{"id":90441,"date":"2006-04-13T00:00:00","date_gmt":"2006-04-12T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/jindal-stainless-ltd-anr-vs-state-of-haryana-ors-on-13-april-2006"},"modified":"2017-08-17T11:37:22","modified_gmt":"2017-08-17T06:07:22","slug":"jindal-stainless-ltd-anr-vs-state-of-haryana-ors-on-13-april-2006","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/jindal-stainless-ltd-anr-vs-state-of-haryana-ors-on-13-april-2006","title":{"rendered":"Jindal Stainless Ltd. & Anr vs State Of Haryana & Ors on 13 April, 2006"},"content":{"rendered":"
Supreme Court of India<\/div>\n
Jindal Stainless Ltd. & Anr vs State Of Haryana & Ors on 13 April, 2006<\/div>\n
Author: Kapadia<\/div>\n
Bench: Ruma Pal Kapadia, Tarun Chatterjee, P.P. Naolekar<\/div>\n
           CASE NO.:\nAppeal (civil)  3453 of 2002\n\nPETITIONER:\nJindal Stainless Ltd. & Anr\n\nRESPONDENT:\nState of Haryana & Ors\n\nDATE OF JUDGMENT: 13\/04\/2006\n\nBENCH:\nRUMA PAL B.N. SRIKRISHNA S.H. KAPADIA, TARUN CHATTERJEE & P.P. NAOLEKAR\n\nJUDGMENT:\n<\/pre>\n
J U D G M E N T<\/p>\n
KAPADIA, J.\n<\/p>\n
WITH <\/p>\n
CIVIL APPEAL NOs.3455, 3460, 3456-59, 3469, 3461,
\n3467, 3468, 3465, 3466, 3462-63, 3454, 3470 OF 2002;
\n8241, 8242, 8243, 8244, 8245, 8246,  8247, 8248,  8249,
\n8250, 8251 OF 2003; 5858 OF 2002; 8252 OF 2003;
\n3464 OF 2002;  3381-3400, 4651, 3592 OF 1998;  918
\nOF 1999; 4476 OF 2000; 2608 OF 2003; 4471 OF 2000;
\n3314 OF 2001; 5740 OF 2002; 6331, 2637 OF 2003;
\n6383-6421, 6436, 6437-40, 6422-35 OF 1997; 2769 OF
\n2000; 997-998 OF 2004; 3144, 3145, 3146, 4954, 5141,
\n5143, 5144, 5145, 5147, 5148, 5149, 5150, 5151, 5152,
\n5153,  5156,  5157,  5158, 5159, 5160, 5162, 5163, 5164,
\n5165,  5166,  5167,  5168,  5169,  5170,  7658 OF  2004;
\nSLP (C) NOs.10003, 10007, 10153, 10156, 10164,
\n10167, 10206, 10381, 10391, 10404, 10417,
\n10501,10563,10568,10571, 11012, 11271,  11326, 9496,
\n9569, 9883, 9891, 9898, 9904, 9910, 9911, 9976, 9993,
\n9998, 9999 OF 2004; 14380 OF 2005; TC NO.13 OF
\n2004, WP NOs.574 AND 512 OF 2003.\n<\/p>\n
*****<\/p>\n
\tBy order dated 26.9.2003, the referring Bench
\nof Hon’ble Ruma Pal, J. and P. Venkatarama Reddy,
\nJ. doubted the correctness of the view taken in M\/s
\nBhagatram Rajeevkumar v. Commissioner of
\nSales Tax, M.P. & others  relied on in the
\nsubsequent decision of this Court in the case of
\nState of Bihar & Ors. v. Bihar Chamber of
\nCommerce & Ors.<\/a> .  Accordingly, all the matters
\nwere ordered to be placed before the Hon’ble the
\nChief Justice for appropriate directions and
\naccordingly, the matter has come to the
\nConstitution Bench to decide with certitude the
\nparameters of the judicially evolved concept of
\n“compensatory tax” vis-`-vis Article 301.  The
\nreferral order is in the case of Jindal Strips Ltd. &
\nAnr. (now known as Jindal Stainless Ltd.) v. State
\nof Haryana & Ors.<\/a>  under Article 145(3).\n<\/p>\n
\tFor this purpose, we are required to examine
\nthe source from which the concept of compensatory
\ntax is judicially derived, the nature and character of
\ncompensatory tax and its parameters in the context
\nof Article 301.\n<\/p>\n
\tIn a batch of appeals, the constitutional
\nvalidity of the Haryana Local Area Development Tax
\nAct, 2000 has been challenged on two grounds : (1)
\nthat, the Act is violative of Article 301 and is not
\nsaved by Article 304; and (2) that, the Act in fact
\nseeks to levy sales tax on inter-State sales, which is
\noutside the competence of the State Legislature.
\nHowever, the referral order is confined to the above-
\nmentioned first question.\n<\/p>\n
\tJindal Strips Ltd. is an industry
\nmanufacturing products within the State of
\nHaryana.  The raw-material is purchased from
\noutside the State.  The finished products are sent to
\nother States on consignment basis or stock transfer
\nbasis.  No sales tax is paid on the input of the raw
\nmaterial.  Similarly, no sales tax is paid on the
\nexport of finished products.\n<\/p>\n
\tThe impugned Act came into force w.e.f. 5th
\nMay, 2000 to provide for levy and collection of tax
\non the entry of goods into the local areas of the
\nState for consumption or use therein.  The Act is
\nenacted to provide for levy and collection of tax on
\nthe entry into a local area of the State, of a motor
\nvehicle for use or sale, and of other goods for use or
\nconsumption therein.  The Act seeks to impose
\nentry tax on all goods brought into a “local area”.
\nThe entire State is divided into local areas.  The Act
\ncovers not only vehicles bringing goods into the
\nState but also vehicles carrying goods from one local
\narea to another.  However, those who pay sales tax
\nto the State are exempt from payment of entry tax.
\nUltimately, the entry tax only falls on concerns, like
\nJindal Strips, which, by virtue of the provisions of
\nthe Central Sales Tax Act, 1956, pay sales tax on
\npurchase of raw-material and sale of finished goods
\nto other States and do not pay sales tax to the State
\nof Haryana.  This is the context in which the
\nchallenge to the Act under Article 301 has been
\nmade.  At this stage, we may point out that prior to
\nSeptember 30, 2003, section 22 stated that the tax
\ncollected under the Act shall be distributed by the
\nState Government amongst the local bodies to be
\nutilized for the development of local areas.
\nHowever, on 30th September, 2003, section 22 was
\namended clarifying that the tax levied and collected
\nshall be utilized for facilitating free flow of trade and
\ncommerce.\n<\/p>\n
REASONS FOR THE REFERRAL ORDER:\n<\/p>\n
\tIn Atiabari Tea Co. Ltd. etc. v. State of
\nAssam & Ors. , it was held that taxing laws are not
\nexcluded from the operation of Article 301, which
\nmeans that tax laws can and do amount to
\nrestrictions on the freedoms guaranteed to trade
\nunder Part-XIII of the Constitution. However, the
\nprohibition of restrictions on free trade is not an
\nabsolute one.  Statutes restrictive of trade can avoid
\ninvalidation if they comply with Article 304(a) or (b) .\n<\/p>\n
\tIn Automobile Transport (Rajasthan) Ltd. v.
