M/S Vkg Packers vs. Union Of INDIA
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Cause title — parties, addresses and appearances
CAV ORDER
The petitioners, though different in the batch of these petitions, call in question notification dated 31-03-2023 and its amended notification dated 26-07-2023, by which the petitioners are directed to pay compensation cess at Maximum Retail Price (‘MRP’) as against the transaction value, as determined under Section 15 of the Central Goods and Services Tax Act, 2017. For the sake of convenience, the facts obtaining in Writ Petition No.100239 of 2024, which are similar in other writ petitions on the question involved in the lis would be narrated.
Facts, in brief, germane are as follows: -
The petitioner is a proprietorship concern engaged in the business of manufacturing chewing tobacco with lime tube sold under the brand name ‘Royale’. The chewing tobacco pouches manufactured by the petitioner contained various ingredients such as tobacco, lime, menthol, glycerin, perfume inter alia. The petitioner manufactures its products and sells them to various
7 stockists who act as the first intermediary in the supply chain. The stockists in turn sell the products to the wholesalers who further sell the products to retailers eventually reaching the consumer. There are two to three intermediaries before the products reach the end consumer.
The Government of India in terms of its 101st amendment to the Constitution of India on 08-09-2016, paved way for an integrated regime of indirect taxes on various goods and services. Pursuant to the said amendment Articles 246-A, 269-A, 279-A, 366(12-A), 366 (26-A) and 366 (26-B) came to be inserted and Articles 248, 249, 250, 268, 270, 271, 286 and 368 were suitably amended and certain substitutions and deletions also ensued. Here comes the genesis of the Goods and Services Tax from 01-07-2017. Four enactments were notified on the same day i.e., 01-07-2017 called: (i) Central Goods and Services Tax Act, 2017 (‘CGST Act’) (ii) Integrated Goods and Services Tax Act, 2017 (‘IGST Act’); (iii) Union Territory Goods and Services Tax Act, 2017 (UTGST Act’) and (iv) Goods and Services Tax (Compensation to States) Act, 2017
8 (hereinafter referred to as ‘the Compensation Act’ for short). The issue in the lis revolves round the Compensation Act.
A Circular on 01-02-2022 is notified clarifying the levy of Basic Excise Duty and National Calamity Contingent Duty on the MRP. The petitioner’s products being goods classified under Chapter 24 of the Schedule to the Compensation Act become subject to taxation under two regimes. One, the GST regime and the other Excise Duty under the Central Excise Act. The Government of India, in terms of the Circular, directs abatement of 55% on MRP by levying Basic Excise Duty and National Calamity Contingent Duty. The said circular is indicative that GST and compensation cess is payable on the transaction value and not on the retail sale price. When intermediaries such as stockists, wholesalers and retailers make further sales, they pay GST and compensation cess at 28% and 142% on their transaction value or value addition as it is known.
The impugned notification brings in a substantial change in the way in which the compensation cess is levied not on the transaction value, but on the MRP, notwithstanding the fact that
9 there is no change in the levy of GST, as the same is restricted only to compensation cess. By the impugned notification the petitioner or persons similarly situated are required to pay compensation cess at the rate specified on the MRP, which in the case of chewing tobacco with lime tube is 56%. Prior to the impugned notification, it is the averment in the petition that the petitioner would pay 28% GST and compensation cess at 142% of the transaction value. But now it is constrained to pay compensation cess on the MRP. The fulcrum of the lis revolves round whether compensation cess is to be paid on the transaction value or at the MRP.
Heard Sri G Shivadass, learned senior counsel appearing for the petitioners in Writ Petitions No.106955 of 2023 and Sri Gautham Bharadwaj, learned counsel appearing for the petitioner in Writ Petition Nos.100239 of 2024 and 108091 of 2023; and Sri K.Arvind Kamath, learned Additional Solicitor General of India appearing for the respondents.
The learned senior counsel Sri G Shivadass appearing for the petitioners in one of the writ petitions and Sri Gautham Bharadwaj, learned counsel appearing for the petitioner in two of
10 the petitions would vehemently contend that compensation cess which is levied under the GST is a tax. The compensation cess is imposed in exercise of power under Articles 246-A and 270 of the Constitution of India. The Compensation Act was enacted to provide States revenue loss resulting from implementation of the afore- mentioned four Acts. Therefore, the Compensation Act is an essential part of the scheme. They would further contend that compensation cess that is now imposed on MRP is contrary to the GST enactments itself. Sub-section (3) of Section 15 of the CGST Act excludes any discount explicitly given on the MRP from the value of supply. Therefore, no compensation can be calculated on the MRP when the parent Act itself excludes a discount in computation of the value of supply. The learned counsels, in unison, would submit that Section 8(2) of the Compensation Act further makes it clear that cess can be computed only on the supply of goods which are specified in the schedule. Therefore, they would contend that compensation cess can be levied only on the transaction value and not on the MRP. It is their further submission that the Compensation Act which defines input tax and taxable
11 supply, clearly show that compensation cess can be levied only on the transaction value and not the MRP.
