The Karnataka High Court delivered a ruling on July 13, 2026, concerning the constitutional validity of the Health Security se National Security Cess Act, 2025. The petitioners, including M/s Dhariwal Industries Pvt. Ltd., challenged the Act, which imposed a cess on the manufacturing of Pan Masala, arguing that it was unconstitutional under Articles 14 and 19(1)(g) of the Indian Constitution. The cess was calculated based on machine capacity rather than actual production, which the petitioners found arbitrary and unreasonable.
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The Revenue defended the levy, asserting that it aimed to curb tax evasion in the Pan Masala sector by focusing on machine ownership and capacity instead of potentially suppressed transactions. This approach was intended to ensure greater revenue certainty. The primary issue before the court was whether the Act, along with its Rules and notifications, was constitutionally valid given its method of cess computation.
The Court upheld Parliament's competence to impose taxes, surcharges, or cesses, rejecting the petitioners' argument that Parliament lacked the authority to enact the legislation. However, the Court found the method of cess computation unconstitutional, as it was based on assumed production capacity rather than actual output, violating Article 14. The Court noted that fiscal legislation allows for discretion but must not result in arbitrariness or unequal treatment.
Consequently, the Court partially allowed the petitions, affirming the Union's power to levy the cess but declaring the manner of its imposition as unconstitutional. The Act and its associated Rules were struck down to the extent of this defect, and the Court permitted the Union to draft new legislation in alignment with its observations.
Order Date - 13 July 2026
Parties: M/s Dhariwal Industries Pvt. Ltd. & connected petitioners Vs Union of India and Central Board of Indirect Taxes and Customs (CBIC)
Facts -
- M/s Dhariwal Industries Pvt. Ltd. and the connected petitioners are business entities engaged in manufacturing and supplying Pan Masala classifiable under Customs Tariff Item 2106 90 20, with the product packed in pouches using pouch-packing machines and sold at retail prices.
- The Parliament enacted the Health Security se National Security Cess Act, 2025 to augment resources for national security and public health. The Act introduced a cess linked to machines installed or processes undertaken for manufacture of specified goods, with the Rules providing the mechanism for declaration, quantification, collection and payment.
- Under the scheme, cess was computed with reference to factors such as machine speed/capacity and weight of goods, rather than the actual quantity manufactured. The petitioners therefore challenged the Act, Rules and related notifications as unconstitutional and arbitrary, particularly under Articles 14 and 19(1)(g).
The Revenue defended the levy by arguing that the measure was designed to address tax evasion in the Pan Masala sector by shifting the taxable event from potentially suppressed transactions to machine ownership/capacity, thereby providing greater revenue certainty.
Issue -
Whether the Health Security se National Security Cess Act, 2025, the Rules and the related notifications were constitutionally valid, particularly when the cess was determined on assumed production capacity rather than actual production.
Order -
- The Court held that Parliament does possess legislative competence to introduce a tax, surcharge or cess. The petitioners’ argument that Parliament lacked the power to enact the impugned legislation was therefore rejected; the constitutional defect lay not in the power to levy cess, but in the manner in which the levy was structured and executed.
- The Court found the levy discriminatory under Article 14 because the computation mechanism proceeded on assumed production linked to machine capacity rather than actual manufacture. The Court observed that subsequent changes or purchases of higher-capacity machines could not, by themselves, justify imposing cess without examining the actual circumstances of the machinery and production.
- The Court emphasised that fiscal legislation enjoys considerable legislative discretion, but that discretion cannot result in manifest arbitrariness or unequal treatment. Where substantially dissimilar persons or transactions are subjected to an inappropriate uniform burden, the taxing measure can fail the constitutional requirement of equality under Article 14.
- Accordingly, the Court allowed the petitions in part, upheld the Union’s power to levy cess, but held the impugned manner of levy unconstitutional. The Act and Rules were consequently held unconstitutional to that extent, the specified notifications were obliterated, while liberty was reserved to the Union to bring a fresh enactment keeping the Court’s observations in mind.
