TMI Blog2016 (11) TMI 545X X X X Extracts X X X X X X X X Extracts X X X X ..... the levies in the present case indeed satisfy this test is left to be determined by the regular benches hearing the matters. States are well within their right to design their fiscal legislations to ensure that the tax burden on goods imported from other States and goods produced within the State fall equally. Such measures if taken would not contravene Article 304(a) of the Constitution. The question whether the levies in the present case indeed satisfy this test is left to be determined by the regular benches hearing the matters. The questions whether the entire State can be notified as a local area and whether entry tax can be levied on goods entering the landmass of India from another country are left open to be determined in appropriate proceedings. - T.S. THAKUR, A.K. SIKRI, S.A. BOBDE, SHIVA KIRTI SINGH, N.V. RAMANA, R. BANUMATHI, A.M. KHANWILKAR, ASHOK BHUSHAN, DR D Y CHANDRACHUD, JJ. C.A. NO. 6383-6421/1997, C.A. NO. 6422-6435/1997, C.A. NO. 6436/1997, C.A. NO. 6437-6440/1997 , C.A. NO. 3381-3400/1998, C.A. NO. 4651/1998, C.A. NO. 918/1999, C.A. NO. 2769/2000, C.A. NO. 4471/2000, C.A. NO. 3314/2001, C.A. NO. 3454/2002, C.A. NO. 3455/2002, C.A. NO. 3456-3459/2 ..... 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X X X X Extracts X X X X X X X X Extracts X X X X ..... /2008, SLP(C) NO. 15329/2008, SLP(C) NO. 15330/2008, SLP(C) NO. 15331/2008, SLP(C) NO. 15335/2008, SLP(C) NO. 15337/2008, SLP(C) NO. 15356/2008, SLP(C) NO. 15357/2008, SLP(C) NO. 15369/2008, SLP(C) NO. 15405/2008, SLP(C) NO. 15491/2008, SLP(C) NO. 15492/2008, SLP(C) NO. 15493/2008, SLP(C) NO. 15495/2008, SLP(C) NO. 15496/2008, SLP(C) NO. 15498/2008, SLP(C) NO. 15540/2008, SLP(C) NO. 15551/2008, SLP(C) NO. 15579/2008, SLP(C) NO. 15605/2008, SLP(C) NO. 15618/2008, SLP(C) NO. 15623/2008, SLP(C) NO. 15628/2008, SLP(C) NO. 15629/2008, SLP(C) NO. 15630/2008, SLP(C) NO. 15631/2008, SLP(C) NO. 15632/2008, SLP(C) NO. 15633/2008, SLP(C) NO. 15636/2008, SLP(C) NO. 15643/2008, SLP(C) NO. 15647/2008, SLP(C) NO. 15652/2008, SLP(C) NO. 15653/2008, SLP(C) NO. 15655/2008, SLP(C) NO. 15656/2008, SLP(C) NO. 15657/2008, SLP(C) NO. 15659/2008, SLP(C) NO. 15660/2008, SLP(C) NO. 15666/2008, SLP(C) NO. 15684/2008, SLP(C) NO. 15700/2008, SLP(C) NO. 15711/2008, SLP(C) NO. 15819/2008, SLP(C) NO. 15845/2008, SLP(C) NO. 15934/2008, SLP(C) NO. 16664/2008, SLP(C) NO. 16667/2008, SLP(C) NO. 16689/2008, SLP(C) NO. 16733/2008, SLP(C) NO. 16754/2008, SLP(C) NO. 16832/2008, SLP(C) NO. 16837/2008, SLP(C) NO. 16841/200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3609/2008, SLP(C) NO. 23623/2008, SLP(C) NO. 25378/2008, SLP(C) NO. 25498/2008, SLP(C) NO. 26377/2008, SLP(C) NO. 26543/2008, SLP(C) NO. 26571/2008, SLP(C) NO. 26572/2008, SLP(C) NO. 26593/2008, SLP(C) NO. 26750/2008, SLP(C) NO. 26813/2008, SLP(C) NO. 26972/2008, SLP(C) NO. 27442-27444/2008, SLP(C) NO. 27606/2008, SLP(C) NO. 27927/2008, SLP(C) NO. 29194/2008, SLP(C) NO. 29196/2008, SLP(C) NO. 29561-29570/2008, SLP(C) NO. 29763/2008, SLP(C) NO. 29764/2008, SLP(C) NO. 30276/2008, SLP(C) NO. 30533/2008, SLP(C) NO. 30534-30540/2008, SLP(C) NO. 30542/2008, S.L.P.(C)... /2009 CC NO. 2867, SLP(C) NO. 3276/2009, SLP(C) NO. 4720/2009, S.L.P.(C)... /2009 CC NO. 5143, S.L.P.(C)... /2009 CC NO. 5311, SLP(C) NO. 5371/2009, SLP(C) NO. 5376/2009, SLP(C) NO. 5381/2009, SLP(C) NO. 5383/2009, SLP(C) NO. 5384/2009, SLP(C) NO. 5393/2009, SLP(C) NO. 5395/2009, SLP(C) NO. 5396/2009, SLP(C) NO. 5399/2009, SLP(C) NO. 5401/2009, SLP(C) NO. 5403/2009, SLP(C) NO. 5405/2009, SLP(C) NO. 5406/2009, SLP(C) NO. 5408/2009, SLP(C) NO. 5409/2009, SLP(C) NO. 5410/2009, SLP(C) NO. 5411/2009, SLP(C) NO. 5412/2009, SLP(C) NO. 5413/2009, SLP(C) NO. 5414/2009, SLP(C) NO. 5420/2009, SLP(C) NO. 5421/2009, SLP(C) NO. 5422/20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) NO. 22313/2009, SLP(C) NO. 22316/2009, SLP(C) NO. 22317/2009, SLP(C) NO. 22318/2009, SLP(C) NO. 22320/2009, SLP(C) NO. 22321/2009, SLP(C) NO. 22322/2009, SLP(C) NO. 22323/2009, SLP(C) NO. 22324/2009, SLP(C) NO. 22325/2009, SLP(C) NO. 22408/2009, SLP(C) NO. 22425/2009, SLP(C) NO. 22428/2009, SLP(C) NO. 23990/2009, SLP(C) NO. 24149/2009, SLP(C) NO. 24430/2009, SLP(C) NO. 24822/2009, SLP(C) NO. 25157/2009, SLP(C) NO. 25390/2009, SLP(C) NO. 25399-25400/2009, SLP(C) NO. 25467/2009, SLP(C) NO. 25470/2009, SLP(C) NO. 25474/2009, SLP(C) NO. 25753/2009, SLP(C) NO. 25797/2009, SLP(C) NO. 26116/2009, SLP(C) NO. 26236/2009, SLP(C) NO. 26509/2009, SLP(C) NO. 27883/2009, SLP(C) NO. 28509/2009, SLP(C) NO. 28583/2009, SLP(C) NO. 28696/2009, SLP(C) NO. 28775/2009, SLP(C) NO. 29597/2009, SLP(C) NO. 29868/2009, SLP(C) NO. 30383/2009, SLP(C) NO. 30746-30845/2009, SLP(C) NO. 30847/2009, SLP(C) NO. 31410/2009, SLP(C) NO. 31411/2009, Page 8 8 SLP(C) NO. 31412/2009, SLP(C) NO. 33176/2009, SLP(C) NO. 33663-33665/2009, SLP(C) NO. 33672/2009, SLP(C) NO. 34253/2009, SLP(C) NO. 34859/2009, SLP(C) NO. 35038/2009, SLP(C) NO. 35585/2009, SLP(C) NO. 35587/2009, SLP(C) NO. 35740/2009, SLP(C) NO. 35742/2009, SLP(C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14144/2011, SLP(C) NO. 14269/2011, SLP(C) NO. 14342/2011, SLP(C) NO. 18858/2011, Page 9 9 SLP(C) NO. 18859/2011, SLP(C) NO. 18862/2011, SLP(C) NO. 18863/2011, SLP(C) NO. 18864/2011, SLP(C) NO. 33344/2011, W.P. (C) NO. 278/2012, W.P.(C) NO. 290/2012, C.A. NO. 4210/2012, C.A. NO. 5860/2012, C.A. NO. 5861/2012, C.A. NO. 8275/2012, C.A. NO. 8278/2012, C.A. NO. 8280/2012, C.A. NO. 8283/2012, C.A. NO. 8284/2012, C.A. NO. 8286/2012, C.A. NO. 8290/2012, C.A. NO. 8292/2012, C.A. NO. 8294/2012, C.A. NO. 8295/2012, C.A. NO. 8296/2012, C.A. NO. 8297/2012, C.A. NO. 8298/2012, C.A. NO. 8299/2012, C.A. NO. 8300/2012, C.A. NO. 8301/2012, C.A. NO. 8302/2012, C.A. NO. 8303/2012, C.A. NO. 8304/2012, C.A. NO. 8305/2012, C.A. NO. 8306/2012, C.A. NO. 8307/2012, C.A. NO. 8308/2012, C.A. NO. 8309/2012, C.A. NO. 8311/2012, C.A. NO. 8312/2012, C.A. NO. 8313/2012, C.A. NO. 8314/2012, C.A. NO. 8315/2012, C.A. NO. 8316/2012, SLP(C) NO. 8333/2012, C.A. NO. 8734/2012, C.A. NO. 8735/2012, C.A. NO. 8736/2012, C.A. NO. 8737/2012, C.A. NO. 8738/2012, C.A. NO. 8739/2012, C.A. NO. 8740/2012, C.A. NO. 8741/2012, C.A. NO. 8744/2012, C.A. NO. 8745/2012, C.A. NO. 8832/2012, C.A. NO. 8833/2012, C.A. NO. 8834/2012, C.A. NO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C) NO. 690-691/2015, SLP(C) NO. 684-686/2015, SLP(C) NO. 693-694/2015, SLP(C) NO. 712/2015, SLP(C) NO. 1270/2015, SLP(C) NO. 1424/2015, SLP(C) NO. 1596/2015, SLP(C) NO. 1631/2015, SLP(C) NO. 1714/2015, SLP(C) NO. 1851-1852/2015, SLP(C) NO. 1943-2001/2015, SLP(C) NO. 2038/2015, SLP(C) NO. 2054/2015, SLP(C) NO. 2063-2065/2015, SLP(C) NO. 2081/2015, SLP(C) NO. 91/2015, SLP(C) NO. 4557/2015, SLP(C) NO. 4581/2015, SLP(C) NO. 4657/2015, SLP(C) NO. 5046/2015, SLP(C) NO. 5107/2015, SLP(C) NO. 5131/2015, SLP(C) NO. 5143/2015, SLP(C) NO. 5375/2015, SLP(C) NO. 5447/2015, SLP(C) NO. 5610/2015, SLP(C) NO. 5966/2015, SLP(C) NO. 6086/2015, SLP(C) NO. 6143/2015, SLP(C) NO. 6158/2015, SLP(C) NO. 6240-6243/2015, SLP(C) NO. 6565/2015, SLP(C) NO. 6575/2015, SLP(C) NO. 6631/2015, SLP(C) NO. 4600/2015, SLP(C) NO. 5007/2015, SLP(C) NO. 6728/2015, SLP(C) NO. 6754-6755/2015, SLP(C) NO. 6823/2015, SLP(C) NO. 6907/2015, SLP(C) NO. 6909-6910/2015, SLP(C) NO. 6939/2015, SLP(C) NO. 6956/2015, SLP(C) NO. 4386/2015, SLP(C) NO. 7319/2015, SLP(C) NO. 7957-7958/2015, SLP(C) NO. 8089/2015, SLP(C) NO. 2483/2015, SLP(C) NO. 8248/2015, SLP(C) NO. 8325/2015, SLP(C) NO. 8350-8351/2015, SLP(C) NO. 8527/2015, SLP(C) NO. 958 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2009, SLP(C) NO. 30594/2009, SLP(C) NO. 2636/2015, SLP(C) NO. 2680/2015, SLP(C) NO. 2952/2015, SLP(C) NO. 2641/2015, SLP(C) NO. 2588/2015, SLP(C) NO. 2928/2015, SLP(C) NO. 2737/2015, SLP(C) NO. 2682/2015, SLP(C) NO. 8197-8198/2015, SLP(C) NO. 4197/2015, C.A. NO. 5538/2016, C.A. NO. 5533/2016, SLP(C) NO. 14539-14541/2016, SLP(C) NO. 16820/2016, C.A. NO. 4642-4643/2016 For The Parties : Mr. A.T.M.Sampath, Adv., Mr. K.V.Mohan, Adv., Mr. G.Prakash, Adv., Mr. K.R.Sasiprabhu, Adv., Mr. Rajan Narain, Adv., Mr. L.R.Singh, Adv., M/s. S.Narain CO., Mr. Milind Kumar, Adv., MS. Priya Puri, Adv., Mr. Rajesh Kumar, Adv., Ms. Suruchi Aggarwal, Adv., Ms. Indira Sawhney, Adv., Mr. Ejaz Maqbool, Adv., Mr. Nikhil Nayyar, Adv., Mr. Vishwajit Singh, Adv., Ms. Kamakshi S.Mehwal, Adv., Mr. K.L.Janjani, Adv., Mr. Praveen Kumar, Adv., Mr. Himinder Lal, Adv., Mr. Balaji Srinivasan, Adv., Ms. Kamini Jaiswal, Adv., Mr. B.Lakshmi Menon, Adv., Mr. Romy Chaccko, Adv., Mr. R.P.Goyal, Adv., Mr. Sunil Kumar Jain, Adv., Mr. Vinoo Bhagat, Adv., Mr. P.K.Manohar, Adv., Mr. Devashish Bharukha, Adv., Mr. P.N.Puri, Adv., Mr. Tarun Johri, Adv., M/s. Khaitan CO., MS. Shirin Khajuria, Adv., Mr. Surya Kant, Adv., M/s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Adv., Mr. Harish Pandey, Adv., Mr. Rajiv Shankar Dwivedi, Adv., Mr. P.D.Tyagi, Adv., Mr. Nirmeesh Dube, Adv., Dr. Vinod Kumar Tewary, Adv., Ms. K.Sarada Devi, Adv., Mr. Bijan Kumar Ghosh, Adv., Mr. Raj Singh Rana, Adv., Ms. Manju Jaitley, Adv., Mr. Rabin Majumdar, Adv., Mr. Ashwarya Sinha, Adv., Mr. Ajay Kumar, Adv., M/s. Venkat Palwal Law Associates, Adv., Mr. Rahul Kaushik, Adv., Mr. Ankur Mital, Adv., Mr. Merusagar Samantaray, Adv., Mr. Farrukh Rasheed, Adv., Ms. Garima Prassha, Adv., Mr. Vikas Singh Jangra, Adv., Mr. D.K.Sinha, Adv., Mr. Ajay Choudhary, Adv., Mr. Sudarshan Singh Rawat, Adv., Mr. Vishwa Pal Singh, Adv., Mr. Kush Chaturvedi, Adv., Mr. Amarjit Singh Bedi, Adv., Mr. Pawanshree Agrawal, Adv., Mr. Brajesh Kumar, Adv., Mr. Sudhansu Palo, Adv., Mr. Anuj Bhandari, Adv., Mr. R.Nedumaran, Adv., Mr. S.Thananjayan, Adv., Mr. M.P.Vinod, Adv., Ms. Baby Krishnan, Adv., Mr. B.V.Deepak, Adv., Mr. Rajiv Mehta, Adv., Mr. M.T.George, Adv., Mr. R.Satish, Adv., Mr. K.R.Nambiar, Adv., Mr. C.N.Sree Kumar, Adv., Mr. Sushil Kumar Jain, Adv., Mr. Aruneshwar Gupta, Adv., M/s. J.S.Wad CO., Ms. Sunita Sharma, Adv., Mr. Praveen Kumar, Adv., Mr. Shrish Kumar Misra, Adv., Mr. Rahul Prasanna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... huvodeep Roy,Adv., Mr. H.K. Puri,Adv., Ms. C.K. Sucharita,Adv., Mr. P.K. Manohar,Adv., Mr. M.T. George,Adv., Mr. R. Chandrachud,Adv., Mr. Abhisht Kumar,Adv., Mr. Neeraj Sharma,Adv., Mr. Akshat Shrivastava,Adv., M/s. Corporate Law Group Mr. Anil Shrivastav,Adv., Mr. P.V. Yogeswaran, Adv., Mr. B.S. Banthia, Adv., Mr. Rajesh Prasad Singh, Adv., Ms. Anita Shenoy, Adv., Mr. Ranjith K.C., Adv., Ms. Shally Bhasin, Adv., Ms. Bhaskar Y. Kulkarni, Adv., Mr. Aniruddha P. Mayee, Adv., Mr. Dharmendra Kumar Sinha, Adv., M/s.Lawyers Knit CO., Mr. Ravindra Bana, Adv., Mr. Amit Pawan, Adv., Mr. Dheeraj Nair, Adv., Mr. C.S.N. Mohan Rao, Adv., Mr. D.S. Chauhan, Adv., Mr. Ambhoj Kumar Sinha, Adv., Mr. A. Radhakrishnan, Adv., Ms. Meera Mathur, Adv., Mr. Rakesh K. Sharma, Adv., Mr. G.N. Reddy, Adv., Mr. P.A. Noor Mohamed, Adv., Mr. Nitin Bharadwaj, Adv., M/s.K.J. John CO.,, Adv., Mr. Irshad Ahmed, Adv., Mr. Rabin Majumdar, Adv., Mr. C. Balakrishna, Adv., Mr. Kaushik Poddar, Adv., Ms. Rashmi Singh, Adv., Mr. Ajay Kumar, Adv., Mr. Adarsh Upadhyaya, Adv., Mr. S.K. Verma, Adv., Mr. N. Ganapathy, Adv., Mr. Abhinav Mukerji, Adv., Ms. Archana Pathak Dave, Adv., Mr. Sridhar Pottaraju, Adv., Mr. Ardhendumaul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om another country are left open to be determined in appropriate proceedings. JUDGMENT T.S. THAKUR, CJI (for himself and A.K. Sikri and A.M. Khanwilkar, JJ.) 1. These appeals bring to fore for our determination vexed questions touching the interpretation of Articles 301 to 307 comprising Part XIII of the Constitution which have been the subject matter of several Constitution Bench decisions of this Court, all but one, decided by majority. The questions assume in a great measure considerable public importance not only because the same deal with the powers of the State legislatures to levy taxes but also because any pronouncement of this Court is bound to impact the federal character of our polity and the Centre-State relationship in legislative and fiscal matters. There is no gainsaying that it is the importance of the questions that lies at the bottom of the present reference to a larger Bench made in the following circumstances. 2. In exercise of their legislative powers under Entry 52 of List II of the Seventh Schedule to the Constitution several States in the country, at least 14 of whom are parties to these proceedings, have enacted laws that provide for lev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r less, be commensurate with the cost of the service or facility. The decisions emphasized that the imposition of tax must be with the definite purpose of meeting the expenses on account of providing or adding to the trading facilities either immediately or in future provided the quantum of tax sought to be generated is based on a reasonable relation to the actual or projected expenditure on the cost of the service or facility. 26. The decisions in Bhagatram and Bihar Chamber of Commerce now say that even if the purpose of imposition of the tax is not merely to confer a special advantage on the traders but to benefit the public in general including the traders, that levy can still be considered to be compensatory. According to this view, an indirect or incidental benefit to traders by reason of stepping up the developmental activities in various local areas of the State can be legitimately brought within the concept of compensatory tax, the nexus between the tax known as compensatory tax and the trading facilities not being necessarily either direct or specific. 27. Since the concept of compensatory tax has been judicially evolved as an exception to the provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ters were, in terms of the above direction, listed before a two-Judge bench for hearing of the appeals in the light of the above pronouncement of the Constitution Bench. The two-Judge Bench, however, noticed that although the basic issue in the appeals revolved around the concept of compensatory tax, the High Courts had not examined the same as they had considered themselves bound by the view taken in Bhagatram and Bihar Chamber of Commerce cases (supra). The Court further found that in the absence of relevant data before the High Courts, the issue whether the levies were compensatory could not have been considered and accordingly referred the matter back to the High Courts to decide the said aspect. The appeals were, in the meantime, adjourned to await the finding from the High Courts on the question whether the levies were indeed compensatory in nature having regard to the decisions of this Court in Atiabari and Automobile Transport cases (supra). 6. The matters were accordingly taken up by the High Courts, after the remand, who came to the conclusion that the impugned levies were neither compensatory in character nor was the procedure stipulated by Article 304 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ensatory in character and if the answer to the aforesaid question is in the affirmative what are the yardsticks to be applied to determine the compensatory character of the entry tax? (3) Whether Entry 52 List II, Schedule VII of the Constitution like other taxing entries in the Schedule, merely provides a taxing field for exercising the power to levy and whether collection of entry tax which ordinarily would be credited to the Consolidated Fund of the State being a revenue received by the Government of the State and would have to be appropriated in accordance with law and for the purposes and in the manner provided in the Constitution as per Article 266 and there is nothing express or explicit in Entry 52 List II, Schedule VII which would compel the State to spend the tax collected within the local area in which it was collected? (4) Will the principles of quid pro quo relevant to a fee apply in the matter of taxes imposed under Part XIII? (5) Whether the entry tax may be levied at all where the goods meant for being sold, used or consumed come to rest (standstill) after the movement of the goods ceases in the local area ? (6) Whether the entry tax can be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Articles 304(a) and 304(b). The significance of the non obstante clause in Article 304. The balancing of freedom of trade and commerce in Article 301 vis-a-vis the States authority to levy taxes under Articles 245 and 246 of the Constitution read with the appropriate legislative entries in the Seventh Schedule, particularly in the context of movement of trade and commerce. 12. Whether Article 304(a) and Article 304(b) deal with different subjects? Whether the impugned taxation law to be valid under Article 304 (a) must also fulfil the conditions mentioned in Article 304(b), including Presidential assent? Whether the word restrictions in Article 302 and in Article 304(b) includes tax laws? Whether validity of a law impugned as violative of Article 301 should be judged only in the light of the test of non-discrimination? Does Article 303 circumscribe Article 301? Whether internal goods would come under Article 304(b) and external goods under Article 304(a)? Whether per se test propounded in Atiabari case should or should not be rejected? Whether tax simpliciter constitutes a restriction under Part XIII of the Constitution? Whether the word restriction in Article 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... motes attainment of national goals and objectives. It must, as observed by this Court, in Kihoto Hollohan v. Zachillhu (1992) Supp 2 SCC 651 be read as a logical whole. The Constitutional provisions cannot be read in isolation, nor can they be interpreted in a manner that renders another provision redundant declared this Court in T.M.A. Pai Foundation and others v. State of Karnataka (2002) 8 SCC 481 . If words used in the provision are imprecise, protean or evocative or can reasonably bear meaning more than one, it would be legitimate for the Court to go beyond the literal confines of the provision and to call in aid other well recognised rules of construction such as legislative history, the basic scheme and framework of the statute as a whole, the object sought to be achieved and the consequence flowing from the adoption of one in preference to the other possible interpretation observed this Court in Chief Justice of Andhra Pradesh and others. v. L.V. A. Dixitulu and others (1979) 2 SCC 34 . Reference may also be made to the decision of this Court in Kesavananda Bharati v. State of Kerala (1973) 4 SCC 225 where this Court quoted with approval Lord Greene s observ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hip between different limbs of the State including that between the Centre and the States or States inter se adopted. This may, at times, involve ironing out of rough edges which exercise a Constitutional Court must necessarily undertake to avoid confusion and resultant negation of the Constitutional objectives. 13. Having said so, we must sail smooth on certain fundamentals before we address the question whether levy of taxes per se operate as an impediment or restriction on the right to free trade, commerce and intercourse. That is because a true and correct answer to Question No.1 can be found only if we constantly keep those fundamentals in mind while attempting to resolve what has been found to be somewhat difficult to resolve. For instance, whether levy of a tax is an attribute of sovereignty and if so whether Article 246 of the Constitution recognises the sovereign power of the State to make laws including the power to levy taxes on subjects enumerated in List II of the Seventh Schedule of the Constitution is an important dimension that must be addressed as a part of the interpretative exercise. So also, we must examine whether power to tax if held to be subservient t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onstitute limitations upon a power which would otherwise be practically without limit. This inherent power to tax extends to everything over which the sovereign power extends, but not to anything beyond its sovereign power. Even the federal government s power of taxation does not include things beyond its sovereign power. But where exclusive jurisdiction over land is granted to another state or country, the land remains subject to the taxing power of the state within whose boundaries it is located. 15. To the same effect is the decision of this Court in Raja Jagannath Baksh Singh v. State of U.P. Anr. ( AIR 1962 SC 1563) where this Court observed: . The power of taxation is, no doubt, the sovereign right of the State; as was observed by Chief Justice Marshall in M Culloch v. Maryland [4 Law Edn.579 p.607] : The power of taxing the people and their property is essential to the very existence of Government, and may be legitimately exercised on the objects to which it is applicable to the utmost extent to which the Government may choose to carry it. In that sense, it is not the function of the court to enquire whether the power of taxation has been reasonably exerci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 162 by the State. 22. Under Article 366(28) Taxation has been defined to include the imposition of any tax or impost whether general or local or special and tax shall be construed accordingly. Impost means compulsory levy. The well-known and well-settled characteristic of tax in its wider sense includes all imposts. Imposts in the context have following characteristics: (i) The power to tax is an incident of sovereignty. (ii) Law in the context of Article 265 means an Act of legislature and cannot comprise an executive order or rule without express statutory authority. (iii) The term tax under Article 265 read with Article 366(28) includes imposts of every kind viz. tax, duty, cess or fees. (iv) As an incident of sovereignty and in the nature of compulsory exaction, a liability founded on principle of contract cannot be a tax in its technical sense as an impost, general, local or special. (Emphasis Supplied) Power of Taxation under the Constitution: 18. We shall presently turn to the Constitutional limitations on the sovereign power to tax but before we do so we need to point out that while the power to levy taxes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Ors. v. State of Bihar and Ors. (1983) 4 SCC 45 , held on a review of the available decisions that the Constitution effects a complete separation of taxing powers of the Union and the States under Article 246 and that there is no overlapping anywhere in the exercise of that power. The sources of taxation are clearly delineated, observed the Court. The Court also held that there is a distinction between general subjects of legislation and taxation for the former are dealt within one group while the later is dealt with in a separate group. The result is that the power to tax cannot be deduced from a general legislative entry. That view was approved by a Constitution Bench of this Court in State of West Bengal v. Kesoram Industries Ltd. (2004) 10 SCC 201 . The propositions stated in the two decisions must therefore be treated to be fairly well settled. Reference may also be made to the decision of this Court in State of Kerala and ors. v. Mar Appraem Kuri Co. Ltd. and Anr. (2012) 7 SCC 106 where this Court explained the sweep and purport of Articles 245 and 246: 35. Article 245 deals with extent of laws made by Parliament and by the legislatures of States. The ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Limitations on the Exercise of Power 20. Exercise of sovereign power is, however, subject to Constitutional limitations especially in a federal system like ours where the States also to the extent permissible exercise the power to make laws including laws that levy taxes, duties and fees. That the power to levy taxes is subject to constitutional limitations is no longer res-integra. A Constitution Bench of this Court has in Synthetics and Chemicals Ltd. and Ors. v. State of U.P. and Ors. (1990) 1 SCC 109 recognised that in India the Centre and the States both enjoy the exercise of sovereign power, to the extent the Constitution confers upon them that power. This Court declared: 56 We would not like, however, to embark upon any theory of police power because the Indian Constitution does not recognise police power as such. But we must recognise the exercise of Sovereign power which gives the State sufficient authority to enact any law subject to the limitations of the Constitution to discharge its functions. Hence, the Indian Constitution as a sovereign State has power to legislate on all branches except to the limitation as to the division of powers b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 50 is yet another provision which empowers the Parliament to legislate with respect to any matter in the State List when there is a proclamation of emergency. In the event of an inconsistency between laws made by Parliament under Articles 249 and 250, and laws made by legislature of the States, the law made by Parliament shall, to the extent of the inconsistency, prevail over the law made by the State in terms of Article 251. 24. The power of Parliament to legislate for two or more States by consent, in regard to matters not otherwise within the power of the Parliament is regulated by Article 252, while Article 253 starting with a non-obstante clause empowers Parliament to make any law for the whole country or any part of the territory of India for implementing any treaty, agreement or convention with any other country or countries or any decision made at any international conference, association or other body. 25. Article 285 exempts the property of the Union from all taxes imposed by the States save in so far as the Parliament may by law provide. Article 286 places yet another Constitutional limitation on the State s power to collect any levy that imposes or authorises th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to once again examine the very same issues as have been debated and determined in the previous judgments of this Court only shows that the task of interpreting the provisions is by no means easy and has in fact become more and more difficult on account of the pronouncements of this Court taking different views not many of which have been unanimous. The marked difference in the approach adopted by learned counsel for the parties in these appeals is also a measure of the complexities of issues that fall for determination. This is specially so because the prevailing legal position in terms of the judgment of this Court in Atiabari and Automobile cases (supra) holding that fiscal measures that are compensatory fall beyond the mischief of Article 301 has been questioned by both sides. Mr. Harish Salve who led the forensic exercise followed by M/s.Arvind Datar, Laxmi Kumaran, Ravindra Shrivastava, N. Venkataraman and others vehemently argued that the Compensatory Tax Theory propounded by the Seven Judges Bench of this Court in Automobile case (supra) had no legal basis or constitutional sanction and was neither acceptable nor workable. That is particularly so because the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Constitution expressly prohibiting legislation on the subject either absolutely or conditionally, there is no fetter or limitation on the plenary powers which the State Legislature enjoys to legislate on the topics enumerated in the Lists II III of the Seventh Schedule to the Constitution. xxxx xxxx xxxx 13. The fetter or limitation upon the legislative power of the State Legislature which had plenary powers of legislation within the ambit of the legislative heads specified in the Lists II III of the Seventh Schedule to the Constitution could only be imposed by the Constitution itself and not by any obligation which had been undertaken by either the Dominion Government or the Province of Bombay or even the State of Bombay. Under Article 246 the State Legislature was invested with the power to legislate on the topics enumerated in Lists II III of the Seventh Schedule to the Constitution and this power was by virtue of article 245(1) subject to the provisions of the Constitution. The Constitution itself laid down the fetters or limitations on this power, e.g., in Article 303 or article 286(2). But unless and until the Court came to the conclusion that the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... islating about it unless the Constitution Act itself expressly prohibits legislation on the subject either absolutely or conditionally. Accordingly, in the absence of any such express prohibition, the United Provinces Tenancy Act, 1939, which in consolidating and amending the law relating to agricultural tenancies and other matters connected therewith in Agra and Oudh, dealt with matters within the exclusive legislative competence of the Provincial legislature under Item 21 of List 11 of the Seventh schedule to the Government of India Act, 1935, was intra vires the Provincial legislature notwithstanding that admittedly some of its provisions cut down the absolute rights claimed by the appellant taluqdar to be comprised in the grant of his estate as evidenced by the sanad granted by the Crown to his predecessor. The same principle has been reiterated by this Court in Maharaj Umeg Singh and others v. The State of Bombay [1955 2 SCR 164]. It was pointed out that in view of Art. 246 of the Constitution, no curtailment of legislative competence can be spelt out of the terms of clause 5 of the Letters of Guarantee given by the Dominion Government to the Rulers of States subsequent to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Centre for their legislative or executive authority. The Centre and the States are coequal in this matter. It is difficult to see how such a Constitution can be called centralism. It may be that the Constitution assigns to the Centre too large a field for the operation of its legislative and executive authority than is to be found in any other federal Constitution. It may be that the residuary powers are given to the Centre and not to the States. But these features do not form the essence of federalism. The chief mark of federalism as I said lies in the partition of the legislative and executive authority between the Centre and the units by the Constitution. This is the principle embodied in our Constitution. 31. To the same effect was the answer given to the criticism by Shri T.T. Krishnamachari during the Constituent Assembly Debates on the draft Constitution, when he said: Sir, I would like to go into a few fundamental objections because as I said it would not be right for us to leave these criticisms uncontroverted. Let me take up a matter which is perhaps partly theoretical but one which has a validity so far as the average man in this country is concerned. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... feature of a federal Constitution are found in the Indian Constitution which makes it a quasi federal Constitution, if not truly federal in character and in stricto sensu federal. The two decisions which stand out in the long line of pronouncements of this Court on the subject may, at this stage, be briefly mentioned. The first of these cases is the celebrated decisions of this Court in Kesavananda Bharati case ( supra ), wherein a thirteen Judges Bench of this Court, Sikri CJ (as His Lordship then was), being one of them talks about whether the Constitution of India was federal in character and if so whether federal character of the Constitution formed the basic feature of the Constitution. Sikri CJ. summed up the basic feature of the Constitution in the following words: 292. ... ... ...The true position is that every provision of the Constitution can be amended provided in the result the basic foundation and structure of the Constitution remains the same. The basic structure may be said to consist of the following features: (1) Supremacy of the Constitution. (2) Republican and Democratic form of Government. (3) Secular character of the Constitution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat ordinarily the States have independent source of revenue of their own. The legislative entries relating to taxes in List II show that the sources of revenue available to the States are substantial and would increasingly become more substantial. In addition to the exclusive taxing powers of the States, the States become entitled either to appropriate taxes collected by the Union or to a share in the taxes collected by the Union. 99. The above discussion thus shows that the States have an independent constitutional existence and they have as important a role to play in the political, social, educational and cultural life of the people as the Union. They are neither satellites nor agents of the Centre. The fact that during emergency and in certain other eventualities their powers are overridden or invaded by the Centre is not destructive of the essential federal nature of our Constitution. The invasion of power in such circumstances is not a normal feature of the Constitution. They are exceptions and have to be resorted to only occasionally to meet the exigencies of the special situations. The exceptions are not a rule. 100. For our purpose, further it is really not necessar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere can be no quarrel with the proposition that the Indian model is broadly based on federal form of governance. Answering the criticism of the tilt towards the Centre, Shri T.T. Krishnamachari, during debates in the Constituent Assembly on the draft Constitution, had stated as follows: . 36. While parting with this aspect we must also refer to the decision of this Court in Re: Under Article 143, Constitution of India (Special Reference No.1 of 1964) AIR 1965 SC 745 wherein this Court held: 39. In dealing with this question, it is necessary to bear in mind one fundamental feature of a Federal Constitution. In England, Parliament is sovereign; and in the words of Dicey, the three distinguishing features of the principle of Parliamentary Sovereignty are that Parliament has the right to make or unmake any law whatever; that no person or body is recognised by the law of England as having a right to override or set aside the legislation of Parliament, and that the right or power of Parliament extends to every part of the Queen s dominions (1). On the other hand, the essential characteristic of federalism is the distribution of limited executive, legislative and judici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a reference is the Constitution Bench decision in M.P.V. Sunderaramier v. State of Andhra Pradesh, AIR 1958 SC 468 . That was a case filed under Article 32 of the Constitution of India for a Writ of Prohibition restraining the State of Andhra Pradesh from imposing a tax on inter-State trade of sale and purchase of yarn. The levy and collection of any such tax was according to the petitioner contrary to the provision contained in Article 282 (6) of the Constitution of India. One of the questions that fell for consideration of the Court was whether the States could impose a tax on inter-State sales having regard to the provisions of Articles 246 and 301 of the Constitution of India. The argument was that the freedom guaranteed under Article 301 included freedom from taxation with the result that any tax on inter-State sales would offend that guarantee. The contention was rejected by this Court in unequivocal terms. The Court said : (50) This contention suffers, in our opinion, from serious infirmities. It overlooks that our Constitution was not written on a tabula-rasa, that a Federal Constitution had been established under the Government of India Act, 1935, and though that h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emented and which also introduced full provincial autonomy enacted Section 297 prohibiting certain restrictions on internal trade in these terms: 297. (1) No Provincial Legislature or Government shall (a) By virtue of the entry in the Provincial Legislative List relating to trade and commerce within the Province, or the entry in that list relating to the production, supply, and distribution of commodities, have power to pass any law or take any executive action prohibiting or restricting the entry into, or export from the Province of goods of any class or description; or (b) By virtue of anything in this Act have power to impose any tax, cess, toll or due which, as between goods manufactured or produced in the Province and similar goods not so manufactured or produced, discriminates in favour of the former, or which, in the case of goods manufactured or produced outside the Province, discriminates between goods manufactured or produced in one locality and similar goods manufactured or produced in another locality. (2) Any law passed in contravention of this section shall, to the extent of the contravention, be invalid. 10. It will be noticed that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... barriers and therefore had to make transitional provisions with the ultimate objective of abolishing them all. Most of those Native States, big or small, had their own taxes, cesses, tolls and other imposts and duties meant not only for raising revenue, but also as trade barriers and tariff walls. It was in the background of these facts and circumstances that the Constitution by Article 301 provided for the abolition of all those trade barriers and tariff walls. When for the first time in the history of India the entire territory within the geographical boundaries of India, minus what became Pakistan, was knit into one political unit, it was necessary to abolish all those trade barriers and custom posts in the interest of national solidarity, economic and cultural unity as also of freedom of trade, commerce and intercourse. (Emphasis supplied) 40. The majority opinion offered by Gajendragadkar J., also traced the history of Part XIII in the following words: 33. Let us first recall the political and constitutional background of Part XIII. It is a matter of common knowledge that, before the Constitution was adopted, nearly two-thirds of the territory of India was sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the historical background. It is necessary to do this, because extensive references have been made to Australian and American decisions, Australian decisions with regard to the interpretation of Section 92 of the Australian Constitution and American decisions with regard to the Commerce clause of the American Constitution. This Court pointed out in the Atiabari Tea Co. case (1961) 1 SCR 809 : (AIR 1961 SC 232), that it would not be always safe to rely upon the American or Australian decisions in interpreting the provisions of our Constitution. Valuable as those decisions might be in showing how the problem of freedom of trade, commerce and intercourse was dealt with in other federal constitutions, the provisions of our Constitution must be interpreted against the historical background in which our Constitution was made; the background of problems which the Constitution-makers tried to solve according to the genius of the Indian people whom the Constitution-makers represented in the Constituent Assembly. The first thing to be noticed in this connection is that the Constitution-makers were not writing on a clean slate. They had the Government of India Act, 1935 and they also had t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... referred to the backdrop in which the Government of India Act, 1935 was enacted, including the recommendations made by the Butler Committee, the Round Table Conference, the Federal Structure Committee, the Federal Legislature and Provincial Legislature Committee and the Joint Parliamentary Committee to eventually conclude that the avowed object underlying all these recommendations and constitutional framework was to ensure that the accession of the State to the federation implies its acceptance of the principle that it will not set up a barrier to free interchange so formidable as to constitute a threat to the future of the federation. Based on the historical developments decades before the enactment of Government of India Act, 1935, his Lordship concluded: 95. The detailed examination of the history lying at the back of the Government of India Act, 1935 lays bare some fundamental facts and premises. It shows that the process through a whole century was the breakup of a highly centralized Government and the creation of autonomous Provinces with distinct and separate political existence, to be combined inter se and with the Indian States, at a later period, in a federation. To ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a-State; (c) whether to make the prohibition against restrictions absolute or qualified, and if so, in what manner; (d) if qualified, by whom was the restriction to be imposed and to what extent; (e) whether the freedom should be to the individual or also to trade and commerce as a whole; (f) what to do with the existing laws in British India and more so, in the acceding Indian States; (g) whether any special provisions were needed for emergencies; (h) what should be the special provisions to enable the States to levy taxes on sale of goods, which taxes were to be the main source of income for the States according to the experts. All these matters have, in fact, been covered in Part XIII, and the pitfalls which were disclosed in the Law Reports of the Countries which had accepted freedom of trade and commerce have been attempted to be avoided by choosing language appropriate for the purpose. In addition to this, the broad pattern of the political set-up, namely, a federation of autonomous States was not lost sight of. These autonomous conditions had strengthened during the operation of the 1935 Constitution and led to what Prof. Coupland described as Provincial-patriotism , ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e we may do so, we need to remember that Section 297 of the Government of India Act, 1935 dealt with the subject that eventually came under the umbrella of Part XIII and prohibited provincial governments from imposing barriers on trade within the country. The said provision also prohibited levy of cess, tolls or other tax duties which discriminated between the goods manufactured in one locality as against similar goods manufactured elsewhere. It is because of the said provision that Venkatarama Iyer, J. in MPV Sunderaramier s case (supra) made the observation that the Constitution was not written on a tabula rasa. 45. The first germ plasma for Article 301 was located in what was introduced as Clause 13 in the draft submitted by the Sub-Committee on fundamental rights comprising Mr. K.M. Munshi, Sir Alladi Krishnaswami Ayyar and Sir B.N. Rau amongst others. The clause was in the following words: Subject to regulation by the law of the Union, trade, commerce and intercourse among the units, whether by means of internal carriage or by ocean navigation, shall be free: Provided that any unit may by law impose reasonable restrictions thereon in the interest of public ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nted out in para 6 of our report. C. Rajagopalachari: That is why I am adding it. Alladi Krishnaswami Ayyar: Subject to regulation by the law of the Union, trade, commerce, and intercourse among the units by and between the citizens shall be free. That is the general principle. Then come the exceptions, Provided that any unit may by law impose reasonable restrictions in the interest of public order, morality or health or in an emergency. Suppose there is a general famine, and people are starved, that is what is meant here to be dealt with. And then Provided that nothing in this section shall prevent any unit from imposing on goods imported from other units the same duties and taxes to which the goods produced in the unit are subject. That is to say, we ought not to differentiate; but at the same time, goods coming in should not go scot-free; they should be subject to the same duty as goods produced in the area. And then Provided further that no preference shall be given by any regulation of commerce or revenue by a unit to one unit over another. Now, kindly read paragraph 6 of the report, regarding adding a proviso. K.M. Panikkar: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainst the federation idea. Chairman: What shall we do about the note? A proviso will have to be added to meet the difficulty pointed out in para 6 of the report. Shall we leave it as it is or shall we draft it? C. Rajagopalachari: I would request members who have given thought to this subject to please inform me how the units will raise their revenue. As it is, the Union does not contemplate the distribution of subsidies to the provinces. The provinces or groups differ among themselves, some are rich and some are poor. Some are capable of managing with their existing resources; but others may have to increase their revenue for managing their affairs. If you impose so many limitations on them, how can they do that? It is all very well to say free trade is necessary; but how are the provinces to live? Alladi Krishnaswami Ayyar: So far as the provincial legislatures are concerned, there is provision in Sec. 297 of the present Government of India Act itself: (Reads) No Provincial Legislature or Government shall by virtue of entry *** have power to pass any law or take any executive action ***description C. Rajagopalachari: But at present ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e made between one State and another by any law or regulation relating to trade or commerce, whether carried by land, water or air. 244. Notwithstanding anything contained in article 16 or in the last preceding article of this Constitution, it shall be lawful for any State (a) to impose on good imported from other States any tax to which similar goods manufactured or produced in that State are subject, so, however, as not to discriminate between goods so imported and goods so manufactured or produced; and (b) to impose by land such reasonable restrictions on the freedom of trade, commerce or intercourse with that State as may be required in the public interests: Provided that during a period of five years from the commencement of this Constitution the provisions of clause (b) of this article shall not apply to trade or commerce in any of the commodities mentioned in clause (a) of Article 306 of this Constitution. 245. Parliament shall by law appoint such authority as it considers appropriate for the carrying out of the provisions of Articles 243 and 244 of this Constitution and confer on the authority so appointed such powers and such duties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity of goods; Article 274-D vested with the State legislatures the power to impose non-discriminatory tax qua external goods and to impose reasonable restrictions in public interest and Article 274-E provided for an Inter-State Commission. 55. The Constituent Assembly Debates suggests that the introduction of Articles 274A to 274E was severely criticized by several members of the Assembly including Thakur Das Bhargava and Dr. P.S. Deshmukh who moved several amendments to these clauses but the same were rejected and Articles 274-A to 274-E including Articles 274 DD and 274 DDD were adopted without any modification. These Articles are now renumbered and appear as Articles 301 to 307 of the Constitution of India. 56. It is in the above backdrop that question No.1shall have to be answered which turns on a true and correct interpretation of Article 301 of the Constitution. We must at the threshold say that while attempting to answer the question we are not on virgin ground, for this Court has in Atiabari Tea Company case ( supra) examined the matter at great length. The decision of this Court in Automobile case (supra) has modified the view in Atiabari, by bringing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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. 51. Thus the intrinsic evidence furnished by some of the Articles of Part XIII shows that taxing laws are not excluded from the operation of Article 301; which means that tax laws can and do amount to restrictions freedom from which is guaranteed to trade under the said Part. Does that mean that all tax laws attract the provisions of Part XIII whether their impact on trade or its movement is direct 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otally unaffected by Article 301 of the Constitution of India. Free trade, commerce and intercourse was not, according to the learned counsel, to be understood as free from any restrictions, leave alone free from taxes which the State legislatures were otherwise competent to levy. Enunciation of law by Sinha, CJ. was according to the learned Attorney General for India and learned Counsel appearing for the States, the correct view which ought to be accepted in preference to the other two contrary views propounded in the judgment. Reliance, in particular, was placed by Mr. Rohatgi and learned Counsel for the respondent-States upon the following passages appearing in Sinha, CJ. s judgment: 14. Viewed in this all comprehensive sense taxation on trade, commerce and intercourse would have many ramifications and would cover almost the entire field of public taxation, both in the Union and in the State Lists. It is almost impossible to think that the makers of the Constitution intended to make trade, commerce and intercourse free from taxation in that comprehensive sense. If that were so, all laws of taxation relating to sale and purchase of goods on carriage of goods and commodit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxation simpliciter is not within the terms of Article 301 of the Constitution is that the very connotation of taxation is the power of the State to raise money for public purposes by compelling the payment by persons, both natural and juristic, of monies earned or possessed by them, by virtue of the facilities and protection afforded by the State. Such burdens or imposts, either direct or indirect, are in the ultimate analysis meant as a contribution by the citizens or persons residing in the State or dealing with the citizens of the State, for the support of the Government, with particular reference to their respective abilities to make such contributions. Thus public purpose is implicit in every taxation, as such. Therefore, when Part XIII of the Constitution speaks of imposition of reasonable restrictions in public interest, it could not have intended to include taxation within the generic term reasonable restrictions . This Court has laid it down in the case of Ramjilal v. Income Tax Officer, Mohindargarh(1951 SCR 127 at page 136) (AIR 1951 SC 97 at page 100), that imposition and collection of taxes by authority of law envisaged by Article 265 is outside the scope of the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill have to satisfy the courts - a course which will seriously affect the division of powers on which modern constitutions, including ours, are based. (5) Taxation on movement of goods and passengers is not necessarily an impediment. 17. That conclusion leads to a discussion of the other extreme position that taxation is wholly out of the purview of Article 301. That extreme position is equally untenable in view of the fact that Article 304 contains, and Article 306, before it was repealed in 1956, contained, reference to taxation for certain purposes mentioned in those Articles. But Article 306, which now stands repealed, contained references to tax or duty on the import of goods into one State from another or on the exports of goods from one State to another. Such imposts were really in the nature of impediments to the free flow of goods and commodities on account of customs barriers, which it was the intention of Article 301 to abolish. Similarly, Article 304 while recognising the power of a State Legislature to tax goods imported inter-State, insists that a similar tax is imposed on goods manufactured or produced within the State. The Article thus brings out the clear dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (supra) by declaring that taxes that were compensatory in nature fell outside Part XIII and could never be treated as restrictions offensive to Article 301 of the Constitution. S.K. Das, J. speaking for the majority explained the concept of compensatory taxes falling outside Part XIII in the following words: 10 As the language employed in Article 301 runs unqualified the Court, bearing in mind the fact that that provision has to be applied in the working of an orderly society, has necessarily to add certain qualifications subject to which alone that freedom may be exercised. This point has been very lucidly discussed in the dissenting opinion which Fullagar, J. wrote in McCarter v. Brodie (1950) 80 CLR 432 an opinion which was substantially approved by the Privy Council in Hughes and Vale Proprietary Ld. v. State of New South Wales 1955 AC 241 . The learned Judge gave several examples to show the distinction between what was merely permitted regulation and what was true interference with freedom of trade and commerce. He pointed out that in the matter of motor vehicles most countries have legislation which requires the motor vehicle to be registered and a fee to be paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and commerce is not a restriction, and that which in reality hampers or burdens trade and commerce is a restriction. It is the reality or substance of the matter that has to be determined. It is not possible a priori to draw a dividing line between that which would really be a charge for a facility provided and that which would really be a deterrent to a trade; but the distinction, if it has to be drawn, is real and clear. For the tax to become a prohibited tax it has to be a direct tax the effect of which is to hinder the movement part of trade. So long as a tax remains compensatory or regulatory it cannot operate as a hindrance. xxx xxx xxx 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 in an earlier part of this judgment. Such regulatory measures as do not impede the fre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e unity of India. Just as unity cannot be allowed to be frittered away by insular action the existence of separate States is not to be sacrificed by a fusion beyond what the Constitution envisages. No doubt. Part XIII ensures economic unity to India and combines the federating States into the larger State called India. The Constitution also permits independent powers of taxation. What the Constitution does not permit is that trade, commerce and intercourse should be rendered unfree . Trade and commerce remain free even when general taxes are paid by tradesmen in common with non-tradesmen. The question whether a tax offends Part XIII can only arise when it seeks to tax trade, commerce and intercourse. Support for the contrary proposition is not to be found in 1936 AC 578 James v. Commonwealth . The Privy Council in James v. Commonwealth did not lay down: Every step in the series of operations which constitutes particular transaction is an act of trade, and control under the State law of any of these steps must be an interference with ifs freedom as trade (p.629) This passage represents the view held in McArthur s case 1920 (28) CLR 530. That case was disapproved at p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , and therefore do not need to be processed under Article 304. Such regulations are designed to give equal opportunity to everyone, subject to a certain standard. The object being a public object, such regulations cannot be questioned unless they amount to restrictions. A tax, however, which is made the condition precedent of the right to enter upon and carry on business at all is a very different matter. It is a restriction on the right to carry on trade and commerce, and the restriction is released on the payment of the tax, which is the price of such release. It is from this point of view that the impugned provisions in this case must be examined. 61. Subbarao J. as His Lordship then was, agreed with the majority view but added the following passage to the same: 37. The next question is, what is the content of the concept of freedom? The word freedom is not capable of precise definition, but it can be stated what would infringe or detract from the said freedom. Before a particular law can be said to infringe the said freedom, it must be ascertained whether the impugned provision operates as a restriction impeding the free movement of trade or only as a regulation fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... odifications and adjustments. Of all the doctrines evolved, in my view, the doctrine of direct and immediate effect on the freedom would be a reasonable solvent to the difficult situation that might arise under our Constitution. If a law, whatever may have been its source, directly and immediately affects the free movement of trade, it would be restriction on the said freedom. But a law which may have only indirect and remote repercussions on the said freedom cannot be considered to be a restriction on it. Taking the illustration from taxation law, a law may impose a tax on the movement of goods or persons by a motor-vehicle; it directly operates as a restriction on the free movement of trade, except when it is compensatory or regulatory. On the other hand, a law may tax a vehicle as property, or the garage wherein the vehicle used for conveyance is kept. The said law may have indirect repercussion on the movement, but the said law is not one directly imposing restrictions on the free movement. In this context, two difficulties may have to be faced: firstly, though a law purporting to impose a tax on a property or a motor-vehicle, as the case may be, may in fact and in reality im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tate under Article 304(b), subject to the conditions mentioned therein. And (7) the State can impose a non-discriminatory tax on goods imported from other States or the Union territory to which similar goods manufactured or produced in that State are subject. 62. The net effect of the decision in Automobile c ase (supra) is that taxes, if the same are compensatory in character, do not offend the guarantee of free trade, commerce and intercourse under Article 301 of the Constitution. The further question whether the compensatory character of a tax has to be determined by reference to the direct and substantial benefits/ facilities provided by the State to the tax payer was examined and answered in the affirmative in Jindal Stainless Steel case (supra), where this Court while overruling the decisions in Bhagatram and Bihar Chamber of Commerce cases (supra) declared that it is not just a remote benefit to the tax payer but only a direct and substantial benefit that would justify levy of compensatory taxes without offending Article 301 of the Constitution of India. Speaking for the Court, Kapadia, J. observed: 49. The concept of compensatory taxes was prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Bihar Chamber of Commerce is, in our opinion, not good law. Accordingly, the constitutional validity of various local enactments which are the subject-matters of pending appeals, special leave petitions and writ petitions will now be listed for being disposed of in the light of this judgment. 63. The legal position that today holds the field in light of the above is that compensatory taxes would fall outside Part XIII of the Constitution only if tax payers receive benefits and facilities commensurate to the levy. Any and every benefit howsoever remote or distant, would not save the levy from an attack on the ground of violation of Article 301. Having said that we must mention to the credit of the learned counsel for the dealers/assessees that except a feeble attempt made by Mr.A.K. Ganguly, learned counsel appearing for Sony India Pvt. Ltd. and Mr. Bagaria, learned counsel appearing for Steel Authority of India Limited (SAIL) the rest of the counsel fairly accepted that there was no constitutional or juristic basis for the Compensatory Tax Theory propounded by the majority judgment in Automobile Transport case (supra). Mr. Salve, who led the team of lawyers appearing fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operty levied by authority of the state for the support of government and for all public needs. xxx xxx xxx xxx xxx xxx xxx xxx Taxes are public burdens, of which every individual may be compelled to bear his part, and that in proportion to the extent of protection he receives or the amount of property held by him, as the will of the Legislature may direct. The power of taxation is said to be an incident of sovereignty, and co-extensive with that of which it is incident. Blackwell on Tax Titles as cited in Tata Iron Steel Co. Ltd. v. State of Bihar, AIR 1991 Patna 75, 81 has the following to say about taxes: Taxes are defined to be burdens or charges imposed by the legislative power upon persons or property to raise money for public purposes. Black s Law Dictionary, 7th Edn., P. 1469 d efines tax as under: A monetary charge imposed by government on persons, entities or property to yield public revenue, If taxes are eventually meant to serve larger public good and for running the governmental machinery and providing to the people the facilities essential for civilized living, there is no question of a tax being non-compensato ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeing with that submission, the arguments of M/s. Ganguly and Bagaria to the contrary notwithstanding. 