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ITC Limited v. State of Tamil Nadu - WP.Nos.12553 of 2002  RD-TN 1055 (22 March 2007)
IN THE HIGH COURT OF JUDICATURE AT MADRAS
The Honourable Mr.A.P.SHAH, CHIEF JUSTICE and
The Honourable Mr.Justice K.CHANDRU
Writ Petition Nos. 12553 to 12555/2002, 13457/02, 14246/02, 14247/02, 14578 to 14580/02, 14581/02, 14593/02, 15340/02, 15667 to 15669/02, 15809 to 15810/02, 15830/02, 15833/02, 15862/02, 15896/02, 15898/02, 15902/02, 15908/02, 16430 to 16432/02, 16433/02, 16434/02, 16959 to 16962/02, 16469 to 16472/02, 18225/02, 18871 to 18874/02, 18894/02 to 18898/02, 18899 to 18901/02, 18902 to 18905/02, 19003/02, 19284 to 19286/02, 19326/02, 19356/02, 19570/02, 19958 & 19959/02, 20054 to 20058/02, 20332/02, 20466/02, 20738/02, 20790/02, 20791 to 20793/02, 21268/02, 21566/02, 21655/02, 21815/02, 21816 & 21817/02, 21818/02 & 21819/02, 21823/02, 22016/02, 22023 to 22027/02, 22039 to 22043/02, 22072 to 22075/02, 22260/02, 22285/02 to 22287/02, 22288 to 22291/02, 22302 to 22306/02, 22408/02, 22458/02, 22519 & 22521/02, 22541 to 22544/02, 22545/02, 22597/02, 22679 to 22685/02, 22738/02, 22956 to 22958/02, 23103/02, 23140/02, 23175/02, 23176/02, 23263 to 23266/02, 23443/02, 23553/02 & 23554/02, 23738 to 23742/02, 23941 to 23943/02, 24143/02, 24181 to 24184/02, 24385/02, 24419 to 24420/02, 24525 & 24526/02, 25021/02, 25346/02, 25373/02, 29937/02, 29963/02, 30035/02, 30532/02, 30668 to 30673/02, 30906/02, 31195/02, 31198/02, 31241/02, 31535 to 31540/02, 31541 to 31544/02, 31612 & 31613/02, 31633/02, 31690/02, 32425/02, 32460 & 32461/02, 32463 & 32464/02, 32734 & 32735/02, 33099/02, 33100/02, 33101/02, 33102/02, 33103/02, 33104/02, 33105/02, 33106/02, 33107/02, 33108/02, 33583/02, 34203/02, 34266/02, 34283/02& 34284/02, 34313/02, 34342/02, 34343/02, 22961/02, 23177/02, 24352/02, 25068/02, 29058 & 29059/02, 29649/02, 29890/02, 32412/02, 32977/02, 33875/02, 34873/02, 35776/02, 36273/02, 36519 to 36521/02, 37078/02, 37465/02, 37480/02, 37660/02, 37718/02, 37778/02, 38430/02, 38855 to 38858/02, 39382 to 39384/02, 40280/02, 29825/02, 33194 to 33197/02, 34130/02, 34132/02, 34145/02, 34156/02, 34159/02, 34162/02, 34173/02, 34186/02, 34402/02, 34406 to 34407/02, 35554/02, 35555/02, 35691/02, 35834/02, 36498/02, 36503/02, 36707/02, 37129 to 37132/02, 37281 & 37282/02, 37297/02, 37298/02, 38030/02, 38214/02, 38270/02, 39051/02, 39275/02, 39276/02 to 39279/02, 39392/02, 39424/02, 39428 to 39431/02, 39656/02, 39791/02, 40099/02, 40534/02, 40895/02, 18875/02, 19603/02, 19907/02, 19920/02, 19931/02, 19932/02, 19955 to 19957/02, 20229/02, 23642/02, 23908 to 23919/02, 31808&31809/02, 31887/02, 34304/02, 34788/02, 35388/02, 35847/02, 35866/02, 35891/02, 35896/02, 38183/02, 38261/02, 38668 & 38669/02, 39319 &39320/02, 41364/02, 41543/02, 41712/02, 41784 & 41785/02, 42261/02, 42487/02, 42749/02, 43800/02, 44412/02, 44436/02, 44470/02, 44473/02, 44486/02, 44487/02, 44510 to 44512/02, 44697/02, 44997/02, 45066/02, 45191 & 45192/02, 45312/02, 45332/02, 45408/02, 45943/02, 46010/02, 46445/02, 46651/02, 46689 to 46691/02, 47051/02,37934/02, 27/2003, 59/03, 61/03, 392/03, 565/03, 695/03, 790/03, 813/03, 816/03, 817/03, 818/03, 824/03, 827/03, 979/03, 1031/03, 1155/03, 1259, 2201, 2293, 2313, 2740, 3353, 3779, 3765, 4113, 3513, 4513, 5458, 5459, 6184, 8608, 8631, 7148, 7587, 7623, 7942, 8124, 8220, 8221, 9134, 9244, 9571, 9627, 9743, 9908, 9909, 10429, 10601, 11326, 11327, 11450, 11615, 11616, 11620 to 11625, 11820 to 11824, 12968, 12969, 12970, 13279, 13407, 13450, 13567, 13960, 14049, 14050, 14057, 15575 to 15578, 16659, 16757, 16816, 16926, 17633, 18068, 18213, 18871, 19842, 20767, 21315, 21723 to 21726, 22039, 22040, 22041, 23309, 23390, 24069, 24119, 25150 to 25153, 24536, 24540, 24745, 26710, 27000, 27049, 27479, 27803, 28289, 28618, 28619, 28708, 28709, 28938, 29085, 29252, 29277, 29476, 29497, 29657, 29847, 29913, 30144, 30337, 30886, 32767,32777, 32823, 32824, 32826, 32846, 32850, 32851, 33271, 33319, 34502, 35490, 29266, 35899, 35971, 35972, 35973, 35994, 36078, 36115, 36152, 36493, 36522, 36758, 36990 to 36992, 37026, 38543, 38544, 38653, 38654, 38690, 38802/2003, 158/2004, 223, 484, 510, 675, 955, 977, 989, 1175, 1204, 1713, 2515, 2691, 2692, 2693, 2839, 2960, 3091, 3153 to 3158, 3161 to 3163, 3574, 3716, 3721, 24153 to 24168, 37208, 37807, 37752, 37768, 37798, 37989, 38057, 38058, 38093, 38442, 2014, 15461, 15634, 15707, 15711, 15912, 7340, 7341, 15110, 15227, 15453, 15487, 15492, 20305, 20306, 21026/2004, 21162, 21192, 21193, 21196/04, 21246/04, 26042to 26044/04, 27017/04, 28718/04, 29915/04, 29919/04, 30678/04, 35055/04, 36909/04, 22292/04, 30636/03, 39534/04, 37582/04, 37626/04, 38024/04, 38033/04, 24199/04, 11412/04, 11740/04, 12769/04, 12770/04, 3929 to 3931/04, 20764, 20765/05, 18864/05, 18873 & 18874/05, 26122&26123/05, 26147 to 26149/05, 26949/05, 30564/05, 32662/05, 100/05, 595 to 597/05, 1144&1145/05, 1458/05, 1495/05, 1799 & 1800/05, 1527/05, 2153 & 2154/04, 3824/04, 4676/04, 4676/04, 4679/04, 4730/04, 5926 to 5928/04, 5604&5605/04, 5785*04, 5880/04, 6192/04, 6440/04, 6548 to 6551/04. 6915/04, 7418/04, 7421/04, 7453/04, 7472/04, 8719/04, 8964/04, 9078/04, 9156/04, 9393/04, 9620/04, 9806/04, 9980/04, 10362/04, 10655/04, 11223/04, 11224/04, 11239/04, 11494/04, 12573/04, 13278/04, 13279/04, 13630/04, 13631/04, 13561 &13562/04, 27149/04, 27175/04, 27485/04, 27575/04, 27709/04, 27733/04, 27827/04, 27829/04, 27835/04, 27993&27994/04, 28028/04, 28029/04, 28048/04, 28361/04, 29469/04, 29617/04, 29679/04, 29789/04, 29870/04, 5143 & 5144/04, 5644/04, 17096/04, 17163/04, 19095/04, 22114/04, 22437/04, 22614/04, 22791/04, 22793&22794/04, 22948/04, 24178/04, 24635/04, 25291/04, 25650/04, 25658/04, 25743/04, 26667&26668/04, 29057/04, 29920/04, 30282&30283/04, 30496/04, 31084/04, 31210/04,37668/04, 37669/04, 38420/04, 39628/04, 21581/05, 1317/04,1372/04, 1380/04, 1513/04, 1976/04, 2336 & 2337/04, 14522/04, 14644/04, 23099/05, 6247/04, 6315/04, 7091 &7092/04, 204/05, 239/05, 905/05, 1116/05, 24699/05, 13325/04, 13913/04, 14316&14317/04, 14328/04,14372/04, 14420&14421/04, 16599/04, 18736/04, 19561/04, 22325/04, 22660/04, 23333/04, 23841/04, 23988 to 23990/04, 25029/04, 28720/04, 28971 to 28973/04, 21903/05, 21922/05, 22031&22032/05, 22638/05, 22795/05, 23881&23882/05, 23923/05, 5566/05, 5627/05, 5656/05, 5675&5676/05, 7353/05, 9369/05, 10410/05, 10437/05, 10804/05,13335/05, 15999/05, 16082/05, 25387/04, 8406/05, 8644/05, 8848/05, 10171/05, 10413&10414/05, 5840/04, 19677&19678/05, 12938/05, 11800/05, 19680/05, 33105/04, 33106/04, 34410 & 34411/04, 35479/04, 35776/04, 37139 to 37141/04, 10075/05, 12027/05, 20790/05, 20956/05, 24190/05, 24547/05, 24652/05, 24997/05, 39301&39032/05, 39647&39648/05, 39841&39842/05, 40150/05, 320/06, 8075/04, 489/06, 1030&1031/06, 1351/06, 1474/06, 1642 to 1644/06, 4186/06, 4655/06, 4945/06, 12451 to 12454/04, 22359 &22360/04, 39422&39423/05, 7804/04, 12674 & 12675/04, 15960/04, 15963/04, 26440 to 26444/04, 2150&2151/05, 1912/04, 2443/04, 16083&16084/05, 15045/04, 36484/04, 16250/05, 13335/04, 29684/05, 3385/06, 8948/06, 9000/06,40118/06, 4105/05, 15864& 15865/05, 15135/04, 19131/04, 19845/04, 20756/04 & 20757/04, 33410/04, 1935/05, 6236/05, 6240/05, 6241/05, 33965/05, 35909/05, 9240/06, 9865 & 9866/06, 42549/06, 42963/06, 4168/05, 4277/05, 1415/06, 518/06, 18073/05 & W.A.Nos. 1320 & 1321/06.
