2017 (3) TMI 1956 - SC - VAT / Sales Tax

Levy of entry tax - levy was in the nature of compensatory tax or not - entire State can be treated as 'local area' for the purposes of entry tax or not - levy of entry tax on the goods which are directly imported from other countries and brought in a particular State - whether the benefits given to certain categories of manufacturers would amount to discrimination Under Section 304 or not - HELD THAT - The impugned Act came into force w.e.f. 5th May, 2000, to provide for levy and collection of tax on the entry of goods into the local areas of the State for consumption or use therein. The Act is enacted to provide for levy and collection of tax on the entry into a local area of the State, of a motor vehicle for use or sale, and of other goods for use or consumption therein. The Act seeks to impose entry tax on all goods brought into a local area . The entire State is divided into local areas. The Act covers not only vehicles bringing goods into the State but also vehicles carrying goods from one local area to another. However, those who pay sales tax to the State are exempt from payment of entry tax. Ultimately, the entry tax only falls on concerns, like Jindal Strips, which, by virtue of the provisions of the Central Sales Tax Act, 1956, pay sales tax on purchase of raw-material and sale of finished goods to other States and do not pay sales tax to the State of Haryana. This is the context in which the challenge to the Act Under Article 301 has been made. Reasons for referral order - HELD THAT - In Atiabari Tea Co. Ltd. etc. v. State of Assam and Ors. 1960 (9) TMI 94 - SUPREME COURT , it was held that taxing laws are not excluded from the operation of Article 301, which means that tax laws can and do amount to restrictions on the freedoms guaranteed to trade under Part-XIII of the Constitution. However, the prohibition of restrictions on free trade is not an absolute one. Statutes restrictive of trade can avoid invalidation if they comply with Article 304(a) or (b) - Reference was made to Nine Judges' Bench, as indicated at the outset of this order. The appropriate course of action would be to permit the Appellants to file fresh petitions by May 31, 2017, raising the aforesaid issues with necessary factual background or any other constitutional/statutory issue which arises for consideration. All these appeals/writ petition are, accordingly, disposed of. The interim orders which were passed by this Court and which are continued in these appeals shall continue till May 31, 2017. It will be open to the Appellants to seek interim orders.

Summary

Issues Involved:

1. Validity of compensatory tax theory.
2. Interpretation of Article 301 and 304(a) of the Constitution of India.
3. Legality of treating the entire State as a 'local area' for entry tax purposes.
4. Levy of entry tax on goods imported from other countries.
5. Discrimination in tax benefits provided to certain manufacturers.

Detailed Analysis:

1. Validity of Compensatory Tax Theory:

The Supreme Court addressed the validity of the compensatory tax theory, which was initially propounded in the Automobile Transport (Rajasthan) Ltd. case. The Court held that the compensatory tax theory has no juristic basis and is therefore rejected. This decision overruled previous judgments that relied on this theory, including those in the Atiabari and Automobile Transport cases.

2. Interpretation of Article 301 and 304(a) of the Constitution of India:

The Court clarified that taxes simpliciter are not within the contemplation of Part XIII of the Constitution, and the word 'Free' in Article 301 does not imply freedom from taxation. It was emphasized that only discriminatory taxes are prohibited by Article 304(a), and non-discriminatory taxes do not infringe Article 301. Furthermore, clauses (a) and (b) of Article 304 should be read disjunctively, meaning a violation of Article 304(a) cannot be justified by compliance with Article 304(b).

3. Legality of Treating the Entire State as a 'Local Area':

The issue of whether the entire State can be considered a 'local area' for the purpose of levying entry tax was left open for determination in appropriate proceedings. The Court did not provide a definitive ruling on this matter, indicating that it requires further examination by regular benches.

4. Levy of Entry Tax on Goods Imported from Other Countries:

The Court also left open the question of whether entry tax can be levied on goods entering the landmass of India from another country. This issue was not resolved in the present judgment and was deferred for consideration in future proceedings.

5. Discrimination in Tax Benefits Provided to Certain Manufacturers:

The judgment addressed concerns regarding potential discrimination arising from tax benefits such as incentives and setoffs granted to certain manufacturers. The Court noted that Article 304(a) prohibits hostile discrimination and not mere differentiation. Incentives aimed at developing economically backward areas, if non-hostile, would not violate Article 304(a). However, the determination of whether the levies in the present case satisfy this test was left to be decided by the regular benches hearing the matters.

Conclusion:

The Supreme Court's judgment provided significant clarity on the interpretation of constitutional provisions related to taxation and trade. It rejected the compensatory tax theory, clarified the scope of Articles 301 and 304, and deferred certain complex issues for further examination. The Court allowed appellants to file fresh petitions with necessary factual backgrounds to address unresolved issues, granting liberty to seek interim orders from the High Courts. The judgment has implications for fiscal legislation and the design of tax systems by states, ensuring non-discriminatory practices in line with constitutional mandates.