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TMI Blog2016 (11) TMI 545X X X X Extracts X X X X X X X X Extracts X X X X ..... he levies in the present case indeed satisfy this test is left to be determined by the regular benches hearing the matters. States are well within their right to design their fiscal legislations to ensure that the tax burden on goods imported from other States and goods produced within the State fall equally. Such measures if taken would not contravene Article 304(a) of the Constitution. The question whether the levies in the present case indeed satisfy this test is left to be determined by the regular benches hearing the matters. The questions whether the entire State can be notified as a local area and whether entry tax can be levied on goods entering the landmass of India from another country are left open to be determined in appropriate proceedings. - T.S. THAKUR, A.K. SIKRI, S.A. BOBDE, SHIVA KIRTI SINGH, N.V. RAMANA, R. BANUMATHI, A.M. KHANWILKAR, ASHOK BHUSHAN, DR D Y CHANDRACHUD, JJ. C.A. NO. 6383-6421/1997, C.A. NO. 6422-6435/1997, C.A. NO. 6436/1997, C.A. NO. 6437-6440/1997 , C.A. NO. 3381-3400/1998, C.A. NO. 4651/1998, C.A. NO. 918/1999, C.A. NO. 2769/2000, C.A. NO. 4471/2000, C.A. NO. 3314/2001, C.A. NO. 3454/2002, C.A. NO. 3455/2002, C.A. NO. 3456-3459/2002, C.A. NO. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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X X X X Extracts X X X X X X X X Extracts X X X X ..... SLP(C) NO. 14269/2011, SLP(C) NO. 14342/2011, SLP(C) NO. 18858/2011, Page 9 9 SLP(C) NO. 18859/2011, SLP(C) NO. 18862/2011, SLP(C) NO. 18863/2011, SLP(C) NO. 18864/2011, SLP(C) NO. 33344/2011, W.P. (C) NO. 278/2012, W.P.(C) NO. 290/2012, C.A. NO. 4210/2012, C.A. NO. 5860/2012, C.A. NO. 5861/2012, C.A. NO. 8275/2012, C.A. NO. 8278/2012, C.A. NO. 8280/2012, C.A. NO. 8283/2012, C.A. NO. 8284/2012, C.A. NO. 8286/2012, C.A. NO. 8290/2012, C.A. NO. 8292/2012, C.A. NO. 8294/2012, C.A. NO. 8295/2012, C.A. NO. 8296/2012, C.A. NO. 8297/2012, C.A. NO. 8298/2012, C.A. NO. 8299/2012, C.A. NO. 8300/2012, C.A. NO. 8301/2012, C.A. NO. 8302/2012, C.A. NO. 8303/2012, C.A. NO. 8304/2012, C.A. NO. 8305/2012, C.A. NO. 8306/2012, C.A. NO. 8307/2012, C.A. NO. 8308/2012, C.A. NO. 8309/2012, C.A. NO. 8311/2012, C.A. NO. 8312/2012, C.A. NO. 8313/2012, C.A. NO. 8314/2012, C.A. NO. 8315/2012, C.A. NO. 8316/2012, SLP(C) NO. 8333/2012, C.A. NO. 8734/2012, C.A. NO. 8735/2012, C.A. NO. 8736/2012, C.A. NO. 8737/2012, C.A. NO. 8738/2012, C.A. NO. 8739/2012, C.A. NO. 8740/2012, C.A. NO. 8741/2012, C.A. NO. 8744/2012, C.A. NO. 8745/2012, C.A. NO. 8832/2012, C.A. NO. 8833/2012, C.A. NO. 8834/2012, C.A. NO. 8836/2012, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1/2015, SLP(C) NO. 684-686/2015, SLP(C) NO. 693-694/2015, SLP(C) NO. 712/2015, SLP(C) NO. 1270/2015, SLP(C) NO. 1424/2015, SLP(C) NO. 1596/2015, SLP(C) NO. 1631/2015, SLP(C) NO. 1714/2015, SLP(C) NO. 1851-1852/2015, SLP(C) NO. 1943-2001/2015, SLP(C) NO. 2038/2015, SLP(C) NO. 2054/2015, SLP(C) NO. 2063-2065/2015, SLP(C) NO. 2081/2015, SLP(C) NO. 91/2015, SLP(C) NO. 4557/2015, SLP(C) NO. 4581/2015, SLP(C) NO. 4657/2015, SLP(C) NO. 5046/2015, SLP(C) NO. 5107/2015, SLP(C) NO. 5131/2015, SLP(C) NO. 5143/2015, SLP(C) NO. 5375/2015, SLP(C) NO. 5447/2015, SLP(C) NO. 5610/2015, SLP(C) NO. 5966/2015, SLP(C) NO. 6086/2015, SLP(C) NO. 6143/2015, SLP(C) NO. 6158/2015, SLP(C) NO. 6240-6243/2015, SLP(C) NO. 6565/2015, SLP(C) NO. 6575/2015, SLP(C) NO. 6631/2015, SLP(C) NO. 4600/2015, SLP(C) NO. 5007/2015, SLP(C) NO. 6728/2015, SLP(C) NO. 6754-6755/2015, SLP(C) NO. 6823/2015, SLP(C) NO. 6907/2015, SLP(C) NO. 6909-6910/2015, SLP(C) NO. 6939/2015, SLP(C) NO. 6956/2015, SLP(C) NO. 4386/2015, SLP(C) NO. 7319/2015, SLP(C) NO. 7957-7958/2015, SLP(C) NO. 8089/2015, SLP(C) NO. 2483/2015, SLP(C) NO. 8248/2015, SLP(C) NO. 8325/2015, SLP(C) NO. 8350-8351/2015, SLP(C) NO. 8527/2015, SLP(C) NO. 9585/2015, SLP(C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NO. 30594/2009, SLP(C) NO. 2636/2015, SLP(C) NO. 2680/2015, SLP(C) NO. 2952/2015, SLP(C) NO. 2641/2015, SLP(C) NO. 2588/2015, SLP(C) NO. 2928/2015, SLP(C) NO. 2737/2015, SLP(C) NO. 2682/2015, SLP(C) NO. 8197-8198/2015, SLP(C) NO. 4197/2015, C.A. NO. 5538/2016, C.A. NO. 5533/2016, SLP(C) NO. 14539-14541/2016, SLP(C) NO. 16820/2016, C.A. NO. 4642-4643/2016 For The Parties : Mr. A.T.M.Sampath, Adv., Mr. K.V.Mohan, Adv., Mr. G.Prakash, Adv., Mr. K.R.Sasiprabhu, Adv., Mr. Rajan Narain, Adv., Mr. L.R.Singh, Adv., M/s. S.Narain CO., Mr. Milind Kumar, Adv., MS. Priya Puri, Adv., Mr. Rajesh Kumar, Adv., Ms. Suruchi Aggarwal, Adv., Ms. Indira Sawhney, Adv., Mr. Ejaz Maqbool, Adv., Mr. Nikhil Nayyar, Adv., Mr. Vishwajit Singh, Adv., Ms. Kamakshi S.Mehwal, Adv., Mr. K.L.Janjani, Adv., Mr. Praveen Kumar, Adv., Mr. Himinder Lal, Adv., Mr. Balaji Srinivasan, Adv., Ms. Kamini Jaiswal, Adv., Mr. B.Lakshmi Menon, Adv., Mr. Romy Chaccko, Adv., Mr. R.P.Goyal, Adv., Mr. Sunil Kumar Jain, Adv., Mr. Vinoo Bhagat, Adv., Mr. P.K.Manohar, Adv., Mr. Devashish Bharukha, Adv., Mr. P.N.Puri, Adv., Mr. Tarun Johri, Adv., M/s. Khaitan CO., MS. Shirin Khajuria, Adv., Mr. Surya Kant, Adv., M/s.ArputhamAruna CO., Mr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Mr. Rajiv Shankar Dwivedi, Adv., Mr. P.D.Tyagi, Adv., Mr. Nirmeesh Dube, Adv., Dr. Vinod Kumar Tewary, Adv., Ms. K.Sarada Devi, Adv., Mr. Bijan Kumar Ghosh, Adv., Mr. Raj Singh Rana, Adv., Ms. Manju Jaitley, Adv., Mr. Rabin Majumdar, Adv., Mr. Ashwarya Sinha, Adv., Mr. Ajay Kumar, Adv., M/s. Venkat Palwal Law Associates, Adv., Mr. Rahul Kaushik, Adv., Mr. Ankur Mital, Adv., Mr. Merusagar Samantaray, Adv., Mr. Farrukh Rasheed, Adv., Ms. Garima Prassha, Adv., Mr. Vikas Singh Jangra, Adv., Mr. D.K.Sinha, Adv., Mr. Ajay Choudhary, Adv., Mr. Sudarshan Singh Rawat, Adv., Mr. Vishwa Pal Singh, Adv., Mr. Kush Chaturvedi, Adv., Mr. Amarjit Singh Bedi, Adv., Mr. Pawanshree Agrawal, Adv., Mr. Brajesh Kumar, Adv., Mr. Sudhansu Palo, Adv., Mr. Anuj Bhandari, Adv., Mr. R.Nedumaran, Adv., Mr. S.Thananjayan, Adv., Mr. M.P.Vinod, Adv., Ms. Baby Krishnan, Adv., Mr. B.V.Deepak, Adv., Mr. Rajiv Mehta, Adv., Mr. M.T.George, Adv., Mr. R.Satish, Adv., Mr. K.R.Nambiar, Adv., Mr. C.N.Sree Kumar, Adv., Mr. Sushil Kumar Jain, Adv., Mr. Aruneshwar Gupta, Adv., M/s. J.S.Wad CO., Ms. Sunita Sharma, Adv., Mr. Praveen Kumar, Adv., Mr. Shrish Kumar Misra, Adv., Mr. Rahul Prasanna Dave, Adv., Mr. Shakil Ahmed Sye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .K. Sucharita,Adv., Mr. P.K. Manohar,Adv., Mr. M.T. George,Adv., Mr. R. Chandrachud,Adv., Mr. Abhisht Kumar,Adv., Mr. Neeraj Sharma,Adv., Mr. Akshat Shrivastava,Adv., M/s. Corporate Law Group Mr. Anil Shrivastav,Adv., Mr. P.V. Yogeswaran, Adv., Mr. B.S. Banthia, Adv., Mr. Rajesh Prasad Singh, Adv., Ms. Anita Shenoy, Adv., Mr. Ranjith K.C., Adv., Ms. Shally Bhasin, Adv., Ms. Bhaskar Y. Kulkarni, Adv., Mr. Aniruddha P. Mayee, Adv., Mr. Dharmendra Kumar Sinha, Adv., M/s.Lawyers Knit CO., Mr. Ravindra Bana, Adv., Mr. Amit Pawan, Adv., Mr. Dheeraj Nair, Adv., Mr. C.S.N. Mohan Rao, Adv., Mr. D.S. Chauhan, Adv., Mr. Ambhoj Kumar Sinha, Adv., Mr. A. Radhakrishnan, Adv., Ms. Meera Mathur, Adv., Mr. Rakesh K. Sharma, Adv., Mr. G.N. Reddy, Adv., Mr. P.A. Noor Mohamed, Adv., Mr. Nitin Bharadwaj, Adv., M/s.K.J. John CO.,, Adv., Mr. Irshad Ahmed, Adv., Mr. Rabin Majumdar, Adv., Mr. C. Balakrishna, Adv., Mr. Kaushik Poddar, Adv., Ms. Rashmi Singh, Adv., Mr. Ajay Kumar, Adv., Mr. Adarsh Upadhyaya, Adv., Mr. S.K. Verma, Adv., Mr. N. Ganapathy, Adv., Mr. Abhinav Mukerji, Adv., Ms. Archana Pathak Dave, Adv., Mr. Sridhar Pottaraju, Adv., Mr. Ardhendumauli Kumar Prasad, Adv., Ms. Patibha Jain, Adv., Ms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... K. Sikri and A.M. Khanwilkar, JJ.) 1. These appeals bring to fore for our determination vexed questions touching the interpretation of Articles 301 to 307 comprising Part XIII of the Constitution which have been the subject matter of several Constitution Bench decisions of this Court, all but one, decided by majority. The questions assume in a great measure considerable public importance not only because the same deal with the powers of the State legislatures to levy taxes but also because any pronouncement of this Court is bound to impact the federal character of our polity and the Centre-State relationship in legislative and fiscal matters. There is no gainsaying that it is the importance of the questions that lies at the bottom of the present reference to a larger Bench made in the following circumstances. 2. In exercise of their legislative powers under Entry 52 of List II of the Seventh Schedule to the Constitution several States in the country, at least 14 of whom are parties to these proceedings, have enacted laws that provide for levy of a tax on the entry of goods into local areas comprising the States . The constitutional validity of these levies was questioned in differe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of providing or adding to the trading facilities either immediately or in future provided the quantum of tax sought to be generated is based on a reasonable relation to the actual or projected expenditure on the cost of the service or facility. 26. The decisions in Bhagatram and Bihar Chamber of Commerce now say that even if the purpose of imposition of the tax is not merely to confer a special advantage on the traders but to benefit the public in general including the traders, that levy can still be considered to be compensatory. According to this view, an indirect or incidental benefit to traders by reason of stepping up the developmental activities in various local areas of the State can be legitimately brought within the concept of compensatory tax, the nexus between the tax known as compensatory tax and the trading facilities not being necessarily either direct or specific. 27. Since the concept of compensatory tax has been judicially evolved as an exception to the provisions of Article 301 and as the parameters of this judicial concept are blurred, particularly by reason of the decisions in Bhagatram and Bihar Chamber of Commerce we are of the view that the interpretation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... satory tax, the High Courts had not examined the same as they had considered themselves bound by the view taken in Bhagatram and Bihar Chamber of Commerce cases (supra). The Court further found that in the absence of relevant data before the High Courts, the issue whether the levies were compensatory could not have been considered and accordingly referred the matter back to the High Courts to decide the said aspect. The appeals were, in the meantime, adjourned to await the finding from the High Courts on the question whether the levies were indeed compensatory in nature having regard to the decisions of this Court in Atiabari and Automobile Transport cases (supra). 6. The matters were accordingly taken up by the High Courts, after the remand, who came to the conclusion that the impugned levies were neither compensatory in character nor was the procedure stipulated by Article 304(b) and the proviso to the same followed. The levies were on that basis held to be in violation of Article 301 being an impediment to free trade, commerce and intercourse and accordingly struck down. The High Courts of Assam, Arunachal Pradesh, Jharkhand, Kerala and Tamil Nadu struck down the levies imposed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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, Schedule VII 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 (standstill) after the movement of the goods ceases in the local area ? (6) Whether the entry tax can be termed a tax on the movement of goods when there is no bar to the entry of goods at the State border or when it passes through a local area within which they are not sold, used or consumed? (7) Whether interpretation of Articles 301 to 304 in the context of tax on vehicles (commonly known as transport ) cases in Atiabari case and Automobile Transport case apply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 impugned as violative of Article 301 should be judged only in the light of the test of non-discrimination? Does Article 303 circumscribe Article 301? Whether internal goods would come under Article 304(b) and external goods under Article 304(a)? Whether per se test propounded in Atiabari case should or should not be rejected? Whether tax simpliciter constitutes a restriction under Part XIII of the Constitution? Whether the word restriction in Article 304(b) includes tax laws? Is taxation justiciable? Whether the working test laid down in Atiabari makes a tax law per se violative of Article 301? Interrelationship between Article 19(1)(g) and Article 301 of the Constitution? These are some of the questions which warrant reconsideration of the judgments in Atiabari Tea Co. Ltd. and Automobile Transport (Rajasthan) Ltd. by a larger Bench of this Court. 9. At the hearing before us learned counsel fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing more than one, it would be legitimate for the Court to go beyond the literal confines of the provision and to call in aid other well recognised rules of construction such as legislative history, the basic scheme and framework of the statute as a whole, the object sought to be achieved and the consequence flowing from the adoption of one in preference to the other possible interpretation observed this Court in Chief Justice of Andhra Pradesh and others. v. L.V. A. Dixitulu and others (1979) 2 SCC 34 . Reference may also be made to the decision of this Court in Kesavananda Bharati v. State of Kerala (1973) 4 SCC 225 where this Court quoted with approval Lord Greene s observations in the following words: 56. It is not right to construe words in vacuum and then insert the meaning into an article. Lord Green observed in Bidie v. General Accident, Fire and Life Assurance Corporation [1948] 2 All E.R. 995: The first thing one has to do, I venture to think, in construing words in a section of an Act of Parliament is not to take those words in vacuo, so to speak, and attribute to them what is sometimes called their natural or ordinary meaning. Few words in the English language have a na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er to Question No.1 can be found only if we constantly keep those fundamentals in mind while attempting to resolve what has been found to be somewhat difficult to resolve. For instance, whether levy of a tax is an attribute of sovereignty and if so whether Article 246 of the Constitution recognises the sovereign power of the State to make laws including the power to levy taxes on subjects enumerated in List II of the Seventh Schedule of the Constitution is an important dimension that must be addressed as a part of the interpretative exercise. So also, we must examine whether power to tax if held to be subservient to Article 301, shall have the effect of denuding the States of their sovereignty in the matter of levy of taxes and in the process affect the federal structure of the polity envisaged by the Constitution. If levy of taxes is always presumed to be reasonable and in public interest, whether such levies could be said to be within the contemplation of Article 304(b) when it provided for imposition of reasonable restrictions in public interest is yet another aspect that must be explored especially when the reasonableness of any restriction within the comprehension of Article 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AIR 1962 SC 1563) where this Court observed: . 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. In that sense, it is not the function of the court to enquire whether the power of taxation has been reasonably exercised either in respect of the amount taxed or in respect of the property which is made the object of the tax. Article 265 of the Constitution provides that no tax shall be levied or collected, except by authority of law; and so, for deciding whether a tax has been validly levied or not, it would be necessary first to enquire whether the legislature which passes the Act was competent to pass it or not. (Emphasis supplied) 16. Reference may also be made to Dena Bank v. Bhikhabhai Prabhudas Parekh Co. (2000) 5 SCC 694 where this Court held: 8. The principle of priority of government debts is founded on the rule of necessity a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , cess or fees. (iv) As an incident of sovereignty and in the nature of compulsory exaction, a liability founded on principle of contract cannot be a tax in its technical sense as an impost, general, local or special. (Emphasis Supplied) Power of Taxation under the Constitution: 18. We shall presently turn to the Constitutional limitations on the sovereign power to tax but before we do so we need to point out that while the power to levy taxes is an attribute of sovereignty, exercise of that power is controlled by the Constitution. This is evident from the provisions of Article 265 which forbids levy or recovery of any tax except by the authority of law. It reads: 265. Taxes not to be imposed save by authority of law No tax shall be levied or collected except by authority of law. The authority of law referred to above must be traceable to a provision in the Constitution especially where the legislative powers are shared by the Centre and the States as is the case with our Constitution which provides for what has been described as quasi federal system of governance. The source of power to enact laws is contained in Articles 245 and 246 of the Constitution which read: 245. Extent of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re be treated to be fairly well settled. Reference may also be made to the decision of this Court in State of Kerala and ors. v. Mar Appraem Kuri Co. Ltd. and Anr. (2012) 7 SCC 106 where this Court explained the sweep and purport of Articles 245 and 246: 35. Article 245 deals with extent of laws made by Parliament and by the legislatures of States. The verb made , in past tense, finds place in the Head Note to Article 245. The verb make , in the present tense, exists in Article 245(1) whereas the verb made , in the past tense, finds place in Article 245(2). While the legislative power is derived from 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. 36. Article 246 deals with the subject-matter of laws made by Parliament and by the legislatures of States. The verb made once agai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h gives the State sufficient authority to enact any law subject to the limitations of the Constitution to discharge its functions. Hence, the Indian Constitution as a sovereign State has power to legislate on all branches except to the limitation as to the division of powers between the Centre and the States and also subject to the fundamental rights guaranteed under the Constitution. The Indian States, between the Centre and the States, has sovereign power. The sovereign power is plenary and inherent in every sovereign State to do all things which promote the health, peace, morals, education and good order of the people. Sovereignty is difficult to define. This power of sovereignty is, however, subject to constitutional limitations. This power, according to some constitutional authorities, is to the public what necessity is to the individual. Right to tax or levy impost must be in accordance with the provisions of the Constitution. 21. What then are the Constitutional limitations on the power of the State legislatures to levy taxes or for that matter enact legislations in the field reserved for them under the relevant entries of List II and III of the Seventh Schedule. The first a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 285 exempts the property of the Union from all taxes imposed by the States save in so far as the Parliament may by law provide. Article 286 places yet another Constitutional limitation on the State s power to collect any levy that imposes or authorises the imposition of a tax on the sale or purchase of goods where such sale or purchase takes place outside the State or in the course of import of the goods into or export of the goods outside the territory of India. It also makes any law of a State imposing tax on sale or purchase of goods of special importance in inter State trade or commerce or a tax on the sale or purchase of goods being a tax of the nature referred to in the relevant sub-clauses of clause 29(A) of Article 366 subject to such restrictions and conditions as to the system of levy, rates and other incidents of tax as the Parliament may by law specify. 26. Article 287 places a Constitutional limitation on the State s legislative power to enact laws in so far as imposition of tax on consumption or sale of electricity consumed by the Government of India or sold to the Government of India for consumption by the Government or for consumption of the construction, maintenan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the Compensatory Tax Theory propounded by the Seven Judges Bench of this Court in Automobile case (supra) had no legal basis or constitutional sanction and was neither acceptable nor workable. That is particularly so because the State legislatures had taken umbrage under the Compensatory Tax Theory and declared the fiscal levies imposed by them to be compensatory in character and claimed the same to be outside the mischief of Article 301 and consequently immune from any challenge on the ground that these taxes and levies were unreasonable restrictions on the right to free trade and commerce. The States who have enacted the laws providing for levy of taxes on the entry of goods into a local area within the meaning of Entry 52 of List II have, on the other hand similarly contended that the Compensatory Tax Theory is bereft of any legal basis and that the decision in Atiabari and Automobile cases (supra) need to be revisited to restore and protect the sovereign power of legislation of the States and the Federal character of our polity. Suffice it to say that except a feeble attempt made by some Counsel, there has been a general consensus that the compensatory tax theory deserves to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n itself laid down the fetters or limitations on this power, e.g., in Article 303 or article 286(2). But unless and until the Court came to the conclusion that the Constitution itself had expressly prohibited legislation on the subject either absolutely or conditionally the power of the State Legislature to enact legislation within its legislative competence was plenary. Once the topic of legislation was comprised within any of the entries in the Lists II III of the Seventh Schedule to the Constitution the fetter or limitation on such legislative power had to be found within the Constitution itself and if there was no such fetter or limitation to be found there the State Legislature had full competence to enact the impugned Act no matter whether such enactment was contrary to the guarantee given, or the obligation undertaken by the Dominion Government or the Province of Bombay or even the State of Bombay. 29. Again in Bansidhar s case ( supra ) this Court reiterated the legal position in the following words: 8 It is well-established that Parliament or the State Legislatures are competent to enact a law altering the terms and conditions of a previous contract or of a grant under whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e can be spelt out of the terms of clause 5 of the Letters of Guarantee given by the Dominion Government to the Rulers of States subsequent to the agreements of Merger, which guaranteed, inter alia, the continuance of Jagirs in the merged States . This principle also underlies the recent decision of this Court in Maharaja Shree Umaid Mills Ltd. v. Union of India [1963 Supp 2 SCR 515] in which it was pointed out that there is nothing in Art. 295 of the Constitution which prohibits Parliament from enacting a law altering the terms. and conditions of a contract or of a grant under which the liability of the Government of India arises . (Emphasis Supplied) 30. One other fundamental aspect which must always be kept in mind while interpreting the provisions of the Constitution is the federal structure envisaged by it. Whether or not the Constitution of India is truly federal in character has been the subject matter of debate not only in the Constituent Assembly but also in Courts for over 60 years. The character of the Constitutional scheme described in the Constituent Assembly Debates was that there were doubts expressed whether the Constitution really provided a federal structure in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perhaps partly theoretical but one which has a validity so far as the average man in this country is concerned. Are we framing a unitary Constitution? Is this Constitution centralising power in Delhi? Is there any way provided by means of which the position of people in various areas could be safeguarded, their voices heard in regard to matters of their local administration? I think it is a very big charge to make that this Constitution is not a federal Constitution, and that it is a unitary one. We should not forget that this question that the Indian Constitution should be a federal one has been settled by our Leader who is no more with us, in the Round Table Conference in London eighteen years back. I would ask my honourable friend to apply a very simple test so far as this Constitution is concerned to find out whether it is federal or not. The simple definition I have got from the German school of political philosophy is that the first criterion is that the State must exercise compulsive power in the enforcement of a given political order, the second is that these powers must be regularly exercised over all the inhabitants of a given territory, and the third is the most importan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m of Government. (3) Secular character of the Constitution. (4) Separation of powers between the legislature, the executive and the judiciary; (5) Federal character of the Constitution. 293. The above structure is built on the basic foundation i.e. the dignity and freedom of the individual. This is of supreme importance. This cannot by any form of amendment be destroyed. 294. The above foundation and the above basic features are easily discernible not only from the preamble but the whole scheme of the Constitution, which I have already discussed. To the same effect are the views expressed by Shelat and Grover JJ. who declared that the federal character of the Constitution is a part of its basic structure. 33. In S.R. Bommai v. Union of India 1994 (3) SCC 1 , this Court had yet another occasion to examine whether the Constitution was federal in nature. Speaking for himself and Justice Kuldeep Singh, Sawant J. while referring to H.M Seervai s commentary on Constitutional Law of India held that the principle of federalism has not been watered down so as to make the Constitution unitary in character. The presence in the Constitution exclusive legislative powers conferred on the State a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etermine whether, in spite of the provisions of the Constitution referred to above, our Constitution is federal, quasi-federal or unitary in nature. It is not the theoretical label given to the Constitution but the practical implications of the provisions of the Constitution which are of importance to decide the question that arises in the present context, viz., whether the powers under Article 356(1) can be exercised by the President arbitrarily and unmindful of its consequences to the governance in the State concerned. So long as the States are not mere administrative units but in their own right constitutional potentates with the same paraphernalia as the Union, and with independent Legislature and the Executive constituted by the same process as the Union, whatever the bias in favour of the Centre, it cannot be argued that merely because (and assuming it is correct) the Constitution is labelled unitary or quasi-federal or a mixture of federal and unitary structure, the President has unrestricted power of issuing Proclamation under Article 356(1). If the Presidential powers under the said provision are subject to judicial review within the limits discussed above, those limitatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd independent of each other . 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 which are desirous of union, but not prepared to merge their individuality in a unity. This supremacy of the constitution is protected by the authority of an independent judicial body to act as the interpreter of a scheme of distribution of powers. Nor is any change possible in the Constitution by the ordinary process of federal or State legislation (2). Thus the dominant characteristic of the British Constitution cannot be claimed by a Federal Constitution like ours. 37. Before we turn to the provisions of Articles 301 to 307 comprising Part XIII of the Constitution, we need to also bear in mind the historical backdrop in which that part of the Constitution was enacted. While doing so we must at the threshold acknowledge that the historical perspective of Part XIII has been explored several times during the past in several pronouncements of this Court. The exposit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dition, it still remains the framework on which the present Constitution is built, and that the provisions of the Constitution must accordingly be read in the light of the provisions of the Government of India Act. (Emphasis supplied) 39. Three years later came the Constitution Bench decision of this Court in Atiabari Tea Company Ltd. case (supra) . The petitioner in that case questioned the constitutional validity of Assam Taxation (on Goods Carried by Roads or Inland Waterways) Act, (Assam Act XIII of 1954), before the High Court. The Writ Petition having failed, the matter was brought up in appeal before this Court which was heard alongwith several petitions filed under Article 32 of the Constitution of India. The impugned legislation levied taxes on certain goods carried by road and inland waterways in the State of Assam. The levy under the legislation was challenged primarily on the ground that the same was ultra vires of the Constitution inter aila because of their repugnance with the provision of Article 301 of the Constitution. This Court by a majority struck down the Constitutional validity of the enactment holding that the impugned levy operated directly and immediately a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce to entries in the Provincial Legislative List relating to trade and commerce within the Province and to production, supply and distribution of commodities. That section dealt with prohibitions or restrictions in respect of import into or export from a Province, of goods generally. It also dealt with the power to impose taxes etc. and prohibited discrimination against goods manufactured or produced outside a Province or goods produced in different localities. Part XIII of the Constitution has introduced all those prohibitions, not only in respect of State Legislatures, but of Parliament also. . 11. In this connection it has got to be remembered that before the commencement of the Constitution about two-thirds of India was directly under British rule and was called British India and the remaining about one-third was being directly ruled by the Princes and was known as Native States . There were a large number of them with varying degrees of sovereignty vested in them. Those rulers had, broadly speaking, the trappings of a Sovereign State with power to impose taxes and to regulate the flow of trade, commerce and intercourse. It is a notorious fact that many of them had erected trad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f several Indian States. A large number of these States claimed sovereign rights within the limitations imposed by the paramount power in that behalf, and they purported to exercise their legislative power of imposing taxes in respect of trade and commerce which inevitably led to the erection of customs barriers between themselves and the rest of India. In the matter of such barriers British India was governed by the provisions of Section 297 of the Constitution Act, 1935. To the provisions of this section we will have occasion later to refer during the course of this judgment. Thus, prior to 1950 the flow of trade and commerce was impeded at several points which constituted the boundaries of Indian States. After India attained political freedom in 1947 and before the Constitution was adopted the historical process of the merger and integration of the several Indian States with the rest of the country was speedily accomplished with the result that when the Constitution was first passed the territories 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. This merger or integration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifferences of language, religion etc. Some of the Provinces were economically more developed than the others. Even inside the same Province, there were under developed, developed and highly developed areas from the point of view of industries, communications etc. The problem of economic integration with which the Constitution-makers were faced was a problem with many facets. Two questions, however, stood out; one question was how to achieve a federal, economic and fiscal integration, so that economic policies affecting the interests of India as a whole could be carried out without putting an ever-increasing strain on the unity of India, particularly in the context of a developing economy. The second question was how to foster the development of areas which were under-developed without creating too many preferential or discriminative barriers. Besides the Provinces, there were the Indian States also known as Indian India. After India attained political freedom in 1947 and before the Constitution was adopted, the process of merger and integration of the- Indian States with the rest of the country had been accomplished so that when the Constitution was first passed the territory of In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he fields of taxation were demarcated, and those for the Provinces were chosen with special care to make these units self-supporting as far as possible with enough to spare for nation-building activities . In this arrangement, the door was open for the Indian States to join on the same basis and on terms of equality. The most important fact was that unlike the American and the Canadian Constitutions the commerce power was divided between the Centre and the Provinces as the Entries quoted by us clearly show. The commerce power of the Provinces was exercisable within the Provinces. The fetter on the commercial power of the Provinces was placed by Section 297. This was in two directions. Clause (a) of sub-section (1) banned restrictions at the barriers of the Provinces on the entry and export of goods, and clause (b) prohibited discrimination in taxing goods between goods manufactured and produced in the Province as against goods not so manufactured or produced and local discriminations . (Emphasis supplied) 43. In the opinion of Hidayatullah J., as his Lordship then was, several pitfalls existed in the 1935 Act regarding trade and commerce which were sought to be remedied by the fram ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... people took a new pride in Governments that were now in a sense theirs. (The Constitutional Problem in India, part III p. 40). 44. The historical backdrop painted by the decisions of this Court referred to above has not been challenged on a question of fact. Inferences drawn from the same may have, as noticed earlier, varied depending on the individual perspective of the Judges about the said backdrop. The common thread that runs through the historical narratives in the pronouncements of this Court however is discernible and may be briefly summed-up at this stage. The first of these threads that runs through the historical perspective is the fact that before commencement of the Constitution nearly 2/3rd of the country was ruled by the British while the remaining 1/3rd was ruled by the Princes also known as native States that enjoyed varying degrees of sovereignty over their respective territories. These rulers had the power to impose taxes and to regulate the flow of trade, commerce and intercourse. Some of them had erected trade barriers thereby impeding free flow of trade, commerce and intercourse. With the merger of these Princely States into the dominion of India to constitute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the Draft Report of 10th, 14th and 15th April, 1947 in relation to Clause 13 suggested that it must be made clear that: (1) goods from other parts of India than in the units concerned coming into the units cannot escape duties and taxes to which the goods produced in the units in themselves are subject. (2) It must also be open to the unit in an emergency to place restrictions on the rights declared by the clause. 47. The above suggestions were accepted and it was modified and incorporated as Clause 14 in the following words: 14. (1) Subject 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 a unit to one unit over another. [N.B. A proviso will have to be added to meet the difficulty poin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of parity. But our friends want to go a little further and say that the right to impose taxes, or transit duty or some other kind of duty must be given to the units. That I am afraid, will be a negation of the clause. There are certain rates and duties existing in Indian States which for budgetary and other reasons cannot now be extinguished immediately. It may be possible to extinguish them over a period of time, by agreement, but not immediately. C. Rajagopalachari: If the States everywhere can impose taxes and duties for revenue, cannot the provinces also do so? Alladi Krishnaswami Ayyar: We do not give a carte blanche to the States. It has been pointed out that certain condition of things obtain at present in the States, and K.M. Panikkar: Let me explain the position. The position with regard to the internal customs in the States is complicated. In a large number of States these customs or duties do not exist. For example for the whole of the Punjab States there is no right for internal customs. For Hyderabad they have the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 or a 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 only thing to be considered is how to give effect to the suggestion made in para 6 of the President s letter which we have received through the chairman. Should we append a note to the effect that the Constituent Assembly may consider how best to give effect to this clause in relation to the States or shall we put up a draft. If we are not going to put up a draft, then the matter is simple enough. 