TaxTMI 
TaxTMI 
2007 (3) TMI 706
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.... v. State of Haryana reported in [2003] 129 STC 534 (P&H). 3. When the appeal against judgment of this Court was placed for hearing before a Bench of the honourable Supreme Court, correctness of the view taken by the honourable Supreme Court in earlier judgment in Bhagatram Rajeev Kumar v. Commissioner of Sales Tax [1995] 96 STC 654; [1995] Supp 1 SCC 673, which was followed in State of Bihar v. Bihar Chamber of Commerce : [1996] 2 SCR 184, was doubted and the matter was referred to a Constitution Bench to decide with certitude, the parameters of the judicially evolved concept of compensatory tax vis-a-vis Article 301 of the Constitution. The said order dated September 26, 2003 is Jindal Stripe Ltd. v. State of Haryana reported in 2003) 8 SCC 60, [hereafter referred to as" Jindal Stainless Limited (1)"]. The Constitution Bench decided the issue referred to it vide its judgment dated April 13, 2006, Jindal Stainless Limited v. State of Haryana reported in [2006] 283 ITR 1 (SC) [hereafter referred to as "Jindal Stainless Limited (2)"]. 4. The issue arose in the context of challenge to the constitutional validity of the Haryana Local Area Development Tax Act, 2000 (hereinafter r....
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....arliament, and, subject to Clause (1) the Legislature of any State also, have power to make laws with respect to any of the matters enumerated in List III of the Seventh Schedule. Clause (3) declares that subject to Clauses (1) and (2), the Legislature of any State has exclusive power to make laws for such State or any part thereof with respect to any of the matters enumerated in List II in the Seventh Schedule. It is, thus, evident that the Legislature of a State has the exclusive power to make laws for the whole or any part of the territory of that State in respect of the matters enumerated in List II of the Seventh Schedule, but this power is subject to the other provisions of the Constitution. This means that the power of the Legislature to make laws is also subject to the provisions of Part XIII of the Constitution. Article 301, which is first in the family of articles dealing with trade, commerce and intercourse within the territory of India, lays down that subject to other provisions of this Part (Part XIII), trade, commerce and intercourse throughout the territory of India shall be free. Article 302 declares that the Parliament may by law impose such restrictions on the fre....
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.... between taxation as such for the purpose of revenue on the one hand and taxation for the purpose of making discrimination or giving preference on the other hand and recorded the following conclusion: Thus, on a fair construction of the provisions of Part XIII, the following propositions emerge: (1) trade, commerce, and intercourse throughout the territory of India are not absolutely free, but are subject to certain powers of legislation by Parliament or the Legislature of a State; (2) the freedom declared by Article 301 does not mean freedom from taxation simpliciter, but does mean freedom from taxation which has the effect of directly impeding the free-flow of trade, commerce and intercourse; (3) the freedom envisaged in Article 301 is subject to non-discriminatory restrictions imposed by Parliament in public interest (Article 302); (4) even discriminatory or preferential legislation may be made by Parliament for the purpose of dealing with an emergency like a scarcity of goods in any part of India [Article 303(2)]; (5) reasonable restrictions may be imposed by the Legislature of a State in the public interest [Article 304(b)]; (6) non-discriminatory taxes may be imposed....
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....s which constitutes trade or commerce is an act of trade or commerce and burdens or impediments imposed on any such step are restrictions on the freedom of trade, commerce and intercourse. What is guaranteed is freedom in its widest amplitude--freedom from prohibition, control, burden or impediment in commercial intercourse. 48. In Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan [1963] 1 SCR 491 , a seven-Judge Bench of the Supreme Court considered the constitutional validity of the Rajasthan Motor Vehicles Taxation Act, 1951. Four of the Judges constituting the Bench disapproved the extreme views expressed by B. P. Sinha, C.J. and Shah, J., in Atiabari Tea Co. Ltd. v. State of Assam [1961] 1 SCR 809 . They also explained the majority view in the following words: If the word "free" in Article 301 means "freedom to do whatever one wants to do" then chaos may be the result; for example, one owner of a motor vehicle may wish to drive on the left of the road, while another may wish to drive on the right of the road. If they come from opposite directions, there will be an inevitable clash. Another class of examples relates to making a charge for the use of ....
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....retation which was accepted by the majority in the Atiabari Tea Co.' case [1961] 1 SCR 809 is correct, but subject to this clarification. Regulatory measures or measures imposing compensator)/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. (Underlining is ours) 49. The court also rejected the argument that tax cannot be regarded as compensatory if the amount collected is not actually used for providing any facility and held that a working test for deciding whether a tax is compensatory or not is to enquire whether the trades people are having the use of certain facilities for the better conduct of their business and paying not patently much more than what is required for providing the facilities. Their Lordships further observed that it would be impossible to judge the compensatory nature of a tax by a meticulous test. 50. The decisions of the Supreme Court in Atiabari Tea Co. Ltd. v. State of Assam [1961] 1 SCR 809 and Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan ....
