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CASE NO.:

Appeal (civil) 6223-24 of 1997

PETITIONER:

M/s Geo Miller & Co. Pvt. Ltd. & Ors.

RESPONDENT:

State of M.P. & Ors.

DATE OF JUDGMENT: 05/05/2004

BENCH:

CJI & G.P. MATHUR.

JUDGMENT:

J U D G M E N T

RAJENDRA BABU, CJI. :

The appellants are dealers registered under the M.P.

General Sales Tax Act, 1958 and were also assessed to the

Entry Tax during the period from 1.1. 1986 to 11.12.1986

under the Madhya Pradesh Sthaniya Kshetra Me Mal Ke

Pravesh Par Kar Adhiniyam, 1976 (hereinafter referred to

as the 'M.P. Entry Tax Act'). The appellants are carrying on

the business of execution of works contract. Before the

authorities below, it was the appellants' contention that

since the goods were brought for purpose of works contract

and they have been subjected to sales tax under the Sales

Tax Act, the appellants were not liable to pay the entry tax

on goods. The appellants had unsuccessfully challenged the

assessment of tax before the Appellate Deputy

Commissioner of Sales Tax and the Board of Revenue and

thereupon appellants preferred Misc. Petition No. 3960 of

1991 before the High Court of Madhya Pradesh.

The appellants contended that by virtue of the

definition of sale as defined under Article 366 (29-A) of the

Constitution, the activity involved was a transfer of goods in

works contract, it amounted to a 'sale' and as such the

goods are not exigible to the entry tax. The High Court vide

judgment dated 18/09/1996, did not accept this contention

and dismissed their prayer. Hence these appeals by Special

Leave. In view of the High Court's judgment the Madhya

Pradesh Builders Association has also joined the present

petitions for special leave to appeal as the judgment affects

the entire community of contractors.

The questions that arise for consideration herein are:

i) Whether the M.P. Entry Tax Act, 1976, is unconstitutional

as it is hit by Article 301 of the Constitution for not

satisfying the conditions laid down in Article 304 (b)?

ii) Whether in any event the goods used by the appellants

are subject to Entry Tax by virtue of Section 3 of the M.P.

Entry Tax Act, 1976?

It is the submission of the appellants that the M.P.

Entry Tax Act, 1976 is unconstitutional as it offends Article

301 owing to non-compliance of the conditions laid down in

Article 304 (b).

The appellants relied on the cases of Atiabari Tea

Co. Ltd. Vs. The State of Assam & Ors., (1961) 1 SCR

809 and Automobile Transport (Rajasthan) Ltd. vs.

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The State of Rajasthan & Ors. (1963) 1 SCR 491, to

state that taxation may impede the movement of goods

from one barrier to the other and would accordingly bring

Article 301 into play. They then contend that the conditions

of Article 304 (b) have not been complied thereby rendering

the M.P. Entry Tax Act, 1976 unconstitutional.

This argument of the appellants does not seem to be

correct. It is well settled by the decision in Atiabari Tea

Co. [supra] at p.860, that only such restrictions or

impediments which directly or immediately impede the free

flow of trade, commerce and intercourse fall within the

prohibition imposed by Article 301. This Court did not

accept the argument that all taxes whether or not their

impact on trade is immediate or mediate, direct or remote

should be governed by Article 301. This view was further

upheld in the Automobile Transport Case and in State of

Kerala vs. A.B. Abdul Kadir & Ors., 1969 (2) SCC 363.

Hence, the mere fact that a tax is imposed does not

automatically bring Article 301 into play.

In fact the concept of "compensatory taxes" was

propounded in the Automobile Transport Case. By virtue

of this, taxes, which would otherwise interfere with the

unfettered freedoms under Article 301, will be protected

from becoming unconstitutional if they are compensatory.

Thus, the reliance placed by the appellants on the

observations made in the Atiabari Case and the

Rajasthan Automobile Case that taxation may impede

the movement of goods from one barrier to the other and

accordingly submitting that the M.P. Entry Tax Act, 1976 is

hit by Article 301 is not properly founded.

In fact, Section 3 of the said Act was under challenge

in the case of M/s Bhagatram Rajeevkumar vs.

Commissioner of Sales Tax, M.P. & Ors., 1995 Supp.

(1) SCC 673. A three Judge Bench of this Court, found that

the levy of tax under the M.P. Entry Tax Act, 1976 was

constitutional, since the nature of revenue earned was

compensatory, as it was handed over to the local bodies to

compensate them for the loss caused.

In the present case too, the respondents have

reiterated that the tax being imposed is compensatory in

nature as the revenue earned therefrom passes over to the

local bodies to compensate them for the loss incurred due

to abolition of octroi.

Augmentation of their finance would enable them to

promote Municipal Services more efficiently helping in the

free flow of trade and commerce.

