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TMI Blog2006 (4) TMI 120X X X X Extracts X X X X X X X X Extracts X X X X ..... ned law chooses an activity like trade and commerce as the criterion of its operation and if the effect of the operation of the enactment is to impede trade and commerce then article 301 is violated.In the context of article 301, therefore, compensatory tax is a compulsory contribution levied broadly in proportion to the special benefits derived to defray the costs of regulation or to meet the outlay incurred for some special advantage to trade, commerce and intercourse. It may incidentally bring in net-revenue to the Government but that circumstance is not an essential ingredient of compensatory tax. 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 [1960 (9) TMI 94 - SUPREME COURT] and the working test enunciated in Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan [1962 (4) TMI 91 - Supreme Court of India] for deciding whether a tax is compensatory or not vide paragraph 19 of the report, will continue to apply and the test of "some connection" indicated in paragraph 8 of the judgment in Bhagatram Rajeev Kumar v. Commissioner of Sales Tax [1994 (11) TMI 33 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appeals Nos. 6411, Civil Appeals Nos. 6412, Civil Appeals Nos. 6413, Civil Appeals Nos. 6414, Civil Appeals Nos. 6415, Civil Appeals Nos. 6416, Civil Appeals Nos. 6417, Civil Appeals Nos. 6418, Civil Appeals Nos. 6419, Civil Appeals Nos. 6420, Civil Appeals Nos. 6421, Civil Appeals Nos. 6422, Civil Appeals Nos. 6423, Civil Appeals Nos. 6424, Civil Appeals Nos. 6425, Civil Appeals Nos. 6426, Civil Appeals Nos. 6427, Civil Appeals Nos. 6428, Civil Appeals Nos. 6429, Civil Appeals Nos. 6430, Civil Appeals Nos. 6431, Civil Appeals Nos. 6432, Civil Appeals Nos. 6433, Civil Appeals Nos. 6434, Civil Appeals Nos. 6435, Civil Appeals Nos. 6436, Civil Appeals Nos. 6437, Civil Appeals Nos. 6438, Civil Appeals Nos. 6439, Civil Appeals Nos. 6440 of 1997, Civil Appeals Nos. 997, Civil Appeals Nos. 998, Civil Appeals Nos. 3144, Civil Appeals Nos. 3145, Civil Appeals Nos. 3146, Civil Appeals Nos. 4954, Civil Appeals Nos. 5141, Civil Appeals Nos. 5143, Civil Appeals Nos. 5144, Civil Appeals Nos. 5145, Civil Appeals Nos. 5147, Civil Appeals Nos. 5148, Civil Appeals Nos. 5149, Civil Appeals Nos. 5150, Civil Appeals Nos. 5151, Civil Appeals Nos. 5152, Civil Appeals Nos. 5153, Civil Appeals Nos. 5156, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Jahanvi Worah, Surya Kant, Ramesh Kumar Agarwal, D. Bharuka, R.C. Kohli, S.W.A. Qadri, R. Dubey Adarsh Upadhyay, A. Chaudhary, G. Bhatia, N. Singh, K. Misra, Adarsh Udadhyay, Bhargava V. Desai, Sanjeev K.R. Singh, Ms. Sheenam Parwanda, M.Nupur Kanungo, Gopal Singh, Ms. Vimla Sinha, Sushil Kumar Jain, A.P. Dhamija, Ram Niwas, H.D. Thanvi, B.K. Sharma, V.N. Koura, Ms. Paramjit Benipal, A. Mariarputham, Ms. Aruna Mathur (for M/s. Arputham Aruna Co.), Vijay Pratap Singh, K. S. Rana, L.K. Bhushan, Ms. Jasleen Oberoi, Rahul Prasanna Dave, Kavin Gulati, Ms. Rashmi Singh, T. Mahipal, Dhurv Aggarwal, Praveen Kumar, K.R. Sasiprabhu, Ashish Verma, S.P. Singh Chauhan, Balaji Srinivasan, V. Sudeer, M.B.R.S. Raju, S.Srinivasan, Amit Mahajan, D.N. Ray, Ms. Sumita Ray, Ajay Siwach, Pradeep Dahiya, Shandeep Sharma, T. Singhdev, K. Ramesh, Hari Kumar G., T.V. George, U.A. Rana, P. Thakur, Arvind Kumar, Ms. S. Roy (for M/s. Gargat Co.), Rajesh Kumar, Vishwajit Singh, Ms. Mayuri Vats, Vijay Kumar, Sunil K. Jain, S. Borthakur, B. Barooah, P.K. Bansal, P.K. Singh, M. Verma, V.K. Tiwari, Vinay Kumar Garg, Roy Abraham, S. Jain, Himinder Lal, Mahabir Singh, P.N. Puri, M.P. Vinod, D. Pillai, A.K. Jain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Haryana. The raw material is purchased from outside the State. The finished products are sent to other States on consignment basis or stock transfer basis. No sales tax is paid on the input of the raw material. Similarly, no sales tax is paid on the export of finished products. The impugned Act came into force with effect from May 5, 2000, to provide for levy and collection of tax on the entry of goods into the local areas of the State for consumption or use therein. The Act is enacted to provide for levy and collection of tax on the entry into a local area of the State, of a motor vehicle for use or sale, and of other goods for use or consumption therein. The Act seeks to impose entry tax on all goods brought into a "local area". The entire State is divided into local areas. The Act covers not only vehicles bringing goods into the State but also vehicles carrying goods from one local area to another. However, those who pay sales tax to the State are exempt from payment of entry tax. Ultimately, the entry tax only falls on concerns, like Jindal Stripe, which, by virtue of the provisions of the Central Sales Tax Act, 1956, pay sales tax on purchase of raw material and sale of fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Taxation Act, 1951. The challenge under article 301 was rejected by the Constitution Bench of seven judges of this court by holding, vide paragraph 19, that "the taxes are compensatory taxes which instead of hindering trade, commerce and intercourse facilitate them by