SCA/8953/2004 1/75 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION No. 8953 of 2004 For Approval and Signature: HONOURABLE MR.JUSTICE R.S.GARG HONOURABLE MR.JUSTICE M.R. SHAH ========================================================= 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ========================================================= EAGLE CORPORATION PVT LTD - Petitioner(s) Versus STATE OF GUJARAT & 3 - Respondent(s) ========================================================= Appearance : MR KH KAJI for Petitioner(s) : 1,MR MANISH K KAJI for Petitioner(s) : 1, Mr. Kamal Trivedi, Advocate General with Ms. Sangita Vishen, AGP for Respondent(s) : 1 - 4. DS AFF.NOT FILED (N) for Respondent(s) : 1 - 4. ========================================================= CORAM : HONOURABLE MR.JUSTICE R.S.GARG and HONOURABLE MR.JUSTICE M.R. SHAH Date : 10/10/2006 C.A.V. (Per : HONOURABLE MR.JUSTICE M.R. SHAH) SCA/8953/2004 2/75 JUDGMENT By this writ petition under Article 226 of the Constitution of India, petitioner seeks to challenge the provisions of Gujarat Tax on Entry of Specified Goods for the Local Areas Act, 2001 (Entry Tax Act) [hereinafter referred to as “the Act”] as ultra vires the Constitution of India being violative of Articles 301 and 304 of the Constitution of India. The petitioner also seeks to challenge the notices issued by the respondents No. 3 and 4 dated 24th March 2004, 1st April 2004 and 27th May 2004 at Annexure 'B' to the petition by which the petitioner is called upon to produce the certificate with regard to payment of entry tax. 2. The Statement and Objects of the Act, the Preamble, and the relevant provisions of the Act are as under; SCA/8953/2004 3/75 JUDGMENT Statement of Objects and Reasons (Bill No.36 of 2001): This Bill seeks to introduce the entry tax on the specified goods with a view to giving effect to the proposal contained in the Budget Speech of the Finance Minister in the Legislative Assembly on the 26th July, 2001. During the recent past, it has been observed that due to the difference in the rate of sales tax between the State of Gujarat and neighbouring States, diversion of trade has taken place and in some cases sales tax payments are avoided or evaded by various methods. This results in the loss of sales tax revenue legitimately due to the State of Gujarat. With a view to compensating such loss of sales tax revenue, it is considered necessary to levy a tax on entry of certain specified SCA/8953/2004 4/75 JUDGMENT goods purchased outside the State and brought into the local areas of the State of Gujarat for use, consumption or sale therein. Preamble.__ AN ACT (First published, after having received the assent of the Governor in the “Gujarat Government Gazette” on 31st August 2001) to provide for levy of a tax in the State of Gujarat on the entry of certain goods into a local area of the State from any place outside the State, but not outside the territory of the Union of India for consumption, use or sale therein and for the matters connected therewith or incidental thereto. SCA/8953/2004 5/75 JUDGMENT 2. Definitions. (a) ......... (b) ......... (c) ......... (d) “entry of specified goods into a local area” with all its grammatical variations and cognate expressions means entry of specified goods into a local area from any place outside the State but not being a place outside the territory of the Union of India, for consumption, use or sale therein; (e) “importer” means a person who brings any of the specified goods into a local area from any place outside the State but not being a place outside the territory of the Union of India, for consumption, use or sale therein; SCA/8953/2004 6/75 JUDGMENT (f) “local area” means,_ (i) a city within the meaning of the Bombay Provincial Municipal Corporations Act, 1949; (ii) a municipal borough, transitional area, small urban area or a notified area within the meaning of the Gujarat Municipalities Act, 1963; (iii) a village, within the meaning of the Gujarat Panchayats Act, 1993; (iv) a cantonment within the meaning of the Cantonment Act, 1924; (g) (h)(i) (j).......... (k) “specified goods” means goods specified in column 2 of the Schedule; SCA/8953/2004 7/75 JUDGMENT (l)“State” means the State of Gujarat, (m) “tax” means the tax payable under this Act, 3. Incidence of tax. (1) Subject to the other provisions of this Act, on and from the 1st day of September, 2001, there shall be levied and collected on the entry of specified goods into a local area, a tax on the purchase of value thereof at such rates as may be fixed by the State Government by notification in the Official