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TMI Blog2007 (3) TMI 706X X X X Extracts X X X X X X X X Extracts X X X X ..... st 60 per cent of the amount is to be utilised. The board is to ensure balanced development of the local areas and recommend allotment of proceeds of tax and changes in the rate of tax. The board is also to ensure that the proceeds of tax are not more than the amount actually required for development of local areas. We find merit in the contention raised on behalf of the petitioners. The levy is not to meet the cost of any specific facility already provided or planned to be provided. The parameters clearly laid down in Jindal [ 2006 (4) TMI 120 - SUPREME COURT] are that compensatory tax represents the costs incurred in procuring facilities/services on the principle of pay for value . It is a charge for offering trade facilities. It adds to value of trade and commerce. It is based on the principle of equivalence. It must have a broad proportion to the benefit derived to defray the cost of regulation or to meet the outlay incurred for some special advantage to trade and commerce and intercourse. The impugned levy initially was meant to be for assistance to local areas for their development generally and the amendment brings about only a superficial change in the language while retain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 21, 2001, Jindal Strips Limited v. State of Haryana reported in [2003] 129 STC 534 (P H). 3. When the appeal against judgment of this Court was placed for hearing before a Bench of the honourable Supreme Court, correctness of the view taken by the honourable Supreme Court in earlier judgment in Bhagatram Rajeev Kumar v. Commissioner of Sales Tax [1995] 96 STC 654; [1995] Supp 1 SCC 673, which was followed in State of Bihar v. Bihar Chamber of Commerce : [1996] 2 SCR 184, was doubted and the matter was referred to a Constitution Bench to decide with certitude, the parameters of the judicially evolved concept of compensatory tax vis-a-vis Article 301 of the Constitution. The said order dated September 26, 2003 is Jindal Stripe Ltd. v. State of Haryana reported in 2003) 8 SCC 60, [hereafter referred to as Jindal Stainless Limited (1) ]. The Constitution Bench decided the issue referred to it vide its judgment dated April 13, 2006, Jindal Stainless Limited v. State of Haryana reported in [2006] 283 ITR 1 (SC) [hereafter referred to as Jindal Stainless Limited (2) ]. 4. The issue arose in the context of challenge to the constitutional validity of the Haryana Local Area Development Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (3), Parliament, and, subject to Clause (1) the Legislature of any State also, have power to make laws with respect to any of the matters enumerated in List III of the Seventh Schedule. Clause (3) declares that subject to Clauses (1) and (2), the Legislature of any State has exclusive power to make laws for such State or any part thereof with respect to any of the matters enumerated in List II in the Seventh Schedule. It is, thus, evident that the Legislature of a State has the exclusive power to make laws for the whole or any part of the territory of that State in respect of the matters enumerated in List II of the Seventh Schedule, but this power is subject to the other provisions of the Constitution. This means that the power of the Legislature to make laws is also subject to the provisions of Part XIII of the Constitution. Article 301, which is first in the family of articles dealing with trade, commerce and intercourse within the territory of India, lays down that subject to other provisions of this Part (Part XIII), trade, commerce and intercourse throughout the territory of India shall be free. Article 302 declares that the Parliament may by law impose such restrictions on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tween taxation as such for the purpose of revenue on the one hand and taxation for the purpose of making discrimination or giving preference on the other hand and recorded the following conclusion: Thus, on a fair construction of the provisions of Part XIII, the following propositions emerge: (1) trade, commerce, and intercourse throughout the territory of India are not absolutely free, but are subject to certain powers of legislation by Parliament or the Legislature of a State; (2) the freedom declared by Article 301 does not mean freedom from taxation simpliciter, but does mean freedom from taxation which has the effect of directly impeding the free-flow of trade, commerce and intercourse; (3) the freedom envisaged in Article 301 is subject to non-discriminatory restrictions imposed by Parliament in public interest (Article 302); (4) even discriminatory or preferential legislation may be made by Parliament for the purpose of dealing with an emergency like a scarcity of goods in any part of India [Article 303(2)]; (5) reasonable restrictions may be imposed by the Legislature of a State in the public interest [Article 304(b)]; (6) non-discriminatory taxes may be imposed by the Legi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of trade or commerce and burdens or impediments imposed on any such step are restrictions on the freedom of trade, commerce and intercourse. What is guaranteed is freedom in its widest amplitude--freedom from prohibition, control, burden or impediment in commercial intercourse. 48. In Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan [1963] 1 SCR 491 , a seven-Judge Bench of the Supreme Court considered the constitutional validity of the Rajasthan Motor Vehicles Taxation Act, 1951. Four of the Judges constituting the Bench disapproved the extreme views expressed by B. P. Sinha, C.J. and Shah, J., in Atiabari Tea Co. Ltd. v. State of Assam [1961] 1 SCR 809 . They also explained the majority view in the following words: If the word free in Article 301 means freedom to do whatever one wants to do then chaos may be the result; for example, one owner of a motor vehicle may wish to drive on the left of the road, while another may wish to drive on the right of the road. If they come from opposite directions, there will be an inevitable clash. Another class of examples relates to making a charge for the use of trading facilities, such as, road, bridges, aerodromes, etc. The colle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 09 is correct, but subject to this clarification. Regulatory measures or measures imposing compensator)/taxes for the use of trading facilities do not come within the purview of the restrictions contemplated by Article 301 and such measures need not comply with the requirements of the proviso to Article 304(b) of the Constitution. (Underlining is ours) 49. The court also rejected the argument that tax cannot be regarded as compensatory if the amount collected is not actually used for providing any facility and