Bombay High Court
Eurotex Industries And Exports Ltd. And ... vs State Of Maharashtra And Anr. on 16 January, 2004
Equivalent citations: 2004(3)BOMCR562, 2004(2)MHLJ1017, [2004]135STC25(BOM)
Author: J.P. Devadhar
Bench: R.M.S. Khandeparkar, J.P. Devadhar
JUDGMENT J.P. Devadhar, J.
1. Both these petitions raise common questions of law and hence both these petitions were heard together and are disposed of by this common judgment.
2. In these petitions Constitutional validity of the Maharashtra Tax on the Entry of Goods into Local Areas Act, 2002 is challenged in so far as it purports to levy entry tax on entry of furnace oil and low sulphur waxy residue oil into any local area in the State of Maharashtra for consumption, use or sale therein. Although the legislative competence of the State to levy entry tax has been raised in the petition, the counsel for the petitioners have not pressed that ground at the final hearing of the petition and have restricted their challenge based on violation of Articles 14, 19(1)(g), 301, 304 and 286 of the Constitution of India.
3. Both the petitioners manufacture electricity and for that purpose have set up their power plants in the State of Maharashtra. Eurotex Industries use furnace oil for their captive power plant as raw material, whereas Tata Power Limited use low sulphur waxy residue oil as raw material for the manufacture of electricity. Eurotex Industries Limited import furnace oil through Goa or Karwar Port and then transport it to their factory situated at Kolhapur in the State of Maharashtra. Tata Power Limited have their power plant situated at Chembur in Bombay and the raw material required is imported through the Port in Bombay.
4. By the Maharashtra Tax on the Entry of Goods into Local Areas Act, 2002 (hereinafter referred to as "the Entry Tax Act", for short) the State Government has levied entry tax on certain goods that enter into the local areas (entire State is divided into several local areas) in the State of Maharashtra for consumption, use or sale from any place outside the State at the rate specified in the Schedule to the said Act. First proviso to Section 3 of the Entry Tax Act provides that the rate of entry tax to be levied shall not exceed the rate specified for that commodity under the Bombay Sales Tax Act, the Bombay Sales of Motor Spirit Taxation Act, 1958 or as the case may be, the Maharashtra Purchase Tax on Sugarcane Act, 1962. Furnace oil and low sulphur waxy residue oil (hereinafter referred to as "goods") imported by the petitioners are covered at serial No. 13 of the Schedule to the Entry Tax Act and attract entry tax at 15 per cent ad valorem. Thus, if the petitioners purchase the said goods from the local dealers in Maharashtra then tax at 15 per cent is attracted under the Bombay Sales Tax Act, 1959 ("the BST Act", for short) and if the said goods are imported from outside the State, then entry tax is attracted at 15 per cent under the Entry Tax Act. However, under Section 42 of the BST Act read with Rule 41D of the Bombay Sales Tax Rules, 1959 ("the BST Rules", for short), a manufacturer who purchases specified goods for manufacture of taxable goods within the State is given drawback, set-off or refund at the rate of 12 per cent or 15 per cent as set out therein. In other words, where the specified raw materials which have borne the sales tax under the BST Act are used in the manufacture of the final product in the State of Maharashtra, then the sales tax paid on the raw material are refunded under the aforesaid provisions. However, there is no provision for refund of entry tax paid on raw materials brought from outside the State and used in the manufacture of final product within the State. Thus, for manufacture of electricity, use of raw materials purchased within the State works out to be cheaper as compared to the raw materials brought from outside the State.
5. Mr. Jagtiani, learned Senior Advocate appearing on behalf of Eurotex Industries Limited, submitted that the entry tax levied on furnace oil is liable to be struck down on the following grounds :
(a) That the entry tax creates a tax barrier which affects the free-flow of goods from outside Maharashtra into Maharashtra on account of the differential rates and tax burden that furnace oil would have to bear depending on from where it is purchased.
(b) That it discriminates between the petitioner and persons similarly placed only by virtue of the fact that the petitioners purchase furnace oil outside Maharashtra.
(c) That the said Act violates the petitioner's fundamental right to free trade under Article 19(1)(g) of the Constitution by imposing unreasonable restriction in the manner indicated above.
6. Elaborating the above submissions, Mr. Jagtiani submitted that Article 301 guarantees freedom of trade, commerce and intercourse throughout the territory of India and is made subject only to Part XIII of the Constitution. Relying upon the decision of the apex Court in the case of Indian Cement Ltd. v. State of A.P. , Mr. Jagtiani submitted that a taxing statute does constitute a fiscal barrier, which affects free-flow of goods from one State to another. He submitted that in the instant case the Entry Tax Act clearly operates as a barrier to the inflow of furnace oil from outside Maharashtra into Maharashtra for the following reasons :
(A) There is a direct 12 per cent to 15 per cent advantage in the pricing/cost of production in favour of a person who purchases furnace oil in Maharashtra for manufacture of electricity because of the provisions of Section 42 read with Rule 41D of the BST Act and Rules. The differential is so evident and glaring that any prudent businessman would opt to purchase furnace oil in Maharashtra for this reason alone.
(B) Entry tax was initially promulgated as an Ordinance with effect from October 1, 2002 and then converted into the said Act with effect from January 8, 2003 with very insignificant and minor changes which have no bearing to the issues in this case. At the time when the Ordinance was promulgated, the above concessions under the BST Act and Rules were already in force and available to the manufacturers of electricity. Thus the said Act consciously creates a barrier to the import of furnace oil from outside Maharashtra into the State.