Gazette, but not exceeding the maximum rates specified in column 4 of the Schedule; and different rates may be fixed for different specified goods. (2) The tax shall be payable and paid by an importer in such SCA/8953/2004 8/75 JUDGMENT manner and within such time as may be prescribed. (3) The tax shall be in addition to the tax levied and collected as octroi by a municipal corporation of a city constituted under the Bombay Provincial Municipal Corporations Act, 1949 or any other local authority, as the case may be, within its local area. 4. Reduction in tax liability. (1) The amount of tax leviable under this Act shall, subject to such conditions as may be prescribed, be reduced to the extent of the amount of tax paid, if any, under the law relating to Sales Tax as may be in force in any other state or Union Territory by an importer who had purchased the specified goods in that State. SCA/8953/2004 9/75 JUDGMENT (2) The amount of tax leviable under this Act shall, subject to such conditions as may be prescribed be reduced to the extent of the amount of tax paid, if any, under the Central Sales Tax, 1956 on the purchase of the specified goods in the course of inter-State trade or commerce. (3) Where an importer of specified goods liable to pay tax under this Act, being a dealer in the specified goods, becomes liable to pay tax under the Gujarat Sales Tax Act,, 1996 or the Bombay Sales of Motor Spirit Taxation Act, 1958 by virtue of the sale of such specified goods, then his liability under the Gujarat Sales Tax Act, 1958 shall be reduced to the extent of tax paid under this Act. Exemptions SCA/8953/2004 10/75 JUDGMENT 12. (1) No tax shall be levied and collected in respect of motor vehicles mentioned at serial number 1 in the Schedule if such motor vehicles are registered in any other State or Union Territory of India under the Motor Vehicles Act, 1988 for a period exceeding fifteen months before their entry into a local area of the State (2) Subject to such conditions as it may impose, the State Government may, if it is necessary so to do in public interest, by notification in the Official Gazette, exempt any class of importers from payment of the whole or any part of the tax payable under this Act. SCHEDULE SCA/8953/2004 11/75 JUDGMENT (See section 2(7c) and section 3(1) PART I _________________________________________________ Sr. Specified goods Entry in Maximum No. Schedule II, rate of Part A of tax. G.S.T.Tct, 1969. _________________________________________________ 1 2 3 4 _________________________________________________ 1. Motor Vehicles 128(1) Twelve including Motor per cent. Cars, motor taxi- cabs, motoettes, motor omnibuses, motor vans, motor lorries. Motor cycles, motor 128(2) Twelve cycle combinations, per cent. Motor scooters, mopeds. Chassis of motor 128(4) Twelve vehicles. Per cent. Body which is built 128(5) Twelve on chassis of motor per cent. Vehicles. 2. .......... to. 7. ........... _________________________________________________ Explanation – For the purposes of this Schedule,- SCA/8953/2004 12/75 JUDGMENT (1) Where sales of any of the specified goods at Sr. No. 1 to 6 of the Schedule is, by notification under sub-section (2) of section 49 of the Gujarat Sales Tax Act, 1969 exempt from whole or any part of the tax payable under that Act, the maximum rate of tax for such goods shall be reduced by such exemption. (2) Where sales of the specified goods at Sr.No.7 of the Schedule is, by notification under section 35 of the Bombay Sales of Motor Spirit Taxation Act, 1995, exempt from whole or any part of the tax payable under that Act, the maximum rate of tax for such goods shall be reduced by such exemption.” The Gujarat Tax On Entry Of Specified Goods Into Local Areas Rules, 2001. 1 to 4........ “5. Reduction in tax liability.__ SCA/8953/2004 13/75 JUDGMENT The amount of tax shall be reduced under sub-sections (1) and (2) of section 4 of the Act, subject to the following conditions, namely:- (i) The importer shall produce before the Assessing Authority,__ (a) the purchase invoice, along with a copy thereof, wherein the amount of tax payable, under the law relating to Sales Tax in the State or the Union Territory or as the case may be, the Central Sales Tax, was charged by the vendor who is a dealer registered under such law and who had sold the specified goods to the importer from that State or, as the case may be, the Union Territory, or (b) a declaration, along with a copy thereof, from such vendor, declaring inter-alia that he had included the SCA/8953/2004 14/75 JUDGMENT amount of such tax in the price charged by him in the purchase invoice. (ii)The importer shall furnish to the Assessing Authority the copy of the purchase invoice mentioned in clause (a) or as the case may be, the copy of the declaration mentioned in clause (b).” 