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2016 (10) TMI 561 - BOMBAY HIGH COURT

2016 (10) TMI 561 - BOMBAY HIGH COURT - [2016] 96 VST 531 (Bom) - Constitutional validity of levy of VAT on pan masala containing tobacco - claim of exemption from VAT since tobacco products liable to ADE (GSI) under section 3 of the ADE Act, 1957 - The Parliament omitted Chapter headings 2401, 2402 and 2403 and sub-heading and tariff item thereunder from the First Schedule to ADE Act 1957 vide section 10, Taxation Laws (Amendment) Act, 2007 (Act No.16 of 2007) effective from 1st April, 2007, wi .....

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f Act, 1985, in which after the Finance Act 2001, it classified pan masala containing tobacco as 2404.09. Mrs. Jeejeebhoy is right in submitting that pan masala on the face of it is different from tobacco and constitutes a separate class by itself. We have perused Chapters 21 and 24 of the Central Excise Tariff Act and as appearing in the compilation tendered by the petitioners from pages 88 to 90, 93, 96 and 101. The corresponding Note, namely, Note No.3 in Chapter No.21 was amended to clarify .....

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world as different from tobacco. Pan masala is said to be a preparation containing betel-nuts and one or more of the ingredients referred above. Unlike the other entries in Chapter 24 of the 1985 Act, essentially dealing with tobacco, pan masala may or may not contain tobacco. - The State's power to legislate is not curtailed by the ADE Act. If that is not curtailed, then, any reliance on the constitutional scheme of distribution of revenues and taxes cannot be of assistance. That would prob .....

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nation as above need not be considered at all. - Decided against the petitioner. - WRIT PETITION NO. 8572 OF 2015 & WRIT PETITION NO. 9265 OF 2015 - Dated:- 4-10-2016 - S.C. DHARMADHIKARI & DR. SHALINI PHANSALKARJOSHI, JJ. Mr. V. Sridharan, senior counsel with Mr. C.B. Thakar, Mr. Rahul Thakkar, Mr. Girish Kala and Mr. Puneeth Ganapathy for the Petitioner in both the Writ Petitions. Mrs. Naira Jeejeebhoy, special counsel for the Respondents in both the Writ Petitions. ORAL JUDGMENT. : [P .....

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26.6.2015 demanding part payment of ₹ 1,41,93,1897/- from the Petition for grant of stay in appeal. (ii) restraining the Respondents by their servants, agents and subordinates from enforcing the order dated 26.6.2015 passed by the Respondent No.3 directing the Petitioners to make part payment. …. (f) this Hon'ble Court may be pleased to issue a Writ of Mandamus or Writ in the nature of Mandamus or any other appropriate Writ, order or direction under Article 226 of the Constituti .....

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er has been passed by respondent No.3. 3 The writ petition is filed by contending that the petitioner in this writ petition is a private limited company, incorporated and registered under the Indian Companies Act, 1956, having its registered office at the address mentioned herein above. 4 Respondent Nos.1 to 4 are the authorities exercising powers together with the State itself under the Maharashtra Value Added Tax Act, 2002 (for short MVAT ). 5 The petitioner, inter-alia, engages itself in the .....

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liability of 12.5% on the sale of such pan masala not containing tobacco. At Annexure-A collectively are copies of invoices for sale of such pan masala. 6 The petitioner also manufactured and sold pan masala containing tobacco, commonly known as Guthka / Mawa under various brand names. That is classifiable under Tariff Heading 24939990 of the Central Excise Tariff Act, 1985 during the relevant period. The petitioner has claimed exemption on payment of VAT on sale of such pan masala containing to .....

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February, 2006, therefore, the petitioners have claimed exemption from payment of VAT on sale of such pan masala containing tobacco under Schedule Entry A-45 of the MVAT Act, 2002. 9 Entry 45 of the Schedule A to the MVAT Act, 2002, as introduced reads as under : Sr.No. Name of the Commodity Conditions & exceptions Rate of Tax (%) Date of effect 45 Sugar, fabrics and tobacco as described from time to time in column 3 of the First schedule to the Additional Duties of Excise (Goods of Special .....

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tion containing betel nuts and tobacco and any one or more of the following ingredients, namely :- (i) Lime, and (ii) Kattha (Catechu) whether or not containing any other ingredient such as cardamom, copra and menthol. 11 With effect from 1st March, 2006, pan masala containing tobacco falling under 24039990 of the First Schedule to ADE Act, 1957, was liable to additional duty of excise @ 18% under the said Schedule. However, the said tobacco product was exempt from payment of additional duty of .....

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. It continued to avail exemption from payment of VAT vide Entry A-45 of the MVAT for the period from 1st March, 2006 till 31st March, 2007. 14 Since the said pan masala containing tobacco is described in column (3) of the First Schedule to The Additional Duties of Excise (Goods of Special Importance) Act, 1957, during the relevant period of time, the petitioners have discharged ADE at 18% on the sale of such pan masala containing tobacco. Illustrative copies of the invoices for sale of such pan .....

