2007 (12) TMI 429 - HC - VAT and Sales Tax

Constitutional validity of sections 3 and 4 of the Andhra Pradesh Tax on Entry of Goods into Local Areas Act of 2001, together with the notifications issued thereunder challenged Held that - For one to justify, a particular tax levied to be compensatory in nature, it is essential that there should be direct and intricate relationship between the collection of tax and its intended expenditure.Construction of roads, culverts and bridges or providing basic health care facilities or rest-houses for the transport operators on the waysides are not exclusively intended or meant for promoting any class, or even generally, the trade or commerce. Such basic and essential infrastructural facilities are also liable to be put to use by all others as well. In that respect, provision of such facilities like good motorable roads, illumination of streets or provision of parks or gardens cannot be rolled up and presented as the specific end objectives of the intended promotion of the interests of tradesmen or businessmen. The essential link between the infrastructure or facility or service, which is directly or even indirectly held to promote the cause of trade or commerce, is missing in them. Hence, we find ourselves not in a position to accord approval for the present impost as a compensatory tax. Therefore, clearly the impugned law amounts to impeding the freedom of movement of trade or commerce across the territory of the nation. Further, it is admitted that the procedure prescribed to obtain the sanction of the President has not been obtained prior to enacting the impugned Entry Tax Act. Therefore, no hesitation to declare the impugned levy as unconstitutional.

Issues Involved:
1. Constitutional validity of sections 3 and 4 of the Andhra Pradesh Tax on Entry of Goods into Local Areas Act of 2001 (Entry Tax Act).
2. Discrimination and impediment to free trade and commerce under Article 301 of the Constitution.
3. Requirement of Presidential consent under Article 304(b) of the Constitution.
4. Nature of the levy as compensatory tax.

Issue-Wise Detailed Analysis:

1. Constitutional Validity of Sections 3 and 4 of the Entry Tax Act:
The petitioners challenged the constitutional validity of sections 3 and 4 of the Entry Tax Act, arguing that the levy is discriminatory and impedes free trade and commerce, thus violating Article 301 of the Constitution. They also contended that the Act was enacted without obtaining the necessary Presidential consent as required under Article 304(b). The State argued that the Act was within the legislative competence of the State Legislature under entry 52, List II of the Seventh Schedule of the Constitution and claimed the levy was compensatory in nature, thus falling outside the purview of Article 301.

2. Discrimination and Impediment to Free Trade and Commerce under Article 301:
The petitioners argued that the levy discriminates against importers bringing goods into local areas from outside Andhra Pradesh while exempting intra-state movements of goods. This, they claimed, created an unfair advantage for local manufacturers and impeded the free movement of trade and commerce guaranteed under Article 301. The State countered that the levy aimed to create a level playing field by equating the total tax burden on goods, irrespective of their origin.

3. Requirement of Presidential Consent under Article 304(b):
The petitioners argued that the Entry Tax Act imposed restrictions on trade and commerce, which required prior Presidential consent under Article 304(b). Since no such consent was obtained, they claimed the Act was unconstitutional. The State argued that since the levy was compensatory, it did not fall under the restrictions of Article 301, and hence, Article 304(b) was not applicable.

4. Nature of the Levy as Compensatory Tax:
The court examined whether the levy was compensatory in nature. Citing precedents from Atiabari Tea Co. Ltd. v. State of Assam and Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan, the court noted that for a tax to be compensatory, there must be a direct and quantifiable link between the tax collected and the benefits provided to the taxpayers. The State argued that the funds from the levy were used for infrastructure improvements that facilitated trade and commerce. However, the court found that the State failed to demonstrate a direct and intricate relationship between the tax collected and its intended expenditure. The court concluded that the levy was not compensatory as it primarily aimed to augment the State's general revenue.

Conclusion:
The court declared the impugned levy as unconstitutional, stating that it impeded the freedom of movement of trade and commerce and violated the principles enunciated in various Supreme Court judgments. The court also noted the failure to obtain Presidential consent as required under Article 304(b). The batch of writ petitions was allowed, and the Rule Nisi was made absolute without costs.

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