TMI Blog2007 (12) TMI 429X X X X Extracts X X X X X X X X Extracts X X X X ..... r businessmen. The essential link between the infrastructure or facility or service, which is directly or even indirectly held to promote the cause of trade or commerce, is missing in them. Hence, we find ourselves not in a position to accord approval for the present impost as a compensatory tax. Therefore, clearly the impugned law amounts to impeding the freedom of movement of trade or commerce across the territory of the nation. Further, it is admitted that the procedure prescribed to obtain the sanction of the President has not been obtained prior to enacting the impugned Entry Tax Act. Therefore, no hesitation to declare the impugned levy as unconstitutional. - W.P. Nos. 615,931,1535 of 2002 & W.P. Nos. 21867 of 2004 And others - - - Dated:- 31-12-2007 - BILAL NAZKI ACTG. C.J. AND NOOTY RAMAMOHANA RAO , JJ. ORDER:- The order of the court was made by NOOTY RAMAMOHANA RAO J. Constitutional validity of sections 3 and 4 of the Andhra Pradesh Tax on Entry of Goods into Local Areas Act of 2001, together with the notifications issued thereunder, has been questioned in this batch of cases. The State of Andhra Pradesh enacted the Andhra Pradesh Tax on Entry of Goo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale therein or who owns the notified goods at the time of entry into the local area from any place outside the State. The charging provision, section 3, reads as under: 'Section 3. Levy and collection of tax. (1)(a) There shall be levied and collected a tax on the 'entry of the notified goods into any local area' for sale, consumption or use therein. The goods and the rates at which, the same shall be subjected to tax shall be notified by the Government. The tax shall be on the value of the goods as defined in clause (n) of sub-section (1) of section 2 and different rates may be prescribed for different goods or different classes of goods or different categories of persons in the local area; (b) the tax shall be payable by the importer in such manner and within such time as may be prescribed; (c) the rate of tax to be notified by the Government in respect of any commodity shall not exceed the rate specified for that commodity under the Andhra Pradesh Value Added Tax Act, 2005 or the notifications issued thereunder: Provided that the tax payable by the importer under this Act shall be reduced by the amount of tax paid, if any, under the law relating to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y highlighted their contention by pointing out that if the notified goods are brought into the local area of Hyderabad from the local area at Visakhapatnam, they are not subjected to entry tax as both these local areas are situate within the limits of Andhra Pradesh whereas if the notified goods manufactured at Bombay are brought into the local area limits of Hyderabad, such notified goods are subjected to the entry tax. Therefore, according to the learned counsel, it is plain discrimination shown by preferring such local manufacturers within the State of Andhra Pradesh and the manufacturers situated outside the State of Andhra Pradesh are thus discriminated. Since imposition of any tax implies in itself a certain degree of impediment on the freedom of trade, commerce and intercourse guaranteed through the federal polity under article 301 and hence for this violation of the guarantee under article 301 also, according to the learned counsel the impugned levy of entry tax is unconstitutional. Since the impost is an unreasonable restriction on the freedom of trade and commerce, the same is not liable to be brought on to the statute book without obtaining the previous sanction of the P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve the protection of article 301. It was also held that article 301 had also built implicitly an injunction against the State. Therefore, levy of taxes was considered as capable of impeding such free-flow or movement of trade. When the State of Rajasthan wanted to subject the motor vehicles used in any public places or kept for such use thereat to tax, the question of competence of the State Legislature to enact such a taxing law had fallen for consideration before the Supreme Court in Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan AIR 1962 SC 1406. The jurisprudential concept of compensatory taxation was propounded in the above mentioned case. Taxes, which would otherwise interfere with the freedom of their free movement guaranteed under article 301 were sought to be protected, if they are shown to be compensatory taxes. For determining what constitutes a compensatory tax, the necessary test was also evolved in Automobile Transport (Rajasthan) Ltd. AIR 1962 SC 1406. It is pointed out that if the trade people are provided the use of certain facilities for enabling them to conduct their business better and if they are not paying much more than what is required to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. For example, for installation of pipeline carrying gas from Gujarat to Rajasthan, which passes through M. P., a fee charged to provide security to the pipeline will come in the category of manifestation of regulatory power. However, a tax levied on sale or purchase of gas which flows from that very pipe is a manifestation of exercise of the taxing power. This example indicates the difference between taxing and regulatory powers (see Essays in Taxation by Seligman). Difference between 'a tax', 'a fee' and 'a compensatory tax': Parameters of compensatory tax: 39. As stated above, in order to lay down the parameters of a compensatory tax, we must know the concept of taxing power. 