# + - JINDAL STAINLESS LTD. AND ANR v. STATE OF HARYANA AND ORS

- **Citation:** [2006] 3 S.C.R. 1095
- **Court:** Supreme Court of India
- **Decided:** 2006-04-13
- **Case number:** Civil Appeal No. 3453 of2002
- **Bench:** Mrs. Ruma Pal, B.N. Srikrishna, S.H. Kapadia, Tarun Chatterjee, P.P. Naolekar
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/jindal-stainless-ltd-and-anr-v-state-of-haryana-and-ors-21201
- **Pages:** 33

## Headnote

A
B
Constitution of India, 1950-Articles 301, 302, 303 and 304--Constitution
Bench of this Court in Automobile Transport (Rajasthan) Ltd. v. State of C
Rajasthan held a compensatory tax for use of trading facilities is not hit by
Article 301 and propounded a working test to determine whether the tax
under an impugned enactment is compensatory in nature by enquiring whether
there is any proportional benefit/facility received by trade on payment of such
tax-A smaller Bench later in Bhagatram Rajeevkumar v. Commissioner of
Sales Tax MP. and Ors. took a view that a tax is compensatory in nature even D
if there is some connection between the tax and the facilities extended to the
trade either directly or indirectly-Reference to a Constitution Bench doubting
the correctness of the view in Bhagatram case-Held, the view held in
Bhagatram case is not only contrary to the working test propounded in
Automobile Transport but also obliterates the ve1y basis of compensatory E
tax-Hence, the view held in Bhagatram case is overruled-Distinction
between tax, fee and compensatory tax explained.
In Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan, AIR
(1962) SC 1406 (CB); [1963[ 1 SCR 49l(CB), a Constitution Bench of this
Court held that regulatory measure or measures imposing compensatory F
taxes for the use of trading facilities did not hamper trade, commerce or
intercourse, rather facilitated them and therefore were not hit by the
freedom declared by Article 301 of the Constitution of India. This Court
took the view that compensatory taxed constitute an exception to Article
301. This Court laid down a working test for deciding whether a tax is
compensatory or not by enquiring whether th.e trade is having the use of G
certain facilities for the better conduct of its business and paying not
patently much more than what is required for providing the facilities.
In Mis Bhagatram Rajeevkumar v. Commissioner a/Sales Tax, MP. and
1095
H
1096
SUPREME COURT REPORTS
[2006) 3 S.C.R.
A Ors., (19951 Supp 1 sec 673, a Bench of three judges of this Court took
the view that even if there is 'some connection' between the tax and the
trading facilities extended to dealers directly or indirectly, the tax would
be characterised as a compensatory tax and hence cannot be held unvalid
under Article 301 of the Constitution. The decision was relied on by this
B Court by a Bench of two judges in State of Bihar and Ors. v. Bihar Chamber
of Commerce and Ors., [19961 9 SCC 136.
A Bench of two judges of this Court, while deciding a case regarding
constitutional validity of levy of entry tax by State under the Haryana
Local Area Development Tax Act, 2000, doubted the correctness of the
C views taken by this in Bhagatram and Bihar Chamber of Commerce cases
and hence referred the case to a Constitution Bench to decide with
certitude the parameters of the judicially evolved concept of compensatory
tax in Automobile Transport case vis-a-vis Article 301 of the Constitution
of India.
D
Answering the question referred to it the Court
HELD: 1. Article 301 of the Constitution of India, though positively
worded, in effect 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
E to freedom from laws which go beyond regulations which burdens, restricts
or prevents the trade movement between States and also within the State.
Article 301 is not only an authorization 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,
F therefore, Article 301 per se constitutes limitation on the power of the
State. [1119-A-DJ
2.1. The primary purpose of a taxing statute is collection of revenue.
On the other hand, regulation extends to administrative acts which
produces regulative effects on trade and commerce. Payment for
G

## Text

_Characters 0–39,919 of 85,342. This is a partial read: ask again with offset=39919 for what follows._

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JINDAL STAINLESS LTD. AND ANR.
v.
STATE OF HARYANA AND ORS.
APRIL 13, 2006
[MRS. RUMA PAL, B.N. SRIKRISHNA, S.H. KAPADIA, TARUN
CHATTERJEE AND P.P. NAOLEKAR, JJ.)
A
B
Constitution of India, 1950-Articles 301, 302, 303 and 304--Constitution
Bench of this Court in Automobile Transport (Rajasthan) Ltd. v. State of C
Rajasthan held a compensatory tax for use of trading facilities is not hit by
Article 301 and propounded a working test to determine whether the tax
under an impugned enactment is compensatory in nature by enquiring whether
there is any proportional benefit/facility received by trade on payment of such
tax-A smaller Bench later in Bhagatram Rajeevkumar v. Commissioner of
Sales Tax MP. and Ors. took a view that a tax is compensatory in nature even D
if there is some connection between the tax and the facilities extended to the
trade either directly or indirectly-Reference to a Constitution Bench doubting
the correctness of the view in Bhagatram case-Held, the view held in
Bhagatram case is not only contrary to the working test propounded in
Automobile Transport but also obliterates the ve1y basis of compensatory E
tax-Hence, the view held in Bhagatram case is overruled-Distinction
between tax, fee and compensatory tax explained.
In Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan, AIR
(1962) SC 1406 (CB); [1963[ 1 SCR 49l(CB), a Constitution Bench of this
Court held that regulatory measure or measures imposing compensatory F
taxes for the use of trading facilities did not hamper trade, commerce or
intercourse, rather facilitated them and therefore were not hit by the
freedom declared by Article 301 of the Constitution of India. This Court
took the view that compensatory taxed constitute an exception to Article
301. This Court laid down a working test for deciding whether a tax is
compensatory or not by enquiring whether th.e trade is having the use of G
certain facilities for the better conduct of its business and paying not
patently much more than what is required for providing the facilities.
In Mis Bhagatram Rajeevkumar v. Commissioner a/Sales Tax, MP. and
1095
H
1096
SUPREME COURT REPORTS
[2006) 3 S.C.R.
A Ors., (19951 Supp 1 sec 673, a Bench of three judges of this Court took
the view that even if there is 'some connection' between the tax and the
trading facilities extended to dealers directly or indirectly, the tax would
be characterised as a compensatory tax and hence cannot be held unvalid
under Article 301 of the Constitution. The decision was relied on by this
B Court by a Bench of two judges in State of Bihar and Ors. v. Bihar Chamber
of Commerce and Ors., [19961 9 SCC 136.
A Bench of two judges of this Court, while deciding a case regarding
constitutional validity of levy of entry tax by State under the Haryana
Local Area Development Tax Act, 2000, doubted the correctness of the
C views taken by this in Bhagatram and Bihar Chamber of Commerce cases
and hence referred the case to a Constitution Bench to decide with
certitude the parameters of the judicially evolved concept of compensatory
tax in Automobile Transport case vis-a-vis Article 301 of the Constitution
of India.
D
Answering the question referred to it the Court
HELD: 1. Article 301 of the Constitution of India, though positively
worded, in effect 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
E to freedom from laws which go beyond regulations which burdens, restricts
or prevents the trade movement between States and also within the State.
Article 301 is not only an authorization 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,
F therefore, Article 301 per se constitutes limitation on the power of the
State. [1119-A-DJ
2.1. The primary purpose of a taxing statute is collection of revenue.
On the other hand, regulation extends to administrative acts which
produces regulative effects on trade and commerce. Payment for
G regulation is different from payment for revenue. If the law enacted is to
enforce discipline or conduct under which the trade has to perform or if
the payment is for regulation of conditions or incidents of trade or
manufacture, then the levy is regulatory. (1121-D-F)
2.2. Tax is levied as a part of common burden. The principle behind
H the levy of a tax is the principle of ability or capacity. There is no
t
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JINDALSTAINLESSLTD.v. STATEOFHARYANA
1097
identification of a specific benefit and even if such identification is there, A
it is not capable of direct measurement. A particular advantage, if it exists
at all, is only incidental to the Government action. It is not a term or
condition of a licence. A tax is a payment where the special benefit, if any,
is converted into common burden. A tax can be progressive. [1122-C-D)
2.3. A fee is generally a term of a licence. It is based on the "principle B
of equivalence" which is the converse of the "principle of ability" to pay.
The basis of a fee or a compensatory tax is the same which is the
quantifiable and measurable benefit. A fee or a compensatory tax has to
be broadly proportional and not progressive. The value of the quantifiable
benefit is represented by the costs incurred in procuring the facility/
services which become the basis of reimbursement/recompense for the C
provider of the services/facilities. Compensatory tax is based on the
principle of "pay for the value". It is a sub-class of "a fee". It rests upon
the principle that if the government by some positive action confers upon
individual(s), a particular measurable advantage, it is only fair to the
community at large that the beneficiary shall pay for it. The basic D .
difference between a tax on one hand and. a fee/compensatory tax on the
other hand is that the former is based on the concept of burden whereas
compensatory tax/fee is based on the concept of recompense/
reimbursement. Jn other words it is a recompense/reimbursement.
(1122-D-E; G-H; 1123-C-E)
2.4. When a tax is imposed as a part of regulation or as a part of
regulatory measure, its basis shift 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. Compensatory
E
tax is by nature hybrid but it is more closer to fees than to tax as both F
are based on the principle of equivalence and on the basis of
reimbursement/recompense. [1124-A-B)
3. If the provisions of an impugned law 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 G
material before the Court, that the payment of compensatory tax is a
reimbursement/recompense for the quantifiable benefit provided or to be
provided to its payer (s). (1124-D-E)
4. The test of "some connection" enunciated in Bhagatram case is not H
1098
SUPREME COURT REPORTS
[2006] 3 S.C.R.
