TaxTMI 
TaxTMI 
2004 (1) TMI 644
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....ioner No. 1 in Writ Petition No. 251 of 2003 is a public sector corporation, being a Government of India undertaking. It has various units in the country, but in this case we are only concerned with its refinery unit at Mathura where the petitioner is manufacturing various petroleum products which are sold by the petitioner within and outside the State of U.P. The refinery of the petitioner situate at Mathura purchases crude oil from different Gulf countries from abroad. This crude oil which is coming from outside the country within the local area of Mathura has been subjected to entry tax under the aforesaid Act during the assessment years 2000-01, 2001-02 and 2002-03 and is liable to be similarly assessed in future years. 5. It is alleged in paragraph 4-A of the writ petition that the Mathura refinery was designed and conceived to supply the requirement of petroleum in the northern region of the country, particularly in the States of U.P., Delhi, Haryana and Punjab using crude oil produced in the oil fields located in India as well as imported into India from Gulf countries. The Mathura refinery was designed to process up to 6 MMTPA of crude oil to produce liquefied petroleum ....
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....tered price mechanism was abolished with respect to the refineries from April 1, 1998, the entire impact of any entry tax levied on crude oil processed at Mathura refinery has to be borne entirely by the petitioner No. 1. 8. The U.P. Tax on Entry of Goods Ordinance, 1999 was promulgated by an Ordinance in November, 1999 and was thereafter replaced by the impugned Act in the year 2000. The result has been that the entry tax of 4 per cent levied by the State of U.P. has resulted in increase of the cost of approximately 4.14 per cent (taking into account the impact of the tax and conversion loss aforesaid relatable to the products) of petroleum products manufactured at Mathura refinery and sold in the State of U.P. and outside U.P. It is alleged that due to this the products of Mathura refinery would be at least 4.14 per cent more expensive than the like products manufactured in Gujarat and other States in India where there is no levy of entry tax on crude oil or petroleum products. It is alleged that bearing in mind the cascading effect of cess, excise duty, sales tax and other imports, this means that if the burden of the additional cost was to pass on to the consumers in other S....
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....cal area from any place outside that local area including a place outside the Uttar Pradesh for consumption, use or sale therein, at such rates not exceeding five per cent of the value of the goods as may be specified by the State Government by notification, and different rates may be specified in respect of different goods or different classes of goods: Provided that the State Government may by notification amend the Schedule and upon the issue of any such notification, the Schedule shall, subject to the provisions of sub-section (6) be deemed to be amended accordingly." 12. It is alleged in paragraph 30 of the writ petition that the petitioner has deposited the entry tax even on the imported crude oil which is liable to be refunded. 13. In paragraph 30-A of the writ petition it is mentioned that the impugned entry tax is not a compensatory tax and it interferes with freedom of trade, commerce and inter-course guaranteed under article 301 of the Constitution. It is alleged in paragraphs 30-B to 30-F of the writ petition that the entry tax has not received the previous assent of the President of India under article 304(b) of the Constitution. In paragraph 30-D of the....
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....evant articles of Part XIII the makers of the Constitution were fully conscious that economic unity was absolutely essential for the stability and progress of the federal polity which had been adopted by the Constitution for the governance of the country. Political freedom which had been won, and political unity which had been accomplished by the Constitution, had to be sustained and strengthened by the bond of economic unity. It was realised that in course of time different political parties believing in different economic theories or ideologies may come in power in the several constituent units of the Union, and that may conceivably give rise to local and regional pulls and pressures in economic matters. Local or regional fears or apprehensions raised by local or regional problems may persuade the State Legislatures to adopt remedial measures intended solely for the protection of regional interests without due regard to their effect on the economy of the nation as a whole. The object of Part XIII was to avoid such a possibility. Free movement and exchange of goods throughout the territory of India is essential for the economy of the nation and for sustaining and improving living ....
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....by article 301 was larger than the freedom contemplated by section 297 of the Constitution Act of 1935, and whatever else it may or may not include, it certainly includes movement of trade which is of the very essence of all trade and is its integral part. If the transport or the movement of goods is taxed solely on the basis that the goods are thus carried or transported that, in our opinion, directly affects the freedom of trade as contemplated by article 301. If the movement, transport or the carrying of goods is allowed to be impeded, obstructed or hampered by taxation without satisfying the requirements of Part XIII the freedom of trade on which so much emphasis is laid by article 301 would turn to be illusory. When article 301 provides that trade shall be free throughout the territory of India primarily it is the movement part of the trade that it has in mind and the movement or the transport part of trade must be free subject of course to the limitation and exceptions provided by the other articles of Part XIII. That we think is the result of article 301 read with the other articles in Part XIII." 23. As regards the question whether taxing laws are excluded from operation....
