M/S TRIMURTHI FRAGRANCES (P) LTD. THR. ITS v. GOVT. OF N.C.T. OF DELHI

M/S TRIMURTHI FRAGRANCES (P) LTD. THR. ITS DIRECTOR SHRI PRADEEP KUMAR AGRAWAL v. GOVT. OF N.C.T. OF DELHI THR. ITS PRINCIPAL SECRETARY (FINANCE) 1051 Lucknow [1998] 2 Suppl. SCR 119; Madhya Pradesh v. M.V. Narsimhan [1976] 1 SCR 6; Nagpur Improvement Trust v. Vasantrao [2002] 2 Supp SCR 636; U.P. Avas Evam Vikas Parishad v. Jainul Islam & Anr [1998] 1 SCR 254 – referred to. Case Law Reference (2000) 9 SCC 263 (2018) 11 SCC 505 [1987] 3 SCR 93 (1994) 2 Supp SCC 639 (1997) 9 SCC 763 referred to referred to referred to referred to referred to [1988] Suppl 2 SCR 1088 referred to [2013] 2 SCR 849 (2011) 15 SCC 762 [1964] 7 SCR 820 [2011] 3 SCR 1 referred to referred to referred to referred to [1998] 2 Suppl. SCR 119 referred to [1976] 1 SCR 6 [2002] 2 Supp SCR 636 [1998] 1 SCR 254 [2022] 15 SCR 516 [1995] 2 SCR 1061 [2019] 10 SCR 381 [2005] 2 SCR 441 referred to referred to referred to followed referred to referred to referred to para 14 para 14 para 17 para 17 para 17 para 19 para 30 para 30 para 33 para 33 para 34 para 43 para 43 para 43 para 54 para 58 para 59 para 61 CIVIL APPELLATE JURISDICTION: Civil Appeal No.

8486 of 2011. From the Judgment and Order dated 05.04.2006 of the High Court of Delhi at New Delhi in Writ Petition (C) No. 2925 of 2005. With A B C D E F G H 1052 SUPREME COURT REPORTS [2023] 7 S.C.R. A Civil Appeal Nos. 8485, 8487, 8488, 8491-8494, 8495, 8496-8501, 8502 of 2011, 8617, 10374-10379 of 2014 and 289 of 2023. Dhruv Agrawal, Sr. Adv., Madhav Bhatia, Aditya Pandey, Ms. Bharti Tyagi, Pawanshree Agrawal, Ms. Shubhangi Negi, Mrs. Prabha Swami, Shwetank Sailakwal, Nishit Agrawal, Kanishk Mittal, Ms. Vanya, Zaid Raza, Vipin Kumar Jai, G. Prakash, Jishnu M L, Mrs. Priyanka Prakash, Nalin Talwar, Praveen Kumar, Ms. Sunaina Kumar, Advs. for the Appellant. R Venkataramani, AG, N. Venkatraman, A.S.G., Arijit Prasad, R K Raizada, K. Radha Krishnan, Sr. Advs., Mukesh Kumar Maroria, Rupesh Kumar, Kanu Agarwal, V. Chandra Shekhra Bharathi, H.R. Rao, Zoheb Hussain, H. Raghvendra Bajaj, Ms. Amrita Vijay Kumar, Vikas Bansal, M. Yogesh Kanna, Bhakti Vardhan Singh, V. M. Vishnu, Ankit, Sabarish Subramanian, Vishnu Unnikrishnan, Ms. Shivani Jena, Naman Dwivedi, P. Shankar, R. Nedumaran, Gurmeet Singh Makker, Ms. Kannu Agarwaal, Arijit Prasad, Ms. V.C. Bharathi, H.R. Rao, Zoheb Hussain, Advs. for the Respondents. The Judgment of the Court was delivered by S. RAVINDRA BHAT, J.