49. The Advisory Committee accepted the recommendation of the Sub-Committee in relation to Clause 14 with one change that the sub-clause providing for central regulation of trade by or with non-citizens was dropped as being vague and unnecessary. The Advisory Committee in its report submitted on 23rd April, 1947 incorporated 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 Octob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Rao; the Framing of India s Constitution, Volume-IV, Page 329] 53. The note in support of the proposed clause (b) to Article 244, however, clearly suggests that restrictions referred to in clause (b) were meant to be restrictions other than by way of taxation. The explanatory note which was appended by Sir B.N. Rau was in the following words: Note: During a period of depression owing to destruction by flood or otherwise of crops in any particular State, it may be necessary for the State to impose restrictions on the export of any crop from such State in the public interests. Similarly on the outbreak of any epidemic disease, like plague, in a State it may be necessary for a neighbouring State to impose restrictions on the freedom of intercourse between the inhabitants of that State with the inhabitants of such neighbouring State. Clause (b) of Article 244 is intended to give power to the State to impose such restrictions. 54. On 8th of September, 1949, Dr. B.R. Ambedkar 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 A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he counsel appearing for the parties for it was candidly accepted that the same was an extreme view that was legally unsupportable. What was all the same argued on behalf of the dealers/assessees was that the majority view that propounded the test of direct and immediate effect on free trade, commerce and intercourse was the correct view. Reliance, in particular, was placed by learned counsel for the dealers/assessees upon the following passages appearing in the majority judgment authored by Gajendragadkar, J. to contend that the same propounded the correct legal position: 50. Let us now revert to Article 301 and ascertain the width and amplitude of its scope. On a careful examination of the relevant provisions of Part XIII as a whole as well as the principle of economic unity which it is intended to safeguard by making the said provisions, 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t irrelevant to remember in this connection that the Article we are construing imposes a constitutional limitation on the power of the Parliament and State Legislatures to levy taxes, and generally, but for such 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. 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt in the matter of trade, commerce and intercourse. Instead of being such impediments or restraints, they may, on the other hand, provide the wherewithals to improve different kinds of means of transport, for example, in cane growing areas, unless there are good roads, facility for transport of sugarcane from sugarcane fields to sugar mills may be wholly lacking or insufficient. In order to make new roads as also to improve old ones, cess on the grower of cane or others interested in the transport of this commodity has to be imposed, and has been known in some parts of India to have been imposed at a certain rate per md. or ton of sugarcane transported to sugar factories. Such an imposition is a tax on transport of sugarcane from one place to another, either intra-State or inter-State. It is the tax thus realised that makes it feasible for opening new means of communication or for improving old ones. It cannot, therefore, be said that taxation in every 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 lev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venting 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 Constitutionmakers to abolish by Part XIII. The objections against the contention that taxation was included within the prohibition contained in Part XIII may thus be summarised: (1) Taxation, as such, always implies that it is in public interest. Hence, it would be outside particular restrictions, which may be characterised 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 movement of goods and passengers would be rendered ineffective, if not otiose, if it were held that taxation simpliciter is within the term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned the inhibition that such taxes shall not be permitted to have the effect of impeding the free flow of goods and commodities. Sinha, CJ. concluded as follows: 18. .. Thus, on a fair construction of the provisions of Part XIII, the following propositions emerge: (1) trade, commerce, and intercourse throughout the territory of India are not absolutely free, but are subject to certain powers of legislation by Parliament or the Legislature of a State; (2) the freedom declared by Article 301 does not mean freedom from taxation simpliciter, but does mean freedom from taxation which has the effect of directly impeding the free flow of trade, commerce and intercourse; (3) the freedom envisaged in Article 301 is subject to non-discriminatory restrictions imposed by Parliament in public interest (Article 302); (4) even discriminatory or preferential legislation may be made by Parliament for the purpose of dealing with an emergency like a scarcity of goods in any part of India [Article 303(2)]; (5) reasonable restrictions may be imposed by the Legislature of a State in the public interest [Article 304(b)]; (6) non-discriminatory taxes may be imposed by the Legislature of a State on goods i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... flow of trade and commerce. The reason is that these rules cannot fairly be said to impose a burden on a trader or deter him from trading: it would be absurd, for example, to suggest that freedom of trade is impaired or hindered by laws which require a motor vehicle to keep to the left of the road and not drive in a manner dangerous to the public. If the word free in Article 301 means freedom to do whatever one wants to do , then chaos may be the result; for example, one owner of a motor vehicle may wish to drive on the left of the road while another may wish to drive on the right of the road. If they come from opposite directions, there will be an inevitable clash. Another class of examples relates to making a charge for the use of trading facilities, such as, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purview of the restrictions contemplated by Article 301 and such measures need not comply with the requirements of the proviso to Article 304(b) of the Constitution. 60. Hidayatullah, J. in his dissenting judgment, however, took the view that even when a tax may be compensatory in character it would be a valid levy only if it goes through the process of presidential assent in terms of Article 304(b) of the Constitution of India and the proviso thereto. The following passage in this regard is relevant: 125. That a tax is a restriction when it is placed upon a trade directly and immediately may be admitted. But there is a difference between a tax which burdens a trader in this manner and a tax, which being general, is paid by tradesmen in common with others. The first is a levy from the trade by reason of its being trade, the other is levied from all, and tradesmen pay it because everyone has to pay it. There is 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 distin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e public purpose which affects trade and commerce incidentally but without impairing the freedom. Sometimes, however, the regulation itself may amount to a restriction, and if such a stage is reached, then under our Constitution the restriction must be reasonably in the public interest, and the President s prior sanction must be obtained, if the law imposing such restriction is made by the State Legislature, If, however, it does not reach the stage of restriction of trade and remains only a regulation incidentally touching trade and commerce, the regulation is outside the operation of Articles 301 and 304. It is on this ground that laws prescribing the rule of the road and like provisions already referred to as well as a regulation that the height to which trucks may be loaded must be such as not to endanger the overhead bridges or wires, do not have to go before the President, since they do not affect 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic, whether charged or not, cannot also be described as restrictions impeding the freedom. To say all these is not to say that every provision couched in the form of regulation but in effect and substance a restriction can pass off as a permissible regulation. It is for the Court in a given case to decide whether a provision purporting to regulate trade is in fact a restriction on freedom. If it be a colourable exercise of power and the regulatory provision in fact is a restriction, unless the said provision is one of the permissible restrictions under the succeeding articles, it would be struck down. This view is consistent with the principles laid down by the Australian High Court and the Privy Council in the context of interprelation of the words absolutely free in Section 92 of the Commonwealth of Australia Constitution Act, which is more emphatic than the word free in Article 301 of our 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e impediment relates to the question of degree rather than to the nature of it. If it is a restriction, it must satisfy the conditions laid down in Article 302 of the Constitution. xxx xxx xxx 46. The foregoing discussion may be summarized in the following propositions: (1) Article 301 declares a right of free movement of trade without any obstructions by way of barriers, inter-State or intra-State, or other impediments operating as such barriers. (2) The said freedom is not impeded, but, on the other hand, promoted, by regulations creating conditions for the free movement of trade, such as, police regulations, provision for services, maintenance of roads, provision for aerodromes, wharfs etc., with or without compensation. (3) Parliament may by law impose restrictions on such freedom in the public interest; and the said law can be made by virtue of any entry with respect whereof 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 prefe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ropounded in Automobile Transport case but it obliterates the very basis of compensatory tax. We may reiterate that when a tax is imposed in the regulation or as a part of regulatory measure the controlling factor of the levy shifts from burden to reimbursement/recompense. The working test propounded by a Bench of seven Judges in Automobile Transport and the test of some connection enunciated by a Bench of three Judges in Bhagatram case cannot stand together. Therefore, in our view, the test of some connection as propounded in Bhagatram case is not applicable to the concept of compensatory tax and accordingly to that extent, the judgments of this Court in Bhagatram Rajeevkumar v. CST and State of Bihar v. Bihar Chamber of Commerce stand overruled. xxx xxx xxx xxx 52. In our opinion, the doubt expressed by the referring Bench about the correctness of the decision 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 Transp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d straightaway. The first and the foremost of these aspects is that the concept of compensatory taxes is not recognised by the Constitution. A tax is a compulsory exaction of money for general public good and is defined as under by Thomas M Cooley in his book The Law of Taxation at page 61 (Clark A. Nichols ed., 4th ed. 1924) as: Taxes are the enforced proportional contributions from persons and property, levied by the state by virtue of its sovereignty for the support of government and for all public needs. This definition of taxes, often referred to as Cooley s definition, has been quoted and endorsed, or approved, expressly or otherwise, by many different courts. While this definition of taxes characterizes them as contributions , other definitions refer to them as imposts , duty or impost , charges , burdens , or exactions , ; but these variations 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esoram Industries Ltd. ors. (2004) 10 SCC 201 . 65. Thirdly, and lastly, the concept of Compensatory taxes being outside Part XIII, is difficult to apply in actual practice. Experience in the present batch of cases has amply demonstrated that difficulty. Most of the legislations enacted by the States in these cases have described the entry tax levied under the same to be compensatory in character. This may have been done to take the levy outside the mischief of Article 301 of the Constitution. The question however is whether tax amount collected in terms of the said legislation is really used by the State for the purpose of providing or maintaining services and benefits to the tax payers and whether the Courts can follow the money trail to determine whether the State concerned has actually used the amount for the 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 justi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. (2) Nothing in clause (1) shall prevent Parliament from making any law 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 from scarcity 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 ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause which has been the subject matter of forensic debates in several cases. We do not for the present propose to address the effect of the non-obstante clause at this stage or the interplay between the expression subject to appearing in Article 301 and the non obstante clause in Article 304. We shall turn to that aspect a little later. What we wish to examine is whether Article 304(a) treats taxes as a restriction so that any such levy may fall foul of Article 301. The answer to that question, we say without any hesitation is in the negative. Article 304(a) far from treating taxes as a restriction per se , specifically recognises the State legislature s power to impose the same on goods imported from other States or Union Territories. The expression the legislature of a State may by law 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 clear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o Clause (b). It was argued that Article 304(a) does not exhaust the universe in so far as levy of taxes is concerned for even when the law complies with the requirement of Clause (a), it may fail to pass the test of reasonableness and of public interest under Clause (b) in which event the President may decline the sanction for introduction of any Bill aimed at levying such a tax. 71. There is, in our opinion, no merit in any of the contentions noted above. Clauses (a) and (b) of Article 304 deal with two distinct subjects and must, therefore, be understood to be independent of each other. While Clause (a) deals entirely with imposition of taxes on goods imported from other States, Clause (b) deals with imposition of reasonable restriction in public interest. It is trite that levy 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imported from other States, the legislative power to do so being found in Articles 245 and 246 of the Constitution. 6. Such power to levy taxes is however subject to the condition that similar goods manufactured or produced in the State levying the tax are also subjected to tax and that there is no discrimination on that account between goods so imported and goods so manufactured or produced. 7. The limitation on the power to levy taxes is entirely covered by Clause (a) of Article 304 which exhausts the universe in so far as the State legislature s power to levy of taxes is concerned. 8. Resultantly a discriminatory tax on the import of goods from other States alone will work as an impediment on free trade, commerce and intercourse within the meaning of Article 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intercourse. Section 297 aimed at removing such trade barriers. It provided for a prohibition against enactment of any law or taking of any executive action by the provincial legislature that restricted the entry into or export from the province goods of any class or description. 77. More importantly, in terms of clause (b) of Section 297(1) of Government of India Act, 1935 no provincial legislature or Government could impose any tax, cess, toll or due which discriminated between goods manufactured or produced in the provinces and goods not so manufactured or produced or between goods manufactured or produced outside the province discriminated between goods manufactured or produced in one locality and similar goods manufactured or produced 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... textual interpretation placed by us upon Articles 301-304 instead gets considerable support from the contextual and the historical perspective of Part XIII. 79. We may now turn to yet another contextual feature that has a bearing on the true and correct interpretation of Part XIII namely the sovereign character of the power to tax available to the State legislature. It is now fairly well settled that the Constitutionally vested power to levy tax can be regulated or controlled only by specific Constitutional limitations, if any. We have in the earlier part of this judgment elaborated how the power to levy taxes is a sovereign power with several limitations specifically stipulated by the Constitution itself. We have also 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interpretation that supports and promotes federalism while upholding the Central supremacy as contemplated by some of the Articles must be preferred. To the same effect is the nine judge Bench decision of this Court in S.R. Bommai s case (supra) where this Court cautioned against adoption of an interpretation that has the effect of whittling down the powers reserved to the States. This Court said: 276. The fact that under the scheme of our Constitution, greater power is conferred upon the Centre vis-a-vis the States does not mean that States are mere appendages of the Centre. Within the sphere allotted to them, States are supreme. The Centre cannot tamper with their powers. More particularly, the C ourts 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 Constit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ively interpreted, as to whittle down the power of the State legislature. That might affect and jeopardize the very federal principle. The federal nature of the Constitution demands that an interpretation which would allow the exercise of legislative power by Parliament pursuant to the residuary powers vested in it to trench upon State legislation and which would thereby destroy or belittle state autonomy must be rejected. (emphasis supplied) 83. An approach which tends to dilute the federal character of our Constitutional scheme must, therefore, be avoided and one that supports and promotes the concept of federalism preferred by the courts while interpreting the provisions of the Constitution. 84. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reminding itself of the need for a harmonious construction lest interpretation placed on a given provision has the effect of diluting or whittling down the effect or the importance of any other provision or feature of the Constitution. So interpreted Article 301 appearing in Part XIII does not, in our opinion, work as an impediment on the States taxing powers except in situations where such taxes fall foul of Article 304(a) of the Constitution. The contextual approach thus fully matches the textual interpretation which we have placed on Part XIII. 87. On behalf of the dealers/assessees it was contended with considerable amount of tenacity that since Article 304 starts with a 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 pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see that as soon as the first part is over, we start with notwithstanding whatever is said in the first part, such and such a thing will happen . In the next clause, we say not only notwithstanding what is contained in the first clause, together with notwithstanding what is contained in the other clauses' and then add something more. I think there is a better method of drafting. Even if it is necessary to cope with complex situations and to provide something on the lines proposed, there should be a simpler and more direct way of drafting and making a provision which is not so ununderstandable that only supermen could read this constitution, even assuming that 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atory law and it does not in any way prohibit the State Legislature from imposing a non-discriminatory tax permitted under Art. 304(a). But, with reference to Art. 304(b), the non-obstante clause has significance and meaning even in regard to Art. 303, as clause (b) lifts the ban imposed by Art. 303, subject to the limitation mentioned therein. Therefore, the non-obstante clause must be deemed to apply only to that part of Art. 304 appropriate to the said clause. If so read, the difficulty in the construction disappears. Art. 304(a) lifts the general ban imposed by Article 301 in respect of imposition of non-discriminatory taxes on goods 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 pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trade, commerce and intercourse. It was urged that if such statutory fiscal barrier is also held not to be a restriction upon the freedom of trade, commerce and intercourse guaranteed under Part XIII, a citizen whose right under that Part is affected may have no redress against such levies. Relying upon the decision of this Court in Ramjilal v. Income Tax Officer, Mohindargarh, AIR 1951 SC 97 , it was contended that a challenge to a fiscal statute shall not be maintainable even under Part III of the Constitution, thereby, not only violating the citizen s constitutional rights of free trade and commerce but also denying them the remedy 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and extent of property on the basis of such taxation, the law shall not be open to attack on the ground of inequality even though the result of taxation may be that the total burden on different persons may be unequal. The Court summed up that taxing statute is not fully immune from an attack on the ground that it infringes equality clause under Article 14, no matter the Courts are not concerned with the policy underlying the taxing statute or whether a particular tax could have been imposed in a different way or a way that the Court might think would have been more equitable in the interest of equity. 95. To the same effect 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same may be levied. Just because room for challenge to a fiscal statute is limited is in our view no reason to hold that levy of taxes otherwise within the competence of the legislature imposing the same should be seen as a restriction on free trade and commerce guaranteed under Article 301 which Article does not either textually or contextually recognize levy of taxes as impediments except in cases where the same are discriminatory in nature thereby being offensive to Article 304 (a) of the Constitution. 97. On behalf of the States it was argued by the learned Attorney General, and M/s. Rao and Dwivedi that 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 A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oth cases, for a word or a phrase may take a colour from its context and bear different senses accordingly. (emphasis supplied) 99. Having said that Gajendragadkar J., referred to these decisions with a view to supporting his conclusions by reference to Judges in other jurisdiction responding to similar challenges posed by interpretation of what His Lordship described as sister constitutions . He said: 59. When you are dealing with the problem of construing a constitutional provision which is none-too-clear or lucid you feel inclined to inquire how other judicial minds have 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 Aus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly so that the direct and immediate effect test evolved by the pronouncement of the Australian High Court has itself been watered down and diluted. The current view in Australia is that only such taxes as are discriminatory introduced by way of a protectionist measure operate as restrictions on the freedom of trade, commerce and intercourse. This is evident from the decisions of the Australia High Court in Cole v. Whitfield (1988) 165 CLR 360 . The Court in that case reviewed the case law on the subject and rejected 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ectionist, discriminates against inter-State trade or commerce in pursuit of that object in a way or to an extent which warrants characterization of the law as protectionist, a court will be justified in concluding that it nonetheless offends Section 92. (emphasis supplied) 105. The above passage signifies a paradigm shift in the judicial opinion in Australia as regards the interpretation of Section 92 of the Australian Constitution. The earlier view that any impediment including one in the nature 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 Const ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riers set-up for such collection could not be completely taken away in one go. The framers of the Constitution in that view considered it necessary in the interest of stability of revenue to preserve the power exercised by the States for a limited period subject to the conditions stipulated in Article 306. The true effect of Article 306, therefore, was that while the States had no power under the Constitutional Scheme to levy customs duties on the import and export of goods to and from 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. Seerv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elivered by Sinha, CJ in Atiabari s case (supra). If that be so, the only way such a restriction could meet the constitutional requirements would be through the medium of the proviso to Article 304(b) of the Constitution. There is, in our opinion, no merit in that contention either and we say so for two precise reasons. Firstly, because taxes whether high or low do not constitute restrictions on the freedom of trade and commerce. We have held so in the previous paragraphs 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 gov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... islator, and on the influence of the constituents over their representative, to guard them against its abuse. 112. To the same effect is the decision of this Court in State of Madras v. N.K. Nataraja Mudaliar (AIR 1969 SC 147) where this Court recognized that political and economic forces would operate against the levy of an unduly high rate of tax. The Court said: 16. Again, in a democratic constitution political forces would operate 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the State and the other where the State imposes the high tariff wall with a view to imposing an impediment to the free flow of trade, commerce and intercourse. Insofar as the first category viz. laws that forbid imports into and exports out of a State are concerned, the same would work as a restriction in terms of restrictions within the contemplation of Part XIII and may be permissible 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res to levy taxes. By that logic it was contended that levy of taxes is also treated as a restriction within the contemplation of Part XIII making it necessary for the legislature to resort to Article 304(b) and the proviso for doing so. There is in our opinion no merit in that contention also. 118. We say so for two precise reasons. Firstly because entries relating to Trade and commerce 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... including levy of taxes also. That apart, once taxes are held to be outside Part XIII for the reason that we have already set out earlier, there is no way we can bring them back into that Part by a tenuous interpretation or understanding of Article 303. As explained by us earlier, Article 303 is an exception to Article 302, inasmuch as it limits the power 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 lev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uchstone of Article 14. Having said that we need to remind ourselves that Part XIII of the Constitution was aimed at addressing the mischief arising from fiscal and other barriers which the princely states had imposed and which gravely impeded free trade and commerce. The Constituent Assembly Debates show that framers of the Constitution were concerned 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. 123. Appearing for some of the assessees Mr. Venkatraman argued that the Central Sales Tax Act was a classic example of the Union exercising its power under Article 302 of Part XIII. He contended that the restrictions so imposed signify that tax and restrictions are synonymous within the contemplation of part XIII. 124. The Central Sales Tax Act, 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, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourse but such of them as are compensatory in nature do not offend Article 301. Resultantly decisions of his Court in Jindal Stainless Limited(2) and anr. v. State of Haryana and ors. (2006) 7 SCC 241 shall also stand overruled. 127. Re. Question No.2 In view of our answer to Question No.1, Question No.2 does not arise 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. Cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted goods manufactured by small scale industries within the State from payment of sales tax even when the sales tax payable by other industries including manufacturers of goods in adjoining States was in the range of 8%. This exemption was questioned by manufacturers of edible oils from other States on the ground 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 cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot occur in Article 14. The expression discriminate against is used in Article 15(1) and Article 16(2), and it means, according to the Oxford Dictionary, to make an adverse distinction with regard to; to distinguish unfavourably from others . Discrimination thus involves an element of unfavourable 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing states will be an illusion if they do not have the opportunity or the legal entitlement to promote industries within their respective territories by granting incentives and exemptions necessary for such growth and development. The argument that power to grant exemption cannot be 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the rate of VAT/ Sales Tax and entry tax adjustment/credit of the amount paid towards VAT/ Sales tax has the effect of reducing the entry tax liability proportionately. It is argued that so long as similar credit/adjustment/setoff is made admissible to goods coming from another 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 ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive, though due to some fortuitous circumstance arising out of a peculiar situation some included in a class get an advantage over others, so long as they are not singled out for special treatment. Taxation law is not an exception to this doctrine vide Purshottam Govindji 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of raw hides and skins which are purchased locally in the State, the levy of tax would be at the rate of 3 per cent at the point of last purchase in the State. When those locally purchased raw hides and skins are tanned and are sold locally as dressed hides and 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt should refrain from striking it down on the ground of discrimination. These are some of the broad principles laid down by this Court in several of its decisions and it is unnecessary to burden this judgment with citations. Applying these principles it is seen that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levy of a tax is a distinct event from the transaction. Trade and commerce must take place to attract a tax. Undoubtedly a tax may make the transaction less profitable to the extent of the tax. But that is far from being an impediment on the transaction 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de and commerce; the other is Article 304 (a) which (unlike Section 297 of the erstwhile Government of India Act, 1935 which prohibited - through a negative mandate, discriminatory treatment) empowers State Legislatures to impose non-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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rohibition under Article 304 (a), but the actual production or manufacture of similar goods, that are subject to like or similar tax. Absent this condition, the levy would fall foul of Article 304 (a) since it would constitute 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mits them to impose taxes affecting freedom of trade and commerce but on the condition that it is actually by way of a fee, justified by some sort of quid pro quo . 6. In the above factual background the heavy 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r and my brother/sister judges. I am broadly in agreement with the conclusion of the learned Chief Justice on most of the issues. The erudite draft 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 Ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s relating to entry tax to be tested with reference to Articles 304(a) and 304(b) of the Constitution for determining their validity? 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Clause (b) of Article 304? 2.Whether imposition of Entry Tax levied in terms of Entry 52 List II of 7th Schedule is violative of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n , Dawoodi Bora 2005 (2) S.C.C 673. That s how the matter is before us. 2.3 Entry tax is levied by the State of Haryana 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 cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to impose a tax without complying with the requirement of Article 304(b). 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. G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OF RESPONDENTS (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 citizens, Ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onstitution 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, A.I.R 1967 S.C 1 (9 judge bench); Suptd. And R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mber 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 Atiabari that 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 not feel shy of using all the tools and employ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nciples 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 aspirations of the people a beacon to guide and inspire all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee 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://www.census2011.co.in/slums.php. The Utility of the Uni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tes. 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 framers will be more fully achieved by such construction. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ower. 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 and right in and over the land, which are vested in State. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... buting 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 the central supremacy as contemplated by some of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 to other similar powers. Although all powers exercised by St ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 of goods in any part of the territory of India. 304. Restrictions on trade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 regulations. 7.4 The dissection of Article 301 shows that it has three significant parts or phras ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 7.9 In this connection, it has to be remembered that before the commencement of the Constitution, about two-thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 21, 1947 the clause came up for debate before the Advisory Committee. Shri C. Rajgopalchari expressed his view that the units must ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 provision practically nullify the freedom of trade secured by the Article 16 as the expression interests of public is vague and uncertain and cannot be subject to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 for Part XIII has been American and Australian models. These models present before the Constituent Assembly were re-designed and expanded by the framers of the Constit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urts 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 known as the Commerce Clause has been under judicial scrutiny for a long time. The plain reading of this Article means that the Federal Legislature is empowered to regulate the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 interpretation. CANADA 7.27 Canadian Constitution envisages freedom of trade under Section 121 as follows All Articles of the Growth, Produce, or Manufacture of any one of the Provinces shall, from and afte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sy 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 exceptions provided by the other Articles in Part XIII. The freedom guaranteed is limited in the manner specified by the said Articles but it is not limited by any other provisions of the Constitution outside Part XIII. That ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 kinds of impediments, restraints and trade barriers including freedom from all taxation , the Learned Chief Justice said as follows: In my opinion, there is no warrant for such an extreme position. It has to be remembered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 federal economic and fiscal integration and addresses the questions of economic unity. He held that, regulatory measures or measures imposing compensatory taxes for the use of trading facilities do not come within the purview of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entioned 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 law satisfying the two conditions in Article 304. In examining the constitutionality of the statute, it must be assumed that the legislature understands and appreciates the needs of the people and the laws it enacts are directed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imitation 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 introduction of the Bill. 7.37 One need to note that Atiabari dealt with the challenge to an enactment which squarely comes under Entry 56 whereas Automobile is a case concerned with the challenge to Rajasthan Motor Vehicle Taxation Act. Taxes on m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome 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 doubt, the tax levied was one on entry of scheduled goods in local areas meaning thereby it had all the broad features of octroi, yet the manner of levy, the method of collection and the persons liable to pay the same were so devised by the impugned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tiabari 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 legislature to make laws is subject to the provisions of the Constitution. Nonetheless, if a State makes law under Article 245(1) r/w. Article 246(3) in respect of the subjects enumerated in Entries 45 to 63 of List II in the Seventh Schedule, it is dou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 incorporation of Article 301 only as a constitutional right. Seventhly , That Article 306 cannot have an impact on the interpretation of Article 301, as it only saved certain discriminatory taxes. Since the framers wanted to preserve the imposition of such disc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onstitution 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 outside that Province, discriminates between goods manufactured or produced in another locality. (2)Any law passed in contravention of this section shall, to the extent of the contravention, be invalid. 