TaxTMI 
TaxTMI 
2014 (10) TMI 379
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....ntry of Goods into Local Areas Act, 2007, (in short the U.P. Act of 2007) on the grounds of lack of the legislative competence of the State of U.P. of enactment, as also violative of freedom of trade, commerce and intercourse guaranteed under Art.301 and not saved by Art.304 (b) of the Constitution of India. The petitioners have also challenged the retrospectivity of the Act. w.e.f. 1.11.1999, when the U.P. Tax on Entry of Goods Ordinance, 1999, replaced by U.P. Tax on Entry of Goods Act, 2000, was promulgated and which was struck down by this Court in Indian Oil Corporation Ltd. v. State of U.P., AIR 2004 Alld. 277. 2. The substance of challenge in all these writ petitions to the constitutional validity of the U.P. Act of 2007 is that the entry tax is levied under the Act is by way of payment of compensatory tax of which the quantifiable/ measurable benefits are not provided either facially or patently to its payers, in view of the tests laid down in Jindal Stainless Ltd. (2) and Anr. v. State of Haryana and Anr., (2006) 7 SCC 241. The expenditure of the entry tax as compensatory tax collected is not broadly in proportion to defray the cost of regulation, or to meet the outley ....
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....llowing the recommendations of the First State Finance Commission. The volume of transfers to the Urban Local Bodies substantively improved under the new system. In 1995-96 total non-planned grants to Urban Local Bodies in U.P. amounted to Rs. 285 crores. In the year 2001-02 this amount exceeded to Rs. 700 crores. 5. The 11th Finance Commission in its report presented to the Lok Sabha on 27th July, 2000 considered in para 8.13 the assessment about the manner and extent of augmentation of the Consolidated Funds of the State, keeping in view of the provisions required to be made for the emoluments and terminal benefits of the local bodies including teachers; the existing powers of the local bodies to raise financial resources and the powers, authorities and responsibilities transferred to local bodies. In para 8.14 to para 8.18 of the report, the 11th Finance Commission submitted the study of the report on panchayats and municipalities; measures to augment the consolidated funds of the State, reforms in local tax and rates and maintenance of civil services. In para 8.16 on the issue of reforms in local tax and rates, the 11th Finance Commission reported as follows:- "8.16....
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....sferred to the local bodies in the form of grant. During our interaction with the representatives of the local bodies, we were told that though the grant in lieu of octroi given to the local bodies was raised by certain percentage from year to year, it does not have as much buoyancy as the octroi had. There have also been numerous complaints of delay in release of the compensatory grants. While we do not advocate reintroduction of octroi, we do feel that there is a need for replacing it with a suitable tax that is buoyant and can be collected by the local bodies." 6. The State of U.P. promulgated the U.P. Tax on Entry of Goods Ordinance, 1999 w.e.f. 1.11.1999, which was later on enacted as U.P. Tax on Entry of Goods Act, 2000. The Prefatory Note of the Act of 2000 read as follows:- "Prefatory Note-Statement of Objects and Reasons:- With a view to augmenting the revenue of the State, it was decided to make law to provide for the levy and collection of tax on entry of certain goods into a local area from any place outside that local area including a place outside Uttar Pradesh for consumption, use or sale therein, at such rates, not exceeding five per cent of the value of....
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....medicines to poor people etc. Similarly in our opinion a compensatory tax is really in the nature of a cess because it generates revenue which is not used for general public purpose but for the specific purpose of facilitating trade and commerce. Paragraph no.66:- In fact in the Statement of Objects and Reasons of the impugned Act (U.P. Act no.12 of 2000) it is specifically mentioned:- "Preferatory Note-Statement of Objects and Reasons:- With a view to augmenting the revenue of the State it was decided to make law to provide for levy and collection of tax on entry of certain goods into a local area from any place outside that local area including a place outside U.P........." Paragraph no.67:- Thus the Statement of objects and Reasons of the impugned Act clearly discloses that the impugned Act was enacted to augment the general revenue of the State and not for facilitating trade and commerce. Paragraph no.68:- In the supplementary counter affidavit of Shri B.P. Sonkar dated 7th January, 2004 the respondents have annexed copy of a letter of the Director (Judicial), Government of India, Ministry of Home Affairs, dated 19th January, 2000 addressed t....
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....h. In Jindal Stainless Ltd. (2) v. State of Haryana, (2006) 7 SCC 241 a Constitution Bench of the Supreme Court overruled the judgment in Bhagat Ram and Bihar Chamber of Commerce's case and concluded as follows:- "49. In our opinion, the doubt expressed by the referring Bench about the correctness of the decision in Bhagatram's case 1995 Supp. (1) SCC 673 followed by the judgment in the case of Bihar Chamber of Commerce (1996) 9 SCC 136 was well-founded. 50. 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 para 19 of the report, will continue to apply and the test of "some connection" indicated in para 8 of the judgment in Bhagatram Rajeevkumar v. Commissioner of Sales Tax, M.P. 1995 Supp. (1) SCC 673 and followed in the case of State of Bihar v. Bihar Chamber of Commerce (1996) 9 SCC 136, is, in our opinion, not good law. Accordingly, the constit....
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....uantifiable and measurable; (c) That it is broadly-proportional and not progressive; (d) That it is based on the principle of "pay for the value"; (e) That it is based on the concept of recompense/reimbursement; and reimbursement/recompense is in close proximity to the cost incurred by the provider of the services/facilities; and (f) That compensatory tax, compulsorily charged is in proportion to the special benefits derived to defray the cost of regulation or facilities or special advantages provided to the trades in question; (g) That the burden of showing that the tax is compensatory in nature lies on the State. 28. Laying down parameters of compensatory tax, the apex court in Jindal Stainless Ltd. observed:- "40. 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."....
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....ted 8.1.2007 in which following interim order was passed by the Supreme Court on 17.4.2007:- "It is stated by learned counsel for the State of U.P. that an appeal shall be filed against the order of the Allahabad High Court which was passed pursuant to the directions given by this Court on 14th July, 2006 in Civil Appeal No.3453 of 2003 and connected cases. It is stated that some other High Court have also decided the matter afresh. The High Court's orders, wherever it has been passed in favour of the tax payers, shall operate so far as the concerned writ petitioner's are concerned. A list has been filed indicating that seven of the High Courts have already decided the writ petitions and the judgments are awaited in respect of five other High Courts. The concerned High Courts, i.e. Karnataka, Rajasthan, Andhra Pradesh, Orissa and Tamil Nadu are requsted to dispose of the matter pursuanct to the direcgtion of this Court dated 14th July, 2006 within a period of three months." 13. M/s Indian Oil Corporation demanded refund of the entry tax of Rs. 3022 crores on the basis of the order dated 8.1.2007 passed by the High Court and the interim order dated 17.4.2007 pass....
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....der dated 17.4.2007 of the Apex Court, the State Government was considering to enact afresh the said Act retrospectively after the judgment of the Constitution Bench of the Hon'ble Supreme Court. In the meantime, the Bihar Entry Tax Act has been held valid by the Hon'ble Patna High Court. It was, therfore, decided to make a law with retrospective effect by removing the shortcomings pointed out in the judgment of the High Court of Judicature at Allahabad and in the light of the observations with respect to the compensatory tax made by the Constiuttion Bench of the Supreme Court and on the basis of the provision of the Bihar Entry Tax Act, which has been held valid by the Patna High Court. Since the State Legislature was not in session and immediate legislative action was necessary to implement the aforesaid decision, 'The Uttrar Pradesh Tax on Entry of Goods into Local Areas Ordinance, 2007' U.P. Ordinance No.35 of 2007 was promulgated by the Governor on September 24, 2007. This Bill is introduced to replace the aforesaid Ordinance." 15. The Act was amended by the Amendment Act No.8 of 2009 to make it single point levy on the entry of the schedul....
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....t of the value of the goods as may be specified by the State Government by notification and different rates may be specified in respect of different goods or different classes of goods:- Provided that the State Government may by notification amend the Schedule and upon issue of any such notification, the Schedule shall, subject to the provisions of sub-section (10), be deemed to be amended accordingly. (2) The tax under sub-section (1) shall be continued to be levied till such time as is required to improve infrastructure within the State such as power, road, market condition etc. with a view to facilitate better market conditions for trade, commerce and industry. (3) The tax levied under sub-section (1) shall be payable by a dealer who brings or causes to be brought into the local area such goods, whether on his account or on the account of his principal or takes delivery or is entitled to take delivery of such goods on its entry into a local area:- Provided that the State Government may by notification, permit any Power Project Industrial Unit engaged in generation, transmission and distribution, having aggregate capital investment of rupees on....
