LUXURY TAX ON TOBACCO AND TOBACCO PRODUCTS STRUCK DOWN

The Hon'ble Supreme Court in its recent judgement in Godfrey Phillips India Ltd. and Anr. Vs. State of U.P. and Ors. , struck down the provisions, relating to the imposition of a luxury tax on tobacco and tobacco products, of the concerned Luxury Tax enactments of various States including, Andhra Pradesh, Uttar Pradesh, and West Bengal. The main challenge by the assesses, including manufacturers, dealers or sellers of tobacco and tobacco products was qua the legislative competence of the State Governments to impose and levy a luxury tax on tobacco and tobacco products by treating them as "luxuries" within the meaning of the word in Entry 62 of List II.

Whereas the impugned enactments sought to levy a tax on specified commodities, being chewing tobacco in different forms, cigarettes, and pan masala , "for enjoyment over and above the necessities of life" the incidence of taxation was envisaged at the first point of supply of the tobacco in the State "by sale or otherwise" in the Uttar Pradesh and the Andhra Pradesh enactments, and on the turnover of stockists in the West Bengal enactment. The taxes, as envisaged by the enactments, it was contended, were nothing but taxes on sale of tobacco products, i.e., goods, and was beyond the competence of the State Governments in as much as the State's power to legislate in respect of luxuries under Entry 62 of List II of the Seventh Schedule to the Constitution did not extend to tax the sale, manufacture, or import of goods. It was argued that 'luxuries' as used in Entry 62 of List II has been used in the sense of an activity or service namely, the providing of luxury and what could be taxed by the State under that entry would be such service but not the goods themselves.

It was further contended by the assesses that the U.P. and the A.P. Luxuries Tax Acts were a fraud on the Constitution and a device to avoid operation of the Additional Duties of Excise (Goods of Special Importance) Act, 1957 (referred hereafter as the ADE Act) under which a State Government which levies sales or purchase tax on specified goods including tobacco is to be denied its share in the proceeds of additional excise duties levied under the ADE Act of 1957. Both the States of U.P. and A.P., while taking full advantage of the enactment of the ADE Act of 1957 and availing of the benefit thereunder had sought to levy sales tax under the guise of luxury tax in order to continue to reap such benefit.

The constitutionality of the Acts was also challenged on the ground of violation of Article 301 of the Constitution in as much as the only exception to the right to free trade, commerce and intercourse throughout the territory of India provided for under Article 301 related to articles which are res extra commercium. This exception did not apply to tobacco as held in Godawat Pan Masala Products v. Union of India (2004) 7 SCC 68. The further contention was that any tax that would result in a declared commodity, such as tobacco, being subjected to higher taxes in a particular State would ipso facto contravene Article 301 since it would lead to a regional economic imbalance.

The Union of India supported the contentions of the assessees. The States on the other hand relied on the decisions of the Supreme Court in Abdul Kadir wherein, it was contended, luxuries had been defined authoritatively, as, "something which conduces enjoyment over and above the necessaries of life. It denotes something which is superfluous and not indispensable and to which we take with a view to enjoy, amuse or entertain ourselves". The case of Express Hotels v. State of Gujarat (1989) 3 SCC 677 - was relied to establish that the word 'luxury' was applicable both to commodities and services. The taxes were therefore not on sale but on the article, tobacco, and articles made out of tobacco both of which give rise to luxuries in the sense that they are taken for pleasure and enjoyment and are wholly unnecessary for human health and sustenance.

It was argued that the form of the luxury either as goods or services was immaterial and that the actual presence of a consumer is inessential to the concept of luxury tax in as much as the Constitution provides for legislation in respect of taxation of different taxable events in respect of the same subject and for taxation in respect of different aspects of the subject itself.

The Hon'ble Court, having noticed that the assessees did not dispute that tobacco is an article of luxury in terms of the judgement in Abdul Kadir's case, went on to consider whether articles of luxury, such as tobacco are covered by Entry 62 in as much as that argument was neither raised nor considered in Abdul Kadir.

Dealing with the above issue the Hon'ble Court observed that in none of the cases cited by either of the parties, had the Court called upon to address the question whether Entry 62 did not cover articles of luxury and ought to be restricted to things incorporeal such as enjoyment or indulgence in what is either choice or costly. Therefore general principles of interpretation would have to be applied. Considering the wealth of authority on the question of interpretation of legislative heads, the Hon'ble Court thought it fit to restrict itself to its earlier decisions and not to consider foreign authorities.

It was observed that taxing entries must be construed with clarity and precision so as to maintain such exclusivity, and a construction of a taxation entry which may lead to overlapping must be eschewed. If the taxing power is within a particular legislative field it would follow that other fields in the legislative lists must be construed to exclude this field so that there is no possibility of legislative trespass.

