Holding

The "working test" from Automobile Transport is the proper standard for determining a compensatory tax, and the "some connection" test from Bhagatram Rajeevkumar and Bihar Chamber of Commerce is overruled.

Summary

The Supreme Court examined the constitutional validity of the Haryana Local Area Development Tax Act, 2000, which imposed an entry tax on goods entering local areas. The key issue was whether such a tax qualified as a "compensatory tax" and therefore fell outside the prohibition of Article 301 of the Constitution. The Court reaffirmed the "working test" from Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan, requiring a direct, proportional link between the tax and a specific trading facility. It held that the "some connection" test propounded in Bhagatram Rajeevkumar and applied in Bihar Chamber of Commerce is inconsistent with the Automobile Transport test and must be overruled. Consequently, the earlier judgments in Bhagatram and Bihar Chamber of Commerce were declared bad law. The Court clarified that a tax is compensatory only when it is essentially a reimbursement for a quantifiable benefit, not merely a revenue-raising measure. The decision directs that pending cases involving similar taxes be listed for disposal using the clarified test.

Issues considered

The Haryana Local Area Development Tax Act, 2000, violates Article 301 of the Constitution.
Whether the tax imposed is a compensatory tax exempt from Article 301 restrictions.
Which test—"working test" from Automobile Transport or "some connection" from Bhagatram—governs the determination of a compensatory tax.
Whether the judgments in Bhagatram Rajeevkumar and Bihar Chamber of Commerce should be overruled.

Legislation cited

Central Sales Tax Act, 1956
Constitution of Indias. Article 301, s. Article 302, s. Article 303, s. Article 304

Subjects

compensatory taxArticle 301freedom of tradetax vs feeconstitutional lawIndiastate taxationjudicial testoverruling precedentBhagatram caseAutomobile Transport case

Judgment

+

- JINDAL STAINLESS LTD. AND ANR.
v.
A

STATE OF HARYANA AND ORS.

APRIL 13, 2006

[MRS. RUMA PAL, B.N. SRIKRISHNA, S.H. KAPADIA, TARUN B
CHATTERJEE AND P.P. NAOLEKAR, JJ.)

Constitution ofIndia, 1950-Articles 301, 302, 303 and 304--Constitution
Bench of this Court in Automobile Transport (Rajasthan) Ltd. v. State of C
Rajasthan held a compensatory tax for use of trading facilities is not hit by
Article 301 and propounded a working test to determine whether the tax
under an impugned enactment is compensatory in nature by enquiring whether
there is any proportional benefit/facility received by trade on payment of such
tax-A smaller Bench later in Bhagatram Rajeevkumar v. Commissioner of
Sales Tax MP. and Ors. took a view that a tax is compensatory in nature even D
if there is some connection between the tax and the facilities extended to the
trade either directly or indirectly-Reference to a Constitution Bench doubting
the correctness of the view in Bhagatram case-Held, the view held in
Bhagatram case is not only contrary to the working test propounded in
Automobile Transport but also obliterates the ve1y basis of compensatory E
tax-Hence, the view held in Bhagatram case is overruled-Distinction
between tax, fee and compensatory tax explained.

In Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan, AIR
(1962) SC 1406 (CB); [1963[ 1 SCR 49l(CB), a Constitution Bench of this
Court held that regulatory measure or measures imposing compensatory F
taxes for the use of trading facilities did not hamper trade, commerce or
intercourse, rather facilitated them and therefore were not hit by the
freedom declared by Article 301 of the Constitution of India. This Court
took the view that compensatory taxed constitute an exception to Article
301. This Court laid down a working test for deciding whether a tax is
compensatory or not by enquiring whether th.e trade is having the use of G
certain facilities for the better conduct of its business and paying not
patently much more than what is required for providing the facilities.

In Mis Bhagatram Rajeevkumar v. Commissioner a/Sales Tax, MP. and

1095 H
t

1096 SUPREME COURT REPORTS [2006) 3 S.C.R.

A Ors., (19951 Supp 1 sec 673, a Bench of three judges of this Court took
the view that even if there is 'some connection' between the tax and the
-
trading facilities extended to dealers directly or indirectly, the tax would
be characterised as a compensatory tax and hence cannot be held unvalid
under Article 301 of the Constitution. The decision was relied on by this
B Court by a Bench of two judges in State of Bihar and Ors. v. Bihar Chamber
of Commerce and Ors., [19961 9 SCC 136.

A Bench of two judges of this Court, while deciding a case regarding
constitutional validity of levy of entry tax by State under the Haryana
Local Area Development Tax Act, 2000, doubted the correctness of the
C views taken by this in Bhagatram and Bihar Chamber of Commerce cases
and hence referred the case to a Constitution Bench to decide with
certitude the parameters of the judicially evolved concept of compensatory
tax in Automobile Transport case vis-a-vis Article 301 of the Constitution
of India.

D Answering the question referred to it the Court

HELD: 1. Article 301 of the Constitution of India, though positively
worded, in effect is negative as freedom correspondingly creates general
limitation on all legislative power to ensure that trade, commerce and
intercourse throughout India shall be free. Article 301, therefore, refers
E to freedom from laws which go beyond regulations which burdens, restricts
or prevents the trade movement between States and also within the State.
Article 301 is not only an authorization to enact laws for the protection
and encouragement of trade and commerce amongst the States but by its
own force creates an area of trade free from interference by the State and,
F therefore, Article 301 per se constitutes limitation on the power of the
State. [1119-A-DJ

2.1. The primary purpose of a taxing statute is collection of revenue.
On the other hand, regulation extends to administrative acts which
produces regulative effects on trade and commerce. Payment for
G regulation is different from payment for revenue. 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 levy is regulatory. (1121-D-F)

2.2. Tax is levied as a part of common burden. The principle behind
H the levy of a tax is the principle of ability or capacity. There is no
JINDALSTAINLESSLTD.v. STATEOFHARYANA 1097
identification of a specific benefit and even if such identification is there, A
it is not capable of direct measurement. A particular advantage, if it exists
at all, is only incidental to the Government action. It is not a term or
condition of a licence. A tax is a payment where the special benefit, if any,
is converted into common burden. A tax can be progressive. [1122-C-D)
2.3. A fee is generally a term of a licence. It is based on the "principle B
of equivalence" which is the converse of the "principle of ability" to pay.
The basis of a fee or a compensatory tax is the same which is the
quantifiable and measurable benefit. A fee or a compensatory tax has to
be broadly proportional and not progressive. The value of the quantifiable
benefit is represented by the costs incurred in procuring the facility/
services which become the basis of reimbursement/recompense for the C
provider of the services/facilities. Compensatory tax is based on the
principle of "pay for the value". It is a sub-class of "a fee". It rests upon
the principle that if the government by some positive action confers upon
individual(s), a particular measurable advantage, it is only fair to the
community at large that the beneficiary shall pay for it. The basic D .
difference between a tax on one hand and. a fee/compensatory tax on the
other hand is that the former is based on the concept of burden whereas
compensatory tax/fee is based on the concept of recompense/
reimbursement. Jn other words it is a recompense/reimbursement.
(1122-D-E; G-H; 1123-C-E)
E
2.4. When a tax is imposed as a part of regulation or as a part of
regulatory measure, its basis shift from the concept of "burden" to the
concept of measurable/quantifiable benefit and then it becomes "a
compensatory tax" and its payment is then not for revenue but as
reimbursement/recompense to the service/facility provider. Compensatory
tax is by nature hybrid but it is more closer to fees than to tax as both F
are based on the principle of equivalence and on the basis of
reimbursement/recompense. [1124-A-B)

3. If the provisions of an impugned law are ambiguous or even if
the Act does not indicate facially the quantifiable benefit, the burden will
be on the State as a service/facility provider to show by placing the G
material before the Court, that the payment of compensatory tax is a
reimbursement/recompense for the quantifiable benefit provided or to be
provided to its payer (s). (1124-D-E)

4. The test of "some connection" enunciated in Bhagatram case is not H
+'

A
1098 SUPREME COURT REPORTS [2006] 3 S.C.R.

only contrary to the working test propounded in Automobile Transport case
but also obliterates the very basis of compensatory tax. When a tax is
-
imposed in the regulation or as a part of regulatory measure, the
controlling factor of the levy shifts from burden to reimbursement/
recompense. The working test propounded by a Bench of seven Judges in
B the case of Automobile Transport and the test of "some connection"
enunciated by a Bench of three Judges in Bhagatram case cannot stand
together. Therefore, the test of "some connection" as propounded in
Bhagatram case is not applicable to the concept of compensatory tax and
accordingly to that extent, the judgments of this Court in Bhagatram and
Bihar Chamber of Commerce stand overruled. The doctrine of "direct and
C immediate effect" of the impugned law on trade and commerce under
Article 301 as propounded in Atiabari Tea Co. and the working test
enunciated in Automobile Transport for deciding whether a tax is
compensatory or not will continue to apply. 11126-C-E; G-H; 1127-A)

Attiabari Tea Co. Ltd. etc. v. State of Assam and Ors., AIR (1961) SC
D 232 CB; (196111 SCR 809 (CB) and Automobile Transport (Rajasthan) Ltd.
v. State of Rajasthan, AIR (1962) SC 1406; I 19631 1 SCR 491, followed .

