- (1.) IN all these writ petitions the petitioners as traders, manufacturers and importers bringing scheduled goods into the local areas in the State of U.P. for consumption, use or sale therein have challenged the validity of the U.P. Tax on Entry of Goods into Local Areas Act, 2007, (in short the U.P. Act of 2007) on the grounds of lack of the legislative competence of the State of U.P. of enactment, as also violative of freedom of trade, commerce and intercourse guaranteed under Article 301 and not saved by Article 304 (b) of the Constitution of INdia. The petitioners have also challenged the retrospectivity of the Act. w.e.f. 1.11.1999, when the U.P. Tax on Entry of Goods Ordinance, 1999, replaced by U.P. Tax on Entry of Goods Act, 2000, was promulgated and which was struck down by this Court in INdian Oil Corporation Ltd. v. State of U.P., AIR 2004 All 277.
(2.) THE substance of challenge in all these writ petitions to the constitutional validity of the U.P. Act of 2007 is that the entry tax is levied under the Act is by way of payment of compensatory tax of which the quantifiable/ measurable benefits are not provided either facially or patently to its payers, in view of the tests laid down in Jindal Stainless Ltd. (2) and another v. State of Haryana and another, (2006) 7 SCC 241. THE expenditure of the entry tax as compensatory tax collected is not broadly in proportion to defray the cost of regulation, or to meet the outley incurred for some special benefit to the trade commerce and industry. THEre is no link between the entry tax collected and the facilities extended to the trades, directly or indirectly, and for which the State on which the burden of proof lies has failed to prove the direct and immediate effect on trade and commerce, as laid down in Atiabari Tea Co. Ltd. v. State of Assam, AIR 1961 SC 232, and the working trest enunciated in Automobile Transport (Rajashtan) Ltd. v. State of Rajasthan, AIR 1962 SC 1406. We have heard Shri S.P. Gupta, Sr. Advocate assisted by Shri Yashwant Verma; Shri Bharat Ji Agrawal, Sr. Advocate assisted by Shri Piyush Agrawal, Shri Subham Agrawal; Shri V.K. Upadhyay, Sr. Advocate assisted by Shri Ritwik Upadhyay; Shri Dhruv Agrawal, Sr. Advocate assisted by Shri Nikhil Agrawal; Shri Aloke Kumar; Shri K.N. Kumar; Shri R.R. Agrawal appearing alongwith Shri Suyash Agrawal; Shri S.D. Singh; Shri Nishant Mishra; Shri Navin Sinha, Sr. Advocate assisted by Shri Saral Srivastava for the petitioners. Shri S.P. Kesarwani, Addl. Chief Standing Counsel alongwith Shri C.B. Tripathi, Addl. Chief Standing Counsel appear for the State respondents. THE Background The Second State Finance Commission (2001-06) of the State of U.P. observed in para 14.111 of its report that octroi used to be the most important source of revenue for urban local bodies in the State. The collection of octroi was full of deficiencies, malpractice and caused harassment. It also imposed negative economic costs due to impediments on movement of goods carriers, leading to wastage of fuel and substantial time delays. A decision was taken at the national level to abolish octroi and to compensate local bodies through matured mechanisms for loss of revenue cost. The U.P. Taxation Enquiry Committee 1980 recommended abolition of octroi. In the alternative it suggested levy of entry tax on selected commodities. Subsequently in many states including State of U.P. octroi was abolished. Some States like Maharashta and Gujarat did not abolish the octroi. In U.P. it was decided to levy surcharge on sales tax, the proceeds whereof were to be distributed to Urban Local Bodies as grants to compensate them for the loss of revenue. In the course of time the surcharge was merged in trade tax. The Urban Local Bodies were made entitled to receive a share of 7% in net tax receipts, following the recommendations of the First State Finance Commission. The volume of transfers to the Urban Local Bodies substantively improved under the new system. In 1995-96 total non-planned grants to Urban Local Bodies in U.P. amounted to Rs. 285 crores. In the year 2001-02 this amount exceeded to Rs. 700 crores. The 11th Finance Commission in its report presented to the Lok Sabha on 27th July, 2000 considered in para 8.13 the assessment about the manner and extent of augmentation of the Consolidated Funds of the State, keeping in view of the provisions required to be made for the emoluments and terminal benefits of the local bodies including teachers; the existing powers of the local bodies to raise financial resources and the powers, authorities and