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TMI Blog2008 (2) TMI 825X X X X Extracts X X X X X X X X Extracts X X X X ..... e, it cannot be said that the Orissa Entry Tax Act is ultra vires the Constitution. - W. P. (C) No. 6515 of 2006 - - - Dated:- 18-2-2008 - QUDDUSI I.M. AND SAMANTRAY A.K. , JJ. I.M. QUDDUSI J. In these writ petitions, the petitioners have, inter alia, challenged the validity of the Orissa Entry Tax Act, 1999 (Orissa Act 11 of 1999). The Act was enacted by the State Legislature under entry 52 of List II of the Seventh Schedule to the Constitution of India, which came into force with effect from December 1, 1999. Earlier a batch of writ petitions was filed before this court challenging the validity of the Act. This court declined to strike down the Act as ultra vires with the following directions: (1) Unless the basic ingredients, i.e., entry of Scheduled goods for the purpose of consumption, use or sale into a local area of the State, are satisfied, the provisions of the Orissa Entry Tax Act, 1999 shall not be attracted; (2) The goods which enter into a local area/areas only for the purpose of transit will not be subject to entry tax; and (3) Every manufacturer of Scheduled goods under section 26 of the Orissa Entry Tax Act shall collect by way of entry tax an amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t vide para 19 of the Report, will continue to apply and the test of 'some connection' indicated in para 8 of the judgment in Bhagatram Rajeev Kumar v. Commissioner of Sales Tax, Madhya Pradesh [1995] 96 STC 654 (SC); [1995] Suppl 1 SCC 673 and followed in the case of State of Bihar v. Bihar Chamber of Commerce's [1996] 103 STC 1 (SC); [1996] 9 SCC 136 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. Thereafter the two-judge Bench of the honourable apex court comprising of the honourable Dr. Justice Arijit Pasayat and honourable Mr. Justice S.H. Kapadia observed that the basic issue in all the appeals revolves round the concept of compensatory tax and the High Courts do not appear to have examined the issue in the proper prospective, as they were bound by the judgments in Bhagatram's case [1995] 96 STC 654 (SC); [1995] Suppl 1 SCC 673 and Bihar Chamber of Commerce's case [1996] 103 STC 1 (SC); [1996] 9 SCC 136 and the apex court referred the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Constitution, (b) article 301 applies not only to inter-State trade, commerce and intercourse but also to intra-State trade, commerce and intercourse. The freedom of trade guaranteed by article 301 is freedom from all restrictions except those which are provided by the other articles in Part XIII of the (1)Reported as National Aluminium Company Limited v. State of Orissa [2008] 15 VST 296 (Orissa). Constitution, (c) restrictions, freedom from which is guaranteed by article 301 would be such restrictions as directly and immediately restrict or impede the free-flow or movement of trade and therefore taxes may and do amount to restrictions but it is only such taxes as directly and immediately restrict trade that would fall within the purview of article 301. Therefore, the crucial point for consideration is: does the impugned restriction operate directly or immediately on trade or its movement? The State Legislature can only impose restriction after satisfying the requirements of article 304(b) of the Constitution. He further submitted that article 304(b) requires not only that the law should be in public interest but should also be reasonable and should receive the previous ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eneral including the traders that levy can still be considered to be compensatory. According to the decision in the case of Bihar Chamber of Commerce [1996] 103 STC 1 (SC); [1996] 9 SCC 136, an indirect or incidental benefit to traders by reason of stepping up the developmental activities in various local areas of the State can be brought within the concept of compensatory tax, the nexus between the tax known as compensatory tax and the trading facilities not being necessarily either direct or specific. It will appear therefore that the concept of compensatory tax has been judicially evolved as an exception to the provisions of article 301 and as the parameters of this judicially evolved concept are blurred, particularly, by reason of the decisions in Bhagatram's case [1995] 96 STC 654 (SC); [1995] Suppl 1 SCC 673 and Bihar Chamber of Commerce [1996] 103 STC 1 (SC); [1996] 9 SCC 136, the Supreme Court in the case of Jindal Stripe Ltd. v. State of Haryana [2004] 134 STC 303; [2003] 8 SCC 60 referred the matter to a larger Bench for the interpretation of article 301 vis-a-vis compensatory tax so that legal position may be authoritatively laid down with certitude by the Constit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or Union Territories any tax to which similar