2007 (1) TMI 514 - HC - VAT and Sales Tax

Constitutional validity of the U.P. Tax on Entry of Goods Act, 2000 ( the Act ) - entry tax levied on crude oil imported - whether the entry tax is compensatory tax - violative of articles 301 and 304, Constitution of India - HELD THAT - It is to be appreciated that we are not called upon to adjudicate or define parameters of compensatory tax or vires of the Act , which is outside the scope of the issue remitted to High Court vide Supreme Court judgment and order dated July 14, 2006(1) whereunder High Court/s, after affording opportunity to the parties to furnish relevant data (to discharge its burden ) decide nature of entry tax , i.e., whether the tax under the Act, is compensatory in nature. Undisputedly it is to be done on the parameters/touchstone laid down by the apex court in the case of Jindal Stainless Ltd. 2006 (4) TMI 120 - SUPREME COURT . It is clear from the perusal of documents annexed with the affidavit of Amitabh Mishra that the amount of revenue earned from entry tax under the Act is pooled in the consolidated fund which is utilised under budgetary-allocation to the States, which is also utilised as grant-in-aid by State to make up budgetary deficit of a local body to discharge their statutory/constitutional obligations which apart from others include construction of roads, bridges, etc. The respondents have placed figures relating to the funds given as grant-in-aid to panchayats/local bodies from consolidation fund as part of its share received by State of U.P. There is, therefore, no occasion for us to probe reasonableness or proportionality of the same in the instant case. Aims and objects of the Act, even though not decisive as held by the Supreme Court, merely refer to augment revenue of the State and hence support the contention of the petitioners that tax under it is not compensatory in nature. The State has failed to pin-point or establish through its data, the specific/additional service/facility provided to its tax-payer(s). It is obvious that the apex court remitted the issue of compensatory tax (after parties are given opportunity to file data to discharge their burden) apparently for the reason that it found aims and object of the Act irrelevant and none of the provisions of the Act (including its sections 4, 4-A and 6 read with the Schedule) reflect that the amount of entry tax is to provide additional or specific facility to the scheduled trades visa-vis those who are not subjected to this tax . There is no co-relation between the levy of entry tax and the scheduled trades . Finding There is not even an iota of evidence/material on record to give required data/statistics to prove/establish that the amount collected as tax and its expenditure on providing additional/specific advantage/facility provided to trade/s in particular mentioned under the Schedule of the Act. In absence of such a data it is not possible for this court to hold that entry tax is compensatory tax . We hold accordingly. In the nature of the case we make no order as to costs.

Summary

Issues Involved:
1. Constitutional validity of the U.P. Tax on Entry of Goods Act, 2000.
2. Whether the tax levied under the Act is compensatory in nature.
3. Compliance with Articles 301 and 304 of the Constitution of India.

Detailed Analysis:

Issue 1: Constitutional Validity of the U.P. Tax on Entry of Goods Act, 2000
The petitioners challenged the constitutional validity of the U.P. Tax on Entry of Goods Act, 2000, arguing that the tax levied under it was not "compensatory" and hence violated Articles 301 and 304 of the Constitution of India. They relied on the apex court judgments in Atia-bari Tea Co. Ltd. v. State of Assam and Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan, where it was established that a tax is compensatory if it provides certain facilities for the better conduct of business and is not patently more than what is required for providing those facilities.

Issue 2: Whether the Tax Levied Under the Act is Compensatory in Nature
The respondents contended that the entry tax was not ultra vires of the Constitution and was compensatory in nature. They cited the apex court's decisions in Bhagatram Rajeev Kumar v. Commissioner of Sales Tax and State of Bihar v. Bihar Chamber of Commerce, which held that it is sufficient if some connection is established between the tax and the trading facilities provided, either directly or indirectly.

The Allahabad High Court initially allowed the writ petitions, leading the State of U.P. to file special leave petitions before the Supreme Court. The Supreme Court referred the matter to a Constitutional Bench, which reaffirmed the parameters of a compensatory tax under Article 304 of the Constitution.

The Constitutional Bench clarified that a compensatory tax must have a quantifiable and measurable benefit, broadly proportional to the costs incurred in providing the facilities. The tax should be based on the principle of equivalence and should not be progressive. The burden of proving that the tax is compensatory lies on the State.

Issue 3: Compliance with Articles 301 and 304 of the Constitution of India
The Supreme Court remitted the issue back to the High Courts to determine whether the levy under the Act was compensatory in nature, based on the data provided by the State. The Allahabad High Court considered the data supplied by the State, which included year-wise receipts from entry tax and funds provided to local bodies for developmental works.

The court found that the data failed to show that the entry tax was compensatory. The revenue from the entry tax was pooled into the consolidated fund and used for general budgetary allocations, including grants to local bodies for urban development and maintenance of roads and bridges. There was no specific link between the tax levied and the benefits provided to the scheduled trades.

The court concluded that the State had not discharged its burden of proving that the entry tax was compensatory. The "aims and objects" of the Act indicated that the tax was intended to augment the State's revenue, rather than provide specific benefits to the trades subjected to the tax.

Conclusion:
The Allahabad High Court held that the U.P. Tax on Entry of Goods Act, 2000, did not levy a compensatory tax as required under Articles 301 and 304 of the Constitution. The State failed to provide quantifiable and measurable data showing that the tax was used to provide specific facilities or benefits to the trades enumerated in the Schedule of the Act. Therefore, the entry tax under the Act was not compensatory in nature, and the writ petitions were allowed. The court made no order as to costs.