40.. Tax is levied as a part of common burden. The basis of a tax is the ability or the capacity of the tax-payer to pay. The principle behind the levy of a tax is the principle of ability or capacity. In the case of a tax, there is no identi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is levied on an individual as a member of a class, whereas a fee is levied on an individual as such. If one keeps in mind the 'principle of ability' vis-a-vis the 'principle of equivalence', then the difference between a tax on the one hand and a fee or a compensatory tax on the other hand can be easily spelt out. Ability or capacity to pay is measurable by property or rental value. Local rates are often charged according to the ability to pay. Reimbursement or recompense are the closest equivalence to the cost incurred by the provider of the services/facilities. The theory of compensatory tax is that it rests upon the principle that if the Government by some positive action confers upon individual(s), a particular measurable advantage, it is only fair to the community at large that the beneficiary shall pay for it. The basic difference between a tax on one hand and a fee/compensatory tax on the other hand is that the former is based on the concept of burden whereas compensatory tax/fee is based on the concept of recompense/reimbursement. For a tax to be compensatory, there must be some link between the quantum of tax and the facility/services. Every benefi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... court, that the payment of compensatory tax is a reimbursement/recompense for the quantifiable/measurable benefit provided or to be provided to its payer(s). As soon as it is shown that the Act invades freedom of trade it is necessary to enquire whether the State has proved that the restrictions imposed by it by way of taxation are reasonable and in public interest within the meaning of article 304(b) [see para 35 (of AIR) of the decision in Khyerbari Tea Co. Ltd. v. State of Assam AIR 1964 SC 925] Scope of articles 301, 302 and 304 vis-a-vis compensatory tax: 47. As stated above, taxing laws are not excluded from the operation of article 301, which means that tax laws can and do amount to restrictions on the freedom guaranteed to trade under Part XIII of the Constitution. This principle is well-settled in Atiabari Tea Co. AIR1961 SC 232. It is equally important to note that in Atiabari Tea Co. AIR 1961 SC 232 the Supreme Court propounded the doctrine of 'direct and immediate effect'. Therefore, whenever a law is challenged on the ground of violation of article 301, the court has not only to examine the pith and substance of the levy but in addition thereto, the court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It is now well-settled principle that a modern welfare State is certainly expected to engage in all activities necessary for the promotion of the social and economic welfare of its larger community. It is therefore accepted that the State carries in the process certain primary and fundamental obligations in the form and shape of providing infrastructure so essentially needed for securing the welfare and common good of the society. No State can carry on its obligations of securing such a social welfare without collecting the revenue by way of imposition of taxes. Consequently, it has been recognised that for imposing a tax, there was no necessity for the State to demonstrate a direct or immediate corresponding service or failure or an obligation to discharge towards the taxed. Keeping that in consideration, taxes imposed for augmenting the general revenues of the State, which are in the form of sales tax are not considered as compensatory taxes. Thus, imposition of sales tax stands out completely and distinctly from compensatory taxes which it might seek to additionally impose. In the instant case, the State in its counter-affidavit has taken a specific plea that the present le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. To Municipal Corporations for maintenance of roads, etc., 61.15 15.89 35.00 19.65 Rural 3. To Panchayat Raj institutions for maintenance of rural roads etc., . . . . . . 78.09 48.11 Total For the year (in crores) 137.15 146.65 207.49 147.76 Statement showing the receipts under Entry Tax Act Head of account 2001-02 2002-03 2003-04 2004-05 Taxes on entry of goods into local areas 5.16 20.87 40.37 61.02 The annexure has also enclosed a statement showing the receipts pursuant to the impugned levy. Obviously due to the hopeless mismatch between the levy of the entry tax and the budgetary allocation made by the State to the local bodies, it is sought to be contended by the learned Government Pleader that the impugned levy can be justified on the premise that it is compensatory. We are afraid that the justification offered by the State for us to treat or accept the impugned levy as compensatory is wholly inadequate. A mere look at the statement showing the allocation of funds to the various local bodies in the various years between 2001 to 2005 will provide the answer thereto. The budgetary allocation for municipalities for the purpose of maintenance of roads during 2001 was sh ..... X X X X Extracts X X X X X X X X Extracts X X X X
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