held that a working test for deciding whether a tax is compensatory or not is to enquire whether the trades people are having the 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. Their Lordships further observed that it would be impossible to judge the compensatory nature of a tax by a meticulous test. 50. The decisions of the Supreme Court in Atiabari Tea Co. Ltd. v. State of Assam [1961] 1 SCR 809 and Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan [1963] 1 SCR 491 came up for consideration before a Constitution Bench in Khyerbari Tea Co. Ltd. v. State of Assa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. [1961] 1 SCR 809 was substantially accepted by the majority of the learned Judges constituting the larger Bench which heard Automobile Transport (Rajasthan) Ltd.'s case [1963] 1 SCR 491 but a corollary was added to the said view as we have just indicated. The majority view in Atiabari case [1961] 1 SCR 809 proceeded on the basis that the Australian decisions which dealt with the scope and effect of Section 92 of the Australian Constitution would be of no assistance in construing the effect of the provisions in Part XIII of our Constitution, because the legislative, historical and political background, the structure and the effect of the relevant provisions contained in Part XIII were in material particulars different from those of Section 92 of the Australian Constitution; Section 92 is absolute in terms and on its literal construction, admits of no exceptions. The Australian decisions, therefore, had to introduce distinctions, such as compensatory or regulatory tax laws in order to take laws answering the said description out of the purview of Section 92. In our Constitution, however, though Article 301 is worded substantially in the same way as Section 92, articles 302 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iction on the freedom of trade and commerce because foreign liquor is not manufactured in the State and as such, no duty of excise could be levied on the locally manufactured foreign liquor. By a majority of 4 :1, their Lordships of the Supreme Court upheld the challenge and observed as under: The notification levying duty at the enhanced rate is purely a fiscal measure and cannot be said to be a reasonable restriction on the freedom of trade in the public interest. Article 301 has declared freedom of trade, commerce and intercourse throughout the territory of India, and restriction on that freedom may only be justified if it falls within Article 304. Reasonableness of the restriction would have to be adjudged in the light of the purpose for which the restriction is imposed, that is, as may be required in the public interest . Without entering upon an exhaustive categorization of what may be deemed required in the public interest , it may be said that restrictions which may validly be imposed under Article 304(b) are those which seek to protect public health, safety, morals and property within the territory. Exercise of the power under Article 304(a) can only be effective if the ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce. In the present case, the High Court has not gone into the question whether the provisions of Act 9 of 1964 and the notification dated January 25, 1951 issued under the Cochin Tobacco Act constitute such restrictions or impediments as directly and immediately hamper free-flow of trade, commerce and intercourse and, therefore, fall within the prohibition imposed under Article 301 of the Constitution. Unless the High Court first comes to the finding on the available material whether or not there is infringement of the guarantee under Article 301 of the Constitution, the further question as to whether the statute is saved under Article 304(b) does not arise and the principle laid down by this Court in Kalyani Stores' case [1966] 1 SCR 865 cannot be invoked. 53. In G.K. Krishnan v. State of Tamil Nadu [1975] 2 SCR 715, the Supreme Court considered the challenge to the Madras Motor Vehicles Taxation Act, 1931 on the ground of violation of articles 14, 19(1)(g), 301 and 304 of the Constitution. Their Lordships referred to the majority judgment in Atiabari Tea Co. Ltd. v. State of Assam [1961] 1 SCR 809, which had propounded the direct and immediate restriction test for judging the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of which is to hinder the movement part of the trade. If the tax is compensatory or regulatory, it cannot operate as a restriction on the freedom of trade or commerce. Strictly speaking, a compensatory tax is based on the nature and the extent of the use made of the roads, as, for example, a mileage or ton-mileage charge or the like, and if the proceeds are devoted to the repair, upkeep, maintenance and depreciation of relevant roads and the collection of the exaction involves no substantial interference with the movement. . . . What is essential for the purpose of securing freedom of movement by road is that no pecuniary burden should be placed upon it which goes beyond a proper recompense to the State for the actual use made of the physical facilities provided in the shape of a road. 54. We may now refer to some judgments of the Supreme Court and the High Courts in which the constitutionality of the entry tax was challenged on the ground of violation of articles 301 and 304. In State of Karnataka v. Hansa Corporation [1981] 1 SCR 823, the Supreme Court examined the constitutionality of the Karnataka Tax on Entry of Goods into Local Areas for Consumption, Use or Sale therein A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hin the State and identical goods imported from outside the State, Article 304(a) would be complied with. There is an underlying assumption in Article 304(a) that such a tax when levied within the constraints of Article 304(a) would not be violative of Article 301 and State Legislature has the power to levy such tax. Tax under the impugned legislation would be levied on scheduled goods either manufactured or produced within Karnataka State or imported from outside on their entry in a local area. Thus, this tax is non-discriminatory in that it does not discriminate between scheduled goods manufactured or produced within Karnataka State or those imported from outside. And the microscopic discrimination relied upon by the respondents that there is differential treatment accorded to goods produced within a local area and those imported from outside the local area is hardly relevant for the purpose of Article 304(a). The High Court was accordingly right in concluding that the impugned tax satisfies the requirements of Article 304(a). The next question is whether this levy is in public interest. As has been pointed out earlier, the levy was to compensate the loss suffered by abolition of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le it must be