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....pe of the regulatory statutes as considered by Subba Rao, J. In the result, the majority view expressed in the case of the Atiabari Tea Co. Ltd. [1961] 1 SCR 809 was substantially accepted by the majority of the learned Judges constituting the larger Bench which heard Automobile Transport (Rajasthan) Ltd.'s case [1963] 1 SCR 491 but a corollary was added to the said view as we have just indicated. The majority view in Atiabari case [1961] 1 SCR 809 proceeded on the basis that the Australian decisions which dealt with the scope and effect of Section 92 of the Australian Constitution would be of no assistance in construing the effect of the provisions in Part XIII of our Constitution, because the legislative, historical and political background, the structure and the effect of the relevant provisions contained in Part XIII were in material particulars different from those of Section 92 of the Australian Constitution; Section 92 is absolute in terms and on its literal construction, admits of no exceptions. The Australian decisions, therefore, had to introduce distinctions, such as compensatory or regulatory tax laws in order to take laws answering the said descri....
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....allon and from April 1, 1961 at Rs. 70 under Section 27 of the Bihar and Orissa Excise Act, 1915. The argument of the appellant was that the duty amounted to unreasonable restriction on the freedom of trade and commerce because foreign liquor is not manufactured in the State and as such, no duty of excise could be levied on the locally manufactured foreign liquor. By a majority of 4 :1, their Lordships of the Supreme Court upheld the challenge and observed as under: The notification levying duty at the enhanced rate is purely a fiscal measure and cannot be said to be a reasonable restriction on the freedom of trade in the public interest. Article 301 has declared freedom of trade, commerce and intercourse throughout the territory of India, and restriction on that freedom may only be justified if it falls within Article 304. Reasonableness of the restriction would have to be adjudged in the light of the purpose for which the restriction is imposed, that is, "as may be required in the public interest". Without entering upon an exhaustive categorization of what may be deemed "required in the public interest", it may be said that restrictions which may validly be imposed under....
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....ain cases directly and immediately restrict or hamper the flow of trade, but every imposition of tax does not do so. Every case must be judged on its own facts and in its own setting of time and circumstance. In the present case, the High Court has not gone into the question whether the provisions of Act 9 of 1964 and the notification dated January 25, 1951 issued under the Cochin Tobacco Act constitute such restrictions or impediments as directly and immediately hamper free-flow of trade, commerce and intercourse and, therefore, fall within the prohibition imposed under Article 301 of the Constitution. Unless the High Court first comes to the finding on the available material whether or not there is infringement of the guarantee under Article 301 of the Constitution, the further question as to whether the statute is saved under Article 304(b) does not arise and the principle laid down by this Court in Kalyani Stores' case [1966] 1 SCR 865 cannot be invoked. 53. In G.K. Krishnan v. State of Tamil Nadu [1975] 2 SCR 715, the Supreme Court considered the challenge to the Madras Motor Vehicles Taxation Act, 1931 on the ground of violation of articles 14, 19(1)(g), 301 and ....
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....reas restrictions impede that freedom. The collections of toll or tax for the use of roads, bridges, or aerodromes, etc., do not operate as barriers or hindrance to trade. For a tax to become a prohibited tax, it has to be a direct tax, the effect of which is to hinder the movement part of the trade. If the tax is compensatory or regulatory, it cannot operate as a restriction on the freedom of trade or commerce. Strictly speaking, a compensatory tax is based on the nature and the extent of the use made of the roads, as, for example, a mileage or ton-mileage charge or the like, and if the proceeds are devoted to the repair, upkeep, maintenance and depreciation of relevant roads and the collection of the exaction involves no substantial interference with the movement. . . . What is essential for the purpose of securing freedom of movement by road is that no pecuniary burden should be placed upon it which goes beyond a proper recompense to the State for the actual use made of the physical facilities provided in the shape of a road. 54. We may now refer to some judgments of the Supreme Court and the High Courts in which the constitutionality of the entry tax was chall....
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....the State to levy tax on such imported goods in the same manner and to the same extent as may be levied on the goods manufactured or produced inside the State. If a State tax law accords identical treatment in the matter of levy and collection of tax on the goods manufactured within the State and identical goods imported from outside the State, Article 304(a) would be complied with. There is an underlying assumption in Article 304(a) that such a tax when levied within the constraints of Article 304(a) would not be violative of Article 301 and State Legislature has the power to levy such tax. Tax under the impugned legislation would be levied on scheduled goods either manufactured or produced within Karnataka State or imported from outside on their entry in a local area. Thus, this tax is non-discriminatory in that it does not discriminate between scheduled goods manufactured or produced within Karnataka State or those imported from outside. And the microscopic discrimination relied upon by the respondents that there is differential treatment accorded to goods produced within a local area and those imported from outside the local area is hardly relevant for the purpose of A....
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....ction to the impugned Act. Therefore the requirement of the proviso is satisfied. 56. The apex court also rejected the plea that the Act amounted to unreasonable restriction on the fundamental rights of the petty dealers to carry on their trade and observed as under: Looking at the matter from a slightly different angle it must be confessed that if the contentions of the respondents were to be upheld it would provide a fruitful source for evasion of tax. If petty dealers are to be excluded some criterion will have to be provided relatable to his turnover in scheduled goods for classifying who are petty dealers. That turnover will have to be kept reasonably high to make it rational but in that event the big registered dealer can always conveniently defeat the tax by bringing into the local area scheduled goods in the name of such petty dealer. It would be an incentive to a big registered dealer to set up a number of petty dealers and import scheduled goods into local area in the name of those petty dealers. To avoid any such contingency, if the tax is levied on the entry of scheduled goods in the local area at the hands of a dealer irrespective of his turnover a po....