(C) The additional affidavit of the Assistant Commissioner of Sales Tax affirmed on November 20, 2003 categorically confirms that as a result of introduction of entry tax the purchase of petroleum products in the State of Maharashtra has increased. Thus, there is a "direct and immediate" nexus between the imposition of an entry tax on furnace oil and the sale of such product in Maharashtra. Therefore, it is obvious that the said Act imposes a fiscal barrier which inhibits the flow of furnace oil and other petroleum products into Maharashtra in violation of Article 301.
(D) In paras 4, 5 and 6 of the said affidavit of the Assistant Commissioner of Sales Tax it is confirmed that the tax colleted on the sale of petroleum products in the State of Maharashtra between 2001-2002 up to September, 2003 has increased substantially, if not exponentially. The additional/increased collection of sales tax only signifies that the volume of trade in petroleum products in Maharashtra has correspondingly increased on account of the imposition of the entry tax.
7. It was submitted that Article 301 is subject to the exceptions set out in Part XIII, viz., Articles 302 and 304 of the Constitution, but neither of those articles are attracted in this case. Article 302 applies to laws made by Parliament and therefore, not applicable in the present case. Article 304 whilst empowering a State Legislature to impose tax on goods imported from other States is coupled with an injunction restraining that State from discriminating between goods so imported and similar goods manufactured in that State. It was submitted that the Entry Tax Act though on the face of it imposes the same rate of tax on furnace oil imported into Maharashtra as the BST Act does on furnace oil manufactured and sold in Maharashtra, but in effect, by virtue of Section 42 read with Rule 41D of the BST Act and Rules the rate of tax is anything but the same and there is a wide gap of 12 per cent to 15 per cent in respect of furnace oil brought into the local area from outside the State. Thus the said Act merely pays lip service to the provisions of Article 304(a) whilst in effect discriminating between the furnace oil imported and locally manufactured furnace oil. In this connection he relied upon the decision of the apex Court in the case of Shree Mahavir Oil Mills v. State of J. & K. , particularly paragraph 25 at page 53 (page 162 of STC) which reads as follows :
"In our opinion, it is this : the States are certainly free to exercise the power to levy taxes on goods imported from one States/ Union Territories but this freedom, or power, shall not be so exercised as to bring about a discrimination between the imported goods and the similar goods manufactured or produced in that State. The clause deals only with discrimination by means of taxation ; it prohibits it. The prohibition cannot be extended beyond the power of taxation. It means in the immediate context that States are free to encourage and promote the establishment and growth of industries within their States by all such means as they think proper but they cannot, in that process, subject the goods imported from other States to a discriminatory rate of taxation, i.e., a higher rate of sales tax vis-a-vis similar goods manufactured/produced within that State and sold within that State. Prohibition is against discriminatory taxation by the States. It matters not how this discrimination is brought about."
8. It was then submitted that the other exception to Article 301 is contained in Article 304(b) which empowers a State Legislature to impose reasonable restrictions on the freedom of trade, commerce and intercourse with or within that State as may be required in public interest. It was submitted that although public interest was canvassed as a justification for enacting the said Act in the affidavit in reply filed on behalf of the State, the same has not been urged by the counsel for the State during the course of his arguments. Even if public interest is sought to be applied to uphold the validity of the said Act, then it is clearly hit by the proviso to Article 304(b), because, the said Act was not moved or introduced in the Legislature with the previous sanction of the President. Even a post facto sanction of the President as such has not been obtained for such enactment.
9. It was next contended that the entry tax is neither compensatory nor regulatory in nature. The differential rates in tax vis-a-vis tax on locally manufactured goods may be tolerated to some extent if a tax which is imposed, is compensatory or regulatory. It was submitted that in the instant case the Entry Tax Act is not compensatory or regulatory in nature, for the following reasons :
(A) Section 3(7) of the Entry Tax Act in terms provides that the entry tax shall be in addition to the levy of octroi. Thus intrinsically the said provision of the Act rules out its compensatory nature.
(B) Section 3(7) further provides that the entry tax shall be in addition to any other entry tax collected by any authority including the local authority in respect of the movement of goods from one local area to another in the State. Once again this provides intrinsic evidence that the Act is not meant to be compensatory in nature.
(C) The two affidavits filed by the State in terms state that the purpose of levying entry tax is to augment the State revenue. On the face of it, augmentation of revenue is neither compensatory nor regulatory in purpose.
(D) The additional affidavit filed on behalf of the State read along with the written submissions filed by the State reveal that the Act has been enacted to create "level playing fields". This declaration of intent, which is also reflected in the Statement of Objects and Reasons, certainly militates against the pretence of the Act being compensatory or regulatory in nature. If at all, the Act is retaliatory in intent vis-a-vis other States.
(E) The additional affidavit of the State seeks to justify the imposition of entry tax as being compensatory by showing that the same has been utilised to compensate those local areas which have abolished octroi and that the expenditure has been made on account of the State Road Fund. It was submitted that this argument must be rejected for the following reasons :
(a) The contention that the entry tax is to compensate for abolition of octroi is not supported by the provisions of Section 3(7) of the Entry Tax Act.