confessed that if the contentions of the respondents were to be upheld it would provide a fruitful source for evasion of tax. If petty dealers are to be excluded some criterion will have to be provided relatable to his turnover in scheduled goods for classifying who are petty dealers. That turnover will have to be kept reasonably high to make it rational but in that event the big registered dealer can always conveniently defeat the tax by bringing into the local area scheduled goods in the name of such petty dealer. It would be an incentive to a big registered dealer to set up a number of petty dealers and import scheduled goods into local area in the name of those petty dealers. To avoid any such contingency, if the tax is levied on the entry of scheduled goods in the local area at the hands of a dealer irrespective of his turnover a potential source of evasion can be checkmated. Viewed from either angle, non-exemption of petty dealers from the operation of the Act does not lead to the conclusion that the impugned legislation constitutes unreasonable restrictions on the fundamental right of the petty dealers to carry on their trade or business. The High Court was, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... properly contravened, or other considerations which may be relevant in that behalf. Normally, it would be inappropriate and indeed illegitimate to hold an enquiry into the manner in which the funds raised by an Act would be dealt with when the court is considering the question about the validity of the Act itself... In this case also the argument was that the Act impugned there was passed by the Parliament not for raising funds for the Union of India but for validating the illegal recovery of cesses made by the State Governments, and which funds had already gone into the Consolidated Funds of the respective States. Reliance was placed upon Article 266 of the Constitution in that behalf. The aforesaid observations were made negativing the said contention. The court further observed: ...if the taxes or cesses recovered under an Act are not dealt with in the manner prescribed by the Constitution, what remedy a citizen may have and how it can be enforced, are questions on which we express no opinion in this appeal. 59. Their Lordships also rejected the challenge that the impugned levy should be treated as sales tax because the machinery created under the Sales Tax Act is employed for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thus not an essential ingredient of levy. The expression liable to tax has been used to identify the person who shall pay the entry tax. To put it conversely if any goods mentioned in Schedule II are brought from outside the State by a person who is not liable to tax under the Sales Tax Act then entry tax shall not be realised from such person. The intention is to levy tax only when the goods are brought inside the State by a dealer carrying on business whose turnover is not less than Rs. 1,000 annually and not by any other person. In other words, the tax is leviable on all goods specified in Schedule II brought for consumption, use or sale; but it shall be realised only from those persons who are dealers registered under the Sales Tax Act and are liable to pay tax. The expression liability to tax is determinative of the person from whom the tax shall be realised and not of the goods which could be subjected to levy. The construction suggested by the learned Counsel for the appellant militates against the clear language of the section as the levy being on goods specified in Schedule II. If the submission is accepted then it would result in non-levy on those items on which addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved as under: Item 54 of List II of the Seventh Schedule to the Constitution relates to tax on sale or purchase of goods subject to the provisions of entry 92-A of List I. Item 52 of List II relates to tax on entry of goods into local area for consumption, use or sale therein. Item 92A of List I relates to the sale of goods other than newspapers, where such sale or purchase takes place in the course of inter-State trade or commerce. Item 92-B of List I relates to tax on consignment of goods. Tax on sale or purchase, tax on entry of goods into local area for consumption, use or sale therein and tax on consignment of goods are different in nature and character and are imposed by local authorities under separate laws. Octroi is in the nature of a multi-point imposition. Various State Legislatures, with the intention of reducing harassment of dealers, abolished octroi which is a multi-point imposition and at the same time, legislated on single point entry tax for the purpose of compensating the local authorities who suffered loss of revenue on account of abolition of octroi. Single point entry tax is a substitute for multi-point octroi and falls within the ambit of entry 52 of List II. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Central Sales Tax Act, 1956, are not attracted to this legislation. The point is answered against the petitioners. For the same reasons as aforesaid, it has to be held that levy of entry tax does not amount to levy of consignment tax and the contention that it offends article 92A of List I of the Constitution is not tenable. 63. The challenge based on violation of Article 304(a) of the Constitution was rejected by the High Court in the following words: This is a provision enabling the State Legislatures to introduce certain restrictions on trade, commerce and intercourse amongst States. There may be State tax imposed on goods imported from other States or Union territories to which similar goods manufactured in that State are subject so as not to discriminate between the goods so imported and goods manufactured. What is contemplated is a tax imposed on goods imported from outside the State. Entry tax is not a tax on goods, but a tax on entry of goods into a local area for particular purposes. Entry tax would be levied on specified goods either manufactured or produced within the State or imported from outside on their entry into a local area. The tax does not discriminate betw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... local bodies. The document shows that during the period 1976-77 till 1988-89, provision was made in the budget to compensate the municipalities and the amount budgeted was made over. It also shows that with effect from the year 1983-84, there has been a regular annual increase of 10 per cent in total compensation amount. Considering the Statement of Objects and Reasons and the particulars given in annexure A.R-3, the statutory changes referred to above have no significance. Entry tax remains compensatory in nature and, therefore, it is immune from challenge. 