CWP No.8049 of 2008 1
IN THE HIGH COURT OF PUNJAB AND HARYANA AT
CHANDIGARH.
CWP No.8049 of 2008
Date of decision: 01.10.2008
M/s Indian Oil Corporation Limited
........Petitioner
Vs.
State of Haryana and another
-----Respondents
CORAM:- HON'BLE MR JUSTICE ADARSH KUMAR GOEL
HON'BLE MR JUSTICE AJAY TEWARI
Present Mr. Puneet Bali, Mr. Ashu M.Punchhi, Mr.K.LGoyal, Mr. Sandeep Goyal & Mr. Avneesh Jhingan, Advocates for the petitioner.
Mr. Uday Lalit, Sr. Advocate
with Mr. Ajay Chitale, Advocate and
Mr. SK Garg Narwana, Addl.A.G.Haryana
for the respondents.
Adarsh Kumar Goel,J.
1. This petition seeks declaration to the effect that the Haryana
Tax on Entry of Goods into Local Areas Act, 2008 (hereinafter referred to
as the 2008 Act') is unconstitutional and void.
2. Case set out in the petition is that the petitioner was carrying on
business of refining crude oil and manufacturing petroleum products for
sale. It has its refinery at Panipat in Haryana for which crude oil is partly
imported from foreign countries and partly supplied from Bombay High.
The crude oil is unloaded through Single Buoy Mooring (SBM) facility in CWP No.8049 of 2008 2
the Gulf of Kutch (off the coast of Gujarat). Submarine pipe lines are linked
to Panipat refinery through underground pipeline network for which no
facility or service is provided by the State of Haryana.
3. On 5.5.2000, the State of Haryana issued Haryana Local Area
Development Tax Ordinance 2000 (Ordinance No.10 of 2000). The
Ordinance was later replaced by Haryana Local Area Development Tax Act,
2000. Therein, provision was made for levy and collection of tax on entry of
goods in local area. The validity of the said Act was challenged on the
ground that it violated Articles 301 and 304 of the Constitution. CWP
No.6630 of 2000 (Jindal strips Limited and another v. State of Haryana
and others) and connected petitions were dismissed by this Court on
21.12.2001. The said judgment is reported in (2003) 129 STC 534.
Following the judgments of the Hon'ble Supreme Court, inter-alia, in M/s
Bhagatram Rajeev Kumar v. Commissioner of Sales Tax, MP (1995)
Supp.1 SCC 673 and State of Bihar v. Bihar Chamber of Commerce,
(1996) 9 SCC 136, this Court upheld the validity of the said Act. It was held
that the entry tax was compensatory as per parameters laid down by the
Hon'ble Supreme Court in the said judgments and thus, did not violate
Articles 301/304 of the Constitution. On appeal to the Hon'ble Supreme
Court, the matter was referred to the Constitution Bench in Civil Appeal
No.3453 of 2002 vide order dated 26.9.2003. The said order is reported as
Jindal Strips Ltd. v. State of Haryana, (2003) 8 SCC 60. On 13.4.2006.
The Constitution Bench delivered its judgment reported as Jindal stainless
Limited (2) and another v. State of Haryana and others, (2006) 7 SCC
241 (hereinafter referred to as the judgment in "Jindal Stainless Limited CWP No.8049 of 2008 3
(2)") and reversed the earlier judgments in M/s Bhagat Ram Rajeev
Kumar and Bihar Chamber of Commerce (supra). The Constitution
Bench laid down the ingredients of compensatory tax as being value of
direct, measurable and quantifiable special benefits provided by the State to
tax payers on the basis of equivalence. The matter was thereafter placed
before a Division Bench of Hon'ble the Supreme Court for decision in the
light of judgment of the Constitution Bench. On 14.7.2006, the Division
Bench of the Hon'ble Supreme Court in its order in Jindal Stainless
Limited v. State of Haryana (2006) 7 SCC 271, observed that relevant
data had not been placed before the High Court for determining the nature
of tax and asked the High Court to deal with the basic issue whether the
levy was compensatory in nature. Accordingly, the State filed data by
means of affidavits and vide order dated 14.3.2007, (reported as Jindal
Strips Limited v. State of Haryana and others, 2007(2) PLR 76 (to be
called Jindal Strips Limited (3)), a Division Bench of this Court held that
the levy was not compensatory in character and amounted to restriction on
free flow of trade and commerce and violative of Articles 301/304 of the
Constitution of India.
