M/S U.P.Asbestos Limited vs The State Of Rajasthan And Ors

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 JUDGMENT

NAGARATHNA, J.

INDEX

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