65. In State of Bihar v. Bihar Chamber of Commerce [1996] 103 STC 1, the Supreme Court examined the challenge to the constitutional validity of the Bihar Tax on Entry of Goods into Local Areas for Consumption, Use or Sale therein Act, 1993 which provided for levy of tax on entry of scheduled goods into a local area for consumption, use or sale therein at a rate not exceeding 5 per cent. The expression 'local areas' was defined in Section 2(f) of the Act to mean the areas within the limits of a (i) Municipal Corporation, (ii) Municipality, (iii) Notified area committee, (iv) Cantonment board, (v) Town board, (vi) Mines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubt, be different if the local areas are confined to a few cities or towns in the State and the levy is upon the entry of goods into those local areas alone. This is an important distinction which should be kept in mind while appreciating this aspect and also while examining the decisions of this Court rendered in fifties and sixties ). The facilities provided in the State are the facilities provided in the local areas as well. Interests of the State and the interests of the local authorities are, in essence, no different. It is not and it cannot be stipulated that for the purpose of establishing the compensatory character of the tax, it is necessary to establish that every rupee collected on account of the entry tax should be shown to be spent on providing the trading facilities. It is enough if some connection is established between the tax and the trading facilities provided. The connection can be a direct one or an indirect one, as held by this Court in Bhagatram Rajeev Kumar v. Commissioner of Sales Tax, Madhya Pradesh 1994(4)SCALE1103 . The concept of compensatory nature of tax has been widened and if there is substantial or even some link between the tax and the facilities e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... local authorities. The highest that Sri Ganesh can legitimately put in his submission is that the tax is meant for and must be utilised for the purpose of the local areas. It cannot further be stipulated that this utilisation should be through or by the concerned local authorities. In our opinion, the relevant requirement is satisfied in this case. As stated hereinbefore, the entire State of Bihar is divided into local areas. From the point of view of the entry tax, one may say that the State is a compendium of local areas. Spending for the purposes of the State is thus spending for the purposes of local areas. Situation may perhaps be different where the local areas are confined to a few cities or towns in the State. But where the local areas span the entire State, it cannot be argued that money spent for welfare schemes for improvement of roads, rivers and other means of transport and communication is not spent on or for the purposes of local areas. The purposes and needs of local areas are no different from the purposes and needs of the State--not at any rate to any appreciable degree. In this context, it is relevant to notice that the Maharashtra Entry Tax Act, considered by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the State of Rajasthan by enacting Act No. 13 of 1999. The State Legislature, in exercise of its legislative power, under Clause (3) of Article 246 of the Constitution, which provides that subject to Clauses (1) and (2), the Legislature of any State has exclusive power to make laws for such State or any part thereunder, with respect to any of the matter enumerated in List II of the Seventh Schedule. In the present case, the State Legislature has exclusive power to legislate upon entry No. 52 of List II of the Seventh Schedule which provides making of laws on tax as on entry of goods into a local area, for consumption, use or sale therein. The State Legislature has enacted Act No. 13 of 1999, empowering State Government in charging Section 3 of the said Act, to impose a very modest levy of the entry tax on goods brought into local areas, not exceeding ten per cent of the value of goods, for compensating the loss suffered by the abolition of octroi. The State Government by issuing notification on October 15, 1999, annexure 2 to the writ petition, under Section 3 of Act No. 13 of 1999 has imposed entry tax on tobacco of only 1.5 per cent on the value of goods brought into local area ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... them to provide municipal services more efficiently which would help the free-flow of trade or commerce, the impost will be regarded as compensatory in nature. (v) While examining the validity of entry tax, it would be inappropriate to the court to hold an enquiry into the manner in which the funds raised by levy of entry tax would be dealt with and it is sufficient that a provision is made for disbursing the amount to the local bodies for use in the local areas. (vi) The entry tax is not a tax on goods, but a tax on entry of goods into a local area for particular purposes and even if such tax, to some extent, imposes an economic impediment on the activity taxed, that by itself is not sufficient either to stigmatise the levy as unreasonable or contrary to public interest. (vii) The entry tax levied on scheduled goods either manufactured or produced within the State or imported from outside on their entry into a local area cannot be treated as discriminatory even if there is microscopic difference in the treatment accorded to the goods produced within the area and those imported from outside the area. (viii) Where the local areas contemplated by the taxing statute cover the entire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 243H, the Legislature of a State is empowered to enact law and authorise a panchayat to levy, collect and appropriate such taxes, duties, tolls and fees and assign to a panchayat such taxes, duties, tolls, fees, levied and collected by the State Government for such purposes and subject to such conditions and limits as may be specified in the law. Similarly, under Article 243X, the Legislature of a State can enact law and authorise a municipality to levy, collect and appropriate such taxes, duties, tolls, fees and assign to a municipality such taxes, duties, tolls, fees levied and collected by the State Government for such purposes and subject to such conditions and limits as may be specified in the law. Article 243I makes it mandatory for the Governor of a State to constitute a Finance Commission to review the financial position of the panchayats and to make recommendations to the Governor as to--(a) the principles which should govern (i) the distribution between the State and the Panchayats of the net proceeds of the taxes, duties, tolls and fees leviable by the State which may be divided between them under Part IX and the allocation between the panchayats at all levels of their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of land-use and construction of buildings. 