9-JUDGES HEARING IN ENTRY TAX CASE AT INDIAN ... HEARING IN ENTRY TAX CASE AT INDIAN SUPREME COURT - KEY ARGUMENTS SO FAR Available exclusively at e 2 may be required in the public

9-JUDGES HEARING IN ENTRY TAX CASE AT INDIAN SUPREME COURT -

KEY ARGUMENTS SO FAR

Available exclusively at www.idt.taxsutra.com

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Case Background: Entry Tax is a levy imposed by State Governments in India on movement of goods into a local territory within their States. This levy has been challenged on numerous occasions by companies in India on the ground that it violates freedom of trade & commerce enshrined in Article 301 of the Indian Constitution. The State Governments meanwhile defend the levy, arguing that Article 304(a) of the Constitution gives them the power to impose a tax on goods entering their State. The companies however argue that this power comes with an important rider - that the tax ought to be non-discriminatory, i.e. the levy ought to equally apply to goods moving within the State as it does to goods coming from outside the State. Two landmark verdicts of the Indian Supreme Court (both delivered in the 1960s) upheld the Constitutional validity of the levy, but at the same time laid down an important test that any entry tax legislation ought to satisfy – same being that the tax should be in the nature of a ‘compensatory tax’. Compensatory tax refers to a levy that is collected for the purpose of offering better infrastructure that facilitates trade, such as roads, bridges, aerodromes etc. (as laid down by a 7-Judges Bench of Supreme Court in Automobiles Transport (Rajasthan) Ltd). Since entry tax legislations enacted by different State Governments in India have to be evaluated on the touchstone of the principle of compensatory tax, it has resulted in the levy being challenged in 16 different State High Courts. Of the 16, 9 High Courts have quashed the entry tax legislation while 7 High Courts upheld the Constitutional validity of the same. As a result, several thousand cases from the 16 High Courts have reached the door steps of the Supreme Court. Given the enormity of the matter, differing interpretation of the concept of compensatory tax by the Supreme Court itself and several billion dollars in State Governments’ revenue at stake, the Supreme Court constituted a rare 9-Judges Bench to decide the matter once and for all. Several legal luminaries are arguing the matter on both sides.

Day 1 (July 19, 2016) : ‘Complex’, ‘sensitive’ Entry Tax hearing begins; Bench ponders federal

structure, Article 304 interpretation

9-Judges Bench of Supreme Court of India (Supreme Court / SC) begins hearing on challenge to

Entry Tax levy by State Govts, presents volley of questions pertaining to the Federal structure,

touchy issue of Centre-State relations, interplay between Articles 301 and 304 of Constitution and

also whether Article 304(a) & (b) ought to be read in a conjunctive or disjunctive manner; Lead

Counsel for petitioners, Sr. Advocate Harish Salve argues that one cannot have a tax on goods

of another State which is not levied on goods in your own State; Further, stresses that even if one

were to levy such tax on goods of another State, the same cannot be so high so as to be an

‘impediment’ to movement of goods and that any unreasonable restriction on trade is prohibited

A Courtroom jam packed with presence of legal luminaries, Senior Advocates, Senior Counsels,

representatives of Fortune 500 Companies, media and curious visitors who did not want to miss

their chance to witness history. At the stroke of 11 am, in walked 9 Judges of the Supreme Court

of India led by Chief Justice T. S. Thakur, to decide the fate of the challenge to the levy of Entry

tax by various State Govts.

Legal eagle and former Solicitor General of India Harish Salve (lead Counsel for the petitioners)

rose to make his submissions that would try and strike at the root of this levy, as being

unconstitutional. That very moment, Senior Advocate T. R. Andhyarujina terming the matter as

complex, suggested that a 9-Judges bench was not warranted and this might only complicate

a matter that had been settled 49 years ago by this very Court. To this, Chief Justice T. S. Thakur

stated, “If it is complicated, so be it…. That is the glory of this system.” A while later, Attorney

General Mukul Rohatgi (assisting the Court in his capacity as AG) also suggested that the Court




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may consider deferring this matter in the wake of positive signs emanating on passage of the

GST Bill. If that happened, this issue (entry tax) would not arise in the future and only past cases

would remain for which Mr. Rohatgi hinted that a solution could be found by the Centre. But the

Bench appeared firm to hear the case with the CJI quoting pendency figures in the thousands

on this vexed issue and also suggested that in case the GST were to become a reality, the Bench

would consider the same while the final judgment.

The better part of the day witnessed the Bench repeatedly posing probing questions on the

interplay between Article 3011 and Article 3042 of the Constitution as also whether Article 304(a)

and 304(b) were to be read together (conjunctive) or to be read in a disjunctive manner.

The Bench posed a fundamental question that would a

mere levy be an impediment to movement of goods? Mr.

Salve replied that it was complex subject involving the

concept of ‘federalism’. He then spoke on the key aspects

of 7 Judges Bench ruling in Automobile Transport

(Rajasthan) Ltd. vs. State of Rajasthan [TS-3-SC-1962-

VAT] that carved out the ‘compensatory tax’ thereby

essentially ushering in the concept of freedom but in an

orderly manner. The Chief Justice then shot a rhetorical

question on this aspect, saying “Every tax is

compensatory….which tax is not? You are virtually

bringing compensatory tax at par with the fee.” The Chief Justice repeatedly pointed out to Mr.

Salve that on a conjoint reading of Articles 301 and 304, what emerges is the following:

1) The State has unquestionable power to impose tax on the entry of goods;

2) The only condition to be satisfied to levy entry tax is that there ought to be parity

between the levy and tax levied on locally produced goods;

3) The dominant intention seems to be that locally produced goods should not be at a

disadvantage;

4) That despite the guarantee (of freedom of trade) in Article 301, Article 304 might

overrule Article 301;

5) ‘Impediment’ (to movement of goods) in itself might not be impermissible.

