IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE K.S.RADHAKRISHNAN & THE HONOURABLE MR. JUSTICE M.N.KRISHNAN MONDAY, THE 18TH DECEMBER 2006 / 27TH AGRAHAYANA 1928 OP.No. 434 of 1996(B) --------------------- PETITIONER: --------------- THRESSIAMMA L. CHIRAYIL, W/o LATE C.J.LUKA, CHIRAYIL HOUSE, ATHIRAMPUZHA, KOTTAYAM BY ADV. SRI.MATHEW JOHN RESPONDENTS: ------------------- 1. STATE OF KERALA REPRESENTED BY THE DEPUTY COMMISSIONER OF AGRICULTURAL INCOMETAX AND SALESTAX, KOTTAYAM 2. THE REGIONALT RANSPORT OFFICER,KOTTAYAM BY SPL. GOVT PLEADER FOR TAXES SRI V.V.ASOKAN THIS ORIGINAL PETITION HAVING BEEN FINALLY HEARD ON 14/11/2006, ALONG WITH OP NO. 1788 OF 1996 OP NO. 6987 OF 1997 OP NO. 2408 OF 1997 OP NO. 20344 OF 1996 OP NO. 16151 OF 1996 OP NO. 3724 OF 1997 OP NO. 6151 OF 1996 OP NO. 14183 OF 1996 OP NO. 17299 OF 1996 OP NO. 154 OF 1997 OP NO. 19893 OF 1996 OP NO. 19209 OF 1996 OP NO. 20061 OF 1996 OP NO. 20112 OF 1996 OP NO. 5009 OF 1997 OP NO. 808 OF 1996 OP NO. 14950 OF 1996 OP NO. 19885 OF 1996 OP NO. 16729 OF 1996 OP NO. 17875 OF 1996 OP NO. 20249 OF 1996 OP NO. 9350 OF 1999 OP NO. 8444 OF 1997 WA NO. 1412 OF 1998 WA NO. 770 OF 1997 WA NO. 816 OF 1997 WA NO. 841 OF 1997 WA NO. 844 OF 1997 WA NO. 854 OF 1997 WA NO. 975 OF 1997 WA NO. 1003 OF 1997 WA NO. 1004 OF 1997 WA NO. 1005 OF 1997 WA NO. 1022 OF 1997 WA NO. 1074 OF 1997 WA NO. 1076 OF 1997 WA NO. 115 OF 1997 WA NO. 1115 OF 1997 WA NO. 1121 OF 1997 WA NO. 1147 OF 1997 WA NO. 1149 OF 1997 WA NO. 1235 OF 1997 WA NO. 1264 OF 1997 WA NO. 1346 OF 1997 WA NO. 1466 OF 1996 WA NO. 1714 OF 1997 WA NO. 1249 OF 1997 OP NO. 19391 OF 2001 WPC NO. 8741 OF 2005 WPC NO. 21063 OF 2004 WPC NO. 12864 OF 2006 WPC NO. 12865 OF 2006 WPC NO. 12513 OF 2005 WPC NO. 12513 OF 2006 WPC NO. 12819 OF 2006 WPC NO. 12490 OF 2006 WPC NO. 12671 OF 2006 WPC NO. 12888 OF 2006 WA NO. 1295 OF 2004 WA NO. 2267 OF 2005 WA NO. 1010 OF 2006 WA NO. 1011 OF 2006 THE COURT ON 18/12/2006 DELIVERED THE FOLLOWING: SOME OF THE OTHER COUNSEL APPEARED FOR PETITIONERS IN OTHER CASES: SRI P. GOPALAKRISHNAN NAIR, SRI ANTONY DOMINIC, SRI RANJITH THAMPAN SRI V.N.ACHUTHA KURUP, SMT S.K.DEVI, SRI P.K.SURESHKUMAR SRI M.K.CHANDRAMOHAN DAS SRI C.K.ABDUL RAHIM SRI GEORGE POONTHOTTAM SRI P.K.RAVINDRANATHA MENON, SRI P. SANJAY, SRI C.C.THOMAS ETC. OP 434/96 Etc. 1 K.S. RADHAKRISHNAN & M.N. KRISHNAN, JJ. ------------------------------------------------------------------------------------------------------ O.P. Nos. 434,1788, 20344,16151,6151,14183,17299, 19893,19209,20061,20112,808,14950,19885,16729, 17875 and 20249 of 1996, 6987, 2408, 3724, 154, 5009 and 8444 of 1997 and 9350 of 1999 and 21791 of 2001, W.A. Nos. 770, 816, 841, 844, 854,975,1003, 1004, 1005, 1022,1074,1076,1115,1121,1147,1149,1235, 1264,1346,1466, 1714 and 1249 of 1997 and 1412 of 1998 O.P. No 19391 of 2001, W.P.C. Nos. 21063/2004, 8741 and 27659 of 2005,12864, 12865, 12888, 12671, 12490, 12819,12513 and of 2006 and W.A. Nos. 1295/2004, 2267/2005 and 1010 and 1011 of 2006 --------------------------------------------------------------------------------------- Dated: 18th December 2006 JUDGMENT Radhakrishnan,J. Constitutional validity of certain provisions of the Kerala Tax on Entry of Goods into Local Areas Act, 1994 (Act 15 of 1974) is under challenge in all these original petitions. A few of the writ petitioners have sought for a declaration that Section 2 (1)(d), 2 (1) (g), 2(1)(i) and Section 3 of the Kerala Tax on Entry of Goods into Local Areas Act, 1994 (in short “Entry Tax Act”) are discriminatory and ultra vires of Articles 14, 19(1)(a), 19(1) (g), 246, 265, 286, 301, OP 434/96 Etc. 2 304(a), 304(b) and other consequential reliefs. State maintained the stand that the Act is within the legislative competence of the State since it was promulgated in exercise of its powers under Articles 245 and 246 read with Entry 52 List II of the VII Schedule to the Constitution of India. Two batches of cases have also come up for our consideration; some pertaining to the levy of entry tax with regard to the goods brought from outside the State to the State of Kerala and some others with regard to the goods brought from outside the country to the State of Kerala. Counsel appearing for the petitioners submitted that the right of the State to impose entry tax under the Entry Tax Act has to be tested in the light of the decision of the Constitution Bench of the apex court in Jindal Stainless Ltd v. State of Haryana and others (2006) 7 S.C.C. 241). Counsel submitted, in the light of the above decision of the apex court the decision rendered by a Division Bench of this court in Rajan v. State of Kerala (1995 (2) KLT 369) is no longer good law and that the decision in Father William Fernandez v. State of Kerala and others (115 STC 591) has to be affirmed. 