66. With the Compensatory Tax Theory no longer found acceptable, we are left with only two competing view points, one expressed by Gajendragadkar, J. and the other by B.P. Sinha, CJ. Which one is the correct view is the critical question that falls for our determination having regard to the Constitutional scheme and the language employed in Articles 301 to 307 to which we must now turn for a closer look. Article 301 is as under: 301. Freedom of trade, commerce and intercourse.- Subject to the other provisions of this Part, trade, commerce and intercourse throughout the territory of India shall be free A plain reading of the above would show that freedom of trade, commerce and intercourse is by no means absolute, the same being subject to the other provisions of Part XIII of the Constitution. Amongst those provisions are Articles 302, 303 and 304 which have a direct bearing on the nature and the extent of restrictions subject to which only is the right to freedom of trade, commerce and intercourse referred to in Article 301 exercisable. Article 302 reads thus: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause (2) of Article 303 (supra) it is manifest that the restriction on the power vested in Parliament in terms of Clause (1) of Article 303 shall not extend to Parliament making any law with a view to giving or authorising the giving of, 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 out of scarcity. A conjoint reading of Clauses (1) and (2) of Article 303 would thus make it clear that while Parliament/ Legislature of a State shall have no power to make a law imposing restriction on trade, commerce and intercourse, by giving or authorizing the giving of any preference to one State over the other, such limitation on the legislative power of Parliament shall not extend to giving of any preference or making or authorizing any discrimination if it is declared by law that a situation has arisen out of scarcity of goods that makes it necessary to do so. In other words, while the Parliament may impose restrictions in public interest under Article 302, the restriction so imposed shall not be in the nature of giving preference or discrimination betwee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y law impose is certainly not a restriction on the power to tax. That does not, however, mean that the power to tax goods imported from other States or Union Territories is unqualified or unrestricted. There are, in our opinion, two restrictions on that power. The words to which similar goods manufactured or produced in that State are subject impose the first restriction on the power of the State legislature to levy any such tax. These words would imply that a tax on import of goods from other States will be justified only if similar goods manufactured or produced in the State are also taxed. The second restriction comes from the expression so, however, as not to discriminate between goods so imported and goods so manufactured or produced . The State legislature cannot in the matter of levying taxes discriminate between goods imported from other States and those manufactured or produced within the State levying such a tax. The net effect of Article 304 (a) therefore is that while levy of taxes on goods imported from others State and Union territories is clearly recognised as Constitutionally permissible, the exercise of such power is subject to the two restrictive conditions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds. The use of the word and between clauses (a) and (b) does not admit of an interpretation that may impose an obligation upon the legislature to necessarily impose a tax and a restriction together. The law may simply impose a tax without any restriction reasonable or otherwise or it may simply impose a reasonable restriction in public interest without imposing any tax whatsoever. It may also levy a tax and impose such reasonable restriction as may be considered necessary in public interest. All the three situations are fully covered and permissible under Article 304 in view of the phraseology used therein. The word and can mean or as well as and depending upon the context in which the law enacted by the legislature uses the same. Suffice it to say that levy of taxes do not constitute a restriction under Part XIII except in cases where the same are discriminatory in nature. Once Article 304 (a) is understood in that fashion, Clause (b) dealing with reasonable restrictions must necessarily apply to restrictions other than those by way of taxes. It follows that for levy of taxes prior Presidential sanction in terms of the proviso under Article 304(b) will be wholly unnecessar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e more acceptable. That is so because it is only when both the text and the context are kept in view that the statutory provisions can be best understood. An interpretation that makes the textual match the contextual meaning of the provision is preferred by Courts over one that prefers one at the cost of the other. 74. In Reserve Bank of India v. Peerless General Finance and Investment Co. Ltd. ( 1987) 1 SCC 424 this Court pithily summed up the law on the subject in the following words: 33. Interpretation must depend on the text and the context. They are the basis of interpretation. One may well say if the text is the texture, context is what gives the colour. Neither can be ignored. Both are important. The interpretation is best which makes the textual interpretation match the contextual 75. We may also refer to the following passage of Constitutional Law of India (4th Edition) by H.M. Seervai where the distinguished author has adverted to the golden rule of interpretation applicable to Constitutional provisions in the following words: 2.12. The golden rule of interpretation is that words should be read in their ordinary, natural and grammatical mean ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid provisions and Section 297 of the 1935 Act was that the principles enunciated in the latter were extended to the Union Government and the Union Parliament and to the territory which had after merger become a part of India. Notably, the essence of the freedom of trade commerce and intercourse as recognized in the 1935 Act and in the Constitution under Part XIII remained the same. It was for that reason that Justice Venkatarama Iyer had in M.P.V. Sunderaramier s case (Supra) observed and if we may say so rightly that the Constitution of India was not written on a tabula rasa. The common feature which the two provisions share is that the provincial legislature s power to impose taxes is recognized subject only to the limitation that there is no discrimination between goods manufactured or produced within the Province or State vis-a-vis those imported from outside. In Atiabari s case (supra), the majority speaking through Gajendragadkar, J. noticed the co-relation between Section 297 of 1935 Act, and Article 301 of the Constitution of India but concluded that Article 301 did not simply adopt Section 297 of the 1935 Act but widened and enriched the same in content. The Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he State s power to levy taxes on the import of goods from other States except the one referred to in Article 304(a) of the Constitution. That limitation we have sufficiently explained is confined to levy of discriminatory taxes within the comprehension of Article 304(a). So long as taxes are non-discriminatory and, therefore, consistent with Article 304(a), there is no limitation leave alone any express limitation on the States legislative power to levy any tax on the import of goods from another State. The power to levy a tax in terms of Articles 245 and 246 read with Entry 52 of list II not being in dispute in the cases at hand, the absence of any specific limitation forbidding the exercise of such power whether for the sake of free trade, commerce and intercourse or otherwise simply means that the State legislatures are free to levy taxes that are non-discriminatory in nature. 81. That brings us to the third contextual feature relevant to the interpretation of Part XIII. We have in the earlier part of this judgment referred to the decisions of this Court in Kuldip Nayyar s case and S.R. Bommai s case apart from the decisions of this Court in Special Reference No. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erwise, and that even in USA the Centre has become far more powerful notwithstanding the obvious bias in that Constitution in favour of the States. All this must put the court on guard against any conscious whittling down of the powers of the States. Let it be said that the federalism in the Indian Constitution is not a matter of administrative convenience, but one of principle - the outcome of our own historical process and a recognition of the ground realities. This aspect has been dealt with elaborately by Shri M.C. Setalvad in his Tagore Law Lectures Union and State relations under the Indian Constitution (Eastern Law House, Calcutta, 1974). The nature of the Indian federation with reference to its historical background, the distribution of legislative powers, financial and administrative relations, powers of taxation, provisions relating to trade, commerce and industry, have all been dealt with analytically. It is not possible nor is it necessary for the present purposes to refer to them. It is enough to note that our Constitution has certainly a bias towards Centre vis-a-vis the States: Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan. It is equally necessary to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n within the meaning of that Article, it would totally dislocate the scheme under our Constitution. The celebrated author, in our opinion, was right in saying so for the taxing power of the Union and the States are mutually exclusive. While the Parliament cannot legislate on the subjects reserved for the States, the States cannot similarly trespass onto the taxing powers of the Union. If the Constitutional scheme does not allow the Parliament to usurp the taxing powers of the State Legislatures, such process of usurpation cannot also be permitted to take place in the garb of making Union executive s concurrence an essential pre-requisite for any taxing legislation. The following passage from Seervai s book (Vol. 3, Page 2607) is in this regard instructive: 23.43. Thirdly , the whole scheme of taxation in our Constitution would be completely dislocated if Article 304(b) included a tax. The taxing powers of the Union and the States have been made mutually exclusive so that Parliament cannot deprive the States of their taxing powers as has happened in countries where the powers of taxation are concurrent. It would be surprising if the Union legislature, i.e. Parliament could n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ramers of the Constitution to start Article 304 with a non-obstante clause inasmuch as a non-obstante clause is meant to be only an exception to the generality of the provision. Similar contentions urged in the past have been noticed by this Court and by jurists alike while attempting interpretation of Part XIII. This is evident from the passages which have dealt with the anomaly arising out of the use of the expression subject to in Article 301 and the non-obstante clause in Article 304 of the Constitution. This Court has often found the use of the non-obstante clause in Article 304 to be either confusing or an unnecessary surplusage. But the problem with the use of non-obstante clauses in Part XIII has been the subject matter of criticism even in the Constituent Assembly as is evident from the following passages from the debates: Constitution Assembly Debates (Vol. IX Page 1131): Dr. P S Deshmukh: If we analyse the new articles that have been proposed, it is very difficult to understand them and I think the comment is absolutely justified that this is going to be a lawyers' constitution, a paradise for lawyers where there will be so many innumer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hraseology which is more easily understandable and simpler. xxx xxx xxx xxx I hope therefore that the whole chapter will be made simpler. Instead of tying the hands of both the States as well as of Parliament, it would be far better not to commit ourselves to any policy, but to leave the whole thing to Parliament. Otherwise, the situation which has arisen already in respect of article 16 may arise in respect of article 274 itself. It is, therefore, better to have simpler provisions and I have given them the simplest form. I hope that this will appeal to the drafters of the Constitution and if they accept it, I can tell them that they will be out of much of the trouble. But if they insist upon the draft that they have produced, it will be very difficult for trade and commerce not only to prosper but even to exist. 88. In Automobile Transport case (supra), S K Das, J. speaking for the majority noticed the anomaly arising out of the use of the non-obstante clause in Article 304 and described the same to be somewhat inappropriate . The majority judgment in Automobile Transport case (supra) in fact took the view that the mix up of exception upon exception in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be somewhat anomalous and described the same as inaccurate drafting of the Constitution . 91. Suffice it to say that the use of the non-obstante clause in Article 304 has had its share of criticism from the very inception which criticism has to an extent been prophetic for the interpretation of Part XIII has indeed been a lawyer s paradise over the past fifty years or so. Seervai has in his treatise adverted to this anomaly arising from the use of the non-obstante clause and said that the same covers both the clauses (a) and (b) of Article 304. He argues with considerable forensic force that reference to Article 301 in the non-obstante clause is meaningless having regard to the fact that the freedom granted thereunder is itself subject to other provisions of Part XIII including Article 304. This would necessarily imply that Article 304 (a) and (b) do not subtract anything from Article 301. That appears to us to be the correct view on the subject. While it is true that legislature does not waste words and that no part of a legislation can be rendered a surplusage, the only rational meaning that can be attributed to the non-obstante clause appearing in Article 304 is that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jilal s case (supra), a petition under Article 32 of the Constitution was filed before this Court by the petitioner who was carrying on business in the State of Nabha. With the merger of Nabha into the State of Pepsu, the petitioner was required by the assessing authority to file return and pay income tax for the income earned by him during the previous years. Aggrieved, the petitioner challenged the proceedings inter alia on the ground that the assessment of tax for previous year violated his right guaranteed under Article 14. This Court repelled the contention founded on Article 14 holding that there was reasonable classification of assessee under the relevant statute and that the petitioner s challenge to the proceedings under Article 14 was untenable. Having said that, the Court examined the question whether the taxing statute violated Right to Property guaranteed under Article 31 (1) of the Constitution. Repelling the contention this Court held that if collection of taxes amounted to deprivation of property within the meaning of Article 31 (1), there was no point in making a separate provision regarding the same as is made in Article 265. This Court declared that Article 31(1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ok note of the pronouncements of this Court in the three cases mentioned above to examine whether there was any conflict between the view taken in Moopil Nair case on the one hand and Ramjilal and Laxmanappa cases on the other, the Court found on a closer examination that there was no such conflict and clarified that the observation made in Ramjilal and Laxmanappa cases must in the context bear reference to abrogation of Article 31 (1) only in so far as the admissibility of a challenge to taxation law with reference to Part III is concerned. The Court explained that in Moopil Nair s case this Court has held that a taxing statute was not immune from challenge under Article 14 just because the legislature that imposed the tax was competent to levy the tax in terms of Article 265. This Court summed up the legal position in the following words: The result of the authorities may thus be summed up: (1) A tax will be valid only if it is authorized by a law enacted by a competent legislature. That is Article 265. (2) A law which is authorized as aforesaid must further be not repugnant to any of the provisions of the Constitution. Thus, a law which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Australian and American decisions. It was urged that although the view taken by the majority decision in the former had recognized that decisions from other jurisdictions may not be helpful while interpreting the provisions of our Constitution, yet the Court had referred to and relied upon those decisions to buttress its conclusions. The Australian decisions relied upon by the majority have, it was contended, been reversed by subsequent pronouncements of the Australian High Court, which pronouncements are now gravitating towards the theory that discriminatory taxes alone will operate as restrictions against free trade, commerce and intercourse. It was in that view argued that the theoretical basis borrowed from the foreign judgments by this Court in Atiabari case stood demolished or atleast substantially eroded by the subsequent pronouncements of the Australian High Courts, thereby, rendering the correctness of the view taken by the majority in Atiabari s case open to serious doubts. 98. There is, in our view, considerable merit in that submission. In Atiabari s case (supra), Gajendragadkar J., speaking for the majority while referring to the American and Austral ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that spirit that we propose to refer to two Privy Council decisions which dealt with the construction of Section 92 of the Australian Constitution. 100. The Court, then, relied upon the decisions of the Australian High Court in James v. Commonwealth of Australia (1936) A.C. 578 and Commonwealth of Australia and others v. Bank of New South Wales and others [1950] A.C. 235 to hold that the test of direct and immediate effect evolved by the Australian High Court pronouncements, while interpreting Section 92 of the Australian Constitution, was the correct test applicable even to our Constitution including interpretation of Article 301 thereof. The Court said: Commonwealth of Australia v. Bank of New South Wales 61. In deciding the said question one of the tests which was applied by Lord Porter was: Does the act not remotely or incidentally (as to which they will say something later) but directly restrict the inter-State business of banking , and he concluded that two general propositions may be accepted, (1) that regulation of trade, commerce and intercourse among the States is compatible with its absolute freedom, and (2) that Section 92 is violate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterpreted to be forbidding only discriminatory burdens it would have the effect of denying the freedom of trade, commerce and intercourse. The Court said: .. ..Plainly, however, the construction which treats Section 92 as being concerned to guarantee the freedom of inter-State trade and commerce from discriminatory burdens does not involve the consequence that the grant of legislative power with respect to inter-State trade and commerce is deprived of its essential content. 103. The Court noticed the evolution of the law on the subject and held that it is only discriminatory burdens that are forbidden by Section 92 and that the question whether a burden is indeed discriminatory is a question of fact and degree to be answered upon judicial interpretation and impressions. The following passage is, in this regard, instructive. Departing now from the doctrine which has failed to retain general acceptance, we adopt the interpretation which, as we have shown, is favoured by history and context. In doing so, we must say something about the resolution of cases in which no impermissible purpose appears on the face of the impugned law, but its effect is discriminatory in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iately affects free trade, commerce and intercourse would violate Section 92 has been evidently abandoned by the Australian jurists. It follows that whatever support may have been available from the earlier decisions for the view taken in Atiabari (supra) and Automobile (supra) cases as to the true test applicable for interpreting Part XIII, has, if we may use that expression, fizzled out with the passage of time. 106. We may, at this stage, deal with yet another contention urged on behalf of the dealers in support of their case that taxes were, in the scheme of Part XIII, treated as restrictions. It was argued that the presence of Article 306 of the Constitution which now stands repealed by Constitution 7th Amendment Act, 1956 was itself suggestive of the fact that taxes were intended to be restrictions on free trade, commerce and intercourse, for otherwise, there was no reason why a provision like Article 306 should have been incorporated by the framers of the Constitution. Article 306, as it stood, before its deletion, was in the following terms: Article 306. Power of certain States in Part B of the First Schedule to impose restrictions on trade and commerce. - N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n when such taxes and levies were discriminatory vis-a-vis goods produced/manufactured from outside the State, the discriminatory duties and levies were in larger interest of stability of revenue of the concerned States permitted, but, conditionally for a limited period. The marginal note of Article 306, therefore, rightly mentions such levies and duties to be restrictions on trade, commerce and intercourse. The reason for such description being the discriminatory nature of such taxes and levies. Seen in the historical perspective, it is futile to argue that Article 306 lends any assistance for determining whether taxes act as restrictions on free trade, commerce and intercourse. Seervai has correctly summed-up the true import of Article 306 in the following passage from his treatise (supra): 24.42. Again, Article 306 enabled the former Native States, which became Part B States, to continue to levy any tax or duty on the import of goods into such States from other States and to impose a duty on the export of goods out of such States for a limited period of time. The reason for enacting this provision is simple. First, Part B States claimed to be sovereign States vis- -vis Br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dgment based on our textual understanding of the provisions of Part XIII which is matched by the contextual interpretation. That being so the mere fact that a tax casts a heavy burden is no reason for holding that it is a restriction on the freedom of trade and commerce. Any such excessive tax burden may be open to challenge under Part III of the Constitution but the extent of burden would not by itself justify the levy being struck down as a restriction contrary to Article 301 of the Constitution. 110. Secondly because, levy of taxes is both an attribute of sovereignty and an unavoidable necessity. No responsible government can do without levying and collecting taxes for it is only through taxes that governments are run and objectives of general public good achieved. The conceptual or juristic basis underlying the need for taxation has not, therefore, been disputed by learned counsel for the dealers and, in our opinion, rightly so. That taxation is essential for fulfilling the needs of the government is even otherwise well-settled. A reference to A Treatise on the Constitutional Limitations (8th Edn. 1927 Vol. II Page 986) by Thomas M Cooley brings home the point with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces would operate against the levy of an unduly high rate of tax. The rate of tax on sales of a commodity may not ordinarily be based on arbitrary considerations, but in the light of the facility of trade in a particular commodity, the market conditions internal and external and the likelihood of consumers not being scared away by the price which includes a high rate of tax. Attention must also be directed sub-Section (5) of Section 8 which authorizes the State Government, notwithstanding anything contained in Section 8, in the public interest to waive tax or impose tax on sales at a lower rate on inter-State trade or commerce. It is clear that the legislature has contemplated that elasticity of rates consistent with economic forces is clearly intended to be maintained. 113. Also apposite is the following passage from the said decision where this Court held that free flow of trade does not necessarily depend upon the rate of taxes but upon a variety of factors which the Court identified in the following words: 14. The flow of trade does not necessarily depend upon the rates of sales tax: it depends upon a variety of factors, such as the source of supply, place of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd may be permissible in the manner and to the extent the said Part permits to do so, but, in the second case, viz. legislature imposing a high tariff wall so as to operate as an impediment to free flow of trade, commerce and intercourse, there are considerable difficulties. That is so because the judgment does not elaborate as to what would constitute a high tariff wall for the tax to operate as a restriction/impediment. 116. Counsel for the parties were, in the course of arguments, repeatedly asked whether any objective standards and norms can be evolved to determine the height and the width of the wall referred to in the passage extracted above. They were, however, unable to suggest any such norms. They fairly conceded that it was difficult if not impossible to evolve any such norm applicable to myraid situations that would arise before the courts. This implies that the tariff wall theory actually breaks down and is not amenable to judicially manageable dimensions. What may sound a high tariff wall or a fiscal barrier to one may not be so to the other. What may constitute a fiscal wall or barrier for one category of traders may not be so for other categories. So also, the tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rstly because entries relating to Trade and commerce by themselves are not sufficient to empower the legislature to levy taxes. The constitutional scheme is such that a taxing entry is distinct from other entries and a levy of tax is possible only if there is an entry which authorizes the competent legislature to levy the same. This distinction has for long been maintained by judicial pronouncements of this Court. We may in this regard refer to M.P.V. Sunderaramier s case (supra) where this Court has declared: 51. In List I, Entries 1 to 81 mention the several matters over which Parliament has authority to legislate. Entries 82 to 92 enumerate the taxes which could be imposed by a law of Parliament. An examination of these two groups of Entries shows that while the main subject of legislation figures in the first group, a tax in relation thereto is separately mentioned in the second. Thus, Entry 22 in List I is Railways , and Entry 89 is Terminal taxes on goods or passengers, carried by railway, sea or air; taxes on railway fares and freights . If Entry 22 is to be construed as involving taxes to be imposed, then Entry 89 would be superfluous. Entry 41 mentions Trade an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an exception to Article 302, inasmuch as it limits the power conceded to the Parliament under Article 302 to impose restrictions on freedom of Trade, commerce and intercourse in public interest. The power exercised by Article 302 cannot be so exercised as to give preference to one state over another except under a situation covered by Article 303(2) namely situation arising from scarcity of goods in any part of the territory of India. We cannot add to this Article any artificially extended meaning the ingenuity of the bar in coining any such interpretation notwithstanding. 120. Relying upon the decision in Mudaliar s case (supra) it was argued on behalf of the assessee that this Court has upheld the constitutional validity of the Central State Tax Act on the ground that such a tax was in public interest within the contemplation of Article 302 of the Constitution of India, hence, validly leviable. This, according to the learned counsel, implied that the tax was recognised as a restriction which could be levied only if found to be in public interest as stipulated in Article 302. We have no difficulty in rejecting that contention. In Mudaliar s case, this Court was bound b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. The Constituent Assembly Debates show that framers of the Constitution were concerned with the removal of such barriers. Discrimination intra-State in terms of levy of taxes was never considered to be a challenge for presumably the Constituent Assembly never considered the same to be a real possibility necessitating a specific provision prohibiting levy of discriminatory intra-State taxes. 122. On behalf of the assessees-dealers, it was next argued that levy of entry tax on import of goods from outside the local area in the State will be per se discriminatory if goods so imported or similar are not produced or manufactured within the State. That is, argued the learned counsel, because the levy will fall unequally thereby violating the guarantee against discrimination contained in Article 304(a). We have no difficulty in rejecting that submission as well. The reason is obvious. Article 304(a), in our opinion, strikes at discriminatory taxation implying thereby that the levy falls unequally as between goods produced or manufactured within the State and those being imported from outside. The essence of the guarantee in Article 304(a) lies in the same or similar goods being tre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x and restrictions are synonymous within the contemplation of part XIII. 124. The Central Sales Tax Act, 1956 was enacted pursuant to the Sixth Amendment Act, 1956 whereby taxes on sale and purchase of goods in the course of inter-state trade and commerce were expressly brought within the purview of the legislative competence of Parliament. This included the power to impose restrictions upon the power of the State legislature insofar as levy of taxes of sale or purchase of goods of special importance is concerned. Entry 92-A added by the Sixth Amendment Act 1956 empowered the Parliament to levy taxes on the sale and purchase of the goods other than newspapers in the course of trade and commerce. Entry 54 of the State List by the same amendment was redrawn to make the taxes on the sale and purchase of goods subject to Entry 92-A of List I. The two entries read as under: 92-A. Taxes on the sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter-State trade or commerce. 54. Taxes on the sale or purchase of goods other than newspapers, subject to the provisions of Entry 92-A of List-I. 125. The States power it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aryana and ors. (2006) 7 SCC 241 shall also stand overruled. 127. Re. Question No.2 In view of our answer to Question No.1, Question No.2 does not arise for consideration. 128. Re. Question No.3 In the light of what we have said in Question Nos. 1 and 2, this question also does not survive for consideration. 129. Re. Question No.4 This question touching the constitutional validity of the impugned State enactments can be split into two parts. The first part which can be briefly dealt with at the outset is whether the constitutional validity of the impugned legislations has to be tested by reference to both Articles 304(a) and 304(b) as contended by learned counsel for the assessees or only by reference to Article 304(a) as argued by the States. In the light of what we have said while dealing with question No.1 we have no hesitation in holding that Article 304(b) does not deal with taxes as restrictions. At the risk of repetition, we may say that restrictions referred to in Article 304(b) are non-fiscal in nature. Constitutional validity of any taxing statute has, therefore, to be tested only on the anvil of Article 304(a) and if the law is found to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other industries including manufacturers of goods in adjoining States was in the range of 8%. This exemption was questioned by manufacturers of edible oils from other States on the ground that the same was discriminatory and violative of Articles 301 and 304 of the Constitution. 131. This Court held that the exemption given to manufacturers of edible oil was total and unconditional, while producers of edible oil from industries in adjoining states had to pay sales tax @ 8%. Grant of exemption to local oil producing units thereby put the former at a disadvantage. Having said that, the Court exercised its powers under Article 142 of the Constitution and struck down the exemption by moulding the reliefs to suit the exigencies of the situation. The Court no doubt noticed a three-Judge Bench decision in Video Electronics vs. State of Punjab (1990) 3 SCC 87 in which notifications issued by the States of U.P and Punjab providing for exemptions to new units established in certain areas for a prescribed period of 3 to 7 years were assailed as discriminatory. The challenge to the exemption was in that case also based on the alleged violation of Articles 301 and 304. This Court howe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Article 16(2), and it means, according to the Oxford Dictionary, to make an adverse distinction with regard to; to distinguish unfavourably from others . Discrimination thus involves an element of unfavourable bias and it is in that sense that the expression has to be understood in this context. If such bias is disclosed and is based on any of the grounds mentioned in Articles 15 and 16, it may well be that the statute will, without more, incur condemnation as violating a specific constitutional prohibition unless it is saved by one or other of the provisos to those articles. But the position under Article 14 is different. Equal protection claims under that article are examined with the presumption that the State action is reasonable and justified. This presumption of constitutionality stems from the wide power of classifi-cation which the legislature must, of necessity, possess in making laws operating differently as regards different groups of persons in order to give effect to its policies .. .. 133. Fazl Ali J. in his concurring judgment explained the concept in the following words: 19. I think that a distinction should be drawn between discrimination without ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he opportunity or the legal entitlement to promote industries within their respective territories by granting incentives and exemptions necessary for such growth and development. The argument that power to grant exemption cannot be used by the State even in case where such exemptions are manifestly intended to promote industrial growth or promoting industrial activity has not appealed to us. The power to grant exemption is a part of the sovereign power to levy taxes which cannot be taken away from the States that are otherwise competent to impose taxes and duties. The conceptual foundation on which such exemptions and incentives have been held permissible and upheld by this Court in Video s case is, in our opinion, juristically sound and legally unexceptionable. Video Electronics, therefore, correctly states the legal position as regards the approach to be adopted by the Courts while examining the validity of levies. So long as the differentiation made by the States is not intended to create an unfavourable bias and so long as the differentiation is intended to benefit a distinct class of industries and the life of the benefit is limited in terms of period, the benefit must be he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entry tax adjustment/credit of the amount paid towards VAT/ Sales tax has the effect of reducing the entry tax liability proportionately. It is argued that so long as similar credit/adjustment/setoff is made admissible to goods coming from another state there is no question of any discrimination qua them. The rate of tax paid on such goods in the state from where they are brought including the Central Sales Tax, if any payable on the same may be equal to the entry tax payable under the relevant statute in which case such outside goods also enjoy the same advantage as goods manufactured in the taxing state, dispelling any misconceived impression about any discrimination qua such goods. 137. The legal position as to the approach that courts adopt towards fiscal measures while examining their constitutional validity is fairly well settled by a long line of decisions of this Court. The law on the subject is so well settled that it calls for no elaborate discussion of the same. Courts have almost universally accepted the principle that keeping in view the inherent complexities of fiscal adjustments and the diverse elements and inputs that go into such exercise a greater latitude is d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ough due to some fortuitous circumstance arising out of a peculiar situation some included in a class get an advantage over others, so long as they are not singled out for special treatment. Taxation law is not an exception to this doctrine vide Purshottam Govindji v. B.M. Desai, and Kunnathat Thathuni Moopil Nair v. State of Kerala. But in the application of the principles, the courts, in view of the inherent complexity of fiscal adjustment of diverse elements, permit a larger discretion to the legislature in the matter of classification, so long it adheres to the fundamental principles underlying the said doctrine. The power of the legislature to classify is of wide range and flexibiliy so that it can adjust its system of taxation in all proper and reasonable ways. 139. In V. Guruviah Naidu and Sons and ors. v. State of Tamil Nadu and ors , (1977) 1 SCC 234 the Court was examining whether levy of sales tax on hides and skins from within or outside the State was discriminatory and offensive to Article 304(a) of the Constitution. Repelling the contention that it was violative of Article 304(a), this Court held: 8. None of the circumstances which led this Court to st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct is that in case of raw hides and skins which are purchased locally in the State, the levy of tax would be at the rate of 3 per cent at the point of last purchase in the State. When those locally purchased raw hides and skins are tanned and are sold locally as dressed hides and skins, no levy would be made on such sales as those hides and skins have already been subjected to local tax at the rate of 3 per cent when they were purchased in raw form. As against that, in the case of hides and skins which have been imported from other States in raw form and are thereafter tanned and then sold inside the State as dressed hides and skins, the levy of the tax is at the rate of 11/2 per cent at the point of first sale in the State of the dressed hides and skins. This levy cannot be considered to be discriminatory as it takes into account the higher price of dressed hides and skins compared to the price of raw hides and skins. It also further takes note of the fact that no tax under the State Act has been paid in respect of those hides and skins. The legislature, it seems, calculated the price of hides and skins in dressed condition to be double the price of such hides and skins in raw sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manifestly discriminatory the court should refrain from striking it down on the ground of discrimination. These are some of the broad principles laid down by this Court in several of its decisions and it is unnecessary to burden this judgment with citations. Applying these principles it is seen that stage carriages which travel on an average about 260 kilometres every day on a specified route or routes with an almost assured quantum of traffic which invariably is overcrowded belong to a class distinct and separate from public carriers which carry goods on undefined routes. Moreover the public carriers may not be operating every day in the State. There are also other economic considerations which distinguish stage carriages and public carriers from each other. The amount of wear and tear caused to the roads by any class of motor vehicles may not always be a determining factor in classifying motor vehicles for purposes of taxation. The reasons given by this Court in G.K. Krishnan case for upholding the classification made between stage carriages and contract carriages both of which are engaged in carrying passengers are not relevant to the case of a classification made between stage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e would be no transaction and no occasion for the levy of a tax. The levy of a tax is a distinct event from the transaction. Trade and commerce must take place to attract a tax. Undoubtedly a tax may make the transaction less profitable to the extent of the tax. But that is far from being an impediment on the transaction which is part of trade, the freedom which is guaranteed under Article 301. It is not possible to readily conceive of a tax, which in itself, restricts or impedes the freedom of trade. The circumstances are much like the freedom of movement of an individual by a bus and the charge of a bus ticket for such movement. It can hardly be contended that the charge of a bus ticket impedes the freedom of movement. 3. The other related contentions have been adequately dealt with by the Judgment of the Chief Justice and I fully subscribe to the same. I would also agree in this regard with the view of Sinha, CJ, in Atiabari that a tax is not a restriction. Sinha, CJ, observed that .if a law is passed by the Legislature imposing a tax which in its true nature and effect is meant to impose an impediment to the free flow of trade, commerce and intercourse, for example, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1) - Parliament cannot impose restrictions under Article 302 and make a discriminatory law under any entry relating to trade and commerce; the other is Article 304 (a) which (unlike Section 297 of the erstwhile Government of India Act, 1935 which prohibited - through a negative mandate, discriminatory treatment) empowers State Legislatures to impose non-discriminatory taxes on goods. Thus, Article 304 (a) differentiates between discriminatory and non-discriminatory taxes. The premise underlying this provision is the paramount aim of Part XIII to establish and foster economic unity of the country. Non-discrimination, or parity of treatment is therefore at the core of its purpose, which Shri T.T Krishnamachari stressed, in his speech in the Constituent Assembly. He said that restrictions by the State have to be prevented so that the particular idiosyncrasy of some people in power or narrow provincial policies of certain States should not be allowed to come into play and affect the general economy of the country. [Constituent Assembly Debates, 1139 (1949)]. 6. The Article, therefore, recognizes the power of a Legislature to a State to impose the tax on the imported goods so, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n be imposed is the existence of not mere taxes on goods produced or manufactured locally, or the theoretical possibility of taxation, to avoid the prohibition under Article 304 (a), but the actual production or manufacture of similar goods, that are subject to like or similar tax. Absent this condition, the levy would fall foul of Article 304 (a) since it would constitute an additional burden (the goods already having suffered some form of taxation in the producing state). This interpretation, in my opinion would also further economic progress and the unhindered availability of goods in states which do not have manufacturing capacities and may not be able to develop it, having regard to lack of natural resources or other geographical limitations. It also furthers the aims underlying Article 301 of the Constitution of India. Conclusion 9. I answer Question No.1 in the negative and I agree with the conclusions drawn by the Chief Justice. I would also answer Question Nos. 2, 3 and 4 in agreement with the Chief Justice. JUDGMENT Shiva Kirti Singh, J. 1. Since I am in respectful agreement with the judgment by T.S. Thakur, CJI, I do not propose to go into whole ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... satory tax and regular tax. On the other hand, the States comprising the Indian Union are clearly unhappy with the law settled in Atiabari s case as well as in Automobile Transport case which permits them to impose taxes affecting freedom of trade and commerce but on the condition that it is actually by way of a fee, justified by some sort of quid pro quo . 6. In the above factual background the heavy burden that has befallen on this nine Judges Bench is to interpret Articles 301 to 304 comprising Part XIII of the Indian Constitution in a manner which is justified both by the text as well as the historical context and also effects the desired balance between the need of the country to have free movement of trade and commerce on one hand and the sovereign taxing powers of the States given to them by the Constitution on the other. Limitation on such power must be explicit in the Constitution. For safeguarding freedom of trade and commerce, such limitation is to be found only in Article 304(a) of Part XIII of the Constitution. 7. Answering the question No. 1 in the negative or in other words declaring that levy of a non-discriminatory tax per-se does not violate Article 301 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra 4.1 - 4.2 Part-V : Constitutional Interpretation Para 5.1 - 5.9 Part-VI : Introduction to taxation and its importance Para 6.1 6.2 Part-VII : Freedom of trade, commerce and intercourse Para 7.1 7.41 Part-VIII : Article 304 of the Constitution Para 8.1 8.26 Part-IX : Conclusions Para 9.1 - 9.2 PART - I : INTRODUCTION 1.1. I have had the privilege of going through the draft judgments prepared by the learned Chief Justice T.S. Thakur and my brother/sister judges. I am broadly in agreement with the conclusion of the learned Chief Justice on most of the issues. The erudite draft judgment of learned Chief Justice would in the usual course may not have warranted another concurring judgment. But when a Bench of nine judges of this Court has been assembled to consider the seminal issues that have been bothering the nation for about fifty years and such issues have been debated in the Court over a period of four weeks, many aspects having a bearing, canvassed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... below the referral order formulated as many as twelve (12) questions. Nonetheless on very first day with the consent of the learned counsels, we reframed these questions as under- 1. Can levy of a non-discriminatory tax per se constitute infraction of Article 301 of the Constitution of India? 2. If the answer to Question No.1 is in the affirmative, can a tax which is compensatory in nature also fall foul of Article 301 of the Constitution of India? 3. What are the tests for determining whether the tax or levy is compensatory in nature? 4. Is the entry tax levied by the states in the present batch of cases is violative of Article 301 of the Constitution and in particular have the impugned State enactments relating to entry tax to be tested with reference to Articles 304(a) and 304(b) of the Constitution for determining their validity? PART II : CASE HISTORY 2.1 Let me take up the first case in the batch of appeals (Civil Appeal No. 3453 of 2002 (Jindal Stainless Steel Ltd. v. State of Haryana). On May 5, 2000, the State of Haryana issued the Haryana Local Area Development Tax Ordinance, 2000 (Ordinance No. 10 of 2000). The Ordinance was later replaced by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in this Appeal. The High Court in Indian Oil Corporation v. State of Haryana(2009) 21 V.S.T 10 (P H), declared that the provisions of the Haryana Tax on Entry of Goods into Local Areas Act, 2008 to be unconstitutional and void. The Punjab and Haryana High Court invalidated the Haryana Act, the matters again came to this Court in a connected matter being Jaiprakash Associates 2009 (7) S.C.C 339 (A two judge bench) referred ten questions to the constitutional bench. Questions are- 1.Whether the State enactments relating to levy of Entry Tax have to be tested with reference to both Clauses (a) and (b) of Article 304 of the Constitution for determining their validity and whether Clause (a) of Article 304 is conjunctive with or separate from Clause (b) of Article 304? 2.Whether imposition of Entry Tax levied in terms of Entry 52 List II of 7th Schedule is violative of Article 301 of the Constitution? If the answer is in the affirmative whether such levy can be protected if Entry Tax is compensatory in character and if the answer to the aforesaid question is in the affirmative what are the yardsticks to be applied to determine the compensatory character of the Entry Tax. 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Tax? 2.2 One of the questions is whether State enactment relating to levy of entry tax has to be tested with reference to both Articles 304 (a) and 304(b). When the matter was placed before the constitutional bench along with Jindal (3) 2010 (4) S.C.C 595, the constitutional bench was confronted with the arguments by the State that the tests propounded by the Atiabari and Automobile failed to strike a balance between freedom of trade and commerce under Article 301 and taxing power of the State under Article 246 r/w relevant legislative entries to the Constitution of India. The constitutional bench, found merit to refer to suitable larger bench for reconsideration of Atiabari and Automobile . For doing so support was drawn from Keshav Mills A.I.R 1965 S.C 1636, GK Krishnan , Dawoodi Bora 2005 (2) S.C.C 673. That s how the matter is before us. 2.3 Entry tax is levied by the State of Haryana under the provisions of Haryana tax on Entry of Goods into Local Areas Act, 2008. Section 3 of the Act contains the charging the provision which states that the tax is levied for the purpose of development of trade, commerce and industry and for creation and maintenanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her he supported the concept of compensatory tax which has stood the test of time. 3.3 Mr. T.R. Andhyarujina, learned senior counsel argues as follows- That there is no requirement of reference to a larger bench as there is no public mischief being caused by the prior Judgment. In alternative he submits that the compensatory taxes levied by the States would in a large measure negative the freedom of trade and commerce guaranteed by Article 301 because there is no proof that the State will utilize the tax for the improvement of trade facilities etc. Even assuming a State in the Act that the tax collected will be used for that particular purpose. A declaration to that effect would only mean a clever device to refute the abridgment of free trade. Hence, it is his submission that where a State claims to have imposed a compensatory tax, it should not be permitted to impose a tax without complying with the requirement of Article 304(b). Otherwise according to him all taxes would be outside the purview of the freedom of trade by mere assertion as is done by 22 States that the tax is compensatory. 3.4 Mr. Arvind P. Datar contends- That Concept of compensatory t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature and has sufficient remedies to cover excessive taxation and other burdens. Moreover, Hon ble C.J Sinha s View in Atiabari has not required any reconsideration and the same should be followed even by this court. He submits that any test under article 301 will have to draw a line as to when taxes become Trade barriers. Such examination by Courts is not warranted. Part XIII has its origin in section 297 of Government of India Act 1935. It is to be noticed that earlier Article 301 was present as Article 16 under Part III of Constitution which was subsequently taken out. The source of Power to tax is present both under Article 245 as well as Article 246. We should not separate Article 246 and read taxing power only under 246. He argues that our Constitution is organic and flexible document which was considerate about providing level playing field to various States. He lastly argues that Video Electronic Case should be upheld. ARGUMENTS OF RESPONDENTS (STATES/AUTHORITIES) 3.7 Mr. P. P. Rao, learned senior counsel contends- that scope of Entry 52 of the State List cannot be reduced. Discrimination only arises if goods are available. If no tax c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Kamath, learned Additional Advocate General for the State of Karnataka, Mr. S. S. Shamshery, learned Additional Advocate General for the State of Rajasthan, have either adopted the submissions made by the above named advocates or provided alternative reasons for the conclusions reached by the abovementioned advocates. PART - IV : NEED FOR REVIEW 4.1 The learned counsel for the dealers/assesses argued for rejection of the reference itself. Shri T.R. Andhyarujina and Shri A.K. Ganguli, Learned Senior Counsel submitted that the doctrine of direct and immediate effect as well as compensatory tax which furnish a workable test vis-a-vis validity of a tax law in the context of inter-State trade are sound. Therefore, there is no need to review the decisions in Atiabari and Automobile . They would urge that these two decisions have been followed by this Court in half a dozen judgments and by various High Courts, and therefore, the ratio therein acquired the status of stare decisis . According to them, in the absence of any compelling changes in the Constitution or the law, the reference may not be necessary. They would point out that after the decision in Automobile , every S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rave need for settling the issue which caused grave mischief to the general-public at large. These numbers speak of restraint in over-ruling its own decisions. When Atiabari was decided, States sovereign power to levy tax within its permissible Constitutional competence stood curtailed. Probably, for this reason, two years after the decision in Atiabari came the decision in Automobile on the premise that the ruling in Atiabari was insufficient. Indeed, Automobile added new dimension to the tax by introducing the doctrine of compensatory tax which is very conspicuous in the Constitutional scheme by its absence. The judicial innovation of compensatory tax was seemingly to unfetter the State s power to some extent the levy of taxes on entry of goods. There is no gainsaying that Part XIII nowhere, much less Article 301 either expressly or impliedly contemplate compensatory tax. The workable test of compensatory tax to comply with the Constitutional principle was doubted within a decade of the decision in G.K. Krishnan (1974), followed by the decisions in Bhagat Ram and Bihar Chamber of Commerce . From 1960 to 1996, there remained uncertainty with regard to the power of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ution is not to be construed in any narrow and pedantic sense.... A broad and liberal spirit should inspire those whose duty it is to interpret it; but I do not imply by this that they are free to stretch or pervert the language of the enactment in the interests of any legal or constitutional theory, or even for the purpose of supplying omissions or of correcting supposed errors. 5.3 Equally important point is that legislative powers especially taxing powers cannot be tested by implication. Unless there is express limitation on the power of the State to enact the State law, it is not the province of the court to curtail the power of the state by interpretative process. We have reached a stage that every law must be tested with reference to preamble and Directive Principles of State Policy. As held in Atam Prakash v. State of Haryana [ herein after Atam Prakash ] (1986) 2 S.C.C 249, if preamble is the guiding light Directive Principles of State Policy is the book of interpretation, this was lucidly explained in Atam Prakash . The Preamble embodies and expresses the hopes and aspirations of the people. The Directive Principles set out proximate goals. When we go about t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th and development of all regions of India. India that is Bharath is said to be a Country with economic unity. But such assertion cannot be sustained for the reason that 82.5˚ Meridian or Indian Standard Time line seems to starkly divide India broadly as affluent West and destitute East. Top 5 states share 44.87% of India's total economy. NITI A ayog (last visited on 15.10.2016): http://niti.gov.in/state-statistics. Relevant table is http://niti.gov.in/content/gsdp-constant-2004-05prices-2004-05-2014-15Five states of South India share 25.98%. Ibid. Eight States of North-East India share only 2.64% of economy. Ibid. 13 States/UTs have Gross State Domestic Product less than ₹ 1 lakh Crore. Ibid. While the growth in 2013-14 in Maharashtra was pegged at 8.71% while Rajasthan recorded mere 4.6% growth at 2004-2005 prices. NitiAayog, GSDP and at constant prices, percent growth available at table (las t visited on 15.10.2016): http://niti.gov.in/content/gsdp-constant2004-05prices-percent-growth-2004- 05-2014-15 As per Tendulkar formulation Bihar has 54.4% population below poverty line while Jammu Kashmir has only 13.2%. Tendulkar committee report. The table is available at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te are parallel. The Parliament as a super-legislature over State assemblies cannot be accepted. On legislative front, demarcation of power is apparent from the language of Article 246 read with VII Schedule of the Constitution. People have vested the power in States to administer and provide welfare measures. For this process it is the State Government which has been elected by the people to administer by taking into consideration priorities and peculiarities of that particular region. 5.7 This Constitutional principle should not be ignored while imposing restrictions on the State. While feeling happy that we are one nation, we must not ignore the State rights. The facts and realities cannot be forgotten in the first place. The Union does not exist in isolation rather it is a co-operative association of the States. Taking into consideration of various problems faced and differences which exists between the States, importance of State s power to tax cannot be ignored or stifled. Poverty, unemployment, backwardness and adverse climate etc. are running amok within our Country. Natural calamities, insurgencies and extremism are confronted by certain States. Over-growth and indust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... center and the States not by any law to be made by the center but the Constitution itself.This is what the Constitution does. The States, under our Constitution, are in no way dependent upon the center for their legislative or executive authority. The center and the States are CO-EQUAL in this matter.It is difficult to see how such a Constitution can be called centralism . It may be that the Constitution assigns to the center too large a field for the operation of its legislative and executive authority than is to be found in any other Federal Constitution. It may be that the residuary powers are given to the center and not to the States. But these features do not form the essence of federalism. The chief mark of federalism, as I said lies in the partition of the legislative and executive authority between the centre and the Units by the Constitution. This is the principle embodied in our Constitution. ( Emphasis Supplied ) before the Constituent Assembly. Common philosophy which runs through our Constitution is that both Center and States have been vested with the substantial powers which are necessary to preserve our unique federation with clear demarcation of power. Calling Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Constitution cannot be damaged or destroyed. And, as to what are the basic structures of the Constitution, illustrations were given by each of these Judges. They include supremacy of the Constitution, democratic, republican form of Government, secular character of the Constitution, separation of powers among the legislature, executive and judiciary, the federal character of the Constitution, Rule of Law, equality of status and of opportunity; justice, social, economic and political; unity and integrity of the nation and the dignity of the individual secured by the various provisions of the Constitution. In (iii) S.R. Bommai , this Court while determining the constitutional validity of emergency proclamations issued by the Centre in various States observed that federalism, as understood by the American Scholars is absent in Indian Constitution which is more of a hybrid of pure federalist character and pure unitary character. However, the distribution of powers must not be rubbished out as being absent. It was observed by Ahmadi J . that in order to maintain the unity and integrity of the nation our founding fathers appear to have leaned in favour of a strong Centre while distribut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tilized for interpreting every part of the Constitution. and 2. In a federal Constitution, an interpretation which preserves the State s power should be preferred. PART-VI :INTRODUCTION TO TAXATION AND ITS IMPORTANCE 6.1 The States in the modern era are not strictly confined to political activities and law making functions. They function in a welfare society. Such working of States was visualized by our framers also, who were aware of responsibilities a State must shoulder and discharge. This is the very reason for existence of Directive Principles of State Policy and which sets normative and positive standards for the Government. When the State is burdened with such normative goals as its primary responsibility, such activities are inevitably dependent on availability of monitory resources. The definition of Sovereignty has acquired a new flavor in the recent past, Sovereignty is responsibility . In a democratic system the elected Governments are always responsible for its people. If there is any high taxation which is affecting their life, this puts pressure on the Governments to reduce taxes and elected Governments are answerable to public every five years. No Gove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith respect to any matter enumerated in the Concurrent List (List III of schedule VII). As per Article 265, no taxes shall be levied or collected except by the authority of law. It is important to note that taxation entries are to be found only in lists I and II, indicating that in our Constitutional scheme, taxation powers of the Centre and the States are mutually exclusive. There are no Entries in the Concurrent List which gives power of taxation. This being the case, the moment the levy contained in a taxing statute transgresses into a prohibited field, it is liable to be struck down. PART-VII :FREEDOM OF TRADE, COMMERCE AND INTERCOURSE 7.1 To consider the question as to whether the tax laws come under the ambit of Article 301 vis-a-vis freedom of trade, commerce and intercourse, it is necessary to refer to the constitutional provisions, Constituent Assembly Debates and precedents. To begin with, I will first consider the relevant Articles, by extracting Part XIII verbatim. PART XIII TRADE, COMMERCE AND INTERCOURSE WITHIN THE TERRITORY OF INDIA 301.Freedom of trade, commerce and intercourse.