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NO. 4715/2008, C.A. NO. 5041-5042/2008, SLP(C) NO. 5407/2008, SLP(C) NO. 5408/2008, SLP(C) NO. 6148-6152/2008, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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NO. 6692/2009, SLP(C) NO. 6693/2009, SLP(C) NO. 6694/2009, SLP(C) NO. 6696/2009, SLP(C) NO. 6698/2009, SLP(C) NO. 6699/2009, SLP(C) NO. 6700/2009, SLP(C) NO. 6701/2009, SLP(C) NO. 6702/2009, SLP(C) NO. 6703/2009, Page 7 7 SLP(C) NO. 6704/2009, SLP(C) NO. 6705/2009, SLP(C) NO. 6708/2009, SLP(C) NO. 6709/2009, SLP(C) NO. 6710/2009, SLP(C) NO. 6711/2009, SLP(C) NO. 6712/2009, SLP(C) NO. 6713/2009, SLP(C) NO. 6714-6715/2009, SLP(C) NO. 6953/2009, SLP(C) NO. 7345/2009, SLP(C) NO. 8244/2009, SLP(C) NO. 9548/2009, SLP(C) NO. 9699/2009, SLP(C) NO. 10040/2009, SLP(C) NO. 10041/2009, SLP(C) NO. 10042/2009, SLP(C) NO. 10045/2009, SLP(C) NO. 10047/2009, SLP(C) NO. 10048/2009, SLP(C) NO. 10049/2009, SLP(C) NO. 10050/2009, SLP(C) NO. 10051/2009, SLP(C) NO. 10053-10054/2009, SLP(C) NO. 10192/2009, SLP(C) NO. 10279/2009, SLP(C) NO. 10952/2009, SLP(C) NO. 10954-10956/2009, SLP(C) NO. 11042/2009, SLP(C) NO. 11122/2009, SLP(C) NO. 11603-11611/2009, SLP(C) NO. 11646/2009, SLP(C) NO. 12948/2009, SLP(C) NO. 13270-13274/2009, SLP(C) NO. 13483/2009, SLP(C) NO. 13496/2009, SLP(C) NO. 13517/2009, SLP(C) NO. 13611-13612/2009, SLP(C) NO. 14429/2009, SLP(C) NO. 14484/2009, SLP(C) NO. 14488/2009, SLP(C) NO. 146 ..... 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NO. 5343-5344/2010, SLP(C) NO. 6037/2010, SLP(C) NO. 6723/2010, SLP(C) NO. 6762/2010, SLP(C) NO. 6763/2010, SLP(C) NO. 6765/2010, SLP(C) NO. 6770/2010, SLP(C) NO. 6811/2010, SLP(C) NO. 7356/2010, SLP(C) NO. 7426/2010, SLP(C) NO. 7776/2010, SLP(C) NO. 7929/2010, SLP(C) NO. 9022/2010, SLP(C) NO. 9077/2010, SLP(C) NO. 9702/2010, SLP(C) NO. 9723/2010, SLP(C) NO. 10361/2010, SLP(C) NO. 11419/2010, SLP(C) NO. 11423/2010, SLP(C) NO. 12690/2010, SLP(C) NO. 14845/2010, SLP(C) NO. 14886/2010, SLP(C) NO. 15015/2010, SLP(C) NO. 15903/2010, SLP(C) NO. 16694/2010, SLP(C) NO. 16720/2010, SLP(C) NO. 18318/2010, SLP(C) NO. 18834/2010, SLP(C) NO. 19194/2010, SLP(C) NO. 19199/2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /2012, C.A. NO. 9162/2012, C.A. NO. 9163/2012, C.A. NO. 9164/2012, C.A. NO. 9165/2012, C.A. NO. 9166/2012, C.A. NO. 9167/2012, C.A. NO. 9168/2012, C.A. NO. 9169/2012, C.A. NO. 9170/2012, C.A. NO. 9292/2012, C.A. NO. 9293/2012, SLP(C) NO. 16535-16536/2012, SLP(C) NO. 16538/2012, SLP(C) NO. 18602/2012, SLP(C) NO. 28173/2012, SLP(C) NO. 33954/2012, SLP(C) NO. 36187/2012, SLP(C) NO. 37455/2012, SLP(C) NO. 37680/2012, SLP(C) NO. 37708-37709/2012, SLP(C) NO. 37712/2012, SLP(C) NO. 37728/2012, SLP(C) NO. 38304/2012, SLP(C) NO. 38919/2012, SLP(C) NO. 39998/2012, SLP(C) NO. 40146/2012, SLP(C) NO. 40147/2012, T.C.(C) NO. 149/2013, SLP(C) NO. 449/2013, C.A. NO. 539/2013, C.A. NO. 540/2013, C.A. NO. 541/2013, C.A. NO. 542/2013, C.A. NO. 543/2013, C.A. NO. 544/2013, C.A. NO. 545/2013, C.A. NO. 546/2013, C.A. NO. 547/2013, C.A. NO. 548/2013, SLP(C) NO. 1426/2013, SLP(C) NO. 8939/2013, SLP(C) NO. 9844/2013, SLP(C) NO. 10466/2013, SLP(C) NO. 10516/2013, SLP(C) NO. 10879/2013, SLP(C) NO. 11060/2013, SLP(C) NO. 16744-16746/2013, SLP(C) NO. 16867/2013, SLP(C) NO. 16869/2013, SLP(C) NO. 16870/2013, SLP(C) NO. 27001-27002/2013, SLP(C) NO. 30986/2013, SLP(C) NO. 32256/2013, SLP(C) NO. 33600/2013, C.A. N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 015, SLP(C) NO. 11170/2015, SLP(C) NO. 12844/2015, SLP(C) NO. 8162/2015, SLP(C) NO. 11484/2015, SLP(C) NO. 12847/2015, SLP(C) NO. 11582/2015, SLP(C) NO. 11592/2015, SLP(C) NO. 13200/2015, SLP(C) NO. 13201/2015, SLP(C) NO. 4219-4227/2015, SLP(C) NO. 2966-2999/2015, SLP(C) NO. 11888/2015, SLP(C) NO. 11203/2015, SLP(C) NO. 14828/2015, SLP(C) NO. 14854/2015, SLP(C) NO. 15856/2015, SLP(C) NO. Page 11 11 15857/2015, SLP(C) NO. 15858/2015, SLP(C) NO. 11458-11465/2015, SLP(C) NO. 18213/2015, SLP(C) NO. 18333/2015, SLP(C) NO. 16312/2015, SLP(C) NO. 18334/2015, SLP(C) NO. 18335/2015, SLP(C) NO. 15855/2015, SLP(C) NO. 18338/2015, SLP(C) NO. 18184/2015, SLP(C) NO. 18179/2015, C.A. NO. 1956/2003, SLP(C) NO. 8775-8777/2015, SLP(C) NO. 5303/2015, SLP(C) NO. 16853/2015, SLP(C) NO. 21720/2015, SLP(C) NO. 23673-23674/2015, SLP(C) NO. 23764/2015, SLP(C) NO. 23765/2015, SLP(C) NO. 15353/2015, SLP(C) NO. 22349/2015, SLP(C) NO. 21718/2015, SLP(C) NO. 24547/2015, SLP(C) NO. 23757/2015, C.A. NO. 8240/2015, SLP(C) NO. 26751/2015, SLP(C) NO. 9117/2015, SLP(C) NO. 2214/2015, SLP(C) NO. 2531/2015, SLP(C) NO. 2289/2015, SLP(C) NO. 2530/2015, SLP(C) NO. 2392/2015, SLP(C) NO. 2499/2015, SLP(C) NO. 2502/2015, SLP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sharmila Upadhayay, Adv., Mr. E.C.Agrawala, Adv., M/s. Gagrat & CO., Ms. B.Sunita Rao, Adv., Ms. Bina Gupta, Adv., Mr. Jayant Kumar Mehta, Adv., Mr. Rajesh Prasad Singh, Adv., Mr. Akshat Shrivastava, Adv., Mr. Rajeev Sharma, Adv., Mr. V.N.Raghupathy, Adv., Mr. Ashok Kumar Gupta II, Mr. Ashok Panigrahi, Adv., Mr. Kedar Nath Tripathi, Adv., Mr. T.K.Pradhan, Adv., Mr. Vinay Garg, Adv., MS. Rakhi Ray, Adv., MS. Kumud Lata Das, Adv., Mr. T.Mahipal, Adv., Mr. B.K.Prasad, Adv., Mr. Abhay Kumar, Adv., Mr. A.S.Bhasme, Adv., Mr. A.P.Medh, Adv., Ms. Manik Karanjawala, Adv., Mr. K.K.Mani, Adv., Mr. Gaurav Kejriwal, Adv., Mr. Arvind Minocha,Adv., Mr. Shadan Farasat, Adv., Mr. G.V.Rao, Adv., Ms. Prerna Mehta, Adv., Mr. C.D.SIngh, Adv., MR. Sanjay Kumar Visen, Adv., Mr. Jai Prakash Pandey, Adv., Mr. Vivek Jain, Adv., Mr. S.S.Shroff, Adv., Mr. Vipin Kumar Jai, Adv., Mr. Anil Shrivastav, Adv., Mr. Parmanand Pandey, Adv., Mr. Krishnanad Pandeya, Adv., Mr. Abhijit Sengupta, Adv., Ms. Sushma Suri, Adv., Mr. P.V. Dinesh, Adv., Mr. Radha Shyam Jena, Adv., Ms. Kanchaan Kaur Dhodi, Adv., MS. Divya Roy, Adv., MS. Naresh Bakshi, Adv., Mr. M.A.Krishna Moorthy, Adv., Mr. A.P.Mayee, Adv., Mr. Parijat Sinha, Ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Aruna & CO., Mr. M.K. Michael,Adv., Mr. A. Raghunath,Adv., Mr. Rajesh Kumar,Adv., Mr. K. Rajeev,Adv., Mrs.Prabha Swami,Adv., Mr. Deba Prasad Mukherjee,Adv., Mr. R.V. Kameshwaran,Adv., Mr. T.G. Narayanan Nair,Adv., Mr. V.K. Sidharthan,Adv., Ms. Srikala Gurukrishna Kumar,Adv., Mr. C.K. Sasi,Adv., Ms. S. Janani,Adv., Ms. Malani Poduval,Adv., Mr. Shree Pal Singh,Adv., Mr. Vijay Kumar,Adv., Mr. E.M.S. Anam,Adv., Ms. Meera Mathur,Adv., Mr. Jogy Scaria,Adv., Mr. Bijoy kumar Jain,Adv., Mr. Rupesh Kumar,Adv., Mrs.Kanchan Kaur Dhodi,Adv., Mr. Samil Ali Khan,Adv., Mr. A. Raghunath,Adv., M/s.T.T.K. Deepak & CO., Mr. Rauf Rahim,Adv., Mr. Jai Prakash Pandey,Adv., Mr. Manish Bishnoi,Adv., Mr. Ghanshyam Joshi,Adv., Mr. M.P. Devanath,Adv., Mr. Somiran Sharma,Adv., Mr. Chiranjan Addey,Adv., Mr. Rajiv Tyagi,Adv., Mr. Vipin Kumar Jain,Adv., Mr. V.K. Monga,Adv., Mr. K.V. Mohan,Adv., Mr. Liz Mathew,Adv., Mr. Parmanand Pandey,Adv., Mr. Ejaj Maqbool,Adv., Mr. Prem Prakash,Adv., Mr. A.V. Rangam,Adv., Mr. Y. Raja Gopala Rao,Adv., Mr. Abhijat P. Medh,Adv., Ms. T. Anamika,Adv., Mr. Vipin Nair,Adv., Mr. Sunil Kumar Jain,Adv., Mr. Praveen Kumar,Adv., Ms. Bina Gupta,Adv., Mr. Rajeev Maheswaranand Roy,Adv., Mr. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollows that levy of a non-discriminatory tax would not constitute an infraction of Article 301. 3. Clauses (a) and (b) of Article 304 have to be read disjunctively. 4. A levy that violates 304(a) cannot be saved even if the procedure under Article 304(b) or the proviso there under is satisfied. 5. The compensatory tax theory evolved in Automobile Transport case and subsequently modified in Jindal's case has no juristic basis and is therefore rejected. 6. Decisions of this Court in Atiabari, Automobile Transport and Jindal cases (supra) and all other judgments that follow these pronouncements are to the extent of such reliance over ruled. 7. A tax on entry of goods into a local area for use, sale or consumption therein is permissible although similar goods are not produced within the taxing state. 8. Article 304 (a) frowns upon discrimination (of a hostile nature in the protectionist sense) and not on mere differentiation. Therefore, incentives, set-offs etc. granted to a specified class of dealers for a limited period of time in a non-hostile fashion with a view to developing economically backward areas would not violate Article 304(a). The question whether the levies in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tution of India. Absence of Presidential sanction in terms of Article 304(b) of the Constitution of India was also set-up as a ground of challenge to the levies imposed by the respective State legislatures. Writ Petition (Civil) No. 8700 of 2000 filed before the High Court of Punjab and Haryana was one such petition that assailed the constitutional validity of the Haryana Local Development Act, 2000. Relying upon the decisions of this Court in Atiabari Tea Co. Ltd. v. State of Assam & Ors. (AIR 1961 SC 232); Automobile Transport (Rajasthan) Ltd. etc. v. State of Rajasthan & Ors. (AIR 1962 SC 1406); M/s. Bhagatram Rajeev Kumar v. Commissioner of Sales Tax, M.P. and Ors. (1995 Supp [1] SCC 673 ); and State of Bihar and Ors. v. Bihar Chamber of Commerce and Ors. (1996) 9 SCC 136, a Division Bench of the High Court of Punjab and Haryana dismissed the said petition and connected matters on the ground that the levy was compensatory in character hence outside the purview of Article 301. 3. The correctness of the said order was assailed before this Court in Jindal Stripe Ltd. and Anr. v. State of Haryana and Ors. (2003) 8 SCC 60. A two-Judge Bench of this Court, however, referred the matt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nless Ltd. (2) and Anr. v. State of Haryana and Ors., (2006) 7 SCC 241 which resolved the conflict noticed in the reference order by holding that the working test propounded by seven Judges in Automobile Transport case (supra) was incompatible with the test of 'some connection' enunciated by the three Judge Bench in Bhagatram's case (supra). The Court held that the test of 'some connection' as propounded in Bhagatram's case (supra) had no application to the concept of compensatory tax. The Court, accordingly, overruled the decisions rendered in Bhagatram and Bihar Chamber of Commerce cases and held that the doctrine of 'direct and immediate effect' of the impugned law on trade and commerce under Article 301 as propounded in Atiabari (supra) and the working test enunciated in Automobile Transport (supra) cases for deciding whether a tax is compensatory or not will continue to apply. The Court observed: "53. 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 and the working test enunciated in Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two-Judge Bench of this Court comprising Justice Arijit Pasayat and Justice S.H. Kapadia. Their Lordships referred the same to a Constitution Bench for an authoritative pronouncement on as many as ten questions formulated in the reference order (Jaiprakash Associates Limited v. State of Madhya Pradesh and Ors. (2009) 7 SCC 339). The Court noticed the arguments advanced on behalf of the assessees that entry taxes were, in essence and in the classical sense, in the nature of 'a fee' and not 'a tax'. It also noted the contention that all the cases on which the parties had placed reliance related to entry tax in the context of tax on vehicles in contradiction to taxes on entry of goods. The Court was of the view that while the Constitution Bench in Jindal Stainless Ltd. (2) (supra) had dealt with some aspects of the matter, certain other important constitutional issues remained to be examined especially because a conceptually and contextually different approach may be required vis-à-vis "transport cases" on the one hand and cases of "entry tax on goods" on the other. The questions formulated by the Court for determination by the Constitution Bench were in the following words: " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ates Article 301 of the Constitution can be saved by reference to Article 304 of the Constitution alone or can be saved by any other article? (10) Whether a levy under Entry 52 List II, even if held to be in nature of a compensatory levy, must, on the principle of equivalence demonstrate that 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) to be provided in the "local area" concerned and whether the entire State or a part thereof can be comprehended as local area for the purpose of entry tax?" 8. The matter was accordingly placed before a five-Judge Bench of this Court (Jindal Stainless Limited and Anr. v. State of Haryana and Ors. (2010) 4 SCC 595) who briefly referred to the decisions in Atiabari, Automobile Transport cases (supra) and Keshav Mills Co. Ltd. v. CIT (AIR 1965 SC 1636) and a few others and referred the matters to a larger Bench for reconsideration of the judgment of this Court in Atiabari and Automobile Transport (supra). The Court noted that the correctness of the view taken in the said two ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n No. 1 is in the affirmative, can a tax which is compensatory in nature also fall foul of Article 301 of the Constitution of India? 3. What are the tests for determining whether the tax or levy is compensatory in nature? 4. Is the Entry Tax levied by the States in the present batch of cases violative of Article 301 of the Constitution and in particular have the impugned State enactments relating to entry tax to be tested with reference to both Articles 304(a) and 304(b) of the Constitution for determining their validity? 10. We have heard learned counsel for the parties at considerable length on the above questions which we shall now take up for discussion ad-seriatim. Re: Question No. 1 11. Whether non-discriminatory fiscal measures also impede free trade, commerce and intercourse and thereby fall foul of Article 301 of the Constitution can be answered only if one keeps in view the Constitutional scheme underlying separation of powers in a federal system of governance like the one chosen by us. The answer would also depend upon the way we look at, understand and interpret the provisions of the Constitution and in particular the provisions of Parts XI, XII and XIII thereo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to displace or modify. It is to read the statute as a whole and ask oneself the question: 'In this state, in this context, relating to this subject-matter, what is the true meaning of that word. 57. I respectfully adopt the reasoning of Lord Green in construing the expression "the amendment of the Constitution.... xxxxxxxx 61. I may also refer to the observation of Gwyer, C.J., and Lord Wright: "A grant of the power in general terms, standing by itself, would no doubt be construed in the wider sense; but it may be qualified by other express provisions in the same enactment, by the implications of the context, and even by considerations arising out of what appears to be the general scheme of the Act." (Per Gwyer, C.J. - The Central Provinces and Berar Act, 1939, FCR 18 at 42 MR). "The question, then, is one of construction and in the ultimate resort must be determined upon the actual words used, read not in vacua but as occurring in a single complex instrument, in which one part may throw light on another. The Constitution has been described as the federal compact, and the Construction must hold a balance between all its parts." (Per Lord Wright - James v. Commonwealth o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tercourse. We may now briefly refer to these fundamentals before adverting to the provisions of Part XIII that fall for our interpretation. Power to Tax : an Attribute of sovereignty 14. Power to levy taxes has been universally acknowledged as an essential attribute of sovereignty. Cooley in his Book on Taxation - Volume-1 (4th Edn.) in Chapter-2 recognises the power of taxation to be inherent in a sovereign State. The power, says the author, is inherent in the people and is meant to recover a contribution of money or other property in accordance with some reasonable rule or apportionment for the purpose of defraying public expenses. The following passage from the book is apposite: "57. Power to tax as an inherent attribute of sovereignty. The power of taxation is an essential and inherent attribute of sovereignty, belonging as a matter of right to every independent government. It is possessed by the government without being expressly conferred by the people. The power is inherent in the people because the sustenance of the government requires contributions from them. In fact the power of taxation may be defined as "the power inherent in the sovereign state to recover a contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved by the State, it would not be able to function as a sovereign Government at all. It is essential that as a sovereign, the State should be able to discharge its primary governmental functions and in order to be able to discharge such functions efficiently, it must be in possession of necessary funds and this consideration emphasises the necessity and the wisdom of conceding to the State, the right to claim priority in respect of its tax dues (see Builders Supply Corpn.[AIR 1965 SC 1061: (1965) 56 ITR 91])" (Emphasis supplied) 17. In Commissioner of Income Tax, Udiapur, Rajasthan v. MCdowell and Co. Ltd. (2009) 10 SCC 755 where this Court reiterated the legal position in the following words: "21. "Tax", "duty", "cess" or "fee" constituting a class denotes to various kinds of imposts by State in its sovereign power of taxation to raise revenue for the State. Within the expression of each specie each expression denotes different kind of impost depending on the purpose for which they are levied. This power can be exercised in any of its manifestation only under any law authorising levy and collection of tax as envisaged under Article 265 which uses only the expression that no " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the territory of India, and the Legislature of a State may make laws for the whole or any part of the State. (2) No law made by Parliament shall be deemed to be invalid on the ground that it would have extra-territorial operation. 246. Subject-matter of laws made by Parliament and by the Legislatures of States - (1) Notwithstanding anything in clauses (2) and (3), Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule (in this Constitution referred to as the "Union List"). (2) Notwithstanding anything in clause (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 in the Seventh Schedule (in this Constitution referred to as the "Concurrent List"). (3) 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 (in this Constitution referred to as the 'State List'). (4)Parliament has power to make laws with respect to any matter for any part of the te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te Legislatures, with reference to the different Lists in the Seventh Schedule. In short, Parliament has full and exclusive powers to legislate with respect to matters in List I and has also power to legislate with respect to matters in List III, whereas the State Legislatures, on the other hand, have exclusive power to legislate with respect to matters in List II, minus matters falling in List I and List III and have concurrent power with respect to matters in List III. (See Subrahmanyan Chettiar v. Muttuswami Goundan) 37. Article 246, thus, provides for distribution, as between Union and the States, of the legislative powers which are conferred by Article 245. Article 245 begins with the expression "subject to the provisions of this Constitution". Therefore, Article 246 must be read as "subject to other provisions of the Constitution". 38. For the purposes of this decision, the point which needs to be emphasised is that Article 245 deals with conferment of legislative powers whereas Article 246 provides for distribution of the legislative powers. Article 245 deals with extent of laws whereas Article 246 deals with distribution of legislative powers. In these articles, the Con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laws in force in the territory of India immediately before the commencement of the Constitution are void to the extent they are inconsistent with the provisions of Part III dealing with the fundamental rights guaranteed to the citizens. It forbids the States from making any law which takes away or abridges, any provision of Part III. Any law made in contravention of the said rights shall to the extent of contravention be void. There is no gain saying that the power to enact laws has been conferred upon the Parliament subject to the above Constitutional limitation. So also in terms of Article 248, the residuary power to impose a tax not otherwise mentioned in the Concurrent List or the State List has been vested in the Parliament to the exclusion of the State legislatures, and the States' power to levy taxes limited to what is specifically reserved in their favour and no more. 22. Article 249 similarly empowers the Parliament to legislate with respect to a matter in the State List for national interest provided the Council of States has declared by a resolution supported by not less than two-thirds of the members present and voting that it is necessary or expedient in national inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntains a Constitutional limitation on the power of the State in so far as imposition of a tax in respect of any water or electricity stored, generated, consumed, distributed or sold by any authority established by any existing law or any law made by the Parliament is concerned. 27. It would thus appear that even when Article 246(2) and (3) confers exclusive power on the State legislatures to make laws with respect to matters in the Seventh Schedule such legislative power is exercisable subject to constitutional limitations referred to above. What is significant is that the power of the State legislatures to levy taxes is also subject to the limitations of Article 304(a) of the Constitution appearing in Part XIII thereof, which part regulates trade, commerce and intercourse within the territory of India and comprises Articles 301 to 307. The provisions of these Articles have been the subject matter of a series of decisions of this Court including several Constitution Bench decisions to some of which we shall presently refer. The language employed in the provisions and the non-obstante clauses with which the same start have all the same given rise to several contentious issues for d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titutional provisions. We are mentioning all this only to show that even after fifty years and several illuminating pronouncements of this Court, the cleavage in the judicial opinion as to the true and correct legal position on the subject continues to loom large and haunt lawyers and litigants and, if we may say so, even Judges alike. The present reference to a larger Bench is in that backdrop expected to give a quietus to this raging legal controversy of considerable complexity, though given the perseverance of the litigants and the ingenuity of the bar a quietus is only a pious hope which has and may even in future elude us. Constitutional Limitations must be Express: 28. The power to levy taxes, being a sovereign power controlled only by the Constitution, any limitation on that power must be express. That proposition is well settled by the decisions of this Court in Maharaj Umeg Singh v. State of Bombay, AIR 1955 SC 540 and Firm Bansidhar Premsukhdas v. State of Rajasthan AIR 1967 SC 40. In Umeg Singh's case (supra) this Court stated the legal position in the following words: "12.......The legislative competence of the State Legislature can only be circumscribed by express ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ises. The legislative competence of Parliament or of the State Legislatures can only be circumscribed by express prohibition contained in the Constitution itself and unless and until there is any provision in the Constitution expressly prohibiting legislation on the subject either absolutely or conditionally, there is no fetter of limitation on the plenary powers which the Legislature is endowed with for legislating on the topics enumerated in the relevant lists. This view is borne out by the decision of the Judicial Committee in Thakur Jagannath Baksh Singh v. The United Provinces [1946 FCR 111] in which a similar complaint was made by the taluqdars of Oudh against the United Provinces Tenancy Act (U.P. Act 17 of 1939). It was held by the Judicial Committee that the Crown cannot deprive itself of its legislative authority by the mere fact that in the exercise of its prerogative it makes a grant of land within the territory over which such legislative authority exists, and no court can annul the enactment of a legislative body acting within the legitimate scope of its sovereign competence. If therefore, it be found that the subject-matter of a Crown grant is within the competence o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nderlying the Constitution was more unitary than federal, on account not only of several provisions in the Constitution that empowered the Centre to at times intervene and enact laws for the States but also on account of the Centre's power to take over the governance of the State. Repelling that criticism, Dr. B.R. Ambedkar speaking in the Constituent Assembly explained the true character of the Constitution of India in the following significant words: "There is only one point of constitutional import to which I propose to make a reference. A serious complaint is made on the ground that there is too much of centralisation and that the States have been reduced to municipalities. It is clear that this view is not only an exaggeration, but is also founded on a misunderstanding of what exactly the Constitution contrives to do. As to the relation between the Centre and the States, it is necessary to bear in mind the fundamental principle on which it rests. The basic principle of federalism is that the legislative and executive authority is partitioned between the Centre and the States not by any law to be made by the Centre but by the Constitution itself. This is what Constitution does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be completely circumscribed by orders handed down for execution by the superior unit. The important words are 'must not be completely circumscribed', which envisages some powers of the State are bound to be circumscribed by the exercise of federal authority. Having all these factors in view, I will urge that our Constitution is a federal Constitution. I will urge that our Constitution is one in which we have given power to the units which are both substantial and significant in the legislative sphere and in the executive sphere." (Emphasis Supplied) 32. Whether or not the Constitution provides a federal structure for the governance of the country has been the subject matter of a long line of decisions of this Court, reference to all of which may be unnecessary but the legal position appears to be fairly well settled that the Constitution provides for a quasi federal character with a strong bias towards the Centre. The pronouncements recognised the proposition that even when Constitution may not be strictly federal in its character as the United States of America, where sovereign States came together to constitute a federal union, where each State enjoins a privilege of having ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such powers may be exercised by the Parliament during an emergency may not affect and dilute the federal character of the Constitution. So also, the provisions of Article 355 imposing the duty on the Union to protect a State against internal disorder are not inconsistent with the federal principles nor are the powers vested in the Central Government under Article 356 inconsistent with the federal character of the Constitution. The Court, in particular, dealt with the question whether List II contains unimportant matters thereby denuding the Constitution of its federal character. The Court observed that List II contains very important subjects assigned to the State including the power to levy taxes which powers are made mutually exclusive so that ordinarily the States have independent source of revenue of their own. The following passages from the decision are apposite: "....... 97 (k) The view that unimportant matters were assigned to the States cannot be sustained in face of the very important subjects assigned to the States in List II, and the same applies to taxing powers of the States, which are made mutually exclusive of the taxing powers of the Union so that ordinarily th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be applied strictly while scrutinising the concerned material." (Emphasis Supplied) 34. What is important is that B.P. Jeevan Reddy, J. speaking for himself and Aggarwal J., while holding the Constitution to be federal in character cautioned that the Centre cannot tamper with the powers conferred upon the States. States are not mere appendages of the Centre within the sphere allotted to them. The States are supreme and the Centre cannot tamper with their powers. 35. Justice K. Ramaswamy, speaking for himself also accepted federalism of the Indian Constitution as a basic feature. One other decision that has dealt with the federal character of the Constitution of India is Kuldeep Nair v. Union of India and Ors. (2006) 7 SCC 1 wherein this Court held that nature of federalism in the Indian Constitution is no longer res integra. Relying upon the Constituent Assembly Debates to which we have referred earlier. The Court declared: "50. A lot of energy has been devoted on behalf of the petitioners to build up a case that the Constitution of India is federal. The nature of federalism in the Indian Constitution is no longer res integra. 51. There can be no quarrel with the propositio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The exposition of different stages of evolution and development of what comprises Part XIII today has been both extensive as well as incisive. The decisions of the Court have gone into great details while examining the history of Part XIII. It will, therefore, be presumptuous for us to suggest that the historical basis of Part XIII is a virgin area being traversed for the first time. In fairness to the scholarly pronouncements that have preceded the present batch of cases, we must acknowledge with gratitude the usefulness of the in-depth study and understanding of the Judges who have examined and traced the evolution of Part XIII while drawing their conclusions from the same, no matter such inferences and conclusions have more often than not been varied which is but natural when one examines history or the events that led to its making. 38. It is, in our opinion, unnecessary to refer to all the decisions that have till now traced the development of the jurisprudence concerning Part XIII from its inception. A reference to some of the decisions alone should, in our opinion, suffice. The first of these decisions to which we must make a reference is the Constitution Bench decision in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and immediately as a restriction on free trade, commerce and intercourse guaranteed under Article 301 of the Constitution of India. The decision propounded three different points of view, one each taken by B.P. Sinha, CJ. and J.C. Shah, J. and the third by majority comprising P.B. Gajendragadkar, K.N. Wanchoo and K.C. Das Gupta, JJ. We shall presently deal with the rationale underlying the three views but before we do so, we may gainfully extract from the decision rendered by Sinha, CJ., the historical perspective in which Part XIII of the Constitution was enacted. In Para 9 of the Report, Sinha, CJ., as His Lordship then was, traced the evolution of Part XIII in the following words: "9. In order to fully appreciate the implications of the provisions of Part XIII of the Constitution, it is necessary to bear in mind the history and background of those provisions. The Constitution Act of 1935 (Government of India Act, 26 ('Geo. 5, Ch. 2) which envisages the federal constitution for the whole of India, including what was then Indian India in contradistinction to British India, which could not be fully implemented and which also introduced full provincial autonomy enacted Section 297 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact that many of them had erected trade barriers seriously impeding the free flow of trade, commerce and intercourse, not only shutting out but also shutting in commodities meant for mass consumption. Between the years 1947 and 1950 almost all the Indian States entered into engagements with the Government of India and ultimately merged their individualities into India as one political unit, with the result that what was called British India, broadly speaking, became, under the Constitution, Part A States, and subject to certain exceptions not relevant to our purpose, the Native States became Part B States. We also know that before the Constitution introduced the categories of Part A States, Part B States and Part C States (excluding Part D relating to other territories), Part B States themselves, before their being constituted into so many units, contained many small States, which formed themselves into Unions of a number of States, and had such trade barriers and custom posts, even inter se. But even after the merger, the Constitution had to take notice of the existence of trade barriers and therefore had to make transitional provisions with the ultimate objective of abolishing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p of Indian States. This merger or integration of Indian States with the Union of India was preceded by the merger and consolidation of some of the States inter-se between themselves. It is with the knowledge of the trade barriers which had been raised by the Indian States in exercise of their legislative powers that the Constitutionmakers framed the Articles in Part XIII. The main object of Article 301 obviously was to allow the free flow of the stream of trade, commerce and intercourse throughout the territory of India." 41. Then came the decision of this Court in Automobile case (supra) wherein, this Court examined the challenge to the Rajasthan Motor Vehicles Act, inter aila, on the ground that levy of taxes imposed under the said Act were offensive to Article 301 of the Constitution of India. S.K. Das, J. speaking for the majority also traced the historical background of Part XIII in the following words: "7. So far we have set out the factual and legal background against which the problem before us has to be solved. We must now say a few words regarding the historical background. It is necessary to do this, because extensive references have been made to Australian and Ameri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Constitution was first passed the territory of India consisted of Part A States, which broadly stated, represented the Provinces in British India, and Part B States which were made up of Indian States. There were trade barriers raised by the Indian States in the exercise of their legislative powers and the Constitution-makers had to make provisions with regard to those trade barriers as well. The evolution of a federal structure or a quasi-federal structure necessarily involved, in the context of the conditions then prevailing, a distribution of powers and a basic part of our Constitution relates to that distribution with the three legislative lists in the Seventh Schedule. ... ... ..." 42. Hidayatullah J., in a separate dissenting opinion traced at great length the historical evolution of not only the federal structure of the Government of India Act, 1915 but also the recommendations made by the Simon Commission and the Joint Parliamentary Committee on the Evolution of such Federalism and for the protection of trade, commerce and intercourse. His Lordship referred to the backdrop in which the Government of India Act, 1935 was enacted, including the recommendations made by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct regarding trade and commerce which were sought to be remedied by the framers of the Constitution while maintaining its federal structure. The following passage is, in this regard, instructive: "96. When drafting the Constitution of India, the Constituent Assembly being aware of the problems in various countries where freedom of trade, commerce and intercourse has been provided differently and also the way the Courts of those countries have viewed the relative provisions, must have attempted to evolve a pattern of such freedom suitable to Indian conditions. The Constituent Assembly realised that the provisions of Section 297 and the Chapter on Discriminations in the Government of India Act, 1935 hardly met the case, and were inadequate. They had to decide the following questions: (a) whether to give the commerce power only to Parliament or to divide it between Parliament and the State Legislatures; (b) whether to ensure freedom of trade, commerce and intercourse inter-State, that is to say, at the borders of the States or to ensure it even intra-State; (c) whether to make the prohibition against restrictions absolute or qualified, and if so, in what manner; (d) if qualified, by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urse. With the merger of these Princely States into the dominion of India to constitute one single political entity, that part of the country that was ruled by the British came to be known as Part-A State while the native States became Part B States. What is significant is that even after the merger of these States, the Constitution had to acknowledge the existence of trade barriers and make transitional provisions with a view to eventually abolishing the same. It was in that background that the Constitution by Article 301 provided for the abolition of all such trade barriers consequent upon the entire geographical boundaries of India being knit into one political unit. The whole object underlying the removal of such barriers was to facilitate free trade, commerce and intercourse in the interest of national solidarity and economic unity of the country. The evolution of Articles 301 to 307 comprising Part XIII of the Constitution is also punctuated by several events, twists and turns to which we may briefly refer at this stage, but, while we may do so, we need to remember that Section 297 of the Government of India Act, 1935 dealt with the subject that eventually came under the umbr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e or revenue by a unit to one unit over another. [N.B. - A proviso will have to be added to meet the difficulty pointed out in para 6 of our report.] (2) Trade, commerce or intercourse within the territories of the Union by or with any person other than the citizens shall be regulated and controlled by the law of the Union. 48. The above clause then came up for consideration before the Advisory Committee where an elaborate debate ensued. What is of considerable importance is the statement of Sir Alladi Krishnaswami Ayyar where he explained the purpose of enabling a State to impose reasonable restriction in the interest of public order, morality, health or in an emergency: "Chairman: Then let us take up clause 14 C. Rajagopalachari: I Think we should add to 14 (1) that this shall not be a bar to the imposition of taxes for genuine purposes of revenue. Many Members: That comes later on: "N.B. A proviso will have to be added to meet the difficulty pointed out in para 6 of our report." C. Rajagopalachari: That is why I am adding it. Alladi Krishnaswami Ayyar: "Subject to regulation by the law of the Union, trade, commerce, and intercourse among the units by and between t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e right to impose a tax up to 5% only, both on imports and exports. In Travancore and Cochin it is governed by what is called inter-portal convention. A large number of States have no right whatever even now for imposing customs duty, but a considerable number of them do enjoy this power and their budgetary position today is based on the customs duties they receive, both the maritime States and the internal States. Therefore arrangements will have to be made with them by agreement and contract for setting this matter. Alladi Krishnaswami Ayyar: The Union Powers Committee's attention was drawn to this matter and it was suggested by Sir V.T. Krishnamachari and Sir B.L. Mitter that some reference should be made to it in their report. We wanted to permit the States to enjoy the indulgence they have been enjoying. But we should guard against converting the country into competing units; that will be against the federation idea. Chairman: What shall we do about the note? A proviso will have to be added to meet the difficulty pointed out in para 6 of the report. Shall we leave it as it is or shall we draft it? C. Rajagopalachari: I would request members who have given thought to this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rporated the above provision as Clause 10. Certain amendments to the said clause were suggested and adopted by the Constituent Assembly. 50. In the first Draft Constitution of October, 1947, Clause 17 underwent further amendments and eventually appeared in the Draft Constitution of 1948 as Clause 16 incorporated in the Fundamental Rights Chapter in the following words: "16. Subject to the provisions of Article 244 of this Constitution and of any law made by Parliament, trade, commerce and intercourse throughout the territory of India shall be free." 51. It is noteworthy to mention here that Inter-State trade and commerce was dealt with in Articles 243, 244 and 245 in the Draft Constitution of 1948 which Articles were in the following terms: "243. No preference shall be given to one State over another nor shall any discrimination be made between one State and another by any law or regulation relating to trade or commerce, whether carried by land, water or air. 244. Notwithstanding anything contained in article 16 or in the last preceding article of this Constitution, it shall be lawful for any State - (a) to impose on good imported from other States any tax to which simila ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... moved an amendment seeking to delete Articles 243, 244 and 245 and the same was adopted. Simultaneously, a new Part XA was introduced containing draft Article 274-A to E. Dr. Ambedkar informed the House that the Articles that were otherwise scattered were now brought together so as to ensure that members could get a holistic idea regarding trade and commerce. Article 274-A was a repetition of Article 16 and laid down the general principle. Article 274-B empowered Parliament to impose restrictions in public interest. Article 274-C prohibited Parliament and the State legislatures from making any law giving any preference to one State over another, or making any discrimination between one State and another, except when Parliament found it necessary to do so to deal with a situation arising from scarcity of goods; Article 274-D vested with the State legislatures the power to impose non-discriminatory tax qua external goods and to impose reasonable restrictions in public interest and Article 274-E provided for an Inter-State Commission. 55. The Constituent Assembly Debates suggests that the introduction of Articles 274A to 274E was severely criticized by several members of the Assembly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m contemplated by Section 297 of the Constitution Act of 1935, and whatever else it may or may not include, it certainly includes movement of trade which is of the very essence of all trade and is its integral part. If the transport or the movement of goods is taxed solely on the basis that the goods are thus carried or transported that, in our opinion, directly affects the freedom of trade as contemplated by Article 301. If the movement, transport or the carrying of goods is allowed to be impeded, obstructed or hampered by taxation without satisfying the requirements of Part XIII the freedom of trade on which so much emphasis is laid by Article 301 would turn to be illusory. When Article 301 provides that trade shall be free throughout the territory of India primarily it is the movement part of the trade that it has in mind and the movement or the transport part of trade must be free subject of course to the limitations and exceptions provided by the other Articles of Part XIII. That we think is the result of Article 301 read with the other Articles in Part XIII. 51. Thus the intrinsic evidence furnished by some of the Articles of Part XIII shows that taxing laws are not exclude ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt is accepted it would mean, for instance, that even a legislative enactment prescribing the minimum wages to industrial employees may fall under Part XIII because in an economic sense an additional wage bill may indirectly affect trade or commerce. We are, therefore, satisfied that in determining the limits of the width and amplitude of the freedom guaranteed by Article 301 a rational and workable test to apply would be: Does the impugned restriction operate directly or immediately on trade or its movement? It is in the light of this test that we propose to examine the validity of the Act under scrutiny in the present proceedings." 58. On behalf of the respondent-States it was per contra argued that the power to levy taxes is a sovereign power that remains totally unaffected by Article 301 of the Constitution of India. Free trade, commerce and intercourse was not, according to the learned counsel, to be understood as free from any restrictions, leave alone free from taxes which the State legislatures were otherwise competent to levy. Enunciation of law by Sinha, CJ. was according to the learned Attorney General for India and learned Counsel appearing for the States, the correct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case must mean an impediment or restraint against free flow of trade and commerce. Similarly, for the facility of passengers and goods by motor transport or by railway, a surcharge on usual fares or freights is levied, or may be levied in future. But for such a surcharge, improvement in the means of communication may not be available at all. Hence, in my opinion, it is not correct to characterise a tax on movement of goods or passengers as necessarily connoting an impediment, or a restraint, in the matter of trade and commerce. That is another good reason in support of the conclusion that taxation is not ordinarily included within the terms of Article 301 of the Constitution. 16. In my opinion, another very cogent reason for holding that taxation simpliciter is not within the terms of Article 301 of the Constitution is that the very connotation of taxation is the power of the State to raise money for public purposes by compelling the payment by persons, both natural and juristic, of monies earned or possessed by them, by virtue of the facilities and protection afforded by the State. Such burdens or imposts, either direct or indirect, are in the ultimate analysis meant as a contri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring the Union Government and the State Governments to impose certain taxations with reference to movement of goods and passengers would be rendered ineffective, if not otiose, if it were held that taxation simpliciter is within the terms of Article 301. (3) If the argument on behalf of the appellants were accepted, many taxes, for example, sales tax by the Union and by the States, would have to go through the gamut prescribed in Articles 303 and 304, thus very much detracting from the limited sovereignty of the States, as envisaged by the Constitution. (4) Laws relating to taxation, which is essentially a legislative function of the State, will become justiciable and every time a taxation law is challenged as unconstitutional, the State will have to satisfy the courts - a course which will seriously affect the division of powers on which modern constitutions, including ours, are based. (5) Taxation on movement of goods and passengers is not necessarily an impediment. 17. That conclusion leads to a discussion of the other extreme position that taxation is wholly out of the purview of Article 301. That extreme position is equally untenable in view of the fact that Article 304 cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Legislature of a State on goods imported from another State or other States, if similar taxes are imposed on goods produced or manufactured in that State [Article 304(a)]; and lastly (7) restrictions imposed by existing laws have been continued, except insofar as the President may by order otherwise direct (Article 305)." 59. Before we examine the rival submissions, we must also refer to the decision of this Court in Automobile case (supra) which added a new dimension to the legal exposition in Atiabari case (supra) by declaring that taxes that were compensatory in nature fell outside Part XIII and could never be treated as restrictions offensive to Article 301 of the Constitution. S.K. Das, J. speaking for the majority explained the concept of compensatory taxes falling outside Part XIII in the following words: "10... As the language employed in Article 301 runs unqualified the Court, bearing in mind the fact that that provision has to be applied in the working of an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or deterrent to traders who, in their absence, may have to take a longer or less convenient or more expensive route. Such compensatory taxes are no hindrance to anybody's freedom so long as they remain reasonable; but they could of course be converted into a hindrance to the freedom of trade. If the authorities concerned really wanted to hamper anybody's trade, they could easily raise the amount of tax or toll to an amount which would be prohibitive or deterrent or create other impediments which instead of facilitating trade and commerce would hamper them. It is here that the contrast, between "freedom" (Articles 301) and "restrictions" (Articles 302 and 304) clearly appears: that which in reality facilitates trade and commerce is not a restriction, and that which in reality hampers or burdens trade and commerce is a restriction. It is the reality or substance of the matter that has to be determined. It is not possible a priori to draw a dividing line between that which would really be a charge for a facility provided and that which would really be a deterrent to a trade; but the distinction, if it has to be drawn, is real and clear. For the tax to become a prohibited tax it has to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a vital difference between the two, viewed from the angle of freedom of trade and commerce. The first is an impost on trade as such, and may be said to restrict it; the second may burden the trader, but it is not a "restriction" of the trade. To refuse to draw such a distinction would mean that there is no taxing entry in Lists I and II which is not subject to Articles 301 and 304, however general the tax and however non-discriminatory its imposition. To bring all the taxes within the reach of Article 301 and thus to bring them also within the reach of Article 304 is to overlook the concept of a Federation, which allows freedom of action to the States, subject, however, to the needs of the unity of India. Just as unity cannot be allowed to be frittered away by insular action the existence of separate States is not to be sacrificed by a fusion beyond what the Constitution envisages. No doubt. Part XIII ensures economic unity to India and combines the federating States into the larger State called India. The Constitution also permits independent powers of taxation. What the Constitution does not permit is that trade, commerce and intercourse should be rendered "unfree". Trade and com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the freedom guaranteed. The object of such laws cannot be regarded as a restriction of trade and commerce. Freedom in Article 301 does not mean anarchy. Similarly, a demand for a tax from traders in common with others is not a restriction of their right to carry on trade and commerce. A system of licensing of motor vehicles is a regulation, but does not impair the freedom of trade and commerce unless the licensing is made to depend upon arbitrary discretion of the licensing authority. Similarly, a fee for administrative purposes may also be viewed as a part of regulation. Such licensing and fees fall outside Article 301, because they cannot be viewed as restrictions, and therefore do not need to be processed under Article 304. Such regulations are designed to give equal opportunity to everyone, subject to a certain standard. The object being a public object, such regulations cannot be questioned unless they amount to restrictions. A tax, however, which is made the condition precedent of the right to enter upon and carry on business at all is a very different matter. It is a restriction on the right to carry on trade and commerce, and the restriction is released on the payment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Constitution. xxx xxx xxx 39. But the more difficult question is, what does the word "restrictions" mean in Article 302? The dictionary meaning of the word "restrict" is "to confine, bound, limit". Therefore, any limitation placed upon the freedom is a restriction on that freedom. But the limitation must be real, direct and immediate, but not fanciful, indirect or remote. In this context, the principles evolved by American and Australian decisions in their attempt to reconcile the commerce power and the State police power or the freedom of commerce and the Commonwealth power to make laws affecting that freedom can usefully be invoked with suitable modifications and adjustments. Of all the doctrines evolved, in my view, the doctrine of "direct and immediate effect" on the freedom would be a reasonable solvent to the difficult situation that might arise under our Constitution. If a law, whatever may have been its source, directly and immediately affects the free movement of trade, it would be restriction on the said freedom. But a law which may have only indirect and remote repercussions on the said freedom cannot be considered to be a restriction on it. Taking the illustration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Parliament has power to make a law. (4) The State also, in exercise of its legislative power, may impose similar restrictions, subject to the two conditions laid down in Article 304(b) and subject to the proviso mentioned therein. (5) Neither Parliament nor the State Legislature can make a law giving preference to one State over another or making discrimination between one State and another, by virtue of any entry in the Lists, infringing the said freedom. (6) This ban is lifted in the case of Parliament for the purpose of dealing with situations arising out of scarcity of goods in any part of the territory of India and also in the case of a State under Article 304(b), subject to the conditions mentioned therein. And (7) the State can impose a non-discriminatory tax on goods imported from other States or the Union territory to which similar goods manufactured or produced in that State are subject." 62. The net effect of the decision in Automobile case (supra) is that taxes, if the same are compensatory in character, do not offend the guarantee of free trade, commerce and intercourse under Article 301 of the Constitution. The further question whether the compensatory character ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Bhagatram case followed by the judgment in Bihar Chamber of Commerce was well founded. 53. 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 and the working test enunciated in Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan for deciding whether a tax is compensatory or not vide para 19 of the Report (AIR), will continue to apply and the test of "some connection" indicated in para 8 (of SCC) of the judgment in Bhagatram Rajeevkumar v. CST and followed in State of Bihar v. Bihar Chamber of Commerce is, in our opinion, not good law. Accordingly, the constitutional validity of various local enactments which are the subject-matters of pending appeals, special leave petitions and writ petitions will now be listed for being disposed of in the light of this judgment." 63. The legal position that today holds the field in light of the above is that compensatory taxes would fall outside Part XIII of the Constitution only if tax payers receive benefits and facilities commensurate to the levy. Any and every benefit howsoever remote or distant, would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions in phraseology are of no practical importance." xxx xxx xxx xxx xxx xxx xxx xxx The term is defined also in The Major Law Lexicon by P. Ramanatha Aiyar - Vol. 6 - 4th Edition - Page Nos.6678 and 6679 in the following words: The term "tax" and "taxes" have been defined as a rate or sum of money assessed on the person or property of a citizen by government for the use of the nation or state; burdens or charges imposed by the legislative power upon persons or property to raise money for public purposes, and the enforced proportional contribution of persons and property levied by authority of the state for the support of government and for all public needs. xxx xxx xxx xxx xxx xxx xxx xxx Taxes are public burdens, of which every individual may be compelled to bear his part, and that in proportion to the extent of protection he receives or the amount of property held by him, as the will of the Legislature may direct. The power of taxation is said to be an incident of sovereignty, and co-extensive with that of which it is incident." Blackwell on Tax Titles as cited in 'Tata Iron & Steel Co. Ltd. v. State of Bihar, AIR 1991 Patna 75, 81 has the following to say about taxes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... avowed purpose underlying the legislation. This process is fraught with serious difficulties, a fact that was not disputed by learned Counsel for the assessees/dealers. Actual application of the Compensatory Tax Theory, therefore, runs into difficulties to an extent that the theory at some stage breaks down. M/s. Salve, Rohatgi and Dwivedi were in that view perfectly justified in submitting that the Compensatory Tax Theory was legally unsupportable and deserved to be abandoned. We have no hesitation in agreeing with that submission, the arguments of M/s. Ganguly and Bagaria to the contrary notwithstanding. 66. With the Compensatory Tax Theory no longer found acceptable, we are left with only two competing view points, one expressed by Gajendragadkar, J. and the other by B.P. Sinha, CJ. Which one is the correct view is the critical question that falls for our determination having regard to the Constitutional scheme and the language employed in Articles 301 to 307 to which we must now turn for a closer look. Article 301 is as under: "301. Freedom of trade, commerce and intercourse.- Subject to the other provisions of this Part, trade, commerce and intercourse throughout the territ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... city of goods in any part of the territory of India." 68. A careful reading of the above would show that notwithstanding the power vested in the Parliament under Article 302, it shall not make any law giving, or authorising the giving of any preference to one State over another, or making, or authorising the making of, any discrimination between one State and another, by virtue of any entry relating to trade and commerce in any of the Lists in the Seventh Schedule. From Clause (2) of Article 303 (supra) it is manifest that the restriction on the power vested in Parliament in terms of Clause (1) of Article 303 shall not extend to Parliament making any law with a view to giving or authorising the giving of, any preference or making, or authorising the making of, any discrimination if it is declared by such law that it is necessary to do so for the purpose of dealing with a situation arising out of scarcity. A conjoint reading of Clauses (1) and (2) of Article 303 would thus make it clear that while Parliament/ Legislature of a State shall have no power to make a law imposing restriction on trade, commerce and intercourse, by giving or authorizing the giving of any preference to one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... impose on goods imported from other States (or Union Territories) any tax" are much too clear and specific to be capable of any equivocation or confusion. It is true that the source of power available to the State legislature to levy a tax is found in Articles 245 and 246 of the Constitution but, the availability of such power for taxing goods imported from other States or Union Territories is clearly recognised by Article 304 (a). The expression 'may by law impose' is certainly not a restriction on the power to tax. That does not, however, mean that the power to tax goods imported from other States or Union Territories is unqualified or unrestricted. There are, in our opinion, two restrictions on that power. The words "to which similar goods manufactured or produced in that State are subject" impose the first restriction on the power of the State legislature to levy any such tax. These words would imply that a tax on import of goods from other States will be justified only if similar goods manufactured or produced in the State are also taxed. The second restriction comes from the expression "so, however, as not to discriminate between goods so imported and goods so manufactured o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of a tax in terms of Article 304(a) may or may not be accompanied by the imposition of any restriction whether reasonable or unreasonable. There is, in our opinion, no rationale in the contention that the legislature of a State cannot levy a tax without imposing one or more reasonable restrictions or that a law that is simply imposing restrictions in terms of Clause (b) to Article 304 must be accompanied by the levy of a tax on the import of goods. The use of the word 'and' between clauses (a) and (b) does not admit of an interpretation that may impose an obligation upon the legislature to necessarily impose a tax and a restriction together. The law may simply impose a tax without any restriction reasonable or otherwise or it may simply impose a reasonable restriction in public interest without imposing any tax whatsoever. It may also levy a tax and impose such reasonable restriction as may be considered necessary in public interest. All the three situations are fully covered and permissible under Article 304 in view of the phraseology used therein. The word 'and' can mean 'or' as well as 'and' depending upon the context in which the law enacted by the legislature uses the same. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 301. 9. Reasonable restrictions in public interest referred to in Clause (b) of Article 304 do not comprehend levy of taxes as a restriction especially when taxes are presumed to be both reasonable and in public interest. 73. The inferences enumerated above are based on a textual interpretation of the provisions of Article 301 to Article 304. An interpretation which is both textual and contextual has always been found to be more acceptable. That is so because it is only when both the text and the context are kept in view that the statutory provisions can be best understood. An interpretation that makes the textual match the contextual meaning of the provision is preferred by Courts over one that prefers one at the cost of the other. 74. In Reserve Bank of India v. Peerless General Finance and Investment Co. Ltd. (1987) 1 SCC 424 this Court pithily summed up the law on the subject in the following words: "33. Interpretation must depend on the text and the context. They are the basis of interpretation. One may well say if the text is the texture, context is what gives the colour. Neither can be ignored. Both are important. The interpretation is best which makes the textual inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced in another locality. With India attaining its freedom, Part XIII of the Constitution adopted by it, was aimed at bringing about economic unity. The object underlying Part XIII was to make movement and exchange of goods free throughout the territory of India. This was achieved by Article 301 to Article 304 adopting substantially the scheme underlying the 1935 Act. The only difference between the said provisions and Section 297 of the 1935 Act was that the principles enunciated in the latter were extended to the Union Government and the Union Parliament and to the territory which had after merger become a part of India. Notably, the essence of the freedom of trade commerce and intercourse as recognized in the 1935 Act and in the Constitution under Part XIII remained the same. It was for that reason that Justice Venkatarama Iyer had in M.P.V. Sunderaramier's case (Supra) observed and if we may say so rightly that the Constitution of India was not written on a tabula rasa. The common feature which the two provisions share is that the provincial legislature's power to impose taxes is recognized subject only to the limitation that there is no discrimination between goods manufactured ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... explained at some length how legislative competence of the State legislatures can be circumscribed only by express provisions of the Constitution and unless there is an express limitation on the plenary taxing power of the States, there is no other fetter on the exercise of that power. 80. Applying the above principle to the case at hand, we do not see any specific limitation on the State's power to levy taxes on the import of goods from other States except the one referred to in Article 304(a) of the Constitution. That limitation we have sufficiently explained is confined to levy of discriminatory taxes within the comprehension of Article 304(a). So long as taxes are non-discriminatory and, therefore, consistent with Article 304(a), there is no limitation leave alone any express limitation on the States' legislative power to levy any tax on the import of goods from another State. The power to levy a tax in terms of Articles 245 and 246 read with Entry 52 of list II not being in dispute in the cases at hand, the absence of any specific limitation forbidding the exercise of such power whether for the sake of free trade, commerce and intercourse or otherwise simply means that the S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot adopt an approach, an interpretation, which has the effect of or tends to have the effect of whittling down the powers reserved to the States. It is a matter of common knowledge that over the last several decades, the trend the world over is towards strengthening of Central Governments be it the result of advances in technological/scientific fields or otherwise, and that even in USA the Centre has become far more powerful notwithstanding the obvious bias in that Constitution in favour of the States. All this must put the court on guard against any conscious whittling down of the powers of the States. Let it be said that the federalism in the Indian Constitution is not a matter of administrative convenience, but one of principle - the outcome of our own historical process and a recognition of the ground realities. This aspect has been dealt with elaborately by Shri M.C. Setalvad in his Tagore Law Lectures "Union and State relations under the Indian Constitution" (Eastern Law House, Calcutta, 1974). The nature of the Indian federation with reference to its historical background, the distribution of legislative powers, financial and administrative relations, powers of taxation, pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Dealing in particular with the scope and meaning of Article 304 (b) of the Constitution on a true and correct interpretation Seervai in his treatise Constitutional Law of India (supra) sounded a note of caution and observed that if Article 304(b) was interpreted in a manner that would include levy of taxes as a restriction within the meaning of that Article, it would totally dislocate the scheme under our Constitution. The celebrated author, in our opinion, was right in saying so for the taxing power of the Union and the States are mutually exclusive. While the Parliament cannot legislate on the subjects reserved for the States, the States cannot similarly trespass onto the taxing powers of the Union. If the Constitutional scheme does not allow the Parliament to usurp the taxing powers of the State Legislatures, such process of usurpation cannot also be permitted to take place in the garb of making Union executive's concurrence an essential pre-requisite for any taxing legislation. The following passage from Seervai's book (Vol. 3, Page 2607) is in this regard instructive: "23.43. Thirdly, the whole scheme of taxation in our Constitution would be completely dislocated if Article ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non-obstante clause the inference was that the framers of the Constitution treated taxes as impediments for free trade, commerce and intercourse. The argument was that unless Article 301 was understood to mean that taxes could also be restrictions on free trade and commerce, there was no need for the framers of the Constitution to start Article 304 with a non-obstante clause inasmuch as a non-obstante clause is meant to be only an exception to the generality of the provision. Similar contentions urged in the past have been noticed by this Court and by jurists alike while attempting interpretation of Part XIII. This is evident from the passages which have dealt with the anomaly arising out of the use of the expression 'subject to' in Article 301 and the non-obstante clause in Article 304 of the Constitution. This Court has often found the use of the non-obstante clause in Article 304 to be either confusing or an unnecessary surplusage. But the problem with the use of non-obstante clauses in Part XIII has been the subject matter of criticism even in the Constituent Assembly as is evident from the following passages from the debates: Constitution Assembly Debates (Vol. IX Page 1131): ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only supermen are to be born in India hereafter. If this Constitution is made for the average man, if it is going to affect the rights and privileges of the ordinary common man, it is necessary that the drafters of this constitution should be more clear and use phraseology which is more easily understandable and simpler. xxx xxx xxx xxx I hope therefore that the whole chapter will be made simpler. Instead of tying the hands of both the States as well as of Parliament, it would be far better not to commit ourselves to any policy, but to leave the whole thing to Parliament. Otherwise, the situation which has arisen already in respect of article 16 may arise in respect of article 274 itself. It is, therefore, better to have simpler provisions and I have given them the simplest form. I hope that this will appeal to the drafters of the Constitution and if they accept it, I can tell them that they will be out of much of the trouble. But if they insist upon the draft that they have produced, it will be very difficult for trade and commerce not only to prosper but even to exist." 88. In Automobile Transport case (supra), S K Das, J. speaking for the majority noticed the anomaly arisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imported, which indicates that but for the said provision the law of taxation in that regard would infringe the freedom declared under Art. 301." 90. Hidayatullah, J. also found the non-obstante clause in Article 304 to be somewhat anomalous and described the same as "inaccurate drafting of the Constitution". 91. Suffice it to say that the use of the non-obstante clause in Article 304 has had its share of criticism from the very inception which criticism has to an extent been prophetic for the interpretation of Part XIII has indeed been a lawyer's paradise over the past fifty years or so. Seervai has in his treatise adverted to this anomaly arising from the use of the non-obstante clause and said that the same covers both the clauses (a) and (b) of Article 304. He argues with considerable forensic force that reference to Article 301 in the non-obstante clause is meaningless having regard to the fact that the freedom granted thereunder is itself subject to other provisions of Part XIII including Article 304. This would necessarily imply that Article 304 (a) and (b) do not subtract anything from Article 301. That appears to us to be the correct view on the subject. While it is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emedy against such violation. This according to the learned counsel was one among other reasons why levy of taxes ought to be treated as restrictions on free trade, commerce and intercourse. 93. In Ramjilal's case (supra), a petition under Article 32 of the Constitution was filed before this Court by the petitioner who was carrying on business in the State of Nabha. With the merger of Nabha into the State of Pepsu, the petitioner was required by the assessing authority to file return and pay income tax for the income earned by him during the previous years. Aggrieved, the petitioner challenged the proceedings inter alia on the ground that the assessment of tax for previous year violated his right guaranteed under Article 14. This Court repelled the contention founded on Article 14 holding that there was reasonable classification of assessee under the relevant statute and that the petitioner's challenge to the proceedings under Article 14 was untenable. Having said that, the Court examined the question whether the taxing statute violated Right to Property guaranteed under Article 31 (1) of the Constitution. Repelling the contention this Court held that if collection of taxes amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is the decision in Laxmanappa Hanumantappa Jamkhandi v. Union of India, AIR 1955 SC 3. Reference may also be made to Smt. Ujjam Bai v. State of Uttar Pradesh, AIR 1962 SC 1621 which took note of the pronouncements of this Court in the three cases mentioned above to examine whether there was any conflict between the view taken in Moopil Nair case on the one hand and Ramjilal and Laxmanappa cases on the other, the Court found on a closer examination that there was no such conflict and clarified that the observation made in Ramjilal and Laxmanappa cases must in the context bear reference to abrogation of Article 31 (1) only in so far as the admissibility of a challenge to taxation law with reference to Part III is concerned. The Court explained that in Moopil Nair's case this Court has held that a taxing statute was not immune from challenge under Article 14 just because the legislature that imposed the tax was competent to levy the tax in terms of Article 265. This Court summed up the legal position in the following words: " The result of the authorities may thus be summed up: (1) A tax will be valid only if it is authorized by a law enacted by a competent legislature. That is Ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the decisions of this Court in Atiabari and Automobile Transport cases had drawn support for their conclusion on the Australian and American decisions. It was urged that although the view taken by the majority decision in the former had recognized that decisions from other jurisdictions may not be helpful while interpreting the provisions of our Constitution, yet the Court had referred to and relied upon those decisions to buttress its conclusions. The Australian decisions relied upon by the majority have, it was contended, been reversed by subsequent pronouncements of the Australian High Court, which pronouncements are now gravitating towards the theory that discriminatory taxes alone will operate as restrictions against free trade, commerce and intercourse. It was in that view argued that the theoretical basis borrowed from the foreign judgments by this Court in Atiabari case stood demolished or atleast substantially eroded by the subsequent pronouncements of the Australian High Courts, thereby, rendering the correctness of the view taken by the majority in Atiabari's case open to serious doubts. 98. There is, in our view, considerable merit in that submission. In Atiabari's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... responded to the challenge presented by similar provisions in other sister Constitutions. It is in that spirit that we propose to refer to two Privy Council decisions which dealt with the construction of Section 92 of the Australian Constitution." 100. The Court, then, relied upon the decisions of the Australian High Court in James v. Commonwealth of Australia (1936) A.C. 578 and Commonwealth of Australia and others v. Bank of New South Wales and others [1950] A.C. 235 to hold that the test of direct and immediate effect evolved by the Australian High Court pronouncements, while interpreting Section 92 of the Australian Constitution, was the correct test applicable even to our Constitution including interpretation of Article 301 thereof. The Court said: Commonwealth of Australia v. Bank of New South Wales "61. ... ... ... In deciding the said question one of the tests which was applied by Lord Porter was: "Does the act not remotely or incidentally (as to which they will say something later) but directly restrict the inter-State business of banking", and he concluded that "two general propositions may be accepted, (1) that regulation of trade, commerce and intercourse among th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the argument that if Section 92 of the Australian Constitution was interpreted to be forbidding only discriminatory burdens it would have the effect of denying the freedom of trade, commerce and intercourse. The Court said: "... .. ..Plainly, however, the construction which treats Section 92 as being concerned to guarantee the freedom of inter-State trade and commerce from discriminatory burdens does not involve the consequence that the grant of legislative power with respect to inter-State trade and commerce is deprived of its essential content." 103. The Court noticed the evolution of the law on the subject and held that it is only discriminatory burdens that are forbidden by Section 92 and that the question whether a burden is indeed discriminatory is a question of fact and degree to be answered upon judicial interpretation and impressions. The following passage is, in this regard, instructive. " Departing now from the doctrine which has failed to retain general acceptance, we adopt the interpretation which, as we have shown, is favoured by history and context. In doing so, we must say something about the resolution of cases in which no impermissible purpose appears on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ature of a tax which directly and immediately affects free trade, commerce and intercourse would violate Section 92 has been evidently abandoned by the Australian jurists. It follows that whatever support may have been available from the earlier decisions for the view taken in Atiabari (supra) and Automobile(supra) cases as to the true test applicable for interpreting Part XIII, has, if we may use that expression, "fizzled out" with the passage of time. 106. We may, at this stage, deal with yet another contention urged on behalf of the dealers in support of their case that taxes were, in the scheme of Part XIII, treated as restrictions. It was argued that the presence of Article 306 of the Constitution which now stands repealed by Constitution 7th Amendment Act, 1956 was itself suggestive of the fact that taxes were intended to be restrictions on free trade, commerce and intercourse, for otherwise, there was no reason why a provision like Article 306 should have been incorporated by the framers of the Constitution. Article 306, as it stood, before its deletion, was in the following terms: "Article 306. Power of certain States in Part B of the First Schedule to impose restrictions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m a State and even when such taxes and levies were discriminatory vis-a-vis goods produced/manufactured from outside the State, the discriminatory duties and levies were in larger interest of stability of revenue of the concerned States permitted, but, conditionally for a limited period. The marginal note of Article 306, therefore, rightly mentions such levies and duties to be restrictions on trade, commerce and intercourse. The reason for such description being the discriminatory nature of such taxes and levies. Seen in the historical perspective, it is futile to argue that Article 306 lends any assistance for determining whether taxes act as restrictions on free trade, commerce and intercourse. Seervai has correctly summed-up the true import of Article 306 in the following passage from his treatise (supra): "24.42. Again, Article 306 enabled the former Native States, which became Part B States, to continue to levy any tax or duty on the import of goods into such States from other States and to impose a duty on the export of goods out of such States for a limited period of time. The reason for enacting this provision is simple. First, Part B States claimed to be sovereign States ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agraphs of the judgment based on our textual understanding of the provisions of Part XIII which is matched by the contextual interpretation. That being so the mere fact that a tax casts a heavy burden is no reason for holding that it is a restriction on the freedom of trade and commerce. Any such excessive tax burden may be open to challenge under Part III of the Constitution but the extent of burden would not by itself justify the levy being struck down as a restriction contrary to Article 301 of the Constitution. 110. Secondly because, levy of taxes is both an attribute of sovereignty and an unavoidable necessity. No responsible government can do without levying and collecting taxes for it is only through taxes that governments are run and objectives of general public good achieved. The conceptual or juristic basis underlying the need for taxation has not, therefore, been disputed by learned counsel for the dealers and, in our opinion, rightly so. That taxation is essential for fulfilling the needs of the government is even otherwise well-settled. A reference to "A Treatise on the Constitutional Limitations" (8th Edn. 1927 - Vol. II Page 986) by Thomas M Cooley brings home the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e against the levy of an unduly high rate of tax. The rate of tax on sales of a commodity may not ordinarily be based on arbitrary considerations, but in the light of the facility of trade in a particular commodity, the market conditions internal and external - and the likelihood of consumers not being scared away by the price which includes a high rate of tax. Attention must also be directed sub-Section (5) of Section 8 which authorizes the State Government, notwithstanding anything contained in Section 8, in the public interest to waive tax or impose tax on sales at a lower rate on inter-State trade or commerce. It is clear that the legislature has contemplated that elasticity of rates consistent with economic forces is clearly intended to be maintained." 113. Also apposite is the following passage from the said decision where this Court held that free flow of trade does not necessarily depend upon the rate of taxes but upon a variety of factors which the Court identified in the following words: "14. ... ... ... The flow of trade does not necessarily depend upon the rates of sales tax: it depends upon a variety of factors, such as the source of supply, place of consumption, ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the manner and to the extent the said Part permits to do so, but, in the second case, viz. legislature imposing a high tariff wall so as to operate as an impediment to free flow of trade, commerce and intercourse, there are considerable difficulties. That is so because the judgment does not elaborate as to what would constitute a high tariff wall for the tax to operate as a restriction/impediment. 116. Counsel for the parties were, in the course of arguments, repeatedly asked whether any objective standards and norms can be evolved to determine the height and the width of the wall referred to in the passage extracted above. They were, however, unable to suggest any such norms. They fairly conceded that it was difficult if not impossible to evolve any such norm applicable to myraid situations that would arise before the courts. This implies that the tariff wall theory actually breaks down and is not amenable to judicially manageable dimensions. What may sound a high tariff wall or a fiscal barrier to one may not be so to the other. What may constitute a fiscal wall or barrier for one category of traders may not be so for other categories. So also, the tax at a given rate may be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merce by themselves are not sufficient to empower the legislature to levy taxes. The constitutional scheme is such that a taxing entry is distinct from other entries and a levy of tax is possible only if there is an entry which authorizes the competent legislature to levy the same. This distinction has for long been maintained by judicial pronouncements of this Court. We may in this regard refer to M.P.V. Sunderaramier's case (supra) where this Court has declared: "51. In List I, Entries 1 to 81 mention the several matters over which Parliament has authority to legislate. Entries 82 to 92 enumerate the taxes which could be imposed by a law of Parliament. An examination of these two groups of Entries shows that while the main subject of legislation figures in the first group, a tax in relation thereto is separately mentioned in the second. Thus, Entry 22 in List I is "Railways", and Entry 89 is "Terminal taxes on goods or passengers, carried by railway, sea or air; taxes on railway fares and freights". If Entry 22 is to be construed as involving taxes to be imposed, then Entry 89 would be superfluous. Entry 41 mentions "Trade and commerce with foreign countries; import and export a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conceded to the Parliament under Article 302 to impose restrictions on freedom of Trade, commerce and intercourse in public interest. The power exercised by Article 302 cannot be so exercised as to give preference to one state over another except under a situation covered by Article 303(2) namely situation arising from scarcity of goods in any part of the territory of India. We cannot add to this Article any artificially extended meaning the ingenuity of the bar in coining any such interpretation notwithstanding. 120. Relying upon the decision in Mudaliar's case (supra) it was argued on behalf of the assessee that this Court has upheld the constitutional validity of the Central State Tax Act on the ground that such a tax was in public interest within the contemplation of Article 302 of the Constitution of India, hence, validly leviable. This, according to the learned counsel, implied that the tax was recognised as a restriction which could be levied only if found to be in public interest as stipulated in Article 302. We have no difficulty in rejecting that contention. In Mudaliar's case, this Court was bound by and followed the pronouncement of the larger bench in Atiabari's case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the removal of such barriers. Discrimination intra-State in terms of levy of taxes was never considered to be a challenge for presumably the Constituent Assembly never considered the same to be a real possibility necessitating a specific provision prohibiting levy of discriminatory intra-State taxes. 122. On behalf of the assessees-dealers, it was next argued that levy of entry tax on import of goods from outside the local area in the State will be per se discriminatory if goods so imported or similar are not produced or manufactured within the State. That is, argued the learned counsel, because the levy will fall unequally thereby violating the guarantee against discrimination contained in Article 304(a). We have no difficulty in rejecting that submission as well. The reason is obvious. Article 304(a), in our opinion, strikes at discriminatory taxation implying thereby that the levy falls unequally as between goods produced or manufactured within the State and those being imported from outside. The essence of the guarantee in Article 304(a) lies in the same or similar goods being treated similarly in the matter of taxation. The question, therefore, is whether that guarantee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1956 was enacted pursuant to the Sixth Amendment Act, 1956 whereby taxes on sale and purchase of goods in the course of inter-state trade and commerce were expressly brought within the purview of the legislative competence of Parliament. This included the power to impose restrictions upon the power of the State legislature insofar as levy of taxes of sale or purchase of goods of special importance is concerned. Entry 92-A added by the Sixth Amendment Act 1956 empowered the Parliament to levy taxes on the sale and purchase of the goods other than newspapers in the course of trade and commerce. Entry 54 of the State List by the same amendment was redrawn to make the taxes on the sale and purchase of goods subject to Entry 92-A of List I. The two entries read as under: "92-A. Taxes on the sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter-State trade or commerce. 54. Taxes on the sale or purchase of goods other than newspapers, subject to the provisions of Entry 92-A of List-I." 125. The States' power it is evident is made subservient to the powers of the Parliament under Entry 92-A. Section 15 of the Central Sales Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise for consideration. 128. Re. Question No.3 In the light of what we have said in Question Nos. 1 and 2, this question also does not survive for consideration. 129. Re. Question No.4 This question touching the constitutional validity of the impugned State enactments can be split into two parts. The first part which can be briefly dealt with at the outset is whether the constitutional validity of the impugned legislations has to be tested by reference to both Articles 304(a) and 304(b) as contended by learned counsel for the assessees or only by reference to Article 304(a) as argued by the States. In the light of what we have said while dealing with question No.1 we have no hesitation in holding that Article 304(b) does not deal with taxes as restrictions. At the risk of repetition, we may say that restrictions referred to in Article 304(b) are non-fiscal in nature. Constitutional validity of any taxing statute has, therefore, to be tested only on the anvil of Article 304(a) and if the law is found to be non-discriminatory, it can be declared to be constitutionally valid without the legislation having to go through the test or the process envisaged by Article 304(b). Should, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound that the same was discriminatory and violative of Articles 301 and 304 of the Constitution. 131. This Court held that the exemption given to manufacturers of edible oil was total and unconditional, while producers of edible oil from industries in adjoining states had to pay sales tax @ 8%. Grant of exemption to local oil producing units thereby put the former at a disadvantage. Having said that, the Court exercised its powers under Article 142 of the Constitution and struck down the exemption by moulding the reliefs to suit the exigencies of the situation. The Court no doubt noticed a three-Judge Bench decision in Video Electronics vs. State of Punjab (1990) 3 SCC 87 in which notifications issued by the States of U.P and Punjab providing for exemptions to new units established in certain areas for a prescribed period of 3 to 7 years were assailed as discriminatory. The challenge to the exemption was in that case also based on the alleged violation of Articles 301 and 304. This Court however upheld the notifications in question on the ground that the same related to a specific class of industrial units and the benefit under the same was admissible for a limited period of time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bias and it is in that sense that the expression has to be understood in this context. If such bias is disclosed and is based on any of the grounds mentioned in Articles 15 and 16, it may well be that the statute will, without more, incur condemnation as violating a specific constitutional prohibition unless it is saved by one or other of the provisos to those articles. But the position under Article 14 is different. Equal protection claims under that article are examined with the presumption that the State action is reasonable and justified. This presumption of constitutionality stems from the wide power of classifi-cation which the legislature must, of necessity, possess in making laws operating differently as regards different groups of persons in order to give effect to its policies... .. .." 133. Fazl Ali J. in his concurring judgment explained the concept in the following words: "19. I think that a distinction should be drawn between "discrimination without reason" and "discrimination with reason". The whole doctrine of classification is based on this distinction and on the well-known fact that the circumstances which govern one set of persons or objects may not necessari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e used by the State even in case where such exemptions are manifestly intended to promote industrial growth or promoting industrial activity has not appealed to us. The power to grant exemption is a part of the sovereign power to levy taxes which cannot be taken away from the States that are otherwise competent to impose taxes and duties. The conceptual foundation on which such exemptions and incentives have been held permissible and upheld by this Court in Video's case is, in our opinion, juristically sound and legally unexceptionable. Video Electronics, therefore, correctly states the legal position as regards the approach to be adopted by the Courts while examining the validity of levies. So long as the differentiation made by the States is not intended to create an unfavourable bias and so long as the differentiation is intended to benefit a distinct class of industries and the life of the benefit is limited in terms of period, the benefit must be held to flow from a legitimate desire to promote industries within its territory. Grant of exemptions and incentives in such cases must be deemed to have been inspired by considerations which in the larger context help achieve the Con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r state there is no question of any discrimination qua them. The rate of tax paid on such goods in the state from where they are brought including the Central Sales Tax, if any payable on the same may be equal to the entry tax payable under the relevant statute in which case such outside goods also enjoy the same advantage as goods manufactured in the taxing state, dispelling any misconceived impression about any discrimination qua such goods. 137. The legal position as to the approach that courts adopt towards fiscal measures while examining their constitutional validity is fairly well settled by a long line of decisions of this Court. The law on the subject is so well settled that it calls for no elaborate discussion of the same. Courts have almost universally accepted the principle that keeping in view the inherent complexities of fiscal adjustments and the diverse elements and inputs that go into such exercise a greater latitude is due to the legislature in taxation related legislations. It is unnecessary to refer to all the decisions in which this Court has conceded such play at the joints to the legislature. Reference to some of the decision of this Court should in our opini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ji v. B.M. Desai, and Kunnathat Thathuni Moopil Nair v. State of Kerala. But in the application of the principles, the courts, in view of the inherent complexity of fiscal adjustment of diverse elements, permit a larger discretion to the legislature in the matter of classification, so long it adheres to the fundamental principles underlying the said doctrine. The power of the legislature to classify is of "wide range and flexibiliy" so that it can adjust its system of taxation in all proper and reasonable ways." 139. In V. Guruviah Naidu and Sons and ors. v. State of Tamil Nadu and ors, (1977) 1 SCC 234 the Court was examining whether levy of sales tax on hides and skins from within or outside the State was discriminatory and offensive to Article 304(a) of the Constitution. Repelling the contention that it was violative of Article 304(a), this Court held: "8. None of the circumstances which led this Court to strike down the relevant provisions in the abovementioned two cases exists in the present case. In Mehtab's case discrimination was found to exist because of the fact that tax was being levied at the same rate in respect of both raw hides and skins as well as dressed hides a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d skins, no levy would be made on such sales as those hides and skins have already been subjected to local tax at the rate of 3 per cent when they were purchased in raw form. As against that, in the case of hides and skins which have been imported from other States in raw form and are thereafter tanned and then sold inside the State as dressed hides and skins, the levy of the tax is at the rate of 11/2 per cent at the point of first sale in the State of the dressed hides and skins. This levy cannot be considered to be discriminatory as it takes into account the higher price of dressed hides and skins compared to the price of raw hides and skins. It also further takes note of the fact that no tax under the State Act has been paid in respect of those hides and skins. The legislature, it seems, calculated the price of hides and skins in dressed condition to be double the price of such hides and skins in raw state. To obviate and prevent any discrimination or differential treatment in the matter of levy of tax, the legislature therefore prescribed a rate of tax for sale of dressed hides and skins which was half of that levied under Item 7(a) in respect of raw hides and skins." 140. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat stage carriages which travel on an average about 260 kilometres every day on a specified route or routes with an almost assured quantum of traffic which invariably is overcrowded belong to a class distinct and separate from public carriers which carry goods on undefined routes. Moreover the public carriers may not be operating every day in the State. There are also other economic considerations which distinguish stage carriages and public carriers from each other. The amount of wear and tear caused to the roads by any class of motor vehicles may not always be a determining factor in classifying motor vehicles for purposes of taxation. The reasons given by this Court in G.K. Krishnan case for upholding the classification made between stage carriages and contract carriages both of which are engaged in carrying passengers are not relevant to the case of a classification made between stage carriages which carry passengers and public carriers which transport goods. The petitioners have not placed before the court sufficient material to hold that the impugned levy suffers from the vice of discrimination on the above ground." 141. Seen in the context of the above, we are inclined to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which is part of trade, the freedom which is guaranteed under Article 301. It is not possible to readily conceive of a tax, which in itself, restricts or impedes the freedom of trade. The circumstances are much like the freedom of movement of an individual by a bus and the charge of a bus ticket for such movement. It can hardly be contended that the charge of a bus ticket impedes the freedom of movement. 3. The other related contentions have been adequately dealt with by the Judgment of the Chief Justice and I fully subscribe to the same. I would also agree in this regard with the view of Sinha, CJ, in Atiabari that a tax is not a restriction. Sinha, CJ, observed that ".......if a law is passed by the Legislature imposing a tax which in its true nature and effect is meant to impose an impediment to the free flow of trade, commerce and intercourse, for example, by imposing a high tariff wall, or by preventing imports into or exports out of a State, such a law is outside the significance of taxation, as such, but assumes the character of a trade barrier which it was the intention of the Constitution makers to abolish by Part-XIII". However, it is difficult to implement such a test ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discriminatory taxes on goods. Thus, Article 304 (a) differentiates between discriminatory and non-discriminatory taxes. The premise underlying this provision is the paramount aim of Part XIII to establish and foster economic unity of the country. Non-discrimination, or parity of treatment is therefore at the core of its purpose, which Shri T.T Krishnamachari stressed, in his speech in the Constituent Assembly. He said that "restrictions by the State have to be prevented so that the particular idiosyncrasy of some people in power or narrow provincial policies of certain States should not be allowed to come into play and affect the general economy of the country." [Constituent Assembly Debates, 1139 (1949)]. 6. The Article, therefore, recognizes the power of a Legislature to a State to impose the tax on the imported goods so, however, as not to discriminate between goods so imported and goods so manufactured or produced. While there is no doubt that this Article recognizes the power to legislate on a State, it equally qualifies that power with the condition that such a law must comply with. That condition is that the law which imposes a tax on imported goods cannot "discriminate" b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itute an additional burden (the goods already having suffered some form of taxation in the producing state). This interpretation, in my opinion would also further economic progress and the unhindered availability of goods in states which do not have manufacturing capacities and may not be able to develop it, having regard to lack of natural resources or other geographical limitations. It also furthers the aims underlying Article 301 of the Constitution of India. Conclusion 9. I answer Question No.1 in the negative and I agree with the conclusions drawn by the Chief Justice. I would also answer Question Nos. 2, 3 and 4 in agreement with the Chief Justice. JUDGMENT Shiva Kirti Singh, J. 1. Since I am in respectful agreement with the judgment by T.S. Thakur, CJI, I do not propose to go into whole gamut of documents, materials, relevant constitutional provisions and the precedents which have already been noticed not only by T.S. Thakur, CJI, but also by N.V. Ramana, R. Banumathi, D.Y. Chandrachud, and Ashok Bhushan, JJ. in their separate detailed judgments, which I had the privilege to go through. 2. 3. While recording my agreement with judgment of T.S. Thakur, CJI and other s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... burden that has befallen on this nine Judges Bench is to interpret Articles 301 to 304 comprising Part XIII of the Indian Constitution in a manner which is justified both by the text as well as the historical context and also effects the desired balance between the need of the country to have free movement of trade and commerce on one hand and the sovereign taxing powers of the States given to them by the Constitution on the other. Limitation on such power must be explicit in the Constitution. For safeguarding freedom of trade and commerce, such limitation is to be found only in Article 304(a) of Part XIII of the Constitution. 7. Answering the question No. 1 in the negative or in other words declaring that levy of a non-discriminatory tax per-se does not violate Article 301, in my opinion means that the majority view in respect of limits in imposition of tax through legislation in Atiabari case (supra) as well as in Automobile Transport case is no longer a good law. Since, in the matter of levy of taxes the compensatory theory is no more relevant, the State Legislatures are free to exercise their taxing powers without the need of declaring and showing that taxes imposed by them o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment of learned Chief Justice would in the usual course may not have warranted another concurring judgment. But when a Bench of nine judges of this Court has been assembled to consider the seminal issues that have been bothering the nation for about fifty years and such issues have been debated in the Court over a period of four weeks, many aspects having a bearing, canvassed about a constitutional question, a concurring judgment cannot be treated as a repetitive burden or a superfluous legal exercise. Journey Started from Atiabari Tea Co., Ltd. V. The State of Assam and Ors., A.I.R 1961 S.C 232 [hereinafter 'Atiabari']; continued in Automobile Transport (Rajasthan) Ltd. V. The State of Rajasthan, A.I.R 1962 S.C 1406 [hereinafter 'Automobile']. Doubted for first time in G. K. Krishnan v. State of Tamil Nadu, A.I.R 1975 S.C 583 [hereinafter 'GK Krishnan']. Dilution of compensatory took place in Bhagatram Rajeev Kumar v. CIT, MP, 1995 Supp. (1) S.C.C 673 [hereinafter 'Baghatram'] and State of Bihar v. Bihar Chamber of Commerce and Otr., (1996) 9 S.C.C 136 [hereinafter 'Bihar Chamber of Commerce']. Further went back to old formulation in Jindal Stainless Ltd. And Anr. V. State of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty? PART II : CASE HISTORY 2.1 Let me take up the first case in the batch of appeals (Civil Appeal No. 3453 of 2002 (Jindal Stainless Steel Ltd. v. 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, a 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 Constitution. C.W.P. No. 6630 of 2000 (Jindal Strips Limited v. State of Haryana) and connected petitions were dismissed by the High Court on December 21, 2001Jindal Strips Ltd. v. State of Haryana, [2003] 129 S.T.C 534. Following the judgments of this Court, inter alia, in Bhagatram and Bihar Chamber of Commerce, the High Court upheld the validity of the said Act. It was held that the entry tax was compensatory as per parameters laid down by this Court in the said judgments and thus, did not violate Articles 301/304 of the Constitution. On appeal to this Court, the matter was referred to the Constitution Bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Article 301 of the Constitution? If the answer is in the affirmative whether such levy can be protected if Entry Tax is compensatory in character and if the answer to the aforesaid question is in the affirmative what are the yardsticks to be applied to determine the compensatory character of the Entry Tax. 3.Whether Entry 52, List II, 7th Schedule of the Constitution like other taxing entries in the Schedule, merely provides a taxing field for exercising the power to levy and whether collection of Entry tax which ordinarily would be credited to the Consolidated Fund of the State being a revenue received by the Government of the State and would have to be appropriated in accordance with law and for the purposes and in the manner provided in the Constitution as per Article 266 and there is nothing express or explicit in Entry 52, List II, 7th Schedule which would compel the State to spend the tax collected within the local area in which it was collected? 4. Will the principles of quid pro quo relevant to a fee apply in the matter of taxes imposed under Part XIII?. 5. Whether the Entry Tax may be levied at all where the goods meant for being sold, used or consumed come to rest (st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the provisions of Haryana tax on Entry of Goods into Local Areas Act, 2008. Section 3 of the Act contains the charging the provision which states that the tax is levied 'for the purpose of development of trade, commerce and industry and for creation and maintenance of infrastructure facilities for free flow of trade and commerce in State'. Section 25 of the Act provides that the proceeds of the levy shall be appropriated to a fund notified by the Government and shall be exclusively utilized for the development or facilitating the trade, commerce and industry in the State and also inter alia provides benefits towards which the proceeds may be applied. Most of the States in appeal have enacted similar provisions under the impugned enactments. Part-III : Arguments canvassed ARGUMENTS OF PETITIONERS/APPELLANTS (ASSESSEE(S)) 3.1 Mr. Harish Salve, learned senior counsel argued as below- * That taxes generally amount to restriction but it is only such taxes that directly and immediately restrict trade that will fall within the Article 301. Applying this test the court can strike down the law as violative of Article 301 unless saved by Article 304(b). * The result of reading ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Otherwise according to him all taxes would be outside the purview of the freedom of trade by mere assertion as is done by 22 States that the tax is compensatory. 3.4 Mr. Arvind P. Datar contends- * That Concept of compensatory tax may be confined to Entry no. 56 and 57 and not applied to any other tax/duty in State List. * Further the working test contemplated in Automobile Case has not worked satisfactorily. * Neither the "direct or immediate effect" test of Atiabari nor the "working test" of Automobile Case is feasible in practice. * He suggested the bench to adopt "Appreciable Adverse Effect on Trade & Commerce [AAETC]" borrowed from section 3 of the Competition Act, 2002. The difference between enactment of AAETC before and after the impugned Law will provide the impact on Trade & commerce. * The Burden of Proof will be on the petitioner to establish, prima facie, to prove actual or potential AAETC. 3.5 Mr. S.K. Bagaria, learned senior advocate, Mr. J. Dhankar, learned senior advocate, Mr. N. Venkatraman, learned senior advocate, Mr. R. Srivastava, learned senior advocates, Mr. Dhruv Aggrawal, learned senior advocate, Mr. Gopal Jain, learned senior advocate, Mr. Tus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TS (STATES/AUTHORITIES) 3.7 Mr. P. P. Rao, learned senior counsel contends- * that scope of Entry 52 of the State List cannot be reduced. * Discrimination only arises if goods are available. If no tax can be imposed on the ground that there is no production that consumer state loses their revenue and the same is detrimental to the existence of very State itself. Therefore, the interpretation that sub-serves the intent and autonomy of State should be adopted in a Federal Constitution. * that 304 (a) is not a part of 301 and the only restriction on imposition of tax is article 304(a) of Constitution. * He argues that inclusion of taxes under article 304(b) was never argued before the bench of Atiabari. The observation in Atiabari is per in curium as there was no discussion or deliberation regarding the same. 3.8 Mr. Rakesh Dwivedi, learned counsel submits- * That Part XIII is not a basic feature of the Constitution and every provision of Constitution though important cannot be elevated to the pedestal of basic feature. Economic Unity is not defined and for trade, commerce and intercourse political unity is equally important. * If Article 19(1)(g) is explicitly given to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the absence of any compelling changes in the Constitution or the law, the reference may not be necessary. They would point out that after the decision in Automobile, every State which made law for the levy of tax on entry of goods, declaring such tax to be compensatory so as to save such law from the effect of Articles 301 and 304 of the Constitution. We have given our earnest and anxious consideration to these submissions and are not able to agree with any of these contentions. 4.2 This Court has over-ruled approximately 60 Constitutional judgments in its 60 years of existence A. Lakshminath, Precedent in India (3rd Ed.) p. 178 (2009), which is an impressive rate in itself, considering the fact that our nation is comparatively young and is developing jurisprudence in many aspects. Further it is interesting to note that there are only Seventeen Judgments of this Court with nine or higher bench strength. In re Sea Customs Act, A.I.R 1963 S.C 1760 (9 judge bench); State Trading Corp. of India Ltd. v. CTO, A.I.R 1963 S.C 1811 (9 judge bench); Golaknath v. State of Punjab, A.I.R 1967 S.C 1643 (hereinafter 'Golak Nath') (11 judge bench); Naresh ShridharMirajkar v. State of Maharastra, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the decisions in Bhagat Ram and Bihar Chamber of Commerce. From 1960 to 1996, there remained uncertainty with regard to the power of the State to levy tax as per entry 52 of the State List and principle of compensatory tax to immunize such entry tax from the perceived injunctive rigor of Articles 301 and 304(a). Thus, it would not be sound to argue that the principle laid down in Atiabarithat is "direct and immediate effect" and doctrine of "compensatory tax" evolved in Automobile attained any finality. Further even in Jindal (2), the aspect of compensatory tax was doubted by Justice S. H. Kapadia also (as his lordship then was). Therefore, this cannot be a ground to doubt the sound reasoning in the referral order of five Judges Bench of this Court in Jindal (3). Thus there is a need for review. PART-V :CONSTITUTIONAL INTERPRETATION 5.1 The resolution of constitutional litigation ultimately rests upon the plain language of the text. In the event of vagueness in the language or when the language is capable of two different meanings it is not a bar to analyze the context RBI v. Pearless General Finance, A.I.R 1987 S.C 1023 . In interpreting the constitutional text the court may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hopes and aspirations of the people. The Directive Principles set out proximate goals. When we go about the task of examining statutes against the Constitution, it is through these glasses that we must look, 'distant vision' or 'near vision'. The Constitution being sui-generis, where Constitutional issues are under consideration, narrow interpretative rules which may have relevance when legislative enactments are interpreted may be misplaced. Originally the Preamble to the Constitution proclaimed the resolution of the people of India to constitute India into 'a Sovereign Democratic Republic' and set forth 'Justice, Liberty, Equality and Fraternity', the very rights mentioned in the French Declarations of the Rights of Man as our hopes and aspirations. That was in 1950 when we had just emerged from the colonial-feudal rule. Time passed. The people's hopes and aspirations grew. In 1977 the 42nd amendment proclaimed India as a Socialist Republic. The word 'socialist' was introduced into the Preamble to the Constitution. The implication of the introduction of the word 'socialist', which has now become the center of the hopes and aspir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne while Jammu Kashmir has only 13.2%. Tendulkar committee report. The table is available at PRS website (last visited on 15.10.2016), http://www.prsindia.org/theprsblog/? tag=tendulkar-committee Population in Uttar Pradesh was pegged at 199,812,341 while Kerala is 33,406,061, as per Census 2011. Uttar Pradesh, Census of India (last visited on 15.10.2016) http://censusindia.gov.in/2011census/censusinfodashboard/stock/profil es/en/IND009_Uttar%20Pradesh.pdf Kerala http://censusindia.gov.in/2011census/censusinfodashboard/stock/profil es/en/IND032_Kerala.pdf Literacy Rate in Kerala is 94% while in Bihar its 61%. (last visited on 15.10.2016) http://censusindia.gov.in/2011-prov-results/data_files/india/Final_PPT_2011_c hapter6.pdf Sex ratio in Kerala is 1084 while in Haryana is 879. Kerala State Profile, Census of India (last visited on 15.10.2016) http://censusindia.gov.in/2011census/censusinfodashboard/stock/profil es/en/IND032_Kerala.pdf Haryana state profile, Census of India http://censusindia.gov.in/2011census/censusinfodashboard/stock/profil es/en/IND006_Haryana.pdf In Andhra Pradesh 12.04% live in slums whereas in Assam only 0.63% live in slums. (Last visited on 15.10.2016) http: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , insurgencies and extremism are confronted by certain States. Over-growth and industrialization have taken place only in some places whereas rest of the country is reeling under under-development because of various facts such as geographical positioning, colonial establishments and discriminatory policies that have resulted in concentration of wealth in only certain affluent areas. No State, in this grand Union, should be made to feel discriminated and embarrassed because of the mere fact that history has not been congenial to them and have remained under-developed. Any restriction imposed should not come in the way of natural development of a State on the ground that it creates barriers for free movement of the goods and trade. All States must be provided an equal level playing field for development and opportunities. This was the grand intention of the framers of our Constitution to not make a lassiez faire State. Constituent Assembly Debate, Vol. IX, September 8, 1949. Determined to make our Country a co-operative federalist, our framers set definite rules to achieve the objective. Through interpretation, Constitution cannot be re-constructed so that the goal envisaged by our f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eserve our unique federation with clear demarcation of power. Calling India as quasi-federal might not be advisable as our features are unique and quite different from other Countries like United States of America etc. Courts in India should strive to preserve this unique balance which our framers envisaged, any interference into this balancing act would be detrimental for grand vision proscribed by our makers. State of West Bengal v. Union of India, [1964] 1 S.C.R 371 [hereinafter 'West Bengal'], S. R. Bommai, State of Karnataka v. Union of India and Anr., [1978] 2 S.C.R1, (Special Reference No. 1 of 1964) AIR 1965 SC 745, ITC Ltd. v. Agricultural Produce Market Committee and Ors, (2002)1 S.C.R 441 [hereinafter 'ITC']. Amphibious nature of our federalism has been even noted by the Sarkaria Commission Report on Center-State relationship. Co-operative federalism envisaged under our Constitution is a result of pick and choose policy which our framers abstracted from the wisdom of working experience of other Constitutions. Some Judgments which are illustrative of nature of federalism in India are (i)West Bengal (6 Judge Bench), a case relating to the power of Union to acquire land an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have leaned in favour of a strong Centre while distributing the powers and functions between Centre and the States. But the essential characteristics can be understood by knowing the "effects" of such a system. As per Sawant and Kuldip Singh JJ: The features in the Constitution which provide the Centre with overriding powers over the states is only an exception and are not normal features of the Constitution. K. Ramaswamy J., observed that Indian Federalism places the nation as a whole under control of a national Government, while States are allowed to exercise their sovereign power within their legislative sphere. As per Jeevan Reddy and Agrawal, JJ. the bias in favour of the Centre does not make the states mere appendages of the Centre. States are supreme in the sphere allotted to them. The ultimate conclusion reached by this Court was that the fundamental feature of federalism being that irrespective of each list, each legislature is supreme. In (iv) ITC, the majority led by Justice Ruma Pal held that the Constitution of India deserves to be interpreted in a manner that it does not whittle down the powers of State Legislatures and preserves the federalism while also upholding t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... public every five years. No Government can raise tax which would cause public inconvenience. In this context, Sovereignty is no more endless power, rather it is responsibility. A responsible government in a democracy should always strive to keep taxes as low as possible, so that no heavy burden is placed on the individuals. Although States are empowered to tax under the Constitution, it does not necessarily mean that they should tax at exorbitant rates. Tax is a way of apportioning the cost of government among those who in some measure are privileged to enjoy the benefits and must therefore bear its burdens. Fundamentally the exercise of sovereignty also includes lawful taxation as its incident. Assesses/dealer on the other hand stated that all powers exercised by the state such as police powers, power of eminent domain and power to tax are also incidents of sovereignty. Jaganathbaksh Singh v. State of UP, (1963) 1 S.C.R 220; Dena Bank v. BhikhabhaiPrabhudas Parekh & Co., (2000) 5 S.C.C 694; Commissioner of Income Tax, Udaipur, Rajasthan v. McDowell and co. Ltd., (2009) 10 S.C.C 755. There is nothing which mandates this Court to deny latitude in use of taxing powers in comparison ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , commerce and intercourse throughout the territory of India shall be free. 302. Power of Parliament to impose restrictions on trade, commerce and intercourse.- Parliament may by law impose such restrictions on the freedom of trade, commerce or intercourse between one State and another or within any part of the territory of India as may be required in the public interest. 303. Restrictions on the legislative powers of the Union and of the States with regard to trade and commerce.