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CASE NO.: Appeal (civil)  3453 of 2002

PETITIONER: M/s. Jindal Stainless Ltd. & Anr.                        

RESPONDENT: State of Haryana and Ors.                                        

DATE OF JUDGMENT: 14/07/2006

BENCH: ARIJIT PASAYAT & S.H. KAPADIA

JUDGMENT: J U D G M E N T WITH (SLP (C) No.10003/2004, SLP (C) No.10007/2004         SLP (C) No.10156/2004,  SLP (C) No.10164/2004         SLP (C) No.10167/2004,  SLP (C) No.10206/2004         SLP (C) No.10381/2004,  SLP (C) No.10391/2004         SLP (C) No.10404/2004,  SLP (C) No.10417/2004         SLP (C) No.10501/2004,  SLP (C) No.10563/2004         SLP (C) No.10568/2004,  SLP (C) No.10571/2004         SLP (C) No.11012/2004,  SLP (C) No.11271/2004         SLP (C) No.11326/2004, T.C. (C) No. 13/2004         SLP (C) No.14380/2005         C.A.Nos.2608/2003, 2637/2003, 2769/2000, 3144/2004,         3145/2004, 3146/2004, 3314/2001, 3381-3400/1998,         3454/2002, 3455/2002, 3456-3459/2002, 3460/2002         3461/2002, 3462-3463/2002,      3464/2002, 3465/2002         3466/2002, 3467/2002, 3468/2002, 3469/2002,          3470/2002, 3592/1998, 4471/2000, 4476/2000,         4651/1998, 4954/2004, Writ Petition No. 512/2003,         C.A. Nos. 5141/2004, 5143/2004, 5144/2004, 5145/2004,         5147/2004, 5148/2004, 5149/2004, 5150/2004,          5151/2004, 5152/2004, 5153/2004, 5156/2004,          5157/2004, 5158/2004, 5159/2004, 5160/2004,         5162/2004, 5163/2004, 5164/2004, 5165/2004, 5166/2004,         5167/2004, 5168/2004, 5169/2004, 5170/2004,          Writ Petition (C) No. 574/2003, C.A. Nos. 5740/2002,         5858/2002, 6331/2003, 6383-6421/1997, 6422-6435/1997,         6436/1997, 6437-6440/1997, 7658/2004, 8241/2003,         8242/2003, 8243/2003, 8244/2003, 8245/2003, 8246/2003,         8247/2003, 8248/2003, 8249/2003, 8250/2003, 8251/2003, 8252/2003, 918/1999, SLP (C) No.9496/2004, SLP (C)  No.9569/2004, SLP (C) No.9883/2004, SLP (C) No.9891/2004, SLP (C) No. 9898/2004, SLP (C) No. 9904/2004, SLP (C) No. 9910/2004, SLP (C) No. 9911/2004, C.A. Nos. 997-998/2004,  SLP (C) No.9976/2004, SLP (C) No.9993/2004, SLP (C) No.9998/2004, SLP (C) No.9999/2004, C.A.Nos. 1956/2003, 2633/2003, 2638/2003, 3720- 3722/2003, SLP (C) No.10153/2004

ARIJIT PASAYAT, J.

       These appeals and certain connected matters were  initially heard by a two-Judge Bench of this Court.  The  matters were referred to a larger Bench by order dated  26.9.2003 as the Bench hearing the matters doubted the

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correctness of the views expressed in M/s. Bhagatram  Rajeevkumar v. Commissioner of Sales Tax, M.P. and Others   [1995 (Suppl.) 1 SCC 673] which was relied on in a  subsequent decision in State of Bihar and Others  v.  Bihar  Chambers of Commerce and Others  [1996 (9) SCC 136] .  The  matters were dealt with by a Constitution Bench to decide with  certitude the parameters of the judicially evolved concept of  ’Compensatory Tax" viz-a-viz. Article 301 of the Constitution of  India, 1950 (in short the ’Constitution’).

       The Constitution Bench in  Jindal Stainless Ltd. & Anr.   v. State of Haryana & Ors. [2006(4) SCALE 300] [speaking  through one of us (Kapadia, J] concluded as follows :          49. In our opinion, the doubt expressed by the  referring Bench about the correctness of the  decision in Bhagatram’s case 1995 Supp. (1)  SCC 673 followed by the judgment in the case  of Bihar Chamber of Commerce (1996) 9 SCC  136 was well-founded.  50. We reiterate that the doctrine of "direct and  immediate effect" of the impugned law on trade  and commerce under Article 301 as  propounded 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 for deciding whether a tax is  compensatory or not vide para 19 of the report,  will continue to apply and the test of "some  connection" indicated in para 8 of the  judgment in Bhagatram Rajeevkumar v.  Commissioner of Sales Tax, M.P. 1995 Supp.  (1) SCC 673 and followed in the case of State  of Bihar v. Bihar Chamber of Commerce (1996)  9 SCC 136, is, in our opinion, not good law.  Accordingly, the constitutional validity of  various local enactments which are the subject  matters of pending appeals, special leave  petitions and writ petitions will now be listed  for being disposed of in the light of this  judgment.

