TaxTMI 
TaxTMI 
2008 (1) TMI 834
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....ia. The respondents-State filed counter-affidavit taking various defences available in law in support of their case that the provisions of the Act is compensatory in nature and, therefore, not violative of the provisions of article 301 and article 304(b) of the Constitution of India. A supplementary counter-affidavit was filed by the respondents on March 17, 2008. During the pendency of the writ applications, the respondents filed aforementioned supplementary counter-affidavit stating, inter alia, that respondent No. 3-Additional Commissioner of Commercial Taxes, Jharkhand vide letter dated March 8, 2007 wrote to the Ministry of Home Affairs, Government of India requesting for grant of post facto assent/approval of the President of India. In response thereof, the Home Ministry, Government of India, vide letter dated August 11, 2007 informed the department that the Jharkhand Value Added Tax Act, 2005 is valid and no post facto assent is to be required. The Bihar Tax on Entry of Goods into Local Areas for Consumption, Use or Sale Therein Ordinance, 1993 was promulgated in February, 1993 by the Government of Bihar. By a subsequent notification dated February 25, 1993 "entry tax" was....
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....ix) reads as under: "'Entry of goods'-'entry of goods' with all its grammatical variations and cognate expressions means entry of goods mentioned in the Third Schedule into a local area from any place outside the State." Section 2(xxvi) defines the word "importer". "Importer" means a dealer who brings any goods into the State or to whom any goods are dispatched from any place outside the State. Section 2(xxix) defines "input tax " as under: "(xxix) 'Input tax' means the tax paid or payable under this Act, by a registered dealer to another registered dealer on the purchase of goods, in the course of business for resale or for use in manufacturing or processing of taxable goods for sale, or for direct use in mining or use as containers or packing materials for taxable goods or for the execution of works contract: Provided that input tax shall also include tax paid on the entry of goods into the local area as specified in the Third Schedule. Provided further that input tax shall also include tax paid on the capital goods for registered start-up-business and shall qualify for input tax credit as prescribed." Section 11 of the 2005 Act is a charging....
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.... 2008). Section 1 of the Amendment Act, 2007 made the amended provisions effective from April 1, 2006. In section 2, one more definition of "fund" has been inserted by clause (xxiA) which reads as under: "Section 2(xxiA). 'Fund' means, the 'Jharkhand Trade Development Fund', as created by the State Government through a notification published in the official gazette for the purpose of development of trade, commerce and industry of the State, for such period(s) as may be specified in this behalf." Sections 8 and 9 of the VAT Act, 2005 have also been amended. Section 11 which is relevant to the present case, has also been amended. The amendment brought in section 11 is quoted hereinbelow: "11. Charge of tax on entry of goods.-(1) Notwithstanding anything contained in sections 9, 12, 13 and 14 of this Act or any notification issued thereunder, there shall be levied and collected a tax on import price(s), on entry of such goods mentioned in the Third Schedule of this Act, into the State or into a local area for consumption, use or sale therein, subject to such condition as may be prescribed: Provided that the tax levied on import price(s) of such goods mentioned in t....
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....ed March 29, 2008 reads as under: "Finance Department Notification S.O. 48, dated the 29th March, 2008/930/FD In exercise of the powers conferred by the clause (xxiA) of section 2 read with section 11 of the Jharkhand Value Added Tax Act, 2005 (Jharkhand Act 5 of 2006) as amended by (Act 3 of 2008) which prescribes for levy and collection of tax on import price(s) on entry of goods mentioned in Third Schedule of the Act into the State or into a local area for consumption, use or sale therein, subject to conditions as may be prescribed and also other conditions laid down under sub-sections (2) and (3) of section 11 and all other enabling powers in this behalf, the Governor of Jharkhand is pleased to create a fund to be known as the Jharkhand Trade Development Fund (hereinafter called the 'Fund'). 2. The proceeds of the entry tax levied and collected under section 11 of the Jharkhand Value Added Tax Act, 2005 (Jharkhand Act 5 of 2006) shall be appropriated into the 'Fund'. 3. The proceeds of the 'Fund' shall be exclusively utilised for facilitating trade, commerce and industry throughout the State of Jharkhand which shall include the following: (a) constr....
