High courts have given widely differing verdicts, leading to scores of appeals to the Supreme Court.
Semantics play a major role in interpreting laws, and there is nothing the legal profession enjoys more than nit-picking on words. A lay person would not stop to think over the different meanings of tax, cess, fees, levy or duty. But not the tribe in black robes. This is illustrated in two sets of judgements delivered by the Supreme Court in recent weeks.
In the appeals against the Andhra Pradesh High Court, led by Vijayalashmi Rice Mill vs Commercial Tax Officer, the issue was whether the rural development cess charged on purchase and sale of rice was a tax, fee or any one of the imposts. If it is a tax, the state government has no power to levy it under the Constitution. On the other hand, if it is a fee, the state government can demand it. However, there is a condition that the government must provide some service or facility in return for the fee. The same question arose with regard to legislations passed by other state governments. The traders challenged the cess on the ground that it was a tax as there was no quid pro quo in it. The cess is collected from the dealers and nothing is provided for their benefit. The state government contended that it was a fee and, therefore, it had the power to charge it under the Constitution. The Supreme Court accepted the contention of the government, but not before pointing out the new turn in the judicial thinking on the subject.
Referring to the Constitution bench judgement in India Cement vs State of Tamil Nadu (1990), the Supreme Court once again explained the two concepts. Ordinarily, a cess is also a tax, but it is a special kind of tax. Generally, tax raises revenue which can be used generally for any purpose of the state. For instance, income tax or excise tax can be utilised by the government for any purpose, like payment of salary to the armed forces or for development programmes. However, cess is a tax that generates revenue for a specific purpose, like health cess utilised for building hospitals or giving medicines for the poor.
This traditional view, in recent times, has undergone a sea change. According to judgements as in State of Himachal Pradesh vs Shivalik Agro Poly Products (2004), the Court explained that it was no longer regarded necessary that some specific service must be rendered to the particular individuals from whom the fee is being realised. What has to be seen is whether there is a broad and general co-relationship between the totality of the fee on the one hand, and the totality of expenses and services on the other. There need not be an exact mathematical co-relation between the amount realised as a fee and the value of the services rendered. A broad co-relation between the two is sufficient to sustain the levy.
As an illustration, the Supreme Court said that if Rs 100 crore revenue was generated every year by a cess, it is not necessary that this entire amount must be spent on the assigned purposes. It will be sufficient if a substantial part of this Rs 100 crore is spent on such purposes. At the same time, we would like to clarify that if, say, Rs 100 crore is generated by the cess in question and only Rs 1 crore or Rs 50 lakh is spent on the avowed purpose, obviously there would not be in such a case a broad co-relation between the fee being realised and the service rendered, the judgement pointed out.
The second group of judgements relating to a question similar to this was delivered by the Supreme Court in Jindal Stainless Ltd vs State of Haryana. The issue revolved round the concept of compensatory tax. Several high courts in the country took one position, which was not satisfactory in the view of a two-judge bench of the Supreme Court. But this bench of the apex court itself doubted the law laid down by it in earlier cases. Therefore, the issue was further referred to a Constitution bench and then returned to a smaller bench.
The prevailing view of the Supreme Court on this issue is that compensatory tax is by nature hybrid, but it is closer to fees than to tax as both fees and compensatory taxes are based on the principle of equivalence and on the basis of reimbursement/recompense. Pointing out the principles laid down in the Constitution bench judgement, the court referred all the appeals, some hundred of them, back to the respective high courts to be dealt with anew within five months. All those cases will, however, return to the Supreme Court in the first week of 2007. If the high courts still give divergent verdicts on this issue in individual cases, there will be further flow of judicial ink at the apex level. This is something that should be avoided for the sake of good business and certitude in law.
M J Antony