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CASE NO.: Appeal (civil)  3453 of 2002

PETITIONER: Jindal Stainless Ltd. & Anr

RESPONDENT: State of Haryana & Ors

DATE OF JUDGMENT: 13/04/2006

BENCH: RUMA PAL B.N. SRIKRISHNA S.H. KAPADIA, TARUN CHATTERJEE & P.P. NAOLEKAR

JUDGMENT: J U D G M E N T

KAPADIA, J.

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 OF 2002;  3381-3400, 4651, 3592 OF 1998;  918  OF 1999; 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,  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. *****

       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 M/s  Bhagatram Rajeevkumar v. Commissioner of  Sales Tax, M.P. & others  relied on in the  subsequent decision of this Court in the case of  State of Bihar & Ors. v. Bihar Chamber of  Commerce & Ors. .  Accordingly, 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-‘-vis Article 301.  The  referral order is in the case of Jindal Strips Ltd. &  Anr. (now known as Jindal Stainless Ltd.) v. State  of Haryana & Ors.  under Article 145(3).  

       For this purpose, we are required to examine  the source from which the concept of compensatory  tax is judicially derived, the nature and character of  compensatory tax and its parameters in the context  of Article 301.

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       In a batch of appeals, the constitutional  validity of the Haryana Local Area Development Tax  Act, 2000 has been challenged on two grounds : (1)  that, the Act is violative of Article 301 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  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 finished products are sent to  other States on consignment basis or stock 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 levy and collection of tax  on the entry of goods into the local areas of the  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  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 is the context in which the  challenge to the Act under Article 301 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 facilitating free flow of trade and  commerce.

REASONS FOR THE REFERRAL ORDER:         In Atiabari Tea Co. Ltd. etc. v. State of  Assam & Ors. , it was held that taxing laws are not  excluded from the operation of Article 301, 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) .         

       In Automobile Transport (Rajasthan) Ltd. v.  State of Rajasthan , it was held that only such  taxes as directly and immediately restrict trade

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would fall within the purview of Article 301 and that  any restriction in the form 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 (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.

According to M/s 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 Constitution Bench of five  Judges.  However, an exception to Article 301 and  its operation was judicially crafted in Automobile  Transport6.  In that case, the challenge was to the  Rajasthan Motor Vehicles Taxation Act, 1951.  The  challenge under Article 301 was rejected by the  Constitution Bench of seven Judges of this Court by  holding vide para 19 that "the taxes are  compensatory taxes which instead of hindering  trade, commerce and intercourse facilitate 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, the concept of  "compensatory taxes" was propounded. Therefore,  taxes which would otherwise interfere with the  unfettered freedom under Article 301 will be  protected from the vice of unconstitutionality if they  are compensatory.

In Automobile Transport6, 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 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  levy was compensatory or not.  The decisions  proceeded on the principle adumbrated in  Automobile Transport6, which was paraphrased  by Mathew, J. speaking for a Bench of three Judges  in G.K. Krishnan & Ors. v. State of T.N. & Ors. ,  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]

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       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 Bhagatram’s case1, which was  decided by a Bench of three Judges.

       In Bhagatram’s case1, 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 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. M/s  Hansa Corporation .  At this stage, it may be  noted that although there was a challenge to the  levy of entry tax in the case of Hansa  Corporation8, 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 case 8 .

       The dictum in Bhagatram’s case1  was relied  on by a Bench of two Judges in the case of Bihar  Chamber of Commerce2, 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  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.   

       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 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 case1 and in the case of Bihar  Chamber of Commerce2, now say that even if the  purpose of imposition of the tax is not merely to

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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 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.         According to the referral order, since the  concept of compensatory tax has been judicially  evolved as an exception to the provisions of Article  301 and as the parameters of this judicially evolved  concept are blurred, particularly, by reason of the  decisions in Bhagatram’s case1 and Bihar  Chamber of Commerce2, the Court felt that the  interpretation of Article 301 vis-‘-vis compensatory  tax should be authoritatively laid down with  certitude 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 even a tax legislation would have to bear the  scrutiny of Part-XIII of the Constitution and such  legislation could infringe Article 301 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 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 placed  reliance on the judgment of Justice Das from pages  522 to 523, in this regard.  Learned counsel  submitted that the working test laid down in the  Automobile Transport6 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 test laid down in Automobile Transport6  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 learned counsel, regulations  provide for necessary services to enable free  movement of traffic and, therefore, they cannot be  described as restrictions impeding the freedom