W.P.Nos.12553 to 12555 of 2002
having its Registered Office
at Virginia House,
37, J.L.Nehru Road, Kolkata-700 071.
And one of its Marketing Office at ITC Centre,
4th Floor, 760, Anna Salai, Chennai - 600 002.
Rep. by its Constituted Attorney,
Mr.Subhatosh Banerjee . Petitioner in the above petitions vs.
1. The State of Tamil Nadu
rep. by the Chief Secretary to
Government of Tamil Nadu,
2. The Commercial Tax Officer,
Thiruvottiyur Assessment Circle,
Chennai. ..Respondents in the above petitions. Petitions filed under Article 226 of the Constitution of India praying for the issue of a Writ of Declaration for the reasons stated therein.
For Petitioners in ::: Mr.Anil B.Divan, SC W.P.Nos.12553,12554&12555/02 Mr.A.L.Somayaji, SC 15667, 15668 & 15669/02 & Mr.S.Ganesh, SC 36503/2002 Assisted by Mr.Krishna Srinivas Mr.AR.Ramanathan for M/s.Ramasubramaniam& Associates For Petitioners in
W.P.Nos.24058, 24059&24060/06 Mr.Arvind P.Datar, SC For M/s.S.Ramasubramaniam & Associates.
For Petitioners in Mr.C.Natarajan, SC for W.P.Nos.13457,14246,14578 Mr.Inbarajan
14581, 14593, 18871, 18894, 18899,
to 18901, 18902, 19958, 21268,
21655, 21816, 21818, 22016, 22023,
22039 to 22043, 22072 to 22075,
22260, 22285, 22288, 22519, 22541,
22545, 22679 to 22685, 22738,
23140, 23553, 23941 to 23943,
24143, 29937, 34266, 22961, 24352,
32412, 39275, 19955, 34788,
42261 of 2002, 4113/2003, 5458/03,
9743/03, 24069/03, 29847/03,
510/04, 595/05, 27709/04,
28048/04, 28200/04, 26667/04,
30282/04, 38420/04, 905/05,
28971/04, 23881/05 & 23923/05.
For Petitioners in
W.P.Nos.7091/04 & 18073/05 Mr.S.Sivanandam For Petitioner in
W.P.No.40118/06 Mr.D.Venkatesh for Mr.V.P.Raman For Petitioners in W.P.Nos. Mr. R.Venkatraman, SC 29963/02, 42749/02, 9244/03, assisted by Mr.T.Ramesh Kutty,
13407/03, 13450/03, 16659/03,
28708/03, 29085/03, 29913/03 Mr.K.Venkatasubramaniam 30886/03, 2014/04, 20305/04, for M/s.R.V.Chitra Associates 20306/04, 30636/04, 23333/04,
For Petitioners in Mr.M.N.Rao, SC for 15830/02, 15833/02, 15862/02, M/s.R.Hemalatha 15896/02, 15898/02, 15902/02,
15908/02, 16430/02, 16433/02,
16434/02, 16959 to 16962/02,
16469/02 to 16472/02, 18225/02,
19284/02, 20332/02, 20790/02,
20791/02, 31341/02, 37078/02,
37480/02, 38855/02, 37297/02,
37298/02, 38270/02, 39276 to
39279/02, 39428 to 39431/02,
18875/02, 19907/02, 19920/02,
19931/02, 19932/02, 35891/02,
41712/02, 41784/02, 44412/02,
44436/02, 44470/02, 565/02,
8631/03, 7623/03, 9571/03,
9627/03, 11326/03, 22039/03,
22040/03, 22041/03, 35971/03,
35972/03, 35973/03, 35994/03,
36078/03, 36115/03, 36153/03,
36493/03, 36758/03, 38653/03,
38654/03, 675/04, 1175/04,
1204/04, 1713/04, 2693/04,
2839/04, 2960/04, 3091/04,
37208/03, 37752/03, 37768/03,
38093/03, 15461/04, 15634/04,
15707/04, 15711/04, 15912/05,
7340/04, 7341/04, 15110/04,
21162/04, 21192/04, 21193/04,
21196/04, 27017/04, 3929/05,
to 3931/05, 20764/05, 18864/05,
18873/05 & 18874/05, 20765/05,
26147 to 26149/05, 26949/05,
30564/05, 32662/05, 1144/05,
1458/05, 1495/05, 2153/04 ,
2154/04, 3824/04, 4679/04,
4730/04, 5296/04 to 5298/04,
5604 & 5605/04, 7453/04,
8719/04, 11223/04, 11224/04,
11239/04, 13279/04, 13630/04,
13631/04, 27575/04, 27733/04,
27993/04 & 27994/04, 19095/04,
22437/04, 22791/04, 22793/04,
24178/04, 25291/04, 37668/04,
37669/04, 1317/04, 1513/04,
2336/04, 23099/05, 239/05,
14316/04, 14420/04, 19561/04,
22638/05, 5675/05, 10437/05,
9717/05, 9582/05, 10595/05,
9611/05, 9767/05, 10804/05,
10171/05, 10413 & 10414/05,
19677/05, 19678/05, 12938/05,
19680/05, 33105/04, 33106/04,
35479/04, 37139 to 37141/04,
10075/05, 20790/05, 39301/05,
39647 & 39648/05, 39841 & 39842/
2005, 8075/04, 489/06, 1030/06,
1031/06, 1351/06, 1642 to 1644/
2006, 4186/06, 4655/06, 22359 to
22360/04, 15960/04, 15963/04,
2150 & 2151/05, 36484/04,
3385/06, 42549/06 & 42963/06.
For Respondents Mr.R.Viduthalai, Advocate General Assisted by Mr.Haja Naziurudeen, Spl.Govt.Pleader (Taxes) O R D E R
THE HON'BLE CHIEF JUSTICE
Constitutional validity of the Tamil Nadu Tax on Entry of Goods into Local Areas Act, 2001("Act" for short), and various notifications issued by the State Government in exercise of the powers conferred by Section 15 of the Act is questioned in these writ petitions and connected writ appeals.
2. Tamil Nadu State enacted the Act to provide for the levy of tax on entry of goods into local areas for consumption, use or sale therein, being Tamil Nadu Act 20 of 2001. Section - 3 empowers the State Government to levy and collect tax on entry of scheduled goods into any local area for consumption, use or sale therein at such rate not exceeding 30 ad valerom, as may be specified by the State Government. Goods liable for levy of tax under the Act on entry in the specified local areas at the specified rates are those set out in the schedule annexed to the Act. Section 15 of the Act contains power of the State Government to amend the schedule and armed with that power the State Government issued various notifications inserting several goods/classes of goods into the schedule annexed to the Act. The Act was brought into force on 01.12.2001.
