2007 (3) TMI 706 - HC - VAT and Sales Tax

Constitutional validity of the Haryana Local Area Development Tax Act, 2000 - levy and collection of tax on entry of goods into local areas for consumption, use or sale - individual service - Whether a levy is compensatory or not has to be decided with reference to the nature of the levy itself? - Violation of Article 301 - HELD THAT - A perusal of statutory provisions shows that the levy of tax is on entry of goods into a local area for consumption, use or sale and the tax is payable by the importer with reference to value of goods at a specified rate. The tax collected is to be distributed by the State Government among the local bodies. The same is to be utilised for development facilitating free-flow of trade and commerce on infrastructural facilities such as roads, bridges, culverts, sewerage, drainage, sanitation, waste-management, electricity, drinking water and other infrastructural facilities. At least 60 per cent of the amount is to be utilised. The board is to ensure balanced development of the local areas and recommend allotment of proceeds of tax and changes in the rate of tax. The board is also to ensure that the proceeds of tax are not more than the amount actually required for development of local areas. We find merit in the contention raised on behalf of the petitioners. The levy is not to meet the cost of any specific facility already provided or planned to be provided. The parameters clearly laid down in Jindal 2006 (4) TMI 120 - SUPREME COURT are that compensatory tax represents the costs incurred in procuring facilities/services on the principle of pay for value . It is a charge for offering trade facilities. It adds to value of trade and commerce. It is based on the principle of equivalence. It must have a broad proportion to the benefit derived to defray the cost of regulation or to meet the outlay incurred for some special advantage to trade and commerce and intercourse. The impugned levy initially was meant to be for assistance to local areas for their development generally and the amendment brings about only a superficial change in the language while retaining the basic character of the levy as a source for raising general development. In this view of the matter, we are unable to hold that the facial test is met. Mere specification of the 60 per cent of the amount being in line with judgments dealing with the levy of fee is of no consequence when the very subject-matter of utilisation cannot be treated as any special direct or exclusive service or benefit to the payer of the tax. Thus, the data given by the State in respect of the amount Spent does not stand scrutiny. As rightly pointed out by learned Counsel for the petitioners, the expenditure incurred is 17 per cent of the total collection and the expenditure is far less than the collection of much more amount under other statutes levying compensatory taxes to cover the cost of at least some of the very same services. The burden of proof on the State cannot be held to have been discharged. Though the levy was earlier upheld by this Court with reference to the parameters as understood from the judgments of the honourable Supreme Court, including judgments in Bhagatram 1994 (11) TMI 337 - SUPREME COURT and Bihar Chamber of Commerce 1996 (2) TMI 430 - SUPREME COURT , which now stand disapproved by the Constitution Bench, applying the parameters as laid down in Jindal 2006 (4) TMI 120 - SUPREME COURT , we are of the view that the impugned levy is not compensatory in character. The same amounts to restriction on free flow of trade and commerce and is hit by Article 301 of the Constitution of India. We record our finding accordingly.

Issues Involved:
1. Constitutional validity of the Haryana Local Area Development Tax Act, 2000.
2. Whether the tax is compensatory in nature.
3. Compliance with Article 301 and 304 of the Constitution.
4. Distribution and utilization of tax collected under the Act.
5. Impact of the 73rd and 74th Constitutional Amendment Acts on local bodies.
6. Judicial precedents and their application to the case.

Detailed Analysis:

1. Constitutional Validity of the Haryana Local Area Development Tax Act, 2000:
The Haryana Local Area Development Tax Act, 2000, was challenged on the grounds of its constitutional validity, specifically its compliance with Article 301 of the Constitution, which ensures the freedom of trade, commerce, and intercourse throughout the territory of India.

2. Whether the Tax is Compensatory in Nature:
The petitioners argued that the tax was not compensatory but intended to augment general revenue. The State contended that the tax was compensatory, facilitating better trade and commerce through local area development. The Court examined whether the tax met the parameters of a compensatory tax as laid down in judicial precedents, particularly focusing on whether the tax provided measurable benefits to the payers.

3. Compliance with Article 301 and 304 of the Constitution:
The Court reviewed whether the tax imposed restrictions on the freedom of trade and commerce under Article 301 and if it complied with Article 304(b), which allows states to impose reasonable restrictions in the public interest. It was argued that the tax did not directly or immediately affect the movement of trade, and facilities provided in local areas ultimately benefited traders.

4. Distribution and Utilization of Tax Collected Under the Act:
The tax collected was to be distributed among local bodies for the development of local areas. The Court scrutinized whether the funds were utilized in a manner that facilitated the free flow of trade and commerce. The State provided data showing allocations and expenditures on infrastructure like roads, bridges, and sanitation, arguing that these facilities benefited trade and commerce.

5. Impact of the 73rd and 74th Constitutional Amendment Acts on Local Bodies:
The amendments aimed to empower local bodies to function as self-governments, including the authority to levy and collect taxes. The Court considered whether the provisions of the Act aligned with the constitutional mandate to support the local bodies in providing infrastructure that facilitated trade and commerce.

6. Judicial Precedents and Their Application to the Case:
The Court referred to various judgments, including those from the Supreme Court and other High Courts, to determine the validity and nature of the tax. Key judgments included:
- Atiabari Tea Co. Ltd. v. State of Assam: Established that taxes directly impeding trade were unconstitutional.
- Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan: Clarified that compensatory taxes facilitating trade were permissible.
- Bhagatram Rajeev Kumar v. Commissioner of Sales Tax and State of Bihar v. Bihar Chamber of Commerce: These cases were reviewed and their interpretations of compensatory taxes were reconsidered in light of the Constitution Bench judgment in Jindal Stainless Ltd. v. State of Haryana.

Conclusion:
The Court concluded that the Haryana Local Area Development Tax Act, 2000, did not meet the criteria for a compensatory tax as it did not provide specific, measurable benefits to the payers of the tax. The tax was primarily for augmenting general revenue rather than facilitating trade and commerce. Consequently, the tax was deemed a restriction on the freedom of trade and commerce, violating Article 301 of the Constitution. The judgment emphasized the need for a direct link between the tax collected and the benefits provided to the taxpayers, aligning with the principles laid down in the Jindal Stainless Ltd. case.

← Previous Next →