The main legal point established in the judgment is that taxes simpliciter are not within the contemplation of Part XIII of the Constitution of India, and only discriminatory taxes are prohibited by Article 304(a). The compensatory tax theory has no juristic basis and states have the right to design their fiscal legislations to ensure equal tax burden on goods imported from other states and goods produced within the state.

Headnote:
Taxes - Entry Tax - Article 301, Article 304 - [Automobile Transport (Rajasthan) Ltd. Etc. v. State of Rajasthan and Ors.' [1963 (1) SCR 491], Jindal Stainless Ltd. and Anr. v. State of Haryana and Ors.' [2016 (11) SCALE 1] - The court held that 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 discriminatory taxes are prohibited by Article 304(a). 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 has no juristic basis and is therefore rejected. 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. 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. 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.
Fact of the Case:

The case involved challenges to the levy of entry tax by assessees in various states primarily on the ground that the levy was not in the nature of compensatory tax. The assessees challenged various provisions of similar enactments made by the states, with some High Courts upholding the legislation and others striking down the provisions.
Finding of the Court:

The Court found that taxes simpliciter are not within the contemplation of Part XIII of the Constitution of India. It rejected the compensatory tax theory and held that a tax on entry of goods into a local area for use, sale or consumption therein is permissible. The Court also left certain questions regarding the levy of entry tax to be determined in appropriate proceedings.
Issues: The main issues included whether the entire State can be treated as 'local area' for the purposes of entry tax, whether entry tax can be levied on goods directly imported from other countries, and whether benefits given to certain categories of manufacturers would amount to discrimination under Section 304.
Ratio Decidendi: The Court held that only discriminatory taxes are prohibited by Article 304(a) and that the compensatory tax theory has no juristic basis. It also affirmed the right of states to design their fiscal legislations to ensure equal tax burden on goods imported from other states and goods produced within the state.
Final Decision: The appeals were disposed of with liberty granted to the appellants to file fresh petitions raising the main issues with necessary factual background or any other constitutional/statutory issue which arises for consideration.

ORDER :

Leave granted in the special leave petitions.

2. Having regard to the fact that the correctness of the ratio of the judgment of the Seven Judges' Bench of this Court in 'Automobile Transport (Rajasthan) Ltd. Etc. v. State of Rajasthan and Ors.' [1963 (1) SCR 491] and the theory of compensatory tax was questioned, the matter was referred to Nine Judges' Bench. The Nine Judges' Bench of this Court heard the matters and answered the reference in those cases, leading case being 'Jindal Stainless Ltd. and Anr. v. State of Haryana and Ors.' [2016 (11) SCALE 1]. The Court, by majority, answered the reference in the following terms:

“1. 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”.
2. 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.
3. Clauses (a) and (b) of Article 304 have to be read disjunctively.
4. A levy that violates 304(a) cannot be saved even if the procedure under Article 304(b) or the proviso there under is satisfied.
5. The compensatory tax theory evolved in Automobile Transport case and subsequently modified in Jindal's case has no juristic basis and is therefore rejected.
6. Decisions of this Court in Atiabari, Automobile Transport and Jindal cases (supra) and all other judgments that follow these pronouncements are to be extent of such reliance over ruled.
7. 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.
8. 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.
9. 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.
10. 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 the determined in appropriate proceedings.”

2. It may be recapitulated at this stage that insofar as the instant appeals are concerned, which were also part of the aforesaid reference, the levy of entry tax was challenged by the assessees by filing writ petitions in the High Courts primarily on the ground that the levy was not in the nature of compensatory tax. The aforesaid challenge was because of the law laid down in Automobile Transport case (supra) which held the field at that time.

3. Similar challenges were made by the assessees in other States challenging various provisions of the similar enactments made by the said States. Some of the High Courts upheld the legislation holding the tax to be compensatory tax whereas some other High Courts found the legislation not to be compensatory in nature and, thus, struck down the provisions thereof. Some High Courts had taken support of certain other reasons also in striking down these legislations. The assessees as well as the States had filed special leave petitions against those judgments. Those cases were heard and decided by the Constitution Bench of this Court in Jindal Stainless Ltd.(2) and Anr. v. State of Haryana and Ors.' [2006 (7) SC

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2017 Supreme(SC) 1737

Cases Referred (2)