Tata Steel Limited and Others vs State of Jharkhand and Others

M.Y. Eqbal, A.C.J.

In all these writ petitions, the petitioners have challenged the vires of Section 11 of the Jharkhand Value Added Tax Act, 2005 as ultra vires and violative of Article 301 read with Article 304(a) of the Constitution of India since the provision is not saved by Article 304(b) of the Constitution of India and further for a direction restraining the respondents from enforcement of the provisions of Section 11 of the Jharkhand Value Added Tax Act. 2005 whereby Entry Tax is liable to be collected on entry of goods mentioned in Schedule III of the said Act. The petitioners further sought a declaration that the entry tax is not compensatory in nature falling under Article 304 of the Constitution of India. As such, the said provision is violative of Article 301 of the Constitution of India.

The respondents-State filed counter-affidavit taking various defences available in law in support of their case that provisions of the Act is compensatory in nature and, therefore, not violative of the provisions of Article 301 and Article 304(b) of the Constitution of India. A supplementary counter-affidavit was filed by the respondents on 17.3.2008. During the pendency of the writ applications, the respondents filed aforementioned supplementary counter-affidavits stating inter alia that respondent No. 3 - Additional Commissioner of Commercial Taxes. Jharkhand vide letter dated 8.3.2007 wrote to the Ministry of Home Affairs, Government of India requesting for grant of post facto assent/approval of the President of India. In response thereof, the Home Ministry, Government of India, vide letter dated 11.8.2007 informed the department that the Value Added Tax Act, 2005 is valid and no post facto assent is to be required.

Bihar Tax on Entry of Goods into Local Areas for Consumption, Use and Sale Therein Ordinance. 1993 was promulgated in February, 1993 by the Government of Bihar. By a subsequent notification dated 25th February, 1993 "entry tax" was introduced in the State of Bihar. After the lapse of the said Ordinance, another ordinance, namely, "Bihar Tax on Entry of Goods into Local Areas for Consumption, Use and Sale Therein Ordinance, 1993" was issued which was made an Act, namely, Bihar Tax on Entry of Goods into Local Areas for Consumption, Use and Sale Therein Act, 1993. The constitutional validity of the said Act was challenged in Patna High Court. The Division Bench of Patna High Court in the matter of State of Bihar v. Bihar Chamber of Commerce. : [1996]2SCR184 , held that the charging provision contained in Section 3 of the Act was ultra vires to the Constitution of India. The State of Bihar then preferred an appeal before the Supreme Court. The said appeal was allowed and the constitutional validity of Sections 3 and 6 of the Act was upheld following the earlier decision of the Supreme Court in the case of Bhagatram Rajeevkumar v. CST 1995 (1) SCC 673.

After the creation of the State of Jharkhand, a fresh ordinance was issued in 2001, namely, Jharkhand Tax on Entry of Goods into Local Areas for Consumption, Use and Sale Thereof (Amendment) Ordinance, 2001. In 2005 the State of Jharkhand came with a new legislation, namely, Jharkhand Value Added Tax Act, 2005. By the said Act, the Bihar Tax on Entry of Goods into Local Areas for Consumption, Use and Sale Therein Act, 1993 as adopted in the State of Jharkhand was repealed. By the said Act, 2005 (VAT Act), the provision of imposition of Entry Tax on entry of goods into a local area in the State of Jharkhand has been introduced.

Before discussing the issue involved in these writ applications, 1 would first file to refer relevant provisions of Jharkhand Value Added Tax Act, 2005 (in short ''VAT Act'') and subsequent amendments made in the said Act by Jharkhand Value Added Tax (Amendment) Act, 2007 (in short Amendment Act, 2007'').

In the VAT Act, 2005, preamble of the Act reads as under:

An Act to provide for and consolidate the law relating to levy of Value Added Tax on sales or purchases of goods and on Entry of Goods into a local Area in the State of Jharkhand.

The said Act was published in Jharkhand Gazette (Extraordinary) dated 15.2.2006. In the original Act of 2005, the word "Entry of goods'' as defined in Section 2(xix) reads as under:

Entry of goods - "Entry of goods" with all its grammatical variations and cognate expressions means entry of goods mentioned in Schedule III into a local Area from any place outside the State.

Section 2(xxvi) defines the word "Importer"�"Importer" means a dealer who brings any goods into the State or to whom any goods are dispatched from any place outside the State.

Section 2(xxix) defines ''Input Tax" as under:

Input Tax" means the tax paid or payable under this Act, by a registered dealer to another registered dealer on the purchase of goods, in the course of business for re-sale or for use in manufacturing or processing of taxable goods for sale, or for directly use in mining or use as containers or packing materials for taxable goods or for the execution of works contract;

Provided that input tax shall also include tax paid on the entry of goods into the local area as specified in Schedule- III.

Provided further that input tax shall also include tax paid on the capital goods for Registered Start-up-business and shall qualify for Input Tax Credit as prescribed.

Section 11 of 2005 Act is a charging section which reads as under:

Charge of Tax on Entry of Goods.-(1) Notwithstanding anything contained in Sections 9, 12. 13 and 14 of this Act or any notification issued thereunder, there shall be levied and collected a tax on import price(s). on entry of such goods mentioned in Schedule III of this Act, into the State or into a local Area for consumption, use or sale therein, subject to such condition as may be prescribed.

Provided that the tax levied on import price(s) of such goods mentioned in Schedule III, shall be levied at the rate of 4 percentum.

Provided further that where a dealer has paid tax on entry of such goods, and on which he is not liable to pay tax u/s 17 of the Act, but is liable to pay tax. by virtue of sale of such goods, under Sub-section (2) of Section 9, his liability to pay tax on such goods, as specified in Part-E of Schedule-II u/s 13, shall stand reduced to the extent of tax paid on the entry of such goods subject to such condition as may be prescribed.

(2) The tax leviable under this section shall be paid by every dealer or registered dealer or any other person who in course of his business or other wise brings or causes to be brought into the local area, such goods mentioned in Schedule III whether on his own ac count or on account of his principal or takes delivery or is entitled to take delivery of such goods on such entry.

Provided no tax shall be leviable, in respect of entry of such goods affected by a person other than the dealer if the value of such goods does not exceed Rs. 10,000 (ten thousand) in a year.

(3) The liability to pay tax under this section, on goods mentioned in Schedule III shall be only at the point of first entry into the State or into a local area and any subsequent sale or sales into the State or into any local area or areas of the said goods, shall not be subject to tax under this section, provided the subsequent selling dealer or registered dealer produces before the prescribed authority, original copy of bill, invoice, cash memo or challan is sued to him by the dealer from whom he purchased or received the said goods and files a true declaration in the form and manner prescribed.

In 2007 the respondents-State amended various provisions of VAT Act, 2005 by enacting Jharkhand Value Added Tax (Amendment) Act, 2007 (Jharkhand Act 3 of 2008). Section 1 of the Amendment Act, 2007 made the amended provisions effective from 1.4.2006. In Section 3, one more definition of "Fund" has been inserted by Clause (xxiA) which reads as under:

Section 2(xxiA) "Fund" means, the "Jharkhand Trade Development Fund", as created by the State Government through a Notification published in the Official Gazette for the purpose of development of trade, commerce and industry of the State, for such period(s) as may be specified in this behalf.

Sections 8 and 9 of the VAT Act. 2005 have also been amended. Section 11 which is relevant to the present case, has also been amended. The amendment brought in Section 11 is quoted herein below:

Change of Tax on Entry of Goods.�(1) Notwithstanding anything contained in Sections 9, 12, 13 and 14 of this Act or any notification issued thereunder, there shall be levied and collected a tax on import price(s), on entry of such goods mentioned in Schedule III of this Act, into the State or into a local Area for consumption, use or sale therein, subject to such condition as may be prescribed.

Provided that the tax levied on import price(s) of such goods mentioned in Schedule III, shall be levied at the rate of 4 percentum.