- Subject to the other provisions of this Part, trade, commerc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as it relates to, or prevent Parliament or the Legislature of a State from making any law relating to, any such matter as is referred to in sub-clause (ii) of clause (6) of article 19. 306.[Power of certain States in Part B of the First Schedule to impose restrictions on trade and commerce.] Repealed Article 306- Notwithstanding anything in the foregoing provisions of this Part or in any other provisions of this Constitution, any State specified in Part B of the First Schedule which before the commencement of this Constitution was levying any tax or duty on the import of goods into the State from other States or on the export of goods from the State to other States may, if an agreement in that behalf has been entered into between the Government of India and the Government of that State, continue to levy and collect such tax or duty subject to the terms of such agreement and for such period not exceeding ten years from the commencement of this Constitution as may be specified in the agreement : Provided that the President may at any time after the expiration of five years from such commencement terminate or modify any such agreement if, after consideration of the report of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Part XIII have to be read together so as to understand the width and meaning of the Part XIII. Subject to is the dominant expression so far as Article 301 is concerned. It indicates subservience to at least Articles 302, 303 and 304. Articles 302 to 304 embody a restatement of powers under Article 246 r/w the State List under the VII Schedule. Each restated power by itself overrides the freedom of trade in Article 301. 7.6 Article 301 loses its prime place, if States make laws under any of the taxing entries, erecting reasonable restrictions or imposing tax on the free trade. Such power over-rides freedom of trade and commerce. Thus, the general declaration by Article 301 is relaxed in favor of Parliament by Article 302 and in favor of the States by Articles 303 and 304. It is interesting to note that Article 304 starts with a non-obstante clause whereas Article 302 does not have a non-obstante clause. As the freedom of trade in Article 301 is itself subject to 302 and 304, the intention of the framers, to my mind, appears to be clear. The Constitution guards and protects the State legislations under Article 304(a) and (b) from overemphasized effect on freedom of trade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of unions of small States or individual princely States. They erected, more often than not, trade barriers and customs posts even amongst themselves. It was in this background, India for the first time, was constituted as one political unit. Hence, it was necessary to abolish all those trade barriers and custom posts in the interest of national solidarity, economic and cultural unity as also of freedom of trade. 7.10 One of the early tasks to engage the attention of the Constituent Assembly in 1947 was freedom of trade and commerce within territories of the Union. It is important to note that in the Draft Constitution, the freedom of trade, commerce and intercourse which was a part of fundamental right, was dropped as such. Basic principles were formulated in the notes submitted to the sub-committee on Fundamental Rights by Dr. K.M. Munshi B. Shiva Rao, The Framing of India s Constitution, Vol.II, p. 69 (1967). [ hereinafter B. Shiva Rao ] Extract from the Note and draft Articles on Fundamental Rights by Dr. K. M. Munshi, dt. March 17, 1947 Article V- (1) Every Citizen within the limits of the law of the Union and in accordance therewith has : (i)The right of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in principle with this clause we recommend that instead of being included in Fundamental Rights, it should find a place in some other part of the Constitution. 7.13 Taking into consideration above deliberations and decisions of the Assembly, Sir B.N. Rau incorporated the following clause in his draft Constitution of October, 1947 under Part III-Fundamental Rights including Directive Principles of State Policy B. Shiva Rao, p. 701:- 17 . Provided that nothing in this section shall prevent any unit from imposing on goods manufactured or produced in that unit are subject, so, however, as not to discriminate between goods so imported and goods so manufactured or produced : Provided further that no preference shall be given by any regulation of trade, commerce or revenue to one unit over another : Provided also that nothing in this section shall preclude the Federal Parliament from imposing by Act restrictions on the freedom of trade, commerce and intercourse among the units in the interests of public order, morality or health or in cases of emergency. Freedom of trade, commerce and intercourse among the units. [Cf. Common wealth of Australia C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the course of discussion that a large number of members of the House were not in a position to understand the implications of articles 243, 244 and 245, because these articles were dissociated from article 16. In order, therefore, to give the House a complete picture of all the provisions. relating to freedom of trade and commerce the Drafting Committee felt that it was much better to assemble all these different articles scattered in the different parts of the Draft Constitution into one single part and to set them out seriatim, so that at one glance it would be possible to know what are the provisions with regard to the freedom of trade and commerce throughout India . I should also like, to say that according to the provisions contained in this part it is not the intention to make trade and commerce absolutely free, that is to say, deprive both Parliament as well as the States of any power to depart from the fundamental provision that trade and commerce shall be free throughout India. Constituent Assembly Debate, Vol. IX, 8th September 1949 ( Emphasis Supplied ) 7.17 From the above legislative history and Constituent Assembly Debates, four propositions would emer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or free trade clause in such a manner that the (federal units) were completely barred to levy any taxes on inter-state trade and commerce, Fortunately off late, in these jurisdictions, the law has been diluted to enable the federal units to regulate inter-state trade and commerce even by imposing levies. This would be clear by brief reference to the case law governing inter-state trade in Australia, Canada and the United States of America. COMMONWEALTH OF AUSTRALIA 7.21 Section 92 of the Australian Constitution declares that on the imposition of uniform duties of customs, trade, commerce and intercourse among the States, whether by means of internal carriage or ocean navigation, shall be absolutely free. In Cole v Whitfield [ Herein after Cole ] (1988) 165 C.L.R 360, and later in CastlemaineTooheys Ltd v South Australia (1990) 169 C.L.R 436 and, most recently, in Betfair Pty Ltd v Western Australia (2008) 234 C.L.R 418, the Court observed that Section 92 of the Australian Constitution only meant that Australia was free from those measures which were discriminatory and protectionist burdens. Cole insisted that Section 92 proscribes both direct and indirect pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... served that the powers remaining with the States may be so exercised as to come in conflict with those vested in Congress. When this happens, that which is not supreme must yield to that which is supreme . 7.25 The Supreme Court in Freeman v. Hewitt 329 U.S. 249 (1946), put a bar on the States to tax such activities which directly affected inter-state commerce as federal government was the sole authority to regulate these matters. Following extract may be relevant- The Commerce Clause was not. merely an authorization to Congress to enact laws for the protection and encouragement of commerce among the States, but by its own force created an area of trade free from interference by the States. In short, the Commerce Clause even without implementing legislation by Congress is a limitation upon the power of the States.... This limitation on State power ... does not merely forbid a State to single out interstate commerce for hostile action. A State is also precluded from taking any action which may fairly be deemed to have the effect of impeding the free flow of trade between States. It is immaterial that local commerce is subjected to a similar encumbrance . 7.26 In 1977 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e (1921) Gold Seal Ltd. V. Alberta AG, (1921) 62 S.C.R 424, In this Case the Supreme Court of Canada speaking through Duff J. observed that: The capacity of the Parliament of Canada to enact the amendment of 1919 is denied. With this I do not agree. And, first, I am unable to accept the contention founded upon Section 121 of the B.N.A. Act; the phraseology adopted, when the context is considered in which this section is found, shews, I think, that the real object of the clause is to prohibit the establishment of customs duties affecting interprovincial trade in the products of any province of the Union. Ibid. at 456 Similarly, Mignault J. stated: I think that, like the enactment I have just quoted, the object of section 121 was not to decree that all articles of the growth, produce or manufacture of any of the provinces should be admitted into the others, but merely to secure that they should be admitted free, that is to say without any tax or duty imposed as a condition of their admission. The essential word here is free and what is prohibited is the levying of custom duties or other charges of a like nature in matters of interprovincial trade. Ibid. at 470 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rticles of Part XIII; this position appears to us to be inescapable. 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.... 51 . certainly includes movement of free 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commerce not only in goods and commodities, but also transportation of men and animals by all means of transportation. Commerce would thus include dealings over the telegraph, telephone or wireless and every kind of contract relating to sale, purchase, exchange etc. of goods and commodities. 15. Viewed in this, all comprehensive sense, taxation on trade, commerce and intercourse would have many ramifications and would cover almost the entire field of public taxation, both in the Union and in the State Lists. It is almost impossible to think that the makers of the Constitution intended to make trade, commerce and intercourse free from taxation in that comprehensive sense. If that were so, all laws of taxation relating to sale and purchase of goods on carriage of goods and commodities, men and animals, from one place to another, both inter-State and intra-State, would come within the purview of Art. 301 and the proviso to Art. 304(b) would make it necessary that all bills or Amendments or pre-existing laws shall have to go thereof the gamut prescribed by that proviso. That will be putting too great an impediment to the power of taxation vested in the States and reduce the States&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of trading facilities are not hit by the freedom declared by Article 301. They are excluded from the purview of the provisions of Part XIII of the Constitution for the simple reason that they do not hamper trade, commerce and intercourse but rather facilitate them . 7.34 Justice K. Subba Rao (as his lordship then was) in a separate opinion concurred with the majority and summarized the following principles that are to be applied while testing a law under challenge as violating Article 301 of the Constitution (1) Article 301 declares a right of free movement of trade without any obstructions by way of barriers, inter-State or intra-State, or other impediments operating as such barriers. (2) The said freedom is not impeded, but, on the other hand, promoted, by Regulations creating conditions for the free movement of trade, such as, police Regulations, provision for services, maintenance of roads, provision for aerodromes, wharfs etc., with or without compensation. (3) Parliament, may by law, impose restrictions on such freedom in the public interest; and the said law can be made by virtue of any entry with respect whereof Parliament has power to make a law.(4) The State also, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed under Article 304(b) can be made to have retrospective effect. 7.36 In Jindal (2) , the law was summarized by the Constitutional Bench as under: Article 301 is binding upon the Union Legislature and the State Legislatures, but Parliament can get rid of the limitation imposed by Article 301 by enacting a law under Article 302. Similarly, a law made by the State Legislature in compliance with the conditions imposed by Article 304 shall not be hit by Article 301. Article 301 thus provides for freedom of inter-State as well as intra-State trade and commerce subject to other provisions of Part XIII and correspondingly it imposes a general limitation on the legislative powers, which is relaxed under the following circumstances: (a) Limitation is relaxed in favour of Parliament under Article 302, in which case Parliament can impose restrictions in public interest. Although the fetter is limited enabling Parliament to impose by law restrictions on the freedom of trade in public interest under Article 302, nonetheless, it is clarified in Clause (1) of Article 303 that notwithstanding anything contained in Article 302, Parliament is not authorised even in public interest, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in these appeals levy tax on entry of goods from one State to other. The taxable event is the entry into local area in another State. As defined in Concise Oxford Dictionary the verb enter means to come or go into and entry as a noun is act of coming or going . Concise Oxford Dictionary, p. 474 (10th Ed.) There is a palpable difference between the entry of goods and sale of goods. Many enactments levying tax on sale define the sale as transfer of property from one person to another in course of business for cash or deferred payment. When goods enter the State it may be for consumption, use or sale. The factum of entry and sale may not happen at the same time and, therefore, entry of goods is one thing and consumption, use or sale is another thing. Therefore, the mere fact that the goods are intended for sale is no significance to the taxable event in law on the entry of goods. 7.38 In Hansa Corp . 1980 (4) S.C.C 463, the Constitutional validity of Karnataka Tax on Entry of Goods into Local Areas for Consumption, Use or Sale Therein Act, 1979 was challenged before this Court. This Court upheld the validity of the Act and pointed out that the formulation in Atiabari and Au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut in the schedule, the entry of which in a local area would provide the taxing event. The goods selected for levy are textiles, tobacco and sugar. Way back in 1957 there was a demand for abolition of sales tax on the scheduled goods and at the instance of the Union Government the State Governments agreed to forego their right to levy sales tax on the aforementioned scheduled goods on the condition that the Union Government would levy additional excise duty on them and distribute the net proceeds of such duty amongst the consenting States. Parliament accordingly has enacted the Additional Duties on Goods (Goods of Special Importance) Act, 1957. Therefore, while raising rates of sales tax and levying surcharge in respect of some other items the State Government could not have levied sales tax on the scheduled goods. They were, therefore, selected for the levy of the tax under the impugned Act on their entry into a local area . XXX On a conspectus of these decisions it appears well settled that if a tax is compensatory in character it would be immune from the challenge under Article 301. If on the other hand the tax is not shown to be compensatory in character it would be nece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt XIII deals with Trade, Commerce and Intercourse within the territory of India. Thus, these two Parts are kept distinctly separate. Though every law is made subject to all provisions of the Constitution, it does not mean that every tax law made by the State must be made answerable to the general provisions relating to trade, commerce and intercourse. The provisions of the Constitution, the Constituent Assembly Debates and the precedents, lead us to such a conclusion. The reasons for this conclusion are summarized as below- First , Taxation is an incident of sovereignty, which cannot be curtailed by any implied limitations. Maharaj Umeg Singh v. State of Bombay, A.I.R 1955 S.C 540 Secondly , It is part of any sovereign government to ensure a welfare State. To achieve the same, tax is the only course available to the government to generate revenue for purposes of welfare activities. Courts, therefore, cannot abridge the taxing power of the sovereign State. Thirdly , the very conception of Part XIII was only to prevent discriminatory taxes under Article 304(a). Fourthly , argument of inconvenience cannot affect the interpretation of Article 301 to bring in new test ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment as taxes are lifeline of the Governments. Ninthly , Article 301 of the Indian Constitution uses the term free . The word free means which is not confined or restricted . Either the trade is free or not free . To state that trade, commerce and intercourse throughout the territory in India is free and then qualify this Article 301 with subsequent Articles under 302, 303 and 304 only portrays that Article 301 is merely clarificatory in nature. If trade was, indeed, free then majority of Articles in the Constitution would have been redundant. From the history, context and interpretation it is clear that Article 301 is just a form to be understood subject to other provisions of Part XIII. If no other motive for its insertion can be suggested, a sufficient one is found in the desire to remove all doubts i.e., the wordings of Article 301 is beyond any doubt a clarificatory provision and the extent of freedom is limited to those discriminatory taxes, restrictions (other than taxation simpliciter) and prohibitions provided explicitly under Articles 302, 303 and 304. 7.41 In Atiabari and Automobile this Court relied on a non-obstante clause in Article 304 to hold tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xes etc. and prohibited discrimination against goods manufactured or produced outside a Province or goods produced in different localities. 8.3 The Sub Committee on Fundamental Rights comprising of Shri. K. M. Munshi, Sir Alladi Krishnaswami Iyer and Sir. B. N. Rau on March, 29 1947 introduced Clause 13 in the following form:- Subject to regulation by the law of the Union, trade, commerce and intercourse among the units, whether by means of internal carriage or by Ocean Navigation, shall be free: Provided that any unit may by law impose reasonable restrictions thereon in the interest of public order, morality or health. B. Shiva Rao, Framing of India s Constitution, A Study (2nd Ed.), p. 699 to 707 (Emphasis supplied) 8.4 The proviso herein above empowered the Unit to impose by law, reasonable restrictions in the interest of the public order, morality or health. Sir B. N. Rau in his comments to the aforesaid draft discussed by the Sub Committee stated that the first paragraph of Clause 13 is adopted from the Australian Constitution (Sec. 92) while the proviso was new . Further, Sir Alladi Krishnaswami Iyer in his comments on Draft Report of 10th, 14th 15t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in any emergency: Provided that nothing in this section shall prevent any unit from imposing on goods imported from other units the same duties and taxes to which the goods produced in the unit are subject: Provided further that no preference shall be given by any regulation of commerce or revenue by a unit to one unit over the another . Ibid., P. 297 8.8 On 01.05.1947 certain amendments were suggested which were adopted by the Constituent Assembly. Clause 10, as amended, reads as follows: 10. Subject to regulation by the law of the Union, trade, commerce, and intercourse among the units by and between the citizens shall be free: Provided that any unit may by law impose reasonable restrictions in the interest of public order, morality or health or in any emergency: Provided that nothing in this section shall prevent any unit from imposing on goods imported from other units the same duties and taxes to which the goods produced in the unit are subject: Provided further that no preference shall be given by any regulation of commerce or revenue by a unit to one unit over another. 8.9 In the first Draft Constitution of October, 1947, Clause 17 reads as follows: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er than in Part III dealing with fundamental rights. 192-G (1) there shall be an Inter-State Commerce Commission consisting of such members as the president may think fit to appoint for the execution and maintenance within the territory of India of the provisions of this Constitution relating to Trade and Commerce. (2) The term of the office of the members of the commission, and the remuneration to be paid to them shall be such as the President may by Order determine. (3) The procedure of the commission shall be defined by the President by the Order and the Commission shall have such powers including the power of adjudication as the President may, from time to time, by Order, confer on it. (4) It shall be the duty of the Commission to decide any dispute relating to Trade or Commerce between the States referred to it by the President for adjudication and the decision of the Commission shall be final and shall not be questioned in any Court . On 29.01.1948, the said clause was further revised and the revised clause reads as follows: *192-E. No preference shall be given to nor shall any discrimination be made between one state or any part thereof and another State o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during a period of five years from the commencement of this Constitution the provisions of Clause (b) of this Article shall not apply to trade or commerce in any of the Commodities mentioned in Clause (a) of Article 306 of this Constitution. 245. Parliament shall by law appoint such authority as it considers appropriate for the carrying out of the provisions of Articles 243 and 244 of this Constitution and confer on the authority so appointed such powers and such duties as it thinks necessary. Ibid., p. 453 to 454 8.12 In the comments and suggestions to the Draft Constitution of February, 1948, the note to the comment of the Ministry of Industry and Supply is relevant. The Ministry of Industry and Supply has expressed the view that Clause (b) of Article 244 is open to serious objection on principle and should be deleted altogether. The Ministry has pointed out that it is not possible to foresee the circumstances in which the freedom of trade, commerce or intercourse with a State will need to be interfered with by the State in the Public interest, unless it be on the basis of discrimination between the residents of one State and another, and this would be wholly contrary to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly , Article 304(a) does not bar or limit State power to levy non-discriminatory taxes on the goods imported from other States. What is restricted is levy of discriminatory tax only, so to say, similar goods manufactured or produced in that State are also subjected to tax, so as not to discriminate between the goods imported and goods manufactured or produced in the State. Thirdly , the two clauses of Article 304 are connected by the word and . Sub-clause (a) puts a restriction on the State to not impose a discriminatory tax, whereas sub-clause (b) deals with other restrictions relating to trade, commerce and intercourse. Fourthly , Article 304 (a) and (b), on a careful reading would show that Article 304 (a) and (b) are disjunctive. This is made clear by the proviso, which is to the effect that a Bill for the purpose of Article 304 (b) can be moved by the Legislature of the States, only by the previous sanction of the President. If Clauses (a) and (b) are not disjunctive, then the language of the proviso would have been certainly different and the Bill for the purpose for Clause (a) would have been mentioned. Conspicuous absence of reference to 304(a) in the proviso would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vanced, and who therefore stand in need of assistance . From that point of view, my amendment seeks to give Parliament a blank cheque and leave to it entirely the determination of the policy with regard to trade and commerce not only of the whole Union or in regard to any particular State or States, but so far as all States and their trade and commerce inter se is concerned. Therefore, I have proposed a very simple provision as has been embodied in my amendment No. 340 . (emphasis supplied) Sir Alladi Krishnaswami Iyer stated: My friend Mr. Krishnamachari has pointed out that this freedom clause in the Australian Constitution has given rise to considerable trouble and to conflicting decisions of the highest Court. There has been a feeling in those parts of Australia which depend for their well-being on agricultural conditions that their interests are being sacrificed to manufacturing regions, and there has been rivalry between manufacturing and agricultural interests. Therefore, in a federation what you have to do is, first, you will have to take into account the larger interests of India and permit freedom of trade and intercourse as far as possible. Secondly, you canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hostile discrimination . Ibid. p. 113 8.17 There is a vital difference between mere differentiation and discrimination. It is discrimination not differentiation that is sought to be prevented through Part XIII. Again reference to certain observations of this Court in Video Electronics would be pertinent: very differentiation is not discrimination. The word 'discrimination' is not used in art. 14 but is used in Articles 16, 303 304(a). When used in Article 304(a), it involves an element of intentional and purposeful differentiation thereby creating economic barrier and involves an element of an unfavorable bias. Discrimination implies an unfair classification. Reference may be made to the observations of this Court in Kathi Raning Rawat v. The State of Saurashtra, [1952] SCR 435 where Chief Justice Shastri at p. 442 of the report reiterated that all legislative differentiation is not necessarily discriminatory. At p. 448 of the report, Justice Fazal Ali noticed the distinction between 'discrimination without reason' and 'discrimination with reason'. The whole doctrine of classification is based on this and on the well-known fact that the ci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x exemptions for a certain period of time as desired by the competent legislature, the same would be permissible and would fall outside the scope of Article 304 (a). Such State enactment is not inherently discriminatory, but rather aims to ensure economic equality which is a facet of economic unity. 8.20 A State law directed towards development of a particular region is permissible under Part XIII. In support, we may again refer to the discussion in the Constituent Assembly debates dealing with the concepts of public interest and interest of general public . Clause 13 was introduced in Chapter dealing with Fundamental Rights making the right to free trade, commerce and intercourse as a Fundamental Right subject to reasonable restriction. Pandit Thakur Das Bhargava sought to move an amendment Constituent Assembly Debates, 1949, vol. IX, Page 1145. to substitute the words, public interest for interests of the general public he said : That is amendment No. 269 of List IV (Seventh Week), in clause (b) of the proposed new Article 274-D, for the words in the public interest , the words interests of the general public and are not inconsistent with the provision of Articl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The contention that the taxing power lies in Article 304 (a) and not in Article 245 r/w 246 is not correct. The words may by law appearing in Article 304 is not source of legislative power. It is an option given to the States in case it decides to levy any tax on the goods imported from other States. The source of legislative power resides in Article 245 r/w. Article 246 which is indisputable. This power is not subject to any implied limitation. The plain reading would show that in a given situation, the State may by choice decide not to levy any tax imported from other States or opt to levy taxes on certain goods imported from other States. Indeed in all the entry tax laws, the charging section enables the levy of entry tax only on the scheduled goods. The scheduled goods are goods declared as attracting entry tax. 8.24 Discrimination is a relative concept; in order to discriminate a reference point is required. Article 304(a) rather than being an enabling provision to allow the State to impose tax, is a restricting provision, which prevents such levy of tax on goods as would result in discrimination between goods imported from other States and similar goods manufactured or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the way the hearing of the case took place before the Court. Attorney General needs to be specially mentioned and thanked, who had appeared and assisted the Court. Lastly, it was a wonderful sight to see young practitioners ably assisting their seniors which only goes on to reflect vibrancy of Indian Supreme Court Bar. JUDGMENT R. BANUMATHI J. 1. I have perused the judgment of Hon ble the Chief Justice. I agree with the views taken by Hon ble the Chief Justice on Question Nos.1 and 4 with certain additions. On Question Nos. 2 and 3, while agreeing with the views of the Chief Justice over-ruling Jindal Stainless Ltd. (2), on the question of Compensatory tax , I have recorded my reasonings which in my view is necessary to be clarified. Since substantial questions of law arise for determination which is of considerable importance from the point of view of trade, commerce and intercourse and economic unity of the nation, I would like to give my own reasonings for my conclusions. 1(a). Question No. 1 :- I agree with the conclusion of the Chief Justice holding that a non-discriminatory tax does not per se constitute a restriction on the right to free trade, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omobile and the case subsequent to it. Subject to passing the muster of Art. 304(a), entry tax levied by the States under entry 52, List II even though termed as compensatory tax does not fall foul of Art. 301. In my view, Jindal Stainless Ltd. (2) Anr. v. State of Haryana Ors. (2006) 7 SCC 241 is not a correct view in adopting quantifiable data approach; for a tax, there is no requirement of proximate quid pro quo and Jindal Stainless Ltd. (2) is overruled. I agree with the view taken in Bhagatram and Bihar Chamber of Commerce as the same is in harmony with the original design of compensatory tax laid down in Automobile . 1(d). For the above conclusions, I have put forth my views and reasonings under the following heads of discussions:- Introduction .. [Para Nos. 1-1(d)] Background to the reference .. [Para Nos. 2-7] Scheme of the Constitution/distribution of legislative powers .. [Para Nos. 8-14] Freedom of trade commerce and intercourse .. [Para Nos. 15-27] Freedom under Article 301 is subject to Part XIII and other parts of the Constitution viz. Part III, IV, XII etc. .. [Para Nos. 28-35] Question No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ors. (2006) 7 SCC 241, Constitution Bench considered the various decisions relating to compensatory tax and held that whenever a law levying compensatory tax is impugned as violative of Art. 301 of the Constitution, the Court has to see whether the impugned enactment facially indicates the proportionality to the quantifiable data on the basis of which the compensatory tax is sought to be levied. It was further held: 46 . it must broadly indicate proportionality to the quantifiable benefit. If the provisions are ambiguous or even if the Act does not indicate facially the quantifiable benefit, the burden will be on the State as a service/facility provider to show by placing the material before the Court, that the payment of compensatory tax is a reimbursement/recompense for the quantifiable/ measurable benefit provided or to be provided to its payer(s). As soon as it is shown that the Act invades freedom of trade it is necessary to enquire whether the State has proved that the restrictions imposed by it by way of taxation are reasonable and in public interest within the meaning of Article 304 (b). 4. The Constitution Bench further held that the test of some connecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reference made in Jaiprakash Associates , the matter was referred to a larger Bench. Accordingly, the matters are now before this larger Bench. 7. Even though ten questions were framed for reference, when the matters came up for consideration before this larger Bench, the issues for consideration were abridged to four questions as under:- (1) Can the levy of a non-discriminatory tax per se constitute infraction of Article 301 of the Constitution of India? (2) If answer to Question No. 1 is in the affirmative, can a tax which is compensatory in nature also fall foul of Article 301 of the Constitution of India? (3) What are the tests for determining whether the tax or levy is compensatory in nature? (4) Is the entry tax levied by the States in the present batch of cases violative of Article 301 of the Constitution and in particular have the impugned State enactments relating to entry tax to be tested with reference to both Articles 304(a) and 304(b) of the Constitution for determining their validity? SCHEME OF THE CONSTITUTION/DISTRIBUTION OF LEGISLATIVE POWERS: 8. Art. 1 of the Constitution describes India as a Union of States, thereby implying the ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te on the topics enumerated in List II and List III of the Seventh Schedule to the Constitution. It is noteworthy that though Art. 245 is pre-fixed by the words Subject to the provisions of this Constitution ; Art. 246 is not. But because Art. 246 only provides for distribution of the legislative powers conferred under Art. 245, the words subject to the provisions of the Constitution apply equally to Art. 246. 12. The power of the Parliament and State Legislature to enact laws flows from Articles 245 and 246. Considering the source of legislative powers of the Union and the State in Maharaj Umeg Singh and Others v . The State of Bombay and Others , 1955 (2) SCR 164, it was held as under:- Under Article 246 the State Legislature was invested with the power to legislate on the topics enumerated in Lists II III of the Seventh Schedule to the Constitution and this power was by virtue of Article 245(1) subject to the provisions of the Constitution. 13. A Constitution Bench of this Court in K.T. Plantation Private Limited and Another v. State of Karnataka (2011) 9 SCC 1 (Five Judges) observed as under: 186. A Constitution Bench of this Court in Hoechs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 97.] [ Emphasis Supplied ] FREEDOM OF TRADE, COMMERCE AND INTERCOURSE: 15. Art. 301 of the Constitution provides for freedom of trade, commerce and intercourse throughout the territory of India, subject to the other provisions of Part XIII, Articles 302-305 which permit the imposition of reasonable restrictions on this freedom by Parliament and the State Legislatures. The underlining idea in making trade, commerce and intercourse throughout the territory of India free is to emphasize on the economic unity of India and to ensure that unity of the country may not be broken by internal barriers. 16. The Constitution-makers desired free flow of trade and commerce in India as they realized that economic unity and integration of the country provided the main sustaining force for the stability and progress of the political and economic unity of the nation, and that the country should function as one single economic unity without barriers on internal trade. In order to ensure that the State Legislatures subjected to local and regional pulls did not create trade barriers in future, Art. 301 was incorporated in the Constitution. Art. 301 in general enacts that subject to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c entries on trade and commerce and not to be confused with the general application of Art. 301 to all the legislative entries other than the entries relating to trade and commerce. But when any part of the country is suffering from scarcity of goods, Parliament may, to meet such a situation; pass even a discriminatory law [Art. 303(2)]. Art. 303(2) is an exception to Art. 303(1) inasmuch that the limitations of Art. 303(1) lose operation when aforesaid preference and discrimination is made for the purpose of dealing with situation arising from scarcity of goods, and the Parliament may in these situations enact a law that gives or authorises giving preference or makes or authorises making of any discrimination. 19. As per Art. 304(a), a State Legislature may impose any tax on goods imported from other States or Union Territories to which similar goods produced in that State are also subject, so as not to discriminate between the goods so imported and goods so manufactured or produced within the State. A State Legislature is also authorised to impose reasonable restrictions on the freedom of trade and commerce with or within that State as may be required in public interest, subje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d intercourse absolutely free in India. Relevant extracts from the debate are as under:- .I should also like, to say that according to the provisions contained in this part it is not the intention to make trade and commerce absolutely free, that is to say, deprive both Parliament as well as the States of any power to depart from the fundamental provisions that trade and commerce shall be free throughout India. The freedom of trade and commerce has been made subject to certain limitations which may be imposed by Parliament or which may be imposed by the Legislatures of various states, subject to the fact that the limitation contained in the power of Parliament to invade the freedom of trade and commerce is confined to cases arising from scarcity of goods in any part of the territory of India and in the case of, the States it must be justified on the ground of public interest. The action of the States in invading the freedom of trade and commerce in the public interest is also made subject to a condition that any Bill affecting the freedom of trade and commerce shall have the previous sanction of the President; otherwise, the State would not be in a position to undertake such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion has given rise to considerable trouble and to conflicting decisions of the highest Court. There has been a feeling in those parts of Australia which depend for their well-being on agricultural conditions that their interests are being sacrificed to manufacturing regions, and there has been rivalry between manufacturing and agricultural interests. Therefore, in a federation what you have to do is first, you will have to take into account the larger interests of India and permit freedom of trade and intercourse as far as possible. Secondly, you cannot ignore altogether regional interests. Thirdly, there must be the power intervention of the Centre in any case of crisis to deal with peculiar problems that might arise in any part of India. All these three factors are taken into account in the Scheme that has been placed before you . [CAD Page No.1143 dated 08.09.1949] 24. Referring to reasonable restrictions that may be imposed by the States and the necessity to obtain sanction from the President, Shri Alladi Krishnaswami Ayyar further observed as under:- Shri Alladi Krishnaswami Ayyar : . Therefore, if on account of parochial patriotism or separatism, without consul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Shri C. Subramanian (Madras : General): .There are three Articles 243, 244 and 245 which deal with this subject inter-state trade and commerce in the body of the Draft. Then in the list of legislative powers in the Union list, we find in entry 73 inter-state trade and commerce subject to the provisions of entry 23 of List No. II . Then item 32 in List II is trade and commerce within the state; markets and fairs ; and item 33 refers to the regulation of trade, commerce and intercourse with other States for the purposes of the provisions of article 244 of this Constitution. Therefore, you will find inter-state trade and commerce, subject to article 244, is a Union subject. Parliament can deal with it. Trade and commerce within the state and inter-state commerce as provided in article 244 are given to the State Legislatures. You will find, Sir, that in article 244, even though it might be inter-state trade and commerce, the State Legislature is given certain powers to impose certain taxes and impose certain restrictions. Having this in mind, if we come to Article 16, we find the words, subject to the provisions of article 244 of this Constitution , that is, even in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be free throughout India, was to bring it under fundamental rights. That is the reason why, awkward as it may seem, we thought that there was no other way left to us, except to bring trade and commerce under fundamental rights. I think that will satisfy my friend Mr. Subramaniam why we gave this place to trade and commerce in the list of fundamental rights, although theoretically, I agree that the subject is not germane to the subject-matter of fundamental rights. With regard to the other argument, that since trade and commerce have been made subject to article 244, we have practically destroyed the fundamental right, I think I may fairly say that my friend Mr. Subramaniam has either not read article 244, or has misread that article. Article 244 has a very limited scope. All that it does is to give powers to the provincial legislatures in dealing with inter-state commerce and trade, to impose certain restrictions on the entry of goods manufactured or transported from another State, provided the legislation is such that it does not impose any disparity, discrimination between the goods manufactured within the State and the goods imported from outside the State. Now, I am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 108. Section 107 itself has been made subject to Section 110 of the Act. The words subject to conveys the idea of a provision yielding place to another provision or other provisions to which it is made subject. 65. In Black s Law Dictionary, 5th Edn. At p. 1278, the expression subject to has been defined as under: Subject to Liable, subordinate, subservient, inferior, obedient to; governed or effected by; provided that; provided; answerable for. 66. Since Section 107 is made subject to Section 110, the former section conveys the idea of yielding to the provision to which it is made subject that is Section 110 which is the will of the legislature . 31. Interpretation of the Constitution should emerge from a reading of the whole of the Constitution to ensure that the overall objectives are achieved. Part XIII as a whole is based on a balanced scheme and it should be interpreted with reference to other parts of the Constitution including Part III, Part XII and Articles 38 and 39 of the Directive Principles of State Policy. Each of these Parts must be read not in isolation or as water tight compartments but harmoniously as a logical whole. The Constitutio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ong with other Parts of the Constitution namely, Parts III, IV and XII along with the basic features of sovereignty and federalism. Free trade, commerce and intercourse is subject to the other provisions of Part XIII as well as other constitutional provisions. Art. 301 does not use the word subject only to Part XIII. The word free in Art. 301 is to be read not in isolation or in the limited context of Part XIII, but has to be read as part of the Constitution as a whole. The word free cannot be given a meaning which renders the legislative powers of the State ineffective. For instance, Art. 301 cannot be held to employ freedom from giving minimum wage, gratuity, provident fund etc. to the workers employed. 34. Articles 302 to 304 are neither exceptions nor provisos to Art. 301 and therefore, the principles of interpreting a proviso cannot be applied to them. But both Atiabari and Automobile proceeded on the footing that Art. 302 is in the nature of exception to Art. 301. Gajendragdkar J. in Atiabari held: Thus, the effect of Art. 302 is to provide for an exception to the general rule prescribed by Article 301 . [ Pages 853-854 ] Similarly, Das J. in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... President to the introduction of the bill can be made good by his subsequent assent. It follows therefore that the freedom guaranteed by Art. 301 is not limited to restriction permitted only by Art. 304(b) for the proviso to it is overridden by Art.255 (3). Trade is dealt with not only in Art. 301 but also in Art.19(1)(g) and the relation of that Article is necessary for a proper interpretation of Part XIII. Article 19(1)(g) guarantees to every citizen the right to carry on any trade or business. But trade cannot be carried on without goods or property and the right to acquire, hold and dispose of property which is guaranteed under Art; 19(1) (f). Again, it is not only Art.303 which speaks of discrimination Arts. 14 and 15 do likewise and the relation of this Article to 303 must be considered. [ Page 2591 ] The States are right in submitting that the majority view, both in Atiabari and Automobile , is not correct. Part XIII and Freedom of Trade, Commerce and Intercourse will have to be read with other Parts of the Constitution, particularly, Part III, IV and XII and basic features of sovereignty and federalism. QUESTION NO.1: CAN THE LEVY OF A NON-DISCRIMINATORY ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Tax by Herman M. Knoeller reported in Market Law Review Volume 22 Issue 3 April, 1938. ) 38. This Hon ble Court has held in a catena of cases that power to levy tax is a sovereign power of the State starting from Raja Jagannath Baksh Singh v. The State of U.P. and Anr., (1963) 1 SCR 220 , where this Hon ble Court observed that:- . The power of taxation is, no doubt, the sovereign right of the State; as was observed by Chief Justice Marshall in M Culloch v. Maryland [4 Law Edn. 579 p. 607] : The power of taxing the people and their property is essential to the very existence of Government, and may be legitimately exercised on the objects to which it is applicable to the utmost extent to which the Government may choose to carry it. In that sense, it is not the function of the Court to enquire whether the power of taxation has been reasonably exercised either in respect of the amount taxed or in respect of the property which is made the object of the tax. Article 265 of the Constitution provides that no tax shall be levied or collected, except by authority of law; and so, for deciding whether a tax has been validly levied or not, it would be necessary first t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... els Investments Ltd. and Others v. Union of India (1989) 3 SCC 698, it was held:- 20 .Taxation is not now a mere source of raising money to defray expenses of Government. It is a recognized fiscal tool to achieve fiscal and social objectives 42. Parts XI and XII of the Constitution deal with Relations between the Union and the States and Finance, Property, Contracts and Suits respectively. Part XII dealing with finance etc. has been treated as Part dealing with the sovereign power of the States to impose taxes, which must always mean imposing burden on citizens and others in public interest. The power of taxation is vested in a sovereign State to carry on with the affairs of the Government. Our Constitution had laid the foundation of a Welfare State, very much extending the activities of the Government and the administration thus making it necessary for the State to impose taxes on a large scale and in much wider fields. The legislative competence of the Parliament or of the State Legislatures can only be circumscribed by express prohibition contained in the Constitution itself. The plenary powers of legislation vested in the Union and State Legislatures by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the power of taxation is an inherent attribute of sovereignty emanating from necessity. As noted earlier, the exaction is not merely fundamental for existence of the State but also to support the welfare activities, therefore, it forms a pre-condition for exercise of other legislative power. The special status conferred on taxing statutes is evident from the following special provisions: Article 265 provides that no tax shall be levied or collected except by the authority of law; therefore there can be no levy or collection by exercise of executive power. Tax legislations are given the status of Money Bills under Articles 110 and 199 of the Constitution and, therefore, have a different laying procedure. They can originate only in the lower houses of the Parliament and the State Legislature as per Articles 109 and 198. Being a Money Bill, all the revenue is sent to the Consolidated Fund and can only be taken out through Appropriation Bills (Articles 114 and 204). Freedom in Art. 301 does not mean freedom from taxation :- 47. Historically, Art. 301 was meant to do away with barriers between Native States and the rest of India. Thus, Art. 301 should be interpreted in the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to tax and the tax could be to such extent , if any, as Parliament may by law provide. When even the trade or business carried on by or on behalf of the Government of the State can also be subjected to tax, it would be erroneous to hold trade, commerce and intercourse carried on by private individuals and companies in the country free from tax; and that too, by implication. 50. It is well-settled that even Fundamental Rights in Part III of the Constitution are not immune from taxation and taxation has been held to be not a restriction . In Indian Express Newspapers (Bombay) Pvt. Ltd. and Ors. etc. v. Union of India and Ors. etc. (1985) 1 SCC 641, levy of indirect tax on newspaper industry, through levies on imported newsprints was challenged as violative of Art. 19(1)(a). Holding that press is not immune from taxes it was held:- 49. . Yet the American courts have recognized the power of the State to levy taxes on newspaper establishments, of course, subject to judicial review by courts by the application of the due process of law principle .Taxation is the legal capacity of sovereignty or one of its governmental agents to exact or impose a charge upon persons or t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on goods imported from other States, any tax, to which similar goods manufactured or produced in that State are subject so as not to discriminate between goods so imported and goods so manufactured or produced within the State. Art. 304(a) states non-discriminatory tax does not impede the flow of trade, commerce and intercourse. Art. 304(a) applies where the following conditions are cumulatively satisfied:- (a) the State Legislature by law imposes a tax; (b) tax is imposed on goods imported into that State from other States or Union Territories; (c) a tax is also imposed on similar goods manufactured or produced in that State; and (d) there is no discrimination between goods imported and goods manufactured or produced in that State. When these four conditions are fulfilled, Art. 304(a) provides a constitutional route to levy non-discriminatory tax. Under Art. 304(b), the ban under Art.301 stands lifted even if discriminatory restrictions are imposed by the State Legislatures, provided they fulfill the following conditions (a) such restrictions are in public interest; (b) they are reasonable; and (c) they are subject to obtaining of prior sanction of the President bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nse of a Union of Federal Constitution. If the units are to be discriminated against we will come to blows more often than otherwise. Therefore this should be avoided. ( The framing of India s Constitution, Select Documents by Universal Law, Law Publishing Pvt. Co. Pvt. Ltd. Vol.2 Page.254 ) Shri Krishnaswami Ayyar So far as article 16 is concerned, the substance of the freedom of trade guarantee is preserved. We have prohibited the States and the Centre from passing discriminatory laws [ Constituent Assembly Debates dated 30.07.1949 to 18.09.1949 (Page 1144) ] 56. A tax legislation could be challenged on the ground of legislative competence as well as violation of Fundamental Rights guaranteed under Part III of the Constitution. In Rai Ramkrishna and Ors. v. The State of Bihar (1964) 1 SCR 897, this Court while holding that tax Statutes were not beyond the constitutional limitation prescribed by Articles 14 and 19 held that the challenge must however be dealt with caution and circumspection: 13 . ..that taxing statutes are not beyond the pale of the constitutional limitations prescribed by Articles 19 and 14, and he also concedes that the test of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... power to tax is not a power that transcends fundamental rights, a taxing Statute cannot merely be challenged on the ground that it is harsh and excessive. It was observed as under:- 10. It was urged that even if the exercise of the powers to compel deposits be regarded as not unconstitutional, its exercise is harsh and the demands made by the State are excessive. Exercise of the taxing power by the State has undoubtedly to be tested in the light of the fundamental freedoms guaranteed by Ch. III of the Constitution. It is not a power which transcends the fundamental rights, as was assumed in certain earlier decisions : Ramjilal v. Income-tax Officer (1951) 19 ITR 174 (SC) ; Laxmanappa Hanumantappa v. Union of India (UOI) (1954) 26 ITR 754 (SC) ; and the view expressed by Venkatarama Ayyar J., in S. Anantha Krishnan v. State of Madras I.L.R. [1952] Mad. 933. But it is now settled by decisions of this Court (e.g.) Kunnathat Thathunni Moopil Nair v. The State of Kerala and Another (1961) 3 SCR 77 that a taxing statute is subject to the conditions laid down in Art. 13 of the Constitution . A taxing statute may accordingly by open to challenge on the ground that it is expropriat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a taxing Statute as a restriction on individual freedoms. 60. The essential characteristics of a tax are that: (i) it is imposed under a statutory power without the taxpayer s consent and the payment is enforced by law; (ii) it is an imposition made for public purpose without reference to any special benefit to be conferred on the payer of the tax; and (iii) it is part of the common burden. In Commissioner Hindu Religious Endowments, Madras v. Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt 1954 SCR 1005, the Constitution Bench has laid down the characteristics of a tax which has since been consistently followed and it is as under :- .A tax is a compulsory exaction of money by a public authority for public purposes enforceable by law and is not payment for services rendered . This definition brings out, in all opinion, the essential characteristics of a tax as distinguished from other forms of imposition which, in a general sense, are included within it. It is said that the essence of taxation is compulsion, that is to say, it is imposed under statutory power without the taxpayer s consent and the payment is enforced by law. The second characteristic of tax is tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat it affects the earnings cannot, per se, be held to violate Article 19(1)(g) . 63. Art. 304(a) authorizes a State Legislature to impose a non-discriminatory tax on goods imported from other States. Art. 304(a) does not prevent levy of tax on goods; what it prohibits is such levy of tax on goods as would result in discrimination between goods imported from other States and similar goods manufactured or produced within the State. The object is to prevent imported goods from being discriminated by imposition of a higher tax thereon than the local goods. Under Art. 304(b), States can impose reasonable restrictions on the freedom of trade, commerce and intercourse with or within that State as may be required in public interest; provided they obtain prior sanction of the President before introduction of the Bill. As taxes are levied for the purpose of raising revenue, they are not restrictions and are presumed to be in public interest. Thus, tax simpliciter is not a restriction on the freedom of trade and commerce and is outside the purview of Art. 301. Majority view in Atiabari and Automobile: Need of re-appreciation :- 64. In Atiabari Tea Co. Ltd. v. The State of As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat any legislation whether taxing or otherwise which imposed any restrictions that had the effect of directly offending the movement or transport of goods would attract the provisions of Art. 301 and its validity could be sustained only if it satisfied Art. 302 or Art. 304(b) of the Constitution. 