[Delhi Race Club Ltd. v. UOI (2012) 347 ITR 593 (SC)]
Licence Fee – A licence fee imposed for regulatory purposes is not conditioned by the fact that there must be a quid pro quo for the services rendered, but that, such licence fee must be reasonable and not excessive. It would again not be possible to work out with arithmetical equivalence the amount of fee which could be said to be reasonable or otherwise. If there is a broad correlation between the expenditure which the State incurs and the fees charged, the fees could be sustained as reasonable.
On 19-10-1994, the Central Government in exercise of its powers u/s. 2 of the Union Territories (Laws) Act, 1950, extended the Mysore Race Courses Licensing Act, 1952 (the Act) to the Union Territory of Delhi, as it existed then, with certain amendments. Section 4 of the said Act provided for the payment of a Licence fee. Section 11 empowered the Government to make rules. In furtherance of the power conferred u/s. 11 of the Act, by a notification dated 1-3-1985, the Administration of the Union Territory of Delhi notified the Delhi Race Course Licensing Rules, 1985. Rules 4 and 5 of the 1985 Rules laid down the procedure for submission of application for grant of licence for horse racing and the validity period of such licence, respectively. Rule 6 prescribed the rate of “licence fee”, which was Rs.2000/- per day for horse racing on which the race is held on the race course and Rs.500/- per day for arranging for wagering or betting on a horse race run on any other race course within or outside the Union Territory of Delhi. On 7-3-2001, in exercise of the powers conferred u/s. 11 of the Act, the Lt. Governor of the National Capital Territory of Delhi enacted the Delhi Race Course Licensing (Amendment) Rules, 2001 and enhanced the aforesaid licence fee rates to Rs.20,000 and Rs.5,000 respectively.
On January 31, 2002, the Commissioner of Excise, Entertainment and Luxury Tax issued a demand letter to Delhi Race Club, a body corporate, the appellant, informing them that the licence fee deposited by them was short by Rs.17,80,000 for the year 2001-02 and by Rs. 18 lakh for the year 2002-03. Validity of the demand notice was questioned by the appellant by way of a writ petition in the High Court of Delhi, on the grounds that both the notifications, dated 19th October, 1984 and 7th March, 2001, were illegal in as much as : (i) delegation of powers u/s. 11 of the Act to the Lt. Governor, to fix the licence fee without any guidelines is excessive delegation of legislative power and is therefore, ultra vires, (ii) in the absence of an element of quid pro quo, the licence fee charged was not in the nature of a fee but a tax and (iii) the ten-fold increase in licence fee was highly excessive. However, based on the arguments advanced by the learned counsel, the High Court framed two key questions, viz., (i) Is the licence fee under rule 6 of the 1985 Rules a “fee” or not? And (ii) If it is a fee, is it excessive or not?
Answering both the questions against the appellant, the High Court concluded that the licence fee in question was not a compensatory fee and consequently there was no requirement of quid pro quo; the licence fee was in the nature of a regulatory fee and therefore, would not require any quid pro quo in the form of any social service and when the impost of Rs. 2,000 and Rs. 500 in the year 1984 was not regarded by the appellant as being excessive, keeping in mind the high rate of inflation between 1984 and 2001, the enhanced rates of Rs. 20,000 and Rs. 5,000 in the year 2001 could not be said to be excessive.
The appellant’s writ petition having been dismissed, they approached the Supreme Court.
The Supreme Court, after considering authorities wherein the question as to the limits of permissible delegation of legislative power by a Legislature to an executive/another body was examined, held that from the conspectus of the views on the question of nature and extent of delegation of legislative functions by the Legislature, two board principles emerge, viz. (i) that delegation of nonessential legislative function of fixation of rate of imposts is a necessity to meet the multifarious demands of a welfare state, but while delegating such a function, laying down of a clear legislative policy is pre-requisite and (ii) while delegating the power of fixation of rate of tax, there must be in existence, inter alia, some guidance, control, safeguards and checks in the concerned Act. It is manifest that the question of application of the second principle will not arise unless the impost is a tax. Therefore, as along as the legislative policy is defined in clear terms, which provides guidance to the delegate, such delegation of a non-essential legislative function is permissible.
