IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. C.W.P. No.6630 of 2000 Date of decision: 14.03. 2007 Jindal Strips Limited and another. -----Peititioners. Vs. State of Haryana and others. -----Respondents. CORAM:- HON'BLE MR JUSTICE ADARSH KUMAR GOEL HON'BLE MR JUSTICE H.S. BHALLA Present: Mr. A.K. Ganguly, Sr, Advocate with Mr. Puneet Bali, Advocate, Mr. Rajiv Agnihotri, Advocate, Mr. Nikhil Nayyar, Advocate, Mr. Rajan Jain, Advocate, Mr. Amit Prashar, Advocate, Mr. Karanjit Singh, Advocate, Mr. Ranjit Saini, Advocate and Mr. K.K. Mittal, Advocate for the petitioners. Mr. Rakesh Dwivedi, Senior Advocate and Mr. Uday Lalit, Senior Advocate with Mr. Jaswant Singh, Additional Advocate General of Haryana, Ms. P. Keswani, Advocate and Mr. Kavin Gulati, Advocate. for the respondent. ----- ADARSH KUMAR GOEL,J 1. This matter has been placed for hearing before us in pursuance of order of Hon’ble the Supreme Court dated 14.7.2006 in CA No.3453 of 2002 and connected matters reported C.W.P. No.6630 of 2000 2 in Jindal Stainless Limited (3) and another v. State of Haryana and others, (2006) 7 SCC 271 (hereinafter referred to as ‘Jindal Stainless Limited (3)’). 2. Appeal before the Hon’ble Supreme Court arose from the judgment of this Court dated 21.12.2001 reported in Jindal Strips Limited and another v. State of Haryana and others, (2003) 129 STC 534. 3. When the appeal against judgment of this Court was placed for hearing before a Bench of the Hon’ble Supreme Court, correctness of the view taken by the Hon’ble Supreme Court in earlier judgment in Bhagatram Rajeev Kumar v. CST, 1995 Supp (1) SC 673, which was followed in State of Bihar v. Bihar Chamber of Commerce, (1996) 9 SCC 136, was doubted and the matter was referred to a Constitution Bench to decide with certitude the parameters of the judicially evolved concept of compensatory tax vis-a-vis Article 301 of the Constitution. The said order dated 26.9.2003 is reported in Jindal Stripe Limited and another v. State of Haryana and others, (2003) 8 SCC 60, (hereafter referred to as ‘Jindal Stripe Limited (I)’. The Constitution Bench decided the issue referred to it vide its judgment dated 13.04.2006 reported in Jindal Stainless Limited C.W.P. No.6630 of 2000 3 (2) and another v. State of Haryana and others, (2006) 7 SCC 241 (hereafter referred to as ‘Jindal Stainless Limited (2)’). 4. The issue arose in the context of challenge to the constitutional validity of the Haryana Local Area Development Tax Act, 2000 (hereinafter referred to as, “the Act”) on the anvil of Article 301 of the Constitution. Contention raised on behalf of the petitioners was that the impugned levy was hit by Article 301 as the same was not compensatory or regulatory but imposed for augmenting general revenue. On the other hand, the stand taken by the State was that the impugned tax was compensatory in character. It was also submitted that the tax did not directly or immediately affected the movement of trade. Facilities provided in the local area ultimately led to better trade and commerce and benefited the traders. This Court rejected the contentions raised on behalf of the petitioners. Reliance was placed, inter-alia, on judgments of the Hon’ble Supreme Court in Bhagatram and Bihar Chamber of Commerce’s cases (supra). It was concluded that the impugned tax was compensatory tax and did not come within the purview of “restriction” contemplated in Article 301 of the Constitution. This Court also took into account provisions incorporated in the Constitution of India by 73rd and 74th C.W.P. No.6630 of 2000 4 Constitutional Amendment Acts by way of Part IX and IX-A, providing for conferring powers on panchayats and local bodies to enable them to function as institutions of self government in respect of functions listed in Eleventh and Twelfth Schedules to the Constitution. It was observed that provisions relating to roads, bridges, streets, markets, water supply and sanitation were meant to facilitate free flow of trade and since Section 22 of the Act provided for distribution of tax collected among local bodies, the same was compensatory. 