The highlight of the day was exchange between the Bench and Mr. Salve on the interpretation

of clauses (a) and (b) of Article 304 and whether they ought to be read in a conjunctive or

disjunctive manner. With regards to the proviso to Article 304(b) that requires the sanction of the

President to any Bill or amendment passed by the State Legislature, the Chief Justice remarked

1 Article 301 of the Constitution enshrines freedom of trade, commerce and intercourse throughout the territory of India.

2 Article 304. Restrictions on trade, commerce and intercourse among States : Notwithstanding anything contained in

Article 301 or 303, Legislature of a State may by law –

(a) Impose on goods imported from other States or Union territories 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 or produced; and

(b) Impose such reasonable restrictions on the freedom of trade, commerce or intercourse with or within that State as

may be required in the public interest:

Provided that no Bill or amendment for the purposes of clause (b) shall be introduced or moved in the Legislature of a

State without the previous sanction of the President.

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that the proviso does not seem to be applicable to taxes levied under Article 304(a). The Chief

Justice then asked a searching question, “Taxation is provided under

Article 304(a)…why should that not be exhausted under Article

304(a)?” The Bench then asked Mr. Salve to justify the reading of Article

304(a) & (b) together and sought an example from him, apart from

intra-state sale. The Bench then quipped “it is a sensitive issue”. Mr.

Salve, replying to the volley of questions from the Bench, submitted as

follows –

1) One cannot have a tax on goods of another State which is not

levied on goods in your own State;

2) Even if one were to levy such a tax on goods of another State, the same cannot be so

high so as to be an ‘impediment’;

3) Any unreasonable restriction on trade is prohibited;

4) The Constitution framers have put a premium on freedom of trade;

5) He said, “Taxing powers to a State is a necessity…but we must prevent tariff barriers.”

The discussion then moved to the ‘touchy’ issue of Centre-State relations (as described by the

CJI) with the Bench questioning Mr. Salve “Why should there be a Federal control on entry tax? Is

there a Federal control on land & building? We would want to look at cases where there is a

restriction on intra-state movement…” The Chief Justice then sought details from Mr. Salve on

1988 Sarkaria Commission recommendations on relationship and balance of power between

State and Central Governments.

Mr. Salve also spent considerable amount of time buttressing his point that entry tax could only

be levied on entry of goods into a local area for consumption and use, and strongly argued that

the whole of a State could not be categorized as ‘local area’. To a question from the Bench, he

submitted that there was no express decision on what constituted a local area except for an

Apex Court judgment in the case of Diamond Sugar Mills Ltd. vs. State of Uttar Pradesh [1961 AIR

65]. Senior Advocate Rakesh Dwivedi, the lead counsel for State Govts. intervened on this point,

stating that “the State is not akin to local area, but only part of State is part of local area”.

A substantial discussion also took place on the powers of the

President under Article 304(b) proviso and on whether the President

could strike down a tax levy legislated by the States if he were to find

it ‘unreasonable’. Justice D.Y. Chandrachud sought to know from Mr.

Salve if the powers exercised by the President of India differed

qualitatively from those of enshrined in Article 200 of the Constitution

(relating to powers of the High Court).

On Article 304(b) allowing for a reasonable restriction on freedom of

trade in ‘public interest’, Justice D.Y. Chandrachud commented

that “public interest may not be necessarily related to the aspect of

constitutional validity”. Mr. Salve concurred with this observation.

Mr. Salve also presented before the Bench the key parts of the landmark Apex Court ruling

in Atiabari Tea Co. Ltd [TS-2-SC-1960-VAT], the correctness of which is to be decided by this 9-

Judges Bench. Discussion also took place on whether entry tax could be imposed on goods

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merely passing through a State, or it should be strictly levied on goods brought into local area for

consumption or use.

As the day’s proceedings came to a close, Attorney General Mukul

Rohatgi, in reply to queries from the Bench, opined on two

important aspects that came up for discussion today:

1) Mr. Rohatgi stated that the proviso appearing in Article

304(b) applies only to that part and not to Article 304(a);

2) The President of India cannot decide if a tax is

‘reasonable’.

Day 2 (July 20, 2016) : SC proposes broad questions on Entry Tax; Salve urges ‘Automotive

Transport’ ratio reaffirmation

After lengthy deliberations, 9-Judges Bench of Apex Court begins formulating questions to

decide entry tax case; Bench proposes 4 broad questions including the basic question as to

whether the levy of tax per se can constitute an infraction of Article 301 of Constitution (relating

to freedom of trade, commerce and intercourse); Senior Adv. Harish Salve (lead counsel for the

petitioners) urges the Bench to reaffirm ratio laid down by 7-Judges Bench in Automotive

Transport (Rajasthan) Ltd wherein the Court carved out the concept of 'compensatory tax';

Bench poses probing questions on whether the benefits of a local levy can actually be

'quantified'; Mr. Salve submits that a local levy ought to be direct and must not be unreasonable

Day 2 of the 9-Judges Bench hearing in the Entry Tax case witnessed several key moments that

kept the packed Courtroom audience on their toes

throughout. For a better part of the day, legal eagle

Harish Salve took the Bench through the landmark

Apex Court rulings in Atiabari Tea Co. Ltd and

Automotive Transport (Rajasthan) Ltd. as also the

‘extreme views’ of the SC in Bihar Chamber of

Commerce [JT 1996 (2) 53] and Bhagatram

Rajeevkumar [1994 SUPPL (6) SCR 91]. As the clock hit

3.30 pm, and with half an hour left for the day’s close,

the Chief Justice led Bench got down to formulating

the broad questions of law that would aid in settling

this controversy once and for all. Questions framed so

far read as follows –

1) Can the levy of tax per se constitute an infraction of Article 301 of the Constitution?

2) Does a tax which is ‘compensatory’ in nature violate Article 301 of the Constitution?

3) If the answer to the above question is in the negative, what are the tests to determine if

the tax / levy is compensatory in nature?

4) Is Entry Tax levied by States violative of Article 301 of the Constitution?

