.JINDAL STA!NLESS TTD. & ANR. v. STATE OF HARYANA & ORS.

556 SUPREME COURT REPORTS [2016] 10 S.C.R.

A maintenance of such roads will cost the government money. But, because the users of vehicles generally, and of public motor vehicles in particular, stand in a special and direct relation to such roads, and may be said to derive a special and direct benefit from them, it seems not unreasonable B that they should be called upon to make a special contribution to their maintenance over and above their general contribution as taxpayers of the State. If, however, a charge is imposed, not for the purpose of obtaining a proper contribution to the maintenance and upkeep of the road, but for the purpose of adversely affecting trade or c c0111111erce, then it would be a restriction on the freedom of trade, commerce or intercourse." (Id. at p. 382)

86. The Bench of three Judges in G K Krishnan (supra) was bound by the view which was taken by a larger Bench of seven Judges in Automobile Transport. The above extract however, indicates the difficulties which the Court noticed in applying concepts such as "reasonable compensation", an expression, which however convenient, is but vague. The Court noticed the rationale for the doctrine of compensatory taxes: providing recompense to the state for the provision of services which facilitate trade. A compensatory tax is distinguished from a general measure of taxation. The state may impose the tax as a part of raising revenues in aid of the general expenditure of the state. Though, all revenues of the state in the ultimate analysis are expended for public purposes, a burden imposed as a part of raising resources for meeting general expenditure is not compensatory. A compensatory tax in terms of the concept evolved by the Supreme Court in Automobile Transport is to provide a proper recompense to the state for the provision or use of all facilities made available to trade and commerce.

87. Justice Mathew, observed that in such matters, a rough approximation rather than a mathematically accuracy is what is required. The law imposed by the state legislature was held to pass muster of judicial review.

88. The judgment in GK Krishnan (supra) is also noteworthy because it raises the issue as to whether the restrictions contemplated H

JINDAL STAINLESS LTD. v. STATE OF HARYANA 557

[DR. D. Y. CHANDRACHUD, J.]

89. The judgment in Automobile Transport held that compensatory taxes lie outside the purview of Article 301. Justice H

558 SUPREME COURT REPORTS (2016] 10 S.C.R.

A Mathew while upholding that the Madras Motor Vehicles Taxation Act, l 931 had cautioned in G K Krishnan (supra) that the concept of reasonable compensation is "convenient but vague" and emphasized "very great" difficulties in defining it. The issue came to the fore in M/s Bhagatram Rajeev Kumar v. Commissioner of Sales Tax, M. P28 .An entry tax was imposed on goods such as sugar on which no sales B tax is leviable, under the Madhya Pradesh Sthaniya Kshetra Me Mal Ke Pravesh Par Kar Adhiniyam, 1976. No sales tax could be levied on sugar since it is one of the goods on which additional excise duty is leviable under the Additional Duties of Excise Act, 1957. This Court held that though sugar was a commodity on which no sales tax is leviable c because additional excise duty is payable, it was within the taxing provisions of the entry tax legislation. There was a challenge to the entry tax law on the ground that it violated A1iicle 301 and that it was not regulatory or compensatory. A Bench of three Judges of this Court held that the figures which had been disclosed by the state as justification for the levy as a compensatory tax were not disputed. However, the Bench reformulated the test of what constitutes a compensatory tax in the following observations : "8 ..... The concept of compensatory nature of tax has been widened and if there is substantial or even some link between the tax and the facilities extended to such dealers directly or indirectly, the levy cannot be impugned as invalid. The stand of the State that the revenue earned is being made over to the local bodies to compensate them for the loss caused, makes the impost compensatory in nature, as augmentation of their finance would enable them to provide municipal services more efficiently, which would help or ease free flow of trade and commerce, because of which the impost has to be regarded as compensatory in nature, in view of what has been stated in the aforesaid decisions, more particularly in Hansa Corpn. Case." (Id. at p. 678) G

90. These observations made a marked departure from the test which was adopted in the judgment of seven Judges in Automobile

"[1995 Supp (IJ sec 673) 1-1

JINDAL STAINLESS LTD. v. STATE OF l-IARYANA 559 [DR. D. Y. Cl-IANDRACl-IUD, J.]

Transport. The test of a compensatory tax as formulated in Automobile A Transport is whether the trade has the use of facilities for the conduct of its business and is required to pay not patently much more than what is required for providing the facilities. In a substantially watered down redefinition of the test, Bhagatram required a "substantial or even some link" between the tax and the facilities extended "directly or indirectly". B The underlying basis or foundation for regarding a tax as compensatory was almost obliterated. The reference in Bhagatram to the earlier decision in State of Karnataka v. Hansa Corporation 29 , clearly overlooks that in that case the state had made no effort to sustain the validity of the tax on the ground that it was compensatory in character. Hence, the Bench in Hansa Corporation expressly clarified that it c was not necessary for the Court to examine whether the tax was compensatory. Yet, the decision in Hansa Corporation was construed in Bhagatram to be an authority for the proposition that even some link between the facilities provided and the payment demanded, whether direct or indirect, would suffice. D

91. The decision in Bhagatram was followed by another Bench of two judges in State of Bihar v. Bihar Chamber of Commerce"'. At issue was an entry tax imposed by the Bihar (Tax on Entry of Goods into Local Areas for Consumption, Use or Sale therein), 1993. The High Court had held the Act to be invalid on the ground that the state E had not disclosed material to justify that it was compensatory or regulatory nor had the state fulfilled the requirements of Article 304(b). The submission of the state in appeal was that the enactment was intended by the state legislature to offset at least in pa1t the loss of revenue caused to it, as a result of a decision of this Court in India Cement F Ltd. v. State ofTamil Nadu". The state submitted that due to a loss of revenue from the cess on minerals, it was necessary for the state to find alternative sources ofrevenue to support its welfare schemes. The money raised would, it was asserted, be spent for the welfare of the state, which was divided into local areas. Moreover, it was urged that even if the levy was not compensatory, the assent of the President had been G obtained under Article 304(b) read with Article 255. The enactment

"(J980J 4 sec 697 '" (!9'16) 9 sec 136 " (l 990) 1 sec 12 H

560 SUPREME COURT REPORTS [2016] 10 S.C.R.

A was held to be compensatory. The following tests were laid down:

"12 ... .It is not and it cannot be stipulated that for the purpose of establishing the compensatory character of the tax, it is necessary to establish that every rupee collected on account B of the entry tax should be shown to be spent on providing the trading facilities. It is enough if some connection is established between the tax and the trading facilities provided. The connection can be a direct one or indirect one, as held by this Court in Bhagatram c Rajeevkumar v. CST [1995 Supp (1) SCC 673: (1995) 96 STC 654] : (SCC p. 678, para 8) ...... " The concept of compensatory nature of tax has been widened and ifthere is substantial or even some link between the tax and the facilities extended to such dealers directly or indirectly the levy cannot be impugned as invalid" ..... Though not stated in the counter-affidavit, we can take notice of the fact that the State does provide several facilities to the trade including laying and maintenance of roads, waterways and markets, etc. As a matter of fact, since the levy is by the State, we must also look to the facilities provided by the State for ascertaining whether the State has established the compensatory character of the tax." (Id. at p. 14 7)

The Court in Bihar Chamber of Commerce held that so long as "some connection is established between the tax and the trading facilities provided" the levy would be held to be compensatory in character.

92. These decisions were doubted by a Bench of two-Judges in Jindal Stripe Ltd. v. State of Haryana 32 .

G 93. Jindal Stripe involved a batch of appeals raising a challenge to the Haryana Local Area Development Tax Act, 2000 on the ground that it was "violative" of Article 301 and was not saved by Article 304. A Bench of two judges held that the decisions in Bhagatram and Bihar

32 c2003 l 8 sec 60 H

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Chamber of Commerce seem to have deviated from the principles A underlying the imposition of a compensatory tax which had held the field from 1962 to 1995. ln the view of the refening Bench, if the test enunciated in the above two cases was to be accepted as the position in law, any tax could pass the test of a compensatory tax without infringing upon the freedom ordained by Article 301. The reference was heard by B a Constitution Bench in Jindal Stainless Ltd. (2) v. State of Haryana 33 , The Constitution Bench in Jindal Stainless elucidated the difference between regulatory and taxing powers. Taxing legislation, the Court ruled, is based on the concept of burden and on the principle of ability to pay. On the other hand, regulatory charges are a recompense for the costs or expenses incuned by the state for the provision of services or c facilities:

"31 ... Suffice it to state at this stage that the basis of special assessments, bettem1ent charges, fees, regulatory charges D is "recompense/reimbursement" of the cost or expenses incuned or inclllTable for providing services/facilities based on the principle of equivalence unlike taxes whose basis is the concept of"burden" based on the principle of ability to pay. At this stage, we may clarify that in the above case of Automobile Transport[(l 963) 1 SCR 491 : AIR 1962 SC E 1406], this Court has equated regulatory charges with compensatory taxes and since it is the view expressed by a Bench of seven Judges, we have to proceed on that basis. The fallout is that compensatory tax becomes a sub-class of fees". (Id. at p. 264) F

Based on this distinction, the Constitution Bench held that if a law, fiscal or otherwise, operates upon the movement of trade or commerce and its effect is to impede that activity, the law would constitute a restriction under A1ticle 301. However, if the law seeks to enforce a G payment for regulation of conditions or incidents of trade, it is regulatory in character:

.u (2006 J 7 sec 241 H

562 SUPREME COURT REPORTS [2016] 10 S.C.R.

A "38 ..... Jfthe impugned law seeks to control the conditions under which an activity like trade is to take place then such law is regulatory. Payment for regulation is different from payment for revenue. If the impugned taxing or non-taxing law chooses an activity, say, movement of trade and commerce as the criterion of its operation and if the effect B of the operation of such a law is to impede the activity, then the law is a restriction under Article 30 I. However, if the law enacted is to enforce discipline or conduct under which the trade has to perform or if the payment is for regulation of conditions or incidents of trade or manufacture then the c levy is regulatory." (Id. at p. 266)

