IMPORTANT POINT
Concept of compensatory tax judicially evolved as an exception to Article 301 of Constitution of India but parameters of this judicial concept were blurred by reason of decisions in Bhagat Ram and Bihar Chamber of Commerce cases, interpretation requires authoritative pronouncement from Constitution Bench.

Headnote:Constitution of India-Articles 301 and 304-Haryana Local Area Development Tax Act, 2000-Section 22-Levy and collection of tax on entry of goods into the local areas of the State of Haryana for consumption-Validity of Act challenged on ground that it was violative of Article 301 and not saved by Article 304 of the Constitution of India-Under Section 22 of the Act, tax collected is to be distributed by the State Government amongst local bodies to be utilised for development of local areas-Act impugned imposed a restriction on trade and would fall foul of Article 301 if provisions of Article 304(b) had not been adhered to-A "compensatory tax" is an exception to Article 301 as pronounced in Automobile Transport (Rajasthan) Ltd. s case -Working test for deciding whether tax was compensatory tax-Whether compensatory nature of tax should be self-evident from taxing laws itself or could be judged from manner in which tax revenue was utilized in course of time?-Approach in two subsequent judgments i.e. Bhagat Ram and Bihar Chamber of Commerce cases did away with difference between taxes in general and compensatory taxes-Nothing in Section 22 to indicate that "development of local area" meant development of roads or other trading facilities-Interpretation of Article 301 vis-a-vis "compensatory tax" required authoritative pronouncement with certitude by the Constitution Bench under Section 145(3) of Constitution of India.
Held : To sum up : the pre-1995 decisions held that an exaction to reimburse/recompense the State the cost of an existing facility made available to the traders or the cost of a specific facility planned to be provided to the traders is compensatory tax and that it is implicit in such a levy that it must, more or less, be commensurate with the cost of the service or facility. The decisions emphasised 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. The decisions in Bhagat Ram 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. Since the concept of compensatory tax has been judicially evolved as an exception to the provisions of Article 301 and as the parameters of this judicial concept are blurred particularly by reason of the decisions in Bhagat Ram (supra) and Bihar Chamber of Commerce (supra), we are of the view that the interpretation of Article 301 vis-a-vis compensatory tax should be authoritatively laid down with certitude by the Constitution Bench under Article 145(3). (Paras 23 to 25)

ORDER

Leave granted in special leave petitions.

2. In this batch of appeals, the constitutional validity of the Haryana Local Area Development Tax Act, 2000 has been challenged primarily on two grounds, first: that the Act is violative of Article 301 of the Constitution and is not saved by Article 304 and second: that the Act in fact seeks to levy sales tax on inter-state sales, which is outside the competence of the State Legislature.

3. After we had been addressed at length on the first of these issues by both sides, we were of the view, and the counsel for the appearing parties also submitted, that the question needed to be referred to a larger Bench under Article 145 (3) of the Constitution. Arguments on the second issue were, therefore, not concluded and will be necessary only if the first issue is decided against the appellants.

4. The factual background in which the issues are raised is briefly stated. The appellants are all industries or associations of industries manufacturing their products within the State of Haryana. The raw material for their respective products is purchased from outside the State. Most of the finished products are sent to other States on stock transfer or on consignment basis. It is the admitted position that sales tax both on the import of the raw material and on the export of finished products is not payable nor paid by the appellants to the State of Haryana.

5. The Act came into force w.e.f. 5th May 2000 "to provide for levy and collection of tax on the entry of goods into the local areas of the State of Haryana for consumption for use therein and matters incidental thereto and connected therewith". In 2001 the Preamble has been amended. The object of the Act now reads "to provide for levy and collection of tax on the entry into a local area of the State of Haryana, of a motor vehicle for use or sale, and of other goods for use or consumption, therein and matters incidental thereto and connected therewith".

6. We do not consider it appropriate to discuss the various provisions of the Act which have been analyzed by the parties before us but only highlight the aspects of the Act which, in our opinion, are relevant for the purpose of this reference under Article 145(3).

7. The Act seeks to impose entry tax on all goods brought into a "local area". The phrase `local area has been defined in Section 2(14) of the Act as meaning:

"an area within the limits of a Municipal Corporation established under the Haryana Municipal Corporation Act, 1994 (Haryana Act 16 of 1994), or a municipality established under the Haryana Municipal Act, 1973 (Haryana Act 24 of 1973), or a Town Board or a Cantonment Board established under the Cantonment Act, 1924 (Central Act 2 of 1924) or a Zila Parishad established under the Haryana Panchayati Raj Act, 1994 (Haryana Act No. 11 of 1994), or any other local authority constituted or continued under any law for the time being in force".

8. The entire State is divided into local areas. The Act ostensibly covers not only vehicles bringing goods into the state but also vehicles carrying goods from one local area to another. However those who pay sales tax to the State are exempted from payment of the entry tax. Ultimately the entry tax only falls on concerns like the appellants which, by virtue of the provisions of the Central Sales Tax Act, 1956, pay sales tax on the purchase of raw material and sale of finished goods to other States and do not pay sales tax to the State of Haryana. Under section 22 of the Haryana Act, "The tax collected under this Act shall be distributed by the State Government amongst the local bodies to be utilised for the development of local areas". This, shortly put, is the context in which the challenge to the Act under Article 301 has been made.

9. Article 301 of the Constitution which guarantees freedom of trade, commerce and intercourse says:

"Subject to the other provisions of this Part, trade, commerce and intercourse throughout the territory of India

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2003 Supreme(SC) 969

Cases Referred (11)