2009 (3) TMI 918 - HC - VAT and Sales Tax

Constitutionality, legality and validity of the section 3(2)(b) of Arunachal Pradesh Goods Tax Act 2005 challenged which imposes tax on the entry of goods, other than non-taxable import, for consumption, use or sale thereof into the local area of the State of Arunachal Pradesh Held that - the impugned levy, on import of goods into the State of Arunachal Pradesh, is violative of article 301 and also article 304 inasmuch as the levy is discriminatory in nature and cannot, under the Constitutional scheme be allowed to survive. Apart from the fact that the impugned Act does not facially indicate the quantifiable benefits provided or to be provided to a tax-payer, the averments, made in paragraphs 5 and 7 of the respondents affidavit, clearly show that the impugned levy is not compensatory in nature; rather, it aims at raising general revenue collection of the State Hence, the impugned provisions must be held to be ultra vires. Consequently, the levy must be struck down. Appeal allowed.

Issues Involved:
1. Violation of Article 301 of the Constitution of India.
2. Discrimination under Article 304(a) of the Constitution of India.
3. Nature of the levy: whether regulatory or compensatory.

Detailed Analysis:

1. Violation of Article 301 of the Constitution of India:
The petitioners argued that the Arunachal Pradesh Goods Tax Act, 2005, particularly section 3(2)(b), violates Article 301 of the Constitution, which guarantees freedom of trade, commerce, and intercourse throughout India. They contended that the tax imposes unreasonable restrictions on the movement of goods into the State, thus impeding free trade.

The respondents countered that the tax is intended to generate revenue for the State and is utilized for the overall welfare of its people, including developmental activities. They argued that the tax does not hamper the free flow of trade and commerce but rather protects the interests of local traders.

The court examined the constitutional scheme under Part XIII, emphasizing that Article 301 guarantees freedom from laws that restrict or impede the movement of goods. The court referred to landmark cases such as Atiabari Tea Co. Ltd. v. State of Assam, which clarified that tax laws are not immune from Article 301 and that only taxes directly and immediately restricting trade fall under its purview.

The court concluded that the entry tax, being a tax on the movement of goods into the State, directly impacts trade and commerce and thus falls within the ambit of Article 301. The tax can only be justified if it is compensatory or if it complies with Article 304(b).

2. Discrimination under Article 304(a) of the Constitution of India:
The petitioners contended that the entry tax is discriminatory under Article 304(a) because it impedes the import of goods into Arunachal Pradesh from other States while not imposing any such restriction on goods moving within the State.

The court noted that Article 304(a) prohibits a State from imposing a tax on goods imported from other States if similar goods produced within the State are not subjected to such a tax. The court observed that the entire State of Arunachal Pradesh is treated as one local area under the Act, meaning that only goods imported into the State are taxed, while locally produced goods are not.

The court referred to the case of State of Assam v. Chhotabhai Jethabhai Patel Tobacco Products Co. Ltd., where a similar entry tax was struck down for being discriminatory. The court found that the respondents' arguments, suggesting that traders should procure goods locally to avoid entry tax, clearly indicated discrimination against goods imported from other States.

The court held that the entry tax is discriminatory and violates Article 304(a), as it provides a commercial advantage to local goods over imported goods.

3. Nature of the Levy: Whether Regulatory or Compensatory:
The petitioners argued that the entry tax is neither regulatory nor compensatory. They contended that the tax is not intended to provide any specific trading facilities to the importers or traders but is aimed at augmenting the general revenue of the State.

The respondents admitted that the tax is intended to generate revenue for the State and is not compensatory in nature. They argued that the revenue is used for the overall welfare and developmental activities of the State, which indirectly benefits traders.

The court emphasized that for a tax to be compensatory, it must provide quantifiable and measurable benefits to the traders and should not be patently much more than what is required to provide such facilities. The court referred to the case of Jindal Stainless Ltd. v. State of Haryana, which clarified the parameters of compensatory tax and overruled the broader interpretation given in Bhagatram Rajeev Kumar v. Commissioner of Sales Tax and Bihar Chamber of Commerce.

The court found that the respondents failed to show that the entry tax is compensatory. The tax is primarily aimed at augmenting general revenue and does not provide any specific trading facilities to the importers. The court held that the entry tax is not compensatory and thus violates Article 301.

Conclusion:
The court concluded that the entry tax imposed under the Arunachal Pradesh Goods Tax Act, 2005, is discriminatory under Article 304(a) and violates the freedom of trade guaranteed by Article 301. The tax is neither regulatory nor compensatory and is primarily aimed at augmenting general revenue. Consequently, the court quashed the imposition of entry tax under section 3 of the Act.

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