Trade and Commerce Part III

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Trade and Commerce Clauses
MODULE VIII PART III

CONSTITUTIONAL LAW – II
PROF. SHIREEN MOTI
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Cases
Cases
▪ Jindal Stainless v. State of Haryana, AIR 2006 SC 2550
▪ Jindal Stainless v. State of Haryana, (2017) 12 SCC 1
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Jindal Stainless v. State of Haryana, AIR 2006 SC 2550
Facts:
▪ The petitioner (Jindal Strips Ltd.) is an industry. It manufactures products within the
State of Haryana.
▪ The raw material is purchased from outside the State and no sales tax is paid on the
input of the raw material.
▪ Similarly, the finished products are sent to other States and no sales tax is paid on the
export of finished products.
▪ Thus, the State of Haryana introduced the Haryana Local Area Development Act,
2000 (the “Haryana Act”) for levies and collection of tax on entry of goods into the
local area. The Haryana Act imposed entry tax not only on the vehicles bringing goods
into the State but also vehicles carrying goods from one local area to another.
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Facts:
▪ Hence, the petitioners challenged the provisions of the Haryana Act for being violative
of Article 301 and Article 304 of the Constitution of India before the Punjab &
Haryana High Court.
Issue:
▪ Whether the Haryana Local Development Tax Act 2000 is violative of (a) Article 301
and is not saved by Article 304; and (b) the Haryana Act in fact seeks to levy sales tax
on inter-State sales, which is outside the competence of the State legislature (the
referral order is confined to the abovementioned first question).
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Decision & reasoning:

▪ In the Supreme Court’s opinion, the doubt expressed by referring Bench about the
correctness of the decision in Bhagatram Rajeevkumar v. Commissioner of Sales Tax,
M.P., (1995) Supp [1] SCC 673 case followed by the Judgement in State of Bihar v.
Bihar Chamber of Commerce, AIR 1996 SC 2344 was well founded.
▪ The Supreme Court reiterated that the doctrine of “direct and immediate effect” of the
impugned law on trade and commerce under Article 301 as propounded in Atibari Tea
Co. Ltd. V. State of Assam, AIR 1961 SC 232 and the working test enunciated in
Automobile Transport Rajasthan Ltd. v. State of Rajasthan, AIR 1962 SC 1406 for
deciding whether a tax was compensatory or not will continue to apply and the test of
“some connection” indicated in the judgement in Bhagatram case and followed in the
Bihar Chamber of Commerce case, in the Supreme Court’s opinion is not good law.
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▪ Taxing laws are not excluded from the operation of Article 301, which means that tax
laws can and do amount to restrictions on the freedom guaranteed to trade under Part-
XIII of the Constitution.
▪ This principle is well settled in the case of Atiabari Tea Co. It is equally important to
note that in Atiabari Tea Co., the Supreme Court propounded the doctrine of "direct
and immediate effect".
▪ Therefore, whenever a law is challenged on the ground of violation of Article 301, the
Court has not only to examine the pith and substance of the levy but in addition
thereto, the Court has to see the effect and the operation of the impugned law on inter-
State trade and commerce as well as intra-State trade and commerce.
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▪ The concept of compensatory taxes was propounded in the case of Automobile
Transport in which compensatory taxes were equated with regulatory taxes.
▪ In that case, a working test for deciding whether a tax is compensatory or not was laid
down.
▪ In that judgment, it was observed that one has to enquire whether the trade as a class is
having the use of certain facilities for the better conduct of the trade/business.
▪ This working test remains unaltered even today.
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▪ In the post 1995 era, the said working test propounded in the 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 the Supreme Court’s view, this test of “some connection” enunciated in
Bhagatram’s case is not only contrary to the working test propounded in Automobile
Transport’s 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.
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▪ The working test propounded by a Bench of seven Judges in the case of Automobile
Transport6 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 case and State of Bihar Chamber of
Commerce case stand overruled.
