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May 10, 2023

State tax rates may be higher than those capped by CST for gutkha and pan masala

State tax rates may be higher than those capped by CST for gutkha and pan masala

Fact and issue of the case

This judgment will dispose of appeals arising from judgments of three High Courts, on the question of taxability of pan masala or gutka/gutkha1, under state enactments. The appellants unsuccessfully argued that state legislatures were not empowered to levy sales tax on those articles, in view of the provision in the Constitution enabling the Union to levy additional duties of excise, and further that in any case, the rate of state tax cannot exceed the limit prescribed by the Central Sales Tax Act, 1956

The relevant central enactments are the Central Sales Tax Act, 1956 (hereafter “CST Act”), the Central Excise Tariff Act, 1985 (hereafter “CET Act”), and the Additional Duties of Excise (Goods of Special Importance) Act, 1957 (hereafter “ADE Act”). The state enactments in question are the Delhi Sales Tax Act, 1975 (hereafter “DST Act”); Tamil Nadu General Sales Tax Act, 1959 (hereafter “TNGST Act”) and the Uttar Pradesh Trade Tax Act, 1948 (hereafter “UPTT Act

Section 14 of the CST Act declares certain goods to be of special importance; and Section 15 restricts the power of taxation on the said goods. Originally Section 14(ix) of the CST Act read as follows

tobacco, as defined in Item No. 4 of the First Schedule to the Central Excises and Sale Act, 1944 (1 of 1944)

Entry 4 of the CET Act, which defines ‘tobacco’, reads as follows


Tobacco” means any form of Tobacco, whether cured or uncured and whether manufactured or not and includes the leaf, stalks and stems of the tobacco plant, but does not include any part of a tobacco plant while still attached to the earth

Manufactured Tobacco

Chewing tobacco, including preparations commonly known as “Khara Masala”, “Kimam”, “Dokta”, “Zarda”, “Sukha” and “Surti

The Finance Act, 1988 (Central Act No. 26/1988) substituted the expressions in Section 14(ix) of the CST Act, with the following words, w.e.f. 13.05.1988

Unmanufactured tobacco and tobacco refuse covered under sub-Heading No. 2401.00, cigars and cheroots of tobacco covered under Heading No. 24.02, cigarettes and cigarillos of tobacco covered under the sub-Heading Nos. 2403.11 and 2403.21, and other manufactured tobacco covered under sub-heading Nos. 2404.41, 2404.50 and 2404.60 of the Schedule to the Central Excise Tariff Act, 1985 (5 of 1986)

The 1988 amendment to Section 14 of the CST Act was with a view to align the description of goods in that law, with the description in the CET Act, as is clear from the Finance Bill, 1988. Heading 24.04 of the CET Act originally read to include “Gudaku with brand name and without brand name” (Entries 2404.11 and 2404.12); cut tobacco (Entry 2404.13); hookah tobacco, chewing tobacco (including preparations known as khara masala, khiman, dokta, zarda and surti (Entry 2404.39); snuff (Entry 2404.49); and snuff of tobacco (Entry 2404.50). The entry in relation to chewing tobacco was amended w.e.f. 1993-94

By Finance Act, 1995, ‘Pan Masala’ was brought under the Heading 21.06. In the year 1995, the Fourth Schedule was amended, and the relevant Clause (8) in Chapter 21 read as follows

in Chapter 21

for NOTE 3, the following NOTE shall be substituted, namely

In this Chapter, ‘Pan Masala’ means any preparation containing betel nuts and any one or more of the following ingredients, namely lime, katha (catechu) and tobacco, whether or not containing any other ingredients, such as cardamom, copra and menthol

Clause (10) in Chapter XXIV reads as follows: (i) for NOTE 2, for the figures and word ‘24.02, 24.03 and 24.04ç the figures and word ‘24.01, 24.02, 24.03 and 24.04’ shall be substituted

Clause (9) in Chapter XXI reads as follows

for Heading Nos. 21.06 and 21.07 and the entries relating thereto, the following shall be inserted, namely:

21.06 2106.00 ‘Pan Masala’ 50%

Finance (No. 2) Act, 1996, again changed the entry, in the following manner

in Chapter 24, after NOTE 4, the following NOTE shall be inserted, namely

In this Chapter, ‘smoking mixtures for pipes and cigarettes’ of sub-heading No. 2404.10 does not cover ‘Gudaku

