State in a Constitutional Republic can’t indulge in arbitrary generation of funds: High Court of Meghalaya

The principle is too well established to be questioned. Yet, it will not do for a State in a constitutional republic wedded to the rule of law to suggest that it may indulge in arbitrary or irrational or illegal generation of funds without being liable to return the same upon the Court finding the process to be illegal. These were held by High Court of Meghalaya through the bench of Justice Sanjib Banerjee, and Justice W. Diengdoh, in the case Megha Technical & Engineers Pvt. Ltd. v. State of Meghalaya & Ors. (WP (C) No. 280-281 of 2016)

The crux of the case is the writ petitions were filed to challenge the validity of the Act which was repealed after the goods and services tax (“GST”) regime took over. It was alleged by the petitioners that the cess imposed by the State of Meghalaya was completely illegal, without any authority and grossly prejudicial to them and others connected with cement industry. It was impugned for being arbitrary as the cess was subsumed by the State as a general revenue and was not earmarked for any special public beneficial purpose, for which all kinds of cesses are usually collected.

The petitioner contended that in order for any State to levy taxes or collect cesses in it, the appropriate place must be complied with in Table II (State List) of Seventh Schedule of the Constitution. They argue that since a charging charge makes a person who produces or manufactures cement within the State liable to pay taxes, that is the same as the type of additional tax that must be included under tax collection.

Petitioner referred to Entry 84 on the Union’s list as it stood before the 101th amendment to the Constitution which came into effect in 2016. They argued that since cement was not included as one of the external products in Entry 84 of List I, no imports could be charged by the State for cement despite the fact that the production process was within the territory of the State. Thus, the State did not have the authority to levy taxes or anything like that in making cement to the State and it did not have the authority to levy taxes on such production.

The State relies on the entry of 54 Provincial Provinces to monitor the authority to charge this cess. However, the Petitioner strongly insisted that such an entry did not authorize the State to impose a “tax with a different name”. The 54th inclusion of State List, as appeared before the 101st Amendment to the Constitution, the tax allowed for the ‘sale’ or ‘purchase’ of goods outside the press, subject to the provisions of Entry 92A of the Union List. Therefore, taxes should be limited to the sale or purchase of such goods.

However, under Section 3 of the Opposition Act, the tax was levied on “any person or industry producing cement within the State.” Section 6 provides for the collection and payment of taxes and in subsection (2) thereby prohibits the removal of cement without payment. Applicants have submitted that the term “sale or transfer” in the last part of Section 6 (2) does not imply that the tax will be by sale or transfer. The term “sell or transfer” simply governs the word “remove”, meaning the act of removing or moving or attempting to remove or relocate.

The learned bench of Justice Sanjib Banerjee, and Justice W. Diengdoh, held that the State had no authority to impose any tax or cess on the manufacture or production of cement, whether by the said Act or by any other manner, and, in all fairness, no further attempt was also made on behalf of the State to justify the legislative illegality except to suggest that after the GST regime has been put in place, the impugned Act has been repealed and replaced. The Court further observed, “The firmer limb of the State’s argument is that since the component of cess, like excise duty, would have been passed on by the manufacturer or producer to the customer, the petitioners cannot be refunded the amounts collected from them, even if the levy may have been illegal or without authority. In essence, the State invokes the doctrine of unjust enrichment in the sense that the customer bore the brunt of the levy of cess and since the manufacturer or producer would not be able to reasonably identify the users of the product or distribute the amount refunded to such persons, the manufacturer or producer would not be entitled to any refund to retain it for personal benefit as the perceived illegal additional expense has been borne by the end-user of the product.

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Judgement reviewed by Himanshu Ranjan

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