Judgments

JINDAL STAINLESS LTD VS. STATE OF HARYANA : CASE SUMMARY

The Supreme Court held in Jindal Stainless Ltd.  Vs. State of Haryana  (2016) 10 SCR 1  that non-discriminatory tax does not per se constitute a restriction on the right to free trade, commerce and intercourse guaranteed under Article 301. It was also held that compensatory tax theory evolved in Automobile Transport (Rajasthan ) Ltd. Vs. the State of Rajasthan (1963) 1 SCR 491  has no juristic basis.

FACTS OF THE CASE

Several States enacted laws which provide for levy of tax on the “entry of goods in local areas comprising the states” under Entry 52 of List II. The constitution validity of all these laws were challenged before Several High Courts on the ground that same were violative of the constitutionally recognized right to free trade, commerce and intercourse guaranteed under Article 301 of the Constitution of India. They were also assailed on the ground that the same were discriminatory and therefore violative of Article 304 (a) of the Constitution of India. These matters finally landed before the Constitution Bench for determination.

FINDINGS OF THE SUPREME COURT

The Supreme Court noted that the power to tax is an essential attribute of sovereignty. But such power is subject to constitutional limitations. Any such limitation must be express.

In Atiabari Tea Company Ltd Vs. the State of Assam (1961) 1 SCR 809, levy of taxes on certain goods carried by road and inland waterways in State of Assam  under the Assam Taxation (on Goods Carried by Roads or Inland Waterways) Act has been challenged before the Supreme Court.  The Supreme Court struck down the constitutional validity of the enactment holding that the impugned levy operated directly and immediately as a restriction on free trade, commerce and intercourse guaranteed under Article 301 of the Constitution of India.

The Supreme Court in Automobile Transport (Rajasthan ) Ltd. Vs. the State of Rajasthan (1963) 1 SCR 491  added a new dimension to the legal exposition in Atiabari case  by declaring that taxes that were compensatory in nature fell outside Part XIII and could never be treated as restrictions offensive to Article 301 of the Constitution.

The Supreme Court in Jindal Stainless Steel Ltd Vs. State of Haryana overruled decisions in Bhagatram Rajeev Kumar Vs Commissioner of Sales Tax, M.P.  1994 (6) Suppl. SCR 91  and State of Bihar Vs. Bihar Chamber of Commerce  1996 (2) SCR 184  and declared that it is not just a remote benefit to the tax payer but only a direct and substantial benefit that would justify levy of compensatory taxes without offending Article 301 of the Constitution of India.

The Supreme Court noted that there is no constitutional basis for the Compensatory Tax Theory propounded by the majority judgment in Automobile Transport. If taxes are eventually meant to serve larger public good and for running the governmental machinery and providing to the people the facilities essential for civilized living, there is no question of a tax being non-compensatory in character in the broader sense.

The concept of compensatory tax obliterates the distinction between a tax and a fee. The essential difference between a tax and a fee is that while a tax has no element of quid pro quo, a fee without that element cannot be validly levied. The Concept of compensatory taxes being outside Part XIII is difficult to apply in actual practice.

The Supreme Court observed that Freedom of trade, commerce and intercourse is by no means absolute, the same being subject of the other provisions of Part XIII of the Constitution. Articles 301 and 302 show that the freedom of trade, commerce and intercourse is subject to restrictions which Parliament may by law impose in public interest. Article 303 restricts Parliament from making any law giving or authorizing the making of any discrimination between one State and another. 

Article 304 (a) far from treating taxes as restriction per se, specifically recognizes the State Legislature’s power to impose the same on goods imported from other States and Union Territories. Article 304 (a) recognizes the availability of the power to impose taxes on goods imported from other States, the legislative power to do so being found in Articles 245 and 246 of the Constitution. Such power to levy taxes is however subject to conditions that similar goods manufactured or produced in the State levying the tax are also subjected to tax and there is no discrimination on that account between goods so imported and goods so manufactured or produced. The limitation on the power to levy taxes is entirely covered by Clause (a) of Article 304 which exhausts the universe in so far as the State Legislature’s power to levy of taxes is concerned. Resultantly a discriminatory tax on the import of goods from other states alone will work as impediment on free trade, commerce and intercourse within the meaning of Article 301. Reasonable restrictions in public interest referred to in Clause (b) of Article 304 do not comprehend levy of taxes as a restriction especially when taxes are presumed to be both reasonable and in public interest.

The Supreme Court held that non-discriminatory tax does not per se constitute a restriction on the right to free trade, commerce and intercourse guaranteed under Article 301. Decisions taking a contrary view in Atiabari’s case followed by a series of later decisions shall, therefore, stand overruled including the decision in Automobile Transport declaring that taxes generally are restrictions on the freedom of trade, commerce, and intercourse but such of them as are compensatory in nature do not offend Article 301.

__________________________________________________________________

Mukesh Kumar Suman is an advocate and legal author based at Delhi. He regularly appears before various Judicial Forums including NCLT, NCLAT, High Courts and the Supreme Court. He can be approached at mukesh_suman@outlook.com or +91 9717864570.

Mukesh Kumar Suman

Mukesh Kumar Suman

Mukesh Kumar Suman is an advocate based at Delhi. He has rich experience in civil, criminal, commercial, arbitration and corporate insolvency matters. He regularly appears before District Courts, NCLT, NCLAT, High Court and the Supreme Court. He can be approached at mukesh_suman@outlook.com or +91 9717864570.

Leave a Reply

Your email address will not be published. Required fields are marked *