The Hindu Business Line : Sea change in the fee concept

In A Midsummer Night's Dream, Puck speaks of `pleading for a lover's fee' and asks Oberon, `Shall we their fond pageant see?' A recent case before the apex court was about rice mills' plea that the taxman see the difference between cess and fee.

Most of the petitioners-appellants in Vijayalakshmi Rice Mill and Others vs The Commercial Tax Officers, Palakol and Others were registered firms. A few were `individual traders engaged in the business of rice milling,' as one gathers from the text of the Supreme Court verdict dated August 7.

The mills and traders were regularly submitting returns to the Commercial Tax Authorities, disclosing their turnover on the purchase of paddy and sale of rice every year, and accordingly paying purchase and sales tax. What irked them was the levy of cess under the Andhra Pradesh Rural Development Act, 1996. They said that the cess did not fall under any of the entries in List-II (State List) or List III (Concurrent List) of the Seventh Schedule to the Constitution. And so, the levy of cess was invalid, argued the businessmen.

Entry 54 of List II of the Seventh Schedule does empower the State Legislatures to levy tax on purchase or sale of goods. It reads: "Taxes on the sale or purchase of goods other than newspapers, subject to the provisions of entry 92A of List I." However, the case of the appellants was that the goods in question are `declared goods' under the Central Sales Tax Act. The maximum sale or purchase tax could be 4 per cent, which had already been paid, they said.

Cess = fee?

For the State of Andhra Pradesh, it was Rakesh Dwivedi who argued. He submitted that the cess in dispute was in fact a fee, and hence it came under Entry 66 of List-II of the Seventh Schedule to the Constitution. This entry reads: "Fees in respect of any of the matters in this List, but not including fees taken in any court."

M.N. Rao, the counsel for the appellants contended that there was no quid pro quo in the levy of the cess. Therefore, it could not be called a fee, he said. "The cess is collected from a dealer and nothing is done specially to benefit the dealer. The cess partakes the character of a tax," is a snatch from a supporting document (in the form of affidavit to the writ petition) produced before the court by the businessmen.

The court studied the Statement of Objects and Reasons of the Andhra Pradesh Rural Development Act, 1996. It starts with the observation that development in the rural areas in the State had not been accelerated due to paucity of funds.

"The Government are of the view that there is an imperative need to provide financial assistance for the development of rural areas in the State by creating infrastructure facilities, so that the economic activities in the rural areas will increase and thereby contribute for the growth of the economy," declares the Act.

"With a view to generating funds for the purpose of development of the rural areas, it is considered desirable to levy a cess at 5 per cent on an ad valorem basis on the quantity of the purchase of goods specified in the Schedule appended to the Bill."

As per Section 3 of the Act, the State Government could, by notification, establish the Andhra Pradesh Rural Development Board. Section 8 is about the Andhra Pradesh Rural Development Fund. And Section 9 listed the purposes for which the Fund could be utilised.

These were: "(i) to provide and accelerate comprehensive rural development including the construction of rural roads and bridges;

(ii) to augment storage facilities for storing agricultural produce; and

(iii) for maintaining and strengthening of Public Distribution System."

Justices Ashok Bhan and Markandey Katju heard the arguments and said that the question in the present case was whether the impost is a fee or a tax. "If it is a tax, then it will have to be held to be unconstitutional because it does not come in any of the Entries in List II of the Seventh Schedule to the Constitution. However, if it is a fee, then it comes under Entry 66 of List II," they said.

Cess Defined

What is a cess? It is a tax that raises revenue, which is applied to a specific purpose, as one learns from the text of the judgment. A precedent that the court cited was Guruswamy and Co vs State of Mysore (1966), in which Justice Hidayatullah had observed in his dissenting judgment as follows: "The word `cess' is used in Ireland and is still in use in India although the word `rate' has replaced it in England. It means a tax and is generally used when the levy is for some special administrative expense, which the name (health cess, education cess, road cess, etc.) indicates.

