The main legal point established in the judgment is the rejection of the compensatory tax theory and the clarification of the permissibility of taxes on entry of goods into a local area, as well as the allowance for filing fresh petitions raising constitutional/statutory issues with necessary factual background.

Headnote:
Taxes - Entry Tax - Article 301, Article 304(a) and (b) of the Constitution of India - [1963 (1) SCR 491], [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). The compensatory tax theory was rejected. The court also clarified the permissibility of taxes on entry of goods into a local area and the design of fiscal legislations by states to ensure equal tax burden on imported and locally produced goods.
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 impugned Act sought to impose entry tax on all goods brought into a 'local area', with exemptions for those paying sales tax to the state.
Finding of the Court:

The court found that the compensatory tax theory was rejected and clarified the permissibility of taxes on entry of goods into a local area. It also allowed the appellants to file fresh petitions raising constitutional/statutory issues with necessary factual background.
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 rejected the compensatory tax theory and clarified the permissibility of taxes on entry of goods into a local area. It also allowed the appellants to file fresh petitions raising constitutional/statutory issues with necessary factual background.
Final Decision: All the appeals/writ petitions were disposed of with liberty granted to the appellants to file fresh petitions raising constitutional/statutory issues with necessary factual background. The interim orders were continued till a specified date, and the High Courts were directed to consider the import and effect of the reference answered by the Nine Judges' Bench.

ORDER :

1. With the consent of counsel for the parties, all the matters of the State of Uttar Pradesh and Haryana on the issue arising in the instant matters are taken on record and shall be governed by this order.

2. Leave granted in the special leave petitions.

3. 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:

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.”

4. 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.

5. 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

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2017 Supreme(SC) 1837

Cases Referred (2)