3. Case on behalf of the Petitioner: It is the case of the petitioner that the petitioner is engaged in the business of transportation and travel services to passengers in the State of Gujarat. The petitioner s registered under the Gujarat Sales Act as well as Central Sales-tax Act. The petitioner for the purposes of its travel and transportation business purchases Volvo luxury bus coaches from Bangalore and the same are brought into Gujarat for the purpose of its travel business. The petitioner purchased one Volvo luxury bus from one Jaico Automobile Engineering Co.Pvt.Ltd., and SCA/8953/2004 15/75 JUDGMENT the said bus coach was brought by road to Gujarat. The petitioner received a notice dated 24th March 2004 in Form No. 45 under Section 59 of the Gujarat Sales-tax Act to attend the office of respondent No.3 in regard to payment of entry tax and the said notice was followed by another notice dated 27.5.2004 calling upon the petitioner to pay the entry tax and produce evidence thereof failing which the registration under the Gujarat Act may be cancelled and he will be called upon to give security under the provisions of Section 30B of the Act. The petitioner also received notice dated 1.4.2004 from the R.T.O., Rajkot calling upon the petitioner to pay entry tax and produce the proof thereof. As according to the petitioner, the provisions of the Act are violative of Articles 301 and 304 of the Constitution, the petitioner has preferred the present Special Civil Application challenging the constitutional validity of the aforesaid provisions of the Act. SCA/8953/2004 16/75 JUDGMENT 3.1. Shri K.H. Kazi, learned advocate appearing on behalf of the petitioner, has submitted that as the Objects and Reasons, the Act is enacted with a view to compensating the State for loss of salex tax revenue caused to the State owing to diversion of trade to neighbouring States where there is sales-tax at lower rate and therefore it is considered necessary to levy Entry Tax. It is submitted that the Entry Tax is violative of Article 301 of the Constitution because tax is imposed on importer of specified goods from other States into local area in the State of Gujarat which hampers free flow of trade from one State to another State. It is submitted that such a tax would clearly violate the mandate of Article 301 of the Constitution which states that trade, commerce throughout the territory of India shall be free. It is submitted that the only exception carved out by judicial interpretation is in respect of “Compensatory SCA/8953/2004 17/75 JUDGMENT Tax”. It is submitted by Shri Kazi that such expression is now interpreted and defined by the Constitutional Bench of the Supreme Court in the recent case of Jindal Stainless Ltd And Another Vs. State of Haryana and Others – [2006] 145 Sales Tax Cases Page 544. It is submitted that as per the decision of the Hon'ble Supreme Court though the tax is a compensatory tax, there must be quantifiable and measurable benefits to the class of persons who are made liable to pay such a tax. It is submitted that the earlier view of some Benches of the Supreme Court, taking a liberal view of the expression “compensatory tax”, is overruled. It is submitted that to compensate the loss of sales tax revenue to the State, an entry tax cannot be justified on the ground that it is compensatory tax. It is submitted by Shri Kazi that though the State in its first affidavit-in-reply tried to justify the levy on the ground that it is a compensatory tax, in view of the decision of the Hon'ble Supreme SCA/8953/2004 18/75 JUDGMENT Court in the case of Jindal Stainless Ltd. And Another (supra) but the State has given up the case of compensatory tax and have now sought to justify the same under Article 304 of the Constitution. 3.2. It is the contention on behalf of the petitioner that levy of entry tax which is only on importer of specified goods from other States into a local area in the State of Gujarat is discriminatory as there is no such tax on local dealers bringing specified goods from one local area to another local area in the State. It is submitted that as the discrimination is patent on the face of it, the levy violates Article 304(a) of the Constitution. It is submitted that Article 304(a) permits levy of any tax on goods imported from other States 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 SCA/8953/2004 19/75 JUDGMENT manufactured or produced. It is submitted that as the levy is only on imported goods and not on local goods entering into local area, the same is clear discrimination between importers and local dealers and therefore it is violative of Article 304(a) of the Constitution. 