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CASE NO.: Appeal (civil)  6223-24 of 1997

PETITIONER: M/s Geo Miller & Co. Pvt. Ltd. & Ors.

RESPONDENT: State of M.P. & Ors.

DATE OF JUDGMENT: 05/05/2004

BENCH: CJI & G.P. MATHUR.

JUDGMENT: J U D G M E N T

RAJENDRA BABU, CJI. :

The appellants are dealers registered under the M.P.  General Sales Tax Act, 1958 and were also assessed to the  Entry Tax during the period from 1.1. 1986 to 11.12.1986  under the Madhya Pradesh Sthaniya Kshetra Me Mal Ke  Pravesh Par Kar Adhiniyam, 1976 (hereinafter referred to  as the ’M.P. Entry Tax Act’). The appellants are carrying on  the business of execution of works contract. Before the  authorities below, it was the appellants’ contention that  since the goods were brought for purpose of works contract  and they have been subjected to sales tax under the Sales  Tax Act, the appellants were not liable to pay the entry tax  on goods. The appellants had unsuccessfully challenged the  assessment of tax before the Appellate Deputy  Commissioner of Sales Tax and the Board of Revenue and  thereupon appellants preferred Misc. Petition No. 3960 of  1991 before the High Court of Madhya Pradesh.  

The appellants contended that by virtue of the  definition of sale as defined under Article 366 (29-A) of the  Constitution, the activity involved was a transfer of goods in  works contract, it amounted to a ’sale’ and as such the  goods are not exigible to the entry tax. The High Court vide  judgment dated 18/09/1996, did not accept this contention  and dismissed their prayer. Hence these appeals by Special  Leave. In view of the High Court’s judgment the Madhya  Pradesh Builders Association has also joined the present  petitions for special leave to appeal as the judgment affects  the entire community of contractors.  

       The questions that arise for consideration herein are: i)      Whether the M.P. Entry Tax Act, 1976, is unconstitutional  as it is hit by Article 301 of the Constitution for not  satisfying the conditions laid down in Article 304 (b)? ii)     Whether in any event the goods used by the appellants  are subject to Entry Tax by virtue of Section 3 of the M.P.  Entry Tax Act, 1976?

       It is the submission of the appellants that the M.P.  Entry Tax Act, 1976 is unconstitutional as it offends Article  301 owing to non-compliance of the conditions laid down in  Article 304 (b).

       The appellants relied on the cases of Atiabari Tea  Co. Ltd. Vs. The State of Assam & Ors., (1961) 1 SCR  809 and Automobile Transport (Rajasthan) Ltd. vs.

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The State of Rajasthan & Ors. (1963) 1 SCR 491, to  state that taxation may impede the movement of goods  from one barrier to the other and would accordingly bring  Article 301 into play. They then contend that the conditions  of Article 304 (b) have not been complied thereby rendering  the M.P. Entry Tax Act, 1976 unconstitutional.

       This argument of the appellants does not seem to be  correct.  It is well settled by the decision in Atiabari Tea  Co. [supra] at p.860, that only such restrictions or  impediments which directly or immediately impede the free  flow of trade, commerce and intercourse fall within the  prohibition imposed by Article 301.  This Court did not  accept the argument that all taxes whether or not their  impact on trade is immediate or mediate, direct or remote  should be governed by Article 301.  This view was further  upheld in the Automobile Transport Case and in State of  Kerala vs. A.B. Abdul Kadir & Ors., 1969 (2) SCC 363.   Hence, the mere fact that a tax is imposed does not  automatically bring Article 301 into play.

       In fact the concept of "compensatory taxes" was  propounded in the Automobile Transport Case.  By virtue  of this, taxes, which would otherwise interfere with the  unfettered freedoms under Article 301, will be protected  from becoming unconstitutional if they are compensatory.  

       Thus, the reliance placed by the appellants on the  observations made in the Atiabari Case and the  Rajasthan Automobile Case that taxation may impede  the movement of goods from one barrier to the other and  accordingly submitting that the M.P. Entry Tax Act, 1976 is  hit by Article 301 is not properly founded.

       In fact, Section 3 of the said Act was under challenge  in the case of M/s Bhagatram Rajeevkumar vs.  Commissioner of Sales Tax, M.P. & Ors., 1995 Supp.  (1) SCC 673.  A three Judge Bench of this Court, found that  the levy of tax under the M.P. Entry Tax Act, 1976 was  constitutional, since the nature of revenue earned was  compensatory, as it was handed over to the local bodies to  compensate them for the loss caused.

       In the present case too, the respondents have  reiterated that the tax being imposed is compensatory in  nature as the revenue earned therefrom passes over to the  local bodies to compensate them for the loss incurred due  to abolition of octroi.

       Augmentation of their finance would enable them to  promote Municipal Services more efficiently helping in the  free flow of trade and commerce.  

