M/S Widia
(India) Ltd. & Ors Vs. The State of Karnataka & Others [2003] Insc 397 (21 August 2003)
M.B.
Shah & Ar. Lakshmanan.
WITH CA
Nos.1375-82, 2511-14, 2771, 3279, 3760-62, 4761-64, 5595, 7535 of 2001, CA Nos.
645-47, 1911, 2183-84, 2552, 2730, 4148-49, 5095, 5853-54, 8098-8100 of 2002.
Shah,
J.
The
levy of entry tax on goods by the State of Karnataka has chequered history and the State had to face various litigations on
this score. The constitutional validity of Karnataka Tax on Entry of Goods into
Local Areas for Consumption, Use or Sale Therein Act, 1979 (hereinafter
referred to as 'the Act') and the notifications issued by the State Government
in exercise of its powers conferred by Section 3 of the said Act were
challenged before the High Court by filing writ petitions under Article 226 of
the Constitution. The Act and the notifications issued thereunder were declared
unconstitutional and mandamus was issued directing the State Government and its
officers to forebear from enforcing the provisions of the Act. Against that
judgment and order, the State Government preferred appeal before this Court.
This Court in State of Karnataka and another v. M/s Hansa
Corporation [(1980) 4 SCC 697] set aside the order passed by the High Court
striking down the Act.
The
Court negatived the contention that Section 3 of the Act was vague. The Court
also held that it was settled law that if the tax is compensatory in character,
it would be immune from challenge under Article 301 of Constitution of India;
if on the other hand, the tax is not shown to be compensatory in character, it
would be necessary for the party seeking to sustain the validity of the tax law
to show that the requirements of Article 304 have been satisfied. The Court
also held that the levy of tax by the notification at the relevant time was not
discriminatory in character as envisaged by Article 304(a) and it does not
impose restrictions. The Court further held that the restrictions imposed are
reasonable and in public interest and the Act subsequently having received the
assent of the President, proviso to Article 304(b) is complied with and,
therefore, the Act was saved by Article 304 and could not be struck down on the
ground of its being violative of Article 301.
The
title of the aforesaid Act was amended in 1992 and it was named as 'The
Karnataka Tax on Entry of Goods Act, 1979'. Section 3 of the Act empowers the
State Government to levy tax by issuing notification on the entry of any goods
specified in the Schedule into a local area for consumption, use or sale
therein. At present, Sub- section (1) of Section 3 reads as under: "3.
Levy of Tax.(1) There shall be levied and collected a tax on entry of any
goods specified in the First Schedule into a local area for consumption, use or
sale therein, at such rates not exceeding five per cent of the value of the
goods as may be specified "retrospectively or prospectively" by the
State Government by Notification, and different dates and different rates may
be specified in respect of different goods or different classes of goods or
different local areas." The controversy in these appeals centers round the
addition of the word 'retrospectively'. Section 3 was amended by amending Act
No.8 of 1993, namely, the Karnataka Tax on Entry of Goods (Second Amendment)
Act, 1992, whereby for the words "by the State Government, by notification
from time to time", the words "retrospectively or prospectively by
the State Government by notification and different dates" were
substituted. The amending Act was passed by the State legislature after
obtaining the assent of the Governor on 11th February, 1993 but the assent of the President was
not obtained and that is the only surviving challenge in these appeals.
Thereafter,
Karnataka Act No.45 of 1994, namely, the Karnataka Tax on Entry of Goods
(Amendment) Act, 1994 was enacted after obtaining the assent of the President
on 19.10.1994.
Again,
the said Act was amended by Karnataka Act No.3 of 1995, namely, the Karnataka
Tax on Entry of Goods (Amendment) Act, 1992 after obtaining the assent of the
President on 6.9.1994.
The
Government of Karnataka in exercise of its power under Section 3(1) of the Act
brought out notification dated 30.3.1994, which came into effect on Ist April,
1994, levying tax on the entry of goods brought into a local area from any
place outside the State for consumption and use therein, at the rate of taxes
as specified against the goods stipulated in the table appended thereto.
