CESS – WHETHER A ‘TAX’ OR ‘FEE’?

[Mr. M. GOVINDARAJAN]

The question whether a particular statutory impost is a ‘tax’ or ‘fee’ has arised as a challenge in several cases before High Court as well as before Supreme Court. It necessitated the demarcation between the concepts of ‘cess’, ‘tax’ and ‘fee’. 

The neat and terse definition of tax has been given by Latham C.J. in ‘Matthews V. Chicory Marketing Board’ – (1938) 60 CLR 263.  Tax is a compulsory exaction of money by public authority for public purposes enforceable bylaw and is not payment services rendered.   In bringing out the essential features of a tax this definition also assists in distinguishing a tax from a fee. It is true that between a tax and a fee there is no generic difference. Both are compulsory exaction of money by public authorities; but whereas a tax is imposed for public purposes and is not, and need not, be supported by any consideration of service rendered in return, a fee is levied essentially for services who pays the fee and the public authority which imposes it. If specific services are rendered to a specific area or to a specific class of persons or trade or business in any local area and as a condition precedent for the said services on in return for them cess is levied against the said area or the said class of persons or trade or business the cess is distinguishable from a tax and is described as a fee. Tax recovered by the public authority invariably goes into the consolidated fund which ultimately is utilized for all public purpose, whereas a cess levied by way of fee is not intended to be, and does not become, a part of the consolidated fund. It is earmarked and set apart for the purpose of services for which it is levied. 

In ‘Hingir Rampur Coal Co. Ltd., V. State of Orissa’ – 1961 (2) SCR 537 the constitutional validity of the Orissa Mining Areas Development Fund Act, 1952 levying cess on the petitioner’s colliery was challenged.   The Supreme Court opined that the primary and the principal object of the Act was to develop the mineral areas in the State and to assist in providing more efficient and extended exploitation of its mineral wealth.   The Cess levied did not become a part of the consolidated fund and was not subject to an appropriation in that behalf.  It went into a special fund earmarked for carrying out the purpose of the Act and thus, its existence established a correlation between the Cess and the purpose for which it was levied, satisfying the element of quid pro quo in the scheme.   These features of the Act impressed upon the levy the character of a ‘fee’ as distinct from a ‘tax’.

In ‘State of West Bengal V. Kesoram Industries Limited & Others’ – 2004 -TMI - 40362 - SUPREME Court the Constitution Bench decided the validity of the levy of Cesses on coal-bearing lands, tea plantation lands and on removal of bricks earth.   In this case the Supreme Court explained the distinction between the terms ‘tax’ and ‘fee’.  It was held that the term ‘cess’ is commonly employed to connote a tax with a purpose or a tax allocated to a particular thing.   However, it also means an assessment or levy.   Depending on the context and purpose of levy, cess may not be a tax; it may be a fee or fee as well.   It is not necessary that the services rendered from out of the fee collected should be directly in proportion with the amount of fee collected.   It is equally not necessary that the services rendered by the fee collected should remain confined to the person from whom the fee has been collected.   Availability of indirect benefit and a general nexus between the persons bearing the burden of levy of fee and the services rendered out of the fee collected is enough to uphold the validity of the fee charged.

In ‘Kewal Krishan Puri and another V. State of Punjab and another’ – 1980 (1) SCC 416, the Supreme Court dealt with the provisions of Punjab Agricultural Produce Markets Act, 1961.   The Supreme Court held that the element of quid pro quo must exist between the payer of the fee and the special services rendered.  The Constitution Bench of the Supreme Court observed that a ‘fee’ is a charge for special service rendered to individuals by the Government agency and therefore, for levy of fee an element of quid pro quo for the services rendered was necessary; service rendered does not mean any personal or domestic service and it meant service in relation to the transaction, property or the institution in respect of which the fee is paid.