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....n Kumar, Additional Finance Commissioner, Jharkhand, Ranchi." After Amendment Act and the notification were brought on record, the petitioners filed application for amendment of different paragraph of the writ applications. The said amendments sought for by the writ petitioners are as under: "(I) That in paragraph 1 of the writ petition, the following prayer may be added: (F) For issuance of an appropriate writ for a declaration that Jharkhand Value Added Tax Act, 2005 as amended by the Jharkhand Value Added Tax (Amendment) Act, 2007 is violative of article 301 of the Constitution of India as the said Act is not compensatory in character and also is not saved by article 304 of the Constitution as the said legislation is discriminatory in character and also has not received the sanction of the President of India before the Jharkhand Value Added Tax Act, 2005 or the Jharkhand Value Added Tax (Amendment) Act, 2007 has been introduced or moved before the State Legislature. (G) For issuance of an appropriate writ for a further declaration that the Jharkhand Value Added Tax (Amendment) Act, 2007 cannot be given retrospective effect from April 1, 2006. (H) For issuance of an appropr....
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....ill has been made into an Act and the Amendment Act has been now enacted with the assent of the Governor of the State. 74.. That it is submitted that under the Amendment Act a Trade evelopment Fund has been introduced and the definition of said "Trade Development Fund" has been made in section 2(xxi) of the said Act. Section 11 of the Jharkhand VAT Act has been further amended by the Amendment Act of 2008 by introducing sub-sections (4), (5), (6) and (7) of section 11 of the original Act. It appears from the aforesaid sub-sections which have been newly introduced by the Amendment Act of 2008 that the "Trade Development Fund" as defined in section 2(xxi) and notified by the State Government in the official gazette in this behalf is to be utilised for the various purposes set out in sub-sections (6) of section 11 of the Act. 75.. That it is submitted that the Trade Development Fund has not yet been notified in the official gazette and in the absence of any such notification, the Trade Development Fund does not exist in the eye of law. In any event such Trade Development Fund is to be utilised for the various purposes as mentioned in sub-section (6) of section 11 of the Act. The pro....
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....e how financial aids, grants subsidies will be allowed by the Trade Development Fund when such granting of financial aids is the responsibility and duty of the State Financial Corporation enacted for such specific purpose. 79.. That similarly clause (c) of sub-section (6) of section 11 provides for creating infrastructure for supply of electrical energy and water supply to industries, marketing and other commercial complexes. The aforesaid purpose forms the common burden and responsibility of the welfare State and no special benefit or advantage is provided to the trade people of the local area in which such entry tax is levied and collected. 80.. That it is submitted that supply of electrical energy cannot be held to be compensatory for meeting the outlay incurred for special advantage to trade, commerce and intercourse. The facilities are incidental and do not provide for any special benefit or advantage to the trade people of the local area in which such entry tax is levied and collected. Water and electricity are not connected with the facilities for the purpose of trade. The said facilities are for the general development of the State though termed as facilitating tra....
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.... of the finished products and if the entry tax is so adjusted against the sales tax on the output it cannot be predicated even that any part of the entry tax is earmarked for any specific purpose and such entry tax is to be utilised for the benefit and interest of the trade people of the local area. Moreover, tax on the output, viz., finished products, is a tax on the sale of such goods. The proceeds of sales tax form a part of the consolidated fund of the State and therefore entry tax insofar as it is adjusted against the sales tax payable on the output, viz., output tax, the entry tax also forms part of the consolidated fund of the State and it is not legally possible or even arguable that any part of the entry tax that is levied and collected is specially earmarked for the utilisation of the same for the benefit and interest of the trade people of the local area. 84.. That even the constitution of the Trade Development Fund does not in any way affect the above legal position and therefore the Trade Development Fund cannot be created by appropriating the entry tax levied and collected as such entry tax levied and collected is adjusted only against the output tax which is nothing....
