S.H. Kapadia, J - By order dated 26-9-2003, the referring Bench of Honble 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, 1995 Supp (1) SCC 673 relied on in the subsequent decision of this Court in the case of State of Bihar & ors. v. Bihar Chamber of Commerce & ors., 1996(9) SCC 136. Accordingly, all the matters were ordered to be placed before the Honble 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., 2003(8) SCC 60 under Article 145(3).

2. 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.

3. 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 abovementioned first question.

4. 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.

5. 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 Riferral Order.

6. In Atiabari Tea Co. Ltd. etc. v. State of Assam & ors., AIR 1961 SC 232, 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 Legislat