Allahabad High Court uphelds the vires of the UP Tax on Entry of Goods into Local Areas Act, 2007

Allahabad High Court uphelds the vires of the UP Tax on Entry of Goods into Local Areas Act, 2007- Act do not treat the entire State as one local area.

ABCAUS Case Law Citation:
ABCAUS 2322 (2018) (05) HC

Important Case Laws Cited/relied upon by the parties:
Automobile Transport (Rajasthan) Ltd. etc. vs. State of Rajasthan and others, 1963(1) SCR 491
Jai Prakash Associates Ltd. vs. State of M.P. and others, (2009) 7 SCC 339,
Jindal Stainless Ltd & Anr vs. State of Haryana & ors,
Atiabari Tea Company Ltd. Vs. State of Assam, AIR 1961 SC 232

UP Tax on Entry of Goods

A bunch of petitions were filed under Article 226 of the Constitution calling into question the vires of the Uttar Pradesh Tax on Entry of Goods into Local Areas Act, 2007. The petitions were filed on basis of liberty granted by the Supreme Court while disposing of a batch of Civil Appeals and other connected matters.

The issues framed and left for the Hon’ble Allahabad High Court to decided, were as under:

(1) Whether the entire State can be treated as ‘local area’ for the purposes of entry tax?

(2) Whether entry tax can be levied on the goods which are directly imported from other countries and brought in a particular State?

(3) In some statutes enacted by certain States, there was a provision for giving adjustment of other taxes like VAT, incentive etc paid by indigenous manufacturers and it was contended by the assesses that whether the benefits given to certain categories of manufacturers would amount to discrimination under Section 304?

Since the entire batch of writs revolved around a common factual matrix, involving same or similar questions, they were disposed of by a common judgement.

The State of Uttar Pradesh (“State”) promulgated the Uttar Pradesh Tax on Entry of Goods Ordinance, 1999, which was, later on, enacted as Uttar Pradesh Tax on Entry of Goods Act, 2000 (“Act, 2000”) with a view to augmenting the revenue of the State and decided to make law to provide for levy of tax on entry of goods.

The validity of levy of entry tax under the Act, 2000, on bringing cement within the local area of Uttar Pradesh, was challenged by M/s. Birla Corporation Ltd in a writ petition. Several writ petitions were filed raising the same challenge including Petition by M/s Indian Oil Corporation etc. The Hon’ble Allahabad Court allowed the aforesaid writ petitions. The judgment was carried to the Supreme Court by the State by way of special leave petitions The Supreme Court ordered that the High Courts’ orders wherever it had been passed in favour of the payers shall operate so far as the concerned writ petitions were concerned. In view of this order of the Supreme Court, the companies became entitled for the benefit of the judgment of the High Court along with entitlement for refund towards entry tax deposited by them.

Subsequently, the State promulgated the Uttar Pradesh Tax on Entry of Goods into Local Areas Ordinance (U P Ordinance No 35 of 2007) with retrospective effect from 1 November 1999. The Ordinance was thereafter replaced by the Uttar Pradesh Tax on Entry of Goods into Local Areas Act, 2007 (for short, “Act, 2007′) on 16 November 2007. The new legislation seeks to remove the defects pointed out by the High Court in the old enactment on the subject and purports to be in line with the compensatory theory propounded by the Supreme Court in the Constitution Bench judgement.

The Birla Corporation filed a petition challenging the constitutional validity of the Ordinance/Act. An interim order was passed by the Allahabad High Court to the effect that the realisation of entry tax for the period between April 2007 and 24 September 2007 would not be made from the Company, provided they furnish security other than cash or bank guarantee, for the entire tax in respect of the transaction during this period. The interim order further provided that the entry tax for the future period, i.e. after 24 September 2007, which is the date of promulgation of Ordinance, would not be realised from the Company in respect of the transaction, subsequent to the promulgation, provided the Company furnishes bank guarantee for the entire dues. The writ petition was finally dismissed by the Court holding that the State legislature did not lack legislative competence in enacting the Act, imposing entry tax on the entry of scheduled goods into local areas for consumption, use or sale therein. This Court also observed that the provisions of the Act patently and facially indicate that there are sufficient guidelines and guarantees under the Act for ensuring that the entire amount of entry tax collected and credited to the Uttar Pradesh State Development Fund is utilized only for the purposes of its reimbursement to facilitate the trade, commerce and industry. The State, it was further observed, also established that the entire amount of entry tax by way of reimbursement/recompense to the trade, commerce and industry in the local areas of the State of Uttar Pradesh, provides quantifiable/ measurable benefits to its payers. The argument that the Act was discriminatory, unreasonable, against public interest, violates the freedom of trade, commerce and intercourse guaranteed under Article 301 of the Constitution of India was repelled. Section 17 of the Act, validating the amount of entry tax levied, assessed, realized and collected under the Act, 2000 was also held to be valid. The provision authorising the State to keep the entire amount for the purposes of its utilisation for facilitating trade, commerce and intercourse in the local areas of the State was upheld. 

