Supreme Court today upheld the validity of tax levied by various states on goods entering their territory, saying they are "well within their right" to design their fiscal legislations.
In a majority verdict of 7:2, a Constitution Bench headed by Chief Justice T S Thakur said the compensatory tax theory as evolved in earlier judgements has no juristic value and is over-ruled.
"States are well within their right to design their fiscal legislations to ensure that the tax burden on goods imported from other States and goods produced within the state fall equally. Such measures, if taken, would not contravene Article 304(a) of the Constitution.
"The question whether the levies in the present case indeed satisfy this test is left to be determined by the regular benches hearing the matters," Justice Thakur, who penned down the judgement for Justices A K Sikri and A M Khanwilkar, said.
Justices S A Bobde, Shiva Kirti Singh, N V Ramana and R Bhanumathi also concurred with the findings of Chief Justice.
Separate minority judgements were delivered by Justices D Y Chandrachud and Ashok Bhushan which held as unconstitutional the power of the states to legislate their entry tax laws.
Justice Bhanumathi preferred to write a separate judgement, saying she had difference of opinion on one or two points only, but otherwise was in agreement with the majority view.
She said while the majority verdict has left to a smaller bench to give a meaning to the term 'local area', she was of the view that it implied the entire territory of the state.
The majority verdict said if taxing law is non- discriminatory, it can be said to be constitutionally valid without the legislation having to go through the test or the process envisaged by Article 304(b).
"Constitutional validity of any taxing statute has, therefore, to be tested only on the anvil of Article 304(a) and if the law is found to be non-discriminatory, it can be declared to be constitutionally valid without the legislation having to go through the test or the process envisaged by Article 304(b)," the 911-page judgement, including both the dissenting judgements, said.
The majority verdict said "the compensatory tax theory
evolved in Automobile Transport case and subsequently modified in Jindal's case has no juristic basis and is therefore rejected".
It said that only such taxes as are discriminatory in nature are prohibited by Article 304(a) and it follows that levy of a non-discriminatory tax would not constitute an infraction of Article 301.
"The essence of the guarantee in Article 304(a) lies in the same or similar goods being treated similarly in the matter of taxation. The question, therefore, is whether that guarantee is violated if the goods subjected to levy of entry tax are not produced or manufactured within the State levying the tax. Our answer is in the negative.
"This is because there is no question of any discrimination if goods from outside the state are not at a disadvantage vis-a-vis goods produced or manufactured within that State. It is true that a levy on goods that are not produced or manufactured in the state is likely to make such goods costlier but that is not enough for the levy to be considered unconstitutional," the bench said.
It said "a responsive Government aware of the needs of its constituents will be under tremendous pressure to keep such taxes low enough for its constituents to be able to afford the same".
The bench said that democratic processes and pressures within the system of governance that exist, will itself take care of any aberrations in this regard.
"What is absolutely clear, however, is that Article 304 (a) will not frown at a levy simply because same or similar goods as are taxed are not produced or manufactured in the state," the bench said.
The apex court held that "a non-discriminatory tax does not per se constitute a restriction on the right to free trade, commerce and intercourse guaranteed under Article 301".
It said a tax on entry of goods into a local area for use, sale or consumption therein is "permissible although similar goods are not produced within the taxing state".
It said that incentives, set-offs granted to a specified class of dealers for a limited period of time in a non-hostile fashion with a view to developing economically backward areas would not violate Article 304(a).
Justice Bhanumathi, who concurred with the findings of
the majority view but wrote a separate judgement on a few points, said when entry tax is levied by Entry Tax Act enacted by State, the term 'a local area' may cover the 'whole state' or 'a local area' as notified in the legislation.
"I agree with the view taken in Bihar Chamber of Commerce that from the point of view of entry tax, that the State is a compendium of local areas and where the local areas contemplated by the Act cover the entire State, the difference between the state and 'a local area' practically disappears," she said.
"The concept of unjust enrichment is applicable for considering the question of refund. Unless the assessees establish that they have not passed on the tax burden to the consumers, they cannot make a claim for refund and unjustly enrich themselves," Justice Bhanumathi said.
Justice Chandrachud, who wrote a dissenting verdict, said that a 'local area' for the purposes of Entry 52 of List II is "not the entire state".
"Local area postulates an area within a state administered by a local body under relevant state legislation," he said.
"The freedom guaranteed by Article 301 enables goods, services, persons and capital to engage in trade, commerce and commercial intercourse throughout the territory of India. The expression 'throughout' extends the ambit of the freedom across and within state boundaries.
"Article 301 subserves the constitutional goal of integrating the nation into an economic entity comprising of a common market for goods and services," Justice Chandrachud said.
Writing a separate dissenting verdict, Justice Bhushan said that levy of taxes is an attribute of a sovereign state as per Constitutional scheme and limited to the extend as provided in the Constitution.