66. Sinha, C.J. in his dissenting judgment referred to the integration of Native States with the Government of India and how the Native States ultimately merged their individualities into India to emerge as one political unit with the result that what was called British India became under the Constitution Part-A States , and the Native States became Part-B States . Sinha, C.J. pointed out that most of the Native States , big or small had their own taxes, cesses, tolls and other imposts and duties meant not only for raising revenue but also as trade barriers and tariff walls. In the background of those circumstances, it was necessary to abolish all those trade barriers and custom posts as also in the interest of national solidarity, economic and cultural unity and freedom of trade and commerce guaranteed in the Constitution by Art. 301. Observing that the power to tax is inhe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the activities of Government and administration, thus making it necessary for the State to impose taxes on a much larger scale and in much wider fields. The legislative entries in the three lists referred to above empowering the Union Government and the State Governments to impose certain taxations with reference to movements of goods and passengers would be rendered ineffective, if not otiose, if it were held that taxation simpliciter is within the terms of Art. 301. (3) If the argument on behalf of the appellants were accepted, many taxes, for example, sales tax by the Union and by the States, would have to go through the gamut prescribed in Articles 303 and 304, thus very much detracting from the limited sovereignty of the States, as envisaged by the Constitution. (4) Laws relating to taxation, which is essentially a legislative function of the State, will become justiciable and every time a taxation law is challenged as unconstitutional, the State will have to satisfy the courts a course which will seriously affect the division of powers on which modern constitutions, including ours, are based. (5) Taxation on movement of goods and passengers is not necessarily an impediment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with an emergency like a scarcity of goods in any part of India [Art. 303(2)]; (5) reasonable restrictions may be imposed by the Legislature of a State in the public interest [Art. 304(b)]; (6) non-discriminatory 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 [Art. 304(a)]; and lastly (7) restrictions imposed by existing laws have been continued, except insofar as the President may by order otherwise direct (Art. 305). [ Page 831-832] [ Emphasis added ] 67. A larger Bench of seven Judges was constituted in Automobile Transport (Rajasthan) Ltd. v. The State of Rajasthan and Ors. (1963) 1 SCR 491, in which the validity of Rajasthan Motor Vehicles Taxation Act, 1951 and the Rules made thereunder was under challenge. Section 4 of the Rajasthan Act required every owner of motor vehicle used in any public place or kept for use in Rajasthan to pay tax at the appropriate rate specified in the Schedule to the Act. The appellants therein who were stage carriage operators challenged the validity of the Rajasthan Act on the ground that such lev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... though the majority referred to Section 297 of the Government of India Act, 1935 and referred to the economic unity of the nation, no detailed discussion was done on the history of Part XIII and Constituent Assembly Debates which threw considerable light on Part XIII and consequently erred in holding that Art. 301 read in its proper context imposes constitutional limitations on the legislative powers of the Parliament and the State. [ Page 848 ] Majority in Atiabari held 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 requirement of Art. 304(b) . [ Page 861 ]. If the said view of Atiabari is to be adopted then for each and every legislation, the State Legislatures will have to undergo the process of Art. 304(b). Tax is one important mode of raising revenue to enable the States to discharge its obligations as a Welfare State. Such plenary powers of the State legislature to impose taxes cannot be whittled down or made subservient to Art. 301. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In Atiabari , Sinha, C.J. took a different view of Art. 301 than the one taken by the majority and concluded as under:- ..(2) the freedom declared by Art. 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; [ Page 831 ] In my opinion, another very cogent reason for holding that taxation simpliciter is not within the terms of Article 301 of the Constitution is that the very connotation of taxation is the power of the State to raise money for public purposes by compelling the payment by persons, both natural and juristic, of monies earned or possessed by them, by virtue of the facilities and protection afforded by the State. Such burdens or imposts, either direct or indirect, are in the ultimate analysis meant as a contribution by the citizens or persons residing in the State or dealing with the citizens of the State, for the support of the Government, with particular reference to their respective abilities to make such contributions. Thus public purpose is implicit in every taxation, as such. Therefore, when Part XIII of the Constitution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an Constitution. 77. The following observations of Shri T.T. Krishnamachari are relevant to be noted: .I do not know if he realises that an ombnibus right such as the one that we recognise should not be given so far as freedom of trade and commerce is concerned, which perhaps has an echo in article 92 of the Australian Constitution, which has made the economic position of Australia a very difficult one today. They in Australia find that by reason of the fact that their provisions for amendment of the Constitution are so difficult that they are not able to amend the Constitution, and article 92 stands as a bar to any progressive legislation which they have undertaken. It may be right or it may be wrong - the people of Australia are behind the Government but when they wanted to nationalise banking, article 92 of the Australian Constitution has been held as a bar to the Government's power to nationalise the banks. There is no point in shutting the hands of the future Government in operating this Constitution. [ Constitutional Assembly Debates, Volume IX, Page.1142, dated 30.07.1949-18.09.1949 ] 78. Shri T.T. Krishnamachari highlighted how Section 92 stood in betwe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commerce in which the individual was engaged? Atiabari and Automobile fundamentally concurred with the Australian cases to hold tax as a restriction for the purposes of Part XIII of the Constitution of India. Gajendragadkar, J. in Atiabari observed: It is commonplace to say that the political and historical background of the federal polity adopted by the Australian Commonwealth, the setting of the Constitution itself, the distribution of powers and the general scheme of the Constitution are different, and so it would to be safe to seek for guidance or assistance from the Australian decisions when we are called upon to construe the provisions of our Constitution. . Gajendragadkar, J. further relied on the Bank Nationalisation Case to borrow the concept of direct and immediate impediment on the freedom of trade and commerce from the Australian system. Relevant extract from Gajendragadkar J. s judgment is as under: In the case of Commonwealth of Australia v. Bank of New South Wales (1927) 40 C.L.R. 1 to which reference has already been made in connection with the test of pith and substance the Privy Council was examining the validity of s. 46 of Ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... views taken in Atiabari and Automobile in the light of the Australian cases represent a mechanical implantation of a foreign concept into the Indian legal system, not keeping in view the distinct features of Indian Polity and the Constituent Assembly Debates. Majority view in Atiabari and Automobile do not appear to have taken note of the historical background of merger of Native States with their individualities, with British India, and the federal nature of the Indian Constitution while discussing the fundamental question as to whether Freedom in Art. 301 meant freedom from tax. The majority appears to have begun with the presumption of tax laws being subservient to Art. 301 and later concluded that if all the tax laws are brought in Art. 301, State s legislative power to tax would be destroyed. Thereafter, in an attempt to save the taxing power of the State, they borrowed the concepts of direct and immediate test and compensatory tax from the Australian and American Cases. 83. In this regard, learned author H.M. Seervai in Constitutional Law of India , 4th Edition, Volume 3 has observed as under: It is submitted that the principles of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch, as we have shown, is favoured by history and context. In doing so, we must say something about the resolution of cases in which no impermissible purpose appears on the face of the impugned law, but its effect is discriminatory in that it discriminates against inter-State trade and commerce and thereby protects intra-State trade and commerce of the same kind . 85. In Cole v. Whitfield, the High Court while disapproving of the individual rights approach authoritatively adopted in Bank Nationalisation Case held that Section 92 guarantees freedom of inter-State trade and commerce only against the discriminatory protectionist burdens. This decision brought to an end the quite unacceptable state of affairs then attending Section 92 of the Constitution, as the preceding eighty years of judicial development concerning freedom of inter-State trade, commerce and intercourse in Australia had yielded neither clarity of meaning nor certainty of operation . Cole v. Whitfield laid down that for a burden to be protectionist it must discriminate against inter-State trade or commerce in a protectionist sense . The Court observed as under: A law which has as i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ject to the Constitutional limitations. Atiabari and Automobile erred in relying on Freeman v. Hewit 329 U.S. 249 (1946), which has been discarded by the US Supreme Court itself in Complete Auto Transit, Inc. v. Charles R. Brady [1977] USSC 54: (1977) 430 US 274. In Complete Auto Transit , the US Supreme Court while dealing with an inter-State levy purported to be compensatory, formulated a four-part test to determine if a State tax violates the Commerce Clause: (i) Nexus: there must be a sufficient connection between the taxpayer and the State to warrant the imposition of State Tax Authority; (ii) Fair Apportionment: the State must not tax more than its fair share of the income of a taxpayer; (iii) No discrimination: the State must not treat out-of-State taxpayers differently than in-State taxpayers; and (iv) Related to services: the tax must be fairly related to services provided to the taxpayer by the State. 89. In view of the above, the position which stands good today is that the judgments of US Supreme Court, Privy Council and Australian High Court relied upon in Atiabari and Automobile have been overruled in Complete Auto Transit in USA and Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gi Vedic Vishwavidyalaya Adhiniyam , 1995, in Maharishi Mahesh Yogi Vedic Vishwavidyalaya v. State of Madhya Pradesh and Others (2013) 15 SCC 677 and observing that the word and is used as disjunctive, this Court held as under:- 93. . we also refer to the following decisions rendered by this Court in Ishwar Singh Bindra v.State of U.P., AIR 1968 SC 1450, wherein in para 11 it has been held as under: (AIR p. 1454) 11. It would be much more appropriate in the context to read it disconjunctively. In Stroud s Judicial Dictionary , 3rd Edn., it is stated at p. 135 that and has generally a cumulative sense, requiring the fulfilment of all the conditions that it joins together, and herein it is the antithesis of or. Sometimes, however, even in such a connection, it is, by force of a context, read as or . Similarly in Maxwell on Interpretation of Statutes, 11 th Edn., it has been accepted that to carry out the intention of the legislature it is occasionally found necessary to read the conjunctions or and and one for the other . [ Emphasis supplied ] 94. We may also refer to para 4 of the decision rendered by this Court in Director of Mines Safety ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by learned counsel for the petitioner. It is an enabling provision empowering Parliament to prescribe two things. Parliament may prescribe either or both. If a father tells his delicate child that he may play table tennis and badminton but not the strenuous game of football, it obviously does not mean that the child, if he chooses to play at all, must play both table tennis and badminton. It is an option given to the child. Likewise, the Constitution gives to Parliament the power of prescribing two things. Parliament is not obliged to prescribe at all but if, it chooses to prescribe it may prescribe either or both [ Emphasis added ] Applying the ratio in the above decisions since the expression and is used in Art. 304 after semi-colon, it will have to be read as or creating a disjunctive reading of Art. 304(a) and Art. 304(b) indicating that the State Legislature can exercise its power either under Art.304 (a) or Art. 304 (b) or both. Whether Art. 304(b) coupled with the proviso is applicable to tax laws-Judicial Approach : 93. In Atiabari, majority held that tax laws fall within the comprehension of Art. 301 and, therefore, any legislation whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der, morality or health or in an emergency : Provided that nothing in this section shall prevent any unit from imposing on goods imported from other units the same duties and taxes to which the goods produced in the unit are subject: Provided further that no preference shall be given by any regulation of commerce or revenue by a unit to one unit over another . [ Emphasis added ] 95. The first proviso to Draft Art. 10 corresponds to Art. 304(b) and second proviso relates to Art. 304(a). That first proviso to Draft Art.10 [Art. 304(b)] relates only to public order, morality or health or in an emergency is also made clear from the Constituent Assembly Debates/Advisory Committee Proceedings. In this regard, we may refer to the speech of Shri Alladi Krishnaswami Ayyar in the Constituent Assembly Debates, which is as under:- Alladi Krishnaswami Ayyar : Subject to regulation by the law of the Union, trade, commerce, and intercourse among the units by and between the citizens shall be free. That is the general principle. Then come the exceptions, Provided that any unit may by law impose reasonable restrictions in the interest of public order, morality or health or in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt Art. 304(b)]. As seen from page 330 of the first Draft Constitution, the Committee was of the opinion that the first and second proviso should be transferred as independent clauses in the Chapter dealing with relation between the different States and the third proviso was found unnecessary in view of the opening words subject to the regulation by the law of the Union and, accordingly, the same was adopted in Art. 274(D)(b) [Present Art. 304(b)] which reads as under:- (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) of this article shall be introduced or moved in the legislature of a State nor shall any Ordinance be promulgated for the purpose by the Governor or Ruler of the State without the previous sanction of the President. 99. If Art. 304(b) is also held to cover tax laws, it would amount to empowering the States to make laws imposing tax even on the freedom of trade, commerce and intercourse. As such there is no such entry in List II of Seventh Schedule of the Constitution so empoweri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s apparent from the fact that trade and commerce with foreign countries and inter-State trade and commerce are subject matters in List I of the Seventh Schedule (entries 41 and 42, List I). Further, trade and commerce in production, supply and distribution of industry controlled by the Union, food stuffs, including edible oils, seeds and oils; cattle fodder; raw cotton, cotton seed; and raw jute are subject matters in entry 33, List III. Entry 34, List III deals with price control. Only intra-State trade and commerce is in List II (entry 26, List II) subject to entry 33, List III, as stated therein. Parliament has thus occupied an overwhelming space with respect to trade and commerce within the State also. It is in this backdrop that the State has been given power to impose reasonable restrictions on the freedom of trade, commerce and intercourse with or within that State with the proviso requiring presidential assent before the Bill is introduced. The rationale, therefore, is that a non-fiscal law of the State with respect to freedom of trade, commerce and intercourse would be entrenching upon either the exclusive legislative field of the Parliament in List I or the occupied field ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Parliament has occupied an overwhelming space with respect to trade and commerce both within and outside the State and it is in this backdrop, that the State has been given power to impose such reasonable restrictions in public interest on the trade, commerce and intercourse with or within that State subject to the satisfaction of the proviso under Art. 304(b). It follows, therefore, that Art. 304(b) relates to non-fiscal laws of the States. To subject the State s sovereign legislative levying tax to Presidential assent would in effect erode the pillar of federalism which this country is built on. In the absence of an express provision in the Constitution, such presidential sanction for taxing laws cannot be read into the provision. Conclusion on Question No.1 : 103. Non-discriminatory taxes do not constitute infraction of Art. 301 of the Constitution. With due respect, the view taken in Atiabari and approved in Automobile Transport declaring that taxes do amount to restriction and that freedom of trade, commerce and intercourse cannot be subject to restriction in the form of taxes is not a correct view and are to be over-ruled. However, I am agreeing with the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... highly productive, towns began to collect them by creating octroi limits. They came to be known as town duties . The term octroi appeared in the Scheduled Tax Rules framed under the Government of India Act, 1919. The expression signified a tax levied on entry into an area of a unit of local administration. The entry was re-fashioned and enacted as item 49 of the Provincial Legislative List under the Government of India Act, 1935. Item 49 reads as Cesses on the entry of goods into a local area for consumption, use or sale therein . In Burmah Shell Oil Storage and Disturbing Co. of India Ltd. Belgaum v. Belgaum Borough Municipality Belgaum Cell , 1963 SCR Suppl. (2) 216, the Supreme Court of India while distinguishing terminal tax and Octroi held that the Octroi s leviable in respect of goods brought into a municipal area for consumption or use of sale. 107. When Government of India Act, 1935 was enacted, terminal taxes were separated from octroi and were included in the Union List while octroi was allocated to the provinces. The term octroi was avoided because terminal taxes are also octroi in a sense. This scheme has been adopted in the Constitution with the differe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D. They indicate that the constitutional intention was to understand the local area in the sense of any area which is administered by a local body, may be corporation, municipal board, district board etc. The High Court on this aspect held and in our opinion rightly that the definition does not comprehend entire State as local area as the use of word a before local area in the section is significant. 110. As discussed above, entry tax is not collected at the behest of municipality or a panchayat attached to a checkpost. It is payable by the assesses by filing their returns. Entry tax is a State level levy, levied by State Legislature upon entry of goods into a local area for consumption, use or sale therein. The local authorities themselves cannot levy the tax. The power is that of State Legislature and of no one. In Bihar Chamber of Commerce , this Court was faced with the task of interpreting the term local area in the context of entry 52, List II. The Court observed that where State Legislature has levied a tax covering the entire State and proceeds of such tax are spent for common welfare activities of the State, the distinction between the State and the local ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... slature, the term a local area contemplated by Entry 52 may cover the whole State or a local area as notified in the legislation. I agree with the views taken in Bihar Chamber of Commerce that from the view of Entry Tax, the State is a compendium of local areas and where the local areas cover the entire State, the difference between the State and a local area practically disappears. 111. Counsel appearing for the States contend that the burden of entry tax, if any, on the trader cannot by itself constitute a restriction on the inter-State movement of goods. To constitute a restriction per se on the freedom of trade, commerce and intercourse, levy of tax, in conjunction with other factors should actually create a substantial advantage in favour of the persons who indigenously manufacture or produce goods as compared to the similar goods which are imported from outside the State. The sovereign power available to the State Legislature to levy tax cannot be decimated by every inconvenience that may be caused to a trader. If the tax is of such a character, that the burden, if any, borne by the dealer, can be absorbed by him as a part of his trade and business, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e setoff of entry tax paid on raw materials and thus preferential treatment given to locally produced goods. Chhattisgarh Excessive delegation to the executive to levy entry taxes up to 50% who in turn levy higher rate of entry tax on certain goods and lesser rate for similar goods which is discriminatory. Entry Tax levied only on goods imported from other States: No levy of Entry Tax on the goods manufactured inside the State-Whether discriminatory. 114. Contention of the assessees is that entry tax is levied only on goods entering the local area from other States and there is no levy of entry tax on the locally produced goods when they move from one local area to another; as goods imported from other States are being discriminated against, such levy is not saved under Art. 304(a). It is their contention that entry tax only on goods coming from outside the State and not intra-State entry of goods from one local area to another local area or on movement of goods is a clear case of discrimination, offending Art. 304(a). 115. The assessees seek to narrow down the wide purport of the term any tax used in Art. 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 118. The expression any tax used in Art. 304(a) is generic in nature and covers all taxes on goods which a State is competent to impose by virtue of Articles 245 and 246 read with List II of Seventh Schedule. A Scheme adopted by a State Legislature whereby several taxes are levied on the goods (either locally produced or imported from other States) under different heads, cannot be faulted with if it conforms to the principle of equivalence and non-discrimination. For e.g., both sales tax levied under entry 54, List II and entry tax levied under entry 52, List II are taxes on goods. It is the burden of the tax which can discriminate and not the form. States are free to equalise the burden of entry tax on the goods imported from other States by giving them set-off against the sales tax paid by them in the exporting State. In such a manner, equivalence can be brought about in the tax burden borne by the goods imported from other States and the locally manufactured/produced goods. The contention of the assessees that the term any tax used in Art. 304(a) refers to every tax distinctly, thereby prohibiting imposition of entry tax on imported goods unless, entry tax is imposed on lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to induce trade diversion from high-rate tax States to low-rate tax territories. In such cases, levy of entry tax equalizes the revenue loss to the State where the vehicle is used, and at the same time prevents discrimination between the locally purchased vehicles and vehicles purchased in other States/Union Territories. 121. Entry of goods into a local area from another local area of the State can be effected either by a dealer who purchased the goods from the manufacturer or by an individual. A dealer who effects entry of goods into a local area from another local area in the same State would be taxed in the form of sales tax/VAT; so also the individual would have already paid the sales tax in another local area, where he bought the goods. In case of entry tax levied on goods imported from other State, set-off like in the cases of State enactments of Tamil Nadu and Andhra Pradesh is given to the extent of the sales tax/VAT paid in the purchasing State; in few of the States like Kerala, after levy of entry tax, to the extent entry tax paid, input credit is given from the sales tax/VAT payable in the State where the goods are imported. Tax burden is more or less the same, for bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt held the Notification invalid as it was hit by Art. 304(a) affecting inter-State trade and commerce. 124. In Western Electronic and Anr. vs. State of Gujarat and Ors . (1988) 2 SCC 568, State of Gujarat imposed sales tax at 15% on all electronic goods whether locally manufactured or imported from outside. After sometime, the State reduced the tax to 10% on goods imported from outside and to 1% on locally manufactured goods with a view to give incentive to encourage local manufacturing units. The Supreme Court held that by applying different rates of tax between goods imported into the State of Gujarat and goods manufactured within that State is discriminatory and violative of Art. 304(a) and, accordingly, quashed the Notification. 125. In State of U.P. and Anr. v. Laxmi Paper Mart and Ors . (1997) 2 SCC 697, State Government had exempted the exercise-books made from paper purchases within Uttar Pradesh from the levy of sales tax. Whereas, exercise-books produced outside the State of Uttar Pradesh were subjected to sales tax at the rate of 5%. The said exemption granted to indigenously manufactured exercise-books was challenged. The challenge was upheld by this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) development of economically backward regions through regulations or restrictions which may incidentally differentiate between States or regions. Part XIII is not about freedom alone but is a code of checks and balances on inter-State trade, commerce and intercourse intended to achieve economic integration of the country and parity. Balanced development of the country is an equally vital facet of economic integration. The freedom referred to in Art. 301 must take flavour from the expression throughout the territory of India ; the Union was envisaged not only as a political union but also an economic union. The grand vision was to unify the country, not only politically but also by creation of an economic union of hitherto disparate Provinces and Princely States. Freedom of movement of goods and services and the creation of a common market must be understood in this context. Thus, the spirit of Part XIII must be seen in the context of achieving a balance between a cohesive economic union having due regard for the federal character of the Constitution and not in the sense of a handicap for State s individual development. 129. We may usefully refer to the following passag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... affording avenues for economic opportunity and economic equality for less developed parts of the country. Significant observations have been made in Constituent Assembly Debates justifying certain amount of flexibility to the States. In this regard, reference to Constituent Assembly Debates dated 30.07.1949 to 18.09.1949 whereby Dr. P.S. Deshmukh proposed a series of amendments in Part XIII granting powers to the States, is relevant to be noted:- Dr. P.S. Deshmukh: Trade and commerce are not things which are decided once, for all; they are things that arise and grown from day to day. They may be varied; there may be circumstances and situations when the whole thing will have to be revised. This may arise so far as a particular State is concerned or in respect of more than one State. How pompously did we decide that there shall be free trade everywhere. It is not such an easy thing as that and I hope that this is now broadly realized. For instance, we know that the stage, of advancement and progress of the various units of the Union varies considerably. Some of them are backward like Assam or Orissa where there are, very few industries and very little trade is in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the Centre in any case of crises to deal with peculiar problems that might arise in any part of India. All these three factors are taken into account in the scheme that has been placed before you. [ Emphasis added ] [ Page No. 1143 ] 131. Similar was the concern expressed by Shri C. Rajagopalachari in his observations on the proposed draft Article 10: C. Rajagopalachari : I would request members who have given thought to this subject to please inform me how the units will raise their revenue. As it is, the Union does not contemplate the distribution of subsidies to the provinces. The provinces or groups differ among themselves, some are rich and some are poor. Some are capable of managing with their existing resources; but others may have to increase their revenue for managing their affairs. If you impose so many limitations on them, how can they do that? It is all very well to say free trade is necessary; but how are the provinces to live? [ Page No.254 of the Framing of India s Constitution Select Documents-The Project Committee, Volume 2 by the Indian Institute of Public Administration Universal Law Publishing Co. Pvt. Ltd. ] 132. There are considerabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... devolution of fiscal and legislative powers on the States to create a level playing field. Relevant portion of this article reads as under:- per capita net domestic product from 1960 to 2014 of India s 12 largest States, that accounted for 85 per cent of the total population, shows that economic disparity within India s States is among the largest in the world... This gap of four times between the richest and the poorest large State in India is among the highest in the world. A similar ratio in other federal polities such as the U.S., European Union and China is between two and three times. Our convergence analysis shows that this economic disparity among States is only widening and not narrowing. India is the only large country in the world today that is experiencing an economic divergence among its States and not convergence, as economic theory would posit. ..Pre-1990 and post-1990 look like almost two different eras in India s history of economic diversity among States. Economic theory would suggest that the poorer regions grow faster to catch up with the richer States to cause an eventual convergence, as is happening globally. Contrary to global experienc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luding High Courts in due course. They have to develop their own industrial bases for manufacture and production and for creating job opportunities. To attract capital investment, they have to provide infrastructure like transport, communication, power and technology. Re-organisation of States apart, as a Welfare State, a State is under an obligation to create job opportunities and promote welfare of the people by securing standard of living and economic justice. Having regard to the multifarious activities of a Welfare State, it is necessary that the States must have leverage/flexibility in exercise of their power to levy taxes and, therefore, steps taken by the States that result in differentiation cannot amount to discrimination that impedes the free flow of trade, commerce and intercourse. 136. Manufacturing activities within the State involve several activities right from sourcing of raw-materials, manufacture of goods, marketing of the manufactured goods, and export of the manufactured goods. Manufacturing activities convert the State from a mere trade hub to a manufacturing hub, creating employment opportunities for the locals, thereby giving impetus to the growth of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g different courts with different procedures according to the needs of different parts of its territory is an essential part of its police power (cf. Missouri v. Lewis) (3). Though the differing (1) [1950] SCR 88 (3) 101 US 22 (92) AIR 1951 Hyderabad II. Fazl Ali, J .: I think that a distinction should be drawn between discrimination without reason and discrimination with reason . The whole doctrine of classification is based on this distinction and on the well-known fact that the circumstances which govern one set of persons or objects may not necessarily be the same as those governing another set of persons or objects, so that the question of unequal treatment does not really arise as between persons governed by different conditions and different sets of circumstances . [ Emphasis added ] 138. The desired objective of economic integration through checks and balances to encourage less developed parts of the country, so that they may compete as equals with others, does not contravene Part XIII of the Constitution. In Video Electronics, the three Judges Bench held as under: 20 . The question as we see is, how to harmonise the construction of the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng of an orderly society economic equality of all the States is as much vital as economic unity. ... 22. It has to be examined whether difference in rates per se discriminates so as to come within Articles 301 and 304(a) of the Constitution. It is manifest that free flow of trade between two States does not necessarily or generally depend upon the rate of tax alone. Many factors including the cost of goods play an important role in the movement of goods from one State to another. Hence the mere fact that there is a difference in the rate of tax on goods locally manufactured and those imported would not amount to hampering of trade between the two States within the meaning of Article 301 of the Constitution. As is manifest, Article 304 is an exception to Article 301 of the Constitution. The need of taking resort to exception will arise only if the tax impugned is hit by Articles 301 and 303 of the Constitution. If it is not then Article 304 of the Constitution will not come into picture at all. See the observations in Nataraja Mudaliar's case [1968] 3 SCR 829 of the report. It has to be borne in mind that there may be differentiations based on consideration of nat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime often cease to be so at another point of time. It will be wrong to denude the people of the State of the right to grant exemptions which flow from the plenary powers of legislative heads in List II of the 7th Schedule of the Constitution. In a federal polity, all the States having powers to grant exemption to specified class for limited period, such granting of exemption cannot be held to be contrary to the concept of economic unity. The contents of economic unity by the people of India would necessarily include the power to grant exemption or to reduce the rate of tax in special cases for achieving the industrial development or to provide tax incentives to attain economic equality in growth and development. When all the States have such provisions to exempt or reduce rates the question of economic war between the States inter se or economic disintegration of the country as such does not arise. It is not open to any party to say that this should be done and this should not be done by either one way or the other. It cannot be disputed that it is open to the States to realise tax and thereafter remit the same or pay back to the local manufacturers in the shape of subsidies and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y referred to by the Constitution Bench in Sri Digvijay Cement Company Limited and Ors. v. State of Rajasthan and Others (2000) 1 SCC 688. In Digvijay , Section 8 of the Central Sales Tax Act came up for consideration. Section 8 of the Central Sales Tax Act stipulates that the State Governments were empowered to either exempt any goods from Central Sales Tax or to prescribe a lower rate of tax. The State of Rajasthan had reduced the rate to seven percent though stipulated local sales tax was sixteen per cent. In consequence, cement in Rajasthan became cheaper in comparison to Gujarat and that increased the flow of cement from Rajasthan to other States. After referring to the cases Firm ATB Mehtab Majid Co v. State of Madras Anr. AIR 1963 SC 928 and State of Madras v. N.K. Nataraja Mudaliar (1968) 3 SCR 829, this Court held as under:- 24 . We are unable to agree with the contention of the learned counsel for the petitioners that the impugned notification had the effect of preventing or hindering the free movement of goods from one State to another. As far as the State of Rajasthan is concerned, it had the opposite effect. Merely because local rate of tax in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... population is still below poverty level. Subjects like public order (entry 1, List II); public health and sanitation, hospital and dispensaries (entry 6, List II); Education (entry 25, List III); providing employment opportunities; roads, bridges etc. and other infrastructure (entry 30, List II) inter alia are subject matters for the State; and States have limited resources to provide for education, healthcare, civic amenities, infrastructure, communications, village industries, rural employment and technology and to ensure dignified human living of the people of the State, without access to an adequate source of revenue. 144. As discussed earlier, development of the country is seemingly unbalanced and unequal. Despite the economic reforms initiated in the country about twenty five years ago, entrepreneurs are hesitant to invest in backward States because of varied reasons like inadequacy of power, lack of infrastructure and transportation, quality of human resources etc. Resultantly, few States continue to be backward States. In order to have a planned development for the benefit of the people and overall growth of the country as a nation, regional imbalances are to be remov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or imported into the State of Orissa. When the levy was challenged as violative of Art.301, it was held that:- 7. .The notification levying duty at the enhanced rate is purely a fiscal measure and cannot be said to be a reasonable restriction on the freedom of trade in the public interest. Article 301 has declared freedom of trade, commerce and intercourse throughout the territory of India, and restriction on that freedom may only be justified if it falls within Article 304. Reasonableness of the restriction would have to be adjudged in the light of the purpose for which the restriction is imposed, that is, as may be required in the public interest . Without entering upon an exhaustive categorization of what may be deemed required in the public interest , it may be said that restrictions which may validly be imposed under Article 304(b) are those which seek to protect public health, safety, morals and property within the territory. Exercise of the power under Article 304( a ) can only be effective if the tax or duty imposed on goods imported from other States and the tax or duty imposed on similar goods manufactured or produced in that State are such that there is no discri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax impeded the free flow of trade and commerce under Art.301. The Court stated that levy of tax on tobacco did not impede the free flow of trade and commerce. 149. The first part of Art. 304(a) re-states the power of the State to impose a tax on goods imported from the other States. Second part of Art. 304(a) places a limitation on the power of the State Legislature. It provides that a State may only tax imported goods so as not to discriminate them with the locally produced or manufactured similar goods i.e. the limitation of non-discrimination vis- -vis similar internal goods. When a situation arises where no similar goods are manufactured or produced in that State, the tax merely does not fall within the scope of Art.304(a); the limitation is taken away but the power to tax remains. The sovereign and plenary power of the State to tax cannot be emasculated and made subject to a limitation that a State can only tax those goods which are produced within its territory also. 150. This is better explained by way of an example: Zinc is an important mineral resource used in galvanization of iron and steel. It is also used in automotive, electrical and machinery industries. Har ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itution prevents the State from levying sales tax so as not to interfere with the Union s legislative power with respect to import and export across frontier s (entry 41, List I) and the duties of customs including export duty (entry 83, List I). It is contended that if the State is permitted to levy entry tax under entry 52, List II on goods imported from outside the country, the same would amount to levy of tax on imported goods which is a clear transgression of powers of the Parliament under entry 41 and entry 83 of List I. 154. Per contra , the States contend that once the imported goods are cleared on payment of customs duty, the goods are mixed with the mass of goods in India and when such imported goods enter into the local area, the States are well within their legislative competence to levy entry tax in exercise of their legislative power under entry 52, List II. Counsel for the States have submitted before us that the taxable event under entry 83, List I and that under entry 52, List II are distinct; taxable event with respect to entry 83, List I, is the act of import i.e. bringing of goods from a foreign country to India, whereas, the taxable event under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies; import and export across customs frontiers; definition of customs frontiers. 83 . Duties of customs including export duties. 159. As per Section 2(28) of the Customs Act, 1962 read with Section 5(1) of the Territorial Waters Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976, Indian Customs Waters mean water extending in sea upto the limit of contiguous zone, i.e., a line, every point of which is at a distance of 24 Nautical Miles from the nearest point of the base line. These definitions define the customs frontier. 160. Goods imported in a vessel/aircraft require payment of customs duty before they are cleared into the country. Unless these are not meant for customs clearance at the port/airport of arrival by particular vessel/aircraft and are intended for transit by the same vessel/aircraft or trans-shipment to another customs station or to any place outside India, detailed customs clearance formalities of the landed goods have to be followed by the importers. In respect of goods which are off-loaded, importers have the option to clear them for home consumption after payment of the duties leviable or to clear them for warehousi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overlapping in one sense; but there is no overlapping in law. The two taxes which he is called on to pay are economically two separate and distinct imposts. There is in theory nothing to prevent the Central Legislature from imposing a duty of excise on a commodity as soon as it comes into existence, no matter what happens to it afterwards, whether it be sold, consumed, destroyed, or given away It is the fact of manufacture which attracts the duty, even though it may be collected later In the case of a sales tax, the liability to tax arises on the occasion of a sale, and a sale has no necessary connection with manufacture or production. .there are two complementary powers, each expressed in precise and definite terms then there is no reason for extending the meaning of the expression duties of excise at the expense of the provincial power to levy taxes on sale of goods. [ Page 101 ] 163. Boddu Paidanna has been affirmed in Governor General of Council v. Province of Madras AIR 1945 PC 98 = 58 LW 228 in following words:- Here again their Lordships find themselves in complete accord with the reasoning and ocnslusions of the Federal Court in the Boddu Paidan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 004) 10 SCC 201. 167. The other contention of the appellants is that the doctrine of Unbroken Package should be applied in the context of entry 83, List I as was initially applied by US courts. Doctrine of Unbroken Package postulates that import of goods continues even after crossing customs barrier until the package imported is broken up at the importer s destination and the goods are taken out. This argument was pressed upon mainly to save the foreign goods from suffering entry tax at the instance of State authorities. The appellants contended that no entry tax can be levied under entry 52, List II by the State authorities before the package is broken. 168. Such a contention does not find force in the light of the fact that doctrine of Unbroken Package has not only been discredited by Indian Courts, but also by the American Courts. In the American context, reference can be made to Prof. Tribe on American Constitutional Law States, in which the learned Professor has criticized the doctrine of Unbroken Package in the following words: in the dormant commerce clause context, the court long ago disparaged the unbroken-package doctrine as applied to inters ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g more, that is 'incorporating and mixing up of the goods with the mass of the property in local area', thus accepting the enunciation of the 'Original Package Doctrine' by Chief Justice Marshall in Brown v. State of Maryland 6 L. Ed. 78. Another reason given by the learned Judges to arrive at the conclusion that they did, was that the very levy was a 'terminal tax' and, therefore the words 'import and export', in the given context, had something to do with the idea of a terminus and not an intermediate stage of a journey. We are afraid the case is really not of any guidance to us since in the context of a 'terminal tax' the words 'imported and exported' could be construed in no other manner than was done by the Court. We must however say that the 'original package doctrine' as enunciated by Chief Justice Marshall on which reliance was placed was expressly disapproved first by the Federal Court in the Province of Madras v. Boddu Paidanna:1942 FCR 90 and again by the Supreme Court in State of Bombay v. F.N. Balsara,. Apparently these decisions were not brought to the notice of the Court which decided the case of Central India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advanced without any basis in pleadings and facts. 175. A comparison of Sections 58 and 57 shows that a licensed private warehouse is different from a public warehouse. Section 58 deploys the expression dutiable goods imported by or on behalf of the licensee, or any other imported goods . Similar expression is not used in Section 57 with respect to public warehouses wherein dutiable goods may be deposited. It is clear that the goods deposited in private warehouses are considered to be goods which have already been imported. Further, warehousing bond is dealt with in Section 59 which is issued where the goods have been entered for warehousing and after assessment of the duty, the bond is executed for a sum twice the amount of the duty assessed. When the requirements in Section 59 are complied with then permission to deposit the goods in warehouse is granted. This indicates that both in public warehouses and private warehouses the deposits are permitted only for goods which are already imported. Stringent provision is made in Section 59(2) to pay all duties or interest on or before the date of demand. Under Section 62, the proper custom officer exercises control over all the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under Art.304(a). Any incentive/benefits of concession in the rate of tax given to the local manufacturers/producers in order to encourage the local manufacturers/production in the State cannot be said to be discriminatory. Digvijay and Video Electronics have laid down the correct law. Mahavir Oil Mills is not a correct view. Levy of entry tax on the goods imported from the other States is not discriminatory merely on the ground that there are no similar goods manufactured or produced within the taxing State. The law laid down in Kalyani Stores is not a good law. Levy of entry tax on the goods imported from outside India which enter into local area for consumption, use or sale therein is within the legislative competence of the State. QUESTION NO. 2: IF ANSWER TO QUESTION NO.1 IS IN THE AFFIRMATIVE, CAN A TAX WHICH IS COMPENSATORY IN NATURE ALSO FALL FOUL OF ARTICLE 301 OF THE CONSTITUTION OF INDIA? QUESTION NO. 3: WHAT ARE THE TESTS FOR DETERMINING WHETHER THE TAX OR LEVY IS COMPENSATORY IN NATURE? 178. The concept of compensatory tax is a judicially evolved concept. Majority in Atiabari held that taxes may and do amount to restri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itself, this Court had ruled out the element of quid pro quo from the ambit of compensatory tax. While stressing on the need for ensuring that the assessees are not paying much more than what is required for providing the facilities , the Court merely intended to prohibit levy of an exorbitant tax. It was nowhere intended by the Court to authorise levy of fee in the name of compensatory tax . 181. In various cases, this Court has repeatedly held that regulatory measures like licensing or price control or compensatory measures cannot be treated as violative of freedom of trade, commerce and intercourse within the territory of India. While upholding the enhancement of the motor vehicles tax, in G.K. Krishnan v. State of Tamil Nadu (1975) 1 SCC 375, this Court held that a compensatory tax is not a restriction upon the movement part of trade and commerce. Neither should the tax go beyond a proper recompense to the State for the actual use made of the physical facilities provided in the shape of a road nor it is necessary that there should be a separate fund or express allocation of money for the maintenance of roads to prove the compensatory purpose, when such pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tory taxes and from other taxes of a general nature nor can there be any objection to more or less expenditure being incurred on the object behind the compensatory and regulatory levy than the realisation from the levy . [ Emphasis added ] 183. In M/s. Bhagatram Rajeevkumar v. Commissioner of Sales Tax, M.P. and Ors. 1995 Supp (1) SCC 673, it was held that even if there is some link or some connection between the tax and the facilities extended to the trade directly or indirectly the levy cannot be challenged as invalid. 184. The same dictum was followed in State of Bihar and Ors. v. Bihar Chamber of Commerce and Ors. (1996) 9 SCC 136, wherein this Court considered the challenge to a legislation in which the State of Bihar levied entry tax on the goods entering into a local area for consumption, use or sale therein. The Act was challenged as violative of Art.301 of the Constitution. After referring to Bhagatram , it was held as under:- 18. In this connection, it is necessary to notice a few decisions brought to our notice. In Bhagatram Rajeevkumar (1995) Suppl. 1 SCC 673, a three-judge Bench of this Court has rejected the argument that to be compensatory, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w enacted is to enforce discipline or conduct under which the trade has to perform or if the payment is for regulation of conditions or incidents of trade or manufacture then the levy is regulatory. This is the way of reconciling the concept of compensatory tax with the scheme of Articles 301, 302 and 304. ... The Bench further held: 45 . To sum up, the basis of every levy is the controlling factor. In the case of a tax , the levy is a part of common burden based on the principle of ability or capacity to pay. In the case of a fee , the basis is the special benefit to the payer (individual as such) based on the principle of equivalence. When the tax is imposed as a part of regulation or as a part of regulatory measure, its basis shifts from the concept of burden to the concept of measurable/ quantifiable benefit and then it becomes a compensatory tax and its payment is then not for revenue but as reimbursement/ recompense to the service/facility provider . It is then a tax on recompense. Compensatory tax is by nature hybrid but it is more closer to fees than to tax as both fees and compensatory taxes are based on the principle of equivalence and on the basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The distinction between tax and fee has been elucidated in Gujarat Ambuja Exports Limited and Another v. State of Uttarakhand and Others (2016) 3 SCC 601 as under: .it is necessary to consider the difference between the concept of tax and that of a fee. The neat and terse definition of tax which has been given by Latham, C.J., in Matthews v. Chicory Marketing Board (1938) 60 C.L.R. 263 is often cited as a classic on this subject. A tax , said Latham, C.J., is a compulsory exaction of money by public authority for public purposes enforceable by law, and is not payment for serviced rendered . In bringing out the essential features of a tax this definition also assists in distinguishing a tax from a fee. It is true that between a tax and a fee there is no generic difference. Both are compulsory exactions of money by public authorities; but whereas a tax is imposed for public purposes and is not, and need not, be supported by any consideration of service rendered in return, a fee is levied essentially for services rendered and as such there is an element of quid pro quo between the person who pays the fee and the public authority which imposes it .In regard to fees th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the States in the form of entry tax has to necessarily form part of this Fund, and once it so subsumed, States cannot be asked to show a proximate quid pro quo by furnishing quantifiable data as to their expenditure. It may not be possible for the States to show with mathematical precision a direct link between the expenditure incurred in individual cases and the corresponding levy imposed. 188. I hold that the entry tax levied by various States, falling within the domain of entry 52, List II, is a tax simpliciter, even though by nomenclature it is termed as a compensatory tax . Subject to passing the muster of Art. 304(a), entry tax levied by the States under entry 52, List II even though termed as compensatory tax does not fall foul of Art. 301. The ratio laid down in Jindal Stainless Ltd. (2) equating compensatory taxes to fee had wide ramifications. Some High Courts viz., Orissa, Chhattisgarh and Madhya Pradesh upheld the levy of entry tax as compensatory. Many other High Courts struck down the levy applying the test laid down in Jindal Stainless Ltd. (2) . In those cases where the levy was struck down, High Courts held that the State could not show what w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... realized by the levy should be put into a separate Fund or that the levy should be proportionate to the expenditure. There is no bar to subsumption of the revenue realized from regulatory/compensatory taxes into the Consolidated Fund of the State as they are no different from other taxes of a general nature. Moreover, the quantum of expenditure incurred in achieving the object behind a compensatory levy cannot be inquired into. Jindal Stainless Ltd. (2) Anr. v. State of Haryana Ors. (2006) 7 SCC 241 is not a correct view in adopting quantifiable data approach; for a tax, there is no requirement of proximate quid pro quo and Jindal Stainless Ltd. (2) is overruled. The view taken in Bhagatram and Bihar Chamber of Commerce is correct as the same is in harmony with the original design of compensatory tax laid down in Automobile . REFUND AND UNJUST ENRICHMENT:- 192. Lastly, it is necessary to consider an important issue raised by the assessees on the payment of tax/refund of tax in case the validity of the legislations is upheld or otherwise as the case may be. It has come on record that many Entry Tax legislations of the State are enacted pursuant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0; Mafatlal Industries Ltd vs Union of India (1997) 5 SCC 536 etc. 195. By catena of judicial pronouncements, this Court has fairly laid down the concept of `unjust enrichment' in respect of tax laws. The doctrine of unjust enrichment is that no person can be allowed to enrich inequitably at the expense of another. A right of recovery/payment under the doctrine of unjust enrichment arises where retention of a benefit is considered contrary to justice or against equity. The concept of unjust enrichment is applicable for the purpose of grant of refund. The concept provides that if a person pays tax/duty to the Government in terms of the prevailing tax Statutes and passes it on to the consumers and, subsequently, the tax/duty is found not payable, refund cannot be claimed from the Government authorities, as whatever liability he had incurred has already been recovered. And, if he gets the refund, he would be unjustly enriched. 196. In Mafatlal Industries Ltd v. Union of India (1997) 5 SCC 536, a nine-judge Bench of this Court considered the scope and ambit of the said doctrine in detail. The Court held that Central Excise and Salt Act is a self-contained Code ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... presents the people of the country. No one can speak of the people being unjustly enriched. 197. In Godfrey Philips India Ltd. v. State of U.P. (2005) 2 SCC 515, the constitutional validity of the Uttar Pradesh Tax on Luxuries Act, 1995 as also other State Acts was challenged inter alia on the ground of legislative competence of the State Legislatures. The Court allowed the petition and held that the State Legislatures were not competent to impose luxury tax on tobacco and tobacco products and the Acts were declared ultra vires and unconstitutional. In the intervening period, however, tax was collected by the appellants from consumers and also paid to the State Governments. The Court held as under: 94. It was stated on behalf of the State Governments that after obtaining interim orders from this Court against recovery of luxury tax, the appellants continued to charge such tax from consumers/customers. It is alleged that they did not pay such tax to respective State Governments. It was, therefore, submitted that if the appellants are allowed to retain the amounts collected by them towards luxury tax from consumers, it would amount to unjust enrichment by them. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... templated by Entry 52 may cover the Whole State or a local area as notified in the legislation . I agree with the view taken in Bihar Chamber of Commerce that from the point of view of entry tax that the State is a compendium of local areas and where the local areas contemplated by the Act cover the entire State, the difference between the State and a local area practically disappears. Articles 304(a) and 304(b) are to be read disjunctively; both apply to different subject matters; while Art. 304(a) deals with tax, Art. 304(b) deals only with non-fiscal matters. Where there is equivalence in terms of tax treatment between the locally produced goods and the ones imported from other States, levy of entry tax on the goods imported from other States when there is no such levy on the locally produced goods is not discriminatory. Every differentiation is not discrimination. Any difference in the rate of tax on goods locally manufactured and those imported, such difference not being discriminatory does not fall foul under Art.304(a). Any incentive/benefits of concession in the rate of tax given to the local manufacturers/producers in order to encourage the loca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laid down in Automobile . Unjust Enrichment: The concept of unjust enrichment is applicable for considering the question of refund. Unless the assessees establish that they have not passed on the tax burden to the consumers, they cannot make a claim for refund and unjustly enrich themselves. JUDGMENT Dr D Y CHANDRACHUD, J This judgment is structured to consist of the following parts : A Introduction; B Part XIII of the Constitution : text and context; C Constitutional history as a guide; D The trend-setting decisions : Atiabari and Automobile Transport ; D1 Atiabari : Article 301 and taxation D.2 Automobile Transport E Compensatory taxes; E.1 Original understanding E.2 Khyerbari E.3 Subsequent applications E.4 The breaking point E.5 Doctrinal concerns and inconsistencies F The content of freedom : goods, services, persons and capital; G Taxation and Federalism; H Taxing powers; H.1 Article 245 and constitutional limitations H.2 Sovereignty and constitutional limitations H.3 Part XIII and taxation H.3.1 All taxes are not impediments H.3.2 Articles 302, 303 and 304 H.3.3 Construing Art ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were far from uniform at the eve of Independence. Many of the erstwhile princely states had concerns about ceding their control over trade and commerce to a national entity. Part XIII was formulated in this background. It represents the balancing vision of the framers and seeks to create an equilibrium between free trade and regulation, state and federal control and between provincial autonomy and national interests in an area closely related to economic growth and development. 