Full Judgment Text
2025 INSC 1154
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.3577 OF 2008
M/s. U.P. ASBESTOS LIMITED … APPELLANT
VERSUS
STATE OF RAJASTHAN & OTHERS … RESPONDENTS
WITH
CIVIL APPEAL NO.3578 OF 2008
M/s. EVEREST INDUSTRIES LIMITED … APPELLANT
VERSUS
STATE OF RAJASTHAN & OTHERS … RESPONDENTS
AND
CIVIL APPEAL NO.2692 OF 2013
M/s. U.P. ASBESTOS LIMITED … APPELLANT
VERSUS
STATE OF RAJASTHAN & OTHERS … RESPONDENTS
Signature Not Verified
Digitally signed by
BORRA LM VALLI
Date: 2025.09.24
19:44:33 IST
Reason:
1
J U D G M E N T
NAGARATHNA, J.
I N D E X
Bird’s Eye View of the Controversy: ...................................... 4
Factual Background: ........................................................... 6
Submissions: ...................................................................... 12
Points for Consideration: ................................................... 21
Relevant Constitutional Provisions: .................................... 21
Atiabari Tea Co. Ltd.: ........................................................ 23
Automobile Transport Ltd.: ................................................ 32
Firm Mehtab Majid: ............................................................ 35
Kalyani Stores: ................................................................... 39
Weston Electronics:............................................................ 41
Video Electronics: .............................................................. 43
Shree Mahavir Oil Mills: ..................................................... 51
Loharn Steel Industries Ltd.: .............................................. 57
Laxmi Paper Mart: .............................................................. 58
Digvijay Cements: .............................................................. 59
Jaiprakash Associates: ....................................................... 61
Jindal Stainless Ltd.: .......................................................... 67
Discussion from Overseas Case Law: ................................... 83
Application of the Analysis to the Present Case: ................. 87
2
Since these Civil Appeals involve common questions of facts
and law, they have been heard and are disposed of by this common
judgment.
2. The instant appeals have been preferred by the appellants-
assessees against the following three separate orders of the High
Court of Judicature for Rajasthan at Jaipur:
i) Order dated 02.08.2007 in D.B. Civil Writ Petition
No.3580/2007;
ii) Order dated 23.08.2007 in D.B. Civil Writ Petition
No.2222/2007; and
iii) Order dated 05.09.2012 in D.B. Civil Writ Petition
No.4447/2011.
2.1 All the three Writ Petitions were dismissed on the basis of
reasons given in judgment and order dated 02.08.2007 in D.B.
Civil Writ Petition No.3506/2007 titled M/s. Hyderabad
Industries Ltd. vs. State of Rajasthan and Ors. (“Hyderabad
Industries”) passed by the High Court of Judicature for Rajasthan.
Aggrieved by the orders of dismissal, the appellants are before this
Court.
3
Bird’s Eye View of the Controversy:
3. Briefly stated, the issue for determination in these appeals
concern the validity of the impugned Notification No. S.O.377,
dated 09.03.2007, issued by the Government of Rajasthan in
exercise of its powers conferred by Section 8(3) of the Rajasthan
Value Added Tax Act, 2003 (“2003 Act”, for short). Specifically, the
issue concerns whether Notification No.S.O.377 dated 09.03.2007
issued by Respondent State granting exemption from payment of
Value Added Tax on sale of asbestos cement sheets and bricks,
manufactured in the State of Rajasthan, having contents of fly ash
25% or more by weight subject to specific conditions, is violative of
Article 304(a) of the Constitution of India being discriminatory vis-
à-vis goods imported from outside the State of Rajasthan.
3.1 The notification, in effect, exempted from tax the
manufacturers within the State of Rajasthan of asbestos cement
sheets and bricks having content of fly ash 25% or more.
Specifically, the challenge concerned sub-clauses (ii) and (iii) of the
above notification, on the ground, inter alia, that they violate free
movement of trade and commerce as envisaged in Articles 301 to
304 of the Constitution of India.
4
3.2 For immediate reference, the notification dated 09.03.2007 is
extracted below:
“FINANCE DEPARTMENT
(TAX DIVISION)
NOTIFICATION
JAIPUR, MARCH 9, 2007
S.O.377 – In exercise of the powers conferred by sub-
section (3) of section 8 of the Rajasthan Value Added Tax
Act, 2003 (Rajasthan Act No.4 of 2003), the State
Government being of the opinion that it is expedient
in the public interest so to do , hereby exempts from
payment of tax the sale of asbestos cement sheets and
bricks manufactured in the State having contents of fly
ash twenty five percent or more by weight, on the following
conditions, namely:-
(i) that the goods shall be entered in the registration
certificate of the selling dealer.
(ii) that the exemption shall be for such goods
manufactured by the dealer who commenced
commercial production in the State by
31.12.2006; and
(iii) that the exemption shall be available up to
23.01.2010.
No.F.12 (28) FD/Tax/2007/141)
By Order of the Governor
(Arun Gupta)
Deputy Secretary to Government”
(emphasis supplied by us)
5
3.3 In the course of the determination, this Court is also required
to examine the applicability of the judgment of this Court in Video
Electronics Pvt. Ltd. vs. State of Punjab, (1989) Supp. 2 SCR
731 (“Video Electronics”) to the facts of this case, especially in
light of the nine-Judge Constitution Bench judgment of this Court
in Jindal Stainless Ltd. vs. State of Haryana, (2017) 12 SCC 1
(“Jindal Stainless Ltd.”).
Factual Background:
4. The facts emanating from all the three appeals are similar.
The appellants herein are engaged in the business of manufacture
and sale of fly ash based asbestos cement products. They do not
have their manufacturing units in the State of Rajasthan, but have
their sales depots in the State. These sales depots are duly
registered with the Commercial Tax Department under Central and
local State Tax Acts.
4.1 Initially, the State of Rajasthan issued a notification dated
24.01.2000 under the erstwhile Section 15 of the Rajasthan Sales
Tax Act, 1994 (hereinafter “1994 Act”) in the form of exemption
from sales tax, to encourage industries of asbestos cement sheets
6
and bricks manufactured in the State by an industrial unit having
fly ash as its main raw material on certain conditions mentioned
therein. The benefit was given to industries starting commercial
production upto 31.12.2001 and the notification was to remain in
force upto 23.01.2010.
4.2 In supersession of the above notification dated 24.01.2000,
another notification dated 16.03.2005 was issued to exempt from
tax the sale of asbestos cement sheets and bricks manufactured in
the State by an industrial unit having fly ash as its main raw
material on the condition that such fly ash shall constitute 25% or
more in content by weight of such asbestos cement sheets or
bricks. The benefit was given to industries starting commercial
production by 31.12.2006 and the notification was to remain in
force upto 23.01.2010. Admittedly, the above notifications dated
24.01.2000 and 16.03.2005 were never challenged by the
appellants herein before any forum.
4.3 From 01.04.2006, the Rajasthan Value Added Tax Act, 2003
(hereinafter “VAT Act”) came into operation on repeal of the 1994
Act. In order to continue the operation of the above-mentioned
7
notifications issued under the 1994 Act, the State issued
notifications dated 01.06.2006 and 05.07.2006 under Section 8 of
the VAT Act which are in pari materia to Section 15 of the 1994 Act.
4.4 The above notifications dated 01.06.2006 and 05.07.2006
were challenged by one of the appellants herein before the
Rajasthan High Court in W.P.No.7149 of 2006. While the matter
was pending, the State Government withdrew the notification dated
05.07.2006 and issued the impugned notification dated
09.03.2007. It is relevant to note that, under this notification also,
the benefit was given to industries starting commercial production
by 31.12.2006 and the notification was to remain in force upto
23.01.2010. This notification was challenged before the Rajasthan
High Court in D.B. Civil Writ Petition Nos.3580/2007 and
2222/2007 and the impugned judgments were passed on
02.08.2007 and 23.08.2007 respectively.
4.5 While the present appeals were pending before this Court, the
State by way of notification dated 28.12.2010 amended clause (iii)
of the impugned notification dated 09.03.2007 as follows:
8
“(iii) that maximum exemption benefits shall be available
for 10 years from the date of commencement of first
commercial production, but in no case exemption shall be
available after 23.1.2016.”
4.6 One of the appellants herein, namely M/s. U.P. Asbestos Ltd.,
filed a writ petition being D.B. Civil Writ Petition No.4447/2011
challenging the notification dated 28.10.2010. The said writ
petition was also dismissed by way of impugned order dated
05.09.2012.
4.7 As the High Court dismissed all the three writ petitions by the
impugned orders based on the judgment of that Court in
Hyderabad Industries, it is necessary to dilate the reasoning
provided therein.
4.8 The High Court in Hyderabad Industries first discussed the
judgments of this Court in Firm A.T.B. Mehtab Majid and Co. vs.
State of Madras, (1963) Supp. 2 SCR 435 (“Firm Mehtab
Majid”); Shree Mahavir Oil Mills vs. State of J&K, (1996)
Supp.9 SCR 356 (“Shree Mahavir Oil Mills”); State of U.P. vs.
M/s Laxmi Paper Mart, (1997) 1 SCR 914 (“Laxmi Paper Mart”);
9
Loharn Steel Industries Ltd. vs. State of Andhra Pradesh,
(1996) Supp. 10 SCR 898 (“Loharn Steel Industries Ltd.”);
Video Electronics and Shree Digvijay Cement Co. Ltd. vs. State
of Rajasthan, (1999) Supp. 5 SCR 428 (“Digvijay Cements”).
4.9 Based on a reading of the above judgments, the High Court
opined that the decision on the question whether, there has been
discrimination between the imported and the local goods depends
on diverse factors. That where there is no intentional
discrimination but the concession from sales tax is given in respect
of goods manufactured in a particular State which is not so
developed, in furtherance of economic development and where
such concession is granted to new industries for a specific time
which came into existence for a specific period, such concession or
exemption may not offend Part XIII of the Constitution of India.
4.10 The High Court also observed that there was no challenge
either to the constitutional validity of Section 8 of the VAT Act or
to the notifications dated 24.01.2000 and 16.03.2005 which were
on identical terms to the impugned notification. That there is no
dispute that fly ash coming out of thermal power plants is
10
abundantly available in the State of Rajasthan and is not
unreasonable to presume that the State Government gave
incentives for asbestos manufacturing plants within the State of
Rajasthan to promote the use of fly ash as raw material for the
production of asbestos cement sheets and bricks.
4.11 The High Court further noted that it was for the above
reason that way back in the year 2000, the State Government
passed the notification dated 24.01.2000 and that the benefit was
extended from time to time. It accepted the stand of the State that
it was bound even otherwise by the principle of promissory estoppel
to continue with the exemption since in the notification dated
24.01.2000 itself, the benefit was to continue until 23.01.2010.
4.12 The High Court acknowledged that this Court in Shree
Mahavir Oil Mills distinguished Video Electronics . However, the
High Court noted that Shree Mahavir Oil Mills justified the
decision in Video Electronics to grant exemption to a special class
for a limited period on specific conditions when there are justifiable
and national reasons for differentiation.
11
4.13 Hence, the High Court held that the impugned notification,
in the backdrop of earlier notifications dated 24.01.2000 and
16.03.2005, fell within the exceptional category covered in Video
Electronics and hence cannot be held to be offending Article
304(a) of the Constitution of India. Therefore, the question would
also arise as to whether the Rajasthan High Court decided
Hyderabad Industries correctly.
Submissions:
5. Learned senior counsel Sri Nikhil Goel appearing for the
appellant M/s U.P. Asbestos Ltd. and Smt. Kavita Jha appearing
for appellant M/s. Everest Industries Ltd., strenuously argued that
the impugned notification was unconstitutional and violated
Article 304(a) of the Constitution of India. To substantiate, the
following submissions were put forth:
5.1 That the impugned notification is discriminatory in nature
and falls foul of Article 304(a) of the Constitution of India as it did
not provide for any reason for the blanket exemption from payment
of tax provided to locally manufactured goods in the State of
Rajasthan as compared to goods imported from outside the State.
12
In this regard, they relied on Shree Mahavir Oil Mills, Laxmi
Paper Mart , and Anand Commercial Agencies vs. Commercial
Tax Officer VI Circle, Hyderabad, (1998) 1 SCC 101 .
5.2 Referring to the text of the impugned notification, it was
contended that it does not require the industries within the State
to only manufacture or procure fly ash from within the State. That
the lack of such a requirement ex-facie falsifies the justification of
the State that the exemption provided for in the impugned
notification was to encourage industries to utilise the excess fly ash
from the State. They further contended that arguendo , even if the
impugned notification required the fly ash to be purchased within
the State of Rajasthan, the notification would still have to be
quashed in light of the judgment of this Court in State of U.P. vs.
Jaiprakash Associates Ltd., (2014) 4 SCC 720 (“Jaiprakash
Associates”).
5.3 Reliance was placed on the observations of the nine-Judge
bench judgment in Jindal Stainless Ltd. to contend that the
differentiation made through the impugned notification was
intended or inspired by an element of unfavourable bias in favour
13
of the goods produced or manufactured in the State of Rajasthan
as against those imposed from outside. They submitted that, in
Jindal Stainless Ltd. , this Court held that every differentiation is
discrimination if it involved an element of “intentional and
unfavourable bias”. Learned senior counsel Ms. Kavita Jha also
provided us a summary of the relevant observations in Jindal
Stainless Ltd. which we shall discuss later in this judgment.
5.4 That the High Court was not right in relying on Video
Electronics as the facts of that case are distinguishable. They
highlighted that in Video Electronics, this Court upheld the
notifications impugned therein on the ground that they related to
a specific class of industrial units and that the benefit under the
same was admissible only for a limited period of time. However, in
the present case, the restriction was not limited to a specific class
or period, but such exemption has been extended from time to time
from the year 2000 till the year 2016, to all the old and new dealers
of asbestos sheets, without assigning any reason. Hence, the
finding in paragraph 17 of the judgment in Hyderabad Industries
that the exemption was only to a limited class, i.e. those who
commenced production by 31.12.2006 and was only for a limited
14
period, i.e. till 23.01.2010 was not accurate. Rather, they
contended that the facts of the present case are akin to that in
Shree Mahavir Oil Mills and Jaiprakash Associates.
5.5 Learned senior counsel also sought to repel the objection
that the appellants herein had not challenged the earlier
notifications by relying on the dictum in Shree Mahavir Oil Mills
that there can be no estoppel or acquiescence in a matter relating
to constitutional rights of citizens.
5.6 Referring to the submission of the State in its reply before
the High Court, they contended that the only justification put forth
by them was that it was empowered to grant exemption to a class
of industries to boost industrialisation within its State. The learned
senior counsel questioned this rationale by submitting that if the
same was accepted as a general proposition justifying
discrimination between two States while applying a tax regime,
such proposition would practically nullify the entire Chapter XIII
of the Constitution. That every State would then exempt local
manufacturers from tax simply by saying that it wants to boost
industrial growth. They submitted that Article 301 of the
15
Constitution cannot be stretched to its unnatural limits to justify
such a vague rationale.
6. In response to the above submissions, learned senior counsel
Dr. Manish Singhvi made the following submissions:
6.1 Highlighting the implications of the Constitution Bench
judgment in Jindal Stainless Ltd., it was contended that the
plenary power to tax under Articles 245 and 246 of the Constitution
read in conjunction with the Entries in the Seventh Schedule to
the Constitution is per se not subject to Article 301 of the
Constitution. That the plenary power is restrained only if it
discriminates in terms of Article 304(a) of the Constitution.
6.2 That, in Jindal Stainless Ltd. , this Court upheld the ratio
laid down in Video Electronics . He highlighted that, so long as the
differentiation made by the States is not intended to create an
unfavourable bias and so long as the differentiation is intended to
benefit a distinct class of industries and the life of the benefit is
limited in terms of period, the benefit must be held to flow from a
legitimate desire to promote industries within its territories. That
this Court also distinguished Shree Mahavir Oil Mills by noting
16
that if the incentive/exemption in taxation to spur industrialisation
was for a limited period and for achieving some objective, then it
shall not be violative of Article 304(a) of the Constitution.
6.3 Our attention was drawn to the observations of this Court
in Digvijay Cements wherein this Court stated that all States have
powers to grant exemption to specified class of goods for a limited
period and that such grant of exemption cannot be held to be
contrary to the concept of economic unity. It was submitted that
the power to grant exemptions is thus a dynamic concept and they
must be viewed at keeping in mind the overall objectives sought to
be achieved.
6.4 Learned senior counsel for the State of Rajasthan submitted
that, after the judgment in Jindal Stainless Ltd., it is not clear if
the ratio in Jaiprakash Associates still holds field. He referred to
paragraph 32 of the judgment in Jaiprakash Associates to
contend that it relied on the judgment rendered in Atiabari Tea
Co. Ltd. vs. State of Assam, AIR 1961 SC 232 (“Atiabari Tea
Co. Ltd.”) , which was partly overruled in Jindal Stainless Ltd.
17
6.5 Dealing with the facts of the case, learned senior counsel
submitted that prior to the notification dated 24.01.2000, there
was no asbestos sheet plant/industry in the State of Rajasthan.
That fly ash is an abundant raw material available in the State and
the intention of the exemption from sales tax was to promote the
use of fly ash coming out of thermal power plants as a raw material
for the production of asbestos cement sheets and bricks for which
there was no manufacturing plant in the State. He also submitted
that various notifications issued by the Ministry of Environment
and Forests required the compulsory use of fly ash and hence the
exemption as provided in the impugned notification was envisaged.
That additionally, having contents of fly ash twenty five percent or
more in asbestos sheets by weight also improves the environment
which was another laudable objective.
6.6 Learned senior counsel also submitted that if such an
exemption was not granted, then no asbestos sheet industry would
have come to the State of Rajasthan and the fly ash in the State
would go unutilised/unused, considering huge transportation
costs associated with transporting fly ash. That the economics of
transportation itself would repel any argument that the
18
notifications did not specifically require the manufacturers to
utilise the fly ash generated in the State. He also submitted that, it
was not the case of the appellants herein that they would use the
fly ash manufactured in the State of Rajasthan, despite having
manufacturing units elsewhere.
6.7 For the above reasons, Dr. Manish Singhvi emphasised that
the exemption provided for in the notification qualifies as
‘differentiation’, rather than discrimination and is saved as per
Article 304(a) of the Constitution.
6.8 To our query that the reasons for the notification could not
be found in the notification itself, learned senior counsel submitted
that the reasons for the notification can be discerned from the
records available and the counter affidavit filed before the High
Court. He therefore drew our attention to the relevant portions in
the counter-affidavit filed by the State before the High Court where
the reasons mentioned above were elucidated. He submitted that
there is presumption of constitutionality of any law enacted by a
State and that the State, though could have provided the reasons
for such an enactment in the notification itself, was not incumbent
19
to so spell out and the same could always be gathered by
surrounding circumstances.
6.9 In response to the submissions of learned senior counsel Dr.
Manish Singhvi, learned senior counsel Ms. Kavita Jha added that
the object behind the impugned notification, as stated by the
learned senior counsel in his submissions, was not provided/
expressed in the impugned notification. That from its bare perusal,
no object, purpose or rationale was mentioned to provide impetus
to any industry but on the other hand to discriminate among
indigenous goods and imported goods.
7. Learned senior counsel for the appellants relied on the
judgment of this Court in Mohinder Singh Gill vs. Chief Election
Commissioner, (1978) 1 SCC 405 (“Mohinder Singh Gill”) to
substantiate that any order passed by any public authority
exercising administrative/executive or statutory powers must be
judged by the reasons so mentioned in that order and cannot be
supplemented by fresh reasons in the shape of an affidavit or
otherwise.
20
Points for Consideration:
8. The following points would arise for our consideration:
(i) Whether the High Court was right in dismissing the
writ petitions filed by the appellants herein by holding
that the impugned notification dated 09.03.2007 did
not violate Article 301(a) of the Constitution of India?
(ii) If the answer to point No.(i) is in the negative, then,
what order?
Relevant Constitutional Provisions:
9. Articles 301 to 304, which are under Part XIII of the
Constitution are relevant for our discussion and are extracted as
under:
“301. Freedom of trade, commerce and intercourse.-
Subject to the other provisions of this Part, trade,
commerce and intercourse throughout the territory of
India shall be free.
302. Power of Parliament to impose restrictions on
trade, commerce and intercourse .—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.
303. Restrictions on the legislative powers of the
Union and of the States with regard to trade and
commerce .—(1) Notwithstanding anything in article 302,
21
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 any entry relating to trade
and commerce in any of the Lists in the Seventh Schedule.
(2) Nothing in clause (1) shall prevent Parliament from
making any law giving, or authorising the giving of, any
preference or making, or authorising the making of, any
discrimination if it is declared by such law that it is
necessary to do so for the purpose of dealing with a
situation arising from scarcity of goods in any part of the
territory of India.
304. Restrictions on trade, commerce and
intercourse among States. - Notwithstanding anything in
article 301 or article 303, the Legislature of a State may by
law—
(a) 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; and
(b) impose such reasonable restrictions on the freedom
of trade, commerce or intercourse with or within that State
as may be required in the public interest:
Provided that no Bill or amendment for the purposes of
clause (b) shall be introduced or moved in the Legislature
of a State without the previous sanction of the President.”
10. The significant judgments of this Court on the interpretation
of Articles 301 to 304 could be discussed at this stage.
22
Atiabari Tea Co. Ltd.:
10.1 In Atiabari Tea Co. Ltd., the constitutionality of the Assam
Taxation (on Goods Carried by Roads or Inland Waterways) Act
(Assam Act) 13 of 1954 was questioned in a petition filed under
Article 32 of the Constitution before this Court. The question that
fell for determination in this case was, whether, the said Act
infringed the provisions of Part XIII of the Constitution, with
particular reference to Article 301. While analysing Part XIII of the
Constitution, it was observed that Article 301 was subject to other
provisions of Part XIII and not subject to other provisions of the
Constitution and the generality of the words used in Article 301 is
cut down only by the provisions of the other Articles of Part XIII
ending with Article 307. Article 301 emphatically declares that
trade, commerce and intercourse throughout the territory of India
is free, but there is wide divergence of views on the answer to the
question “free from what”. It was observed that having regard to
the divergence and nature of States in pre-Constitution India, it
was necessary for the abolition of all those trade barriers and tariff
walls so that the entire country was knit into one political unit in
23
the interest of national solidarity, economic and cultural unity as
also of freedom of trade, commerce and intercourse.
10.1.1 Adverting to Article 304, it was observed that the said
Article would show that it is divided into two parts, namely, (i)
dealing with imposition of non-discriminatory taxes by a State
Legislature; and (ii) relating to imposition of reasonable
restrictions, thus showing that imposition of taxes is a class apart
from imposition of reasonable restrictions on freedom of trade,
commerce and intercourse.
10.1.2 It was further observed that if a law is passed by the
Legislature imposing a tax which in its true nature and effect is
meant to impose an impediment to the free flow of trade, commerce
and intercourse, for example, by imposing a high tariff wall, or by
preventing imports into or exports out of a State, such a law is
outside the significance of taxation, as such, but assumes the
character of a trade barrier which it was the intention of the
Constitution-makers to abolish by Part XIII, but taxation on
movement of goods and passengers is not necessarily an
impediment. Article 304, while recognising the power of a State
Legislature to tax goods imported inter-State, insists that a similar
24
tax is imposed on goods manufactured or produced within the
State. The Article thus brings out the clear distinction between
taxation as such for the purpose of revenue and taxation for
purposes of making discrimination or giving preference.
10.1.3 It was observed by Sinha, C.J. that the Union and State
Legislature have the power to legislate by way of taxation in respect
of trade, commerce and intercourse, so as not to erect trade
barriers, tariff walls or imposts, which have a deleterious effect on
the free flow of trade, commerce and intercourse.
10.1.4 Consequently, he did not concur with the majority of the
Court by observing that his reading of Part XIII of the Constitution
did not justify the inference that taxation simpliciter is within the
terms of Article 301 of the Constitution.
10.1.5 The majority judgment delivered by Gajendragadkar, J.
(as he then was) referred to the constitutional background of Part
XIII and observed that prior to 1950, the flow of trade and
commerce was impeded at several points which constituted the
boundaries of Indian States. The main object of Article 301
obviously was to allow the free flow of the stream of trade,
25
commerce and intercourse throughout the territory of India. The
reason being that economic unity was absolutely essential for the
stability and progress of the federal policy which had been adopted
by the Constitution for the governance of the country.
10.1.6 The majority then proceeded to consider whether tax
laws are wholly outside the purview of Part XIII. In this regard,
Cooley's Constitutional Limitations on the power of taxation was
referred to observe that “ the power to impose taxes is one so
unlimited in force and so searching in extent, that the courts scarcely
venture to declare that it is subject to any restriction whatever,
except such as rest in the discretion of the authority which exercises
it ”. (Cooley's Constitutional Limitation Vol. 2, 8th Edn., p.986) . It was
observed that the power of levying tax is essential for the very
existence of the government, its exercise must inevitably be
controlled by the constitutional provisions made in that behalf. It
cannot be said that the power of taxation per se is outside the
purview of any constitutional limitations.
10.1.7 Referring to Ramjilal vs. Income Tax Officer, AIR
1951 SC 97, it was observed that protection against the imposition
and collection of taxes, save by the authority of law, directly comes
26
under Article 265 and cannot be said to be covered by clause (1) of
Article 301. Therefore, levy of a tax per se cannot be a violation of
Article 14 of the Constitution. It was also held that the power to
levy tax would ultimately be based on Article 245 which deals with
the extent of laws made by Parliament and by the Legislatures of
States, as it begins with the words “Subject to the provisions of the
Constitution”. Therefore, the power of Parliament and the
Legislatures of the States to make laws including laws imposing
taxes is subject to the provisions of the Constitution and therefore,
the application of Part XIII also. However, Article 301 which is in
Part XIII is not subject to the other provisions of the Constitution
but is made subject only to other provisions of only Part XIII.
Therefore, once the width and amplitude of the freedom enshrined
in Article 301 are determined, they cannot be controlled by any
provision outside Part XIII. The freedom guaranteed under Article
301 is made subject to the exceptions provided by the other Articles
in Part XIII and is not limited by any other provisions of the
Constitution outside Part XIII. It was also observed that
the legislative competence of the Legislature in question would
have to be judged in light of the relevant Articles of Part XIII. Hence,
27
it was observed that the argument that tax laws are outside Part
XIII, cannot be accepted.
