TMI Blog2009 (3) TMI 918X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 178(AP)324(AP)325(AP),326(AP) of 2007 - - - Dated:- 5-3-2009 - ANSARI I.A. AND MUSAHARY P.K. , JJ. The judgment of the court was delivered by I.A. ANSARI J. The petitioners, in this batch of writ petitions, who are involved in various commercial activities, in the State of Arunachal Pradesh, and import various goods from other States, have challenged the constitutionality, legality and validity of the Arunachal Pradesh Goods Tax Act, 2005 (in short, the Act ) and, particularly, section 3(2)(b) thereof, which imposes tax on the entry of goods, other than non-taxable import, for consumption, use or sale thereof into the local area of the State of Arunachal Pradesh. The levy has been challenged, broadly speaking, on three grounds, namely, (i) that the levy is violative of article 301 of the Constitution of India inasmuch as the impugned legislation imposes unreasonable restrictions on the freedom of trade, commerce 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, doe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Arunachal Pradesh, without paying tax on the goods, which are taxable under the impugned legislation. The petitioners do not want to pay tax for importing goods from outside the State of Arunachal Pradesh, though the same goods can be procured by them from the local market by paying local tax. The locally produced goods are levied under local tax and goods imported from other States are levied under entry tax. Such taxation is not discriminatory inasmuch as the local producers pay local tax and the importers and dealers are required to pay entry tax on the goods, which they import or bring into the State of Arunachal Pradesh. There is, therefore, no merit in the writ petitions and the same deserve dismissal. Appearing on behalf of the writ petitioners, Dr. A.K. Saraf, learned Senior Counsel, contends that the Act is in violation of article 301 of the Constitution of India inasmuch as article 301 guarantees freedom of trade, commerce 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, accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has not provided to the importers or traders of the goods, which are imported into, or brought into, the State of Arunachal Pradesh, any facility whatsoever, which can be termed as trading facility. Far from this, submits Dr. Saraf, the respondents, admittedly, utilize the revenue collected from imposition of entry tax, for general welfare and developmental activities of the State. Thus, according to Dr. Saraf, the revenue realized from entry tax, is, in fact, meant for augmenting general revenue of the State and not for providing any specific or particular facility to the dealers or importers of goods, which are subject to entry tax. The entry tax, in the present case, cannot, therefore, be regarded, submits Dr. Saraf, as compensatory. Pointing out that the Act, not being compensatory in nature, ought to have received, in the facts and circumstances of the present case, prior sanction from the President in accordance with the mandatory requirements 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the present case, is compensatory in nature; rather, concedes Mr. Nabam, that the entry tax, in the present case, aims at augmenting the general revenue of the State, because the State, according to Mr. Nabam, needs economic development and entry tax is one of the measures, adopted by the State, for the purpose of improving its financial strength. Mr. Nabam has further pointed out that though the impugned legislation helps the State, with the collection of entry tax, to augment its general revenue collection, the fact remains that the revenue, so generated, is utilised by the State for State's overall welfare and developmental activities, which, in turn, would obviously help the traders and importers in their commercial activities and, hence, to this extent, the impugned Act may be treated, though specifically not pleaded in the affidavit by the respondents, as compensatory in nature. Countering the submissions, made on behalf of the respondents, 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 poli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f, any preference or making, or authorising 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, the Legislature of a State may by law (a) impose on goods imported from other States or the Union territories any tax to which similar goods manufactured or produced in the State are, subject, so, however, as not to discriminate between goods so imported and goods so manufactured or produced; and (b) impose such reasonable restrictions on the freedom of trade, commerce or intercourse with or within that State as may be required in the public interest: Provided that no bill or amendment for the purposes of clause (b) shall be introduced or moved in the Legislature of a State without 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 territori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as possible, these trade barriers were started being removed. Having noticed the history of development of industries all over the world, and in order to give India strong economic base, the makers of our Constitution incorporated, in Part XIII, a specific Constitutional scheme for conduct of trade, commerce and intercourse and while making this scheme, they naturally