2 Yet, the semantics of the provisions adopted in framing all of six constitutional articles which comprised Part XIII- Articles 301 to 306 - attracted criticism within the Constituent Assembly. One member complained of several provisions threatening to become a paradise for lawyers where there will be so many innumerable loopholes that we will be wasting years and years before we could come to the final and correct interpretation of many clauses P.S. Deshmukh : Constituent Assembly Debates, Vol. IX, pp. 1131; see also: B. Shiva Rao, The Framing of India s Constitution A study, p. 704 (1978) . Many years later, a distinguished Judge of this court spoke of the mix up of exception upon exception in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch would knit the nation together as a cohesive unit. The instrumentalities of trade and commerce were conceived, in the vision of the draftsmen of the Constitution, as a means for bringing about economic integration. The economic integration of India into a common market was to be achieved by guaranting the freedom of trade throughout the territory of India. Yet, at its birth the new nation comprised of different regions, with disparate social attainments and economic development. They had their own concerns, be they the erstwhile princely states or the states which formed part of British India. Part XIII reflected an attempt by the framers to draw a balance between freedom on one hand and the need to regulate to protect diverse aspects of public interest both of a national and regional character, on the other. The regulatory power under Article 302 would enable the national legislative body to perceive and regulate aspects of public interest of a national character. Within the area of regulation a distribution was envisaged between the Centre and the States to preserve the balance within the newly created federation. The attention that was bestowed to the regulatory requirements ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Constitution : Text and Context 8 Part XIII of the Constitution has more than an abundant share of constitutional intricacies. Despite a judicial discourse of more than five decades, the debate on the true meaning of its provisions continues to bedevil academics, lawyers and judges who have had occasion to visit its provisions. 9 The ambit of Part XIII is trade, commerce and intercourse within the territory of India. Article 301 Article 301: Freedom of trade, commerce and intercourse : Subject to the other provisions of this Part, trade, commerce and intercourse throughout the territory of India shall be free. mandates that trade, commerce and intercourse throughout the territory of India shall be free, subject to the other provisions of Part XIII. The freedom thus conferred is subject to the restrictions that are contemplated in the provisions of Part XIII that follow. The sources of the restrictions, the extent of the restrictions and the limitations or qualifications upon the power to restrict are defined in Part XIII. 10 In framing Article 301, the framers of the Constitution made a deliberate departure 88 Article 301: Freedom of trade, commerce and intercou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not merely among the states. The expression among the states would cover a movement inter-State or across State boundaries. In discarding the expression among the states (which is used in Section 92 of the Australian Constitution) and among several states (which is used in Article 1 Section 8 of the US Constitution), Article 301 guarantees a more comprehensive coverage to the freedom to include both inter-State and intra-State trade, commerce and intercourse. Throughout the territory of India , means in every part of India. In other words, the freedom that is conferred by Article 301 extends over but is not confined to inter-State movement across State boundaries. 13 The Constitution, while recognising the freedom of trade, commerce and intercourse throughout the territory of India makes that freedom subject to the provisions of Part XIII. Article 302 Article 302 : Power of Parliament to impose restrictions on trade, commerce and intercourse : Parliament may by law impose such restrictions on the freedom of trade, commerce or intercourse between one State and another or within any part or the territory of India as may be required in the public interest. empowers Parliam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the situation contemplated by clause 2 of Article 303. The prohibition on the enactment of law which has the effect of granting preferences or making discrimination between states is, in relation to Parliament, lifted by clause 2 when it is necessary to deal with a situation of the scarcity of goods in any part of India. 14 Article 304 Article 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 that 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 or a State without the previous sanction of the President. commences with a non-obstante provision, notwithstanding anything in Article 301 or Arti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithin that state. The expression with or within that state indicates that the state legislature in exercise of its power can impose restrictions both in regard to inter-State as well as intra-State trade, commerce and intercourse. The power of the state to do so is, however, conditioned by three limitations : the first is that the restriction must be reasonable; the second is that the restriction should be required in the public interest; and the third which is spelt out in the proviso, is that the Bill or an amendment for the purpose of clause (b) shall not be introduced or moved in the legislature of a state without the previous sanction of the President. 16 A plain construction of the provisions of clause (a) and clause (b) of Article 304 would indicate that clause (a) is not exhaustive of the universe of taxing legislation insofar as the state legislatures are concerned. Clause (a) of Article 304 embodies the principle of non-discrimination and prescribes it as a limitation subject to which a state may by law impose a tax on goods which are imported into the state. Clause (a) lifts the embargo arising from Article 301 on the power of a state to impose a tax on goods import ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wield India into an economically integrated entity. In adopting Part XIII, the founding fathers did not intend to elaborate as much on the notion of lassiez-faire as on the integration of India into an economic entity. 21 The Constitution was framed in the context of a social, economic and political upheaval. The Constituent Assembly debates provide an enriching insight into the problems and concerns that were present to the minds of the draftsmen of the Constitution, as they adopted what became Part XIII. Dr B Shiva Rao in his seminal work titled The Framing of India s Constitution (Chapter 22 Part. 699) explains the historical perspective which led to the attention of the Constituent Assembly being engaged towards the freedom of trade and commerce within the territories of the Union : Under the British Rule, freedom of trade was the established practice in British India, with no inter-provincial duties or other trade barriers. With the advent of provincial autonomy in April, 1937, it was considered necessary to place this mater on a statutory basis. Accordingly, section 297 of the Government of India Act, 1935, prohibited Provincial Governments from imposing barriers o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... might encourage competition between them and thus weaken the federal idea and should, therefore, be prevented. The committee accepted the provisions as recommended by the sub-committee with one change; the sub-clause providing for central regulation of trade by or with non-citizens was dropped as being vague and unnecessary. (Id. at p.700) 24 The clause was debated in the Constituent Assembly. B N Rau incorporated the following clauses in the draft constitution of October 1947 : Subject to the provisions of any Federal law, trade, commerce and intercourse among the units shall, if between the citizens of the Federation, be free : Provided that nothing in this section shall prevent any unit from imposing on goods imported from other units any tax to which similar goods manufactured or produced in that unit are subject, so, however, as not to discriminate between goods so manufactured or produced : Provided further that no preference shall be given by any regulation of trade, commerce or revenue to one unit over another: Provided also that nothing in this section shall preclude the Federal Parliament from imposing by Act restrictions on the freedom of trade, commerce and inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A, exclusively devoted to trade, commerce and intercourse within the territory of India be adopted. Part XA was to consist of Articles 274A to 274E. Eventually, Article 16 was deleted from the Chapter on Fundamental Rights on the ground that with the inclusion of the right in Article 274A (corresponding to present Article 301), the retention of Article 16 was rendered superfluous. Dr Ambedkar explained that different articles which were scattered in various parts were brought together in one part dealing with the freedom of trade, commerce and intercourse. Shiva Rao adverts to the observations of Alladi Krishnaswami Ayyar, which are significant : Alladi Krishnaswami Ayyar replied that the transfer of a provision in regard to freedom of inter-State trade from one part of the Constitution to another did not alter or affect the nature of the right embodied in it; the mere placing of a provision in the chapter on fundamental rights did not carry with it any particular sanctity, nor did its justiciability depend on such placement. (Id. at p.706) Moreover, with the integration of the Indian states and with the strong federation having materialised there was no need felt to retain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds think that we are in the days of the nineteenth century when the laissez faire enthusiast had practically the ordering of everything in the world, I am afraid they are mistaken. In his address to the Constituent Assembly, T T Krishnamachari emphasised the need to restrain the exercise of state powers which, it was apprehended, may be deployed to pursue narrow provincial interests : A certain amount of freedom of trade and commerce has to be permitted. No doubt, restrictions by the State have to be prevented so that the particular idiosyncrasy of some people in power or narrow provincial policies of certain States should not be allowed to come into play and affect the general economy of the country. 31 Yet regional concerns could not be ignored. Addressing the Constituent Assembly, Alladi Krishnaswami Ayyar spoke about the diversity of interests, geographical position and economic attainments of various regions of the country. They required attention as well: My friend, Dr Ambedkar in the scheme has evolved and has taken into account the larger interests of India as well as the interest of particular states and the wide geography of this country in which the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... economic development. Towards achieving that goal, the founding fathers recognised the need to weave the nation into one economic entity. At the same time, regional interests representing the diversity prevalent within the states had to be recognised by allowing a regulatory role for the states. While recognising the importance of the state legislatures in relation to trade, commerce and intercourse, the founding fathers had evident concerns about what they described as parochial interests or narrow provincial policies posing a danger to the economic development of the nation. Hence, the Union Government was conferred with a power of intervention which was qualitatively different from the regulatory power conferred upon the states. To the Union Government was assigned the role of ensuring that the goal of PART C pursuing economic development of the nation as one economic entity was not PART D destroyed by the pursuit of parochial interests. It was in that background that the proviso to Article 304 (b) mandated the prior sanction of the President to a bill or amendment introduced in the state legislature for imposing reasonable restrictions in the public interest on the freedom tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Seventh Schedule. According to this view, restrictions on freedom of trade and commerce include burdens in the nature of taxation. The Act was held as having infringed Article 301 and failing compliance with the proviso to Article 304 (b), it was found to be unconstitutional. Chief Justice B P Sinha differed with the majority on the ground that Part XIII of the Constitution did not justify the inference that taxation simpliciter is within Article 301 of the Constitution. 39 The correctness of the view in Atiabari was reconsidered by a larger bench of seven Judges in Automobile Transport (supra) . The Rajasthan Motor Vehicles Taxation Act, 1951 provided for the levy of a tax on motor vehicles used in any public places or kept for use in Rajasthan. The Rajasthan High Court, in view of a judgment rendered by its Full Bench negatived a challenge to the provisions of the Act. The decision of the Rajasthan High Court had been rendered before the judgment in Atiabari was pronounced. When a Bench of seven Judges considered the matter in this Court, Justice S K Das, delivered the leading majority judgment on behalf of himself and Justices Kapoor and Sarkar. 40 The view of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts as also transport of goods and commodities for the purposes of production, distribution and consumption in all their aspects, that is to say, transportation by land, air or water. They must also include commerce not only in goods and commodities, but also transportation of men and animals by all means of transportation. Commerce would thus include dealings over the telegraph, telephone or wireless and every kind of contract relating to sale, purchase, exchange etc. of goods and commodities. (Id. at p. 826-827) 44 In the view of Chief Justice Sinha, in this comprehensive sense, taxation of trade, commerce and intercourse would cover almost the entire field of public taxation both in the Union and in the State lists. Hence, it is almost impossible to think that the makers of the Constitution intended to make trade, commerce and intercourse free from taxation in that comprehensive sense . (emphasis supplied) 45 The first reason adduced in Chief Justice Sinha s judgment for not adopting such a comprehensive definition of the freedom under Article 301 is that the power to tax in order to raise revenue is a manifestation of sovereignty. Being a sovereign power, it is not ordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xes, discriminatory or otherwise, is a class apart from imposition of reasonable restrictions on freedom of trade, commerce and intercourse. (Id. at p. 824) Fifthly, Chief Justice Sinha opined that not all taxes constitute necessarily an impediment or restraint in the matter of trade, commerce and intercourse : 15 ..all taxation is not necessarily an impediment or a restraint in the matter of trade, commerce and intercourse. Instead of being such impediments or restraints, they may, on the other hand, provide the wherewithals to improve different kinds of means of transport, for example, in cane growing areas, unless there are good roads, facility for transport of sugarcane from sugarcane fields to sugar mills may be wholly lacking or insufficient. In order to make new roads as also to improve old ones, cess on the grower of cane or others interested in the transport of this commodity has to be imposed, and has been known in some parts of India to have been imposed at a certain rate per maund or ton of sugarcane transported to sugar factories. Such an imposition is a tax on transport of sugarcane from one place to another, either intra-State or inter-State. It is the tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ased on the provisions of Part XIII. (Id. at p. 830) 47 In this view, a law which imposes an impediment to the free flow of trade, commerce and intercourse such as by a high tariff wall is not a measure of taxation but assumes a character of a trade barrier : 16 ..If a law is passed by the Legislature imposing a tax which in its true nature and effect is meant to impose an impediment to the free flow of trade, commerce and intercourse, for example, by imposing a high tariff wall, or by preventing imports into or exports out of a State, such a law is outside the significance of taxation, as such, but assumes the character of a trade barrier which it was the intention of the Constitution - makers to abolish by Part XIII. (Id. at p. 829) The conclusions of the Chief Justice are restated in the following propositions : 16 .The objections against the contention that taxation was included within the prohibition contained in Part XIII may thus be summarised: (1) Taxation, as such, always implies that it is in public interest. Hence, it would be the outside particular restrictions, which may be characterised by the courts as reasonable and in public interest. (2) The power ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 49 The judgment of Justice Gajendragadkar, for the majority holds that the power of taxation is subject to constitutional provisions : 35 Basing himself on this character of the taxing power of the State, the learned Attorney General has asked us to hold that Part XIII that can have no application to any statute imposing a tax. In our opinion, this contention is not well-founded .. therefore, the true position appears to be that, though the power of levying tax is essential for the very existence of the government, its exercise must inevitably be controlled by the constitutional provisions made in that behalf. It cannot be said that the power of taxation per se is outside the purview of any constitutional limitations. (Id. at p. 846) 50 Justice Gajendragadkar noted first, that the power under Article 265 of the Constitution to levy a tax under the authority of law is referable to Article 245 read with the corresponding legislative entries in the Seventh Schedule. Since Article 245 is subject to the provisions of the Constitution, the power of Parliament and of the state legislatures to impose taxes is subject to the application of constitutional provisions, which must ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 304. Finally, Justice Gajendragadkar held that movement of trade is the essence of the freedom guaranteed by Article 301. If transport or movement of goods is taxed solely on the basis that goods are carried PART D or transported, that would affect directly the freedom of trade under Article 301 : 49 ..it certainly includes movement of trade which is of the very essence of all trade and 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. (Id ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hit. Between discriminatory tariffs and trade barriers on the one hand and taxation for raising revenue on commercial intercourse, the difference is one of purpose and not of quality. Both these forms of burden on commercial intercourse trench upon the freedom guaranteed by Article 301. (Id. at p. 874-875) The freedom under Article 301, in the judgment of Justice Shah, connotes freedom from tax burdens as well as other impediments but is subject to Part XIII of the Constitution. 54 The distinction between the judgment of the majority and the view of Justice Shah is precisely in the extent to which tax laws are held to fall within the ambit of Article 301. For the majority, movement constitutes the soul of trade whereas for Justice Shah, it is not an essential ingredient in all situations. For the majority, it is the movement or the transport part of trade that must be free subject to the limitations in Part XIII. However, it was only such taxes as directly and immediately impede trade that fall within the purview of Article 301. Justice Gajendragadkar rejected the contention that all taxes should be governed by Article 301 whether or not their impact on trade is immediate a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The circumstance that the Constitution has chosen to deal with a specific field of taxation as an exception to Articles 301 and 303 (which should really be Article 303(1)) strongly supports the inference that taxation was one of the restrictions from the imposition of which by the guarantee of Article 301, trade, commerce and intercourse are declared free. (Id at p. 881) Thirdly, Justice Shah adopts the same position as the majority did in holding that the expression restrictions in clause (b) of Article 304 includes a restriction in the nature of a tax : 75 ..Clause (b) deals with a general restriction which includes a restriction by the imposition of a burden in the nature of tax. Clause (a) deals with a specific burden of taxation in a limited field. (Id. at p. 881) 56 The basic difference between the judgment of the majority and the decision of Justice Shah lies in the extent to which the taxing power is regarded as being within or outside the purview of Article 301. For the majority every taxing legislation is not within the ambit of Article 301. The guarantee under Article 301 is against such restrictions as directly and immediately restrict or impede the free ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cle 301 which could have been achieved lawfully only by satisfying the requirements of Article 304 (b). On the other hand, Chief Justice Sinha would regard only a discriminatory tax as a restriction on trade. D.2 Automobile Transport 58 The seven Judge bench in Automobile Transport dealt, in the three judgments which were delivered, with: (i) the nature and extent of the freedom guaranteed by Article 301; (ii) the power to impose taxes; (iii) constitutional limitations or restrictions on the power to tax; (iv) the necessity of interpreting the provisions of Part XIII so as not to eviscerate the sovereignty of the states; and (v) whether, and if so, the extent to which Part XIII controls fiscal legislation. D.2.1 Freedom and regulation 59 Justice S K Das, in the leading judgment of the majority held that though Article 301 runs unqualified , the freedom must necessarily be delimited by considerations of social orderliness : 10 . As the language employed in Article 301 runs unqualified the Court, bearing in mind the fact that that provision has to be applied in the working of an orderly society, has necessarily to add certain qualifications subject to which a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of vehicles do not impede trade. Adverting to these examples Justice S K Das held : 10 ..that the application of rules like the above does not really affect the freedom of trade and commerce; on the contrary they facilitate the free flow of trade and commerce. The reason is that these rules cannot fairly be said to impose a burden on a trader or deter him from trading: it would be absurd, for example, to suggest that freedom of trade is impaired or hindered by laws which require a motor vehicle to keep to the left of the road and not drive in a manner dangerous to the public. If the word free in Article 301 means freedom to do whatever one wants to do , then chaos may be the result. (Id. at p. 522) Justice Subba Rao adopted the same position. Facilitative regulations, in his view, do not restrict trade : 37 Before a particular law can be said to infringe the said freedom, it must be ascertained whether the impugned provision operates as a restriction impeding the free movement of trade or only as a regulation facilitating the same. Restrictions obstruct the freedom, whereas regulations promote it. Police regulations, though they may superficially appear to restr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e power conferred under the Constitution by virtue of the entries found therein. It is a law just like any other law made under the Constitution. This Court, in K. Thathunni Moopil Nair v. State of Kerala [ AIR (1962) SC 552] and in Balaji v. I.T. Officer [ AIR (1962) SC 123] , held that a law of taxation would be void if it infringed the fundamental right guaranteed under Article 19 of the Constitution. Therefore, the law of taxation also should satisfy the two tests laid down in Article 19(6) of the Constitution. It is said that a law of taxation is always in public interest. Ordinarily, it may be so, but it cannot be posited that there cannot be any exceptions to it. A taxing law may be in public interest in the sense that the income realised may be used for public good, but there may be occasions, when the rate or the mode of taxation may be so abhorrent to the principles of natural justice or even to the well settled principles of taxation that it may cause irremediable harm to the public rather than promote public good, that the court may have to hold that it is not in public interest. Nor can I agree with the contention that it is impossible for a court to hold in any case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D view would lead to a situation where every law passed by the state legislature would be subject to the proviso to Article 304(b). Justice S K Das observed that a construction which would bring about such a result must be avoided : 11 .. 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 imposition of taxes in List II. The Constitution-makers must have intended that under those items, the States will be entitled to raise revenue for their own purposes. If the widest view is accepted, then there would be for all practical purposes, an end of State autonomy even within the fields allotted to them under the distribution of powers envisaged by our Constitution. An examination of the entries in the Lists of the Seventh Schedule to the Constitution would show that there are a large number of entries in the State List (List II) and the Concurrent List (List III) under which a State Legislature has power to make laws. Under some of these ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted all state legislations having a conceivable, if even remote, impact upon trade to Presidential sanction : 124 the financial independence of the States was secured by an elaborate division of heads of taxation, which were well thought out to provide the States with the means of independent existence and the wherewithal of nation-building activities. There is hardly any tax which the States are authorised to collect which could not be said to fall on traders. Property tax, sales tax, municipal taxes, electricity taxes (to mention only a few) are paid by traders as well as by non-traders. To say that all these taxes are so many, restrictions upon the freedom of trade, commerce and intercourse is to make the entire Constitutional document subordinate to trade and commerce. Since it is axiomatic that all taxes which a tradesman pays must burden him, any tax which touches him must fall within Article 304, if the word restriction is given such a wide meaning, every such legislation will then be within the pleasure of the President, and this could not have been intended. Restriction must, therefore, mean something more than a mere tax burden. (Id. at p. 633-634) Every burd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ier part of this judgment. Such regulatory measures as do not impede the freedom of trade, commerce and intercourse and compensatory taxes for the use of trading facilities are not hit by the freedom declared by Article 301. (Id. at p. 528) In the view of the majority : 17 .Regulatory measures or measures imposing compensatory taxes for the use of trading facilities do not come within the purview of the restrictions contemplated by Article 301 and such measures need not comply with the requirements of the proviso to Article 304 (b) of the Constitution. (Id. at p. 533) Compensatory taxes were held to lie outside Article 301. Not being restrictions which hamper the freedom of trade, compensatory taxes would not fall within the ambit of Article 301 and were not subject to the rigours of the proviso to Article 304(b). 73 The tax imposed by the State of Rajasthan was held to be compensatory since it facilitated trade and commerce : 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. (Id. at p. 536) A tax would not cease to be compe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice Hidayatullah adopted the position that a tax would amount to a restriction when it is placed upon trade directly and immediately. But, in his view, a distinction would have to be drawn between a tax which is paid by tradesmen in common with non-tradesmen and a tax upon trade. A tax which is imposed upon trade, as such, must be distinguished from general taxes imposed for the purposes of revenue. The latter are normally not within the reach of Part XIII : 125.That a tax is a restriction when it is placed upon a trade directly and immediately may be admitted. But there is difference between a tax which burdens a trader in this manner and a tax, which being general, is paid by tradesmen in common with others. The first is a levy from the trade by reason of its being trade, the other is levied from all, and tradesmen pay it because everyone has to pay it. There is a vital difference between the two, viewed from the angle of freedom of trade and commerce. The first is an impost on trade as such, and may be said to restrict it; the second may burden the trader, but it is not a restriction' of the trade. To refuse to draw such a distinction would mean that there is no taxing e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Third, the test to be applied in determining whether a law infringes the freedom guaranteed by Article 301 is whether the direct and immediate effect is to hinder the movement of trade. A law which has that effect, including a tax law must, where it has been enacted by the state legislature be subject to the provisions of Article 304. Fourth, compensatory taxes which are imposed in consideration of the facilities which are provided by the state to trade and commerce are outside the ambit of Article 301. Fifth, a compensatory tax does not hinder the freedom of trade and commerce and need not comply with the PART E requirements of the proviso to Article 304(b) of the Constitution. E.2 Khyerbari 77 In Atiabari , an enactment of 1954 legislated by the State of Assam was found to be invalid. The state legislature then obtained the previous sanction of the President under Article 304(b) and proceeded to enact the Assam Taxation (on goods carried by road or on inland waterways) Act - 1961. A Constitution Bench dealt with the challenge to the new law in Khyerbari Tea Co. Ltd. v. State of Assam (1964) 5 SCR 975. 78 Justice Gajendragadkar who delivered the judgment of the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... having been invalidated in Atiabari . In Atiabari , the view of the majority was that such a tax (even if compensatory) could be sustained only after complying with Article 304(b). The earlier law had been struck down though it was compensatory . Justice Gajendragadkar found that it would be unfair to preclude the petitioners from PART E contending that the compensatory character of the levy was not material to its validity under Part XIII. Justice Gajendragadkar accordingly held as follows : 14 . If in the present case, it had been urged before us that the tax levied by the Act is compensatory in character, it would have been necessary to consider the question once again by constituting a larger Bench. It will be recalled that the Act with which we are concerned has been passed by the Assam Legislature directly as a result of the decision of this Court in Atiabari Tea Co. case [(1961) 1 SCR 809] ; that decision was that if the tax imposed by the Act was compensatory in character, then the Act could be sustained only if it was passed after complying with the provisions of Article 304(b). The Assam Legislature has accordingly adopted the said procedure and passed the Act. If ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... G. K. Krishnan v. State of TN[1975] 1 SCC 375; International Tourist Corpn. v. State of Haryana[1981] 2 SCC 318, 1981 SCC (Tax) 103; Malwa Bus Service (P) Ltd. v. State of Punjab[1983] 3 SCC 237, 1983 SCC (Tax) 162; Meenakshi v. State of KarnatakaAIR (1983) SC 1283 , (1984) Supp SCC 326, (1984) SCC (Tax) 206; B.A. Jayaram v. Union of India[1984] 1 SCC 168 and State of Maharashtra v. Madhukar Balkrishna Badiya[l988] 4 SCC 290, (1988) SCC (Tax) 506. 83 In International Tourist Corporation v. State of Haryana(1981) 2 SCC 318, Justice O. Chinnappa Reddy speaking for a Bench of two Judges of this Court refined the test of a regulatory and compensatory tax by stipulating that there must exist a specific or identifiable object behind the levy and a nexus between the subject and the object. This Court held : 9.While in the case of a fee it may be possible to precisely identify and measure the benefits received from the Government and levy the fee according to the benefits received and the expenditure incurred, in the case of a regulatory and compensatory tax it would ordinarily be well nigh impossible to identify and measure, with any exactitude, the benefits received and the expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which, though invariably found to occur in some form or another in the transaction or action are not essential to the conception. What is relevant is the contrast between the essential attribute of trade and commerce and the incidents of the transaction which do not give it necessarily the character of trade and commerce. Such matters relating to hours, equipment, weight/size of load, lights, which form the incidents of transportation, even if inseparable, do not give the transaction its essential character of trade or commerce. Laws for Government of such incidents regulate . (Id. at p. 381) 85 The Bench of three Judges, following the line of precedent in Automobile Transport held that for a law to become a prohibited tax, it has to be a direct tax, the effect of which is to hinder the movement part of trade. A tax which is compensatory or regulatory does not however operate as a restriction on the freedom under Article 301. The nature of a compensatory tax was considered in the following observations : 17. Strictly speaking, a compensatory tax is based on the nature and the extent of the use made of the roads, as for example, a mileage or ton-mileage charge or the like ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acilitate trade. A compensatory tax is distinguished from a general measure of taxation. The state may impose the tax as a part of raising revenues in aid of the general expenditure of the state. Though, all revenues of the state in the ultimate analysis are expended for public purposes, a burden imposed as a part of raising resources for meeting general expenditure is not compensatory. A compensatory tax in terms of the concept evolved by the Supreme Court in PART E Automobile Transport is to provide a proper recompense to the state for the provision or use of all facilities made available to trade and commerce. 87 Justice Mathew, observed that in such matters, a rough approximation rather than a mathematically accuracy is what is required. The law imposed by the state legislature was held to pass muster of judicial review. 88 The judgment in G K Krishnan (supra) is also noteworthy because it raises the issue as to whether the restrictions contemplated by Article 304(b) would include the levy of a non-discriminatory tax. Justice Mathew held that it was strange that the power to impose a tax conferred upon the states should yet depend upon the sanction of the President un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Pradesh Sthaniya Kshetra Me Mal Ke Pravesh Par Kar Adhiniyam, 1976. No sales tax could be levied on sugar since it is one of the goods on which additional excise duty is leviable under the Additional Duties of Excise Act, 1957. This Court held that though sugar was a commodity on which no sales tax is leviable because additional excise duty is payable, it was within the taxing provisions of the entry tax legislation. There was a challenge to the entry tax law on the ground that it violated Article 301 and that it was not regulatory or compensatory. A Bench of three Judges of this Court held that the figures which had been disclosed by the state as justification for the levy as a compensatory tax were not disputed. However, the Bench reformulated the test of what constitutes a compensatory tax in the following observations : 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. The stand of the State that the revenue earned is being made over to the local bodies to compensate them for the loss caused ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in India Cement Ltd . v. State of Tamil Nadu (1990) 1 SCC 12. The state submitted that due to a loss of revenue from the cess on minerals, it was necessary for the state to find alternative sources of revenue to support its welfare schemes. The money raised would, it was asserted, be spent for the welfare of the state, which was divided into local areas. Moreover, it was urged that even if the levy was not compensatory, the assent of the President had been obtained under Article 304(b) read with Article 255. The enactment was held to be compensatory. The following tests were laid down: 12 .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 indirect one, as held by this Court in Bhagatram Rajeevkumar v. CST [1995 Supp (1) SCC 673 : (1995) 96 STC 654] : (SCC p. 678, para 8) The concept of compensatory nature of tax has been widen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... burden based on the principle of ability to pay. At this stage, we may clarify that in the above case of Automobile Transport [(1963) 1 SCR 491 : AIR 1962 SC 1406], this Court has equated regulatory charges with compensatory taxes and since it is the view expressed by a Bench of seven Judges, we have to proceed on that basis. The fallout is that compensatory tax becomes a sub-class of fees . (Id. at p. 264) Based on this distinction, the Constitution Bench held that if a law, fiscal or otherwise, operates upon the movement of trade or commerce and its effect is to impede that activity, the law would constitute a restriction under Article 301. However, if the law seeks to enforce a payment for regulation of conditions or incidents of trade, it is regulatory in character: 38 ..If the impugned law seeks to control the conditions under which an activity like trade is to take place then such law is regulatory. Payment for regulation is different from payment for revenue. If the impugned taxing or non-taxing law chooses an activity, say, movement of trade and commerce as the criterion of its operation and if the effect of the operation of such a law is to impede the activity, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifiable/measurable benefit provided or to be provided to the payer of the tax. The reference was answered by the Constitution Bench by holding that the test of what constitutes a PART E compensatory tax had been substantially altered by the decisions in Bhagatram and Bihar Chamber of Commerce in a manner which was inconsistent with the judgment of seven Judges in Automobile Transport . In holding that some connection or some link between the tax and the facilities extended would suffice, whether direct or indirect , the judgments in the Bhagatram and Bihar Chamber of Commerce were held to have deviated from the settled concept of compensatory taxes and were hence overruled. E.5 Doctrinal concerns and inconsistencies 96 The theory of compensatory taxes was evolved in Automobile Transport to assimilate doctrinal concerns at several levels. Freedom of trade and commerce under Article 301 of the Constitution is expressly made subject to the provisions of Part XIII. The deliberate use of the expression free instead of absolutely free (the latter expression being adopted in the Australian Constitution) coupled with the language of Article 301 which subjects i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents of the proviso to Article 304(b). 98 The judgment in Automobile Transport indicates that a second doctrinal PART E concern which weighed with the Court was a dilution of the sovereign power to tax conferred upon the states if all fiscal legislation was required to pass muster of a Presidential sanction under the proviso to Article 304(b). This concern was present to the mind of the Court in Automobile Transport , when Justice Das observed that if all legislation of the state legislatures which has a repercussion on tariffs, licensing, marketing regulation and price control was required to proceed through a prior Presidential sanction, the plenary power of the states in the fields of legislation allocated to them would be meaningless. The theory of compensatory taxes was an answer to this conundrum. So long as the tax retained a compensatory character, it did not fall within the fold of Article 301. If a compensatory tax does not offend Article 301, the provisions of Article 304(b) are not attracted. In the same vein, Justice Subba Rao cautioned against a construction of Part XIII that would render the states as the handmade of the central executive . Besides the direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he state legislatures. The difficulties which would be encountered however PART E became evident, when the three judge Bench in Bhagatram and the two judge Bench in Bihar Chamber of Commerce rested the decision on a some connection or some link requirement. If some connection or some link were to suffice, the whole notion of compensatory taxes being a means of recouping the states for the cost of providing facilities to the trade would tend to disappear. In fact, as the decision in Bhagatram indicated, the compensatory aspect of the tax which was upheld in that case was a loss which was sustained by the state as a result of sugar not being amenable to sales tax (being a commodity on which an additional duty of excise was leviable). Similarly, in Bihar Chamber of Commerce , the state had sought to sustain the tax as compensatory on the ground that the loss of revenue sustained from the cess upon minerals, as a result of a judgment of the Supreme Court, had to be made up by tapping an alternative source of revenue. These two decisions showed that the concept of compensatory taxes was understood by the states not as a method of compensating a state for the provision of infr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cifically clarified that the precise amount that is realized need not be spent on the provision of facilities and the only requirement is that the trade should not be made to pay patently much more than what is incurred for the provision of the facilities. The observations in Jindal Stainless requiring the establishment of a nexus or relationship between a quantifiable or measurable benefit and a reimbursement/recompense to the state are contrary to and inconsistent with the law which was laid down in Automobile Transport . 102 Evidently, both Justice Gajendragadkar in Khyerbari and Justice Mathew in G.K. Krishnan had reservations about the concept of compensatory taxes. Justice Gajendragadkar recorded his reservations because the predecessor of the enactment of the state legislature of Assam in issue in Khyerbari had been struck down in the decision in Atiabari . The majority in Atiabari had held the tax to be invalid for want of compliance with the proviso to Article 304(b) despite its compensatory character. Justice Gajendragadkar held that if the new enactment, which had been brought into force after complying with the proviso to Article 304(b) was to be supporte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Transport . But as we have seen, the quantifiable/measurable benefit test laid down in Jindal Stainless by the Constitution Bench is itself replete with doctrinal problems, besides its patent inconsistency with Automobile Transport . If both these extremes are to be avoided, we are left with the middle ground which the decision in Automobile Transport sought to adopt. However, the basic conception of compensatory taxes as propounded in Automobile Transport is vague and indefinite and has produced a maze of doctrinal uncertainty, if not chaos in constitutional litigation. As this batch of appeals indicates, the state legislatures have amended their entry tax legislation to incorporate specific statutory provisions indicating the manner in which the proceeds of the tax would be utilized so as to enable the tax to approximate a compensatory tax. Once the state legislature has done so, by adopting statutory provisions, would the Court have either the expertise or the competence to second guess the basis which has been made by the state legislature? The answer to that would necessarily have to be in the negative. The Court cannot assume the character of an accountant overseeing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y citizen the right to carry on any occupation trade or business. At a certain level, a distinction can be drawn between the two sets of freedoms. Article 19(1)(g) guarantees individual freedom. Article 301, on the other hand, looks at trade, commerce and intercourse as a whole. Such a distinction however may have its own limitations. Individual rights of all citizens protected by Article 19 lead to the establishment of a constitutional democratic order governed by the rule of law and based on human freedom. The dichotomy that Article 301 in its perspective looks at trade and commerce as a whole (as distinguished from an individual right) may also have its own limitations. The freedom recognised by Article 301 is enforceable. Enforceability is at the behest of an individual. In the constitutional recognition of freedom dwells the constitutional right of the individual to enforce it and to secure remedies for enforcing wrongs. The real content of freedom lies in the right which inheres in it and in the protection of the individual to enforce the right. The freedoms guaranteed by Article 301 are enforceable at the instance of individuals who are aggrieved by state action. Thus, a dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oms are the foundation of Article 301. The free movement of goods constitutes the traditional domain of trade and commerce. Our Constitution in its recognition of the freedom of intercourse protects the movement of persons engaging in commercial intercourse. Trade and commerce has diversified into services which constitute a vital element in the economic life of the nation. The movement of capital is the foundation for trade and commerce. Capital provides the foundation for business. These four freedoms guaranteeing the free movement of goods, services, persons and capital between the states, form the basis of the guarantee under Article 301. Commercial transactions by which the free movement of each constituent element takes place fall within the ambit of the freedom. G Taxation and Federalism 109 In determining an interpretation that would bring a balance between the diverse strands of Part XIII, it is necessary for the Court equally to bear in mind the needs of the federal structure. The doctrine of the basic structure of the Indian Constitution has evolved to incorporate federalism as one of its integral features. 110 The guarantee that trade, commerce and intercour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tes (2nd Edn. Vol. 1, p.65) states : The Constitution is a logical whole, each provision of which is an integral part thereof, and it is, therefore, logically proper, and indeed imperative, to construe one part in the light of the provisions of the other parts .. 27. A constitutional document outlines only broad and general principles meant to endure and be capable of flexible application to changing circumstances - a distinction which differentiates a statute from a Charter under which all statutes are made .. (Id. at p.676) Words of the Constitution cannot be read in isolation and have to be read harmoniously to provide meaning and purpose ( T.M.A Pai Foundation v. State of Karnataka (2002) 8 SCC 481). 113 The judgment of Justice Gajendragadkar, speaking for the majority in Atiabari, however construed the language of Article 301 to mean that the guarantee of freedom was subject only to the provisions of Part XIII. With respect, this does not constitute an appropriate approach to constitutional interpretation since it leads to a construction of Part XIII in isolation from other provisions which have a significant bearing on the nature of the freedom and its r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in State of West Bengal v. Union of India (1964) 1 SCR 371 dealt with whether the property of a state in coal bearing areas is immune from acquisition by the Union. This Court held that in the structures of constitutional governance that are created by the Constitution full sovereignty does not reside in the states. Moreover, the Constitution contains a marked tilt in favour of the powers of the Union. Chief Justice B P Sinha adverted to the provisions of Part XIII which seek to make India a single economic unit for purposes of trade and commerce under the overall control of the Union Parliament and the Union Executive(Id at p. 396) Our Constitution, the Court held was not true to any traditional pattern of federalism (Id at p.396). Legal sovereignty is vested in the people of India while political sovereignty is distributed between the Union and the States, with greater weightage in favour of the Union. In that context, this Court held that : 35. The normal corporate existence of States entitles them to enter into contracts and invests them with power to carry on trade or business and the States have the right to hold property. But having regard to certain basic f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... union, but not prepared to merge their individuality in a unity. This supremacy of the Constitution is protected by the authority of an independent judicial body to act as the interpreter of a scheme of distribution of powers. Nor is any change possible in the Constitution by the ordinary process of federal or State legislation. (para 38) 118 The constitutional position is authoritatively set forth in the judgment in S.R. Bommai v. Union of India (1994) 3 SCC 1. Justice K. Ramaswami construed federalism to be a basic feature, in the following observations : 247. Federalism envisaged in the Constitution of India is a basic feature in which the Union of India is permanent within the territorial limits set in Article 1 of the Constitution and is indestructible Neither the relative importance of the legislative entries in Schedule VII, Lists I and II of the Constitution, nor the fiscal control by the Union per se are decisive to conclude that the Constitution is unitary. The respective legislative powers are traceable to Articles 245 to 254 of the Constitution. The State qua the Constitution is federal in structure and independent in its exercise of legislative and exec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate legislature) which subjects the legislative power of the states to constitutional limitations, it would not be open to the Court to ignore the plain meaning and effect of such a provision. The text of the Constitution cannot be subverted on the basis of an abstract notion or hypothesis. While creating a federal structure, the draftsmen of the Constitution were conscious of the need for preserving a political and economic Union. If, as a part of that constitutional scheme, the text of the document has incorporated specific provisions, they must be given their plain meaning and effect. It would not be open to the Court to dilute the meaning of the text on the basis of a priori considerations. H Taxing powers H.1 Article 245 and constitutional limitations 121 Article 245 of the Constitution provides for the extent of laws made by Parliament and the legislatures of the states. Clause 1 of Article 245 enables Parliament subject to the provisions of this Constitution to make laws for the whole or any part of the territory of India and for the legislature of a state to make laws for the whole or any part of the state. Implicit in Article 245, which defines the terri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petence. Though Article 245 is made expressly subject to the provisions of the Constitution while there are no such similar words in Article 246, both Articles are subject to the other provisions of the Constitution. The language of Article 245 which subjects the conferment of legislative power to constitutional provisions is a recognition of the doctrinal principle that all constitutional power vesting in the organs of the state is subject to constitutional limitations. The Constitution which entrusts power conditions the entrustment to the observance of constitutional safeguards and limitations. All legislative power is subject to constitutional limitations. 124 In State of Kerala v. Mar Appraem Kuri Co. Ltd (2012) 7 SCC 106, this Court construed the relationship between Articles 245 and 246 in the following observations : 35 While the legislative power is derived from Article 245, the entries in the Seventh Schedule of the Constitution only demarcate the legislative fields of the respective legislatures and do not confer legislative power as such 36. Article 246 deals with the subject-matter of laws made by Parliament and by the legislatures of States. The verb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the States of the American Union(Indian Reprint 2005) provides a jurisprudential foundation to the taxing power in the following observations : Taxes are defined to be burdens or charges imposed by the legislative power upon persons or property, to raise money for public purposes. The power to tax rests upon necessity, and is inherent in every sovereignty. The legislature of every free State will possess it under the general grant of legislative power, whether particularly specified in the constitution among the powers to be exercised by it or not. No constitutional government can exist without it, and no arbitrary government without regular and steady taxation could be anything but an oppressive and vexatious despotism, since the only alternative to taxation would be a forced extortion for the needs of government from such persons or objects as the men in power might select as victims. In the language of Chief Justice Marshall : The power of taxing the people and their property is essential to the very existence of government, and may be legitimately exercised on the objects to which it is applicable to the utmost extent to which the government may choose to carry it. The on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tmost extent to which the Government may choose to carry it. In Amrit Banaspati Co. Ltd . v. State of Punjab (1992) 2 SCC 411, this Court held that : 10 .taxation is a sovereign power exercised by the State to realise revenue to enable it to discharge its obligations. (Id. at page 424). In Dena Bank v. Bhikhabhai Prabhudas Parekh Co . (2000) 5 SCC 694, this Court held thus: 8 ..the State is entitled to raise money by taxation because unless adequate revenue is received by the State, it would not be able to function as a sovereign Government at all. It is essential that as a sovereign, the State should be able to discharge its primary governmental functions and in order to be able to discharge such functions efficiently, it must be in possession of necessary funds and this consideration emphasises the necessity and the wisdom of conceding to the State, the right to claim priority in respect of its tax dues. (Id. at p. 702) 129 The limitation on the states power to tax must as a consequence be found in constitutional limitations. This follows the constitutional principle that all legislative powers conferred upon the Union Parliament and the state legislat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egislature which has competence to enact law on the subject. This is the consequence of the distribution of legislative power between the Union and the States under Articles 245 and 246 read with the lists contained in the Seventh Schedule. The legislatures, whether at the national or the state level, are entrusted with the power of legislation in exercise of which they must confine themselves to the boundaries allocated by the Constitution. These boundaries are defined with reference to the competence to enact law governing a particular subject matter. Parliamentary legislative power has a residuary or catch all area: subjects not enunciated elsewhere fall in its ambit. Second, the enumeration of fundamental rights by Part III of the Constitution operates as a restraint on the sovereign power vesting in the legislatures to enact law. Article 13 of the Constitution stipulates that the state shall not enact law which violates the freedoms guaranteed by the PART F Chapter on fundamental rights. A law whether made before or after the advent of the Constitution is void to the extent of its inconsistency with Part XIII. Third, other constitutional limitations or restrictions may conditi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st of goods of special importance, the manner of imposing taxes and the restrictions on the power of imposing taxes. 133 The second source of containment on the legislative powers of the states in the area of taxation is Article 253 of the Constitution under which Parliament, notwithstanding anything contained in the earlier provisions of Chapter 1 of Part XI is entrusted with the power to enact legislation for the entire territory of India for implementing a treaty, agreement or convention with one or more countries or to implement a decision at an international conference association or other body. The non-obstante provision of Article 253 operates in relation to Articles 245 to 252. Hence, the legislative powers of the states including in the area of taxation may be eclipsed where Parliament has enacted a law to effectuate India s international obligations in pursuance of Article 253. 134 The third source of constitutional containment on the legislative power of a state is in the form of limitations of which Clause 3 of Article 286 provides an illustration. Under Clause 3, Parliament provides the restrictions and conditions in regard to the system of levy, rates and other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,51,54,55, and 57) which are specifically subject to limitations or principles prescribed by Parliament by a law made under List I and List III. In other words, it has been urged that wherever an exemption from taxes or a limitation on states taxing powers is contemplated by the Constitution, this has been expressly provided under Articles 285, 287, 288 and 289. Consequently, it has been urged that exemption from the taxing power cannot be a matter of inference or PART F implication and must be provided expressly and unambiguously. Moreover, under Article 289(2), a trade or business carried on by or on behalf of the government of a state can be subjected to tax to such extent as Parliament may by law provide. Based on this and the judgment of a nine Judge Bench of this Court in NDMC v. State of Punjab (1997) 7 SCC 339, it has been urged that in a situation where the Constitution subjects even the trade or business of a state to tax, an exemption in favour of trade, commerce and intercourse carried on by private individuals cannot be contemplated particularly by implication. 138 While evaluating this submission, it would at the outset be necessary to notice that there are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the state to create conditions requisite for trade and commerce to exist would be denuded. Hence, as a matter of first principle it cannot be postulated that taxation in whatever form is a burden on trade, commerce and intercourse and that every tax necessarily hinders PART F trade. Such a wide construction cannot be accepted simply because by raising revenues through the means of taxation, the state provides a political and legal order based on the rule of law where contractual transactions can be executed effectively. The extreme position that every law which imposes a tax is to be regarded as a hindrance to trade, commerce and intercourse is unsustainable. 140 In the context of the relationship between the freedom guaranteed by Part III of the Constitution and the taxing power, it has been the consistent position of this Court that fundamental rights [particularly, the freedom of trade and business under Article 19(1)(g)] do not confer an immunity from taxation. In Indian Express Newspapers v. Union of India (1985) 1 SCC 641, this Court held that the rights guaranteed by Article 19(1)(a) and Article 19(1)(g) are subject to clauses (2) and (6) and the newspaper industry has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re excessiveness of a tax or a diminution of profit earnings does not per se without more constitute a violation of rights under Article 19(1)(g). (See also in this context : Express Hotels (P) Ltd. v. State of Gujarat (1989) 3 SCC 677, and Pankaj Jain Agencies v. Union of India (1994) 5 SCC 198). 