3. Numerous petitions have been filed under Article 226 of the Constitution contending that the Act and the notifications issued thereunder are unconstitutional on diverse grounds. The main ground of attack is that the tax sought to be levied under the Act is neither regulatory in nature nor does it satisfy the tests laid down for a compensatory tax. The tax being discriminatory in nature and being levied on the entry of goods into a local area is a direct and immediate impediment to the freedom of trade guaranteed under Article 301 of the Constitution. No Presidential assent has been obtained under Article 304(b) of the Constitution for the levy of the entry tax under the Act. The demand and collection of entry tax under the impugned Act is therefore illegal, unauthorised and violative of Articles 301 and 304 of the Constitution.
4. It is necessary at this stage to notice the broad features of the Act. The long title and the preamble of the Act demonstrates the purpose for which the Act was enacted, it being to provide for the levy of tax on the entry of scheduled goods into local areas for consumption, use or sale thereunder. Section 3 of the Act, which is the charging section, reads as under: -
"3. Levy and Collection of tax -
(1) Subject to the provisions of this Act, there shall be levied and collected a tax on the entry of any scheduled goods into any local area for consumption, use or sale therein. The rate of tax of shall be at such rate not exceeding thirty percent on the value of the scheduled goods as may be fixed by the Government, by notification and different rates may be fixed for different scheduled goods.
(2) The tax shall be payable by an importer in accordance with the provisions of the Act."
5. The expression "entry of goods into local area" has been defined under the Act vide Section 2(c) and it reads as follows:
"Section - 2(c): Entry of goods into a local area - with all its grammatical variations and cognate expressions, means entry of scheduled goods into a local area from any place outside the State for consumption, use or sale therein;"
6. It can be seen from a plain reading of Section 2(c) and Section 3 that levy of entry tax under the Act is only on goods which are imported from any place outside the State of Tamil Nadu for consumption, use or sale within the Sate. The term local area is defined in Section 2(h) and it reads as follows: -
"Section - 2(h) Local Area means the area within the limits of -
(i) the City of Chennai as defined in the Chennai City Municipal Corporation Act, 1919 (Tamil Nadu Act No.IV of 1919), or
(ii) the City of Madurai as defined in the Madurai City Municipal Corporation Act, 1971 (Tamil Nadu Act No.15 of 1971), or
(iii) the City of Coimbatore as defined in the Coimbatore City Municipal Corporation Act, 1981 (Tamil Nadu Act No.25 of 1981), or
(iv) the City of Tiruchirappalli as defined in the Tiruchirappali City Municipal Corporation Act, 1994 (Tamil Nadu Act No.27 of 1994), or (v) the City of Tirunelveli as defined in the Tirunelveli City Municipal Corporation Act, 1974 (Tamil Nadu Act No.28 of 1974), or
(vi) the City of Salem as defined in the Salem City Municipal Corporation Act, 1994 (Tamil Nadu Act No.29 of 1994), or
(vii) any other Municipal Corporation that may be constituted under any law for the time being in force, or
(viii) a Municipality under the Tamil Nadu District Municipalities Act, 1920 (Tamil Nadu Act No.V of 1920), or
(ix) a Panchayat under the Tamil Nadu Panchayats Act, 1994 (Tamil Nadu Act No.21 of 1994)".
7. Further, Section 2(c) which defines 'entry of goods into a local area' has to be read with the definion of 'importer' in Section 2(g) because under Section 3(2) the tax is payable only by the 'importer' as defined by Section 2(g), which reads as follows: - "Section 2(g): importer means a person who brings or causes to be brought any scheduled goods whether on his own account or on account of a principal or any other person, into a local area, from any place outside the State for consumption use or sale therein or who owns the scheduled goods at the time of entry into the local area".
8. Section 4 provides for reduction in tax liability in certain cases and reads as follows:- "Section - 4 Reduction in tax liability - (1) Where an importer of any scheduled goods liable to pay tax under this Act, being a dealer in scheduled goods becomes liable to pay tax under the General Sales Tax Act and additional sales tax under the Tamil Nadu Additional Sales Tax Act, 1970 (Tamil Nadu Act No.14 of 1970), by virtue of the sale of such scheduled goods, then his liability under those Acts shall be reduced to the extent of tax paid under this Act.
(2) Where an importer who, not being a dealer in scheduled goods, had purchased the scheduled goods for his own use or consumption in any Union Territory, or any other State, then his liability under this Act, shall, subject to such conditions as may be prescribed be reduced to the extent of the amount of tax paid, if any, under the law relating to General Sales Tax as may be in force in that Union Territory or State."
9. Chapter III of the Act provides for offences and penalties and cognizance of offences, Chapter IV deals with appeals and revisions and Chapter V contains provisions for returns, assessments, payments, recoveries and refunds of tax and reviews.
10. Learned counsel appearing on behalf of the petitioners submitted that the right of the State to impose entry tax has to be decided in the light of the decision of the Constitution Bench of the Supreme Court in Jindal Stainless Ltd. vs. State of Harayana, 2006 (7) SCC 241. It was submitted that in Jindal's case, it has been specifically held that the burden is on the State placing material before the Court to prove that the payment of compensatory tax is reimbursement/re-compensate for the quantifiable/measurable services provided or to be provided to the payers. It was submitted that the essence of compensatory tax is that the services rendered or facilities provided should be more or less commensurate with the tax levied and tax should not be patently more than what was required to provide trading facilities. It was submitted that the tax imposed for augmenting general revenue of the State is not compensatory; that any tax law, which does not or which has the effect of disrupting the trade movement in inter-State trade and commerce between States is contrary to the concept of freedom of trade embodied in Article 301 of the Constitution. According to learned counsel, mere declaration in law that the levy is compensatory in nature is not enough. Whether the tax is compensatory or not cannot depend upon the preamble of the statute imposing it, and the burden would lie heavily on the State administration to prove that the tax proposed to be levied and collected under the impugned enactment is for the use of trade facilities and only then that such levy would come within the purview of compensatory tax as laid down in the judgment of the Supreme Court in Jindal's case. It was submitted that Entry 52 List II indicates that the levy contemplated therein is on the entry of goods into the local area for consumption, use or sell therein. Therefore, if levy of entry tax is claimed to be compensatory in nature such levy would have to be, in the first instance, confined to a local area, and secondly, the trade facilities sought to be provided also should be confined to such local area. Further, the expenses for such facilities and the levy by which such expenses are to be met must bear reasonable and rationale relationship. It was urged that entry tax levied under the impugned Act lacks basic ingredients for a valid compensatory tax as neither under the impugned Act nor in connection with it, any specific facility, convenience or services is provided to the assessees who are required to pay impugned tax nor is there any co-relationship between the quantum of tax recovered from the assessees and the value of convenience/facility or services provided. It was submitted that the Act has not received the assent of the President as required under Article 255 of the Constitution nor the Bill was moved on the floor of the Assembly with the previous sanction of the President as required under the proviso to Section 304(b) of the Constitution, and thus, the Act is not saved by Article 304(b) of the Constitution. Learned counsel further submitted that there is an element of discrimination between the goods entering the local areas from outside the State and goods entering the local areas from within the State i.e., from one local area to another local area. The latter class of goods is not subjected to levy though all the facilities, if at all provided, are there in course of inter-State movement and entry of goods in local areas. Learned counsel, therefore, submitted that this discrimination per se militates against the impugned levy being termed as compensatory. The levy thus violates the non- discrimination clause in Article 304(a) of the Constitution.
11. In reply, on behalf of the State, it was submitted by the learned Advocate General that Tamil Nadu Act 20 of 2001, does not suffer from want of legislative competence. He submitted that the State legislature has the competence under Entry 52 List II to enact the impugned law and the State legislature is competent to levy such tax because the incidence of tax is on the entry of goods into the local area for consumption, use or sale therein. He submitted that the entry tax is compensatory in character, and therefore, the impugned levy, which is compensatory in nature, as can be seen from the preamble of the Act, does not attract Articles 301 and 304 of the Constitution. He urged that the preamble of the Act clearly shows that the tax levied and collected shall be utilized for facilitating free flow of trade and commerce and it is sufficiently demonstrated from the statistical data furnished by the State in relation to the expenditure involved for the maintenance of roads, construction of bridges, etc. and thus, the test laid down by the Constitution Bench in Jindal's case stands fully satisfied. He submitted that if the statute fixes a charge for convenience or services provided by the State and imposes a tax upon those who avail themselves of such services or convenience, freedom of trade and commerce would not be impaired. He submitted that it would be permissible to consider in the context of entry tax that the whole of State is divided into local areas, and therefore, it is necessary to consider various facilities provided by the State in all local areas, and it is enough, if the traders are provided substantial facilities as a class. Learned Advocate General submitted that the plea that there is discrimination is untenable as the levy of entry tax is on all scheduled goods that enter the State. He pointed out that Section 4(2) of the Act provides for set-off when the importer sells goods in the situation contemplated under Section 3(3) of the T.N.General Sales Tax Act or T.N.Additional Sales Tax Act. According to him, the issue of discrimination cannot be worked out by merely referring to an isolated taxing statute like the present one, but the sum total of the taxes levied by the State including under the T.N. General Sales Tax Act and the Additional Sales Tax Act will have to be taken into account. He, therefore, submitted that there is no violation of Article 304(a) of the Constitution.