considered and treated India as one economic unit. No wonder, therefore, that the trade, commerce and intercourse were guaranteed to be free throughout the territory of India , which, as article 1 reflects, consists of various States and Union territories. However, as the conduct of every facet of life needs some regulations and regulatory measures, the freedom of trade, commerce and intercourse too could not have been left absolutely free or completely without any regulation. It is, in this light, that the words subject to the other provisions of this part , occurring in article 301, need to be 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, ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y and salvation are in union and not division'. From the above observations made in Atiabari Tea Co. Ltd. AIR 1961 SC 232, it is clear that our Constitution makers wanted to ensure freedom of movement and exchange of goods throughout the territory of India in order to strengthen the economic base of the nation and for sustaining and improving the living standard of our countrymen. Pointing out that by granting freedom of trade throughout India, article 301, primarily, aims at removing the barriers in the movement or transportation part of the goods, the Supreme Court in Atiabari Tea Co. Ltd. AIR 1961 SC 232, observed as follows: 50. Let us now revert to article 301 and ascertain the width and amplitude of its scope. On a careful examination of the relevant provisions of Part XIII as a whole as well as the principle of economic unity which it is intended to safeguard by making the said provisions, the conclusion appears to us to be inevitable that the content 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and immediate or indirect and remote? It is precisely because the words used in article 301 are very wide, and in a sense vague and indefinite that the problem of construing them and determining their exact width and scope becomes complex and difficult. However, in interpreting the provisions of the Constitution we must always bear in mind that the relevant provision 'has to be read not in vacuo but as occurring in a single complex instrument in which one part may throw light on another'. (Vide James v. Commonwealth of Australia [1936] AC 578 at page 613). In construing article 301 we must, therefore, have regard to the general scheme of our Constitution as well as the particular provisions in regard to taxing laws. The construction of article 301 should not be determined on a purely academic or doctrinaire considerations; in construing the said article we must adopt a realistic approach and bear in mind the essential features of the separation of powers on which our Constitution 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 art ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... do not think it necessary or expedient to consider what other laws would be affected by the interpretation we are placing on article 301 and what other legislative entries would fall under Part XIII. We propose to confine our decision to the Act with which we are concerned. If any other laws are similarly challenged the validity of the challenge will have to be examined in the light of the provisions of those laws. Our conclusion, therefore, is that when article 301 provides that trade shall be free throughout the territory of India, it means that the flow of trade shall run smooth and unhampered by any restriction either at the boundaries of the States or at any other points inside the States themselves. It is the free movement or the transport of goods from one part of the country to the other that is intended to be saved, and if any Act imposes any direct restrictions on the very movement of such goods it attracts the provisions of article 301, and its validity can be sustained only 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aws, which create hindrance to the freedom of trade, commerce and intercourse throughout India, article 302 permits the Parliament to impose, by law, such restrictions on these freedoms as may be required in public interest. Article 303, however, clarifies that neither Parliament nor the Legislature of States shall have the power to make any law giving 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. In other words, article 303 clarifies that even in public interest, Parliament is not authorized to make laws giving preference to one State over the other. This restriction is, however, subject to one exception, the exception being that the Parliament is left with the discretion to make laws giving preferential treatment or making discriminatory provisions if such laws become necessary for the purpose of dealing with the situation arising from scarcity of goods in any part 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 be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rade, commerce and intercourse with other States or within the State, which imposes such restrictions. It may be noted that while article 304(a) relates to inter-State movement of goods, article 304(b) relates to both inter-State as well as intra-State movement of goods. Moreover, a calm and careful analysis of article 304(b) would show that clause (b) allows the State Legislature to impose reasonable restrictions on the movement of goods provided they are in public interest and prior sanction of the President has been obtained before moving