Case at a Glance
In the 1990s Odisha and Punjab imposed a 10% surcharge on the sales tax payable by larger dealers, and dealers argued that a ‘tax on tax’ was beyond State legislative competence. A two-judge bench referred the issue in 1998 because of a perceived conflict between Hoechst Pharmaceuticals and the seven-judge decision in India Cement, and in 1999 the reference was enlarged to consider the five-judge ruling in S. Kodar v. State of Kerala, (1974) 04 SC CK 0032. On 4 November 2026 a seven-judge bench held that the reference has been rendered infructuous: India Cement’s premise that royalty is a tax was overruled in 2024, Entry 54 of List II has since been substituted for GST, and legislative competence over the surcharges is governed by S. Kodar. Justice K.V. Viswanathan, in a separate opinion, held that S. Kodar was correctly decided and needs no reconsideration.
Section 5-A of the Orissa Sales Tax Act, 1947, inserted in 1990, levied a 10% surcharge on the tax payable by dealers whose gross turnover exceeded Rs 10 lakh. Sections 5(1-C) and 30-AA of the Punjab General Sales Tax Act, 1948, imposed a similar 10% surcharge, with Section 30-AA extending it to otherwise exempt industrial units; a cess on sales tax under the Punjab Social Security Act, 2000 was also challenged under Article 266. The Orissa High Court and the Punjab and Haryana High Court upheld the surcharges.
On 13 August 1998 a two-judge bench referred the Orissa appeals to a larger bench, citing a possible conflict between Hoechst Pharmaceuticals v. State of Bihar, (1983) 05 SC CK 0009 and India Cement v. State of Tamil Nadu, (1989) 10 SC CK 0021. On 6 October 1999 a five-judge bench enlarged the reference to consider S. Kodar v. State of Kerala. The question framed for the seven-judge bench was whether a surcharge, additional tax or cess calculated on validly levied sales tax is beyond State legislative competence.
The Key Question Before the Court
Is a surcharge or additional tax computed on the sales tax payable outside the State Legislature’s competence under Entry 54 of List II — and does that question still survive for a seven-judge bench to decide?
Subject of the Tax Versus Its Measure
The majority judgment, authored by Chief Justice Surya Kant, held that the ‘tax on tax’ objection confuses the subject of a tax with its measure; a surcharge on sales tax is an enhancement of the rate of sales tax even when computed on tax payable. India Cement concerned a cess on royalty in a field covered by the MMDR Act and did not hold that a levy computed on another tax is incompetent for that reason. After State of West Bengal v. Kesoram Industries treated the ‘royalty is a tax’ statement as an inadvertent error, the nine-judge bench in Mineral Area Development Authority v. Steel Authority of India, (2024) 07 SC CK 1514 overruled that premise; as the Court put it, “There is, therefore, no subsisting decision of this Court which is in conflict with S. Kodar”.
The Court added that Entry 54 of List II was substituted in 2016 and the sales tax laws were replaced by VAT and GST, so the question is “of no prospective significance” and “does not survive for adjudication by a Seven Judge Bench”. Justice K.V. Viswanathan’s separate opinion found no conflict between S. Kodar and Hoechst, held that India Cement could not be used to undermine S. Kodar, and concluded that S. Kodar “has been correctly decided”, “continues to be a good law and needs no reconsideration”, directing that the Orissa and Punjab appeals be placed before an appropriate bench to be decided as laid down in S. Kodar.
What the Court Actually Held
- The reference is answered as “rendered infructuous”; legislative competence over the impugned surcharges “shall be governed by the law declared in S. Kodar”.
- S. Kodar v. State of Kerala, which upheld an additional sales tax computed on tax payable as a tax on sales under Entry 54 of List II as it then stood, continues to hold the field.
- The validity of Section 30-AA of the Punjab Act and the Article 266 question on the Punjab Social Security Fund cess were left open, as were all other individual contentions.
- The lead and connected matters are to be listed before the appropriate regular benches, subject to the Chief Justice’s directions.
Why This Judgment Matters
- It closes a constitutional reference pending since 1998 without unsettling the law the States and dealers have worked under.
- It confirms that the measure of a tax can be another tax without changing the tax’s character.
- It shows how the 2024 nine-judge ruling on royalty has removed an old source of doctrinal conflict.
What Should Advocates Take Away From the Judgment?
For Dealers & Businesses
- Old sales tax surcharge disputes from the pre-GST era will be decided on the basis of S. Kodar, which upheld such levies.
- Challenges specific to Section 30-AA of the Punjab Act and the Punjab social security cess remain open.
- Track the listing of your matter before the regular bench.
For Counsel
- A ‘tax on tax’ argument alone will not succeed; the Court treats the levy’s measure as distinct from its subject.
- Cite Mineral Area Development Authority to answer reliance on India Cement’s royalty reasoning.
- Distinguish the questions expressly left open in para 103 of the judgment.
Key Takeaways
- Seven-judge reference on surcharge on sales tax held infructuous.
- S. Kodar governs and continues to hold the field.
- GST-era substitution of Entry 54 made the question academic.
- Punjab Section 30-AA and Article 266 cess questions left open.
Frequently Asked Questions
Did the seven-judge bench strike down the surcharges?
No. It held the reference infructuous and said legislative competence over the surcharges is governed by S. Kodar, which upheld an additional tax computed on sales tax payable.
Why was the reference considered academic?
The perceived conflict came from India Cement’s view that royalty is a tax, which was overruled in 2024, and Entry 54 of List II was substituted in 2016 with the move to GST.
Was the decision unanimous?
The majority opinion was by the Chief Justice for six judges; Justice K.V. Viswanathan wrote separately, holding S. Kodar correctly decided and directing the appeals to be decided in line with it.
Conclusion
After nearly three decades, the reference ends by reaffirming existing law rather than announcing a new rule. Pending surcharge disputes will now return to regular benches with S. Kodar as the governing precedent.
Practical takeaway: In legacy sales tax litigation, a surcharge calculated on tax payable is treated as part of the sales tax under Entry 54 of List II; only the specific questions left open by the Court remain arguable.
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