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....ailed to produce any materials or evidences before the court as to how such utilisation of the entry tax will be made for the special benefit and interest of the trading people of the local area. As no material or evidence has been produced, it was held by the earlier judgment in the case of Tata Iron & Steel Company Ltd. v. State of Jharkhand reported in [2007] 6 VST 587 (Jharkh), that the State, in order to avoid that factual position, has merely amended the Act without producing or giving any material as to how such utilisation has been made for the benefit and interest of the trading people. Therefore, the Amendment Act is a colourable piece of legislation and is liable to be struck down. 89.. That it is further stated that the Amendment Act having been made in 2008 has been given retrospective effect from April 1, 2006 although the sanction of the Governor has been obtained only on March 5, 2008. It is submitted that whether the utilisation of the fund is to be made if at all by the constitution of the Trade Development Fund cannot be made retrospective as it is absurd to suggest that by retrospective amendment the utilisation of the entry tax can be made for a specific purpo....
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....ch means that tax laws can and do amount to restrictions on the freedom guaranteed to trade under Part XIII of the Constitution. However, the provision of restrictions on free trade is not an absolute one. Statutory restrictions of trade can be invalid if not complied with under article 304(a) or (b) of the Constitution. In other words, the restriction imposed by the State Legislature can be only after satisfying the requirements of article 304(b) of the Constitution. Article 304(b) requires not only that the law should be in public interest but should also be reasonable and should receive the previous assent of the President of India. In another decision in the case of Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan AIR 1962 SC 1406, the Rajasthan Motor Vehicles Taxation Act, 1951 was challenged. In the said decision, the Supreme Court held that only such taxes as directly and immediately restrict trade would fall within the purview of article 301 and that any restriction in the form of taxes imposed by the State Legislature on the carriage of goods or their movements can only be done after satisfying the requirements of article 304(b) of the Constitution. In Bhagatr....
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....onal and not progressive. In the principle of equivalence, which is the foundation of a compensatory tax as well as a fee, the value of the quantifiable benefit is represented by the costs incurred in procuring the facility/services which costs in turn become the basis of reimbursement/recompense for the provider of the services/facilities. Compensatory tax is based on the principle of 'pay for the value'. It is a sub-class of 'a fee'. From the point of view of the Government, a compensatory tax is a charge for offering trading facilities. It adds to the value of trade and commerce which does not happen in the case of a tax as such. A tax may be progressive or proportional to income, property, expenditure or any other test of ability or capacity (principle of ability). Taxes may be progressive rather than proportional. Compensatory taxes, like fees, are always proportional to benefits. They are based on the principle of equivalence. However, a compensatory tax is levied on an individual as a member of a class, whereas a fee is levied on an individual as such. If one keeps in mind the 'principle of ability' vis-a-vis the 'principle of equivalence', th....
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....mpense to the service/facility provider. It is then a tax on recompense. Compensatory tax is by nature hybrid but it is more closer to fees than to tax as both fees and compensatory taxes are based on the principle of equivalence and on the basis of reimbursement/recompense. If the impugned law chooses an activity like trade and commerce as the criterion of its operation and if the effect of the operation of the enactment is to impede trade and commerce then article 301 is violated. Burden on the State: 46(4). Applying the above tests/parameters, whenever a law is impugned as violative of article 301 of the Constitution, the court has to see whether the impugned enactment facially or patently indicates quantifiable data on the basis of which the compensatory tax is sought to be levied. The Act must facially indicate the benefit which is quantifiable or measurable. It must broadly indicate proportionality to the quantifiable benefit. If the provisions are ambiguous or even if the (1)See para 40 at page 572 of [2006] 145 STC. (2)See para 41 at page 572 of [2006] 145 STC. (3)See para 42 at page 572 of [2006] 145 STC. (4)See para 43 at page 573 of [2006] 145 STC. Act does....