providing roads and maintaining the roads". Vide paragraph 21 of the report, it was observed that "if a statute fixes a charge for a convenience or service provided by the State or an agency of the State, and imposes it upon those who choose to avail themselves of the service or convenience, the freedom of trade and commerce may well be considered unimpaired." Thus, the concept of "compensatory taxes" was propounded. Therefore, taxes which would otherwise interfere with the unfettered freedom under article 301 will be protected from the vice of unconstitutionality if they are compensatory. In Automobile Transport, AIR 1962 SC 1406, it was said, vide paragraph, that "a working test for deciding whether a tax is compensatory or not is to enquire whether the trade is having the use of certain facilities for the better conduct of its business and paying not patently much more than what is required for providing the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er to hold that the State provides several facilities to the trade, such as, laying and maintenance of roads, waterways, markets, etc., and on this premise, it was held that the entry tax was compensatory in nature. The learned judges did not consider it necessary to put the burden on the State to furnish the details of facilities provided to the traders and the expenditure incurred or incurable thereafter. To sum up: the pre-1995 decisions held that an exaction to reimburse/recompense the State the cost of an existing facility made available to the traders or the cost of a specific facility planned to be provided to the traders is compensatory tax and that it is implicit in such a levy that it must, more or less, be commensurate with the cost of the service or facility. Those decisions emphasized that the imposition of tax must be with the definite purpose of meeting the expenses on account of providing or adding to the trading facilities either immediately or in future provided the quantum of tax is based on a reasonable relation to the actual or projected expenditure on the cost of the service or facility. However, the post-1995 decisions in Bhagatram's case [1995] Supp 1 SCC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that the working test laid down in the Automobile Transport, AIR 1962 SC 1406 is good even today. Under the test, although the precise amount collected may not be actually used to provide any facility, the tax collected should be by and large commensurate with the cost of the facilities provided for the trade. Learned counsel, therefore, submitted that the working test laid down in Automobile Transport, AIR 1962 SC 1406, is the only test which would differentiate the tax imposed for augmenting general revenue from the compensatory tax. Learned counsel submitted that there is a basic difference between the law infringing freedom of trade and the law which imposes regulations which in effect facilitates or promotes trade. According to learned counsel, regulations provide for necessary services to enable free movement of traffic and, therefore, they cannot be described as restrictions impeding the freedom under article 301; that in the case of regulations the tax imposed is incidental in order to compensate for the facilities provided. On the other hand, it was urged, that, a tax law is in essence an exercise to augment the general revenue of the State and not for providing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they were contrary to the judgment of the seven-judge Bench of this court in the case of Automobile Transport, AIR 1962 SC 1406. Learned counsel urged that if the test, laid down in the case of Bhagatram [1995] Supp 1 SCC 673; [1995] 96 STC 654 (SC) and in the case of Bihar Chamber of Commerce [1996] 9 SCC 136; [1996] 103 STC 1 (SC), was held to be applicable then as a consequence there would be no difference between a tax and a compensatory tax. It was urged that, therefore, this court should evolve parameters of compensatory tax for future guidance. Learned counsel submitted that to be compensatory, tax must be levied to augment facilities for trade and that is how a tax was held not to impede but to facilitate trade (in Automobile Transport, AIR 1962 SC 1406). It was submitted that the essence of compensatory tax is that the services rendered or facilities provided should be more or less commensurate with the tax levied and the tax should not be patently more than what was required to provide the trading facility. It was submitted that the tax imposed for augmenting general revenue of the State is not compensatory; that any tax law which is designed or which has the effect of di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... means that tax laws do amount to restrictions, freedom from which is guaranteed to trade under Part XIII. It is, therefore, idle to contend as sought to be argued on behalf of the State that a tax under entry 52 List II falls outside article 301. Learned counsel submitted further that in Atiabari Tea Co., AIR 1961 SC 232 a workable test has been evolved under which restrictions which directly and immediately impede free flow of trade, would violate article 301. According to learned counsel one needs to enquire whether the trade is provided with facilities for