The judgment was carried by the Birla Corporation to the Supreme Court in Special Leave Petition (SLP). The Supreme Court granted special leave and also granted interim stay of the impugned judgment and order, subject to the Company depositing 50 percent of the accrued tax liability/arrears under the Act, 2007 and furnishing of bank guarantee for the balance amount within four weeks from the date of the order. The SLP converted into Civil Appeal was heard alongwith bunch of appeals from other States by the Bench of Nine Judges of the Supreme Court and decided the questions referred to it. Thereafter, the appeal filed by the Company and connected matters were placed before the Two Judges’ Bench of the Supreme Court which disposed of the bunch of matters granting liberty to the Company to file fresh petition before this High Court challenging the legality/validity of the Act, 2007 and the notice of demand dated 25 September 2007. Thus, M/s Birla Corporation along with several other petitioners (IOCL etc.) have filed the instant writ petition before the Hon’ble High Court 

The Division bench presided by the Chief Justice in a detailed judgment running into 210 pages gave the following conclusions with respect to various contentions raised in all the writs:

(a) The contention that the impugned Act was not covered under Entry 52 List II since Entry 52 is in essence power of local bodies to levy octroi and thus State legislature had no legislative competence to impose entry tax, is no more res-integra, having been repelled by the Supreme Court in Fr. Williams. Accordingly, we find no force in the said contention.

(b) Again the contention that the provisions of the Act, particularly Section 14 (2), which mandates that the entry tax levied and collected would be credited to a central fund i.e. Uttar Pradesh Trade Development Fund and be utilised for facilitating trade, commerce and industry, violates constitutional mandate of Article 266 of the Constitution having been already repelled by the Supreme Court in Fr. Williams, we do not find any force in the said argument and it is accordingly rejected.

(c) The contention that the provisions of the Act cannot be made applicable to cantonment areas and the impugned legislation seeks to encroach upon the field reserved for the Parliament under Entry 3 List I and is contrary to the Cantonment Act, 1924/Cantonment Act, 2006, is devoid of any merit as the field under Entry 3 List I under which Cantonment Act, 1924/Cantonment Act, 2006 had been enacted is separate and distinct from the legislative field under Entry 52 List II and there is no overlapping nor any conflict.

(d) The contention that the entire State cannot be treated as one local area, is devoid of any merit, as the definition clause of local area under Section 2 (d) did not treat the entire State as one local  area. The other provisions of the Act also do not amount to treating the entire State as one local area vis-a-vis the taxable event and merely because the tax is collected as general revenue and credited to a central fund would not result in altering the taxable event nor would be fatal to the vires of the Act. Thus, the first question framed for consideration by the Supreme Court, does not directly arise in the context of the provisions of the impugned Act.

(e) The contention that the entry tax is a local levy, the power of a local body to impose such tax and the State Government was not competent to realise entry tax as general revenue or to direct the same being credited to a central fund or its appropriation for facilitating trade, commerce and industry in the entire State, rather than passing it to the local body from where the tax had been collected, is based on a wrong premise that the entry tax is a local levy and not the power of the State Government to impose tax.

(f) None of the provisions of the Act suffer from the vice of excessive delegation of power as sought to be contended on behalf of the petitioners.

(g) The provisions of the Act relating to reversal of levy of tax (Section 5), rebate (Section 6) and exemption (Section 7) are neither violative of Article 14 nor Article 304 (a). The rebate and exemption notifications, which have been challenged, also pass muster of Article 14 and Article 304 (a). The third question framed by the Supreme Court is thus answered in favour of the Revenue and against the petitioners.

(h) The crude oil imported by IOC from Gulf countries becomes part of the land mass of the country and was liable to entry tax upon its entry into a local area within the State Entries 41 and 83 of List I operate in separate and distinct fields as compared to Entry 52 of List II and there is no conflict between the Customs Act, 1962 and the impugned Act.

(i) The doctrine of unbroken package having been abandoned by Courts in the United States where the doctrine was propounded and no more followed by the Supreme Court would not come to the rescue of IOC in contending that crude oil could not be subjected to entry tax in course of its transportation to Mathura Refinery through the underground pipelines. In the above context, we further hold that goods which are directly imported from other country could, in a given case, be subject matter of entry tax. We accordingly answer the second question framed by the Supreme Court in affirmative.

(j) The warehousing facility being enjoyed by IOC prior to 15.2.2005 was in the nature of a concession; a special facility being provided to IOC. It is not determinative of the taxable event for imposition of custom duty on imports nor would make the crude oil immune from liability towards entry tax. In any case, the assessment proceedings for the period anterior to the withdrawal of such facility on 15.2.2005 having attained finality, the same could not be reopened in these proceedings.

(k) Proviso (iv) to Section 2 (h) which provides for calculation of value of goods in certain contingencies at wholesale price of such good in the open market in the local area in which goods are being brought or received for consumption, use or sale is neither dehors the provisions of Section 4 nor beyond legislative competence. It is only a legislative device for quantification of tax liability in cases where the price of the good is not ascertainable or not verifiable or not worthy of credence or where no actual sale takes place, as in case of stock transfer. Further, the said plea is also not covered by the window left open by the regular Bench while remitting the matter and, therefore, does not merit any further consideration.

(l) Section 12 of the Act was only a machinery provision to facilitate collection of tax and prevent its evasion. It was neither illegal nor arbitrary nor resulted in shifting the liability of the person who in fact was liable under the Act nor the taxable event. Further, the contention in this regard is now of academic importance only, the Act itself having been repealed since 1.7.2017

In view of the above the Hon’ble High Court dismissed all the petitions as devoid of merit and directed that the State shall be free to encash the bank guarantees or other security, if any, furnished by the petitioners.

Download Full Judgment Click Here >>

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