9911796707
TMI Blog2009 (3) TMI 918X X X X Extracts X X X X X X X X Extracts X X X X ..... and intercourse and even if the impugned legislation is treated to impose, in public interest, reasonable restrictions, on the freedom of trade, commerce and intercourse, the impugned legislation cannot survive inasmuch as the legislation, in question, does not have previous sanction of the President, which is the requirement of article 304(b) of the Constitution of India; (ii) that the impugned levy is discriminatory in nature inasmuch as it impedes import of goods into the State of Arunachal Pradesh from other States and Union territories, whereas the levy in question, does not impose any such restriction in respect of the movement or transportation of goods from one part of the State of Arunachal Pradesh to other part(s) thereof; and (iii) that the impugned legislation aims at augmenting revenue of the State, it is neither regulatory nor compensatory inasmuch as it does not provide any facility to the traders or importers as a class and that the facilities, if any, provided by the State are in the interest of the welfare of the general public and the traders and importers, who are covered by the levy, may be, at best, mere incidental beneficiaries of such facilities, if any, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmerce and intercourse throughout the territory of India, but the Act, in question, impedes free movement of goods into the State of Arunachal Pradesh. The restrictions, which the impugned Act so imposes on the freedom of movement of goods, have, according to Dr. Saraf, no sanction in law inasmuch as the imposition of tax, under the impugned legislation, is neither regulatory nor compensatory in nature. Such imposition of tax, contends Dr. Saraf, cannot be sustained in law. Referring to Atiabari Tea Co. Ltd. v. State of Assam AIR 1961 SC 232, Dr. Saraf points out that the law of taxation is not immune from the guarantee of freedom of trade, commerce and intercourse, which article 301 provides. Dr. Saraf concedes that it is not every restriction, which can be treated as infringement of the guarantee of freedom of trade, commerce and intercourse provided by article 301, but only those restrictions, which have direct and immediate impact on the freedom of trade and commerce. However, relying on the State of Karnataka v. Hansa Corporation AIR 1981 SC 463 and Jindal Stripe Ltd. v. State of Haryana reported in [2004] 134 STC 303 (SC); [2003] 8 SCC 60, Dr. Saraf contends that in the pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equirements of the proviso to article 304(b). Dr. Saraf submits that no sanction from the President was obtained, at any stage, for imposing entry tax on the import of taxable goods. Hence, the impugned legislation, contends Dr. Saraf, having not received the requisite sanction of the President, is not sustainable in law. Dr. Saraf, learned Senior Counsel for the petitioners, has put great emphasis on the affidavits filed by the respondents, and pointed out that it is the admitted case of the respondents that the levy has been imposed to augment general revenue of the State and to arrest entry of goods into the State of Arunachal Pradesh without payment of any tax. The imposition of entry tax is, thus, contends Dr. Saraf, a colourable exercise of power inasmuch as the Act never intended to impose entry tax as a compensatory measure for providing trading facilities, nor does the Act aim at regulating the business; rather, the Act, reiterates Dr. Saraf, aims at augmenting the general revenue of the State. Imposition of such tax, in the name of entry tax, is, according to Dr. Saraf, not sustainable in law. In support of his submissions, Dr. Saraf places reliance on Jindal Stainless L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts, Dr. Saraf points out that when entry tax is collected not entirely as a compensatory measure against providing trading facilities to the importers, the mere fact that the traders would be amongst the beneficiaries of the State policy, cannot justify imposition of the entry tax. With the help of the general collection of revenue, submits Dr. Saraf, the State may take up many welfare activities for its residents and also those, who may come to the State, but such welfare activities, which are not meant at all for traders and/or importers, but for the general public, cannot become the basis of entry tax inasmuch as the traders or importers may become incidental beneficiaries of such welfare activities of the State, but, they, not being the sole or, at least, chief or substantive beneficiaries of such welfare activities, cannot be subjected to payment of entry tax. Dr. Saraf further submits that, when none of the welfare activities of the State are aimed at providing facilities to traders or importers, the imposition of entry tax cannot be regarded as compensatory so as to make the levy constitutionally valid. While considering the rival submissions noted above, what is pertinent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the previous sanction of the President." Article 1, if we may point out, conceives India as a Union of States and declares that the territory of India shall comprise of the territories of the States, the Union territories and such other territories as may be acquired. It is in the backdrop of the fact that article 1 conceives India as a Union of States that the constitutional scheme for the conduct of trade, commerce and