\nState of Rajasthan<\/a> , it was held that only such
\ntaxes as directly and immediately restrict trade
\nwould fall within the purview of Article 301 and that
\nany restriction in the form of taxes imposed on the
\ncarriage of goods or their movement by the State
\nLegislature can only be done after satisfying the
\nrequirements of Article 304(b).  The statute which
\nwas challenged in Atiabari Tea Co.4 was the Assam
\nTaxation (on goods carried by Roads and Inland
\nWaterways) Act, 1954.  It was held that the Act had
\nput a direct restriction on the freedom of trade and
\nsince the State Legislature had not complied with
\nthe provisions of Article 304(b), the Act was declared
\nvoid.\n<\/p>\n
According to M\/s Jindal Strips and similarly
\nsituated other appellants, the impugned Haryana
\nLocal Area Development Tax Act, 2000 imposes a
\nrestriction on trade and is violative of Article 301,
\nparticularly, when the provisions of Article 304(b)
\nhave not been complied with.\n<\/p>\n
The judgment of this Court in Atiabari Tea
\nCo.4 was delivered by a Constitution Bench of five
\nJudges.  However, an exception to Article 301 and
\nits operation was judicially crafted in Automobile
\nTransport6.  In that case, the challenge was to the
\nRajasthan Motor Vehicles Taxation Act, 1951.  The
\nchallenge under Article 301 was rejected by the
\nConstitution Bench of seven Judges of this Court by
\nholding vide para 19 that “the taxes are
\ncompensatory taxes which instead of hindering
\ntrade, commerce and intercourse facilitate them by
\nproviding roads and maintaining the roads”.  Vide
\npara 21 of the report, it was observed that “if a
\nstatute fixes a charge for a convenience or service
\nprovided by the State or an agency of the State, and
\nimposes it upon those who choose to avail
\nthemselves of the service or convenience, the
\nfreedom of trade and commerce may well be
\nconsidered unimpaired.”  Thus, the concept of
\n“compensatory taxes” was propounded. Therefore,
\ntaxes which would otherwise interfere with the
\nunfettered freedom under Article 301 will be
\nprotected from the vice of unconstitutionality if they
\nare compensatory.\n<\/p>\n
In Automobile Transport6, it was said, vide
\npara 19, that “a working test for deciding whether a
\ntax is a compensatory or not is to enquire whether
\nthe trade is having the use of certain facilities for
\nthe better conduct of its business and paying not
\npatently much more than what is required for
\nproviding the facilities”.\n<\/p>\n
\tRight from 1962 up to 1995, this working test
\nwas applied by this Court in relation to motor
\nvehicles taxes for deciding whether the impugned
\nlevy was compensatory or not.  The decisions
\nproceeded on the principle adumbrated in
\nAutomobile Transport6, which was paraphrased
\nby Mathew, J. speaking for a Bench of three Judges
\nin G.K. Krishnan & Ors. v. State of T.N. & Ors. ,
\nin which it was observed that “the very idea of a
\ncompensatory tax is service more or less
\ncommensurate with the tax levied”. [See: para 29
\npage 386]<\/p>\n
\tAccording to the referral order, after 1995,
\nsome of the principles set out stood deviated from
\nwhen the principle of compensatory tax was applied
\nto the entry tax in Bhagatram’s case1, which was
\ndecided by a Bench of three Judges.\n<\/p>\n
\tIn Bhagatram’s case1, the challenge was to
\nM.P. Sthaniya Kshetra Me Mal Ke Pravesh Par Kar
\nAdhiniyam, 1976.  In that case, although it was
\ndemonstrated by the State and not disputed by the
\nassessee that the levy was compensatory,
\nnevertheless, the Court went on to say, vide para 8,
\nthat “the concept of compensatory nature of tax has
\nbeen widened and if there is substantial or even
\nsome link between the tax and the facilities
\nextended to dealers directly or indirectly the levy
\ncannot be impugned as invalid”.  In this connection,
\nreliance was placed on the judgment of this Court in
\nthe case of State of Karnataka & Anr. v. M\/s
\nHansa Corporation<\/a> .  At this stage, it may be
\nnoted that although there was a challenge to the
\nlevy of entry tax in the case of Hansa
\nCorporation8, the issue whether the tax was
\ncompensatory in nature was expressly left open,
\nparticularly, because Article 304(b) stood complied
\nwith.  In fact, the impugned Act was saved because
\nArticle 304 was complied with.  It was for that
\nreason alone that the Act could not be struck down
\nin Hansa Corporation’s case 8 .\n<\/p>\n
\tThe dictum in Bhagatram’s case1  was relied
\non by a Bench of two Judges in the case of Bihar
\nChamber of Commerce2, which reiterated the
\nposition that “some connection” between the tax
\nand the trading facilities extended to dealers directly
\nor indirectly is sufficient to characterize it as
\ncompensatory tax.  The Court went further to hold
\nthat the State provides several facilities to the trade,
\nsuch as, laying and maintenance of roads,
\nwaterways, markets etc. and on this premise, it was
\nheld that the entry tax was compensatory in nature.
\nThe learned Judges did not consider it necessary to
\nput the burden on the State to furnish the details of
\nfacilities provided to the traders and the
\nexpenditure incurred or incurrable thereafter.\n<\/p>\n
\tTo sum up: the pre-1995 decisions held that
\nan exaction to reimburse\/recompense the State the
\ncost of an existing facility made available to the
\ntraders or the cost of a specific facility planned to be
\nprovided to the traders is compensatory tax and
\nthat it is implicit in such a levy that it must, more
\nor less, be commensurate with the cost of the
\nservice or facility.  Those decisions emphasized that
\nthe imposition of tax must be with the definite
\npurpose of meeting the expenses on account of
\nproviding or adding to the trading facilities either
\nimmediately or in future provided the quantum of
\ntax is based on a reasonable relation to the actual
\nor projected expenditure on the cost of the service
\nor facility.  However, the post-1995 decisions in
\nBhagatram’s case1 and in the case of Bihar
\nChamber of Commerce2, now say that even if the
\npurpose of imposition of the tax is not merely to
\nconfer a special advantage on the traders but to
\nbenefit the public in general including the traders,
\nthat levy can still be considered to be compensatory.
\nAccording to this view, an indirect or incidental
\nbenefit to traders by reason of stepping up the
\ndevelopmental activities in various local areas of the
\nState can be brought within the concept of
\ncompensatory tax, the nexus between the tax
\nknown as compensatory tax and the trading
\nfacilities not being necessarily either direct or
\nspecific.\n<\/p>\n
\tAccording to the referral order, since the
\nconcept of compensatory tax has been judicially
\nevolved as an exception to the provisions of Article
\n301 and as the parameters of this judicially evolved
\nconcept are blurred, particularly, by reason of the
\ndecisions in Bhagatram’s case1 and Bihar
\nChamber of Commerce2, the Court felt that the
\ninterpretation of Article 301 vis-`-vis compensatory
\ntax should be authoritatively laid down with
\ncertitude by the Constitution Bench under Article
\n145(3).\n<\/p>\n
ARGUMENTS:\n<\/p>\n
\tMr. Shanti Bhushan, learned senior counsel
\nappearing on behalf of the Jindal Stainelss Ltd.
\nsubmitted that in Atiabari Tea Co.4 this court held
\nthat even a tax legislation would have to bear the
\nscrutiny of Part-XIII of the Constitution and such
\nlegislation could infringe Article 301 to 304 of the
\nConstitution; that the tax laws were within the
\nambit of Part-XIII of the Constitution; that seven-
\nJudge Constitution Bench of this court in
\nAutomobile Transport6  for the first time judicially
\nevolved the principle of compensatory taxes which
\nwould be outside the purview of Part-XIII and which
\ncould not be said to impede free flow of trade and
\ncommerce [majority view].  Such compensatory
\ntaxes were no hindrance to freedom of trade so long
\nas they remained reasonable.  Such compensatory
\ntaxes, in essence and reality, facilitated trade and
\ncommerce and they were not restrictions, it was
\nheld that the substance of the matter has to be
\ndetermined in each case.  Learned counsel placed
\nreliance on the judgment of Justice Das from pages
\n522 to 523, in this regard.  Learned counsel
\nsubmitted that the working test laid down in the
\nAutomobile Transport6 is good even today.  Under
\nthe test, although the precise amount collected may
\nnot be actually used to provide any facility, the tax
\ncollected should be by and large commensurate
\nwith the cost of the facilities provided for the trade.
\nLearned counsel, therefore, submitted that the
\nworking test laid down in Automobile Transport6
\nis the only test which would differentiate the tax
\nimposed for augmenting general revenue from the
\ncompensatory tax.  Learned counsel submitted that
\nthere is a basic difference between the law infringing
\nfreedom of trade and the law which imposes
\nregulations which in effect facilitates or promotes
\ntrade.  According to the learned counsel, regulations
\nprovide for necessary services to enable free
\nmovement of traffic and, therefore, they cannot be
\ndescribed as restrictions impeding the freedom
\nunder Article 301; that in the case of regulations the
\ntax imposed is incidental in order to compensate for
\nthe facilities provided.  On the other hand, it was
\nurged, that, a tax law is in essence an exercise to
\naugment the general revenue of the State and not
\nfor providing facilities and services for the trade.  A
\ntax law which does not in return provide services
\nand facilities for the free movement of trade, can
\nnever be compensatory.  Learned counsel further
\nsubmitted that in Bhagatram’s case1 vide para 8,
\nthe Division Bench of this court held that  “the
\nconcept of compensatory nature of tax has been
\nwidened and if there is substantial or even some
\nlink between the tax and the facilities extended to
\nsuch dealers directly or indirectly the levy cannot be
\nimpugned as invalid”.  In that case the Division
\nBench of this court relied upon the judgment of this
\ncourt in the case of Hansa Corporation8.  Mr.
\nShanti Bhushan, learned counsel for the assessees,
\nsubmitted that the judgment of this court in the
\ncase of Bhagatram1 was erroneous on two counts.
\nFirstly, the reliance on Hansa Corporation8 was
\ntotally misplaced because Hansa Corporation8 did
\nnot deal with the issue of what is compensatory tax.
\nIn fact, that question was expressly not gone into.
\nSecondly, learned counsel submitted that to the
\nextent of Bhagatram1 holding that the concept of
\ncompensatory tax has been widened as stated
\nabove, the said judgment was contrary to the law
\nlaid down by the seven-Judge Bench decision of this
\ncourt in the case of Automobile Transport6 and,
\ntherefore, needs to be overruled.  Mr. Shanti
\nBhushan further contended that the Division Bench
\nof this court in the case of Bihar Chamber of
\nCommerce2 has followed the judgment of this court
\nin the case of Bhagatram1 and has held that even
\nthough the tax was for augmenting the general
\nrevenue of the State, judicial notice could be taken
\nof the fact that the State provides several facilities to
\nthe trade including laying and maintenance of
\nroads, waterways, markets etc. and on that basis it
\nwas held that the State had established the
\nimpugned tax to be compensatory in nature.  In
\nshort, Mr. Shanti Bhushan’s submission was that
\nthe aforestated two judgments in Bhagatram1 and
\nin Bihar Chamber of Commerce2 were erroneous
\nto the extent indicated above; that they were
\ncontrary to the judgment of seven-Judge Bench of
\nthis court in the case of Automobile Transport8.