2. The Division Bench in Rajan's case, supra considered the question as to whether Section 3 of the Entry Tax Act and Rule 4 OP 434/96 Etc. 3 framed therein are ultra vires and violative of the Constitution of India. Though the Bench made reference to the decisions of the apex court in Atiabari Tea Co. Ltd. v. State of Assam (AIR 1961 SC 232) and Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan (AIR 1962 S.C 1406), it upheld the validity of Section 3 of the Entry Tax Act holding that if the tax imposed is compensatory or regulatory in nature it cannot be contended that it is violative of Article 301 of the Constitution of India. The court noticed that the contention of the State that there was evasion of sale tax in motor vehicles purchased from outside the State and brought into the State and it was as a compensatory measure the Entry Tax Act was enacted. The court also took the view that the State Legislature is competent to enact such a legislation under Entry 52 of List II of the VII Schedule of the Constitution. 3. The Kerala Finance Act, 1996 (Act 23 of 1996) had introduced substantial amendments to Act 15 of 1994 with effect from 19.7.1996. Preamble to that Act was substituted as follows: “An Act to provide for the levy of tax on the entry of goods into local areas for consumption, use or sale therein. “ State and its officers sought to levy entry tax not only on goods OP 434/96 Etc. 4 which are brought from outside the State into any local area for consumption, use or sale but also from outside the country. Several writ petitions were filed before this court challenging the imposition of entry tax on motor vehicles and goods like JCB 3 CX Bachoe Loader, escavators etc. brought from outside the State and abroad. Writ petitions were also filed by non-resident Indians challenging the imposition of entry tax when they brought motor cars from outside the country. A few of the A class contractors have also brought JCB from places like England. Placing reliance on the judgment in Rajan's case, State contended that the principle laid down in that case is equally applicable when goods are brought from outside the country. Repelling the contention of the State the Division Bench of this court in Fr William Fernandez's case (supra) took the view that the principles laid down in Rajan's case would not apply when goods are brought from outside the country. 4. Counsel appearing for the petitioners submitted that entry tax cannot be levied when motor vehicles and other goods are brought from other States as well as from abroad in the light of the principles laid down by the apex court in Jindal Stainless Ltd's case, supra, since it is not compensatory in nature. Further it was also OP 434/96 Etc. 5 stated that the State have not furnished any quantifiable data on the basis of which compensatory tax could be levied. Counsel further submitted that levy of entry tax sought to be imposed under the Act cannot be said to be either compensatory or regulatory but prevents free flow of trade, commerce and intercourse and does not satisfy the requirements of Article 304(b) of the Constitution. It was also stated that the amendment Act has not received the assent of the President. It was pointed out that the Bill was not moved in the assembly with the previous sanction of the President as required under the proviso to Article 304(b). 5. The Constitution Bench in Jindal's case, supra, in paragraphs 52 and 53 of the judgment, stated as follows: 52. In our opinion, the doubt expressed by the referring Bench about the correctness of the decision in Bhagatram's case 1995 Supp. (1) SCC 673 followed by the judgment in the case of Bihar Chamber of Commerce (1996) 9 SCC 136) was well founded. 