2007 (7) TMI 600 - HC - VAT and Sales Tax

Constitutional validity of the Tamil Nadu Tax on Entry of Motor Vehicles into Local Areas Act, 1990 - infringement of articles 301 and 304 of the Constitution - Whether the tax imposed is compensatory in nature or not?

Issues Involved:
1. Constitutional validity of the Tamil Nadu Tax on Entry of Motor Vehicles into Local Areas Act, 1990.
2. Whether the levy of entry tax under the Act can be justified as a compensatory tax.

Issue-wise Detailed Analysis:

1. Constitutional Validity of the Tamil Nadu Tax on Entry of Motor Vehicles into Local Areas Act, 1990:
The petitioners challenged the constitutional validity of the Act, arguing that it infringes Articles 301 and 304 of the Constitution. The Act, which replaced an Ordinance promulgated by the Governor, was enacted to curb the evasion of sales tax on motor vehicles purchased outside the State and brought into Tamil Nadu. The petitioners argued that the tax imposed under the Act was not compensatory and thus violated the freedom of trade guaranteed under Article 301 of the Constitution.

2. Whether the Levy of Entry Tax Under the Act Can Be Justified as a Compensatory Tax:
The primary issue for consideration was whether the levy of entry tax could be justified as a compensatory tax. The petitioners contended that the State had not provided sufficient material to prove that the tax was compensatory. They argued that the essence of a compensatory tax is that the services rendered or facilities provided should be commensurate with the tax levied. The tax should not be more than what is required to provide trading facilities, and it should not be imposed for augmenting the general revenue of the State.

In response, the State Government argued that the Act had received Presidential assent as required under Article 255 of the Constitution and was thus saved by Article 304(b). They contended that the entry tax was compensatory in character, as demonstrated by the statistical data on the expenditure for the maintenance of roads, construction of bridges, etc. The State submitted that the tax was a charge for the convenience or services provided by the State, and thus, the freedom of trade and commerce was not impaired.

The court referred to the Constitution Bench decision in Jindal Stainless Ltd. v. State of Haryana, which reaffirmed the working test laid down in Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan. The test requires examining whether the tradespeople 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. The court noted that the State had provided data on the expenditure for the construction and maintenance of roads and bridges. However, the court found that maintaining roads and providing bridges could not be considered compensatory in nature to constitute a special advantage to trade, commerce, and intercourse. The court held that a welfare State has the responsibility of providing good roads and bridges for the benefit of tax-paying citizens, and thus, the impugned levy could not be justified solely for that purpose.

The court concluded that the tax levied under the Tamil Nadu Tax on Entry of Motor Vehicles into Local Areas Act, 1990, was not compensatory in nature. The court emphasized that there must be a rational nexus between the levy and the services provided, and the services should have a direct correlation with the trade. The court found that the State had not established that the tax was a reimbursement for quantifiable and measurable benefits provided to the importers/dealers. Consequently, the levy was found to violate Articles 301 and 304 of the Constitution.

Conclusion:
The court held that the tax imposed under the Tamil Nadu Tax on Entry of Motor Vehicles into Local Areas Act, 1990, was not compensatory in nature and thus violated Articles 301 and 304 of the Constitution. The court emphasized the need for a rational nexus between the levy and the services provided, which was not established by the State.

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