Background facts
The State of U.P. promulgated the U.P. Tax on Entry of Goods Ordinance, 1999 w.e.f. 1.11.1999, which was later on enacted as U.P. Tax on Entry of Goods Act, 2000 (Act of 2000)
The Act of 2000 was challenged by M/s Indian Oil Corporation Ltd. and many other companies and traders importing scheduled goods into local area of the State. The HC in Indian Oil Corporation v. State of UP [AIR 2004 Alld 277] declared the Act of 2000 as ultra vires Article 301 and 304 of the Constitution of India inter alia on the ground that the State failed to show that the realization from entry tax has been used for facilitating trade and commerce and not for raising general revenue.
The Supreme Court once again took up the Entry Tax matter and remanded it back to the High Court to deal with the basic issue as to whether the impugned levy was compensatory in nature.
The Hon‟ble High Court after considering the validity of the Act of 2000 on the relevant date and the material provided by the State of U.P., on the principles of law laid down in Jindal Stainless Ltd. (2) v. State of Haryana (Supra) and on the basis of the direction of the Supreme Court, in its judgment dated 8.1.2007 held that there is not even an iota of evidence/material on record to give required data/statistics to prove/establish that the amount collected as "tax" and its expenditure on providing additional/specific advantage/facility provided to trade/s in particular mentioned under the Schedule of the Act. The High Court further held that in absence of such a data it is not possible for the High Court to hold that "entry tax" is "compensatory tax".
The State of U.P. to remove the defects pointed out by the Division Bench of the High Court and to bring it in conformity with the parameters of the compensatory tax as laid down by the Supreme Court, promulgated with retrospective effect from 1.11.1999 the U.P. Tax on Entry of Goods Into Local Areas Ordinance (U.P. Ordinance No.35 of 2007). The Ordinance was replaced by the U.P. Tax on Entry of Goods into Local Areas Act, 2007 (Act of 2007)
Present Writ Petition
The Writ Petitions filed by traders, manufacturers and importers bringing scheduled goods into the local areas in the State of U.P. for consumption, use or sale therein, challenges the validity of the “U.P. Tax on Entry of Goods into Local Areas Act, 2007”, (Act of 2007) on the grounds of lack of the legislative competence of the State of U.P. of enactment, as also violative of freedom of trade, commerce and intercourse guaranteed under Art.301 and not saved by Art.304 (b) of the Constitution of India. The petitioners also challenged the retrospectivity of the Act of 2007. w.e.f. 1.11.1999, when the U.P. Tax on Entry of Goods Ordinance, 1999, replaced by U.P. Tax on Entry of Goods Act, 2000, was promulgated and which was struck down by the Hon‟ble High Court in Indian Oil Corporation Ltd. v. State of U.P1.,.
Petitioner’s contentions
The entry tax is levied under the Act is by way of payment of compensatory tax of which the quantifiable/ measurable benefits are not provided either facially or patently to its payers, in view of the tests laid down in Jindal Stainless Ltd. (2) & Anr. v. State of Haryana & Anr., (2006) 7 SCC 241.
The expenditure of the entry tax as compensatory tax collected is not broadly in proportion to defray the cost of regulation, or to meet the outlay incurred for some special benefit to the trade commerce and industry.
There is no link between the entry tax collected and the facilities extended to the trades, directly or indirectly, and for which the State on which the burden of proof lies has failed to prove the direct and immediate effect on trade and commerce, as laid down in Atiabari Tea Co. Ltd. v. State of Assam, AIR 1961 SC 232, and the working test enunciated in Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan, AIR 1962 SC 1406.
Respondent’s contentions
A complete mechanism regarding utilization of entry tax has been provided, and the entire entry tax collected is to be utilized for the development of trade and commerce of the goods mentioned in the schedule.
The Accountant General has been given power to audit the entire money collected and the money spent towards entry tax.
The Act of 2007, facially and patently indicates that the benefits, which is quantifiable and measurable is given to the payers of entry tax as a class.
The rate of tax regarding goods imported from outside the State, and the goods manufactured within the State is the same and hence there is no discrimination between the goods imported from outside the State and those manufactured and produced in the State of U.P. and brought into local areas for consumption, use or sale therein.
