"State In A Constitutional Republic Can't Indulge In Arbitrary Generation Of Funds": High Court Annuls Meghalaya Cement Cess Act, 2010

While rebuking the State for irrationally raising revenue through the legislation, a Division Bench of Chief Justice Sanjib Banerjee and Justice W. Diengdoh held,

"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."

Brief Background:

The writ petitions were filed to challenge the validity of the Act which was repealed after the goods and services tax ("GST") regime took over.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.

Contentions:

It was contended by the petitioners that for any State to impose a tax or collect a cess thereon, the relevant field has to be traced in List-II (State List) of the Seventh Schedule to the Constitution. They submitted that since the charging provision makes the person manufacturing or producing cement within the State to be liable to pay cess, it amounts to a kind of additional excise duty which is sought to be imposed under the wrap of cess.

The petitioners referred to Entry 84 from the Union List as it stood prior to the 101^st Amendment to the Constitution which came to effect in 2016. They argued that as cement was not included as one of the excepted products in Entry 84 of List I, no import could have been levied by the State on the manufacture of cement notwithstanding such process of manufacture being within the geographical limits of the State. Thus, the State had no authority to impose any tax or the like on the manufacture of cement in the State and it did not possess any authority to levy cess on such manufacture.

The State relied on Entry 54 of the State List to trace authority for charging the cess. However, the petitioners vehemently pressed that such entry does not authorise the State to impose "a kind of excise duty with a different name". Entry 54 of the State List, as it stood prior to the 101st Amendment to the Constitution, permitted tax on the 'sale' or 'purchase' of goods other than newspapers, subject to the provisions of Entry 92A of the Union List. Therefore, the levy should have been confined to the sale or purchase of such goods.

However, under Section 3 of the impugned Act, the levy was imposed on "any person or factory who produces cement within the State." Section 6 provided for the manner of collection and payment of cess and in sub-section (2) thereof prohibited the removal of cement without cess being paid. The petitioners submitted that the expression "sale or transfer" in the final part of Section 6(2) does not imply that the levy would be on the sale or transfer. The expression "sale or transfer" merely governs the word "remove", i.e. the action of removing or transporting or attempting to remove or transport.

Judgment:

The Court 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."

The Court acknowledged that there is no available mechanism to assess the quantum of the levy that may have been passed on to the customer or may have been absorbed by the manufacturers. It apprehended the possibilities that a part of it had been passed on and a part absorbed by reducing the profit element or that the entirety of the impost had been passed on to the customers.

However, it held that notwithstanding the product (in the present case being cement), any additional levy on the price of a product leads to reduction of the quantum of sale or manufacture in the usual course. Hence, the Court suspected that the manufacturers and producers of cement in the State might have taken a hit as a direct consequence of the illegal impost. So, they ought to be compensated for their loss.

As there existed no degree of certainty as to whether the illegal levy resulted in a specific percentage of loss of revenue, the Court fixed an ad hoc figure of 20 percent to be reasonable amount of loss that was occasioned to the manufactures and producers of cement in the State as a result of the illegal levy of cess by the State without any authority. It clarified that this figure of is arrived at as a 'rough and ready' measure, so that the same acts as a deterrent to discourage the State from acting in such high-handed manner and extorting money without authority.

Consequently, while declaring the Act as ultra vires the Constitution, it required the State to refund 20 percent of the amount realized on such count from the individual petitioners and to invest 30 percent of the total amount of cess realised under the legislation for the purpose of procuring advanced equipment for the cancer wing of the Government General Hospital in Shillong.

Case Title: Megha Technical & Engineers Pvt. Ltd. v. State of Meghalaya & Ors.

Case No.: WP (C) No. 280-281 of 2016

Date of Judgment: 9^th February 2022

Coram: Chief Justice Sanjib Banerjee and Justice W. Diengdoh

Citation: 2022 LiveLaw (Meg) 2