4. On 16.4.2008, the State of Haryana repealed the 2000 Act and
enacted Haryana Tax on entry of Goods into Local Areas Act, 2008,
impugned in the present petition. According to the petitioner, the said Act
was unconstitutional being violative of Articles 301 and 304 of the
Constitution as the tax levied therein was not compensatory. The tax
envisaged therein was for augmenting general revenue of the State without
any facility or special benefits to the payers. No special service, benefit or CWP No.8049 of 2008 4
facility whatsoever was rendered to the petitioner for transportation of crude
oil to Panipat refinery. Provision for validation of tax already collected
under the 2000 Act, by treating the same to have been collected under the
2008 Act, without ensuring appropriation of amount collected and already
spent otherwise than by way of providing services to the payers and for the
reasons for which the tax was held to be non-compensatory earlier, was
liable to be struck down.
5. In the reply filed, the State has defended the validity of the Act
by submitting that the State Legislature had necessary competence under
Entry 52 List II of the Seventh Schedule to the Constitution. The levy
provided under the Act was to facilitate trade and commerce in the State and
the said levy was facially and patently compensatory in character and no
violation of Articles 301 or 304 was involved. The assesses were to yet file
returns or deposit tax and at this stage, it could not be said that levy will not
satisfy the working test laid down by the Hon'ble Supreme Court in
Automobile Transport Limited v. State of Rajasthan, 1963(1) SCR 491.
Broad correlation between the tax generated and value of service was
required. The new Act was an improvement over the earlier Act. The
amount collected is to be credited to a special fund and is to be utilised for
infrastructure development for free flow of trade and commerce under the
control of high-powered Board. New legislation has removed the basis of
the judgment of this Court dated 14.3.2007. The refinery of the petitioner
may be receiving its supply through the underground net work of pipes but
for transportation of finished product, petrol, diesel, LPG, Kerosene and
bitumen and marketing thereof required infrastructure facilities like roads
etc. throughout the State.
CWP No.8049 of 2008 5
6. We have heard learned counsel for the parties and perused the
record.
7. Main contention raised on behalf of the petitioner is that the
2008 Act is in substance re-enactment of the 2000 Act and suffers from the
same vice as its predecessor. Provision for validation of the tax collected
also suffers from the same vice as the old Act which was held to be
violative of Articles 301/304 of the Constitution. Reliance was mainly
placed on Constitution Bench judgment of the Hon'ble Supreme Court in
Jindal Stainless Limited (2)(supra), judgment of a Division Bench of this
Court dated 14.3.2007 in Jindal Strips Limited (3) (supra), judgment of
the Hon'ble Supreme Court in Virender Singh Hooda and others v. State
of Haryana and another, (2004) 12 SCC 588, Hardev Motor Transport
v. State of MP and others, (2006) 8 SCC 613 and Indian Aluminum Co.
and others v. State of Kerala and others, (1996) 7 SCC 637.
8. Learned counsel appearing on behalf of the State opposed the
submission on behalf of the petitioners and submitted that the 2008 Act had
remedied the defects pointed out in the judgment of this Court and the levy
under the new Act was compensatory in nature. As against the rate of 10%,
the rate now notified was 2%. Appeal against judgment of this Court was
pending in the Hon'ble Supreme Court. Rules had not yet been notified and
thus, the Act had not been made functional. On this ground, challenge to the
Act was premature. It was also submitted that provision for validation was
also valid because of deeming fiction providing for levy under the old Act
to be treated as levy under the new Act. However, it was stated that out of a
sum of about Rs.1600 crores collected under the old Act, a sum of Rs.240 CWP No.8049 of 2008 6
crores was available to be spent under the new Act and rest of the amount
had already been spent as per the old Act. Reliance was also placed on
judgment of the Hon'ble Supreme Court in Vijayalashmi Rice Mill and
others v. Commercial Tax Officers, Palakol and others, (2006) 6 SCC
763, in para 25 to the effect that the decision of Constitution Bench could
not be interpreted to mean that sea change which had taken place in the
concept of fee had vanished and old concept of fee had been restored and
that it was required to be established that particular individual was rendered
specific services. The judgment of the Constitution Bench was not regarding
the nature of fee and could not be regarded as an authority explaining nature
of fee.