Provided further that Where a dealer has paid tax on entry of such goods, and on which he is not liable to pay tax u/s 17 of the Act, but is liable to pay tax by virtue of sale of such goods, under Sub-section (2) of Section 9, his liability to pay tax on such goods, as specified in Part-E of Schedule-II u/s 13, shall stand reduced to the extent of tax paid on the entry of such goods subject to such condition as may be prescribed.

(2) The tax leviable under this section shall be paid by every dealer or registered dealer or any other person who in course of his business or other-wise brings or courses to be brought into the local area, such goods mentioned in Schedule III whether on his own account or on account of his principal or takes delivery or is entitled to take delivery of such goods on such entry.

Provided no tax shall be leviable in respect of entry of such goods affected by a person other than the dealer if the value of such goods does not exceed Rs. 10,000 (ten thousand) in a year.

(3) The liability to pay tax under this section, on goods mentioned in Schedule III shall be only at the point of first entry into the State or into a local area and any subsequent sale or sales into the State or into any local area or areas of the said goods, shall not be subject to tax under this section, provided in subsequent selling dealer or registered dealer produces before the prescribed authority, original copy of bill, invoice, cash memo or challan issued to him by the dealer from whom he purchased or received the said goods and files a true declaration in the form and manner prescribed.

Various other sections of the VAT Act, 2005 have been amended. However, it is worth to mention here that no amendment has been made in Sections 12, 15 to 21.

As noticed above, during pendency of the writ petitions, relevant provisions of VAT Act, 2005 have been amended by Jharkhand Value Added Tax (Amendment) Act, 2007. Immediately thereafter, in order to give effect to the amended provisions, a notification was issued by the Finance Department vide S.O. No. 48 dated 29.8.2008 describing the procedure for levy and collection of tax on import price on entry of goods into the State or into a local area for consumption, use or sale therein. The notification dated 29th March, 2008 reads as under:

Finance Department Notification The 29th March, 2008

S.O. 48. dated 29th March. 2008/930/FD�In exercise of the powers conferred by the Clause (xxiA) of Section 2 read with Section 11 of the Jharkhand Value Added Tax Act, 2005 (Jharkhand Act, 5, 2006) as amended by Act 3. 2008 which prescribes for levy and collection of tax on Import Price(s) on entry of goods mentioned in Schedule III of the Act. into the State of into a local area for consumption, use or sale therein, subject to conditions as may be prescribed and also other conditions laid down under Sub-sections (2) and (3) of Section 11 and all other enabling powers in this behalf, the Governor of Jharkhand is pleased to create a Fund to be known as The Jharkhand Trade Development Fund (hereinafter called the ''Fund'').

The proceeds for the entry tax levied and collected u/s 11 of the Jharkhand Value Added Tax Act, 2005 (Jharkhand Act, 5 of 2006) shall be appropriated into the ''Fund''.

The proceeds of the "Fund" shall be exclusively utilized for facilitating trade, commerce and industry through out the State of Jharkhand which shall include the following:

(a) construction, development and maintenance of roads and bridges for linking the market and industrial areas to their hinterlands.

(b) providing finance, aids, grants and subsidies for development of infrastructure to facilitate free movement of goods:

(c) creating infrastructure for supply of electrical energy and water supply to augment trade and commerce in the State;

(d) creation, development and maintenance of other infrastructure for, the furtherance of trade, commerce and industry in general.

There shall be constituted a High Level Committee under the Chairman ship of the Chief Secretary for specifying the manner in which the proceeds of the "Fund" shall be utilized. The Committee shall be consisting of a Chairman, a

Member Secretary and the following ex-officio members:

(a) Chief Secretary, Jharkhand ex-officio Chairman (b) Finance Secretary, Jharkhand Member Secretary (c) Secretary-cum-Commissioner, Commercial Co-ordinat Taxes, Department, Government of Jharkhand or (d) Secretary, Road Construction Department, ex-officio Government of Jharkhand member (e) Secretary, Agriculture and Sugarcane ex-officio Department, Government of Jharkhand member (f) Secretary, Industries Department, Government ex-officio Jharkhand member (g) Secretary, Energy Department, Government of ex-officio Jharkhand member (h) Secretary, Drinking Water and Sanitation ex-officio Department, Government of Jharkhand member

The Headquarter of the said Committee shall be at Ranchi.

High Level Committee shall identify and sanction schemes to be completed from the proceeds of the Fund keeping in view necessary facilities and infrastructure to be created for the benefit of Entry Tax payers as far as possible commensurate with their respective contribution by such class of tax payers.

The member Secretary of the Committee shall convene the meeting, at least once a year to allocate the proceeds of the amount so collected, to the different respective departments in order to achieve the objective of this "fund".

High Level Committee shall monitor the utilization of Fund for the purposes specified in the Clause (3) from time to time with a view to ensure full and proper utilization thereof.

The entry tax deposited under Jharkhand Value Added Tax Act, 2005 under minor Head-106 of the major Head-0042 shall be deemed to have been appropriated into the Fund.

Any amount credited to the Fund and unutilized during any financial year shall be utilized for the same purpose in the subsequent financial year in accordance with the direction of the High Level Committee.

This notification shall remain valid for ten years, provided the State Government may extend its validity for such period as it may deem necessary in this regard.

This notification shall be deemed to have come into effect from 1st April, 2006.

By the order of the Governor of Jharkhand, Niranjan Kumar, Additional Finance Commissioner, Jharkhand, Ranchi.

After Amendment Act and the Notification were brought on record, the petitioners filed application for amendment of different paragraphs of the writ applications. The said amendments sought for by the writ petitioners are as under:

(I) That in paragraph-1 of the writ petition, the following prayer may be added:

(F) For issuance of an appropriate writ for a declaration that Jharkhand Value Added Tax, 2005 as amended by Jharkhand Value Added Tax (Amendment) Act, 2008 is violative of Article 301 of the Constitution of India as the said Act is not compensatory in character and also is not saved by Article 304 of the Constitution as the said legislation is discriminatory in character and also has not received the sanction of the President of India before the Jharkhand Value Added-Tax, 2005 or the Jharkhand Value Added Tax (Amendment) Act, 2008 has been introduced or moved before the State Legislature.

(G) For issuance of an appropriate writ for a further declaration that the Jharkhand Value Added Tax (Amendment) Act, 2008 cannot be given retrospective effect from 1st April, 2006.

(H) For issuance of an appropriate writ for a further declaration that the Jharkhand Value Added Tax (Amendment) Act, 2008 cannot be implemented or enforced in the absence of any notification issued under Sub-section (7) of Section 11 of the Jharkhand Value Added Tax (Amendment) Act. 2008.

(II) That after paragraph-70, the following paragraphs may be, added:

"71" That the State of Jharkhand has enacted the Jharkhand Value Added Tax (Amendment) Act, 2007 (Jharkhand Act 03-08), which is an Act to amend the Jharkhand Value Added Tax, 2005 (Jharkhand Act 05-06). By the said Amendment Act, the various provisions of the Jharkhand Value Added Tax has been amended w.e.f. 1.4.2006, the Hon''ble Governor has given his assent on 5th March, 2008 and the same has been published in the Official Gazette on 12th March. 2008.

"72" That the Amendment Act is a colourable piece of legislation intended to give a veneer of regularization and legalization of the Jharkhand VAT Act which facially discloses that the said Act is not compensatory as it does not disclose under the provisions of the said Act as to how and in what manner the proceeds of Entry Tax are to be utilized for the purpose of the benefit and interest of trade people of the local area in which such Entry Tax is sought to be levied. In view of the Judgment of the Supreme Court in the case of Jindal Stainless Ltd. and Another Vs. State of Haryana and Others, the burden therefore lies upon the State to place materials before the Court as to how the proceeds of entry tax are sought to be utilized for the benefit and interest of the trade people of the local.

