TaxTMI 
TaxTMI 
2006 (4) TMI 120
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.... 3393, Civil Appeals Nos. 3394, Civil Appeals Nos. 3395, Civil Appeals Nos. 3396, Civil Appeals Nos. 3397, Civil Appeals Nos. 3398, Civil Appeals Nos. 3399, Civil Appeals Nos. 3400, Civil Appeals Nos. 3592, Civil Appeals Nos. 4651 of 1998, Civil Appeals Nos. 918 of 1999, Civil Appeals Nos. 2769, Civil Appeals Nos. 4471, Civil Appeals Nos. 4476 of 2000, Civil Appeals Nos. 3314 of 2001, Civil Appeals Nos. 6383, Civil Appeals Nos. 6384, Civil Appeals Nos. 6385, Civil Appeals Nos. 6386, Civil Appeals Nos. 6387, Civil Appeals Nos. 6388, Civil Appeals Nos. 6389, Civil Appeals Nos. 6390, Civil Appeals Nos. 6391, Civil Appeals Nos. 6392, Civil Appeals Nos. 6393, Civil Appeals Nos. 6394, Civil Appeals Nos. 6395, Civil Appeals Nos. 6396, Civil Appeals Nos. 6397, Civil Appeals Nos. 6398, Civil Appeals Nos. 6399, Civil Appeals Nos. 6400, Civil Appeals Nos. 6401, Civil Appeals Nos. 6402, Civil Appeals Nos. 6403, Civil Appeals Nos. 6404, Civil Appeals Nos. 6405, Civil Appeals Nos. 6406, Civil Appeals Nos. 6407, Civil Appeals Nos. 6408, Civil Appeals Nos. 6409, Civil Appeals Nos. 6410, Civil Appeals Nos. 6411, Civil Appeals Nos. 6412, Civil Appeals Nos. 6413, Civil Appeals Nos. 6414, Civil Appeal....
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....ti Bhushan, A.K. Ganguli, Dr. A.M. Singhvi, R.F. Nariman, Raju Ramachandran, Rakesh Dwivedi, Dinesh Dwivedi, R.G. Padia, B. Sen, P.N. Misra, T.L.V. Iyer, P.P. Rao and A.S. Rao for the parties. Other Advocates: Jayant Bhushan, S.K. Pathak, Mini Kaushik, Ejaz Maqbool, Vikas Singh, Taruna Singh, Abhijit Sinha, A. Dutt, Rajesh Jain, Mrs. Rajesh Bindal, L.R. Singh, C. Prakash, Nikhil Nayyar, Ankit Singhal, P.K. Bansal, R. Agnihotri, K.L. Janjani, A.T.M. Sampath, V. Balaji, Mrs. T. Shanti, Mrs. Meena Kumari, Rajeev K. Virmani, Ms. Rashmi Virmani, R. Narain, P. Shishodia, S. Sharma, A. Aggarwal, M. Borthakur, S. Dahiya, R. Bindal, Ms. Priya Puri, K. Gomber, Rajan Narain (for M/s. Rajan Narain & Co.), A. Dubey, K.B. Upadhyay, M. Kumar, M.K. Rai, M. Dubey, S.R. Setia, Mrs. Indira Sawhney, Anupam Sharma, Rakesh Ojha, H.K. Puri, Ujwal Banerjee, S.K. Puri, V.M. Chauhan, Ms. Indu Malhotra, Ms. B. Vijayalakshmi Menon (for M/s. Arputham Aruna & Co.), Ms. Kamakshi S. Mehlwal, Ms. Kadambani, Sachin Puri, Abhisth Kumar, Rakesh K. Khanna, Dr. Rashmi Khanna, S. Shekhar, Mrs. S. Sinha, Ms. Jahanvi Worah, Surya Kant, Ramesh Kumar Agarwal, D. Bharuka, R.C. Kohli, S.W.A. Qadri, R. Dubey Adarsh Upa....
