Himachal Pradesh Passenger Tax: Supreme Court Upholds Legislative Amendment

The case of NHPC Ltd. vs. State of Himachal Pradesh and associated appeals before the Supreme Court revolved around the legality of the Himachal Pradesh Passengers and Goods Taxation Act, 1955 (referred to as the ‘Act of 1955’) and its amendments introduced by the Himachal Pradesh Passengers and Goods (Amendment and Validation) Act, 1997. The key issue was whether providing free transport to employees and their children could be subject to passenger tax.

In a landmark judgment dated September 6, 2023, the Supreme Court upheld the constitutional validity of the Amendment and Validation Act of 1997, ruling that it effectively removed the basis of an earlier High Court decision that had invalidated the tax. The Court ruled that non-fare-paying passengers, such as employees and their children, could be considered passengers under the amended Act, making employers responsible for paying the tax.

Background of the Case

NHPC Ltd., along with other appellants, operates power projects in remote areas of Himachal Pradesh, where public transport facilities are inadequate. As a welfare measure, these organizations provided free transport to their employees and their children. However, the State of Himachal Pradesh sought to levy passenger tax on this service under the Act of 1955.

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The appellants contested this tax liability, arguing that since the transport was provided gratis (free of charge), it did not fall within the ambit of the Act, which primarily sought to tax fare-paying passengers. The High Court, in a judgment dated March 27, 1997, ruled in favor of the appellants, holding that the Act did not apply to such activities. However, the State Government subsequently amended the law through the Amendment and Validation Act of 1997, retrospectively altering the definitions of key terms such as ‘business’, ‘passenger’, and ‘fare’ to include non-fare-paying transport within its scope.

Key Issues in the Appeal

• Whether the Amendment and Validation Act of 1997 validly removed the basis of the High Court’s decision.
• Whether non-fare-paying employees and their children could be considered ‘passengers’ for taxation purposes.
• Whether the Himachal Pradesh Legislature had the legislative competence to enact the Amendment and Validation Act of 1997.
• Whether the retrospective effect of the Amendment and Validation Act of 1997 was legal and justified.

Arguments of the Parties

Arguments by the Appellants (NHPC Ltd. and Others)

• The transport provided was a welfare measure and not a commercial service, making it outside the scope of the Act.
• The amendment was an attempt to nullify a judicial decision without actually curing the defects in the law.
• The Act, as amended, effectively imposed a tax on vehicles rather than on passengers, which was beyond the legislative competence of the State Legislature under the Constitution.
• The retrospective application of the Amendment and Validation Act of 1997 was arbitrary and excessive.

Arguments by the State of Himachal Pradesh

• The amendments validly removed the defects in the previous law, thereby making the tax applicable to all categories of passengers, including those traveling free of charge.
• The tax was on passengers and goods carried by road, not on vehicles themselves, and was within the legislative competence of the State.
• The retrospective application of the law was necessary to maintain the continuity of tax collection.

Supreme Court’s Decision

The Supreme Court ruled that the Amendment and Validation Act of 1997 was a valid exercise of legislative power. The Court noted that:

• The amendments to the Act of 1955 effectively removed the basis of the High Court’s judgment by clarifying the definitions of key terms such as ‘passenger’, ‘business’, and ‘fare’.
• The amended Act validly extended passenger tax to non-fare-paying passengers, thereby bringing the employees and their children under its ambit.
• The Himachal Pradesh Legislature had the necessary legislative competence under Entry 56 of List II (State List) of the Constitution, which allows States to impose taxes on goods and passengers carried by road.
• Retrospective application of the law was permissible as it was meant to cure defects in the earlier statute and validate past collections.

Relief Granted to the Appellants

Recognizing the long passage of time since the enactment of the Amendment and Validation Act of 1997, the Court exercised its power under Article 142 of the Constitution to provide relief to the appellants. It ruled that the tax liability would be applicable only from April 1, 2023, onwards, thereby exempting the appellants from paying arrears for the earlier years.

Conclusion

The Supreme Court’s judgment in NHPC Ltd. vs. State of Himachal Pradesh is a significant ruling in the realm of taxation law, particularly in cases involving legislative amendments that seek to retrospectively validate tax collections. The Court upheld the legislative power of the Himachal Pradesh government while also ensuring a balanced approach by limiting the retrospective burden on taxpayers. This decision reaffirms the principle that while legislatures have the power to remove the basis of judicial decisions through retrospective amendments, such exercises must be reasonable and in accordance with constitutional principles.

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Petitioner Name: NHPC Ltd..
Respondent Name: State of Himachal Pradesh.
Judgment By: Justice B.V. Nagarathna, Justice Ujjal Bhuyan.
Place Of Incident: Himachal Pradesh.
Judgment Date: 06-09-2023.

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