"73" That the State has failed to discharge that burden under the Jharkhand VAT Act, 2005. Faced with the said situation when the matter came up before this Hon''ble Court, the counsel for the petitioner had made submissions on the basis of the Constitution Bench judgment in Jindal Stainless Ltd. The State had made the submission that a bill has been introduced and therefore they took time for the adjournment of the case. Even on the last day when the matter was heard, the State could not produce any material to show that the bill has already been made into an Act. After the case was adjourned by the Hon''ble bench the present Supplementary Counter Affidavit has been filed disclosing that the said bill has been made into an Act and the Amendment Act has been now enacted with the assent of the Governor of the State.

"74" That it is submitted that under the Amendment Act a trade development fund has been introduced and the definition of said trade development fund has been made in Section 2(xxi) of the said Act. Section 11 of the Jharkhand VAT Act has been further amended by the Amendment Act of 2008 by introducing Sub-sections (4), (5), (6) and (7) in Section 11 of the original Act. It appears from the aforesaid sub-sections which have been newly introduced by the Amendment Act of 2008 that the trade development fund as defined in Section 2(xxi) and notified by the State Government in the Official Gazette in this behalf is to be utilized for the various purposes set out in Sub-section (6) of Section 11 of the Amendment Act.

"75" That it is submitted that the trade development fund has not yet been notified in the Official Gazette and in the absence of any such notification, the trade development fund does not exist in the eye of law. In any event such trade development fund is to be utilized for the various purposes as mentioned in Sub-section (6) of Section 11 of the Amendment Act. The purpose for which the said trade development fund which is proposed to be constituted are to be utilized for the following purposes:

(a) construction, development and maintenance of roads and bridges for linking the market and industrial areas to their hinterlands;

(b) providing finance, aids, grants and subsidies to financial, industrial and commercial units,

(c) creating infrastructure for supply of electrical energy and water supply to industries, marketing and other commercial complexes,

(d) creation, development and maintenance of other infrastructure for the furtherance of trade, commerce and industry in general.

"76" That it is submitted that none of the purposes which have been so enumerated does in any way indicate that the proceeds of Entry Tax which are required to be appropriated to the trade development fund are earmarked for the benefit and interest of the trading people of the local area in which such Entry Tax is sought to be levied and collected. Under Clause (a) of Sub-section (6} of Section 11 maintenance of roads and bridges is hot compensatory in nature so as to constitute special advantage to trade, commerce and intercourse. Even otherwise welfare State is bestowed with the respondents of providing good roads and bridges for the tax paying citizens and hence to contend that the impugned levy is being raised for that purpose viz. for providing roads and bridges and for maintaining such roads and bridges for the benefit and interest of the trading people of the local area is not justified.

"77" That in fact maintenance and construction of roads and bridges are met from the general revenue of the State. Whether the goods are transported into the State or abroad the State has a duty to provide facilities like roads, bridges etc. which is not only enjoyed by persons who bring the notified goods for levy of entry tax but also others. Roads and bridges are not special benefits to the trade people of the local area. No exclusive or special advantage is provided to the trade people.

"78" That similarly Clause (b) of Sub-section (6) of Section 11 provides for finance: aids, grants and subsidies to financial, industrial and commercial units. It is submitted that financial aid is granted by the financial institutions which operate and function under a special Act viz. the State Financial Corporation Act. It is not even indicate how financial aids, grants subsidies will be allowed by the trade development fund when such granting of financial aids are the responsibility and duty of the State Financial Corporation enacted for such specific purpose.

"79" That similarly Clause (c) of Sub-section (6) of Section 11 provides for creating infrastructure for supply of electrical energy and water supply to industries, marketing and other commercial complexes. The aforesaid purpose forms the common burden and responsibility of the welfare State and no special benefit or advantage is provided to the trade people of the local area in which such Entry Tax is levied and collected.

"80" That it is submitted that supply of electrical energy cannot be held to be compensatory for meeting the outlay incurred for special advantage to trade, commerce and intercourse. The facilities are Incidental and do not provide for any special benefit or advantage to the trade people of the local area in which such Entry Tax is levied and collected. Water and electricity are not connected with the facilities for the purpose of trade. The said facilities are for the general development of the State though termed as facilitating trade and commerce. There is no separate earmarking of the facilities planned for the traders or facilities generally for water supply and electricity.

"81" That similarly Clause (d) of Sub-section (6) of Section 11 provides for creation, development and maintenance of other infrastructure for the furtherance of trade, commerce and industry in general. The said clause is significantly vague and indefinite in its scope and operation and does not even indicate that expenditure created for such alleged purposes viz. other infrastructure is specifically earmarked for the benefit and interest of the trade people of the local area in which such entry tax is levied and collected.

"82" That it is further submitted that said trade development fund has not yet been constituted by any notification. Similarly no notification has been issued in terms of Sub-section (7) of Section 11 regarding the manner of deposit of tax under appropriate heads of account and the manner in which the proceeds of the fund shall be utilized exclusively for the development of trade, commerce and industries of the State of Jharkhand. In the absence of any such notification in terms of Sub-section (7) of Section 11 of the Amendment Act, the trade development fund is only a hypothetical and notional until the proper notification is issued in terms of Sub-section (7) of Section 11 of the Amendment Act. The said provision therefore is only dormant until it is brought to light by appropriate notification. Therefore the trade development fund is not workable till such time as the notification in terms of the statute is not made. The petitioner reserves its right for making further submission regarding the propriety, legality and validity as and when such notification is issued.

"83" That the petitioner further states that according to the scheme of the Jharkhand VAT Act particularly Section 17 and the proviso to Section 18(6) of the original Act the input tax includes according to Section 2(xxix) tax payable on the entry of goods into the local area. Such entry tax is to be treated as input tax credit by the dealer and shall be adjustable against the output tax payable by the dealer which is nothing but a tax on the sale of the finished products viz. output tax. Therefore the input tax which is paid by a dealer on the entry of goods into the local area is adjusted against the output tax which is levied on the sale of the finished products and if the entry tax is so adjusted against the sales tax on the output it cannot be predicated even that any part of the entry tax is earmarked for any specific purpose and such entry tax is to be utilized for the benefit and interest of the trade people of the local area. Moreover, tax on the output viz. finished products is a tax on the sale of such goods. The proceeds of sales tax form a part of the consolidated fund of the State and therefore entry tax in so far as it is adjusted against the sales tax payable on the output viz. output tax, the entry tax also forms part of the consolidated fund of the State and it is not legally possible or even arguable that any part of the entry tax levied and collected is specially earmarked for the utilization of the same for the benefit and interest of the trade people of the local area.

"84" That even the constitution of the trade development fund does not in anyway affect the above legal position and therefore the trade development fund cannot be created by appreciating the entry tax levied and collected as such entry tax levied and collected is adjusted only against the output tax which is nothing but a tax on the sale of output. The sales tax forming part of the consolidated fund of the State but entry tax in so far as it is adjusted against the sales tax viz. output tax forms part also of the consolidated fund of the State and there cannot be any consolidated earmarking of the proceeds of the entry tax even by the constitution of a trade development fund.

"85" That is further submitted that the creation of a trade development fund miserably fails the test laid down by the Supreme Court in the case of Jindal Stainless Ltd. and Another Vs. State of Haryana and Others, and it is undoubtedly therefore is not compensatory in character and it is an admitted position that no sanction of the President of India has been obtained either at the time when the original Act was introduced or at the time when the Amendment Act was introduced and therefore the impugned Act along with its amendment being not compensatory in character is not saved by Article 304(b) of the Constitution as not sanction of the President of India has been obtained before the bill was introduced or the amendment introduced in the State Legislature.

"86" That moreover, entry tax is levied only on the goods which are imported from outside the State and does not apply to the goods which are moved from one local area into another. The Act therefore is discriminatory in character and violates Article 304(a) of the Constitution. Therefore the Act cannot be saved by the provisions of Article 304 of the Constitution and the Act remains a legislation which violates Article 301 as being not compensatory in nature.