53. We reiterate that the doctrineof “direct and immediate effect” of the impugned law on trade and commerce under Article 301 as propounded in Atiabari Tea Co. Ltd. v. State of Assam AIR 1961 SC 232 and the working test enunciated in Automobile Transport (Rajasthan) Ltd v. State of Rajasthan AIR 1962 SC 1406 for deciding whether a tax is compensatory or not vide para 19 of the report, will continue to OP 434/96 Etc. 6 apply and the test of “some connection” indicated in para 8 of the judgment in Bhagatram Rajeevkumar v. Commissioner of Salestax M.P. 1995 Supp. SCC 673 and followed in the case of State of Bihar v. Bihar Chamber of Commerce (1996) 9 SCC 136, is, in our opinion, not good law. Accordingly, the constitutional validity of various local enactments which are the subject matters of pending appeals, special leave petitions and writ petitions will now be listed for being disposed of in the light of this judgment. “ The matter was accordingly listed for hearing before the Division Bench dealing with those matters. The Bench placing reliance on paragraphs 42 to 45 of the judgment in Jindal's case, supra, permitted, vide its order dated 14.07.2006 the parties to place the relevant data before the respective High Court and the High Courts were directed to ascertain as to whether the impugned levy was compensatory in nature. The order is reported in (2006 (7) SCC 271). 6. In Jindal's case it has been specifically stated that the burden is on the State to show placing materials before court that payment of compensatory tax is reimbursement/recompense for the quantifiable/measurable benefit provided or to be provided to payers. It also opined that as soon as it is shown that the Act invades freedom of trade it is necessary to enquire whether the State has OP 434/96 Etc. 7 proved that the restrictions imposed by it by way of taxation are reasonable and in public interest within the meaning of Article 304(b) of the Constitution. 7. The Commissioner of Commercial Taxes, Government of Kerala, in due reverence to the direction of the apex court, filed affidavit before this court on 11.09.2006 explaining the services and expenditure incurred by the State for importers of the goods. It is stated that the State provides variety of services such as convenient roads, protection for transport of goods through traffic checking and police protection for transport of goods through traffic checking and police aid. The affidavit refers to tables explaining the various expenditure incurred by the State for maintenance of roads, bridges, water transport, development of industries and allied matters. Those tables are extracted below: Table 1 Year Entry Tax Collection (In Cr.) Capital exp. On roads and bridges (In Cr.) 1994-95 95.68 1995-96 114.05 1996-97 1.89 124.73 1997-98 8.26 182.9 1998-99 0.87 132.99 OP 434/96 Etc. 8 Year Entry Tax Collection (In Cr.) Capital exp. On roads and bridges (In Cr.) 1999-00 10.20 199.02 2000-01 15.62 149.58 2001-02 12.91 199.78 2002-03 44.37 257.68 2003-04 72.68 243.09 2004-05 126.55 218.28 2005-06 140.68 (Unt 28.2.2006 434.03 1708.05 Table 2 Years Capital outlay of Industries and Minerals Of which village and small industries Ports and light houses Industrial water transport Other transport services Road transport 1994-95 8437.81 1276.18 222.8 37.33 852.83 779.48 1995-96 9131.1 2021.45 542.7 50.94 1255.65 771.96 1996-97 1104.62 3718.55 512.1 40.99 455.63 77.76 1997-98 1058.3 2757.65 421.78 160.89 1462.55 853.49 1998-99 7987.75 2157.94 595.66 217.72 504.4 3288.25 1999-2000 6878.77 2832.57 398.75 58.7 475.68 1000.58 2000-01 5820.34 2052.19 275.52 58.04 884.87 886.72 2001-02 3023.94 691.55 175.38 37.39 724.22 915.9 2002-03 3309.28 593.15 364.26 214.34 487.74 564.09 2003-04 3055.33 355.33 471.87 404.78 400.38 472.47 2004-05 7452.96 974.38 783.2 209.12 358.94 624.87 OP 434/96 Etc. 9 Referring to the above tables it is stated that in the light of the expenditure and services being regularly provided by the State, State is providing service to compensate the levy of entry tax under the Entry Tax Act. It is stated that there is a direct nexus to the levy of entry tax on goods and the expenditure incurred by the State to provide corresponding service to the importers of goods. Referring to the counter affidavit filed by the State, a synopsis of notes of argument was filed in W.P. (C) No 12490 of 2006. Referring to column 2 of the table it is stated that entry tax collection does not indicate whether it was collected for vehicles alone or inclusive of goods and vehicles or after giving rebate as per Section 4 of the Act. It is stated that no figure has been shown for 1994-95 and 1995-96, the starting years. It is also pointed out that during 1996-97 collection was Rs 1.89 crores and in 2005-2006 it is Rs 140.68 crores. It is also pointed out that the expenditure for roads is met from motor vehicle tax revenue and from funds allotted from other agencies like National Highway Fund, World Bank Loan and Allotment from NABARD. Referring to table 2, it is pointed out that capital outlay for industry and minerals have no relevance or OP 434/96 Etc. 10 connection with levy of entry tax. Referring to column 3 it is stated that there is no nexus between the Village and