Supreme Court Clarifies “Local Area” Definition for Entry Tax in Industrial Townships: OCL India Ltd. vs. State of Orissa (2022)

Introduction

Date of the Judgment: 04 November 2022

Citation: 2022 INSC 1429

Judges: Uday Umesh Lalit, CJI., S. Ravindra Bhat, J., J.B. Pardiwala, J.

Can an area within an industrial township, which is excluded from a municipality, be considered a ‘local area’ for the purpose of levying entry tax? The Supreme Court of India recently addressed this complex question, which has significant implications for businesses operating within industrial zones. The core issue revolves around whether industrial townships, despite being excluded from municipal limits, can still be subjected to state entry taxes. This judgment clarifies the scope of the term “local area” under Entry 52 of List II of the Seventh Schedule of the Constitution. The judgment was delivered by a three-judge bench comprising of Chief Justice Uday Umesh Lalit, Justice S. Ravindra Bhat, and Justice J.B. Pardiwala, with the opinion authored by Justice S. Ravindra Bhat.

Case Background

M/s OCL India Ltd. (OCL), Steel Authority of India Ltd. (SAIL), and Hindustan Aluminium Company Ltd. (HINDALCO) challenged the imposition of entry tax by the states of Orissa and Uttar Pradesh. OCL contested the inclusion of its industrial township as a ‘local area’ under the Orissa Entry Tax Act, 1999, arguing that its township was excluded from the Rajgangpur Municipality. SAIL argued that the entry tax on capital goods and raw materials was unconstitutional and that its industrial area, previously part of the Rourkela Municipality, should not be considered a ‘local area’ after being excluded. HINDALCO similarly challenged the inclusion of its industrial area in Renukoot as a ‘local area’ under the UP Entry Tax Act of 2007. All three companies sought relief from the entry tax imposed by their respective state governments.

Timeline

Course of Proceedings

The Orissa High Court dismissed the writ petitions of OCL and SAIL, holding that the Orissa entry tax did not violate any constitutional provisions. The High Court reasoned that the inclusion of industrial townships within the definition of ‘local area’ was constitutionally valid. Similarly, the Allahabad High Court rejected HINDALCO’s petitions, affirming that the inclusion of industrial townships for entry tax purposes did not exceed constitutional limits. These decisions led to the appeals before the Supreme Court, where the companies challenged the High Court’s interpretation of “local area” and the validity of the entry tax.

Legal Framework

The primary legal framework for this case is based on Entry 52 of List II of the Seventh Schedule to the Constitution, which allows State Legislatures to levy taxes on the entry of goods into a local area for consumption, use, or sale. The term “local area” is not defined in the Constitution. However, Article 367 states that the General Clauses Act, 1897 applies for interpretation. The General Clauses Act, 1897, defines “local authority” in Section 2(31) as:

“(31) “local authority” shall mean a municipal committee, district board, body of port Commissioners or other authority legally entitled to, or entrusted by the Government with, the control or management of a municipal or local fund.”

The Orissa Entry Tax Act, 1999, defined “local area” to include industrial townships. The Orissa Municipal Act, 1950, allows the State Government to constitute various municipal bodies but also provides that no such body shall be constituted in an area specified as an industrial township. Article 243-Q of the Constitution, introduced by the Constitution (Seventy-fourth) Amendment Act, 1992, deals with the constitution and administration of municipal bodies. The proviso to Article 243-Q allows the Governor to exclude industrial townships from the purview of municipal bodies.

Arguments

Appellants’ Arguments

✓ OCL argued that its industrial township, being excluded from municipal limits and not levying octroi, should not be considered a “local area” under Entry 52. They contended that the interpretation of “local area” in Diamond Sugar Mills Ltd. & Anr. v. State of Uttar Pradesh & Anr. [1961] 3 SCR 242, which defined it as an area administered by a local body, should apply. OCL also argued that Article 243-Q excludes industrial establishments from municipal bodies, thus their industrial township cannot be a ‘local area’. They relied on the agreement with the Municipality that goods procured by OCL would not be liable for octroi.

✓ SAIL argued that the entry tax violated Article 301 of the Constitution and that its industrial area, excluded from the Rourkela Municipality, should not be considered a ‘local area’. SAIL also relied on Diamond Sugar Mills (supra) and New Okhla Industrial Development Authority v Commissioner of Income Tax [(2018) 9 SCC 351], asserting that Article 243-Q does not equate industrial establishments with municipalities. They contended that since SAIL was not endowed with powers of municipalities under Article 243-W, it cannot be considered a local authority.

