Jindal Stainless Steel Ltd. & Anr. Vs. State of Haryana & Ors.

Jindal Stainless Steel Ltd. & Anr. Vs. State of Haryana & Ors.

{11 November 2016}, Appeal (Civil) 3453 of 2002.

Bench constituting CJI & 8 other Judges.

Author: Astitva Sharma, a student at Himachal Pradesh National Law University, Shimla. {HPNLU}.


These appeals give decisions on controversial issues relating to the interpretation of Articles 301 to 307 including Part XIII of the Constitution of India, which has been the subject of several decisions of the Constitutional Court of the Honorable Supreme Court, all but one, are decided by majority. In the exercise of their legislative powers under Entry 52 of List II of the Seventh Schedule to the Constitution, several States in the country, at least 14 of which are parties to these proceedings, have promulgated and enacted a law providing for the imposition of taxes on “importations of goods into the territories forming states. The constitutional validity of these taxes was challenged before various High Courts by assessors/merchants who were aggrieved, among others because they violated the right to Constitutional recognition for free trade and commerce relations guaranteed by section 301 of the Indian Constitution.

Article 301 of the Constitution of India is reproduced below for easy reference: 

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. The taxes were also attacked because they were discriminatory and therefore violative of Article 304(a) of the Indian Constitution. The absence of presidential sanction under Article 304(b) of the Indian Constitution also serves as a ground to challenge taxes imposed by the respective state legislatures.

Article 304 of the Constitution of India is reproduced below for easy reference: 

Restrictions on interstate commerce and intercourse: Notwithstanding anything contained in Article 301 or Article 303, the legislature of a State may, by law:

(a ) Apply to goods on imports from other States or Union Territories any similar duty on goods manufactured or produced in the State shall not be discriminatory between goods imported and goods imported from other States or  Union Territories produce or produce such.

(b) Impose on the freedom of trade, commerce, or intercourse with or within this State such reasonable restrictions as may be required in the public interest: Provided that no law or amendment, no provision shall be made or proposed in the legislature of any State. State without prior approval of the President.

 Writ Petition (Civil) No. 8700 of 2000 filed before the  Punjab and Haryana High Court is one of the petitions attacking the validity of the Haryana Local Development Act, 2000 – based on the decisions  Supreme Court decision in the case of Assam State Atiabari Tea Company Limited and Ors.  [AIR 1961 SC 232] (“Atiabari Case”), Motor Transport (Rajasthan) Ltd., etc. State of Rajasthan and Ors. [AIR 1962 SC 1406] (“Car Transport Box”), M/s.  Bhagatram Rajeev Kumar Vs. Sales Tax Commissioner, Congressman, and Ors. [(1995 Supp [1] SCC 673)] (“Bhagatram Case”) and State of Bihar v. Ors. Against Chamber of Commerce v Ors Bihar [(1996) 9 SCC 136] (“Bihar Chamber Case”), the Hon’ble  Punjab and Haryana High Court dismissed the said petition. They linked the cases on the ground that the tax was compensatory and therefore fell outside the ambit of Article 301 of the Constitution.


The petitioner (Jindal Strips Ltd.) is a product manufactured industrially in the State of Haryana.

  • Raw materials purchased out of state and no sales tax is payable on import of raw materials. Likewise, finished products are sent to other states and no sales tax is payable when exporting the finished product.
  • The State of Haryana has therefore enacted the Haryana Local Area Development Act, 2000 (“the Act”) regarding taxes and collection of taxes on import of goods into local areas.
  • The law imposes poll tax not only on vehicles carrying goods into the state but also on vehicles transporting goods from one locality to another.
  • The petitioners, therefore, challenged the provisions of the Act violative of Articles 301 and  304 of the Constitution of India before the Haryana High Court.

 ISSUE IN THE CASE: head tax must satisfy the test outlined in clauses (a) and (b) of section 304 separately, individually, or together.

  • Whether the imposition of personal tax on item 52 of List II of Annex VII constitutes a violation of Article 301 of the Constitution?
  • Whether Entry 52 of List II of Schedule VII to the Constitution only provides for tax items and nothing is expressly stated or expressly mentioned in Entry 52 of List II of Schedule VII which requires Does the state spend taxes collected locally?
  • Does a tax on goods intended for sale, use or consumption stop once the movement of goods within the “local area” stops?
  • Does the interpretation of Articles 301 to 304 in the context of vehicle tax referred to in  Atiabari v. Motor Transport apply to the case of entry tax and if so, to what extent?
  • Whether a nondiscriminatory state indirect tax passed on by sellers to consumers violates Section 301.
  • Whether a tax on intrastate goods impairs direct commerce no and therefore whether it violates Article 301 and can be saved by Article 304 or any other provision.
  • Whether the entry tax levied under Entry 52, List II of Schedule VII to the Constitution amounts to a compensatory tax?
  • Can all or part of a state be taxed as a “local area”?
  • Does Article 301 provide for a balance between free trade and commerce, consistent with the State’s right to tax under Articles 245 and  246 of the Constitution in the context of commercial circulation?

