AI Drafter 
TaxTMI 
TaxTMI 
2008 (1) TMI 837
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....n of the mandatory provisions of article 304(b) of the Constitution inasmuch as no previous sanction of the President was obtained and even otherwise no post facto assent of the President under article 255 of the Constitution had been obtained; and (d) Entry 52 of List II of the Seventh Schedule to the Constitution of India is made exclusively to pass any legislation to augment the income of the local authorities and by the definition of "local area" given in the Act, the entire State has been brought under the purview of the Act and hence it is a colourable exercise of power. After hearing learned counsel appearing for the parties and after going through the various decisions relied upon by the learned counsel for the parties, this court came to hold that the entry tax sought to be introduced by the Orissa Entry Tax Act, 1999 being compensatory in nature is within the legislative competence of the State Government and is intra vires. While declining to strike down the Act as ultra vires, this court directed as follows: (1) Unless the basic ingredients, i.e., entry of Scheduled goods for the purpose of consumption, use or sale into a local area of the Stat....
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....est of 'some connection' indicated in paragraph 8 of the judgment in Bhagatram Rajeev Kumar v. Commissioner of Sales Tax, Madhya Pradesh [1995] 96 STC 654 (SC); [1995] (Suppl.) 1 SCC 673 and followed in the case of State of Bihar v. Bihar Chamber of Commerce [1996] 103 STC 1 (SC); [1996] 9 SCC 136 is, in our opinion, not good law. Accordingly, the constitutional validity of various local enactments which are the subject-matters of pending appeals, special leave petitions and writ petitions will now be listed for being disposed of in the light of this judgment." Thereafter, the two-judge Bench of the honourable apex court comprising honourable Mr. Justice A. Pasayat and honourable Mr. Justice S.H. Kapadia observed that the basic issue in all the appeals revolved round the concept of "compensatory tax" and the High Courts do not appear to have examined the issue in the proper perspective as they were bound by the judgments in Bhagatram's case [1995] 96 STC 654; [1995] (Suppl.) 1 SCC 673 and Bihar Chamber of Commerce's case [1996] 103 STC 1 (SC); [1996] 9 SCC 136. It was further observed that since relevant data did not appear to have been placed before the High Cou....
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....fies the imposition of the said levy being in the nature of compensatory tax. Similarly the quantum of such compensatory tax must co-relate with the funds required for such facilities/regulatory measures. But if the tax is levied for general augmentation of revenue in lieu of octroi then such tax would lose its character of compensatory tax. There is no facility even mentioned with relation to entry of goods into local area for use, consumption or sale therein and, therefore, the link or co-relation between local area and levy is absent and consequently collection of levy not by the local authority but by the State on entry of goods from outside State is unconstitutional. He submitted that the State Government is not providing for any facility, as required to qualify as compensatory tax. Such failure to provide for facilities or services against the entry tax is apparent from the Statement of Object and Reasons. He submitted that in the context of article 301, compensatory tax is a compulsory contribution levied broadly in proportion to the special benefits derived to defray the costs of regulation or to meet the outlay incurred for some special advantage to trade, commerce and int....
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....nd regulations which burdens, restricts, or prevents the trade movement between States and also within the State. Since freedom correspondingly imposes "limitation", the Constitution Bench was of the view that the doctrine of "direct and immediate effect" of the operation of the impugned law on the freedom of trade and commerce in article 301 as enunciated in Atiabari Tea Co.'s case AIR 1961 SC 232. According to the Constitution Bench article 301 is, therefore, not only an authorisation to enact laws for the protection and encouragement of trade and commerce amongst the States but by its own force creates an area of trade free from interference by the State and, therefore, article 301 per se constitutes limitation on the power of the State. Article 301 is however subject to the other provisions of articles 302, 303 and 304 of the Constitution. The Constitution Bench analysing the power of the State Legislature to enact any law which may come under the protection of article 304(b) observed that apart from the limitation imposed by article 301, clause (1) of article 303 imposes additional limitation, namely, that it must not give preference or make discrimination between on....
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....2 does not apply to the tax under the impugned Act. Therefore, the levy is outside the scope of article 301. There is only one rate of tax on goods or class or classes of goods under the Act in respect of goods coming into a local area both from another local area within the State or from any place outside the State. The impact of the levy on both intra-State trade and commerce and inter-State trade and commerce is the same. The rate of tax is same for all local areas. The levy does not create any fiscal barrier/ trade barrier/tariff wall which will impede the flow of goods to a local area from another within the State or from outside the State. The levy complies with article 304(a). Therefore, it is not an impediment to free-flow of trade and commerce under article 301. He further submitted that assuming that the tax imposed directly and immediately impedes free-flow of trade and commerce or in any manner discriminates goods imported from outside the State vis-a-vis goods produced within the State in the matter of tax, yet the facilities provided by the State and its agencies to trades people go to show that the levy is compensatory. The tax being paid by the consumer, the trades ....