goods manufactured in its own State are subjected but not so as to discriminate between the imported goods and the goods manufactured in the State. Article 304 also confers upon the State Legislature power to lift the limitations imposed on it by article 301 and clause (1) of article 303. This aspect is important because the doctrine of direct and immediate effect which is mentioned in Atiabari Tea Co.'s AIR 1961 SC 232 and Automobile Transport's case AIR 1962 SC 1406 emerges from the concept of limitation embodied in article 301. This doctrine of direct and immediate effect constitutes the basis of the working test propounded vide para 19 in Automobile Transport's case AIR 1962 SC 1406. According to the Constitution Bench, therefore, whenever the law is impugned as violative of article 301, the courts will have to examine the effect of the operation of the impugned law on the inter-State and the intra-State movement of goods, which movement constitutes an integral part of trade. If the working test propounded by the Constitution Bench of seven judges in Automobile Transport's case AIR 1962 SC 1406 is not satisfie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wer, shall not be so exercised as to bring about a discrimination between the imported goods and the similar goods manufactured or produced in that State. The clause deals only with discrimination by means of taxation, it prohibits it. Hence, the issue is whether goods similar to the Scheduled goods are also manufactured or produced within the State and such goods are subjected to similar tax. The onus or burden is on the State, as to whether similar goods manufactured or produced in the State are subjected to similar tax, which it has miserably failed to discharge. He also submitted that this submission made by the State was more of an argument of despair and less of argument of substance. He further stated that in order to attract article 304(a), following conditions are to be satisfied, i.e., the manufactured goods imported from outside the State are subjected to a rate of tax by way of entry tax and the goods which are manufactured within the State are subjected to the same rate of tax. If the above conditions are satisfied then the taxes are not discriminatory and therefore the provisions of article 304(a) would be applicable. In the present case the State has not given any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered. He has submitted that in the cases where any particular goods are not produced in Orissa, the power to legislate under article 304(a) of the Constitution is not available. For example, no foreign liquor is produced in the State of Orissa and, as such, in respect of foreign liquor entering into the local area, the State has no power to legislate or enact law under the provisions of article 304(a) of the Constitution. He has, however, placed reliance on the case of State of Karnataka v. Hansa Corporation [1980] 4 SCC 697 wherein in paras 27 and 30, it has been held as follows: On a conspectus of these decisions it appears well-settled that if a tax is compensatory in character it would be immune from the challenge under article 301. If on the other hand the tax is not shown to be compensatory in character it would be necessary for the party seeking to sustain the validity of the tax law to show that the requirements of article 304 have been satisfied. Article 304 lifts the embargo placed on the legislative power of State to enact law which may infringe the freedom of inter-State trade and commerce if its requirements are fulfilled. Article 304(a) imposes a restriction o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ales tax legislation. It is not an essential characteristic of sales tax that the seller must have the right to pass it on to the consumer, nor is the power of the Legislature to impose a tax on sales conditional on its making a provision for sellers to collect the tax from the purchasers. Whether a law should be enacted, imposing a sales tax, or validating the imposition of sales tax, when the seller is not in a position to pass it on to the consumer, is a matter of policy and does not affect the competence of the Legislature . . . Mr. S.C. Lal has relied upon the submission of Dr. Pal, learned Senior Advocate. However, he has further submitted that to see whether the tax is compensatory in nature, it is necessary to take notice that general collection of entry tax goes to the consolidated fund of the State of Orissa and it is not allowed that the some levy should be compensatory and some should not be. Shri J.K. Das, learned Senior Advocate, also relying upon the arguments of Dr. Pal and Shri A.K. Ganguly, learned Senior Advocates, further submitted that the burden to prove whether the tax levied is quantifiable, compensatory or regulatory in nature is on the State as l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. It