(b) Even prior to the coming into existence of the said Act, funds were allocated by the State Government right from 1997 onwards towards the State Road Fund and to compensate by way of grants to municipal council and village panchayat on account of abolition of octroi. Thus it cannot be said that the Act is compensatory in nature but that was the general policy of the Government to provide for the aforesaid allocations.
(c) There is absolutely no nexus shown between the collection of entry tax and its utilisation for the benefit of traders/manufacturers from whom such tax is collected. In fact the affidavits are vague and general in this respect and simply state that the revenue obtained from the imposition of the entry tax are used for welfare activities such as maintenance of roads, hospitals, markets, etc. These are the general welfare activities of the State and it cannot be contended that in the absence of collecting entry tax such welfare activities would cease to be performed.
10. Reliance was placed on the decision of the apex Court in the case of Jindal Stripe Ltd. v. State of Haryana , wherein it was held that for an Act to be compensatory in nature there must be a clear nexus between the tax collected and the benefit conferred upon the persons from whom such tax has been collected. It was submitted that the said judgment has cast a doubt on the soundness of the ratio laid down in the case of Bhagatram Rajeev Kumar v. Commissioner of Sales Tax and State of Bihar v. Bihar Chamber of Commerce and, therefore, the apex Court has referred the issue raised in Jindal Stripe Ltd. to a larger constitutional Bench under Article 145(3) of the Constitution. In this view of the matter, it was submitted that this Court ought not to consider itself bound by the ratio laid down in the case of Bhagatram and Bihar Chamber of Commerce . It was submitted that if the aforesaid two judgments are taken to lay down the correct law on the questions of compensatory and regulatory nature of a taxing Act, then every fiscal legislation without exception will pass muster under the head "compensatory and regulatory", for, any tax collected by a Government has necessarily to be utilised for the benefit of the citizen and for no other purpose.
11. It was further submitted that by imposing entry tax the State has brought about discrimination which is emphasised by the fact that every manufacturer of goods purchasing furnace oil within Maharashtra is entitled to a refund/rebate/set-off or drawback irrespective of the size of its manufacturing unit or the place where it is located. It was submitted that the conditions for claiming benefit under Rule 41D are as follows :
(a) that he is a dealer registered under the Act.
(b) that he has purchased goods covered in entry 6 of Schedule B and in Schedule C ;
(c) that the goods are purchased by him in the State for manufacture of goods or sale or export ;
(d) that the goods so manufactured or actually sold by him or exported by him and not given away as samples ;
(e) that the goods purchased by him are used by him in the packing of the goods manufactured.
It was submitted that from the aforesaid conditions, it is clear that the refund/rebate/set-off of sales tax paid on the raw material used in the final product is not restricted to any special class of manufacturers but is available to all manufacturers who purchase raw materials within the State and use it in the manufacture of final product. Accordingly, it was submitted that taxing a manufacturer if he brings the raw materials from outside the State and not taxing him if he procures the raw materials within the State amounts to hostile discrimination and hence liable to be struck down.
12. It was submitted that in the case of Video Electronics v. State of Punjab , the apex Court has carved out another limited exception under which a differential in the rates of tax between imported goods and locally manufactured goods may be tolerated. In that case, a limited concession of subsidy granted to new industries for a specific duration to encourage the setting up of industries in backward areas or some such economic benefit for a limited period to a deserving class of people was held permissible. In the present case, it was submitted that there is no such exception carved out and in fact there is a blanket concession conferred under Rule 41D of the BST Rules which results in hostile discrimination and thus is violative of Articles 301 and 303 of the Constitution.
13. Mr. Jetley, learned Senior Advocate appearing on behalf of Tata Power Co. Ltd., submitted that the entry tax under the impugned Act can be levied only if the scheduled goods are brought within the local areas in the State of Maharashtra from a place outside Maharashtra but within the territory of India. In other words, the submission was that if the scheduled goods are brought into the local area from a place outside India, then entry tax is not leviable. Mr. Jetley, relying upon the decision of the apex Court in the case of 20th Century Finance Corporation Ltd v. State of Maharashtra reported in [2000] 119 STC 182, submitted that the definition of "entry of goods" under the Act means goods brought into local area from any place outside the State for consumption, use or sale. Any place outside the State would mean any place or territory within India. It was submitted that the words "any place outside the State" cannot be said to include any State outside the territory of India. Accordingly, it was submitted that on the raw materials imported by the petitioners from a place outside India, the entry tax is not leviable.
14. Mr. Jetley submitted that the term "import", "importer" and "local area" defined in Section 2(1) of the Entry Tax Act refer to bringing goods from outside the State of Maharashtra and these expressions cannot be extended so as to include imports from outside the territory of India. It was submitted that there is an obvious distinction between the expression "outside the State of Maharashtra" and "outside the country". Since the term used is "outside the State of Maharashtra", it was submitted that entry tax was not leviable on scheduled goods which are imported from outside the country. In this connection, Mr. Jetley relied upon the judgment of the Kerala High Court in the case of FR. William Fernandez v. State of Kerala [1999] 115 STC 591 and the decision of the Karnataka High Court in the case of Syndicate Bank v. State of Karnataka [2000] 119 STC 155.
15. The counsel for the petitioners further submitted that Section 2(1)(n) of the Entry Tax Act defines the words "value of goods". The said definition does not include the customs duty paid on the import of the goods from outside the territory of India. It was submitted that this omission is not accidental but is based on considered deliberation and it is evident that there is no legislative intent to levy entry tax on import of goods from outside the territory of India.