94. The Constitution Bench held that taxes are levied as a part of the common burden. While the foundation ofa fee is "the principle C)f D equivalence", the basis of a tax is ability to pay. The main basis of a fee or a compensatory tax is an equivalence and a "quantifiable measurable benefit". A compensatory tax has to be broadly proportional:

E "42 ... Compensatory tax is based on the principle of''pay for the value''. It is a sub-class of "a fee". From tile point of view of the Government, a compensatory tax is a charge for offering trading facilities. It adds to the value of trade and commerce which does not happen in the case of a tax as such. A tax may be progressive or proportional to income, property, expenditure or any other test of ability or capacity (principle of ability). Taxes may be progressive rather than proportional. Compensatory taxes, like fees, arc always proportional to benefits. They are based on the principle of equivalence. However, a compensatory tax is levied on an individual as a member of a class, whereas a fee is levied on an individual as such. If one keeps in mind the "principle of ability" vis-a-vis the "principle ofequivalence'', then the difference between a tax on one hand and a fee or a compensatory tax on the other hand can be easily spelt out." (Id. at p. 267)

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95. The Constitution Bench held that a compensatory tax is a A compulsory contribution levied broadly in proportion to the special benefits derived to meet the costs ofregulation or an outlay which is incurred to provide a special advantage to trade, commerce and intercourse. Whenever a law is impugned as being violative of Article 301, the Court must detem1ine whether the enactment facially or patently indicates B quantifiable data on the basis of which the compensatory tax is sought to be levied. The statute must broadly indicate a proportionality to a quantifiable benefit. Even if the statute were not to indicate this, the state may discharge the burden cast upon it by producing material to indicate that the payment of the compensatory tax is a reimbursement or recompense for a quantifiable/measurable benefit provided or to be c provided to the payer of the tax. The reference was answered by the Constitution Bench by holding that the test of what constitutes a compensatory tax had been substantially altered by the decisions in Bhagatram and Bihar Chamber of Commerce in a manner which was inconsistent with the judgment of seven Judges in Automobile D Transport. In holding that 'some connection' or 'some link' between the tax and the facilities extended would suffice, 'whether direct or indirect', the judgments in the Bhagatram and Bihar Chamber of Commerce were held to have deviated from the settled concept of compensatory taxes and were hence overruled. E

E.5 Doctrinal concerns and inconsistencies

96. The theory of compensatory taxes was evolved in Automobile Transport to assimilate doctrinal concerns at several levels. Freedom of trade and commerce under Article 301 of the Constitution is expressly F made subject to the provisions of Part Xlll. The deliberate use of the expression 'free' instead of"absolutely free" (the latter expression being adopted in the Australian Constitution) coupled with the language of A1ticle 301 which subjects its provisions to Part Xlll is indicative of the fact that the freedom which is guaranteed is subject to legislative control. G Articles 302, 303 and 304 are a part of the constitutional scheme which, while defining the ambit of the freedom in Article 301 subjects it to restrictions under Articles 302 and 304. The nature of the restrictions and the limitations on the power of Parliament and of the state legislatures while legislating to impose restrictions is conditioned by constitutional H

564 SUPREME COURT REPORTS [2016] I0 S.C.R.

A parameters. The conditions arc based on the fulfilment of substantive and procedural norms: substantive such as the principle of non- discrimination, the element of publk intaest and reasonableness; and proeedural (if it ean be regarded as a matter of procedure) by requiring the sanction of the President prior to the introduction of a Bill in the state legislature. B

97. At a doctrinal level, the Court in Automobile Transport was cognizant of the fact that regulation of trade and commerce may, in fact facilitate trade rather than impede its freedom. As the Court postulated, the freedom to trade does not mean a freedom to trade in chaos. Conditions of chaos are destructive of an orderly society. Conditions c which ensure a disciplined and orderly conduct of trade and commerce facilitate trade. Trade also pre-su pposcs the existence of infrastructure and the provision of facilities for pursuing the avenues of commerce and trade. The state which pr1wides those facilities has a legitimate interest in recovering the costs which it incurs. In the absence of resources D generated by charges levied for the use of facilities, the state may not have the wherewithal to provide the facilities in the first place. Hence, when the concept of compensatory taxes was devised. Justice SK Das, in Automobile Transport adverted to collections made for the use of trading facilities, such as roads, bridges and airports. ''Such E compensato1y taxes" as the judgment held, were not a hindrance to anyone 'sfreedom so long as they remain reasonable. So long as the tax was compensatory or regulatory, it did not operate as a hindrance. In another part of the judgment, Justice Das held that a regulatory measure or measures imposing compensatory tax.es for the use of trading facilities did not fall within the purview of restrictions contemplated by Article F 30 l and did not have to comply with the requirements of the proviso to Article 304(b).

98. The judgment in Automobile Transport indicates that a second doctrinal concern which weighed with the Court was a dilution of the sovereign power to tax conferred upon the states if all fiscal G legislation was required to pass muster of a Presidential sanction under the proviso to Atiicle 304(b). This concern was present to the mind of the Court in Automobile Transport, when Justice Das observed that if all legislation of the state legislatures which has a repercussion on tariffs, licensing. marketing regulation and price control was required to H

JINDAL STAINLESS LTD. v. STATE OF HARYANA ~65 [DR. D. Y. CHANDRACHUD, J.]

proceed through a prior Presidential sanction, the plenary power of the states in the fields oflegislation allocated to them would be meaningless. The theory of compensatory taxes was an answer to this conundrum. So long as the tax retained a compensatory character, it did not fall within the fold of Article 30 I. If a compensatory tax does not offend Article 301, the provisions of Article 304(b) are not attracted. In the same vein, Justice Subba Rao cautioned against a construction of Part Xlll that would render the states as ·'the handmade of the central executive". Besides the ·direct and immediate' test which the karned judge considered to be a "reasonable solvent", Justice Subba Rao also adverted to a tax which is compensatory or regulatory not operating as a restriction on the free movement of trade. C

99. Compensatory taxes were envisaged as a doctrinal concept to preserve an area where the sovereignty of the state legislatures in fiscal matters could operate without the constraining influence of a prior Presidential sanction. Such taxes would not fall within the ambit of Article 30 l. Their position was reconciled with freedom on the ground that a compensatory tax for the use of facilities is not a hindrance to trade but facilitates it. I 00. The difficulties that the concept of compensatory taxes would encounter had their seeds in the formulation in Automobile Transport itself. The judgment of Justice Das used the concept in varying contexts as a tax for the use of facilities and, in other places, as a tax to provide facilities. Use relates to the availment of a facility. Providing for facilities emphasises the role of the state in terms of the investment which it incurs and the expenditure required for upkeep and maintenance. Use and provision may be two shades of the same coin but they have their own distinctions. The concept of compensatory taxes was by its very nature formulated in terms which were vague and not capable of precise definition. The judgment of the majority in Automobile Transport speaks of compensatory taxes not being a hindrance, so long as they are reasonable. Moreover, the working test that was adopted in the judgment made it clear that it was not the precise or specific amount that is collected that is required to be expended for providing facilities. The working test is that the trade which has the use of facilities for the better conduct of business does not pay ·patently much more' than what is rcqui1·ed for providing the facilities. ·Paying not patently much more' is a concept H

566 SUPREME COURT REPORTS [1016] J 0 S.C.R.

A which suffers from vagueness. How much more is within the ambit of the phrase 'not patently much more' introduces an element of subjectivity. A standard which is subjective becomes uncertain and indefinite in its practical application. The lack of precision about what constitutes a compensatoty tax undoubtedly did furnish to the Court and to the process ofjudicial review a measure of flexibility to preserve the sovereignty of B the state legislatures. The difficulties which would be encountered however became evident, when the three judge Bench in Bhagatram and the two judge Bench in Bihar Chamber of Commerce rested the decision on a "some connection'' or ''some link" requirement. If some connection or some link were to suffice, the whole notion of compensatory c taxes being a means of recouping the states for the cost of providing facilities to the trade would tend to disappear. ln fact, as the decision in Bhagatram indicated, the compensatory aspect of the tax which was upheld in that case was a loss which was sustained by the state as a result of sugar not being amenable to sales tax (being a commodity on which an additional duty of excise was leviable). Similarly, in Bihar Chamber of Commerce, the state had sought to sustain the tax as compensatoty on the ground that the loss of revenue sustained from the cess upon minerals, as a result of a judgment of the Supreme Court, had to be made up by tapping an alternative source of revenue. These two decisions showed that the concept ofcompensatoty ta,'\.es was understood by the states not as a method of compensating a state for the provision of infrastructure and facilities to the trade but as a measure to recover a loss of revenue under another head. If compensatory taxes were to mean compensation for the loss of state revenue under some other head, the theory which found acceptance in the two decisions of this Court F had travelled far beyond the domain that was contemplated in Automobile Transport. Correctly, therefore. both the decisions in Bhagatram and in Bihar Chamber of Commerce were ovt:rruled in .Jindal Stainless. However, both the decisions led to subjectivity, uncertainty and vagueness. G I 0 I. A close reading of the decision in .Jindal Stainless indicates that while the earlier decisions in Bhagatram and in Bihar Chamber of Commerce were overruled, the pendulum had swung to the other extreme. The Constitution Bench in Jindal Stainless proceeded to explain the basis of the ·~udicially evolvt:d concept" of compensatory taxes by distinguishing a tax which is based on the principle of ability to 1-1