Several
assessees filed writ petitions challenging the said notification. Pending writ
petitions, Government of Karnataka in exercise of its power under Section 3(1)
of the Act read with Section 21 of the Mysore General Clauses Act, 1899, by
issuing Notification No.FD-109-CET-97(8) dated 31st March, 1997, amended the
notification dated March 30, 1994 by substituting for the words "from any
place outside the State for consumption or use", the words "where
such entry is for consumption or use of such goods and where such goods have
not suffered tax under the Karnataka Sales Tax Act, 1957" with effect from
Ist April, 1994.
The
said notification was also challenged by filing interlocutory applications in
pending writ petitions. Thereafter, the Division Bench of the High Court, by
its judgment dated 4th
August, 1997 in Avinyl
Polymers Pvt. Ltd. etc. v. The State of Karnataka and others [(1998) 109 STC 26] quashed both the notifications, namely,
notification dated 30th
March, 1994 and
notification dated 31st
March, 1997. The High
Court arrived at the conclusion that the levy of tax on entry of goods was
compensatory in nature and not restrictive requiring any previous sanction or
assent of the President of India and, therefore, the said Act cannot be held to
be illegal for want of President's assent.
However,
the Court arrived at the conclusion that the notifications were discriminatory
for the reasons recorded therein and it was also held that the authority
exceeded its powers conferred under Section 3(1) of the Act and, therefore, the
said notifications were ultra vires.
The
said judgment and order was challenged before this Court and the Court finally
passed the following order: "C.A. No.3958 of 1998 and Nos.1819-1848 of
2000 be delinked and listed separately.
Leave
granted in S.L.P. (C) No.134 of 1998.
Counsel
for the parties agree that the appeals filed by the State of Karnataka have become infructuous.
These
appeals arise out of judgment of the Karnataka High Court before whom the
respondents had challenged the notification dated March 30, 1994 and the amendment made on March 31, 1997 pertaining to entry tax. The said notification was quashed
but while quashing the same the High Court had accepted the contention of the
State of Karnataka that the entry tax was compensatory
in nature.
We are
now informed that the aforesaid notifications on March 30, 1994 and March
31, 1997 have been
superseded by notification dated January 7, 1998 and notification on September 23, 1998, which are retrospective in
character. The later notifications are subject-matter of challenge before the
Karnataka High Court. As far as the State of Karnataka is concerned, it is not seeking to realise any tax under
the earlier notification dated March, 30, 1994
and March 31, 1997.
This
being so, the appeals filed by the State of Karnataka have become academic and nothing more survives.
As far
as the appeals filed by the respondents are concerned, the same relate to the
finding of the High Court to the effect that the entry tax was compensatory in
nature. Learned Advocate-General agrees that without going into the merits this
finding may be set aside and the High Court will be at liberty to go into this
question afresh while deciding the writ petition which have been filed
challenging the subsequent notifications.
Ordered
accordingly. The High Court while deciding the fresh writ petitions will not be
bound by its earlier decision. The appeals are disposed of. No order as to
costs." As this Court had declined to stay the operation of the judgment
rendered by the Division Bench of the High Court in Avinyl Polymers's case, the
Government of Karnataka issued notification dated January 7, 1998 which provided rate of tax on entry of goods into a local
area for consumption, use or sale therein. The notification was brought in
consonance with the judgment rendered by the High Court and it remained in
force from January 7,
1998 to March 31, 1998. On March 31, 1998, another notification was issued providing levy of tax on
entry of goods into local area for consumption, use or sale therein. This
notification was prospective in operation.
Thereafter,
on 23rd September, 1998, Government of Karnataka brought out another
notification, which was effective for the period from April 1, 1994 up to
January 6, 1998 by prescribing different rates of taxes for goods enumerated in
the table appended to the notification purporting to levy tax on entry of goods
brought into a local area from outside for consumption, use or sale therein.