- (1) Notwithstanding anything in article 302, neither Parliament nor the Legislature of a State shall have power to make any law giving, or authorising the giving of, any preference to one State over another, or making, or authorizing the making of, any discrimination between one State and another, by virtue of any entry relating to trade and commerce in any of the Lists in the Seventh Schedule. (2) Nothing in clause (1) shall prevent Parliament from making any law giving, or authorizing the giving of, any preference or making, or authorizing the making of, any discrimination if it is declared by such law that it is necessary to do so for the purpose of dealing with a situation arising from scarcity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ituted under article 280, he thinks it necessary to do so." Rep. by the Constitution (Seventh Amendment) Act, 1956, s. 29 and Sch. 307. Appointment of authority for carrying out the purposes of articles 301 to 304.- Parliament may by law appoint such authority as it considers appropriate for carrying out the purposes of articles 301, 302, 303 and 304, and confer on the authority so appointed such powers and such duties as it thinks necessary. 7.2 Needless to mention that when the language of the provision is clear and unambiguous that, the intention of the law makers should be inferred from a plain reading of the provision itself. Ordinarily, we need not go beyond the clear language of the provision to interpret the Statute. 7.3 The freedom of trade, commerce and intercourse throughout the territory of India is assured, but such freedom of trade is subject to Part XIII of the Constitution. When we evaluate the impact of Article 301 on the plenary taxing power of the Sovereign State, the opening words become significant. Be that as it may, Article 301 only guarantees throughoutness of trade and commerce, the freedom, however, is not absolute freedom nor is it free from regulat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce that entire statute has to be construed as a whole and not in isolation. While doing so, no clause in any provision can be ignored especially when we interpret the Constitution which is 'suprema lex'. The difference between the power of the Union and the States vis-a-vis Article 301 is that Article 302 does not have application to tax laws like Article 304(a), but under Article 304(a), tax can be imposed on the goods imported from other States. From the understanding of the Articles 301, 302, 303 and 304, what emerges is summarized below- 1. Article 302 is an exception to Article 301. 2. The limitation under Article 302 is again subject to Article 303. 3. Articles 302 and 303 do not refer to laws under taxing entries. 4. Article 304 can be an exception to be generally construed as dealing with non-tax discriminatory tax and restrictions. 7.8 In addition to plain reading, an analysis of the relevant provisions and the legislative history of Article 301, is also relevant, in understanding the free trade clause in our Constitution. This can be considered also with reference to Constituent Assembly Debates and the legislative history which are equally important external aids. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iva Rao, p. 68 Extract from the Note on Fundamental Rights by Alladi Krishnaswami Iyer, dt. March 14, 1947- 'The Union powers being restricted in scope, care will have to be taken to bring in (a) the freedom of Inter-state and inter-provincial trade, (b.) inter-state and inter-provincial movement...'. The Sub-Committee discussed Sir B.N. Rau's draft provision on the subject on March 29, 1947 and was adopted in the following form: Subject to regulation by the law of the Union, trade, commerce, and intercourse among the units, whether by means of internal carriage or by ocean navigation, shall be free: Provided that any unit may by law impose reasonable restrictions thereon in the interest of public order, morality or health. 7.11 Commenting on the Clause when the draft of the sub-committee's report was under Consideration. Sir Alladi Krishnaswami Iyer suggested that goods entering a particular unit from other units of the Union should not escape duties and taxes to which goods produced in the concerned unit itself were subjected to. These suggestions were accepted by the Sub-committee and incorporated in the report submitted to the Advisory Committee on April 16, 1947. On April ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chapter in the draft Constitution of February 21, 1948. The proviso was redrafted and included as an independent Article under a separate heading, namely, "Inter-state trade and commerce" in Part IX of the Draft Constitution pertaining to relations between the Union and the States. B. Shiva Rao, p. 524 and p. 610 7.15 Further when the draft Constitution was published and circulated for suggestions and opinions, Sir Alladi Krishnaswami Iyer commented in the following manner:- "Comments of AlladiKrishnaswamiAyyar: In this regard to interstate trade there are three main provisions in the Draft Constitution : I. The freedom of inter-state trade secured by Article 16; II. Subject to an interference by federal law : III. An interference by a provision or state law to the extent provided in item 33, Draft of Constitution, February 21, 1948-Seventh Schedule, List II- State List 33. Regulation of trade, commerce and intercourse with other states for the purposes of the provisions of Article 244 of this Constitution., List II. The power of interference under Sub-clause (b) of the Article 244 is too drastic and much wider than that provided in the Original Draft. Would not this provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... That freedom of trade, commerce and intercourse is not a fundamental right. c. That trade, commerce and intercourse in India is not absolutely free. d. That the discriminatory tax (like erstwhile custom duties imposed by certain independent states) is harmful for the federation. PLAINS OF GANGES CAN NEVER BE FERTILIZED BY WATER OF MURRAY OR POTMAC RIVERS 7.18 The precedents as well support the view that tax laws are not contemplated in Article 301. Before considering the relevant precedents, a brief reference to the extent and scope of right to free trade as enforced in Australia, USA and Canada may be refereed to. It is to be kept in mind that the plains of Ganges can never be fertilized by waters of Murray Longest River of Australia or Potmac River in United States of America. But it is important to see the course which they have sailed and taken their countries to glory. It is imperative to mention that during the drafting process of Article 301, foot note for the same had reference to Australian Constitution. It is no gainsaying that our framers were learned men who drew our Constitution having hindsight of the wisdom of these great federations. 7.19 The main inspiration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subjects that trade or commerce to a disability or disadvantage or if the factual operation of the law produces such a result'. Ibid, p. 399 7.22 Earlier to this, Australian Courts have grappled to achieve uniformity until 1988 [Cole]. Earlier Judgments had taken a right based approach, wherein a single trader who was burdened, could claim violation of Section 92 of the Australian Constitution. Common wealth v. Bank of new South Wales, (1949) 79 C.L.R 497. Such wide interpretation given in the earlier case laws led to development of narrower test by the High Court in Cole. Earlier Case laws were available and were cited in the Atiabari and Automobile also. It is interesting to note that our framers drawing experience of Bank Nationalization Case Ibid., were concerned about stifling the natural growth of the Country by broad law such as Section 92 of Australian Constitution. Constituent Assembly Debate, Vol. IX, 8th September 1949 UNITED STATES OF AMERICA 7.23 Article 1 Section 8 Clause 3 of the U.S. Constitution states that "The Congress shall have the legislative power to regulate commerce, with foreign nations and among several States, and with Indian Tribes." This Clause also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tory against inter-state commerce, and fairly related to the services provided by the State" shall not be invalidated on the ground that States lack legislative competence. Subsequently the Supreme Court has further empowered the States to adopt legislations and it now only requires that there should be a fair relation or connection between the tax imposed and the general benefits provided to the taxpayers which include civic services as maintenance of public roads and running of mass transits (refer D.H. Holmes Company Ltd. vs. Shirley McNamara 486 U.S. 24 (1988)). In the Commonwealth Edison Company vs. State of Montana 453 U.S. 609 (1981) the Supreme Court has observed that- 'when a general revenue tax does not discriminate against interstate commerce and is apportioned to activities occurring within the State, the State is free to pursue its own fiscal policies unembarrassed by the Constitution.' It is obvious from the line of cases that America has been moving towards empowering States to develop their own fiscal policy under the Commerce Clause. Our Constitution, on the other hand, has achieved directly what the US Courts are trying to achieve by way of judicial interpretati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uently there is a paradigm shift even in these jurisdictions and currently the existing provisions have been interpreted so as not to deny such powers to States. INDIAN CASE LAW 7.29 Returning to the main controversy in the case, it may be noted that apart from the two leading judgments on the entry tax and compensatory tax in the context of transportation Cases, we have large number of cases decided by the various High courts and this Court. It is however not necessary to refer to all cases. It would be suffice to refer to a few. 7.30 In Atiabari, the validity of Assam Taxation (on Goods Carried by Roads and Inland Waterways) Act, 1954, which squarely comes under Entry 56 of List II fell for consideration. It was assailed as violating Article 301, and as not saved by Article 304(b). The challenge was upheld. It is necessary to extract the following from the Atiabari. : '...It is obvious that whatever may be the content of the said freedom it is not intended to be an absolute freedom; absolute freedom in matters of trade, commerce and intercourse would lead to economic confusion, if not chaos and anarchy; and so the freedom guaranteed by Article 301 is made subject to the excep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h limitation, the power of taxation would be presumed to be for public good and would not be subject to judicial review or scrutiny. Thus considered we think it would be reasonable and proper to hold that restrictions freedom from which is guaranteed by Article 301, would be such restrictions as directly and immediately restrict or impede the free flow or movement of trade. Taxes may and do amount to restrictions; but it is only such taxes as directly and immediately restrict trade that would fall within the purview of Article 301.' (Emphasis Supplied) 7.31 In Atiabari, Chief Justice B. P. Sinha wrote a dissenting opinion holding that any inference that the taxation simpliciter is within the terms of Article 301 cannot be justified under the Constitution. Indeed, it is observed that, it is only such taxes which directly and immediately affect trade would fall within the purview of Article 301, though both the Learned Judges used different languages, the purports appears to be same. It is only such laws which operate in a restrictive manner, right to free trade that are prohibited. Be that as it is, rejecting the submission that Article 301 must be construed as freedom from all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... very connotation of taxation is the power of the State to raise money for public purposes by compelling the payment by persons, both natural and juristic, of monies earned or possessed by them, by virtue of the facilities and protection afforded by the State. Such burdens or imposts, either direct or indirect, are in the ultimate analysis meant as a contribution by the citizens or persons residing in the State or dealing with the citizens of the State, for the support of the Government, with particular reference to their respective abilities to make such contributions. Thus public purpose is implicit in every taxation, as such. Therefore, when Part XIII of the Constitution speaks of imposition of reasonable restrictions in public interest, it could not have intended to include taxation within the generic term "reasonable restrictions"' 7.33 In Automobile, the challenge was to the Rajasthan Motor Vehicles Taxation Act, 1951. The Appellants were unsuccessful before the Rajasthan High Court, which upheld the said Act. By majority of 4:3 this Court affirmed the judgment of the High Court. Justice S.K.Das who wrote the lead judgment observed that Part XIII is intended to achieve the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is lifted in the case of Parliament for the purpose of dealing with situations arising out of scarcity of goods in any part of the territory of India and also in the case of a State under Article 304(b), subject to the conditions mentioned therein; and (7) The State can impose a non-discriminatory tax on goods imported from other States or the Union territory to which similar goods manufactured or produced in that State are subject. 7.35 As discussed above, a Constitution Bench of this Court in Atiabari had struck down the Assam Act levying the tax on goods carried by road or inland waterways. Making certain additional provisions, Assam Assembly enacted the Assam Act No. 10 of 1961, coming under Entry 56 of the State List, with the previous sanction of the President with the same nomenclature, which was impeached as unreasonable under Article 32 of the Constitution, in Khyerbari Tea Company v. State of Assam (1964) 5 SCR 975 : AIR 1964 SC 925. By the time, this Court took up the case, the scope and effect of provisions contained in Part XIII of the Constitution came to be considered in Automobile. Rejecting the challenge this Court observed that the freedom can be restricted by a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 03 imposes additional limitation, namely, that it must not give preference or make discrimination between one State or another in exercise of its powers relating to trade and commerce under Entry 26 of List II or List III. However, this limitation on the State Legislatures is lifted in two cases, namely, it may impose on goods imported from sister State(s) or Union Territories any tax to which similar goods manufactured in its own State are subjected but not so as to discriminate between the imported goods and the goods manufactured in the State [see Clause (a) of Article 304]. In other words, Clause (a) of Article 304 authorises a State Legislature to impose a non-discriminatory tax on goods imported from sister State(s), even though it interferes with the freedom of trade and commerce guaranteed by Article 301. Secondly, the ban under Article 303(1) shall stand lifted even if discriminatory restrictions are imposed by the State Legislature provided they fulfil the following three conditions, namely, that such restrictions shall be in public interest; they shall be reasonable; and lastly, they shall be subject to the procurement of prior sanction of the President before introducti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elegated to it under various laws providing for setting up of and administration of municipal corporations and municipalities. Octroi thus understood was being levied by various municipalities and municipal corporations in Karnataka State. Since some time a feeling had grown that octroi was obnoxious in character and impeded the development of trade and commerce and there was a clamour for its abolition. Taking note of the resentment of the business community, Karnataka State abolished octroi with effect from April 1, 1979. However, no one was in doubt that octroi was a major source of revenue to municipalities and its abolition would cause such a dent on municipal finances that compensation for the loss would be inevitable. Accordingly, the State Government undertook a policy of compensating the municipalities year by year. For generating funds for this compensation, rates of sales tax were raised and in some cases a surcharge was levied. The amount so collected was not sufficient to bridge the gap in municipal budget. To further augment the finances for compensating the municipalities, additional fund was sought to be generated by levy of tax under the impugned legislation. No do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Automobile does not apply to general notion of entry tax. As pointed out earlier Atiabari is a case dealing with tax under Entry 56, whereas Automobile is a case under Entry 57. In view of this it would not be safe to apply the majority opinion in Atiabari and Automobile while dealing with entry tax. I am therefore compelled to hold that tax law simpliciter is not contemplated in Article 301 of the Constitution. 7.40 There is no gainsaying that the law made by Parliament or State legislature is subject to Constitutional limitations. A law which abridges fundamental rights is rendered void by reason of Article 13. A law by the Union or the States relating to a subject matter outside the powers assigned under Articles 245 read with Article 246 and relevant legislative entries in the Seventh Schedule would be ultra vires as legislatively incompetent. Apart from these limitations, the law of the Union or the States is also subject to other Constitutional limitations. The provisions of Part XIII, especially, Article 304(a) and (b) also act as a limitation on the legislative jurisdiction of the Union and the States. The power endowed under Articles 245 and Article 246 to a competent leg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ramier & Co. vs. The State of Andhra Pradesh and Anr., AIR 1958 SC 468 In light of this principle the Constituent Assembly passed the Articles and Entries in the following time line: On 13 June, 1949 present Article 245 which was Article 217 (in the draft Constitution) was passed. On September 02, 1949 Entry 52 of State List (which was entry 61 in the draft Constitution) was passed. On September 08, 1949 PART XIII (which was PART XA in the draft Constitution) was passed. This shows that our Constitution framers are presumed to be aware of the inter-play of taxing provisions. Therefore, the only explicit limitation imposed on the taxing power of the State is Article 304(a) of the Constitution. Sixthly, we cannot ignore the legislative journey of Article 301 in Part XIII. At the stage of drafting, free trade, commerce and intercourse was in fact sought to be made a fundamental right but it was not accepted. Ultimately it was resolved to bring all the provisions relating to free trade, commerce and intercourse at one place. What started as a fundamental right came to be enacted as a constitutional right? Thus, there is abundant guidance from the legislative history in regard to incorp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rence to Article 304(a) and (b) of the Constitution? In order to appreciate the implication of Article 304 of the Constitution, it is necessary to bear in mind that historical background of these provisions. The Government of India Act, 1935 envisaged a federal Constitution for the whole of British India. The Government imposed restriction on the legislature of the States to legislate in relation to internal trade under Section 297 in the following terms:- '297. (1)No Provincial Legislature or Government shall. (a) by virtue of the entry in the Provincial Legislative List relation to trade and commerce within the Province, or the entry in that list relating to the production, supply, and distribution of commodities, have power to pass any law or take any executive action prohibiting or restricting the entry into or export from, the Province of goods of any class or description; or (b) by virtue of anything in this Act have power to impose any tax, cess, toll, or due which, as between goods manufactured, or produced in the Province and similar goods not so manufactured or produced, discriminates in favour of the former or which, in the case of goods manufactured or produced outsi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bject to regulation by the law of the Union trade, commerce and intercourse among the units by and between the citizens shall be free: Provided that any unit may by law impose reasonable restrictions in the interest of public order, morality or health or in an emergency: Provided that nothing in this Section shall prevent any unit from imposing on goods imported from other units the same duties and taxes to which the goods produced in the unit are subject: Provided further that no preference shall be given by any regulation of commerce or revenue by unit to one unit over another. Ibid. 8.6 It may be relevant to note that while imposing reasonable restriction in the first Proviso, the imposition of non-discriminatory tax was in the second Proviso. The third Proviso was a pre-cursor of Article 303. On 21.04.1947, the aforesaid Clause 14 came up for consideration of the Advisory Committee. Explaining the purpose of enabling a State to impose reasonable restriction in the interest of public order, morality, health or in emergency, Sir Alladi Krishnaswamy Iyer said: 'Suppose there is a general famine and people are starved that is what is meant here to be dealt with' The advisory Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther: Provided also that nothing in this section shall preclude the Federal Parliament from imposing by Act restrictions on the freedom of trade, commerce and intercourse among the units in the interests of public order, morality or health or in cases of emergency'. B. Shiva Rao, Framing of India's Constitution, Vol. III, p. 9 (2nd Ed.) 8.10 On 01.11.1947, the Drafting Committee considered Clause 17 and was of the opinion that 'the first and second provisos to this clause should be transferred as independent clauses in the chapter dealing with relations between the different States and the third proviso was unnecessary. Ibid, p. 330 8.11 On 28.01.1948, the Drafting Committee decided to introduce three new clauses, namely Clause 192 E, 192 F & 192 G, relating to trade, commerce and intercourse. Clause 192 E, 192 F and 192 G as introduced by the Drafting Committee on 28.01.1948, reads as follows: '192E. No Preference shall be given by any regulation of trade, commerce or revenue to one State or any part thereof over another State or any part thereof. 192-F. Notwithstanding anything contained in Article 17 or in the last preceding Article of this Constitution, it shall be lawful f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... course with that State as may be required in the public interests. *The committee is of opinion that the provisions contained in Articles 192-E and 192-F should more appropriately be included in this Chapter than in Part-III dealing with the fundamental rights. *192-G. Parliament shall by law appoint such authority as it considers appropriate for the carrying out of the provisions of Article 192-E and 192-F of this Constitution and confer on the authority so appointed such powers and such duties as it thinks necessary. In the Draft Constitution of 1948, Clause 16 was incorporated in the Fundamental rights Chapter which reads as under: '16. Subject to the provisions of Article 244 of this Constitution and of any law made by the Parliament, trade, commerce and intercourse throughout the territory of India shall be free. Inter-State trade and Commerce was dealt with in Article 243, Article 244 and Article 245 which reads as below: '*243. No preference shall be given to one State over another nor shall any discrimination be made between one state and another by any law or regulation relating to trade or commerce, whether carried by land, water or air. *244. Notwithstanding anyth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t accepted by the Advisory Committee and not even moved in the Constituent Assembly for adoption. Second, though the precursor clause to Article 304 underwent repeated changes before the Advisory Committee and the Drafting Committee, never it was suggested that freedom of trade was meant to be freedom from payment of taxes. Third, the power of federal unit to levy tax on the goods imported from other units was specifically adumbrated to dispel any doubt about taxing power of the State. The logical conclusion is that the power of the State to levy any tax on goods imported is specifically saved and declared in the final clause, therefore it would be impermissible to test a law imposing entry tax with reference to Article 304(b). Fourth, taxes were never intended to be a restriction on freedom of trade. 8.14 Another important question which needs to be answered as a part of this reference is whether State enactments relating to levy of entry tax have to be tested with reference to both clauses (a) and (b) of Article 304 or only with reference to clause (a) of Article 304 of the Constitution? In other words is Clause (a) and (b) of Article 304 is conjunctive or disjunctive? The answ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nomic integration. To achieve the economic unity of the country, allowing trade and commerce without imposing taxes is not the only solution but it can also be achieved by bringing in overall prosperity. Part XIII of the Constitution permits some forms of differentiation, for example, to encourage a backward region or to create a level playing field for parts of the Country that may not have reached the desired level of economic development. Therefore, Part XIII envisions a twofold object: (i) facilitation of a common market through ease of trade, commerce and intercourse by erasing barriers; and (ii) regulations (or restrictions) which may be necessary for development of backward regions or in public interest. A brief reference to the Constituent Assembly debates would amply demonstrate the same. Hon'ble Member Shri P. S. Deshmukh said: 'How pompously did we decide that there shall be "free trade" everywhere! It is not such an easy thing as that and I hope advancement and progress of the various units of the Union varies considerably. Some of them are backward like Assam or Orissa where there are very few industries and very little trade is in the hands, at least of the indigenou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crimination. The following passage from Video Electronics is apposite: 'Economic unity is a desired goal, economic equilibrium and prosperity is also the goal. Development on parity is one of the commitments of the Constitution. Directive principles enshrined in Articles 38 and 39 must be harmonized with economic unity as well as economic development of developed and under developed areas. In that light on Article 14 of the Constitution, it is necessary that the prohibitions in Article 301 and the scope of Article 304(a) and (b) should be understood and construed. Constitution is a living organism and the latent meaning of the expressions used can be given effect to only if a particular situation arises. It is not that with changing times the meaning changes but changing times illustrate and illuminate the meaning of the expressions used. The connotation of the expressions used takes its shape and color in evolving dynamic situations. A backward State or a disturbed State cannot with parity engage in competition with advanced or developed States. Even within a State, there are often backward areas which can be developed only if some special incentives are granted. If the incentive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... right to grant exemptions which flow from the plenary powers of legislative heads in list II of the 7th Schedule of the Constitution. In a federal polity, all the States having powers to grant exemption to specified class for limited period, such granting of exemption cannot be held to be contrary to the concept of economic unity. The contents of economic unity by the people of India would necessarily include the power to grant exemption or to reduce the rate of tax in special cases for achieving the industrial development or to provide tax incentives to attain economic equality in growth and development. When all the States have such provisions to exempt or reduce rates the question of economic war between the States inter se or economic disintegration of the country as such does not arise. It is not open to any party to say that this should be done and this should not be done by either one way or the other. It cannot be disputed that it is open to the States to realize tax and thereafter remit the same or pay back to the local manufacturers in the shape of subsidies and that would neither discriminate nor be hit by art.304(a) of the Constitution. In this case and as in all consti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it would be encouraging provincialism and the interests of a few as against the general interest if we accept the words 'public interest' in the place of the words "in the interests of the general public' Constituent Assembly debates, 1949, Vol. IX, p. 1125. 8.21 This amendment was negatived. The fact that this amendment did not go through would indicate that 'public interest' could imply a regional interest that needs to be protected which may not be 'in the interests of the general public' but specific to a smaller region. Such an interpretation is supported by the manner in which the word 'discrimination' has been interpreted by a three Judge bench of this Court in Video Electronics. Thus it can be said that the common thread in Part XIII is the achievement of economic unity and parity which does not altogether preclude differentiation for justifiable and rational reasons wherever necessary. The heart and soul of Part XIII is to dissolve hostile discrimination within the territory of India. 8.22 The second facet is that Article 304 (a) is a limitation to impose any tax on goods imported from other States. This power is subject to the condition that the goods manufactu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s given by the learned Chief Justice regarding the exemption/set off/credit with respect to Sales tax. 8.26 There was good amount of debate on the doctrine of compensatory tax evolved by this Court in Automobile. I am in respectful agreement with the consideration, reasoning and conclusion in the judgment of the learned Chief Justice, who held that concept of compensatory tax has neither any juristic basis nor a part of Indian Constitutional law. It is interesting and glaring to note that at the stage of drafting, at the stage of consideration by the Sub-Committee as well as Advisory Committee and when the Part XA (now Part XIII) was adopted by the Constituent Assembly, never even for a moment, the principle of compensatory tax was thought of. PART-IX:CONCLUSIONS 9.1 On an analysis and reasoning as herein above the following conclusions would emerge a. Part XIII does not contemplate tax laws within its ambit except to the extent of Article 304(a) of the Constitution. b. Article 304 (a) and (b) are disjunctive. c. Restrictions mentioned under Article 304(b) of the Constitution do not include tax. d. It is not correct to say that since goods being taxed are not produced in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enacted by the State Legislature, the term 'a local area' contemplated by Entry 52 may cover the 'Whole State' or 'a local area' as notified in the legislation. I agree with the view taken in Bihar Chamber of Commerce that from the point of view of entry tax that the State is a compendium of local areas and where the local areas contemplated by the Act cover the entire State, the difference between the State and 'a local area' practically disappears. (iii States have legislative competence to levy entry tax on the goods imported from other countries when those goods imported from other countries enter a local area for use, consumption or sale therein. (iiii Tax concessions/benefits/subsidies granted by the State for locally manufactured goods need not necessarily be limited for a specific period of time. 1(c). Questions Nos. 2 and 3:- Insofar as compensatory taxes are concerned in the light of the conclusions on question No. 1, I hold that the nomenclature of 'compensatory' ascribed to the taxes levied by the State Government under Entry 52, List II pursuant to Automobile is unwarranted. The concept of compensatory tax was evolved fifty years back through judicial pronounceme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the trading facilities, either immediately or in future, provided the tax sought to be generated is based on a reasonable relation to the actual or the projected expenditure on the cost of the service or facility. But the decisions in Bhagatram Rajeevkumar v. Commissioner of Sales Tax, M.P. & Ors. 1995 Suppl. (1) SCC 673 and State of Bihar & Ors. v. Bihar Chamber of Commerce and Ors. (1996) 9 SCC 136 held that even if the purpose of imposition of the tax is not to confer a special advantage on the traders, but to benefit the public in general including the traders, the levy can still be considered compensatory. In Bihar Chamber of Commerce, this Court reiterated the position that "some connection" between the tax and the trading facilities is sufficient to characterize it as compensatory tax. The Court went on further to hold that an indirect or incidental benefit to traders by reason of stepping up the developmental activities in various local areas of the State can be legitimately brought within the concept of compensatory tax and the nexus between the compensatory tax and the trading facility need not necessarily be either direct or specific. In Jindal Stripe Ltd. and Anr. v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to place materials on record. After the matter was so remanded, in pursuance of the parameters laid down by the Constitution Bench in Jindal Stainless Ltd. (2), the Punjab and Haryana High Court by judgment dated 14.03.2007, took the view that the levy under Haryana Local Area Development Act, 2000 was not compensatory. The State of Haryana challenged the aforesaid judgment dated 14.03.2007 in Civil Appeal No.4715 of 2008 and filed certain other appeals challenging orders in separate cases. 6. Considering the importance of the issues relating to Articles 301, 304 and other provisions of Part XIII of the Constitution, in Jaiprakash Associates Ltd. vs. State of Madhya Pradesh and Ors (2009) 7 SCC 339 [two Judges], the matter was referred to a larger Bench in terms of Art. 145(3) of the Constitution stating that the concept of compensatory tax is a judicially evolved concept and in a way provides a balancing factor between federal control and the State Taxing Board. It was observed that the concept had its matrix in transportation cases and did not apply to the general notion of entry tax. The Court considered it necessary to refer the batch of appeals to a larger Bench in terms of A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent or State List. 10. Art. 246 stipulates that with respect to the matters enumerated in List I, Parliament has the exclusive jurisdiction; with respect to those in List II, State Legislatures have exclusive jurisdiction; and with respect to those in List III, both of them can legislate subject to the discipline enjoined in Art. 254. But the power of Parliament with respect to matters in List I is "notwithstanding anything in clauses (2) and (3)" of Art. 246. In other words, List I has priority over Lists III and II; and List III has priority over List II. The Scheme of legislative relations between the Union and the State is inviolable. [A.K. Gopalan v. State of Madras AIR 1950 SC 27] 11. As the opening words of Art. 245(1) state, the legislative powers of both Union and State Legislatures are subject to other provisions of the Constitution even though their powers are plenary within the spheres assigned to them respectively by the Constitution. Legislative competence of State Legislature can only be circumscribed by express prohibition contained in the Constitution itself. Unless and until there is any provision in the Constitution expressly prohibiting legislation on the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Article 245, the entries in the Seventh Schedule of the Constitution only demarcate the legislative fields of the respective legislatures and do not confer legislative power as such. While Parliament has power to make laws for the whole or any part of the territory of India, the legislature of a State can make laws only for the State or part thereof. Thus, Article 245 inter alia indicates the extent of laws made by Parliament and by the State Legislatures. ..... 37. Article 246, thus, provides for distribution, as between Union and the States, of the legislative powers which are conferred by Article 245. Article 245 begins with the expression "subject to the provisions of this Constitution". Therefore, Article 246 must be read as "subject to other provisions of the Constitution". 38. For the purposes of this decision, the point which needs to be emphasized is that Article 245 deals with conferment of legislative powers whereas Article 246 provides for distribution of the legislative powers. Article 245 deals with extent of laws whereas Article 246 deals with distribution of legislative powers. In these articles, the Constitution Framers have used the word "make" and not "comme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s has been the past experience of the country in regard to food. If Parliament has no effective powers to impose restrictions in such situations on freedom of trade and commerce, then it will undermine the unity of nation. It is reasonable to presume that the Parliament, people's representative is a better judge of public interest and that its judgment must have primacy over any other judgment, including that of the courts. 18. Although Parliament is empowered to restrict the free movement of articles in trade and commerce, normally the laws passed by Parliament in this context ought to be non-discriminatory in character. Art. 303(1) of the Constitution prohibits Parliament and the State Legislature from making "any law giving or authorizing the giving of, any preference to one State over another, or making or authorizing the making or, any discrimination between State and another, by virtue of any entry relating to trade and commerce in any of the Lists in Seventh Schedule". Preference or discrimination amounts to a restriction on the freedom guaranteed under Art. 301 of the Constitution only if it is a law made by the virtue of any entry relating to trade and commerce in any of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purposes of Articles 301 to 304 and to confer on that authority such powers and duties as it thinks necessary. 21. Part XII and Part XIII of the Constitution lay down the parameters within which State Governments can exercise their right to enact laws/impose tax, restricting the freedom of trade, commerce and intercourse. Purpose of including Part XIII (as it stands today) in the Constitution as emerges from Section 297 of the Government of India Act, 1935 was to confer a freedom of trade, commerce and intercourse, subject to restrictions and non-discriminatory tax laws. In this respect, Art. 301 does not confer any higher right. Even the Constitutional Assembly Debates show that the framers did not intend to confer any absolute freedom of trade, commerce and intercourse. Be it noted that they did not adopt the expression "absolutely free" as found in the Australian Constitution. Reference to "Constituent Assembly Debates 30.07.1949 to 18.09.1949" shows that Dr. B.R. Ambedkar while introducing Part XA: Trade, Commerce and Intercourse within the territory of India Articles 274A to 274D (which corresponds to Articles 301 to 304 and 307) before the Constituent Assembly specificall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ell-nigh come to a position when trade and commerce cannot be run without control and somekind of direction by the Government. If my honorable friends think that we are in the days of the nineteenth century when the laissez faire enthusiast had practically the ordering of everything in the world I am afraid they are mistaken."[CAD Page No.1140 dated 08.09.1949] 23. Reiterating the views of Shri T.T. Krishnamachari, Shri Alladi Krishnaswami Ayyar pointed out that the Scheme as evolved has taken into account larger interest of India along with the interests of particular State, wide geography of the country where the interest of one region differs from the interest of another region, and future prosperity of our country. Relevant extract is as under:- "Shri Alladi Krishnaswami Ayyar:.... It may be that manure and other things are required in one part of the country while profiteers from another part of the country may try to transport the goods from the part affected. At the same time, in the interests of the larger economy and the future prosperity of our country, a certain degree of freedom of trade must be guaranteed. My Friend, Mr. Krishnamachari has pointed out that this fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcourse throughout the territory of India as important for economic unity, but they did not deify trade, commerce and intercourse nor they entertained any fetish for it. In fact, freedom of trade, commerce and intercourse was initially meant to be a fundamental right but was removed from the part pertaining to 'Fundamental Rights' as it was considered that it did not have any great content as a fundamental right. 26. It was considered that freedom of trade, commerce and intercourse need not be kept at such a high pedestal. It is apposite to refer to the following relevant Debates of the Constituent Assembly. "Atul Chandra Gupta (Advocate, Calcutta High Court) has suggested that clause (b) of article 244 should be deleted as this clause negatives articles 16 and 243 by its vague generality. Note: Clause (b) of article 244 is based on the recommendation of the Advisory Committee as adopted by the Constituent Assembly. The Drafting Committee has considered it necessary to substitute for the words "in the interest of public order, morality or health" which occur in the said recommendation, the words "in the public interests". [The Framing of India's Constitution (Vol. 4) (Page 328) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tuent Assembly began, we began under certain limitations. One of the limitations was that the Indian States would join the Union only on three subjects- foreign affairs, defence and communications. On no other matter they would agree to permit the Union Parliament to extend its legislative and executive jurisdiction..... Or to put it briefly and in a different language, they were not prepared to allow trade and commerce to be included as an entry in List No.I. If it was possible for us to include trade and commerce in List I, which means that Parliament will have the executive authority to make laws with regard to trade and commerce throughout India, we would not have found it necessary to bring trade and commerce under article 16, in the fundamental rights. But as that door was blocked, on account of the basic considerations which operated at the beginning of the Constituent Assembly, we had to find some place, for the purpose of uniformity in the matter of trade and commerce throughout India, under some head. After exercising considerable amount of ingenuity, the only method we found of giving effect to the desire of a large majority of our people that trade and commerce should b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 301 in the constitutional context does not mean freedom from all laws, it is subject to restrictions in Part XIII and also to other parts of the Constitution. 29. Art. 301 provides for freedom of trade, commerce and intercourse throughout the territory of India. It strikes an eco-political balance required for the working of a federal structure. Art. 301 cannot be interpreted as to mean a restriction on the plenary power of the State to impose tax in respect of the relevant "fields" in List II of the Seventh Schedule of the Constitution. What it means is that such plenary power of taxation shall not be used to create trade barriers or to discriminate between "goods manufactured within the State" and "goods imported". The expression in Art. 301 "subject to" is a dominant expression. It indicates subservience of the freedom to Articles 302, 303 and 304. 30. Considering the scope of the expression "subject to" this Court in K.T. Plantation (P) Ltd v. State of Karnataka (2011) 9 SCC 1, observed: "Section 110 of the Land Reforms Act empowers the State Government to withdraw the exemption granted to any land referred to in Sections 107 and 108. Section 107 itself has been made "su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Australia, 1936 AC 578 at 613.) See also Kihoto Hollohan v. Zachillhu and Ors. (1992) Supp 2 SCC 651 [Paras 26 and 27]. 32. In T.M.A. Pai Foundation v. State of Karnataka, (2002) 8 SCC 481, the Supreme Court stated:- "148. ....When constitutional provisions are interpreted, it has to be borne in mind that the interpretation should be such as to further the object of their incorporation. They cannot be read in isolation and have to be read harmoniously to provide meaning and purpose. They cannot be interpreted in a manner that renders another provision redundant. If necessary, a purposive and harmonious interpretation should be given." It follows from the above decisions that while interpreting the Constitution the emphasis must be on reading it as a whole, and in a manner that the intent and object of no part of the Constitution is defeated. In this regard, there must be a holistic approach towards the provisions of the Constitution. 33. Object of Part XIII is not to make inter-State trade, commerce and intercourse absolutely free. Part XIII will have to be read along with other Parts of the Constitution namely, Parts III, IV and XII along with the basic features of sover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, they cannot be controlled by any provision outside Part XIII..." [Page 848] The majority appears to have read Art. 301 as "subject only to Part XIII". In the opinion of learned author H.M. Seervai too, the majority view in Atiabari that Art. 301 is subject "only to Part III" was not correct. It is apposite to quote the relevant passage from H.M. Seervai's book on Constitutional Law of India, 4th Edition, Volume 3: ".....The reasons are - (1) It read into Art. 301 after the words "subject" the word "only" which is not there and this is contrary to well-settled principles of interpretation. Further, the power to make rules, referred to in Arts. 302 to 305 is governed by Articles 245 and 246, and, therefore, subject to the provisions of our Constitution. (2) The proviso to Art. 304(b) which requires the previous consent of the President to a bill for the purpose of clause (b), necessarily takes us out of Part XIII to Part XI, since Art. 255 in that part provide that the failure to obtain the previous sanction of the President to the introduction of the bill can be made good by his subsequent assent. It follows therefore that the freedom guaranteed by Art. 301 is not limited to r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ident. All subjects over which the sovereign power of a State extends are objects of taxation, but those over which it does not extend are, upon the soundest principles, exempt from taxation. This proposition may almost be pronounced self-evident. The power of taxation is an essential and inherent attribute of sovereignty, belonging as a matter of right to every independent Government. It is possessed by the Government without being expressly conferred by the people. The power is inherent in the people because the sustenance of the government requires contributions from them. In fact the power of taxation may be defined as "the power inherent in the sovereign state to recover a contribution of money or other property, in accordance with some reasonable rule or apportionment, from the property or occupation within its jurisdiction for the purpose of defraying the public expenses"." (Cooley, Taxation (4th Edition) Pages. 72, 149, 150; Referred to in the Article Power to Tax by Herman M. Knoeller reported in Market Law Review Volume 22 Issue 3 April, 1938. ) 38. This Hon'ble Court has held in a catena of cases that power to levy tax is a sovereign power of the State starting fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty for its support and maintenance. Without taxes, for lack of source of revenue, the Government would become paralyzed. How much revenue is to be drawn and from which source is a matter of fiscal policy and wholly depends on the needs of a State. In order to support the existence of the State and its welfare activities, as mandated by the Directive Principles of the State Policy, the State is empowered to raise revenue through, (i) taxes and duties; (ii) loans raised by the issue of treasury bills, loans or ways and means of advances; (iii) fees for licenses; (iv) fees for services rendered; and (v) fines or other pecuniary penalties (Articles 199, 207 and 266). On behalf of the State, it was submitted that there are fiscal limitations against taking loans in view of debt servicing; even otherwise tax is preferable as it is a mode of re-distributing wealth in the form of public welfare. 41. In Elel Hotels & Investments Ltd. and Others v. Union of India (1989) 3 SCC 698, it was held:- "20....Taxation is not now a mere source of raising money to defray expenses of Government. It is a recognized fiscal tool to achieve fiscal and social objectives..." 42. Parts XI and XII of the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds enumerated in List II of Seventh Schedule. 45. In the State List, there are eighteen entries on which the State Legislature has the power to levy taxes. States and only States have power to enact legislation in the above fields levying taxes and raise revenue. The above entries in List II relating to the imposition of taxes by the States, despite the limited width of its field are plenary in nature. States must have revenue to carry out their administration and the States are entitled to raise revenue by exercising its power to tax. Such an important power of taxation expressly granted under the Constitution cannot be allowed to be whittled down and made subservient to trade, commerce and intercourse. 46. Tax has always been treated as a distinct entity and is kept on a pedestal separate from all the other legislative fields of the Seventh Schedule. It is worth repeating that the power of taxation is an inherent attribute of sovereignty emanating from necessity. As noted earlier, the exaction is not merely fundamental for existence of the State but also to support the welfare activities, therefore, it forms a pre-condition for exercise of other legislative power. The special s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Identically, there are at least five entries in List II [entries 50, 51, 54, 55 and 57] which specifically provide that they are subject to the limitations/principles prescribed by Parliament by law made under List I and List III. 49. In the Constitution, wherever exemption from taxes were contemplated, they were expressly provided for-Exemption of property of the Union from State taxation [Art. 285]; Exemption from taxes on electricity [Art. 287]; Exemption from taxation by States in respect of water or electricity in certain cases [Art. 288]; Exemption of property and income of a State from Union taxation [Art. 289]. Exemption from tax power of Parliament/State Legislature must thus be provided expressly and unambiguously. Art. 289(2) shows that the trade or business carried on by, or on behalf of, the Government of the State, can also be subjected to tax and the tax could be "to such extent", if any, as Parliament may by law provide. When even the trade or business carried on by or on behalf of the Government of the State can also be subjected to tax, it would be erroneous to hold trade, commerce and intercourse carried on by private individuals and companies in the country fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cate. On the other hand, in the case of a tax on newsprint, it may be sufficient to show a distinct and noticeable burdensomeness, clearly and directly attributable to the tax." [Emphasis added] 51. In All Bihar Schools Association and Anr. v. State of Bihar and Ors. (1988) 1 SCC 206, it was held that religious minority institutions are not immune from general laws including tax measures and social welfare legislations. Similarly, in Printers (Mysore) Ltd. and Anr. v. Asstt. Commercial Tax Officer and Ors. (1994) 2 SCC 434, after referring to Express Newspapers case, it was held that press is not immune from taxation or general law. Thus when even Fundamental Rights are not free from taxation, trade, commerce and intercourse cannot claim immunity from taxation. 52. Art. 304(a) allows levy of tax on goods imported from other States, any tax, to which similar goods manufactured or produced in that State are subject so as not to discriminate between goods so imported and goods so manufactured or produced within the State. Art. 304(a) states non-discriminatory tax does not impede the flow of trade, commerce and intercourse. Art. 304(a) applies where the following conditions are cumul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's Constitution: Shri Alladi Krishnaswami Ayyar "And then, "Provided that nothing in this section shall prevent any unit from imposing on goods imported from other units the same duties and taxes to which goods produced in the unit are subject". That is to say we ought not to differentiate; but at the same time, goods coming in should not go scot free: they should be subject to the same duty as goods produced in the area" (The framing of India's Constitution, Select Documents by Universal Law, Law Publishing Pvt. Co. Pvt. Ltd. Vol.2 Page.253) Gobind Ballabh Pant "There is unanimity about the body of this clause and it is clear that there should not be any discrimination against one unit by another unit. Otherwise we will be going against the very sense of a Union of Federal Constitution. If the units are to be discriminated against we will come to blows more often than otherwise. Therefore this should be avoided."(The framing of India's Constitution, Select Documents by Universal Law, Law Publishing Pvt. Co. Pvt. Ltd. Vol.2 Page.254) Shri Krishnaswami Ayyar "So far as article 16 is concerned, the substance of the freedom of trade guarantee is preserved. We have prohibite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atute was struck down because it suffered from several fatal infirmities. On the other hand, we may refer to the case of Raja Jagannath Baksh Singh v. State of Uttar Pradesh [1962] 46 ITR 169 (SC) , where a challenge to the taxing statute on the ground that its provisions were unreasonable was rejected and it was observed that unless the infirmities in the impugned statute were of such a serious nature as to justify its description as a colourable exercise of legislative power; the Court would uphold a taxing statute." [Emphasis supplied] 57. In Hari Krishna Bhargav v. Union of India and Anr. AIR 1966 SC 619, the Bench noting the effect the series of decisions has had on Ramjilal, concluded that although the power to tax is not a power that transcends fundamental rights, a taxing Statute cannot merely be challenged on the ground that it is harsh and excessive. It was observed as under:- "10. It was urged that even if the exercise of the powers to compel deposits be regarded as not unconstitutional, its exercise is harsh and the demands made by the State are excessive. Exercise of the taxing power by the State has undoubtedly to be tested in the light of the fundamental freedoms g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose without reference to any special benefit to the taxpayers. 59. The taxing power of the State stands independently fortified by Parts XI and XII of the Constitution of India and can only be challenged on the ground of reasonableness. It needs no reiteration that power of States to levy taxes for the purpose of governance and carrying out its welfare activities is a necessary attribute of State's sovereignty and in that sense it is a power of supreme attribute. It is well-settled that taxes are levied in public interest and hence, cannot be considered a restriction per se on the enjoyment of any freedom contemplated by the Constitution. It would be highly unjustified to view a taxing Statute as a restriction on individual freedoms. 60. The essential characteristics of a tax are that: (i) it is imposed under a statutory power without the taxpayer's consent and the payment is enforced by law; (ii) it is an imposition made for public purpose without reference to any special benefit to be conferred on the payer of the tax; and (iii) it is part of the common burden. In Commissioner Hindu Religious Endowments, Madras v. Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt 1954 SCR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcumstance that its imposition might tend towards the diminution of the earnings or profits of the persons of incidence does not, per se, and without more, constitute violation of the rights under Article 19(1)(g)." 62. Similar view was expressed in Express Hotels Private Limited v. State of Gujarat and Anr. (1989) 3 SCC 677. A taxing Statute is not per se restriction of the freedom under Art. 19(1)(g): "28. So far as the argument that Fundamental Rights under Article 19(1)(g) are violated by a levy on a mere provision for luxury, without its actual utilisation, is concerned it is settled law that the mere excessiveness of a tax or that it affects the earnings cannot, per se, be held to violate Article 19(1)(g)...." 63. Art. 304(a) authorizes a State Legislature to impose a non-discriminatory tax on goods imported from other States. Art. 304(a) does not prevent levy of tax on goods; what it prohibits is such levy of tax on goods as would result in discrimination between goods imported from other States and similar goods manufactured or produced within the State. The object is to prevent imported goods from being discriminated by imposition of a higher tax thereon than the loca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If the said argument is accepted it would mean, for instance, that even a legislative enactment prescribing the minimum wages to industrial employees may fall under Part XIII because in an economic sense an additional wage bill may indirectly affect trade or commerce. We are, therefore, satisfied that in determining the limits of the width and amplitude of the freedom guaranteed by Art. 301 a rational and workable test to apply would be: Does the impugned restriction operate directly or immediately on trade or its movement?" [Page 860] [Emphasis Supplied] The majority based its opinion on the reasoning that any legislation whether taxing or otherwise which imposed any restrictions that had the effect of directly offending the movement or transport of goods would attract the provisions of Art. 301 and its validity could be sustained only if it satisfied Art. 302 or Art. 304(b) of the Constitution. 66. Sinha, C.J. in his dissenting judgment referred to the integration of "Native States" with the Government of India and how the "Native States" ultimately merged their individualities into India to emerge as one political unit with the result that what was called British India beca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ude taxation within the generic term "reasonable restrictions".........[Page 828] ...... ....The objections against the contention that taxation was included within the prohibition contained in Part XIII may thus be summarized: (1) Taxation, as such, always implies that it is in public interest. Hence, it would be outside particular restrictions, which may be characterized by the Courts as reasonable and in public interest. (2) The power is vested in a sovereign State to carry on Government. Our Constitution has laid the foundations of a welfare State, which means very much expanding the scope of the activities of Government and administration, thus making it necessary for the State to impose taxes on a much larger scale and in much wider fields. The legislative entries in the three lists referred to above empowering the Union Government and the State Governments to impose certain taxations with reference to movements of goods and passengers would be rendered ineffective, if not otiose, if it were held that taxation simpliciter is within the terms of Art. 301. (3) If the argument on behalf of the appellants were accepted, many taxes, for example, sales tax by the Union and by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Art.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 Art. 301 is subject to non-discriminatory restrictions imposed by Parliament in public interest (Art.