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....ctions and accordingly, the matter has come to the Constitution Bench to decide with certitude the parameters of the judicially evolved concept of "compensatory tax" vis-a-vis article 301. The referral order is in the case of Jindal Stripe Ltd. (now known as Jindal Stainless Ltd.) v. State of Haryana [2003] 8 SCC 60; [2003] 1 RC 728 under article 145(3). For this purpose, we are required to examine the source from which the concept of compensatory tax is judicially derived, the nature and character of compensatory tax and its parameters in the context of article 301. In a batch of appeals, the constitutional validity of the Haryana Local Area Development Tax Act, 2000, has been challenged on two grounds: (1) that, the Act is violative of article 301 and is not saved by article 304; and (2) that, the Act in fact seeks to levy sales tax on inter-State sales, which is outside the competence of the State Legislature. However, the referral order is confined to the abovementioned first question. Jindal Stripe Ltd. is an industry manufacturing products within the State of Haryana. The raw material is purchased from outside the State. The finished products are sent to other States on con....
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....xes imposed on the carriage of goods or their movement by the State Legislature can only be done after satisfying the requirements of article 304(b). The statute which was challenged in Atiabari Tea Co., AIR 1961 SC 232, was the Assam Taxation (on Goods Carried by Roads and Inland Waterways) Act, 1954. It was held that the Act had put a direct restriction on the freedom of trade and since the State Legislature had not complied with the provisions of article 304(b), the Act was declared void. According to M/s. Jindal Stripe and similarly situated other appellants, the impugned Haryana Local Area Development Tax Act, 2000, imposes a restriction on trade and is violative of article 301, particularly, when the provisions of article 304(b) have not been complied with. The judgment of this court in Atiabari Tea Co., AIR 1961 SC 232, was delivered by a Constitution Bench of five judges. However, an exception to article 301 and its operation was judicially crafted in Automobile Transport, AIR 1962 SC 1406. In that case, the challenge was to the Rajasthan Motor Vehicles Taxation Act, 1951. The challenge under article 301 was rejected by the Constitution Bench of seven judges of this court ....
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....irectly the levy cannot be impugned as invalid". In this connection, reliance was placed on the judgment of this court in the case of State of Karnataka v. Hansa Corporation [1980] 4 SCC 697. At this stage, it may be noted that although there was a challenge to the levy of entry tax in the case of Hansa Corporation [1980] 4 SCC 697, the issue whether the tax was compensatory in nature was expressly left open, particularly, because article 304 (b) stood complied with. In fact, the impugned Act was saved because article 304 was complied with. It was for that reason alone that the Act could not be struck down in Hansa Corporation's case [1980] 4 SCC 697. The dictum in Bhagatram's case [1995] Supp 1 SCC 673; [1995] 96 STC 654 (SC) was relied on by a Bench of two judges in the case of Bihar Chamber of Commerce [1996] 9 SCC 136; [1996] 103 STC 1 (SC), which reiterated the position that "some connection" between the tax and the trading facilities extended to dealers directly or indirectly is sufficient to characterize it as compensatory tax. The court went further to hold that the State provides several facilities to the trade, such as, laying and maintenance of roads, waterways, markets....
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.... on behalf of Jindal Stainless Ltd., submitted that in Atiabari Tea Co., AIR 1961 SC 232, this court held that even a tax legislation would have to bear the scrutiny of Part XIII of the Constitution and such legislation could not infringe articles 301 to 304 of the Constitution; that the tax laws were within the ambit of Part XIII of the Constitution; that the seven-judge Constitution Bench of this court in Automobile Transport, AIR 1962 SC 1406, for the first time judicially evolved the principle of compensatory taxes which would be outside the purview of Part XIII and which could not be said to impede free flow of trade and commerce [majority view]. Such compensatory taxes were no hindrance to freedom of trade so long as they remained reasonable. Such compensatory taxes, in essence and reality, facilitated trade and commerce and they were not restrictions, it was held that the substance of the matter has to be determined in each case. Learned counsel placed reliance on the judgment of Justice Das from pages 522 to 523, in this regard. Learned counsel submitted that the working test laid down in the Automobile Transport, AIR 1962 SC 1406 is good even today. Under the test, althoug....