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....The remand order quotes paragraph 43 of the judgment of the Constitution Bench which reads "State has to show by placing materials before the court, that the payment of compensatory tax is a reimbursement/recompense for the quantifiable/ measurable benefit provided or to be provided to its payer(s)". The said expression "to its payers" is significant. Honourable Supreme Court has not directed to examine if the petitioners have been provided with the facilities. But, it is to be seen if the payers of the tax are provided with the facilities for finding if the tax is compensatory. This examination is required as the concept of compensatory tax laid down by the Constitution Bench states, "the theory of compensatory tax is that it rests upon the principle that if the Government by some positive action confers upon individual(s), a particular measurable advantage, it is only fair to the community at large that the beneficiary shall pay for it". Therefore, the most crucial points that fall for determination according to the remand order dated July 14, 2006 passed by the two-judge Bench are (i) who pays the tax and whether they are provided with the facilities/services involving quanti....
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....h more than what is collected through entry tax. 17.. The detailed list of statement showing major works of the year 2001-02 to 2005-06 is annexed hereto and marked as annexure B-1. 18.. The Urban Local Bodies are instrumentalities for urbanisation. In the process of urbanisation the concerned local areas became the centres of trade and commerce. There is great deal of nexus with the urbanisation and trades and commerce. When more of trading would occasion there would be increase and growth of commercial activities. The allotment made through urban and housing development department would substantiate the same. Some of the important gist of allocation is prepared in the form of a Schedule and annexed as annexure C-1. Thus the urban bodies would require more of finance to establish infrastructure of trade and commerce. Keeping an eye over the growth of population and growth of commercial activities, some more facilities need to be added. In other words, financial investment would be of dire necessity. The urban bodies would require to establish new market places, shop rooms, laying down of new roads, expansion of existing roads and maintenance of them, besides small, med....
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....been incurring heavy expenditure and providing fiscal support for a formidable industrial base which has also facilitated flow of trade and commerce. The total financial burden on the State on these accounts is a necessary element of special advantage to trade and commerce and is relevant to compliance of parameters of a compensatory tax. In this regard, some of the details of financial burden on the State facilities/services are more fully described in the form of a Schedule appended to this affidavit and marked as annexure E-1. 23.. That the State Government have been spending huge sums of money each year through works, Housing and Urban Development Department, Rural Development Department, Panchayati Raj Department and W.R. Department on construction of roads including bridges, culverts, water supply and sanitation and maintenance thereof. The details of expenditure incurred in this regard prepared in the form of a Schedule is annexed marked as annexure F-1. 24.. That the State Government through co-operative department has established several godowns market places and market shades and Krusak Bazar. In these investments a portion of the proceeds of entry tax utilised. The....
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.... go to indicate the percentage of revenue collected from entry tax and spent for compensatory purpose. The same are invested in rendering benefits/facilities to the trading community as a whole providing better amenities and better atmosphere for the growth of trade and commerce. 5.. That, in substance, the State Government had spent more than the collection of the entry tax in providing the aforestated facilities/ benefits. The expenditure would go to show that much more had been spent than the collection of entry tax revenue of the State Government, which had to pull resources from its own fund and borrowings for providing the aforestated facilities/benefits. Apart from this, the State Government has the liability to pay interest on such borrowed funds. Substantial amounts are also spent for the maintenance of road and bridges." The entry tax collection and the expenditure made from out of the tax collected and the entry tax collection from 1999-2000 to 2005-06 have been furnished in annexures I-1 and J-1 of the counter-affidavit filed by the State on May 15, 2007 which are as follows: 1 2 3 4 5 6 7 8 9 10 11 12 2005-06 463.3....