.lvf!s Bhagatram Rajeevkumar v. Commissioner of Sales Tax, M.P. and
Ors., ll 995) Supp. I SCC 673 and State of Bihar and Ors. v. Bihar Chamber
of Commerce and Ors.. 1199619 SCC 136, overruled.
E
Jindal Strips ltd and Anr. v. State ofHaryana and Ors.. [2003] 8 SCC
60; G.K. Krishnan and Ors. v. State of T.N. and Ors.. [ 1975) I SCC 375;
State of Karnataka and Anr. v. M/s Hansa Corporation, [1980] 4 SCC 697;
Sanjay Trading Campany v. Commissioner of Sales Tax and Ors .. (1994) 93
F STC 589; Sharma Tramport v. Government of Andhra Pradesh and Ors.,
120021 2 SCC 188; Pradip Chandra Parija and Ors. v. Pramod Chandra
Patnaik and Ors., (20021 I SCC 1; Central Board of Dawoodi Bohra
Community and Anr. v. State of Maharashtra and Anr., (20051 2 SCC 673;
Mis International Tourist Corporation etc. etc. v. State of Haryana and Ors.
etc. etc., AIR (1981) SC 774; Ram Chandra Kai/ash Kumar and Co. and Ors.
G v. State of UP. and Anr., (1980] Supp. SCC 27; Diamond Sugar Mills Ltd.
and Anr. v. The State of UP. and Anr.. (1961[ 3 SCR 242; Boiani Ores Ltd.
etc. v. State ofOrissa etc.. AIR (1975) SC 17 and Khyerbari Tea Co. Ltd. v.
State of Assam, referred to.

CIVIL APPELLATE JURISDICTION Civil Appeal No. 3453 of2002.
H
-- JINDAL STAINLESS LTD. v. STATEOFHARYANA '1099

From the Final Judgment and order dated 21.12.2001 of the Punjab and A
Haryana High Court in C.W.P. No. 6630 of 2000.
WITH
Civil Appeal Nos. 3455, 3460, 3456-59, 3469, 3461, 3467, 3468, 3465,
3466, 3462-63, 3454, 3470 of 2002; 8241, 8242, 8243, 8244, 8245, 8246,
8247, 8248, 8249, 8250, 8251 of 2003; 5858 of 2002; 8252 of 2003; 3464 B
of2002; 3381-3400, 4651, 3592of1998; 918of1999; 4476 of 2000; 2608
of 2003; 4471 of 2000; 3314 of 2001; 5740 of 2002; 6331, 2637 of 2003;
6383-6421, 6436, 6437-40, 6422-35 of 1997; 2769 of 2000; 997-998 of
2004; 3144, 3145, 3146, 4954, 5141, 5143, 5144, 5145, 5147, 5148, 5149,
5150, 5151, 5152, 5153, 5156, 5157, 5158, 5159, 5160, 5162, 5163, 5164, c
5165, 5166, 5167, 5168, 5169, 5170, 7658 of 2004.

SLP (C) Nos.10003, 10007, 10153, 10156, 10164, 10167, 10206, 10381,
10391, 10404, 10417, 10501,10563,10568,10571, 11012, 11271, 11326, 9496,
9569, 9883, 9891, 9898, 9904, 9910, 9911, 9976, 9993, 9998, 9999 of 2004;
14380 of 2005; TC No.13 of 2004, WP Nos, 574 and 512 of 2003. D
L.N. Rao, ASG, Shanti Bhushan, A.K. Ganguli, Dr. A.M. Singhvi, R.F.
Nariman,Raju Ramachandran, Rakesh Dwivedi, Dinesh Dwivedi, R.G. Padia,
B. Sen, P.N. Misra, TLV Lyer, P.P. Rao, A.S. Rao, Jayant Bhushan, S.K.
Pathak, Mini Kaushik, Ejaz .Maqbool, Vikas Singh, Taruna Singh, Abhijit
Sinha, A. Dutt, Rajesh Jain, Mrs. Rajesh Bindal, L.R. Singh, C. Prakash, E
Nikhil Nayyar, Ankit Singhal, P.K. Bansal, R. Agnihotri, K.L. Janjani, A.T.M.
Sampath, V. Balaji, Mrs. T. Shanti, Mrs. Meena Kumari, Rajeev K. Virmani,
Ms. Rashmi Virmani, R. Narain, P. Shishodia, S. Sharma, A. Aggarwal, M.
Borthakur, S. Kahiya, R. Bindal, Ms. Priya Puri, k. Gomber, Rajan Narain
-(for Mis. Rajan Narain & Co.), A. Dubey, K.B. Upadhyay, M. Kumar, M.K. F
Rai, M. Dubey, S.R. Setia, Mrs. Indira Sawhney, Anupam Sharma, Rakesh
Ojha, H.K. Puri, Ujwal Banerjee, S.K. Puri, V.M. Chauhan, Ms. Indu Malhotra,
Ms. B. Vijaylakshmi Menon, Mis. Arputham Aruna & Co., Ms. Kmakshi, S.
Mehlwal, Ms. Kadambani, Sachin Puri, Abisth Kumar, Rakesh K. Khanna,
Dr. Rashmi Khanna, S. Shekhar, Mrs. S. Sinha, Ms. Jahanvi Worah, Surya
Kant, Ramesh Kumar Agarwal, D. Bharuka, R.C. Kohli, SWA Qadri, R. G. ·
Dubey, Adarsh Upadhyay, A. Chaudhary, G. Bhatia, N. Singh, K. Misra,
Adarsh Upadhyay, Bhargava V. Desai, Sanjeev Kr. Singh, Ms. Sheenam
Parwanda, M. Nupur Kanungo, Gopal Singh, Ms. Vimla Sinha, Sushi! Kumar
Jain, A.P. Dhamija, Ram Niwas, HD Thanvi, B.K Sharma, V.N. Koura, Ms.
Paramjit Benipal, A. Mariarputham, Ms. Aruna Mathur (for Mis. Arputham, H
1100 SUPREME COURT REPORTS [2006) 3 S.C.R.

A Aruna & Co.), Vijay Pratap Singh, K.S. Rana, L.K. Bhushan, Ms. Jasleen
Oberoi, Rahul Prasanna Dave, Kavin Gulati, Ms. Rashmi Singh. T. Mahipal,
-
Dhurv Aggarwal, Parveen Kumar, K.R. Sashiprabhu, Ashish Verma, S.P.
Singh Chauhan, Balaji Srinivasan, V. Sudeer, MBRS Raju, S. Srinivasan,
Amit Mahajan, D.N. Ray, Ms. Sumita Ray, Ajay Siwach, Pradeep Dahiya,
B Shandeep Sharma, T. Singhdev, K. Ramesh, Hari Kumar G., T.V. George,
UA Rana, P. Thakur, Arvind Kumar, Ms. S. Roy (for Mis. Gargat & Co.),
Rajesh Kumar, Vishwajit, Ms. Mayuri Vats,Vijay Kumar, Sunil K. Jain, S.
Borthakur, B. Barooah, P.K. Bansal, P.K. Singh, M. Verma, V.K. Tiwari,
Vinay Kumar Garg, Roy Abraham, S. Jain, Himinder Lal, Mahabir Singh,
P.N. Puri, M.P.Vinod, D. Pillai, A.K. Jain, Sajith P., S.A. Syed, A. Singh, P.
C Saxena, S.V. Deshpande, Mrs. A. Rustogi, S.K. Misra, V.P. Singh, Ms. Indira
Sawhney, Anupam Sharam, Rakesh Ojha, Ms. Kavita Wadia, Tarun Johri,
R.K. Maheshwari, Vishwajit Singh, C.N. Sree Kumar, Sanjay R. Hegde,
Areneshwar Gupta, Guntur Prabhakar, Vinoo Bhagat, Ms. Kirti Renu Mishra,
Subramonium Prasad, K.V. Mohan, Rajiv Tyagi, Prashant Kumar, Shakil
Ahemd Syed, Sanjay Kapur, B.K. Satija, Amlan Kumar Ghosh, Shrish Kumar
D Mishra, Ashok Mathur, Ms. Baby Krishnan, Romy Chacko, Sibo Shankar
Mishra, B V Deepak, Rajiv Mehta, M.T. George, R. Sathish, K.R. Nmbiar,
E.C. Agrawala and S.B. Upadhyay for the appearing Parties.

The Judgment of the Court was delivered by
E KAPADIA, J. By order dated 26.9.2003, the referring Bench of Hon'ble
Ruma Pal, J. and P. Venkatarama Reddy, J. doubted the correctness of the
--
view taken in Mis Bhagatram Rajeevkumar v. Commissioner of Sales Tax,
MP. & Ors. 1 relied on in the subsequent decision of this Court in the case
of State of Bihar & Ors. v. Bihar Chamber ofCommerce & Ors. 1 Accordingly,
F all the matters were ordered to be placed before the Hon 'ble the Chief Justice
for appropriate directions and accordingly, the matter has come to the
Constitution Bench to decide with certitude the parameters of the judicially
evolved concept of "compensatory tax" vis-a-vis Article 30 I. The referral
order is in the case of Jindal Strips Ltd. & Anr. (now known as Jindal
Stainless Ltd.) v. State of Haryana & Ors. 3 under Article 145(3).
G
For this purpose, we are required to examine the source from which the

1. (1995] Supp. 1 sec 673.

2. (1996] 9 sec 136.

H 3. 120031 s sec 60.
-t-

JINDAL STAINLESS LTD. v. STATEOFHARYANA [KAPADIA, J.] 1101

concept of compensatory tax is judicially derived, the nature and character of A
compensatory tax and its parameters in the context of Article 30 I.

In a batch of appeals, the constitutional validity of the Haryana Local
Area Development Tax Act, 2000 has been challenged on two grounds : (I)
that, the Act is violative of Article 30 I and is not saved by Article 304; and
(2) that, the Act in fact seeks to levy sales tax on inter-State sales, which is B
outside the competence of the State Legislature. However, the referral order
is confined to the above-mentioned first question.

