Union Of India vs Mohit Mineral Pvt Ltd on 3 October, 2018

1. Outcome

• The Supreme Court dismissed the writ petition and transferred case filed by Mohit Mineral Pvt. Ltd.
• The Civil Appeals filed by the Union of India were allowed.
• The validity of the Goods and Services Tax (Compensation to States) Act, 2017 and the Goods and Services Tax Compensation Cess Rules, 2017 was upheld.
• The petitioner's claim for a set-off of Clean Energy Cess against the Goods and Services Tax Compensation Cess was rejected.

2. Core Issue

The core issue was the constitutional validity and legislative competence of Parliament to enact the Goods and Services Tax (Compensation to States) Act, 2017, and the Goods and Services Tax Compensation Cess Rules, 2017. This involved examining whether:
a. The Act was beyond Parliament's legislative competence.
b. The Act violated the Constitution (One Hundred and First Amendment) Act, 2016.
c. The Act constituted a colourable legislation.
d. The levy of Compensation Cess and GST on the same taxing event was permissible.
e. The petitioner was entitled to a set-off of Clean Energy Cess paid against the Compensation Cess.

3. Key Facts

• Petitioner: Mohit Mineral Pvt. Ltd., a company trading in imported and Indian coal.
• Pre-GST Regime: Clean Energy Cess was levied on coal production under Chapter VII of the Finance Act, 2010, collected as a duty of excise at the time of removal of coal from mines.
• Constitutional Amendment: The Constitution (One Hundred and First Amendment) Act, 2016 introduced the Goods and Services Tax (GST) regime, aiming to subsume various indirect taxes and cesses. Section 18 of this Amendment specifically enabled Parliament to enact a law to provide compensation to States for revenue loss due to GST for a period of five years.
• GST Enactments: On April 12, 2017, Parliament enacted the Central Goods and Services Tax Act, 2017 (CGST Act), the Integrated Goods and Services Tax Act, 2017 (IGST Act), and the Goods and Services Tax (Compensation to States) Act, 2017.
• Cess Repeal: On May 4, 2017, the Taxation Laws (Amendment) Act, 2017 repealed several cesses, including the Clean Energy Cess.
• Dispute: The petitioner challenged the Compensation to States Act, 2017, and its rules before the Delhi High Court, arguing lack of legislative competence, violation of the constitutional amendment, and impermissible double taxation. They also sought a set-off for Clean Energy Cess already paid.
• Interim Order: The Delhi High Court granted partial interim relief, directing that no further payment be required on coal stocks where Clean Energy Cess had already been paid, but made payments on other stocks subject to the petition's outcome.
• Supreme Court Transfer: The Union of India challenged the interim order, and the Supreme Court transferred the main writ petition to itself for final disposal.

4. Arguments (Taxpayer vs Revenue)

• Taxpayer (Mohit Mineral Pvt. Ltd.):

  • The Compensation to States Act, 2017, lacked legislative competence, as Section 18 of the 101st Amendment Act only provided for "law to provide compensation," not to levy a cess/tax.
  • The Act transgressed the mandate of the 101st Amendment, which aimed to subsume all cesses and surcharges into GST, making the new Compensation Cess contrary to the constitutional objective.
  • The Act was a "colourable legislation" because it sought to levy a tax under the guise of compensation.
  • Levying Compensation Cess on the same intra-State and inter-State supply of goods/services on which CGST/IGST is levied amounted to impermissible double taxation and overlapping of laws.
  • Even if the Compensation Cess was valid, the petitioner should be entitled to set off the Clean Energy Cess already paid on coal stocks (approx. ₹7.68 crores) against the new Compensation Cess liability.

• Revenue (Union of India):

  • A cess is a special kind of tax. Parliament's competence to levy the main tax (GST under Article 246A) inherently includes the power to levy a cess with respect to it.
  • The power to levy cess can also be traced to Article 270 (which allows Parliament to levy cess for specific purposes) and Entry 97 of List I (residuary power).
  • The Clean Energy Cess and the GST Compensation Cess were entirely different in nature (excise vs. supply), purpose (clean energy vs. state compensation), and utilisation, thus not constituting impermissible double taxation.
  • The Compensation to States Act, 2017, was enacted in pursuance of the express provisions of Section 18 of the 101st Amendment, which specifically empowered Parliament to legislate for state compensation. Thus, it was neither ultra vires nor a colourable legislation.
  • Granting credit or set-off is a policy decision. Since the two cesses were distinct in their nature, purpose, and distribution, no legal basis existed for allowing a set-off of Clean Energy Cess against Compensation Cess.

