2006 (4) TMI 120 - SUPREME COURT

Whether a levy is compensatory or not has to be decided with reference to the nature of the levy itself?

Held that:- 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 part of regulation or as a part 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.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 337 - SUPREME COURT OF INDIA] and followed in the case of State of Bihar v. Bihar Chamber of Commerce [1996 (2) TMI 430 - SUPREME COURT OF INDIA], is, in our opinion, not good law. Accordingly, the constitutional validity of various local enactments which are the subject matters of pending appeals, special leave petitions and writ petitions will now be listed for being disposed of in the light of this judgment.