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.... STC 1 (SC); [1996] 9 SCC 136 stand overruled. (1)See para 47 at page 574 of [2006] 145 STC. 51(1). Before concluding, we may point out that parties before us have taken more or less extreme positions and, therefore, we have not examined the arguments in seriatim. Conclusion: 52(2). In our opinion, the doubt expressed by the referring Bench about the correctness of the decision in Bhagatram's case [1995] 96 STC 654 (SC); [1995] Supp. 1 SCC 673 followed by the judgment in the case of Bihar Chamber of Commerce [1996] 103 STC 1 (SC); [1996] 9 SCC 136 was well-founded. 53(3). We reiterate that the doctrine of 'direct and immediate effect' of the impugned law on trade and commerce under article 301 as propounded in Atiabari Tea Co. Ltd. v. State of Assam AIR 1961 SC 232 and the working test enunciated in Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan AIR 1962 SC 1406 for deciding whether a tax is compensatory or not vide paragraph 19 of the Report, will continue to apply and the test of 'some connection' indicated in paragraph 8 of the judgment in Bhagatram Rajeev Kumar v. Commissioner of Sales Tax [1995] 96 STC 654 (SC); [1995] Supp. 1 SCC 673 and fo....
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....to satisfy the parameters laid down in Jindal's case [2006] 145 STC 544; [2006] 7 SCC 241. It was further stated by the State that the quantifiable data on the basis of which the compensatory tax was sought to be levied has been facially and patently indicated in the manner which was necessary to augment the revenue of the State to compensate the expenditure to provide trading facilities including laying and maintenance of roads and provision of markets and welfare measures and further that for the said purposes, it was considered necessary to levy and collect tax on the goods entering into the local areas of the State for consumption, use or sale therein. In the case of ITC Limited v. State of Tamil Nadu [2007] 7 VST 367, the Madras High Court rejecting the contention of the State of Tamil Nadu held as under: "25. We are afraid the materials produced by the State are hardly relevant to establish that the levy is compensatory. In the first place, the above data is rather ambiguous, as it does not provide details or even examples of the specific areas where the alleged roads have been laid and does not even name the few bridges that have been constructed with the amount collect....
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....at para 28, p.473) which is extracted below: 'The State did not attempt in the High Court to sustain the validity of the impugned tax law on the submission that it was compensatory in character. No attempt was made to establish that the dealers in scheduled goods in a local area would be availing of municipal services and municipal services can be efficiently rendered if the municipality charged with a duty to render services has enough and adequate funds and that the impugned tax was a measure for compensating the municipalities for the loss of revenue or for augmenting its finances. As such a stand was not taken, it is not necessary for us to examine whether the tax is compensatory in character.' (emphasis(1) supplied)" (1)Here italicised. In the Punjab and Haryana, the Haryana Local Area Development Tax Act, 2000 and the Haryana Local Area Development Tax (Amendment) Ordinance, 2007 were enacted and promulgated making provisions for levy and collection of tax on the entry of goods into local areas of the State of Haryana for consumption, sale or use therein. Section 3 confers power to the State to levy and collect tax on entry into the local areas of all goods except t....
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....f the honourable Supreme Court, we are required to deal with the issue whether the impugned levy was compensatory in nature having regard to the judgment of the Constitution Bench in Jindal [2006] 145 STC 544 (SC); [2006] 7 SCC 241. 30.. The question is whether the impugned Act meets the facial test laid down by the honourable Supreme Court in Jindal [2006] 145 STC 544; [2006] 7 SCC 241 and whether the data placed on record by the State shows that the impugned levy functionally is compensatory and provides quantifiable or measurable benefit to the payers of the tax. 31.. A perusal of statutory provisions shows that the levy of tax is on entry of goods into a local area for consumption, use or sale and the tax is payable by the importer with reference to value of goods at a specified rate. The tax collected is to be distributed by the State Government among the local bodies. The same is to be utilised for development facilitating free-flow of trade and commerce on infrastructural facilities such as roads, bridges, culverts, sewerage, drainage, sanitation, waste-management, electricity, drinking water and other infrastructural facilities. At least 60 per cent of the amount is to be....
