Supreme Court Upholds State Tax on Gutkha and Pan Masala: Trimurthi Fragrances vs. Govt. of NCT of Delhi (2023)

Introduction

Date of the Judgment: May 4, 2023

Citation: 2023 INSC 429

Judges: S. Ravindra Bhat, J., Dipankar Datta, J.

Can states impose sales tax on products like gutkha and pan masala, especially when the central government already levies excise duties? The Supreme Court of India tackled this complex issue in a recent judgment, clarifying the powers of state legislatures in taxation matters. This case involved multiple appeals from different High Courts, all challenging the imposition of state sales tax on these products. The core question was whether these products should be considered as “tobacco” and therefore exempt from state tax, or as separate taxable items.

The Supreme Court bench, comprising Justices S. Ravindra Bhat and Dipankar Datta, delivered the judgment, with Justice S. Ravindra Bhat authoring the opinion. This judgment consolidates several appeals from the Delhi, Madras, and Allahabad High Courts, all concerning the taxability of pan masala and gutkha under respective state laws.

Case Background

The case involves appeals from various manufacturers of pan masala and gutkha, who challenged the imposition of sales tax by different state governments. The appellants argued that these products should be considered as “tobacco” and therefore exempt from state sales tax, based on the definition of tobacco in the Central Excise Act, 1944 and the Additional Duties of Excise (Goods of Special Importance) Act, 1957. They also contended that the state tax rates exceeded the limits prescribed by the Central Sales Tax Act, 1956.

The core dispute arose from the states’ classification of pan masala and gutkha as separate taxable items, distinct from “tobacco,” which is often exempted or taxed at a lower rate. The manufacturers argued that gutkha and pan masala are essentially tobacco products and should be treated as such for tax purposes. The states, on the other hand, maintained that these are distinct products and therefore subject to state sales tax.

The appellants sought relief from the imposition of state sales tax on their products, arguing that the states lacked the legislative competence to tax these items or that the tax rates were excessive. They relied on previous Supreme Court judgments, particularly Kothari Products Ltd. v. Government of A.P., to support their claim that gutkha is a form of tobacco and therefore exempt from state tax.

Timeline:

Legal Framework

The judgment revolves around the interpretation of several key legal provisions:

• Central Sales Tax Act, 1956 (CST Act):
  • Section 14: Declares certain goods to be of special importance, including tobacco. Initially, Section 14(ix) defined tobacco by referencing Item No. 4 of the First Schedule to the Central Excises and Sale Act, 1944. This was later amended to include specific sub-headings of the Central Excise Tariff Act, 1985.
  • Section 15: Restricts the power of states to tax goods declared to be of special importance.
• Central Excise Tariff Act, 1985 (CET Act):
  • Chapter 21: Deals with miscellaneous edible preparations, including ‘Pan Masala’. Note 3 of this chapter defines ‘Pan Masala’ as a preparation containing betel nuts and other ingredients, which, over time, was amended to exclude tobacco.
  • Chapter 24: Deals with tobacco and manufactured tobacco substitutes. This chapter includes various sub-headings for different forms of tobacco, including chewing tobacco and, later, ‘Pan Masala containing tobacco’ (Gutkha).
• Additional Duties of Excise (Goods of Special Importance) Act, 1957 (ADE Act):
  • This Act allows the Union to levy additional duties of excise on certain goods. The definition of “tobacco” in this act is relevant to the case.
• Delhi Sales Tax Act, 1975 (DST Act):
  • Section 3: Imposes local sales tax on dealers whose turnover exceeds a specified limit.
  • Section 3(6): Exempts dealers dealing exclusively in goods specified in the Third Schedule from paying tax.
  • Section 7: Specifies tax-free goods listed in the Third Schedule and allows for amendments to the schedule by notification.
  • Third Schedule, Entry 22: Initially exempted “Tobacco as defined under the Central Excise and Salt Act, 1944.”
  • First Schedule, Entry 46: Introduced by notification, included “Pan Masala and Gutkha” as taxable items.
• Tamil Nadu General Sales Tax Act, 1959 (TNGST Act):
  • Section 3(2): Specifies that tax is payable on goods mentioned in the First Schedule.
  • Section 8: Exempts dealers dealing in goods specified in the Third Schedule from paying tax.
  • Third Schedule, Sl. No. 1(iv)(d): Exempted “Chewing tobacco and preparations containing chewing tobacco.”
• Uttar Pradesh Trade Tax Act, 1948 (UPTT Act):
  • Section 3: Imposes trade tax on the sale of various articles.
  • Section 4: Empowers the state to exempt articles from the levy.
  • Notification dated 31.01.1985: Exempted “tobacco in any form” from tax.
  • Notification dated 26.06.1997: Amended Entry 14 to exclude “pan masala containing tobacco”.
  • Notification dated 06.04.1999: Further clarified the exclusion of “pan masala containing tobacco.”