Jindal Stainless v. State of Haryana, (2017) 12 SCC 1 10
Facts:
▪ In exercise of their legislative powers under Entry 52 of List II of the Seventh
Schedule to the Constitution several States in the country, at least 14 of whom are
parties to these proceedings, have enacted laws that provide for levy of a tax on the
“entry of goods into local areas comprising the States”.
▪ The constitutional validity of these levies was questioned in different High Courts by
assesses/dealers aggrieved of the same, inter alia, on the ground that the same were
violative of the constitutionally recognised right to free trade commerce and
intercourse guaranteed under Article 301 of the Constitution of India.
▪ The levies were also assailed on the ground that the same were discriminatory and,
therefore, violative of Article 304(a) of the Constitution of India.
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Jindal Stainless v. State of Haryana, (2017) 12 SCC 1
Facts:
▪ Absence of Presidential sanction in terms of Article 304(b) of the Constitution of India
was also set-up as a ground of challenge to the levies imposed by the respective State
legislatures.
Procedural history:
▪ Writ Petition (Civil) No. 8700 of 2000 filed before the High Court of Punjab and
Haryana was one such petition that assailed the constitutional validity of the Haryana
Local Development Act, 2000.
▪ A Division Bench of the High Court of Punjab and Haryana dismissed the said petition
and connected matters on the ground that the levy was compensatory in character
hence outside the purview of Article 301.
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Issues:
▪ Whether the State enactments relating to levy of entry tax have to be tested with
reference to both clauses (a) and (b) of Article 304 of the Constitution for determining
their validity and whether clause (a) of Article 304 is conjunctive with or separate from
clause (b) of Article 304?
▪ Whether imposition of entry tax levied in terms of Entry 52 List II of the Schedule VII
is violative of Article 301 of the Constitution? If the answer is in the affirmative
whether such levy can be protected if entry tax is compensatory in character and if the
answer to the aforesaid question is in the affirmative what are the yardsticks to be
applied to determine the compensatory character of the entry tax?
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Issues:
▪ Whether Entry 52 List II, Schedule VII of the Constitution like other taxing entries in
the Schedule, merely provides a taxing field for exercising the power to levy and
whether collection of entry tax which ordinarily would be credited to the Consolidated
Fund of the State being a revenue received by the Government of the State and would
have to be appropriated in accordance with law and for the purposes and in the manner
provided in the Constitution as per Article 266 and there is nothing express or explicit
in Entry 52 List II, Schedule VII which would compel the State to spend the tax
collected within the local area in which it was collected?
▪ (4) Will the principles of quid pro quo relevant to a fee apply in the matter of taxes
imposed under Part XIII?
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Issues:
▪ Whether the entry tax may be levied at all where the goods meant for being sold, used
or consumed come to rest (standstill) after the movement of the goods ceases in the
“local area”?
▪ Whether the entry tax can be termed a tax on the movement of goods when there is no
bar to the entry of goods at the State border or when it passes through a local area
within which they are not sold, used or consumed?
▪ Whether interpretation of Articles 301 to 304 in the context of tax on vehicles
(commonly known as “transport”) cases in Atiabari case and Automobile Transport
case apply to entry tax cases and if so, to what extent?
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Issues:
▪ Whether the non-discriminatory indirect State tax which is capable of being passed on
and has been passed on by traders to the consumers infringes Article 301 of the
Constitution?
▪ Whether a tax on goods within the State which directly impedes the trade and thus
violates Article 301 of the Constitution can be saved by reference to Article 304 of the
Constitution alone or can be saved by any other article?
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▪ The answer to the question as to whether a compensatory tax is out of reach of Article
301 has to be found out from the Scheme of Part XIII of the Constitution itself and not
from the theory of compensatory charge as evolved in Australia or United States of
America. Two fundamental principles of taxes are:
✓ (i) that it is an imposition made for public purpose,
✓ (ii) without reference to any special benefit to be conferred on the payer of the tax.
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▪ The scheme of Constitution of India indicates that wherever it was contemplated to
insulate any provision from challenge, expressed provisions have been made to
provide for such insulation. Article 31B is one of such examples which provides that
none of the Acts and Regulations specified in IXth Schedule shall be deemed to be
void or ever to have become void on the ground of such Act, Regulation or provision
is inconsistent with or takes away or abridges any of the rights conferred by Part III.