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....given for infrastructure development basing on collection of entry tax (in crores) Year Major Head (Roads) of which maintenance expenditure 3054 (Rev) 5054 (Cap) Total Works Dept. (D. No. 7) H&Ud Dept. (D. No. 13) PR Dept. (D. No. 17) WR Dept. (D. No. 20) RD Dept. (D. No. 28) 1998-99 101.21 120.36 221.57 51.73 0.00 0.00 0.00 49.48 1999-00 138.17 117.62 255.79 73.51 0.00 0.00 0.00 64.66 2000-01 142.12 149.17 291.29 71.39 0.00 0.00 0.00 70.74 2001-02 130.18 114.70 244.88 67.17 0.00 0.00 0.00 56.76 2002-03 140.34 302.47 442.81 82.09 0.00 0.00 0.00 57.44 2003-04 125.87 196.00 321.87 76.63 0.00 0.00 0.00 49.24 2004-05 138.54 357.97 496.51 91.56 0.00 0.00 0.00 46.97 2005-06(RE) 175.59 300.74 476.33 88.32 0.00 0.00 0.00 87.27 2006-07 (BE) 547.89 373.88 921.77 240.26 18.75 50.00 17.50 221.38 Compensation given for infrastructure development based on collection of entry tax (in ....
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....ter of the tax. He further submitted that under the public policy as well as relevant provisions of different statutes where the State Government is obligated to spend huge sum for promotion of inter-State as well as intra-State trade and commerce for providing various trading facilities to the trading community of different statutes like the Orissa Development Authority Act, 1982, Orissa Municipal Corporation Act, Orissa Municipal Act, Orissa Zilla Parishad Act, Orissa Panchayat Samiti Act, Gram Panchayat Act. Under the abovementioned statutes, provisions of the establishment of market place shopping complex, village market, Hata, village industries, etc., for industrial establishment have been provided in compliance with the statutory purposes. Funds have been provided under different grants in the budget. Such grants directly go to maintain the compensatory nature of expenditure as the trading communities are directly benefited. Therefore, the assignment under section 36 of the Act is a relevant consideration and is justifiable under law. Much emphasis was given to the cases of Atiabari Tea Co. Ltd. v. State of Assam AIR 1961 SC 232, Automobile Transport (Rajasthan) Ltd. v. S....
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....e the above objectives." Now we come to the definition clause of the Act. "Entry of goods", "importer" and "purchase value" have been defined in clauses (d), (e) and (j), respectively, of section 2 of the Act as follows: "(d) 'Entry of goods' will all its grammatical variations and cognate expressions, means entry of goods into a local area from any place outside that local area or any place outside the State for consumption, use or sale therein; (e) 'Importer' means a dealer or any other person who in any capacity brings or causes to be brought any Scheduled goods into a local area for consumption, use or sale therein; (j) 'purchase value' means the value of the scheduled goods as ascertained from original invoice or bill and includes insurance charges, excise duties, countervailing charges, sales tax, value added tax or, as the case may be, turnover tax, transport charges, freight charges and all other charges incidental to the purchase of such goods: Provided that where purchase value of any Scheduled goods is not ascertainable on account of non-availability or non-production of the original invoice or bill or when the invoice or bill produ....
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....merce and intercourse.-Parliament may by law impose such restrictions on the freedom of trade, commerce or intercourse between one State and another or within any part of the territory of India as may be required in the public interest. 303.. Restrictions on the legislative powers of the Union and of the States with regard to trade and commerce.-(1) Notwithstanding anything in article 302, neither Parliament 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 List in the Seventh Schedule. (2) Nothing in clause (1) shall prevent Parliament from making any law giving, or authorising the giving of, any preference or making, or authorising the making of, any discrimination if it is declared by such law that it is necessary to do so for the purpose of dealing with a situation arising from scarcity of goods in any part of the territory of India; and 304.. Restrictions on trade, commerce and intercourse among States.-Notwithstanding ....
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....ing of any law, to give preference to one State over another. However, the said clarification is subject to one exception and that too only in favour of the Parliament, where discrimination or preference is admissible to the Parliament in making of laws in case of scarcity. This is provided in clause (2) of article 303. (b) As regards the State Legislatures, apart from the limitation imposed by article 301, clause (1) of article 303 imposes additional limitation, namely, that it must not give preference or make discrimination between one State or another in exercise of its powers relating to trade and commerce under entry 26 of List II or List III. However, this limitation on the State Legislatures is lifted in two cases, namely, it may impose on goods imported from sister State(s) or Union Territories any tax to which similar goods manufactured in its own State are subjected but not so as to discriminate between the imported goods and the goods manufactured in the State [see clause (a) of article 304]. In other words, clause (a) of article 304 authorises a State Legislature to impose a non-discriminatory tax on goods imported from sister State(s), even though it interferes with....