Small Scale Industries with the collection of entry tax. So also with regard to the Port and Light House. Referring to column 5 it is stated that the collection of entry tax is not relevant with regard to Industrial Water Transport and also other transport services. With regard to column (7) - road transportation, it is stated that expenses are met from the collection of motor vehicles tax and also aid and allotment from other agencies and Central Government. It is pointed out that the State has not provided any quantitative data on the basis of which compensatory tax could be levied. It is pointed out that the materials furnished do not show any quantifiable or measurable date which have any nexus to the quantifiable benefit. 8. Counsel on either side cited a large number of case laws before us including the decision of the apex court in Atiabari Tea Co.'s case, supra (AIR 1961 SC 232) and Automobile Transport's case, supra (AIR 1962 SC 1406). Most of those decisions were considered by the Constitution bench of the apex court in Jindal's Stainless Ltd's case, and the court has now settled the law. The apex court has examined the source from which the concept of OP 434/96 Etc. 11 compensatory tax was evolved and its nature and character and its parameters in the context of Article 301 of the Constitution and held as follows: “32. Article 301 states that subject to the other provisions of Part XIII, trade, commerce and intercourse throughout India shall be free. It is not freedom from all laws but freedom from such laws which restrict or affect activities of trade and commerce amongst the States. Although Article 301 is positively worded, in effect, it is negative as freedom correspondingly creates general limitation on all legislative power to ensure that trade, commerce and intercourse throughout India shall be free. Article 301, therefore, refers to freedom from laws which go beyond regulations which burdens, restricts or prevents the trade movement between States and also within the State. Since “freedom” correspondingly imposes “limitation”, we have the doctrine of “direct and immediate effect” of the operation of the impugned law on the freedom of trade and commerce in Article 301 as enunciated in Atiabari Tea Co. 33. Article 301 is, therefore, not only an authorisation to enact laws for the protection and encouragement of trade and commerce amongst the States but by its own force creates an area of trade free from interference by the State and, therefore, Article 301 per se constitutes limitation on the power of the State. Article 301 is, however, subject to the other provisions of Articles 302, 303 and 304. It states that subject to other provisions of Part XIII, trade, commerce and intercourse throughout India shall be free. 34. Article 301 is binding upon the Union Legislature and the State Legislatures, but Parliament can get rid of the limitation imposed by Article 301 by enacting a law under Article 302. Similarly, a law made by the State Legislature in compliance with the conditions imposed by Article 304 shall not OP 434/96 Etc. 12 be hit by Article 301. Article 301 thus provides for freedom of inter-State as well as intra-State trade and commerce subject to other provisions of Part XIII and correspondingly it imposes a general limitation on the legislative powers, which limitation is relaxed under the following circumstances: (a) Limitation is relaxed in in favour of Parliament under Article 302, in which case Parliament can impose restrictions in public interest. Although the fetter is limited enabling Parliament to impose by law restrictions on the freedom of trade in public interest under Article 302, nonetheless, it is clarified in clause (1) of Article 303 that notwithstanding anything contained in article 302, Parliament is not, authorised even in public interest, in the making of any law, to give preference to one State over another. However, the said clarification is subject to one exception and that too only in favour of Parliament, where discrimination or preference is admissible to Parliament in making of laws in case of scarcity. This is provided in clause (2) of Article 303. (b) As regards the State Legislatures, apart from the limitation imposed by Article 301, clause (1) of Article 303 imposes additional limitation, namely, that it must not give preference or make discrimination between one State or another in exercise of its powers relating to trade and commerce under Entry 26 of List II or List III. However, this limitation on the State Legislatures is lifted in two cases, namely, it