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unt of sale of Gutkha and Mawa. A copy of the said assessment order dated 22nd August, 2014, is annexed as Annexure-C to the paper-book. 16 Being aggrieved by the assessment order dated 22nd August, 2014, the petitioner has preferred an appeal before the respondent No.4. During the hearing of the stay application, it was submitted before the respondent No.4 that the petitioners are claiming exemption from payment of VAT only on gutkha and mawa which are tobacco products liable to ADE (GSI) under .....

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d ordered part payment of ₹ 1,60,39,180/- vide order dated 22nd September, 2014. A copy of the order dated 22nd September, 2014 passed by respondent No.4 is annexed as Annexure-D to the paper-book. 17 Being aggrieved by the part payment order of the Respondent No.4, the petitioner filed an appeal before the respondent No.5. The respondent No.5, vide order dated 26th June, 2015, in VAT Appeal No.971/2014 relied on the Explanation to Schedule Entry A-45 inserted with effect from 1st February .....

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cording to the petitioner, are as under : 19 The Parliament omitted Chapter headings 2401, 2402 and 2403 and sub-heading and tariff item thereunder from the First Schedule to ADE Act 1957 vide section 10, Taxation Laws (Amendment) Act, 2007 (Act No.16 of 2007) effective from 1st April, 2007, without losing share of central taxes. This enabled States to levy VAT on tobacco with effect from 1st April, 2007. 20 The objects and reasons of the Taxation Laws (Amendment) Bill, 2007, read as under : 5. .....

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er amended Entry A-45 of the MVAT Act, 2002, to remove all references to tobacco in the said entry with effect from 1st April, 2007. 23 The said Entry A-45 relevant for the period in dispute reads as under : Sr.No. Name of the Commodity Conditions & exceptions Rate of Tax (%) Date of effect 45 Sugar, fabrics and tobacco as described from time to time in column 3 of the First schedule to the Additional Duties of Excise (Goods of Special Importance) Act, 1957 (58 of 1957). Nil % 1-4-2007 to 31 .....

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eriod after 1st April, 2007 is not subject of this petition. 26 An affidavit-in-reply has been filed by the State in Writ Petition No.9265 of 2015. In the affidavit-in-reply, apart from raising preliminary objections, what has been submitted is that the petitioner in writ petition No.9265 of 2015 filed this petition in September, 2015, to impugn the provisions of a Notification dated 21st January, 2006, and the number of which has been set out in the affidavit in paragraph 2(a). It is submitted .....

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or to this petition being filed, the petitioners preferred an appeal against the assessment order before the Joint Commissioner of Sales Tax (Appeals), Kolhapur. That appeal is still pending. The petitioner has, inter-alia, submitted in the grounds of that appeal that it has paid additional duty of excise and the State of Maharashtra has been provided a share from the undivided pool of such duty as per the Presidential Order existing during the relevant period of time. Thus, the issues that are .....

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urt. An extensive reference is made to the findings and conclusion which can be deduced from the Hon'ble Supreme Court's judgment. Summing up the same, it is submitted that levy of additional excise duties under the ADE Act, 1957, and distribution thereof to the States does not take away the State's power to make law with reference to Entry No.52 or Entry No.54 in List II (State List) to the VIIth Schedule of the Constitution of India. Once it is accepted that the State has a power t .....

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und which could be easily raised by the State Government. The matter thus is strictly between the Centre and the State Governments and the petitioners cannot in any way be affected or concerned about the same. Once the State is empowered to legislate, then, the issue of constitutional validity of the impugned law does not arise. In the present case, the categorization is justifiable and the alleged retrospective applicability of the impugned provisions is the only point to be adjudicated in the .....

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light of the judgment of the Hon'ble Supreme Court. 30 Then, the affidavit-in-reply attempts to distinguish the judgment of the Hon'ble Supreme Court of India in the case of Godfrey Phillips (India) Limited & Anr. v. State of Uttar Pradesh & Ors. (2005) 2 SCC 515. The affidavit-in-reply then deals with the grounds with regard to the levy and distribution of additional duties of excise. 31 It is then urged that clause (10) of the impugned Notification is clarificatory. It is in c .....

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e levies any tax or duty on sale or purchase of the goods described in column (3) of the First Schedule to the ADE Act. This was reflected in Schedule Entry A-45 of the MVAT Act which, at the relevant time, provided that sugar, fabrics and tobacco as described from time to time in column (3) of the First Schedule to the Additional Duties of Excise (Goods of Special Importance) Act, 1957 would not be taxed. Therefore Ground V.2 at page 30 of the petition is incorrect in interpreting Schedule Entr .....

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nd kattha (catechu) and tobacco whether or not containing any other ingredient, such as, copra and menthol. The said tariff item was numbered as 2106. It was only pursuant to the Finance Act, 2001, that pan masala containing tobacco was classified in Chapter 24 as a tobacco product under tariff item 2404.49. This position was reflected in the First Schedule to the ADE Act. Until 2001 pan masala was not included in the First Schedule to the ADE Act. It was only after 2001 that one of the goods de .....

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1956 as goods of special importance in inter-State trade or commerce. The fact that pan masala intrinsically and commercially differs from tobacco and its other variants is also clear from the description of pan masala, which is said to be a preparation containing betel nuts and one or more of the following ingredients, namely lime and kattha (catechu) whether or not containing any other ingredients such as cardamom, copra and menthol. Unlike the other entries in Chapter 24 of the 1985 Act, pan .....