\nLearned counsel urged that if the test, laid down in
\nthe case of  Bhagatram1 and in the case of Bihar
\nChamber of Commerce2, was held to be applicable
\nthen as a consequence there would be no difference
\nbetween a tax and a compensatory tax.  It was
\nurged that therefore this court should evolve
\nparameters of compensatory tax for future
\nguidance.  Learned counsel submitted that to be
\ncompensatory,  tax must be levied to augment
\nfacilities for trade and that is how a tax was held
\nnot to impede but to facilitate trade (in Automobile
\nTransport6).  It was submitted that the essence of
\ncompensatory tax is that the services rendered or
\nfacilities provided should be more or less
\ncommensurate with the tax levied and the tax
\nshould not be patently more than what was
\nrequired to provide the trading facility.  It was
\nsubmitted that the tax imposed for augmenting
\ngeneral revenue of the State is not compensatory;
\nthat any tax law which is designed or which has the
\neffect of disrupting trade movement in inter-State
\ntrade and commerce between States is contrary to
\nthe concept of freedom of trade embodied in Article\n<\/p>\n
301.  It was submitted that the compensatory
\ncharacter of tax should be self-evident from the
\ntaxing law itself and it cannot be judged from the
\nmanner in which the tax revenue is utilized in
\ncourse of time.  It was urged that in the case of
\nambiguity, the burden would fall on the State to
\nshow that in essence the levy was imposed as a
\nrecompense for the facilities\/services provided by
\nthe State.  It was urged that in the case of Sanjay
\nTrading Company  v. Commissioner of Sales Tax
\nand others , the tax was held to be compensatory
\nbased on the figures furnished by the State and it
\nwas found that the levy was imposed to offset the
\nloss caused by the abolition of octroi which
\naccording to the learned counsel is totally missing
\nin the case of Haryana Local Area Development Tax
\nAct, 2000.\n<\/p>\n
\tMr. A.K. Ganguli, learned senior counsel
\nappearing on behalf of one of the appellants,
\nsubmitted that the legislative power of the State to
\nmake any law under Article 246 read with the
\nentries in list II, though plenary in nature, is
\nsubject to two limitations:\n<\/p>\n
\t(i) \tFundamental Rights
\n\t\t[Part III of the Constitution)\n<\/p>\n
\t(ii)\tTrade, Commerce and Intercourse
\n                within the Territory of India
\n                 (Part XIII of the Constitution)<\/p>\n
Therefore, the State cannot exercise its legislative
\npower in a manner which would transgress the
\nabove constitutional limitations.  In this connection,
\nlearned counsel placed reliance on the judgment in
\nAtiabari Tea Co.4.  Learned counsel further urged
\nthat keeping in mind the impact of globalization
\nsince mid-1990s the international trade barriers
\nstand removed in view of multi-lateral trade
\nagreements between the committee of nations.  He
\nsubmitted that the framers of the Constitution
\nengrafted Part-XIII in the Constitution with the
\nobject of securing economic unity of the country as
\na whole and, therefore, the State’s power of
\nimposing taxes and duties on goods, freedom of
\nwhich throughout India is guaranteed by Article
\n301, would be subject to the said limitation.
\nLearned counsel urged that taxing statutes
\nimposing duties on goods do attract Article 301;
\nthat the intrinsic evidence furnished by the Articles
\nin Part-XIII shows that the taxing laws are not
\nexcluded from the operation of Article 301; which
\nmeans that tax laws do amount to restrictions,
\nfreedom from which is guaranteed to trade under
\nPart-XIII.  It is, therefore, idle to contend as sought
\nto be argued on behalf of the State that a tax under
\nentry 52 list II falls outside Article 301.  Learned
\ncounsel submitted further that in Atiabari Tea
\nCo.4 a workable test has been evolved under which
\nrestrictions which directly and immediately impede
\nfree flow of trade, would violate Article 301.
\nAccording to learned counsel one needs to enquire
\nwhether the trade is provided with facilities for the
\nbetter conduct of their business.  According to
\nlearned counsel once the said working test is
\nsatisfied then the levy is regulatory in nature
\nprovided it is not disproportionate to the value of
\nthe facility\/service provided.  Learned counsel urged
\nthat a tax imposed for raising general revenue of the
\nState is not a compensatory levy.  It was submitted
\nthat for the purpose of securing freedom of
\nmovement by road, it was essential that no
\npecuniary burden is placed upon it which burden
\ngoes beyond a proper recompense to the State for
\nthe actual use made of the facilities provided by the
\nState.  Therefore, there has to be a direct relation
\nbetween the levy and the facility and the users must
\nderive a special direct benefit of that facility.    It
\nwas submitted that Part-XIII imposes constitutional
\nlimitations on the legislative powers of the State, the
\nonus would lie on the State to demonstrate that the
\nprovisions of the impugned enactment facilitate the
\nfree flow of trade by providing a regulatory measure.
\nSimilarly, in respect of taxing statutes, the burden
\nwould lie heavily on the State administration that
\nthe taxes proposed to be levied and collected under
\nthe impugned enactment are for the use of trading
\nfacilities and only then that such levy would come
\nwithin the purview of compensatory tax as laid
\ndown in the judgment of this court in the case of
\nAutomobile Transport6.  According to the learned
\ncounsel mere declaration in law that the levy is
\ncompensatory in nature is not enough.  Whether a
\ntax is compensatory or not, cannot depend on the
\npreamble of the statute imposing it.  A tax cannot
\nbe said not to be compensatory merely because the
\nprecise or specific amount collected is not actually
\nused to provide facilities.  In this connection,
\nreliance is placed on the judgment of this court in
\nthe case of Sharma Transport v. Government of
\nAndhra Pradesh & Ors. .  However, learned
\ncounsel submitted that the Act must spell out the
\nnature of the trading facilities intended to be
\nprovided to the trading community and also the cost
\nof providing such facilities.  Learned counsel
\nsubmitted that the Act must indicate a direct co-
\nrelation between the two.\n<\/p>\n
At this stage, we may clarify that we are not
\nrequired to go into the question as to whether the
\nimpugned tax based on ad valorem basis cannot be
\ntermed as a compensatory tax.  As stated above, we
\nare confining this judgment only to the question as
\nto whether the observations of this court in the case
\nof Bhagatram1 (supra) followed by the judgment of
\nthis court in the case of Bihar Chamber of
\nCommerce2 needs to be overruled in the light of the
\njudgment of seven-Judge Constitution Bench in the
\ncase of Automobile Transport6.  In the present
\nmatter, we are required to lay down the parameters
\nof the concept of compensatory tax vis-`-vis Article\n<\/p>\n
301.  All other questions will have to be gone into at
\nthe relevant stage before the division bench of this
\ncourt with regard to the constitutional validity of
\n2000 Act.\n<\/p>\n
Learned counsel next submitted that the
\nquestion as to whether a levy is compensatory or
\nnot has to be decided with reference to the nature of
\nthe levy itself.  In this connection reliance was
\nplaced on entry 57 List II.  It was urged that taxes
\non motor vehicles are levied statewise.  Such levies
\nare annual levies.  Such levy, if claimed to be
\ncompensatory, must bear a definite nexus with the
\nfacilities which the State seeks to extend to the
\ntrading community using their transports on the
\nroads and bridges maintained by the State.
\nSimilarly, it was argued that levy of entry tax under
\nentry 52 list II indicates that the levy contemplated
\nis on the entry of goods into a local area for
\nconsumption, use or sale therein.  It was submitted
\nthat the levy contemplated is on entry into a local
\narea and not when the goods cross the State
\nbarrier.  Therefore, if a levy of entry tax is claimed to
\nbe compensatory in nature such levy would have to
\nbe, in the first instance, confined to a local area and
\nsecondly the trading facilities sought to be provided
\nalso should be confined to such local area.  Further
\nthe expenses for such facilities and the levy by
\nwhich such expenses are to be met must bear a
\nreasonable and rational relationship.\n<\/p>\n
\tMr. R.F. Nariman, learned senior counsel
\nappearing for one of the appellants, submitted that
\nthe ingredients of a compensatory tax broadly fall
\ninto two categories, namely, positive ingredients
\nwhich ought to be there to constitute a
\ncompensatory tax and negative ingredients which if
\npresent, the tax in question cannot be called a
\ncompensatory tax.  In this connection, learned
\ncounsel submitted that if the purpose of levy is to
\nraise resources for above-stated facilities or if the
\nresources are raised as regulatory measures to
\nfacilitate trade then such an ingredient is a positive
\ningredient.  Similarly, the quantum of such
\ncompensatory tax must co-relate with the funds
\nrequired for such facilities\/regulatory measures.