12. In view of the rival contentions raised at the Bar, two questions arise for our consideration, namely, a)Whether the levy of entry tax under Tamil Nadu Act 20 of 2001 can be justified as a compensatory tax? b)Whether the impugned levy of entry tax is violative of Article 304(a) of the Constitution?
Re. Question(a): -
13.Articles 301, 302, 303 & 304 are relevant for the purpose of deciding the controversy:
"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 territory of India as may be required in the public interest.
303. Restrictions on the legislative powers of the Union and of the States with regard to trade and commerce - (1) Notwithstanding anything in Article 302, neither Parliament nor the legislature of a State shall have power to make any law giving, or authorising the giving of, any preference to one State over another, or making, or authorising the making of, any discrimination between one State and another, by virtue of any entry relating to trade and commerce in any of the Lists in the Seventh Schedule.
(2) Nothing in clause (1) shall prevent Parliament from making any law giving, or authorising the giving of, any preference or making, or authorising the making of, any discrimination if it is declared by such law that it is necessary to do so for the purpose of dealing with a situation arising from scarcity of goods in any part of the territory of India. 304. Restrictions on trade, commerce and intercourse among States - Notwithstanding anything in Article 301 or Article 303, the legislature of a State may by law -
(a) impose on goods imported from other States or the Union Territories any tax to which similar goods manufactured or produced in that State are subject, so, however, as not to discriminate between goods so imported and goods so manufactured or produced; and
(b) impose such reasonable restrictions on the freedom of trade, commerce or intercourse with or within that State as may be required in the public interest:
Provided that no Bill or amendment for the purposes of clause (b) shall be introduced or moved in the legislature of a State without the previous sanction of the President.
14. In G.K.Krishnan Vs. State of Tamil Nadu, (1975) 1 SCC 375 K.K.Mathew, J. succintly summarised the scope of Articles 301 to 304 and stated that Article 301 imposes a general limitation on all legislative power in order to secure that trade, commerce and intercourse throughout the territory of India shall be free. Article 302 gave power to Parliament to impose general restrictions upon that freedom. But a restriction is put on this relaxation by Article 303(1) which prohibits Parliament from giving preference to one State over another or discriminating between one State and another by virtue of the entries relating to trade and commerce in Lists I and III of Seventh Schedule and a similar restriction is placed on the States, though the reference to the States is inappropriate. Each of the clauses of Article 304 operates as a proviso to Articles 301 and 303. Article 304(a) places goods imported from sister- States on a par with similar goods manufactured or produced inside the State in regard to State taxation within the allocated field. Article 304(b) is the State analogue to Article 302, for it makes the State's power contained in Article 304(b) expressly free from the prohibition contained in Article 303(1) by reason of the opening words of Article 304. Whereas in Article 302 the restrictions are not subject to such requirement of reasonableness, the restrictions under Article 304(b) are so subject.
15. In Atiabari Tea Co. Vs. State of Assam, AIR 1961 SC 232 the constitutionality of Assam Taxation (On Goods Carried by Roads and Inland Waterways) Act, 1954 enacted by the Legislature of Assam providing for levy of tax on certain goods carried by road or inland waterways in the State of Assam, was questioned by a number of tea companies who sold most of their products outside the State of Assam after transporting them by road or waterways to West Bengal and other States. The majority opinion (Gajendragadkar, Wanchoo and Das Gupta, JJ.) stated their conclusion in the following words:
52)"... Our conclusion, therefore, is that when Article 301 provides that trade shall be free throughout the territory of India it means that the flow of trade shall run smooth and unhampered by any restriction either at the boundaries of the States or at any other points inside the States themselves. It is the free movement or the transport of goods from one part of the country to the other that is intended to be saved, and if any Act imposes any direct restrictions on the very movement of such goods it attracts the provisions of Article 301, and its validity can be sustained only if it satisfies the requirements of Article 302 or Article 304 of Part XIII. At this stage we think it is necessary to repeat that when it is said that the freedom of the movement of trade cannot be subject to any restrictions in the form of taxes imposed on the carriage of goods or their movement all that is meant is that the said restrictions can be imposed by the State Legislatures only after satisfying the requirements of Article 304(b). It is not as if no restrictions at all can be imposed on the free movement of trade." (AIR p.254, para.52)
It was also held:-
".... Thus considered we think it would be reasonable and proper to hold that restrictions, freedom from which is guaranteed by Article 301, would be such restrictions as directly and immediately restrict or impede the free flow or movement of trade. Taxes may and do amount to restrictions; but it is only such taxes as directly and immediately restrict trade that would fall within the purview of Article 301. ... ... ... We are, therefore, satisfied that in determining the limits of the width and amplitude of the freedom guaranteed by Article 301 a rational and workable test to apply would be: Does the impugned restriction operate directly or immediately on trade or its movement?" (AIR p.254 para.51)
16. In Automobile Transport (Rajasthan) Ltd. Vs. State of Rajasthan, AIR 1962 SC 1406 validity of Section 4(1) of the Rajasthan Motor Vehicles Taxation Act, 1951 was challenged. The section levied a tax on all motor vehicles used in any public place or kept for use at the rates specified in the Schedules. Violation of the provision invited penalties provided under Section 11. Certain operators challenged the Act as violative of Articles 301 and 304(b). Since serious doubts were expressed with respect to the propositions enunciated by the majority and by Shah, J. in Atiabari Tea Co. (supra) the matters were referred to a larger Constitution Bench of seven Judges. By a majority 4:3 (S.K.Das, Kapur and Sarkaria, JJ. Joined by Subba Rao, J.), the Supreme Court upheld the constitutionality of the Act on the ground that the taxes levied by it are compensatory in nature and, therefore, outside the purview of Article 301. Once outside the purview of Article 301, it was held, Article 304 was also not attracted. The Court observed in paragraph - 19 that: "The taxes are compensatory taxes which instead of hindering trade, commerce and intercourse facilitate them by providing roads and maintaining the roads......." (AIR page 1425)
Vide para. 21 of the Report, it was observed that:
"If a statue fixes a charge for a convenience or service provided by the State or an agency of the State, and imposes it upon those who choose to avail themselves of the service or convenience, the freedom of trade and commerce may well be considered unimpaired." (AIR page.1425)
Thus, the concept of "compensatory tax" was propounded. Therefore, taxes which would otherwise interfere with the unfettered freedom under Article 301 will be protected from the vice of unconstitutionality if they are compensatory.
17. In Automobile Transport it was said, vide (AIR page.1425, para 19), that
"a working test for deciding whether a tax is compensatory or not is to enquire whether the trade is having the use of certain facilities for the better conduct of its business and paying not patently much more than what is required for providing the facilities."
18. In Jindal Stripe Ltd. (1) Vs. State of Haryana, (2003) 8 SCC 60 a two-Judge Bench referred the matters to a larger Bench as the Bench hearing the matters doubted the correctness of the views expressed inBhagatram Rajeevkumar Vs. CST, 1995 Supp. (1) SCC 73 which was relied on in a subsequent decision in State of Bihar Vs. Bihar Chamber of Commerce, (1996) 9 SCC 136. The matters were dealt with by a Constitution Bench to decide with certitude the parameters of the judicially evolved concept of "compensatory tax" vis- a-vis Article 301 of the Constitution of India.
19. The Constitution Bench in Jindal Stainless Steel Ltd. Vs. State of Haryana (supra) concluded as follows: (SCC p.270, paras 52 & 53)
"52. In our opinion, the doubt expressed by the referring Bench about the correctness of the decision in Bhagatram case followed by the judgment in Bihar chamber of Commerce was well founded.
53. We reiterate that the doctrine of "direct and immediate effect" of the impugned law on trade and commerce under Article 301 as propounded in Atiabari Tea Co. Ltd. Vs. State of Assam and the working test enunciated in Automobile Transport (Rajasthan) Ltd. Vs. State of Rajasthan for deciding whether a tax is compensatory or not vide para 19 of the report (AIR), will continue to apply and the test of "some connection" indicated in para 8 (of SCC) of the judgment in Bhagatram Rajeevkumar Vs. CST and followed in State of Bihar Vs. Bihar Chamber of Commerce is, in our opinion, not good law. Accordingly, the constitutional validity of various local enactments which are the subject matters of pending appeals, special leave petitions and writ petitions will now be listed for being disposed of in the light of this judgment."
20. It is thus, seen that the Constitution Bench decision in Jindal's case has re-affirmed the working test laid down in Automobile Transport that for any tax to be compensatory, it is necessary to examine whether the trades people are having the use of certain facilities for the better conduct of business and paying not patently much more than what is required for providing the facilities.