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4 in Chapter 24 of the Central Excise Tariff Act, 1985, read with the reference to the tariff item in Column (2) and is not expressly referred in Column (3) of the First Schedule to the ADE Act. 33 Since pan masala containing tobacco was no longer described in column (3) of the First Schedule to the ADE Act, it no longer fell within the definition of Schedule Entry A-45 in the MVAT Act. The impugned Notification inserted an Explanation to Schedule Entry A-45 to clarify this position. In accordan .....

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ding pan masala was also inserted in the Bombay Sales Tax Act and operated retrospectively during the period prior to 2001 when pan masala containing tobacco was not described in column (3) of the First Schedule to the ADE Act. It is in these circumstances that the petitioner is not liable to pay VAT on the sale of gutkha for the Financial Year 2005- 2006 when additional duties of excise was applicable on the products and has been discharged by the petitioner whether for the reasons alleged or a .....

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ion. 36 While dealing with Grounds Y.1 to Y.5, it is denied that the States were entitled to levy VAT on tobacco only with effect from 1st April, 2007. The Trade Circular 29T of 2007 dated 30th March, 2007, as well as the Thirteenth Finance Commission Report referred to in Grounds Y and Z.1 of the petition are being deliberately misconstrued by the petitioners and, in any event, are not determinative of the legal position. For all these reasons, it is submitted that no relief should be granted t .....

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the petition challenges the order dated 20th June, 2015. Therefore, it cannot be said to be not maintainable or barred by delay and laches. 38 Then it is submitted that existence of an alternate remedy is not a bar to the maintainability of the writ petition, particularly when the challenge is to the validity of the Explanation added to Entry A-45 by Notification dated 21st January, 2006. The petitioners' other contention that amendment introduced by the Notification dated 21st February, 20 .....

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paragraph 9 of this affidavit relies on Article 261 of the Constitution of India to submit that the State cannot argue and urge anything to the contrary, particularly when it has projected and assured the Central Government / other State Governments that it is complying with the stipulations in Payment Order under Article 270 and is not levying sales tax on commodities covered by the Schedule to the ADE Act. That is why it is entitled to full share of all Central taxes without any reduction wha .....

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It is on this material that we have to consider the submissions of the learned senior counsel appearing for the petitioners and of the special counsel appearing for the State. 43 Mr. Sridharan, the learned senior counsel appearing on behalf of the petitioners submits that the Tax Rental Agreement between the Centre and States for collection of additional duties of excise by the Centre, but distribution of the same entirely to the State Governments is reflected from the constitutional scheme its .....

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on these commodities. The entire additional excise duties levied and collected by the Centre will be disbursed to the States (except the portion in relation to Union territories). On their part, the States were to refrain from exercising their power to levy sales tax on these three commodities. In view of this arrangement, the Centre has been levying and collecting additional excise duty since 1957 and distributing the same among the States. The inter-se share of the States in accordance with t .....

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red in both the Writ Petitions, but essentially in Writ Petition No.9265 of 2015. It is, therefore, clear that during the subsistence of this Tax Rental Agreement, no State while choosing to impose sales tax on the above commodities shall be eligible to the share in additional duties of excise. Further, if a State chooses to reimpose sales tax on any of the above commodities, then, no sums will be paid to that State as its share in the proceeds from the additional excise duty of that commodity u .....

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able event is manufacture. However, the duty levied under the ADE Act is over and above the duty levied under the Central Excise Act and to distinguish it from duties levied under the Central Excise Act popularly, known as additional duties of excise. Then, Mr. Sridharan relies on section 4 of this ADE Act which provides for a distribution of the additional duties of excise among the States. He also relies upon the amendments carried out to the Second Schedule to the ADE Act by Amending Act enac .....

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eu of the share towards additional duties of excise. This is apart from 26% of the Central taxes being State's share in Central taxes. Mr. Sridharan then invites our attention to Articles 270, 271 and paragraph 13 of the Report of the Tenth Finance Commission to urge that this would demonstrate that the Finance Commission recommended 25% of the tax collected, including the additional duties of central excise to be distributed to the States as per their share of Central taxes. In addition, th .....

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endment was asserted on 19th June, 2000. Now, the new Article 270 is substituted with retrospective effect from 1st April,1996. Mr. Sridharan then invites our attention to the Report of the Eleventh Finance Commission of June, 2000, for the period 2000-2005 and to submit that the States were to get 1.5% of the total Central taxes in lieu of their share of additional duties of excise. Mr. Sridharan submits that the recommendations are that if any State levies and collects sales tax on sugar, text .....

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Maharashtra has been given a share of additional duties of excise on the condition that they will not levy any sales tax on the three commodities referred above. Mr. Sridharan then refers to the scheme set out in the Thirteenth Finance Commission Report for the period 2010- 2015. He submits that the State of Maharashtra has received its share of 3.5% of all Central taxes. It has accepted throughout this position that it is entitled to this share provided it does not levy VAT on pan masala contai .....