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under Article 301; 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 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 \026 "the  concept of compensatory nature of tax has been  widened and if there is substantial or even some  link between 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 Corporation8.  Mr.  Shanti Bhushan, learned counsel for the assessees,  submitted that the judgment of this court in the  case of Bhagatram1 was erroneous on two counts.    Firstly, the reliance on Hansa Corporation8 was  totally misplaced because Hansa Corporation8 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 Bhagatram1 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 Transport6 and,  therefore, needs to be 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 Bhagatram1 and has held that even  though the tax was for augmenting the general  revenue of the State, judicial notice could be taken  of the fact that the State provides several facilities to  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 Bhagatram1 and  in Bihar Chamber of Commerce2 were erroneous  to the extent indicated above; that they were  contrary to the judgment of seven-Judge Bench of  this court in the case of Automobile Transport8.   Learned counsel urged that if the test, laid down in  the case of  Bhagatram1 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 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  Transport6).  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

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required to provide the trading facility.  It was  submitted that the tax imposed for augmenting  general revenue of the State is not compensatory;  that any tax law which is designed or which has the  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  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 others , 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 counsel is totally missing  in the case of Haryana Local Area Development Tax  Act, 2000.         Mr. A.K. Ganguli, learned senior counsel  appearing 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 nature, is  subject to two limitations:         (i)     Fundamental Rights                 [Part III of the Constitution)         (ii)    Trade, Commerce and Intercourse                  within the Territory of India                  (Part XIII of the Constitution)

Therefore, the State cannot exercise its legislative  power in a manner which would transgress the  above constitutional 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-1990s the international trade barriers  stand removed in view of multi-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 goods do attract Article 301;  that the intrinsic evidence furnished by the Articles  in Part-XIII shows that the taxing laws are not  excluded from the operation of Article 301; which  means that tax laws do amount to restrictions,  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.4 a workable test has been evolved under which  restrictions which directly and immediately impede

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free flow of trade, would violate Article 301.   According to learned counsel one needs to enquire  whether 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 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  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 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 Transport6.  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 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. .  However, learned  counsel submitted that the Act must spell out the  nature of the trading facilities intended to be  provided 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 question as to whether the  impugned tax based on ad valorem basis cannot 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 Transport6.  In the present  matter, we are required to lay down the parameters  of the concept of compensatory tax vis-‘-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.  

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Learned counsel next submitted that the  question as to whether a levy 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.   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 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 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 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 make the tax labelled as  compensatory, attract the vice of interference with  freedom of trade, are two-fold - firstly, if the 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.  Learned  counsel next urged that in the case of Bhagatram1  a three-Judge bench of this court noted that "the  levy was in fact demonstrated to be compensatory"  and, therefore, the latter observation by the court  saying that "the concept of compensatory nature of  tax has been widened and if there is some link  between the tax and the facility the levy cannot be  impugned as invalid" is obiter dicta and such  observation is not supported by any of the  previously decided cases.  It was urged that under  2000 Act the entry tax lacks the positive ingredients  enumerated above for a valid compensatory tax.  As

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there is no facility even mentioned with relation to  entry of goods into local area for use, consumption  or sale and, therefore, the link between local area  and levy is absent and consequently collection of  levy not by the local authority but by the State on  entry of goods from outside State is  unconstitutional.  Further, according to the learned  counsel, negative ingredients indicated above also  exist in the impugned levy inasmuch as the  justification pleaded is augmentation of general  revenue of State in lieu of octroi in name of facilities  for which provisions are made by way of other  compensatory taxes such as motor vehicle tax,  property tax etc.  Learned counsel submitted that  there is also an element of discrimination between  goods entering local areas from outside State and  goods entering local area from within the State, i.e.,  from one local area to another local area.  The latter  class of goods are not subjected to levy though all  the facilities, if at all provided, are there in course of  intra-State movement and entry of goods in local  areas.  Learned counsel, therefore, submitted that  this discrimination per se militates against the  impugned levy being termed as compensatory.                          S/Shri A.M. Singhvi, learned senior counsel,   A.T.M. Sampath, H.K. Puri and Ms. K.S. Mehlwal  also made their respective submissions on behalf of  the assessees and substantially adopted the  submissions made by S/Shri Shanti Bhushan, R.F.  Nariman and A.K. Ganguli, learned senior counsel.  

       Shri P.P. Rao, learned senior counsel  appearing on behalf of the State of Haryana,  submitted  that the impugned 2000 Act does not  suffer from want of levy competence; that the State  legislature has the competence under entry 52 list II  to enact the impugned law; that the State  legislature is competent to levy such tax because  the incidence of tax is on the entry of goods into a  local area for consumption, use or sale therein and,  therefore, it is not a tax on the import of goods from  outside India, nor a tax on the manufacture of  goods, nor a tax on the export of the goods to places  outside the State.  Finally, it is not a sales tax.   Learned counsel further contended that under entry  52 list II it is not obligatory for the State to enact a  law for the levy of entry tax on goods which are  brought for use, consumption or sale; it is within  the power of the State to make a law for levy of such  tax on goods brought for use, consumption or sale.   Learned counsel submitted that the legislature has  selected goods brought for use or consumption in a  local area for the purposes of the levy; that it is  within the power of the State to make a law for levy  of tax on goods for any of the three purposes or for  one of them or two of them.  Learned counsel   submitted that Article 286 read with entry 41, entry  83, entry 92A and entry 92B does not have any  bearing on the constitutional validity of the  impugned 2000 Act because the above entries deal  with different subjects; that the entry tax is not a  tax on sale of goods affected by branch transfer or  export out-of-State.  Learned counsel urged that the  entry tax is compensatory in character and,

