By TIOL News Service

NEW DELHI, OCT 03, 2018: THE validity of the Goods and Services Tax (Compensation to States) Act, 2017 enacted by Parliament as well as the Goods and Services Tax Compensation Cess Rules, 2017, the Rules framed by the Central Government in exercise of power under Section 11 of the Goods and Service Tax (Compensation to States) Act, 2017 are under challenge in these cases.

The writ petitioner imports coal from Indonesia, South Africa and also purchases coal from Indian mines. The Finance Act, 2010 with effect from 01.07.2010 levied Clean Energy Cess which was in the nature of a duty of excise on the production of coal and was being collected at the time of removal of raw coal, raw lignite and raw peat from the mine to the factory.

Section 18 of the Constitution (One Hundred and First Amendment) Act, 2016 enabled the Parliament to levy a cess for five years to compensate the States for the loss of revenue on account of GST.

On 12.04.2017, Parliament enacted three Acts, namely, (1) The Central Goods and Services Tax Act, 2017; (2) The Integrated Goods and Services Tax Act, 2017; and (3) The Goods and Services Tax (Compensation to States) Act, 2017. On 04.05.2017, the Taxation Laws (Amendment) Act, 2017 was enacted, whereunder, several cesses including Clean Energy Cess was repealed.

The writ petitioner submitted a representation to the GST Council seeking set off of Clean Energy Cess against GST Compensation Cess.

A Writ Petition came to be filed by Mohit Minerals Pvt. Ltd. in Delhi High Court.

In the interim order dated 25.08.2017, the Division Bench observed that there is a prima facie case made out by the writ petitioner regarding lack of legislative competence of Parliament to enact Compensation to States Act, 2017. See 2017-TIOL-06-HC-DEL-GST. Also see 2017-TIOL-1844-HC-DEL-MISC.

Civil Appeal came to be filed against this interim order.

The Supreme Court stayed the impugned order dated 25.08.2017 passed by the High Court. See 2017-TIOL-01-SC-GST.

The matter was heard and an order was passed today.

After hearing at length both sides, the Supreme Court inter alia crystallised the issues and made its observations as under:

Issue No.1

Whether the Compensation to States Act, 2017 is beyond the legislative competence of Parliament?

Adverting to the Article 248, 246A, the definition of “Cess” as given in the Advanced Law Lexicon by P RamanathaAiyar, the apex court decision in Shinde Brothers vs. Deputy Commissioner AIR 1967 SC 1512 [para 39], India Cement Ltd. 1990 1 SCC 12 [para 19] - 2002-TIOL-1926-SC-MISC-LB, Vijayalakshmi Rice Mill vs. CTO, (2006) 6 SCC 763 [para 13] - 2006-TIOL-99-SC-CT, the Apex Court observed -

40.? The expression “cess” as held above means a tax levied for some special purpose, which may be levied as an increment to an existing tax. The Scheme of Compensation to States Act, 2017 as noticed above indicate that the cess is with respect to goods and services tax. There are more than one reasons to uphold the legislative competence of Parliament to enact the Compensation to States Act, 2017…[Constitution Bench in Union of India Vs. Harbhajan Singh Dhillon, (1971) 2 SCC 779, para 21 refers]

41. When we pose the above question in context of impugned legislation, i.e. Compensation to States Act, 2017, we do not find any entry in List II or List III of Seventh Schedule, which may refer to levying of cess in question. Article 248 read with Articles 246 and 246A clearly indicate that residuary power of legislation is with the Parliament. In the present case, we may notice that no contention has been raised before us that the subject matter of legislation was within the competence of State Legislature, and that the Parliament had no competence to legislate. Applying the H.S. Dhillon's test (supra) , we do not find any lack of legislative competence in the Parliament.

47. After Constitution (One Hundred and First Amendment) Act, 2016, as per Article 270, Parliament can levy cess for a specific purpose under a law made by it. Article 270, thus, specifically empowers Parliament to levy any cess by law. Lastly, Section 18 of the Constitution (One Hundred and First Amendment) Act, 2016 expressly empowers Parliament shall, “by law” on the recommendation of the Goods and Services Tax Council, provide for compensation to the states for loss of revenue arising on account of implementation of the goods and services tax....” When Constitution provision empowers the Parliament to provide for Compensation to the States for loss of revenue by law , the expression “law” used therein is of wide import which includes levy of any cess for the above purpose. We, thus, do not find any merit in the submission of the learned counsel for the petitioner that Parliament has no legislative competence to enact the Compensation to States Act, 2017.

Held:

++ The Compensation to States Act, 2017 is not beyond the legislative competence of the Parliament.

Issue No.2 and Issue No.3

Whether Compensation to States Act, 2017 violates Constitution (One Hundred and First Amendment) Act, 2016 and is against the objective of Constitution (One Hundred and First Amendment) Act, 2016?

Whether the Compensation to States Act, 2017 is a colourable legislation?