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....in sub-section (1) or sub-section (3), no tax shall be levied on or collected from a dealer who brings or causes to be brought into a local area any goods which are:- (i) consigned without using them in the local area to any place outside the State; or (ii) sold or re-sold either in the course of inter-State trade or commerce or in the course of export out of the territory of India, Explanation:- Section 3, section 5 and section 6-A of the Central Sales Tax Act, 1956 shall apply for the purpose of determining whether or not any goods has been sold by a dealer in the course of inter-State trade or commerce or in the course of export out of the territory of India:- Provided that where at the time of entry of goods into a local area, the quantity or value of goods to be sold within such local area for the purpose of being taken outside the State without consumption, use or sale in such local area, is not ascertainable, the dealer shall pay the amount of tax on the value of total quantity of goods and after the goods are consigned or sold outside the State or int he course of export, the dealer may claim refund or adjustment of the amount so paid as ....
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....pt that any imposition, assessment, levy or collection of tax or penalty shall be subject to the said modification or annulment. 5. Reversal of levy of tax:- Where any dealer has brought or has caused to be brought or has taken delivery of any goods notified under sub-section (1) of section 4 on its entry into a local area, for consumption, use or sale therein and has paid tax in respect of entry of such goods into such local area or purchased such goods on which entry tax has already been paid, such tax shall be refunded or adjusted to such dealer by whom without using them in the local area such goods are consigned to any other place outside the State or are sold either in the course of inter- State trade or commerce or in the course of export outside the territory of India. 12. Realization of tax through manufacturer:- (1) Notwithstanding anything contained in any other provision of this Ordinance, any person who intends to bring into a local area from any manufacturer within the State, such goods specified in the Schedule as may be notified by the State Government, shall, at the time of taking delivery of the goods from the manufacturer, pay to the ma....
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....try in the State of Uttar Pradesh which shall include the following:- (a) construction, development and maintenance of roads and bridges for linking the market and industrial areas; (b) providing finance, aids, grants and subsidies to financial, industrial and commercial units; (c) creating infrastructure for supply of electricity and water to industries, marketing and other commercial complexes; (d) creation, development and maintenance of other infrastructure for the furtherance of trade, commerce and industry in general; (e) providing finance, aids, grants and subsidies for creating, developing and maintaining pollution free environment in the concerned areas; (f) any other purpose connected with the development of trade, commerce and industry or for facilities relating thereto which the State Government may specify by notification; (g) providing finance, aids, grants and subsidies to local bodies and government agencies for the purposes specified in clauses (a), (c), (d), (e) and (f); (2) The entry tax levied and collected under this Ordinance shall be credited to the Uttar Pradesh Trade Development Fund an....
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.... The entry tax was notified at 2% on the remaining items including machinery and spare parts (Item 2); non-levy sugar (Item 4); cement (Item 8), coal (Item 9); aluminum and its product (Item 14); cable of all kinds (Item 16), laptop, computer system and peripherals, TV including LCD (Item 17); tyre and tubes excluding tyres and tubes of cycle, rickshaw and animal driving vehicle (Item 18), and marbles stones and their tiles (Item 18). 19. The notification was amended on 19.2.2010, excluding natural gas, cement, motor vehicles of all kinds, tyres and tubes. It was again amended on 29.3.2009 excluding machinery and spare parts; wood and timber of all kinds; clinker; aluminum and its products; cables of all kinds, lap top-computer system and peripherals; marbles stones and tiles; and refrigerator, air conditioner and conditioning plants. On high speed diesel and other petroleum products, excluding kerosene oil for public distribution system, a notification was issued on 04.3.2008 providing rebate and a notification was issued on 30.6.2008, providing exemptions. At present only 08 items out of 20 are left in the Schedule for levy of entry tax. Section 5 of the Act of 2007 provides f....
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....ions upholding the validity of the Gujarat Tax on Entry of Specified Goods into Local Areas Act, 2001. The High Court found that the levy of entry tax under the Gujarat Act were compensatory. The entry tax on the goods did not violate Art.301, nor was the levy of tax found to be discriminatory between goods so imported and the goods so manufactured or produced in the State. The importer would be at par with the local dealers. 22. The Patna High Court in Indian Oil Corporation Ltd. and Anr. v. State of Bihar and Ors. decided on January 9th, 2007, (2007) 10 VST 140 (Patna) examined the provisions of the Bihar Tax on Entry of Goods into Local Areas for Consumption, Use or Sale therein Act, 1993 as amended by Bihar Amendment Act, 2001; Bihar Amendment Act, 2003; Bihar (Amendment and Validation) Act, 2003; Bihar Amendment Act 7 of 2006 and Bihar Amendment Act (9) of 2006 and held the Validation Act to be constitutionally valid. It held that the collection of entry tax is compensatory tax, which has been diverted to Urban Local Bodies, to provide various services and infrastructure facilities to traders community to carry on their business activity. The Patna High Court further found ....
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....s for facilitating trade and commerce; there was no direct or immediate impact empowering trading facilities; the incidental used by community of the facilities used by traders, did not engage the primary or principal use for facilitating trade and commerce; the entry tax collected was allotted to the local bodies for the loss sustained due to abolition of octroi. The substantial amount of the entry tax was allotted to the local bodies was spent in commercial or industrial centres; measures have been taken to provide trading facilities and markets had been established. The proportionality between quantum of tax and the facilities/services provided demonstrated that 44% of the amount spent by them was on the expenditure incurred creating facilities for trade, commerce and industry; the tax imposed was single point tax and was provisional to the benefits without which the trading facilities could not have been availed of. 26. The Guwahati High Court in Indian Oil Corporation Ltd. (Guwahati Refinery) v. State of Assam and Ors. decided on 9.1.2009 reported in (2009) 21 VST 76 (Guwahati) upheld the validity of the Assam Entry of Tax Act, 2008 as well as the retrospectivity of the Act....
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....on and not saved by Article 304 of the Constitution of India on the grounds that the respondent- State did not produce and place any material before the Court showing that payment of compensatory tax is a reimbursement for the quantifiable/measurable benefit provided or to be provided to its payers. The High Court found that there was no 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. The 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. Similarly, State Financial Corporation, constituted under the State Financial Corporation Act for providing incentive and financial aids functions as a statutory body. The supply of electrical energy and waters to the industries, marketing and commercial complexes, cannot be held to be special benefits to the trades men. The trade development fund was created by notification dated 29.3.2008 with retrospective effect from 1.4.2006. Nothing wa....
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....t is the test. Maintaining of roads, bridges, etc., and promotion of SSI units, etc. are generally met from the general funds or revenue. Whether the goods are transported into the State from outside the State or abroad the State has got a duty to provide those facilities, like roads, and bridges, which is being enjoyed not only by persons who bring goods notified for levy of entry tax but also others. The Kerala High Court found that there are 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. 29. The Karnataka High Court, in Bharat Earth Movers Ltd v. State of Karnataka and others decided on 29.3.2007 (2007) 8 VST 69 (Katn), allowed the writ petitions holding the Karnataka Special Tax on Entry of Certain Goods Act, (29 of 2004) as violative of Articles 301, 304 (a), (b) and 255 of Constitution of India; followed its earlier Division Bench decision in Avinyl Polymers Pvt. Ltd v. State of Karnataka (1998) 109 STC 26 (Karn) and held that the State was not able to demonstrate any exclusive or special service provided to the class of taxpayers who bear the entry tax under t....
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....f entry tax under the Act was held to be illegal, unauthorised and violative of Article 301 of the Constitution. The Madras High Court held that maintaining of roads, providing bridges etc. cannot be said to be compensatory in nature so as to constitute special advantage to trade, commerce and intercourse. Maintenance of roads, bridges etc., is generally met from general funds or revenue. Whether goods are transported into the State or outside State or abroad, the State has got a duty to provide facilities like roads, brides, etc., which are being enjoyed not only by the persons who bring the goods notified for levy of entry tax, but also by others. The State of Tamilnadu also levies taxes for the purpose of maintenance of roads from the owners of motor vehicles under the Tamil Nadu Motor Vehicles Taxation Act, 1974 wherein the parameters of levy are based on the laden weight of the motor vehicle. The Madras High Court also held that the levies of entry tax only on goods which are imported into the State of Tamil Nadu as against those which are produced or obtained within the State of Tamilnadu causes discrimination. The price structure of the imported goods vis-a-vis the locally m....