"87" That it is further submitted that the amendment introduced by the Amendment Act of 2008 is a mere colourable piece of legislation intended to avoid and get over the constitutional requirements laid down by the Constitution Bench in the case of Jindal Stainless Ltd. and Another Vs. State of Haryana and Others, . The Constitution Bench has categorically stated that if the Act does not facially or patently indicate that the proceeds of the entry tax are specially earmarked for the benefit and interest of the trade people, the burden lies upon the State to satisfy the Court with the materials as to how the utilization of the entry tax is made for the benefit and interest of the trade people of the local area.

"88" That the State has miserably failed to produce any materials or evidences before the Court as to how such utilization of the entry tax will be made for the special benefit and interest of the trading people of the local area. As no material or evidence has been produced, it has held by the earlier judgment in the case of Tata Steel v. State of Jharkhand reported in (2007) 6 VST 587, the State in order to avoid that factual position has merely amended the Act without producing or giving any material as to how such utilization has been made for the benefit and interest of the trading people. Therefore the Amendment Act is a colourable piece of legislation and is liable to be struck down.

�89" That it is further stated that the Amendment Act having been made in 2008 has been made retrospective effect from 1st April, 2006 although the sanction of the Governor has been obtained on 5th March, 2008. It is submitted that whether the utilization of the fund is to be made if at all by the constitution of the trade development fund cannot be made retrospective as it is absurd to suggest that by retrospective amendment the utilization of the entry tax can be made for a specific purpose for the benefit and interest of the trade people of the local area. Such retrospective operation of the Amendment Act is also a colourable piece of legislation giving a veneer of the regularization and legalization of the infirmity in the statute.

In all these writ petitions, the vires of Section 11 of the VAT Act. 2005 and the amendment brought in 2007 have been challenged mainly on the ground that it does not fulfill the requirement of Articles 301 and 304 of the Constitution of India. There is no need to go in detail the constitutional provision contained in the Constitution of India. Suffice to say that Article 301 provides that subject to other provisions of Part- XIII, trade, commerce and intercourse throughout India shall be from Article 301 contemplates freedom on such laws which restrict or affect activities of trade and commerce amongst the States. However, Article 304(a) and 304(b) carve out an exception to Article 301. Article 304(a) empowers the State Legislature to impose tax on goods imported from outside the States provided that like goods manufactured within the State are subjected to the same tax. Article 304(b) vests the State Legislature with the authority or competence to impose restrictions on the freedom of trade, commerce or intercourse provided that such restrictions are imposed by the Legislature in public interest with the previous sanction of the President.

The vires of Section 11 and subsequent amendment made in the VAT Act has also been challenged in these writ petitions on the ground that imposition of entry tax is not compensatory in nature and therefore, restrictions imposed on the movement of goods and imposition of entry tax without the sanction of the President is unconstitutional.

The Constitution Bench of the Supreme Court in the case of Jindal Stainless Ltd. and Another Vs. State of Haryana and Others, , has considered the correctness of earlier judgment rendered by the Supreme Court in Bhagatram Rajeevkumar v. CST (supra) and also subsequent decision in the case of State of Bihar v. Bihar Chamber of Commerce : [1996]2SCR184 . On this subject, the Supreme Court in the case of Atiabari Tea Co., Ltd. Vs. The State of Assam and Others, . held that taxation laws are not excluded from 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 provision of restrictions on free trade is not an absolute one. Statutory restrictions of trade can be invalid if not complied under Article 304 (a) or (b) of the Constitution. In other words, the restriction imposed by the State Legislature can be only after satisfying the requirements of Article 304(b) of the Constitution. Article 304(b) requires not only that the law should in the public interest but should also be reasonable and should receive the previous assent of the President of India.

Another decision in the case of The Automobile Transport (Rajasthan) Ltd. Vs. The State of Rajasthan and Others, , the Rajasthan Motor Vehicles Taxation Act. 1951 was challenged. In the said decision, the Supreme Court held that only such taxes as directly and immediately restrict trade would fall within the purview of Article 301 and that any restriction in the form of taxes imposed by the State Legislature on the carriage of goods or their movements can only be done after satisfying the requirements of Article 304(b) of the Constitution.

In Bhagatram''s case (supra), the Supreme Court took the view that concept of compensatory nature of tax can be 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 challenged as invalid. The aforesaid decision of the Supreme Court in Bhagatram''s case was subsequently followed by the Supreme Court in the case of Bihar Chamber of Commerce (supra) and it was held that if some connection between the tax and the trading facilities extended to dealers directly or indirectly is sufficient to characterize, it is compensatory tax.

As notice above, the correctness of the aforementioned two decisions rendered in Bhagatram''s case and Bihar Chamber of Commerce''s case was doubted and hence, the matter was referred to Constitution Bench in Jindal Stainless Ltd''s case (supra). The Constitution Bench have considered all the earlier decisions in detail and laid down the law as to when imposition of tax can be held to be compensatory in nature. At this juncture, it would be very useful to refer some of the paragraphs of the judgment rendered in Jindal Stainless Ltd.''s case, which reads as under:

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 "principle of ability" vis-a-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 the 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

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 AIR) of the decision in Khyerbari Tea Co. Ltd. v. State of Assam].

In the concluding part of the judgment, the Supreme Court further held:

As stated above, in the post 1995 era, the said working test propounded in Automobile Transport stood disrupted when in Bhagatram case, 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 case is not only contrary to the working test propounded in Automobile Transport case 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 Automobile Transport and the test of "some connection" enunciated by a Bench of three Judges in Bhagatram case cannot stand together. Therefore, in our view, the test of "some connection" as propounded in Bhagatram case is not applicable to the concept of compensatory tax and accordingly to that extent, the judgments of this Court in Bhagatram Rajeevkumar v. CST and State of Bihar v. Bihar Chamber of Commerce 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 ar guments in seriatim.

Conclusion

In our opinion, the doubt expressed by the referring Bench about the correctness of the decision in Bhagatram''s case followed by the judgment in Bihar Chamber of Commerce 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 Assam and the working test enunciated in Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan 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 para 8 (of SCC) of the judgment in Bhagatram Rajeev-kumar v. CST and followed in State of Bihar v. Bihar Chamber of Commerce 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.

After the aforesaid judgment rendered by Constitution Bench of the Supreme Court, all those appeals and connected matters pending before the Supreme Court were placed before the Division Bench of the Supreme Court in Jindal Stainless Steel''s case (supra). The Supreme Court took the view that since relevant date da not appear to have been placed before the High Court, the parties are permitted to place them in the writ petition and the High Court shall deal with the basic issue as to whether the impugned levy of entry tax was compensatory in nature. This is how different High Courts have heard the writ petitions wherein the proviso is of entry tax imposed by the concerned State Legislature were considered. Therefore, it would be useful to discuss the view taken by the different High Courts on the question as to whether the provision of entry tax is compensatory in nature.

In Madras High Court, the constitutional validity of Tamil Nadu Tax on. Entry of Goods in Local Areas Act, 2001 and various notifications issued by the State Government in exercise of powers conferred by Section 15 of the Act was challenged. The Act was enacted to provide for the levy of tax on entry of goods into local areas for consumption, use or sale therein. Section 3 empowers the State Government to levy and collect tax on entry of scheduled goods into any local areas for consumption, use or sale. The main ground of tax was that the tax was to be levied under the Act was neither regulatory in nature nor does it satisfy the test laid down for a compensatory tax. Further, no Presidential assent was obtained under Article 304(b) of the Constitution. In those writ petitions, the State of Tamil Nadu by counter affidavit brought certain figures of expenditure incurred in the matter of laying roads, construction of bridges which was said to be quantifiable data to satisfy the parameters laid down in Jindal''s case. It was further stated by the State that the quantifiable data on the basis of which the compensatory tax was sought to be levied has been facially and patently indicated in the manner which was necessary to augment the revenue of the State to compensate the expenditure to provide trading facilities including laying and maintenance of roads and provision of markets and welfare measures and further that for the said purposes, it was considered necessary to levy and collect tax on the goods entering into the local areas of the State for consumption, use or sale therein. In the case of ITC Limited Vs. The State of Tamil Nadu, the Madras High Court rejecting the contention of the State of Tamil Nadu held as under:

We are afraid the materials produced by the State are hardly relevant to establish that the levy is compensatory. In the first place; the above data is rather ambiguous, as it does not provide details or even examples of the specific areas where the alleged roads have been laid and does not even name the few bridges that have been constructed with the amount collected as entry tax. In Jindal''s case, the Court has categorically ruled that for a law to be compensatory, there has to be a rational nexus between the levy and the services provided. The decision proceeds to make a clear-cut distinction between the general taxing power of the State and the levy of compensatory tax. The essence of compensatory tax is that the services rendered or facilities provided should be more or less commensurate with the tax levied. Services provided will have a direct co-relation with the trade. The main basis of compensatory tax is the quantifiable and measurable benefit represented by the cost incurred in procuring the facilities/services. The cost in turn becomes the basis of reimbursement/recompense for provider of services/facilities. As held in Jindal''s case, the compensatory tax is a charge for offering trade facilities and they are based on the principles of equivalence. Applying the above test, it cannot be said that maintaining of roads, providing bridges etc., is compensatory in nature so as to constitute special advantage to trade, commerce and intercourse. Even otherwise, a welfare State is bestowed with the responsibilities of providing good roads and bridges for the benefit of the tax paying citizens and hence to contend that the impugned levy is being raised only for the said purpose is not justified. Maintenance of roads, bridges, etc., are generally met from the general funds or revenue. Whether goods are transported into the State or outside State or abroad, the State has got a duty to provide facilities like roads, bridges, etc., which are being enjoyed not only by the persons who bring the goods notified for levy of entry tax, but also by others.

The Bench further held:

If an entry tax levied under Entry 52 is at all to be substantiated as a compensatory tax then it has to be done with reference to the nature of such tax i.e., a tax payable by a special class of dealers in a local area who import only the specified goods from outside the State and the special benefits/facilities provided to such payers of the tax within the local area concerned. As to what could satisfy such a test in the context of an entry tax could be gathered from Para 28 in State of Karnataka and Another Vs. Hansa Corporation, at para 28, p. 473, which is extracted below:

The State did not attempt in the High Court to sustain the validity of the impugned tax law on the sub-mission that it was compensatory in character. No attempt was made to establish that the dealers in scheduled goods in a local area would be availing of municipal services and municipal services can be efficiently rendered if the municipality charged with a duty to render services has enough and adequate funds and that the impugned tax was a measure for compensating the municipalities for the loss of revenue or for augmenting its finances. As such a stand was not taken, it is not necessary for us to examine whether the tax is compensatory in character.

In the Punjab and Haryana, the Haryana Local Area Development Tax Act, 2000 and the Haryana Local Area Development Tax (Amendment) Ordinance. 2007 were enacted and promulgated making provisions for levy and collection of tax on the entry of goods into local areas of the State of Haryana for consumption, sale or use therein. Section 3 confers power to the State to levy and collect tax of entry into the local areas of all goods except those goods specified in Schedule ''A'' for consumption or use therein. Section 22 of the said Act provides that tax collected under this Act shall be distributed by the State Government amongst the local bodies to be utilized for the development of local areas. An Explanation was added to Section 22 in 2003 according to which, the ''development of local areas'' means developing and maintaining infrastructure facilities useful for free-flow of trade and commerce. An Explanation was further added explaining that development facilitating free-flow of trade and commerce means developing and maintaining infrastructure facilities facilitating the free-flow of trade and commerce such as roads, bridges, culverts, sewerage. drainage, sanitation, waste management, electricity, drinking water and other infrastructure facilities. Section 22 of the said Act provides constitution of Board and its following functions:

Constitution of Board and its functions --(1) There shall be a Board consisting of a Chairman and following ex officio members:

(a) Chief Minister, Haryana Chairman (b) Chief Secretary, Haryana ex officio member (c) Finance Secretary, Haryana ex officio member (d) Financial Commissioner and Secretary ex officio member to Government, Haryana, Excise and Taxation Department (e) Financial Commissioner and Secretary ex officio member to Government, Haryana, Development and Panchayats Department (f) Commissioner, Urban Local bodies, Haryana ex officio member (g) Excise and Taxation Member-Commissioner Haryana, Secretary (h) Additional Excise Chief Commissioner. and Taxation Officer Joint Excise and Executive Taxation Commissioner, Haryana

(2) The Headquarter of the Board shall be at Chandigarh.

(3) The Board shall perform the following functions:

(i) It shall ensure balance development of the local areas falling within the domain of the urban as well as rural local bodies.

(ii) It shall identify the areas which require immediate development/maintenance of infrastructure facilities out of proceeds of tax.

(iii) It shall accordingly recommend allotment of proceeds of tax for developing and maintaining infrastructure facilities like roads. bridges, culverts, sewerage, drainage, sanitation, waste management, electricity, drinking water and other infrastructural facilities.

(iv) It shall recommend changes in the rate of tax in order to keep the levy as per the guidelines issued in this behalf from time to time.

(v) It shall ensure that the proceeds of tax collected under this Act are not much more than the amount actually required for development of local areas.

In the case of Jindal Strips Limited and Another Vs. State of Haryana and Others, while considering the vires of Haryana Local Area Development Tax Act, 2000, the Division Bench of Punjab and Haryana High Court after analyzing the Act came to the following conclusion:

From the rival submissions of the learned Counsel for the parties and in the light of direction of the honourable Supreme Court, we are required to deal with the issue whether the impugned levy was compensatory in nature having regard to the judgment of the Constitution Bench in Jindal Stainless Ltd. and Another Vs. State of Haryana and Others, .

The question is whether the impugned Act meets the facial test laid down by the honourable Supreme Court in Jindal Stainless Ltd. and Another Vs. State of Haryana and Others, , and whether the data placed on record by the State shows that the impugned levy functionally is compensatory and provides quantifiable or measurable benefit to the payers of the tax?

A perusal of statutory provisions shows that the levy of tax is only entry of goods into a local area for consumption, use or sale and the tax is payable by the importer with reference to value of goods at a specified rate. The tax collected is to be distributed by the State Government among the local bodies. The same is to be utilized for development facilitating free-flow of trade and commerce on infrastructural facilities such as roads, bridges, culverts, sewerage, drainage, sanitation, waste-management, electricity, drinking water and other infrastructural facilities. At least 60 per cent of the amount is to be utilized. The board is to ensure balanced development of local areas and recommend allotment of proceeds of tax and changes in the rate of tax. The board is also to ensure that the proceeds of tax are not more than the amount actually required for development of local areas. The petitioners have advanced two grounds for submitting that the impugned levy does not meet the facial test:

(i) Compulsion to utilize the tax collected is only to the extent of 60 per cent and the amount of 40 per cent need not be accounted for, and

(ii) Infrastructural facilities facilitating free-flow of trade and commerce may not in fact, have any connection with the facilities for trade and commerce.

Waste-management, sanitation, drainage, water, electricity may be unconnected with the facilities for the purpose of trade. The said facilities may be made before general development of the State, though termed as facilitating trade and commerce. There is no separate earmarking of the facilities planned for the traders or facilities generally for water supply, hygiene, sanitation, waste-management, etc.

The defence on behalf of the State is that the statutory provisions for constituting a Board and requiring the Board to ensure that the tax collected was not much more than the amount actually required and provision for utilizing at least 60 per cent for development facilitating free-flow of trade and commerce of the payers of the tax was not enough to meet the facial test, if the payers of the tax are taken to be the ultimate payers to whom, the burden was passed on. which include farmers, transporters and consumers.