\nAccording to learned counsel these are two positive
\ningredients.  The negative ingredients, which if
\npresent, would make the tax labelled as
\ncompensatory, attract the vice of interference with
\nfreedom of trade, are two-fold – firstly, if the tax is
\nfor general augmentation of revenue, and secondly,
\nthe said compensatory tax must not be
\ndiscriminatory.  According to learned counsel, the
\npurported compensatory tax must also not be for
\ntrade facilities and purposes for which there is
\nalready a levy of other compensatory tax.  Learned
\ncounsel next urged that in the case of Bhagatram1
\na three-Judge bench of this court noted that “the
\nlevy was in fact demonstrated to be compensatory”
\nand, therefore, the latter observation by the court
\nsaying that “the concept of compensatory nature of
\ntax has been widened and if there is some link
\nbetween the tax and the facility the levy cannot be
\nimpugned as invalid” is obiter dicta and such
\nobservation is not supported by any of the
\npreviously decided cases.  It was urged that under
\n2000 Act the entry tax lacks the positive ingredients
\nenumerated above for a valid compensatory tax.  As
\nthere is no facility even mentioned with relation to
\nentry of goods into local area for use, consumption
\nor sale and, therefore, the link between local area
\nand levy is absent and consequently collection of
\nlevy not by the local authority but by the State on
\nentry of goods from outside State is
\nunconstitutional.  Further, according to the learned
\ncounsel, negative ingredients indicated above also
\nexist in the impugned levy inasmuch as the
\njustification pleaded is augmentation of general
\nrevenue of State in lieu of octroi in name of facilities
\nfor which provisions are made by way of other
\ncompensatory taxes such as motor vehicle tax,
\nproperty tax etc.  Learned counsel submitted that
\nthere is also an element of discrimination between
\ngoods entering local areas from outside State and
\ngoods entering local area from within the State, i.e.,
\nfrom one local area to another local area.  The latter
\nclass of goods are not subjected to levy though all
\nthe facilities, if at all provided, are there in course of
\nintra-State movement and entry of goods in local
\nareas.  Learned counsel, therefore, submitted that
\nthis discrimination per se militates against the
\nimpugned levy being termed as compensatory.\n<\/p>\n
\tS\/Shri A.M. Singhvi, learned senior counsel,
\nA.T.M. Sampath, H.K. Puri and Ms. K.S. Mehlwal
\nalso made their respective submissions on behalf of
\nthe assessees and substantially adopted the
\nsubmissions made by S\/Shri Shanti Bhushan, R.F.
\nNariman and A.K. Ganguli, learned senior counsel.\n<\/p>\n
\tShri P.P. Rao, learned senior counsel
\nappearing on behalf of the State of Haryana,
\nsubmitted  that the impugned 2000 Act does not
\nsuffer from want of levy competence; that the State
\nlegislature has the competence under entry 52 list II
\nto enact the impugned law; that the State
\nlegislature is competent to levy such tax because
\nthe incidence of tax is on the entry of goods into a
\nlocal area for consumption, use or sale therein and,
\ntherefore, it is not a tax on the import of goods from
\noutside India, nor a tax on the manufacture of
\ngoods, nor a tax on the export of the goods to places
\noutside the State.  Finally, it is not a sales tax.
\nLearned counsel further contended that under entry
\n52 list II it is not obligatory for the State to enact a
\nlaw for the levy of entry tax on goods which are
\nbrought for use, consumption or sale; it is within
\nthe power of the State to make a law for levy of such
\ntax on goods brought for use, consumption or sale.
\nLearned counsel submitted that the legislature has
\nselected goods brought for use or consumption in a
\nlocal area for the purposes of the levy; that it is
\nwithin the power of the State to make a law for levy
\nof tax on goods for any of the three purposes or for
\none of them or two of them.  Learned counsel
\nsubmitted that Article 286 read with entry 41, entry
\n83, entry 92A and entry 92B does not have any
\nbearing on the constitutional validity of the
\nimpugned 2000 Act because the above entries deal
\nwith different subjects; that the entry tax is not a
\ntax on sale of goods affected by branch transfer or
\nexport out-of-State.  Learned counsel urged that the
\nentry tax is compensatory in character and,
\ntherefore, the impugned levy which is compensatory
\nin nature, as can be seen from section 22 of the
\nsaid Act, does not attract Article 301 and Article
\n304(a) of the Constitution.  Learned counsel
\nsubmitted that section 22 of the Act was amended
\non September 30, 2003 clarifying that the tax levied
\nand collected shall be utilized for facilitating free
\nflow of trade and commerce.  Learned counsel,
\ntherefore, submitted that the levy is compensatory
\nin nature.  Learned counsel next contended  that
\nthe compensatory levy need not satisfy the rule of
\nquid pro quo strictly; that it is sufficient that there is
\nsome relation or nexus between facilities provided
\nand the tax imposed.  Even the concept of fee has
\nundergone significant change over the years as a
\nresult of a catena of decisions of this court and,
\ntherefore, this reference under Article 145(3) of the
\nConstitution was uncalled for.  As a matter of
\npreliminary submission, Shri P.P. Rao, learned
\nsenior counsel for the State, contended that in view
\nof the amendment made by Act 18 of 2003 adding
\nan explanation to section 22 of the impugned 2000
\nAct clarifying that the tax collected shall be utilized
\nfor developing and maintaining infrastructure
\nfacilities useful for free flow of trade, the question
\ninvolved in this matter has become academic.
\nLearned counsel submitted that in view of various
\ndecisions of the Constitution Bench the case should
\nhave been first placed before a bench of three
\nJudges and not before a constitution bench straight
\naway.  It is only when that bench refers it to five
\nJudges that the case should have been placed
\nbefore a constitution bench because it has been a
\nsettled law that a bench of two judges is bound by
\nthe principles of law laid down by a bench of three
\njudges which alone has the jurisdiction to interpret
\nthe law declared by a constitution bench.  In this
\nconnection reliance was placed on two judgments of
\nthis court, in the case of Pradip Chandra Parija &
\nOrs. v. Pramod Chandra Patnaik & Ors.  and<\/a> in
\nthe case of Central Board of Dawoodi Bohra
\nCommunity & Anr. v. State of Maharashtra &
\nAnr.<\/a> .  On merits learned counsel urged that the
\nConstitution contemplates levy of taxes and levy of
\nfees.  He urged that in the case of fees, quid pro quo
\nis an essential element though not in taxes.
\nHowever, compensatory taxes are an exception;
\nthey contain an element of quid pro quo but not to
\nthe extent as in the case of “fees”.  Learned counsel
\nplaced reliance in this connection on the judgment
\nof this court in the case of M\/s International
\nTourist Corporation etc. etc. v. State of
\nHaryana and others etc. etc. .  Learned counsel
\nsubmitted that the extent of quid pro quo required
\nin a fee has undergone a sea-change and it would
\nbe irrational to insist on such a test in the case of
\ncompensatory tax.  Learned counsel next submitted
\nthat the element of compensation in compensatory
\ntaxes needs to be interpreted taking note of
\nconstitutional developments, the changed
\nperception of the entire relationship of fundamental
\nrights and directive principles as well as the sea-
\nchange in the concept of fee particularly with
\nreference to the element of quid pro quo.  Learned
\ncounsel submitted that the principles of law
\ndeclared in Bhagatram1 are consistent with
\ncontemporary thinking about the basic concepts of
\ntax, fee and compensatory tax with due regard to
\nthe developments subsequent to Automobile
\nTransport6.\n<\/p>\n
\tShri Rakesh Dwivedi, learned senior counsel
\nappearing for the State of U.P., submitted that while
\nlaying down parameters of compensatory tax for
\npurposes of Part-XIII it is necessary to note that
\nunder the scheme of our Constitution, States have
\ncertain powers including the power to raise revenue
\nby taxation and further Article 301 has to be
\napplied for the working of an orderly society.
\nLearned counsel submitted that the States must
\nhave revenue to carry out their administration; that
\nthere are several items relating to the imposition of
\ntaxes in list II, therefore, according to learned
\ncounsel the Constitution framers intended that
\nunder such items the States are entitled to raise
\nrevenue for their own purposes.  Learned counsel
\nsubmitted that any wide view of the word “freedom”
\nunder Article 301 or even a restricted view of the
\nterm “compensatory tax” would put an end to the
\nState autonomy and its plenary powers within the
\nfields allotted to them.  In this connection reliance
\nwas placed on the judgment of this court in the
\ncase of Automobile Transport6.  It was urged that
\nthe State legislature may impose different kinds of
\ntaxes and duties such as property tax, sales tax,
\nexcise duty etc. and legislation in respect of any one
\nof these items, may have an indirect effect on trade
\nand commerce.  Learned counsel submitted that if
\nevery law made by the State legislature which has
\nan indirect effect on free flow of trade is required to
\nhave prior sanction of the President then the
\nConstitution insofar as it gives plenary power to the
\nStates and the State legislatures in the fields
\nallocated to them would be rendered meaningless
\nand, therefore, it cannot be laid down as a general
\nproposition that the power to tax is outside the
\npurview of constitutional limitation of Part-XIII.
\nLearned counsel submitted that in any event
\nregulatory measures and compensatory taxes are
\nnot hit by Article 301.  Learned counsel urged that
\nin every case the court will have to ascertain
\nwhether an impugned law directly and immediately
\naffects the movement of trade or whether it
\nindirectly or remotely affects such movement.