The Act of 2007 is not violative of Art.301 or 304 of the Constitution of India.
The power to legislate comprehends power to tax prospectively as well as retrospectively.
Observations of the Hon’ble High Court
The Supreme Court in Atiabari Tea Co. Ltd. v. State of Assam AIR 1961 SC 232, while deciding the constitutionality of the Assam Taxation (On Goods Carried by Roads and Inland Waterways) Act, 1954, held that trade shall be free throughout the territory of India it means that the flow of trade shall run smooth and unhampered by any restriction either at the boundaries of the States or at any other points inside the States themselves. It is the free movement or the transport of goods from one part of the country to the other that is intended to be saved, and if any Act imposes any direct restrictions on the very movement of such goods it attracts the provisions of Article 301.
The Supreme Court , once again in Automobile Transport (Rajasthan) Ltd. Vs. State of Rajasthan, AIR 1962 SC 1406, the Constitution Bench while upholding the validity of the Rajasthan Motor Vehicles Taxation Act, 1951 held that a working test for deciding whether a tax is compensatory or not is to enquire whether the 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
A Constitutional bench of five judges of the Supreme Court in Jindal Stainless v. State of Haryana [(2006) 7 SCC 241] laid down the parameters of a „compensatory tax‟.
The Act of 2007 levies entry tax for the purpose of development of trade, commerce and industry in the State The tax is provided to be continued to be levied till such time as it is required to improve infrastructure within the State such as power, road, market condition etc. with a view to facilitate better market conditions for trade, commerce and industry.
The Act of 2007 provides for the proceeds of the levy to be appropriated to the funds namely, the U.P. Trade Development Fund under sub-section (2), and shall be utilised exclusively for development of facilitating the trade, commerce and industry to include the activities specified.
The Act of 2007 ensures that the funds shall not be utilised for the purposes other than specified exclusively for the development or facilitating the trade, commerce and industry in the State of UP.
The Act of 2007 patently satisfies the tests of the entry tax laid down in Jindal Stainless Limited (supra). The defects, pointed out by the High Court in IOC v. State of UP (supra) decided by this Court on 27.1.2004 declaring the Act of 2000 to be violative of Article 301 and 304 of the Constitution of India have been fully cured.
No material has been placed by the petitioners to contradict the factual and legal position under the Act nor there is any tangible material to demonstrate that the entry tax causes any discrimination, is unreasonable or is against public interest.
Final Order
Based on the discussions above, the Hon‟ble High Court decided as below:
The State of U.P. did not lack legislative competence in enacting the Act of 2007, imposing entry tax on the entry of scheduled goods into the local areas for consumption, use or sale
The provisions of the Act of 2007 patently and facially indicate and that there are sufficient guarantees for ensuring that the entire amount of entry tax collected is utilized only for the purposes of its reimbursement to facilitate the trade, commerce and industry.
The State Government has also established that the entire amount of entry tax is by way of reimbursement / recompense to the trade, commerce and industry, in the local areas of the State of U.P. and provides quantifiable/ measurable benefits to its payers.
The Act validating the amount of entry tax levied, assessed, realized and collected under the U.P. Tax on Entry of Goods Act, 2000, is also valid
Comments
It is understood that all key traders, manufacturers and importers are approaching the Supreme Court because the bank guarantees have become immediately encashable and in some cases have already been encashed. At any rate the entire matter on the scope of Art 304(a) and/ or (b) and its operation in the context of the State‟s powers under Art 245 and 246 has been referred to the Larger Bench of the Supreme Court by order dated April 16, 2010 in C.A. No 3543 of 2002 in Jindal Stainless v. State of Haryana [AIT-2010-135-SC] listing out certain questions including the scope of the developmental activities to be enumerated in the legislation. This matter will have to be heard by a bench of more than 7 judges possibly 9 or 11 as the earlier judgments in Atiabari (supra) and Automobile Transport Rajasthan Ltd. (supra) were decided by benches of 5 and 7 judges respectively.