Senior Advocate Harish Salve made a fervent plea to the Bench that the ratio laid down by the

7-Judges Bench in Automotive Transport (Rajasthan) Pvt. Ltd. ought to be reaffirmed by the




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Court. In the said case, the Larger Bench had carved out the concept of what is famously

known as ‘compensatory tax’ and laid down working tests on what would constitute a

compensatory tax. The Bench went on to hold that compensatory tax would not violate Article

301 of the Constitution that enshrines freedom of trade, commerce and intercourse. While doing

so, the Court in Automobile Transport (Rajasthan) Ltd largely upheld the earlier 5-Judges Bench

judgment in the landmark case of Atiabari Tea Co. Ltd. Attorney General Mukul Rohatgi,

explaining this ratio, stated that the ruling in Automotive Transport (Rajasthan) Ltd upheld the

principles laid down in Atiabari Tea Co. Ltd. but with certain caveats. At this stage, Chief Justice

T. S. Thakur posed to the counsels if one could say that the majority view in Automotive Transport

(Rajasthan) Ltd was that if tax is compensatory in nature, then it would not be considered an

‘impediment’ to free movement of goods. The Chief Justice further posed whether it would be

treated as settled that tax by itself is not an impediment. To this, Mr. Salve replied that the levy

must be direct and must not be unreasonable.

Mr. Salve submitted to the Bench that the confusion arose mainly due to later cases wherein the

Court, according to him, took extreme views. He then questioned the ratio in Bihar Chamber of

Commerce wherein the Court upheld the local levy and accepted the State’s contention that

money raised will be spent on welfare of Bihar people. Mr. Salve told the Court, “States are

saying we are giving up sales tax (on entry of goods from a different State) and so the entry tax

is compensatory. That is not right”. He then stated that if this logic were

to be extended, any and every tax could be argued as being for the

welfare of the people. The Bench on the other hand seemed to

suggest that quantifiable, measurable benefit test as laid down by

Apex Court in Bhagatram Rajeevkumar ruling, also may have gone

too far and the CJI wondered how benefit of an entry tax levy could

be quantified or even audited? CJI said tongue in cheek that “It is like

asking to prove 2+2 = 4”.

Justice Bobde suggested that quantifiable benefit could probably

mean a ‘discernible benefit’. Mr. Salve appeared to concur with this

observation and acknowledged that quantifiable benefit does not

mean accounting for every penny of a local levy, but as long as the tax is for a particular

purpose, that would suffice. Quoting Shakespeare, Mr. Salve strongly stressed to the Court that

the Bench ought to reaffirm the ratio laid down in Automotive Transport (Rajasthan) Ltd and he

quipped, “the formulation in Automotive Transport cannot be

improved.”

Earlier in the day, former Solicitor General Harish Salve explained to

the Bench that disparate taxation by different municipalities had

necessitated the condition of Presidential approval as envisaged in

Article 304(b). He added that the overall freedom of movement of

goods is also affected by high taxation. The Chief Justice posed a

question to Mr. Salve asking if the levy would be an impediment to

free movement of goods only if the rate were to be high? Justice

Bobde asked Mr. Salve “where tax and restriction are mentioned

separately, should they be read together?” Justice D. Y.

Chandrachud then gave the example of Australian and US Constitutions which talk about

movement of goods ‘amongst the States’. Justice Sikri explained the concept of compensatory

tax as being something between a fee and a tax.

The Court would reconvene Thursday morning at 10.30 am and might continue to formulate

additional questions.




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Day 3 (July 21, 2016) : Freedom of trade doesn't exclude freedom from tax; Entry-tax 'ugly',

submits Salve

First week of hearing in the Entry tax case concludes, 9-Judges Bench poses pointed questions

on why the freedom of trade and commerce in Article 301 ought to be considered free of

taxation; Sr. Advocate Harish Salve (lead counsel for petitioners) argues that Article 301 does not

exclude freedom from tax and that 'some taxes' could be considered burdensome and a

violation of Article 301; Addressing questions from the Bench as to whether imposing restrictions

on States with regards to levying certain types of taxes amounts to 'emasculating' the States, Mr.

Salve submits that the States can levy any tax as long as it is “…reasonable, in public interest &

doesn’t discriminate against other States”; Hearing to continue on July 26

The entire day 3 of the 9-Judges Bench hearing in the historic entry tax

case saw Sr. Advocate Harish Salve putting up spirited arguments on

how ‘some taxes’ could be considered as violation of Freedom of

Trade, Commerce and Intercourse enshrined in Article 301 of the

Constitution. The Bench led by Chief Justice T. S. Thakur repeatedly

questioned as to whether a tax levy could at all constitute a violation

of Article 301. The Bench was keen to understand the interplay

between Articles 245 / 246 (dealing with the States’ powers to legislate)

and Article 301, 304(a) & 304(b). At one point, the CJI remarked that

the anomaly would disappear if the Bench were to hold that tax is not

a restriction vis-à-vis Article 301. The Bench repeatedly pressed Mr.

Salve to address them on why the freedom of trade and commerce in Article 301 ought to be

considered free of taxation, especially when the States have power under Articles 245 / 246 to

levy tax. To this, Mr. Salve submitted that Articles 302 to 306 are all exceptions to Article 301.

Explaining in detail the scheme of the Constitution as regards the Articles 301 to 306, Mr. Salve

formulated his arguments thus:

1) Article 301 of the Constitution does not exclude freedom from tax;

2) If Article 301 indeed is a Constitutional limitation to the power of the States to legislate a

tax levy, then Article 304 is an exception to this Constitutional limitation;

3) If Article 304 were to be considered an exception to the Constitutional limitation under

Article 301, and if the word “restriction” includes ‘tax’ for the purpose of Article 301, and if

this is not limited to only inter-state trade or commerce but were to also protect intra-

state trade, then it must flow that one has to find some exception to a local law;

4) The language / interpretation of Article 304(a) is qualitatively different from Article 14 of

the Constitution. One of the presumptions for satisfaction of non-discriminatory condition

in Article 304(a) is imposition of tax on the movement of goods within the home State;

5) Intra-state restrictions on movement of goods that fall foul of Article 304(a) are saved by

Article 304(b) provided they are ‘reasonable’;

6) The proviso should be ignored while construing Articles 304(a) & (b);

7) Articles 301 & 304 envisage a unified India as regards the movement of goods and the

States can levy any tax as long as it is “…reasonable, in public interest & doesn’t

discriminate against other States”;




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8) At first blush, all the above may appear to be a huge ‘carve out’ of States’ powers, but it

isn’t !