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circumstances, the Notification dated 21st January, 2006, of the State Government is in clear breach of the Constitution (Distribution of Revenues) Order 2005 made by the President of India under Article 270 of the Constitution of India. 48 Mr. Sridharan then submits that the Hon'ble Supreme Court in the case of Godfrey Phillips (supra) has held that the State cannot levy sales tax on goods covered by additional duties of excise and relies upon paragraphs 63, 67 and 70 of this judgment. 49 .....

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les Tax Act,1959. To place the matters beyond doubt, Maharashtra Act No.51 of 2000 amended Schedule A-15 by adding the Explanation. This Explanation was effective retrospectively only for the period 1st October, 1995 to 30th April, 2001. The amended explanation excluded pan masala whether or not containing tobacco from Schedule Entry A-15. However, post 2001, the Explanation was not applicable and pan masala containing tobacco was being exempted by Entry A-15. The Finance Act 2001 carried out ce .....

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nd tobacco manufactured substitutes. Note 4 of this Chapter 24 of the First Schedule to the Central Excise Tariff Act, 1985, is then referred to by Mr. Sridharan to urge that the rules of interpretation governing the interpretation of the Central Excise Tariff Act would also apply to interpretation of the First Schedule to the ADE Act. On a bare reading of Note No.4 to Chapter No.24 of the First Schedule to the Central Excise Tariff Act it is clear that pan masala containing tobacco is specifica .....

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the ADE Act only with effect from 1st April, 2007, vide section 10 of the Taxation Laws (Amendment) Act, 2007 (Act No.16 of 2007) read with the Notification dated 29th March, 2007. The Schedule Entry A-45 was amended with effect from 1st April, 2007, to delete reference to tobacco. Mr. Sridharan took us through all this to emphasize that the Schedules of the Bombay Sales Tax Act, 1959, and the MVAT Act reflected a clear and careful policy. In that regard, he refers to Schedule Entry A-15 of the .....

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endment made by Notification dated 21st January, 2006, added an Explanation to Entry A-45 effective from 1st April, 2007, for the purpose of giving effect to the changes in the ADE Act. Elaborating this aspect, Mr. Sridharan would submit that all the three goods, namely, sugar, textiles and tobacco covered by the First Schedule to the ADE Act, 1957, when exempt from sales tax vide Entry No.A-45 of the MVAT Act, 2002, post Notification dated 21st January, 2006, only pan masala containing tobacco .....

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January, 2006, has no nexus with the object sought to be achieved by the legislation in the form of Entry A-45. The pan masala containing tobacco has been singled out for this treatment. This is contrary to the fundamental objective of Entry A-45 read with the ADE Act. It is also violative of Article 14 of the Constitution of India and the Notification is, therefore, liable to be struck down. From 1st April, 2007, tobacco was omitted from Schedule to the ADE Act, 1957, and, consequently, referen .....

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nt, can be effective only from 1st February, 2006, and not from 1st April, 2005. In that regard, he submits that we must give the Explanation added to Schedule Entry A-45, prospective effect. We should give the same effect only from 1st February, 2006. Section 9 of the MVAT Act which empowers the State Government to amend the Schedule does not contain the power to give it retrospective effect. Mr. Sridharan relies upon the language of section 9 to submit that delegated legislation cannot have re .....

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of the respondents is erroneous. The respondents have ignored Note 4 of Chapter 24 of the First Schedule to the Central Excise Tariff Act, 1985, read with Note 2 to the First Schedule to the ADE Act. This is not the error in the reply affidavits of the respondents alone. This is the same error / basis on which the Government issued the Notification dated 21st January, 2006. During the above Financial Years, the First Schedule to the ADE Act applied to all goods falling under Tariff Item 24039990 .....

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dible Preparations of the First Schedule to the Central Excise Tariff Act, Mr. Sridharan submits that it specifically excludes pan masala containing tobacco from the ambit of Chapter 21. Then, it is pertinent to note that the First Schedule to the ADE Act was amended by the Central Government by Notification dated 29th March, 2007. By that Notification, any reference to Tariff Headings 2403 and subheadings and tariff items thereunder was omitted with effect from 1st April, 2007. All this would d .....

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nuary, 2006. Therefore, this Notification is contrary to the State Government's policy. It is, therefore, violative of Article 14 of the Constitution of India. Mr. Sridharan has relied on the following judgments in support of the above contentions : (1) Cannore Spinning & Weaving Mills Ltd. v. CC & CCE & Ors. (1969) 3 SCC 112. (2) Hukam Chand etc. v. UOI & Ors. (1972) 2 SCC 601. (3) CIT v. Vatika Township Pvt. Ltd. (2015) 1 SCC 1. (4) Sedco Forex International Drill Inc. & .....

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of Orissa 1954 SCR 1. (12) P. Vajravelu Mudaliar v. Spl. Deputy Collector for Land Acquisition 1965 1 SCR 614. 51 He has also taken us extensively through the provisions of the enactments referred in the foregoing paragraphs, the Constitution and the Objects and Reasons of the Taxation Laws (Amendment) Bill, 2007. Mr. Sridharan has also taken us through the Trade Circulars. All this has been compiled by the petitioners' advocate in two volumes of the compilation. 52 On the other hand, Mrs. J .....

