2008 (1) TMI 837 - HC - VAT and Sales Tax

Levy and collection of tax on the entry of goods into the local areas of the State of Orissa for consumption, use or sale therein and matters incidental thereto and connected therewith, Orissa State Legislature promulgated the Orissa Entry Tax Act, 1999 (Orissa Act 11 of 1999) on September 20, 1999 challenged Held that - We are only determining the issue whether the impugned levy imposed by way of the Orissa Entry Tax Act was compensatory in nature and, therefore, we consider whether the impugned enactment facially or patently indicates the quantifiable data on the basis of which the compensatory tax is sought to be levied and whether the Act facially indicates the benefits which is quantifiable or measurable and the proportionality of the quantifiable benefits but we have not found any such thing in the Act. They do not show that payment of entry tax is reimbursement/recompense for the quantifiable and measurable benefits to be provided to its payers. Providing facilities to the citizens or others would not definitely come under the activities like movement of trade, commerce and intercourse for the free-flow of trade and commerce. Therefore, the State has failed to show that the Orissa entry tax is reimbursement/recompense for the quantifiable and measurable benefits provided to trades people and the provision for realisation of tax therein was not compensatory in nature.

Issues Involved:
1. Legislative competence of the State Legislature to enact the Orissa Entry Tax Act, 1999.
2. Violation of Articles 301 and 304 of the Constitution of India.
3. Requirement of Presidential sanction under Article 304(b) and Article 255 of the Constitution.
4. Whether the Orissa Entry Tax Act, 1999 is a colorable exercise of power under Entry 52 of List II of the Seventh Schedule to the Constitution of India.
5. Determination of whether the Orissa Entry Tax is compensatory in nature.

Detailed Analysis:

1. Legislative Competence of the State Legislature:
The petitioners challenged the legislative competence of the Orissa State Legislature to enact the Orissa Entry Tax Act, 1999. The court held that the entry tax introduced by the Orissa Entry Tax Act, 1999, being compensatory in nature, is within the legislative competence of the State Government and is intra vires.

2. Violation of Articles 301 and 304:
The petitioners argued that the Act violated Articles 301 and 304 of the Constitution as it hampered the free flow of trade throughout India. The court examined this issue in light of the Supreme Court's direction and the Constitution Bench's decision in Jindal Stainless Ltd. v. State of Haryana, which reiterated that the doctrine of 'direct and immediate effect' of the impugned law on trade and commerce under Article 301 will continue to apply. The court found that the Orissa Entry Tax Act did not facially or patently indicate quantifiable data on the basis of which the compensatory tax is sought to be levied. Therefore, the State failed to show that the entry tax was compensatory in nature.

3. Requirement of Presidential Sanction:
The petitioners contended that the Act violated Article 304(b) as no previous sanction of the President was obtained, and no post facto assent of the President under Article 255 was obtained. The court noted that Article 304(b) requires the previous sanction of the President for imposing reasonable restrictions on trade, commerce, or intercourse. However, since the court was only tasked with determining whether the levy was compensatory, it did not delve into this issue in detail.

4. Colorable Exercise of Power:
The petitioners argued that Entry 52 of List II of the Seventh Schedule is meant exclusively to augment the income of local authorities, and by defining "local area" to include the entire State, the Act was a colorable exercise of power. The court did not find merit in this argument, as it held that the entry tax was within the legislative competence of the State Government.

5. Compensatory Nature of the Orissa Entry Tax:
The core issue referred back to the High Court was whether the Orissa Entry Tax is compensatory in nature. The court examined the provisions of the Act and the data provided by the State. It found that the Act did not facially indicate the benefits that are quantifiable or measurable, nor did it show proportionality to the quantifiable benefit. The State failed to demonstrate that the entry tax collected was reimbursed/recompensed for the quantifiable/measurable benefits to the tradespeople. The court concluded that the Orissa Entry Tax Act was not compensatory in nature.

Conclusion:
The court held that the Orissa Entry Tax Act, 1999, was within the legislative competence of the State Government but failed to meet the criteria of a compensatory tax as it did not demonstrate quantifiable benefits to the tradespeople. The Act was thus not compensatory in nature, and the State did not provide sufficient evidence to show that the tax collected was used as reimbursement for specific benefits provided to the payers.

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