142 In Vrajlal Manilal Co . v. State of M.P (1986) Supp. 1 SCC 201, this Court held that an increase in the rate of tax on a particular commodity cannot per se be said to impede free trade and commerce in that commodity. The Court reaffirmed the principle that in order to be a restriction or impediment a legislative measure must directly or immediately impede the free flow of trade, commerce and intercourse so as to fall within the prohibition of Article 301. A tax may in certain cases directly and immediately restrict or hamper the flow of trade. Whether the imposition of a tax does so in each case has to be judged on its own facts and in its own setting of time and circumstance. H.3.2 Articles 302, 303 and 304 143 Articles 302, 303 and 304 provide for restrictions on trade and commerce. The marginal note to each of the three articles specifically contemplates restriction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t across customs frontiers; definition of customs frontiers ... 42. Inter-State trade and Commerce. Entry 26 of the State List is as follows : 26. Trade and commerce within the State subject to the provisions of Entry 33 of List III. 27. Production, supply and distribution of goods subject to the provisions of Entry 33 of List III. Entry 33 of the Concurrent list is as follows : 33. Trade and commerce in and the production, supply and distribution of - (a) the products of any industry where the control of such industry by the Union is declared by Parliament by law to be expedient in the public interest, and imported goods of the same kind as such products; (b) foodstuffs, including edible oilseeds and oils; (c) cattle fodder, including oilcakes and other concentrates; (d) raw cotton, whether ginned or unginned, and cotton seed; and (e) raw jute. 145 In Automobile Transport it was urged that the expression by virtue of the entries relating to trade and commerce in any of the lists in the Seventh Schedule are of wider import than the words by virtue of the said entries . Therefore, any law under Article 303 made by virtue of any entry in any o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 297 of the Government of India Act 1935. In the section, the inhibition was only against a Provincial Legislature or Government. Here the inhibition embraces not only these but is also against Parliament and the Central executive. The executive limb has been made powerless, because the source of restrictions must be law and if a law cannot be made, executive action per se would be ineffective without more. Further, Section 297 was concerned only with goods and their taxation differentially. The Article takes in its stride not only the passage of goods or their taxation but all other matters inherent in free trade, commerce and intercourse. 147 However, it has been urged that this interpretation would be contrary to the position which has been adopted since the judgment in MPV Sundararamier v. State of Andhra Pradesh AIR (1950) SC 468 : In support, it has been submitted that the taxing entries in the lists of the Seventh Schedule are indicated separately from non-taxing entries. Hence, it is urged, the words of Article 303 cannot be interpreted to include taxing entries. This submission cannot be accepted as a matter of first principle. What the judgment in MPV S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry relating to trade and commerce has a comprehensive significance, meaning something that is associated with or having a nexus to. The words any entry relating to trade and commerce are words of amplitude and cannot be construed in a restrictive sense. 150 In State of Madras v. NK Nataraja Mudaliar (1968) 3 SCR 829, a Constitution Bench of this Court, while construing the provisions of the Central Sales Tax Act, 1956 dealt with the submission that entries relating to trade and commerce in the legislative lists, within the meaning of Article 303 would not include entries with respect to the levy of a tax on trade and commerce. It was also urged that the words in Article 303 must be confined to entries 41 and 42 of List I, entries 26 and 27 of List II and entry 33 of List III. This issue was however kept open by the Constitution Bench, as is evident from the following extracts : 12. It was contended on behalf of the State that the power under Article 303 could only be exercised so as to restrict the authority of the Parliament which arises by virtue of an entry relating to trade and commerce in the legislative lists and it was urged that an entry with respect to the levy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed at the higher rate under Section 8(2)(b) of the Central Sales Tax Act, 1956 on the turnover of sales in the course of inter-state trade to government or to unregistered dealers even though they had not obtained the C and D forms because Section 2(B) violates Articles 301 and 303(1) of the Constitution. The High Court accepted those claims. In appeal, the Constitution Bench observed : 8 .Normally, a tax on sale of goods does not directly interfere with the free flow or movement of trade. But a tax can be such that because of its rate or other features, it might operate to impede the free movement of goods. The majority judgment delivered by Shah, J., in State of Madras v. N.K. Nataraja Mudaliar proceeds on the basis that tax under the Central Sales Tax Act is in its essence a tax which encumbers movement of trade and commerce, but the tax imposed in the case in question was saved by the other provisions of Part XIII. The Court then said that the exercise of the power to tax would normally be presumed to be in the public interest and as Parliament is competent under Article 302 to impose restrictions on the freedom of trade, commerce and intercourse between one State and anoth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purpose if the rate applicable to intra-State sales of such goods was more than 10 per cent. The rate of 10 per cent would then be favourable and they would be at an advantage compared to local consumers. It is because of this that Parliament provided, as a matter of legislative policy that the rate of tax shall be 10 per cent or the rate applicable to intra-State sales whichever is higher .. 11. If prevention of evasion of tax is a measure in the public interest, there can be no doubt that Parliament is competent to make a provision for that purpose under Article 302, even if the provision would impose restrictions on the inter-State trade or commerce. (Id. at 413-414) The statutory provision was consequently upheld on the ground that as a measure for preventing the evasion of tax in the public interest, Parliament was competent to enact it under Article 302 even if it restricted inter-state trade and commerce. H.3.3 Construing Article 304 152 The area which assumes a great deal of importance in the present case is whether it would be correct to postulate that taxes, save and except for discriminatory taxes under Article 304(a) would lie outside the pale and pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned Judge held : 11 .It will be seen that the principle of freedom of inter-State trade and commerce declared in Article 301 is expressly subordinated to the State power of taxing goods imported from sister States, provided only no discrimination is made in favour of similar goods of local origin. Thus the states in India have full power of imposing what in American State Legislation is called the use tax, gross receipts tax, etc. not to speak of the familiar property tax, subject only to the condition that such tax is imposed on all goods of the same kind produced or manufactured in the taxing State, although such taxation is undoubtedly calculated to fetter inter-State trade and commerce. In other words, the commercial unity of India is made to give way before the State-power of imposing any non-discriminatory tax on goods imported from sister Sates. (Id. at p.1081) 155 Article 304 begins with a non-obstante provision which takes effect notwithstanding what is contained in Articles 301 or 303. A non-obstante provision of this nature has a distinctive meaning. In Chandavarkar Sita Ratna Rao v. Ashalata S. Guram150 , this Court held that : 68 It is well settled t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision. Article 304(a), however, mandates that a tax which is being imposed on goods imported from other States or Union territories must be a tax to which similar goods manufactured or produced in that state are subject. Moreover, the tax shall not discriminate between goods that are imported and goods so manufactured and produced. H.3.4 Conjunctive or disjunctive : may ; and 157 Clauses (a) and (b) of Article 304 are separated by the use of the expression and . The issue is whether the expression and is to be construed as conjunctive or disjunctive. Clause (b) contemplates reasonable restrictions being imposed under PART F a law enacted by the state legislature on the freedom of trade, commerce and intercourse with or within that state as are required in the public interest. The proviso operates only in relation to clause (b) and not clause (a). It stipulates 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. The mandate of the proviso can however be cured under Article 255 which provides as follows : Article 255 : No Act of Parliament or of the L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uous in that it may be joint or joint and several. In the case of a joint and , every listed possibility must be included: both (a) and (b); all of (a), (b), and (c). In the case of a joint and several and , all the possibilities may be, but need not be, included: (a) or (b) or both; (a) or (b) or (c), or any two, or all three. In other words, the joint and several and is equivalent to and/or .. Which meaning is appropriate depends on the context. When and is used before the final item in a list of powers, for example, it is joint and several : To carry out the purposes of this Act, the Governor in Council may make regulations respecting (a) the conditions on which licences may be issued; (b) the information and fees that firearm vendors may be required to furnish; and (c) the annual fees that firearm owners may be charged . In this provision the Governor in Council is empowered to make regulations on any one or more of the listed subjects. However, notice what happens if may is replaced by shall . If the Governor in Council is obliged to make regulations respecting (a) conditions (b) information and (c) fees, the joint and several and becomes joint . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erritory of India. If the freedom of trade and PART F commerce is restricted by a discriminatory tax as Article 304(a) postulates is the case the imposition of a discriminatory tax on internal movement within a state must by the same logic breach the freedom guaranteed by Article 301. Since Article 304(a) covers only a tax on goods imported from other states, a discriminatory tax on goods which do not traverse state boundaries would not fall within the ambit of Article 304(a). Yet it would offend Article 301. A state may conceivably have a justification in the public interest in doing so or for imposing such a tax and if it were to do so, it must meet the requirements of Article 304(b). If Article 304 (b) were to be construed to not include taxes, such a course of action would be barred, however legitimate be the state interest. 163 There is a second reason why the language and scheme of Part XIII must lead to the conclusion that it is not only discriminatory taxes of the nature contemplated by Article 304(a) which fall within the ambit of the Part. Article 304(a) only covers a tax on goods (goods imported from other states as seen above). A tax imposed by the state legislat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d intercourse they would infringe Article 301 though they do not fall within Article 304(a). 164 Third, Article 302 has been held to enable Parliament to impose Central Sales Tax ( Sitolakshmi Mills ) (supra). The expression restrictions in Article 302 has been construed not to exclude a restriction by way of a taxing measure. If the expression restriction for the purposes of Article 302 does not exclude a legislative measure by way of a fiscal imposition, it cannot evidently be excluded from the ambit of the phrase restrictions in Article 304. 165 Fourth, this conclusion is buttressed by the non-obstante provision contained in Article 304. The plain meaning of the non-obstante provision is that state legislatures may enact legislation in exercise of their law making authority under Articles 245 and 246, of the nature contemplated by clauses (a) and (b) of Article 304, despite the fact that such a legislative measure would otherwise fall within the ambit and purview of Article 301. The non-obstante provision in Article 304(a) refers to Article 301. Obviously, unless something falls within the ambit of Article 301, there is no reason to incorporate the non-obstante claus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ods in any part of the territory of India. In relation to the legislature of the state, Article 303(1) imposes the same mandate against the grant of preferences between states or the making of any discrimination. However, clause (2) of Article 303 does not apply to the state legislatures. Clause (1) of Article 303 is a restraint on discriminating between one state over another or from granting preferences between them. In other words, the treatment which is extended to one state has to be extended to every other state. The grant of preferences or the making of discrimination is proscribed. Article 303(1) is akin to a provision in international trade parlance conferring a most favoured nation treatment. Under such an mfn clause, treatment extended to one nation state has to be extended to the other. Article 303(1) embodies a similar principle inter se between the states so as to ensure a uniformity of treatment between states when Parliament or the state legislatures enact a law in exercise of their law making power. A state legislature which enacts a law is required to confer a parity of treatment to other states and is prevented from granting preferences to one state over an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or export of goods between states. 170 Article 304(a) elaborates that a particular form of taxation - a non-discriminatory tax on goods shall not be construed to violate Article 301. But Article 304(a) is not exhaustive of the universe of taxation. Article 304(a) has three defining characteristics. The first is that the tax is a tax on goods. The second is that it is a tax on goods imported from other states. The third is the non-discrimination norm in relation to similar goods produced or manufactured in the state. A tax which fails to meet the yardstick embodied in Article 304(a) will violate Article 301. But Article 304(a) cannot be a basis for holding that every fiscal measure (apart from a discriminatory tax) lies outside the purview of Part XIII. For one thing, the rate of tax is but one element of taxation. There are other elements in a fiscal exaction including assessment, the machinery for collection and set offs and exemptions which can have an important bearing on whether the tax operates in a manner that impedes the freedom of interstate trade and commerce. Moreover, as we have noticed earlier, a discriminatory tax otherwise than on goods, does not attract the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olly redundant. In the United States of America, the power of taxation is regarded as distinct from the exercise of police power or eminent domain. Our Constitution evidently has also treated taxation as distinct from compulsory acquisition of property and has made independent provision giving protection against taxation save by authority of law. 174 However, in Kunnathat Thathunni Moopil Nair v. The State of Kerala 1961 (3) SCR 77, Chief Justice Sinha speaking for a Constitution Bench rejected the submission that Article 265 of the Constitution was a complete answer to the validity of a state taxing law (The Travancore- Cochin Land Tax, 1955). The Constitution Bench held that Article 265 imposes a limitation by which a tax cannot be levied or collected by a mere executive fiat. Under Article 265, a tax can be imposed only with the authority of law which, it was held, must mean a valid law. For a law to be valid, it must be enacted by a legislature which possesses legislative competence and the tax must accord with Article 13. Hence, the Constitution Bench ruled that if the enactment imposing a tax violates Article 14, it would have to be struck down since the guarantee of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd of judicial review in relation to taxing legislation however recognizes that there inheres in the legislature the power to determine the objects on which a tax should be levied and to classify persons or properties for the purposes of the levy. If the classification is rational, a taxing statute cannot be challenged merely because different rates of taxation are prescribed for different categories of persons or objects. The validity of a taxing statute cannot be challenged merely on the ground that the rate of taxation is excessive. However, if the statute is a colourable piece of legislation or a fraud on legislative power, it would be open to challenge on the ground that while enacting the law, the legislature has adopted a cloak or devise to confiscate the property of a citizen who is taxed. But such a conclusion cannot be reached merely on a finding that the tax which is imposed is unreasonably high or excessive. 178 Conceptually, the availability of judicial review in regard to taxing legislation is distinct from the standard of judicial review. Taxing legislation is not immune from constitutional challenges based on a lack of legislative competence, a breach of fundamen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt XII; iii) taxes provide for resources to improve facilities for trade and do not constitute a restriction on the movement of trade; and iv) the concept of public purpose being implicit in every tax law, it cannot form a part of Article 301. With the greatest of deference to the view of the learned Chief Justice, it is difficult to subscribe to the general proposition that tax laws per se lie outside the ambit of Part XIII. Taxation is indeed a manifestation of the sovereign power of the state to raise revenues for public purposes. But the exercise of sovereignty is subject to the constitutional limitations of a written constitution. Enactment of law by a law making body which possess a legislative competence over the subject matter upon which it legislates is one of the constitutional limitations. The Constitution distributes legislative powers between the Union and States. While doing so it carves out fields of legislation which are reserved to the Union and the States respectively. Legislative powers in relation to taxation are also distributed between PART F the Union and the States. Hence, all legislative power (of which the legislative power to impose a tax is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e construed to include a legislative measure imposing a tax, this would constitute a substantial encroachment on the power of the states to impose taxes. The requirement of obtaining prior Presidential sanction to a bill which is to be introduced or moved in the legislature of a state it is urged will, it is urged dilute the sovereign power of the states to impose taxes in the fields reserved for them and make them subservient to the Union. 185 While evaluating this submission, it must be emphasised that the proviso attaches to clause b of Article 304. Article 303 prohibits both Parliament and the legislature of a state from enacting laws granting preferences to one state over another or making discrimination between one state over another. 186 Article 303(2) makes an exception in respect of Union legislation enacted to deal with a situation of scarcity of goods in any part of the territory of India. The prohibition contained in clause 1 of Article 303 is, hence, lifted in the case of Parliament by clause 2. In the case of a state legislature, Article 303(1) is attracted where it grants preferences or makes a discrimination between one state and another. Article 304 in its no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by a manufacturer or a member of his family. 189 A Constitution Bench of this Court held that the notification did not discriminate between foot-wear manufactured or produced in the state and that which was imported from other states since the three conditions of the notification equally applied to all foot-wear irrespective of its origin. A notification granting an exemption for the benefit of small manufacturers making hand-made shoes of a small value who may be unable to compete with large manufacturers was valid. Significantly, in relation to Article 304(a) it was held that the exemption notification made no discrimination between out-of state manufacturers and in-state manufacturers since its conditions applied equally to both. A manufacturer situated outside the state could also claim the benefit of the exemption upon fulfilling the conditions of the exemption. Hence Article 304(a) was held not to have been breached. 190 In Firm A.T.B. Mehtab Majid v. State of Madras (1963) Suppl.(2) SCR 435, the validity of Rule 16 of the rules framed under the Madras General Sales Tax Act, 1939 was challenged by the petitioner who was a dealer in hides and skins. The petitioner so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed against imported hides and skins sold upto 1 August 1957. The rate of tax on the sale of tanned hides and skins was: 10 ..2 per cent on the purchase price of those hides and skins in the untanned condition, while the rate of tax on the sale of raw hides and skins in the State during 1955 to 1957 is 3 pies per rupee. Referring to the judgment in Mehtab Majid , this Court held that: 10. In the earlier case, discrimination was brought about on account of sale price of tanned hides and skins to be higher than the sale price of untanned hides arid skins, though the rate of tax was the same, while in the present case, the discrimination does not arise on account of difference of the price on which the tax is levied as the tax on the tanned hides and skins is levied on the amount for which those hides and skins were last purchased in the untanned condition, but on account of the fact that the rate of tax on the sale of tanned hides and skins is higher than that on the sale of untanned hides and skins. The rate of tax on the sale of tanned hides and skins is 2% on the purchase price of those hides and skins in the untanned condition while the rate of tax on the sale of raw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cases in which notwithstanding the lower rate of tax in a particular part of the country and goods may be purchased from another part, where a higher rate of tax prevails. PART F Supposing in a particular State in respect of a commodity, the rate of tax is 2 per cent but if the benefit of that low rate is offset by the freight which a merchant in another State may have to pay for carrying that commodity over a long distance, the merchant would be willing to purchase the goods from a nearer State, even though the rate of tax in that State may be higher. Existence of long-standing business relations, availability of communications, credit facilities and a host of other factors - natural and business - enter into the maintenance of trade relations and the free flow of trade cannot necessarily be deemed to have been obstructed merely because in a particular State the rate of tax on sales is higher than the rates prevailing in other States . (emphasis supplied) The object of enacting a central legislation on the subject was explained thus:- 17 ..But since the power of taxation could be exercised in a manner prejudicial to the larger public interests by the States, it was found ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per L.P. Gallon. Under Section 27 of the Bihar and Orissa Excise Act, 1915, a countervailing duty was provided on an excisable article imported into the state. Countervailing duties are provided for in Entry 51 of List II to the Seventh Schedule to the Constitution. This Court noted that countervailing duties can only be levied if similar goods are actually produced or manufactured in the state on which excise duties are being levied : 4 .. The fact that countervailing duties may be imposed at the same or lower rates suggests that they are meant to counterbalance the duties of excise imposed on goods manufactured in the State. They may be imposed at the same rate as excise duties or at a lower rate, presumably to equalise the burden after taking into account the cost of transport from the place of manufacture to the taxing State. It seems therefore that countervailing duties are meant to equalise the burden on alcoholic liquors imported from outside the State and the burden placed by excise duties on alcoholic liquors manufactured or produced in the State. If no alcoholic liquors similar to those produced or manufactured imported into the State are produced or manufactured, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1969) 2 SCR 544, applied the test formulated in N.K. Nataraja Mudaliar (supra) in the context of a challenge to the Punjab General Sales Tax (Amendment and Validation) Act, 1967 and the Punjab Sales Tax (Haryana Amendment and Validation) Act, 1967. The Constitution Bench held that so long as the rate of tax is the same between goods imported from other states and similar goods, produced or manufactured within the state, Article 304 is satisfied. 197 In V. Guruviah Naidu and Sons v. State of Tamil Nadu (1977) 1 SCC 234, a Bench of two Judges of this Court repelled a challenge to the validity of a tax imposed under the Madras General Sales Tax Act, 1959 on raw hides and skins and on dressed hides and skins. In that case the rate of sales tax for raw hides and skins was three per cent, whereas for dressed hides and skins it was one and a half per cent. The Court held that a lower rate of tax in the case of dressed hides and skins was prescribed to offset the difference between the higher price of dressed hides and skins and the lower price of raw hides and skins. No material was shown to indicate that despite this lower rate of tax, imported hides and skins were subjected to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may infringe the freedom of inter-State trade and commerce if its requirements are fulfilled. Article 304(a) imposes a restriction on the power of legislature of a State to levy tax which may be discriminatory in character by according discriminatory treatment to goods manufactured in the State and identical goods imported from outside the State. The effect of Article 304(a) is to treat imported goods on the same basis as goods manufactured or produced in a State. This Article further enables the State to levy tax on such imported 167 (1980) 4 SCC 697 PART F goods in the same manner and to the same extent as may be levied on the goods manufactured or produced inside the State. If a State tax law accords identical treatment in the matter of levy and collection of tax on the goods manufactured within the State and identical goods imported from outside the State, Article 304(a) would be complied with. There is an underlying assumption in Article 304(a) that such a tax when levied within the constraints of Article 304(a) would not be violative of Article 301 and State legislature has the power to levy such tax. (Id. at p. 712) The Court considered whether the Act being leviable on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds by way of an incentive, placing reliance on clauses (b) and (c) of Article 39 of the Constitution. This in the view of the Court did not provide a justification for a discrimination between imported goods and goods which were locally manufactured or produced. The prescription of a lower rate of tax for the latter was held to be invalid. This Court held : An exception to the mandate declared in Article 301 and the prohibition contained in clause (1) of Article 303 can be sustained on the basis of clause (a) of Article 304 only if the conditions contained in the latter provision are satisfied. In the result, the discrimination effected by applying different rates of tax between goods imported into the State of Gujarat and goods manufactured within the State must be struck down. 200 The judgment in Weston Electroniks was considered but distinguished by a larger Bench of three Judges of this Court in Video Electronics Pvt. Ltd . v. State of Punjab (1990) 3 SCC 87. The judgment of this Court, inter alia , dealt with a challenge to the constitutional validity of notifications issued under the Uttar Pradesh Sales Tax Act, 1948, as well as under the Punjab General Sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certain specified goods, such as electronic goods; (iii) Limitation of the period during which the reduced rate of tax could operate; and (iv) Applicability of the general rate of sales tax to an overwhelmingly large number of local manufacturers, at par with imported goods. 202 While sustaining the grant of a reduced rate of sales tax, this Court distinguished, inter alia , the judgment in Weston Electroniks (supra) and similar cases in the following observations : 30 These cases were not at all concerned with granting of exemption to a special class for a limited period on specific conditions of maintaining the general rate of tax on the goods manufactured by all those producers in the State who do not fall within the exempted category at par with the rate applicable to imported goods as we have read these cases. Hence, it was not necessary in those decisions to consider the problem in its present aspect. If, however, the said power is exercised in a colourable manner intentionally or purposely to create unfavourable bias by prescribing a general lower rate on locally manufactured goods either in the shape of general exemption to locally manufactured goods or i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te manufacturers unsuccessfully impugned the notification before the High Court. Explaining the ambit of Article 304, the Bench of two learned Judges observed thus : 8 .The idea was not really to empower the State Legislatures to levy tax on goods imported from other States and Union Territories - that they are already empowered by other provisions in the Constitution - but to declare that that power shall not be so exercised as to discriminate against the imported goods vis- -vis locally manufactured goods. The clause, though worded in positive language has a negative aspect. It is, in truth, a provision prohibiting discrimination against the imported goods. In the matter of levy of tax - and this is important to bear in mind - the clause tells the State Legislatures - tax you may the goods imported from other States/Union Territories but do not, in that process, discriminate against them vis- -vis goods manufactured locally . In short, the clause says: levy of tax on both ought to be at the same rate. This was and is a ringing declaration against the States creating what may be called tax barriers - or fiscal barriers , as they may be called - at or along their boundaries ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tar Pradesh notification. It is not possible to go on extending the limited exception created in the said judgment, by stages, which would have the effect of robbing the salutary principle underlying Part XIII of its substance. Indeed, it has been the contention of Shri Salve that, on principle, the exception carved out in Video Electronics is unsustainable. For the purpose of this case, it is not necessary for us to say anything about the correctness of Video Electronics. Suffice it to say that the limited exception carved out therein cannot be widened or expanded to cover cases of a different kind. It must be held that the total exemption granted in favour of small-scale industries in Jammu and Kashmir producing edible oil (there are no large-scale industries in that State producing edible oil) is not sustainable in law. (Id. at p. 52) 205 The Court cautioned that a limited exception which had been carved out in Video Electronics should not be enlarged lest it eat up the main provision. An unconditional exemption in the case of edible oil produced within the state from sales tax while subjecting similar goods produced in other states to sales tax at 8 per cent was held to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... State of Punjab, the defence of the State was that a reduced rate of sales tax was imposed to boost the electronics manufacturing industry and to stop existing industrial units shifting to neighbouring states, particularly having regard to the prevailing peculiar circumstances of Punjab . Moreover, while states, such as Gujarat and Maharashtra were fully developed industrial states, Punjab at that stage was backward in terms of industrial growth. These factors undoubtedly weighed with this Court in sustaining the notification. 208 A state does have a legitimate concern and interest in ensuring the growth and development of its own industry. Levels of industrial growth and economic development are not uniform across the country. A state legislature can have a legitimate interest, in the exercise of its law making power, to ensure balanced development and growth of its industry, particularly, in the nascent stage of industrial development. Yet, while doing so and granting incentives the legislature or as its delegate, the state government must ensure that the grant of incentives is carefully structured so as not to defeat the underlying spirit and object of Article PART F 304(a) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion-construes the need for development in terms of mitigating regional histories of suffering and strife, and of denial, deprivation and discrimination. 211 Article 304(a) is an amalgam of formal as well as substantive norms of equality. At a formal level, the provision requires that when a state imposes a tax on imported goods, the tax must likewise be imposed on similar goods which are manufactured or produced in the state. Parity of tax between domestic goods produced and manufactured in a state with those which are imported from other states is the first and formal requirement. But beyond this, Article 304(a) brings into focus substantive principles by embodying a norm of non-discrimination in its latter stipulation. Non-discrimination in a substantive sense requires a level playing-field. Two states in the nation may not be comparable in terms of social development and economic advancement. One state may be industrialised with a PART F growth of capital investment in urban infrastructure while another state may be predominantly agricultural. Article 304(a) does not prohibit a state from taking steps that are necessary for development and growth within its territories. But ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncluded in sub-paragraph (b) of this entry. 213 The words similar goods manufactured or produced are common to both Article 304(a) and Entry 51. However, the notion of a countervailing duty under Entry 51 (as the judgment in Kalyani Stores explains) is intended to counterbalance the duty of excise levied on articles which are produced or manufactured in the state. The countervailing duty is imposed on articles which are produced or manufactured elsewhere in India. In the context of a countervailing duty, this Court in Kalyani Stores held that it postulates the actual production or manufacture of goods. This principle cannot be extrapolated to Article 304(a) where the tax which is imposed is not in the nature of a countervailing duty. Article PART F 304(a), when it refers to a tax on goods, covers taxes on any aspect of goods which fall within the legislative competence of the state legislature. The latter part of Article 304(a) which contains the words so however as not to discriminate between goods so imported and goods so manufactured and produced is not a surplusage. The object of the latter part is to ensure that there is no discrimination between goods which are pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Second Schedule : Item No. 7. An octroi Item No. 8. A Terminal tax on goods imported into or exported from a local area save where such tax is first imposed in a local area in which an octroi was not levied on or before 6 July, 1917. In the Government of India Act, 1935, Entry 49 of the legislative lists (list II) provided as follows : 49.Cesses on entry of goods into a local area for consumption, use or sale therein. Terminal taxes were placed in List I. 216 In the Government of India Act, 1935, Entry 49 used the expression entry of goods into a local area for consumption, use or sale therein , instead and in place of octroi (as contained in the Devolution Rules under the Act of 1915). The Constitution incorporated Entry 52 in List II in language which corresponds to Entry 49 of List II under the Government of India Act, 1935 but with the difference that the expression taxes is used instead of cesses . 217 The imposition of octroi has a historical significance both in India and elsewhere. Tracing its history, a Constitution Bench of this Court in Diamond Sugar Mills Ltd. v. The State of Uttar Pradesh (1961) 3 SCR 242, explained the meaning of octr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied area inside the State . The obvious fallacy of this argument is that it draws no distinction between the word area standing by itself and the phrase local area . If the Entry had been entry of goods into any area of the State......... some area would be specified for the purpose of the law levying the cess on entry. If the Constitution makers were empowering the State Legislatures to levy a cess on entry of goods into any specified area inside the state, the proper words to use PART F would have been entry of goods into any area.......... It would be meaningless and indeed incorrect to use the words they did use entry of goods into a local area . The use of the words local area instead of the word area cannot but be due to the intention of the Constitution-makers to make sure that the power to make laws relating to levy on entry of goods would not extend to cases of entry of goods into any and every part of the state from outside that part but only to entry from outside into such portions of the state as satisfied the description of local area . (Id. at p. 250) In holding that a factory could not be a local area, the Constitution Bench observed that : It was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e High Court for a writ seeking to prohibit the municipality from charging octroi on its products which were brought inside octroi limits for sale. The goods brought into octroi limits by the appellant comprise of four categories : (i) Goods consumed by the appellant; (ii) Goods sold by the appellant itself or through dealers and consumed within octroi limits by others; (iii) Goods sold by the appellant itself or through dealers within octroi limits but consumed outside; and (iv) Goods sent by the appellant from its depot within octroi limits to points outside the municipality where they were produced and consumed by others. 223 Under Section 73 of the Bombay Municipal Boroughs Act, 1925, the municipality was empowered to impose an octroi on animals or goods brought within the octroi limits for consumption, use or sale therein. The Constitution Bench took note of the legislative history relating to terminal taxes and octroi. Terminal Taxes were concerned only with the entry of goods into a local area irrespective of whether or not they were used there. Octrois were taxes on goods brought into the local area for consumption, use or sale. When the Constitution was adop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reference to Entry 52 of List II (read with Articles 244, 245 and 246). Octroi, however, assumed an obnoxious character and was a subject of comment by this Court in Hansa Corporation (supra). Octroi duty became associated with check posts installed by local bodies. The octroi barriers became notorious for long queues of fully laden vehicles awaiting entry into local limits. Worse still, octroi became a vexed symbol of the misdeeds of local officials or contractors tasked with the collection of octroi duty. Over a period of time, accepting the clamour of the trade, octroi was gradually phased out and replaced by entry tax legislation in the states. Noteworthy, among PART F the changes made, was that the tax would be leviable upon a dealer. Moreover, the tax would be collected not at the octroi or municipal limit but subsequently after the submission of returns. K.2 Entry taxes and Article 304(a) 226 For the purposes of this reference, it is necessary to clarify at the outset that the detailed provisions of each state legislation pertaining to entry tax do not fall for consideration. It is sufficient for the purposes of the present reference to consider some of the impor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h reference to the entire state. If the legislation imposes a tax only upon the entry of goods originating outside the state into the state, while goods produced and manufactured within the state are not subject to the levy, this would constitute a hostile discrimination prohibited by Article 304 (a). K.3 Meaning of Local area 230 The issue as to whether the entire area of a state can be treated as a local area for the purposes of Entry 52 of List II, was specifically kept open for consideration in the judgment of the Constitution Bench in Diamond Sugar Mills . The issue was, however, dealt with in a judgment of three learned Judges of this Court in Shaktikumar M. Sancheti v. State of Maharashtra (1995) 1 SCC 351. In that case an entry tax was levied under Section 3 of the Maharashtra Tax on Entry of Motor Vehicles into Local Areas Act, 1987. The Act was challenged by contractors or dealers of motor vehicles who had purchased them outside the state and had brought them within the state of Maharashtra as being a colorable exercise of legislative power under Entry 52 of List II as well as violating Article 301. Taking note of the fact that the issue of what constitute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssumed a constitutional context and significance. 232 In the judgment in Diamond Sugar Mills , the Constitution Bench emphasized that in using the expression local area, the framers of the Constitution were aware of the previous legislative history and meant an area administered by a body (such as Municipalities, Panchayats or local board) constituted under the law for the governance of local affairs in any part of the state. This statement of principle in the decision in Diamond Sugar Mills now stands fortified in view of PART F the constitutional amendments brought by the insertion of Parts IX and IXA into the Constitution. A local area cannot be defined with reference to the entire state but will comprehend within the state, an area that is administered by a local body constituted under the law. K.4 Severability 233 On behalf of the states, it has been urged that where a state legislature provides for the levy of an entry tax only upon goods brought from outside the state, the offending words may be treated as severable and struck down so as to allow for the imposition on goods entering a local area both from within or outside the state. Such an exercise would cle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the petitioners, however, which falls for close examination is that Article 304(a) requires that the very tax which is imposed by a taxing state on imported goods must be imposed on domestic goods. In the context of entry tax, the submission is that unless the taxing state imposes it on similar local goods, an entry tax cannot be imposed on goods imported from other states. If goods manufactured or produced in the taxing state are not subject to entry tax, that will result in a discrimination if imported goods of other states are so subject. 236 The example which has been set out above of the application of differential rates of tax, for the same tax imposed on domestic as opposed to imported goods presents a simple application of Article 304(a). The example is simple in the sense that a discrimination is then effected in the imposition of the same tax by subjecting domestic and imported goods to differing treatment. The picture may, however, become more nuanced. Different states have adopted varying models while framing legislation in a manner which, according to them, fulfils the mandate of Article 304(a). Whether it in fact, does so is for the court to determine. 237 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from other states any tax to which similar goods manufactured or produced in that state are subject . Several aspects of Article 304(a) merit emphasis : 240 The first is that Article 304(a) refers to the imposition of any tax on goods. The provision is not either a source of legislative power nor does it prescribe fields of legislation. The expression any tax on goods is of a generic nature and covers all taxes which a state is competent to impose on any aspect of goods under Articles 245 and 246 read with List II of the Seventh Schedule. The expression any tax would mean any exaction in the nature of an impost or levy which the state legislature is competent to enact by virtue of its legislative powers. The expression any tax must mean what it says: it means any levy which the state is constitutionally competent to legislate. The second aspect of Article 304(a) is the latter part which provides that the state shall act : so, however, as not to discriminate between goods so imported or goods so manufactured or produced. 241 The fundamental reason for the incorporation of this provision is to prohibit discrimination being practiced by the state against impor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nother state cannot be placed at a comparative disadvantage. The expression between also signifies that goods produced or manufactured within the taxing state should also not be discriminated against. In seeking parity of treatment, it is as much the obligation of the taxing state to ensure that there is no discrimination against goods originating in other states, as much as it is its concern to ensure that domestic goods are not discriminated against. The former is a matter of constitutional obligation. However, it does not exclude a similar obligation and concern of the taxing state in respect of goods produced and manufactured within its territorial limits. Both must go hand in hand. Discrimination both in a positive manner against imported goods and a reverse discrimination against domestic goods are within the ambit of Article 304(a). The fifth important principle which requires emphasis is that our Constitution does not embody a requirement that the state legislature while enacting a legislation must legislate separately in respect of each subject of legislation contained in List II. A law enacted by the state legislature imposing a fiscal levy may cover more than one su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... must cover only one legislative entry, the legislature is entitled to devise a law in a suitable manner which while being consistent with the norm of non-discrimination also preserves a parity of tax burden between goods imported and domestic goods. This is the foundation of the theory of equivalence. 244 The burden of establishing that there is a discrimination against goods which are imported from other states lies on the person who sets up such a plea. In answering a plea of discrimination, it would be open to the state to establish that the legislative provision which it has enacted maintains the principle of non-discrimination between goods produced and manufactured within the state and goods imported from other states while at the same time bringing about parity in terms of tax burden between domestic and imported goods. Sales tax is referable to Entry 54 of List II ( taxes on the sale or purchase of goods other than newspapers, subject to the provisions of Entry 92A of List I ). Entry tax is referable to Entry 52 of List II ( taxes on the entry of goods into a local area for consumption, use or sale therein ). Both sets of taxes fall within the competence of the state le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is urged that until the goods become a part of the land mass, they can be subjected to a law under Entry 83 of List I and to a duty of import. It is only where a Bill of entry for home consumption is filed that the goods cease to be imported goods. Until then, it is urged, no entry tax would be leviable. 247 The taxable event referable to a law enacted under Entry 83 of List I (in relation to an import customs duty) is the act of import by which goods originating in a foreign country are brought into India. Section 2 (23) of the Customs Act, 1962 defines the expression import to mean bringing into India from a place outside India . The expression imported goods is defined to mean any goods brought into India from a place outside India but so as not to include goods which have been cleared for home consumption. Section 2 (26) defines the expression importer in relation to any goods at any time between their importation and the time when they are cleared for home consumption, to include any owner or any person holding himself out to be an importer. 248 Section 46 provides that the importer of any goods (other than goods for transit or transhipment) shall present to the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to the petitioners cover taxes on the movement of goods. According to the petitioners, Entry 52 should cover an entry into a local area after the importation of the goods is complete since the field of Entry 83 continues to subsist until the goods have been imported by filing of a Bill of entry for home consumption. 250 Entry 83 of List I and Entry 52 of List II have separate and distinct fields of operation. Entry 41 of List I deals with trade and commerce with foreign countries; import and export across customs frontiers; and definition of customs frontiers. The distribution of powers with reference to the taxing entries in List I and II is mutually exclusive. 251 In a decision rendered in 1942 by the Federal Court in Province of Madras v. Messrs. Boddu Paidanna Sons 1942 F.C.R.90, it was held that if a tax payer who pays sales tax is also a manufacturer subject to excise duty there may no doubt be overlapping in one sense, but there is no overlapping in law . The two taxes which he is called upon to pay excise duty and sales tax were held to be economically two separate and distinct imposts . There was, in the view of the Federal Court no reason to expand the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it that he would be rendered liable to pay the duty prescribed by the Act. The Central Provinces and Berar Electricity Act was enacted under Entry 48-B of List II of the Government of India Act, 1935. The relevant portion of that Entry read thus: Taxes on the consumption or sale of electricity Entry 53 of List II of the Constitution is to the same effect (Id. at p. 286-287) 253 In D G Gose v. State of Kerala (1980) 2 SCC 410, this Court held that a tax on buildings imposed under the Kerala Building Tax Act, 1961 was referable to Entry 49 of List II and was not a tax on the capital value of assets under Entry 86 of List I. In that context, it was held that : 7 .So if a tax is levied on all that one owns, or his total assets, it would fall within the purview of Entry 86 of List I, and would be outside the legislative competence of a State legislature, e.g. a tax on one's entire wealth. That entry would not authorise a tax imposed on any of the components of the assets of the assessee. A tax directly on one's lands and buildings will not therefore be a tax under Entry 86 .. 8 .If, therefore, a tax is directly imposed on buildings , it will bear a direct r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7) The constitutional principle has been enunciated by a Constitution Bench in Godfrey Phillips India Ltd. v. State of U P (2005) 2 SCC 515 thus : The logical corollary of holding that taxes are imposed only on taxable events is that even when an entry speaks of a levy of a tax on goods, it does not include the right to impose taxes on taxable events which have been separately provided for under other taxation entries. The tax in respect of goods has sometimes been referred to as a tax on an aspect of the goods and sometimes as the taxable income. (See Federation of Hotel Restaurant v. Union of India (1989) 3 SCC 634= AIR 1990 SC 1637, (Pr. 13, 14, 16). (Id. at p. 544) 256 The principle of law is hence well-settled : the taxing powers of the Union and the states are mutually exclusive. (See in this context the decisions in Hoechst Pharmaceuticals v. State of Bihar (1983) 4 SCC 45 ; and State of West Bengal v. Kesoram Industries (2004) 10 SCC 2011). 257 A Bench of nine Judges of this Court in Re Sea Customs(1963) 3 SCR 787, distinguished the taxable event in the case of a duty of excise, which is the manufacture of goods, with a sales tax where the taxable eve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st I and Entry 52 of List II has been clarified above. The taxable event for the imposition of a duty of customs is distinct from the taxable event in respect of an entry tax, which is the entry of goods into a local area for consumption, use and sale therein. PART M M Direct and inevitable effect test 260 Whether taxes per se constitute an impediment upon the freedom of trade, commerce and intercourse is an issue which has resulted in two contrary positions, neither of which has been subscribed to in this judgment. At one end of the spectrum is the theory that all taxes impede the freedom of trade, commerce and intercourse. If this theory were to be accepted, the entire tax regime and the state taxing power would be controlled by Part XIII of the Constitution. The states which are sovereign within their own sphere would in the exercise of their constitutional power to raise revenues by way of taxation be subject to the rigours of Part XIII. Such an extreme view is not acceptable either from the stand point of textual construction or from its consequence for the federal structure of the Constitution. All taxes do not impede the freedom of trade, commerce and intercourse. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; (iv) Article 301 guarantees free trade, commerce and intercourse throughout the territory of India. Inter-state trade as well as trade and commerce within a state is guaranteed. Article 304(a) covers only taxes imposed on goods imported from other states. Article 304(a) in other words does not cover imposts on goods traversing within a state; (v) Article 306 of the Constitution, as it stood prior to its repeal contemplated that restrictions could take the form of duties and imposts; and (vi) The expression restrictions has been utilized in Part XIII of the Constitution, as the provisions of Articles 302, 303, 304 and 306 would indicate in a manner that would not exclude taxing legislation. The consistent view of Constitution Benches of this Court has been that taxes may under certain circumstances amount to a restriction on the freedom of trade and commerce. The position has been lucidly summarized in the erudite judgment of Justice M N Venkatachaliah (as the learned Chief Justice then was) in Express Hotels Pvt. Ltd. v. State of Gujarat (1989) 3 SCC 677. After reviewing the position of law, the learned judge held thus : Taxes can and do sometimes, having regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m of action that determines the protection he can claim: it is the effect of the law and of the action upon the right which attracts the jurisdiction of the Court to grant relief. If this be the true view, and we think it is, in determining the impact of State action upon constitutional guarantees which are fundamental, it follows that the extent of protection against impairment of a fundamental right is determined not by the object of the Legislature nor by the form of the action, but by its direct operation upon the individual s rights. (Id at p. 288) In Bennett Coleman Co. v. Union of India (1972) 2 SCC 788, the same principle was formulated in the following statement of law : ..First, it is not the object of the authority making the law impairing the right of the citizen nor the form of action that determines the invasion of the right. Secondly, it is the effect of the law and the action upon the right which attracts the jurisdiction of the court to grant relief. The direct operation of the Act upon the rights forms the real test. (Id at p. 799) 264 In Maneka Gandhi v. Union of India (1978) 1 SCC 248, this Court refined this test to mean the direct and inev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal freedom. When a legislative measure seeks to curtail that freedom, the test is whether the right of the individual has been infringed or eviscerated. In the context of Part XIII, the matter is looked at from the perspective of trade and commerce as a whole. Hence, in a case which falls under Part XIII of the PART M Constitution it is for the petitioner to demonstrate and establish that the direct and inevitable effect of the law imposing a tax is to impede or restrict the flow of trade and commerce. 266 The mere fact that the activity which is taxed is related to the flow or movement of trade and commerce is not sufficient in itself to lead to the inference that a tax on that activity impedes or restricts it. Businessmen and traders must and do necessarily factor in the requirement of tax compliance as a part of an overall business plan. Hence, the mere fact that the tax is imposed with reference to an activity or thing which constitutes an aspect of trade or commerce is not sufficient in itself lead to the consequence that it is a restriction or impediment of trade and commerce. The petitioner with such a grievance must cross the threshold of establishing in cogent terms be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty. Nor can a right be exercised in such a manner as would create chaos through unregulated actions of numerous participants. In other words, the fact that a requirement operates as a pre-condition is not sufficient in itself to hold that it impedes or restricts trade. In PART M order to constitute an impediment, the condition must be demonstrated to cause, as a direct and inevitable consequence of its operation a restriction of trade or commerce. Every regulatory requirement does not restrict or impede trade and commerce even if at the threshold, its fulfilment is a condition enabling a person or entity to engage in a regulated activity. 269 In a fiscal context, the payment of an impost or levy is attracted when the taxing event occurs. The tax may be on persons, activities or things. It is the taxing event which incurs the charge or liability to tax. The charge may be associated with an aspect of an activity or thing. The mere fact that this aspect is connected with the flow or movement of trade or commerce does not in itself lead to the conclusion that the tax constitutes an impediment or restriction. The impediment does not lie in the aspect of the activity or thing which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iament and the state legislatures may impose by laws enacted in pursuance of their legislative powers under Articles 245 and 246. Besides providing for permissible restrictions, those articles lay down the limits which govern the law making authority. 272 Articles 245 and 246 together constitute the source of the legislative power of Parliament and the state legislatures. Article 245 is subject to the provisions of the Constitution. Every constitutional authority is subject to its provisions. No arm of the Constitution is vested with absolute power. Every institution created by the constitution operates subject to the governing principles of the written constitution and is subject to the limitations which it prescribes. Constitutional limitations on legislative power originate in the necessity that the enacting body must possess legislative competence on the subject on which it enacts law, that the law which it enacts must not infringe fundamental rights and that it must abide by other norms prescribed by the Constitution. 273 Part XIII of the Constitution enunciates a set of constitutional limitations on the legislative power to regulate trade, commerce and commerce. 274 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on where its direct and inevitable effect is to restrict the freedom of trade, commerce and intercourse. The burden to establish this is on the person who seeks to assail the validity of a particular tax on the ground that it amounts to a restriction on the freedom guaranteed by Article 301. Unless this threshold is crossed, the proviso to Article 304(b) will have no application for, it is only when there is a restriction that the question of its reasonableness can arise. 