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 487
Judges: S. Ravindra Bhat, J. and Dipankar Datta, J.

Can states levy sales tax on pan masala and gutkha, especially when these products are also subject to central excise duties? The Supreme Court of India recently addressed this complex question, which has significant implications for both state revenues and businesses. This judgment clarifies the extent of states’ powers to tax these products, considering their classification under central laws. The bench comprised Justices S. Ravindra Bhat and Dipankar Datta, with the judgment authored by Justice S. Ravindra Bhat.

Case Background

The case involves multiple appeals from judgments of the Delhi, Madras, and Allahabad High Courts. The core issue revolves around the taxability of pan masala and gutkha under state sales tax laws. The appellants, manufacturers of these products, argued that states lack the power to impose sales tax due to the central government’s authority to levy additional excise duties. They also contended that state tax rates should not exceed limits set by the Central Sales Tax Act, 1956 (CST Act).

The dispute arises from different interpretations of the Central Excise Tariff Act, 1985 (CET Act), the Additional Duties of Excise (Goods of Special Importance) Act, 1957 (ADE Act), and respective state sales tax laws such as the Delhi Sales Tax Act, 1975 (DST Act), the Tamil Nadu General Sales Tax Act, 1959 (TNGST Act), and the Uttar Pradesh Trade Tax Act, 1948 (UPTT Act). The appellants argued that gutkha and pan masala should be considered as “tobacco,” which is exempt from state sales tax.

Timeline:

Legal Framework

The case primarily involves the interpretation of the following legal provisions:

• Section 14 of the CST Act: Declares certain goods to be of special importance, restricting state taxation. Initially, it included “tobacco” as defined in the Central Excises and Salt Act, 1944. Later amended to include specific tobacco products under the CET Act.
• Section 15 of the CST Act: Restricts the power of taxation on goods declared to be of special importance under Section 14.
• Central Excise Tariff Act, 1985 (CET Act): Defines and classifies goods for central excise duty. Chapter 24 of the CET Act deals with “tobacco and manufactured tobacco substitutes” and includes entries for chewing tobacco and pan masala containing tobacco.
• Additional Duties of Excise (Goods of Special Importance) Act, 1957 (ADE Act): Enables the Union to levy additional duties of excise on certain goods.
• Delhi Sales Tax Act, 1975 (DST Act): Imposes local sales tax in Delhi. Section 3 imposes tax on dealers, Section 7 exempts goods in the Third Schedule, and Section 4 specifies tax rates for goods in the First Schedule.
• Tamil Nadu General Sales Tax Act, 1959 (TNGST Act): Imposes sales tax in Tamil Nadu. Section 3(2) specifies tax rates for goods in the First Schedule, and Section 8 exempts goods in the Third Schedule.
• Uttar Pradesh Trade Tax Act, 1948 (UPTT Act): Imposes trade tax in Uttar Pradesh. Section 3 imposes the levy, and Section 4 empowers the state to exempt articles from the levy.

The core issue is whether “pan masala” and “gutkha” should be classified as “tobacco” under these acts and whether states can impose sales tax on these items when they are also subject to central excise duties.

Arguments

Appellants’ Arguments:

• The appellants argued that under Section 7(1) of the DST Act, read with Entry 22 of Schedule III, gutkha is a “tax-free good” and no tax is payable on it. They contended that despite the power to amend Schedule III, it was not amended, and gutkha remained outside the purview of the DST levy.
• They contended that Entry 22 of Schedule III of the DST Act amounts to a ‘Legislation by way of Incorporation’ of the definition of ‘tobacco’ from the CEA, and subsequent changes in the law have no impact on the earlier incorporated provisions.
• Relying on Kothari Products Ltd. v. Government of A.P., the appellants argued that gutkha is “tobacco” and is covered by the explanation to the Fourth Schedule of the APGST Act, which exempts it from tax.
• They argued that State of Orissa v. Radheshyam Gudakhu Factory held that gutkha is a product of tobacco, and its essential ingredient is tobacco, thus falling under the exemption for tobacco.
• The appellants argued that “Pan masala containing tobacco” is a chewing tobacco, and any form of chewing tobacco, including its preparations, should be part of that entry. They argued that gutkha is essentially a preparation of chewing tobacco.
• They argued that the rate of tax on declared goods cannot be more than the rate provided in Section 15 of the CST Act, and that “Pan masala containing tobacco” should not be taxed as an ‘unclassified item’.
• They argued that subsequent legislation can be looked at in order to see the correct interpretation of an earlier legislation, especially when the earlier one is obscure or ambiguous.

Revenue’s Arguments:

• The revenue argued that the use of the term ‘including’ in sub-heading 2404.41 is followed by the words “preparations commonly known as” and therefore, the word has to be understood and read as “and” in the conjunctive sense. As a result, the preparations mentioned therein should be treated as exhaustive and cannot be expanded beyond that.
• The revenue contended that pan masala and gutkha are separate and distinct entries from tobacco, and therefore, the State Legislatures are competent to tax them.
• They argued that the State Legislatures are competent to levy taxes on the sale or purchase of commodities subjected to the ADE Act.
• The revenue submitted that the definition of “tobacco” had to be in terms of the changing definitions of tobacco under the Central enactments, and that it is a case of legislation by reference, not incorporation.
• They argued that “Pan Masala containing tobacco” and “chewing tobacco” are not identical, and that the amendment from 2001 clarified that “chewing tobacco” does not include “Pan Masala containing tobacco.”
• The revenue relied on the General Rules for Interpretation under the CET Act, stating that “Pan Masala containing tobacco” is a specific description of the goods, and that the description of ‘Pan Masala’ in Heading 21.06 describes the goods specifically.