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....vement or transportation of a particular item of goods has received the President's sanction under the proviso to Article 304 (b), it will not absolve the State Legislature from obtaining the President's specific sanction if an item, which had not been originally included in the Bill, when it had received the sanction of the President, is sought to be subsequently included. The President's sanction, under Article 304 (b), is the sine qua non for the validity of a legislative enactment. The new insertion in the Bill, which was originally not there, will not survive, unless the President's sanction is obtained for that purpose. 34. The Gauhati High Court - Itanagar Bench in Jaiprakash Associates Limited (Cement Division) v. State of Arunachal Pradesh and others decided on 5.3.2009 (2009) 22 VST 310 (Gauhati) held that the levy of tax on the entry of goods, other than non-taxable import, under the Arunachal Pradesh Goods Tax Act, 2005, for consumption use or sale thereof into the local area of State of Arunachal Pradesh is violative of Articles 301 and 304 of the Constitution of India. The High Court held that a conjoint reading of the Articles 301 to 304 would show....
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....heir development generally. The amendments brought in the year 2007 brought about only a superficial change in the language while retaining the basic character of the levy as a source for general development. Mere specification of the 60% of the amount in line with jdugments 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. The data given by the State of having incurred expenditure at 17% of the total collections and is for less than the amount. The other statute namely Haryana Rural Development Fund Act, 1983, Punjab Passengers and Goods Taxation Act, 1952, Punjab Agricultural Produce Market Act, 1961, etc., levying compensatory taxes to cover the cost of services. The burden of proof on the State that the payment of levy of entry tax is reimbursement/recompense for the quantifiable/measurable benefits provided or to be provided to the petitioners was not discharged and thus the levy under the act was not found to be compensatory in nature. It thus amounted to restriction on free-flow of trade and commerce and is hit by Article 301 of the Con....
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....tion was premature, in the absence of any estimate of services to be provided or projected to be provided, the levy was unconstitutional. The Trade, Commerce and Intercourse within the Territory of India:- 38. Part XIII of the Constitution of India provides for trade, commerce and intercourse within the territory of India. Article 301 to Article 307 under this Chapter are quoted as below:- "Article 301. Freedom of trade, commerce and intercourse:- Subject to the other provisions of this Part, trade, commerce and intercourse throughout the territory of India shall be free. Article 302. Power of Parliament to impose restrictions on trade, commerce 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. Article 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 th....
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....h powers and such duties as it thinks necessary." 39. Article 301 states that subject to the other provisions of Part XIII, trade, commerce and intercourse throughout the territory of India shall be free. Freedom is not for all laws but from such laws which restrict and affect activities of trade, and commerce amongst the State. 40. In Atiabari Tea Co. Ltd. v. State of Assam AIR 1961 SC 232, the constitutionality of Assam Taxation (On Goods Carried by Roads and Inland Waterways) Act, 1954 enacted by the Legislature of Assam providing for levy of tax on certain goods carried by road or inland waterways in the State of Assam, was questioned by a number of tea companies who sold most of their products outside the State of Assam after transporting them by road or waterways to West Bengal and other States. The majority opinion (Gajendragadkar, Wanchoo and Das Gupta, JJ.) stated their conclusion in the following words:- "52. ...Our conclusion, therefore, is that when Article 301 provides that trade shall be free throughout the territory of India it means that the flow of trade shall run smooth and unhampered by any restriction either at the boundaries of the States or at a....
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....me Court upheld the constitutionality of the Act on the ground that the taxes levied by it are compensatory in nature and, therefore, outside the purview of Article 301. Once outside the purview of Article 301, it was held, Article 304 was also not attracted. The Court observed in paragraph - 19 that:- "The taxes are compensatory taxes which instead of hindering trade, commerce and intercourse facilitate them by providing roads and maintaining the roads......" (AIR page 1425) Vide para. 21 of the Report, it was observed that:- "If a statue fixes a charge for a convenience or service provided by the State or an agency of the State, and imposes it upon those who choose to avail themselves of the service or convenience, the freedom of trade and commerce may well be considered unimpaired. (AIR page.1425) Thus, the concept of "compensatory tax" was propounded. Therefore, taxes which would otherwise interfere with the unfettered freedom under Article 301 will be protected from the vice of unconstitutionality if they are compensatory." 42. In Automobile Transport AIR 1962 SC 1406 it was said, vide (AIR page.1425, para 19), that:- "a working test f....
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....uch dealers directly or indirectly the levy cannot be impugned as invalid.". In State of Bihar v. Bihar Chamber of Commerce (1996) 9 SCC 136 the Bench of two Judges reiterated the position that "some connection" between the tax and the trading facilities extended to dealers directly or indirectly is sufficient to characterise it as compensatory tax. The Court held that where the State provides several facilities to the trace, such as laying and maintenance of roads, waterways, markets etc. the entry tax on that premise is compensatory in nature. 45. On 26.9.2003 a Two-Judge Bench of Supreme Court doubted the correctness of the view in Bhagatram Rajeevkumar v. CST (supra) and State of Bihar v. Bihar Chamber of Commerce (supra) and the matter was heard by a larger bench. In Jindal Stainless Ltd. (2) and another vs. State of Haryana and others (2006) 7 SCC 241 a Constitution Bench of Five Judges considered the reference and held in paragraphs 36 to 53 as follows:- "36. We have examined and analyzed the relevant provisions of Part-XIII and particularly Article 301 as we are required to lay down the parameters of compensatory tax vis-a-vis Article 301, as indicated vide para....
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....en "A Tax", "A Fee" and "A Compensatory Tax":- Parameters of Compensatory Tax:- 39. As stated above, in order to lay down the parameters of a compensatory tax, we must know the concept of taxing power. 40. 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. In the case of a tax, a particular advantage, if it exists at all, is incidental to the States' action. It is assessed on certain elements of business, such as, manufacture, purchase, sale, consumption, use, capital etc. 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 ....
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....munity at large that the beneficiary shall pay for it. 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/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. 43. 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. 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 t....
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....m the operation of Article 301, which means that tax laws can and do amount to restrictions on the freedom guaranteed to trade under Part-XIII of the Constitution. This principle is well settled in the case of Atiabari Tea Co. It is equally important to note that in Atiabari Tea Co, the Supreme Court propounded the doctrine of "direct and immediate effect". Therefore, whenever a law is challenged on the ground of violation of Article 301, the Court has not only to examine the pith and substance of the levy but in addition thereto, the Court has to see the effect and the operation of the impugned law on inter-State trade and commerce as well as intra- State trade and commerce. 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 facilitat....
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....ransport's case but it obliterates the very basis of compensatory tax. We may reiterate that when a tax is imposed in the regulation or as a part of regulatory measure the controlling factor of the levy shifts from burden to reimbursement/recompense. The working test propounded by a Bench of seven Judges in the case of Automobile Transport and the test of "some connection" enunciated by a Bench of three Judges in Bhagatram's case cannot stand together. Therefore, in our view, the test of "some connection" as propounded in Bhagatram's case is not applicable to the concept of compensatory tax and accordingly to that extent, the judgments of this Court in Bhagatram Rajeevkumar v. Commissioner of Sales Tax, M.P. and State of Bihar v. Bihar Chamber of Commerce stand overruled. 51. 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. In our opinion, the doubt expressed by the referring Bench about the correctness of the decision in Bhagatram's case followed by the judgment in the case of Bihar Chamber of Commerce was w....
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....o these writ petitions. 48. Most of the States have amended the legislation imposing entry tax to bring it in tune with the law laid down in Jindal Stainless Ltd. (2) and another vs. State of Haryana and others (supra). The judgement holds the field and that almost all the cases cited by us decided by different High Courts rely upon the law of compensatory tax as judicially evolved in Automobile Transport (supra) as a part of regularly charge. Most of the High Courts of the States namely Punjab and Haryana, Jharkhand, Kerala, Karnataka, Tamil Nadu, Assam and Bihar have struck down the entry tax where sufficient data was not produced by the States to establish that the entry tax was not compensatory inasmuch as it was not levied to reimburse or recompense, and that the State Government failed to provide sufficient data to show that the benefits were quantifiable/measurable with the levy. The States of Gujarat, Orissa and Madhya Pradesh have, however, held otherwise. 49. On 18.12.2008, when some of the cases arising out of the judgements of the High Courts in entry tax matters came up for hearing before the Constitution Bench of Supreme Court, it was found that some of the High....