10.1.8 It was noted that the freedom of trade guaranteed by
Article 301 is freedom from all restrictions except those which are
provided by the other Articles in Part XIII. While examining the
other Articles of Part XIII, it was stated that the effect of Article
304(a) is to treat imported goods on the same basis as goods
manufactured or produced in any State; and it authorises tax to be
levied on such imported goods in the same manner and to the same
extent as may be levied on goods manufactured or produced inside
the State. In other words, taxation can be levied by the State
Legislature on goods manufactured or produced within its territory
and it provides that outside goods cannot be treated any worse.
The non-obstante clause referring to Article 301 would go with
Article 304(a) and that tax on goods would not have been
permissible but for Article 304(a) with the non-obstante clause. In
other words, Article 304(a) is another exception to Article 301.
10.1.9 Analysing Article 304(a), it was observed that a tax could
be levied by a State Legislature on goods manufactured or
produced or imported in the State and thereby reasonable
28
restrictions can be placed on the freedom of trade either with
another State or between different areas of the same State. Tax
legislation, thus authorised, must therefore be deemed to be
included in Article 301, for that is the obvious inference from the
use of the non-obstante clause.
10.1.10 It was concluded that while determining the limits of the
width and amplitude of the freedom guaranteed by Article 301, a
rational and workable test should apply and that only such
restrictions as directly and immediately restrict or impede the free
flow or movement of trade, are barred. Therefore, it cannot be held
that all taxes should be governed by Article 301, whether or not
their impact on trade is immediate or mediate, direct or remote.
Thus, an extreme approach cannot be upheld. Therefore, Article
301 envisages that the flow of trade shall run smooth and
unhampered by any restriction either at the boundaries of the
States or at any other points inside the States themselves.
10.1.11 Consequently, it was held that the Assam Act had
imposed a direct restriction on the freedom of trade and since it
had not complied with the provision of Article 304(b), it was
declared to be void.
29
10.1.12 In the said case, Shah, J. in his opinion observed that
the power of taxation is essentially an attribute of the sovereignty
of the State and is not exercised in consideration of the protection
it affords or the benefit that it confers upon citizens and aliens. Its
content is not measured by the apparent need of the amounts
sought to be collected and its incidence does not depend upon the
ability of the citizens to meet the demand. But it is still not an
unrestricted power. By Article 265 of the Constitution, the power
to tax can be exercised by authority of law alone. The power of
taxation has therefore to be exercised by the Legislature strictly
within the limits prescribed by the Constitution and any alleged
transgression either by Parliament or the State Legislature of the
limits imposed by the Constitution is justiciable.
10.1.13 Discussing on the guarantee of freedom of trade and
commerce, it was observed by Shah, J. that the guarantee is not
addressed merely against prohibitions, complete or partial; it is
addressed to tariffs, licensing, marketing regulations, price-
control, nationalisation, economic or social planning,
discriminatory tariffs, compulsory appropriation of goods, freezing
or stand still orders and similar other impediments operating
30
directly and immediately on the freedom of commercial intercourse
as well. It was clarified that what is guaranteed is freedom in its
widest amplitude — freedom from prohibition, control, burden or
impediment in commercial intercourse. Not merely discriminative
tariffs restricting movement of goods are included in the
restrictions which are hit by Article 301, but all taxation on
commercial intercourse even imposed as a measure for collection
of revenue is so hit.
10.1.14 It was also stated that between discriminatory tariffs
and trade barriers on the one hand and taxation for raising revenue
on commercial intercourse, the difference is one of purpose and not
of quality. Both these forms of burden on commercial intercourse
trench upon the freedom guaranteed by Article 301.
10.1.15 While interpreting Article 304(a), it was observed that
the State Legislature has the power to impose tax on the imports
of goods to which similar goods manufactured or produced in the
State are subject, provided that by taxing the goods imported from
another State or Union Territory, no discrimination is practised.
Consequently, Shah, J. held that the Assam Act was infringing the
guarantee of freedom of trade and commerce under Article 301.
31
10.1.16 However, in view of the majority opinion, the writ
petitions were allowed.
Automobile Transport Ltd.:
10.2 A seven-Judge Bench of this Court in Automobile
(Rajasthan) Transport Ltd. vs. State of Rajasthan, AIR 1962
SC 1406 (“ Automobile Transport Ltd.”) heard the appeals
having regard to the importance of the constitutional issues
involved and the views expressed in Atiabari Tea Co. Ltd. while
considering the validity of Rajasthan Motor Vehicles Taxation Act,
1951. The contours of the freedom envisaged under Article 301 was
considered inasmuch as the question, whether, regulatory
measures or compensatory taxes were restrictions on the freedom
of trade came up for consideration and more particularly, the State
law imposing tax on motor vehicles carrying passengers and goods
within or throughout the State. The majority view was expressed
through S.K. Das, J. (as he then was) who observed that the taxes
imposed under the Rajasthan Motor Vehicles Taxation Act, 1951
are compensatory taxes which did not hinder the freedom of trade,
commerce and intercourse assured by Article 301 and hence, the
Act did not violate the provisions of that Article. This was because
32
regulatory measures imposing taxation for use of trading facilities
do not come within the purview of the restrictions contemplated
under Article 301 and such measures need not comply with the
requirements of the proviso to Article 304(b) of the Constitution.
10.2.1 While analysing the issues raised in the said case, it
was observed that those which facilitate trade and commerce are
not a restriction, and those which in reality hampers or burdens
trade and commerce are a restriction. That, it is the substance of
the matter that has to be considered and it is not possible a priori
to draw a dividing line between that which would really be a charge
for a facility provided and that which would really be a deterrent to
a trade; but the distinction is real and clear. For the tax to become
a prohibited tax, it has to be a direct tax, the effect of which is to
hinder the movement part of trade. So long as a tax remains
compensatory or regulatory, it cannot operate as a hindrance. A
working test for deciding whether a tax is compensatory or not is
to enquire whether the trades people are having the use of certain
facilities for the better conduct of their business and paying not
patently much more than what is required for providing the
facilities. It would be impossible to judge the compensatory nature
33
of a tax by a meticulous test, and in the nature of things that
cannot be done. If a statute fixes a charge for a convenience or
service provided by the State or an agency of the State and imposes
it upon those who choose to avail themselves of the service or
convenience, the freedom of trade and commerce may well be
considered unimpaired. In such a case, the imposition assumes
the character of remuneration or consideration charged in respect
of an advantage sought and received.
10.2.2 The minority, speaking through Hidayatullah, J. (as he
then was) observed that a law which prohibits trade, commerce and
intercourse and releases them on the fulfilment of some
unreasonable condition including the payment of an unreasonable
or discriminatory tax will just as much be a restriction offending
the freedom as a tariff wall or any other barrier. No question of pith
and substance in this context arises. Therefore, taxation laws
directly impinging on trade and commerce cannot be upheld on the
ground that they are regulatory. A tax which is made the condition
precedent of the right to enter upon and carry on business is a
restriction on the right to carry on trade and commerce and the
restriction is released on the payment of the tax, which is the price
34
of such release. A regulation of trade and commerce, on the other
hand, may achieve some public purpose which affects trade and
commerce incidentally but without impairing the freedom. It was
observed that the tax is evidently not a fee for administrative
purposes. Therefore, it cannot be justified as representing payment
of services. Its object is the raising of revenue. Therefore, such a
tax is neither a compensatory tax nor a regulatory Act. It was
further held that the said tax offended Article 301 of the
Constitution and since resort to the procedure prescribed by Article
304(b) was not taken, it was ultra vires the Constitution.
Firm Mehtab Majid:
10.3 The validity of Rule 16 of the Madras General Sales Tax
(Turnover and Assessment) Rules, 1939, (hereinafter, called “the
Madras Rules”) was impugned in Firm Mehtab Majid . The
Constitution Bench of this Court, speaking through Raghubar
Dayal, J. noted the contention of the petitioner therein to the effect
that under the impugned rule, tanned hides or skins imported from
outside the State and sold within the State were subject to a higher
rate of tax than the tax imposed on hides or skins tanned and sold
within the State, inasmuch as sales tax on the imported hides or
35
skins tanned outside the State is on their sale price while the tax
on hides or skins tanned within the State, though ostensibly on
their sale price, was, in view of the proviso to clause (ii) of sub-rule
(2) of rule 16, really on the sale price of these hides or skins when
they were purchased in the raw condition and which was
substantially less than the sale price of tanned hides or
skins. Further, for similar reasons, hides or skins imported from
outside the State after purchase in their raw condition and then
tanned inside the State were also subject to higher taxation than
hides or skins purchased in the raw condition in the State and
tanned within the State, as the tax on the former was on the sale
price of the tanned hides or skins and, on the latter, was on the
sale price of the raw hides or skins. Such a discriminatory
taxation was said to offend Article 304(a) of the Constitution.
10.3.1 Taking note of the earlier decision in Atiabari Tea Co.
Ltd., it was observed that in the majority judgment in Automobile
Transport Ltd. , the interpretation of the majority in Atiabari Tea
Co. Ltd. was held to be correct but subject to a clarification. That,
regulatory measures or measures imposing compensatory taxes for
the use of trading facilities do not come within the purview of
36
restrictions contemplated by Article 301. That, such regulatory
measures which do not impede the freedom of trade, commerce and
intercourse and compensatory taxes for the use of trading facilities
are not hit by the freedom declared by Article 301. They are
excluded from the purview of the provisions of Part XIII of the
Constitution for the simple reason that they do not hamper trade,
commerce and intercourse but rather facilitate them. Subba Rao,
J, had also concurred with this view in Automobile Transport
Ltd.
10.3.2 It was observed that taxing laws can be restrictions on
trade, commerce and intercourse, if they hamper the flow of trade
and if they are not what can be termed to be compensatory taxes
or regulatory measures. On the other hand, sales tax, which has
the effect of discriminating between goods of one State and goods
of another, may affect the free flow of trade which offends against
Article 301 and will be valid only if it comes within the terms of
Article 304(a). That Article 304(a) enables the Legislature of a State
to make laws affecting trade, commerce and intercourse by
imposition of taxes on goods from other States if similar goods in
the State are also subjected to similar taxes, so as not to
37
discriminate between the goods manufactured or produced in that
State and the goods which are imported from other States.
10.3.3 Applying the said principles to the said case, it was held
that the effect of the sales tax on tanned hides or skins imported
from outside was that the latter becomes subject to a higher tax
by the application of the proviso to sub-rule (2) of rule 16 of the
Rules, and was discriminatory and unconstitutional and was
hence, struck down.
10.3.4 On the aspect of whether the rule discriminated between
hides or skins imported from outside the State and those
manufactured or produced in the State, this Court examined the
grievance ventilated on the amount of tax levied being different on
account of the existence of a substantial disparity in the price of
the raw hides or skins and of those hides or skins after they had
been tanned, though the rate was the same. It was explained that
if the dealer has purchased the raw hide or skin in the State, he
would have had to pay on the purchase price only. But if the dealer
purchased raw hides or skins from outside the State and tanned
them within the State, he would be liable to pay sales tax on the
sale price of the tanned hides or skins. He too would have had to
38
pay more tax even though the hides and skins were tanned within
the State, merely on account of his having imported the hides and
skins from outside and having not therefore paid any tax under
sub-rule (1). Thus, there was discriminatory nature of tax
imposed. As a result, Rule 16(2) was held to discriminate against
the imported hides or skins which had been purchased or tanned
outside the State and therefore it contravened the provisions of
Article 304(a) of the Constitution. Hence, the petition was allowed
and the State was directed to refund of tax illegally collected from
the petitioner.
Kalyani Stores:
10.4 In Kalyani Stores vs. State of Orissa, AIR 1966 SC 1686,
(“Kalyani Stores”) the notifications issued under Section 27 of the
Bihar and Orissa Excise Act, 1915, imposing countervailing duty
on foreign liquor imported into the State and later enhancing the
duty by another notification, were assailed. The contention of the
appellant therein was that the State could levy under Section 27 of
the said Act duty on excisable articles produced or manufactured
in the State and a countervailing duty on excisable articles
imported into the State, imposed with a view to equalize the burden
39
on the imported articles with the burden on manufactured articles
in the State, but no countervailing duty on liquor imported could
be levied if there was in the year of licence no liquor similar to the
imported liquor manufactured within the State and as there was
no distillery in the State manufacturing "foreign liquor", the levy of
countervailing duty was without authority of law.
10.4.1 It was observed that exercise of power under Article
304(a) can only be effective if the tax or duty imposed on goods
imported from other States and the tax or duty imposed on similar
goods manufactured or produced in that State are such that there
is no discrimination against imported goods. As no foreign liquor
was produced or manufactured in the State of Orissa, the power to
legislate provided under Article 304 was not available and the
restriction which is declared on the freedom of trade, commerce or
intercourse by Article 301 of the Constitution remained unfettered.
Hence, the appeal was partially allowed by this Court by declaring
that the notification enhancing duty on foreign liquor was invalid
as offending Article 304 of the Constitution and therefore
unenforceable. However, the right of the State to enforce the
liability against the appellants to pay duty at the rate prescribed in
40
the earlier notification which held the field, remained however
unaffected.
10.4.2 Hidayatullah, J. (as he then was) however observed that
Article 304(a) was not applicable to the case. That, in the matter
of excise duties, the State Legislature has competence even apart
from Article 304(a) because the power to impose duties of excise on
alcoholic liquors for human consumption produced in the State
and countervailing duties on similar liquors produced outside the
State in India was already conferred by the legislative
list. Therefore, it was held that the notification issued in the year
1961 under Section 27 was valid and the new notification did not
run against any constitutional provision. Therefore, he dismissed
the appeal. However, the majority partially allowed the appeal.
Weston Electronics:
10.5 The case in Weston Electronics vs. State of Gujarat,
(1988) 2 SCC 568 (“Weston Electronics”) concerned
manufacturers of electronic goods, including television sets,
television cameras and television monitors at factories located at
Delhi and the goods sold through sales organisations spread all
41
over India, including the State of Gujarat. The petitioners therein
filed a writ petition before this Court questioning the Notification
dated 29.03.1986 under which the rate of sales tax in respect of
television sets imported from outside the State was reduced from
15 per cent to 10 per cent, and for goods manufactured within the
State the sales tax was reduced to 1 per cent. It was contended that
there was an invidious discrimination which adversely affected the
free flow of inter-State trade and commerce, resulting in a
contravention of Article 301 of the Constitution. It was contended
that the sale of electronic goods manufactured by the petitioner
has been prejudicially affected within the State of Gujarat. Based
on the rulings of this Court in Firm Mehtab Majid as well as in H.
Anraj vs. Government of Tamil Nadu, (1986) 1 SCC 414 (“H.
Anraj”) - wherein this Court struck down the levy of tax imposed
by the State of Tamil Nadu on lottery tickets issued by other States
and sold within the State of Tamil Nadu while exempting from such
levy lottery tickets issued by the Government of Tamil Nadu - the
writ petition was allowed and Notifications dated 23.07.1981 and
29.03.1986 prescribing a lower rate of tax for local manufacturers
42
in respect of television sets and other electronic goods were
quashed.
Video Electronics:
10.6 A three-Judge Bench of this Court decided a batch of writ
petitions filed under Article 32 of the Constitution of India in Video
Electronics . The focus of the said case was on the question of
harmonising the power of different States in the Union of India to
legislate and/or give appropriate directions within the parameters
of the subjects in List II of the Seventh Schedule of the Constitution
with the principle of economic unity envisaged in Part XIII of the
Constitution of India. The provision of exemption/
encouragement/incentives given by different States to boost or
help economic growth and development in those States and in so
doing the attempt of the States to give preferential treatment to the
goods manufactured or produced in those States was also
considered.
10.6.1 In one of the writ petitions, the challenge was to the
constitutional validity of Notification dated 26.12.1985 issued by
the State of Uttar Pradesh under the Uttar Pradesh Sales Tax Act,
1948 as well as subsequent notifications thereunder. The
43
petitioners therein stated that they carried on business of selling
cinematographic films and other equipment in the State of Uttar
Pradesh and in Delhi. They were dealers on behalf of the
manufacturers from outside the said State. In Uttar Pradesh, there
was a single point levy of sales tax. Their contention was that the
Notification dated 26.12.1985 discriminated between the
manufacturers covered by the said Notification who were entitled
to sell the articles manufactured by them without liability to pay
sales tax and the manufacturers in other States and non-
manufacturers of the same article selling the same goods in the
State who were liable to pay sales tax under the local Sales Tax Act.
They contended that they were subjected to gross discrimination
and their business was crippled on account of the said fact and
therefore, they challenged the vires of the said notification under
Articles 14 and 19(1)(g) of the Constitution. However, this Court
opined that the main question was, whether, the said notifications
were valid in light of Part XIII of the Constitution.
10.6.2 This Court speaking through Sabyasachi Mukharji, J.
(as he then was) made a detailed discussion of the judgment
rendered in Atiabari Tea Co. Ltd. and also the decision of this
44
Court in Automobile Transport Ltd. This was also in the context
of whether regulatory measures or measures imposing
compensatory taxes for using trading facilities did not come within
the purview of restrictions contemplated under Article 301.
10.6.3 Reference was made to the case of A. Hajee Abdul
Shakoor & Co. vs. State of Madras, AIR 1964 SC 1729 and to
the observations of this Court in State of Madras vs. N.K.
Nataraja, AIR 1969 SC 147 as well as in Andhra Sugars Ltd.
vs. State of Andhra Pradesh, AIR 1968 SC 599 , wherein it was
reiterated that a sales tax which discriminates against goods
imported from other States may impede the free flow of trade and
is invalid unless protected by Article 304(a) of the Constitution.
10.6.4 It was observed that Part XIII of the Constitution cannot
be read in isolation. That it is part and parcel of a single
constitutional instrument envisaging a federal scheme and
containing a general scheme conferring legislative powers in
respect of the matters relating to List II of the Seventh Schedule on
the States. That the economic development of States to bring in the
constitutional philosophy of equality between the States and
thereby developing the economic unity of India is one of the goals
45
or commitments of the constitutional aspirations. The economic
equality of all the States is as much vital as economic unity. Thus,
it held that the taxes which do not directly or immediately restrict
or interfere with trade, commerce and intercourse throughout the
territory of India, would therefore be excluded from the ambit of
Article 301 of the Constitution. That sales tax has only an indirect
effect on trade and commerce and does not directly impede the free
movement of transport. On the aspect of the imposition of a rate of
tax on goods, it was observed that the free flow of trade between
two States does not necessarily or generally depend upon the rate
of tax alone. Many factors including the cost of goods play an
important role in the movement of goods from one State to another.
Hence, the mere fact that there is a difference in the rate of tax on
goods locally manufactured and those imported would not amount
to hampering of trade between the two States within the meaning
of Article 301 of the Constitution. That, since Article 304(a) and (b)
is an exception to Article 301, resort to an exception will arise only
if the tax impugned is hit by Articles 301 and 303 of the
Constitution. If it is not, then Article 304 will not come into picture
at all. Further, the imposition of a rate of sales tax is influenced
46
by various political, economic and social factors. Prevalence of
differential rate 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. This Court also recalled the
observations in V. Guruviah Naidu & Sons vs. State of Tamil
Nadu, AIR 1977 SC 548 , wherein it was observed that Article
304(a) does not prevent levy of tax on goods; what it prohibits is
such levy of tax on goods as would result in discrimination between
goods imported from other States and similar goods manufactured
or produced within the State. That any discrimination in that
regard would constitute a tariff wall or fiscal barrier and would
thus impede the free flow of inter-State trade and commerce.
10.6.5 This Court further noted that the question as to when
the levy of tax would constitute discrimination would depend upon
a variety of factors including the rate of tax and the item of goods
in respect of the sale of which it is levied. The object is to prevent
discrimination against the imported goods by imposing tax on such
goods at a rate higher than that borne by local goods. It was
observed that every differentiation is not discrimination. This was
because the expression 'discrimination' in Article 304(a) involves
47
an element of intentional and purposeful differentiation thereby
creating economic barrier and involves an element of an
unfavourable bias. That discrimination implies an unfair
classification. When the general rate applicable to the goods locally
made and on those imported from other States is the same, nothing
more is to be shown by the State to dispel the argument of
discrimination under Article 304(a), even though the resultant tax
amount on imported goods may be different.
10.6.6 Further, the question, whether, the power to grant
exemption to specified class of manufacturers for a limited period
on certain conditions would be violative of Article 304(a) was
considered. The contention was that the State should grant
exemption to all goods irrespective of the fact that the goods are
locally manufactured or imported from other States, else it would
be violative of Article 304(a). The aforesaid argument was
contested by the respondent therein by stating that if the
exemptions are based on natural and business factors which do
not involve any intentional bias, the impugned notifications to
grant exemption for limited period on certain specific conditions
cannot be held to be bad in law. Accepting the said argument, it
48
was held that the impugned notification was not violative of the
constitutional provisions since Article 301 did not apply to the
case. Then, Article 304(a), which is an exception to Article 301,
would also not apply. In paragraph 27, it was noted that in the said
case, the general rate applicable to locally made goods was the
same as on the imported goods. Hence, it did not fall within the
exception of Article 304 as it was not hit by Article 301. In
paragraph 28 of the judgment, this Court observed that the
concept of economic barrier must be adopted in a dynamic sense
with changing conditions. That in a federal polity, all the States
have powers to grant exemption to specified class for limited period;
such granting of exemption cannot be held to be contrary to the
concept of economic unity. It was reasoned that the contents of
economic unity by the people of India would necessarily include
the power to grant exemption or to reduce the rate of tax in special
cases for achieving industrial development or to provide tax
incentives to attain economic equality in growth and development.
When all the States have such provisions to exempt or reduce
rates, the question of economic war between the States inter se or
49
economic disintegration of the country as such did not arise.
Therefore, the challenge to the exemption was upheld.
10.6.7 In the very same case, writ petitions concerning the
notification issued by the Punjab Government whereby two
different rates of taxes were provided, were also considered. There
was a differentiation in the rate of tax between the manufacturers
of electronic goods outside the State and those within the State of
Punjab. It was reasoned that the lower rate of tax on those
electronic goods manufactured in the State of Punjab was due to
the prevailing peculiar circumstances of Punjab. It was to attract
new entrepreneurs from other States and within the State to
manufacture within the State of Punjab. Therefore, incentive was
provided for growth of industry in Punjab which had already shifted
to other States.
10.6.8 In view of the above, the concessional rate of tax
introduced was held to be non-discriminatory. Taking note of the
situation in the State of Punjab, it was observed that a backward
State or a disturbed State cannot with parity engage in competition
with advanced or developed States. Even within a State, there are
often backward areas which can be developed only if some special
50
incentives are granted. If the incentives in the form of subsidies or
grant are given to any part of a State so that it may come out of its
limping or infancy to compete as equals with others, that cannot
contravene the spirit and the letter of Part XIII of the Constitution.
However, there must be valid, justifiable and rational reasons for
differentiation. If there is none, it will amount to hostile
discrimination. Consequently, the notification issued by the
Punjab Government under the Punjab General Sales Tax Act was
also upheld.
Shree Mahavir Oil Mills:
10.7 In Shree Mahavir Oil Mills, the facts were that the cost of
production of edible oil in Jammu and Kashmir was higher than in
the adjoining States and as a result, the manufacturers of edible
oil in the adjoining States were able to sell their products in Jammu
and Kashmir at a price lower than the price at which the local
manufacturers were able to sell them. Facing the prospect of
closure, the manufacturers of the edible oil in the State sought
exemption from the levy of sales tax on the sale of their products.
With a view to protect the local edible oil industry, the Government
of Jammu and Kashmir issued SRO 93 of 1991 on 07.03.1991
51
under Section 5 of the Jammu and Kashmir General Sales Tax Act,
1962 directing that “the goods manufactured by a dealer operating
as a small-scale industrial unit in the State and registered with the
Director of Industries and Commerce, Handicrafts or Handloom
Development, subject to certain conditions, shall be exempted from
payment of tax to the extent and for the period specified in the
Schedule forming Annexure A”. The exemption was total and the
period of exemption was five years and later extended by another
five years. This led to the manufacturers of edible oil in other States
being obliged to pay sales tax on the sales effected by them in the
State of Jammu and Kashmir at the rate of four per cent, while the
local manufacturers were totally exempted therefrom. The rate of
tax was thereafter raised from four per cent to eight per cent to be
paid only by the outside manufacturers, while the local
manufacturers were exempt fully. The outside manufacturers
approached the Jammu and Kashmir High Court by way of writ
petitions which were dismissed by both learned Single Judge as
well as by the Division Bench of the High Court, based mainly on
the decision of this Court in Video Electronics.
52
10.7.1 B.P. Jeevan Reddy, J. observed that under Article
304(a), a State Legislature may tax goods imported from other
States/Union Territories but in the process ought not to
discriminate against them vis-à-vis goods manufactured locally.
Therefore, there could not be tax barriers or fiscal barriers, in the
interest of freedom of trade, commerce and intercourse throughout
the territory of India, guaranteed by Article 301. In other words,
for the purpose of encouraging or promoting the local
industries, the weapon of taxation cannot be used to discriminate
against the imported goods vis-à-vis the locally manufactured
goods. That, Part XIII of the Constitution would indicate that no
State would tax its people at a higher level merely with a view to
tax the people of other States at that level. But conversely, there
cannot be “tariff walls” or fiscal barriers in so far as goods
manufactured outside a State and imported into the State is
concerned.
10.7.2 It was further observed that the freedom guaranteed in
Article 301 was “throughout the territory of India” and not merely
between the States as such; the emphasis is upon the oneness of
the territory of India. That, Article 301 was a general provision and
53
Article 304(a) was not really an exception to Article 301, despite the
use of the non-obstante clause but a restatement of a facet of the
very freedom guaranteed by Article 301, namely, power of taxation
by the States.
10.7.3 After referring to several decisions of this Court, in the
context of the judgment Video Electronics on which strong
reliance was placed by the State of Jammu and Kashmir, it was
noted that in the said case there were two notifications impugned
and as already noted above, the said notifications were upheld.
Relying on the said judgment of the three-judge Bench, it was
contended on behalf of the State of Jammu & Kashmir that a State
which is technically and economically weak on account of various
factors should be allowed to develop economically by granting
concessions, exemptions and subsidies to new industries. That, all
parts of the country are not equally developed, industrially or
economically. Further, the power to grant exemption is inherent in
all taxing statutes and the Government cannot be deprived of this
power by invoking Articles 301 and 304. This is because a
backward State or a disturbed State cannot be on par with
advanced or developed States. Even within a State, there are often
54
backward areas which could be developed only if some special
incentives are granted. If there are justifiable and rational reasons
for differentiation, then there will be no hostile discrimination.
10.7.4 Distinguishing the judgment in Video Electronics, it
was observed that the limited exception created in the said
case does not help the State of Jammu & Kashmir for the reason
that exemption concerned herein is neither confined to “new
industries”, nor is circumscribed by other conditions of the nature
stipulated in the Uttar Pradesh notification. That it is not possible
to go on extending the limited exception created in the said
judgment, by stages, which would have the effect of robbing the
salutary principle underlying Part XIII of its substance.
