Holding

The "some connection" test is not good law; the proper test for determining a compensatory tax is the "direct and immediate effect" doctrine as articulated in Atiabari Tea Co. Ltd. and Automobile Transport (Rajasthan) Ltd.

Summary

Multiple appeals and writ petitions challenged various state levies imposed by Haryana, alleging that the taxes were compensatory in nature and violated Article 301 of the Constitution. The Supreme Court examined the judicially evolved concept of "compensatory tax" and overruled the earlier "some connection" test from Bhagatram Rajeevkumar and Bihar Chambers cases. It reaffirmed the doctrine of "direct and immediate effect" and the test laid down in Atiabari Tea Co. Ltd. and Automobile Transport (Rajasthan) Ltd. for determining whether a levy is compensatory. The Court explained that a compensatory tax is a hybrid, more akin to a fee, and that the State bears the burden of showing a quantifiable benefit to justify such a levy. It held that if the levy impedes trade, it violates Article 301 unless it satisfies the reasonableness test under Article 304(b). Consequently, the Court remanded the matters to the respective High Courts to decide the issue using the clarified test and directed parties to submit relevant data.

Issues considered

Whether the impugned levy imposed by the State of Haryana is a compensatory tax within the meaning of Article 301 of the Constitution.
Which judicial test is appropriate for determining the compensatory nature of a tax – the "direct and immediate effect" doctrine or the "some connection" test.
Whether a levy that impedes inter‑State trade violates Article 301 and, if so, whether it can be saved under the reasonableness requirement of Article 304(b).

Legislation cited

Constitution of Indias. Article 301, s. Article 302, s. Article 304

Subjects

Compensatory taxArticle 301Freedom of tradeConstitutional lawTaxationDirect and immediate effectArticle 304(b)Remand

Judgment

c
A
MIS. JINDAL STAINLESS LTD. AND ANR.
v.
STATE OF HARYANA AND ORS.

JULY 14, 2006 B
[ARIJIT PASA YAT AND S.H. KAPADIA, JJ.]

Taxation:

Compensatoty tar-Impugned levy whether compensat0ty in nature-
c
High Courts examined the issue following two earlier Supreme Court
judgments--Such judgments subsequently struck down by a Constitution
Bench of Supreme Court-High Courts therefore directed to decide the issue
aji-esh in light of the Constitution Bench judgment-Constitution of India,
1950-Article 301. D

In all the present appeals and connected matters the basic issue revolves
round the judicially evolved concept of"compensatory tax".

In a recent decision, a Constitution Bench of this Court in case of Jindal
Stainless Ltd. while examining the concept of compensatory tax vis-a-vis E
Article 301 of the Constitution held that the doctrine of"direct and immediate
effect" of the impugned law on trade and commerce under Article 301 as
propounded in the case of Atiabari Tea Co. Ltd. and the working test
enunciated in Automobile Transport 's case for deciding whether a tax is
compensatory or not will continue to apply and the test of"some connection"
F
indicated in the Bhagatram Rajeevkumar 's case and followed in the case of
Bihar Chamber of Commerce is not good law.

Directing placing of the present matters for further hearing, the Court

HELD: I. I. In all these matters, the concerned High Courts do not
G
.. appear to have examined the issue in the proper perspective, as they were
bound by the judgments in Bhagatram 's case and Bihm· Chambers of
Commerce's case.1572-GI
'·
.. 569 H
570 SUPREME COURT REPORTS [2006] SUPP. 3 S.C.R.

A 1.2. At this juncture, it is necessary to take note of what has been stated
in the judgment rendered by the Constitution Bench in case of .Jindal Stainless
ltd. Since relevant data do not appear to have been placed before the High
Courts, the parties are permitted to place them in the concerned Writ
Petitions within two months. The concerned High Courts shall deal with the
basic issue as to whether the impugned levy was compensatory in nature. The
B High Courts are requested to decide the aforesaid issue within five months
from the date of receipt of this order. The judgment in the respective cases
shall be placed 011 record by the concerned parties within a month from the
date of the decision in each case pursuant to direction of this Court.
1573-A; 575-B-CJ
c .Jindal Stainless Ltd & Anr. v. State of Haryana & Ors., (2006) 4 SCALE
300, followed.

Atiabari Tea Co. Lid. v. State ofAssam, AIR (1961) SC 232; Aulomobile
Transport (Rajasthan) Ltd v. State of Rajasthan, AIR (1962) SC 1406; Mis.
D Bhagalram Raieevkumar v. Commissioner ofSales Tax, M.P. and Ors., 119951
Suppl. 1 SCC 673 and State of Bihar and Ors. v. Bihar Chambers ofCommerce
and Ors., 119961 9 SCC 136, referred to.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 3453 of2002.

E From the Judgment and Order dated 21.12.200 I of the High Court of
Punjab and Haryana at Chandigarh in C.W.P. No. 6630/2000.

