[This is a Guest Post by Rahul Narayan.]
The Judgment in Unicorn Industries v. Union of India dated 6.12.2019 does not refer to the Constitution; nor was any constitutional argument made in the oral submissions in the case, though there was reference made in the pleadings. However, the case touches upon an important Constitutional question: one which was not framed and therefore not answered correctly. What is the nature of a surcharge imposed by the union government on existing levies such as excise duty?
Brief Factual Background
In a nutshell, the dispute in Unicorn Industries arose because the Department refused to allow Unicorn Industries to take a refund or re-credit for the National Calamity Contingent Duty (“NCCD”), Education Cess, and secondary and higher education cess (“SHE cess”) under a Notification applicable in Sikkim that “hereby exempts the goods….from so much of the duty of excise or additional duty of excise, as the case may be, leviable thereon under any of the said Acts”.
The NCCD was introduced vide Section 136 the Finance Act 2001 as “levied and collected for the purposes of the Union, by surcharge, a duty of excise”. The education cess was brought about under Sections 91 and 93 of the Finance Act 2004 “as surcharge for the purposes of the union, a cess to be called the Education cess…”. “The education cess …shall be a duty of excise.” The SHE Cess was brought about under Sections 126 and 128 of the Finance Act 2007 “as surcharge for the purposes of the union, a cess to be called the Secondary and Higher Education Cess…”. “The Secondary and Higher Education Cess …shall be a duty of excise.”
The question that squarely arose before the Court in Unicorn Industries was whether the NCCD, Education Cess and SHE Cess were covered as “duties of excise or additional duty of excise” under the Notification. If they were, then Unicorn was entitled to take the benefit of the exemption, if not, then Unicorn was not so entitled.
The Sikkim High Court held that the NCCD, Education Cess and SHE Cess were not covered under the Notification as they were not in essence duties of excise and that the case was covered by the earlier Supreme Court case of Union of India v. Modi Rubber (1986) 4 SCC 66. By the time Unicorn Industries was heard in the Supreme Court, the Supreme Court had held that the Education Cess and SHE Cess were duties of excise in the division bench judgment of SRD Nutrients v. CCE, (2018) 1 SCC 105 and that the NCCD was a duty of excise in he division bench judgment of Bajaj Auto v. Union of India, 2019 SCC Online SC 421.
In Unicorn Industries, the Supreme Court sitting in a bench of 3 judges held that the NCCD, Education CESS and SHE Cess are additional or special duties of excise (para 40). As a sequitur to this finding, the Court went on to rely upon the judgment of the Supreme Court in Modi Rubber Limited, (1986) 4 SCC 66 which dealt with additional and special duties of excise imposed by the Finance Act 1979 and stated that the Notification did not extend to the NCCD, Education Cess and SHE Cess. It then went on to overrule SRD Nutrients and Bajaj Auto for being per incuriam for having ignored the 3 judge bench in Modi Rubber.
Under Article 265 of the Indian Constitution, as indeed under common law, there is no power to tax without the authority of law. Thus when examining the nature of any levy, one has to see the charging section and the Constitutional power under which such section has been enacted.
The charging sections of the NCCD, Education Cess and SHE Cess each make it abundantly clear that the same have been imposed as a Surcharge “for the purposes of the Union”.
A surcharge is a special kind of levy in our Constitutional scheme. Chapter I of Part XII of the Constitution generally provides for how taxes are imposed and how they are to be apportioned or distributed between the Union and the States. Generally speaking, under Article 270 taxes and duties referred to in the Union List are levied and collected by the Union and are distributed to the States as per formulae determined by the Finance Commission. Article 271 provides for the power to increase any of the duties or taxes mentioned in Article 269 and 270 by a surcharge for the purposes of the Union and that the entire proceeds of such surcharge form part of the Consolidated Fund of India and are thus not shared with the States. A similar provision existed as the proviso to Section 137 under the Government of India Act 1935. The Constituent Assembly adopted the same on 5th August 1949.
A textual analysis of Article 271 reveals that the surcharge is “an increase of the duties and taxes” referred to under Articles 269 and 270 for the purposes of the Union. The Supreme Court has consistently held that a surcharge is a higher rate of tax or additional charge or imposition resulting in the enhancement of the tax and that the nature of the additional imposition is the same as the underlying levy. Thus a surcharge on income tax is also income tax and a surcharge on estate duty is also estate duty.
On the other hand, in Modi Rubber, the court was specifically dealing with an additional levy of excise imposed under the Finance Act 1979 and not with a surcharge. On facts and an analysis of the phraseology of the notification in question, it was found that the exemption notification under the Central Excise Act did not apply to additional duties of excise imposed under different Acts. Further, the notification in Modi Rubber spoke only of “duty of excise” and not duties of excise and special duties of under any Act as provided in the Notification in question in Unicorn Industries.
There is a two-fold Constitutional difference between a surcharge and an additional levy that has not been considered in Unicorn Industries. Firstly, an additional levy imposed by law may take the character of an existing levy, or not, as the ratio in Modi Rubber reveals. On the other hand, a surcharge on an existing levy takes the character of the underlying levy as a matter of Constitutional law. Secondly, an additional levy imposed by law under the Union List is shared between the Union and the States as per the formula of the Finance Commission under Article 270 whereas a surcharge is for Union purposes only and is not shared with the States under Article 271.
In Unicorn Industries, the judgment does not deal with the fact that the NCCD, Education Cess and SHE Cess have each been imposed as surcharge on duties of excise. By the operation of Article 271, the NCCD, Education Cess and SHE Cess are each an increase of excise duty for the purposes of the Union and are thus, by binding precedent of 3 judges and 2 judges, excise duties albeit those imposed under the Finance Acts rather than Central Excise Act.
SRD Nutrients also did not discuss the nature of the levy as a surcharge but it relied upon and approved of the judgment of the Rajasthan High Court in Banswara Syntex v. Union of India (2007) SCC Online SC. 365 which had specifically held that the decision was based on the fact that the levy was a surcharge and not an additional duty of excise. Bajaj Auto followed SRD Nutrients. Thus, the finding in Unicorn Industries that SRD Nutrients and Bajaj Auto were per incuriam as they did not cite Modi Rubber is incorrect. They did not cite Modi Rubber as that judgment was not relevant for levies of surcharge.
Unicorn Industries holds that the NCCS, Education Cess and SHE Cess are in the nature of additional duties of excise. This is erroneous. As Surcharge on excise duty, they are duties of excise per se due to the operation of Article 271. Unicorn should have been allowed the exemption under the Notification.