Observation of the court

This court, in Kothari Products Ltd. (supra) reversed the Full Bench decision stating that

The contention on behalf of the appellants is that it is not open to the State of Andhra Pradesh to tax gutka. Section 8 of the State Sales Tax Act provides that a dealer who deals in the goods specified in the Fourth Schedule thereto shall be exempt from tax thereunder in respect of such goods. Entry 7 of the Fourth Schedule of the State Sales Tax Act refers to tobacco and the explanation in this behalf is that the goods mentioned in Entry 7

shall be goods included in the relevant heads and sub-heads of the First Schedule to the Additional Duties of Excise (Goods of Special Importance) Act, 1957, but does not include goods where no additional duties of excise are levied under that Schedule

The said Additional Duties of Excise Act, in Entry 2404, refers to “Gudaku” under the sub-Heading “Other manufactured tobacco”. Gudaku which bears a brand name is taxable under Entry 2404.11 at the rate of 5% and Gudaku not bearing a brand name is subject to tax at nil rate under Entry 2404.12. The Schedule to the Central Excise Act also makes the same distinction between Gudaku bearing a brand name and Gudaku not bearing a brand name under the sub-Heading, “Other manufactured tobacco and manufactured tobacco substitutes; homogenised or ‘reconstituted’ tobacco; tobacco extracts and essences

Clearly, therefore, gutka is a tobacco that is covered by an entry in the First Schedule to the said Additional Duties of Excise Act and the branded gutka that the appellants manufacture is liable to tax thereunder. Gutka, therefore, is ‘goods’ covered by the Explanation to the Fourth Schedule to the State Sales Tax Act and, therefore, covered by the exemption contained in Section 8 thereof. The Schedule to the State Act could, therefore, not have been amended by including gutka as a kind of pan masala in entry 194 of its First Schedule. It must, therefore, be held that the inclusion of gutka in the said entry 194 in the manner in which it is done is bad in law and is struck down. The appellants will be entitled to all consequential benefits

As far as the first point argued by the appellants are concerned, which is, whether in a state law which contains two provisions: one which taxes entries, and another which exempts articles from levy (the latter being listed separately, in a notification, or a schedule to the enactment itself), the inclusion, or insertion into the list or schedule of articles that can be taxed (like Section 4 of the DST Act) without amending the subsisting notification that excludes levy (as under Section 7 DST) would the levy fail?

There was apparent conflict between two lines of judgments of this court i.e., Radheshyam Gudakhu Factory and Kothari Products Ltd. (supra) on the one hand, and Dealing Dairy Products (supra), Krishna Kuthar Kabra (supra) and Agra Belting Works (supra) on the other hand. This court, in the latter three judgments held that notification introducing an entry and subjecting it to levy, when previously, it was exempt in another part of the taxing statute, the intention was to withdraw the exemption and make the sale leviable to tax at the rate prescribed in the later notification. The court held it to be unnecessary that “a specific or separate notification withdrawing or revoking the notification should be issued”. This conflict was referred to a larger bench of five judges, in Trimurti Fragrances (P) Ltd v. Govt of NCT of Delhi30 (a case, which is part of the present batch). The court held that the judgment in Agra Belting Works (supra) does not in any manner conflict with the ruling in Kothari Products Ltd. (supra) or Radheshyam Gudakhu Factory (supra)

In our considered opinion there is no conflict between the Kothari Products (supra) line of cases and the Agra Belting line of cases. The Kothari Products (supra) line of cases was on the question of whether “tobacco” or other goods specified in the First Schedule to the ADE Act and hence exempted from Sales Tax under State sales tax enactments, can be made exigible to tax under the State enactments by amending the Schedule thereto. On the other hand, Agra Belting Works (supra) line of cases was on the question of interplay between general exemption of specified goods from sales tax under Section 4 of the U.P. Sales Tax Act and specification of rates of sales tax under Section 3-A of the said Act. This Court held that goods exempted from sales tax under Section 4 would be exigible to tax by virtue of subsequent notification under Section 3-A specifying the rate of sales tax for any specific item of the class of goods earlier exempted under Section 4. There being no conflict, the reference to Constitution Bench is incompetent

