• Dated 06^th November, 2025

Karnataka High Court Quashes MRP-Based Valuation for Compensation Cess

Brief Facts of the Case

The case concerned a manufacturer of chewing tobacco who supplied goods through intermediaries such as stockists and wholesalers before reaching the end consumers. Under the GST regime, the manufacturer was discharging GST and Compensation Cess on the transaction value of the supply, as mandated under Section 15 of the Central Goods and Services Tax Act, 2017 (CGST Act).

Subsequently, the Government issued notifications linking the levy of Compensation Cess under the Goods and Services Tax (Compensation to States) Act, 2017 ("Compensation Act") to the Maximum Retail Price (MRP) of the goods. This marked a shift from the established transaction-value-based levy to a notional, MRP-based assessment.

Assessee's Contention

The assessee argued that Compensation Cess, being a levy under the GST framework, must follow the valuation mechanism prescribed under Section 15 of the CGST Act, i.e., the transaction value - the actual price paid or payable for the supply. The notifications linking cess to MRP effectively introduced a notional price basis, contrary to the statutory mandate.

It was contended that Section 8(2) of the Compensation Act explicitly requires valuation to be determined in accordance with Section 15 of the CGST Act. Therefore, computation of cess on MRP amounts to deviation from the legislative scheme and renders the delegated notification ultra vires the parent statute. The assessee maintained that revenue considerations or perceived leakages cannot justify departure from a statutory valuation mechanism.

Department's Contention

The Department defended the notifications on the ground that they were issued to curb tax evasion and revenue leakage prevalent in the tobacco sector. It was argued that many retailers operate below the GST registration threshold, leading to unaccounted sales. By linking cess to MRP, the Government sought to ensure revenue protection and simplify administration, consistent with the recommendations of a Group of Ministers on capacity-based taxation. The Department contended that the notifications were within the power conferred under Section 8(2) of the Compensation Act, issued on GST Council's recommendation.

Court's Decision

The Karnataka High Court held that the Compensation Act levies cess on supplies of goods and mandates valuation based on the provisions of the CGST Act. The proviso to Section 8(2) of the Compensation Act clearly stipulates that where cess is chargeable with reference to value, the value shall be determined as per Section 15 of the CGST Act.

The Court observed that Section 15 provides that the value of supply shall be the transaction value - the actual price paid or payable for the supply. Therefore, introducing an MRP-based valuation through a delegated notification directly conflicts with the statutory mandate. Citing settled jurisprudence, the Court reiterated that delegated legislation cannot override or contradict the parent Act.

Accordingly, the notifications linking Compensation Cess to MRP were declared ultra vires and quashed. However, the Court left it open to the legislature to amend the law, should it deem fit to prescribe MRP-based valuation through a statutory route.

Our Comments

The ruling reiterates that delegated legislation must remain within the scope of the parent statute. While preventing tax evasion is a valid objective, administrative or revenue considerations cannot override statutory provisions.

By affirming that Compensation Cess valuation must follow the CGST framework, the judgment clarifies the law for goods under dual levy regimes such as tobacco. It reinforces judicial oversight over delegated legislation and signals that any move toward MRP-based valuation would require a clear legislative amendment, not an executive notification.

V.K.G. Packers Vs. Union of India (2025) 36 Centax 16 (Kar.)

Author: Sneha Nandi

Edited by: Shaily Gupta