Full Judgment Text
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PETITIONER:
STATE OF MADRAS
Vs.
RESPONDENT:
N. K. NATARAJA MUDALIAR
DATE OF JUDGMENT:
18/04/1968
BENCH:
SHAH, J.C.
BENCH:
SHAH, J.C.
BACHAWAT, R.S.
MITTER, G.K.
VAIDYIALINGAM, C.A.
HEGDE, K.S.
CITATION:
1969 AIR 147 1968 SCR (3) 829
CITATOR INFO :
R 1970 SC 508 (15)
F 1970 SC1742 (14)
RF 1970 SC1912 (7)
R 1974 SC1505 (12)
RF 1974 SC1660 (4)
RF 1975 SC 583 (27)
R 1976 SC 182 (17)
RF 1976 SC1016 (18)
E 1984 SC1194 (18)
R 1986 SC 63 (36)
F 1987 SC1922 (7,10,13)
RF 1988 SC 567 (11)
R 1989 SC1119 (13)
RF 1990 SC 781 (74)
F 1990 SC 820 (15,17,21,22)
ACT:
Central Sales Tax Act, 1956--Different rates of tax in
different States under s. 8 sub-cls. (2), (2A) and
(5)--These provisions whether void for contravention Arts.
301 and 303 of the Constitution--Computation of turnover
under s. 9(3) of Act--Must be in the same manner as under
State law of sales tax--Excise Duty must be excluded if
State law so provides.
Constitution of India, Arts. 301, 302, 303 and
304--Differential rates of Central Sales Tax in different
States under s. 8, sub-cls. (2), (2A) and (5) of Central
Sales Tax Act, 1956--Freedom of trade and commerce whether
hampered--Discrimination between one State and another
whether results.
HEADNOTE:
The respondent claimed before the Commercial Tax Officer,
Madras that some of his goods had been sent from Madras to
his depot in Andhra Pradesh and that the sales of those
goods were intra-State sales in Andhra Pradesh where they
had been taxed as such. The Commercial Tax Officer however
held that the goods had been moved from the State of Madras
under contracts of sale and were therefore taxable as inter-
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State sales under the Central Sales Tax Act, 1956. The
respondent filed a petition under Art. 226 of the
Constitution. The High Court did not determine the nature
of the transactions, but held that sub-ss. (2), (2A) and (5)
of s. 8 of the Central Sales Tax Act as they stood at the
relevant time imposed or authorised the imposition of
varying rates of tax in different States on similar inter-
State transactions and the ’resultant inequality in the
burden of tax affected and impeded inter-State trade,
commerce and intercourse and thereby offended Arts. 301 and
303(1) of the Constitution. The application of s. 9(3) of
the Act was also considered. Against the High Court’s
judgment the State appealed. -
HELD : (i) Restrictions or impediments which directly and
immediately impede or hamper the free flow of trade,
commerce and intercourse whether inter-State or intra-State
fall within the prohibition imposed by Art. 301 and subject
to other provisions may be regarded as void. A tax may in
certain cases directly and immediately restrict or hamper
the flow of trade but every imposition of tax does not do
so. [840 D]
Atiabari Tea Co. Ltd. v. State of Assam & Ors. [1961] 1
S.C.R. 809, Automobile Transport (Rajasthan) Ltd. v. State
of Rajasthan & Ors., [1963] 1 S.C.R. 491 and Firm A.T.B.
Mehtab Majid and Co. v. State of Madras & Anr. [1963] Supp.
2 S.C.R. 435, relied on.
(ii) Tax, under the Central Sales Tax Act on inter-State
sales is in its essence a tax which encumbers movement of
trade and commerce, since by the definition in s. 3 of the
Act a sale or purchase of the goods is deemed to take place
in the course of inter-State trade, if it-(a) occasions the:
movement of goods ’from one State to another; (b) is
effected by a transfer of documents of title to the goods
during the movement from one State to another. But the tax
in the present case was saved by the operation of Art. 302
of the Constitution whereby Parliament is, notwithstanding
the protection conferred by Art. 301 authorised to impose
830
restrictions on the freedom of-trade, commerce or
intercourse between one State and another or within any part
of the territory of India as may be required in the public
interest. [841 C-E]
The expression ’between one State and another’ does not
imply that the power under Art. 302 can be exercised only in
respect of trade between one State and another as two
entities. The Article expressly provides that restrictions
may be imposed not only as between one State and another but
also within any part of the territory of India. There is
also no doubt that exercise of the power to tax may normally
be presumed to be in the public interest. [841 F-H]
(iii) The Central Sales Tax Act does not discriminate
between one State and another within the meaning of Art.
303.
An Act which is merely enacted for the purpose of imposing
tax which is to be collected and to be retained by the State
does not amount to law, giving or authorising the giving of
any preference to one State over another, or making, or
authorising the making of any discrimination between one
State and another merely because of varying rates of tax
between different States. By leaving it to the States to
levy sales tax in respect of a commodity on intra-State
transactions no discrimination is practised and by
authorising the State from which the movement of goods
commences to levy on transactions of sale Central Sales Tax,
at rates prevailing in the, State, subject to certain
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limitations, no discrimination can be deemed to be
practised. [843 C-D; 846 C]
The flow of trade does not necessarily depend upon the rates
of sales tax; it depends upon a variety of factors such as
the source of supply, place of consumption, existence of
trade channels, the rates of freight, trading ’facilities,
availability of efficient transport and other facilities for
carrying on trade. [843 G-H]
The King v. Barger, [1908] 6 C.L.R. 41 and W. R. Moran
Proprietary Ltd. v. The Deputy Federal Commissioner of
Taxation (N.S.W.) & Ors., [1940] 63 C.L.R. 338. referred to.
The rate which a State Legislature imposes in respect of
inter-State transactions in a particular commodity must
depend on a variety of factors-political and economic. If
the rate is so high as to drive away prospective traders
from purchasing a commodity and to resort to other sources
of supply, in its own interest the State will adjust the
rate to attract purchasers. Again in a democratic
constitution political forces would operate against the levy
of an unduly high rate of tax. Attention must also be
directed to sub-s. (5) of s. 8 which authorises the State
Government, notwithstanding anything contained in s. 8 in
the public interest to waive tax or impose tax on sales at a
lower rate on inter-State trade or commerce. It is clear
that the Legislature has contemplated that elasticity of
rates consistent with economic forces may be maintained.
[845 B-E]
(iv) Article 304 (a) had no application to the present case
because there was no imposition of rates of tax on imported
goods different from rates of tax on goods manufactured or
produced in the State. [847 F]
Firm A.T.B. Mehtab Majid and Company v. State of Madras and
Another, [1963] Supp. 2 S.C.R. 435 and State of Mysore v.
Lakshminarasimhiah Setty & Sons, 16 S.T.C. 231,
distinguished.
(v) In the matter of determining the taxable turnover the
same rules namely the rules under the State law will apply
by virtue of s. 9(1) of the Central Sales Tax Act, whether
the tax is to be levied under the Central Sales Tax Act or
the Madras General Sales Tax Act. Therefore in calculating
the turnover of inter-State transactions excise duty would
831
be excluded as provided in the Rules made under the Madras
Act, although there was no such provision in the Central
Act. [848 G-H]
State of Mysore v. Lakshminarasimhiah Setty & Sons, 16
S.T.C. 231, referred to.
Per Bachawat J. (partly dissenting),-(i) It cannot be said
that tax under the Central Sales Tax Act on inter-State
sales as defined in s. 3 of the Act is in its essence a tax
hampering movement of trade or commerce within the meaning
of Art. 301. That Article makes no distinction between.
movement from one part of the State :to another part of the
same State and movement from one State to another. If a tax
on intra-State sales does not offend Art. 301, logically a
tax on inter-State sales also cannot do so. Neither tax
operates directly or immediately on the free, flow of trade
or the free movement or the transport of goods from one part
of the country to the other. The tax is on the sale. The
movement is incidental and a consequence of the sale. (851
F-H; 85Z A]
Even assuming that the Central Sales Tax is within the
mischief of Art. 301, it is certainly a law made by
Parliament in the public interest and is saved by Art. 302.