A only contrary to the working test propounded in Automobile Transport case
but also obliterates the very basis of compensatory tax. When a tax is
imposed in the regulation or as a part of regulatory measure, the
controlling factor of the levy shifts from burden to reimbursement/
recompense. The working test propounded by a Bench of seven Judges in
B the case of Automobile Transport and the test of "some connection"
enunciated by a Bench of three Judges in Bhagatram case cannot stand
together. Therefore, the test of "some connection" as propounded in
Bhagatram case is not applicable to the concept of compensatory tax and
accordingly to that extent, the judgments of this Court in Bhagatram and
Bihar Chamber of Commerce stand overruled. The doctrine of "direct and
C immediate effect" of the impugned law on trade and commerce under
Article 301 as propounded in Atiabari Tea Co. and the working test
enunciated in Automobile Transport for deciding whether a tax is
compensatory or not will continue to apply. 11126-C-E; G-H; 1127-A)
Attiabari Tea Co. Ltd. etc. v. State of Assam and Ors., AIR (1961) SC
D 232 CB; (196111 SCR 809 (CB) and Automobile Transport (Rajasthan) Ltd.
v. State of Rajasthan, AIR (1962) SC 1406; I 19631 1 SCR 491, followed .
E
. lvf!s Bhagatram Rajeevkumar v. Commissioner of Sales Tax, M.P. and
Ors., ll 995) Supp. I SCC 673 and State of Bihar and Ors. v. Bihar Chamber
of Commerce and Ors .. 1199619 SCC 136, overruled.
Jindal Strips ltd and Anr. v. State ofHaryana and Ors .. [2003] 8 SCC
60; G.K. Krishnan and Ors. v. State of T.N. and Ors .. [ 1975) I SCC 375;
State of Karnataka and Anr. v. M/s Hansa Corporation, [1980] 4 SCC 697;
Sanjay Trading Campany v. Commissioner of Sales Tax and Ors .. (1994) 93
F STC 589; Sharma Tramport v. Government of Andhra Pradesh and Ors.,
120021 2 SCC 188; Pradip Chandra Parija and Ors. v. Pramod Chandra
Patnaik and Ors., (20021 I SCC 1; Central Board of Dawoodi Bohra
Community and Anr. v. State of Maharashtra and Anr., (20051 2 SCC 673;
Mis International Tourist Corporation etc. etc. v. State of Haryana and Ors.
etc. etc., AIR (1981) SC 774; Ram Chandra Kai/ash Kumar and Co. and Ors.
G v. State of UP. and Anr., (1980] Supp. SCC 27; Diamond Sugar Mills Ltd.
and Anr. v. The State of UP. and Anr .. (1961[ 3 SCR 242; Boiani Ores Ltd.
etc. v. State ofOrissa etc .. AIR (1975) SC 17 and Khyerbari Tea Co. Ltd. v.
State of Assam, referred to.
H
CIVIL APPELLATE JURISDICTION Civil Appeal No. 3453 of2002.
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JINDAL STAINLESS LTD. v. STATEOFHARYANA
'1099
From the Final Judgment and order dated 21.12.2001 of the Punjab and A
Haryana High Court in C.W.P. No. 6630 of 2000.
WITH
Civil Appeal Nos. 3455, 3460, 3456-59, 3469, 3461, 3467, 3468, 3465,
3466, 3462-63, 3454, 3470 of 2002; 8241, 8242, 8243, 8244, 8245, 8246,
8247, 8248, 8249, 8250, 8251 of 2003; 5858 of 2002; 8252 of 2003; 3464 B
of2002; 3381-3400, 4651, 3592of1998; 918of1999; 4476 of 2000; 2608
of 2003; 4471 of 2000; 3314 of 2001; 5740 of 2002; 6331, 2637 of 2003;
6383-6421, 6436, 6437-40, 6422-35 of 1997; 2769 of 2000; 997-998 of
2004; 3144, 3145, 3146, 4954, 5141, 5143, 5144, 5145, 5147, 5148, 5149,
5150, 5151, 5152, 5153, 5156, 5157, 5158, 5159, 5160, 5162, 5163, 5164, c
5165, 5166, 5167, 5168, 5169, 5170, 7658 of 2004.
SLP (C) Nos.10003, 10007, 10153, 10156, 10164, 10167, 10206, 10381,
10391, 10404, 10417, 10501,10563,10568,10571, 11012, 11271, 11326, 9496,
9569, 9883, 9891, 9898, 9904, 9910, 9911, 9976, 9993, 9998, 9999 of 2004;
14380 of 2005; TC No.13 of 2004, WP Nos, 574 and 512 of 2003.
D
L.N. Rao, ASG, Shanti Bhushan, A.K. Ganguli, Dr. A.M. Singhvi, R.F.
Nariman,Raju Ramachandran, Rakesh Dwivedi, Dinesh Dwivedi, R.G. Padia,
B. Sen, P.N. Misra, TLV Lyer, P.P. Rao, A.S. Rao, Jayant Bhushan, S.K.
Pathak, Mini Kaushik, Ejaz .Maqbool, Vikas Singh, Taruna Singh, Abhijit
Sinha, A. Dutt, Rajesh Jain, Mrs. Rajesh Bindal, L.R. Singh, C. Prakash, E
Nikhil Nayyar, Ankit Singhal, P.K. Bansal, R. Agnihotri, K.L. Janjani, A.T.M.
Sampath, V. Balaji, Mrs. T. Shanti, Mrs. Meena Kumari, Rajeev K. Virmani,
Ms. Rashmi Virmani, R. Narain, P. Shishodia, S. Sharma, A. Aggarwal, M.