intercourse, contained in Part XIII, needs to be analyzed. What becomes glaringly noticeable to the eyes are the two expressions used in article 301, namely, "throughout the territory of India" and "subject to the other provisions of this part". The use of the words "throughout the territory of India" shows that Part XIII conceives India as one economic unit. To appreciate as to why article 301 guarantees freedom of trade, commerce and intercourse "throughout the territory of India", the background in which article 301 came to be enacted needs to be borne in mind. BACKGROUND EVENTS Before the industrial revolution, the society, world over, was mainly agriculture based; there were small principalities and very little quantity of goods moved from one area ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... read. Some of these aspects of our Constitutional scheme succinctly surface from the decision of the Constitution Bench, in Atiabari Tea Co. Ltd. v. State of Assam AIR 1961 SC 232, wherein the court, at paragraph 34, observed as follows: "In drafting the relevant articles of Part XIII the makers of the Constitution were fully conscious that economic unity was absolutely essential for the stability and progress of the federal policy which had been adopted by the Constitution for the governance of 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 Legislature to adopt remedial measures intended solely for the protection of regional interests without due regard to their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 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 limitations 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." Whether taxing statues, enacted under Part XII, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titution rests. It is a federal Constitution which we are interpreting, and so the impact of article 301 must be judged accordingly. Besides, it is not 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 enactm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly if it satisfies the requirements of article 302 or article 304 of Part XIII. At this stage we think it is necessary to repeat that when it is said that the freedom 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 requirements of article 304(b). It is not as if no restrictions at all can be imposed on the free movement of trade." Whether article 301 applies both to inter-State as well as intra-State movement of goods? What, thus, surfaces from the above discussion, is that article 301 guarantees freedom of trade, commerce and intercourse "throughout the territory of India". It is, however, not freedom from all laws that article 301 aims at protecting; rather, it guarantees freedom only from such laws, which restrict or impede the movement or transportation of goods or adversely affect the activities of trade and commerce amongst the States. In effect, article 301 casts an obligation on the legislative power of the Parliament and the States to ensure that the trade, commerce and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt of the territory of India. Thus, a State Legislature, apart from the limitation imposed by article 301, has the limitation of not making laws to give preference or make discrimination between one State and another, while making laws, in exercise of its powers, relating to trade, commerce and intercourse. However, this limitation, on the State Legislature, is lifted in two cases, namely, that the State may, under article 304(a), impose, on goods, imported from sister States 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. In other words, article 304(a) authorizes State Legislature to impose non-discriminatory tax on goods imported from sister States even if such law interferes with the freedom of trade, commerce and intercourse guaranteed by article 301. Apart from non-discriminatory taxes, the ban imposed, under article 303(1), on the State's power to impose restrictions on the freedom of trade, commerce and intercourse, stands lifted if the legislation fulfils three conditions, which article 304(b) embodies, namely, (i) that su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and must be reasonable and in public interest. The word "and" as mentioned in article 304(a) will have to be read, while connecting the same to article 304(b), conjunctively or else, the special provisions of article 304(b) would stand defeated. The use of the word "and" conveys a cumulative sense and requires fulfilment of all the conditions that it joins together. It is an antithesis to the word "or". The word "or" is a disjunctive article that makes an alternative, generally corresponding to "either this or that". It is not in dispute that the word "and" can, indeed, be used, at times, in a disjunctive sense and the word "or" can be used in a conjunctive sense provided that such construction becomes imperative so as to give effect to the manifest intention of the Legislature. However, such alteration or the meaning ought not to be resorted to unless some other part of the same statute or the manifest intention of the Legislature necessitates such a construction. A close and patient examination of article 304 would reveal the Legislature's definite intention to use the word "and" conjunctively inasmuch as article 304(a) only speaks of inter-State trade; whereas article 304( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions of the provisions of article 304(b) and its proviso. From the