R. GANDHI Vs. STATE OF TAMIL NADU

JUDGEMENT

(1.) ALL these writ petitions filed by the importers/dealers of motor vehicles challenge the constitutional validity of the Tamil Nadu Tax on Entry of Motor Vehicles into Local Areas Act, 1990 (Act 13 of 1990) (hereinafter, for brevity sake, will be referred to as 'the Act'). The Act was in replacement of an Ordinance (No. 1 of 1990) promulgated by the Governor on February 19, 1990 and published in the gazette on February 20, 1990. The Act received the assent of the President on April 24, 1990, published in the gazette on the next day, and deemed to have come into force from February 20, 1990.

(2.) THE challenge to the validity of the Act which was basically on the ground of infringement of Articles 301 and 304 of the Constitution was originally dealt with and rebutted on the basis of the law laid down by the Supreme Court in Bhagatram Rajeev Kumar v. Commissioner of Sales Tax and State of Bihar v. Bihar Chamber of Commerce : [1996]2SCR184 , wherein it was held that in order to establish the tax as compensatory, some connection between the tax and the trading facilities extended to the dealers directly or indirectly is sufficient to characterise it as compensatory tax. The judgment of the Division Bench is R. Gundhi v. Union of India reported in : 1997(3)CTC255 . Special leave petitions were filed in the Supreme Court against the Division Bench judgment and those special leave petitions and certain connected matters were referred to a Larger Bench by order dated September 26, 2003 as the Bench hearing the matters doubted the correctness of the view expressed in the case of Bhagatram Rajeev Kumar : 1994(4)SCALE1103 and Bihar Chamber of Commerce : [1996]2SCR184 . The matters were dealt with by the Constitution Bench in Jindal Stainless Ltd. v. State of Haryana : [2006]283ITR1(SC) and the Bench concluded that the doubt expressed by the referring Bench about the correctness of the decision in Bhagatram case : 1994(4)SCALE1103 followed by the judgment in Bihar Chamber of Commerce case : [1996]2SCR184 was well founded. The Bench held 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 : [1961]1SCR809 and the working test enunciated in Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan : [1963]1SCR491 for deciding whether a tax is compensatory or not vide para 19 of the report (AIR), will continue to apply and the test of 'some connection' indicated in (page 658 of STC; para 8 of SCC) the judgment in Bhagatram case : 1994(4)SCALE1103 and followed in Bihar Chamber of Commerce case : [1996]2SCR184 is not good law. Accordingly, the special leave petitions and the writ petitions were directed to be listed for being disposed of in the light of the said judgment. In Jindal Stainless Ltd. v. State of Haryana : (2006)7SCC271 , a two -judge Bench noted that in all these matters, the High Courts concerned have not examined the issue in the proper perspective, as they were bound by the judgments in Bhagatram case : 1994(4)SCALE1103 and Bihar Chamber of Commerce case : [1996]2SCR184 and granted liberty to the parties to place the relevant data in the writ petitions concerned and directed the High Courts to deal with the basic issue as to whether the impugned levy was compensatory in nature.

(3.) THE learned Counsel appearing on behalf of the petitioners submitted that the right of the State to impose entry tax has to be decided in the light of the decision of the Constitution Bench of the Supreme Court in Jindal Stainless Ltd. v. State of Haryana : [2006]283ITR1(SC) . It was submitted that in Jindal case : [2006]283ITR1(SC) , it has been specifically held that the burden is on the State placing material before the court to prove that the payment of compensatory tax is reimbursement/re -compensate for the quantifiable/measurable services provided or to be provided to the payers. 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 tax should not be patently more than what was required to provide trading facilities. 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 the trade movement in inter -State trade and commerce between States is contrary to the concept of freedom of trade embodied in Article 301 of the Constitution. It was urged that as seen from the Statement of Objects and Reasons of the Act, the Act has been enacted to curb the evasion of sales tax on the sale of motor vehicles which are purchased outside the State and brought into this State and the State has not discharged the burden to prove that the tax levied and collected under the impugned Act is for the purpose of providing trade facilities. It was submitted that entry 52, List II, indicates that the levy contemplated therein is on the entry of goods into the local area for consumption, use or sale therein. Therefore, if levy of entry tax is claimed to be compensatory in nature, such levy should be, in the first instance, confined to a local area, and secondly, the trade facilities sought to be provided also should be confined to such local area. It was submitted that the expenses for such facilities and the levy by which such expenses are to be met must bear reasonable and rationale relationship. It was submitted that the entry tax levied under the impugned Act lacks basic ingredients for a valid compensatory tax as neither under the impugned Act nor in connection with it, any specific facility, convenience or service is provided to the importers/dealers, who are required to pay the impugned tax nor is there any co -relationship between the quantum of tax recovered from the importers/ dealers and the value of convenience/facility or services provided. The levy thus violates Articles 301 and 304 of the Constitution.