JINDAL STRIPE LTD. AND ORS.versusSTATE OF HARYANA AND ORS.

A                      JINDAL STRIPE LTD. AND ORS.
                                         v.
                      STATE OF HARYANA AND ORS ..

                                SEPTEMBER 26, 2003

B             [RUMA PAL AND P. VENKATRAMA REDD!, JJ.]

         Constitution of India, 1950 :
                            .        '

         Articles 301and304(b)-Entry tax-Hwyana Local Area Development
C Tax Act, 2000-Providingfor levy and collection of tax on entry of goods
  into local areas of the State-Constitutional validity of-Held, the position
  of lmv as deducible ji-om decided cases is that tax levied upon entry of
  goods into a local area for purposes of use, consumption or sale therein
  has a direct impact on movement of goods and on the flow of trade and
  commerce-It can be saved only ifthe levy is in the nature ofcompensatory
D tax/or the use oftradingfacilities or it comes under the protective umbrello
  ofArticle 304-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
E must, more or less, be commensurate with the cost of the sen1ice or
  facility-These dr;cisions emphasized that the imposition of tax must be
   with the definite pwpose of meeting the expenses on account ofproviding
  or adding to the trading facilities either immediately or in future provided
  the quantum ofta'r sought to be generated is based on a reasonable relation
F to the actual or projected expenditure on the cost ofthe service or facility--
   However, the decision in Bhagat Ram* and Bihar Chamber of
  Commerce** say that even if the pwpose 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-Since the concept of compensatory ta..; has been judicially
G evolved as an exception to the provisions of Article 30 I and as the
  parameters of this judicial concept are blurred particularly by reason of
  the decision in Bhagat Ram* and Bihar Chamber of Commerce**, the
   interpretation of Article 301 vis-a-vis compensat01y tax should be
  authoritatively laid down with certitude by the Constitution Bench under
H Article 145(3)-Matter be placed before Hon 'ble the Chief Justice for
                                         154
                     JINDAL STRIPE LTD. v. ST ATE                    155

appropriate directions.                                                     A
     *Bhagat Ram v. Commissioner of Sales Tax fl 9951 Suppl. 1 SCC
673; **State of Bihar v. Bihar Chamber of Commerce, 11996) 9 SCC 136;
Atiabari Tea Co. v. State of Assam, [19601 1 SCR 809; Automobile
Transport (Rajasthan) Ltd. v. State Rajasthan, [1962] l SCR 491; G.K. B
Krishnan v. State of Tamil Nadu, [19751 1 SCC 375; Kama/it Singh v.
Municipal Board, [1986] 4 SCC 174 and State of Karnataka v. Hansa
Corporation, [1980] 1 SCC 697, referred to.

     Haryana Local Area Development Tax Act, 2000:

     Levy and collection of tax on ent1y of goods into local areas of the
                                                                            c
State-Constitutional validity of-Matter referred to Constitution Bench.

     CIVIL APPELLATE JURISDICTION : Civil Appeal No. 3453 of
2002.
                                                                            D
    From the Judgment and Order dated 21.12.2001 of the Punjab and
Haryana High Court in C.W.P. No. 6630 of 2000.

                                 WITH

     C.A. Nos. 3454-63, 3465-71, 5858/2002 and SLP (C) Nos. 9537, E
11698. 11558, 11595, 12260, 12424, 13995, 14388, 14400, 14409, 16555
and 22462 of 2002.