WITH

SLP (C) No. 10003/2004, SLP (C) No. 10007/2004, SLP (C) No. 10156/
F 2004, SLP (C) No. 10164/2004, SLP (C) No. 10167/2004, SLP (C) No. 10206/
2004, SLP (C) No.10381/2004, SLP (C) No.10391/2004, SLP (C) No.10404/2004,
SLP (C) No. 10417/2004, SLP (C) No. 10501/2004. SLP (C) No. 10563/2004, SLP
(C) No.10568/2004, SLP (C) No. 10571/2004, SLP (C) No. 11012/2004, SLP (C)
No. 1127112004, SLP (C) No. 1132612004, T.C. (C) No. 1312004, SLP (C) No.14380/
2005, C.A. Nos.2608/2003, 2637/2003, 2769/2000, 3144/2004, 3145/2004, 3146/
G 2004, 331412001, 3381-3400/1998, 3454/2002, 3455/2002, 3456-345912002, 3460/
2002, 3461/2002, 3462-3463/2002, 346412002, 3465/2002 3466/2002, 3467/2002, ..
3468/2002, 3469/2002, 3470/2002, 3592/1998, 447112000, 4476/2000, 465111998,
... 4954/2004, Writ Petition No. 512/2003, C.A. Nos. 5141/2004, 5143/2004, 5144/
2004, 514512004, 514712004, 5148/2004, 5149/2004, 5150/2004, 515112004, 51521
H 2004, 5153/2004, 5156/2004, 5157/2004, 5158/2004, 5159/2004, 516012004, 5162/ _ ..
JINDAL STAINLESS LTD. v. ST ATE OF HARY ANA 571
c
2004, 5163/2004, 5164/2004, 5165/2004, 5166/2004, 5167/2004, 5168/2004, 5169/ A
2004, 5170/2004, Writ Petition (C) No. 574/2003, C.A. Nos. 5740/2002, 5858/
2002, 6331/2003, 6383-6421/1997, 6422-6435/1997, 6436/1997, 6437-6440/1997,
7658/2004, 8241/2003, 8242/2003, 8243/2003, 8244/2003, 8245/2003, 8246/2003,
8247/2003, 8248/2003, 8249/2003, 8250/2003, 8251/2003, 8252/2003, 918/1999,
SLP (C) No.9496/2004, SLP (C) No.9569/2004, SLP (C) No.9883/2004, SLP (C)
No.9891/2004, SLP (C) No. 9898/2004, SLP (C) No. 9904/2004, SLP (C) No. B
9910/2004, SLP (C) No. 9911/2004, C.A. Nos. 997-998/2004, SLP (C) No.9976/
2004, SLP (C) No.9993/2004, SLP (C) No.9998/2004, SLP (C) No.9999/2004,
CA.Nos. 1956/2003, 2633/2003, 2638/2003, 3720-3722/2003, SLP (C) No.10153/
2004.

Ajay Siwach, AAG, Aruneshwar Gupta, Addi. Genl. (Rajasthan) Shanti
c
Bhushan, R.F. Nariman, J.N. Dubey, A.M. Singhvi, Dinesh Dwivedi, T.L.
Viswanath Iyer, A.K. Ganguli, S. Ganesh, A.S. Garg, Jayant Bhushan, Ejaz
Maqbool, Vikas Singh, Taruna Singh, Abhijit Sinha, Anurag Dubey, K.B.
Upadhayay, Meenesh Dubey, Manish Kumar, S.R. Setia, Dhruv Agarwal,
Praveen Kumar, P.K. Bansal. Rajeev Agnihotri, K. Mishra, Rajeev Dubey, D
S.W.A. Qadri, Rashmi Singh, Gaurav Bhatia, S. Prasad, Gopalkrishnan, R.K.
Yirmani, Rashmi Virmani, L.R. Singh, Ankit Singhal, Nikhil Nayyar, Ravinder
Narain, S. Sharma, Meghalee Barthakur, A. Aggarwal, Kanika Gomber, Rajan
. Narain. V.N. Koura, Paramjeet Banepal, A. Mariarputham, Mini N. Nair, Gopal
Singh, Nishakant Pandey, P.V. Dinesh, U.A. Rana, Prashant Thakur (for Gagrat
"." E
& Co.), Kuldeep Kumar Singh, Amit Mahajan D.N. Ray, Sumita Ray, Kavin
Gulati, Rana Mukherjee, Rashmi Singh, T. Mahipal, B.V. Desai, Rahul Gupta,
N. Kanungo, R.K. Khanna, R. Khanna, Jhanvi Warah, S. Kant, V.N. Koura,
Paramjeet Banipal, Aruna Mathur (for Arputham, Aruna & Co.), Pradeep
Dahiya, San deep Sharma, T. V. George, Kamakshi S. Mehlwal, Naveen Kumar
Sii1gh, Praveen Kumar, Roy Abrahman, Seema Jain, H. Lal, M.P. Vinod, Ajay F
K. Jain, P.K. Bansal, Pankaj Kumar Singh, Yinod K. Tiwari, K.L. Janjani, H.K.
Puri, U.LJawal Banerjee, S.K. Puri, V.M. Chauhan, Devashish Bharukha, Ramesh
Chander Agarwal, Hans Bharukha, R.C. Kohli, Pram it Saxena. Anurdha Rustagi,
Sandeep. Kaadambari, Vikas Tomar, Gaurav Agrawal, Prashant Kumar, Raj iv
Tyagi, Himanshu Mehta, Balender, L.K. Bhushan, Jasleen Oberori, Rahul
Prasamna Dave, Devajyoti Bhattacharya, Indra Sawhney, lndu Malhotra, P.N.
G
.. , Puri, R.K. Maheshwari, Yinoo Bhagat, B. Vijayalakshmi Menon, K.B. Sasiprabhu,
K.V. Mohan, Rajesh Kumar, Tarun Johri, Yishwajit Singh, Nikhil Nayyar, Romy
Chacko, Abhish Kumar, C.N. Sree Kumar, Guntur Prabhakar, Sushil Kumar
Jain, S.B. Upadhayay, Shrish Kumar Misra, Kirti Renu Mishra, Shakil Ahmed
Syed, K.S. Rana, B.K. Satija, Sanjay R. Hegde, Sanjay Kapur, Subramonium H
572 SUPREME COURT REPORTS [2006] SUPP. 3 S.C.R.