Borthakur, S. Kahiya, R. Bindal, Ms. Priya Puri, k. Gomber, Rajan Narain
-(for Mis. Rajan Narain & Co.), A. Dubey, K.B. Upadhyay, M. Kumar, M.K. F
Rai, M. Dubey, S.R. Setia, Mrs. Indira Sawhney, Anupam Sharma, Rakesh
Ojha, H.K. Puri, Ujwal Banerjee, S.K. Puri, V.M. Chauhan, Ms. Indu Malhotra,
Ms. B. Vijaylakshmi Menon, Mis. Arputham Aruna & Co., Ms. Kmakshi, S.
Mehlwal, Ms. Kadambani, Sachin Puri, Abisth Kumar, Rakesh K. Khanna,
Dr. Rashmi Khanna, S. Shekhar, Mrs. S. Sinha, Ms. Jahanvi Worah, Surya
Kant, Ramesh Kumar Agarwal, D. Bharuka, R.C. Kohli, SWA Qadri, R. G. ·
Dubey, Adarsh Upadhyay, A. Chaudhary, G. Bhatia, N. Singh, K. Misra,
Adarsh Upadhyay, Bhargava V. Desai, Sanjeev Kr. Singh, Ms. Sheenam
Parwanda, M. Nupur Kanungo, Gopal Singh, Ms. Vimla Sinha, Sushi! Kumar
Jain, A.P. Dhamija, Ram Niwas, HD Thanvi, B.K Sharma, V.N. Koura, Ms.
Paramjit Benipal, A. Mariarputham, Ms. Aruna Mathur (for Mis. Arputham, H
1100
SUPREME COURT REPORTS
[2006) 3 S.C.R.
A Aruna & Co.), Vijay Pratap Singh, K.S. Rana, L.K. Bhushan, Ms. Jasleen
Oberoi, Rahul Prasanna Dave, Kavin Gulati, Ms. Rashmi Singh. T. Mahipal,
Dhurv Aggarwal, Parveen Kumar, K.R. Sashiprabhu, Ashish Verma, S.P.
Singh Chauhan, Balaji Srinivasan, V. Sudeer, MBRS Raju, S. Srinivasan,
Amit Mahajan, D.N. Ray, Ms. Sumita Ray, Ajay Siwach, Pradeep Dahiya,
B Shandeep Sharma, T. Singhdev, K. Ramesh, Hari Kumar G., T.V. George,
UA Rana, P. Thakur, Arvind Kumar, Ms. S. Roy (for Mis. Gargat & Co.),
Rajesh Kumar, Vishwajit, Ms. Mayuri Vats,Vijay Kumar, Sunil K. Jain, S.
Borthakur, B. Barooah, P.K. Bansal, P.K. Singh, M. Verma, V.K. Tiwari,
Vinay Kumar Garg, Roy Abraham, S. Jain, Himinder Lal, Mahabir Singh,
P.N. Puri, M.P.Vinod, D. Pillai, A.K. Jain, Sajith P., S.A. Syed, A. Singh, P.
C Saxena, S.V. Deshpande, Mrs. A. Rustogi, S.K. Misra, V.P. Singh, Ms. Indira
Sawhney, Anupam Sharam, Rakesh Ojha, Ms. Kavita Wadia, Tarun Johri,
R.K. Maheshwari, Vishwajit Singh, C.N. Sree Kumar, Sanjay R. Hegde,
Areneshwar Gupta, Guntur Prabhakar, Vinoo Bhagat, Ms. Kirti Renu Mishra,
Subramonium Prasad, K.V. Mohan, Rajiv Tyagi, Prashant Kumar, Shakil
Ahemd Syed, Sanjay Kapur, B.K. Satija, Amlan Kumar Ghosh, Shrish Kumar
D Mishra, Ashok Mathur, Ms. Baby Krishnan, Romy Chacko, Sibo Shankar
Mishra, B V Deepak, Rajiv Mehta, M.T. George, R. Sathish, K.R. Nmbiar,
E.C. Agrawala and S.B. Upadhyay for the appearing Parties.
E
The Judgment of the Court was delivered by
KAPADIA, J. By order dated 26.9.2003, the referring Bench of Hon'ble
Ruma Pal, J. and P. Venkatarama Reddy, J. doubted the correctness of the
view taken in Mis Bhagatram Rajeevkumar v. Commissioner of Sales Tax,
MP. & Ors. 1 relied on in the subsequent decision of this Court in the case
of State of Bihar & Ors. v. Bihar Chamber of Commerce & Ors. 1 Accordingly,
F all the matters were ordered to be placed before the Hon 'ble the Chief Justice
for appropriate directions and accordingly, the matter has come to the
Constitution Bench to decide with certitude the parameters of the judicially
evolved concept of "compensatory tax" vis-a-vis Article 30 I. The referral
order is in the case of Jindal Strips Ltd. & Anr. (now known as Jindal
Stainless Ltd.) v. State of Haryana & Ors. 3 under Article 145(3).
G
For this purpose, we are required to examine the source from which the
1. (1995] Supp. 1 sec 673.