       The Act being compensatory in nature it is not open to  challenge under Article 301 and there is no need to venture  into the argument based on Article 304 (b).  Accordingly,  the constitutionality of the Act is upheld.

In the case of Jindal Stripe Ltd. v. State of  Haryana, (2003) 8 SCC 60, a division bench of this court,  raised doubts over the legal proposition laid down in the  aforementioned Bhagatram case (which upheld the  validity of the M.P. Entry Tax Act, 1976) and refers the  matter to a Constitution Bench over the interpretation of  Article 301 vis-‘-vis compensatory tax. In Bhagatram’s

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Case, although it was demonstrated by the appellant State  and not disputed by the respondents that the levy was  compensatory, the Court goes on to make an observation  that compensation need not be that which facilitates the  trade only. It observes 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 such dealer directly or indirectly the levy  cannot be impugned as invalid". In the Jindal Stripe  Case, the division bench noted that the above observation  would mean that "an indirect or incidental benefit to traders  by reason of stepping up the developmental activities in  various local areas of the State can be legitimately brought  within the concept of compensatory tax". Accordingly it  refers the matter to a Constitution Bench to decide what  exactly would fall under the ambit of "compensatory tax",  and thereby fall outside the purview of Article 301.   Inasmuch as the Act in question has been upheld on the  basis that it had been demonstrated by the State and not  disputed by the dealers that the levy was compensatory it  may not be necessary for us to dilate on this aspect any  further.

It is the contention of the appellants that Sec. 3(1) (b)  of the M.P. Entry Tax Act, 1976 does not permit levy of any  entry tax on the entry in the course of a business of a  dealer of goods specified in Schedule III into a local area for  consumption or use of such goods in the execution of works  contracts, as these amount to ’sale’. They contend that  owing to the 46th Amendment transfer of property in goods  involved in the execution of a works contract amounts to  ’sale’.  

The relevant part of Section 3 of the M.P. Entry Tax  Act is reproduced herein; "Section 3: Incidence of Taxation ;- (1) There  shall be levied an entry tax (a)     \005\005.. (b)     on the entry in the course of business of a  dealer of goods specified in Schedule III, into  each local area for consumption or use of such  goods (raw material or incidental goods) or as  packing material or in the execution of works  contracts but not for sale therein\005\005\005."

(Emphasis supplied)

The relevant portion of Article 366 of the Constitution  is as follows; "Article 366: In this Constitution, unless the  context otherwise requires, the following  expressions have the meaning hereby  respectively assigned to them, that is to say \026  \005\005\005.. (29-A) "tax on the sale or purchase of goods"  includes \026  (b) a tax on the transfer of property in goods  (whether as goods or in some other form)  involved in the execution of a works contract.."

Accordingly, the appellant contends that Section 3(1)  (b) of the M.P. Entry Tax Act, 1976, no longer permits levy  of entry tax on goods consumed or used in works contract

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as these amount to ’sale’ by virtue of Article 366(29-A).

The question that arises for consideration is whether  the definition of "tax on the sale or purchase of goods" as  provided by the 46th amendment through Article 366 (29-A)  applies to the M.P. Entry Tax Act.  

It is evident from the section 3(1) (b) of the M.P.  Entry Tax Act, 1976,  that if a dealer effects the entry of  goods specified in Schedule III into any local area and those  goods are meant for  a) consumption or  b) to be used as i)        raw materials or ii)       incidental goods or iii)      as packing material or iv)       in the execution of works contract,  such dealer would come within the ambit of the charging  section and hence, liable to pay tax on the entry of those  goods.  

The section goes on to make it clear that goods  specified in Schedule III if they are imported for the  purpose of sale then they are not subject to tax.  

Admittedly, the appellants, a dealer, has effected  entry of goods specified in Schedule III in the local area for  use in execution of works contract, and is hence liable to  tax as per Section 3(1)(b) of the Act.  

It is hence evident that the M.P. Entry Tax Act, 1976  makes a clear distinction between ’sale’ and ’execution of  works contracts’ and specifically excludes the latter from  the purview of the former. The appellants contention that  the definition of ’sale’ under Article 366 (29-A) of the  Constitution which includes transfer of goods in execution of  works contract, should be adopted into the M.P. Entry Tax  Act, 1976 is not well founded.  

The M.P. Entry Tax Act has been enacted by the  Legislature by virtue of Entry 52 of List II of the VIIth  Schedule. It reads as under:

"Entry 52: Taxes on entry of goods into a local  area for consumption, use or sale therein."

 Article 366(29-A) on the other hand seeks to define  ’tax on the sale or purchase of goods’. This phrase is used  in Schedule VII, List I, Entries 92 and 92-A and Schedule  VII, List II Entry 54. Hence, it can be seen that the said  meaning cannot be imported for the purposes of Entry 52 of  List II.  