the Bill in the Legislature of the State. Even when a non-discriminatory tax imposes restrictions, the same has to be not only reasonable and in public interest, but that such a fiscal legislation ought to comply with the proviso to article 304(b). In short, if a non-discriminatory tax is imposed and such tax imposes restrictions, in the inter-State or intra-State movement of goods, the same has to comply with the proviso to article 304(b) of the Constitution 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 els ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry State enactment, relating to levy, shall have to be tested with reference to both clause (a) as well as clause (b) of article 304; or else, article 301 would mean freedom in respect of trade, commerce and intercourse in respect of inter-State movement of goods only and the use of the words with or within that State , appearing in article 304(b), would be rendered redundant. Furthermore, if such an interpretation is accepted, the State Legislature would be empowered to impose non-discriminatory taxes in the form of restrictions which even the Parliament cannot do under article 302 of the Constitution of India. If the word and , appearing between clauses (a) and (b) of article 304, is read as or , then, a statute, levying nondiscriminatory taxes, cannot be assailed under articles 301 and 304(b), though such taxing statute may be, in a given case, imposing restrictions. If this proposition is accepted, the logical result would be that even a discriminatory tax would become valid on the fulfilment of the conditions 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 disc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .39, observed that the two clauses of article 304 are connected by the word and and it is clear that and means and/or thereby empowering the State Legislature to exercise the power separately or together. This aspect of matter is emphasised by the fact that the power under article 304(a) is unqualified and the power under article 304(b) is qualified by the proviso. What can also not be ignored is that while article 304(a) deals exclusively with the power to impose tax, article 304(b) relates to the imposition of restrictions, which may be an after-effect of imposition of tax of some legislation, other than fiscal legislation. Whereas the imposition of discriminatory tax is totally barred under the scheme of our Constitution, reasonable restrictions, imposed in public interest, which may have an effect of the imposition of a non-discriminatory tax can be valid, if prior sanction of the President is obtained under the proviso to article 304(b) of the Constitution. We have already noticed that article 301 guarantees 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the ambit of article 301 and a tax, on the movement of goods or passengers, did not necessarily connote impediment or restraint in the matter of trade and commerce. Drawing a distinction between laws of taxation, which are enacted for the purpose of general revenue, and taxation laws, which are enacted for the purpose of making discrimination or giving preference, the learned Chief Justice took the view that taxing statutes enacted for the purpose of general revenue were outside the purview of article 301 and it is only those laws of taxation, which were made for the purpose of making discrimination or giving preference, which fall within the ambit of article 301. The learned Chief Justice concluded these views in the following words: ...Thus, on a fair construction of the provisions of Part XIII, the following propositions emerge: (1) trade, commerce and intercourse throughout the territory of India are not absolutely free, but are subject to certain powers of legislation by Parliament or the Legislature of a State; (2) the freedom declared by article 301 does not mean freedom from taxation simpliciter, but does mean freedom from taxation which has the effect of directly imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... XII of the Constitution and were outside Part XIII. The majority did not also agree with the views expressed by Shah, J. Hence, speaking for the majority, in Atiabari Tea Co. Ltd. AIR 1961 SC 232, Gajendragadkar, J, observed as follows: ...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 the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Transport (Rajasthan) Ltd. AIR 1962 SC 1406, would, if accepted, result in stoppage of every Bill undermining thereby effective legislation, which may, at times, be, otherwise, urgent in nature. Pointing to the difficulties in accepting the views expressed by Shah, J, the court, in Automobile Transport (Rajasthan) Ltd. AIR 1962 SC 1406, observed as follows: 11. The most serious objection to the widest view canvassed before us is that it ignores altogether that in the conception of freedom of trade, commerce and intercourse in a community regulated by law freedom must be understood in the context of the working of an orderly society. The widest view proceeds on the footing that article 301 imposes a general restriction on legislative power and grants a freedom of trade, commerce and intercourse in all its series of operations, from all barriers, from all restrictions, from all control and from all regulation, and the only qualification that is to be found in the article is the opening clause, namely, subject to the other