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.... be said to be invalid because the cesses recovered under it are not dealt with in the manner provided by the Constitution. The validity of the Act must be judged in the light of the legislative competence of the Legislature which passes the Act and may have to be examined in certain cases by reference to the question as to whether fundamental rights of citizens have been improperly contravened, or other considerations which may be relevant in that behalf. Normally, it would be inappropriate and indeed illegitimate to hold an enquiry into the manner in which the funds raised by an Act would be dealt with when the court is considering the question about the validity of the Act itself..." In this case also the argument was that the Act impugned there was passed by the Parliament not for raising funds for the Union of India but for validating the illegal recovery of cesses made by the State Governments, and which funds had already gone into the Consolidated Funds of the respective States. Reliance was placed upon Article 266 of the Constitution in that behalf. The aforesaid observations were made negativing the said contention. The court further observed: ...if the taxes or c....
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....hree-Judge Bench of the Supreme Court considered the validity of the M. P. Sthaniya Kshetra Me Mal Ke Pravesh Par Kar Adhiniyam, 1976, and rejected the challenge based on the ground that those who were not liable to pay sales tax were exempted and that it was violative of Article 301 of the Constitution. The relevant observations made on these issues are extracted below: Liability to pay sales tax on the goods specified in Schedule II is thus not an essential ingredient of levy. The expression "liable to tax" has been used to identify the person who shall pay the entry tax. To put it conversely if any goods mentioned in Schedule II are brought from outside the State by a person who is not liable to tax under the Sales Tax Act then entry tax shall not be realised from such person. The intention is to levy tax only when the goods are brought inside the State by a dealer carrying on business whose turnover is not less than Rs. 1,000 annually and not by any other person. In other words, the tax is leviable on all goods specified in Schedule II brought for consumption, use or sale; but it shall be realised only from those persons who are dealers registered under the Sales Tax A....
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....h High Court considered the constitutionality of the Madhya Pradesh Entry Tax Act, 1976. It was argued on behalf of the petitioners that the impugned enactment is ultra vires to articles 19(1)(g), 286(3) and 304(a) of the Constitution. The petitioner relied on entries 92A and 92B of List II. While rejecting the argument that the State Legislature was not competent to enact such law and only the Parliament was competent to do so, the Division Bench of the High Court observed as under: Item 54 of List II of the Seventh Schedule to the Constitution relates to tax on sale or purchase of goods subject to the provisions of entry 92-A of List I. Item 52 of List II relates to tax on entry of goods into local area for consumption, use or sale therein. Item 92A of List I relates to the sale of goods other than newspapers, where such sale or purchase takes place in the course of inter-State trade or commerce. Item 92-B of List I relates to tax on consignment of goods. Tax on sale or purchase, tax on entry of goods into local area for consumption, use or sale therein and tax on consignment of goods are different in nature and character and are imposed by local authorities under separa....
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....her things, for furnishing of returns, payment of tax or penalty imposed on him, order of assessment and form thereof, authority and manner for assessment of tax and appeal or revision against the order of assessment. These provisions completely negative the contention of the petitioners that in pith and substance, entry tax contemplated under the Act is a tax on entry, irrespective of the purpose of entry and amounts to purchase tax. Therefore, Article 286(3) of the Constitution and Section 15 of the Central Sales Tax Act, 1956, are not attracted to this legislation. The point is answered against the petitioners. For the same reasons as aforesaid, it has to be held that levy of entry tax does not amount to levy of consignment tax and the contention that it offends article 92A of List I of the Constitution is not tenable. 63. The challenge based on violation of Article 304(a) of the Constitution was rejected by the High Court in the following words: This is a provision enabling the State Legislatures to introduce certain restrictions on trade, commerce and intercourse amongst States. There may be State tax imposed on goods imported from other States or Un....
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....e municipalities and municipal corporations and to make transportation of goods trouble-free by abolishing octroi check-posts. A copy of the Statement of Objects and Reasons is found in annexure A.R-1 appended to the additional submissions made on behalf of the respondents in M.P. No. 2289 of 1989. It indicates that the statute had the view of raising financial resources to compensate local bodies consequent upon abolition of octroi with a view to simplifying the taxation structure. Annexure A.R-3 gives summary in respect of levy and details of allotment made to local bodies. The document shows that during the period 1976-77 till 1988-89, provision was made in the budget to compensate the municipalities and the amount budgeted was made over. It also shows that with effect from the year 1983-84, there has been a regular annual increase of 10 per cent in total compensation amount. Considering the Statement of Objects and Reasons and the particulars given in annexure A.R-3, the statutory changes referred to above have no significance. Entry tax remains compensatory in nature and, therefore, it is immune from challenge. 65. In State of Bihar v. Bihar Chamber of Commerce [1996]....