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therefore, the impugned levy which is compensatory  in nature, as can be seen from section 22 of the  said Act, does not attract Article 301 and Article  304(a) of the Constitution.  Learned counsel  submitted that section 22 of the Act was amended  on September 30, 2003 clarifying that the tax levied  and collected shall be utilized for facilitating free  flow of trade and commerce.  Learned counsel,  therefore, submitted that the levy is compensatory  in nature.  Learned counsel next contended  that  the compensatory levy need not satisfy the rule of  quid pro quo strictly; that it is sufficient that there is  some relation or nexus between facilities provided  and the tax imposed.  Even the concept of fee has  undergone significant change over the years as a  result of a catena of decisions of this court and,  therefore, this reference under Article 145(3) of the  Constitution was uncalled for.  As a matter of  preliminary submission, Shri P.P. Rao, learned  senior counsel for the State, contended that in view  of the amendment made by Act 18 of 2003 adding  an explanation to section 22 of the impugned 2000  Act clarifying that the tax collected shall be utilized  for developing and maintaining infrastructure  facilities useful for free flow of trade, the question  involved in this matter has become academic.   Learned counsel submitted that in view of various  decisions of the Constitution Bench the case should  have been first placed before a bench of three  Judges and not before a constitution bench straight  away.  It is only when that bench refers it to five  Judges that the case should have been placed  before a constitution bench because it has been a  settled law that a bench of two judges is bound by  the principles of law laid down by a bench of three  judges which alone has the jurisdiction to interpret  the law declared by a constitution bench.  In this  connection reliance was placed on two judgments of  this court, in the case of Pradip Chandra Parija &  Ors. v. Pramod Chandra Patnaik & Ors.  and in  the case of Central Board of Dawoodi Bohra  Community & Anr. v. State of Maharashtra &  Anr. .  On merits learned counsel urged that the  Constitution contemplates levy of taxes and levy of  fees.  He urged that in the case of fees, quid pro quo  is an essential element though not in taxes.   However, compensatory taxes are an exception;  they contain an element of quid pro quo but not to  the extent as in the case of "fees".  Learned counsel  placed reliance in this connection on the judgment  of this court in the case of M/s International  Tourist Corporation etc. etc. v. State of  Haryana and others etc. etc. .  Learned counsel  submitted that the extent of quid pro quo required  in a fee has undergone a sea-change and it would  be irrational to insist on such a test in the case of  compensatory tax.  Learned counsel next submitted  that the element of compensation in compensatory  taxes needs to be interpreted taking note of  constitutional developments, the changed  perception of the entire relationship of fundamental  rights and directive principles as well as the sea- change in the concept of fee particularly with  reference to the element of quid pro quo.  Learned  counsel submitted that the principles of law

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declared in Bhagatram1 are consistent with  contemporary thinking about the basic concepts of  tax, fee and compensatory tax with due regard to  the developments subsequent to Automobile  Transport6.

       Shri Rakesh Dwivedi, learned senior counsel  appearing for the State of U.P., submitted that while  laying down parameters of compensatory tax for  purposes of Part-XIII it is necessary to note that  under the scheme of our Constitution, States have  certain powers including the power to raise revenue  by taxation and further Article 301 has to be  applied for the working of an orderly society.   Learned counsel submitted that the States must  have revenue to carry out their administration; that  there are several items relating to the imposition of  taxes in list II, therefore, according to learned  counsel the Constitution framers intended that  under such items the States are entitled to raise  revenue for their own purposes.  Learned counsel  submitted that any wide view of the word "freedom"  under Article 301 or even a restricted view of the  term "compensatory tax" would put an end to the  State autonomy and its plenary powers within the  fields allotted to them.  In this connection reliance  was placed on the judgment of this court in the  case of Automobile Transport6.  It was urged that  the State legislature may impose different kinds of  taxes and duties such as property tax, sales tax,  excise duty etc. and legislation in respect of any one  of these items, may have an indirect effect on trade  and commerce.  Learned counsel submitted that if  every law made by the State legislature which has  an indirect effect on free flow of trade is required to  have prior sanction of the President then the  Constitution insofar as it gives plenary power to the  States and the State legislatures in the fields  allocated to them would be rendered meaningless  and, therefore, it cannot be laid down as a general  proposition that the power to tax is outside the  purview of constitutional limitation of Part-XIII.   Learned counsel submitted that in any event  regulatory measures and compensatory taxes are  not hit by Article 301.  Learned counsel urged that  in every case the court will have to ascertain  whether an impugned law directly and immediately  affects the movement of trade or whether it  indirectly or remotely affects such movement.   Learned counsel submitted that while Parliament  cannot trench upon the exclusive domain preserved  for the State legislature under list II, the central  executive nevertheless would oversee and sanction  most of the taxing measures under Article 304 and,  therefore, the wider concept of compensatory tax  should be accepted.  Learned counsel next  submitted that all taxing power is for raising  revenue.  However, it cannot be argued that while  imposing a compensatory tax the States cannot  raise general revenue.  Learned counsel submitted  that this court has drawn consistently a distinction  between a "tax" and a "fee", and the power of  taxation has always been understood as a power to  raise revenue.  It was urged that even in  Automobile Transport6, while discussing the