Jindal Strips Ltd. is an industry manufacturing products within the
State of Haryana. The raw-material is purchased from outside the State. The C
finished products are sent to other States on consignment basis or ~tock
transfer basis. No sales tax is paid on the input of the raw material. Similarly,
no sales tax is paid on the export of finished products.

The impugned Act came into force w.e.f. 5th May, 2000 to provide for
Ie_vy and collection of tax on the entry of goods into the local areas of the D
State for'consumption or use therein. The Act is enacted to provide for levy
and collection of tax on the entry into a local area of the State, of a motor
vehicle for use or sale, and of other goods for use or consumption therein.
The Act seeks to impose entry tax on all goods brought into a "local area".
The entire State is divided into local areas. The Act covers not only vehicles
bringing goods into the State but also vehicles carrying goods from one local E
area to another. However, those who pay sales tax to the State are exempt
from payment of entry tax. Ultimately, the entry tax only falls on concerns,
like Jindal Strips, which, by virtue of the provisions of the Central Sales Tax
Act, 1956, pay sales tax on purchase of raw-material and sale of finished
goods to other States and do not pay sales tax to the State of Haryana. This F
is the context in which the challenge to the Act under Article 30 I has been
made. At this stage, we may point out that prior to September 30, 2003,
section 22 stated that the tax collected under the Act shall be distributed by
the State Government amongst the local bodies to be utilized for the
development of local areas. However, on 30th September, 2003, section 22
was amended clarifying that the tax levied and collected shall be utilized for G
facilitating free flow of trade and commerce.

REASONS FOR THE REFERRAL ORDER:
In Atiabari Tea Co. Ltd. etc. v. State of Assam & Ors4., it was held that
.J
4. Air (1961) SC 232. H
+

1102 SUPREME COURT REPORTS (2006] 3 S.C.R.

A taxing laws are not excluded from the operation of Article 30 I, which means
that tax laws can and do amount to restrictions on the freedoms guaranteed
to trade under Part-XIII of the Constitution. However, the prohibition of
restrictions on free trade is not an absolute one. Statutes restrictive of trade
can avoid invalidation if they comply with Article 304(a) or (b)5.
B In Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan6, it was
held that only such taxes as directly and immediately restrict trade would fall
within the purview of Article 301 and that any restriction in the fonn of taxes
imposed on the carriage of goods or their movement by the State Legislature
can only be done after satisfying the requirements of Article 304(b). The
statute which was challenged in Atiabari Tea Co.4 was the Assam Taxation
C (on goods carried by Roads and Inland Waterways) Act, 1954. It was held
that the Act had put a direct restriction on the freedom of trade and since the
State Legislature had not complied with the provisions of Article 304(b ), the
Act was declared void.

D According to Mis Jindal Strips and similarly situated other appellants,
the impugned Haryana Local Area Development Tax Act, 2000 imposes a
restriction on trade and is violative of Article 301, particularly, when the
provisions of Article 304(b) have not been complied with.

The judgment of this Court in Atiabari Tea Co. 4 was delivered by a
E Constitution Bench of five Judges. However, an exception to Article 301 and
its operation was judicially crafted in Automobile Transport'. In that case, the
challenge was to the Rajasthan Motor Vehicles Taxation Act, 1951. The
challenge under Article 30 I was rejected by the Constitution Bench of seven
Judges of this Court by holding vi de para 19 that "the taxes are compensatory

F
5. "304. Restrictions on trade. commerce and intercourse among States.-Notwithstanding
anything in article 301 or article 301 or article 303. the Legislature ofa State may by law-

(a) impose on goods imported from other States or the Union Territories any tax to which
similar goods manufactured or produced in that State are subject, so, however. as not to
discriminate between goods so imported and goods so manufactured or produced; and
G
(b) impose such reasonable restrictions on the freedom of trade, commerce or intercourse
...
with or within that State as may be required in tlie public interest:

Provided that no Bill or amendment for the purpose of clause (b) shall be introduced or
moved in the Legislature of a State without the previous sanction of the President.''
-
H 6. AIR (1962) SC 1406.
+
JINDAL STAINLESS LTD. v. STATEOFHARYANA [KAPADIA, J.] 1103

taxes which instead of hindering trade, commerce and intercourse facilitate A
them by providing roads and maintaining the roads". Vide para 21 of the
report, it was observed that "if a statute fixes a charge for a convenience or
service provided by the State or an agency of the State, and imposes it upon
those who choose to avail themselves of the service or convenience, the
freedom of trade and commerce may well be considered unimpaired." Thus, B
the concept of "compensatory taxes" was propounded. Therefore, taxes which
would otherwise interfere with the unfettered freedom under Article 30 I will
be protected from the vice of unconstitutionality if they are compensatory.

In Automobile Transport", it was said, vide para 19, that "a working test
for deciding whether a tax is a compensatory or not is to enquire whether the C
trade is having the use of certain facilities for the better conduct of its business
and paying not patently much more than what is required for providing the
'- facilities".

Right from 1962 up to 1995, this working test was applied by this
Court in relation to motor vehicles taxes for deciding whether the impugned D
levy was compensatory or not. The decisions proceeded on the principle
adumbrated in Automobile Transport", which was paraphrased by Mathew, J.
speaking for a Bench of three Judges in G.K. Krishnan & Ors. v. Stale of
T.N. & Ors. 7, in which it was observed that "the very idea of a compensatory
tax is service more or less commensurate with the tax levied". [See: para 29
page 386] E
According to the referral order, after 1995, some of the principles set
out stood deviated from when the principle of compensatory tax was applied
to the entry tax in Bhagatram's case, which was decided by a Bench of three
Judges.
F
In Bhagatram 's case, the challenge was to M.P. Sthaniya Kshetra Me
Mal Ke Pravesh Par Kar Adhiniyam, 1976. In that case, although it was
demonstrated by the State and not disputed by the assessee that the levy was
compensatory, nevertheless, the Court went on to say, vide para 8, that "the
concept of compensatory nature of tax has been widened and if there is G
substantial or even some link between the tax and the facilities extended to
dealers directly or indirectly the levy cannot be impugned as invalid". In this
connection, reliance was placed on the judgment of this Court in the case of
State of Karnataka & Anr. v. Mis Hansa Corporation. At this stage, it may

1. [1975) I sec 375. H
1104 SUPREME COURT REPORTS [2006] 3 S.C.R.

A be noted that although there was a challenge to the levy of entry tax in the
case of Hansa Corporations, the issue whether the tax was compensatory in
nature was expressly left open, particularly, because Article 304(b) stood
complied with. In fact, the impugned Act was saved because Article 304 was
complied with. It was for that reason alone that the Act could not be struck
down in Hansa Corporation's cases.
B
The dictum in Bhagatram 's case 1 was relied on by a Bench of two
Judges in the case of Bihar Chamber of Commerce1, which reiterated the
position that "some connection" between the tax and the trading facilities
extended to dealers directly or indirectly is sufficient to characterize it as
C compensatory tax. The Court went further to hold that the State provides
several facilities to the trade, such as, laying and maintenance of roads,
waterways, markets etc. and on this premise, it was held that the entry tax
was compensatory in nature. The learned Judges did not consider it necessary
to put the burden on the State to furnish the details of facilities provided to
the traders and the expenditure incurred or incurrable thereafter.
D
To sum up: the pre-1995 decisions held that an exaction to reimburse/
recompense the State the cost of an existing facility made available to the
traders or the cost of a specific facility planned to be provided to the traders
is compensatory tax and that it is implicit in such a levy that it must, more

E
or less, be commensurate with the cost of the service or facility. Those
decisions emphasized that the imposition of tax must be with the definite
purpose of meeting the expenses on account of providing or adding to the
trading facilities either immediately or in future provided the quantum of tax
·-
is based on a reasonable relation to the actual or projected expenditure on the
cost of the service or facility. However, the post-1995 decisions in Bhagatram 's
F case 1 and in the case of Bihar Chamber of Commerce, now say that even if
the purpose of imposition of the tax is not merely to confer a special advantage
on the traders but to benefit the public in general including the traders, that
levy can still be considered to be compensatory. According to this view, an
indirect or incidental benefit to traders by reason of stepping up the
developmental activities in various local areas of the State can be brought
G within the concept of compensatory tax, the nexus between the tax known as
.,.
compensatory tax and the trading facilities not being necessarily either direct
or specific. -
H s. (198014 sec 697.
+
JINDAL STAINLESS LTD. v. STATE OFHARYANA(KAPADIA, J.] 1105

According to the referral order, since the concept of compensatory tax A
has been judicially evolved as an exception to the provisions of Article 30 l
and as the parameters of this judicially evolved concept are blurred,
particularly, by reason of the decisions in Bhagatram 's case' and Bihar
Chamber of Commerce', the Court felt that the interpretation of Article 301
vis-a-vis compensatory tax should be authoritatively laid down with certitude B
by the Constitution Bench under Article 145(3).