▪ The Constitutional Scheme as delineated by Part XIII does not indicate that a
particular type of legislation, i.e., compensatory tax is out of Part XIII. Reading any
such protection to compensatory tax legislation is against the constitutional provision.
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▪ We, thus, are of the opinion that the compensatory theory as evolved in Automobile
Transport (Rajasthan) Ltd. etc. v. State of Rajasthan & Ors., AIR 1962 SC 1406 is not
compatible to the constitutional scheme and a compensatory tax legislation cannot be
insulated from challenge under Part XIII of the Constitution.
▪ We may, however, observe that it is always open to scrutinize the true nature and
character of legislation to decipher as to whether it contains any restriction on freedom
of trade, commerce and intercourse violating Article 301.
▪ A legislation which is compensatory in nature may shed light while determining
whether it contains restriction on trade, commerce and intercourse or facilitate the
trade, commerce and intercourse.
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▪ Levy of a non-discriminatory tax may constitute infraction of Article 301 of the
Constitution of India if it impedes the freedom of trade, commerce and intercourse. All
taxes which contain restrictions to trade, commerce and intercourse, discriminatory or
non-discriminatory infringe Article 301 unless they are saved under Article 302 – 304.
▪ The compensatory tax theory as judicially evolved in Automobile Transport is not
compatible to constitutional scheme as delineated by Part XIII of the Constitution. The
Automobile Transport case in so far as it lays down that compensatory taxes are out of
the reach of Article 301 cannot be approved.
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▪ But all legislations be it a compensatory tax legislation or otherwise has to be tested in
accordance with provisions of Part XIII of the Constitution. The ratio of judgment of
Automobile Transport case is overruled in so far as it lays down that the compensatory
tax legislations are out of part XIII of the Constitution.
▪ All legislative powers of the State are “subject to the Constitution” as per article 245 of
the Constitution of India. Legislative power of the State is also subject to the limitation
as provided in Part XIII of the Constitution.
▪ Part XIII of the Constitution covers tax legislation which restrict freedom of trade,
commerce and intercourse.
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▪ Word 'restriction' as used in Part XIII as well as in Article 304(b) of the Constitution
includes tax legislation also.
▪ For enabling a State to make a law under Article 304(a) following two pre-conditions
which are independent of each other have to be satisfied:-
✓ It may impose on goods imported from other States or the Union Territory any tax
to which similar goods manufactured or produced in that State are subject.
✓ So, however, as not to discriminate between goods so imported and goods so
manufactured and produced.
▪ Word “and” between Clause(a) and Clause(b) of Article 304 has to be read as joint and
several. Both the meaning can be assigned, as per requirement of State legislation.
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▪ A law made by State legislature exercising the power under Clause(a) in Article 304,
which does not impose any restriction on the freedom of trade, commerce and
intercourse need not comply with Article 304(b) however, a law even though
complying with Article 304(a) containing restriction on freedom of trade, commerce
and intercourse is to obtain sanction of the President, as contemplated by proviso to
Clause(b). The requirement of obtaining the previous sanction of the president has to
be decided in accordance with the nature and content of the State Legislation.
▪ The proviso of Article 304(b) is part of Constitutional Scheme which is neither against
the federal structure of the Constitution nor affects the State's sovereignty.
▪ Word 'restriction' used in Article 304(b) is wide enough to include restrictions placed
both by fiscal or non-fiscal law.
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▪ State Legislature in exercise of its taxing power can grant exemption\set off to locally
produced and manufactured goods only to a limited extent based on intelligible differentia
which is not in nature of general\unspecified exemption.
▪ The ratio of judgment of Video Electronics vs. State of Punjab, (1990) 3 SCC 87 has to be
read as justifying only exemption limited to specified category for a short period. Exemption
in general terms for unlimited period cannot be approved. Any exemption can not be used as
measure of discrimination between goods imported from other States and goods
manufactured or produced in the State.