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....n the purview of article 301." 24. Subsequent to the aforesaid decision in Atiabari Tea Co. Ltd. case AIR 1961 SC 232 a seven-Judge Constitution Bench of the Supreme Court in Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan AIR 1962 SC 1406 (vide para 17) observed: "Regulatory measures or measures imposing compensatory taxes for the use of trading facilities do not come within the purview of the restrictions contemplated by article 301, and such measures need not comply with the requirements of the proviso to article 304(b) of the Constitution." 25. Thus, in the aforesaid decision in Automobile Transport (Rajasthan) Ltd. AIR 1962 SC 1406 the Constitution Bench of the Supreme Court further clarified that the compensatory taxes do not come within the purview of article 301 of the Constitution. The expression "compensatory taxes" was explained by the Supreme Court (vide paragraph 19 of the aforesaid decision) in the following words: The taxes are compensatory taxes which instead of hindering trade, commerce and inter-course facilitate them by providing roads and maintaining the roads in a good state of repairs. Whether a tax is compensatory or not ca....
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....5) Supp 1 SCC 673 (vide paragraph 8) (at page 658 of STC) a three-Judge Bench of the Supreme Court observed: "The submission of Sri Ashok Sen, learned Senior Counsel, that compensation is that which facilitates the trade only does not appear to be sound. The concept of compensatory nature of tax has been widened and if there is substantial or even some link between the tax and the facilities extended to such dealers directly or indirectly the levy cannot be impugned as invalid. The stand of the State that the revenue earned is being made over to the local bodies to compensate them for the loss caused, makes the impost compensatory in nature, as augmentation of their finance would enable them to provide municipal services more efficiently, which would help or ease free-flow of trade and commerce, because of which the impost has to be regarded as compensatory in nature, in view of what has been stated in the aforesaid decisions more particularly in Hansa Corporation's case [1981] 1 SCR 823; AIR 1981 SC 463; (1980) 4 SCC 697." The above decision was followed by a two-Judge decision of the Supreme Court in State of Bihar v. Bihar Chamber of Commerce [1996] ....
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....ons expressed by larger Benches of this Court in preference to those expressed by smaller Benches of the court. That is the practice followed by this Court itself. The practice has now crystallised into a rule of law declared by this Court." 30. A similar view was taken by a division Bench decision of this Court in Rapti Commission Agency v. State of Uttar Pradesh [2004] 134 STC 436 (All.); 2003 UPTC 780. 31. In Bharat Petroleum Corporation Limited v. Mumbai Shramik Sangh (2001) 4 SCC 448, a five-Judge Constitution Bench of the Supreme Court observed: "We are of the view that a decision of a Constitution Bench of this Court binds a Bench of two learned Judges of this Court and that judicial discipline obliges them to follow it, regardless of their doubts about its correctness. At the most, they could have ordered that the matter be heard by a Bench of three learned Judges." 32. Sri S.P. Gupta, learned Senior Counsel for the respondents submitted that since the decision of the smaller Benches in Bhagatram Rajeev Kumar's case [1995] 96 STC 654 (SC); (1995) Supp 1 SCC 673 and State of Bihar v. Bihar Chamber of Commerce case [1996] 103 STC 1 (SC); (1996) 9 SCC 136....
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....ench decisions in Bhagatram Rajeev Kumar's case [1995] 96 STC 654 (SC); (1995) Supp 1 SCC 673 and State of Bihar v. Bihar Chamber of Commerce case [1996] 103 STC 1 (SC); (1996) 9 SCC 136 so as to make those decisions consistent with the aforesaid two Constitution Bench decisions of the Supreme Court. 38. So far as the decision in Bhagatram Rajeev Kumar's case [1995] 96 STC 654 (SC); (1995) Supp 1 SCC 673 is concerned in our opinion that is not of much help because it was observed therein: "........In the counter-affidavit filed on behalf of the State which was not disputed the nature of levy has been demonstrated to be compensatory." 39. Thus, the above decision has proceeded on a concession made by the petitioner's counsel that the levy was compensatory in nature. 40. However, in the subsequent part of the aforesaid judgment it has been observed: "The concept of compensatory nature of tax has been widened and if there is substantial or even some link between the tax and the facilities extended to such dealers directly or indirectly the levy cannot be impugned as invalid. The stand of the State that the revenue earned is being made over....