ARGUMENTS:

Mr. Shanti Bhushan, learned senior counsel appearing on behalf of the
Jindal Stainelss Ltd. submitted that in Atiabari Tea Co. 4 this court held that C
even a tax legislation would have to bear the scrutiny of Part-XIII of the
Constitution and such legislation could infringe Article 30 I to 304 of the
Constitution; that the tax laws were within the ambit of Part-XIII of the
Constitution; that seven-Judge Constitution Bench of this court in Automobile
Transport6 for the first time judicially evolved the principle of compensatory
taxes which would be outside the purview of Part-XIII and which could not D
be said to impede free flow of trade and commerce [majority view]. Such
compensatory taxes were no hindrance to freedom of trade so long as they
remained reasonable. Such compensatory taxes, in essence and reality;
facilitated trade and commerce and they were not restrictions, it was held that

-· the substance of the matter has to be determined in each case. Learned counsel
placed reliance on the judgment of Justice Das from pages 522 to 523, in this
regard. Learned counsd submitted that the working test laid down in the
E

Automobile Transport• is good even today. Under the test, although the precise
amount collected may not be actually used to provide any facility, the tax
collected should be by and large commensurate with the cost of the facilities
provided for the trade. Learned counsel, therefore, submitted that the working F
test laid down in Automobile Transport• is the only test which would
differentiate the tax imposed for augmenting general revenue from the
compensatory tax. Learned counsel submitted that there is a basic difference
between the law infringing freedom of trade and the law which imposes
regulations which in effect facilitates or promotes trade. According to the G
learned counsel, regulations provide for necessary services to enable free
movement of traffic and, therefore, they cannot be described as restrictions
impeding the freedom under Article 30 I; that in the case of regulations the
tax imposed is incidental in order to compensate for the facilities provided.
On the other hand, it was urged, that, a tax law is in essence an exercise to
augment the general revenue of the State and not for providing facilities and H
1106 SUPREME COURT REPORTS [2006) 3 S.C.R.

A services for the trade. A tax law which does not in return provide services
and facilities for the free movement of trade, can never be compensatory.
Learned counsel further submitted that in Bhagatram 's case 1 vide para 8, the
Division Bench of this court held that--"the concept of compensatory nature
of tax has been widened and if there is substantial or even some link between
B the tax and the facilities extended to such dealers directly or indirectly the
levy cannot be impugned as invalid". In that case the Division Bench of this
court relied upon the judgment of this court in the case of Hansa Corporations.
Mr. Shanti Bhushan, learned counsel for the assessees, submitted that the
judgment of this court in the case of Bhagatram' was erroneous on two
counts. Firstly, the reliance on Hansa Corporation' was totally misplaced
C because Hansa Corporations did not deal with the issue of what is
compensatory tax. In fact, that question was expressly not gone into. Secondly,
learned counsel submitted that to the extent of Bhagatram 1 holding that the
concept of compensatory tax has been widened as stated above, the said
judgment was contrary to the law laid down by the seven-Judge Bench decision
of this court in the case of Automobile Transport and, therefore, needs to be
D overruled. Mr. Shanti Bhushan further contended that the Division Bench of
this court in the case of Bihar Chamber of Commerce2 has followed the
judgment of this court in the case of Bhagatram 1 and has held that even
though tfie tax was for augmenting the general revenue of the State, judicial
notice could bi: taken of the fact that the State provides several facilities to
E the trade including laying and maintenance of roads, waterways, markets etc.
and on that basis it was held that the State had established the impugned tax
to be compensatory in nature. In short, Mr. Shanti Bhushan's submission was
that the aforestated two judgments in Bhagatram 1 and in Bihar Chamber of
-
Commerce 2 were e1rnneous to the extent indicated above; that they were
contrary to the judgment of seven-Judge Bench of this court in the case of
F Automobile Transport". Learned counsel urged that if the test, laid down in
the case of Bhagatram' and in the case of Bihar Chamber of Commerce 2, was
held to be applicable then as a consequence there would be no difference
between a tax and a compensatory tax. It was urged that therefore this court
should evolve parameters of compensatory tax for future guidance. Learned
G counsel submitted that to be compensatory, tax must be levied to augment
facilities for trade and that is how a tax was held not to impede but to
facilitate trade (in Automobile Transport). It was submitted that the essence
of compensatory tax is that the services rendered or facilities provided should
be more or less commensurate with the tax levied and the tax should not be
patently more than what was required to provide the trading facility. It was
H submitted that the tax imposed for augmenting general revenue of the State
.,- \

JINDAL STAINLESS LTD. v. STATEOFHARYANA [KAPADIA, J.] 1107

is not compensatory; that any tax law which is designed or which has the A
effect of disrupting trade movement in inter-State trade and commerce between
States is contrary to the concept of freedom of trade embodied in Article 301.
It was submitted that the compensatory character of tax should be self-evident
from the taxing law itself and it cannot be judged from the manner in which
the tax revenue is utilized in course of time. It was urged that in the case of B
ambiguity, the burden would fall on the State to show that in essence the levy
was imposed as a recompense for the facilities/services provided by the State.
It was urged that in the case of Sanjay Trading Company v. Commissioner
of Sales Tax and Ors. 9, the tax was held to be compensatory based on the
figures furnished by the State and it was found that the levy was imposed to
offset the loss caused by the abolition of octroi which according to the learned C
counsel is totally missing in the case of Haryana Local Area Development
Tax Act, 2000.

Mr. A.K. Ganguli, learned senior counsel appeariHg on behalf of one
of the appellants, submitted that the legislative power of the State to make
any law under Article 246 read with the entries in list II, though plenary in D
nature, is subject to two limitations:

(i) Fundamental Rights [Part III of the Constitution)
(ii) Trade, Commerce and Intercourse within the Territo1y of India
(Part XIII of the Constitution) E
Therefore, the State cannot exercise its legislative power in a manner which
would transgress the above constitut_ional limitations. In this connection,
learned counsel placed reliance on the judgment in Atiabari Tea Co. 4• Learned
counsel further urged that keeping in mind the impact of globalization since
mid- l 990s the international trade barriers stand removed in view of multi- p
lateral trade agreements between the committee of nations. He submitted that
the framers of the Constitution engrafted Part-XIII in the Constitution with
the object of securing economic unity of the country as a whole and, therefore,
the State's power of imposing taxes and duties on goods, freedom of which
throughout India is guaranteed by Article 301, would be subject to the said
limitation. Learned counsel urged that taxing statutes imposing duties on G
goods do attract Article 30 I; that the intrinsic evidence furnished by the
Articles in Part-XIII shows that the taxing laws are not excluded from the
operation of Article 30 I; which means that tax laws do amount to restrictions,

...... 9. (1994) 93 SIC 589 . H
1108 SUPREME COURT REPORTS (2006) 3 S.C.R.

A freedom from which is guaranteed to trade under Part-XIII. It is, therefore,
idle to contend as sought to be argued on behalf of the State that a tax under
entry 52 list II falls outside Article 301. Learned counsel submitted further
-
that in Atiabari Tea Co.' a workable test has been evolved under which
restrictions which directly and immediately impede free flow of trade, would •
violate Article 301. According to learned counsel one needs to enquire whether
B the trade is provided with facilities for the better conduct of their business.
According to learned counsel once the said working test is satisfied then the
levy is regulatory in nature provided it is not disproportionate to the value of
the facility/service provided. Learned counsel urged that a tax imposed for
raising general revenue of the State, is not a compensatory levy. It was
C submitted that for the purpose of securing freedom of movement by road, it
was essential that no pecuniary burden is placed upon it which burden goes
beyond a proper recompense to the State for the actual use made of the
facilities provided by the State. Therefore, there has to be a direct relation
between the levy and the facility and the users must derive a special direct
benefit of that facility. It was submitted that Part-XIII imposes constitutional
D limitations on the legislative powers of the State, the onus would lie on the
State to demonstrate that the provisions of the impugned enactment facilitate
the free flow of trade by providing a regulatory measure. Similarly, in respect
of taxing statutes, the burden would lie heavily on the State administration
that the taxes proposed to be levied and collected under the impugned
E enactment are for the use of trading facilities and only then that such levy
would come within the purview of compensatory tax as laid down in the
judgment of this court in the case of Automobile Transporf'. According to the
learned counsel mere declaration in law that the levy is compensatory in
nature is not enough. Whether a tax is compensatory or not, cannot depend
on the preamble of the statute imposing it. A tax cannot be said not to be
F compensatory merely because the precise or specific amount collected is not
actually used to provide facilities. In this connection, reliance is placed on
the judgment of this court in the case of Sharma Transport v. Government
of Andhra Pradesh & Ors., w . However, learned counsel submitted that the
Act must spell out the nature of the trading facilities intended to be provided
G to the trading community and also the cost of providing such facilities. Learned
counsel submitted that the Act must indicate a direct co-relation between the
two.

At this stage, we may clarify that we are not required to go into the

H 10. [200212 sec 188.
r
.TINDAL STAINLESS LTD. v. STATEOFHARYANA [KAPADIA,J.] 1109

question as to whether the impugned tax based on ad valorem basis cannot A
be termed as a compensatory tax. As stated above, we are confining this
judgment only to the question as to whether the observations of this court in
the case of Bhagatram 1 (supra) followed by the judgment of this court in the
case of Bihar Chamber of Commerce 2 needs to be overruled in the light of
the judgment of seven-Judge Constitution Bench in the case of Automobile
Transport". In the present matter, we are required to lay down the parameters B
of the concept of compensatory tax vis-a-vis Article 301. All other questions
will have to be gone into at the relevant stage before the division bench of
this court with regard to the constitutional validity of 2000 Act.