8.2 It may be noticed that prohibition contained in the section quote ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thing 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 Committee accepted the recommendation of the Sub-Committee in relation to Clause 14 with one change; the sub-clause providing for central regulation of trade by or with non-citizens was dropped as being vague and unnecessary. Ibid., p. 253 8.7 The Advisory Committee submitted its report on 23. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion, 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 for any state- To impose on goods imported from other State any tax to which similar goods manufactured or produced in that State are subject, so, however, as not to discriminate between goods so imported and goods so manufactured or produced: and To impose by law any restrictions on the freedom of trade, commerce o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iders 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 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 goods imported from other States any tax to which similar goods manufactured or produced in that State are subject, so, however, as not to discriminate between goods so imported and goods so manufacture ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 answer must be that the history, the context and the plain words indicate that Article 304 (a) and (b) are disjunctive in nature. A levy of tax need not be tested with reference to Article 304 (b) of the Constitution. Following are the reasons for reading Article 304 (a) and (b) of the Indian Constitution disjunctively. First , the legislative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 incentives in the form of subsidies or grant are given to any part of units of a State so that it may come out of its limping or infancy to compete as equals with others, that, in our opinion, does not and cannot contravene the spirit and the letter of Part XIII of the Constitution. However, this is permissible only if there is a valid reason, that is to say, if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 supplied) 8.19 Thus stated, the principle laid down in Video Electronics is that, if a backward area in a State needs impetus for the development, and in such circumstances incentives are given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 manufactured or produced within the State are also subjected to tax, so as not to discriminate between the goods imported from outside the State. Article 304(a) is not a limitation on the legislature of a State to impose such tax on goods imported. The only condition envisaged under Article 304 (a) is, same tax is imposable on the goods imported from other States as well as goods if manufactured in that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 State the power to levy a tax gets obliterated, that is to say, that Article 304 (a) does not bar levy of tax if the goods are not manufactured or produced within the State. e. Article 304(a) of the Constitution protects from discrimination (for protectionism) and not mere differentiation. 9.2 Before parting with this case, I would like to express my appreciation for the way the hearing of the case took place be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctically 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 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 State Governments should not suffer any loss of revenue solely because of judicial interpretations and innovations in Automobile and the case subsequent to it. Subject to passing the muster of Art. 304(a), entry tax levied by the States under entry 52, List II even thou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit 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. State of Haryana and Ors. (2003) 8 SCC 60, this Court referred the matter to the Constitution Bench to authoritatively lay down the principles vis- -vis compensatory tax. 3. In Jindal Stainless Ltd. (2) Anr. v. State of Haryana Ors. (2006) 7 SCC 241, Constitution Bench considered the various decisions relating to compensatory tax and held that whenever a law levying compensatory tax is impugned as violative of Art. 301 of the Constitution, the Court has to see whether the impugned enactment facially indicates the proport ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Art. 145(3) of the Constitution and framed ten questions for reference. Subsequently, in Jindal Stainless Ltd. Anr. v. State of Haryana Ors. (2010) 4 SCC 595, after referring to the reference made in Jaiprakash Associates , the matter was referred to a larger Bench. Accordingly, the matters are now before this larger Bench. 7. Even though ten questions were framed for reference, when the matters came up for consideration before this larger Bench, the issues for consideration were abridged to four questions as under:- (1) Can the levy of a non-discr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 subject either absolutely or conditionally, there is no fetter or limitation on the plenary powers which the State Legislatures enjoy to legislate on the topics enumerated in List II and List III of the Seventh Schedule to the Constitution. It is noteworthy that though Art. 245 is pre-fixed by the words Subject to the provisions of this Constitution ; Art. 246 is not. But because Art. 246 only provides for distribution of the legislative powers conferred under Art. 245, the words subject to the provisions of the Constitution apply equally to Art. 246. 12. The power ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ticle 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 commencement which has a specific legal connotation. [See Section 3(13) of the General Clauses Act, 1897.] [ Emphasis Supplied ] FREEDOM OF TRADE, COMMERCE AND INTERCOURSE: 15. Art. 301 of the Constitution provides for freedom of trade, commerce and intercourse throughout the territory of India, subject to the other provisions of Part XIII, Articles 302-305 which permit the imposition of reasonable restrictions on this freedom by Parliament and the State Legislatures. The underlining idea in making trade, commerce and intercourse throughout the territory of India free is to emphasize on the economic unity of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the Lists in the Seventh Schedule. Application of Art. 303(1) is to specific entries on trade and commerce and not to be confused with the general application of Art. 301 to all the legislative entries other than the entries relating to trade and commerce. But when any part of the country is suffering from scarcity of goods, Parliament may, to meet such a situation; pass even a discriminatory law [Art. 303(2)]. Art. 303(2) is an exception to Art. 303(1) inasmuch that the limitations of Art. 303(1) lose operation when aforesaid preference and discrimination is made for the purpose of dealing with situation arising ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 specifically noted that it is not the intention to make trade, commerce and intercourse absolutely free in India. Relevant extracts from the debate are as under:- .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 provisions that trade and commerce shall be free throughout India. The freedom of trade and commerce has been made subject to certain limitations which may be imposed by Parliament or which may be imposed by the Legis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gion 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 freedom clause in the Australian Constitution has given rise to considerable trouble and to conflicting decisions of the highest Court. There has been a feeling in those parts of Australia which depend for their well-being on agricultural conditions that their interests are being sacrificed to manufacturing regions, and there has been rivalry between manufacturing and agricultural interests. 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, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) ] Shri C. Subramanian (Madras : General): .There are three Articles 243, 244 and 245 which deal with this subject inter-state trade and commerce in the body of the Draft. Then in the list of legislative powers in the Union list, we find in entry 73 inter-state trade and commerce subject to the provisions of entry 23 of List No. II . Then item 32 in List II is trade and commerce within the state; markets and fairs ; and item 33 refers to the regulation of trade, commerce and intercourse with other States for the purposes of the provisions of article 244 of this Constitution. Therefore, you will find inter-state trade and commerce, subject to article 244, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 be free throughout India, was to bring it under fundamental rights. That is the reason why, awkward as it may seem, we thought that there was no other way left to us, except to bring trade and commerce under fundamental rights. I think that will satisfy my friend Mr. Subramaniam why we gave this place to trade and commerce in the list of fundamental rights, although theoretically, I agree that the subject is not germane to the subject-matter of fundamental rights. With regard to the other argument, that since trade and commerce have been made subject to article 244, we have practically destroyed the fundamental right, I think I may fairly say that my friend Mr. Subramaniam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 subject to Section 110 of the Act. The words subject to conveys the idea of a provision yielding place to another provision or other provisions to which it is made subject. 65. In Black s Law Dictionary, 5th Edn. At p. 1278, the expression subject to has been defined as under: Subject to Liable, subordinate, subservient, inferior, obedient to; governed or effected by; provided that; provided; answerable for. 66. Since Section 107 is made subject to Section 110, the former section conveys the idea of yielding to the provision to which it is made subject that is Section 110 which is the will of the legislature . 31. Interpretation of the Constitution should emerge from a reading of the whole of the Const ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding 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 sovereignty and federalism. Free trade, commerce and intercourse is subject to the other provisions of Part XIII as well as other constitutional provisions. Art. 301 does not use the word subject only to Part XIII. The word free in Art. 301 is to be read not in isolation or in the limited context of Part XIII, but has to be read as part of the Constitution as a whole. The word free cannot be given a meaning which renders the legislative powers of the State ineffective. For instance, Art. 301 cannot be held to employ freedom from giving minimum wage, gratuity, provident fund etc. to the workers employed. 34. Articles 302 to 304 are neither exceptions nor provisos to Art. 301 and therefore, the principles of interpreting a proviso cannot be applied to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uires 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 restriction permitted only by Art. 304(b) for the proviso to it is overridden by Art.255 (3). Trade is dealt with not only in Art. 301 but also in Art.19(1)(g) and the relation of that Article is necessary for a proper interpretation of Part XIII. Article 19(1)(g) guarantees to every citizen the right to carry on any trade or business. But trade cannot be carried on without goods or property and the right to acquire, hold and dispose of property which is guaranteed under Art; 19(1) (f). Again, it is not only Art.303 which speaks of discrimination Arts. 14 and 15 do likewise and the relation of this Article to 303 must be considered. [ Page 2591 ] The States are right in submitting that the majority view, both in Atiabari and Automobile , is not correct. Part XIII and Freedom of Trade, Commerce and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts 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 from Raja Jagannath Baksh Singh v. The State of U.P. and Anr., (1963) 1 SCR 220 , where this Hon ble Court observed that:- . 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. In that sense, it is not the function of the Court to enquire whether the power of taxation has been reasonably exercised either in respect of the amount taxed or in respect of the property which is made the object of the tax. Article 265 of the Constitution provides that no tax shall be levied or colle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-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 Constitution deal with Relations between the Union and the States and Finance, Property, Contracts and Suits respectively. Part XII dealing with finance etc. has been treated as Part dealing with the sovereign power of the States to impose taxes, which must always mean imposing burden on citizens and others in public interest. The power of taxation is vested in a sovereign State to carry on with the affairs of the Government. Our Constitution had laid the foundation of a Welfare State, very much extending the activities of the Government and the administration thus making it necessary for the State to impose taxes on a large scale and in much wider fields. The legislative competence of the Parliament or of the State Legislatures can only be circumscribed by express prohibition contained in the Constitution itself. The plenary powers of legislation ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 status conferred on taxing statutes is evident from the following special provisions: Article 265 provides that no tax shall be levied or collected except by the authority of law; therefore there can be no levy or collection by exercise of executive power. Tax legislations are given the status of Money Bills under Articles 110 and 199 of the Constitution and, therefore, have a different laying procedure. They can originate only in the lower houses of the Parliament and the State Legislature as per Articles 109 and 198. Being a Money Bill, all the revenue is sent to the Consolidated Fund and can only be taken out through Appropriation Bills (Articles 114 and 204). Freedom in Art. 301 does not mean freedom from taxation :- 47. Historically, Art. 301 was meant to do away with barriers between Native States and the rest of India. Thus, Art. 301 should be interprete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 free from tax; and that too, by implication. 50. It is well-settled that even Fundamental Rights in Part III of the Constitution are not immune from taxation and taxation has been held to be not a restriction . In Indian Express Newspapers (Bombay) Pvt. Ltd. and Ors. etc. v. Union of India and Ors. etc. (1985) 1 SCC 641, levy of indirect tax on newspaper industry, through levies on imported newsprints was challenged as violative of Art. 19(1)(a). Holding that press is not immune from taxes it was held:- 49. . Yet the American courts have recognized the power of the State to levy taxes on newspaper establishments, of course, subject to judicial review by courts by the application of the due process of law principle .Taxation is the legal capacity of sovereignty or one of its governmental agents to exact or impose a charge upon persons or their property for the support of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced 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 cumulatively satisfied:- (a) the State Legislature by law imposes a tax; (b) tax is imposed on goods imported into that State from other States or Union Territories; (c) a tax is also imposed on similar goods manufactured or produced in that State; and (d) there is no discrimination between goods imported and goods manufactured or produced in that State. When these four conditions are fulfilled, Art. 304(a) provides a constitutional route to levy non-discriminatory tax. Under Art. 304(b), the ban under Art.301 stands lifted even if discriminatory restrictions are imposed by the State Legislatures, provided they fulfill the following conditions (a) such restrictions are in public interest; (b) they are reasonable; and (c) they are subject to obtaining of prior sanction of the President before introduction of the Bill or amendment. 53. While the States have legislative power to levy taxes on g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hould 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 prohibited the States and the Centre from passing discriminatory laws [ Constituent Assembly Debates dated 30.07.1949 to 18.09.1949 (Page 1144) ] 56. A tax legislation could be challenged on the ground of legislative competence as well as violation of Fundamental Rights guaranteed under Part III of the Constitution. In Rai Ramkrishna and Ors. v. The State of Bihar (1964) 1 SCR 897, this Court while holding that tax Statutes were not beyond the constitutional limitation prescribed by Articles 14 and 19 held that the challenge must however be dealt with caution and circumspection: 13 . ..that taxing statutes are not beyond the pale of the constitutional limitations prescribed by Articles 19 and 14, and he also concedes that the test of reasonableness prescribed by Art. 304(b) is justiciable. It is, of course, true that the power of taxing the people and their property is an essential attribute of the Government and G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 guaranteed by Ch. III of the Constitution. It is not a power which transcends the fundamental rights, as was assumed in certain earlier decisions : Ramjilal v. Income-tax Officer (1951) 19 ITR 174 (SC) ; Laxmanappa Hanumantappa v. Union of India (UOI) (1954) 26 ITR 754 (SC) ; and the view expressed by Venkatarama Ayyar J., in S. Anantha Krishnan v. State of Madras I.L.R. [1952] Mad. 933. But it is now settled by decisions of this Court (e.g.) Kunnathat Thathunni Moopil Nair v. The State of Kerala and Another (1961) 3 SCR 77 that a taxing statute is subject to the conditions laid down in Art. 13 of the Constitution . A taxing statute may accordingly by open to challenge on the ground that it is expropriatory; 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 . [ Emphasis supplied ] Consistent view ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sition 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 1005, the Constitution Bench has laid down the characteristics of a tax which has since been consistently followed and it is as under :- .A tax is a compulsory exaction of money by a public authority for public purposes enforceable by law and is not payment for services rendered . This definition brings out, in all 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 revenues of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 local goods. Under Art. 304(b), States can impose reasonable restrictions on the freedom of trade, commerce and intercourse with or within that State as may be required in public interest; provided they obtain prior sanction of the President before introduction of the Bill. As taxes are levied for the purpose of raising revenue, they are not restrictions and are presumed to be in public interest. Thus, tax simpliciter is not a restriction on the freedom of trade and commerce and is outside the purview of Art. 301. Majority view in Atiabari and Automobile: Need of re-appreciation :- 64. In Atiabari Tea Co. Ltd. v. The State of Assam and Ors. , 1961 SCR 809, Assam Legislature enacted the Assam Taxation (On Goods Carried by Roads or Inland Waterways) Act, 1954 acting on entry 56 of the State List and imposed tax at a rate of one anna per pound of tea in chest box, carried through the State of Assam by any means other than the railways and the air. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 became under the Constitution Part-A States , and the Native States became Part-B States . Sinha, C.J. pointed out that most of the Native States , big or small had their own taxes, cesses, tolls and other imposts and duties meant not only for raising revenue but also as trade barriers and tariff walls. In the background of those circumstances, it was necessary to abolish all those trade barriers and custom posts as also in the interest of national solidarity, economic and cultural unity and freedom of trade and commerce guaranteed in the Constitution by Art. 301. Observing that the power to tax is inherent in sovereignty, public purpose is inherent in every taxation and tax simpliciter is not an impediment to the freedom of trade, commerce and intercourse, Sinha C.J. held as under:- . 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 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. [ Page 829] Article 301, with which Part XIII commences, contains the crucial words shall be free and provides the key to the solution of the problems posed by the whole Part. The freedom declared by this Article is not an absolute freedom from all legislation. As already indicated, the several entries in the three Lists would suggest that both Parliament and State Legislatures have been given the power t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trictions 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 larger Bench of seven Judges was constituted in Automobile Transport (Rajasthan) Ltd. v. The State of Rajasthan and Ors. (1963) 1 SCR 491, in which the validity of Rajasthan Motor Vehicles Taxation Act, 1951 and the Rules made thereunder was under challenge. Section 4 of the Rajasthan Act required every owner of motor vehicle used in any public place or kept for use in Rajasthan to pay tax at the appropriate rate specified in the Schedule to the Act. The appellants therein who were stage carriage operators challenged the validity of the Rajasthan Act on the ground that such levy contravened Art. 301 of the Constitution and was not saved by Art. 304(b) thereof. The validity of the Rajasthan Act was upheld by a majority of 4:3. Justice S.K. Das who spoke for the majority, agreed with the majority view of Atiabari that only those restrictions which directly and immediately restrict or impede the free flow of trade, commerce and intercourse would be in violation of Art. 301. But the majority in Automobile added a clar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eedom 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 is that the said restrictions can be imposed by the State Legislatures only after satisfying the requirement of Art. 304(b) . [ Page 861 ]. If the said view of Atiabari is to be adopted then for each and every legislation, the State Legislatures will have to undergo the process of Art. 304(b). Tax is one important mode of raising revenue to enable the States to discharge its obligations as a Welfare State. Such plenary powers of the State legislature to impose taxes cannot be whittled down or made subservient to Art. 301. (ii) The majority read Art. 301 as subject only to the provisions of Part XIII. [ Page 848 ] (iii) Majority drew support from the Constitutions of Australia and USA however one does not find any provision comparable to Part XIII in Australian and American Constitution. Even Australia and USA now reject the direct and immediate test and have adopted discrimination theory . 71. Learned Attorney General for India, Mr. Mukul Rohatgi has additionally submitted that bringing taxes within the purview of Art. 304(b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 . [ Page 828 ] According to Sinha C.J., every tax including a tax on movement of goods or passengers was not necessarily an impediment or restraint in the matter of trade, commerce and intercourse. As per Sinha C.J., taxation by its very nature could not be included within the term reasonable restriction used in Part XIII. The view of Sinha C.J. is a correct view and is in consonance with the consistent view taken by this C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny progressive legislation which they have undertaken. It may be right or it may be wrong - the people of Australia are behind the Government but when they wanted to nationalise banking, article 92 of the Australian Constitution has been held as a bar to the Government's power to nationalise the banks. There is no point in shutting the hands of the future Government in operating this Constitution. [ Constitutional Assembly Debates, Volume IX, Page.1142, dated 30.07.1949-18.09.1949 ] 78. Shri T.T. Krishnamachari highlighted how Section 92 stood in between the nationalisation of private banks in Australia. This observation was probably made taking note of the view taken by Australian High Court, which was later affirmed by Privy Council in Commonwealth of Australia v. Bank of New South Wales (1949) 79 CLR 497:[1950] AC 235, (famously known as Bank Nationalisation Case ). In 1947, the Australian Government decided to nationalise private banks in Australia. In line of this process, the Banking Act, 1947, was enacted. However, the policy faced several controversies and was ultimately challenged before the courts. The Bank of New South Wales challenged the constitutional validity of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further relied on the Bank Nationalisation Case to borrow the concept of direct and immediate impediment on the freedom of trade and commerce from the Australian system. Relevant extract from Gajendragadkar J. s judgment is as under: In the case of Commonwealth of Australia v. Bank of New South Wales (1927) 40 C.L.R. 1 to which reference has already been made in connection with the test of pith and substance the Privy Council was examining the validity of s. 46 of Banking Act (Commonwealth) (No. 57 of 1947) in the light of the provisions of s. 92 of the Australian Constitution. 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 the States is compatible with its absolute freedom, and (2) that s. 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 consequ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... islative power to tax would be destroyed. Thereafter, in an attempt to save the taxing power of the State, they borrowed the concepts of direct and immediate test and compensatory tax from the Australian and American Cases. 83. In this regard, learned author H.M. Seervai in Constitutional Law of India , 4th Edition, Volume 3 has observed as under: It is submitted that the principles of interpretation adopted by the majority judgment in the Atiabari case and by all the judgments in the Automobile case depart widely from well settled principles of construction. They first try to ascertain the intention of the framers of the Constitution, by reference to history and then proceed to consider what construction would best effectuate that intention. But if an intention is to be first assumed, it is not difficult to read it into the words to be interpreted. It is submitted that words have to be interpreted according to their terms, or according to well known extrinsic aids to construction [ Page 2598 ] Mr. Seervai has also pointed out that the very observation that the Australian scenario is akin to the Indian scenario was flawed. It is obscure how the comparative study of the Australian a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcourse in Australia had yielded neither clarity of meaning nor certainty of operation . Cole v. Whitfield laid down that for a burden to be protectionist it must discriminate against inter-State trade or commerce in a protectionist sense . The Court observed as under: A law which has as its real object the prescription of a standard for a product or a service or a norm of commercial conduct will not ordinarily be grounded in protectionism and will not be prohibited by s 92. But if a law, which may be otherwise justified by reference to an object which is not protectionist, discriminates against interstate trade or commerce in pursuit of that object in a way or to an extent which warrants characterization of the law as protectionist, a court will be justified in concluding that it nonetheless offends s 92. [ Page 66 ] 86. This requirement was based on an appraisal of the history of Section 92, which showed that its purpose was the achievement of inter-colonial free trade. As was observed in Betfair Pty Ltd v Western Australia (2008) 244 ALR 32: S. 92 was not designed to create a laissez-faire economy in Australia ; rather, it had a more limited operation, to prevent the use of Stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osition which stands good today is that the judgments of US Supreme Court, Privy Council and Australian High Court relied upon in Atiabari and Automobile have been overruled in Complete Auto Transit in USA and Cole v. Whitfield in Australia. The principle of direct and immediate effect on the trade and commerce has been rejected and it has been held that the norms of commercial conduct shall not be protectionist or discriminatory . The principles of direct and immediate test laid down in Atiabari and Compensatory Taxes enunciated in Automobile are to be overruled and minority judgment of Sinha, C.J. that tax simpliciter is not violative of Art. 301 is to be affirmed. Art.304 (a) and (b) must be read disjunctively: 90. As the word restrictions in the marginal note of Art. 304 suggests plurality of powers and indicates that Clauses (a) and (b) of Art. 304 confer distinct powers. Art. 304(a) deals with tax; Art. 304(b) deals with restrictions that are reasonable and in public interest. Constitution framers could not have intended to include tax in Art. 304(b); since the elements of reasonableness and public interest are inherent in a tax. The use of the word and does not assist the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o refer to para 4 of the decision rendered by this Court in Director of Mines Safety v. Tandur and Nayandgi Stone Quarries (P) Ltd. (1987) 3 SCC 208 (SCC p. 211, para 4) 4. According to the plain meaning, the exclusionary clause in sub-section (1) of Section 3 of the Act read with the two provisos beneath clauses (a) and (b), the word and at the end of para (b) of sub-clause (ii) of the proviso to clause (a) of Section 3(1) must in the context in which it appears, be construed as or ; and if so construed, the existence of any one of the three conditions stipulated in paras (a), (b) and (c) would at once attract the proviso to clauses (a) and (b) of sub-section (1) of Section 3 and thereby make the mine subject to the provisions of the Act. The High Court overlooked the fact that the use of the negative language in each of the three clauses implied that the word and used at the end of clause (b) had to be read disjunctively. That construction of ours is in keeping with the legislative intent manifested by the scheme of the Act which is primarily meant for ensuring the safety of workmen employed in the mines. [ Emphasis supplied ] 95. ..we are not inclined to hold that the expression ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether taxing or otherwise which imposes any direct restriction on the movement or transport of goods attracts the provisions of Art. 301, and its validity can be sustained only if it satisfies the requirements of Art. 302 or Art. 304. According to the above view in Atiabari , it is not possible for the State Legislature to pass any law at all with respect to some of the tax entries viz. sales tax (entry 54, List II); law relating to gambling (entry 34, List II) or tax on betting and gambling (entry 62, List II); and tax on the carriage of goods or passengers by road or inland waterways (entry 56, List II). If the legislations under the above entries are challenged on the ground that they operate as a direct restriction on the freedom of trade, commerce and intercourse, as per the view in Atiabari , these legislations may have to be justified under Art. 304(b). Atiabari approach would totally take away the sovereign powers of the State Legislature to enact laws in exercise of its powers under various taxing entries of List II, which could not have been the intention of the framers of the Constitution. ART. 304(b) IS APPLICABLE ONLY TO NON-FISCAL LAWS AND NOT TO TAX LAWS :- 94. Ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is what is meant here to be dealt with . 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 the 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. [ Emphasis Added ] (Page. 253 of the said book of Select Documents-Project Committee) 96. In October 1947, the Draft presented by the Drafting Committee shifted the then Art. 10 outside the Part on Fundamental Rights (Right of Freedom) to Articles 243 and 244 and the power under Art. 244(b) was kept within the States. Art. 244(b) as adopted reads as under:- 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 goods imported from other States any tax to which similar goods manufactured or produced in that State are subject, so, however, as not to discriminate between goods so imported and goods so manufactured or produced; and (b) to impose by law such reasonable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... easons supporting the conclusion that a tax simpliciter is not a restriction on the freedom of trade. Article 304 itself makes a distinction between taxes and restrictions and the correct conclusion to draw from this fact is that restrictions in Art.304 (b) do not include a tax. Secondly, by virtue of the non obstante clause, Art.304 (b) enables even discriminatory restrictions to be imposed which are forbidden by Art. 303 (1). We have seen that Art. 303(1) cannot possibly refer to taxes. Thirdly, the whole scheme of taxation in our Constitution would be completely dislocated if Art.304 (b) included a tax. The taxing powers of the Union and the States have been made mutually exclusive so that Parliament cannot deprive the States of their taxing powers as has happened in countries where the powers of taxation are concurrent. It would be surprising if the Union legislature, i.e. Parliament could not take away the taxing powers of the State legislatures and yet it would be open to the Union executive under Art.304 (b) to deprive the State legislatures of their taxing powers. Again, if restrictions include a tax, two questions would arise. As a matter of language, Art.302 would then ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b) would be somewhat akin to the assent contemplated in Art. 254. Such assents are not judicially reviewable. [vide Kaiser-i-Hind (P) Ltd. and Anr. v. National Textile Corpn. (Maharashtra North) Ltd. and Others (2002) 8 SCC 182, ( Paras 23 to 27 )] 101. If the framers of the Constitution intended that State legislation required sanction of the President for tax laws pertaining to inter-State trade, commerce and intercourse, the Constitution would have made an express provision in the Constitution. Art.274 says that no Bill or Amendment which imposes or varies any tax or duty in which States are interested; or which alters meaning of agricultural income under Income Tax Act or principles of distribution; or, imposes surcharge for Union purpose shall be introduced or moved in either House of Parliament except on the recommendation of the President . This indicates the significance of revenue for States and also the limits on Union. If framers intended to have an identical framework in Art. 304 for State Tax Laws they would have expressly said so. Art. 288 also provides for the role of President in the context of imposition of tax by States in respect of water and electricity. Under A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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? 104. The core question which needs to be addressed is whether the tax levied under entry 52, List II would impinge upon Article 301. Entry 52, List II reads as: Tax on the entry of goods into a local area or consumption or sale therein . A bare reading of the entry would show that entry tax can be levied only on the satisfaction of the conditions in entry 52 of List II namely: (i) the tax to be levied on the entry of goods into local area; (ii) entry of goods into the local area is for consumption, use or sale therein. 105. There are two other entries in the Constitution which also authorize the levy of taxes which fall essentially on the movement of tradables within the country, viz., entry 56 of the State List and entry 89 of the Union List. Entry 56 of the State List empowers the State to levy taxes on goods and passengers carried by road or inland waterways ; while entry 89 of the Union List contemplates the levy of terminal taxes on goods or passengers carried by r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... causing wastage of business hours, loss of fuel etc. 108. Entry tax like octroi is a tax on entry of goods into a local area for consumption, use or sale therein. However, entry tax is different from octroi, inter alia , in the following respects:- Firstly, it is not collected at the checkpost; but is payable by furnishing returns of the purchases from outside the local area or the details of the goods entered into the local area. Entry tax is easier to administer as returns are filed on self- assessment and it avoids the harassment associated with octroi. Secondly, it is imposed as an ad valorem tax as against octroi, which is generally a combination of specific and ad valorem levies. Thirdly, entry tax is a State-level levy while octroi is a local levy; entry tax revenue is treated as State revenue and is spent on local bodies for their development and the State in general. 109. On behalf of the assessees, it was contended that proper meaning attached to the words local area in Entry 52 is an area administered by a local body like a municipality, a district Board, a local Board, a Union Board, a Panchayat or the like. In this regard, reliance has been placed upon Diamond Sugar M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levy is upon the entry of goods into those local areas alone. This is an important distinction which should be kept in mind while appreciating the aspect and also while examining the decisions of this Court rendered in fifties and sixties). The facilities provided in the State are the facilities provided in the local areas as well. Interests of the State and the interests of the local authorities are, in essence, no different . 