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pay from a fee which is based on the principle of equivalence. A Compensatory taxes, the Constitution Bench held, constitute a sub-class of a fee and are based on the principle of "pay for value". In holding that the collection on account of a compensatory tax must be "broadly in proportion" to the special benefits derived to defray the costs of regulation or to meet the outlay incurred, the Constitution Bench was restating the B working test of Automobile Transport. But the subsequent observations in .Jindal Stainless make it evident that the Constitution Bench introduced a near mathematical formulation which would not be consistent with the test which was propounded in Automobile Transport. The judgment of the Constitution Bench requires that the enactment which imposes a compensatory tax must facially or patently, c indicate quantifiable data and a benefit which is quantifiable or measurable. The Court held that however, where a statute did not to do so, the burden would lie on the state as a service provider to produce material indicating that the payment of the tax is a reimbursement or recompense for a quantifiable/measurable benefit. These observations bring the concept of a compensatory tax in line with a fairly strict application of a quid pro quo principle which had not been accepted in Automobile Transport. In fact, the Bench of seven Judges in Automobile Transport had specifically clarified that the precise amount that is realized need not be spent on the provision of facilities and the only requirement is that the trade should not be made to pay patently much more than what is incurred for the provision of the facilities. The observations in Jindal Stainless requiring the establishment ofa nexus or relationship between a quantifiable or measurable benefit and a reimbursement/recompense to the state are contrary to and inconsistent with the law which was laid down in Automobile Transport. F l 02. Evidently, both Justice Gajendragadkar in Khycrbari and Justice Mathew in GK. Krishnan had reservations about the concept of compensatory taxes. Justice G<\iendragadkar recorded his reservations because the predecessor of the enactment of the state legislature of Assam in issue in Khyerbari had been struck down in the decision in G Atiabari. The majority in Atiabari had held the tax to be invalid for want of compliance with the proviso to Article 304(b) despite its compensatory character. Justice Gajendragadkar held that if the new enactment, which had been brought into force after complying with the proviso to Article 304(b) was to be supported by the state as being H

568 SUPREME COURT REPORTS [2016] 10 S.C.R.

A compensatory in character, a reference to a larger Bench would have been necessitated. That, however, did not become necessary because the State of Assam did not support the enactment as being compensatory before the Supreme Court. These observations of Justice Gajendragadkar were in the decision rendered in 1964 in Khyerbari. Eleven years later, B Justice Mathew in an eloquent judgment in G.K. Krishnan spoke about the expression 'reasonable' being convenient but vague. The judge stressed th~t that were very difficulties in defining this conception. The Constitution Bench in Jindal Stainless was bound by the doctrine of compensatory taxes which had been fomrnlated by a larger Bench of seven Judges in Automobile Transport. The validity of the c compensatory tax theory was not under challenge.

103. The judicially evolved concept of compensatory taxes has created in its wake new problems in its search for solutions. If a strict reading of the doctrine of compensatory taxes in tenns of the 'quantifiable/ measurable benefits' approach is adopted (as did the Constitution Bench D in Jindal Stainless) the formulation assumes the character of a strict application of a quid pro quo test. A compensatory tax is then a fee properly so called. The Constitution, in the legislative entries contained in the Lists in the Seventh Schedule classifies taxes and fees under distinct heads. If a compensatory tax were to assume the character of E a fee, that raises the question as to whether the concept has any utility in the first place. lf, on the other hand, the concept of compensatory taxes were to have a loose and undefined ambit, by the application of the 'some link' or 'some connection' test (as was adopted in Bhagatram and Bihar Chamber of Commerce), then any connection would suffice for a tax to be called compensatory. Both these approachc<> which are extreme in their own way are contrary to the law laid down by seven Judges in Automobile Transport. Bhagatram and Bihar Chamber of Commerce render the conceptso loose and undefined as to denude it of its rationale. Jindal Stainless while overruling these decisions adopted a strict standard which was not contemplated by Automobile G Transport. Bhagatram and Bihar Chamber of Commerce were overruled in Jindal Stainless as being contrary to the test laid down in Automobile Transport. But as we have seen, the quantifiable/ measurable benefit test laid down in Jindal Stainless by the Constitution Bench is itself replete with doctrinal problems, besides its patent H inconsistency with Automobile Transport. lfboth these extremes are

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to be avoided, we are left with the middle ground which the decision in A Automobile Transport sought to adopt. However, the basic conception of compensat01y taxes as propounded in Automobile Transport is vague and indefinite and has produced a maze of doctrinal uncertainty, if not chaos in constitutional litigation. As this batch of appeals indicates, the state legislatures have amended their entry tax legislation to incorporate . 8 specific statutory provisions indicating the manner in which the proceeds of the tax would be utilized so as to enable the tax to approximate a compensatory tax. Once the state legislature has done so, by adopting statutory provisions, would the Court have either the expertise or the competence to second guess the basis which has been made by the state legislature? The answer to that would necessarily have to be in c the negative. The Court cannot assume the character of an accountant overseeing the balance sheets of income and expenditure and enquiring into capital account investments made by the states. Such matters do not lie within the competence or ken of judicial review. More fundamentally, all tax revenues are utilised by the state for public purposes. D All taxation being in aid of the creation of conditions of social order, a compensatory element can never be disassociated from taxation. Equally insofar as fees are concerned, the payment which is required to be made is not always voluntary. The contribution exacted from trade and commerce may not always be for the actual use of a facility but may be E for the provision of the facility which trade and commerce is entitled to use. The state expends large budgets on providing expenditure to maintain law and order and security. The distinction between a tax and a fee has become blmTed in our jurisprndence and Courts have found it difficult to find a clear dividing line. F

104. A doctrinal irrationality which the theory of compensatory taxes fails to meet is a discriminatory compensatory tax. Discriminatory taxes which single out goods originating in other states to hostile discrimination violate Article 304(a). lf compensatory taxes as a class fall outside Part Xlll, this would include even those compensatory taxes which are discriminatory. While holding that compensatory taxes fall G outside Part Xlll, the theory propounded by this Court did not account for the position that discriminatory compensatory taxes constitute an impediment to trade and commerce, thereby violating Article 301.

105. Hence, the notion of compensatory taxes is beset with H

570 SUPREME COURT REPORTS [2016] 10 S.C.R.

A doctrinal problems. The concept has led to uncertainty and vagueness and has produced inconsistencies in constitutional adjudication. Constitutional adjudication must avoid these uncertainties which result in a multiplication of litigation and uncertainty both to the revenue and to the tax payer. Unce11ainty in the application of fiscal legislation leads to B a situation where tax compliance is beset with interpretational and practical difficulties.A concept which is replete with such evident problems is best eschewed.

F The content of freedom :goods, services, persons and c capital

106. A11icle 301 has guaranteed the freedom of trade, commerce and intercourse (subject to the provisions of Pai1 XIII). Article 19(1 )(g) guarantees to every citizen the right to carry on any occupation trade or business. At a certain level, a distinction can be drawn between the two sets of freedoms. A11icle 19( 1)(g) guarantees individual freedom. Article 301, on the other hand, looks at trade, commerce and intercourse as a whole. Such a distinction however may have its own limitations. Individual rights of all citizens protected by Article 19 lead to the establishment of a constitutional democratic order governed by the rule oflaw and based on human freedom. The dichotomy that A11icle 301 in its perspective looks at trade and commerce as a whole (as distinguished from an individual right) may also have its own limitations. The freedom recognised by Article 301 is enforceable. Enforceability is at the behest of an individual. In the constitutional recognition of freedom dwells the constitutional right of the individual to enforce it and to secure remedies for enforcing wrongs. The real content of freedom lies in the right which inheres in it and in the protection of the individual to enforce the right. The freedoms guaranteed by Article 301 are enforceable at the instance of individuals who are aggrieved by state action. Thus, a distinction between Article 19( I )(g) and Article 301 on the basis of the fom1er G reflecting an individual right as opposed to a collective entitlement under the latter may not be completely accurate. Though, one is an enforceable fundamental right of a citizen while the other is a recognition of the free flow of trade, commerce and intercourse, both in essence are enforceable, and enforceable at the behest of aggrieved individuals. A more nuanced perspective with regard to both sets ofrights recognises that both reflect H

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shades of the same universe of freedom. A

107Copy pinpoint107. Indian society and the economy have evolved between the advent of the Constitution and the present in a manner that would appear unrecognisable between 1950 and now. The entrepreneurial spirit of the nation has resulted in a diversification of the economy. A predominantly agricultural economy at the birth of the Constitution has increasingly B found change in the last seven decades with the enhancement of the manufacturing base, and in more recent times to the diversification into services, especially financial services. The age of the internet was yet to dawn when the Constitution was adopted. The internet with its powerful tools for the dissemination of knowledge and infornrntion has c provided new avenues for business, trade and commerce. The ambit of A11icle 301 must in a contemporary context incorporate all avenues of trade, commerce and intercourse and the instrumentalities by which they flourish.

108Copy pinpoint108. Trade and commerce do not exist in a vacuum. The channels of trade and commerce require a stable social order for business transactions to be concluded, for contracts to be fulfilled and for commercial dealings to be enforced in law. The sanctity of contracts, secure conditions for trade and commerce and conditions which ensure an ease of doing business are supported by the state which has a vital role in the preservation of the rule oflaw. The meaning of the guarantee under Article 301 must in a modem context accommodate the needs and aspirations of business that would allow for economic development and growth to take place in the nation. Fundamentally the creation of a common market for goods and services requires the removal of obstacles to the free movement of goods, persons, services and capital between the states which constitute the Union of India. These four fundamental freedoms are the foundation of Article 301. The free movement of goods constitutes the traditional domain of trade and commerce. Our Constitution in its recognition of the freedom of intercourse protects the movement of persons engaging in commercial intercourse. Trade and commerce has diversified into services which constitute a vital element in the economic life of the nation. The movement of capital is the foundation for trade and commerce. Capital provides the foundation for business. These four freedoms guaranteeing the free movement of goods, services, persons and capital between the states, form the basis of the H

572 SUPREME COURT REPORTS [2016) 10 S.C.R.

A guarantee under Article 301. Commercial transactions by which the free movement of each constituent element takes place fall within the ambit of the freedom.

