M. Katju, J.
1. These two writ petitions alongwith connected and similar writ petitions are being disposed off by a common judgment.
2. Heard Shri Bharatji Agarwal, Senior Advocate, Sri Piyush Agarwal, Advocate, and other learned counsel for the petitioners, and Shri S.P. Gupta, Senior Advocate and learned standing Counsel for the respondents.
3. By means of this writ petition the petitioners are challenging the constitutional validity of the U. P. Tax on Entry of Goods Act, 2000 (hereinafter referred to as 'the Act') on the ground inter alia that it is violative of Articles 301 and 304 of the Constitution of India.
4. The petitioner No. 1 in writ petition No. 251 of 2003 is a public sector corporation, being a Government of India undertaking. It has various units in the country, but in this case we are only concerned with its refinery unit at Mathura where the petitioner is manufacturing various petroleum products which are sold by the petitioner within and outside the State of U. P. The refinery of the petitioner situate at Mathura purchases crude oil from different Gulf countries from abroad. This crude oil which is coming from outside the country within the local area of Mathura has been subjected to entry tax under the aforesaid Act during the assessment years 2000-01, 2001-02, and 2002-03 and is liable to be similarly assessed in future years.
5. It is alleged in paragraph 4-A of the writ petition that the Mathura refinery was designed and conceived to supply the requirement of petroleum in the northern region of the country, particularly in the states of U. P., Delhi, Haryana and Punjab using crude oil produced in the oil fields located in India as well as imported into India from Gulf countries. The Mathura Refinery was designed to process up to 6 MMTPA of crude oil to produce liquefied petroleum gas, naptha, petrol diesel, kerosene, aviation turbine fuel (ATF), furnace oil and bituman. It is alleged in paragraph 4-B of the writ petition that crude oil is not produced in the State of U. P. The crude oil produced in the country is barely sufficient to meet 30% of the demand of crude oil in the country. In view of the difficulties in transporting the crude oil from road and rail in huge quantities the petitioner Corporation had to construct a pipeline connecting the crude handliing facilities in the Gulf of Kutch to Mathura Refinery for the transportation of indigenous crude oil produced by the offshore oil fields of the western coast of India (Particularly Bombay High) and of imported crude oil from the Gulf of Kutch to Mathura refinery at considerable cost. For this purpose land was acquired for the petitioner under the Petroleum, Minerals and Pipelines (Acquisition of Right of User of Land) Act, 1962 for which compensation was paid by the petitioner and the right of user in respect of which vested in the petitioner No. 1. The pipeline was subsequently constructed beneath the said land linking Mathura refinery with the crude oil handling facilities in the Gulf of Kutch for the transportation of crude oil to Mathura refinery without the use of any infra-structure or facility whatsoever provided by the State of U. P. or by any local authority within U. P.
6. In Paragraph 4-D of the writ petition it is alleged that the petitioner corporation had to compete with multinationals and the private sector in its business. Reliance Industries, which is the biggest refinery and producer of petroleum products in India after the petitioner No. 1, has a modern state of the art refinery and is in a position to economically produce and to export petroleum products from its refinery in Gujarat without any burden of entry tax on the import of crude oil into the State of Gujarat for processing in its refinery of any burden of entry -tax on petroleum products exported by it.
7. The petitioner No. 1 expanded the refining capacity of Mathura refinery to a processing capacity of 8 million M per annum of crude oil. Since its commissioning in October 1982, a substantial portion of crude oil processed at Mathura refinery has been crude oil imported from outside India through the Gulf of Kutch and Safaya Mathura Pipeline. It is alleged that after the administered price mechanism was abolished with respect to the refineries from 1-4-1998 the entire impact of any entry tax levied on crude oil processed at Mathura, refinery has to be borne entirely by the petitioner No. 1.
8. The U. P. Tax on Entry of Goods Ordinance, 1999 was promulgated by an ordinance in November 1999 and was thereafter replaced by the impugned Act in the year 2000. The result has been that the entry tax of 4% levied by the State of U. P. has resulted in increase of the cost of approximately 4.14% (taking into account the impact of the tax and conversion loss aforesaid relatable to the products) of petroleum products manufactured at Mathura refinery and sold in the State of U. P. and outside U. P. It is alleged that due to this the products of Mathura refinery would be at least 4.14% more expensive than the like products manufactured in Gujarat and other States in India where there is no levy of entry tax on crude oil or petroleum products. It is alleged that bearing in mind the cascading effect of cess, excise duty, sales tax and other imports, this means that if the burden of the additional cost was to pass on to the consumerism other States on a litre of diesel which sells at Rs. 23.42 per litre in U. P. there would be a total impact of not less than 96 paise per litre in the price. Similarly on a litre of petrol which sells at a price of Rs. 33.56 per litre in U. P. there would be a total impact of not less than Rs. 1.39 per litre in the price. Consequently Mathura refinery would be at a disadvantage in competition with private operators and others who import petroleum products into the region from other states in which no entry tax is payable on crude oil brought into the State for processing. Because of the constraints of maintaining a competitive price and of Government policy, the Mathura refinery has been unable to pass on the burden of the additional tax to the consumers, and has had to itself absorb the additional burden of the entry tax. As a result, Mathura refinery has had to suffer a loss in the recoverable price of petroleum products sold by it to the extent of the tax it has had to pay on the crude oil utilized in the manufacture of products by virtue of the entry tax as stated above. This will severely impair the competitiveness of Mathura refinery as a producer of petroleum products.
9. It is alleged in paragraph 4-K of the writ petition that the State of U. P. is not providing any facility whatsoever to Mathura Refinery for transport or import of crude oil to the said refinery. It is alleged that the petitioner No. 1 used its own transportation system and infra-structure installed by it in the land in which the right of user is vested in it in terms of the Petroleum Minerals and Pipelines (Acquisition of Right of User of Land) Act, 1962. Hence it is alleged that the entry tax has no compensatory element in it and operates purely as a tax on crude oil imported and used at Mathura refinery.
