Arjun Flour Mills Vs State of Odisha Finance Department Secretary & Ors. (Supreme Court of India)
Summary: The Supreme Court of India, in Arjun Flour Mills Vs The State of Odisha Finance Department Secretary & Ors. (2026 INSC 1192), examined a long-pending constitutional reference concerning the legislative competence of State Legislatures to impose a surcharge or additional levy calculated as a percentage of sales tax payable by dealers. The central controversy was whether such a levy constituted a permissible enhancement of sales tax under Entry 54 of List II of the Seventh Schedule to the Constitution of India, as it stood before the Goods and Services Tax regime, or an impermissible “tax on tax” falling outside the State’s legislative powers. The assessees contended that a surcharge measured by tax already payable could not properly be characterised as a tax on the sale or purchase of goods and was instead a levy on the dealer’s fiscal burden or income. The States maintained that the surcharge merely increased the effective rate of sales tax for specified classes of dealers and that its method of computation did not alter the nature of the underlying taxable event. The Seven-Judge Bench, in the principal judgment authored by Chief Justice Surya Kant, considered whether the reference continued to require adjudication in view of intervening constitutional amendments and subsequent decisions of larger Benches.
The lead appeals arose from Section 5-A of the Orissa Sales Tax Act, 1947, introduced by the Orissa Sales Tax (Amendment) Act, 1990, with effect from 1 July 1990. The provision required dealers whose gross turnover exceeded Rs. 10 lakh to pay a surcharge of 10% of the total sales tax payable under the Act. Although the underlying sales tax continued to be levied on taxable sales or purchases, the surcharge was calculated by applying a percentage to the amount of tax rather than directly to turnover. The appellants challenged this method on the ground that Entry 54 authorised taxation of sales or purchases and did not separately authorise taxation of the liability arising from an existing tax. The State defended the provision as an additional component of sales tax, payable only when the dealer was liable to sales tax and calculated in proportion to that liability. The Court noted that the surcharge was inseparably connected with the principal levy, and its quantum increased or decreased with the sales tax payable on the dealer’s taxable turnover.
The connected Punjab matters involved two further sets of statutory provisions presenting additional issues. Under Section 5(1-C) of the Punjab General Sales Tax Act, 1948, a surcharge of 10% was calculated on the sales tax payable by a dealer. Section 30-AA introduced a separate complication by requiring industrial units enjoying exemption from sales tax under Section 30-A to pay the surcharge notwithstanding that exemption. This raised the question whether a levy described as a percentage of tax payable could operate where the dealer otherwise had no sales tax liability because of a statutory exemption. Another group of appeals concerned the Punjab Social Security Act, 2000, which imposed a cess calculated by reference to sales tax payable, with proceeds earmarked for the Punjab Social Security Fund. The Punjab and Haryana High Court had struck down the enactment on grounds including the requirement under Article 266 of the Constitution that State revenues first form part of the Consolidated Fund of the State. The Supreme Court recognised that these connected matters involved distinct questions concerning exemptions and constitutional public-finance requirements, beyond the common question of legislative competence.
Examining the constitutional framework, the Supreme Court referred to Articles 246 and 265 of the Constitution and the distribution of legislative powers under the Seventh Schedule. Before the Constitution (One Hundred and First Amendment) Act, 2016, Entry 54 of List II empowered State Legislatures to impose taxes on the sale or purchase of goods, other than newspapers, subject to Entry 92-A of List I. The Court reiterated that taxation powers must be traced to specific taxing entries, while such entries must receive a broad interpretation covering incidental and ancillary matters reasonably connected with the authorised levy. The power to impose sales tax consequently included the authority to determine rates, establish turnover-based classifications, prescribe methods of computation and provide for assessment and recovery. A fundamental distinction existed between the subject of taxation and the measure adopted for calculating tax. The subject identifies the taxable event and the constitutional source of legislative competence, whereas the measure determines the amount payable. Therefore, selecting an existing tax liability as the computational base for a surcharge does not automatically transform its essential character into a separate tax on that liability.