21. At this juncture, it is necessary to take note of what has been stated about the scope of Articles 301, 302 & 304 vis--vis compensatory tax by the Constitution Bench in Jindal's case which read as follows: (SCC pp.268 & 269) "45. To sum up, the basis of every levy is the controlling factor. In the case of "a tax", the levy is a part of common burden based on the principle of ability or capacity to pay. In the case of "a fee", the basis is the special benefit to the payer (individual as such) based on the principle of equivalence. When the tax is imposed as a part of regulation or as a part of regulatory measure, its basis shifts from the concept of "burden" to the concept of measurable/quantifiable benefit and then it becomes "a compensatory tax" and its payment is then not for revenue but as reimbursement/recompense to the service/facility provider. It is then a tax on recompense. Compensatory tax is by nature hybrid but it is more closer to fees than to tax as both fees and compensatory taxes are based on the principle of equivalence and on the basis of reimbursement/recompense. If the impugned law chooses an activity like trade and commerce as the criterion of its operation and if the effect of the operation of the enactment is to impede trade and commerce then Article 301 is violated.
46. Applying the above tests/parameters, whenever a law is impugned as violative of Article 301 of the Constitution, the Court has to see whether the impugned enactment facially or patently indicates quantifiable data on the basis of which the compensatory tax is sought to be levied. The Act must facially indicate the benefit which is quantifiable or measurable. It must broadly indicate proportionality to the quantifiable benefit. If the provisions are ambiguous or even if the Act does not indicate facially the quantifiable benefit, the burden will be on the State as a service/facility provider to show by placing the material before the Court, that the payment of compensatory tax is a reimbursement/recompense for the quantifiable/measurable benefit provided or to be provided to its payer(s). As soon as it is shown that the Act invades freedom of trade it is necessary to enquire whether the State has provided that the restrictions imposed by it by way of taxation are reasonable and in public interest within the meaning of Article 304(b) [see para 35 (of AIR) of the decision in Khyerbari Tea Co.Ltd. Vs. State of Assam].
47. As stated above, taxing laws are not excluded from the operation of Article 301, which means that tax laws can and do amount to restrictions on the freedom guaranteed to trade under Part XIII of the Constitution. This principle is well settled in Atiabari Tea Co. It is equally important to note that in Atiabari Tea Co. the Supreme Court propounded the doctrine of "direct and immediate effect". Therefore, whenever a law is challenged on the ground of violation of Article 301, the Court has not only to examine the pith and substance of the levy but in addition thereto, the Court has to see the effect and the operation of the impugned law on inter- State trade and commerce as well as intra-State trade and commerce.
48. When any legislation, whether it would be a taxation law or a non- taxation law, is challenged before the Court as violating Article 301, the first question to be asked is: what is the scope of the operation of the law? Whether it has chosen an activity like movement of trade, commerce and intercourse throughout India, as the criterion of its operation? If yes, the next question is: what is the effect of operation of the law on the freedom guaranteed under Article 301? If the effect is to 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 preference and discrimination decreed by Article 303(1) unless Parliament makes the declaration under Article 303(2), the State power contained in Article 304(b) is made expressly free from the prohibition contained in Article 303(1) because the opening words of Article 304 contain a non obstante clause both to Article 301 and Article 303.
(b) While Parliament's power to impose restriction under Article 302 is not subject to the requirement of reasonableness, the power of the State to impose restrictions under Article 304 is subject to the condition that they are reasonable.
(c) An additional requisite for the exercise of the power under Article 304(b) by the State Legislature is that previous Presidential sanction is required for such legislation."
22. In the light of the principles laid down in Jindal's case we shall now proceed to examine whether the tax levied under the impugned Act is compensatory or not? The preamble of the Act undoubtedly states that "Act is necessary to augment the revenue of the State to compensate the expenditure to provide trading facilities including laying and maintenance of roads and provision of markets and welfare measures". But merely calling a particular tax compensatory does not have the effect or consequence of making the levy a compensatory one. A levy can in law be considered to be of a compensatory nature only if the levy is charged for the use of certain trading facilities, and the charge that is so made is not disproportionate to the value of the use of such trading facilities. The mere declaration in the preamble or statement of objects and reasons of an enactment that it is compensatory is of no consequence at all. As observed in Automobile Transport's case (supra) " Whether the tax is compensatory or not cannot be made to depend on the preamble of the statute imposing it... It is obvious that if the preamble decided the matter, then the mercantile community would be helpless and it would be the easiest thing for the legislature to defeat the freedom assured by Article 301 by stating in the preamble that it is meant to provide facilities to the tradesmen. It seems to us that a working test for deciding whether the tax is compensatory or not is to enquire whether the trades people are having the use of certain facilities for the better conduct of their business and paying not patently much more than what is required for providing the facilities." In Jindal Stripe Limited v. State of Harayana (supra) , the Supreme Court observed in paragraph-16 at pp.65 & 66 thereof that the following propositions are deducible from the cases noticed therein: "..... ...... ......
....... ....... .......
...... ....... ........
4. Tax imposed for augmenting general revenue of the State such as sales-tax is not compensatory ........"
23. In the counter filed by the State, the test of some connection or the existence of an even indirect link as propounded by the decisions in Bhagatram Rajeevkumar Vs. CST, State of Bihar Vs. Bihar Chamber of Commerce (supra) was pressed into service. Both the decisions have been overruled and hence, the reliance placed by the State on the aforesaid decisions is rather misplaced. In the wake of decision of the Constitution Bench in Jindal's case the State has filed an additional counter whereby the State has sought to project certain figures of expenditure incurred from the year 2002 - 03 to 2005 - 06 in the matter of laying roads, construction of bridges, etc., which according to the State is said to be a quantifiable data to satisfy the parameters laid down in Jindal's case. The following are those two charts: -
EXPENDITURE INCURRED BY THE STATE
Year Entry Tax Expenditure Expenditure Total collected on road on Construction on goods maintenance of bridges (Rupees in Crores)
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 2002-03 228.77 189.57 107.84 297.41 2003-04 249.02 322.02 880.89 1202.91 2004-05 288.56 442.65 488.41 931.06 2005-06 360.23 478.13 1388.30 1866.43 Total 1126.58 1432.44 2865.44 4297.81 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
EXPENDITURE INCURRED BY THE HIGHWAYS DEPARTMENT ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Year Roads Expenditure No. of Expenditure Total (Length in (Rs. in Bridges (Rs. in Expenditure Km.) Lakhs) Lakhs) ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 2002-03 1541.41 33767.81 185 9392.48 43160.29 2003-04 3425.66 48173.29 164 10398.38 58571.67 2004-05 3550.63 95343.17 177 13948.72 109291.89 2005-06 13577.65 161266.74 227 11589.16 172855.90 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
24. It is, further, stated in the counter affidavit: - " It is most respectfully submitted that as per the preamble to the impugned enactment the quantifiable data on the basis of which the compensatory tax is sought to be levied has been facially and patently indicated in the manner. That is necessary to augment the revenue of the State to compensate the expenditure to provide trading facilities including layingand maintenance of roads and provision of markets and welfare measures and further that for the said purposes it is considered necessary to levy and collect tax on the goods entering into the local areas of the State for consumption, use or sale therein, the compensatory nature of the levy stands demonstrated and made patent from the statistical data furnished above in relating to the expenditure involved for the purposes and objects mentioned in the impugned enactment corresponding to the actual amount collected by way of tax. Therefore, it is most respectfully submitted that the principles laid down by the Constitutional Bench in the case of Jindal Stainless Steel Ltd., v. State of Harayana reported in 2006 (7) SCC 241 stands satisfied and the burden of the State to establish the reimbursement/recompense made by way of quantifiable benefit to the trading public from and out of the tax proceeds also stands discharged. Inasmuch as the impugned levy being a compensatory tax, there is no violation of Article 301 as such and consequently the requirement of presidential sanction contemplated under Article 304(b) does not arise."
25. We are afraid the materials produced by the State are hardly relevant to establish that the levy is compensatory. In the first place, the above data is rather ambiguous, as it does not provide details or even examples of the specific areas where the alleged roads have been laid and does not even name the few bridges that have been constructed with the amount collected as entry tax. In Jindal's case, the Court has categorically ruled that for a law to be compensatory, there has to be a rational nexus between the levy and the services provided. The decision proceeds to make a clear-cut distinction between the general taxing power of the State and the levy of compensatory tax. The essence of compensatory tax is that the services rendered or facilities provided should be more or less commensurate with the tax levied. Services provided will have a direct co-relation with the trade. The main basis of compensatory tax is the quantifiable and measurable benefit represented by the cost incurred in procuring the facilities/services. The cost in turn becomes the basis of reimbursement/recompense for provider of services/facilities. As held in Jindal's case, the compensatory tax is a charge for offering trade facilities and they are based on the principles of equivalence. Applying the above test, it cannot be said that maintaining of roads, providing bridges etc., is compensatory in nature so as to constitute special advantage to trade, commerce and intercourse. Even otherwise, a welfare State is bestowed with the responsibilities of providing good roads and bridges for the benefit of the tax paying citizens and hence to contend that the impugned levy is being raised only for the said purpose is not justified. Maintenance of roads, bridges etc., are generally met from the general funds or revenue. Whether goods are transported into the State or outside State or abroad, the State has got a duty to provide facilities like roads, bridges, etc., which are being enjoyed not only by the persons who bring the goods notified for levy of entry tax, but also by others.