10. Learned counsel for the petitioner has raised a large number of points. However, we are not going into non-constitutional issues as they can be raised before the appropriate statutory authorities and hence the petitioner has an alternative remedy to canvass those points before such authorities. We are only considering the constitutional validity of the impugned Act with respect to Article 301 and 304 of the Constitution.
11. Section 4 of the Entry Tax Act states.
"There shall be levied and collected a tax on entry of any goods specified in the schedule into a local area from any place outside that local area including a place outside Uttar Pradesh for consumption, use or sale therein, at such rates not exceeding five per cent of the value of the goods as may be specified by the State Government by notification, and different rates may be specified in respect of different goods or different classes of goods;
Provided that the State Government may by notification amend the schedule and upon the issue of any such notification, the schedule shall, subject to the provisions of Sub-section (6) be deemed to be amended accordingly"
12. It is alleged in paragraph 30 of the writ petition that the petitioner has deposited the entry tax even on the imported crude oil which is liable to be refunded.
13. In paragraph 30-A of the writ petition it is mentioned that the impugned entry tax is not a compensatory tax and it interferes with freedom of trade, commerce and intercourse guaranteed under Article 301 of the Constitution. It is alleged in paragraph 30-B to 30-F of the writ petition that entry tax has not received the previous assent of the President of India under Article 304(b) of the Constitution. In paragraph 30-D of the writ petition it is stated that it is for the state to show that the restriction imposed by the impugned entry tax satisfies the requirements of Article 304(b) as being reasonable and in the public interest. In paragraph 30-1 of the writ petition it is stated the premises of Mathura refinery is not a local area and hence the entry tax cannot be imposed on petitioner No. 1.
14. In paragraph 31 of the writ petition it is stated that during the assessment year 2000-2001 the petitioner deposited Rs. 1,55,55,17,661/- under protest in respect of the imported crude oil and imported machinery towards entry tax. Similarly for the assessment year 2001-02 the petitioner deposited Rs. 1,47,63,44,552/- towards entry tax in respect of the imported crude oil and has also paid entry tax towards the machinery. Similarly entry tax has been paid by the petitioner for the year 2002-03.
15. A counter-affidavit has been filed and we have perused the same. The respondent has relied on Entry 52 List II of the 7th Schedule of the Constitution which states.
"Taxes on entry of goods into a local area for consumption, use or sale therein."
16. The term local area has been defined in Section 2(c) of the Act which includes a municipality and municipal corporation. Hence in our view the crude oil has certainly been brought into a local area as Mathura is a municipality. We cannot therefore accept this submission of the learned counsel for the petitioner. The respondents are right in contending that it is wholly immaterial from where the goods have been brought into the local area. There is no doubt that the goods in question (crude oil) had entered into the local area of Mathura.
17. The basic question which arises in this case is whether the impugned entry tax is ultra vires Articles 301 and 304 of the Constitution.
18. Article 301 of the Constitution of India states:
"subject to the other provisions of this part, trade, commerce and intercourse throughout the territory of India shall be free."
19. The use of the words "through out the territory of India" is significant, and cannot be under emphasized. Article 301 embodies the concept that India is one economic unit. As observed by the Five Judge Constitution Bench of the Supreme Court in Atiabari Tea Co. Ltd. v. State of Assam AIR 1961 SC 232 (vide paragraph 34)
"In drafting the relevant Articles of part XIII the makers of the Constitution were fully conscious that economic unity was absolutely essential for the stability and progress of the federal policy which had been adopted by the Constitution for the governance of the country. Political freedom which had been won, and political unity which had been accomplished by the Constitution, had to be sustained and strengthened by the bond of economic unity. It was realised that in course of time different political parties believing in different economic theories or ideologies may come in power in the several constituent units of the Union, and that may conceivably give rise to local and regional pulls and pressures in economic matters. Local or regional fears or apprehensions raised by local or regional problems may persuade the State Legislatures to adopt remedial measures intended solely for the protection of regional interests without due regard to their effect on the economy of the nation as a whole. The object of Part XIII was to avoid such a possibility. Free movement and exchange of goods throughout the territory of India is essential for the economy of the nation and for--sustaining and improving living standards of the country. The provision contained in Article 301, guaranteeing the freedom of trade, commerce and intercourse is not a declaration of a mere platitude or the expression of a pious hope of a declaratory character, it is not also a mere statement of a directive principle of State policy, it embodies and enshrines a principle of paramount importance that the economic unity of the country will provide the main sustaining force for the stability and progress of the political and cultural unity of the country. In appreciating the significance of these general considerations we may profitably refer to the observations made by Cardozo J. in Charles H. Baldwin v. G.A. Seeling (1934) 294 US 511 at page 523 : 79 Law Ed. 1032 at p. 1033 while he was dealing with the commerce Clause contained in Article 1, Section 8, Clause 3 of the American Constitution. "This part of the Constitution" observed, Cardozo, J. "was framed under the dominion of a political philosophy less parochial in range. It was framed upon the theory that the people of the several states must sink or swim together and that in the long run prosperity and salvation are in union and not division."
20-21. To understand the true purport of Article 301 we must understand that in feudal times when society was mainly agricultural there were small principalities, and often there were customs or toll barriers at the boundaries of every small principality. This hampered the free flow of goods and was obstructing the growth of modern industry.
22. Modern industry, being big as contrasted to feudal handicraft industry, requires a large market. Hence if there are restrictions on the free flow of goods from one part of the country to the other, growth of modern industry will not be possible. Our founding fathers in their wisdom realised the importance of having a large market so that a big and powerful modern industry can grow in the country. It is for this reason that they provided for Article 301 in the Constitution.
23. In Atiabari Tea Co. Ltd. (supra) the Supreme Court also observed.
"On a careful examination of the relevant provisions of Part XIII as a whole as well as the principle of economic unity which it is intended to safeguard by making the said provisions, the conclusion appears to us to be inevitable that the content of freedom provided for by Article 301 was larger than the freedom contemplated by Section 297 of the constitution Act of 1935, and whatever else it may or may not include, it certainly includes movement of trade which is of the very essence of all trade and is its integral part. If the transport or the movement of goods is taxed solely on the basis that the goods are thus carried or transported that, in our opinion, directly affects the freedom of trade as contemplated by Article 301. If the movement, transport or the carrying of goods is allowed to be impeded, obstructed or hampered by taxation without satisfying the requirement of Part XIII the freedom of trade on which so much emphasis is laid by Article 301 would turn to be illusory. When Article 301 provides that trade shall be free throughout the territory of India primarily it is the movement part of the trade that it has in mind and the movement or the transport part of trade must be free subject of course to the limitation and exceptions provided by the other Articles of Part XIII. That we think is the result of Article 301 read with other Articles in Part XIII."