281 The expression 'may' in Article 304 has to be read in conjunction with the expression 'and' which separates clauses (a) and (b). The true construction of the expressions is in the sense of a joint and several and/or . 282 Article 304(a) does not require that in order to impose a tax on goods imported from other states, similar goods must be actually produced or manufactured within the taxing state. The object of the provision is to prevent states from following protectionist policies by discriminating against goods produced or manufactured by other states. Article 304(a) does not import the concept of a countervailing duty. 283 Article 304(a) does not prevent a reasonable classific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concluded the debates and quenched the doubts, a galaxy of lawyers by their illuminating arguments engaged the Court for long twenty one days hearing. Now, it is our turn to respond. 2. In preparing my judgment I had advantage of going through thoughtful well reasoned judgment of My Lord the Chief Justice. I deeply regret my inability to share the views of learned Chief Justice on Question No. 1 4 as framed by us, although I agree with the conclusion of His Lordship on Question No. 2 3. The views of Dr. Justice D. Y. Chandrachud in his scholarly judgment are fairly near my own except on few subjects on which I have expressed different opinion. Looking to the vital Constitutional issues having a far reaching impact on economic unity of the country, I consider it my duty to express my views in my own way on all issues raised before us. I begin my task in following manner. 3. This larger Bench has been constituted on a reference made by a Constitution Bench of this Court in Jindal Stainless Ltd another Vs. State of Haryana Other, 2010 (4) SCC 595, expressing doubts on correctness of Constitution Bench Judgment in Atiabari Tea Co. Ltd, 1961 (1) SCR 809 and 7 Jud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TICLE 304(a) AND ARTICLE 304(b). F. INTERPRETATION, SCOPE AND AMBIT OF ARTICLE 304(a) AND ARTICLE 304(b). G. ENTRY 52, LIST II OF VIITH SCHEDULE. H. MEANING OF RESTRICTION AS USED IN PART XIII. I. WHETHER DIRECT AND IMMEDIATE EFFECT TEST AS LAID DOWNIN ATIABARI APPROVED IN AUTOMOBILE TRANSPORT IS NO LONGER A CORRECT TEST. J. COMPENSATORY TAX THEORY. PART I FACTS AND EVENTS LEADING TO REFERENCE TO THIS NINE JUDGES BENCH 6. For fully appreciating the issues and questions raised in this batch of cases, certain facts and events preceding the Reference to this larger Bench need to be noted. The challenges to various State Legislations were laid before different High Courts on various grounds including the ground that levy of Entry Tax violates the freedom of trade, commerce and intercourse as guaranteed by Article 301 of the Constitution of India and Legislations are not saved under Article 304. 7. One of the State Legislations, namely, Haryana Local Area Development Tax Act, 2000 came to be challenged before Punjab and Haryana High Court. The High Court by its judgment dated 21.12.2001 upheld the validity of the Act which judgment cam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re not hindrance to any body's freedom. It was held that regulatory measures or measures imposing compensatory taxes for the use of trading facilities do not come within the purview of the restrictions contained in Article 301 and such measures need not comply with the requirement of the proviso to Article 304(b). 10. It was further held that a working test for deciding whether a tax is compensatory or not is to enquire whether the traders people are having the use of certain facilities for the better conduct of their business and paying not much more than what is required for providing the facilities. 11. The above two judgments, around which discussion before us has centered shall be noted hereinafter in some detail including the views expressed by the majority and minority. 12. What is compensatory tax came for consideration by this Court in the context of M.P. Sthaniya Kshetra Me Mal Ke Pravesh Par Kar Adhiniyam, 1976 in M/s. Bhagatram Rajeevkumar vs. Commissioner of Sales Tax, M.P. and others, (1995) Supp. (1) SCC 673. The Three Judge Bench in the above case held that the concept of compensatory nature of tax has been widened and if there is substantial or eve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Bihar Chamber of Commerce (supra), we are of the view that the interpretation of Article 301 visavis compensatory tax should be authoritatively laid down with certitude by the Constitution Bench under Article145(3). 14. Consequent to Reference made to the Constitution Bench in Jindal Stripe Ltd.(supra), a Five Judges Bench answered the Reference by its judgment dated 13th April, 2006 reported in Jindal Stainless Ltd.(2) and another vs. State of Haryana and others, (2006) 7 SCC 241, t he Constitution Bench overruled judgments of Bhagatram Rajeevkumar and Bihar Chamber of Commerce and recorded their views in paragraph 5253 to the following effect: 52. In our opinion, the doubt expressed by the referring Bench about the correctness of the decision in Bhagatram's case followed by the judgment in the case of Bihar Chamber of Commerce was wellfounded. 53. We reiterate that the doctrine of direct and immediate effect of the impugned law on trade and commerce under Article 301 as propounded in Atiabari Tea Co. Ltd. v. State of Assam and the working test enunciated in Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan for deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held the respective Acts as not compensatory. The judgments of the different High Courts consequent to directions in Jindal Stainless Ltd.(3) came to be challenged by different assessees and the State before this Court. A batch of SLPs came for consideration before Two Judge Bench. Two Judge Bench observed that though some of the factors have been addressed to by the Constitution Bench in Jindal Stainless (2)(supra) whereas certain other constitutional issues are involved. Two Judge Bench opined that considering the importance of the issues relating to Articles 301 and 304 and Part XIII of the Constitution, it is necessary to refer the matter to a larger Bench in terms of Article 145(3) of the Constitution. In Reference order following was stated in paragraphs 8 and 9: 8. The concept of compensatory tax is judicially evolved and in a way provides a balancing factor between federal control and State Taxing Board. The concept really had its matrix in transportation cases and does not apply to general notion of Entry Tax. Therefore, considering the importance of the issues relating to Articles 301 and 304 and Part XIII of the Constitution, we consider it necessary to r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax which is capable of being passed on and has been passed on by traders to the consumers infringes Article 301 of the Constitution? (9) Whether a tax on goods within the State which directly impedes the trade and thus violates Article 301 of the Constitution can be saved by reference to Article 304 of the Constitution alone or can be saved by any other Article? (10) Whether a levy under Entry 52, List II, even if held to be in the nature of a compensatory levy, it must, on the principle of equivalence demonstrate that the value of the quantifiable benefit is represented by the costs incurred in procuring the facility/services (which costs in turn become the basis of reimbursement/ recompense for the provider of the services/ facilities) to be provided in the concerned `local area' and whether the entire State or a part thereof can be comprehended as local area for the purpose of Entry Tax? 17. Consequent to the above Reference order dated 18th December, 2008 in Jaiprakash Associates Limited vs. State of Madhya Pradesh and others, (2009) 7 SCC 339, the matter again came to be listed before a Constitution Bench of Five Judges. The Constitution Bench again ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on a number of aspects a larger Bench of this Court needs to revisit the interpretation of Part XIII of the Constitution including the various tests propounded in the judgments of the Constitution Bench of this Court in Atiabari Tea Co. and Automobile Transport(Rajasthan) Ltd. Some of these aspects which need consideration by a larger Bench of this Court were enumerated in Paragraphs 11, 12 and 13 14 which are relevant, are to the following effect: 11. Some of these aspects which need consideration by larger Bench of this Court may be briefly enumerated. Interplay/interrelationship between Article 304(a) and Article 304(b). The significance of the word and between Article 304(a) and 304(b). The significance of the non obstante clause in Article 304. The balancing of freedom of trade and commerce in Article 301 vis vis the States' authority to levy taxes under Article 245 and Article 246 of the Constitution read with the appropriate legislative Entries in the Seventh Schedule, particularly in the context of movement of trade and commerce. 12. Whether Article 304(a) and Article 304(b) deal with different subjects? Whether the impugned taxation law to be val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 54 of List II to pass a law imposing tax on sale of goods should depend upon the goodwill of the Union Executive. (emphasis supplied) 14. For the aforestated reasons, let this batch of cases be put before Hon'ble Chief Justice of India for constituting a suitable larger Bench for reconsideration of the judgments of this Court in Atiabari Tea Co. and Automobile Transport (Rajasthan) Ltd. (supra). 19. In pursuance of Reference made by the Constitution Bench by its order dated 16th April, 2010 Hon'ble the Chief Justice has constituted this Nine Judges Bench to hear the matter. 20. Although in paragraphs 11 and 12, as extracted above, certain questions were noted by the Constitution Bench, when the hearing began in the present batch of cases this Bench with the assistance of learned counsel appearing for the parties have reframed the questions to be considered. Four main issues which have been framed by this Bench are as follows: 1. Can the levy of a nondiscriminatory tax per se constitute infraction of Article 301 of the Constitution of India? 2. If answer to Question No.1 is in the affirmative, can a tax which is compensatory in nature als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I ATIABARI TEA CO. LTD. 23. The Constitution Bench of this Court, by majority opinion, delivered by P.B. Gajendragadkar J. had considered various aspects of Part XIII of the Constitution of India, especially Article 301. The challenge before this Court was to the provisions of Assam Taxation (on goods carried by Roads and Inland Waterways) Act, 1954 (hereinafter referred to as the Assam Act, 1954 ). Under the Assam Act, 1954, appellants who were growers of tea in the West Bengal or in Assam and carried out their tea to the market in Calcutta were asked to pay tax on goods in their journey in part of territory of Assam. 24. The appellant had challenged the vires of the Assam Act, 1954 before the Assam High Court on various grounds including the ground that provisions of the Assam Act, 1954 are violative of rights given under Article 301 of Constitution of India. The Assam High Court repelled the challenge by dismissing the writ petition. Three appeals were filed on certificate granted by the High Court; two writ petitions were directly filed under Article 32, challenging the vires of the Assam Act, 1954. Both the appeals and the writ petitions were heard by the Constit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Further, it was observed that: . We are, therefore, satisfied that in determining the limits of the width and amplitude of the freedom guaranteed by Article 301 a rational and workable test to apply would be: Does the impugned restriction operate directly or immediately on trade or its movement?..... 27. After laying down the relevant proposition on interpretation of Part XIII and after applying the said propositions to the Assam Act, 1954, following was observed in the majority opinion:- . It purports to put a restraint in the form of taxation on the movement of trade, and if the movement of trade is regarded as an integral part of trade itself, the Act in substance puts a restriction on trade itself. The effect of the Act on the movement of trade is direct and immediate; it is not indirect or remote; and so legislation under the said Entry must be held to fall directly under Article 301 as legislation in respect of trade and commerce 28. B.P. Sinha, C.J. in his minority opinion held that freedom declared by Article 301 does not mean freedom of taxation simpliciter but it does mean freedom from taxation which has the effect of directly impeding the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipal contention raised before the High Court was that the provision of the Act imposing tax on their motor vehicles was unconstitutional and void as they contravened the freedom of trade, commerce and intercourse throughout the territory of India as guaranteed by Article 301 of the Constitution of India. 34. The Division Bench of the High Court referred the matter to the Full Bench. The Full Bench took the view that taxation under the aforesaid Act cannot be said to offend Article 301 for its effect on trade, commerce is only indirect and consequential and it may be regarded only as remote. 35. The matter was taken to this Court and heard by a Constitution Bench of five Judges which felt that having regard to the importance of the Constitutional issues involved and the views expressed by this Court in case Atiabari Tea Co. Ltd. Vs. The State of Assam and Others reported in (1961) 1 SCR 809 , the appeals should be heard by a larger Bench. The appeals were consequently placed for hearing before the Bench of seven Judges. Three opinions came to be delivered in the larger Bench. S.K. Das, J. delivered the judgment for himself, J.L. Kapur, J., A.K. Sarkar J. and K. Subb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that which would really be a deterrent to a trade; but the distinction: if it has to be drawn, is real and clear. For the tax to become a prohibited tax it has to be a direct tax the effect of which is to hinder the movement part of trade. So long as a tax remains compensatory or regulatory it cannot operate as a hindrance..... 38. Das, J. did not accept the arguments that restrictions in Part XIII of the Constitution do not apply to taxation laws. 39. After laying down the relevant test for examining the validity of taxing statue, Das J. noted various provision of the Act. It was held that Section 4 of the Act makes it clear that tax is imposed on a motor vehicle which is to be used in any public place or kept to be used for in the State of Rajasthan. What should be the test to enquire as to whether a tax is a compensatory or not, following was stated as under:- .....It seems to us that a working test for deciding whether a tax is compensatory or not is to enquire whether the trades people 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eedom of action to the States, subject, however, to the needs of the unity of India. Just as unity cannot be allowed to be frittered away by insular action, the existence of separate States is not to be sacrificed by a fusion beyond what the Constitution envisages. No doubt, Part XIII ensures economic unity to India and combines the federating States into the larger State called India. The Constitution also permits independent powers of taxation. What the Constitution does not permit is that trade, commerce and intercourse should be rendered unfree . Trade and commerce remain free even when general taxes are paid by tradesmen in common with nontradesmen...... 43. Hidyatullah, J. held that taxes which are imposed by the Act by Schedules II, III and IV operates restriction on trade and commerce directly. Hence, the provisions have to be held offending Article 301 and resort to the procedure prescribed by Article 304(b) having not been taken, the Act is ultra vires to the Constitution of India. PART III SUBMISSIONS 44. The arguments on behalf of the petitioners, who have challenged various Entry Tax Legislations, have been led by Shri Harish Salve, learned senior ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gislation. He contended that had tax legislation was not included in Part XIII there was no occasion for specific mention of tax in Article 304(a) and Article 306 [as it was before the Constitution (7th Amendment) Act 1956] of the Constitution of India. He, however, contended that the freedom from the tax law or any other law was guaranteed under the Article 301 only to the extent when the tax legislation or any other law impeded trade, commerce and intercourse throughout the territory. He submitted that historically there were various tax barriers in different independent states prior to enforcement of the Constitution and to remove the barriers, the freedom of trade, commerce and intercourse was included in Part XIII. 49. Referring to majority view in Atiabari case (supra) he contended that the tax laws are covered by Part XIII of the Constitution. He submitted that above majority view in Atiabari was not doubted by subsequent 7 Judges Bench in Automobile Transport (supra) . Shri Salve however submitted that various statutes regulating trade and commerce may not impede trade and commerce like laws pertaining to traffic rules. Taxes, regulatory in nature may not be h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e legislative power of the state and limitation envisaged by different provisions of the Constitution being part of the Constitutional scheme it cannot be said that States are denuded with their sovereign power. 54. Answering to incidental Question No. 5 and 6 Shri Salve contends that taxes are always presumed to be in public interest, but however, the levy of taxes are restrictions imposed in public interest is a question which has be decided by considering the individual legislation. Levy of taxes may or may not be reasonable restrictions. 55. Answering to incidental Question No. 7, Shri Salve contends that under Article 304(b) a State is empowered to legislate imposing reasonable restriction on the freedom of trade and commerce and intercourse in the public interest subject to obtaining previous sanction of the President. The State thus is free to legislate with one limitation that the Bill is to be moved with the previous sanction of the President. State autonomy is in no manner affected. The judicial review being a basic structure of the Constitution, the Court is fully empowered to examine whether a law framed by State complies with Part XIII of the Constitution. He sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of goods from one local area of a State to local area of another State does not fall under Article 304(a) but it falls under Article 304(b). 59. Justice Hidyatullah s views in Automobile Transport case be accepted that tax to be compensatory is not the way out from Article 301. He further submitted that any tax viz. by its legal structure and practical effect may impede the trade and have a immediate and direct effect. Shri Salve also posed a question as to whether goods imported from other countries entering into a local area are liable to pay Entry Tax under legislation covered by Entry 52 List II ? He submits that in the above case the Entry Tax, if any, has to be justified under Article 304(b). Goods not covered by Article 304(a) should satisfy Article 304(b). The precondition permitting Entry Tax under Article 304(a) is that similar goods of that very State have to be taxed first. 60. Shri Salve in support of his submissions has also placed reliance on various judgments of this Court as well as judgments of the Australian High Court, Privy Council and US Supreme Court which shall be referred to while considering the submissions in detail. 61. Shri A.K.Ganguly, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es any tariff barrier is that when the tax is more than the value of the goods, it is a tariff barrier which is hit by Article 301. 68. Shri S.K. Bagaria, learned senior counsel submits that under Article 304(a) tax can be imposed on interState trade, whereas when goods move from one local area to other local area within a State, tax can be covered only under Article 304(b). He submits that the question whether a tax is a tariff barrier or not cannot be decided quantitatively but can be decided qualitatively. 69. Shri Bagaria submits that he appears for Steel Authority of India in some cases. He stated that Bhilai is maintained by Steel Authority of India and all expenditures for maintaining it and all civic amenities in township are being provided by Steel Authority of India. In township in Bhilai, there are no facilities being provided by the State. He referred to the details of expenditures spent by Steel Authority of India during the years 199596 to 20082009. He submits that the State Government do not provide any facility and expenditure currently is more than 200 crores every year. He submits that the State not providing municipal/civil facilities is not entitled to l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a founding member. The whole purpose of GATT, 1947 was to encourage free trade among the GATT members by eliminating tariff and nontariff barriers. Learned counsel further submitted that even if a tax levied by the state is nondiscriminatory, it may impede right guaranteed under Article 301. Learned counsel supports his submission by giving an illustration. In a state laptops and Ipads are manufactured. A State which wants to encourage the manufacturing of laptop has put only 0.5 % tax on laptop but has imposed 50 % tax on Ipad with an intent to discourage the import of Ipad. The said state's above action may not be violating Article 304(a), however, procedure prescribed in Article304(b) has to be applied with. Another example where state, although, complies with Article 304(a) but violates Article 304(b) given by learned counsel is; the State of Maharashtra imposed Entry Tax exactly equal to the local taxes but puts conditions: (i) All goods to Maharashtra should enter only through Balharshah; (ii)Finished goods manufactured in Maharashtra should have at least 75 % local content. Learned counsel thus contends that while imposing tax by the state both the Articles 304(a) and 30 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3)(b) restricts the State's power of taxation. Similarly, Part XIII is restriction on the State legislative power. Articles 302 to 304 also contain various restrictions on the powers of Parliament and the States in making laws. 77. Referring to the Constitution (One Hundred and Twenty Second Amendment)Bill, 2014 he submits that Union and State have reached to a conversion where both are entitled to legislate. He has referred to Article 246A of the Bill. There is consensus between Union and the States to abolish all the taxes including Entry Tax and is now to be subsumed in two taxes that is services and goods. The above Bill indicates that we have now moved to real economic unity. 78 . Shri Dhruv Agrawal , learned senior counsel, submits that freedom of trade, commerce and intercourse is a basic structure of the Constitution. Referring to the Preamble of the Constitution learned senior counsel submits that the unity and integrity of the Nation is a basic feature of the constitutional structure. Part XIII has been inserted in the Constitution to achieve the economic unity of the country. Shri Agrawal has also referred to the Constituent Assembly Debates. 79. Shri Gopal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He further submits that during the course of the submission he will bring on record necessary pleading on behalf of the Indian Oil Corporation in the appeal before this Court. 84. Shri Mukul Rohatgi, learned Attorney General has made his submissions. Shri Rohatgi submitted that power to tax in List II is Sovereign and Plenary Power which can be curtailed only by express provisions of the Constitution of India. Part XIII of the Constitution does not deal generally with tax except, in so far as, it makes reference under Article 304(a). Entire ethos of Part XIII of the Constitution is a discrimination and that too a deliberate discrimination. Article 304(a) and Article 304(b) are disjunctive. Article 304(a) applies to taxes whereas Article 304(b) applies to nonfiscal measures. Taxes are assumed to be in public interest and are reasonable. Under subclause( b) of Article 304, President cannot be made super adjudicator. India is a Federation and the sovereign power of the State cannot be subjected to an implied control. 85. Shri Rohatgi submitted that federal structure is a basic feature of our Constitution. Though India is described as a QuasiFederal or a Federation with stro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ney General submits that since we are at the fag end of Entry Tax Regime, it shall be appropriate to stick with Compensatory Tax Theory. 89. Shri P.P.Rao, learned senior counsel, has made his submissions on behalf of States of Madhya Pradesh and Andhra Pradesh. Shri Rao submits that it is well settled that a Constitution must not be construed in any narrow and pedantic sense and the construction which is most beneficial to the widest possible amplitude of its power must be adopted. He further submits that no entry in the VIIth Schedule of the Constitution should be so read as to rob the entry of its content. He submits that in a federal system of governance, the power to levy tax is an inherent attribute of a sovereign function of a State. 90. Clause(a) and Clause(b) of Article 304 are mutually exclusive. Taxes are covered in Clause(a) whereas restrictions other than taxes are covered in Clause(b). It is only discriminatory taxes visavis goods of other States and Union Territories which restrict the freedom of trade in Article 301 and all other taxes do not obstruct the said freedom. The federal character of the Constitution is a part of the basic structure. The power to le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om within the State. He submitted that this is an example of 'trade barrier' by a protectionist measure. Article 304(a) has a limited scope and ambit. 95. Power both in (a) and (b) can be exercised or either (a) or (b) can be exercised or none can be exercised. There is no necessity that power under 304(a) and 304(b) are to be exercised necessarily together. Shri Divan further submitted that there is difference between differentiation and discrimination. Lastly, he contended that in terms of 2000 Act and 2008 Act , the entire tax collected by the State under the respective statute would be utilized for the development of trade, commerce and industry in the state. 96. Shri Rakesh Dwivedi , learned senior counsel has advanced his submissions on behalf of the States of Orissa, Bihar, Madhya Pradesh, Tamil Nadu and West Bengal. Shri Dwivedi submits that petitioners' arguments are that the judgments of this Court in Atiabari and Automobile Transport be not revisited. Shri Dwivedi submits that there were fundamental errors in both the above decisions. He submits that following fundamental errors are, in the above two cases : I. (i) Both the cases confined on ec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treated as exempted from tax. 97. Shri Dwivedi further submits that tax per se is not covered by Part XIII. Tax is not a trade barrier and unless it is discriminatory it shall not be treated as a barrier. The right of trade, commerce and intercourse cannot be exalted as a basic feature of the Constitution. 98. Shri Dwivedi submits that Free in Article 301 does not mean free from tax. State's power, despite the limited width of its field is plenary in nature. Wherever,exemption from taxes were contemplated they were expressly provided as under Articles 285, 287,288 and 289. Referring to Part III of the Constitution, he submits that Part III does not confer freedom from taxation. A fortiori, Article 301, which is not a fundamental right cannot result in conferring a freedom of trade, commerce and intercourse from tax. He submits that there are inherent limitations on taxation by a State. The imposition of tax is always for public purpose and various inherent limitations in taxation operate as limitation in taking any discriminatory or any other unreasonable measures. Article 302 to 304 are not exceptions or provisos to Article 301. Coming to Article 304, it is submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he petitioner to prove that the tax is an impediment. 103. Coming to the Australian cases relied by this Court in Atiabari Tea Company Ltd and Automobiles , he submits that 'direct and immediate effect test' which was propounded in above two cases based on earlier cases of Australian High Court, including James Vs. Commonwealth (1936) 55 CLR (1), a 7Judges Bench of High Court of Australia in Cole Vs. Whitfield and Another reiterated in (1988)78 ALR (41) have rejected the 'direct immediate effect test' and has preferred to discriminatory test. The 7Judges Bench held that the various interpretations of Section 92 which have attracted any support over the years only the Fiscal Charges Theory and the AntiDiscrimination Interpretation have been favoured. 104. Coming to cases of U.S. Supreme Court, learned counsel submits that trend of cases indicates that effort is on shifting the test of discrimination. He submits that in the Complete Auto Transit Vs. Charles R Brady 430 U.S. 274 , it was held that it was not the purpose of commerce clause to relieve those engaged in interstate commerce from their just share of State tax burden, even though, it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has struck down the enactment. One of the grounds taken by Jharkhand is that for amendments made by the State of Jharkhand in the 1993 Act, no Presidential Sanction was obtained. He submits that for carrying out the amendments, no Presidential sanction was required. 111 . Shri Jugal Kishore Gilda, learned Advocate General of the State of Chhattisgarh has addressed his submissions on behalf of State of Chhattisgarh. Learned Advocate General has at the very outset stated that he adopts the submission made by Sh. P.P.Rao and Shri Rakesh Dwiwedi. 112 . Shri Dev Dutt Kamath, l earned Additional Advocate General has raised submissions on behalf of State of Karnataka. He submits that Constitution validity of Karnataka(Tax on entry of goods) Act 1979 has already been upheld by this Court in State of Karnataka Vs. Hansa Corporation 1980 (4) SCC 697. 113. He submits that in fact in three Civil Appeals being Civil Appeal No. 4476 of 2000, SLP(Civil) No. 1678616788 of 2009 and SLP(Civil) No. 12789 of 2009, the questions referred to this larger Bench do not arise and he adopts the submissions made by Sh. P.P.Rao and Sh. Rakesh Dwiwedi. 114 . Shri Saurabh Shyam Shamshery, le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an exorbitant tax and can contend that the exorbitant tax impedes the trade under Article 301. 119. Shri Salve submits that entry tax legislations of different States in the country can be characterized in different groups. He submits that one group of the legislations which consists of States of Tamil Nadu, Andhra Pradesh, Kerala is the legislation in which Entry Tax is imposed only on the goods which are imported from different State and no tax is imposed on locally produced/manufactured goods which is clearly discriminatory and violative of Article 304(a). He submits that second category of legislation consists of cases where in the enactment facially Entry Tax is imposed on the goods i.e. goods coming from out of State and local goods, but legislation contains a devise by which there is setoff\ exemptions to the local goods which result in nonimposition of Entry Tax on the local goods, leading to another kind of discrimination which also violates Article 304(a). In the second category, State of Assam, Bihar, Jharkhand and few other States are included. There is third category of legislation where discrimination is practiced in several manners, for example, manufacturers are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discriminatory taxes between the imported goods and the local goods. He further contends that other varieties of taxes not covered under 304(a) shall fall in 304(b). 123. Shri S. K. Bagaria, Shri Arvind P. Datar, Sri Ravindra Srivastava, Sri B. Laxmikumaran and Shri N. Venkataraman have also made their submissions in rejoinder. 124. Shri S. K. Bagaria , learned senior counsel, in his rejoinder submits that Article 304(a) has two conditions. He further submits that Entry 92(a) and 92(b) of List II cover the entire interstate trade and all facets of interstate movement. 125. Shri Arvind P. Datar, learned senior counsel, in his submissions reiterated that tax laws per se are not outside the purview of Part XIII. He further contends that Article 304(b) includes taxation. He submits that Article 304(a) refers to goods alone whereas taxes can be levied on persons, activities and things also. Article 304(a) shall not cover other parts of the taxes which necessarily has to go under Article 304(b). Entry Tax only on the goods imported from outside States and not levying them on entry into local areas from within the State is not permissible. Such taxes are violative of Entry 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 304(b) can cover tax law in addition to other law. 128 . Shri N. Venkataraman ,learned senior counsel in his rejoinder contends that legislative powers of both the Union and the States are subject to the provisions of the Constitution including limits thereupon and enacted therein. 129. In the end, we have again heard Shri P. P. Rao and Shri Rakesh Dwivedi in reply to some additional submissions made in rejoinder. PART IV A. LEGISLATIVE HISTORY AND DEBATES IN CONSTITUENT ASSEMBLY ON FREEDOM OF TRADE, COMMERCE AND INTRECOURSE 130. The discussion on the above subject needs to be focused on following three aspects, namely: a. Legislative history of freedom of trade, b. Freedom of trade as it emerges from the debates in the Constituent Assembly, c. Tax, whether was treated as 'restriction' on the freedom of trade by Constituent Assembly. 131. During the British Rule, by the end of 19th Century efforts for drafting a Constitution for India had begun. Under the inspiration of Shri Bal Gangadhar Tilak, the Swaraj Bill, 1885 was the first nonofficial attempt of drafting the Constitution. The dominion status as achieved by Australia and passing of A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onstituent Assembly preferred the Australian model from Sections 92 and 99 of the Australian Constitution, which were to the following effect: 92. Trade within the Commonwealth to be free On the imposition of uniform duties of customs, trade, commerce, and intercourse among the States, whether by means of internal carriage or ocean navigation, shall be absolutely free.... 99. Commonwealth not to give preference The Commonwealth shall not, by any law or regulation of trade, commerce, or revenue, give preference to one State or any part thereof over another State or any part thereof. 135. The Privy Council in James vs. Commonwealth of Australia, (1936) AC 578, had occasion to consider the freedom of trade as granted under Section 92 of the Constitution of the Australia. Following was stated by the Privy Council: Thus reference may be made to the sections dealing in the midst of which s.92 is placed. It is well known that one of the objects which the federation sought to achieve was the abolition of restrictions on trade between the Colonies, and of the diversity in the different States of tariffs and border regulations; this was described ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. Clause 10 deals with the freedom, throughout the Union, of trade, commerce and intercourse between the citizens. In dealing with this clause we have taken into account the fact that several Indian States depend upon internal customs for a considerable part of their revenue and it may not be easy for them to abolish such duties immediately on the coming into force of the Constitution Act. We, therefore, consider that it would be reasonable for the Union to enter into agreements with such States, in the light of their existing rights, with a view to giving them time, up to a maximum period to be prescribed by the Constitution, by which internal customs could be eliminated and complete free trade established within the Union. 139. Constituent Assembly on 1st May 1947 considered the report on fundamental rights. 140. Shri K. M. Munshi made following statement with regard to Custom Duties and Taxes: The proviso contemplates that a Unit can impose certain customs duty with a view to bring up the level of the price of goods imported to the level of the price of the goods manufactured in the Unit itself. Otherwise, the goods produced in other Units will flood that par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are subject, so, however, as not to discriminate between goods so imported and goods so manufactured or produced; and (b) to impose by land such reasonable restrictions on the freedom of trade, commerce or intercourse with that State as may be required in the public interests: Provided that during a period of five years from the commencement of this Constitution the provisions of clause (b) of this article shall not apply to trade or commerce in any of the commodities mentioned in clause (a) of article 306 of this Constitution. 245. Appointment of authority to carry out the provisions of articles 243 and 244. Parliament shall by law appoint such authority as it considers appropriate for the carrying out of the provisions of articles 243 and 244 of this Constitution and confer on the authority so appointed such powers and such duties as it thanks necessary. Draft Article 16 came for discussion before the Constituent Assembly on 03rd December 1948. 143. Shri C. Subramaniam raised the objection to the effect that powers given to the State Legislature have been in resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch operated at the beginning of the Constituent Assembly, we had to find some place for the purpose of uniformity in the matter of trade and commerce throughout India, under some head. After exercising considerable amount of ingenuity, the only method we found of giving effect to the desire of a large majority of our people that trade and commerce should be free throughout India, was to bring it under fundamental rights. 145. One more important statement made by Dr. Ambedkar was to the following effect: Yes, but reasonable restrictions do not mean that the restrictions can be such as to altogether destroy the freedom and equality of trade. It does not mean that at all. 146. The Constituent Assembly resolved to adopt the motion making Article 16 as a part of the Constitution. On 08th September 1949, Dr. Ambedkar moved a motion for inserting a Part XA consisting of Article 274A, 274B, 274C, 274D and 274E. Part XA included provisions as contained in Article 16 as Article 274A as was passed in the fundamental rights and Article 274B to 274E as was earlier contained in provisions of Article 244 245 in the Draft Constitution. Dr. Ambedkar, while moving a motion stated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As a matter of fact, ever since political awakening dawned upon the people of the Indian States customs taxes have been a particular target of political opposition. It was not without reason that the people of the Indian States and their movements were set against the imposition of customs duties on both imports and exports. It was because of a particular feeling amongst the people that this opposition was there. We have felt all through that all our trade, our industries have been crippled because of these Customs Duties. Even today we are not going to be benefited by it. Somehow or other , because these States were not viable units and they had to balance their budget the customs taxation was resorted to. Apart from that it was also supposed to be a part of the sovereign rights of the States. But so far as the interests of the people were concerned, they were not served by the imposition of these customs duties. Constituent Assembly adopted Article 274DD. 149. The debates on draft article 264(A) (Now Article 286 in the Constitution) with regard to imposition of sales tax came for consideration on 16.10.1949 which are also relevant in the context of freedom of trade and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f or prevention of local barriers to economic unity so that competing economic units within unions shall not threaten the stability of the nation as a whole. The Unity of India was seen to some extent on above realization. 151. From what we have noted above, it is clear that the Constitution framers gave great importance to the freedom of trade and commerce. In the beginning, when States had conceded to union, only foreign affairs, defence and communication, right of freedom of trade and commerce was placed in the Chapter of Fundamental Rights since it was thought that making of All India Union will be useless if trade and commerce is not free. Dr. Ambedkar on 08.09.1949, during the debates had stated that even though, there may be reasonable restriction on the right, however, the restriction can be such which altogether may not destroy the freedom and equality of trade. 152. The Constitution framers were conscious of the fact that goal setup for freedom of trade and commerce is to eliminate internal custom duties and States were conceded to impose limited taxes with restrictions as envisaged in the proposed articles. 153. Article 274DD as adopted by the Constituent Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itially, it was perceived that the federal Government i.e. Union Government shall be responsible for Foreign Affairs, Defence and Communication. After declaration of Partition on 3rd June, 1947, there was considerable change in the views of the Constituent Assembly. Union Constitution Committee on 6th June, 1947 took a decision that Constitution would be federal with a strong Centre. Granville Austin in the Indian Constitution:Cornerstone of a Nation has described the shift in the following words: Mountbatten announced Partition on 3 June 1947. Within four days the Assembly had embarked on a centralized federal union. On 5 June the Union and Provincial Constitution Committees,having spent much of the first month of their lives marking time, met in joint session and concluded that in the light of the June Third Statement the Cabinet Mission Plan no longer applied to the Assembly. The following day the Union Constitution Committee met alone. Present were Nehru, the Chairman, Prasad,Azad,Pant,Jagjivan Ram, Ambedkar, Ayyar, Munishi, Shah, S.P. Mookerjee, V.T.Krishnamachari, Panikkar, N.G. Ayyangar,and P. Govinda Menon. These men took the following tentative decisions: Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it cannot change its form and shape. It can never be unitary. On the other hand the Draft Constitution can be both unitary as well as federal according to the requirements of time and circumstances. In normal times,it is framed to work as a federal system. But in times of was it is so designed as to make it work as though it was a unitary system. 160. Dr. Ambedkar further stated that a Federal Constitution cannot but be a written Constitution. The following was stated: A Federal Constitution cannot but be a written Constitution and a written Constitution must necessarily be a rigid Constitution. A Federal Constitution means division of Sovereignty by no less a sanction than that of the law of the Constitution between the Federal Government and the States, with two necessary consequences (1)that any invasion by the Federal Government in the field assigned to the States and vice versa is a breach of the Constitution (2)such breach is a justiciable mater to be determined by the Judiciary only. 161. A.V. Dicey in his celebrated work The Law of the Constitution while dealing with the aim of Federation stated the following: A federal state is a political cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn that supremacy of the Constitution is fundamental to the existence of the Federal Constitution, following was stated: In dealing with this question, it is necessary to bear in mind one fundamental feature of a federal constitution. In England, Parliament is sovereign; and in the words of Dicey, the three distinguishing features of the principle of Parliamentary Sovereignty are that Parliament has the right to make or unmake any law whatever; that no person or body is recognised by the law of England is having a right to override or set aside the legislation of Parliament; and that the right or power of Parliament extends to every part of the Queen's dominions (Dicey, The Law of the Constitution 10th ed. pp. xxxiv, xxxv). On the other hand, the essential characteristic of federalism is the distribution of limited executive, legislative and judicial authority among bodies which are coordinate with an independent of each others. The supremacy of the constitution is fundamental to the existence of a federal State in order to prevent either the legislature of the federal unit or those of the member States from destroying or impairing that delicate balance of power which sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o closely connected by locality, by history, by race, or the like, as be capable of bearing, in the eyes of their inhabitants an impress of common nationality ; and, secondly, absolutely essential to the founding of a federal system is the existence of a very peculiar state of sentiment among the inhabitants of the countries . He pointed out that, without the desire to unite there could be no basis for federalism. But, if the desire to unite goes to the extent of forming an integrated whole in all substantial matters of Government, it produces a unitary rather than a federal constitution. Hence, he said, a federal State Is a political contrivance intended to reconcile national unity with the maintenance of State rights. The degree to which the State rights are separately preserved and safeguarded gives the extent to which expression is given to one of the two contradictory urges so that there is a union without a unity in matters of government. In a sense, therefore, the Indian union is federal. But, the extent of federalism in it is largely watered down by the needs of progress and development of a country which has to be nationally integrated, politically and economically coor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 275. A review of the provisions of the Constitution shows unmistakably that while creating a federation, the Founding Fathers wished to establish a strong Centre. In the light of the past history of this subcontinent, this was probably a natural and necessary decision. In a land as varied as India is, a strong Centre is perhaps a necessity. This bias towards Centre is reflected in the distribution of legislative heads between the Centre and States. All the more important heads of legislation are placed in List I. Even among the legislative heads mentioned in List II, several of them, e.g., Entries 2, 13, 17, 23, 24, 26, 27, 32, 33, 50, 57 and 63 are either limited by or made subject to certain entries in List I to some or the other extent. Even in the Concurrent List (List III), the parliamentary enactment is given the primacy, irrespective of the fact whether such enactment is earlier or later in point of time to a State enactment on the same subjectmatter. Residuary powers are with the Centre. By the 42nd Amendment, quite a few of the entries in List II were omitted and/or transferred to other lists. Above all, Article 3 empowers Parliament to form new States out of exist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tes and it has been described as quasifederation and similar other concepts. Dr. Justice Durga Das Basu in his Treatise Comparative Federalism by tracing the history of framing of our Constitution stated following in Chapter IV Indian Federation in particular - The strong centralising tendency of the Indian federation which has attracted the notice of foreign observers, can be properly appreciated only if its genesis is understood. Federation, under our Constitution, is the resultant of conflicting forces. The political tradition of the country was unitary, but it was not possible to adopt a unitary Constitution, since it was necessary to fit in the Indian States (about 600 in number) which had practically become independent since the lapse of paramountcy, as a result of the Indian Independence Act, 1947. On the other hand, it was not possible to make the Union the 'exceptional' government as in the United States, because all the units of the federation were not equally developed,and central control was necessary to secure uniform development of the country as well as of the backward classes of the population. Above all, a strong Central Government had been neces ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of Part XIII of the Constitution specially Article 304. C. LIMITATION ON THE LEGISLATIVE POWER OF THE STATE UNDER THE CONSTITUTION 175. Thomas M. Cooley in A Treatise on the Constitutional Limitations defines a Constitution in the following words: A constitution is sometimes defined as the fundamental law of a state, containing the principles upon which the government is founded, regulating the division of the sovereign powers, and directing to what persons each of these powers is to be confided, and the manner in which it is to be exercised. Perhaps an equally complete definition would be,that body of rules and maxims in accordance with which the powers of sovereignty are habitually exercised. 176. The Indian Constitution has adopted federal structure as noted above. Three characteristics of federal system are : (1) supremacy of the Constitution; (2) division of powers between the Union and State Governments; and (3) existence of an independent judiciary. The Constitution operates as a fundamental law. Organs of the States, i.e., executive Legislature and judiciary derive their authority and discharge their responsibilities within the framework of the Con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the subjectmatter of the laws made by Parliament and by the Legislatures of States. Articles 245 and 246 are as follows: 245. Extent of laws made by Parliament and by the Legislatures of States .( 1) Subject to the provisions of this Constitution, Parliament may make laws for the whole or any part of the territory of India, and the Legislature of a State may make laws for the whole or any part of the State. (2) No law made by Parliament shall be deemed to be invalid on the ground that it would have extraterritorial operation. 246. Subjectmatter of laws made by Parliament and by the Legislatures of States .( 1) Notwithstanding anything in clauses (2) and (3), Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule (in this Constitution referred to as the Union List ). (2) Notwithstanding anything in clause (3), Parliament, and, subject to clause (1), the Legislature of any State also, have power to make laws with respect to any of the matters enumerated in List III in the Seventh Schedule (in this Constitution referred to as the Concurrent List ). (3) Subject to clauses (1) and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as one of the Articles by which limitations were put on the legislative powers of the State. 180. The above view has been reiterated in a large number of judgments of this Court. It will be sufficient to refer only one more Constitution Bench judgment of this Court in State of Kerala and others vs. Mar Appraem KuriCompany Limited and another, ( 2012) 7 SCC 106. This Court again had occasion to consider Articles 245 and 246. The Constitution Bench held in the said case that while the legislative power is derived from Article 245, entries in the Seventh Schedule of the Constitution only demarcate the legislative fields of the respective legislatures and do not confer legislative power as such. Following observations were made in paragraph 35: 35.....While the legislative power is derived from Article 245,the entries in the Seventh Schedule of the Constitution only demarcate the legislative fields of the respective legislatures and do not confer legislative power as such. While Parliament has power to make laws for the whole or any part of the territory of India, the legislature of a State can make laws only for the State or part thereof. Thus Article 245 inter alia indicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vied must be within the legislative competence of the Legislature imposing a tax and authorizing the collection thereof and, secondly, the tax must be subject to the conditions laid down in Art.13 of the Constitution. One of such conditions envisaged by Art.13(2) is that the Legislature shall not make any law which takes away or abridges the equality clause in Art.14 which enjoins the State not to deny to any person equality before the law or the equal protection of the laws of the country. 184. Another Constitution Bench judgment in Hari Krishna Bhargav vs. Union of India and another, 1966 AIR SC 619, held that exercise of taxing power is also to be tested in the light of the fundamental freedoms guaranteed under Chapter III of the Constitution. Following was observed in paragraph 7: 7...rcise of the taxing power to the State has undoubtedly to be tested in the light of the fundamental freedoms guaranteed by Ch.III of the Constitution. It is not a power which transcends the fundamental rights, as was assumed in certain earlier decisions. Ramjilal v. Income-tax Officer Mohinder Garh, 1951 SCR 127: (AIR 1951 SC 97): Laxmanappa Hanumantappa v. Union of India,19551 SCR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the State under the Constitution we have already concluded that Article 245 which is a source of all legislative power puts a general limitation on all legislative power which has been expressly made 'subject to the provisions of this Constitution'. When all legislative powers are subject to the provision of Constitution, Part XIII being also a part of the Constitution, all legislative power has also to be subject to Part XIII. 189. A textual interpretation of Part XIII also lead to the same conclusion. Article 303 is an express provision which provides for 'restriction on the legislative power of the Union and the States with regard to trade and commerce'. Article 304 is another provision which although empowers the legislature of the State to put restriction on trade, commerce and intercourse among the States by law, but law to be made by the State is hedged by various restrictions as contained in Article 304(a) and 304(b). Thus Article 304 is also a limitation on legislative power of the State. 190. This Court in State of Karnataka and Another Vs. Hansa Corporation, (1980) 4 SCC 697, has held in Para 30: Article 304(a) imposes a restriction on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reasonable restrictions'.... In the same Paragraph further observed: ... if a law is passed by the Legislature imposing a tax which in its true nature and effect is meant to impose an impediment to the free flow of trade, commerce and intercourse, for example, by imposing a high tariff wall, or by preventing imports into or exports out of a State, such a law is outside the significance of taxation, as such, but assumes the character of a trade barrier which it was the intention of the Constitution makers to abolish by Part XIII... 196. Shah J., in Atiabari Tea Company has held that all taxations which imposed restriction are hit by Article 301. The Automobile Transport (supra) where correctness of Atiabari Tea Co. was questioned reiterated that taxation is included in Part XIII. Following was observed by Das J. ...in view of the provisions of Article 245, we find it difficult to accept the argument that the restrictions in Part XIII of the Constitution do not apply to taxation laws... 197. Both K. Subba Rao, J. and M. Hidayatullah, J. in their separate opinions have held that restriction by law of taxation is also hit by Article 301. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the State with regard to trade and commerce. Article 303(1) provides that a State shall have no powers to make any law giving or authorising the giving of, any preference to one State over another, or making or authorising the making of, any discrimination between one State or another, by virtue of any entry relating to trade and commerce in any Lists of the VIIth Schedule. The legislative power of the State, which is restricted under 303(1) cannot be held to be confined only to law as referred to in 304(a) rather it can extend to a legislation by virtue of any entry relating to the trade and commerce in List II. From this, it is clear that tax legislation which are covered under Part XIII are not confined to only Article 304(a). (d) In the event, the submission is accepted that all taxes are outside Part XIII except nondiscriminatory taxes as permitted under Article 304(a), the same will lead to giving right to the Parliament and State Legislature to pass facially nondiscriminatory laws but creating restrictions on trade and commerce by other means by providing arbitrary procedure and various other kind of restraints. The taxation which can impede the trade, commerce and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... teway for the State Legislature to impose tax which may not impede Article 301. (g) Lastly, there are no provision in Part XIII which negate the applicability of Part XIII on taxes which operates as restriction to trade, commerce and intercourse. Something which is not expressly excluded in Part XIII cannot be excluded by way of interpretation. Whether restriction used under Part XIII includes tax legislation 200. While discussing the subject 'Legislative History and Debates in Constituent Assembly' on freedom of trade, commerce and intercourse, we have already found that taxes were treated as restrictions on freedom of trade and commerce and it was further comprehended that restrictions on freedom of trade and commerce can be put by taxation also. Apart from above, there are following reasons which support our conclusion that word 'restriction' used in Part XIII includes tax legislation: (i) The textual interpretation of Part XIII itself indicates that taxes were contemplated to be included in word 'restriction'. The heading of Article 304 reads 'restrictions on trade, commerce and intercourse among States'. Although the heading refer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation in word 'restriction' in Part XIII also. The word restriction has to be given same meaning as contained in Part XIII. (v) Article 302 contains a heading 'power of Parliament to impose restrictions on trade, commerce and intercourse'. Article further provides that the Parliament by laws impose such restrictions on the freedom of trade, commerce and intercourse. Under Article 302 tax laws enacted by the Parliament, namely, Central Sales Tax Act, 1956 has been saved by this Court in State of Madras Vs. N. K. Nataraja Mudaliar 1968 (3) SCR 829. Bachawat, J., agreeing with the majority opinion stated as following: I may add that even assuming that the Central Sales Tax Act, 1956 is within the mischief of Art. 301, it is certainly a law made by Parliament in the public interest and is saved by Art. 302. find nothing in the Act which offends Art. 303(1). (vi) The word 'restriction' used in Article 304(b) has also to be interpreted in the same manner. As noted above, Article 304(a) covers limited field to taxes on goods imported from other States. Article 304(a) does not cover intraState taxation. An IntraState Tax Legislation, impeding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r put a note on the above Clause 13 which was to the following effect: Clause 13. Though I have been in some measure responsible for the inclusion of this clause I feel it must be made clear that :(1) goods from other parts of India than in the units concerned coming into the units cannot escape duties and taxes to which the goods produced in the units themselves are subject. 203. While submitting the report of the SubCommittee dated 16th April, 1947, Chairman of Fundamental Rights SubCommittee stated that although every citizen is entitled to free trade, commerce and intercourse within the territories of the Union unburdened by any internal duties or taxes of customs but many Indian States depend upon such duties and taxes for a considerable part of their revenue and cannot do without it all at once. It was stated that some agreement had to be made with those States in the light of their existing rights with a view to their ultimate elimination within a period to be prescribed by the Constitution. 204. Thus, with regard to the taxes the above view was reiterated by Shri Vallabhbhai Patel in the report of Advisory Committee submitted on 23rd April, 1947. Shri C. Rajag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the public interests: Provided that during a period of five years from the commencement of this Constitution the provisions of clause (b) of this article shall not apply to trade or commerce in any of the commodities mentioned in clause (a) of Article 306 of this Constitution. 