Per contra, the learned Additional Solicitor General of India Sri K.Arvind Kamath would vehemently refute the submissions in contending that the loss to the States was to be augmented by the Compensation Act. A group of Ministers on capacity-based taxation and special composition scheme in certain sectors deliberated upon the issue and drew up a report. The final report was that there existed greater leakages in the revenue at the later stages of the supply chain of products and most of the end retailers of these products are below the threshold limit of mandatory GST registration. He would contend that with a view to plug leakages and improve revenue collection, particularly from the evasion prone commodities like pan masala, gutkha, chewing tobacco, the group of Ministers inter alia recommended that compensation cess levied on such evasion prone commodities should be changed from the current ad valorem tax, to specific tax-based levy, to boost first stage – manufacture level. Additionally, the specific tax was to be linked to retail price to maintain revenue boost. It is this that
12 resulted in the impugned notification. It is his submission that the charging section – Section 8 of the Compensation Act inter alia permits cess to be levied on supply of goods and services, which is done by the impugned notification. It is brought to implement the recommendation of group of Ministers so that the legislatively prescribed ceiling rate on concerned goods should be linked to the retail sale price. He would, therefore, contend that the action of the revenue is in consonance with law and, therefore, this Court in exercise of its juri iction under Article 226 of the Constitution should not interfere and obliterate a policy, which is in tune with the Act.
I have given my anxious consideration to the submissions made by the respective learned counsel and have perused the material on record.
The afore-narrated facts are not in dispute. They are a matter of record. Four enactments are notified on 01-07-2017. The entire fulcrum of the subject lis revolves around the fourth enactment i.e., the Compensation Act. Therefore, it becomes necessary to notice certain provisions of the Compensation Act.
13 The relevant sections that are necessary to be noticed are as follows:
“2. Definitions.—(1) In this Act, unless the context otherwise requires,— …
…
… (c) “cess” means the goods and services tax compensation cess levied under Section 8; (d) “compensation” means an amount, in the form of goods and services tax compensation, as determined under Section 7;
(e) “Council” means the Goods and Services Tax Council constituted under the provisions of Article 279-A of the Constitution; …
…
…
Levy and collection of cess.—(1) There shall be levied a cess on such intra-State supplies of goods or services or both, as provided for in Section 9 of the Central Goods and Services Tax Act, and such inter State supplies of goods or services or both as provided for in Section 5 of the Integrated Goods and Services Tax Act, and collected in such manner as may be prescribed, on the recommendations of the Council, for the purposes of providing compensation to the States for loss of revenue arising on account of implementation of the goods and services tax with effect from the date from which the provisions of the Central Goods and Services Tax Act is brought into force, for a period of five years or for such period as may be prescribed on the recommendations of the Council:
Provided that no such cess shall be leviable on supplies made by a taxable person who has decided to opt for composition levy under Section 10 of the Central Goods and Services Tax Act.
(2) The cess shall be levied on such supplies of goods and services as are specified in column (2) of the Schedule, on the basis of value, quantity or on such basis at such rate not exceeding the rate set forth in the corresponding entry in column (4) of the Schedule, as the
14 Central Government may, on the recommendations of the Council, by notification in the Official Gazette, specify:
Provided that where the cess is chargeable on any supply of goods or services or both with reference to their value, for each such supply the value shall be determined under Section 15 of the Central Goods and Services Tax Act for all intra-State and inter-State supplies of goods or services or both:
Provided further that the cess on goods imported into India shall be levied and collected in accordance with the provisions of Section 3 of the Customs Tariff Act, 1975 (51 of 1975), at the point when duties of customs are levied on the said goods under Section 12 of the Customs Act, 1962 (52 of 1962), on a value determined under the Customs Tariff Act, 1975. …
…
…
THE SCHEDULE [See Section 8 (2)]
In this Schedule, reference to a “tariff item”, “heading”, “sub-heading” and “Chapter”, wherever they occur, shall mean respectively a tariff item, heading, sub-heading and Chapter in the First Schedule to the Customs Tariff Act, 1975 (51 of 1975).
The rules for the interpretation of the First Schedule to the Customs Tariff Act, 1975 (51 of 1975), the section and Chapter Notes and the General Explanatory Notes of the First Schedule shall, so far as may be, apply to the interpretation of this Schedule.
S. No. Description of supply of goods or services Tariff item, heading, sub- heading, Chapter, or supply of goods or services, as the case may be The maximum rate at which goods and services tax compensation cess may be collected (1) (2) (3) (4)
15
Pan Masala. 2106 90 20 Fifty-one per cent. of retail sale price per unit.
Tobacco and manufactured tobacco substitutes, including tobacco products. 24 Four thousand one hundred and seventy rupees per thousand sticks or two hundred and ninety per cent ad valorem or a combination thereof, but not exceeding four thousand one hundred and seventy rupees per thousand sticks plus two hundred and ninety per cent. ad valorem or hundred per cent of retail sale price per unit.
Coal, briquettes, ovoids and similar solid fuels manufactured from coal, lignite, whether or not agglomerated, excluding jet, peat (including peat litter), whether or not agglomerated.
2701, 2702 or 2703 Four hundred rupees per tonne.
Aerated waters. 2202 10 10 Fifteen per cent. ad valorem.
4-A. Motor vehicles for the transport of not more than thirteen persons, including the driver. 8702 10, 8702 20, 8702 30 or 8702 90
Twenty-five per cent. ad valorem.
Motor cars and other motor vehicles principally designed for the transport of persons (other than motor vehicles for the transport of ten or more persons, including the driver), including station wagons and racing 8703 Twenty-five per cent. ad valorem.
