Analysis of Whether State Government Can Levy Tax on Inter State Sale of Electricity

Background In case of ONGC Tripura Power Co. Ltd. v. State of Tripura, the petitioner has challenged the vires of Section 4(4)(d) of the Tripura Electricity Duty Act, 2019 on the ground that the same seeks to levy duty on inter-State sale of electricity which is beyond the competence of the State legislature. Petitioner ONGC Tripura Power Company Limited (OTPC, for short) is a power generating company and has set up a power generation station in the State of Tripura and generates electricity based on Gas Turbine Units and Steam Turbine Units. The petitioner sales bulk of its electricity generated from the said power project to seven north-eastern States including the State of Tripura. The Government of Tripura passed Tripura Electricity Duty Act, 2019 under which the State would levy duty on sale or consumption of electrical energy. Section 4 of the said act pertained to levy of electricity duty.

“4. Levy of electricity duty:
(4) Duty shall also be levied on-
(d) electricity sold outside the State and licensees shall have to pay electricity duty on sold energy charges.”
The above clause was point of dispute under the petition.
 
Petitoner’s Plea
 
i. Sale of power to the other six North Eastern States shall fall within Entry 54 and will be subject to Entry 92A of List I and cannot be taxed by the Government of Tripura.
 
ii. Provision which levies electricity duty on electricity sold outside the State is unconstitutional and is in the teeth of the law laid down by the judgment of the Supreme Court in the State of Andhra Pradesh v. National Thermal Power Corpn. Ltd.
 
Respondent’s contention
 
i. After amendment in constitution through Constitution (One Hundred and First Amendment) Act, 2016, the exclusion clause then applicable on the state legislature prohibiting enactment of Taxing statue imposing tax on supply of goods or of services outside the state now stand limited only to 6items as mentioned in Entry 54 of the State List and the definition of the term “goods” as contained in Section 2(d) of the Central Sales Tax Act, 1956.
 
ii. Entry 92A of List I of the Seventh Schedule will be read, interpreted and apply only in respect of those “goods” which has been defined by the Parliament in the Taxation Laws (Amendment) Act, 2017 by virtue of powers conferred under Article 286(2) of the Constitution of India.
 
iii. Entry 53, List II of Seventh Schedule now stands as an independent fountain source of State Legislative Power.
 
iv. State legislature of Tripura has been vested with power to enact statute imposing and prescribing tax on sale and supply of electricity outside the state on any licensee as defined under law.
 
Now to understand the rations behind pleas taken by the petitioner and respondent, we need to travel to the Constitution of India and more specifically:-
 
i. Constitution of India (Pre Amendment of 11-09-1956)
 
ii. The Constitution (Sixth Amendment) Act, 1956 (w.e.f 11-09-1956)
 
iii. The Constitution (Eightieth Amendment) Act, 2000 (w.e.f. 9-06-2000).
 
iv. The Constitution (One Hundred and First Amendment) Act, 2016 (w.e.f. 16-9-2016).
 
Background to Constitution of India and its relevant amendments
 
Article 246 lays down the subject matter of laws to be made by Parliament and the State legislature. It refers to the three lists given in Schedule VII of the Constitution – Union List, State List and Concurrent List. Further, Article 246A was brought through 101st Amendment which overrides Article 246, specifying power of Parliament and State legislature for laws in respect of Goods & Service Tax (GST)
 
Article 246 – Subject-matter of laws made by Parliament and by the Legislatures of States Article 246A – Special provision with respect to goods and services tax – Inserted vide Constitution (One Hundred and First Amendment) Act, 2016
(1) Notwithstanding anything in clauses (2) and (3), Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule (in this Constitution referred to as the ‘Union List’. (1) Notwithstanding anything contained in articles 246 and 254, Parliament, and, subject to clause (2), the Legislature of every State, have power to make laws with respect to goods and services tax imposed by the Union or by such State.
(2) Notwithstanding anything in clause (3), Parliament, and, subject to clause (1), the Legislature of any State also, have power to make laws with respect to any of the matters enumerated in List III in the Seventh Schedule (in this Constitution referred to as the ‘Concurrent List’). (2) Parliament has exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.
(3) Subject to clauses (1) and (2), the Legislature of any State has exclusive power to make laws for such State or any part thereof with respect to any of the matters enumerated in List II in the Seventh Schedule (in this Constitution referred to as the ‘State List’). Explanation.—The provisions of this article, shall, in respect of goods and services tax referred to in clause (5) of article 279A, take effect from the date recommended by the Goods and Services Tax Council.]
(4) Parliament has power to make laws with respect to any matter for any part of the territory of India not included in a State notwithstanding that such matter is a matter enumerated in the State List.  

Article 286 places restriction on State Legislature to impose tax on the sale or purchase of goods where such sale or purchase takes place in course of inter-state trade or commerce or in the course of import or export. Further, Article 286 gives power to Parliament for formulating principles for determining when sale or purchase takes place in any of the ways mentioned supra. Article 286 was amended earlier through Constitution (Sixth Amendment) Act, 1956 and under this power, Parliament brought Central Sales Tax Act, 1956.

