.P. & Others, AIR 1958 SC 468: Principle that taxation is a distinct matter for legislative competence reiterated.
• M/s. Doypack Systems Pvt. Ltd. Vs. Union of India & Others, (1988) 2 SCC 299: Expansive meaning of “with respect to” and similar expressions.
• Dewan Chand Builders and Contractors Vs. Union of India and Others, (2012) 1 SCC 101: Distinction between fee and tax discussed.
• Commissioner, Hindu Religious Endowments, Madras Vs. Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt, AIR 1954 SC 282: Distinction between fee and tax discussed.
• Federation of Hotel & Restaurant Associate of India, Etc. Vs. Union of India and others, (1989) 3 SCC 634: Principle that taxes on different aspects of a transaction are permissible.
• Avinder Singh and others Vs. State of Pubjab and others, (1979) 1 SCC 137: Principle that legislature can levy tax twice on the same subject matter.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the constitutional provisions granting legislative power to the Parliament, the nature of a cess as a special kind of tax, and the specific purpose of the Compensation to States Act, 2017. The Court emphasized that the Parliament has the power to make laws with respect to goods and services tax, which includes the power to levy a cess for a specific purpose. The Court also noted that the Clean Energy Cess and the GST Compensation Cess are levied for different purposes, and thus, there is no question of set-off.

The Court’s reasoning can be summarized in the following flowchart:

The Court considered alternative interpretations but rejected them, holding that the Parliament had the legislative competence to enact the Act and that the Act did not violate the constitutional amendment. The Court also rejected the argument of double taxation, stating that the cess was a separate and distinct impost. The Court concluded that the petitioner was not entitled to a set-off of the Clean Energy Cess.

The Court’s decision was based on a detailed analysis of the constitutional provisions, the legislative history, and the nature of a cess. The Court emphasized that the Parliament has the power to make laws with respect to goods and services tax, which includes the power to levy a cess for a specific purpose.

The Court quoted the following from the judgment:

“The expression “cess” as held above means a tax levied for some special purpose, which may be levied as an increment to an existing tax.”

“The Clean Energy Cess and States Compensation Cess are entirely different from each other, payment of Clean Energy Cess was for different purpose and has no bearing or connection with States Compensation Cess.”

“Giving credit or set off in the payment is legislative policy which had to be reflected in the legislative scheme.”

There were no dissenting opinions in this case.

The implications of this decision are that the Parliament has the power to levy a cess for the purpose of compensating states for revenue loss due to the implementation of GST. This decision also clarifies that the GST Compensation Cess is a separate and distinct impost from the GST itself. Further, the decision clarifies that set-off or credit of taxes/cesses is a matter of legislative policy and cannot be claimed as a matter of right.

The Supreme Court did not introduce any new doctrines or legal principles in this case.

Key Takeaways

• The Parliament has the legislative competence to enact the Goods and Services Tax (Compensation to States) Act, 2017.
• The GST Compensation Cess is a separate and distinct impost from the GST itself.
• There is no constitutional bar to levying a cess on the same transaction on which GST is levied.
• Taxpayers are not entitled to a set-off of the Clean Energy Cess against the GST Compensation Cess.
• Credit or set-off of taxes/cesses is a matter of legislative policy.

This judgment has significant implications for the implementation of GST and the financial relationship between the Union and the States. It confirms the Parliament’s power to levy a cess for compensating states and clarifies that such a levy is not double taxation. This decision will impact future cases involving similar issues related to taxation and legislative competence.

Directions

The Supreme Court dismissed the writ petition and allowed the civil appeals filed by the Union of India.

Development of Law

The ratio decidendi of the case is that the Parliament has the legislative competence to enact the Goods and Services Tax (Compensation to States) Act, 2017, and that the levy of the GST Compensation Cess is a valid exercise of legislative power. This judgment upholds the constitutional validity of the Act and clarifies the Parliament’s power to levy a cess for compensating states. This case does not change the previous position of law, but rather clarifies and reinforces the existing legal principles.

Conclusion

The Supreme Court upheld the constitutional validity of the Goods and Services Tax (Compensation to States) Act, 2017, affirming the Parliament’s legislative competence to enact such a law. The Court clarified that the GST Compensation Cess is a separate and distinct tax from GST and that the Parliament has the power to levy a cess for specific purposes. The decision also emphasized that the set-off of taxes is a matter of legislative policy and cannot be claimed as a matter of right.