2006 (8) TMI 307 - SC - VAT and Sales Tax

Whether the impost in question is a fee or a tax? Whether there is a broad and general correlationship between the totality of the fee on the one hand, and the totality of the expenses of the services on the other? Held that - Appeal dismissed. Cess in question is in substance a fee as it is being levied for rendering to the rural public the service of rural development for the purposes stated in para 9 of the Act. Clearly roads, bridges and storage facilities have to be built in rural areas for progress, and naturally this will require generating funds. Thus, even if no specific service is rendered to any particular individual from whom the fee has been realised, the cess in question is nevertheless a fee, for the reasons already mentioned above. Services are being rendered to the people in the rural areas as mentioned in section 9 of the Act.

Issues Involved:
1. Constitutional validity of the Andhra Pradesh Rural Development Act, 1996.
2. Nature of the cess imposed under the Act - whether it is a tax or a fee.
3. Correlation between the cess collected and the services provided.

Issue-wise Detailed Analysis:

1. Constitutional Validity of the Andhra Pradesh Rural Development Act, 1996:

The appellants challenged the constitutional validity of the Andhra Pradesh Rural Development Act, 1996, which levies a cess in addition to the purchase or sales tax already being paid by them. They argued that the cess did not fall under any of the entries in List II or List III of the Seventh Schedule to the Constitution, making it invalid. The High Court of Andhra Pradesh upheld the Act's validity, leading to the present appeals.

2. Nature of the Cess - Tax or Fee:

The appellants contended that the cess was a tax since it lacked quid pro quo, a necessary characteristic of a fee. They argued that the cess partakes the character of a tax because no specific benefit was provided to the dealers from whom the cess was collected. The respondents, representing the State of Andhra Pradesh, argued that the cess was, in fact, a fee under entry 66 of List II of the Seventh Schedule to the Constitution.

The court examined the nature of the cess, noting that traditionally, a cess is a tax for a specific purpose. However, nomenclature is not critical; the nature of the levy is what matters. The court reiterated that the basic difference between a tax and a fee is that a tax is a compulsory exaction for public purposes without specific services rendered, while a fee is a charge for a special service rendered by a governmental agency.

3. Correlation Between Cess Collected and Services Provided:

The court noted that the concept of quid pro quo for a fee had evolved. It was no longer necessary for the fee to provide a direct benefit to the payer. Instead, a broad and general correlation between the totality of the fee and the services rendered suffices. The court observed that the writ petition did not allege that there was no broad correlation between the cess collected and the services rendered as per section 9 of the Act, which includes rural development, construction of roads and bridges, storage facilities, and maintaining the public distribution system.

The court concluded that the cess in question is a fee since it is levied for rendering services to the rural public for development purposes. The court upheld the validity of the Act but left open the possibility for the appellants or any concerned person to file a fresh petition if they could specifically aver that there was no broad correlation between the cess collected and the services rendered.

Conclusion:

The appeals were dismissed, and the validity of the Andhra Pradesh Rural Development Act, 1996, was upheld. However, the court allowed for the possibility of a fresh petition if it could be shown that there was no broad correlation between the cess collected and the services rendered.

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