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....poses of the respective local areas ? (5) Whether the proviso to Section 3(1) and Section 6 are void for the reasons assigned by the High Court ? 66. On the first question, the court referred to the judgment of the seven-Judge Bench in Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan [1963] 1 SCR 491 and accepted the argument of the Additional Solicitor-General that the tax was compensatory in nature and observed as under: Where the local areas contemplated by the Act cover the entire State, the distinction between the State and the local areas practically disappears. (The situation would, no doubt, be different if the local areas are confined to a few cities or towns in the State and the levy is upon the entry of goods into those local areas alone. This is an important distinction which should be kept in mind while appreciating this aspect and also while examining the decisions of this Court rendered in "fifties and sixties"). The facilities provided in the State are the facilities provided in the local areas as well. Interests of the State and the interests of the local authorities are, in essence, no different. It is not and it cannot be sti....
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....ds. Entry 52 empowers the State Legislature to levy this tax. The local authorities cannot themselves levy this tax. The power is that of the State Legislature and of none else. So long as the tax is levied upon the entry of goods into a local area for the purpose of consumption, use or sale therein, the requirement of entry 52 is satisfied. The character of the tax so levied is that of entry tax--by whatever name it is called. The decisions relied upon by Sri Ganesh do not say that the State must levy the tax and make over the collection part of it to local authorities nor do they say that after collecting it, the State must make over the proceeds to the local authorities. The highest that Sri Ganesh can legitimately put in his submission is that the tax is meant for and must be utilised for the purpose of the local areas. It cannot further be stipulated that this utilisation should be through or by the concerned local authorities. In our opinion, the relevant requirement is satisfied in this case. As stated hereinbefore, the entire State of Bihar is divided into local areas. From the point of view of the entry tax, one may say that the State is a compendium of local areas. Spendi....
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....us decisions of the Supreme Court and the High Courts and held that the Act was not violative of articles 301 and 304(b) of the Constitution by recording the following observations: Indisputably, octroi is abolished in State of Rajasthan. That due to abolition of octroi, the local bodies, i.e., Panchayats, established under the Rajasthan Panchayati Raj Act, 1994, municipalities, established under the Rajasthan Municipalities Act, 1959 and notified area committees and cantonment boards suffered a financial dent, on account of abolition of octroi cannot be ruled out. In our considered opinion, after abolition of obnoxious features of octroi, a very modest impost is levied in the State of Rajasthan by enacting Act No. 13 of 1999. The State Legislature, in exercise of its legislative power, under Clause (3) of Article 246 of the Constitution, which provides that subject to Clauses (1) and (2), the Legislature of any State has exclusive power to make laws for such State or any part thereunder, with respect to any of the matter enumerated in List II of the Seventh Schedule. In the present case, the State Legislature has exclusive power to legislate upon entry No. 52 of List II o....
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....trading facilities do not come within the purview of restrictions contemplated by Article 301 and such measures need not comply with the requirements of the proviso to Article 304(b) of the Constitution. (iii) A tax will be regarded as compensatory tax if it is levied on those using trading facilities which include roads, bridges, markets and such tax would retain its character as compensatory tax if some link is established between the tax and the facilities extended directly or indirectly to those who are required to pay the tax. (iv) If the amount collected by the levy of entry tax is meant to compensate the local bodies for the loss caused by abolition of octroi and/or augmentation of finances, to enable them to provide municipal services more efficiently which would help the free-flow of trade or commerce, the impost will be regarded as compensatory in nature. (v) While examining the validity of entry tax, it would be inappropriate to the court to hold an enquiry into the manner in which the funds raised by levy of entry tax would be dealt with and it is sufficient that a provision is made for disbursing the amount to the local bodies for use in the ....
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....a State may, by law, endow the panchayats with such powers and authority as may be necessary to enable them to function as institutions of self-Government and such law may contain provisions for the devolution of powers and responsibilities upon the panchayats at appropriate level, subject to the conditions as may be specified therein, with respect to--(i) the preparation of plans for economic development and social justice; and (ii) the performance of functions and the implementation of schemes as may be entrusted to them including those in relation to the matters listed in the Eleventh Schedule. Identical provision is contained in Article 243W in respect of municipalities with the only difference that the said article refers to matters listed in Twelfth Schedule. Under Article 243H, the Legislature of a State is empowered to enact law and authorise a panchayat to levy, collect and appropriate such taxes, duties, tolls and fees and assign to a panchayat such taxes, duties, tolls, fees, levied and collected by the State Government for such purposes and subject to such conditions and limits as may be specified in the law. Similarly, under Article 243X, the Legislature of a State can....
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....el and fodder. 13. Roads, culverts, bridges, ferries, waterways and other means of communication. 14. Rural electrification, including distribution of electricity. 15. Non-conventional energy sources. 16. Poverty alleviation programme. 17. Education, including primary and secondary schools. 18. Technical training and vocational education. 19. Adult and non-formal education. 20. Libraries. 21. Cultural activities. 22. Markets and fairs. 23. Health and sanitation, including hospitals, primary health centres and dispensaries. 24. Family welfare. 25. Women and child development. 26. Social welfare, including welfare of the handicapped and mentally retarded. 27. Welfare of the weaker sections, and in particular, of the Scheduled Castes and Scheduled Tribes. 28. Public distribution system. 29. Maintenance of community assets. Twelfth Schedule: 1. Urban planning including town planning. 2. Regulation of land-use and construction of buildings. 3. Planning for economic and social development. 4. Roads and....