Consequently, it was held that the total exemption granted in
favour of small-scale industries in Jammu and Kashmir producing
edible oil was not sustainable in law. It was also observed that
Article 304(a) of the Constitution shall not be so exercised as to
bring about a discrimination between the imported goods and the
similar goods manufactured or produced in a State. That the clause
deals only with discrimination by means of taxation; it prohibits
it. The prohibition cannot be extended beyond the power of
55
taxation. This means that the States are free to encourage and
promote the establishment and growth of industries within their
States by all such means as they think proper but they cannot, in
that process, subject the goods imported from other States to a
discriminatory rate of taxation, i.e., a higher rate of sales tax vis-à-
vis similar goods manufactured/produced within that State and
sold within that State. The prohibition is against discriminatory
taxation by the States and it matters not how this discrimination
is brought about. The limited exception carved out in Video
Electronics cannot be enlarged, lest it would eat up the main
provision. Placing reliance on Firm Mehtab Majid and the other
cases, it was held that the exemption from payment of sales tax
altogether was discriminatory and prohibited under Article 304(a)
of the Constitution.
10.7.5 Another contention which was urged by the State of
Jammu and Kashmir was to the effect that when the rate of tax
was four percent there was no challenge to the sale but when the
rate of tax climbed to eight per cent there was a challenge and
hence a principle of acquiescence applied. This contention was
repelled by stating that there can be no question of any
56
acquiescence in matters affecting constitutional rights or
limitations. Further, the contention regarding applicability of
Article 14 and there being an intangible difference between locally
produced edible oil and imported edible oil was also retorted. This
Court observed that Article 14 speaks of equality; whereas Article
301 speaks of freedom and Article 304( a ) speaks of uniform
taxation of both the imported goods and the locally produced goods
by the States. However, the consequential direction was that the
declaration of invalidity of the impugned notification was to take
effect from 01.04.1997 and till that date, the impugned notification
was to continue to be effective and operative. Therefore, the
appellants therein were not entitled to claim any amount by way of
refund or otherwise.
Loharn Steel Industries Ltd.:
10.8 In Loharn Steel Industries Ltd. , the facts were that the
appellant therein was a registered dealer of iron and steel in the
State of Andhra Pradesh and purchased iron and steel scraps and
ingots in the said State and sent to a rerolling mill in the State of
Karnataka. The raw material was rerolled and brought back to the
State of Andhra Pradesh and sold therein. The impugned
57
exemption notification impugned therein, as it originally stood
exempted all rerolled finished products sold in the State of Andhra
Pradesh from tax provided tax had been paid in the said State on
the raw material. This exemption was available to rerolled products
which were manufactured even within the said State. There was no
challenge to that portion of the notification. However, the
exemption notification discriminated against goods manufactured
outside the State of Andhra Pradesh by denying exemption to such
goods (manufactured outside the State). This portion was added by
an amendment to the notification. This amendment was struck
down by applying the doctrine of severability on the premise that
it violated Article 304(a) of the Constitution as it was
discriminatory.
Laxmi Paper Mart:
10.9 Exercise books prepared from paper purchased within the
State was exempted from sales tax whereas exercise books
prepared outside the State and brought and sold within the State
was subjected to sales tax. This was held to be in violation of Article
304(a) of the Constitution in Laxmi Paper Mart. Referring to Firm
Mehtab Majid and Shree Mahavir Oil Mills , it was observed that
58
the exemption from payment of tax on locally manufactured goods
vis-à-vis imported goods from other States was discriminatory as it
created a fiscal barrier on the free flow of trade and commerce and
hence, the exemption was struck down as offending Article 301 of
the Constitution.
Digvijay Cements :
10.10 In Digvijay Cements , the challenge was to notification
dated 12.03.1997 issued by the State of Rajasthan under Section
8(5) of the Central Sales Tax Act whereby it reduced the rate of
sales tax on inter-state sale of cement by any dealer from that State
to 4%. The grievance of the petitioner therein was that as a
consequence of such reduction of sales tax, cement from Rajasthan
became much cheaper in the neighbouring States like Gujarat and
that adversely affected the local sale of cement manufactured by
the petitioners therein in Gujarat by reason of higher rate of sales
tax on the local sales within that State. Such reduction of the rate
of tax, it was contended, was contrary to the scheme contained in
Part XIII of the Constitution and was liable to be struck down. The
Constitution Bench of this Court did not agree with the contention
that the impugned notification had the effect of preventing or
59
hindering the free movement of goods from one State to another.
As far as the State of Rajasthan was concerned, it had the opposite
effect. Merely because local rate of tax in the neighbouring States
on the sale of cement was higher than the inter-state sales tax on
the cement sold from the State of Rajasthan cannot lead to the
conclusion that the impugned notification prevented or hindered
the free movement of goods from one State to another.
10.10.1 According to this Court, the impugned notification
increased the movement of cement from the State of Rajasthan to
the other States. There was no barrier as such but there was an
increase in the volume of inter-state trade. Referring to Shri
Digvijay Cement Co. vs. State of Rajasthan, AIR 1997 SC
2609 , it was observed that increase in revenue and its utilisation
for the public of the State can generally be regarded to be in public
interest but that by itself could not be regarded as sufficient, if it
had the effect of going against the policy of the statute and the
object of the constitutional provisions. That Section 8(5) of the
Central Sales Tax Act, 1956 clearly enables the State Governments
to reduce the rate of inter-state sales tax if it is satisfied that it is
necessary to do so in public interest. It was observed that if the
60
reduction of the rate of tax results in increase of revenue and of
industrial activities, providing employment in the industry, it
cannot be said that the notification was not issued in the public
interest. On the other hand, if the lowering of tax adversely affects
the movement of goods from one State to another then, the free
flow of trade would be adversely affected which would be violative
of Article 301 of the Constitution. Consequently, on the facts of the
said case, Shri Digvijay Cement Co. vs. State of Rajasthan, AIR
1997 SC 2609 was overruled.
Jaiprakash Associates:
10.11 A Notification dated 18.06.1997 issued under Section 5
of the Uttar Pradesh Trade Tax Act, 1948 (“UP Act”) was the centre
of controversy in Jaiprakash Associates. The substantial
question of law that was considered was, whether, grant of rebate
of tax by the Uttar Pradesh State Government by issuance of a
notification under Section 5 of the UP Act, discriminated between
the goods imported from neighbouring States and goods
manufactured and produced in the State of Uttar Pradesh
contravened the constitutional provisions of Articles 301 and
304( a ) of the Constitution of India.
61
10.11.1 The appellants therein were public limited companies,
manufacturing cement in their manufacturing units in Rewa
District situated in the State of Madhya Pradesh after procuring fly
ash from the thermal power stations in the State of Uttar Pradesh
and thereafter selling the manufactured product, namely, cement,
in the districts of the State of Uttar Pradesh. Utilisation of fly ash
so as to control its pollution led to cement projects being set up to
make use of the fly ash generated from the power plants. To
encourage manufacturers using fly ash in manufacturing of their
products, the Government of Uttar Pradesh by Notification dated
18.06.1997, granted “rebate of tax” to the dealers in the State of
Uttar Pradesh excluding all other dealers manufacturing cement
outside the State of Uttar Pradesh using fly ash purchased in the
State of Uttar Pradesh. The said notification provided the names of
the districts and the period for which the rebate was allowed. The
second Notification dated 27.02.1998 was issued by the
Government of Uttar Pradesh which was rescinded by issuing a
Notification dated 14.10.2004. Aggrieved by the Notification dated
27.02.1998, the cement industries situated in the neighbouring
States approached the Allahabad High Court by filing writ petitions
62
and seeking quashing of Condition I of the Notification dated
27.02.1998, which were dismissed.
10.11.2 Two issues fell for consideration before this Court which
could be epitomised as under:
“Firstly, whether the grant of rebate of tax was hit by the
constitutional limitation on the State Legislature under
Article 304(a) read with Article 301 of the Constitution of
India, as and when it discriminated between the imported
goods and the goods manufactured and produced outside
the State.
The second issue that arose was, whether the grant of
rebate, directly or indirectly, restricted the free flow of
trade, commerce and intercourse among States by
assuming the effects of an exemption/concession which is
nothing but a concept within the scope of taxation.”
10.11.3 Discussing on Chapter XIII of the Constitution, it was
observed that Article 304(a) does not prevent levy of tax on goods;
what is prohibited is such levy of tax on goods as would result in
discrimination between goods imported from other States and
similar goods manufactured or produced within the State. The
object was to prevent imported goods being discriminated against
by imposing a higher tax thereon than on local goods. Thus, the
rate of taxation on local as well as imported goods must be the
same so as to discourage the States from creating fiscal barriers.
63
10.11.4 It was noted that the principle of “non-discriminatory
tax” is a sine qua non to free movement of goods between States as
provided in Article 304(a) of the Constitution of India. Thus, the
power given to the State under the said clause is not a blanket
power but is restrictive, although it is an exception to Article 301.
Observing thus, it was noted that in order to ascertain
discrimination under Article 304(a), the effect of the tax on the flow
of the goods from outside the taxing statute has to be taken into
consideration and whether the overall effects of rebate of tax is
such that they fall within the meaning of “concessional rate of tax”.
10.11.5 Delineating on the concept of rebate of tax and its overall
impact on the trade, commerce and intercourse, it was observed
that a rebate is a “discount”, i.e., to allow a deduction from a gross
amount. It is a discount repaid to the payer. A rebate of tax can
also be akin to concessional / reduced rate of tax. That in the said
case, the controversy concerned the grant of rebate up to the full
amount of the tax levied on any specific point in the series of
sales/purchase of goods. Such rebate was only extended to the
districts in the State of Uttar Pradesh. The question was, whether,
this was a weapon of taxation that was discriminatory between the
64
goods imported and manufactured in Uttar Pradesh as laid down
in Article 304(a) of the Constitution. While observing that this
Court in Shree Mahavir Oil Mills clarified the exception carved
out by the three-judge bench in Video Electronics, it was held
necessary to ascertain whether the particular exemption granted
by the State affected Articles 301 and 304. This Court noted that
Article 304(a) is a provision that deals with taxation to limit the
power of taxation by the State so as to prevent discrimination
against imported goods by imposing taxes on such goods at a
higher rate than is borne by indigenous goods. It was observed that
if the rebate of tax by way of repayment to the full amount of tax
levied qualified within the same meaning as that of exemption,
then the same would a fortiori mean discrimination on the rate of
tax by repaying by way of a rebate to one class of local dealers the
whole amount of sales tax paid and on the other hand the outside
dealers are taxed higher in the absence of the benefit of rebate. This
was held to be “discrimination” within the meaning of Article 304(a)
of the Constitution.
10.11.6 On the aspect of exemption from tax, it was noted that
it has a twofold impact: first, exemptions/concessional rate of tax
65
affect consumer choice by impacting relative pricing and therefore,
materially altering the economic balance. Since consumption
tends to shift towards the items which are not taxed, the prices of
those items and the raw materials used to produce them would
increase while the prices of taxed items would decrease relatively;
second , such exemptions unfairly burden some businesses either
within the same industry or in other competing industries.
10.11.7 Speaking about rebate, it was observed that it is another
device used by the Government which, when given on the rate of
tax to the full amount of tax levied, gives favourable treatment to
one class of dealers situated within the State barring the dealers
similarly placed outside the State manufacturing goods using the
same raw material. Then, grant of such rebate has the colour of
exemption/concessional rate of tax along with the same deleterious
effects of an exemption. While considering Article 304(a) in the
context of whether rebate is within the realm of tax defined under
the said clause so as to say that it discriminates between the two
classes of goods, namely, locally manufactured goods and the
imported goods when both the classes of dealers meet the
conditions required to qualify for the grant of rebate i.e. the use of
66
fly ash, the Court noted that the overall effect or impact of such
rebate would be on the manufacturer. Following the judgments of
Firm Mehtab Majid; W.B. Hosiery Assn. vs. State of Bihar,
(1988) 4 SCC 134 (“W.B. Hosiery Assn.”) and H. Anraj, the issue
with regard to the disparity between the locally manufactured
goods within the State and those manufactured in other States
were discussed in light of the facts of those cases. It was observed
that the rebate of tax being in the nature of an exemption in the
instant case was discriminatory and violative of Article 304(a) of
the Constitution of India.
Jindal Stainless Ltd.:
10.12 Jindal Stainless Ltd. is a nine-Judge Bench decision
of this Court wherein by a majority, this Court, inter alia, observed
as under:
“1159.1. Taxes simpliciter are not within the
contemplation of Part XIII of the Constitution of India. The
word “free” used in Article 301 does not mean “free from
taxation”.
1159.2. Only such taxes as are discriminatory in nature
are prohibited by Article 304( a ). It follows that levy of a
non-discriminatory tax would not constitute an infraction
of Article 301.
1159.3. Clauses ( a ) and ( b ) of Article 304 have to be read
disjunctively.
67
1159.4. A levy that violates Article 304( a ) cannot be saved
even if the procedure under Article 304( b ) or the proviso
thereunder is satisfied.
1159.5. The Compensatory Tax Theory evolved
in Automobile Transport (Rajasthan) Ltd. v. State of
Rajasthan , AIR 1962 SC 1406 : (1963) 1 SCR 491 and
subsequently modified in Jindal Stainless Ltd.
(2) v. State of Haryana, (2006) 7 SCC 241 has no juristic
basis and is therefore rejected.
1159.6. The decisions of this Court in Atiabari Tea Co.
Ltd. v. State of Assam, AIR 1961 SC 232 : (1961) 1 SCR
809 , Automobile Transport (Rajasthan) Ltd. v. State
of Rajasthan, AIR 1962 SC 1406 : (1963) 1 SCR 491
and Jindal Stainless Ltd. (2) v. State of Haryana,
(2006) 7 SCC 241 cases and all other judgments that
follow these pronouncements are to the extent of such
reliance overruled.
xxx
1159.8. Article 304( a ) frowns upon discrimination (of a
hostile nature in the protectionist sense) and not on mere
differentiation. Therefore, incentives, set-offs, etc. granted
to a specified class of dealers for a limited period of time in
a non-hostile fashion with a view to developing
economically backward areas would not violate Article
304( a ). The question whether the levies in the present case
indeed satisfy this test is left to be determined by the
regular Benches hearing the matters.”
10.12.1 The question formulated by this Court for determination
by the nine-Judge Bench which are relevant to the present case
read as under:
“(i) Can the levy of a non-discriminatory tax per se
constitute infraction of Article 301 of the Constitution of
India?”
68
10.12.2 While answering these questions, the majority, speaking
through Thakur, C.J., discussed whether levy of a tax is an
attribute of sovereignty and if so, whether Article 246 of the
Constitution recognises the sovereign power of the State to make
laws including the power to levy taxes on subjects enumerated in
List II of the Seventh Schedule to the Constitution. While holding
that power to levy taxes is an essential attribute of sovereignty, it
was observed that constitutional provisions relating to the power
of taxation do not operate as grants of the power of taxation to the
Government but instead merely constitute limitations upon a
power which would otherwise be practically without limit. Since
Article 265 of the Constitution provides that no tax shall be levied
or collected except by authority of law, it would be necessary to
first enquire whether the legislature which passes the Act was
competent to pass it or not. Thus, power to tax being an incident
of sovereignty, however, under the Constitution, is circumscribed
by Articles 245, 246 and 265. In other words, the exercise of
sovereign power of taxation is subject to constitutional limitation
in a federal system like in India where the Union as well as the
69
States have the power to make laws including laws that levy taxes,
duties and fees, however, within the extent permissible under the
Constitution.
10.12.3 These constitutional limitations on the power of the
State Legislatures to levy taxes or for that matter enact laws are
mentioned by way of relevant Entries of Lists II and III of the
Seventh Schedule (there being no taxation in Entry of List III).
Further, there are other provisions which provide for the
constitutional limitations in the matter of taxation to be levied by
the Union or the State which is not necessary to advert to in the
present case.
10.12.4 After analysing other Articles in Part XIII of the
Constitution, the Court dealt with Article 304 that deals with
restrictions on trade, commerce and intercourse among States
which could be made by the Legislature of a State. It was observed
that Article 304(a) does not treat tax as a restriction so that any
such levy may fall foul of Article 301. In fact, Article 304(a)
recognises the State Legislature’s competence to impose a tax on
goods imported from other States or the Union Territories.
However, the power to tax goods imported from other States or
70
Union Territories is not unqualified or unrestricted. That there are
two restrictions on the power. The words “to which similar goods
manufactured or produced in that State are subject” impose the first
restriction on the power of the State Legislature to levy such tax.
These words would imply that a tax on import of goods from other
States will be justified only if similar goods manufactured or
produced in the State are also taxed. The second restriction comes
from the expression “ so, however, as not to discriminate between
goods so imported and goods so manufactured or produced ”. The
State Legislature cannot in the matter of levying taxes discriminate
between goods imported from other States and those manufactured
or produced within the State levying such a tax. The net effect of
Article 304(a) therefore is that while levy of taxes on goods imported
from other State and the Union Territories is clearly recognised as
constitutionally permissible, the exercise of such power is subject
to the two restrictive conditions referred to above. That does not
however detract from the proposition that levy of taxes on goods
imported from other States is constitutionally permissible so long
as the State Legislatures abide by the limitations placed on the
exercise of that power. To put it differently, levy of taxes on import
71
of goods from other States is not by itself an impediment under the
scheme of Part XIII or Article 301 appearing therein.
10.12.5 The next question, namely, whether clauses (a) and (b)
of Article 304 have to be read conjunctively or disjunctively was
also considered.
10.12.6 It was observed that clauses (a) and (b) of Article 304
deal with two distinct subjects and must, therefore, be understood
to be independent of each other. While clause (a) deals entirely with
imposition of taxes on goods imported from other States, clause (b)
deals with imposition of reasonable restriction in public interest.
The use of the word “and” between clauses (a) and (b) does not
admit of an interpretation that may impose an obligation upon the
legislature to necessarily impose a tax and a restriction together.
The word “and” can mean “or” as well as “and” depending upon the
context in which the law enacted by the legislature uses the same.
Levy of taxes do not constitute a restriction under Part XIII except
in cases where the same are discriminatory in nature. In paragraph
76, the discussion was summarised as under:
72
“76. The sum total of what we have said above regarding
Articles 301, 302, 303 and 304 may be summarised as
under:
76.1. Freedom of trade, commerce and intercourse in
terms of Article 301 is not absolute but is subject to the
provisions of Part XIII.
76.2. Article 302 which appears in Part XIII empowers
Parliament to impose restrictions on trade, commerce and
intercourse in public interest.
76.3. The restrictions which Parliament may impose in
terms of Article 302 cannot however give any preference to
one State over another by virtue of any entry relating to
trade and commerce in any of the Lists in the Seventh
Schedule.
76.4. The restriction that Parliament may impose in terms
of Article 302 may extend to giving of preference or
permitting discrimination between one State over another
only if Parliament by law declares that a situation arising
out of scarcity of goods warrants such discrimination or
preference.
76.5. Article 304( a ) recognises the availability of the power
to impose taxes on goods imported from other States, the
legislative power to do so being found in Articles 245 and
246 of the Constitution.
76.6. Such power to levy taxes is however subject to the
condition that similar goods manufactured or produced in
the State levying the tax are also subjected to tax and that
there is no discrimination on that account between goods
so imported and goods so manufactured or produced.
76.7. The limitation on the power to levy taxes is entirely
covered by clause ( a ) of Article 304 which exhausts the
universe insofar as the State Legislature's power to levy of
taxes is concerned.
73
76.8. Resultantly, a discriminatory tax on the import of
goods from other States alone will work as an impediment
on free trade, commerce and intercourse within the
meaning of Article 301.
76.9. Reasonable restrictions in public interest referred to
in clause ( b ) of Article 304 do not comprehend levy of taxes
as a restriction especially when taxes are presumed to be
both reasonable and in public interest.”
10.12.7 Thus, it was held that Article 304(b) of the Constitution
does not deal with taxes as restrictions. That those restrictions
referred to in that provision are non-fiscal in nature. Therefore, any
constitutional validity of any taxing statute has to be tested only
on the anvil of Article 304(a) and if the law is found to be non-
discriminatory, it can be declared to be constitutionally valid
without the legislation having to go through the test of the process
envisaged by Article 304(b). Should, however, the statute fail the
test of non-discrimination under Article 304(a), it must be struck
down for the same cannot be sustained even if it had gone through
the process stipulated by Article 304(b). This is because what is
constitutionally impermissible in terms of Article 304(a) cannot be
validated and sanctioned through the medium of Article 304(b).
Any challenge to a fiscal enactment on the touchstone of Article
304(a) must be tested by the same standard as in the decision of
74
this Court in Kathi Raning Rawat vs. State of Saurashtra, AIR
1952 SC 123. The Court ought to examine whether the
differentiation made is intended or inspired by an element of
unfavourable bias in favour of the goods produced or
manufactured in the State as against those imported from outside.
If the answer be in the affirmative, the differentiation would fall foul
of Article 304(a) and may tantamount to discrimination.
Conversely, if the Court were to find that there is no such element
of intentional bias favouring the locally produced goods as against
those from outside, it must go further and see whether the
differentiation would be supported by valid reasons. This is
because discrimination without reason would be unconstitutional
whereas discrimination with reason may be legally acceptable.
10.12.8 Regarding the decision in Video Electronics, it was
observed that the differentiation made was supported by reasons.
It was observed that power to grant exemption is a part of the
sovereign power to levy taxes which cannot be taken away from the
States that are otherwise competent to impose taxes and duties. It
was further observed that Video Electronics , therefore, correctly
states the legal position as regards the approach to be adopted by
75
the courts while examining the validity of levies. So long as the
differentiation made by the States is not intended to create an
unfavourable bias and so long as the differentiation is intended to
benefit a distinct class of industries and the life of the benefit is
limited in terms of period, the benefit must be held to flow from a
legitimate desire to promote industries within its territory. In this
context, Shree Mahavir Oil Mills was held
distinguishable inasmuch as the manufacturers of edible oil
therein were exempt totally and unconditionally while other
manufacturers from outside the State were not so exempt.
Referring to several other decisions, in paragraph 144 of the
judgment, it was observed that so long as the intention behind the
grant of exemption/adjustment/credit is to equalise the fall of the
fiscal burden on the goods from within the State and those from
outside the State, such exemption or setoff will not amount to
hostile discrimination offensive to Article 304(a).
10.12.9 Bobde, J. (as he then was) concurred with Thakur, C.J.
and SK Singh, J. and observed that to muster compliance with Part
XIII of the Constitution, the tax must pass the twin tests embodied
in Article 304(a) i.e., (i) similar goods produced locally must also be
76
subjected to similar tax; and (ii) such State action should not
attract the vice of discrimination between the two varieties of goods.
10.12.10 In paragraph 262 of the judgment, Ramana, J. (as he
then was) observed that the object is to prevent discrimination
against imported goods by imposing tax on such goods at a rate
higher than that borne by local goods since the difference between
the two rates would constitute a tariff wall or fiscal barrier and thus
impede the free flow of inter-State trade and commerce. It does not
prohibit levy of tax as such in the situation wherein the goods are
not produced or manufactured in the State itself and does not
affect the authority of the State to tax the imported goods. It only
bars discrimination on the basis of taxing the products
manufactured within the State vis-à-vis imported goods which will
only occur if the precondition of manufacturing in the taxing State
is satisfied.
10.12.11 Banumathi, J. while agreeing with Thakur, C.J.
observed that decisions in Atiabari Tea Co. Ltd. and Automobile
Transport Ltd. to the extent they declare that taxes generally are
restrictions on the freedom of trade, commerce and intercourse
ought to be overruled. Further, non-discriminatory taxes do not
77
constitute infraction of Article 301 of the Constitution. The law laid
down in Video Electronics was also endorsed.
10.12.12 By contrast, Dr. Chandrachud, J. (as he then was),
firstly stated that a discriminatory tax is prohibited under Article
304(a) in the context of exemptions and incentives as held in the
judgments of this Court in Video Electronics and Shree Mahavir
Oil Mills. It was observed that in Video Electronics, this Court
considered the validity of the notifications issued under the Uttar
Pradesh Sales Tax Act, 1948, as well as under the Punjab General
Sales Tax Act. Under the notification issued under the Uttar
Pradesh legislation, an exemption from the payment of sales tax
was granted for goods manufactured in new industrial units, where
the date of commencement of production fell between two
stipulated dates. The exemption was for a stipulated period
reckoned from the date of first sale if such sale took place not later
than six months from the commencement of production. The
period of exemption was confined for a specified period of three to
seven years. Insofar as the State of Punjab was concerned, sales
tax at the rate of 12% was provided on electronic goods sold within
the State irrespective of their manufacture. In pursuance of a
78
notification issued under the Sales Tax law, the rate of sales tax
payable by electronic manufacturing units producing goods
specified thereunder was brought down from 12% to 1%. This was
justified on the ground that it was an incentive to a backward
industrial State. A Bench of three learned Judges in Video
Electronics observed that this was not a case involving “a naked
blanket preference in favour of locally manufactured goods, as
against goods coming from outside the State”. This Court therefore
held that there was no discrimination under both the notifications
against goods manufactured outside the State. In Video
Electronics , this Court distinguished the judgment in Weston
Electronics. Dr. Chandrachud, J. (as he then was) observed that
the substratum of the judgment in Video Electronics clearly is
that Article 304(a) would not be breached by a classification
brought about by a carefully structured notification which grants
incentives to local industry of a specified class of units, with
reference to a specific category of manufactured goods and for a
stipulated period. The judgment in Video Electronics was
distinguished on the ground that in that case, the notifications of
79
the States of Uttar Pradesh and Punjab were carefully
circumscribed.
10.12.13 Referring to paragraphs 22 and 23 of the judgment of
this Court in Shree Mahavir Oil Mills, Dr. Chandrachud, J. (as
he then was) observed that “the Court cautioned that a limited
exception which had been carved out in Video Electronics should
not be enlarged “lest it eat up the main provision””. An
unconditional exemption in the case of edible oil produced within
the State from sales tax while subjecting similar goods produced in
other States to sales tax at 8% was held to violate Article 304(a) of
the Constitution. In Shree Mahavir Oil Mills, an exemption from
the payment of sales tax altogether granted to local industry was
set aside as violating Article 304(a). The earlier decision in Video
Electronics was distinguished on the ground that it related to a
case not involving a blanket preference. In this regard, in
paragraph 693, Dr. Chandrachud, J. (as he then was) observed as
under:
“693. A close reading of the judgment in Video
Electronics would thus indicate that both sets of
notifications involving the States of Uttar Pradesh and
Punjab were carefully structured to cover one or more of
the following circumstances:
80
(i) Availability of a reduced rate of sales tax to
new industrial units;
(ii) Applicability of a reduced rate of sales tax to
producers of certain specified goods, such as
electronic goods;
(iii) Limitation of the period during which the
reduced rate of tax could operate; and
(iv) Applicability of the general rate of sales tax to
an overwhelmingly large number of local
manufacturers, on a par with imported
goods.”
