2004 (8) TMI 380 - SC - VAT and Sales Tax

Whether the levy was a tax or a fee - Held that - Appeal dismissed. The High Court was, however, right in concluding that the levy, even if it be a fee, is arbitrary and discriminatory. The levy is ostensibly for the purpose of co-ordination between organisations engaged in the dairy sector and to develop modern dairy farming technology. However, the levy is on milk plants at the rate of 10 paise per litre of the licensed capacity. The term milk plant has been defined under section 2(d) to mean a milk handling, processing or manufacturing unit registered under the Milk and Milk Products Order, 1992, of the Government of India. This order has been issued under the Essential Commodities Act. Under this order, only milk plants having an installed capacity for handling milk in excess of 10,000 litres per day or milk products in excess of 500 tonnes per annum require registration. Thus, only such milk plants, i.e., milk plants which have an installed capacity to handle 10,000 litres per day or which produce milk products in excess of 500 tonnes per annum have to pay cess. Further, the levy is not on the basis of actual production but on the licensed capacity of their plants. Thus if a milk plant had a licensed capacity of 40,000 litres, even though the actual consumption was only 10,000 litres, they would still have to pay cess at the rate of 10 paise per litre on 40,000 litres.

Summary

Issues Involved:
1. Competence of State Legislature to levy tax under any entry in List II of the Seventh Schedule to the Constitution of India.
2. Whether the levy was a tax or a fee.
3. Arbitrariness and discrimination of the levy on licensed capacity of milk plants.

Detailed Analysis:

1. Competence of State Legislature to Levy Tax:
The appellants challenged the Punjab Dairy Development Board Act, 2000, on the grounds that the State Legislature was not competent to levy a tax on the licensed capacity of an industry under any entry in List II of the Seventh Schedule to the Constitution of India. The High Court held that the levy was in effect a tax and not a fee, following the principles laid down in Kishan Lal Lakhmi Chand v. State of Haryana (1993) Supp 4 SCC 461. The High Court concluded that the State Legislature had impinged upon a field already occupied by the Central legislation, namely, the Industries (Development and Regulation) Act, 1951. However, the Supreme Court found that the High Court was wrong in concluding that the field was already occupied by a Central legislation. The Supreme Court cited Ch. Tika Ramji v. State of U.P. and Belsund Sugar Co. Ltd. v. State of Bihar, stating that repugnancy must exist as a fact and not as a mere possibility. Since the Central legislation levied no cess or fee, there was no question of repugnancy.

2. Tax or Fee:
Lengthy arguments were made on whether the levy was a tax or a fee. The appellants argued that the levy was a fee imposed under entries 15 and 27 of List II to preserve, protect, and improve stock and prevent animal diseases, and for improving production, supply, and distribution of goods. They cited several cases to support their contention, including Krishi Upaj Mandi Samiti v. Orient Paper and Industries Ltd., B.S.E. Brokers' Forum v. Securities and Exchange Board of India, Sreenivasa General Traders v. State of Andhra Pradesh, City Corporation of Calicut v. Thachambalath Sadasivan, and Sirsilk Ltd. v. Textiles Committee. The respondents, on the other hand, argued that the High Court correctly held it to be a tax, relying on Commissioner, Hindu Religious Endowments v. Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt, M.P.V. Sundararamier and Co. v. State of Andhra Pradesh, and Municipal Corporation of Delhi v. Mohd. Yasin. The Supreme Court noted that the principles laid down in Kishan Lal Lakhmi Chand's case had been diluted by subsequent decisions and held that the High Court was not correct in following those principles. However, the Supreme Court did not find it necessary to decide whether the levy was a tax or a fee and left the question open.

3. Arbitrariness and Discrimination:
The High Court held that the levy was arbitrary and discriminatory, as it was imposed only on milk plants with an installed capacity of more than 10,000 litres per day or producing more than 500 tonnes of milk products per annum, and not on the basis of actual production. The Supreme Court agreed with the High Court's conclusion that the levy was arbitrary and discriminatory. The Court found that the levy was imposed on the licensed capacity of milk plants, irrespective of actual production or consumption, and that there was no rational explanation for why the levy was only on certain milk plants and not on farmers or cooperative societies. The Court also noted that the levy would still apply even if the plant was shut down or had reduced production due to repairs or maintenance. The Supreme Court found the levy to be arbitrary and discriminatory and thus struck it down.

Conclusion:
The Supreme Court upheld the High Court's decision to quash the Punjab Dairy Development Board Act, 2000, as the levy was found to be arbitrary and discriminatory. The appeals were dismissed with no order as to costs.