Supreme Court Upholds GST Compensation Cess: Union of India v. Mohit Mineral [2018 INSC 929]

GST compensation cess – Supreme Court ruling explained with headnote, key holdings, important paragraphs and FAQs.

The Supreme Court upheld the constitutional validity of the Goods and Services Tax (Compensation to States) Act, 2017, which levies the GST Compensation Cess. It held that Parliament had the legislative competence to enact the Act, that the Act does not violate the Constitution (One Hundred and First Amendment) Act, 2016 and is not colourable legislation, and that levying the cess alongside GST on the same supply is permissible because the cess is an increment to GST. It also held that a coal trader that had paid Clean Energy Cess up to 30.06.2017 was not entitled to set that amount off against the Compensation Cess, since the statute provides for no such credit. The transferred writ petition was dismissed and the Union of India's civil appeals against the Delhi High Court's interim orders were allowed (paras 40–68).

Headnote

Goods and Services Tax — GST Compensation Cess — Legislative competence, double levy and set-off of Clean Energy Cess — Goods and Services Tax (Compensation to States) Act, 2017, Ss. 2(c), 8; Constitution of India, Arts. 246A, 248, 270, Entry 97 of List I; Constitution (One Hundred and First Amendment) Act, 2016, S. 18; Finance Act, 2010, S. 83

A coal trader that had paid Clean Energy Cess until 30.06.2017 challenged the Compensation to States Act, 2017, the Rules and the rate notifications, and in the alternative sought a set-off; the Delhi High Court granted partial interim relief. Held, (i) a cess is a tax levied for a special purpose, which may be levied as an increment to an existing tax, and the cess under the Act is "with respect to" goods and services tax; (ii) Parliament is competent to enact the Act under Article 246A, the residuary power in Article 248 read with Entry 97 of List I, Article 270, and Section 18 of the 101st Amendment Act; (iii) the Act implements, and does not violate, the 101st Amendment and is not colourable legislation; (iv) GST and the Compensation Cess on the same supply are two separate imposts in law, and the levy is valid; (v) Clean Energy Cess and Compensation Cess serve different purposes, and any credit or set-off is a matter of legislative policy that the Act and Rules do not provide. Writ petition (transferred case) dismissed; civil appeals of the Union allowed; no costs.

(Paras 19, 35–47, 53, 55–58, 60–68)

Judgment Intelligence

Key Holdings

• A "cess" is a tax levied for some special purpose, which may be levied as an increment to an existing tax, and the cess under the Compensation to States Act, 2017 is a cess with respect to goods and services tax (para 40).
• No entry in List II or List III covers the cess. Applying the Harbhajan Singh Dhillon test, Parliament's residuary power under Article 248 read with Entry 97 of List I supports the Act (paras 40–41, 45).
• Article 270 empowers Parliament to levy a cess for specific purposes, and the word "law" in Section 18 of the 101st Amendment Act is wide enough to include a cess to compensate the States. The Act is therefore within Parliament's competence (paras 46–47).
• The power under Article 246A to make laws "with respect to" GST includes the power to levy a cess on GST. The 101st Amendment subsumed various cesses but does not say that no surcharge or cess may be levied in future (paras 50, 55).
• The Act was enacted in pursuance of the 101st Amendment to fulfil its objective. It does not transgress that Amendment and is not colourable legislation (paras 57–58).
• GST and the Compensation Cess on the same supply are two separate imposts in law that no law prohibits. The cess is an increment to GST and is permissible (paras 60–64).
• Clean Energy Cess paid up to 30.06.2017 cannot be set off against Compensation Cess. The two levies serve different purposes, and credit or set-off is legislative policy that the Act and Rules do not provide (paras 65–67).

Brief Facts

Mohit Mineral Pvt. Ltd. trades in imported and Indian coal. From 01.07.2010, the Finance Act, 2010 levied Clean Energy Cess, in the nature of a duty of excise, on the production of coal. After the Constitution (One Hundred and First Amendment) Act, 2016, Parliament enacted the CGST Act, the IGST Act and the Goods and Services Tax (Compensation to States) Act, 2017 on 12.04.2017. The Taxation Laws (Amendment) Act, 2017 then repealed several cesses, including the Clean Energy Cess. The company asked the GST Council to set off the Clean Energy Cess against the GST Compensation Cess. It then filed W.P.(C) No. 7459 of 2017 in the Delhi High Court, seeking to quash the Act, the Compensation Cess Rules and Notification Nos. 1/2017 and 2/2017-Compensation Cess (Rate) dated 28.06.2017. It also sought a declaration that the GST Council had no power under Article 279A to recommend the levy (paras 2, 7).