responsibilities transferred to local bodies. In para 8.14 to para 8.18 of the report, the 11th Finance Commission submitted the study of the report on panchayats and municipalities; measures to augment the consolidated funds of the State, reforms in local tax and rates and maintenance of civil services. In para 8.16 on the issue of reforms in local tax and rates, the 11th Finance Commission reported as follows: "8.16. In addition to the measures mentioned above, we would like to highlight the need for improving the revenue mobilisation by the local bodies themselves. Many SFCs have, in their reports, given suggestions in this regard, of which some are State specific but some can be considered useful for all the States. We mention two local taxes, besides user charges, for consideration of all the States. (a) Property/house tax : Property tax/house tax is the single most important local tax today, in a majority of the States. Yet it has remained beset with a variety of problems that have prevented the local bodies to exploit its full potential. Such problems are not merely confined to the proximity factor, namely, the local bodies being too close to the people to be effective tax collectors. In most States, the tax rates have not been revised periodically and there is no standard mechanism for determination of property tax rates and their revision. Indeed, West Bengal has experimented with the institution of Central valuation authority and some other States have initiated reforms in the system of property taxation with provisions for self-assessment, mandatory periodic revision, dispensing with the demand notice for the tax and putting the onus on property owners for timely tax payment, etc. Such measures have yielded good results and need to be pursued by all States in a rationalised manner. Most States have accorded a variety of tax concession/exemption leading to Revenue loss to the local bodies. Arrears of taxes are allowed to accumulate either due to sheer inefficiency or due to delay in assessments and in appeals. Yet another major impediment to the growth of revenue from the property/ house tax has been the rent control laws. The property/house tax legislation should be suitably modified to overcome this impediment where the property has been let out, the property tax should be made recoverable from the occupier. (b) Octroi/entry tax: Besides the property/house tax, octroi has been the major source of revenue for the municipalities and, in some States, even for the panchayats. Many States have, however, abolished octroi with a view to remove impediments to the physical movement of goods, though several other new barriers have been created. Some States have introduced a levy in lieu of octroi, usually the entry tax, the net proceeds of which are transferred to the local bodies in the form of grant. During our interaction with the representatives of the local bodies, we were told that though the grant in lieu of octroi given to the local bodies was raised by certain percentage from year to year, it does not have as much buoyancy as the octroi had. There have also been numerous complaints of delay in release of the compensatory grants. While we do not advocate re-introduction of octroi, we do feel that there is a need for replacing it with a suitable tax that is buoyant and can be collected by the local bodies." The State of U.P. promulgated the U.P. Tax on Entry of Goods Ordinance, 1999 w.e.f. 1.11.1999, which was later on enacted as U.P. Tax on Entry of Goods Act, 2000. The Prefatory Note of the Act of 2000 read as follows : "Prefatory Note-Statement of Objects and Reasons.-With a view to augmenting the revenue of the State, it was decided to make law to provide for the levy and collection of tax on entry of certain goods into a local area from any place outside that local area including a place outside Uttar Pradesh for consumption, use or sale therein, at such rates, not exceeding five per cent of the value of the goods, as may be specified by the State Government by notification. It was also decided to provide for the application of certain provisions of the Uttar Pradesh Trade Tax Act, 1948 including the use of check-posts and barriers established thereunder for the purposes of the said law. Since the State Legislature was not in session and immediate legislative action to implement the aforesaid decision was necessary, the Uttar Pradesh Tax on Entry of Goods Ordinance, 1999 (U.P. Ordinance No. 21 of 1999) was promulgated by the Governor on October 30, 1999 after obtaining the instructions of the President...."