Again,
various writ petitions were filed before the High Court challenging the said
notifications, which were dismissed by the Single Judge by holding as under:
1. The
provisions of Section 3(1) of the Act are not ultra vires of the Constitution
of India on the ground that no guidelines for prescribing rate of tax has been
given and the provisions are compensatory in nature and does not require the
assent of the President of India.
2.
Notifications dated 31.3.1998 and 7.1.1998 are valid piece of legislation.
3.
Notification dated 23.9.1998 has not been issued under Section 4B of the Act,
but has been issued under Section 3(1) and as such retrospective effect could
have been given.
4.
Notification dated 23.9.1998 cannot be considered to be invalid on the ground
that it was not in force on the date of issue and was made applicable for past
transactions only.
5.
Notification dated 23.9.1998 is a valid piece of legislation. It is however
declared that tax shall not be levied or collected for the period from 1.4.1994
to 6.1.1998 for entry of goods in local area when the goods are brought from
other areas of the State of Karnataka and
also when the goods have been imported from outside the State of Karnataka and are meant for sale.
6.
Entry 2-A by Notification dated 9.11.1998 prescribing rate of tax at 8% from
1.4.1995 is ultra vires the power of Section 3(1) of the Act.
7. In
cases where assessments were already framed, the assessees would be free to
file appeals within four weeks and where notice alone has been issued, they may
submit objections within the aforesaid period.
The
State had not preferred any appeal against the aforesaid judgment and order.
However,
the appellants (dealers) filed appeals before the Division Bench of the High
Court. The High Court, by judgment and order dated 18th October, 2000, dismissed the Writ Appeal Nos.1717- 21, 8191-93 of 1999
and other appeals involving similar question.
Those
judgments and orders are challenged by filing these appeals.
For
the levy of entry tax, the High Court held that:
17.
The State of Karnataka came into being on 1.11.1956 pursuant to the
reorganizations of the State of India. Municipal laws prevailing in different
areas of the new State provided for imposition of tax called octroi. With
effect from 1.4.1965 uniform taxation on various items under the Municipalities
Act was brought into force.
18.
Considerable debate is going on in the country regarding the justification of
charging the octroi by the municipal committees. The octroi was being
criticized as Archaic and Obnoxious impeding the free flow of trade creating
bottlenecks. State of Karnataka was the first State to abolish octroi
with effect from 1.4.1979. In order to compensate the loss, Karnataka Tax on
Entry of Goods into Local Areas for Consumption, Use or Sale therein Act, 1979 was passed. The Act was enacted
under the legislative powers derived from Article 246 of the Constitution of
India read with Entry 52 List II of the 7th Schedule of the Constitution. It
received the assent of the President of India on 27.5.1979.
Originally
the tax was levied on three items, namely textiles, tobacco and its products
and sugar. Subsequently, there has been changes and the position as now stands
is that tax could be levied on any items specified in the first schedule from
items 1 to 103. Item No.103 is a residuary clause and confers power on the
State Government to levy tax on:
"Goods
other than those specified in any entries in this schedule, but excluding those
specified in the second schedule." Further, in the High Court, the
appellants did not challenge
(a) the
notification levying the tax w.e.f. 7th January, 1998 (paragraph 12); and
(b) the
nature of the tax being compensatory or regulatory (paragraph 20).
Instead,
it was contended that Act No.8 of 1993 which introduces the words
"retrospectively or prospectively by the State Government by notification
on different dates" is neither reasonable nor in public interest and in
any event if the said restriction could be said to be reasonable and in public
interest, the same is unconstitutional and void as assent of the President was
not obtained before enacting the same.
Dealing
with this contention, the High Court relied upon its earlier decision in Avinyl
Polymers's case (supra) as well as the decision rendered by this Court in Venkata
Rao Esajirao Limbekar and others v. The State of Bombay and others [(1969) 2
SCC 81], wherein the Court held thus: "
We would, however, like to
observe that, as noticed before, when Hyderabad Amending Act III of 1954 was
enacted the assent of the President was duly obtained. Similarly when Bombay
Act XXXII of 1958 which was meant for amending Hyderabad Act XXI of 1950 was
enacted the assent of the President had been given. If the assent of the
President had been accorded to the amending Acts, it would be difficult to hold
that the President had never assented to the parent Act, namely, Hyderabad Act
XXI of 1950. Even if such assent had not been accorded earlier it must be taken
to have been granted when amending Act III of 1954 was assented to." The
Court, thereafter, arrived at the conclusion that the assent of President of
India would be deemed to have been given to the Act 8 of 1993 when assent to
the subsequent Acts No.45 of 1994 and 3 of 1993 was given.
