OCTOBER 17, 2017

By Narendra Kumar Singhvi

IN my earlier article titled 'Entry Tax on goods imported from abroad - An Insight' published on June 14, 2016, I had discussed the issue of validity of levy of Entry Tax on goods imported from abroad and brought into a local area. Different High Courts had interpreted provisions of different State Acts differently and there were conflicting decisions on the issue. The matters reached Supreme Court and were pending disposal.

A Nine-judge Constitution Bench in Jindal Stainless v. State of Haryana - 2016-TIOL-187-SC-MISC-CB , had answered several questions pertaining to Entry Tax legislations of different States, which has largely settled (the principles pertaining to) various issues relating to Entry Tax. The bench also took note of the issue pertaining to leviability of Entry Tax on imported goods, but left it to be answered by regular bench. In fact, answering the reference, the following was stated in Answer No. 10:

"The questions whether the entire State can be notified as a local area and whether entry tax can be levied on goods entering landmass of India from another country are left to be determined in appropriate proceedings."

However, in their separate judgments, the two Judges on the bench, i.e. Justice R Banumathi and Justice Dr. DY Chandrachud, have considered the leviability of Entry Tax on imported goods in detail and held that there is no clash/overlap between Entry Tax levied by the State under Entry 52 of List-II and the Custom Duty levied by the Union under Entry 83 of List-I.

On the issue of levy of Entry Tax on imported goods in a batch of appeals, consisting of appeals from the judgments of Orissa High Court, Patna High Court, Kerala High Court and Jharkhand High Court, the Supreme Court has delivered its judgment on 09.10.2017, titled as State of Kerala v . Fr. William Fernandez , Civil Appeal Nos. 3381-3400 of 1998 - 2017-TIOL-380-SC-MISC Following the trend, but with valid reasons, the Court has upheld the validity of levy of Entry Tax on goods imported from abroad.

On behalf of assesses, broadly the following contentions were raised:

a) Whether the charging provisions of the State Acts, providing for levy of Entry Tax on goods brought into a local area from any place (i) outside that local area or (ii) any place outside the State, could be interpreted to include the goods brought into a local area from any place outside the country. This was sought to be supported by the subsequent amendments to the Acts, which specifically provided for levy on entry of goods into a local area from any place outside the territory of India.

b) In terms of Entry 41 read with Entry 83 of List-I, the entire field connected or related to trade & commerce with foreign countries is within the exclusive domain of the Union and beyond the legislative competence of the State Legislature. Till the imported goods reach the final destination in India, i.e. factory, the movement continues to be in the course of import, on which there is no power vested with the State Legislature to levy any tax. This was sought to be supported by the Doctrine of Unbroken Package/ Original Package, according to which, the goods imported by actual users for their captive consumption and own use continues to remain in the course of import and continues to retain the character of imported goods. The non-inclusion of Customs Duty in the value of goods for purposes of levy of Entry Tax is indicator of fact that the Legislature never intended to levy Entry Tax on imported goods.

c) The scope of Entry 52 of List-II is restricted to levy of octroi, which is a tax levied by a local authority on the entry of goods into the area administered by such local authority. The levy of Entry Tax is beyond the legislative powers of the State Legislatures and not covered under Entry 52.

d) The imported machineries, which are imported in completely knocked out condition, are not machineries or equipments and thus not covered under the Schedules to Entry Tax Acts.

e) The levy of Entry Tax is also violative of Article 266 of the Constitution, which mandates that all public money must be credited to the Consolidated Fund of respective States.

All the above contentions have been categorically rejected by the Court with the following observations:

a) Goods entering into local area from any place outside the local area or outside the State are to be charged with Entry Tax. Foreign territory is place not only outside the local area but also outside the State and any goods brought therefrom into a local area are liable to Entry Tax. As per Entry 52, the Legislature is concerned only with entry of goods into a local area and the origin of goods is of no relevance with regard to chargeability of Entry Tax. The subsequent amendments to Entry Tax Acts for specific inclusion of words 'from outside the India' are provisions made by way of abundant caution.

b) Entry 52 of List-II has to be given its full meaning and thus, on its plain and literal construction, State Legislature has all powers to levy Entry Tax on any goods imported into a local area.

c) The import of goods starts when the goods cross the customs barrier in foreign country and ends when they cross the customs barrier in the importing country. When the goods land in the custom area of the Indian territory and released for the home consumption, it forms part of the mass of goods within the country and the importation is complete. Once the goods are released for home consumption, the character of imported goods is lost and thereafter no longer the goods could be called as imported goods. The goods are released for home consumption only after payment of the Customs Duty due to the Central Government. The non-inclusion of Customs Duty in the definition of Purchase Value of goods for levy of Entry Tax is irrelevant to determination of the legislative intention.

d) The Doctrine of Unbroken Package/ Original Package, which originated in the United States, has been abandoned in the US by its Supreme Court. The said Doctrine has been held to be not applicable in India by various Supreme Court decisions.

e) The taxing event with regard to levy of Customs Duty by Parliament and levy of Entry Tax by States under Entry 52 of List-II are entirely different and separate. The taxing event pertaining to levy of Entry Tax occurs only after the taxing event of levy of Customs Duty is over. Thus, the State Legislation imposing Entry Tax in no manner encroaches upon the Parliamentary Legislation under Entry 41 and Entry 83.

f) Machinery and equipments are wide words, which shall also cover plant in a knocked-out condition.

g) The creation of fund and utilisation of funds received from the collection of Entry Tax can, in no manner, effect the levy of the Entry Tax, particularly when the theory of compensatory tax has already been negated in Jindal Stainless (supra) .

Though the above observations of the Court are made by considering the Entry Tax Acts of particular States, these will largely be applicable to other States as well. To this extent, thus, the issue of levy of Entry Tax on imported goods stands settled now in favour of the State Legislatures. Nonetheless, the establishment of the fact of discrimination due to levy of Entry Tax in terms of Article 304(a) is still an unanswered question and will open a Pandora's box of differing opinions. The wait is, thus, not yet over with the matters in various High Courts pending after decision of Nine-judge bench in Jindal Stainless (supra) .

(The author is Principal Associate, Lakshmikumaran & Sridharan and the views expressed are strictly personal.)