5. This Court observed:- “44. We have given serious thought to the respective arguments. Article 245(1) declares that subject to the provisions of the Constitution, the Parliament may make laws for the whole or any part of the territory of India and the Legislature of a State may make laws for the whole or any part of the State. Article 246 deals with subject-matter of laws made by the Parliament and the Legislatures of the States. Clause (1) of Article 246 declares that notwithstanding anything in clauses (2) and (3), Parliament has exclusive power to make laws with respect to any of the matters enumerated in List-I of the Seventh Schedule. Clause (2) lays down that notwithstanding anything in clause (3), Parliament, and, subject to clause (1), the Legislature of any State also, have power to make laws with respect to any of the matters enumerated in List III of the Seventh Schedule. Clause (3) declares that subject to clauses (1) and (2), the Legislature of any State has exclusive power to make laws for such State or any part thereof with respect to any of the matters enumerated in List-II in the Seventh Schedule. It is, thus, evident that the C.W.P. No.6630 of 2000 5 Legislature of a State has the exclusive power to make laws for the whole or any part of the territory of that State in respect of the matters enumerated in List-II of the Seventh Schedule, but this power is subject to the other provisions of the Constitution. This means that the power of the Legislature to make laws is also subject to the provisions of Part-XIII of the Constitution. Article 301, which is first in the family of Articles dealing with trade, commerce and inter-course within the territory of India, lays down that subject to other provisions of this part (Part-XIII), trade, commerce and inter- course throughout the territory of India shall be free. Article 302 declares that the Parliament may by law impose such restrictions on the freedom of trade, commerce or inter-course between one State and another or within any part of India as may be required in public interest. Article 303(1) contains a non-obstante clause. It lays down that notwithstanding anything in Article 302, neither Parliament nor the Legislature of a State shall have power to make any law giving, or authorising the giving of, any preference to one State over another, or making, or authorising the making of, any discrimination between one State and the another, by virtue of any entry relating to trade and commerce in any of the lists in the Seventh Schedule. Clause (2) of Article 303 further lays down that nothing in clause (1) would prevent the Parliament from making any law giving or authorising the giving of, any preference or making, or authorising the making of, any discrimination if it is declared by such law that it is necessary to do so for the purpose of dealing with a situation arising from scarcity of goods in any part of the territory of India. Article 304 also contains a non- obstante clause. It lays down that notwithstanding anything in Article 301 or Article 303, the Legislature of a State may by law-- (a) impose on goods imported from other States or the Union Territories any tax to which similar goods manufactured or produced in that State C.W.P. No.6630 of 2000 6 are subject, so, however, as not to discriminate between goods so imported and goods so manufactured or produced; and (b) impose such reasonable restrictions on the freedom of trade, commerce or intercourse with or within that Sate as may be required in the public interest. 45. In Atiabari Tea Co. Ltd. v. State of Assam (supra), a Constitution Bench of the Supreme Court considered the validity of the Assam Taxation (on goods carried by Roads or Inland Waterways) Act, 1954. Their Lordships of the Supreme Court referred to the provisions of the Government of India Act, 1935 and the Constitution and by a majority judgment struck down the impugned legislation on the ground that it violated Article 301 of the Constitution. In all, three views were expressed by the Judges constituting the Bench. Chief Justice-- B.P.Sinha expressed the view that taxation simpliciter was not within the terms of Article 301, a tax on movement of goods or passengers and it did not necessarily connote impediment or restraint in the matter of trade and commerce. He drew a distinction between taxation as such for the purpose of revenue on the one hand and taxation for the purpose of making discrimination or giving preference on the other hand and recorded the following conclusion: " Thus, on fair construction of the provisions of Part XIII, the following propositions emerge : (1) trade, commerce, & inter-course throughout the territory of India are not absolutely free, but are subject to certain powers of legislation by Parliament or the Legislature of a State; (2) the freedom declared by Art.301 does not mean freedom from taxation simpliciter, but does mean freedom from taxation which has the effect of directly impeding the freedom flow of trade, commerce and intercourse; (3) the free envisaged in Art. 301 is subject to non-discriminatory restrictions imposed by Parliament in public interest (Art. 302); (4) even discriminatory or preferential legislation may be made by C.W.P. No.6630 of 2000 7 Parliament for the purpose of dealing with an emergency like a scarcity of goods in any part of India (Art. 303(2)); (5) reasonable restrictions may be imposed by the Legislature of a State in the public interest (Art. 304(b)); (6) non- discriminatory taxes may be imposed by the Legislature of a State on goods imported from another State or other States, if similar taxes are imposed on goods produced or manufactured in that Stage (Art. 304(a)); and lastly (7) restrictions imposed by existing laws have been continued, except in so far as the President may by order otherwise direct (Art. 305)." 