Levy On Entry Tax

Source: The Hitavada      Date: 31 Jul 2017 12:06:29


All these appeals have been disposed of with the liberty granted to the appellants to file fresh petitions by the stipulated date, which was May 31, 2017. The interim orders passed by the apex court and which were to continue in these appeals till the said date. It has been left open to the appellants to seek interim orders.

PASSING orders in a bunch of civil appeals including - Jaiprakash Associates Ltd vs State of Madhya Pradesh & Others, on March 22, 2017, Justice A K Sikri and Justice Ashok Bhushan, at the Supreme Court have pointed out that in many of these appeals, there are no adequate factual foundation and there are no discussions in the impugned judgements as well.


This view point has been agreed to by the lawyers on both sides, that in absence thereof, it may not be possible for the Supreme Court to decide the issues involved relating to levy of Entry Tax, hence in this backdrop, the court permitted the appellants to file fresh petitions, raising all these issues with necessary factual background or any other Constitutional/statutory issue, which may be arising for consideration.


Granting leave in these special leave petitions, the Supreme Court has pointed out in the order that having regard to the fact that that the correctness of the ratio of the judgement of the 7-judge bench of the apex court in the case - Automobile Transport (Rajasthan) Ltd vs State of Rajsthan and the theory of compensatory tax has been questioned, the matter was referred to nine judges’ bench.


The said bench answered the reference in the leading case - Jindal Stainless Ltd vs State of Haryana in the terms as under: 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 such taxes as are discriminatory in nature are prohibited by Article 304(a). it follows that levy of non-discriminatory tax would not constitute an infraction of Article 301.


Clauses (a) and (b) of Article 304 have to be read disjunctively.
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 evolved in Automobile Transport case and subsequently modified in Jindal’s case has no juristic basis and is therefore rejected.


Decisions of the Supreme Court in Atiabari, Automobile Transport and Jindal cases and all other judgements that follow these pronouncements are to the extent of such reliance overruled. 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.


Article 304(a) frowns upon discrimination (of a hostile nature in the protectionist sense) and not on mere differentiation, hence 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 develop economically backward areas would not violate Article 304(a). Whether actual violation is there or not in these cases, has been left to the regular benches to decide.


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 land mass of India from another country are left open to be determined in appropriate proceedings.


It was held by the apex court in the case - Atiabari Tea Ltd vs State of Assam & Others, 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, prohibition of restrictions on free trade is not absolute one.

Statutes restrictive of free trade is not an absolute one and can avoid invalidation, if they comply with Article 304(a) or (b). In the case, Automobile Transport (Rajasthan) Ltd vs State of Rajasthan 1963(1) SCR 491, it was held that only such taxes that immediately and directly restrict trade would fall within the purview of Article 301 and that any restriction in the form of taxes imposed on the carriage of goods or their movement by the State Legislature can only be done after satisfying the requirements of Article 304(b).


The statute which was challenged in Atiabari Tea Co case 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), the act was declared void.


It is in this background, reference was made to a bench of 9 judges, as indicated at the outset of this order.
The court also noted that that when the cases were argued before the bench, certain other aspects were also argued. Primarily, three kinds of issues were taken up by the assesses, which are: 1.

Whether the entire State can be treated as ‘local area’ for the purpose of entry tax ? 2. Whether entry tax can be levied on the goods which are directly imported from other countries and brought in a particular State? 3. In some statutes enacted by certain States, there was a provision for giving adjustment of other taxes like VAT, incentives etc paid by the indigenous manufacturers and it was contended by the assessees that whether the benefits given to certain categories of manufacturers would amount to discrimination under Article 304.


The 9-judge bench, while answering the reference deemed it appropriate to leave these questions to be agitated before the regular bench. That is how these matters were posted before this bench and it has been agreed to that these issues are the main issues to be decided.


During the hearing of arguments, counsel for both sides submitted that since the main challenge in the writ petitions filed by the petitioners before the High Court, was predicated on the law laid down by the Constitution bench in the ‘Atiabari Tea’ case, the High Court essentially confined its discussion only on “compensatory tax theory”, as propounded in the said judgement, so the High Courts looked at the issue only by keeping in mind the principle propounded in the said judgement and decided as to whether the tax imposed by a particular statute is compensatory in nature or not.


Thus, when other issues are to be dealt with, the court found that in many cases, there is no adequate factual foundation in the impugned judgements and there is no discussion as well, and in absence thereof, perhaps it was not possible for the court to decide the issues involved in these civil appeals.


All these appeals have been disposed of with the liberty granted to the appellants to file fresh petitions by the stipulated date, which was May 31, 2017. The interim orders passed by the apex court and which were to continue in these appeals till the said date. It has been left open to the appellants to seek interim orders. The Supreme Court has made it clear that the High Courts shall deal with the interim prayers of stay on their own merits without being influenced by the fact that the stay order was passed in these cases or has been extended by the Supreme Court.

At that time, High Courts shall also consider the import and effect of the reference answered by the 9-judges bench. There are many applicants, who have filed applications for intervention in some of the petitions. Those applications are dismissed giving them liberty to file substantive writ petitions in the High Court on the same lines as indicated. Some of the intervenors have been also granted similar liberty.