- 1 - IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN AT JODHPUR J U D G M E N T M/s Dinesh Pouches Ltd. vs. State of Rajasthan & ors. D.B.CIVIL WRIT PETITION NO.21/2002 DATE OF JUDGMENT : 21st August, 2007 REPORTABLE P R E S E N T HON'BLE SHRI RAJESH BALIA, J. HON'BLE SHRI MANAK MOHTA, J. Mr. Dinesh Mehta, for the petitioner. Mr. N.M.Lodha, Addl. Advocate General along with Mr. Anil Bhansali, ] Mr. Raju Ramchandran ] for the respondent. BY THE COURT: (PER HON'BLE SHRI RAJESH BALIA, J.) THE CASE The petitioner is a manufacturer of `Sada Pan Masala', mixed with tobacco in the brand name of Geetanjali, Zafri 2100 Gutkha etc. The petitioner as a manufacturer is subject to excise duty and is also liable to sales tax under the State Sales Tax or Central Sales Tax, as the case may be, in respect of the transactions of sale entered by it. - 2 - Vide impugned Notification dated 3/1/2001 “Zarda mixed Pan Masala “including gutkha and churi” was added to the list of commodities on which the levy of tax under the Rajasthan Tax on Entry of Goods into Local Area Act, 1999 was extended. The petitioner is aggrieved with the levy of tax under the Act of 1999 on its product when its brand is carried into local area of State of Rajasthan for use, consumption or sale within such local area. He has challenged the constitutional validity of the Act of 1999 and the aforesaid notification issued thereunder. Amongst other grounds, the petitioner has challenged the levy being ultra vires Article 301 under Chapter XIII of the Constitution of India. It is submitted by learned counsel for the petitioner that the impugned tax on the entry of goods into local area has direct impact on movement of trade from any place to a local area within the State of Rajasthan as it is a levy on entry of its product or movement of its product from any place outside local area to within local are where it is to be used, sold or consumed. That being so, it is hit by Article 301 of the Constitution. In view of the fact that before enacting the impugned Act the Bill has not been laid before the President for his assent as envisaged under proviso to Article 304(b) of the Constitution. Hence, it is not saved from restriction imposed under Article 301. He has pressed into service the principle enunciated in 1. Atiabari Tea Co.Ltd. vs. State of Assam & Ors. - 3 - AIR 1961 SC 232 2. Automobile Transport (Rajasthan) vs. State of Rajasthan AIR 1962 SC 1406 3. Jindal Stripe Ltd. & Ors vs. State of Haryana & Ors. 2004 (134) STC 303 ( 1st Jindal Case) 4. Jindal Stainless Ltd. & anr. vs. State of Haryana & Ors. 2006 (145) STC 544 ( 2nd Jindal Case) On the other hand, respondents have contended that: (i) the tax in question is not suffered by the trade because the same is transmitted to the end consumer and it being an indirect tax, it does not impede the activity of goods and is not hit by Article 301 of the Constitution and consequently it is inapt to refer to the procedure provided under Article 304 of the Constitution for the purpose of saving it from the restriction imposed under Article 301 of the Constitution to be a reasonable restriction. (ii) The contention was also that the entry tax is not merely on the entry of goods within the local area but it requires something more than that i.e. to say entry of goods into local area must be for its use, consumption or sale therein. (iii) It was also argued that octroi being a compensatory tax, it does not fall within the province of Article 301 of the Constitution at all, which also - 4 - obviate necessarily to follow procedure for making a law by State Legislature to overcome the prohibition imposed under Article 301 of the Constitution. In this regard, the specific case of the respondents is that prior to introducing Entry Tax under the Act of 1999, the octroi duty on entry of goods within local limits of Municipality or Panchayat for use, sale or consumption at such rates as may be notified by the State Government in each local area under municipality or panchayat, as the case may be, was being levied and collected by the concerned local self Government Institution. The amount realised by way of octroi was not only the major source of revenue for such authority but it was basically a lifeline for such authorities. However, levy and collection of octroi as such was creating hindrance to smooth flow of traffic on account of check posts at various points within the local area and led to harassment to the transporters and traders. Therefore, octroi was abolished vide notification dated 31/7/1998 and the Act of 1999 was introduced to recoup the loss of revenue of State on account of levy of octroi and to compensate the local