16. It was further submitted that Article 286 of the Constitution prohibits the States to impose or authorise imposition of tax on the sale or purchase of the goods when such sale or purchase takes place outside the State or in the course of import of goods into or export of goods. It was submitted that the petitioners have purchased the raw materials from outside the territory of India for use as a fuel in their power generation plant. In view of the prohibition contained in Article 286 of the Constitution, it was submitted that no entry tax could be levied on the said goods.
17. Mr. Jetley submitted that Article 301 of the Constitution guarantees freedom of trade and business and if it is infringed, the aggrieved person could seek remedy from the court against the offending legislation or executive action. It was submitted that the impugned provisions are a colourable exercise of regulatory power aimed at imposing restrictions on free-flow of trade, commerce and intercourse. It was submitted that the impugned provisions are arbitrary or excessive. It was submitted that the impugned provisions restrict the trade, commerce or intercourse directly and immediately. It was submitted that the entry tax imposed by the impugned provisions is confiscatory in nature and, therefore, invalid as it imposes an unreasonable restrictions upon the freedom of trade, commerce and intercourse guaranteed by Article 301 of the Constitution.
18. The counsel further submitted that even if the impugned legislation was in public interest, the same having not being enacted with the prior or subsequent approval of the President of India, must be held to be violative of Article 304(b) of the Constitution of India. It was submitted that by virtue of the impugned Act, the petitioners are required to pay entry tax at the rate of 15 per cent on the import of the raw materials from abroad and brought into the local area for the consumption/use as fuel for power generation. As against that, if the said raw material is locally purchased, the tax payable thereon would be 15.9 per cent by way of sales tax, turnover tax and surcharge under the provisions of the BST Act, but the same are refunded or given set-off under Rule 41D of the BST Rules. The significance of this situation is that the persons importing the scheduled goods from outside the territory of India will have to pay entry tax and will not be entitled to claim any set-off, drawback or rebate of the same ; whereas, others who purchase the said goods within the State of Maharashtra are entitled to set-off or rebate of refund of the taxes paid on the said goods. Relying upon the decisions of the apex Court in the case of Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan and Anand Commercial Agencies v. Commercial Tax Officer [1997] 107 STC 586, Mr. Jetley submitted that it is not open to the State to discriminate between the imported goods and the goods manufactured or produced within the State. Accordingly, it was submitted that the impugned legislation which seeks to discriminate between the imported goods and the goods manufactured in the State is wholly arbitrary, unreasonable, illegal and contrary to law and accordingly, liable to be quashed and set aside.
19. Mr. Bharucha, learned Senior Advocate appearing on behalf of the respondents, submitted that the impugned legislation is neither constitutionally invalid nor it is discriminatory as contended by the petitioners. He submitted that the validity of an Act cannot be challenged on the basis of exemption notification issued in another Act. If at all the petitioners were aggrieved by the exemption issued under the BST Act, then the proper course available to the petitioners was to challenge the said notification under the BST Act and not the validity of the Entry Tax Act.
20. Mr. Bharucha submitted that the rationale behind the levy of entry tax on goods which enter a local area from outside the State is that such goods have not borne the sales tax leviable under the BST Act. The goods which enter the local area from within the State bear sales tax and consequentially they do not again bear the entry tax. He submitted that the entry tax thus ensures that all goods which enter the local area for use, consumption or sale bear either the entry tax or the sales tax. He submitted that the proviso to Section 3(1) of the Act clearly shows the balancing nature of the entry tax. Since the goods coming from within the State are not taxed at the rate higher than the sales/purchase tax borne by goods coming into local area from within the State, there is no discrimination in the levy of entry tax. Mr. Bharucha submitted that second proviso to Section 3(1) of the impugned Act provides for reduction of entry tax by any amount paid by the importer on the goods on sales in the State in which the goods are purchased by the importer. This ensures that the goods entering the local area from any place outside the State do not bear entry tax in addition to the sales tax in the State of purchase of goods. He submitted that Section 3(5) of the impugned Act exempts entry tax on goods imported into a local area for the purpose of resale in the State or sale in the course of inter-State trade or commerce or exports within the territory of India. He submitted that the exemption ensures that no goods bear both State sales tax and also the entry tax. Similarly, the exemption in favour of the goods which enter a local area for the purpose of sale in the course of inter-State trade or commerce ensures that such goods bear the Central sales tax and do not in addition bear the entry tax. This provision puts the goods imported from outside the State into a local area on par with the goods within the State of Maharashtra. Both types of goods will bear only Central sales tax. He submitted that the sale in the course of exports are also exempted from the sales tax as well as entry tax. These goods which are sold in the course of exports and coming from a place outside Maharashtra, are put on par with similar goods from within the State and accordingly, he submitted that the impugned Act cannot be said to be discriminatory.
21. Mr. Bharucha submitted that the Statement of Objects and Reasons for enacting of the Entry Tax Act, inter alia, provides that some States have levied entry tax on goods imported from outside their States. Thus, levy of entry tax by several States would discriminate against the industries trade and consumers in Maharashtra, if a similar tax to equalise the tax was not levied in Maharashtra. Accordingly, Mr. Barucha submitted that the entry tax ensures a level playing field for goods which enter the local area from within the State and those goods that enter the local area from outside the State. He submits that the entry tax seeks to iron out anomalies that arise on account of different rates of sales tax in different States. He submitted that the entry tax does not impose any restrictions whatsoever on freedom of trade and commerce. He submitted that the Entry Tax Act in fact assists free trade by ironing out the discrepancies and providing a level playing field. Accordingly, the counsel submitted that the Entry Tax Act does not contravene the provisions of Article 301 of Constitution of India.