provisions 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the fields allocated to them would be meaningless. In our view the concept of freedom of trade, commerce and intercourse postulated by article 301 must be understood in the context of an orderly society and as part of a Constitution which envisages a distribution of powers between the States and the Union, and if so understood, the concept must recognise the need and the legitimacy of some degree of regulatory control, whether by the Union or the States: this is irrespective of the restrictions imposed by the other articles in Part XIII of the Constitution. We are, therefore, unable to accept the widest view as the correct interpretation of the relevant articles in Part XIII of the Constitution. As regards the narrow view expressed by the learned Chief Justice, in Atiabari Tea Co. Ltd. AIR 1961 SC 232, which was to the effect that taxing laws were governed by the provisions of Part XII and except when a tax law is made under article 304(a), article 301 did not come into play or, in other words, none of the provisions of Part XIII, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on do not apply to taxation laws. As to the argument that article 301 must take colour from article 303, we are unable to accept as correct the argument that the provisions of article 303 must delimit the general terms of article 301. It seems to us that so far as Parliament is concerned, article 303(1) carves out an exception from the relaxation given in favour of Parliament by article 302; the relaxation given by article 302 is itself in the nature of an exception to the general terms of article 301. It would be against the ordinary canons of construction to treat an exception or proviso as having such a repercussion on the interpretation of the main enactment so as to exclude from it by implication what clearly falls within its express terms. Regulatory measures vis-a-vis compensatory tax Having, thus, agreed with the views expressed by the majority, in Atiabari Tea Co. Ltd. AIR 1961 SC 232; [1961] 1 SCR 809, the seven-judge Bench, in Automobile Transport (Rajasthan) Ltd. AIR 1962 SC 1406, further held that regulatory measures, which do not impede the freedom of trade, commerce and intercourse, and compensatory taxes for use of the trading facilities are not hit by article 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tory in nature, it upheld the enactment. This aspect can be discerned from the observations made in paragraph Nos. 19 and 20, which run as follows: 19....The taxes are compensatory taxes which instead of hindering trade, commerce and intercourse 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 preamble decided the matter, then the mercantile community would be helpless and it would be the easiest thing for the Legislature to defeat the freedom assured by article 301 by stating in the preamble that it is meant to provide facilities to the tradesmen. Likewise actual user would often be unknown to tradesmen and such user may at some time be compensatory and at others not so. It seems to us that a working test for deciding whether a tax is compensatory or not is to enquire whether the tradespeople are having the use of certain facilities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tate, 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 tax, which has not been specifically incorporated, in our Constitution, was judicially evolved in Automobile Transport (Rajasthan) Ltd. AIR 1962 SC 1406 as a part of the regulatory charge, the concept of compensatory tax being that the taxes, which would, otherwise, interfere with unfettered freedom under article 301, will still be protected from the vice of unconstitutionality if such taxes are compensatory. For the purpose of determining as to whether a given levy is or is not compensatory, Automobile Transport (Rajasthan) Ltd. AIR 1962 SC 1406 prescribed a working test, the working test being whether the people, involved in the trading activities, have been using the facilities for better conduct of their business or not and, whether for such use of facilities , the users of such facilities are paying patently much more than what is required by the State in order to provide such facilities to the traders. In short, thus, the concept of compensatory tax is an exception to article 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n nature or not had not been really decided, because article 304(b) was found to have been complied with. Be that as it may, a two-judge Bench of the Supreme Court in Bihar Chamber of Commerce [1996] 103 STC 1 (SC); [1996] 9 SCC 136, extended the concept of some link between the tax imposed and the facilities provided, as propounded in Bhagatram Rajeev Kumar [1995] 96 STC 654 (SC); [1995] Suppl 1 SCC 673, by holding thus: (at page 8 of 103 STC) 12. It is not possible to deny the force of this submission. Where the local areas contemplated by the Act cover the entire State, the distinction between the State and the local areas practically disappears. (The situation would, no doubt, be different if the local areas are confined to a few cities or towns in the State and the levy is upon the entry of goods into those local areas alone. This is an important distinction which should be kept in mind while appreciating this aspect and also while examining the decisions of this court rendered in 'fifties and sixties.') The