2016 (11) TMI 545 - SC - VAT / Sales Tax

Supreme Court Rules: Non-Discriminatory Taxes Allowed; Compensatory Tax Theory Rejected; State Fiscal Laws Scrutinized.

The SC held that taxes simpliciter do not infringe Part XIII of the Indian Constitution, and only discriminatory taxes are prohibited by Article 304(a). ... Freedom of trade, commerce and intercourse - Article 301 - Non discriminatory tax - Discriminatory tax (protectionist/hostile discrimination) - Article 304(a) - taxation of goods imported into a State - Article 304(b) - reasonable restrictions in public interest and presidential sanction - Compensatory tax theory - Entry tax (tax on entry of goods into a local area) - Exemptions/set offs and limited incentivesFreedom of trade, commerce and intercourse - Article 301 - Non discriminatory tax - Whether levy of a non discriminatory tax per se constitutes an infraction of Article 301 - HELD THAT: - The Court held that Article 301 does not mean freedom from taxation simpliciter. A non discriminatory tax does not, by that fact alone, infringe Article 301; only taxes that operate as restrictions on free trade (in particular discriminatory or protectionist taxes) fall foul of Article 301. The constitutional scheme treats taxation and restrictions differently but does not exclude tax legislation from Part XIII; tax laws that impede trade, commerce and intercourse must be tested under the Part XIII framework.Levy of a non discriminatory tax will not by itself violate Article 301; only taxes that impede trade - especially discriminatory/protectionist ones - are prohibited.Article 304(a) - taxation of goods imported into a State - Discriminatory tax (protectionist/hostile discrimination) - Exemptions/set offs and limited incentives - Scope and conditions of Article 304(a) and the permissibility of exemptions or incentives - HELD THAT: - Article 304(a) permits a State to impose a tax on goods imported from other States only if similar goods produced or manufactured in the State are subject to tax and the tax does not discriminate against imported goods. The Court emphasised that Article 304(a) frowns on protectionist/hostile discrimination, not on benign differentiation: targeted, time limited incentives, set offs or exemptions for a specified class to foster economic development will not violate Article 304(a) provided they are non hostile and not a colourable device to discriminate against imports. Conversely, a facial scheme that taxes only imports while not taxing similar local goods, or that creates broad/general exemptions amounting to effective discrimination, will be invalid under Article 304(a).Article 304(a) requires that (i) similar local goods be taxed and (ii) there be no discriminatory treatment of imports; limited, non hostile incentives or set offs for specified classes are permissible.Article 304(b) - reasonable restrictions in public interest and presidential sanction - Article 304(a) - taxation of goods imported into a State - Joint and several reading of clauses (a) and (b) - Relationship between clauses (a) and (b) of Article 304 and necessity of presidential sanction - HELD THAT: - The Court held that clauses (a) and (b) are to be read as joint and several (i.e. either or both may apply depending on the legislation). A law made under Article 304(a) that does not impose additional restrictions on trade need not undergo the Article 304(b) procedure; however, if a law - even though it satisfies 304(a) - contains restrictions that impede trade, it may require routing under 304(b) and the proviso (previous sanction of the President). Whether presidential sanction is required depends on the nature and content of the State enactment. The proviso is a constitutional feature and does not impermissibly impair State sovereignty.Clauses (a) and (b) are joint and several; compliance with 304(b) (and prior presidential sanction) is necessary only where the State law contains restrictions on trade that fall within 304(b)'s ambit.Compensatory tax theory - Article 301 - Part XIII - Whether the compensatory tax doctrine exempts a tax from Part XIII scrutiny - HELD THAT: - The Court rejected the compensatory tax theory to the extent it was treated as an automatic escape from Part XIII scrutiny. The compensatory tax doctrine as judicially evolved in Automobile Transport (and modified in later decisions) has no juristic basis within the constitutional scheme: the Constitution specifies the exceptions to Article 301 and a judicially invented compensatory exception cannot override that scheme. While the compensatory character of a levy may be material in assessing whether a law in substance restricts trade, it does not categorically remove the levy from Part XIII review.The compensatory tax theory as a judicially created immunity from Part XIII is rejected; compensatory character may inform the analysis but does not by itself take a levy outside Part XIII.Entry tax (tax on entry of goods into a local area) - Article 301 - Article 304(a) and 304(b) - Permissibility and Constitutional testing of entry taxes levied under Entry 52, List II - HELD THAT: - A tax on entry of goods into a local area (Entry 52) is a species of tax that affects the movement of goods and thus falls within the scope of Part XIII. Such entry taxes are permissible in principle, but their validity must be judged under the Part XIII framework: where they are discriminatory or impose protectionist barriers they will be struck down; where they comply with Article 304(a) (and do not otherwise contain restrictions requiring Article 304(b) scrutiny) they can be sustained. Whether a particular State enactment of entry tax is constitutional depends on its terms, effects, and whether it imposes discriminatory or other unreasonable restrictions; those factual determinations are to be made by the regular benches hearing the individual cases.Entry tax is constitutionally permissible