22. Mr. Bharucha further submitted that it is the case of the petitioners that because the goods under the BST Act are entitled to exemption, the actual quantum of tax under the BST Act may be lower than the entry tax and this makes the entry tax invalid. He submitted that even assuming for the sake of argument that the exemption granted under the BST Act is discriminatory, it cannot affect the validity of the Entry Tax Act. By relying upon the decisions of the apex Court in the case of State of Punjab v. Sansari Mal Puran Chand and State of Bombay v. F.N. Balsara AIR 1951 SC 318, he submitted that the act done or exemption granted under one Act cannot render another Act invalid. He submitted that at best, the exemption may be bad but not the statute.
23. Mr. Bharucha further submitted that in fact there is no discrimination as a result of grant of exemption under the BST Act and BST Rules, because, there is no automatic exemption granted under the said Act. He submitted that grant of refund or set-off under the BST Rules is governed by specific provisions laid down under Rule 45 and other Rules of the BST Rules and the said Rules provide for conditional exemption. He submitted that the nature and quantum of exemption from tax is the State function and cannot be assailed on the ground of discrimination. Relying upon the decision of the apex Court in case of R.K. Garg v. Union of India the counsel submitted that it is not necessary for the State to exempt every tax-payer in order to grant exemption to some transactions. He submitted that there may be crudities, unequalities and even possibilities of abuse but on that count alone, the statute cannot be struck down as invalid. Relying upon the decisions of the apex Court in the case of Associated Tanners v. Commercial Tax Officer and Shree Digvijay Cement Co. Ltd. v. State of Rajasthan [2000] 117 STC 395 ; AIR 2000 SC 630, it was submitted that mere fact that there is difference in the rate of tax on goods locally manufactured and those imported from outside the State would not amount to hampering trade between two States within the meaning of Article 301 of the Constitution. He submitted that only direct and immediate restrictions are hit by Article 301 of the Constitution but a conditional exemption is not a direct and immediate restriction and, therefore, the same is not hit by Article 301. Relying upon the decisions of the apex Court in the case of State of Madras v. N.K. Nataraja Mudaliar [1968] 22 STC 376 ; AIR 1969 SC 147, State of Tamil Nadu v. Sitalakshmi Mills Ltd. , Video Electronics Pvt. Ltd. v. State of Punjab and Amrit Banaspati Co. Ltd. v. Union of India , he submitted that free-flow of trade does not depend on the rate of tax. Accordingly, it was submitted that merely because in some cases the burden of tax is not exactly equal, cannot render the provisions of the entry tax invalid.
24. Without prejudice to the aforesaid submissions, Mr. Bharucha submitted that the entry tax does not hinder or restrict the free-flow of trade and commerce and that it in fact aids the free trade by removing the anomalies caused by differential rates of sales tax. He submitted that the entry tax is compensatory and regulatory in nature and, therefore, the Entry Tax Act is immune from challenge under Article 301 of the Constitution of India. He submitted that the State provides many trading facilities which are in the nature of aids to promotion of free trade and commerce within the State in the form of maintenance of roads, markets, shops, etc. The entry tax levied is compensatory and regulatory in nature as the same helps in providing the above facilities. He submitted that because of imposition of the entry tax, the Government gets crores of rupees by way of tax which is utilised for providing facilities like transport facilities, roads and markets. He submitted that there is no material on record to show that after imposition of entry tax, free-flow of goods into the State of Maharashtra is adversely affected. Relying upon the decision of the apex Court in the case of Bhagatram Rajeev Kumar v. Commissioner of Sales Tax [1995] 96 STC 654 ; (1995) Supp 1 SCC 673, Widia (India) Ltd. v. State of Karnataka [2003] 132 STC 360 ; (2003) 8 SCC 271, State of Bihar v. Bihar Chamber of Commerce , Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan , G.K. Krishnan v. State of Tamil Nadu . Malwa Bus Service (Pvt.) Ltd. v. State of Punjab , International Tourist Corporation v. State of Haryana , Suresh Chand Sri Gopal v. Union of India , Meenakshi v. State of Karnataka (1984) Supp SCC 326 and Bishamber Dayal Chandra Mohan v. State of U.P. , counsel submitted that even if there is substantial or some link between the tax and the facilities extended to such dealers directly or indirectly then the levy cannot be said to be invalid.
25. Mr. Bharucha submitted that Article 286 of the Constitution of India provides for restrictions as to imposition of tax on the sale or purchase of goods. He submitted that Article 286 of the Constitution does not prohibit imposition of entry tax on the entry of goods into a local area. He submitted that under item 52, List II, Seventh Schedule to the Constitution, the State is empowered to levy taxes on the entry of goods into a local area for consumption, use or sale thereof. Relying upon the decision of the apex Court in the case of Kiran Spinning Mills v. Collector of Customs , he submitted that import of goods is completed when the goods cross the customs barrier. He submitted that the taxing event under the Entry Tax Act is long after the goods are imported and have merged with the mass of goods in India. Therefore, the entry tax is outside the restrictions of Article 286 of the Constitution of India.