46. The majority consisting of Gajendragadkar, Wanchoo and Dasgupta, JJ. did not agree with the Chief Justice and held as under: " It is a federal constitution which we are interpreting and so the impact of Art. 301 must be judged accordingly. Besides, it is not irrelevant to remember in this connection that the Article we are construing imposes a constitutional limitation on the power of the Parliament and the State Legislatures to levy taxes, and generally, but for such limitation, the power of taxation would be presumed to be for public good and would not be subject to judicial review or scrutiny. Thus considered we think it would be reasonable and proper to hold that restrictions freedom from which is guaranteed by Art. 301, would be such restrictions as directly and immediately restrict or impede the free flow or movement of trade. Taxes may and do amount to restrictions; but it is only such taxes as directly & immediately restrict trade that would fall within the purview of Art. 301. The argument that all taxes should be governed by Art. 301 whether or not their impact on trade is immediate or mediate, direct or remote, adopts, in our opinion, an extreme approach which cannot be upheld." 47. The third view was expressed by Shah J. who held that the freedom contemplated under Article 301 was freedom of C.W.P. No.6630 of 2000 8 trade, commerce and inter-course in all their varied aspects inclusive of all activities which constitute commercial inter- course and not merely restrictions on the movement aspect and observed as under: " The guarantee of freedom of trade and commerce is not addressed merely against prohibitions, complete or partial; it is addressed to tariffs, licensing, marketing regulations, price-control, nationalisation, economic or social planning, discriminatory tariffs, compulsory appropriation of goods, freezing or stand-still orders and similar other impediments operating directly and immediately on the freedom of commercial intercourse as well. Every sequence in the series of operations which constitutes trade or commerce is an act of trade or commerce and burdens or impediments imposed on any such step are restrictions on the freedom of trade, commerce and intercourse. What is guaranteed is freedom in its widest amplitude-freedom from prohibition, control, burden or impediment in commercial intercourse." 48. In Automobile Transport Ltd. v. State of Rajasthan (supra), a seven-Judges Bench of the Supreme Court considered the constitutional validity of Rajasthan Motor Vehicles Taxation Act, 1951. Four of the Judges constituting the Bench disapproved the extreme views expressed by B.P.Sinha, C.J. and Shah J. in Atiabari Tea Co. Ltd. v. State of Assam and others (supra). They also explained the majority view in the following words: " If the word `free' in Art. 301 means `freedom to do whatever one wants to do' then chaos may be the result; for example, one owner of a motor vehicle may wish to drive on the left of the road. If they come from opposite directions, there will be an inevitable clash. Another class of examples relates to making a charge for the use of trading facilities, such as, road, bridges, aerodromes etc. The collection of a toll or a tax for the use of a road or for the use of a bridge or for C.W.P. No.6630 of 2000 9 the use of an aerodrome is no barrier or burden or deterrent to traders who, in their absence, may have to take a longer or less convenient or more expensive route. Such compensatory taxes are no hindrance to anybody's freedom so long as they remain reasonable; but they could of course be converted into a hindrance to the freedom of trade. If the authorities concerned really wanted to hamper anybody's trade, they could easily raise the amount of tax or toll to an amount which would be prohibitive or deterrent or create other impediments which instead of facilitating trade and commerce would hamper them. It is here that the contrast, between `freedom' (Art. 301) and `restrictions' (Arts. 302 and 304) clearly appears: that which in reality facilitates trade and commerce is not a restriction, and that which is reality hampers or burdens