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TMI Blog2008 (1) TMI 837X X X X Extracts X X X X X X X X Extracts X X X X ..... itely come under the activities like movement of trade, commerce and intercourse for the free-flow of trade and commerce. Therefore, 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. - - - - - Dated:- 17-1-2008 - QUDDUSI I.M. AND SAMANTRAY A.K. , JJ. I.M. QUDDUSI J. This is the second journey of the petitioners in these writ petitions to this court occasioned due to the direction of the honourable Supreme Court of India. For the purpose of levy and collection of tax on the entry of goods into the local areas of the State of Orissa for consumption, use or sale therein and matters incidental thereto and connected therewith, Orissa State Legislature promulgated the Orissa Entry Tax Act, 1999 (Orissa Act 11 of 1999) on September 20, 1999. Validity of the said Act was challenged in the aforesaid writ petitions, inter alia, on the following grounds: (a) The State Legislature lacked legislative competence to enact the same; (b) The Act opposed to articles 301 and 304 of the Constitution of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the matters doubted the correctness of the views expressed in Bhagatram Rajeev Kumar v. Commissioner of Sales Tax, Madhya Pradesh [1995] 96 STC 654; [1995] (Suppl.) 1 SCC 673 which was relied on in a subsequent decision in State of Bihar v. Bihar Chamber of Commerce [1996] 103 STC 1 (SC); [1996] 9 SCC 136, the matters were referred to a larger Bench by order dated September 26, 2003. The Constitution Bench in Jindal Stainless Ltd. v. State of Haryana [2006] 145 STC 544 (SC); [2006] 4 SCALE 300; [2006] 7 SCC 241 concluded as follows (page 575 of STC): In our opinion, the doubt expressed by the referring Bench about the correctness of the decision in Bhagatram's case [1995] 96 STC 654 (SC); [1995] (Suppl.) 1 SCC 673 followed by the judgment in the case of Bihar Chamber of Commerce [1996] 103 STC 1 (SC); [1996] 9 SCC 136 was well-founded. We reiterate that 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 AIR 1961 SC 232 and the working test enunciated in Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan AIR 1962 SC 1406 for deciding whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use of certain facilities for the better conduct of their business and paying not patently much more than what is required for providing the facilities. He submitted that the Statement of Object and Reasons and the Act itself do not indicate that the tax has been levied without providing for any facility to ensure and make easy the free-flow of trade. He contended that the entry tax is a fiscal measure which impedes free-flow of trade. He next contended that the Orissa Entry Tax Act and the Rules framed thereunder are violative of article 301 of the Constitution. Relying on Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan AIR 1962 SC 1406, he contended that only such taxes as directly and immediately restrict trade would fall within the purview of article 301 and that any restriction in the form of taxes imposed on the carriage of goods or their movement by the State Legislature can only be done after satisfying the requirements of article 304(b). He further contended that the Act provides for restrictions which directly and immediately impede free-flow of trade and would violate article 301. A compensatory levy and/or tax is an exception to article 301. If the purpose o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid by the dealers is not utilised to provide any special benefit to the trades people rather admittedly it is utilised to discharge the common burden of the State. Therefore, the levy cannot be classified as a sub-class of fee. He has further argued that as a result of the reference the present decision in the case of Jindal Stainless Ltd. v. State of Haryana [2006] 145 STC 544 (SC); [2006] 4 SCALE 300; [2006] 7 SCC 241 [hereinafter referred as Jindal Stainless (2) ] has been rendered by a Constitution Bench consisting of five Judges. The Constitution Bench on an analysis of the relevant provisions of Part XIII of the Constitution analysed the scope of articles 301, 302 and 304. The Constitution Bench observed that article 301 states that subject to the other provisions of Part XIII, trade, commerce and intercourse throughout India shall be free. It is not freedom from all laws but freedom from such laws which restrict or affect activities of trade and commerce amongst the States. Although article 301 is positively worded, in effect, it is negative as freedom correspondingly creates general limitation on all legislative power to ensure that trade, commerce and intercourse thr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve 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 satisfied in that event the State has to satisfy that such restrictions complied with the provisions of article 304(b) of the Constitution. Shri J. Patnaik, learned Senior Advocate, though appeared for the State in other fresh cases, it is necessary to consider his arguments also. He argued that the Orissa 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. He further argued that in pith and substance, the tax is on consumption, use or sale aspect of the goods in a 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. He has further argued tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cular traffic of trade and commerce. The facilities are provided by positive action by the State or its agencies. Referring to the various legal principles and detailed facts