24. As regards the question whether taxing laws are excluded from operation of Article 301 the Supreme Court replied in the aforesaid decision in the negative (vide paragraph 51 of the aforesaid decision):
"Thus the intrinsic evidence furnished by some of the Articles of Part XIII shows that taxing laws are not excluded from the operation of Article 301; which means that tax laws can and do amount to restrictions freedom from which is guaranteed to trade under the said part. Does that mean that all tax laws attract the provisions of Part XIII whether their impact on trade or its movement is direct and immediate or indirect and remote? It is precisely because the words used in Article 301 are very wide and in a sense vague and indefinite that the problem of construing them and determining their exact width and scope becomes complex and difficult. However, in interpreting the provisions of the Constitution we must always bear in mind that the relevant provision, "has to be read not in vacuo but as occurring in a single complex instrument in which one part may throw light on another" (vide James v. Commonwealth of Australia, (1936) AC 578 at p. 613). In construing Article 301 we must, therefore, have regard to the general scheme of our Constitution as well as the particular provisions in regard to taxing laws, The construction of Article 301 should not be determined on a purely academic or doctrinaire consideration; in construing the said Article we must adopt a realistic approach and bear in mind the essential features of the separation of powers on which our constitution rests. It is a federal Constitution which we are interpreting and so the impact of Article 301 must be judged accordingly. Besides, it is not irrelevant to remember in this connection that the Article we are construing imposes a constitutional limitation on the power of the parliament and State Legislatures to levy taxes, and generally, but for such limitation, the power of taxation would be presumed to be for public good and would not be subject to judicial review or scrutiny. Thus considered we think it would be reasonable and proper to hold that restrictions freedom form which is guaranteed by Article 301, would be such restrictions as directly and immediately restrict or impede the free flow or movement of trade. Taxes may and do amount to restrictions; but it is only such taxes as directly and immediately restrict trade that would fall within the purview of Article 301."
25. Subsequent to the aforesaid decision in Atiabari Tea Co. Limited case (supra) a Seven Judge Constitution Bench of the Supreme Court in Automobile Transport Ltd. v. State of Rajasthan AIR 1962 SC 1406 (vide para 17) observed:
"Regulatory measures or measures imposing compensatory taxes for the use of trading facilities do not come within the purview of the restrictions contemplated by Article 301, and such measures need not comply with the requirements of the proviso to Article 304(b) of the Constitution."
26. Thus in the aforesaid decision in Automobile Transport co. Ltd. the Constitution Bench of the Supreme Court further clarified that the compensatory taxes do not come within the purview of Article 301 of the Constitution. The expression compensatory taxes was explained by the Supreme Court (vide paragraph 19 of the aforesaid decision) in the following words:
The taxes are compensatory taxes which instead of hindering trade commerce and intercourse facilitate them by providing roads and maintaining the roads in a good state of repairs. Whether a tax is compensatory or not cannot be made to depend on the preamble of the statute imposing it. Nor do we think that it would be right to say that a tax is not compensatory because the precise or specific amount collected is not actually used in providing any facilities. It is obvious that if the preamble decided the matter, then the mercantile community would be helpless and it would be the easiest thing for the legislature to defeat the freedom assured by Article 301 by stating in the preamble that it is meant to provide facilities to the tradesmen. Likewise actual user would often be unknown to tradesmen and such user may sometimes be compensatory and at others not so. It seems to us that 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 facilities. It would be impossible to judge the compensatory nature of a tax by a meticulous test and in the nature of things that cannot be done.
Nor do we think that it will make any difference that the money collected from the tax is not put into a separate fund so long as facilities for the trades people who pay the tax are provided and the expenses incurred in providing them are borne by the state out of whatever source it may be. In the cases under our consideration the tax is based on passenger capacity of commercial buses and loading capacity of goods vehicles; both have some relation to the wear and tear caused to the roads used by the buses. In basing the taxes on passenger capacity or loading capacity, the Legislature has merely evolved a method and measure of compensation demanded by the state, but the taxes are still compensation and charge for regulation."
27. The above decisions of the two Constitution Benches of the Supreme Court clearly show that if a tax imposed for raising revenue which is utilised for facilitating trade and commerce instead of hampering it that will be compensatory tax outside the ambit of Article 301 of the Constitution,
28. It appears however that subsequently two decisions were given by smaller Benches (non Constitution Benches) which appear to have taken a somewhat different view of a compensatory tax. Thus in Bhagatram Rajeev Kumar v. CST 1965 Supp (1) SCC 673 (vide paragraph 8) a three Judge Bench of the Supreme Court observed :
"The submission of Sri 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 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 levy 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 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 Corporation case (1980) 4 SCC 697 : AIR 1981 SC 463.
The above decision was followed by a two Judge Bench decision of the Supreme Court in State of Bihar v. Bihar Chamber of Commerce 1996 (9) SCC 136 : (AIR 1996 SC 2344) where it was observed:
"It is not and it cannot be stipulated that for the purpose of establishing the compensatory character of the tax, it is necessary to establish that every rupee collected on account of the entry tax should be shown to be spent on providing the trading facilities. It is enough if some connection is established between the tax and the trading facilities provided. The connection can be a direct one or an indirect one, as held by this Court in Bhagatram Rajeev Kumar v. CST 1995 Supp. (1) SCC 673 (SCC p. 678, para 8).
"The concept of compensatory nature of tax 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 levy cannot be impugned as invalid."
