TMI Blog2004 (1) TMI 644X X X X Extracts X X X X X X X X Extracts X X X X ..... th its refinery unit at Mathura where the petitioner is manufacturing various petroleum products which are sold by the petitioner within and outside the State of U.P. The refinery of the petitioner situate at Mathura purchases crude oil from different Gulf countries from abroad. This crude oil which is coming from outside the country within the local area of Mathura has been subjected to entry tax under the aforesaid Act during the assessment years 2000-01, 2001-02 and 2002-03 and is liable to be similarly assessed in future years. 5.. It is alleged in paragraph 4-A of the writ petition that the Mathura refinery was designed and conceived to supply the requirement of petroleum in the northern region of the country, particularly in the States of U.P., Delhi, Haryana and Punjab using crude oil produced in the oil fields located in India as well as imported into India from Gulf countries. The Mathura refinery was designed to process up to 6 MMTPA of crude oil to produce liquefied petroleum gas, naptha, petrol, diesel, kerosene, aviation turbine fuel (ATF), furnace oil and bituman. It is alleged in paragraph 4-B of the writ petition that crude oil is not produced in the State of U.P. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he petitioner No. 1. 8.. The U.P. Tax on Entry of Goods Ordinance, 1999 was promulgated by an Ordinance in November, 1999 and was thereafter replaced by the impugned Act in the year 2000. The result has been that the entry tax of 4 per cent levied by the State of U.P. has resulted in increase of the cost of approximately 4.14 per cent (taking into account the impact of the tax and conversion loss aforesaid relatable to the products) of petroleum products manufactured at Mathura refinery and sold in the State of U.P. and outside U.P. It is alleged that due to this the products of Mathura refinery would be at least 4.14 per cent more expensive than the like products manufactured in Gujarat and other States in India where there is no levy of entry tax on crude oil or petroleum products. It is alleged that bearing in mind the cascading effect of cess, excise duty, sales tax and other imports, this means that if the burden of the additional cost was to pass on to the consumers in other States on a litre of diesel which sells at Rs. 23.42 per litre in U.P. there would be a total impact of not less than 96 paise per litre in the price. Similarly on a litre of petrol which sells at a pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fied by the State Government by notification, and different rates may be specified in respect of different goods or different classes of goods: Provided that the State Government may by notification amend the Schedule and upon the issue of any such notification, the Schedule shall, subject to the provisions of sub-section (6) be deemed to be amended accordingly." 12.. It is alleged in paragraph 30 of the writ petition that the petitioner has deposited the entry tax even on the imported crude oil which is liable to be refunded. 13.. In paragraph 30-A of the writ petition it is mentioned that the impugned entry tax is not a compensatory tax and it interferes with freedom of trade, commerce and inter-course guaranteed under article 301 of the Constitution. It is alleged in paragraphs 30-B to 30-F of the writ petition that the entry tax has not received the previous assent of the President of India under article 304(b) of the Constitution. In paragraph 30-D of the writ petition it is stated that it is for the State to show that the restriction imposed by the impugned entry tax satisfies the requirements of article 304(b) as being reasonable and in the public interest. In paragrap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the country. Political freedom which had been won, and political unity which had been accomplished by the Constitution, had to be sustained and strengthened by the bond of economic unity. It was realised that in course of time different political parties believing in different economic theories or ideologies may come in power in the several constituent units of the Union, and that may conceivably give rise to local and regional pulls and pressures in economic matters. Local or regional fears or apprehensions raised by local or regional problems may persuade the State Legislatures to adopt remedial measures intended solely for the protection of regional interests without due regard to their effect on the economy of the nation as a whole. The object of Part XIII was to avoid such a possibility. Free movement and exchange of goods throughout the territory of India is essential for the economy of the nation and for sustaining and improving living standards of the country. The provision contained in article 301 guaranteeing the freedom of trade, commerce and inter-course is not a declaration of a mere platitude, or the expression of a pious hope of a declaratory character; it is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the transport or the movement of goods is taxed solely on the basis that the goods are thus carried or transported that, in our opinion, directly affects the freedom of trade as contemplated by article 301. If the movement, transport or the carrying of goods is allowed to be impeded, obstructed or hampered by taxation without satisfying the requirements of Part XIII the freedom of trade on which so much emphasis is laid by article 301 would turn to be illusory. When article 301 provides that trade shall be free throughout the