incorporated in the counteraffidavit/additional counter-affidavit, he contended that the levy is compensatory. He further submitted that in any view of the matter, the levy is outside article 301 and, therefore, compliance of article 304(b) is not necessary. He further contended that in any view of the matter the levy is intra vires article 301 and valid. As regards the scope of consideration, he has submitted that the honourable Supreme Court in the order dated July 14, 2006 observed that (a) the basic issue revolves round the concept of compensatory tax and (b) the said issue has not been examined by the High Courts in proper perspective. The order envisages, as the concept of compensatory tax has been laid down and perspective of examination has been stipulated by the Constitution Bench in Jindal Stainless [2006] 145 STC 544 (SC); [2006] 4 SCALE 300; [2006] 7 SCC 241, the basic issue as to whether the impugned levy was compensatory in nature has to be decided accordingly. He further submitted that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it filed on December 9, 2006 which are as under: 12. One of the important aspects of entry tax is to lend financial support and strength to the Urban Local Bodies (ULBS) and other local authorities to create facilities and infrastructure for expansion of trade and commerce as the meagre source of income from the octroi had been stopped. 13.. Under section 36 of the 1999 Act the State Government is to contribute the proceeds of the revenue to the Urban Local Bodies. The year wise assignment of tax amount out of the entry tax to Urban Local Bodies (ULV wise) from the years 1999-2000 to 2006-07 is prepared in the form of a schedule and the same is annexed hereto and marked as annexure A-1. 16.. This opposite party stated the detail expenditure incurred for laying down the roads, maintaining the old roads and expending them along with necessary culverts, bridges and subways. It would not be out of place to mention that in the State, road communications serve a major need for transportation of goods both for inter-State and intra-State transportation. The State spends much more than the proceeds of the entry tax for the abovementioned purpose. A comparative table of tax pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , village roads are being laid down. The State some times gets the loan from outside agencies like Union Government, World Bank, etc. But the repayments of the loan are being made through the public exchequer, where the proceeds of entry tax is also a constituent. The State has repaid the loan amount as well as a portion of the principal amount. The year-wise details are stated in the form of a Schedule appended to this counter-affidavit and marked as annexure D-1. Thus this expenditure is borne with a purpose for allowing the growth of trade and commerce. 22.. That the State Government through industries department incurs expenditure on establishment of growth centres, urban hats, testing laboratories. Besides expenditure, in terms of financial support to industries for making capital investment including on capital goods, are also made by which purchase and consequent flow of capital goods, predominantly from outside the State, are facilitated. Moreover, the facilities in industrial areas established by the State agencies have also immediately contributed in augmenting flow of trade and commerce into/out of the State. It need not be emphasised that the 'industries ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring the years 1999-2000, 2000-01, 2001-02, 2002-03, 2003-04, 2004-05, 2005-06 and 2006-07 have been annexed as annexures A-1 to F-1 to the counteraffidavit filed on December 9, 2006. The State has filed additional counter-affidavit on May 15, 2007. Paragraphs 4 and 5 of the said counter-affidavit filed by the State on May 15, 2007 are as under: 4. That, the State Government has submitted its counter in different Schedules based on departmental actuals and as per accounts, and revised estimates. The statements of accounts have now been extracted from the finance accounts and budget document of the relevant years and pre-actual figures certified by the concerned department for 2005-06 where the actuals have not been published. The figures are comprehended in the form of a Schedule for better and proper appreciation of the fact/figure indicating the collection of revenue through entry tax from the year 1999-2000 to the year 2006-07. The State Government in its additional affidavit had supplied the details and the same are summarised and are stated in the form of a Schedule. Some of the major relevant figures coming within the ambit of compensatory nature of expenditure are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al expenditure by State on inland transport Funds provided by State ULBs out of ET collection Total expenditure made by the State Govt. for the purpose indicated in columns 3 to 9 Expen as a % of ET revenue 1 2 3 4 5 6 7 8 9 10 1999-00 34.18 2.24 114.20 0.00 0.02 0.00 31.87 148.33 433.97 2000-01 194.04 0.39 143.54 0.00 0.04 0.00 84.93 228.90 114.97 2001-02 252.04 0.00 114.70 2.86 0.07 0.00 94.83 212.46 84.30 2002-03 313.07 39.28 261.32 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of which maintenance expenditure 3054 (Rev) 5054 (Cap) Total Works Dept. (D. No. 7) H Ud Dept. (D. No. 13) PR Dept. (D. No. 17) WR Dept. (D. No. 20) RD Dept. (D. No. 28) 1998-99 101.21 120.36 221.57 51.73 0.00 0.00 0.00 49.48 1999-00 138.17 117.62 255.79 73.51 0.00 0.00 0.00 64.66 2000-01 142.12 149.17 291.29 71.39 0.00 0.00 0.00 70.74 2001-02 130.18 