There is nothing in its provisions which offends Art. 303
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[851 F]
Per- Hegde, J.-(i) A taxing statute is not outside the scope
of Art. 301 of the Constitution. But before a taxing
statute is held to be violative of that article it must be
shown that it has a direct or immediate, impact on the
freedom of trade, commerce and intercourse within the
country. A mere remote or incidental impact is insufficient
to hold that Art. 301 has been contravened. [85Z B]
(ii) The power conferred on Parliament by Art. 302 is
extremely wide and the only limitation placed on that power
is that the law in question must be required in the public
interest. Primarily it is for Parliament to determine the
requirement as to public interest, and its decision is not
easy to challenge. In addition there is the presumption of
the constitutionality of a statute. [852 D]
(iii) Mere difference in rates is neither showing
preference nor making discrimination within the meaning of
Art. 303(1). But other things being equal the difference in
rates would re-suit in showing preference to. some States
and making discrimination against others. Hence difference,
in rates is a prima facie proof of the preference or
discrimination complained of. Once the difference in rates
is shown it is for the State to, show that the same has not
resulted in showing preference to one or more States or
making discrimination against one or more States over others
in the matter of inter-State trade. No interpretation
should be placed on Art. 303(1), which would render that
provision purposeless. The State, must place before the
Court its reasons for making the enactment and’ satisfy it
that Art. 303(1) has not been contravened. [852 F-853 C]
On an examination of the material placed before the Court in
the present case it was clear that the differences in the
rates we’re in public interest and those differences did not
materially affect the tree flow of trade in the country.
[853 C]
[The impugned sections of the Act having been held to be
valid, the case was remanded to the High Court for
determining the nature of the transactions]
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 763 of 1967.
832
Appeal from the judgment and order dated April 7, 1967 of
the Madras High Court in Writ Petition No. 836 of 1966.
Bishan Narain and A. Y. Rangam, for the appellant.
M. R. M. Abdul Karim, K. Rajendra Choudhury and K. R.
Choudhury, for the respondents.
R. Thiagarajan, for intervener No. 1.
R. Gopalakrishnan, for intervener No. 2.
A. N. Singh and D. N. Gupta, for intervener No. 3.
B. R. L. Iyengar, R. N. Sachthey and S. P. Nayyar, for
intervener No. 4.
B. Sen, G. S. Chatterjee for P. K. Bose, for intervener
No. 5.
C. B. Agarwala and O. P. Rana, for intervener No. 6.
Lal Narain Sinha, Advocate-General for the State of Bihar,
R. K. Garg, S. C. Agarwala, Anil Kumar and S. P. Singh, for
intervener No. 7.
Naunit Lal, for intervener No. 8.
K. Baldev Mehta, for intervener No. 9.
M. R. K. Pillai, for intervener No. 10.
The Judgment of SHAH, MITTER and VAIDIALINGAM, JJ. was
delivered by SHAH, J. BACHAWAT, J. partly dissented. HEGDE,
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J. ,delivered a separate opinion.
Shah, J--In a proceeding for assessment of tax for 1963-64
under the Central Sales Tax Act, 1956, the Deputy Commercial
Tax Officer rejected the contention of the assessee that a
part of the turnover of his business in matches arose out of
intra-State sale transactions at the assessee’s depot at
Ongole (in the State of Andhra Pradesh) to which depot the
goods were despatched by him from his place of business in
the State of Madras. The .Deputy Commercial Tax Officer
held that the goods were moved from "the godown stock’ of
the assessee in execution of contracts of sale with
merchants outside the State of Madras, and on that account
the turnover from sales was liable to tax under the Central
Sales Tax Act. The assessee moved the High Court of Madras
under Art. 226 of the Constitution seeking a writ of
certiorari ,quashing the order of assessment, on the
grounds, that the provisions of the Central Sales Tax Act
which permitted levy of tax at varying rates in different
States were invalid, and that the transactions brought to
tax were not in truth inter-State transactions. The High
Court did not determine the nature of the transactions ’but
held that sub-s. (2), (2A) and (5) of s..8 of the Central
833
Sales Tax Act, 1956, in operation at the relevant time
imposed or authorised the imposition of varying rates of tax
in different States on similar inter-State transactions and
the resultant inequality in the burden of tax affected and
impeded inter-State trade. commerce and intercourse, and
thereby offended Arts. 301 and 303(1) of the Constitution.
The High Court rejected the plea of the assessee that S.
9(3) of the Act was ultra vires. The State has appealed to
this Court with certificate granted by the High Court
against the order declaring sub-ss. (2), (2A) and (5) of
S. 8 of the Central Sales Tax Act, 1956, invalid.
A brief review of the developments in the law relating to
imposition of tax on ’transactions of sale and its inter-
relation with the constitutional provisions leading to the
enactment of the Central Sales Tax Act, 1956, will
facilitate appreciation of the competing views put forward
before us at the Bar. The Government of India Act, 1935, by
List II entry 48 of the Seventh Schedule conferred power
exclusively upon the Provinces to legislate on the subject
of "tax on the sale of goods and on advertisement". In
exercise of that power the Provincial Legislatures enacted
sales tax laws for their respective Provinces acting on the
principle of "territorial nexus", and picked out one or more
ingredients constituting a sale and made it or them the
basis of imposing liability for tax. This exercise of
taxing power by the Provinces led to multiple taxation of
the same transaction by many provinces, the burden of tax
falling ultimately on the consuming public.
In order to remove this burden imposed upon the consumers,
Art. 286 was incorporated in the Constitution inter alia for
the regulation of inter-State sales transactions. This
Court in The State of Bombay v. United Motors (India)
Ltd.(1) held that under the Bombay Sales Tax Act 24 of 1952
sales effected in Bombay in respect of goods exported from
the State were not taxable by the State of Bombay, but the
importing State was competent to levy tax on transactions of
sale in the course of inter-State trade or commerce on
persons who were resident outside its territory, provided
that the goods were delivered in the importing State for the
purpose of consumption therein. This decision made the
dealer carrying on business in the exporting State amenable
to the sales tax law of the importing State. The question
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was reconsidered by this Court in Bengal Immunity Company
Ltd. v. State of Bihar(1). The Court held that the sales or
purchases made by an assessee which actually took place in
the course of inter-State trade or commerce could not be
taxed by any State until by law it was otherwise provided by
Parliament. The judgment in Bengal Immunity Co.’s case(2)
removed, by making inter-State
(1) [1953] S. C. R. 1069. (2) [1955] 2 S. C. R. 603.
834
sales immune from taxation, the difficulties till then
experienced by the trading community but the importing
States which had imposed tax on inter-State sales by non-
resident dealers, relying on them principle of the judgment
in United Motors case(1) were faced with innumerable claims
for restitution of the tax realized. The President then
promulgated Ordinance No. III of 1956 which was later
replaced by the "Sales Tax Laws Validation Act VII of 1956"
with the object of restoring for the period specified in the
Act the decision in United Motors case(1).
The problem of tax on inter-State sales was, in the
meanwhile, examined by the Taxation Enquiry Commission. The
report of the Commission led to the enactment of the
Constitution Amendment) Act, 1956. By that amendment entry
92A was added in Union List in the Seventh Schedule to the
Constitution conferring power upon the Union to legislate in
respect of "taxes on the sale or purchase of goods other
than newspapers, where such sale or purchase takes place in
the course of inter-State trade or commerce"; and for entry
54 in the State List, the following entry was substituted :
"Taxes on the sale or purchase of goods other than
newspapers, subject to the provisions of entry 92A of List
I."
Explanation to cl. (1) of Art. 286 was omitted, and cls. (2)
& (3) were substituted by fresh clauses: by the newly
enacted cl. (2) the Parliament was authorised by law to
formulate principles for determining when a sale or purchase
of goods takes place in any of the ways mentioned in cl.