2. (1996] 9 sec 136.
H 3. 120031 s sec 60.
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JINDAL STAINLESS LTD. v. STATEOFHARYANA [KAPADIA, J.] 1101
concept of compensatory tax is judicially derived, the nature and character of A
compensatory tax and its parameters in the context of Article 30 I.
In a batch of appeals, the constitutional validity of the Haryana Local
Area Development Tax Act, 2000 has been challenged on two grounds : (I)
that, the Act is violative of Article 30 I and is not saved by Article 304; and
(2) that, the Act in fact seeks to levy sales tax on inter-State sales, which is B
outside the competence of the State Legislature. However, the referral order
is confined to the above-mentioned first question.
Jindal Strips Ltd. is an industry manufacturing products within the
State of Haryana. The raw-material is purchased from outside the State. The C
finished products are sent to other States on consignment basis or ~tock
transfer basis. No sales tax is paid on the input of the raw material. Similarly,
no sales tax is paid on the export of finished products.
The impugned Act came into force w.e.f. 5th May, 2000 to provide for
Ie_vy and collection of tax on the entry of goods into the local areas of the D
State for'consumption or use therein. The Act is enacted to provide for levy
and collection of tax on the entry into a local area of the State, of a motor
vehicle for use or sale, and of other goods for use or consumption therein.
The Act seeks to impose entry tax on all goods brought into a "local area".
The entire State is divided into local areas. The Act covers not only vehicles
bringing goods into the State but also vehicles carrying goods from one local E
area to another. However, those who pay sales tax to the State are exempt
from payment of entry tax. Ultimately, the entry tax only falls on concerns,
like Jindal Strips, which, by virtue of the provisions of the Central Sales Tax
Act, 1956, pay sales tax on purchase of raw-material and sale of finished
goods to other States and do not pay sales tax to the State of Haryana. This F
is the context in which the challenge to the Act under Article 30 I has been
made. At this stage, we may point out that prior to September 30, 2003,
section 22 stated that the tax collected under the Act shall be distributed by
the State Government amongst the local bodies to be utilized for the
development of local areas. However, on 30th September, 2003, section 22
was amended clarifying that the tax levied and collected shall be utilized for G
facilitating free flow of trade and commerce.
REASONS FOR THE REFERRAL ORDER:
In Atiabari Tea Co. Ltd. etc. v. State of Assam & Ors4., it was held that
4. Air (1961) SC 232.
H
1102
SUPREME COURT REPORTS
(2006] 3 S.C.R.
A taxing laws are not excluded from the operation of Article 30 I, which means
that tax laws can and do amount to restrictions on the freedoms guaranteed
to trade under Part-XIII of the Constitution. However, the prohibition of
restrictions on free trade is not an absolute one. Statutes restrictive of trade
can avoid invalidation if they comply with Article 304(a) or (b)5.
B
In Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan6, it was
held that only such taxes as directly and immediately restrict trade would fall
within the purview of Article 301 and that any restriction in the fonn of taxes
imposed on the carriage of goods or their movement by the State Legislature
can only be done after satisfying the requirements of Article 304(b ). The
statute which was challenged in Atiabari Tea Co.4 was the Assam Taxation
C (on goods carried by Roads and Inland Waterways) Act, 1954. It was 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.
D
According to Mis Jindal Strips and similarly situated other appellants,
the impugned Haryana Local Area Development Tax Act, 2000 imposes a
restriction on trade and is violative of Article 301, particularly, when the
provisions of Article 304(b) have not been complied with.
The judgment of this Court in Atiabari Tea Co. 4 was delivered by a
E Constitution Bench of five Judges. However, an exception to Article 301 and
its operation was judicially crafted in Automobile Transport'. In that case, the
challenge was to the Rajasthan Motor Vehicles Taxation Act, 1951. The
challenge under Article 30 I was rejected by the Constitution Bench of seven
Judges of this Court by holding vi de para 19 that "the taxes are compensatory
F
5.
G
"304. Restrictions on trade. commerce and intercourse among States.-Notwithstanding
anything in article 301 or article 301 or article 303. the Legislature ofa 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 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 State as may be required in tlie public interest:
Provided that no Bill or amendment for the purpose of clause (b) shall be introduced or
moved in the Legislature of a State without the previous sanction of the President.''
H 6.
AIR (1962) SC 1406.
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JINDAL STAINLESS LTD. v. STATEOFHARYANA [KAPADIA, J.] 1103
taxes which instead of hindering trade, commerce and intercourse facilitate A
them by providing roads and maintaining the roads". Vide para 21 of the
report, it was 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." Thus, B
the concept of "compensatory taxes" was propounded. Therefore, taxes which
would otherwise interfere with the unfettered freedom under Article 30 I will
be protected from the vice of unconstitutionality if they are compensatory.
In Automobile Transport", it was said, vide para 19, that "a working test
for deciding whether a tax is a compensatory or not is to enquire whether the C
trade is having the use of certain facilities for the better conduct of its business
and paying not patently much more than what is required for providing the
facilities".