✓ HINDALCO adopted the arguments made by OCL and SAIL. They additionally argued that the retrospective application of the UP Entry Tax Act of 2007 was unfair and arbitrary.

Respondents’ Arguments

✓ The State of Orissa argued that the industrial townships were open to public use and that the Rajgangpur Municipality had access to several amenities within the township. They also submitted that the amount paid by OCL was compensation for loss of revenue from octroi and not an exemption. The State contended that Diamond Sugar Mills (supra) was not applicable as it was confined to areas where octroi was levied and did not consider whether an entire state could be a “local area”.

✓ The State of UP argued that the entire state is a conglomerate of local areas and that the entry tax is levied by the state, not by local authorities. They contended that the levy was compensatory in nature and did not violate Article 301 of the Constitution. The State argued that the concept of industrial townships evolved due to large industries providing municipal services, and that these areas are not insulated from the state’s legislative powers.

✓ The respondents also argued that Entry 52 must be interpreted in light of Part IX-A and Article 243 of the Constitution. They contended that rendering municipal services is a precondition for specification of an industrial area and that industrial areas retain a nexus with the adjacent municipalities for certain purposes.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for determination:

1. Whether the exclusion of an industrial area from the limits of municipal councils or municipalities under state laws, or by a declaration under proviso to Article 243-Q, results in that area ceasing to be a “local area” within Entry 52 of List II, thereby precluding the State from levying and collecting entry tax from those areas?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Cases

• Diamond Sugar Mills Ltd. & Anr. v. State of Uttar Pradesh & Anr. [1961] 3 SCR 242 – The court discussed the interpretation of “local area” in the context of factory premises and noted that a local area is one administered by a local body.
• Shaktikumar M. Sancheti & Anr. v. State of Maharashtra & Ors. (1995) 1 SCC 351 – The court discussed the taxable event for entry tax and clarified that the entire area of a state could be considered a local area.
• Saij Gram Panchayat v. State of Gujarat & Ors. (1999) 2 SCC 366 – The court held that the Gujarat Industrial Development Act, 1962 operates in a different sphere from Parts IX and IX-A of the Constitution and that industrial areas could be notified as municipal areas.
• MGR Industries Association & Anr. v. State of Uttar Pradesh & Ors. (2017) 3 SCC 494 – The court held that the exclusion of industrial areas from panchayats requires a notification under Article 243-Q(1).
• New Okhla Industrial Development Authority v Commissioner of Income Tax (2018) 9 SCC 351 – The court clarified that an industrial township is not equivalent to a municipality under Article 243P(e).
• Union of India v RC Jain (1981) 2 SCC 308 – The court discussed the attributes and features of a local authority.
• Housing Board of Haryana v Haryana Housing Board Employees’ Union (1996) 1 SCC 95 – The court discussed the attributes and features of a local authority.
• ITC Ltd v Agriculture Produce Market Committee (2002) 9 SCC 232 – The court discussed the scope of constitutional taxation power.
• State of Karnataka v. Hansa Corporation (1981) 1 SCR 823 – The court discussed the taxable event for entry tax.
• Kishansing Tomar v. Municipal Corporation of the City of Ahmedabad & Ors 2006 (8) SCC 352 – The court discussed the object and purpose of the Constitution (Seventy-fourth) Amendment Act, 1992.
• Sri Prithvi Cotton Mills v. Baroda Borough Municipality & Ors. 1970 (1) SCR 388 – The court discussed the validity of retrospective taxation.
• Navinchandra Mafatlal v Commissioner of Income Tax, 1955 (1) SCR 829 – The court discussed the interpretation of words in a taxing statute.