territory of India primarily it is the movement part of the trade that it has in mind and the movement or the transport part of trade must be free subject of course to the limitation and exceptions provided by the other articles of Part XIII. That we think is the result of article 301 read with the other articles in Part XIII." 23.. As regards the question whether taxing laws are excluded from operation of article 301 the Supreme Court replied in the aforesaid decision in the negative. (Vide paragraph 51 of the aforesaid decision): "Thus, the intrinsic evidence furnished by some of the articles of Part XIII shows that taxing laws are not excluded from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rved: "Regulatory measures or measures imposing compensatory taxes for the use of trading facilities do not come within the purview of the restrictions contemplated by article 301, and such measures need not comply with the requirements of the proviso to article 304(b) of the Constitution." 25.. Thus, in the aforesaid decision in Automobile Transport (Rajasthan) Ltd. AIR 1962 SC 1406 the Constitution Bench of the Supreme Court further clarified that the compensatory taxes do not come within the purview of article 301 of the Constitution. The expression "compensatory taxes" was explained by the Supreme Court (vide paragraph 19 of the aforesaid decision) in the following words: "(19) .........The taxes are compensatory taxes which instead of hindering trade, commerce and inter-course facilitate them by providing roads and maintaining the roads in a good state of repairs. Whether a tax is compensatory or not cannot be made to depend on the Preamble of the statute imposing it. Nor do we think that it would be right to say that a tax is not compensatory because the precise or specific amount collected is not actually used in providing any facilities. It is obvious that if the Prea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompensatory nature of tax has been widened and if there is substantial or even some link between the tax and the facilities extended to such dealers directly or indirectly the levy cannot be impugned as invalid. The stand of the State that the revenue earned is being made over to the local bodies to compensate them for the loss caused, makes the impost compensatory in nature, as augmentation of their finance would enable them to provide municipal services more efficiently, which would help or ease free-flow of trade and commerce, because of which the impost has to be regarded as compensatory in nature, in view of what has been stated in the aforesaid decisions more particularly in Hansa Corporation's case [1981] 1 SCR 823; AIR 1981 SC 463; (1980) 4 SCC 697." 28.. The above decision was followed by a two-Judge decision of the Supreme Court in State of Bihar v. Bihar Chamber of Commerce [1996] 103 STC 1 (SC); (1996) 9 SCC 136, where it was observed: "It is not and it cannot be stipulated that for the purpose of establishing the compensatory character of the tax, it is necessary to establish that every rupee collected on account of the entry tax should be shown to be spent on prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Agency v. State of Uttar Pradesh [2004] 134 STC 436 (All.); 2003 UPTC 780. 32.. In Bharat Petroleum Corporation Limited v. Mumbai Shramik Sangh (2001) 4 SCC 448, a five-Judge Constitution Bench of the Supreme Court observed: "We are of the view that a decision of a Constitution Bench of this Court binds a Bench of two learned Judges of this Court and that judicial discipline obliges them to follow it, regardless of their doubts about its correctness. At the most, they could have ordered that the matter be heard by a Bench of three learned Judges." 33.. Sri S.P. Gupta, learned Senior Counsel for the respondents submitted that since the decision of the smaller Benches in Bhagatram Rajeev Kumar's case [1995] 96 STC 654 (SC); (1995) Supp 1 SCC 673 and State of Bihar v. Bihar Chamber of Commerce case [1996] 103 STC 1 (SC); (1996) 9 SCC 136 have noticed the Constitution Bench decisions in Atiabari Tea Co. Ltd. case AIR 1961 SC 232 and Automobile Transport (Rajasthan) Ltd. case AIR 1962 SC 1406 the decision of the smaller Benches should be followed so far as the concept of compensatory tax is concerned. 34.. We are of the opinion that while it is true that if a subsequent smalle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [1995] 96 STC 654 (SC); (1995) Supp 1 SCC 673 is concerned in our opinion that is not of much help because it was observed therein: "........In the counter-affidavit filed on behalf of the State which was not disputed the nature of levy has been demonstrated to be compensatory." 40.Thus, the above decision has proceeded on a concession made by the petitioner's counsel that the levy was compensatory in nature. 41.. However, in the subsequent part of the aforesaid judgment it has been observed: "The concept of compensatory nature of tax has been widened and if there is substantial or even some link between the tax and the facilities extended to such dealers directly or indirectly the levy cannot be impugned as invalid. The stand of the State that the revenue earned is being made over to the local bodies to compensate them for the loss caused, makes the impost compensatory in nature, as augmentation of their finance would enable them to provide municipal services more efficiently, which would help or ease freeflow of trade and commerce,........" 