Right from 1962 up to 1995, this working test was applied by this
Court in relation to motor vehicles taxes for deciding whether the impugned D
levy was compensatory or not. The decisions proceeded on the principle
adumbrated in Automobile Transport", which was paraphrased by Mathew, J.
speaking for a Bench of three Judges in G.K. Krishnan & Ors. v. Stale of
T.N. & Ors. 7, in which it was observed that "the very idea of a compensatory
tax is service more or less commensurate with the tax levied". [See: para 29
page 386]
E
According to the referral order, after 1995, some of the principles set
out stood deviated from when the principle of compensatory tax was applied
to the entry tax in Bhagat ram's case, which was decided by a Bench of three
Judges.
F
In Bhagatram 's case, the challenge was to M.P. Sthaniya Kshetra Me
Mal Ke Pravesh Par Kar Adhiniyam, 1976. In that case, although it was
demonstrated by the State and not disputed by the assessee that the levy was
compensatory, nevertheless, the Court went on to say, vide para 8, that "the
concept of compensatory nature of tax has been widened and if there is G
substantial or even some link between the tax and the facilities extended to
dealers directly or indirectly the levy cannot be impugned as invalid". In this
connection, reliance was placed on the judgment of this Court in the case of
State of Karnataka & Anr. v. Mis Hansa Corporation. At this stage, it may
1. [1975) I sec 375.
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A be noted that although there was a challenge to the levy of entry tax in the
case of Hansa Corporations, the issue whether the tax was compensatory in
nature was expressly left open, particularly, because Article 304(b) stood
complied with. In fact, the impugned Act was saved because Article 304 was
complied with. It was for that reason alone that the Act could not be struck
down in Hansa Corporation's cases.
B
The dictum in Bhagatram 's case1 was relied on by a Bench of two
Judges in the case of Bihar Chamber of Commerce1, which reiterated the
position that "some connection" between the tax and the trading facilities
extended to dealers directly or indirectly is sufficient to characterize it as
C compensatory tax. The Court went further to hold that the State provides
several facilities to the trade, such as, laying and maintenance of roads,
waterways, markets etc. and on this premise, it was held that the entry tax
was compensatory in nature. The learned Judges did not consider it necessary
to put the burden on the State to furnish the details of facilities provided to
the traders and the expenditure incurred or incurrable thereafter.
D
To sum up: the pre-1995 decisions held that an exaction to reimburse/
recompense the State the cost of an existing facility made available to the
traders or the cost of a specific facility planned to be provided to the traders
is compensatory tax and that it is implicit in such a levy that it must, more
or less, be commensurate with the cost of the service or facility. Those
E decisions emphasized that the imposition of tax must be with the definite
purpose of meeting the expenses on account of providing or adding to the
trading facilities either immediately or in future provided the quantum of tax
is based on a reasonable relation to the actual or projected expenditure on the
cost of the service or facility. However, the post-1995 decisions in Bhagatram 's
F case 1 and in the case of Bihar Chamber of Commerce, now say that even if
the purpose of imposition of the tax is not merely to confer a special advantage
on the traders but to benefit the public in general including the traders, that
levy can still be considered to be compensatory. According to this view, an
indirect or incidental benefit to traders by reason of stepping up the
developmental activities in various local areas of the State can be brought
G within the concept of compensatory tax, the nexus between the tax known as
compensatory tax and the trading facilities not being necessarily either direct
or specific.
H s. (198014 sec 697.
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JINDAL STAINLESS LTD. v. STATE OFHARYANA(KAPADIA, J.] 1105
According to the referral order, since the concept of compensatory tax A
has been judicially evolved as an exception to the provisions of Article 30 l
and as the parameters of this judicially evolved concept are blurred,
particularly, by reason of the decisions in Bhagatram 's case' and Bihar
Chamber of Commerce', the Court felt that the interpretation of Article 301
vis-a-vis compensatory tax should be authoritatively laid down with certitude B
by the Constitution Bench under Article 145(3).
ARGUMENTS:
Mr. Shanti Bhushan, learned senior counsel appearing on behalf of the
Jindal Stainelss Ltd. submitted that in Atiabari Tea Co. 4 this court held that C
even a tax legislation would have to bear the scrutiny of Part-XIII of the
Constitution and such legislation could infringe Article 30 I to 304 of the
Constitution; that the tax laws were within the ambit of Part-XIII of the
Constitution; that seven-Judge Constitution Bench of this court in Automobile
Transport6 for the first time judicially evolved the principle of compensatory
taxes which would be outside the purview of Part-XIII and which could not D
be said to impede free flow of trade and commerce [majority view]. Such
compensatory taxes were no hindrance to freedom of trade so long as they
remained reasonable. Such compensatory taxes, in essence and reality;
facilitated trade and commerce and they were not restrictions, it was held that
the substance of the matter has to be determined in each case. Learned counsel E
placed reliance on the judgment of Justice Das from pages 522 to 523, in this
regard. Learned counsd submitted that the working test laid down in the
Automobile Transport• is good even today. Under the test, although the precise
amount collected may not be actually used to provide any facility, the tax
collected should be by and large commensurate with the cost of the facilities
provided for the trade. Learned counsel, therefore, submitted that the working F
test laid down in Automobile Transport• is the only test which would
differentiate the tax imposed for augmenting general revenue from the
compensatory tax. Learned counsel submitted that there is a basic difference
between the law infringing freedom of trade and the law which imposes
regulations which in effect facilitates or promotes trade. According to the G
learned counsel, regulations provide for necessary services to enable free
movement of traffic and, therefore, they cannot be described as restrictions
impeding the freedom under Article 30 I; that in the case of regulations the
tax imposed is incidental in order to compensate for the facilities provided.
