Facts of the case: The petitioners are Jindal Strip Ltd. (Jindal Stainless Steel Ltd.) and another. And the respondents are the State of Haryana and Others.
Jindal Strips Ltd is a part of a product manufacturing industry within the state of Haryana. It imports the raw materials for production purposes and exports the finished goods to other states.
The Haryana Local Area Development Act, 2000 provides for levy and collection of entry tax (supposed to be compensatory), i.e., tax levied on the entry of goods in the states for the consumption or use therein. As amended in 2003, Section 22 of the act provided for the collection of a tax for utilization and facilitating the nationwide free flow of trade and commerce. This section initially provided for utilization for the development of local areas instead of the utility above.
The petitioner challenged the constitutional validity of the Haryana Local Area Development Act, 2000 before a Division Bench of the Supreme Court which was further referred to a nine-judge Constitution Bench before the same headed by Chief Justice T. S. Thakur and Justices A. K. Sikri, S. A. Bobde, Shiva Kirti Singh, N. V. Ramana, R. Banumathi, A. M. Khanwilkar, D. Y. Chandrachud and Ashok Bhushan.
Issues: Pre-1995(from 1962) the working test for deciding the validity of a compensatory tax laid down by the Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan (The Automobile Case) was to check whether the amount of tax paid and the facilities which the trader can use is proportional or not.
But post 1995, in Bhagatram Rajeevkumar v. Commissioner of Sales Tax (The Bhagatram case) the suggested working test was to check if there is any substantial or some other link between the tax paid and the facilities enjoyed by the traders.
So, because of the Bhagatram case, according to the referral order, the parameters on which the concept of compensatory tax evolved judicially are obscure. Thus, the interpretation of the article 301 vis-a-vis compensatory tax was needed to be laid down by the constitution bench under Article 145(3).
Contentions of the petitioners: The working test laid down in automobile case for the first time, by a majority view, became a precedent which explained the principle of compensatory taxes which goes parallel to the Part-XIII of the Constitution. The essence of compensatory tax is that the service rendered or facilities provided should be more or less proportionate with the tax levied, even though some amount may not be used to provide any facility. By this view, a tax law which does not serve its purpose of free trade and commerce cannot be designated as a compensatory tax. Thus, this can be taken as a correct test to differentiate a ‘compensatory tax’ from a regular ‘tax’.
On the other hand, The Bhagatram case holding eliminates the difference between a tax and a compensatory tax. And instead of evolving the concept of compensatory tax laid down by the SC seven-judge Bench in the Automobile Case, it went in the opposite direction. Thus, it needs to be overruled.
Contentions for the respondents: On the question of a link between the service provided and the levy, it is not necessary that a quid pro quo rule should be maintained. Some link between facilities provided and the tax imposed are sufficient. In the case of levying of certain fees, a quid pro quo becomes essential, but taxes do not fall within that ambit. It is true that in the case of a compensatory tax the element of quid pro quo is there more than it is there in a regular tax but not to the extent as in the case of a fee.
And, as a result of a chain of decisions, even the concept of ‘fee’ has undergone a sea of change from essentially a quid pro quo to a casual relation with the services. So, the interpretation of the extent to which compensation exists in a compensatory tax needs to be evolved taking note of recent developments. And thus, the principles of suggested by the Bhagatram case are consistent with the contemporary thinking.
The entry tax does not have a limited range of facility as the entries 56, 57, 59 of the Part-II of the schedule 7 which indicates a link to road, waterways, bridges, etc. On the other hand, an entry tax has a link with local areas as well, which provides for certain amenities for better living. Accordingly, the entry tax aims at enabling and facilitating local bodies in discharging their multiple functions. So, the compensatory nature of the entry tax has to be adjudged keeping in mind these facilities provided by the local bodies.
Judgement: Whenever an impugned law is brought under the purview of Article 301, the Courts need to examine the effect its provisions have on the inter-State and the intra-State movement of goods as it is an integral part of a trade.
The primary purpose of a tax law is collecting revenue while a regulation has to produce some regulative effects on trade and commerce. If a law charges a levy and in return seeks to control the conditions under which an activity such as trade must be carried on, then such law is in essence a regulatory one while if it operates to impede the activity, then the law is a restraint and is thus brought under the purview of Article 301.
The principle behind levy of a tax is “ability or capacity” of a taxpayer. It is levied as a part of the common burden for generating general revenue. The benefit that we receive as a result of paying tax is common good. Thus, it does not have any measurable benefits. On the other hand, in the cases of fees and compensatory taxes, the well-known “principle of equivalence” is to be applied. The cost paid by us for obtaining a facility becomes the basis of compensation for the provider of the facilities. In other words, we pay for what we get. Thus, there is a measurable advantage. It must however be noted that a compensatory tax is levied on a class of persons while fees are to be paid by individuals.
In the Automobile case, one had to check if there is any substantial or other link between the tax paid and the facilities enjoyed by the traders. But, in the words of Justice Kapadia, “the test of ‘some connection’ enunciated in Bhagatram’s case is not only contrary to the working test propounded in Automobile Transport’s case, but it obliterates the very basis of compensatory tax.” Therefore, the working test laid down by the Bhagatram case stood overruled while the automobile case’s test holds fit.
Conclusion: For a nation to compete in the present era of globalisation, it needs to come out to the rest of the world as a unified body. There must be a minimisation of discrimination between the states and especially in the trad-able sector. The Bhagatram decision left a scope to resort to the levying of unreasonable taxes by the states to earn revenue. A unified tax system (like GST) for interstate trades is much needed. And this decision provides towards gaining clarity in setting the applicability of a valid levy which, to the least, is a positive step. The decision will add to the firmness in the implementation of a uniform entry tax system throughout the nation. Thus, the judgement will encourage the free flow of trade subject to Part-XIII of the Constitution.