Learned counsel next submitted that the question as to whether a levy C
is compensatory or not has to be decided with reference to the nature of the
levy itself. In this connection reliance was placed on entry 57 List II. It was
urged that taxes on motor vehicles are levied statewise. Such levies are annual
levies. Such levy, if claimed to be compensatory, must bear a definite nexus
with the facilities which the State seeks to extend to the trading community
using their transports on the roads and bridges maintained by the State. D
Similarly, it was argued that levy of entry tax under entry 52 list II indicates
that the levy contemplated is on the entry of goods into a local area for
consumption, use or sale therein. It was submitted that the levy contemplated
is on entry into a local area and not when the goods cross the State barrier.
Therefore, if a levy of entry tax is claimed to be compensatory in nature such E
levy would have to be, in the first instance, confined to a local area and
secondly the trading facilities sought to be provided also should be confined
to such local area. Further the expenses for such facilities and the levy by
which such expenses are to be met must bear a reasonable and rational
relationship.
F
Mr. R.F. Nariman, learned senior counsel appearing for one of the
appellants, submitted that the ingredients of a compensatory tax broadly fall
into two categories, namely, positive ingredients which ought to be there to
constitute a compensatory tax and negative ingredients which if present, the
tax in question cannot be called a compensatory tax. In this connection,
learned counsel submitted that if the purpose of levy is to raise resources for G
above-stated facilities or if the resources are raised as regulatory measures to
facilitate trade then such an ingredient is a positive ingredient. Similarly, the
. quantum of such compensatory tax must co-relate with the funds required for
such facilities/regulatory measures. According to learned counsel these are
two positive ingredients. The negative ingredients, which if present, would H
1110 SUPREME COURT REPORTS [2006] 3 S.C.R.

A make the tax labelled as compensatory, attract the vice of interference with
freedom of trade, are two-fold-firstly, ifthe tax is for general augmentation
of revenue, and secondly, the said compensatory tax must not be
discriminatory. According to learned counsel, the purported compensatory
tax must also not be for trade facilities and purposes for which there is
already a levy of other compensatory tax. Learned counsel next urged that in
B the case of Bhagatram 1 a three-Judge bench of this court noted that "the levy
was in fact demonstrated to be compensatory" and, therefore, the latter
observation by the court saying that "the concept of compensatory nature of
tax has been widened and if there is some link between the tax and the
facility the levy cannot be impugned as invalid" is obiter dicta and such
C observation is not supported by any of the previously decided cases. It was
urged that under 2000 Act the entry tax lacks the positive ingredients
enumerated above for a valid compensatory tax. As there is no facility even
mentioned with relation to entry of goods into local area for use, consumption
or sale and, therefore, the link between local area and levy is absent and
consequently collection of levy not by the local authority but by the State on
D entry of goods from outside State is unconstitutional. Further, according to
the learned cou11sel, negative ingredients indicated above also exist in the
impugned levy inasmuch as the justification pleaded is augmentation of general
revenue of State in lieu of octroi in name of facilities for which provisions
are made by way of other compensatory taxes such as motor vehicle tax,
E property tax etc. Learned counsel submitted that there is also an element of
discrimination between goods entering local areas from outside State and
goods entering local area from within the State, i.e., from one local area to
another local area. The latter class of goods are not subjected to levy though
all the facilities, if at all provided, are there in course of intra-State movement
and entry of goods m local areas. Learned counsel, therefore, submitted that
F this discrimination per se militates against the impugned levy being termed
as compensatory.

S/Shri A.M. Singhvi, learned senior counsel, A.T.M. Sampath, H.K.
Puri and Ms. K.S. Mehlwal also made their respective submissions on behalf
G of the assessees and substantially adopted the submissions made by S/Shri
Shanti Bhushan, R.F. Nariman and A.K. Ganguli, learned senior counsel.

Shri P.P. Rao, learned senior counsel appearing on behalf of the State
of Haryana, submitted that the impugned 2000 Act does not suffer from want
of levy competence; that the State legislature has the competence under entry
H 52 list II to enact the impugned law; that the State legislature is competent
JINDAL STAINLESS LTD. v. STATEOFHARYANA [KAPADIA, J.] 1111

to levy such tax because the incidence of tax is on the entry of goods into A
a local area for consumption, use or sale therein and, therefore, it is not a tax
on the import of goods from outside India, nor a tax on the manufacture of
goods, nor a tax on the export of the goods to places outside the State.
Finally, it is not a sales tax. Learned counsel further contended that under
entry 52 list II it is not obligatory for the State to enact a law for the levy B
of entry tax on .goods which are brought for use, consumption or sale; it is
within the power of the State to make a law for levy of such tax on goods
brought for use, consumption or sale. Learned counsel submitted that the
legislature has selected goods brought for use or consumption in a local area
for the purposes of the levy; that it is within the power of the State to make
a law for levy of tax on goods for any of the three purposes or for one of C
them or two of them. Learned counsel submitted that Article 286 read with
entry 41, entry 83, entry 92A and entry 928 does not have any bearing on
the constitutional validity of the impugned 2000 Act because the above entries
deal with different subjects; that the entry tax is not a tax on sale of goods
affected by branch transfer or export out-of-State. Learned counsel urged that·
the entry tax is compensatory in character and, therefore, the impugned levy D
which is compensatory in nature, as can be seen from section 22 of the said
Act, does not attract Article 301 and Article 304(a) of the Constitution.
Learned counsel submitted that section 22 of the Act was amended on
September 30, 2003 clarifying that the tax levied and collected shall be
utilized for facilitating free flow of trade and commerce. Learned counsel, E
therefore, submitted that the levy is compensatory in nature. Learned counsel
next contended that the compensatory levy need not satisfy the rule of quid
pro quo strictly; that it is sufficient that there is some relation or nexus
between facilities provided and the tax imposed. Even the concept of fee has
undergone significant change over the years as a result of a catena of decisions
of this court and, therefore, this reference under Article 145(3) of the F
Constitution was uncalled for. As a matter of preliminary submission, Shri
P.P. Rao, learned senior counsel for the State, contended that in view of the
amendment made by Act 18 of 2003 adding an explanation to section 22 of
the impugned 2000 Act clarifying that the tax collected shall be utilized for
developing and maintaining infrastructure facilities useful for free flow of G
trade, the question involved in this matter has become academic. Learned
counsel submitted that in view of various decisions of the Constitution Bench

I the case should have been first placed before a bench of three Judges and not
before a constitution bench straight away. It is only when that bench refers
it to five Judges t(1at the case should have been placed before a constitution
I bench because it has been a settled law that a bench of two judges is bound H
1112 SUPREME COURT REPORTS [2006] 3 S.C.R.

A by the principles of law laid down by a bench of three judges which alone
has the jurisdiction to interpret the law declared by a constitution bench. In
this connection reliance was placed on two judgments of this court, in the
case of Pradip Chandra Parija & Ors. v. Pramod Chandra Patnaik & Ors.. 11
and in the case of Central Board of Dawoodi Bohra Community & Anr. v.
State of Maharashtra & Anr., 12 • On merits learned counsel urged that the
B Constitution contemplates levy of taxes and levy of fees. He urged that in the
case offees, quid pro quo is an essential element though not in taxes. However,
compensatory taxes are an exception; they contain an element of quid pro
quo but not to the extent as in the case of "fees". Learned counsel placed
reliance in this connection on the judgment of this court in the case of Mis
C International Tourist Corporation etc. etc. v. State of Haryana and Ors. etc.
etc. 13 • Learned counsel submitted that the extent of quid pro quo required in
a fee has undergone a sea-change and it would be irrational to insist on such
a test in the case of compensatory tax. Learned counsel next submitted that
the element of compensation in compensatory taxes needs to be interpreted
taking note of constitutional developments, the changed perception of the
D entire relationship of fundamental rights and directive principles as well as
the sea-change in the concept of fee particularly with reference to the element
of quid pro quo.Learned counsel submitted that the principles of law declared
in Bhagatram' are consistent with contemporary thinking about the basic
cor1cepts of tax, fee and compensatory tax with due regard to the developments
E subsequent to Automobile Transport.

Shri Rakesh Dwivedi, learned senior counsel appearing for the State of
U.P., submitted that while laying down parameters of compensatory tax for
purposes of Part-Xlll it is necessary to note that under the scheme of our
Constitution, States have certain powers including the power to raise revenue
F by taxation and further Article 30 I has to be applied for the working of an
orderly society. Learned counsel submitted that the States must have revenue
to carry out their administration; that there are several items relating to the
imposition of taxes in list II, therefore, according to learned counsel the
Constitution framers intended that under such items the States are entitled to
raise revenue for their own purposes. Learned counsel submitted that any
G wide view of the word "freedom" under Article 301 or even a restricted view
of the term "compensatory tax" would put an end to the State autonomy and
11. 120021 1 sec 1.

12. 12oos12 sec 673.
H 13. AIR (1981) SC 774 (para "8').
JINDAL STAINLESS LTD. v. STATEOFHARYANA [KAPADIA, J.] 1113

its plenary powers within the fields allotted to them. In this connection reliance A
was placed on the judgment of this court in the case of Automobile Transporf'.
It was urged that the State legislature may impose different kinds of taxes
and duties such as property tax, sales tax, excise duty etc. and legislation in
respect of any one of these ite!Jls, may have an indirect effect on trade and
commerce. Learned counsel submitted that if every Jaw made by the State
legislature which has an indirect effect on free flow of trade is required to B
have prior sanction of the President then the Constitution insofar as it gives
plenary power to the States and the State legislatures in the fields allocated
to them would be rendered meaningless and, therefore, it cannot be laid
down as a general proposition that the power to tax is outside the purview
of constitutional limitation of Part-XIII. Learned counsel submitted that in C
any event regulatory measures and compensatory taxes are not hit by Article
30 I. Learned counsel urged that in every case the court will have to ascertain
whether an impugned Jaw directly and immediately affects the movement of
trade or whether it indirectly or remotely affects such movement. Learned
counsel submitted that while Parliament cannot trench upon the exclusive
domain preserved for the State legislature under list II, the central executive D
nevertheless would oversee and sanction most of the taxing measures under
Article 304 and, therefore, the wider concept of compensatory tax should be
accepted. Learned counsel next submitted that all taxing power is for raising
revenue. However, it cannot be argued that while imposing a compensatory
tax the States cannot raise general revenue. Learned counsel submitted that E
this court has drawn consistently a distinction between a "tax" and a "fee",
and the power of taxation has always been understood as. a power to raise
revenue. It was urged that even in Automobile Transport, while discussing
the concept of compensatory tax, this court never intended to Jay down that
such compensatory taxes are not revenue measures but are fees. Any such
view would be contrary to the scheme of distribution of powers and also the F
structure of the seventh schedule and, therefore, a tax which is levied to
facilitate trade and commerce would remain compensatory even if some extra
revenue is generated. Learned counsel next submitted that even with respect
to fee for licence and fee for service this court has adopted a broad test of
co-relation between money raised and expenditure incurred; in this connection G
reliance, was placed on the judgment of this court in the case of Ram Chandra
Kai/ash Kumar & Co. & Ors. v. State of U.P. & Anr. 14. In the above case it
was held that the amount of fee realized must be earmarked for rendering
services to the licensees in the notified market and a substantial..portion of it
must be shown to be spent for the requisite purpose. That the services rendered
to the licensees must be in relation to the transaction of purchase or sale of H
1114 SUPREME COURT REPORTS [2006] 3 S.C.R.