The Court placed particular emphasis on the Constitution Bench decision in S. Kodar Vs State of Kerala, (1974) 4 SCC 422, which had upheld the constitutional validity of the Tamil Nadu Additional Sales Tax Act, 1970. That enactment imposed an additional tax equivalent to 5% of the sales tax payable by dealers whose annual turnover exceeded Rs. 10 lakh. The Constitution Bench had rejected the contention that the additional tax amounted to a tax on the dealer’s income rather than a tax on sales. It held that calculating additional tax with reference to sales tax payable did not change the nature of the levy, which remained an enhancement of the rate of sales tax applicable to the aggregate sales of the specified dealers. The Constitution Bench had also upheld turnover-based classification against a challenge under Article 14 and rejected the argument that preventing dealers from passing the additional tax to purchasers rendered the levy unconstitutional. A sales tax did not necessarily require a statutory right to recover its economic incidence from purchasers. The Seven-Judge Bench observed that these principles directly answered the controversy concerning the Orissa and Punjab surcharges, whose structure substantially resembled the levy upheld in S. Kodar.
The Supreme Court further examined Hoechst Pharmaceuticals Ltd. Vs State of Bihar, (1983) 4 SCC 45, in which a Three-Judge Bench had considered a surcharge under the Bihar Finance Act, 1981. That surcharge was imposed at 10% of the sales tax payable by dealers exceeding the prescribed gross turnover threshold, while dealers were prohibited from recovering the surcharge separately from purchasers. Applying S. Kodar, the Court in Hoechst Pharmaceuticals recognised that such a surcharge was relatable to Entry 54 of List II and represented a higher rate of sales tax. Although the assessees in the present proceedings argued that the conclusion on legislative competence in Hoechst Pharmaceuticals rested upon a concession, the Seven-Judge Bench rejected the suggestion that this undermined the controlling legal position. It pointed out that Hoechst Pharmaceuticals had independently addressed and rejected the contention that a non-recoverable surcharge was effectively a tax on income. More importantly, the constitutional validity of such a levy had already been expressly examined and settled by the Five-Judge Constitution Bench in S. Kodar, whose authority did not depend upon any concession recorded in subsequent proceedings.
The perceived conflict responsible for the larger-Bench reference arose from India Cement Ltd. Vs State of Tamil Nadu, (1990) 1 SCC 12, a Seven-Judge decision concerning a cess imposed on royalty payable by mining lessees under the Madras Panchayats Act, 1958. In that case, the State sought to support the levy by relying upon constitutional entries concerning land revenue, taxes on land and buildings, and taxes on mineral rights. The Court had treated royalty as a tax and concluded that the cess on royalty could not be sustained within the State’s legislative competence in the circumstances considered. The present Bench explained that India Cement arose from a fundamentally different statutory and constitutional setting and did not establish a universal prohibition against calculating one levy as a percentage of another. Its reasoning was connected with the character of royalty, the legislative field occupied by the Mines and Minerals (Regulation and Development) Act, 1957, and the relevant taxing entries. India Cement had not considered or overruled S. Kodar or Hoechst Pharmaceuticals, nor had it determined the validity of additional sales tax under Entry 54 of List II. Consequently, the apparent inconsistency between the judgments was more superficial than substantive.
The decisive subsequent development was the Nine-Judge Bench decision in Mineral Area Development Authority Vs Steel Authority of India, (2024) 10 SCC 1. That decision authoritatively held that royalty is not a tax but contractual consideration paid by a mining lessee to the lessor for the enjoyment of mineral rights. It overruled India Cement to the extent that the earlier decision had characterised royalty as a tax and clarified the scope of State legislative competence concerning mineral rights and mineral-bearing lands. The Seven-Judge Bench held that the very premise upon which India Cement had been perceived as conflicting with S. Kodar and Hoechst Pharmaceuticals had thereby disappeared. It also noted the earlier clarification in State of West Bengal Vs Kesoram Industries Ltd., (2004) 10 SCC 201. The existence of a curative petition challenging Mineral Area Development Authority and the subsequent insertion of Section 9D into the MMDR Act in 2026 did not alter the binding effect of the Nine-Judge decision on the issue under consideration. Accordingly, there was no surviving conflict in binding precedent requiring reconsideration of S. Kodar.