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....walls, town-gates, embankments, drains, privies, latrines, urinals, tanks and water-courses and the preparation of compost manure; (b) the watering and lighting of such streets or any of them; (c) the construction, establishment and maintenance of schools, hospitals and dispensaries and other institutions for the promotion of education or for the benefit of the public health, and of rest-houses, sarais, poor houses, markets, stalls, encamping grounds, pounds, and other works of public utility, and the control and administration of public institutions of any of these descriptions; (d) grants-in-aid to schools, hospitals, dispensaries, poor-houses, leper-asylums and other educational or charitable institutions; (e) the training of teachers and the establishment of scholarships; (f) the giving of relief and the establishment and maintenance of relief works in time of famine or scarcity; (g) the supply, storage and preservation from pollution of water for the use of men or animals; (h) the planting and preservation of trees, and the establishment and maintenance of public parks and gardens; (i) the taking of a cens....
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....therein. Thus, the taxable event is on the entry of goods into a local area for consumption or use therein and not manufacture of a product. The manufacturer who brings raw material into the local area for consumption and produces goods, which are either sold in the State or transferred outside the State subsequently, is liable to pay the tax. Even non-manufacturer who brings any goods into a local area for use therein, is liable to pay tax. Those bringing goods into a local area from one local area or outside the State are liable to pay tax in similar measure at the same rate. Therefore, Section 3 of the Entry Tax Act cannot be regarded as discriminatory and violative of articles 14 and 304(a) of the Constitution. 75. The deductions envisaged by Section 5(1) or exemptions granted by the Government by issuing notification under Section 11 of the Entry Tax Act are also uniformly applicable to all those who are liable to pay tax, i.e., those bringing the goods from outside the State into a local area or from one local area to another local area. Therefore, on this count also, the entry tax cannot be regarded as discriminatory and violative of Article 304(a) of the Constituti....
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.... the effect of the sales tax on tanned hides or skins imported from outside is that the latter becomes subject to a higher tax by the application of the proviso to Sub-rule (2) of Rule 16 of the Rules, then the tax is discriminatory and unconstitutional and must be struck down. (Underlining is ours) 77. In Andhra Steel Corporation v. Commissioner of Commercial Taxes in Karnataka [1990]2 SCR 253 , the Supreme Court applied the ratio of Firm A. T. B. Mehtab Majid & Co. v. State of Madras AIR1963SC928 and held that Section 5(4) of the Karnataka Sales Tax Act, under which exemption was granted from payment of sales tax to finished goods manufactured out of locally purchased raw material while taxing sale of finished goods manufactured out of imported raw material, was discriminatory and violative of Article 304(a) of the Constitution. 78. In Shree Mahavir Oil Mills v. State of jammu and Kashmir (1996) 11 SCC 39, the exemption granted to local manufacturers producers of edible oil from payment of sales tax under the Jammu and Kashmir General Sales Tax Act was declared violative of articles 301 and 304(a) of the Constitution on the ground that it was discriminatory q....
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....lready taxed in the State was declared discriminatory and violative of articles 301 and 304 of the Constitution. 80. In State of Uttar Pradesh v. Laxmi Paper Mart AIR 1997 SC 950 , the exemption granted by the State of U. P. to the exercise books of paper purchased within Uttar Pradesh while subjecting other exercise books to tax under the Uttar Pradesh Sales Tax Act was declared violative of Article 304(a) by applying the ratio of Firm A. T. B. Mehtab Majid & Co. v. State of Madras AIR 1963 SC 928 and Shree Mahavir Oil Mills v. State of Jammu and Kashmir (1996) 11 SCC 39 . 81. In West on Electroniks v. State of Gujarat (1988) 2 SCC 568, the levy of different rates of sales tax between electronic goods imported into the State of Gujarat and goods manufactured within that State was declared violative of articles 301 and 304(a) of the Constitution. 82. In our opinion, the ratio of the above noted cases does not have any bearing on the issue before us. In those cases, the Supreme Court had considered the constitutionality of the provisions under which lower rates of sales tax had been imposed on the goods manufactured from the raw material procured from with....
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....to this view, an indirect or incidental benefit to traders by reason of stepping up the developmental activities in various local areas of the State can be brought within the concept of compensatory tax, the nexus between the tax known as compensatory tax and the trading facilities not being necessarily either direct or specific. ... 37. The concept of compensatory tax is not there in the Constitution but is judicially evolved in Automobile Transport [1963] 1 SCR 491 (Bhagatram Rajeev Kumar v. Commissioner of Sales Tax [1995] 96 STC 654; [1995] Supp. 1 SCC 673) as a part of regulatory charge. Consequently, we have to go into concepts and doctrines of taxing powers vis-a-vis regulatory powers, particularly when the concept of compensatory tax was judicially crafted as an exception to Article 301 in Automobile Transport [1963] 1 SCR 491 . Difference between exercise of taxing and regulatory power: 38. In the generic sense, tax, toll, subsidies, etc., are manifestations of the exercise of the taxing power. The primary purpose of a taxing statute is the collection of revenue. On the other hand, regulation extends to administrative acts which produces....