G Taxation and Federalism B

109Copy pinpoint109. In detennining an interpretation that would bring a balance between the diverse strands of Part Xlll, it is necessary for the Court equally to bear in mind the needs of the federal structure. The doctrine of the basic structure of the Indian Constitution has evolved to incorporate federalism as one of its integral features. c

110Copy pinpoint110. The guarantee that trade, commerce and intercourse shall be free throughout the territory of India is subject to the provisions of Part XIII. The meaning of the expression "throughout the territory of India" is elucidated by Article 1 of the Constitution which stipulates that "India, that is Bharat, shall be a Union of States". The Union which the D Constitution postulates is defined in terms of a political union and an economic union which brought together the erstwhile provinces of British India and the princely states. The freedom under Article 301 comprehends, as we have seen, the free movement of goods, services, persons and capital. These are essential ingredients in the creation of a E common market as an incident of an economic union. The freedom under Article 301 is not absolute for, the constitutional guarantee is subject to the provisions of Part XIII. The provisions of Article 302 to Article 304 bring about a balance between the guarantee of freedom on one hand and legislative control over trade and commerce on the other hand. While F doing so, those articles define the powers of Parliament and the state legislatures, while subjecting them to restraints that are intended to preserve the power of regulating trade and commerce.

111Copy pinpoint111. While the Constitution does in that sense subordinate the freedom under Article 301 to the provisions of Part Xlll, it would not be G c01Tect to read the provisions of Part Xlll in isolation. Part Xlll is an integral element of the Constitution, but so are the other Parts under which executive and legislative powers are constitutionally conferred upon the structures of governance in the Union and the States. While construing the provisions of the Constitution it is necessary to construe the text in the context of the organic nature of the constitutional document. H

JINDAL STAINLESS LTD. v. STATE OF HARYANA 573

[DR. D. Y. Cl-IANDRACHUD. J.]

The linkages between various Parts of the Constitution contribute to the creation of a composite whole. No segment of the Constitution can be read in isolation. The scheme of the Constitution must hence be understood having regard to its history, text and context.

112Copy pinpoint112. A Constitution Bench of this Court in Kihoto Hollohan v. Zachillhu1", emphasised the essential oneness of the Constitution when it held that:

"26. In expounding the processes of the fundamental law, the Constitution must be treated as a logical whole. Westel c Woodbury Willoughby in The Constitutional Law o/ the United Stales (2nd Edn. Vol. I, p.65) states: "The Constitution is a logical whole, each provision of which is an integral part thereof; and it is, therefore. logically prope1~ and indeed imperative, to construe one part in the light of the provisions of the oth..:r parts" .....

27. A constitutional document outlines only broad and general principles meant to endure and be capable of flexible application to changing circumstances- a distinction which differentiates a statute from a Charter under which all statutes are made ..... " (Id. at p.676)

Words of the Constitution '·cannot be read in isolation and have to be read harmoniously to provide meaning and purpose" (T.M.A Pai Foundation v. State of Karnataka 35 ). F

113Copy pinpoint113. The judgment of Justice Gajendragadkar, speaking for the majority in Atiabari, however construed the language of Article 30 I to mean that the guarantee of freedom was subject onlv to the provisions of Part XIH. With respect, this does not constitute an appropriate approach to constitutional interpretation since it leads to a construction G of Part X[[l in isolation from other provisions which have a significant bearing on the nature of the freedom and its relationship with the

"(1992) Supp 2 sec 651 u (2002) s sec 481 H

574 SUPREME COURT REPORTS [2016] 10 S.C.R.

A structures of governance. To consider the guarantee under Article 301 as being subject only to Article 302 to 304 overlooks the relationship of Part XIII with other provisions of the Constitution. Freedom is integral to that relationship.

114Copy pinpoint114. The issue as to whether the Constitution creates a federal B structure was debated upon in the Constituent Assembly. When the Draft Constitution was being discussed, TT Krishnamachari while supporting the view that the Constitution was to establish a federal structure observed thus:

c "the first criterion is that the State must exercise compulsive power in the enforcement of a given political order, the second is that these powers must be regularly exercised over all the inhabitants of a given territory, and the third is the most impo11ant and that is that the activity of the State D must not be completely circumscribed by orders handed down for execution by the superior unit. The important words are 'must not be completely circumscribed', which envisage some powers of the State are bound to be circumscribed by the exercise of federal authority. Having all these factors E in view, I will urge that our Constitution is a federal Constitution." (Id. at p.21)

Dr. Ambedkar gave expression to the same thought in the following observations: F

"The basic principle of federalism is that the legislative and executive authority is partitioned between the Centre and the States not by any law to be made by the Centre but by the Constitution itself. This is what the Constitution does. G The States under our Constitution are in no way dependent upon the Centre for their legislative or executive authority. The Centre and the States are coequal in this matter. It is difficult to see how such a Constitution can be called centralism. It may be that the Constitution assigns to the H

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[DR. D. Y. CHANDRACHUD, J.]

Centre too large a field for the operation of its legislative and executive authority than is to be found in any other federal Constitution. It may be that the residuary powers are given to the Centre and not to the States. But these features do not form the essence of federalism. The chief mark of federalism as I said lies in the partition of the legislative and executive authority between the Centre and the units by the Constitution. This is the principle embodied in our Constitution." (Id. at p.22)

115Copy pinpoint115. A Bench of six Judges of this Court in State of West Bengal c v. Union of lndia 36 dealt with whether the property of a state in coal bearing areas is immune from acquisition by the Union. This Court held that in the structures of constitutional governance that are created by the Constitution full sovereignty does not reside in the states. Moreover, the Constitution contains a marked tilt in favour of the powers of the D Union. Chief Justice BP Sinha adverted to the provisions of Part Xlll "which seek to make India a single economic unit for purposes of trade and commerce under the overall control of the Union Parliament and the Union Executive 37 " Our Constitution, the Court held "was not true to any traditional pattern offederalism 38 ." Legal sovereignty is vested in the people oflndia while political sovereignty is distributed between the E Union and the States, with greater weightage in favour of the Union. In that context, this Court held that:

"35. The non11al corporate existence of States entitles them F to enter into contracts and invests them with power to carry on trade or business and the States have the right to hold property. But having regard to certain basic features of the Constitution, the restrictions on the exercise of their powers executive and legislative and on the powers of taxation, and dependence for finances upon the Union Government, G it would not be correct to maintain that absolute sovereignty 36 (1964) 1 SCR 371 "(Id at p. 396) " (Id at p.396) H

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A remains vested in the States .....

36. The Parliamentary power of legislation to acquire property is, subject to the express provisions of the Constitution, unrestricted. To imply limitations on that power on the assumption of that degree of political sovereignty B which makes the States coordinate with and independent of the union, is to envisage a Constitutional scheme which does not exist in law or in practice. On a review of the diverse provisions of the Constitution, the inference is inevitable that the distribution of powers-both legislative c and executive does not support the theory of full sovereignty in the States so as to render it immune from the exercise of legislative power of the Union Parliament particularly in relation to acquisition of property of the States."

116Copy pinpoint116. The evolution of constitutional doctrine in the five decades that have elapsed since the judgmentin State of West Bengal (supra) indicates a recognition that the Constitution does indeed create a federal structure. Though the federal structure is asymmetric in the powers assigned to the states as compared to those assigned to the Centre ·this E does not render the Constitution unitary. The Constitution is federal and in the working of a democratic Constitution, judicial review has stepped in to restore the balance despite the asymmetries of distribution and powers. The provisions of the Constitution which indicate a tilt in favour of the Union do not detract from the principle that in the fields which are assigned to them, the states are intended to be integral elements of a F federal structure. They are sovereign within their competence, subject to constitutional limitations.

117Copy pinpoint117. This principle was set forth in the following terms in Special Reference 1 of 1964 30 under A1iicle 143 of the Constitution:

G "The supremacy of the Constitution is fundamental to the existence of a federal State in order to prevent either the legislature of the federal unit or those of the member States

"(1%1) I SCR 413 H

JINDAL STAINLESS LTD. v. STATE OF 1-IARYANA 577 [DR. D. Y. CHANDRACHUD, J.]

from destroying or impairing that delicate balance of power which satisfies the particular requirements of States which are desirous of union, but not prepared to merge their individuality in a unity. This supremacy of the Constitution is protected by the authority of an independent judicial body to act as the interpreter of a scheme of distribution of powers. Nor is any change possible in the Constitution by the ordinary process of federal or State legislation. "(para 38)

118Copy pinpoint118. The constitutional position is authoritatively set forth in the judgment in S. R. Bommai v. Union of India'". Justice K. Ramaswami c construed federalism to be a basic feature, in the following observations: "247. Federalism envisaged in the Constitution of India is a basic feature in which the Union oflndia is pennanent within the territorial limits set in Article 1 of the Constitution and is indestructible ...... Neither the relative importance of the legislative entries in Schedule Vil, Lists I and II of the Constitution, nor the fiscal control by the Union per se are decisive to conclude that the Constitution is unitary. The respective legislative powers are traceable to Articles 245 to 254 of the Constitution. The Srate qua the Constitution is federal in structure and independent in its exercise of legislative and executive power. However, being the creature of the Constitution the State has no right to secede or claim sovereignty. Qua the Union, State is quasi-federal. Both are coordinating institutions and ought to exercise their respective powers with adjustment, understanding and accommodation to render socio-economic and political justice to the people, to preserve and elongate the constitutional goals including secularism. "(Id. at p. 205) Justice B. P. Jeevan Reddy accepted the same doctrinal position in the following tenns: G "276. The fact that under the scheme of our Constitution, greater power is confened upon the Centre vis-a-vis the States does not mean that States are mere appendages of ---- '" (1994) J sec 1 I-I

578 SUPREME COURT REPORTS (2016] 10 S.C.R.

A the Centre. Within the sphere allotted to them, States are supreme. The Centre cannot tamper with their powers. More particularly, the courts should not adopt an approach, an interpretation, which has the effect of or tends to have the effect of whittling down the powers reserved to the B States ...... must put the Court on guard against any conscious whittling down of the powers of the States." (Id. at p. 216-217) Justice P. B. Sawant, similarly held that though there are provisions under which the Centre has overriding powers over the states, our c Constitution does create a federal structure. The states are sovereign in the fields which are left to them.

