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TMI Blog2008 (10) TMI 604X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by ADARSH KUMAR J. This petition seeks declaration to the effect that the Haryana Tax on Entry of Goods into Local Areas Act, 2008 (hereinafter referred to as, the 2008 Act ) is unconstitutional and void. Case set out in the petition is that the petitioner was carrying on business of refining crude oil and manufacturing petroleum products for sale. It has its refinery at Panipat in Haryana for which crude oil is partly imported from foreign countries and partly supplied from Bombay High. The crude oil is unloaded through single buoy mooring (SBM) facility in the Gulf of Kutch (off the coast of Gujarat). Submarine pipelines are linked to Panipat refinery through underground pipeline network for which no facility or service is provided by the State of Haryana. On May 5, 2000, the State of Haryana issued the Haryana Local Area Development Tax Ordinance, 2000 (Ordinance No. 10 of 2000). The Ordinance was later replaced by the Haryana Local Area Development Tax Act, 2000. Therein, provision was made for levy and collection of tax on entry of goods into local area. The validity of the said Act was challenged on the ground that it violated articles 301 and 304 of the Consti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his court held that the levy was not compensatory in character and amounted to restriction on free flow of trade and commerce and violative of articles 301/304 of the Constitution of India. On April 16, 2008, the State of Haryana repealed the 2000 Act and enacted the Haryana Tax on Entry of Goods into Local Areas Act, 2008, impugned in the present petition. According to the petitioner, the said Act was unconstitutional, being violative of articles 301 and 304 of the Constitution as the tax levied therein was not compensatory. The tax envisaged therein was for augmenting general revenue of the State without any facility or special benefits to the payers. No special service, benefit or facility whatsoever was rendered to the petitioner for transportation of crude oil to Panipat refinery. Provision for validation of tax already collected under the 2000 Act, by treating the same to have been collected under the 2008 Act, without ensuring appropriation of amount collected and already spent otherwise than by way of providing services to the payers and for the reasons for which the tax was held to be non-compensatory earlier, was liable to be struck down. In the reply filed, the Sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the submission on behalf of the petitioners and submitted that the 2008 Act had remedied the defects pointed out in the judgment of this court and the levy under the new Act was compensatory in nature. As against the rate of 10 per cent, the rate now notified was two per cent. Appeal against judgment of this court was pending in the honourable Supreme Court. Rules had not yet been notified and thus, the Act had not been made functional. On this ground, challenge to the Act was premature. It was also submitted that provision for validation was also valid because of deeming fiction providing for levy under the old Act to be treated as levy under the new Act. However, it was stated that out of a sum of about Rs. 1,600 crores collected under the old Act, a sum of Rs. 240 crores was available to be spent under the new Act and rest of the amount had already been spent as per the old Act. Reliance was also placed on judgment of the honourable Supreme Court in Vijayalakshmi Rice Mill v. Commercial Tax Officer, Palakol [2006] 147 STC 609; [2006] 6 SCC 763, in para 25 (para 26 of STC) to the effect that the decision of the Constitution Bench could not be interpreted to mean that sea change w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pecified by the State Government by notification and different rates may be specified in respect of different goods or different classes of goods. (2) The tax levied under sub-section (1) shall be paid by the importer: Provided that an importer shall not be liable to pay tax so long as the aggregate value of taxable goods he brings into or receives on their entry into any local area does not, in a year, exceed ten lakh rupees or such other sum as the State Government may, by notification, specify: Provided further that an importer who has once become liable to pay tax under this Act shall continue to be so liable until the expiry of three consecutive years during each of which the aggregate value of any taxable goods he brings into or receives on their entry into any local area does not exceed the amount specified in the first proviso to this sub-section. Explanation. Where the goods are received on its entry into a local area by a person other than an importer, the importer, if any, who further receives the goods from such person shall be deemed to have received the goods on entry into the local area: Provided further that an importer who incurred liability for pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be a Board consisting of a Chairman and following ex-officio members: (a) Chief Minister, Haryana : Chairman (b) Chief Secretary, Haryana ex-officio member : (c) Finance Secretary, Haryana ex-officio member : (d) Financial Commissioner and Principal Secretary to Government of Haryana, Excise and Taxation Department ex-officio member : (e) Financial Commissioner and Principal Secretary to Government of Haryana, Development and Panchayats Department ex-officio member : (f) Commissioner, Urban Local Bodies, Haryana ex-officio member : (g) Excise and Taxation Commissioner, Haryana : Member-Secretary (h) Additional Excise and Taxation Officer Commissioner/Joint Excise and Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... free-flow of trade and commerce such as roads, bridges, culverts, sewerage, drainage, sanitation, waste management, electricity, drinking water and other infrastructure facilities. Whether the levy under the 2000 Act envisaged was compensatory or not was the question considered by this court in Jindal Strips Limited [2008] 12 VST 149; [2007] 2 PLR 76. Finding recorded therein is extracted below for ready reference: (page 213 of STC) 29. From the rival submissions of the learned counsel for the parties and in the light of direction of the honourable Supreme Court, we are required to deal with the issue whether the impugned levy was compensatory in nature having regard to the judgment of the Constitution Bench in Jindal [2006] 145 STC 544 (SC); [2006] 7 SCC 241. 30.. The question is whether the impugned Act meets the facial test laid down by the honourable Supreme Court in Jindal [2006] 145 STC 544; [2006] 7 SCC 241 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? 