     Shanti Bhushan, Jayant Bhushan, Dr. A.M. Singhvi, R.P. Gupta, M.L.
Verma, H.N. Salve, A.K. Ganguli, P.P. Rao, Mahendra Anand, Jaideep F
Gupta, Ejaz Maqbool, Ujjwal Kumar Jha, Ms. Minakshi Nag, Rajesh
Bindal, Rajesh Jain, Kuldeep Kumar Jain, Sanjai K. Pathak, P.K. Bansal,
Rajiv Agnihotri, Pankaj Kumar Singh Rajesh Kumar, K.L. Janjani, Ms.
Kamakshi, S. Mehlwal, Binod Kumar Jha, Pravesh, Roy Abraham, Mrs.
Dr., Seema Jain, Himinder Lal, Ms. Kadambri, Sacchin Puri, Ms. Punita
Khanna, P.N. Puri, Ms. Veena Nanda, Atul Nanda, S.K. Sabarwal, Ms. G
Vijayalakshmi Menon, Rakesh K. Khanna, Ms. Rashmi Khanna, Reetesh
Singh, Surya Kant, Nikhil Nayyar, Prakash Jha, H.K. Puri, S.K. Puri,
Ujjwal Banerjee, Mahabir Singh, S.P. Singh Chauhan, Ajay Pal, Ms. Nitu
Samita Das Rakesh Dahiya, Ms. Vanita Bhargava, Tarun Johri, R.K.
Maheshwari, Ms. Varuna Bhandari Gugnani, Neeraj Kumar Jain, Vinay H
    156                 SUPREME COURT REPORTS [200:] SUPP. 4 S.C.R.
A   Kumar Garg, Bharat Kumar, Sanjay Sen, Chetan Prabhakar, Rana
    Mukherjee, Rana S. Biswas, Ms. Indira Sawhney, J.P. Dhanda, Ms. Kavita
    Wadia and Kamlendra Misra for the appearing parties.

          The following Order of the Court was delivered :

B          Leave granted in special leave petitions.

          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 30 I of the Constitution
C   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.

          After we had been addressed at length on the first of these issues by
D 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.

E         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
F   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.

       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
G 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
H incidental thereto and connected therewith".
                     JINDAL STRIPE LTD. v. ST ATE                      157

     We do not consider it appropriate to discuss the various provisions A
of the Act which have been analyzed by the patties 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).

      The Act seeks to impose entry tax on all goods brought into a "local    B
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 C
         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, t 994
         (Haryana Act No. 1 t of t 994), or any other local authority D
         con:;titutcd or CO•'l !;med under any law for the time being in
         force".

      The entire State is divided into local areas. The Act ostensibly covers
not only vehicles bringing goods into the state but also vehicles carrying E
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 F
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.
                                                                              G
    Article 30 l of the Constitution which guarantees freedom uf trade,
commerce and intercourse says :

         "Subject to the other provisions of this Part, trade, commerce and
         intercourse throughout the territory of India shall be free".      H
    158                      SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.

A         In Atiabari Tea Co. Ltd. v. State of Assam, [1996] 1 SCR 809, it was
    held that taxing laws are not excluded from the operation of Article 30 I;
    which means that tax laws can and do amount to restrictions on the
    freedoms guaranteed to trade under Part Xlll of the Constitution. However
    the prohibition of restrictions on free trade is not an absolute one. Statutes
B   restrictive of trade can avoid invalidation if they comply with Article 304
    (a) or'(b) 1• In Atiabari Tea it is was held that only such taxes as diredly
    and immediately restrict trade would fail within the purview of Article 301
    and that, any restriction in the fonn of taxes imposed on the carriage of
    goods or their movement by the State Legislature can only be done after
C   satisfying the requirements of Article 304(b). The Statute which was
    challenged in Atiabari Tea was the Assam Taxation (on goods carried by
    Roads and Inland Waterways) Act, 1954. It was held that the Act had put
    a direct restriction on the freedom of trade and since the State Legislature
    had not complied with the provisions of Article 304(b), it was declared
    void. Similarly, the Act which is impugned before us imposes a restriction
D   on trade and would fall foul of Article 301, particularly when the provisions
    of Article 304(b) have not been adhered to.