       In all these appeals and connected matters the basic  issue revolves round the concept of "Compensatory Tax".  In  all these matters the concerned High Courts do not appear to  have examined the issue in the proper perspective, as they  were bound by the judgments in Bhagatram’s case (supra) and  Bihar Chambers of Commerce’s case (supra).   

At this juncture, it is necessary to take note of what has  been stated in paragraphs 42 to 45 of the judgment rendered  by the Constitution Bench, which read as follows :          42.To sum up, the basis of every levy is the  controlling factor. In the case of "a tax", the  levy is a part of common burden based on the  principle of ability or capacity to pay. In the  case of "a fee", the basis is the special benefit  to the payer (individual as such) based on the  principle of equivalence. When the tax is  imposed as a part of regulation or as a part of  regulatory measure, its basis shifts from the  concept of "burden" to the concept of  measurable/quantifiable benefit and then it

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becomes "a compensatory tax" and its payment  is then not for revenue but as reimbursement/  recompense to the service/facility provider. It  is then a tax on recompense. Compensatory  tax is by nature hybrid but it is more closer to  fees than to tax as both fees and compensatory  taxes are based on the principle of equivalence  and on the basis of  reimbursement/recompense. If the impugned  law chooses an activity like trade and  commerce as the criterion of its operation and  if the effect of the operation of the enactment is  to impede trade and commerce then Article  301 is violated. BURDEN ON THE STATE: 43.. Applying the above tests/parameters,  whenever a law is impugned as violative of  Article 301of the Constitution, the Court has  to see whether the impugned enactment  facially or patently indicates quantifiable data  on the basis of which the compensatory tax is  sought to be levied. The Act must facially  indicate the benefit which is quantifiable or  measurable. It must broadly indicate  proportionality to the quantifiable benefit. If  the provisions 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  material before the Court, that the payment of  compensatory tax is a  reimbursement/recompense for the  quantifiable/ measurable benefit provided or  to be provided to its payer(s). As soon as it is  shown that the Act invades freedom of trade it  is necessary to enquire whether the State has  proved that the restrictions imposed by it by  way of taxation are reasonable and in public  interest within the meaning of Article 304(b)  [See: para 35 of the decision in the case of  Khyerbari Tea Co. Ltd. and Anr. v. State of  Assam reported in AIR 1964 SC 925. SCOPE OF ARTICLES 301, 302 & 304 VIS-@- VIS COMPENSATORY TAX: 44. As stated above, taxing laws are not  excluded from the operation of Article 301,  which means that tax laws can and do amount  to restrictions on the freedom guaranteed to  trade under Part-XIII of the Constitution. This  principle is well settled in the case of Atiabari  Tea Co.  AIR 1961 SC 232. It is equally  important to note that in Atiabari Tea Co.  AIR  1961 SC 232, the Supreme Court propounded  the doctrine of "direct and immediate effect".  Therefore, whenever a law is challenged on the  ground of violation of Article 301, the Court  has not only to examine the pith and  substance of the levy but in addition thereto,  the Court has to see the effect and the  operation of the impugned law on inter-State  trade and commerce as well as intra-State  trade and commerce. 45. When any legislation, whether it would be  a taxation law or a non-taxation law, is  challenged before the court as violating Article

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301, the first question to be asked is: what is  the scope of the operation of the law? Whether  it has chosen an activity like movement of  trade, commerce and intercourse throughout  India, as the criterion of its operation? If yes,  the next question is: what is the effect of  operation of the law on the freedom  guaranteed under Article 301? If the effect is to  facilitate free flow of trade and commerce then  it is regulation and if it is to impede or burden  the activity, then the law is a restraint. After  finding the law to be a restraint/restriction one  has to see whether the impugned law is  enacted by the Parliament or the State  Legislature. Clause (b) of Article 304 confers a  power upon the State Legislature similar to  that conferred upon Parliament by Article 302  subject to the following differences:_ (a) While the power of Parliament under Article  302 is subject to the prohibition of preference  and discrimination decreed by Article 303(1)  unless Parliament makes the declaration  under Article 303(2), the State power  contained in Article 304(b) is made expressly  free from the prohibition contained in Article  303(1) because the opening words of Article  304 contains a non-obstante clause both to  Article 301 and Article 303. (b) While the Parliament’s power to impose  restrictions under Article 302 is not subject to  the requirement of reasonableness, the power  of the State to impose restrictions under  Article 304 is subject to the condition that they  are reasonable. (c) An additional requisite for the exercise of  the power under Article 304(b) by the State  Legislature is that previous Presidential  sanction is required for such legislation.

       Since relevant data do not appear to have been placed  before the High Courts, we permit the parties to place them in  the concerned Writ Petitions within two months. The  concerned High Courts shall deal with the basic issue as to  whether the impugned levy was compensatory in nature.  The  High Courts are requested to decide the aforesaid issue within  five months from the date of receipt of our order. The  judgment in the respective cases shall be placed on record by  the concerned parties within a month from the date of the  decision in each case pursuant to our direction.

       Place these matters for further hearing in third week of  January, 2007.