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petitioners' contentions are properly appreciated they would reveal that the petitioners cannot and do not dispute the competence of the State to issue the Notification. All that the petitioners raise are some issues and pertaining to the interpretation of the same and its retrospective operation. They cannot be said to be outside the purview of the power of the Appellate Authority who the petitioners can definitely approach. In other words, Mrs. Jeejeebhoy would submit that questions of law .....

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sidential Order and hence ultra vires the Constitution. The decision of the Hon'ble Supreme Court in Godrey Phillips (supra) supports the submission of the petitioner inasmuch as it purportedly held that States cannot levy sales tax on goods covered by the ADE Act, 1957. The impugned Notification violates Article 14 of the Constitution as the State of Maharashtra has exempted all other goods covered by the ADE Act. The amendment of Schedule Entry A-45 by the impugned Notification is prospect .....

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es tax on goods covered by the ADE Act merely because the State is receiving a portion of the taxes levied and collected under the ADE Act. (c) Apart from the decision of the Supreme Court in the case of State of Bihar v. Bihar Chamber of Commerce (supra) there are several decisions of the Supreme Court and High Court which hold that the State's power to legislate is not curtailed by the ADE Act [See State of Kerala v. M/s. Attesee (1989) Supp 1 SCC 733 at paras 6-8 (page 51, petitioner' .....

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of Entry 62 of List II to the Constitution (para 3) and not with the legislative competence of the State to impose a tax on sale of goods on account of the enactment of the ADE Act and/or because the State is getting a portion of the taxes levied and collected under the ADE Act, which was the question raised and considered in State of Bihar v. Bihar Chamber of Commerce (supra). (e) As stated in Godfrey Phillips (supra), the ADE Act has to be read with Article 286 of the Constitution of India. T .....

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as issued. Accordingly, at the relevant time, the ADE Act neither declared any goods to be of special importance nor imposed any restrictions / conditions as envisaged by Article 286 of the Constitution. Notably, pan masala containing tobacco was not even included in the Schedule to the ADE Act at the time section 7 of the ADE Act was in force. (g) Section 14 of the Central Sales Tax Act, 1956 declares certain goods to be of special importance in inter-State trade or commerce. Section 14(ix) of .....

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g Nos. 2403.11 and 2403.21 and other manufactured tobacco covered under sub-heading Nos. 2404.11, 2404.12, 2404.13, 2404.19, 2404.21, 2404.29, 2404.31, 2404.39, 2404.41, 2404.50 and 2404.60 of the Schedule to the Central Excise Tariff Act, 1985. (h) The petitioners' product (pan masala containing gutkha/tobacco) admittedly falls under tariff heading 24039990 of the Central Excise Tariff Act, 1985, which tariff heading was not included in section 14 of the Central Sales Tax Act. (i) Section 1 .....

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nor the provisions of the ADE Act would in any manner restrict the power of the State to levy sales tax on the said goods. The findings in Godfrey Phillips (supra) are not applicable qua pan masala containing tobacco and the decision in Godfrey Phillips which considers the effect of these provisions is, therefore, clearly inapplicable and irrelevant. (k) Article 270 of the Constitution, on a plain reading, provides for distribution of net proceeds between the Union and the States. It does not i .....

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ale or purchase of goods described in column (3) of the First Schedule to the ADE Act and any sums paid in excess of the entitlement is recoverable by the Centre. Therefore, the said Order envisages and provides for the imposition of tax or duty on goods described in column (3) of the Schedule to the ADE Act and sets out the consequences of such levy. On a plain reading the said Order does not prohibit the levy of any tax or duty by the State. In the light of the foregoing, it is clear that the .....

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to refund of ADE paid by it. (l) Moreover, without prejudice to the generality of the foregoing, it is submitted that in the present case pan masala containing tobacco was not covered by the said Order and/or Article 270 at the relevant time. Section 116 of the Finance Act, 2005, replaced the Schedule to the ADE Act with a new Schedule that does not describe pan masala in the column. Accordingly, pursuant to the Finance Act, 2005, additional duty of excise paid on p;an masala is by way of a sur .....

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erent from tobacco and constitutes a separate class by itself. This is inter alia clear from the manner in which pan masala has been treated even by the Union Legislature. Illustratively, until 2001, pan masala including pan masala containing tobacco, was classified under Chapter 21 Miscellaneous Edible Preparations of the Central Excise Tariff Act,1985. Note 3 of Chapter 21 defined pan masala as a preparation containing betel-nuts, lime and kattha (catechu) and tobacco whether or not containing .....

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ge was brought about in column (3) of the First Schedule to the ADE Act to include 2404.49 pan masala containing tobacco . Therefore, until 2001 pan masala was not included in either Chapter 24 of the 1985 Act nor in the First Schedule to the ADE Act. (o) Without prejudice to the foregoing and assuming whilst denying that additional duties of excise were being levied on pan masala under the ADE Act even after the Finance Act, 2005, all tobacco products covered by the ADE Act were exempt from pay .....