facilities provided in the State are the facilities provided in the local areas as well. Interests of the State and the interests of the local authorities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate with the definite purpose of meeting the expenses on account of providing trading facilities or for making improvement in trading facilities and that there must be a reasonable relation between the actual and projected expenditure, on the one hand, and the services offered or facilities provided, on the other, so that the traders, as users of such facilities, shall not be required to pay patently much more than what is required to provide such facilities . However, 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, the court took the view that it is not necessary for a levy, to be compensatory, that the purpose of the levy shall be to provide any specific service or facility to the traders and that for a levy to be compensatory, it is enough if the facilities are provided to the public, in general, and traders are incidentally beneficiaries of such facilities. Confronted with the fact that the constitutionally held view as regards the compensatory tax has been departed from in Bhagatram Rajeev Kumar [1995] 96 STC 654 (SC); [1995] Suppl 1 SCC 673 and Bihar Chamber of Commerce [199 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, the court, in Jindal Stripe Ltd. [2004] 134 STC 303 (SC); [2003] 8 SCC 60, referred the matter to a Constitution Bench for an authoritative pronouncement on the subject. This can be easily discerned from the observations made in Jindal Stainless Ltd. [2006] 145 STC 544 (SC); [2006] 7 SCC 241, which proceed, thus: 16. According to the referral order, since the concept of compensatory tax has been judicially evolved as an exception to the provisions of article 301 and as the parameters of this judicially evolved concept are blurred, particularly, by reason of 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, the court felt that the interpretation of article 301 vis-a-vis compensatory tax should be authoritatively laid down with certitude by the Constitution Bench under article 145(3). In Jindal Stainless Ltd. [2006] 145 STC 544 (SC); [2006] 7 SCC 241, the Constitution Bench has, in fact, pointed out that Part XIII of our Constitution amalgamates two d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ] 145 STC 544 (SC); [2006] 7 SCC 241 that their Lordships have explained the concept of compensatory tax. This aspect of the compensatory tax and its co-relation with article 301 can be discerned from a careful reading of the observations made in Jindal Stainless Ltd. [2006] 145 STC 544 (SC); [2006] 7 SCC 241, which read as follows: (at page 566 of STC) 26. Section 8 of article 1 of the U.S. Constitution contains what is called 'commerce clause', which regulates trade and commerce. Keeping in mind the dual form of Government in U.S.A. and the concept of 'police power' vis-a-vis the 'taxing power', the U.S. Supreme Court has held that the commerce power embodied in the commerce clause implies the power to regulate, that is, the power to prescribe the rule by which commerce is to be governed (see: Constitutional Law by Stone). Section 8 of article 1 is an authorisation in favour of the Congress to enact laws for the protection and encouragement of commerce among the States. By its own force, it creates an area of trade free from interference by the States. Therefore, the commerce clause is per se a limitation upon the power of the States and is not depe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pensatory tax becomes a sub-class of fees. Having noted, in detail, the parameters of not only article 301, but also of articles 302, 303 and 304, the Constitution Bench, in Jindal Stainless Ltd. [2006] 145 STC 544 (SC); [2006] 7 SCC 241, pointed out, at para 34, The concept of compensatory tax is not there in the Constitution but is judicially evolved in Automobile Transport (Rajasthan) Ltd. AIR 1962 SC 1406 as a part 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 (Rajasthan) Ltd. AIR 1962 SC 1406. The Constitution Bench, in Jindal Stainless Ltd. [2006] 145 STC 544 (SC); [2006] 7 SCC 241, has also pointed out that primary purpose of a taxing statute is collection of revenue, whereas regulations are administrative actions, which produce regulatory effects on trade and commerce. The Constitution Bench reiterates, in Jindal Stainless Ltd. [2006] 145 STC 544 (SC); [2006] 7 SCC 241, that there is a working test for deciding the question as to whether a given levy is the resul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peline 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]. The Constitution Bench proceeds further to observe, in Jindal Stainless Ltd. [2006] 145 STC 544 (SC); [2006] 7 SCC 241, as under: (at page 571 of STC) 37. 