(1), and by cl. (3) it was enacted that any law of a State
shall, in so far as it imposes or authorises the imposition
of, a tax on the sale or purchase of goods declared by
Parliament by law to be of special importance in inter-State
trade or commerce, be subject to such restrictions and
conditions in regard to the system of levy, rates and other
incidents of the tax as Parliament may by law specify. In
Art. 269(1) clause (g) was added authorising the Government
of India to collect tax on the sale or purchase of goods
other than newspapers, where such sale or purchase takes
place in the course of inter-State trade or commerce and
making it obligatory upon the Government of India- to assign
the tax to the States in the manner provided in cl. (2). By
cl. (3) it was enacted that
"Parliament may by law formulate principles for determining
when a sale or purchase of goods takes place in the course
of inter-State trade or commerce."
In exercise of authority conferred by the Constitution
(Sixth Amendment) Act, 1956, the Parliament
enacted on
(1) [1953] S.C.R. 1069.
835
December 21, 1956, the Central Sales Tax Act, 1956, with a
view to formulate principles (a) for determining when a sale
or purchase of goods takes place in the course of inter-
State trade or commerce or outside a State or in the course
of import into or export from India; (b) providing for the
levy, collection and distribution of taxes on sales of goods
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in the course of inter-State trade or commerce; (c)
declaring certain goods to ’be of special importance in
inter-State trade or commerce and specifying the
restrictions and conditions to which State laws imposing
taxes on the sale or purchase of such goods of special
importance shall be subject. By s. 3 of the Act a
definition of sale or purchase of goods said to take place
in the course of inter-State trade or commerce was devised.
By s. 4 conditions in which a sale or purchase of goods was
to be deemed to have taken place outside a State were
specified. By.s. 5 the conditions in which a sale or
purchase of goods taking place in the course of import or
export were specified. By Ch. III (ss. 6 to 13) provisions
were enacted for declaring a charge of tax on inter-State
sales and for setting up machinery for levy of tax and
incidental matters. Section 6 imposed a charge on all sales
effected by a dealer in the course of inter-State trade or
commerce during any year. By s. 7 provision was made for
registration of dealers. Section 8, insofar as it is
material, and as amended by Act 31 of 1958, read as follows
"(1) Every dealer, who in the course of inter-
State trade or commerce-
(a) sells to the Government any goods; or
(b) sells to a registered dealer other than
the Government goods of the description
referred to in sub-section (3) :
shall be liable to pay tax under this Act,
which shall be two per cent. of his turnover.
(2) The tax payable by any dealer on his
turnover in so far as the turnover or any part
thereof relates to the sale of goods in the
course of inter-State trade or commerce not
falling within sub-section (1)-
(a) in the case of declared goods, shall be
calculated at the rate applicable to the sale
or purchase of such goods inside the
appropriate State; and
(b) in the case of goods other than declared
goods, shall be calculated at the rate of
seven per cent., or at the rate applicable to
the sale or purchase of such goods inside the
appropriate State, whichever is higher;
and for the purpose of-making any such
calculation any such dealer shall be deemed to
be a dealer liable to pay
836
tax under the sales tax law of the appropriate
State, notwithstanding that he, in fact, may
not be so liable under that law.
(2A) Notwithstanding anything contained in
subsection (1) or sub-section (2), if under
the sales tax law of the appropriate State the
sale or purchase, as the case may be, of any
goods by a dealer is exempt from tax generally
or is subject to tax generally at a rate which
is lower than two per cent. (whether
called a
tax or fee or by any other name), the tax
payable. under this Act on his turnover in so
far as the turnover or any part thereof
relates to the sale of such goods shall be
nil, or, as the case may be, shall be
calculated at the lower rate.
Explanation.--For the purpose of this sub-
section a sale or purchase of goods shall not
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be deemed to be exempt from tax generally
under the sales tax law of the appropriate
State if under that law it is exempt only in
specified circumstances or under specified
conditions or in relation to which the tax is
levied at specified stages or otherwise than
with reference to the turnover of the goods.
(3)
(4)
(5) Notwithstanding anything contained in
this section, the State Government may, if it
is satisfied that it is necessary so to do in
the public interest, by notification in the
Official Gazette, direct that in respect of
such goods or classes of goods as may be
mentioned in the notification and subject to
such conditions as it may think fit to impose,
no tax under this Act shall be payable by any
dealer having his place of business in the
State in respect of the sale by him from any
such place of business of any such goods in
the course of inter-State trade or commerce or
that the tax on such sales shall be calculated
at such lower rates than those specified in
sub-section (1) or sub-section (2) as may be
mentioned in the notification."
By S. 9 machinery was set up for levy and
collection of tax and penalties. Insofar as
it is material, it provided :
"(1) The tax payable by any dealer under this
Act on sales of goods effected by him in the
course of interState trade or commerce whether
such sales fall within clause (a) or clause
(b) of section 3 shall be levied and
837
collected by the Government of India in the
manner provided in sub-section (3) in the
State from which the movement of the goods
commenced:
Provided
(2)
(3) The authorities for the time being
empowered to assess, collect and enforce
payment of any tax under the general sales tax
law of the appropriate State shall, on behalf
of the Government of India and subject to any
rules made under this Act, assess, collect and
enforce payment of any tax, including any
penalty, payable by a dealer under this Act in
the same manner as the tax on the sale or
purchase of goods under the general sales tax
law of the State is assessed, paid and
collected; and for this purpose they may
exercise all or any of the, powers they have
under the general sales tax law of the State,
and the provisions of such law, including
provisions relating to returns, appeals,
reviews, revisions, references, penalties and
compounding of offences, shall apply
accordingly
Provided
(4) The proceeds in any financial year of
any tax, including any penalty, levied and
collected under this Act in any State (other
than a Union territory) on behalf of the
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Government of India shall be assigned to that
State and shall be retained by it; and the
proceeds attributable to Union territories
shall form part of the Consolidated Fund of
India."
By Ch. IV (ss. 14 & 15) provision was made
for levy of tax at specially low rates on
goods of special importance in inter-State
trade or commerce. By S. 14 certain goods
were declared to be of special importance in
inter-State trade or commerce, and by, s. 15,
as amended by Act 31 of 1958, it was provided:
"Every sales tax law of a State shall, in so
far as it imposes or authorises the imposition
of a tax on the sale or purchase of declared
goods, be subject to the following
restrictions and conditions, namely :-
(a) the tax payable under that law in
respect of any sale or purchase of such
goods inside the State shall not’ exceed two
per cent. of the sale or purchase price
thereof, and such tax shall not be levied at
more than one stage;
838
(b) where a tax has been levied under that
law in respect of the sale or purchase inside
the State of any declared goods and such goods
are sold %in the course of inter-State trade
or commerce, the tax so levied shall not
exceed two per cent of the sale or
purchase
subject to such conditions as may be provided
in any law in force in that State."
The scheme of the Act was first to devise definitions of
’interState sales’ and ’sales outside the State’, and then
to declare interState sales subject to tax, and to set up
machinery for levying and collecting tax on those sales.
Transactions in goods which were made subject to tax in the
course of inter-State trade or commerce were classified into
three broad categories-(1) transactions falling within s. 8
(1) i.e. all sales to Government, and sales to a registered
dealer other than the Government of goods referred to in
sub-s. (3) of s. 8; (2) transactions falling within S. 8 (2)
(a) i.e., sales in respect of declared goods; and (3)
transactions falling within S. 8 (2) (b) i.e. sales [not
falling within ( 1 ) in respect of goods other than
declared goods. Sales of goods in category ( 1 ) were
declared liable, at the relevant time to pay a tax of two
per cent. on the turnover. On sales of declared goods tax
Was to be calculated at the rate applicable to the sale or
purchase of such goods inside the appropriate State. But by
S. 15 the tax payable under a State law in respect of any
sale or purchase of declared goods inside the State was not
to exceed two per cent. of the sale or purchase price
thereof, and was not leviable at more than one stage. On
turnover from sale of goods not failing within categories
(1) & (2) the rate was seven per cent. or the rate
applicable to the sale or purchase of such goods inside the
appropriate State, whichever was higher. But by sub-s. (2A)
of s. 2 it was provided that notwithstanding anything
contained in sub-s. (1) or sub-s. (2), if under the sales
tax law of the appropriate State the sale or purchase, as
the case may be, of any goods by a dealer is exempt from tax
generally or is subject to tax generally at a rate which is
lower than two per cent. the tax payable under the Act on
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the turnover insofar as the turnover or any part thereof
relates to the sale of such goods shall be nil, or as the
case may be shall be calculated at the lower rate. There is
a slight inconsistency between s. 8 (2) and S. 8 (2A). If
the rate of tax under the State law is less than two per
cent. by virtue of S. 8 (2A), even in respect of turnover
falling within S. 8 (2) (b), the rate of tax will not exceed
the State rate : if the State rate exceeds two per cent, tax
at the rate of seven per cent. or of the State, whichever is
higher, shall prevail. But that has no bearing on the
question under discussion.