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concept of compensatory tax, this court never  intended to lay down that such compensatory taxes  are not revenue measures but are fees.  Any such  view would be contrary to the scheme of  distribution of powers and also the structure of the  seventh schedule and, therefore, a tax which is  levied to facilitate trade and commerce would  remain compensatory even if some extra revenue is  generated.  Learned counsel next submitted that  even with respect to fee for licence and fee for  service this court has adopted a broad test of co- relation between money raised and expenditure  incurred; in this connection reliance, was placed on  the judgment of this court in the case of Ram  Chandra Kailash Kumar & Co. & Ors. v. State  of U.P. & Anr. .  In the above case it was held that  the amount of fee realized must be earmarked for  rendering services to the licensees in the notified  market and a substantial portion of it must be  shown to be spent for the requisite purpose.  That  the services rendered to the licensees must be in  relation to the transaction of purchase or sale of the  goods; that while rendering services in the market  area for the purposes of facilitating the transactions  of produce and sale, it is not necessary to confer the  whole of the benefit on the licensee but some  special benefit must be conferred on the licensee  which must have a direct, close and reasonable co- relation between the transaction and the licensee.   That the spending of the amount of market fees for  augmenting agriculture produce, for augmenting  the facility of transport in villages with a view that  such services in the long run would increase the  volume of transactions in the market, was not  permissible on the ground that such a benefit was  an indirect and remote benefit to the traders; that  the element of quid pro quo may not be possible but  even broadly and reasonably, it must be established  by the authorities who charge the fees that the  amount was being spent for rendering services to  traders on whom the burden falls.  Learned counsel  submitted that the tests laid down with regard to  quid pro quo under principles 2, 3 and 5 in the case  of Ram Chandra Kailash Kumar14 have no  application to the compensatory tax because the  concept of compensatory tax is only to judge the  effect on trade, commerce and intercourse and,  therefore, according to learned counsel the test of  direct and close relation/link between the levy and  the service rendered, cannot be applied to the  concept of compensatory tax.  Learned counsel  submitted that the only test which is applicable to  the concept of compensatory tax is \026 whether "trade  and commerce" is benefitted generally by such levy;   that, it should be sufficient if the facilities provided  in the local area ultimately lead to better trading  and commerce and even indirect benefit to traders  in future on the ground that such services would  increase the volume of trade in the market, can  constitute an important element of compensatory  tax. Learned counsel next urged that the  parameters for adjudging a tax as compensatory or  regulatory would depend upon the nature of tax or  in other words, the particular entry in list II with  respect to which the tax is imposed.  In this

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connection, it was urged that the scope of entry 52,  entry 56, entry 57 and entry 59 in list II cannot be  identical and, therefore, the parameters for those  entries cannot be identical, they have to be  different.  That, the very nature of tax indicates the  nature of facility with which the tax has a link.   While entries 56, 57 and 59 indicate a nexus with  road, waterways, bridges etc. entry tax under entry  52 does not have such limited range of facility.  It  has a nexus with local area which is equivalent to  local authority as held in the case of Diamond  Sugar Mills Ltd. & another v. The State of U.P.  & Anr. .  According to learned counsel entry tax,  therefore, is for the purposes of enabling the local  bodies to discharge their several functions.  Learned  counsel next urged that there is one more aspect of  entry tax, it has a co-relation to bring in goods for  consumption, use or sale in a local area.  The  consumption, use or sale not only require roads but  also a proper hygiene, lighting, drinking water,  health, sanitation  etc.;  that, it is not possible to  have trade without such facilities, therefore, the  compensatory character of the entry tax has to be  adjudged with reference to the revenue collected  and with reference to the various functions of the  local body. Learned counsel contended that a tax  can also be collected by the State and then assigned  to the local body; that such collection avoids  duplication of levy.  Learned counsel contended that  uneven economic development of various States in  India hampers and hinders free flow of trade  throughout India and, therefore, it is in the interest  of trade and commerce that backward areas should  be developed and, therefore, merely because the  States assigned proportionately more money to  backward local areas should not be objected to, so  long as good and substantial portion assigned to  the specified local area from which tax is collected.   Learned counsel, therefore, contended in conclusion  that a broad co-relation of the levy with the facility  was enough.  Learned counsel contended that in  the case of Bolani Ores Ltd. etc.  v. State of  Orissa etc. , the Taxation Act envisaged  imposition of tax on motor vehicles actually using  the roads saying that if the facility is not used then  no tax can be collected and if collected it will not be  compensatory. Learned counsel contended,  however, that the judgment of this court in Bolani  Ores16 was in the context of entry 52 list II which  restricts the imposition of tax by actual use of roads  by vehicles.  A tax upon vehicles need not be  contingent upon actual user.  In this connection  reliance was placed on entry 57.  Therefore, it was  submitted that a compensatory character of tax  would not be lost merely because some vehicles pay  tax even though they may not use the roads.   Learned counsel urged that under entry 57 list II  once the vehicle is suitable for use on road, the tax  can be imposed.  Learned counsel, therefore,  submitted that if a statute fixes a charge for  convenience or service provided by the State and  imposes the tax upon those who avail themselves of  such service or convenience the freedom of trade  and commerce will not be impeded.  As long as the  dealer/trader has a choice to use the goods brought