Citing an example of Haryana, Mr. Salve submitted to the Court that

the law will frown equally whether the State of Haryana puts a barrier

to goods entering from Rajasthan border or even if any barrier was

put to movement of goods within Haryana. To a pointed question

from Justice Ashok Bhushan as to whether entry tax needs Presidential

sanction under Article 304(b), Mr. Salve replied in the affirmative. On

Mr. Salve’s submission that Articles 302 to 306 are all exceptions to

Article 301, the CJI remarked that none of those Articles deal with

taxation except Article 304(a). Mr. Salve contended that the Central

Sales Tax levy infact was saved due to Article 302. To a question from

the Bench on whether Parliament has to invoke ‘public interest’ under

Article 304(b) to levy a tax, Mr. Salve replied that public interest is

implied and the moot question is whether tax is a ‘restriction’.

Justice D.Y. Chandrachud pondered on whether the intention of the framers of the Constitution

was to protect against a levy that discriminates against the ‘origin’ of goods. Justice D. Y.

Chandrachud also wondered if one could parse the words ‘restrict’ & ‘discriminate’.

Towards the end of the proceedings, Chief Justice T. S. Thakur remarked that “on the one hand

you give the States powers to levy tax and on the other hand, you emasculate them by saying

that you cannot levy tax that impedes trade”. Mr. Salve replied that only some taxes are a

burden, not all. He strongly criticized the States that substituted entry tax for sales tax and

wondered “are we really emasculating them?” Launching into the entry tax levy, he termed it

one of the ugliest tax collection mechanism.

The Bench spent a good amount of time on the question of

point of taxation in the case of entry tax. Sr. Advocate Rakesh

Dwivedi (Counsel for three States) submitted to the Court that

none of the States he is representing, are collecting taxes at

the point of entry into local area. He stated as a matter of fact

that all goods that came in from other States could be freely

sold in the home State, and the payment mechanism in most

cases is in the nature of self-assessment tax paid periodically.

Mr. Salve countered this argument by quipping “you have

removed physical barrier, not fiscal barrier”. He continued that

a local levy which is discriminatory cannot be ‘compensatory’

and any attempt by the States to show that it is of a compensatory nature would amount to a

colourable device.

The first week of hearing concluded with some lighter moments as the Bench was told by the

Counsel were the High Courts were almost equally divided on upholding / striking down the

entry tax levy. When told that 9 High Courts have struck down the levy [most of them as a

violation of Article 304(a)] and 7 High Courts have upheld the levy, the Bench remarked in a

lighter vein that a 9-Judges Bench is now sitting and considering the judgment of a 7-Judges

Bench.




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Day 4 (July 26, 2016) : Classic Constitutional debate ensues as Salve chips away at

‘compensatory’ tax

A dramatic Day 4 in Entry Tax case as CJI led 9-Judges Bench expresses reservations over

concept of ‘compensatory tax’ carved out by 7-Judges Bench in Automobile Transport

(Rajasthan) Ltd; CJI T. S. Thakur remarks that ‘dichotomy' arising out of compensatory tax is

bothering the Bench; Sr. Advocate Harish Salve urges the Bench to take a fresh look at concept

of compensatory tax, says it has produced more problems than it has solved; Court poses

searching queries on the scope and interpretation of Articles 245, 246 (State’s power to legislate)

and Part XIII (dealing with freedom of trade & commerce) of Constitution; Mr. Salve seeks to

strike at the very root of Entry Tax, calls it a tax on movement of goods, a direct impediment on

trade and violative of Article 301 of Constitution

A dramatic Day 4 in the historic Entry Tax case started on a reflective note with Sr. Advocate

Harish Salve in a pensive mood, telling the Court that he had developed a new line of thinking

over the weekend. To this, Chief Justice T. S. Thakur mentioned in jest, “weekends are a good

time for introspection”.

Mr. Salve submitted to the Bench that taxation is undoubtedly an attribute of a sovereign State,

but it has implied limitation. The CJI quipped – “can there be

a limitation where the State surrenders its sovereignty?” To

this, Mr. Salve replied that the Indian Constitution is a quasi-

federal Constitution with specific provisions on who shall

exercise the powers and has inherent limitations. He

continued that the limitation is based on the effect of

legislation.

The morning session witnessed a spirited discussion on the

scope and interpretation of Articles 2453, 2464, 301 & 304(a) of the Constitution.

Mr. Salve sought to point out to the Court that Article 245 (dealing with power of States to

legislate) begins with the words “Subject to the provisions of this Constitution”. He stated that the

fundamental law making power is in Article 245 while Article 246 provides for delineation of the

fields of legislation between the Centre & the States. The Bench questioned Mr. Salve’s assertion

with the CJI remarking that there is nothing to show that Article 246 is subject to other parts of

the Constitution. Mr. Salve quickly retorted that such an interpretation would leave Part XIII of the

Constitution (Articles 301 to 307) with no role to play. He strongly argued that Part XIII is exception

3 245. Extent of laws made by Parliament and by the Legislatures of States. - (1) Subject to the provisions of this

Constitution, Parliament may make laws for the whole or any part of the territory of India, and the Legislature of a State

may make laws for the whole or any part of the State.

(2) No law made by Parliament shall be deemed to be invalid on the ground that it would have extra-territorial

operation. 4 246. Subject-matter of laws made by Parliament and by the Legislatures of States. - (1) Notwithstanding anything in

clauses (2) and (3), Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I

in the Seventh Schedule (in this Constitution referred to as the “Union List”).

(2) Notwithstanding anything in clause (3), Parliament, and, subject to clause (1), the Legislature of any State also, have

power to make laws with respect to any of the matters enumerated in List III in the Seventh Schedule (in this Constitution

referred to as the “Concurrent List”).