Though not stated in the counter affidavit we can take notice of the fact that the state does provide--- several facilities to the trade including laying and maintenance of roads, waterways and markets, etc. As a matter of fact, since the levy is by the State, we must also look to the facilities provided by the State for ascertaining whether the State has established the compensatory character of the tax. On this basis, it must be held that the State has established that the impugned tax is compensatory in nature. This finding is by itself sufficient to negative the attack based on Article 301 but even if we assume that the State has not established the said fact, even so the result is not different."
29. In our opinion we cannot interpret the decisions of the smaller benches of the Supreme Court in Bhagatram Rajeev Kumar's case (supra) and State of Bihar v. Bihar Chamber of Commerce's case (supra) to mean that they have overruled the larger bench decisions of the Supreme Court in Atiabari Tea Co. case (supra) and Automobile Transport Limited v. State of Rajasthan case (supra). It is well settled that larger bench decisions of the Supreme Court will prevail over smaller bench decisions of the Supreme Court.
30. In Union of India v. K.S. Subramanian AIR 1976 SC 2433 (1976 Lab IC 1551) the Supreme Court observed.
"The proper course for a High Court, in such a case, in to try to find out and follow the opinions expressed by larger benches of this Court in preference to those expressed by smaller benches of the Court. That is the practice followed by this Court itself. The practice has now crystallized into a rule of law declared by this Court."
31. A similar view was taken by a Division Bench decision of this court in Rapti Commission Agency v. State of U. P., 2003 UPTC 780.
32. In Bharat Petroleum Corporation Limited v. Mumbai Shramik Sangh (2001) 4 SCC 448 (2001 AIR SCW 1846, a five Judge Constitution Bench of the Supreme Court observed at page 1847 of AIR SCW
"We are of the view that a decision of a Constitution Bench of this Court binds a Bench of two learned Judges of this Court and that judicial discipline obliges them to follow it, regardless of their doubts /about its correctness. At the most, they could have ordered that the matter be heard by a Bench of three learned Judges."
33. Sri S.P. Gupta, learned senior counsel for the respondents submitted that since the decision of the smaller Benches in Bhagatram Rajeev Kumar's case (supra) and State of Bihar v. Bihar Chamber of Commerce case (supra) have noticed the constitution Bench decisions in Atiabari Tea Co. Limited case (supra) and Automobile Transport Limited case (supra) the decision of the smaller Benches should be followed so far as the concept of compensatory tax is concerned.
34. We are of the opinion that while it is true that if a subsequent smaller bench of the Supreme Court has referred to a larger bench of the Supreme Court we cannot ignore the smaller bench decision, but at the same time we have to interpret the smaller bench decision in a manner so as to make it consistent with the larger bench decision of the Supreme Court. Surely a smaller bench decision cannot overrule a larger bench decision of the Supreme Court.
35. In the seven Judge Constitution Bench decision of the Supreme Court in Automobile Transport Limited v. State of Rajasthan (supra) it has been clearly stated that taxes are compensatory taxes which instead of hindering trade commerce and intercourse facilitate them by providing roads and maintaining the roads in a good state of repairs. It has further been stated in paragraph 19 of the said decision that.
"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 facilities."
36. Similarly in Atiabari Tea Company Limited v. State of Assam (supra) it has been observed by the five Judge Bench decision of the Supreme Court (vide paragraph 50) that "if the transport or movement of goods is taxed solely on the basis that the goods are thus carried or transported that, in our opinion, directly affects the freedom of trade as contemplated by Article 301."
37. Thus both the aforesaid Constitution Bench decisions have clearly laid down that taxes which facilitate trade and commerce by raising revenue for maintenance of roads etc. would not come within the ambit of Article 301 of the Constitution as it is compensatory tax. However, if the tax is imposed solely because goods are transported into a certain region without providing facilities for the trade that directly affects the freedom of trade under article 301 of the Constitution.
38. We have therefore to interpret the smaller bench decisions in Bhagatram Rajeevkumar's case (supra) and State of Bihar v. Bihar Chamber of Commerce case (supra) so as to make those decisions consistent with the aforesaid two Constitution Bench decisions of the Supreme Court.
39. So far as the decision in Bhagatram Rajeevkumar's case (supra) is concerned in our opinion that is not of much help because it was observed therein:
"In the counter affidavit filed on behalf of the State which was not disputed the nature of levy has been demonstrated to be compensatory."
40. Thus the above decision has proceeded on a concession made by the petitioner's counsel that the levy was compensatory in nature.
41. However, in the subsequent part of the aforesaid judgment it has been observed.
The concept of compensatory nature of tax 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 levy 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 enable them to provide municipal services more efficiently, which would help or ease free flow of trade and commerce."
42. We have to carefully examine the above observation of the three Judge bench decision of the Supreme Court in Bhagatram Rajeev Kumar's case (supra) and make it in conformity with the two Constitution Bench decisions in Atiabari Tea Company's case (supra) and Automobile Transport Limited case (supra).
43. It may first be noticed that in the above observation it has not been disputed that facility has to be given for facilitating trade and commerce in order to make the tax compensatory, though the link between the tax and facilities may be indirect. This itself implies that if the tax is being raised for augmenting the general revenue of the State and not for the specific purpose of giving facilities to facilitate trade and commerce then it would not be a compensatory tax. To take a contrary view would really mean that there is no difference between a compensatory tax and a non-compensatory tax. However, a distinction has to be made between a compensatory and non compensatory tax as pointed out by the Constitution Bench decisions of the Supreme Court, and we cannot interpret the smaller bench decisions of the Supreme Court in a manner which leads to the conclusion as if the decisions in Atiabari Tea Company case (supra) and Automobile Transport Limited case (supra) have been overruled or have become redundant and otiose.