Arguments

The appellants (manufacturers of pan masala and gutkha) and the respondents (state governments) presented the following key arguments:

Appellants’ Arguments:

• Gutkha as “Tax-Free Goods”: The appellants argued that gutkha should be considered “tax-free goods” under Section 7(1) of the DST Act, read with Entry 22 of Schedule III, which refers to “tobacco” as defined under the Central Excise Act, 1944. They contended that since gutkha falls under the definition of tobacco, it is exempt from state tax.
• No Amendment to Schedule III: They pointed out that despite the power under Section 7(2) of the DST Act to amend Schedule III, Entry 22 was never amended to exclude gutkha. Therefore, gutkha remains a tax-free good and cannot be included in the taxable turnover under Section 4(2)(a)(ii) of the DST Act.
• Reliance on Kothari Products Ltd.: The appellants heavily relied on the Supreme Court’s ruling in Kothari Products Ltd. v. Government of A.P. [2000] 9 SCC 263, which held that gutkha is a tobacco product and therefore exempt from state sales tax. They also cited State of Orissa v. Radheshyam Gudakhu Factory [2018] 11 SCC 505, which stated that gutkha is a product of tobacco.
• General vs. Specific Entries: The appellants argued that the High Court’s reasoning that Entry 22 in Schedule III was general and Entry 46 of Schedule I was specific was incorrect. They cited Reliance Trading Company v. State of Kerala [2011] 15 SCC 762, which held that an exemption in the Third Schedule continues if it is not amended, even after the amendment of the First Schedule.
• Legislation by Incorporation: They contended that Entry 22 of Schedule III of the DST Act amounts to “Legislation by way of Incorporation” of the definition of “tobacco” from the CEA. Therefore, subsequent changes in the definition of tobacco under central laws would not impact the definition under the DST Act.
• Gutkha as Chewing Tobacco: The appellants argued that “Pan masala containing tobacco” is essentially a form of chewing tobacco, and any form of chewing tobacco, including its preparations, would fall under the exempted category. They argued that the essential characteristic of gutkha is tobacco, and the percentage of tobacco in the product does not change its nature.
• Restriction on Tax Rate: The appellants argued that the rate of tax on declared goods cannot exceed the rate provided in Section 15 of the CST Act, and since gutkha is a declared good, the state tax rate should be restricted.

Respondents’ Arguments:

• Distinction between Tobacco and Pan Masala/Gutkha: The respondents argued that pan masala and gutkha are separate and distinct from tobacco, and therefore, state legislatures are competent to tax them. They emphasized the distinction between the entries for “tobacco” and “pan masala” in the Central Excise Tariff Act, 1985.
• Competence to Levy Taxes: The state governments argued that they are competent to levy taxes on the sale or purchase of commodities subjected to additional excise duty. The levy of sales tax would only mean that the additional excise duty collected by the central government would not be shared with the states that levy sales tax on these goods. They relied on Mahalakshmi Oil Mills v. State of Andhra Pradesh [1989] 1 SCC 164.
• Legislation by Reference: The respondents argued that the definition of “tobacco” in the state laws is an instance of “legislation by reference,” not “legislation by incorporation.” Therefore, changes in the definition of tobacco under central enactments would automatically be reflected in the state laws. They cited State of Madhya Pradesh v. M.V. Narsimhan [1975] 2 SCC 377, Nagpur Improvement Trust v. Vasantrao [2002] 7 SCC 657, and U.P. Avas Evam Vikas Parishad v. Jainul Islam [1998] 2 SCC 467.
• Specific Entry Prevails: The respondents contended that “Pan Masala containing tobacco” is a specific description of the goods, and therefore, it should be classified under the specific entry for pan masala, even if tobacco is one of its ingredients. They relied on the General Rules for Interpretation under the CET Act.
• No Conflict with Kothari Products: The respondents argued that Kothari Products Ltd. dealt with Gudaku, a tobacco product, and not pan masala or gutkha, and therefore, it is not applicable to the present case.
• Withdrawal of Exemption: The state governments argued that the introduction of a specific entry for pan masala and gutkha in the First Schedule, while they were exempted in the Third Schedule, indicates an intention to withdraw the exemption and impose tax on these goods. They relied on Commissioner, Sales Tax, U.P. v. Agra Belting Works [1987] 3 SCC 140, Sale Tax Officer, Sector IX, Kanpur v. Dealing Dairy Products [1994] Supp (2) SCC 639, and State of Bihar v. Krishna Kuthar Kabra [1997] 9 SCC 763.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court considered the following key issues:

1. Whether, in a state law which contains two provisions: one which taxes entries, and another which exempts articles from levy (the latter being listed separately, in a notification, or a schedule to the enactment itself), the inclusion, or insertion into the list or schedule of articles that can be taxed (like Section 4 of the DST Act) without amending the subsisting notification that excludes levy (as under Section 7 DST) would the levy fail?
2. Whether pan masala was an exempted item, being “tobacco”?
3. Whether the rate of local tax can exceed the limit under the CST Act?