trade and commerce is a restriction. It is the reality or substance of the matter that has to be determined. It is not possible a priori to draw a dividing line between that which would really be a charge for a facility provided and that which would really be a deterrent to a trade but the distinction, if it has to be drawn, is real and clear. For the tax to become a prohibited tax it has to be a direct tax the effect of which is to hinder the movement part of trade. So long as a tax remains compensatory or regulatory it cannot operate as a hindrance. .... .... ... In our view the concept of freedom of trade, commerce and intercourse postulated by Art. 301 must be understood in the context of an orderly society and as part of a Constitution which envisages a distribution of powers between the States and the Union, and if so understood, the concept must recognise the need and the legitimacy of some degree of regulatory control, whether by the Union or the States : this is irrespective of the restrictions imposed by the other articles in Part XIII of the Constitution. We are, therefore, unable to C.W.P. No.6630 of 2000 10 accept the widest view as the correct interpretation of the relevant articles in Part XIII of the Constitution." ... ..... .... We have, therefore, come to the conclusion that neither the widest interpretation nor the narrow interpretations canvassed before us are acceptable. The interpretation which was accepted by the majority in the Atiabari Tea Co. case, (1961) 1 SCR 809 : (AIR 1961 SC 232) is correct, but subject to this clarification. Regulatory measures or measures imposing compensatory taxes for the use of trading facilities do not come within the purview of the restrictions contemplated by Art. 301 and such measures need not comply with the requirements of the proviso to Art. 304(b) of the Constitution." (Underlining is ours). 49. The Court also rejected the argument that tax cannot be regarded as compensatory if the amount collected is not actually used for providing any facility and held 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. Their Lordships further observed that it would be impossible to judge the compensatory nature of a tax by a meticulous test. 50. The decisions of the Supreme Court in Atiabari Tea Co. v. State of Assam (supra) and Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan (supra) came up for consideration before a Constitution Bench in Khyerbari Tea Co. Ltd. v. State of Assam, AIR 1964 SC 925. Speaking for the Bench, Gajendragadkar, J. (as his Lordship then was), referred to the majority and minority views in Atiabari Tea Company v. State of Assam (supra) and Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan (supra) and observed as under: C.W.P. No.6630 of 2000 11 "In the Automobile Transport (Rajasthan) Ltd.'s case, 1963-I SCR 491: (AIR 1962 SC 1406) the majority view expressed by Das, J. on behalf of himself and Kapur and Sarkar, JJ. was that if a tax is compensatory in character, it cannot be said to fall within the mischief of Art.301. According to this view, a clarificatory rider was added to the majority view expressed in the case of Atiabari Tea Co. Ltd. 1961-I SCR 809: (AIR 1961 SC 232) by providing that regulatory measures or measures imposing compensatory taxes for the use of trading facilities do not come within the purview of the restrictions contemplated by Art.301 and such measures need not comply with the requirements of the provisions of Art. 304(b). Subha Rao, J. who delivered a separate judgment concurring with the conclusion reached by Das J. preferred to emphasise that taxing statutes which would escape the mischief of Art. 301 could be appropriately described as regulatory. He, therefore, held that the Rajasthan Motor Vehicles Taxation Act (No.11 of 1951) with which the Bench was dealing, was regulatory in character and as such not unconstitutional. In other words, whereas Das, Kapur and Sarkar, JJ. upheld the validity of the Act on the ground that it was either compensatory or regulatory, Subha Rao, J. preferred to base his decision mainly on the ground that it was regulatory. The minority view which has been expressed by Hidayatullah, J. on behalf of himself and Ayyangar and Mudholkar, JJ. assumed that though regulatory taxing statutes may be said to fall outside Art. 301, conmpensatory taxing statutes cannot make the same claim. According to this view, if a taxing statute was sought to be justified on the ground that the tax imposed by it was compensatory in character, that could be done only by adopting the procedure prescribed by Art. 304(b). It may be noticed that the scope of the regulatory C.W.P. No.6630 of 2000 12 statutes as discussed by