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....ows:- "11. Some of these aspects which need consideration by larger Bench of this Court may be briefly enumerated. Interplay/interrelationship between Article 304(a) and Article 304(b). The significance of the word "and" between Article 304(a) and 304(b). The significance of the non obstante clause in Article 304. The balancing of freedom of trade and commerce in Article 301 vis-a-vis the States' authority to levy taxes under Article 245 and Article 246 of the Constitution read with the appropriate legislative Entries in the Seventh Schedule, particularly in the context of movement of trade and commerce. 12. Whether Article 304(a) and Article 304(b) deal with different subjects? Whether the impugned taxation law to be valid under Article 304(a) must also fulfil the conditions mentioned in Article 304(b), including Presidential assent? Whether the word "restrictions" in Article 302 and in Article 304(b) includes tax laws? Whether validity of a law impugned as violative of Article 301 should be judged only in the light of the test of non-discrimination? Does Article 303 circumscribe Article 301? Whether "internal goods" would come under Article 304(b) and "exter....
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....he State" refer to the development of trade, commerce and industry in the whole of the State. It does not restrict the development of trade, commerce and industry in the local area indicating that the object is to provide facilities to trade in general and not to any industry or any class thereof. The linkage of benefits of the tax to be compensatory to save itself from the vice of Article 301 should be to provide services to that particular trade or industry and not to the development of trade, commerce and industry in the State in general. He submits that the levy being on the value of the goods (advalorem) makes the levy progressive which is an attribute of tax as a common burden and not a compensatory tax which is close to a fee in which the benefit has to be given to the payer and not in general. 52. Referring to Section 14 of the Act of 2007 Shri Gupta submits that the words in sub-section (1) "the proceeds of the levy under the Act shall be appropriated to the Fund and shall be utilised exclusively for the development or facilitating the trade, commerce and industry in the State of Uttar Pradesh" looses its relevance when the word is used broadly with no definite meaning.....
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.... 52 List II of the 7th Schedule has to be restricted and treated as subject to Article 301 and other Articles in the main body of the Constitution. The entry tax cannot be imposed as it violates Article 301 of the Constitution, despite Entry 52 of List II. In paragraph-65 this Court held that impugned Act imposing entry tax violates Article 301 of the Constitution as the revenue generated by it cannot be said to be specifically meant for facilitating trade or commerce, but is raised for augmenting the general revenue of the State. The statement of objects and reasons of the Act (U.P. Act No. 12 of 2000) also discloses that the Act was enacted to augment the general revenue of the State and not for facilitating trade and commerce. 55. Shri Bharat Ji Agrawal submits that though on 27.1.2004, when the earlier writ petition was decided, the judgment in Bhagatram Rajeevkumar v. CST (supra) held the field. This Court held that the case is not of much help because in the said case in the counter affidavit filed by the State which was not disputed, the nature of levy was demonstrated to be compensatory. The decision proceeded on a concession made by the petitioner's counsel that the....
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....dering to enact a new Act retrospectively after the Constitution Bench of the Supreme Court and in view of the judgment of the Patna High Court upholding the validity of the Bihar Entry Tax Act. Shri Bharat Ji Agrawal submits that the Act of 2007 was enacted only to avoid the liability arising out of judgment of this Court to refund the amount to the Indian Oil Corporation. 57. Shri Bharat Ji Agrawal refers to judgment in Jindal Stainless Limited (2) which has now decided the constitutional issue of the validity of the enactments levying entry tax. He submits that the tests laid down by the Jindal Stainless Limited (2) are not satisfied in the levy of entry tax in the Act of 2007. For the compensatory tax to be constitutional valid, if it does not have protection of Article 304 (b), the benefit of tax must be quantifiable and measurable to the trade. The compensatory tax is by way of recompense/reimbursement to the trade. It is of an hybrid nature which is more closure to fee than tax. The burden of proving that the benefit to the trade is quantifiable or measurable is on the State. Shri Agrawal referred to Section 14 of the Act of 2007 and submits that none of the benefits inte....
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.... to Mathura refinery for transport or import of crude oil to the said refinery. As mentioned above, the petitioner uses its own infrastructure installed by it in the land in which the right of user is vested in terms of Petroleum, Minerals and Pipelines (Acquisition of Right of User of Land) Act, 1962. He submits that in IOC v. State of U.P. decided on 27th January, 2004 this Court had held that no facility whatsoever has been provided by the U.P. Government to Mathura refinery for transportation of crude oil from outside State of U.P., which is ultimately transported through underground pipelines maintained exclusively by the petitioner itself. He submits that the cost incurred by the IOC for acquiring land for Sadaya Mathura pipelines was approximately 13.6 crores in or about 1976-77, made up of free hold land (Rs.11.47 corres); lease hold land (Rs.1.13 crores) and right to way, (Rs.98.75 lacs). In addition the petitioner Corporation has spent approximately Rs. 1361.33 crores for construction of Salaya Mathura Pipeline in 1977-80. The pipeline is operated, maintained, secured and insured by the Corporation. The Corporation has installed sophisticated tele-supervisory and telecomm....
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....rpose for development of trade, commerce and industry cannot make the impugned tax as compensatory tax. Applying the tests laid down in Jindal Stainless, it is clear that the tax is not compensatory tax for following reasons:- "1. The tax is levied on traders dealing in 15 goods and not on any other goods; 2. The tax is levied on traders moving the goods into the local area and outside the local area, and not on traders moving the goods within the local area; 3. There are no specific benefits or facilities or amenities to be provided to the traders in those 15 goods who move from one local area to another, to the exclusion of benefits or facilities provided to the members of trader, commerce and industry generally; 4. The proceeds of the tax collected from such a limited category of traders is being applied to the entire State; 5. Even assuming that the traders who pay the said tax may also incidentally, as part of the larger body of trade, commerce and industry derive some benefit, the tax collected from them is patently much more than the facilities provided to them; 6. On both the principles laid down in Jindal Stainless name....
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....ct was not held to satisfy the requirement under Article 301 with Article 304 (b) of Constitution of India. The levy of entry fee was thus held as ultra vires Article 301 of the Constitution of India. He has also relied upon Hardev Motor Transport vs. State of M.P. and others (2006) 8 SCC 613; Sree Rayalaseema Alkalies and Allied Chemicals Limited v. State of Andhra Pradesh and others (2008) 13 VST 15 (AP) and Dinesh Pouches Ltd. v. State of Rajasthan and others (2008) 16 VST 387 (Raj) in support of his submission. Shri Bharat Ji Agrawal has also referred to the judgments of Kerala High Court, Karnataka High Court, Punjab and Haryana High Court and Gauhati High Court in which the similar Acts to levy entry fee were held to be ultra vires to Article 301 of Constitution. 70. Shri Bharat Ji Agrawal appearing in Writ Petition No. 1284 of 2008 (M/s GAIL India Limited vs. State of UP and others) submits that earlier Writ Petition No. 1138 of 2002 (Gas Authority of India Limited vs. State of UP and another) challenging the Circular dated 2.3.2002 to levy tax on whole sale price is pending. The entry tax can be levied only on purchase price or on the price on which the natural gas is pu....
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....780 of 2008 (M/s Jaypee Greens Limited vs. State of UP and others), Writ Petition No. 1532 of 2007 (Jaiprakash Industries Ltd vs. State of UP and ors), Writ Petition No. 840 of 2007 (Diamond Cement Limited vs. State of UP and others), Writ Petition No. 1515 of 2007 (Birla Corporation Ltd. vs. State of UP and others) and Writ Petition No. 1525 of 2007 (M/s Prism Cement Ltd vs. State of UP and others). The cement was deleted from the 1st Schedule as notified goods for the levy of entry tas by Notification No. 104 dated 15.1.2009. The levy and collections prior to 15.1.2009 are under challenge in these writ petitions. 73. Shri Bharat Ji Agrawal submits that cement plants are situated in remote corner of the State where the facility of transportation is not given nor there is any roads or bridges linking these areas with the highways. In Writ Petition No. 1532 of 2007 more than Rs. 34 crores have been paid as entry tax by Jaiprakash Industries Limited from the years 2003-04 to the year 2006-07, out of which not even Rs. 1 crore has been paid by way of any facility. In Writ Petition No. 2074 of 2008 (Hitech Pipe Limited vs. State of UP and others) the entry tax on iron and steel incl....