The above holding, that there is no conflict between the Agra Belting Works (supra) line of cases, and the Kothari Products Ltd. (supra) line of cases, therefore, concludes the question urged with respect to efficacy or validity of notifications introducing as entries in a schedule(s) and subjecting them to tax, when those articles are part of the statute or are exempted from taxation. The assessees’ contentions therefore, fail on this point

Turning next to the question of whether pan masala was an exempted item, being “tobacco”, it is noticeable that pan masala was expressly mentioned in Chapter 21 for the first time, in 1995 in the CET Act. Note 3 defined ‘Pan Masala’ as “any preparation containing betel nuts and any one or more of the following ingredients, namely lime, katha (catechu) and tobacco, whether or not containing any other ingredients”. However, at the same time, Chapter 24 contained a specific entry “tobacco” which enumerated tobacco, manufactured tobacco, substitutes etc. The relevant sub-heading at that time was 2404.41 which enumerated chewing tobacco, including preparations commonly known as khara masala, kimam, dokta, zarda, sukha and surti. Thus, the CET Act itself made a distinction between pan masala – whether it contained tobacco, or not, and all forms of tobacco. Right from 1995, the distinction in the CET Act between pan masala (Chapter 21) and tobacco (Chapter 24), had been made. The definition of pan masala also clarified that despite one of its ingredients being tobacco, it would nevertheless be a separate article

This court had to consider the effect of the term “includes” in relation to the definition of tobacco in Mahalakshmi Oil Mills (supra). The controversy was whether the term “tobacco” and the inclusive clause was wide enough to cover tobacco seeds. This court, observed that

Can then the words “tobacco” and “any form of tobacco” in the first part of the definition be given a wider meaning and read as including the seeds also, particularly as it talks of “tobacco in any form, cured or uncured, manufactured or unmanufactured”? We do not think they can be for several reasons. In the first place, tobacco seeds hardly answer to the description of either the expression “manufactured tobacco” or the expression “unmanufactured tobacco” in their ordinary connotation; and the expression “cured or uncured” cannot also be associated with tobacco seeds. The expression used in the first part of the definition, though every wide, is, therefore, singularly inappropriate to take within its purview tobacco seeds as well. Secondly, the definition occurs in a statute levying excise duty which is concerned not with the parts of a plant grown on the field but with the use to which those parts are put or can be put after severance. The legislature could not but have been aware that if the leaves, stalks and stems of the tobacco plant are used for manufacturing cured tobacco, biris, cigarettes and so on, the seed is also used to produce oil and cake. It takes care to mention the first three items which are used in the manufacture of some forms of tobacco consumption which are also enumerated but refrains from referring to seeds which it would have done had it been intended to include the oil and cake also for purposes of the levy. The categories of unmanufactured tobacco enumerated in the entry in the Schedule include “stalks” but not “seeds”. This also indicates that seeds are not intended to be included. In other words, the omission of the word “seeds” from the second part of the definition casts its shadow on the first part as well. Indeed it rather looks as if the second part of the definition is intended to restrict rather than expand the scope of the first part. Thirdly, it is to be noticed that the first part of definition is somewhat restrictively worded

In P. Kasilingam v. PSG College of Technology31 this court followed the same principle, i.e., that “includes” used in conjunction with some words, expands the natural import of the term, to the extent it incorporates those words: “The word “includes”, when used, enlarges the meaning of the expression defined so as to comprehend not only such things as they signify according to their natural import but also those things which the clause declares that they shall include

The words “means and includes”, on the other hand, indicate “an exhaustive explanation of the meaning which, for the purposes of the Act, most invariably be attached to these words or expressions” [See: Dilworth v. Commissioner of Stamps, [1899] AC 99 at pp. 105-106 (Lord Watson); Mahalakshmi Oil Mills v. State of Andhra Pradesh, [1989] 1 SCC 164, at p. 169)

These decisions have been followed in later judgments as well; one of them is Pioneer Land & Urban Infrastructure v. Union of India32. For these reasons, throughout (till 2001), “Pan masala” and chewing tobacco have received different treatment. They are not interchangeable or synonymous expressions. Entry 2404 refers to chewing tobacco “including preparations commonly known as “Khara Masala”, “Kimam”, “Dokta”, “Zarda”, “Sukha” and “Surti””. Gudaku and snuff are dealt with under a separate heading. The effect of inclusion of pan masala with tobacco in Chapter 24 and simultaneously that product’s exclusion from Chapter 21, as well as imposition of ADE with effect from 2001, on ‘pan masala containing tobacco’ meant that the product (i.e. pan masala without tobacco) went out, for the first time, of the reach of state sales tax. All along, goods and products described as pan masala and gutkha, were included in Chapter 21. The conclusion therefore, is that till 2001, and the introduction of ADE, these two products were covered by local or sales tax levies

