2014 (10) TMI 379 - HC - VAT / Sales Tax

Entry tax on goods into local areas upheld as compensatory, non-discriminatory and reasonable; Section 17 validating past collections sustained

ITC Limited and M/s. Parmarth iron pvt. Ltd. Versus State of UP. and Others.

HC upheld validity of the U.P. Tax on Entry of Goods into Local Areas Act, 2007, finding it not violative of Art.301 and not saved by Art.304(b) was ... Validity of the U.P. Tax on Entry of Goods into Local Areas Act, 2007 - violative of freedom of trade, commerce and intercourse guaranteed under Art.301 and not saved by Art.304 (b) of the Constitution of India - Held that:- notification was amended on 19.2.2010, excluding natural gas, cement, motor vehicles of all kinds, tyres and tubes. It was again amended on 29.3.2009 excluding machinery and spare parts; wood and timber of all kinds; clinker; aluminum and its products; cables of all kinds, lap top-computer system and peripherals; marbles stones and tiles; and refrigerator, air conditioner and conditioning plants. On high speed diesel and other petroleum products, excluding kerosene oil for public distribution system, a notification was issued on 04.3.2008 providing rebate and a notification was issued on 30.6.2008, providing exemptions. At present only 08 items out of 20 are left in the Schedule for levy of entry tax. Section 5 of the Act of 2007 provides for reversal of levy of tax. Where any dealer has paid entry tax in respect of entry of such goods in such local area or purchased such goods, on which entry tax has already been paid, such tax shall be refunded or adjusted to such dealer by whom without using them in the local area, such goods are assigned to any other place outside the State or are sold either in the course of inter-state trade or commerce or in the course of export outside the territory of India. Section 6 provides for powers to the State Government to give rebate by a notification upto the full amount of tax leviable under the Act. Where the tax is payable in respect of a sale or purchase of such goods under the UP Value Added Tax Act, 2008 by a dealer registered under the Act, and for exemptions under Section 7 by the State Government on any notified goods. The notification establishing the industrial area, for a limited purpose, therefore, does not take it out or carve out a separate area for which there may be no Municipal Corporation, Municipality or Panchayat. The entire State is divided into local areas for the purposes of self-governance. The statement of objects and reasons, the manner and method levy and collection of the entry tax, and its utilisation exclusively for development for facilitating the trade, commerce and industry in the State of UP; the credit of the entire entry tax levied and collected to the UP Trade Development Fund, the manner of utilisation of the UP Trade Development Fund Management Committee under Rule 4 of the Rules of 2007, the maintenance of the accounts and its audit by the Accountant General, UP, facially and patently satisfies the tests of the entry tax laid down in Jindal Stainless Limited (2). In our opinion the defects, pointed out by this Court in IOC v. State of UP decided by this Court on 27.1.2004 declaring the Act of 2000 to be violative of Article 301 and 304 of the Constitution of India have been fully cured. The new Act of 2007 has not been enacted as a Validating Act. It is a new legislation, which does not allow the collections of entry tax to augment the general revenue of the State. It provides for, ensures and guarantees the utilisation of entire entry tax levied and collected for facilitating the trade and commerce. Objects and reasons and the provisions of the Act of 2007 clearly provide that the entire collection of the entry tax has to be credited to the U.P. Trade Development Fund, to be used exclusively for facilitating trade, commerce and industry and that the amount realised shall not be used for the purposes other than those specified in sub-section (1) of Section 14 of the Act. The distribution of entry tax so collected and credited to the UP Trade Development Fund by the UP Trade Development Fund Management Committee, to the local bodies and its expenditure through the local bodies is also not seriously in dispute. Provisions of the new Act of 2007, patently and facially indicate the benefit of the entry tax to the trade and commerce, which is quantifiable and measurable. The entire amount of entry tax collected and credited to the UP Trade Development Fund has to be utilised exclusively for facilitating the trade, commerce and industry, and is not to be used for the purpose other than those specified in sub-section (1) of Section 14. There are sufficient provisions in the Act and the Rules to ensure the utilisation of the amount for the benefit of trade and commerce. When the constitutional validity of any legislation of the State levying compensatory tax, as violative of Art.301, is under challenge, the imposition of such tax has to be examined, with reference to the entire scheme of Part XIII of the Constitution of India. The tax is compensatory, to save it from the vice of violating Art.301, not only if it is by way of recompense/ reimbursement to the trades, it is also required to be tested on the touchstone of Art.304 (a) and (b), namely that it is not discriminatory, unreasonable and is