26. It is necessary to bear in mind that the roads, bridges expenditure test was applied in Automobile Transport' case (supra) as the tax impugned therein was the tax on motor vehicles which use the roads/bridges. Therefore, there was a clear nexus between the purpose of the levy and the purpose for which the tax was spent. As observed in Jindal Stripe Ltd., Vs. State of Haryana (supra) (SCC para.14, pp.64 & 65): -
"Right from 1962 upto 1995 this working test was applied by this Court only in relation to motor vehicle taxes for deciding whether it was compensatory or not. The decisions proceeded on the principle adumbrated in Automobile Transport, which was paraphrased by Mathew, J. speaking for the Bench of three Judges in G.K.Krishnan Vs. State of T.N. That the very idea of a compensatory tax is service more or less commensurate with the tax levied. As the operation of motor vehicles has direct relation the use of roads/bridges, the statistics relating to receipts and expenditure for construction roads and bridge for some years was considered in each case in order to judge whether the tax was not patently more than what was required provide facility, and therefore, compensatory. [Please see Sk.Madarsaheb Vs. State of A.P., Bolani Ores Ltd. Vs. State of Orissa, G.K.Krishnan Vs. State of T.N., International Tourist Corporation Vs. State of Haryana, Malwa Bus Service (P) Ltd. Vs. State of Punjab, Meenakshi Vs. State of Karnataka, B.A.Jayaram Vs. Union of India and State of Maharashtra Vs. Madhukar Balkrishna Badiya."
27. If an entry tax levied under Entry 52 is at all to be substantiated as a compensatory tax, then it has to be done with reference to the nature of such tax i.e., a tax payable by a special class of dealers in a local area who import only the specified goods from outside the State and the special benefits/facilities provided to such payers of the tax within the local area concerned. As to what could satisfy such a test in the context of an entry tax could be gathered from Para 28 in Hansa Corporation. (AIR 1981 SC 463 at para.28 p.473) which is extracted below:
"The State did not attempt in the High court to sustain the validity of the impugned tax law on the submission that it was compensatory in character. No attempt was made to establish that the dealers in scheduled goods in a local area would be availing of municipal services and municipal services can be efficiently rendered if the municipality charged with a duty to render services has enough and adequate funds and that the impugned tax was a measure for compensating the municipalities for the loss of revenue or for augmenting its finances. As such a stand was not taken, it is not necessary for us to examine whether the tax is compensatory in character. " (emphasis supplied)
28. As per the statement of objects appended to the impugned legislation, the State is also bound to provide for trading facilities and the welfare of the markets established, but both the counters filed by the State are silent on this aspect. The additional counter of the State merely gives the statistics with regard to total cost of building of roads and bridges and on the maintenance of roads that is incurred from year to year by the State. This expenditure merely represents the expenditure incurred by the State from its general total taxes revenue and other receipts including the World Bank grants and loans. The said roads and bridges which are constructed or maintained by incurring this expenditure cannot possibly be considered to be a facility or convenience of services, which is provided to a particular importer who imports the goods into a particular local area. Further, the State has conveniently omitted to state that apart from the levy made under the impugned legislation, taxes for the purpose of maintenance of roads are also being levied on the owners of motor vehicles under Tamil Nadu Motor Vehicles Taxation Act, 1974 wherein the parameters of levy are based on the laden weight of the motor vehicle. Different yardsticks of levy are contemplated under the said Act such as stage carriers, contract carriers, private vehicles, etc., which also add to the coffers of the exchequer. The figures of revenue earned by the levy under the Motor Vehicles Taxation Act or the money spent out of the said levy have not been disclosed. We, therefore, find substance in the contention of the petitioners that the legislation has been enacted only with an eye of raising or augmenting general revenue and not as reimbursement or recompense as held in Jindal's case.
29. In Indian Oil Corporation Ltd., v. State of U.P, 2004 Vol137 STC 399 (All.), the validity of U.P.Tax on Entry of Goods Act, 2000 was challenged as violative of Articles 301 & 304 of the Constitution. The Division Bench of the Allahabad High Court allowing the petitions has held: - "(i) that the term `local area'
defined in Section 2(c) of the Act
includes a municipality and
municipal corporation. Hence, the
crude oil had certainly been
brought into a local area as
Mathura was a municipality. It was
wholly immaterial from where the
goods had been brought into the
(ii) that the respondents had not
established any broad correlation
between the entry tax being
realized and the expenditure on the
facilities for facilitating trade
and commerce. The petitioner had
already paid more than Rs.758
crores as entry tax. In none of the
affidavits filed by the respondents
had it been stated how much was the
amount of the total entry tax
collected under the Act and how
much was the expenditure on
facilities for facilitating trade
and commerce. The burden was on the
respondents to establish this broad
correlation but they had failed to
do so. There was nothing to show
that the amount realized as entry
tax could not be used or had not
been used for setting up schools,
housing, payment of salary to
Government employees, payment of
salaries to ministers, M.L.As.,
constructing Government buildings,
acquiring land, etc. No facility
had been provided by the
U.P.Government, directly or
indirectly, for transportation of
the crude oil. The underground
pipes for transporting the oil were
built by the petitioner and not by
(iii) that the fact that the State
Government provides funds to local
self-Governments to enable them to
function as institutions of self-
Government with respect to
preparation of plans for economic
development and social justice and
to implement the scheme for
economic development and social
justice as may be entrusted to them
including those in relation to the
matters listed in the Eleventh
Schedule to the Constitution of
India had no correlation with the
amounts realized as entry tax under
the Act. There was nothing in the
Act which stated that the revenue
realized by the entry tax would be
utilize d for facilitating trade
and commerce, directly or
indirectly. The amount realized as
entry tax could be used for any
purpose and not merely for
facilitating trade and commerce."
30. It may be mentioned that a Division Bench of the Kerala High Court in its recent decision rendered on 18.12.2006 in O.P.No.434 of 1996 (Thressiammal L.Chirayil v. State of Kerala, rep. by the Deputy Commissioner of Agricultural Income Tax and Sales Tax, Kottayam & Another) has held that applying the principles of equivalence, as set forth by the Supreme Court in Jindal's case, it cannot be said that maintaining of roads, providing bridges, etc., is compensatory in nature so as to meet the outlay incurred for some special advantage to trade, commerce and intercourse. Providing the above facilities and its use may incidentally bring in net revenue to the Government, but that circumstance is not an essential ingredient of compensatory tax. It was held that there is absolutely no connection or nexus with the collection of entry tax and its utilization for the benefit of traders/manufacturers from whom such tax is collected and consequently, the levy of entry tax is unauthorized and violative of Article 301 of the Constitution.
31. In yet another recent decision rendered in the aftermath of the Jindal's case, a Division Bench of the Jharkhand High Court in W.P (T) No.5354 of 2004 (The Tata Iron & Steel Company Ltd., Jamshedpur v. The State of Jharkhand and Others) by judgment and order dated 14.08.2006 held that the State of Jharkhand was not in a position to furnish any relevant data of facilities provided or to be provided to the assessees, and hence the levy on entry tax under Bihar Tax on Entry of Goods into Local Areas for Consumption, Use or Sale thereof Act, 1993 was not compensatory in nature and hit by Article 301 of the Constitution.
32. In Eurotex Industries & Exports Lts., v. State of Maharashtra, 2004 Vol.135 STC 25 (Bom.), a Division Bench of the Bombay High Court has held that for an Act to be compensatory in nature, there must be a clear nexus between the tax collected and benefits conferred upon the persons from whom such tax is collected. In the absence of any link between the entry tax on imported goods, and the facilities extended to the importers directly or indirectly, the levy of entry tax which is discriminatory cannot be said to be compensatory in nature. In these circumstances, subjecting the goods imported from outside the State to entry tax becomes unauthorized, arbitrary, discriminatory and violative of Article 301 of the Constitution. It was held that Entry 13 of the Schedule to the Maharashtra Tax on the Entry of Goods into Local Areas Act, 2002 insofar as it purports to levy entry tax on furnace oil and low sulphur waxy residue oil is unauthorized and unconstitutional.
33. In view of the foregoing discussion, we hold that the impugned Act does not satisfy the test laid down for compensatory tax and as no Presidential assent has been obtained under Article 304(b) of the Constitution the provisions of the impugned Act are ultra vires Article 301 of the Constitution.
Re. Question (b): -
34. The validity of the Act is also challenged on the ground that the tax sought to be levied under the Act is patently discriminatory since entry tax is being levied on import of specified goods from outside the State and not on the specified goods if produced/ manufactured within the State even though they are brought into local area of the State for consumption, use or sale therein. According to the petitioner the discrimination which is made between goods imported into the State of Tamil Nadu and goods which are indigenously produced/obtained within the State is violative of Articles 304(a) of the Constitution.
