Exceptions to Sales Tax Exemptions #1: Bench Reserves Judgment and Refers Questions to Regular Bench

Today, a Constitution Bench led by Justice Indira Banerjee and comprising Justices Hemant Gupta, Surya Kant, M.M. Sundresh, and Sudhanshu Dhulia heard the challenge to the Lieutenant Governor’s notification on taxation of Pan Masala and Gutka from January 31st, 2000. The notification introduced ‘Pan Masala and Gutka’ to the First Schedule of the Delhi Sales Tax Act, 1975 (DST Act)—all the items under this schedule are taxed according to Section 4 of the DST Act. Before the notification was issued, these goods were exempted from taxation as a ‘Tobacco’ product under the Third Schedule of the DST Act. 

The case was first heard by the Delhi High Court in November 2004 which upheld the notification, allowing Pan Masala and Gutka to be taxed under the First Schedule of the DST. The Delhi HC’s decision was challenged at the SC and a Bench comprising Justices Nariman and Kaul referred the case to a 5-Judge Constitution Bench in September 2017.

Today, the Constitution Bench referred the question of whether Pan Masala and Gutka could be taxed when Tobacco products were exempt, to a ‘regular’ 3-Judge Bench. The Bench has reserved Judgment on the question of whether a specific good can be taxed when the broad heading it is included under, is exempt from taxation. 

The Bench heard arguments from Senior Advocate Raja Ram Agarwal, representing the petitioner company Shanti Fragrances, and Additional Solicitor General N. Venkataraman, representing the Union government. 

Mr. Agarwal Explains the Conflict Between the Two SC Decisions

Sr. Adv. Raja Ram Agarwal first laid out the issues for the Bench to consider. He said there are two major cases that are in conflict with each other, Kothari Products Ltd. v Govt. of Andhra Pradesh (2000) and Commissioner, Sales Tax, Uttar Pradesh v Agra Belting Works (1987). 

In Kothari Products a 3-Judge Bench unanimously decided that Pan Masala and Gutka were Tobacco products, which are already subject to taxation under the First Schedule of the Additional Duties of Excise (Goods of Special Importance) Act, 1957 (ADE Act). Consequently, as with all other goods taxed under the First Schedule of the ADE Act, it was exempted from sales tax under the Andhra Pradesh General Sales Tax Act, 1957.

However, in Commissioner v Agra Belting Works, 3-Judge Bench, by a 2:1 majority, held that if taxation of a specific good interfered with an exemption provided in the same act, then it would be implied that the exemption was withdrawn. 

Mr. Agarwal laid out the two issues for the Court to decide. First, which of these two conflicting cases was correct in law? Second, would the Kothari Products decision have more ‘precedential value’ and be considered as the more authoritative pronouncement since it was a unanimous decision. On the other hand, Justice B.C. Ray, dissented in Agra Belting Works. 

Mr. Agarwal argued that two distinct steps need to be completed to tax an exempted good—the exemption must be withdrawn, and then a notification must be issued to begin imposing tax on the good. 

ASG Venkataraman Argues There is No Longer any Conflict Between the SC Decisions

Additional Solicitor General Venkataraman interjected during Mr. Agarwal’s arguments to correct him on the facts of the case. He said that before May 2001, Pan Masala and Gutka were considered a ‘beetle nut’ product and not a Tobacco product under the Central Excise Tax Act, 1944 (CET Act). On May 11th, 2001, Parliament amended the CET Act to distinguish between Pan Masala and Gutka which contained tobacco from Pan Masala and Gutka which did not. 

Further, he referred to the case of Godfrey Phillips (I) Ltd. v State of Uttar Pradesh (2005) where the SC held that states could not impose sales tax on products taxed under the CET or the ADE Acts. Mr. Venkataraman argued that after May 2001, when the CET was amended, States could not impose sales tax on Pan Masala and Gutka. So, there was no longer any conflict between the Judgments in Kothari Products and Agra Belting Works. 

The Bench readily accepted Mr. Venkataraman’s submission that there was no conflict between the two Judgments. Justice Gupta suggested sending the case back to a ‘regular’ 3-Judge Bench to decide the case. 

Mr. Agarwal attempted to continue his arguments and said that the challenge was to the power and method of issuing the notification, and agreed that the decision on the specific facts of this case should be referred to a regular Bench. 

Bench Strength is the Only Consideration for Determining Precedential Value

The Bench briefly considered if a dissenting opinion in a case should take away from the precedential value of the majority decision. None of the Judges or the advocates, including Mr. Agarwal who was making the argument, seemed interested in changing how the Court has assigned value to more than 70 years of case law. 

In one instance, Justice Gupta asked Mr. Agarwal if the landmark 13-Judge Bench decision in Kesavananda Bharathi v State of Kerala (1973) could be overruled by 8 Judges, as the decision had a 7:6 split. Mr. Agarwal replied stating the quorum (the total number of Judges on the Bench) would have to be larger as well for this to be the case. 

Sr. Adv. Gopal Subramaniam appeared as well, despite not being one of the parties in the case, to argue against Mr. Agarwal’s submission. He argued that cases that decided important questions of law would be upset by accepting his argument, and it should be given ‘the burial it deserves’. 

At the end of the hearing, the question of whether Pan Masala and Gutka could be taxed under the DST Act was referred to a 3-Judge Bench. The Court reserved Judgment on the question of whether a dissent can negatively affect the precedential value of a decision. The Judgment will also clarify whether states can issue notifications withdrawing the exemption from sales tax provided to specific goods.