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....on illustrative and not exhaustive, and that, to our mind, is the true purport of the decision in Bhagatram Rajeev Kumar's case [1995] 96 STC 654; (1995) Supp 1 SCC 673. When the Supreme Court in Bhagatram Rajeev Kumar's case [1995] 96 STC 654; (1995) Supp 1 SCC 673 observes: "the concept of compensatory nature of tax has been widened" it obviously means that the word "road" in Automobile Transport (Rajasthan) Ltd. case AIR 1962 SC 1406 is only illustrative and not exhaustive. However, we cannot interpret the decision in Bhagatram Rajeev Kumar's case [1995] 96 STC 654; (1995) Supp 1 SCC 673 to mean that if the tax is for raising general revenue even when it will be a compensatory tax. In our opinion, the tax to be compensatory in nature must be for generating revenue which is used for providing facilities for trade and commerce, even if that is done indirectly, and not merely for augmenting the general revenue. 44. Moreover, it has been observed in the seven-Judge Bench decision of the Supreme Court in Automobile Transport (Rajasthan) Ltd. case AIR 1962 SC 1406 (vide paragraph 19): "..............and paying not patently much more than what is required for pr....
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....ve not been able to establish that the impugned tax is compensatory in nature. The court cannot act on the mere ipse dixit of the respondents. 47. Thus, in the supplementary counter-affidavit filed by Sri S.C. Dwivedi it has been stated in paragraph 4 "It shall not be out of place to mention that the State Government provides funds to local self-Governments established under Part IX of the Constitution of India to enable them to function as institutions of self-Government with respect of preparation of plans for economic development and social justice and to implement the scheme for economic development and social justice as may be entrusted to them including those in relation to the matters listed in the Eleventh Schedule of the Constitution of India." 48. In our opinion the aforesaid averment is so vague in nature that it is really of no help of the respondents. Hence, it is not established that the impugned tax is compensatory in nature. 49. In the supplementary counter-affidavit filed by Sri B.P. Sonkar a chart showing the amount given by the State Government to the local bodies and Panchayatiraj Institutions to meet various expenses for their developme....
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....ting trade and commerce. 54. The amounts granted by the State Government to the local bodies and Panchayatiraj Institutions have no corelation, what to say of broad corelation, with the amounts realised as entry tax under the impugned Act. The amount realised as entry tax can be used for any purpose and not merely for facilitating trade and commerce. In fact there is nothing mentioned in the impugned Act which states that the revenue realised by the entry tax will be utilised for facilitating trade and commerce, directly or indirectly. 55. We have carefully perused the impugned Act. It consists of only nine sections. There is no provision anywhere in the Act stating for what purpose the revenue raised by it will be utilised. There is also no provision therein stating that the revenue raised by it will be used for facilitating trade and commerce. Hence, the amounts realised under the impugned Act can be used for any purpose. Hence, in our opinion it is not a compensatory tax. 56. Yet another supplementary counter-affidavit dated January 12, 2004 was filed by the respondents after the case had already been heard on several dates. We cannot appreciate this practice of filing ....
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....to the other articles in the Constitution. 62. It may be noted that article 301 states that it is subject to the other provisions of Part XIII. Hence, it is not subject to article 246 as article 246 is in Part XI of the Constitution. Hence, power to legislate under article 246 of the Constitution has to be read as subject to article 301 of the Constitution. It follows that the State Legislature cannot make a law which violates article 301 of the Constitution. Hence, the scope of the legislative field contained in entry 52, List II of the Seventh Schedule has to be restricted and treated as subject to article 301 and other articles in the main body of the Constitution. 63. It follows that an entry tax cannot be imposed which violates article 301 of the Constitution, despite entry 52 of List II. 64. To our mind it is clear that the impugned Act imposing entry tax violates article 301 of the Constitution as the revenue generated by it cannot be said to be specifically meant for facilitating trade or commerce, but is raised for augmenting the general revenue of the State. 65. In fact in the Statement of Objects and Reasons of the impugned Act (U.P. Act No. 12 of 2000....