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:

• Central Sales Tax Act, 1956 (CST Act):
  • Section 14
  • Section 15
• Central Excise Tariff Act, 1985 (CET Act):
  • Chapter 21
  • Chapter 24
  • General Rules for the Interpretation of the Schedule
• Additional Duties of Excise (Goods of Special Importance) Act, 1957 (ADE Act)
• Delhi Sales Tax Act, 1975 (DST Act):
  • Section 3
  • Section 3(6)
  • Section 4
  • Section 7
  • Third Schedule, Entry 22
  • First Schedule, Entry 46
• Tamil Nadu General Sales Tax Act, 1959 (TNGST Act):
  • Section 3(2)
  • Section 8
  • Third Schedule, Sl. No. 1(iv)(d)
• Uttar Pradesh Trade Tax Act, 1948 (UPTT Act):
  • Section 3
  • Section 4

Judgment

The Supreme Court analyzed the submissions and authorities as follows:

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

How each authority was viewed by the Court?

The Court’s view on the authorities cited is as follows:

• Kothari Products Ltd. [2000] 9 SCC 263:* Distinguished on facts, stating it dealt with Gudaku and not Gutkha.
• Radheshyam Gudakhu Factory [2018] 11 SCC 505:* Acknowledged, but noted it did not dispute that “gutkha” is not included in “tobacco”.
• Agra Belting Works [1987] 3 SCC 140:* Upheld, stating that there is no conflict between this line of cases and the Kothari Products Ltd. line of cases.
• Dealing Dairy Products [1994] Supp (2) SCC 639:* Upheld, having followed the ratio in Agra Belting Works.
• Krishna Kuthar Kabra [1997] 9 SCC 763:* Upheld, having followed the ratio in Agra Belting Works and Dealing Dairy Products.
• Mahalakshmi Oil Mills [1989] 1 SCC 164:* Relied on to affirm the state’s competence to levy taxes.
• Reliance Trading Company [2011] 15 SCC 762:* Distinguished on facts.
• State of Madhya Pradesh v. M.V. Narsimhan [1975] 2 SCC 377:* Relied on to hold that definition of “tobacco” is “legislation by reference.”
• Nagpur Improvement Trust v. Vasantrao [2002] 7 SCC 657:* Relied on to hold that definition of “tobacco” is “legislation by reference.”
• U.P. Avas Evam Vikas Parishad v. Jainul Islam [1998] 2 SCC 467:* Relied on to hold that definition of “tobacco” is “legislation by reference.”
• P. Kasilingam v. PSG College of Technology [1995] 2 SCR 1061:* Relied on to explain the interpretation of the word “includes.”
• Pioneer Land & Urban Infrastructure v. Union of India [2019] 8 SCC 416:* Relied on to explain the interpretation of the word “includes.”
• Collector of Central Excise Nagpur v. Simplex Mills Co. Ltd [2005] 3 SCC 513:* Relied on to explain the application of the General Rules of Interpretation of the CET Act.
• Trimurti Fragrances (P) Ltd v. Govt of NCT of Delhi [2022] SCC OnLine SC 1247:* Relied on to hold that there is no conflict between the Kothari Products line of cases and the Agra Belting line of cases.

Decision

The Supreme Court held that:

• The introduction of a specific entry for “Pan Masala and Gutkha” in the taxable schedule effectively withdraws any existing exemption, without the need for a separate notification.
• Pan masala and gutkha are distinct from tobacco and are not exempted from state sales tax.
• The state tax rate on pan masala and gutkha is not restricted by the Central Sales Tax Act, as these are not declared goods under the Act.

In light of these findings, the Supreme Court dismissed all the appeals and upheld the judgments of the High Courts.

Flowchart of the Decision Making Process

Implications

The Supreme Court’s judgment has significant implications:

• State Tax Revenues: States are now empowered to collect sales tax on pan masala and gutkha, which will significantly boost their revenues.
• Clarity on Tax Laws: The judgment clarifies the distinction between “tobacco” and products like pan masala and gutkha, providing clarity on their taxability under state laws.
• Impact on Manufacturers: Manufacturers of pan masala and gutkha will now have to pay state sales tax, which may impact their pricing and profitability.
• No Restriction on State Tax Rate: States are free to set their tax rates on these products without being restricted by the Central Sales Tax Act.
• Precedent for Similar Cases: This judgment sets a precedent for similar cases involving the taxability of other products that may have some overlap with goods listed under central excise laws.

Conclusion

The Supreme Court’s judgment in Trimurthi Fragrances vs. Govt. of NCT of Delhi is a landmark decision that clarifies the taxation of pan masala and gutkha. By upholding the state’s power to tax these products and distinguishing them from “tobacco,” the Court has provided much-needed clarity on the interplay between central and state tax laws. This judgment will have far-reaching consequences for state revenues, the tobacco industry, and the interpretation of tax laws in India.