1. Constitutional validity of Haryana Local Area Development Tax Act, 2000 challenged as violative of Article 301. (Para 1 , 2 )
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2006 Supreme(SC) 351
IN THE SUPREME COURT OF INDIA
B.N. Srikrishna, P.P. Naolekar, Ruma Pal, S.H. Kapadia, Tarun Chatterjee, JJ.
JINDAL STAINLESS LTD. & ANOTHER
Versus
STATE OF HARYANA & OTHERS.
Appeal (Civil) 3453 of 2002
Decided On: Decided On : 13-04-2006
Advocates Appeared:
Shanti Bhushan, A. K. Ganguli, Dr. A. M. Singhvi, R. F. Nariman, Raju Ramachandran, Rakesh Dwivedi, Dinesh Dwivedi, R. G. Padia, B. Sen, P. N. Misra, T. L. V. Iyer, P. P. Rao, A. S. Rao - Appearing parties.
Shanti Bhushan, A. K. Ganguli, Dr. A. M. Singhvi, R. F. Nariman, Raju Ramachandran, Rakesh Dwivedi, Dinesh Dwivedi, R. G. Padia, B. Sen, P. N. Misra, T. L. V. Iyer, P. P. Rao, A. S. Rao - Appearing parties.
A compensatory tax is a regulatory levy based on the "principle of equivalence," requiring a quantifiable link between the tax and benefits provided. The "some connection" test is overruled; the tax must be broadly commensurate with the cost of facilities provided to the trade to be exempt from Article 301.
Headnote:(A) Constitution of India - Articles 301, 302, 303 and 304 - Freedom of trade, commerce and intercourse - Legislative power of States - Compensatory tax - Scope and parameters.
(B) Article 301 - Freedom from laws which burden, restrict or prevent trade movement between States - Tax laws are not excluded from the operation of Article 301 and may amount to restrictions on trade.
(C) Compensatory Tax - Judicially evolved concept as an exception to Article 301 - Based on the "principle of equivalence" where the levy is a recompense or reimbursement for quantifiable and measurable benefits provided to the trader, unlike a general tax based on the "principle of ability" to pay - Such taxes are regulatory in nature and are considered a sub-class of fees.
(D) Working Test - For a tax to be compensatory, the trade as a class must utilize certain facilities for the better conduct of business, and the tax must be broadly commensurate with the cost of such facilities - A mere "some connection" or indirect link between the tax and the facilities provided is insufficient to characterize a levy as compensatory.
Facts of the case:
A company manufacturing products within a state challenged the constitutional validity of a local area development tax. The tax was imposed on the entry of goods into local areas for consumption, use, or sale. The appellant contended that the legislation violated the freedom of trade under Article 301 as it did not provide for specific facilities commensurate with the tax levied, whereas the state argued the tax was compensatory since the funds were intended to facilitate the free flow of trade and commerce.
Findings of Court:
The court held that the concept of compensatory tax must be strictly based on the principle of equivalence. The judicial shift towards a broadened "some connection" test was found to be contrary to the original established working test, as it blurred the distinction between a general revenue tax and a regulatory charge.
Issues: The primary issue was to determine the authoritative parameters of the judicially evolved concept of "compensatory tax" vis-a-vis Article 301 and whether a mere "some connection" between the tax and trading facilities is sufficient to save a levy from being an unconstitutional restriction on trade.
Ratio Decidendi: A tax is compensatory only if it is a reimbursement for a quantifiable benefit provided to the trader. The "some connection" test is not good law because it obliterates the distinction between a general revenue tax and a compensatory tax. The validity of such taxes must be judged by whether the levy is broadly proportional to the cost of the facilities provided, shifting the basis from a common burden to a measurable benefit.
Result: The test of "some connection" is overruled; the working test for deciding whether a tax is compensatory is reaffirmed.
Legal Category Hierarchy
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constitutional law
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freedom of trade commerce and intercourse
- article 301
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article 304
- reasonable restrictions
- presidential sanction
-
taxation power
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compensatory tax
- principle of equivalence
- quantifiable benefit
-
compensatory tax
-
freedom of trade commerce and intercourse
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practice and procedure
- reference to constitution bench (Para 1)
Table of Contents
JUDGMENT
S. H. KAPADIA, J.
By order dated 26.9.2003, the referring Bench of Hon'ble Ruma Pal, J. and P. Venkatarama Reddy, J. doubted the correctness of the view taken in M/s. Bhagatram Rajeevkumar v. Commissioner of Sales Tax, M.P. & others relied on in the subsequent decision of this Court in the case of State of Bihar & Ors. v. Bihar Chamber of Commerce & Ors. Accordingly, all the matters were ordered to be placed before the Hon'ble the Chief Justice for appropriate directions and accordingly, the matter has come to the Constitution Bench to decide with certitude the parameters of the judicially evolved concept of "compensatory tax" vis-a-vis Article 301. The referral order is in the case of Jindal Strips Ltd. & Anr. (now known as Jindal Stainless Ltd.) v. State of Haryana & Ors. under Article 145(3).
For this purpose, we are required to examine the source from which the concept of compensatory tax is judicially derived, the nature and character of compensatory tax and its parameters in the context of Article 301.
In a batch of appeals, the constitutional validity of the Haryana Local Area Development Tax Act, 2000 has been challenged on two grounds :
(1) that, the Act is violative of Article 301 and is not saved by Article 304; and
(2) that, the Act in fact seeks to levy sales tax on inter-State sales, which is outside the competence of the State Legislature. However, the referral order is confined to the above-mentioned first question.
Jindal Strips Ltd. is an industry manufacturing products within the State of Haryana. The raw-material is purchased from outside the State. The finished products are sent to other States on consignment basis or stock transfer basis. No sales tax is paid on the input of the raw material. Similarly, no sales tax is paid on the export of finished products.
The impugned 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 for consumption or use therein. The Act is enacted to provide for levy and collection of tax on the entry into a local area of the State, of a motor vehicle for use or sale, and of other goods for use or consumption therein. The Act seeks to impose entry tax on all goods brought into a "local area". The entire State is divided into local areas. The Act 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 exempt from payment of entry tax. Ultimately, the entry tax only falls on concerns, like Jindal Strips, which, by virtue of the provisions of the Central Sales Tax Act, 1956, pay sales tax on purchase of raw-material and sale of finished goods to other States and do not pay sales tax to the State of Haryana. This is the context in which the challenge to the Act under Article 301 has been made. At this stage, we may point out that prior to September 30, 2003, section 22 stated that the tax collected under the Act shall be distributed by the State Government amongst the local bodies to be utilized for the development of local areas. However, on 30th September, 2003, section 22 was amended clarifying that the tax levied and collected shall be utilized for facilitating free flow of trade and commerce.
REASONS FOR THE REFERRAL ORDER :
In Atiabari Tea Co. Ltd. etc. v. State of Assam & Ors. It was held that taxing laws are not excluded from the operation of Article 301, which means that tax laws can and do amount to restrictions on the freedoms guaranteed to trade under Part-XIII of the Constitution. However, the prohibition of restrictions on free trade is not an absolute one. Statutes restrictive of trade can avoid invalidation if they comply with Article 304(a) or (b) "(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 t