          However, an exception to Article 301 and its operation was judicially
    crafted in Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan,
E   [1962] I SCR 491. The challenge in that case was to the Rajasthan Motor
    Vehicles Taxation Act, I 951. The challenge under Article 301 was rejected
    by the Constitution Bench by holding that "the taxes are compensatory
    taxes which instead of hindering trade, commerce and intercourse facilitate
    them by providing and maintaining the roads". The following observation
F   at paragraph 2 I of the report also merit attention :

                "If a statute fixes a charge for a convenience or service provided
                by State or an agency of the State and imposes it upon those who
                choose to avail themselves of the service or convenience, the
                freedom of trade and commerce may well be considered
G               unimpaired."


    I.     Art 304(a) impose on 11oods imported from other States [or the Union territories] any tax
          to which similar goods manufactured or produced in that State are subject, so, however,
          as not to discriminate between goods so imported and goods so manufactured or produced;
          and b) impose such reasonable restrictions on the freedom of trade, commerce or
H         intercourse with or within that State as may be required in the public interest :
                      JINDAL STRIPE LTD. v. ST ATE                         159

      Thus the concept of"compensatory taxes" was propounded. Therefore A
taxes which would otherwise interfere with the unfettered freedoms under
Article 30 I will be protected from the vice of unconstitutionality if they
are compensatory. The question therefore is, is the Act impugned in the
present case compensatory?
                                                                                 B
     In Automobile Transport, it was said :

         " ..... a working test for deciding whether a tax is compensatory or
         not is to enquire whether the trades people are having the use of
         certain facilities for the better conduct of their business and paying
         not patently much more than what is required for providing the C
         facilites."
                                                             (Emphasis added)

          Right from 1962 upto 1995, this working test was applied by this
r::''l\lrt only in rel;;;tio" to Motor Vehicles Taxes for deciding whether it was D
compensatory or not. Ti1e decisions proceeded on the principle adumbrated
in Automobile Transport which was paraphrased by Mathew, J speaking
for a Bench of three Judges in G.K. Krishnan v. State a/Tamil Nadu, (1975]
I SCC 375 that "the very idea of compensatory tax is service more or less
commensurate with the tax levied". As the operation of motor vehicles has
direct relation to the use of roads/bridges, the statistics relating to receipts E
and expenditure for constructing road and bridges for some years were
considered in each case in order to judge whether the tax was not patently
more than what was required to provide the facility, and therefore
compensatory. [See : Shaik Madar Saheb & Ors. v. The State of Adhra
Pradesh, [1972] 4 sec 635; Boiani Ores Ltd V. State of Orissa, [1974] F
2 SCC 777; G.K. Krishnan v. State of Tamil Nadu, (1975] I SCC 375;
Mis. International Tourist Corporation v. State of Haryana, (1981] 2 SCC
318; Malwa Bus Service (P) Ltd. v. State of Punjab, [1983] 3 SCC 237;
Mrs. Meenakshiv. State ofKarnataka, AIR (1983) SC 1283; B. A. Jayarqm
v. Union of India, [1984] I sec 168 and State of Maharashtra 'v. G
Madhukar Balkrishna Badiya, [1988] 4 SCC 290.

     The only case cited at the bar dealing with tax other than motor
vehicles tax during the aforementioned period is the case of Kama/it Singh
v. Municipal Board, [ 1986] 4 SCC 174. In that case the toll tax levied under
                                                                                 H
    160                 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.
A the U.P. Municipalities Act on vehicles and other conveyances entering the
    Municipal limits was tested from the standpoint of Article 30 I. It was held
    that the tax cannot be treated to be compensatory tax for the reason that
    the Municipal Board provided no facilities whatever to the owners of
    vehicles like State carriages making use of national highway in question.
B         The following propositions are deducible from these cases :

         I) The essence of article 30 I is a right of free movement of trade
    without any obstructions by way of barriers - inter-state or intra-state or
    impediments operating as such barriers. Taxes which have a direct impact
C   on the flow of trade and commerce constitute a violation of Article 301
    unless the legislation is brought with.in the scope of Article 304(b).