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 identification of a specific benefit, and even if such identification is there, it is not capable of direct measurement. In the case of a tax, a particular advantage, if it exists at all, is incidental to the State's action. It is assessed on certain elements of business, such as, manufacture, purchase, sale, consumption, use, capital, etc., but its payment is not a condition precedent. It is not a term or condition of a licence. A fee is generally a term of a licence. A tax is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 benefit is measured in terms of cost which has to be reimbursed by compensatory tax or in the form of compensatory tax. In other words, compensatory tax is a recompense/ reimbursement. How compensatory tax differs from other taxes? What emerges from the above discussion is that a tax is levied as a part of common burden, the basis of tax being the ability or capability of the tax-payer to pay. In the case of a tax, there may not be any identifiable benefit, and even if there is some be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue, but as reimbursement/recompense to the services/facilities provided. Thus, compensatory tax is, by nature, hybrid, but it is more close to fees than to tax inasmuch as both fee and compensatory tax are based, broadly speaking, on the principle of equivalence. The burden shall be on the State as a service or facility provider to place before the court all such materials, as may be required and show that payment of compensatory tax is reimbursed or recompensed in the quantifiable or measurable benefits, which are provided, or intended to be provided, to its payer(s). Firmly laying down the parameters of compensatory tax, the court, in Jindal Stainless Ltd. [2006] 145 STC 544 (SC); [2006] 7 SCC 241, observed: 40. 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. Having, thus, made it clear as to how a compensato ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 SCC 241, has pointed out: 46. The concept of compensatory taxes was propounded in the case of Automobile Transport (Rajasthan) Ltd. AIR 1962 SC 1406 in which compensatory taxes were equated with regulatory taxes. In that case, a working test for deciding whether a tax is compensatory or not was laid down. In that judgment, it was observed that one has to enquire whether the trade as a class is having the use of certain facilities for the better conduct of the trade/business. This working test remains unaltered even today. Having, thus, adhered to the working test of compensatory tax, which was laid down in Automobile Transport (Rajasthan) Ltd. AIR 1962 SC 1406, the Constitution Bench, in Jindal Stainless Ltd. [2006] 145 STC 544 (SC); [2006] 7 SCC 241, commented on the decisions, rendered 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, in the following words: (at page 574 of 145 STC) 47. As stated above, in the post 1995 era, the said working test propounded in the Automobile Transport case AIR 1962 SC 1406, stood disrupted when in Bhagatram's case [1995] 96 STC 654 (SC); [199 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kind of working connection between the tax collected and facilities provided would not be enough; rather, the State must establish that the tax imposed is not for general revenue, but as a measure of reimbursement or to recompensate the services offered or facilities provided, for, the compensatory tax is founded on the principle of equivalence and is based on the concept of reimbursement. The parameters of compensatory tax, as laid down in Jindal Stainless Ltd. [2006] 145 STC 544 (SC); [2006] 7 SCC 241, are summarised hereinbelow: (a) The principle of equivalance , which is converse of the principle of ability to pay , applies to a case of compensatory tax; (b) The benefits, under a compensatory tax, are quantifiable and measurable; (c) A compensatory tax has to be broadly proportional and not progressive; (d) A compensatory tax is based on the principle of pay for the value ; (e) Reimbursement or recompense are the closest equivalence to the cost incurred by the provider of the services/facilities; (f) Compensatory tax is based on the concept of recompense/ reimbursement; (g) Compensatory tax is a compulsory contribution levied broadly in proportion to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly seeks to ensure that tax shall not be imposed on movement of goods solely for the reason that the goods are carried to, or transported through, a given State so that freedom of trade, commerce and intercourse can be achieved in true sense. The tax laws have, therefore, been held, in Atiabari Tea Co. Ltd. AIR 1961 SC 232; [1961] 1 SCR 809, not to be immune from the operation of article 301. Having held that tax laws are not immune from the operation of the article 301 or, for that matter, the constitutional scheme, embodied in Part XIII, the Constitution Bench, in Atiabari Tea Co. Ltd. AIR 1961 SC 232; [1961] 1 SCR 809, clarified that it is not all taxes, which will hit article 301, but only such taxes, which, directly and immediately, restrict trade, for, it is only direct restrictions causing impediments to the movement of goods that article 301 seeks to avoid and nullify. When a tax is imposed on the entry of goods into a local area for the purpose of use, consumption or sale therein, it has an immediate impact on the movement of the goods. That such measure would fall within the ambit of article 301 is clearly indicated by the Constitution Bench in Hansa Corporation [1980] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me being discriminatory in nature inasmuch as, under the impugned provisions, while the importers are required to pay entry tax on the entry of specified goods into the State of Arunachal Pradesh, the local manufacturers or producers of such goods are not required to pay any entry tax, when such goods or products move from one part of the State to another