16 cars.
Any other supplies.
Fifteen per cent. ad valorem.
Explanation.—For the purposes of this Schedule,—
(i) “retail sale price” means the maximum price at which the concerned goods in packaged form may be sold to the ultimate consumer and includes all taxes, local or otherwise, freight, transport charges, commission payable to dealers, and all charges towards advertisement, delivery, packing, forwarding and the like and the price is the sole consideration for such sale:
Provided that where the provisions of the Legal Metrology Act, 2009 (1 of 2010) or the rules made thereunder or any other law for the time being in force require to declare on the package, the retail sale price excluding any taxes, local or otherwise, the retail sale price shall be construed accordingly;
(ii) where on the package of any concerned goods more than one retail sale price is declared, the maximum of such retail sale price shall be deemed to be the retail sale price;
(iii) where the retail sale price, declared on the package of any concerned goods at the time of its clearance from the place of manufacture, is altered to increase the retail sale price, such altered retail sale price shall be deemed to be the retail sale price;
(iv) where different retail sale prices are declared on different packages for the sale of any concerned goods in packaged form in different areas, each such retail sale price shall be the retail sale prices for the purposes of determination of the rate of cess for the said goods intended to be sold in the area to which the retail sale price relates.”
(Emphasis supplied)
17 Section 15 of the CGST Act reads as follows: - “15. Value of taxable supply.—(1) The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.
(2) The value of supply shall include—
(a) any taxes, duties, cesses, fees and charges levied under any law for the time being in force other than this Act, the State Goods and Services Tax Act, the Union Territory Goods and Services Tax Act and the Goods and Services Tax (Compensation to States) Act, if charged separately by the supplier;
(b) any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the goods or services or both;
(c) incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply and any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services;
(d) interest or late fee or penalty for delayed payment of any consideration for any supply; and (e) subsidies directly linked to the price excluding subsidies provided by the Central Government and State Governments.
Explanation.—For the purposes of this sub-section, the amount of subsidy shall be included in the value of supply of the supplier who receives the subsidy.
18 (3) The value of the supply shall not include any discount which is given—
(a) before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply; and (b) after the supply has been effected, if—
(i) such discount is established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoices; and (ii) input tax credit as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient of the supply.
(4) Where the value of the supply of goods or services or both cannot be determined under sub-section (1), the same shall be determined in such manner as may be prescribed.
(5) Notwithstanding anything contained in sub-section (1) or sub-section (4), the value of such supplies as may be notified by the Government on the recommendations of the Council shall be determined in such manner as may be prescribed.
Explanation.—For the purposes of this Act,—
(a) persons shall be deemed to be “related persons” if—
(i) such persons are officers or directors of one another's businesses;
(ii) such persons are legally recognised partners in business;
(iii) such persons are employer and employee;
(iv) any person directly or indirectly owns, controls or holds twenty-five per cent. or more of the
19 outstanding voting stock or shares of both of them;
(v) one of them directly or indirectly controls the other;
(vi) both of them are directly or indirectly controlled by a third person;
(vii) together they directly or indirectly control a third person; or (viii) they are members of the same family;
(b) the term “person” also includes legal persons;
(c) persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, howsoever described, of the other, shall be deemed to be related.”
(Emphasis supplied)
Section 2(c) of the Compensation Act defines ‘cess’, to mean the goods and services tax compensation cess levied under Section 8. Section 8 deals with levy and collection of cess. Sub-section (2) thereof directs that cess shall be levied on supplies of goods and services as specified in Column No.2 of the Schedule, on the basis of value, quantity or on such basis not exceeding the rate set forth in the corresponding entry of Column No.4 of the Schedule.
20 Section 15 of the CGST Act deals with value of taxable supply. Sub-section (3) thereof mandates that the value of supply shall not include any discount which is given before or at the time of supply if such discount has been recorded in the invoice. Sub-section (4) mandates that where the value of supply of goods or services or both cannot be determined under sub-section (1), the same shall be determined in any manner prescribed. Therefore, it becomes necessary to notice sub-section (1). Sub-section (1) mandates the value of supply of goods or services or both shall be the transaction value which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration of such supply. What is discernible from a conjoint reading of the aforesaid provisions is, that cess can be imposed under Section 8 of the Compensation Act and the value of cess is imposable only under Section 15 of the CGST Act. Section 15 mandates that the value of cess to be imposed only on transaction value and not beyond it.
21
In exercise of powers conferred under Section 8 of the Compensation Act, the impugned notification has sprung on 31-03-2023. The preamble of the Notification reads as follows:
“G.S.R….. (E). In exercise of the powers conferred by sub-section (2) of Section 8 of the Goods and Services Tax (Compensation to States) Act, 2017 (15 of 2017), the Central Government, on the recommendations of the Council, hereby makes the following further amendments in the notification of the Government of India, in the Ministry of Finance (Department of Revenue), No.1/2017-Compensation Cess (Rate), dated the 28th June, 2017, published in the Gazette of India, Extraordinary Part-II, Section 3, Sub-section (i), vide number G.S.R.720(E), dated the 28th June, 2017, namely….”