9. Before we go into the issue of validity of the Act, it would be
necessary to refer to the key provisions of the 2008 Act:
"2. Definitions.
In this Act, unless the context otherwise requires,-
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(l). "entry of goods into a local area" means taking or bringing goods into a local area from any place outside the State or from any place inside any other local area in the State;
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(t). "local area" means an area within the limits of a Municipal Corporation established under the Haryana Municipal Corporation Act, 1994 (Haryana Act 16 of CWP No.8049 of 2008 7
1994), or a municipality established under the Haryana Municipal Act, 1973 (Haryana Act 24 of 1973), or a Town Board or a Cantonment Board established under the Cantonment Act, 1924 (Central Act 2 of 1924), or a Zila Parishad established under the Haryana Panchayati Raj Act, 1994 (Haryana Act No. 11 of 1994), or any other local authority constituted or continued under any law for the time being in force;
Explanation:-Notwithstanding the above definition of local area, the whole State, for the purposes of section 25, shall be treated as one local area.
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(zm). "value of the goods" means the purchase value of such goods, that is to say, the purchase price at which an importer has purchased the goods inclusive of charges borne by him as cost of transportation, packing, forwarding and handling charges, commission, insurance, taxes, duties and the like, or if such goods have not been purchased by him, the prevailing market price of such goods in the local area;
xx xx xx xx
3 Levy of tax.
(1) For the purpose of development of trade, commerce and industry and for creation and maintenance of infrastructure facilities for free flow of trade and commerce in the State, there shall be levied and collected a tax on entry of CWP No.8049 of 2008 8
all goods, except goods specified in Schedule 'A' into a local area for consumption, use or sale therein, from any place outside that local area, at such rate not exceeding five percent 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.
(2) The tax levied under sub-section (1) shall be paid by the importer :
Provided that an importer shall not be liable to pay tax so long as the aggregate value of taxable goods he brings into or receives on their entry into any local area does not, in a year, exceed ten lakh rupees or such other sum as the State Government may, by notification, specify:
Provided further that an importer who has once become liable to pay tax under this Act shall continue to be so liable until the expiry of three consecutive years during each of which the aggregate value of any taxable goods he brings into or receives on their entry into any local area does not exceed the amount specified in the first proviso to this sub-section.
Explanation. - Where the goods are received on its entry into a local area by a person other than an importer, the importer, if any, who further receives the goods from such person shall be deemed to have received the goods on entry into the local area.
Provided further that an importer who incurred liability for payment of tax under the old Act, whose certificate of registration continues to be intact till the time of repeal of the CWP No.8049 of 2008 9
old Act, shall continue to be so liable for tax under this Act as well.
(3) The tax shall be levied, assessed and collected in such manner and in such instalments, if any, as may be prescribed.
xx xx xx xx
25. Utilization of the proceeds of the levy.
(1) The proceeds of the levy under this Act shall be appropriated to the Fund to be notified by the Government and shall be utilized exclusively for the development or facilitating the trade, commerce and industry in the State which shall include the following:-
(a) construction, development and maintenance of roads and bridges for linking the market and
industrial areas;
(b) construction, development and maintenance of roads linking the markets and industrial areas to railway stations, wherever possible ;
(c) construction, development and maintenance of railway over-bridges ;
(d) providing finance, aids, grants and subsidies to financial, industrial and commercial units;
CWP No.8049 of 2008 10
(e) creating infrastructure for supply of electricity and water to industries and other commercial complexes;
(f) creating development and maintenance of other infrastructure for the furtherance of trade, commerce and industry in general;
(g) providing finance, aids, grants and subsidies for creating, developing and maintaining pollution free environment in the concerned areas;
(h) any other purpose connected with the development of trade, commerce and industry or for facilities relating thereto which the State Government may specify by notification;
(i) providing finance, aids, grants and subsidies to local bodies and government agencies for the
purposes specified in clauses (a),(c), (d),(e) and (f).
(2) The tax levied and collected under this Act shall be credited to the Haryana Trade Development Fund and shall exclusively be used for facilitating trade, commerce and industry. The amount so realised shall not be used for the purposes other than those specified in sub-section (1).