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 [Art. 303(2)]; (5) reasonable restrictions may be imposed by the Legislature of a State in the public interest [Art. 304(b)]; (6) non-discriminatory taxes may be imposed by the Legislature of a State on goods imported from another State or other States, if similar taxes are imposed on goods produced or manufactured in that State [Art. 304(a)]; and lastly (7) restrictions imposed by existing laws have been continued, except insofar as the President may by order otherwise direct (Art. 305). [Page 831-832] [Emphasis added] 67. A l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at they operate as a restriction on the movement of goods or persons and impose a burden on the freedom of trade and commerce. 70. Mr. P.P. Rao, Mr. Rakesh Dwivedi, Mr. V. Giri, Mr. Shyam Divan and Mr. Ajit Kumar Sinha learned Senior Counsel and other counsel appearing for the States advanced meticulous arguments that there is erroneous approach in the judgments of Atiabari and Automobile and they made the following submissions to fortify their contentions that the majority views in Atiabari and Automobile are to be re-visited:- (i) Even though the majority referred to Section 297 of the Government of India Act, 1935 and referred to the economic unity of the nation, no detailed discussion was done on the history of Part XIII and Constituent Assembly Debates which threw considerable light on Part XIII and consequently erred in holding that Art. 301 read in its proper context imposes constitutional limitations on the legislative powers of the Parliament and the State. [Page 848] Majority in Atiabari held that :- "....the freedom of the movement of trade cannot be subject to any restrictions in the form of taxes imposed on the carriage of goods or their movement, all that is meant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Part XII of the Constitution and can be challenged only on the ground of reasonableness. Through a series of judicial pronouncements, it is accepted that even a challenge to the taxing Statute under Articles 19(1)(g), 14 and under Part III of the Constitution has to be dealt with caution and only after great circumspection should the Statute be struck down. Freedom in Art. 301 is not freedom from taxation-non-discriminatory taxes are outside the purview of Art. 301: 74. In Atiabari, Sinha, C.J. took a different view of Art. 301 than the one taken by the majority and concluded as under:- ".....(2) the freedom declared by Art. 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;......" [Page 831] "In my opinion, another very cogent reason for holding that taxation simpliciter is not within the terms of Article 301 of the Constitution is that the very connotation of taxation is the power of the State to raise money for public purposes by compelling the payment by persons, both natural and juristic, of monies earned or possessed by them, by virtue of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certaining the scope of freedom of inter-State trade and commerce in India deliberated upon Section 92 of the Australian Constitution. Pandit Thakur Das Bhargav was in favour of making trade and commerce absolutely free in India. However, Shri T.T. Krishnamachari speaking for the Draft Committee brought out the difficulties which could have been faced by guaranteeing absolute freedom of trade and commerce in India on par with Section 92 of the Australian Constitution. 77. The following observations of Shri T.T. Krishnamachari are relevant to be noted: "....I do not know if he realises that an ombnibus right such as the one that we recognise should not be given so far as freedom of trade and commerce is concerned, which perhaps has an echo in article 92 of the Australian Constitution, which has made the economic position of Australia a very difficult one today. They in Australia find that by reason of the fact that their provisions for amendment of the Constitution are so difficult that they are not able to amend the Constitution, and article 92 stands as a bar to any progressive legislation which they have undertaken. It may be right or it may be wrong - the people of Australia a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stricted trade and commerce directly and immediately. The Court observed that where the restriction is indirect or remote, the freedom provided by Section 92 would not be impaired. The test on which every impugned legislation ought to be examined was formulated in the following terms: Does the law under challenge directly and immediately, as opposed to incidentally, restrict the trade and commerce in which the individual was engaged? Atiabari and Automobile fundamentally concurred with the Australian cases to hold 'tax' as a restriction for the purposes of Part XIII of the Constitution of India. Gajendragadkar, J. in Atiabari observed: "It is commonplace to say that the political and historical background of the federal polity adopted by the Australian Commonwealth, the setting of the Constitution itself, the distribution of powers and the general scheme of the Constitution are different, and so it would to be safe to seek for guidance or assistance from the Australian decisions when we are called upon to construe the provisions of our Constitution.". Gajendragadkar, J. further relied on the Bank Nationalisation Case to borrow the concept of 'direct and immediate impediment on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at might arise under our Constitution. If a law, whatever may have been its source, directly and immediately affects the free movement of trade, it would be restriction on the said freedom. But a law which may have only indirect and remote repercussion on the said freedom cannot be considered to be a restriction on it." 82. The above views taken in Atiabari and Automobile in the light of the Australian cases represent a mechanical implantation of a foreign concept into the Indian legal system, not keeping in view the distinct features of Indian Polity and the Constituent Assembly Debates. Majority view in Atiabari and Automobile do not appear to have taken note of the historical background of merger of 'Native States' with their individualities, with British India, and the federal nature of the Indian Constitution while discussing the fundamental question as to whether 'Freedom' in Art. 301 meant freedom from tax. The majority appears to have begun with the presumption of tax laws being subservient to Art. 301 and later concluded that if all the tax laws are brought in Art. 301, State's legislative power to tax would be destroyed. Thereafter, in an attempt to save the taxing powe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relating to freedom of trade and commerce and found the test of "direct and immediate effect" to be insignificant; the Court held as under:- "48. Departing now from the doctrine which has failed to retain general acceptance, we adopt the interpretation which, as we have shown, is favoured by history and context. In doing so, we must say something about the resolution of cases in which no impermissible purpose appears on the face of the impugned law, but its effect is discriminatory in that it discriminates against inter-State trade and commerce and thereby protects intra-State trade and commerce of the same kind...." 85. In Cole v. Whitfield, the High Court while disapproving of the "individual rights" approach authoritatively adopted in Bank Nationalisation Case held that Section 92 guarantees freedom of inter-State trade and commerce only against the discriminatory protectionist burdens. This decision brought to an end the "quite unacceptable state of affairs" then attending Section 92 of the Constitution, as the preceding eighty years of judicial development concerning freedom of inter-State trade, commerce and intercourse in Australia "had yielded neither clarity of meaning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nter-State commerce, and activities that substantially affect inter-State commerce; whereas in the Indian Constitution, States have plenary power to legislate on the subjects enumerated in List II subject to the Constitutional limitations. Atiabari and Automobile erred in relying on Freeman v. Hewit 329 U.S. 249 (1946), which has been discarded by the US Supreme Court itself in Complete Auto Transit, Inc. v. Charles R. Brady [1977] USSC 54: (1977) 430 US 274. In Complete Auto Transit, the US Supreme Court while dealing with an inter-State levy purported to be compensatory, formulated a four-part test to determine if a State tax violates the Commerce Clause: (i) Nexus: there must be a sufficient connection between the taxpayer and the State to warrant the imposition of State Tax Authority; (ii) Fair Apportionment: the State must not tax more than its fair share of the income of a taxpayer; (iii) No discrimination: the State must not treat out-of-State taxpayers differently than in-State taxpayers; and (iv) Related to services: the tax must be fairly related to services provided to the taxpayer by the State. 89. In view of the above, the position which stands good today is that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dering whether the word "and" is conjunctive or disjunctive, in relation to Section 4(i) of Maharishi Mahesh Yogi Vedic Vishwavidyalaya Adhiniyam, 1995, in Maharishi Mahesh Yogi Vedic Vishwavidyalaya v. State of Madhya Pradesh and Others (2013) 15 SCC 677 and observing that the word "and" is used as disjunctive, this Court held as under:- 93. .... we also refer to the following decisions rendered by this Court in Ishwar Singh Bindra v.State of U.P., AIR 1968 SC 1450, wherein in para 11 it has been held as under: (AIR p. 1454) "11. ... It would be much more appropriate in the context to read it disconjunctively. In Stroud's Judicial Dictionary , 3rd Edn., it is stated at p. 135 that 'and' has generally a cumulative sense, requiring the fulfilment of all the conditions that it joins together, and herein it is the antithesis of or. Sometimes, however, even in such a connection, it is, by force of a context, read as 'or'. Similarly in Maxwell on Interpretation of Statutes, 11 th Edn., it has been accepted that 'to carry out the intention of the legislature it is occasionally found necessary to read the conjunctions "or" and "and" one for the other'."[Emphasis supplied] 94. We may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e months. I am unable to construe clause (7) (a) in the way suggested by learned counsel for the petitioner. It is an enabling provision empowering Parliament to prescribe two things. Parliament may prescribe either or both. If a father tells his delicate child that he may play table tennis and badminton but not the strenuous game of football, it obviously does not mean that the child, if he chooses to play at all, must play both table tennis and badminton. It is an option given to the child. Likewise, the Constitution gives to Parliament the power of prescribing two things. Parliament is not obliged to prescribe at all but if, it chooses to prescribe it may prescribe either or both......" [Emphasis added] Applying the ratio in the above decisions since the expression 'and' is used in Art. 304 after semi-colon, it will have to be read as 'or' creating a disjunctive reading of Art. 304(a) and Art. 304(b) indicating that the State Legislature can exercise its power either under Art.304 (a) or Art. 304 (b) or both. Whether Art. 304(b) coupled with the proviso is applicable to tax laws-Judicial Approach: 93. In Atiabari, majority held that "tax laws" fall within the comprehension of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, morality or health or in an emergency: Provided that nothing in this section shall prevent any unit from imposing on goods imported from other units the same duties and taxes to which the goods produced in the unit are subject: Provided further that no preference shall be given by any regulation of commerce or revenue by a unit to one unit over another." [Emphasis added] 95. The first proviso to Draft Art. 10 corresponds to Art. 304(b) and second proviso relates to Art. 304(a). That first proviso to Draft Art.10 [Art. 304(b)] relates only to "public order, morality or health or in an emergency" is also made clear from the Constituent Assembly Debates/Advisory Committee Proceedings. In this regard, we may refer to the speech of Shri Alladi Krishnaswami Ayyar in the Constituent Assembly Debates, which is as under:- "Alladi Krishnaswami Ayyar: "Subject to regulation by the law of the Union, trade, commerce, and intercourse among the units by and between the citizens shall be free." That is the general principle. Then come the exceptions, "Provided that any unit may by law impose reasonable restrictions in the interest of public order, morality or health or in an emergency." Suppo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion, the Committee was of the opinion that the first and second proviso should be transferred as independent clauses in the Chapter dealing with relation between the different States and the third proviso was found unnecessary in view of the opening words "subject to the regulation by the law of the Union and, accordingly, the same was adopted in Art. 274(D)(b) [Present Art. 304(b)] which reads as under:- "(b) impose such reasonable restrictions on the 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 purposes of clause (b) of this article shall be introduced or moved in the legislature of a State nor shall any Ordinance be promulgated for the purpose by the Governor or Ruler of the State without the previous sanction of the President." 99. If Art. 304(b) is also held to cover tax laws, it would amount to empowering the States to make laws imposing tax even on the freedom of trade, commerce and intercourse. As such there is no such entry in List II of Seventh Schedule of the Constitution so empowering the States. Commenting on this, learned author H.M. Seervai in his Consti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e trade and commerce are subject matters in List I of the Seventh Schedule (entries 41 and 42, List I). Further, trade and commerce in production, supply and distribution of industry controlled by the Union, food stuffs, including edible oils, seeds and oils; cattle fodder; raw cotton, cotton seed; and raw jute are subject matters in entry 33, List III. Entry 34, List III deals with price control. Only intra-State trade and commerce is in List II (entry 26, List II) subject to entry 33, List III, as stated therein. Parliament has thus occupied an overwhelming space with respect to trade and commerce within the State also. It is in this backdrop that the State has been given power to impose reasonable restrictions on the freedom of trade, commerce and intercourse with or within that State with the proviso requiring presidential assent before the Bill is introduced. The rationale, therefore, is that a non-fiscal law of the State with respect to freedom of trade, commerce and intercourse would be entrenching upon either the exclusive legislative field of the Parliament in List I or the occupied field of the Parliament in List III. It follows that Art. 304(b) relates to non-fiscal laws ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the State and it is in this backdrop, that the State has been given power to impose such reasonable restrictions in "public interest" on the trade, commerce and intercourse with or within that State subject to the satisfaction of the proviso under Art. 304(b). It follows, therefore, that Art. 304(b) relates to non-fiscal laws of the States. To subject the State's sovereign legislative levying tax to Presidential assent would in effect erode the pillar of federalism which this country is built on. In the absence of an express provision in the Constitution, such presidential sanction for taxing laws cannot be read into the provision. Conclusion on Question No.1: 103. Non-discriminatory taxes do not constitute infraction of Art. 301 of the Constitution. With due respect, the view taken in Atiabari and approved in Automobile Transport declaring that taxes do amount to restriction and that freedom of trade, commerce and intercourse cannot be subject to restriction in the form of taxes is not a correct view and are to be over-ruled. However, I am agreeing with the concept of compensatory tax evolved in the Automobile case for the reasons indicated while answering question Nos. 2 and 3. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Scheduled Tax Rules framed under the Government of India Act, 1919. The expression signified a tax levied on entry into an area of a unit of local administration. The entry was re-fashioned and enacted as item 49 of the Provincial Legislative List under the Government of India Act, 1935. Item 49 reads as "Cesses on the entry of goods into a local area for consumption, use or sale therein". In Burmah Shell Oil Storage and Disturbing Co. of India Ltd. Belgaum v. Belgaum Borough Municipality Belgaum Cell, 1963 SCR Suppl. (2) 216, the Supreme Court of India while distinguishing terminal tax and Octroi held that the Octroi's leviable in respect of goods brought into a municipal area for consumption or use of sale. 107. When Government of India Act, 1935 was enacted, terminal taxes were separated from octroi and were included in the Union List while octroi was allocated to the provinces. The term "octroi" was avoided because terminal taxes are also 'octroi' in a sense. This scheme has been adopted in the Constitution with the difference that in the entry relating to 'octroi' the word 'tax' replaces the word 'cess'. Levy of octroi was also criticized for being an obsolete method of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd, district board etc. The High Court on this aspect held and in our opinion rightly that the definition does not comprehend entire State as local area as the use of word 'a' before 'local area' in the section is significant." 110. As discussed above, entry tax is not collected at the behest of municipality or a panchayat attached to a checkpost. It is payable by the assesses by filing their returns. Entry tax is a State level levy, levied by State Legislature upon entry of goods into a local area for consumption, use or sale therein. The local authorities themselves cannot levy the tax. The power is that of State Legislature and of no one. In Bihar Chamber of Commerce, this Court was faced with the task of interpreting the term "local area" in the context of entry 52, List II. The Court observed that where State Legislature has levied a tax covering the entire State and proceeds of such tax are spent for common welfare activities of the State, the distinction between the State and the local areas practically disappears. In Bihar Chamber of Commerce, it was held as under:- "12. ....Where the local areas contemplated by the Act cover the entire States the distinction between the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that from the view of Entry Tax, the State is a compendium of local areas and where the local areas cover the entire State, the difference between the 'State' and 'a local area' practically disappears. 111. Counsel appearing for the States contend that the burden of entry tax, if any, on the trader cannot by itself constitute a restriction on the inter-State movement of goods. To constitute a restriction per se on the freedom of trade, commerce and intercourse, levy of tax, in conjunction with other factors should actually create a substantial advantage in favour of the persons who indigenously manufacture or produce goods as compared to the similar goods which are imported from outside the State. The sovereign power available to the State Legislature to levy tax cannot be decimated by every inconvenience that may be caused to a trader. If the tax is of such a character, that the burden, if any, borne by the dealer, can be absorbed by him as a part of his trade and business, then the trader will have to bear the same. It does not then make the tax discriminatory or create a restriction on the flow of goods from one State to another. 112. Imposition of entry tax is not merely "on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from other States: No levy of Entry Tax on the goods manufactured inside the State-Whether discriminatory. 114. Contention of the assessees is that entry tax is levied only on goods entering the local area from other States and there is no levy of entry tax on the locally produced goods when they move from one local area to another; as goods imported from other States are being discriminated against, such levy is not saved under Art. 304(a). It is their contention that entry tax only on goods coming from outside the State and not intra-State entry of goods from one local area to another local area or on movement of goods is a clear case of discrimination, offending Art. 304(a). 115. The assessees seek to narrow down the wide purport of the term 'any tax' used in Art. 304(a) by contending that equivalence should be brought about in the imposition of entry tax itself. By contending so, the appellants have become oblivious of the fact that the State Legislature is always free to provide for equivalence in the Entry Tax Act, and alternately make provisions for adjustments and set-offs in other enactments of Sales Tax or Value Added Tax Acts. 116. The term 'any tax' means any exacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of equivalence and non-discrimination. For e.g., both sales tax levied under entry 54, List II and entry tax levied under entry 52, List II are taxes on goods. It is the burden of the tax which can discriminate and not the form. States are free to equalise the burden of entry tax on the goods imported from other States by giving them set-off against the sales tax paid by them in the exporting State. In such a manner, equivalence can be brought about in the tax burden borne by the goods imported from other States and the locally manufactured/produced goods. The contention of the assessees that the term 'any tax' used in Art. 304(a) refers to every tax distinctly, thereby prohibiting imposition of entry tax on imported goods unless, entry tax is imposed on locally manufactured/produced goods, does not lead to just and reasonable interpretation of Art. 304(a). The wholesome effect of the taxes levied under distinct heads needs to be taken into account. The tax burden borne by the goods form a part of the price of the goods and if both, locally manufactured/produced goods and imported goods are subjected to similar tax burdens, irrespective of the heads under which the taxes are levie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o purchased the goods from the manufacturer or by an individual. A dealer who effects entry of goods into a local area from another local area in the same State would be taxed in the form of sales tax/VAT; so also the individual would have already paid the sales tax in another local area, where he bought the goods. In case of entry tax levied on goods imported from other State, set-off like in the cases of State enactments of Tamil Nadu and Andhra Pradesh is given to the extent of the sales tax/VAT paid in the purchasing State; in few of the States like Kerala, after levy of entry tax, to the extent entry tax paid, input credit is given from the sales tax/VAT payable in the State where the goods are imported. Tax burden is more or less the same, for both indigenous goods and outside goods. This is because, where an entry tax is imposed on goods brought from outside, the benefit of credit of the amount already paid as entry tax is given as input credit for the purpose of payment of VAT. Moreover, if a State enactment provides for set-off and statutory exemptions to goods paying local sales tax, thereby equalising the net tax burden on the imported goods and local goods, it does not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e incentive to encourage local manufacturing units. The Supreme Court held that by applying different rates of tax between goods imported into the State of Gujarat and goods manufactured within that State is discriminatory and violative of Art. 304(a) and, accordingly, quashed the Notification. 125. In State of U.P. and Anr. v. Laxmi Paper Mart and Ors. (1997) 2 SCC 697, State Government had exempted the exercise-books made from paper purchases within Uttar Pradesh from the levy of sales tax. Whereas, exercise-books produced outside the State of Uttar Pradesh were subjected to sales tax at the rate of 5%. The said exemption granted to indigenously manufactured exercise-books was challenged. The challenge was upheld by this Court and the exemption granted to locally manufactured exercise-books was held to be discriminatory within the meaning of Art. 304(a) of the Constitution of India. Preferential treatment for locally produced goods by grant of exemption or set-off etc. and non-grant of such exemption or set-off to goods imported from other States - Not-discriminatory: 126. While States have the sovereign power to levy taxes to raise revenue, difference in rates of taxes by it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur from the expression "throughout the territory of India"; the Union was envisaged not only as a political union but also an economic union. The grand vision was to unify the country, not only politically but also by creation of an economic union of hitherto disparate Provinces and Princely States. Freedom of movement of goods and services and the creation of a common market must be understood in this context. Thus, the spirit of Part XIII must be seen in the context of achieving a balance between a cohesive economic union having due regard for the federal character of the Constitution and not in the sense of a handicap for State's individual development. 129. We may usefully refer to the following passage authored by Prof. D.D. Basu in Comparative Federalism, Prentice Hall of India, 1987, which reads as under: "The great problem of any federal structure is to prevent the growth of sectional and local interests which are inimical to the interests of the nation as a whole. The strength of the Union may be achieved only by minimizing inter-State barriers as much as possible, so that the people may feel that they are the members of one nation, though they may, for the time being, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gs which are decided once, for all; they are things that arise and grown from day to day. They may be varied; there may be circumstances and situations when the whole thing will have to be revised. This may arise so far as a particular State is concerned or in respect of more than one State. How pompously did we decide that there shall be "free trade" everywhere. It is not such an easy thing as that and I hope that this is now broadly realized. For instance, we know that the stage, of advancement and progress of the various units of the Union varies considerably. Some of them are backward like Assam or Orissa where there are, very few industries and very little trade is in the hands, at least of the indigenous population. We may have probably to give them some protection in order that they may rapidly come on par with other units. It may be necessary also from time to time to vary our provisions so far as aid and concessions to industries and other things are concerned. I therefore do not think that is right to bar all discrimination, as it is called (in fact it is not), barring all possibility of help to those who are backward and who are unable to compete with the more advanced, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not contemplate the distribution of subsidies to the provinces. The provinces or groups differ among themselves, some are rich and some are poor. Some are capable of managing with their existing resources; but others may have to increase their revenue for managing their affairs. If you impose so many limitations on them, how can they do that? It is all very well to say free trade is necessary; but how are the provinces to live?" [Page No.254 of the Framing of India's Constitution Select Documents-The Project Committee, Volume 2 by the Indian Institute of Public Administration Universal Law Publishing Co. Pvt. Ltd.] 132. There are considerable regional disparities in India attributable to a variety of reasons. Economically speaking, of these reasons, the ones that are most apparent are geography and consequent economic inadequacy. States with access to seacoasts and natural resources including mineral wealth, water resources have a definite edge over the other States. Whereas States that have terrains that make access to a region difficult, including hills, rivers and dense forests, show lesser signs of economic development. Lack of perennial sources of water or water scarcity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an Union and China is between two and three times. Our convergence analysis shows that this economic disparity among States is only widening and not narrowing. India is the only large country in the world today that is experiencing an economic divergence among its States and not convergence, as economic theory would posit." ".....Pre-1990 and post-1990 look like almost two different eras in India's history of economic diversity among States. Economic theory would suggest that the poorer regions grow faster to catch up with the richer States to cause an eventual convergence, as is happening globally. Contrary to global experiences of narrowing disparity, both across and within nations, India actually shows trends of an exacerbating divergence among its large States, implying the richer States will continue to grow faster." "Whatever be the reasons, it is quite evident that the priorities of a more prosperous State will be quite different from those that are still very poor. India's cultural and political diversity is a well-entrenched fact. It is time to accept its economic diversity too. Amid such economic disparity among States with varying future needs and priorities, a Delh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... verage/flexibility in exercise of their power to levy taxes and, therefore, steps taken by the States that result in differentiation cannot amount to discrimination that impedes the free flow of trade, commerce and intercourse. 136. Manufacturing activities within the State involve several activities right from sourcing of raw-materials, manufacture of goods, marketing of the manufactured goods, and export of the manufactured goods. Manufacturing activities convert the State from a mere trade hub to a manufacturing hub, creating employment opportunities for the locals, thereby giving impetus to the growth of the State. Manufacturing is a giant step for boosting the economy of the State; it brings in opportunities and socio-economic benefits to the residents of the respective States. Per contra, goods coming in from outside the State only tap the market potential of the State without creating any employment opportunities or boosting the economy of the State. Thus granting exemptions/set-off/tax incentives to locally produced goods and not granting such exemption to goods coming from outside cannot be said to be discriminatory. 137. Furthermore, every differentiation is not necess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erning another set of persons or objects, so that the question of unequal treatment does not really arise as between persons governed by different conditions and different sets of circumstances...." [Emphasis added] 138. The desired objective of economic integration through checks and balances to encourage less developed parts of the country, so that they may compete as equals with others, does not contravene Part XIII of the Constitution. In Video Electronics, the three Judges Bench held as under: "20. The question as we see is, how to harmonise the construction of the several provisions of the Constitution, It is true that if a particular provision being taxing provision or otherwise impedes directly or immediately the free flow of trade within the Union of India then it will be violative of Article 301 of the Constitution. It has further to be borne in mind that Article 301 enjoins that trade, commerce and intercourse throughout the territory of India shall be free. The first question, therefore, which one has to examine in this case is, whether the sales tax provisions (exemption etc.) in these cases directly and immediately restrict the free flow of trade and commerce within ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hampering of trade between the two States within the meaning of Article 301 of the Constitution. As is manifest, Article 304 is an exception to Article 301 of the Constitution. The need of taking resort to exception will arise only if the tax impugned is hit by Articles 301 and 303 of the Constitution. If it is not then Article 304 of the Constitution will not come into picture at all. See the observations in Nataraja Mudaliar's case [1968] 3 SCR 829 of the report. It has to be borne in mind that there may be differentiations based on consideration of natural or business factors which are more or less in force in different localities. A State might be allowed to impose a higher rate of tax on a commodity either when it is not consumed at all within the State or if it is felt that the burden falling on consumers within the State, will be more than that and large benefit is derived by the revenue. The imposition of a rate of sales tax is influenced by various political, economic and social factors. Prevalence of differential rate of tax on sales of the same commodity cannot be regarded in isolation as determinative of the object to discriminate between one State and another. Unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provide tax incentives to attain economic equality in growth and development. When all the States have such provisions to exempt or reduce rates the question of economic war between the States inter se or economic disintegration of the country as such does not arise. It is not open to any party to say that this should be done and this should not be done by either one way or the other. It cannot be disputed that it is open to the States to realise tax and thereafter remit the same or pay back to the local manufacturers in the shape of subsidies and that would neither discriminate nor be hit by Article 304(a) of the Constitution. In this case and as in all constitutional adjudications the substance of the matter has to be looked into to find out whether there is any discrimination in violation of the constitutional mandate." [Emphasis added] Thus while considering the scope of "discrimination" under Art. 304(a) in Video Electronics, this Court has carved out an exception that States have powers to grant exemption to specific class for limited period and that such grant of exemption cannot be held to be discriminatory. To reduce the rate of tax in special cases or to provide tax ince ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the cases Firm ATB Mehtab Majid & Co v. State of Madras & Anr. AIR 1963 SC 928 and State of Madras v. N.K. Nataraja Mudaliar (1968) 3 SCR 829, this Court held as under:- "24. We are unable to agree with the contention of the learned counsel for the petitioners that the impugned notification had the effect of preventing or hindering the free movement of goods from one State to another. As far as the State of Rajasthan is concerned, it had the opposite effect. Merely because local rate of tax in the State of Gujarat on the sale of cement was higher than the inter-State sales tax on the cement sold from Rajasthan cannot lead to the conclusion that the impugned notification prevented or hindered the free movement of goods from one State to another. In fact the impugned notification had the opposite effect, namely, it increased the movement of cement from Rajasthan to other States. It is not as if the impugned notification created a barrier which may have had the effect of hindering free movement of goods but on the other hand, the sales tax barrier was lowered resulting in increased volume of inter-state trade." 141. It follows from the Constituent Assembly Debates and the decisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spite the economic reforms initiated in the country about twenty five years ago, entrepreneurs are hesitant to invest in backward States because of varied reasons like inadequacy of power, lack of infrastructure and transportation, quality of human resources etc. Resultantly, few States continue to be backward States. In order to have a planned development for the benefit of the people and overall growth of the country as a nation, regional imbalances are to be removed. While trade, commerce and intercourse is important for the economic unity of the nation, the Courts cannot be oblivious of the responsibilities of a Welfare State in raising its resources by levy of taxes to meet the challenges. Incentives to invest in backward areas, subsidies and tax concessions are some of the measures used by the State to guide the location of the industries in backward areas and to generate employment opportunities for the people of the State. While power of taxation is indispensable, State also has the power to grant tax concessions or incentives to indigenous manufacturers/producers. Such incentives/tax concessions would certainly create differentiation between the locally produced goods and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 tax or duty imposed on goods imported from other States and the tax or duty imposed on similar goods manufactured or produced in that State are such that there is no discrimination against imported goods. As no foreign liquor is produced or manufactured in the State of Orissa the power to legislate given by Article 304 is not available and the restriction which is declared on the freedom of trade, commerce or intercourse by Article 301 of the Constitution remains unfettered." [Emphasis supplied] Learned Counsel for the assesses have relied on Kalyani Stores to contend that Art. 304(a) is the only avenue for the State to impose entry tax and the same can be availed of only when there are similar goods being manufactured within the State so as to prevent discrimination. However, the law laid down in Kalyani Stores cannot be applied in the case of entry tax levied under entry 52, List II. The dictum of Kalyani Stores has a limited appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vereign and plenary power of the State to tax cannot be emasculated and made subject to a limitation that a State can only tax those goods which are produced within its territory also. 150. This is better explained by way of an example: Zinc is an important mineral resource used in galvanization of iron and steel. It is also used in automotive, electrical and machinery industries. Haryana does not have zinc ore, however, it does have the industries mentioned above. If zinc is imported from Odisha or Rajasthan, then State of Haryana can impose a tax on it, even though there is no local production of zinc. This does not mean that there is a discrimination against the imported zinc. Discrimination involves an element of intentional and purposeful differentiation; without a comparable good there cannot be a disparate treatment or discrimination of the imported zinc. Thus, a State law that imposes a tax on imported goods where similar goods are not manufactured or produced in that State, will meet the requirement of Art.304(a) and there would not arise any question of discrimination. 151. It is true that when similar goods are not manufactured inside the State, there are chances of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcise of their legislative power under entry 52, List II. Counsel for the States have submitted before us that the taxable event under entry 83, List I and that under entry 52, List II are distinct; taxable event with respect to entry 83, List I, is the act of import i.e. bringing of goods from a foreign country to India, whereas, the taxable event under entry 52, List II is the entry of goods into local area for consumption, use or sale therein. It was further argued that entry 41, List I which deals with trade and commerce with foreign countries, import and export across custom frontiers, and definition of custom frontiers has to be read along with entry 83, List I. Meaning of the word "Import": 155. "Import" means bringing or taking by sea or air across any customs frontier. Import is defined in Section 2(23) and imported goods in Section 2(25) of the Customs Act as under:- "(23) "import", with its grammatical variations and cognate expressions, means bringing into India from a place outside India; .... (25) "imported goods" means any goods brought into India from a place outside India but does not include goods which have been cleared for home consumption; 156. The mea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to any place outside India, detailed customs clearance formalities of the landed goods have to be followed by the importers. In respect of goods which are off-loaded, importers have the option to clear them for home consumption after payment of the duties leviable or to clear them for warehousing without immediate discharge of the duties leviable in terms of the warehousing provisions as provided in the Customs Act. Sections 45 to 48 deal with clearance of imported goods for home consumption. In terms of Section 46, every importer is required to file Bill of Entry for clearance of goods for home consumption or warehousing in the form as prescribed by regulations. In terms of Section 47 of the Customs Act, proper officer on being satisfied that the goods entered for home consumption are not prohibited goods and the importer has paid the import duty and on being satisfied that the prescribed formalities have been duly completed, passes an order for clearance of goods for home consumption. Evidently Chapter IX of the Customs Act is a facility for warehousing, deposit of imported goods and their clearance. Section 68 provides for clearance of warehoused goods for home consumption by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Boddu Paidanna has been affirmed in Governor General of Council v. Province of Madras AIR 1945 PC 98 = 58 LW 228 in following words:- "Here again their Lordships find themselves in complete accord with the reasoning and ocnslusions of the Federal Court in the Boddu Paidanna Case (1). The two taxes, the one levied upon a manufacturer in respect of his goods, the other upon a vendor in respect of his sales, may, as is there pointed out, in one sense overlap. But in law there is no overlapping. The taxes are separate and distinct imposts. If in fact they overlap, that may be because the taxing authority, imposing a duty of excise, finds it convenient to impose that duty at the moment when the exciseable article leaves the factory or workshop for the first time upon the occasion of its sale. But that method of collecting the tax is an accident of administration, it is not of the essence of the duty of excise which is attracted by the manufacturer itself." 164. In Ram Krishan Ram Nath Agarwal v. Secretary, Municipal Committee, Kamptee, Union of India AIR 1950 SC 11, a case relating to bidi manufacturer who was required to pay excise duty and octroi, the Supreme Court approved the Fed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the learned Professor has criticized the doctrine of 'Unbroken Package' in the following words: "in the dormant commerce clause context, the court long ago disparaged the 'unbroken-package doctrine as applied to interstate commerce........as more artificial than sound' and the court has concluded that taxes imposed on goods while in transit through the taxing state are in effect potentially repeatable taxes on interstate commerce itself and are thus barred by the commerce clause. But non-discriminatory taxes imposed on goods prior to their movement into interstate transit, or subsequent to the completion of such transit, are taxes incapable of multiple application and are thus sufficiently local to survive jurisdiction scrutiny." [Page. 1162-1163] 169. Learned counsel on behalf of the States rightly contended that the 'original package doctrine' or 'unbroken package doctrine' as propounded in Brown v. State of Maryland by Chief Justice Marshall has been expressly disapproved by Indian courts as well. In this regard, reliance has been placed upon Province of Madras v. Boddu Paidanna & Sons AIR 1942 FC 33 = 1942 FCR 90; State of Bombay v. F.N. Balsara (CB) AIR 1951 SC 318; St ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 942 FCR 90 and again by the Supreme Court in State of Bombay v. F.N. Balsara,. Apparently these decisions were not brought to the notice of the Court which decided the case of Central India Spinning and Weaving and Manufacturing Co. Ltd., The Empress Mills, Nagpur v. Municipal Committee, Wardha. So we derive no help from this case. As we said, we prefer to interpret the word 'import' as it is found in the Copyright Act rather than search for its meaning by referring to other statutes where it has been used." 171. Chapter VIII of Customs Act deals with goods in Transit. Section 54 deals with trans-shipment of goods without payment of duty upon presentation of bill of trans-shipment. The inland container depot and land custom station are creatures of Statute. They are not determinative of the taxable event for imposition of custom duty on imports. Many of the provisions are facilitative and/or intended for purposes of valuation and fixation of rates. The crucial aspect is that according to entry 83, List I as well as the Customs Act, 1962 the taxable event is 'import' or 'bringing of the goods into India' and it is distinct from the taxable event of entry 52, List II. 172. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vision is made in Section 59(2) to pay all duties or interest on or before the date of demand. Under Section 62, the proper custom officer exercises control over all the warehoused goods and he may cause any warehouse to be locked. The owner of the goods can with the sanction of the proper officer deal with the goods, show the goods for sale and even carry on any manufacturing process or other operations in the warehouse in relation to such goods. 176. Such warehousing or warehousing bond cannot prevent the levy of entry tax, especially where warehouse is established in a factory unit. On the basis of the law laid down above, I hold that the taxable events under entry 83, List I and entry 52, List II are distinct; any movement of the imported goods to the warehouse in the factory unit would not prevent the State from levying and collecting entry tax when such goods enter a local area of the State for consumption, use or sale therein. 177. Summarily, the conclusion on question No.4 is as under:- * Entry tax with reference to entry 52, List II of Seventh Schedule is not violative of Art. 301 subject to the levy being non-discriminatory i.e. passing the muster of Art. 304(a). A le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a judicially evolved concept. Majority in Atiabari held that taxes may and do amount to restrictions and hence tax legislation is subject to scrutiny under Art. 301. In Atiabari, the test of "direct and immediate effect on trade, commerce and intercourse" was evolved. The majority in Atiabari had thus completely read down State's taxing power under entry 52, List II thereby holding that State's legislative power is subject to the freedom clause in Art. 301. This had an adverse effect on the legislative power of the State to levy tax and its financial autonomy. 179. In Automobile, while the Supreme Court affirmed the views of Atiabari, compensatory taxes were carved out as an exception to Art. 301. In Automobile, this Court evolved the concept of compensatory taxes and held that "regulatory measures or measures imposing compensatory taxes for the use of trading facilities do not come within the purview of the restrictions contemplated by Article 301". Compensatory taxes were held to be ones which did not hinder the freedom of trade, commerce and intercourse, instead facilitated the same. Further, the Court laid down a "working test" to ascertain whether a tax is compensatory or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... compensatory purpose, when such purpose is proved by alternative evidence. 182. The decision in Krishnan's case was reiterated in International Tourists Corporation and Ors. v. State of Haryana and Ors. (1981) 2 SCC 318, in which levy of tax on passengers and goods under The Punjab Passengers and Goods Taxation Act, 1952 and similar other enactments of other States were under challenge. State of Haryana levied a tax on transporters plying motor vehicles between Delhi and Jammu and Kashmir. The transporters would use national highway, pass through Haryana, without picking up or setting down passengers in the State. Since, the responsibility to construct and maintain the highways is with the National Highways Authority of India, it was contended by the transporters that the tax could hardly be regarded as compensatory. But the Court rejected this contention and held that if the taxes were to be proportionate to the expenditure on regulation and service, it would not be a tax but a fee. It was pointed out that in the case of a fee, it may be possible to precisely identify and measure the benefits received from the Government and in the case of regulatory and compensatory tax, it wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax must facilitate the trade. The reason is obvious: if a measure facilitates the trade, it would not be a restriction on trade but an encouragement to it. It was observed: [SCC Page 678, Para 8] "...The submission of Shri Ashok Sen, learned Senior Counsel that compensation is that which facilitates the trade only does not appear to be sound. 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 extended to such dealers directly or indirectly the levy cannot be impugned as invalid. The stand of the State that the revenue earned is being made over to the local bodies to compensate them for the loss caused, makes the impost compensatory in nature, as augmentation of their finance would enable them to provide municipal services more efficiently, which would help or ease free flow of trade and commerce, because of which the impost has to be regarded as compensatory in nature, in view of what has been stated in the aforesaid decisions, more particularly in Hansa Corpn. Case (1980) 4 SCC 697".[Emphasis supplied] 185. The Constitution Bench in Jindal Stainless Ltd. (2) after placing reliance on Automo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 46. Burden on the State: 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 reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be rendered....The distinction between a tax and a fee is, however, important, and it is recognized by the Constitution. Several Etnries in the Three Lists empower the appropriate Legislatures to levy taxes; but apart from the power to levy taxes thus conferred each List specifically refers to the power to levy fees in respect of any of the matters covered in the said List excluding of course the fees taken in any Court." The same view was reiterated in State of Tamil Nadu v. TVL South Indian Sugar Mills Association (2015) 13 SCC 748, Krishi Upaj Mandi Samiti and Others v. Orient Paper & Industries Ltd. (1995) 1 SCC 655 and Krishna Das v. Town Area Committee, Chirgaon (1990) 3 SCC 645. 187. It must be reiterated that all the taxes are intended for public purpose and are levied in public interest. Levy of tax is not to fill the State coffers but to perform various functions including public welfare for which said funds are required. Taxation is not a profit-making exercise for the States; as stated earlier, the States perform several functions for which they require funds and have the power to levy tax to raise revenues and thus virtually all taxes are monies paid for service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disagree with the narrow approach in Jindal Stainless Ltd. (2) equating compensatory taxes to 'fee' and mandating the States to prove 'proximate quid pro quo' by 'quantifiable data approach'. Since now we have held that taxes are outside the purview of Art. 301, taxes in the name of 'compensatory taxes' are also outside the purview of Art. 301. To uphold a regulatory or compensatory tax, comprehensive parameters cannot be laid down as they may vary depending upon the nature of the levy. Automobile case itself has laid down parameters of compensatory taxes (Das J. at Pages 536-537). It is not necessary that the money so collected should be put into a separate fund or that the levy should be proportionate to the expenditure. 190. Insofar as levy of entry tax is concerned, enactments of some States facially declare that they are compensatory. The compensatory tax so levied is subsumed in the Consolidated Fund of the State. Once there is intermingling in the Fund and money is spent for public purposes of development of various local areas like construction, maintenance of roads and bridges, and for other amenities which facilitate trade, there will always be a link between the liabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Courts have struck down the impugned legislation as being non-compensatory, while the others have upheld the laws declaring them compensatory. In some States, the High Courts have passed interim orders directing petitioners to pay 33% of the demand and in some cases 50% of the demand. When the matters were admitted by the Court, interim orders were passed directing the assessees to pay 50% of the demand. But, this Court cannot lose sight of the fact that assessees have not pleaded and produced evidence to establish that they have not passed on the tax burdens to the consumers. In absence of such a submission, the normal presumption is that they have passed on the tax burden. Had they contended otherwise, burden would have been on them to allege and establish the same. In the absence of any such allegation and proof, the claim of refund is not called for. 193. Learned Senior Counsel Mr. Giri has argued that the payment effected under the Entry Tax Act can be legitimately taken into account for the purpose of fixing the price of goods that can be collected by the same person as a dealer under the Sales Tax Act, just as in the case of Sales Tax. It is thus submitted that the bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xercise of jurisdiction under Articles 32 and 226, Court would certainly take note of the legislative intent manifested in the provision in the Act. The Court further dealt extensively with the scope of refund in a case where the burden of tax has been passed on to the consumers. An excerpt from the majority view reads as under: "108. A claim for refund, whether made under the provisions of the Act as contemplated in proposition... (i) above or in a suit or writ petition in the situations contemplated by proposition (ii) above, can succeed only if the petitioner/plaintiff alleges an d establishes that he has not passed on the burden of duty to another person/other persons. His refund claim shall be allowed/decreed only when he establishes that he has not passed on the burden of the duty or the extent he has not so passed on, as the case may be. Whether the claim for restitution is treated as a constitutional imperative or as a statutory requirement, it is neither an absolute right nor an unconditional obligation but is subject to the above requirement, as explained in the body of t he judgment. Where the burden of the duty has been passed on, the claimant cannot say that he has su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said amounts to the respective State Governments." From the above decision in Godfrey Philips India Ltd., it is clear that even when the legality of a tax has been challenged successfully, there can be no question of the State tax being retained by the dealer/manufacturer notwithstanding its illegality. 198. It is well-settled that a claim of refund can be allowed only when the claimant establishes that he has not passed on the tax burden to the consumers. No refund can be granted so as to cause windfall gain to any person when he has not suffered the burden of tax. The possibility of the tax burden having been passed on to the consumers by the assessees cannot be ruled out in the present case. Applying the law laid down above to the present case, it emerges that the assessees cannot claim refund irrespective of whether the impugned legislations are declared valid or unconstitutional. Unless the assessees establish that they have not passed on the tax burden to the consumers, they cannot make a claim for refund and unjustly enrich themselves. 199. Summary of the conclusions on Question Nos. 1 to 4 are as under:- Question No. 1: Non-discriminatory taxes do not constitute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re no similar goods manufactured or produced within the taxing State. The law laid down in Kalyani Stores is not a good law. * Levy of entry tax on the goods imported from outside India which enter into local area for consumption, use or sale therein is within the legislative competence of the State. Q uestion Nos. 2 and 3:- * In so far as compensatory taxes are concerned in the light of the conclusion on question No.1, I hold that the nomenclature of 'compensatory' ascribed to the taxes levied by the State Government under Entry 52, List II pursuant to Automobile is unwarranted. The concept of compensatory tax was evolved fifty years back through judicial pronouncements. It has withstood the test of time and thus, any subsequent judicial pronouncement like the present one should not prejudice the interest of the parties involved. The States should not suffer any loss of revenue solely because of judicial interpretations and innovations in Automobile and the decisions subsequent to it. * Subject to passing the muster of Art. 304(a), entry tax levied by the States under entry 52, List II even though termed as compensatory tax does not fall foul of Art. 301. It is not necessary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncentives : Video Electronics and Mahavir J.3 Article 304(a) and reasonable classification J.3.1 Formal and substantive equality J.4 Production and manufacture within the home state K Entry tax; K.1 Octrois and terminal taxes K.2 Entry taxes and Article 304(a) K.3 Meaning of 'Local area' K.4 Severability K.5 Equalising tax burdens K.6 Entry tax and imported goods M Direct and inevitable effect test; N Conclusion. A Introduction References to Benches of nine Judges, or at any rate decisions by nine, are a comparative rarity. Despite a prolific tradition of precedent in our judicial institutions, there have been only eight reported decisions by a Bench of nine Judges since the adoption of the Constitution 9 Judges decisions : Ahmedabad St. Xaviers College Society v. State of Gujarat (1974) 1 SCC 717; Indra Sawhney v. Union of India 1992 Supp (3) SCC 217; Supreme Court Advocates-on-Record Association v. Union of India (1993) 4 SCC 441; S.R.Bommai v. Union of India (1994) 3 SCC 1; Attorney General of India v. Amratlal Prajivandas (1994) 5 SCC 54; Mafatlal Industries Ltd v. Union of India (1997) 5 SCC 536; Special Reference No. 1 of 1998 (1998) 7 SCC 739; I. R. Coelho ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nate outcry (as of appeal or protest) (ii) According to Oxford Dictionary: A passionate appeal, complaint or protest.. That this is so should not seem surprising : this is an area of the Constitution which cuts across major concerns about the federal structure, the states' power to tax and, the relationship between growth, development and free trade. 3 Each of those concerns has a pointed contemporary relevance with the adoption of the constitutional amendment providing for a Goods and Services Tax. When the hearings began, many of the counsel had reservations on the continued relevance of the reference. With the passage of the one hundred and first constitutional amendment, the distribution of the legislative power to tax goods and services has undergone a significant change. The taxing entry for the levy of Entry tax (Entry 52 of List II of the Seventh Schedule), which lies at the core of the dispute in the present reference, stands deleted as part of a constitutional process by which several taxes are being subsumed under the GST. Yet, the reference has to be answered, not the least of the reasons for which is the determination of past liabilities and entitlements. But more ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as reflected in regulatory powers of the centre and the concerns of the federating states to preserve their interests and obligations as well as their commitments to their people. 6 The debates of the Constituent Assembly provide a valuable insight, grounded in history, which helps us in illuminating the meaning and content of the text of Part XIII. History constitutes a seminal value in interpreting the words of the Constitution since the events which were a forerunner to the adoption of the Constitution shed light on the concerns which led to the adoption of the text. Yet, as our contemporary jurisprudence recognises, the text of the Constitution cannot be frozen by the context of history which produced the language of the text. The concerns that motivated the framers provide a historical context which is an aid to constitutional interpretation. But, it is important to realise that the Constitution as an organic document has to evolve with societal change. The challenges to governance which India has faced over the last seven decades cannot be ignored in giving present meaning to the constitutional text. The words of the Constitution cannot be frozen in their content with refere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es whether by means of internal carriage or ocean navigation shall be absolutely free". The expression 'absolutely free' occurring in the Australian Constitution was consciously not adopted in the framing of India's Constitution. A simpler expression, "free", was preferred to "absolutely free". 