Open Ended Provision Permitting Collection of Duty in future Amounts to excessive delegation: Andhra Pradesh HC [Read Order]

A.P. Textile Mills Association, the A.P. Electricity DutyAct, 1939 (the Duty Act) was enacted for levying duty on the sale of electrical energy by licensees. The term Licensee was originally defined to mean any person licensed under the Indian Electricity Act, 1910 to supply energy or any person who was authorized under section 28 of the same Act to supply energy. This definition was amended to mean a person who has been granted a licence under section 14 of the Electricity Act, 2003.

Complete practical guide to Drafting Commercial Contracts, Click Here

The question before court was whether the amendment to Section 7 of the Duty Act, by Act 23 of 2024 is valid?

The changes made in section 7, of the Duty Act is that any licensee may with the previous sanction of the State Government and subject to such conditions as they may impose, recover from any person or class of persons to whom energy, is sold at a price of more than twelve paise per unit, the duty which falls to be paid by the licensee in respect of energy so sold or any part of it, as may be determined by the State Government.

Any Licensee may, with the sanction of the state government, whether granted prior or post facto and subject to such condition as may be imposed at any time, recover from any person or class of persons to whom energy, is sold at a price of more than twelve paise per unit, the duty which falls to be paid by the licensee in respect of energy so sold or any part of it, as may be determined by the State Government.

Provided that the duty recovered or to be recovered by the licensee from any person or class of persons, for the full amount of duty paid/falls to be paid by the licensee to the state government, shall always be deemed to have been recovered with the sanction of the State Government, which sanction can be granted either

before or after any action for recovery.

The petitioners contended that, under section 7 of the un-amended Duty Act, prior sanction was necessary for recovery of duty, by the Licensees from the consumers, whereas the amendment removes this safeguard and gives unbridled and unguided power to the executive to grant sanction post or pre facto, for collection of Duty from the consumers.

They would point out to a situation where, the licensee recovers Duty, without sanction and is permitted to utilize the same, for any length of time, on the pretext that the Government had not taken a decision to sanction such recovery or not. The petitioners contend that in such a situation, there would be collection of Duty without authority of Law. Further, such power is given, to the licensees, without any guidelines and would be bad for excessive delegation of power.

The Advocate General contended that the plenary power of the legislature would include the power to legislate retrospectively. He would also contend that the State is the ultimate beneficiary of the collection of Duty and as such, pre or post facto sanction would not make any difference. It is further contended that this amendment had been carried out for the purposes of saving the collection of the Duty from 26.08.2021 till 19.12.2024, when Act 23 of 2024 had been brought into force.

Practical Case Studies in Forensic Accounting & Corporate Fraud Investigation - CLICK HERE

The scheme of the Duty Act, prior to the impugned amendment of Section 7 of the Duty Act, needs to be considered. The Duty, under the Duty Act is levied and collected, by the State, from the licensee. However, the State, under Section 7, can permit the licensee to reimburse itself, by collecting the said Duty from its consumers. This permission was to be obtained before any Duty could be collected from the consumers.

Direct taxation statutes are Acts where the levy and collection is on the taxpayer under that Act, without any opportunity to pass on the liability. Indirect Taxation statutes are Acts where the person who is liable to pay the tax, is permitted to pass on the burden. Normally, passing on the burden is again a matter of contract between the person liable to pay the tax and the person to whom such liability is being passed on.

The person to whom the liability is sought to be passed on has a say in the matter and can decline to bear the burden. This does not appear to be the case, under the Duty Act. The language of Section 7 makes it clear that this permission is a sanction to collect, without reference to consent of the consumers. The consumer has no say in the matter and the licensee is entitled to pass on the Duty. Effectively, wherever such prior sanction is given, the levy and collection of Duty is shifted to the consumer. This can also be seen in the language in which G.O.Ms.No.277, dated 09.12.1994, has been couched. In this G.O., sanction is granted to collect

Duty from the consumers subject to certain conditions contained therein. None of the conditions require the consent of the consumers for collection of Duty from them. On the contrary, it is stipulated, in condition (d) that the licensee can exercise powers under section 24 (1) of the Indian Electricity Act, 1910 to recover the Duty. Condition (e) directs that interest at the rate of 24% per annum can be collected as interest, on unpaid Duty, from the consumer.

Under the above scheme, the Duty Act is neither a classical direct tax nor indirect tax system. It is a statute where a direct tax regime could be changed into an indirect tax regime, of sorts, by the government giving prior sanction. The option of making such a switch was delegated to the government alone. This scheme is now modified to permit the licensees to collect the Duty, levied on them, without any prior sanction. The sanction can be pre or post facto.

The collection of Duty, from the consumers, is at the sole discretion of the licensees. In effect, the burden and liability of payment of Duty, on the consumers, can be decided by the licensees, who are non state entities, without reference to the government and the situation can be rectified only if the government intervenes, subsequently. This kind of delegation is not delegation to the government, but delegation to private/public entities, with oversight given to the government. Such a delegation, by any stretch of imagination, would not be permissible.

The division bench of Chief Justice Dhiraj Singh Thakur and Justice R Raghunandan Rao observed that it was open to the legislature to have shifted to an indirect tax regime, by simply stipulating that Duty can always be collected, by a licensee, from its consumers, subject to an exemption being given by the government, from such collection.

Know Practical Aspects of Tax Planning, Click Here

Instead, the legislature chose to amend section 7, in the manner set out above. It would have to be construed that, the legislature was not proposing to change the system, except to the extent of giving discretion to the licensees to collect Duty from the consumers.

The court held that the open ended provision, permitting such collection in the future also, militates against any such consideration. The amendment to section 7, including the proviso would have to be declared to be invalid and violative of Article 265 of the Constitution of India apart from amounting to excessive delegation.

“When such power is given, to the licensees, without any guidelines it would be bad for excessive delegation of power.”, the bench added.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates