2016 (11) TMI 545 - SC - VAT / Sales Tax

Constitutional validity of levy of entry tax - power of the state legislature - Article 304(a) of the Constitution - non-obstante clause - Interpretation of word Free used in Article 301 - concept of compensatory tax - separation of power between the Legislature and judiciary on the ground that levy of taxes under Article 304(b) - distinction between a tax and a fee - HELD THAT - The essential difference between a tax and a fee is that while a tax has no element of quid pro quo a fee without that element cannot be validly levied. The difference between a tax and the fee has been examined and elaborated in a long line of decisions of this Court. Suffice it to say that the use of the non-obstante clause in Article 304 has had its share of criticism from the very inception which criticism has to an extent been prophetic for the interpretation of Part XIII has indeed been a lawyer s paradise over the past fifty years or so. Seervai has in his treatise adverted to this anomaly arising from the use of the non-obstante clause and said that the same covers both the clauses (a) and (b) of Article 304. He argues with considerable forensic force that reference to Article 301 in the non-obstante clause is meaningless having regard to the fact that the freedom granted thereunder is itself subject to other provisions of Part XIII including Article 304. This would necessarily imply that Article 304 (a) and (b) do not subtract anything from Article 301. That appears to us to be the correct view on the subject. While it is true that legislature does not waste words and that no part of a legislation can be rendered a surplusage the only rational meaning that can be attributed to the non-obstante clause appearing in Article 304 is that the same was used only as a manner of abundant caution and a possible reassurance that Article 301 is indeed subordinate to Article 304 which it was even otherwise without the use of that clause. The net effect of the discussion therefore is that the expression subject to other provisions of this Part appearing in Article 301 and the non-obstante clause appearing in Article 304 do not traverse in different directions. There is no conflict in the two provisions on account of the use of the said expressions. Interpreted individually or conjointly the said two expressions simply mean that Article 304 takes precedence over Article 301. While Article 304(a) recognizes the power of the State Legislatures to tax goods imported from other State it also imposes limitations on the exercise of that power. On the other hand clause (b) to Article 304 permits imposition of reasonable restrictions subject to the proviso appearing below that clause. We have thus no hesitation in rejecting the argument that the use of the non-obstante clause in Article 304 is suggestive of the Constitution recognizing taxes as restrictions under Article 301 or that the power to impose a reasonable restriction under Article 304(b) is meant to include the power to levy taxes so that levy of taxes may be permissible only in case the procedure provided under the proviso is followed. Final Conclusion In terms of the signed order by majority the Court answers the reference in the following terms 1. Taxes simpliciter are not within the contemplation of Part XIII of the Constitution of India. The word Free used in Article 301 does not mean free from taxation . 2. Only such taxes as are discriminatory in nature are prohibited by Article 304(a). It follows that levy of a non-discriminatory tax would not constitute an infraction of Article 301. 3. Clauses (a) and (b) of Article 304 have to be read disjunctively. 4. A levy that violates 304(a) cannot be saved even if the procedure under Article 304(b) or the proviso there under is satisfied. 5. The compensatory tax theory evolved in Automobile Transport case and subsequently modified in Jindal s case has no juristic basis and is therefore rejected. 6. Decisions of this Court in Atiabari Automobile Transport 1960 (9) TMI 94 - SUPREME COURT and Jindal cases ( supra ) and all other judgments that follow these pronouncements are to the extent of such reliance over ruled. 7. A tax on entry of goods into a local area for use sale or consumption therein is permissible although similar goods are not produced within the taxing state. 8. Article 304 (a) frowns upon discrimination (of a hostile nature in the protectionist sense) and not on mere differentiation. Therefore incentives set-offs etc. granted to a specified class of dealers for a limited period of time in a non-hostile fashion with a view to developing economically backward areas would not violate Article 304(a). The question whether the levies in the present case indeed satisfy this test is left to be determined by the regular benches hearing the matters. 9. States are well within their right to design their fiscal legislations to ensure that the tax burden on goods imported from other States and goods produced within the State fall equally. Such measures if taken would not contravene Article 304(a) of the Constitution. The question whether the levies in the present case indeed satisfy this test is left to be determined by the regular benches hearing the matters. 10. The questions whether the entire State can be notified as a local area and whether entry tax can be levied on goods entering the landmass of India from another country are left open to be determined in appropriate proceedings.