10.12.14 Thus, Dr. Chandrachud J. (as he then was) opined
that the judgment in Shree Mahavir Oil Mills left open the
correctness of the view in Video Electronics. Shree Mahavir Oil
Mills is a judgment rendered by a two-Judge Bench comprising
B.P. Jeevan Reddy, J. and S.C. Sen, J. while Video Electronics
was a judgment of three Judges of this Court. The decision
in Video Electronics was distinguished on the ground that it
related to a case not involving a blanket preference.
10.12.15 Ashok Bhushan, J. in his dissenting opinion but
concurring on some issues, speaking about the three-Judge Bench
decision of this Court in Video Electronics, observed that the
exemption therein was upheld as it was granted to a special class
for limited period on specific conditions of maintaining the general
81
rate of tax on the goods manufactured by all those producers in
the State who do not fall within that category. That Video
Electronics , however, further states that if tax is imposed in a
colourable manner, intentionally or purposely to create
unfavourable bias by prescribing a general lower rate on locally
manufactured goods either in the shape of general exemption to
locally manufactured goods or in the shape of lower rate of tax,
such an exercise of power can always be struck down by the
courts. However, in Shree Mahavir Oil Mills, it was observed that
exception carved out in Video Electronics cannot be widened or
expanded to cover cases of a different kind. That in Video
Electronics, the exemption notification was upheld because it was
limited to a specified type with short period. Therefore, even in
Video Electronics, general exemption of a wider nature was not
approved. In other words, the exemption cannot be used as a
measure of discrimination between goods imported from other
States and goods manufactured or produced in the State. The
exemption has to be a limited exemption to the tax which is
imposed on the similar goods. In the event such exemption is total
and general in nature, the said exemption is clearly violative of
82
Article 304(a). Similarly, set-off of a particular tax which is general
and not limited to specified category has also to be disapproved.
Therefore, Ashok Bhushan, J. held that the ratio of the three-Judge
Bench judgment in Video Electronics has to be read to the above
extent and with the limitation as noticed above. Hence, the State
Legislature in exercise of its taxing power can grant exemption/set-
off to local goods, only to a limited extent based on intelligible
differentia which is not in the nature of general/unspecified
exemption. The exemption/set-off which tend to become a general
exemption violates Article 304(a) of the Constitution.
Discussion from Overseas Case Law:
11. At this instance, it is relevant to discuss a similar provision
in Section 51(ii) and Section 92 of the Commonwealth of Australia
Constitution Act, 1900, also known as the Australian Constitution.
Sections 51(ii) and 92 provide as follows:
“ 51. Legislative powers of the Parliament
The Parliament shall, subject to tis Constitution, have
power to make laws for the peace, order, and good
government of the Commonwealth with respect to:
xxx
(ii) taxation; but so as not to discriminate between
States or parts of States ;
83
xxx
92. Trade within the Commonwealth to be free
On the imposition of uniform duties of customs, trade,
commerce, and intercourse among the States, whether by
means of internal carriage or ocean navigation, shall be
absolutely free .”
(emphasis supplied)
11.1 A bare reading of the above provision would instantly draw
our attention to Articles 301 and 304 of our Constitution.
11.2 It appears that the interpretation of Section 92 of the
Australian Constitution, specifically as to ‘what should the
imposition be free from?’, has been a subject matter of conflicting
opinions. It was the decision of the High Court of Australia in Cole
vs. Whitfield, (1988) HCA 18 that clarified its scope. The High
Court of Australia, through a unanimous opinion, and relying on
Australian federal movement, held that section 92 of the Australian
Constitution prohibits measures that discriminate against
interstate trade and commerce with the purpose or effect of
protecting intrastate trade or industry against competition from
other States.
84
11.3 The High Court specifically held:
“25. The task which has confronted the Court is to
construe the unexpressed; to formulate in legal
propositions, so far as the text of s.92 admits, the criteria
for distinguishing between the burdens (including
restrictions, controls and standards) to which inter-State
trade and commerce may be subjected by the exercise of
legislative or executive power and the burdens from which
inter-State trade and commerce is immune. The history of
s.92 points to the elimination of protection as the object of
s.92 in its application to trade and commerce. The means
by which that object is achieved is the prohibition of
measures which burden inter-State trade and commerce
and which also have the effect of conferring protection on
intra-State trade and commerce of the same kind. The
general hallmark of measures which contravene s.92 in
this way is their effect as discriminatory against inter-
State trade and commerce in that protectionist sense.
xxx
26. In relation to both fiscal and non-fiscal measures,
history and context alike favour the approach that the
freedom guaranteed to inter-State trade and commerce
under s.92 is freedom from discriminatory burdens in the
protectionist sense already mentioned.”
11.4 The High Court further explained that the concept of
discrimination, so far as it relates to inter-State trade and
commerce, embraces both factual as well as legal discrimination.
By factual, the Court meant the operation of a law producing a
disability or a disadvantage, and by legal, the Court meant the
provisions, on the face of it. The Court however noted that the
85
section accommodates laws that genuinely regulate intra-State and
inter-State trade in a non-protective manner.
11.5 Finally, the Court concluded that a general law enacted
under Section 51(i) of their Constitution may offend Section 92 if
its effect is discriminatory and the discrimination is upon
protectionist grounds. That whether such a law is discriminatory
in effect and whether the discrimination is of a protectionist
character are questions raising issues of fact and degree. That such
answer to those questions may, in the ultimate, depend upon
judicial determination.
11.6 While we are aware of the dangers involved in importing an
interpretation from a judgment of a foreign jurisdiction, it is
relevant to note from Australian jurisprudence that when the Court
therein was called upon to interpret Section 92 of their
Constitution, specifically to answer what should the imposition of
uniform duties of customs, trade, commerce, and intercourse
among their States be free from, the Court answered that they
should be free from discrimination of a protectionist character . Their
emphasis on the protectionist nature is of relevance to us, for the
86
insertion of Part XIII in our Constitution was also to prevent the
growth of sectional and local interests which are inimical to the
interests of the nation as a whole.
Application of the Analysis to the Present Case:
12. On a perusal of the facts of the present cases and the judicial
dicta relating to Articles 301 and 304(a) of the Constitution of India,
we find that the issue herein could be decided by determining if the
impugned notification falls within the parameters of the exception
provided for in Video Electronics. In other words, if the impugned
notification could be justified as falling within the parameters of
the dictum in Video Electronics , it could be upheld. Otherwise, it
would have to be struck down as unconstitutional. Thus, the
dictum in Video Electronics has to be juxtaposed with the facts of
the present cases as well as in light of other judicial dicta discussed
above.
12.1 On a perusal of the judgment of this Court in Jindal
Stainless Ltd. as regards Video Electronics, the position of law
as to when a tax merely differentiates and not discriminates,
appears to be as follows:
87
(i) Clauses (a) and (b) of Article 304 are to be read
disjunctively, and hence, a tax cannot be said to merely
differentiate only if the procedure under Article 304(b) is satisfied,
but not Article 304(a) of the Constitution;
(ii) A tax imposed on goods imported from another state would
not be discriminatory if no similar goods are produced within that
State;
(iii) States are at liberty to design their fiscal legislations in such
a manner to ensure that the tax burden on goods imported from
other States is equal to the tax burden on those goods produced
within the State. Therefore, a tax designed to impose equal burdens
cannot be said to be discriminatory. However, whether the tax
burden falls equally is a question of fact to be determined in each
case when the question arises;
(iv) Further, a tax rebate or other relief in the form of incentives
or set-off which is:
• granted to a specified class of dealers;
• for a limited period of time;
• in a non-hostile fashion;
88
• with a view to developing economically backward areas;
would not be held to be discriminatory.
(v) However, the question whether a tax fulfils the above
criteria is a question of fact to be determined depending upon the
facts of each case.
12.2 Before applying the aforementioned law to the facts of this
case, it is relevant to note that our analysis is not restricted to the
impugned notification alone. Rather, it will be looked at in the
context of the preceding and succeeding notifications issued by the
State of Rajasthan. This is necessary because the impugned
notification is merely one of the notifications out of a series of
notifications effected to grant tax exemptions to the sale of asbestos
cement sheets and bricks having contents of fly ash 25% or more
by weight, manufactured in the State of Rajasthan. However, we
make it clear that our decision would be restricted to the validity
of the impugned notification only.
12.3 Applying the criteria provided for as above, we find that
admittedly, the impugned notification restricted the exemption
from payment of tax to a specified class of dealers, namely, those
89
who manufactured asbestos cement sheets and bricks having
contents of fly ash 25% or more by weight. We also find that, as
regards the time period, the impugned notification restricted the
exemption to those dealers who commenced commercial
production in the State by 31.12.2006 and the exemption was
available up to 23.01.2010.
12.4 However, a combined reading of the notifications dated
24.01.2000, 16.03.2005, 05.07.2006 and 28.12.2010 suggests
that, initially, the benefit was restricted to dealers who commenced
commercial production in the State of Rajasthan by 31.12.2001
and the benefit was upto 23.01.2010. Later, it was extended to
those who commenced production by 31.12.2006. While initially
the benefit was upto 23.01.2010, by notification dated 28.12.2010,
the benefit was made available for ten years from the date of
commencement of first commercial production, but with an outer
cut-off date of 23.1.2016. There is nothing on record to suggest
that the exemption was granted thereafter as well.
12.5 As far as duration is concerned, it can be observed that the
maximum benefit a dealer would have obtained under these
90
notifications was ten years. There were no serious arguments
raised by the appellants herein to the question whether the benefit
of a maximum of ten years would qualify as ‘limited period of time’
within the criteria devised in Jindal Stainless Ltd. . Hence, we do
not intend to decide on the same.
12.6 As regards the criterion of “with a view to developing
economically backward areas”, admittedly, the impugned
notification is not restricted to any specific district or a set of
districts within the State of Rajasthan. Rather, the notifications
provide exemption to any dealer commencing production anywhere
in the State.
12.7 However, the criterion of ‘non-hostile fashion’ was fiercely
contested by both sides, as noted earlier in the submissions. The
expression ‘non-hostile’, as expressed in Jindal Stainless Ltd. ,
relates to discrimination of a hostile nature in the protectionist
sense.
12.8 In our view, the contours of such discrimination, in
essence, can be reduced to whether there are sufficient reasons to
term such discrimination as ‘differentiation’. In State of West
91
Bengal vs. Anwar Ali Sarkar, (1952) 1 SCC 1 , this Court noted
that the expressions “discriminatory” and “hostile” are found to be
used by American Judges often simultaneously in connection with
discussions on the equal protection clause. That if a legislation is
discriminatory and discriminates one person or class of persons
against others similarly situated and denies to the former the
privileges that are enjoyed by the latter, it has to be regarded as
“hostile” in the sense that it affects injuriously the interests of that
person or class.
12.9 Similarly, the opinion of this Court in Twyford Tea Co.
Ltd. vs. State of Kerala, (1970) 1 SCC 189 on the meaning of
‘classification without unreasonably discriminating between
persons similarly situated’ is relevant to this case. The Court noted
then as follows:
“18. What is meant by the power to classify without
unreasonably discriminating between persons similarly
situated, has been stated in several other cases of this
Court. The same applies when the Legislature reasonably
applies a uniform rate after equalising matters between
diversely situated persons. Simply stated the law is this:
Differences in treatment must be capable of being
reasonably explained in the light of the object for which
the particular legislation is undertaken. This must be
based on some reasonable distinction between the cases
differentially treated. When differential treatment is not
92
reasonably explained and justified the treatment is
discriminatory. If different subjects are equally treated
there must be some basis on which the differences have
been equalised otherwise discrimination will be found. To
be able to succeed in the charge of discrimination, a
person must establish conclusively that persons equally
circumstanced have been treated unequally and vice
versa.”
(underlining by us)
12.10 In Vijay Lakshmi vs. Punjab University, (2003) 8
SCC 440 , this Court discussed the earlier judgment in State of
J&K vs. Triloki Nath Khosa, (1974) 1 SCC 19 and observed that
discrimination is the essence of classification and does violence to
the constitutional guarantee of equality only if it rests on an
unreasonable basis.
12.11 Further, in Video Electronics , this Court noted that the
word ‘discrimination’ is not used in Article 14 but is used in Articles
16, 303 and 304(a). That in the context of Article 304(a), it involves
an element of intentional and purposeful differentiation.
12.12 As regards the reasons behind a public authority issuing
a notification, this Court in Commissioner of Police vs.
Gordhandas Bhanji, AIR 1952 SC 16 noted that:
93
“We are clear that public orders, publicly made, in exercise
of a statutory authority cannot be construed in the light of
explanations subsequently given by the officer making the
order of what he meant, or of what was in his mind, or
what he intended to do. Public orders made by public
authorities are meant to have public effect and are
intended to affect the actings and conduct of those to
whom they are addressed and must be construed
objectively with reference to the language used in the order
itself.”
(underlining by us)
12.13 Similarly, as submitted by learned counsel for the
appellants, the Constitution Bench of this Court in Mohinder
Singh Gill observed that any order passed by any public authority
exercising administrative/executive or statutory powers must be
judged by the reasons so mentioned in that order and cannot be
supplemented by fresh reasons in the shape of an affidavit or
otherwise.
12.14 A perusal of the impugned notification dated 09.03.2007
would suggest that the reason stated by the State Government to
exempt from payment of tax was simply that “it was expedient in
the public interest so to do”. The notification states no further
reason for issuing the impugned notification. The exemption from
94
payment of tax on the sale of asbestos sheets and bricks subject to
the following conditions:
(i) That the asbestos sheets and bricks are manufactured in the
State of Rajasthan; and
(ii) They have 25% content of fly ash or more by weight.
Further, the following condition would apply, namely –
(i) that the goods shall be entered in the registration certificate of
the selling dealer.
(ii) that the exemption shall be for such goods manufactured by
the dealer who commenced commercial production in the State
by 31.12.2006; and
(iii) that the exemption shall be available up to 23.01.2010.
Therefore, with respect to the goods manufactured by the
dealer who commenced commercial production in the State before
31.12.2006 the exemption was upto 21.03.2010. Thereafter, by
subsequent notification, the benefit was extended upto
23.01.2016.
95
12.15 There is also nothing on record to suggest that the
notification was issued pursuant to, say, an industrial policy or
otherwise. During the course of submissions, we had asked the
learned senior counsel for the respondent State if there are any
policies of the State as regards setting up of asbestos sheet or
cement industry, pursuant to which the notifications were issued,
the learned senior counsel could not take us to any such
background policy, but submitted that the reasons for the
notification can be discerned from the counter affidavit filed before
the High Court. In light of the dictum of this Court in Mohinder
Singh Gill , we are not able to accept the contention of the learned
senior counsel for the State of Rajasthan that the reasons for the
notification can be discerned from the counter affidavit filed before
the High Court.
12.16 Keeping aside the dictum in Mohinder Singh Gill , even
otherwise , the counter affidavit filed before the High Court
attempts to provide reasons as to why the notification dated
24.01.2000 was issued. The reason stated was to promote the use
of fly ash as a raw material from the production of asbestos cement
sheets and bricks with the intention of utilization of fly ash coming
96
out of thermal power plant and to promote the production of
asbestos cement sheets for which there was no manufacturing
plant in Rajasthan. There is no other reason stated for why the
impugned notification is issued. Admittedly, the impugned
notification can be said to be a continuation of the earlier
notifications, including the notification dated 24.01.2000.
However, there are no reasons stated even in the counter-affidavit
as to why the benefit was extended to those who commenced
production beyond 31.12.2001 through the impugned notification.
The State ought to have explained, for e.g., the effect of the earlier
notifications, the inadequacy, if any, of the notification in fulfilling
the intended objectives, if any, and the consequent need for issuing
the subsequent notification.
12.17 In the absence of any such explanation, we cannot, but
conclude, that the impugned notification is bereft of any reason or
justification. The High Court in the impugned judgment relied
upon the reasoning in Video Electronics to arrive at the
conclusion that the stand of the State of Rajasthan was supported
by the reasoning in the aforesaid case. While acknowledging that
in Shree Mahavir Oil Mills, this Court had explained and
97
distinguished the dictum in Video Electronics wherein the
exemption was granted to new industries for a specified period, the
High Court in our view, fell in error in holding that the present case
also falls in the exceptional category covered by the case of Video
Electronics . We observe that the said finding is incorrect
inasmuch as the exemption was not granted to new industries and
neither was it given for a limited period of time. The exemption was
granted initially upto 23.01.2010 and later extended upto
23.01.2016. The exemption was granted to those asbestos sheet
and bricks manufacturers in the State of Rajasthan utilizing fly ash
as its main raw material on the conditions namely, (i) that such fly
ash constituted 25% or more in the contents by weight; and (ii) that
the unit commenced commercial production by 31.12.2001.
12.17.1 The first condition is an ingredient specific criterion.
This would mean that any asbestos sheet product containing 25%
fly ash manufactured outside the State of Rajasthan and sold in
the said State would not have the benefit of the exemption. This
would mean that the source of fly ash is not really the basis for the
exemption. The asbestos products could be manufactured in the
State of Rajasthan with fly ash obtained from outside the State and
98
sold within the State. If the object of the exemption was to utilise
the fly ash available in the State of Rajasthan itself, it should have
been so spelt out in the impugned notification. Otherwise, we find
a discrimination between asbestos products manufactured in the
State of Rajasthan and manufactured outside, having content of fly
ash to an extent of 25% when sold in the State of Rajasthan. On
the other hand, if the notification had prescribed a condition that
fly ash sourced from State of Rajasthan and products sold in the
State, irrespective of their place of manufacture would have the
benefit such exemption, there would not have been any
discrimination between products manufactured outside the State
of Rajasthan sold within the said State and those manufactured
within the State, both having the benefit of exemption as both
categories of products would have utilised fly ash available in the
State of Rajasthan. This approach would have also met the
objective of utilising the available fly ash in the State of Rajasthan.
But, that is not so in the present case. Hence, we have no hesitation
in holding that the impugned notification violates Article 304(a) of
the Constitution as it is discriminatory in nature.
99
12.17.2 The impugned notification initially was to remain
operative upto 23.01.2010 only. The time for commencement of
commercial production was extended from time to time and by the
notification issued on 16.03.2005, the State Government extended
the commencement of production by 31.12.2006. It was submitted
that the notification dated 09.03.2007 impugned in the writ
petition before the High Court came to be issued by the State
Government after coming into force of the Rajasthan VAT Act so as
to continue with the discriminatory exemption.
12.18 On a survey of the judicial dicta of this Court, what
emerges is that in Atiabari Tea Co. Ltd., the object and purpose
of Part XIII of the Constitution of India and particularly Article 301
was considered and it was observed that while determining the
width and amplitude of the freedom guaranteed by the said Article,
a rational and workable test should be applied and only if the
restrictions impede free flow of trade, it would be barred.
Otherwise, taxes imposed on goods would not by themselves
impede trade and commerce in the said case, the Assam Act was
held to be void as it had not complied with Article 304(b) of the
Constitution. While interpreting Article 304(a), it was observed that
100
the State Legislatures have the power to impose tax on the import
of goods to which similar goods manufactured or produced in the
State are subject, provided that by taxing the goods imported from
another State or Union Territory, no discrimination is practised.
12.18.1 Automobile Transport Ltd. also concerned Article
304(b) of the Constitution. It was observed that a tax to become a
prohibited tax, has to be a direct tax, the effect of which is to hinder
the movement of trade. So long as a tax remains compensatory or
regulatory, it cannot operate as a hindrance. Taxation which
impedes trade and commerce cannot be upheld on the ground that
they are regulatory. A regulation of trade and commerce, on the
other hand, may achieve some public purpose which affects trade
and commerce incidentally but not impairing the freedom. In the
said case, it was observed that the tax offended Article 301 of the
Constitution since resort to the procedure prescribed by Article
304(b) was not taken.
12.18.2 In Firm Mehtab Majid, referring to the aforesaid
decisions, it was held that sales tax which has the effect of
discriminating between goods of one State and goods of another
101
State may affect the free flow of trade which offends Article 301 and
will be valid if it comes within the terms of Article 304(a). Thus,
Article 304(a) enables the Legislature of a State to make laws by
imposition of taxes on goods from other States if similar goods in
the State are also subjected to similar taxes, so as not to
discriminate between the goods manufactured or produced in that
State and the goods which are imported from other States. In the
said case, the writ petition was allowed as the sales tax was held
to be discriminatory in nature and the State was directed to refund
the tax illegally collected from the petitioner therein.
12.18.3 Similarly, in Weston Electronics , the reduction on the
rate of sales tax on television sets manufactured within the State
to 1% whereas television sets imported from outside the State of
Gujarat being at 10% was held to be discriminatory in nature and
therefore, struck down.
12.18.4 The judgment in Video Electronics by a three-Judge
Bench of this Court is a watershed in the line of precedent on the
interpretation of Chapter XIII of the Constitution. In this case, the
imposition of differential rate of tax on sales of the commodity
102
imported from outside the State as compared to the same
commodity manufactured within the State and sold in the State
was upheld as being not discriminatory in nature. It was observed
that the expression “discrimination” in Article 304(a) of the
Constitution involves an element of intentional and purposeful
discrimination thereby creating an economic barrier and involves
an element of unfavourable bias. Insofar as the State of Punjab was
concerned, it was reasoned that the lower rate of tax on those
electronic goods manufactured in the State of Punjab was due to
the prevailing peculiar circumstances in the said case, namely,
terrorist activity. In order to attract new entrepreneurs from other
States and to encourage manufacturers within the State of Punjab,
incentives were provided for growth of industry in the State of
Punjab which had already shifted to other States, therefore, the
concessional rate of tax introduced for goods manufactured within
the State of Punjab was held to be non-discriminatory. The
aforesaid reasoning was given having regard to the situation then
prevailing in the State of Punjab as it was observed that a disturbed
State cannot with parity engage in competition with advanced or
developed States. Therefore, the differential rate of taxation was
103
upheld in the said case. The emphasis was on goods manufactured
in the State having a concessional rate of tax irrespective of who
manufactured the goods. The object was to attract industrial
activity in the State as it was passing through a difficult phase and
hence the need for a focus on economic development. Such a
reason is conspicuous by its absence in the present case.
12.18.5 On the other hand in Shree Mahavir Oil Mills, it was
observed that under Article 304(a), a State Legislature may tax
goods imported from other States or Union Territories but in the
process ought not to discriminate against them vis-à-vis goods
manufactured locally. Therefore, there cannot be tax barriers or
fiscal barriers in the interest of free trade, commerce and
intercourse throughout the territory of India guaranteed by Article
301. Thus, the weapon of taxation cannot be used to discriminate
against the imported goods vis-à-vis the locally manufactured
goods.
12.18.6 Referring to Video Electronics, on which strong
reliance was placed by State of Jammu and Kashmir in the
aforesaid case, this Court made a distinction by observing that the
104
said judgment created a limited exception and that it was not
possible to go on extending the limited exception created in the said
judgment, by stages which would have the effect of robbing the
salutary principle underlying Part XIII of its substance. That States
can also encourage growth of industries by all such means that are
just and proper provided goods imported from other States are not
discriminated against by a higher rate of sales tax being imposed.
That the limited exception carved out in Video Electronics cannot
be enlarged, “lest it would eat up the main provision”. Placing
reliance on Firm Mehtab Majid, this Court ruled in favour of the
petitioners therein. Loharn Steel Industries Ltd., Laxmi Paper
Mart have followed Shree Mahavir Oil Mills.
12.18.7 In Jaiprakash Associates, while considering the
question whether rebate is within the realm of tax defined under
Article 304(a) so as to say that it discriminates between the two
classes of goods, namely, locally manufactured goods and imported
goods when both the classes of dealers meet the condition required
to qualify for the grant of rebate i.e., use of fly ash, this Court noted
that the overall effect or impact of such rebate would be on the
manufacturer. Consequently, this Court held that “rebate of tax
105
granted by the State Government to cement manufacturing units
using fly ash as raw material in a unit established in the districts
of the State of Uttar Pradesh alone was violative of the provisions
contained in Articles 301 and 304(a) of the Constitution of India.”
This judgment squarely applies to the present cases.
12.18.8 While analysing Article 304(a) of the Constitution, the
majority in the nine-Judge Bench in Jindal Stainless Ltd.
identified two restrictions under Article 304(a) of the Constitution
which are in the use of the expressions “ to which similar goods
manufactured or produced in that State are subject ” and “ so,
however, as not to discriminate between goods so imported and
goods so manufactured or produced ”. Therefore levy of taxes on
goods imported from other States is constitutionally permissible so
long as the State Legislature abides by the limitations placed on
the exercise of that power. Thus, levy of taxes on import of goods
from other States by itself, is not an impediment under the scheme
of Part XIII of the Constitution.
12.18.9 With regard to Video Electronics, it was opined that so
long as the differentiation is to benefit a distinct class of industries
106
and not intended to create an unfavourable bias and if the
differentiation is for a limited period, then, the benefit must be held
to flow from a legitimate desire to promote industries within its
territory. It was also held that Shree Mahavir Oil Mills was also
distinguishable from Video Electronics. This was because the
exemption for locally manufacturers of edible oil was
discriminatory vis-à-vis other manufacturers from outside the
State who had no benefit of the said exemption.
12.19 Applying the aforesaid dicta to the present cases, we find
that the notification impugned in these cases are hit by the
judgments referred to above and the judgment in Video
Electronics being an exception having regard to the peculiar facts
therein does not apply to the present cases. Therefore, the
notification impugned in these cases dated 09.03.2007 is violative
of Article 304(a) of the Constitution. Consequently, the impugned
notification is quashed. The civil appeals are hence allowed. No
cost.
12.20 Having regard to the interim order dated 09.05.2008
passed in these appeals, it is necessary to ascertain whether the
107
differential amount which has been deposited before this Court was
collected from their customers. If not, the appellants would be
entitled to refund of the amount deposited with interest @ 6% per
annum from the date of deposit till realisation. In order to ascertain
this aspect, we post the appeals for directions.
All pending applications, if any, shall stand disposed of.
………………………………..J.
(B.V. NAGARATHNA)
………………………………..J.
(K.V. VISWANATHAN)
NEW DELHI;
SEPTEMBER 24, 2025.