3. Planning for economic and social development. 4. Roads and bridges. 5. Water supply for domestic, industrial and commercial purposes. 6. Public health, sanitation conservancy and solid waste management. 7. Fire services. 72. Soon after insertion of Parts IX and IX-A in the Constitution, the Legislature of the State of Haryana amended the Municipal Act and also enacted the Haryana Panchayat Raj Act, 1994 (for short, the Panchayati Raj Act ) repealing Punjab Gram Panchayat Act, 1952 and Punjab Panchayat Samiti Act, 1961, as applicable to the State of Haryana. This was done solely with the object of bringing the State legislations in tune with the new constitutional provisions. Sections 21, 75 and 137 of the Panchayati Raj Act, which enumerate functions and duties of the Gram Panchayats, Panchayat Samitis and Zila Parishads respectively, are exhaustive reflection of various items specified in the Eleventh Schedule of the Constitution. The provisions contained in Chapters V, XI and XVII relate to finances and taxation of the three bodies. Likewise, Sections 66A and 68A, which were added in Chapter VI of the Municipal Act, are virtual repro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tration of births, marriages and deaths, public, vaccination and any sanitary measure; (j) the holding of fairs and industrial exhibitions; (k) the preparation and maintenance of a record of rights in immovable property; (l) all acts and things which are likely to promote the safety, health, welfare or convenience of the inhabitants or expenditure whereon may be declared by the committee, with the sanction of the State Government to be an appropriate charge on the municipal fund. 73. Some of the services envisaged under the Eleventh and Twelfth Schedules and the relevant provisions of the Municipal Act and the Panchayati Raj Act may appear to be meant for general public but those concerning the roads, bridges, streets, markets, water supply, sanitation are certainly meant to facilitate the free-flow of trade and the petitioners, who bring the goods from outside the State into a local area or from one local area to another local area, avail these services. For providing these services, the local bodies are required to incur expenditure, a majority source of which was octroi and other similar levies. The State Government was bound to provide for alternative source for augmenting the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the judgments relied upon by the learned Counsel for the petitioners. In Firm A. T. B. Mehtab Majid Co. v. State of Madras AIR1963SC928 , a Constitution Bench of the Supreme Court considered the validity of Rule 16(2) of the Madras General Sales Tax (Turnover and Assessment) Rules, 1939. The petitioner, who was a dealer in hides and skins, challenged the impugned rule on the ground that it had the effect of imposing higher rate of tax on tanned hides or skins imported from outside the State and sold within the State as compared to the tax imposed on hides or skins tanned and sold within the State. It was further submitted that hides or skins imported from outside the State after purchase in their raw condition and then tanned inside the State are also subjected to higher tax than hides or skins purchased in the raw condition within the State and tanned within the State. According to the petitioner, the levy of higher rate of tax on imported hides and skins was violative of Article 304(a) of the Constitution. Their Lordships of the Supreme Court referred to the views expressed by Subba Rao, ]., in Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan [1963] 1 SCR 491 , and h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... abari Tea Co. Ltd. v. State of Assam [1961] 1 SCR 809 , Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan [1963] 1 SCR 491 and Firm A. T. B. Mehtab Majid Co. v. State of Madras AIR1963SC928 and some other decisions and held as under: In our opinion, it is this : the States are certainly free to exercise the power to levy taxes on goods imported from other States/Union territories but this freedom, or power, 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. The prohibition cannot be extended beyond the power of taxation. It means in the immediate context that States are free to encourage and promote the establishment and growth of industries within their States by all such means as they think proper but they cannot, in that process, subject the goods imported from other States to a discriminatory rate of taxation, i.e., a higher rate of sales tax vis-a-vis similar goods manufactured/produced within that State and sold within that State. Prohibition is against discriminatory taxation by the State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed goods. The court held that the levy was discriminatory and violative of articles 301 and/or 304(a) of the Constitution. A careful reading of the ratio of Firm A.T.B. Mehtab Majid Co. v. State of Madras AIR1963SC928 which appears to be the basis of all subsequent decisions, shows that their Lordships were clearly of the view that the sales tax in question was not compensatory tax or a regulatory measure. This is clearly borne out from the portion, which we have underlined above while dealing with that judgment. Thus, the aforesaid judgments cannot be relied upon for striking down the entry tax. 7. The Constitution Bench of the honourable Supreme Court Reported in [2006] 145 STC 544 [Jindal Stainless Ltd. v. State of Haryana] considered the issue of parameters to be applied for determining whether tax was compensatory, while considering the issue referred about correctness of the view taken in Bhagatram 1994 (4) SCALE 1103 and Bihar Chamber of Commerce : [1996] 2 SCR 184 and observed (paras 15, 34, 35, 36, 37, 38, 39, 40, 41, 42, 43, 44, 45 at STC): 16. To sum up : the pre-1995 decisions held that an exaction to reimburse/recompense the State the cost of an existing facility made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulatory power or whether it is the product of the exercise of the taxing power. If the impugned law seeks to control the conditions under which an activity like trade is to take place then such law is regulatory. Payment for regulation is different from payment for revenue. If the impugned taxing or non-taxing law chooses an activity, say, movement of trade and commerce as the criterion of its operation and if the effect of the operation of such a law is to impede the activity, then the law is a restriction under Article 301. However, if the law enacted is to enforce discipline or conduct under which the trade has to perform or if the payment is for regulation of conditions or incidents of trade or manufacture then the levy is regulatory. This is the way of reconciling the concept of compensatory tax with the scheme of articles 301, 302 and 304. For example, for