11 Dr B R Ambedkar while moving the introduction of draft Part XA of the Constitution (corresponding to Part XIII) emphasised the impact of the deletion of the qualification "absolutely" in defining the extent of the freedom. Dr Ambedkar observed that : "I should also like to say that according to the provisions contained in this part, it is not the intention to make trade and commerce absolutely free, that is to say, deprive both Parliament as well as the States of any power to depart from the fundamental provision that trade and commerce shall be free throughout India." At a certain level, the expression "absolutely free" adds little by way of substantive content to 'free'. However, in the context of comparative constitutional history, the deletion of the word 'absolute' carried significance. Absolute freedom may carry the meaning that the freedom is not subject to restrictions. The use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cle 30390, there is an absolute prohibition upon Parliament making any law giving or authorising the giving of preferences to one state over another or making a discrimination between one state and another, by virtue of any entry relating to trade and commerce in any of the lists of the Seventh Schedule. A similar limitation is imposed on the state legislatures. The non-obstante provision in clause 1 of Article 303 is somewhat inapposite in its application to the legislature of a state. In its application to Parliament, the non-obstante provision which operates over Article 302 was intended to impose a constitutional limitation upon Parliament while legislating to impose a restriction in the public interest. Since Article 302 applies only to Parliament and not to the state legislatures, the non-obstante provision contained in Article 303 is to that extent inartistic. Be that it is may, clause 1 of Article 303 imposes a constitutional limitation upon the law making power of Parliament and the state legislatures while enacting a law by virtue of any entry relating to trade and commerce in the lists of the Seventh Schedule. The constitutional limitation prevents the grant of preferenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of non-discrimination is in regard to the tax which is imposed on goods imported from another state. The equality of treatment is with reference to the tax imposed on goods manufactured or produced in the state. The nonobstante provision which refers to Article 301 carries the clear intendment that a tax of the nature within the contemplation of clause (a) of Article 304 would, but for that provision have fallen within the ambit of Article 301. The effect of the non-obstante provision is that notwithstanding Article 301 (which would otherwise bring within its purview a tax of this nature), clause (a) of Article 304 enables the imposition by a state of a tax on imported goods subject to the constitutional limitation of non-discrimination between the goods that are imported into the state with goods that are manufactured or produced within the state. Both clause (1) of Article 303 and clause (a) of Article 304 embody principles of non-discrimination, though with different facets. 15 Clause (1) of Article 303 deals with preferences or discrimination between one state and another. Article 304 (a) deals with a non-discriminatory tax imposed on goods imported into a state when a similar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the conjunctive 'and'. The use of the expression 'and' must however be read together with the prefatory part of Article 304. Article 304 provides that the legislature of a state 'may' by law impose a tax on goods imported from other states, subject to the principle of non-discrimination [embodied in clause (a)]. The state legislature may also impose such reasonable restrictions as are required in the public interest [under clause (b)]. Clause (b) is, however, subject to the proviso. 18 The provisions of Part XIII of the Constitution contain an elaboration of the freedom of trade, commerce and intercourse and the restrictions which the Constitution contemplates as being within the legislative powers of Parliament and the state legislatures. The legislative power conferred upon Parliament can restrict the ambit of the freedom to the extent that is specified in Articles 302 and 303. Similarly, the state legislatures are subject to the limitations contained in Article 303 (1) and Article 304. Parliament as well as the state legislatures are subject to constitutional limitations on the exercise of their law making power in restricting the freedom of trade, commerce and intercourse. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the freedom of trade and commerce, which read thus : "Subject to regulation by the law of the Union, trade, commerce and intercourse among the units, whether by means of internal carriage or by ocean navigation, shall be free: Provided that any unit may by law impose reasonable restrictions thereon in the interest of public order, morality or health." (Id. at p.699) 23 While discussing the report of the Sub-committee Alladi Krishnaswami Ayyar opined that: (i) goods which enter a particular unit from other units of the of the union should not escape duties and taxes to which goods produced in the concerned unit itself were subject; (ii) in an emergency a unit should be able to (Chapter 22 Part. 699) PART C place restrictions on inter-State trade and commerce; (iii) the right should extend to non-citizens; and (iv) the freedom of trade should cover coastal trade specifically. After these suggestions were accepted, the Advisory Committee took up the issue for discussion. Commenting on these developments, B Shiva Rao (supra) specifically adverts to the view of C Rajagopalachari which was that the units of the Union must have the power to impose customs duties and other taxes for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Article 243 prohibited preferences and discrimination between one state and another. Articles 244 permitted the imposition of a non-discriminatory tax by a state on goods imported from another state similar to a tax which goods manufactured in the state are subject. 26 Alladi Krishnaswami Ayyar had strong reservations to allowing the imposition of reasonable restrictions on inter-State trade, on the ground that this would practically nullify the freedom of trade secured under draft Article 16, the expression "in the public interest" being vague. When draft Article 16 was taken up in the Constituent Assembly, objections were raised to it being adopted as an Article under the Fundamental Rights. Subjecting the freedom of trade under Article 16 to a law made by Parliament and to the power of the state to impose PART C taxes and restrictions was in this view destroying the fundamental character of the freedom conferred and no residue would be left which could not be curtailed by Parliament or the states. 27 Dr B R Ambedkar while responding to the inclusion of Article 16 drew attention to the history surrounding the article. The Indian states had initially agreed to join the Union o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fathers were the inequalities of resources and disparities in development between various provinces, including those that constituted British India on one hand and Indian states on the other. The framers of the Constitution contemplated that the provisions of draft Part XA (present Part XIII) should be an instrument for achieving economic progress under the rubric of one nation. Part XIII was the corner stone for fostering the economic development of the nation. In the vision of the founding fathers, India had to be knit together in terms of an economic and fiscal union. PART C 30 In the social and political milieu that preceded the adoption of the Constitution, the emphasis in Part XIII was not as much upon creating a market economy: laissez faire was not an attractive political doctrine. In fact, responding to an amendment that was proposed by Pandit Thakur Das Bhargava that the freedom of trade should be absolute, T T Krishnamachari, responded by stating that the extent of freedom which was allowed "is about the maximum amount of liberty that we can give for trade and commerce, the maximum amount of concession that we can give to trade and commerce consistent with the future ec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conomic prosperity, he spelt out the following priorities underlying Part XIII : "Therefore in a federation what you have to do is, first you will have to take into account the larger interests of India and permit freedom of trade and intercourse as far as possible. Secondly, you cannot ignore altogether regional interests. Thirdly, there must be the power of intervention of the Centre in any case of crisis to deal with peculiar problems that might arise in any part of India. All these three factors are taken into account in the scheme that has been placed before you." 32 The introduction of the proviso to draft Article 274 (D) [corresponding to the proviso to the present Article 304 (b)] was justified as being necessary "if on account of parochial patriotism or separatism without consulting the larger interest of India as a whole," a bill or amendment was introduced by a state legislature. This was regarded by Alladi Krishnaswami Ayyar as "a very restricted power that is conferred on the legislation of a state" to impose reasonable restrictions on the freedom of trade, commerce and intercourse with or within that state as may be required in the public interest. Therefore, it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Part XIII was an instrument of fostering economic progress as an important facet of national policy. D. The trend-setting decisions : Atiabari and Automobile Transport 35 Two decisions rendered over five decades ago have shaped constitutional jurisprudence under Part XIII. They form the fulcrum of the reference in these proceedings. The first is the decision of a Constitution Bench in Atiabari Tea Company Ltd. v. The State of Assam (1961) 1 SCR 809. The second is a decision of seven Judges in the The Automobile Transport (Rajasthan) Ltd. v. The State of Rajasthan(1963) 1 SCR 491. 36 In Atiabari, the Assam Taxation (on goods carried by roads and inland waters ways) Act, 1954 was enacted by the state legislature under entry 56 of the State List to the Seventh Schedule. The law provided for the levy of a tax on manufactured tea in chests carried by motor vehicles (except by railways and airways) at a specified rate per pound. 37 A Special Bench of the High Court dismissed the petitions challenging the validity of the Act. By a judgment of the Supreme Court rendered by a majority, the appeals and petitions filed under Article 32 by producers of tea were allowed. The majority he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S K Das, in a concurring judgment. 41 Justice M Hidayatullah delivered a dissenting judgment for and on behalf of himself and Justices Rajagopala Ayyangar and Mudholkar. In the view of the PART D minority a tax which is made a condition precedent to the right to enter upon and carry on business is a restriction on the right to carry on trade and commerce. The tax, it was held, was not a fee for administrative purposes, its object being to raise revenue. The judgment of the minority held that the tax was directly upon trade and on its movement. 42 In order to facilitate an analysis of the varying and divergent lines of thought in the three judgments in Atiabari and the three judgments in Automobile Transport (supra), it would be necessary to consider the views expressed under the following heads : D.1 Atiabari : Article 301 and taxation 43 Chief Justice Sinha in his judgment in Atiabari held that freedom under Article 301 could not be construed in such a comprehensive manner as to include freedom from all impediments, restraints and barriers, including freedom from all taxes : "13. Learned counsel for the appellants vehemently argued that the freedom contemplated by Article 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the freedom conferred by Article 301 is the dilution of the power of the states to impose taxes, which would result from adopting such a construction : "14...It is almost impossible to think that the makers of the Constitution intended to make trade, commerce and intercourse free from taxation in that comprehensive sense. If that were so, all laws of taxation relating to sale and purchase of goods on carriage of goods and commodities, men and animals, from one place to another, both inter-State and intra-State, would come within the purview of Article 301 and the proviso to Article 304(b) would make it necessary that all Bills or Amendments of pre-existing laws shall have to go through the gamut prescribed by that proviso. That will be putting too great an impediment to the power of taxation vested in the States and reduce the States' limited sovereignty under the Constitution to a mere fiction. That extreme position has, therefore, to be rejected as unsound." (Id. at p. 827) Fourthly, Chief Justice Sinha held that Article 304 is divided into two parts : (i) clause(a) which deals with the imposition of discriminatory taxes by a state legislature; and (ii) clause(b) whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commerce. That is another good reason in support of the conclusion that taxation is not ordinarily included within the terms of Article 301 of the Constitution." (Id. at p. 827-828) Sixthly, in the view of the Chief Justice Sinha "taxation simpliciter" is not within the terms of Article 301 since the very purpose underlying the taxing power is the ability of the state to raise money for public purposes by compelling the payment by those who are taxed of moneys earned or possessed by them, by virtue of the facilities and protection offered by the state. A public purpose is implicit in every taxation. Part XIII when it refers to 'reasonable restrictions in the public interest' could not have intended to include taxation within the ambit of the expression. 46 At the same time, Chief Justice Sinha rejected the 'extreme proposition' that taxation would be wholly outside the purview of Article 301. That position was rejected on the ground that firstly, Article 304 contains a specific reference to taxation and secondly, Article 305 prior to its repeal made a specific reference to taxation for certain purposes. Chief Justice Sinha made a distinction in the following observations : "17. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s were accepted, many taxes, for example, sales tax by the Union and by the States, would have to go through the gamut prescribed in Articles 303 and 304, thus very much detracting from the limited sovereignty of the States, as envisaged by the Constitution. (4) Laws relating to taxation, which is essentially a legislative function of the State, will become justiciable and every time a taxation law is challenged as unconstitutional, the State will have to satisfy the courts - a course which will seriously affect the division of powers on which modern constitutions, including ours, are based. (5) Taxation on movement of goods and passengers is not necessarily an PART D impediment." (Id. at p. 829-830) The basic principle which is enunciated in the judgment of the Chief Justice Sinha is that : "18.....(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." (Id. at p. 831) 48 The test, in the view of Chief Justice Sinha, is whether a tax has the effect of directly impeding the free flow of trade, commerce and intercourse. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Part XIII. Thirdly, in the view of Justice Gajendragadkar, the freedom guaranteed by Article 301 is a freedom from all restrictions except those which are contemplated under Part XIII : "42....Stated briefly trade even in a narrow sense would include all activities in relation to buying and selling, or the interchange or exchange of commodities and that movement from place to place is the very soul of such trading activities. When Article 301 refers to the freedom of trade, it is necessary to enquire what freedom means. Freedom from what? is the obvious question which falls to be determined in the context. At this stage, we would content ourselves with the statement that the freedom of trade guaranteed by Article 301 is freedom from all restrictions except those which are provided by the other Articles in Part XIII." (Id. at p. 853) Fourthly, Justice Gajendragadkar adverts to the effect of the non-obstante clause in Article 304 which enables the imposition of a tax notwithstanding the provisions of Article 301 : "46.....How a tax can be levied on internal goods is, however, provided by Article 304(b). The non-obstante clause referring to Article 301 would go with Article 304(a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fall within the purview of Article 301. The argument that all taxes should be governed by Article 301 whether or not their impact on trade is immediate or mediate, direct or remote, adopts, in our opinion, an extreme approach which cannot be upheld." (Id. at p. 860) 52 Justice Gajendragadkar, in the ultimate analysis also shuns an interpretation under which all taxes would be brought within the ambit of Article 301. The principle which the learned judge adopts is that taxing laws are not excluded from the operation of Article 301 and that they can and do amount to restrictions on freedom. Yet, tax laws which directly and immediately restrict trade or its movement are alone within the ambit of Article 301. 53 Justice Shah joined the conclusion of the majority in holding that the Assam enactment violated the guarantee of freedom under Article 301 and had not passed muster under the proviso to Article 304(b). But Justice Shah agreed with the conclusion of the majority on a much wider premise that all laws of taxation fall within the purview of Article 301. In his view, trade and commerce comprehends traffic in goods and much more. In this view, while movement of goods may be an imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreed with this premise in the following observations : "64....On the exercise of the legislative power to tax trade, commerce and intercourse, restrictions are prescribed by certain provisions contained in Part XII, e.g., Articles 276, 286, 287, 288 and 289: but these restrictions do not exhaustively delimit the periphery of that power. The legislative power to tax is restricted also by the fundamental freedoms contained in Part III, e.g., Articles 14,15(1),19(1)(g) and 31(1) and is further restricted by Part XIII. Article 245, clause (1), of the Constitution expressly provides that the legislative powers of the Parliament and the State Legislatures to make laws are subject to the provisions of the Constitution; and Article 301 is undoubtedly one of the provisions to which the legislative powers are subject." (Id. at p. 873) Secondly, Justice Shah like the majority emphasized the non-obstante provision of Article 304 which operates with reference to Article 301. In his view, if Article 301 did not deal with the burdens of taxation, there was no reason to incorporate a non-obstante provision in Article 304 : "74.... If Article 301 and Article 303 did not deal with the restricti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e appropriate in a federal structure to make the state power of taxation subservient by the application of Article 304 (b) to all taxing legislation. However, Chief Justice Sinha ultimately accepts the position that not all but some tax legislation is subject to the mandate of Article 301. In his view, so long as a tax imposition is not an impediment to the free flow of trade, commerce and intercourse, it must pass muster and would not fall within Article 301. Justice Gajendragadkar also held (speaking for the majority) that a tax law which directly and immediately restricts trade will fall within the ambit of Article 301. The test in the judgment of Chief Justice Sinha is whether a tax law "has the effect of directly imposing the free flow of trade". The test adopted by the majority of "such taxes as directly and immediately restrict trade" find a broad co-relation to the test adopted by Chief Justice Sinha. The difference in the view of the majority from that of the learned Chief Justice on this aspect was essentially a difference of degree. Chief Justice Sinha noted that he differed with the majority on the ground that the Constitution does not justify the inference that taxatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ween two States at the boundary of the States or between two districts, two taluks, two towns or between two parts of a town. The barrier may be at a particular point, at a boundary or might take the form of a continuous impediment till the boundary is crossed. It may take different forms. The restrictions may be before or after movement. It may be a prior restraint or a subsequent burden. But the essential idea is that a barrier is an obstacle put across trade in motion at a particular point or different points. The expression "shall be free" declares in a mandatory form a freedom of such transport or movement from such barriers." (Id. at p. 547-548) 61 Freedom under Article 301, being throughout the territory of India, Justice Subba Rao held that Article 301 removes both inter-State and intra-State barriers, making the country as a whole into one unit : "36.....The freedom declared under Article 301 may be defined as a right to free movement of persons or things, tangible or intangible, commercial or non-commercial, unobstructed by barriers, inter-State or intra-State or any other impediment operating as such barriers." (Id. at p. 548) 62 Yet, the judgment of the majority posi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns impeding the freedom." (Id. at p. 549) Significantly, these observations of Justice Subba Rao indicate that fees for the use of facilities or as charges for regulations which facilitate trade do not hinder or obstruct the free flow of trade. For, without those facilities, trade would be rendered difficult. D.2.2 Taxation and constitutional limitations 63 Justice S K Das held that the power to impose taxes is essential for the existence of government. Yet, in his view, it can be controlled by constitutional provisions. Part XII of the Constitution controls the power to levy taxes. But, Part XII does not exhaust the limitations on the power to tax: "13.... though the power of levying tax is essential for the very existence of government, its exercise may be controlled by constitutional provisions made in that behalf. It cannot be laid down as a general proposition that the power to tax is outside the purview of any constitutional limitations. We have carefully examined the provisions in Part XII of the Constitution and are unable to agree that those provisions exhaust all the limitations on the power to impose a tax." (Id. at p. 527) 64 Justice Subba Rao dealt with the issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utional limitations or restrictions. Under Article 265, a tax can be levied only with the authority of law. Article 245 which empowers Parliament to enact legislation for the territory of India and the state legislatures, for the territories of the respective states, is "subject to the provisions of this Constitution." This expression would include Parts XII and XIII. Justice S K Das held thus : "13.... Article 245 which deals with the extent of laws made by Parliament and by the Legislatures of States expressly states that the power of Parliament and of the State Legislatures to make laws is "subject to the provisions of this Constitution". The expression "subject to the provisions of this Constitution" is surely wide enough to take in the provisions of both Part XII and Part XIII. In view of the provisions of Article 245, we find it difficult to accept the argument that the restrictions in Part XIII of the Constitution do not apply to the taxation laws." (Id. at p. 527-528) 67 Having held that the power of taxation is subject to constitutional limitations which include Part XIII, Justice S K Das rejected what he described as a "narrow interpretation" which postulates that save ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5) 69 Justice Subba Rao in the concurring judgment also noted that conceivably, every law enacted by a state legislature in pursuance of its legislative power may remotely affect trade. If every Bill introducing such a legislation were to be subjected to the prior sanction of the President under the proviso to Article 304 (b) that would result in a serious dilution of the autonomy of the states : "38. The Constitution confers on the Parliament and the State Legislatures extensive powers to make laws in respect of various matters. A glance at the entries in the Lists of the Seventh Schedule to the Constitution would show that every law so made may have some repercussion on the declared freedom. Property tax, profession tax, sales tax, excise duty and other taxes may all have an indirect effect on the free flow of trade. So too, laws, other than those of taxation, made by virtue of different entries in the Lists, may remotely affect trade. Should it be held that any law which may have such repercussion must either be passed by the Parliament or by the State Legislature with the previous consent of the President, there would be an end of provincial autonomy, for in that event, with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... state autonomy. Compensatory taxes which are in the nature of a charge for the use of trading facilities would not be regarded as being a hindrance to the freedom of trade, so long as they are reasonable. By first devising the concept and then placing it beyond the pale of Article 301, the Court in Automobile Transport ensured that compensatory taxes would not be subject to the constitutional grind of Article 304(a). A class of tax legislation bearing a compensatory character was carved out of Part XIII. 72 What are compensatory taxes? Explaining the concept, Justice S K Das in the judgment of the majority held that : "10... Another class of examples relates to making a charge for the use of trading facilities, such as, roads, bridges, aerodromes etc. The collection of a toll or a tax for the use of a road or for the use of a bridge or for the use of an aerodrome is no barrier or burden or deterrent to traders who, in their absence, may have to take a longer or less convenient or more expensive route. Such compensatory taxes are no hindrance to anybody's freedom so long as they remain reasonable; but they could of course be converted into a hindrance to the freedom of trade. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "38...If a law directly and immediately imposes a tax for general revenue purposes on the movement of trade, it would be violating the freedom. On the other hand, if the impact is indirect and remote, it would be unobjectionable. The Court will have to ascertain whether the impugned law in a given case affects directly the said movement or indirectly and remotely affects it." (Id. at p. 550-551) A law which directly and immediately affects the free movement of trade in this view is a restriction on freedom. However, a measure which is compensatory or regulatory does not hinder trade : "40.... Of all the doctrines evolved, in my view, the doctrine of "direct and immediate effect" on the freedom would be a reasonable solvent to the difficult situation that might arise under our Constitution. If a law, whatever may have been its source, directly and immediately affects the free movement of trade, it would be restriction on the said freedom. But a law which may have only indirect and remote repercussions on the said freedom cannot be considered to be a restriction on it. Taking the illustration from taxation law, a law may impose a tax on the movement of goods or persons by a motor- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on trade and commerce can be upheld on the ground that they are regulatory. Here, a distinction must be made between fees and taxes. Fees charged as quid pro quo for services rendered or as representing administrative charges are quite different from taxes, pure and simple. Fees may partake of regulation when they are demanded to enable Government to meet the cost of administration. But the tax, with which we are concerned, is hardly a fee in that narrow sense. It is a tax for raising revenue." Justice Hidayatullah dissented from the judgment of the majority on the ground that the tax in question was evidently not a fee for administrative purposes nor could it be justified as representing a payment for services. The object of the tax was to raise revenue, which distinguished it from a fee. 76 The correctness of the decision in Automobile Transport - as indeed of the earlier decision in Atiabari - lies at the heart of this reference. At this stage, it would be necessary to recapitulate the basic principles which emerged from Automobile Transport. The decision and the principles which it proceeds to formulate have their own logic. First, Automobile Transport enunciates that the fre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... freedom guaranteed by Article 301. Justice Gajendragadkar adverted to the minority view of Justice Hidayatullah in Automobile Transport on this aspect. His observations on the concept of compensatory taxes are as follows : "13... 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 and 304 provide for reasonable restrictions being imposed on the freedom of trade subject to the requirements of the said two articles, and so, the problem facing judicial decisions in Australia and in this country in regard to the freedom of trade and the restrictions which it may be permissible to impose on it, is not exactly the same. The minority view expressed by Hidayatullah, J. has pointedly referred to this aspect of the matter." 80 In Khyerbari, the judgment of the Supreme Court noted in more than one place that the tax in question had not been su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 and 301 if the said tax direct and immediately imposes a restriction on the freedom of trade; but the power conferred on this Court to strike down a taxing statute if it contravenes the provisions of Articles 14, 19 or 301 has to be exercised with circumspection bearing in mind that the power of the State to levy taxes for the purpose, governance and for carrying out its welfare activities is a necessary attribute sovereignty and in that sense it is a power of paramount character. In what case a taxing statute can be struck down as being unconstitutional is illustrated in the decision of this Court in K.T. Moopil Nair v. State of Kerala. [(1961) 3 SCR 77]....... It is in regard to such a taxing statute which can properly be regarded a purely confiscatory that the power of the court can be legitimately invoked and exercised". The law enacted by the state legislature was upheld in Khyerbari not on the ground that it was compensatory- such a justification having not been pressed by the state - but on the ground that its provisions were not violative of Articles 14, 19 and 301. The Act was not confiscatory and was held to pass muster under Articles 14, 19 and 301. E.3 Subsequent ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Taxation Act, 1931 was under challenge on the ground of a violation of Article 301. By a notification, the rate of tax which was imposed on a quarterly basis was enhanced. Justice K K Mathew who delivered the judgment of a Bench of three Judges of this Court observed that the judgment in Automobile Transport "practically overruled" the decision in Atiabari : "13.....insofar as it held that if a State Legislature wanted to impose tax to raise moneys necessary in order to maintain roads, that could only be done after obtaining the sanction of the President as provided in Article 304(b)". (Id. at p. 380) Justice Mathew held that there is a clear distinction between a law which interferes with the freedom to trade and a law which merely regulates : "14....The word "free" in Article 301 does not mean freedom from regulation. There is a clear distinction between laws interfering with freedom to carry out the activities constituting trade and laws imposing on those engaged therein rules of proper conduct or other restraints directed to the due and orderly manner of carrying out the activities. This distinction is described as regulation. The word "regulation" has no fixed connotation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of which particular use is made and a burden placed upon transportation in aid of the general expenditure of the State. It is clear that the motor vehicles require, for their safe, efficient and economical use, roads of considerable PART E width, hardness and durability; the maintenance of such roads will cost the government money. But, because the users of vehicles generally, and of public motor vehicles in particular, stand in a special and direct relation to such roads, and may be said to derive a special and direct benefit from them, it seems not unreasonable that they should be called upon to make a special contribution to their maintenance over and above their general contribution as taxpayers of the State. If, however, a charge is imposed, not for the purpose of obtaining a proper contribution to the maintenance and upkeep of the road, but for the purpose of adversely affecting trade or commerce, then it would be a restriction on the freedom of trade, commerce or intercourse." (Id. at p. 382) 86 The Bench of three Judges in G K Krishnan (supra) was bound by the view which was taken by a larger Bench of seven Judges in Automobile Transport. The above extract however, indica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... try 54 of List II to pass a law imposing tax on sale of goods should depend upon the goodwill of the Union Executive. It is said that a tax on sale does not impede the movement of goods. But Shah, J. said in State v. Nataraja [AIR 1969 SC 147 : (1968) 3 SCR 829 : (1968) 22 STC 376] : "that PART E tax under Central sales tax on inter-State sale, it must be noticed, is in its essence a tax which encumbers movement of trade and commerce." (Id. at p. 385) Justice Mathew also observed that the Court was not called upon to make any pronouncement on whether there was any warrant to restrict Article 301 to the movement part of trade and commerce. However, as the court held, it was unnecessary to pursue the matter any further as the tax imposed under the notification of the state in that case was held to be compensatory in character and hence not restrictive of the freedom. E.4 The breaking point 89 The judgment in Automobile Transport held that compensatory taxes lie outside the purview of Article 301. Justice Mathew while upholding that the Madras Motor Vehicles Taxation Act, 1931 had cautioned in G K Krishnan (supra) that the concept of reasonable compensation is "convenient but vagu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "directly PART E or indirectly". The underlying basis or foundation for regarding a tax as compensatory was almost obliterated. The reference in Bhagatram to the earlier decision in State of Karnataka v. Hansa Corporation(1980) 4 SCC 697, clearly overlooks that in that case the state had made no effort to sustain the validity of the tax on the ground that it was compensatory in character. Hence, the Bench in Hansa Corporation expressly clarified that it was not necessary for the Court to examine whether the tax was compensatory. Yet, the decision in Hansa Corporation was construed in Bhagatram to be an authority for the proposition that even some link between the facilities provided and the payment demanded, whether direct or indirect, would suffice. 91 The decision in Bhagatram was followed by another Bench of two judges in State of Bihar v. Bihar Chamber of Commerce(1996) 9 SCC 136. At issue was an entry tax imposed by the Bihar (Tax on Entry of Goods into Local Areas for Consumption, Use or Sale therein), 1993. The High Court had held the Act to be invalid on the ground that the state had not disclosed material to justify that it was compensatory or regulatory nor had the stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeals raising a challenge to the Haryana Local Area Development Tax Act, 2000 on the ground that it was "violative" of Article 301 and was not saved by Article 304. A Bench of two judges held that the decisions in Bhagatram and Bihar Chamber of Commerce seem to have deviated from the principles underlying the imposition of a compensatory tax which had held the field from 1962 to 1995. In the view of the referring Bench, if the test enunciated in the above two cases was to be accepted as the position in law, any tax could pass the test of a compensatory tax without infringing upon the freedom ordained by Article 301. The reference was heard by a Constitution Bench in Jindal Stainless Ltd.(2) v. State of Haryana(2006) 7 SCC 241, The Constitution Bench in Jindal Stainless elucidated the difference between regulatory and taxing powers. Taxing legislation, the Court ruled, is based on the concept of burden and on the principle of ability to pay. On the other hand, regulatory charges are a recompense for the costs or expenses incurred by the state for the provision of services or facilities: "31...Suffice it to state at this stage that the basis of special assessments, betterment cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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-à-vis the "principle of equivalence", then the difference between a tax on one hand and a fee or a compensatory tax on the other hand can be easily spelt out." (Id. at p. 267) 95 The Constitution Bench held that a compensatory tax is a compulsory contribution levied broadly in proportion to the special benefits derived to meet the costs of regulation or an outlay which is incurred to provide a special advantage to trade, commerce and intercourse. Whenever a law is impugned as being violative of Article 301, the Court must determine whether the enactment facially or patently indicates quantifiable data on the basis of which the compensatory tax is sought to be levied. The statute must broadly indicate a proportionality to a quantifiable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , in fact, facilitate trade rather than impede its freedom. As the Court postulated, the freedom to trade does not mean a freedom to trade in chaos. Conditions of chaos are destructive of an orderly society. Conditions which ensure a disciplined and orderly conduct of trade and commerce facilitate trade. Trade also pre-supposes the existence of infrastructure and the provision of facilities for pursuing the avenues of commerce and trade. The state which provides those facilities has a legitimate interest in recovering the costs which it incurs. In the absence of resources generated by charges levied for the use of facilities, the state may not have the wherewithal to provide the facilities in the first place. Hence, when the concept of compensatory taxes was devised, Justice S K Das, in Automobile Transport adverted to collections made for the use of trading facilities, such as roads, bridges and airports. "Such compensatory taxes" as the judgment held, were not a hindrance to anyone's freedom so long as they remain reasonable. So long as the tax was compensatory or regulatory, it did not operate as a hindrance. In another part of the judgment, Justice Das held that a regulatory me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity. Providing for facilities emphasises the role of the state in terms of the investment which it incurs and the expenditure required for upkeep and maintenance. Use and provision may be two shades of the same coin but they have their own distinctions. The concept of compensatory taxes was by its very nature formulated in terms which were vague and not capable of precise definition. The judgment of the majority in Automobile Transport speaks of compensatory taxes not being a hindrance, so long as they are reasonable. Moreover, the working test that was adopted in the judgment made it clear that it was not the precise or specific amount that is collected that is required to be expended for providing facilities. The working test is that the trade which has the use of facilities for the better conduct of business does not pay 'patently much more' than what is required for providing the facilities. 'Paying not patently much more' is a concept which suffers from vagueness. How much more is within the ambit of the phrase 'not patently much more' introduces an element of subjectivity. A standard which is subjective becomes uncertain and indefinite in its practical application. The lack o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lence. Compensatory taxes, the Constitution Bench held, constitute a sub-class of a fee and are based on the principle of "pay for value". In holding that the collection on account of a compensatory tax must be "broadly in proportion" to the special benefits derived to defray the costs of regulation or to meet the outlay incurred, the Constitution Bench was restating the working test of Automobile Transport. But the subsequent observations in Jindal Stainless make it evident that the Constitution Bench introduced a near mathematical formulation which would not be consistent with the test which was propounded in Automobile Transport. The judgment of the Constitution Bench requires that the enactment which imposes a compensatory tax must facially or patently, indicate quantifiable data and a benefit which is quantifiable or measurable. The Court held that however, where a statute did not to do so, the burden would lie on the state as a service provider to produce material indicating that the payment of the tax is a reimbursement or recompense for a quantifiable/measurable benefit. These observations bring the concept of a compensatory tax in line with a fairly strict application of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roach is adopted (as did the Constitution Bench in Jindal Stainless) the formulation assumes the character of a strict application of a quid pro quo test. A compensatory tax is then a fee properly so called. The Constitution, in the legislative entries contained in the Lists in the Seventh Schedule classifies taxes and fees under distinct heads. If a compensatory tax were to assume the character of a fee, that raises the question as to whether the concept has any utility in the first place. If, on the other hand, the concept of compensatory taxes were to have a loose and undefined ambit, by the application of the 'some link' or 'some connection' test (as was adopted in Bhagatram and Bihar Chamber of Commerce), then any connection would suffice for a tax to be called compensatory. Both these approaches which are extreme in their own way are contrary to the law laid down by seven Judges in Automobile Transport. Bhagatram and Bihar Chamber of Commerce render the concept so loose and undefined as to denude it of its rationale. Jindal Stainless while overruling these decisions adopted a strict PART E standard which was not contemplated by Automobile Transport. Bhagatram and Bihar Chambe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out goods originating in other states to hostile discrimination violate Article 304(a). If compensatory taxes as a class fall outside Part XIII, this would include even those compensatory taxes which are discriminatory. While holding that compensatory taxes fall outside Part XIII, the theory propounded by this Court did not account for the position that discriminatory compensatory taxes constitute an impediment to trade and commerce, thereby violating Article 301. 105 Hence, the notion of compensatory taxes is beset with doctrinal problems. The concept has led to uncertainty and vagueness and has produced inconsistencies in constitutional adjudication. Constitutional adjudication must avoid these uncertainties which result in a multiplication of litigation and uncertainty both to the revenue and to the tax payer. Uncertainty in the PART E application of fiscal legislation leads to a situation where tax compliance is beset with interpretational and practical difficulties. A concept which is replete with such evident problems is best eschewed. F The content of freedom : goods, services, persons and capital 106 Article 301 has guaranteed the freedom of trade, commerce and interco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnet was yet to dawn when the Constitution was adopted. The internet with its powerful tools for the dissemination of knowledge and information has provided new avenues for business, trade and commerce. The ambit of Article 301 must in a contemporary context incorporate all avenues of trade, commerce and intercourse and the instrumentalities by which they flourish. 108 Trade and commerce do not exist in a vacuum. The channels of trade and commerce require a stable social order for business transactions to be concluded, for contracts to be fulfilled and for commercial dealings to be enforced in law. The sanctity of contracts, secure conditions for trade and commerce and conditions which ensure an ease of doing business are supported by the state which has a vital PART F role in the preservation of the rule of law. The meaning of the guarantee under Article 301 must in a modern context accommodate the needs and aspirations of business that would allow for economic development and growth to take place in the nation. Fundamentally the creation of a common market for goods and services requires the removal of obstacles to the free movement of goods, persons, services and capital betwee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that are intended to preserve the power of regulating trade and commerce. 111 While the Constitution does in that sense subordinate the freedom under Article 301 to the provisions of Part XIII, it would not be correct to read the provisions of Part XIII in isolation. Part XIII is an integral element of the Constitution, but so are the other Parts under which executive and legislative powers are constitutionally conferred upon the structures of governance in the Union and the States. While construing the provisions of the Constitution it is necessary to construe the text in the context of the organic nature of the constitutional document. The linkages between various Parts of the Constitution contribute to the creation of a composite whole. No segment of the Constitution can be read in isolation. The scheme of the Constitution must hence be understood having regard to its history, text and context. 112 A Constitution Bench of this Court in Kihoto Hollohan v. Zachillhu(1992) Supp 2 SCC 651, emphasised the essential oneness of the Constitution when it held that: "26. In expounding the processes of the fundamental law, the Constitution must be treated as a logical whole. Westel Wood ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , I will urge that our Constitution is a federal Constitution." (Id. at p.21) Dr. Ambedkar gave expression to the same thought in the following observations: "The basic principle of federalism is that the legislative and executive authority is partitioned between the Centre and the States not by any law to be made by the Centre but by the Constitution itself. This is what the Constitution does. The States under our Constitution are in no way dependent upon the Centre for their legislative or executive authority. The Centre and the States are coequal in this matter. It is difficult to see how such a Constitution can be called centralism. It may be that the Constitution assigns to the Centre too large a field for the operation of its legislative and executive authority than is to be found in any other federal Constitution. It may be that the residuary powers are given to the Centre and not to the States. But these features do not form the essence of federalism. The chief mark of federalism as I said lies in the partition of the legislative and executive authority between the Centre and the units by the Constitution. This is the principle embodied in our Constitution." (Id. at p.22) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) indicates a recognition that the Constitution does indeed create a federal structure. Though the federal structure is asymmetric in the powers assigned to the states as compared to those assigned to the Centre this does not render the Constitution unitary. The Constitution is federal and in the working of a democratic Constitution, judicial review has stepped in to restore the balance despite the asymmetries of distribution and powers. The provisions of the Constitution which indicate a tilt in favour of the Union do not detract from the principle that in the fields which are assigned to them, the states are intended to be integral elements of a federal structure. They are sovereign within their competence, subject to constitutional limitations. 117 This principle was set forth in the following terms in Special Reference 1 of 1964(1961) 1 SCR 413 under Article 143 of the Constitution: "The supremacy of the Constitution is fundamental to the existence of a federal State in order to prevent either the legislature of the federal unit or those of the member States from destroying or impairing that delicate balance of power which satisfies the particular requirements of States whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich the Centre has overriding powers over the states, our Constitution does create a federal structure. The states are sovereign in the fields which are left to them. 119 In ITC v. Agricultural Produce Market Committee(2002) 9 SCC 232, this Court emphasised that in interpreting the text of the Constitution the Court should ensure, where the language permits that the powers of the state legislatures are not diluted and that the principles of federalism are preserved (See also in this context Kuldip Nayar v. Union of India(2006) 7 SCC 1) 120 The federal constitutional doctrine has consequences for interpretation. In interpreting the text of the Constitution, the Court must construe the text in a manner that would preserve the carefully crafted balance between the Union and the states. Where the language of the text permits, the effort of constitutional interpretation should be to ensure that the states are not subordinated to the Union in areas reserved to them. Yet it is equally a matter of constitutional doctrine that here a particular provision (such as the proviso to Article 304(b) imposes a specific requirement (assent of the President before a Bill is introduced in the state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve powers upon Parliament and the state legislatures makes them subject to the provisions of the Constitution. 122 The power to enact laws is a manifestation of sovereignty. The Constitution while conferring legislative powers upon the Union and the states makes them subject to constitutional limitations. The sovereignty of the legislature is subject to the norms of the written constitution. The power to tax is subsumed in legislative power. Like all legislative power, fiscal legislation is subject to the mandate of the written constitution. This is the plain consequence of the opening words of Article 245(1) under which the conferment of legislative powers is made subject to the provisions of the Constitution. 123 The entries in the legislative lists of the Seventh Schedule are not sources of legislative power but only define the subjects or heads of legislation entrusted to the law making competence of Parliament and the state legislatures. Read together, Articles 245 and 246 confer legislative power upon the Union and the states in the first place and distribute that power between them to enact legislation on the fields of legislation entrusted to their competence. Though Arti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on and distributed between the Centre and the states is that though the enactment of law is a manifestation of sovereignty, law making authority under the Indian Constitution is subject to constitutional restraints. Absolute power does not dwell in any constitutional authority which is subject to a written constitution. 126 The legislative entries in the Lists of the Seventh Schedule to the Constitution delineate general fields of legislation separately from taxing heads. In the Union List taxing entries are contained from Entries 82 to 92C. The residual entry, Entry 97 deals with matters not enumerated in the state or concurrent lists, including any tax not mentioned in either of those lists. In the state list taxes are comprised in Entries 46 to 62. Fees are dealt with under separate heads: in Entry 96 of List I, Entry 66 of List II and Entry 47 of List III. H.2 Sovereignty and constitutional limitations 127 The power to tax has been considered to be an essential attribute of government and a sovereign power vesting in the state. Thomas Cooley in his "Treatise on the Constitutional Limitations which rest upon the Legislative power of the States of the American Union(Indian Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te of government and sovereignty. In Rai Ramkrishna v. State of BiharAIR (1963) SC 1667, it was held that : "It is, of course, true that the power of taxing the people and their property is an essential attribute of the Government and Government may legitimately exercise the said power by reference to the objects to which it is applicable to the utmost extent to which Government thinks it expedient to do so. The objects to be taxed so long as they happen to be within the legislative competence of the legislature can be taxed by the legislature according to the exigencies of its needs, because there can be no doubt that the State is entitled to raise revenue by taxation." In Raja Jagannath Baksh Singh v. State of U.P. (1963) 1 SCR 220, this principle was stated as follows: "15...The power of taxation is, no doubt, the sovereign right of the State; as was observed by Chief Justice Marshall in M"Culloch v. Maryland [ 4 Law Edn. 579 p. 607] : "The power of taxing the people and their property is essential to the very existence of Government, and may be legitimately exercised on the objects to which it is applicable to the utmost extent to which the Government may choose to carry it. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the State Legislatures are competent to enact a law altering the terms and conditions of a previous contract or of a grant under which the liability of the Government of India or of the State Governments arises. The legislative competence of Parliament or of the State Legislatures can only be circumscribed by express prohibition contained in the Constitution itself and unless and until there is any provision in the Constitution expressly prohibiting legislation on the subject either absolutely or conditionally, there is no fetter or limitation on the plenary powers which the legislature is endowed with for legislating on the topics enumerated in the relevant lists. This view is borne out by the decision of the Judicial Committee in Thakur Jagannath Baksh Singh v. United Provinces." (Id. at p. 19) 130 The legislative power of the states to impose taxes is subject, in general, to the same constitutional parameters which govern the exercise of all legislative power. The containment of legislative power follows from three constitutional precepts. First, legislation is valid if it is enacted by a legislature which has competence to enact law on the subject. This is the consequence of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er than newspapers. Arguably, this could extend to the exercise of taxing powers on inter-state trade on the strength of the explanation to Article 286. For the purposes of this judgment, it is not necessary to burden the record by referring to the judgment in The Bengal Immunity Company v The State of Bihar(1953) 1 BLJR 48. As a result of the sixth amendment, the ambit of Entry 54 is now expressly subject to the power of the Union under Entry 92(A) of List I. 132 Article 286 stipulates that a state law shall not impose or authorize the imposition of a tax on the sale or purchase of goods, where the sale or purchase takes place outside the state or in the course of import or export from or outside the territory of India. Article 286(1) provides an express bar. Article 269(3) empowers Parliament by law to formulate principles for determining when a sale or purchase or consignment of goods takes place in the course of inter-state trade or commerce. Parliament, in exercise of its powers under Article 269(3) enacted the Central Sales Tax Act 1956. Sections 14 and 15 of that Act provide a list of goods of special importance, the manner of imposing taxes and the restrictions on the powe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dian Constitution contemplates the position of the states as constitutional units of a federal structure, each of whom is sovereign within the fields allotted. Taxation, it has been urged is a manifestation of sovereign power which is foundational to the existence of government. Tax revenues are required for welfare and developmental activities. Hence, it has been submitted that these are strong reasons for not construing the freedom under Article 301 as freedom from taxation. 137 The next limb of the submission is that under Article 265, taxes can only be imposed under a law enacted by the competent legislature and the executive has no role to play in the levy and collection of tax, except under delegated legislative power. Under various Articles of Part XII [for instance Articles 276(2), 286(1) and 288(2)] the Constitution provides for limitations on the taxing powers of the states or powers are conferred upon Parliament to provide for limitations by law (Clauses 2 and 3 of Article 286). There are at least five entries in the State List of the Seventh Schedule (Entries 50,51,54,55, and 57) which are specifically subject to limitations or principles prescribed by Parliament by a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it cannot be gainsaid that an orderly society is a condition precedent for an environment in which trade, commerce and intercourse can flourish. Trade and commerce survive and flourish on the foundation of the rule of law. The sanctity of contracts must be recognized, protected and enforced through a legal system which creates rights and provides remedies for redressal. Again, the free movement of goods, services, persons and capital requires the existence of public order and conditions which allow for trade and commerce to take place unhindered. Neither trade nor commerce can flourish amidst violence, unrest and social disorder. Taxes provide revenue for the state to sustain manifold activities which are geared to providing conditions of social order. The state provides infrastructure both tangible and intangible. Tax revenues form an essential part of the requirements necessary for states to govern. Taxes are required by Article 265 to be imposed by a law enacted by Parliament or the state legislatures. Without the power to raise revenues, the ability of the state to create conditions requisite for trade and commerce to exist would be denuded. Hence, as a matter of first princip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ile therefore holding that it was rejecting the submission that no tax could be levied on the newspaper industry, this Court held that any such levy was subject to judicial review under the provisions of the Constitution. 141 In Government of Tamil Nadu v. Ahobila Matam(1987) 1 SCC 38, this Court held that the imposition of an assessment on lands held by a religious denominational institution would not attract the right guaranteed by Article 26 of the Constitution. In All Bihar Christian Schools' Association v. State of Bihar(1988) 1 SCC 266, this Court held that an unaided minority institution is not immune from the operation of the general laws of the land and cannot claim an immunity, inter alia, from measures of taxation. Apart from these decisions, there are judgments of this Court holding that a taxing statute is not per se a restriction on the freedom under Article 19(1)(g). In Federation of Hotel & Restaurant Association of India v. Union of India(1989) 3 SCC 634, this Court while laying down the above principle held that the mere excessiveness of a tax or a diminution of profit earnings does not per se without more constitute a violation of rights under Article 19(1)(g). ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the effect of stipulating that the power of Parliament to impose restrictions in the public interest under Article 302 is subject to the principle of non-discrimination and non-grant of preferences to one state over another under Article 303. 