119Copy pinpoint119. In ITC v. Agricultural Produce Market Committee 41 , this Court emphasised that in interpreting the text of the Constitution the Court should ensure, where the language pem1its that the powers of the state legislatures are not diluted and that the principles offederalism are preserved (See also in this context Kuldip Nayar v. Union of India 41 )

120Copy pinpoint120. The federal constitutional doctrine has consequences for interpretation. In interpreting the text of the Constitution, the Court must construe the text in a manner that would preserve the carefully crafted balance between the Union and the states. Where the language of the text pem1its, the effort of constitutional interpretation should be to ensure that the states are not subordinated to the Union in areas reserved to them. Yet it is equally a matter of constitutional doctrine that where a particular provision (such as the proviso to Article 304(b) imposes a specific requirement (assent of the President before a Bill is introduced in the state legislature) which subjects the legislative power of the states to constitutional limitations, it would not be open to the Court to ignore the plain meaning and effect of such a provision. The text of the Constitution cannot be subverted on the basis of an abstract notion or hypothesis. While creating a federal structure, the draftsmen of the G Constitution were conscious of the need for preserving a political and economic Union. If, as a part of that constitutional scheme, the text of the document has incorporated specific provisions, they must be given

" c2002) 9 sec n2 H " c2006 l 1 sec 1

JINDAL STAINLESS LTD. v. STATE OF HARYANA 579

[DR. D. Y. CHANDRACHUD, J.]

their plain meaning and effect. It would not be open to the Court to dilute the meaning of the text on the basis of a priuri considerations. H Taxing powers H. l Article 245 and constitutional limitations 12 l. Article 245 of the Constitution provides for the extent of laws made by Parliament and the legislatures of the states. Clause l of Article 245 enables Parliament "subject to the provisions of this Constitution" to make laws for the whole or any part of the territory of India and for the legislature of a state to make laws for the whole or any part of the state. Implicit in Article 245, which defines the territorial extent of laws enacted by Par Iiament and the state legislatures, is the c power to enact laws. Defining the extent of the law making power with reference to territorial coverage presupposes the existence of a power to frame legislation in the first place. Hence Article 245 is the fountainhead of legislative power.lt makes legislative powers subject to constitutional limitations. The distribution oflegislative powers is embodied in Article D 246 which deals with the subject matter of laws made by the Parliament and by the state legislatures. Parliament has exclusive powers to make laws with respect to matters enumerated in List I of the Seventh Schedule. Subject to the law making powers of Parliament in List I, the legislature of a state has exclusive power to enact law for the state with E respect to any of the matters enumerated in List II. Parliament and the state legislatures have concurrent powers to enact legislation in respect of matters enumerated in List Ill. Article 245 is the source of legislative power. Article 246 distributes legislative powers between Parliament and the state legislatures on the basis of the Lists in the Seventh Schedule. Article 245, in the conferment of legislative powers upon Parliament F and the state legislatures makes them subject to the provisions of the Constitution.

122Copy pinpoint122. The power to enact laws is a manifestation ofsovcreignty.The Constitution while conferring legislative powers upon the Union and the states makes them subject to constitutional limitations. The sovereignty G of the legislalun: is subject to the norms of the written constitution. The power to tax is subsumed in legislative power. Like all legislative power, fiscal legislation is subject to the mandate of the written constitution. This is the plain consequence of the opening words of Article 245( 1) H

580 SUPREME COURT REPORTS [2016] 10 S.C.R.

A under which the conferment of legislative powers is made subject to the provisions of the Constitution.

123Copy pinpoint123. The entries in the legislative lists of the Seventh Schedule are not sources of legislative power but only define the subjects or heads of legislation entrusted to th.: law making competence of Parliament and B the state legislatures. Read together, Articles 245 and 246 confer legislative power upon the Union and the states in the first place and distribute that power between them to enact legislation on the fields of legislation entrusted to their competence. Though Article 245 is made expressly subject to the provisions of the Constitution while there are no such c similar words in Article 246, both Articles arc subject to the other provisions of the Constitution. The language of Article 245 which subjects the conferment of legislative power to constitutional provisions is arecognition of the doctrinal principle that all constitutional power vesting in the organs of the state is subject to constitutional limitations. The Constitution which entrusts power conditions the entrustrnent to the D observance of constitutional safeguards and limitations. All legislative power is subject to constitutional limitations.

124Copy pinpoint124. ln State of Kera la v. Mar Appraem Kuri Co. Ltd'3, th is Court construed the relationship between Articles 245 and 246 in the following observations: E

"35 ... While the legislative power is derived from Article 245, the entries in the Seventh Schedule of the Constitution only demarcate the legislative fields of the respective legislatures and do not confer legislative power as such ..... .

36. A1iicle 246 deals with the subject-matter of laws made by Parliament and by the legislatures of States. The verb "made" once again finds place in the Head Note to Article

246. This article deals with distribution of legislative powers as between the Union and the State Legislatures, with reference to the different Lists in the Seventh Schedule.

" (201 2 J 7 sec 106 H

JINDAL STAINLESS LTD. v. STATE OF HARYANA 581

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37.Article 246. thus. provides for distribution. as between A Union and the States. of the legislative powers which are conferred by Article 245. Article 245 be!!ins with the expression "subject to the provisions of this Constitution". ·1"11ercfore, Article 246_ must be read as "subject to other provisions of the Constitution". (Id. at p. 128) B

125Copy pinpoint125. The limitations on the exercise of legislative power emanate from(i) guarantees of freedom under Part Ill of the Constitution co11tai11i11g fundamental rights; (ii) the requirement that the law making authority must possess legislative competence to enact a law on the subjl'ct on which it legislates; and (iii) other constitutional Iimitations.Part c XIII of the Constitution is one of those constitutional limitations. The constitutional limitation emanating from Part XIII arises from the recognition which it contains of the guarantee of free trade, commerce and intercourse. Hence the first premise upon which legislative powers are conferred upon and distributed between the Centre and the states is that though the enactment of law is a manifestation of sovereignty, law making authority under the Indian Constitution is subject to constitutional restraints. Absolute power does not dwell in any constitutional authority which is subject to a written constitution.

126Copy pinpoint126. The legislative entries in the Lists of the Seventh Schedule to the Constitution delineate general fields of legislation separately from taxing heads. In the Union List taxing entries are contained from Entries 82 to 92C. The residual entry, Entry 97 deals with matters not enumerated in the state or concurrent lists, including any tax not mentioned in either of those lists. In the state list taxes are comprised in Entries 46 to 62. Fees are dealt with under separate heads: in Entry 96 of List I, Ent1y 66 F of List II and Entry 4 7 of List III. H.2 Sovereignty and constitutional limitations

127Copy pinpoint127. The power to tax has been considered to be an essential attribute of government and a sovereign pO\ver vesting in the state. Thomas Cooley in his "Treatise on the Constitutional Limitations which G rest upon the Legislative power of the States of the American Union"'" provides a jurisprudential foundation to the taxing power in the following observations:

''(Indian Rerrinl 2005) 1-1

582 SUPREME COURT REPORTS [2016] 10 S.C.R.

A "Taxes are defined to be burdens or charges imposed by the legislative power upon persons or property, to raise money for public purposes. The power to tax rests upon necessity, and is inherent in every sovereignty. The legislature of every free State will possess it under the general grant of legislative power, whether particularly B specified in the constitution among the powers to be exercised by it or not. No constitutional government can exist without it, and no arbitrary government without regular and steady taxation could be anything but an oppressive and vexatious despotism, since the only alternative to taxation c would be a forced extortion for the needs of government from such persons or objects as the men in power might select as victims. In the language of Chief Justice Marshall: "The power of taxing the people and their property is essential to the very existence of government, and may be legitimately exercised on the objects to which it is applicable to the utmost extent to which the government may choose to caITy it. The only security against the abuse of this power is found in the strncture of the govenunent itself. In imposing a tax, the legislature acts upon its constituents. This is, in general, a sufficient security against erroneous and oppressive taxation. The people of a State, therefore, give to thdr government a right of taxing themselves and their property; and as the exigencies of the government cannot be limited, they prescribe no limits to the exercise of this right, resting confidently on the interest of the legislator, and on the influence of the constituents over their representative, to guard them against its abuse." (Id. at p.2-3)

Under the Indian Constitution the confem1ent oflegislative power to impose, collect and enforce the realization of taxes is specifically spelt out from and enumerated under constitutional provisions. Taxing entries in Lists I and 11 are specifically enumerated and their ambit defined. Article 366(28) of the Constitution defines the expression taxation to include "the imposition of any tax or impost, whether general or local H

JINDAL STAINLESS LTD. v. STATE OF HARYANA 583

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or special" and provides that the expression tax ''shall be construed A accordingly".