Pre Amendment Post Constitution (One Hundred and First Amendment) Act, 2016 (w.e.f. 16-9-2016).
Union List
Entry 92A
Taxes on the sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter-State trade or commerce.1
State List
Entry 52
Taxes on the entry of goods into a local area for consumption, use or sale therein.
Entry 53
Taxes on the consumption or sale or electricity.
Entry 54
Taxes on the sale or purchase of goods other than newspapers, subject to the provisions of entry 92A of Union List1.
1. Through Constitution (Sixth Amendment) Act, 1956.
Union List
Entry 92A
Taxes on the sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter-State trade or commerce.
State List
Entry 52
Omitted
Entry 53
Taxes on the consumption or sale or electricity.
Entry 54
Taxes on the sale of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas, aviation turbine fuel and alcoholic liquor for human consumption, but not including sale in the course of inter-State trade or commerce or sale in the course of international trade or commerce of such goods.
 
Analysis
 
Before 101st Amendment, State Legislature has the power to impose tax on the consumption or sale of electricity through Entry 53. Through Entry 54, State legislate was able to impose tax on the sale or purchase of goods other than newspaper. Entry 54 was amended through Constitution (Sixth Amendment) Act, 1956 and it was made subject to Entry 92A of Union List. New entry 92A was inserted in Union list. Effect of such amendment was that State legislature could not impose tax on sale or purchase of goods which is in the course of inter-state trade or commerce.
 
Matter came up before Supreme Court in case of NTPC Ltd.,(suprato decide upon following issues:-
 
i. Whether Electricity is goods
 
ii. Whether Entry 53 is in isolation to Entry 54 or it is also subject to Entry 54 of State List
 
iii. Whether State legislature can impose tax on inter-state sale of electricity
 
Issue was discussed in detail by the Hon’ble Supreme court and following was held:
 
i. The definition of goods as given in Article 366 (12) of the Constitution was considered by this Court and it was held that the definition in terms is very wide according to which “goods” means all kinds of moveable property and thus electricity held to be covered under ‘goods’
 
ii. Entry 53 has to be read in harmonised way with Entry 54. Since Entry 54 is subject to entry 92A of the Union list, Entry 53 also has to be read as subject to Entry 54. Since electricity falls under meaning of ‘goods’, state legislature cannot tax on consumption or sale of electricity in course of inter trade commerce.
 
iii. Source of power to levy tax doesn’t come from the entries of Seventh Schedule. Competence to legislation has to be traced to the constitution. The prohibition which is imposed by Article 286(1) of the Constitution is independent of the legislative entries in Seventh Schedule. Bans imposed by Articles 286 and 269 on the taxation powers of the State are independent and separate and must be got over before a State legislature can impose tax on transactions of sale or purchase of goods.
 
However, State legislature of Tripura enacted Tripura Electricity Duty Act’ 2019 thereby levying electricity duty on inter-state sale of electricity. The main contention of the respondent in ONGC Tripura Power Co. Ltd. (suprawas that after amendment by Constitution (One Hundred and First Amendment) Act, 2016, Entry 54 was no more subject to Entry 92A of the Union List and thus accordingly, state legislature is restricted to impose tax only on 6 items mentioned in Entry 54 of the State List. Resultantly Entry 53, List II of Seventh Schedule now stands as an independent fountain source of State Legislative Power.
 
Decision
 
Hon’ble High Court of Tripura held that Sec 4(4)(d) of the Tripura Electricity Duty Act’ 2019 is ultra-vires and un-constitutional to the power of state legislature basis following:
 
* The entries in the lists in Schedule VII are not the source of power of legislation but are fields of legislation in relation to which the State or Union legislation has the authority to frame a law.
 
* Article 246-A which was inserted by the 101st Amendment also while enabling the Union as well as the State legislatures to frame laws for levying goods and services tax, nevertheless retained this limitation on the power of the State legislature when in clause (2) it provided that the Parliament has exclusive power to make laws with respect to goods and services tax where the supplies takes place in the course of inter-State trade or commerce.
 
* Clause (5) of Article 269-A authorizes the Parliament to frame a law to formulate the principles for determining the place of supply, and when a supply of goods, or of services or both takes place in the course of inter-State trade or commerce.
 
* Power to levy tax on inter-State supply of goods or services is retained by the Parliament and also the power to frame the law specifying as to when supply of goods, or of services can be said to have taken place in the course of inter-State trade or commerce.
 
* Article 286 thus prior to its amendment by 101st Amendment Act, 2016, was concerning the sale or purchase of goods. Even after the amendments by the said Amending Act when post this amendment the phrase “the sale or purchase of goods” was replaced by “the supply of goods or of services or both”, the heading of the Article remained the same namely “restrictions as to imposition of tax on the sale or purchase of goods”.