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.... Ltd. and Anr. v. Broach Borough Municipality and Ors. (1970 (1) SCR 388 at 392) the Supreme Court held as follows:- "Applying the said principles to the facts of the present case, it is seen that the invalidity pointed out by the High Court about the lack of services rendered at the relevant point of time is an invalidity which was not capable of being removed to justify the levy of tax by an Amending Act and the Legislature could not have either ignored this finding of fact by the High Court or overruled the same. Therefore, in our opinion, in respect of the tax collected for the period before the date of the Amendment there could have been no validation of such collection. Hence, the Amending Act so far as it validates the collection of property tax by the BDA, cannot be sustained for a period prior to the date of the Amending Act. We however make it clear that in this appeal we have not decided the nature of levy under Section 28B after it was introduced by the Amending Act as to whether it is a tax simpliciter requiring no service at all or whether it is a tax in the nature of a fee requiring services as held by the learned Single Judge in the earlier round o....
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.... Amending Act which validates the collection of property tax by the BDA before the introduction of Sections 28A and 28B as invalid; consequently the said collection is liable to be refunded as directed by the court in earlier proceedings. Accordingly, this appeal is partly allowed to the extent indicated hereinabove. No costs." 77. Shri Dhruv Agrawal further submits that the words "local area" in Entry 52 of the State List had come up for consideration in Diomond Sugar Mill's case AIR 1961 SC 653. Referring to paragraph-25 of the judgment Shri Agrawal submits that local area is not any specified area in the State. The area must be administered by the local body. The local area cannot be understood in the general sense. The entry tax has to be seen in the context of the local area. The U.P. Trade Development Fund to which the entire amount of entry tax levied or collected has to be credited under sub-section (2) of Section 14 refers to the fund for development of the State and not in respect of any local area. Shri Agrawal submits that the entry tax can be levied for entry of goods into local area. The entry tax is a compensatory tax which must be utilised for the development....
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.... in Writ Petition No. 1510 of 2007 (Kanoria Chemical Industries Ltd vs. State of UP and others); Writ Petition No. 566 of 2009 (M/s Soni India Private Limited vs. State of UP and others); Writ Petition No. 1153 of 2008 (M/s Hi-Tech Carbon Limited vs. State of UP and others), Writ Petition No. 1856 of 2008 (Arun Kumar Singh vs. State of UP and others) and in Writ Petition No. 2138 of 2008 (M/s Honda Seil Cars (I) Limited vs. State of UP and others). He submits that the entry tax under Section 4 of the Act is imposed on the entry of scheduled goods into local area. The "local area" under Section 2 (c) is defined under the Act as follows:- (d) "local area" means the territorial area of,- (i) a Municipal Corporation under the Uttar Pradesh Municipal Corporation Act, 1959; (ii) a Municipality under the Uttar Pradesh Municipalities Act, 1916; (iii) a Zila Panchayat or a Kshettra Panchayat under the Uttar Pradesh Kshettra Panchayats and Zila Panchayats Adhiniyam, 1961; (iv) a Gram Panchayat under the United Provinces Panchayat Raj Act, 1947; (v) a Cantonment under the Cantonments Act, 1924; (vi) any Industrial Development Area....
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....of word "a" before "local area" in the Section is significant. The taxable event is not the entry in any area of the State but a local area. If the goods are brought into the factory, which is defined by a separate notification as industrial area, it cannot be said that the goods have been brought into the local area in the State. The notified industrial area of Hindalco is not a notified industrial development area under the U.P. Industrial Area Development Act, 1976. The industrial area of Hindalco is not a local authority, and does not have a local fund, and thus the entry of goods into local area will not attract the levy of entry fee. Hindalco Industries Limited had earlier filed a Writ Petition No. 1891 of 2006, and thereafter Writ Petition No. 1699 of 2007 challenging notices issued under Section 21 of the Trade Tax Act relating to the period under the old Act. The company has also filed Writ Petition No. 1489 of 2005 challenging the assessment and demand, which was paid under protest. A Writ Petition No. 382 of 2007 challenging notices under Rule 4 (5) under the Entry Tax Act is also pending. 83. Shri Navin Sinha, Senior Advocate assisted by Shri Saral Saxena appears in ....
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.... free from irregularities. The new Act does not provide for any safeguard for checking the irregularities for which the octroi was abolished. Shri Goyal submits that the entry tax is a different form of octroi. The Schedule includes only 20 items and leaves many other items at the discretion of the State Government. There is no rational nexus in notifying the goods and thus the Act is discriminatory in character in respect to various trades. 85. Shri K.N. Kumar appears for Railways in Writ Petition Nos. 791 of 2009; 801 of 2009 and 875 of 2009. He submits that under Section 184 of the Railways Act, 1989 the taxation on railways by local authorities, and under Section 185 the taxation on railways for advertisement is prohibited. The railway administration is not liable to pay any tax in aid of funds of any local authority, unless the Central Government by a notification declares the railway administration to be liable to pay the tax specified in such notification and while such notification is enforced, the railway administration shall be liable to pay to the local authority either the tax specified in the notification or in lieu thereof such sums may be determined by an officer ....
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....cording to the loading capacity of the vehicle, the coal traders have no use of power or water for running their trade. They are also paying Clean Energy Cess to the Central Government. Similarly the traders in tendu patta cannot be compensated from the collections of entry tax, as they are not entitled nor get any compensation or facility under the Act. The Reply:- 87. Shri S.P. Kesarwani, Addl. Chief Standing Counsel assisted by Shri C.B. Tripathi have defended the constitutional validity of the Act of 2007, its working and the retrospective operation of the Act in Section 17. They have relied upon short counter affidavit of Shri C.L. Gupta, Asstt. Commissioner, Commercial Tax, Sector-1, Nodia in Writ Petition No.1284 of 2008, M/s Coal (India) Ltd. v. State of U.P. and Ors. and the counter affidavit of Shri V.B. Singh, Deputy Commissioner, Commercial Tax, Sector-1, 2 and 3, Allahabad in Writ Petition No.1532 of 2007, Jaiprakash Associates Ltd. v. State of U.P. 88. It is submitted by Shri S.P. Kesarwani that the Act of 2000 was enacted to provide for the levy and collection of entry tax on entry of certain goods specified in the Schedule into a local area from any place o....
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....ence/material on record to give required date/statistics to prove, establish that the amount collected as tax and its expenditure on providing additional/specific addition/facility provided to trades in particular mentioned under the Schedule of the Act. In the absence of such data it is not possible for the Court to hold that the entry tax is compensatory tax. 91. Against the observations made by the court and the order passed on 8.1.2007 the State of U.P. has fled objections by way of special leave petition in the Supreme Court and the matter is still pending. In the meantime, the following interim order was passed on 17.4.2007:- "It is stated by learned counsel for the State of U.P. that an appeal shall be filed against the order of the Allahabad High Court which was passed pursuant to the directions given by this Court on 14th July, 2006 in Civil Appeal No.3453 of 2003 and connected cases. It is stated that some other High Court have also decided the matter afresh. The High Court's orders, wherever it has been passed in favour of the tax payers, shall operate so far as the concerned writ petitioner's are concerned. A list has been filed indicating that seven....
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....ting of the U.P. Trade Development Fund presided by the Chief Secretary, Government of U.P. held on 5.5.2008 the entire collections and allocations of the year 2007- 08 was considered. In the year 2007-08 the entry tax collected on the 15 scheduled items are given as below:- 1. Crude oil as defined under Section 14 of the Central Sales Tax Act, 1956 67.18 lacs 2. Machinery and machinery parts of which the value is more than 10 lacs 519.23 lacs 3. Natural gas 13482.99 lacs 4. Sugar other than levy sugar 2472.74 lacs 5. Tobacco in the shape of cigarette 6.25 lacs 6. All kinds of paper 2094.74 lacs 7. Pan Masala with tobacco (Gutkha) 508.18 lacs 8. Cement 1104.58 lacs 9. Coal 9159.12 lacs 10. Tendu patta 253.54 lacs 11. Wax 18.67 lacs 12. Treated leather 112.8 lacs 13. All kind of timber from the trees of any variety 122.85 lacs 14. High speed diesel and another petroleum products except the kerosene oil for public distribution 5239.8 lacs 15. Clinker 163.04 lacs 94. The Committee found that on paper and high speed diesel oil and other petroleum pro....