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....ent was contrary to the law laid down by the seven-judge Bench decision of this court in the case of Automobile Transport, AIR 1962 SC 1406, and, therefore, needs to be overruled. Mr. Shanti Bhushan further contended that the Division Bench of this court in the case of Bihar Chamber of Commerce [1996] 9 SCC 136; [1996] 103 STC 1 has followed the judgment of this court in the case of Bhagatram [1995] Supp 1 SCC 673; [1995] 96 STC 654 and has held that even though the tax was for augmenting the general revenue of the State, judicial notice could be taken of the fact that the State provides several facilities to the trade including laying and maintenance of roads, waterways, markets, etc., and on that basis it was held that the State had established the impugned tax to be compensatory in nature. In short, Mr. Shanti Bhushan's submission was that the aforestated two judgments in Bhagatram [1995] Supp 1 SCC 673; [1995] 96 STC 654 (SC) and in Bihar Chamber of Commerce [1996] 9 SCC 136; [1996] 103 STC 1 (SC) were erroneous to the extent indicated above; that they were contrary to the judgment of the seven-judge Bench of this court in the case of Automobile Transport, AIR 1962 SC 1406. Lea....
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....III of the Constitution). Therefore, the State cannot exercise its legislative power in a manner which would transgress the above constitutional limitations. In this connection, learned counsel placed reliance on the judgment in Atiabari Tea Co., AIR 1961 SC 232. Learned counsel further urged that keeping in mind the impact of globalization since the mid-1990s the international trade barriers stand removed in view of multilateral trade agreements between the comity of nations. He submitted that the framers of the Constitution engrafted Part XIII in the Constitution with the object of securing economic unity of the country as a whole and, therefore, the State's power of imposing taxes and duties on goods, freedom of which throughout India is guaranteed by article 301, would be subject to the said limitation. Learned counsel urged that taxing statutes imposing duties on goods do attract article 301; that the intrinsic evidence furnished by the articles in Part XIII shows that the taxing laws are not excluded from the operation of article 301; which means that tax laws do amount to restrictions, freedom from which is guaranteed to trade under Part XIII. It is, therefore, idle to cont....
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....ll out the nature of the trading facilities intended to be provided to the trading community and also the cost of providing such facilities. Learned counsel submitted that the Act must indicate a direct co-relation between the two. At this stage, we may clarify that we are not required to go into the question as to whether the impugned tax based on ad valorem basis cannot be termed as a compensatory tax. As stated above, we are confining this judgment only to the question as to whether the observations of this court in the case of Bhagatram [1995] Supp 1 SCC 673; [1995] 96 STC 654 (SC) followed by the judgment of this court in the case of Bihar Chamber of Commerce [1996] 9 SCC 136; [1996] 103 STC 1 (SC) need to be overruled in the light of the judgment of the seven-judge Constitution Bench in the case of Automobile Transport, AIR 1962 SC 1406. In the present matter, we are required to lay down the parameters of the concept of compensatory tax vis-a-vis article 301. All other questions will have to be gone into at the relevant stage before the Division Bench of this court with regard to the constitutional validity of the 2000 Act. Learned counsel next submitted that the question a....
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....re is already a levy of other compensatory tax. Learned counsel next urged that in the case of Bhagatram [1995] Supp 1 SCC 673; [1995] 96 STC 654 (SC) a three-judge Bench of this court noted that "the levy was in fact demonstrated to be compensatory" and, therefore, the latter observation by the court saying that "the concept of compensatory nature of tax has been widened and if there is some link between the tax and the facility the levy cannot be impugned as invalid" is obiter dicta and such observation is not supported by any of the previously decided cases. It was urged that under the 2000 Act the entry tax lacks the positive ingredients enumerated above for a valid compensatory tax. As there is no facility even mentioned with relation to entry of goods into local area for use, consumption or sale and, therefore, the link between local area and levy is absent and consequently collection of levy not by the local authority but by the State on entry of goods from outside State is unconstitutional. Further, according to learned counsel, the negative ingredients indicated above also exist in the impugned levy inasmuch as the justification pleaded is augmentation of general revenue o....