207. Article 244 which was subsequently approved as Article 274D in Part XA and was adopted as Article 304 of the Constitution. The above indicates that initially the provisions empowered the State to impose on goods imported from other States any tax to which similar goods manufactured or produced in that State are subject , and by an amendment another restriction i.e. so, however, as not to discriminate between goods so imported and goods so manufactured or produced was added. Article 304(a) contains both the above restrictions on the legislative power of the State. The proceedings of the Constituent Assembly, thus, clearly indicate that both the above conditions have been added in the provision as separate conditions and the second condition was added by way of amendment in addition to the first condition which already existed. Now coming to Article 304(b) which was similar to draft Article 244( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that it does not impose any disparity, discrimination between the goods manufactured within the State and the goods imported from outside the State. Now, I am sure he will agree that that is a very limited law. It certainly does not take away the right of trade and commerce and intercourse throughout India which is required to be free. 210. As stated above Article 244 was akin to Article 274D which was sought to be added in new Chapter and came for discussion on 8th September, 1949 before the Constituent Assembly. Dr. B.R. Ambedkar by moving a motion in support of Chapter XA giving a complete picture of the Articles now put at one place stated as follows: I should also like, to say that according to the provisions contained in this part it is not the intention to make trade and commerce absolutely free, that is to say, deprive both Parliament as well as the States of any power to depart from the fundamental provision that trade and commerce shall be free throughout India. The freedom of trade and commerce has been made subject to certain limitations which may be imposed by Parliament or which may be imposed by the Legislatures of various States, subject to the fact that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neral standpoint, from the standpoint of the whole of India, whereas a State is bound to consider it from a parochial point of view, from the point of view of the State and therefore, this mutual jealousy is bound to arise if we allow these powers to the State. Therefore, the policy of the Government should be that so far as the State is concerned, they should not be allowed to exercise that power unless it be through Parliament. If a State is empowered to use its powers under clause (a) I have no quarrel as it will be a salutary power; but if you allow clause (b) to remain as it is, I do not understand what it may lead to. 213. Prof.Shibban Lal Saksena also supported the amendments moved by Pandit Bhargava. 214. Shri T.T. Krishnamachari replying the objections of Pandit Bhargava stated following with regard to Article 274D: So far as 274D is concerned, my honourable Friend Pandit Thakur Das Bhargava will either wholly amend it in such a way as to completely change its shape or completely eliminate it. I feel that it arises-I have no doubt-from a particular bitter experience of his in which a Provincial Government has not executed its duty towards its people in the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e a watertight formula for the purpose of defining these restrictions. 216. Replying the Debate, Dr. B.R. Ambedkar stated that he cannot usefully add anything to what Shri T.T. Krishnamachari and Shri Alladi Krishnaswami Ayyar had said. Article 274D was added to the Constitution by negating the amendments. From the above, it is clear that objections with regard to Article 274D subclause (b) which is now Article 304(b) were raised before the Constituent Assembly but the objections were overruled by retaining Article 274D subclause (b) which is now Article 304(b), thus, inclusion of Article 304(b) in the Constitution was consequent to well deliberated Constitutional Scheme and was accepted as restriction on the power of State to have uniform fiscal policy and uniform an economic policy. F. INTERPRETATION, SCOPE AND AMBIT OF ARTICLE 304(a) AND ARTICLE 304(b) 217. Article 304 of the Constitution reads as follows: 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 wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed there is no question of discrimination and State is free to tax imported goods, which are not produced or manufactured in the State. On first blush, the submission appears to be attractive but on a deeper scrutiny it merits rejection. Article 304 is, in nature of enabling provisions to the State, to impose taxes on goods imported from other States. Framers of the Constitution had stated that the goods coming from other parts of the India in the units concerned cannot escape duties and taxes to which the goods produced in the units are subject. There is specific purpose and object in enabling the State to impose tax on goods imported from other States only when similar goods manufactured or produced in that State are subject. The object is that trade and commerce throughout the territory of India has to be free, as required by Article 301 and limited power to State was given to tax the outside goods when local goods are subject to taxes. In event, locally manufactured or produced goods are not subject to any tax, State has no jurisdiction to impose tax on similar goods coming from other States. Tax on the locally manufactured or produced goods is condition precedent for imposing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on a consideration of the notification under which the tax was assessed that it imposed a tax only on imported tobacco and not on home grown tobacco and so it did not come within the special provisions of Art. 304(a) of the Constitution and consequently the infringement of Art. 301 of the Constitution which resulted from the imposition of a tax on import of goods made the provisions void in law. The prayer for refund was allowed in the applications out of which C.A. Nos. 362377, C.A. Nos. 861867 of 1962 and C.A. No. 25 of 1963 have arisen. The prayer was rejected in the remaining applications. In the present appeals the State of Madhya Pradesh challenges the correctness of the High Court's decision that the taxing provision was unconstitutional and void and also the orders for refund made in some of the petitions mentioned above. 222. This Court came to conclusion that similar goods manufactured or produced in the State of the Madhya Bharat have not been subject to the tax which tobacco imported from other States have to pay hence tax was not saved under 304(a), affirming the judgment of the High Court this Court held as follows: There can, therefore, be no e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e imposed on goods manufactured in the State. They may be imposed at the same rate as excise duties or at a lower rate, presumably to equalise the burden after taking into account the cost of transport from the place of manufacture to the taxing State. It seems, therefore, that countervailing duties are meant to equalise the burden on alcoholic liquors imported from outside the State and the burden placed by excise duties on alcoholic liquors manufactured or produced in the State. If no alcoholic liquors similar to those imported into the State are produced or manufactured, the right to impose counterbalancing duties of excise levied on the goods manufactured in the State will not arise. It may, therefore, be accepted that countervailing duties can only be levied if similar goods are actually produced or manufactured in the State on which excise duties are being levied. 226. This Court held that exercise of power under Article 304(a) can only be effective if the tax duty is imposed on goods imported from other States and the tax or duty imposed on similar goods manufactured or produced in that State are such. This Court held as no foreign liquor is manufactured or produced i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , hides or skins imported from outside the State after purchase in their raw condition and then tanned inside the State are also subject to higher taxation than hides or skins purchased in the raw condition in the State and tanned within the State, as the tax on the former is on the sale price of the tanned hides or skins and on the latter is on the sale price of the raw hides or skins. Such a discriminatory taxation is said to offend the provisions of the Art. 304(a) of the Constitution. Similar are the contentions for the intervenes in the case. 230. This Court held that taxing laws can be restrictions on the trade, commerce and intercourse and the tax which is affecting and discriminating goods of one State and goods of another may affect the free flow of trade and offend Article 301 and will be followed only if it comes within the term of Article 304(a). This Court held as follows: It is therefore now well settled that taxing laws can be restrictions on trade, commerce, and intercourse, if they hamper the flow of trade and if they are not what can be termed to be compensatory taxes or regulatory measures. Sales tax, of the kind under consideration here, cannot be sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arly imposes Entry Tax only on goods imported and there was no Entry Tax on the local goods which clearly violates Article 304(a) of the Constitution of India. 234. We find force in the submission of Shri Salve, which is supported by the Constitution Bench judgments in State of Madras Vs. Bhailal Bahi and Kalyani Stores Vs. State of Orissa and Other s. Imposition of tax only on imported goods when no such tax is levied on local goods violates Article 304(a). The Division Bench of the Madras High court in ITC Ltd. Vs. State of Tamil Nadu and Others [2007] 7 VST 367 Madras has struck down the enactment. To the same effect, submissions have been made by Shri Salve with regard to Entry Tax enactments of State of Kerala, State of Andhra Pradesh and State of Assam. 235. Articles 304(a) and 304(b) are joined with conjunction and . Learned counsel for the petitioners who have challenged the various enactments of various States contend that clauses (a) and (b) of Article 304 have to be read conjunctively as they are not mutually exclusive. It is contended that tax Legislation by State has to comply both clauses (a) and (b) whereas learned counsel for the States contends that w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Similarly in Maxwell on Interpretation of Statutes, 11th Ed., it has been accepted that to carry out the intention of the legislature it is occasionally found necessary to read the conjunctions 'or' and 'and' one for the other . 238. We may revert to the Constitutional Scheme to find out the true purpose and object of the provision. Article 304 is an exemption granted to the State when State can impose taxes and impose restrictions on the freedom of trade and commerce which freedom is guaranteed under Article 301 of the Constitution of India. Article 304 begins with the words Notwithstanding anything in Article 301 or Article 303, the Legislature of a State may by law- . Two subclauses (a) and (b) are enabling powers given to the State by which taxes can be imposed on imported goods and restrictions can be imposed on the freedom of trade, commerce or intercourse. In the event, we tend to read conjunction and as or it may mean that the State may exercise only one of the enabling powers as given in the clauses (a) and (b). It is not the intention of Article 304 to empower the State to only exercise either of the powers, the clear intendment of the State is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... what happens if may is replaced by shall . If the Governor in Council is obliged to make regulations respecting (a) conditions (b) information and (c) fees, the joint and several and becomes joint. 240. We find force in the submission and we are of the view that word 'and' between clauses (a) and (b) has to be read as joint and several, both meaning can be assigned as per requirement of a State Legislature. One of the submissions raised by the learned counsel of the petitioners as noted above is that whenever State Legislature imposes a tax by law under clause (a), it has necessarily to go through the procedure provided under clause 304(b), since both the clauses are conjunctive and require compliance. We are not inclined to accept the extreme submission that in each and every case whenever law is framed under clause (a) procedure under clause (b) has to be complied with. The proviso to clause (b) 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, is confined to clause (b) which indicates that Constitutional Scheme does not provide that it is necessary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of check and balances between the Union and States. Apart from Article 304(b) following are the other Constitutional provisions where Presidential sanction has been contemplated: (1) 31A. Saving of laws providing for acquisition of estates, etc.- (1) Notwithstanding anything contained in Article 13, no law providing for- xxxxxxxxxxxxxxxxxxxx Provided that where such law is a law made by the Legislature of a State, the provisions of this article shall not apply thereto unless such law, having been reserved for the consideration of the President, has received his assent. (2) 31C. Saving of laws giving effect to certain directive principles.- xxxxxxxxxxxxxxxxxxx Provided that where such law is made by the Legislature of a State, the provisions of this Article shall not apply thereto unless such law, having been reserved for the consideration of the President, has received his assent. (3) 213. Power of Governor to promulgate Ordinances during recess of Legislature.- xxxxxxxxxxxxxxxxxxx Provided that the Governor shall not, without instructions from the President, promulgate any such Ordinance if (a) a Bill contai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts of law by any authority, the law shall provide for the previous consent of the President being obtained to the making of any such rule or order. 242. The above provisions are part of our Constitutional Scheme and could not be wished away by saying that such provisions impinge upon the sovereign power of the State. Power of a State Legislature to the above extent is expressly limited by Constitutional Scheme. Article 304(b) proviso is one of such Constitutional Schemes where the State power is restricted and limited to the above extent. The Constituent Assembly Debates, as noticed above, clearly bring about the rationale of introduction of the requirement of Presidential assent in respect of certain laws by which State Legislature put restriction on the freedom of trade, commerce and intercourse. We have noted above that in the Constituent Assembly there was serious objection raised against clause (b) of Article 304 and amendment was moved for deletion of clause (b) from the Constitution. The above amendment after great discussion was negatived by approving the limited restraint put on the State Legislature as engrafted in Article 304(b) proviso. 243. A Constitution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the President to ensure, at the initial stage, that the State Legislation does not, by imposing unreasonable restrictions on trade, commerce or intercourse, endanger the commercial unity of the nation. It is true that clause (b) is not confined to interState trading activities, it extends to trade within the State, also. But intraState trading activities often have a close and substantial relation to interState trade and commerce. State laws, though purporting to regulate trade within a State, may have interState implications. They may impose discriminatory taxes or unreasonable restrictions which impede the freedom of interState trade and commerce. That is why, both interState and intraState trade have been made the subject of limitations on State legislative power under Article 304(b). 246. The Sarkaria Commission in para 2.40.07 has also recorded : However, no instance of a Bill reserved under the Proviso to clause (b) of Article 304, which might have been vetoed by the President, has been cited. In para 2.40.08 it was concluded: 2.40.08. For these reasons, we cannot support the demand for amendment of Article 304, or omission of the Proviso to its clause (b). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iso to Article 304(b) gives a supervisory power to the President (i.e. Union Council of Ministers) over a State legislation seeking to impose restrictions on interState or intraState trade, is not a good enough argument to hold that these are antifederal features making unjustifiable encroachment on the autonomy of the States. No doubt, these features give due weightage to the Union. But the scheme of the Articles in Part XIII considered as a whole, is wellbalanced. It reconciles the imperative of economic unity of the Nation with interests of State autonomy by carving out in clauses (a) and (b) of Article 304, two exceptions in favour of State legislature to the freedom guaranteed under Article 301. 248. Now one more limb of submissions with regard to Article 304(b) needs to be considered. The submission on behalf of the States is that Article 304 subclause (b) does not contemplate taxing legislation. It is contended that Article 304(a) has specifically used word tax and absence of word tax in Article 304(b) clearly indicates that the Constitution framers have intended to cover restrictions other than tax. Learned counsel for the petitioners have refuted the submission a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmerce, whereas the Constitution does not provide any exemption to State Legislature in that regard. 250. There are few more reasons due to which we are of the opinion that word 'restriction' uses in Article 304(b) also includes taxation law. 251. A State Legislature in exercise of its legislative power referable to any of the Entries of List II can frame law both fiscal or nonfiscal. When Article 304 uses words by law and the law is a wider term which embraces both fiscal and nonfiscal legislation with regard to clause (b), it cannot be limited as only nonfiscal law. If we have to hold that Article 304(b) does not refer to tax law, we have to give different meaning to words by law used in the beginning of Article 304 which governs both clauses (a) and (b). The mere fact that clause (a) uses the words any tax and clause (b) does not use the word tax is not of much significance since the word restrictions used in clause (b) is wide enough to cover any kind of restriction by fiscal law. Neither Article 302 nor Article 303 uses the word tax . Both Articles are dealing with freedom of trade and commerce, nonuse of word tax in Article 304(b) is also inconsequential ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 304(a). On the other hand, counsel appearing for the States submit that a State is not, in any manner, precluded from granting exemption to specified class of goods to give a helping hand for development of a particular industry specially in a State which is not so developed and State patronage for development is necessary. It is contended that all States are not equal in its economic and industrial development and backward State needs a special treatment by way of exemption in tax in deserving cases for coming up at level playing field with other States. It is contended that State's protection by way of exemption/set off in such cases cannot be termed as discrimination. It is contended that discrimination is one when it is a hostile discrimination. 255. Learned counsel for the parties have placed reliance on various pronouncements of this Court in support of their respective submissions which we shall notice hereinafter. 256. A Constitution Bench of this Court in Firm A.T.B. Mehtab Majid and Co. vs. State of Madras and another, (1963) Suppl. (2) SCR 435, had occasion to consider Article 301 and Article 304 in the context of Madras General Sales Tax Act, 1939 and Madr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds of one State and goods of another, may affect the free flow of trade and it will then offend against Article 301 and will be valid only if it comes within the terms of Article 304(a). 11. Article 304(a) enables the legislature of a State to make laws affecting trade, commerce and intercourse. It enables the imposition of taxes on goods from other States if similar goods in the State are subjected to similar taxes, so as not to discriminate between the goods manufactured or produced in that State and the goods which are imported from other States. This means that if the effect of the sales tax on tanned hides or skins imported from outside is that the latter becomes subject to a higher tax by the application of the proviso to subrule of Rule 16 of the Rules, then the tax is discriminatory and unconstitutional and must be struck down. 258. Petitioners rely on Weston Electronics and another vs. State of Gujarat and others, (1988) 2 SCC 568. Under Section 49 subSection (2) of Gujarat Sales Act, 1969 the State was empowered to exempt, in the public interest, any specified class of sales from sales tax. In 1981, while the rate for electronic goods entering the Gujarat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tate trade or commerce. Two Judge Bench of this Court referring to Atiabari Tea Co. Ltd. and Automobile Transport Ltd. Stated following in paragraph 12: 12. There can be no dispute that taxation is a deterrent against free flow. As a result of favourable or unfavourable treatment by way of taxation, the course of flow of trade gets regulated either adversely or favourably. If the scheme which Part XIII guarantees has to be preserved in national interest, it is necessary that the provisions in the article must be strictly complied with. One has to recall the farsighted observations of Gajendragadkar, J. in Atiabari Tea Co. case [AIR 1961 SC 232 : (1961) 1 SCR 809] and the observations then made obviously apply to cases of the type which is now before us. 261. This Court held both the notifications issued by Andhra Pradesh Government unsustainable in law. Following was stated in paragrph 14: 14.....Variation of the rate of interstate sales tax does affect free trade and commerce and creates a local preference which is contrary to the scheme of Part XIII of the Constitution. The notification extends the benefit even to unregistered dealers and the observations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emption is always inherent in all taxing statutes. If the suggestions/submissions as advanced by the petitioners are accepted, it was averred, and in our opinion rightly, that it will destroy completely or make nugatory the plenary powers of the States. If the exemption is based on natural and business factors and does not involve any intentional bias, the impugned notifications to grant exemption of limited period on certain specific conditions cannot be held to be bad. Judged by that yardstick, the present notifications cannot be held to be violative of the constitutional provisions. An examination of Article 304(a) would reveal that what is being prohibited by this article which is really an exception to Article 301 will not apply if Article 301 does not apply. 264. This Court further held that grant of exemption to specified class for limited period, such granting of exemption cannot be held to be contrary to the concept of economic unit. Following was stated: 28. Concept of economic barrier must be adopted in a dynamic sense with changing conditions. What constitutes an economic barrier at one point of time often ceases to be so at another point of time. It will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wing was stated: 36. It has to be reiterated that sales tax laws in all the States provide for exemption. It is well settled that the different entries in Lists I, II and III of the Seventh Schedule deal with the fields of legislation, and these should be construed widely, liberally and harmoniously. And these entries have been construed to include ancillary or incidental power. Power to grant exemption is inherent in all taxing legislations. Economic unity is a desired goal, economic equilibrium and prosperity is also the goal. Development on parity is one of the commitments of the Constitution. Directive principles enshrined in Articles 38 and 39 must be harmonised with economic unity as well as economic development of developed and under developed areas. In that light on Article 14 of the Constitution, it is necessary that the prohibitions in Article 301 and the scope of Article 304(a) and (b) should be understood and construed. Constitution is a living organism and the latent meaning of the expressions used can be given effect to only if a particular situation arises. It is not that with changing times the meaning changes but changing times illustrate and illuminate th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ok the view that the case in hand was fully covered by the decision of A.T.B. Mehtab Majid (supra). Following was stated in paragraph 22 and 23: 22. The tax was levied under the State Act in respect of steel semis. The State Act exempted steel semis which have been manufactured out of iron scrap which have suffered tax but not the other categories where the scrap had not suffered tax at that stage. This is directly covered by the decision in A.T.B. Mehtab case [1963 Supp 2 SCR 435 : AIR 1963 SC 928 : (1963) 14 STC 355] and that decision has not been dissented in Nataraja Mudaliar case[(1968) 3 SCR 829 : AIR 1969 SC 147 : (1968) 22 STC 376] or Rattan Lal Co. case [(1969) 2 SCR 544 : AIR 1970 SC 1742 : (1970) 25 STC 136] . The decision in A.T.B. Mehtab case [1963 Supp 2 SCR 435 : AIR 1963 SC 928 : (1963) 14 STC 355] is by a Constitution Bench and had not been dissented so far in any case. The ratio of the judgment being fully applicable, the judgment of the High Court under appeal is not acceptable. 23. We accordingly hold that the provision which is impugned in this case is ultra vires and accordingly set aside the judgment of the High Court and allow th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s - or fiscal barriers , as they may be called - at or along their boundaries in the interest of freedom of trade, commerce and intercourse throughout the territory of India, guaranteed by Article 301. As we shall presently point out, this clause does not prevent in any manner the States from encouraging or promoting the local industries in such manner as they think fit so long as they do not use the weapon of taxation to discriminate against the imported goods vis vis the locally manufactured goods. To repeat, the clause bars the States from creating tax barriers - or fiscal barriers, as they can be called - around themselves and/or insulate themselves from the remaining territories of India by erecting such tariff walls . Part XIII is premised upon the assumption that so long as a State taxes its residents and the residents of other States uniformly, there is no infringement of the freedom guaranteed by Article 301; no State would tax its people at a higher level merely with a view to tax the people of other States at that level. And it is this clause which has a crucial bearing on this case..... 270. Two Judge Bench noticed earlier cases as well as three Judge Bench jud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t ) P.R. 41254, dated 2751955 of this department has exempted from the payment of sales tax, in case of sale by the manufacturer or any member of his family, the sale of all such shoes, chappals, country shoes and footwears which are handmade and which are not manufactured on power machine and whose sale price does not exceed ₹ 1280. 273. The respondent was carrying on business of importing and selling different style of footwear in the State of Madhaya Pradesh. The respondent contended before the Sales Tax Officer that he was not liable to pay any sales tax on sale of handmade shoes, chappals and other types of footwear whose sale price did not exceed ₹ 1280 per pair. The claim of the respondent was rejected that the respondent does not fulfill the conditions of the notification. In the writ petition filed by the respondent in the High Court one of the contentions was raised to the following effect: 3. ..The respondent further averred that if the exemption were held to be in favour of sales by a manufacturer or a member of his family and not on sales by an importer, then the notification would be discriminatory in nature and would contravene the provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... habad [ Petition No. 94 of 1955 decided on August 20, 1962.]. 275. In the above case submission of the assessee was that in the event benefit of exemption is not granted to the assessee the exemption notification may itself be invalid creating a discrimination between similar manufacturer of outside the State traveling in the State and selling handmade shoes wherein small manufacturer has not to travel in order to get the benefit of the exemption. The Court rejected the above argument stating that it is really an argument of inconvenience. In any view of the matter, this Court in the above case held that assessee did not fulfill the condition of the notification, i.e., sale was exempted only when it is by a manufacturer or a family member of his family. Hence, there was no error in assessing him to the tax. The issue whether it was permissible to grant exemption to local goods and not to grant such exemption to the goods coming from outside was not the issue in the above case. In the above case, this Court has noticed that there was no discrimination with regard to the exemption in regard to the goods manufactured outside the State or within the State. The above case, thus, d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, three Judge Bench upheld the exemption noticing the fact that the exemption granted was to a special class for limited period on specific conditions of maintaining the general rate of tax on the goods manufactured by all those producers in the State who do not fall within that category. Video Electronics , however, further states that if tax is imposed in a colourable manner intentionally or purposely to create unfavourable bias by prescribing a general lower rate on locally manufactured goods either in the shape either of general exemption to locally manufactured goods or in the shape of lower rate of tax, such an exercise of power can always be struck down by the Courts. Following was observed in paragraph 30: These cases were not at all concerned with granting of exemption to a special class for a limited period on specific conditions of maintaining the general rate of tax on the goods manufactured by all those producers in the State who do not fall within the exempted category at par with the rate applicable to imported goods as we have read these cases. Hence, it was not necessary in those decisions to consider the problem in its present aspect. If, however, the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctronics have to be read to the above extent and with the limitation as noticed above. 280. We, thus, come to the conclusion that State Legislature in exercise of its taxing power can grant exemption/set off to local goods, only to a limited extent based on intelligible differentia which is not in the nature of general/unspecified exemption. The exemption/set off which tend to become general exemption violates Article 304(a). G. ENTRY 52 OF LIST II OF VIITH SCHEDULE OF THE CONSTITUTION 281. Legislative field under State List, Entry 52 is 'taxes on the entry of goods into a local area for consumption, use or sale therein'. The Entry 52 itself demonstrate that there are inherent limitations as regard the nature and character of the levy. In order to have a levy of tax to come within the purview of Entry 52, such levy has to satisfy three conditions: (i) The levy under the State Entry must be 'on the entry of goods' which constitutes the taxable events. (ii) The levy in question must be in respect of 'into a local area'. The local area has been defined as ' an area administered by local body like a municipality, a district board, a local ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed solely on the basis that goods are thus carried or transported that, in our opinion, directly affects the freedom of trade as contemplated by Article 301. 286. This Court, while construing the Karnataka tax on entry of goods into local area for consumption, use or sale therein Act, 1979 in State of Karnataka Vs. Hansa Corporation 1980 4 SCC 697 has held that the tax on the entry of goods falls within the inhibition of Article 301. Following was observed: 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. 287. A law, made under the subject matter of Entry 52 List II, would thus clearly be a tax on the movement of goods and thus would fall within the purview of the inhibition of Article 301 and the said law can only be saved if it complies with the Article 304. Learned counsel for the States have contended that Entry Tax does not prohibit the entry of goods and tax is collected, only subsequently and normally, on the basis of returns filed by the persons taking the goods into a local area. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of legislation and its impact on trade, commerce and intercourse. H. MEANING OF RESTRICTION AS USED IN PART XIII 290. Freedom of trade, commerce and intercourse throughout the territory of India is guaranteed under Article 301. The framers of the Constitution were conscious that the freedom cannot be absolute and it may be necessary in several circumstances to restrict the freedom in public interest. Article 302 306 enumerates exceptions to the freedom as guaranteed under Article 301. What is the meaning and contents of word 'restriction' as used in Part XIII? The word 'restriction' has also been used under Article 19 (2) to 19 (6) while empowering the State to impose reasonable restrictions on the fundamental rights guaranteed under Article 19(1) (a) to 19 (1) (g). The word 'restriction' is defined in New Webster Dictionary in the following manner:- The act of restricting, or state of being restricted; that which restricts; a restraint; limitation. 291. The Black's Law Dictionary also defines 'restriction' in following manner:- restriction.1. Confinement within bounds or limits; a limitation or qualification ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar as it expressly refer to various acts, actions which are treated to be restrictions in freedom of trade and commerce. Article 302 306 contain provisions, by which restriction can be put on the freedom of trade and commerce. Some restrictions have been expressly mentioned in said articles. Article 303 provides for 'restrictions on the legislative powers of the Union and of the States with regard to the trade and commerce'. As per Article 303, subarticle Clause 1 following are treated to be restrictions:- (i) Any law giving or authorising the giving of any preference to one State over another, (ii) Any law making or authorising the making of, any discrimination between one State and another. 295. Thus preferences and discrimination both are treated as restriction in the context of freedom of trade and commerce. Coming to Article 304(a) any law framed by legislature is restriction on freedom of trade and commerce which:- a). Imposes on goods imported from other State, any tax when no such tax is imposed on similar goods manufactured or produced in that State, b). Imposes on goods imported from other States any tax which discriminates between goods so imported ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es prohibitions but restriction is not to be understood with complete prohibition or stoppage of business, effect of tax when it hinders the trade commerce, it becomes restriction and prohibited under Article 301. This Court in Laxmi Khandsari Etc. Vs. State of U.P. 1981 (3) SCR 92 . While considering the concept of reasonable restriction has held that reasonable restriction would depend on the nature and circumstances of the case following was laid down in page 105: As to what are reasonable restrictions would naturally depend on the nature and circumstances of the case, the character of the statute, the object which it seeks to serve, the existing circumstances, the extent of the evil sought to be remedied as also the nature of restraint or restriction placed on the rights of the citizen. It is difficult to lay down any hard or fast rule of universal application but this Court has consistently held that in imposing such restrictions the State must adopt an objective standard amounting to a social control by restricting the rights of the citizens where the necessities of the situation demand. 300. Further, it was held in Laxmi Khandsari Etc. Etc. Vs. State of U.P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ): 46. It is now well settled that though taxing laws are not outside Article 14, however, having regard to the wide variety of diverse economic criteria that go into the formulation of a fiscal policy legislature enjoys a wide latitude in the matter of selection of persons, subject matter, events etc., for taxation. The tests of the vice of discrimination in a taxing law are, accordingly, less rigorous. Further in para 52 following was stated: 62. Then again, the mere excessiveness of a tax or even the circumstance that its imposition might tend towards the diminution of the earnings or profits of the persons of incidence does not, per se, and without more, constitute violation of the rights under Article 19(1)(g). 303. It is, however, relevant to note that the issue as to whether the restriction contained in any taxing statute impede the freedom of trade and commerce is a question which will vary from case to case. The nature of restriction and the magnitude of the restriction are all relevant factors to determine whether trade is impeded or not. It is well settled that provisions in a statute which is regulatory in nature which facilitates the trade have not b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgments, namely, James Vs. Commonwealth of Australia (1936) A.C. 578 and judgment of Lord Porter in, Commonwealth of Australia and Others Vs. Bank of New South Wales and Another (1950) A.C. 23 5 . It is further relevant to note that Gajendragadkar, J., was conscious of the fact that political and historical background of the federal polity adopted by Australian Commonwealth and the setting of the Constitution of India, the distribution of powers and general scheme is entirely different. The caution noted by Gajendragadkar, J., was in following words: Before we conclude we would like to refer to two decisions in which the scope and effect of the provisions of S. 92 of the Australian Constitution came to be considered. We have deliberately not referred to these decisions earlier because we thought it would be unreasonable to refer to or rely on the said section or the decisions thereon for the purpose of construing the relevant Articles of Part XIII of our Constitution. It is commonplace to say that the political and historical background of the federal polity adopted by the Australian Commonwealth, the setting of the Constitution itself, the distribution of powers and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to interstate trade is too wide. Instead of placing interstate trade on an equal footing with intrastate trade, the doctrine keeps interstate trade on a privileged or preferred footing, immune from burdens to which other trade is subject. ..... ...... ...... ...... The second major reason for rejecting the doctrine as an acceptable interpretation of s. 92 is that it fails to make any accommodation for the need for laws genuinely regulating intrastate and interstate trade. The history of the movement for abolition of colonial protection and for the achievement of intercolonial free trade does not indicate that it was intended to prohibit genuine nonprotective regulation of intercolonial or interstate trade. The criterion of operation makes no concession to this aspect of the section's history. In the result there has been a continuing tension between the general application of the formula and the validity of laws which are purely regulatory in character. Judged by reference to the doctrine, the validity of a regulatory law hinged on whether it imposed a burden on an essential attribute or on a mere incident of trade or commerce. 312. As noted above, our Constit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterstate or intrastate trade that is Article 304(b). Although the Australian High Court rejected the idea of 'direct and immediate effect test' as being artificial, this Court has continued to adopt the said doctrine whenever legislation is decided on the touchstone of reasonable restriction and the doctrine has been applied consistently in the vast number of cases for decades which have stood the test of time. 314. Shri Dwivedi has also referred to American cases and contends that free trade immunity, which was propounded in Spector Motor Services, Inc. Vs. O'Connor 430 U.S. 289(1951) had been overruled in Complete Auto Transit Vs. Brady 430 U.S. 274(1977) . Shri Dwivedi submits that in Complete Auto , it was held that 'it was not the purpose of the commerce class to relieve those engaged in interstate commerce from their just share of State tax burden even though it increases the cost of doing business'. Shri Dwivedi, further relies on State of Maryland Vs. State of Louisiana 451 U.S. 725 where it was observed, one of the fundamental principles of commerce class jurisprudence is that no State, consistent with the commerce class, may or impos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atter to purpose or otherwise, that the validity of the exercise of the power must sometimes depend on facts, facts which some how must be ascertained by the court responsible for deciding the validity of the law......All that is n ecessary is to make the point that if a criterion of constitutional validity consists in matter of fact, the fact must be ascertained by the court as best it can, when the court is called upon to pronounce upon validity. I entirely agree with these observations. It is common place to point out that intricate problems come before a court involving decision on different and complicated aspects of human activity. Questions involving science, medicine, engineering, geology, biology, economics, Psychology, etc. all come for judicial scrutiny, and I have never heard any court saying that it is difficult to decide upon such a question and, therefore, the proceeding raising such a question is outside the jurisdiction of such a court. In saying this, I am not ignoring the difficulties inherent in a problem of fixing the rate of taxes by a court. Experience shows that the court applies certain presumptions, such as that of the wisdom, knowledge and the goo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me detail. 320. The compensatory tax theory as evolved in Automobile Transport was soon doubted by the Constitution Bench in Khyerbari Tea Company Ltd. v. State of Assam, (1964) 5 SCR 975. Gajendragadkar, J. looking into the nature of the compensatory tax theory, opined that the same is required to be reconsidered by a larger Bench, he, however, noted that since the legislation was not tried to be saved on the basis of compensatory tax theory, the question was not further pursued. Gajendragadkar, J. made following observation: According to the majority view in the case of Atiabari Tea Co., if an Act is passed under Art. 304(b) and its validity is impeached, then the State may seek, to justify the Act on the ground that the restrictions imposed by it are reasonable and in the public interest, and in doing so, it may, for instance, rely on the fact that the taxes levied by the impugned Act are compensatory in character. On the other hand, according to the majority decision in the Automobile Transport (Rajasthan) case, compensatory taxation would be outside Art.301 and cannot therefore, fall under Art.304(b). If in the present case it had been urged before us that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s said that the essence of taxation is compulsion, that is to say, it is imposed under statutory power without the taxpayer s consent and the payment is enforced by law. The second characteristic of tax is that it is an imposition made for public purpose without reference to any special benefit to be conferred on the payer of the tax. This is expressed by saying that the levy of tax is for the purposes of general revenue, which when collected forms part of the public revenues of the State. As the object of a tax is not to confer any special benefit upon any particular individual, there is, as it is said, no element of quid pro quo between the taxpayer and the public authority. Another feature of the taxation is that as it is a part of the common burden, the quantum of imposition upon the taxpayer depends generally upon his capacity to pay. 325. It is an accepted proposition that one of the characteristics of tax is that it is an imposition made for public purpose without reference to any special benefit to be conferred on the payer of the tax. The taxes imposed by the Legislature, apart from being source of Revenue is also expended for various public welfare measures and when ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourse of interState and intrastate trade and commerce. 330. Justice Das has specifically referred to dissenting opinion of Fullagar, J. in McCarter and Another V. Brodie, ( 1950) 80 CLR 432, in which case the Parliament of Victoria had passed an Act, namely, Transport Regulation Act, 193347 which provided that a commercial goods vehicle should not operate on any public highway unless licensed in accordance with Act. A fee was to be paid for license, by an amendment further fee was imposed to be calculated at an annual rate determined from time to time by referring to the load capacity of the vehicle in respect of which license was sought to. 331. Chief Justice Latham delivered his opinion for the Court, after referring to various earlier decision of Australian High Court and Privy Council. Chief Justice held that the regulation of trade, commerce and intercourse in the States is compatible with absolute freedom envisaged under Section 92 and the freedom is violated only when statute operates to restrict such trade and commerce, directly and immediately, it was said: This quotation follows an express statement that regulation of trade, commerce and intercourse amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if the car is being driven on a road. Every motor car must carry a warning device, such as a horn. A motor car must not be driven at a speed or in a manner which is dangerous to the public having regard to all the circumstances of the case. Other legislation of the StateParliamentary or subordinateprescribes other rules. In certain localities a motor car must not be driven at more than a certain specified speed. The weight of the load which may be carried by a motor car on a public highway is limited. The driver of a motor car must keep to the left in driving along a highway. He must not overtake another vehicle on a curve in the road which is marked by a double line in the centre. He must observe certain rules of the road at intersections: for example, the vehicle on the right has the right of way. Such examples might be multiplied indefinitely. Nobody would doubt that the application of such rules to an interState trader will not infringe s.92. And clearly in such matters of regulation a very wide range of discretion must be allowed to the legislative body. When we ask why such rules do not infringe s.92, I think that commonsense suggests a fairly clear and satisfactory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irectly and immediately as distinct from creating some indirect or consequential impediment which may fairly be regarded as remote. In the application of these general propositions, in determining whether an enactment is regulatory or something more, or whether a restriction is direct or only remote or incidental, there cannot fail to be differences of opinion. The problem to be solved will often be not so much legal as political, social, or economic, yet it must be solved by a court of law. 334. In Armstrong and Others (supra) , the provisions of Commercial Goods Vehicle Act, 1955 were under challenge on the ground that it violated Section 92. The provisions require the owner of every commercial goods vehicle of loading capacity exceeding four tonnes and not engaged in conveying certain specified classes of goods to pay contribution towards the compensation for wear and tear costs to public highways. The High Court held that imposition of charge for using the roads of State is not necessarily inconsistent with the freedom of interstate trade and commerce. 335. The Chief Justice Dixson has held that a State can not single out interState transport or transport generally ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is clear that Australian High Court have read qualifications under Section 92 of the Act. The statutes regulating the trade which have no direct effect on trade and commerce and levying compensatory charge were held to be compatible with freedom under Section 92. 338. Another judgment of the Privy Council which have been referred to by Das, J. was judgment in Commonwealth of Australian and Others V. Bank of New South Wales and Others [1950] A.C. 235 . The Privy Council laid down as following: But it appears to their Lordships that, if these two tests are applied: first, whether the effect of the Act is in a particular respect direct or remote; and, secondly, whether in its true character it is regulatory, the area of dispute may be considerably narrower. It is beyond hope that it should be eliminated. 339. After referring to above cases, Das, J. recorded the conclusion in following words: We have, therefore, come to the conclusion that neither the wide interpretation nor the narrow interpretations canvassed before us are acceptable. The interpretation which was accepted by the majority in the Atiabari Tea Co. case is correct, but subject to this clarific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt held that tax is not violative of interState trade and commerce. It was noticed that no greater tax is held on the liquor brought into the State than on those manufactured out of the State and the tax on the liquor brought in from other State was only complimentary provision necessary to make tax equal on all liquors sold in the States. Following was laid down: A tax is imposed by the previous sections of the same act of fifty cents per gallon on all whiskey and all brandy from fruits manufactured in the State. In order to collect this tax, every distiller is compelled to take our a license and to make regular returns of the amount of distilled spirits manufactured by him. On this he pays fifty cents per gallon. So that when we come in the light of these earlier sections of the act, to examine the 13th, 14th, and 15th sections, it is found that no greater tax is laid on liquors brought into the State than on those manufactured within it. And it is clear that whereas collecting the tax of the distiller was supposed to be the most expedient mode of securing its payment, as to liquors manufactured within the State, the tax on those who sold liquors brought in from other State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was always payable where the user had acquired the property by retail purchase in or from another State, Unless he has paid sales or use tax elsewhere before bringing it to Washington. Challenge was made on the ground that it violates the commerce class of the U.S. Constitution. Justice Cardozo held that the equality is a theme that runs through the above sections. Following are the reasons which were given for upholding the above compensating tax: Equality is the theme that runs through all the sections of the statute. There shall be a tax upon the use, but subject *to an offset if another use or sales tax has been paid for the same thing. This is true where the offsetting tax became payable to Washington by reason of purchase or use within the state. It is true in exactly the same measure where the offsetting tax has been paid to another state by reason of use or purchase there. No one who uses property in Washington after buying it at retail is to be exempt from a tax upon the privilege of enjoyment except to the extent that he has paid a use or sales tax somewhere. Every one who has paid a use or sales tax anywhere, or, more accurately, in any state, is to that extent to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... since 1869. Following was stated by the U.S. Supreme Court: At least since our decision in Hinson V. Lott, 8 Wall. 148 (1869), these principles have found expression in the compensatory or complementary tax doctrine. Though our cases sometimes discuss the concept of the compensatory tax as if it were a doctrine unto itself, it is merely a specific way of justifying a facially discriminatory tax as achieving a legitimate local purpose that cannot be achieved through nondiscriminatory means. See Chemical Waste, supra, at 346, n. 9 (referring to the compensatory tax doctrine as a justification for a facially discriminatory tax). Under that doctrine, a facially discriminatory tax that imposes on interstate commerce the rough equivalent of an identifiable and substantially similar tax on intrastate commerce does not offend the negative Commerce Clause. Maryland, supra, at 758759. See also Tyler Pipe Industries, Inc. v. Washington State Dept. of Revenue, MANU/USSC/0058/1987: 483 U.S. 232, 242243( 1987); Armco, U.S., AT 643. To justify a charge on interstate commerce as a compensatory tax, a State must, as a threshold matter, identify... the [intrastate tax] burden for which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , bridges etc. which was treated as recompense to the traders who were required to pay tax. 350. Law of compensatory charge as developed in Australia was due to the fact that Section 92 did not contain any qualification to the absolute freedom of trade and commerce granted therein. Various qualifications and restrictions to the above freedom were culled out by judicial decisions of the High Court of Australia and Privy Council to justify the said qualifications and restrictions. The ratio contained in various judgments of the High Court of Australia and the Privy Council on Section 92 of the Constitution of Australia cannot be a guiding factor for interpreting Part XIII of the Constitution of India. 351. The Constitution Bench of this Court in State of Bombay v. R.M.D. Chamarbaugwala and another, AIR 1957 SC 699 had sounded a caution in paragraph 35: 35. In construing the provisions of our Constitution the decisions of the American Supreme Court on the commerce clause and the decisions of the Australian High Court and of the Privy Council on Section 92 of the Australian Constitution should, for reasons pointed out by this Court in State of TravancoreCochin v. Bom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in Part XIII render such a construction of Art.301 at once unnecessary and impermissible. 353. Gajendragadkar, J. in Khyerbari Tea Company Ltd.(supra) had also expressed opinion that compensatory or regulatory tax theory as introduced in the Australian decisions is not to be made applicable in Part XIII. Following was observed: The majority view in the Atiabari case proceeded on the basis that the Australian decisions which dealt with the scope and effect of s.92 of the Australian Constitution would be of no assistance in constructing the effect of the provisions in Part XIII of our Constitution, because the legislative, historical and political background,the structure and the effect of the relevant provisions contained in Part XIII were in material particulars different from those of s. 92 of the Australian Constitution; s.92 is absolute in terms and on its literal construction, admits of no exceptions. The Australian decisions, therefore, had to introduce distinctions, such as compensatory or regulatory tax laws in order to take laws answering the said description out of the purview of s.92. In our Constitution, however, though Art. 301 is worded substantially ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oviding facilities shall take out the statute from the scrutiny of Part XIII ? Answer has to be in negative. The fact that a tax statute compensates the payer of the tax does not take out the statute beyond Part XIII, all taxes, being for one or other public purposes. The tax legislation which professes to compensate the payer cannot take the tax legislation on a higher pedestal beyond the reach of Part XIII, making such legislation not subject to Constitution . When all legislative power is subject to Constitution as per Article 245 and 246 of the Constitution, a legislation, namely, compensatory tax legislation cannot be said to be beyond Part XIII. Any such interpretation is clearly against the constitutional scheme. 356. Thus the judgments of the High Court of Australia and the Privy Council relied in Automobile Transport did not furnish a foundation for evaluation of compensatory tax theory in part XIII of the Constitution. 357. The scheme of Constitution of India indicates that wherever it was contemplated to insulate any provision from challenge, expressed provisions have been made to provide for such insulation. Article 31B is one of such examples which provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to discriminate between goods so imported and goods so manufactured and produced. 5. Word and between Clause(a) and Clause(b) of Article 304 has to be read as joint and several. Both the meaning can be assigned, as per requirement of State legislation. 6. A law made by State legislature exercising the power under Clause(a) in Article 304, which does not impose any restriction on the freedom of trade, commerce and intercourse need not comply with Article 304(b), however, a law even though complying with Article 304(a) containing restriction on freedom of trade, commerce and intercourse is to obtain sanction of the President, as contemplated by proviso to Clause(b). The requirement of obtaining the previous sanction of the president has to be decided in accordance with the nature and content of the State Legislation. 7. The proviso of Article 304(b) is part of Constitutional Scheme which is neither against the federal structure of the Constitution nor affects the State's sovereignty. 8. Word 'restriction' used in Article 304(b) is wide enough to include restrictions placed both by fiscal or nonfiscal law. 9. State Legislature in exercise of its taxing pow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... criminatory infringe Article 301 unless they are saved under Article 302 304. Question NO.2 and Question No.3 The compensatory tax theory as judicially evolved in Automobile Transport is not compatible to constitutional scheme as delineated by Part XIII of the Constitution. The Automobile Transport case in so far as it lays down that compensatory taxes are out of the reach of Article 301 cannot be approved. The nature and content of taxation at best may throw light on the aspect as to whether it contains restriction on freedom of trade, commerce and intercourse. The compensatory tax theory being not compatible with the Constitution, it is not necessary to answer Question No.3. Question No.4 To find out as to whether Entry Tax levied by different States in the present batch of cases violates Article 301 of the Constitution, each statute has to be looked into and examined as per our discussions and conclusions as above. A law made by State Legislature complying clause(a) of Article 304 and not containing any restriction on the freedom of trade, commerce and intercourse need not comply Article 304(b). However, a law even though complies with Artic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere a State legislation is subject to Presidential sanction which provisions are in accordance with the Constitutional scheme and does not affect the separation of power between the Legislature and judiciary. Article 304(b) enables the State Legislature to frame legislations containing restriction on freedom of trade, commerce and intercourse after routing the legislation through proviso to Article 304(b). The question of judicial review arises only when there is challenge to such legislation. Judicial review of such legislation in no manner affects the separation of power. (9) The compensatory tax theory as propounded in Automobile Transport is not compatible with the Constitutional scheme as delineated in the Part XIII of the Constitution. Framers of the Constitution have provided for all exceptions under which freedom of trade, commerce and intercourse guaranteed under Article 301 can be overridden, the compensatory tax not being included as one of the exceptions, the same cannot be added as an exception by any judicial interpretation. The compensatory tax theory brings dichotomy which is inconsistent with the language employed in Article 301. Hon'ble the Chief Jus ..... X X X X Extracts X X X X X X X X Extracts X X X X
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