scheme of article 301 to article 304 of the Constitution, it will be clear that where tax is discriminatory, the same shall be violative of article 304(a) of the Constitution of India and is liable to be struck down. No further enquiry is required to be made in such a case and the Presidential assent, if obtained, would not validate such a fiscal legislation. In a case, where a tax is not discriminatory, but imposes, a restriction, the same has to be reasonable and in public interest and, further, the same can be imposed only with the previous sanction of the President. While considering the above aspect of the case, it needs to be noted that the apex court in State of Karnataka v. Hansa Corporation reported in [1980] 4 SCC 697; AIR 1981 SC 463, at paragraph 31, came to a finding that the tax imposed was a non-discriminatory tax inasmuch the tax did not discriminate between Scheduled goods manufactured and produced within the State of Karnataka and those goods, which are imported from outside. Despite such a clear finding, reached in Hansa Corporation [1980] 4 SCC 697; AIR 1981 SC 463 the apex court, at p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ees freedom of trade and commerce "throughout the territory of India". This freedom is not, however, absolute, for, in an orderly society, the conduct of trade and commerce cannot be left completely free from regulations. Regulatory measures, therefore, cannot be regarded as impediments on the freedom of trade and commerce. It is for this reason that the Constitution Bench, in Atiabari Tea Co. Ltd. AIR 1961 SC 232, makes it clear that though tax laws are not immune from article 301, all tax laws do not infringe article 301. The question, which, naturally, arises is this: what can be these laws, which may hit article 301 or be treated as infringement of the guarantee given by article 301? Since it is the movement part of the goods, which article 301 guarantees, the Supreme Court makes it clear, in Atiabari Tea Co. Ltd. AIR 1961 SC 232, that only such tax laws, which, directly and immediately, impedes the free flow of trade and commerce that will be impermissible under article 301. However, a law, which has direct and immediate impact on the movement of goods, can be saved only if it falls in any of the permissible restrictions, which articles 302, 303 and 304 perceive. It may also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 392); (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) nondiscriminatory taxes may be imposed by the Legislature of a State on goods imported from another State or other States, if similar taxes are imposed on goods produced or manufactured in that State [article 304(a)]; and lastly (7) restrictions imposed by existing laws have been continued, except in so far as the President may by order otherwise direct (article 305)." (pages 242). The other view, which may be called the third view, as expressed by Shah, J, and described, in Automobile Transport (Rajasthan) Ltd. AIR 1962 SC 1406, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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..." In short, thus, in Atiabari Tea Co. Ltd. AIR 1961 SC 232, while the narrow view was to the effect that unless a tax law is enacted for the purpose of making discrimination or giving preferential treatment, such a law would not fall within the purview of article 301, the majority view was that apart from discrimination or preferential treatment, it was the movement or transport part of goods, which article 301 seeks to make free, and, hence, any such law, which, directly and immediately, restrict the free flow or movement of goods would fall within the ambit of article 301. The third view, expressed by Shah, J, was that it is not merely movement part of the goods, which article 301 seeks to make free, but also trade and commerce, in all its varied aspects and in all its activities, shall be free. In Automobile Transport (Rajasthan) Ltd. AIR 1962 SC 1406, which is a decision of a seven-j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of Part XIII. This in actual practice will mean that if the State Legislature wishes to control or regulate trade, commerce and intercourse in such a way as to facilitate its free movement, it must yet proceed to make a law under article 304(b) and no such Bill can be introduced or moved in the Legislature of a State without the previous sanction of the President. The practical effect would be to stop or delay effective legislation which may be urgently necessary. Take for example, a case where in the interests of public health, it is necessary to introduce urgently legislation stopping trade in goods which are deleterious to health, like the trade in diseased potatoes in Australia. If the State Legislature wishes to introduce such a Bill, it must have the sanction of the President. Even such legislation as imposes traffic regulations would require the sanction of the President. Such an interpretation would, in our opinion, seriously affect the legislative power of the State Legislatures which power has been held to be plenary with regard to subjects in List II. The States must also have revenue to carry out their administration and there are several items relating to the imposit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... except article 304(a), extended to taxing laws, it may be pointed out that the majority, in Automobile Transport (Rajasthan) Ltd. AIR 1962 SC 1406, did not accept this view