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....or the concerned departments in the places, where these goods are traded. (iv) Rs. 75 crores be allotted for concerned department for taking care of water and river pollution and its affect on the health from the pollution caused by the units of crude oil, leather and cigarette. (v) The Committee has allocated all the amounts realised from the entry tax other than the amount of which the realisation has been stayed by the High Court. As and when the amount will be received, the Committee will make allocations from time to time. The meeting will be convened accordingly at the relevant time. (vi) It will be proper that the principal payers of the entry tax may also make available any working plan or suggestions on any of the additional items or points for the development of the trade, commerce and industry so that the Committee may consider and take appropriate decisions. Steps be taken accordingly. 96. At the end of the meeting the Chief Secretary laid emphasis to all the departments that the development of trade, commerce and industry is the top priority of the State Government and thus according to the will of the legislature and the judgment of Hon&#....
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....rrect and baseless. The Act of 2007, facially and patently indicates that the benefits, which is quantifiable and measurable is given to the payers of entry tax as a class. The rate of tax regarding goods imported from outside the State, and the goods manufactured within the State is the same. There is no discrimination in the provisions of the Act or the Rules made thereunder between the goods imported from outside the State and those manufactured and produced in the State of U.P. and brought into local areas for consumption, use or sale therein. The Act of 2007 is not violative of Art.301 or 304 of the Constitution of India. In Jindal Stainless Ltd. (2) in paragraph 44 and 45 the Supreme Court has held that whenever a law is violative of Art.301 of the Constitution, the Court has to see whether the impugned enactment facially or patently indicates quantifiable data on the basis fo which the compensatory tax is sought to be levied. The Act must facially indicate the benefit, which is quantifiable or measurable. 99. Shri S.P. Kesarwani submits that the validity of the Act or Rules can be challenged only on two grounds namely lack of legislative competence and violation of any of....
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....effect of its provision. If on such adjudication it is found that the enactment falls substantially on a matter assigned to the State legislature, in that event such an enactment must be held to be valid, even though nomenclature of such enactment shows that it is beyond the competence of the State legislature. 101. Shri S.P. Kesarwani submits that power to legislate comprehends power to tax prospectively as well as retrospectively. The legislature has completely removed the entire defects pointed out by this Court in its judgment dated 27.1.2004 in enacting the U.P. Act of 2007 and has passed fresh Act with complete retrospective effect from 1.11.1999. Such a mode of legislation is recognised right from the case of Tata Iron and Steel Co. Ltd. v. State of Bihar, 1958 (9) STC 267 upto Welfare Association ARP Maharashtra v. Ranjeet P. Gohil, JT 2003 (2) SC 335. Shri S.P. Kesarwani submits that the U.P. Act of 2007 has been enacted with complete retrospective effect from 1.11.1999 removing the entire basis of the judgment of this Court, by curing all the defects. The tax is proportional and not progressive or regressive and is inconformity with the parameters of compensatory tax a....
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....ale, applicable from April 1st, 1948 and consequently validating the levy of sales tax, it was held that sales tax is an indirect tax on the consumer. The idea is that seller will pass it on to the purchaser and collect it from them. Replying to the arguments that once the time goes past, the seller loose the chance of realising it from purchaser, the Supreme Court held that argument is not sound as from the point of view of economist and as an economic theory the sales tax may be an indirect tax to the consumer, but legally it need not be so, the primary liability to pay the sales tax under the Act is on the seller. Before the amendment the sellers had no authority to collect the sales tax from the purchaser. He could have put up the price so as to include the sales tax but he could not realise it from the purchaser. The circumstances could not prevent the sales tax imposed on the seller to be any the less sales tax on the sale of goods. After the amendment Act permitted the seller (a registered dealer) to collect the sales tax as a tax from the purchaser but that the amendment did not do away with the primary liability of the seller to pay the sales tax. It was held that sales ta....
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....o restrictions on the nature of the law to be passed by Parliament. On the other hand, the words 'in so far as' clearly leave it to Parliament to decide on the form and nature of the law to be enacted by it. What is material to observe is that the power conferred on Parliament under Art.286(2) is a legislative power, and such a power conferred on a Sovereign Legislature carries with it authority to enact a law either prospectively or retrospectively, unless there can be found in the Constitution itself a limitation on that power." (p. 1460 (of SCR): (p. 486 of AIR)). And it was held that the law was within the competence of the legislature. We must, therefore, hold that the Validation Act is not ultra vires the powers of the legislature under entry 54, for the reason that it operates retrospectively." 104. In Rai Ram Krishna v. State of Bihar, AIR 1963 SC 1667, the Supreme Court held in para 20 as follows:- "20. In this connection, it would be relevant to refer to another fact which appears on the record. Along with the appellants, 18 other bus owners had filed writ petitions challenging the validity of the Act. These petitioners have not appealed to th....
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....he plea that a taxing statute, though retrospective in its operation, can be reasonable and in the public interest within the meaning of clause (6) of Art. 19. Therefore, if a taxing statute can, in a given case, operate retrospectively and its validity cannot be successfully challenged under Art. 19 we do not see how a similar challenge could be sustained against a taxing statute which has been passed under Art. 304(b). The freedom of trade guaranteed by Art. 301 is not doubt of very great importance to the political and economic unity of the country; but the freedom guaranteed to the individual is not less important; just as in the case of a challenge to the validity of a statute under Art. 19 the court has to consider whether the restrictions imposed by the statute are reasonable and in the interest of the general public, so in dealing with a challenge to the validity of a statute passed under Art. 304(b), the court has to consider whether the restrictions imposed by the statute are reasonable and are required in the public interest. The impact of the restrictions on the individual's right has to be judged in one case, whereas the impact of the restrictions on the freedom of....
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....Government it was validly exercised by the State Government and though the legislature may withdraw such exemption, it cannot do so retrospectively. It is obvious that if the State Government which is the delegate of the legislature can withdraw the exemption granted by it, the legislature cannot be denied such right. But it is urged that once exemption was validly granted; the legislature cannot withdraw it retrospectively, because that would be invalidating the notification itself. We are not impressed by this argument. What the legislature has purported to do by S. 2 of the impugned Act is to make the intention of the notification clear. Section 2 in substance declares that the intention of the delegate in issuing the notification granting exemption was to confine the benefit of the said exemption only to persons who actually produce gold ornaments or employ artisans for that purpose. We do not see how any question of legislative incompetence can come in the present discussion. and, if the State Government was given the power either to grant or withdraw the exemption, that cannot possibly affect the legislature's competence to make any provision in that behalf either prospec....
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.... carry on business. It was urged, however, that unreasonable restrictions would be there because of the retrospectivity. The power of the Parliament to make retrospective legislation including fiscal legislation are well settled. (See Krishnamurthi and Co. v. State of Madras, (1973) 2 SCR 54: AIR 1972 SC 2455). Such legislation per se is, not unreasonable. There is no particular feature of this legislation which can be said to create any unreasonable restriction upon the petitioners. 50. In the view we have taken of the expression 'manufacture', the concept of process being embodied in certain situation in the idea of manufacture, the impugned legislation is only making 'small repairs' and that is a, permissible mode of legislation. In 73rd Volume of Harward Law Review p. 692 at p. 795, it has been stated as follows:- "It is necessary that the legislature should be able to cure inadvertent defects in statutes or their administration by making what has been aptly called 'small repairs'. Moreover, the individual who claims that a vested right has arisen from the defect is seeking a windfall since had the legislature's or administrator'....