Clause 24A is germane to be noticed. It reads as follows: “24A. 2403 91 00 “Homogenised” or “reconstituted” tobacco, bearing a brand name 0.36R per unit”
Clauses 36A and 36B read as follows:
“36A 2403 99 90 All goods, other than pan masala containing tobacco ‘gutkha’ bearing a brand name 0.43R per unit 36B 2403 99 90 All goods, other than pan masala containing tobacco ‘gutkha’, not bearing a brand name 0.43R per unit”
Illustration reads as follows:
“Illustration:Calculation of goods and services tax compensation cess on Pan Masala (Sl.No.1 in the Schedule above)
22 Rate of goods and services tax compensation cess=0.32R per unit. If retail sale price of unit (pouch) of Pan Masala = Rs.10. goods and services tax compensation cess leviable=0.32R =0.32*10=₹3.2 per unit (pouch).”
A perusal at the aforesaid notification or its amendment would clearly indicate that the notification runs counter to Section 8(2) of the Compensation Act and Section 15 of the CGST Act. Section 15 of the CGST Act clearly holds that value of supply of goods is the transaction value, which is the price actually paid or payable for supply of goods. As observed, Section 8(2) of the Compensation Act includes compensation cess within the value of supply. The proviso to Section 8(2) of the Compensation Act in unambiguous terms states that the value of compensation cess chargeable on any supply shall be determined as per Section 15 of the CGST Act. Therefore, the notification which brings in value of cess linked to the MRP and not to transaction value runs counter to the Act.
It becomes germane to notice a judgment of the Apex Court and that of this Court interpreting old regime of two sets viz., the Rajasthan Sales Tax Act and the Karnataka Sales Tax Act.
23
The Apex Court in the case of STATE OF RAJASTHAN v. RAJASTHAN CHEMISTS ASSOCIATION1, has held as follows:
“…. …. ….
In the context of the meaning assigned to the expression “sale of goods” or price or consideration element of such “sale of goods” as taxable event, the conclusion that can fairly be reached is that for the taxing event of sale, if the price is to be the basis for measuring tax, it must relate to actual transaction of sale that becomes the subject of tax and not to a different transaction that may take place in future at a price. …
…
…
Applying the principles enunciated above, the inevitable conclusion is that when the wholesaler sells any formulation to a retailer in bulk quantity, taxable event of sale of goods takes place where the wholesaler and retailers are the parties to the contract, the goods in question are the formulations and the consideration is one which is agreed to between the parties to that transaction within the limits permissible by law. By substituting the assumed quantity of goods or a price which is not the subject-matter of that contract of completed sale for the purpose of measuring tax, the legislature assumes existence of contract of sale of drugs by legal fiction which has not taken place and which cannot be considered to be a sale in the manner stated in the Sales Act, which alone can be the subject of tax under Entry 54 in List II. Substitution of assumed price or the assumed quantity in place of actual price/quantity in a completed sale transaction, for the purpose of levy of tax on the subject-matter of tax results in taking away from it the character of “sale of goods” as envisaged under the Sales Act.”
(Emphasis supplied)
1 (2006) 6 SCC 773
24
This Court in the case of ITC LIMITED v. STATE OF KARNATAKA2, has held as follows: “…. …. ….
As stated above, the Supreme Court in Rajasthan Chemists Association [2006] 147 STC 542 (SC) ; (2006) 6 SCC 773, while considering the validity of a provision similar to the one impugned herein, has upheld the view of the Rajasthan High Court that it is not permissible for the Legislature of a State to levy tax on the sale of goods by adopting a notional price as a measure of tax ; such a legislative measure is held to be outside the ambit of entry 54 of List II of the Seventh Schedule to the Constitution of India. In my opinion, the same reasoning applies to the provision impugned herein as both are similar.
In view of the above, sub-section (5) of section 4 of the KVAT Act, 2003 which provides for levy of tax on the maximum retail price indicated on the label of the container or pack thereof, is declared as unconstitutional on the ground that such a taxing provision is beyond the legislative competence of the State under entry 54 of List II of the Seventh Schedule to the Constitution of India.”
(Emphasis supplied)
Both the Apex court and this Court have held that it is impermissible for the legislature to impose tax on a notional price. Notional price would be the MRP. Therefore, the justification of the revenue to plug leakage, that happens when the product reaches the end consumer, or the product that is sold at the time when it 2 2012 SCC OnLine Kar 8765
25 reaches the consumer, cannot mean that power can be exercised contrary to the CGST Act. The CGST Act clearly holds that it should be on transaction value. Hitherto, there was only a transaction value. It cannot now mean by a notification it would be on MRP by defeating Section 15 of the CGST Act itself.
It is trite that a notification issued in terms of the powers conferred under the parent Act cannot run counter to the said Act. In that light, I deem it appropriate to refer to the judgment rendered by this Court in the case of SUDARSHAN V. BIRADAR v. STATE OF KARNATAKA3, which held as follows: “…. …. ….