Tax under the Act is payable by the seller. The State from
which the movement of goods commences in the course of
inter-
839
State sale collects the tax as agent of the Central
Government, and in the manner provided in sub-s. (3) of s.
9. By sub-s. (4) of s. 9 the proceeds in any financial year
of any tax, including any penalty, levied and collected
under the Act in any State (other than a Union territory) on
behalf of the Government of India are to be assigned to that
State and are to be retained by it, and the proceeds
attributable to Union territories are to form part of the
Consolidated Fund of India.
The Act and the constitutional provisions were intended to
restrict the imposition of multiple taxation on a single
inter-State .transaction by different States, each State
relying upon some territorial nexus between the State and
the sale. The tax though collected by the State under the
Central Sales Tax Act was as an agent of the Central
Government, it was, by sub-s. (4) of s. 9 enacted in
implementation of the principle of assignment of tax set out
in cl. (2) of Art. 269, assigned to the State which
collected it.
This somewhat tortuous scheme of levying tax on inter-State
transactions and making it available to the State which
levied it, in effect countenances levy of different rates of
tax on inter-State transactions in similar goods. It is
upon the prevalence of different rates of tax which, subject
to adjustments, and incorporated in the Central Sales Tax
Act, that the argument of the assessee is largely founded.
He contends-and his contention has found favour with the
High Court-that the liability to pay tax on interState
transactions, depending upon the rate of tax prevailing in
the exporting State, hampers trade and commerce, by giving
or authorising the giving of preference to one State over
another or by making or authorising the making of
discrimination between one State and another, and thereby
violates the guarantee of freedom of trade, commerce and
intercourse declared by Part XIII of the Constitution. The
assessee primarily relies upon Arts. 301 and 303(1) of the
Constitution in support of his contention. Article 301
provides :
"Subject to the other provisions of this Part, trade,
commerce and intercourse throughout the territory of India
shall be free."
This Article is couched in terms of the widest amplitude,
trade, commerce and intercourse are thereby declared free
and unhampered throughout the territory of India. The
freedom of trade so declared is against the imposition of
barriers or obstructions within the State as well as inter-
State : all restrictions which directly and immediately
affect the movement of trade are declared by Art. 301 to be
ineffective. The extent to which Art. 301 operates to make
trade and commerce free has been considered by this Court in
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 11 of 24
several cases. In Atiabari Tea Co. Ltd. v. The State
Sup. C. I./68-14
840
of Assam and others(1), Gajendragadkar, J., speaking for
himself and Wanchoo & Das Gupta, JJ., observed at p. 860:
"....... we think it would be reasonable and
proper to hold that restrictions, freedom from
which is guaranteed by Art. 301, would be such
restrictions as directly and immediately
restrict or impede the free flow or movement
of trade."
In Automobile Transport (Rajasthan) Ltd. v.
The State of Rajasthan and others(1), the view
expressed by Gajendragadkar, J., in Atiabari
Tea Co.’s case(1) was accepted by the
majority.
Subba Rao, J., who agreed with the majority
observed that the freedom .declared under Art.
301 of the Constitution of India referred to
the right of free movement of trade without
any obstructions by way of barriers, inter-
State or intra-State, or other impediments
operating as such barriers. The same view was
expressed in Firm A. T. B. Mehtab Majid and
Company v. State of Madras and Another(") by a
unanimous Court. It must be taken as settled
law that the restrictions or impediments which
directly and immediately impede or hamper the
free flow of trade, commerce and intercourse
fall within the prohibition imposed by Art.
301 and subject to the other provisions of the
Constitution they may be regarded as void.
But it is said that by imposing tax on sales,
no restriction hampering trade is imposed. In
the Atiabari Tea Company’s
case (1), Gajendragadkar, J., observed :
"Taxes may and do amount to restrictions; but
it is only such taxes as directly and
immediately restrict trade that would fall
within the purview of Art. 301. The argument
that all taxes should be governed by Art. 301
whether or not their impact on trade is
immediate or mediate, direct or remote,
adopts, in our opinion, an extreme approach
which cannot be upheld."
In a recent judgment of this Court in The
Andhra Sugars Ltd. and Another v. The State of
Andhra Pradesh and others(4), Bachawat, J.,
speaking for the Court, after referring to the
observations made by Gajendragadkar, J., in
Atiabari Tea Company’s case(1) observed
"This interpretation of Article 301 was not
dissented from in Automobile Transport
(Rajasthan) Ltd. v. State of Rajasthan--[1963]
I S.C.R. 491. Normally, a tax on sale of
goods does not directly impede the free
(1) [1961]1 S.C.R.809.
(2) [1963] Supp. 2 S.C.R. 435.
(3) [1963] 1 S. C. R. 491.
(4) 21 S. T. C. 212.
841
movement or transport of goods. Section 21 is
no exception. It does not impede the free
movement or transport of goods and is not
violative of Article 301."
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 12 of 24
Section 21 of the Andhra Pradesh Sugar Cane (Regulation of
Supply and Purchase) Act which was referred to in the
judgment authorised the State Government to levy a tax at
such rate not exceeding five rupees per metric tonne as may
be prescribed on the purchase of cane required for use,
consumption or sale in a factory. It must, therefore, be
regarded as settled law that a tax may in certain cases
directly and immediately restrict or hamper the flow of
trade, but every imposition of tax does not do so.
Tax under the Central Sales Tax Act on inter-State sales, it
must be noticed, is in its essence a tax which encumbers
movement of trade or commerce, since by the definition in s.
3 of the Act a sale or purchase of goods is deemed to take
place in the course of inter-State trade or commerce, if it-
(a) occasions the movement of goods from one State to
another; (b) is effected by a transfer of documents of title
to the goods during their movement from one State to
another. The question which then falls to be determined is
whether the tax imposed in the present case is saved by the
operation of the other provisions of Part XIII. Article 302
of the Constitution provides that Parliament may by law
impose such restrictions on the freedom of trade, commerce
or intercourse between one State and another or within any
part of the territory of India as may be required in the
public interest. Thereby the Parliament is, notwithstanding
the protection conferred by Art. 301, authorised to impose
restrictions on the freedom of trade, commerce or
intercourse in the public interest. The expression "between
one State and another does not imply that it is only
intended to confer upon the Union Parliament the power to
remove the fetter upon legislative authority only so as to
keep trade, commerce or intercourse free between one State
Government and another. It is intended to declare trade,
commerce and intercourse free between residents in one State
and residents in another State. That is clear because Art.
302 expressly provides that on the freedom of trade
restrictions may be imposed not only as between one State
and another, but also within any part of the, territory of
India. As we have already observed, Art. 301 does not
merely protect inter-State trade or operate against inter-
State barriers : all trade is protected whether it is intra-
State or interState by the prohibition imposed by Art. 301,
and there is nothing in the language or the context for
restricting the power of the Parliament which it otherwise
possesses in the public interest to impose restrictions on
the freedom of trade, commerce or intercourse, operative
only as between one State and another as two entities.
’Mere is also no doubt that exercise of the power to tax may
normally be presumed to be in the public interest.
Article 303 provides, by the first clause:
"Notwithstanding anything in article 302,
neither Parliament nor the Legislature of a
State, shall have power to make any law
giving, or authorising the giving of, any
preference to one State over another, or
making, or authorising the making of, any
discrimination between one State and another.,
by virtue of an entry relating to trade and
commerce in any of the Lists in the Seventh
Schedule."