(3) The State Government shall, by notification specify the manner of deposit of tax under appropriate Heads of Accounts and the manner in which the proceeds of the levy shall be utilized exclusively for the development of trade and commerce in the State.
CWP No.8049 of 2008 11
26. Constitution of Board and its functions.
(1) There shall be a Board consisting of a Chairman and following ex-officio members:-
(a) Chief Minister, Haryana : Chairman (b) Chief Secretary, Haryana : ex-officio member (c) Finance Secretary, Haryana : ex-officio member (d) Financial Commissioner and : ex-officio member Principal Secretary to
Government Haryana, Excise and
Taxation Department.
(e) Financial Commissioner and : ex-officio member Principal Secretary to
Government Haryana,
Development and Panchayats
Department.
(f) Commissioner, Urban Local : ex-officio Bodies, Haryana Member (g) Excise and Taxation : Member- Commissioner, Haryana Secretary (h) Additional Excise and Taxation : Chief Executive Commissioner / Joint Excise and Officer Taxation Commissioner,
Haryana.
(2) The Headquarter of the Board shall be at Chandigarh.
(3) The Board shall perform the following functions:- CWP No.8049 of 2008 12
(i) It shall ensure that the funds generated under this Act shall be utilized exclusively for facilitating trade, commerce and industry in the State.
(ii) It shall identify the areas which require immediate development or maintenance of infrastructure
facilities out of proceeds of tax.
(iii) It shall accordingly recommend allotment of proceeds of tax for the purposes specified in sub- section (1) of section 25.
(iv) It shall recommend changes in the rate of tax in order to keep the levy as per the guidelines issued in this behalf from time to time.
(v) It shall ensure that the proceeds of tax collected under this Act are not much more than the amount actually required for development of local areas.
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33. Validation.
Notwithstanding any judgement, decree or order of any Court, Tribunal or Authority, all actions taken, things done, rules made, notifications issued or purported to have been taken, done, made or issued and tax levied, assessed, collected, realised, received or liability accrued under the Haryana Local Area Development Tax Act, 2000 (13 of 2000), shall be deemed to have been validly taken, done, made, issued, levied, assessed, collected, realised, received or accrued under this Act, as if this Act were in force at all material times and no suit CWP No.8049 of 2008 13
or other proceeding shall be maintained or continued in any Court or before Tribunal or any Authority for the refund of entry tax."
10. We may also refer to the key provision of the 2000 Act i.e.
Section 22, which was subject matter of consideration in the earlier Division
Bench judgment of this Court in Jindal Strips (3) (supra):-
"22. Utilisation of proceeds of tax - The tax collected under this Act shall be utilized by the State Government through the local bodies in such manner that a substantial portion of the tax collected not less than sixty percent is utilized for development facilitating free-flow of trade and commerce of the payers of the tax individually or as a class.
Explanation - In this section 'development facilitating free-flow of trade and commerce' means developing and maintaining infrastructure facilities facilitating the free-flow of trade and commerce such as roads, bridges, culverts, sewerage, drainage, sanitation, waste management, electricity, drinking water and other infrastructure facilities."
11. Whether the levy under the 2000 Act envisaged was
compensatory or not was the question considered by this Court in Jindal
strips Limited (3) (supra). Finding recorded therein is extracted below for
ready reference:-
"26. From the rival submissions of the learned counsel for the parties and in the light of direction of the Hon'ble Supreme Court, we are required to deal with the issue whether the impugned levy was compensatory in nature having regard to the judgment of the Constitution Bench Jindal (2). CWP No.8049 of 2008 14
The question is whether the impugned Act meets the facial test laid down by the Hon'ble Supreme Curt in Jindal (2) and whether the data placed on record by the State shows that the impugned levy functionally is compensatory and provides quantifiable or measurable benefit to the payers of the tax?