26. Mr. Bharucha relied upon the decision in the case of Secretary to Government of Home Department, Tamil Nadu v. Salem Dharmapuri Omnibus Association submitted that if Government has power to impose a tax, the motive for the purpose with which that power has been exercised is immaterial. Relying upon the decision of the apex Court in the case of Orissa State Warehousing Corporation v. Commissioner of Income-tax , it was submitted that intentment has no place in a taxing statute. He submitted that a fiscal statute has to be interpreted on the basis of the language used therein and not de hors the same. He submitted that the court has to ascribe the natural and ordinary meaning to the words used by the legislation and the Court ought not under any circumstances can substitute its own impression and ideas in place of the legislative intent as is available from the plain reading of the statutory provisions. Accordingly, he submitted that the entry tax is a valid piece of legislation and the petitions challenging the said legislation are liable to be dismissed.
27. After hearing counsel on both sides, we are of the opinion that the imposition of entry tax on furnace oil and low sulphur waxy residue oil covered under serial No. 13 to the Schedule to the Entry Tax Act cannot be sustained in law. On perusal of the Entry Tax Act it is seen that the rate of entry tax on a commodity shall not exceed the rate specified for the commodity under the BST Act. According to the State, the rationale in levying entry tax is to ensure that all goods which enter the local area for consumption, use or sale must bear either the entry tax or sales tax and that the entry tax levied does not exceed the sales tax levied on that commodity under the BST Act. In the present case, although a rate of entry tax levied on the goods is equivalent to the rate of sales tax leviable on such goods under the BST Act, in view of refund/rebate/set-off granted under the BST Act, effectively, there is no tax if the goods are brought into the local area from within the State, whereas entry tax is levied on the said goods if brought from outside the State. In other words, even though the goods entering the local area from within the State do not bear sales tax, the goods entering the local area from outside the State are subjected to entry tax.
28. The first question, therefore, to be considered in the present case is, whether, entry tax under the Entry Tax Act can be levied on a commodity on which there is no sales tax levied under the BST Act ? The answer to the above question has to be in the negative because the proviso to Section 3(1) of the Entry Tax Act clearly provides that the rate of entry tax shall not exceed the rate of tax specified for that commodity under the BST Act. Therefore, if there is no sales tax leviable on a commodity under the BST Act, then entry tax cannot be levied on that commodity.
29. The question then to be considered is, where the sales tax leviable on a commodity is exempted or made refundable under the BST Act and the rules made thereunder, then, whether entry tax can be levied on that commodity at the rate specified under the BST Act ? For example, where the sales tax at 15 per cent levied and collected on a commodity is refunded as per the provisions of the BST Act, can entry tax still be levied at 15 per cent, especially where the same is legislated to bring the importers on par with the local purchasers of raw material ? In other words, whether the effective rate of tax on a commodity under the BST Act should be taken into consideration for determining the levy of entry tax ?
30. Similar question had arisen in the matter of levy of additional duty under Section 3 of the Customs Tariff Act, 1985 ("the CTA", for short). Section 3(1) of the CTA provided that on every imported article additional duty shall be leviable equal to the excise duty for the time being leviable on a like article if produced or manufactured in India, or capable of being manufactured in India. The explanation to Section 3(1) of the CTA provided that the expression "the excise duty for the time being leviable" means the excise duty for the time being in force. The issue before the court was, for determining the additional duty under the CTA whether the exemption notifications issued under the Excise Act or the Rules made thereunder should be considered or not. This Court in the case of Century Enka Ltd. v. Union of India (1982) 10 ELT 64 and in the case of Nirlon Synthetic Fibres & Chemicals Ltd. v. State of Maharashtra (1997) 96 ELT 251 (Bom) at para 9 has held that Section 3 of the Customs Tariff Act has to be read with the provisions of the Central Excise Act and the liability to pay additional duty under CTA would depend upon the fact as to whether such an article is liable to pay excise duty under the Excise Act. In the present case, the first proviso to Section 3(1) of the Entry Tax Act clearly provides that the rate of entry tax in respect of any commodity shall not exceed the rate specified for that commodity under the BST Act, etc. In our opinion, the words "rate specified" in Section 3(1) of the Entry Tax Act have to be construed to mean the effective rate of sales tax payable on the said commodity under the BST Act. If the effective rate of sales tax is nil, then the entry tax has to be nil. If the entry tax exceeds the sales tax leviable on a commodity after taking into account the exemption granted under the BST Act, then it would be in violation of the proviso to Section 3(1) of the Entry Tax Act, because the said proviso clearly provides that the entry tax on a commodity shall not exceed the sales tax leviable on that commodity under the BST Act. In this view of the matter, where the goods entering the local area from within the State do not bear sales tax, levy of entry tax on goods entering the local area from, outside the State would be unauthorised.