Having conferred by Art. 302 power upon the Parliament to
impose restrictions upon freedom of trade, commerce or
intercourse, the Constitution proceeds to impose certain
restrictions upon the power so conferred. Reference to the
power of the State Legislatures in Art. 303 (1 ) creates a
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 13 of 24
complication which we are not called upon in the present
case to resolve. It is expressly declared that the
Parliament shall not have the power to make any law giving
preference to one State over another, authorising the giving
of any preference to one State over another, making any
discrimination between one State and another, and
authorising the making of any discrimination between one
State and another, in exercise of or by virtue of any entry
relating to trade and commerce in any of the Lists in the
Seventh Schedule.
It was contended on behalf of the State that the power under
Art. 303 could only be exercised so as to restrict the
authority of the Parliament which arises by virtue of an
entry relating to trade and commerce in the legislative
lists and it was urged that an entry with respect to the
levy of tax on trade and commerce and is not an entry
relating to trade and commerce and therefore there is no
prohibition against the Parliament exercising power or
authorising the giving of any preference to one State over
another or making or authorising the making of any
discrimination between one State and another by the exercise
of taxing power. Reliance in support of that contention was
placed upon the judgment in Sundararamier and Company v.
State of Andhra Pradesh(1) in which Venkatarama Aiyar, J.,
pointed out that under he scheme of entries in List I & III
of the Seventh Schedule the power of taxation exercisable in
respect of any matter is a power distinct from the power to
legislate in respect of that matter. It was also urged that
the expression "an entry relating to trade and commerce in
any of the Lists in the Seventh Schedule" was restricted to
the entries which expressly deal with the power to legislate
in respect of trade and commerce i.e., entries 41 & 42 of
List I, entries 26 & 27 of List II and entry 33 of List III
in the Seventh Schedule, and
(1) [1958] S. C R. 1422.
843
extended to no others. On the other hand it was contended
that all legislative entries which directly affect trade and
commerce are also within the expression "entry relating to
trade and commerce".
We need express no opinion on the two questions argued
before us. The question whether entries relating to trade
and commerce in the Lists in the Seventh Schedule are
restricted to entries 41 & 42 of List I, entries 26 & 27 of
List II and entry 33 of List III, or relate to all general
entries which affect trade and commerce, is academic in the
present case. Nor do we think it necessary to decide
whether for the purpose of Art. 303 entries relating to tax
on sale or purchase of goods i.e., entry 92A of List I, and
entry 54 of List II are entries relating to trade and
commerce, for, in our opinion, an Act which is merely
enacted for the purpose of imposing tax which is to be
collected and to be retained by the State does not amount to
law giving, or authorising the giving of, any preference to
one State over another, or making, or authorising the making
of, any discrimination between one State and another, merely
because of varying rates of tax prevail in different States.
It was urged that the High Court was right in holding that
rates of tax on the sale of the same or similar commodity by
different States by itself was discriminatory, since it
authorised placing of an unequal burden on inter-State trade
and commerce affecting its free flow between the States.
The rates of tax prevailing in different States on
transactions of sale in the diverse commodities are
undoubtedly not uniform. According to the High Court such a
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 14 of 24
scheme was "obviously quite discriminatory and considerably
affected the freedom of trade, commerce and inter-Course",
the differential rates or exemptions in various Statler,
imposing an unequal burden on the same or similar goods
which affected their free movement or flow in inter-State
trade and commerce, and that a higher rate of tax in a State
worked as a barrier to the free movement of similar goods to
another State where there was no tax or a lower rate of tax,
and for trade in particular goods declared or undeclared to
be free throughout the territory of India, the rate of tax
or exemption as the case may be must be uniform. We are
unable to accept the view propounded by the High Court. The
flow of trade does not necessarily depend upon the rates of
sales tax : it depends upon a variety of factors, such as
the source of supply, place of consumption, existence of
trade channels, the rates of freight, trading facilities,
availability of efficient transport and other facilities for
carrying on trade. Instances can easily be imagined of
cases in which notwithstanding the lower rate of tax in a
particular part of the country goods I may be purchased from
another part, where a higher rate of tax prevails.
Supposing in a particular State in, respect of a particular
commodity, the rate of tax is 2 % but if the benefit of that
low
844
rate is offset by the freight which a merchant in another
State. may have to pay for carrying that commodity over a
long distance, the merchant would be willing to purchase the
goods from a nearer State, even though the rate of tax in
that State may be higher. Existence of long-standing
business relations, availability of communications, credit
facilities and a host of other factors-natural and
business--enter into the maintenance of trade relations and
the free flow of trade cannot necessarily be deemed to have
been obstructed merely because in a particular State the
rate of tax on sales is higher than the rates prevailing in
other States.
In The King v. Barger(1) the Australian High Court was
called upon to deal with the meaning of the expression
"discrimination between States or parts of States" used in
S. 51 of the Australian Constitution, Isaacs, J., observed
at p. 108 :
". . . . . the pervading idea is the
preference of locality merely because it is
locality, and because it is a particu
lar part
of a particular State. It does not include a
differentiation based, on other
considerations, which are dependent on natural
or business circumstances, and may operate
with more or less force in different
localities; and there is nothing, in my
opinion, to prevent the Australian Parliament,
charged with the welfare of the people as a
whole, from doing what every State in the
Commonwealth has power to do for its own citi-
zens, that is to say, from basing its taxation
measures on considerations of fairness and
justice, always observing the constitutional
injunction not to prefer States or parts of
States."
In W. R. Moran Proprietary Ltd. v. The Deputy Federal
Commissioner of Taxation (N.S.W.) and others(1), the
Judicial Committee of the Privy Council recorded its
approval to that exposition. It is true that the Judicial
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 15 of 24
Committee was interpreting s. 51(ii) of the Australian
Constitution. It also appears from the provisions of the
Australian Constitution that by virtue of s. 96 of the
Constitution there is to be a uniform imposition of customs
duties. But the observations made by Isaacs, J., in King v.
Barger(1) and approved by the Judicial Committee are useful
in the determination of the true principle applicable in the
present case, that, it is where differentiation is based on
consideration not dependent upon natural or business factors
which operate with more or less force in different
localities that the Parliament is prohibited from making a
discrimination.
The rates of tax in force at the date when the Central Sales
Tax Act was enacted have again not become crystallized.
The
(1) [1908] 6 C. L R. 41.
(2) [1940] 63 C. L. R. 338.
845
rate which the State Legislature determines, subject to the
maximum prescribed for goods referred to in s. 8 ( 1 ) and
(2) are the operative rates for those transactions : in
respect of transactions falling within S. 8 (2) (b) the rate
is determined by the State rate except where the State rate
is between the range of two and seven per cent. The rate
which a State Legislature imposes in respect of inter-State
transactions in a particular commodity must depend upon a
variety of factors. A State may be led to impose a high
rate of tax on a commodity either when it is not consumed at
all within the State, or if it feels that the burden which
is falling on consumers within the State will be more than
offset by the gain in revenue ultimately derived from
outside consumers. The imposition of rates of sales tax is
normally influenced by factors political and economic. If
the rate is, so high as to drive away prospective traders
from purchasing a commodity and to resort to other sources
of supply, in its own interest the State will adjust the
rate to attract purchasers.............. Again, in a demo-
cratic constitution political forces would operate against
the levy of an unduly high rate of tax. The rate of tax on
sales of a commodity may not ordinarily be based on
arbitrary considerations but in the light of the facility of
trade in a particular commodity, the market conditions-
internal and external--and the likelihood of consumers not
being scared away by the price which includes a high rate of
tax. Attention must also be directed to sub-s. (5) of s. 8
which authorises the State Government, notwithstanding
anything contained in s. 8, in the public interest to waive
tax or impose tax on sales at a lower rate on inter-State
trade or commerce. it is clear that the legislature has
contemplated that elasticity of rates consistent with
economic forces may be maintained.
Prevalence of differential rates of tax on sales of the same
commodity cannot be regarded in isolation as determinative
of the object to discriminate between one State and another.
Under the Constitution as originally framed, revenue from
sales-tax was reserved to the States. But since the power
of taxation could be exercised in a manner prejudicial to
the larger public interests by the States it was found
necessary to restrict the power of taxation in respect of
transactions which had an inter-State content. Amendment of
Art. 286 and the enactment of the Sales Tax Validation Act
1956, and the Central Sales Tax Act, 1956, were all intended
to serve a dual purpose: to maintain the source of revenue
from sales-tax to the States and at the same time to prevent
the States from subjecting transactions in the course of
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 16 of 24
interState trade so as to obstruct the free flow of trade by
making commodities unduly expensive. The effect of the
Constitutional pro,visions achieved in a somewhat devious
manner is still clear, viz.