27. A perusal of statutory provisions shows that the levy of tax is on entry of goods into a local area for consumption, use or sale and the tax is payable by the importer with reference to value of goods at a specified rate. The tax collected is to be distributed by the State Government among the local bodies. The same is to be utilized for development facilitating free flow of trade and commerce on infrastructural facilities such as roads, bridges, culverts, sewerage, drainage, sanitation, waste management, electricity, drinking water and other infrastructural facilities. At least 60% of the amount is to be utilized. The Board is to ensure balanced development of the local areas and recommend allotment of proceeds of tax and changes in the rate of tax. The Board is also to ensure that the proceeds of tax are not more than the amount actually required for development of local areas. The petitioners have advanced two grounds for submitting that the impugned levy does not meet the facial test:-
(i) Compulsion to utilize the tax collected is only to the extent of 60% and the amount of 40% need not be accounted for and
(ii) Infrastructural facilities facilitating free flow of trade and commerce may not in fact, have any
connection with the facilities for trade and
commerce.
Waste management, sanitation, drainage, water, electricity may be unconnected with the facilities for the purpose of trade. The said facilities may be before general CWP No.8049 of 2008 15
development of the State, though termed as facilitating trade and commerce. There is no separate earmarking of the facilities planned for the traders or facilities generally for water supply, hygiene, sanitation, waste management etc.
28. The defence on behalf of the State is that the statutory provisions for constituting a Board and requiring the Board to ensure that the tax collected was not much more than the amount actually required and provision for utilizing at least 60% for development facilitating free flow of trade and commerce of the payers of the tax was not enough to meet the facial test, if the payers of the tax are taken to be the ultimate payers to whom the burden was passed on which include farmers, transporters and consumers.
29. We find merit in the contention raised on behalf of the petitioners. The levy is not to meet the cost of any specific facility already provided or planned to be provided. The parameters clearly laid down in Jindal (2) (particularly paras 16 and 41 to 45) are that compensatory tax represent the costs incurred in procuring facilities/services on the principle of "pay for value". It is a charge for offering trade facilities. It adds to value of trade and commerce. It is based on the principle of equivalence. It must have a broad proportion to the benefit derived to defray the cost of regulation or to meet the outlay incurred for some special advantage to trade and commerce and intercourse. The impugned levy initially was meant to be for assistance to local areas for their development generally and the amendment brings about only a superficial change in the language while retaining the basic character of the levy as a source for raising general development. In this view of the matter, we are unable to hold that the facial test is met. Mere specification of the 60% of the amount being in line with judgments dealing with the levy of fee is of no consequence when the very subject matter of utilization cannot be treated as CWP No.8049 of 2008 16
any special direct or exclusive service or benefit to the payer of the tax.
30. In view of above, the data given by the State in respect of the amount spent does not stand scrutiny. As rightly pointed out by learned counsel for the petitioners, the expenditure incurred is 17% of the total collection and the expenditure is far less than the collection of much more amount under other statutes levying compensatory taxes to cover the cost of atleast some of the very same services. The burden of proof on the State cannot be held to have been discharged." (Underlining is ours).
12. We may now deal with the issue of validity of the impugned
Act.
13. A reference to the provisions of the Act reproduced above
shows that Section 3 is the charging section which provides for levy of tax
on entry of goods specified therein from any place outside the local area at a
rate not exceeding 5% of the value of the goods as may be specified by the
State Government. The tax is to be paid by the importer. Section 25
provides for utilization of proceeds of levy which are to be appropriated to a
fund to be notified by the Government for development or facilitating trade,
commerce and industry. Trade, commerce and industry have been given
inclusive meaning in section 25 to include construction, development and
maintenance of roads and bridges for linking the market and industrial
areas; construction, development and maintenance of roads linking the
markets and industrial areas to railway stations, construction, development
and maintenance of railway over-bridges; providing finance, aids, grants
and subsidies to financial, industrial and commercial units; creating CWP No.8049 of 2008 17
infrastructure for supply of electricity and water to industries and other
commercial establishments; creating development and maintenance of other
infrastructure for the furtherance of trade, commerce and industry in
general; providing finance, aids, grants and subsidies for creating,
developing and maintaining pollution free environment in the concerned
areas; any other purpose connected with the development of trade,
commerce and industry or for facilities relating thereto which the State
Government may specify by notification; and providing finance, aids, grants
and subsidies to local bodies and government agencies for the purposes
specified in the said section.