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....ce and intercourse. The impugned levy initially was meant to be for assistance to local areas for their development generally and the amendment brings about only a superficial change in the language while retaining the basic character of the levy as a source for raising general development. In this view of the matter, we are unable to hold that the facial test is met. Mere specification of the 60 per cent of the amount being in line with judgments dealing with the levy of fee is of no consequence when the very subject-matter of utilisation cannot be treated as any special direct or exclusive service or benefit to the payer of the tax." A similar provision, namely, Karnataka Special Tax on Entry of Certain Goods Act, 2004 was challenged in the case of Bharat Earth Movers Ltd. v. State of Karnataka [2007] 8 VST 69 (Karn), before the Karnataka High Court. Under the said Act, provision was made for levy and collection of tax on the entry of any notified goods in the area for consumption, use or sale therein. The said tax was made payable by an importer in accordance with the Act and the Rules made thereunder. The petitioner's case was that such levy only on goods brought from out....
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....ctment and the revenue and expenditure under other enactments. The defence of the State that the levy under the Act is a compensatory levy fails miserably and is rejected. " Similarly, the Allahabad High Court in the case of Indian Oil Corporation Limited v. State of Uttar Pradesh [2007] 10 VST 282 (All) also decided the vires of the U.P. Tax on Entry of Goods Act, 2000, which was challenged by the assessee. The challenge was mainly on the ground that tax levied under the said Act was not compensatory and hence, violative of articles 301 and 304 of the Constitution of India. In that case, State of U.P., supplied data by filing affidavit showing year-wise receipt from entry tax and funds provided by the State Government to local bodies by way of grant-in-aid and also the expenditure incurred for developmental works. The Allahabad High Court declaring the provision ultra vires held (at page 306): "13. Contents of the affidavit of Amitabh Mishra, and documents filed along with it (quoted above) utterly fail to show that amount of 'entry tax' in any manner (as pointed out by the apex court in its judgment in the case of Jindal Stainless Ltd. v. State of Haryana [2006] 145 ST....
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....ra vires to the Constitution of India. In that case also an affidavit was filed by the Commissioner of Commercial Taxes, Government of Kerala, explaining the services and expenditure incurred by the State for importers of the goods. It was stated that the State provides variety of services such as convenient roads, protection for transport of goods through traffic checking and police protection for transport of goods through traffic checking and police aid. The affidavit also referred the data explaining various expenditure incurred by the State for maintenance of roads, bridges, water transport, development of industries and allied matters. It was contended that there is a direct nexus to the levy of entry tax on goods and the expenditure incurred by the State to provide corresponding service to the importers of goods. The Bench while considering the various provisions of the Act and the law laid down by the Supreme Court declared such provisions as discriminatory and ultra vires to the Constitution. The Bench observed (at page 313): "26. We shall now examine whether the State has discharged the burden of showing that the levy is compensatory by placing materials before the cour....
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.... persons who bring goods notified for levy of entry tax but also others. 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. The apex court in Vijayalashmi Rice Mill's case [2006] 147 STC 60....
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....cle 304(a) and 304(b) carves out an exception to article 301. The learned counsel referred the decision of the Supreme Court in Atiabari Tea Co. case AIR 1961 SC 232 and submitted that freedom of trade guaranteed by article 301 is freedom from all restrictions except those which are provided by the other articles of Part XIII of the Constitution. The learned counsel contended that restrictions can be imposed by the State Legislature only after satisfying the requirements of article 304(b) of the Constitution, which means that such law should be in public interest and reasonable. The learned counsel further developed his argument by referring Supreme Court decision in Automobile Transport (Rajasthan) Ltd.'s case AIR 1962 SC 1406 and submitted that only such taxes as directly and immediately restrict trade would fall within the purview of article 301 and that any restriction in the form of taxes imposed on the carriage of goods or their movement by the State Legislature can only be done after satisfying the requirements of article 304(b) of the Constitution. Mr. Pal then contended that a working test for deciding whether a tax is a compensatory or not is to enquire whether the t....
