Supreme Court Upholds Terminal Tax in Scheduled Areas: South Eastern Coalfields Ltd vs. State of Madhya Pradesh (21 September 2023)

Date of the Judgment: 21 September 2023
Citation: 2023 INSC 865
Judges: Dr. Dhananjaya Y Chandrachud, CJI, J.B. Pardiwala, J., Manoj Misra, J.
Can a municipal body impose a terminal tax on goods exported from a Scheduled Area? The Supreme Court of India recently addressed this question in a case involving a coal mining company and the State of Madhya Pradesh. The core issue revolved around whether the special provisions for Scheduled Areas under the Constitution override the state’s power to levy taxes through municipalities. The three-judge bench, comprising of Chief Justice of India Dr. Dhananjaya Y Chandrachud, Justice J.B. Pardiwala, and Justice Manoj Misra, delivered a unanimous judgment, dismissing the appeals and upholding the levy of terminal tax.

Case Background

The appellant, South Eastern Coalfields Ltd, a company owning coal mines in Madhya Pradesh, challenged the imposition of terminal tax by the Municipal Council. The company’s coal mining operations fell within the geographical limits of the Municipal Council, which was levying the tax on goods exported from its limits. The appellant contended that since the area was a Scheduled Area, the municipal laws regarding taxation would not apply.

Timeline:

Course of Proceedings

The appellant challenged the levy of terminal tax by filing a petition under Article 226 of the Constitution in the High Court of Madhya Pradesh. The High Court rejected the plea, stating that the land where the appellant conducted its mining operations fell within the jurisdiction of the Municipal Council, which had the legislative power to impose the tax. The High Court also noted that no exceptions had been notified to the powers of the Municipal Council under the Constitution. Aggrieved by the decision, the appellant filed appeals before the Supreme Court.

Legal Framework

The case involves several key legal provisions:

• Section 132 of the Madhya Pradesh Municipal Corporation Act 1956: This section allows the Corporation to impose taxes, including a terminal tax on goods exported from its limits. Specifically, sub-section 6(n) empowers the Corporation to levy “a terminal tax” on goods and animals exported from the limits of the Corporation.
• Section 127(6)(n) of the Madhya Pradesh Municipalities Act 1961: This provision empowers the Municipal Council to impose “a terminal tax on goods or animals exported from the limits of the Council”.
• Terminal Tax (Assessment and Collection) on the Goods Exported from Madhya Pradesh Municipal Limits Rules 1996: These rules were framed under the powers conferred by the above two statutes. Section 2(c) defines “terminal tax” as: “terminal tax on goods exported from the Municipal limit in accordance with the sanction of State Government under clause (o) of sub-section (2) of Section 132 of the Madhya Pradesh Municipal Corporation Act, 1956 and the tax described in clause (xvi) of sub-section (1) of Section 127 of the Madhya Pradesh Municipalities Act, 1961.”
• Article 244 of the Constitution of India: This article states that the provisions of the Fifth Schedule shall apply to the administration and control of Scheduled Areas and Scheduled Tribes.
• Paragraph 6(2) of the Fifth Schedule to the Constitution of India: This provision empowers the Union Ministry of Law and Justice to issue notifications regarding Scheduled Areas.
• Article 243-ZC of the Constitution of India: This article stipulates that Part IXA of the Constitution, which deals with Municipalities, does not apply to Scheduled Areas.
• Article 243X of the Constitution of India: This article empowers the State Legislature to authorize municipalities to levy, collect, and appropriate taxes.
• Paragraph 5 of the Fifth Schedule to the Constitution of India: This provision empowers the Governor to direct that any Act of Parliament or the State Legislature shall not apply to a Scheduled Area or shall apply with exceptions and modifications.
• Entry 89 of List I of the Seventh Schedule: This entry empowers Parliament to levy terminal taxes on goods or passengers carried by railway, sea, or air.
• Entry 56 of List II of the Seventh Schedule: This entry empowers the State Legislature to levy taxes on goods and passengers carried by road or on inland waterways.
• Entry 52 of List II of the Seventh Schedule: This entry, as it stood at the material time, provided for taxes on the entry of goods into a local area for consumption, use, or sale therein.

Arguments

The Additional Solicitor General, Mr. N Venkataraman, appearing for the appellant, advanced two main arguments:

• First Argument: Since Article 243X, which empowers the State Legislature to authorize municipalities to levy taxes, is part of Part IXA of the Constitution, and Part IXA does not apply to Scheduled Areas under Article 243-ZC, the power under Article 243X is not available in relation to Scheduled Areas. Further, Paragraph 5 of the Fifth Schedule empowers the Governor to direct that any law of Parliament or the State Legislature shall not apply to a Scheduled Area. Therefore, the municipal laws levying terminal tax should not apply to the Scheduled Area in question.
• Second Argument: Entry 89 of List I of the Seventh Schedule empowers Parliament to levy terminal taxes on goods or passengers carried by railway, sea, or air. Entry 56 of List II empowers the State Legislature to levy taxes on goods and passengers carried by road or on inland waterways. However, Entry 52 of List II, which deals with taxes on the entry of goods into a local area, does not use the expression “terminal.” Therefore, the levy of terminal tax by the municipality is ultra vires.