(3.) THE Act of 2000 was challenged by M/s Indian Oil Corporation Ltd. and many other companies and traders importing scheduled goods into local area of the State. A Division Bench consisting of Hon'ble Mr. Justice M. Katju (as he then was) and Mrs. Justice Poonam Srivastava by their judgment dated 27.1.2004 reported in AIR 2004 All 277, declared the Act as violative of Articles 301 and 304 of the Constitution of India and thus ultra vires, and allowed all the writ petitions. THE observations of the Bench made in paragraph 51, 54, 66, 67, 68, 69 and 107 are quoted as below : "Paragraph No. 51, In our opinion, this does not help the respondents because the respondents have to show that the realization from entry tax has been used for facilitating trade and commerce and not for raising general revenue. THEre is nothing to show that the amount realised as entry tax cannot be used or has not been used for setting up schools, housing payment of salary to Government employees, payment of salaries to Ministers, M.L.As, constructing Government building acquiring land etc. Paragraph No. 54. In our opinion a tax to be a compensatory tax must be in the nature of a cess. A cess is a tax imposed for realizing revenue which is utilized for a specific purpose. Thus, while a cess is also a tax, it is a tax of a special nature. It does not realize revenue which is used for general public expenditure but for specific expenditure for a specific purpose. For example, education cess would be a tax which generates revenue which is utilized for education purposes e.g., school building, paying salaries to teachers etc. Similarly, a health cess would be a tax which generates revenue which is utilized for health purposes e.g. for building hospitals giving free medicines to poor people etc. Similarly in our opinion a compensatory tax is really in the nature of a cess because it generates revenue which is not used for general public purpose but for the specific purpose of facilitating trade and commerce. Paragraph No. 66. In fact in the Statement of Objects and Reasons of the impugned Act (U.P. Act No. 12 of 2000) it is specifically mentioned: "Preferatory Note-Statement of Objects and Reasons- with a view to augmenting the revenue of the State it was decided to make law to provide for levy and collection of tax on entry of certain goods into a local area from any place outside that local area including a place outside U.P........." Paragraph No. 67. Thus the Statement of objects and Reasons of the impugned Act clearly discloses that the impugned Act was enacted to augment the general revenue of the State and not for facilitating trade and commerce. Paragraph No. 68. In the supplementary counter-affidavit of Shri B.P. Sonkar dated 7th January, 2004 the respondents have annexed copy of a letter of the Director (Judicial), Government of India, Ministry of Home Affairs, dated 19th January, 2000 addressed to the Principal Secretary, Legislative Section, Government of U.P. this letter states: "With reference to your letter No. 2386/XVII-V-I-1 (Ka)-39/39 dated 1st January, 2000 on the subject mentioned above, I am directed to say that the Government of India have no objection to the introduction of the Uttar Pradesh Tax of Entry of Goods Bill, 2000, in the State Legislature under Article 304 (B) of the Constitution of India." Paragraph No. 69. In our opinion, there is a difference between the Government of India and President of India. THE aforesaid letter dated 19th January 2000 only states that the Government of India has no objection to the introduction of the impugned Act but it does not say that the president of India has given his previous sanction as required by the proviso the Article 304 (b) of the Constitution. Paragraph No. 107. Any amount collected under the said Act shall be refunded to the petitioners with 10 per cent annum interest from the date of realization to the date of refund and the refund shall be made within two months from Tribunal today. However, if the burden of tax has been passed on by the petitioners to the consumers then the refund shall not be given to the petitioners of the tax realized as it will amount to unjust enrichment." Aggrieved by the judgment the State of U.P. preferred Special Leave to Appeal (Civil) No. 2757-2758 of 2004. The Supreme Court by order dated 9.2.2004 stayed the operation of the judgment subject to appellant depositing all the taxes that may be realized from the respondents after 27.1.2004 in a separate interest bearing account. The interim order is quoted as below : "Issue notice on the application for impleadment. Leave granted. The operation of the impugned judgment is stayed, subject to the appellant's depositing all taxes that may be realized by the appellant from the respondents after 27.1.2004 in a separate interest bearing account. This amount and the interest accrued thereon shall be held subject to the further orders of this Court." A two judges bench of the Supreme Court had doubted the correctness of the views expressed in Bhagat Ram Rajiv Kumar v. CST, 1995 Supp 1 SCC 673, which was relied on in a subsequent decision in State of Bihar v. Bihar Chamber of Commerce, (1996) 9 SCC 136 and had referred the matter to a Larger Bench. In Jindal Stainless Ltd. (2) v. State of Haryana, (2006) 7 SCC 241 a Constitution Bench of the Supreme Court overruled the judgment in Bhagat Ram and Bihar Chamber of Commerce's case and concluded as follows: "49. In our opinion, the doubt expressed by the referring Bench about the correctness of the decision in Bhagatram's case 1995 Supp. (1) SCC 673 followed by the judgment in the case of Bihar Chamber of Commerce (1996) 9 SCC 136 was well-founded. 50. We reiterate that the doctrine of "direct and immediate effect" of the impugned law on trade and commerce under Article 301 as propounded in Atiabari Tea Co. Ltd. v. State of Assam, AIR 1961 SC 232 and the working test enunciated in Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan, AIR 1962 SC 1406 for deciding whether a tax is compensatory or not vide para 19 of the report, will continue to apply and the test of "some connection" indicated in para 8 of the judgment in Bhagatrom Rajeevkumar v. Commissioner of Sales Tax, M.P. 1995 Supp. (1) SCC 673 and followed in the case of State of Bihar v. Bihar Chamber of Commerce, (1996) 9 SCC 136, is, in our opinion, not good law. Accordingly, the constitutional validity of various local enactments which are the subject matters of pending appeals, special leave petitions and writ petitions will now be listed for being disposed of in the light of this judgment." ;