\nLearned counsel submitted that while Parliament
\ncannot trench upon the exclusive domain preserved
\nfor the State legislature under list II, the central
\nexecutive nevertheless would oversee and sanction
\nmost of the taxing measures under Article 304 and,
\ntherefore, the wider concept of compensatory tax
\nshould be accepted.  Learned counsel next
\nsubmitted that all taxing power is for raising
\nrevenue.  However, it cannot be argued that while
\nimposing a compensatory tax the States cannot
\nraise general revenue.  Learned counsel submitted
\nthat this court has drawn consistently a distinction
\nbetween a “tax” and a “fee”, and the power of
\ntaxation has always been understood as a power to
\nraise revenue.  It was urged that even in
\nAutomobile Transport6, while discussing the
\nconcept of compensatory tax, this court never
\nintended to lay down that such compensatory taxes
\nare not revenue measures but are fees.  Any such
\nview would be contrary to the scheme of
\ndistribution of powers and also the structure of the
\nseventh schedule and, therefore, a tax which is
\nlevied to facilitate trade and commerce would
\nremain compensatory even if some extra revenue is
\ngenerated.  Learned counsel next submitted that
\neven with respect to fee for licence and fee for
\nservice this court has adopted a broad test of co-
\nrelation between money raised and expenditure
\nincurred; in this connection reliance, was placed on
\nthe judgment of this court in the case of Ram
\nChandra Kailash Kumar & Co. & Ors. v. State
\nof U.P. & Anr.<\/a> .  In the above case it was held that
\nthe amount of fee realized must be earmarked for
\nrendering services to the licensees in the notified
\nmarket and a substantial portion of it must be
\nshown to be spent for the requisite purpose.  That
\nthe services rendered to the licensees must be in
\nrelation to the transaction of purchase or sale of the
\ngoods; that while rendering services in the market
\narea for the purposes of facilitating the transactions
\nof produce and sale, it is not necessary to confer the
\nwhole of the benefit on the licensee but some
\nspecial benefit must be conferred on the licensee
\nwhich must have a direct, close and reasonable co-
\nrelation between the transaction and the licensee.
\nThat the spending of the amount of market fees for
\naugmenting agriculture produce, for augmenting
\nthe facility of transport in villages with a view that
\nsuch services in the long run would increase the
\nvolume of transactions in the market, was not
\npermissible on the ground that such a benefit was
\nan indirect and remote benefit to the traders; that
\nthe element of quid pro quo may not be possible but
\neven broadly and reasonably, it must be established
\nby the authorities who charge the fees that the
\namount was being spent for rendering services to
\ntraders on whom the burden falls.  Learned counsel
\nsubmitted that the tests laid down with regard to
\nquid pro quo under principles 2, 3 and 5 in the case
\nof Ram Chandra Kailash Kumar14 have no
\napplication to the compensatory tax because the
\nconcept of compensatory tax is only to judge the
\neffect on trade, commerce and intercourse and,
\ntherefore, according to learned counsel the test of
\ndirect and close relation\/link between the levy and
\nthe service rendered, cannot be applied to the
\nconcept of compensatory tax.  Learned counsel
\nsubmitted that the only test which is applicable to
\nthe concept of compensatory tax is  whether “trade
\nand commerce” is benefitted generally by such levy;
\nthat, it should be sufficient if the facilities provided
\nin the local area ultimately lead to better trading
\nand commerce and even indirect benefit to traders
\nin future on the ground that such services would
\nincrease the volume of trade in the market, can
\nconstitute an important element of compensatory
\ntax. Learned counsel next urged that the
\nparameters for adjudging a tax as compensatory or
\nregulatory would depend upon the nature of tax or
\nin other words, the particular entry in list II with
\nrespect to which the tax is imposed.  In this
\nconnection, it was urged that the scope of entry 52,
\nentry 56, entry 57 and entry 59 in list II cannot be
\nidentical and, therefore, the parameters for those
\nentries cannot be identical, they have to be
\ndifferent.  That, the very nature of tax indicates the
\nnature of facility with which the tax has a link.
\nWhile entries 56, 57 and 59 indicate a nexus with
\nroad, waterways, bridges etc. entry tax under entry
\n52 does not have such limited range of facility.  It
\nhas a nexus with local area which is equivalent to
\nlocal authority as held in the case of Diamond
\nSugar Mills Ltd. & another v. The State of U.P.
\n& Anr. .  According to learned counsel entry tax,
\ntherefore, is for the purposes of enabling the local
\nbodies to discharge their several functions.  Learned
\ncounsel next urged that there is one more aspect of
\nentry tax, it has a co-relation to bring in goods for
\nconsumption, use or sale in a local area.  The
\nconsumption, use or sale not only require roads but
\nalso a proper hygiene, lighting, drinking water,
\nhealth, sanitation  etc.;  that, it is not possible to
\nhave trade without such facilities, therefore, the
\ncompensatory character of the entry tax has to be
\nadjudged with reference to the revenue collected
\nand with reference to the various functions of the
\nlocal body. Learned counsel contended that a tax
\ncan also be collected by the State and then assigned
\nto the local body; that such collection avoids
\nduplication of levy.  Learned counsel contended that
\nuneven economic development of various States in
\nIndia hampers and hinders free flow of trade
\nthroughout India and, therefore, it is in the interest
\nof trade and commerce that backward areas should
\nbe developed and, therefore, merely because the
\nStates assigned proportionately more money to
\nbackward local areas should not be objected to, so
\nlong as good and substantial portion assigned to
\nthe specified local area from which tax is collected.
\nLearned counsel, therefore, contended in conclusion
\nthat a broad co-relation of the levy with the facility
\nwas enough.  Learned counsel contended that in
\nthe case of Bolani Ores Ltd. etc.  v. State of
\nOrissa etc. , the Taxation Act envisaged
\nimposition of tax on motor vehicles actually using
\nthe roads saying that if the facility is not used then
\nno tax can be collected and if collected it will not be
\ncompensatory. Learned counsel contended,
\nhowever, that the judgment of this court in Bolani
\nOres16 was in the context of entry 52 list II which
\nrestricts the imposition of tax by actual use of roads
\nby vehicles.  A tax upon vehicles need not be
\ncontingent upon actual user.  In this connection
\nreliance was placed on entry 57.  Therefore, it was
\nsubmitted that a compensatory character of tax
\nwould not be lost merely because some vehicles pay
\ntax even though they may not use the roads.
\nLearned counsel urged that under entry 57 list II
\nonce the vehicle is suitable for use on road, the tax
\ncan be imposed.  Learned counsel, therefore,
\nsubmitted that if a statute fixes a charge for
\nconvenience or service provided by the State and
\nimposes the tax upon those who avail themselves of
\nsuch service or convenience the freedom of trade
\nand commerce will not be impeded.  As long as the
\ndealer\/trader has a choice to use the goods brought
\ninto the local area the levy on such entry is
\ncompensatory.  Learned counsel submitted that
\nArticle 304(a) coupled with the test of
\nreasonableness as applied to fiscal measures shows
\nthat a tax which is non-discriminatory would be
\npresumed to be compensatory if it has some
\nrelation to the facilities provided.  Similarly, on the
\nconverse side a tax which is discriminatory would
\nbe hit by Article 301.  Shri Dwivedi lastly submitted
\nthat in the case of Bihar Chamber of Commerce2
\ntwo principles were propounded.  It was reiterated
\nthat there should be some connection between a tax
\nand the facilities.  To that extent learned counsel
\nsubmitted that there is no discord with the
\njudgment of this court in the case of Automobile
\nTransport6.  The second principle propounded was
\nthat it would be permissible to consider in the
\ncontext of entry tax that the whole of the State is
\ndivided into local areas and, therefore, the court
\nheld that it would be permissible to consider
\nvarious facilities provided by the State in all the
\nlocal areas.  Learned counsel submitted that this
\nsecond principle\/proposition should be followed by
\na caveat or a rider to the effect that the traders who
\npay the tax in a local area should be shown to have
\nbeen provided with substantial facilities as a class.
\nLearned counsel submitted that subject to above
\ncaveat\/rider there was no need to overrule the
\njudgments of this court in the case of Bhagatram1
\nand in the case of Bihar Chamber of Commerce2.\n<\/p>\n
\tShri Dinesh Dwivedi, learned senior counsel
\nappearing for the State of Uttar Pradesh and Shri B.