14. Section 25, is thus, the key provision for determining the
question whether the entry tax sought to be levied is compensatory in nature
and is, thus, saved under Article 304 of the constitution. In our view, levy
cannot be held to be compensatory in character if the object is to create a
fund for purposes specified in Section 25 of the Act. The provision of
Section 25 of the present Act, though worded slightly different from
Section 22 of the 2000 Act, in substance, does not change the character of
levy and the reasons which weighed with this Court in holding the levy
under section 22 of the 2000 Act to be non-compensatory in character,
substantially apply for our view that levy under section 25 is also not
compensatory. It will be appropriate to make a reference to the legal
position laid down by the Hon'ble Supreme Court on this aspect.
15. Test for validity of tax as per Article 301 of the Constitution
has since been restated in recent Constitution Bench judgment in Jindal
Stainless Limited (2) (supra).
CWP No.8049 of 2008 18
16. Earlier, in Atiabari Tea Co. Limited v. State of Assam and
others, AIR 1961 SC 232, the majority held that tax which "directly and
immediately" restricts trade, would fall under Article 301 of the
Constitution. In Automobile Transport Limited (supra), larger Bench
explained the majority view in Atiabari Tea Co. Limited (supra) by
observing that freedom under Article 301 has to be understood in the
context of an orderly society and thus, some degree of regulatory control
was legitimate and could not be taken to interfere with the freedom under
Article 301. Regulatory measures or measures imposing compensatory taxes
for use of trading facilities were held to be permissible.
17. In Jindal stainless Limited (2) (supra), after referring to
earlier judgments in Atiabari Tea Co. Limited and Automobile
Transport (supra), it was observed:-
9. The judgment of this Court in Atiabari Tea Co, AIR 1961 SC 232 was delivered by a Constitution Bench of five Judges. However, an exception to Article 301 and its operation was judicially crafted in Automobile Transport, AIR 1962 SC 1406. In that case, the challenge was to the Rajasthan Motor Vehicles Taxation Act, 1951. The challenge under Article 301 was rejected by the Constitution Bench of seven Judges of this Court by holding :
"The taxes are compensatory taxes which instead of hindering trade, commerce and intercourse facilitate them by providing roads and maintaining the roads...."
It was observed that:
"If a statute fixes a charge for a convenience or service provided by the State or an agency of the State, and imposes it upon those who choose to avail themselves of CWP No.8049 of 2008 19
the service or convenience, the freedom of trade and commerce may well be considered unimpaired."
Thus, the concept of "compensatory taxes" was propounded. Therefore, taxes which would otherwise interfere with the unfettered freedom under Article 301 will be protected from the vice of unconstitutionality if they are compensatory.
10. In Automobile Transport, it was said that:
"a working test for deciding whether a tax is compensatory or not is to enquire whether the trade is having the use of certain facilities for the better conduct of its business and paying not patently much more than what is required for providing the facilities".
It was further observed:
"16. To sum up: the pre-1995 decisions held that an exaction to reimburse/ recompense the State the cost of an existing facility made available to the traders or the cost of a specific facility planned to be provided to the traders is compensatory tax and that it is implicit in such a levy that it must, more or less, be commensurate with the cost of the service or facility. Those decisions emphasised that the imposition of tax must be with the definite purpose of meeting the expenses on account of providing or adding to the trading facilities either immediately or in future, provided the quantum of tax is based on a reasonable relation to the actual or projected expenditure on the cost of the service or facility. However, the post-1995 decisions in Bhagatram case and in Bihar Chamber of Commerce now say that even if the purpose of imposition of the tax is not merely to confer a special advantage on the traders but to benefit the public in general including the traders, that levy can still be considered to be compensatory. According to this CWP No.8049 of 2008 20
view, an indirect or incidental benefit to traders by reason of stepping up the developmental activities in various local areas of the State can be brought within the concept of compensatory tax, the nexus between the tax known as compensatory tax and the trading facilities not being necessarily either direct or specific.
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37. The concept of compensatory tax is not there in the Constitution but is judicially evolved in Automobile Transport as a part of regulatory charge. Consequently, we have to go into concepts and doctrines of taxing powers vis--vis regulatory powers, particularly when the concept of compensatory tax was judicially crafted as an exception to Article 301 in Automobile Transport .