but must be tested under Part XIII; discriminatory or restrictive levies are invalid, and factual inquiry is required in each case.Exemptions/set offs and limited incentives - Article 304(a) - Permissibility of exemptions, set offs or incentives provided by States in tax laws - HELD THAT: - The Court held that States may design fiscal measures (including targeted exemptions, set offs or incentives) to develop backward areas or foster industries, provided such measures are limited in scope and non hostile in the protectionist sense. Unlimited or generalized exemptions or mechanisms that in practice amount to discriminatory treatment of imported goods will violate Article 304(a). The Video Electronics line of authorities stands for the narrow proposition that limited, time bound, non hostile incentives may be constitutionally permissible; that authority must be read narrowly and does not license general or colourable discrimination.Targeted, limited, non hostile incentives/exemptions are permissible; broad or general exemptions that produce discrimination will violate Article 304(a).Final Conclusion: Part XIII applies to taxation that restricts trade: taxes simpliciter are not excluded from Part XIII, but a nondiscriminatory tax does not automatically violate Article 301. Article 304(a) permits taxation of imports only when similar local goods are taxed and there is no protectionist discrimination; Article 304(b) permits reasonable public interest restrictions and (where applicable) requires prior Presidential sanction. The compensatory tax doctrine cannot be treated as a free constitutional escape from Part XIII. Entry taxes are permissible in principle but their validity must be assessed under the Part XIII tests on the facts of each enactment. Issues Involved:1. Whether the levy of a non-discriminatory tax per se constitutes an infraction of Article 301 of the Constitution of India.2. If a compensatory tax can also fall foul of Article 301 of the Constitution.3. Tests for determining whether a tax or levy is compensatory in nature.4. Validity of Entry Tax levied by States in light of Articles 301 and 304 of the Constitution.Detailed Analysis:1. Non-Discriminatory Tax and Article 301:The Court held that taxes simpliciter are not within the contemplation of Part XIII of the Constitution of India. The word 'free' used in Article 301 does not mean 'free from taxation.' Only such taxes as are discriminatory in nature are prohibited by Article 304(a). It follows that the levy of a non-discriminatory tax would not constitute an infraction of Article 301.2. Compensatory Tax and Article 301:The compensatory tax theory evolved in the Automobile Transport case and subsequently modified in Jindal’s case has no juristic basis and is therefore rejected. All legislation, including compensatory or regulatory, has to be examined in accordance with the Constitutional Scheme as contained in Part XIII of the Constitution. The nature and content of taxation at best may shed light on the aspect as to whether it impedes/restricts the freedom of trade, commerce, and intercourse or facilitates the same.3. Tests for Determining Compensatory Nature of Tax:The Court did not find it necessary to answer the question regarding the tests for determining whether a tax or levy is compensatory in nature, as the compensatory tax theory itself was found incompatible with the Constitutional Scheme.4. Validity of Entry Tax Levied by States:To determine whether Entry Tax levied by different States violates Article 301, each statute has to be looked into and examined as per the discussions and conclusions detailed in the judgment. A law made by State Legislature complying with clause (a) of Article 304 and not containing any restriction on the freedom of trade, commerce, and intercourse need not comply with Article 304(b). However, a law even though complying with Article 304(a) but containing restrictions on freedom of trade, commerce, and intercourse has to be routed through the proviso to clause (b) of Article 304 of the Constitution.Separate Judgments and Concurrences:- The Chief Justice pronounced a separate judgment comprising Hon’ble Mr. Justice A.K. Sikri and Hon’ble Mr. Justice A.M. Khanwilkar.- Hon’ble Mr. Justice S.A. Bobde, Hon’ble Mr. Justice Shiva Kirti Singh, Hon’ble Mr. Justice N.V. Ramana, Hon’ble Mrs. Justice R. Banumathi, Hon’ble Dr. Justice D.Y. Chandrachud, and Hon’ble Mr. Justice Ashok Bhushan pronounced separate judgments.Final Conclusions:1. Taxes simpliciter are not within the contemplation of Part XIII of the Constitution of India.2. Only such taxes as are discriminatory in nature are prohibited by Article 304(a).3. Clauses (a) and (b) of Article 304 have to be read disjunctively.4. A levy that violates Article 304(a) cannot be saved even if the procedure under Article 304(b) or the proviso thereunder is satisfied.5. The compensatory tax theory evolved in Automobile Transport and subsequently modified in Jindal’s case has no juristic basis and is therefore rejected.6. Decisions of this Court in Atiabari, Automobile Transport, and Jindal cases (supra) and all other judgments that follow these pronouncements are to the extent of such reliance overruled.7. A tax on the entry of goods into a local area for use, sale, or consumption therein is permissible although similar goods are not produced within the taxing state.8. Article 304(a) frowns upon discrimination (of a hostile nature in the protectionist sense) and not on mere differentiation.9. States are well within their right to design their fiscal legislations to ensure that the tax burden on goods imported from other States and goods produced within the State fall equally.10. The questions whether the entire State can be notified as a local area and whether entry tax can be levied on goods entering the landmass of India from another country are left open to be determined in appropriate proceedings.