128Copy pinpoint128. Several decisions of this Court have regarded the taxing power as an essential attribute of government and sovereignty. In Rai Ramkrislma v. State of Bihar45, it was held that : B "It is, of course, true that the power of taxing the people and their property is an essential attribute of the Government and Government mav legitimately exercise the said power by reference to the objects to which it is applicable to the utmost extent to which Government thinks it expedient to do so. The objects to be taxed so long as they happen to be c within the legislative competence of the legislature can be taxt.::d by the legislature according to the exigencies of its needs, because there can be no doubt that the State is entitled to raise revenue by taxation." In Raja Jagannath Baksh Singh v. State of U.P.4 6 , this principle D was stated as follows:

"15 ... The power of taxation is, no doubt, the sovereign right of the State; as was observed by Chief Justice Marshall E in M"Culloch v. Maryland [ 4 Law Edn. 579 p. 607]: "The power of taxing the people and their property is essential to the very existence of Government, and may be legitimately exercised on the objects to which it is applicable to the utmost extent to which the Government may choose to carry it." F

In Amrit Banaspati Co. Ltd. v. State of Punjab", this Court held that: "10 .... taxation is a sovereign power exercised by the State G to realise revenue to enable it to discharge its obligations.'' (Id. at page 424 ). ,; AIR (!963) SC 1667 "' ( 1963) l SCR 220 n (1992) 2 sec 411 H

584 SUPREME COURT REPORTS [2016] 10 S.C.R.

A ln Dena Bank v. Bhikhabhai Prabhudas Parekh & Co. 4\ this Court held thus:

"8 .... .the State is entitled to raise money by taxation because unless adequate revenue is received by the State, it would B not be able to function as a sovereign Government at all. It is essential that as a sovereign, the State should be able to discharge its primary governmental functions and in order to be able to discharge such functions efficiently, it must be in possession of necessary funds and this consideration c emphasises the necessity and the wisdom of conceding to the State, the right to claim priority in respect of its tax dues." (Id. at p. 702)

129Copy pinpoint129. The limitation on the states' power to tax must as a D consequence be found in constitutional limitations.This follows the constitutional principle that all legislative powers conferred upon the Union Parliament and the state legislatures are an attribute of sovereignty. Hence the limitations on the exercise of those powers are such as have been crafted by the Constitution. These limitations which impose a fetter on the exercise of legislative powers may arise as a result of the guarantees of freedom in Part IIl; restraints arising from legislative competence and constitutional limitations imposed by other provisions of the Constitution. Hence in Maharaj Umeg Singh v. State ofBombay49 , this Court held that the power of legislation that is vested in the state is plenary and the fetters or limitations on the exercise oflegislative powers could only be imposed by the Constitution itself. The Court recognized that the Constitution may itself lay down fetters or limitations on the exercise of the power such as in Article 303 or Article 286(2). The fetter or limitation must however be traceable to the Constitution. In Firm Bansidhar Premsukhdas v. State of Rajasthan 50 , this Com1 G adverted to the decision in Thakur Jagannath Baksh Singh v. United Provinces 51 , and held that the limitation on the plenary powers of the " c20ooi 5 sec 694 "AIR (1955) SC 540 '° (1966) Supp SCR 81 H "(1946) FCR 111

JINDAL STAINLESS LTD. v .. STATE OF HARYANA 585 [DR. D. Y. CHANDRACHUD, J.]

legislature to enact law must be traced to an express provision in the A Constitution:

·' ... It is well-established that Parliament or the State Legislatures are competent to enact a law altering the terms B and conditions of a previous contract or of a grant under which the liability of the Government oflndia or of the State Governments arises.The legislative competence of Parliament or of the State Legislatures can only be circumscribed by express prohibition contained in the Constitution itself and unless and until there is any provision c in the Constitution expressly prohibiting legislation on the subject either absolutely or conditionally, there is no fetter or limitation on the plenary powers which the legislature is endowed with for legislating on the topics enumerated in the relevant lists. This view is borne out by the decision of the Judicial Committee in Thakur Jagannath Baksh Singh v. United Provinces."' (Id. at p. 19)

130Copy pinpoint130. The legislative power of the states to impose taxes is subject in general, to the same constitutional parameters which govern the exercise of all legislative power. The containment of legislative power follows from three constitutional precepts. First, legislation is valid if it is enacted by a legislature which has competence to enact law on the subject. This is the consequence of the distribution of legislative power between the Union and the States under Articles 245 and 246 read with the lists contained in the Seventh Schedule. The legislatures, whether at the national or the state level, are entrusted with the power of legislation in exercise of which they must confine themselves to the boundaries allocated by the Constitution. These boundaries are defined wfrh reference to the competence to enact law governing a particular subject matter. Parliamentary legislative power has a residuary or catch all area: subjects not enunciated elsewhere fall in its ambit. Second, the enumeration offundamental rightsby Part !II of the Constitution operates as a restraint on the sovereign power vesting in the legislatures to enact law. Article 13 of the Constitution stipulates that the state shall not H

586 SUPREME COURT REPORTS [2016] 10 S.C.R.

A enact law which violates the freedoms guaranteed by the Chapter on fundamental rights. A law whether made before or after the advent of the Constitution is void to the extent of its inconsistency with Part XIII. Third, other constitutional limitations or restrictions may condition or contain the law making power including in the field of taxation. These B constitutional provisions are a manifestation of the doctrine of constitutional limitations under which every organ of the state which is a creation of the Constitution operates in the field assigned to it.

131Copy pinpoint131. In the field of taxation, the containment of legislative powers vesting in the states may take place through provisions which are in the c nature of: (i) abstraction; (ii) eclipse; and (iii) limitationsor restrictions. These categories, it must be noted are convenient reference points for understanding the source of constitutional restrictions. An illustration of an abstraction of legislative power is contained in Entry 54 of the State List which provides for taxes on the sale or purchase of goods other than newspapers, subject to the provisions of Entry 92(A) of the Union D List. Entry 92(A) of the Union List was introduced by the Sixth amendment to the Constitution in 1956 to provide for taxes on the sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter-state trade or commerce. Under Entry 54 of the State List as it originally stood, the states possessed an unfettered E area for imposing taxes on the sale or purchase of goods other than newspapers. Arguably, this could extend to the exercise of taxing powers on inter-state trade on the strength of the explanation to Article 286. For the purposes of this judgment, it is not necessary to burden the record by refe1Ting to the judgment in The Bengal Immunity Company v The State of Bihar 5 ~. As a result of the sixth amendment, the ambit of Entry F 54 is now expressly subject to the power of the Union under Entry 92(A) of List I.

132Copy pinpoint132. Article 286 stipulates that a state law shall not impose or authorize the imposition of a tax on the sale or purchase of goods, where G the sale or purchase takes place outside the state or in the course of import or export from or outside the territory of India. Article 286(1) provides an express bar. Article 269(3) empowers Parliament by law to formulate principles for determining when a sale or purchase or consignment of goods takes place in the course of inter-state trade or ;2 (1953) I BLJR 48 H

JINDAL STAINLESS LTD. v. S"IATE OF HARYANA 587 [DR. D. Y. Cl-IANDRACHUD. J.]

commerce. Parliament, in exercise of its powers under Article 269(3) A enacted the Central Sales Tax Act 1956. Sections 14 and 15 of that Act provide a list of goods of special importance, the manner of imposing taxes and the restrictions on the power of imposing taxes.

133Copy pinpoint133. The second source of containment on the legislative powers of the states in the area of taxation is A1ticle 253 of the Constitution B under which Parliament, notwithstanding anything contained in the earlier provisions of Chapter I of Part XI is entrusted with the power to enact legislation for the entire territory of India for implementing a treaty, agreement or convention with one or more countries or to implement a decision at an international conference association or other body. The c non-obstante provision of Article 253 operates in relation to A1ticles 245 to 252. Hence, the legislative powers of the states including in the area of taxation may be ioclipsed where Parliament has enacted a law to effe<.:tuate India ·s international obligations in pursuance of Article 253.

134Copy pinpoint134. The third source of constitutional containment on the kgislative power of a state is in the form oflimitations of which Clause 3 of Article 286 provides an illustration. Under Clause 3, Parliament provides the restrictions and conditions in regard to ''the system of levy, rates and other incidents of tax'' upon which a law enacted by a state providing for a tax of the nature specified in sub-clause (a) and (b) is subject. Sub- clause (a) deals with a tax on the sale or purchase of goods declared to be of special importance in inter-state trade or commerce by a law enacted by Parliament. Sub-clause (b) deals with a tax on the sale or purchase of goods falling under sub-clauses ( b), ( c). and ( d) of Article 366(29A). Among other things, a tax on contracts for hire purchase and involving transfer of the right to use goods is subject to the restrictions and conditions which are provided by a law enacted by Parliament in regard to the system of levy rates and other incidents of tax.

135Copy pinpoint135. The constitutional-,;ontainment of the legislative powers of the states also originates in the provisions of Part XIII which enable Parliament and the state legislatures to impose restrictions on inter-state trade or commerce subject to defining parameters. Whether, and if so, the extent to which taxes arc within the purview of Part XIII is bei112 dealt with separately below.

588 SUPREME COURT REPORTS [2016] 10 S.C.R.

A H.3 Part XIII and taxation

136Copy pinpoint136. The basic submission on the part of the states is that freedom under Article 301 is not freedom from taxation. This submission has been adduced primarily on the foundation that the Indian Constitution contemplates the position of the states as constitutional units of a federal B structure, each of whom is sovereign within the fields allotted. Taxation, it has been urged is a manifestation of sovereign power which is foundational to the existence of government. Tax revenues are required for welfare and developmental activities. Hence, it has been submitted that these are st·ong reasons for not construing the freedom under Article c 301 as freedom from taxation.

137Copy pinpoint137. The next limb of the submission is that under Article 265, taxes can only be imposed under a law enacted by the competent legislature and the executive has no role to play in the levy and collection of tax, except under delegated legislative power. Under various A11icles D of Part Xll [for instance Articles 276(2), 286(1) and 288(2)] the Constitution provides for limitations on the taxing powers of the states or powers are conferred upon Parliament to provide for limitations by law (Clauses 2 and 3 of Article 286). There are atleast five entries in the State List of the C:cventh Schedule (Entries 50, 51, 54, 55 and 57) which are specifically subject to limitations or principles presc1ibed by Parliament E by a law made under List 1 and List Ill. In other words, it has been urged that wherever an exemption from taxes or a limitation on states' taxing powers is contemplated by the Constitution, this has been expressly provided under Articles 285, 287, 288 and 289. Consequently, it has been urged that exemption from the taxing power cannot be a matter of F inference or implication and must be provided expressly and unambiguously. Moreover, under A1ticle 289(2), a trade or business carried on by or on behalf of the government of a state can be subjected to tax "to such extent" as Parliament may by law provide. Based on this and the judgment of a nine Judge Bench of this G Court in NDMC v. State of Punjab 53 , it has been urged that in a situation where the Constitution subjects even the trade or business of a state to tax, an exemption in favour of trade, commerce and intercourse carried

s1 (1997) 7 sec 339 H

JINDAL STAlNLESS LTD. v. STATE or HARYANA 589 [DR. D. Y. CHANDRACHUD, J.]

on by private individuals cannot be contemplated particularly by implication.

