Jindal Stainless Ltd. v. State of Haryana, (2016) 11 SCC 1

Jindal Stainless Ltd. v. State of Haryana, (2016) 11 SCC 1

Bench:

A 9-Judge Constitution Bench of the Supreme Court:

• Justice T.S. Thakur (Chief Justice)
• Justice A.K. Sikri
• Justice S.A. Bobde
• Justice Shiva Kirti Singh
• Justice N.V. Ramana
• Justice R. Banumathi
• Justice A.M. Khanwilkar
• Justice D.Y. Chandrachud
• Justice Ashok Bhushan

Facts:

Jindal Stainless Ltd., a company engaged in manufacturing stainless steel, challenged the Entry Tax Act imposed by various states, particularly Haryana, arguing that it violated the constitutional right to free trade and commerce under Article 301. The company contended that the entry tax levied on goods entering the state from another state was discriminatory and hindered the free movement of goods.

Haryana, along with other states, defended the tax, stating that it was a compensatory tax meant to cover the cost of road infrastructure and public services used by transporters bringing goods into the state. The matter was initially heard by a 5-Judge Bench but was later referred to a 9-Judge Constitution Bench due to its significance in interpreting the taxation powers of states under Article 304(a) and (b) of the Constitution.

Issues:

1. Whether entry tax imposed by states on goods coming from other states violates Article 301, which guarantees free trade, commerce, and intercourse throughout India.
2. Whether states have the power under Article 304(a) to impose taxes on goods from outside the state in a manner that discriminates against such goods compared to local goods.
3. Whether such entry tax qualifies as a compensatory tax and is thus exempt from the restrictions of Article 301.
4. Whether previous judgments, including Automobile Transport Ltd. v. State of Rajasthan (1962), correctly interpreted the scope of compensatory taxation.

Arguments:

Petitioners (Jindal Stainless Ltd. and others):

• The entry tax violates Article 301 as it directly impedes the free flow of goods across state borders.
• Under Article 304(a), a state cannot impose a tax on goods coming from another state if similar goods produced within the state are not subject to the same tax, making the tax discriminatory.
• The tax does not qualify as a compensatory tax, as it does not provide a direct quid pro quo (equal compensation) in terms of benefits to those paying the tax.
• The Automobile Transport case (1962) and subsequent rulings should be reconsidered because they incorrectly expanded the scope of compensatory taxation.

Respondents (State of Haryana and other States):

• The entry tax is justified under Article 304(b), which allows states to impose reasonable restrictions on trade and commerce in the public interest.
• The tax is not discriminatory under Article 304(a) because it applies uniformly to all goods entering the state, whether from another Indian state or from outside India.
• The funds collected from the entry tax are used for infrastructure development, road maintenance, and public services that benefit those paying the tax, making it compensatory in nature.
• Previous judgments supporting compensatory taxation should be upheld as they allow states to levy such taxes to recover costs incurred due to increased trade activities.

Ratio Decidendi:

• Scope of Article 301: The Court clarified that while Article 301 guarantees free trade, commerce, and intercourse, it does not provide an absolute right and must be read with Articles 302–304, which allow Parliament and state legislatures to regulate trade in the public interest.
• Interpretation of Article 304(a): The Court ruled that states cannot impose entry tax in a discriminatory manner against goods from other states unless it is done for a valid reason under Article 304(b).
• Entry Tax and Compensatory Taxation: The Court overruled the compensatory tax doctrine laid down in earlier cases, holding that entry taxes must comply with Article 304(b) and cannot be justified merely on the grounds of compensating for infrastructure usage.
• Legislative Power of States: While states have the power to levy taxes under the State List, such taxation must pass the test of non-discrimination and public interest as outlined in Article 304.

Observations:

• The concept of compensatory taxation should not be used to justify taxes that burden interstate trade without direct benefits to those paying the tax.
• Any tax restricting the movement of goods must be evaluated based on whether it serves a legitimate public purpose under Article 304(b).
• The judgment clarifies the balance of power between the Union and State legislatures in imposing trade-related taxes.
• A state cannot impose barriers to trade in a way that gives an unfair advantage to local goods over goods coming from other states.

Decision:

The Supreme Court upheld the constitutional validity of entry tax imposed by states but ruled that such taxes must comply with Article 304(b), meaning they must be non-discriminatory and justified in the public interest. It overruled the compensatory tax doctrine, stating that any tax restricting trade must meet constitutional scrutiny.

The Court remanded individual cases to the respective High Courts to determine whether the entry taxes imposed by different states satisfied the requirements of Article 304(b).

Important Terms:

• Article 301: Ensures free trade, commerce, and intercourse throughout India.
• Article 304(a): Prohibits states from imposing discriminatory taxes on goods coming from other states.
• Article 304(b): Allows states to impose reasonable restrictions on trade and commerce in the public interest, subject to Presidential approval.
• Entry Tax: A tax imposed by state governments on goods entering their territory from other states.
• Compensatory Tax: A tax imposed to cover the costs of infrastructure and services used by those paying the tax. The Court rejected this doctrine in the present case.

This judgment clarified the limitations on state taxation powers in relation to interstate trade. It struck down the compensatory tax doctrine, ensuring that states cannot impose entry taxes unless they fulfill constitutional conditions. It reinforced the principles of free trade and commerce, preventing states from imposing unjustified trade barriers.