Supreme Court Upholds Himachal Pradesh Passenger Tax on Employee Transport: NHPC Ltd. vs. State of Himachal Pradesh (2023)

Introduction

Date of the Judgment: 6 September 2023
Citation: 2023 INSC 810
Judges: B.V. Nagarathna, J. and Ujjal Bhuyan, J.
Can a state government levy passenger tax on companies providing free transport to their employees? The Supreme Court of India recently addressed this question, examining the validity of amendments made to the Himachal Pradesh Passengers and Goods Taxation Act, 1955. This case revolves around whether the state legislature could retroactively impose taxes on companies providing free transport to employees by amending the law and removing the basis of an earlier High Court judgment. The judgment was delivered by a two-judge bench comprising Justices B.V. Nagarathna and Ujjal Bhuyan.

Case Background

The case involves NHPC Ltd., a company engaged in electricity generation with projects in Himachal Pradesh. Due to the remote locations of their project sites, NHPC provides free transport to its employees and their children between their residences and workplaces or schools. The Himachal Pradesh government, through its tax authorities, sought to levy passenger tax on NHPC for this transport service. The Assessing Authority, under the Himachal Pradesh Passengers and Goods Taxation Act, 1955 (the Act of 1955), assessed NHPC’s liability for passenger tax for the years 1984-1985 to 1990-1991. The assessment was based on the premise that NHPC’s employees and their children were passengers under the Act, and thus, NHPC was liable to pay passenger tax for providing them with transport facilities. The Assessment Orders were passed on 01 October, 1992.

NHPC challenged these assessments, arguing that the Act was intended for fare-paying passengers, not free transport. The High Court initially ruled in favor of NHPC, stating that the Act did not apply to free transport services. However, the Himachal Pradesh legislature subsequently amended the Act to include such services, leading to the current dispute.

Timeline

Course of Proceedings

Initially, the Assessing Authority under the Act of 1955 assessed NHPC’s liability to pay passenger tax for the years 1984-1985 to 1990-1991. NHPC filed a revision application, which was dismissed. Subsequently, NHPC filed Writ Petition No. 1733 of 1995 before the High Court, challenging the vires of the Act of 1955 and the assessments made. The High Court allowed the writ petition on 27 March 1997, directing the Respondents to refund the tax collected, citing that the Act was intended for businesses carrying passengers for hire and reward, and that the terms “route” and “normal rate” were not defined. The High Court held that the Act did not apply to the free transport services provided by NHPC.

Following the High Court’s decision, the Himachal Pradesh legislature enacted the Amendment and Validation Act of 1997 to remove the basis of the High Court’s judgment. This led to fresh notices for recovery of tax under the amended provisions. NHPC then filed Civil Writ Petition No. 725 of 1998, challenging the vires of the Amendment and Validation Act of 1997 and the assessments made under it. The High Court dismissed this petition on 11 December 2008, upholding the validity of the amended Act. This decision was followed by another order on 06 May 2009 in CWP 79 of 2007, leading to the present appeals before the Supreme Court.

Legal Framework

The legal framework for this case centers on Entry 56, List II of the Seventh Schedule of the Constitution of India, which grants states the power to levy “taxes on goods and passengers carried by road or on inland waterways.” The Himachal Pradesh Passengers and Goods Taxation Act, 1955, was enacted under this provision.

Key provisions of the Act of 1955, as amended by the Amendment and Validation Act of 1997, include:

• Section 2(aa), which defines “business” to include not only the carriage of passengers and goods but also any trade, commerce, manufacture, or related activities, regardless of profit motive.
• Section 2(c), which defines “fare” to include sums fixed by competent authorities under the Motor Vehicles Act, sums payable for season tickets, and sums specified in Schedule I of the Act.
• Section 2(gb), which defines “private service vehicle” as a motor vehicle used by the owner for carrying persons in connection with their trade or business.
• Section 2(gc), which defines “road” as a track for travel or transportation between two places.
• Section 2(ia), which defines “transport vehicle” to include public service vehicles, goods carriages, educational institution buses, and private service vehicles.
• Section 3(1A), which states that when passengers are carried and goods are transported without charge or at a concessional rate, tax shall be levied as if the passengers were carried or goods transported at fares or freights fixed by the competent authority under the Motor Vehicles Act or specified in Schedule I of the Act, whichever is higher.

The Amendment and Validation Act of 1997 also omitted the Explanation to Section 3(1) of the Act of 1955, which had been a point of contention in the earlier High Court judgment. The Explanation had stated that when no fare was charged, tax would be levied as if the passengers were carried at the normal rate prevalent on the route. The High Court had found this provision ambiguous due to the lack of definitions for “normal rate” and “route.”

