2014 (10) TMI 379 - HC - VAT and Sales Tax

Validity of the U.P. Tax on Entry of Goods into Local Areas Act, 2007 - violative of freedom of trade, commerce and intercourse guaranteed under Art.301 and not saved by Art.304 (b) of the Constitution of India - Held that - notification was amended on 19.2.2010, excluding natural gas, cement, motor vehicles of all kinds, tyres and tubes. It was again amended on 29.3.2009 excluding machinery and spare parts; wood and timber of all kinds; clinker; aluminum and its products; cables of all kinds, lap top-computer system and peripherals; marbles stones and tiles; and refrigerator, air conditioner and conditioning plants. On high speed diesel and other petroleum products, excluding kerosene oil for public distribution system, a notification was issued on 04.3.2008 providing rebate and a notification was issued on 30.6.2008, providing exemptions. At present only 08 items out of 20 are left in the Schedule for levy of entry tax. Section 5 of the Act of 2007 provides for reversal of levy of tax. Where any dealer has paid entry tax in respect of entry of such goods in such local area or purchased such goods, on which entry tax has already been paid, such tax shall be refunded or adjusted to such dealer by whom without using them in the local area, such goods are assigned to any other place outside the State or are sold either in the course of inter-state trade or commerce or in the course of export outside the territory of India. Section 6 provides for powers to the State Government to give rebate by a notification upto the full amount of tax leviable under the Act. Where the tax is payable in respect of a sale or purchase of such goods under the UP Value Added Tax Act, 2008 by a dealer registered under the Act, and for exemptions under Section 7 by the State Government on any notified goods. The notification establishing the industrial area, for a limited purpose, therefore, does not take it out or carve out a separate area for which there may be no Municipal Corporation, Municipality or Panchayat. The entire State is divided into local areas for the purposes of self-governance. The statement of objects and reasons, the manner and method levy and collection of the entry tax, and its utilisation exclusively for development for facilitating the trade, commerce and industry in the State of UP; the credit of the entire entry tax levied and collected to the UP Trade Development Fund, the manner of utilisation of the UP Trade Development Fund Management Committee under Rule 4 of the Rules of 2007, the maintenance of the accounts and its audit by the Accountant General, UP, facially and patently satisfies the tests of the entry tax laid down in Jindal Stainless Limited (2). In our opinion the defects, pointed out by this Court in IOC v. State of UP decided by this Court on 27.1.2004 declaring the Act of 2000 to be violative of Article 301 and 304 of the Constitution of India have been fully cured. The new Act of 2007 has not been enacted as a Validating Act. It is a new legislation, which does not allow the collections of entry tax to augment the general revenue of the State. It provides for, ensures and guarantees the utilisation of entire entry tax levied and collected for facilitating the trade and commerce. Objects and reasons and the provisions of the Act of 2007 clearly provide that the entire collection of the entry tax has to be credited to the U.P. Trade Development Fund, to be used exclusively for facilitating trade, commerce and industry and that the amount realised shall not be used for the purposes other than those specified in sub-section (1) of Section 14 of the Act. The distribution of entry tax so collected and credited to the UP Trade Development Fund by the UP Trade Development Fund Management Committee, to the local bodies and its expenditure through the local bodies is also not seriously in dispute. Provisions of the new Act of 2007, patently and facially indicate the benefit of the entry tax to the trade and commerce, which is quantifiable and measurable. The entire amount of entry tax collected and credited to the UP Trade Development Fund has to be utilised exclusively for facilitating the trade, commerce and industry, and is not to be used for the purpose other than those specified in sub-section (1) of Section 14. There are sufficient provisions in the Act and the Rules to ensure the utilisation of the amount for the benefit of trade and commerce. When the constitutional validity of any legislation of the State levying compensatory tax, as violative of Art.301, is under challenge, the imposition of such tax has to be examined, with reference to the entire scheme of Part XIII of the Constitution of India. The tax is compensatory, to save it from the vice of violating Art.301, not only if it is by way of recompense/ reimbursement to the trades, it is also required to be tested on the touchstone of Art.304 (a) and (b), namely that it is not discriminatory, unreasonable and is enacted for public purpose. The expression compensatory tax is not to be examined in a narrow sense of giving substantial or one to one benefit to the tax payer. The tax to be violative of Art.301, has to be noncompensatory and also violative of Art.304 (a) and (b), in the sense that even if the levy is imposed by a legislation, introduced with the sanction of the President, it still has to be nondiscriminatory, unreasonable and against public purpose. The freedom of trade, commerce and intercourse is violated if it affects the free movement of trade and commerce between the States and has an impact on the overall economic growth of the nation. Chapter XIII of the Constitution seeks to achieve economic unity and growth of the nation as a whole, by removing artificial barriers. We may not, therefore, look to justify the tax, if it is a barrier and not to judge it only by the manner of its expenditure. If a tax impose a barrier, or is discriminatory, unreasonable, and is not levied in public interest, it cannot be justified on the ground that the amount levied and collected is spent by way of quantifiable and measurable benefits on the trades. In such case the power to levy entry tax, even if it is traced to Entry 52 of List II would be a colourable exercise of legislative power. State of U.P. did not lack legislative competence in enacting U.P. Tax on Entry of Goods into Local Areas Act, 2007, imposing entry tax on the entry of scheduled goods into the local areas for consumption, use or sale thereunder. The provisions of the Act patently and facially indicate and that there are sufficient guidelines and guarantees under the Act for ensuring that the entire amount of entry tax collected and credited to the U.P. State Development Fund is utilised only for the purposes of its reimbursement to facilitate the trade, commerce and industry. The State Government has also established that the entire amount of entry tax is by way of reimbursement/recompense to the trade, commerce and industry, in the local areas of the State of U.P. provides quantifiable/measurable benefits to its payers. The levy under the Act, 2007 is also not discriminatory, unreasonable or against public interest. The levy of entry tax under the Act, therefore, does not violate the freedom of trade, commerce and intercourse guaranteed under Art.301 of the Constitution of India. Section 17 of the Act validating the amount of entry tax levied, assessed, realized and collected under the U.P. Tax on Entry of Goods Act, 2000, is also valid and authorises the State to keep the entire amount, for the purposes of its utilisation for facilitating trade, commerce and intercourse in the local areas of the State - Decided against assessee.