36. Entry 52 empowers the State Legislature to levy this tax. The local authorities cannot themselves levy this tax. The power is that of the State Legislature and of none else. So long as the tax is levied upon the entry of goods into a local area for the purpose of consumption, use or sale therein, the requirement of Entry 52 is satisfied. The character of the tax so levied is that of entry tax by whatever name it is called ..From the point of view of the entry tax, one may say that the State is a compendium of local areas. Spending for the purposes of the State is thus spending for the purposes of local areas. Situation may perhaps be different where the local areas are confined to a few cities or towns in the State. But where the local areas span the ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sold therein. If the goods merely enter into a local area and then move to another destination beyond that local area, no tax can be levied under entry 52. To attract a levy under entry 52, List II, the goods must come to rest in the local area where they are taxed in the sense that their further movement and transport stands terminated and the goods are supposed to be used, consumed or sold in that local area. Since the taxable event under entry 52 is not the mere entry of the goods into the local area, but the fact that the goods are also to be used, consumed or sold, the necessary sequiter is that the movement of goods is terminated in that local area. Power to levy entry tax lies within the competence of a State Legislature. Since entry tax is leviable at the termination of the movement of trade and the goods have entered the local area for the purpose of use, consumption or sale, the levy of entry tax does not restrict flow of trade, commerce or intercourse and is not violative of Arti. 301 of the Constitution. 113. Taking us through various States legislations, Senior Counsel Mr. Harish Salve on behalf of the assessees contended that the entry tax levied by State legislation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed goods. Unlike Section 92 of the Australian Constitution, Art. 304(a) does not talk of uniformity. Section 92 of the Australian Constitution reads as follows:- On the imposition of uniform duties of customs, trade, commerce, and intercourse among the States, whether by means of internal carriage or ocean navigation, shall be absolutely free. No such restriction is imposed on the legislative power of the States in India to ensure uniformity in levy of a particular tax. The raison d etre for use of the expression so, however, as not to discriminate is to prohibit protectionism. Moreover, Constitution of India does not contain a provision similar to Section 55 of the Australian Constitution which mandates one tax law on one subject. In India, the State Legislature is nowhere obligated by the Constitution to ensure that the law imposing tax deals with one subject of taxation only. 117. The chargeable event in the case of entry tax is entry of goods into a local area. By its very nature, entry tax does not contemplate impost on indigenous goods. Goods imported into a local area from another State are subjected to entry tax but goods entering into a local area from another local area o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax State, causing loss of revenue to the high-rate tax States, where the goods are used or consumed. Let us take an example of entry tax in the case of motor vehicles. System of sales tax on motor vehicles varies from one State to another. Rates of tax also vary according to the category of the vehicles viz., car, jeep, scooter, motorcycle, truck, tractor etc. Inter-State sales tax differential is large enough to induce trade diversions from high-rate tax States to low-rate tax States. These trade diversions have their impact on the collection of sales tax and results in loss of tax revenue to the State and the local area where the vehicles are used; but there is tax gain to the exchequer of the low-rate tax State where the vehicles are shown to have been purchased. Thus levy of entry tax by the importing State where the vehicles are used is justified to accord equal treatment to vehicles purchased within the State and those purchased from outside. 120. Often the diversion occurs merely on paper; for instance, manufacturers of vehicles in Tamil Nadu may employ local dealers in low-rate tax State/Union territories to sell their products to consumers all over the country. Where the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that are cast on persons who bring the goods into the taxing State and that which is suffered by the persons who manufacture or produce the goods within the State. Art. 304(a) does not prevent levy of tax on goods imported from other States. The expression used is any tax ; what is prohibited 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 against by imposing a higher tax thereon than on local goods. If the tax burden on both the categories are almost the same, then the entry tax obviously cannot constitute an impediment to the very flow of trade and commerce across the borders of the State. There is no merit in the contention of the assessees that the levy of entry tax only on goods imported from other States and not on indigenous goods is discriminatory and violative of Art. 304(a). 123. In a catena of decisions, this Court has struck down the levy of entry tax on the imported goods holding that the levy is discriminatory and not saved by Art. 304(a). In Indian Cement and Ors. v. State of Andhra Prade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d is an area of concern. 127. Contention of States is that apart from legislative power to levy taxes, States also have the power to grant exemptions, tax concessions or incentives to the goods manufactured within the State so as to encourage the manufacturing units and traders within the State, and also to attain economic growth and development. Reiterating the same, the learned Attorney General has submitted that such fiscal measures are necessary for economic parity as also for further strengthening of the economic unity of the nation which the assessees themselves desire. Placing reliance upon Video Electronics Pvt. Ltd. and Anr. v. State of Punjab and Anr. (1990) 3 SCC 87, it was submitted that every differentiation in the tax rebate, exemption or tax concession granted to indigenous goods which may result in differentiation in the rate of tax on goods imported into the State, would not amount to discrimination falling foul under Art.304(a). The States submit that every differentiation is not discrimination, and only those restrictions which impede the flow of trade, commerce and intercourse would fall foul under Art.304 (a). The above contention of the States has been favoura ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is formed to preserve or secure regional autonomy, that is not done at the sacrifice of notional interests. Unless the national interests are safeguarded, the country would be divided into pieces, resulting in a weak government unable to maintain itself from foreign aggression, and would also create economic chaos in an age when apparently local disturbances have a wide repercussion. It is this last mentioned economic strength of the federation which is intended to be ensured by the safeguard for maintaining freedom of trade, commerce and intercourse throughout the federal territory, which safeguard the Union and the States are both enjoined not to violate. [ Page 613 ] Part XIII and the provisions therein are to be interpreted in a manner that encourages a backward region or creates a level playing field for those parts of the country that may not have reached the desired level of development. 130. Historically, regional imbalances in India started from the British regime. During that time, industrialists started development in a few earmarked regions of the country like the metropolitan cities of Kolkata, Mumbai, Chennai that possessed rich potential for manufacturing, trading a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or States, but so far as all States and their trade and commerce inter se is concerned. Therefore, I have proposed a very simple provision as has been embodied in my amendment No. 340. [ Page No. 1133] While the proposed amendments were not accepted, the debate acknowledged that flexibility to allow certain amount of leverage to the States was necessary and also desirable. It is apposite to refer to the following observation by Shri Alladi Krishnaswami Ayyar in Constituent Assembly Debates dated 30.07.1949 to 18.09.1949 :- Shri Alladi Krishnaswami Ayyar: . .My Friend Dr. Ambedkar, in the scheme he has evolved, has taken into account the larger interests of India as well as the interests of particular State and the wide geography of this country in which the interests of one region differ from the interests of another region .. My Friend Mr. Krishnamachari has pointed out that this freedom clause in the Australian Constitution has given rise to considerable trouble and to conflicting decisions of the highest Court. There has been a feeling in those parts of Australia which depend for their well-being on agricultural conditions that their interests are being sacrificed to manufactur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eveloped regions, which provide infrastructural support required to maintain those industries. This has accelerated the development in these forward States; and the backward regions, unable to attract significant investment have not seen much growth. To counter-balance this tendency, various incentive and disincentive schemes have been introduced to direct investments to backward regions. However, the success of these policies has been limited because often the States with these backward regions are unable to meet their expenses and provide economic overheads, such as transport, communication, power, banking insurance etc. This has widened the gaps between the States where investments of the past have created adequate social and economic infrastructure to attract private investments and the States that were neglected in the past and are unable to attract investments due to lack of infrastructure. [Reference: N J Kurian, Regional Disparities in India , Planning Commission of India, 2001 available at: http://planningcommission.nic.in/reports/sereport/ser/vision- 2025/regdsprty. 133. A recent news article published in The Hindu , titled The gap between rich and poor States , delineate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew Delhi Edition dated 5th September, 2016 ] 134. Since economic unity of the nation is the underlying object for freedom in Art. 301, it would be necessary to define the concept of economic unity adopted by the Constitution of India. Firstly, economic unity cannot but be federal in nature; it must involve the even development of all the States. All States, particularly, the underdeveloped and far-flung border-States have a right to develop themselves so as to secure the welfare of their residents. Secondly, the object of freedom of trade, commerce and intercourse is to foster economic unity by contribution to the development of all the States. Thirdly, as per the Directive Principles of State Policy, the States are to sub-serve common good; secure and protect a social order which stands for the welfare of the people; endeavour to provide an adequate means of livelihood; and also secure, within the limits of its economic capacity the right to work, education and public assistance. 135. Re-organisation of States is yet another factor which has to be borne in mind. Creation of State of Uttarakhand from the undeveloped hilly area of Uttar Pradesh; State of Jharkhand from the predomina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifferentiation and discrimination has been culled out in Kathi Raning Rawat v. The State of Saurashtra (1952) SCR 435, wherein the Constitution Bench held as under:- Patanjali Shastri J : . All legislative differentiation is not necessarily discriminatory. In fact, the word discrimination does not occur in Article 14. The expression discriminate against is used in Article 15(1) and Article 16(2), and it means, according to the Oxford Dictionary, to make an adverse distinction with regard to; to distinguish unfavourably from others . Discrimination thus involves an element of unfavourable 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 statue 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Constitution cannot be read in isolation. It is part and parcel of a single constitutional instrument envisaging a federal scheme and containing general scheme conferring legislative powers in respect of the matters relating to list II of the 7th Schedule on the States . It also confers plenary powers on States to raise revenue for its purposes and does not require that every legislation of the State must obtain assent of the President. Constitution of India is an organic document. It must be so construed that it lives and adapts itself to the exigencies of the situation, in a growing and evolving society, economically, politically and socially. The meaning of the expressions used there must, therefore, be so interpreted that it attempts to solve the present problem of distribution of power and rights of the different States in the Union of India, and anticipate the future contingencies that might arise in a developing organism. Constitution must be able to comprehend the present at the relevant time and anticipate the future which is natural and necessary corollary for a growing and living organism. That must be part of the constitutional adjudication. Hence, the economic d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the rate of tax and the item of goods in respect of the sale on which it is levied. Every differentiation is not discrimination. The word 'discrimination' is not used in Article 14 but is used in Articles 16, 303 304(a). When used in Article 304(a), it involves an element of intentional and purposeful differentiation thereby creating economic barrier and involves an element of an unfavourable bias. Discrimination implies an unfair classification. Reference may be made to the observations of this Court in Kathi Raning Rawat v. State of Saurashtra,1952 SCR 435 where Chief Justice Shastri at p. 442 of the report reiterated that all legislative differentiation is not necessarily discriminatory. At p. 448 of AIR) of the report, Justice Fazal Ali noticed the, distinction between 'discrimination without reason' and 'discrimination with reason'. The whole doctrine of classification is based on this and on the well-known fact that the circumstances covering one set of provisions or objects may not necessarily be the same as these covering another set of provisions and objects so that the question of unequal treatment does not arise as between the provisions covered b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e State of Jammu and Kashmir from sales tax while subjecting the edible oil produced in other States to sales tax at 8 per cent. A subsequent Notification was issued on 20.12.1993 as a result of which the general rate of sales tax payable on edible oil became 8%. The manufacturers of edible oil from the adjoining States claimed that the exemption granted from payment of tax to the local industries was discriminatory. The exemption given by the Government of Jammu and Kashmir to the manufacturers of the edible oil was absolute and the period of exemption was five years which was later extended by another five years. The said legislation was struck down on the ground that the State has brought about discrimination prohibited by Art. 304(a) of the Constitution. The Court declined to apply the limited exception carved out in Video Electronics and observed that the said exception in Video Electronics cannot be widened or expanded to cover cases of a different kind. This Court held that the unconditional exemption granted to edible oil industries within the State of Jammu and Kashmir for a period of ten years and at the same time subjecting edible oil imported from other States to sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r tax concessions for a certain period of time would be permissible and would fall outside the scope of Part XIII and Art. 304(a). Such action of the State Government is not discriminatory; rather it aims at ensuring economic equality. 142. In Video Electronics and Digvijay , this Court held that it is constitutionally permissible for a State Legislature to make laws that promote and encourage local trade; a form of affirmative action to move beyond the concept of discrimination towards true and a stronger union which is the underlining objective of the Constitution. Although balanced growth and economic integration of the nation as a whole has been accepted as one of the major objectives of economic planning, it is to make a headway in achieving the object. The growing regional disparities have become a reality and hence may pose a barrier to India s future economic growth. 143. India is a union of States with federalism as a basic feature of the Constitution. However, revenue-wise Union has an edge over the States. All major taxes like income tax, wealth tax, service tax, excise duty etc. are with the Union. Taxes raised by the States are insufficient to discharge their mandate a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Mart which relies upon Mahavir Oils is also held bad in law. Moreover, Indian Cement needs no consideration as it has been specifically overruled in Digvijay. The conclusions in this regard could be summarized as under:- Any difference in the rate of tax on goods locally manufactured and those imported, such difference not being discriminatory does not fall foul of Art. 304(a); Any incentive/benefits of concession in the rate of tax given to the indigenous manufacturers in order to encourage the manufacture/production in the State cannot be said to be discriminatory. Repercussions of Art. 304(a) when no local goods are produced: 146. The State may by law impose any tax on imported goods to which similar goods manufactured or produced in the State are subject. It is the submission of the assessees that when a State does not produce or manufacture goods within its territory then it cannot resort to the power conferred on it by Art.304(a) to impose a tax on similar imported goods. In support of their contentions, the assessees placed reliance upon Kalyani Stores v. State of Orissa (1966) 1 SCR 865, where no foreign liquor was produced or manufactured in the State of Orissa but tax w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st II is materially distinct from a levy under entry 52, List II and thus, an interpretation of the law relating to the former cannot be applied to the latter. 147. Furthermore, Kalyani Stores does not appear to have noticed the non-obstante clause in Art. 304 N otwithstanding anything in Article 301 or Article 303 . . The non obstante clause should be understood in a manner appropriate to the substance of Articles 302 to 304. The true source of power of the State Legislature remains in Part XI, in Article 245 read with Article 246 and entries of List II. Art.304 is not a source of power; it embodies a re-statement of powers conferred under Articles 245 and 246 read with the entries of List II of Seventh Schedule with some limitations. 148. The rigorous view taken in Kalyani Stores was diluted in State of Kerala v. Abdul Qadir and Others (1969) 2 SCC 363. The State of Kerala levied a tax on tobacco which was imported into the State from outside. No tobacco was manufactured or produced within the State of Kerala. The Court, upon a challenge to the tax law, upheld the levy of tax on tobacco and observed that the correct approach was to see whether the impugned tax impeded the free fl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 19(1)(g) read with Art. 19(6) and Art. 14. With these observations, I hold that the power to impose a tax on imported goods is not taken away when no similar local goods are manufactured within the State and thus, the law laid down in Kalyani Stores is not a good law . Levy of Entry Tax on Imported Goods 152. Most of the States levy entry tax on the goods imported from outside the country when they enter into a local area for consumption, use or sale therein. The issue that arises is as to whether State Legislature is competent to levy entry tax on the goods imported from other countries when they enter into a local area for consumption, use or sale therein. 153. Contention of the assessees is that import and export across the customs frontiers are covered by entry 41, List I; duties of customs including export duties are covered by entry 83, List I of the Seventh Schedule and thus transactions relating to import/export across customs frontiers including duties of customs including export duties fall within the exclusive domain of the Parliament. It is further contended that the mandate of Clause 1(d) of Art. 286 of the Constitution prevents the State from levying sales tax so as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt . Goods brought into the country from abroad. The importation of certain goods, as authorized reprints of copyright books, false coin and indecent or obscene prints, is expressly forbidden and with regard to certain other goods, such as wine, spirits and tobacco, restrictions are imposed as to the place and manner of their importation. Goods or services brought into a country for sale, from abroad, or to bring in such goods or services. ( Trade Finance Banking ) [ Page 3207 ] 157. Similarly, as per Section 2(e) of the Foreign Trade (Development and Regulation) Act (22 of 1992), Import and export means respectively bringing into, or taking out of India, any goods by land, sea or air. 158. Import and export across customs frontiers and definition of customs frontiers are covered by entry 41, List I and duties of customs including export duties are covered by entry 83, List I of the Seventh Schedule. Entry 41 and entry 83 of List I of the Seventh Schedule read as under:- 41 . Trade and commerce with foreign countries; import and export across customs frontiers; definition of customs frontiers. 83 . Duties of customs including export duties. 159. As per Section 2(28) of the Customs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e country are not integral. Import of goods and customs clearance and the entry of goods into the local areas are two distinct events. In the case of customs duty, the taxable event is entry of goods into the territory of India. The taxable event under entry 52, List II is the entry of goods into local area for consumption, use or sale therein. Two taxable events are distinct in law and there is no overlap. 162. Under the Indian Constitution, the distribution of power with regard to tax has been done in a mutually exclusive manner and in great detail with reference to different aspects of property or goods. Considering an issue with regard to excise duty and sales tax payable by a manufacturer upon manufacture and sale in Province of Madras v. M/s Boddu Paidanna and Sons AIR 1942 FC 33 = 1942 FCR 90, the Federal Court has held that:- If the taxpayer who pays a sales tax is also a manufacturer or producer of commodities subject to a central duty of excise, there may no doubt be an overlapping in one sense; but there is no overlapping in law. The two taxes which he is called on to pay are economically two separate and distinct imposts. There is in theory nothing to prevent the Centra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India (2005) 4 SCC 214, the levy of service tax on carriage of goods by transport operators was challenged as being legislatively beyond the competence of Parliament. This Court held that there is a distinction between the object of tax, the incidence of tax as well as collection machinery. The legislative competence is to be determined with reference to object of the levy. It was held that the service tax and the tax under entry 56, List II are distinct. 166. As already noted, under our Constitution, there is no overlapping in the taxing power. The Constitution gives independent powers of taxation to the Union and the States. The taxing power of the Union and of the States are mutually exclusive. This avoids the difficulties which have arisen under other Federal Constitutions as rightly observed in Hoechst Pharmaceuticals v. State of Bihar (1983) 4 SCC 45 and State of West Bengal v. Kesoram Industries (2004) 10 SCC 201. 167. The other contention of the appellants is that the doctrine of Unbroken Package should be applied in the context of entry 83, List I as was initially applied by US courts. Doctrine of Unbroken Package postulates that import of goods continues even after crossi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ords the High Court relied on the 'original package doctrine' as enunciated by the American Court. Reliance was placed by the High Court upon the decision of this Court in the Central India Spinning and Weaving and Manufacturing Co. Ltd. The Empress Mills, Nagpur v. Municipal Committee, Wardha [1958]1SCR1102 . That was a case which arose under the C.P. and Berar Municipalities Act and the question was whether the power to impose 'a terminal tax on goods or animals imported into or exported from the limits of a municipality' included the right to levy tax on goods which 'were neither loaded or unloaded at Wardha but were merely carried across through the municipal area'. This Court said that it did not. The word 'import', it was thought meant not merely the bringing into but comprised something more, that is 'incorporating and mixing up of the goods with the mass of the property in local area', thus accepting the enunciation of the 'Original Package Doctrine' by Chief Justice Marshall in Brown v. State of Maryland 6 L. Ed. 78. Another reason given by the learned Judges to arrive at the conclusion that they did, was that the very levy w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es may be licensed. The public warehouses are appointed under Section 57 and private warehouses are licensed under Section 58. 174. On behalf of the States, it was submitted that there is no submission by any of the assessees that there is a warehousing station in their factory units or in the local area where they are located or that there is any public warehouse or private warehouse so located. Our attention was drawn to SLPs pertaining to Indian Oil Corporation, Vedanta and NALCO to contend that the assessees have not produced any evidence nor is there any pleading that the Bill of Entry is filed in the factory units or in a land custom station which is located in the same local area as the assessees unit. Hence, it is submitted that the warehouse and warehouse bond based contentions have been advanced without any basis in pleadings and facts. 175. A comparison of Sections 58 and 57 shows that a licensed private warehouse is different from a public warehouse. Section 58 deploys the expression dutiable goods imported by or on behalf of the licensee, or any other imported goods . Similar expression is not used in Section 57 with respect to public warehouses wherein dutiable goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocal area practically disappears. Articles 304(a) and 304(b) are to be read disjunctively; both apply to different subject matters; while Art. 304(a) deals with tax, Art. 304(b) deals only with non-fiscal matters. Conclusions on the incidental questions arising under Question No.4:- Where there is equivalence in terms of tax treatment between the locally produced goods and the ones imported from other States, levy of entry tax on the goods imported from other States when there is no such levy on the locally produced goods is not discriminatory. Every differentiation is not discrimination. Any difference in the rate of tax on goods locally manufactured and those imported, such difference not being discriminatory does not fall foul under Art.304(a). Any incentive/benefits of concession in the rate of tax given to the local manufacturers/producers in order to encourage the local manufacturers/production in the State cannot be said to be discriminatory. Digvijay and Video Electronics have laid down the correct law. Mahavir Oil Mills is not a correct view. Levy of entry tax on the goods imported from the other States is not discriminatory merely on the ground that there are no similar g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the State need not maintain a separate fund for the compensatory taxes so collected from the traders enjoying the benefit of the services provided by the State; rather it is sufficient if the State provides certain facilities for better conduct of traders business. This Court held as under:- 28 . Nor do we think that it will make any difference that the money collected from the tax is not put into a separate fund so long as facilities for the trades people who pay the tax are provided and the expenses incurred in providing them are borne by the State out of whatever source it may be Having observed so, in Automobile itself, this Court had ruled out the element of quid pro quo from the ambit of compensatory tax. While stressing on the need for ensuring that the assessees are not paying much more than what is required for providing the facilities , the Court merely intended to prohibit levy of an exorbitant tax. It was nowhere intended by the Court to authorise levy of fee in the name of compensatory tax . 181. In various cases, this Court has repeatedly held that regulatory measures like licensing or price control or compensatory measures cannot be treated as violative of free ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the expenditure incurred. What is necessary to uphold a regulatory and compensatory tax is the existence of a specific, identifiable object behind the levy and a nexus between the subject and the object of the levy. If the object behind the levy is identifiable and if there is sufficient nexus between the subject and the object of the levy, it is not necessary that the money realised by the levy should be put into a separate fund or that the levy should be proportionate to the expenditure. There can be no bar to an intermingling of the revenue realised from regulatory and compensatory taxes and from other taxes of a general nature nor can there be any objection to more or less expenditure being incurred on the object behind the compensatory and regulatory levy than the realisation from the levy . [ Emphasis added ] 183. In M/s. Bhagatram Rajeevkumar v. Commissioner of Sales Tax, M.P. and Ors. 1995 Supp (1) SCC 673, it was held that even if there is some link or some connection between the tax and the facilities extended to the trade directly or indirectly the levy cannot be challenged as invalid. 184. The same dictum was followed in State of Bihar and Ors. v. Bihar Chamber of Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, outside the scope of Articles 301, 302 304. 38 .... If the impugned law seeks to control the conditions under which an activity like trade is to take place then such law is regulatory. Payment for regulation is different from payment for revenue. If the impugned taxing or non-taxing law chooses an activity, say, movement of trade and commerce as the criterion of its operation and if the effect of the operation of such a law is to impede the activity, then the law is a restriction under Article 301. However, if the law enacted is to enforce discipline or conduct under which the trade has to perform or if the payment is for regulation of conditions or incidents of trade or manufacture then the levy is regulatory. This is the way of reconciling the concept of compensatory tax with the scheme of Articles 301, 302 and 304. ... The Bench further held: 45 . To sum up, the basis of every levy is the controlling factor. In the case of a tax , the levy is a part of common burden based on the principle of ability or capacity to pay. In the case of a fee , the basis is the special benefit to the payer (individual as such) based on the principle of equivalence. When the tax is imposed as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inless Ltd. (2) equated compensatory tax to a fee and held that compensatory tax is based on the principle of pay for the value and that it is a sub-class of fee . It was further held that compensatory tax is a recompense/reimbursement. The distinction between a tax and a fee lies primarily in the fact that a tax is levied as a part of common burden, while a fee is for payment of a specific benefit or privilege rendered by some governmental agency. The distinction between tax and fee has been elucidated in Gujarat Ambuja Exports Limited and Another v. State of Uttarakhand and Others (2016) 3 SCC 601 as under: .it is necessary to consider the difference between the concept of tax and that of a fee. The neat and terse definition of tax which has been given by Latham, C.J., in Matthews v. Chicory Marketing Board (1938) 60 C.L.R. 263 is often cited as a classic on this subject. A tax , said Latham, C.J., is a compulsory exaction of money by public authority for public purposes enforceable by law, and is not payment for serviced rendered . In bringing out the essential features of a tax this definition also assists in distinguishing a tax from a fee. It is true that between a tax and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the Constitution provides another safeguard in lieu of ensuring legitimate use of public money. The manner of appropriation of money collected in the Consolidated Fund of the State falls under Part VI, Chapter III, ranging from Articles 202 to 206 of the Constitution. There are sufficient constitutional safeguards for the appropriation of money collected in Consolidated Fund. The revenue generated by the States in the form of entry tax has to necessarily form part of this Fund, and once it so subsumed, States cannot be asked to show a proximate quid pro quo by furnishing quantifiable data as to their expenditure. It may not be possible for the States to show with mathematical precision a direct link between the expenditure incurred in individual cases and the corresponding levy imposed. 188. I hold that the entry tax levied by various States, falling within the domain of entry 52, List II, is a tax simpliciter, even though by nomenclature it is termed as a compensatory tax . 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. The ratio laid down in Jindal Sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... suffer any loss of revenue solely because of judicial interpretations and innovations in Automobile and the cases 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 that the money realized by the levy should be put into a separate Fund or that the levy should be proportionate to the expenditure. There is no bar to subsumption of the revenue realized from regulatory/compensatory taxes into the Consolidated Fund of the State as they are no different from other taxes of a general nature. Moreover, the quantum of expenditure incurred in achieving the object behind a compensatory levy cannot be inquired into. Jindal Stainless Ltd. (2) Anr. v. State of Haryana Ors. (2006) 7 SCC 241 is not a correct view in adopting quantifiable data approach; for a tax, there is no requirement of proximate quid pro quo and Jindal Stainless Ltd. (2) is overruled. The view taken in Bhagatram and Bihar Chamber of Commerce is correct as the same is in harmony with the original design of compensatory tax laid down in Automobile . REFUND AND UNJUST ENRI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such prospective application is to save the taxes which has been already collected. In order to support his contentions, he relied on the decisions of this Court in Synthetics Chemicals v. State of U.P. (1990) 1 SCC 109; Belsund Sugar Co. Ltd. v. State of Bihar (1999) 9 SCC 620; Mafatlal Industries Ltd vs Union of India (1997) 5 SCC 536 etc. 195. By catena of judicial pronouncements, this Court has fairly laid down the concept of `unjust enrichment' in respect of tax laws. The doctrine of unjust enrichment is that no person can be allowed to enrich inequitably at the expense of another. A right of recovery/payment under the doctrine of unjust enrichment arises where retention of a benefit is considered contrary to justice or against equity. The concept of unjust enrichment is applicable for the purpose of grant of refund. The concept provides that if a person pays tax/duty to the Government in terms of the prevailing tax Statutes and passes it on to the consumers and, subsequently, the tax/duty is found not payable, refund cannot be claimed from the Government authorities, as whatever liability he had incurred has already been recovered. And, if he gets the refund, he would be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the ground that it has been collected from him contrary to law. The power of the court is not meant to be exercised for unjustly enriching a person. The doctrine of unjust enrichment is, however, inapplicable to the State. State represents the people of the country. No one can speak of the people being unjustly enriched. 197. In Godfrey Philips India Ltd. v. State of U.P. (2005) 2 SCC 515, the constitutional validity of the Uttar Pradesh Tax on Luxuries Act, 1995 as also other State Acts was challenged inter alia on the ground of legislative competence of the State Legislatures. The Court allowed the petition and held that the State Legislatures were not competent to impose luxury tax on tobacco and tobacco products and the Acts were declared ultra vires and unconstitutional. In the intervening period, however, tax was collected by the appellants from consumers and also paid to the State Governments. The Court held as under: 94. It was stated on behalf of the State Governments that after obtaining interim orders from this Court against recovery of luxury tax, the appellants continued to charge such tax from consumers/customers. It is alleged that they did not pay such tax to re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purview of Art. 301. When the entry tax is levied by the Entry Tax Act 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. Articles 304(a) and 304(b) are to be read disjunctively; both apply to different subject matters; while Art. 304(a) deals with tax, Art. 304(b) deals only with non-fiscal matters. Where there is equivalence in terms of tax treatment between the locally produced goods and the ones imported from other States, levy of entry tax on the goods imported from other States when there is no such levy on the locally produced goods is not discriminatory. Every differentiation is not discrimination. Any difference in the rate of tax on goods locally manufactured and those imported, such difference not being discriminatory does not fall foul under Art.304(a). Any incentive/benefit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of compensatory tax laid down in Automobile . Unjust Enrichment: The concept of unjust enrichment is applicable for considering the question of refund. 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. JUDGMENT Dr D Y CHANDRACHUD, J This judgment is structured to consist of the following parts : A Introduction; B Part XIII of the Constitution : text and context; C Constitutional history as a guide; D The trend-setting decisions : Atiabari and Automobile Transport ; D1 Atiabari : Article 301 and taxation D.2 Automobile Transport E Compensatory taxes; E.1 Original understanding E.2 Khyerbari E.3 Subsequent applications E.4 The breaking point E.5 Doctrinal concerns and inconsistencies F The content of freedom : goods, services, persons and capital; G Taxation and Federalism; H Taxing powers; H.1 Article 245 and constitutional limitations H.2 Sovereignty and constitutional limitations H.3 Part XIII and taxation H.3.1 All taxes are not impediments H.3.2 Articles 302, 303 and 304 H.3.3 Construing Article 304 H.3.4 Conjunctive or disjunctive: may ; and H.3.5 Article 304(a) not t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entity. Part XIII was formulated in this background. It represents the balancing vision of the framers and seeks to create an equilibrium between free trade and regulation, state and federal control and between provincial autonomy and national interests in an area closely related to economic growth and development. 