Source: Allahabad High Court Writ Tax No.1484/ 2007 ITC Limited v. State of Uttar Pradesh, 2011-VIL-57-ALH
The State of U.P. promulgated the U.P. Tax on Entry of Goods Ordinance, 1999 w.e.f. 1.11.1999, which was later on enacted as U.P. Tax on Entry of Goods Act, 2000 (Act of 2000)
The Act of 2000 was challenged by M/s Indian Oil Corporation Ltd. and many other companies and traders importing scheduled goods into local area of the State. The HC in Indian Oil Corporation v. State of UP [AIR 2004 Alld 277] declared the Act of 2000 as ultra vires Article 301 and 304 of the Constitution of India inter alia on the ground that the State failed to show that the realization from entry tax has been used for facilitating trade and commerce and not for raising general revenue.
The Supreme Court once again took up the Entry Tax matter and remanded it back to the High Court to deal with the basic issue as to whether the impugned levy was compensatory in nature.
The Hon‟ble High Court after considering the validity of the Act of 2000 on the relevant date and the material provided by the State of U.P., on the principles of law laid down in Jindal Stainless Ltd. (2) v. State of Haryana (Supra) and on the basis of the direction of the Supreme Court, in its judgment dated 8.1.2007 held that there is not even an iota of evidence/material on record to give required data/statistics to prove/establish that the amount collected as "tax" and its expenditure on providing additional/specific advantage/facility provided to trade/s in particular mentioned under the Schedule of the Act. The High Court further held that in absence of such a data it is not possible for the High Court to hold that "entry tax" is "compensatory tax".
The State of U.P. to remove the defects pointed out by the Division Bench of the High Court and to bring it in conformity with the parameters of the compensatory tax as laid down by the Supreme Court, promulgated with retrospective effect from 1.11.1999 the U.P. Tax on Entry of Goods Into Local Areas Ordinance (U.P. Ordinance No.35 of 2007). The Ordinance was replaced by the U.P. Tax on Entry of Goods into Local Areas Act, 2007 (Act of 2007)
Present Writ Petition
The Writ Petitions filed by traders, manufacturers and importers bringing scheduled goods into the local areas in the State of U.P. for consumption, use or sale therein, challenges the validity of the “U.P. Tax on Entry of Goods into Local Areas Act, 2007”, (Act of 2007) on the grounds of lack of the legislative competence of the State of U.P. of enactment, as also violative of freedom of trade, commerce and intercourse guaranteed under Art.301 and not saved by Art.304 (b) of the Constitution of India. The petitioners also challenged the retrospectivity of the Act of 2007. w.e.f. 1.11.1999, when the U.P. Tax on Entry of Goods Ordinance, 1999, replaced by U.P. Tax on Entry of Goods Act, 2000, was promulgated and which was struck down by the Hon‟ble High Court in Indian Oil Corporation Ltd. v. State of U.P1.,.
Petitioner’s contentions
The entry tax is levied under the Act is by way of payment of compensatory tax of which the quantifiable/ measurable benefits are not provided either facially or patently to its payers, in view of the tests laid down in Jindal Stainless Ltd. (2) & Anr. v. State of Haryana & Anr., (2006) 7 SCC 241.
The expenditure of the entry tax as compensatory tax collected is not broadly in proportion to defray the cost of regulation, or to meet the outlay incurred for some special benefit to the trade commerce and industry.
There is no link between the entry tax collected and the facilities extended to the trades, directly or indirectly, and for which the State on which the burden of proof lies has failed to prove the direct and immediate effect on trade and commerce, as laid down in Atiabari Tea Co. Ltd. v. State of Assam, AIR 1961 SC 232, and the working test enunciated in Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan, AIR 1962 SC 1406.
Respondent’s contentions
A complete mechanism regarding utilization of entry tax has been provided, and the entire entry tax collected is to be utilized for the development of trade and commerce of the goods mentioned in the schedule.
The Accountant General has been given power to audit the entire money collected and the money spent towards entry tax.
The Act of 2007, facially and patently indicates that the benefits, which is quantifiable and measurable is given to the payers of entry tax as a class.
The rate of tax regarding goods imported from outside the State, and the goods manufactured within the State is the same and hence there is no discrimination between the goods imported from outside the State and those manufactured and produced in the State of U.P. and brought into local areas for consumption, use or sale therein.