The General Rules of Interpretation (of the CET Act) which guide the appropriate classification of products, inter alia, provide that


Classification of goods in this Schedule shall be governed by the following principles

The titles of Sections, Chapters and Sub-Chapters are provided for ease of reference only; for legal purposes, classification shall be determined according to the terms of the headings and any relative Section or Chapter Notes and, provided such headings or Notes do not otherwise require, according to the following provisions

Any reference in a heading to an article shall be taken to include a reference to that article incomplete or unfinished, provided that, as presented, the incomplete or unfinished article has the essential character of the complete or finished article. It shall also be taken to include a reference to that article complete or finished (or falling to be classified as complete or, finished by virtue of this rule), presented unassembled or disassembled

Any reference in a heading to a material or substance shall be taken to include a reference to mixtures or combinations of that material or substance with other materials or substances. Any reference to goods of a given material or substance shall be taken to include a reference to goods consisting wholly or partly of such material or substance. The classification of goods consisting of more than one material or substance shall be according to the principles of rule 3

When by application of rule 2(b) or for any other reason, goods are, prima facie, classifiable under two or more headings, classification shall be effected as follows

the heading which provides the most specific description shall be preferred to headings providing a more general description. However, when two or more headings each refer to part only of the materials or substances contained in mixed or composite goods or to part only of the items in a set put up for retail sale, those headings are to be regarded as equally specific in relation to those goods, even if one of them gives a more complete or precise description of the goods

mixtures, composite goods consisting of different materials or made up of different components, and goods put up in sets for retail sale, which cannot be classified by reference to (a), shall be classified as if they consisted of the material or component which gives them their essential character, insofar as this criterion is applicable

when goods cannot be classified by reference to (a) or (b), they shall be classified under the heading which occurs last in numerical order among those which equally merit consideration

In Collector of Central Excise Nagpur v. Simplex Mills Co. Ltd33 this court outlined the role of the interpretive rules

for legal purposes, classification “shall be determined according to the terms of the headings and any relevant section or chapter notes”. If neither the heading nor the notes suffice to clarify the scope of a heading, then it must be construed according to the other following provisions contained in the Rules. Rule 1 gives primacy to the section and chapter notes along with terms of the headings. They should be first applied. If no clear picture emerges then only can one resort to the subsequent rules. The appellants have relied upon Rule 3. Rule 3 must be understood only in the context of sub- rule (b) of Rule 2 which says inter alia that the classification of goods consisting of more than one material or substance shall be according to the principles contained in Rule 3. Therefore when goods are prima facie, classifiable under two or more headings, classification shall be effected according to sub- rules (a), (b) and (c) of Rule 3 and in that order

On a plain application of the interpretive rules, especially Rule 3(a) it is clear that the heading which provides the most accurate description has to be followed. In the present case, there is no doubt, that before 2001, pan masala and gutkha fell within Chapter 21, as pan masala, regardless of whether they contained tobacco. Goods classifiable under Chapter 24, i.e. tobacco items were more general; also they did not include pan masala

As regards the question of the rate of tax, in view of the restrictions under Section 15 CST Act, neither gutkha nor pan masala were “declared goods” under Section 14 of the CST Act. The amendment to the CET Act did not become part of Section 14(ix). The goods under the relevant sub-headings of the CET Act were absent in the list of declared goods of the CST Act; they were not part of the provisions introduced to the Finance Act, 1988. Therefore, the subsequent changes made introducing 2404.40 in the CET Act do not affect or change the CST Act. Consequently gutkha and pan masala are not covered under sub-heading 2404.40 so far as CST Act is concerned. Resultantly the arguments of the assessees that the rate of local tax, cannot exceed the limit under the CST Act, are rejected as unmerited

For the foregoing reasons, the appeals by the assessees have to fail. The revenue’s appeals are consequently allowed. There shall be no order on costs


In the result, appeal of the assessee is allowed and ruled in favour of the assessee

Read the full order from here


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