enacted for public purpose. The expression compensatory tax is not to be examined in a narrow sense of giving substantial or one to one benefit to the tax payer. The tax to be violative of Art.301, has to be noncompensatory and also violative of Art.304 (a) and (b), in the sense that even if the levy is imposed by a legislation, introduced with the sanction of the President, it still has to be nondiscriminatory, unreasonable and against public purpose. The freedom of trade, commerce and intercourse is violated if it affects the free movement of trade and commerce between the States and has an impact on the overall economic growth of the nation. Chapter XIII of the Constitution seeks to achieve economic unity and growth of the nation as a whole, by removing artificial barriers. We may not, therefore, look to justify the tax, if it is a barrier and not to judge it only by the manner of its expenditure. If a tax impose a barrier, or is discriminatory, unreasonable, and is not levied in public interest, it cannot be justified on the ground that the amount levied and collected is spent by way of quantifiable and measurable benefits on the trades. In such case the power to levy entry tax, even if it is traced to Entry 52 of List II would be a colourable exercise of legislative power. State of U.P. did not lack legislative competence in enacting U.P. Tax on Entry of Goods into Local Areas Act, 2007, imposing entry tax on the entry of scheduled goods into the local areas for consumption, use or sale thereunder. The provisions of the Act patently and facially indicate and that there are sufficient guidelines and guarantees under the Act for ensuring that the entire amount of entry tax collected and credited to the U.P. State Development Fund is utilised only for the purposes of its reimbursement to facilitate the trade, commerce and industry. The State Government has also established that the entire amount of entry tax is by way of reimbursement/recompense to the trade, commerce and industry, in the local areas of the State of U.P. provides quantifiable/measurable benefits to its payers. The levy under the Act, 2007 is also not discriminatory, unreasonable or against public interest. The levy of entry tax under the Act, therefore, does not violate the freedom of trade, commerce and intercourse guaranteed under Art.301 of the Constitution of India. Section 17 of the Act validating the amount of entry tax levied, assessed, realized and collected under the U.P. Tax on Entry of Goods Act, 2000, is also valid and authorises the State to keep the entire amount, for the purposes of its utilisation for facilitating trade, commerce and intercourse in the local areas of the State - Decided against assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether the State legislature has legislative competence to enact a law levying tax on the entry of goods into a local area for consumption, use or sale therein under Entry 52, List II read with Article 246 of the Constitution. 2. Whether the levy under the impugned statute qualifies as a 'compensatory tax' (hence outside the scope of Article 301) by satisfying the tests of quantifiable/measurable benefits, principle of equivalence, broad proportionality and 'pay for the value' as expounded in Automobile Transport and clarified in Jindal Stainless Ltd. (2). 3. Whether, if not compensatory, the levy unreasonably restricts freedom of trade, commerce and intercourse guaranteed by Article 301 and is saved (or not) by Article 304(a) and/or Article 304(b) (including the requirement of previous Presidential sanction under the proviso to Article 304(b)). 4. Whether retrospective validation of past collections by legislative enactment (validation clause) is constitutionally permissible in the circumstances of this tax and whether Section 17 (validation) is sustainable. 5. Whether the definition and scope of 'local area' and the statutory scheme (including utilization by a State Trade Development Fund and procedural safeguards such as fund-management rules, auditing and allocation mechanisms) satisfy the legal requirements for a compensatory levy and avoid discrimination or unreasonable restriction. 6. Whether incidental statutory immunities or other statutory provisions (e.g. special provisions relating to railways, Union property or export-oriented units) exclude certain payers or transactions from liability under the impugned law. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legislative Competence to Levy Entry Tax (Entry 52, List II) Legal framework: Entry 52, List II confers on States power to legislate 'tax on the entry of goods into a local area for consumption, use or sale therein'; Articles 246 and Part XIII (Articles 301-307) set limits on that competence. Precedent treatment: Diamond Sugar Mills and related authorities interpret 'local area' as an area administered by a local authority; jurisprudence has recognised State competence to tax within List II subject to Part XIII constraints. Interpretation and reasoning: The Court held the State possessed competence to enact a levy under Entry 52. The statutory definition of 'local area' (municipal corporations, municipalities, panchayats, cantonments, industrial development areas, industrial townships and other local authorities) properly confines the taxed event to entry into an area administered by a local