(3) Subject to clauses (1) and (2), the Legislature of any State has exclusive power to make laws for such State or any

part thereof with respect to any of the matters enumerated in List II in the Seventh Schedule (in this Constitution referred

to as the “State List”').

(4) Parliament has power to make laws with respect to any matter for any part of the territory of India not included in a

State notwithstanding that such matter is a matter enumerated in the State List.




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to States’ powers. When the Bench sought to know if Article 246 could be treated as ‘complete’

by itself, Mr. Salve replied in the negative saying that “Article 245 is the fountainhead”. Mr. Salve

referred to Section 92 of the Australian Constitution (dealing with free trade within the

Commonwealth of Australia) and asserted that the framers of the Indian Constitution too had

enacted Article 301 out of the same fear – the fear of protectionist tariff barriers that may be

imposed by States, specifically tax. Chief Justice T. S. Thakur posed to Mr. Salve that if the States’

power to levy tax is subject to Part XIII, then either :

i. Article 246 ought to expressly say that it is subject to Part XIII; OR

ii. Part XIII ought to expressly say that the provisions of this Part shall prevail notwithstanding

the provisions of Article 246.

At this point, Justice A. K. Sikri interjected to this point and referring to Mr.

P. M. Bakshi’s Book on the Constitution, remarked that it probably gives a

hint on Article 245 being the fountainhead in relation to States’ powers.

Relying on the landmark Apex Court ruling in Indira Gandhi vs. Shri. Raj

Narain & Anr. [1975 AIR 2299], Mr. Salve submitted that Article 301 is not

meant to be a ‘decorative piece’. On the scheme of Articles 245, 246

and Part XIII of the Constitution, Mr. Salve finally summarized his

propositions as follows :

1) The sovereign powers of the States under the Constitution are

limited by Part III, Articles 285 & 286, Part XIII of the Constitution;

2) Article 304(a) cannot be the source of power for States to levy tax;

3) Interpreting Article 304(a) to confer that power would then enable one to make an

argument that the State legislature might also be able to levy without limitation, any

tax on goods imported into the State;

4) The Constitution has been very carefully drafted wherein Article 301 does not confer

powers, but it actually curtails powers (in relation to imposing any restriction on

freedom of trade & commerce);

5) This is amply borne out by the fact that Article 304(a) starts with the

words “Notwithstanding anything in article 301 or article 303…”;

6) From a citizen’s point of view, Article 301 confers a right that he may not be unduly

prevented from carrying out trade & commerce;

7) A balance ought to be struck between the freedom of

citizen under Article 301 and the right of States to raise

revenues.

Half way into the morning session, the CJI remarked that the

yesteryear judgments had created a ‘dichotomy’ wherein

compensatory tax falls outside the purview of Article 301, while a non-

compensatory tax gets caught in Article 301’s net. The CJI

commented, “That is bothering us”. Without any hesitation, Mr. Salve

concurred with CJI’s observations and submitted that “compensatory

tax is not a satisfactory answer”. He continued that the Court must




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either see wisdom in Justice Sinha’s views (that taxes are out of the scope of Part XIII) or Justice

Hidayatullah’s views (that taxes would be covered under Article 301 with an exception carved

out for regulatory / compensatory taxes) but Article 304(a) and (b) are standalone clauses.

Incidentally, both Justice Sinha and Justice Hidayatullah wrote the minority judgements

in Atiabari Tea Co. Ltd. [TS-2-SC-1960-VAT] and Automobile Transport (Rajasthan) Ltd. [TS-3-SC-

1962-VAT] respectively. He kept hammering on the concept of compensatory tax, stating that “it

has produced more problems than it has solved”. Terming the compensatory tax as one with a

doubtful origin, Mr. Salve requested the present 9-Judges Bench to consider either of the two

options, viz. to accept the 7-Judges Bench ratio in Automobile Transport (that carved out the

concept of compensatory tax); or to take a completely fresh look at the Automobile Transport

ratio and the concept of compensatory tax. Mr. Salve then proceeded to give an example of

States arguing that since there is a 12% local tax and only a 4% CST, therefore an 8% tax on inter-

state movement of goods (entry tax) is essentially compensatory in nature. He informed the

Court that some States grant exemption from entry tax to goods on which local sales tax has

been paid and which according to Mr. Salve, discriminates against goods coming in from other

States. He called this a direct barrier to free movement of

goods. At this stage, the Bench sought a chart from Mr.

Salve showing which States have levied entry tax in what

manner.

The Bench repeatedly pressed Mr. Salve to cite the types

of ‘restrictions’ apart from tax that may have been

envisaged by the framers of the Constitution. To this Mr.

Salve mentioned ‘licenses’ and ‘tariffs’ as possible

restrictions on free movement of goods. Mr. Salve then

launched into entry tax arguing that by its very genre, entry tax is on ‘movement’ of goods and

hence, bound to violate Article 301. He further argued that levy of a compensatory tax is not the

way around this issue. Justice D. Y. Chandrachud and Justice Ashok Bhushan remarked that

every tax by its nature is ‘compensatory’. Justice A. K. Sikri commented that since the Court has

laid down the compensatory test, the State legislatures have enacted that provision; but he

wondered if anyone is checking whether the tax collected is being spent for the purpose of

which it is raised. Chief Justice T. S. Thakur then observed that “it is becoming facial

compensatory”.

Mr. Salve laid before the Bench the ‘direct & immediate’ test to check if the levy is an

impediment to trade. He strongly argued that a discriminatory tax will impede Article 301 and

this interpretation shall not change even if Article 304(a) were presumed to be not there in the

Constitution. Justice D. Y. Chandrachud expressed curiosity to know as to which of the 18 entries

relating to the State List are ‘trade neutral’. He asked Mr. Salve “would it be possible to say that

ordinarily some entries may not impede Article 301 at all?”. Mr. Salve replied in the affirmative,

except and unless a State does something out the way and imposes a ‘facial tax’.