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....tc., but its payment is not a condition precedent. It is not a term or condition of a licence. A fee is generally a term of a licence. A tax is a payment where the special benefit, if any, is converted into common burden. 41. On the other hand, a fee is based on the 'principle of equivalence'. This principle is the converse of the 'principle of ability to pay. In the case of a fee or compensatory tax, the 'principle of equivalence' applies. The basis of a fee or a compensatory tax is the same. The main basis of a fee or a compensatory tax is the quantifiable and measurable benefit. In the case of a tax, even if there is any benefit, the same is incidental to the Government action and even if such benefit results from the Government action, the same is not measurable. 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. 42. A tax can be progressive. However, a fee or a compensatory tax has to be broadly proportional and not progressive. In the principle of equivalence, which is the foundation of a compensatory tax as well as a fee, ....
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....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. 44. Since compensatory tax is a judicially evolved concept, understanding of the concept, as discussed above, indicates its parameters. 45. 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 fee', the basis is the special benefit to the payer (individual as such) based on the principle of equivalence. When the tax is imposed as a part of regulation or as a part of regulatory measure, its basis shifts from the concept of 'burden' to the concept of measurable/quantifiable benefit and then it becomes 'a compensatory tax' and its payment is then not for revenue but as reimbursement/recompense 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 an....
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....merce. 48. When any legislation, 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 scope of the operation of the law ? Whether it has chosen an activity like movement of trade, commerce and intercourse throughout India, as the criterion of its operation ? If yes, the next question 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. After finding the law to be a restraint/restriction one has to see whether the impugned law is enacted by the Parliament or the State Legislature. Clause (b) of Article 304 confers a power upon the State Legislature similar to that conferred upon Parliament by Article 302 subject to the following differences: (a) While the power of Parliament under Article 302 is subject to the prohibition of preference and discrimination decreed by Article 303(1) unless Parliament makes the declaration under Article 303(2), the State power co....
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....sions with reference to the said Ordinance. 10. Two affidavits have been filed on behalf of the State of Haryana--affidavit dated November 14, 2006 and affidavit dated February 19, 2007, extracts from which are as under: Affidavit dated November 14, 2006: 1. That, as per the information received from Finance Department, Haryana, tax amounting to Rs. 910.75 crores collected under the LADT Act during the financial years 2000-01, 2001-02, 2002-03, 2003-04, 2004-05 has been allocated to (a) Panchayati Raj Institution and (b) Urban Local Bodies in accordance with the directions dated December 28, 2005 of the High Powered Committee headed by Chief Secretary, Haryana. A copy of the Finance Department letter dated July 5, 2006 is attached as annexure RII. 8. That a perusal of the Minutes of the Meeting (attached as annexure RIII) of the High Powered Committee would show that there is a direction--clear and unambiguous--that LADT funds are to be utilised through Local Bodies for development and maintenance of infrastructure facilities useful for free-flow of trade and commerce. The minutes further show that 'as the local bodies do not have sufficient infras....
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....September 4, 2006 (annexure RV) the amount released is not in excess of the requirement of the department to provide facilities in municipalities for free-flow of trade and commerce. 12. That the Urban Development Department is considering finalising a proposal entailing an estimated expenditure of Rs. 586.88 crores for development work in Urban Local Bodies, Haryana, for facilitating free-flow of trade and commerce. A copy of the aforesaid proposal showing necessary details regarding projects and expenditure is enclosed as annexure RVI. 13. That the State Government is actively considering setting up a Local Area Development Board which will be a monitoring agency to ensure that the funds generated under the LADI Act, 2000 are utilised solely for the purpose of facilitating free-flow of trade and commerce. 14. That it has been clarified by the Urban Development Department, Haryana, to utilising agencies that the funds are not to be utilised for construction/maintenance of community centers and parks. (annexure RVII). 15. That, lastly it is reiterated that the funds collected under the LADT Act, 2000 are being utilised for the purposes envisaged ....
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....ate could recover the entire tax due by the middle of 2003. It may be mentioned that in the year 2000-01 a sum of Rs. 19.53 crores was collected in the State, and in the year 2001-02 Rs. 128.85 crores were collected. In the year 2002-03 a sum of Rs. 245.63 crores and in the year 2003-04 a sum of Rs. 243.79 crores were collected. In the subsequent years, some more collections were made. The data establish that in the initial two years, the State was unable to collect the entry tax in accordance with law. In the circumstances, the expenditure could be planned properly only from the year 2002 onwards. The other notable aspect is that the utilisation for the purposes of development under the Act is an ongoing process and not a one time or annual phenomenon. Hence, it would be open and permissible to the State to replan the expenditure and utilisation of LADT fund for development purpose under the Act in accordance with the recent judgment of the Supreme Court in Jindal Stainless [2006] 283 ITR1 (SC) . 10. That as a measure of rectification and decision to implement Jindal Stainless judgment of the honourable Supreme Court [2006] 283 ITR 1 (SC), the State Government is actively....
