By TIOL News Service

NEW DELHI, NOV 11, 2016: THE Nine Member Bench of Supreme Court has upheld the levy Entry Tax by the States.

Article 301 of the Constitution, stipulates, “Subject to the other provisions of this Part, trade, commerce and intercourse throughout the territory of India shall be free.”

In a landmark judgement the Supreme Court held that the word ‘Free’ used in Article 301 does not mean “free from taxation”.

By majority, the Supreme Court answered the reference in the following terms:

• Taxes simpliciter are not within the contemplation of Part XIII of the Constitution of India. The word ‘Free’ used in Article 301 does not mean “free from taxation”.

• Only such taxes as are discriminatory in nature are prohibited by Article 304(a). It follows that levy of a non-discriminatory tax would not constitute an infraction of Article 301.

• Clauses (a) and (b) of Article 304 have to be read disjunctively.

• A levy that violates 304(a) cannot be saved even if the procedure under Article 304(b) or the proviso there under is satisfied.

• The compensatory tax theory evolved in Automobile Transport case and subsequently modified in Jindal’s case has no juristic basis and is therefore rejected.

• Decisions of this Court in Atiabari, Automobile Transport and Jindal cases and all other judgments that follow these pronouncements are to the extent of such reliance over ruled.

• A tax on entry of goods into a local area for use, sale or consumption therein is permissible although similar goods are not produced within the taxing state.

• Article 304 (a) frowns upon discrimination (of a hostile nature in the protectionist sense) and not on mere differentiation. Therefore, incentives, set-offs etc. granted to a specified class of dealers for a limited period of time in a non-hostile fashion with a view to developing economically backward areas would not violate Article 304(a). 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.

• 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.

The Background:

1. These appeals bring to fore for 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 the Supreme 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 levy of a tax on the “entry of goods into local areas comprising the States”. The constitutional validity of these levies was questioned in different High Courts by assesses/dealers aggrieved of the same, inter alia, on the ground that the same were violative of the constitutionally recognised right to free trade commerce and intercourse guaranteed under Article 301 of the Constitution of India. The levies were also assailed on the ground that the same were discriminatory and, therefore, violative of Article 304(a) of the Constitution of India. Absence of Presidential sanction in terms of Article 304(b) of the Constitution of India was also set-up as a ground of challenge to the levies imposed by the respective State legislatures. Writ Petition (Civil) No. 8700 of 2000 filed before the High Court of Punjab and Haryana was one such petition that assailed the constitutional validity of the Haryana Local Development Act, 2000. Relying upon the decisions of the Supreme Court in Atiabari Tea Co. Ltd. v. State of Assam & Ors. Automobile Transport (Rajasthan) Ltd. etc. v. State of Rajasthan & Ors.; M/s. Bhagatram Rajeev Kumar v. Commissioner of Sales Tax, M.P. and Ors.; and State of Bihar and Ors. v. Bihar Chamber of Commerce and Ors, a Division Bench of the High Court of Punjab and Haryana dismissed the said petition and connected matters on the ground that the levy was compensatory in character hence outside the purview of Article 301.

3. The correctness of the said order was assailed before the Court in Jindal Stripe Ltd. and Anr. v. State of Haryana and Ors. A two-Judge Bench of the Court, however, referred the matter to a larger Bench as it noticed an apparent conflict between the pronouncements of the Court in Atiabari and Automobile Transport cases on the one hand and Bhagatram and Bihar Chamber of Commerce on the other.

4. The matters were, pursuant to the above, placed before a Constitution Bench of the Court in Jindal Stainless Ltd. and Anr. v. State of Haryana and Ors., which resolved the conflict noticed in the reference order by holding that the working test propounded by seven Judges in Automobile Transport case was incompatible with the test of ‘some connection’ enunciated by the three Judge Bench in Bhagatram’s case. The Court held that the test of ‘some connection’ as propounded in Bhagatram’s case (supra) had no application to the concept of compensatory tax. The Court, accordingly, overruled the decisions rendered in Bhagatram and Bihar Chamber of Commerce cases and held that the doctrine of ‘direct and immediate effect’ of the impugned law on trade and commerce under Article 301 as propounded in Atiabari and the working test enunciated in Automobile Transport cases for deciding whether a tax is compensatory or not will continue to apply.

5. The matters 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. 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.

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(b) and the proviso to the same followed. The levies were on that basis held to be in violation of Article 301 being an impediment to free trade, commerce and intercourse and accordingly struck down. The High Courts of Assam, Arunachal Pradesh, Jharkhand, Kerala and Tamil Nadu struck down the levies imposed by their respective States also on the ground that they were discriminatory in nature hence violative of Article 304(a) of the Constitution.

7. All these judgments and orders of the High Courts, passed after the remand, then, came to be challenged by the States concerned in the appeals filed against the same. These appeals initially came-up before a two-Judge Bench of the Court comprising Justice Arijit Pasayat and Justice S.H. Kapadia. Their Lordships referred the same to a Constitution Bench for an authoritative pronouncement on as many as ten questions formulated in the reference order (Jaiprakash Associates Limited v. State of Madhya Pradesh and Ors. The Court noticed the arguments advanced on behalf of the assessees that entry taxes were, in essence and in the classical sense, in the nature of ‘a fee’ and not ‘a tax’. It also noted the contention that all the cases on which the parties had placed reliance related to entry tax in the context of tax on vehicles in contradiction to taxes on entry of goods. The Court was of the view that while the Constitution Bench in Jindal Stainless Ltd. (2) had dealt with some aspects of the matter, certain other important constitutional issues remained to be examined especially because a conceptually and contextually different approach may be required vis-à-vis “transport cases” on the one hand and cases of “entry tax on goods” on the other.

8. The matter was accordingly placed before a five-Judge Bench of this Court (Jindal Stainless Limited and Anr. v. State of Haryana and Ors.) who briefly referred to the decisions in Atiabari, Automobile Transport cases and Keshav Mills Co. Ltd. v. CIT and a few others and referred the matters to a larger Bench for reconsideration of the judgment of this Court in Atiabari and Automobile Transport. The Court noted that the correctness of the view taken in the said two cases had been doubted as early as in the year 1975 in G.K. Krishnan v. State of Tamil Nadu. The reference order briefly set out some of the questions that required consideration by a larger Bench.

(See full text of decision - 2016-TIOL-187-SC-MISC-CB)