either; rather, accepting the majority view expressed in Atiabari Tea Co. Ltd. AIR 1961 SC 232, the majority, in Automobile Transport (Rajasthan) Ltd. AIR 1962 SC 1406, held thus, "It would appear from what we have stated above that this interpretation consists of two main parts: one part is that taxation simpliciter is not within the terms of article 301 and the second part is that article 301 must take colour from the provisions of article 303 which, it is said, is restricted to legislation with respect to entries relating to trade and commerce in any of the Lists in the Seventh Schedule. In Atiabari Tea Co. Ltd.'s case [1961] 1 SCR 809 this court dealt with the correctness or otherwise of this narrow interpretation and by the majority decision held against it. The majority judgment in the Atiabari Tea Co. Ltd.'s case [1961] 1 SCR 809, deals with the arguments advanced in support of the interpretation in detail and as we are substantially in agreement with the reason given in that judgment, we do not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h do not impede the freedom of trade, commerce and intercourse, and compensatory taxes for use of the trading facilities are not hit by article 301, for, such regulatory measures or compensatory taxes, instead of hampering trade, commerce and intercourse, facilitate them. In short, in the opinion of the majority, in Automobile Transport (Rajasthan) Ltd. AIR 1962 SC 1406, regulatory measures, which do not impede freedom of trade, commerce and intercourse, are not hit by article 301 nor can compensatory taxes, which are imposed for providing trading facilities to the traders, as a class, be said to be violative of article 301. The majority view, so expressed, in Automobile Transport (Rajasthan) Ltd. AIR 1962 SC 1406, runs as under: "14. After carefully considering the arguments advanced before us we have come to the conclusion that the narrow interpretation canvassed for on behalf of the majority of the States cannot be accepted, namely, that the relevant articles in Part XIII apply only to legislation in respect of the entries relating to trade and commerce in any of the Lists of the Seventh Schedule. But we must advert here to one exception which we have already indicated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... test for deciding whether a tax is compensatory or not is to enquire whether the tradespeople 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. 20.. 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 tradespeople 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. In the cases under our consideration the tax is based on passenger capacity of commercial buses and loading capacity of goods vehicles; both have some relation to the wear and tear caused to the roads used by the buses. In basing the taxes on passenger capacity or loading capacity, the Legislature has merely evolved a method and measure of compensation demanded by the State, but the taxes are still compensation and charge for regulation." Birth of the concept of compensatory tax and working test for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order to provide such facilities to the traders. In short, thus, the concept of compensatory tax is an exception to article 301. Changes in the working test in the realm of compensatory tax It is, now, pertinent to point out that a three-judge Bench of the apex court, in its later decision, in G.K. Krishnan v. State of Tamil Nadu reported in [1975] 1 SCC 375, speaking through Mathew, J, observed that "the very idea of a compensatory tax is a service more or less commensurate with the tax levied." Thus, even in G.K. Krishnan [1975] 1 SCC 375, the apex court took the view that compensatory tax is more or less commensurate with the services offered or facilities provided. However, in Bhagatram Rajeev Kumar v. Commissioner of Sales Tax reported in [1995] 96 STC 654 (SC); [1995] Suppl 1 SCC 673, though the State had demonstrated that the levy was compensatory, the court further observed thus: (page 658 of STC) "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". For coming to this conclusion, the court in Bhaga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te 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. 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 providing the trading facilities. It is enough if some connection is established between the tax and the trading facilities provided. The connection can be a direct one or an indirect one, as held by this court in Bhagatram Rajeev Kumar v. Commissioner of Sales Tax [1995] 96 STC 654 (SC); [1995] Suppl 1 SCC 673 (at page 658 of STC; page SCC 678, para 8). '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.' 