The Act being compensatory in nature it is not open to

challenge under Article 301 and there is no need to venture

into the argument based on Article 304 (b). Accordingly,

the constitutionality of the Act is upheld.

In the case of Jindal Stripe Ltd. v. State of

Haryana, (2003) 8 SCC 60, a division bench of this court,

raised doubts over the legal proposition laid down in the

aforementioned Bhagatram case (which upheld the

validity of the M.P. Entry Tax Act, 1976) and refers the

matter to a Constitution Bench over the interpretation of

Article 301 vis-`-vis compensatory tax. In Bhagatram's

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Case, although it was demonstrated by the appellant State

and not disputed by the respondents that the levy was

compensatory, the Court goes on to make an observation

that compensation need not be that which facilitates the

trade only. It observes that "the concept of compensatory

nature of tax has been widened and if there is substantial

or even some link between the tax and the facilities

extended to such dealer directly or indirectly the levy

cannot be impugned as invalid". In the Jindal Stripe

Case, the division bench noted that the above observation

would mean that "an indirect or incidental benefit to traders

by reason of stepping up the developmental activities in

various local areas of the State can be legitimately brought

within the concept of compensatory tax". Accordingly it

refers the matter to a Constitution Bench to decide what

exactly would fall under the ambit of "compensatory tax",

and thereby fall outside the purview of Article 301.

Inasmuch as the Act in question has been upheld on the

basis that it had been demonstrated by the State and not

disputed by the dealers that the levy was compensatory it

may not be necessary for us to dilate on this aspect any

further.

It is the contention of the appellants that Sec. 3(1) (b)

of the M.P. Entry Tax Act, 1976 does not permit levy of any

entry tax on the entry in the course of a business of a

dealer of goods specified in Schedule III into a local area for

consumption or use of such goods in the execution of works

contracts, as these amount to 'sale'. They contend that

owing to the 46th Amendment transfer of property in goods

involved in the execution of a works contract amounts to

'sale'.

The relevant part of Section 3 of the M.P. Entry Tax

Act is reproduced herein;

"Section 3: Incidence of Taxation ;- (1) There

shall be levied an entry tax

(a) \005\005..

(b) on the entry in the course of business of a

dealer of goods specified in Schedule III, into

each local area for consumption or use of such

goods (raw material or incidental goods) or as

packing material or in the execution of works

contracts but not for sale therein\005\005\005."

(Emphasis supplied)

The relevant portion of Article 366 of the Constitution

is as follows;

"Article 366: In this Constitution, unless the

context otherwise requires, the following

expressions have the meaning hereby

respectively assigned to them, that is to say \026

\005\005\005..

(29-A) "tax on the sale or purchase of goods"

includes \026

(b) a tax on the transfer of property in goods

(whether as goods or in some other form)

involved in the execution of a works contract.."

Accordingly, the appellant contends that Section 3(1)

(b) of the M.P. Entry Tax Act, 1976, no longer permits levy

of entry tax on goods consumed or used in works contract

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as these amount to 'sale' by virtue of Article 366(29-A).

The question that arises for consideration is whether

the definition of "tax on the sale or purchase of goods" as

provided by the 46th amendment through Article 366 (29-A)

applies to the M.P. Entry Tax Act.

It is evident from the section 3(1) (b) of the M.P.

Entry Tax Act, 1976, that if a dealer effects the entry of

goods specified in Schedule III into any local area and those

goods are meant for

a) consumption or

b) to be used as

i) raw materials or

ii) incidental goods or

iii) as packing material or

iv) in the execution of works contract,

such dealer would come within the ambit of the charging

section and hence, liable to pay tax on the entry of those

goods.

The section goes on to make it clear that goods

specified in Schedule III if they are imported for the

purpose of sale then they are not subject to tax.

Admittedly, the appellants, a dealer, has effected

entry of goods specified in Schedule III in the local area for

use in execution of works contract, and is hence liable to

tax as per Section 3(1)(b) of the Act.

It is hence evident that the M.P. Entry Tax Act, 1976

makes a clear distinction between 'sale' and 'execution of

works contracts' and specifically excludes the latter from

the purview of the former. The appellants contention that

the definition of 'sale' under Article 366 (29-A) of the

Constitution which includes transfer of goods in execution of

works contract, should be adopted into the M.P. Entry Tax

Act, 1976 is not well founded.

The M.P. Entry Tax Act has been enacted by the

Legislature by virtue of Entry 52 of List II of the VIIth

Schedule. It reads as under:

"Entry 52: Taxes on entry of goods into a local

area for consumption, use or sale therein."

Article 366(29-A) on the other hand seeks to define

'tax on the sale or purchase of goods'. This phrase is used

in Schedule VII, List I, Entries 92 and 92-A and Schedule

VII, List II Entry 54. Hence, it can be seen that the said

meaning cannot be imported for the purposes of Entry 52 of

List II.