144 Be that it is may, the effect of the norm which Article 303 enunciates is that neither Parliament nor the legislature of a state can grant preferences while enacting law to one state over another or make any discrimination. Article 303 concludes with the words "by virtue of any entry relating to trade and commerce in any of the lists in the Seventh Schedule." These words were held by Justice Subba Rao in PART F Automobile Transport to have the widest import. The entries which specifically refer to trade and commerce in the Seventh Schedule are entries 41 and 42 of the Union List, entries 26 and 27 of the State List and Entry 33 of the Concurrent list. Entries 41 and 42 of the Union List are as follows : 41. Trade and Commerce with foreign countries; import and export across customs frontiers; definition of customs frontiers...... 42. Inter-State trade and Commerce. Entry 26 of the State List is as follows : 26. Trade and commerce w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngar and Mudholkar adopted a similar interpretation of the language of Article 303. The learned Judge held that in the Seventh Schedule there are many other entries apart from entries 41 and 42 of List 1, entries 26 and 27 of List II and Entry 33 of list III regulating inter-state trade. In that context, he observed that : "103....By the words of Article 303 'by virtue of any entry relating to trade and commerce' is meant not the five Entries last named by us but others also, e.g., Entry 8 of List II, Entries 29, 30, 81 of List I, Entry 29, 15 of List III (to mention only a few from each List). Thus, is achieved one purpose which is paramount viz., that the exercise of the commerce powers, however derived is not to be exercised to create preferences and discrimination between one state and other State Legislature or both acting in union. No question of the content of the power or its source can arise in this context, because the prohibition is absolute. The article makes a great advance upon Section 297 of the Government of India Act 1935. In the section, the inhibition was only against a Provincial Legislature or Government. Here the inhibition embraces not only these but is also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbit to all matters which are reasonably proximate or connected to the subject. While the constitution mandates the principle of non-discrimination between one state over another and the non-grant of preferences under Article 303, there is no basis to confine those words merely to the entries noted earlier (entries 41 and 42 of List I, entries 26 and 27 of List II and entry 33 of List III). 149 To recapitulate, the submission that the scope of Article 303 is restricted only to the four entries noted above cannot commend itself for acceptance of the following reasons : (i) the key expressions in Article 303 are "shall have the power to make any law" making any discrimination between one state and another and "by virtue of any entry relating to trade and commerce"; (ii) the expression "power to make any law" would on its plain and literal meaning include tax laws. There is no justification to read this as "any law other than a tax legislation; (iii) the expression "any entry relating to trade and commerce has a comprehensive significance, meaning something that is associated with or having a nexus to. The words 'any entry relating to trade and commerce' are words of amplitude and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 26 & 27 of List II and entry 33 of List III, or relate to all general entries which affect trade and commerce, is academic in the present case. Nor do we think it necessary to decide whether for the purpose of Article 303 entries relating to tax on sale or purchase of goods i.e. entry 92A of List I, and entry 54 of List II are entries relating to trade and commerce, for, in our opinion, an Act which is merely enacted for the purpose of imposing tax which is to be collected and to be retained by the State does not amount to law giving, or authorising the giving of any preference to one State over another, or making, or authorising the making of, any discrimination between one State and another, merely because of varying rates of tax prevail in different States." 151 In a subsequent judgment of a Constitution Bench in State of Tamil Nadu v. Sitolakshmi Mills(1974) 4 SCC 408, the assesse had claimed before the Madras High Court that it was not liable to be taxed at the higher rate under Section 8(2)(b) of the Central Sales Tax Act, 1956 on the turnover of sales in the course of inter-state trade to government or to unregistered dealers even though they had not obtained the C and D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in one State and unregistered dealers or consumers in another, this low rate of levy will not be suitable, as it is likely to encourage avoidance of tax on more or less the same scale as the present provisions of Article 286 have done. If this is to be prevented, it is necessary that transactions of this type should be taxable at the same rates which exporting States impose on similar transactions within their own territories. The unregistered dealers and consumers in the importing State will then find themselves be unable to secure any advantage over the consumers of locally purchased articles, nor of course will they, under this system, be able to escape the taxation altogether, as many of them do at present."[See Report of the Taxation Enquiry Commission, 1953-54, Vol. 3, p. 57]....... In other words, it was to discourage inter-State sale to un-registered dealers that Parliament provided a high rate of tax, namely 10 per cent. But even that might not serve the purpose if the rate applicable to intra-State sales of such goods was more than 10 per cent. The rate of 10 per cent would then be favourable and they would be at an advantage compared to local consumers. It is because of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e as to the meaning and purpose of the Article'." While Article 301 stipulates that trade, commerce and intercourse throughout the territory of India shall be free, this guarantee is made subject to the other provisions of Part XIII. Part XIII has employed both the expressions "subject to" on the one hand and "notwithstanding anything" on the other. The expression "subject to" has a well-known legal connotation which conveys the idea of a provision yielding place to another provision or to other provisions to which it is made subject. This principle has been enunciated in the judgment of this Court in South Indian Corporation (P) Ltd. v Board of Revenue (1964) 4 SCR 280. 154 In State of Bombay v. The United Motors (India) Ltd (1953) 4 SCR 1069, Chief Justice Patanjali Sastri, speaking for a Constitution Bench spoke of the subordination of the freedom under Article 301 to the powers of the states to levy non-discriminatory taxes. The learned Judge held : "11....It will be seen that the principle of freedom of inter-State trade and commerce declared in Article 301 is expressly subordinated to the State power of taxing goods imported from sister States, provided only no discriminat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1964) 4 SCR 280 PART F contained in Article 303, the state legislature is empowered to do something of the nature that falls within the ambit of the provision. The non-obstante provision of Article 304 governs both Clauses (a) and (b) that follow. By virtue of Clause (a), the legislature of a State can, despite the provisions of Article 301, impose a non-discriminatory tax. The power to impose a tax, it must be noted, is not conferred by Clause (a) of Article 304 but is a power which is traceable to the legislative power of the states under Articles 245 and 246 of the Constitution read with the legislative entries in the State List. Article 304(a) is a clear indication that though a tax may constitute a restriction within the meaning of Article 301, the imposition of a non-discriminatory tax is permissible to the state legislature. Article 304(a) lifts an embargo that would otherwise have existed but for the non-obstante provision. Article 304(a), however, mandates that a tax which is being imposed on goods imported from other States or Union territories must be a tax to which similar goods manufactured or produced in that state are subject. Moreover, the tax shall not discrimina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion and is not bound to do so. 159 The word 'and' is normally used in the conjunctive sense (G P Singh on Interpretation of StatutesId. at p. 530). However, this is not always the case. Coupled with the use of the expression 'may, the expression 'and' in Article 304 should be construed to mean and/or. In other words, the legislature of a state may take recourse to both clauses (a) and (b) of Article 304 or either of them. 160 The nuances of statutory interpretation when the expressions 'may' and 'and' are used together, have been succinctly summarised in "Statutory Interpretation" by Ruth Sullivan. The statement of legal position is thus : "2) "And" and "Or" a) Joint or Joint and Several "and" Both "and" and "or" are inherently ambiguous. "And" is always conjunctive in the sense that it always signals the cumulation of the possibilities listed before and after the "and". However, "and" is ambiguous in that it may be joint or joint and several. In the case of a joint "and", every listed possibility must be included: both (a) and (b); all of (a), (b), and (c). In the case of a joint and several "and", all the possibilities may be, but need not be, included: (a) or (b) or both; (a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... confer an immunity from taxation. 162 A discriminatory tax is prohibited by Article 304(a). There is intrinsic material in the constitutional text to indicate that Article 304(a) does not exhaust the universe of taxation for the purposes of Part XIII. First, Article 304(a) provides that the legislature of a state may by law impose on goods imported from other states or union territories any tax to which similar goods manufactured or produced in that state are subject. The ambit of clause (a) is a tax on goods, the origin of the goods being a state other than the state which is imposing the tax. Article 301 (over which the non-obstante clause contained in Article 304 operates) has a geographical coverage which extends throughout the territory of India. Article 301 guarantees the freedom of trade and commerce not only across state boundaries but equally freedom within any part of the territory of India. If the freedom of trade and PART F commerce is restricted by a discriminatory tax - as Article 304(a) postulates is the case - the imposition of a discriminatory tax on internal movement within a state must by the same logic breach the freedom guaranteed by Article 301. Since Article ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plies only to taxes on goods. A tax which is not on goods or on aspects bearing on goods is not governed by Article 304(a). A discriminatory tax which is not on goods is not within the prohibition of that article. For instance, a discriminatory tax on luxuries, entertainments, amusements, betting and gambling will not be governed by Article 304(a). Similarly, Article 304(a) will not apply to a tax on passengers carried on roads or inland waterways under Entry 56. Since the ambit of Article 304(a) is a non-discriminatory tax on goods imported from other states, it is evident that this provision is not exhaustive even of those discriminatory taxes which will offend Article 301. There are taxes which fall within the legislative competence of the states, other than on goods, which are outside the PART F purview of Article 304(a). If those taxes impede the freedom of trade, commerce and intercourse they would infringe Article 301 though they do not fall within Article 304(a). 164 Third, Article 302 has been held to enable Parliament to impose Central Sales Tax (Sitolakshmi Mills) (supra). The expression "restrictions" in Article 302 has been construed not to exclude a restriction by wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to enact a law despite the fact that it may otherwise fall within the ambit of Articles 301 or 303. Article 303 contains the mandate that neither Parliament nor the legislature of the state can grant preferences to one state over another or discriminate between one state and another by virtue of the entries relating to trade and commerce in the lists of the Seventh Schedule. Article 303 postulates (in relation to Parliament) that the power conferred upon Parliament under Article 302 to impose restrictions on the freedom of trade, commerce or PART F intercourse, in the public interest between one state and another or over any part of the territory of India cannot be exercised so as to grant preferences or to discriminate between one state and another. However, this embargo is lifted by clause (2) of Article 303 when Parliament is dealing with a situation of scarcity of goods in any part of the territory of India. In relation to the legislature of the state, Article 303(1) imposes the same mandate against the grant of preferences between states or the making of any discrimination. However, clause (2) of Article 303 does not apply to the state legislatures. Clause (1) of Article 303 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t may at any time after the expiration of five years from such commencement terminate or modify any such agreement if, after consideration of the report of the Finance Commission constituted under Article 280, he thinks it necessary to do so." The above provision clearly envisages that taxes and duties which were being levied on imports into and exports from Part B states were restrictions. Hence, a specific provision was incorporated, to provide for their continuance for a stipulated period. That such taxes and duties would otherwise have infringed Article 301 is evident from the non-obstante provision permitting their continuance. 169 Article 306 as it was originally incorporated into the Constitution provided a clear indicator that the founding fathers did not intend to use the expression 'restrictions' in contradistinction to taxes or duties on the import or export of goods between states. 170 Article 304(a) elaborates that a particular form of taxation - a non-discriminatory tax on goods - shall not be construed to violate Article 301. But Article 304(a) is not exhaustive of the universe of taxation. Article 304(a) has three defining characteristics. The first is that the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... analysed. The initial view was that the power of taxation was subject to exclusively to Article 265 under which a tax can be imposed only with the authority of law. Consequently, a Constitution Bench of this Court in Ramjilal v. Income Tax Officer, Mohindargarh(1951) 2 SCR 127, held that the protection against imposition and collection of taxes save by authority of law directly comes from Article 265 and is not secured by clause (1) of Article 31: "11... If collection of taxes amounts to deprivation of property within the meaning of Article 31(1), then there was no point in making a separate provision again as has been made in Article 265. It, therefore, follows that clause (1) of Article 31 must be regarded as concerned with deprivation of property otherwise than by the imposition or collection of tax, for otherwise Article 265 becomes wholly redundant. In the United States of America, the power of taxation is regarded as distinct from the exercise of police power or eminent domain. Our Constitution evidently has also treated taxation as distinct from compulsory acquisition of property and has made independent provision giving protection against taxation save by authority of law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statute, a consensus had emerged in subsequent decisions of this Court that a law imposing a tax could be challenged not only for want of legislative competence but also on the ground of its violating the freedoms contained in Part III. 176 A law which imposes a tax is not immune from constitutional challenge merely because taxation is a manifestation of the sovereign power of the state or because there is a presumption that a tax is imposed by the legislature in public interest. Taxing legislation is subject to constitutional restraints originating in the legislative competence of the legislature to enact the law, the guarantees of fundamental freedoms contained in Part III and constitutional limitations originating in the provisions of the Constitution. I.2 The standard of judicial review 177 The standard of judicial review in relation to taxing legislation however recognizes that there inheres in the legislature the power to determine the objects on which a tax should be levied and to classify persons or properties for the purposes of the levy. If the classification is rational, a taxing statute cannot be challenged merely because different rates of taxation are prescribed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bari 180 Part XIII of the Constitution uses the expression "law" in Articles 302, 303 and 304, among others. There is no reasonable basis for holding that Part XIII includes all laws enacted by Parliament or the State legislatures except laws falling under Entries 82 to 96C of the Union List and Entries 46 to 62 of the State List. The judgment of Chief Justice Sinha in Atiabari broadly enunciated four reasons for excluding taxes from Part XIII of the Constitution : i) imposition of taxes is a manifestation of the sovereign power of the state which possess the inherent power to impose taxes to raise revenues; ii) taxation is specifically governed by Part XII which is a self-contained code and the validity of a taxing statute cannot be assessed with reference to a provision outside Part XII; iii) taxes provide for resources to improve facilities for trade and do not constitute a restriction on the movement of trade; and iv) the concept of public purpose being implicit in every tax law, it cannot form a part of Article 301. With the greatest of deference to the view of the learned Chief Justice, it is difficult to subscribe to the general proposition that tax laws per se lie ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... implicit in all legislation which is presumed to be in the public interest. Yet the presumption of constitutionality or of legislation being in the public interest does not confer a protection or immunity against a specific challenge on the ground that it violates a constitutional limitation such as that originating in legislative competence, the fundamental rights or constitutional provisions. I.4 Presidential sanction : the proviso to Article 304(b) 184 There is an aspect of the submission of the states bearing on the impact of the requirement of Presidential sanction under the proviso to Article 304(b), which requires close scrutiny. The submission is that if "reasonable restrictions" on the freedom of trade, commerce or intercourse with or within a state are construed to include a legislative measure imposing a tax, this would constitute a substantial encroachment on the power of the states to impose taxes. The requirement of obtaining prior Presidential sanction to a bill which is to be introduced or moved in the legislature of a state it is urged will, it is urged dilute the sovereign power of the states to impose taxes in the fields reserved for them and make them subser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e economic development of the state. If development is a legitimate priority, to what extent does Article 304(a) condition the power of the state legislature to encourage the growth of its own industries by the grant of incentives, rebates and exemptions through fiscal legislation? J.1 Precedent : 1963 to 1980 188 An early decision arose in State of Madhya Pradesh v. Abdeali AIR (1963) SC 1237. The state government issued a notification under the Madhya Bharat Sales Tax Act, 1950, exempting the sale of footwear from the payment of sales tax subject to three conditions : (i) The foot-wear had to be hand-made and not manufactured on a power machine; (ii) The sale price should not exceed a stipulated amount; and (iii) The sale must be by a manufacturer or a member of his family. 189 A Constitution Bench of this Court held that the notification did not discriminate between foot-wear manufactured or produced in the state and that which was imported from other states since the three conditions of the notification equally applied to all foot-wear irrespective of its origin. A notification granting an exemption for the benefit of small manufacturers making hand-made shoes of a small ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficantly, the Constitution Bench also dealt with the submission of the state that the circumstance of hides or skins tanned within the state and on which tax had been paid earlier at the time of their purchase in a raw condition was sufficient to consider them to be different from hides or skins tanned outside the state. This Court held that : "18...The similarity contemplated by Article 304(a) is in the nature of the quality and kind of the goods and not with respect to whether they were subject of a tax already or not." 191 In a subsequent decision in A Hajee Abdul Shakoor v. State of Madras AIR (1964) SC 1729, this Court held that Section 2(1) of the Madras General Sales Tax (Special Provisions) Act, 1953 discriminated against imported hides and skins sold upto 1 August 1957. The rate of tax on the sale of tanned hides and skins was: "10.....2 per cent on the purchase price of those hides and skins in the untanned condition, while the rate of tax on the sale of raw hides and skins in the State during 1955 to 1957 is 3 pies per rupee." Referring to the judgment in Mehtab Majid, this Court held that: "10. In the earlier case, discrimination was brought about on account of sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not either grant a preference to one state or another or make any discrimination merely because varying rates of tax prevailed in different states. This Court rejected the view which had prevailed in the High Court that different rates of tax on the sale of the same or similar commodities by different states placed an unequal burden on inter-state trade: "14...The flow of trade does not necessarily depend upon the rates of sales tax: it depends upon a variety of factors, such as the source of supply, place of consumption, existence of trade channels, the rates of freight, trading facilities, availability of efficient transport and other facilities for carrying on trade. Instances can easily be imagined of cases in which notwithstanding the lower rate of tax in a particular part of the country and goods may be purchased from another part, where a higher rate of tax prevails. PART F Supposing in a particular State in respect of a commodity, the rate of tax is 2 per cent but if the benefit of that low rate is offset by the freight which a merchant in another State may have to pay for carrying that commodity over a long distance, the merchant would be willing to purchase the goods f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n inter-state trade or commerce since sufficient safeguards were provided - firstly, by providing for the levy of sales tax in the state in which the goods are produced and secondly, by placing restrictions on the power of the states in fixing the rates. 194 The judgment of the Constitution Bench in Kalyani Stores v. The State of Orissa (1966) 1 SCR 865, involved a challenge to a levy imposed by the state of Orissa under the Bihar and Orissa Excise Act, 1915 at a rate of Rs. 40/- per L.P. Gallon on foreign liquor of Indian manufacture imported into the state from other parts of the country. Subsequently, acting under the Bihar and Orissa Excise Act, 1915, the duty was enhanced to Rs. 70/- per L.P. Gallon. Under Section 27 of the Bihar and Orissa Excise Act, 1915, a countervailing duty was provided on an excisable article imported into the state. Countervailing duties are provided for in Entry 51 of List II to the Seventh Schedule to the Constitution. This Court noted that countervailing duties can only be levied if similar goods are actually produced or manufactured in the state on which excise duties are being levied : "4..... The fact that countervailing duties may be imposed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le 301 and was found not to have complied with Articles 304(a) and (b). The judgment in Kalyani Stores was explained and confined to the facts of the case in a subsequent decision in State of Kerala v. A.B. Abdul Khadir (1970) 1 SCR 700. In Abdul Khadir this Court held that the earlier decision did not intend to lay down a proposition of universal applicability that the imposition of a duty or tax in every case would per se be an infringement of Article 301 and only such restrictions which directly or immediately impede the free flow of trade fall within the prohibition of Article 301. 196 A Constitution Bench of this Court in Rattan Lal & Co. v. The Assessing Authority (1969) 2 SCR 544, applied the test formulated in N.K. Nataraja Mudaliar (supra) in the context of a challenge to the Punjab General Sales Tax (Amendment and Validation) Act, 1967 and the Punjab Sales Tax (Haryana Amendment and Validation) Act, 1967. The Constitution Bench held that so long as the rate of tax is the same between goods imported from other states and similar goods, produced or manufactured within the state, Article 304 is satisfied. 197 In V. Guruviah Naidu and Sons v. State of Tamil Nadu (1977) 1 SCC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hides and skins which was half of that levied under Item 7(a) in respect of raw hides and skins." (Id. at p. 239-240) 198 A subsequent judgment of a Bench of two Judges in State of Karnataka v. Hansa Corporation (1980) 4 SCC 697, involved a challenge to the constitutional validity of an entry tax legislation, namely, the Karnataka Tax on Entry of Goods Into Local Areas for Consumption, Use or Sale Therein Act, 1979. The law was enacted under Articles 245 and 246 read with Entry 52 of the State List. Explaining the ambit of Article 304(a), this Court held that : "30. Article 304 lifts the embargo placed on the legislative power of State to enact law which may infringe the freedom of inter-State trade and commerce if its requirements are fulfilled. Article 304(a) imposes a restriction on the power of legislature of a State to levy tax which may be discriminatory in character by according discriminatory treatment to goods manufactured in the State and identical goods imported from outside the State. The effect of Article 304(a) is to treat imported goods on the same basis as goods manufactured or produced in a State. This Article further enables the State to levy tax on such importe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd incentives : Video Electronics and Mahavir 199 A Bench of two Judges of this Court in Weston Electroniks v. State of Gujarat (1988) 2 SCC 568, dealt with the validity of an exemption granted under the Gujarat Sales Tax Act, 1969. A notification was issued under Section 49(2) of the Act by which sales tax on television sets imported from outside the state was fixed at 10 per cent, whereas it was one per cent for goods manufactured within the state. Adverting to the judgment of the Constitution Bench in Mehtab Majid, a Bench of two learned Judges noted the defence of the state that the rate of tax was reduced for locally manufactured goods by way of an incentive, placing reliance on clauses (b) and (c) of Article 39 of the Constitution. This in the view of the Court did not provide a justification for a discrimination between imported goods and goods which were locally manufactured or produced. The prescription of a lower rate of tax for the latter was held to be invalid. This Court held : "... An exception to the mandate declared in Article 301 and the prohibition contained in clause (1) of Article 303 can be sustained on the basis of clause (a) of Article 304 only if the cond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otifications in case of U.P., only newly set up units are eligible to claim the benefits thereunder for a limited period of 5 years and that also only if they strictly comply with the terms and conditions set out in the notification." (Id. at p. 113) 201 A close reading of the judgment in Video Electronics would thus indicate that both sets of notifications involving the States of Uttar Pradesh and Punjab were carefully structured to cover one or more of the following circumstances: (i) Availability of a reduced rate of sales tax to new industrial units; (ii) Applicability of a reduced rate of sales tax to producers of certain specified goods, such as electronic goods; (iii) Limitation of the period during which the reduced rate of tax could operate; and (iv) Applicability of the general rate of sales tax to an overwhelmingly large number of local manufacturers, at par with imported goods. 202 While sustaining the grant of a reduced rate of sales tax, this Court distinguished, inter alia, the judgment in Weston Electroniks (supra) and similar cases in the following observations : "30...... These cases were not at all concerned with granting of exemption to a special class fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In that case, under the J&K General Sales Tax Act, 1962, sales tax on edible oil was prescribed at 4 per cent. However, in order to protect the local edible oil industry, the state government issued a notification directing that the goods manufactured by a dealer operating as a small-scale industrial unit in the state would be exempted from the payment of tax to the extent and for the period specified. Subsequently, edible oils in general were shifted from Schedule D to Schedule C attracting tax at 8 per cent. There were in fact no large industries in Jammu and Kashmir producing edible oil. Out-of state manufacturers unsuccessfully impugned the notification before the High Court. Explaining the ambit of Article 304, the Bench of two learned Judges observed thus : "8....The idea was not really to empower the State Legislatures to levy tax on goods imported from other States and Union Territories - that they are already empowered by other provisions in the Constitution - but to declare that that power shall not be so exercised as to discriminate against the imported goods vis-à-vis locally manufactured goods. The clause, though worded in positive language has a negative aspec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd for a short period. They were not meant to nor can they be read as justifying a blanket exemption to all small-scale industries in the State irrespective of their date of establishment. The case before us clearly falls within the ratio of the Constitution Bench decision in A.T.B. Mehtab Majid and the decisions in Indian Cement, W.B. Hosiery Assn. and Weston Electroniks. The limited exception created in Video Electronics does not help the State herein for the reason that exemption concerned herein is neither confined to "new industries", nor is circumscribed by other conditions of the nature stipulated in the Uttar Pradesh notification. It is not possible to go on extending the limited exception created in the said judgment, by stages, which would have the effect of robbing the salutary principle underlying Part XIII of its substance. Indeed, it has been the contention of Shri Salve that, on principle, the exception carved out in Video Electronics is unsustainable. For the purpose of this case, it is not necessary for us to say anything about the correctness of Video Electronics. Suffice it to say that the limited exception carved out therein cannot be widened or expanded to cove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... viding a PART F parity of taxes between imported goods and similar goods produced or manufactured within. While stipulating that "any tax" to which similar goods produced or manufactured in the state are subject can be imposed on goods imported into the state from other states, clause (a) contains the mandate that there should be no discrimination between goods, that are imported and goods that are manufactured within. The judgment in Video Electronics construed Article 304(a) as not precluding a state from taking steps to promote the growth of its own nascent industry. In the case of the State of Punjab, the defence of the State was that a reduced rate of sales tax was imposed to boost the electronics manufacturing industry and to stop existing industrial units shifting to neighbouring states, particularly having regard to "the prevailing peculiar circumstances of Punjab". Moreover, while states, such as Gujarat and Maharashtra were fully developed industrial states, Punjab at that stage was backward in terms of industrial growth. These factors undoubtedly weighed with this Court in sustaining the notification. 208 A state does have a legitimate concern and interest in ensuring t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nefits of development permeated to regions where economic opportunity was available. Yet, other areas of the country have remained in a state of comparative under-development as a result of circumstances such as geographical isolation and the absence of developed means of communication. Many regions have suffered from the absence of education and unavailability of access to health and sanitation. Social deprivation and discrimination have been the defining characteristic of large swathes of the nation. In this background, substantive equality like its mirror image-non-discrimination-construes the need for development in terms of mitigating regional histories of suffering and strife, and of denial, deprivation and discrimination. 211 Article 304(a) is an amalgam of formal as well as substantive norms of equality. At a formal level, the provision requires that when a state imposes a tax on imported goods, the tax must likewise be imposed on similar goods which are manufactured or produced in the state. Parity of tax between domestic goods produced and manufactured in a state with those which are imported from other states is the first and formal requirement. But beyond this, Article ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not in the nature of a countervailing duty. Entry 51 of List II of the Seventh Schedule on the other hand, provides for countervailing duties and is as follows : "51. Duties of excise on the following goods manufactured or produced in the State and countervailing duties at the same or lower rates on similar goods manufactured or produced elsewhere in India- (a) Alcoholic liquors for human consumption; (b) Opium, Indian hemp and other narcotic drugs and narcotics; But not including medicinal and toilet preparations containing alcohol or any substance included in sub-paragraph (b) of this entry." 213 The words "similar goods manufactured or produced" are common to both Article 304(a) and Entry 51. However, the notion of a countervailing duty under Entry 51 (as the judgment in Kalyani Stores explains) is intended to counterbalance the duty of excise levied on articles which are produced or manufactured in the state. The countervailing duty is imposed on articles which are produced or manufactured elsewhere in India. In the context of a countervailing duty, this Court in Kalyani Stores held that it postulates the actual production or manufacture of goods. This principle cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... area for consumption, use or sale therein." Entry 89 of List I provides for terminal taxes on goods or passengers, carried by railway, sea or air; taxes on railway fares and freights. K.1 Octrois and Terminal taxes 215 The legislative history surrounding the incorporation of Entry 52 is a significant guide to interpreting its provisions. Section 80A of the Government of India Act, 1915 defined the powers of the provincial legislatures. Under the Devolution Rules, the following provisions were contained in Item Nos. 7 and 8 of the Second Schedule : "Item No. 7. An octroi Item No. 8. A Terminal tax on goods imported into or exported from a local area save where such tax is first imposed in a local area in which an octroi was not levied on or before 6 July, 1917." In the Government of India Act, 1935, Entry 49 of the legislative lists (list II) provided as follows : "49.Cesses on entry of goods into a local area for consumption, use or sale therein. Terminal taxes were placed in List I." 216 In the Government of India Act, 1935, Entry 49 used the expression "entry of goods into a local area for consumption, use or sale therein", instead and in place of "octroi" (as contained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be first observed that whether or not the whole of the State can be a "local area", for the purpose of Entry 52, it is clear that to be a "local area" for this purpose it must be an area within the State. On behalf of the respondents, it is argued that "local area" in Entry 52 should therefore be taken to mean "any part of the State in any place therein". So, the argument runs, a single factory being a part of the State in a place in the State is a "local area". In other words, "local area" means "any specified area inside the State". The obvious fallacy of this argument is that it draws no distinction between the word "area" standing by itself and the phrase "local area". If the Entry had been "entry of goods into any area of the State........." some area would be specified for the purpose of the law levying the cess on entry. If the Constitution makers were empowering the State Legislatures to levy a cess on entry of goods into any specified area inside the state, the proper words to use PART F would have been "entry of goods into any area.........." It would be meaningless and indeed incorrect to use the words they did use "entry of goods into a local area". The use of the words ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , in the submission of the state, saved by Article 305 which stipulated that nothing in Articles 301 and 303 shall affect the provisions of any existing law except in so far as the President may by order otherwise direct. The Constitution Bench accepted the submission and held that there was no contravention of Article 301. 222 In Burmah Shell Oil Storage and Distribution Co. India Ltd. v. The Belgium Borough Municipality(1963) Supp. 2 SCR 216, the appellant had unsuccessfully moved the High Court for a writ seeking to prohibit the municipality from charging octroi on its products which were brought inside octroi limits for sale. The goods brought into octroi limits by the appellant comprise of four categories : (i) Goods consumed by the appellant; (ii) Goods sold by the appellant itself or through dealers and consumed within octroi limits by others; (iii) Goods sold by the appellant itself or through dealers within octroi limits but consumed outside; and (iv) Goods sent by the appellant from its depot within octroi limits to points outside the municipality where they were produced and consumed by others. 223 Under Section 73 of the Bombay Municipal Boroughs Act, 1925, the mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he goods to consumers within the municipal area irrespective of whether such consumers bought them for use inside or outside the area. However, the appellant was not liable to octroi in respect of goods which it brought into a local area for re-export. 225 For many years after the adoption of the Constitution, local bodies across the country continued to levy octroi, which was an important source of revenue. Octroi was levied under state legislation, enacted with reference to Entry 52 of List II (read with Articles 244, 245 and 246). Octroi, however, assumed an obnoxious character and was a subject of comment by this Court in Hansa Corporation (supra). Octroi duty became associated with check posts installed by local bodies. The octroi barriers became notorious for long queues of fully laden vehicles awaiting entry into local limits. Worse still, octroi became a vexed symbol of the misdeeds of local officials or contractors tasked with the collection of octroi duty. Over a period of time, accepting the clamour of the trade, octroi was gradually phased out and replaced by entry tax legislation in the states. Noteworthy, among PART F the changes made, was that the tax would be levi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... place, for instance, in a situation where state law defines the entire area of the state as a local area or by incorporating a specific definition of the expression dealer or importer to mean an importer of goods from outside the state. For instance, goods may be subject to entry tax only when they cross the state boundary. Movement of goods exclusively within the state, is not subject to entry tax. Alternatively, the expression local area may be defined with reference to the entire state. If the legislation imposes a tax only upon the entry of goods originating outside the state into the state, while goods produced and manufactured within the state are not subject to the levy, this would constitute a hostile discrimination prohibited by Article 304 (a). K.3 Meaning of 'Local area' 230 The issue as to whether the entire area of a state can be treated as a local area for the purposes of Entry 52 of List II, was specifically kept open for consideration in the judgment of the Constitution Bench in Diamond Sugar Mills. The issue was, however, dealt with in a judgment of three learned Judges of this Court in Shaktikumar M. Sancheti v. State of Maharashtra (1995) 1 SCC 351. In that ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls and fees in accordance with such procedure and subject to such limits. Article 243Q provides for the constitution of a Nagar Panchayat, a Municipal Council and a Municipal Corporation. Article 243X empowers the legislature of a state by law to authorize a Municipality to levy, collect and appropriate such taxes duties, tolls and fees in accordance with such procedure and subject to such limits. With these amendments, local areas now have assumed a constitutional context and significance. 232 In the judgment in Diamond Sugar Mills, the Constitution Bench emphasized that in using the expression local area, the framers of the Constitution were aware of the previous legislative history and meant an area administered by a body (such as Municipalities, Panchayats or local board) constituted under the law for the governance of local affairs in any part of the state. This statement of principle in the decision in Diamond Sugar Mills now stands fortified in view of PART F the constitutional amendments brought by the insertion of Parts IX and IXA into the Constitution. A local area cannot be defined with reference to the entire state but will comprehend within the state, an area that is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sought to be obviated by the requirement that the rate of tax should be the same as between similar goods produced or manufactured within the taxing state and goods imported from other states. This furnishes the rationale for several decisions of this Court, which hold that Article 304(a) mandates the same rate of tax and once that requirement is fulfilled, the application of the provision is at an end. 235 The submission of the petitioners, however, which falls for close examination is that Article 304(a) requires that the very tax which is imposed by a taxing state on imported goods must be imposed on domestic goods. In the context of entry tax, the submission is that unless the taxing state imposes it on similar local goods, an entry tax cannot be imposed on goods imported from other states. If goods manufactured or produced in the taxing state are not subject to entry tax, that will result in a discrimination if imported goods of other states are so subject. 236 The example which has been set out above of the application of differential rates of tax, for the same tax imposed on domestic as opposed to imported goods presents a simple application of Article 304(a). The example ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppropriate Bench after the reference is answered. For the purposes of this reference, it is sufficient for the court to lay down broad principles governing the area without going into individual facts or detailed provisions covering each case in relation to the period at issue in the respective states. 239 Article 304(a), in so far as is material, authorises the legislature of a state to impose on "goods imported" from other states "any tax to which similar goods manufactured or produced in that state are subject". Several aspects of Article 304(a) merit emphasis : 240 The first is that Article 304(a) refers to the imposition of any tax on goods. The provision is not either a source of legislative power nor does it prescribe fields of legislation. The expression "any tax on goods" is of a generic nature and covers all taxes which a state is competent to impose on any aspect of goods under Articles 245 and 246 read with List II of the Seventh Schedule. The expression 'any tax' would mean any exaction in the nature of an impost or levy which the state legislature is competent to enact by virtue of its legislative powers. The expression 'any tax' must mean what it says: it means an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom other states and goods that are manufactured and produced within. The use of the expression "so" in the latter part is an obvious reference to the imported goods and the goods manufactured or produced within, referred to in the first part. The expression 'between' postulates that imported goods and local goods must be allowed a level playing field in the taxing state. Imported goods from another state cannot be placed at a comparative disadvantage. The expression 'between' also signifies that goods produced or manufactured within the taxing state should also not be discriminated against. In seeking parity of treatment, it is as much the obligation of the taxing state to ensure that there is no discrimination against goods originating in other states, as much as it is its concern to ensure that domestic goods are not discriminated against. The former is a matter of constitutional obligation. However, it does not exclude a similar obligation and concern of the taxing state in respect of goods produced and manufactured within its territorial limits. Both must go hand in hand. Discrimination both in a positive manner against imported goods and a reverse discrimination against domes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... states and goods which are produced or manufactured within. It is legitimately entitled to ensure that the tax burden should not discriminate between locally produced or manufactured goods of that state and goods originating in other states. The substance must prevail over form. Once there is no constitutional necessity that the form in which legislation is enacted in India must cover only one legislative entry, the legislature is entitled to devise a law in a suitable manner which while being consistent with the norm of non-discrimination also preserves a parity of tax burden between goods imported and domestic goods. This is the foundation of the theory of equivalence. 244 The burden of establishing that there is a discrimination against goods which are imported from other states lies on the person who sets up such a plea. In answering a plea of discrimination, it would be open to the state to establish that the legislative provision which it has enacted maintains the principle of non-discrimination between goods produced and manufactured within the state and goods imported from other states while at the same time bringing about parity in terms of tax burden between domestic and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntry 83 of List I provides for "duties of customs including export duties". The submission of the petitioners is that there being no over-lapping of legislative entries, the field of Entry 52 of List II would begin where that of Entry 83 of List I ends. Hence, while considering whether entry tax can be imposed in relation to goods imported into India, it is urged that until the goods become a part of the land mass, they can be subjected to a law under Entry 83 of List I and to a duty of import. It is only where a Bill of entry for home consumption is filed that the goods cease to be imported goods. Until then, it is urged, no entry tax would be leviable. 247 The taxable event referable to a law enacted under Entry 83 of List I (in relation to an import customs duty) is the act of import by which goods originating in a foreign country are brought into India. Section 2 (23) of the Customs Act, 1962 defines the expression import to mean "bringing into India from a place outside India". The expression imported goods is defined to mean "any goods brought into India from a place outside India" but so as not to include goods which have been cleared for home consumption. Section 2 (26) de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he fields may appear to overlap, they must be construed to be mutually exclusive. The submission of the petitioners proceeds on the basis that if entry into any part of India from outside India is an entry into a local area, it would nonetheless be necessary to earmark the ambit of Entry 83, List I and Entry 52 List II respectively. Both, according to the petitioners cover taxes on the movement of goods. According to the petitioners, Entry 52 should cover an entry into a local area after the importation of the goods is complete since the field of Entry 83 continues to subsist until the goods have been imported by filing of a Bill of entry for home consumption. 250 Entry 83 of List I and Entry 52 of List II have separate and distinct fields of operation. Entry 41 of List I deals with trade and commerce with foreign countries; import and export across customs frontiers; and definition of customs frontiers. The distribution of powers with reference to the taxing entries in List I and II is mutually exclusive. 251 In a decision rendered in 1942 by the Federal Court in Province of Madras v. Messrs. Boddu Paidanna & Sons1942 F.C.R.90, it was held that if a tax payer who pays sales tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... event with respect to a duty of excise is "manufacture" or "production". Here the taxable event is not production generation of electrical energy but its consumption. If a producer generates electrical energy and stores it up, he would not be required to pay any duty under the Act. It is only when he sells it or consumes it that he would be rendered liable to pay the duty prescribed by the Act. The Central Provinces and Berar Electricity Act was enacted under Entry 48-B of List II of the Government of India Act, 1935. The relevant portion of that Entry read thus: "Taxes on the consumption or sale of electricity" Entry 53 of List II of the Constitution is to the same effect..." (Id. at p. 286-287) 253 In D G Gose v. State of Kerala(1980) 2 SCC 410, this Court held that a tax on buildings imposed under the Kerala Building Tax Act, 1961 was referable to Entry 49 of List II and was not a tax on the capital value of assets under Entry 86 of List I. In that context, it was held that : "7....So if a tax is levied on all that one owns, or his total assets, it would fall within the purview of Entry 86 of List I, and would be outside the legislative competence of a State legislature, e.g. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titution and that it is essentially a tax on status or financial position combined with a tax on property. These decisions correctly describe the nature of the tax on circumstances and property. We affirm the view taken therein, especially that the aforesaid tax is not a tax on income." (Id at p. 337) The constitutional principle has been enunciated by a Constitution Bench in Godfrey Phillips India Ltd. v. State of U P(2005) 2 SCC 515 thus : "The logical corollary of holding that taxes are imposed only on taxable events is that even when an entry speaks of a levy of a tax on goods, it does not include the right to impose taxes on taxable events which have been separately provided for under other taxation entries. The tax in respect of goods has sometimes been referred to as a tax on an aspect of the goods and sometimes as the taxable income. (See Federation of Hotel Restaurant v. Union of India (1989) 3 SCC 634= AIR 1990 SC 1637, (Pr. 13, 14, 16)." (Id. at p. 544) 256 The principle of law is hence well-settled : the taxing powers of the Union and the states are mutually exclusive. (See in this context the decisions in Hoechst Pharmaceuticals v. State of Bihar(1983) 4 SCC 45 ; an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the facts of the above cases. Hence, it is only appropriate and proper that all the facts are fully established before the regular bench adjudicating upon the cases relating to goods imported from abroad. However, the constitutional position in respect of Entry 83 of List I and Entry 52 of List II has been clarified above. The taxable event for the imposition of a duty of customs is distinct from the taxable event in respect of an entry tax, which is the entry of goods into a local area for consumption, use and sale therein. PART M M Direct and inevitable effect test 260 Whether taxes per se constitute an impediment upon the freedom of trade, commerce and intercourse is an issue which has resulted in two contrary positions, neither of which has been subscribed to in this judgment. At one end of the spectrum is the theory that all taxes impede the freedom of trade, commerce and intercourse. If this theory were to be accepted, the entire tax regime and the state taxing power would be controlled by Part XIII of the Constitution. The states which are sovereign within their own sphere would in the exercise of their constitutional power to raise revenues by way of taxation be subjec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r things (Godfrey Phillips India Ltd. v. State of UP Supra note 109 ). Article 304(a) covers only the last category namely a tax on goods. It does not cover taxes on persons (profession taxes or luxury tax) or taxes on activities (betting and gambling); (iv) Article 301 guarantees free trade, commerce and intercourse throughout the territory of India. Inter-state trade as well as trade and commerce within a state is guaranteed. Article 304(a) covers only taxes imposed on goods imported from other states. Article 304(a) in other words does not cover imposts on goods traversing within a state; (v) Article 306 of the Constitution, as it stood prior to its repeal contemplated that restrictions could take the form of duties and imposts; and (vi) The expression 'restrictions' has been utilized in Part XIII of the Constitution, as the provisions of Articles 302, 303, 304 and 306 would indicate in a manner that would not exclude taxing legislation. The consistent view of Constitution Benches of this Court has been that taxes may under certain circumstances amount to a restriction on the freedom of trade and commerce. The position has been lucidly summarized in the erudite judgment of Ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he fundamental right of the individual and not the effect of the action that was relevant. This Court held that : "49.....But it is not the object of the authority making the law impairing the right of a citizen, nor the form of action that determines the protection he can claim: it is the effect of the law and of the action upon the right which attracts the jurisdiction of the Court to grant relief. If this be the true view, and we think it is, in determining the impact of State action upon constitutional guarantees which are fundamental, it follows that the extent of protection against impairment of a fundamental right is determined not by the object of the Legislature nor by the form of the action, but by its direct operation upon the individual's rights." (Id at p. 288) In Bennett Coleman & Co. v. Union of India(1972) 2 SCC 788, the same principle was formulated in the following statement of law : "..First, it is not the object of the authority making the law impairing the right of the citizen nor the form of action that determines the invasion of the right. Secondly, it is the effect of the law and the action upon the right which attracts the jurisdiction of the court to gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e fundamental right to carry on an occupation trade or business under Article 19(1)(g). Under Article 19 (1)(g), it is the individual's right to carry on trade or business which is guaranteed as a fundamental freedom. When a legislative measure seeks to curtail that freedom, the test is whether the right of the individual has been infringed or eviscerated. In the context of Part XIII, the matter is looked at from the perspective of trade and commerce as a whole. Hence, in a case which falls under Part XIII of the PART M Constitution it is for the petitioner to demonstrate and establish that the direct and inevitable effect of the law imposing a tax is to impede or restrict the flow of trade and commerce. 266 The mere fact that the activity which is taxed is related to the flow or movement of trade and commerce is not sufficient in itself to lead to the inference that a tax on that activity impedes or restricts it. Businessmen and traders must and do necessarily factor in the requirement of tax compliance as a part of an overall business plan. Hence, the mere fact that the tax is imposed with reference to an activity or thing which constitutes an aspect of trade or commerce is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in themselves or an impediment of trade and commerce. The right to carry on trade and commerce is not a right to be free from regulation that ensures orderly conditions for the pursuit of the activity. Nor can a right be exercised in such a manner as would create chaos through unregulated actions of numerous participants. In other words, the fact that a requirement operates as a pre-condition is not sufficient in itself to hold that it impedes or restricts trade. In PART M order to constitute an impediment, the condition must be demonstrated to cause, as a direct and inevitable consequence of its operation a restriction of trade or commerce. Every regulatory requirement does not restrict or impede trade and commerce even if at the threshold, its fulfilment is a condition enabling a person or entity to engage in a regulated activity. 269 In a fiscal context, the payment of an impost or levy is attracted when the taxing event occurs. The tax may be on persons, activities or things. It is the taxing event which incurs the charge or liability to tax. The charge may be associated with an aspect of an activity or thing. The mere fact that this aspect is connected with the flow or movem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by Article 301 is not absolute but is subject to legislative control by Parliament and the state legislatures. Articles 302, 303 and 304 define the ambit of the restrictions which Parliament and the state legislatures may impose by laws enacted in pursuance of their legislative powers under Articles 245 and 246. Besides providing for permissible restrictions, those articles lay down the limits which govern the law making authority. 272 Articles 245 and 246 together constitute the source of the legislative power of Parliament and the state legislatures. Article 245 is subject to the provisions of the Constitution. Every constitutional authority is subject to its provisions. No arm of the Constitution is vested with absolute power. Every institution created by the constitution operates subject to the governing principles of the written constitution and is subject to the limitations which it prescribes. Constitutional limitations on legislative power originate in the necessity that the enacting body must possess legislative competence on the subject on which it enacts law, that the law which it enacts must not infringe fundamental rights and that it must abide by other norms presc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scriminatory tax on goods) is a restriction. All taxes do not constitute restrictions. Some taxes may impede trade and commerce. 280 A tax may amount to a restriction where its direct and inevitable effect is to restrict the freedom of trade, commerce and intercourse. The burden to establish this is on the person who seeks to assail the validity of a particular tax on the ground that it amounts to a restriction on the freedom guaranteed by Article 301. Unless this threshold is crossed, the proviso to Article 304(b) will have no application for, it is only when there is a restriction that the question of its reasonableness can arise. 281 The expression 'may' in Article 304 has to be read in conjunction with the expression 'and' which separates clauses (a) and (b). The true construction of the expressions is in the sense of a joint and several "and/or". 