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p) Under the ADE Act section 4 provides for distribution of additional duties among States in accordance with the provision of the Second Schedule. (q) It is well settled that an exemption is to be strictly construed. Since pan masala containing tobacco was no longer described in column(3) of the First Schedule to the ADE Act, it did not fall within the definition of Schedule Entry A-45 in the MVAT Act. Moreover, from 1st April, 2005, pan masala was subject to additional duty of excise under sec .....

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55 For properly appreciating the rival contentions, it would be proper and worthwhile if we first refer to the constitutional provisions and thereafter the respective Acts. 56 As far as the Constitution is concerned, the parties have referred and relied upon the following Articles and the Entries in List II to the VIIth Schedule of the Constitution. 57 For ready reference we reproduce them : 269. Taxes levied and collected by the Union but assigned to the States.- (1) Taxes on the sales or purch .....

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r-State trade or commerce; (b) the expression taxes on the consignment of goods shall mean taxes on the consignment of goods (whether the consignment is to the person making it or to any other person), where such consignment takes place in the course of inter- State trade or commerce. (2) The net proceeds in any financial year of any such tax, except in so far as those proceeds represent proceeds attributable to Union territories, shall not form part of the Consolidated Fund of India, but shall .....

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Union List, except the duties referred to in the Union List, except the duties and taxes referred to in articles 268, 268A and 269, respectively, surcharge on taxes and duties referred to in article 271 and any cess levied for specific purposes under any law made by Parliament shall be levied and collected by the Government of India and shall be distributed between the Union and the States in the manner provided in clause (2). (2) Such percentage, as may be prescribed, of the net proceeds of an .....

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constituted, prescribed by the President by order after considering the recommendations of the Finance Commission. 271. Surcharge on certain duties and taxes for purposes o the Union.-Notwithstanding anything in articles 269 and 270, Parliament may at any time increase any of the duties or taxes referred to in those articles by a surcharge for purposes of the Union and the whole proceeds of any such surcharge shall form part of the Consolidated Fund of India. …. …. …. 286. R .....

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(3) Any law of a State shall, in so far as it imposes, or authorises the imposition of ,- (a) a tax on the sale or purchase of goods declared by Parliament by law to be of special importance in inter-State trade or commerce; or (b) a tax on the sale or purchase of goods, being a tax of the nature referred to in sub-clause (b), sub-clause (c) or sub-clause(d) of clause (29A) of article 366, be subject to such restrictions and conditions in regard to the system of levy, rates and other incidents .....

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e three Articles reproduced above, namely, 269, 270 and 271 which fall under Part XII titled as Finance, Property, Contracts and Suits . It is common ground that Article 264 of the Constitution in which this Chapter I - 'Finance' opens with a sub-heading 'General' defines the Finance Commission to mean a Finance Commission constituted under Article 280. Article 265 which also falls in the Part declares that taxes not to be imposed, save by authority of law. Article 266 deals with .....

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dia, but shall be collected as set out particularly in that clause. Clause (2) of Article 268 states that the proceeds in any financial year of any such duty leviable within any State shall not form part of the Consolidated Fund of India, but shall be assigned to that State. Then comes Article 268A which was inserted by Constitution (88th Amendment) Act, 2003 (section 2) and is titled as 'Service tax levied by Union and collected and appropriated by the Union and the States', but this Ar .....

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d shall be deemed to have been assigned to the States on or after the 1st day of April, 1996 in the manner provided in clause (2). Therefore, the explanation below it defines the words and expressions taxes on sale or purchase of goods and taxes on the consignment of goods and both take place in the course of inter- State or commerce. Thereafter, by clause (2), it is stated that the net proceeds in any financial year of any such tax except insofar as those proceeds represent proceeds attributabl .....

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distributed by the Union and the States. One would, therefore, clearly appreciate and understand that this is a scheme of distribution of the Revenue between the Union and the States and for that distribution to take place and be effective it had to be clarified that which duties could be levied by the union but collected and appropriated by the States, which taxes levied and collected by the union can be assigned to the States and the taxes levied and distributed between the Union and the State .....

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axes and duties except those in clause (1) in accordance with the manner provided in clause (2). It is in clause (2) of Article 270 that we find a reference to the percentage of distribution. The manner of such percentage has to be prescribed by the Finance Commission and till a Finance Commission has been constituted, it can be prescribed by the President by Order and after the Finance Commission has been constituted, it shall be prescribed by the President by Order after considering the recomm .....

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rticles of this Part for the simple reason that we are then taken through the miscellaneous financial provisions. Though they follow Article 280 which is titled as 'Finance Commission' what is referred therein is Article 286. It is clear that there are restrictions as to imposition of tax on the sale and purchase of goods and no law of a State shall impose or authorise the imposition of a tax on the sale or purchase of goods where such sale or purchase taxes place (a) outside the State; .....

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the nature referred to in Article 366 (29A) sub-clauses (b), (c) or (d), then, such imposition or authorising of the imposition would be subject to such restrictions and conditions in regard to the system of levy, rates and other incidence of tax as Parliament may by law specify. 63 The constitutional provisions, so far referred, to our mind to not indicate that the State is denuded, much less divested of its power to levy and impose a tax on sale or purchase of goods. Therefore, Schedule VII L .....