installation of pipeline carrying gas from Gujarat to Rajasthan, which passes through M. P., a fee charged to provide security to the pipeline will come in the category of manifestation of regulatory power. However, a tax levied on sale or purchase of gas which flows from that very pipe is a manifestation of exercise of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay 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 may be progressive rather than proportional. Compensatory taxes, like fees, are always proportional to benefits. They are based on the principle of equivalence. However, a compensatory tax is levied on an individual as a member of a class, whereas a fee is levied on an individual as such. If one keeps in mind the 'principle of ability vis-a-vis the 'principle of equivalence', then the difference between a tax on the one hand and a fee or a compensatory tax on the other hand can be easily spelt out. Ability or capacity to pay is measurable by property or rental value. Local rates are often charged according to ability to pay. Reimbursement or recompense are the closest equivalence to the cost incurred by the provider of the services/facilities. The theory of compensatory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icle 301 is violated. Burden on the State: 46. Applying the above tests/parameters, 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 payment of compensatory tax is a reimbursement/recompense for the quantifiable/measurable benefit provided or to be provided to its payer(s). As soon as it is shown that the Act invades freedom of trade it is necessary to enquire whether the State has proved that the restrictions imposed by it by way of taxation are reasonable and in public interest within the meaning of Article 304(b) (See: paragraph 35 of the decision in the case of Khyerbari Tea Co. Ltd. v. State of Assam reported in [196 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate to impose restrictions under Article 304 is subject to the condition that they are reasonable. (c) An additional requisite for the exercise of the power under Article 304(b) by the State Legislature is that previous Presidential sanction is required for such legislation. After the judgment of the Constitution Bench dated April 13, 2006 reported in Jindal Stainless Ltd. v. State of Haryana reported in [2006] 283 ITR 1 (SC), the matter was placed before a Division Bench of the honourable Supreme Court and while adjourning the matter, the following directions were issued in order dated July 14, 2006 (Jindal Stainless Ltd. v. State of Haryana (2006) 7 SCC 271): Since relevant data do not appear to have been placed before the High Courts, we permit the parties to place them in the writ petitions concerned within two months. The High Courts concerned shall deal with the basic issue as to whether the impugned levy was compensatory in nature. The High Courts are requested to decide the aforesaid issue within five months from the date of receipt of our order. The judgment in the respective cases shall be placed on record by the parties concerned within a month from the date of the decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nchayats Department vide Memo. No. PRA-1-2006/48876, dated September 11, 2006 which shows that Rs. 1,170.16 lacs, during 2003-04, Rs. 2,250 lacs during 2004-05, Rs. 103.80 crores during 2005-06 were released to the Panchayati Raj Institutions. The information shows that the funds aforementioned were actually required for developing and maintaining infrastructure facilities useful for free-flow of trade and commerce and that the said funds released under LADT scheme have been actually utilised for construction/repair of roads in rural areas and for strengthening infrastructure to facilitate free-flow and commerce in rural area. This memo points out in unmistakable terms that link roads/village links being developed and maintained by Panchayati Raj Institutions will in fact be facilitating movement to and for between industries in rural areas. This memo, clarifies that the funds are still not sufficient for overall development of the facilities being provided. A copy of the memo, dated September 11, 2006 is attached as annexure RIV. 10. That a Memo (No. DUD/TA/2006/50172, dated September 4, 2006) received from Director Urban Development, Haryana, Chandigarh, shows receipt of LADT fun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is that this honourable court earlier upheld the validity of the Act. Consequently, the allocations were earlier being made on this legal basis. However, after the Constitution Bench judgment dated April 13, 2006 of the Supreme Court in Jindal Stainless case [2006] 283 ITR 1 (SC), the concept of compensatory tax has been explained and the theory of 'some connection' has been discarded and overruled. In this backdrop, the State Government would implement the concept of compensatory tax with regard to entry tax as explained by Jindal Stainless and the State is committed to ensure that the LADT funds collected are expended substantially in developments which facilitate the trade and commerce of the payer of the tax either individually or as a class. In this context, the aberrations which may have occurred in the past on account of the earlier judgment of the Supreme Court would be rectified in due course. 8. That in the aforesaid context, it is notable that the Haryana Local Area Development Tax Act, 2000 was gazetted on September 19, 2000. Soon thereafter, writ petitions had been filed in the honourable High Court. This honourable court was pleased to issue interim order dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of road, drainage and sewerage. It is estimated at Rs. 997.12 crores. A true copy of the proposal is annexed as annexure AA3. Part of the later proposal would be implemented with the aid of Central Government. 