We find merit in the contention raised on behalf Of the petitioners. The levy is not to meet the cost of any specific facility already provided or planned to be provided. The parameters clearly laid down in Jindal Stainless Ltd. and Another Vs. State of Haryana and Others, [particularly paras 16 and 41 to 45 (paras 15 and 38 to 42 in 145 STC] are that compensatory tax represents the costs incurred in procuring facilities/services on the principle of "pay for value". It is a charge for offering trade facilities. It adds to value of trade and commerce. It is based on the principle of equivalence. It must have a broad proportion to the benefit derived to defray the cost of regulation or to meet the outlay incurred for some special advantage to trade and commerce and intercourse. The impugned levy initially was meant to be for assistance to local areas for their development generally and the amendment brings about only a superficial change in the language while retaining the basic character of the levy as a source for raising general development. In this view of the matter, we are unable to hold that the facial test is met : Mere specification of the 60 per cent of the amount being in line with judgments dealing with levy of fee is of no consequence when the very subject-matter of utilization cannot be treated as any special direct or exclusive service or benefit to the payer of the tax.

A similar provision, namely. Karnataka Special Tax on Entry of Certain Goods Act, 2004 was challenged in the case of Bharat Earth Movers Ltd. v. State of Karnataka and Ors. (2007) 8 VST 69 (Kant) before the Karnataka High Court. Under the said Act. provision was made for levy and collection of tax on the entry of any notified goods in the area for consumption, use or sale therein. The said tax was made payable by an importer in accordance with the Act and the rules made thereunder. Petitioners'' case was that such levy on only goods brought from outside the State payable by the importer who causes the entry of goods in the local area from any place outside the State for consumption or use therein and the levy being confined to only persons who are importers, is discriminatory and in violation of the mandate under Article 301 of the Constitution of India. In that case, the defence put forth on behalf of the State was that the levy was in the nature of compensatory levy and therefore, it is out of the purview of Part XIII of the Constitution of India itself. It was contended that the revenue raised from the levy of tax of this nature on the importers is broadly equivalent to the value of the facilities such as roads, lighting facility, drainage etc., provided to the importers, costs considerable amount to the State. Declaring the said provision ultra vires, the Karnataka High Court held:

Assuming that the argument of the learned Advocate-General is good in law, even then the State has miserably failed to make good the defence on facts. There is absolutely no correlation to the revenue generated under the specific Act to the so-called expenditure incurred by the local authorities for providing the services mentioned by the respondents. I say so for the reason that the local authorities have their own means of raising revenues and in respect of the expenditure for meeting such benefits, 30 per cent of the expenditure is sought to be collected from the assessees under the Act. There are other levies imposed under the other enactments by the State and the local authorities and such revenue is not at all accounted for. In act, there is no serious attempt at all on the part of the State to demonstrate either that the expenditure incurred towards the so-called services provided to the trading community in general is a particular amount and that the assessees under the Act constitute 30 per cent of such members of the trading community for whose benefit the expenditure is incurred.

This apart no material at all is placed about the revenue to the State and the local authorities under the other enactments, which have links or nexus to the kind of the facilities sought to be provided by the State such as provision for roads, water, lighting, drainage, etc., etc. There is no link or correlation at all on facts in respect of the revenue from the levies under the present enactment and the revenue and expenditure under other enactments. The defence of the State that the levy under the Act is a compensatory levy fails miserably and is rejected.

Similarly, the ''Allahabad High Court in the case of Indian Oil Corporation Limited Vs. State of Uttar Pradesh and Others, also decided the vires of U.P. Tax on Entry of Goods Tax, 2000, which was challenged by the asses-see. The challenge was mainly on the ground that tax levied under the said Act was not compensation and hence, violative of Articles 301 and 304 of the Constitution of India. In this case. State of U.P. supplied data by filing affidavit showing yearwise receipt from entry tax and funds provided by the State Government to local bodies by way of grant-in-aid and also that expenditure incurred for development works. The Allahabad High Court declaring the provision ultra vires held:

Contents of the affidavit of Amitabh Mishra, and documents filed along with it (quoted above) utterly fail to show that amount of "entry tax" in any manner (as pointed out by the Apex Court in its judgment in the case of Jindal Stainless Ltd. and Another Vs. State of Haryana and Others, "indicate the quantifiable benefit" to the "traders" scheduled u/s 4 of the Act. The State has failed to discharge the "burden" required for establishing the "levy" under the Act is compensatory either directly or indirectly. The "data" brought on record by the respondents do not reflect the "levy" as entry tax to be proportionally measurable/quantifiable benefit which may be said to be specially extended to scheduled trades only. The documents filed by the respondents show that certain amount has, been allocated for panchayats and local bodies by way of "grant-in-aid" to the local bodies/municipalities by the State Government for urban development which includes water supply, health, general development of village, construction of roads, bridges, etc. Whatever is being realized under the Act is pooled into the consolidated fund and thereafter budgetary allocation is done to make the deficiency of funds, enable panchayats and local bodies who otherwise fails to earn revenue on their own and thus to facilitate them to carry out their statutory/constitutional obligations, i.e., implementation of "Welfare Schemes" and maintain "civil services" in general "Entry tax", under impugned Act. 2000 has no identifiable or specified link with the "trades" enumerated in the Schedule in the Act.

The Bench further held:

It is clear from the perusal of documents annexed with the affidavit of Amitabh Mishra that the amount of revenue earned from "entry tax" under the Act is pooled in the "consolidated fund" - which is utilized under budgetary-allocation to the States, which is also utilized as "grant-in-aid" by "State" to make up budgetary deficit of a local body to discharge their statutory/constitutional obligations - which apart from other include construction of roads, bridges, etc. The respondents have placed figures relating to the "funds" given as "grant-in-aid" to panchayats/local bodies from "consolidation fund" - as part of its share received by State of U.P."

A similar case under the Kerala Tax on Entry of Goods Into Local Areas Act. 1994 was challenged in the case of Thressiamma L. Chirayil Vs. State of Kerala, as being illegal discriminatory and ultra vires to the Constitution of India. In that case also the affidavit filed by the Commissioner of Commercial Taxes, Government of Kerala explaining the services and expenditure incurred by the State for importers of the goods. It was stated that the State provides variety of services such as convenient roads, protection from transport of goods through traffic checking and police aid. The affidavit also referred the datas explaining various expenditure incurred by the State for maintenance of roads, bridges, water transport, development of industries and allied matters. It was contended that there is direct nexus to the levy of entry of tax on goods and the expenditure incurred by the State to provide corresponding service to the importers of goods. The Bench while considering the various provisions of the Act and the law laid down by the Supreme Court declared such provisions as discriminatory and ultra vires to the Constitution. The Bench observed:

We shall now examine whether the State has discharged the burden of showing that the levy is compensatory by placing materials before the Court. We have already referred to the affidavit filed by the Commissioner of Commercial Tax. Provision for convenient roads in the State and its expenditure for maintenance, so also bridges, water transport, ports, light houses, development of industries and allied matters are the services rendered by the State so as to support the levy of compensatory tax. Neither in the object and reasons of bill nor in the preamble of the Act there is any indication that the levy of entry tax was for the aforesaid purpose but only for augmenting the general revenue. Essence of compensatory tax is that the services rendered or faculties provided should be more or less commensurate with the tax levied. Services provided will have a direct, co-relation with the trade. The main basis of a compensatory tax is the quantifiable and measurable benefit, represented by the costs incurred in procuring the facility/service. The cost, in turn, became the basis of reimbursement/recompense for the provider of services/facilities. From the point of view of Government, as stated by the Apex Court in Jindal Stainless Ltd. and Another Vs. State of Haryana and Others, , a compensatory tax is a charge for offering trading facilities and they are based on the principles of equivalence. Applying the above test, it cannot be said that maintaining of roads, providing bridges, etc., is compensatory in nature so also meet the outlay incurred for some special advantage to trade, commerce and intercourse. Providing the above facilities and its use may incidentally bring in net revenue to the Government, but that circumstance is not an essential ingredient of compensatory tax. We may in this connection point out that in the counter- affidavit filed by the K.V. Rajan Vs. State of Kerala and Others, the stand of the State was that entry tax was collected in lieu of sales tax and to compensate the loss of sales tax revenue. Some indirect connection or some connection, more or less commensurate, etc., are not the tests, but the direct and immediate effect is the test. Maintaining of roads, bridges, etc. and promotion of SSJ units, etc. are generally met from the general funds or revenue. Whether goods are transported into the State from outside the State or abroad the State has got a duty to provide those facilities, like roads, bridges, etc., which is being enjoyed not only by persons who bring goods notified for levy of entry tax but also others. In our view, there is absolutely no connection or nexus with the collection of entry tax and its utilization for the benefit of traders/manufacturers from whom such tax is collected. Affidavit filed is not specific and the State has not been able to establish the nexus between entry tax collected and the benefit conferred upon the person from whom the tax is collected. We also notice, the State is also discriminating between traders who bring goods from outside the State or country to a local area as defined u/s 2(1)(h) read with Section 2(1)(d) and person who brings goods from an area within the State to a local area in the State. Facts would indicate that on the introduction of entry tax, manufacturers have opted to purchase raw materials from within the State because they are less costlier since the levy of entry tax has definitely created a tax barrier affecting the free-flow of trade, commerce and intercourse, such a tax violates Article 391 of the Constitution and therefore liable to be declared as unconstitutional. The Apex Court in Vijayalashmi Rice Mill and Others Vs. The Commercial Tax Officers, Palakol and Others, held that even in the case of imposing cess for providing facilities like roads, bridges and storage facilities in rural areas, there must be a broad correlation between the fee being realized and the services rendered, even for traders who do their business in the State of Andhra Pradesh. Entry tax in Kerala, it may be noticed, is being collected only from persons who bring goods from outside the State while persons within the State are not burdened with the levy which is discriminatory and violative of Article 14 of the Constitution of India. The decision in K.V. Rajan Vs. State of Kerala and Others, , in our view, is contrary to the principle laid down by the Apex Court in Jindal Stainless Ltd. and Another Vs. State of Haryana and Others, and Vijayalashmi Rice Mill and Others Vs. The Commercial Tax Officers, Palakol and Others, and is no longer good law.

We. therefore, hold that unless and until State discharges its burden by placing materials before Court that payment of compensatory tax is reimbursement/recompense, quantifiable/measurable benefit provided or to be provided to the payers or there is any broad correlation between the entry tax being realized and the services rendered, it cannot sustain levy of entry tax. We are of the view. State has not discharged its burden by providing quantitative data on the basis of which compensatory tax is sought to be levied and the working test laid down in The Automobile Transport (Rajasthan) Ltd. Vs. The State of Rajasthan and Others, . Jindal Stainless Ltd. and Another Vs. State of Haryana and Others, or Vijayalashmi Rice Mill and Others Vs. The Commercial Tax Officers, Palakol and Others, is not satisfied in these cases for levying entry tax.

Dr. Debiprasad Pal, learned senior counsel appearing for the petitioners assailed the provision of Section 11 of the VAT Act and the amendment made therein levying tax on entry of goods mentioned in Schedule III of the said Act as ultra vires of the Constitution of India which does not comply the requirement of Articles 301 and 304 of the Constitution. Learned Counsel submitted that Article 301 subsequently provides that trade, commerce and intercourse throughout India shall be free. Article 301 contemplates freedom from such laws which restrict or affect activities of trade and commerce amongst the States. Learned Counsel further submitted that Article 304(a) and 304(b) carve out an exception to Article 301. Learned Counsel referred the decision of the Supreme Court in Atiabari Tea Co., Ltd. Vs. The State of Assam and Others, and submitted that freedom of trade guaranteed by Article 301 is freedom from all restrictions except those which are provided by the other articles of Part XIII of the Constitution. Learned Counsel contended that restrictions can be imposed by the State Legislature only after satisfying the requirements of Article 304(b) of the Constitution, which means that such law should be in the public interest and reasonable. Learned Counsel further developed his argument by referring Supreme Court decision in The Automobile Transport (Rajasthan) Ltd. Vs. The State of Rajasthan and Others, and submitted that only such taxes as directly and immediately restrict trade 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) of the Constitution. Mr. Pal then contended 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. Learned Counsel submitted that two subsequent judgments in Bhagatrams case (1995) (1) SCC 673) and in Bihar Chamber of Commerce''s case : (1996) 9 SCC 136, have been overruled by Constitution Bench judgment of the Supreme Court in Jindal Stainless Ltd. and Another Vs. State of Haryana and Others, . Learned Counsel referred relevant paragraphs of the judgment of the Supreme Court and submitted that when the tax is as a part of regulation or as a part of regulatory measures, 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/facilily provider.

Learned Counsel drawn our attention to Section 11 of the Act and the amendment made therein and submitted that maintaining of roads, providing bridges is not compensatory in nature so as to constitute special advantage or trade, commerce and intercourse. Even otherwise welfare State is bestowed with the responsibilities of providing good roads and bridges for the tax paying citizens and therefore levy of entry tax for these purposes are not justified. Learned Counsel also attacked the provisions contained in Section 16 of the VAT Act which provides that input tax in relation to a registered dealer to mean the tax charges under this Act by selling dealer to such dealer on the sale to him of any goods for resale or for use in manufacturing or processing of goods for sale or for directly use in manufacturing or processing of goods for sale or for directly use in mining or use as containers or packing materials or for the execution of works contract. Learned Counsel submitted that once entry tax is made adjustable against the output tax payable by a dealer, it becomes abundantly clear that entry tax forms part of the consolidated fund of the State. Learned Counsel submitted that after entry tax collected is merged in the general revenue of the State, it is neither possible nor conceivable that the proceeds of entry tax would be exclusively utilized by the Fund.

Last but not the least, learned Counsel submitted that the amendment to Section 11 have been made effective from 1st April 2006. The Trade Development Fund has been constituted only in March 2008. Learned Counsel submitted that in view of the establishment of Trade Development Fund in March 2008, the Legislature could not have made the amendment to Section 11 with retrospective effect. The retrospective amendment sought to be made by the State Legislature is irrational and arbitrary as there was no scope for utilization of the proceeds of entry tax by the fund, when the fund was constituted recently.

Mr. S.B. Gadodia, learned Advocate General on the other hand submitted that the relevant provisions of the VAT Tax Act relating to imposition of entry tax under facially and patently show that the levy of entry tax is compensatory in nature for the following reasons:

(i) The preamble of the Act, after amendment by 2007 Amendment Act says that Value Added Tax Act is an Act to provide for and consolidate the laws relating to Value Added Tax on sale or purchase of goods and on entry of goods into local area in the State of Jharkhand and to create Jharkhand Trade Development Fund for the purpose of development of Trade. Commerce and Industry. Therefore, from reading of the preamble it is clear that this Act has been framed to create Jharkhand Trade Development Fund for the purpose of development of Trade, Commerce and Industry of the State.

(ii) From perusal of Aims and Object of Jharkhand Value Added (Amendment) Bill, 2007 and Financial Memorandum appended to the aforesaid Bill, it is clear that amendments have been made in the Jharkhand Value Added Tax Act, 2005 for creating Jharkhand Trade Development Fund to give compensatory nature to the concept of Entry Tax under VAT.

(iii) Newly added Section 2(xxiA) of the Act defines ''Fund'' as created by the State Government through notification published in the Official Gazette for the purpose of Development of Trade, Commerce and Industry. In fact, the Fund'' has been created vide S.O. No. 48 dated 29.3.2008 by the Finance Department.

(iv) That Section 11 of the Act is charging section for entry of goods mentioned in Schedule-Ill of the Act on their entry into the State or into the Local Areas for the purpose of consumption, used and sale therein.

(v) Newly added Sub-section (4) of Section 11 says that entry tax levied and collected under this section shall be appropriate into the fund i.e. Jharkhand Trade Development Fund as created under Clause (xxiA) of Section 2 of the Act.

(vi) In Section 11(5), tax payable under Sub-section (1) shall continue to be levied till such time as is required to improve infrastructure within the State such as. Power, Road. Market condition etc. with a view to facilitate the better market condition for trade, commerce and industry.