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....are therefore proximately connected locationally also. 12. That in so far as construction of roads, bridges and culverts are concerned, they constitute a single integrated Statewide network connecting the 20 Districts in the State of Haryana as well as the various urban Local Bodies and Panchayats. This integrated and interconnected infrastructure facility constitutes the spine for free flow of trade and commerce throughout the State and even outside. It constitutes a direct immediate benefit to various industries in the State of Haryana which are paying entry taxes notwithstanding that they are used by common people also. In view of the law declared by the Supreme Court, the facilities can be provided as a class also. Thus considered all the payers of entry tax are utilising the Statewide integrated network of roads, bridges and culverts as a class and therefore the utilisation of LADT funds with respect to these benefits in the various local areas of the State would constitute the provision of facility to the payers of tax as a class. 11. The petitioners have filed affidavits dated December 4, 2006 and March 2, 2007, wherein apart from pointing out that the petitioner....
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.... actual or constructive, or cause the goods to be received by any other person. (26) 'tax' means the tax leviable under this Act. 3. (1) There shall be levied and collected a tax on entry into a local area, of all goods except those specified in Schedule A, for consumption or use therein, at such rates not exceeding four per cent of the value of the goods, as may, by notification, be specified by the State Government and different dates and different rates may be specified in respect of different goods or different classes of goods or different local areas. (2) The tax levied under Sub-section (1) shall be paid by the importer: Provided that an importer shall not be liable to pay tax so long as the aggregate value of taxable goods he brings into or receives on their entry into any local area does not, in a year, exceed ten lakh rupees or such other sum as the State Government may, by notification, specify: Provided further that an importer who has once become liable to pay tax under this Act shall continue to be so liable until the expiry of three consecutive years during each of which the aggregate value of any taxable goods he ....
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....tness of the proof furnished. 11. (1) The State Government may, if in its opinion it is necessary in public interest so to do, by notification and subject to such restrictions and conditions and for such period as may be specified in the notification, exempt or reduce the tax payable by any class of importers under this Act. (2) Where any restriction or condition specified, under a notification issued under Sub-section (1) is contravened or is not observed by an importer or where a declaration, if any, specified under the said notification for observance of any condition or restriction imposed therein, is found to be wrong, then such importer shall, in addition to tax calculated at the full rate, notified under Sub-section (1) of Section 3, on the value of such goods in respect of which such contravention or non-observance has taken place or a wrong declaration has been furnished, be liable to pay interest in terms of Sub-section (5) of Section 6 of this Act: Provided that before taking action under this sub-section, the importer shall be given a reasonable opportunity of being heard. 22. The tax collected under this Act shall be distributed by t....
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.... as per the guidelines issued in this behalf from time to time. (v) It shall ensure that the proceeds of tax collected under this Act are not much more than the amount actually required for development of local areas. 15. Submissions on behalf of the petitioners: Shri Ganguly submitted that the impugned Act does not meet the facial test laid down in para 46 (para 43 of STC) of the Constitution Bench judgment in Jindal Stainless Ltd. [2006] 283 ITR 1 (SC), as no quantifiable data, on the basis of which the tax was sought to be levied, was indicated in the Act. The Act did not indicate quantifiable or measurable benefit to the payers of the tax. Section 22 of the Act provides for distribution of the tax collected amongst the local bodies for the development of local areas, which did not in any manner amount to giving of any measurable advantage to the payers of the tax in terms of the parameters of compensatory tax laid down in paras 40 to 44 (paras 37 to 41 of STC) of the judgment in Jindal Stainless Ltd. [2006] 283 ITR 1 (SC). Explanation added to Section 22, as published in notification dated September 30, 2003 to the effect that "the development of local area....
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....ssengers and Goods Taxation Act, 1952, Punjab Agricultural Produce Market Act, 1961 and the Haryana Rural Development Fund Act, 1983. Reference was also made to the provisions of the Act providing for ad valorem levy of tax deductions out of turnover under Section 5, provision for exemption under Section 11 to submit that the tax was intended to be levied for raising of revenue in circumstances where sales tax was not payable by the manufacturers, getting raw material from outside the State and selling their products outside the State after transferring the finished products to their branches. It was submitted that the tax was not local area specific and tax collected from any local area was allowed to be spent in any other local area on general developmental activities. Learned Counsel also referred to two affidavits filed on behalf of the State, purporting to give data justifying the character of tax as compensatory tax. He pointed out that as per details of the said affidavits, a sum of Rs. 910.74 crores was collected for the years 2000-01 to 2004-05 while utilisation was of the amount of Rs. 154.20 crores, which was 17 per cent of the total collection. He further pointed out th....
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....dal Stainless Limited v. State of Haryana (2006) 7 SCC 271. The said provisions had been earlier upheld by a Division Bench of the High Court in K. V. Rajan v. State of Kerala [2003] 133 STC 598 (Ker); [1995] 2 KLT 369. A different view was, however, taken in a later judgment in FR. William Fernandez v. State of Kerala [1999] 115 STC 591 (Ker). On behalf of the State, affidavit was filed showing the amount collected from entry tax and capital expenditure on roads and bridges. The court held that the Act did not indicate any benefit which was either quantifiable or measurable and, thus, compensatory character of tax was not self-evident from the Act. It was further held that the Act was for the purpose of augmenting general revenue. Maintenance of roads, providing of bridges, etc., could not be held to be compensatory to meet outlay incurred for special advantage to trade, commerce and intercourse. The facilities were incidental. Expenses on roads, bridges were met from the general fund of the revenue and the said facilities were enjoyed not only by the persons bringing notified goods subjected to entry tax but also others. There is no nexus of tax with the utilisation of services. ....