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into the local area the levy on such entry is  compensatory.  Learned counsel submitted that  Article 304(a) coupled with the test of  reasonableness as applied to fiscal measures shows  that a tax which is non-discriminatory would be  presumed to be compensatory if it has some  relation to the facilities provided.  Similarly, on the  converse side a tax which is discriminatory would  be hit by Article 301.  Shri Dwivedi lastly submitted  that in the case of Bihar Chamber of Commerce2   two principles were propounded.  It was reiterated  that there should be some connection between a tax  and the facilities.  To that extent learned counsel  submitted that there is no discord with the  judgment of this court in the case of Automobile  Transport6.  The second principle propounded was  that it would be permissible to consider in the  context of entry tax that the whole of the State is  divided into local areas and, therefore, the court  held that it would be permissible to consider  various facilities provided by the State in all the  local areas.  Learned counsel submitted that this  second principle/proposition should be followed by  a caveat or a rider to the effect that the traders who  pay the tax in a local area should be shown to have  been provided with substantial facilities as a class.   Learned counsel submitted that subject to above  caveat/rider there was no need to overrule the  judgments of this court in the case of Bhagatram1  and in the case of Bihar Chamber of Commerce2.               

       Shri Dinesh Dwivedi, learned senior counsel  appearing for the State of Uttar Pradesh and Shri B.  Sen, learned senior counsel appearing for the State  of Rajasthan substantially adopted the submissions  made by S/Shri P.P. Rao and Rakesh Dwivedi,  learned senior counsel.

ANALYSIS OF THE RELEVANT PROVISIONS OF  PART-XIII:

       The relevant provisions are as follows:

"301. Freedom of trade, commerce  and intercourse. \026 Subject to the other  provisions of this Part, trade, commerce  and intercourse throughout the territory  of India shall be free.

302. Power of Parliament to impose  restrictions on trade, commerce and  intercourse. \026 Parliament may by law  impose such restrictions on the freedom  of trade, commerce or intercourse  between one State and another or within  any part of the territory of India as may  be required in the public interest.

303.  Restrictions on the legislative  powers of the Union and of the States  with regard to trade and commerce. \026  

(1) Notwithstanding  anything in article 302, neither  Parliament nor the Legislature

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of a State shall have power to  make any law giving, or  authorizing the giving of, any  preference to one State over  another, or making, or  authorizing the making of, any  discrimination between one  State and another, by virtue of  any entry relating to trade and  commerce in any of the Lists in  the Seventh Schedule.

(2)  Nothing in clause (1)  shall prevent Parliament from  making any law giving, or  authorizing the giving of, any  preference or making, or  authorizing the making of, any  discrimination if it is declared  by such law that it is necessary  to do so for the purpose of  dealing with a situation arising  from scarcity of goods in any  part of the territory of India.

304.  Restrictions on trade,  commerce and intercourse among  States. \026 Notwithstanding anything in  article 301 or article 303, the Legislature  of a 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 the  public interest:

Provided that no Bill or amendment  for the purposes of clause (b) shall be  introduced or moved in the Legislature  of a State without the previous sanction  of the President."

INTRODUCTION:         Section 8 of Article 1 of the U.S. Constitution  contains what is called "Commerce Clause", which  regulates trade and commerce.  Keeping in mind the

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dual form of government in USA and the concept of  "Police Power" vis-‘-vis the "Taxing Power", the U.S.  Supreme Court has held that the commerce power  embodied in the commerce clause implies the power  to regulate; that is the power to prescribe the rule  by which commerce is to be governed (See:  Constitutional Law by Stone).  Section 8 of Article 1  is an authorization in favour of the Congress to  enact laws for the protection and encouragement of  commerce among the States.  By its own force, it  creates an area of trade free from interference by  the States.  Therefore, the commerce clause is per  se a limitation upon the power of the States and is  not dependent upon the law being enacted.  It  prohibits the States from enacting a law which  impedes free flow of trade between the States.