\nSen, learned senior counsel appearing for the State
\nof Rajasthan substantially adopted the submissions
\nmade by S\/Shri P.P. Rao and Rakesh Dwivedi,
\nlearned senior counsel.\n<\/p>\n
ANALYSIS OF THE RELEVANT PROVISIONS OF
\nPART-XIII:\n<\/p>\n
\tThe relevant provisions are as follows:\n<\/p>\n
“301. Freedom of trade, commerce
\nand intercourse.  Subject to the other
\nprovisions of this Part, trade, commerce
\nand intercourse throughout the territory
\nof India shall be free.\n<\/p>\n
302. Power of Parliament to impose
\nrestrictions on trade, commerce and
\nintercourse.  Parliament may by law
\nimpose such restrictions on the freedom
\nof trade, commerce or intercourse
\nbetween one State and another or within
\nany part of the territory of India as may
\nbe required in the public interest.\n<\/p>\n
303.  Restrictions on the legislative
\npowers of the Union and of the States
\nwith regard to trade and commerce.  <\/p>\n
(1) Notwithstanding
\nanything in article 302, neither
\nParliament nor the Legislature
\nof a State shall have power to
\nmake any law giving, or
\nauthorizing the giving of, any
\npreference to one State over
\nanother, or making, or
\nauthorizing the making of, any
\ndiscrimination between one
\nState and another, by virtue of
\nany entry relating to trade and
\ncommerce in any of the Lists in
\nthe Seventh Schedule.\n<\/p>\n
(2)  Nothing in clause (1)
\nshall prevent Parliament from
\nmaking any law giving, or
\nauthorizing the giving of, any
\npreference or making, or
\nauthorizing the making of, any
\ndiscrimination if it is declared
\nby such law that it is necessary
\nto do so for the purpose of
\ndealing with a situation arising
\nfrom scarcity of goods in any
\npart of the territory of India.\n<\/p>\n
304.  Restrictions on trade,
\ncommerce and intercourse among
\nStates.  Notwithstanding anything in
\narticle 301 or article 303, the Legislature
\nof a State may by law-\n<\/p>\n
(a)\timpose on goods imported
\nfrom other States or the
\nUnion territories any tax
\nto which similar goods
\nmanufactured or
\nproduced in that State are
\nsubject, so, however, as
\nnot to discriminate
\nbetween goods so
\nimported and goods so
\nmanufactured or
\nproduced; and <\/p>\n
(b)\timpose such reasonable
\nrestrictions on the
\nfreedom of trade,
\ncommerce or intercourse
\nwith or within that State
\nas may be required in the
\npublic interest:\n<\/p>\n
Provided that no Bill or amendment
\nfor the purposes of clause (b) shall be
\nintroduced or moved in the Legislature
\nof a State without the previous sanction
\nof the President.”\n<\/p>\n
INTRODUCTION:\n<\/p>\n
\tSection 8 of Article 1 of the U.S. Constitution
\ncontains what is called “Commerce Clause”, which
\nregulates trade and commerce.  Keeping in mind the
\ndual form of government in USA and the concept of
\n“Police Power” vis-`-vis the “Taxing Power”, the U.S.
\nSupreme Court has held that the commerce power
\nembodied in the commerce clause implies the power
\nto regulate; that is the power to prescribe the rule
\nby which commerce is to be governed (See:
\nConstitutional Law by Stone).  Section 8 of Article 1
\nis an authorization in favour of the Congress to
\nenact laws for the protection and encouragement of
\ncommerce among the States.  By its own force, it
\ncreates an area of trade free from interference by
\nthe States.  Therefore, the commerce clause is per
\nse a limitation upon the power of the States and is
\nnot dependent upon the law being enacted.  It
\nprohibits the States from enacting a law which
\nimpedes free flow of trade between the States.\n<\/p>\n
\tOn the other hand, section 92 of the
\nAustralian Constitution provides for freedom of
\ntrade and commerce.  It does not seek to regulate as
\nin case of commerce clause.  However, it has been
\nheld in numerous decisions of the Privy Council and
\nthe Australian High Courts that section 92 leaves
\nopen the regulation of trade and commerce at all
\nevents until the regulation is enacted provided it
\ndoes not impede the true freedom of inter-State
\ncommerce.  This reasoning is based on the principle
\nthat all trade and commerce must be conducted
\nsubject to law.  Thus, we have the difference
\nbetween taxing and regulatory laws.  This is how
\nthe concept of “regulatory charges” came about.
\n\tArticle 301 is inspired by section 92 of the
\nAustralian Constitution when it refers to freedom of
\ntrade and commerce, however, Article 301 is subject
\nto limitations and conditions in Articles 302, 303
\nand 304 which are borrowed from the commerce
\nclause under Article 1 of the US Constitution.
\nTherefore, Part-XIII is an amalgam of the United
\nStates and Australian Constitutions which brings
\nout the difference between regulatory and taxing
\npowers.  This is how the concept of Payment for
\nRevenue and concept of Payment for Regulation
\narose.  This is how the regulatory power stood
\nexcluded from the taxing power and on that
\nreasoning in Automobile Transport6 case, this
\nCourt took the view that compensatory taxes
\nconstitute an exception to Article 301.  It is a
\njudicially evolved concept.  However, the basis of
\nthat concept was not discussed by this Court in
\nthat case which we have done in this case.  Suffice
\nit to state at this stage that the basis of special
\nassessments, betterment charges, fees, regulatory
\ncharges is “recompense\/reimbursement” of the cost
\nor expenses incurred or incurrable for providing
\nservices\/facilities based on the principle of
\nequivalence unlike taxes whose basis is the concept
\nof “burden” based on the principle of ability to pay.
\nAt this stage, we may clarify that in the above case
\nof Automobile Transport6, this Court has equated
\nregulatory charges with compensatory taxes and
\nsince it is the view expressed by a Bench of seven
\nJudges, we have to proceed on that basis.  The fall-
\nout is that compensatory tax becomes a sub-class of
\nfees.\n<\/p>\n
SCOPE OF ARTICLES 301, 302 AND 304:\n<\/p>\n
\tArticle 301 states that subject to the other
\nprovisions of Part-XIII, trade, commerce and
\nintercourse throughout India shall be free.  It is not
\nfreedom from all laws but freedom from such laws
\nwhich restrict or affect activities of trade and
\ncommerce amongst the States.  Although Article
\n301 is positively worded, in effect, it is negative as
\nfreedom correspondingly creates general limitation
\non all legislative power to ensure that trade,
\ncommerce and intercourse throughout India shall
\nbe free.  Article 301, therefore, refers to freedom
\nfrom laws which go beyond regulations which
\nburdens, restricts or prevents the trade movement
\nbetween States and also within the State.  Since
\n“freedom” correspondingly imposes “limitation”, we
\nhave the doctrine of “direct and immediate effect” of
\nthe operation of the impugned law on the freedom of
\ntrade and commerce in Article 301 as enunciated in
\nAtiabari Tea Co.4 .\n<\/p>\n
Article 301 is, therefore, not only an
\nauthorization to enact laws for the protection and
\nencouragement of trade and commerce amongst the
\nStates but by its own force creates an area of trade
\nfree from interference by the State and, therefore,
\nArticle 301 per se constitutes limitation on the
\npower of the State.\t Article 301 is, however,
\nsubject to the other provisions of Articles 302, 303
\nand 304.  It states that subject to other provisions
\nof Part-XIII, trade, commerce and intercourse
\nthroughout India shall be free.\n<\/p>\n
\tArticle 301 is binding upon the Union
\nLegislature and the State Legislatures, but
\nParliament can get rid of the limitation imposed by
\nArticle 301 by enacting a law under Article 302.
\nSimilarly, a law made by the State Legislature in
\ncompliance with the conditions imposed by Article
\n304 shall not be hit by Article 301.  Article 301 thus
\nprovides for freedom of inter-State as well as intra-
\nState trade and commerce subject to other
\nprovisions of Part-XIII and correspondingly it
\nimposes a general limitation on the legislative
\npowers which limitation is relaxed under the
\nfollowing circumstances:\n<\/p>\n
a)\tLimitation is relaxed in favour of the
\nParliament under Article 302, in
\nwhich case Parliament can impose
\nrestrictions in public interest.\n<\/p>\n
Although the fetter is limited
\nenabling the Parliament to impose
\nby law restrictions on the freedom of
\ntrade in public interest under Article
\n302, nonetheless, it is clarified in
\nclause (1) of Article 303 that
\nnotwithstanding anything contained
\nin Article 302, the Parliament is not
\nauthorized even in public interest,
\nin the making of any law, to give
\npreference to one State over
\nanother. However, the said
\nclarification is subject to one
\nexception and that too only in
\nfavour of the Parliament, where
\ndiscrimination or preference is
\nadmissible to the Parliament in
\nmaking of laws in case of scarcity.\n<\/p>\n
This is provided in clause (2) of
\nArticle 303.\n<\/p>\n
b)\tAs regards the State Legislatures,
\napart from the limitation imposed by
\nArticle 301, clause (1) of Article 303
\nimposes additional limitation,
\nnamely, that it must not give
\npreference or make discrimination
\nbetween one State or another in
\nexercise of its powers relating to
\ntrade and commerce under Entry 26
\nof List-II or List-III.  However, this
\nlimitation on the State Legislatures
\nis lifted in two cases, namely, it may
\nimpose on goods imported from
\nsister State(s) or Union Territories
\nany tax to which similar goods
\nmanufactured in its own State are
\nsubjected but not so as to
\ndiscriminate between the imported
\ngoods and the goods manufactured
\nin the State [See Clause (a) of Article
\n304].  In other words, clause (a) of
\nArticle 304 authorizes a State
\nLegislature to impose a non-\n<\/p>\n
discriminatory tax on goods
\nimported from sister State(s), even
\nthough it interferes with the freedom
\nof trade and commerce guaranteed
\nby Article 301.  Secondly, the ban
\nunder Article 303(1) shall stand
\nlifted even if discriminatory
\nrestrictions are imposed by the State
\nLegislature provided they fulfill the
\nfollowing three conditions, namely,
\nthat such restrictions shall be in
\npublic interest; they shall be
\nreasonable; and lastly, they shall be
\nsubject to the procurement of prior
\nsanction of the President before
\nintroduction of the bill.\n<\/p>\n
Broadly, the above analysis of the scheme of
\nArticles 301 to 304 shows that Article 304 relates to
\nthe State Legislature while Article 302 relates to the
\nParliament in the matter of lifting of limitation,
\nwhich, as stated above, flows from the freedom of
\ntrade and commerce guaranteed under Article 301.