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....ion Ltd. (2002) 8 SCC 182, article 304(b) along with article 254(2), articles 31-A and 31-C constitute a distinct class and category of their own providing for the President's assent which is different from the normal assent envisaged under article III of the Constitution. There is nothing to show that the President of India has given previous sanction to the Bill in connection with the impugned Act and all we can gather from the letter dated 19th January, 2000 is that the Government of India has no objection to the introduction of the U.P. Tax on Entry of Goods Bill, 2000 in the State Legislature. To our mind this does not meet the specific requirement of the proviso to article 304(b) of the Constitution. There is not even a mention of the President of India in the aforesaid letter dated January 19, 2000. The said letter does not state that it has been issued under the authority of the President of India, and hence we have to conclude that no previous sanction was given by the President of India to the Bill in connection with the impugned Act. No doubt article 255 of the Constitution validates an action even if the sanction was subsequently given by the President of India, but....
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....liament nor the Legislature of a State shall have power to make any law giving, or authorising the giving of, any preference to one State over another, or making, or authorising the making of, any discrimination between one State and another, by virtue of any entry relating to trade and commerce in any of the Lists in the Seventh Schedule." 79. The above provision further enforces the general provision in article 301 by providing that neither Parliament nor the State Legislature can make any law giving preference to one State over another or authorising discrimination between two States. Similarly, article 304(a) provides that the State Legislature can impose a tax on goods imported from other States on which similar goods manufactured or produced in that State are subject so however as not to discriminate between goods so imported and goods so manufactured or produced. 80. Article 304(a) again gives further emphasis to article 301 providing for the economic unity of India. Thus, the whole scheme in articles 301 to 304 show that the founding fathers in their wisdom have repeatedly emphasised in these articles that India is one economic unit and different States are not separa....
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....e principal that one state in its dealings with another may not place itself in a position of economic isolation'." 85. In this connection we may refer to the commerce clause in article I, section 8(3) of the U.S. Constitution which states: "Congress shall have power........... to regulate commerce with foreign nations and amongst the several States." 86. The above provision in the U.S. Constitution is no doubt different from article 301 of our Constitution but the decisions of the U.S. Supreme Court relating to the commerce clause have dealt with the evil of economic isolation and protectionism while at the same time recognising that incidental burden on inter-State commerce may be unavoidable when the State legislates to safeguard the health and safety of its people. 87. The Australian Constitution contains a provision which is more similar to article 301 than the commerce clause in the U.S. Constitution. Section 92 of the Australian Constitution states: "Trade, commerce and inter-course among the States shall be absolutely free." 88. Section 99 states that the Commonwealth "shall not by any law or regulation of trade, commerce or revenue ....
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....e towards payment of salary to the staff, school buildings, etc. We have to set up tens of thousands of such schools, colleges, institutes, polytechnics, hospitals, etc. This money can only be generated if we set up a big and powerful industry and that is possible only if such industry has a large and vast market. Hence the impugned tax is certainly not in the public interest as it leads to economic fragmentation and economic isolation of the various States which comprise India, and hence it will hamper the growth of big and modern industry. Hence, in our opinion the impugned tax is against the public interest for the reasons given above. 94. No doubt invalidating the tax would affect the revenue of the State of U.P., but the nation is larger than the State. We have to first look at the interest of India, and place it above the interest of the State of U.P. However, it may be mentioned, as pointed out in para 8 of the supplementary rejoinder affidavit filed in reply to the supplementary counter-affidavit of Shri B.P. Sonkar, the State Government is getting its share from the excise duty, Central sales tax, etc. from the Central Government apart from getting substantial revenue f....
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....remises. 100. By the notification dated June 18, 2001 exemption has been granted from payment of entry tax by the State Government to the petitioner-company being a 100 per cent export oriented unit, and the dispute is hence confined prior to June 18, 2001. Even by the subsequent notification dated February 18, 2003 machinery being imported for the purposes of installing it in the factory has been exempted and hence no entry tax is being levied even on those unit which are not 100 per cent export oriented unit on the import of machinery with effect from February 18, 2003. Sri Agrawal submitted that in view of the decision in S.M. Ram Lal & Co.'s case (1969) UJ (SC) 373 even for the period prior to February 18, 2003 in respect of machinery installed in the petitioner factory no entry tax can be levied. 101. As already stated above, we are only going into the constitutional question in this case and hence we need not finally decide this additional point urged by Sri Bharat Ji Agrawal (or the other points urged by him) though the decision of the Supreme Court in S.M. Ram Lal & Co.'s case (1969) UJ (SC) 373 prima facie appears to support the contention of the learned coun....