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....ity of the impugned 2000 Act because the above entries deal with different subjects; that the entry tax is not a tax on sale of goods effected by branch transfer or export out-of-State. Learned counsel urged that the entry tax is compensatory in character and, therefore, the impugned levy which is compensatory in nature, as can be seen from section 22 of the said Act, does not attract article 301 and article 304 (a) of the Constitution. Learned counsel submitted that section 22 of the Act was amended on September 30, 2003, clarifying that the tax levied and collected shall be utilized for facilitating free flow of trade and commerce. Learned counsel, therefore, submitted that the levy is compensatory in nature. Learned counsel next contended that the compensatory levy need not satisfy the rule of quid pro quo strictly; that it is sufficient that there is some relation or nexus between facilities provided and the tax imposed. Even the concept of fee has undergone significant change over the years as a result of a catena of decisions of this court and, therefore, this reference under article 145(3) of the Constitution was uncalled for. As a matter of preliminary submission, Shri P.P.....
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....he basic concepts of tax, fee and compensatory tax with due regard to the developments subsequent to Automobile Transport, AIR 1962 SC 1406. Shri Rakesh Dwivedi, learned senior counsel appearing for the State of U.P., submitted that while laying down the parameters of compensatory tax for purposes of Part XIII it is necessary to note that under the scheme of our Constitution, the States have certain powers including the power to raise revenue by taxation and further article 301 has to be applied for the working of an orderly society. Learned counsel submitted that the States must have revenue to carry out their administration; that there are several items relating to the imposition of taxes in List II, therefore, according to learned counsel the Constitution framers intended that under such items the States are entitled to raise revenue for their own purposes. Learned counsel submitted that any wide view of the word "freedom" under article 301 or even a restricted view of the term "compensatory tax" would put an end to the State autonomy and its plenary powers within the fields allotted to them. In this connection reliance was placed on the judgment of this court in the case of Au....
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....ad test of co-relation between money raised and expenditure incurred; in this connection reliance was placed on the judgment of this court in the case of Ram Chandra Kailash Kumar & Co. v. State of U.P. [1980] Supp SCC 27. In the above case it was held that the amount of fee realised must be earmarked for rendering services to the licensees in the notified market and a substantial portion of it must be shown to be spent for the requisite purpose. That the services rendered to the licensees must be in relation to the transaction of purchase or sale of the goods; that while rendering services in the market area for the purposes of facilitating the transactions of purchase and sale, it is not necessary to confer the whole of the benefit on the licensee but some special benefit must be conferred on the licensee which must have a direct, close and reasonable co-relation between the transaction and the licensee. That the spending of the amount of market fees for augmenting agriculture produce, for augmenting the facility of transport in villages with a view that such services in the long run would increase the volume of transactions in the market, was not permissible on the ground that s....
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....e or sale in a local area. The consumption, use or sale not only require roads but also proper hygiene, lighting, drinking water, health, sanitation, etc.; that, it is not possible to have trade without such facilities and, therefore, the compensatory character of the entry tax has to be adjudged with reference to the revenue collected and with reference to the various functions of the local body. Learned counsel contended that a tax can also be collected by the State and then assigned to the local body; that such collection avoids duplication of levy. Learned counsel contended that uneven economic development of various States in India hampers and hinders free flow of trade throughout India and, therefore, it is in the interest of trade and commerce that backward areas should be developed and, therefore, merely because the States assigned proportionately more money to backward local areas should not be objected to, so long as a good and substantial portion is assigned to the specified local area from which tax is collected. Learned counsel, therefore, contended in conclusion that a broad co-relation of the levy with the facility was enough. Learned counsel contended that in the ca....