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....Twelfth Schedules to the Constitution. Reference was also made to report of the State Finance Commission regarding allocation of funds to local bodies and to report of the Eleventh Finance Commission suggesting taxes for augmenting consolidated funds of the States. It was observed by the court that since the amount of revenue earned from the entry tax was pooled in the consolidated fund and utilised under the budgetary allocation and also utilised to make up budgetary deficit of local bodies, there was no occasion to probe reasonableness or proportionality of the same. It was observed that the State failed to pin-point or establish the specific/additional service/facility provided to payers of the tax. 23. The Patna High Court in its judgment dated January 9, 2007 in Harinagar Sugar Mills Limited v. State of Bihar Civil Writ Jurisdiction case No. 2739 of 2003 See [2007] 10 VST 140, also considered the question of validity of levy of Bihar entry tax under the 1993 Act, in the light of the directions of the honourable Supreme Court in Jindal Stainless Limited (2006) 7 SCC 271. The State relied upon amendments made to the Act providing for creation of Bihar Trade Development Fund. ....
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....r importers of the goods. The grants included grants for expenses incurred in local areas not only for facilities for traders or importers of the goods but also to the public at large. Reference may be made to the conclusions reached in para 142 (para 144 in VST), which is as under: 142. From what have been averred in para 9 of the said affidavit, it becomes transparent that the State Government has not been able to give any clear and categorical answer to the queries raised by this Court as to what specific facilities are being provided by the State Government to the traders or importers of goods into the local areas or what facilities are proposed to be provided to the traders, in future, so as to justify the imposition of the entry tax. The averments made, in the affidavit, are wholly vague inasmuch as these averments reveal, at best, the total grants, which the State Government has made to the local bodies. These grants would obviously include grants for expenses incurred in the local areas not only for the facilities, which may have been, incidentally, provided to the traders or importers of goods in the State of Assam, but also to the public at large. The State Gover....
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.... Goods into Local Areas for Consumption, Use or Sale therein Act, 1993 (Act 16 of 1993) as adopted by the State of Jharkhand vide notification dated December 15, 2000 and as amended vide Jharkhand Tax on Entry of Goods Into Local Areas for Consumption, Use or Sale therein (Amendment) Ordinance, 2001 and held that the levy therein was not compensatory. Submissions on behalf of the State: 26. Learned Counsel for the State submitted that the levy of tax was not local area-wise, though taxing event was entry of goods in a local area with reference to entry 52 in List II of the Seventh Schedule to the Constitution. The levy of tax only at one point and provision for deduction of value of goods on which tax had been paid once or on which sales tax had been paid or other statutory exemptions, were meant to lessen the burden of tax and facilitating the payers of tax. Under Article 243II and 243X, State Legislature could authorise the levy of tax by the local bodies and the power of taxation was with the State and not with the local bodies. He submitted that the State Finance Commission could be constituted under Article 243I and 243Y for distribution of proceeds of tax to local bodie....
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....he tax collected for development, facilitating free flow of trade and commerce was consistent with the principles laid down by the honourable Supreme Court in Kewal Krishan Puri v. State of Punjab [1979] 3 SCR 1217 , Ram Chandra Kailash Kumar & Co. v. State of U.P. [1980] Supp. SCC 27, Malwa Bus Service (Private) Limited v. State of Punjab [1983] 2 SCR 1009 , Delhi Cloth & General Mills Co. Ltd. v. Chief Commissioner, Delhi [1970] 2 SCC 172. He also relied on judgment of the honourable Supreme Court in Vijayalashmi Rice Mills v. Commercial Tax Officer, Palakol 2006(201) ELT 329 (SC), wherein it was observed that the Constitution Bench judgment in Jindal Stainless Limited [2006] 283 ITR 1 (SC), could not be read as having made sea-change in the concept of fee, which had been interpreted by the honourable Supreme Court to mean that specific services to individual payers was not required. Judgments in Sreenivasa General Traders v. State of Andhra Pradesh [1983] 3 SCR 843, City Corporation of Calicut v. Thachambalath Sadasivan [1985] 2 SCR 1008 , State of Himachal Pradesh v. Shivalik Agro Poly Products AIR 2004 SC 4393 were referred to. He also referred to judgment in Hardev Motor Tran....
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....eet the facial test: (i) Compulsion to utilise the tax collected is only to the extent of 60 per cent and the amount of 40 per cent need not be accounted for, and (ii) Infrastructural facilities facilitating free-flow of trade and commerce may not in fact, have any connection with the facilities for trade and commerce. 31. Waste-management, sanitation, drainage, water, electricity may be unconnected with the facilities for the purpose of trade. The said facilities may be made before general development of the State, though termed as facilitating trade and commerce. There is no separate earmarking of the facilities planned for the traders or facilities generally for water supply, hygiene, sanitation, waste-management, etc. 32. The defence on behalf of the State is that the statutory provisions for constituting a Board and requiring the Board to ensure that the tax collected was not much more than the amount actually required and provision for utilising at least 60 per cent for development facilitating free flow of trade and commerce of the payers of the tax was not enough to meet the facial test, if the payers of the tax are taken to be the ultimate payers to....