▪ A law passed by State Legislature imposing tax only on the imported goods coming from
other States and Union Territories and there being no similar tax imposed to the locally
produced\manufactured goods, the law is not saved by Article 304(a) and violates Article 301.
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▪ A law imposing tax on goods imported from other States and Union Territories,
facially taxing goods locally manufactured and produced but granting set off
exemption in general terms is discriminatory and violates Article 301.
▪ What have been expressly prohibited under Article 302, 303 and 304 are restrictions in
the freedom of trade and commerce violating Article
▪ A law containing restriction impeding freedom of trade and commerce and intercourse
which is not saved by Article 302, 303 and 304 violates Article 301.
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▪ The nature and content of taxation at best may throw light on the aspect as to whether
it contains restriction on freedom of trade, commerce and intercourse. The
compensatory tax theory being not compatible with the Constitution, it is not necessary
to answer Question No.3.
▪ To find out as to whether Entry Tax levied by different States in the present batch of
cases violates Article 301 of the Constitution, each statute has to be looked into and
examined as per our discussions and conclusions.
▪ A law made by State Legislature complying clause(a) of Article 304 and not containing
any restriction on the freedom of trade, commerce and intercourse need not
comply Article 304(b).
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▪ However, a law even though complies with Article 304(a) but contains restrictions on
freedom of trade, commerce and intercourse has to be routed through proviso to clause
(b) of Article 304 of the Constitution. The compliance of Article 304(b) proviso
whether required or not shall depend on the nature and content of the State legislation.
▪ Levy of taxes is an attribute of a sovereign State as per Constitutional scheme and
limited to the extent as provided in the Constitution.
▪ Article 245 read with Article 246 recognises the exclusive power of the State to make
laws including law of levying taxes on subject matter enumerated in List II of VIIth
Schedule in accordance with limitations and restrictions contained in the Constitution
of India.
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▪ The power to make law and levy taxes reserved in favour of the State under Article
246 read with List II of VIIth Schedule is subject to Part XIII of the
Constitution. Article 245 has to be read along with Article 246 for finding out the
source of the legislative power.
▪ Part XIII (including Article 301) of the Constitution to which legislative power of
State is subject, does not have effect of denuding any sovereign power of the State or
effecting the federal structure of the Constitution.
▪ The levy of taxes is presumed to be in public interest.
▪ Levy of taxes which may be presumed to be in public interest still has to comply with
Part XIII of the Constitution for it to be justified as reasonable restriction.
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▪ Imposition of restriction by way of tax legislation under Article 304(b) is part of
constitutional scheme and Presidential sanction has been provided to keep a check on
the legislative power of the State impeding freedom of trade, commerce and
intercourse. All legislative powers under the Constitution are subject to judicial review
and the mere fact that a legislation passed under Article 304(b) is also subject to
judicial review, in no manner, militants against the Constitutional scheme.
▪ There is no question of affecting the separation of power between the Legislature and
judiciary on the ground that levy of taxes under Article 304(b) which contains
restriction to the freedom of trade, commerce and intercourse have to be routed
through the President of India as per the Constitutional scheme.
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▪ The Constitution contains large number of provisions including Article 304(b) where a
State legislation is subject to Presidential sanction which provisions are in accordance
with the Constitutional scheme and does not affect the separation of power between
the Legislature and judiciary.
▪ Article 304(b) enables the State Legislature to frame legislations containing restriction
on freedom of trade, commerce and intercourse after routing the legislation through
proviso to Article 304(b).
▪ The question of judicial review arises only when there is challenge to such legislation.
Judicial review of such legislation in no manner affects the separation of power.
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▪ The compensatory tax theory as propounded in Automobile Transport is not
compatible with the Constitutional scheme as delineated in the Part XIII of the
Constitution.
▪ Framers of the Constitution have provided for all exceptions under which freedom of
trade, commerce and intercourse guaranteed under Article 301 can be overridden, the
compensatory tax not being included as one of the exceptions, the same cannot be
added as an exception by any judicial interpretation.
▪ The compensatory tax theory brings dichotomy which is inconsistent with the
language employed in Article 301.

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Trade and Commerce Clauses

MODULE VIII PART III

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