authorities on regular basis by way of Grants. Object of providing such financial assistance to all the local bodies was to enable them to undertake various welfare activities, whereby, trades and businesses are directly and immediately benefited. - 5 - This petition was first listed for hearing on 27/2/2002 and the matter was dismissed by referring to an earlier decision of this Court in M/s Godfrey Philips India Ltd. & Anr. vs. State of Rajasthan & Anr. [ 2000 (7) STT 50 ], which has upheld the validity of the Act of 1999. However, both the decisions of this Court in Godfrey Philips India's case as well as in this case, which was dismissed by following the Godfrey India's case were challenged before the Supreme Court by way of appeal. BACKDROP IN WHICH CASE WAS REMITTED BACK TO HIGH COURT It may be noticed here that in the meantime another matter has reached before apex court arising from Punjab & Haryana High Court relating to `Haryana Local Area Development Tax Act, 2000', challenge has been laid to the validity of said Haryana Act on two grounds: firstly; that the Act is violative of Article 301 of the Constitution and is not saved by Article 304 of Constitution and the Act, in fact, seeks to levy sales tax for inter- State sales, which is outside the competence of State Legislature. The Haryana Act had provided for levy and collection of tax on the entry of goods into local area of the State of Haryana for consumption or use therein and matters incidental thereto and connected therewith. The Haryana Act has sought to impose tax on all goods brought into the local - 6 - area and phrase “Local Area” has been defined in Section 2(14) of that Act to mean “an area within the limits of a Municipal Corporation established under the Haryana Municipal Corporation Act, 1994, or a municipality established under the Haryana Municipal Act, 1973, or a Town Board or a Cantonment Board established under the Cantonment Act, 1924, or a Zila Parishad established under the Haryana Panchayati Raj Act, 1994, or any other local authority constituted or continued under any law for the time being in force.” Both the provisions under the Haryana Act are pari materia with the provisions of the Rajasthan Tax on Entry of Goods into Local Aea for consumption, use or sale therein. Local Area has been defined under Section 2 in the Rajasthan Act of 1999 as under:- “(j) Local Area means the area within the limits of,- (i) a panchayat established under the Rajasthan Panchayati Raj Act, 1994 (Act No.13 of 1994) or (ii) a municipality established under the Rajasthan Municipalities Act, 1959 (Act NO.38 of 1959), or (iii) a notified area committee or a cantonment board constituted or established under any law for the time being in force; - 7 - Charging Section 3 of the Act reads as under:- “Levy of Tax.-(1) There shall be levied, collected and paid to the State Government a tax on entry of any goods brought into a local area, for consumption, use or sale therein, with effect from such date and at such rates, not exceeding ten per cent of the value of the goods, as may be specified by the State Government, by notification in the Official Gazette, and different dates and different rates may be specified in respect of different goods or different class of goods or different local areas. (2) The entry tax shall be levied on taxable purchase value of the goods, so however that in case where it is not possible to determine the taxable purchase value of goods, the entry tax shall be levied on taxable market value of goods. (3) The tax levied under sub-section (1) shall be paid by every registered dealer or a dealer liable to get himself registered under this Act who brings or causes to be brought into a local area, the goods whether on his own account or on account of his principal or any other person or who takes delivery or is entitled to take delivery of such goods on its entry into a local area.” In its order dated 26th September, 2004 in Ist Jindal case - 8 - (Jindal Stripe Ltd. & Ors vs. State of Haryana & Ors. 2004 (134) STC 303), the Supreme Court referred to principle enunciated in Atiabari Tea Co.Ltd. vs. State of Assam (AIR 1961 SC 232) that all taxing laws are not excluded from the operation of Article 301. The tax laws can and do amount to restrictions on the freedoms guaranteed to trade under Part XIII of the Constitution. Statutes of State Legislature, restrictive of trade can avoid invalidation if they comply with Article 304(a) & (b). It was further held that only such taxes as directly and immediately restrict trade would fall within the purview of Article 301. However, the prohibition of restrictions on free trade is not an absolute one and