Chief Justice T. S. Thakur once again invoked the federal structure of the Indian Republic and

remarked that one of the factors that would weigh on the mind of the Bench is whether the

States will be subjugated to Presidential approval / sanction [under Article 304(b)] for the levies

enacted by State legislature. On the words “public interest” appearing in Article 304(b), the CJI

suggested why not to presume that every tax is in public interest and if one were to make that

presumption, requirement of President’s approval is merely duplicating it. The Bench then

questioned as to what would be the remedy available to a State if the President were to decline

to give his approval to a levy [under Article 304(b)]. Mr. Salve quickly replied that the State could

approach the Supreme Court under Article 131 of the Constitution. The Bench then pressed Mr.

Salve to suggest an interpretation that satisfies the federal structure as also the States’ sovereign

http://www.idt.taxsutra.com/sites/idt.taxsutra.com/files/webform/TS-2-SC-1960-VAT-Atiabari%20Tea%20Co%20Ltd.pdf






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rights. Acknowledging the concern of the Bench, Mr. Salve suggested that the Court may read

down Article 304(b) and make the President’s approval to a State levy a mere ‘formality’ and

also add in good measure that taxes are generally presumed to be in public interest.

The CJI also sought to know from Mr. Salve as to the position that would emanate if a person

were to challenge a particular tax both under Article 19(1)(g) (freedom to practice any

profession, carry on any occupation, trade or business) and Article 304(a). To this Mr. Salve

replied that the test under Article 19(1)(g) is very different from Article 301. He opined that

nothing short of an ‘expropriatory’ law will violate Article 19(1)(g). He also added that Article 14

will kick in if a levy is rank arbitrary.

Mr. Salve extensively relied on the Australian High Court ruling in Cole vs. Whitfield [(1988) 165

CLR 360] wherein the Court interpreted Section 92 of the Australian Constitution dealing with free

trade & commerce, and held that laws of a protectionist kind

interfering with interstate trade and commerce would be invalid5.

Mr. Salve then sought to drive the final nail in the coffin, asserting

that compensatory tax is not required to make Article 301

workable.

Having dealt with Questions 2 & 3 framed by the Bench with

regards to compensatory tax, Mr. Salve closed the day’s

proceedings by giving a sneak peek into his arguments on the

final question – the legality of entry tax levy. Mr. Salve submitted to the Bench that “any tax by its

legal nature or its practical effect impedes trade”. He stated that the taxable event is entry of

goods into local area and to argue otherwise by saying that the dealer could pay the taxes

later is mere sophistry. He termed the entry tax as a ‘direct impediment’ on trade.

Mr. Salve will wind up his arguments in the first half tomorrow and shall be followed by an array of

Senior Counsels representing other petitioners.

Day 5 (July 27, 2016) : ‘Discrimination’, ‘Tariff Wall’ buzz words as Salve concludes arguments; Sr.

Advocate Ganguli supports status quo

On Day 5 of hearing in the historic 9-Judges Entry Tax case, Sr. Advocate Harish Salve concludes

arguments, submits that if goods of a particular type are not produced in a given State, then

Entry Tax cannot be sustained under Article 304(a) on similar goods imported from other States;

Sr. Advocate A. K. Ganguli (representing one of the petitioner-companies) urges the Court to

maintain status quo and uphold the landmark Apex Court verdicts in Atiabari Tea Co. Ltd &

Automobile Transport (Rajasthan) Ltd; Bench suggests that objective of Article 304(a) is to

prevent ‘discrimination’ and if a particular type of goods is not produced locally, then question

of discrimination may not arise; Also noting Justice Sinha’s view in case of Atiabari Tea Co. Ltd,

Bench indicates that only if tariff barrier / wall is so unreasonably high that it prevents one from

carrying on trade, then same could be held as violating Article 301

5 From Wikipedia

https://en.wikipedia.org/wiki/Cole_v_Whitfield




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The buzz word on Day 5 at the historic 9-Judges Entry Tax case was

‘urgency’ as the Bench sought to expedite the hearing which is now

well into its second week. Lead counsel for the petitioner companies

Mr. Harish Salve concluded his arguments in the morning session,

spending most of his time on Article 304 interpretation. He strongly

argued that if the words “goods imported from other States” were to

also include goods imported from overseas, then Entry Tax would

virtually overlap with Customs Duty. Sr. Advocate Harish Salve then

proceeded to give an example of goods landing at a port in Orissa,

being imported from abroad, and which are then transported to a

factory warehouse located within Orissa. He stated that since the

goods would be entering a local area, it might attract a levy of Entry Tax, which according to

him, would have serious consequences including the Union of India having to face WTO for

levying a discriminatory tax on imported goods. He then opined that only Article 304(b) could

come to the rescue in such a case, not Article 304(a) of the Constitution.

The final argument of Mr. Salve centered around the words “similar goods manufactured or

produced in that State are subject”. He argued that if a particular product is not manufactured

in a given State, then Entry Tax on such goods (imported from other States) cannot be levied /

saved under Article 304(a); the rationale being that Article 304(a) is an exception (to Article

301), not the source of taxing power. He then gave the example of mangoes which might not

be produced in the State of Delhi and hence, the Delhi Govt. cannot levy Entry Tax [under

Article 304(a)] on mangoes imported into Delhi from other States. Mr. Salve however, hastened

to add that the levy can be sustained under Article 304(b) (which requires approval of

President). Chief Justice T. S. Thakur seemed to suggest that the objective of Article 304(a) is to

prevent ‘discrimination’ and if a particular type of goods is not produced locally, then the

question of discrimination may not arise. To a question from Justice Banumathi as to what would

happen to the powers of the States under Article 245 / 246, Mr. Salve replied that they would be

subject to Part XIII of the Constitution (Articles 301 to 307).

Justice D. Y. Chandrachud then proceeded to explain with the help of an example, how a non-

discriminatory Entry Tax may also impede on free trade & commerce. He gave the instance of

goods that might undergo processing in three different States and suffer 10% Entry Tax in each

State and then a fourth State where the Entry Tax might be 30%, same rate at which locally

produced goods are taxed.