This judgment will dispose of appeals arising from judgments of three High Courts, on the question of taxability of pan masala or gutka/gutkha1, under state enactments. The appellants unsuccessfully argued that state legislatures were not empowered to levy sales tax on those articles, in view of the provision in the Constitution enabling the Union to levy additional duties of excise, and further that in any case, the rate of state tax cannot exceed the limit prescribed by the Central Sales Tax Act, 1956. Brief Facts

The relevant central enactments are the Central Sales Tax Act, 1956 (hereafter “CST Act”), the Central Excise Tariff Act, 1985 (hereafter “CET Act”), and the Additional Duties of Excise (Goods of Special Importance) Act, 1957 (hereafter “ADE Act”). The state enactments in question are the Delhi Sales Tax Act, 1975 (hereafter 1 Which is spelt differently in regional contexts as ‘gutka’ or ‘gutkha’ or ‘guhtka’, For convenience, this is hereafter referred to uniformly as ‘gutkha’. B C D E F G H M/S TRIMURTHI FRAGRANCES (P) LTD. THR. ITS DIRECTOR SHRI PRADEEP KUMAR AGRAWAL v. GOVT. OF N.C.T. OF DELHI THR. ITS PRINCIPAL SECRETARY (FINANCE) [S. RAVINDRA BHAT, J.] 1053 “DST Act”); Tamil Nadu General Sales Tax Act, 1959 (hereafter “TNGST Act”) and the Uttar Pradesh Trade Tax Act, 1948 (hereafter “UPTT Act”).

Section 14 of the CST Act declares certain goods to be of special importance; and Section 15 restricts the power of taxation on the said goods. Originally Section 14(ix) of the CST Act read as follows: “(ix) tobacco, as defined in Item No. 4 of the First Schedule to the Central Excises and Sale Act, 1944 (1 of 1944)” Entry 4 of the CET Act, which defines ‘tobacco’, reads as follows: “4. Tobacco “Tobacco” means any form of Tobacco, whether cured or uncured and whether manufactured or not and includes the leaf, stalks and stems of the tobacco plant, but does not include any part of a tobacco plant while still attached to the earth. ... II. Manufactured Tobacco ... (5) Chewing tobacco, including preparations commonly known as “Khara Masala”, “Kimam”, “Dokta”, “Zarda”, “Sukha” and “Surti”.”

The Finance Act, 1988 (Central Act No. 26/1988) substituted the expressions in Section 14(ix) of the CST Act, with the following words, w.e.f. 13.05.1988:

14(ix). Unmanufactured tobacco and tobacco refuse covered under sub-Heading No. 2401.00, cigars and cheroots of tobacco covered under Heading No. 24.02, cigarettes and cigarillos of tobacco covered under the sub-Heading Nos. 2403.11 and 2403.21, and other manufactured tobacco covered under sub-heading Nos. 2404.41, 2404.50 and 2404.60 of the Schedule to the Central Excise Tariff Act, 1985 (5 of 1986).

The 1988 amendment to Section 14 of the CST Act was with a view to align the description of goods in that law, with the description in A B C D E F G H 1054 SUPREME COURT REPORTS [2023] 7 S.C.R. the CET Act, as is clear from the Finance Bill, 1988. Heading 24.04 of the CET Act originally read to include “Gudaku with brand name and without brand name” (Entries 2404.11 and 2404.12); cut tobacco (Entry 2404.13); hookah tobacco, chewing tobacco (including preparations known as khara masala, khiman, dokta, zarda and surti (Entry 2404.39); snuff (Entry 2404.49); and snuff of tobacco (Entry 2404.50). The entry in relation to chewing tobacco was amended w.e.f. 1993-94.

By Finance Act, 1995, ‘Pan Masala’ was brought under the Heading 21.06. In the year 1995, the Fourth Schedule was amended, and the relevant Clause (8) in Chapter 21 read as follows:

(8) in Chapter 21, - (i) for NOTE 3, the following NOTE shall be substituted, namely: ‘3. In this Chapter, ‘Pan Masala’ means any preparation containing betel nuts and any one or more of the following ingredients, namely lime, katha (catechu) and tobacco, whether or not containing any other ingredients, such as cardamom, copra and menthol’. Clause (10) in Chapter XXIV reads as follows: (i) for NOTE 2, for the figures and word ’24.02, 24.03 and 24.04', the figures and word ’24.01, 24.02, 24.03 and 24.04' shall be substituted.