114.70 244.88 67.17 0.00 0.00 0.00 56.76 2002-03 140.34 302.47 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 115.19 46.87 162.06 78.16 2.18 80.34 2005-06 122.56 101.39 223.95 91.07 22.96 114.03 2006-07 144.06 197.01 341.07 117.09 28.06 145.15 Dr. M.R. Panda, learned Senior Counsel appearing for the State in these seven writ petitions, submitted that the items of some of the relevant expenditure are actual capital outlay on roads and bridges (non-plan) actual capital outlay on roads and bridges (plan), expenditure incurred by industries department on growth centre, funds provided by State to Co-operatives for infrastructure development, capital expenditure by State on inland transport, funds provided by State to ULBS out of entry tax collection. The gist of the expenditure would go to show that the State had spent 433.97 per cent, 117.97 per cent, 84.30 per cent, 131.20 per cent, 82.51 per cent, 124.06 per cent, 95.13 per cent, of collected entry tax in respect of the years 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 006] 145 STC 544 (SC); [2006] 4 SCALE 300; [2006] 7 SCC 241 by the Constitution Bench and the honourable two-judge Bench of the apex court has referred the only issue to this court, i.e., whether the impugned levy was compensatory in nature, we think it proper to discuss the latest decision of the Constitution Bench in Jindal case [2006] 145 STC 544 (SC); [2006] 4 SCALE 300; [2006] 7 SCC 241. Before proceeding further, it is necessary to peruse the provisions of the Orissa Entry Tax Act, 1999 (hereinafter referred to as the Act ). First of all the Preamble of the Act is to be reproduced, which is as under: An Act to provide for the levy and collection of tax on the entry of goods into the local areas of the State of Orissa for consumption, use or sale therein and matters incidental thereto and connected therewith The Statement of Objects and Reasons of the Act is as follows: The Bill seeks to provide for the levy of a tax on entry of goods into a local area for consumption, use or sale therein as enjoined under entry 52 of the List II of the Seventh Schedule to the Constitution of India. The tax is proposed to be levied on every dealer in Scheduled goods or any perso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 26. Manufacturer to collect and pay tax. (1) Notwithstanding anything contained in this Act, every manufacturer of Scheduled goods who is registered under the VAT Act shall in respect of sale of its finished products effected by it to a buying dealer or person, either directly or through an intermediary, shall collect by way of tax an amount equal to the tax payable on the value of such finished products under section 3 of this Act by the buying dealer or person in prescribed manner and shall pay the tax so collected into the Government treasury: Provided that the tax so payable by a manufacturer under this subsection during a year shall be reduced by the amount of tax paid under this Act on the raw materials which directly go into the composition of the finished products during that year in the prescribed manner: Provided further that where a buying dealer, under the Rules providing for the rates of tax required to be specified with reference to section 3, is entitled to pay tax at a concessional rate or not to pay any tax, as the case may be, in respect of such finished products, the manufacturer shall, on a declaration furnished by the buying dealer in the prescribed form ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... freedom of trade, commerce or intercourse with or within that State as may be required in the public interest: Provided that no Bill or amendment for the purpose of clause (b) shall be introduced or moved in the Legislature of a State without the previous sanction of the President. In Jindal case [2006] 145 STC 544 (SC); [2006] 4 SCALE 300; [2006] 7 SCC 241 it has been held by the Constitution Bench that article 301 is not only an authorisation to enact laws for the protection and encouragement of trade and commerce amongst the States but by its own force creates an area of trade free from interference by the State and, therefore, article 301 per se constitutes limitation on the power of the State. Article 301 is, however, subject to the other provisions of articles 302, 303 and 304 as it states that subject to other provisions of Part XIII, trade, commerce and intercourse throughout India shall be free and this article is binding upon the Union Legislature and the State Legislatures but Parliament can get rid of the limitation imposed by article 301 by enacting a law under article 302. Similarly, a law made by the State Legislature in compliance with the conditions imposed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sanction of the President before introduction of the Bill. The Constitution Bench further laid down that the above analysis of the scheme of articles 301 to 304 shows that article 304 relates to the State Legislature while article 302 relates to Parliament in the matter of lifting of limitation, which, as stated above, flows from the freedom of trade and commerce guaranteed under article 301. 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. 