the better conduct of their business. According to learned counsel once the said working test is satisfied then the levy is regulatory in nature provided it is not disproportionate to the value of the facility/service provided. Learned counsel urged that a tax imposed for raising general revenue of the State, is not a compensatory levy. It was submitted that for the purpose of securing freedom of movement by road, it was essential that no pecuniary burden is placed upon it which burden goes beyond a proper recompense to the State for the actual use made of the facilities provided by the State. Therefore, there has to be a d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivision Bench of this court with regard to the constitutional validity of the 2000 Act. Learned counsel next submitted that the question as to whether a levy is compensatory or not has to be decided with reference to the nature of the levy itself. In this connection reliance was placed on entry 57, List II. It was urged that taxes on motor vehicles are levied State-wise. Such levies are annual levies. Such levy, if claimed to be compensatory, must bear a definite nexus with the facilities which the State seeks to extend to the trading community using their transports on the roads and bridges maintained by the State. Similarly, it was argued that levy of entry tax under entry 52, List II, indicates that the levy contemplated is on the entry of goods into a local area for consumption, use or sale therein. It was submitted that the levy contemplated is on entry into a local area and not when the goods cross the State barrier. Therefore, if a levy of entry tax is claimed to be compensatory in nature such levy would have to be, in the first instance, confined to a local area and secondly the trading facilities sought to be provided also should be confined to such local area. Further t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gative ingredients indicated above also exist in the impugned levy inasmuch as the justification pleaded is augmentation of general revenue of the State in lieu of octroi in the name of facilities for which provisions are made by way of other compensatory taxes such as motor vehicle tax, property tax, etc. Learned counsel submitted that there is also an element of discrimination between goods entering local areas from outside the State and goods entering local areas from within the State, i.e., from one local area to another local area. The latter class of goods are not subjected to levy though all the facilities, if at all provided, are there in the course of intra-State movement and entry of goods in local areas. Learned counsel, therefore, submitted that this discrimination per se militates against the impugned levy being termed compensatory. S/Shri A.M. Singhvi, learned senior counsel, A.T. M. Sampath, H.K. Puri and Ms. K.S. Mehlwal also made their respective submissions on behalf of the assessees and substantially adopted the submissions made by S/Shri Shanri Bhushan, R.F. Nariman and A.K. Ganguli, learned senior counsel. Shri P.P. Rao, learned senior counsel appearing on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt and, therefore, this reference under article 145(3) of the Constitution was uncalled for. As a matter of preliminary submission, Shri P.P. Rao, learned senior counsel for the State, contended that in view of the amendment made by Act 18 of 2003 adding an Explanation to section 22 of the impugned 2000 Act clarifying that the tax collected shall be utilized for developing and maintaining infrastructure facilities useful for free flow of trade, the question involved in this matter has become academic. Learned counsel submitted that in view of various decisions of the Constitution Bench the case should have been first placed before a Bench of three judges and not before a Constitution Bench straightaway. It is only when that Bench refers it to five judges that the case should have been placed before a Constitution Bench because it has been a settled law that a Bench of two judges is bound by the principles of law laid down by a Bench of three judges which alone has the jurisdiction to interpret the law declared by a Constitution Bench. In this connection reliance was placed on two judgments of this court, in the case of Pradip Chandra Parija v. Pramod Chandra Patnaik [2002] 1 SCC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd its plenary powers within the fields allotted to them. In this connection reliance was placed on the judgment of this court in the case of Automobile Transport, AIR 1962 SC 1406. It was urged that the State Legislature may impose different kinds of taxes and duties such as property 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. Learned counsel submitted that if every law made by the State Legislature which has an indirect effect on free flow of trade is required to have prior sanction of the President then the Constitution, in so far as it gives plenary power to the States and the State Legislatures in the fields allocated to them, would be rendered meaningless and, therefore, it cannot be laid down as a general proposition that the power to tax is outside the purview of constitutional limitation of Part XIII. Learned counsel submitted