The power to make Rules is delegated to the State Governments under Section 30 of the Act. Therefore, the Rules that are made are delegated legislation. Delegated legislation can be challenged before the Courts on the ground that it is ultra vires the parent Act. The Court examining the said issue can adjudge the legality and validity of the delegated legislation on the touchstone of the doctrine of ultra vires. The doctrine of ultra vires has two aspects, substantive and procedural. When the delegated legislation travels beyond the scope of the Authority conferred by or is in conflict with the parent statute, it becomes invalid on the ground of it being substantive ultra vires. If any prescribed procedure under the parent statute is deviated while framing the Rules, in terms of 3 2023 SCC OnLine Kar 178
26 power conferred under the parent Act, such a Rule would be declared ultra vires the parent Act, for violation of the procedure that is stipulated under the parent Act for it to become procedural ultra vires. What is alleged in the case at hand is substantive ultra vires and not procedural ultra vires. Whenever any person or body of persons exercising statutory authority acts beyond the powers conferred upon it by the statute such acts become ultra vires and resultantly void. Therefore, substantive ultra vires would mean delegated legislation goes beyond the scope of the authority conferred on it by the parent statute. It is the fundamental principle of law that a public authority cannot act outside the powers that is conferred upon it. …
…
…
As observed hereinabove, it is trite law that the Rule making power conferred upon by the parent Act cannot travel beyond the mandate of the parent Act. The view of mine in this regard is fortified by the judgment of the Apex Court in the case of UNION OF INDIA v. A. SRINIVASAN wherein the Apex Court considers the entire spectrum of the law rendered from time to time and holds that a provision therein was contrary to the provision contained in the enabling Act. The Apex Court has held as follows:
“21. At this stage, it is apposite to state about the rule-making powers of a delegating authority. If a rule goes beyond the rule- making power conferred by the statute, the same has to be declared ultra vires. If a rule supplants any provision for which power has not been conferred, it becomes ultra vires. The basic test is to determine and consider the source of power which is relatable to the rule. Similarly, a rule must be in accord with the parent statute as it cannot travel beyond it.
In this context, we may refer with profit to the decision in General Officer Commanding-in-Chief v. Subhash Chandra Yadav [(1988) 2 SCC 351 : 1988 SCC (L&S) 542 : (1988) 7 ATC 296 : AIR 1988 SC 876] wherein it has been held as follows : (SCC p. 357, para 14)
“14. … before a rule can have the effect of a statutory provision, two conditions must be fulfilled, namely, (1) it must conform to the provisions of the statute under which it is framed; and (2) it must also come within the scope and purview of the rule-
27 making power of the authority framing the rule. If either of these two conditions is not fulfilled, the rule so framed would be void.”
In Delhi Admn. v. Siri Ram [(2000) 5 SCC 451 : AIR 2000 SC 2143] it has been ruled that it is a well-recognised principle that the conferment of rule-making power by an Act does not enable the rule-making authority to make a rule which travels beyond the scope of the enabling Act or which is inconsistent therewith or repugnant thereto.
In Sukhdev Singh v. Bhagatram Sardar Singh Raghuvanshi [(1975) 1 SCC 421 : 1975 SCC (L&S) 101 : AIR 1975 SC 1331] the Constitution Bench has held that : (SCC p. 433, para 18)
“18. … statutory bodies cannot use the power to make rules and regulations to enlarge the powers beyond the scope intended by the legislature. Rules and regulations made by reason of the specific power conferred by the statute to make rules and regulations establish the pattern of conduct to be followed”.
In State of Karnataka v. H. Ganesh Kamath [(1983) 2 SCC 402 : 1983 SCC (Cri) 514 : AIR 1983 SC 550] it has been stated that : (SCC p. 410, para 7)
“7. … It is a well-settled principle of interpretation of statutes that the conferment of rule-making power by an Act does not enable the rule-making authority to make a rule which travels beyond the scope of the enabling Act or which is inconsistent therewith or repugnant thereto.”
In Kunj Behari Lal Butail v. State of H.P. [(2000) 3 SCC 40 : AIR 2000 SC 1069] it has been ruled thus : (SCC p. 46, para 13)
“13. It is very common for the legislature to provide for a general rule-making power to carry out the purpose of the Act. When such a power is given, it may be permissible to find out the object of the enactment and then see if the rules framed satisfy the test of having been so framed as to fall within the scope of such general power confirmed. If the rule-making power is not expressed in such a usual general form then it shall have to be seen if the rules made are protected by the limits prescribed by the parent Act.”
In St. Johns Teachers Training Institute v. National Council for Teacher Education [(2003) 3 SCC 321 : AIR 2003 SC 1533] it has been observed that : (SCC p. 331, para 10)
28
“10. A regulation is a rule or order prescribed by a superior for the management of some business and implies a rule for general course of action. Rules and regulations are all comprised in delegated legislations. The power to make subordinate legislation is derived from the enabling Act and it is fundamental that the delegate on whom such a power is conferred has to act within the limits of authority conferred by the Act. Rules cannot be made to supplant the provisions of the enabling Act but to supplement it. What is permitted is the delegation of ancillary or subordinate legislative functions, or, what is fictionally called, a power to fill up details.”
In Global Energy Ltd. v. Central Electricity Regulatory Commission [(2009) 15 SCC 570] this Court was dealing with the validity of clauses (b) and (f) of Regulation 6-A of the Central Electricity Regulatory Commission (Procedure, Terms and Conditions for Grant of Trading Licence and Other Related Matters) Regulations, 2004. In that context, this Court expressed thus : (SCC p. 579, para 25)
“25. It is now a well-settled principle of law that the rule-making power ‘for carrying out the purpose of the Act’ is a general delegation. Such a general delegation may not be held to be laying down any guidelines. Thus, by reason of such a provision alone, the regulation-making power cannot be exercised so as to bring into existence substantive rights or obligations or disabilities which are not contemplated in terms of the provisions of the said Act.”