42.. We have to carefully examine the above observation of the three-Judge Bench decision of the Supreme Court in Bhagatram Rajeev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. case AIR 1962 SC 1406 is only illustrative and not exhaustive. However, we cannot interpret the decision in Bhagatram Rajeev Kumar's case [1995] 96 STC 654; (1995) Supp 1 SCC 673 to mean that if the tax is for raising general revenue even when it will be a compensatory tax. In our opinion, the tax to be compensatory in nature must be for generating revenue which is used for providing facilities for trade and commerce, even if that is done indirectly, and not merely for augmenting the general revenue. 45.. Moreover, it has been observed in the seven-Judge Bench decision of the Supreme Court in Automobile Transport (Rajasthan) Ltd. case AIR 1962 SC 1406 (vide paragraph 19): " ..and paying not patently much more than what is required for providing facilities." 46.. The above observation clearly implies that while it is true as pointed out by the two-Judge Bench of the Supreme Court in State of Bihar v. Bihar Chamber of Commerce [1996] 103 STC 1 (SC) at page 8; (1996) 9 SCC 136 (vide paragraph 12) that "it is not necessary to establish that every rupee collected on account of the entry tax should be shown to be spent on providing the trading facilities," there has yet to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n as institutions of self-Government with respect of preparation of plans for economic development and social justice and to implement the scheme for economic development and social justice as may be entrusted to them including those in relation to the matters listed in the Eleventh Schedule of the Constitution of India." 49.. In our opinion the aforesaid averment is so vague in nature that it is really of no help of the respondents. Hence, it is not established that the impugned tax is compensatory in nature. 50.. In the supplementary counter-affidavit filed by Sri B.P. Sonkar a chart showing the amount given by the State Government to the local bodies and Panchayatiraj Institutions to meet various expenses for their development for the financial years 2000-01, 2001-02, 2002-03 has been annexed. This shows that a total sum of Rs. 2,442 crores has been given as aid by the State Government to the local bodies and Panchayatiraj Institutions towards urban development, water supply, compensation, village development, health, etc. 51.. In our opinion, this does not help the respondents because the respondents have to show that the realisation from entry tax has been used for fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax will be utilised for facilitating trade and commerce, directly or indirectly. 56.. We have carefully perused the impugned Act. It consists of only nine sections. There is no provision anywhere in the Act stating for what purpose the revenue raised by it will be utilised. There is also no provision therein stating that the revenue raised by it will be used for facilitating trade and commerce. Hence, the amounts realised under the impugned Act can be used for any purpose. Hence, in our opinion it is not a compensatory tax. 57.. Yet another supplementary counter-affidavit dated January 12, 2004 was filed by the respondents after the case had already been heard on several dates. We cannot appreciate this practice of filing of supplementary counter-affidavits after the case has already been heard on several dates. Several supplementary counter-affidavits had already been filed in this case earlier before the aforesaid affidavit was filed. 58.. It may be mentioned that on January 8, 2004 this Court passed the following order: "Supplementary counter-affidavit has been filed today in Writ Petition No. 251 of 2003. List peremptorily before us on January 13, 2004 by that time supp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scope of the legislative field contained in entry 52, List II of the Seventh Schedule has to be restricted and treated as subject to article 301 and other articles in the main body of the Constitution. 64.. It follows that an entry tax cannot be imposed which violates article 301 of the Constitution, despite entry 52 of List II. 65.. To our mind it is clear that the impugned Act imposing entry tax violates article 301 of the Constitution as the revenue generated by it cannot be said to be specifically meant for facilitating trade or commerce, but is raised for augmenting the general revenue of the State. 66.. In fact in the Statement of Objects and Reasons of the impugned Act (U.P. Act No. 12 of 2000) it is specifically mentioned: "Preferatory note-Statement of Objects and Reasons.-With a view to augmenting the revenue of the State it was decided to make law to provide for levy and collection of tax on entry of certain goods into a local area from any place outside that local area including a place outside U.P ." 67.. Thus, the Statement of Objects and Reasons of the impugned Act clearly discloses that the impugned Act was enacted to augment the general revenue of the S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as no objection to the introduction of the U.P. Tax on Entry of Goods Bill, 2000 in the State Legislature. To our mind this does not meet the specific requirement of the proviso to article 304(b) of the Constitution. There is not even a mention of the President of India in the aforesaid letter dated January 19, 2000. The said letter does not state that it has been issued under the authority of the President of India, and hence we have to conclude that no previous sanction was given by the President of India to the Bill in connection with the impugned Act. No doubt article 255 of the Constitution validates an action even if the sanction was subsequently given by the President of India, but in the present case there is no averment that even subsequently the President gave assent. 