Applying the settled distinction between the subject and measure of taxation, the Supreme Court explained why a surcharge calculated on sales tax payable retained its character as a tax on sales. The Court illustrated that where sales tax is charged at 10% of taxable turnover and a further surcharge is imposed at 10% of that sales tax, the surcharge is mathematically equivalent to an additional 1% of taxable turnover. The indirect computational method does not alter the taxable event or transform the levy into an independent tax on another tax. Similarly, the surcharge cannot be characterised as a tax on income merely because the dealer bears its financial incidence. Both sales tax and the surcharge are linked to taxable turnover rather than profits, and a dealer may remain liable even when business operations produce no profit or result in a loss. The Court reaffirmed that turnover-based classifications of dealers and restrictions on passing the burden to purchasers do not, by themselves, invalidate an otherwise competent sales tax levy. The Orissa surcharge and the general surcharge under Section 5(1-C) of the Punjab Act were therefore governed by the principles already established in S. Kodar.
The Court also considered the transformation of India’s indirect taxation framework. The Constitution (One Hundred and First Amendment) Act, 2016 introduced Article 246A, providing a new constitutional foundation for the Goods and Services Tax, and substituted Entry 54 of List II. The revised entry confines State sales-tax powers to specified goods, including petroleum crude, high-speed diesel, motor spirit, natural gas, aviation turbine fuel and alcoholic liquor for human consumption, subject to the stated exclusions. Even before the GST transition, the earlier sales tax regimes in the concerned States had been replaced by the Orissa Value Added Tax Act, 2004, and the Punjab Value Added Tax Act, 2005. The disputed surcharges consequently related to historical assessment periods under superseded enactments. The Court observed that the original constitutional question lacked prospective significance in the form in which it had arisen, while any comparable issue concerning goods remaining within the amended Entry 54 would continue to be governed by S. Kodar. Referring to the principles of judicial precedent explained in Central Board of Dawoodi Bohra Community Vs State of Maharashtra, (2005) 2 SCC 673, it held that a larger-Bench reference need not continue where the perceived conflict has already been authoritatively resolved. Nevertheless, the pending appeals and the parties’ substantive rights remained live and required individual adjudication.
Consequently, the Supreme Court held that the reference had become infructuous and did not require further adjudication by the Seven-Judge Bench. The Court affirmed that S. Kodar continued to govern the legislative competence of States to levy additional sales tax or surcharges calculated as a percentage of sales tax payable under the pre-GST constitutional framework. However, it expressly left open the separate question concerning Section 30-AA of the Punjab General Sales Tax Act, 1948, under which exempt industrial units could be subjected to surcharge despite their sales tax exemptions. It also declined to decide whether proceeds of the cess under the Punjab Social Security Act, 2000 could constitutionally be credited directly to the Punjab Social Security Fund without first entering the State’s Consolidated Fund under Article 266. Questions relating to individual assessments, periods of levy and consequential reliefs were likewise preserved for determination by regular Benches. The Registry was directed to place the lead and connected matters before appropriate regular Benches after obtaining administrative directions. In a separate concurring judgment, Justice K. V. Viswanathan independently examined the precedential history and concluded that S. Kodar had been correctly decided, remained good law and required no reconsideration. He further directed that the appeals concerning the Punjab Social Security Act be segregated for assignment to an appropriate Division Bench. Thus, the judgment settled the continued authority of S. Kodar without finally disposing of the individual appeals or adjudicating their distinct statutory and constitutional disputes.
Cases Discussed
- S. Kodar v. State of Kerala, (1974) 4 SCC 422 / [1975] 1 SCR 121 — Constitution Bench ruling that additional sales tax measured as a percentage of sales tax is an enhancement of the sales tax rate.
- Hoechst Pharmaceuticals Ltd. & Ors. v. State of Bihar & Ors., (1983) 4 SCC 45 — Reaffirmed the surcharge’s character as sales tax and rejected the argument that it was a tax on income.
- India Cement Ltd. & Ors. v. State of Tamil Nadu & Ors., (1990) 1 SCC 12 — Earlier royalty-cess ruling distinguished; its premise that royalty was a tax was subsequently overruled.
- State of West Bengal v. Kesoram Industries Ltd., (2004) 10 SCC 201 — Explained the error in the earlier characterisation of royalty as tax.
- Mineral Area Development Authority & Anr. v. Steel Authority of India & Anr., (2024) 10 SCC 1 — Nine-Judge Bench settled that royalty is not a tax.
- Central Board of Dawoodi Bohra Community & Anr. v. State of Maharashtra & Anr., (2005) 2 SCC 673 — Explained binding precedents and references to larger Benches.