Plaintiffs’ Arguments: 

Plaintiffs contend that there is a difference between compensatory tax and regulatory tax. The law must be formulated in such a way that it does not restrict the right to freedom of trade and commerce under Article 301 of the Constitution. Therefore, there is a difference between regular tax and compensatory tax. It is important to pay compensatory taxes as they provide resources for road development and facilitate the movement of vehicles within and outside the state. However, such taxes cannot be imposed while undermining the intended freedom of trade and commerce. Petitioners refer to various cases to confirm their contention that the government’s imposition of duties on imported food products is violative and invalid.

In the case of iron ore Bolani  v.State of Orissa, the Supreme Court has held that under Section 57, List II cannot go beyond compensation and must also have a nexus with the vehicles used for transportation. Compensation tax is only applicable to motor vehicles. However,  in the current scenario, taxes are levied on goods. Taxes declared to be non-discriminatory must be collected in accordance with the Constitution.  In addition, taxes on imported goods are “fees” collected in the name of “taxes”. Charging such fees is contrary to rights and unfairly restricts commercial activities. It is also claimed that states like Arunachal Pradesh, Assam, Jharkhand, Kerala, etc. also repealed the imposition of these taxes because they were discriminatory and considered a violation of Section 304(a) of the Constitution. The plaintiff’s opinion contradicts the defendant’s precedent.

Defendant’s Arguments:

The State argues that the enactment of the 2000 Act was an essential step that needed to be taken to increase taxes. Reliance was placed on the case of Commissioner of Income Tax, Udaipur, Rajasthan v. McDowell and Co Ltd. to point out the difference and significance of fees and taxes. In the above-mentioned case, the Supreme Court held that “fees”, “taxes”, “taxes” or “duties” are different types of taxes collected by the state and fall under the sovereign jurisdiction of the state. These revenues are generated to serve the welfare of the state. The authority to levy tax is provided in Article 265 of the  Constitution of India and for levy of tax, the presence of legislation in this regard is important and necessary because an authority without any legislative power cannot be taxable. Therefore, the enactment of the Haryana State Act, 2000  is valid and the contention of the petitioners that the amount collected is a ‘fee’ and not a ‘tax’, is all within the jurisdiction and sovereign right similar to that of the State of Haryana. Furthermore, it is claimed that scrutiny of the government’s tax collection and questioning of the validity of Indian laws has at times emphasized the decisions of the United States and Australia. However, in the  Atibari Tea and Co. case, the court held that relying on international judgments to establish the validity of Indian law is not always correct, as each country operates differently together. Therefore, it would not be reasonable to compare each time. The tax does not have many restrictions and entry 56 of Part II of Annex VII is linked to roads and highways in such a way that the collection of tax on goods is associated with roads and highways used for transportation. The state’s power to tax is valid insofar as the reason behind it is for the maintenance and welfare of the state.

Another case discussed is Raja Jagannath Baksh Singh v. State of UP and Anr. In this case, the Supreme Court found that tax collection is of primary importance to the states. It is correct to say that tax collection falls under the sovereign authority of the State. However, this is also necessary for them to progress and earn income to develop.


 Apex Court, while answering the dispute, said that yes, it is the sovereign right of the State.

 In the case of Dena Bank v.  Bhikhabhai Prabhudas Parekh & Co., the Court emphasized but also explained that although it is a sovereign right, it must be exercised within the prescribed constitutional framework. The Supreme Court held that whether the tax rate is high or low, it does not constitute a restriction within the meaning of Article 301 of the Constitution. The Court found that taxation was both an attribute of sovereignty and an unavoidable necessity. The court held that this was simply because there were trade-related items that, by themselves, were not enough to raise taxes. The Court held that it does not constitute a restriction on Article 301 of the Constitution of India.  Further, the purpose of this section is therefore clear that where there is a tax on goods imported into a State, there should be a special law authorizing the legislature to impose such tax. The court held that it did not constitute a restriction on Article 301 of the Indian Constitution.

Furthermore, the purpose of this section is therefore clear that where there is a duty on goods imported into a State, there should be no discrimination between such duty and a duty on goods manufactured or produced in that State. The Supreme Court, before discussing the said concept and before providing its analysis, has considered the historical context to analyze the reasoning and thinking of the constitutional decision-makers behind the provisions of the said clause and, for this precise purpose, all by way of detailed analysis of various case laws, the Court reiterated the long-held notion that the Indian Constitution has a quasi-federal character, this concept even forms part of the basic structural doctrine and reliance is placed on S.R. Bommai v. Union of India and Kaeshvananda Bharti v. State of Kerala.

The Court further said that a joint reading of Sections 301 and  302 leads to a clear implication that the legislature has the power to impose restrictions on freedom of trade and commerce. The only limitation in this regard is that Parliament cannot pass laws that are discriminatory or give special preference to one state over another. The court then considered the chronological developments that have taken place from the beginning on this issue, specifically sales taxes and the interstate movement of goods. The first decision that was returned by the court was the tax on sales and transportation of goods between states. The decision returned by the court was that M.P. Sunderaremier v. State of Andhra Pradesh, in which the petition was filed under Article 32 of the Constitution of India, wherein the interstate tax on the sale of yarn was challenged and the assessee contended that the liberty guaranteed under Section 301 also included includes the freedom to tax for the imposition of such a tax would weaken this guarantee.

The court in the above case said that she suffered from illness and rejected the defendant’s argument. Another view emerged three years after this judgment in the  Atiable Tea Company case, in which the validity of the Assam Excise Act was challenged and it was held to be constitutionally invalid as it directly contravened section 301 of the law.

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