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....rch, 2008. The learned counsel submitted that in view of the establishment of Trade Development Fund in March 2008, the Legislature could not have made the amendment to section 11 with retrospective effect. The retrospective amendment sought to be made by the State Legislature is irrational and arbitrary as there was no scope for utilisation of the proceeds of entry tax by the fund, when the fund was constituted recently. Mr. S.B. Gadoda, the learned Advocate-General, on the other hand, submitted that the relevant provisions of the VAT Act relating to imposition of entry tax facially and patently show that the levy of entry tax is compensatory in nature for the following reasons: (i) The preamble of the Act, after amendment by 2007 Amendment Act, says that Value Added Tax Act is an Act to provide for and consolidate the laws relating to levy of value added tax on sale or purchase of goods and on entry of goods into local area in the State of Jharkhand and to create Jharkhand Trade Development Fund for the purpose of development of trade, commerce and industry. Therefore, from a reading of the preamble it is clear that this Act has been framed to create Jharkhand Trade Development....
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....g in view necessary facility and infrastructure to be created for the benefit of entry-tax payers. According to the learned counsel the entire amount of entry tax shall be appropriated and proceeds of the said tax shall be utilised exclusively for the development of trade, commerce and industry in the State. The learned Advocate-General drew our attention to section 11(6) of the Act and submitted that a provision has been made for utilising the proceeds of the fund exclusively for the development of trade, commerce and industry in the State of Jharkhand. The learned Advocate-General submitted that from reading of various sections of the Act and the amendment made therein and also notification the entry tax has become compensatory in nature and the facial and patent test laid down by the Supreme Court in Jindal Stainless Ltd.'s case [2006] 145 STC 544; [2006] 7 SCC 241 has been fully complied with. The learned counsel then submitted that since levy of entry tax is compensatory in nature, the same is not violative of article 301 of the Constitution of India and the same does not need assent of the President of India under article 304(b) of the Act. The learned counsel then submit....
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....sition of law has been set at rest by the Constitution Bench of the Supreme Court in Jindal Stainless Ltd.'s case [2006] 145 STC 544; [2006] 7 SCC 241. The main basis of a fee or a compensatory tax is the quantifiable and measurable benefit. Under the principle of equivalence, as applicable to a fee or a compensatory tax, there is an indication of a quantifiable data, namely, a benefit which is measurable. As held by the Supreme Court, the basic difference between a tax, on one hand, and a fee/compensatory tax, on the other hand, is that the former is based on the concept of burden, whereas compensatory tax is based on the concept of recompense/reimbursement. For a tax to be compensatory, there must be some link between the quantum of tax and the facilities/ services. The Supreme Court further observed and held that whenever a law is impugned as violative of article 301 of the Constitution, the court has to see whether the impugned enactment, facially or patently, indicates quantifiable data on the basis of which, the compensatory tax is sought to be levied. The Act must facially indicate the benefit which is quantifiable or measurable. If the Act does not indicate facially the....
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....esident as required under the proviso to article 304(b) of the Constitution of India. Save and except the amendment brought in 2007 and notification issued in 2008, the respondent-State has not produced and placed any material before this court showing that payment of compensatory tax is a reimbursement for the quantifiable/measurable benefit provided or to be provided to its payers. Prima facie, we do not find any quantifiable data, i.e., a benefit which is measurable. Maintaining of roads and providing bridges is not compensatory in nature so as to constitute special advantage to trade, commerce and intercourse. Undisputedly, expenses for maintenance or construction of roads and bridges are met from the general revenue of the State. It is the statutory obligation and duty of the State to provide facilities like roads and bridges, etc. Similarly, a statutory body, namely, State Financial Corporation, has been constituted under the State Financial Corporation Act for providing incentive and financial aids to the industries. So far question of supply of electrical energy and waters to the industries, marketing and commercial complexes is concerned, it cannot be held that these facil....