On 25.08.2017, the High Court found a prima facie case on legislative competence. It ordered that no further payment was required on coal stocks on which Clean Energy Cess had already been paid, and it passed a similar interim order on 08.09.2017 in the Hind Energy petition. The Union appealed both orders, and on 22.09.2017 the Supreme Court stayed the first one. On 16.01.2018, the writ petition was transferred to the Supreme Court as Transferred Case (C) No. 9 of 2018, and with the parties' consent it was heard finally together with the appeals (paras 3–6, 8–9). In the alternative, the petitioner claimed a set-off of Rs. 7.68 crores of cess already paid on stock held on 30.06.2017 (para 15).

Issue (para 19)

1. Is the Compensation to States Act, 2017 beyond the legislative competence of Parliament?
2. Does the Compensation to States Act, 2017 violate the Constitution (One Hundred and First Amendment) Act, 2016, and is it against the objective of that Amendment?
3. Is the Compensation to States Act, 2017 a colourable legislation?
4. Is it permissible in law to levy the Compensation to States Cess and GST on the same taxing event?
5. Is the petitioner, having paid Clean Energy Cess till 30 June 2017, entitled to a set-off in payment of the Compensation to States Cess?

Court's Findings

Legislative competence (Issue 1): A cess is a special kind of tax that may be levied as an increment to an existing tax. No entry in List II or List III refers to this cess, so under the Harbhajan Singh Dhillon test the residuary power under Article 248 and Entry 97 of List I applies. The Hoechst and Sundararamier principle, that a tax cannot be levied under a general entry, does not apply because Section 2(c) defines the cess as the GST compensation cess levied under Section 8. Article 270 and the wide word "law" in Section 18 of the 101st Amendment Act also support the Act (paras 33–47).

Not contrary to the 101st Amendment and not colourable (Issues 2 and 3): "With respect to" in Article 246A is an expression of expansion (Doypack). Dewan Chand Builders did not apply because the cess here is a tax, not a fee. Clause 18 of the 2014 Bill, which proposed an additional 1% tax, was dropped, but Clause 19 became Section 18 of the Amendment Act. The Act's Preamble shows it was enacted in pursuance of the Amendment, so the plea of colourable legislation failed (paras 48–58).

Same taxable event (Issue 4): Two separate and distinct imposts on different aspects of a transaction are permissible because "in law there is no overlapping", as held in Federation of Hotel & Restaurant. The Court also relied on Avinder Singh, which held that nothing in Article 265 creates a constitutional vice of double taxation. GST and the cess under Section 8, levied on the supplies covered by Section 9 of the CGST Act and Section 5 of the IGST Act, are two separate imposts in law that no law prohibits (paras 59–64).

No set-off of Clean Energy Cess (Issue 5): Under Section 83(3) of the Finance Act, 2010, Clean Energy Cess financed clean-energy initiatives and research, and under Section 83(6) it was used for the purposes of the Union. The Compensation Cess, by contrast, compensates the States and is wholly distributed among them. Since the levies are entirely different and neither the Act nor the Rules provide for credit, no set-off is available (paras 65–67).

Final Outcome / Directions (paras 64, 67–68)

• The Compensation to States Act, 2017 is held to be within Parliament's legislative competence, consistent with the 101st Amendment, and not colourable legislation.
• Levying the Compensation Cess as an increment to GST is held to be permissible in law (para 64).
• The petitioner is not entitled to any set-off of Clean Energy Cess paid against the Compensation Cess (para 67).
• The writ petition (Transferred Case (C) No. 9 of 2018) is dismissed. Both civil appeals of the Union of India are allowed, and the parties bear their own costs (para 68).

Legal Principle

A cess is a tax raised for a specific purpose and may be levied as an increment to an existing tax. A cess "with respect to" GST therefore falls within Parliament's power, and the GST reform did not bar new cesses. Two separate imposts on the same transaction are valid unless some law prohibits them, and a credit or set-off of one levy against another exists only if the legislature provides it.