A Prasad, Yinay Kumar Garg, Abhijit Sengupta, Kavita Wadia, R. Sathish, K.R.
Nambiar, Baby Krishnan, B.V. Deepak and M.T. George for the appearing
parties.

ARIJIT PASAYAT, J. These appeals and certain connected matters
were initially heard by a two-Judge Bench of this Court. The matters were
B referred to a larger Bench by order dated 26.9.2003 as the Bench hearing the
matters doubted the correctness of the views expressed in Mis. Bhagatram
Rajeevkumar v. Commissioner of Sales Tax, MP. and Ors., (l 995] Suppl. I
SCC 673 which was relied on in a subsequent decision in State of Bihar and
Ors. v. Bihar Chambers ofCommerce and Ors., [1996] 9 SCC 136. TI1e matters
C were dealt with by a Constitution Bench to decide with certitude the parameters
of the judicially evolved concept of 'Compensatory Tax" vis-a-vis. Article 30 I
of the Constitution of India, 1950 (in short the 'Constitution').

The Constitution Bench in Jindal Stainless Ltd. & Anr. v. State of
Haryana & Ors., (2006) 4 SCALE 300 speaking through one of us (Kapadia,
D JJ concluded as follows :
49. In our opinion, the doubt expressed by the referring Bench about
the correctness of the decision in Bhagatram's case [1995] Supp. I
SCC 673 followed by the judgment in the case of Bihar Chamber of
Commerce [ 1996] 9 SCC 136 was well-founded.
E
50. We reiterate that the doctrine of "direct and immediate effect" of
the impugned law on trade and commerce under Article 30 I as
propounded in Atiabari Tea Co. ltd. v. State ofAssam, AIR ( 1961) SC
232 and the working test enunciated in Automobile Transport
(Rajas than) ltd v. State of Rajasthan, AIR (1962) SC 1406 for deciding
F whether a tax is compensatory or not vide para 19 of the report, will
continue to apply and the test of "some connection" indicated in para
8 of the judgment in Bhagatram Rajeevkumar v. Commissioner of
Sales Tax, M.P [199'.i] Supp. I SCC 673 and followed in the case of
State of Bihar V. Bihar Chamber of Commerce, (l 996] 9 sec 136, is,
in our opinion, not good law. Accordingly, the constitutional validity
G
of various local enactments which are the subject matters of pending
appeals, special leave petitions and writ petitions will now be listed
for being disposed of in the light of this judgment.

In all these appeals and connected matters the basic issue revolves
H round the concept of "Compensatory Tax". In all these matters the concerned
JINDAL STAINLESS LTD. v. STATEOFHARYANA(PASAYAT,J.) 573
High Courts do not appear to have examined the issue in the proper perspective, A
as they were bound by the judgments in Bhagatram 's case (supra) and Bihar
Chambers of Commerce's case (supra).

