The Hindu Business Line : A world broken up into fragments

On April 13, a five-judge Bench of the apex court decided the Jindal Stainless Ltd vs State of Haryana case. An important verdict, it was, because of the focus on local levies. First the story: Jindal Strips Ltd (now known as Jindal Stainless Ltd) manufactures products in Haryana. The company bought raw materials from outside the State; and sent finished products to other States on consignment or stock transfer basis.

The State Government brought in the Haryana Local Area Development Tax Act with effect from May 5, 2000. It was for levy and collection of tax on the entry of goods into the `local areas' of the State for consumption or use therein. For this purpose, the entire State was divided into local areas. Seems like an instance of world `broken up into fragments by narrow domestic walls,' which Rabindranath Tagore wishes to steer clear of in a Gitanjali poem titled `Mind Without Fear'.

"The Act covers not only vehicles bringing goods into the State but also vehicles carrying goods from one local area to another. However, those who pay sales tax to the State are exempt from payment of entry tax," reads the text of the apex court judgment. Section 22 of the Act stated that the tax collected should be distributed by the State among the local bodies to be utilised for the development of local areas. However, in September 2003, this section was amended clarifying that the tax levied and collected should be utilised for facilitating free flow of trade and commerce.

When the Department demanded tax of Jindal, the company challenged the Act as being violative of Article 301 and not saved by Article 304 of the Constitution.

Article 301, as you can see on http://lawmin.nic.in, reads: "Freedom of trade, commerce and intercourse — subject to the other provisions of this Part, trade, commerce and intercourse throughout the territory of India shall be free."

And Article 304 is about `restrictions on trade, commerce and intercourse among States'. Accordingly, a State Legislature may impose on goods imported from other States or Union territories any tax to 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; and 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.

`compensatory taxes'

One of the precedents that finds mention in the judgment is the Atiabari Tea Co case, where the Assam Taxation (on goods carried by Roads and Inland Waterways) Act, 1954 had come under challenge. The Act was declared void then by a Constitution Bench of five judges, saying that there was a direct restriction on the freedom of trade.

"An exception to Article 301 and its operation was judicially crafted" in the Automobile Transport case, where the Rajasthan Motor Vehicles Taxation Act, 1951 was challenged under Article 301. The challenge was rejected by the Constitution Bench of seven Judges of the Supreme Court; it was held that "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: "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 the service or convenience, the freedom of trade and commerce may well be considered unimpaired."

Thus came into being the concept of `compensatory taxes', whereby taxes that otherwise interfere with the unfettered freedom under Article 301 will be protected from the vice of unconstitutionality if they are compensatory. The verdict had laid down `a working test for deciding whether a tax is a compensatory or not' thus: "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".

`Some connection' sufficient!

Right from 1962 up to 1995, this working test was applied in relation to motor vehicles taxes for deciding whether the levy was compensatory or not. However, after 1995, "some of the principles set out stood deviated from when the principle of compensatory tax was applied to the entry tax in the Bhagatram case," where the law under challenge was M.P. Sthaniya Kshetra Me Mal Ke Pravesh Par Kar Adhiniyam, 1976.

A Bench of three judges that decided the case went on to say: "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 dealers directly or indirectly the levy cannot be impugned as invalid".

The dictum in the Bhagatram case was relied upon when a Bench of two judges decided the Bihar Chamber of Commerce case; it was reiterated that `some connection' between the tax and the trading facilities extended to dealers directly or indirectly was sufficient to characterise it as compensatory tax.

The court was of the view that the State provided several facilities to the trade, such as laying and maintenance of roads, waterways, markets and so on; on that premise, it was held that the entry tax was compensatory in nature. "The learned judges did not consider it necessary to put the burden on the State to furnish the details of facilities provided to the traders and the expenditure incurred or incurrable thereafter," narrates the recent verdict, citing the earlier decision.

decision-divide and resolution

In sum, the pre-1995 decisions took the view 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. Also, that the quantum of tax be based on a reasonable relation to the actual or projected expenditure on the cost of the service or facility.

In contrast, the post-1995 decisions, such as in the Bhagatram case and the Bihar Chamber of Commerce case, said that even if the purpose of imposition of the tax was not merely to confer a special advantage on the traders but to benefit the public in general, including the traders, that levy could still be considered to be compensatory.

The Jindal case had come up before a two-judge Bench comprising Justices Ruma Pal and P. Venkatarama Reddy. In September 2003, they expressed doubts about the correctness of the view taken in the Bhagatram case and relied on in the Bihar Chamber of Commerce case. Therefore, the matter was placed before the Chief Justice for appropriate directions and accordingly, the Jindal case came before the Constitution Bench "to decide with certitude the parameters of the judicially evolved concept of `compensatory tax' vis-à-vis Article 301".

In conclusion, the five-judge Bench observed that the doubt expressed by the referring Bench about the correctness of the decision in the Bhagatram case was well founded. Which means: one, the doctrine of `direct and immediate effect' of the impugned law on trade and commerce under Article 301 as propounded in the Atiabari Tea Co case, and the working test enunciated in the Automobile Transport case for deciding whether a tax is compensatory, will continue to apply. And two, the test of `some connection' indicated in the Bhagatram case and followed in the Bihar Chamber of Commerce case is not good law, opined the court.

Tailpiece

"I have only contempt... "

"For whom?"

"Those who attempt to tempt!"

http://Detaxification.blogspot.com

D. Murali

More Stories on : Taxation | Detaxfication | Courts/Legal Issues

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
The view at 12,000

Reshaping voters' list

A world broken up into fragments

Element of discrimination

Apportionment of expenses

Poles apart from reason

Education, the great leveller

Three players of trade game in new economic geography