108
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.3577 OF 2008
M/s. U.P. ASBESTOS LIMITED … APPELLANT
VERSUS
STATE OF RAJASTHAN & OTHERS … RESPONDENTS
WITH
CIVIL APPEAL NO.3578 OF 2008
M/s. EVEREST INDUSTRIES LIMITED … APPELLANT
VERSUS
STATE OF RAJASTHAN & OTHERS … RESPONDENTS
AND
CIVIL APPEAL NO.2692 OF 2013
M/s. U.P. ASBESTOS LIMITED … APPELLANT
VERSUS
STATE OF RAJASTHAN & OTHERS … RESPONDENTS
Signature Not Verified
Digitally signed by
BORRA LM VALLI
Date: 2025.09.24
19:44:33 IST
Reason:
1
J U D G M E N T
NAGARATHNA, J.
I N D E X
Bird’s Eye View of the Controversy: ...................................... 4
Factual Background: ........................................................... 6
Submissions: ...................................................................... 12
Points for Consideration: ................................................... 21
Relevant Constitutional Provisions: .................................... 21
Atiabari Tea Co. Ltd.: ........................................................ 23
Automobile Transport Ltd.: ................................................ 32
Firm Mehtab Majid: ............................................................ 35
Kalyani Stores: ................................................................... 39
Weston Electronics:............................................................ 41
Video Electronics: .............................................................. 43
Shree Mahavir Oil Mills: ..................................................... 51
Loharn Steel Industries Ltd.: .............................................. 57
Laxmi Paper Mart: .............................................................. 58
Digvijay Cements: .............................................................. 59
Jaiprakash Associates: ....................................................... 61
Jindal Stainless Ltd.: .......................................................... 67
Discussion from Overseas Case Law: ................................... 83
Application of the Analysis to the Present Case: ................. 87
2
Since these Civil Appeals involve common questions of facts
and law, they have been heard and are disposed of by this common
judgment.
2. The instant appeals have been preferred by the appellants-
assessees against the following three separate orders of the High
Court of Judicature for Rajasthan at Jaipur:
i) Order dated 02.08.2007 in D.B. Civil Writ Petition
No.3580/2007;
ii) Order dated 23.08.2007 in D.B. Civil Writ Petition
No.2222/2007; and
iii) Order dated 05.09.2012 in D.B. Civil Writ Petition
No.4447/2011.
2.1 All the three Writ Petitions were dismissed on the basis of
reasons given in judgment and order dated 02.08.2007 in D.B.
Civil Writ Petition No.3506/2007 titled M/s. Hyderabad
Industries Ltd. vs. State of Rajasthan and Ors. (“Hyderabad
Industries”) passed by the High Court of Judicature for Rajasthan.
Aggrieved by the orders of dismissal, the appellants are before this
Court.
3
Bird’s Eye View of the Controversy:
3. Briefly stated, the issue for determination in these appeals
concern the validity of the impugned Notification No. S.O.377,
dated 09.03.2007, issued by the Government of Rajasthan in
exercise of its powers conferred by Section 8(3) of the Rajasthan
Value Added Tax Act, 2003 (“2003 Act”, for short). Specifically, the
issue concerns whether Notification No.S.O.377 dated 09.03.2007
issued by Respondent State granting exemption from payment of
Value Added Tax on sale of asbestos cement sheets and bricks,
manufactured in the State of Rajasthan, having contents of fly ash
25% or more by weight subject to specific conditions, is violative of
Article 304(a) of the Constitution of India being discriminatory vis-
à-vis goods imported from outside the State of Rajasthan.
3.1 The notification, in effect, exempted from tax the
manufacturers within the State of Rajasthan of asbestos cement
sheets and bricks having content of fly ash 25% or more.
Specifically, the challenge concerned sub-clauses (ii) and (iii) of the
above notification, on the ground, inter alia, that they violate free
movement of trade and commerce as envisaged in Articles 301 to
304 of the Constitution of India.
4
3.2 For immediate reference, the notification dated 09.03.2007 is
extracted below:
“FINANCE DEPARTMENT
(TAX DIVISION)
NOTIFICATION
JAIPUR, MARCH 9, 2007
S.O.377 – In exercise of the powers conferred by sub-
section (3) of section 8 of the Rajasthan Value Added Tax
Act, 2003 (Rajasthan Act No.4 of 2003), the State
Government being of the opinion that it is expedient
in the public interest so to do , hereby exempts from
payment of tax the sale of asbestos cement sheets and
bricks manufactured in the State having contents of fly
ash twenty five percent or more by weight, on the following
conditions, namely:-
(i) that the goods shall be entered in the registration
certificate of the selling dealer.
(ii) that the exemption shall be for such goods
manufactured by the dealer who commenced
commercial production in the State by
31.12.2006; and
(iii) that the exemption shall be available up to
23.01.2010.
No.F.12 (28) FD/Tax/2007/141)
By Order of the Governor
(Arun Gupta)
Deputy Secretary to Government”
(emphasis supplied by us)
5
3.3 In the course of the determination, this Court is also required
to examine the applicability of the judgment of this Court in Video
Electronics Pvt. Ltd. vs. State of Punjab, (1989) Supp. 2 SCR
731 (“Video Electronics”) to the facts of this case, especially in
light of the nine-Judge Constitution Bench judgment of this Court
in Jindal Stainless Ltd. vs. State of Haryana, (2017) 12 SCC 1
(“Jindal Stainless Ltd.”).
Factual Background:
4. The facts emanating from all the three appeals are similar.
The appellants herein are engaged in the business of manufacture
and sale of fly ash based asbestos cement products. They do not
have their manufacturing units in the State of Rajasthan, but have
their sales depots in the State. These sales depots are duly
registered with the Commercial Tax Department under Central and
local State Tax Acts.
4.1 Initially, the State of Rajasthan issued a notification dated
24.01.2000 under the erstwhile Section 15 of the Rajasthan Sales
Tax Act, 1994 (hereinafter “1994 Act”) in the form of exemption
from sales tax, to encourage industries of asbestos cement sheets
6
and bricks manufactured in the State by an industrial unit having
fly ash as its main raw material on certain conditions mentioned
therein. The benefit was given to industries starting commercial
production upto 31.12.2001 and the notification was to remain in
force upto 23.01.2010.
4.2 In supersession of the above notification dated 24.01.2000,
another notification dated 16.03.2005 was issued to exempt from
tax the sale of asbestos cement sheets and bricks manufactured in
the State by an industrial unit having fly ash as its main raw
material on the condition that such fly ash shall constitute 25% or
more in content by weight of such asbestos cement sheets or
bricks. The benefit was given to industries starting commercial
production by 31.12.2006 and the notification was to remain in
force upto 23.01.2010. Admittedly, the above notifications dated
24.01.2000 and 16.03.2005 were never challenged by the
appellants herein before any forum.
4.3 From 01.04.2006, the Rajasthan Value Added Tax Act, 2003
(hereinafter “VAT Act”) came into operation on repeal of the 1994
Act. In order to continue the operation of the above-mentioned
7
notifications issued under the 1994 Act, the State issued
notifications dated 01.06.2006 and 05.07.2006 under Section 8 of
the VAT Act which are in pari materia to Section 15 of the 1994 Act.
4.4 The above notifications dated 01.06.2006 and 05.07.2006
were challenged by one of the appellants herein before the
Rajasthan High Court in W.P.No.7149 of 2006. While the matter
was pending, the State Government withdrew the notification dated
05.07.2006 and issued the impugned notification dated
09.03.2007. It is relevant to note that, under this notification also,
the benefit was given to industries starting commercial production
by 31.12.2006 and the notification was to remain in force upto
23.01.2010. This notification was challenged before the Rajasthan
High Court in D.B. Civil Writ Petition Nos.3580/2007 and
2222/2007 and the impugned judgments were passed on
02.08.2007 and 23.08.2007 respectively.
4.5 While the present appeals were pending before this Court, the
State by way of notification dated 28.12.2010 amended clause (iii)
of the impugned notification dated 09.03.2007 as follows:
8
“(iii) that maximum exemption benefits shall be available
for 10 years from the date of commencement of first
commercial production, but in no case exemption shall be
available after 23.1.2016.”
4.6 One of the appellants herein, namely M/s. U.P. Asbestos Ltd.,
filed a writ petition being D.B. Civil Writ Petition No.4447/2011
challenging the notification dated 28.10.2010. The said writ
petition was also dismissed by way of impugned order dated
05.09.2012.
4.7 As the High Court dismissed all the three writ petitions by the
impugned orders based on the judgment of that Court in
Hyderabad Industries, it is necessary to dilate the reasoning
provided therein.
4.8 The High Court in Hyderabad Industries first discussed the
judgments of this Court in Firm A.T.B. Mehtab Majid and Co. vs.
State of Madras, (1963) Supp. 2 SCR 435 (“Firm Mehtab
Majid”); Shree Mahavir Oil Mills vs. State of J&K, (1996)
Supp.9 SCR 356 (“Shree Mahavir Oil Mills”); State of U.P. vs.
M/s Laxmi Paper Mart, (1997) 1 SCR 914 (“Laxmi Paper Mart”);
9
Loharn Steel Industries Ltd. vs. State of Andhra Pradesh,
(1996) Supp. 10 SCR 898 (“Loharn Steel Industries Ltd.”);
Video Electronics and Shree Digvijay Cement Co. Ltd. vs. State
of Rajasthan, (1999) Supp. 5 SCR 428 (“Digvijay Cements”).
4.9 Based on a reading of the above judgments, the High Court
opined that the decision on the question whether, there has been
discrimination between the imported and the local goods depends
on diverse factors. That where there is no intentional
discrimination but the concession from sales tax is given in respect
of goods manufactured in a particular State which is not so
developed, in furtherance of economic development and where
such concession is granted to new industries for a specific time
which came into existence for a specific period, such concession or
exemption may not offend Part XIII of the Constitution of India.
4.10 The High Court also observed that there was no challenge
either to the constitutional validity of Section 8 of the VAT Act or
to the notifications dated 24.01.2000 and 16.03.2005 which were
on identical terms to the impugned notification. That there is no
dispute that fly ash coming out of thermal power plants is
10
abundantly available in the State of Rajasthan and is not
unreasonable to presume that the State Government gave
incentives for asbestos manufacturing plants within the State of
Rajasthan to promote the use of fly ash as raw material for the
production of asbestos cement sheets and bricks.
4.11 The High Court further noted that it was for the above
reason that way back in the year 2000, the State Government
passed the notification dated 24.01.2000 and that the benefit was
extended from time to time. It accepted the stand of the State that
it was bound even otherwise by the principle of promissory estoppel
to continue with the exemption since in the notification dated
24.01.2000 itself, the benefit was to continue until 23.01.2010.
4.12 The High Court acknowledged that this Court in Shree
Mahavir Oil Mills distinguished Video Electronics . However, the
High Court noted that Shree Mahavir Oil Mills justified the
decision in Video Electronics to grant exemption to a special class
for a limited period on specific conditions when there are justifiable
and national reasons for differentiation.
11
4.13 Hence, the High Court held that the impugned notification,
in the backdrop of earlier notifications dated 24.01.2000 and
16.03.2005, fell within the exceptional category covered in Video
Electronics and hence cannot be held to be offending Article
304(a) of the Constitution of India. Therefore, the question would
also arise as to whether the Rajasthan High Court decided
Hyderabad Industries correctly.
Submissions:
5. Learned senior counsel Sri Nikhil Goel appearing for the
appellant M/s U.P. Asbestos Ltd. and Smt. Kavita Jha appearing
for appellant M/s. Everest Industries Ltd., strenuously argued that
the impugned notification was unconstitutional and violated
Article 304(a) of the Constitution of India. To substantiate, the
following submissions were put forth:
5.1 That the impugned notification is discriminatory in nature
and falls foul of Article 304(a) of the Constitution of India as it did
not provide for any reason for the blanket exemption from payment
of tax provided to locally manufactured goods in the State of
Rajasthan as compared to goods imported from outside the State.
12
In this regard, they relied on Shree Mahavir Oil Mills, Laxmi
Paper Mart , and Anand Commercial Agencies vs. Commercial
Tax Officer VI Circle, Hyderabad, (1998) 1 SCC 101 .
5.2 Referring to the text of the impugned notification, it was
contended that it does not require the industries within the State
to only manufacture or procure fly ash from within the State. That
the lack of such a requirement ex-facie falsifies the justification of
the State that the exemption provided for in the impugned
notification was to encourage industries to utilise the excess fly ash
from the State. They further contended that arguendo , even if the
impugned notification required the fly ash to be purchased within
the State of Rajasthan, the notification would still have to be
quashed in light of the judgment of this Court in State of U.P. vs.
Jaiprakash Associates Ltd., (2014) 4 SCC 720 (“Jaiprakash
Associates”).
5.3 Reliance was placed on the observations of the nine-Judge
bench judgment in Jindal Stainless Ltd. to contend that the
differentiation made through the impugned notification was
intended or inspired by an element of unfavourable bias in favour
13
of the goods produced or manufactured in the State of Rajasthan
as against those imposed from outside. They submitted that, in
Jindal Stainless Ltd. , this Court held that every differentiation is
discrimination if it involved an element of “intentional and
unfavourable bias”. Learned senior counsel Ms. Kavita Jha also
provided us a summary of the relevant observations in Jindal
Stainless Ltd. which we shall discuss later in this judgment.
5.4 That the High Court was not right in relying on Video
Electronics as the facts of that case are distinguishable. They
highlighted that in Video Electronics, this Court upheld the
notifications impugned therein on the ground that they related to
a specific class of industrial units and that the benefit under the
same was admissible only for a limited period of time. However, in
the present case, the restriction was not limited to a specific class
or period, but such exemption has been extended from time to time
from the year 2000 till the year 2016, to all the old and new dealers
of asbestos sheets, without assigning any reason. Hence, the
finding in paragraph 17 of the judgment in Hyderabad Industries
that the exemption was only to a limited class, i.e. those who
commenced production by 31.12.2006 and was only for a limited
14
period, i.e. till 23.01.2010 was not accurate. Rather, they
contended that the facts of the present case are akin to that in
Shree Mahavir Oil Mills and Jaiprakash Associates.
5.5 Learned senior counsel also sought to repel the objection
that the appellants herein had not challenged the earlier
notifications by relying on the dictum in Shree Mahavir Oil Mills
that there can be no estoppel or acquiescence in a matter relating
to constitutional rights of citizens.
5.6 Referring to the submission of the State in its reply before
the High Court, they contended that the only justification put forth
by them was that it was empowered to grant exemption to a class
of industries to boost industrialisation within its State. The learned
senior counsel questioned this rationale by submitting that if the
same was accepted as a general proposition justifying
discrimination between two States while applying a tax regime,
such proposition would practically nullify the entire Chapter XIII
of the Constitution. That every State would then exempt local
manufacturers from tax simply by saying that it wants to boost
industrial growth. They submitted that Article 301 of the
15
Constitution cannot be stretched to its unnatural limits to justify
such a vague rationale.
6. In response to the above submissions, learned senior counsel
Dr. Manish Singhvi made the following submissions:
6.1 Highlighting the implications of the Constitution Bench
judgment in Jindal Stainless Ltd., it was contended that the
plenary power to tax under Articles 245 and 246 of the Constitution
read in conjunction with the Entries in the Seventh Schedule to
the Constitution is per se not subject to Article 301 of the
Constitution. That the plenary power is restrained only if it
discriminates in terms of Article 304(a) of the Constitution.
6.2 That, in Jindal Stainless Ltd. , this Court upheld the ratio
laid down in Video Electronics . He highlighted that, so long as the
differentiation made by the States is not intended to create an
unfavourable bias and so long as the differentiation is intended to
benefit a distinct class of industries and the life of the benefit is
limited in terms of period, the benefit must be held to flow from a
legitimate desire to promote industries within its territories. That
this Court also distinguished Shree Mahavir Oil Mills by noting
16
that if the incentive/exemption in taxation to spur industrialisation
was for a limited period and for achieving some objective, then it
shall not be violative of Article 304(a) of the Constitution.
6.3 Our attention was drawn to the observations of this Court
in Digvijay Cements wherein this Court stated that all States have
powers to grant exemption to specified class of goods for a limited
period and that such grant of exemption cannot be held to be
contrary to the concept of economic unity. It was submitted that
the power to grant exemptions is thus a dynamic concept and they
must be viewed at keeping in mind the overall objectives sought to
be achieved.
6.4 Learned senior counsel for the State of Rajasthan submitted
that, after the judgment in Jindal Stainless Ltd., it is not clear if
the ratio in Jaiprakash Associates still holds field. He referred to
paragraph 32 of the judgment in Jaiprakash Associates to
contend that it relied on the judgment rendered in Atiabari Tea
Co. Ltd. vs. State of Assam, AIR 1961 SC 232 (“Atiabari Tea
Co. Ltd.”) , which was partly overruled in Jindal Stainless Ltd.
17
6.5 Dealing with the facts of the case, learned senior counsel
submitted that prior to the notification dated 24.01.2000, there
was no asbestos sheet plant/industry in the State of Rajasthan.
That fly ash is an abundant raw material available in the State and
the intention of the exemption from sales tax was to promote the
use of fly ash coming out of thermal power plants as a raw material
for the production of asbestos cement sheets and bricks for which
there was no manufacturing plant in the State. He also submitted
that various notifications issued by the Ministry of Environment
and Forests required the compulsory use of fly ash and hence the
exemption as provided in the impugned notification was envisaged.
That additionally, having contents of fly ash twenty five percent or
more in asbestos sheets by weight also improves the environment
which was another laudable objective.
6.6 Learned senior counsel also submitted that if such an
exemption was not granted, then no asbestos sheet industry would
have come to the State of Rajasthan and the fly ash in the State
would go unutilised/unused, considering huge transportation
costs associated with transporting fly ash. That the economics of
transportation itself would repel any argument that the
18
notifications did not specifically require the manufacturers to
utilise the fly ash generated in the State. He also submitted that, it
was not the case of the appellants herein that they would use the
fly ash manufactured in the State of Rajasthan, despite having
manufacturing units elsewhere.
6.7 For the above reasons, Dr. Manish Singhvi emphasised that
the exemption provided for in the notification qualifies as
‘differentiation’, rather than discrimination and is saved as per
Article 304(a) of the Constitution.
6.8 To our query that the reasons for the notification could not
be found in the notification itself, learned senior counsel submitted
that the reasons for the notification can be discerned from the
records available and the counter affidavit filed before the High
Court. He therefore drew our attention to the relevant portions in
the counter-affidavit filed by the State before the High Court where
the reasons mentioned above were elucidated. He submitted that
there is presumption of constitutionality of any law enacted by a
State and that the State, though could have provided the reasons
for such an enactment in the notification itself, was not incumbent
19
to so spell out and the same could always be gathered by
surrounding circumstances.
6.9 In response to the submissions of learned senior counsel Dr.
Manish Singhvi, learned senior counsel Ms. Kavita Jha added that
the object behind the impugned notification, as stated by the
learned senior counsel in his submissions, was not provided/
expressed in the impugned notification. That from its bare perusal,
no object, purpose or rationale was mentioned to provide impetus
to any industry but on the other hand to discriminate among
indigenous goods and imported goods.
7. Learned senior counsel for the appellants relied on the
judgment of this Court in Mohinder Singh Gill vs. Chief Election
Commissioner, (1978) 1 SCC 405 (“Mohinder Singh Gill”) to
substantiate that any order passed by any public authority
exercising administrative/executive or statutory powers must be
judged by the reasons so mentioned in that order and cannot be
supplemented by fresh reasons in the shape of an affidavit or
otherwise.
20
Points for Consideration:
8. The following points would arise for our consideration:
(i) Whether the High Court was right in dismissing the
writ petitions filed by the appellants herein by holding
that the impugned notification dated 09.03.2007 did
not violate Article 301(a) of the Constitution of India?
(ii) If the answer to point No.(i) is in the negative, then,
what order?
Relevant Constitutional Provisions:
9. Articles 301 to 304, which are under Part XIII of the
Constitution are relevant for our discussion and are extracted as
under:
“301. Freedom of trade, commerce and intercourse.-
Subject to the other provisions of this Part, trade,
commerce and intercourse throughout the territory of
India shall be free.
302. Power of Parliament to impose restrictions on
trade, commerce and intercourse .—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.
303. Restrictions on the legislative powers of the
Union and of the States with regard to trade and
commerce .—(1) Notwithstanding anything in article 302,
21
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 any entry relating to trade
and commerce in any of the Lists in the Seventh Schedule.
(2) Nothing in clause (1) shall prevent Parliament from
making any law giving, or authorising the giving of, any
preference or making, or authorising the making of, any
discrimination if it is declared by such law that it is
necessary to do so for the purpose of dealing with a
situation arising from scarcity of goods in any part of the
territory of India.
304. Restrictions on trade, commerce and
intercourse among States. - Notwithstanding anything in
article 301 or article 303, the Legislature of a State may by
law—
(a) 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; and
(b) impose such reasonable restrictions on the freedom
of trade, commerce or intercourse with or within that State
as may be required in the public interest:
Provided that no Bill or amendment for the purposes of
clause (b) shall be introduced or moved in the Legislature
of a State without the previous sanction of the President.”
10. The significant judgments of this Court on the interpretation
of Articles 301 to 304 could be discussed at this stage.
22
Atiabari Tea Co. Ltd.:
10.1 In Atiabari Tea Co. Ltd., the constitutionality of the Assam
Taxation (on Goods Carried by Roads or Inland Waterways) Act
(Assam Act) 13 of 1954 was questioned in a petition filed under
Article 32 of the Constitution before this Court. The question that
fell for determination in this case was, whether, the said Act
infringed the provisions of Part XIII of the Constitution, with
particular reference to Article 301. While analysing Part XIII of the
Constitution, it was observed that Article 301 was subject to other
provisions of Part XIII and not subject to other provisions of the
Constitution and the generality of the words used in Article 301 is
cut down only by the provisions of the other Articles of Part XIII
ending with Article 307. Article 301 emphatically declares that
trade, commerce and intercourse throughout the territory of India
is free, but there is wide divergence of views on the answer to the
question “free from what”. It was observed that having regard to
the divergence and nature of States in pre-Constitution India, it
was necessary for the abolition of all those trade barriers and tariff
walls so that the entire country was knit into one political unit in
23
the interest of national solidarity, economic and cultural unity as
also of freedom of trade, commerce and intercourse.
10.1.1 Adverting to Article 304, it was observed that the said
Article would show that it is divided into two parts, namely, (i)
dealing with imposition of non-discriminatory taxes by a State
Legislature; and (ii) relating to imposition of reasonable
restrictions, thus showing that imposition of taxes is a class apart
from imposition of reasonable restrictions on freedom of trade,
commerce and intercourse.
10.1.2 It was further observed that if a law is passed by the
Legislature imposing a tax which in its true nature and effect is
meant to impose an impediment to the free flow of trade, commerce
and intercourse, for example, by imposing a high tariff wall, or by
preventing imports into or exports out of a State, such a law is
outside the significance of taxation, as such, but assumes the
character of a trade barrier which it was the intention of the
Constitution-makers to abolish by Part XIII, but taxation on
movement of goods and passengers is not necessarily an
impediment. Article 304, while recognising the power of a State
Legislature to tax goods imported inter-State, insists that a similar
24
tax is imposed on goods manufactured or produced within the
State. The Article thus brings out the clear distinction between
taxation as such for the purpose of revenue and taxation for
purposes of making discrimination or giving preference.
10.1.3 It was observed by Sinha, C.J. that the Union and State
Legislature have the power to legislate by way of taxation in respect
of trade, commerce and intercourse, so as not to erect trade
barriers, tariff walls or imposts, which have a deleterious effect on
the free flow of trade, commerce and intercourse.
10.1.4 Consequently, he did not concur with the majority of the
Court by observing that his reading of Part XIII of the Constitution
did not justify the inference that taxation simpliciter is within the
terms of Article 301 of the Constitution.
10.1.5 The majority judgment delivered by Gajendragadkar, J.
(as he then was) referred to the constitutional background of Part
XIII and observed that prior to 1950, the flow of trade and
commerce was impeded at several points which constituted the
boundaries of Indian States. The main object of Article 301
obviously was to allow the free flow of the stream of trade,
25
commerce and intercourse throughout the territory of India. The
reason being that economic unity was absolutely essential for the
stability and progress of the federal policy which had been adopted
by the Constitution for the governance of the country.
10.1.6 The majority then proceeded to consider whether tax
laws are wholly outside the purview of Part XIII. In this regard,
Cooley's Constitutional Limitations on the power of taxation was
referred to observe that “ the power to impose taxes is one so
unlimited in force and so searching in extent, that the courts scarcely
venture to declare that it is subject to any restriction whatever,
except such as rest in the discretion of the authority which exercises
it ”. (Cooley's Constitutional Limitation Vol. 2, 8th Edn., p.986) . It was
observed that the power of levying tax is essential for the very
existence of the government, its exercise must inevitably be
controlled by the constitutional provisions made in that behalf. It
cannot be said that the power of taxation per se is outside the
purview of any constitutional limitations.
10.1.7 Referring to Ramjilal vs. Income Tax Officer, AIR
1951 SC 97, it was observed that protection against the imposition
and collection of taxes, save by the authority of law, directly comes
26
under Article 265 and cannot be said to be covered by clause (1) of
Article 301. Therefore, levy of a tax per se cannot be a violation of
Article 14 of the Constitution. It was also held that the power to
levy tax would ultimately be based on Article 245 which deals with
the extent of laws made by Parliament and by the Legislatures of
States, as it begins with the words “Subject to the provisions of the
Constitution”. Therefore, the power of Parliament and the
Legislatures of the States to make laws including laws imposing
taxes is subject to the provisions of the Constitution and therefore,
the application of Part XIII also. However, Article 301 which is in
Part XIII is not subject to the other provisions of the Constitution
but is made subject only to other provisions of only Part XIII.
Therefore, once the width and amplitude of the freedom enshrined
in Article 301 are determined, they cannot be controlled by any
provision outside Part XIII. The freedom guaranteed under Article
301 is made subject to the exceptions provided by the other Articles
in Part XIII and is not limited by any other provisions of the
Constitution outside Part XIII. It was also observed that
the legislative competence of the Legislature in question would
have to be judged in light of the relevant Articles of Part XIII. Hence,
27
it was observed that the argument that tax laws are outside Part
XIII, cannot be accepted.