Clause (9) in Chapter XXI reads as follows: “(i) for Heading Nos. 21.06 and 21.07 and the entries relating thereto, the following shall be inserted, namely:

21.06 2106.00 ‘Pan Masala’ 50%” Finance (No. 2) Act, 1996, again changed the entry, in the following manner: “(7) in Chapter 24, after NOTE 4, the following NOTE shall be inserted, namely:

5. In this Chapter, ‘smoking mixtures for pipes and cigarettes’ of sub-heading No. 2404.10 does not cover ‘Gudaku’.” ..... A B C D E F G H M/S TRIMURTHI FRAGRANCES (P) LTD. THR. ITS DIRECTOR SHRI PRADEEP KUMAR AGRAWAL v. GOVT. OF N.C.T. OF DELHI THR. ITS PRINCIPAL SECRETARY (FINANCE) [S. RAVINDRA BHAT, J.] 1055 “(iii) For Heading No. 24.03 and the entries relating thereto, the following shall be substituted, namely A B C D E F The relevant extracts from the Finance Act, 2001, which again carried out changes, read as follows: “ THE FOURTH SCHEDULE [See Section 134 (a)] PART - I In the First Schedule to the Central Excise Tariff Act, - (1) in Chapter 21, for NOTE 3, the following NOTE shall be substituted, namely:

3. In this Chapter, ‘Pan Masala’ means any preparation containing betel-nuts and any one or more of the following ingredients, namely: (i) lime; and (ii) kattha (catechu), but not tobacco, whether or not containing any other ingredients such as cardamom, copra and menthol”; G (2) in Chapter 24, after NOTE 5, the following NOTE shall be inserted, namely: ‘6. In this Chapter, ‘Pan Masala’ containing tobacco”, commonly known as ‘Gutkha’ or by any other name, means H 1056 SUPREME COURT REPORTS [2023] 7 S.C.R. A B C D E F G H any preparation 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 ingredients such as cardamom, copra and menthol.” On the above products, a special excise duty of 16% was also levied in the V Schedule, apart from additional duties of excise in Part- II of the VI Schedule as indicated below: The Delhi batch of appeals: Shanti Fragrances2, Trimurti Fragrances3, Kuber Tobacco4, Sunrise Food Products5, and Dharam Pal Satyapal6

In this batch of appeals, the grievance is in respect of five judgments of the Delhi High Court, on the interpretation of the DST Act. 2 CA No. 8485/2011, against impugned judgment dated 05.11.2004 in WP (C) No. 11251/2004 (DHC). 3 CA No. 8486/2011, against impugned judgment dated 05.04.2006 in WP (C) No. 2925/2005 (DHC) 4 CA No. 8491-94/2011, against impugned judgment dated 01.12.2006 in WP (C) No. 17886/2006 (DHC); and CA No. 8487/2011, against impugned judgment dated 05.04.2006 in WP (C) No. 23698/2005 (DHC). 5 CA No. 8488/2011, against impugned judgment dated 05.04.2006 in WP (C) No. 9837/2005 (DHC). 6 CA No. 8495/2011, against impugned judgment dated 14.11.2007 in WP (C) 7883/ 2007 (DHC) M/S TRIMURTHI FRAGRANCES (P) LTD. THR. ITS DIRECTOR SHRI PRADEEP KUMAR AGRAWAL v. GOVT. OF N.C.T. OF DELHI THR. ITS PRINCIPAL SECRETARY (FINANCE) [S. RAVINDRA BHAT, J.] 1057 The earliest judgment was delivered in relation to the appeal by M/s Shanti Fragrances; the subsequent judgments have reiterated the ruling in that case.

Section 3 of the DST Act imposes local sales tax on every dealer whose turnover exceeds the limit specified in a notification, and who is registered or is liable to pay tax under the CST Act, on all sales effected on or after the commencement of the DST Act. Section 3(6) reads as follows: “no dealer who deals exclusively on one or more classes of goods specified in the Third Schedule shall be liable to pay any tax under this Act.” Section 7 of the DST reads as follows:

7. Tax Free Goods (1) No tax shall be payable under this Act on the sale of goods specified in the Third Schedule subject to the conditions and exceptions, if any, set out therein. (2) The 7[Lieutenant Governor may] by notification in the Official Gazette, add to, or omit from, or otherwise amend, the Third Schedule either retrospectively or prospectively, and thereupon the Third Schedule shall be deemed to be amended accordingly: Provided that no such amendment shall be made retrospectively if it would have the effect of prejudicially affecting the interests of any dealer.

Entry 22 of the Third Schedule reads as follows: “22. Tobacco as defined under the Central Excise and Salt Act, 1944 (1 of 1944).”