       On the other hand, section 92 of the  Australian Constitution provides for freedom of  trade and commerce.  It does not seek to regulate as  in case of commerce clause.  However, it has been  held in numerous decisions of the Privy Council and  the Australian High Courts that section 92 leaves  open the regulation of trade and commerce at all  events until the regulation is enacted provided it  does not impede the true freedom of inter-State  commerce.  This reasoning is based on the principle  that all trade and commerce must be conducted  subject to law.  Thus, we have the difference  between taxing and regulatory laws.  This is how  the concept of "regulatory charges" came about.         Article 301 is inspired by section 92 of the  Australian Constitution when it refers to freedom of  trade and commerce, however, Article 301 is subject  to limitations and conditions in Articles 302, 303  and 304 which are borrowed from the commerce  clause under Article 1 of the US Constitution.   Therefore, Part-XIII is an amalgam of the United  States and Australian Constitutions which brings  out the difference between regulatory and taxing  powers.  This is how the concept of Payment for  Revenue and concept of Payment for Regulation  arose.  This is how the regulatory power stood  excluded from the taxing power and on that  reasoning in Automobile Transport6 case, this  Court took the view that compensatory taxes  constitute an exception to Article 301.  It is a  judicially evolved concept.  However, the basis of  that concept was not discussed by this Court in  that case which we have done in this case.  Suffice  it to state at this stage that the basis of special  assessments, betterment charges, fees, regulatory  charges is "recompense/reimbursement" of the cost  or expenses incurred or incurrable for providing  services/facilities based on the principle of  equivalence unlike taxes whose basis is the concept  of "burden" based on the principle of ability to pay.   At this stage, we may clarify that in the above case  of Automobile Transport6, this Court has equated  regulatory charges with compensatory taxes and  since it is the view expressed by a Bench of seven  Judges, we have to proceed on that basis.  The fall- out is that compensatory tax becomes a sub-class of  fees.

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SCOPE OF ARTICLES 301, 302 AND 304:

       Article 301 states that subject to the other  provisions of Part-XIII, trade, commerce and  intercourse throughout India shall be free.  It is not  freedom from all laws but freedom from such laws  which restrict or affect activities of trade and  commerce amongst the States.  Although Article  301 is positively worded, in effect, it 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 to freedom  from laws which go beyond regulations which  burdens, restricts or prevents the trade movement  between States and also within the State.  Since  "freedom" correspondingly imposes "limitation", we  have the doctrine of "direct and immediate effect" of  the operation of the impugned law on the freedom of  trade and commerce in Article 301 as enunciated in    Atiabari Tea Co.4 .

        Article 301 is, therefore, 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, therefore,  Article 301 per se constitutes limitation on the  power of the State.      Article 301 is, however,  subject to the other provisions of Articles 302, 303  and 304.  It states that subject to other provisions  of Part-XIII, trade, commerce and intercourse  throughout India shall be free.           Article 301 is binding upon the Union  Legislature and the State Legislatures, but  Parliament can get rid of the limitation imposed by  Article 301 by enacting a law under Article 302.   Similarly, a law made by the State Legislature in  compliance with the conditions imposed by Article  304 shall not be hit by Article 301.  Article 301 thus  provides for freedom of inter-State as well as intra- State trade and commerce subject to other  provisions of Part-XIII and correspondingly it  imposes a general limitation on the legislative  powers which limitation is relaxed under the  following circumstances: a)      Limitation is relaxed in favour of the  Parliament under Article 302, in  which case Parliament can impose  restrictions in public interest.     Although the fetter is limited  enabling the Parliament to impose  by law restrictions on the freedom of  trade in public interest under Article  302, nonetheless, it is clarified in  clause (1) of Article 303 that  notwithstanding anything contained  in Article 302, the Parliament is not  authorized even in public interest,  in the making of any law, to give  preference to one State over  another. However, the said  clarification is subject to one

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exception and that too only in  favour of the Parliament, where  discrimination or preference is  admissible to the Parliament in  making of laws in case of scarcity.   This is provided in clause (2) of  Article 303. b)      As regards the State Legislatures,  apart from the limitation imposed by  Article 301, clause (1) of Article 303  imposes additional limitation,  namely, that it must not give  preference or make discrimination  between one State or another in  exercise of its powers relating to  trade and commerce under Entry 26  of List-II or List-III.  However, this  limitation on the State Legislatures  is lifted in two cases, namely, it may  impose on goods imported from  sister State(s) or Union Territories  any tax to which similar goods  manufactured in its own State are  subjected but not so as to  discriminate between the imported  goods and the goods manufactured  in the State [See Clause (a) of Article  304].  In other words, clause (a) of  Article 304 authorizes a State  Legislature to impose a non- discriminatory tax on goods  imported from sister State(s), even  though it interferes with the freedom  of trade and commerce guaranteed  by Article 301.  Secondly, the ban  under Article 303(1) shall stand  lifted even if discriminatory  restrictions are imposed by the State  Legislature provided they fulfill the  following three conditions, namely,  that such restrictions shall be in  public interest; they shall be  reasonable; and lastly, they shall be  subject to the procurement of prior  sanction of the President before  introduction of the bill.