Issues Framed by the Supreme Court

The Supreme Court addressed the following issues:

1. Whether the provisions of the two municipal laws, which have been noticed above, would have no application and hence, the levy of a terminal tax was ultra vires in a Scheduled Area.
2. Whether the levy of a terminal tax by the municipality is ultra vires, given that the expression ‘terminal’ is not used in Entry 56 of List II.

Treatment of the Issue by the Court:

Authorities

The Supreme Court considered the following authorities:

Judgment

How each authority was viewed by the Court?

• The Supreme Court followed the Constitution Bench decision in Central India Spinning and Weaving & Manufacturing Co. Ltd. The Empress Mills, Nagpur v. The Municipal Committee, Wardha [1958 SCR 1102]*, which had already settled the issue regarding the use of the word “terminal” in Entry 56 of List II.
• The Court explained the provisions of Article 244, Article 243-ZC, and Article 243X of the Constitution, as well as Paragraph 5 of the Fifth Schedule, to show that while Part IXA does not apply to Scheduled Areas, the State Legislature still has the power to enact laws for the State, and the Governor has the power to exclude the application of any law to Scheduled Areas.
• The Court also explained the provisions of Section 132 of the Madhya Pradesh Municipal Corporation Act 1956, Section 127(6)(n) of the Madhya Pradesh Municipalities Act 1961, and the Terminal Tax (Assessment and Collection) on the Goods Exported from Madhya Pradesh Municipal Limits Rules 1996 to show that the Municipal Council had the power to levy the terminal tax.

What weighed in the mind of the Court?

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

• The absence of any notification by the Governor under Paragraph 5 of the Fifth Schedule, which would have excluded the application of the municipal laws to the Scheduled Area or applied them with exceptions.
• The precedent set by the Constitution Bench in Central India Spinning and Weaving & Manufacturing Co. Ltd. The Empress Mills, Nagpur v. The Municipal Committee, Wardha [1958 SCR 1102], which had already concluded the issue regarding the use of the word “terminal” in Entry 56 of List II.
• The Court emphasized that the inapplicability of Article 243X did not denude the State Legislature of its power to enact legislation for the State.

Logical Reasoning:

The Court’s reasoning was based on the interpretation of constitutional provisions and the application of established legal precedents. The Court noted that “the consequence of paragraph 5(1) of the Fifth Schedule is that it enables the Governor to direct either that a parliamentary or state law shall not apply to a Scheduled Area in the State or that it would apply subject to exceptions and modifications.” Since no such notification was produced, the Court concluded that the municipal laws would apply to the Scheduled Area. The Court also emphasized that “the inapplicability of article 243X did not denude the state legislature to enact legislation for the State.” Additionally, the Court relied on the precedent set by the Constitution Bench in Central India Spinning and Weaving & Manufacturing Co. Ltd. The Empress Mills, Nagpur v. The Municipal Committee, Wardha [1958 SCR 1102], stating that “Since he fairly concedes that the issue which was sought to be raised has been concluded in the above decision of the Constitution Bench, no further submissions have been urged in that regard.”

Key Takeaways

• Municipal laws, including those imposing terminal taxes, apply to Scheduled Areas unless the Governor issues a notification under Paragraph 5 of the Fifth Schedule excluding their application or modifying their provisions.
• The inapplicability of Part IXA of the Constitution to Scheduled Areas does not prevent the State Legislature from enacting laws for the State, including those related to taxation.
• The term “terminal tax” can be levied by the State Legislature even if the specific term is not used in the relevant entry of List II of the Seventh Schedule, as clarified by the Constitution Bench in the Central India Spinning and Weaving & Manufacturing Co. Ltd. The Empress Mills, Nagpur v. The Municipal Committee, Wardha [1958 SCR 1102].

Directions

No specific directions were issued by the Supreme Court in this case.

Development of Law

The ratio decidendi of the case is that municipal laws, including those imposing terminal taxes, apply to Scheduled Areas unless specifically excluded by the Governor through a notification under Paragraph 5 of the Fifth Schedule. This judgment reinforces the principle that the State Legislature retains the power to enact laws for the State, even in Scheduled Areas, unless explicitly restricted. The Supreme Court also reaffirmed the position of law regarding the term “terminal tax” as settled in Central India Spinning and Weaving & Manufacturing Co. Ltd. The Empress Mills, Nagpur v. The Municipal Committee, Wardha [1958 SCR 1102]. There is no change in the previous position of law.

Conclusion

The Supreme Court dismissed the appeals, upholding the decision of the High Court. The Court ruled that the municipal laws imposing terminal tax were applicable to the Scheduled Area in question, as no notification had been issued by the Governor to exclude their application. The Court also reaffirmed the validity of the levy of terminal tax by the municipality, relying on a previous Constitution Bench decision. The judgment clarifies the interplay between the constitutional provisions for Scheduled Areas and the State’s power to levy taxes through municipal bodies.