Summary

Issues Involved:
1. Whether the levy of a non-discriminatory tax per se constitutes an infraction of Article 301 of the Constitution of India.
2. If a compensatory tax can also fall foul of Article 301 of the Constitution.
3. Tests for determining whether a tax or levy is compensatory in nature.
4. Validity of Entry Tax levied by States in light of Articles 301 and 304 of the Constitution.

Detailed Analysis:

1. Non-Discriminatory Tax and Article 301:
The Court held that taxes simpliciter are not within the contemplation of Part XIII of the Constitution of India. The word 'free' used in Article 301 does not mean "free from taxation." Only such taxes as are discriminatory in nature are prohibited by Article 304(a). It follows that the levy of a non-discriminatory tax would not constitute an infraction of Article 301.

2. Compensatory Tax and Article 301:
The compensatory tax theory evolved in the Automobile Transport case and subsequently modified in Jindal’s case has no juristic basis and is therefore rejected. All legislation, including compensatory or regulatory, has to be examined in accordance with the Constitutional Scheme as contained in Part XIII of the Constitution. The nature and content of taxation at best may shed light on the aspect as to whether it impedes/restricts the freedom of trade, commerce, and intercourse or facilitates the same.

3. Tests for Determining Compensatory Nature of Tax:
The Court did not find it necessary to answer the question regarding the tests for determining whether a tax or levy is compensatory in nature, as the compensatory tax theory itself was found incompatible with the Constitutional Scheme.

4. Validity of Entry Tax Levied by States:
To determine whether Entry Tax levied by different States violates Article 301, each statute has to be looked into and examined as per the discussions and conclusions detailed in the judgment. A law made by State Legislature complying with clause (a) of Article 304 and not containing any restriction on the freedom of trade, commerce, and intercourse need not comply with Article 304(b). However, a law even though complying with Article 304(a) but containing restrictions on freedom of trade, commerce, and intercourse has to be routed through the proviso to clause (b) of Article 304 of the Constitution.

Separate Judgments and Concurrences:
- The Chief Justice pronounced a separate judgment comprising Hon’ble Mr. Justice A.K. Sikri and Hon’ble Mr. Justice A.M. Khanwilkar.
- Hon’ble Mr. Justice S.A. Bobde, Hon’ble Mr. Justice Shiva Kirti Singh, Hon’ble Mr. Justice N.V. Ramana, Hon’ble Mrs. Justice R. Banumathi, Hon’ble Dr. Justice D.Y. Chandrachud, and Hon’ble Mr. Justice Ashok Bhushan pronounced separate judgments.

Final Conclusions:
1. Taxes simpliciter are not within the contemplation of Part XIII of the Constitution of India.
2. Only such taxes as are discriminatory in nature are prohibited by Article 304(a).
3. Clauses (a) and (b) of Article 304 have to be read disjunctively.
4. A levy that violates Article 304(a) cannot be saved even if the procedure under Article 304(b) or the proviso thereunder is satisfied.
5. The compensatory tax theory evolved in Automobile Transport and subsequently modified in Jindal’s case has no juristic basis and is therefore rejected.
6. Decisions of this Court in Atiabari, Automobile Transport, and Jindal cases (supra) and all other judgments that follow these pronouncements are to the extent of such reliance overruled.
7. A tax on the entry of goods into a local area for use, sale, or consumption therein is permissible although similar goods are not produced within the taxing state.
8. Article 304(a) frowns upon discrimination (of a hostile nature in the protectionist sense) and not on mere differentiation.
9. States are well within their right to design their fiscal legislations to ensure that the tax burden on goods imported from other States and goods produced within the State fall equally.
10. The questions whether the entire State can be notified as a local area and whether entry tax can be levied on goods entering the landmass of India from another country are left open to be determined in appropriate proceedings.