31.. A perusal of statutory provisions shows that the levy of tax is on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y laid down in Jindal [2006] 145 STC 544 (SC); [2006] 7 SCC 241 [particularly paras 16 and 41 to 45 (paras 15 and 38 to 42 in 145 STC)] 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 retaining the basic character of the levy as a source for raising general development. In this view of the matter, we are unable to hold that the facial test is met. Mere specification of the 60 per cent of the amount 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levied is compensatory in nature and is, thus, saved under article 304 of the Constitution. In our view, levy cannot be held to be compensatory in character if the object is to create a fund for purposes specified in section 25 of the Act. The provision of section 25 of the present Act, though worded slightly different from section 22 of the 2000 Act, in substance, does not change the character of levy and the reasons which weighed with this court in holding the levy under section 22 of the 2000 Act to be non-compensatory in character, substantially apply for our view that levy under section 25 is also not compensatory. It will be appropriate to make a reference to the legal position laid down by the honourable Supreme Court on this aspect. Test for validity of tax as per article 301 of the Constitution has since been restated in the recent Constitution Bench judgment in Jindal Stainless Limited [2006] 145 STC 544 (SC); [2006] 7 SCC 241. Earlier, in Atiabari Tea Co. Ltd. v. State of Assam AIR 1961 SC 232, the majority held that tax which directly and immediately restricts trade, would fall under article 301 of the Constitution. In Automobile Transport (Rajasthan) Ltd. [196 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility made available to the traders or the cost of a specific facility planned to be provided to the traders is compensatory tax and that it is implicit in such a levy that it must, more or less, be commensurate with the cost of the service or facility. Those decisions emphasised that the imposition of tax must be with the definite purpose of meeting the expenses on account of providing or adding to the trading facilities either immediately or in future provided the quantum of tax is based on a reasonable relation to the actual or projected expenditure on the cost of the service or facility. However, the post-1995 decisions in Bhagatram's case [1995] 96 STC 654 (SC); [1995] Suppl 1 SCC 673 and in the case of Bihar Chamber of Commerce [1996] 103 STC 1 (SC); [1996] 9 SCC 136 now say that even if the purpose of imposition of the tax is not merely to confer a special advantage on the traders but to benefit the public in general including the traders, that levy can still be considered to be compensatory. According to this view, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and regulatory powers (see Essays in Taxation by Seligman). Difference between 'a tax', 'a fee' and 'a compensatory tax': Parameters of compensatory tax: 36.. As stated above, in order to lay down the parameters of a compensatory tax, we must know the concept of taxing power. 37.. Tax is levied as a part of common burden. The basis of a tax is the ability or the capacity of the tax-payer to pay. The principle behind the levy of a tax is the principle of ability or capacity. In the case of a tax, there is no identification of a specific benefit and even if such identification is there, it is not capable of direct measurement. In the case of a tax, a particular advantage, if it exists at all, is incidental to the States' action. It is assessed on certain elements of business, such as, manufacture, purchase, sale, consumption, use, capital, etc., but its payment is not a condition precedent. It is not a term or condition of a licence. A fee is generally a term of a licence. A tax is a payment where the special benefit, if any, is converted into common burden. 38.. On the other hand, a fee is based on the 'principle of equivalence'. Thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciple that if the Government by some positive action confers upon individual(s), a particular measurable advantage, it is only fair to the community at large that the beneficiary shall pay for it. The basic difference between a tax on one hand and a fee/compensatory tax on the other hand is that the former is based on the concept of burden whereas compensatory tax/fee is based on the concept of recompense/reimbursement. For a tax to be compensatory, there must be some link between the quantum of tax and the facility/services. Every benefit is measured in terms of cost which has to be reimbursed by compensatory tax or in the form of compensatory tax. In other words, compensatory tax is a recompense/ reimbursement. 40.. In the context of article 301, therefore, compensatory tax is a compulsory contribution levied broadly in proportion to the special benefits derived to defray the costs of regulation or to meet the outlay incurred for some special advantage to trade, commerce and intercourse. It may incidentally bring in net-revenue to the Government but that circumstance is not an essential ingredient of compensatory tax. 41.. Since compensatory tax is a judicially evolved conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Scope of articles 301, 302 and 304 vis-a-vis compensatory tax: 44.. As stated above, taxing laws are not excluded from the operation of article 301, which means that tax laws can and do amount to restrictions on the freedom guaranteed to trade under Part XIII of the Constitution. This principle is well-settled in the case of Atiabari Tea Co. AIR 1961 SC 232. It is equally important to note that in Atiabari Tea Co. AIR 1961 SC 232, the Supreme Court propounded the doctrine of 'direct and immediate effect'. Therefore, whenever a law is challenged on the ground of violation of article 301, the court has not only to examine the pith and substance of the levy but in addition thereto, the court has to see the effect and the operation of the impugned law on inter-State trade and commerce as well as intraState trade and commerce. 45.. When any legislation, whether it would be a taxation law or a non-taxation law, is challenged before the court as violating article 301, the first question to be asked is: What is the scope of the operation of the law? Whether it has chosen an activity like movement of trade, commerce and intercourse throughout India, as the criterion of its ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to meet the facial test as there is no quantifiable data on the basis of which the nature of tax can be held to be compensatory. There is no quantifiable or measurable benefit. Provisions are clearly ambiguous and are of the nature of general development. Mere mention of words exclusively for development or facilitating trade, commerce and industry is not enough to satisfy the test laid down for holding the levy to be compensatory in character. There is no tangible data to ascertain that service is planned to be provided, envisages quantifiable and measurable benefit. On the other hand, the levy is for general development and incidental benefit which is not measurable does not meet the principle of equivalence. Such a levy unless saved under article 304, will be ultra vires article 301 of the Constitution on the principles laid down by the Constitution Bench. For the same reasons, provisions of section 33 validating the levy under the 2000 Act to retain the amount collected for which no specific services were held to have been rendered will also be hit by article 301 of the Constitution. It has not been disputed that out of a sum of Rs. 1,600 crores already collected, only a sum ..... X X X X Extracts X X X X X X X X Extracts X X X X
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