A the goods; that while rendering services in the market area for the purposes
of facilitating the transactions of produce and sale, it is not necessary to
confer the whole of the benefit on the licensee but some special benefit must
be conferred on the licensee which must have a direct, close and reasonable
co-relation between the iransaction and the licensee. That the spending of the
amount of market fees for augmenting agriculture produce, for augmenting
B the facility of transport in villages with a view that such services in the long
run would increase the volume of transactions in the market, was not
permissible on the ground that such a benefit was an indirect and remote
benefit to the traders; that the element of quid pro quo may not be possible
but even broadly and reasonably, it must be established by the authorities
C who charge the fees that the amount was being spent for rendering services
to traders on whom the burden falls. Learned counsel submitted that the tests
laid down with regard to quid pro quo under principles 2, 3 and 5 in the case
of Ram Chandra Kai/ash Kumar 14 have no application to the compensatory
tax because the concept of compensatory tax is only to judge the effect on
trade, commerce and intercourse and, therefore, according to learned counsel
D the test of direct and close relation/link between the levy and the service
rendered, cannot be applied to the concept of compensatory tax. Learned
counsel submitted that the only test which is applicable to the concept of
compensatory tax is-whether "trade and commerce" is benefitted generally
by such levy; that, it should be sufficient ifthe facilities provided in the local
E area ultimately lead to better trading and commerce and even indirect benefit
to traders in future on the ground that such services would increase the
volume of trade in the market, can constitute an important element of
compensatory tax. Learned counsel next urged that the parameters for
adjudging a tax as compensatory or regulatory would depend upon the nature
of tax or in other words, the particular entry in list II with respect to which
F the tax is imposed. In this connection, it was urged that the scope of entry
52, entry 56, entry 57 and entry 59 in list II cannot be identical and, therefore,
the parameters for those entries cannot be identical, they have to be different.
That, the very nature of tax indicates the nature of facility with which the tax
has a link. While entries 56, 57 and 59 indicate a nexus with road, waterways,
G bridges etc. entry tax under entry 52 does not have such limited range of
facility. It has a nexus with local area which is equivalent to local authority
as held in the case of Diamond Sugar Mills Ltd. & Anr. v. The State of U.P.
& Anr. 11 • According to learned counsel entry tax, therefore, is for the purposes
14. [1980J supp. sec 21.

H 1s. (196113 sec 242.
JINDAL STAINLESS LTD. v. S!ATEOFHARYANA [KAPADIA, J.) 1115
of enabling the local bodies to discharge their several functions. Learned A
counsel next urged that there is one more aspect of entry tax, it has a co-
relation to bring in goods for consm,nption, use or sale in a local area. The
consumption, use or sale not only require roads but also a proper hygiene,
lighting, drinking water, health, sanitation etc.; that, it is not possible to have
trade without such facilities, therefore, the compensatory character of the B

- entry tax has to be adjudged with reference to the revenue collected and with
reference to the various functions of the local body. Learned counsel contended
that a tax can also be collected by the State and then assigned to the local
body; that such collection avoids duplication of levy. Learned counsel
contended that uneven economic development of various States in India
hampers and hinders free flow of trade throughout India and, therefore, it is C
in the interest of trade and commerce that backward areas should be developed
and, therefore, merely because the States assigned proportionately more money
to backward local areas should not be objected to, so long as good and
substantial portion assigned to the specified local area from which tax is
collected. Learned counsel, therefore, contended in conclusion that a broad
co-relation of the levy with the facility was enough. Learned counsel contended D
that in the case of Boiani Ores Ltd. etc. v. State of Orissa etc. 16 the Taxation
Act envisaged imposition of tax on motor vehicles actually using the roads
saying that if the facility is not used then no tax can be collected and if
collected it will not be compensatory. Learned counsel contended, however,
that the judgment of this court in Boiani Ores 16 was in the context of entry E
52 list II which restricts the imposition of tax by actual use of roads by
vehicles. A tax upon vehicles need not be contingent upon actual user. In this
connection reliance was placed on entry 57. Therefore, it was submitted that
a compensatory character of tax would not be lost merely because some
vehicles pay tax even though they may not use the roads. Learned counsel
urged that under entry 57 list II once the vehicle is suitable for use on road, F
the tax can be imposed. Learned counsel, therefore, submitted that if a statute
fixes a charge for convenience or service provided by the State and imposes
the tax upon those who avail themselves of such service or convenience the
freedom of trade and commerce will not be impeded. As long as the dealer/
trader has a choice to use the goods brought into the local area the levy on G
such entry is compensatory. Learned counsel submitted that Article 304(a)
coupled with the test of reasonableness as applied to fiscal measures shows
that a tax which is non-discriminatory would be presumed to be compensatory
if it has some relation to the facilities provided. Similarly, on the converse

16. AIR (1975) 17. H
1116 SUPREME COURT REPORTS (2006] 3 S.C.R.

A side a tax which is discriminatory would be hit by Article 301. Shri Dwivedi
lastly submitted that in the case of Bihar Chamber ofCommerce'- two principles
were propounded. It was reiterated that there should be some connection
between a tax and the facilities. To that extent learned counsel submitted
that there is no discord with the judgment of this court in the case of
B Automobile Transporf'. The second principle propounded was that it would
be permissible to consider in the context of entry tax that the whole of the
State is divided into local areas and, therefore, the court held that it would
be permissible to consider various facilities provided by the State in all the
-
local areas. Learned counsel submitted that this second principle/proposition
should be followed by a caveat or a rider to the effect that the traders who
C pay the tax in a local area should be shown to have been provided with
substantial facilities as a class. Learned counsel submitted that subject to
above caveat/rider there was no need to overrule the judgments of this court
in the case of Bhagatram 1 and in the case of Bihar Chamber of Commerce'-.

Shri Dinesh Dwivedi, learned senior counsel appearing for the State of
D Uttar Pradesh and Shri B. Sen, learned senior counsel appearing for the State
of Rajasthan substantially adopted the submissions made by S/Shri P.P. Rao
and Rakesh Dwivedi, learned senior counsel.

ANALYSIS OF THE RELEVANT PROVISIONS OF PART-XIII:

E The relevant provisions are as follows:

"'30 I. Freedom of trade, commerce and intercourse.-Subject to the
other provisions of this Part, trade, commerce and intercourse
throughout the territory of India shall be free.

F 302. Power of Parliament to impose restrictions on trade, commerce
and intercourse.-Parliament may by law impose such restrictions on
the freedom of trade, commerce or intercourse between one State and
an~her o'r within any part of the territory of India as may be required
in the public interest.

G 303. Restrictions on the legislative powers of the Union and of the
States with regard to trade and commerce.-

(I) Notwithstanding anything in article 302, neither Parliament
nor the Legislature of a State shall have power to make any law ·
giving, or authorizing the giving of, any preference to one State
H over another, or making, or authorizing the making of, any
JINDAL STAINLESS LTD. v. STATEOFHARYANA [KAPADIA,J.] 1117

discrimination between one State and another, by virtue of any A
entry relating to trade and commerce in any of the Lists in the
Seventh Schedule.

(2) Nothing in clause (I) shall prevent Parliament from making
any law giving, or authorizing the giving of, any preference or making,
or authorizing the making of, any discrimination if it is declared by B
such law that it is necessary to do so for the purpose of dealing with
a situation arising from scarcity of goods in any part of the territory
of India.

304. Restrictions on trade, commerce and intercourse among
Stales.-Notwithstanding anything in article 301 or article 303, the C
Legislature of a State may by law-

(a) impose on goods imported from other States or, the Union
territories any tax to which similar goods manufactured or
produced in that State are subject, so, however, as not to D
discriminate between goods so imported and goods so
manufactured or produced; and

(b) impose such reasonable restrictions on the freedom of trade,
commerce or intercourse with or within that State as may be
required in the public interest: E
Provided that no Bill or amendment for the purposes of clause (b)
shall be introduced or moved in the Legislature of a State without the
previous sanction of the President."

INTRODUCTION:
F
Section 8 of Article I of the U.S. Constitution contains what is called
"Commerce Clause", which regulates trade and commerce. Keeping in mind
the dual form of government in USA and the concept of "Police Power" vis-
a-vis the "Taxing Power", the U.S. Supreme Court has held that the commerce
power embodied in the commerce clause implies the power to regulate; that G
is the power to prescribe the rule by which commerce is to be governed (See:
Constitutional Law by Stone). Section 8 of Article I is an authorization in
favour of the Congress to enact laws for the protection and encouragement
of commerce among the States. By its own force, it creates an area of trade
free from interference by the States. Therefore, the commerce clause is per
H
1118 SUPREME COURT REPORTS [2006] 3 S.C.R.