10.1.8 It was noted that the freedom of trade guaranteed by
Article 301 is freedom from all restrictions except those which are
provided by the other Articles in Part XIII. While examining the
other Articles of Part XIII, it was stated that the effect of Article
304(a) is to treat imported goods on the same basis as goods
manufactured or produced in any State; and it authorises tax to be
levied on such imported goods in the same manner and to the same
extent as may be levied on goods manufactured or produced inside
the State. In other words, taxation can be levied by the State
Legislature on goods manufactured or produced within its territory
and it provides that outside goods cannot be treated any worse.
The non-obstante clause referring to Article 301 would go with
Article 304(a) and that tax on goods would not have been
permissible but for Article 304(a) with the non-obstante clause. In
other words, Article 304(a) is another exception to Article 301.
10.1.9 Analysing Article 304(a), it was observed that a tax could
be levied by a State Legislature on goods manufactured or
produced or imported in the State and thereby reasonable
28
restrictions can be placed on the freedom of trade either with
another State or between different areas of the same State. Tax
legislation, thus authorised, must therefore be deemed to be
included in Article 301, for that is the obvious inference from the
use of the non-obstante clause.
10.1.10 It was concluded that while determining the limits of the
width and amplitude of the freedom guaranteed by Article 301, a
rational and workable test should apply and that only such
restrictions as directly and immediately restrict or impede the free
flow or movement of trade, are barred. Therefore, it cannot be held
that all taxes should be governed by Article 301, whether or not
their impact on trade is immediate or mediate, direct or remote.
Thus, an extreme approach cannot be upheld. Therefore, Article
301 envisages that the flow of trade shall run smooth and
unhampered by any restriction either at the boundaries of the
States or at any other points inside the States themselves.
10.1.11 Consequently, it was held that the Assam Act had
imposed a direct restriction on the freedom of trade and since it
had not complied with the provision of Article 304(b), it was
declared to be void.
29
10.1.12 In the said case, Shah, J. in his opinion observed that
the power of taxation is essentially an attribute of the sovereignty
of the State and is not exercised in consideration of the protection
it affords or the benefit that it confers upon citizens and aliens. Its
content is not measured by the apparent need of the amounts
sought to be collected and its incidence does not depend upon the
ability of the citizens to meet the demand. But it is still not an
unrestricted power. By Article 265 of the Constitution, the power
to tax can be exercised by authority of law alone. The power of
taxation has therefore to be exercised by the Legislature strictly
within the limits prescribed by the Constitution and any alleged
transgression either by Parliament or the State Legislature of the
limits imposed by the Constitution is justiciable.
10.1.13 Discussing on the guarantee of freedom of trade and
commerce, it was observed by Shah, J. that the guarantee is not
addressed merely against prohibitions, complete or partial; it is
addressed to tariffs, licensing, marketing regulations, price-
control, nationalisation, economic or social planning,
discriminatory tariffs, compulsory appropriation of goods, freezing
or stand still orders and similar other impediments operating
30
directly and immediately on the freedom of commercial intercourse
as well. It was clarified that what is guaranteed is freedom in its
widest amplitude — freedom from prohibition, control, burden or
impediment in commercial intercourse. Not merely discriminative
tariffs restricting movement of goods are included in the
restrictions which are hit by Article 301, but all taxation on
commercial intercourse even imposed as a measure for collection
of revenue is so hit.
10.1.14 It was also stated that between discriminatory tariffs
and trade barriers on the one hand and taxation for raising revenue
on commercial intercourse, the difference is one of purpose and not
of quality. Both these forms of burden on commercial intercourse
trench upon the freedom guaranteed by Article 301.
10.1.15 While interpreting Article 304(a), it was observed that
the State Legislature has the power to impose tax on the imports
of goods to which similar goods manufactured or produced in the
State are subject, provided that by taxing the goods imported from
another State or Union Territory, no discrimination is practised.
Consequently, Shah, J. held that the Assam Act was infringing the
guarantee of freedom of trade and commerce under Article 301.
31
10.1.16 However, in view of the majority opinion, the writ
petitions were allowed.
Automobile Transport Ltd.:
10.2 A seven-Judge Bench of this Court in Automobile
(Rajasthan) Transport Ltd. vs. State of Rajasthan, AIR 1962
SC 1406 (“ Automobile Transport Ltd.”) heard the appeals
having regard to the importance of the constitutional issues
involved and the views expressed in Atiabari Tea Co. Ltd. while
considering the validity of Rajasthan Motor Vehicles Taxation Act,
1951. The contours of the freedom envisaged under Article 301 was
considered inasmuch as the question, whether, regulatory
measures or compensatory taxes were restrictions on the freedom
of trade came up for consideration and more particularly, the State
law imposing tax on motor vehicles carrying passengers and goods
within or throughout the State. The majority view was expressed
through S.K. Das, J. (as he then was) who observed that the taxes
imposed under the Rajasthan Motor Vehicles Taxation Act, 1951
are compensatory taxes which did not hinder the freedom of trade,
commerce and intercourse assured by Article 301 and hence, the
Act did not violate the provisions of that Article. This was because
32
regulatory measures imposing taxation for use of trading facilities
do not come within the purview of the restrictions contemplated
under Article 301 and such measures need not comply with the
requirements of the proviso to Article 304(b) of the Constitution.
10.2.1 While analysing the issues raised in the said case, it
was observed that those which facilitate trade and commerce are
not a restriction, and those which in reality hampers or burdens
trade and commerce are a restriction. That, it is the substance of
the matter that has to be considered and it is not possible a priori
to draw a dividing line between that which would really be a charge
for a facility provided and that which would really be a deterrent to
a trade; but the distinction is real and clear. For the tax to become
a prohibited tax, it has to be a direct tax, the effect of which is to
hinder the movement part of trade. So long as a tax remains
compensatory or regulatory, it cannot operate as a hindrance. A
working test for deciding whether a tax is compensatory or not is
to enquire whether the trades people are having the use of certain
facilities for the better conduct of their business and paying not
patently much more than what is required for providing the
facilities. It would be impossible to judge the compensatory nature
33
of a tax by a meticulous test, and in the nature of things that
cannot be done. If a statute fixes a charge for a convenience or
service provided by the State or an agency of the State and imposes
it upon those who choose to avail themselves of the service or
convenience, the freedom of trade and commerce may well be
considered unimpaired. In such a case, the imposition assumes
the character of remuneration or consideration charged in respect
of an advantage sought and received.
10.2.2 The minority, speaking through Hidayatullah, J. (as he
then was) observed that a law which prohibits trade, commerce and
intercourse and releases them on the fulfilment of some
unreasonable condition including the payment of an unreasonable
or discriminatory tax will just as much be a restriction offending
the freedom as a tariff wall or any other barrier. No question of pith
and substance in this context arises. Therefore, taxation laws
directly impinging on trade and commerce cannot be upheld on the
ground that they are regulatory. A tax which is made the condition
precedent of the right to enter upon and carry on business is a
restriction on the right to carry on trade and commerce and the
restriction is released on the payment of the tax, which is the price
34
of such release. A regulation of trade and commerce, on the other
hand, may achieve some public purpose which affects trade and
commerce incidentally but without impairing the freedom. It was
observed that the tax is evidently not a fee for administrative
purposes. Therefore, it cannot be justified as representing payment
of services. Its object is the raising of revenue. Therefore, such a
tax is neither a compensatory tax nor a regulatory Act. It was
further held that the said tax offended Article 301 of the
Constitution and since resort to the procedure prescribed by Article
304(b) was not taken, it was ultra vires the Constitution.
Firm Mehtab Majid:
10.3 The validity of Rule 16 of the Madras General Sales Tax
(Turnover and Assessment) Rules, 1939, (hereinafter, called “the
Madras Rules”) was impugned in Firm Mehtab Majid . The
Constitution Bench of this Court, speaking through Raghubar
Dayal, J. noted the contention of the petitioner therein to the effect
that under the impugned rule, tanned hides or skins imported from
outside the State and sold within the State were subject to a higher
rate of tax than the tax imposed on hides or skins tanned and sold
within the State, inasmuch as sales tax on the imported hides or
35
skins tanned outside the State is on their sale price while the tax
on hides or skins tanned within the State, though ostensibly on
their sale price, was, in view of the proviso to clause (ii) of sub-rule
(2) of rule 16, really on the sale price of these hides or skins when
they were purchased in the raw condition and which was
substantially less than the sale price of tanned hides or
skins. Further, for similar reasons, hides or skins imported from
outside the State after purchase in their raw condition and then
tanned inside the State were also subject to higher taxation than
hides or skins purchased in the raw condition in the State and
tanned within the State, as the tax on the former was on the sale
price of the tanned hides or skins and, on the latter, was on the
sale price of the raw hides or skins. Such a discriminatory
taxation was said to offend Article 304(a) of the Constitution.
10.3.1 Taking note of the earlier decision in Atiabari Tea Co.
Ltd., it was observed that in the majority judgment in Automobile
Transport Ltd. , the interpretation of the majority in Atiabari Tea
Co. Ltd. was held to be correct but subject to a clarification. That,
regulatory measures or measures imposing compensatory taxes for
the use of trading facilities do not come within the purview of
36
restrictions contemplated by Article 301. That, such regulatory
measures which do not impede the freedom of trade, commerce and
intercourse and compensatory taxes for the use of trading facilities
are not hit by the freedom declared by Article 301. They are
excluded from the purview of the provisions of Part XIII of the
Constitution for the simple reason that they do not hamper trade,
commerce and intercourse but rather facilitate them. Subba Rao,
J, had also concurred with this view in Automobile Transport
Ltd.
10.3.2 It was observed that taxing laws can be restrictions on
trade, commerce and intercourse, if they hamper the flow of trade
and if they are not what can be termed to be compensatory taxes
or regulatory measures. On the other hand, sales tax, which has
the effect of discriminating between goods of one State and goods
of another, may affect the free flow of trade which offends against
Article 301 and will be valid only if it comes within the terms of
Article 304(a). That Article 304(a) enables the Legislature of a State
to make laws affecting trade, commerce and intercourse by
imposition of taxes on goods from other States if similar goods in
the State are also subjected to similar taxes, so as not to
37
discriminate between the goods manufactured or produced in that
State and the goods which are imported from other States.
10.3.3 Applying the said principles to the said case, it was held
that the effect of the sales tax on tanned hides or skins imported
from outside was that the latter becomes subject to a higher tax
by the application of the proviso to sub-rule (2) of rule 16 of the
Rules, and was discriminatory and unconstitutional and was
hence, struck down.
10.3.4 On the aspect of whether the rule discriminated between
hides or skins imported from outside the State and those
manufactured or produced in the State, this Court examined the
grievance ventilated on the amount of tax levied being different on
account of the existence of a substantial disparity in the price of
the raw hides or skins and of those hides or skins after they had
been tanned, though the rate was the same. It was explained that
if the dealer has purchased the raw hide or skin in the State, he
would have had to pay on the purchase price only. But if the dealer
purchased raw hides or skins from outside the State and tanned
them within the State, he would be liable to pay sales tax on the
sale price of the tanned hides or skins. He too would have had to
38
pay more tax even though the hides and skins were tanned within
the State, merely on account of his having imported the hides and
skins from outside and having not therefore paid any tax under
sub-rule (1). Thus, there was discriminatory nature of tax
imposed. As a result, Rule 16(2) was held to discriminate against
the imported hides or skins which had been purchased or tanned
outside the State and therefore it contravened the provisions of
Article 304(a) of the Constitution. Hence, the petition was allowed
and the State was directed to refund of tax illegally collected from
the petitioner.
Kalyani Stores:
10.4 In Kalyani Stores vs. State of Orissa, AIR 1966 SC 1686,
(“Kalyani Stores”) the notifications issued under Section 27 of the
Bihar and Orissa Excise Act, 1915, imposing countervailing duty
on foreign liquor imported into the State and later enhancing the
duty by another notification, were assailed. The contention of the
appellant therein was that the State could levy under Section 27 of
the said Act duty on excisable articles produced or manufactured
in the State and a countervailing duty on excisable articles
imported into the State, imposed with a view to equalize the burden
39
on the imported articles with the burden on manufactured articles
in the State, but no countervailing duty on liquor imported could
be levied if there was in the year of licence no liquor similar to the
imported liquor manufactured within the State and as there was
no distillery in the State manufacturing "foreign liquor", the levy of
countervailing duty was without authority of law.
10.4.1 It was observed that exercise of power under Article
304(a) can only be effective if the tax or duty imposed on goods
imported from other States and the tax or duty imposed on similar
goods manufactured or produced in that State are such that there
is no discrimination against imported goods. As no foreign liquor
was produced or manufactured in the State of Orissa, the power to
legislate provided under Article 304 was not available and the
restriction which is declared on the freedom of trade, commerce or
intercourse by Article 301 of the Constitution remained unfettered.
Hence, the appeal was partially allowed by this Court by declaring
that the notification enhancing duty on foreign liquor was invalid
as offending Article 304 of the Constitution and therefore
unenforceable. However, the right of the State to enforce the
liability against the appellants to pay duty at the rate prescribed in
40
the earlier notification which held the field, remained however
unaffected.
10.4.2 Hidayatullah, J. (as he then was) however observed that
Article 304(a) was not applicable to the case. That, in the matter
of excise duties, the State Legislature has competence even apart
from Article 304(a) because the power to impose duties of excise on
alcoholic liquors for human consumption produced in the State
and countervailing duties on similar liquors produced outside the
State in India was already conferred by the legislative
list. Therefore, it was held that the notification issued in the year
1961 under Section 27 was valid and the new notification did not
run against any constitutional provision. Therefore, he dismissed
the appeal. However, the majority partially allowed the appeal.
Weston Electronics:
10.5 The case in Weston Electronics vs. State of Gujarat,
(1988) 2 SCC 568 (“Weston Electronics”) concerned
manufacturers of electronic goods, including television sets,
television cameras and television monitors at factories located at
Delhi and the goods sold through sales organisations spread all
41
over India, including the State of Gujarat. The petitioners therein
filed a writ petition before this Court questioning the Notification
dated 29.03.1986 under which the rate of sales tax in respect of
television sets imported from outside the State was reduced from
15 per cent to 10 per cent, and for goods manufactured within the
State the sales tax was reduced to 1 per cent. It was contended that
there was an invidious discrimination which adversely affected the
free flow of inter-State trade and commerce, resulting in a
contravention of Article 301 of the Constitution. It was contended
that the sale of electronic goods manufactured by the petitioner
has been prejudicially affected within the State of Gujarat. Based
on the rulings of this Court in Firm Mehtab Majid as well as in H.
Anraj vs. Government of Tamil Nadu, (1986) 1 SCC 414 (“H.
Anraj”) - wherein this Court struck down the levy of tax imposed
by the State of Tamil Nadu on lottery tickets issued by other States
and sold within the State of Tamil Nadu while exempting from such
levy lottery tickets issued by the Government of Tamil Nadu - the
writ petition was allowed and Notifications dated 23.07.1981 and
29.03.1986 prescribing a lower rate of tax for local manufacturers
42
in respect of television sets and other electronic goods were
quashed.
Video Electronics:
10.6 A three-Judge Bench of this Court decided a batch of writ
petitions filed under Article 32 of the Constitution of India in Video
Electronics . The focus of the said case was on the question of
harmonising the power of different States in the Union of India to
legislate and/or give appropriate directions within the parameters
of the subjects in List II of the Seventh Schedule of the Constitution
with the principle of economic unity envisaged in Part XIII of the
Constitution of India. The provision of exemption/
encouragement/incentives given by different States to boost or
help economic growth and development in those States and in so
doing the attempt of the States to give preferential treatment to the
goods manufactured or produced in those States was also
considered.
10.6.1 In one of the writ petitions, the challenge was to the
constitutional validity of Notification dated 26.12.1985 issued by
the State of Uttar Pradesh under the Uttar Pradesh Sales Tax Act,
1948 as well as subsequent notifications thereunder. The
43
petitioners therein stated that they carried on business of selling
cinematographic films and other equipment in the State of Uttar
Pradesh and in Delhi. They were dealers on behalf of the
manufacturers from outside the said State. In Uttar Pradesh, there
was a single point levy of sales tax. Their contention was that the
Notification dated 26.12.1985 discriminated between the
manufacturers covered by the said Notification who were entitled
to sell the articles manufactured by them without liability to pay
sales tax and the manufacturers in other States and non-
manufacturers of the same article selling the same goods in the
State who were liable to pay sales tax under the local Sales Tax Act.
They contended that they were subjected to gross discrimination
and their business was crippled on account of the said fact and
therefore, they challenged the vires of the said notification under
Articles 14 and 19(1)(g) of the Constitution. However, this Court
opined that the main question was, whether, the said notifications
were valid in light of Part XIII of the Constitution.
10.6.2 This Court speaking through Sabyasachi Mukharji, J.
(as he then was) made a detailed discussion of the judgment
rendered in Atiabari Tea Co. Ltd. and also the decision of this
44
Court in Automobile Transport Ltd. This was also in the context
of whether regulatory measures or measures imposing
compensatory taxes for using trading facilities did not come within
the purview of restrictions contemplated under Article 301.
10.6.3 Reference was made to the case of A. Hajee Abdul
Shakoor & Co. vs. State of Madras, AIR 1964 SC 1729 and to
the observations of this Court in State of Madras vs. N.K.
Nataraja, AIR 1969 SC 147 as well as in Andhra Sugars Ltd.
vs. State of Andhra Pradesh, AIR 1968 SC 599 , wherein it was
reiterated that a sales tax which discriminates against goods
imported from other States may impede the free flow of trade and
is invalid unless protected by Article 304(a) of the Constitution.
10.6.4 It was observed that Part XIII of the Constitution cannot
be read in isolation. That it is part and parcel of a single
constitutional instrument envisaging a federal scheme and
containing a general scheme conferring legislative powers in
respect of the matters relating to List II of the Seventh Schedule on
the States. That the economic development of States to bring in the
constitutional philosophy of equality between the States and
thereby developing the economic unity of India is one of the goals
45
or commitments of the constitutional aspirations. The economic
equality of all the States is as much vital as economic unity. Thus,
it held that the taxes which do not directly or immediately restrict
or interfere with trade, commerce and intercourse throughout the
territory of India, would therefore be excluded from the ambit of
Article 301 of the Constitution. That sales tax has only an indirect
effect on trade and commerce and does not directly impede the free
movement of transport. On the aspect of the imposition of a rate of
tax on goods, it was observed that the free flow of trade between
two States does not necessarily or generally depend upon the rate
of tax alone. Many factors including the cost of goods play an
important role in the movement of goods from one State to another.
Hence, the mere fact that there is a difference in the rate of tax on
goods locally manufactured and those imported would not amount
to hampering of trade between the two States within the meaning
of Article 301 of the Constitution. That, since Article 304(a) and (b)
is an exception to Article 301, resort to an exception will arise only
if the tax impugned is hit by Articles 301 and 303 of the
Constitution. If it is not, then Article 304 will not come into picture
at all. Further, the imposition of a rate of sales tax is influenced
46
by various political, economic and social factors. Prevalence of
differential rate 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. This Court also recalled the
observations in V. Guruviah Naidu & Sons vs. State of Tamil
Nadu, AIR 1977 SC 548 , wherein it was observed that Article
304(a) does not prevent levy of tax on goods; what it prohibits is
such levy of tax on goods as would result in discrimination between
goods imported from other States and similar goods manufactured
or produced within the State. That any discrimination in that
regard would constitute a tariff wall or fiscal barrier and would
thus impede the free flow of inter-State trade and commerce.
10.6.5 This Court further noted that the question as to when
the levy of tax would constitute discrimination would depend upon
a variety of factors including the rate of tax and the item of goods
in respect of the sale of which it is levied. The object is to prevent
discrimination against the imported goods by imposing tax on such
goods at a rate higher than that borne by local goods. It was
observed that every differentiation is not discrimination. This was
because the expression 'discrimination' in Article 304(a) involves
47
an element of intentional and purposeful differentiation thereby
creating economic barrier and involves an element of an
unfavourable bias. That discrimination implies an unfair
classification. When the general rate applicable to the goods locally
made and on those imported from other States is the same, nothing
more is to be shown by the State to dispel the argument of
discrimination under Article 304(a), even though the resultant tax
amount on imported goods may be different.
10.6.6 Further, the question, whether, the power to grant
exemption to specified class of manufacturers for a limited period
on certain conditions would be violative of Article 304(a) was
considered. The contention was that the State should grant
exemption to all goods irrespective of the fact that the goods are
locally manufactured or imported from other States, else it would
be violative of Article 304(a). The aforesaid argument was
contested by the respondent therein by stating that if the
exemptions are based on natural and business factors which do
not involve any intentional bias, the impugned notifications to
grant exemption for limited period on certain specific conditions
cannot be held to be bad in law. Accepting the said argument, it
48
was held that the impugned notification was not violative of the
constitutional provisions since Article 301 did not apply to the
case. Then, Article 304(a), which is an exception to Article 301,
would also not apply. In paragraph 27, it was noted that in the said
case, the general rate applicable to locally made goods was the
same as on the imported goods. Hence, it did not fall within the
exception of Article 304 as it was not hit by Article 301. In
paragraph 28 of the judgment, this Court observed that the
concept of economic barrier must be adopted in a dynamic sense
with changing conditions. That in a federal polity, all the States
have powers to grant exemption to specified class for limited period;
such granting of exemption cannot be held to be contrary to the
concept of economic unity. It was reasoned that the contents of
economic unity by the people of India would necessarily include
the power to grant exemption or to reduce the rate of tax in special
cases for achieving industrial development or to provide tax
incentives to attain economic equality in growth and development.
When all the States have such provisions to exempt or reduce
rates, the question of economic war between the States inter se or
49
economic disintegration of the country as such did not arise.
Therefore, the challenge to the exemption was upheld.
10.6.7 In the very same case, writ petitions concerning the
notification issued by the Punjab Government whereby two
different rates of taxes were provided, were also considered. There
was a differentiation in the rate of tax between the manufacturers
of electronic goods outside the State and those within the State of
Punjab. It was reasoned that the lower rate of tax on those
electronic goods manufactured in the State of Punjab was due to
the prevailing peculiar circumstances of Punjab. It was to attract
new entrepreneurs from other States and within the State to
manufacture within the State of Punjab. Therefore, incentive was
provided for growth of industry in Punjab which had already shifted
to other States.
10.6.8 In view of the above, the concessional rate of tax
introduced was held to be non-discriminatory. Taking note of the
situation in the State of Punjab, it was observed that a backward
State or a disturbed State cannot with parity engage in competition
with advanced or developed States. Even within a State, there are
often backward areas which can be developed only if some special
50
incentives are granted. If the incentives in the form of subsidies or
grant are given to any part of a State so that it may come out of its
limping or infancy to compete as equals with others, that cannot
contravene the spirit and the letter of Part XIII of the Constitution.
However, there must be valid, justifiable and rational reasons for
differentiation. If there is none, it will amount to hostile
discrimination. Consequently, the notification issued by the
Punjab Government under the Punjab General Sales Tax Act was
also upheld.
Shree Mahavir Oil Mills:
10.7 In Shree Mahavir Oil Mills, the facts were that the cost of
production of edible oil in Jammu and Kashmir was higher than in
the adjoining States and as a result, the manufacturers of edible
oil in the adjoining States were able to sell their products in Jammu
and Kashmir at a price lower than the price at which the local
manufacturers were able to sell them. Facing the prospect of
closure, the manufacturers of the edible oil in the State sought
exemption from the levy of sales tax on the sale of their products.
With a view to protect the local edible oil industry, the Government
of Jammu and Kashmir issued SRO 93 of 1991 on 07.03.1991
51
under Section 5 of the Jammu and Kashmir General Sales Tax Act,
1962 directing that “the goods manufactured by a dealer operating
as a small-scale industrial unit in the State and registered with the
Director of Industries and Commerce, Handicrafts or Handloom
Development, subject to certain conditions, shall be exempted from
payment of tax to the extent and for the period specified in the
Schedule forming Annexure A”. The exemption was total and the
period of exemption was five years and later extended by another
five years. This led to the manufacturers of edible oil in other States
being obliged to pay sales tax on the sales effected by them in the
State of Jammu and Kashmir at the rate of four per cent, while the
local manufacturers were totally exempted therefrom. The rate of
tax was thereafter raised from four per cent to eight per cent to be
paid only by the outside manufacturers, while the local
manufacturers were exempt fully. The outside manufacturers
approached the Jammu and Kashmir High Court by way of writ
petitions which were dismissed by both learned Single Judge as
well as by the Division Bench of the High Court, based mainly on
the decision of this Court in Video Electronics.
52
10.7.1 B.P. Jeevan Reddy, J. observed that under Article
304(a), a State Legislature may tax goods imported from other
States/Union Territories but in the process ought not to
discriminate against them vis-à-vis goods manufactured locally.
Therefore, there could not be tax barriers or fiscal barriers, in the
interest of freedom of trade, commerce and intercourse throughout
the territory of India, guaranteed by Article 301. In other words,
for the purpose of encouraging or promoting the local
industries, the weapon of taxation cannot be used to discriminate
against the imported goods vis-à-vis the locally manufactured
goods. That, Part XIII of the Constitution would indicate that no
State would tax its people at a higher level merely with a view to
tax the people of other States at that level. But conversely, there
cannot be “tariff walls” or fiscal barriers in so far as goods
manufactured outside a State and imported into the State is
concerned.
10.7.2 It was further observed that the freedom guaranteed in
Article 301 was “throughout the territory of India” and not merely
between the States as such; the emphasis is upon the oneness of
the territory of India. That, Article 301 was a general provision and
53
Article 304(a) was not really an exception to Article 301, despite the
use of the non-obstante clause but a restatement of a facet of the
very freedom guaranteed by Article 301, namely, power of taxation
by the States.
10.7.3 After referring to several decisions of this Court, in the
context of the judgment Video Electronics on which strong
reliance was placed by the State of Jammu and Kashmir, it was
noted that in the said case there were two notifications impugned
and as already noted above, the said notifications were upheld.
Relying on the said judgment of the three-judge Bench, it was
contended on behalf of the State of Jammu & Kashmir that a State
which is technically and economically weak on account of various
factors should be allowed to develop economically by granting
concessions, exemptions and subsidies to new industries. That, all
parts of the country are not equally developed, industrially or
economically. Further, the power to grant exemption is inherent in
all taxing statutes and the Government cannot be deprived of this
power by invoking Articles 301 and 304. This is because a
backward State or a disturbed State cannot be on par with
advanced or developed States. Even within a State, there are often
54
backward areas which could be developed only if some special
incentives are granted. If there are justifiable and rational reasons
for differentiation, then there will be no hostile discrimination.
10.7.4 Distinguishing the judgment in Video Electronics, it
was observed that the limited exception created in the said
case does not help the State of Jammu & Kashmir for the reason
that exemption concerned herein is neither confined to “new
industries”, nor is circumscribed by other conditions of the nature
stipulated in the Uttar Pradesh notification. That it is not possible
to go on extending the limited exception created in the said
judgment, by stages, which would have the effect of robbing the
salutary principle underlying Part XIII of its substance.