part thereof; and (ii) the impugned provisions of entry tax are neither regulatory nor compensatory in nature and, hence, the same is violative of article 304(b). Let us, now, consider the two distinct challenges to the provisions of entry tax, which form the subject-matter of controversy in this set of writ petitions. Whether entry tax levied by the act is violative of article 304(a) of the Constitution of India? In the light of the position of law as noted above, we, now, proceed to ascertain if the impugned levy is discriminatory in nature and if, on this ground, the impugned levy can be struck down. As already discussed above, clause (a) of article 304 empowers a State Legislature to impose non-discriminatory tax on goods imported from other States even if imposition of such tax interferes with the freedom of trade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nto, or transported into, any place within the territorial jurisdiction of the State of Arunachal Pradesh. We, now, turn to section 2(r), which defines the term, importer . According to section 2(r), importer means, (i) a person who brings their own goods into Arunachal Pradesh; or (ii) a person on whose behalf another person brings goods into Arunachal Pradesh; or (iii) in the case of a sale occurring in the circumstances referred to in section 6(2) of the Central Sales Tax Act, 1956 (74 of 1956), the person in Arunachal Pradesh to whom the goods are delivered. Bearing in mind the definition of the term importer , we, now, turn to section 3, which contains the charging provisions. The relevant provisions of section 3 read: 3. Imposition of tax. (1) Imposition on persons who are dealers and importers. Subject to other provisions of this Act, every person who is (a)... (i) and (ii).... (b) an importer of goods; shall be liable to pay tax in accordance with this Act, at the time in the manner provided in this Act. (2) Imposed on sale and entry of goods. Every person who (a)... (i) and (ii).... (b) is an importer, shall, be liable to pay tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tercourse throughout the territory of India unless, in the light of the provisions of article 304(a), a tax is one, which a State Legislature imposes not only on the goods, which is produced or manufactured within that State, but also on similar goods, when such goods are moved from one part of the State to another part thereof. In State of Assam v. Chhotabhai Jethabhai Patel Tobacco Products Co. Ltd. reported in [2008] 15 VST 70 (Gauhati), some writ petitions challenged the validity of the Assam Entry tax Act, 2001, as enacted prior to its first amendment, on the ground that the imposition of entry tax was discriminatory and is in violation of article 304(a). It may be pointed out that prior to the first amendment of the Assam Entry tax Act, 2001, entry tax was levied only on goods brought from outside the State into the local area of the State of Assam; whereas similar goods, manufactured or produced within the State of Assam, were not subjected to such tax. A Division Bench, in Chhotabhai Jethabhai Patel [2008] 15 VST 70 (Gauhati), while allowing the writ petitions, held that the principal Act, prior to its first amendment, was unconstitutional and violative of article 301 inasm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause (a) of article 304, on the goods imported from other State. If the writ petitioners are not willing to pay entry tax, they should not import/bring goods from outside, but should procure their requirements from the local market. On the way out to avoid payment of entry tax is to make purchase by paying local tax that is value added tax (VAT). Entry tax cannot be termed as discriminatory as much as the same protects illegal entry of goods into the local area of Arunachal Pradesh. 10.. That with regard to statement made in para 14 of the writ petition, the humble deponent submits that under section 3 of the Act all goods except non-taxable goods are liable to entry tax. The goods locally produced suffer local tax and the goods coming from outside the State suffer entry tax. Therefore, there is no question of treating the goods imported from outside the State differently, and hence entry tax cannot be treated as discriminatory. All taxable goods either locally manufactured or imported from outside the State suffer either VAT in case of locally manufactured goods or entry tax in case of imported goods, respectively. Hence all goods are treated equal in terms of levy of entry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the impugned provisions of entry tax, in the present case, are violative of article 304(a) inasmuch as the levy is discriminatory in nature and cannot, under the Constitutional scheme, be allowed to survive. Is the impugned levy regulatory or compensatory in nature? Turning to the question as to whether entry tax, as imposed under the impugned Act, is compensatory in nature or not, it is important to bear in mind that such a question has to be judged on the facts and circumstances of a given case. As already indicated above, when an entry tax is challenged as unconstitutional on the ground that it is not compensatory in nature, the burden rests on the State to show that the tax, so imposed, is compensatory in nature. The State, in the present case has to, therefore, satisfy the court that the principles of equivalence is attracted to the