A se a limitation upon the power of the States and is not dependent upon the
law being enacted. It prohibits the States from enacting a law which impedes
free flow of trade between the States.

On the other hand, section 92 of the Australian Constitution provides
for freedom of trade and commerce. It does not seek to regulate as in case
B of commerce clause. However, it has been held in numerous decisions of the
Privy Council and the Australian High Courts that section 92 leaves open the
regulation of trade and commerce at all events until the regulation is enacted
provided it does not impede the true freedom of inter-State commerce. This
reasoning is based on the principle that all trade and commerce must be
C conducted subject to law. Thus, we have the difference between taxing and
regulatory laws. This is how the concept of "regulatory charges" came about.

Article 301 is inspired by section 92 of the Australian Constitution
when it refers to freedom of trade and commerce, however, Article 30 I is
subject to limitations and conditions in Articles 302, 303 and 304 which are
D borrowed from the commerce clause under Article I of the US Constitution.
Therefore, Part-XIII is an amalgam of the United States and Australian
Constitutions which brings out the difference between regulatory and taxing
powers. This is how the concept of Payment for Revenue and concept of
Payment for Regulation arose. This is how the regulatory power stood excluded
E from the taxing power and on that reasoning in Automobile Transport case,
this Court took the view that compensatory taxes constitute an exception to
Article 30 l. It is a judicially evolved concept. However, the basis of that
concept was not discussed by this Court in that case which we have done in
this case. Suffice it to state at this stage that the basis of special assessments,
betterment charges, fees, regulatory charges is "recompense/reimbursement"
F of the cost or expenses incurred or incurrable 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", this Court has equated
regulatory charges with compensatory taxes and since it is the view expressed
G by a Bench of seven Judges, we have to proceed on that basis. The fall-out
is that compensatory tax becomes a sub-class of fees.

SCOPE OF ARTICLES 301, 302 AND 304:

Article 30 l states that subject to the other provisions of Part-XIII,
H trade, commerce and intercourse throughout India shall be free. It is not
JINDAL STAINLESS LTD. v. STATE OFHARYANA [KAPADIA, J.] 1119

· freedom from all laws but freedom from such laws which restrict or affect A
activities of trade and commerce amongst the States. Although Article 301 is
positively worded, in effect, it is negative as freedom correspondingly creates
general limitation on all legislative power to ensure that trade, commerce and
intercourse throughout India shall be free. Article 301, therefore, refers to
freedom from laws which go beyond regulations which burdens, restricts or B
prevents the trade movement between States and also within the State. Since
"freedom" correspondingly imposes "limitation'', we have the doctrine of
"direct and immediate effect" of the operation of the impugned law on the
freedom of trade and commerce in Article 301 as enunciated in Atiabari Tea
Ca.4

Article 301 is, therefore, not only an authorization to enact Jaws for the
c
protection and encouragement of trade and commerce amongst the States but
by its own force creates an area of trade free from interference by the State
and, therefore, Article 30 I per se constitutes limitation on the power of the
State. Article 30 I is, however, subject to the other provisions of Articles
302, 303 and 304. It states that subject to other provisions of Part-XIII, trade, D
commerce and intercourse throughout India shall be free.

Article 301 is binding upon the Union Legislature and the State
Legislatures, but Parliament can get rid of the limitation imposed by Article
_._ 301 by enacting a law under Article 302. Similarly, a law made by the State E
Legislature in compliance with the conditions imposed by Article 304 shall
not be hit by Article 30 l. Article 301 thus provides for freedom of inter-State
as well as intra-State trade and commerce subject to. other provisions of Part-
XIII and correspondingly it imposes a general limitation on the legislative
powers which limitation is relaxed under the following circumstances:
F
(a) Limitation is relaxed in favour of the Parliament under Article
302, in which case Parliament can impose restrictions in public
interest. Although the fetter is limited enabling the Parliament
to impose by law restrictions on the freedom of trade in public
interest under Article 302, nonetheless, it is clarified in clause
(1) of Article 303 that notwithstanding anything contained in G
Article 302, the Parliament is not authorized even in public
interest, in the making of any law, to give preference to one
State over another. However, the said clarification is subject to
one exception and thac too only in favour of the Parliament,
. where discrimination or preference is admissible to the Parliament H
1120 SUPREME COURT REPORTS [2006] 3 S.C.R.

A in making of laws in case of scarcity. This is provided in clause
(2) of Article 303.

(b) As regards the State Legislatures, apart from the limitation
imposed by Article 301, clause ( 1) of Article 303 imposes
additional limitation, namely, that it must not give preference or
B make discrimination between one State or another in exercise of
its powers relating to trade and commerce under Entry 26 of
List-II or List-III. However, this limitation on the State
Legislatures is lifted in two cases, namely, it may impose on
goods imported from sister State(s) or Union Territories any tax
to which similar goods manufactured in its own State are
c subjected but not so as to discriminate between the imported
goods and the goods manufactured in the State [See Clause (a)
of Article 304]. In other words, clause (a) of Article 304
authorizes a State Legislature to impose a non-discriminatory
tax on goods imported from sister State(s), even though it
D interferes with the freedom of trade and commerce guaranteed
by Article 30 I. Secondly, the ban under Article 303(1) shall
stand lifted even if discriminatory restrictions are imposed by
the State Legislature provided they fulfill the following three
conditions, namely, that such restrictions shall be in public
interest; they shall be reasonable; and lastly, they shall be subject
E to the procurement of prior sanction of the President before
introduction of the bill.

Broadly, the above analysis of the scheme of Articles 30 I to 304 shows
that Article 304 relates to the State Legislature while Article 302 relates to
F the Parliament in the matter of lifting of limitation, which, as stated above,
flows from the freedom of trade and commerce guaranteed under Article
30 I. Article 304 also confers upon the State Legislature power to lift the
limitations imposed on it by Article 30 I and clause (I) of Article 303. This
aspect is important because the doctrine of "direct and immediate effect"
which is mentioned in Atiabari Tea Co. 4 emerges from the concept of
G "limitation" embodied in Article 30 I. It is this doctrine of direct and immediate
effect which constitutes the basis of the working test propounded vide para
19 in Automobile Transport". Therefore, whenever the law is impugned as
violative of Article 30 l, the Courts will have to examine the effect of the
operation of the impugned law on the inter-State and the intra-State movement
H of goods, which movement constitutes an integral part of trade. ...
JINDAL STAINLESS LTD. v. STATEOFHARYANA [KAPADIA, J.] 1121

~--. We have examined and analyzed the relevant provisions of Part-XIII A
and particularly Article 30 I as we are required to lay down the parameters
of compensatory tax vis-a-vis Article 30 I, as indicated vide para 27 of the
referral order.

GENERIC CONCEPT OF COMPENSATORY TAX: INTRODUCTION:
B
The concept of compensatory tax is not there in the Constitution but is
judicially evolved in Automobile Transporf' as a part of regulatory charge.
Consequently, we have to go into concepts and doctrines of taxing powers
vis-a-vis regulatory powers, particularly when the concept of compensatory
tax was judicially crafted as an exception to Article 30 I in Automobile C
Transporf'.

DIFFERENCE BETWEEN EXERCISE OF TAXING AND
REGULATORY POWER:

In the generic sense, tax, toll, subsidies etc. are manifestations of the
D.
exercise of the taxing power. The primary purpose of a taxing statute is· the
collection of revenue. On the other hand, regulation extends to administrati.ve
acts which produces regulative effects on trade and commerce. The difficulty
arises because taxation is also used as a measure of regulation. There is a
working test to decide whether the law impugned is the result of the exercise
of regulatory power or whether it is the product of the exercise of the taxing E
power. If the impugned law seeks to control the conditions under which an
activity Eke 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 of the operation of such a F
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 levy is regulatory. This is the way
of reconciling the concept of compensatory tax with the scheme of Articles
30 I, 302 and 304. For example, for installation of pipeline carrying gas from G
Gujarat to Rajasthan, which passes through M.P., a fee charged to provide
security to the pipeline will come in the category of manifestation of regulatory
power. However, a tax levied on sale or purchase of gas which flows from
that very pipe is a manifestation of exercise of the taxing power. This example
indicates the difference between taxing and regulatory powers [See: Essays H
1122 SUPREME COURT REPORTS [2006] 3 S.C.R..

A in Taxation by Setigman].
DIFFERENCE BETWEEN "A TAX", "A FEE" AND "A
COMPENSATORY TAX":

PARAMETERS OF COMPENSATORY TAX:-
B
As stated above, in order to lay down the parameters of a compensatory
tax, we must know the concept of taxing power.

Tax is levied as a part of common burden. The basis of a tax is the
ability or the capacity of the taxpayer to pay. The principle behind the levy
C of a tax is the principle of ability or capacity. In the case of a tax, there is
no identification of a specific benefit and even if such identification is there,
it is not capable of direct measurement. In the case of a tax, a particular
advantage, if it exists at all, is incidental to the States' action. It is assessed
on certain elements of business, such as, manufacture, purchase, sale,
D consumption, use, capital etc. but its payment is not a condition precedent.
It is not a term or condition of a licence. A fee is generally a term of a
licence. A tax is a payment where the special benefit, if any, is converted into
common burden.