44. Secondly, in our opinion, the true interpretation of the decision of the Supreme Court in Bhagatram Rajeev Kumar's case (supra) is that the observation in paragraph 19 of the Constitution Bench decision in Automobile Transport Case (supra) that "Taxes are compensatory taxes which instead of hindering trade, commerce and intercourse facilitate them by providing roads and maintaining the roads in a good state of repairs" should not be interpreted to mean that a compensatory tax is only that which raises revenue for erecting or maintaining roads. The word 'roads' in paragraph 19 of the aforesaid decision is in our opinion illustrative and not exhaustive and that to our mind is the true purport of the decision in Bhagatram Rajeev Kumar's case (supra). When the Supreme Court in Bhagatram Rajeev Kumar's case (supra) observes "the concept of compensatory nature of tax has been widened" it obviously means that the word 'road' in Automobile Transport limited case (supra) is only illustrative and not exhaustive. However, we cannot interpret the decision in Bhagatram Rajeev Kumar's case (supra) to mean that if the tax is for raising general revenue even then it will be a compensatory tax. In our opinion, the tax to be compensatory in nature must be for generating revenue which is used for providing facilities for trade and commerce, even if that is done indirectly, and not merely for augmenting the general revenue.
45. Moreover, it has been observed in the seven Judge Bench decision of the Supreme Court in Automobile Transport Limited case (supra) (vide Paragraph 19).
"..................... and paying not patently much more than what is required for providing facilities."
46. The above observation clearly implies that while it is true as pointed out by the two Judge bench of the Supreme Court in State of Bihar v. Bihar Chamber of Commerce (vide paragraph 12) that "it is not necessary to establish that every rupee collected on account of the entry tax should be shown to be spent on providing the trading facilities", there has yet to be a broad correlation between the revenue generated by the entry tax and the expenditure on the facilities for facilitating trade and commerce. Thus, for instance, if the entry tax raises revenue of Rs. one crore and the expenditure on the facilities to facilitate trade and commerce is, say, Rs. 90 lacs the Court would uphold such a levy. However, if the revenue realised by the entry tax is Rs. one crore and the expenditure on the facilities provided for facilitating trade and commerce is only Rs. one lac obviously there is no broad correlation between the levy and the expenditure on the facilities, and in such a case the tax cannot be regarded as a compensatory tax. In the present case the respondents have not been able to establish any broad correlation between the entry tax being realised and the expenditure on the facilities for facilitating trade and commerce. For instance petitioner No. 1 in civil Misc., Writ Petition No. 251 of 2003 has already paid more than Rs. 758 crores as entry tax under protest as is evident from paragraph 4 of the supplementary rejoinder affidavit in reply to the supplementary counter affidavit filed by Sri B.P. Sonkar. Similarly, other petitioners have also paid huge amounts of entry tax to the State Government. In none of the affidavits filed by the respondents has it been stated how much is the amount of the total entry tax collected under the impugned Act by the respondents and how much is the expenditure on facilities for facilitating trade and commerce. In our opinion the burden was on the respondents to establish this broad correlation but they have failed to do so. Hence in our opinion it cannot be said that the impugned tax is compensatory in nature.
47. No doubt in some of the affidavits filed by the respondents some figures have been given, in an endeavour to establish that it is a compensatory tax, but we are not at all impressed by these averments, and in our opinion respondents have not been able to establish that the impugned tax is compensatory in nature. The Court cannot act on the mere ipse dixit of the respondents.
48. Thus in the supplementary counter affidavit filed by Sri S.C. Dwivedi it has been stated in paragraph 4--
"It shall not be out of place to mention that the State Government provides funds to local self Governments established under Part IX of the Constitution of India to enable them to function as institutions of self Government with respect of preparation of plans for economic development and special Justice and to implement the scheme for economic development and special Justice as may be entrusted to them including those in relation to the matters listed in the XI schedule of the Constitution of India."
49. In our opinion the aforesaid averment is so vague in nature that it is really of no help of the respondents. Hence it is not established that the impugned tax is compensatory in nature.
50. In the supplementary counter affidavit filed by Sri B.P. Sonkar a chart showing the amount given by the State Government to the local bodies and Panchayatiraj Institutions to meet various expenses for their development for the financial years 2000-01, 2001-02, 2002-03 has been annexed. This shows that a total sum of Rs. 2442 crores has been given as aid by the State Government to the local bodies and Panchayatiraj Institutions towards urban development, water supply, compensation, village development, health, etc.
51. In our opinion this does not help the respondents because the respondents have to show that the realisation from entry tax has been used for facilitating trade and commerce and not for raising general revenue. There is nothing to show that the amount realised as entry tax cannot be used or has not been used for setting up schools, housing, payment of salary to Government employees, payment of salaries to Ministers, M. L. As. constructing Government buildings, acquiring land, etc.
52. Para 6 of the supplementary rejoinder affidavit filed by the petitioner in reply to the supplementary counter affidavit of Shri B.P. Sonkar states.
"That it is reiterated that no facility whatsoever has been provided by the U. P. Government to Mathura Refinery for transportation of crude oil from outside the State of U. P., which is ultimately transported through underground pipelines built exclusively by the petitioner itself."
53. This averment makes it clear that no facility is provided by the U. P. Government, directly or indirectly, for transportation of the crude oil. The underground pipes for transporting the oil were built by the petitioner and not by the respondents.
54. In our opinion a tax to be a compensatory tax must be in the nature of a cess. A cess is a tax imposed for realising revenue which is utilised for a specific purpose. Thus, while a cess is also a tax, it is a tax of a special nature. It does not realise revenue which is used for general public expenditure but for specific expenditure for a specific purpose. For example, education cess would be a tax which generates revenue which is utilised for education purposes e.g., school buildings, paying salaries to teachers etc. Similarly, a health cess would be a tax which generates revenue which is utilised for health purposes e.g. for building hospitals, giving free medicines to poor people etc. Similarly in our opinion a compensatory tax is really in the nature of a cess because it generates revenue which is not used for general public purpose but for the specific purpose of facilitating trade and commerce.
55. The amounts granted by the State Government to the local bodies and Panchayatiraj institutions have no correlation, what to say of broad correlation, with amounts realised as entry tax under the impugned Act. The amount realised as entry tax can be used for any purpose and not merely for facilitating trade and commerce. In fact there is nothing mentioned in the impugned Act which states that the revenue realised by the entry tax will be utilised for facilitating trade and commerce, directly or indirectly.
56. We have carefully perused the impugned Act. It consists of only 9 Sections. There is no provision anywhere in the Act stating for what purpose the revenue raised by it will be utilized. There is also no provision therein stating that the revenue raised by it will be used for facilitating trade and commerce. Hence the amounts realised under the impugned Act can be used for any purpose. Hence in our opinion it is not a compensatory tax.
