2006 (4) TMI 120 - SC - VAT and Sales Tax

Whether a levy is compensatory or not has to be decided with reference to the nature of the levy itself? Held that - In the case of a tax , the levy is a part of common burden based on the principle of ability or capacity to pay. In the case of a fee , the basis is the special benefit to the payer (individual as such) based on the principle of equivalence. When the tax is imposed as a part of regulation or as a part of regulatory measure, its basis shifts from the concept of burden to the concept of measurable/quantifiable benefit and then it becomes a compensatory tax and its payment is then not for revenue but as reimbursement/recompense to the service/facility provider. It is then a tax on recompense. Compensatory tax is by nature hybrid but it is more closer to fees than to tax as both fees and compensatory taxes are based on the principle of equivalence and on the basis of reimbursement/recompense. If the impugned law chooses an activity like trade and commerce as the criterion of its operation and if the effect of the operation of the enactment is to impede trade and commerce then article 301 is violated.In the context of article 301, therefore, compensatory tax is a compulsory contribution levied broadly in proportion to the special benefits derived to defray the costs of regulation or to meet the outlay incurred for some special advantage to trade, commerce and intercourse. It may incidentally bring in net-revenue to the Government but that circumstance is not an essential ingredient of compensatory tax. The doctrine of direct and immediate effect of the impugned law on trade and commerce under article 301 as propounded in Atiabari Tea Co. Ltd. v. State of Assam 1960 (9) TMI 94 - SUPREME COURT and the working test enunciated in Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan 1962 (4) TMI 91 - Supreme Court of India for deciding whether a tax is compensatory or not vide paragraph 19 of the report, will continue to apply and the test of some connection indicated in paragraph 8 of the judgment in Bhagatram Rajeev Kumar v. Commissioner of Sales Tax 1994 (11) TMI 337 - SUPREME COURT OF INDIA and followed in the case of State of Bihar v. Bihar Chamber of Commerce 1996 (2) TMI 430 - SUPREME COURT OF INDIA , is, in our opinion, not good law. Accordingly, the constitutional validity of various local enactments which are the subject matters of pending appeals, special leave petitions and writ petitions will now be listed for being disposed of in the light of this judgment.

Issues Involved:

1. Constitutional validity of the Haryana Local Area Development Tax Act, 2000.
2. Whether the Act is violative of Article 301 and not saved by Article 304.
3. Whether the Act seeks to levy sales tax on inter-State sales, which is outside the competence of the State Legislature.
4. The parameters of the judicially evolved concept of "compensatory tax" vis-a-vis Article 301.

Detailed Analysis:

1. Constitutional Validity of the Haryana Local Area Development Tax Act, 2000:

The Act was challenged on the grounds that it violates Article 301 and is not saved by Article 304. The Act imposes entry tax on goods brought into local areas for consumption or use, affecting industries like Jindal Stripe Ltd., which purchase raw materials from outside the state and send finished products to other states. The Act was amended to clarify that the tax collected would be used for facilitating free flow of trade and commerce.

2. Violation of Article 301 and Saving by Article 304:

Article 301 ensures freedom of trade, commerce, and intercourse throughout India, subject to other provisions of Part XIII. The court examined whether the impugned Act imposes restrictions on this freedom. The concept of compensatory tax, which facilitates trade by providing necessary infrastructure, was central to this examination. The court reiterated the doctrine of "direct and immediate effect" from Atiabari Tea Co. Ltd. v. State of Assam, which means that any law that directly restricts trade would violate Article 301 unless it is compensatory in nature.

3. Levy of Sales Tax on Inter-State Sales:

The court noted that the challenge to the Act under this ground was not the primary focus of the referral order. It was confined to the question of whether the Act violates Article 301. The court did not delve deeply into whether the Act levies sales tax on inter-State sales, leaving this issue to be addressed at a later stage.

4. Parameters of Compensatory Tax vis-a-vis Article 301:

The court examined the concept of compensatory tax, distinguishing it from general taxes. Compensatory taxes are levied to reimburse the state for the cost of facilities provided to traders, and they must be proportional to the benefits derived. The court revisited the working test from Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan, which requires that the tax should facilitate trade by providing necessary infrastructure. The court overruled the "some connection" test from Bhagatram Rajeev Kumar v. Commissioner of Sales Tax and Bihar Chamber of Commerce cases, which allowed a broader interpretation of compensatory tax.

Conclusion:

The court concluded that the decisions in Bhagatram and Bihar Chamber of Commerce were erroneous to the extent that they deviated from the working test established in Automobile Transport. The doctrine of "direct and immediate effect" and the working test for compensatory tax would continue to apply. The court held that the constitutional validity of the Haryana Local Area Development Tax Act, 2000, and similar local enactments would be examined in light of this judgment. The test of "some connection" was not good law, and the court emphasized the need for a clear link between the tax and the facilities provided to traders.

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