        2) The tax levied upon the entry of goods into a local area for the
   purpose of use, consumption or sale therein has a direct effect on the
D movement of goods and therefore it can be saved only if the levy is in the
   nature of compensatory tax for the use of trading facilities or it comes under
  ithe protective umbrella of Article 304.

         3) So long as a tax remains compensatory ·or regulatory, it cannot
    operate as a hindrance to trade. Regulatory measures or compensatory
E   taxes imposed to provide facilities and services to traders do not affect the
    freedom contemplated by Article 30 l and such measure/taxes need not
    comply with the requirements of Article 304.

          4) Tax imposed for augmenting general revenues of the State such
F as Sales Tax, is not compensatory. However, Motor Vehicles Tax is a
    typical instance of compensatory tax because, in substance, it is a tax
    imposed for the use of roads in the State and the tax enables the State to
    provide and maintain roads.

          5) It is of the essence of compensatory tax that the service rendered
G or facility provided should be more or less commensurate with the tax
    levied.

         6) A tax does not cease to be compensatory in nature merely because
    the precise or specific amount collected is not actually used in providing
H   the facilities. However, the existence of a specific, identifiable object
                         .JINDAL STRIPE LTD. v. ST ATE                      161

    behind the levy and a nexus between the subject and the object of the levy A
    is necessary to uphold a regulatory and compensatory tax.

         7) The expenditure for providing the facilities may be met from other
    sources.

          8) The actual user of the facility pay the tradesmen who are subject B
    to the tax is immaterial.

          Apart from these principles, the appellants have urged additional
    grounds for holding that the impugned Act is not compensatory. It has been
    submitted that (1) A taxation measure which seeks to impose tax only on C
    a section or a class of traders and exclude substantial section of the traders
    cannot be called compensatory tax. Unifonnity in the incidence of taxation
    so as to bring all the traders who use the facility within the net of taxation
    is an essential attribute of compensatory tax, (2) Tax imposed on ad
    valorem basis can never be compensatory tax, and (3) if an amenity or D
    service is already taxed under other laws, the tax in question cannot be
    regarded as compensatory.

         Another question of importance which needs an answer to decide the
    controversy in the case on hand is whether the compensatory nature of tax
    should be self-evident from the taxing law itself or could it be judged from   E
    the manner in which the tax revenue is utilized in course of time?

          In 1995, some of the principles set out supra appear to have been
    deviated from when the principle of compensatory tax was applied to entry
    tax in Bhagat Ram v. CommissionerofSales Tax, [1995] I SCC 673 which           f
    was decided by a Bench of three Judges.

         In Bhagat Ram v. Commissioner of Sales Tax (supra), the subject
    matter of challenge was the M.P. Sthaniya Kshetra Me Mal Ke Pravesh
    Par Kar Adhiniyam, (1976). In that case, although it was demonstrated by G
    the appellant-State and not disputed by the respondents that the levy was
J   compensatory nevertheless the court went on to say :

             "The submissio.n of Shri Ashok Sen, learned senior counsel that
             compensation is that which facilitates the trade only does not
             appear to be sound. The concept of compensatory nature of tax H
    162                SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.

A            has been widened and if there is substantial or even some link
             between the tax and the.facilities extended to such dealers directly
             or indirectly the le'y cannot be impugned as invalid. The stand
             of the State that the revenue earned is being made over to the local
             bodies to compensate them for the loss caused, makes the impost
             compensatory in nature. as augmentation of their finance would
B
             enable them to provide municipal services more efficiently, which
             would help or ease free flow of trade and commerce, because of
             which the impost has to be regarded as compensatory in nature,
             in view of what has been stated in the aforesaid decisions, more
             particularly in Hansa Corpn. Case."
c
         The reference to State of Karnataka v. Hansa Corporation, [1980]
      SCC 697 by the Court was inapposite. In Hansa's case although the
    challenge was to the levy of. entry tax, the issue whether the tax was
    compensatory in nature was expressly left open. This is what the Court had
D   said:

             "The State did not attempt in the High Court to sustain the validity
             of the impugned tax law on the submission that it was compensatory
             in character. No attempt was made to establish that the dealers in
             scheduled goods in a local area would be availing of municipal
E            services and municipal services can be efficiently rendered if the
             municipality charged with a duty to render services has enough
             and adequate funds and that the impugned tax was a measure for
             compensating the municipalities for the loss of revenue or for
             augmenting its finances. As such a stand was not taken, it is not
F            necessa1y for us to examine whether the tax·is compensatory in
             character."