2 Yet, the semantics of the provisions adopted in framing all of six constitutional articles which comprised Part XIII- Articles 301 to 306 - attracted criticism within the Constituent Assembly. One member complained of several provisions threatening to become a paradise for lawyers where there will be so many innumerable loopholes that we will be wasting years and years before we could come to the final and correct interpretation of many clauses P.S. Deshmukh : Constituent Assembly Debates, Vol. IX, pp. 1131; see also: B. Shiva Rao, The Framing of India s Constitution A study, p. 704 (1978) . Many years later, a distinguished Judge of this court spoke of the mix up of exception upon exception in the series of articles in Part XIII that a purely textual interpretation may not disclose the true intendment of the articles Justice S K Das : (1963) 1 SCR 491, Para 10, pg. 52 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inging about economic integration. The economic integration of India into a common market was to be achieved by guaranting the freedom of trade throughout the territory of India. Yet, at its birth the new nation comprised of different regions, with disparate social attainments and economic development. They had their own concerns, be they the erstwhile princely states or the states which formed part of British India. Part XIII reflected an attempt by the framers to draw a balance between freedom on one hand and the need to regulate to protect diverse aspects of public interest both of a national and regional character, on the other. The regulatory power under Article 302 would enable the national legislative body to perceive and regulate aspects of public interest of a national character. Within the area of regulation a distribution was envisaged between the Centre and the States to preserve the balance within the newly created federation. The attention that was bestowed to the regulatory requirements of the states in relation to trade and commerce reflected the need for bringing the states on board for producing a viable and acceptable social compact that the constitutional docume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bate on the true meaning of its provisions continues to bedevil academics, lawyers and judges who have had occasion to visit its provisions. 9 The ambit of Part XIII is trade, commerce and intercourse within the territory of India. Article 301 Article 301: Freedom of trade, commerce and intercourse : Subject to the other provisions of this Part, trade, commerce and intercourse throughout the territory of India shall be free. mandates that trade, commerce and intercourse throughout the territory of India shall be free, subject to the other provisions of Part XIII. The freedom thus conferred is subject to the restrictions that are contemplated in the provisions of Part XIII that follow. The sources of the restrictions, the extent of the restrictions and the limitations or qualifications upon the power to restrict are defined in Part XIII. 10 In framing Article 301, the framers of the Constitution made a deliberate departure 88 Article 301: Freedom of trade, commerce and intercourse : Subject to the other provisions of this Part, trade, commerce and intercourse throughout the territory of India shall be free. from the text of the Australian and US Constitutions. Article 1 Section 8 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ong several states (which is used in Article 1 Section 8 of the US Constitution), Article 301 guarantees a more comprehensive coverage to the freedom to include both inter-State and intra-State trade, commerce and intercourse. Throughout the territory of India , means in every part of India. In other words, the freedom that is conferred by Article 301 extends over but is not confined to inter-State movement across State boundaries. 13 The Constitution, while recognising the freedom of trade, commerce and intercourse throughout the territory of India makes that freedom subject to the provisions of Part XIII. Article 302 Article 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 or the territory of India as may be required in the public interest. empowers Parliament to impose restrictions on the freedom of trade, commerce and intercourse between one state and another or within any part of the territory of India. This is subject to qualifications. First, restrictions have to be imposed by law. Second, they m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary to deal with a situation of the scarcity of goods in any part of India. 14 Article 304 Article 304 : Restrictions on trade commerce and intercourse among states : Notwithstanding anything in article 301 or article 303, the Legislature of a State may by law (a) impose on goods imported from other States [or the Union territories] any tax to which similar goods manufactured or produced in that State are subject, so, however, as not to discriminate between goods so imported and goods so manufactured or produced; and (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) shall be introduced or moved in the Legislature or a State without the previous sanction of the President. commences with a non-obstante provision, notwithstanding anything in Article 301 or Article 303 . Under clause (a), a state legislature may by law impose on goods imported from other states, a tax to which similar goods manufactured or produced in that state are subject. This has to be done in a manner that does not discriminate between the goo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o is, however, conditioned by three limitations : the first is that the restriction must be reasonable; the second is that the restriction should be required in the public interest; and the third which is spelt out in the proviso, is that the Bill or an amendment for the purpose of clause (b) shall not be introduced or moved in the legislature of a state without the previous sanction of the President. 16 A plain construction of the provisions of clause (a) and clause (b) of Article 304 would indicate that clause (a) is not exhaustive of the universe of taxing legislation insofar as the state legislatures are concerned. Clause (a) of Article 304 embodies the principle of non-discrimination and prescribes it as a limitation subject to which a state may by law impose a tax on goods which are imported into the state. Clause (a) lifts the embargo arising from Article 301 on the power of a state to impose a tax on goods imported from other states subject to a condition: the State may impose any tax to which similar goods manufactured or produced in that state are subject. Clause (a), in other words deals only with the taxation of goods which are imported from other states or union territ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d political upheaval. The Constituent Assembly debates provide an enriching insight into the problems and concerns that were present to the minds of the draftsmen of the Constitution, as they adopted what became Part XIII. Dr B Shiva Rao in his seminal work titled The Framing of India s Constitution (Chapter 22 Part. 699) explains the historical perspective which led to the attention of the Constituent Assembly being engaged towards the freedom of trade and commerce within the territories of the Union : Under the British Rule, freedom of trade was the established practice in British India, with no inter-provincial duties or other trade barriers. With the advent of provincial autonomy in April, 1937, it was considered necessary to place this mater on a statutory basis. Accordingly, section 297 of the Government of India Act, 1935, prohibited Provincial Governments from imposing barriers on trade within the country; nor could they levy any tax, cess, toll or other due which discriminated between goods manufactured in one locality and similar goods manufactured elsewhere. But this was far from ensuring freedom of internal trade throughout the sub-continent. Indian States could, and ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cessary. (Id. at p.700) 24 The clause was debated in the Constituent Assembly. B N Rau incorporated the following clauses in the draft constitution of October 1947 : Subject to the provisions of any Federal law, trade, commerce and intercourse among the units shall, if between the citizens of the Federation, be free : Provided that nothing in this section shall prevent any unit from imposing on goods imported from other units any tax to which similar goods manufactured or produced in that unit are subject, so, however, as not to discriminate between goods so manufactured or produced : Provided further that no preference shall be given by any regulation of trade, commerce or revenue to one unit over another: 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. (Id. at p.701) 25 The Drafting Committee thereafter redrafted the above provisos which came to be included as independent articles under the heading of Inter-State Trade and Commerce in Part IX of the draft constitution. Ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Article 16 was rendered superfluous. Dr Ambedkar explained that different articles which were scattered in various parts were brought together in one part dealing with the freedom of trade, commerce and intercourse. Shiva Rao adverts to the observations of Alladi Krishnaswami Ayyar, which are significant : Alladi Krishnaswami Ayyar replied that the transfer of a provision in regard to freedom of inter-State trade from one part of the Constitution to another did not alter or affect the nature of the right embodied in it; the mere placing of a provision in the chapter on fundamental rights did not carry with it any particular sanctity, nor did its justiciability depend on such placement. (Id. at p.706) Moreover, with the integration of the Indian states and with the strong federation having materialised there was no need felt to retain the provision for freedom of inter-State trade in the chapter on Fundamental Rights. 29 Partition and the immense human suffering inflicted upon large segments of the population provided a strident political backdrop for the need to preserve the unity of the nation. In assigning the role of a strong centre in the federal polity, the founding father ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w provincial interests : A certain amount of freedom of trade and commerce has to be permitted. No doubt, 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. 31 Yet regional concerns could not be ignored. Addressing the Constituent Assembly, Alladi Krishnaswami Ayyar spoke about the diversity of interests, geographical position and economic attainments of various regions of the country. They required attention as well: My friend, Dr Ambedkar in the scheme has evolved and has taken into account the larger interests of India as well as the interest of particular states and the wide geography of this country in which the interests of one region differ from the interests of another region. There is no need to mention that famine may be raging in one part of the country while there is plenty in another part. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the founding fathers had evident concerns about what they described as parochial interests or narrow provincial policies posing a danger to the economic development of the nation. Hence, the Union Government was conferred with a power of intervention which was qualitatively different from the regulatory power conferred upon the states. To the Union Government was assigned the role of ensuring that the goal of PART C pursuing economic development of the nation as one economic entity was not PART D destroyed by the pursuit of parochial interests. It was in that background that the proviso to Article 304 (b) mandated the prior sanction of the President to a bill or amendment introduced in the state legislature for imposing reasonable restrictions in the public interest on the freedom that was guaranteed by Part XIII. 34 The founding fathers were careful when they noted that it was not possible to elucidate by a watertight formula, the form in which such restrictions may take. The nature of the Indian economy on the eve of the adoption of the Indian Constitution was radically different from the economy which has emerged in the era of trade liberalism and beyond. I shall deal with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er is within Article 301 of the Constitution. 39 The correctness of the view in Atiabari was reconsidered by a larger bench of seven Judges in Automobile Transport (supra) . The Rajasthan Motor Vehicles Taxation Act, 1951 provided for the levy of a tax on motor vehicles used in any public places or kept for use in Rajasthan. The Rajasthan High Court, in view of a judgment rendered by its Full Bench negatived a challenge to the provisions of the Act. The decision of the Rajasthan High Court had been rendered before the judgment in Atiabari was pronounced. When a Bench of seven Judges considered the matter in this Court, Justice S K Das, delivered the leading majority judgment on behalf of himself and Justices Kapoor and Sarkar. 40 The view of the three judges was that the Act did not violate the provisions of Article 301 because the taxes imposed were compensatory in nature which did not hinder the freedom of trade, commerce and intercourse. The interpretation placed by the majority in Atiabari was held to be correct, but subject to this clarification that regulatory measures or measures imposing compensatory taxes for the use of trading facilities do not fall within the purview of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commodities. (Id. at p. 826-827) 44 In the view of Chief Justice Sinha, in this comprehensive sense, taxation of trade, commerce and intercourse would cover almost the entire field of public taxation both in the Union and in the State lists. Hence, 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 . (emphasis supplied) 45 The first reason adduced in Chief Justice Sinha s judgment for not adopting such a comprehensive definition of the freedom under Article 301 is that the power to tax in order to raise revenue is a manifestation of sovereignty. Being a sovereign power, it is not ordinarily justiciable. Second, the power of the states to raise finances for the purpose of government is elucidated in Part XII of the Constitution. Article 265 imposes a prohibition on the levy or collection of a tax except by authority of law. Part XII of the Constitution which deals with finances and Part XIII are self-contained provisions, one not being subject to the other : Hence, both Parts XII and XIII are meant to be self-contained in their respective fields. It cannot, therefore, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e wherewithals to improve different kinds of means of transport, for example, in cane growing areas, unless there are good roads, facility for transport of sugarcane from sugarcane fields to sugar mills may be wholly lacking or insufficient. In order to make new roads as also to improve old ones, cess on the grower of cane or others interested in the transport of this commodity has to be imposed, and has been known in some parts of India to have been imposed at a certain rate per maund or ton of sugarcane transported to sugar factories. Such an imposition is a tax on transport of sugarcane from one place to another, either intra-State or inter-State. It is the tax thus realised that makes it feasible for opening new means of communication or for improving old ones. It cannot, therefore, be said that taxation in every 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch 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. (Id. at p. 829) The conclusions of the Chief Justice are restated in the following propositions : 16 .The objections against the contention that taxation was included within the prohibition contained in Part XIII may thus be summarised: (1) Taxation, as such, always implies that it is in public interest. Hence, it would be the outside particular restrictions, which may be characterised 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 the movement of goods and passengers would be rendered ineffective, if not otios ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstitutional provisions made in that behalf. It cannot be said that the power of taxation per se is outside the purview of any constitutional limitations. (Id. at p. 846) 50 Justice Gajendragadkar noted first, that the power under Article 265 of the Constitution to levy a tax under the authority of law is referable to Article 245 read with the corresponding legislative entries in the Seventh Schedule. Since Article 245 is subject to the provisions of the Constitution, the power of Parliament and of the state legislatures to impose taxes is subject to the application of constitutional provisions, which must include Part XIII : 37 .Now, if we look at Article 245 which deals with the extent of laws made by Parliament and by the Legislatures of States, it begins with the words subject to the provisions of this Constitution ; in other words, the power of Parliament and the Legislatures of the States to make laws including laws imposing taxes is subject to the provisions of this Constitution and that must bring in the application of the provisions of Part XIII. (Id. at p. 847-848) Second, in this view, the freedom of trade, commerce and intercourse under Article 301 is subject only to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cle 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. (Id. at p. 859) 51 Justice Gajendragadkar did notice the need to draw a balance for preserving the powers of the states in a federal constitution. The test which he formulated is that the restrictions which fall within Article 301 are those which directly and immediately restrict or impede the free flow or movement of trade : 50 ..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; bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hin the ambit of Article 301. For the majority, movement constitutes the soul of trade whereas for Justice Shah, it is not an essential ingredient in all situations. For the majority, it is the movement or the transport part of trade that must be free subject to the limitations in Part XIII. However, it was only such taxes as directly and immediately impede trade that fall within the purview of Article 301. Justice Gajendragadkar rejected the contention that all taxes should be governed by Article 301 whether or not their impact on trade is immediate and direct on the one hand or whether it is remote and mediate on the other. For Justice Shah every law of taxation of commercial intercourse, even when it is a measure for the collection of revenue is hit by Article 301. 55 Having said this, it is necessary also to note that there was at the same time an agreement on principle on certain crucial aspects of Part XIII between the views expressed in the judgment of the majority and the views of Justice Shah. Firstly, the PART D majority (as noted earlier) spoke of constitutional restrictions and limitations on the legislative powers of Parliament and the state legislatures, and emphasise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a burden in the nature of tax. Clause (a) deals with a specific burden of taxation in a limited field. (Id. at p. 881) 56 The basic difference between the judgment of the majority and the decision of Justice Shah lies in the extent to which the taxing power is regarded as being within or outside the purview of Article 301. For the majority every taxing legislation is not within the ambit of Article 301. The guarantee under Article 301 is against such restrictions as directly and immediately restrict or impede the free flow or movement of trade. Only those taxes which directly and immediately restrict trade would fall within Article 301. For Justice Shah all taxation on commercial intercourse would attract the provisions of Article 301. 57 A comparison of the view that was adopted by the majority with the PART D judgment of Chief Justice Sinha would indicate differences of substance on some issues and essentially of degree on other aspects. Chief Justice Sinha prefaced his discussion with the premise that taxation is governed by Part XII and that Part XII and Part XIII are self-contained and independent provisions. Moreover, Chief Justice Sinha held that taxation being an essenti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t XIII controls fiscal legislation. D.2.1 Freedom and regulation 59 Justice S K Das, in the leading judgment of the majority held that though Article 301 runs unqualified , the freedom must necessarily be delimited by considerations of social orderliness : 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 orderly society, has necessarily to add certain qualifications subject to which alone that freedom may be exercised. (Id. at p. 521) 60 Justice Subba Rao in a concurring judgment held that the freedom conferred by Article 301 is a freedom of trade across borders. The freedom is to trade unrestricted by barriers : 35 .. the said composite expression means trade across the borders: what is free is that trade. It is implicit in the concept of freedom that there will be obstructions to it. Such obstructions or barriers may be, in the present context, to the freedom to trade across the borders. Article 301 provides for freedom from the said barriers or impediments in effect operating as barriers. This freedom from barriers cannot operate in vacuum and must be limited by space. A b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rao adopted the same position. Facilitative regulations, in his view, do not restrict trade : 37 Before a particular law can be said to infringe the said freedom, it must be ascertained whether the impugned provision operates as a restriction impeding the free movement of trade or only as a regulation facilitating the same. Restrictions obstruct the freedom, whereas regulations promote it. Police regulations, though they may superficially appear to restrict the freedom of movement, in fact provide the necessary conditions for the free movement. Regulations such as provision for lighting, speed, good condition of vehicles, timings, rule of the road and similar others, really facilitate the freedom of movement rather than retard it. So too, licensing system with compensatory fees would not be restrictions but regulatory provisions; for without it, the necessary lines of communication, such as roads, water-ways and air-ways, cannot effectively be maintained and the freedom declared may in practice turn out to be an empty one. So too, regulations providing for necessary services to enable the free movement of traffic, whether charged or not, cannot also PART D be described as restricti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for public good, but there may be occasions, when the rate or the mode of taxation may be so abhorrent to the principles of natural justice or even to the well settled principles of taxation that it may cause irremediable harm to the public rather than promote public good, that the court may have to hold that it is not in public interest. Nor can I agree with the contention that it is impossible for a court to hold in any case that a rate of taxation is reasonable or not . (Id. at p. 553) In this view, no restriction, if it is unreasonable, can be more deleterious to freedom than the imposition of a fiscal burden on it, which may in certain circumstances destroy the very freedom. Consequently, Justice Subba Rao rejected the notion that laws of taxation are outside the scope of the freedom guaranteed by Article 301. The presumption of the fiscal law being in the public interest does not exclude judicial review where the law has transgressed those boundaries. 65 Justice Hidayatullah was explicit in holding that taxation is within the prohibition contained in Part XIII Id. at p-637. 66 The basic premise of the majority is that tax legislation is subject to constitutional limitations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utonomy even within the fields allotted to them under the distribution of powers envisaged by our Constitution. An examination of the entries in the Lists of the Seventh Schedule to the Constitution would show that there are a large number of entries in the State List (List II) and the Concurrent List (List III) under which a State Legislature has power to make laws. Under some of these entries, the State Legislature may impose different kinds of taxes and duties, such as property tax, profession tax, sales tax, excise duty etc., and legislation in respect of any one of these items may have an indirect effect on trade and commerce. Even laws other than taxation laws, made under different entries in the Lists referred to above, may indirectly or remotely affect trade and commerce. If it be held that every law made by the Legislature of a State which has a repercussion on tariffs, licencing, marketing regulations, price-control etc. must have the previous sanction of the President, then the Constitution insofar as it gives plenary power to the States and State Legislatures in the fields allocated to them would be meaningless . (Id. at p. 524-525) 69 Justice Subba Rao in the concurrin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es which a tradesman pays must burden him, any tax which touches him must fall within Article 304, if the word restriction is given such a wide meaning, every such legislation will then be within the pleasure of the President, and this could not have been intended. Restriction must, therefore, mean something more than a mere tax burden. (Id. at p. 633-634) Every burden of tax, in this view would not be a restriction of trade and commerce. Justice Hidayatullah too shared this concern when he observed : 125 To bring all 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. (Id. at p. 634-635) E. Compensatory Taxes E.1 Original understanding 71 The judgment of the majority evolved the concept of compensatory taxes in response to its felt concern to preserve state autonomy. Compensatory taxes which are in the nature of a ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as held to be compensatory since it facilitated trade and commerce : 19 .The taxes are compensatory taxes which instead of hindering trade, commerce and intercourse facilitate them by providing roads and maintaining the roads in a good state of repairs. (Id. at p. 536) A tax would not cease to be compensatory merely because the precise or specific amount which is calculated is not actually used to provide facilities. The test on whether a tax is compensatory is formulated thus : 19 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. (Id. at p. 536) Even if the proceeds from the tax are not credited to a separate fund that would make no difference so long as facilities are provided for trades people who pay the tax. In his concurring judgment, Justice Subba Rao also adopted the direct and immediate effect test. Justice Subba Rao held that : 38 If a law directly and immediately imposes a tax for general revenue purposes on the movement of trade, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 . 75 Justice Hidayatullah accepted the notion of facilitative regulations such as traffic rules and rules of the road. Such regulatory provisions, in his view, are not restrictions at all since they do not hamper trade or impair its freedom. Consequently, a fee for rendering services to the trade would not hamper or restrict it. Similarly, an administrative fee may also be viewed as a part of regulation and would not fall to be classified as a restriction. A tax however, which is a condition precedent to the right to enter upon and carry on business stands on a different footing : 131. Let us now see whether the validity of taxation laws directly impinging on trade and commerce can be upheld on the ground that they are regulatory. Here, a distinction must be made between fees and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad or on inland waterways) Act - 1961. A Constitution Bench dealt with the challenge to the new law in Khyerbari Tea Co. Ltd. v. State of Assam (1964) 5 SCR 975. 78 Justice Gajendragadkar who delivered the judgment of the majority held that the judgment in Automobile Transport introduced a clarificatory rider to the majority view in Atiabari Id. at p-985 and that it had substantially accepted the earlier decision Id. at p. 986. 79 The opinion of Justice Gajendragadkar in Khyerbari seems to indicate an element of reservation in regard to the concept of compensatory taxes. Compensatory taxes, the judge noted, were evolved in conceptual terms in Australia in the context of Section 92 which is absolute in terms and on its literal construction, admits of no exceptions . Justice Gajendragadkar indicated that the constitutional compulsions which led to the notion of compensatory taxes not being a hindrance to freedom being adopted in Australia were absent in India. Articles 302 to 304 specifically provide for the imposition of restrictions on the freedom guaranteed by Article 301. Justice Gajendragadkar adverted to the minority view of Justice Hidayatullah in Automobile Transport on this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t could be sustained only if it was passed after complying with the provisions of Article 304(b). The Assam Legislature has accordingly adopted the said procedure and passed the Act. If the Act had been compensatory in character, it would have become necessary for us to consider the whole position once again, because it would obviously be unfair and unjust that the earlier Act should have been struck down though it was compensatory in character and in testing the validity of the present Act, it should be open to the petitioners to contend that its compensatory character is irrelevant to the enquiry under Article 304(b). 81 A reference to the larger bench was however obviated since the High Court had held that Act not to be compensatory and no submission to the contrary was urged by the state. The new enactment of the Assam Legislature was upheld against the challenge that it violated Articles 14, 19 and 301 : 45. It is, of course, true that the validity of tax laws can be questioned the light of the provisions of Articles 14, 19 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egulatory and compensatory tax it would ordinarily be well nigh impossible to identify and measure, with any exactitude, the benefits received and the expenditure incurred and levy the tax according to the benefits received and the expenditure incurred. What is necessary to uphold a regulatory and compensatory tax is the existence of a specific, identifiable object behind the levy and a nexus between the subject and the object of the levy. If the object behind the levy is identifiable and if there is sufficient nexus between the subject and the object of the levy, it is not necessary that the money realised by the levy should be put into a separate fund or that the levy should be proportionate to the expenditure. (Id. at p. 328) Reading the nexus requirement into a compensatory tax represented the effort of this Court to bring clarity to the otherwise vague and uncertain core of a judicially evolved doctrine. 84 In G K Krishnan v. State of Tamil Nadu [1975] 1 SCC 375, a tax on motor vehicles under the Motor Vehicle 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 enhance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the nature and the extent of the use made of the roads, as for example, a mileage or ton-mileage charge or the like, and if the proceeds are devoted to the repair, upkeep, maintenance and depreciation of relevant roads and the collection of the exaction involves no substantial interference with the movement. The expression reasonable compensation is convenient but vague. The standard of reasonableness can only lie in the severity with which it bears on traffic and such evidence of extravagance in its assessment as comes from general considerations. What is essential for the purpose of securing freedom of movement by road is that no pecuniary burden should be placed upon it which goes beyond a proper recompense to the State for the actual use made of the physical facilities provided in the shape of a road. The difficulties are very great in defining this conception. But the conception appears to be based on a real distinction between remuneration for the provision of a specific physical service 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... impose a tax conferred upon the states should yet depend upon the sanction of the President under the proviso to Article 304(b) : 27. Whether the restrictions visualized by Article 304(b) would include the levy of a non-discriminatory tax is a matter on which there is scope for difference of opinion. Article 304(a) prohibits only imposition of a discriminatory tax. It is not clear from the article that a tax simpliciter can be treated as a restriction on the freedom of internal trade. Article 304(a) is intended to prevent discrimination against imported goods by imposing on them tax at a higher rate than that borne by goods produced in the State. A discriminatory tax against outside goods is not a tax simpliciter but is a barrier to trade and commerce. Article 304 itself makes a distinction between tax and restriction. That apart, taxing powers of the Union and States are separate and mutually exclusive. It is rather strange that power to tax given to States, say, for instance, under Entry 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver 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. (Id. at p. 678) 90 These observations made a marked departure from the test which was adopted in the judgment of seven Judges in Automobile Transport . The test of a compensatory tax as formulated in Automobile Transport is whether the trade has the use of facilities for the conduct of its business and is required to pay not patently much more than what is required for providing the facilities. In a substantially watered down redefinition of the test, Bhagatram required a substantial or even some link between the tax and the facilities extended 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 Corp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..Though not stated in the counter-affidavit, we can take notice of the fact that the State does provide several facilities to the trade including laying and maintenance of roads, waterways and markets, etc. As a matter of fact, since the levy is by the State, we must also look to the facilities provided by the State for ascertaining whether the State has established the compensatory character of the tax. (Id. at p. 147) The Court in Bihar Chamber of Commerce held that so long as some connection is established between the tax and the trading facilities provided the levy would be held to be compensatory in character. 92 These decisions were doubted by a Bench of two-Judges in Jindal Stripe Ltd . v. State of Haryana (2003) 8 SCC 60. 93 Jindal Stripe involved a batch of 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 B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion under Article 301. However, if the law enacted is to enforce discipline or conduct under which the trade has to perform or if the payment is for regulation of conditions or incidents of trade or manufacture then the levy is regulatory. (Id. at p. 266) 94 The Constitution Bench held that taxes are levied as a part of the common burden. While the foundation of a fee is the principle of equivalence , the basis of a tax is ability to pay. The main basis of a fee or a compensatory tax is an equivalence and a quantifiable measurable benefit . A compensatory tax has to be PART E broadly proportional : 42 Compensatory tax is based on the principle of pay for the value . It is a sub-class of a fee . From the point of view of the Government, a compensatory tax is a charge for offering trading facilities. It adds to the value of trade and commerce which does not happen in the case of a tax as such. A tax may be progressive or proportional to income, property, expenditure or any other test of ability or capacity (principle of ability). Taxes may be progressive rather than proportional. Compensatory taxes, like fees, are always proportional to benefits. They are based on the principle of e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich is guaranteed is subject to legislative control. Articles 302, 303 and 304 are a part of the constitutional scheme which, while defining the ambit of the freedom in Article 301 subjects it to restrictions under Articles 302 and 304. The nature of the restrictions and the limitations on the power of Parliament and of the state legislatures while legislating to impose restrictions is conditioned by constitutional parameters. The conditions are based on the fulfilment of substantive and procedural norms: substantive such as the principle of non-discrimination, the element of public interest and reasonableness; PART E and procedural (if it can be regarded as a matter of procedure) by requiring the sanction of the President prior to the introduction of a Bill in the state legislature. 97 At a doctrinal level, the Court in Automobile Transport was cognizant of the fact that regulation of trade and commerce may, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice Subba Rao also adverted to a tax which is compensatory or regulatory not operating as a restriction on the free movement of trade. 99 Compensatory taxes were envisaged as a doctrinal concept to preserve an area where the sovereignty of the state legislatures in fiscal matters could operate without the constraining influence of a prior Presidential sanction. Such taxes would not fall within the ambit of Article 301. Their position was reconciled with freedom on the ground that a compensatory tax for the use of facilities is not a hindrance to trade but facilitates it. 100 The difficulties that the concept of compensatory taxes would encounter had their seeds in the formulation in Automobile Transport itself. The judgment of Justice Das used the concept in varying contexts as a tax for the use of facilities and, in other places, as a tax to provide facilities. Use relates to the availment of a facility. 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 taxe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ory taxes were to mean compensation for the loss of state revenue under some other head, the theory which found acceptance in the two decisions of this Court had travelled far beyond the domain that was contemplated in Automobile Transport . Correctly, therefore, both the decisions in Bhagatram and in Bihar Chamber of Commerce were overruled in Jindal Stainless . However, both the decisions led to subjectivity, uncertainty and vagueness. 101 A close reading of the decision in Jindal Stainless indicates that while the earlier decisions in Bhagatram and in Bihar Chamber of Commerce were overruled, the pendulum had swung to the other extreme. The Constitution Bench in Jindal Stainless proceeded to explain the basis of the judicially evolved concept of compensatory taxes by distinguishing a tax which is based on the principle of ability to pay from a fee which is based on the principle of equivalence. 