846
to reserve sales-tax as a source of revenue for the States.
The Central Sales Tax Act is enacted under the authority of
the Union Parliament, but the tax is collected through the
agency of the State and is levied ultimately for the benefit
of the States and is statutorily assigned to the States.
That is clear from the amendments made by the Constitution
(Sixth Amendment) Act, 1956, in Art. 269, and the enactment
of cls. (1) & (4) of s. 9 of the Central Sales Tax Act. The
Central sales-tax though levied for and collected in the
name of the Central Government is a part of the sales-tax
levy imposed for the benefit of the States. By leaving it
to the States to levy sales-tax in respect of a commodity on
intrastate transactions no discrimination is practiced: and
by authorising the State from which the movement of goods
commences to levy on transactions of sale Central sales-tax,
at rates prevailing in the State, subject to the limitation
already set out, in our judgment, no discrimination can be
deemed to be practised.
The view taken by the High Court was largely influenced by
two cases decided by this Court on the interpretation of
Art. 304(a). In Firm A. T. B. Mehtab Majid & Co.’s case(1)
this Court struck down the levy of tax on sales of tanned
hides and skins imported from outside the State of Madras at
a rate higher, than the rate of tax on sales of hides and
skins tanned and sold within the State of Madras as
infringing Art. 304(a). By r. 16 framed under s. 19 of the
Madras General Sales Tax Act, it was provided that in the
case of untanned hides and skins the tax under s. 3 (1) of
the Madras General Sales Tax Act shall be levied from the
dealer who is the last purchaser in the State not exempt
from tax under s. 3 (3) on the amount for which they are
brought by him. By r. 16(2) it was provided that-(i) in the
case of hides or skins which had been tanned outside the
State the tax under s. 3 (1) shall be levied from the dealer
who in the State is the first dealer in such hides or skins
not exempt from tax under s. 3(3) on the amount for which
they are sold by him; and (ii) in the case of tanned hides
or skins which had been tanned within the State, the tax
under s. 3 (1) shall be levied from a person who is the
first dealer in such hides of skins not exempt from tax
under s. 3(3) on the amount for which they are sold by him.
The taxpayer contended in Firm A. T. B. Mehtab Majid’s
case(1) that the tanned hides and skins imported from
outside and sold inside the State were under r. 16 of the
Madras General Sales Tax Rules subjected to a higher rate of
tax than the rate imposed on hides and skins tanned and sold
within the State and this-discriminatory system of taxation
offended Art. 304(a) of the Constitution: This Court
accepted the contention and held that r. 16(2) discriminated
against imported hides or skins which had been purchased or
(1) [1963] Supp. 2 S. C. R. 435.
847
tanned outside and therefore it contravened Art. 304(a) of
the Constitution.
Similarly in A. Hajee Abdul Shakoor and Co. v. State of
Madras(1) the assessees who were dealers in skins in the
State of Madras, purchased raw skins from places both within
and outside the State of Madras. They were assessed to
sales-tax in accordance with the provisions of the Madras
General Sales Tax (Turnover and Assessment) Rules, on the
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 17 of 24
turnover of hides and skins purchased in the untanned
condition outside the State and tanned within the State with
respect to the assessment years 1955-56, 1956-57 and 1957-
58. The tax was assessed at 3 pies per rupee on the price
of tanned hides and skins for the years 1955-56 and 1956-57
and at the rate of 2 per cent on the turnover for the year
1957-58. In petitions filed by the assessees in this Court
under Art. 32 of the Constitution it was held that S. 2(1)
of the Madras General Sales Tax (Special Provisions) Act,
1963, discriminated against imported hides and skins which
were sold upto August 1, 1957, upto which date the tax on
sale of raw hides and skins was at the rate of 3 pies per
rupee and was therefore void.
In the two cases the differential treatment violated Art.
304(a) of the Constitution, which authorises the Legislature
of a State notwithstanding anything in Arts. 301 and 303 by
law to "Impose on goods imported from other States or the
Union territories any tax to which similar goods
manufactured or produced in that State are subject, so
however, as not to discriminate between goods so imported
and goods so manufactured or produced;". Imposition of
differential rates of tax by the same State on goods
manufactured or produced in the State and similar goods
imported in the State is prohibited by that clause. But
where the taxing State is not imposing rates of taxon
imported goods different from rates of tax on goods
manufactured or produced, Art. 304(a) has no application.
Article 303 prohibits the making of law which gives, or
authorises the giving of, any preference to one State over
another, or makes, or authorises the making of, and
discrimination between one State and another. Prevalence of
different rates of sales-tax in the State which have been
adopted by the Central Sales Tax Act for the purpose of levy
of tax under that Act is, as already mentioned, not
determinative of the giving of preference or making a
discrimination. The view expressed by the High Court that
s. 8(2), 8(2A) and 8(5) infringe Art. 301 and Art. 303(1)
cannot be sustained.
It was contended before the High Court that whereas excise
duty was not liable to be included in the turnover of goods
under the Madras General Sales Tax Act, it was liable to be
included
(1) [1964] 8 S. C. R. 217.
848
in the turnover for the purpose of Central Sales Tax Act.
The High Court in making a general discussion on this
question observed, following the judgment of this Court in
State of Mysore v. Lakshminarasimhiah Setty & Sons(1) that
by "levied" in s. 9(1) ,of the Central Act, what was meant
was "levied as under the State Act", that would include also
the State Rules enabling deductions in the computation of
the turnover. The Court rejected the contention that "to
the extent the excise duty is not deductible from taxable
turnover under the Central Act unlike under the Madras
General Sales Tax Act, there is discrimination .... between
one State and another". They observed that :
"In the matter of non-deductibility of excise
duty from the turnover of inter-State sales,
the Central Act has equal application and
makes no discrimination. The Central Act does
not say that excise duty will be deductible in
one State and not in another. It is not
deductible from the turnover of the inter-
State sales and this rule is uniformly applied
to all inter-State sales. There is,
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 18 of 24
therefore, no question of inequality or
discrimination forbidden by Art. 303(1) and
there is no question of contravention of Art.
301 either."
But in dealing with the case of the assessee in the last
paragraph ,of the judgment, the High Court observed that
since no provision had been made for deduction of the excise
duty from the turnover of inter-state sales or purchases
under the Central Act with the result that unequal burden
will fall on differences in the quantum of turnover because
of allowance in the one case and disallowance in another, of
deduction of excise duty. This in the view of the High
Court would impede the freedom of inter-State trade, com-
merce and intercourse within the meaning of Art. 301 of the
Constitution and was not saved by Art. 303. The
observations so made, somewhat blur the earlier discussion.
If under the Madras General Sales Tax Act in computing the
turnover the excise duty is not liable to be included and by
virtue of S. 9 (1 ) ,of the Central Sales Tax Act has to be
levied in the same manner as the Madras General Sales Tax
Act, the excise duty will not be liable to be included in
the turnover, and the observations made in the last
paragraph ’of the judgment under appeal that because no
express provision was made for exclusion of the excise duty
in the computation of turnover from inter-State sales or
purchases there was discrimination cannot be accepted as
correct. We are of the view that in the matter of
determining the taxable turnover the same rules will apply
by virtue of S. 9 (1) of the Central Sales Tax Act, whether
the tax is to be levied under the Central Sales Tax Act or
the General Sales Tax Act.
(1) 16 S. T. C. 231.
849
The High Court proceeded to determine the case before them
only on the plea that the impugned provisions of the Act
were ultra vires. They did not consider whether the
transactions in dispute were inter-State transactions and
liable to tax in the hands of the assessee in the Madras
State. It is the case of the assessee that he has been
taxed in the Andhra Pradesh State by the appropriate
authority in respect of the transactions of sale of goods
which are sought to be taxed, on the footing that the
transactions were inter-State transactions. The question
whether the transactions were inter-State and were liable to
be taxed under the Madras General Sales Tax Act has not been
determined. The case must therefore be remanded to the High
Court. The High Court will proceed to decide the question.