that, any restriction in the form of taxes imposed on the carriage of goods or passengers on their movement by the State Legislature can only be done after satisfying the requirements of Article 304 (b). In Atiabari Tea's case considering the fact that the Assam Taxation (on Goods Carried by Roads and Inland Waterways) Act, 1954, which imposed the impugned tax had put a direct restriction on the freedom of trade and since the State Legislature had not complied with the provisions of Article 304(b), it was declared void. The Haryana Act was also enacted without adhering to the provisions of Article 304 (b). The Court further noticed that in Automobile Transport (Rajasthan) Ltd. vs. State of Rajasthan [ AIR 1962 SC 1406 ] the - 9 - exception to Article 301 and its operation in relation to Compensatory Taxes was a judicial crafted concept by the apex court while examining the validity of Rajasthan Motor Vehicles Taxation Act, 1951. The challenge to the Rajasthan Motor Vehicles Taxation Act, 1951 was rejected on the ground that the tax on motor vehicles was compensatory taxes which instead of hindering trade, commerce and inter-course, facilitate them by providing and maintaining the roads. In Automobile Transport's case, the Court has 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 the service or convenience, the freedom of trade and commerce may well be considered unimpaired.” The Court further noticed in Automobile Transport's case 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.” Thus, in order to consider whether any tax is compensatory, the principle of quid pro quo on the touchstone of proportionality was held - 10 - to be the working test. That is to say where in order to raise funds to provide facilities to the trade and commerce any tax is imposed and if the trade people who are having the use of certain facilities for better conduct of their business are paying in fairly equal ratio with the expenses incurred for providing such facilities, the tax is by way of reimbursing the expenses incurred by the State for providing facilities to the trade and in such event it cannot be considered a law impeding the free movement of trade, commerce or intercourse to fall within Article 301 of the Constitution. The working test was approved and applied by the Supreme Court in large number of cases referred to in Ist Jindal's case. However, the Court noticed the discordant note struck on the true scope of aforesaid working test devised in Automobile Transport's case justifying the compensatory tax to fall beyond the scope of Article 301 of the Constitution in Bhagatram Rajeev Kumar vs. Commissioner of Sales Tax [ (1995) Suppl.1 SCC 678 ] in which the Court had opined that 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 principle stated in Bhagatram Rajeev Kumar's case was reiterated by the Bench of two Judges in State of Bihar vs. Bihar Chamber of Commerce [ (1996) 9 SCC 136 ]. - 11 - Noticing two different and divergent stream of thoughts that what should be the test for determining whether the particular tax is compensatory or not, in Ist Jindal's case the court finally referred the matter to be decided by a Constitution Bench of apex court. Following order was made in 1st Jindal Case: “Since the concept of compensatory tax has been judicially evolved as an exception to the provisions of article 301 and as the parameters of this judicial concept are blurred particularly by reason of the decisions in Bhagatram's case and Bihar Chamber of Commerce's case (1996) 9 SCC 136, we are of the view that the interpretation of article 301 vis-a-vis compensatory tax should be authoritatively laid down with certitude by the Constitution Bench under article 145(3).” The reference came to be decided by the Constitution Bench of Supreme Court vide 2nd Jindal's case [ Jindal Stainless Ltd. & Anr. vs. State of Haryana & Ors. 2006 (145) STC 544 ]. The five Judges' Bench of the Supreme Court did not approve the test laid in Bhagatram Rajeev Kumar's case and Bihar Chamber of Commerce's case and overruled the same. It approved the doctrine of “direct and immediate effect” of the impugned law on trade and commerce - 12 - under article 301 as propounded in Atiabari Tea's case and working test devised in Automobile Transport's case for deciding whether a tax is compensatory or not for attracting Article 301 was approved and was held to continue to apply while considering the question whether any taxing law falls within the domain of Article 301 of the Constitution or not ? Since the larger Bench of the Supreme Court was only to decide the reference in relation to matter noticed above, the appeals in which this question was raised were