authority; industrial area notifications do not carve out areas from municipal/panchayat jurisdiction for this purpose. The manner of entry (pipeline, rail, road, air or sea) is immaterial for the taxing event. Ratio vs. Obiter: Ratio - State legislative competence under Entry 52 to levy entry tax on goods entering a defined 'local area' is affirmed; reasoning is central to disposal. Conclusion: The impugned statute falls within the legislative field of List II and is not beyond State competence, subject to Part XIII constitutional limitations. Issue 2 - Whether the Levy Is a Compensatory Tax Legal framework: Automobile Transport supplied the working test (use of facilities by trade and not 'patently much more' than cost) and Jindal Stainless (Constitution Bench) restated and refined parameters: compensatory tax must be based on principle of equivalence, quantifiable/measurable benefits, broad proportionality (not progressive), 'pay for the value', recompense/reimbursement closely proximate to cost, and burden on State to demonstrate the compensatory character. Precedent treatment: Jindal Stainless overruled the looser 'some connection' test (Bhagatram/Bihar Chamber) and reaffirmed the Atiabari/Automobile Transport 'direct and immediate effect' and working tests for compensatory tax. Interpretation and reasoning: The Court examined the Act's charging section, Section 14 (fund appropriation and exclusive utilization for development/facilitating trade, commerce and industry), Rules establishing a Fund Management Committee chaired by the Chief Secretary, audit and accounting safeguards (Accountant General), and specific heads for utilization (roads/bridges, electricity, water, pollution control, grants/subsidies, local-body allocations). The statute facially and patently indicates quantifiable/measurable benefits to the class of payers through earmarking, allocation mechanisms and supervisory safeguards. The Court emphasized that the compensatory tax concept does not require a strict one-to-one direct benefit to an individual payer; rather, the levy must be broadly proportional to special benefits conferred on the payer-class and not be merely general revenue augmentation. The State's allocation plan (initial allocations and sectoral earmarks) and rules addressing exclusive utilization and audit sufficiently cure defects earlier found in the struck-down predecessor Act. Ratio vs. Obiter: Ratio - The Act of 2007 meets the Jindal Stainless parameters; facial earmarking plus institutional safeguards satisfy burden of proof to characterise the levy as compensatory. Obiter - observations on theoretical limits of one-to-one benefit are explanatory. Conclusion: The levy qualifies as compensatory in nature because the statute patently provides for appropriation to a specified fund and exclusive, supervised utilisation for facilitation/development of trade and commerce of scheduled goods; the State discharged its burden sufficiently at the statutory level. Issue 3 - Interaction with Articles 301 and 304 (Discrimination, Reasonableness, Presidential Sanction) Legal framework: Article 301 guarantees freedom of trade subject to Part XIII; Article 304(a) permits taxation of imported goods so long as there is no discrimination vis-à-vis similar locally produced goods; Article 304(b) permits reasonable restrictions required in public interest but requires previous Presidential sanction for bills/amendments imposing such restrictions. Precedent treatment: Atiabari and Automobile Transport articulate the 'direct and immediate effect' test and the compensatory exception; Jindal Stainless clarified that compensatory taxes escape Article 301 scrutiny provided tests are met; other High Court decisions vary on application depending on evidence of quantifiable benefits and non-discrimination. Interpretation and reasoning: The Court found no discrimination between goods imported from other States and similar goods produced in-State in rates and scheme as applied; the statute is compensatory (thus not within the core prohibition of Article 301), and even if tested under Article 304, the levy's earmarking, non-diversion guarantees and supervisory mechanism render it reasonable and in public interest. The absence of Presidential sanction for introduction is relevant only if Article 304(b) is invoked as the saving; here, because the levy meets compensatory criteria, the lack of prior Presidential sanction did not invalidate the enactment. The Court also emphasised that even if the legislature had obtained Presidential assent, the levy must remain nondiscriminatory, reasonable and in public interest. Ratio vs. Obiter: Ratio - A compensatory levy that satisfies Jindal Stainless parameters is not violative of Article 301 and need not fail for want of prior Presidential sanction when its compensatory character is established facially and by the statutory regime; the non-discrimination and reasonableness requirements remain applicable. Conclusion: The impugned levy does not violate Article 301; the scheme is not discriminatory, is reasonable and in public interest, and therefore survives Article 304 scrutiny. Issue 4 - Retrospective Validation of Past Collections (Section 17) Legal framework: Legislative power to enact retrospective fiscal laws is recognised but subject to constitutional limits; validating statutes may be sustained