While concluding, Mr. Salve urged the Bench to lay down

broad principles rather than decide the fate of individual

State Acts, which according to him involve lot of nuances.

Both the CJI and Justice Sikri however, opined that then the

matter may go on for several more years and expressed the

desire to atleast decide the fate of one or two State Acts.

Since the maximum number of appeals are from Orissa and

Kerala, the Bench indicated that it might the validity of the

Entry Tax legislation enacted by both the States.

Sr. Advocate A. K. Ganguli (representing Sony) then took guard and in essence, argued in

favour of the 9-Judges Bench upholding the landmark verdicts in Atiabari Tea Co. Ltd. and

Automobile Transport (Rajasthan) Ltd. Chief Justice T. S. Thakur however interjected opining that

if a tax levy is reasonable, rationale and the method of collection is proper, then why should the

Court interfere? He also suggested that the only condition is that it should be non-discriminatory.

The CJI reiterated the point he made the day before that compensatory tax has caused a lot of




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problems. He also remarked that the verdict in second Jindal Stainless Ltd case has taken things

to a point where you may virtually require a Chartered Accountant to audit the spending /

allocation of a State levy to justify its compensatory nature. Justice Sikri added that the Supreme

Court had handed down two extreme views in the case of Bihar Chamber of Commerce and in

the case of Jindal Stainless Ltd; the former laying down that almost every tax is compensatory

and the latter going the other way in terms of audit of the tax levies

spent. The CJI then opined that there are now three species – tax,

compensatory tax & fee. He also repeatedly asked Mr. Ganguli as to

whether a mere legislative declaration on compensatory tax would be

enough or should the Court go further than that. Mr. Ganguli replied in

the affirmative submitting that the Court would have to test if a levy

which declares that the same is being collected for a particular

purpose, is really doing so. He further added that a mere declaration is

not good enough. He submitted that while an exact mathematical

accuracy is not warranted, a broad correlation however ought to be

there between the tax levy collection and whether it is spent towards

the objectives stated in the legislation. On the concern of the Court to preserve the federal

structure and the sovereignty of the States, Mr. Ganguli more than once stated that while

political unity is first priority, economic unity too is important and urged the Bench to look at Part

XIII of the Constitution with that prism.

He also took the Bench through the ratio laid down by the

5-Judges Bench in Atiabari Tea Co. Ltd. and which had

been only slightly modified by Automobile Transport

(Rajasthan) Ltd. He argued that from 1962 to 1995, both

these judgements had held fort and it was only post 1995

that different benches of the Apex Court had gone in two

extreme directions. Chief Justice T. S. Thakur observed that

Justice Sinha’s view (minority view in Atiabari) was that a

tariff barrier “should be so high and so strong that it literally

shuts you out” but he wondered as to when does the tax

become such unsurmountable wall. The CJI seemed to

indicate that only if the tariff wall is so unreasonably high that it prevents you from carrying on

trade, then the same could be held as violating Article 301.

Day 6 (July 28, 2016) : Datar advocates "Appreciable Adverse Effect Test" to replace

compensatory-tax; Andhyarujina suggests 'audit'

Array of Senior Advocates continue arguments in historic Entry Tax case before 9-Judges Bench

of Apex Court; Sr. Advocate Arvind Datar argues that compensatory tax must go, suggests

replacing it with 'Appreciable Adverse Effect Test' (concept contained in Competition Law)

wherein if a levy were to have an adverse effect on free trade & commerce, it would be violative

of Article 301; Mr. Datar strongly argues that Article 304(a) only exhausts the universe of quantum

of taxes while the States may also impose non-fiscal barriers to inter-state movement of goods;

Senior Advocate & former Solicitor General of India, T. R. Andhyarujina as also Sr. Advocate S.K.

Bagaria argue in favour of a State audit to check if the levy is actually compensatory; Mr.

Bagaria propounds that intra-state movement of goods can only be taxed under Article 304(b),

not Article 304(a) as the latter only deals with goods imported from other States; All the 3 Senior

Advocates submit that the word 'and' makes Articles 304(a) & (b) conjunctive and therefore, the




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sanction of President of India a necessity for any Entry Tax levy; Bench seeks to know the

"definitive standard" for a levy to be a fiscal barrier high enough to constitute a violation of

Article 301; Hearing to resume next Tuesday, August 2

Day 6 at the Supreme Court in the Entry Tax saga saw an array of Senior Advocates take guard

and argue on substantive points with regard to interpretation of Articles 301, 304(a) & 304(b) of

the Constitution. Sr. Advocate and former Solicitor General of India Mr. T. R.

Andhyarujina opened the proceedings, arguing initially that the landmark

Supreme Court verdicts in Atiabari Tea Co. Ltd and Automobile Transport

(Rajasthan) Ltd. have stood the test of time for 49 years, that they were

‘massive’ cases and a review of such judgments could not be asked for

without the Court indicating the basis for such review. Chief Justice T. S.

Thakur remarked that the Court was conscious of this fact and hence,

formulated the four broad questions of law. Mr. Andhyarujina submitted that

the concept of compensatory tax was never thought of in Constituent

Assembly debates, that this concept has caused great prejudice and

therefore, requires serious reconsideration. He put forth a rhetorical question before the Court –

“are we reducing Article 301 to an idle statement where the States have to merely say that a

tax is compensatory?”. The former Solicitor General further submitted that even if a tax were

held to be non-discriminatory for the purposes of Article 304(a), it would still require the approval

of the President under Article 304(b). On a question from the Bench, Mr. Andhyarujina seemed

to support the decision of the Apex Court in the second Jindal Stainless Ltd. case and stated

that the compensatory tax should be a separate collection and there ought to be a “State

Audit” so as to exercise some control over the same. He further argued that Articles 304(a) &

304(b) are to be read conjunctively. To this, Justice D. Y. Chandrachud remarked that the word

“and” appearing between Articles 304(a) & 304(b) seems to confer ‘cumulative power’ and

enhances the power of States to levy non-discriminatory tax.