At this juncture, it is necessary to take note of what has been stated
in paragraphs 42 to 45 of the judgment rendered by the Constitution Bench,
which read as follows : B
42. To sum up, the basis of every levy is the controlling factor. In the
case of "a tax", the levy is a part of common burden based on the
principle of ability or capacity to pay. In the case of "a fee", the basis
is the special benefit to the payer (individual as such) based on the
principle of equivalence. When the tax is imposed as a part of regulation C
or as a part of regulatory measure, its basis shifts from the concept
of "burden" to the concept of measurable/quantifiable benefit and
then it becomes "a compensatory tax" and its payment is then not for
revenue but as reimbursement/recompense to the service/facility
provider. It is then a tax on recompense. Compensatory tax is by D
nature hybrid but it is more closer to fees than to tax as both fees and
compensatory taxes are based on the principle of equivalence and on
the basis of reimbursement/recompense. If the impugned law chooses
an activity like trade and commerce as the criterion of its operation
and if the effect of the operation of the enactment is to impede trade
and commerce then Article 30 I is violated. E
BURDEN ON THE STATE:

43. Applying the above tests/parameters, whenever a law is impugned
as violative of Article 30 Iof the Constitution, the Court has to see
whether the impugned enactment facially or patently indicates F
quantifiable data on the basis of which the compensatory tax is
sought to be levied. The Act must facially indicate the benefit which
is quantifiable or measurable. It must broadly indicate proportionality
to the quantifiable benefit. If the provisions are ambiguous or even
if the Act does not indicate facially the quantifiable benefit, the G
burden will be on the State as a service/facility provider to show by
placing the material before the Court, that the payment of compensatory
tax is a reimbursement/recompense for the quantifiable/ measurable
benefit provided or to be provided to its payer(s). As soon as it is
shown that the Act invades freedom of trade it is necessary to enquire
H
574 SUPREME COURT REPORTS [2006] SUPP. 3 S.C.R.

. A whether the State has proved that the restrictions imposed by it by
way of taxation are reasonable and in public interest within the meaning
of Article 304(b) [See: para 35 of the decision in the case of Khyerbari
Tea Co. Ltd and Anr. v. State ofAssam reported in AIR (1964) SC 925].

SCOPE OF ARTICLES 301, 302 and 304 VIS-A-VIS COMPENSATORY
B TAX:

44. As stated above, taxing laws are not excluded from the operation
of Article 301, which means that tax laws can and do amount to
restrictions on the freedom guaranteed to trade under Part-XIII of the
Constitution. This principle is well settled in the case of Atiabari Tea
c Co., AIR ( 1961) SC 232. It is equally important to note that in Atiabari
Tea Co., AIR (1961) SC 232, the Supreme Court propounded the
doctrine of "direct and immediate effect". Therefore, whenever a law
is challenged on the ground of violation of Article 30 I, the Court has
not only to examine the pith and substance of the levy but in addition
thereto, the Court has to see the effect and the operation of the
D
impugned law on inter-State trade and commerce as well as intra-State
trade and commerce.

45. When any legislation, whether it would be a taxation law or a non-
taxation law, is challenged before the court as violating Article 301,
the first question to be asked is: what is the scope of the operaticn
E
of the law? Whether it has chosen an activity like movement of trade,
commerce and intercourse throughout India, as the criterion of its
operation? If yes, the next question is: what is the effect of operation
of the law on th<: freedom guaranteed under Article 30 I? If the effect
is to facilitate free- flow of trade and commerce then it is regulation and
F if it is to impede or burden the activity, then the law is a restraint.
After finding the law to be a restraint/restriction one has to see
whether the impugned law is enacted by the Parliament or the State
Legislature. Clause (b) of Article 304 confers a power upon the State
Legislature similar to that conferred upon Parliament by Article 302
subject to the following differences:-
G
(a) While the power of Parliament under Article 302 is subject to the
prohibition of preference and discrimination decreed by Article 303( 1)
unless Parliament makes the declaration under Article 303(2), the State
power contained in Article 304(b) is made expressly free from the
H prohibition contained in Article 303( I) because the opening words of
JINDAL STAINLESS LTD. v. STATE OF HARY ANA(PASA YAT,J.) 575

Article 304 contains a non-obstante clause both to Article 301 and A
Article 303.

(b) While the Parliament's power to impose restrictions under Article
302 is not subject to the requirement of reasonableness, the power of
the State to impose restrictions under Article 304 is subject to the
condition that they are reasonable. B
(c) An additional requisite for the exercise of the power under Article
304(b) by the State Legislature is that previous Presidential sanction
is required for such legislation.

Since relevant data do not appear to have been placed before the High C
Courts, we permit the parties to place them in the concerned Writ Petitions
within two months. The concerned High Courts shall deal with the basic issue
as to whether the impugned levy was compensatory in nature. The High
Courts are requested to decide the aforesaid issue within five months from
the date of receipt of our o~der. The judgment in the respective cases shall
be placed on record by the concerned parties within a month from the date D
of the decision in each case pursuant to our direction.

Place these matters for further hearing in third week of January, 2007.

B.B.B. Matter placed for further hearing.