3.3. Meeting with the submission on behalf of the State that the local dealer pays sales tax at the same rate as the levy of tax leviable on importer and therefore there is no discrimination, it is submitted by Shri Kazi, learned advocate for the petitioner that the words “any tax” in Article 304(a) of the Constitution mean same tax which is levied on a importer and which is not levied on a local dealer. It is submitted that the discrimination should be considered qua the same tax and not with regard to different taxes. It is submitted that Entry Tax is a tax on entry and not on sale, while the sales-tax is a tax on sale. Two taxing events are totally different and operate at SCA/8953/2004 20/75 JUDGMENT different points of time and cannot be said to be pari materia so as to avoid the charge of discrimination. It is submitted that the importer may have bought the goods manufactured from another State who may not be liable to pay sales tax in that State because of incentive scheme but the importer has to pay entry tax as the provision in Section 4 of the Entry Tax Act providing for reduction or rebate in the Entry Tax for the sales-tax paid in the other State will not be available to him. It is submitted that similarly a manufacturer bringing the goods in the State of Gujarat will have to pay entry tax while a manufacturer in the State of Gujarat by entering in local area does not pay any entry tax nor sales-tax as there is no sale. It is submitted that levying entry tax on an importer whose seller in another State enjoys sales-tax exemption would amount to depriving the importer of that exemption as he would be liable to pay entry tax in Gujarat. SCA/8953/2004 21/75 JUDGMENT 3.4. It is further submitted that violation of Article 304(a) of the Constitution cannot be justified on the ground that combined effect of two types of taxes imposed under different laws and having different taxing events ultimately imposing same amount of tax on both the importer and the local dealer. It is submitted that if discrimination is found in the entry tax itself it cannot be justified by submitting that other dealers are paying sales-tax under the sales-tax law or that when sales-tax is not payable by local dealers, entry tax also will not be payable. 3.5. It is further submitted that Article 304 of the Constitution overrides restrictions under Article 301 of the Constitution in respect of two types of legislations; (i) imposing tax on imported goods to SCA/8953/2004 22/75 JUDGMENT which similar goods manufactured in the State are subject so as not to discriminate between goods so imported and so manufactured; (ii) the State can impose reasonable restrictions on freedom of trade etc., in public interest provided bill is introduced in the Legislature with the previous sanction of the President. 3.6. It is further submitted that two clauses of Articles 304 of the Constitution are disjunctive and not in the alternative. Under Article 304(b) of the Constitution, restriction on the freedom of trade can only be justified provided following conditions are fulfilled; (a) Restrictions are reasonable; SCA/8953/2004 23/75 JUDGMENT (b) Restrictions are in public interest; (c) The Bill is moved with the previous sanction of the President. It is therefore submitted that the State is not correct in contending that even if there is no discrimination violative of Article 304(a) of the Constitution, it need not comply with Article 304(b) of the Constitution. It is submitted that it is too late in the field to contend that tax is not a restriction on the free movement of goods. Relying upon paragraphs No. 43 and 45 of the Judgment of the Hon'ble Supreme Court in the case of Jindal Stainless Ltd. And Another (supra), it is submitted that the tax is a restriction on freedom of trade and therefore, of necessity, it has to comply with both Articles, i.e., Article 304(a) and 304(b) of the Constitution. It is submitted that it is not SCA/8953/2004 24/75 JUDGMENT sufficient to comply only Article 304(a) of the Constitution because every tax is held to be a restriction on the movement of goods. 