Supreme Court Says S. Kodar Settles State Power To Levy Legacy Sales-Tax Surcharges, Leaves Individual Cases Open

The appeals challenged State sales-tax surcharges calculated as a percentage of sales tax payable, including levies under the Orissa Sales Tax Act, 1947 and the Punjab General Sales Tax Act, 1948.

The reference arose from a perceived conflict between S. Kodar and Hoechst Pharmaceuticals, which upheld comparable levies, and India Cement, which was considered potentially inconsistent with them.

The matters were referred to a seven-Judge Bench to consider whether such a levy fell within Entry 54 of List II.

During the reference, a nine-Judge Bench in Mineral Area Development Authority held that royalty is not a tax, and the constitutional and statutory sales-tax regimes relevant to the impugned levies were replaced.

The batch also included challenges concerning a surcharge on tax-exempt Punjab industrial units and the treatment of proceeds under the Punjab Social Security Act, 2000.

Article 246(3), read with the former Entry 54 of List II, conferred on State Legislatures power to tax sales or purchases of goods, subject to the constitutional limitations then applicable; Article 265 requires every tax to be imposed by a competent law.

The subject of a tax is distinct from its measure: the method used to calculate the amount payable does not, by itself, determine the tax’s character.

In S. Kodar v. State of Kerala, a Constitution Bench held that additional sales tax calculated as a percentage of sales tax payable remains a tax on sales, and is not transformed into a tax on the dealer’s income; Hoechst Pharmaceuticals Ltd. v. State of Bihar applied that principle.

India Cement Ltd. v. State of Tamil Nadu concerned a cess on royalty in the context of the MMDR Act, not a general rule invalidating levies calculated by reference to another tax.

Mineral Area Development Authority v. Steel Authority of India subsequently held that royalty is not a tax and overruled India Cement to that extent.

Under Central Board of Dawoodi Bohra Community v. State of Maharashtra, a decision of a larger Bench binds Benches of lesser or equal strength.

The Court concluded that the perceived conflict did not justify a seven-Judge determination.

India Cement addressed the State’s competence to impose a cess on royalty in a field governed by central mining legislation; it did not establish that any levy calculated by reference to another levy is invalid.

In any event, Mineral Area Development Authority displaced the premise that royalty is itself a tax, while S. Kodar directly addressed and upheld an additional sales-tax levy calculated by reference to tax payable.

Applying the distinction between a tax’s subject and its measure, the Court reasoned that a surcharge calculated as a percentage of sales tax is, arithmetically, an additional percentage of turnover; it therefore remains a sales tax rather than a tax on income.

The changed constitutional regime further reduced the reference’s prospective significance, but did not extinguish the parties’ claims concerning past assessments.

The separate opinion of K.V. Viswanathan J. likewise concluded that S. Kodar remained good law and that India Cement did not create a conflict, while directing the connected Social Security Act matters to be heard separately.

It left open the validity of Section 30-AA of the Punjab Act insofar as it applied to otherwise exempt industrial units, the Article 266 issue concerning the Punjab Social Security Fund, and other case-specific contentions.

The connected matters were directed to be listed before appropriate regular Benches for disposal on their individual merits.