11. That the Municipal Solid Waste Management and handling is a mandatory requirement under the Environment (Protection) Act, 1986 and the Municipal Solid Wastes (Management and Handling) Rules, 2000 made thereunder. A copy of the Rules is enclosed as annexure AA4, vide Rule 4 every Municipal Authority is made responsible for the implementation of the provisions and for infrastructure developments for collection, storage, segregation, transportation, processing and disposal of municipal solid wastages. As per Rule 3(xv), municipal solid wastages is defined to include commercial and residential wastages generated in a municipal area in either solid or semi-solid form including bio-medical wastages. In view of Rule 5, the State Government is overall responsible for implementation of the Rules. It is a known fact that big industries and refineries require large scale employment of staff and officials and also require construction of colonies for residential purposes, or alterna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equires: (5) 'bring goods into a local area' means causing the entry of goods into a local area by bringing them inside the local area or causing the goods to be brought inside the local area from any place outside the local area. (9) 'entry of goods into a local area' means taking or bringing goods into a local area from any place outside the State or from any place inside any other local area in the State. (12) 'gross turnover' used in relation to an importer with reference to a period of time means the sum of value of goods which the importer brings or receives on the entry of such goods into a local area during the given period. (13) 'importer' means any person who, in the course of business, whether on his own account or on account of a principal or any other person, brings any goods into or receives or is entitled to receive any goods on their entry into a local area and includes a casual importer. (14) 'local area' means an area within the limits of a Municipal Corporation established under the Haryana Municipal Corporations Act, 1994 (Haryana Act 16 of 1994), or a municipality established under the Haryana Municipal Act, 1973 (Haryana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;; (b) the value of goods which have, without use or consumption, been delivered outside the local area; (c) the value of goods which have been subjected to tax once under this Act, either as such or in some other form; (d) the value of goods on which sales tax has been paid or has become payable to the State; (e) the value of plant, machinery, equipment and tools, brought or received on lease; (f) the value of goods left in the stock, whether as such or in different form, lying with him in the local area, except when the certificate of registration issued under this Act is cancelled: Provided that the value of goods deducted under this clause shall, except when the certificate of registration issued under this Act is cancelled, form part of the turnover for the period immediately succeeding: Provided further that the value of plant, machinery, equipment and tools, if forming part of the turnover, may form part of the closing stock, if capitalised; and (g) the value of such other goods as may be prescribed. Explanation.--For the purpose of this sub-section, deductions of value of only such goods shall be admissible which forms part of gross turnover of the importer and if value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cent is utilised for development facilitating free-flow of trade and commerce of the payers of the tax individually or as a class. Explanation.--In this section 'development facilitating free-flow of trade and commerce' means developing and maintaining infrastructure facilities facilitating the free-flow of trade and commerce such as roads, bridges, culverts, sewerage, drainage, sanitation, waste management, electricity, drinking water and other infrastructure facilities. 4. After Section 22 of the principal Act, the following section shall be inserted, namely: 22A. Constitution of Board and its functions.--(1) There shall be a Board consisting of a Chairman and following ex officio members: (2) The Headquarter of the Board shall be at Chandigarh. (3) The Board shall perform the following functions: (i) It shall ensure balanced development of the local areas falling within the domain of the urban as well as rural local bodies. (ii) It shall identify the areas which require immediate development/maintenance of infrastructure facilities out of proceeds of tax. (iii) It shall accordingly recommend allotment of proceeds of tax for developing and maintaining infrastructure facil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anation is to the effect that development facilitating free-flow of trade and commerce means developing and maintaining infrastructure facilities facilitating the free-flow of trade and commerce such as roads, bridges, culverts, sewerage, drainage, sanitation, waste management, electricity, drinking water and other infrastructural facilities. 16. It was not explained as to what will happen to the 40 per cent. In absence of any specific details or any relevant mechanism, provision for spending the tax collected on drainage sanitation, waste management, electricity, water, culverts, bridges, roads, etc., was not enough to hold that the parameters of the compensatory tax were met. Development of the State or of the local areas had to be carried out from the general revenue of the State and not out of the compensatory tax. If compensatory tax is to be used for development of the State or the local areas, the distinction between tax collected by way of general revenue and compensatory tax will be irrelevant and proviso to Article 304(b) of the Constitution will be meaningless. It was also submitted that apart from raising general revenue, compensatory taxes were also already being levie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly any individual or specific services. Arguments with regard to individual services need not, thus, be individually gone into. 18. Learned Counsel for the petitioners submitted that the view taken in Bhagatram Rajeev Kumar's case [1995] 96 STC 654; [1995] Supp. 1 SCC 673 that if there is some link between tax and the facilities extended, directly or indirectly, the tax will be compensatory and handing over of revenue collected to local bodies to provide municipal services efficiently, would help free-flow of trade, has not been approved by the Constitution Bench. Similarly, the view taken in Bihar Chamber of Commerce, case: [1996] 2 SCR 184 that management of roads, water, drainage and markets, etc., justified recovery of entry tax, had also not been approved by the Constitution Bench. 19. Judgments of other High Courts: Learned Counsel for the petitioners also relied upon judgments of High Courts of Kerala, Allahabad, Patna, Gauhati and Jharkhand rendered in the light of judgment of the honourable Supreme Court in Jindal (2006) 7 SCC 271 . 20. The Kerala High Court in its judgment dated December 18, 2006 in India Gateway Terminal (Pvt.) Ltd. v. Intelligence Officer W.A. No. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh Court in Eurotex Industries and Exports Ltd. v. State of Maharashtra [2004] 135 STC 25, judgment of the honourable Supreme Court in State of Himachal Pradesh v. Yash Pal Garg [2003]3 SCR 1056 and judgment of the Jharkhand High Court in W. P. T. No. 5354 of 2004 (Tata Iron Steel Co. Ltd. v. State of Jharkhand [2007] 6 VST 587), and also dealt with the judgment of the honourable Supreme Court in Vijayalashmi Rice Mills v. Commercial Tax Officer 2006(201) ELT 329 (SC) . 