138Copy pinpoint138. While evaluating this submission, it would at the outset be necessary to notice that there are two extreme positions which lie at opposing ends of the spectrum. The first is the position adopted by Justice JC Shah in Atiabari that all taxation falls within the ambit and purview of Part Xlll. This submission postulates that every tax constitutes a restraint on the freedom of trade, commerce and intercourse. The opposing end of the spectrum is that taxes per se can never be a restraint on free trade since it is through the raising of revenues that a state provides ordered conditions for the safe, secure and efficient means for c transacting trade and commerce. In this view, only a discriminatory tax would run afoul of Part Xlll [being violative of Article 304(a)] and, so long as a tax is non-discriminatory, it cannot be contrary to the provisions of Pa1tXlll. This position would broadly cotrespond to the view espoused by Chief Justice Sinha. The middle ground which was sought to be advanced in the decision in Automobile Transport was that D compensatory taxes would lie outside Part XIII since they facilitate rather than restrict trade. Taxes which are not compensatory and which in their direct and immediate effect restrict trade would be subject to the rigours of A1ticle 304(b) of the Constitution. H.3.1 All taxes are not impediments E

139Copy pinpoint139. While evaluating the merits of the rival viewpoints, it cannot be gainsaid that an orderly society is a condition precedent for an environment in which trade, commerce and intercourse can flourish. Trade and commerce survive and flourish on the foundation of the rule of law. The sanctity of contracts must be recognized, protected and f' enforced through a legal system which creates rights and provides remedies for redressal. Again, the free movement of goods, services, persons and capital requires the existence of public order and conditions which allow for trade and commerce to take place unhindered. Neither trade nor commerce can flourish amidst violence, unrest and social G disorder. Taxes provide revenue forthe state to sustain manifold activities which are geared to providing conditions of social order. The state provides infrastructure both tangible and intangible. Tax revenues form an essential part of the requirements necessary f01: states to govern. H

590 SUPREME COURT REPORTS [:?.016J JO S.C.R.

A Taxes are required by Article 265 to be imposed by a lg}cv enacted by Parliament or the state legislatures. Without the power to raise revenues, the ability of the state to create conditions requisite for trade and commerce to exist would be denuded. Hence. as a matter of first principle it cannot be postulated that taxation in whatever form is a burden on B trade, commerce and intercourse and that every tax necessarily hinders trade. Such a wide construction cannot be accepted simply because by raising revenues through the means of taxation, the state provides a political and legal order based on the rule of law where contractual transactions can be executed effectively. The extreme position that every law which imposes a tax is to be regarded as a hindrance to trade. c commerce and intercourse is unsustainable.

140Copy pinpoint140. In the context of the relationship between the freedom guaranteed by Part Ill of the Constitution and the taxing power, it has been the consistent position of this Court that fundamental rights [particularly, the freedom of trade and business under Article 19( 1)(g)] D do not confer an immunity from taxation. In Indian Express Newspapers v. Union of India 54 , this Court held that the rights guaranteed by Article 19( l )(a) and Article 19( I)(glare subject to clauses (2) and (6) and the newspaper industry has not been granted an exemption from taxation in express terms. On the other hand, Entry 92 of the E Union List of the Seventh Schedule empowers Parliament to make laws for levying taxes on sale or purchase of newspapers and on advettisements published therein. The police power, taxation and eminent domain were held to be a form of social control essential for peace and good governance. Newspapers were held not to be free from the requirement of bearing a common fiscal burden, like others: F ·'43 .... Their newspapers have to be transported by roads, railways and air services. Arrangements for security of their property have to be made. The Government has to provide many other services to them. All these result in a big drain on the financial resources of the State as many of these G services are heavily subsidized. Naturally such big newspaper organizations have to contribute their due share to the pub! ic exchequer. They have to bear the common fiscal burden like all others." (Id. at p. 671) "{1985J 1 sec 641 1-1

JINDAL STAINLESS LTD. v. STATE OF HARYANA 591

[DR. D. Y. CHANDRACHUD, J.]

This Court held that in the case of an ordinary taxing statute, a A law may be questioned ifit is openly confiscatory or a colourable device to confiscate. On the other hand, in the case of a tax on newsprint, it would be sufficient to show a "distinct and noticeable burdensomeness, clearly and directly attributable to the tax". While therefore holding that it was <ejecting the submission that no tax could be levied on the B newspaper industry, this Court held that any such levy was subject to judicial review under the provisions of the Constitution.

141Copy pinpoint141. In Government of Tamil Nadu v. Ahobila Matam 55 , this Court held that the imposition of an assessment on lands held by a religious denominational institution would not attract the right guaranteed by Article c 26 of the Constitution. Jn All Bihar Christian Schools' Association v. State ofBihar"', this Court held that an unaided minority institution is not immune from the operation of the general laws of the land and cannot claim an immunity, inter alia, from measures of taxation. Apart from these decisions, there are judgments of this Court holding that a taxing statute is not per se a restriction on the freedom under Article 19( 1)(g). D In Federation of Hotel & Restaurant Association of India v. Union of lndia 57 , this Court while laying down the above principle held that the mere excessiveness of a tax or a diminution of profit earnings does not per se without more constitute a violation ofrights under Article 19(1 )(g). (See also in this context :Express Hotels (P) Ltd. v. State ofGujarat 58 , E and Pankaj Jain Agencies v. Union of lndia 59).

142Copy pinpoint142. In Vrajlal Manila! & Co. v. State of M. PM', this Court held that an increase in the rate of tax on a particular commodity cannot per se be said to impede free trade and commerce in that commodity. The Court reaffirmed the principle that in order to be a restriction or F impediment a legislative measure must directly or immediately impede the free flow of trade, commerce and intercourse so as to fall within the prohibition of Article 30 I. A tax may in certain cases directly and immediately restrict or hamper the flow of trade. Whether the imposition G ,, (1987) 1 sec 38 " (1988) 1 sec 266 "(1989) 3 sec 634 "(1989) 3 sec 677 "(1994) s sec 198 ''" (1986) Supp. 1 sec 201 H

592 SUPREME COURT REPORTS [2016] 10 S.C.R.

A of a tax does so in each case has to be judged on its own facts and in its own setting of time and circumstance.

H.3.2 Articles 302, 303 and 304

143Copy pinpoint143. Articles 302, 303 and 304 provide for restrictions on trade and commerce. The marginal note to each of the three articles specifically contemplates restrictions on or with regard to trade and commerce. The marginal note to Article 302 refers to the power of Parliament to impose restrictions on trade, commerce and intercourse. Under Article 302 Parliament is empowered by law to impose restrictions in the public c interest on the freedom of h·ade, commerce and intercourse between one state and another or within any part of the te1Titory of the India. Consequently, Parliamentary power under Article 302 to impose restrictions is not only confined to inter-state trade but extends to restrictions within any part of the tetTitory of India. However, Article D 303 imposes a limitation both on Parliament and the state legislatures. Under Article 303, neither Parliament nor the legislature of a state can enact a law giving or authoring the giving of a preference to one state over another or making or authorising the making of discrimination between one state and another, by virtue of any entry relating to trade and commerce in any of the lists in the Seventh Schedule. A11icle 303 has a non-obstante provision which overrides Article 302. The non- obstante clause in Article 303 is evidently inapposite in relation to the legislature of a state because Article 302 does not apply to a state legislature in the first instance. Evidently the non-obstante provision can have meaning only in relation to Parliament because it has the effect of stipulating that the power of Parliament to impose restrictions in the public interest under Article 302 is subject to the principle of non- discrimination and non-grant of preferences to one state over another under Article 303.

144Copy pinpoint144. Be that it is may, the effect of the nonn which Article 303 G enunciates is that neither Parliament nor the legislature of a state can - grant preferences while enacting law to one state over another or make any discrimination. Article 303 concludes with the words "by virtue of any entry relating to trade and commerce in any of the lists in the Seventh Schedule." These words were held by Justice Subba Rao in Automobile H

JINDAL STAINLESS LTD. v. STATE OF HARYANA 593

[DR. D. Y. CHANDRACHUD, J.]

Transport to have the widest import. The entries which specifically A refer to trade arid commerce in the Seventh Schedule are entries 41 and 42 of the Union List, entries 26 and 27 of the State List and Entry 33 of the Concurrent list. Entries 41 and 42 of the Union List are as follows :

41. Trade and Commerce with foreign countries; import and export across customs frontiers; definition of customs frontiers ..... .

42. Inter-State trade and Commerce. Ent1y 26 of the State List is as follows : c

26. Trade and commerce within the State subject to the provisions of Entry 33 of List III.

27. Production, supply and distribution of goods subject to the provisions of Entry 33 of List Ill. D Entry 33 of the Concurrent list is as follows:

33. Trade and commerce in and the production, supply and distribution of - (a) the products of any industry where the control of such industry by the Union is declared by Parliament by law E to be expedient in the public interest, and imported goods of the same kind as such products; (b) foodstuffs, including edible oilseeds and oils; (c) cattle fodder, including oilcakes and other concentrates; F (d) raw cotton, whether ginned or unginned, and cotton seed; and ( e) raw jute.