(vii) u/s 11(7). the State Government can, by notification, shall specify the manner of deposit of tax under appropriate Head of Account and the manner in which proceeds of the fund shall be utilized exclusively for the development of trade, commerce and industry of the State of Jharkhand.

(viii) Finance Department of the State of Jharkhand has issued S.O. No. 48 dated 29.3.2008 creating Jharkhand Trade Development Fund, wherein in Part 2 it haw been specified that proceeds of entry tax levied and collected u/s 11 of the Act shall be appropriated into the Fund.

Learned Counsel further submitted that notification clearly stipulates that a High Level Committee has been constituted for specifying the manner in which the proceeds of the fund shall be utilized. The Committee shall identify and sanction schemes to be completed from the proceeds of the fund keeping in view necessary facility and infracture to be created for the benefit of entry tax payers. According to the learned Counsel that the entire amount of entry tax shall be appropriated and proceeds, of the said tax shall be utilized exclusively for the development of trade, commerce and industry in the State. Learned Advocate General drawn our attention to Section 11(6) of the Act and submitted that provision has been made for utilizing the proceeds of the fund exclusively for the development of trade, commerce and industry in the State of Jharkhand. Learned Advocate General submitted that from reading of various sections of the Act and the amendment made therein and also notification the entry tax has become compensatory in nature and facial and patent test laid down by the Supreme Court in Jindal Stainless Ltd''s case has been fully complied with. Learned Counsel then submitted that since levy of entry tax is compensatory in nature, the same is not violative of Article 301 of the Constitution of India and the same does not need assent of the President of India under Article 304(b) of the Act. Learned Counsel then submitted that vires of Entry Tax was challenged in the Patna High Court in the case of Indian Oil Corporation and Anr. v. State of Bihar and Ors. (2007) 10 VST 140 and the Patna High Court upheld the vires of the Act holding that the Bihar Entry Tax Act as amended in 2006 is compensatory in nature.

Learned Advocate General then submitted that category of persons bringing goods from outside the State into the State of Jharkhand or any local areas as well as another category of persons who bring goods from one local area to another local area are similarly situated and these two categories of persons are not discriminated. According to the learned Counsel, levy of entry tax on a person who brings goods from outside the State into the State of Jharkhand or any local area is identically the same as of any person who brings goods from one local area to another local area. Persons of both the categories have to pay entry tax at the rate of 4%. Learned Counsel referred the decision of the Gujarat High Court in the case of Eagle Corporation Ltd. v. State of Gujarat (2007) 6 VST 560, where the Court held that ultimate liability of the tax on both categories of persons bringing goods from outside the State and persons bringing goods from one local area to another local area of the State is the same. There is eventually no differentiation between the goods imported from outside the State or the goods moved from one local area to other local area inside the State. Learned Advocate General submitted that entry tax is payable only by persons who bring goods from outside the State. There is no discrimination between the persons who bring goods from outside the State and pay entry tax.

Distinguishing the ratio decided by other High Courts on the issue whether levy of entry taxis compensatory in nature, learned Advocate General submitted that none of those provisions of different State Acts imposing entry tax facially and patently discloses that Act is compensatory in nature. On the contrary provisions of the VAT Act and Notification issued by the State Government patently and facially demonstrate that provisions are compensatory in nature and the entire fund collected on account of entry tax is kept separately in separate fund and the entire amount is exclusively utilized for providing facilities to the tax payers.

As noticed above, the proposition of law has been set at rest by the Constitution Bench of the Supreme Court in Jindal Stainless Limited''s case (supra). The main basis of a fee or a compensatory tax is the quantifiable and measurable benefit. 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. As held by the Supreme Court, 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 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 facilities/services. The Supreme Court further observed and held that 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. 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 materials before the Court, that the payment of compensatory tax is a reimbursement for the quantifiable/measurable benefit provided or to be provided to its payers.

In the light of the ratio decided by the Constitution Bench of the Supreme Court in Jindal Stainless Limited''s case (supra), the relevant paragraphs of which have been quoted herein above, now I shall proceed to decide the constitutional validity of the provisions of Section 11 of the VAT Act as challenged in these writ petitions.

Section 11 of the Act is a charging Section. By amendment of Section 11, provision was made for levy of entry tax on import price and entry of goods mentioned in Schedule III of the Act into State or into local areas for consumption, use or sale therein. Section 11 of the Act, as originally stood, ex facie is violative of provision of Articles 301 and 304 of the Constitution of India inasmuch as it imposes limitations and restrictions in the free movement of goods.

In course of hearing of the writ petitions, the State came with an amendment, namely, Jharkhand Value Added Tax Act (Amendment Act. 2007). By the aforesaid amendment, Sub-sections (4). (5), (6) and (7) have been inserted. According to Sub-section (4), entry tax levied and collected shall be appropriated into funds. According to Sub-section (6) of Section 11. the proceeds of the fund shall be utilized exclusively for the development of trade and industry in the State of Jharkhand. According to the provision, the fund collected is to be used for construction, development and maintenance of roads and bridges providing finances, aids, grants, subsidies to the financial, industrial and commercial units, creating infrastructure for supply of electrical energy and water supply to the industries, marketing and other commercial complexes, etc.

In 2008, a notification was issued by the Finance Department vide S.O. No. 48 dated 29th March. 2008 prescribing the procedures for levy of tax on import price on entry of goods into the State or into the local areas for consumption, use or sale therein. In the said notification, the aforesaid purposes have been mentioned.

Admittedly, Section 11 of the Act has been introduced without obtaining prior sanction of the President as required under the proviso to Article 304(b) of the Constitution of India. Save and except, the amendment brought in 2007 and notification issued in 2008, the respondent-State has not produced and placed any material before this Court showing that payment of compensatory tax is a reimbursement for the quantifiable/measurable benefit provided or to be provided to its payers. Prima facie, we do not find any quantifiable data i.e. a benefit which is measurable. Maintaining of roads: and providing bridges is not compensatory in nature so as to constitute special advantage to trade, commerce and intercourse. Undisputedly, expenses for maintenance of construction of roads and bridges are met from the general revenue of the State. It is the statutory obligation and duty of the State to provide facilities, like roads and bridges, etc.

Similarly, a statutory body, namely. State Financial Corporation, has been constituted under the State Financial Corporation Act for providing in centive and financial aids to the industries. So far question of supply of electrical energy and waters to the industries, marketing and commercial complexes are concerned, it cannot be held that these are the special benefits to the trades men. In our opinion, the purposes for which the trade development fund has been created, do not directly facilitates trade and commerce and do not specially benefits the trade people in the local areas for which such entry tax is collected. Curiously enough, the trade development fund has been created by notification dated 29th March, 2008 giving retrospective effect from 1st April, 2006. Nothing has been brought on record by the respondent-State to show that the entry tax collected from 1st April, 2006 till the date of notification has been utilized. In our considered opinion, therefore, levy of entry tax is discriminatory being violative of Article 304(a) of the Constitution of India.

As stated above, no data or details have been placed by the State to show as to in what manner, entry tax so collected has been or being utilized. In the amended provision or in the notification issued pursuant to the said provision, no separate earmarked facility has been planned for the traders. Moreover, there is absolutely no correlation to the revenue generated under the Act and the expenditure incurred by the local authorities for providing the services. Whatever facilities sought to be provided by the Act and the notification, are either the constitutional obligation of the State or statutory duty of the Corporation and the local bodies constituted under the Act.

Having regard to the law discussed herein above, we, therefore, hold that Section 11 of the Jharkhand Value Added Tax Act. 2005 and the amendment made therein by Jharkhand VAT (Amendment) Act, 2007 is ultra vires and unconstitutional as being opposed to Article 301 of the Constitution and is not saved by Article 304 of the Constitution of India.

These writ petitions are accordingly allowed. However, in the facts of the case, there shall be no order as to costs.

D.K. Sinha, J.

I agree.