282 Article 304(a) does not require that in order to impose a tax on goods imported from other states, similar goods must be actually produced or manufactured within the taxing state. The object of the provision is to prevent states from following protectionist policies by discriminating against goods produced or m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which have time and again, when there arose serious debates and doubts on the Constitutional provisions of our country, authoritatively concluded the debates and quenched the doubts, a galaxy of lawyers by their illuminating arguments engaged the Court for long twenty one days hearing. Now, it is our turn to respond. 2. In preparing my judgment I had advantage of going through thoughtful & well reasoned judgment of My Lord the Chief Justice. I deeply regret my inability to share the views of learned Chief Justice on Question No. 1 & 4 as framed by us, although I agree with the conclusion of His Lordship on Question No. 2 & 3. The views of Dr. Justice D. Y. Chandrachud in his scholarly judgment are fairly near my own except on few subjects on which I have expressed different opinion. Looking to the vital Constitutional issues having a far reaching impact on economic unity of the country, I consider it my duty to express my views in my own way on all issues raised before us. I begin my task in following manner. 3. This larger Bench has been constituted on a reference made by a Constitution Bench of this Court in Jindal Stainless Ltd & another Vs. State of Haryana & Other, 2010 (4) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ES TAX LEGISLATION. E. LEGISLATIVE HISTORY AND CONSTITUENT ASSEMBLY DEBATES RELATING TO ARTICLE 304(a) AND ARTICLE 304(b). F. INTERPRETATION, SCOPE AND AMBIT OF ARTICLE 304(a) AND ARTICLE 304(b). G. ENTRY 52, LIST II OF VIITH SCHEDULE. H. MEANING OF RESTRICTION AS USED IN PART XIII. I. WHETHER DIRECT AND IMMEDIATE EFFECT TEST AS LAID DOWNIN ATIABARI & APPROVED IN AUTOMOBILE TRANSPORT IS NO LONGER A CORRECT TEST. J. COMPENSATORY TAX THEORY. PART I FACTS AND EVENTS LEADING TO REFERENCE TO THIS NINE JUDGES BENCH 6. For fully appreciating the issues and questions raised in this batch of cases, certain facts and events preceding the Reference to this larger Bench need to be noted. The challenges to various State Legislations were laid before different High Courts on various grounds including the ground that levy of Entry Tax violates the freedom of trade, commerce and intercourse as guaranteed by Article 301 of the Constitution of India and Legislations are not saved under Article 304. 7. One of the State Legislations, namely, Haryana Local Area Development Tax Act, 2000 came to be challenged before Punjab and Haryana High Court. The High Court by its judgment dated 21.12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at compensatory taxes are not hindrance to any body's freedom. It was held that regulatory measures or measures imposing compensatory taxes for the use of trading facilities do not come within the purview of the restrictions contained in Article 301 and such measures need not comply with the requirement of the proviso to Article 304(b). 10. It was further held that a working test for deciding whether a tax is compensatory or not is to enquire whether the traders people are having the use of certain facilities for the better conduct of their business and paying not much more than what is required for providing the facilities. 11. The above two judgments, around which discussion before us has centered shall be noted hereinafter in some detail including the views expressed by the majority and minority. 12. What is compensatory tax came for consideration by this Court in the context of M.P. Sthaniya Kshetra Me Mal Ke Pravesh Par Kar Adhiniyam, 1976 in M/s. Bhagatram Rajeevkumar vs. Commissioner of Sales Tax, M.P. and others, (1995) Supp. (1) SCC 673. The Three Judge Bench in the above case held that the concept of compensatory nature of tax has been widened and if there is subst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supra), we are of the view that the interpretation of Article 301 visavis compensatory tax should be authoritatively laid down with certitude by the Constitution Bench under Article145(3)." 14. Consequent to Reference made to the Constitution Bench in Jindal Stripe Ltd.(supra), a Five Judges Bench answered the Reference by its judgment dated 13th April, 2006 reported in Jindal Stainless Ltd.(2) and another vs. State of Haryana and others, (2006) 7 SCC 241, the Constitution Bench overruled judgments of Bhagatram Rajeevkumar and Bihar Chamber of Commerce and recorded their views in paragraph 5253 to the following effect: "52. In our opinion, the doubt expressed by the referring Bench about the correctness of the decision in Bhagatram's case followed by the judgment in the case of Bihar Chamber of Commerce was wellfounded. 53.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 and the working test enunciated in Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan for deciding whether a tax is compensatory or not vide para 19 of the report, wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Stainless Ltd.(3) came to be challenged by different assessees and the State before this Court. A batch of SLPs came for consideration before Two Judge Bench. Two Judge Bench observed that though some of the factors have been addressed to by the Constitution Bench in Jindal Stainless (2)(supra) whereas certain other constitutional issues are involved. Two Judge Bench opined that considering the importance of the issues relating to Articles 301 and 304 and Part XIII of the Constitution, it is necessary to refer the matter to a larger Bench in terms of Article 145(3) of the Constitution. In Reference order following was stated in paragraphs 8 and 9: "8.The concept of compensatory tax is judicially evolved and in a way provides a balancing factor between federal control and State Taxing Board. The concept really had its matrix in transportation cases and does not apply to general notion of Entry Tax. Therefore, considering the importance of the issues relating to Articles 301 and 304 and Part XIII of the Constitution, we consider it necessary to refer the matter to a larger Bench in terms of Article 145(3) of the Constitution. 9.The following questions are referred for the afore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tate which directly impedes the trade and thus violates Article 301 of the Constitution can be saved by reference to Article 304 of the Constitution alone or can be saved by any other Article? (10) Whether a levy under Entry 52, List II, even if held to be in the nature of a compensatory levy, it must, on the principle of equivalence demonstrate that 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) to be provided in the concerned `local area' and whether the entire State or a part thereof can be comprehended as local area for the purpose of Entry Tax?" 17. Consequent to the above Reference order dated 18th December, 2008 in Jaiprakash Associates Limited vs. State of Madhya Pradesh and others, (2009) 7 SCC 339, the matter again came to be listed before a Constitution Bench of Five Judges. The Constitution Bench again heard the entire batch of cases including the appeals against the judgment dated 21.12.2001 of the Punjab and Haryana High Court where the validity of 2000 Act was upheld. The Constitution B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i Tea Co. and Automobile Transport(Rajasthan) Ltd. Some of these aspects which need consideration by a larger Bench of this Court were enumerated in Paragraphs 11, 12 and 13 & 14 which are relevant, are to the following effect: "11.Some of these aspects which need consideration by larger Bench of this Court may be briefly enumerated. Interplay/interrelationship between Article 304(a) and Article 304(b). The significance of the word "and" between Article 304(a) and 304(b). The significance of the non obstante clause in Article 304. The balancing of freedom of trade and commerce in Article 301 visàvis the States' authority to levy taxes under Article 245 and Article 246 of the Constitution read with the appropriate legislative Entries in the Seventh Schedule, particularly in the context of movement of trade and commerce. 12.Whether Article 304(a) and Article 304(b) deal with different subjects? Whether the impugned taxation law to be valid under Article 304(a) must also fulfil the conditions mentioned in Article 304(b), including Presidential assent? Whether the word "restrictions" in Article 302 and in Article 304(b) includes tax laws? Whether validity of a law impugne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... constituting a suitable larger Bench for reconsideration of the judgments of this Court in Atiabari Tea Co. and Automobile Transport (Rajasthan) Ltd. (supra)." 19. In pursuance of Reference made by the Constitution Bench by its order dated 16th April, 2010 Hon'ble the Chief Justice has constituted this Nine Judges Bench to hear the matter. 20. Although in paragraphs 11 and 12, as extracted above, certain questions were noted by the Constitution Bench, when the hearing began in the present batch of cases this Bench with the assistance of learned counsel appearing for the parties have reframed the questions to be considered. Four main issues which have been framed by this Bench are as follows: 1. Can the levy of a nondiscriminatory tax per se constitute infraction of Article 301 of the Constitution of India? 2. If answer to Question No.1 is in the affirmative, can a tax which is compensatory in nature also fall foul of Article 301 of the Constitution of India. 3. What are the tests for determining whether the tax or levy is compensatory in nature? 4. Is the Entry Tax levied by the States in the present batch of cases violative of Article 301 of the Constitution and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Waterways) Act, 1954 (hereinafter referred to as "the Assam Act, 1954"). Under the Assam Act, 1954, appellants who were growers of tea in the West Bengal or in Assam and carried out their tea to the market in Calcutta were asked to pay tax on goods in their journey in part of territory of Assam. 24. The appellant had challenged the vires of the Assam Act, 1954 before the Assam High Court on various grounds including the ground that provisions of the Assam Act, 1954 are violative of rights given under Article 301 of Constitution of India. The Assam High Court repelled the challenge by dismissing the writ petition. Three appeals were filed on certificate granted by the High Court; two writ petitions were directly filed under Article 32, challenging the vires of the Assam Act, 1954. Both the appeals and the writ petitions were heard by the Constitution Bench. The majority opinion was expressed by P.B. Gajendragadkar J.: B.P. Sinha, C.J. and J.C. Shah, J. delivered separate opinions. Before the Constitution Bench, the principal submission which was made by the appellants/petitioners was that Article 301 of the Constitution of India grants the freedom of trade, commerce and intercours ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt proposition on interpretation of Part XIII and after applying the said propositions to the Assam Act, 1954, following was observed in the majority opinion:- "....... It purports to put a restraint in the form of taxation on the movement of trade, and if the movement of trade is regarded as an integral part of trade itself, the Act in substance puts a restriction on trade itself. The effect of the Act on the movement of trade is direct and immediate; it is not indirect or remote; and so legislation under the said Entry must be held to fall directly under Article 301 as legislation in respect of trade and commerce......" 28. B.P. Sinha, C.J. in his minority opinion held that freedom declared by Article 301 does not mean freedom of taxation simpliciter but it does mean freedom from taxation which has the effect of directly impeding the free flow of trade, commerce and intercourse. 29. Sinha J. also held that if legislature imposes a tax, which is an impediment to the free flow of trade, commerce and intercourse, such law assumes character of trade barrier which is contrary to freedom granted under Article 301. Following was observed by Sinha J. "......If a law is passed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter to the Full Bench. The Full Bench took the view that taxation under the aforesaid Act cannot be said to offend Article 301 for its effect on trade, commerce is only indirect and consequential and it may be regarded only as remote. 35. The matter was taken to this Court and heard by a Constitution Bench of five Judges which felt that having regard to the importance of the Constitutional issues involved and the views expressed by this Court in case "Atiabari Tea Co. Ltd. Vs. The State of Assam and Others" reported in (1961) 1 SCR 809, the appeals should be heard by a larger Bench. The appeals were consequently placed for hearing before the Bench of seven Judges. Three opinions came to be delivered in the larger Bench. S.K. Das, J. delivered the judgment for himself, J.L. Kapur, J., A.K. Sarkar J. and K. Subba Rao, J. delivered separate opinion concurring with the opinion expressed by Das J. 36. Justice M. Hidayatullah delivered minority judgment on behalf of himself and N. Rajagopala Ayyangar, J., J.R. Mudholkar, J., Dass J. and SubbaRao J. Das, J. upheld the provisions of the Act, upholding the provisions of the Act as regulatory and compensatory. However, while upholding the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Part XIII of the Constitution do not apply to taxation laws. 39. After laying down the relevant test for examining the validity of taxing statue, Das J. noted various provision of the Act. It was held that Section 4 of the Act makes it clear that tax is imposed on a motor vehicle which is to be used in any public place or kept to be used for in the State of Rajasthan. What should be the test to enquire as to whether a tax is a compensatory or not, following was stated as under:- ".....It seems to us 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. It would be impossible to judge the compensatory nature of a tax by a meticulous test, and in the nature of things that cannot be done....." 40. Ultimately, Das, J. held that the Act does not violate the provision of Article 301 and the tax imposed under the Act are compensatory taxes which did not hinder the freedom of trade, commerce and intercourse assured by Article 301. Taxes imposed were legal and High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmits independent powers of taxation. What the Constitution does not permit is that trade, commerce and intercourse should be rendered "unfree". Trade and commerce remain free even when general taxes are paid by tradesmen in common with nontradesmen......" 43. Hidyatullah, J. held that taxes which are imposed by the Act by Schedules II, III and IV operates restriction on trade and commerce directly. Hence, the provisions have to be held offending Article 301 and resort to the procedure prescribed by Article 304(b) having not been taken, the Act is ultra vires to the Constitution of India. PART III SUBMISSIONS 44. The arguments on behalf of the petitioners, who have challenged various Entry Tax Legislations, have been led by Shri Harish Salve, learned senior counsel. For the petitioners, we have also heard several other eminent Senior Advocates and other counsel who have additionally made substantial submissions, however, to avoid repetition of submissions while referring to the submissions of other counsel we have not noted the submissions which have already been covered by Shri Harish Salve. 45. The arguments on behalf of different States have been led by Shri P.P. Rao and S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, commerce and intercourse throughout the territory. He submitted that historically there were various tax barriers in different independent states prior to enforcement of the Constitution and to remove the barriers, the freedom of trade, commerce and intercourse was included in Part XIII. 49. Referring to majority view in Atiabari case (supra) he contended that the tax laws are covered by Part XIII of the Constitution. He submitted that above majority view in Atiabari was not doubted by subsequent 7 Judges Bench in Automobile Transport (supra). Shri Salve however submitted that various statutes regulating trade and commerce may not impede trade and commerce like laws pertaining to traffic rules. Taxes, regulatory in nature may not be hit by Article 301. However, it is contended that taxes which have effect directly and immediately on the trade, commerce and intercourse violates Article 301. He contended that Entry Tax under Entry 52 of List II of VIIth Schedule of the Constitution is one subject which directly impede Freedom of trade and commerce. 50. Answering Question No. 1, Shri Salve contends that in a set of circumstances nondiscriminatory tax may violate Article 301. Shri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the individual legislation. Levy of taxes may or may not be reasonable restrictions. 55. Answering to incidental Question No. 7, Shri Salve contends that under Article 304(b) a State is empowered to legislate imposing reasonable restriction on the freedom of trade and commerce and intercourse in the public interest subject to obtaining previous sanction of the President. The State thus is free to legislate with one limitation that the Bill is to be moved with the previous sanction of the President. State autonomy is in no manner affected. The judicial review being a basic structure of the Constitution, the Court is fully empowered to examine whether a law framed by State complies with Part XIII of the Constitution. He submits that there is no question of affecting separation of powers merely on the ground that State Legislation can be judicially scrutinized regarding compliance of Part XIII of the Constitution. 56. Answering to the subsidiary Question No. 9, Shri Salve contends that Compensatory Tax Theory is not consistent with the language implied in Article 301. He submits that Compensatory Tax Theory is a theory which has been judicially evolved in Automobile Transport ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s imported from other countries entering into a local area are liable to pay Entry Tax under legislation covered by Entry 52 List II ? He submits that in the above case the Entry Tax, if any, has to be justified under Article 304(b). Goods not covered by Article 304(a) should satisfy Article 304(b). The precondition permitting Entry Tax under Article 304(a) is that similar goods of that very State have to be taxed first. 60. Shri Salve in support of his submissions has also placed reliance on various judgments of this Court as well as judgments of the Australian High Court, Privy Council and US Supreme Court which shall be referred to while considering the submissions in detail. 61. Shri A.K.Ganguly, learned senior counsel, submitted at very outset that reference to this larger bench to reconsider the decisions in Atiabari and Automobile is not warranted. 62. Relying on Constitution Bench judgment in Keshav Mills case(Keshav Mills Vs. Commissioner of Income Tax 1965 (2) SCR 908) he submits that when this court decides questions of law which are binding under Article 141 on all courts, it must be constant endeavor and concern of this court to introduce and maintain an element of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... garia submits that he appears for Steel Authority of India in some cases. He stated that Bhilai is maintained by Steel Authority of India and all expenditures for maintaining it and all civic amenities in township are being provided by Steel Authority of India. In township in Bhilai, there are no facilities being provided by the State. He referred to the details of expenditures spent by Steel Authority of India during the years 199596 to 20082009. He submits that the State Government do not provide any facility and expenditure currently is more than 200 crores every year. He submits that the State not providing municipal/civil facilities is not entitled to levy Entry Tax as a tax compensatory in nature. 70. Shri Arvind P. Datar, learned senior counsel contends that the concept of compensatory tax as judicially evolved in Automobile Transport has to go. He submits that concept of compensatory tax is anomalous, tax being compulsory extraction and all taxes are to be utilized for public good. He suggests that proper test is whether there is 'Appreciable Adverse Effect' on trade and commerce, which can be determined by the manner in which trade and commerce was carried out before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to discourage the import of Ipad. The said state's above action may not be violating Article 304(a), however, procedure prescribed in Article304(b) has to be applied with. Another example where state, although, complies with Article 304(a) but violates Article 304(b) given by learned counsel is; the State of Maharashtra imposed Entry Tax exactly equal to the local taxes but puts conditions: (i) All goods to Maharashtra should enter only through Balharshah; (ii)Finished goods manufactured in Maharashtra should have at least 75 % local content. Learned counsel thus contends that while imposing tax by the state both the Articles 304(a) and 304(b) have to be complied with. 73. Shri Jagdeep Dhankar, learned senior counsel, contends that Part XIII of the Constitution is a basic structure of the Constitution. He contends that nothing can be more basic than economic unity of the country. Learned senior counsel submitted that compensatory theory cannot be supported which shall only lead to right to litigate. Words "tax" and "restrictions" are employed in Part XIII separately. These are not interchangeable and there can be no component of tax in the restrictions adverted in Part XIII. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be subsumed in two taxes that is services and goods. The above Bill indicates that we have now moved to real economic unity. 78. Shri Dhruv Agrawal, learned senior counsel, submits that freedom of trade, commerce and intercourse is a basic structure of the Constitution. Referring to the Preamble of the Constitution learned senior counsel submits that the unity and integrity of the Nation is a basic feature of the constitutional structure. Part XIII has been inserted in the Constitution to achieve the economic unity of the country. Shri Agrawal has also referred to the Constituent Assembly Debates. 79. Shri Gopal Jain, learned senior counsel appearing for the appellants in C.A.No.3453 of 2002 submits that the Constitutional Scheme is a well crafted architecture which must be read holistically. A Constitutional provision has to be interpreted from the reading of the whole of the Constitution to ensure that overall objectives are achieved. 80. Shri Dilip Tandon, learned counsel referring to judgment of this Court in Automobile Transport contended that the opinion expressed by Justice Hidayatullah be accepted. Shri Tandon submitted that he adopts the arguments of Shri Harish Salve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nation and that too a deliberate discrimination. Article 304(a) and Article 304(b) are disjunctive. Article 304(a) applies to taxes whereas Article 304(b) applies to nonfiscal measures. Taxes are assumed to be in public interest and are reasonable. Under subclause( b) of Article 304, President cannot be made super adjudicator. India is a Federation and the sovereign power of the State cannot be subjected to an implied control. 85. Shri Rohatgi submitted that federal structure is a basic feature of our Constitution. Though India is described as a QuasiFederal or a Federation with strong central bias, this does not militate from the fact that states are sovereign in the field which is left to them under the Constitution. Shri Rohatgi submitted that Constitution is to be read as a whole. Part XIII of the Constitution must be interpreted with reference to other parts of the Constitution, including Part III of the Constitution, Part XII and Article 38 and Article 39 of the Directive Principles of State Policy. 86. Referring to Article 245 and Article 246 learned Attorney General submitted that Article 245 is the source of legislative power, whereas, Article 246 provides for distribut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. He submits that in a federal system of governance, the power to levy tax is an inherent attribute of a sovereign function of a State. 90. Clause(a) and Clause(b) of Article 304 are mutually exclusive. Taxes are covered in Clause(a) whereas restrictions other than taxes are covered in Clause(b). It is only discriminatory taxes visavis goods of other States and Union Territories which restrict the freedom of trade in Article 301 and all other taxes do not obstruct the said freedom. The federal character of the Constitution is a part of the basic structure. The power to levy Entry tax under Entry 52 of the State is not subject to any restriction. 91. The framers of the Constitution never intended that the exclusive power of State to levy tax on the entry of goods be subject to requirement of obtaining the previous sanction of the President mention in proviso of Article 304(b). For imposing a tax on goods coming from other State, it is not essential that similar goods produced and manufactured in the State should be taxed. The only restriction is that the tax shall not be discriminatory. Taxes per se are not restrictions. Only taxes which suffer from the vice of protectionist disc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , commerce and industry in the state. 96. Shri Rakesh Dwivedi, learned senior counsel has advanced his submissions on behalf of the States of Orissa, Bihar, Madhya Pradesh, Tamil Nadu and West Bengal. Shri Dwivedi submits that petitioners' arguments are that the judgments of this Court in Atiabari and Automobile Transport be not revisited. Shri Dwivedi submits that there were fundamental errors in both the above decisions. He submits that following fundamental errors are, in the above two cases : I. (i) Both the cases confined on economic unity as sole factor for trade, commerce and intercourse; (ii) whereas, a perusal of various provisions of the Constitution indicates that economic unity depends on the continuity of political unit; and (iii) Territory of Union is nothing but States and Union Territories. II. This Court completely ignored the concept of 'Federalism' which has now been accepted as basic feature of the Constitution after judgment of this Court in Kesavanand Bharati's case (supra). III. Each of their Lordships in aforesaid cases draw support from various Australian and US cases, whereas, there is no comparison of Part XIII with Australian and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. A fortiori, Article 301, which is not a fundamental right cannot result in conferring a freedom of trade, commerce and intercourse from tax. He submits that there are inherent limitations on taxation by a State. The imposition of tax is always for public purpose and various inherent limitations in taxation operate as limitation in taking any discriminatory or any other unreasonable measures. Article 302 to 304 are not exceptions or provisos to Article 301. Coming to Article 304, it is submitted that both clauses (a) and (b) of Article 304 are disjunctive and freedom of trade, commerce and intercourse is subject to them. The word 'and' normally is conjunctive but it is often construed as disjunctive where the legislative intent as gathered from the words of the provision and the context indicate that it was used in the disjunctive sense. Learned counsel elaborating his submissions contends that Article 304 relates to interState trade which is apparent from marginal heading. 99. He submits that by use of the words "within that State" alongwith "with", it is clearly meant that the words "within that State" was used in relation to interState trade. He submits that interSt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heory and the AntiDiscrimination Interpretation have been favoured. 104. Coming to cases of U.S. Supreme Court, learned counsel submits that trend of cases indicates that effort is on shifting the test of discrimination. He submits that in the Complete Auto Transit Vs. Charles R Brady 430 U.S. 274, it was held that it was not the purpose of commerce clause to relieve those engaged in interstate commerce from their just share of State tax burden, even though, it increases the cost of doing business. 105. Coming to Entry 52 List II, learned counsel contends that, even if, we apply the Test laid down in the Automobile, the goods coming from other states come to repose in a local area and the Entry Tax is not tax on border or a tax on movement of goods. The legislative scheme of different states for which he appears indicates that no tax is collected at border and only a transit pass is given and the Entry Tax is to be paid based on selfassessment. Article 304(a) protects this type of Entry Tax. 106. Shri Dinesh Dwivedi, learned senior counsel has made his submissions on behalf of the State of U. P. Shri Dwivedi, answering the Question No. 1 submits that levy of NonDiscriminatory Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ready been upheld by this Court in 'State of Karnataka Vs. Hansa Corporation' 1980 (4) SCC 697. 113. He submits that in fact in three Civil Appeals being Civil Appeal No. 4476 of 2000, SLP(Civil) No. 1678616788 of 2009 and SLP(Civil) No. 12789 of 2009, the questions referred to this larger Bench do not arise and he adopts the submissions made by Sh. P.P.Rao and Sh. Rakesh Dwiwedi. 114. Shri Saurabh Shyam Shamshery, learned Additional Advocate General has appeared for the State of Rajasthan. He submits that Rajasthan Tax on Entry Of Goods Into Local Areas Act, 1999 had been upheld against which Special Leave Petition had been filed by Assesses in the year 2001. Subsequently, after the judgment of this Court in Jindal Stainless Steel (2) division Bench dated 21st August, 2007, declared Act 1999 as 'ultra vires' to Article 301 against which judgment the appeal has been filed by the State which is pending. 115. Shri Harish Salve, learned senior counsel in rejoinder to the submissions made by learned Attorney General, learned counsel appearing for different States and other parties, contends that submission that taxing power is some sort of sovereignty, is not a correct preposition. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... setoff\ exemptions to the local goods which result in nonimposition of Entry Tax on the local goods, leading to another kind of discrimination which also violates Article 304(a). In the second category, State of Assam, Bihar, Jharkhand and few other States are included. There is third category of legislation where discrimination is practiced in several manners, for example, manufacturers are given setoff of Entry Tax on rawmaterials like State of Orissa and Madhya Pradesh. There is fourth category of legislation where Entry Tax is imposed by creating a special area like State of Chhattisgarh. 120. Shri Salve contends that the submission raised on behalf of the States that question of discrimination under Article 304(a) is to be decided based upon the totality of burden of taxes and not the impact of a particular tax, is contrary to the plain language of Article 304(a) and would defeat the underlying object of Part XIII of the Constitution. Shri Salve further submits that Article 304(a) has two parts. Under first part of the Act 'State by law may impose on goods imported from other States, any tax to which similar goods manufactured or produced in that State are subject.' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to goods alone whereas taxes can be levied on persons, activities and things also. Article 304(a) shall not cover other parts of the taxes which necessarily has to go under Article 304(b). Entry Tax only on the goods imported from outside States and not levying them on entry into local areas from within the State is not permissible. Such taxes are violative of Entry 52 List II which permits Entry Tax only on entry into "local areas". Article 304(b) could also include taxes when rate of tax is same but there were other features which are restrictions. High rate of tax may not militate Article 19(1)(g) but it may violate Article 304(b). He submits that the question of tax barrier, as propounded in Atiabari has to be left to case to case. Restrictions contemplated under Part XIII can both be fiscal and nonfiscal. As on date 42 per cent of taxes of Union go to the State. 126. Coming to Video Electronics, learned counsel submits that if the object of a State is economic development, the State cannot levy different taxes with regard to imported goods and local goods, the State is free to give subsidies, and other assistance to any kind of industry but providing for discriminatory taxe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assembly. 131. During the British Rule, by the end of 19th Century efforts for drafting a Constitution for India had begun. Under the inspiration of Shri Bal Gangadhar Tilak, the Swaraj Bill, 1885 was the first nonofficial attempt of drafting the Constitution. The dominion status as achieved by Australia and passing of Australian Constitution Act 1900 was noticed by those associated with National Movement. Indian leaders including Members and ExMembers of Central and Provincial Legislature had framed a Bill, namely, 'Commonwealth of India Bill, 1925' which was read in House of Commons in December, 1925, contained a clause on freedom of trade to the following effect: "25. Trade, commerce and intercourse among the provinces shall be free, and there shall be no preference given to any province or provinces." 132. In the British India, freedom of trade was in practice with no internal provincial duties or other trade barriers whereas in the Indian States internal custom and other trade barriers were there. The above practice took statutory form in Section 297 of Government of India Act, 1935 which prohibited provincial Government from imposing barriers on trade within cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which s.92 is placed. It is well known that one of the objects which the federation sought to achieve was the abolition of restrictions on trade between the Colonies, and of the diversity in the different States of tariffs and border regulations; this was described as "the old intercolonial trade war." 136. Section 92 was interpreted as to mean "free trade means,in ordinary parlance freedom from tariffs". Professor David P. Derham, of Melbourne University dealing on the subject; "Some Constitutional problems arising under Part XIII of the Indian Constitution" has expressed his views on Section 92 of the Australian Constitution in following manner: "In its Australian origins there is no doubt whatever that freedom of trade, commerce and intercourse means at least freedom from taxation. One of the main motives of the federal movement in Australia was the desire to do away with what had become known as "border barbarism"the operation of customs barriers on the State borders. Section 92 of the Australian Constitution was one of the provisions drawn to achieve this purpose, to ensure the economic unity of Australia, to prevent the continuance of competing State fiscal systems." 13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nit can impose certain customs duty with a view to bring up the level of the price of goods imported to the level of the price of the goods manufactured in the Unit itself. Otherwise, the goods produced in other Units will flood that particular Unit. With that view only has this proviso been added. Provinces, therefore, can impose certain duties and taxes on goods imported from other units with a view to bring up the value to the level of good manufactured in the Unit itself. But it was felt, Sir, that this was incomplete. Such regulations and conditions may be made as to favour the goods produced in the Unit and therefore, the words 'and under regulations and conditions which are nondiscriminatory' have to be added, so that conditions must not be such as to force up the price of the goods imported. Therefore, the whole point is that there should not be any regulation or any conditions of such a nature which would favour the goods produced in the Unit as against those produced and imported from outside." Certain amendments on 01st May 1947 were adopted. 141. In the Draft Constitution finalized by Drafting Committee, freedom of trade, commerce and intercourse throughout t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of interstate trade and commerce to impose certain taxes and Article 16 being subject to the law of the Parliament, how it can be fundamental right and whether there is any right at all reserved. 144. Dr. B. R. Ambedkar replied the objections of Shri Subramaniam and explained as to why Article 16 was placed in fundamental rights. Dr. Ambedkar stated that Constituent Assembly when began its task, there were limitations since the States were to join the Union only on three subjects, namely, foreign affairs, defence and communication, said Dr. Ambedkar that it was realized that there would be no use and purpose in forming an All India Union if trade and commerce throughout India was not free. Hence it was decided to put article in fundamental rights. Following was stated by Dr. Ambedkar: "But I shall explain to him why it was found necessary to include this matter in the fundamental rights. My friend, Mr. Subramaniam will remember that when the Constituent Assembly began, we began under certain limitations. One of the limitations was that the Indian States would join the Union only on three subjectsforeign affairs, defence and communications. On no other matter they would agree to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aling with the freedom of trade and commerce were scattered in different parts of the Draft Constitution, as article 16 was under fundamental rights and article 243, 244 and 245 were in Part IX. Various amendments were proposed by Pandit Thakur Das Bhargava and other members. After a great discussion Part XA was passed to be included in the Constitution with certain minor amendments. 147. Subsequently, Dr. Ambedkar on 16th October 1949 moved a motion for insertion of Article 274DD, which was to the following effect: "274DD. Notwithstanding anything contained in Power of certain States in Part III of the First schedule in impose restrictions on trade and commerce by the levy of certain taxes and duties on the import of goods into or the export of goods from such States. the foregoing provisions of this Part or in any other provisions of this Constitution, any State which before the commencement of this Constitution was levying any tax or duty on the import of goods into the State from other States or on the export of goods from the State to other States may, if an agreement in that behalf has been entered into between the Government of India and the Government of that State, con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rade and commerce. Dr. B.R. Ambedkar further stated that imposition of sales tax shall not be in conflict with provisions of Part XA (Now Part XIII). Following was stated by Dr. Ambedkar: "Sir, as everyone knows, the sales tax has created a great deal of difficulty throughout India in the matter of freedom of trade and commerce. It has been found that the very many sales taxes which are levied by the various Provincial Governments either cut into goods which are the subject matter of imports or exports, or cut into what is called interState trade or commerce. It is agreed that this kind of chaos ought not to be allowed and that while the provinces may be free to levy the sales tax there ought to be some regulations whereby the sales tax levied by the provinces would be confined within the legitimate limits which are intended to be covered by the sales tax. It is, therefore, felt that there ought to be some specific provisions laying down certain limitations on the power of the provinces to levy sales tax. The first thing that I would like to point out to the House is that there are certain provisions in this article 264A which are merely reproductions of the different parts of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not exceeding 10 years clearly indicates that taxes are restrictions on trade and commerce, hence period of 10 years was allowed to abolish the same and the State to ensure free flow of trade and commerce. 154. One more important fact is to be noticed from the Constituent Assembly Debates dated 8th September, 1949 in reference to Article 244 (now Article 304), which permitted the State to impose any tax on goods imported from other States. Dr. B.R. Ambedkar referred the above Article 244 as a provision giving limited power to impose certain restrictions on the entry of goods. Dr. Ambedkar in his statement in the proceeding instead of repeating the word 'tax' as specifically mentioned in Article 244 used the word 'restriction'. The above also indicates that the use of word 'restriction' included the tax also. 155. From the legislative history as noted above and the extent of freedom of trade and commerce as emerged from Constituent Assembly Debates, it is abundantly clear that the taxes were treated as restriction on freedom of trade and commerce and it was further comprehended that restriction on freedom of trade and commerce can be put by taxation also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment; That the Princely States should be on a par with the provinces regarding the Federal List,subject to special matters; and That generally speaking the Executive authority of the Union should be coextensive with its legislative authority." 158. The Drafting Committee which was charged with the duty of preparing a Constitution in accordance with the decision of the Constituent Assembly on the reports made by the various Committees prepared a Draft Constitution which was made public. The Draft Constitution was placed for discussion on 4th November, 1948. Dr. B.R. Ambedkar while placing the Draft Constitution/while moving the motion had deliberated over the nature of the Constitution. Dr. Ambedkar stated that the Draft Constitution is Federal Constitution in the following words: "Two principal forms of the Constitution are known to historyone is called Unitary and other Federal. The two essential characteristics of a Unitary Constitution are: (1) the supremacy of the Central Polity,and (2)the absence of subsidiary Sovereign politics. Contrariwise,a Federal Constitution is marked: (1) by the existence of a Central polity and subsidiary polities side by side, and (2)by each bei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apparently inconsistent claims of national sovereignty and of state sovereignty consists of the formation of a constitution under which the ordinary powers of sovereignty are elaborately divided between the common or national government and the separate States. The details of this division vary under every different federal constitution,but the general principle on which it should rest is obvious. Whatever concerns the nation is a whole should be placed under the control of the national government. All matters which are not primarily of common interest should remain in the hands of the several States." 162. A.V. Dicey further stated about three leading characteristics of federalism; "the supremacy of the constitutionthe distribution among bodies with limited and coordinate authority of the different powers of government- the authority of the Courts to act as interpreters of the constitution." 163. Shri Alladi Krishnaswami Ayyar while referring to Part XA i.e. trade, commerce and intercourse (within the territory of India) referring to factors of federation in the context of trade, commerce and intercourse stated as follows: "Therefore, in a federation what you have to do i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eter of a scheme of distribution of powers." 165. In the landmark judgment of this Court in His Holiness Kesavanand Bharati Sripadagalvaru vs. State of Kerala and another,(1973) 4 SCC 225 a new dimension was given to the Constitutional principles. This Court by majority judgment declared that the basic feature of the Constitution could not be amended by a constitutional amendment. Chief Justice, Sikri while delivering the majority judgment had held that federal character of the Constitution is one of the basic structures of the Constitution. 166. Shelat and Grover, JJ. while delivering concurring opinion had also stated that our Constitution has all essential elements of federal structure. In paragraph 486 following was stated: "The Constitution has all the essential elements of a federal structure as was the case in the Government of India Act, 1935, the essence of federalism being the distribution of powers between the federation or the Union and the States or, the provinces. All the legislatures have plenary powers but these are controlled by the basic concepts of the Constitution itself and they function within the limits laid down in it Per Gajendragadkar C.J. in Special Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... referring to Dr. Ambedkar following was stated: "60. Although Dr. Ambedkar thought that our Constitution is federal "inasmuch as it establishes what may be called a Dual Polity," he also said, in the Constituent Assembly, that our Constitution makers had avoided the 'tight mould of federalism' in which the American Constitution was forged. Dr. Ambedkar, one of the principal architects of our Constitution, considered our Constitution to be both unitary as well as federal according to the requirements of time and circumstances'." 169. A Nine Judge Bench had occasion to elaborately consider the nature of Constitution of India in S.R. Bommai and others vs. Union of India and others, (1994) 3 SCC 1, Ahmadi, J. referring to federal character of the Constitution in paragraph 14 following was stated: "14.In order to understand whether our Constitution is truly federal, it is essential to know the true concept of federalism. Dicey calls it a political contrivance for a body of States which desire Union but not unity. Federalism is, therefore, a concept which unites separate States into a Union without sacrificing their own fundamental political integrity. Separate States, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sphere allotted to them, States are supreme. The Centre cannot tamper with their powers. More particularly, the courts should not adopt an approach, an interpretation, which has the effect of or tends to have the effect of whittling down the powers reserved to the States. It is a matter of common knowledge that over the last several decades, the trend the world over is towards strengthening of Central Governments be it the result of advances in technological/scientific fields or otherwise, and that even in USA the Centre has become far more powerful notwithstanding the obvious bias in that Constitution in favour of the States. All this must put the court on guard against any conscious whittling down of the powers of the States. Let it be said that the federalism in the Indian Constitution is not a matter of administrative convenience, but one of principle the outcome of our own historical process and a recognition of the ground realities. This aspect has been dealt with elaborately by Shri M.C. Setalvad in his Tagore Law Lectures "Union and State relations under the Indian Constitution" (Eastern Law House, Calcutta, 1974). The nature of the Indian federation with reference to its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... depart from the federal concept embodied in the Objectives Resolution owing to a change in the political situation which had taken place in the meantime. The object of the framers of our Constitution,thus,was to build a strong central authority which might resist external aggression and also to check internal disruptive forces that might tend to undermine the nascent State. This object has been sought to be attained,not only by endowing larger enumerated powers upon the Union than elsewhere and by giving it the residue [Art.248] (as in Canada), but also by enabling the Centre itself to assume control of the units whenever there is any threat of disruption either from outside or from within." 173. The law declared by this Court as noted above clearly indicate that the Indian Constitution is basically federal in form and is marked traditional characteristics of a federal system, namely, supremacy of the Constitution, division of power between the Union and States and existence of an independent judiciary. Federalism is one of the basic features of Indian Constitution. However, the history of Constitution including the Debates in the Constituent Assembly indicate that the distrib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exercise of the legislative power of the State, is one of the issues for consideration before us. Learned counsel appearing for the States contend that the power to legislate as on the subjects as enumerated in List II is a sovereign power which also includes power of State to impose taxes in which no limitation can be read from Part XIII of the Constitution. It is contended that it is only by a specific prohibition or limitation in the Constitution which has to be read as limiting the sovereign power of the State. On the other side, the petitioners contend that State Legislature while exercising its power of taxation exercise the same legislative power as it does while enacting any other law which it is competent to enact and there is no qualitative distinction between the exercise of legislative power enacting a law levying tax or enacting a nonfiscal law. In making of any law, all limitations envisaged by the Constitution shall apply. Learned counsel appearing for the States have submitted that limitations on taxing power of the State Legislature are all contained only in Part XII of the Constitution and no other limitation in exercise of State legislative power can be read. 17 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng that such matter is a matter enumerated in the State List." 179. During submissions before us, one of the issues raised is as to whether Article 245 is source of legislative power or it is Article 246. Some of the counsel appearing on behalf of the States contend that the word "subject to the provisions of this Constitution" is there only in Article 245 which does not govern, Article 246 under which Legislature of any State has exclusive power to make law. Articles 245 and 246 both cover the same subject i.e. law making by the Parliament and the Legislature. Article 245 deals with the extent of laws whereas Article 246 deals with the subjectmatter of laws. Both the Articles together define and demarcate the legislative powers to be exercised by the Parliament and the States. The issue is no longer res integra. The Constitution Bench of this Court in Maharaj Umeg Singh and others vs. The State of Bombay and others,(1955) 2 SCR 164, had occasion to consider the extent and limitations on the legislative powers as provided under Articles 245 and 246. Following was laid by this Court in the above case: "The fetter or limitation upon the legislative power of the State Legislature w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 245 begins with the expression "subject to the provisions of this Constitution". Therefore, Article 246 must be read as "subject to other provisions of the Constitution". 182. Thus, it is well settled that legislative power of the State is subject to the provisions of the Constitution. The words 'subject to the provisions of this Constitution' had to give its full meaning and content. Thus, limitation of the legislative powers wherever found in the Constitution has to be given effect to. There can be no doubt that Part XII of the Constitution deals with "Finance, Property, Contracts and Suits" and there are various express limitations provided in Part XII, namely, Articles 276, 286 and certain other Articles but can Part XII be treated as the only limitations on the legislative powers of the States, the answer has to be in negative. We have already extracted Article 13 subclause (2) and there are more than one Constitution Bench judgments which held that taxing legislation has also to conform Article 13 subclause( 2). In Kunnathat Thathunni Moopil Nair vs. The State of Kerala and another, (1961) 3 SCR 77, Constitutional validity of TravancoreCochin Land Tax Act, 1955 was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground that it is expropriatary, or that the statute prescribes no procedure or machinery for assessing tax, but it is not open to challenge merely on the ground that the tax is harsh or excessive." 185. All legislative powers is subject to limitations in the Constitution, be it fiscal statutes or nonfiscal statutes. 186. Now, we come to the question as to whether Part XIII also contains limitations on the legislative power of the State. Part XIII of the Constitution has been included in the Constitution after great deliberation and debates in the Constituent Assembly as noted above. Part XIII contains one of the most important right and principle on which country was to march to attain economic freedom. Justice Gajendragadkar, J. has beautifully explained the nature and contents of right guaranteed under Part XIII in following words:- "The provision contained in Article 301 guaranteeing the freedom of trade, commerce and intercourse is not a declaration of a mere platitude, or the expression of a pious hope of a declaratory character; it is not also a mere statement of a directive principle of State policy; it embodies and enshrines a principle of paramount important that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... G. K. Krishnan and Others Vs. State of Tamil Nadu and Others (1975) 1 SCC 375 had again reiterated that Article 304 imposes a general limitation on all legislative power, he states that 'Article 301 imposes a general limitation on all legislative power in order to secure that trade, commerce and intercourse throughout the territory of India shall be free'. In view of the aforesaid discussion, we conclude that Part XIII of the Constitution contains limitation on the legislative power of the State and all legislative power of the State whether fiscal or nonfiscal has to conform Part XII of the Constitution. D. Whether Part XIII of the Constitution covers "tax legislation" and word "restriction" used therein includes tax legislation. 193. The above subject is being considered in two parts. Firstly, whether Part XIII of the Constitution covers tax legislation and secondly, whether word restriction used in Part XIII includes tax legislation. Whether Part XIII covers tax legislation 194. Learned counsel for both the parties have to make different submissions on the above subject. Learned counsel for the petitioners on the one hand contends that all tax legislation which re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the Constitution. 199. All subsequent judgments of this Court have also proceeded on the premise that a tax legislation which impedes the freedom of trade, commerce and intercourse and is not saved by Article 302 to 304 is invalid. Apart from the reason which found favour in Atiabari Tea Company and Automobile Transport the following reasons reinforces our view that Part XIII covers all tax legislations which impede the freedom of trade, commerce and intercourse: (a) The express use of word tax in Article 304(a) and 306 (as it existed before its repeal by Constitution's 7th Amendment Act, 1956) indicates that taxes were expressly included in Part XIII. Had the taxes, apart from as mentioned in 304(a) were not to be covered under Part XIII, Article 306 ought not to have been engrafted which permitted continuance of tax or duty on the import and export of the goods, in Part B States for a period not exceeding ten years from the commencement of the constitution. The framers of the Constitution were conscious that unless an overriding effect is given to taxes which are continuing in the State the same shall fall foul to Article 301. (b) Article 302 uses the phrase, "Parli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxation, if it contains restraint on trade between one local area to another local area or is discriminatory, the same is outside the reach of Article 301? The answer is obviously no. Trade and commerce throughout the territory of India is to be free. Thus reach of Article 301 is not confined to taxation as contemplated by 304(a) rather Part XIII embraces in itself all kind of tax legislation, which contains restraint on trade, commerce and intercourse. (f) Article 304(a) only covers taxes on goods imported from other State and Union Territories. List II of VIIth Schedule contains various other entries which empower the State to levy taxes. Entry 49 to Entry 62 enumerate various fields of taxing legislation. In the event, the submission is accepted that it is only taxes referred to under Article 304(a), are covered by Part XIII, all taxing legislations as enumerated in List II shall go out of reach of Part XIII. Whether Constitution framers contemplated that restriction in freedom of trade, commerce and intercourse can be imposed by the State by taxing legislation other than those referred to in 304(a), answer has to be negative. Other taxing legislation apart from those, mentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trictions on trade and commerce whereas section referred to imposition of taxes. Thus textual interpretation of Article 304 and 306 clearly indicates that word 'restriction' was used as inclusive of taxes. iii. The word 'restriction' has been used in Part III, in Article 19(2) to Article 19(6). The word 'restriction' has also been used in Part XIII. The word 'restriction' appearing in Part III and Part XIII have the same meaning and should be construed as such. It is well known principle of statutory interpretation of Constitution that when the same words or phrases are used in different parts of the Constitution, the same meaning should be ascribed to such word unless the context demands otherwise. It is sufficient to refer to judgment of this Court in Kesavananda Bharati Versus State of Kerala, (1973) 4 SCC 225. Justice "Hegde and Mukherjea" in Para 640 had reiterated the above principle as: "...it is one of the accepted rules of construction that the courts should presume that ordinarily the Legislature uses the same words in a statute to convey the same meaning. If different words are used in the same statute, it is reasonable to assume that, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n on intraState trade and with regard to imposition of taxes other than goods imported from other States, which can not be the intention of framers of the Constitution. From the foregoing discussion, we arrive at following conclusions: i. Part XIII of the Constitution covers tax legislation which restrict freedom of trade, commerce and intercourse. ii. The word 'restriction' used in Part XIII includes tax legislations also. E. LEGISLATIVE HISTORY AND CONSTITUENT ASSEMBLY DEBATES RELATING TO ARTICLE 304(a)AND 304(b) 201. By Section 297 of Government of India Act, 1935, the certain restrictions on the Provincial Legislature and the Government were imposed to ensure freedom of trade, as has already been noted above. When the Constituent Assembly proceeded to finalise the provisions of the Constitution on freedom of trade and commerce, the Legislative Scheme as such under Section 297 was already enforced. By Section 297(1)(a) the State Legislature and Government were prohibited from restricting the entry into, or export from, the Province of goods of any class or description; and further by Section 297(1)(b) imposition of any tax, cess, toll, or due which was discriminato ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prevent any Unit from imposing on goods imported from other Units the same duties and taxes to which the goods produced in the Unit are subject: Provided further that no preference shall be given by any regulation of commerce revenue by a Unit to one Unit over another." 205. The above Clause 10 came for discussion before the Constitution Assembly on Ist May, 1947. Shri K.M. Munshi before the Constituent Assembly placed amendment for adding the words 'and under regulations and conditions which are nondiscriminatory'. The Constituent Assembly approved Clause 10 by accepting amendment proposed by Shri K.M. Munshi. Third proviso thus was approved as follows: "Provided that nothing in this section shall prevent any Unit from imposing on goods imported from either Units the same duties and taxes to which the goods produced in the Unit are subject and under regulations and conditions which are nondiscriminatory." 