The Act of 2007 is not violative of Art.301 or 304 of the Constitution of India.
The power to legislate comprehends power to tax prospectively as well as retrospectively.
Observations of the Hon’ble High Court
The Supreme Court in Atiabari Tea Co. Ltd. v. State of Assam AIR 1961 SC 232, while deciding the constitutionality of the Assam Taxation (On Goods Carried by Roads and Inland Waterways) Act, 1954, held that trade shall be free throughout the territory of India it means that the flow of trade shall run smooth and unhampered by any restriction either at the boundaries of the States or at any other points inside the States themselves. It is the free movement or the transport of goods from one part of the country to the other that is intended to be saved, and if any Act imposes any direct restrictions on the very movement of such goods it attracts the provisions of Article 301.
The Supreme Court , once again in Automobile Transport (Rajasthan) Ltd. Vs. State of Rajasthan, AIR 1962 SC 1406, the Constitution Bench while upholding the validity of the Rajasthan Motor Vehicles Taxation Act, 1951 held that a working test for deciding whether a tax is compensatory or not is to enquire whether the 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
A Constitutional bench of five judges of the Supreme Court in Jindal Stainless v. State of Haryana [(2006) 7 SCC 241] laid down the parameters of a „compensatory tax‟.
The Act of 2007 levies entry tax for the purpose of development of trade, commerce and industry in the State The tax is provided to be continued to be levied till such time as it is required to improve infrastructure within the State such as power, road, market condition etc. with a view to facilitate better market conditions for trade, commerce and industry.
The Act of 2007 provides for the proceeds of the levy to be appropriated to the funds namely, the U.P. Trade Development Fund under sub-section (2), and shall be utilised exclusively for development of facilitating the trade, commerce and industry to include the activities specified.
The Act of 2007 ensures that the funds shall not be utilised for the purposes other than specified exclusively for the development or facilitating the trade, commerce and industry in the State of UP.
The Act of 2007 patently satisfies the tests of the entry tax laid down in Jindal Stainless Limited (supra). The defects, pointed out by the High Court in IOC v. State of UP (supra) decided by this Court on 27.1.2004 declaring the Act of 2000 to be violative of Article 301 and 304 of the Constitution of India have been fully cured.
No material has been placed by the petitioners to contradict the factual and legal position under the Act nor there is any tangible material to demonstrate that the entry tax causes any discrimination, is unreasonable or is against public interest.
Final Order
Based on the discussions above, the Hon‟ble High Court decided as below:
The State of U.P. did not lack legislative competence in enacting the Act of 2007, imposing entry tax on the entry of scheduled goods into the local areas for consumption, use or sale
The provisions of the Act of 2007 patently and facially indicate and that there are sufficient guarantees for ensuring that the entire amount of entry tax collected is utilized only for the purposes of its reimbursement to facilitate the trade, commerce and industry.
The State Government has also established that the entire amount of entry tax is by way of reimbursement / recompense to the trade, commerce and industry, in the local areas of the State of U.P. and provides quantifiable/ measurable benefits to its payers.
The Act validating the amount of entry tax levied, assessed, realized and collected under the U.P. Tax on Entry of Goods Act, 2000, is also valid
Comments
It is understood that all key traders, manufacturers and importers are approaching the Supreme Court because the bank guarantees have become immediately encashable and in some cases have already been encashed. At any rate the entire matter on the scope of Art 304(a) and/ or (b) and its operation in the context of the State‟s powers under Art 245 and 246 has been referred to the Larger Bench of the Supreme Court by order dated April 16, 2010 in C.A. No 3543 of 2002 in Jindal Stainless v. State of Haryana [AIT-2010-135-SC] listing out certain questions including the scope of the developmental activities to be enumerated in the legislation. This matter will have to be heard by a bench of more than 7 judges possibly 9 or 11 as the earlier judgments in Atiabari (supra) and Automobile Transport Rajasthan Ltd. (supra) were decided by benches of 5 and 7 judges respectively.
Source: Allahabad High Court Writ Tax No.1484/ 2007 ITC Limited v. State of Uttar Pradesh, 2011-VIL-57-ALH
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