may impose on goods imported from sister State(s) or Union Territories any tax to which similar goods manufactured in its own State are subjected but not so as to discriminate between the imported goods and the goods manufactured in the State (see clause (a) of Article 304). In other words, clause (a) of Article 304 authorises a State Legislature to impose a non-discriminatory tax on goods imported from sister State(s), even though it interferes with the freedom of trade and commerce guaranteed by Article 301. Secondly, the ban under Article 303 (1) shall stand lifted even if discriminatory restrictions OP 434/96 Etc. 13 are imposed by the State Legislature provided they fulfil the following three conditions, namely, that such restrictions shall be in public interest; they shall be reasonable; and lastly, they shall be subject to the procurement of prior sanction of the President before introduction of the Bill.” 35. Broadly, the above analysis of the scheme of Articles 301 to 304 shows that Article 304 relates to the State Legislature while Article 302 relates to Parliament in the matter of lifting of limitation, which, as stated above, flows from the freedom of trade and commerce guaranteed under Article 301. Article 304 also confers upon the State Legislature power to lift the limitations imposed on it by Article 301 and clause (1) of Article 303. This aspect is important because the doctrine of “direct and immediate effect” which is mentioned in Atiabari Tea Co. emerges from the concept of “limitation” embodied in Article 301. It is this doctrine of direct and immediate effect which constitutes the basis of the working test propounded vide para 19 (of AIR ) in Automobile Transport. Therefore, whenever the law is impugned as violative of Article 301, the courts will have to examine the effect of the operation of the impugned law on the inter-State and the intra-State movement of goods, which movement constitutes an integral part of trade.” The concept of compensatory tax was examined by the apex court in the light of the above mentioned constitutional provisions especially Article 301. The concept of compensatory tax was not there in the Constitution but was judicially evolved in Automobile Transport's case, supra as a part of regulatory charge. A compensatory tax is levied on an individual as a member of a class, whereas a fee is levied on an individual as such. The apex court examined the OP 434/96 Etc. 14 difference between a tax, a fee and a compensatory tax. The apex court in Jindal's case, supra reiterated the principle laid down in Atiabari Tea Co.'s case and Automobile Transport's case. In Atiabari's case, supra the apex court propounded the doctrine of “direct and immediate effect” and held that prohibition or restriction to free trade is not absolute one. 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, it 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. 9. In Atiabari Tea Co.'s case, supra, the statute which was under challenge was Assam Taxation (On Goods Carried by Road or Inland Waterways) Act, 1954. The apex court held that the Act 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), the Act was declared void. The court also held that taxing laws are not excluded from the operation of Article 301, meaning thereby tax laws can and do amount to restriction on the freedom of trade, commerce and intercourse guaranteed under Part XIII of the Constitution. OP 434/96 Etc. 15 Prohibition or restriction however is not absolute one, and it can avoid invalidation, if it complies with Article 304(b) of the Constitution. In Automobile Transport's case, supra the challenge was against the Rajasthan Motor Vehicles Taxation Act, 1951. The challenge under Article 301 was rejected by the court holding that the taxes are compensatory taxes which instead of hindering trade, commerce and intercourse facilitate them by providing roads and maintaining the roads. The court held that if a statute fixes a charge for a convenience or service provided by 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 apex court in that case has laid down a working test to decide whether a tax is compensatory or not. Applying that test the court has to see whether the impugned enactment facially or patently indicates quantifiable date 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 and it must broadly indicate proportionality to the quantifiable benefit. 10. The concept of compensatory tax, it is well settled, is a judicially evolved principle and could be an exception to the OP 434/96 Etc. 16 provisions of Article