SUBMISSIONS:
In
these appeals, challenge is confined to the notification dated 23rd September,
1998, which was issued by the State Government in exercise of powers conferred
by sub-section (1) of Section 3 of the Act providing that w.e.f. Ist Day of
April, 1994 and up to 6th day of January, 1998 tax shall be levied and
collected on the entry of goods, specified in Column (2) of the table, into a
local area for consumption or use or sale therein at the rate specified.
The
learned counsel for the appellants submitted that for levy of tax on the entry
of goods on the basis of notification dated 7th January, 1998 which empowers the authority to
collect tax prospectively, the appellants have no grievance. However, the
notification dated 23rd
September, 1998
empowering the authority to levy and collect tax from 1st April, 1994 up to 6th January, 1998 without prior sanction of the President is illegal and void
and requires to be set aside. Further, there was no notification levying tax on
entry of goods for a period from 1.4.1994 to 6.1.1998 as the previous
notifications were held to be illegal and void. It is submitted that the
notification dated 23rd
September, 1998 is in
pith and substance validating notification. It is also submitted that for the
hiatus period from 4.8.1997 to 6.1.1998, there was no notification levying the
entry tax. Such power could not be exercised by the delegated authority,
namely, the State Government. Hence, the notification dated 23rd September, 1998 cannot be justified.
It is
also submitted that the State cannot justify the validity of amending Act No.8
of 1993 on the ground that since the subsequent amendments have received the
President's assent, the impugned amendment is deemed to have received the
President's assent, as it is against the law laid down by this Court in
Kaiser-I-Hind Pvt. Ltd. and Anr. v. National Textile Corporation (Maharashtra North) Ltd. and Ors. [(2002) 8 SCC
182] and Gram Panchayat of Village Jamalpur v. Malwinder Singh and others
[(1985) 3 SCC 661]. It is contended that there was no proposal before the
President to provide for levy of tax on entry of goods with retrospective
effect when assent was given to Act No.45 of 1994.
Lastly,
it is contended that most of the appellants in the appeals fall within the
limit of industrial area as declared under Section 3 of the Karnataka
Industrial Areas Development Act, 1966. Hence, they would not be covered by the
definition provided under Section 2(A)(5) of the Act, which defines 'local
area' to mean: " 'Local Area' means an area within the limits of a city
under the Karnataka Municipal Corporation Act, 1976 (Karnataka Act 14 of 1977)
a municipality under the Karnataka Municipality Act, 1964 (Karnataka Act 22 of
1964) a notified area committee, a town board, a sanitary board or a cantonment
Board constituted or continued under any law for the time being in force and a Mandal
under the Karnataka Zila Parishads, Taluk Panchayat Samithis, Mandal Panchayat
and Nyaya Panchayats Act, 1983 (Karnataka Act 20 of 1985) and Panchayat Area
under the Karnataka Panchayat Raj Act, 1993 (Karnataka Act 14 of 1993)."
The learned counsel for the respondents justified the impugned judgment for the
reasons recorded therein. It is their submission that retrospective effect is
given after removing the defects pointed out by the High Court in Avinyl Polymers's
case (supra) and to validate the levy of entry tax.
FINDINGS:
Before
dealing with the rival contentions, we would first refer to Articles 301 and
304 which are as under:
"301.
Freedom of trade, commerce and intercourse. Subject to the other provisions of
this Part, trade, commerce and intercourse throughout the territory of India shall be free.
304.