57. Yet another supplementary counter affidavit dated 12-1-2004 was filed by the respondents after the case had already been heard on several dates. We cannot appreciate this practice of filing of supplementary counter affidavits after the case has already been heard on several dates. Several supplementary counter affidavits had already been filed in this case earlier before the aforesaid affidavit, was filed.
58. It may be mentioned that on 8-1-2004 this Court passed the following order.
"Supplementary counter affidavit has been filed today in writ petition No. 251 of 2003. List peremptorily before us on 13-1-2004 by that time supplementary rejoinder affidavit, if any, may be file. It is made clear that the case will not be adjourned on that date.
59. When the case came up before us on 13-1-2004 the supplementary counter affidavit dated 12-10-2004 was filed before us and we were informed by the learned counsel for the petitioner that he was served with a copy of the same only at 10 p.m. on 12-1-2004. Hence he could not prepare a reply to the same. We are therefore not inclined to accept this supplementary counter affidavit dated 12-1-2004 and we reject the same as it has been filed at a very belated stage.
60. Learned senior counsel for the respondent Sri S.P. Gupta has submitted that in view of Entry 52 of List II to the 7th Schedule of the Constitution the impugned Act cannot be held to be unconstitutional. Entry 52 States.
"Taxes on the entry of goods into a local area for consumption or use and sale therein."
61. It is well settled that the various entries in the three lists of the 7th Schedule to the Constitution are not powers of legislation but fields of legislation vide Calcutta Gas Company v. State of W. B. AIR 1962 SC 1044 (1049), Harakchand v. Union of India 1970 (1) SCR 479 ; (AIR 1970 SC 1453)(489), Union of India v. Dhillon, (1971) 2 SCC 779 (sic) (792). Power to legislate is given in Articles 246 to 253 and other provisions of the Constitution. The Entries in the Lists are mere legislative heads and are of an enabling character. They are designed to define and delimit the respective areas and legislative competence of the Union and State legislatures vide State of Bihar v. Kameshwar AIR 1952 SC 252.
62. Hence Entry 52 of List II cannot be said to give power to the State Legislature to legislate on entry tax. That power flows from Article 246 of the Constitution. However, the power under Article 246 has to be read subject to the other Articles in the Constitution.
63. It may be noted that Article 301 states that it is subject to the other provisions of Part-XII. Hence it is not subject to Article 246 as Article 246 is in Part XI of the Constitution. Hence power to legislate under Article 246 of the Constitution has to be read as subject to Article 301 of the Constitution. It follows that the State legislature cannot make a law which violates Article 301 of the Constitution. Hence the scope of the legislative field contained in Entry 52 List II of the 7th Schedule has to be restricted and treated as subject to Article 301 and other Articles in the main body of the Constitution.
64. It follows that an entry tax cannot be imposed which violates Article 301 of the Constitution, despite Entry 52 of List II.
65. To our mind it is clear that the impugned Act imposing entry tax violates Article 301 of the Constitution as the revenue generated by it cannot be said to be specifically meant for facilitating trade or commerce, but is raised for augmenting the general revenue of the State.
66. In fact in the Statement of Objects and Reasons of the impugned Act (U. P. Act No. 12 of 2000) it is specifically mentioned.
"Preferatory Note-statement of Objects and Reasons, with a view to augmenting the revenue of the State it was decided to make law to provide for levy and collection of tax on entry of certain goods into a local area from any place outside that local area including a place outside U. P. .............."
67. Thus the Statement of Objects and Reasons of the impugned Act clearly discloses that the impugned Act was enacted to augment the general revenue of the State and not for facilitating trade and commerce.
68. In the supplementary counter affidavit of Sri B.P. Sonkar dated 7-1-2004 the respondents have annexed copy of a letter of the Director (Judicial) Government of India, Ministry of Home Affairs dated 19-1-2000 addressed to the Principal Secretary, Legislative Section, Government of U. P. This letter states.
"With reference to your letter No. 2386 / XVII-V-1-1(Ka) 31/99 dated 1-1-2000 on the subject mentioned above, I am directed to say that the Government of India have no objection to the introduction of the Uttar Pradesh Tax on Entry of Goods Bill, 2000, in the State Legislature under Article 304(b) of the Constitution of India."
69. In our opinion there is a difference between the Government of India and President of India. The aforesaid letter dated 19-1-2000 only states that the Government of India has no objection to the introduction of the impugned Act but it does not say that the President of India has given his previous sanction as required by the proviso to Article 304(b) of the Constitution.
70. In this connection we may refer to the recent Constitution Bench decision of the Supreme Court in Kaiser-I-Hind Pvt. Ltd. v. National Textile Corporation Limited, (2002) 8 SCC 182 : (AIR 2002 SC 3404) where a distinction has been made (in paragraphs 76 and 77 of the said decision) between the ordinary powers of the President and the special powers in Articles 31A, 31C, 254(2) and 304(b) of the Constitution.
71. No doubt in view of Article 74(1) of the Constitution as amended by the 42nd amendment the President has to act in accordance with advice of the Council of Ministers, yet to our mind there is difference between the President of India and Government of India. In view of the clear pronouncement of the Constitution Bench decision in Kaiser-I-Hind Private Limited case (supra) Article 304(b) alongwith Article 254(2), Articles 31A and 31C constitute a distinct class and category of their own providing for the President's assent which is different from the normal assent envisaged under Article 111 of the Constitution. There is nothing to show that the President of India has given previous sanction to the Bill in connection with the impugned Act and all we can gather from the letter dated 19-1-2000 is that the Government of India has no objection to the introduction of the U. P. Tax of Entry of Goods Bill 2000 in the State Legislature. To our mind this does not meet the specific requirement of the proviso to Article 304(b) of the Constitution. There is not even a mention of the President of India in the aforesaid letter dated 19-1-2000. The said letter does not state that it has been issued under the authority of the President of India and hence we have to conclude that no previous sanction was given by the President of India to the Bill in connection, with the impugned Act. No doubt Article 255 of the Constitution validates an action even if the sanction was subsequently given by the President of India, but in the present case there is no averment that even subsequently the President gave assent.
