Karnataka High Court Upholds GST & Central Excise Duty On Tobacco; Says 'Articles 246 & 246A Can Be Simultaneously Exercised'

A single Judge bench of Justice S. Sunil Dutt Yadav said, "It needs to be kept in mind that taxation is not merely a source of raising revenue but is also recognised by the fiscal tool to achieve fiscal and social objective."

The petitioner M/s.V.S.Products and others, all manufacturers of Tobacco and Tobacco products, in addition to quash the notification, had sought a declaration that the Repeal and Saving provision as contained in Section 174 of the Central Goods and Services Act, 2017 insofar as it seeks to save the operation of the Central Excise Act, 1994 qua tobacco and tobacco products as unconstitutional and bad in law.

Further to hold that Section 136 of the Finance Act, 2001 under which there is levy and collection of National Calamity Contingent Duty (NCCD) as unconstitutional. For refund of the NCCD amount collected by the respondents with effect from 01.07.2017 till date.

Petitioners submissions:

It was contended that the Goods and Services Tax is a single tax which subsumes various existing taxes levied at each stage of the supply chain starting from manufacture or import till the last retail level.

It was also argued that, "Article 246A contains a non-obstante clause while conferring power on the Parliament and legislature of the State to make laws with respect to goods and services. As Article 246A is carved out of Article 246, there is a denudation of power under Article 246."

Further, it was said, "Article 246A being a sui generis power exhaustive of taxes on all aspect and facets of supply of goods including tobacco and tobacco products, overrides the taxing power of legislature referable to Article 246 in light of the non-obstante clause in Article 246."

It was also contended that, "The levy of surcharge under Article 271 is to be restricted to goods and services which are excluded under Article 246A and as tobacco products fall within the ambit of Article 246A recourse to Article 271 to justify surcharge and sustain NCCD is impermissible."

Moreover, "The Union cannot levy any tax, cess or surcharge in the form of basic excise duty or NCCD on a facet of supply (that is manufacture) on tobacco products beyond the GST framework and scheme envisaged under Article 246A, 269A, 270 and 279A." It was added "The effect of levy of basic excise duty and NCCD which is exclusively retained by the Union and not subjected to apportionment between the States and the Union is violative of the Constitutional Scheme."

Finally, it was said, "The levy of basic excise duty and NCCD which is a duty of excise on tobacco and tobacco products is violative of Article 14 on the grounds of unreasonable classification and manifest arbitrariness.

Respondents Contentions:

It was submitted that "Except for alcoholic liquor for human consumption, petroleum and petroleum products, stamp duty, tobacco and tobacco products and opium, all other goods are liable only to Goods and Services Tax under Article 246A of the Constitution."

Further, it was said, "The Courts while interpreting the GST regime has to keep in mind that the Parliament had to make balances to accommodate the interest of the States and that the area of GST Law is such that judicial interpretation cannot be ahead of policy making."

The Union government argued that considering the nature of both the Federal partners and the complexity involved certain goods are kept outside the ambit of GST and certain goods such as tobacco, tobacco products and opium are subject to both GST and other taxes.

Further, it was said, "The exercise of power and its availability under Article 246A does not denude or restrict exercise of power under Article 246." It was also said, "The Parliament has retained power under Article 246 to levy excise duty on tobacco products notwithstanding that tobacco products suffer the levy of GST as the levy of GST is on the taxable event of supply of goods or services, whereas levy of excise duty is on taxable event of manufacture."

Court Findings:

The court noted the introduction of levy of Central Excise on tobacco and tobacco products by virtue of Notification of 2019, is traceable to the power under Article 246 with the field of legislation specified in Entry 84 of List I.

It observed, "The effect of introduction of Article 246A is conferment of the power of simultaneous levy on goods and services in the nature of Goods and Services Tax and the use of the word "notwithstanding" which is a non-obstante clause does not have the effect of abrogation of power available under Article 246."

It added that "The words "notwithstanding anything contained in Article 246" ought to be construed as having the effect of merely clarifying that inspite of the power under Article 246, power under Article 246A could be exercised and that Article 246 would not be an impediment to the operation of 246A."

The court held that "Sources of Power Under Article 246A and 246 are in fact mutually exclusive and could be simultaneously exercised."

Further, it held that "If the argument of the petitioners that post-introduction of Article 246A and if on the product by virtue of Goods and Services Tax Act under Article 246A GST has been introduced, there would be no power to take recourse to Article 246 r/w Entry 84 of List I to levy a duty of excise, it would in effect render the restructuring of Entry 84 of List I redundant. Such an interpretation is to be avoided. Further, irrespective of the restructuring of Entry 84 of List I the power under Article 246 remains unaltered."

The court also clarified that the Legislature enjoys a wide latitude to decide on the methodology of revenue generation and the courts should not rush and must tread carefully while dealing with legislation based on Fiscal Policy.

It said that "In the process of achieving ultimate goal as envisaged while introducing the GST the continuance of levies under the previous legislations unless barred ought to be permitted as being competent vis à-vis available source of power which cannot be defeated by resort to argument based on objects of GST as contained in the Objects Clause."

The court also held that "The interpretation of the petitioners that surcharge cannot be levied under Article 271 as regards those goods and services which are included under Article 246A is liable to be rejected as no such restriction could be placed on a plain reading of Article 271 which provides that surcharge could be levied at any time to increase duties or taxes. In fact, surcharge being imposed by way of the Finance Act has nothing to do with surcharge on GST that may still be levied."

The court also junked the contention of the petitioners that levy of excise duty and NCCD is violative of Article 14. It observed,"It must also be noted that the levy is also for the purpose of revenue generation and the choice of the category of goods for the purpose of revenue generation cannot ipso-facto be a ground of judicial review and something more is required such as hostile discrimination and singling out a particular category of goods."

It added, "The choice of the category of goods as in the present case may also be influenced by the objective of discouraging consumption and accordingly the choice of the category of goods for the purpose of revenue generation cannot be held to be arbitrary."

Accordingly the court dismissed the petitions.

Case Title: M/s.V.S.Products v. Union of India

Case No: W.P. No.52371/2019

Citation:  2022 LiveLaw (Kar) 7

Appearance: Senior Advocate C.S.Vaidyanathan, K.G.Raghavan, a/w Advocate Ananyaa Jagirdar, Prashanth F. Goudar, Goutham S. Bharadwaj and Vinay Kuttappa K.S for petitioners; Additional Solicitor General M. Venkataraman, a/w Advocate Jeevan J. Neeralgi, for respondents.

Click Here To Read/Download Order