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 regulatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e State of Assam did not support the enactment as being compensatory before the Supreme Court. These observations of Justice Gajendragadkar were in the decision rendered in 1964 in Khyerbari . Eleven years later, Justice Mathew in an eloquent judgment in G.K. Krishnan spoke about the expression reasonable PART E being convenient but vague. The judge stressed that that were very difficulties in defining this conception. The Constitution Bench in Jindal Stainless was bound by the doctrine of compensatory taxes which had been formulated by a larger Bench of seven Judges in Automobile Transport . The validity of the compensatory tax theory was not under challenge. 103 The judicially evolved concept of compensatory taxes has created in its wake new problems in its search for solutions. If a strict reading of the doctrine of compensatory taxes in terms of the quantifiable/measurable benefits approach 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 Schedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , all tax revenues are utilised by the state for public purposes. All taxation being in aid of the creation of conditions of social order, a compensatory PART E element can never be disassociated from taxation. Equally insofar as fees are concerned, the payment which is required to be made is not always voluntary. The contribution exacted from trade and commerce may not always be for the actual use of a facility but may be for the provision of the facility which trade and commerce is entitled to use. The state expends large budgets on providing expenditure to maintain law and order and security. The distinction between a tax and a fee has become blurred in our jurisprudence and Courts have found it difficult to find a clear dividing line. 104 A doctrinal irrationality which the theory of compensatory taxes fails to meet is a discriminatory compensatory tax. Discriminatory taxes which single 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 pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enforceable fundamental right of a citizen while the other is a recognition of the free flow of trade, commerce and intercourse, both in essence are enforceable, and enforceable at the behest of aggrieved individuals. A more nuanced perspective with regard to both sets of rights recognises that both reflect shades of the same universe of freedom. 107 Indian society and the economy have evolved between the advent of the Constitution and the present in a manner that would appear unrecognisable between 1950 and now. The entrepreneurial spirit of the nation has resulted in a diversification of the economy. A predominantly agricultural economy at the birth of the Constitution has increasingly found change in the last seven decades with the enhancement of the manufacturing base, and in more recent times to the diversification into services, especially financial services. The age of the internet 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is Bharat, shall be a Union of States . The Union which the Constitution postulates is defined in terms of a political union and an economic union which brought together the erstwhile provinces of British India and the princely states. The freedom under Article 301 comprehends, as we have seen, the free movement of goods, services, persons and capital. These are essential ingredients in the creation of a common market as an incident of an economic union. The freedom under Article 301 is not absolute for, the constitutional guarantee is subject to the provisions of Part XIII. The provisions of Article 302 to Article 304 bring about a balance between the guarantee of freedom on one hand and legislative control over trade and commerce on the other hand. While doing so, those articles define the powers of Parliament and the state legislatures, while subjecting them to restraints 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 Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to whether the Constitution creates a federal structure was debated upon in the Constituent Assembly. When the Draft Constitution was being discussed, T T Krishnamachari while supporting the view that the Constitution was to establish a federal structure observed thus : the first criterion is that the State must exercise compulsive power in the enforcement of a given political order, the second is that these powers must be regularly exercised over all the inhabitants of a given territory, and the third is the most important and that is that the activity of the State must not be completely circumscribed by orders handed down for execution by the superior unit. The important words are must not be completely circumscribed , which envisage 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. (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ower of legislation to acquire property is, subject to the express provisions of the Constitution, unrestricted. To imply limitations on that power on the assumption of that degree of political sovereignty which makes the States coordinate with and independent of the union, is to envisage a Constitutional scheme which does not exist in law or in practice. On a review of the diverse provisions of the Constitution, the inference is inevitable that the distribution of powers- both legislative and executive does not support the theory of full sovereignty in the States so as to render it immune from the exercise of legislative power of the Union Parliament particularly in relation to acquisition of property of the States. 116 The evolution of constitutional doctrine in the five decades that have elapsed since the judgment in State of West Bengal (supra) 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, judic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ple, to preserve and elongate the constitutional goals including secularism. (Id. at p. 205) Justice B.P. Jeevan Reddy accepted the same doctrinal position in the following terms : 276. The fact that under the scheme of our Constitution, greater power is conferred upon the Centre vis-a-vis the States does not mean that States are mere appendages of the Centre. Within the 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 must put the Court on guard against any conscious whittling down of the powers of the States. (Id. at p. 216-217) Justice P.B. Sawant, similarly held that though there are provisions under which 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The distribution of legislative powers is embodied in Article 246 which deals with the subject matter of laws made by the Parliament and by the state legislatures. Parliament has exclusive powers to make laws with respect to matters enumerated in List I of the Seventh Schedule. Subject to the law making powers of Parliament in List I, the legislature of a state has exclusive power to enact law for the state with respect to any of the matters enumerated in List II. Parliament and the state legislatures have concurrent powers to enact legislation in respect of matters enumerated in List III. Article 245 is the source of legislative power. Article 246 distributes legislative powers between Parliament and the state legislatures on the basis of the Lists in the Seventh Schedule. Article 245, in the conferment of legislative 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ression subject to the provisions of this Constitution . Therefore, Article 246 must be read as subject to other provisions of the Constitution . (Id. at p. 128) 125 The limitations on the exercise of legislative power emanate from (i) guarantees of freedom under Part III of the Constitution containing fundamental rights; (ii) the requirement that the law making authority must possess legislative competence to enact a law on the subject on which it legislates; and (iii) other constitutional limitations. Part XIII of the Constitution is one of those constitutional limitations. The constitutional limitation emanating from Part XIII arises from the recognition which it contains of the guarantee of free trade, commerce and intercourse. Hence the first premise upon which legislative powers are conferred upon 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he exercise of this right, resting confidently on the interest of the legislator, and on the influence of the constituents over their representative, to guard them against its abuse. (Id. at p.2-3) Under the Indian Constitution the conferment of legislative power to impose, collect and enforce the realization of taxes is specifically spelt out from and enumerated under constitutional provisions. Taxing entries in Lists I and II are specifically enumerated and their ambit defined. Article 366(28) of the Constitution defines the expression taxation to include the imposition of any tax or impost, whether general or local or special and provides that the expression tax shall be construed accordingly . 128 Several decisions of this Court have regarded the taxing power as an essential attribute of government and sovereignty. In Rai Ramkrishna v. State of Bihar AIR (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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the power of legislation that is vested in the state is plenary and the fetters or limitations on the exercise of legislative powers could only be imposed by the Constitution itself. The Court recognized that the Constitution may itself lay down fetters or limitations on the exercise of the power such as in Article 303 or Article 286(2). The fetter or limitation must however be traceable to the Constitution. In Firm Bansidhar Premsukhdas v. State of Rajasthan (1966) Supp SCR 81, this Court adverted to the decision in Thakur Jagannath Baksh Singh v. United Provinces (1946) FCR 111, and held that the limitation on the plenary powers of the legislature to enact law must be traced to an express provision in the Constitution : It is well-established that Parliament or 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 Constit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gories, it must be noted are convenient reference points for understanding the source of constitutional restrictions. An illustration of an abstraction of legislative power is contained in Entry 54 of the State List which provides for taxes on the sale or purchase of goods other than newspapers, subject to the provisions of Entry 92(A) of the Union List. Entry 92(A) of the Union List was introduced by the Sixth amendment to the Constitution in 1956 to provide for 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. Under Entry 54 of the State List as it originally stood, the states possessed an unfettered area for imposing taxes on the sale or purchase of goods other 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oods is subject to the restrictions and conditions which are provided by a law enacted by Parliament in regard to the system of levy rates and other incidents of tax. 135 The constitutional containment of the legislative powers of the states also originates in the provisions of Part XIII which enable Parliament and the state legislatures to impose restrictions on inter-state trade or commerce subject to defining parameters. Whether, and if so, the extent to which taxes are within the purview of Part XIII is being dealt with separately below. H.3 Part XIII and taxation 136 The basic submission on the part of the states is that freedom under Article 301 is not freedom from taxation. This submission has been adduced primarily on the foundation that the Indian 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd commerce. In this view, only a discriminatory tax would run afoul of Part XIII [being violative of Article 304(a)] and, so long as a tax is non-discriminatory, it cannot be contrary to the provisions of Part XIII. This position would broadly correspond to the view espoused by Chief Justice Sinha. The middle ground which was sought to be advanced in the decision in Automobile Transport was that compensatory taxes would lie outside Part XIII since they facilitate rather than restrict trade. Taxes which are not compensatory and which in their direct and immediate effect restrict trade would be subject to the rigours of Article 304(b) of the Constitution. H.3.1 All taxes are not impediments 139 While evaluating the merits of the rival viewpoints, 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 requir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngements for security of their property have to be made. The Government has to provide many other services to them. All these result in a big drain on the financial resources of the State as many of these services are heavily subsidized. Naturally such big newspaper organizations have to contribute their due share to the public exchequer. They have to bear the common fiscal burden like all others. (Id. at p. 671) This Court held that in the case of an ordinary taxing statute, a law may be questioned if it is openly confiscatory or a colourable device to confiscate. On the other hand, in the case of a tax on newsprint, it would be sufficient to show a distinct and noticeable burdensomeness, clearly and directly attributable to the tax . While 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itation both on Parliament and the state legislatures. Under Article 303, neither Parliament nor the legislature of a state can enact a law giving or authoring the giving of a preference to one state over another or making or authorising the making of 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. Article 303 has a non-obstante provision which overrides Article 302. The non-obstante clause in Article 303 is evidently inapposite in relation to the legislature of a state because Article 302 does not apply to a state legislature in the first instance. Evidently the non-obstante provision can have meaning only in relation to Parliament because it has 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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commerce. For instance, a law may be made by Parliament under entries relating to railways, highways, shipping etc. These entries do not expressly refer to trade and commerce, though they may directly affect trade and commerce. If a law made under entry 26 of List II giving preference or making discrimination among the states is objectionable, it should also be objectionable, if made by virtue of any other entry. I would, therefore, hold that any law made by Parliament by virtue of any entry imposing the said discrimination restrictions would be under the said article. (Id. at p. 559- 560) 146 Justice Hidayatullah who delivered a dissenting judgment for and on behalf of himself and Justices Rajagopala Ayyangar 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., En ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that the power of Parliament to legislate on inter-State trade and commerce under Entry 42 does not include a power to impose a tax on sales in the course of such trade and commerce. 148 This principle would have no bearing on the interpretation of the words in Article 303 which restrain Parliament and the state legislatures from granting preferences to one state over another and from discriminating between one state and another by virtue of any entry relating to trade and commerce in any of the lists in the Seventh Schedule. These words namely entry relating to trade and commerce are of the widest import. The expression relating to has a well-known connotation in law extending its ambit 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f that matter. It was also urged that the expression an entry relating to trade and commerce in any of the Lists in the Seventh Schedule i.e. entries 41 42 of List I, entries 26 27 of List III and entry 33 of List III in the Seventh Schedule, and extended to no others. On the other hand, it was contended that all legislative entries which directly affect trade and commerce are also within the expression entry relating to trade and commerce.. . 13. We need to express no opinion on the two questions argued before us. The question whether entries relating to trade and commerce in the Lists in the Seventh Schedule are restricted to entries 41 42 of List I, entries 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 8(2)(b) deals with sale of goods other than declared goods and it is confined to inter-State sale of goods to persons other than registered dealers or governments. The rate of tax prescribed is 10 per cent or the rate of tax imposed on sale or purchase of goods inside the appropriate State, whichever is higher. The report of the Taxation Inquiry Committee would indicate that the main reason for enacting the provision was to canalize inter-State trade through registered dealers, over whom the appropriate government has a great deal of control and thus to prevent evasion of tax : Where transactions take place between registered dealers 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 advantag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 : (1955) 2 SCR 603. See also Golaknath v. State of Punjab, AIR 1967 SC 1643, p. 1658:1967 (2) SCR 762, where marginal note to Article 368 was referred states that marginal notes to constitutional provisions are, as a matter of interpretation, treated as being a part of the Constitution and as providing some guidance as to the meaning of a provision : Marginal notes appended to Articles of the Constitution have been held to constitute part of the Constitution as passed by the Constituent Assembly and therefore they have been made use of in construing the Articles, e.g. Article 286, as furnishing prima facie , some clue 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t XIII, Article 304 commences with a non-obstante provision which operates notwithstanding what is contained in Article 301. A reasonable construction or meaning would have to be attributed to these two provisions. So construed, Article 304, in its non-obstante provision, must mean that it would permit what is contemplated by Clauses (a) and (b) even though it would otherwise be within the ambit of the freedom guaranteed by Article 301. Similarly, in its application to Article 303, the non-obstante clause in Article 304 indicates that despite the prohibition that is 150 (1986) 4 SCC 447 151 (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntercourse. The expression PART F may in the prefatory part of Article 304 has to be read together with the expression and which separates clauses (a) and (b). The use of the expression may is indicative of the intent that the legislature of a state is not bound to levy an impost on goods imported from other states (though if it does so, the tax has to be non-discriminatory). Similarly, the state legislature has an enabling power to impose restrictions under clause (b). The legislature may do so. It has the discretion whether to impose a tax or to impose a restriction 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 304 uses separate expressions, taxes and restrictions, there is no reason or justification to bring taxes within the ambit of restrictions. Second, it has been submitted that clause (b) of Article 304(a) contemplates the imposition of a reasonable restriction in the public interest. Taxation, it has been urged is presumed to be in the public interest. Third, it has been submitted that in the context of Article 19, judgments of this Court which have held that the guarantee under Article 19(1)(g) does not 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icles, whether mechanically propelled or not, suitable for use on roads subject to Entry 35 of List III) and Entry 58 (taxes on boats). Entries which deal with taxes other than on goods are Entry 56 (taxes inter alia on passengers carried by road or on inland waterways); Entry 59 (tolls); Entry 60 (tax on professions, trades, callings and employments); Entry 61 (capitation taxes) and Entry 62 (taxes on luxuries, including taxes on entertainments, amusements, betting and gambling). Article 304(a) applies 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 ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are incongruous. For, the former expression subjects Article 301 to the other provisions of Part XIII [including Article 304(a)]. Hence, it was unnecessary to use a non-obstante clause in Article 304(a). 167 Having noticed this criticism, it is necessary to harmonise the text of Article 301 with Article 304. The guarantee of freedom under Article 301 is subject to Part XIII. Article 304 enables a state legislature in the exercise of its legislative power (under Articles 245 and 246) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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, continue to levy and collect such tax or duty subject to the terms of such agreement and for such period not exceeding ten years as may be specified in the agreement : Provided that the President 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 provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... meaning intended. 172 For these reasons, it would be untenable to postulate as a general principle that it is only a discriminatory tax falling within the ambit of Article 304(a) that is subject to Part XIII of the Constitution. I Tax legislation Judicial review and Part XIII I.1 Taxation and Part XII 173 In early decisions of this Court, the issue as to whether the legislative power to tax was subject to constitutional control independent of Article 265 was 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 dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) lack of legislative competence; (ii) violation of a prohibition under a specific article of the Constitution; or (iii) repugnancy to the fundamental rights guaranteed by Part III. 175 In Raja Jagannath Baksh Singh v. State of U.P. (1963) 1 SCR 220, the Constitution Bench held that though in Ramjilal (supra) there were general observations which indicated that the fundamental rights guaranteed in Part III could not be invoked in respect of a taxing 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng in order to be able to tax something. If there is equality and uniformity within each group, the law would not be discriminatory. Decisions of this Court on the matter have permitted the legislatures to exercise an extremely wide discretion in classifying items for tax purposes, so long as it refrains from clear and hostile discrimination against particular persons or classes. (Id. at p. 658-659) I.3 Limitations of Sinha CJ s view in Atiabari 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 wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n silos. 182 As regards the third rationale undoubtedly, the revenues which the state raises from fiscal exactions generate resources which are also utilized to augment trade and commerce. This, however, does not confer an immunity from a challenge that a law which is enacted in pursuance of the taxing power breaches specific provisions of the Constitution. 183 While the concept of public purpose is implicit in tax law, it is also 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 stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... criminate between goods so imported and goods so manufactured . While defining the meaning of these expressions, judicial review is confronted with the basic question of when Article 304(a) would apply and the situations in which the requirement of a non-discriminatory tax is fulfilled. An important aspect of Article 304(a) is whether it permits a classification by the state legislature based on the need to achieve the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ealer purchases raw hides or skins from outside the State and tans them within the State, he will be liable to pay sales tax on the sale price of the tanned hides or skins. He too will have to pay more for tax even though the hides and skins are tanned within the State, merely on account of his having imported the hides and skins from outside and having not therefore paid any tax under sub-rule (1). Significantly, 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 ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e place in the course of inter-State trade or commerce, if it- (a) occasions the movement of goods from one State to another; (b) is effected by a transfer of documents of title to the goods during their movement from one State to another. However, the judgment held that the Central Sales Tax Act which was enacted for imposing a tax to be collected and retained by the state did 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y a tax on inter-state sale would not do so. In his view, a tax on sale did not directly or immediately operate on the free flow of trade or the free movement of the transport of goods from one part of the country to another. Justice K.S. Hegde concurred with the majority the ground that the provisions of the Central Sales Tax Act had no direct or immediate impact on 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 ₹ 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 ₹ 70/- per L.P. Gallon. Under Section 27 of the Bihar and Orissa Excise Act, 1915, a countervailing duty was provided on an excisable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inst 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. 195 The notification enhancing the duty was held to violate Article 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 Val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of those hides and skins. The legislature, it seems, calculated the price of hides and skins in dressed condition to be doubled 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. (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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the grant of Presidential assent and hence the legislation fell within the purview of Article 304(b). Being not discriminatory, it was held that Article 304(a) was not breached. The constitutional validity of the legislation was thus analysed on both the anvil of clauses (a) and (b) of Article 304 by the Bench of two Judges. J.2 Exemptions and 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tured outside the state for the following reasons: 35 .In case of Punjab, an overwhelmingly large number of local manufacturers of similar goods are subject to sales tax and, therefore, the general statement that the manufacturers within the State are favoured against the manufacturers outside the State, is incorrect. Under the notifications 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 manufactur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for a stipulated period. If the observations in paragraph 20 (quoted above) are however, construed to set a broad principle, that would defeat the primary objective underlying Article 304(a) of the Constitution. This was noticed in a subsequent decision in Shree Mahavir Oil Mills v. State of J K171 . 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 Terr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Again, it was held that : 23. All the above observations were made to justify (1) grant of incentives and subsidies and (2) exemption granted to new industries, of a specified type (small-scale industries commencing production within the two specified dates) and 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 ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on similar goods manufactured or produced within. The latter part of clause (a) which contains a mandate against discrimination must have some meaning. In drafting the provision, the founding fathers evidently did not confine it merely to a norm providing 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vancement and social development. Typically, economic development has spread PART F along areas which developed around the availability of infrastructure and resources. As ports and railways developed over the last century and a half, the benefits 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 simila ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actually produce or manufacture goods similar to goods imported from other states which are sought to be taxed. The crucial words are any tax to which similar goods manufactured or produced in that state are subject . Article 304(a) is 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 ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of that description. no issue of discrimination qua Article 304(a) would arise. K Entry Tax 214 Entry 52 of List II to the Seventh Schedule of the Constitution provides for : 52. Taxes on the entry of goods into a local 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 pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... constitute a local area within the meaning of Entry 52. The Constitution Bench held thus : The etymological meaning of the word local is relating to or pertaining to a place. It may 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 entr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f octroi duty on cotton and wool by the Bangalore Municipal Corporation Act, 1949 inter alia under the provisions of Article 301. The octroi duty was, 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... area : (i) To be consumed by itself or sold directly by it to consumers; (ii) For sale to dealers who in their turn sold the 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manufactured within the state which are not subject to the levy. Such an act of discrimination may take 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a state by law to authorize a Panchayat to levy, collect and appropriate such taxes, duties, tolls 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te, this would result in a discrimination against imported goods. Such a discrimination is 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not being considered since the cases would have to be placed for disposal before the appropriate 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 legi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rimination between goods imported into the taxing state from 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 import ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between goods that are imported from other 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntry tax and imported goods 246 Entry 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in List II. Even where the 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 Sons 1942 F.C.R.90, it was held that if a tax pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The taxable 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 ..... t 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 ; and State of West Bengal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 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 subject to the rigours of Part XIII. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. 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 Justice M N Venkatachaliah (as the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot 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 grant relief. The direct operation of the Act upon the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 sufficient in itself lead to the consequence that it is a restriction o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 movement of trade or commerce does not in itself lead to the conclusion that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iament 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 prescribed by the Constitution. 273 Part XIII of the Constitution enunciates a set of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 manufactured by other states. Article 304(a) does not import the concept of a countervailing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) SCC 595, expressing doubts on correctness of Constitution Bench Judgment in Atiabari Tea Co. Ltd, 1961 (1) SCR 809 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ERPRETATION, 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 21.12.2001 upheld the validity of the Act which judgment came to be challenged in Civil Appeal No.3453 of 2002 with connected matters; Jindal Stainless ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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, t he 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, will continue to apply and the test of some connection indicated in para 8 of the judgment in Bhagatram Rajeevkumar v. Commissioner of Sales Tax, M.P. and followed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch 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 aforesaid purpose: (1) Whether the State enactments relating to levy of Entry Tax have to be tested with reference to both Clauses (a) and (b) of Article 304 of the Constitution for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0) 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 Bench by its order dated April 16, 2010, reported in Jindal Stainless Ltd. and another vs. State of Haryana and others, (2010) 4 SCC 595, decided to make a Reference for constituting a suitable larger ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 vis vis 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 impugned as violative of Article 301 should be judged only in the light of the test of nondiscrimination? Does Article 303 circumscribe Article 301? Whether internal goods would come under Article 304(b) and external goods und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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? 21. With regard to Question No.1 nine incidental questions have als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 intercourse throughout the territory of India and the Assam Act, 1954 levies tax on carrying out the tea throughout the State of Assam, and it had the effect of interfering with the above freedom. The respondent contended that the Act in pith and substance, a legislature to levy tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 provisions of the Act, the majority judgment approved the earlier Constitution Bench Judgment in Atiabari Tea Co. Ltd (supra) with one clarification, in following words: The interpretation which was accepted by the majority in the Atiabari Tea Co. case is correct, but subject to this clarification. Regulatory measures or measures imposing compensatory taxes f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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 Court had rightly dismissed the writ petitions. Subba Rao J., agreed with the conclusion arrived by Das, J. 41. It was held, that the arguments cannot be accepted that law of taxation is outside the scope of freedom enshrined under Article 301 of the Constitution. Subba Rao, J. also laid down that the doctrine of direct and immediate effect is the most important doctrine to fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 Shri Rakesh Dwivedi, Senior Advocates. Several other counsel have also made submissions, however, to avoid repetition, we have noted only those submissions which were not covered by Shri P.P. Rao and Shri Rakesh Dwivedi. Shri Mukul Rohatagi, learned Attorney General has also made his submissions. 46. Shri Harish Salve, learned senior counsel leading the arguments on behalf of the petitioner made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I 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 Salve coming to incidental questions contended that taxation is an attribute of the sovereignty however differences lie in a case where legislative power is limited by Constitution. He contends that source of legislative power is Article 245 (1) which is subject to the provisions of the Constitution . It is contended that express constitutional limitation is clearly laid down in Article 245 (1), and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... slate 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 case (supra) . However, Compensatory Tax Theory is not consistent with the Scheme of Part XIII of the Constitution nor it can be said that if a tax is compensatory, it goes beyond the purview of Article 301. 57. Shri Salve answering Question Nos.2 and 3 contends that tax which is said to be compensatory may also fall foul of Article 301. It is contended that compensatory theory has not worked well and it has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xed 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 K eshav 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 certainty and continuity. In the interpretation of law in the continuity, he submits that review excise is to be undertaken only when earlier decision was clearly erroneous. The Constitution Bench in Jindal Stainless Ltd(supra) without any appropriate reason has made a reference for constituting a larger bench for reconsideration of the judgment of this Court in Atiabari Tea Co. and Automobile Transport, Rajastha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 impugned law and the manner in which it is carried on after the impugned enactment. He submits that the restrictions as referred to in Part XIII can be of multiple applications. They can be fiscal, environmental, commercial and in the form of labour law. Entry Tax cannot be levied on entry of the goods in the State. Referring to the word and used in Article 304(a) and 304(b), he submits that and be interpreted as joint an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould 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. He submitted that the Preamble of the Constitution is to be relied and looked into while interpreting the constitutional question. 74 . Shri Ravindra Srivastava, learned senior counsel, submitted that as a concept compensatory tax cannot be supported. Compensatory tax is a misnomer and it was unnecessary. He submitted that taxes which have direct and immediate effect are hit by Article 301. Relying on opinion of Justice Hidayatul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ructure. 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 and Shri Ravindra Srivastava, learned senior counsel. 81. Smt. Suruchi Aggarwal , learned counsel submitted that Article 301 is a restriction on the legislative power of the State. Referring to Article 304(a) she contends that Article 304(a) is resorted since it is presumed that the law would be a restriction under Article 301. She referring to provisions of the Haryana Local Area Development Tax Act, 2000 contends that manner of co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 distribution of legislative functions between the Union and the states. He submitted that Article 245 begins with the express provision 'subjects to the provisions of this Constitution' which phrase has also to be read under Article 246. Learned Attorney General submitted that GST Bill having been passed on 3rd August, 2016 in the Rajya Sabha, after ratification by the states, the only issue relevant in the present batch of cases shall be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 discrimination visavis goods imported from other States and Union Territories interfere with the freedom of trade, commerce and intercourse mentioned in Article 301. The whole scheme of Part XIII is that the discriminatory tax interferes with the trade, commerce and intercourse. A Nondiscriminatory tax does not interfere with the freedom of trade, commerce and intercourse. 