Arguments

Appellants’ Arguments

The appellants, primarily NHPC Ltd., argued that:

• The amendments made to the Act of 1955 by the Amendment and Validation Act of 1997 did not remove the basis of the High Court’s earlier judgment. The High Court had found that the Act did not apply to free transport provided by employers to their employees and children.
• The tax was being levied on the owners of the vehicles (the appellants), not on the passengers, which is contrary to the legislative intent of Entry 56 of List II. The appellants are not collecting any fare from their employees and their children, and therefore, the incidence of tax cannot be on them.
• The definition of “passenger” should be limited to those who pay a fare. Employees and their children traveling for free are not “passengers” within the meaning of the constitutional entry.
• The expanded definition of “business” in the amended Act is too broad and includes activities unrelated to the business of carrying passengers and goods. This violates Article 14 of the Constitution by treating unequals equally.
• The definitions of ‘business’, ‘passenger’, ‘road’, ‘fare’ and ‘freight’ under the Amendment and Validation Act of 1997 are artificial and an illegal attempt to bring the Amendment and Validation Act of 1997 within the scope of Entry 56 of List II of the Seventh Schedule to the Constitution.
• The retrospective application of the Amendment and Validation Act of 1997, which dates back forty-two years, is unreasonable and arbitrary.

The appellants relied on cases such as A.S. Karthikeyan vs. State of Kerala, (1974) 1 SCC 258 to argue that the incidence of tax must be on the passengers, not the vehicle owners, and M/s Tata Engineering and Locomotive Co. vs. The Sales Tax Officer, Poona, A.I.R. 1979 SC 343, to contend that a “passenger” is someone who pays a fare.

Respondents’ Arguments

The respondents, the State of Himachal Pradesh, argued that:

• The Amendment and Validation Act of 1997 validly addressed the deficiencies in the Act of 1955, removing the basis of the High Court’s earlier judgment. The legislature has the power to correct infirmities in a law that has been struck down by a court.
• Section 3(1A) of the amended Act provides a mechanism for levying tax even when no fare is charged, bringing non-fare paying passengers at par with fare-paying passengers.
• The definition of “business” has been widened to include any trade, commerce, or manufacture, as well as related transactions, irrespective of profit motive.
• The tax is imposed on passengers and goods, not on motor vehicles. The owners of the vehicles are simply required to facilitate the payment of tax.
• The Act of 1955, as amended, was enacted under Entry 56 of List II of the Seventh Schedule of the Constitution, which pertains to taxes on goods and passengers carried by road.

The respondents cited cases such as M/s West Ramnad Electric Distribution Co. vs. State of Madras, A.I.R. 1962 SC 1753 and Rai Ramkrishna vs. State of Bihar, A.I.R. 1963 SC 1667, to support their argument that the legislature can amend a law retrospectively to remove the basis of a court’s decision.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether, by enacting the Amendment and Validation Act of 1997, the Himachal Pradesh State Legislature had validly removed the basis of the judgment of the Division Bench of the High Court dated 27 March, 1997, whereby the Act of 1955 had been held not to include within its scope the activity of the appellants of providing gratis transport facilities for their employees and their children?
2. Whether the activity of the appellants of providing gratis transport facilities for their employees and their children, would now be a taxable activity under Section 3(1-A) of the Amendment and Validation Act of 1997?
3. Whether the impugned judgment of the High Court calls for any interference?
4. What order?

Treatment of the Issue by the Court

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

Authorities

The Supreme Court considered the following authorities:

Cases

Legal Provisions

Judgment

How each submission made by the Parties was treated by the Court?

The Supreme Court dismissed the appeals, upholding the validity of the amended Act. However, considering the long passage of time and the nature of the appellants as public sector organizations providing essential transport services to their employees, the Court limited the liability of the appellants to pay tax from 01.04.2023.

Conclusion

The Supreme Court’s decision in NHPC Ltd. vs. State of Himachal Pradesh clarifies that state legislatures have the power to amend tax laws retrospectively to remove the basis of a court’s judgment. By amending the Himachal Pradesh Passengers and Goods Taxation Act, 1955, the state legislature validly included free transport services provided by employers to their employees within the ambit of passenger tax. This judgment underscores the principle that while courts can interpret laws, legislatures retain the power to amend them to address issues identified by the judiciary.

The decision also highlights the broad scope of the term “business” under tax laws, which can extend beyond profit-making activities to include any trade, commerce, or manufacture. Furthermore, the judgment affirms that the incidence of passenger tax is on the passengers and goods being carried, although vehicle owners are responsible for facilitating the payment of the tax. The Supreme Court’s decision has significant implications for companies providing free transport to their employees, as such services may now be subject to passenger tax under similar state laws. However, the limitation on the date of applicability of tax to 01.04.2023 provides some relief to the appellants in this particular case.

Case Flowchart

Disclaimer

This article is for informational purposes only and should not be considered legal advice. For specific legal guidance, please consult with a qualified legal professional.