In the said case, while discussing further about the discretionary power, delegated legislation and the requirement of law, the Bench observed thus : (Global Energy Ltd. case [(2009) 15 SCC 570], SCC p. 589, para 73)
“73. The image of law which flows from this framework is its neutrality and objectivity : the ability of law to put sphere of general decision-making outside the discretionary power of those wielding governmental power. Law has to provide a basic level of ‘legal security’ by assuring that law is knowable, dependable and shielded from excessive manipulation. In the contest of rule-making, delegated legislation should establish the structural conditions within which those processes can function effectively. The question which needs to be asked is whether delegated legislation promotes rational and accountable policy implementation. While we say so, we are not oblivious of the contours of the judicial review of the legislative Acts. But, we have made all endeavours to keep ourselves confined within the well-known parameters.”
29
In this context, it would be apposite to refer to a passage from State of T.N. v. P. Krishnamurthy [(2006) 4 SCC 517] wherein it has been held thus : (SCC p. 529, para 16)
“16. The court considering the validity of a subordinate legislation, will have to consider the nature, object and scheme of the enabling Act, and also the area over which power has been delegated under the Act and then decide whether the subordinate legislation conforms to the parent statute. Where a rule is directly inconsistent with a mandatory provision of the statute, then, of course, the task of the court is simple and easy. But where the contention is that the inconsistency or non-conformity of the rule is not with reference to any specific provision of the enabling Act, but with the object and scheme of the parent Act, the court should proceed with caution before declaring invalidity.”
In Pratap Chandra Mehta v. State Bar Council of M.P. [(2011) 9 SCC 573], while discussing about the conferment of extensive meaning, it has been opined that : (SCC p. 604, para 58)
“58. … The Court would be justified in giving the provision a purposive construction to perpetuate the object of the Act, while ensuring that such rules framed are within the field circumscribed by the parent Act. It is also clear that it may not always be absolutely necessary to spell out guidelines for delegated legislation, when discretion is vested in such delegatee bodies. In such cases, the language of the rule framed as well as the purpose sought to be achieved, would be the relevant factors to be considered by the Court.”
(Emphasis supplied) …
…
… The Apex Court in a judgment rendered on 16.12.2022 in the case of KERALA STATE ELECTRICITY BOARD v. THOMAS JOSEPH has held as follows:
“66. At this stage, it is apposite to state about the rule making powers of a delegating authority. If a rule goes beyond the rule making power conferred by the statute, the same has to be declared invalid. If a rule supplants any provision for which power has not been conferred, it becomes invalid. The basic test is to determine and consider the source of power, which is relatable to the rule. Similarly, a rule must be in accord with the parent statute, as it cannot travel beyond it.
Delegated legislation has come to stay as a necessary component of the modern administrative process. Therefore, the
30 question today is not whether there ought to be delegated legislation or not, but that it should operate under proper controls so that it may be ensured that the power given to the Administration is exercised properly; the benefits of the institution may be utilised, but its disadvantages minimised. The doctrine of ultra vires envisages that a rule making body must function within the purview of the rule making authority conferred on it by the parent Act. As the body making rules or regulations has no inherent power of its own to make rules, but derives such power only from the statute, it has to necessarily function within the purview of the statute. Delegated legislation should not travel beyond the purview of the parent Act. If it does, it is ultra vires and cannot be given any effect. Ultra vires may arise in several ways; there may be simple excess of power over what is conferred by the parent Act; delegated legislation may be inconsistent with the provisions of the parent Act or statute law or the general law; there may be non-compliance with the procedural requirement as laid down in the parent Act. It is the function of the courts to keep all authorities within the confines of the law by supplying the doctrine of ultra vires.
In this context, we may refer with profit to the decision in General Officer Commanding-in-Chief v. Dr. Subhash Chandra Yadav, (1988) 2 SCC 351, wherein it has been held as follows:—
“14. ….before a rule can have the effect of a statutory provision, two conditions must be fulfilled, namely, (1) it must conform to the provisions of the statute under which it is framed; and (2) it must also come within the scope and purview of the rule making power of the authority framing the rule. If either of these two conditions is not fulfilled, the rule so framed would be void…..”
In Additional District Magistrate (Rev.) Delhi Admn. v. Siri Ram, (2000) 5 SCC 451, it has been ruled that it is a well recognised principle that the conferment of rule-making power by an Act does not enable the rule-making authority to make a rule which travels beyond the scope of the enabling Act or which is inconsistent therewith or repugnant thereto.
In Sukhdev Singh v. Bhagatram Sardar Singh Raghuvanshi, (1975) 1 SCC 421, the Constitution Bench has held that:
“18.….These statutory bodies cannot use the power to make rules and regulations to enlarge the powers beyond the scope intended by the Legislature. Rules and regulations made by reason of the specific
31 power conferred by the statute to make rules and regulations establish the pattern of conduct to be followed. …”
In State of Karnataka v. H. Ganesh Kamath, (1983) 2 SCC 402, it has been stated that:
“7. …..It is a well-settled principle of interpretation of statutes that the conferment of rule-making power by an Act does not enable the rule-making authority to make a rule which travels beyond the scope of the enabling Act or which is inconsistent therewith or repugnant thereto.”
