2006 (12) TMI 444 - HC - VAT and Sales Tax

Kerala's Entry Tax Act of 1994 ruled unconstitutional; lacked compensatory justification and Presidential assent, deemed discriminatory.

The court held that the Kerala Tax on Entry of Goods into Local Areas Act, 1994, was unconstitutional and invalid. It determined that the entry tax ... Levy of entry tax - compensatory in nature ? - Constitutional validity of certain provisions of the Kerala Tax - seeking for a declaration that Section 2(1)(d), 2(1)(g), 2(1)(i) and Section 3 are discriminatory and ultra vires of Articles 14, 19(1)(a), 19(1)(g), 246, 265, 286, 301, 304(a), 304(b) - HELD THAT:- We have found that the compensatory character of tax is not self-evident from the Kerala Entry Tax Act. We have extracted the object of the Act which is for augmenting the general revenue by curbing the evasion of sales tax on goods purchased from outside the State, which cannot be characterised as a compensatory levy. This legal position is well settled by the judgment of the apex court in Jindal Stripe Limited's case,[2003 (9) TMI 345 - SUPREME COURT] wherein the court held that the tax imposed for augmenting the general revenue such as sales tax is not compensatory. Whether the State has discharged the burden of showing that the levy is compensatory by placing materials before the court - In our view, there is absolutely no connection or nexus with the collection of entry tax and its utilisation for the benefit of traders/manufacturers from whom such tax is collected. Affidavit filed is not specific and the State has not been able to establish the nexus between entry tax collected and the benefit conferred upon the person from whom the tax is collected. We also notice, the State is also discriminating between traders who bring goods from outside the State or country to a local area as defined under Section 2(1)(h) read with Section 2(1)(d) and person who brings goods from an area within the State to a local area in the State. Facts would indicate that on the introduction of entry tax, manufacturers have opted to purchase raw materials from within the State because they are less costlier since the levy of entry tax has definitely created a tax barrier affecting the free flow of trade, commerce and intercourse, such a tax violates Article 301 of the Constitution and therefore liable to be declared as unconstitutional. We therefore hold that unless and until State discharges its burden by placing materials before court that payment of compensatory tax is reimbursement/recompense, quantifiable/measurable benefit provided or to be provided to the payers or there is any broad correlation between the entry tax being realised and the services rendered, it cannot sustain levy of entry tax. We are of the view, State has not discharged its burden by providing quantitative data on the basis of which compensatory tax is sought to be levied and the working test laid down in Automobile Transport's case [1962 (4) TMI 91 - SUPREME COURT], Jindal Stainless Ltd's case [2006 (4) TMI 120 - SUPREME COURT] or Vijayalakshmi Rice Mills [2006 (8) TMI 307 - SUPREME COURT] case is not satisfied in these cases for levying entry tax. On facts we have already held that so far as these cases are concerned, imposition of levy of entry tax is not compensatory in nature. Further, even if the notwithstanding clause is employed to bring in within the ambit of Article 304(b) even then the procedure laid down in the proviso has not been satisfied; nor the element of public interest is established. The State could not prove that the Act imposes only reasonable restriction on the freedom of trade, commerce or intercourse as may be required in public interest. There is nothing to show that the levy was made in public interest and that there is nothing on record to suggest that the levy of entry tax on goods introduced by amendment Act had the prior sanction of the President as required under the proviso to Article 304(b); nor was there anything on record to suggest that before amending the act assent of the President was obtained as contemplated under Article 255 of the Constitution of India. What is placed before us is only a letter from the Government of India in response to the letter of June 1992 sent by the Taxes Department stating that the Government of India have no objection to the introduction of the Kerala Tax on Entry of Goods into Local Areas Bill 1992 by the State Legislature under Article 304(b) of the Constitution which is not the assent or previous sanction of the President as per the proviso to Article 304 (b) of the Constitution. We therefore hold that the levy of entry tax on goods imported from other State to the State of Kerala and from abroad is not compensatory in nature since the State Government could not discharge its burden by placing materials before court that payment of levy of entry tax is reimbursement/recompense for the quantifiable/measurable benefit provided or to be provided to the petitioners. The impugned Act imposing entry tax cannot be said to be specifically meant for facilitating trade, commerce and intercourse, but is raised for augmenting the general revenue of the State. We therefore hold that the demand and collection of entry tax under the Kerala Tax on Entry of Goods into Local Areas Act, 1994 is illegal, unauthorised and violative of Article 301 of the Constitution of India. Original Petitions are allowed as above and the levy and demand notices issued would stand quashed. Issues Involved:1. Constitutional validity of the Kerala Tax on Entry of Goods into Local Areas Act, 1994.2. Whether the provisions of the Act are discriminatory and ultra vires of various Articles of the Constitution of India.3. The nature of the entry tax and whether it is compensatory or regulatory.4. The requirement of Presidential assent for the amendment of the Act.5. The applicability of the Act to goods brought from outside the country.Detailed Analysis:1. Constitutional Validity of the Kerala Tax on Entry of Goods into Local Areas Act, 1994:The petitioners challenged the constitutional validity of Section 2(1)(d), 2(1)(g), 2(1)(i), and Section 3 of the Kerala Tax on Entry of Goods into Local Areas Act, 1994, claiming it was discriminatory and ultra vires of Articles 14, 19(1)(a), 19(1)(g), 246, 265, 286, 301, 304(a), 304(b) of the Constitution. The State defended the Act, asserting its legislative competence under Articles 245 and 246 read with Entry 52 List II of the VII Schedule to the Constitution of India.2. Discriminatory and Ultra Vires Provisions:The petitioners argued that the Act was discriminatory and violated the freedom of trade, commerce, and intercourse guaranteed under Article 301. They contended that the Act imposed entry tax on goods brought from outside the State and country, which was not compensatory in nature and lacked quantifiable data to justify it as a compensatory tax. The court noted that the State failed to provide quantifiable/measurable benefits to justify the tax as compensatory.3. Nature of the Entry Tax - Compensatory or Regulatory:The court examined whether the entry tax was compensatory or regulatory. The State claimed that the tax was compensatory, providing services like roads and police protection. However, the court found no quantifiable data to support this claim. The court reiterated the principles from Jindal Stainless Ltd. v. State of Haryana, emphasizing that a compensatory tax must show measurable benefits to the payer, which the State failed to do.4. Requirement of Presidential Assent for Amendment:The petitioners argued that the amendment to the Act had not received the President's assent as required under Article 304(b). The court agreed, stating that the amendment lacked the necessary Presidential assent, making it void. The court emphasized that the State must prove that the restrictions imposed by the tax were reasonable and in the public interest, which was not demonstrated.5. Applicability to Goods Brought from Outside the Country:The court examined whether the Act applied to goods brought from outside the country. It found that the Act's provisions specifically referred to goods brought from outside the State, not the country. The court held that the Act did not include goods imported from abroad, supporting the view from Fr. William Fernandez v. State of Kerala.Conclusion:The court concluded that the Kerala Tax on Entry of Goods into Local Areas Act, 1994, was unconstitutional and invalid. The State failed to prove that the entry tax was compensatory or regulatory, and the amendment to the Act lacked the necessary Presidential assent. The Act was discriminatory and violated Articles 14, 301, and 304 of the Constitution. Consequently, the court quashed the levy and demand notices issued under the Act.