Chief Justice T. S. Thakur remarked that State legislature may impose a tax under Article 304(a)

but which may not be a restriction [under Article 304(b)]; or conversely impose a restriction but

no tax. Justice Ashok Bhushan wondered if Article 304(a) ought to be treated as complete in

case a tax levy is non-discriminatory. He observed, “both [Article 304(a) & (b)] are mutually

exclusive”. Mr. Andhyarujina replied that the question was indeed troublesome to which an

answer was needed to be found. Both CJI and Justice D. Y. Chandrachud were keen to know

the threshold / tax rate limit that would make a levy an impediment to free trade and

commerce enshrined under Article 301. The CJI remarked in jest that, “at one point, even a 97%

income tax was considered reasonable”. Justice Sikri continued on the same lines questioning as

to what would be unreasonable – “will it be 25%, 50%, 75% or 500%?”

Sr. Advocate S. K. Bagaria then commenced his arguments and took a different line from the

other counsels with regards to interpretation of Article 304(a) & (b) of the Constitution. He

submitted that intra-state movement of goods can

only be taxed under Article 304(b) and not Article

304(a). He further argued that Article 304(a) covers

only goods imported from other States and therefore,

excludes intra-state movement of goods. Justice

Ashok Bhushan terming this argument as incorrect,

remarked that Article 304(b) has to be complied with

only if there is a reasonable restriction on freedom of

trade and commerce. The CJI commented that the

powers of the States to enact the levy are contained

in Article 245 / 246 and therefore, where is the need




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to go to Article 304(b)?

With respect to the concept of ‘compensatory tax’, Sr. Advocate Bagaria submitted as follows :

1) Tax law is presumed to be in public interest and reasonable;

2) The problem is not with the concept of compensatory tax but its application;

3) He backed Mr. Andhyarujina’s call for a State audit as a check against mere facial

compensatory tax;

Sr. Advocate Arvind Datar rose to address the Bench at the stroke of

2 pm as the 9 Judges reconvened post the lunch break. The packed

Courtroom witnessed a fine exposition on tax and constitutional law

from the legal scholar. The key arguments advanced by Mr. Datar

were as follows :

1) The concept of compensatory tax has to go since the

same is conceptually not permissible and also not

workable. At most, the Court may restrict the application

of compensatory tax to Entries 56 & 57 of List II, Seventh

Schedule of the Constitution since the Apex Court

in Bolani Ores Ltd [(1974) 2 SCC 777] had laid down that

the levies in said two entries are by their very nature compensatory;

2) If the compensatory tax concept were to go, then an alternative test needs to be

put in place. Mr. Datar suggested the test of “Appreciable Adverse Effect” on trade,

which he had borrowed from the Competition law (Section 3 of the Competition

Act);

3) A levy ought to be tested for any appreciable adverse effect that it might have on

supply of goods and services and if the effect is negligible, then the same shall not be

violative of Article 301;

4) Article 304(a) exhausts only the universe of quantum of taxes. Equally important point

for the Bench to consider is a non-fiscal barrier within a fiscal statute that a State

might erect. He further added that Part XIII of the Constitution should not be confined

to the tax laws alone. He cited the example of the States possibly imposing

restrictions on inter-state movement of goods like, conditions of having a branch

office in the local area, subjecting goods imported from other States to additional

quality control tests, etc.;

5) Article 304(a) and 304(b) ought to be read conjunctively. He relied on the

commentary from Professor Sullivan who had interpreted the word ‘and’ to read as

joint and several;

6) Presidential approval is not only a necessary evil but an affirmative good. If the same

were to be diluted, it would be a dangerous thing to do and might work against the

interest of a united India. He gave a hypothetical example of Tamil Nadu enacting a

law that might have adverse impact on border States like Karnataka. He then took

the Bench through the Articles in the Constitution that mandate the 'sanction' of

President and Articles which require a law to have the 'assent' of the President. Mr.




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Datar urged the Bench to note that Article 304(b) envisages Presidential sanction as

opposed to assent and argued that the former is on a higher footing / requires higher

threshold;

7) Part XIII of the Constitution (Articles 301 to 307) which is full of restrictions, is borrowed

from the Australian Constitution. While the restrictions in the Australian Constitution

are judicially crafted, those in Part XIII have been statutorily crafted.

On Mr. Datar’s suggestion to consider the appreciable adverse effect test, Justice Sikri

quipped, “It is something new and innovative you have suggested. But how shall we measure?

The impact would be different for different goods”. The CJI posed a direct question to Mr. Datar

asking him to enlighten the Bench on the “definitive standard” for a levy that would constitute a

fiscal barrier and hence, violate Article 301. Mr. Datar replied that an exorbitant rate of tax and

also non-fiscal barrier in a fiscal statute shall fall foul of Article 301.

The day had its own share of lighter moments

especially when Mr. Datar gave the example of cattle

grazing and how a law in Madhya Pradesh imposed a

45 days restriction on grazing by foreign cattle. The

Chief Justice made a light-hearted comment that

evoked laughter in the Courtroom – “Is there a

fundamental right to graze?” A comment from Mr.

Datar also brought wide grin to everyone’s faces.

While submitting to the Bench that India is the highest

tax nation where taxes are increasing and therefore,

one must also analyse the situation from the

perspective of a consumer, Mr. Datar remarked wryly, “All of us want to go to heaven, but

nobody wants to die!”. On a serious note, Mr. Datar opined that GST would only increase the

complexity as India would become the only country where States also will be levying a GST.

Attorney General Mukul Rohatgi too joined in the light-hearted banter in the end joking that if all

parties agree that the compensatory tax must go, then the case be declared over with the

consent of lawyers on all sides!

Attorney General Mukul Rohatgi, Sr. Advocate N. Venkataraman and Advocate V.

Lakshmikumaran are likely to address the Court on August 2nd when the hearing resumes.

Documents

9-JUDGES HEARING IN ENTRY TAX CASE AT INDIAN ... HEARING IN ENTRY TAX CASE AT INDIAN SUPREME COURT - KEY ARGUMENTS SO FAR Available exclusively at e 2 may be required in the public