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 (of AIR) 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 ntra-State movement of goods, which movement constitutes an integral part of trade. The Constitution Be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benefit the same is incidental to the Government action and even if such benefit results form the Government action, the same is not measurable. Under the principle of equivalence, as applicable to a fee or a compensatory tax, there is an indication of a quantifiable data, namely, a benefit which is measurable. A tax can be progressive. However, a fee or a compensatory tax has to be broadly proportional and not progressive. In the principle of equivalence, which is the foundation of a compensatory tax as well as a fee, the value of the quantifiable benefit is represented by the costs incurred in procuring the facility/services, which costs in turn become the basis of reimbursement/recompense for the provider of the services/ facilities. Compensatory tax is based on the principle of pay for the value . It is a sub-class of a fee . From the point of view of the Government, a compensatory tax is a charge for offering trading facilities. It adds to the value of trade and commerce which does not happen in the case of a tax as such. A tax may be progressive or proportional to income, property expenditure or any other test of ability or capacity (principle of ability). Taxes ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ense to the service/ acility provider. It is then a tax on recompense. Compensatory tax is by nature hybrid but it is 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. Discussing as above, and applying the above tests/parameters, the Constitution Bench laid down that whenever a law is impugned as violative of article 301 of the Constitution, the court has to see whether the impugned enactment facially or patently indicates quantifiable data on the basis of which the compensatory tax is sought to be levied. The Act must facially indicate the benefit which is quantifiable or measurable. It must broadly indicate proportionality to the quantifiable benefit. If the provisions are ambiguous or even if the Act does not indicate facially the quantifiable benefit, the burden will be on the State as a service/facility provider to show by placing the material before the court that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Entry Tax Act is compensatory does not arise and there was no necessity to indicate in the Act the benefit as a result of realisation of entry tax is quantifiable or measurable and the provisions are unambiguous. However, this issue is not open to be dealt with by us in these seven writ petitions as the same is not to be answered by this court and this court is not to adjudicate the matter at this stage. This court has to deal with the basic issue as to whether the impugned levy was compensatory in nature. The instant writ petitions were disposed of by this court on the basis of the decisions in Bhagatram Rajeev Kumar v. Commissioner of Sales Tax [1995] 96 STC 654; [1995] Supp 1 SCC 673 and State of Bihar v. Bihar Chamber of Commerce [1996] 103 STC 1 (SC); [1996] 9 SCC 136 but the Constitution Bench in Jindal [2006] 145 STC 544 (SC); [2006] 4 SCALE 300; [2006] 7 SCC 241 held that the test of some connection indicated in paragraph 8 of Bhagatram [1995] 96 STC 654; [1995] Supp 1 SCC 673 and followed in Bihar Chamber of Commerce [1996] 103 STC 1 (SC); [1996] 9 SCC 136 is not good law and held that the doctrine of direct and immediate effect of the impugned law on trade and com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding to Dr. M.R. Panda, the State incurred considerable expenditure for maintenance of roads, highways, etc., which facilitate the transport of goods and, therefore, the same is compensatory in nature and since entry tax is not a tax on sale or purchase of goods but the incidence on the entry into the local area or therefor it pertains to the movement . Entry 52 is therefore wider than entry 56 of List II of the Seventh Schedule to the Constitution. He has further argued that in Automobile Transport case AIR 1962 SC 1406 it has been held that providing roads, maintaining the roads, in a good state of repairs are compensatory in nature. Highways including national highways, lighting, traffic control, amenities for passengers and halting places for buses and trucks were held to be compensatory in International Tourist Corporation case [1981] SCR 364. Check-post, departmental organisation intended for regulation of transport and law and order, roads and bridges were held to be compensatory in nature in the case of Malwa Bus Service case reported in [1983] SCR 1009. Police regulation, provisions for services, maintenance of roads, provisions for aerodromes and wharfs were also held to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in these seven writ petitions. However, this plea is open for the State in the other fresh writ petitions which are not being dealt here. We are only determining the issue whether the impugned levy imposed by way of the Orissa Entry Tax Act was compensatory in nature and, therefore, we consider whether the impugned enactment facially or patently indicates the quantifiable data on the basis of which the compensatory tax is sought to be levied and whether the Act facially indicates the benefits which is quantifiable or measurable and the proportionality of the quantifiable benefits but we have not found any such thing in the Act. They do not show that payment of entry tax is reimbursement/recompense for the quantifiable and measurable benefits to be provided to its payers. Providing facilities to the citizens or others would not definitely come under the activities like movement of trade, commerce and intercourse for the free-flow of trade and commerce. Therefore, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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