The effect, prima facie, of an overall reading of provisions of the DST Act therefore, is that all dealers whose turnover exceeds the quantified amount which is termed “as taxable quantum” during the relevant period, are liable to pay state or local sales tax. Section 3(6) of 7 Substituted for “The Administrator may, with the previous approval of the Central Government and “ by Notification No. F4(120)/94 -Fin. (G)/2137 to 2145 dated 02.03.1998. A B C D E F G H 1058 SUPREME COURT REPORTS [2023] 7 S.C.R. A the Act states that the dealer who exclusively deals in goods specified in the Third Schedule shall not be liable to pay tax.

By a notification dated 31.03.2000 issued by the competent authority i.e. the Lt. Governor of the National Capital Territory of Delhi (hereafter “NCTD”), Entry 46 was inserted in the First Schedule to the DST Act. That Entry reads as follows: “46. Pan Masala and Gutkha”

The First Schedule is dealt with under Section 4 of the DST Act (“rate of tax”) it broadly enacts [by Section 4(1)(a)] that the taxable turnover “in respect of the cases specified in the First Schedule” would be at the rate of 12 paise to a rupee. Thus, goods enumerated in the First Schedule are per se subjected to be local or state sales tax levy under the DST Act @ 12%. Similarly, goods referred to in the Third Schedule are tax-free. It is also clear that the Lt. Governor is authorised to change the entries, as indicated in Section 7, that is to say, from tax- free goods to taxed goods and vice versa.

The appellants had argued before the Delhi High Court, that tobacco is mentioned in the Third Schedule at Sl. No. 22 and that the expression (tobacco) refers to what is defined as such under the Central Excise Act, 1944 (hereafter “CEA”). Consequently, to ascertain “tobacco”, one has to refer to the CEA read with Chapter 24 of the Schedule to the CET Act. Chapter Note 3 thereof reads as under:

In this Chapter, ‘tobacco’ means any form of tobacco, whether cured or uncured and whether manufactured or not, and includes the leaf, stalks and stems of the tobacco plant, but does not include any part of a tobacco plant while still attached to the earth.

Chapter Note 6 reads as follows: “In this Chapter, “Pan Masala containing tobacco”, commonly known as ‘Gutka’ or by any other name, means any preparation containing betel nuts and tobacco and any one or more of the following ingredients, namely: (i) lime; and (ii) kattha (catechu), B C D E F G H M/S TRIMURTHI FRAGRANCES (P) LTD. THR. ITS DIRECTOR SHRI PRADEEP KUMAR AGRAWAL v. GOVT. OF N.C.T. OF DELHI THR. ITS PRINCIPAL SECRETARY (FINANCE) [S. RAVINDRA BHAT, J.] 1059 whether or not containing any other ingredients, such as cardamom, copra and menthol.” A Chapter 24 includes Heading No. 2404.49, which reads as under: “Pan Masala containing tobacco”

The appellants had urged before the High Court that “gutkha” is “tobacco” and relied on Kothari Products Ltd. v. Government of A.P8 and State of Orissa v. Radheshyam Gudakhu Factory9. This court in Radheshyam Gudakhu Factory (supra), noted that “tobacco” in Section 2(c) of the ADE Act means goods in Entry 9 of the First Schedule to the CET Act which is as follows:

‘Tobacco’ means any form of tobacco, whether cured or uncured and whether manufactured or not, and includes the leaf, stalks and stems of the tobacco plant, but does not include any part of a tobacco plant while still attached to the earth.

In Radheshyam Gudakhu Factory (supra) the issue was whether ‘Gudaku’ was covered by the expression, ‘tobacco’ defined in ADE Act. The court held that “gudaku” is a form of smoking tobacco and is a product of tobacco, in common parlance. Before the Court there was no dispute that “gutkha” is not included in “tobacco”. Thus, it is clear that “Gutkha” and “Gudaku” are both covered by the expression “tobacco” as understood in Chapter Note 3 of the CET Act. The appellants argued that when ‘Gudaku’ and ‘Gutkha’ are tobacco and fell within Entry No. 22 of the Third Schedule of the Act, local sales tax cannot be levied by introducing Entry No. 46 through a notification and by including it in the First Schedule. Kothari Products Ltd. (supra) was relied on; the dealer was dealing in ‘Gutkha’ (under the brand “Pan Parag”). The introduction of Entry 194 (which taxed “pan masala including gutkha”) in the First Schedule to the A.P. General Sales Tax Act (APGST Act) was in issue. APGST Act had a provision10 like Section 7 of the DST Act which exempted goods in the Fourth Schedule. The Fourth Schedule referred to tobacco (Entry 7) and its explanation stated that it shall be