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....ation. In Empire Industries Limited v. Union of India 1985 Supp.(1) SCR 292 at p. 327 : (AIR 1986 SC 662 at p. 678) this Court observed:- " .......not only because of the paramount governmental interest in obtaining adequate revenues, but also, because taxes are not in the nature of a penalty or a contractual obligation but rather, a means of opportioning the costs of government amongst the who benefit from it." In testing whether a retrospective imposition of a tax operates so, harshly as to violate fundamental rights, under Article l9(1)(g) the factors considered relevant include the context in which retroactivity was contemplated such, as whether the law is one of validation of taxing statute struck down by, Courts for certain defects; the period of such retroactivity, and the degree and extent of any unforeseen or unforeseeable financial burden imposed for the past period. etc. Having regard to all the circumstances, of the present case, this Court in Empire Industries' case held that the retroactivity of the Amending provisions was not such as to incur any infirmity under Article 19(1)(g). We are in respectful agreement with that view." 110. In Welfare....
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....e method or all of them and while it does so it may neutralise the effect of the earlier decision of the Court which becomes ineffective after the change of the law. Whichever method is adopted it must be within the competence of the Legislature and legal and adequate to attain the object of validation. If the Legislature has the power over the subject-matter and competence to make a valid law, it can at any time make such a valid law and make it retrospectively so as to bind even past transactions. The validity of a Validating Law, therefore, depends upon whether the Legislature possesses the competence which it claims over the subject-matter and whether in making the validation it removes the defect which the Courts had found in the existing law and makes adequate provisions in the Validating Law for a valid imposition of the tax." (Emphasis supplied) 44. Thus, it is permissible for the Legislature, subject to its legislative competence otherwise, to enact a law which will withdraw or fundamentally alter the very basis on which a judicial pronouncement has proceeded and create a situation which if it had existed earlier, the Court would not have made the pronouncement. ....
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....c) whether such validation is consistent with the rights guaranteed in Part III of the Constitution; (iv) the Court does not have the power to validate an invalid law or to legalise impost of tax illegally made and collected or to remove the norm of invalidation or provide a remedy. These are not judicial functions but the exclusive province of the Legislature. Therefore, they are not encroachment on judicial power; (v) in exercising legislative power, the Legislature by mere declaration, without anything more, cannot directly overrule, revise or override a judicial decision. It can render judicial decision ineffective by enacting valid law on the topic within its legislative field fundamentally altering or changing its character retrospectively. The changed or altered conditions are such that the previous decision would not have been rendered by the Court, if those conditions had existed at the time of declaring the law as invalid......... It is competent for the Legislature to enact the law with retrospective effect; (vi) the consistent thread that runs through all the decisions of this Court is that the Legislature cannot directly overrule the decision....
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....o enact the Act. Entry 52 of List-II of the 7th Schedule, read with Art.246, gives sufficient powers to the State to levy entry tax on goods in local areas. Levy was found to be violative of Art.301 on the grounds that the Act did not facially or patently or otherwise indicate nor it could be demonstrated on facts that the amount of compensatory tax collected would be and was spent quantitatively or measurably on the trades of scheduled goods from which it was collected. The defects in the Act namely that the object and reasons in the charging section provided for the levy to be used for general revenue and the Act not facially or patently indicating that the levy will be spent on the development of the trade, invalidated the levy and not the Legislative Act. The State legislature could have brought an amendment and to validate the levy. Instead it brought a new legislation, which has removed all the defects, pointed out in the levy of entry tax. The State had legislative competence to validate the levy of entry tax retrospectively with effect from the date, when the Ordinance of 1999 was enacted w.e.f. 1.11.1999. The Local area:- 112. Entry 52 of List-II of the 7th Schedule ....
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....entrusted specifically to the municipalities for legal self-governance. It is submitted that the items mentioned in 12th Schedule overlap the items mentioned in Section 14 (1) of the Act. 114. It is also submitted that local area as defined in the Act to include municipality corporation, a municipality, a zila panchayat or kshetra panchayat, a gram panchayat, a cantonment, any industrial development area, is different from the industrial township under Section 2 (d) (vii). An industrial township is different in class in as much as it does not have an elected body and is not a local authority. It is submitted that industrial township notified by the State Government is a class by itself and cannot be treated as local area. The reference to industrial township for the purposes of levy and collection of entry tax and its expenditure as compensatory tax, is not valid. It is submitted that unless an area is administered by local body, it cannot be classified and treated as local area. Industrial area notified by the State Government such as industrial area for Hindalco, there can be no levy of entry tax. The entry tax being a compensatory tax, the services in the notified industrial ....
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....l that notification declaring an area to be industrial area or the entrustment of the duties to be performed in respect of the items in Schedule-12, will in any way invalidate the levy of entry tax. 117. In M/s Indian Oil Corporation Ltd. and Anr. v. State of U.P. and Ors., 2004 UPTC 170 this Court observed in para 86 to 91 as follows:- "86. In this connection we may refer to the decision of Mr. Justice Jackson of the U.S. Supreme Court in H.P. Hood and Sons Inc V Du Mond, 336 US 525 who observed:- "This principle that our economic unit is the Nation, which alone has the gamut of powers necessary to control of the economy, including the vital power of erecting customs barriers against foreign competition, has as its corollary that the states are not separable economic units. As the Court said in Baldwin v. Seelig, 294 US (511), 527, 'what is ultimate is the principal that one State in its dealings with another may not place itself in a position of economic isolation'." 87. In this connection we may refer to the Commerce Clause in Article 1 Section 8(3) of the U.S. Constitution which states:- "Congress shall have power............... to....
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.... that were not near a harbor. The disparity was the source of constant economic battles among the states. The exercise by Congress of its regulatory power has increased steadily with the growth and expansion of industry and means of transportation. 119. The Commerce Clause authorizes Congress to regulate commerce in order to ensure that the flow of interstate commerce is free from local restraints imposed by various states. When Congress deems an aspect of interstate commerce to be in need of supervision, it will enact legislation that must have some real and rational relation to the subject of regulation. Congress may constitutionally provide for the point at which subjects of interstage commerce become subjects of state law and, therefore, state regulation. 120. The U.S. Constitution places some limits on state power, the states enjoy guaranteed rights by virtue of their reserved powers pursuant to the Tenth Amendment. A state has the inherent and reserved right to regulate its domestic commerce. However, that rights must be exercised in a manner that does not interfere with, or place a burden on, interstate commerce, or else Congress may regulate that area of domestic comm....
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....ute that had nothing to do with commerce and that it did not establish any jurisdictional authority to distinguish it from similar State legislations. Because the Statute did not substantially affect interstate commerce, it went beyond the scope of commerce clause. The Court attempted to create a special protection for the States for providing the heightened scrutiny of federal legislation that regulates areas of traditional concern of the states. 123. In United States v. Bishop Processing Co., 287 F. Supp. 624 (D.C. Md.1968) the Federal Court in U.S. decided that moving of air pollution across state lines from Maryland to Delaware constituted interstate commerce that is subject to congressional regulation. The plaintiff, the United States sought an injunction under the federal Clean Air Act (1955) to prevent the operation of the Maryland Bishop Processing Company, a fat rendering plant, until it installed devices to eliminate its emission of noxious odors. The Court overruled plant owners that the Congress was powerless to regulate their business because it was clearly an intrastate activity. Foul116 smelling air pollution adversely affects business conditions, depresses proper....
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....argument that the goods namely the crude oil brought to underground pipeline cannot be treated as entry of goods into a definite local area, is not convincing. A similar question came up for consideration in Kunwar Ram Nath and Ors. v. The Municipal Board, Pilibhit, AIR 1983 SC 930 in which the question of payment of octroi on cane delivered at railway site inside the factory premises was in issue. The Supreme Court held that the essential feature of the cesses referred to in Entry No.49 of List-II are on the entry of goods into a definite local area and the requirement that the goods should enter for the purpose of consumption, use or sale therein. It was observed following the Federal Court judgment in Punjab Flour and General Mills Co. Ltd. Lahore v. The Chief Officer, Corporation of the City of Lahore and the Province of the Punjab, AIR 1947 FC 14, that the manner by which the goods to be subjected to such cesses, may enter is not of any consequence and is no ground for suggesting that entry of goods by earth or air is in less contemplated than their entry by water-ways or road. Hence we are of the opinion that the manner of entry of goods namely by air, road, water ways or und....
