2013 (7) TMI 72 - HC - VAT and Sales Tax

Validity of West Bengal Tax on Entry of Goods into Local Areas Act, 2012 questioned - whether the purpose for which the proceeds of Entry Tax was sought be spent could be treated as compensatory in nature? - Held that - Utilization of the proceeds of Entry Tax under the impugned Entry Tax Act for the purpose specified in Sub-clause (g) of creating, developing and maintaining pollution free atmosphere in the concerned areas has remote connection, if not, no connection with developing and facilitating trade and commerce, even though the same might improve the quality of life for citizens. In view of the law laid down by in Atiabari Tea Company Ltd. (1960 (9) TMI 94 - SUPREME COURT), the impugned Entry Tax must be held to restrict the right to free trade, commerce and intercourse, throughout the territory of India, even though the restriction is reasonable and in public interest.There can be no doubt that the State Legislature has exclusive power to enact legislation imposing a tax on the entry of goods into a local area, for consumption use or sale therein by virtue of Entry 52 of List II of the Seventh Schedule to the Constitution of India. However, this power is subject to the limitations imposed by the Constitution itself, particularly Part XIII thereof. The imposition of a compensatory tax, being a judicially devised exception to the restrictions of Articles 301 and 303 of the Constitution of India, the tests judicially enunciated in Jindal Stainless Ltd. (2010 (4) TMI 849 - SUPREME COURT OF INDIA) to examine whether the impugned tax on movement of goods from one area to another is, in effect and substance, a compensatory tax, must strictly be applied before the validity of an enactment imposing the impugned tax can be upheld, notwithstanding non-compliance of the requisites of Article 304(b) of the Constitution of India. What distinguishes a compensatory tax is that a compensatory tax is imposed for a specific purpose or a few specific identifiable purposes, to pay for expenses in connection with specific projects, whether completed, in progress or in contemplation, which provide specific, tangible, measurable benefits to the tax payers as a class and is based on the principle of equivalence and/or quid pro quo and/or pay for value . A tax on the other hand generates revenue, but not necessarily for any specific identifiable purpose. To clear the test of compensatory tax, the onus lies on the State to show the exact purpose or purposes for which the levy is imposed, which should be identifiable, measurable, directly beneficial to the tax payers as a class, who in the instant case, would primarily be the traders and manufacturers of the local area, who import goods from outside the State and/or outside the country. The State has failed to disclose details of projects in contemplation, projects in progress and/or completed projects, providing facilities to the trading community, which the levy would pay for, and show that the expected proceeds of such levy are more or less equivalent to the estimated expenditure on such projects. To qualify as a compensatory tax, the Statute imposing the tax must facially indicate that the tax is a recompense for identifiable, measurable benefits to the class of tax payers as a whole on the principle of equivalence. If the statute does not contain particulars of the corresponding benefits in return for the tax, details may be disclosed by affidavit. It is reiterated that a compensatory tax would not cease to be a compensatory tax, only because of some excess collection, which may have to be diverted towards the revenue of the State. However, imposition of the tax would necessarily have to be preceded by the exercise of ascertaining the approximate financial requirements for specific and/or earmarked projects and balancing the same with the targeted tax receipts. The State should be able to justify the basis on which the rate of tax has been determined. The impugned Entry Tax Act does not indicate the quantifiable or measurable benefits to be provided in lieu of the levy. The data on the basis of which the compensatory tax is sought to be levied is neither disclosed in the impugned Entry Tax Act or the Affidavit-in-Opposition filed by the State. There being no disclosure of the quantifiable benefits or the proportionality of the levy to the quantifiable benefits, either in the impugned Act or by way of affidavit, the tax does not meet the test of compensatory tax, even though the tax imposed by the impugned Act may be in public interest, and perhaps reasonable too. The previous sanction of the President of India not having been obtained, before enactment of the impugned Entry Tax Act, this court is constrained to hold that the impugned Entry Tax Act is ultra vires Section 304(b) of the Constitution of India - writ petitions are disposed of accordingly.

Summary

Issues Involved:
1. Violation of Article 301 and 304 of the Constitution of India.
2. Compensatory nature of the Entry Tax.
3. Legislative competence of the State Legislature.
4. Discrimination against goods imported from outside the State.
5. Lack of prior Presidential sanction.

Detailed Analysis:

1. Violation of Article 301 and 304 of the Constitution of India:
The petitioners argued that the West Bengal Tax on Entry of Goods into Local Areas Act, 2012 (impugned Entry Tax Act) violates Article 301, which guarantees free trade, commerce, and intercourse throughout the territory of India, and Article 304, which allows states to impose taxes on imported goods only if similar goods produced within the state are taxed equally. The petitioners contended that the impugned Entry Tax Act imposes a tax that does not align with these constitutional provisions, as it discriminates against goods imported from outside the state and lacks prior Presidential sanction required under Article 304(b).

2. Compensatory Nature of the Entry Tax:
The petitioners argued that the impugned Entry Tax Act is not compensatory in nature. They cited various judgments, including the Supreme Court's decision in Jindal Stainless Ltd. (2) & Ors. Vs. State of Haryana & Ors., which clarified that for a tax to be compensatory, it must provide specific, tangible, and measurable benefits to the taxpayers. The petitioners contended that the Act does not facially indicate the quantifiable benefits or proportionality of the tax to the benefits provided. The State failed to provide data showing that the tax is a recompense for specific benefits to the taxpayers, thus failing the test of a compensatory tax.

3. Legislative Competence of the State Legislature:
The petitioners challenged the legislative competence of the State Legislature to impose a tax on goods imported from outside the country, arguing that it transgresses the power of the Parliament. They referred to Article 286 of the Constitution, which restricts states from imposing taxes on the sale or purchase of goods in the course of import or export. The petitioners also cited relevant entries in the Seventh Schedule, which grant exclusive jurisdiction to the Parliament over import and export duties.

4. Discrimination Against Goods Imported from Outside the State:
The petitioners argued that the impugned Entry Tax Act discriminates against goods imported from outside the state, as it imposes a tax on these goods while exempting similar goods produced within the state. This discrimination violates Article 304(a), which mandates equal treatment of imported and locally produced goods. The petitioners cited various judgments, including ITC Limited Vs. State of Tamil Nadu & Anr., to support their contention that such discrimination is unconstitutional.

5. Lack of Prior Presidential Sanction:
The petitioners contended that the impugned Entry Tax Act was introduced without the prior sanction of the President of India, as required under Article 304(b) for any law imposing restrictions on free trade, commerce, or intercourse in public interest. They argued that the absence of Presidential sanction renders the Act unconstitutional.

Judgment:
The court held that the impugned Entry Tax Act violates Article 301 and 304(b) of the Constitution of India. The Act restricts free trade, commerce, and intercourse by imposing a tax on the entry of goods into local areas without providing specific, tangible, and measurable benefits to the taxpayers. The State failed to demonstrate that the tax is compensatory in nature, as it did not provide data showing the proportionality of the tax to the benefits provided. The court also found that the Act discriminates against goods imported from outside the state, violating Article 304(a). Additionally, the Act was introduced without the prior sanction of the President, as required under Article 304(b). Consequently, the court declared the impugned Entry Tax Act ultra vires the Constitution of India and disposed of the writ petitions accordingly.