22. The Allahabad High Court in its judgment dated January 8, 2007 in Indian Oil Corporation Limited v. State of Uttar Pradesh Civil Misc. Writ Petition No. 251 of 2003: See [2007] 10 VST 282, considered the question of validity of the U.P. Tax on Entry of Goods Act, 2000, with reference to the contention that the same was violative of articles 301 and 304 of the Constitution. The State filed an affidavit in the light of order of the honourable Supreme Court in Jindal Stainless Limited (2006) 7 SCC 271 to show that the tax was compensatory. In the affidavit, the State gave figures of tax received and funds allocated to local bodies and expenditure for development works on construction and maintenance of roads and br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duction of imported goods within the definition of 'Entry of goods' was bad for being retrospective as also for want of the Presidential sanction/assent. (v) After the 2006 Amendment the levy under the Act acquired the nature of a compensatory tax and the Act in its present form is a valid piece of legislation. In light of the above discussions, the two cases are fit to be allowed because they relate to the period 2001-2006. But I would refrain from making any order or direction in that regard since the matter is already pending before the Supreme Court. 24. The two cases are thus disposed of as directed by the Supreme Court in Jindal Stainless Ltd. (2006) 7 SCC 271. The Gauhati High Court in its judgment dated November 17, 2006 in ITC Limited v. State of Assam W.P. (C) No. 2650 of 2005 See [2007] 9 VST 250 (Gauhati), considered the issue in a batch of nine petitions challenging the validity of the Assam Entry Tax Act, 2001. It was held that the entry tax was not in the nature of compensatory tax. The same had been levied to broaden the tax base and to obtain additional tax resources. The data produced by the State only showed that certain amounts had been allocated to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ticle 301, the State must satisfy the court that for the special benefits, which the traders are claimed to have been provided with, the traders are not paying 'patently much more than what is required for providing facilities'. This test has been adhered even in Jindal Stainless Ltd. [2006] 283 ITR 1 (SC). In a case of present nature, the State Government ought to have, therefore, shown as to what trading facilities it has really provided to the traders, what expenses are incurred for providing such facilities and how much amount, realised from the imposition of the entry tax, is being utilised for providing the trading facilities so that this Court could feel satisfied that the traders are paying, for the facilities, if any, provided to them, patently not much more than what is required for providing the facilities. No such thing has been done. Situated thus, it is clear that the State Government has not discharged its burden of showing that the entry tax, in the present case, is compensatory in nature. 25. The Jharkhand High Court in its judgment dated August 14, 2006 in Tata Iron Steel Company Ltd. v. State of Jharkhand W.P. (T) No. 5354 of 2004 reported in [2007] 6 VST ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty, water, waste-management, etc., amounted to special services to the payers of the tax. Referring to observations made in para 42 (para 39 in 145 STC) of the Constitution Bench judgment, it was submitted that what was required was some link between quantum of tax and the facilities/services. He submitted that providing services to transporter, retailer, consumer or farmer was component of service to trade and commerce. He further submitted that after the amendment, the expenditure to be incurred is on selected items of 11th and 12th Schedules and not on all items. He submitted that having regard to the federal structure of the Constitution, the State could not be expected to seek previous sanction of the President for levying taxes with reference to relevant entries in List II. It was also submitted that separate fund was not the requirement for meeting the facial test, though a separate fund may be an additional point to show that the tax was compensatory. The taxes collected were subjected to audit and accounting in accordance with the established procedures. It was open to the Legislature to make reasonable classification or to grant exemption. 27. Shri Uday Lalit, Senior Advo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l test laid down by the honourable Supreme Court in Jindal [2006] 283 ITR 1 (SC) and whether the data placed on record by the State shows that the impugned levy functionally is compensatory and provides quantifiable or measurable benefit to the payers of the tax? 30. A perusal of statutory provisions shows that the levy of tax is on entry of goods into a local area for consumption, use or sale and the tax is payable by the importer with reference to value of goods at a specified rate. The tax collected is to be distributed by the State Government among the local bodies. The same is to be utilised for development facilitating free-flow of trade and commerce on infrastructural facilities such as roads, bridges, culverts, sewerage, drainage, sanitation, waste-management, electricity, drinking water and other infrastructural facilities. At least 60 per cent of the amount is to be utilised. The board is to ensure balanced development of the local areas and recommend allotment of proceeds of tax and changes in the rate of tax. The board is also to ensure that the proceeds of tax are not more than the amount actually required for development of local areas. The petitioners have advanced t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t being in line with judgments dealing with the levy of fee is of no consequence when the very subject-matter of utilisation cannot be treated as any special direct or exclusive service or benefit to the payer of the tax. 34. In view of above, the data given by the State in respect of the amount Spent does not stand scrutiny. As rightly pointed out by learned Counsel for the petitioners, the expenditure incurred is 17 per cent of the total collection and the expenditure is far less than the collection of much more amount under other statutes levying compensatory taxes to cover the cost of at least some of the very same services. The burden of proof on the State cannot be held to have been discharged. 35. Though the levy was earlier upheld by this Court with reference to the parameters as understood from the judgments of the honourable Supreme Court, including judgments in Bhagatram [1995] 96 STC 654: [1995] Supp. 1 SC 673 and Bihar Chamber of Commerce : [1996] 2 SCR 184 , which now stand disapproved by the Constitution Bench, applying the parameters as laid down in Jindal [2006] 283 ITR 1 (SC), we are of the view that the impugned levy is not compensatory in character. The same amo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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