145Copy pinpoint145. In Automobile Transport it was urged that the expression "by virtue of the entries relating to trade and commerce in any of the lists in the Seventh Schedule" are of wider import than the words "by virtue of the said entries". Therefore, any law under Article 303 made by virtue of any entry in any of the lists in the Seventh Schedule, if it H

594 SUPREME COURT REPORTS [2016] IO S.C.R.

A relates to trade and commerce, would be covered by the exception. Accepting the submission, Justice Subba Raoheld as follows :

"42 .... The words "any entry relating to trade and commerce in any of the Lists" are of the widest import and they yield B to a very liberal interpretation. The phraseology used suppo1is this interpretation. The reason of the exception also sustains it. There cannot be any distinction on principles, from the standpoint of the mischief sought to be averted, between a law made by virtue of an entry ex-facie referring c to trade and commerce and that made by virtue of any entry affecting trade and commerce. For instance, a law may be made by Parliament under entries relating to railways, highways, shipping etc. These entries do not expressly refer to trade and commerce, though they may directly affect trade a.nd commerce. If a law made under entJy 26 of List II giving preference or making discrimination among the states is objectionable, it should also be objectionable, if made by virtue of any other entry. I would, therefore, hold that any law made by Parliament by virtue of any entry imposing the said discrimination restrictions would be under the said article." (Id. at p. 559- 560)

146Copy pinpoint146. Justice Hidayatullah who delivered a dissenting judgment for and on behalf ofhimself and Justices RajagopalaAyyangar and Mudholkar F adopted a similar interpretation of the language ofArticle 303. The learned Judge held that in the Seventh Schedule there are many other entries aparc from entries 41 and 42 of List 1, entries 26 and 27 of List II and Entry 33 oflist III regulating inter-state trade. In that context, he observed that:

G "103 .... By the words of Article 303 'by virtue ofany entry relating to trade and commerce' is meant not the five Entries last named by us but others also, e.g., Entry 8 of List II, Entries 29, 30, 81 of List I, Entry 29, 15 of List III (to mention only a few from each List). Thus, is achieved one purpose which is paramount viz., that the exercise of the commerce H

JINDAL STAINLESS LTD. v. STATE OF HARYANA 595

[DR. D. Y. CHANDRACHUD, J.]

powers, however derived is not to be exercised to create A preferences and discrimination between one state and other State Legislature or both acting in union. No question of the content of the power or its source can arise in this context, because the prohibition is absolute. The article makes a great advance upon Section 297 of the Government B of India Act 1935. In the section, the inhibition was only against a Provincial Legislature or Government. Here the inhibition embraces not only these but is also against Parliament and the Central executive. The executive limb has been made powerless, because the source ofrestrictions must be 'law' and if a law cannot be made, executive action c per se would be ineffective without more. Further, Section 297 was concerned only with goods and their taxation differentially. The Article takes in its stride not only the passage of goods or their taxation but all other matters inherent in free trade, commerce and intercourse." D

14 7. However, it has been urged that this interpretation would be contrary to the position which has been adopted since the judgment in MPV Sundararamier v. State of Andhra Pradesh 61 : In support, it has been submitted that the taxing entries in the lists of the Seventh Schedule E are indicated separately from non-taxing entries. Hence, it is urged, the words of Article 303 cannot be interpreted to include taxing entries. This submission cannot be accepted as a matter of first principle. What the judgment in MPV Sundararamier lays down is that in the lists of the Seventh Schedule, the subjects of taxation are dealt with under distinct F heads. Hence, the subject of a tax cannot be traced to a non-taxing entry. It was held that :

"51. In List I, Entries I to 81 mention the several matters over which Parliament has authority to legislate. Entries 82 G to 92 enumerate the taxes which could be imposed by a law of Parliament. An examination of these two groups of

" AIR (I 950) SC 468 H

596 SUPREME COURT REPORTS [2016] l 0 S.C.R.

A Entries shows that while the main subject of legislation figures in the first group, a tax in relation thereto is separately mentioned in the second ..... Construing Entry 42 in the light of the above scheme, it is difficult to resist the conclusion that the power of Parliament to legislate on inter-State trade and commerce under Ently 42 does not include a power to B impose a tax 011 sales in the course of such trade and commerce."

148Copy pinpoint148. This principle would have no bearing on the interpretation of c the words in Article 303 which restrain Parliament and the state legislatures from granting preferences to one state over another and from discriminating between one state and another "by virtue of any entry relating to trade and commerce" in any of the lists in the Seventh Schedule. These words namely "entry relating to trade and commerce'' D are of the widest import. The expression "relating to"' has a well-known connotation in law extending its ambit to all 111atters which are reasonably proximate or connected to the subject. While the constitution mandates the principle ofnon-<liscrimination between one state over another and the non-grant of preferences under Attic le 303, there is 110 basis to confine those words merely to the entries noted earlier (entries 41 and 42 of List E I, entries 26 and 27 of List II and entry 33 of List Ill).

149Copy pinpoint149. To recapitulate, the submission that the scope ofArticle 303 is restricted only to the four entries noted above cannot conummd itself for acceptance of the following reasons : F (i) the key expressions in Article 303 are ·'shall have the power to make any law" 111aki11g any discrimination between one state and another and "by virtue of any entry relating to trade and commerce"; (ii) the expression ''power to make any law'' would on its plain and literal meaning include tax laws. There is no justification to read this G as "any law other than a tax legislation; (iii) the expression "any entry relating to trade and commerce has a comprehensive significance, meaning something that is associated with or having a nexus to. The words ·any entry relating to trade and commerce· are words of amp! itude and cannot be construed in a H restrictive sense.

JINDAL STAINLESS LTD. v. STATE OF HARYANA 597

[DR. D. Y. CHANDRACHUD, J.]

150Copy pinpoint150. In State of Madras v. N K Nataraja Mudaliar 6 \ a A Constitution Bench of this Court, while construing the provisions of the Central Sales Tax Act, 1956 dealt with the submission that entries relating to trade and commerce in the legislative lists, within the meaning of A11icle 303 would not include entries with respect to the levy of a tax on trade and commerce. It was also urged that the words in A11icle 303 B must be confined to entries 41 and 42 of List I, entries 26 and 27 of List 11 and ent1y 33 of List Ill. This issue was however kept open by the Constitution Bench, as is evident from the following extracts : "12. It was contended on behalf of the State that the power under Article 303 could only be exercised so as to restrict c the authority of the Parliament which arises by vi11ue of an entry relating to trade and commerce in the legislative lists and it was urged that an entry with respect to the levy of tax on trade and commerce and is not an entry relating to trade and commerce and therefore there is no prohibition against the Parliament exercising power or authorising the D giving of any preference to one State over another or making or authorising the making of any discrimination between on State and another by exercise of taxing power. Reliance in support of that contention was placed upon the judgment in Sundararamier and Company v. State of Andhra Pradesh E MANU/SC/0151/1958: [1958] 1 SCR 1422 in which Venkatarama Aiyar, J., pointed out that under the scheme of entries in List I & II of the Seventh Schedule, the power of taxation exercisable in respect of any matter is a power distinct from the power to legislate in respect of that matter. F It was also urged that the expression "an entry relating to trade and commerce in any of the Lists in the Seventh Schedule i.e. entries 41 & 42 of List I, entries 26 & 27 of List Ill and entry 33 of List Ill in the Seventh Schedule, and extended to no others. On the other hand, it was contended that all legislative entries which directly affect G trade and commerce are also within the expression "entry relating to trade and commerce ......

"(1968) 3 SCR 829

598 SUPREME COURT REPORTS [2016] 10 S.C.R.

A 13. We need to express no opinion on the two questions argued before us. The question whether entries relating to trade and commerce in the Lists in the Seventh Schedule are restricted to entries 41 & 42 of List I, entries 26 & 27 of List II and entry 33 of List III, or relate to all general entries which affect trade and commerce, is academic in B the present case. Nor do we think it necessary to decide whether for the purpose of Article 303 entries relating to tax on sale or purchase of goods i.e, entry 92A of List I, and entry 54 of List II are entries relating to trade and commerce, for, in our opinion, an Act which is merely c enacted for the purpose of imposing tax which is to be collected and to be retained by the State does not amount to law giving, or authorising the giving of any preference to one State over another, or making, or authorising the making of, any discrimination between one State and another, merely because of varying rates of tax prevail in different States."

151Copy pinpoint151. In a subsequent judgment of a Constitution Bench in State of Tamil Nadu v. Sitolakshmi Mills 63 , the assesse had claimed before the Madras High Court that it was not liable to be taxed at the higher rate under Section 8(2)(b) of the Central Sales Tax Act, 1956 on the turnover of sales in the course of inter-state trade to government or to unregistered dealers even though they had not obtained the and fonns because Section 2(B) violates Articles 301 and 303(1) of the Constitution. The High Court accepted those claims. In appeal, the F Constitution Bench observed:

"8 .... Nonnally, a tax on sale of goods does not directly interfere with the free flow or movement of trade. But a tax can be such that because of its rate or other features, it G might operate to impede the free movement of goods. The majority judgment delivered by Shah, J., in State of Madras v. N. K. Nataraja Mudaliar proceeds on the basis

" (1974 J 4 sec 408 H

JINDAL STAINLESS LTD. v. STATE OF HARYANA 599

[DR. D. Y. CHANDRACHUD, J.]

that tax under the Central Sales Tax Act is in its essence a A tax which encumbers movement of trade and commerce, but the tax imposed in the case in question was saved by the other provisions of Part XIII. The Court then said that the.exercise of the power to tax would nonnally be presumed to be in the public interest and as Parliament is competent B under Article 302 to impose restrictions on the freedom of trade, commerce and intercourse between one State and another or within any part of the territory oflndia as may be required in the public interest, the tax was saved ....

9. Bachawat, J., in his judgment in the case said that if a c tax on intra-State sales does not offend Article 301, logically, a tax on inter-State sales also cannot do so, that a tax does not operate directly or immediately on the free flow of trade or the free movement or transport of goods from one part of the country to the other, that the tax is on the sale, and D that the movement is incidental and a consequence of the sale. He observed further that even assuming that the Central Sales Tax is within the mischief of Article 301, it is certainly a law made by Parliament in the public interest and is saved by Article 302 ..... . E