On the other hand, it is evident that the M.P. General

Sales Tax Act, 1958 has been enacted in relation to Entry

54 of List II, and it indeed includes transfer of goods in the

execution of works contract within the definition of 'sale' as

required by Article 366(29-A). However the M.P. Entry Tax

Act has specifically excluded the definition of 'goods' and

'sale' which is utilised in the M.P. Sales Tax Act. Section

2(2) of the M.P. Entry Tax Act, 1976 reads as under:-

"Section 2(2): All those expressions, other than

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expression 'goods' and 'sale' which are used but

are not defined in this Act and are defined in the

Sales Tax Act shall have the meanings as

assigned to them in that Act."

(Emphasis supplied)

The exclusion is justifiable considering the fact that

the M.P. Entry Tax Act, 1976 has been enacted by virtue of

Entry 52 of List II of Schedule VII. It need not be

circumscribed by the definition provided in Article 366 (29-

A).

Article 366(29-A) does not define the term 'sale', but

enlarges its scope by including transfer of goods in the

execution of works contract within this definition of sale.

Therefore, 'sale' as it appears in Article 366(29-A) is with

reference to the Sales Tax Act. The M.P. Sales Tax Act

indeed adopts the same. However Section 2(2) of the M.P.

Entry Tax Act has expressly not imported the definition of

'sale' from the Sales Tax Act. Therefore, the intention of the

legislature in excluding 'execution of works contract' from

the definition of 'sale' is manifest and this reflects clearly in

the letter of the law.

Further, the contention that the term 'sale' utilised in

Entry 52 of List II and Entry 54 of List II are the same

concept deriving from the expression 'tax on the sale or

purchase of goods' as defined in Article 366(29-A) seems

to be incorrect. The High Court has observed rightly that

the M.P.Sales Tax Act, 1958 is covered by Entry 54 whereas

the M.P. Entry Tax Act, 1976 is covered by Entry 52.

Therefore, both these Acts are covered by different entries

in the Constitution and hence, the incidence of taxation in

both cases is different. Under the Sales Tax Act enacted by

virtue of Entry 54 the incidence of taxation is on the sale

and purchase of goods whereas in the case of the Entry Tax

Act, the incidence of taxation is on the entry of the goods

specified in the Entry Tax Act.

Accordingly, the M.P. Entry Tax Act does not adopt the

expression of "goods" and 'sale' under the M.P. Sales Tax

Act.

It is a well-settled position of law that in interpreting

taxing statutes, one must have regard to the strict letter of

the law. If the person/entity sought to be taxed comes

within the letter of the law he must be taxed.

In the instant case, the letter of the law, i.e. Section 3

(1) (b) of the M.P. Entry Tax Act, 1976, leaves out

"execution of works contracts" from the definition of "sale".

By expressly not adhering to the definition of 'sale' in the

M.P. Sales Tax Act [which includes, transfer of property in

goods involved in the execution of works contract within the

definition of 'sale' as required by Article 366(29A)(b)] their

can be no doubt that the section clearly requires the

appellants to pay the entry tax. Accordingly the appellants

are liable to pay entry tax under the M.P. Entry Tax Act,

1976.

It is true that the M.P. Entry Tax Act, 1976 does not

provide a definition of 'sale'. The appellants contend that in

the absence of such definition the Constitutional definition

as provided in Article 366(29-A) must be imported.

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However, even though the Act does not define 'sale' it does

provide a negative definition by clearly leaving out

'execution of works contract' from the definition of 'sale'.

Thus, there is no ambiguity at least with regard to

'execution of works contract'. It cannot be said to be a 'sale'

for the purposes of the M.P. Entry Tax Act, 1976.

The appellants further contend that under Section 3

(1) (b) of the Entry Tax Act, 1976, the goods specified in

Schedule III if are imported from outside the State for

consumption are completely exempted by virtue of

exception (vi) to proviso attached to Section 3(1)(b). The

relevant proviso is extracted herein:

"(vi) in respect of goods specified in Schedule III

imported from outside the State for consumption

or use as [raw materials or incidental goods] or

as packing materials or in the execution of works

contract but which have been disposed of in any

manner." (Emphasis supplied)

The appellants submit that a plain reading of Section 3

would indicate that all those goods falling in Schedule III

which are imported from outside the State for consumption

are not subject to entry tax. This submission is incorrect.

There is no ambiguity in the proviso which clearly states

that tax shall not be levied only on those goods which have

been imported from outside and are meant for use or

consumption as raw materials, incidental goods as packing

material or in the execution of works contract, but only if

after being brought in for such purpose are disposed of in

some other manner. The interpretation of the appellants

fails to consider the final part of the proviso, which has

been emphasised in the reproduction of the same above.

Hence it can be seen that the Entry Tax imposed by

the respondents is justifiable.

These appeals are accordingly dismissed.