\nArticle 304 also confers upon the State Legislature
\npower to lift the limitations imposed on it by Article
\n301 and clause (1) of Article 303.  This aspect is
\nimportant because the doctrine of “direct and
\nimmediate effect” which is mentioned in Atiabari
\nTea Co.4 emerges from the concept of “limitation”
\nembodied in Article 301.  It is this doctrine of direct
\nand immediate effect which constitutes the basis of
\nthe working test propounded vide para 19 in
\nAutomobile Transport6.  Therefore, whenever the
\nlaw is impugned as violative of Article 301, the
\nCourts will have to examine the effect of the
\noperation of the impugned law on the inter-State
\nand the intra-State movement of goods, which
\nmovement constitutes an integral part of trade.\n<\/p>\n
We have examined and analyzed the relevant
\nprovisions of Part-XIII and particularly Article 301
\nas we are required to lay down the parameters of
\ncompensatory tax vis-`-vis Article 301, as indicated
\nvide para 27 of the referral order.\n<\/p>\n
GENERIC CONCEPT OF COMPENSATORY TAX:
\nINTRODUCTION:\n<\/p>\n
The concept of compensatory tax is not there
\nin the Constitution but is judicially evolved in
\nAutomobile Transport6 as a part of regulatory
\ncharge.  Consequently, we have to go into concepts
\nand doctrines of taxing powers vis-`-vis regulatory
\npowers, particularly when the concept of
\ncompensatory tax was judicially crafted as an
\nexception to Article 301 in Automobile Transport6.\n<\/p>\n
DIFFERENCE BETWEEN EXERCISE OF TAXING
\nAND REGULATORY POWER:\n<\/p>\n
In the generic sense, tax, toll, subsidies etc.
\nare manifestations of the exercise of the taxing
\npower.  The primary purpose of a taxing statute is
\nthe collection of revenue.  On the other hand,
\nregulation extends to administrative acts which
\nproduces regulative effects on trade and commerce.
\nThe difficulty arises because taxation is also used as
\na measure of regulation.  There is a working test to
\ndecide whether the law impugned is the result of the
\nexercise of regulatory power or whether it is the
\nproduct of the exercise of the taxing power.  If the
\nimpugned law seeks to control the conditions under
\nwhich an activity like trade is to take place then
\nsuch law is regulatory.  Payment for regulation is
\ndifferent from payment for revenue.  If the
\nimpugned taxing or non-taxing law chooses an
\nactivity, say, movement of trade and commerce as
\nthe criterion of its operation and if the effect of the
\noperation of such a law is to impede the activity,
\nthen the law is a restriction under Article 301.
\nHowever, if the law enacted is to enforce discipline
\nor conduct under which the trade has to perform or
\nif the payment is for regulation of conditions or
\nincidents of trade or manufacture then the levy is
\nregulatory.  This is the way of reconciling the
\nconcept of compensatory tax with the scheme of
\nArticles 301, 302 and 304.  For example, for
\ninstallation of pipeline carrying gas from Gujarat to
\nRajasthan, which passes through M.P., a fee
\ncharged to provide security to the pipeline will come
\nin the category of manifestation of regulatory power.
\nHowever, a tax levied on sale or purchase of gas
\nwhich flows from that very pipe is a manifestation of
\nexercise of the taxing power.  This example indicates
\nthe difference between taxing and regulatory powers
\n[See: Essays in Taxation by Seligman].\n<\/p>\n
DIFFERENCE BETWEEN “A TAX”, “A FEE” AND
\n“A COMPENSATORY TAX”:\n<\/p>\n
PARAMETERS OF COMPENSATORY TAX: –\n<\/p>\n
As stated above, in order to lay down the
\nparameters of a compensatory tax, we must know
\nthe concept of taxing power.\n<\/p>\n
\tTax is levied as a part of common burden.  The
\nbasis of a tax is the ability or the capacity of the
\ntaxpayer to pay.  The principle behind the levy of a
\ntax is the principle of ability or capacity.  In the case
\nof a tax, there is no identification of a specific
\nbenefit and even if such identification is there, it is
\nnot capable of direct measurement.  In the case of a
\ntax, a particular advantage, if it exists at all, is
\nincidental to the States’ action.  It is assessed on
\ncertain elements of business, such as, manufacture,
\npurchase, sale, consumption, use, capital etc. but
\nits payment is not a condition precedent.  It is not a
\nterm or condition of a licence.  A fee is generally a
\nterm of a licence.   A tax is a payment where the
\nspecial benefit, if any, is converted into common
\nburden.\n<\/p>\n
\tOn the other hand, a fee is based on the
\n“principle of equivalence”.  This principle is the
\nconverse of the “principle of ability” to pay.  In the
\ncase of a fee or compensatory tax, the “principle of
\nequivalence” applies.  The basis of a fee or a
\ncompensatory tax is the same.  The main basis of a
\nfee or a compensatory tax is the quantifiable and
\nmeasurable benefit.  In the case of a tax, even if
\nthere is any benefit, the same is incidental to the
\ngovernment action and even if such benefit results
\nfrom the government action, the same is not
\nmeasurable. Under the principle of equivalence, as
\napplicable to a fee or a compensatory tax, there is
\nan indication of a quantifiable data, namely, a
\nbenefit which is measurable.\n<\/p>\n
\tA tax can be progressive.  However, a fee or a
\ncompensatory tax has to be broadly proportional
\nand not progressive.  In the principle of equivalence,
\nwhich is the foundation of a compensatory tax as
\nwell as a fee, the value of the quantifiable benefit is
\nrepresented by the costs incurred in procuring the
\nfacility\/services which costs in turn become the
\nbasis of reimbursement\/recompense for the
\nprovider of the services\/facilities.  Compensatory
\ntax is based on the principle of “pay for the value”.
\nIt is a sub-class of “a fee”.  From the point of view of
\nthe Government, a compensatory tax is a charge for
\noffering trading facilities.  It adds to the value of
\ntrade and commerce which does not happen in the
\ncase of a tax as such.  A tax may be progressive or
\nproportional to income, property, expenditure or
\nany other test of ability or capacity (principle of
\nability).  Taxes may be progressive rather than
\nproportional. Compensatory taxes, like fees, are
\nalways proportional to benefits.  They are based on
\nthe principle of equivalence.  However, a
\ncompensatory tax is levied on an individual as a
\nmember of a class, whereas a fee is levied on an
\nindividual as such. If one keeps in mind the
\n“principle of ability” vis-`-vis the “principle of
\nequivalence”, then the difference between a tax on
\none hand and a fee or a compensatory tax on the
\nother hand can be easily spelt out.  Ability or
\ncapacity to pay is measurable by property or rental
\nvalue.  Local rates are often charged according to
\nability to pay.  Reimbursement or recompense are
\nthe closest equivalence to the cost incurred by the
\nprovider of the services\/facilities.  The theory of
\ncompensatory tax is that it rests upon the principle
\nthat if the government by some positive action
\nconfers upon individual(s), a particular measurable
\nadvantage, it is only fair to the community at large
\nthat the beneficiary shall pay for it.  The basic
\ndifference between a tax on one hand and a
\nfee\/compensatory tax on the other hand is that the
\nformer is based on the concept of burden whereas
\ncompensatory tax\/fee is based on the concept of
\nrecompense\/reimbursement.  For a tax to be
\ncompensatory, there must be some link between the
\nquantum of tax and the facility\/services.  Every
\nbenefit is measured in terms of cost which has to be
\nreimbursed by compensatory tax or in the form of
\ncompensatory tax.  In other words, compensatory
\ntax is a recompense\/reimbursement.\n<\/p>\n
\tIn the context of Article 301, therefore,
\ncompensatory tax is a compulsory contribution
\nlevied broadly in proportion to the special benefits
\nderived to defray the costs of regulation or to meet
\nthe outlay incurred for some special advantage to
\ntrade, commerce and intercourse. It may
\nincidentally bring in net-revenue to the government
\nbut that circumstance is not an essential ingredient
\nof compensatory tax.\n<\/p>\n
\tSince compensatory tax is a judicially evolved
\nconcept, understanding of the concept, as discussed
\nabove, indicates its parameters.\n<\/p>\n
To sum up, the basis of every levy is the
\ncontrolling factor.  In the case of “a tax”, the levy is
\na part of common burden based on the principle of
\nability or capacity to pay.  In the case of “a fee”, the
\nbasis is the special benefit to the payer (individual
\nas such) based on the principle of equivalence.