In Kunj Behari Lal Butail v. State of H.P., (2000) 3 SCC 40, it has been ruled thus:—
“13. It is very common for the legislature to provide for a general rule-making power to carry out the purpose of the Act. When such a power is given, it may be permissible to find out the object of the enactment and then see if the rules framed satisfy the test of having been so framed as to fall within the scope of such general power confirmed. If the rule-making power is not expressed in such a usual general form then it shall have to be seen if the rules made are protected by the limits prescribed by the parent act…….”
In St. Johns Teachers Training Institute v. Regional Director, National Council for Teacher Education, (2003) 3 SCC 321, it has been observed that:
“10. A regulation is a rule or order prescribed by a superior for the management of some business and implies a rule for general course of action. Rules and regulations are all comprised in delegated legislation. The power to make subordinate legislation is derived from the enabling Act and it is fundamental that the delegate on whom such a power is conferred has to act within the limits of authority conferred by the Act. Rules cannot be made to supplant the provisions of the enabling Act but to supplement it. What is permitted is the delegation of ancillary or subordinate legislative functions, or, what is fictionally called, a power to fill up details…..”
In Global Energy Limited v. Central Electricity Regulatory Commission, (2009) 15 SCC 570, this Court was dealing with the validity of clauses (b) and (f) of Regulation 6-A of the Central Electricity Regulatory Commission (Procedure, Terms and Conditions for Grant of Trading Licence and other Related Matters) Regulations, 2004. In that context, this Court expressed as under:—
“25. It is now a well-settled principle of law that the rule-making power “for carrying out the purpose of the Act” is a general delegation. Such a general delegation may not be held to be laying
32 down any guidelines. Thus, by reason of such a provision alone, the regulation-making power cannot be exercised so as to bring into existence substantive rights or obligations or disabilities which are not contemplated in terms of the provisions of the said Act.
In the aforementioned case, while discussing further about the discretionary power, delegated legislation and the requirement of law, the Bench observed thus:
“73. The image of law which flows from this framework is its neutrality and objectivity : the ability of law to put sphere of general decision-making outside the discretionary power of those wielding governmental power. Law has to provide a basic level of “legal security” by assuring that law is knowable, dependable and shielded from excessive manipulation. In the contest of rule-making, delegated legislation should establish the structural conditions within which those processes can function effectively. The question which needs to be asked is whether delegated legislation promotes rational and accountable policy implementation. While we say so, we are not oblivious of the contours of the judicial review of the legislative Acts. But, we have made all endeavours to keep ourselves confined within the well-known parameters.”
In this context, it would be apposite to refer to a passage from State of T.N. v. P. Krishnamurthy, (2006) 4 SCC 517 wherein it has been held thus:—
“16. The court considering the validity of a subordinate legislation, will have to consider the nature, object and scheme of the enabling Act, and also the area over which power has been delegated under the Act and then decide whether the subordinate legislation conforms to the parent statute. Where a rule is directly inconsistent with a mandatory provision of the statute, then, of course, the task of the court is simple and easy. But where the contention is that the inconsistency or nonconformity of the rule is not with reference to any specific provision of the enabling Act, but with the object and scheme of the parent Act, the court should proceed with caution before declaring invalidity.”
In Pratap Chandra Mehta v. State Bar Council of Madhya Pradesh, (2011) 9 SCC 573, while discussing about the conferment of extensive meaning, it has been opined that:
“58. ….The Court would be justified in giving the provision a purposive construction to perpetuate the object of the Act, while ensuring that such rules framed are within the field circumscribed by the parent Act. It is also clear that it may not always be absolutely necessary to spell out guidelines for delegated legislation, when discretion is vested in such delegatee bodies. In such cases, the language of the rule framed as well as the purpose sought to be
33 achieved, would be the relevant factors to be considered by the Court.”
In Dr. Mahachandra Prasad Singh v. Chairman, Bihar Legislative Council, (2004) 8 SCC 747, this Court explained the concept of delegated legislation thus:
“13. …..Underlying the concept of delegated legislation is the basic principle that the legislature delegates because it cannot directly exert its will in every detail. All it can in practice do is to lay down the outline.
This means that the intention of the legislature, as indicated in the outline (that is the enabling Act), must be the prime guide to the meaning of delegated legislation and the extent of the power to make it. The true extent of the power governs the legal meaning of the delegated legislation. The delegate is not intended to travel wider than the object of the legislature. The delegate's function is to serve and promote that object, while at all times remaining true to it. That is the rule of primary intention. Power delegated by an enactment does not enable the authority by regulations to extend the scope or general operation of the enactment but is strictly ancillary. It will authorise the provision of subsidiary means of carrying into effect what is enacted in the statute itself and will cover what is incidental to the execution of its specific provision. But such a power will not support attempts to widen the purposes of the Act, to add new and different means of carrying them out or to depart from or vary its ends. (See Section 59 in chapter “Delegated Legislation” in Francis Bennion's Statutory Interpretation, 3rd Edn.)…….”