does not have deleterious effect on trade and commerce. The impact of the levy is negligible. No trade barrier is caused. Effect on intra-State trade and commerce and inter-State trade and commerce is the same; (d) the inclusion of freight charges in the purchase value of the goods is not determinative that the levy is on movement of goods, as contended. Shri Patnaik further contended that the object of the Act is to tax goods coming into a local area both from within the State and outside. The Legislature has used plain, clear and unambiguous language to conclusively express its intention. He further contended that the claim that the definition of purchase value in section 2(j) of the Act does not include customs duty for which the goods imported from outside the country does not come within the scope of the Act is not sustainable. The imposition of the levy shall be strictly in accordance with the charging provision. So construed, goods imported from outside the State are within the scope of the Act. The learned counsel submitted that in view of the position stated in the counter-affidavit, the Act without hitting article 301 of the Constitution of India is a compensat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the State has failed to show that the Orissa entry tax is reimbursement/ recompense for the quantifiable and measurable benefits provided to trades people and the provision for realisation of tax therein was not compensatory in nature. Therefore, this point is not to be redetermined here in these cases. The case of the State is that entry tax is an indirect tax on goods. The legal incidence of the levy is both on traders (dealers) in common with the consumers. The tax is borne by the consumers. The levy has not chosen movement of trade and commerce as the criteria of its operation. In pith (1)Reported as National Aluminum Company Limited v. State of Orissa [2008] 15 VST 296 (Orissa). and substance, the tax is on consumption, use or sale aspect of the goods in the local area. It is not a restriction or burden or impediment on trade and commerce. It does not have any direct or immediate impact on trade or its movement. The doctrine of direct and immediate effect enunciated in Atiabari's case AIR 1961 SC 232 does not apply to the tax under the impugned ct. Therefore, the levy is outside the scope of article 301. There is only one rate of tax on goods or class or classes of goo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vires article 301 and is valid. Explaining the power of the State Legislature under article 301 it has been held by the Supreme Court in para 31(b) of the decision in Jindal's case [2006] 145 STC 544 (SC); [2006] 4 SCALE 300; [2006] 7 SCC 241 that in other words, clause (a) of article 304 authorises a State Legislature to impose a non-discriminatory tax on goods imported from sister State(s), even though it interferes with the freedom of trade and commerce guaranteed by article 301. The Supreme Court in V. Guruviah Naidu and Sons v. State of Tamil Nadu [1976] 38 STC 565 (SC) held as under (at page 570 of STC): Article 304(a) does not prevent levy of tax on goods: what it prohibits is such levy of tax on goods as would result in discrimination between goods imported from other States and similar goods manufactured or produced within the State. The object is to prevent discrimination against imported goods by imposing tax on such goods at a rate higher than that borne by local goods since the difference between the two rates would constitute a tariff wall or fiscal barrier and thus impede the free-flow of inter-State trade and commerce . . . In the case of Shree Maha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lature to impose a non-discriminatory tax on goods imported from sister State(s), even though it interferes with the freedom of trade and commerce guaranteed by article 301. Secondly, the ban under article 303(1) shall stand lifted even if discriminatory restrictions are imposed by the State Legislature provided they fulfil the following three conditions, namely, that such restrictions shall be in public interest; they shall be reasonable; and lastly, they shall be subject to the procurement of prior sanction of the President before introduction of the Bill. In the case of Guruviah Naidu [1976] 38 STC 565, the Supreme Court was of the view that object of article 304(a) is to prevent imposition of a tax at a higher rate on goods imported than that borne by the local goods since the difference between the two rates would constitute a tariff wall or fiscal barrier and thus impede the free-flow of trade and commerce. The Supreme Court in Automobile Transport (Rajasthan) Ltd. AIR 1962 SC 1406 held that the State Legislature may impose different kinds of taxes and duties, such as property tax, professional tax, sales tax, excise duty, etc., and legislation in respect of