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 matte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from in Bhagatram Rajeev Kumar [1995] 96 STC 654 (SC); [1995] Suppl 1 SCC 673 and Bihar Chamber of Commerce [1996] 103 STC 1 (SC); [1996] 9 SCC 136, a two-judge Bench, in Jindal Stripe Ltd. [2004] 134 STC 303 (SC); [2003] 8 SCC 60, pointed out, at para 23, that if Bhagatram Rajeev Kumar [1995] 96 STC 654 (SC); [1995] Suppl 1 SCC 673 and Bihar Chamber of Commerce [1996] 103 STC 1 (SC); [1996] 9 SCC 136 are taken to their logical conclusion, there will be no distinction left between a tax imposed for the purpose of revenue collection and a compensatory tax meant for a specific purpose of providing facilities or services to the persons subject to such tax. The relevant observations made, at para 23 Para 21 at page 312 of [2004] 134 STC., of Jindal Stripe Ltd. [2004] 134 STC 303 (SC); [2003] 8 SCC 60, read thus: "It is contended by the appellants, with considerable force, that if the concept of compensatory tax has to be understood in the manner in which it has been viewed by the court in the decisions of Bhagatram Rajeev Kumar [1995] 96 STC 654 (SC); [1995] Suppl 1 SCC 673 and Bihar Chamber of Commerce [1996] 103 STC 1 (SC); [1996] 9 SCC 136, there will be no practical distinction be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 241, the Constitution Bench has, in fact, pointed out that Part XIII of our Constitution amalgamates two distinctly different concepts of freedom of trade as prevails, on the one hand, in the Constitution of the United States and, on the other, in the Constitution of Australia. The decision, in Jindal Stainless Ltd. [2006] 145 STC 544 (SC); [2006] 7 SCC 241, points out that section 8 of article 1 of the U.S. Constitution, contains what is called "commerce clause", which regulates trade and commerce, and in view of the dual form of Government in the United States, the U.S. Supreme Court has held that the commercial power, embodied in the commerce clause, implies the power to regulate, that is, power to prescribe the rules by which the commerce has to be governed, but this commercial power prohibits, at the same time, the States from enacting any law, which impedes the very flow of trade between the States. As against the commercial power, which the U.S. Constitution envisages, section 92 of the Australian Constitution provides for freedom of trade and commerce and does not seek to regulate commerce as in the case of commerce clause. However, notwithstanding the fact that the Austra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tes. Therefore, the commerce clause is per se a limitation upon the power of the States and is not dependent upon the law being enacted. It prohibits the States from enacting a law which impedes free flow of trade between the States. 27. On the other hand, section 92 of the Australian Constitution provides for freedom of trade and commerce. It does not seek to regulate, as in case of commerce clause. However, it has been held in numerous decisions of the Privy Council and the Australian High Courts that section 92 leaves open the regulation of trade and commerce at all events until the regulation is enacted provided it does not impede the true freedom of inter-State commerce. This reasoning is based on the principle that all trade and commerce must be conducted subject to law. Thus, we have the difference between taxing and regulatory laws. This is how the concept of 'regulatory charges' came about. 28.. Article 301 is inspired by section 92 of the Australian Constitution when it refers to freedom of trade and commerce, however, article 301 is subject to limitations and conditions in articles 302, 303 and 304 which are borrowed from the commerce clause under articl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 41, that there is a working test for deciding the question as to whether a given levy is the result of exercise of regulatory power or whether it is the product of exercise of taxing power, the working test being that if the impugned levy seeks to control the conditions under which an activity like trade has to take place, then, such a levy is regulatory, but if the impugned tax chooses an activity, such as, movement or transportation of goods, as the criterion for its imposition and if the effect of such imposition of tax is to impede trading activities, then, the levy would be restrictive as conceived under article 301. In short, if the law enacted is meant to enforce discipline or regulate conduct of the trade or commerce or if the payment is for regulation of conditions or incidence of trade or manufacture, then, the levy is regulatory. One may, in this regard, refer to the observations made, in Jindal Stainless Ltd. [2006] 145 STC 544 (SC); [2006] 7 SCC 241, which proceed, at para 35 as under: " 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not a term or condition of a licence. A fee is generally a term of a licence. A tax is a payment where the special benefit, if any, is converted into common burden. 38.. On the other hand, a fee is based on the 'principle of equivalence'. This principle is the converse of the 'principle of ability' to pay. In the case of a fee or compensatory tax, the 'principle of equivalence' applies. The basis of a fee or a compensatory tax is the same. The main basis of a fee or a compensatory tax is the quantifiable and measurable benefit. In the case of a tax, even if there is any benefit, the same is incidental to the Government 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. 39. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of a tax, there may not be any identifiable benefit, and even if there is some benefit, it may not be directly measurable. A tax is, thus, a payment for the special benefit, if any, converted into a common burden; whereas a fee is based on the principle of equivalence, the principle of equivalence being the converse of the principle of ability and in the case of a compensatory tax, it is the principle of equivalence, which is applicable. Compensatory tax is, thus, a charge for offering trading facilities. It is based on the principle that if the Government, by some positive action, confers upon individual, as a class, a particular measurable advantage, it is only fair that one, who receives such benefits, pays for the same, as a class, irrespective of the fact as to whether he has an individual is using such facilities or not. In other words, compensatory tax is realised from traders as a class and an individual trader cannot charge such levy on the ground that he does not utilise such facilities. Hence, the basis of a compensatory tax is quantifiable and measurable benefit; whereas, in the case of tax, the benefit, if any, is incidental, indirect and immeasurable. A tax can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dient of compensatory tax." Having, thus, made it clear as to how a compensatory tax differs from a tax imposed as a measure of collection of general revenue, the court, in Jindal Stainless Ltd. [2006] 145 STC 544 (SC); [2006] 7 SCC 241, has pointed out that whenever a tax law is impugned as violative of article 301, the court has to determine its effect on the operation of the impugned law on the inter-State and intra-State movement of goods, for, movement or transportation of goods constitutes an integral part of trade. If the court finds, on such examination, that the tax imposed is causing impediment, it cannot survive unless it complies with the provisions of article 304(b); but if the tax, so imposed, facilitates trade instead of causing hindrance thereto and it is for providing such facility to the traders, as a class, that the tax has been imposed, then, such imposition of tax would be compensatory. Laying down the law, so indicated, the Supreme Court, in Jindal Stainless Ltd. [2006] 145 STC 544 (SC); [2006] 7 SCC 241, further observed, at para 43: "43. Applying the above tests/parameters, whenever a law is impugned as violative of article 301 of the Constitution, the cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stood disrupted when in Bhagatram's case [1995] 96 STC 654 (SC); [1995] Suppl 1 SCC 673, a Bench of three-judge enunciated the test of 'some connection' saying that even if there is some link between the tax and the facilities extended to the trade directly or indirectly, the levy cannot be impugned as invalid. In our view, this test of 'some connection' enunciated in Bhagatram's case [1995] 96 STC 654 (SC); [1995] Suppl 1 SCC 673 is not only contrary to the working test propounded in Automobile Transport's case AIR 1962 SC 1406, 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 judge in the case of Automobile Transport AIR 1962 SC 1406 and the test of 'some connection' enunciated by a Bench of three-judge in Bhagatram's case [1995] 96 STC 654 (SC); [1995] Suppl 1 SCC 673 cannot stand together. Therefore, in our view, the test of 'some connection' as propounded in Bhagatram's case [1995] 96 STC 654 (SC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompulsory contribution levied broadly in proportion to the special benefits derived to defray the cost of regulation or facilities or special advantages provided to trade, commerce and intercourse. (h) The burden of showing that the tax is compensatory in nature lies on the State. Put in the briefest of words, one can safely say that the Constitution Bench, in Jindal Stainless Ltd. [2006] 145 STC 544 (SC); [2006] 7 SCC 241, made it clear that the law laid down, in Bhagatram Rajeev Kumar [1995] 96 STC 654 (SC); [1995] Suppl 1 SCC 673, and Bihar Chamber of Commerce [1996] 103 STC 1 (SC); [1996] 9 SCC 136, is contrary to what Automobile Transport (Rajasthan) Ltd. AIR 1962 SC 1406 had laid down, meaning thereby that the State must satisfy, when a levy is challenged as violative of article 301, that what the traders are required to pay is not "patently much more than what is required for providing the facilities". The decision in Jindal Stainless Ltd. [2006] 145 STC 544 (SC); [2006] 7 SCC 241 also makes it clear that the decisions in Bhagatram Rajeev Kumar [1995] 96 STC 654 (SC); [1995] Suppl 1 SCC 673 and Bihar Chamber of Commerce [1996] 103 STC 1 (SC); [1996] 9 SCC 136, are n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by the Constitution Bench in Hansa Corporation [1980] 4 SCC 697; AIR 1981 SC 463, when it observed, "32. The next limb of the contention is that the impugned tax being leviable on the entry of goods into a local area will have a direct and immediate impact on the movement of goods and consequently would infringe freedom of inter-State trade guaranteed by article 301....To the extent the impugned tax is levied on the entry of goods in a local area it cannot be gainsaid that its immediate impact would be on movement of goods and the measure would fall within the inhibition of article 301..." (emphasis Here italicised. is supplied). In Jindal Stripe Ltd. [2004] 134 STC 303 (SC); [2003] 8 SCC 60, too, the court, while making the reference, observed, "The tax levied upon the entry of goods into a local area for the purpose of use, consumption or sale therein has a direct effect on the movement of goods and therefore it can be saved only if the levy is in the nature of compensatory tax for the use of trading facilities or it comes under the protective umbrella of article 304." Thus, even Jindal Stripe Ltd. [2004] 134 STC 303 (SC); [2003] 8 SCC 60, makes it abundantly clear that a tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of such tax interferes with the freedom of trade and commerce guaranteed by article 301. The principle, behind giving such a liberty to the State Legislature, is that no State