again placed before the regular Bench of Hon'ble Supreme Court. On return of answer to reference, the Supreme Court passed its orders on pending appeals, special leave petitions and other applications after culling out the principle stated by Larger Bench and remitted the cases back for deciding the same to the respective High Courts with the following directions: “Since relevant data do not appear to have been placed before the High Courts, we permit the parties to place them in the concerned writ petitions within two months. The concerned High Courts shall deal with the basic issue as to whether the impugned levy was compensatory in nature. The High Courts are requested to decide the aforesaid issue within five months from the date of receipt of our order. The judgment in the respective - 13 - cases shall be placed on record by the concerned parties within a month from the date of the decision in each case pursuant to our direction.” Thereafter, another order was made by the Supreme Court on 23/1/2007, which is as under:- “So far as the High Courts of Allahabad, Patna, Guwahati and Kerala are concerned, the impugned provisions have been held to be ultra-vires by the Allahabad, Guwahati and Kerala High Courts and there has been partial striking down by the Patna High Court. Notwithstanding the pendency of these matters before this Court, it shall be open for any concerned State/aggrieved party to question the correctness of the order passed by the High Court in an appropriate proceeding.”; and extended the period for deciding the writ petition. This is how the matter is before us now. THE PRINCIPLES EMERGING FROM 2ND JINDAL'S CASE – (1) Hon'ble Apex Court culled out following principles from Constitutional Bench decision in 2nd Jindal's case in the light of which the issue whether impugned tax is compensatory tax is to be decided:- - 14 - “42.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 fess 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: 43. 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 on the basis of which the compensatory tax is sought to - 15 - 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 the decision in the case of Khyerbari Tea Co.Ltd. And Anr.vs. State of Assam reported in AIR 1964 SC 925. SCOPE OF ARTICLES 301, 302, 304 VIS-A-VIS COMPENSATORY TAX: 44. 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 the case of 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 - 16 - 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 on inter- state trade and commerce as well as intra-state trade and commerce. 45. 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 facilitiate 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 restraint/restriction one has to see whether the impugned law is enacted by the 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 - 17 - expressly free from the prohibition contained in Article 303(1) because the opening words of Article 304 contains a non-obstante clause both to Article 301 and Article 303. (b) While the 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 is that previous Presidential sanction is required for such legislation.” ENTRY TAX: LEGISLATIVE FIELD & LEGISLATIONS The Legislative field to levy “Tax on entry of goods in a local area for consumption, use or sale therein” is exclusive preserve of State Legislature under Entry 52 of State List in Seventh Schedule appended to the Constitution. It reads “ Taxes on entry of goods in a local area for consumption, use or sale therein”. This term is popularly known as `Octroi'. Octroi has always been considered as a source of revenue in general for meeting the expenses of any institution of self governance of any local area. - 18 - It is imposed on entry of goods within the limits of a given local area for use, sale or consumption and not for mere further transmission to other place. The activity chosen for levy of tax is movement of goods from outside local limits of given local area to within limits of local area. Thus, the octroi directly concerns the free movement of goods and falls within specie of taxes which, if otherwise not shown to be saved from the field of Article 301, is impermissible. The levy being subject of State Legislature can fall outside the indiction under Article 301 on two grounds. Firstly, if it is compensatory tax in the sense that it is levied to provide certain facilities to the trade to impose regulatory provisions for its better development and growth and the tax collected through such levy is in approximate proportion to cost incurred in providing such services or implementing regulatory measures, benefit from which is quantifiable measure, it can be termed