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That Notification, to the extent relevant, reads as under : ... … … … (10) In Entry 45, in column (2), the following Explanation shall be added, namely:- Explanation:- For removal of doubts, it is hereby declared that Tobacco shall not include Pan Masala, that is to say any preparation containing Betel Nuts and Tobacco and any one or more of the following ingredient, namely :- (i) Lime; and (ii) Kattha (catechu),whether or not containing any other ingredients such as Cardamo .....

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To be precise the Government of Maharashtra amended by the Notification with effect from 1st February, 2006, Schedules A and C appended to the Maharashtra Value Added Tax Act in terms of the powers conferred by section 9(1) of the MVAT Act. That power is of adding or modifying or deleting any entry in the schedule. The power is of amendment of the Schedule as above and equally to reduce or enhance the rates of tax or for specifying the rates of tax or for specifying the rates of tax where nil r .....

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t Article in each financial year commencing on and after the first day of April, 2005, but ending before the first day of April, 2010. The percentage is 29 % to be distributed ½ among the States as per the table. 70 We need not refer to Articles 270 to 281 of the Constitution prior to 2000 and Article 270 to 281 of the Constitution post 2000 for the simple reason that we are considering the question about the State Legislature's power to tax pan masala with tobacco. Prior to that we m .....

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hedule A. Once they are referable to section 5 and no tax is payable on the sales of any goods specified in column (2) of that Schedule, then all that one has to find is whether there are any other provisions of the Act, namely, MVAT Act and the conditions or exceptions, if any, set out against each of the goods specified in column (3) in so far as pan masala with or without tobacco. It is conceded as far as the name of the commodities in Entry A- 45, is concerned, they are sugar, fabrics and to .....

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of Excise (Goods of Special Importance) Act, 1957. That Act has been numbered as Act No.58 of 1957 and it has been brought into effect on 24th December, 1957. It is an Act to provide for the levy and collection of additional duties of excise on certain goods and for the distribution of a part of the net proceeds thereof among the States in pursuance of the principles of distribution formulated and the recommendations made by the Finance Commission. The term additional duties is defined in secti .....

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nt thereto. There shall be levied and collected duties of excise at the rate or rates specified in column (4) of this Schedule on these goods. These are additional duties and that is clarified by sub-section (2) of section 3 for they are in addition to duties of excise chargeable on such goods under the Central Excise Act or any other law for the time being in force. Then, there is a provision for distribution of additional duties among States and that has not been done in accordance with the pr .....

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ions. The petitioners in these petitions are concerned with pan masala containing tobacco normally known as Gutkha / Mawa under various brand names. The said pan masala containing tobacco was classifiable under Tariff Head 24039990 of the Central Excise Tariff Act, 1985 during the relevant period. 73 However, on the petitioners' own showing until 2001, Chapter 21 of the Central Excise Tariff Act, 1985, dealt with Miscellaneous Edible Preparations . Note 3 of Chapter 21 defined pan masala to .....

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, that has a Schedule and annexed to it, styled as First Schedule. The petitioners rely upon Chapter 24 of the Central Excise Tariff Act, 1985, in which after the Finance Act 2001, it classified pan masala containing tobacco as 2404.09. Mrs. Jeejeebhoy is right in submitting that pan masala on the face of it is different from tobacco and constitutes a separate class by itself. We have perused Chapters 21 and 24 of the Central Excise Tariff Act and as appearing in the compilation tendered by the .....

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ral Excise Tariff Act nor in the the First Schedule to the ADE Act. 74 We also agree with Mrs. Jeejeebhoy when she contends that even after pan masala was brought within the purview of the ADE Act, it was never declared by the Parliament to be one of the goods of special importance in inter- State trade and commerce covered by sections 14 and 15 of the Central Sales Tax Act, 1956. We also agree with her that from 2005, the levy of additional duties of excise on pan masala was by way of a surchar .....

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tobacco. 75 The essential complaint is that having been included as above in the First Schedule to the ADE Act, the State is denuded of its power to levy MVAT on pan masala containing tobacco. 76 If we have to decide this issue, we must find out some prohibition in the Constitution and by which VAT on pan masala containing tobacco cannot be levied. 77 We are in agreement with Mrs. Jeejeebhoy that the petitioners arguments must be focusing on the constitutional validity and must establish and pr .....

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m. On the own showing of Mr. Sridharan, he analyses the Constitution (Distribution of Revenues) No.5 Order 2000 issued by the President in his oral and written arguments (refer paragraphs 15.1 to 15.3) but concedes that under this scheme of distribution the State which levies the sales tax on one on the commodities liable to additional duties of excise, such State shall not be eligible for the share on all other commodities also. Apart from the fact that tobacco is described and referred to in t .....

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y of VAT on pan masala containing tobacco is ultra vires the Constitution. There is no embargo and of the nature specified in Article 286 of the Constitution of India and pressed into service. All that is pressed into service is the Tax Rental Agreement between the Centre and the States for collection of additional duties of excise by the Centre, but distribution of the same entirely to the State Governments, the legislative measures followed to implement the arrangement as above prior to 1st Ap .....