92. The framers of the Constitution intended minimum inroads in power of taxation i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 US Constitution. In US, States have no power to legislate except law and order, good governance and peace. These differences in our Constitution and the Constitutions of Australia and US have been completely overlooked. Law as developed in Australia and US i.e. direct and immediate effect for finding out impediment in the trade has now been given a go by both by Australian and US Courts. Both the Courts have moved to a discriminatory test. IV. In both the above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted 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 interState does not come to an end after the entering into the State. It may have some effect and operation within the State also. 100. Shri Dwivedi further submits that the Presidential Sanction as contemplated in Article 304(b) proviso was due to the reason that Article 304 is related to interState trade and it falls in Entry 42 List I. He submits that justification for requirement of obtaining Presidential sanction in proviso to Article 304(b) is the restriction which may touch the interState trade, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Tax per se does not constitute infraction of Article 301. He further submits that the question regarding the Compensatory Tax need not be answered since compensatory nature of tax is outside the Constitutional Scheme and has to be struck down. Learned counsel submits that the Constitution is a living organism and each part of it throws light on other part of the Constitution. Every part of the Constitution has to be looked into and no part has to be interpreted de horse the other provisions of the Const ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 116. The earlier view that tax is out of Part III has been reversed. When it is said that Part XIII includes tax no one is asking to emasculate State's sovereignty. What is prohibited by Part XIII is the impediment to trade and commerce, 'direct and immediate'. The sanction of President, as contemplated in Article 304(b) does not mean that such sanction affects the sovereignty of the State. The proviso to 304(b) operates in a very narrow field. 117. Shri Salve further contends that Sinha, J de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation 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.' He submits that the second part provides for nondiscrimination, which is indicated by words 'as not to discriminate'. 121. Lastly, Shri Salve replying to the submission of unjust enrichment contends that presumption that tax has been passed on is a rebutable presumption and whether tax has been passed or not is a question of fact and has to be considered by assessing authorities. He has also referred to judgment of this Court reported in ( 2005) 2 SCC 215 Godfrey Phillips India Ltd Vs. State of U.P. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 taxes in the name of economic development is in the teeth of Article 304(a). Any discrimination between local goods and imported goods is per se hostile. Coming to question of unjust enrichment, learned counsel submits that the issue has to be left to be considered by the assessing authorities. He submits that the States have different laws and facts which in each case are different and have to be examined for applying the theory of unjust enrichment. Learned counsel submits that in the event of this Court overruling ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;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 country. Section 297 reads as under: 297. (1) No Provincial Legislature or Government shall( a) by virtue of the entry in the Provincial Legislative List relating 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 ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 137. The framers of the Indian Constitution although took inspiration from Section 92 above, but even at initial stages the freedom of trade was contemplated with restriction and with permission to levy only certain taxes. The SubCommittee on fundamental rights submitted a report dated 16.04.1947 to the Advisory Committee in Para 6 of which following was stated: 6. We are of the opinion that every citizen is entitled to free trade, commerce and intercourse within the territories of the Union unburdened by any internal duties or taxes of customs. At the same time, we rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 the territory of India was incorporated as one of the fundamental rights in Clause 16 in following words: 16. Subject to provisions of Article 244 of this Constitution and any law made by Parliament, trade, commerce and intercourse throughout the territory of India shall be free. 142. Another set of articles under heading 'interState trade and commerce' where articles 243, 244 and 245 which were to the following effect: 243. Prohibition of preference or discriminat ion to one State over another by any law or regulation relating to trade or commerce. No preference shall be given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 permit the Union Parliament to extend its legislative and executive jurisdiction. So he will realise that the Constituent Assembly, as well as the Drafting Committee, was placed under a very serious limitation. On the one hand it was realised that there would be no use and no purpose served in forming an AllIndia Union if trade and commerce throughout India was not free. That was the general view. On the other hand, it was found that so far as the position of the States was concerned, to which I have already made a reference, they were not prepared to allow trade and commerce throughout India to be made subject ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpose 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, continue to levy and collect such tax or duty subject to the terms of such agreement and for such period not exceeding ten years from the commencement of this Constitution as may be specified in the agreement: Provided that the President 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 260 of this Constitution, he thinks it necessary to do so. 148. While discussing Article 274DD, one of the Members of the Constituent Assembly Shri Raj Bahadur has expressed his concern about cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces 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 the Constitution. For instance, in subclause( 1) of article 264A as proposed by me, subclause (b) is merely a reproduction of the article contained in the Constitution, the entry in the Legislative List that taxation of imports and exports shall be the exclusive province of the Central Government. Consequently so far as subclause (1) (b) is concerned there cannot be any dispute that this is in any sense an invasion of the right of provinces to levy as salestax. Similarly, subclause (2) is merely a reproduction of Part XA which we recently passed dealing with provisions regarding interState trade and commerce. Therefore so far as subclause( 2) is co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... '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. B. Nature of Federalism in Constitution of India 156. ' In the people of India', vests the legal sovereignty while the political sovereignty is distributed between Union and the States. We having adopted for ourselves a well thought, well deliberated written Constitution, it is pertinent to know the structure of our Constitution. Learned counsel for the parties during their respective submissions have referred to the federal structure of the Constitution and one of the submissions raised before us is that while interpreting the Constitution the federal structure of the Constitution has to be kept in mind, since, the framers of the Constitution must ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 being sovereign in the field assigned to it. In other words, Federation means the establishment of a Dual Polity. The Draft Constitution is, Federal Constitution inasmuch as it establishes what may be called a Dual Polity. This Dual Polity under the proposed Constitution will consist of the Union at the Centre and the States at the periphery each endowed with sovereign powers to be exercised in the field assigned to them respectively by the Constitution. 159. Dr. Ambedkar also referred to the Constitution of USA and highlighted the difference between Indian Federation and American Federation. While speaking on the difference of Indian Federation to that of American Federation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remacy 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 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 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. 164. The nature of federalism as contained in the Constitution of India came for consideration before this Court in large number of cases. Several larger Benches of this Court dealt with the issue and had deliberated and explained the principles of federalism as inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing 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 Reference No. 1 of 1964, [1965] 1 S.C.R. 413. All the functionaries, be they legislators, members of the executive or the judiciary take oath of allegiance to the Constitution and derive their authority and jurisdiction from its provisions. The Constitution has entrusted to the judicature in this country the task of construing the provisions of the Constitution and of safeguarding the fundamental rights Ibid p. 446. It is a written and controlled Constitution. 167. Again a Seven Judge Bench in State of Rajasthan and others vs. Union of India and others, (1977) 3 SCC 592 had an occasion to consider the nature of Indian Constitution. M.H. Beg, CJ,while delivering majority decision in paragraph 57 following was stated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, therefore, desire to unite so that all the memberStates may share in formulation of the basic policies applicable to all and participate in the execution of decisions made in pursuance of such basic policies. Thus the essence of a federation is the existence of the Union and the States and the distribution of powers between them. Federalism, therefore, essentially implies demarcation of powers in a federal compact. 170. Ahmadi, J. further stated that the Constitution of India is differently described, more appropriately as 'quasifederal' because it is a mixture of the federal and unitary elements, leaning more towards the latter. 171. B.P. Jeevan Reddy, J., held that the founding fathers wished to establish a strong a Center. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, provisions relating to trade, commerce and industry, have all been dealt with analytically. It is not possible nor is it necessary for the present purposes to refer to them. It is enough to note that our Constitution has certainly a bias towards Centre visavis the States Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan, (1963) 1 SCR 491, 540: AIR 1962 SC 1406. It is equally necessary to emphasise that courts should be careful not to upset the delicatelycrafted constitutional scheme by a process of interpretation. 172. A Constitution Bench in Kuldip Nayar vs.Union of India, (2006) 7 SCC 1, held that India is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 distribution of powers was given shape with creating a strong Centre with the object of unity and integrity of India. The States are sovereign in the allotted fields. The Indian Constitution cannot be put in traditional mould of federalism. The traditional concept of federalism has been adopted with necessary modification in the framework of the Constitution to suit the country's necessity and requirement. The sum total of above discussion is that federalism in the Constitution is limited and controlled by the Constitution and the exercise of powers of both the States and the Centre are controlled by express provisions of the Constitution. 174. The submission that while interpreting Part XIII of the Constitution federal nature of the Constitution has not to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tween 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. 177. Article 13 sub-clause (2) in Part III of the Constitution provides express prohibition in making of law by the State. Article 13 subclause (2) is as follows: 13(2). The State shall not make any law which takes away or abridges the rights conferred by this Part and any law made in contravention of this clause shall, to the extent of the contravention, be void. 178. Part XI of the Constitution deals with Relations between the Union and the States . Chapter I of which contains heading Legislative Relations . Chapter I contains Article 245 to Article 255. Article 245 begins with the words : subject to the provisions of this Constitution, Parliament may make laws for the whole or any part of the territory of India, and the Legislature of a State may make laws for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 which had plenary powers of legislation within the ambit of the legislative heads specified in the Lists II III of the Seventh Schedule to the Constitution could only be imposed by the Constitution itself and not by any obligation which had been undertaken by either the Dominion Government or the Province of Bombay or even the State of Bombay. Under Article 246 the State Legislature was invested with the power to legislate on the topics enumerated in Lists II III of the Seventh Schedule to the Constitution and this power was by virtue of article 245(1)subject to the provisions of the Constitution. The Constitution itself laid down the fetters or limitations on this power, e.g., in article 303 or article 286(2). It is relevant to note that Constitution Bench has noticed Article 303 as one of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nswer 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 challenged. Following contention was raised by the petitioners: On the legal aspect of the controversy raised on behalf of the petitioners, it was argued that the Act has its justification in Art.265 of the Constitution, which was not subject to the provisions of Part III of the Constitution and that, therefore, Arts. 14, 19, 31 could not be pressed in aid of the petitioners. It was also contended that even if the Act is, in effect,confiscatory, it cannot be questioned, being a taxing statute. 183. Repelling the contention the Constitution Bench held that tax legislation is also subject to Article 13. Following was held: It has to be done by authority of law, which must mean valid law. In order that the law may be valid, the tax proposed to be levied must be within the legislative competence of the Legislature imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 economic unity of the country will provide the main sustaining force for the stability and progress of the political and cultural unity of the country. 187. Justice Gajendragadkar speaking for majority in the above case has also held that Article 301 is a Constitutional limitation on the legislative power of the Parliament and the States in following words:- That is why it seems to us that Article 301, read in its proper context and subject to the limitations prescribed by the other relevant Articles in Part XIII, must by regarded as imposing a constitutional limitation on the legislative power of Parliament and the Legislatures of the States. 188. While discussing the limitation on the legislative power of the State under the Constitution we have already concluded that Article 245 which is a source of all legislative power puts a g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... islation 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 restrict freedom of trade, commerce and intercourse are covered by Part XIII whereas learned counsel appearing for the States contend that Part XIII only covers nondiscriminatory taxes as referred to under Article 304(a) and no other tax legislation is covered under Part XIII. 195. Gajendragadkar J., speaking for majority in Atiabari Tea Co. Ltd. has rejected the argument that tax laws are outside Part XIII. Even Sinha C.J., having expressed the following opinion at Page 828: ...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'.... In the same Paragraph further observed: ... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art 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, Parliament may by law . Whereas Article 303 uses the phrase neither Parliament nor the legislature of the State shall have power to make any law..... Article 304 uses the phrase the legislature of a State may by law . All laws framed by Parliament or State in exercise of legislative entries under VIIth Schedule are law. Article 302 304 contain exception according to which, freedom of trade, commerce and intercourse as guaranteed under Article 301 can be overridden. The word law is wide enough to include both fiscal and nonfiscal legislations. (c) Article 303 imposes restriction on the legislative power of the Union as well as of the State with regard to trade and commerce. Article 303(1) provides that a State shall have no powers to 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, mentioned in Article 304(a) are not immuned from restriction contained in Part XIII. For example, Entry 49 provides 'taxes on lands and buildings'. A State Legislation is passed imposing taxes on buildings where trade and commerce is carried, the effect of which is to impede the trade and commerce, can it be said that such tax legislation cannot be questioned as violating Article 301. The answer is that such legislation has also to comply with Article 301. Thus, Article 304(a) is not the only taxation which is covered by Part XIII. But it is only species of taxation which has been expressly indicated for carving out gateway for the State Legislature to impose tax which may not impede Article 301. (g) Lastly, there are no provision in Part XIII which negate the applicability of Part XIII on taxes which operates as restriction to trade, commerce and intercourse. Something which is not express ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, unless the context otherwise indicates, the Legislature intended to convey different meanings of those words. This rule of interpretation is applicable in construing a Constitution as well... (iv) This Court had occasion to consider the word 'restriction' as used in Part III in context of taxing legislation, namely, TravancoreCochin Land Tax Act, 1955 in K.T. Moopil Nair Versus State of Kerala and Anr., 1961 (3) SCR 77. When word 'restriction' as used in Part III has been held to include restriction by tax legislation also, we see no reasons for not reading tax legislation in word 'restriction' in Part XIII also. The word restriction has to be given same meaning as contained in Part XIII. (v) Article 302 contains a heading 'power of Parliament to impose restrictions on trade, commerce and intercourse'. Article further provides that the Parliament by laws impose such restrict ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 discriminatory in nature was prohibited. As noted above the SubCommittee on the fundamental rights in its report dated 3rd April, 1947 has proposed the following clause with regard to trade, commerce and intercourse: 13.Subject to regulation by thelaw 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. 202. Shri Alladi Krishnaswami Ayyar put a note on the above Clause 13 which was to the following effect: Clause 13. Though I have been in some measure responsible for the inclusion of this clause I feel it must be made clear that :(1) goods from other parts of India than in the units concerned coming into the units cannot escape duties and taxes to which the goods produced in the units themselves are subject. 203. While submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 goods imported from other States any tax to which similar goods manufactured or produced in that State are subject, so, however, as not to discriminate between goods so imported and goods so manufactured or produced; and (b) to impose by law such reasonable restrictions on the freedom of trade, commerce or intercourse with that State as may be required in the public interests: Provided that during a period of five years from the commencement of this Constitution the provisions of clause (b) of this article shall not apply to trade or commerce in any of the commodities mentioned in clause (a) of Article 306 of this Constitution. 207. Article 244 which was subsequently approved as Article 274D in Part XA and was adopted as Article 304 of the Constitution. The above indicates that initially the provisions empowe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 commerce have been made subject to article 244, we have practically destroyed the fundamental right, I think I may fairly say that my friend Mr. Subramaniam has either not read article 244, or has misread that article. Article 244 has a very limited scope. All that it does is to give powers to the provincial legislatures in dealing with interstate commerce and trade, to impose certain restrictions on the entry of goods manufactured or transported from another State, provided the legislation is such that it does not impose any disparity, discrimination between the goods manufactured within the State and the goods imported from outside the State. Now, I am sure he will agree that that is a very limited law. It certainly does not take away the right of trade and commerce and intercourse throughout India which is required to be free. 210. As stated above Article 244 was akin to Article 274D which was sought to be added in new Chapter and came for discussion on 8th September, 1949 before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Thakur Das Bhargava raised serious objections to subcluase (b), following was stated by Pandit Bhargava Similarly Sir, in regard to article 274D, I have no objection to clause (a); but so far as (b) is concerned, this is the clause to which I object most seriously. I think this is unnecessary because when the powers are given to the Parliament as originally they were given to the Parliament, I have no objection. The Parliament shall have to consider it from the general standpoint, from the standpoint of the whole of India, whereas a State is bound to consider it from a parochial point of view, from the point of view of the State and therefore, this mutual jealousy is bound to arise if we allow these powers to the State. Therefore, the policy of the Government should be that so far as the State is concerned, they should not be allowed to exercise that power unless it be through Parliament. If a State is empowered to use its powers under clause (a) I have no quarrel as it will be a salutary power ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. After all what is the nature of the power given ? The power is confined to imposing such reasonable restrictions on the freedom of trade, commerce or intercourse with or within that State as may be required in the public interest therefore the President who has to grant sanction will have the opportunity to see that the legislation is in the public interest and that the restriction imposed is reasonable. It is not possible to devise a watertight formula for the purpose of defining these restrictions. 216. Replying the Debate, Dr. B.R. Ambedkar stated that he cannot usefully add anything to what Shri T.T. Krishnamachari and Shri Alladi Krishnaswami Ayyar had said. Article 274D was added to the Constitution by negating the amendments. From the above, it is clear that objections with regard to Article 274D subclause (b) which is now Article 304(b) were raised before the Constituent Assembly but the objections were overruled by retaining Article 274D subclause (b) which is now Article 304(b), thus, inclusion of Article 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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. M. Munshi. Thus (ii) and (iii) Part of Article 304, as noted above contains two separate and independent conditions for invoking 304(a). Learned counsel for the States have submitted that the main content of Article 304(a) is imposition of nondiscriminatory taxes. It is contended that in event, there are no similar goods manufactured or produced in the State to the goods which are imported there is no question of discrimination and State is free to tax imported goods, which are not produced or manufactured in the State. On first blush, the submission appears to be attractive but on a deeper scrutiny it merits rejection. Article 304 is, in nature of enabling provisions to the State, to impose taxes on goods imported from other States. Framers of the Constitution had stated that the goods coming from other parts of the India in the units concerned cannot escape duties and taxes to which the goods produced in the units are subject. There is specific purpose and object in enabling the State to impose tax on goods imported from other States o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion filed by the assessee permitting the refund of the tax assessed and collected from them holding assessment and collection as violative of Article 301 and not being saved by 304(a). The writ petitioners were carrying business of sale of tobacco in accordance with the notifications issued by the State Government, in the notification in question the tax was imposed only on imported tobacco and not on home grown tobacco which was noticed by the High Court in the judgment in following words: The High Court was of opinion on a consideration of the notification under which the tax was assessed that it imposed a tax only on imported tobacco and not on home grown tobacco and so it did not come within the special provisions of Art. 304(a) of the Constitution and consequently the infringement of Art. 301 of the Constitution which resulted from the imposition of a tax on import of goods made the provisions void in law. The prayer for refund was allowed in the applications out of which C.A. Nos. 362377, C.A. Nos. 861867 of 1962 and C.A. No. 25 of 1963 have arisen. The prayer was rejected in the remaining applications. In the present appeals the State of Madhya Pradesh challenges the correct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 225. The writ petition was dismissed by the High Court justifying the levy of duties of excise as countervailing duties under Entry 51 List II in VIIth Schedule. The judgment came to be challenged before this Court. This Court negativated the view of the High Court, justifying the levy as countervailing duty in following words: The fact that countervailing duties may be imposed at the same or lower rates suggests that they are meant to counterbalance the duties of excise imposed on goods manufactured in the State. They may be imposed at the same rate as excise duties or at a lower rate, presumably to equalise the burden after taking into account the cost of transport from the place of manufacture to the taxing State. It seems, therefore, that countervailing duties are meant to equalise the burden on alcoholic liquors imported from outside the State and the burden placed by excise duties on alcoholic liquors manufactured or produced in the State. If no alcoholic liquors similar to those imported into the State are produced or manufactured, the right to impose counterbalancing duties of excise levied on the goods manufactured in the State will not arise. It may, therefore, be accep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s tax on the imported hides or skins tanned outside the State is on their sale price while the tax on hides or skins tanned within the State, though ostensibly on their sale price, is, in view of the proviso to cl. (ii) of subr. (2) of r. 16. really on the sale price of these hides or skins when they are purchased in the raw condition and which is substantially less than the sale price of tanned hides or skins. Further, 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 the Art. 304(a) of the Constitution. Similar are the contentions for the intervenes in the case. 230. This Court held that taxing laws can be restrictions on the trade, commerce and intercourse and the tax which is affecting and discriminating goods of one State and goods of another may affect the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... State of Andhra Pradesh. Referring to Tamil Nadu Entry Tax on Entry of Goods into Local Areas Tax Act, 2001, Shri Salve has contended that under Section 3 subsection 2, tax is payable by an importer. Entry of goods into local area was defined as entry of scheduled goods into a local area from any place outside the State for consumption, use or sale therein. His contention was that enactment clearly imposes Entry Tax only on goods imported and there was no Entry Tax on the local goods which clearly violates Article 304(a) of the Constitution of India. 234. We find force in the submission of Shri Salve, which is supported by the Constitution Bench judgments in State of Madras Vs. Bhailal Bahi and Kalyani Stores Vs. State of Orissa and Other s. Imposition of tax only on imported goods when no such tax is levied on local goods violates Article 304(a). The Division Bench of the Madras High court in ITC Ltd. Vs. State of Tamil Nadu and Others [2007] 7 VST 367 Madras has struck down the enactment. To the same effect, submissions have been made by Shri Salve with regard to Entry Tax enactments of State of Kerala, State of Andhra Pradesh and State of Assam. 235. Articles 304(a) and 304(b) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vely. In Stroud's Judicial Dictionary, 3rd Ed. it is stated at page 135 that and has Generally a cumulative, sense, requiring, the fulfillment 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 contents, read as or . Similarly in Maxwell on Interpretation of Statutes, 11th Ed., 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 . 238. We may revert to the Constitutional Scheme to find out the true purpose and object of the provision. Article 304 is an exemption granted to the State when State can impose taxes and impose restrictions on the freedom of trade and commerce which freedom is guaranteed under Article 301 of the Constitution of India. Article 304 begins with the words Notwithstanding anything in Article 301 or Article 303, the Legislature of a State may by law- . Two subclauses (a) and (b) are enabling powers given to the State by which taxes can be imposed on imported goods and restrictions can be imposed on the freedom of trade, commerce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vendors may be required to furnish; and (c) the annual fees that firearm owners may be charged. In this provision the Governor in Council is empowered to make regulations on any one or more of the listed subjects. However, notice what happens if may is replaced by shall . If the Governor in Council is obliged to make regulations respecting (a) conditions (b) information and (c) fees, the joint and several and becomes joint. 240. We find force in the submission and we are of the view that word 'and' between clauses (a) and (b) has to be read as joint and several, both meaning can be assigned as per requirement of a State Legislature. One of the submissions raised by the learned counsel of the petitioners as noted above is that whenever State Legislature imposes a tax by law under clause (a), it has necessarily to go through the procedure provided under clause 304(b), since both the clauses are conjunctive and require compliance. We are not inclined to accept the extreme submission that in each and every case whenever law is framed under clause (a) procedure under clause (b) has to be complied with. The proviso to clause (b) that no Bill or amendment for the purposes of clau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... more towards the latter, as noted above. The division of powers between Union and the State Legislatures is clearly defined and demarcated in the Constitutional Scheme. The Constitutional Scheme delineates the scheme of check and balances between the Union and States. Apart from Article 304(b) following are the other Constitutional provisions where Presidential sanction has been contemplated: (1) 31A. Saving of laws providing for acquisition of estates, etc.- (1) Notwithstanding anything contained in Article 13, no law providing for- xxxxxxxxxxxxxxxxxxxx Provided that where such law is a law made by the Legislature of a State, the provisions of this article shall not apply thereto unless such law, having been reserved for the consideration of the President, has received his assent. (2) 31C. Saving of laws giving effect to certain directive principles.- xxxxxxxxxxxxxxxxxxx Provided that where such law is made by the Legislature of a State, the provisions of this Article shall not apply thereto unless such law, having been reserved for the consideration of the President, has received his assent. (3) 213. Power of Governor to promulgate Ordinances during recess of Legislature.- xxxxx ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es for the fixation of the rates and other incidents of law by any authority, the law shall provide for the previous consent of the President being obtained to the making of any such rule or order. 242. The above provisions are part of our Constitutional Scheme and could not be wished away by saying that such provisions impinge upon the sovereign power of the State. Power of a State Legislature to the above extent is expressly limited by Constitutional Scheme. Article 304(b) proviso is one of such Constitutional Schemes where the State power is restricted and limited to the above extent. The Constituent Assembly Debates, as noticed above, clearly bring about the rationale of introduction of the requirement of Presidential assent in respect of certain laws by which State Legislature put restriction on the freedom of trade, commerce and intercourse. We have noted above that in the Constituent Assembly there was serious objection raised against clause (b) of Article 304 and amendment was moved for deletion of clause (b) from the Constitution. The above amendment after great discussion was negatived by approving the limited restraint put on the State Legislature as engrafted in Article ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e President to ensure, at the initial stage, that the State Legislation does not, by imposing unreasonable restrictions on trade, commerce or intercourse, endanger the commercial unity of the nation. It is true that clause (b) is not confined to interState trading activities, it extends to trade within the State, also. But intraState trading activities often have a close and substantial relation to interState trade and commerce. State laws, though purporting to regulate trade within a State, may have interState implications. They may impose discriminatory taxes or unreasonable restrictions which impede the freedom of interState trade and commerce. That is why, both interState and intraState trade have been made the subject of limitations on State legislative power under Article 304(b). 246. The Sarkaria Commission in para 2.40.07 has also recorded : However, no instance of a Bill reserved under the Proviso to clause (b) of Article 304, which might have been vetoed by the President, has been cited. In para 2.40.08 it was concluded: 2.40.08. For these reasons, we cannot support the demand for amendment of Article 304, or omission of the Proviso to its clause (b). 247. The Sarkaria Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y power to the President (i.e. Union Council of Ministers) over a State legislation seeking to impose restrictions on interState or intraState trade, is not a good enough argument to hold that these are antifederal features making unjustifiable encroachment on the autonomy of the States. No doubt, these features give due weightage to the Union. But the scheme of the Articles in Part XIII considered as a whole, is wellbalanced. It reconciles the imperative of economic unity of the Nation with interests of State autonomy by carving out in clauses (a) and (b) of Article 304, two exceptions in favour of State legislature to the freedom guaranteed under Article 301. 248. Now one more limb of submissions with regard to Article 304(b) needs to be considered. The submission on behalf of the States is that Article 304 subclause (b) does not contemplate taxing legislation. It is contended that Article 304(a) has specifically used word tax and absence of word tax in Article 304(b) clearly indicates that the Constitution framers have intended to cover restrictions other than tax. Learned counsel for the petitioners have refuted the submission and their contention is that word restrictions used ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te Legislature in that regard. 250. There are few more reasons due to which we are of the opinion that word 'restriction' uses in Article 304(b) also includes taxation law. 251. A State Legislature in exercise of its legislative power referable to any of the Entries of List II can frame law both fiscal or nonfiscal. When Article 304 uses words by law and the law is a wider term which embraces both fiscal and nonfiscal legislation with regard to clause (b), it cannot be limited as only nonfiscal law. If we have to hold that Article 304(b) does not refer to tax law, we have to give different meaning to words by law used in the beginning of Article 304 which governs both clauses (a) and (b). The mere fact that clause (a) uses the words any tax and clause (b) does not use the word tax is not of much significance since the word restrictions used in clause (b) is wide enough to cover any kind of restriction by fiscal law. Neither Article 302 nor Article 303 uses the word tax . Both Articles are dealing with freedom of trade and commerce, nonuse of word tax in Article 304(b) is also inconsequential. We thus are of the opinion that the word restrictions under Article 304(b) is vide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manner, precluded from granting exemption to specified class of goods to give a helping hand for development of a particular industry specially in a State which is not so developed and State patronage for development is necessary. It is contended that all States are not equal in its economic and industrial development and backward State needs a special treatment by way of exemption in tax in deserving cases for coming up at level playing field with other States. It is contended that State's protection by way of exemption/set off in such cases cannot be termed as discrimination. It is contended that discrimination is one when it is a hostile discrimination. 255. Learned counsel for the parties have placed reliance on various pronouncements of this Court in support of their respective submissions which we shall notice hereinafter. 