2007 (3) TMI 686 - HC - VAT and Sales Tax

Constitutional validity of the Tamil Nadu Tax on Entry of Goods into Local Areas Act, 2001 ( the Act ) - notifications issued by the State Government in exercise of the powers conferred by section 15 of the Act - violative of freedom of trade, commerce and intercourse guaranteed under Art.301 and not saved by Art.304 (b) of the Constitution of India - (a) Whether the levy of entry tax under Tamil Nadu Act 20 of 2001 can be justified as a compensatory tax? - HELD THAT - 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 2006 (4) TMI 120 - SUPREME COURT , the compensatory tax is a charge for offering trade facilities and it is 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., is 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. It is necessary to bear in mind that the roads, bridges expenditure test was applied in Automobile Transport's case 1962 (4) TMI 91 - SUPREME COURT 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. v. State of Haryana 2003 (9) TMI 345 - SUPREME COURT . 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 the 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. In Eurotex Industries Exports Ltd. v. State of Maharashtra 2004 (1) TMI 651 - BOMBAY HIGH COURT , 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 unauthorised, 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 unauthorised and unconstitutional. Thus, 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. (b) Whether the impugned levy of entry tax is violative of article 304(a) of the Constitution? - In Laxmi Paper Mart 1997 (2) TMI 447 - SUPREME COURT , 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-a-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 four per cent 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 article 304 of the Constitution. 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. 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 the Tamil Nadu Tax on Entry of Goods into Local Areas Act, 2001 is illegal, unauthorised 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.

Summary

Issues Involved:
1. Constitutional validity of the Tamil Nadu Tax on Entry of Goods into Local Areas Act, 2001.
2. Whether the levy of entry tax under the Act can be justified as a compensatory tax.
3. Whether the impugned levy of entry tax is violative of Article 304(a) of the Constitution.

Detailed Analysis:

Issue 1: Constitutional Validity of the Tamil Nadu Tax on Entry of Goods into Local Areas Act, 2001
The Tamil Nadu State enacted the Act to levy a tax on the entry of goods into local areas for consumption, use, or sale. Section 3 empowers the State Government to levy and collect tax on the entry of scheduled goods into any local area at a rate not exceeding 30%. Numerous petitions were filed under Article 226 of the Constitution contending that the Act and the notifications issued thereunder are unconstitutional on diverse grounds, primarily arguing that the tax is neither regulatory nor compensatory, and is discriminatory, thereby violating Articles 301 and 304 of the Constitution.

Issue 2: Whether the Levy of Entry Tax Under the Act Can Be Justified as a Compensatory Tax
The petitioners argued that the tax is not compensatory as it does not satisfy the tests laid down for compensatory taxes, such as those established in the case of Jindal Stainless Ltd. vs. State of Haryana. The State must prove that the tax is for reimbursement of quantifiable services provided to the payers, which it failed to do. The State's argument that the tax is compensatory because it is used for road maintenance and bridge construction was found insufficient. The court emphasized that maintaining roads and bridges is a general duty of the State and not a special benefit to the taxpayers of the entry tax. The court concluded that the tax is not compensatory as it lacks a direct correlation between the tax collected and the specific benefits provided to the taxpayers.

Issue 3: Whether the Impugned Levy of Entry Tax is Violative of Article 304(a) of the Constitution
Article 304(a) prohibits discrimination against goods imported from other States in favor of similar goods produced within the State. The court found that the Act discriminates against goods imported from outside the State as it imposes an entry tax on these goods but not on similar goods produced within the State. This discrimination violates Article 304(a) as it creates a tax barrier against inter-State trade. The argument that the total tax burden should be considered was rejected, affirming that discrimination must be assessed based on the specific tax statute in question.

Conclusion
The court held that the Tamil Nadu Tax on Entry of Goods into Local Areas Act, 2001, is unconstitutional. The levy of entry tax under the Act is neither compensatory nor non-discriminatory. The State failed to prove that the tax was for reimbursement of quantifiable benefits provided to the taxpayers. The tax was found to be discriminatory against goods imported from other States, violating Article 304(a) of the Constitution. Consequently, the demand and collection of entry tax under the Act were declared illegal, unauthorized, and violative of Article 301 of the Constitution. The writ petitions were allowed, and the levy and demand notices were quashed.