Consequently, it was held that the total exemption granted in
favour of small-scale industries in Jammu and Kashmir producing
edible oil was not sustainable in law. It was also observed that
Article 304(a) of the Constitution shall not be so exercised as to
bring about a discrimination between the imported goods and the
similar goods manufactured or produced in a State. That the clause
deals only with discrimination by means of taxation; it prohibits
it. The prohibition cannot be extended beyond the power of
55
taxation. This means that the States are free to encourage and
promote the establishment and growth of industries within their
States by all such means as they think proper but they cannot, in
that process, subject the goods imported from other States to a
discriminatory rate of taxation, i.e., a higher rate of sales tax vis-à-
vis similar goods manufactured/produced within that State and
sold within that State. The prohibition is against discriminatory
taxation by the States and it matters not how this discrimination
is brought about. The limited exception carved out in Video
Electronics cannot be enlarged, lest it would eat up the main
provision. Placing reliance on Firm Mehtab Majid and the other
cases, it was held that the exemption from payment of sales tax
altogether was discriminatory and prohibited under Article 304(a)
of the Constitution.
10.7.5 Another contention which was urged by the State of
Jammu and Kashmir was to the effect that when the rate of tax
was four percent there was no challenge to the sale but when the
rate of tax climbed to eight per cent there was a challenge and
hence a principle of acquiescence applied. This contention was
repelled by stating that there can be no question of any
56
acquiescence in matters affecting constitutional rights or
limitations. Further, the contention regarding applicability of
Article 14 and there being an intangible difference between locally
produced edible oil and imported edible oil was also retorted. This
Court observed that Article 14 speaks of equality; whereas Article
301 speaks of freedom and Article 304( a ) speaks of uniform
taxation of both the imported goods and the locally produced goods
by the States. However, the consequential direction was that the
declaration of invalidity of the impugned notification was to take
effect from 01.04.1997 and till that date, the impugned notification
was to continue to be effective and operative. Therefore, the
appellants therein were not entitled to claim any amount by way of
refund or otherwise.
Loharn Steel Industries Ltd.:
10.8 In Loharn Steel Industries Ltd. , the facts were that the
appellant therein was a registered dealer of iron and steel in the
State of Andhra Pradesh and purchased iron and steel scraps and
ingots in the said State and sent to a rerolling mill in the State of
Karnataka. The raw material was rerolled and brought back to the
State of Andhra Pradesh and sold therein. The impugned
57
exemption notification impugned therein, as it originally stood
exempted all rerolled finished products sold in the State of Andhra
Pradesh from tax provided tax had been paid in the said State on
the raw material. This exemption was available to rerolled products
which were manufactured even within the said State. There was no
challenge to that portion of the notification. However, the
exemption notification discriminated against goods manufactured
outside the State of Andhra Pradesh by denying exemption to such
goods (manufactured outside the State). This portion was added by
an amendment to the notification. This amendment was struck
down by applying the doctrine of severability on the premise that
it violated Article 304(a) of the Constitution as it was
discriminatory.
Laxmi Paper Mart:
10.9 Exercise books prepared from paper purchased within the
State was exempted from sales tax whereas exercise books
prepared outside the State and brought and sold within the State
was subjected to sales tax. This was held to be in violation of Article
304(a) of the Constitution in Laxmi Paper Mart. Referring to Firm
Mehtab Majid and Shree Mahavir Oil Mills , it was observed that
58
the exemption from payment of tax on locally manufactured goods
vis-à-vis imported goods from other States was discriminatory as it
created a fiscal barrier on the free flow of trade and commerce and
hence, the exemption was struck down as offending Article 301 of
the Constitution.
Digvijay Cements :
10.10 In Digvijay Cements , the challenge was to notification
dated 12.03.1997 issued by the State of Rajasthan under Section
8(5) of the Central Sales Tax Act whereby it reduced the rate of
sales tax on inter-state sale of cement by any dealer from that State
to 4%. The grievance of the petitioner therein was that as a
consequence of such reduction of sales tax, cement from Rajasthan
became much cheaper in the neighbouring States like Gujarat and
that adversely affected the local sale of cement manufactured by
the petitioners therein in Gujarat by reason of higher rate of sales
tax on the local sales within that State. Such reduction of the rate
of tax, it was contended, was contrary to the scheme contained in
Part XIII of the Constitution and was liable to be struck down. The
Constitution Bench of this Court did not agree with the contention
that the impugned notification had the effect of preventing or
59
hindering the free movement of goods from one State to another.
As far as the State of Rajasthan was concerned, it had the opposite
effect. Merely because local rate of tax in the neighbouring States
on the sale of cement was higher than the inter-state sales tax on
the cement sold from the State of Rajasthan cannot lead to the
conclusion that the impugned notification prevented or hindered
the free movement of goods from one State to another.
10.10.1 According to this Court, the impugned notification
increased the movement of cement from the State of Rajasthan to
the other States. There was no barrier as such but there was an
increase in the volume of inter-state trade. Referring to Shri
Digvijay Cement Co. vs. State of Rajasthan, AIR 1997 SC
2609 , it was observed that increase in revenue and its utilisation
for the public of the State can generally be regarded to be in public
interest but that by itself could not be regarded as sufficient, if it
had the effect of going against the policy of the statute and the
object of the constitutional provisions. That Section 8(5) of the
Central Sales Tax Act, 1956 clearly enables the State Governments
to reduce the rate of inter-state sales tax if it is satisfied that it is
necessary to do so in public interest. It was observed that if the
60
reduction of the rate of tax results in increase of revenue and of
industrial activities, providing employment in the industry, it
cannot be said that the notification was not issued in the public
interest. On the other hand, if the lowering of tax adversely affects
the movement of goods from one State to another then, the free
flow of trade would be adversely affected which would be violative
of Article 301 of the Constitution. Consequently, on the facts of the
said case, Shri Digvijay Cement Co. vs. State of Rajasthan, AIR
1997 SC 2609 was overruled.
Jaiprakash Associates:
10.11 A Notification dated 18.06.1997 issued under Section 5
of the Uttar Pradesh Trade Tax Act, 1948 (“UP Act”) was the centre
of controversy in Jaiprakash Associates. The substantial
question of law that was considered was, whether, grant of rebate
of tax by the Uttar Pradesh State Government by issuance of a
notification under Section 5 of the UP Act, discriminated between
the goods imported from neighbouring States and goods
manufactured and produced in the State of Uttar Pradesh
contravened the constitutional provisions of Articles 301 and
304( a ) of the Constitution of India.
61
10.11.1 The appellants therein were public limited companies,
manufacturing cement in their manufacturing units in Rewa
District situated in the State of Madhya Pradesh after procuring fly
ash from the thermal power stations in the State of Uttar Pradesh
and thereafter selling the manufactured product, namely, cement,
in the districts of the State of Uttar Pradesh. Utilisation of fly ash
so as to control its pollution led to cement projects being set up to
make use of the fly ash generated from the power plants. To
encourage manufacturers using fly ash in manufacturing of their
products, the Government of Uttar Pradesh by Notification dated
18.06.1997, granted “rebate of tax” to the dealers in the State of
Uttar Pradesh excluding all other dealers manufacturing cement
outside the State of Uttar Pradesh using fly ash purchased in the
State of Uttar Pradesh. The said notification provided the names of
the districts and the period for which the rebate was allowed. The
second Notification dated 27.02.1998 was issued by the
Government of Uttar Pradesh which was rescinded by issuing a
Notification dated 14.10.2004. Aggrieved by the Notification dated
27.02.1998, the cement industries situated in the neighbouring
States approached the Allahabad High Court by filing writ petitions
62
and seeking quashing of Condition I of the Notification dated
27.02.1998, which were dismissed.
10.11.2 Two issues fell for consideration before this Court which
could be epitomised as under:
“Firstly, whether the grant of rebate of tax was hit by the
constitutional limitation on the State Legislature under
Article 304(a) read with Article 301 of the Constitution of
India, as and when it discriminated between the imported
goods and the goods manufactured and produced outside
the State.
The second issue that arose was, whether the grant of
rebate, directly or indirectly, restricted the free flow of
trade, commerce and intercourse among States by
assuming the effects of an exemption/concession which is
nothing but a concept within the scope of taxation.”
10.11.3 Discussing on Chapter XIII of the Constitution, it was
observed that Article 304(a) does not prevent levy of tax on goods;
what is prohibited is such levy of tax on goods as would result in
discrimination between goods imported from other States and
similar goods manufactured or produced within the State. The
object was to prevent imported goods being discriminated against
by imposing a higher tax thereon than on local goods. Thus, the
rate of taxation on local as well as imported goods must be the
same so as to discourage the States from creating fiscal barriers.
63
10.11.4 It was noted that the principle of “non-discriminatory
tax” is a sine qua non to free movement of goods between States as
provided in Article 304(a) of the Constitution of India. Thus, the
power given to the State under the said clause is not a blanket
power but is restrictive, although it is an exception to Article 301.
Observing thus, it was noted that in order to ascertain
discrimination under Article 304(a), the effect of the tax on the flow
of the goods from outside the taxing statute has to be taken into
consideration and whether the overall effects of rebate of tax is
such that they fall within the meaning of “concessional rate of tax”.
10.11.5 Delineating on the concept of rebate of tax and its overall
impact on the trade, commerce and intercourse, it was observed
that a rebate is a “discount”, i.e., to allow a deduction from a gross
amount. It is a discount repaid to the payer. A rebate of tax can
also be akin to concessional / reduced rate of tax. That in the said
case, the controversy concerned the grant of rebate up to the full
amount of the tax levied on any specific point in the series of
sales/purchase of goods. Such rebate was only extended to the
districts in the State of Uttar Pradesh. The question was, whether,
this was a weapon of taxation that was discriminatory between the
64
goods imported and manufactured in Uttar Pradesh as laid down
in Article 304(a) of the Constitution. While observing that this
Court in Shree Mahavir Oil Mills clarified the exception carved
out by the three-judge bench in Video Electronics, it was held
necessary to ascertain whether the particular exemption granted
by the State affected Articles 301 and 304. This Court noted that
Article 304(a) is a provision that deals with taxation to limit the
power of taxation by the State so as to prevent discrimination
against imported goods by imposing taxes on such goods at a
higher rate than is borne by indigenous goods. It was observed that
if the rebate of tax by way of repayment to the full amount of tax
levied qualified within the same meaning as that of exemption,
then the same would a fortiori mean discrimination on the rate of
tax by repaying by way of a rebate to one class of local dealers the
whole amount of sales tax paid and on the other hand the outside
dealers are taxed higher in the absence of the benefit of rebate. This
was held to be “discrimination” within the meaning of Article 304(a)
of the Constitution.
10.11.6 On the aspect of exemption from tax, it was noted that
it has a twofold impact: first, exemptions/concessional rate of tax
65
affect consumer choice by impacting relative pricing and therefore,
materially altering the economic balance. Since consumption
tends to shift towards the items which are not taxed, the prices of
those items and the raw materials used to produce them would
increase while the prices of taxed items would decrease relatively;
second , such exemptions unfairly burden some businesses either
within the same industry or in other competing industries.
10.11.7 Speaking about rebate, it was observed that it is another
device used by the Government which, when given on the rate of
tax to the full amount of tax levied, gives favourable treatment to
one class of dealers situated within the State barring the dealers
similarly placed outside the State manufacturing goods using the
same raw material. Then, grant of such rebate has the colour of
exemption/concessional rate of tax along with the same deleterious
effects of an exemption. While considering Article 304(a) in the
context of whether rebate is within the realm of tax defined under
the said clause so as to say that it discriminates between the two
classes of goods, namely, locally manufactured goods and the
imported goods when both the classes of dealers meet the
conditions required to qualify for the grant of rebate i.e. the use of
66
fly ash, the Court noted that the overall effect or impact of such
rebate would be on the manufacturer. Following the judgments of
Firm Mehtab Majid; W.B. Hosiery Assn. vs. State of Bihar,
(1988) 4 SCC 134 (“W.B. Hosiery Assn.”) and H. Anraj, the issue
with regard to the disparity between the locally manufactured
goods within the State and those manufactured in other States
were discussed in light of the facts of those cases. It was observed
that the rebate of tax being in the nature of an exemption in the
instant case was discriminatory and violative of Article 304(a) of
the Constitution of India.
Jindal Stainless Ltd.:
10.12 Jindal Stainless Ltd. is a nine-Judge Bench decision
of this Court wherein by a majority, this Court, inter alia, observed
as under:
“1159.1. Taxes simpliciter are not within the
contemplation of Part XIII of the Constitution of India. The
word “free” used in Article 301 does not mean “free from
taxation”.
1159.2. Only such taxes as are discriminatory in nature
are prohibited by Article 304( a ). It follows that levy of a
non-discriminatory tax would not constitute an infraction
of Article 301.
1159.3. Clauses ( a ) and ( b ) of Article 304 have to be read
disjunctively.
67
1159.4. A levy that violates Article 304( a ) cannot be saved
even if the procedure under Article 304( b ) or the proviso
thereunder is satisfied.
1159.5. The Compensatory Tax Theory evolved
in Automobile Transport (Rajasthan) Ltd. v. State of
Rajasthan , AIR 1962 SC 1406 : (1963) 1 SCR 491 and
subsequently modified in Jindal Stainless Ltd.
(2) v. State of Haryana, (2006) 7 SCC 241 has no juristic
basis and is therefore rejected.
1159.6. The decisions of this Court in Atiabari Tea Co.
Ltd. v. State of Assam, AIR 1961 SC 232 : (1961) 1 SCR
809 , Automobile Transport (Rajasthan) Ltd. v. State
of Rajasthan, AIR 1962 SC 1406 : (1963) 1 SCR 491
and Jindal Stainless Ltd. (2) v. State of Haryana,
(2006) 7 SCC 241 cases and all other judgments that
follow these pronouncements are to the extent of such
reliance overruled.
xxx
1159.8. Article 304( a ) frowns upon discrimination (of a
hostile nature in the protectionist sense) and not on mere
differentiation. Therefore, incentives, set-offs, etc. granted
to a specified class of dealers for a limited period of time in
a non-hostile fashion with a view to developing
economically backward areas would not violate Article
304( a ). The question whether the levies in the present case
indeed satisfy this test is left to be determined by the
regular Benches hearing the matters.”
10.12.1 The question formulated by this Court for determination
by the nine-Judge Bench which are relevant to the present case
read as under:
“(i) Can the levy of a non-discriminatory tax per se
constitute infraction of Article 301 of the Constitution of
India?”
68
10.12.2 While answering these questions, the majority, speaking
through Thakur, C.J., discussed whether levy of a tax is an
attribute of sovereignty and if so, whether Article 246 of the
Constitution recognises the sovereign power of the State to make
laws including the power to levy taxes on subjects enumerated in
List II of the Seventh Schedule to the Constitution. While holding
that power to levy taxes is an essential attribute of sovereignty, it
was observed that constitutional provisions relating to the power
of taxation do not operate as grants of the power of taxation to the
Government but instead merely constitute limitations upon a
power which would otherwise be practically without limit. Since
Article 265 of the Constitution provides that no tax shall be levied
or collected except by authority of law, it would be necessary to
first enquire whether the legislature which passes the Act was
competent to pass it or not. Thus, power to tax being an incident
of sovereignty, however, under the Constitution, is circumscribed
by Articles 245, 246 and 265. In other words, the exercise of
sovereign power of taxation is subject to constitutional limitation
in a federal system like in India where the Union as well as the
69
States have the power to make laws including laws that levy taxes,
duties and fees, however, within the extent permissible under the
Constitution.
10.12.3 These constitutional limitations on the power of the
State Legislatures to levy taxes or for that matter enact laws are
mentioned by way of relevant Entries of Lists II and III of the
Seventh Schedule (there being no taxation in Entry of List III).
Further, there are other provisions which provide for the
constitutional limitations in the matter of taxation to be levied by
the Union or the State which is not necessary to advert to in the
present case.
10.12.4 After analysing other Articles in Part XIII of the
Constitution, the Court dealt with Article 304 that deals with
restrictions on trade, commerce and intercourse among States
which could be made by the Legislature of a State. It was observed
that Article 304(a) does not treat tax as a restriction so that any
such levy may fall foul of Article 301. In fact, Article 304(a)
recognises the State Legislature’s competence to impose a tax on
goods imported from other States or the Union Territories.
However, the power to tax goods imported from other States or
70
Union Territories is not unqualified or unrestricted. That there are
two restrictions on the power. The words “to which similar goods
manufactured or produced in that State are subject” impose the first
restriction on the power of the State Legislature to levy such tax.
These words would imply that a tax on import of goods from other
States will be justified only if similar goods manufactured or
produced in the State are also taxed. The second restriction comes
from the expression “ so, however, as not to discriminate between
goods so imported and goods so manufactured or produced ”. The
State Legislature cannot in the matter of levying taxes discriminate
between goods imported from other States and those manufactured
or produced within the State levying such a tax. The net effect of
Article 304(a) therefore is that while levy of taxes on goods imported
from other State and the Union Territories is clearly recognised as
constitutionally permissible, the exercise of such power is subject
to the two restrictive conditions referred to above. That does not
however detract from the proposition that levy of taxes on goods
imported from other States is constitutionally permissible so long
as the State Legislatures abide by the limitations placed on the
exercise of that power. To put it differently, levy of taxes on import
71
of goods from other States is not by itself an impediment under the
scheme of Part XIII or Article 301 appearing therein.
10.12.5 The next question, namely, whether clauses (a) and (b)
of Article 304 have to be read conjunctively or disjunctively was
also considered.
10.12.6 It was observed that clauses (a) and (b) of Article 304
deal with two distinct subjects and must, therefore, be understood
to be independent of each other. While clause (a) deals entirely with
imposition of taxes on goods imported from other States, clause (b)
deals with imposition of reasonable restriction in public interest.
The use of the word “and” between clauses (a) and (b) does not
admit of an interpretation that may impose an obligation upon the
legislature to necessarily impose a tax and a restriction together.
The word “and” can mean “or” as well as “and” depending upon the
context in which the law enacted by the legislature uses the same.
Levy of taxes do not constitute a restriction under Part XIII except
in cases where the same are discriminatory in nature. In paragraph
76, the discussion was summarised as under:
72
“76. The sum total of what we have said above regarding
Articles 301, 302, 303 and 304 may be summarised as
under:
76.1. Freedom of trade, commerce and intercourse in
terms of Article 301 is not absolute but is subject to the
provisions of Part XIII.
76.2. Article 302 which appears in Part XIII empowers
Parliament to impose restrictions on trade, commerce and
intercourse in public interest.
76.3. The restrictions which Parliament may impose in
terms of Article 302 cannot however give any preference to
one State over another by virtue of any entry relating to
trade and commerce in any of the Lists in the Seventh
Schedule.
76.4. The restriction that Parliament may impose in terms
of Article 302 may extend to giving of preference or
permitting discrimination between one State over another
only if Parliament by law declares that a situation arising
out of scarcity of goods warrants such discrimination or
preference.
76.5. Article 304( a ) recognises the availability of the power
to impose taxes on goods imported from other States, the
legislative power to do so being found in Articles 245 and
246 of the Constitution.
76.6. Such power to levy taxes is however subject to the
condition that similar goods manufactured or produced in
the State levying the tax are also subjected to tax and that
there is no discrimination on that account between goods
so imported and goods so manufactured or produced.
76.7. The limitation on the power to levy taxes is entirely
covered by clause ( a ) of Article 304 which exhausts the
universe insofar as the State Legislature's power to levy of
taxes is concerned.
73
76.8. Resultantly, a discriminatory tax on the import of
goods from other States alone will work as an impediment
on free trade, commerce and intercourse within the
meaning of Article 301.
76.9. Reasonable restrictions in public interest referred to
in clause ( b ) of Article 304 do not comprehend levy of taxes
as a restriction especially when taxes are presumed to be
both reasonable and in public interest.”
10.12.7 Thus, it was held that Article 304(b) of the Constitution
does not deal with taxes as restrictions. That those restrictions
referred to in that provision are non-fiscal in nature. Therefore, any
constitutional validity of any taxing statute has to be tested only
on the anvil of Article 304(a) and if the law is found to be non-
discriminatory, it can be declared to be constitutionally valid
without the legislation having to go through the test of the process
envisaged by Article 304(b). Should, however, the statute fail the
test of non-discrimination under Article 304(a), it must be struck
down for the same cannot be sustained even if it had gone through
the process stipulated by Article 304(b). This is because what is
constitutionally impermissible in terms of Article 304(a) cannot be
validated and sanctioned through the medium of Article 304(b).
Any challenge to a fiscal enactment on the touchstone of Article
304(a) must be tested by the same standard as in the decision of
74
this Court in Kathi Raning Rawat vs. State of Saurashtra, AIR
1952 SC 123. The Court ought to examine whether the
differentiation made is intended or inspired by an element of
unfavourable bias in favour of the goods produced or
manufactured in the State as against those imported from outside.
If the answer be in the affirmative, the differentiation would fall foul
of Article 304(a) and may tantamount to discrimination.
Conversely, if the Court were to find that there is no such element
of intentional bias favouring the locally produced goods as against
those from outside, it must go further and see whether the
differentiation would be supported by valid reasons. This is
because discrimination without reason would be unconstitutional
whereas discrimination with reason may be legally acceptable.
10.12.8 Regarding the decision in Video Electronics, it was
observed that the differentiation made was supported by reasons.
It was observed that power to grant exemption is a part of the
sovereign power to levy taxes which cannot be taken away from the
States that are otherwise competent to impose taxes and duties. It
was further observed that Video Electronics , therefore, correctly
states the legal position as regards the approach to be adopted by
75
the courts while examining the validity of levies. So long as the
differentiation made by the States is not intended to create an
unfavourable bias and so long as the differentiation is intended to
benefit a distinct class of industries and the life of the benefit is
limited in terms of period, the benefit must be held to flow from a
legitimate desire to promote industries within its territory. In this
context, Shree Mahavir Oil Mills was held
distinguishable inasmuch as the manufacturers of edible oil
therein were exempt totally and unconditionally while other
manufacturers from outside the State were not so exempt.
Referring to several other decisions, in paragraph 144 of the
judgment, it was observed that so long as the intention behind the
grant of exemption/adjustment/credit is to equalise the fall of the
fiscal burden on the goods from within the State and those from
outside the State, such exemption or setoff will not amount to
hostile discrimination offensive to Article 304(a).
10.12.9 Bobde, J. (as he then was) concurred with Thakur, C.J.
and SK Singh, J. and observed that to muster compliance with Part
XIII of the Constitution, the tax must pass the twin tests embodied
in Article 304(a) i.e., (i) similar goods produced locally must also be
76
subjected to similar tax; and (ii) such State action should not
attract the vice of discrimination between the two varieties of goods.
10.12.10 In paragraph 262 of the judgment, Ramana, J. (as he
then was) observed that the object is to prevent discrimination
against imported goods by imposing tax on such goods at a rate
higher than that borne by local goods since the difference between
the two rates would constitute a tariff wall or fiscal barrier and thus
impede the free flow of inter-State trade and commerce. It does not
prohibit levy of tax as such in the situation wherein the goods are
not produced or manufactured in the State itself and does not
affect the authority of the State to tax the imported goods. It only
bars discrimination on the basis of taxing the products
manufactured within the State vis-à-vis imported goods which will
only occur if the precondition of manufacturing in the taxing State
is satisfied.
10.12.11 Banumathi, J. while agreeing with Thakur, C.J.
observed that decisions in Atiabari Tea Co. Ltd. and Automobile
Transport Ltd. to the extent they declare that taxes generally are
restrictions on the freedom of trade, commerce and intercourse
ought to be overruled. Further, non-discriminatory taxes do not
77
constitute infraction of Article 301 of the Constitution. The law laid
down in Video Electronics was also endorsed.
10.12.12 By contrast, Dr. Chandrachud, J. (as he then was),
firstly stated that a discriminatory tax is prohibited under Article
304(a) in the context of exemptions and incentives as held in the
judgments of this Court in Video Electronics and Shree Mahavir
Oil Mills. It was observed that in Video Electronics, this Court
considered the validity of the notifications issued under the Uttar
Pradesh Sales Tax Act, 1948, as well as under the Punjab General
Sales Tax Act. Under the notification issued under the Uttar
Pradesh legislation, an exemption from the payment of sales tax
was granted for goods manufactured in new industrial units, where
the date of commencement of production fell between two
stipulated dates. The exemption was for a stipulated period
reckoned from the date of first sale if such sale took place not later
than six months from the commencement of production. The
period of exemption was confined for a specified period of three to
seven years. Insofar as the State of Punjab was concerned, sales
tax at the rate of 12% was provided on electronic goods sold within
the State irrespective of their manufacture. In pursuance of a
78
notification issued under the Sales Tax law, the rate of sales tax
payable by electronic manufacturing units producing goods
specified thereunder was brought down from 12% to 1%. This was
justified on the ground that it was an incentive to a backward
industrial State. A Bench of three learned Judges in Video
Electronics observed that this was not a case involving “a naked
blanket preference in favour of locally manufactured goods, as
against goods coming from outside the State”. This Court therefore
held that there was no discrimination under both the notifications
against goods manufactured outside the State. In Video
Electronics , this Court distinguished the judgment in Weston
Electronics. Dr. Chandrachud, J. (as he then was) observed that
the substratum of the judgment in Video Electronics clearly is
that Article 304(a) would not be breached by a classification
brought about by a carefully structured notification which grants
incentives to local industry of a specified class of units, with
reference to a specific category of manufactured goods and for a
stipulated period. The judgment in Video Electronics was
distinguished on the ground that in that case, the notifications of
79
the States of Uttar Pradesh and Punjab were carefully
circumscribed.
10.12.13 Referring to paragraphs 22 and 23 of the judgment of
this Court in Shree Mahavir Oil Mills, Dr. Chandrachud, J. (as
he then was) observed that “the Court cautioned that a limited
exception which had been carved out in Video Electronics should
not be enlarged “lest it eat up the main provision””. An
unconditional exemption in the case of edible oil produced within
the State from sales tax while subjecting similar goods produced in
other States to sales tax at 8% was held to violate Article 304(a) of
the Constitution. In Shree Mahavir Oil Mills, an exemption from
the payment of sales tax altogether granted to local industry was
set aside as violating Article 304(a). The earlier decision in Video
Electronics was distinguished on the ground that it related to a
case not involving a blanket preference. In this regard, in
paragraph 693, Dr. Chandrachud, J. (as he then was) observed as
under:
“693. A close reading of the judgment in Video
Electronics would thus indicate that both sets of
notifications involving the States of Uttar Pradesh and
Punjab were carefully structured to cover one or more of
the following circumstances:
80
(i) Availability of a reduced rate of sales tax to
new industrial units;
(ii) Applicability of a reduced rate of sales tax to
producers of certain specified goods, such as
electronic goods;
(iii) Limitation of the period during which the
reduced rate of tax could operate; and
(iv) Applicability of the general rate of sales tax to
an overwhelmingly large number of local
manufacturers, on a par with imported
goods.”