In McEldowney v. Forde, [1971] A.C. 632 : [1969] 3 WLR 179, Lord Diplock explained the role of the Courts in this area in the following words:
“The division of functions between Parliament and the courts as respects legislation is clear. Parliament makes laws and can delegate part of its power to do so to some subordinate authority. The courts construe laws whether made by Parliament directly or by a subordinate authority acting under delegated legislative powers. The view of the courts as to whether particular statutory or subordinate legislation promotes or hinders the common weal is irrelevant. The decision of the courts as to what the words used in the statutory or subordinate legislation mean is decisive. Where the validity of subordinate legislation made pursuant to powers delegated by Act of Parliament to a subordinate authority is challenged, the court has a threefold task : first, to determine the meaning of the words used in the Act of Parliament itself to describe the subordinate legislation which that authority is authorised to make, secondly, to determine the meaning of the subordinate legislation itself and finally to decide whether the subordinate legislation complies with that description.”
34
A delegated power to legislate by making rules or regulations ‘for carrying out the purpose of the Act’, is a general delegation without laying down any guidelines; it cannot be exercised so as to bring into existence the substantive rights or obligations or disabilities not contemplated by the provisions of the Act, 2003 itself. The Court, considering the validity of a subordinate legislation, will have to consider the nature, object and scheme of the enabling Act, and also the area over which power as has been delegated under the Act and then decide whether the subordinate legislation conforms to the parent statute.
It is important to keep in mind that where a rule or regulation is directly inconsistent with a mandatory provision of the statute, then, of course, the task of the Court is simple and easy. But where the contention is that the inconsistency or non-conformity of the rule is not with reference to any specific provision of the enabling Act, but with the object and scheme of the parent Act, the Court should proceed with caution before declaring the same to be invalid.
Rules or regulation cannot be made to supplant the provisions of the enabling Act but to supplement it. What is permitted is the delegation of ancillary or subordinating legislative functions, or, what is fictionally called, a power to fill up details.
A Constitution Bench of this Court in the case of Sukhdev Singh (supra), while explaining the fine distinction between a rule and regulation and also the power of the delegate authority to frame such rules or regulations has made few very important observations which we must take notice of and quote as under:
“11. The contentions on behalf of the employees are these. Regulations are made under the statute. The origin and source of the power to make regulations is statutory. Regulations are self-binding in character. Regulations have the force of law inasmuch as the statutory authorities have no right to make any departure from the regulations.
Rules, regulations, schemes, bye-laws, orders made under statutory powers are all comprised in delegated legislation. The need for delegated legislation is that statutory rules are framed with care and minuteness when the statutory authority making the rules is after the coming into force of the Act in a better position to adapt the Act to special circumstances. Delegated legislation permits utilisation of
35 experience and consultation with interests affected by the practical operation of statutes.
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Subordinate legislation is made by a person or body by virtue of the powers conferred by a statute. Bylaws are made in the main by local authorities or similar bodies or by statutory or other undertakings for regulating the conduct of persons within their areas or resorting to their undertakings. Regulations may determine the class of cases in which the exercise of the statutory power by any such authority constitutes the making of statutory rules.
The words “rules” and “regulations” are used in an Act to limit the power of the statutory authority. The powers of statutory bodies are derived, controlled and restricted by the statutes which create them and the rules and regulations framed thereunder. Any action of such bodies in excess of their power or in violation of the restrictions placed on their powers is ultra vires. The reason is that it goes to the root of the power of such corporations and the declaration of nullity is the only relief that is granted to the aggrieved party.
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The authority of a statutory body or public administrative body or agency ordinarily includes the power to make or adopt rules and regulations with respect to matters within the province of such body provided such rules and regulations are not inconsistent with the relevant law. In America a “public agency” has been defined as an agency endowed with governmental or public functions. It has been held that the authority to act with the sanction of Government behind it determines whether or not a governmental agency exists. The rules and regulations comprise those actions of the statutory or public bodies in which the legislative element predominates. These statutory bodies cannot use the power to make rules and regulations to enlarge the powers beyond the scope intended by the Legislature. Rules and regulations made by reason of the specific power conferred on the statute to make rules and regulations establish the pattern of conduct to be followed. Rules are duly made relative to the subject-matter on which the statutory bodies act subordinate to the terms of the statute under which they are promulgated. Regulations are in aid of the enforcement of the provisions of the statute. Rules and regulations have been distinguished from orders or determination of statutory bodies in the sense that the orders or determination are actions in which there is more of the judicial function and which deal with a particular present situation. Rules and regulations on the other hand are actions in which the legislative element predominates.
(Emphasis in original)
36 The Apex Court again considers the entire spectrum of the law and lays down that Statutory Bodies cannot use the power to make rules to enlarge the powers beyond the scope intended by the legislature. Any action of the State in excess of their power would be declared a nullity on the ground of it being ultra vires the Act.
(Emphasis supplied) What unmistakably emerges from the afore-quoted judgment of this Court is that a delegated legislation in conflict with the parent Act is ultra vires the said Act and is required to be declared a nullity. The impugned notification being a delegated legislation, cannot travel beyond the contours of its parent Act i.e., the Compensation Act. On this solitary ground, the petitions deserve to succeed and the impugned notifications to be obliterated.
For the aforesaid reasons, the following:
O R D E R
(i) Writ Petitions are allowed.
(ii) Notifications dated 31-03-2023 and 26-07-2023 impugned in the writ petitions stand quashed.
37 (iii) The quashment of these notifications will not, however, come in the way of the legislature legislating upon the said issue. (M.NAGAPRASANNA) JUDGE
bkp CT:MJ
Reproduced from the public record of the Karnataka High Court. Verify against the court's own copy before relying on it. Income tax judgments are on bharattax.net.