35. Article 304(a) categorically prohibits the legislature of a State from making any discrimination between itself and another State, and subjecting goods imported from other States to any tax to which similar goods manufactured or produced in that State are not subjected. In Shree Mahavir Oil Mills Vs. State of J & K, (1996) 11 SCC 39, the Supreme Court explained the implications of Article 304(a) in the following terms: - (SCC pp.45 & 46 paragraph - 8)
"Article 304 contains two clauses. Clause (a) states that "the legislature of a State may by law - (a) impose on goods imported from other States or the Union Territories any tax to which similar goods manufactured or produced in that State are subject, `so, however, as not to discriminate between goods so imported and goods so manufactured or produced'(emphasis supplied). The wording of this clause is of crucial significance. The first half of the clause would make it appear at the first blush that it merely states the obvious: one may indeed say that the power to levy tax on goods imported from other States or Union Territories flows from Article 246 read with Lists II and III in the Seventh Schedule and not from this clause. That is of course so, but then there is a meaning and a very significant principle underlying the clause, if one reads it in its entirety. The idea was not really to empower the State Legislatures to levy tax on goods imported from other States and Union Territories - but to declare that that power shall not be so exercised as to discriminate against the imported goods viz- a-vis locally manufactured goods. The clause, though worded in positive language has a negative aspect. It is, in truth, a provision prohibiting discrimination against the imported goods. In the matter of levy of tax - and this is important to bear in mind - the clause tells the State Legislatures - `tax you may the goods imported from other States/Union Territories but do not, in that process, discriminate against them vis--vis goods manufactured locally'. In short, the clause says: levy of tax on both ought to be at the same rate. This was and is a ringing declaration against the States creating what may be called `tax barriers' - or `fiscal barriers' as they may be called - at or along their boundaries in the interest of freedom of trade, commerce and intercourse throughout the territory of India, guaranteed by Article 301. As we shall presently point out, this clause does not prevent in any manner the States from encouraging or promoting the local industries in such manner as they think fit so long as they do not use the weapon of taxation to discriminate against the imported goods viz-a-vis the locally manufactured goods. To repeat, the clause bars the States from creating tax barriers - or fiscal barriers as they can be called - around themselves and/or insulate themselves from the remaining territories of India by erecting such `tariff walls'. Part XIII is premised of other States uniformly, there is no infringement of the freedom guaranteed by Article 301; no State would tax its people at a higher level merely with a view to tax the people of other States at that level. .. ... ... As a matter of fact, it can well be said that clause (a) of Article 304 is not really an exception to Article 301, notwithstanding the non obstante clause in Article 304 and that it is but a restatement of a facet of the very freedom guaranteed by Article 301, viz., power of taxation by the States."
36. In A.T.B.Mehtab Majid & Co. Vs. State of Madras, AIR 1963 SC 928 the Supreme Court considered the effect of Section 3 of the Madras General Sates Tax Act, 1939 read with Rule 16 whereby tanned hides and skins imported from outside the State of Madras and sold within the State were subjected to a higher rate of tax than the tax imposed on hides or skins tanned and sold within the State. Similarly, hides or skins imported from outside the State after purchase in their raw condition and then tanned inside the State were also subjected to higher rate of tax than hides or skins purchased in raw condition in the State and tanned within the State. This distinction was attacked as violative of Articles 301 and 304(a) of the Constitution. Following the law laid down in Atiabari Tea Co. Ltd. and Automobile
Transport (supra) the Constitution Bench held:
"It is therefore now well settled that taxing laws can be restrictions on trade, commerce and intercourse, if they are not what can be termed to be compensatory taxes or regulatory measures. Sales tax, of the kind under consideration here, cannot be said to be a measure regulating any trade or a compensatory tax levied for the use of trading facilities. Sales tax, which has the effect of discriminating between goods of one State and goods of another, may affect the free flow of trade and it will then offend against Article 301 and will be valid only if it comes within the terms of Article 304(a).
Article 304(a) enables the legislature of a State to make laws affecting trade, commerce or intercourse. It enables the imposition of taxes on goods from other States if similar goods in the State are subjected to similar taxes, so as not to discriminate between the goods manufactured or produced in that State and the goods which are imported from other States. This means that if the effect of the sales tax on tanned hides or skins imported from outside is that the latter becomes subject to a higher tax by the application of the proviso to sub-rule of Rule 16 of the Rules, then the tax is discriminatory and unconstitutional and must be struck down."
37. In H.Anraj Vs. Govt. of T.N., (1986) 1 SCC 414 the Government of Tamil Nadu exempted the lottery tickets issued by it totally while levying tax on lottery tickets issued by other Governments and sold in Tamil Nadu. The Court held that laws imposing taxes can amount to restriction on trade, commerce and intercourse if they hampered the free flow of trade unless they are compensatory in nature and that the sales tax which had the effect of discriminating between goods of one State and another may affect free flow of trade and would be offensive to Article 301 unless saved by Article 304(a). It was held that the direct and immediate result of the notification was to impose an unfavourable and discriminatory tax.
38. In India Cement Vs. State of A.P., (1988) 1 SCC 743 the Government of Andhra Pradesh has issued two notifications, one under Section 9(1) of the A.P.General State Sales Tax Act, 1957 and the other under Section 8(5) of the Central Sales Tax Act. Under the first notification, sales tax on sale of cement manufactured by cement factories situated in the State and sold to the manufacturing units situated within the State was reduced from 13.5 to 4%. Under the second notification, the central sales tax was reduced to two per cent. The Government of Karnataka also issued a similar notification reducing in similar situation central sales tax from 15 to 2%. These were challenged as violative of Articles 301 and 304 and the challenge was upheld. The first ground upheld was that the `reasonable restrictions' contemplated by Article 304(b) can be imposed by a law made by the legislature of the State and not by the orders of the Government, i.e., by executive action. The second ground given by the Bench is that (SCC p.759, para 14) "variation of the rate of inter-State sales tax does affect free trade and commerce and creates a local preference which is contrary to the scheme of Part XIII of the Constitution and hence bad." In the course of discussion, the Bench observed: (SCC pp.755-56, para - 12) "There can be no dispute that taxation is a deterrent against free flow. As a result of favourable or unfavourable treatment by way of taxation, the course of flow of trade gets regulated either adversely or favourably. If the scheme which Part XIII guarantees has to be preserved in national interest, it is necessary that the provisions in the article must be strictly complied with. One has to recall the farsighted observations of Gajendragadkar, J. in Atiabari Tea Co. case and the observations then made obviously apply to cases to the type which is now before us."
39. In the case of Andhra Steel Corporation Vs. Commr. of Commercial Taxes, 1990 Suppl. SCC 617, a provision in Section 5(4) of the Karnataka Sales Tax Act which granted exemption to sale of finished goods manufactured out of locally produced raw material while denying it to the sale of finished goods manufactured out of imported raw material was held to be unconstitutional and contrary to Article 304(a) of the Constitution. The Court distinguished its earlier decisions in State of Madras Vs. N.K.Nataraja Mudaliar, AIR 1969 SC 147 and Rattanlal & Co. Vs. Assessing Authority, AIR 1970 SC 1742 and reaffirmed its decision in A.T.B.Mahtab Majid & Co. case (supra).
40. The question was once again examined in the case of Shree Mahavir Oil Mills Vs. State of J & K (supra). In that case, with a view to protect local edible oil industry, Government of J & K issued an order exempting the goods manufactured by small-scale dealers within the State from payment of sales-tax for a specified period. The rate of sales-tax payable for other industry including manufactures of adjoining States was 4. A subsequent notification was issued on 10.12.1993 as a result of it the general rate of sale -tax payable on edible oil became 8. The manufactures of edible oil from adjoining States claimed that the exemption granted from payment of tax to the local industries was discriminatory. The exemption given by the Government of J & K to the manufacturers of edible oil was total and the period of exemption was 5 years and which was later extended by another 5 years period. It was held that the unconditional exemption granted to the edible oil industry within the State for a period of 10 years and at the same time subjecting edible oil industry from other States to sales-tax at 8 was discriminatory and violative of Article 304(a) of the Constitution. It was observed in paragraph - 25 (SCC p.53) as follows:
"25. Now, what is the ratio of the decisions of this Court so far as clause (a) of Article 304 is concerned? In our opinion, it is this: the States are certainly free to exercise the power to levy taxes on goods imported from other States/Union Territories but this freedom, or power, shall not be so exercised as to bring about a discrimination between the imported goods and the similar goods manufactured or produced in that State. The clause deals only with discrimination by means of taxation; it prohibits it. The prohibition cannot be extended beyond the power of taxation. It means in the immediate context that States are free to encourage and promote the establishment and growth of industries within their States by all such means as they think proper but they cannot, in that process, subject the goods imported from other States to a discriminatory rate of taxation, i.e., a higher rate of sales - tax vis- a- vis similar goods manufactured/produced within the State and sold within that State. Prohibition is against discriminatory taxation by the States. It matters not how this discrimination is brought about. A limited exception has no doubt been carved out in Video Electronics but, as indicated hereinbefore, that exception cannot be enlarged lest it eat up the main provision. So far as the present case is concerned, it does not fall within the limited exception aforesaid; it falls within the ratio of A.T.B. Mehtab Majid and the other cases following it. It must be held that by exempting unconditionally the edible oil produced within the State of Jammu and Kashmir altogether from sales tax, even if it is for a period of ten years, while subjecting the edible oil produced in other States to sales tax at eight per cent, the State of Jammu and Kashmir has brought about discrimination by taxation prohibited by Article 304(a) of the Constitution."