Since the assessee moved the High Court by a writ petition
against the order of the sales-tax authorities without
filing an appeal before the authority competent to deal with
the questions of fact, it will be open to the High Court to
require the assessee to have those questions determined by
the competent departmental authority.
The appeal will be allowed and the order passed by the High
Court declaring the provisions of ss. 8(2), 8(2A). and 8(5)
ultra vires must be set aside.
The petition out of which this appeal arises was one of a
group of petitions filed before the High Court. Against
orders passed in favour of the other assessees the State has
not preferred appeals. The amount involved in the claim is
small. The State apparently has approached this Court with
a view to obtain a final determination of the important
question which was raised in the petitions filed before the
High Court. We therefore direct that there will be no order
as to costs in this Court and in the High Court.
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Bachawat, J. I have read the draft judgment prepared by our
learned brother Justice Shah. He has said that tax under
the Central Sales Tax Act on inter-State sales is in its
essence a tax hampering movement of trade or commerce, since
by the definition in sec. 3 of the Act a sale or purchase of
goods is deemed to take place in the course of inter-State
trade or commerce, if it (a) occasions the movement of goods
from one State to another; or (b) is affected by a transfer
of documents of title to the goods during their movement
from one State to another. He is of the view that the tax
falls within the prohibition imposed under Art. 301 of the
Constitution.
In Atiabari Tea Co. Ltd. v. The State of Assam(1) Gajendra-
gadkar, J. speaking for the majority of the Court said:-
"We are, therefore, satisfied that in
determining the limits of the width and
amplitude of the freedom
(1) [1961] 1 S. C. R. 809, 86D-861.
850
guaranteed by Article 301 a rational and
workable test to apply would be: Does the
impugned restriction operate directly or
immediately on trade or its movement.... It is
the free movement of the transport of goods
from one part of the country to the other that
is intended to be saved, and if any Act
imposes any direct restrictions on the very
movement of such goods it attracts the provi-
sions of Article 301, and its validity can be
sustained only if it satisfies the
requirements of Art. 302 or Article 304 of
Part XIII."
This interpretation of Article 301 was not
dissented from in Automobile Transport
(Rajasthan) Ltd. v. State of Rajasthan(1) In
The Andhra Sugars Ltd. v. The State of Andhra
Pradesh & Ors. (2) this Court rejected the
contention that sec. 21 of the Andhra Pradesh
Sugarcane (Regulation of Supply and Purchase)
Act, 1961 (Andhra Pradesh Act No. 45 of 1961)
did not offend Article 301. The Court held :
"Normally, a tax on sale of goods does not
directly impede the free movement or transport
of goods. Section 21 is no exception. It
does not impede the, free movement or
transport of goods and is not violative of
Article 301."
This Court distinguished the case of Firm A.T. Mehtab Majid
v. State of Madras(3) which decided that a sales tax which
discriminated against goods imported from other States might
affect the free flow of trade and would then be invalid
unless protected by Article 304(a). It is implied in Art.
304(a) that a discriminatory tax might affect freedom of
trade.
On principle I see no distinction between a tax on intra-
State and a tax on inter-State sales. An intra-State sale
may occasion the movement of goods from one part of the
State to another part of the same State. Indeed, normally,
an intra-State sale would occasion such movement, because
the purchaser has to move the goods from the seller’s place
to some other place. An intra-State sale may also be
affected by a transfer of documents of title to the goods
during their movement from one part of the State to another
part of the same State. But, there can be no doubt that a
tax on such sales would not normally offend Article 301.
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That Article makes no distinction between movement from one
part of the State to another part of the same State and
movement from one State to another. Now, if a tax on intra-
State sale does not offend Article 301, logically, I do not
see how a tax on inter-State sale can do so. Neither tax
operate directly or immediately on the
(1) [1963] (1) S.C.R. 491, 533
(2) 21 S. T. C. 212.
(3) [1963] Supp. 2 S. C. R. 435.
851
free flow of trade or the free movement of the transport of
goods from one part of the country to the other. The tax is
on the sale. The movement is incidental to and a
consequence of the sale.
In The Bengal Immunity Company Ltd. v. State of Bihar(1)
Jagannadhadas, J. after referring to Art. 301 said
"Now it is not disputed that a tax on a purely
internal sale which occurs as a result of the
transportation of goods from a manufacturing
centre within the State to a purchasing market
within the same State is clearly permissible
and not hit by anything in the Constitution.
If a sale in that kind of trade can bear the
tax and is not a burden on the freedom of
trade, it is difficult to see why a single
point tax on the same kind of sale where a
State boundary intervenes between the
manufacturing centre and the consuming centers
need be treated as a burden, especially where
that tax is ultimately to come out of the
residents of the very State by which such sale
is taxable. Freedom of trade and commerce
applies as much within a State as outside it.
It appears to me again, with great ’respect,
that there is no warrant for treating such a
tax as in any way contrary either to the
letter or the spirit of the freedom of trade,
commerce and intercourse provided under
Article 301."
As at present advised, I am inclined to agree with these
observations. I am, therefore, inclined to think that
normally a law imposing a tax on intra-State sales does not
offend Art. 301. It seems to me that the Central Sales Tax
Act, 1956 is no exception to this rule. None of its
provisions directly impede the movement of goods or the free
flow of trade.
I may add that even assuming that the Central Sales Tax Act,
1956 is within the mischief of Art. 301, it is certainly a
law made by Parliament in the public interest and is saved
by Art. 302. find nothing in the Act which offends Art.
303(1).
The decision of the High Court that section s. 8 (2), 8
(2A), and 8(5) of the Central Sales Tax Act, 1956 are ultra
vires the Constitution must therefore be set aside. I agree
to the order proposed by Shah J.
Hegde, J. Though I agree with the conclusions reached by my
learned brother Shah, J., namely, sections 8(2), 8(2-A) and
8(5) of the Central Sales Tax Act, 1956 (No. 74 of 1956)-
hereinafter referred to as the Act-are intra vires the
Constitution, my reasons for coming to that conclusion are
not the same as his. Hence this note.
(1) [1955] 2 S. C. R. 603 at p. 754.
852
The facts of the case as well as the history of the
legislation are fully set out in the majority judgment. It
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is settled by the decisions of this Court in Attabari Tea
Co. Ltd. v. The State of Assam(1) and the Automobile
Transport (Rajasthan) Limited v. The State of Rajasthan (2)
that a taxing statute is not outside the, scope of Art. 301
of the Constitution. But before a taxing statute is held to
be violative of that Article, it must be shown that it has a
direct or immediate impact on the freedom of trade, commerce
and intercourse within the country. In other words, a mere
remote or incidental impact is insufficient to hold that
Art. 301 has been contravened. Article 302 empowers
Parliament by law to impose such restrictions on the freedom
of trade, commerce and intercourse between one State and
another or within any part of the territory of India, as may
be required in the public interest. The power conferred on
Parliament is extremely wide and the only limitation placed
on that power by Art. 302 is that the law in question must
be required in the public interest. Primarily it is for
Parliament to determine the requirements of public interest.
The decision of Parliament in this regard is not easy to
challenge. Parliament is presumed to know the needs of the
people, the requirements of the time and the economic and
political interests of the country as a whole. By its very
composition it is unlikely that Parliament would have re-
gional bias or would adopt a parochial approach. In
addition, there is the presumption of the constitutionality
of a statute. Therefore the State undoubtedly starts with
an advantage. But once it is shown that a measure prima
facie gives preference to the residents of one State over
another State or it makes discrimination between the
residents of a State and that of another because of the
adoption of different rates of tax in different States, then
the matter assumes a different complexion in view of Art.
303 (1). It should be within the knowledge of the Union
Government why Parliament adopted different rates in
different States. I agree that mere difference in rates is
neither showing preference nor making discrimination. But
other things being equal, the difference in rates would
result in showing preference to some States and making
discrimination against others. Hence, in my opinion,
difference in rates is a prima facie proof of the preference
or discrimination complained of. It is for the State to
justify those differences. The real question for decision
is whether the impugned provisions have given or authorised
the giving of any preference to one State over another or
made or authorised the making of any discrimination between
one State and another. The word "State" in Art. 301 is used
in the sense of people residing in that State. It is
impossible for any ordinary person to establish positively
the preference or the
(1) [1961] 1 S. C. R. 809.
