2003 (9) TMI 345 - SC - VAT and Sales Tax

Whether the compensatory nature of tax should be self-evident from the taxing law itself or could it be judged from the manner in which the tax Revenue is utilised in course of time? Held that - Since the concept of compensatory tax has been judicially evolved as an exception to the provisions of article 301 and as the parameters of this judicial concept are blurred particularly by reason of the decisions in Bhagatram's case 1994 (11) TMI 337 - SUPREME COURT OF INDIA and Bihar Chamber of Commerce's case ( 1996 (2) TMI 430 - SUPREME COURT OF INDIA ) the interpretation of article 301 vis-a-vis compensatory tax should be authoritatively laid down with certitude by the Constitution Bench under article 145(3). In the circumstances let all these matters be placed before the honourable Chief Justice for appropriate directions.

Summary

Issues Involved:
1. Constitutional validity of the Haryana Local Area Development Tax Act, 2000.
2. Whether the Act is violative of Article 301 of the Constitution and not saved by Article 304.
3. Whether the Act seeks to levy sales tax on inter-State sales, which is outside the competence of the State Legislature.

Detailed Analysis:

1. Constitutional Validity of the Haryana Local Area Development Tax Act, 2000:
The appellants challenged the constitutional validity of the Haryana Local Area Development Tax Act, 2000, on two primary grounds. First, they argued that the Act is violative of Article 301 of the Constitution and is not saved by Article 304. Second, they contended that the Act effectively imposes a sales tax on inter-State sales, which is beyond the legislative competence of the State Legislature.

2. Violation of Article 301 and Not Saved by Article 304:
The Supreme Court addressed the first issue at length. Article 301 guarantees the freedom of trade, commerce, and intercourse throughout the territory of India. In the case of Atiabari Tea Co. Ltd. v. State of Assam [1961] 1 SCR 809, it was established that taxing laws are not excluded from the operation of Article 301, meaning that tax laws can restrict the freedoms guaranteed to trade under Part XIII of the Constitution. However, such restrictions can be avoided if they comply with Article 304(a) or (b).

The Haryana Local Area Development Tax Act imposes an entry tax on goods brought into a "local area" within the State. The term "local area" is defined to include areas under various local authorities. The Act ostensibly covers vehicles bringing goods into the State and those transporting goods between local areas within the State. Those who pay sales tax to the State are exempt from the entry tax, which ultimately affects entities like the appellants who pay sales tax on inter-State transactions but not to the State of Haryana.

The Court noted that the Act imposes a direct restriction on trade, akin to the Assam Taxation Act invalidated in Atiabari Tea's case, and would therefore fall foul of Article 301 unless it is compensatory in nature or complies with Article 304(b).

3. Compensatory Tax Concept:
The concept of compensatory taxes was judicially crafted in Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan [1963] 1 SCR 491. Compensatory taxes are those that facilitate trade by providing and maintaining infrastructure like roads. The Court developed a "working test" to determine if a tax is compensatory: whether the tax is more or less commensurate with the facilities provided to the traders.

The Court reviewed the principles established in various cases, noting that compensatory taxes should be used to reimburse the cost of facilities provided to traders. However, the decisions in Bhagatram Rajeev Kumar v. Commissioner of Sales Tax (1995) Supp 1 SCC 673 and State of Bihar v. Bihar Chamber of Commerce (1996) 9 SCC 136 deviated from this principle by suggesting that even indirect benefits to traders could render a tax compensatory.

4. The Need for Authoritative Interpretation:
Given the blurred parameters of the judicially evolved concept of compensatory tax, particularly due to the decisions in Bhagatram's case and Bihar Chamber of Commerce's case, the Court deemed it necessary to refer the interpretation of Article 301 vis-a-vis compensatory tax to a Constitution Bench under Article 145(3) for authoritative clarification.

Conclusion:
The Court concluded that the matters should be placed before the Chief Justice for appropriate directions, emphasizing the need for a definitive interpretation of the compensatory tax concept in relation to Article 301.