Jindal Stainless Ltd v State of Haryana (2017)

It is the last word on freedom of trade, commerce and intercourse. It overrules the two decisions that had governed Part XIII for half a century — Atiabari Tea Co. and Automobile Transport (Rajasthan) — and rejects the compensatory tax theory outright. Any answer on Part XIII that stops at Atiabari and Automobile Transport is out of date.

Part XIII opens with Art. 301: subject to the other provisions of the Part, trade, commerce and intercourse throughout the territory of India shall be free. The question that dominated the case law was whether a tax is by itself a restriction on that freedom.

Atiabari had held that a tax which directly and immediately restricts the movement of trade falls within Art. 301. Automobile Transport qualified it by carving out compensatory taxes — levies which merely recompense the State for facilities provided to the trade — as outside Art. 301 altogether. An earlier Jindal decision had modified the theory again. The result was a body of doctrine turning on whether a levy was compensatory, a question that generated endless litigation over entry tax and other State levies.

The question had been doubted as early as 1975 in G. K. Krishnan v State of Tamil Nadu, (1975) 1 SCC 375, and the reference order set out some of the questions requiring consideration by a larger Bench.

At the hearing counsel agreed, after a day-long exploratory exercise, that the questions could be reframed as follows:

1. Can the levy of a non-discriminatory tax per se constitute an infraction of Art. 301?
2. If yes, can a tax which is compensatory in nature also fall foul of Art. 301?
3. What are the tests for determining whether a tax or levy is compensatory in nature?
4. Is the entry tax levied by the States in this batch of cases violative of Art. 301, and in particular must the impugned State enactments be tested against both Art. 304(a) and Art. 304(b) for validity?

The starting premise was that the power of the State Legislatures to levy taxes is subject to the limitations of Art. 304(a) appearing in Part XIII, which regulates trade and commerce.

By majority the Court answered the reference in these terms.

1. Taxes simpliciter are not within the contemplation of Part XIII. The word free in Art. 301 does not mean free from taxation.

2. Only such taxes as are discriminatory in nature are prohibited by Art. 304(a). It follows that the levy of a non-discriminatory tax would not constitute an infraction of Art. 301.

3. Clauses (a) and (b) of Art. 304 have to be read disjunctively.

4. A levy that violates Art. 304(a) cannot be saved even if the procedure under Art. 304(b) or the proviso thereunder is satisfied.

5. The compensatory tax theory evolved in Automobile Transport and subsequently modified in Jindal has no juristic basis and is therefore rejected.

6. The decisions in Atiabari, Automobile Transport and Jindal, and all other judgments that follow those pronouncements, are overruled to the extent of such reliance.

7. A tax on entry of goods into a local area for use, sale or consumption therein is permissible although similar goods are not produced within the taxing State.

8. Art. 304(a) frowns upon discrimination of a hostile nature in the protectionist sense, and not upon mere differentiation. Therefore incentives, set-offs and the like granted to a specified class of dealers for a limited period of time in a non-hostile fashion with a view to developing economically backward areas would not violate Art. 304(a). Whether the levies in the cases before the Court satisfied that test was left to be determined by the regular Benches hearing the matters.

9. States are well within their right to design their fiscal legislation to ensure that the tax burden on goods imported from other States and goods produced within the State falls equally. Such measures do not contravene Art. 304(a).

• Art. 302: Parliament may by law impose such restrictions on the freedom of trade, commerce or intercourse between one State and another or within any part of the territory of India as may be required in the public interest.
• Art. 303(1): notwithstanding Art. 302, neither Parliament nor a State Legislature may make a law giving preference to one State over another, or making discrimination between States, by virtue of any entry relating to trade and commerce in any of the Lists.
• Art. 303(2): the sole exception, available to Parliament alone, where the law declares that it is necessary to do so for dealing with a situation arising from scarcity of goods in any part of India.
• Art. 304(a): a State may impose on goods imported from other States or Union territories any tax to which similar goods manufactured or produced in that State are subject, so as not to discriminate between imported and locally produced goods.
• Art. 304(b): a State may impose reasonable restrictions on the freedom of trade with or within that State as required in the public interest — but no Bill or amendment for that purpose may be introduced or moved without the previous sanction of the President.
• Art. 305: saves existing laws, except so far as the President otherwise directs, and saves laws relating to State monopolies within Art. 19(6)(ii).
• Art. 307: Parliament may by law appoint an authority to carry out the purposes of Arts. 301 to 304.

Under the old law the crucial question was whether a levy was compensatory, a factual enquiry into whether the State provided facilities of roughly equivalent value to the trade. That test had no textual home; Part XIII nowhere mentions compensation. The Court's answer relocates the enquiry in the text: Art. 301 is not about taxation at all, and the operative limit on State taxing power is the non-discrimination rule in Art. 304(a). The question is no longer did the State give something back? but does the tax treat goods from outside the State worse than goods produced inside it?

The corollary in conclusion 8 keeps the rule workable. Differentiation is not discrimination. A State may give a limited, non-hostile incentive to a class of dealers in order to develop a backward area without offending Art. 304(a); what it may not do is protect its own producers against goods from other States.

The freedom guaranteed by Art. 301 is not a freedom from taxation. A State tax offends Part XIII only if it is discriminatory within Art. 304(a), that is, hostile and protectionist as between goods imported from other States and similar goods produced within the State; the compensatory tax theory is rejected, and Arts. 304(a) and 304(b) operate disjunctively so that compliance with the procedural requirement of clause (b) cannot save a levy that violates clause (a).

• State the nine conclusions. They are numbered in the judgment and they are the safest possible answer to a Part XIII question.
• Do not omit the overruling. Atiabari, Automobile Transport and the earlier Jindal go, along with everything that followed them on the compensatory point. Cite them only as history.
• Distinguish discrimination from differentiation with the backward-areas example — it is the point that separates a good answer.
• Keep the two clauses of Art. 304 apart. Clause (a) is a substantive non-discrimination rule; clause (b) is a public-interest power with a procedural condition, the previous sanction of the President. They are read disjunctively, and clause (b) cannot cure a clause (a) violation.
• Remember Shree Mahavir Oil Mills v State of J. & K., on facts that show the mischief: to protect the local edible oil industry, whose production costs were higher than in adjoining States, the State exempted goods manufactured by local small-scale units from sales tax while raising the rate on edible oils generally. That is the classic shape of a protectionist measure.