that in any event regulatory measures and compensatory taxes are not hit by article 301. Learned counsel urged that in every case the court will have to ascertain whether an impugned law directly and immediately affects the movement of trade or whether it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with a view that such services in the long run would increase the volume of transactions in the market, was not permissible on the ground that such a benefit was an indirect and remote benefit to the traders; that the element of quid pro quo may not be possible but, even broadly and reasonably, it must be established by the authorities who charge the fees that the amount was being spent for rendering services to traders on whom the burden falls. Learned counsel submitted that the tests laid down with regard to quid pro quo under principles 2, 3 and 5 in the case of Ram Chandra Kailash Kumar [1980] Supp SCC 27, have no application to the compensatory tax because the concept of compensatory tax is only to judge the effect on trade, commerce and intercourse and, therefore, according to learned counsel the test of direct and close relation/link between the levy and the service rendered, cannot be applied to the concept of compensatory tax. Learned counsel submitted that the only test which is applicable to the concept of compensatory tax is-whether "trade and commerce" is benefited generally by such levy; that, it should be sufficient if the facilities provided in the local area ultima ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , therefore, contended in conclusion that a broad co-relation of the levy with the facility was enough. Learned counsel contended that in the case of Bolani Ores Ltd. v. State of Orissa, AIR 1975 SC 17, the Taxation Act envisaged imposition of tax on motor vehicles actually using the roads saying that if the facility is not used then no tax can be collected and if collected it will not be compensatory. Learned counsel contended, however, that the judgment of this court in Bolani Ores, AIR 1975 SC 17 was in the context of entry 52, List II which restricts the imposition of tax to actual use of roads by vehicles. A tax upon vehicles need not be contingent upon actual user. In this connection reliance was placed on entry 57. Therefore, it was submitted that the compensatory character of the tax would not be lost merely because some vehicles pay tax even though they may not use the roads. Learned counsel urged that under entry 57, List II once the vehicle is suitable for use on road, the tax can be imposed. Learned counsel, therefore, submitted that if a statute fixes a charge for convenience or service provided by the State and imposes the tax upon those who avail themselves of such s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 authorizing 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, commerce and intercourse among States.-Notwithstanding anything in article 301 or article 303, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver, article 301 is subject to limitations and conditions in articles 302, 303 and 304 which are borrowed from the commerce clause under article 1 of the US Constitution. Therefore, Part XIII is an amalgam of the United States and Australian Constitutions which brings out the difference between regulatory and taxing powers. This is how the concept of payment for revenue and the concept of payment for regulation arose. This is how the regulatory power stood excluded from the taxing power and on that reasoning in Automobile Transport's case, AIR 1962 SC 1406, this court took the view that compensatory taxes constitute an exception to article 301. It is a judicially evolved concept. However, the basis of that concept was not discussed by this court in that case which we have done in this case. Suffice it to state at this stage that the basis of special assessments, betterment charges, fees, regulatory charges is "recompense/reimbursement" of the cost or expenses incurred or incurrable for providing services/facilities based on the principle of equivalence unlike taxes whose basis is the concept of "burden" based on the principle of ability to pay. At this stage, we may clarify that in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in favour of Parliament under article 302, in which case Parliament can impose restrictions in public interest. Although the fetter is limited enabling Parliament to impose by law restrictions on the freedom of trade in public interest under article 302, none the less, it is clarified in clause (1) of article 303 that notwithstanding anything contained in article 302, Parliament is not authorized even in public interest, in the making of any law, to give preference to one State over another. However, the said clarification is subject to one exception and that too only in favour of Parliament, where discrimination or preference is admissible to Parliament in making of laws in case of scarcity. This is provided in clause (2) of article 303. (b) As regards the State Legislatures, apart from the limitation imposed by article 301, clause (1) of article 303 imposes additional limitation, namely, that it must not give preference or make discrimination between one State or another in exercise of