Hidayatullah J. is much narrower than the scope of the regulatory statutes as considered by Subba Rao, J. In the result, the majority view expressed in the case of the Atiabari Tea Co. Ltd. 1961-I SCR 809: (AIR 1961 SC 232) was substantially accepted by the majority of the learned Judges constituting the larger Benchwhich heard Automobile Transport (Rajasthan) Ltd. case, 1963-I, SCR 491: (AIR 1962 SC 1406) but a corollary was added to the said view as we have just indicated. The majority view in the Atiabari case, 1961-I SCR 809: (AIR 1961 SC 232) proceeded on the basis that the Australian decisions which dealt with the scope and effect of S.92 of the Australian Constitution would be of no assistance in construing the effect of the provisions in Part-XIII of our Constitution, because the legislative, historical and political background, the structure and the effect of the relevant provisions contained in Part XIII were in material particulars different from those of S.92 of the Australian Constitution; S.92 is absolute in terms and on its literal construction, admits of no exceptions. The Australian decisions, therefore, had to introduce distinctions, such as compensatory or regulatory tax laws in order to take laws answering the said description out of the purview of S.92. In our Constitution, however, though Art.301 is worded substantially in the same way as S.92, Arts.302 and 304 provide for reasonable restrictions being imposed on the freedom of trade subject to the requirements of the said two articles, and so the problem facing judicial decisions in Australia and in this country in regard to the freedom of trade and the restrictions which it may be permissible to impose on it, is not exactly the same. The minority view expressed by Hidayatullah J. has pointedly referred to this aspect of the matter. That, in brief, is the position of the two decisions of this Court in Atiabari Tea Co. C.W.P. No.6630 of 2000 13 Ltd. 1961-I SCR 809: (AIR 1961 SC 232) and Automobile Transport (Rajasthan) Ltd.1963-I SCR 491: (AIR 1962 SC 1406) cases respectively. .... ...... ..... It would immediately be noticed that though the majority view in the Automobile Transport (Rajasthan ) Ltd. case (1963) 1 SCR 491: AIR 1962 SC 1406, substantially agreed with the majority decision in the case of Atiabari Tea Co. (1961) 1 SCR 809: AIR 1961 SC 232, there would be a clear difference between the said two views in relation to the scope and effect of the provisions of Article 304(b). According to the majority view in the case of Atiabari Tea Co. Ltd. (1961) 1 SCR 809: AIR 1961 SC 232 if an Act is passed under Article 304(b) and its validity is impeached, then the State may seek to justify the Act on the ground that the restrictions imposed by it are reasonable and in the public interest, and in doing so, it may for instance, rely on the fact that the taxes levied by the impugned Act are compensatory in character. On the other hand, according to the majority decision in the Automobile Transport (Rajasthan) Ltd. case (1963) 1 SCR 491: AIR 1962 SC 1406, compensatory taxation would be outside Article 301 and cannot, therefore, fall under Article 304(b)......." 51. In Kalyani Stores v. State of Orissa and others, AIR 1966 SC 1686, a Constitution Bench of the Supreme Court struck down the notification issued by the State Government under Bihar and Orissa Excise Act, 1915 for levy of countervailing duty on foreign liquor imported into the State by declaring it to be violative of Articles 301 and 304 of the Constitution. The facts of that case were that the appellant, who was dealing in liquor at Rourkela in Orissa challenged the imposition of a duty of excise on foreign liquor imported into the State levied at first at Rs.40 per L.P.Gallon and from April 1,1961 at Rs.70 under Section 27 of the Bihar and C.W.P. No.6630 of 2000 14 Orissa Excise Act, 1915. The argument of the appellant was that the duty amounted to unreasonable restriction on the freedom of trade and commerce because foreign liquor is not manufactured in the State and as such, no duty of excise could be levied on the locally manufactured foreign liquor. By a majority of 4:1, their Lordships of the Supreme Court upheld the challenge and observed as under: "The notification levying duty at the enhanced rate is purely a fiscal measure and cannot be said to be a reasonable restriction on the freedom of trade in the public interest. Article 301 has declared freedom of trade, commerce and inter-course throughout the territory of India, and restriction on that freedom may only be justified if it falls within Art.304. Reasonableness of the restriction would have to be adjudged in the light of the purpose for which