31. Even otherwise, by virtue of the general exemption granted to the goods under Section 42 of the BST Act read with the BST Rules, every manufacturer who purchases the said goods from a dealer in the State of Maharashtra is in an advantageous position in the sense that the cost of the said goods becomes cheaper by 12 to 15 per cent compared to the said goods imported from outside the State. The apex Court in the case of Anand Commercial Agencies v. Commercial Tax Officer, VI Circle, Hyderabad has held as follows :
"11. Freedom of trade, commerce and intercourse guaranteed by Article 301 means freedom to carry on business throughout the territory of India without any obstruction and hindrance. The question whether a fiscal barrier will amount to interference with the right to carry on trade, commerce and intercourse throughout the territory of India is not an easy question to answer. Every State has a right to impose tax on subjects which fall within its jurisdiction under List II of the Seventh Schedule to the Constitution. This includes taxes on sale or purchase of goods other than newspapers. Fiscal powers of the State can be utilised not only to collect revenue but also to regulate economic development of a State. A backward State may try to encourage development of industries within the State by grant of subsidy and also by low rate of tax on goods manufactured by local industries. If small newly set up industries in the State have to compete with big industries, small units may not survive at all. In such a case, the State is entitled to prop up the local industries by taking fiscal measures. This may be done by providing subsidies or by imposing low rate of sales tax on the goods manufactured within the State. This aspect was explained in the case of Video Electronics Pvt. Ltd. v. State of Punjab by Sabyasachi Mukharji, C.J., in the following words :.
'It is manifest that free-flow of trade between two States does not necessarily or generally depend upon the rate of tax alone. Many factors including the cost of goods play an important role in the movement of goods from one State to another. Hence the mere fact that there is a difference in the rate of tax on goods locally manufactured and those imported would not amount to hampering of trade between the two States within the meaning of Article 301 of the Constitution. As is manifest, Article 304 is an exception to Article 301 of the Constitution. The need of taking resort to exception will arise only if the tax impugned is hit by Articles 301 and 303 of the Constitution. If it is not, then Article 304 of the Constitution will not come into picture at all.' But barring special circumstances, as stated hereinabove, the view of this Court has consistently been that a State is not entitled to tax locally made goods at a lower rate while taxing similar goods manufactured in other State at a higher rate."
In the present case, refund of sales tax paid on raw materials is not granted under any special circumstances, but is granted generally to all registered dealers who manufacture goods in the State for sale or export, by using raw materials purchased in Maharashtra.
32. The contention of the State that there is no automatic exemption but only a conditional exemption granted under the BST Act cannot be accepted. A perusal of Section 42 of the BST Act and the Rules made thereunder clearly shows that special conditions are not attached for availing the exemption and in fact, every manufacturer is entitled to the refund/set off of tax paid on raw materials. The said exemption is neither restricted to any particular class of manufacturers nor it is granted for any special reason or for a specified period of time. Thus the goods which enter the local area from outside the State are subjected to entry tax, whereas, the goods which enter the local area from within the State do not suffer any tax because, the sales tax paid thereon is refunded under the BST Act. The direct and immediate consequence of the levy of entry tax is that, for a manufacturer the cost of the raw materials becomes cheaper by 12 to 15 per cent if purchased within the State and costlier by 15 per cent if purchased from outside the State.
33. By levy of entry tax on goods which enter the local area from outside the State while similar goods entering the local area from within the State do not bear sales tax, the State has in fact created a tax barrier in contravention of Article 301 which guarantees free-flow of trade, commerce and intercourse throughout the territory of India. The fact that the tax barrier created by the levy of entry tax has hampered free-flow of goods into the State is established from the averments made in the additional affidavit in reply filed on behalf of the State on November 20, 2003. In the said affidavit in reply it is admitted by the State that after the introduction of entry tax, the sale of goods in question within the State has gone up considerably. This admission on the part of the State clearly establishes that on introduction of entry tax, the manufacturers have opted to purchase raw materials from within the State, because on account of the tax barrier created by the entry tax, bringing raw materials from outside the State works out to be costlier. In other words, by taxing the goods entering the local areas from outside the State while not taxing the goods entering the local area from within the State, free-flow of trade, commerce and intercourse is hampered and, therefore, the entry tax is liable to be declared as unconstitutional.
34. In the present case, refund of sales tax paid on the raw materials used in the manufacture of a final product is a rule and not an exception. Where the State policy is not to tax the raw materials which are used in the manufacture of final products in a local area within the State, then, subjecting the raw materials which enter the local area from outside the State to tax to the exclusion of the raw materials entering the local area from within the State would be arbitrary. Where the raw materials entering the local area from outside the State are only subjected to tax, then such levy directly discriminates between the imported goods and the goods which enter the local area from within the State. By taxing the imported goods while exempting the local goods, the State has sought to treat equals unequally which is not permissible in law.
35. It was contended on behalf of the State that because some States have levied entry tax on goods imported from outside their State, entry tax has been levied on similar goods entering the local areas in the State of Maharashtra so as to ensure a level playing field between the goods which enter the local area from within the State and those goods that enter the local area from outside the State. This contention of the State is without any merit because from the express words used in the Act it is seen that the entry tax is levied to ensure that the goods which enter the local area bear either the sales tax or the entry tax. Thus, from the provisions of the Entry Tax Act it is clear that the entry tax is not levied because some other States have levied entry tax on such goods. This reasoning is further fortified by the fact that the Entry Tax Act clearly provides that the rate of entry tax on any commodity shall not exceed the rate specified for that commodity under the BST Act, etc. Thus, by collecting entry tax on goods entering the local area from outside the State and refunding the sales tax on goods entering the local area from within the State instead of ensuring level playing field," the State has created uneven level playing field thereby discriminating between the imported goods and the local goods manufactured or produced in the State. A tax which discriminates between the imported goods and the locally manufactured goods and hampers the trade between the States violates the constitutional mandate and is therefore, liable to be declared as unconstitutional.