Broadly, the above analysis of the scheme of  Articles 301 to 304 shows that Article 304 relates to  the State Legislature while Article 302 relates to the  Parliament in the matter of lifting of limitation,  which, as stated above, flows from the freedom of  trade and commerce guaranteed under Article 301.   Article 304 also confers upon the State Legislature  power to lift the limitations imposed on it by Article  301 and clause (1) of Article 303.  This aspect is  important because the doctrine of "direct and  immediate effect" which is mentioned in Atiabari  Tea Co.4 emerges from the concept of "limitation"  embodied in Article 301.  It is this doctrine of direct  and immediate effect which constitutes the basis of  the working test propounded vide para 19 in  Automobile Transport6.  Therefore, whenever the  law is impugned as violative of Article 301, the  Courts will have to examine the effect of the

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operation of the impugned law on the inter-State  and the intra-State movement of goods, which  movement constitutes an integral part of trade.  

We have examined and analyzed the relevant  provisions of Part-XIII and particularly Article 301  as we are required to lay down the parameters of  compensatory tax vis-‘-vis Article 301, as indicated  vide para 27 of the referral order.

GENERIC CONCEPT OF COMPENSATORY TAX:  INTRODUCTION: The concept of compensatory tax is not there  in the Constitution but is judicially evolved in  Automobile Transport6 as a part of regulatory  charge.  Consequently, we have to go into concepts  and doctrines of taxing powers vis-‘-vis regulatory  powers, particularly when the concept of  compensatory tax was judicially crafted as an  exception to Article 301 in Automobile Transport6.

DIFFERENCE BETWEEN EXERCISE OF TAXING  AND REGULATORY POWER:

In the generic sense, tax, toll, subsidies etc.  are manifestations of the exercise of the taxing  power.  The primary purpose of a taxing statute is  the collection of revenue.  On the other hand,  regulation extends to administrative acts which  produces regulative effects on trade and commerce.   The difficulty arises because taxation is also used as  a measure of regulation.  There is a working test to  decide whether the law impugned is the result of the  exercise of regulatory power or whether it is the  product of the exercise of the taxing power.  If the  impugned law seeks to control the conditions under  which an activity like trade is to take place then  such law is regulatory.  Payment for regulation is  different from payment for revenue.  If the  impugned taxing or non-taxing law chooses an  activity, say, movement of trade and commerce as  the criterion of its operation and if the effect of the  operation of such a law is to impede the activity,  then the law is a restriction under Article 301.   However, 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.  This is the way of reconciling the  concept of compensatory tax with the scheme of  Articles 301, 302 and 304.  For example, for  installation of pipeline carrying gas from Gujarat to  Rajasthan, which passes through M.P., a fee  charged to provide security to the pipeline will come  in the category of manifestation of regulatory power.   However, a tax levied on sale or purchase of gas  which flows from that very pipe is a manifestation of  exercise of the taxing power.  This example indicates  the difference between taxing and regulatory powers   [See: Essays in Taxation by Seligman].   

DIFFERENCE BETWEEN "A TAX", "A FEE" AND

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"A COMPENSATORY TAX":

PARAMETERS OF COMPENSATORY TAX: -          As stated above, in order to lay down the  parameters of a compensatory tax, we must know  the concept of taxing power.

       Tax is levied as a part of common burden.  The  basis of a tax is the ability or the capacity of the  taxpayer to pay.  The principle behind the levy of a  tax is the principle of ability or capacity.  In the case  of a tax, there is no identification of a specific  benefit and even if such identification is there, it is  not capable of direct measurement.  In the case of a  tax, a particular advantage, if it exists at all, is  incidental to the States’ action.  It is assessed on  certain elements of business, such as, manufacture,  purchase, sale, consumption, use, capital etc. but  its payment is not a condition precedent.  It is not a  term or condition of a licence.  A fee is generally a  term of a licence.   A tax is a payment where the  special benefit, if any, is converted into common  burden.

       On the other hand, a fee is based on the  "principle of equivalence".  This principle is the  converse of the "principle of ability" to pay.  In the  case of a fee or compensatory tax, the "principle of  equivalence" applies.  The basis of a fee or a  compensatory tax is the same.  The main basis of a  fee or a compensatory tax is the quantifiable and  measurable benefit.  In the case of a tax, even if  there is any benefit, the same is incidental to the  government action and even if such benefit results  from the government action, the same is not  measurable. Under the principle of equivalence, as  applicable to a fee or a compensatory tax, there is  an indication of a quantifiable data, namely, a  benefit which is measurable.   