10.12.14 Thus, Dr. Chandrachud J. (as he then was) opined
that the judgment in Shree Mahavir Oil Mills left open the
correctness of the view in Video Electronics. Shree Mahavir Oil
Mills is a judgment rendered by a two-Judge Bench comprising
B.P. Jeevan Reddy, J. and S.C. Sen, J. while Video Electronics
was a judgment of three Judges of this Court. The decision
in Video Electronics was distinguished on the ground that it
related to a case not involving a blanket preference.
10.12.15 Ashok Bhushan, J. in his dissenting opinion but
concurring on some issues, speaking about the three-Judge Bench
decision of this Court in Video Electronics, observed that the
exemption therein was upheld as it was granted to a special class
for limited period on specific conditions of maintaining the general
81
rate of tax on the goods manufactured by all those producers in
the State who do not fall within that category. That Video
Electronics , however, further states that if tax is imposed in a
colourable manner, intentionally or purposely to create
unfavourable bias by prescribing a general lower rate on locally
manufactured goods either in the shape of general exemption to
locally manufactured goods or in the shape of lower rate of tax,
such an exercise of power can always be struck down by the
courts. However, in Shree Mahavir Oil Mills, it was observed that
exception carved out in Video Electronics cannot be widened or
expanded to cover cases of a different kind. That in Video
Electronics, the exemption notification was upheld because it was
limited to a specified type with short period. Therefore, even in
Video Electronics, general exemption of a wider nature was not
approved. In other words, the exemption cannot be used as a
measure of discrimination between goods imported from other
States and goods manufactured or produced in the State. The
exemption has to be a limited exemption to the tax which is
imposed on the similar goods. In the event such exemption is total
and general in nature, the said exemption is clearly violative of
82
Article 304(a). Similarly, set-off of a particular tax which is general
and not limited to specified category has also to be disapproved.
Therefore, Ashok Bhushan, J. held that the ratio of the three-Judge
Bench judgment in Video Electronics has to be read to the above
extent and with the limitation as noticed above. Hence, the State
Legislature in exercise of its taxing power can grant exemption/set-
off to local goods, only to a limited extent based on intelligible
differentia which is not in the nature of general/unspecified
exemption. The exemption/set-off which tend to become a general
exemption violates Article 304(a) of the Constitution.
Discussion from Overseas Case Law:
11. At this instance, it is relevant to discuss a similar provision
in Section 51(ii) and Section 92 of the Commonwealth of Australia
Constitution Act, 1900, also known as the Australian Constitution.
Sections 51(ii) and 92 provide as follows:
“ 51. Legislative powers of the Parliament
The Parliament shall, subject to tis Constitution, have
power to make laws for the peace, order, and good
government of the Commonwealth with respect to:
xxx
(ii) taxation; but so as not to discriminate between
States or parts of States ;
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xxx
92. Trade within the Commonwealth to be free
On the imposition of uniform duties of customs, trade,
commerce, and intercourse among the States, whether by
means of internal carriage or ocean navigation, shall be
absolutely free .”
(emphasis supplied)
11.1 A bare reading of the above provision would instantly draw
our attention to Articles 301 and 304 of our Constitution.
11.2 It appears that the interpretation of Section 92 of the
Australian Constitution, specifically as to ‘what should the
imposition be free from?’, has been a subject matter of conflicting
opinions. It was the decision of the High Court of Australia in Cole
vs. Whitfield, (1988) HCA 18 that clarified its scope. The High
Court of Australia, through a unanimous opinion, and relying on
Australian federal movement, held that section 92 of the Australian
Constitution prohibits measures that discriminate against
interstate trade and commerce with the purpose or effect of
protecting intrastate trade or industry against competition from
other States.
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11.3 The High Court specifically held:
“25. The task which has confronted the Court is to
construe the unexpressed; to formulate in legal
propositions, so far as the text of s.92 admits, the criteria
for distinguishing between the burdens (including
restrictions, controls and standards) to which inter-State
trade and commerce may be subjected by the exercise of
legislative or executive power and the burdens from which
inter-State trade and commerce is immune. The history of
s.92 points to the elimination of protection as the object of
s.92 in its application to trade and commerce. The means
by which that object is achieved is the prohibition of
measures which burden inter-State trade and commerce
and which also have the effect of conferring protection on
intra-State trade and commerce of the same kind. The
general hallmark of measures which contravene s.92 in
this way is their effect as discriminatory against inter-
State trade and commerce in that protectionist sense.
xxx
26. In relation to both fiscal and non-fiscal measures,
history and context alike favour the approach that the
freedom guaranteed to inter-State trade and commerce
under s.92 is freedom from discriminatory burdens in the
protectionist sense already mentioned.”
11.4 The High Court further explained that the concept of
discrimination, so far as it relates to inter-State trade and
commerce, embraces both factual as well as legal discrimination.
By factual, the Court meant the operation of a law producing a
disability or a disadvantage, and by legal, the Court meant the
provisions, on the face of it. The Court however noted that the
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section accommodates laws that genuinely regulate intra-State and
inter-State trade in a non-protective manner.
11.5 Finally, the Court concluded that a general law enacted
under Section 51(i) of their Constitution may offend Section 92 if
its effect is discriminatory and the discrimination is upon
protectionist grounds. That whether such a law is discriminatory
in effect and whether the discrimination is of a protectionist
character are questions raising issues of fact and degree. That such
answer to those questions may, in the ultimate, depend upon
judicial determination.
11.6 While we are aware of the dangers involved in importing an
interpretation from a judgment of a foreign jurisdiction, it is
relevant to note from Australian jurisprudence that when the Court
therein was called upon to interpret Section 92 of their
Constitution, specifically to answer what should the imposition of
uniform duties of customs, trade, commerce, and intercourse
among their States be free from, the Court answered that they
should be free from discrimination of a protectionist character . Their
emphasis on the protectionist nature is of relevance to us, for the
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insertion of Part XIII in our Constitution was also to prevent the
growth of sectional and local interests which are inimical to the
interests of the nation as a whole.
Application of the Analysis to the Present Case:
12. On a perusal of the facts of the present cases and the judicial
dicta relating to Articles 301 and 304(a) of the Constitution of India,
we find that the issue herein could be decided by determining if the
impugned notification falls within the parameters of the exception
provided for in Video Electronics. In other words, if the impugned
notification could be justified as falling within the parameters of
the dictum in Video Electronics , it could be upheld. Otherwise, it
would have to be struck down as unconstitutional. Thus, the
dictum in Video Electronics has to be juxtaposed with the facts of
the present cases as well as in light of other judicial dicta discussed
above.
12.1 On a perusal of the judgment of this Court in Jindal
Stainless Ltd. as regards Video Electronics, the position of law
as to when a tax merely differentiates and not discriminates,
appears to be as follows:
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(i) Clauses (a) and (b) of Article 304 are to be read
disjunctively, and hence, a tax cannot be said to merely
differentiate only if the procedure under Article 304(b) is satisfied,
but not Article 304(a) of the Constitution;
(ii) A tax imposed on goods imported from another state would
not be discriminatory if no similar goods are produced within that
State;
(iii) States are at liberty to design their fiscal legislations in such
a manner to ensure that the tax burden on goods imported from
other States is equal to the tax burden on those goods produced
within the State. Therefore, a tax designed to impose equal burdens
cannot be said to be discriminatory. However, whether the tax
burden falls equally is a question of fact to be determined in each
case when the question arises;
(iv) Further, a tax rebate or other relief in the form of incentives
or set-off which is:
• granted to a specified class of dealers;
• for a limited period of time;
• in a non-hostile fashion;
88
• with a view to developing economically backward areas;
would not be held to be discriminatory.
(v) However, the question whether a tax fulfils the above
criteria is a question of fact to be determined depending upon the
facts of each case.
12.2 Before applying the aforementioned law to the facts of this
case, it is relevant to note that our analysis is not restricted to the
impugned notification alone. Rather, it will be looked at in the
context of the preceding and succeeding notifications issued by the
State of Rajasthan. This is necessary because the impugned
notification is merely one of the notifications out of a series of
notifications effected to grant tax exemptions to the sale of asbestos
cement sheets and bricks having contents of fly ash 25% or more
by weight, manufactured in the State of Rajasthan. However, we
make it clear that our decision would be restricted to the validity
of the impugned notification only.
12.3 Applying the criteria provided for as above, we find that
admittedly, the impugned notification restricted the exemption
from payment of tax to a specified class of dealers, namely, those
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who manufactured asbestos cement sheets and bricks having
contents of fly ash 25% or more by weight. We also find that, as
regards the time period, the impugned notification restricted the
exemption to those dealers who commenced commercial
production in the State by 31.12.2006 and the exemption was
available up to 23.01.2010.
12.4 However, a combined reading of the notifications dated
24.01.2000, 16.03.2005, 05.07.2006 and 28.12.2010 suggests
that, initially, the benefit was restricted to dealers who commenced
commercial production in the State of Rajasthan by 31.12.2001
and the benefit was upto 23.01.2010. Later, it was extended to
those who commenced production by 31.12.2006. While initially
the benefit was upto 23.01.2010, by notification dated 28.12.2010,
the benefit was made available for ten years from the date of
commencement of first commercial production, but with an outer
cut-off date of 23.1.2016. There is nothing on record to suggest
that the exemption was granted thereafter as well.
12.5 As far as duration is concerned, it can be observed that the
maximum benefit a dealer would have obtained under these
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notifications was ten years. There were no serious arguments
raised by the appellants herein to the question whether the benefit
of a maximum of ten years would qualify as ‘limited period of time’
within the criteria devised in Jindal Stainless Ltd. . Hence, we do
not intend to decide on the same.
12.6 As regards the criterion of “with a view to developing
economically backward areas”, admittedly, the impugned
notification is not restricted to any specific district or a set of
districts within the State of Rajasthan. Rather, the notifications
provide exemption to any dealer commencing production anywhere
in the State.
12.7 However, the criterion of ‘non-hostile fashion’ was fiercely
contested by both sides, as noted earlier in the submissions. The
expression ‘non-hostile’, as expressed in Jindal Stainless Ltd. ,
relates to discrimination of a hostile nature in the protectionist
sense.
12.8 In our view, the contours of such discrimination, in
essence, can be reduced to whether there are sufficient reasons to
term such discrimination as ‘differentiation’. In State of West
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Bengal vs. Anwar Ali Sarkar, (1952) 1 SCC 1 , this Court noted
that the expressions “discriminatory” and “hostile” are found to be
used by American Judges often simultaneously in connection with
discussions on the equal protection clause. That if a legislation is
discriminatory and discriminates one person or class of persons
against others similarly situated and denies to the former the
privileges that are enjoyed by the latter, it has to be regarded as
“hostile” in the sense that it affects injuriously the interests of that
person or class.
12.9 Similarly, the opinion of this Court in Twyford Tea Co.
Ltd. vs. State of Kerala, (1970) 1 SCC 189 on the meaning of
‘classification without unreasonably discriminating between
persons similarly situated’ is relevant to this case. The Court noted
then as follows:
“18. What is meant by the power to classify without
unreasonably discriminating between persons similarly
situated, has been stated in several other cases of this
Court. The same applies when the Legislature reasonably
applies a uniform rate after equalising matters between
diversely situated persons. Simply stated the law is this:
Differences in treatment must be capable of being
reasonably explained in the light of the object for which
the particular legislation is undertaken. This must be
based on some reasonable distinction between the cases
differentially treated. When differential treatment is not
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reasonably explained and justified the treatment is
discriminatory. If different subjects are equally treated
there must be some basis on which the differences have
been equalised otherwise discrimination will be found. To
be able to succeed in the charge of discrimination, a
person must establish conclusively that persons equally
circumstanced have been treated unequally and vice
versa.”
(underlining by us)
12.10 In Vijay Lakshmi vs. Punjab University, (2003) 8
SCC 440 , this Court discussed the earlier judgment in State of
J&K vs. Triloki Nath Khosa, (1974) 1 SCC 19 and observed that
discrimination is the essence of classification and does violence to
the constitutional guarantee of equality only if it rests on an
unreasonable basis.
12.11 Further, in Video Electronics , this Court noted that the
word ‘discrimination’ is not used in Article 14 but is used in Articles
16, 303 and 304(a). That in the context of Article 304(a), it involves
an element of intentional and purposeful differentiation.
12.12 As regards the reasons behind a public authority issuing
a notification, this Court in Commissioner of Police vs.
Gordhandas Bhanji, AIR 1952 SC 16 noted that:
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“We are clear that public orders, publicly made, in exercise
of a statutory authority cannot be construed in the light of
explanations subsequently given by the officer making the
order of what he meant, or of what was in his mind, or
what he intended to do. Public orders made by public
authorities are meant to have public effect and are
intended to affect the actings and conduct of those to
whom they are addressed and must be construed
objectively with reference to the language used in the order
itself.”
(underlining by us)
12.13 Similarly, as submitted by learned counsel for the
appellants, the Constitution Bench of this Court in Mohinder
Singh Gill observed that any order passed by any public authority
exercising administrative/executive or statutory powers must be
judged by the reasons so mentioned in that order and cannot be
supplemented by fresh reasons in the shape of an affidavit or
otherwise.
12.14 A perusal of the impugned notification dated 09.03.2007
would suggest that the reason stated by the State Government to
exempt from payment of tax was simply that “it was expedient in
the public interest so to do”. The notification states no further
reason for issuing the impugned notification. The exemption from
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payment of tax on the sale of asbestos sheets and bricks subject to
the following conditions:
(i) That the asbestos sheets and bricks are manufactured in the
State of Rajasthan; and
(ii) They have 25% content of fly ash or more by weight.
Further, the following condition would apply, namely –
(i) that the goods shall be entered in the registration certificate of
the selling dealer.
(ii) that the exemption shall be for such goods manufactured by
the dealer who commenced commercial production in the State
by 31.12.2006; and
(iii) that the exemption shall be available up to 23.01.2010.
Therefore, with respect to the goods manufactured by the
dealer who commenced commercial production in the State before
31.12.2006 the exemption was upto 21.03.2010. Thereafter, by
subsequent notification, the benefit was extended upto
23.01.2016.
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12.15 There is also nothing on record to suggest that the
notification was issued pursuant to, say, an industrial policy or
otherwise. During the course of submissions, we had asked the
learned senior counsel for the respondent State if there are any
policies of the State as regards setting up of asbestos sheet or
cement industry, pursuant to which the notifications were issued,
the learned senior counsel could not take us to any such
background policy, but submitted that the reasons for the
notification can be discerned from the counter affidavit filed before
the High Court. In light of the dictum of this Court in Mohinder
Singh Gill , we are not able to accept the contention of the learned
senior counsel for the State of Rajasthan that the reasons for the
notification can be discerned from the counter affidavit filed before
the High Court.
12.16 Keeping aside the dictum in Mohinder Singh Gill , even
otherwise , the counter affidavit filed before the High Court
attempts to provide reasons as to why the notification dated
24.01.2000 was issued. The reason stated was to promote the use
of fly ash as a raw material from the production of asbestos cement
sheets and bricks with the intention of utilization of fly ash coming
96
out of thermal power plant and to promote the production of
asbestos cement sheets for which there was no manufacturing
plant in Rajasthan. There is no other reason stated for why the
impugned notification is issued. Admittedly, the impugned
notification can be said to be a continuation of the earlier
notifications, including the notification dated 24.01.2000.
However, there are no reasons stated even in the counter-affidavit
as to why the benefit was extended to those who commenced
production beyond 31.12.2001 through the impugned notification.
The State ought to have explained, for e.g., the effect of the earlier
notifications, the inadequacy, if any, of the notification in fulfilling
the intended objectives, if any, and the consequent need for issuing
the subsequent notification.
12.17 In the absence of any such explanation, we cannot, but
conclude, that the impugned notification is bereft of any reason or
justification. The High Court in the impugned judgment relied
upon the reasoning in Video Electronics to arrive at the
conclusion that the stand of the State of Rajasthan was supported
by the reasoning in the aforesaid case. While acknowledging that
in Shree Mahavir Oil Mills, this Court had explained and
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distinguished the dictum in Video Electronics wherein the
exemption was granted to new industries for a specified period, the
High Court in our view, fell in error in holding that the present case
also falls in the exceptional category covered by the case of Video
Electronics . We observe that the said finding is incorrect
inasmuch as the exemption was not granted to new industries and
neither was it given for a limited period of time. The exemption was
granted initially upto 23.01.2010 and later extended upto
23.01.2016. The exemption was granted to those asbestos sheet
and bricks manufacturers in the State of Rajasthan utilizing fly ash
as its main raw material on the conditions namely, (i) that such fly
ash constituted 25% or more in the contents by weight; and (ii) that
the unit commenced commercial production by 31.12.2001.
12.17.1 The first condition is an ingredient specific criterion.
This would mean that any asbestos sheet product containing 25%
fly ash manufactured outside the State of Rajasthan and sold in
the said State would not have the benefit of the exemption. This
would mean that the source of fly ash is not really the basis for the
exemption. The asbestos products could be manufactured in the
State of Rajasthan with fly ash obtained from outside the State and
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sold within the State. If the object of the exemption was to utilise
the fly ash available in the State of Rajasthan itself, it should have
been so spelt out in the impugned notification. Otherwise, we find
a discrimination between asbestos products manufactured in the
State of Rajasthan and manufactured outside, having content of fly
ash to an extent of 25% when sold in the State of Rajasthan. On
the other hand, if the notification had prescribed a condition that
fly ash sourced from State of Rajasthan and products sold in the
State, irrespective of their place of manufacture would have the
benefit such exemption, there would not have been any
discrimination between products manufactured outside the State
of Rajasthan sold within the said State and those manufactured
within the State, both having the benefit of exemption as both
categories of products would have utilised fly ash available in the
State of Rajasthan. This approach would have also met the
objective of utilising the available fly ash in the State of Rajasthan.
But, that is not so in the present case. Hence, we have no hesitation
in holding that the impugned notification violates Article 304(a) of
the Constitution as it is discriminatory in nature.
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12.17.2 The impugned notification initially was to remain
operative upto 23.01.2010 only. The time for commencement of
commercial production was extended from time to time and by the
notification issued on 16.03.2005, the State Government extended
the commencement of production by 31.12.2006. It was submitted
that the notification dated 09.03.2007 impugned in the writ
petition before the High Court came to be issued by the State
Government after coming into force of the Rajasthan VAT Act so as
to continue with the discriminatory exemption.
12.18 On a survey of the judicial dicta of this Court, what
emerges is that in Atiabari Tea Co. Ltd., the object and purpose
of Part XIII of the Constitution of India and particularly Article 301
was considered and it was observed that while determining the
width and amplitude of the freedom guaranteed by the said Article,
a rational and workable test should be applied and only if the
restrictions impede free flow of trade, it would be barred.
Otherwise, taxes imposed on goods would not by themselves
impede trade and commerce in the said case, the Assam Act was
held to be void as it had not complied with Article 304(b) of the
Constitution. While interpreting Article 304(a), it was observed that
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the State Legislatures have the power to impose tax on the import
of goods to which similar goods manufactured or produced in the
State are subject, provided that by taxing the goods imported from
another State or Union Territory, no discrimination is practised.
12.18.1 Automobile Transport Ltd. also concerned Article
304(b) of the Constitution. It was observed that a tax to become a
prohibited tax, has to be a direct tax, the effect of which is to hinder
the movement of trade. So long as a tax remains compensatory or
regulatory, it cannot operate as a hindrance. Taxation which
impedes trade and commerce cannot be upheld on the ground that
they are regulatory. A regulation of trade and commerce, on the
other hand, may achieve some public purpose which affects trade
and commerce incidentally but not impairing the freedom. In the
said case, it was observed that the tax offended Article 301 of the
Constitution since resort to the procedure prescribed by Article
304(b) was not taken.
12.18.2 In Firm Mehtab Majid, referring to the aforesaid
decisions, it was held that sales tax which has the effect of
discriminating between goods of one State and goods of another
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State may affect the free flow of trade which offends Article 301 and
will be valid if it comes within the terms of Article 304(a). Thus,
Article 304(a) enables the Legislature of a State to make laws by
imposition of taxes on goods from other States if similar goods in
the State are also subjected to similar taxes, so as not to
discriminate between the goods manufactured or produced in that
State and the goods which are imported from other States. In the
said case, the writ petition was allowed as the sales tax was held
to be discriminatory in nature and the State was directed to refund
the tax illegally collected from the petitioner therein.
12.18.3 Similarly, in Weston Electronics , the reduction on the
rate of sales tax on television sets manufactured within the State
to 1% whereas television sets imported from outside the State of
Gujarat being at 10% was held to be discriminatory in nature and
therefore, struck down.
12.18.4 The judgment in Video Electronics by a three-Judge
Bench of this Court is a watershed in the line of precedent on the
interpretation of Chapter XIII of the Constitution. In this case, the
imposition of differential rate of tax on sales of the commodity
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imported from outside the State as compared to the same
commodity manufactured within the State and sold in the State
was upheld as being not discriminatory in nature. It was observed
that the expression “discrimination” in Article 304(a) of the
Constitution involves an element of intentional and purposeful
discrimination thereby creating an economic barrier and involves
an element of unfavourable bias. Insofar as the State of Punjab was
concerned, it was reasoned that the lower rate of tax on those
electronic goods manufactured in the State of Punjab was due to
the prevailing peculiar circumstances in the said case, namely,
terrorist activity. In order to attract new entrepreneurs from other
States and to encourage manufacturers within the State of Punjab,
incentives were provided for growth of industry in the State of
Punjab which had already shifted to other States, therefore, the
concessional rate of tax introduced for goods manufactured within
the State of Punjab was held to be non-discriminatory. The
aforesaid reasoning was given having regard to the situation then
prevailing in the State of Punjab as it was observed that a disturbed
State cannot with parity engage in competition with advanced or
developed States. Therefore, the differential rate of taxation was
103
upheld in the said case. The emphasis was on goods manufactured
in the State having a concessional rate of tax irrespective of who
manufactured the goods. The object was to attract industrial
activity in the State as it was passing through a difficult phase and
hence the need for a focus on economic development. Such a
reason is conspicuous by its absence in the present case.
12.18.5 On the other hand in Shree Mahavir Oil Mills, it was
observed that under Article 304(a), a State Legislature may tax
goods imported from other States or Union Territories but in the
process ought not to discriminate against them vis-à-vis goods
manufactured locally. Therefore, there cannot be tax barriers or
fiscal barriers in the interest of free trade, commerce and
intercourse throughout the territory of India guaranteed by Article
301. Thus, the weapon of taxation cannot be used to discriminate
against the imported goods vis-à-vis the locally manufactured
goods.
12.18.6 Referring to Video Electronics, on which strong
reliance was placed by State of Jammu and Kashmir in the
aforesaid case, this Court made a distinction by observing that the
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said judgment created a limited exception and that it was not
possible to go on extending the limited exception created in the said
judgment, by stages which would have the effect of robbing the
salutary principle underlying Part XIII of its substance. That States
can also encourage growth of industries by all such means that are
just and proper provided goods imported from other States are not
discriminated against by a higher rate of sales tax being imposed.
That the limited exception carved out in Video Electronics cannot
be enlarged, “lest it would eat up the main provision”. Placing
reliance on Firm Mehtab Majid, this Court ruled in favour of the
petitioners therein. Loharn Steel Industries Ltd., Laxmi Paper
Mart have followed Shree Mahavir Oil Mills.
12.18.7 In Jaiprakash Associates, while considering the
question whether rebate is within the realm of tax defined under
Article 304(a) so as to say that it discriminates between the two
classes of goods, namely, locally manufactured goods and imported
goods when both the classes of dealers meet the condition required
to qualify for the grant of rebate i.e., use of fly ash, this Court noted
that the overall effect or impact of such rebate would be on the
manufacturer. Consequently, this Court held that “rebate of tax
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granted by the State Government to cement manufacturing units
using fly ash as raw material in a unit established in the districts
of the State of Uttar Pradesh alone was violative of the provisions
contained in Articles 301 and 304(a) of the Constitution of India.”
This judgment squarely applies to the present cases.
12.18.8 While analysing Article 304(a) of the Constitution, the
majority in the nine-Judge Bench in Jindal Stainless Ltd.
identified two restrictions under Article 304(a) of the Constitution
which are in the use of the expressions “ to which similar goods
manufactured or produced in that State are subject ” and “ so,
however, as not to discriminate between goods so imported and
goods so manufactured or produced ”. Therefore levy of taxes on
goods imported from other States is constitutionally permissible so
long as the State Legislature abides by the limitations placed on
the exercise of that power. Thus, levy of taxes on import of goods
from other States by itself, is not an impediment under the scheme
of Part XIII of the Constitution.
12.18.9 With regard to Video Electronics, it was opined that so
long as the differentiation is to benefit a distinct class of industries
106
and not intended to create an unfavourable bias and if the
differentiation is for a limited period, then, the benefit must be held
to flow from a legitimate desire to promote industries within its
territory. It was also held that Shree Mahavir Oil Mills was also
distinguishable from Video Electronics. This was because the
exemption for locally manufacturers of edible oil was
discriminatory vis-à-vis other manufacturers from outside the
State who had no benefit of the said exemption.
12.19 Applying the aforesaid dicta to the present cases, we find
that the notification impugned in these cases are hit by the
judgments referred to above and the judgment in Video
Electronics being an exception having regard to the peculiar facts
therein does not apply to the present cases. Therefore, the
notification impugned in these cases dated 09.03.2007 is violative
of Article 304(a) of the Constitution. Consequently, the impugned
notification is quashed. The civil appeals are hence allowed. No
cost.
12.20 Having regard to the interim order dated 09.05.2008
passed in these appeals, it is necessary to ascertain whether the
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differential amount which has been deposited before this Court was
collected from their customers. If not, the appellants would be
entitled to refund of the amount deposited with interest @ 6% per
annum from the date of deposit till realisation. In order to ascertain
this aspect, we post the appeals for directions.
All pending applications, if any, shall stand disposed of.
………………………………..J.
(B.V. NAGARATHNA)
………………………………..J.
(K.V. VISWANATHAN)
NEW DELHI;
SEPTEMBER 24, 2025.
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