36. It is true that by judicial decisions, an exception to Article 301 has been carved out and it has been held that the taxes which are compensatory or regulatory in nature are protected from the vice of unconstitutionality. In the present case, it is contended by the State that the entry tax is levied to compensate those local areas which have abolished octroi and further entry tax collected has been used in meeting the expenditure on account of the State road fund. This contention of the State is belied by Section 3(7) of the Entry Tax Act which clearly states that the entry tax is leviable in addition to levy and collection of octroi or entry tax by any authority including the local authority. Therefore, it cannot be said that the levy of entry tax is with a view to compensate the local area on account of abolishing octroi. Moreover, it is not in dispute that the State Government has been allocating amounts towards the State road fund even prior to the introduction of entry tax. Therefore, it cannot be said that the entry tax has been levied with a specific purpose of contributing towards State road fund. As held by the apex Court in the case of Jindal Stripe Ltd. , tax imposed for augmenting general revenue of the State such as sales tax is not compensatory. For an Act to be compensatory in nature, there must be a clear nexus between the tax collected and benefits conferred upon the persons from whom such a tax is collected. In spite of several affidavits filed, the State has not been able to establish the nexus between the entry tax collected and the benefit conferred upon the persons from whom the tax is collected. On the contrary, from the affidavit in reply filed by the State, it is established that after the introduction of entry tax, the manufacturers, instead of importing the raw materials have chosen to purchase raw materials from within the State. As a result, sale of the said raw materials within State and consequently collection of sales tax under the BST Act has increased substantially. Thus due to entry tax, the imports have dwindled and sales within the State have increased.
In these circumstances, in the absence of any link between the entry tax on imported goods, and the facilities extended to the importers directly or indirectly, the levy of entry tax which is discriminatory cannot be said to be compensatory in nature.
37. The decision of the apex Court in the case of Bihar Chamber of Commerce , does not support the contention of the State, because, firstly, in that case, the entry tax was levied to compensate the loss of revenue on cess due to the decision rendered by the Supreme Court and secondly, the apex Court has held that in that case prior consent of the President was obtained by the State. In the present case, admittedly consent of the President had not been obtained till date. Moreover, in the present case, entry tax is levied and collected at 15 per cent on the footing that the sales tax is levied and collected on similar goods at 15 per cent when in fact the sales tax collected thereon is refunded as per the exemption notification issued under the BST Act and Rules. In other words, by the impugned legislation, raw materials required for manufacture of electricity are subjected to entry tax if brought into the local area from outside the State even though similar goods when enter the local area from within the State do not effectively bear sales tax. Apart from above, the ratio laid down by the apex Court in the case of Bihar Chamber of Commerce to the effect that for establishing the compensatory nature of tax, it is enough if some connection, direct or indirect, is shown to exist between the tax and the trading facilities provided by the State does not support the case of the State, because, in the present case, admittedly the entry tax is levied to ensure that the goods entering the local area bear either sales tax or entry tax. Once it is found that the specified goods entering local area from within the State do not bear sales tax then entry tax on similar goods entering the local area from outside the State cannot be levied. In these circumstances subjecting the goods imported from outside the State to entry tax becomes unauthorised, arbitrary, discriminatory and violative of Article 301 of the Constitution.
38. The ratio laid down by the Apex Court in the case of R.K. Garg is distinguishable on facts. In the present case unlike the case before the apex Court, the petitioners are not contending that the exemption granted to the raw materials purchased within the State should also be extended to the imported goods. What is contended by the petitioners is that, the basis for levy of entry tax is the levy of sales tax on local goods and if local goods do not bear sales tax then the imported goods cannot be subjected to entry tax. Similarly, the decisions of the apex Court in the case of Associated Tanners and Shree Digvijay Cement Co. Ltd. are also distinguishable on facts. In the present case, it is not the differential rate of tax which is questioned but what is questioned is the propriety of levying entry tax on imported goods entering the local area, when similar goods entering the local area from within the State do not bear the sales tax. Therefore, the decisions in the case of Associated Tanners and Shree Digvijay Cement Co. Ltd. , do not support the case of the petitioners. It is true that what should be the quantum of tax is the prerogative of the State and the same cannot be questioned in a court of law. However, when the State Legislature provides that the entry tax on a commodity shall not exceed the rate specified for that commodity under the BST Act, it would be open to the court to find out whether, effectively any sales tax is levied on that commodity. In the present case, the furnace oil and low sulphur waxy residue oil entering the local area from within the State do not bear sales tax and therefore, entry tax on those goods when enter the local area from outside the State cannot be levied. On the date on which entry tax was introduced on the goods in question, the general exemption granted on those goods under the BST Act and Rules made thereunder were in existence. Therefore, it cannot be said that the levy of entry tax was to ensure that all goods entering the local area bear either the entry tax or the sales tax. Thus the entry tax on furnace oil and low sulphur waxy residue oil instead of striking a balance, in fact creates imbalance between the imported goods and the local goods and in fact has defeated the very purpose of enacting Entry Tax Act.
39. For all the aforesaid reasons, we hold that entry No. 13 to the Schedule to the Entry Tax Act in so far as it purports to levy entry tax on furnace oil and low sulphur waxy residue oil is unauthorised and unconstitutional.
40. Petitions are allowed in the above terms and rule made absolute accordingly, with no order as to costs.