JUNE 14, 2016

By Narendra Kumar Singhvi

ENTRY tax has been one of the most litigated tax in the country, particularly in the constitutional courts. Pursuant to directions of the Supreme Court in Jindal Stainless Limited v. State of Haryana, - 2006-TIOL-94-SC-CT, various High Courts decided the petitions challenging the validity of entry tax in particular states under the concerned state laws. Thereafter, the matters reached back the Supreme Court and in Jaiprakash Associates Limited v. State of Madhya Pradesh, - 2008-TIOL-241-SC-ENTRY, a division bench thereof framed 10 questions of law to be answered by a larger bench. These disputes are essentially centered around the validity of entry tax qua Article 304 of the Constitution and the nature of it being a compensatory tax, i.e. a fee.

Thereafter, a larger bench consisting of five judges passed an order in Civil Appeal No. 3453/2002 in Jindal Stainless Limited v. State of Haryana , on 16.04.2010. After considering the decision of five-member bench in Atiabari Tea Co Limited v. State of Assam, 1961 1 SCR 809 and subsequent decision of seven-member bench in Automobile Transport (Rajasthan) Limited v. State of Rajasthan , 1963 1 SCR 491 , the bench came to a conclusion that the matter needs to be considered by a suitable larger bench not only to decide the 10 questions of law referred to hereinabove but also the validity of the tests laid down in Atiabari (supra) and Automobile (supra) in the present times.

Thereafter, hundreds of special leave petitions have been filed in the Supreme Court and the same continue to be tagged with the earlier matters. Meanwhile, interim applications were filed to speed up the hearing on which a larger bench, to which the present Chief Justice was a member, directed the registry to place all matters for final hearing in the week commencing 18th July, 2016. This came to be ordered on 11.05.2016 in Vedanta Aluminum Limited v. State of Orissa, - 2016-TIOL-75-SC-CT-LB. The bench has given specific directions to all the parties to submit comprehensive compilation and brief submissions and not to seek any adjournments. It seems the matter will be heard and decided this time, putting to rest all apprehensions.

However, the issues of compensatory tax and validity qua Article 304 are only a few of the hurdles being faced by parties to the entry tax litigations. There are a number of other issues also, one of which is the levy of entry tax on goods which are imported from outside the country.

Article 286 of the Constitution restricts the imposition of a tax on sale or purchase of goods where such sale or purchase takes place outside the state or in the course of import of the goods into, or export of the goods out of, territory of India. In this regard, Section 5 of the Central Sales Tax Act, 1956 lays down the principles for determining as to when a sale or purchase of goods can be said to take place in the course of import or export of goods.

In line with these restrictions, the sales tax laws of state exclude, from their applicability, sale or purchase taking place in the course of import or export of goods. However, there are no restrictions on levy of entry tax, under the state laws, on entry of goods into the state, which is actually in the course of import of goods.

While entry tax is commonly perceived to be similar to sales tax, there is a fine distinction in the taxable event in both the cases. In case of sales tax, the charge is attracted on transfer of property in goods for consideration; however, it is the entry of goods into a local area of state which attracts the charge of entry tax. Thus, the transfer of property in goods is immaterial for the purposes of entry tax and what is relevant is only the entry of goods into a local area.

The restriction imposed under the Constitution is only to avoid levy of tax on sale or purchase of goods in the course of import or export. There might be cases where entry of goods into a local area is an integral part of their transport during sale or purchase of goods. For example, a buyer in one state places an order with seller in another state for purchase of goods, which are actually to be imported from abroad. The seller imports the goods and makes a high-sea sale in favour of the buyer and in this course, the goods make their entry into the local area of the state in which buyer is located. In such a case, the entry of goods into a local area is nothing but in the course of sale/ purchase of goods in the course of import and it is possible to argue that the restriction under Article 286 apply to such a situation also as to restrict the applicability of entry tax thereon. Even in such a situation, the essential question will center around the nuances of Article 286 inasmuch as it restricts the imposition of tax on the sale or purchase of goods, while the levy of entry tax is on entry of goods irrespective of the fact of sale/ purchase thereof.

This issue, though not highlighted, is not a new issue and has already been under litigation for quite some time now. A division bench of the Kerala High Court, in Fr. William Fernandez v. State of Kerala, 1999 (115) STC 591 (Ker), held that no entry tax can be levied on goods brought into local area from outside the country. The Court held that the words ‘from any place outside the state' do not mean to convey outside the country from abroad. The Court also took into account Entry No. 92A of List-I in the Seventh Schedule of the Constitution and held that the taxes on imports and exports are exclusive union subjects. Similarly, there a number of other decisions holding a view that no entry tax can be levied on goods entering the local area in the course of their import from abroad.

However, there is another line of judicial interpretation holding that the restrictions envisaged under the Constitution qua the import/ export of goods do not apply to taxes on entry of goods into a local area. In Tata Steel Limited v. State of Odisha, - 2012-TIOL-1124-HC-ORISSA-CUS, a division bench of the Orissa High Court upheld the levy of entry tax on goods imported from abroad and held that the power to levy entry tax is derived from Entry No. 52 of List-II, which is not subject to any such restrictions. The Court held that the coverage of levy of duties on import of goods under Entry No. 83 of List-I ends when the goods cross the customs frontiers. Thereafter, the power to levy entry tax on entry of goods into a local area is unaffected by such restrictions. As already noted, there a number of other decisions holding the view that there is no infirmity in levy of entry tax on goods entering the local area in the course of their import from abroad.

It is evident that this aspect of entry tax is also significant while testing the validity of entry tax in terms of the constitutional limitations. However, this aspect does not seem to have attracted the attention of the relevant forums. Nonetheless, we have to wait and watch till the order of the Apex Court in these matters is received.

(The author is Senior Associate, Lakshmikumaran & Sridharan, Delhi.)