On the other hand, it is evident that the M.P. General  Sales Tax Act, 1958 has been enacted in relation to Entry  54 of List II, and it indeed includes transfer of goods in the  execution of works contract within the definition of ’sale’ as  required by Article 366(29-A). However the M.P. Entry Tax  Act has specifically excluded the definition of ’goods’ and  ’sale’ which is utilised in the M.P. Sales Tax Act. Section  2(2) of the M.P. Entry Tax Act, 1976 reads as under:-

"Section 2(2): All those expressions, other than

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expression ’goods’ and ’sale’ which are used but  are not defined in this Act and are defined in the  Sales Tax Act shall have the meanings as  assigned to them in that Act." (Emphasis supplied)

The exclusion is justifiable considering the fact that  the M.P. Entry Tax Act, 1976 has been enacted by virtue of  Entry 52 of List II of Schedule VII. It need not be  circumscribed by the definition provided in Article 366 (29- A).  

Article 366(29-A) does not define the term ’sale’, but  enlarges its scope by including transfer of goods in the  execution of works contract within this definition of sale.  Therefore, ’sale’ as it appears in Article 366(29-A) is with  reference to the Sales Tax Act. The M.P. Sales Tax Act  indeed adopts the same. However Section 2(2) of the M.P.  Entry Tax Act has expressly not imported the definition of  ’sale’ from the Sales Tax Act. Therefore, the intention of the  legislature in excluding ’execution of works contract’ from  the definition of ’sale’ is manifest and this reflects clearly in  the letter of the law.  

Further, the contention that the term ’sale’ utilised in  Entry 52 of List II and Entry 54 of List II are the same  concept deriving from the expression ’tax on the sale or  purchase of goods’ as defined in Article 366(29-A)  seems  to be incorrect. The High Court has observed rightly that  the M.P.Sales Tax Act, 1958 is covered by Entry 54 whereas  the M.P. Entry Tax Act, 1976 is covered by Entry 52.  Therefore, both these Acts are covered by different entries  in the Constitution and hence, the incidence of taxation in  both cases is different. Under the Sales Tax Act enacted by  virtue of Entry 54 the incidence of taxation is on the sale  and purchase of goods whereas in the case of the Entry Tax  Act, the incidence of taxation is on the entry of the goods  specified in the Entry Tax Act.  

Accordingly, the M.P. Entry Tax Act does not adopt the  expression of "goods" and ’sale’ under the M.P. Sales Tax  Act.  

It is a well-settled position of law that in interpreting  taxing statutes, one must have regard to the strict letter of  the law. If the person/entity sought to be taxed comes  within the letter of the law he must be taxed.  

In the instant case, the letter of the law, i.e. Section 3  (1) (b) of the M.P. Entry Tax Act, 1976, leaves out  "execution of works contracts" from the definition of "sale".  By expressly not adhering to the definition of ’sale’ in the  M.P. Sales Tax Act [which includes, transfer of property in  goods involved in the execution of works contract within the  definition of ’sale’ as required by Article 366(29A)(b)] their  can be no doubt that the section clearly requires the  appellants to pay the entry tax. Accordingly the appellants  are liable to pay entry tax under the M.P. Entry Tax Act,  1976.  

It is true that the M.P. Entry Tax Act, 1976 does not  provide a definition of ’sale’.  The appellants contend that in  the absence of such definition the Constitutional definition  as provided in Article 366(29-A) must be imported.

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However, even though the Act does not define ’sale’ it does  provide a negative definition by clearly leaving out  ’execution of works contract’ from the definition of ’sale’.  Thus, there is no ambiguity at least with regard to  ’execution of works contract’. It cannot be said to be a ’sale’  for the purposes of the M.P. Entry Tax Act, 1976.

The appellants further contend that under Section 3  (1) (b) of the Entry Tax Act, 1976, the goods specified in  Schedule III if are imported from outside the State for  consumption are completely exempted by virtue of  exception (vi) to proviso attached to Section 3(1)(b). The  relevant proviso is extracted herein: "(vi) in respect of goods specified in Schedule III  imported from outside the State for consumption  or use as [raw materials or incidental goods] or  as packing materials or in the execution of works  contract but which have been disposed of in any  manner."     (Emphasis supplied)

The appellants submit that a plain reading of Section 3  would indicate that all those goods falling in Schedule III  which are imported from outside the State for consumption  are not subject to entry tax. This submission is incorrect.  There is no ambiguity in the proviso which clearly states  that tax shall not be levied only on those goods which have  been imported from outside and are meant for use or  consumption as raw materials, incidental goods as packing  material or in the execution of works contract, but only if  after being brought in for such purpose are disposed of in  some other manner. The interpretation of the appellants  fails to consider the final part of the proviso, which has  been emphasised in the reproduction of the same above.

Hence it can be seen that the Entry Tax imposed by  the respondents is justifiable.

       These appeals are accordingly dismissed.