Submissions of Parties

Issues Framed by the Supreme Court

The Supreme Court considered the following key issues:

1. Whether the inclusion of “pan masala” and “gutkha” in the taxable schedule of state sales tax acts, without amending the schedule that exempts “tobacco,” is valid.
2. Whether “pan masala” and “gutkha” should be classified as “tobacco” for the purpose of state sales tax laws, considering the definitions under the Central Excise Tariff Act and the Additional Duties of Excise Act.
3. Whether the state tax rates on gutkha and pan masala can exceed the limits prescribed by the Central Sales Tax Act, 1956.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

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

How each authority was viewed by the Court?

The court distinguished Kothari Products Ltd. v. Government of A.P. [2000] 9 SCC 263* and State of Orissa v. Radheshyam Gudakhu Factory (2018) 11 SCC 505*, stating that the facts of those cases were different. The court relied on Commissioner, Sales Tax, U.P. v. Agra Belting Works [1987] 3 SCR 93*, Sale Tax Officer, Sector IX, Kanpur v. Dealing Dairy Products & Anr. (1994) 94 STC 93 (SC)*, and State of Bihar v. Krishna Kuthar Kabra (1997) 9 SCC 763* to hold that a notification imposing tax on previously exempted goods is valid. The court also relied on Mahalakshmi Oil Mills v. State of Andhra Pradesh [1989] 1 SCC 164, P. Kasilingam v. PSG College of Technology [1995] 2 SCR 1061, and Pioneer Land & Urban Infrastructure v. Union of India (2019) 8 SCC 416 to interpret the term “includes”. The court relied on 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 & Anr. (1998) 2 SCC 467 to hold that the definition of tobacco was by reference and not incorporation. The court relied on Collector of Central Excise Nagpur v. Simplex Mills Co. Ltd (2005) 3 SCC 513 to discuss the interpretive rules of the CET Act. Finally, the court relied on Trimurti Fragrances (P) Ltd v. Govt of NCT of Delhi 2022 SCC OnLine SC 1247 to hold that there was no conflict between the Agra Belting Works line of cases and the Kothari Products Ltd. line of cases.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following points:

• Legislative Intent: The court emphasized the legislative intent behind the amendments to the CET Act, particularly the distinction made between “pan masala” and “tobacco”.
• Specific vs. General Entries: The court favored the specific description of “pan masala” over the general description of “tobacco” when classifying the products.
• Interpretive Rules: The court applied the General Rules for Interpretation of the CET Act, especially Rule 3(a), to classify the goods based on the most specific description.
• No Conflict Between Precedents: The court clarified that there was no conflict between the Agra Belting Works line of cases and the Kothari Products Ltd. line of cases.
• Definition by Reference: The court held that the definition of tobacco was by reference and not incorporation.
• Not Declared Goods: The court held that gutkha and pan masala are not “declared goods” under Section 14 of the CST Act.

Ratio of Fact vs. Law:

The judgment is a mix of fact and law. The court went into the facts of the case and the legislative history of the various enactments in order to come to the conclusion. The court also relied on the interpretive rules of the CET Act to come to the decision. The ratio of fact to law is approximately 40:60.

Sentiment Analysis

Flowchart of the Decision

Ratio of the Judgment

The Supreme Court held that pan masala and gutkha are distinct from tobacco based on the definitions and classifications in the Central Excise Tariff Act, 1985, and that state governments are competent to levy sales tax on these items. Additionally, the Court held that the tax rates imposed by the State Legislatures are not restricted by the Central Sales Tax Act, 1956, because gutkha and pan masala are not “declared goods” under Section 14 of the CST Act.

Implications

For Businesses:

• Manufacturers of pan masala and gutkha will have to pay state sales tax in addition to central excise duties.
• The judgment clarifies that these products are not exempt from state sales tax under the guise of being “tobacco”.

For State Governments:

• States have the power to levy sales tax on pan masala and gutkha, which can significantly boost state revenues.
• The judgment provides clarity on the extent of their taxing powers over these products.

For Consumers:

• Consumers may have to pay higher prices for pan masala and gutkha due to the additional state sales tax.
• The judgment reinforces the state’s regulatory authority over these products.

Ratio Table

Conclusion

The Supreme Court’s judgment in Trimurthi Fragrances vs. Govt. of NCT of Delhi has settled a long-standing dispute regarding the taxability of pan masala and gutkha under state sales tax laws. By clarifying that these products are distinct from “tobacco” and are not subject to the tax rate limits of the Central Sales Tax Act, the court has empowered state governments to levy taxes on these items, thereby enhancing their revenue streams. The judgment underscores the importance of legislative intent and specific classifications when interpreting tax laws. It also highlights that a notification imposing tax on previously exempted goods is valid. This case is a significant step in clarifying the interplay between central and state tax laws in India.