its powers relating to trade and commerce under entry 26 of List II or List III. However, this limitation on the State Legislatures is lifted in two cases, namely, it may impose on goods impor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of regulatory charge. Consequently, we have to go into concepts and doctrines of taxing powers vis-a-vis regulatory powers, particularly when the concept of compensatory tax was judicially crafted as an exception to article 301 in Automobile Transport, AIR 1962 SC 1406. Difference between exercise of taxing and regulatory power: In the generic sense, tax, toll, subsidies, etc., are manifestations of the exercise of the taxing power. The primary purpose of a taxing statute is the collection of revenue. On the other hand, regulation extends to administrative acts which produces regulative effects on trade and commerce. The difficulty arises because taxation is also used as a measure of regulation. There is a working test to decide whether the law impugned is the result of the exercise of regulatory power or whether it is the product of the exercise of the taxing power. If the impugned law seeks to control the conditions under which an activity like trade is to take place then such law is regulatory. Payment for regulation is different from payment for revenue. If the impugned taxing or non-taxing law chooses an activity, say, movement of trade and commerce as the criterion of it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action and even if such benefit results from the Government action, the same is not measurable. Under the principle of equivalence, as applicable to a fee or a compensatory tax, there is an indication of a quantifiable data, namely, a benefit which is measurable. A tax can be progressive. However, a fee or a compensatory tax has to be broadly proportional and not progressive. In the principle of equivalence, which is the foundation of a compensatory tax as well as a fee, the value of the quantifiable benefit is represented by the costs incurred in procuring the facility/services which costs in turn become the basis of reimbursement/ recompense for the provider of the services/facilities. Compensatory tax is based on the principle of "pay for the value". It is a sub-class of "a fee". From the point of view of the Government, a compensatory tax is a charge for offering trading facilities. It adds to the value of trade and commerce which does not happen in the case of a tax as such. A tax may be progressive or proportional to income, property, expenditure or any other test of ability or capacity (principle of ability). Taxes may be progressive rather than proportional. Compensatory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of regulatory measure, its basis shifts from the concept of "burden" to the concept of measurable/quantifiable benefit and then it becomes "a compensatory tax" and its payment is then not for revenue but as reimbursement/recompense to the service/facility provider. It is then a tax on recompense. Compensatory tax is by nature hybrid but it is more closer to fees than to tax as both fees and compensatory taxes are based on the principle of equivalence and on the basis of reimbursement/recompense. If the impugned law chooses an activity like trade and commerce as the criterion of its operation and if the effect of the operation of the enactment is to impede trade and commerce then article 301 is violated. Burden on the State: Applying the above tests/parameters, whenever a law is impugned as violative of article 301 of the Constitution, the court has to see whether the impugned enactment facially or patently indicates quantifiable data on the basis of which the compensatory tax is sought to be levied. The Act must facially indicate the benefit which is quantifiable or measurable. It must broadly indicate proportionality to the quantifiable benefit. If the provisions are ambiguous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o that conferred upon Parliament by article 302 subject to the following differences: (a) While the power of Parliament under article 302 is subject to the prohibition of preference and discrimination decreed by article 303(1) unless Parliament makes the declaration under article 303(2), the State power contained in article 304(b) is made expressly free from the prohibition contained in article 303(1) because the opening words of article 304 contain a non obstante clause both to article 301 and article 303. (b) While Parliament's power to impose restrictions under article 302 is not subject to the requirement of reasonableness, the power of the State to impose restrictions under article 304 is subject to the condition that they are reasonable. (c) An additional requisite for the exercise of the power under article 304 (b) by the State Legislature is that previous Presidential sanction is required for such legislation. Why was the matter placed before a Bench of five judges: The concept of compensatory taxes was propounded in the case of Automobile Transport, AIR 1962 SC 1406, in which compensatory taxes were equated with regulatory taxes. In that case, a working test for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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