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scheme and the Articles noted above. 80 Mr. Sridharan's emphasis on the judgment of Godfrey Phillips (supra) is misplaced. 81 Godfrey Phillips is a five-Judge judgment delivered by the Hon'ble Supreme Court. That concerned the manufacturers, dealers or sellers of tobacco and tobacco products. That challenged the composition and levy of a luxury tax on tobacco and tobacco products by treating them as luxuries within the meaning of the word in Entry 62 of the State List (List II). That is .....

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and then noted the contentions. The constitutional scheme insofar as the Entry No.54 of List II is concerned, that has not been touched at all (see para 59). Thereafter, in para 60 of this judgment the limitation on States jurisdiction to levy sales tax placed by Article 286 has been referred. Then, in paragraph 63, there is a reference made to the Taxation scheme on tobacco. Then from paragraph 64, the ADE Act and its charging section is referred. Therefore, there shall be levied and collected .....

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pe of Entry 54 of List II, the powers of the States to levy such tax are subjected to a corresponding restriction as a consequence of the constitutional curbs imposed on sales tax under Article 286 read with Sections 14 and 16 of the Central Sales Tax Act,1956 and the ADE Act, 1957. The tax leviable by virtue of sub-clause (a) of clause (29-A) of Article 366 of the Constitution thus becomes subject to the same discipline to which any levy under Entry 54 of the State List is made subject to under .....

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paragraphs would support and lend credence to the arguments of Mr. Sridharan before us. The Hon'ble Supreme Court merely declares that while widening the scope of Entry No.54 of List II, the powers of the State to levy such tax are subjected to a corresponding restriction as a consequence of the constitutional curbs imposed on sales tax under Article 286 read with sections 14 and 15 of the Central Sales Tax Act, 1956, and the ADE Act, 1957. In paragraph 70 the Hon'ble Supreme Court decl .....

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ts import the levy of VAT on pan masala containing tobacco. The difficulty in Mr. Sridharan's way is obvious inasmuch as there is nothing in the judgment of Godrey Phillips which would dilute the pronouncement in the case of State of Bihar vs. Bihar Chamber of Commerce (1996) 9 SCC 136. Mr.Sridharan would submit that this judgment cannot be of assistance. Not only this but the other judgments are sought to be distinguished by urging that they are relating to a period prior to 1st April, 2000 .....

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eference to Article 252 of the Constitution, which Article empowers the Parliament to make a law with respect to any matter mentioned in List II, if two or more States pass resolutions requesting the Parliament to make a law in that behalf. We cannot do better then reproduce the relevant paragraphs of the State of Bihar (supra) and which are rightly pressed into service by Mrs. Jeejeebhoy. 27. Section 3 provides for levy and collection of additional duties. Section 4 provides for distribution of .....

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rulemaking power upon the Central Government. The proviso to Rule (2) in the Second Schedule to the Act is of crucial relevance to us. Rule (2) along with its proviso reads thus: "During each of the financial years commencing on and after the Ist day of April, 1974 there shall be paid to each of the States specified in column 1 of the Table below such percentage of the net proceeds after deducting therefrom a sum equal to 1.41 per cent of the said proceeds as being attributable to Union Te .....

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if during a given financial years a State levies and collects a tax on the sale or purchase of scheduled goods or on any one or more of the scheduled goods by or under a law of that States no sums shall be payable to that state under this paragraph in respect of that financial year, unless the Central Government by special order directs otherwise. There is no reference in the Act or in the Statement of Objects and Reasons to any tax other than the tax on sale or purchase of goods. There is no a .....

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r for that matter with reference to Entry 54. The A.D.E. Act is also not a law made under and with reference to Article 252 of the Constitution, which article powers the Parliament to make a law with respect to any matter mentioned in List- II, if two or more States pass resolutions requesting the Parliament to make a law in that behalf. The impugned Act is also not relatable to any of the Articles 249 to 253 which are in the nature of exceptions to the normal rule that Parliament can make no la .....

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led commodities. The Parliament has also provided the consequence that follows if any State levies tax on sale or purchase of scheduled commodities; all that happens is that the State will be deprived of its share in the proceeds of additional duties of excise for that financial year. Even this is subject to the power of the Central Government to direct otherwise. The Parliament could not, and did not, prohibit any State from making any law or levying any tax which a State can levy by virtue of .....

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t should impose sales tax on an item of declared goods, limited by the restrictions in Section 15 pf the CST Act and at the risk of losing a share in the additional excise duty levied in respect of those very items, is for the State to determine. As pointed out by Sri Poti, it was open to the Kerala Legislature to decide - and it did so also - that on some items there should be one or other of the levies or both of them and to modify these levies depending upon its financial exigencies. But thes .....

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taxes cannot be of assistance. That would probably deprive a State of its share in the revenue even if a tax is levied and collected in that State, but would not denude it of its power which is otherwise traceable to the constitutional provisions referred above. Apart from the fact that we do not find the levy to be such as would deprive the State of its share even in Central taxes, we are not in agreement with Mr. Sridharan that VAT on pan masala containing tobacco is ultra vires the Constitut .....

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