Legal Provisions

• Entry 52 of List II of the Seventh Schedule to the Constitution – Authorizes State Legislatures to levy taxes on the entry of goods into a local area.
• Article 367 of the Constitution – States that the General Clauses Act, 1897 applies for interpretation of the Constitution.
• Section 2(31) of the General Clauses Act, 1897 – Defines “local authority.”
• Article 243-Q of the Constitution – Deals with the constitution and administration of municipal bodies.
• Article 301 of the Constitution – Guarantees freedom of trade, commerce, and intercourse throughout India.
• Article 243-W of the Constitution – Deals with powers, authority and responsibilities of Municipalities.
• Article 246 of the Constitution – Deals with subject matter of laws made by Parliament and by the Legislatures of States.
• Section 4 of the Orissa Municipal Act, 1950 – Provides for the constitution of municipal bodies.
• Section 20 of the U.P. Sugarcane (Regulations of State and Purchase) Act, 1953 – Deals with collection of entry tax.
• Section 3 of the U.P. Sugarcane Cess Act, 1956 – Deals with collection of entry tax.
• Section 16 of the Gujarat Industrial Development Act, 1962 – Deals with the power to constitute industrial area into a notified area.
• Section 12A of the U.P. Industrial Area Development Act, 1976 – Deals with exclusion of industrial area from panchayat.
• Section 10 (20) of the Income Tax Act, 1961 – Deals with exemption of income of local authority.
• Section 2(f) of the Orissa Entry Tax Act, 1999 – Defines “local area.”

Judgment

Diamond Sugar Mills Ltd. & Anr. v. State of Uttar Pradesh & Anr. [1961] 3 SCR 242* was distinguished by the court, stating that it was related to factory premises and not industrial townships. The court clarified that the definition of “local area” in that case was in the context of the specific facts and did not exclude the possibility of industrial areas being considered as “local areas”.

The court held that the other cases cited by the appellants, such as New Okhla Industrial Development Authority v Commissioner of Income Tax [(2018) 9 SCC 351], were not directly relevant to the issue of entry tax. The court clarified that the focus of Part IX-A of the Constitution was on local self-governance and not on state taxation.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the understanding that the term “local area” should be interpreted broadly to include areas within a state that are administered for local affairs. The court emphasized that the exclusion of industrial areas from municipal limits under Article 243-Q was intended to ensure that such areas were not subjected to the requirements of municipal governance, such as elections, but did not remove them from being considered as local areas for taxation purposes. The court also noted that the intention of Part IX-A of the Constitution was to strengthen local self-government and not to impact the state’s power to levy taxes. The court also took into account that industrial areas receive municipal services and are part of the state, thus justifying the imposition of entry tax.

Fact:Law Ratio:

Logical Reasoning

The Court considered the argument that industrial areas, once excluded from municipal limits, should not be considered “local areas” for entry tax. However, it rejected this interpretation, stating that the term “local area” should be interpreted broadly to include any area within the state that is administered for local affairs. The court also considered the purpose of Article 243-Q, noting that it was intended to strengthen local self-government and not to impact the state’s power to levy taxes.

The court emphasized that the exclusion of industrial areas from municipal limits was to ensure that they were not subjected to the requirements of municipal governance, such as elections, but itdid not remove them from being considered as local areas for taxation purposes. The court also considered the fact that industrial areas receive municipal services and are part of the state, thus justifying the imposition of entry tax. The court reasoned that if industrial areas were excluded from the definition of “local area,” the state would be deprived of its legitimate taxation powers.

Decision

The Supreme Court dismissed the appeals of OCL, SAIL, and HINDALCO. The court held that the exclusion of an industrial area from the limits of municipal councils or municipalities under state laws, or by a declaration under proviso to Article 243-Q, does not result in that area ceasing to be a “local area” within Entry 52 of List II. Therefore, the State is not precluded from levying and collecting entry tax from those areas.

Implications

The judgment has significant implications for businesses operating within industrial townships and for state governments levying entry tax.

For Businesses

• Businesses operating in industrial townships cannot claim exemption from entry tax based on their exclusion from municipal limits.
• Entry tax will continue to be levied on goods entering industrial townships for consumption, use, or sale.
• Businesses need to factor in entry tax as part of their operational costs.

For State Governments

• State governments can continue to levy entry tax on goods entering industrial townships.
• The judgment provides clarity on the definition of “local area” for the purpose of entry tax.
• The decision reinforces the state’s power to levy taxes on goods entering areas within its jurisdiction.

Conclusion

The Supreme Court’s judgment in OCL India Ltd. vs. State of Orissa clarifies that industrial townships, even when excluded from municipal limits, can be considered “local areas” for the purpose of levying entry tax. The court emphasized that the term “local area” should be interpreted broadly and that the exclusion of industrial areas from municipal governance under Article 243-Q does not affect the state’s power to levy taxes. This judgment has significant implications for businesses operating within industrial townships and for state governments seeking to levy entry tax on goods entering such areas. The court’s decision reinforces the state’s power to tax goods entering any area within its jurisdiction for consumption, use, or sale, provided it is administered for local affairs.