Restrictions on trade, commerce and intercourse among States. Notwithstanding
anything in article 301 or article 303, the Legislature of a State may by law
(a)
impose on goods imported from other States or the 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 the 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." Article 301 provides for free trade, commerce and intercourse
throughout the territory of India. To this, two fold exceptions are carved out in Article 304
by providing that:
(1)
State may by law levy tax on the goods imported from other States. However,
such levy should be similar to the tax levied on similar goods manufactured or
produced in the State so as not to discriminate between the goods imported and
goods manufactured or produced in the State.
Hence,
levy of tax normally by the State legislature per se would not be, in any way, violative
of Article 301.
(2)
Further, Article 304(b) empowers the State legislature to impose reasonable
restrictions on freedom of trade, commerce or intercourse with or within the State
as may be required in the public interest.
For
such restrictions to be valid, the State must obtain previous sanction of the
President before introduction of the bill in the legislature of State.
On
this aspect, it would be worthwhile to refer to the decision in Rattan Lal
& Co. v. Assessing Authority (1969) 2 SCR 544] wherein the Court held that
where the general rate applicable to the goods locally made and on those
imported from other States is the same nothing more normally and generally is
to be shown by the State to dispel the argument of discrimination under Article
304(a), even though the resultant tax amount on imported goods may be
different.
The
aforesaid decision was referred to and relied upon in Video Electronics Pvt.
Ltd. and another v. State of Punjab and another [(1990) 3 SCC 87]. In that
case, the Court also referred to the decision in Kalyani Stores v. State of Orissa
[(1966) 1 SCR 865] wherein it was observed that the restriction on the freedom
of trade, commerce and intercourse throughout the territory of India declared
by Article 301 cannot be justified unless it falls within Article 304.
Exercise
of power under Article 304(a) can be effective only if the tax or duty on goods
imported from other States and the tax or duty imposed on similar goods
manufactured or produced in that State is such that there is no discrimination.
The Court also referred to the observations of Hidayatullah, J. that Article
304(a) imposes no ban but lifts the ban imposed by Articles 301 and 303 subject
to one condition. That article is enabling and prospective. The Court (in para
22) further held: "
It is manifest that free flow of trade between two
States does not necessarily or generally depend upon the rate of tax alone.
Many factors including the cost of goods play an important role in the movement
of goods from one State to another. Hence the mere fact that there is a
difference in the rate of tax on goods locally manufactured and those imported
would not amount to hampering of trade between the two States within the
meaning of Article 301 of the Constitution. As is manifest, Article 304 is an
exception of Article 301 of the Constitution. The need of taking resort to the
exception will arise only if the tax impugned is hit by Articles 301 and 303 of
the Constitution. If it is not then Article 304 of the Constitution will not
come into picture at all
" In V. Guruviah Naidu & Sons v. State of
Tamil Nadu [(1977) 1 SCC 234], this Court held that Article 304(a) does not
prevent levy of tax on goods; what it prohibits is such levy of tax on goods as
would result in discrimination between goods imported from other States and
similar goods manufactured or produced within the State.
The
object is to prevent discrimination against imported goods by imposing tax on
such goods at a rate higher than that borne by local goods since the difference
between the two rates would constitute a tariff wall or fiscal barrier and thus
impede the free flow of inter-State trade and commerce. The Court also held
that it is for the petitioner challenging levy of tax to establish that such
tax is discriminatory.
Further,
for the tax to become a prohibited tax it has to be a direct tax the effect of
which is to hinder the movement part of trade.
So
long as a tax remains compensatory it cannot operate as a hindrance. {Re:
Sharma Transport v. Government of A.P. and others [(2002) 2 SCC 188]} In these
appeals, no contention is raised to the effect that levy of tax on goods by the
impugned notification discriminates between the goods imported from other
States and similar goods manufactured or produced within the State. Hence, it
would be difficult to accept the contention that the sanction of the President
was required to be obtained before amending and enacting Act No.8 of 1993 whereby
for the words "by the State Government, by notification from time to
time", the words "retrospectively or prospectively by the State
Government by notification and different dates" were substituted.