72. However, even assuming that the President of India has given sanction under the proviso to Article 304(b) we are of the opinion that alone would not satisfy the requirement of Article 304(b) of the Constitution.
73. Article 304(b) states.
"Notwithstanding anything in Article 301 or Article 303, the Legislature of a State by law. ....................
(b) Impose such reasonable restrictions on the freedom of trade, commerce or intercourse with or within that State as may be required in the public interest.
Provided that no Bill or amendment for the purpose of Clause (b) shall be introduced or moved in the Legislature or a State without the previous sanction of the President."
74. We are of the opinion that the impugned Act is not saved by Article 304(b) of the Constitution.
75. It may be noticed that Article 304(b) requires that the restriction on freedom of trade, commerce and intercourse should be reasonable and in the public interest.
76. Hence even if the President of India has given previous sanction under the proviso to Article 304(b), the petitioner has further to establish that the restriction on the freedom of trade, commerce and intercourse are (i) reasonable and (ii) in the public interest.
77. The onus on establishing the reasonableness and that it is in public interest is on the respondent vide A.B. Abdul Kadir v. State of Kerala, AIR 1976 SC 182 (vide Paragraph 19) and (1980) 4 SCC 647 : (AIR 1981 SC 653) (vide paragraph 32).
78. We are of the opinion that the restrictions imposed by the impugned Act are not reasonable and they are not in the public interest, as they would hamper the progress and development of the national economy.
79. It may be reitereated that modern industry requires a large market. Article 301 envisages economic unity of the nation. India is one economic unit and hence restrictions cannot ordinarily be placed on free flow of trade and commerce throughout the territory of India as that would hamper the growth of a powerful, modern industry. The restrictions can only be placed by Parliament in public interest as provided in Article 302 of the Constitution.
Article 303(1) of the Constitution states:
"Notwithstanding anything in Article 302 neither Parliament nor the Legislature of a State shall have power to make any law giving, or authorising the giving of, any preference to one State over another, or making, or authorising the making of, any discrimination between one State and another, by virtue of any entry relating to trade and commerce in any of the Lists in the Seventh Schedule."
80. The above provision further enforces the general provision in Article 301 by providing that neither Parliament nor the State Legislature can make any law giving preference to one State over another or authorising discrimination between two States. Similarly, Article 304(a) provides that the State Legislature can impose a tax on goods imported from other States on 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.
81. Article 304(a) again gives further emphasis to Article 301 providing for the economic unity of India. Thus, the whole scheme in Articles 301 to 304 show that the Founding Fathers in their wisdom have repeatedly emphasised in these Articles that India is one economic unit and different States are not separate economic entities. The Founding Fathers realised in their wisdom that it is economic unity which is the basis of the political unity of the country. Without economic unity the country cannot survive as a united nation.
82. Article 301 must be construed in its historical prospect.
83. Before the coming of modern industry, society was mainly agricultural and there were small principalities and there was very little movement of goods from one area to another. The goods produced were mainly for self consumption by the producers (tenant farmers and petty artisans) and were not mainly commodities (i.e. goods for sale and not for self consumption)
84. In contrast today almost all goods which are produced by indian industry are commodities, that is, they are meant for sale and not for self consumption. Modern industry requires a large market and it cannot develop if the country is fragmented into small economic units. If one reads the history of Western Europe before the Industrial Revolution, one will find that countries like France, Germany, Italy etc. were fragmented into small principalities, each principality having its customs or toll barriers which obstructed the free flow of goods from one principality to another. Thus, before the French Revolution of 1789 in France there were a large number of principalities having toll barriers and there were toll taxes similar to (entry tax) after every 30 or 40 km throughout the territory of France. Similar was the condition in Germany which was fragmented into over 300 principalities before its unification under Bismark. This led to obstruction to the growth of modern industry, and hence was abolished by the enlightened leaders of those countries. The result was that there was thereafter rapid growth of industry and commerce in those countries.
85. In this connection we may refer to the decision of Mr. Justice Jackson of the U.S. Supreme Court in H.P. Hood & Sons Inc V Du Mond, 336 US 525 who observed :
"This principle that our economic unit is the Nation, which alone has the gamut of powers necessary to control of the economy, including the vital power of erecting customs barriers against foreign competition, has as its corollary that the states are not separable economic units. As the Court said in Baldwin v. Seelig, 294 US (511), 527, what is ultimate is the principal that ope State in its dealings with another may not place itself in a position of economic isolation'."
86. In this connection we may refer to the Commerce Clause in Article 1 Section 8(3) of the U.S. Constitution which states :
"Congress shall have power................. to regulate commerce with foreign nations and amongst the several states."
87. The above provision in the U.S. Constitution is no doubt different from Article 301 of our Constitution but the decisions of the U.S. Supreme Court relating to the commerce clause, have dealt with the evil of economic solation and protectionism while at the same time recognising that incidental burden on interstate commerce may be unavoidable when the state legislates to safeguard the health and safety of its people.
88. The Australian Constitution contains a provision which is more similar to Article 301 than the Commerce Clause in the U.S. Constitution Section 92 of the Australian Constitution states.
"Trade commerce and intercourse among the states shall be absolutely free."
89. Section 99 states that the Commonwealth "shall not by any law or regulation of trade, commerce or revenue give preference to one State or any part thereof over other States or any part thereof." Thus Section 92 of the Australian Constitution is similar to Article 301 of our Constitution, whereas Section 99 of the Australian Constitution is similar to Article 303(1) of our Constitution.
90. The decisions of the Australian High Court in this connection are hence apposite. They have been referred to in Chapter 5 of the Book 'Australian Federal Constitutional Law' by Colin Howard and Chapter 9 of the book on Australian Constitutional Law by Fajgenbaum & Hanks.
91. Thus in almost all countries having a written Constitution emphasis has been given to the economic unity of the country because without economic unity there cannot be political unity. Economic unity is the substratum on the basis of which political unity is erected. In a country like India in which there is so much diversity economic unity is absolutely essential in order to maintain and further the unity and integrity of the nation.