The Parliament, in exercise of this power, Section 14 of the Central Sales Tax Act, 1956 has declared certain goods, including tobacco (raw and manufactured) to be of special importance in inter-state trade or commerce. The States have been restricted from imposing or authorizing the imposition of tax on the sale or purchase of the declared goods within the State upto a maximum limit of 4 per cent of the sale or purchase price under Section 15 of the Central Sales Tax Act, 1956. Further, in December, 1956, the National Development Council, Planning Commission, Government of India, and the States agreed that the sales tax in respect of inter alia tobacco should be replaced by a surcharge on the Central Excise Duties, the income derived there from being distributed amongst States on the basis of consumption, subject to the income from the States being assured. Pursuant to this and the recommendation of the Finance Commission in its report dated 30th September, 1957, the Additional Duties of Excise (Goods of Special Importance ) Act 1957 was passed by Parliament, to impose additional duties of excise in replacement of the sales tax levied by the Union and the States on sugar, tobacco and millmade textiles and to distribute the net proceeds of these taxes, except the proceeds attributable to Union territories, to the States. Provision was made that the State which levy a tax on the sale or purchase of these commodities after the 1st April, 1958 could not participate in the distribution of the net proceeds of the additional levy under the ADE Act. Provision was also being made in the Act for including specified goods in the category of goods declared to be of special importance in inter-State trade or commerce so that, following the imposition of uniform duties of excise on them, the rates of sales tax if levied by any State were subject from 1st April, 1958 to the restrictions in Section 15 of the Central Sales Tax Act, 1956. It was therefore held that no State can levy luxury tax on items covered by Section 3 of the ADE Act in respect of goods for the same taxable event i.e. goods stored on manufacture, just by describing the goods as luxury goods as overlapping of the powers exercised under Entry 84 of List I and Entry 62 of List II would then be evident. Similarly storage or stocking of imported goods is covered by Entry 83 of List I and cannot be made the subject of levy by the States.

Considering the meaning placed upon taxes on sale of goods by the Clause 29A to the Article 366 of the Constitution, it was held that if any declared goods which are referred to in Section 14 of the Central Sales Tax Act, 1956 are involved in such transfer, supply or delivery, which is referred to in aforesaid Clause, the sales tax law of a State which provides for levy of sales tax thereon will have to comply with the restrictions mentioned Section 15 of the Central Sales Tax Act, 1956. No State can therefore by describing an item as a luxury, seek to levy tax on its supply.

It was held that to read Entry 62 List II as including articles of luxury cannot allow all these constitutional restrictions to be by-passed allowing States to levy tax on the supply of goods by describing them as luxury goods. The supply of luxury is nothing but the supply of goods since the goods themselves constitute the luxury. Therefore, even if tobacco is an article of luxury, a tax on its supply is within the exclusive competence of the State but subject to the constitutional curbs prescribed under Article 286 read with Sections 14 and 15 of the Central Sales Tax Act, 1956 and most importantly the ADE Act of 1957 under which no sales tax can be levied on tobacco at all if the State was to take the benefits under that Act.

However '[D]espite the subtraction of the rights to levy excise or customs duties and the restraint on the States to levy sales tax in cases when the states can levy tax on goods', the Hon'ble Court refused to accept the assessees' contention that all taxable events have been provided for in the different legislative heads. Such a construction, wopuld imply that no object or goods could be taxable. This would render the various entries in the State List including entries 57 and 58 contentless.

On considering the language of Entry 62 and the legislative history it was held that Entry 62 of List II does not permit the levy of tax on goods or articles. On an application of general principles of interpretation, the Court observed that the word 'luxuries' in Entry 62 of List II means the activity of enjoyment of or indulgence in that which is costly or which is generally recognized as being beyond the necessary requirements of an average member of society and not articles of luxury. In as much as none of the impugned statutes sought to tax any activity and sought to tax goods described as luxury goods, they were declared to be beyond legislative competence.

However following the principles in Somaiya Organics (India) Ltd. v. State of U.P. (2001) 5 SCC 519 while striking down the impugned Acts, the Hon'ble Court was pleased not to allow any refund of taxes already paid under the impugned Acts. If the assesses/appellants had collected any amount towards luxury tax from consumers/customers after obtaining interim orders, they were to pay all such amounts to the respective State Governments. In view of the conclusions reached by the Court qua the scope of Entry 62 List II, the other issues raised in the appeals were left open.

LAW RELATING TO ANTICIPATORY BAIL CLARIFIED

The Supreme Court in its recent decision in Adri Dharan Das Vs. State of West Bengal, reported as (2005) 4 SCC 303, while interpreting Section 438 of the Code of Criminal Procedure has observed that the very nature of the direction which the Court can issue under Section 438 of the Code, it is clear that the direction is to be issued only at the pre-arrest stage. The direction becomes operative only after arrest.

The Court further observed that the power exercisable under Section 438 is somewhat extraordinary in character and should be exercised only in exceptional cases where it appears that the person may be falsely implicated or where there are reasonable grounds for holding that a person accused of an offence is not likely to otherwise misuse his liberty.

The protection in terms of Section 438 is for a limited duration during which the regular Court has to be moved for bail in terms of Section 439 of the Code. The Courts while dealing with Section 438 applications cannot restrain arrest of the accused.

The practice of issuing blanket directions, to the effect that the applicant shall be released on bail "whenever arrested for whichever offence whatsoever" was deprecated.

LAW LAID DOWN IN STATE V. NALINI UPHELD

A Constitutional Bench of the The Hon'ble Supreme Court in its recent judgement in Prakash Kumar @ Prakash Bhutto Vs. State of Gujarat reported as (2005) 2 SCC 409, while considering the question as to whether confessional statement duly recorded under Section 15 of TADA would continue to remain admissible as for offences under any other law tried along with TADA offences under Section 12, notwithstanding the fact that accused was acquitted of offences under TADA in the trial, upheld the view taken by a Three Judge Bench in State v. Nalini - (1999) 5 SCC 253.

The Court after considering the arguments placed by the counsel, held inter alia that where the accused has been charged under the Code for TADA offences and offences other than TADA offences, and all offences are tried jointly, i.e., in the same trial, the Designated Court is empowered to convict the accused for the offences under any other law, notwithstanding the fact that no offence under TADA is made out.

Relying upon the decision in case of State Vs. Nalini the Court further held that in cases of such joint trials of accused for TADA offences and offences under any other law, admissibility of confessional Statement recorded in terms of the section 15 of TADA would continue to hold good for purpose of trial of other offences even if accused was ultimately acquitted of the offences under TADA.