any one of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d octroi with effect from April 1, 1979. However, no one was in doubt that octroi was a major source of revenue to municipalities and its abolition would cause such a dent on municipal finances that compensation for the loss would be inevitable. Accordingly, the State Government undertook a policy of compensating the municipalities year by year. For generating funds for this compensation, rates of sales tax were raised and in some cases a surcharge was levied. The amount so collected was not sufficient to bridge the gap in municipal budget. To further augment the finances for compensating the municipalities, additional fund was sought to be generated by levy of tax under the impugned legislation. No doubt, the tax levied was one on entry of Scheduled goods in local areas meaning thereby it had all the broad features of octroi, yet the manner of levy, the method of collection and the persons liable to pay the same were so devised by the impugned Act as to remove the obnoxious features of octroi. As the charging section shows, the tax was to be levied on entry of Scheduled goods in a local area at a rate to be specified by the Government not exceeding two per cent ad valorem. The tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also reproduced hereinbelow: 'Local area' means the areas within the limits of any (i) Municipality constituted under the Orissa Municipal Act, 1950 (Orissa Act 23 of 1950); (ii) Grama Panchayat constituted under the Orissa Grama Panchayats Act, 1963 (Orissa Act 1 of 1965); (iii) Other local authority by whatever name called, constituted or continued in any law for the time being in force; And includes the area within an Industrial township constituted under section 4 of the Orissa Municipal Act, 1950 (Orissa Act 23 of 1950). Perusal of definition of entry of goods shows entry of goods into the local area either from any place outside that local area within the State or any place outside the State for sale, consumption and use in uniform way. Therefore, if entry of goods is made into a particular local area from any place outside that local area within the State of Orissa or outside the State of Orissa, there would be no discrimination between them. Now perusal of article 304 of the Constitution is necessary which is reproduced as under: 304. Restrictions on trade, commerce and intercourse among States. Notwithstanding anything in article ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ations imposed on it by article 301 and clause (1) of article 303. This aspect is important because the doctrine of 'direct and immediate effect' which is mentioned in Atiabari Tea Co. Ltd. AIR 1961 SC 232, emerges from the concept of 'limitation' embodied in article 301. It is this doctrine of direct and immediate effect which constitutes the basis of the working test propounded vide paragraph 19 in Automobile Transport AIR 1962 SC 1406. Therefore, whenever the law is impugned as violative of article 301, the courts will have to examine the effect of the operation of the impugned law on the inter-State and the intra-State movement of goods, which movement constitutes an integral part of trade. Giving reasons for referral order, the Constitution Bench in para 6 of Jindal case [2006] 145 STC 544 (SC); [2006] 4 SCALE 300; [2006] 7 SCC 241 held as under: 6. In Atiabari Tea Co. Ltd. v. State of Assam AIR 1961 SC 232, 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 restric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rier and involves an element of unfavourable bias . In Hansa Corporation [1980] 4 SCC 697, the apex court held that there is always a presumption of constitutionality of a statute. If the language is rather not clear and precise, as it ought to be, attempt of the court is to ascertain the intention of the Legislature and put that construction which would lean in favour of the constitutionality unless such construction is wholly unreasonable. However, where one has to look at a section not very well drafted but the object behind the legislation and the purpose of enacting the same is clearly discernible, the court cannot hold its hand and blame the draftsman and chart an easy course of striking down the statute. In such a situation the court should be guided by a creative approach to ascertain what was intended to be done by the Legislature in enacting the legislation and so construe it has to give force and life to the intention of the Legislature. The contention raised by Shri A.K. Ganguly, Senior Advocate, is that the law under article 304(a) cannot be enacted in the case where the goods are not produced or manufactured in that State. Clause (a) of article 304 applies on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is court held that it was well-settled that taxing laws can be restrictions on trade, commerce and