According to the Supreme Court therefore, the pivotal question to be determined was the nature of the impost in the present case.
The Supreme Court, after noting the precedents on the issue, held that the true test to determine the character of a levy, delineating “tax” from “fee” is the primary object of the levy and the essential purpose intended to be achieved. According to the Supreme Court, in the case before it, it was clear from the scheme of the Act that its sole aim was regulation, control and management of horse-racing. The Supreme Court observed that such a regulation is necessary in public interest to control the act of betting and wagering as well as to promote the sport in the Indian context. To achieve this purpose, licences are issued subject to compliance with the conditions laid down therein, which inter alia include maintenance of accounts and furnishing of periodical returns; amount of stakes which may be allotted for different kinds of horses; the measures to be taken for the training of the persons to become jockeys, to encourage Indian bred horses and Indian jockeys; the inclusion and association of such persons as the government may nominate as stewards or members in the conduct and management of the horse-racing. The violation of the condition of the licence or the Act is penalised under the Act, besides a provision for cognisance by a court not inferior to a Metropolitan Magistrate. To ensure compliance with these conditions, the 1985 Rules empower the District Officer or an Entertainment Tax Officer to conduct inspection of the race club at reasonable times. According to the Supreme Court, the nature of the impost was therefore not compulsory exaction of money to augment the revenue of the State but its true object was to regulate, control, manage and encourage the sport of horse racing as was distinctly spelled out in the Act and the 1985 Rules. For the purpose of enforcement, wide powers were conferred on various authorities to enable them to supervise, regulate and monitor the activities relating to the race course, with a view to secure proper enforcement of the provisions. Therefore, by applying the principles laid down in the aforesaid decisions, it was clear that the said levy was a “fee” and not “tax”.
The Supreme Court further held that a licence fee imposed for regulatory purposes is not conditioned by the fact that there must be a quid pro quo for the services rendered, but that, such licence fee must be reasonable and not excessive. It would again not be possible to work out with arithmetical equivalence the amount of fee which could be said to be reasonable or otherwise. If there is a broad correlation between the expenditure which the State incurs and the fees charged, the fees could be sustained as reasonable.
According to the Supreme Court, the licence fee levied in the present case, being regulatory in nature, the Government need not render some defined or specific services in return as long as the fee satisfies the limitation of being reasonable. The Supreme Court noted that the amount of licence fee charged from the appellant had not been challenged as being excessive. Thus, in the light of the above observations relating to inspection and other provisions of the Act, Supreme Court held that the licence fee charged had a broad co-relation with the object and purpose for which the Act and the 2001 Rules had been enacted.
The Supreme Court observed that the challenge to the constitutionality of section 11(2) of the Act was based on the premise that no guidance, check, control or safe-guard is specified in the Act. This principle, as distinguished above, applied only to the cases of delegation of the function of fixation of rate of tax and not a fee.
The Supreme Court in the conclusion observed that the challenge to the validity of section 11(2) of the Act was raised after almost 15 years of its coming into force. This appellant, since the commencement of the Act, had been regularly paying the licence fee and the present challenge was made only when quantum of the licence was increased by the Government on account of non-revision of the same since the commencement of the Act. Evidently, the inflation during this period was taken as the criterion for increasing the quantum of the fee. It was a reasonable increase keeping in view the fact that expenditure incurred by the Government in carrying out the regulatory activities for attaining the object of the Act would have proportionately increased. Accordingly, to the Supreme Court, an institution of the size of the race course should not have cloaked their objection to an increase in the rate of licence fee and present them as a challenge to the constitutionality of the charging section.