if legislature has competence and removes defects pointed out by courts (Prithvi Cotton Mills principle and subsequent cases including Tata Iron, J.K. Jute, Khyerbari, Empire Industries, Ujagar Prints, Arooran Sugars and related authorities). Precedent treatment: Courts will sustain validation where (i) legislature possesses competence, (ii) defects identified by courts are cured by the validating law, and (iii) Part III rights are not violated; validating retroactivity in taxing statutes has been upheld repeatedly when legitimate legislative competence exists and the validation is not arbitrary. Interpretation and reasoning: The Court held the State had competence and that the 2007 Act remedied the prior Act's defects (lack of earmarking, absence of demonstrable utilitarian mechanism). Section 17 was not a mere attempt to legalise illegitimate collections: the new Act established fund, allocation and audit safeguards and thus removed the defects earlier relied on by the High Court; moreover the collections had been preserved in a separate interest-bearing account under Supreme Court orders pending litigation. The Court applied established tests and authorities recognising retrospective fiscal validation where legislative competence exists and defects are cured. Ratio vs. Obiter: Ratio - Section 17's retrospective validation is constitutionally permissible because competence exists and the validating enactment cures prior defects; collections held under court order can lawfully be appropriated under the new scheme consistent with precedent. Conclusion: Retrospective validation of past collections by the Act is sustainable in the circumstances; Section 17 is valid. Issue 5 - Definition/Scope of 'Local Area', Fund Structure, and Practical Sufficiency of Statutory Safeguards Legal framework: 'Local area' must be an area administered by a local authority; 74th Amendment and Twelfth Schedule devolve functions to municipalities but do not preclude State-directed funding arrangements; administrative and audit safeguards can demonstrate exclusive utilization and accountability. Precedent treatment: Diamond Sugar Mills, Widia (Karnataka) and related decisions have considered whether industrial areas or factory premises qualify as 'local areas' and held that industrial areas do not necessarily remove municipal jurisdiction; courts have required clarity on earmarking and usage. Interpretation and reasoning: The Act's definition squarely targets areas administered by local authorities. The Fund, Management Committee, allocation rules, audit by Accountant General and specified heads for utilization establish clear institutional mechanisms to ensure exclusive and accountable deployment for facilitating trade and commerce; reliance on local bodies for implementation is consistent with constitutional municipal functions and does not amount to usurpation. The Court rejected arguments that the State had to show contemporaneous expenditure before validating a compensatory scheme; collection must precede utilisation, and statutory guarantees sufficed at the constitutional adjudication stage when collection was constrained by interim orders. Ratio vs. Obiter: Ratio - The statutory definition and fund mechanics meet constitutional requirements; industrial townships and industrial areas remain within the concept of local area where municipal/panchayat jurisdiction coexists. Conclusion: The statutory definition of 'local area' and operational safeguards for the Fund are adequate to satisfy compensatory-tax requirements and constitutional limits. Issue 6 - Special Exclusions/Other Statutory Immunities Legal framework: Article 285 (taxation of Union property) and certain provisions of the Railways Act address taxation of Union property or central authorities; exemptions to specified classes (e.g., export-oriented units) may be provided by executive notification under legislative power. Interpretation and reasoning: The Court held that indirect taxes like entry tax are not precluded by Article 285 in the manner contended; railways and other Union entities engaged in commercial activity can be 'dealers' liable under the Act unless excluded by a central notification (Railways Act sections did not operate to bar the entry tax in the facts before the Court). Exemptions where granted by notification (e.g., export-oriented unit exemptions) are matters for implementation and not for declaratory nullification of the statute's scheme. Ratio vs. Obiter: Ratio - No automatic immunity attaches to the railways or Union property from indirect State levies of the impugned character; exclusions require applicable statutory or executive prescription. Conclusion: Special immunity arguments do not defeat the statutory scheme as framed; liability and exemptions remain matters for administrative application under the Act. Final Disposition The Court dismissed the writ petitions challenging the Act of 2007 on constitutional grounds limited to legislative competence, compensatory character, non-discrimination and reasonableness, and upheld Section 17 validating retrospective collections; interim orders were vacated. The Court confined its inquiry to constitutional validity of the statute and left open factual and procedural challenges (assessments, notices, exemptions, rebates, and liabilities) to be addressed before the competent authorities.