CHENNAI: The Madras High Court on Thursday struck down a State legislation providing for demand and collection of entry tax on goods brought from other States into Tamil Nadu for consumption, use or sale.

Declaring as illegal and unconstitutional the Tamil Nadu Tax on Entry of Goods into Local Areas Act 2001, the First Bench comprising Chief Justice A.P. Shah and Justice K.Chandru said: "In the absence of any link between the entry tax on imported goods and the facilities extended to importers directly or indirectly, the levy of entry tax, which is discriminatory, cannot be said to be compensatory in nature.

"In these circumstances, subjecting the goods imported from outside the State to entry tax becomes unauthorised, arbitrary, discriminatory and violative of Article 301 of the Constitution."

The Bench was passing orders on writ petitions filed by various companies, including ITC Limited, against the enactment that came into force on December 1, 2001.

Senior counsel for the petitioners, including A.L. Somayaji and Arvind P. Datar, contended that any tax law, which did not or which had the effect of disrupting movement in inter-State trade and commerce between States, was contrary to the concept of freedom of trade embodied in Article 30. In the case of compensatory taxes, the burden was on the State to prove that the tax was reimbursement for a quantifiable or measurable services provided or to be provided to the payers.

Advocate-General R. Viduthalai denied that the legislation was discriminatory. The preamble of the Act showed that the tax would be utilised for facilitating free flow of trade and commerce. Furnishing data relating to roads and bridges, he said it would not impair trade and commerce.

The Judges, making it clear that the materials produced by the State was not relevant to establish that the levy was compensatory in nature, said the essence of compensatory tax was that the services rendered or facilities provided should be more or less commensurate with the tax levied. "It cannot be said that maintaining roads and providing bridges is compensatory in nature so as to constitute a special advantage to trade and commerce... Maintenance of roads and bridges are generally met from the general funds or revenue."

The Bench also found the Act violative of Article 304(a) of the Constitution, which categorically prohibited the legislature of a State from discriminating between itself and another State and subjecting goods imported from other States to any tax to which similar goods manufactured or produced in that State were not subjected.

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