Precedents Relied Upon

• Union of India v. Harbhajan Singh Dhillon, (1971) 2 SCC 779 – Relied upon · Discussed at paras 40–41: the test for Parliament's competence is whether the matter or tax is in List II or List III; if not, Parliament has the power.
• India Cement Ltd. v. State of Tamil Nadu, (1990) 1 SCC 12 – Relied upon · Discussed at para 38: a cess is a tax, and when levied as an increment, its validity is judged like that of the tax to which it is an increment.
• Vijayalashmi Rice Mill v. Commercial Tax Officers, Palakol, (2006) 6 SCC 763 – Relied upon · Discussed at para 39: a cess is a special kind of tax whose revenue is used for a specific purpose.
• Hoechst Pharmaceuticals Ltd. v. State of Bihar, (1983) 4 SCC 45 and M.P.V. Sundararamier & Co. v. State of A.P., AIR 1958 SC 468 – Distinguished · Discussed at paras 42–44: the principle that the power to tax cannot be deduced from a general entry does not apply to a cess levied with respect to GST.
• Doypack Systems Pvt. Ltd. v. Union of India, (1988) 2 SCC 299 – Relied upon · Discussed at para 50: expressions such as "in relation to" are used in an expansive sense.
• Dewan Chand Builders and Contractors v. Union of India, (2012) 1 SCC 101 – Distinguished · Discussed at paras 51–53: that cess was upheld as a fee, whereas here the Union treats the cess as a tax.
• Federation of Hotel & Restaurant Association of India v. Union of India, (1989) 3 SCC 634 – Relied upon · Discussed at para 61: the same transaction may involve different taxable aspects, and overlapping in fact is not overlapping in law.
• Avinder Singh v. State of Punjab, (1979) 1 SCC 137 – Relied upon · Discussed at para 62: nothing in Article 265 creates a constitutional vice of double taxation.

Important Paragraphs of the Judgment

Para 40: "The expression “cess” as held above means a tax levied for some special purpose, which may be levied as an increment to an existing tax."

Para 47: "When Constitution provision empowers the Parliament to provide for Compensation to the States for loss of revenue by law, the expression “law” used therein is of wide import which includes levy of any cess for the above purpose."

Para 55: "When express power is there to make law regarding goods and services tax, we fail to comprehend that how such power shall not include power to levy cess on goods and services tax."

Para 60: "The principle is well settled that two taxes/imposts which are separate and distinct imposts and on two different aspects of a transaction are permissible as “in law there is no overlapping”."

Para 67: "Giving credit or set off in the payment is legislative policy which had to be reflected in the legislative scheme."

What the Ruling Means: Practical Impact

• Compensation Cess stands on firm footing: Challenges to the 2017 Act based on lack of legislative competence or inconsistency with the 101st Amendment were rejected on several independent grounds (paras 40–47, 57–58).
• "Double taxation" is not a ground by itself: Taxpayers cannot defeat the cess merely because it is levied on the same supply as GST. It is a separate impost and an increment to GST (paras 62–64).
• No carry-forward of legacy cesses without a statutory basis: Credit for pre-GST levies such as Clean Energy Cess depends entirely on the legislative scheme, and courts will not supply a set-off the statute does not provide (para 67).

Frequently Asked Questions

Is the GST Compensation Cess a tax or a fee?

A tax. The Court held that a cess is a tax levied for a special purpose. Because the Compensation Cess is "with respect to" GST, it is a tax, and the Union never claimed that it was a fee (paras 40, 53–54).

Under which constitutional provisions could Parliament levy the Compensation Cess?

Article 246A, Article 248 read with Entry 97 of List I, Article 270 and Section 18 of the 101st Amendment Act (paras 41, 45–47, 55).

Did the 101st Amendment bar any new cess after GST?

No. The Amendment subsumed various taxes, surcharges and cesses, but the Court held that it does not indicate that no surcharge or cess may be levied in future (para 55).

Is levying GST and the Compensation Cess on the same supply double taxation?

The Court held that the two are separate imposts in law that no law prohibits, and that the cess is an increment to GST and is permissible (paras 60–64).

Can Clean Energy Cess paid before 1 July 2017 be adjusted against the Compensation Cess?

No. The two cesses serve different purposes and are distributed differently: Clean Energy Cess was used for the purposes of the Union, while the Compensation Cess goes wholly to the States. Neither the Act nor the Rules provide for credit or set-off (paras 65–67).

Judgment Copy

Judgment PDF: 2018 INSC 929 – Union of India v. Mohit Mineral Pvt. Ltd. (official copy, sci.gov.in)

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