Difference between exercise of Taxing and Regulatory Power
38. In the generic sense, tax, toll, subsidies, etc. are manifestations of the exercise of the taxing power. The primary purpose of a taxing statute is the collection of revenue. On the other hand, regulation extends to administrative acts which produces regulative effects on trade and commerce. The difficulty arises because taxation is also used as a measure of regulation. There is a working test to decide whether the law impugned is the result of the exercise of regulatory power or whether it is the product of the exercise of the taxing power. If the impugned law seeks to control the conditions under which an activity like trade is to take place then such law is regulatory. Payment for regulation is different from payment for revenue. If the impugned taxing or non- CWP No.8049 of 2008 21
taxing law chooses an activity, say, movement of trade and commerce as the criterion of its operation and if the effect of the operation of such a law is to impede the activity, then the law is a restriction under Article 301. However, if the law enacted is to enforce discipline or conduct under which the trade has to perform or if the payment is for regulation of conditions or incidents of trade or manufacture then the levy is regulatory. This is the way of reconciling the concept of compensatory tax with the scheme of Articles 301, 302 and 304. For example, for installation of pipeline carrying gas from Gujarat to Rajasthan, which passes through M.P., a fee charged to provide security to the pipeline will come in the category of manifestation of regulatory power. However, a tax levied on sale or purchase of gas which flows from that very pipe is a manifestation of exercise of the taxing power. This example indicates the difference between taxing and regulatory powers (see Essays in Taxation by Seligman).
Difference between "a tax", "a fee" and "a CompensatoryTax"
Parameters of Compensatory Tax"
"39. As stated above, in order to lay down the parameters of a compensatory tax, we must know the concept of taxing power.
40. Tax is levied as a part of common burden. The basis of a tax is the ability or the capacity of the taxpayer to pay. The principle behind the levy of a tax is the principle of ability or capacity. In the case of a tax, there is no identification of a specific benefit and even if such identification is there, it is not capable of direct measurement. In the case of a tax, a particular advantage, if it exists at all, is incidental to the State's CWP No.8049 of 2008 22
action. It is assessed on certain elements of business, such as manufacture, purchase, sale, consumption, use, capital, etc. but its payment is not a condition precedent. It is not a term or condition of licence. A fee is generally a term of a licence. A tax is a payment where the special benefit, if any, is converted into common burden.
41. On the other hand, a fee is based on the "principle of equivalence". This principle is the converse of the "principle of ability" to pay. In the case of a fee or compensatory tax, the "principle of equivalence" applies. The basis of a fee or a compensatory tax is the same. The main basis of a fee or a compensatory tax is the quantifiable and measurable benefit. In the case of a tax, even if there is any benefit, the same is incidental to the government action and even if such benefit results from the government action, the same is not measurable. Under the principle of equivalence, as applicable to a fee or a compensatory tax, there is an indication of a quantifiable data, namely, a benefit which is measurable.
42. A tax can be progressive. However, a fee or a compensatory tax has to be broadly proportional and not progressive. In the principle of equivalence, which is the foundation of a compensatory tax as well as a fee, the value of the quantifiable benefit is represented by the costs incurred in procuring the facility/services, which costs in turn become the basis of reimbursement/recompense for the provider of the services/facilities. Compensatory tax is based on the principle of "pay for the value". It is a sub-class of a "a fee". From the point of view of the Government, a compensatory tax is a charge for offering trading facilities. It adds to the value of trade and commerce which does not happen in the case of a tax as such. A tax may be progressive or proportional to income, property, CWP No.8049 of 2008 23
expenditure or any other test of ability or capacity (principle of ability). Taxes may be progressive rather than proportional. Compensatory taxes, like fees, are always proportional to benefits. They are based on the principle of equivalence. However, a compensatory tax is levied on an individual as a member of a class, whereas a fee is levied on an individual as such. If one keeps in mind the "principle of ability" vis-à-vis the "principle of equivalence", then the difference between a tax on one hand and a fee or a compensatory ax on the other hand can be easily spelt out. Ability or capacity to pay is measurable by property or rental value. Local rates are often charged according to the ability to pay. Reimbursement or recompense are the closest equivalence to the cost incurred by the provider of the services/facilities. The theory of compensatory tax is that it rests upon the principle that if the Government by some positive action confers upon individual(s), a particular measurable advantage, it is only fair to the community at large that the beneficiary shall pay for it. The basic difference between a tax on one hand and a fee/compensatory tax on the other hand is that the former is based on the concept of burden whereas compensatory tax/fee is based on the concept of recompense/reimbursement. For a tax to be compensatory, there must be some link between the quantum of tax and the facility/services. Every benefit is measured in terms of cost which ahs to be reimbursed by compensatory tax or in the form of compensatory tax. In other words, compensatory tax is a recompense/reimbursement.