3.7. As regards interpretation of Article 304 of the Constitution, the learned advocate appearing on behalf of the petitioner has relied upon the decision of the Hon'ble Supreme Court in the case of Indian Cement Vs. State of Andhra Pradesh, reported in 69 S.T.C. Page 305. It is submitted that in the said decision, challenge was to the notification issued by the State Government providing lower rate of sales tax in respect of cement manufactured within the State as against cement manufactured from outside the State. It is submitted that dealing with interpretation of Article 304(a) of the Constitution, in the said Judgment, the Hon'ble Supreme Court has observed that reasonable restrictions may be imposed while the Legislature of the State in public interest – Article 304(b); SCA/8953/2004 25/75 JUDGMENT Non-discriminatory taxes may be imposed by the Legislature of the State on goods imported from another State, if similar taxes are imposed on goods manufactured in the State – Article 304(a). It is submitted that as observed by the Hon'ble Supreme Court in the said Judgment, when tax is levied interfering with freedom of trade, both conditions have to be satisfied. It is further submitted that it is also observed by the Hon'ble Supreme Court in the said decision that there cannot be any dispute that tax is a deterrent against free flow as a result of favourable or unfavourable treatment by way of taxation and the course of flow of trade gets regulated either adversely or favourably. It is therefore submitted that if the scheme which Part XIII guarantees has to be preserved in national interest, it is necessary that provisions in the Constitution must be strictly complied with. Relying upon the aforesaid decision, it is submitted that Article 304(b) of the Constitution SCA/8953/2004 26/75 JUDGMENT has also to be complied with by a tax legislation and the State must establish that restrictions are reasonable, the same are in the public interest and that previous sanction of the President was obtained. Shri Kazi, has also relied upon the following decisions of the Hon'ble Supreme Court; (1) Weston Electronics vs. State of Gujarat, 70 STC Page 52. (2) West Bengal Hosiery Association vs. State of Bihar, 71 STC 298. (3) Andhra Steel Corporation vs. Commissioner of Commercial Taxes, 78 STC 243. 3.8. Shri Kazi has also relied upon a decision of the Allahabad High Court in the case of Indian Oil Corporation Vs. State of Uttar Pradesh, reported in AIR 2004 All. 277. It is submitted that the tax in issue in that Judgment was also SCA/8953/2004 27/75 JUDGMENT Entry Tax and the Allahabad High Court has dealt with the contention of sanction of the President under Article 304(b) of the Constitution, by observing that Entry Tax is a restriction which is not reasonable and not in public interest and no assent of the President was obtained, and therefore the Legislation was held to be violative of Article 304 of the Constitution. It is further submitted that it is also held by the Allahabad High Court that being not a compensatory tax, it was not saved by Article 301 of the Constitution. Relying upon the aforesaid decision, more particularly of the Allahabad High Court, it is submitted that even if the Entry Tax is not considered as discriminatory between importers and local dealers, still Entry Tax must comply with Article 304(b) of the Constitution. It is submitted that in the present case it is admitted that sanction of the President was not obtained before the Bill was moved in the State Legislature and further there is nothing to show SCA/8953/2004 28/75 JUDGMENT that the restrictions imposed are reasonable or in the public interest. It is further submitted that as the tax itself is a restriction and the same is imposed on the movement of goods from one State to another State, Article 304 of the Constitution has to be complied with. 3.9. Meeting with the decision of the Hon'ble Supreme Court in the case of Shanktikumar M. Sancheti vs. State of Maharashtra, (1995) 1 SCC 351, relied upon by the State, it is submitted by Shri Kazi on behalf of the petitioner that though the challenge was to the Entry Tax in the State of Maharashtra which tax was levied to compensate for the loss of sales-tax on account of business going to neighbouring States, and the Supreme Court upheld the levy, it is submitted that in the said case there was no challenge before the Court with regard to Article 304 of the Constitution nor with regard to the non- compensatory nature of the levy violating Article SCA/8953/2004 29/75 JUDGMENT 301 of the Constitution and therefore it is submitted that the said Judgment has no application to the present as the ratio therein is entirely on different footing, challenging being that it transgressed the limits of Entry 52 of List II of VII Schedule. It is, therefore, requested to allow the present Special