The Supreme Court observed -

50. One of the objectives as noticed in Statements of Objects and Reasons was “conferring concurrent taxing powers upon Parliament and the State Legislature to make laws for levying goods and services tax”. Article 246A sub­article(1) empowers the Parliament to “make laws with respect to goods and services tax”. The word “with respect to” is word of expansion. Similar expressions namely, “pertaining to”, “in relation to” came to be considered before this Court in M/s. Doypack Systems Pvt. Ltd. Vs. Union of India & Others, (1988) 2 SCC 299 - 2002-TIOL-389-SC-MISC, where this Court held that the above expressions are used in the expansive sense. [paragraphs 48 & 49 refers]

53. … The case of the Union is not that cess is a fee. Rather contention is that it is increment to the goods and services tax. We having already held that State compensation cess is “with respect to” goods and services tax, it is a tax.

55. The expression used in Article 246A is “power to make laws with respect to goods and services tax”. The power to make law, thus, is not general power related to a general entry rather it specifically relates to goods and services tax. When express power is there to make law regarding goods and services tax, we fail to comprehend that how such power shall not include power to levy cess on goods and services tax. True, that Constitution (One Hundred and First Amendment) Act, 2016 was passed to subsume various taxes, surcharges and cesses into one tax but the constitutional provision does not indicate that henceforth no surcharge or cess shall be levied .

57. Further, the Preamble of Compensation to States Act, 2017 expressly mentions the Act to provide for compensation to the States for the loss of revenue arising on account of implementation of the goods and services Tax in pursuance of the provisions of the Constitution (One Hundred and First Amendment) Act, 2016. Thus, the Compensation to States Act, 2017 has been enacted under the express Constitution (One Hundred and First Amendment) Act, 2016. We, thus, also do not find any force in the submission of the learned counsel for the petitioner that Compensation to States Act, 2017 transgresses the Constitution (One Hundred and First Amendment) Act, 2016.

58. Due to above reasons, we do not find any substance in the submission of the petitioner that Compensation to States Act, 2017 is a colourable legislation. We having held that Parliament has full legislative competence to enact the Act and the Act having been enacted to implement the Constitution (One Hundred and First Amendment) Act and the object being clearly to fulfill the Constitution (One Hundred and First Amendment) Act's objective, we reject the submission of the petitioner that Compensation to States Act, 2017 is a colourable legislation…

Held:

++ The Compensation to States Act, 2017 does not violate Constitution (One Hundred and First Amendment) Act, 2016 nor is against the objective of Constitution (One Hundred and First Amendment) Act, 2016.

++ The Compensation to States Act is not a colourable legislation.

Issue No.4

Whether levy of Compensation to States Cess and GST on the same taxing event is permissible in law?

60. The principle is well settled that two taxes/imposts which are separate and distinct imposts and on two different aspects of a transaction are permissible as “in law there is no overlapping”.

[Federation of Hotel & Restaurant Associate of India, Etc. Vs. Union of India and others, (1989) 3 SCC 634 = 2002-TIOL-699-SC-MISC-LB. Avinder Singh and others Vs. State of Punjab and others, (1979) 1 SCC 137 refers]

63. Goods and Services Tax imposed under the 2017 Acts as noticed above and levy of cess on such intra­State supply of goods and services or both as provided under Section 9 of the CGST Act and such supply of goods and services or both as part of Section 5 of IGST Act is, thus, two separate imposts in law and are not prohibited by any law so as to declare it invalid.

Held:

++ Levy of Compensation to States Cess is an increment to goods and services tax which is permissible in law.

Issue No.5

Whether on the basis of Clean Energy Cess paid by the petitioner till 30 th June, 2017, the petitioner is entitled for set off in payment of Compensation to States Cess?

66. The distribution between the Union and States of the Clean Energy Cess and GST Compensation Cess so collected are also different. Under Section 83(6) of the Finance Act, 2010 the Clean Energy Cess was to be used for the purposes of the Union and not to be distributed to the States whereas States Compensation Cess has to be wholly distributed amongst the States to compensate the States.

67. The petitioner's submission that the petitioner should be given the credit to the extent of payment of Clean Energy Cessupto 30.06.2017 also cannot be accepted. The Clean Energy Cess and States Compensation Cess are entirely different from each other, payment of Clean Energy Cess was for different purpose and has no bearing or connection with States Compensation Cess. Giving credit or set off in the payment is legislative policy which had to be reflected in the legislative scheme. Compensation to States Act, 2017 or Rules framed thereunder does not indicate giving of any credit or set off of the Clean Energy Cess already paid till 30.06.2017. Thus, claim of the petitioner that he is entitled for set off in payment of Compensation to States Cess to the extent he had already paid Clean Energy Cess cannot be accepted.

Held:

++ The petitioner is not entitled for any set off of payments made towards Clean Energy Cess in payment of Compensation to States Cess.

The Writ Petition (and transferred case) is dismissed and both the Civil Appeals are allowed.

(See 2018-TIOL-462-SC-GST)