On the other hand, it was urged, that, a tax law is in essence an exercise to
augment the general revenue of the State and not for providing facilities and H
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A services for the trade. A tax law which does not in return provide services
and facilities for the free movement of trade, can never be compensatory.
Learned counsel further submitted that in Bhagatram 's case1 vide para 8, the
Division Bench of this court held that--"the concept of compensatory nature
of tax has been widened and if there is substantial or even some link between
B the tax and the facilities extended to such dealers directly or indirectly the
levy cannot be impugned as invalid". In that case the Division Bench of this
court relied upon the judgment of this court in the case of Hansa Corporations.
Mr. Shanti Bhushan, learned counsel for the assessees, submitted that the
judgment of this court in the case of Bhagatram' was erroneous on two
counts. Firstly, the reliance on Hansa Corporation' was totally misplaced
C because Hansa Corporations did not deal with the issue of what is
compensatory tax. In fact, that question was expressly not gone into. Secondly,
learned counsel submitted that to the extent of Bhagatram 1 holding that the
concept of compensatory tax has been widened as stated above, the said
judgment was contrary to the law laid down by the seven-Judge Bench decision
of this court in the case of Automobile Transport and, therefore, needs to be
D overruled. Mr. Shanti Bhushan further contended that the Division Bench of
this court in the case of Bihar Chamber of Commerce2 has followed the
judgment of this court in the case of Bhagatram 1 and has held that even
though tfie tax was for augmenting the general revenue of the State, judicial
notice could bi: taken of the fact that the State provides several facilities to
E the trade including laying and maintenance of roads, waterways, markets etc.
and on that basis it was held that the State had established the impugned tax
to be compensatory in nature. In short, Mr. Shanti Bhushan's submission was
that the aforestated two judgments in Bhagatram 1 and in Bihar Chamber of
Commerce2 were e1rnneous to the extent indicated above; that they were
F
contrary to the judgment of seven-Judge Bench of this court in the case of
Automobile Transport". Learned counsel urged that if the test, laid down in
the case of Bhagatram' and in the case of Bihar Chamber of Commerce2, was
held to be applicable then as a consequence there would be no difference
between a tax and a compensatory tax. It was urged that therefore this court
should evolve parameters of compensatory tax for future guidance. Learned
G counsel submitted that to be compensatory, tax must be levied to augment
facilities for trade and that is how a tax was held not to impede but to
facilitate trade (in Automobile Transport). It was submitted that the essence
of compensatory tax is that the services rendered or facilities provided should
be more or less commensurate with the tax levied and the tax should not be
patently more than what was required to provide the trading facility. It was
H submitted that the tax imposed for augmenting general revenue of the State
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JINDAL STAINLESS LTD. v. STATEOFHARYANA [KAPADIA, J.] 1107
is not compensatory; that any tax law which is designed or which has the A
effect of disrupting trade movement in inter-State trade and commerce between
States is contrary to the concept of freedom of trade embodied in Article 301.
It was submitted that the compensatory character of tax should be self-evident
from the taxing law itself and it cannot be judged from the manner in which
the tax revenue is utilized in course of time. It was urged that in the case of B
ambiguity, the burden would fall on the State to show that in essence the levy
was imposed as a recompense for the facilities/services provided by the State.
It was urged that in the case of Sanjay Trading Company v. Commissioner
of Sales Tax and Ors. 9, the tax was held to be compensatory based on the
figures furnished by the State and it was found that the levy was imposed to
offset the loss caused by the abolition of octroi which according to the learned C
counsel is totally missing in the case of Haryana Local Area Development
Tax Act, 2000.
Mr. A.K. Ganguli, learned senior counsel appeariHg on behalf of one
of the appellants, submitted that the legislative power of the State to make
any law under Article 246 read with the entries in list II, though plenary in D
nature, is subject to two limitations:
(i)
Fundamental Rights [Part III of the Constitution)
(ii) Trade, Commerce and Intercourse within the Territo1y of India
(Part XIII of the Constitution)
E
Therefore, the State cannot exercise its legislative power in a manner which
would transgress the above constitut_ional limitations. In this connection,
learned counsel placed reliance on the judgment in Atiabari Tea Co. 4• Learned
counsel further urged that keeping in mind the impact of globalization since
mid- l 990s the international trade barriers stand removed in view of multip
lateral trade agreements between the committee of nations. He submitted that
the framers of the Constitution engrafted Part-XIII in the Constitution with
the object of securing economic unity of the country as a whole and, therefore,
the State's power of imposing taxes and duties on goods, freedom of which
throughout India is guaranteed by Article 301, would be subject to the said
limitation. Learned counsel urged that taxing statutes imposing duties on G
goods do attract Article 30 I; that the intrinsic evidence furnished by the
Articles in Part-XIII shows that the taxing laws are not excluded from the
operation of Article 30 I; which means that tax laws do amount to restrictions,
9. (1994) 93 SIC 589 .