shall impose a tax, which discriminates between inter-State trade and commerce by providing a direct commercial advantage to the local traders. A tax will be discriminatory if it operates as a disadvantage to the importer of a specified class of goods into a State vis-a-vis the producer or manufacturer of such goods within the State. Such discrimination may occur for a variety of reasons, such as, violation of the rate of tax between the imported goods and the locally manufactured ones or exemption of local goods from payment of a tax, while similar imported goods are subjected to such tax. Bearing in mind the scope of article 304(a) as indicated above, let us, now, turn to some salient features of the impugned Act. The term, "entry of goods into Arunachal Pradesh", has been defined by section 2(m) of the Act as under: "Section 2(m) 'entry of goods into Arunachal Pradesh' means taking, receiving, bringing, carrying, transporting, or causing to bring or receive goods into the local area of Arunachal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liable to pay tax on every entry effected by or for him of goods for consumption, use or sale in local area of Arunachal Pradesh other than a non-taxable import." From a close reading of the relevant provisions of section 3, what becomes clear is that every importer of a specified goods, i.e., a person, who brings or causes to be brought specified goods into any part of the State of Arunachal Pradesh, or a person on whose behalf, specified goods are brought into the State of Arunachal Pradesh, for the purpose of consumption, use or sale, into the local area of the State of Arunachal Pradesh shall be liable to pay entry tax. A conjoint reading of the various definitions, as quoted hereinabove, would go to show that entry tax can be levied and collected on entry of the goods, specified in the Schedules, appended to the Act, into any local area for consumption, use or sale thereof at the rate stipulated in section 4 of the Act. The definition of the term "local area of Arunachal Pradesh", as given in section 2(t), indicates that the entire State of Arunachal Pradesh has been treated as one local area, i.e., entry tax is charged, under section 3 of the Act, only upon goods, which ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cle 301 inasmuch as tax, in question, was discriminatory, for, while it subjected a class of goods to entry tax on being imported into the State of Assam, it did not subject similar goods, produced or manufactured in Assam, to such taxation. The relevant observations made, in this regard, in Chhotabhai Jethabhai Patel [2008] 15 VST 70 (Gauhati), read as under: (page 115) "...It is, therefore, evident that by the charging section what have been subjected to tax are the goods brought from a place outside the State on its entry into a local area. The principal Act did not subject the similar goods specified in the Schedule to tax, which are manufactured or produced in the State when brought into a local area for consumption, use or sale thereof. Article 304(a), of the Constitution prohibits the State Legislature from imposing any tax on goods imported from other States to which similar goods manufactured or produced in that State are not subjected to. Therefore, if the goods brought from outside are subjected to tax without so subjecting similar goods produced or manufactured in the State, such tax would be violative of article 304(a) as well as article 301 of the Constitution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levy of entry tax." The above averments, made in the writ petition, particularly, the statements "that if the writ petitioners are not willing to pay entry tax, they should not import/bring from outside, but should procure their requirement from local market" and that "the only way out to avoid payment of entry is to make local purchase by paying local tax, i.e., value added tax", amply demonstrate and put beyond pale of doubt that the levy, in question, is aimed at forcing the dealers or importers not to purchase goods from outside the State of Arunachal Pradesh. In such circumstances, there can be no doubt that the levy is discriminatory in nature. The statements aforementioned, made in their affidavit-in-opposition by the respondents, run counter to the well-settled principles of law laid down by the apex court in a series of decisions commencing from Atiabari Tea Co. Ltd. AIR 1961 SC 232; [1961] 1 SCR 809 and until Jindal Stainless Ltd. [2006] 145 STC 544 (SC); [2006] 7 SCC 241. Thus, the impugned entry tax, being discriminatory in nature, is clearly violative of article 304(a) and cannot be allowed to survive. It needs to be pointed out that the Act envisages imposition of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... compensatory in nature or not, the averments, made in paras 5 and 7 and by the respondents in their affidavit-in-opposition, need to be taken note of. The relevant averments are reproduced hereinbelow: "5. That with regard to the statement made in para 2 of the writ petition, the humble deponent submits that the imposition of entry tax on the goods entered into the local area of the State of Arunachal Pradesh is intended for collection of revenue to fund the State exchequer, which in turn is utilised for the overall welfare of its people. After its implementation with effect from April 1, 2005, it is smoothly in operation in the State. The contention that it hampers the free flow of trade and