Addition
of words 'retrospectively or prospectively' in Section 3(1) would not make the
Section restrictive which can be hit by Article 301 of the Constitution nor the
said part of the legislation could be held to be discriminatory. To clarify the
situation, it can be stated that a subsequent notification issued in exercise
of the powers conferred under the said Section may in some case amount to
restriction to free trade and commerce but simplicitor addition of the words
'retrospectively or prospectively' would not require sanction of the President
as contemplated under Article 304 (b). Hence, the contention that amending Act
No.8 of 1993, by which the words 'retrospectively or prospectively' are added,
requires sanction of the President, is without any substance.
Further,
once it is conceded that imposition of tax was compensatory or regulatory in
nature, there is no question of obtaining the assent of the President under
Article 304(b) of the Constitution.
For
the Act in question, this question is dealt with and made clear by this court
in M/s. Hansa Corporation (supra) and thereafter in repeated judgments
including State of Himachal Pradesh and others v. Yash Pal Garg (Dead) By LRs
and others [JT 2003 (4) SC 413] wherein it is held that so long as the tax
remains compensatory or regulatory, it cannot operate as hindrance. The Court
also held:
(a) A
demand for tax from the traders in common with others is not a restriction on
the right to carry on trade, commerce and intercourse.
(b)
Such tax would not come within the purview of the restrictions contemplated
under Article 301 unless it is established that in reality, it hampers or
burdens the trade and commerce.
(c) So
long as the tax remains compensatory or regulatory, it cannot operate as a
hindrance.
(d) If
a State tax law accords identical treatment in the matter of levy and
collection of tax on the goods manufactured within the State and identical
goods imported from outside the State, Article 304(a) would be complied with.
There is an underlying assumption in Article 304(a) that such a tax when levied
within the constraints of Article 304(a) would not be violative of Article 301
and State legislature has the power to levy such tax.
In
view of this settled law, once it is held that the tax levied by the State
Government was compensatory in nature, there is no question of obtaining
sanction of the President under proviso to Article 304. In this view of the
matter, the decision rendered by this Court in Kaiser-I-Hind Pvt. Ltd.'s case
(supra) has no bearing in the present case.
It is
true that normally tax would not be levied with retrospective effect but at the
same time to validate the tax which was levied, after removing the defects
pointed out by the previous decision, the State Government could exercise its
powers under Section 3(1) of the Act and it cannot be said that it has acted
beyond its jurisdiction. Therefore, it cannot be held that notification dated
23rd September, 1998 empowering the authority to levy and collect tax w.e.f.
1.4.1994 to 6.1.1998 is, in any way, illegal or erroneous. The defects pointed
out in Avinyl Polymers's case (supra) are removed and, therefore, it cannot be
said that the notification dated 23.9.1998 is, in any way, illegal. In a
situation like present one where notifications levying tax were held to be
illegal, for validating such levy, the State Government has issued the
aforesaid notification. It is not pointed out that the said notification is
discriminatory between the goods imported from other States and similarly goods
manufactured or produced within the State.
Last
contention only requires to be narrated for being rejected, as it cannot be
disputed that the 'industrial area' is either within the area of Municipal
Corporation or within the area of municipal limits or Panchayat limits. The
establishment of industrial areas is for limited purpose and Section 3 of the
Karnataka Industrial Areas Development Act, 1966 specifically provides that the
State Government may by notification declare any area to be an industrial area
for the purposes of the said Act. But, it is nowhere provided that the said
area would cease to be part and parcel of either municipal corporation or the
area of municipality or panchayat. Therefore, the High Court rightly rejected
this contention.
In the
result, the appeals are dismissed. In each appeal, appellants to pay costs of
Rs.10,000/-. SLP (C) Nos. 112-13 of 2002, SLP (C) __________ @ CC Nos. 3488-90
of 2003 and SLP (C ) No.8223-24 of 2003.
Special
Leave Petitions ______ @ CC Nos.3488-90 of 2003 are dismissed on the ground of
delay.
For the
foregoing reasons, Special Leave Petitions are also dismissed.
Back