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A freedom from which is guaranteed to trade under Part-XIII. It is, therefore,
idle to contend as sought to be argued on behalf of the State that a tax under
entry 52 list II falls outside Article 301. Learned counsel submitted further
that in Atiabari Tea Co.' a workable test has been evolved under which
restrictions which directly and immediately impede free flow of trade, would
violate Article 301. According to learned counsel one needs to enquire whether
B the trade is provided with facilities for the better conduct of their business.
According to learned counsel once the said working test is satisfied then the
levy is regulatory in nature provided it is not disproportionate to the value of
the facility/service provided. Learned counsel urged that a tax imposed for
raising general revenue of the State, is not a compensatory levy. It was
C submitted that for the purpose of securing freedom of movement by road, it
was essential that no pecuniary burden is placed upon it which burden goes
beyond a proper recompense to the State for the actual use made of the
facilities provided by the State. Therefore, there has to be a direct relation
between the levy and the facility and the users must derive a special direct
benefit of that facility. It was submitted that Part-XIII imposes constitutional
D limitations on the legislative powers of the State, the onus would lie on the
State to demonstrate that the provisions of the impugned enactment facilitate
the free flow of trade by providing a regulatory measure. Similarly, in respect
of taxing statutes, the burden would lie heavily on the State administration
that the taxes proposed to be levied and collected under the impugned
E enactment are for the use of trading facilities and only then that such levy
would come within the purview of compensatory tax as laid down in the
judgment of this court in the case of Automobile Transporf'. According to the
learned counsel mere declaration in law that the levy is compensatory in
nature is not enough. Whether a tax is compensatory or not, cannot depend
on the preamble of the statute imposing it. A tax cannot be said not to be
F compensatory merely because the precise or specific amount collected is not
actually used to provide facilities. In this connection, reliance is placed on
the judgment of this court in the case of Sharma Transport v. Government
of Andhra Pradesh & Ors., w . However, learned counsel submitted that the
Act must spell out the nature of the trading facilities intended to be provided
G to the trading community and also the cost of providing such facilities. Learned
counsel submitted that the Act must indicate a direct co-relation between the
two.
At this stage, we may clarify that we are not required to go into the
H 10. [200212 sec 188.
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.TINDAL STAINLESS LTD. v. STATEOFHARYANA [KAPADIA,J.] 1109
question as to whether the impugned tax based on ad valorem basis cannot A
be termed as a compensatory tax. As stated above, we are confining this
judgment only to the question as to whether the observations of this court in
the case of Bhagatram1 (supra) followed by the judgment of this court in the
case of Bihar Chamber of Commerce2 needs to be overruled in the light of
the judgment of seven-Judge Constitution Bench in the case of Automobile
Transport". In the present matter, we are required to lay down the parameters B
of the concept of compensatory tax vis-a-vis Article 301. All other questions
will have to be gone into at the relevant stage before the division bench of
this court with regard to the constitutional validity of 2000 Act.
Learned counsel next submitted that the question as to whether a levy C
is compensatory or not has to be decided with reference to the nature of the
levy itself. In this connection reliance was placed on entry 57 List II. It was
urged that taxes on motor vehicles are levied statewise. Such levies are annual
levies. Such levy, if claimed to be compensatory, must bear a definite nexus
with the facilities which the State seeks to extend to the trading community
using their transports on the roads and bridges maintained by the State. D
Similarly, it was argued that levy of entry tax under entry 52 list II indicates
that the levy contemplated is on the entry of goods into a local area for
consumption, use or sale therein. It was submitted that the levy contemplated
is on entry into a local area and not when the goods cross the State barrier.
Therefore, if a levy of entry tax is claimed to be compensatory in nature such E
levy would have to be, in the first instance, confined to a local area and
secondly the trading facilities sought to be provided also should be confined
to such local area. Further the expenses for such facilities and the levy by
which such expenses are to be met must bear a reasonable and rational
relationship.
Mr. R.F. Nariman, learned senior counsel appearing for one of the
appellants, submitted that the ingredients of a compensatory tax broadly fall
into two categories, namely, positive ingredients which ought to be there to
constitute a compensatory tax and negative ingredients which if present, the
F
tax in question cannot be called a compensatory tax. In this connection,
learned counsel submitted that if the purpose of levy is to raise resources for G
above-stated facilities or if the resources are raised as regulatory measures to
facilitate trade then such an ingredient is a positive ingredient. Similarly, the
. quantum of such compensatory tax must co-relate with the funds required for
such facilities/regulatory measures. According to learned counsel these are
two positive ingredients. The negative ingredients, which if present, would H
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A make the tax labelled as compensatory, attract the vice of interference with
freedom of trade, are two-fold-firstly, ifthe tax is for general augmentation
of revenue, and secondly, the said compensatory tax must not be
discriminatory. According to learned counsel, the purported compensatory
tax must also not be for trade facilities and purposes for which there is
already a levy of other compensatory tax.