(2) [1963] 1 S. C. R. 491.
853
discrimination complained of, apart from showing the
difference in the rates. Once he shows the difference in
the rates, it is for the State to show that the same has not
resulted in showing preferences to one or more States over
others or making discrimination against one or more States
over others in the matter of inter-State trade. I am not
prepared to place an interpretation on Art. 303(1) which
would render that provision purposeless. After all it is
the State that had enacted the impugned provisions. It must
have had good reasons for enacting those provisions. It
must place before court those reasons and satisfy it that
Art. 303(1) has not been contravened. But on the material
placed before us, I am satisfied that the differences in the
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rates are in public interest and those differences do not
materially affect the free flow of trade in the country.
From the history of the legislation, it is clear that the
subject of taxing inter-State sales is a complicated
process. It has various facets. Sales-tax is one of the
most important sources of revenue for the States. It was so
even under the Government of India Act, 1935. It was not
the intention of Parliament either to dry up that source or
to divert the same. It wanted to retain that source for the
States; but at the same time guard against States levying
sales tax on inter-State sales in a manner which is likely
to be prejudicial to the free flow of trade and commerce in
the country. Constitutional amendments referred to in the
judgment of Shah J. have an important purpose behind. them.
Same is the case as regards the provisions in the Act.
Before Articles 269 and 286 were amended and the Act
enacted, a Committee known as Taxation Enquiry Committee,
had gone into the various aspects of inter-State trade and
commerce and made recommendations to the Union Government on
that subject. It was largely on the basis of those
recommendations that Articles 269 and 286 of the
Constitution were amended and the Act enacted. Therefore it
is clear that the Act is not a haphazard legislation; it is
the product of deep thinking and clear analysis of the
various aspects of the matter. This Court will be slow to
hold such a. measure as being either not in public interest
or is violative of Art. 303(1). The question of giving
preference or making discrimination depends on various facts
and circumstances, the tax rate being only one of them. The
views of an expert committee on a subject so complicated as
tax on interState sales is entitled to great weight. In the
very nature of things, it is difficult for courts to
ascertain the various factors that impede the free flow of
trade or to assess their importance. This is not the same
thing as saying that this Court should abdicate its
functions in favour of an expert committee or should unduly
exaggerate the importance of the collective knowledge and,
wisdom of the members of Parliament. But the fact remains
that
854
in assessing the strength of economic in a given matter the
views of persons who may be expected to be familiar with the
subject is entitled to weight and in the absence of clear
proof .to the contrary or unless it is shown that their
conclusions are obviously wrong, it will be proper for this
Court to proceed on the basis that the conclusions reached
by them on facts-not on questions of law-are correct. The
Taxation Enquiry Committee has given good reasons in support
of its recommendations.
We shall now examine the purposes behind s. 8 of the Act,
which fixes rates of tax on sales in the course of inter-
State trade, commerce and intercourse. The Act divides
inter-State sales into four categories, namely--4i) sales to
Government, (ii) sales of goods which are declared to be of
special importance in the inter-State trade and commerce,
(iii) sales to registered dealers, and (iv) sales to others.
Good many sales in the course of interState sales are made
to Governments. In a welfare State like ,ours, public
sector is in-charge of various industries, which require raw
material from various parts of the country. The Governments
also require consumer goods of various types for its
governmental functions as well as for its economic
activities. A uniform rate is fixed for those sales under
s. 8(1)(a). Hence in respect of an important segment of
inter-State sales the rate is uniform, no doubt subject to
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s. 8(2-A), the scope of which I shall discuss a little
later.
Section 14 declares that goods enumerated therein are goods
,of special importance in the inter-State trade and
commerce. Section 15 prescribes the restrictions and
conditions under which sales tax in respect of the turnover
relating to those goods may be levied. One of the
conditions prescribed at the relevant time was that tax
should not be more than two percentum of the turnover.
Further in respect of those goods only a single point taxa-
tion is permissible. The declared goods constitute a large
portion of the goods sold in inter-State trade. The
incidence of taxation on those goods is such that it could
not have had any serious repercussion on inter-State trade.
Section 8(1)(b) regulates the sales tax leviable on sales to
registered dealers in the course of inter-State sales. The
maximum rate fixed at the relevant time was two percentum of
the turnover. All that the registered dealer has to do _is
to get included in his certificate of registration goods of
the class or ,classes which he proposes to purchase as being
intended for resale by him or for use by him in the
manufacture or processing goods for sale or in the mining or
is the generation or distribution of electricity or any
other form of power. Here again the
855
incidence of taxation is so low as ordinarily not to affect
the, free flow of trade.
This takes us to the remaining sales in the course of inter-
State trade or commerce. By and large these sales are made
to unregistered dealers. Here again, so far as the declared
goods are concerned, tax has to be levied at the rate
applicable to local sales, as provided in s. 8(2)(a). Then
we come to cl. (b) of s. 8(2), which deals with goods other
than declared goods. Here the law at the relevant time was
that the tax shall be calculated at the rate of seven
percentum of the turnover or at the rate applicable to sale
or purchase of such goods inside the appropriate State,
whichever is higher. As could be seen from the report of
the Taxation Enquiry Committee, the main reason
for this provisions was to prevent as far as possible the
evasion of sales tax. The Parliament was. anxious that
inter-State trade should be canalised through registered
dealers over whom the appropriate government has a great
deal of control. It is not very easy for them to evade tax.
A measure which is intended to check the evasion of tax is
undoubtedly a valid measure. Further, inter-State trade
carried on through dealers coming within s. 8(2), must be in
the very nature of things very little. It is in public
interest to see that in the guise of freedom of trade, they
do not evade the payment of tax. If the sales tax they have
to pay is as high or even higher than intra-State sales tax
then they will be constrained to register themselves and pay
the tax legitimately due. The impact of this provision on
inter-State trade is bound to be negligible, but at the same
time it is an effective safeguard against evasion of tax.
Section 8(2-A) is incorporated with a view to see that the
consumers in the States to which goods are imported are not
placed at a disadvantage as compared to the consumers in the
State from which the goods are imported. In fact this
provision is bound to facilitate inter-State trade. The
purpose behind the section is to see that the State
Governments do not place the local consumers in a better
position than the consumers outside.
Sub-section (5) of s. 8 provides for giving individual
exemptions in public interest. Such a power is there in all
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taxation measures. It is to provide for unforeseen
contingencies. Take for example, when there was famine in
Bihar, if a dealer in Punjab had undertaken to sell goods to
a charitable society in that State at a reasonable price for
distribution to those who were starving, it would have been
in public interest if the Punjab Government had exempted
that dealer from paying sales tax. Such a power cannot
immediately or directly affect the free flow
Sup C.1.168-15
856
of trade. The power in question cannot be said to be bad.
If there is any misuse of that power, the same can be
challenged.
It must be remembered that under the present conditions the
power to tax is not merely used for the purpose of
collecting revenue; it is a powerful social instrument, in
particular an instrument which can be effectively used for
correcting economic maladjustments. While the legislature
must provide in the law for all reasonably foreseeable
contingencies, still some discretionary power has to be
given to the executive to meet unexpected situations.
If we bear in mind the fact that sales tax on inter-State
sales is levied for the benefit of the States and the
further fact that each one of the State Governments in its
own interest is bound to create the best possible condition
for the growth of industry and commerce in that State, it is
reasonable to assume that they will not be blind to economic
forces. All that one has to guard against is to see that
they do not, by having recourse to their taxation power,
obstruct the flow of trade into their State. In the normal
course they will be interested in seeing that goods produced
in their States are sold outside. Reasonably sufficient
safeguards against the free flow of trade into a State have
been provided by the provisions of the Act, firstly, by
providing for the levy of sales tax in the State in which
the goods are produced, and, secondly, by placing various
restrictions on the power of the States in fixing the rates.
None of the impugned provisions, in my opinion, has direct
or immediate impact on inter-State trade or commerce.
G.C. Appeal allowed and remanded.
857