       A tax can be progressive.  However, a fee or a  compensatory tax has to be broadly proportional  and not progressive.  In the principle of equivalence,  which is the foundation of a compensatory tax as  well as a fee, the value of the quantifiable benefit is  represented by the costs incurred in procuring the  facility/services which costs in turn become the  basis of reimbursement/recompense for the  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".  From the point of view of  the Government, a compensatory tax is a charge for  offering trading facilities.  It adds to the value of  trade and commerce which does not happen in the  case of a tax as such.  A tax may be progressive or  proportional to income, property, expenditure or  any other test of ability or capacity (principle of  ability).  Taxes may be progressive rather than  proportional. Compensatory taxes, like fees, are  always proportional to benefits.  They are based on  the principle of equivalence.  However, a  compensatory tax is levied on an individual as a  member of a class, whereas a fee is levied on an  individual as such. If one keeps in mind the

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"principle of ability" vis-‘-vis the "principle of  equivalence", then the difference between a tax on  one hand and a fee or a compensatory tax on the  other hand can be easily spelt out.  Ability or  capacity to pay is measurable by property or rental  value.  Local rates are often charged according to  ability to pay.  Reimbursement or recompense are  the closest equivalence to the cost incurred by the  provider of the services/facilities.  The theory of  compensatory tax is that 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  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.  For a tax to be  compensatory, there must be some link between the  quantum of tax and the facility/services.  Every  benefit is measured in terms of cost which has to be  reimbursed by compensatory tax or in the form of  compensatory tax.  In other words, compensatory  tax is a recompense/reimbursement.   

       In the context of Article 301, therefore,   compensatory tax is a compulsory contribution  levied broadly in proportion to the special benefits  derived to defray the costs of regulation or to meet  the outlay incurred for some special advantage to  trade, commerce and intercourse. It may  incidentally bring in net-revenue to the government  but that circumstance is not an essential ingredient  of compensatory tax.

       Since compensatory tax is a judicially evolved  concept, understanding of the concept, as discussed  above, indicates its parameters.          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  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:

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       Applying the above tests/parameters,  whenever a law is impugned as violative of Article  301 of 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. & Anr. v. State of Assam  & Ors., reported in AIR 1964 SC 925].

SCOPE OF ARTICLES 301, 302 & 304 VIS-@-VIS  COMPENSATORY TAX:

       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.4 .  It is equally important  to note that in Atiabari Tea Co.4, 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.   

       When any legislation, whether it would be a  taxation law or a non-taxation law, is challenged  before the court as violating Article 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

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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.    

WHY WAS THE MATTER PLACED BEFORE A  BENCH OF FIVE JUDGES:

       The concept of compensatory taxes was  propounded in the case of Automobile Transport6  in which compensatory taxes were equated with  regulatory taxes.  In that case, a working test for  deciding whether a tax is compensatory or not was  laid down.  In that judgment, it was observed that  one has to enquire whether the trade as a class is  having the use of certain facilities for the better  conduct of the trade/business. This working test  remains unaltered even today.   

       As stated above, in the post 1995 era, the said  working test propounded in the Automobile  Transport6  stood disrupted when in Bhagatram’s  case1, a Bench of three Judges enunciated the test  of "some connection" saying that even if there is  some link between the tax and the facilities  extended to the trade directly or indirectly, the levy  cannot be impugned as invalid.  In our view, this  test of "some connection" enunciated in  Bhagatram’s case1  is not only contrary to the  working test propounded in Automobile  Transport’s case6  but it obliterates the very basis  of compensatory tax.  We may reiterate that 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 the case of Automobile Transport6 and  the test of "some connection" enunciated by a  Bench of three Judges in Bhagatram’s case1   cannot stand together.  Therefore, in our view, the  test of "some connection" as propounded in  Bhagatram’s case1 is not applicable to the concept

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of compensatory tax and accordingly to that extent,  the judgments of this Court in Bhagatram  Rajeevkumar v. Commissioner of Sales Tax,  M.P.1  and State of Bihar v. Bihar Chamber of  Commerce2  stand overruled.  

       Before concluding, we may point out that  parties before us have taken more or less extreme  positions and, therefore, we have not examined the  arguments in seriatim.  

CONCLUSION:         In our opinion, the doubt expressed by the  referring Bench about the correctness of the  decision in Bhagatram’s case1  followed by the  judgment in the case of Bihar Chamber of  Commerce2  was well-founded.   

       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 Assam4  and the  working test enunciated in Automobile Transport  (Rajasthan) Ltd. v. State of Rajasthan6 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.1  and followed in  the case of State of Bihar v. Bihar Chamber of  Commerce2, 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.