On the other hand, a fee is based on the ·'principle of equivalence".
E This principle is the converse of the "principle of ability" to pay. In the case
of a fee or compensatory tax, the "principle of equivalence" applies. The
basis of a fee or a compensatory tax is the same. The main basis of a fee or
a compensatory tax is the quantifiable and measurable benefit. In the case of
a tax, even if there is any benefit, the same is incidental to the government
action and even if such benefit results from the government action, the same
F is not measurable. Under the principle of equivalence, as applicable to a fee
or a compensatory tax, there is an indication of a quantifiable data, namely,
a benefit which is measurable.

A tax can be progressive. However, a fee or a compensatory tax has to
G be broadly proportional and not progressive. In the principle of equivalence,

---
which is the foundation of a compensatory tax as well as a fee, the value of
the quantifiable benefit is represented by the costs incurred in procuring the
facility/services which costs in turn become the basis of reimbursement/
recompense for the provider of the services/facilities. Compensatory tax is
based on the principle of "pay for the value". It is a sub-class of "a fee".
H
JINDAL STAINLESS LTD. v. STATEOFHARYANA [KAPADIA, J.] 1123
-\
From the point of view of the Government, a compensatory tax is a charge A
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, are always proportional to benefits.
They are based on the principle of equivalence. However, a compensatory
B
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 of equivalence", 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. Ability or capacity to pay is measurable by property or rental value. c
Local rates are often charged according to ability to pay. Reimbursement or
recompense are the closest equivalence to the cost incurred by the provider
of the services/facilities. The theory of compensatory tax is that it rests upon
the principle that if the government by some positive action confers upon
individual(s), a particular measurable advantage, it is only fair to the
community at large that the beneficiary shall pay for it. The basic difference D
between a tax on one hand and a fee/compensatory tax on the other hand is
that the former is based on the concept of burden whereas compensatory tax/
fee is based on the concept of recompense/reimbursement. For a tax to be
compensatory, there must be some link between the quantum of tax and the
facility/services. Every benefit is measured in terms of cost which has to be E
reimbursed by compensatory tax or in the form of compensatory tax. In other
words, compensatory tax is a recompense/reimbursement.

In the context of Article 301, therefore, compensatory tax is a
compulsory contribution levied broadly in proportion to the special benefits
derived to defray the costs of regulation or to meet the outlay incurred for F
some special advantage to trade, commerce and intercourse. It may incidentally
bring in net-revenue to the government but that circumstance is not an essential
ingredient of compensatory tax.

Since compensatory tax is a judicially evolved concept, understanding
of the concept, as discussed above, indicates its parameters. G

To sum up, the basis of every levy is the controlling factor. In the case
of "a tax'', the levy is a part of common burden based on the principle of
ability or capacity to pay. In the case of "a fee", the basis is the special
.,_ benefit to the payer (individual as such) based on the principle of equivalence. H
1124 SUPREME COURT REPORTS [2006] 3 S.C.R.
( -
A When the tax is imposed as a part of regulation or as a part of regulatory
measure, its basis shifts from the concept of "burden" to the concept of
measurable/quantifiable benefit and then it becomes "a compensatory tax"
and its payment is then not for revenue but as reimbursement/recompense to
the service/facility provider. It is then a tax on recompense. Compensatory
tax is by nature hybrid but it is more closer to fees than to tax as both fees
B and compensatory taxes are based on the principle of equivalence and on the
basis of reimbursement/recompense. If the impugned law chooses an activity
like trade and commerce as the criterion of its operation and if the effect of
the operation of the enactment is to impede trade and commerce then Article
30 I is violated.
c BURDEN ON THE STATE:
Applying the above tests/parameters, whenever a law is impugned as
violative of Article 30 I of the Constitution, the Court has to see whether the
impugned enactment facially or patently indicates quantifiable data on the
D basis of which the compensatory tax is sought to be levied. The Act must
facially indicate the benefit which is quantifiable or measurable. It must
broadly indicate proportionality to the quantifiable benefit. If the provisions
are ambiguous or even if the Act does not indicate facially the quantifiable
benefit, the burde.1 will be on the State as a service/facility provider to show
by placing the material before the Court, that the payment of compensatory
E tax is a reimbursement/recompense for the quantifiable/measurable benefit
provided or to be provided to its payer(s). As soon as it is shown that the Act
invades freedom of trade it is necessary to enquire whether the State has
proved that the restrictions imposed by it by way of taxation are reasonable
and in public interest within the meaning of Article 304(b) [See: para 35 of
F the decision in the case of Khyerbari Tea Co. Ltd. & Anr. v. State of Assam
& Ors., reported in AIR (1964) SC 925].

SCOPE OF ARTICLES 301, 302 and 304 VIS-A-VIS COMPENSATORY
TAX:

G As stated above, taxing laws are not excluded from the operation of
Article 301, which means that tax laws can and do amount to restrictions on
the freedom guaranteed to trade under Part-XIII of the Constitution. This
principle is well settled in the case of Atiabari Tea Co.' . It is equally important
-
to note that in Atiabari Tea Co.', the Supreme Court propounded the doctrine
of"direct and immediate effect". Therefore, whenever a law is challenged on
H
JINDAL STAINLESS LTD. v. STATEOFHARYANA [KAPADIA,J.] 1125

the ground of violation of Article 30 l, the Court has not only to examine the A
pith and substance of the levy but in addition thereto, the Court has to see
the effect and the operation of the impugned law on inter-State trade and
commerce as well as intra-State trade and commerce.

When any legislation, whether it would be a taxation law or a non-
taxation law, is challenged before the court as violating Article 30 I, the first B
question to be asked is: what is the scope of the operation of the law?
Whether it has chosen an activity like movement of trade, commerce and
intercourse throughout India, as the criterion of its operation? If yes, the next
question is: what is the effect of operation of the law on the freedom guaranteed
under Article 301? If the effect is to facilitate free flow of trade and commerce C
then it is regulation and if it is to impede or burden the activity, then the law
is a restraint. After finding the law to be a restraint/restriction one has to see
whether the impugned law is enacted by the Parliament or the State Legislature.
Clause (b) of Article 304 confers a power upon the State Legislature similar
to that conferred upon Parliament by Article 302 subject to the following
differences:- D
(a) While the power of Parliament under Article 302 is subject to
the prohibition of preference and discrimination decreed by
Article 303( 1) unless Parliament makes the declaration under
Article 303(2), the State power contained in Article 304(b) is E
made expressly free from the prohibition contained in Article
303( 1) because the opening words of Article 304 contains a
non-obstante clause both to Article 301 and Article 303.

(b) While the Parliament's power to impose restrictions under Article
302 is not subject to the requirement of reasonableness, the F
power of the State to impose restrictions under Article 304 is
subject to the condition that they are reasonable.

(c) An additional requisite for the exercise of the power under Article
304(b) by the State Legislature is that previous Presidential
sanction is required for such legislation. G
WHY WAS THE MATTER PLACED BEFORE A BENCH OF FIVE
JUDGES:

The concept of compensatory taxes was propounded in the case of
Automobile Transport" in which compensatory taxes were equated with H
1126 SUPREME COURT REPORTS [2006] 3 S.C.R.
.-
A regulatory taxes. In that case, a working test for deciding whether a tax is
compensatory or not was laid down. In that judgment, it was observed that
one has to enquire whether the trade as a class is having the use of certain
facilities for the better con.duct of the trade/business. This working test remains
unaltered even today.

B As stated above, in the post 1995 era, the said working test propounded
in the Automobile Transport" stood disrupted when in Bhagatram 's case 1, a
Bench of three Judges enunciated the test of "some connection" saying that
even if there is some link between the tax and the facilities extended to the
trade directly or indirectly, the levy cannot be impugned as invalid. In our
C view, this test of "some connection" enunciated in Bhagatram 's case 1 is not
only contrary to the working test propounded in Automobile Transport 's
case' but it obliterates the very basis of compensatory tax. We may reiterate
that when a tax is imposed in the regulation or as a part of regulatory measure
the controlling factor of the levy shifts from burden to reimbursement/
recompense. The working test propounded by a Bench of seven Judges in the
D case of Automobile Transport and the test of "some connection" enunciated
by a Bench of three Judges in Bhagatram 's case 1 cannot stand together.
Therefore, in our view, the test of "some connection" as propounded in
Bhagatram 's case 1 is not applicable to the concept of compensatory tax and
accordingly to that extent, the judgments of this Court in Bhagatram
E Rajeevkumar v. Commissioner of Sales Tax, M.P. 1 and State of Bihar v.
Bihar Chamber of Commerce2 stand overruled.

Before concluding, we may point out that parties before us have taken
more or less extreme positions and, therefore, we have not examined the
arguments in seriatim.
F
CONCLUSION:

In our opinion, the doubt expressed by the referring Bench about the
correctness of the decision in Bhagatram 's case 1 followed by the judgment
in the case of Bihar Chamber of Commerce2 was well-founded.
G
We reiterate that the doctrine of "direct and immediate effect" of the
impugned law on trade and commerce under Article 301 as propounded in
Atiabari Tea Co. Ltd. v. State of Assam• and the working test enunciated in
-
Automobile Transport (Rajastha'1) Ltd. v. State of Rajasthan' for deciding
whether a tax is compensatory or not vide para 19 of the report, will continue
H
JINDAL STAINLESS LTD. v. STATEOFHARYANA [KAPADIA, J.] 1127
- \

to apply and the test of "some connection" indicated in para 8 of the judgment A
in Bhagatram Rajeevkumar v. Commissioner ofSales Tax, MP. 1 and followed
in the case of State of Bihar v. Bihar Chamber of Commerce', is, in our
opinion, not good law. Accordingly, the constitutional validity of various
local enactments which are the subject matters of pending appeals, special
leave petitions and writ petitions will now be listed for being disposed of in B
the light of this judgment.

B.S. Answered the question referred to.