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....e manufacturing of sale, search and distribution of Pan Masala and Gutkha, it was held by the Supreme Court in paragraph 53 that the gamut of legislation enacted in India, which deals with tobacco does not suggest that the Parliament has ever treated the substance 'pan' in the impugned notification as an article res extra commercium, nor has the Parliament attempted to ban its use absolutely. The States have not banned chewing tobacco or other tobacco products, which contained almost 100% tobacco. The tariff schedule of central sales tax contains several entries, which deal with tobacco and 'pan masala'. In the face of these legislative measures seeking to levy restrictions and control the manufacture and sale of tobacco and its allied products as well as 'pan masala', it is not possible to accept that the article itself has been treated as 'res extra commercium'. Whether an article is to be prohibited as 'res extra commercium', is a matter of legislative policy, and must arise out of an Act of legislature and not by a mere notification issued by an executive authority. 113. A Section 4 of the Act of 2007 provides for levy of entry t....
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....tire entry tax levied and collected to the UP Trade Development Fund, the manner of utilisation of the UP Trade Development Fund Management Committee under Rule 4 of the Rules of 2007, the maintenance of the accounts and its audit by the Accountant General, UP, facially and patently satisfies the tests of the entry tax laid down in Jindal Stainless Limited (2). In our opinion the defects, pointed out by this Court in IOC v. State of UP decided by this Court on 27.1.2004 declaring the Act of 2000 to be violative of Article 301 and 304 of the Constitution of India have been fully cured. The new Act of 2007 has not been enacted as a Validating Act. It is a new legislation, which does not allow the collections of entry tax to augment the general revenue of the State. It provides for, ensures and guarantees the utilisation of entire entry tax levied and collected for facilitating the trade and commerce. 129. The old Act of 2000 and the new Act of 2007 were not introduced or moved in the legislature of the State of UP with the previous sanction of the President. The Act of 2007, therefore, has to stand the test of levying a tax on entry of goods in the State, to be compensatory tax fo....
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....o 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. Further, the Supreme Court observed in paragraph-49 that the concept of compensatory taxes was propounded in the case of Automobile Transport in which the compensatory taxes were equated with regulatory tax. In that case a working test for deciding, whether the tax is compensatory or not, was laid down. In that judgment, it was observed that one has to enquire, whether the trade as a class is having the use of certain facilities for the better conduct of the trade/business. This working test remains unaltered even today. It was thereafter observed in paragraph-50 that some connection test as propounded in Bhagatram Rajeev Kumar's case is not applicable to the concept of compensatory tax. The Constitution Bench concluded that the doctrine of direct and immediate effect of the impugned law on trade and commerce under Section 301 as propounded in Atiabari Tea Company Limited and the working test enunciated in Automobile Transport (Raj.) Limited will continue to ....
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....ded to trade in particular mentioned under the Schedule of the Act. It was held that in the absence of such a data it was not possible for the Court to hold that the entry tax is a compensatory tax. We may observe here that on the concessions of learned Advocate General recorded in paragraph-25 that bridges and roads are general facilities to all and sundry and not for scheduled traders, the Court presumed that the expenditure to the trade in particular was not by way of justifying the compensatory tax. The Court further presumed that the expenses made by the local bodies are not the expenses for providing additional/specific advantage/facility provided to trades in particular mentioned under the Schedule of the Act. The enquiry of the Court was not to find out whether the amount has been spent on the facility provided to trade or commerce but whether the facility provided was to trades in particular mentioned under the Schedule of the Act, with reference to the amounts collected under the Act of 2000. The order, in pursuance of the directions of the Supreme Court on remand, was made on 8.1.2007, whereas the UP Ordinance No. 35 of 2007 was promulgated by the Governor of UP on 24.9.....
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....compensatory tax. 137. The judgments given by the High Courts of the States of Gujarat, Orissa, Madhya Pradesh, Gauhati High Court (at Itanagar), Andhra Pradesh and Chattisgarh have upheld the entry tax. The High Court of the State of Bihar has upheld the retrospective levy of entry tax before the Validation and Amendment Act was passed. The High Court of the States of Jharkhand, Kerela, Karnataka, Tamilnadu, Punjab and Haryana, Rajasthan, West Bengal and Uttranchal High Courts have declared the entry fee in their States as ultra vires Art.301 and not saved by Art.304 of the Constitution of India. All the High Courts have tested the legislations in their States levying entry tax on the touch stone of the tests laid down in Jindal Stainless Limited (2), in their respective legislations. We need not distinguish the judgments of the High Courts, which have declared the entry tax levied in their States ultra vires as all the judgments were rendered in the context of the statutory provision of the Acts in their States. It is sufficient to state that in U.P. the Act of 2007, satisfies these tests. 138. When the constitutional validity of any legislation of the State levying compens....
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....ar provision being taxing provision or otherwise impedes directly or immediately the free flow of trade within the Union of India, then it will be violative of Art.301 of the Constitution. It is further to be borne in mind that Art.301 enjoins that trade, commerce and intercourse throughout territory of India shall be free. The first question, therefore which one has to examine is whether the sales tax provision (exemption etc.), in these cases directly and immediately restricts free flow of trade and commerce within the meaning of Art.301 of the Constitution of India, read with Art.304. The observations of the Supreme Court in Atiabari's case as also observation made in Automobile Transport Rajasthan's case, cannot be read in isolation. The Supreme Court held that Part XIII of the Constitution cannot be read in isolation. It is part and parcel of a single constitutional instrument envisaging a federal scheme and containing general scheme conferring legislative powers in respect of matters relating to List-II of the 7th Schedule of the States. It also confers plenary powers on States to raise revenue for its purpose and does not require that every legislation of the State m....
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....respect of free flow and movement of goods from one part of the country to the other under Art. 301 as well. 22. It has to be examined whether difference in rates per se discriminates so as to come within Arts. 301 and 304(a) of the Constitution. It is manifest that free, flow of trade between two States does not necessarily or generally depend upon the rate of tax alone. Many factors including the cost of goods play an important role in the movement of goods from one State to another. Hence the mere fact that there is a difference in the rate of tax on goods locally manufactured and those imported would not amount to hampering of trade between the two States within the meaning of Art. 301 of the Constitution. As is manifest, Art. 304 is an exception to Art. 301 of the Constitution. The need of taking resort to exception will arise only if the tax impugned is hit by Arts. 301 and 303 of the Constitution. If it is not then Art. 304 of the Constitution will not come into picture at all. See the observations in Natiraja Mudaliar's case at pp. 843-6 (of 1968 (3) SCR 829: at pp. 156-58 of AIR 1969 SC 147 (supra) of the report. It has to be borne in mind that there may be di....
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....ional mandate." 143. Now if the entry tax is not to be violative of Art.301, as it is compensatory tax, the test being recompense to trades, it must also stand the test of non-discrimination, reasonableness and public interest as well. We cannot say that the tax, if it is compensatory and is thus not violative of Art.301, if it discriminatory in the sense as in Art.304 (a), and is unreasonable and against public interest as in Art.304 (b). 144. Another test, which we visualize is whether such tax adversely affects the trade, commerce and intercourse by way of putting a barrier or obstruction in trade. The freedom of trade, commerce and intercourse is violated if it affects the free movement of trade and commerce between the States and has an impact on the overall economic growth of the nation. Chapter XIII of the Constitution seeks to achieve economic unity and growth of the nation as a whole, by removing artificial barriers. We may not, therefore, look to justify the tax, if it is a barrier and not to judge it only by the manner of its expenditure. If a tax impose a barrier, or is discriminatory, unreasonable, and is not levied in public interest, it cannot be justified on t....
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....ing the scheme of Part XII of the Constitution of India would be valid. 148. Like all indirect taxes, the entry tax is passed on and is ultimately paid by the consumer. The amendments to the U.P. Act of 2007, allowing the tax to be passed on to the consumer and giving credit of such tax in the levy of the sales tax, the ultimate payer is the consumer. The consumers of the goods, or goods manufactured from such scheduled goods, when the entry tax is paid on the entry of scheduled goods into a local area in the State, have to bear its burden. It does not stand to reason, that in such a case the entry tax as compensatory tax should be justified only by its expenditure on the tradesmen of the goods brought into local areas. When the consumers of products made of crude oil, natural gas, tobacco, cement, coal, machinery goods, etc. (scheduled goods) have to pay the price of these goods, in the cost of which the entry tax is included, why the services or facility, be concentrated and provided under the Act or otherwise, to the trades or the prayers of such tax. If the imposition of entry tax does not act as barrier of trade, and is not discriminatory, unreasonable or against public int....