When levied as an increment to an existing tax, the name matters not for the validity of the cess must be judged of in the same way as the validity of the tax to which it is an increment." This found mention in a decision of the Constitution Bench of the apex court in 1989: India Cement Ltd and Others vs State of Tamil Nadu and Others.

"Hence, ordinarily a cess is also a tax, but is a special kind of a tax," said Justices Bhan and Katju. "Generally tax raises revenue which can be used generally for any purpose by the State. For instance, the Income Tax or Excise Tax or Sales Tax are taxes which generate revenue which can be utilised by the Union or State Governments for any purpose, e.g. for payment of salary to the members of the armed forces or civil servants, police, etc. or for development programmes, etc."

Not so in the case of cess. It can be spent for a specific purpose. The court spoke of example such as: revenue from health cess used building hospitals or giving medicines to the poor; and education cess collections used for building schools. Nomenclature is not very important, said the court. One had to see the nature of the levy. For, "what is called a cess may be in reality a fee depending on its nature."

The basic difference, therefore, between a tax and a fee is that a tax is "a compulsory exaction of money by the State or a public authority for public purposes, and is not a payment for some specific services rendered." A fee, on the other hand, is generally defined to be a charge for a special service rendered by some governmental agency; there has to be quid pro quo in a fee.

Cess redefined

"The earlier view of the Supreme Court was that to sustain the validity of a fee, some specific service must be rendered to the particular individual from whom the fee is sought to be realised," noted the court in the rice mills case. A shift was visible in Sreenivasa General Traders vs State of Andhra Pradesh (1983), when the court said, "The traditional view that there must be actual quid pro quo for a fee has undergone a sea change in the subsequent decisions."

Again, in a 1985 decision (City Corporation of Calicut vs Thachambalath Sadasivan), the Supreme Court spoke of how the traditional concept in a fee of quid pro quo was undergoing a transformation. The court had clarified that the relationship between fee and the services rendered need not be direct; a mere casual relation may be enough. "It is not necessary to establish that those who pay the fee must receive direct benefit of the services rendered for which the fee is being paid. If one who is liable to pay receives general benefit from the authority levying the fee the element of service required for collecting fee is satisfied."

In State of Himachal Pradesh vs Shivalik Agro Poly Products (2004) the court had observed that there need not be an exact or mathematical correlation between the amount realised as a fee and the value of the services rendered. "A broad correlation between the two is sufficient to sustain the levy."

The missing averment

In the case of rice mills, the traders and mills had mentioned in their affidavit that no specific benefit was given to the dealer from whom the cess was collected. Unfortunately, there was no averment by them that there was no broad correlation between the amount realised as a cess and the amounts spent for the purposes mentioned in Section 9 of the Act. This acted as a negative. "There is no factual averment that there is no broad correlation between the total amount of cess realised and the total value of the service being rendered to the people living in the rural areas," observed the apex court.

"The concept of fee has undergone a sea change, and hence the writ petition is liable to fail on the mere ground that the writ petition was drafted under a total misconception about the legal position," said the judges. What failed the rice mills and traders was that the writ petition had been drafted in the light of the old concept of fee and not the new concept, which was subsequently developed by the Supreme Court.

The court explained to the parties how the correlation between revenues and spending had to be gauged. "If, say, Rs 100 crore revenue is generated every year by this cess, it is not necessary that this entire amount of Rs 100 crore must be spent for the purposes mentioned in Section 9; it will suffice if a substantial part of this Rs 100 crore is spent for such purposes. At the same time we would like to clarify that if, say, Rs 100 crore is generated by the cess in question and only Rs 1 crore or Rs 50 lakh is spent for the purpose mentioned in Section 9, obviously there would not be in such a case a broad correlation between the fees being realised and the service rendered." That left the petitioners with the option to file a fresh petition.

"To plead for love deserves more fee than hate," says Lucetta in The Two Gentlemen of Verona. The vanquished would love to hate the drafting that landed them in defeat. Perhaps, good drafting deserves more fee than hate.

Tailpiece

"You know the tall tale?"

"Of how a mole has taken its toll?"

http://Detaxification.blogspot.com

D. Murali

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