206. The above proviso was included in the Draft Constitution published in October, 1947 and thereafter draft as finalised by Drafting Committee provided for restriction on trade, commerce and intercourse by Article 244 which was of the following effect: "244. Notw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... free trade and commerce. The objection of Shri C. Subramanian was taken in the following words: "You will find, Sir, that in article 244, even though it might be interstate trade and commerce, the State Legislature is given certain powers to impose certain taxes and impose certain restrictions. Having this in mind, if we come to Article 16, we find the words "subject to the provisions of article 244 of this Constitution", that is, even in respect of interstate trade and commerce, the State Legislature has been given certain powers and that is not touched by this article. Therefore leaving that, the article would read "subject to the provisions of any law made by Parliament, trade and commerce and intercourse through the territory of India shall be free". I really fail to understand how this can be a fundamental right and whether there is any right at all reserved. The very conception of a fundamental right is that there is a certain right taken out of the province of the legislature either of the Union or of the State." 209. Dr. Ambedkar replying to the above objection with regard to Article 244 stated as follows: "With regard to the other argument, that since trade and commerc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gard to these amendments my submission is that the way in which I look at the subject is different from the way in which Dr. Ambedkar look at it. According to me, these rights of trade and commerce and intercourse should be absolute and only circumscribed by provisions relating to emergencies while in his view, the power of the Central Government as well as of the provincial Governments should be there, and these rights should be qualified We have already passed article 16 which runs thus: "Subject to the provisions of article 244 of this Constitution and of any law made by Parliament, trade, commerce and intercourse throughout the territory of India shall be free." This article yet stands as it is. There has so far been no amendment that it stands abrogated. The existence of this article in the Chapter on Guaranteed Rights assures us that this is a fundamental right. The nature of this fundamental right has been, I know, curtailed to a great extent by the use of the words "and of any law made by Parliament". Subject to this, this fundamental right has been guaranteed to the citizens of India by the Constitution we have already passed. 212. With regard to Article 274D, Pandit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght in this matter and the only reason why the Centre should interfere is to see that the economic and fiscal policy of the Centre is not unduly interfered with, and to the extent that it cannot be interfered with the State must be given a reasonable amount of power to order its own affairs." 215. Shri Alladi Krishnaswami Ayyar replying the objections of Pandit Bhargava with regard to Article 274D stated as follows: "Then I am surprised at exception being taken to the terms of article 274D. It does not give any unfettered power to the States.The proviso clearly lays down- "No Bill or amendment for the purposes of clause (b) of this article shall be introduced or moved in the legislature of the State nor shall any Ordinance be promulgated for the purpose by the Governor or Ruler of the State without the previous sanction of the President". Therefore, if on account of parochial patriotism or separatism, without consulting the larger interests of India as a whole if any Bill or amendment is introduced, it will be open to the President, namely, the Cabinet of India to withhold sanction. This is therefore a very restricted power that is conferred on the legislature of a State. Af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1, Article 304 provides for 'restrictions on trade, commerce and intercourse' amongst States, as is clear by its heading, which otherwise would not have been permissible under 301. Article 304 also overrides restrictions on the legislative power of the State as provided for in Article 303. 219. Article 304 empowers legislature of a State by law to impose on goods imported from other States or Union Territories any tax. A plain reading of Article 304(a) indicates that it contains certain conditions for imposition of taxes on goods imported from other States. Article 304(a) can be divided in following parts:- i. Impose on goods imported from other States or Union Territories; ii. Any tax to which similar goods manufactured or produced in that State are subject; iii. So, however, as not to discriminate between goods so imported and so manufactured or produced; 220. We have already noted, while noticing the proceeding before the Constituent Assembly that in the initial draft corresponding to 304(a) the condition iii, i.e., "as not to discriminate between goods so imported and goods so manufactured or produced" was not there which was added by an amendment brought by Shri K ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on goods coming from other States. First condition that is, taxing of the local goods being not fulfilled, the question of discrimination, does not arise. We are thus of the considered opinion that power under Article 304(a) for imposing taxes on the imported goods can be exercised by a State only when similar goods manufactured or produced locally are subject to tax. When the similar goods are not subject to tax or similar goods are not available in the State, the State is obliged to permit free flow of goods from other States which is cardinal principle enshrined in Article 301 and the relaxation to the States has been given only on a condition that State imposes taxes both on local goods and outside goods. Article 304(a) came for consideration before this Court in several cases including the Constitution Bench of this Court in State of Madhya Pradesh Vs. Bhailal Bhai and Others 1964 6 SCR 261, in the above case the State has filed an appeal against judgment of the High Court of M.P. by which judgment High Court had allowed the writ petition filed by the assessee permitting the refund of the tax assessed and collected from them holding assessment and collection as violative of Ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 31 March 1961 issued under Bihar & Orissa Excise Act, 1915 by which duty was enhanced from Rs. 40 to 70 per LP Gallon. 224. The petitioners were asked to pay duty at the rate of Rs. 30, in respect of stocks of liquor found in the shop after April 1, 1961. The petitioners challenged the legality of the levy by filing a writ petition, the following contention was raised before this Court: "The appellants contended, inter alia that the State could levy under s.27 of the Bihar and Orissa Act duty on excisable articles produced or manufactured in the State and a countervailing duty on excisable articles imported into the State, imposed with a view to equalize the burden on the imported articles with the burden on manufactured articles in the State, but no countervailing duty on liquor imported could be levied if there was in the year of licence no liquor, similar to the imported liquor, manufactured within the State, and as there was no distillery in the State manufacturing "foreign liquor" the levy of countervailing duty was without authority of law. " 225. The writ petition was dismissed by the High Court justifying the levy of duties of excise as countervailing duties under E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actured or produced or those goods were not locally available. 228. The question of discrimination between tax imposed on the imported goods and that of locally manufactured or produced goods is another factor, on which the levy can fall foul. In Firm A.T.B. Mehtabmajid and Company Vs. State of Madras and Anothers 1963 SCR Supl.(2) 435 a question of discriminatory levy under Article 304(a) was considered. 229. In a writ petition under Article 32 of the Constitution filed in this Court, rule 16 of Madras General Sales Tax (Turnover and Assessment Rules, 1939) was under challenge. Petitioner was a dealer in hides and skins who used to sell the hides and skins taken from outside the State of Madras as well as those taken from inside the State. Case of the petitioner was to the following effect: "It is contended for the petitioner that the effect of this rule is that tanned hides or skins imported from outside the State and sold within the State are subject to a higher rate of tax than the tax imposed on hides or skins tanned and sold within the State, in as much as sales tax on the imported hides or skins tanned outside the State is on their sale price while the tax on hides or ski ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the proviso to subrule of r. 16 of the Rules, then the tax is discriminatory and unconstitutional and must be struck down." 231. This Court allowed the petition by recording the following conclusion: "We are therefore of opinion that the provisions of r. 16(2) discriminate against the imported hides or skins which had been purchased or tanned outside the State and that therefore they contravene the provisions of Art. 304(a) of the Constitution. 232. The law laid down by the above Constitution Bench judgment of this Court reaffirms our view that for enabling a State to make a law under Article 304(a), following two preconditions, which are independent of each other have to be satisfied: a. Imposes on goods imported from other States or the Union Territories any tax to which similar goods manufactured or produced in that State are subject. b. So, however, as not to discriminate between goods so imported and goods so manufactured and produced; 233. During the course of his submission Shri Salve has referred to enactments of State of Tamil Nadu, States of Kerala, State of Assam and State of Andhra Pradesh. Referring to Tamil Nadu Entry Tax on Entry of Goods into Local Areas Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsider the word 'and' as used in Section 3(b) of the Drugs Act, 1940. Section 3(b)(1) which defines the Drug provided as: "The definition of "drug" contained in S.3(b) is in the following terms :( i) all medicines for internal or external use of human beings or animals and all substances intended to be used for or (in the diagnosis, treatment), mitigation or prevention of disease in human beings or animals other than medicines and substances exclusively used or prepared for use in accordance with Ayurvedic or Unani systems of medicine..............." 237. The issue before this Court as to whether word 'and' used in the Section 3(b)(1) between words "medicines and substances" be read as 'or', this Court laid down the following: "Now if the, expression "substances" is to be taken to mean something other than "medicine" as has been held in our previous decision it becomes difficult to understand how the word "and" as used in the definition of drug in s. 3 (b) (i) between "medicines" and "substances" could have been intended to have been used conjunctively. It would be much more appropriate in the context to read it disjunctively. In Stroud's Judicial Dictionary, 3rd Ed. it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or. In support of his submission he has placed reliance on the Statutory Interpretation, Second Edition by RUTH SULLIVAN. Learned Author has expressed following views on 'And' or 'Or': "2) "And" and "Or" a) Joint or Joint and Several "and" Both "and" and "or" are inherently ambiguous. "And" is always conjunctive in the sense that it always signals the cumulation of the possibilities listed before and after the "and". However, "and" is ambiguous in that it may be joint or joint and several. In the case of a joint "and", every listed possibility must be included: both (a) and (b); all of (a), (b), and (c). In the case of a joint and several "and", all the possibilities may be, but need not be, included: (a) or (b) or both; (a) or (b) or (c), or any of two, or all three. In other words, the joint and several "and" is equivalent to "and/or". Which meaning is appropriate depends on the context. When "and" is used before the final item in a list of powers, for example, it is joint and several: To carry out the purposes of this Act, the Governor in Council may make regulations respecting (a) the conditions on which licences may be issued; (b) the information and fees that fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and intercourse has to obtain sanction of the President as contemplated by proviso to clause (b). The requirement of obtaining previous sanction of the President has to be decided in accordance with the nature and content of the State Legislation. 241. One of the submissions which has been emphatically pressed by Shri P.P. Rao and Shri Rakesh Dwivedi, learned senior counsel appearing for the States is that requirement of obtaining previous sanction of the President by the State Legislature erodes the sovereignty of the State Legislature of making law in the field allocated to them included in the VIIth Schedule read with Article 246. It is contended that a State's taxing power is a sovereign power granted to the State and insisting for previous sanction of the President for framing a taxing legislation by the State erodes their sovereignty and is also against the federal structure of the Constitution. We in the foregoing paragraphs have elaborately considered the nature of federal structure of the Constitution of India, which is not a federal Constitution, as it is traditionally understood. This Court termed the Constitution of India as quasifederal, mixture of federal and unitar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been reserved for the consideration of the President and has received his assent, prevail in that State: xxxxxxxxxxxxxxxxxxx (5) 274. Prior recommendation of President required to Bills affecting taxation in which States are interested.- (1) No Bill or amendment which imposes or varies any tax or duty in which States are interested, or which varies the meaning of the expression "agricultural income" as defined for the purposes of the enactments relating to Indian Income-tax, or which affects the principles on which under any of the foregoing provisions of this Chapter moneys are or may distributable to States, or which imposes any such surcharge for the purposes of the Union as is mentioned in the foregoing provisions of this Chapter, shall be introduced or moved in either House of Parliament except on the recommendation of the President. (6)288. Exemption from taxation by States in respect of water or electricity in certain cases.- xxxxxxxxxxxxxxxxxxx (3) The Legislature of a State may by law impose, or authorize the imposition of, any such tax as is mentioned in clause (1), but no such law shall have any effect unless it has, after having been reserved for the consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ked for omission of Article 304, and, in the alternative, for deletion of the Proviso to Article 304(b). The arguments advanced are: "Whether the restrictions imposed by an Act of a State Legislature on the freedom of trade and commerce are reasonable and whether they are in the public interest for purposes of Article 304(b) are questions to be decided ultimately by the High Court or Supreme Court. If the High Court finds that the restrictions are unreasonable or opposed to the public interest, previous sanction of the President or his subsequent assent cannot cure the infirmity. If the legislation is otherwise valid and the restrictions are reasonable and in the public interest, his previous sanction will be a superfluity. In any case the requirement relating to the previous sanction of the President directly encroaches on the field assigned to the State Legislature...". 245. The objects of Article 304(b) and its contents were noted in para 2.40.06 to the following effect: "2.40.06 The broad object of the provisions of Articles 301 and 304 is to ensure that the commercial unity of India is not broken up by physical and fiscal barriers erected by the State Legislatures through ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oad conceptual angle, the suggestion for excluding intraState trade and commerce from the purview of Article 302 and for deletion of the Proviso to Article 304(b) does not stand close scrutiny. It is not in consonance with the prevailing concept of federalism. It presumably draws, inspiration from the antiquated and obsolete theory of federalism, according to which two levels of government were supposed to function in watertight compartments in isolation from each other. Such a "dual" federalism is nowhere a functional reality in the modern world. Even in the socalled classical federation of the United States of America federalism is now a dynamic process of government, a system of shared responsibilities and cooperative action between the three tiers of government. The Constitutionframers were conscious of this reality. Indeed, the very scheme of Articles 301 to 304 which imposes limitations on the legislative powers of the Union and of the States, both with respect of interState and intraState commerce and intercourse, is expected to be worked in cooperation by the Union and the States. The mere fact that Article 303(2) gives an exclusive power to Parliament to m ake a discrimina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... event, the State Legislature imposes restrictions on the freedom of trade and commerce by taxing legislation covering local goods, whether the validity of it cannot be tested on anvil of Article 301. Further, State in public interest requires imposition of reasonable restriction by imposing tax on the local goods, what procedure it has to follow so as to not impede Article 301. There cannot be any dispute that power to legislate including tax legislation is the power allocated to State Legislature under the Constitutional Scheme under Article 245 and 246. Article 304 is not a source of power of legislation by State rather as the heading of the section indicates that it is a "Restriction on trade, commerce and intercourse among States." As we have noted above, Article 304(a) only deals with goods imported from other States hence for imposing reasonable restrictions in the public interest on trade, commerce and intercourse with regard to local goods, only way out for a State to save its legislation is to go through the route as provided under Article 304(b). We cannot imagine that merely because State Legislature has competence to frame tax law with regard to local goods, it can impo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion it needs to go through the routes of Article 304(b) to insulate it from the wrath of Article 301. 253. Article 304(b) thus operates in a very limited field, as explained above and plenary legislative power of the State, in no manner, is restricted by Article 304(b). We are thus of the view that apprehension of the learned counsel for the State that Article 304(b) operates serious restraint on the legislative power is misplaced. We thus conclude that word 'restriction' as used in Part XIII as well as in Article 304(b) at the Constitution includes tax legislation also. 254. With reference to Article 304(a), one of the aspects on which learned counsel for the parties have taken different stand is as to whether exemptions granted in tax by a State Legislature to the local goods does or does not violate Article 304(a). Shri Salve while elaborating his challenge to Entry Tax legislation of different States has referred to the second group of enactments in which an entry tax is imposed on the goods coming from outside and local goods but legislation contains device by which there is set off/ exemptions to the local goods which result in nonimposition of Entry Tax to the loc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for similar reasons, hides or skins imported from outside the State after purchase in their raw condition and then tanned inside the State are also subject to higher taxation than hides or skins purchased in the raw condition in the State and tanned within the State, as the tax on the former is on the sale price of the tanned hides or skins and on the latter is on the sale price of the raw hides or skins. Such a discriminatory taxation is said to offend the provisions of Article 304(a) of the Constitution. Similar are the contentions for the interveners in the case." 257. This Court after considering the respective submissions held that tax on hides and skins imported from outside being higher, it is discriminatory and unconstitutional. Following was held: "10. It is therefore now well settled that taxing laws can be restrictions on trade, commerce and intercourse, if they hamper the flow of trade and if they are not what can be termed to be compensatory taxes or regulatory measures. Sales tax, of the kind under consideration here, cannot be said to be a measure regulating any trade or a compensatory tax levied for the use of trading facilities. Sales tax, which has the effect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Reference is made to clauses (b) and (c) of Article 39 of the Constitution. We do not think that any support can be derived from the two clauses of Article 39. Clause (a) of Article 304 is clear in meaning. An exception to the mandate declared in Article 301 and the prohibition contained in clause (1) of Article 303 can be sustained on the basis of clause (a) of Article 304 only if the conditions contained in the latter provision are satisfied. 7. In the result, the discrimination effected by applying different rates of tax between goods imported into the State of Gujarat and goods manufactured within that State must be struck down." 260. Another two Judge Bench judgment in Indian Cement and others vs. State of Andhra Pradesh and others, (1988) 1 SCC 743, had a occasion to consider notification issued under Section 9(1) of Andhra Pradesh General Sales Tax Act, 1957 whereby rate of tax in respect of sales made by indigenous cement manufacturers to manufacturers of cement products in the State of Andhra Pradesh was reduced. Notification under Section 8(5) of Central Sales Tax Act, 1956 was also issued reducing rate of tax on the sale of cement made in the course of interState tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. This Court held that the power to grant exemption is always inherent in all taxing statutes. The reasons for notification as submitted on behalf of the State i.e. economic encouragement and growth found favour and it was held that exemption do not violate Article 304. This Court laid down following in paragraph 26 at page 108: "26. .......... Economic unity of India is one of the constitutional aspirations of India and safeguarding the attainment and maintenance of that unity are objectives of the Indian Constitution. It would be wrong, however, to assume that India as a whole is already an economic unit. Economic unity can only be achieved if all parts of whole of Union of India develop equally, economically. Indeed, in the affidavits of opposition various grounds have been indicated on behalf of the respondents suggesting the need for incentives and exemptions, and these were suggested to be absolutely necessary for economic viability and survival for these industries in these States. These were based on cogent and intelligible reasons of economic encouragement and growth. There was a rationale in these which is discernible. The power to grant exemption is always inherent in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In this case and as in all constitutional adjudications the substance of the matter has to be looked into to find out whether there is any discrimination in violation of the constitutional mandate." 265. This Court also referred to Article 38 and 39. Earlier two judgments in Indian Cement Ltd. (supra) and Weston Electronics (supra) were noticed by this Court and it was held that these cases were not at all concerned to a special class, had a specific condition of maintaining the general rate of tax, hence they were not applicable. This Court further held that if the power of exemption is in exercise of colourable manner to create unfavourable bias by prescribing general lower rate on locally manufactured goods either in the shape of general exemption to locally manufactured goods or in the shape of lower rate of tax, such an exercise of power can always be struck down by the Courts. 266. The Court also considered the notification issued by the Punjab Government whereby two different rates of tax were provided differentiating between the manufacturers of electronic goods outside the State and within the State. In paragraph 36 following was stated: "36. It has to be reiterated th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the judgment of Video Electronics (supra) a three Judge Bench of this Court also consisting of Sabyasachi Mukherji, CJ in Andhra Steel Corporation vs. Commissioner of Commercial Taxes in Karnataka, 1990 (Suppl.) SCC 617, had occasion to consider exemption granted under Karnataka Sales Tax Act. In the above case the assessee purchases iron scrap from inside and outside the State of Karnataka for the purpose of manufacturing iron ingots, iron steel rounds and torsteel. The main point urged before this Court challenging the exemption as violative Article 304(a) was noted in paragraph 4 to the following effect: "4. The main point was urged in this appeal was that Section 5(4) of the Act insofar as it pertains to Item 2 in Schedule IV read with the Explanation II is violative of Article 304(a) of the Constitution as under that provision the sale of finished goods manufactured out of imported raw material is taxed but the sale of finished goods manufactured out of locally purchased raw material is not taxed and that amounts to hostile discrimination in the rate of tax or quantum of tax." This Court took the view that the case in hand was fully covered by the decision of A.T.B. Mehta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lause. That is of course so, but then there is a meaning and a very significant principle underlying the clause, if one reads it in its entirety. The idea was not really to empower the State Legislatures to levy tax on goods imported from other States and Union Territories - that they are already empowered by other provisions in the Constitution - but to declare that that power shall not be so exercised as to discriminate against the imported goods visàvis locally manufactured goods. The clause, though worded in positive language has a negative aspect. It is, in truth, a provision prohibiting discrimination against the imported goods. In the matter of levy of tax - and this is important to bear in mind - the clause tells the State Legislatures - "tax you may the goods imported from other States/Union Territories but do not, in that process, discriminate against them visàvis goods manufactured locally". In short, the clause says: levy of tax on both ought to be at the same rate. This was and is a ringing declaration against the States creating what may be called "tax barriers" - or "fiscal barriers", as they may be called - at or along their boundaries in the interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laration of invalidity of the impugned notification shall take effect on and from 141997. Till that date,i.e.,up to and inclusive of 31.3.1997, the impugned notification shall continue to be effective and operative. Appeal allowed in the above terms." 271. The State exercises legislative power under Article 246 read with List II which is plenary in nature, when it has power to levy tax it is also entitled to grant of exemption/remission of tax. There cannot be any dispute to the power of a State Legislature in providing for exemption/remission in tax to a specified class based on an intelligible differentia. A Constitution Bench in State of Madhaya Pradesh vs. Abdeali, AIR 1963 SC 1237 need also to be noted. 272. In the above case, in exercise of power under Section 4(3) of Madhya Bharat Sales Tax Act, 1950 exemption was granted from payment of Sales Tax in the following manner: "2. ........... In exercise of the powers conferred by Section 4, subsection (3) of the Madhya Bharat Sales Tax Act, Samvat 2007 the Rajpramukh in supersession of the Notification 59(c) (t) P.R. 41254, dated 2751955 of this department has exempted from the payment of sales tax, in case of sale by the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unsel for the appellants. We do not think that the notification dated January 28, 1956 makes any such discrimination between footwear manufactured or produced in the State of Madhya Pradesh and footwear imported from other States as is prohibited by Article 304(a) of the Constitution. We have already pointed out that the exemption granted by the notification in question depends on the fulfillment of three conditions and all the three conditions are equally applicable to footwear manufactured or produced in the State and footwear imported from other States. It is obvious that the exemption is for the protection and benefit of small manufacturers who make handmade shoes of small value and who may be unable to compete with largescale manufacturers of footwear made on machines. Such a classification in the interests of small manufacturers has often been made and upheld by this Court. (See Orient Weaving Mills (P) Ltd. v. Union of India [Petition No. 110 of 1961 decided on February 28, 1962.]; and British India Corporation Ltd. v. Collector of Central Excise, Allahabad [ Petition No. 94 of 1955 decided on August 20, 1962.]." 275. In the above case submission of the assessee was that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r goods manufactured or produced are subject, (2) so however, as not to discriminate between goods so imported and goods so manufactured or produced. The first condition is that goods manufactured or produced in the State are subject to tax, when exemption is granted in payment of tax to a specified category on fulfillment of certain condition, it presupposes that goods are subject to tax. The exemption granted on a specified class of goods, subject to condition, does not militate against the tax to which the goods are subject. Thus in cases of grant of exemption to a specified category on conditions mentioned therein, first condition as noted above is not breached. Now coming to the second condition i.e. so, however, as not to discriminate goods exported and goods locally manufactured or produced. Goods exempted fall in a different category then the bulk of goods produced and manufactured in the State. Exemptions under different statutes have been upheld due to legislative policy as delineated in a particular statute. In the Video Electronics, three Judge Bench upheld the exemption noticing the fact that the exemption granted was to a special class for limited period on specific c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate producing edible oil] is not sustainable in law." 279. The exception carved out in Video Electronics upheld exemption notification where it is limited to specified type with short period. The general exemption and exemption in wider term has never been approved. The ratio of Video Electronics has to be read as justifying only exemption limited to a specified category for a short period. Exemption in general terms of unlimited in nature cannot be approved. The exemption cannot be used as measure of discrimination between goods imported from other States and goods manufactured or produced in the State. The exemption has to be a limited exemption to the tax which is imposed on the similar goods. In the event exemption is total and general in nature, the said exemption is clearly violative of Article 304(a). Similarly, set off of a particular tax which is general and not limited to specified category has also to be disapproved. In view of above, the ratio of three Judge Bench judgment in Video Electronics have to be read to the above extent and with the limitation as noticed above. 280. We, thus, come to the conclusion that State Legislature in exercise of its taxing power can gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4(a), although permits the State to levy tax but it is hedged with two important conditions, which we have already noticed above. Article 304(a) thus expressly permits the State to impose any tax which includes entry tax also subject to conditions mentioned therein. 285. The Entry Tax is related to movement of goods. Movement of goods have been treated to be an integral part of trade and commerce. In Atiabari, referring to the content of freedom provided by Article 301, it was held that it certainly includes movement of trade following was observed by Gajendragadkar, J., at Page 859: "the conclusion appears to us to be inevitable that the content of freedom provided for by Article 301 was larger than the freedom contemplated by s. 297 of the Constitution Act of 1935, and whatever else it may or may not include, it certainly includes movement of trade which is of the very essence of all trade and is its integral part. If the transport or the movement of goods is taxed solely on the basis that goods are thus carried or transported that, in our opinion, directly affects the freedom of trade as contemplated by Article 301." 286. This Court, while construing the Karnataka tax on ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... local goods at the rate of one percent of value of goods. Normally, such levy cannot be treated as any restriction on the trade and commerce and shall pass muster of Article 304(a) and need no compliance of Article 304(b). But in a case where, Entry Tax is levied to the extent of hundred per cent of the value of goods both on imported goods and locally produced or manufactured goods, the said levy is clear restriction on trade and commerce and has to be routed through Article 304(b). For taking out such levy, from the effect of Article 301 both 304(a) and 304(b) needs to be complied with. 289. We thus conclude that Entry Tax legislation which is a tax on movement of goods, trade and commerce is inhibited by Article 301 and such State legislation can be saved under Article 304. Whether a particular Entry Tax Legislation is valid and does not contravene Part XIII of the Constitution, can be decided only after looking into the nature, content and extent of legislation and its impact on trade, commerce and intercourse. H. MEANING OF "RESTRICTION" AS USED IN PART XIII 290. Freedom of trade, commerce and intercourse throughout the territory of India is guaranteed under Article 301. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which Part XIII guarantees has to be preserved in national interest, it is necessary that the provisions in the article must be strictly complied with. One has to recall the farsighted observations of Gajendragadkar, J. in Atiabari Tea Co. case and the observations then made obviously apply to cases of the type which is now before us." "14. Variation of the rate of interstate sales tax does affect free trade and commerce and creates a local preference which is contrary to the scheme of Part XIII of the Constitution. The notification extends the benefit even to unregistered dealers and the observations of Hegde, J. on this aspect of the matter are relevant. Both the notifications of the Andhra Pradesh Government are, therefore, bad and are hit by the provisions of Part XIII of the Constitution. They cannot be sustained in law." 294. Now, we proceed to examine Part XIII of the Constitution in so far as it expressly refer to various acts, actions which are treated to be restrictions in freedom of trade and commerce. Article 302 306 contain provisions, by which restriction can be put on the freedom of trade and commerce. Some restrictions have been expressly mentioned in said artic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... required in the context of the power. The Constitution Bench, speaking through Patanjali Sastri, CJ., in State of Madras Vs. V. G. Row 1952 SCR 607 while considering the concept of reasonable restriction under Article 19 has stated:- "It is important in this context to bear in mind that the test of reasonableness, wherever prescribed, should be applied to each individual statue impugned, and no abstract standard, or general pattern of reasonableness can be laid down as applicable to all cases. The nature of the right alleged to have been infringed, the underlying purpose of the restrictions imposed, the extent and urgency of the evil sought to be remedied thereby, the disproportion of the imposition, the prevailing conditions at the time, should all enter into the judicial verdict. " 299. Although the word 'restriction' may also in certain circumstances includes prohibitions but restriction is not to be understood with complete prohibition or stoppage of business, effect of tax when it hinders the trade & commerce, it becomes restriction and prohibited under Article 301. This Court in Laxmi Khandsari Etc. Vs. State of U.P. 1981 (3) SCR 92. While considering the concept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. " "27. A discriminatory tax against outside goods is not a tax simpliciter but is a barrier to trade and commerce." 302. A Constitution Bench in Federation of Hotel and Restaurant Association of India, Etc. Vs. Union of India and Others (1989) 3 SCC 634 was considering the validity of a taxing law in the context of Article 14 of the Constitution. The Constitution Bench held that legislature enjoys a wide latitude in the matter of selection of persons, subject matter, events etc. for taxation. Further, it was held that some excessiveness of taxation or its imposition tends towards diminution of earnings or profits, does not violate rights under Article 19 (1) (g): "46. It is now well settled that though taxing laws are not outside Article 14, however, having regard to the wide variety of diverse economic criteria that go into the formulation of a fiscal policy legislature enjoys a wide latitude in the matter of selection of persons, subject matter, events etc., for taxation. The tests of the vice of discriminati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ictions; but it is only such taxes as directly and immediately restrict trade that would fall within the purview of Article 301." 306. Das J.,in Automobile Transport also approved the direct and immediate effect test. Following was stated at page 523: "....For the tax to become a prohibited tax it has to be a direct tax the effect of which is to hinder the movement part of trade." 307. Subba Rao, J., concurring with the above view has also stated at page 550: "....If a law directly and immediately imposes a tax for general revenue purposes on the movement of trade, it would be violating the freedom. On the other hand, if the impact in indirect and remote, it would be unobjectionable." 308. Gajendragadkar, J., in Atiabari Tea Company had also referred to two Privy Council judgments, namely, James Vs. Commonwealth of Australia (1936) A.C. 578 and judgment of Lord Porter in, Commonwealth of Australia and Others Vs. Bank of New South Wales and Another (1950) A.C. 235. It is further relevant to note that Gajendragadkar, J., was conscious of the fact that political and historical background of the federal polity adopted by Australian Commonwealth and the setting of the Constituti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goal of creating free trade as accepted in Cole Vs. Whitfield. He submits that in Cole Vs. Whitfield following observations were made by the Court: "In relation to both fiscal and nonfiscal measures, history and context alike favour the approach that the freedom guaranteed to interstate trade and commerce under s. 92 is freedom from discriminatory burdens in the protectionist sense already mentioned." 311. James Vs. Commonwealth of Australia (supra) was treated to have provided support for the development of the doctrine of criteria of operation. Cole Vs. Whitfield gave various reasons for disapproving the operation theory. Some of the reasons given are as follows: "First, in some respects the protection which it offers to interstate trade is too wide. Instead of placing interstate trade on an equal footing with intrastate trade, the doctrine keeps interstate trade on a privileged or preferred footing, immune from burdens to which other trade is subject." ..... ...... ...... ...... "The second major reason for rejecting the doctrine as an acceptable interpretation of s. 92 is that it fails to make any accommodation for the need for laws genuinely regulating intrastate and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hitfield rejected the 'trade and immediate effect test' is, that because the freedom guaranteed under Section 92 applies only "between the States" i.e. to the interstate trade, i.e., The doctrine accordingly ended up discriminating against intrastate trade as it provided some sort of immunity to interstate transactions which intrastate transaction did not enjoy. We have already extracted the reasons given by Cole Vs. Whitfield, whereas in Part XIII of the Constitution, the Constitution framers had provided for nondiscriminatory taxation between the intrastate and interstate trade with provision for dealing with all situation including a case whether restriction has to be imposed, on both interstate or intrastate trade that is Article 304(b). Although the Australian High Court rejected the idea of 'direct and immediate effect test' as being artificial, this Court has continued to adopt the said doctrine whenever legislation is decided on the touchstone of reasonable restriction and the doctrine has been applied consistently in the vast number of cases for decades which have stood the test of time. 314. Shri Dwivedi has also referred to American cases and contends th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... determine as to whether a particular legislation/taxation violates rights of freedom of trade and commerce under Article 301. It is for the Court to examine facts of each case and come to a conclusion. In this context, observation of Subba Rao , J., is pertinent to be referred to. Referring to observation of Dixson, C.J., following was stated by Subba Rao, J.: "Dixon, C.J., in Commonwealth Freighters Proprietary Limited v. Sneddon, gives a very cogent answer to such an argument in a different context. The learned chief Justice said: "Highly inconvenient as it may be, it is true of some legislative powers limited by definition, whether according to subjectmatter to purpose or otherwise, that the validity of the exercise of the power must sometimes depend on facts, facts which some how must be ascertained by the court responsible for deciding the validity of the law......All that is necessary is to make the point that if a criterion of constitutional validity consists in matter of fact, the fact must be ascertained by the court as best it can, when the court is called upon to pronounce upon validity." I entirely agree with these observations. It is common place to point out tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x theory. Majority of counsel are at agreement that judicial evaluation of compensatory tax theory was uncalled for and the compensatory tax theory is not compatible with a constitutional provision of Part XIII. It is submitted that compensatory theory has been judicially evolved by Seven Judge Bench in Automobile Transport case (supra) and the majority opinion had upheld the provisions of Rajasthan Motor Vehicles Taxation Act, 1951 holding it to be compensatory tax. In view of the serious reservation expressed by the learned counsel for the parties on the compensatory tax theory, it is necessary for us to examine the concept in some detail. 320. The compensatory tax theory as evolved in Automobile Transport was soon doubted by the Constitution Bench in Khyerbari Tea Company Ltd. v. State of Assam, (1964) 5 SCR 975. Gajendragadkar, J. looking into the nature of the compensatory tax theory, opined that the same is required to be reconsidered by a larger Bench, he, however, noted that since the legislation was not tried to be saved on the basis of compensatory tax theory, the question was not further pursued. Gajendragadkar, J. made following observation: "According to the majority ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... large number of subsequent judgments. In paragraph 45 following was stated: "45. A neat definition of what "tax" means has been given by Latham, C.J. of the High Court of Australia in Matthews v. Chicory Marketing Board. "A tax", according to the learned Chief Justice, "is a compulsory exaction of money by public authority for public purposes enforceable by law and is not payment for services rendered". This definition brings out, in our opinion, the essential characteristics of a tax as distinguished from other forms of imposition which, in a general sense, are included within it. It is said that the essence of taxation is compulsion, that is to say, it is imposed under statutory power without the taxpayer's consent and the payment is enforced by law. The second characteristic of tax is that it is an imposition made for public purpose without reference to any special benefit to be conferred on the payer of the tax. This is expressed by saying that the levy of tax is for the purposes of general revenue, which when collected forms part of the public revenues of the State. As the object of a tax is not to confer any special benefit upon any particular individual, there is, as it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... construing the expression free had made following observations: "But the word 'free' does not mean extra legam and any more than freedom means 'anarchy' we boast of being absolutely free people, but that does not mean that we are not subject to law." 329. The most of the cases of Australian High Court which have been referred to and relied by Das, J. were the transport cases wherein various sections were enacted for registration, licensing and realisation of fee/charge from motor vehicles, goods carriages in course of interState and intrastate trade and commerce. 330. Justice Das has specifically referred to dissenting opinion of Fullagar, J. in McCarter and Another V. Brodie, (1950) 80 CLR 432, in which case the Parliament of Victoria had passed an Act, namely, Transport Regulation Act, 193347 which provided that a commercial goods vehicle should not operate on any public highway unless licensed in accordance with Act. A fee was to be paid for license, by an amendment further fee was imposed to be calculated at an annual rate determined from time to time by referring to the load capacity of the vehicle in respect of which license was sought to. 331. Chief Jus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubject matter of transportation, which is now under consideration. The requirements of the Motor Car Acts of Victoria afford very good examples of what is clearly permissible. Every motor car must be registered : we may note in passing that there is no discretionary power to refuse registration. A fee, which is not on the face of it unreasonable, must be paid on registration. Every motor car must carry lamps of a specified kind in front and at the rear, and in the hours of darkness these lamps must be alight if the car is being driven on a road. Every motor car must carry a warning device, such as a horn. A motor car must not be driven at a speed or in a manner which is dangerous to the public having regard to all the circumstances of the case. Other legislation of the StateParliamentary or subordinateprescribes other rules. In certain localities a motor car must not be driven at more than a certain specified speed. The weight of the load which may be carried by a motor car on a public highway is limited. The driver of a motor car must keep to the left in driving along a highway. He must not overtake another vehicle on a curve in the road which is marked by a double line in the cen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion free 'under Section 92 though emphasized by the accompanying, absolutely must receive some qualification'. Privy Council laid down following two general propositions: "But it seems that two general propositions may be accepted: (1) that regulation of trade, commerce and intercourse among the States is compatible with its absolute freedom, and (2) that section 92 is violated only when a legislative or executive act operates to restrict such trade, commerce and intercourse directly and immediately as distinct from creating some indirect or consequential impediment which may fairly be regarded as remote. In the application of these general propositions, in determining whether an enactment is regulatory or something more, or whether a restriction is direct or only remote or incidental, there cannot fail to be differences of opinion. The problem to be solved will often be not so much legal as political, social, or economic, yet it must be solved by a court of law." 334. In Armstrong and Others (supra), the provisions of Commercial Goods Vehicle Act, 1955 were under challenge on the ground that it violated Section 92. The provisions require the owner of every commercial go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... repair, upkeep, maintenance and depreciation of relevant highways, if interState transportation bears no greater burden than the internal transport of the State and if the collection of the exaction involves no substantial interference with the journey. The absence of one or all of these indicia need not necessarily prove fatal, but in the presence of them the conclusion would naturally be reached that the charge was truly compensatory." 337. From the above, it is clear that Australian High Court have read qualifications under Section 92 of the Act. The statutes regulating the trade which have no direct effect on trade and commerce and levying compensatory charge were held to be compatible with freedom under Section 92. 338. Another judgment of the Privy Council which have been referred to by Das, J. was judgment in Commonwealth of Australian and Others V. Bank of New South Wales and Others [1950] A.C. 235. The Privy Council laid down as following: "But it appears to their Lordships that, if these two tests are applied: first, whether the effect of the Act is in a particular respect direct or remote; and, secondly, whether in its true character it is regulatory, the area of di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ama passed a statute by Section 13 of which all dealers on sale of liquor within the limit of the State were required to pay tax of 50 cent per gallon. A merchant of another state against whom collection of tax was sought to be enforced, questioned the tax. Tax was held to be valid by Supreme Court of Alabama and the matter was taken by the merchant to the Supreme Court of the United States. The Supreme Court held that tax is not violative of interState trade and commerce. It was noticed that no greater tax is held on the liquor brought into the State than on those manufactured out of the State and the tax on the liquor brought in from other State was only complimentary provision necessary to make tax equal on all liquors sold in the States. Following was laid down: "A tax is imposed by the previous sections of the same act of fifty cents per gallon on all whiskey and all brandy from fruits manufactured in the State. In order to collect this tax, every distiller is compelled to take our a license and to make regular returns of the amount of distilled spirits manufactured by him. On this he pays fifty cents per gallon. So that when we come in the light of these earlier sections of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) provides that the use tax shall not be laid unless the property has been brought at retail and (c) tax shall not apply to the use of any article of tangible personal property, the sale or use of which had already been subject to a tax equal to or in excess of that imposed. Those users of the State who have produced in the State were thus not to pay the use tax whereas use tax was always payable where the user had acquired the property by retail purchase in or from another State, Unless he has paid sales or use tax elsewhere before bringing it to Washington. Challenge was made on the ground that it violates the commerce class of the U.S. Constitution. Justice Cardozo held that the equality is a theme that runs through the above sections. Following are the reasons which were given for upholding the above compensating tax: "Equality is the theme that runs through all the sections of the statute. There shall be a tax upon the use, but subject *to an offset if another use or sales tax has been paid for the same thing. This is true where the offsetting tax became payable to Washington by reason of purchase or use within the state. It is true in exactly the same measure where the offse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the State he may pay a tax, but if he purchases from outside the State he will pay a "tax of the same amount." 347. Another case which needs to be noted is Oregon Waste Systems V. Department of Environmental Quality of the State of Oregon 511 U.S. 93 (1994). The U.S. Supreme Court noticed that compensatory tax doctrine has been recognised at least since 1869. Following was stated by the U.S. Supreme Court: "At least since our decision in Hinson V. Lott, 8 Wall. 148 (1869), these principles have found expression in the "compensatory" or "complementary" tax doctrine. Though our cases sometimes discuss the concept of the compensatory tax as if it were a doctrine unto itself, it is merely a specific way of justifying a facially discriminatory tax as achieving a legitimate local purpose that cannot be achieved through nondiscriminatory means. See Chemical Waste, supra, at 346, n. 9 (referring to the compensatory tax doctrine as a "justification" for a facially discriminatory tax). Under that doctrine, a facially discriminatory tax that imposes on interstate commerce the rough equivalent of an identifiable and "substantially similar" tax on intrastate commerce does not offend the n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt. In U.S., The compensatory tax doctrine was invoked to save facially discriminatory taxes imposed on interstate trade, to make interstate commerce bear a burden already borne by intrastate commerce. In Automobile Transport compensatory tax has been referred to a tax or charge to provide for trade facilities like construction of road, bridges etc. which was treated as recompense to the traders who were required to pay tax. 350. Law of compensatory charge as developed in Australia was due to the fact that Section 92 did not contain any qualification to the absolute freedom of trade and commerce granted therein. Various qualifications and restrictions to the above freedom were culled out by judicial decisions of the High Court of Australia and Privy Council to justify the said qualifications and restrictions. The ratio contained in various judgments of the High Court of Australia and the Privy Council on Section 92 of the Constitution of Australia cannot be a guiding factor for interpreting Part XIII of the Constitution of India. 351. The Constitution Bench of this Court in State of Bombay v. R.M.D. Chamarbaugwala and another, AIR 1957 SC 699 had sounded a caution in paragraph 35 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observations were made by Hidayatullah, J. at page 639: "The technique of justifying laws as regulatory was evolved in Australia in view of the intractable language of s.92 without any indication of the circumstances in which the absolute freedom could be curtailed. The detailed provisions contained in Part XIII render such a construction of Art.301 at once unnecessary and impermissible." 353. Gajendragadkar, J. in Khyerbari Tea Company Ltd.(supra) had also expressed opinion that compensatory or regulatory tax theory as introduced in the Australian decisions is not to be made applicable in Part XIII. Following was observed: "The majority view in the Atiabari case proceeded on the basis that the Australian decisions which dealt with the scope and effect of s.92 of the Australian Constitution would be of no assistance in constructing 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 s. 92 of the Australian Constitution; s.92 is absolute in terms and on its literal construction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t received from tax will be expended for providing facilities to the entrants in the local area, i.e., on roads, lights, free fooding, free lodging, facility for free servicing, repairs of the vehicles, etc.etc. Can the mere fact that entire amount collected is expended for providing facilities shall take out the statute from the scrutiny of Part XIII ? Answer has to be in negative. The fact that a tax statute compensates the payer of the tax does not take out the statute beyond Part XIII, all taxes, being for one or other public purposes. The tax legislation which professes to compensate the payer cannot take the tax legislation on a higher pedestal beyond the reach of Part XIII, making such legislation "not subject to Constitution". When all legislative power is "subject to Constitution" as per Article 245 and 246 of the Constitution, a legislation, namely, compensatory tax legislation cannot be said to be beyond Part XIII. Any such interpretation is clearly against the constitutional scheme. 356. Thus the judgments of the High Court of Australia and the Privy Council relied in Automobile Transport did not furnish a foundation for evaluation of compensatory tax theory in part XI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndependent of each other have to be satisfied:- (i) It may impose on goods imported from other States or the Union Territory any tax to which similar goods manufactured or produced in that State are subject. (ii) So, however, as not to discriminate between goods so imported and goods so manufactured and produced. 5. Word "and" between Clause(a) and Clause(b) of Article 304 has to be read as joint and several. Both the meaning can be assigned, as per requirement of State legislation. 6. A law made by State legislature exercising the power under Clause(a) in Article 304, which does not impose any restriction on the freedom of trade, commerce and intercourse need not comply with Article 304(b), however, a law even though complying with Article 304(a) containing restriction on freedom of trade, commerce and intercourse is to obtain sanction of the President, as contemplated by proviso to Clause(b). The requirement of obtaining the previous sanction of the president has to be decided in accordance with the nature and content of the State Legislation. 7. The proviso of Article 304(b) is part of Constitutional Scheme which is neither against the federal structure of the Constitution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstitution of India if it impedes the freedom of trade, commerce and intercourse. All taxes which contain restrictions to trade, commerce and intercourse, discriminatory or nondiscriminatory infringe Article 301 unless they are saved under Article 302 - 304. Question NO.2 and Question No.3 The compensatory tax theory as judicially evolved in Automobile Transport is not compatible to constitutional scheme as delineated by Part XIII of the Constitution. The Automobile Transport case in so far as it lays down that compensatory taxes are out of the reach of Article 301 cannot be approved. The nature and content of taxation at best may throw light on the aspect as to whether it contains restriction on freedom of trade, commerce and intercourse. The compensatory tax theory being not compatible with the Constitution, it is not necessary to answer Question No.3. Question No.4 To find out as to whether Entry Tax levied by different States in the present batch of cases violates Article 301 of the Constitution, each statute has to be looked into and examined as per our discussions and conclusions as above. A law made by State Legislature complying clause(a) of Article 304 and not cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of India as per the Constitutional scheme. The Constitution contains large number of provisions including Article 304(b) where a State legislation is subject to Presidential sanction which provisions are in accordance with the Constitutional scheme and does not affect the separation of power between the Legislature and judiciary. Article 304(b) enables the State Legislature to frame legislations containing restriction on freedom of trade, commerce and intercourse after routing the legislation through proviso to Article 304(b). The question of judicial review arises only when there is challenge to such legislation. Judicial review of such legislation in no manner affects the separation of power. (9) The compensatory tax theory as propounded in Automobile Transport is not compatible with the Constitutional scheme as delineated in the Part XIII of the Constitution. Framers of the Constitution have provided for all exceptions under which freedom of trade, commerce and intercourse guaranteed under Article 301 can be overridden, the compensatory tax not being included as one of the exceptions, the same cannot be added as an exception by any judicial interpretation. The compensatory ..... X X X X Extracts X X X X X X X X Extracts X X X X
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