In ‘Sreenivasa General Traders and others V. State of Andhra Pradesh and others’ – (1983) 4 SCC 353, the Supreme Court viewed that the traditional view that there must be actual quid pro quo for a fee has undergone a sea change in the subsequent decisions.  The distinction between a tax and a fee lies primarily in the fact that a tax is levied as part of common burden, while a fee is for payment of a specific benefit or privilege although the special advantage is secondary to the primary motive of regulation in public interest. If the element of revenue for a general purpose of the State predominates, the levy becomes a tax. In regard to fees, there is, and must always be, correlation between the fee collected and the service intended to be rendered.  In determining whether a levy is a fee, the true test must be whether its primary and essential purpose is to render specific services to a specified area of class; it may be no consequence that the State may ultimately and indirectly be benefited by it.  The power of any legislature to levy a fee is conditioned by the fact that it must be ‘by and large’ a quid pro quo for the services rendered is one of general character and not mathematical exactitude.  All that is necessary is that there should be a ‘reasonable relationship’ between the levy of the fee and the services rendered. `

In ‘Dewan Chand Builders & Contractors V. Union of India’ – 2011 (274) ELT 161 (SC) appeals were filed by the petitioners against the order of the High Court hold that-

The Building and other construction workers (Regulation and Employment and conditions of service) Central Rules, 1998;

The Building and other construction Workers (Regulation and Employment and conditions of Service) Central Rules, 1998;

The Building and other Construction Workers Welfare Cess Act, 1996; and

The Building and Other Construction Workers Welfare Cess Rules, 1998 are constitutionally valid.

The petitioners contended that the Cess Act is the lack of legislative competence of the Parliament.  It was strenuously urged by the petitioners that the impost levied by the Cess Act is a compulsory and involuntary exaction made for a public purpose without reference to any special benefit for the payer of the Cess.   It was further argued that there exists no co-relationship between the payer of the Cess and the services rendered and therefore, the levy is in effect a tax.  The maintenance of a separate corpus i.e., Building and Construction Workers Welfare Fund, which also vests in the State, is a cloak to cover the true character of the levy, which is to be utilized for the benefit of the building worker, is in fact a ‘tax’.  Asserting that the Cess Act in fact provides for the levy of tax although it is termed as Cess, it was contended that no tax can be levied or collected in terms of Article 265 of the Constitution of India, except by authority of law.   In other words, the power to make a legislation imposing a tax has to be traced with reference to a specific entry in the Lists in the Seventh Schedule to the Constitution.   The subject matter of the present statute i.e., Cess Act being fully covered by Entry 49 in List II (State List) pertaining to taxes on ‘land and buildings’, the power to levy cess would not be available to the Parliament, based on the assumption of residuary power.

The Department contended that the Cess Act is within the legislative competence of Parliament with reference to Entry 97 of List I in the Seventh Schedule. The charging section in the Cess Act makes it clear that the levy is attracted when there is an activity of building and construction. The collection of cess on the cost of construction is for enhancing the resources of the Building & other Construction Workers’ Welfare Boards constituted under the Act. The Cess so collected is directed to a specific and spelt out in the Act itself. It is set apart for the benefit of the building and construction workers, appropriated specifically for the performance of such welfare work and is not merged in the public revenues for the benefit of the general public.

The court held that the Statement of Objects and Reasons of the Cess Act clearly spells out the essential purpose, the enactment seeks to achieved i.e., to augment the Welfare Fund under the Act.  The levy of Cess on the cost of construction incurred by the employers on the building and other construction works is for ensuring sufficient funds for the welfare boards to undertake social security schemes and welfare measures for building and other construction workers.   The fund, so collected, is directed to specific ends spelt out in the Act.   Therefore, applying the principle laid down in the decisions of many of the Courts, it is clear that the said levy is a ‘fee’ and not ‘tax’.   The said fund is apart and appropriated specifically for the performance of specified purpose; it is not merged in the public revenues for the benefit of the general public and as such the nexus between the Cess and the purpose for which it is levied gets established, satisfying the element of quid pro quo in the scheme. With these features of the Cess Act, the subject levy has to be construed as ‘fee’ and not a ‘tax’. Thus the Court upheld and affirmed the findings of the High Court on the issue.