\nWhen the tax is imposed as a part of regulation or
\nas a part of regulatory measure, its basis shifts from
\nthe concept of “burden” to the concept of
\nmeasurable\/quantifiable benefit and then it
\nbecomes “a compensatory tax” and its payment is
\nthen not for revenue but as reimbursement\/
\nrecompense to the service\/facility provider.  It is
\nthen a tax on recompense.  Compensatory tax is by
\nnature hybrid but it is more closer to fees than to
\ntax as both fees and compensatory taxes are based
\non the principle of equivalence and on the basis of
\nreimbursement\/recompense.  If the impugned law
\nchooses an activity like trade and commerce as the
\ncriterion of its operation and if the effect of the
\noperation of the enactment is to impede trade and
\ncommerce then Article 301 is violated.\n<\/p>\n
BURDEN ON THE STATE:\n<\/p>\n
\tApplying the above tests\/parameters,
\nwhenever a law is impugned as violative of Article
\n301 of the Constitution, the Court has to see
\nwhether the impugned enactment facially or
\npatently indicates quantifiable data on the basis of
\nwhich the compensatory tax is sought to be levied.
\nThe Act must facially indicate the benefit which is
\nquantifiable or measurable.  It must broadly
\nindicate proportionality to the quantifiable benefit.
\nIf the provisions are ambiguous or even if the Act
\ndoes not indicate facially the quantifiable benefit,
\nthe burden will be on the State as a service\/facility
\nprovider to show by placing the material before the
\nCourt, that the payment of compensatory tax is a
\nreimbursement\/recompense for the quantifiable\/
\nmeasurable benefit provided or to be provided to its
\npayer(s).  As soon as it is shown that the Act
\ninvades freedom of trade it is necessary to enquire
\nwhether the State has proved that the restrictions
\nimposed by it by way of taxation are reasonable and
\nin public interest within the meaning of Article
\n304(b) [See: para 35 of the decision in the case of
\nKhyerbari Tea Co. Ltd. & Anr. v. State of Assam
\n& Ors.,<\/a> reported in AIR 1964 SC 925].\n<\/p>\n
SCOPE OF ARTICLES 301, 302 & 304 VIS-@-VIS
\nCOMPENSATORY TAX:\n<\/p>\n
\tAs stated above, taxing laws are not excluded
\nfrom the operation of Article 301, which means that
\ntax laws can and do amount to restrictions on the
\nfreedom guaranteed to trade under Part-XIII of the
\nConstitution.  This principle is well settled in the
\ncase of Atiabari Tea Co.4 .  It is equally important
\nto note that in Atiabari Tea Co.4, the Supreme
\nCourt propounded the doctrine of “direct and
\nimmediate effect”.  Therefore, whenever a law is
\nchallenged on the ground of violation of Article 301,
\nthe Court has not only to examine the pith and
\nsubstance of the levy but in addition thereto, the
\nCourt has to see the effect and the operation of the
\nimpugned law on inter-State trade and commerce as
\nwell as intra-State trade and commerce.\n<\/p>\n
\tWhen any legislation, whether it would be a
\ntaxation law or a non-taxation law, is challenged
\nbefore the court as violating Article 301, the first
\nquestion to be asked is: what is the scope of the
\noperation of the law?  Whether it has chosen an
\nactivity like movement of trade, commerce and
\nintercourse throughout India, as the criterion of its
\noperation?  If yes, the next question is: what is the
\neffect of operation of the law on the freedom
\nguaranteed under Article 301?  If the effect is to
\nfacilitate free flow of trade and commerce then it is
\nregulation and if it is to impede or burden the
\nactivity, then the law is a restraint.  \tAfter finding
\nthe law to be a restraint\/restriction one has to see
\nwhether the impugned law is enacted by the
\nParliament or the State Legislature.  Clause (b) of
\nArticle 304 confers a power upon the State
\nLegislature similar to that conferred upon
\nParliament by Article 302 subject to the following
\ndifferences:_\n<\/p>\n
(a)\tWhile the power of Parliament
\nunder Article 302 is subject to the
\nprohibition of preference and
\ndiscrimination decreed by Article
\n303(1) unless Parliament makes the
\ndeclaration under Article 303(2),
\nthe State power contained in Article
\n304(b) is made expressly free from
\nthe prohibition contained in Article
\n303(1) because the opening words
\nof Article 304 contains a non-\n<\/p>\n
obstante clause both to Article 301
\nand Article 303.\n<\/p>\n
(b)\tWhile the Parliament’s power to
\nimpose restrictions under Article
\n302 is not subject to the
\nrequirement of reasonableness, the
\npower of the State to impose
\nrestrictions under Article 304 is
\nsubject to the condition that they
\nare reasonable.\n<\/p>\n
(c) An additional requisite for the
\nexercise of the power under Article
\n304(b) by the State Legislature is
\nthat previous Presidential sanction
\nis required for such legislation.\n<\/p>\n
WHY WAS THE MATTER PLACED BEFORE A
\nBENCH OF FIVE JUDGES:\n<\/p>\n
\tThe concept of compensatory taxes was
\npropounded in the case of Automobile Transport6
\nin which compensatory taxes were equated with
\nregulatory taxes.  In that case, a working test for
\ndeciding whether a tax is compensatory or not was
\nlaid down.  In that judgment, it was observed that
\none has to enquire whether the trade as a class is
\nhaving the use of certain facilities for the better
\nconduct of the trade\/business. This working test
\nremains unaltered even today.\n<\/p>\n
\tAs stated above, in the post 1995 era, the said
\nworking test propounded in the Automobile
\nTransport6  stood disrupted when in Bhagatram’s
\ncase1, a Bench of three Judges enunciated the test
\nof “some connection” saying that even if there is
\nsome link between the tax and the facilities
\nextended to the trade directly or indirectly, the levy
\ncannot be impugned as invalid.  In our view, this
\ntest of “some connection” enunciated in
\nBhagatram’s case1  is not only contrary to the
\nworking test propounded in Automobile
\nTransport’s case6  but it obliterates the very basis
\nof compensatory tax.  We may reiterate that when a
\ntax is imposed in the regulation or as a part of
\nregulatory measure the controlling factor of the levy
\nshifts from burden to reimbursement\/recompense.
\nThe working test propounded by a Bench of seven
\nJudges in the case of Automobile Transport6 and
\nthe test of “some connection” enunciated by a
\nBench of three Judges in Bhagatram’s case1
\ncannot stand together.  Therefore, in our view, the
\ntest of “some connection” as propounded in
\nBhagatram’s case1 is not applicable to the concept
\nof compensatory tax and accordingly to that extent,
\nthe judgments of this Court in Bhagatram
\nRajeevkumar v. Commissioner of Sales Tax,
\nM.P.1  and State of Bihar v. Bihar Chamber of
\nCommerce2  stand overruled.\n<\/p>\n
\tBefore concluding, we may point out that
\nparties before us have taken more or less extreme
\npositions and, therefore, we have not examined the
\narguments in seriatim.\n<\/p>\n
CONCLUSION:\n<\/p>\n
\tIn our opinion, the doubt expressed by the
\nreferring Bench about the correctness of the
\ndecision in Bhagatram’s case1  followed by the
\njudgment in the case of Bihar Chamber of
\nCommerce2  was well-founded.\n<\/p>\n
\tWe reiterate that the doctrine of “direct and
\nimmediate effect” of the impugned law on trade and
\ncommerce under Article 301 as propounded in
\nAtiabari Tea Co. Ltd. v. State of Assam4  and the
\nworking test enunciated in Automobile Transport
\n(Rajasthan) Ltd. v. State of Rajasthan6 for
\ndeciding whether a tax is compensatory or not vide
\npara 19 of the report, will continue to apply and the
\ntest of “some connection” indicated in para 8 of the
\njudgment in Bhagatram Rajeevkumar v.
\nCommissioner of Sales Tax, M.P.1  and followed in
\nthe case of State of Bihar v. Bihar Chamber of
\nCommerce2, is, in our opinion, not good law.
\nAccordingly, the constitutional validity of various
\nlocal enactments which are the subject matters of
\npending appeals, special leave petitions and writ
\npetitions will now be listed for being disposed of in
\nthe light of this judgment.<\/p>\n","protected":false},"excerpt":{"rendered":"
Supreme Court of India Jindal Stainless Ltd. & Anr vs State Of Haryana & Ors on 13 April, 2006 Author: Kapadia Bench: Ruma Pal Kapadia, Tarun Chatterjee, P.P. Naolekar CASE NO.: Appeal (civil) 3453 of 2002 PETITIONER: Jindal Stainless Ltd. & Anr RESPONDENT: State of Haryana & Ors DATE OF JUDGMENT: 13\/04\/2006 BENCH: RUMA PAL […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30],"tags":[],"class_list":["post-90441","post","type-post","status-publish","format-standard","hentry","category-supreme-court-of-india"],"yoast_head":"\nJindal Stainless Ltd. & Anr vs State Of Haryana & Ors on 13 April, 2006 - Free Judgements of Supreme Court & High Court | Legal India<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.legalindia.com\/judgments\/jindal-stainless-ltd-anr-vs-state-of-haryana-ors-on-13-april-2006\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Jindal Stainless Ltd. & Anr vs State Of Haryana & Ors on 13 April, 2006 - 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