92. When we consider whether the impugned Act is in the public interest or not, we have to keep the above considerations in mind. In our opinion the impugned Act is not in the public interest as the public interest requires that a big and powerful modern industry is rapidly grown in this country so that India soon becomes a powerful, modern, industrial state (like U.S.A., or Europe). Unless India becomes a modern, powerful industrial state we will remain poor and hence will not get respect in the Comity of Nations. Today the real world is cruel and harsh. It respects power, not poverty or weakness. The truth is that Indians are not respected by Westerners not because the colour of our skin is black or brown but because our country is poor.
93. In this connection we may point out that when China and Japan were poor nations the Chinese and Japanese were derisively called yellow races by the westerners. Today they are powerful Industrial nations and now nobody can dare call Chinese and Japanese as yellow races.
94. Moreover, it is rapid industrialisation and growth of modern big industry which alone can generate the wealth which we require for providing for the welfare of our people, for setting up modern schools, engineering colleges, hospitals, scientific institutes, etc. Even a single primary school requires a huge amount of money of recurring nature towards payment of salary to the staff, school buildings, etc. We have to set up tens of thousands of such schools, Colleges, institutes, polytechnics, hospitals, etc. This money can only be generated if we set up a big and powerful industry and that is possible only if such industry has a large and vast market. Hence the impugned tax is certainly not in the public interest as it leads to economic fragmentation and economic isolation of the various states which comprise India and hence it will hamper the growth of big and modern industry. Hence in our opinion the impugned tax is against the public interest for the reasons given above.
95. No doubt invalidating the tax would affect the revenue of the State of U.P. but the nation is larger than the State. We have to first look at the interest of India, and place it above the interest of the State of U.P. However, it may be mentioned, as pointed out in para 8 of the supplementary rejoinder affidavit filed in reply to the supplementary counter affidavit of Shri B.P. Sonkar, the State Government is getting its share from the Excise Duty, Central Sales Tax, etc. from the Central Government, apart from getting substantial revenue from the petitioners towards U.P. Trade (Sales Tax). In para 6 of that affidavit it is mentioned that no facility whatsoever has been provided by the U.P. Government to Mathura Refinery for transportation of crude oil from outside U.P. which in fact is done by underground pipes built by the petitioner itself.
96. Sri Pharatji Agarwal, learned counsel for the petitioner in writ petition No. 486 of 2003 Moser Baer India Ltd. v. State of U.P. has invited our attention to the Supreme Court decision in S.M. Ram Lal & Co. v. Secretary to Government of Punjab 1969 UJ (SC) 373 and has submitted that the petitioner in this case is a 100% export oriented unit which has been established for the manufacture of data storage media by investing about Rs. 14.30 crores.
97. The project has been appraised by IFC Washington and various leading financial institutions of the country and international organizations like IFC Washington, E.M. Warburgh pincus, J.F. Electra Maritious, I.D.B.I., Exim and S.B.I., who are participating in this project.
98. This project will give a big boost to the development of information and Technology in U.P. and with passage of time will surpass the growth level of information Technology in the State of Andhra Pradesh, Tamil Nadu (Chennai) and Karnataka.
99. All the Machines for this project have been imported from foreign countries namely, Switzerland, Germany, etc. and none of them have been purchased within India. The Unit has been established in the Industrial Development Area of Greater NOIDA.
100. Sri Bharatji Agarwal has submitted that under Entry 52 of List II of the Seventh Schedule a tax on entry of goods into a local area can only before consumption, use or sale therein. He has submitted that the machinery imported was not for consumption, use of sale. The factory has been established where these machineries exist in their original form. Sri Agarwal relying on the judgment of the Supreme Court in S.M. Ram Lal & Co.'s case (supra) has submitted that the word 'use' in Entry 52 is sandwiched between the word 'consumption and sale and it must take colour from the context in which it occurs. Hence he has submitted that no entry tax can be charged on the machinery which has been installed in the petitioner's factory premises since they exist in their original form in the factory premises.
101. By the notification dated 18-6-2001 exemption has been granted from payment of entry tax by the State Government to the petitioner company being a 100% export oriented unit, and the dispute is hence confined prior to 18-6-2001. Even by the subsequent notification dated 18-2-2003 machinery being imported for the purposes of installing it in the factory has been exempted and hence no entry tax is being levied even on those units which are not 100% export oriented unit on the import of machinery with effect from 18-2-2003. Sri Agarwal submitted that in view of the decision in S.M. Ram Lal & Co.'s case (supra) even for the period prior to 18-2-2003 in respect of machinery installed in the petitioner factory no entry tax can be levied.
102. As already stated above, we are only going into the constitutional question in this case and hence we need not finally decide this additional point urged by Sri Bharatji Agarwal (or the other points urged by him) though the decision of the Supreme Court in S.M. Ram Lal & Co.'s case (supra) prima facie appears to support the contention of the learned counsel for the petitioner.
103. In Jindal Stripe Limited v. State of Haryana 2003 (9) SCC 60 : (2003 AIR SCW 5625) a two Judge Bench of the Supreme Court has referred the matter to a Constitution Bench since it was of the opinion that the concept of compensatory tax has been judicially evolved as an exception to the provisions of Article 301 and the parameters of this judicial concept were blurred after the decision of the smaller Benches in Bhagatram Rajeevkumar's case (supra) and State of Bihar v. Bihar Chamber of Commerce (supra).
104. However, this Court has not been restrained from deciding these cases and in fact the Constitution Bench of the Supreme Court to which the matter has been referred can have the benefit of our opinion also. Hence we are deciding these cases finally.
105. For the reasons given above this petition and all the connected/similar petitions are allowed. The impugned Act is declared violative of Articles 301 and 304 of the Constitution and is hence ultra vires.
106. Any amount collected under the said Act shall be refunded to the petitioners with 10% per annum interest from the date of realisation to the date of refund and the refund shall be made within two months from today. However, if the burden of the tax has been passed on by the petitioners to the consumers then the refund shall not be given to the petitioners of the tax realised as it will amount to unjust enrichment.