intercourse, if they hampered free-flow of trade and if they are not what can be termed to be compensatory tax or regulatory measure; that sales tax of the kind under consideration could not be said to be a measure regulating any trade or a compensatory tax levied for the use of trading facilities; that the sales tax which had the effect of discriminating between goods of one State and goods of another may affect the free-flow of trade and it will then offend against article 301 but will be valid only if it comes within the terms of article 304(a). The court finally held the impugned rule 16(2) invalid. The instant case is on all fours of this decision. Purchase value has been defined in clause (j) of section 2 of the Act as under: 'Purchase value' means the value of scheduled goods as ascertained from original invoice or bill and includes insurance charges, excise duties, countervailing charges, sales tax, value added tax or, as the case may be, turnover tax, transport charges, freight charges and all other charges incidental to the purchase of such goods. The de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at State would not be authorised to make discrimination between one State and another by any law with regard to any entry relating to trade and commerce in any of the Lists in the Seventh Schedule. We are concerned with entry 52 of List II. Therefore, in plain and natural meaning of article 303 vis-a-vis the instant matter, the State of Orissa has no power to make such law which discriminates between one State and another in respect of imposing tax on entry of goods in the State of Orissa. Clause (a) of article 304 which is an independent clause and provides that notwithstanding anything in article 301 or article 303, the Legislature of the State has been empowered to make law to impose any tax on goods imported from other States or Union Territories to which similar goods manufactured or produced in that State, here we may say in the State of Orissa, as not to discriminate between goods so imported and goods so manufactured or produced in the State of Orissa. Clause (b) of article 304, however, provides that notwithstanding anything in article 301 or article 303, the Legislature of a State may by law impose such reasonable restrictions on the freedom of trade, commerce and inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that State has obtained the previous sanction of the President. To sum up, we are of the opinion that the State has the following three alternatives to impose a levy or tax which would not be violative of article 301 meaning thereby it will not be treated as a hindrance in trade, commerce and intercourse. They are: (i) if the levy imposed is compensatory in nature and facially or patently indicates the quantifiable data on the basis of which the compensatory levy or tax is sought to be levied and the Act facially indicates the benefits which is quantifiable or measurable and the proportionality of the quantifiable benefits and should be in the form of reimbursement/recompense for the quantifiable and measurable benefits to be provided to its payers or trades people; (ii) if the tax is levied under clause (a) of article 304 but subject to conditions given therein that such levy or tax on goods would not result in discrimination between the goods imported from other States and similar goods manufactured or produced within the State entering into a local area. However, the scope of clause (a) of article 304 is limited to the extent that the State cannot impose tax on the g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned Senior Advocate appearing for the State, to the effect that the Orissa Entry Tax Act has been enacted following the provisions of (1)Reported as National Aluminium Company Limited v. State of Orissa [2008] 15 VST 296 (Orissa). article 304(a) of the Constitution is sustainable in the eye of law and, therefore, it cannot be said that the Orissa Entry Tax Act is ultra vires the Constitution. Some of the petitioners have raised objections that the assessing authorities have made the assessments without considering that the goods imported to a local area either from outside the State or from abroad are not taxable. For that purpose instead of filing appeals, they have approached this court questioning the validity of the Orissa Entry Tax Act. Since we have upheld the validity of the Orissa Entry Tax Act, we give them liberty to file appeals against the order of assessments and if such appeals are filed within a period of thirty days from today, the same shall be entertained and shall be dealt with in accordance with law. To enable the petitioners to file appeals, it is provided that till thirty days from today or till filing of the appeals, whichever is earlier, no coercive ..... X X X X Extracts X X X X X X X X Extracts X X X X
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