256. A Constitution Bench of this Court in Firm A.T.B. Mehtab Majid and Co. vs. State of Madras and another, (1963) Suppl. (2) SCR 435, had occasion to consider Article 301 and Article 304 in the context of Madras General Sales Tax Act, 1939 and Madras General Sales Tax Rules, 1939. The writ petition was filed under Article 32 by a dealer who was dealin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alid only if it comes within the terms of Article 304(a). 11. Article 304(a) enables the legislature of a State to make laws affecting trade, commerce and intercourse. It enables the imposition of taxes on goods from other States if similar goods in the State are subjected to similar taxes, so as not to discriminate between the goods manufactured or produced in that State and the goods which are imported from other States. This means that if the effect of the sales tax on tanned hides or skins imported from outside is that the latter becomes subject to a higher tax by the application of the proviso to subrule of Rule 16 of the Rules, then the tax is discriminatory and unconstitutional and must be struck down. 258. Petitioners rely on Weston Electronics and another vs. State of Gujarat and others, (1988) 2 SCC 568. Under Section 49 subSection (2) of Gujarat Sales Act, 1969 the State was empowered to exempt, in the public interest, any specified class of sales from sales tax. In 1981, while the rate for electronic goods entering the Gujarat State for sale therein was maintained at 15%, the rate in respect of locally manufactured goods was reduced to 6% by notification. By further not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ute that taxation is a deterrent against free flow. As a result of favourable or unfavourable treatment by way of taxation, the course of flow of trade gets regulated either adversely or favourably. If the scheme 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 [AIR 1961 SC 232 : (1961) 1 SCR 809] and the observations then made obviously apply to cases of the type which is now before us. 261. This Court held both the notifications issued by Andhra Pradesh Government unsustainable in law. Following was stated in paragrph 14: 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e plenary powers of the States. If the exemption is based on natural and business factors and does not involve any intentional bias, the impugned notifications to grant exemption of limited period on certain specific conditions cannot be held to be bad. Judged by that yardstick, the present notifications cannot be held to be violative of the constitutional provisions. An examination of Article 304(a) would reveal that what is being prohibited by this article which is really an exception to Article 301 will not apply if Article 301 does not apply. 264. This Court further held that grant of exemption to specified class for limited period, such granting of exemption cannot be held to be contrary to the concept of economic unit. Following was stated: 28. Concept of economic barrier must be adopted in a dynamic sense with changing conditions. What constitutes an economic barrier at one point of time often ceases to be so at another point of time. It will be wrong to denude the people of the State of the right to grant exemptions which flow from the plenary powers of legislative heads in List II of the Seventh Schedule of the Constitution. In a federal polity, all the States having power ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be construed widely, liberally and harmoniously. And these entries have been construed to include ancillary or incidental power. Power to grant exemption is inherent in all taxing legislations. 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 harmonised 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 colour in evolving dynamic situations. A backward State or a disturbed State cannot with parity engage in competition with advanced or developed States. Even within ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ap which have suffered tax but not the other categories where the scrap had not suffered tax at that stage. This is directly covered by the decision in A.T.B. Mehtab case [1963 Supp 2 SCR 435 : AIR 1963 SC 928 : (1963) 14 STC 355] and that decision has not been dissented in Nataraja Mudaliar case[(1968) 3 SCR 829 : AIR 1969 SC 147 : (1968) 22 STC 376] or Rattan Lal Co. case [(1969) 2 SCR 544 : AIR 1970 SC 1742 : (1970) 25 STC 136] . The decision in A.T.B. Mehtab case [1963 Supp 2 SCR 435 : AIR 1963 SC 928 : (1963) 14 STC 355] is by a Constitution Bench and had not been dissented so far in any case. The ratio of the judgment being fully applicable, the judgment of the High Court under appeal is not acceptable. 23. We accordingly hold that the provision which is impugned in this case is ultra vires and accordingly set aside the judgment of the High Court and allow the writ petition filed by the assessee in the High Court. There will be no order as to costs. 268. Now we come to two Judge Bench judgment of this Court in Shree Mahavir Oil Mills and another vs.State of J K and others, (1996) 11 SCC 39. In the above case notification under Section 5 of the J K General Sales Tax Act, 1962 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anner as they think fit so long as they do not use the weapon of taxation to discriminate against the imported goods vis vis the locally manufactured goods. To repeat, the clause bars the States from creating tax barriers - or fiscal barriers, as they can be called - around themselves and/or insulate themselves from the remaining territories of India by erecting such tariff walls . Part XIII is premised upon the assumption that so long as a State taxes its residents and the residents of other States uniformly, there is no infringement of the freedom guaranteed by Article 301; no State would tax its people at a higher level merely with a view to tax the people of other States at that level. And it is this clause which has a crucial bearing on this case..... 270. Two Judge Bench noticed earlier cases as well as three Judge Bench judgment in Video Electronics (supra). I n paragraph 23 this Court came to the conclusion that the total exemption granted in favour of smallscale industries in Jammu Kashmir producing edible oil is not sustainable in law. The Court held that States are free to encourage and promote the establishment and growth of industries within their States by all such me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g and selling different style of footwear in the State of Madhaya Pradesh. The respondent contended before the Sales Tax Officer that he was not liable to pay any sales tax on sale of handmade shoes, chappals and other types of footwear whose sale price did not exceed ₹ 1280 per pair. The claim of the respondent was rejected that the respondent does not fulfill the conditions of the notification. In the writ petition filed by the respondent in the High Court one of the contentions was raised to the following effect: 3. ..The respondent further averred that if the exemption were held to be in favour of sales by a manufacturer or a member of his family and not on sales by an importer, then the notification would be discriminatory in nature and would contravene the provisions of Article 304(a) of the Constitution. On these grounds the respondent prayed that the assessment order dated March 25, 1958 be quashed and the Sales Tax Officer be directed to exempt from tax such sales by the respondent as were covered by the exemption granted by the notification dated January 28, 1956. In their reply to the writ petition the appellants pointed out that the notification dated January 28, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e benefit of the exemption. The Court rejected the above argument stating that it is really an argument of inconvenience. In any view of the matter, this Court in the above case held that assessee did not fulfill the condition of the notification, i.e., sale was exempted only when it is by a manufacturer or a family member of his family. Hence, there was no error in assessing him to the tax. The issue whether it was permissible to grant exemption to local goods and not to grant such exemption to the goods coming from outside was not the issue in the above case. In the above case, this Court has noticed that there was no discrimination with regard to the exemption in regard to the goods manufactured outside the State or within the State. The above case, thus, does not decide the issue which has cropped up before us. 276. The power of exemption flows from legislation enacted by the State Legislature, wherever exemptions are granted, normally, statutes so provide with legislative policy. What is exemption, has been succinctly explained by this Court in Union of India and others vs. Wood Papers Ltd. And another, 1990(4) SCC 256 following was stated in paragraph 4: 4.....Literally exemp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a general lower rate on locally manufactured goods either in the shape either 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. Following was observed in paragraph 30: These cases were not at all concerned with granting of exemption to a special class for a limited period on specific conditions of maintaining the general rate of tax on the goods manufactured by all those producers in the State who do not fall within the exempted category at par with the rate applicable to imported goods as we have read these cases. Hence, it was not necessary in those decisions to consider the problem in its present aspect. If, however, the said power is exercised in a colourable manner intentionally or purposely to create unfavorable bias by prescribing a 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. That is not the situation in the instant cases. The aforesaid decisions, therefore, are not authorities for the genera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive field under State List, Entry 52 is 'taxes on the entry of goods into a local area for consumption, use or sale therein'. The Entry 52 itself demonstrate that there are inherent limitations as regard the nature and character of the levy. In order to have a levy of tax to come within the purview of Entry 52, such levy has to satisfy three conditions: (i) The levy under the State Entry must be 'on the entry of goods' which constitutes the taxable events. (ii) The levy in question must be in respect of 'into a local area'. The local area has been defined as ' an area administered by local body like a municipality, a district board, a local board, a union board, a panchayat or the like'. (iii) The goods must enter into the local area for the purpose of 'consumption, use or sale therein'. 282. The expression Entry Tax has to be understood in its plain meaning and also in the backdrop of historical imposition of taxes of this kind. The tax commonly known as octroi was in force in 1901 and it was subsequently included in VIIth Schedule of List II of Government of India Act, 1935. The Constitution of India does not use the word o ctroi . List I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be gainsaid that its immediate impact would be on movement of goods and the measure would fall within the inhibition of Article 301. 287. A law, made under the subject matter of Entry 52 List II, would thus clearly be a tax on the movement of goods and thus would fall within the purview of the inhibition of Article 301 and the said law can only be saved if it complies with the Article 304. Learned counsel for the States have contended that Entry Tax does not prohibit the entry of goods and tax is collected, only subsequently and normally, on the basis of returns filed by the persons taking the goods into a local area. Hence, there is no restriction on the borders of a State or border of a local area. It is contended that on the entry of goods merely a transit slip is given hence there is no barrier to the flow of goods. It is well settled that there is a clear distinction between incidence of a levy and the machinery provisions contained in law to give effect to such levy. The incidence of levy is on entry of goods hence incidence of tax is complete as the goods enters into the local area, whether the tax is collected immediately or subsequently has no relevance with the incide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... III? The word 'restriction' has also been used under Article 19 (2) to 19 (6) while empowering the State to impose reasonable restrictions on the fundamental rights guaranteed under Article 19(1) (a) to 19 (1) (g). The word 'restriction' is defined in New Webster Dictionary in the following manner:- The act of restricting, or state of being restricted; that which restricts; a restraint; limitation. 291. The Black's Law Dictionary also defines 'restriction' in following manner:- restriction.1. Confinement within bounds or limits; a limitation or qualification. 2.A limitation (esp. in a deed) placed on the use or enjoyment of property. 292. The restriction thus is an act to limit, confine and restrain. The 'restriction', in Part XIII has been used in the context of restriction to freedom of trade, commerce and intercourse. The law, which restrict or limit such right are called restrictions. 293. In the present case, since we are concerned with the taxing legislation, our discussions shall confine to find out the nature of restriction which can be put on the freedom of trade and commerce by tax legislation. The Constitution Bench of this Court in Fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of, any discrimination between one State and another. 295. Thus preferences and discrimination both are treated as restriction in the context of freedom of trade and commerce. Coming to Article 304(a) any law framed by legislature is restriction on freedom of trade and commerce which:- a). Imposes on goods imported from other State, any tax when no such tax is imposed on similar goods manufactured or produced in that State, b). Imposes on goods imported from other States any tax which discriminates between goods so imported and goods so manufactured or produced. 296. Again in Article 304 subclause(b) State is empowered to impose reasonable restrictions in the public interest. Article 306, as it was initially enacted, contained heading 'power of certain States in Part B of the Schedule to impose restriction on trade and commerce'. Article 306 permitted any tax on duty on import of goods into the State from other States or on the export of goods from the State to another States which was being imposed by a State specified in Part B to continue by an agreement between Government of India and Government of States for a period, not exceeding ten years. The article contemplat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l sought to be remedied as also the nature of restraint or restriction placed on the rights of the citizen. It is difficult to lay down any hard or fast rule of universal application but this Court has consistently held that in imposing such restrictions the State must adopt an objective standard amounting to a social control by restricting the rights of the citizens where the necessities of the situation demand. 300. Further, it was held in Laxmi Khandsari Etc. Etc. Vs. State of U.P. 1981 (3) SCR 107 that incurring of the loss in trade is not a ground to trade restrictions as unreasonable. Following was laid down: Finally, in determining the reasonableness of restrictions imposed by law in the field of industry, trade or commerce, the mere fact that some of the persons engaged in a particular trade may incur loss due to the imposition of restrictions will not render them unreasonable because it is manifest that trade and industry pass through periods of prosperity and adversity on account of economic, social or political factors. In a free economy controls have been introduced to ensure availability of consumer goods like foodstuffs, cloth or the like at a fair price and the fixat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o note that the issue as to whether the restriction contained in any taxing statute impede the freedom of trade and commerce is a question which will vary from case to case. The nature of restriction and the magnitude of the restriction are all relevant factors to determine whether trade is impeded or not. It is well settled that provisions in a statute which is regulatory in nature which facilitates the trade have not been treated as restriction impeding the freedom of trade and commerce. Traffic regulations, registration of motor vehicles for plying in the State, collection of toll have not been treated to be restriction in freedom of trade and commerce. 304. The above discussion makes it clear that what has been expressly prohibited in Article 302 306 are all restrictions in the freedom of trade and commerce which shall obviously contravene Article 301, but there may be other instances when a law is treated to be restriction although not expressly enumerated in Part 302 to 306. We may clarify that Article 301 is not attracted in a legislation which does not contain any kind of restriction to the freedom of trade and commerce. The question of applicability of Part XIII arises onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to or rely on the said section or the decisions thereon for the purpose of construing the relevant Articles of Part XIII of our Constitution. 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 not be safe to seek for guidance or assistance from the Australian decisions when we are called upon to construe the provisions of our Constitution. 309. It is useful to refer to observations made by Lord Porter in Commonwealth of Australia others(supra) , which are in following words: In this labyrinth there is no golden thread. But it seems that two general propositions may be accepted; (I.) that regulation of trade, commerce and intercourse among the States is compatible with its absolute freedom, and (2.) that s.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. 310. Shri Rakes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... validity of laws which are purely regulatory in character. Judged by reference to the doctrine, the validity of a regulatory law hinged on whether it imposed a burden on an essential attribute or on a mere incident of trade or commerce. 312. As noted above, our Constitution framers were well aware of the provisions of the Australian Constitution and the difficulties which arose in the Australia and different views expressed on the interpretation of Section 92, the Constitution framers though took inspiration from Section 92 but they did not stop there, rather they expressly provided for qualification to the right and freedom guaranteed under Article 301 by Article 302 306. Learned counsel for the State also in their submissions have contended that the Australian judgments pertaining to Constitution of Australia as well as the judgments of the U. S. Supreme Court are not directly applicable with regard to the interpretation of Part XIII. However, now it is contended by Shri Dwivedi that since the Australian High Court has now abandoned the operation test, this Court may also review the test as was laid down in Atiabari . 313. We have already noticed that in Atiabari in all the three ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , further relies on State of Maryland Vs. State of Louisiana 451 U.S. 725 where it was observed, one of the fundamental principles of commerce class jurisprudence is that no State, consistent with the commerce class, may or impose tax which discriminates against interstate commerce....... . Shri Dwivedi submits that the U.S. Supreme Court has also moved to nondiscriminatory test. He submits that even in Cole Vs. Whitfield , the Complete Auto Transit Vs. Brady was noticed. The commerce class of the American Constitution Article 1, Section 8, Clause 3 provides to regulate commerce with foreign nations and among the several States and with the Indian tribes; Part XIII of the Constitution has not adopted the American model and the interpretation on the commerce class is hardly relevant for interpretation of Part XIII. 315. Nondiscriminatory taxation by State in reference to interstate and intrastate trade is ingrained in Article 304(a) itself, and no abstract theory needs to be referred to for following Nondiscriminatory Theory. 316. We are thus of the view, that the concept as evolved in Australia and America with regard to freedom of trade and commerce, cannot be adopted in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the difficulties inherent in a problem of fixing the rate of taxes by a court. Experience shows that the court applies certain presumptions, such as that of the wisdom, knowledge and the good intentions of the Legislature, and does not also meticulously go in to the question, but only looks at the broad features. On the argument of learned counsel when it is permissible and possible for a court to ascertain whether a tax is fiscal or regulatory, I do not see how it becomes impossible, though it may be difficult, to hold whether a fiscal tax is reasonable or not. The distinction lies not in the nature of the enquiry but only in degree. That apart, no restriction, if it is unreasonable, can be more deleterious to the freedom than the imposition of fiscal burden on it, which may in certain circumstances destroy the very freedom. 318. In view of foregoing discussion, we are of the view that submission raised on behalf of the learned counsel for the State that 'direct and immediate effect test' is no longer a correct test, cannot be accepted. As observed above, each case has to be determined on facts of each case. The 'direct and immediate effect test' as laid down in A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tory taxation would be outside Art.301 and cannot therefore, fall under Art.304(b). If in the present case it had been urged before us that the tax levied by the Act is compensatory in character, it would have been necessary to consider the question once again by constituting a larger Bench. 321. The question as to what are the tests for determining whether a tax or levy is compensatory in nature becomes secondary when we have to examine sustainability of the compensatory theory itself. 322. What is the tax ? What are the ingredients of taxation ? Thomas M. Cooley in A Treatise on the Constitutional Limitations defined the taxes in following words: Taxes are defined to be burdens or charges imposed by the legislative power upon persons or property, to raise money for public purposes. The power to tax rests upon necessity, and is inherent in every sovereignty. The legislature of every free State will possess it under the general grant of legislative power, whether particularly specified in the constitution among the powers to be exercised by it or not.. 323. Chief Justice, Marshall in M Culloch vs. State of Maryland, 17 US 316 (1819 ) while examining the nature of taxing power state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being source of Revenue is also expended for various public welfare measures and when it s object is in no way connected with the public interest or public welfare it loses its character of taxation, becomes a levy which is unconstitutional. 326. Das, J. delivering majority opinion in Automobile Transport case , in his judgment has referred to Rajasthan Motor Vehicles Taxation Act, 1951 as compensatory with whose opinion Subba Rao, J. also concurred. 327. Das, J. for coming to the conclusion that 1951 Act is a compensatory in nature has referred to judgments of Australian High Court and the judgment of the Privy Council wherein validity of various statutes in the context of freedom of trade and commerce granted under Section 92 of the Constitution of Australia were considered. Das, J. has referred to following judgments: (i) Duncan v. The State of Queensland, (1916) 22 C.L.R. 556; (ii) Mc Carter v. Brodie, (1950) 80 C.L.R. 432; (iii)Hughes and Vale Proprietary Ltd. v. State of New South Wales, (1955) A.C. 241; (iv) Armstrong v. State of Victoria No.2, (1957) 99 C.L.R. 28; (v) Commonwealth of Australia v. Bank of New South Wales, (1950) A.C. 235; (vi) Commonwealth Freighters Proper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... States is compatible with absolute freedom and that s. 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. Thus the Privy Council in the Banking Case expressly rejected the proposition that s. 92 precluded Parliaments (Commonwealth or State) from in any way regulating or controlling interState trade and commerce, and a statement of the law was selected for approval which defined the relevant criterion as the distinction between regulation which was permitted, and prohibition, which was not permitted. The result is that s.92 does not mean that interState trade and commerce is to be free from control by law. In a passage to which I have just referred their Lordships held that if laws have only an indirect effect in relation to interState trade and commerce they are not invalidated by s. 92. 332. Justice Fullagar, who delivered a dissenting opinion had examined in detail the nature of legislation which can be termed as regulatory and those which cannot be held to be prohibiting the trade. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they cannot fairly be said to impose a burden on a trader or deter him from trading: it would be foolish, for example, to suggest that my freedom to trade between Melbourne and Albury is impaired or hindered by laws which require me to keep to the left of the road and not drive in a manner dangerous to the public. Of course, even rules of the kind which I have taken as examples could be made to operate as a burden or deterrent in a high degree. Let me take an example. The town of Wangaratta is in Victoria, some fifty miles by road from the border between Victoria and New South Wales. It is on the Hume Highway, which is the busy main highway between Melbourne and Sydney. A law which provided that a motor car should not travel on that highway at greater speeds than thirty miles per hour within the limits of towns and sixty miles per hour outside towns would not impede or interfere with the trade of persons carrying goods for reward between Melbourne and Sydney; their trade would remain 'free.' But let me suppose a law that no person should drive a motor car between Wangaratta and the border at a speed exceeding one mile per hour. We should instantly say that such a law interf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry for the use made of them. Following observations were made: It appears to me that on a proper scrutiny of Pt. II of the Motor Car Acts 195156 (Vict.) and the second schedule it must be seen that no room exists for the grounds upon which it has been sought to reconcile with s. 92 the imposition upon vehicles exclusively engaged in interState commerce of the rates contained in subpar.( b) of par. B of the schedule. (1) The exaction cannot be regarded simply as a fee contributing to the cost of registration a service in the interest of motor car owners and drivers and others so that it is nothing but an incident or adjunct of the traffic. (2) It cannot be treated as another contribution to the maintenance of the highways compensatory for the use made of them. (3) It cannot be justified as a tax upon the ownership or possession of a chattel considered independently of the use of the chattel in the carriage of persons or goods, including the interState carriage of persons or goods. (4) It cannot be treated as involving no appreciable burden upon the possession of a motor vehicle as a means of interState carriage and movement. 336. Referring to an earlier judgment of the High Court, W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e purview of the restrictions contemplated by Article 301 and such measures need not comply with the requireme4nts of the proviso to Article 304(b) of the Constitution. 340. The law that if a statute is compensatory in nature, it is beyond Part XIII and does not violate Article 301, was consistently followed after the above pronouncement in Automobile Transport . All State Legislations, after the above pronouncement have been challenged and saved on many grounds including on the above exceptions, as laid down in Automobile Transport . There have been various tests laid down in different cases decided by this Court to find out as to whether State Legislation is compensatory in nature or not. In Messers Bhagatram Rajiv kumar , this Court had held that if there is some link between the tax and trading facility, directly or indirectly, the statute is compensatory and is not open to challenge under Article 301. State of Bihar and Others (supra) following the earlier judgment again reiterated the test of some connection between the tax and trading facility provided. Both the above judgments were doubted and referred to a Constitution Bench. A Constitution Bench of this Court in Jindal St ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstitutes no legislation which discriminates against the products of sister States, but merely subjects them to the same rate of taxation which similar articles pay that are manufactured within the State, we do not see in it an attempt to regulate commerce, but an appropriate and legitimate exercise of the taxing power of the States. 343. The next case needs to be noted is judgment of the U.S. Supreme Court in Harold H. Henneford et al., V. Silas Mason Company, Inc., 300 U.S. 577 . 344. Justice Cardozo delivered the opinion of the Court and upheld the compensatory tax. The facts of the case had been noted in the judgment which reads as follows: A statute of Washington taxing the use of chattels in that state is assailed in this suit as a violation of the commerce clause (Constitution of the United States, article I, 8) in so far as the tax is applicable to chattels purchased in another state and used in Washington thereafter. .... .... .... .... Only two of these taxes are important for the purposes of the case at hand, the 'tax on retail sales,' imposed by title III and the 'compensating tax,' imposed by title IV on the privilege of use. Title III provides that aft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne pays upon one activity or incident, and the other upon another, but the sum is the same when the reckoning is closed. Equality exists when the chattel subjected to the use tax is bought in another state and then carried into Washington. It exists when the imported chattel is shipped from the state of origin under an order received directly from the state of destination. In each situation the burden borne by the owner is balanced by an equal burden where the sale is strictly local. 346. The contents of the compensatory tax doctrine were reiterated by the U.S. Supreme Court in Associated Industries Of Missouri, et al., V. Janette M. Lohman 128 L Ed 2d 639 . In the above cases State of Missouri imposed a uniform statewide use tax on all goods purchased outside the State and stored, used or consumed within the State. The tax was purportedly designed to compensate for sales tax imposed by local jurisdiction on sales of goods in the State. Local sales tax varied very widely, on several occasions the use tax exceeded the sales tax. The tax was challenged, as violating interstate commerce on the ground that it placed greater burden on interstate trade, referring to judgment of Justice C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MANU/USSC/0062/1961 : 366 U.S. 199, 204205 (1961). Finally, the events on which the interstate and intrastate taxes are imposed must be substantially equivalent ; that is, they must be sufficiently similar in substance to serve as mutually exclusive proxies for each other. Armco, supra, at 643. As Justice Cardozo explained for the Court in Henneford, under a truly compensatory tax scheme, the stranger from afar is subject to no greater burdens as a consequence of ownership than the dweller within the gates. 348. Another judgment which needs to be noted is Fulton Corporation V. Jenice H. Folkner, Secretary of Revenue of North Carolina 516 US 325, 133 L Ed 2d 796 . For valid compensatory tax three conditions were noticed by the U.S. Supreme Court in following words: Since Silas Mason, our cases have distiled three conditions necessary for a valid compensatory tax. First, a State must, as a threshold matter, 'identify the [intrastate tax] burden for which the State is attempting to compensate.' Oregon Waste, supra, at 103, 128 L Ed 2d 13, 114 S Ct 1345 (quoting Maryland v Louisiana, 451 US 725, 758, 68 L Ed 2d 576, 101 S Ct 2114 (1981). Second, the tax on interstate commerce m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... then neither the Congress nor any State Legislature could interfere with or regulate interState gambling. Our Constitution, however, has provided adequate safeguards in clause (6) of Article 19 and in Articles 302305. The scheme of the Australian Constitution also is different from that of ours, for in the Australian Constitution there is no such provision as we have in Article 19(6) or Articles 302304 of our Constitution. The provision of Section 92 of the Australian Constitution being in terms unlimited and unqualified the judicial authorities interpreting the same had to import certain restrictions and limitations dictated by common sense and the exigencies of modern society. This they did, in some cases, by holding that certain activities did not amount to trade, commerce or intercourse and, in other cases, by applying the doctrine of pith and substance and holding that the impugned law was not a law with respect to trade, commerce or intercourse. The difficulty which faced the judicial authorities interpreting Section 92 of the Australian Constitution cannot arise under our Constitution, for our Constitution did not stop at declaring by Article 19(1)(g) a fundamental right to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e permissible to impose on it, is not exactly the same. 354. The answer to the question as to whether a compensatory tax is out of reach of Article 301 has to be found out from the Scheme of Part XIII of the Constitution itself and not from the theory of compensatory charge as evolved in Australia or United States of America. Two fundamental principles of taxes are: (i) that it is an imposition made for public purpose, (ii) without reference to any special benefit to be conferred on the payer of the tax. 355. The compensatory doctrine evolved in Automobile Transport is that compensatory tax is to compensate for facility extended, for example, wear and tear of the Road. The compensatory tax can be imposed only for public purpose which fact is not denied by any of the parties before us. Can it be said that a tax which is a compensatory in nature need not to be subject to restriction as contained in part XIII ? If it is accepted that once a tax is held compensatory tax it goes out of reach of Part XIII, it will be carving a new exception to Article 301 which is not contemplated in the constitutional scheme. The framers of the Constitution after providing for freedom of trade, commerce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Part XIII. Reading any such protection to compensatory tax legislation is against the constitutional provision. We, thus, are of the opinion that the compensatory theory as evolved in Automobile Transport (supra) is not compatible to the constitutional scheme and a compensatory tax legislation cannot be insulated from challenge under Part XIII of the Constitution. 358. We may, however, observe that it is always open to scrutinize the true nature and character of legislation to decipher as to whether it contains any restriction on freedom of trade, commerce and intercourse violating Article 301. A legislation which is compensatory in nature may shed light while determining whether it contains restriction on trade, commerce and intercourse or facilitate the trade, commerce and intercourse. But all legislations be it a compensatory tax legislation or otherwise has to be tested in accordance with provisions of Part XIII of the Constitution. The ratio of judgment of Automobile Transport is overruled in so far as it lays down that the compensatory tax legislations are out of part XIII of the Constitution. PART V OUR CONCLUSIONS 1. All legislative powers of the State are subject to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tween goods imported from other States and goods manufactured or produced in the State. 11. A law passed by State Legislature imposing tax only on the imported goods coming from other States and Union Territories and there being no similar tax imposed to the locally produced\manufactured goods, the law is not saved by Article 304(a) and violates Article 301. 12. A law imposing tax on goods imported from other States and Union Territories, facially taxing goods locally manufactured and produced but granting set off \exemption in general terms is discriminatory and violates Article 301. 13. What have been expressly prohibited under Article 302, 303 and 304 are restrictions in the freedom of trade and commerce violating Article 301. A law containing restriction impeding freedom of trade and commerce and intercourse which is not saved by Article 302, 303 and 304 violates Article 301. 14. The compensatory tax theory as judicially evolved in Automobile Transport is not compatible with the Constitutional provisions contained in Part XIII. The ratio in judgment of this Court in Automobile Transport to the extent that the legislation which is compensatory in nature is out of Article 301, ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ws including law of levying taxes on subject matter enumerated in List II of VIIth Schedule in accordance with limitations and restrictions contained in the Constitution of India. (3) The power to make law and levy taxes reserved in favour of the State under Article 246 read with List II of VIIth Schedule is subject to Part XIII of the Constitution. Article 245 has to be read along with Article 246 for finding out the source of the legislative power. (4) Part XIII (including Article 301) of the Constitution to which legislative power of State is subject, does not have effect of denuding any sovereign power of the State or effecting the federal structure of the Constitution. (5) The levy of taxes is presumed to be in public interest. (6) Levy of taxes which may be presumed to be in public interest still has to comply with Part XIII of the Constitution for it to be justified as reasonable restriction. (7) Imposition of restriction by way of tax legislation under Article 304(b) is part of constitutional scheme and Presidential sanction has been provided to keep a check on the legislative power of the State impeding freedom of trade, commerce and intercourse. All legislative powers und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh, Hon'ble Mr. Justice N.V.Ramana, Hon'ble Mrs. Justice R.Banumathi, Hon'ble Dr. Justice D.Y.Chandrachud and Hon'ble Mr. Justice Ashok Bhushan pronounced separate judgments of the Bench. Final Conclusion In terms of the signed order, by majority the Court answers the reference in the following terms: 1. Taxes simpliciter are not within the contemplation of Part XIII of the Constitution of India. The word Free used in Article 301 does not mean free from taxation . 2. Only such taxes as are discriminatory in nature are prohibited by Article 304(a). It follows 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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