72.. However, even assuming that the President of India has given sanction under the proviso to article 304(b) we are of the opinion that that alone would not satisfy the requirement of article 304(b) of the Constitution. 73.. Article 304(b) states: "Notwithstanding anything in article 301 or article 303, the Legislature of a State by law-............ (b) impose such reasonable restrictions on the fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one State over another or authorising discrimination between two States. Similarly, article 304(a) provides that the State Legislature can impose a tax on goods imported from other States on 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. 82.. Article 304(a) again gives further emphasis to article 301 providing for the economic unity of India. Thus, the whole scheme in articles 301 to 304 show that the founding fathers in their wisdom have repeatedly emphasised in these articles that India is one economic unit and different States are not separate economic entities. The founding fathers realised in their wisdom that it is economic unity which is the basis of the political unity of the country. Without economic unity the country cannot survive as a united nation. 83.. Article 301 must be construed in its historical prospect. 84.. Before the coming of modern industry society was mainly agricultural and there were small principalities and there was very little movement of goods from one area to another. The goods produced were mainly for self consumption by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmerce clause have dealt with the evil of economic isolation and protectionism while at the same time recognising that incidental burden on inter-State commerce may be unavoidable when the State legislates to safeguard the health and safety of its people. 89.. The Australian Constitution contains a provision which is more similar to article 301 than the commerce clause in the U.S. Constitution. Section 92 of the Australian Constitution states: "Trade, commerce and inter-course among the States shall be absolutely free." 90.. Section 99 states that the Commonwealth "shall not by any law or regulation of trade, commerce or revenue give preference to one State or any part thereof over other States or any part thereof". Thus, section 92 of the Australian Constitution is similar to article 301 of our Constitution, whereas section 99 of the Australian Constitution is similar to article 303(1) of our Constitution. 91. The decisions of the Australian High Court in this connection are hence apposite. They have been referred to in Chapter 5 of the Book "Australian Federal Constitutional Law" by Colin Noward and Chapter 9 of the book on Australian Constitutional Law by Fajgenbaum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur opinion the impugned tax is against the public interest for the reasons given above. 96.. No doubt invalidating the tax would affect the revenue of the State of U.P., but the nation is larger than the State. We have to first look at the interest of India, and place it above the interest of the State of U.P. However, it may be mentioned, as pointed out in para 8 of the supplementary rejoinder affidavit filed in reply to the supplementary counter-affidavit of Shri B.P. Sonkar, the State Government is getting its share from the excise duty, Central sales tax, etc. from the Central Government apart from getting substantial revenue from the petitioners towards U.P. trade tax (sales tax). In para 6 of that affidavit it is mentioned that no facility whatsoever has been provided by the U.P. Government to Mathura Refinery for transportation of crude oil from outside U.P., which in fact is done by underground pipes built by the petitioner itself. 97.. Sri Bharat Ji Agrawal, learned counsel for the petitioner in Writ Petition No. 486 of 2003, Moser Baer India Ltd. v. State of U.P. has invited our attention to the Supreme Court decision in S.M. Ram Lal Co. v. Secretary to Government ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 18, 2003. Sri Agrawal submitted that in view of the decision in S.M. Ram Lal Co.'s case (1969) UJ (SC) 373 even for the period prior to February 18, 2003 in respect of machinery installed in the petitioner factory no entry tax can be levied. 103.. As already stated above, we are only going into the constitutional question in this case and hence we need not finally decide this additional point urged by Sri Bharat Ji Agrawal (or the other points urged by him) though the decision of the Supreme Court in S.M. Ram Lal Co.'s case (1969) UJ (SC) 373 prima facie appears to support the contention of the learned counsel for the petitioner. 104.. In Jindal Stripe Ltd. v. State of Haryana [2004] 134 STC 303; (2003) 8 SCC 60 a two-Judge Bench of the Supreme Court has referred the matter to a Constitution Bench since it was of the opinion that the concept of compensatory tax has been judicially evolved as an exception to the provisions of article 301 and the parameters of this judicial concept were blurred after the decision of the smaller Benches in Bhagatram Rajeev Kumar's case [1995] 96 STC 654; (1995) Supp 1 SCC 673 and State of Bihar v. Bihar Chamber of Commerce [1996] 103 STC 1 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X
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