5. Court’s Reasoning

The Supreme Court addressed the issues as follows:

• Legislative Competence (Issue 1):

  • Nature of Cess: The Court reaffirmed that 'cess' is a tax levied for a special purpose, often as an increment to an existing tax. It is not a fee where a quid pro quo is essential.
  • Article 246A: The phrase "power to make laws with respect to goods and services tax" in Article 246A is of wide import and includes the power to levy a cess related to GST.
  • Article 270: This Article explicitly provides for "any cess levied for specific purposes under any law made by Parliament," directly granting Parliament the power to levy such a cess.
  • Section 18 of 101st Amendment: This provision explicitly directs Parliament "by law" to provide for compensation. The term "by law" is broad enough to encompass levying a cess for this objective.
  • Residuary Power (Article 248 read with Entry 97 of List I): Applying the H.S. Dhillon's test, since the subject of the cess is not enumerated in List II or List III, it falls under Parliament's residuary legislative power.
  • Conclusion: Parliament has the legislative competence to enact the Compensation to States Act, 2017.

• Violation of 101st Amendment / Colourable Legislation (Issues 2 & 3):

  • The Court acknowledged that the 101st Amendment aimed to subsume many indirect taxes and cesses. However, the constitutional provisions themselves do not prohibit the levy of new cesses or surcharges, especially when specifically enabled by the Amendment itself (Section 18).
  • The Compensation to States Act, 2017, explicitly states in its Preamble that it was enacted "in pursuance of the provisions of the Constitution (One Hundred and First Amendment) Act, 2016." This direct statutory link negates claims of the Act violating the Amendment or being a colourable legislation.
  • The specific inclusion of a provision for compensation via law in Section 18 of the final Amendment Act, after dropping a proposed "additional tax" from the Bill, signifies a deliberate constitutional mandate.
  • Conclusion: The Act does not violate the 101st Amendment nor is it a colourable legislation.

• Levy of Compensation Cess and GST on the same taxing event (Issue 4):

  • Doctrine of Aspects: Citing Federation of Hotel & Restaurant Associate of India, the Court held that the same transaction can involve "two or more taxable events in its different aspects." The fact that there might be an economic overlap does not detract from the distinctiveness of the legal aspects.
  • No Inherent Invalidity: Referring to Avinder Singh, the Court stated that there is no inherent constitutional invalidity in a legislature choosing to levy tax twice over on the same subject-matter, unless specific constitutional prohibitions exist, which are absent here.
  • Distinct Imposts: GST and Compensation Cess, while both related to supply, are legally distinct imposts for distinct purposes.
  • Conclusion: Levy of Compensation Cess as an increment to GST on the same taxing event is permissible in law.

• Entitlement to Set-off (Issue 5):

  • Distinct Purposes: Clean Energy Cess was an excise duty aimed at funding clean energy initiatives, and its proceeds were for the Union. GST Compensation Cess is levied on supply to compensate States for GST revenue loss, with proceeds distributed solely to the States.
  • Legislative Policy: The grant of credit or set-off is a matter of legislative policy. The Compensation to States Act, 2017, and its rules do not provide for any such set-off for Clean Energy Cess already paid.
  • Conclusion: The petitioner is not entitled to any set-off of Clean Energy Cess payments against the Compensation Cess.

6. Statutory References

• Constitution of India:
  • Articles 245, 246, 246A, 248, 270, 279A, 366.
  • Seventh Schedule: List I (Entry 97), List II.
• Constitutional Amendments:
  • The Constitution (One Hundred and First Amendment) Act, 2016 (Sections 18, 19).
  • The Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014 (Clause 18, 19).
• Acts of Parliament:
  • The Goods and Services Tax (Compensation to States) Act, 2017 (Act No. 15 of 2017) - Sections 2(c), 2(e), 8, 12(1), Schedule.
  • The Central Goods and Services Tax Act, 2017 (Act No. 12 of 2017) - Section 9.
  • The Integrated Goods and Services Tax Act, 2017 (Act No. 13 of 2017) - Section 5.
  • The Finance Act, 2010 - Chapter VII, Section 83(3), 83(6).
  • The Taxation Laws (Amendment) Act, 2017.
• Rules:
  • Goods and Services Tax Compensation Cess Rules, 2017.
  • The Central Goods and Services Tax Rules, 2017.

7. Precedents Cited

• Guruswamy and Co. v. State of Mysore, AIR 1967 SC 1512
• India Cement Ltd. v. State of T.N., (1990) 1 SCC 12
• Shinde Brothers Etc. Vs. Deputy Commissioner, Raichur & Others Etc., AIR 1967 SC 1512
• Vijayalashmi Rice Mill & Others Vs. Commercial Tax Officers, Palakol & Others, (2006) 6 SCC 763
• Union of India Vs. Harbhajan Singh Dhillon, (1971) 2 SCC 779
• Hoechst Pharmaceuticals Ltd. & Others Vs. State of Bihar & Others, (1983) 4 SCC 45
• M.P.V. Sundararamier & Co. Vs. State of A.P. & Others, AIR 1958 SC 468
• M/s. Doypack Systems Pvt. Ltd. Vs. Union of India & Others, (1988) 2 SCC 299
• Dewan Chand Builders and Contractors Vs. Union of India and Others, (2012) 1 SCC 101
• Commissioner, Hindu Religious Endowments, Madras Vs. Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt, AIR 1954 SC 282
• Federation of Hotel & Restaurant Associate of India, Etc. Vs. Union of India and others, (1989) 3 SCC 634
• Avinder Singh and others Vs. State of Pubjab and others, (1979) 1 SCC 137