43. In the context of article 301, therefore, compensatory tax is a compulsory contribution levied broadly in proportion to the special benefits derived to defray the CWP No.8049 of 2008 24
costs of regulation or to meet the outlay incurred by some special advantage to trade, commerce and intercourse. It may incidentally bring in net revenue to the Government but that circumstance is not an essential ingredient of compensatory tax.
44. Since compensatory tax is a judicially evolved concept, understanding of the concept, as discussed above, indicates its parameters."
45. 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 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 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 301 is violated.
Burden on the State
46. Applying the above tests/parameters, whenever a law is impugned as violative of Article 301 of the Constitution, the Court has to see whether the impugned enactment facially or patently indicates quantifiable data CWP No.8049 of 2008 25
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 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 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 AIR) of the decision in Khyerbari Tea Co. Limited v. State of Assam, AIR 1964 SC 925.
a. Scope of articles 301, 302 and 304 vis-à-vis
compensatory Tax.
47. 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 Atiabari Tea 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 301, 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 impugned law on inter-State trade and commerce as well as intra-State trade and commerce.
CWP No.8049 of 2008 26
48. 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 operation 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 the freedom guaranteed under Article 301? If the effect is to facilitate free flow of trade and commerce then it is regulation and 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 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:
(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 prohibition contained in Article 303(1) because the opening words of Article 304 contain a non obstante clause both to article 301 and Article 303.
(b) While 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.
(c) An additional requisite for the exercise of the power under Article 304(b) by the State Legislature CWP No.8049 of 2008 27
is that previous Presidential sanction is required for such legislation."
(Underlining is ours).
18. Thus, the levy has to be for reimbursement of actual or
projected expenditure. The functional test does not depend on enforcement
of the Act. If the State is unable to show co-relation between levy and the
cost of existing facility or facility planned to be provided by producing the
relevant data, it cannot be a ground to hold that the petition is premature.
This is clear from observations of Hon'ble the Supreme Court in paras 41
and 43 reproduced above. The plea raised on behalf of the State itself shows
that the State has not made any estimate for the projected expenditure nor
has sought to justify any actual expenditure on the cost of service or facility
to reimburse which the levy is being imposed. The burden of proof to justify
the levy as compensatory is on the State, as observed in para 46 of the
Constitution bench judgment. The key provision of the Act i.e. Section 25
fails to meet the facial test as there is no quantifiable data on the basis of
which the nature of tax can be held to be compensatory. There is no
quantifiable or measurable benefit. Provisions are clearly ambiguous and are
of nature of general development. Mere mention of words "exclusively for
development or facilitating trade, commerce and industry" are not enough to
satisfy the test laid down for holding the levy to be compensatory in
character. There is no tangible data to ascertain that service is planned to be
provided, envisages quantifiable and measurable benefit. On the other hand,
the levy is for general development and incidental benefit which is not
measurable does not meet the principle of equivalence. Such a levy unless CWP No.8049 of 2008 28
saved under Article 304, will be ultra vires Article 301 of the Constitution
on the principles laid down by the Constitution Bench. For the same
reasons, provisions of Section 33 validating the levy under the 2000 Act to
retain the amount collected for which no specific services were held to have
been rendered will also be hit by Article 301 of the Constitution. It has not
been disputed that out of a sum of Rs.1600 crores already collected, only a
sum of Rs.240 crores was available and the remaining had already been
spent. In absence of any estimate of services to be provided or projected to
be provided, in accordance with the purposes which may make the levy to
be compensatory in character under Article 301 of the Constitution, the
impugned levy has to be held to be unconstitutional.
19. Accordingly, we allow this petition and declare the provisions
of the Haryana Tax On Entry of Goods into Local Areas Act, 2008 to be
unconstitutional and void.
(Adarsh Kumar Goel)
Judge
October 01, 2008 (Ajay Tewari) 'gs' Judge