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....e effect of the operation of such a law is to impede the activity, then the law is a restriction under article 301. However, if the law enacted is to enforce discipline or conduct under which the trade has to perform or if the payment is for regulation of conditions or incidents of trade or manufacture then the levy is regulatory. This is the way of reconciling the concept of compensatory tax with the scheme of articles 301, 302 and 304. For example, for installation of pipeline carrying gas from Gujarat to Rajasthan, which passes through M. P., a fee charged to provide security to the pipeline will come in the category of manifestation of regulatory power. However, a tax levied on sale or purchase of gas which flows from that very pipe is a manifestation of exercise of the taxing power. It has been further held that tax is levied as a part of common burden. The basis of a tax is the ability or the capacity of the taxpayer to pay. The principle behind the levy of a tax is the principle of ability or capacity. In the case of a tax, there is no identification of a specific benefit and even if such identification is there, it is not capable of direct measurement. On the o....
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....nd and a fee/compensatory tax on the other hand is that the former is based on the concept of burden whereas compensatory tax/fee 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 facility/services. Every benefit is measured in terms of cost which has to be reimbursed by compensatory tax or in the form of compensatory tax. In other words, compensatory tax is a recompense/reimbursement. In the context of article 301, therefore, compensatory tax is a compulsory contribution levied broadly in proportion to the special benefits derived to defray the costs of regulation or to meet the outlay incurred for some special advantage to trade, commerce and intercourse. It may incidentally bring in net revenue to the Government but that circumstance is not an essential ingredient of compensatory tax. To sum up, the basis of every levy is the controlling factor. In the case of "a tax", the levy is a part of common burden based on the principle of ability or capacity to pay. In the case of "a tax", the levy is a part of common burden based on the principle of ability or capacity to pay. In the case of "a f....
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....slation, whether it would be a taxation law or a non-taxation law, is challenged before the court as violating article 301, the first question to be asked is: what is the effect of operation of the law on the freedom guaranteed under article 301? If the effect is to facilitate free-flow of trade and commerce then it is regulation and if it is to impede or burden the activity, then the law is a restraint. Shri Jagannath Patnaik, learned Senior Advocate appearing on behalf of the State has pleaded that article 301 does not affect the provision of article 304 as it has been provided therein that notwithstanding anything in article 301 or article 303, the Legislature of the State may enact the law with the limitation as mentioned in clause (a) and clause (b). The proviso to clause (b) is limited to only that clause and not to clause (a) of article 301. Therefore, clauses (a) and (b) are independent clauses. To impose restriction on the freedom of trade in clause (b), it is necessary to get the previous sanction of the President before enacting law but for clause (a) of article 304 there is no such restriction and the Legislature of the State can enact the law imposed on goods imported ....
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....e Government from out of the tax collected under this Act, subject to such conditions and in such manner as may be prescribed. But nothing has been prescribed in that regard. It is not disputed that the revenue received by way of entry tax collection is deposited in the consolidated fund of the State and the expenditure which is incurred for the development work is not specifically identifiable as a measure of compensation. Expenditure is made in general for the infrastructure development which is said to be for the welfare of the general public. The data given by the learned counsel appearing for the State, as quoted above, show the entry tax collection in each year and the expenditure which is shown is more than the entry tax collected which itself would go to indicate that there is no link between the quantum of tax and the facilities/services provided to the trades people. More expenditure in comparison to the entry tax collected for the welfare of the general public itself shows that the expenditure made by the State in general is from the general revenue collection of the State by way of taxes. The State has shown the total expenditure for infrastructure development, devel....
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.... article 304(b), there is no doubt that the same would be hit by the provisions of article 301, meaning thereby that it will make hindrance in free trade, commerce and intercourse. Therefore, imposition of a tax or a fee is permissible under the various decisions of the honourable apex court if such fee is based on the principle of equivalence and realised for the purpose of reimbursement facilitating the trade people, i.e., in the form of compensatory tax which is based on the principle of "pay for the value" which is held to be a sub-class of a fee. In Atiabari Tea Co. case AIR 1961 SC 232 the apex court has held that taxes may and do amount to restrictions, but it is only such taxes as directly and immediately restrict trade that would fall within the purview of article 301 and the test is: does the impugned restriction operate directly or immediately on trade or its movement? In Jindal case [2006] 145 STC 544 (SC); [2006] 4 SCALE 300; [2006] 7 SCC 241, it has been held by the Constitution Bench that if a levy of a tax is to be non-discriminatory in that case the previous sanction of the President is not required. The provisions of article 304(a) and article 304(b) are to be con....