commerce is incorrect inasmuch as entry tax is levied under section 3 of the Arunachal Pradesh Goods Tax Act, 2005 (hereinafter called, 'the Act') in public interest duly enacted by the State Legislature. Arunachal Pradesh is geographically having many porous entry points bordering the neighboring States of Assam, Nagaland, etc. At times unscrupulous dealers/importer are disturbing the local markets by bringing goods without payment of tax either to the Government of neighboring Stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of tax is recompensed/reimbursed for quantifiable/measurable benefit provided or to be provided to its tax-payers. In the present case, apart from the fact that the impugned Act does not facially indicate the quantifiable benefits provided or to be provided to a tax-payer, the averments, made in paragraphs 5 and 7 of the respondents' affidavit, clearly show that the impugned levy is not compensatory in nature; rather, it aims at raising general revenue collection of the State. Only because of the fact that certain goods are liable to be taxed under the local sales tax laws, it will not empower the State to impose tax on the entry of goods into the State until and unless the levy complies with the requirements of articles 301 to 304 of the Constitution of India. In the case at hand, as in the case of ITC Limited v. State of Assam reported in [2007] 9 VST 250 (Gauhati); [2007] 1 GLR 1, a careful reading of the preamble, the Statement of Object and Reasons of the Act and also the provisions contained, as a whole, in the Act, we find that the provisions, contained in the Act, clearly demonstrate that the Act was envisaged as a taxing statute for augmenting revenue of the Sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case at hand, it was constitutional obligation of the State to show as to what trading facilities it has really provided or is contemplating to provide, to the importers, what expenses have been incurred for providing such facilities, or what expenses are likely to be incurred for providing such facilities, how much amount, realised from the imposition of entry tax, is being utilised, or is likely to be utilised, for providing trading facilities, so as to satisfy this court that the importers are required to pay entry tax for the facilities provided to them and that the tax, being so paid, is patently not much more than what is required for providing such facilities. The State, in the present case, has completely failed to discharge this burden. Situated thus, we are constrained to hold that the impugned levy is not compensatory in nature. What surfaces from the above discussion is that the impugned levy is a measure of general collection of revenue of the State and not specifically for facilitating trade or commerce. It may be pointed out that the State may raise revenue for its various welfare and developmental activities. If such activities are meant for people, in general, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... movement of trade, commerce and intercourse. In State of Assam v. Chhotabhai Jethabhai Patel Tobacco Products Co. Ltd. [2008] 15 VST 70 (Gauhati), a Division Bench of this court has held as under: (at pages 132-133, 136-137 of VST) "106. The question, therefore, whether the impugned levy is compensatory or not largely depends upon the provisions contained in the Act and/or also whether the State is providing the quantifiable/ measurable benefit to the payers of the tax for reimbursement/ recompense. ... 109.. Thus the preamble and Statement of Objects and Reasons of the impugned Act do not indicate that the entry tax is sought to be levied to provide facilities to the payers to facilitate the trade. ... 112.. Though the impugned Act initially does not provides any stipulation for providing the facilities to the tax-payers to facilitate the trade, section 8A has been inserted by the Second Amendment Act of 2005 with effect from May 12, 2005... 113.. From the provision of section 8A as inserted by the Second Amendment Act of 2005, it is evident that the amount collected by way of tax is proposed to be spent for maintenance of roads, for the purpose of development of trade faci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een framed specifying the conditions under which such sum is to be spent. 114.. In view of the aforesaid discussions, we are of the view that the State has miserably failed to substantiate that the substantial portion of the entry tax collected under the impugned enactment has been spent or is to be spent for providing the facilities to its payers so as to facilitate the trade, by producing materials before the court. The contentions of the learned AAG supporting the 'some connection' theory cannot be accepted. ... 116.. In view of the aforesaid discussion, we hold that the impugned enactment does not satisfy the test laid down for compensatory tax and hence cannot be held to be compensatory in nature. The judgment and order of the learned single judge is affirmed, on this point." In the case of Chhotabhai Jethabhai Patel [2008] 15 VST 70 (Gauhati), the Division Bench of this court, on finding that the State has not produced materials to show that the amount collected by way of entry tax was being spent for providing trading facilities, struck down the levy. In the present case, the situation is worse than the situation in Chhotabhai Jethabhai Patel [2008] 15 VST ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