41. In State of U.P. Vs. Laxmi Paper Mart, (1997) 2 SCC 697 the Court held that exempting the exercise books produced in the State and subjecting the exercise books produced outside the State, but sold in U.P. to sales tax at the rate of 5 is discriminatory and therefore, offends clause (a) of Article 304 of the Constitution. Following the decision in A.T.B.Mehtab Majid's case (supra) the Court held that (SCC p.699, para 3) "once the discrimination is made out, the enquiry by court ends. The price structure of the imported goods vis--vis the locally manufactured goods or the economics of the importer need not be gone into". (emphasis supplied)
42. In Anand Commercial Agencies Vs. The Commercial Tax Officer VI Circle, Hyderabad, (1998) 1 SCC 101 the case of the appellant was that the oil had been extracted out of groundnuts which had borne tax under the Karanataka Sales Tax Act. The levy of tax on the oil imported from Karnataka into Andhra pradesh at a rate higher than the rate at which the oil manufactured in Andhra Pradesh is taxed is discriminatory and violative of the appellant's right to freedom of trade and commerce throughout India. Accepting the challenge the Court held as follows:-
"What has been done by Entry 24 of the First Schedule is to impose a lower rate of duty on groundnut oil or refined oil obtained from groundnuts that have been taxed under the A.P.Act.The contention that groundnut oil manufactured in Andhra Pradesh has not generally been charged at a lower rate of tax has not been substantiated by any fact or figure. It is not the case of the State that only a small portion of the oil manufactured by local manufacturers is produced from groundnuts purchased in Andhra Pradesh. Unless that can be established, it cannot be held that groundnut oil or refined oil within the State is generally charged at the same rate as the imported oil. The only justification that has been made out for this discrimination is that groundnut out of which the oil is manufactured locally has already borne tax. The appellant's contention, which has not been denied by the State, is that the oil manufactured in Karnataka which was imported into Andhra Pradesh was manufactured out of groundnuts which had also borne tax under the Karnataka Sales Tax Act. Therefore, it cannot be said that oil manufacturers in Andhra Pradesh were in a disadvantageous position and had to be compensated by a lower rate of tax. The State of Andhra Pradesh has not been able to make out any special case for imposing a lower rate of tax on groundnut oil produced within the State. ... .. ..
Therefore, Entry 24(a) of Schedule I to A.P. General Sales Tax Act is violative of Articles 301 and 304 insofar as it imposes a higher rate of tax on groundnut oil or refined oil which has been obtained from groundnut that has not been taxed under the Andhra Pradesh Act. The groundnut oil imported by the appellant from Karnataka for sale in Andhra Pradesh cannot be taxed at a rate higher than the rate prescribed in Entry 24(b)."
43. Similar is the view taken in Weston Electroniks Vs. State of Gujarat, (1998) 2 SCC 568; W.B.Hoisery Assn. Vs. State of Bihar, (1983) 4 SCC 134; Lohara Steel Industries Ltd. Vs. State of A.P., (1997) 2 SCC 37.
44. In the present case, the impugned legislation levy entry tax only on goods which are imported into the State of Tamil Nadu from any place outside the State, for consumption, use or sale within the State. In other words, the goods which are produced or obtained within the State of Tamil Nadu do not attract any entry tax at all on their entry into a local area within the State. According to the petitioners this has led to monopolizing the local manufacturers who procure materials locally as against manufacturers who import from outside the State. For example, before the impugned enactment the manufacturer who imported from outside the State could procure the materials simplicitor as against C- Declarations paying 4 central sales tax. But after the enactment the same manufacturer apart from 4 central sales tax is required to pay entry tax even when the material is being used in further processing or manufacturing inside the State and further sold inside the State itself. This clearly offends clause (a) of Article 304. As observed in G.K.Krishan Vs. State of Tamil Nadu (supra) "a discriminatory tax imposed on outside goods is not a tax simplicitor but is a barrier to trade and commerce". (AIR page.385 para.27)
45. Learned Advocate General sought to argue that the question of discrimination cannot be worked out by merely referring only to entry tax levied under the impugned legislation. His submission is that the sum total of taxes levied on the goods will have to be taken into consideration especially keeping in view the provisions of Section 4 of the Act which contemplate reduction in tax liability. This very argument was rejected by a Division Bench of the Karnataka High Court in Avinyl Polymers Pvt. Ltd. Vs. State of Karnataka, 109 STC 27 Kar). The relevant portion of the judgment has been extracted below: -
"The next facet is as to how the discrimination pertaining to levy of any tax vis--vis similar goods needs to be worked out. The contention of the petitioners is that for working out the discrimination one is required to only see the rate of tax applied to imported goods as compared to locally manufactured or produced goods and whether it is the same or different and nothing more. But the contention of the State is that the discrimination envisaged under Article 304(a) should be viewed by taking at the forefront the constitutional scheme under Articles 301 to 303 which intends to ensure trade, commerce and intercourse throughout the territory of India to be free and the economic unity of India may not be broken up by internal barriers by creating the total tax burden created by the taxing legislations of the State concerned as comparatively higher on goods imported from outside the State. According to Mr.D'Sa, the discrimination in question cannot be worked out by merely referring to an isolated taxing statute like the present one. His submission is that if the sum total of tax levied on the goods produced in the State by taking into account the levy of sales tax and the entry tax is found to be higher than the entry tax levied on imported goods, then no discrimination can be alleged in terms of article 304(a).
19. In our opinion, the argument advanced on behalf of the State of Karnataka cannot be accepted as valid and sustainable. This issue has also been repeatedly attended to by the Supreme Court by clearly pronouncing that it is the rate of tax under a particular taxing statute which should be taken as the determining factor for ascertaining the discrimination contemplated under Article 304(a). In the case of Rattan Lal and Co. Vs. Assessing Authority, (1970) 25 STC 136 (SC) at p.147; AIR 1970 SC 1742 (para 15), it has been declared by the Supreme Court `so long as the rate is the same Article 304 is satisfied'. The Supreme Court refused to adjudicate the discrimination aspect by taking into account any other factor."
46. In Laxmi Paper Mart (supra), the Supreme Court has emphatically said that once the discrimination is made out, the enquiry by court ends. The price structure of the imported goods vis--vis the locally manufactured goods or the economics of the importer need not be gone into (supra). Even otherwise, the submission of the learned Advocate General is not factually correct. For example, there is no local sales tax levied on cigarettes and other tobacco products. Therefore, Section 4(2) does not have any application to cigarette and other tobacco products and it cannot be contended that there is no discrimination. As regards, any other scheduled goods, which a dealer imports by way of purchase from another State, such importer suffers central sales tax of 4 in the exporting State and in addition thereto suffers the impugned entry tax. Thus, over and above the entry tax, the purchaser has suffered central sales tax in the exporting State. Learned counsel appearing for the petitioners filed charts showing entry tax and sales tax structure and the effect of Section 4 of the Act on entry of goods into local areas. It is seen from the charts that the importer of goods from outside State is clearly put to disadvantage as compared to a local manufacturer or producer. It may also be noted that the set off under Section 4 of the Act is not available for entry tax paid on the goods used as input raw materials. We have therefore no hesitation in holding that the levy of entry tax under the impugned Act is violative of clause (a) of Art.304 of the Constitution.
47. We may mention that the petitioners also raised the issue of legislative competence of the State Government to levy entry tax under Entry 52 of List II on goods imported from outside the State. But in view of our foregoing conclusion that the levy is violative of Article 301 of the Constitution, it is not necessary for us to express our opinion on this issue.
48. In the result, we hold that the levy of entry tax on goods imported from other States to the State of Tamil Nadu and from abroad is not compensatory in nature, since the State Government could not discharge its burden by placing materials before the Court that payment of levy of entry tax is reimbursement/recompense for the quantifiable/measurable benefit provided or to be provided to the tax payers. The impugned levy imposing entry tax being discriminatory is also violative of Article 304(a) of the Constitution. We, therefore, hold that the demand and collection of entry tax under Tamil Nadu Tax on Entry of Goods into Local Areas Act, 2001 is illegal, unauthorized and violative of Article 301 of the Constitution. The writ petitions are allowed as above and the levy and demand notices issued would stand quashed. Consequently, writ appeals are disposed of. Connected miscellaneous petitions are closed.
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