Summary

Issues Involved:
1. Legislative Competence
2. Violation of Article 301 and Article 304(b) of the Constitution
3. Retrospective Application of the Act
4. Compensatory Nature of the Entry Tax
5. Utilization of Collected Tax
6. Definition and Scope of "Local Area"
7. Validity of Notices, Assessments, Rebates, and Exemptions

Issue-wise Detailed Analysis:

1. Legislative Competence:
The petitioners challenged the legislative competence of the State of U.P. to enact the U.P. Tax on Entry of Goods into Local Areas Act, 2007. The court held that the State of U.P. did not lack legislative competence in enacting the Act, as Entry 52 of List II of the 7th Schedule, read with Article 246, gives sufficient powers to the State to levy entry tax on goods in local areas.

2. Violation of Article 301 and Article 304(b) of the Constitution:
The petitioners argued that the Act violated the freedom of trade, commerce, and intercourse guaranteed under Article 301 and was not saved by Article 304(b). The court observed that the Act must facially indicate the quantifiable or measurable benefits to the trade and commerce to be considered a compensatory tax. The court found that the provisions of the Act of 2007, including the U.P. Trade Development Fund, patently and facially indicate the benefit of the entry tax to the trade and commerce, satisfying the tests laid down in Jindal Stainless Ltd. (2).

3. Retrospective Application of the Act:
The petitioners challenged the retrospective application of the Act, arguing that an unconstitutional Act cannot be validated retrospectively. The court held that the legislature has the power to enact laws with retrospective effect, provided it removes the defects pointed out by the court. The U.P. Act of 2007 was enacted with complete retrospective effect from 1.11.1999, curing all defects and validating the levy of entry tax.

4. Compensatory Nature of the Entry Tax:
The petitioners argued that the entry tax was not compensatory in nature as it did not provide quantifiable or measurable benefits to the payers. The court found that the entire amount of entry tax collected and credited to the U.P. Trade Development Fund is utilized exclusively for facilitating trade, commerce, and industry, ensuring the tax is compensatory. The court held that the State had established that the entry tax provides quantifiable/measurable benefits to its payers.

5. Utilization of Collected Tax:
The court examined the utilization of the collected tax and found that the entire amount of entry tax is credited to the U.P. Trade Development Fund and used exclusively for the development or facilitating trade, commerce, and industry. The U.P. Trade Development Fund Management Committee ensures the proper allocation and expenditure of the funds, satisfying the requirements of a compensatory tax.

6. Definition and Scope of "Local Area":
The petitioners argued that the definition of "local area" in the Act was not valid as it included industrial townships, which are not local authorities. The court held that the notification establishing an industrial area does not take it out of the local area for the purposes of the Act. The entire State is divided into local areas for self-governance, and the entry of goods into these areas attracts the levy of entry tax.

7. Validity of Notices, Assessments, Rebates, and Exemptions:
The court did not examine the validity of notices, assessments, rebates, and exemptions in detail, as the focus was on the constitutional validity of the Act and whether the entry tax is compensatory. These issues remain open to be considered by the competent authorities under the Act.

Conclusion:
The court upheld the constitutional validity of the U.P. Tax on Entry of Goods into Local Areas Act, 2007, finding it to be a compensatory tax that does not violate the freedom of trade, commerce, and intercourse under Article 301 of the Constitution. The retrospective validation of the entry tax was also upheld. All writ petitions were dismissed, and interim orders were discharged.