imposition of entry tax inasmuch as the revenue realised by imposition of tax is, if not entirely, substantially utilised for the facilities provided to the traders. The facilities provided should be in relation to the tax levied on an individual as a member of a class. While considering the question as to whether the impugned levy is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade in the above paragraphs in the affidavits of the respondents, it clearly transpires that the entry tax is levied under the impugned Act, on the entry of the goods into the State of Arunachal Pradesh for the purpose of augmenting general revenue of the State and the tax, so imposed, is not at all compensatory in nature. A tax, which is levied upon entry of goods into a local area, for consumption, use or sale thereof, has a direct effect on the movement of goods and, hence, such a levy can only be saved if the levy is in the nature of compensatory tax or it comes under the protective umbrella of article 304. For a tax to be compensatory, there must be a link between the levy of the tax and the facilities provided. Whenever a levy is impugned as violative of article 301, the court has to determine if the impugned enactment, facially and patently, indicates any quantifiable data on the basis of which the compensatory tax is levied. Such a legislation, if put to challenge, must facially indicate the benefit, which is quantifiable or measurable. In case of any ambiguity, the burden would be on the State, as a service provider, to place, before the court, requisite materials to show ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imposing entry tax arises from article 246(2) read with entry 52, for, while article 246(2) empowers the State Legislature to legislate on the subjects enlisted in the State List, entry 52 allows the State to impose a levy in the nature of entry tax. However, the power, contained under article 246, has to be read subject to other provisions of the Constitution. It is worth noticing that article 301 is not subject to provisions other than Part XIII of the Constitution. Consequently, article 301 cannot be read subject to article 246; rather, article 246 is subject to article 301. Hence, the power to legislate, under article 246, has to be read subject to the provisions of article 301. It clearly follows, therefore, that while exercising powers under article 246, a State Legislature cannot enact a law, which infringes or violates article 301. To put differently, entry tax cannot be imposed in violation of freedom of trade and commerce granted under article 301. It is, therefore, no answer to the question that an entry tax, being legislation under entry 52 of the State List, is a valid piece of legislation even if the imposition of entry tax is, otherwise, found to be violative of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to whether a particular trader is utilising such facilities or not is immaterial. So long as the levy is imposed against certain trading facilities provided by the State, no trader can challenge such a levy on the ground that he does not make use of the facilities, which have been provided by the State to facilitate trade and commerce. A trader cannot also impugn such a levy on the ground that besides the traders, as a class, the facilities are also enjoyed by non-traders. To put it a little differently, when the traders are the substantive beneficiaries of the facilities, provided by the State, which help in the development of trade and commerce, the levy cannot be challenged on the ground that people, other than traders, are also incidentally receiving the benefits of such facilities, which the State provides to the trading community. When, however, the facilities, provided by the State, are not aimed at development of trade and commerce, but are aimed for the general people, the fact that the traders are also enjoying such benefits, which are aimed for the general public, no levy can be imposed if the levy impedes the movement of goods and thereby deny to the trading community t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to the payers of such entry tax, which the Government is otherwise duty-bound to do. From the chart filed along with the additional affidavit filed in Writ Appeal No. 465 of 2006, which has been reproduced above, it also appeared that the amount spent includes the State's share in respect of rural development, compensation and assignment of the local bodies, Panchayati Raj institutions. Apart from giving figure towards assistance for development of urban and rural and local areas under GMC no details have been provided to show that the amount collected by way of entry tax, has in fact been spent or is to be spent for benefit of the payers and to facilitate the trade. It is also evident from section 8(A) of the impugned Act, which has been inserted by the Second Amendment Act of 2005, that the State Government has been empowered to spend such amount of tax collected under the said Act for the purpose of development of trading facilities, maintenance of roads and other infrastructure in the local areas, subject to such condition as may be prescribed, leaving it to the State Government to determine the sum to be spent. But such conditions for determination of the sum to be sp ..... X X X X Extracts X X X X X X X X Extracts X X X X
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