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....he effect that the traders who pay the tax in a local area should be shown to have been provided with substantial facilities as a class. Learned counsel submitted that subject to the above caveat/rider there was no need to overrule the judgments of this court in the case of Bhagatram [1995] Supp 1 SCC 673; [1995] 96 STC 654 (SC) and in the case of Bihar Chamber of Commerce [1996] 9 SCC 136; [1996] 103 STC 1 (SC). Shri Dinesh Dwivedi, learned senior counsel appearing for the State of Uttar Pradesh and Shri B. Sen, learned senior counsel appearing for the State of Rajasthan, substantially adopted the submissions made by S/Shri P.P. Rao and Rakesh Dwivedi, learned senior counsel. Analysis of the relevant provisions of Part XIII: The relevant provisions are as follows: "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. 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 territo....
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....ates. Therefore, the commerce clause is per se a limitation upon the power of the States and is not dependent upon the law being enacted. It prohibits the States from enacting a law which impedes free flow of trade between the States. On the other hand, section 92 of the Australian Constitution provides for freedom of trade and commerce. It does not seek to regulate as in the case of the commerce clause. However, it has been held in numerous decisions of the Privy Council and the Australian High Courts that section 92 leaves open the regulation of trade and commerce at all events until the regulation is enacted provided it does not impede the true freedom of inter-State commerce. This reasoning is based on the principle that all trade and commerce must be conducted subject to law. Thus, we have the difference between taxing and regulatory laws. This is how the concept of "regulatory charges" came about. Article 301 is inspired by section 92 of the Australian Constitution when it refers to freedom of trade and commerce, however, article 301 is subject to limitations and conditions in articles 302, 303 and 304 which are borrowed from the commerce clause under article 1 of the US Co....
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.... trade and commerce amongst the States but by its own force creates an area of trade free from interference by the State and, therefore, article 301 per se constitutes limitation on the power of the State. Article 301 is, however, subject to the other provisions of articles 302, 303 and 304. It states that subject to other provisions of Part XIII, trade, commerce and intercourse throughout India shall be free. Article 301 is binding upon the Union Legislature and the State Legislatures, but Parliament can get rid of the limitation imposed by article 301 by enacting a law under article 302. Similarly, a law made by the State Legislature in compliance with the conditions imposed by article 304 shall not be hit by article 301. Article 301 thus provides for freedom of inter-State as well as intra-State trade and commerce subject to other provisions of Part XIII and correspondingly it imposes a general limitation on the legislative powers which limitation is relaxed under the following circumstances: (a) Limitation is relaxed in favour of Parliament under article 302, in which case Parliament can impose restrictions in public interest. Although the fetter is limited enabling Parliamen....
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....trine of "direct and immediate effect" which is mentioned in Atiabari Tea Co., AIR 1961 SC 232, emerges from the concept of "limitation" embodied in article 301. It is this doctrine of direct and immediate effect which constitutes the basis of the working test propounded vide paragraph 19 in Automobile Transport, AIR 1962 SC 1406. Therefore, whenever the law is impugned as violative of article 301, the courts will have to examine the effect of the operation of the impugned law on the inter-State and the intra-State movement of goods, which movement constitutes an integral part of trade. We have examined and analysed 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 paragraph 27 of the referral order. Generic concept of compensatory tax: Introduction: The concept of compensatory tax is not there in the Constitution but is judicially evolved in Automobile Transport, AIR 1962 SC 1406 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....
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....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. 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....
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....ry tax or in the form of compensatory tax. In other words, compensatory tax is a recompense/reimbursement. In the context of article 301, therefore, compensatory tax is a compulsory contribution levied broadly in proportion to the special benefits derived to defray the costs of regulation or to meet the outlay incurred for some special advantage to trade, commerce and intercourse. It may incidentally bring in net-revenue to the Government but that circumstance is not an essential ingredient of compensatory tax. Since compensatory tax is a judicially evolved concept, understanding of the concept, as discussed above, indicates its parameters. 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 th....
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....ddition 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. 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 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 preferen....