    In fact the impugned Act was saved because Article 304 had been complied
    with. It was for that reason alone that the Act could not be struck down
G   on the ground that it was violative of Article 30 I. We find nothing in Hansa
    Corpn. 's case which seems to support the proposition enunciated in the
    passage quoted above.

          The dicta in Bhagat Ram's case (supra) was relied on by a Bench of
    two Judges in the case of State of Bihar v. Bihar Chamber of Commerce,
H   [ 1966] 9 sec 136 which reiterated the position that "some-connection"
                     JINDAL STRIPE LTD. v. ST ATE                       163

between the tax and the trading facilities is sufficient to characterize it as A
compensatory tax. The Cowt went further and took judicial notice of the
fact that the State provides several facilities to the trade such as laying and
maintenance of roads, waterways, markets etc., and on this premise, held
that the entry tax was compensatory in nature. The learned Judges did not
consider it necessary to insist on the State coming forward with the details B
of facilities provided to the traders and the expenditure incurred or
incurrable thereafte:-. Even though the Act was upheld on an independent
ground i.e. compliance with Article 304(b ), nevertheless the characterization
of the Act impugned in that case as compensatory and the reasoning
adopted for that conclusion car.not be brushed aside as mere obiter dicta. C

      It is contended by the appellants, with considerable force, that if the
concept of compensatory tax has to be understood in the manner in which
it has been viewed by the Court in the decisions of Bhagat Ram and Bihar
Chamber of Commerce. there will be no practical distinction between a tax
raised for general revenue purposes and a compensatory tax meant for the D
specific purpose of providing facilities or services to the persons subjected
to the tax. All State revenues are presumably expended or at least arc
expendible only for the welfare of the nation or the State as a whole. This
may result in a general economic upliftment and the betterment of all facets
of life including ultimately and in an indirect sense the trading community. E
The approach in the two decisions noted does away with the difference
between taxes in general and compensatory taxes. If that is the law then
any tax could pass the test of compensatory tax judged from the standard
applied. Then no tax can impinge on the freedom ordained by Article 30 I,
a result which, it is pointed out, would go counter to the Cou1t's decision
in Atiabari Tea and the long line of authorities referred to earlier starting F
with the Automobile Transport case.

       In the present case, Section 22 which we have quoted earlier, says
that the tax shall be given to local bodies for utilization for the development
of local areas. There is nothing in Section 22 to indicate that the G
"development of local area'' means development of roads or other trading
facilities. It is argued by the appellants that the tax levied on the appellants
could in fact be used purely for 'non trading facilities' such as setting up
schools, hospitals, housing etc. No attempt has been made by the respondents
in any of the special appeals to produce figures to show a nexus between H
    164                 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.

A the levy collected and any service or facility rendered or to be rendered.
    But the High Court rejected the challenge to the Haryana Act on the basis
    of Lhe aforesaid observation in Bihar Chamber of Commerce.

          To sum up : the pre-1995 decisions held that an exaction to reimburse/
B   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
c   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
D say that even ifthe 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
E   State can be legitimately brought within the concept of compensatory tax,
    the nexus between the tax known as compensatory tax and 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 30 l and as the parameters of
F   this judicial concept are blurred particularly by reason of the decisions in
    Bhagat Ram (supra) and Bihar Chamber a/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).
G        In the circumstances let all these matters be placed before the Hon'ble
    Chief Justice for appropriate directions.

    R.P.                                                         Matters pending.