http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 14  

PETITIONER: ANDHRA STEEL CORPORATION

       Vs.

RESPONDENT: COMMISSIONER OF COMMERCIAL TAXES IN KARNATAKA

DATE OF JUDGMENT30/03/1990

BENCH: RAMASWAMI, V. (J) II BENCH: RAMASWAMI, V. (J) II MUKHARJI, SABYASACHI (CJ) PUNCHHI, M.M.

CITATION:  1990 AIR 1912            1990 SCR  (2) 253  1990 SCC  Supl.  617     JT 1990 (2)   380  1990 SCALE  (1)679

ACT:     Karnataka  Sales Tax Act, 1957:  Section  5(4)--Schedule 4---Item  2  Explanation  II  (As  it  stood  prior  to   1. 4.78)--Declared  goods--Levy  of sales  tax--Finished  goods manufactured  out  of imported raw material subject  to  tax while  similar goods manufactured out of  locally  purchased raw  materials not taxed--Held discriminatory and  violative of Article 304(a) of Constitution of India.     Constitution  of India, 1950: Article  304(a):  Restric- tions on trade commerce and intercourse among  States--Simi- larity is in the nature of quality and kind of goods and not whether  they  are subject to tax already  or  not--Finished goods--Iron ingots, Steel rounds and for steel  manufactured out  of  locally purchased raw  material,  iron-scraps,  not subject to tax--Similar goods manufactured out of raw  mate- rial  purchased  from  outside State  subject  to  tax--Held discriminatory  between  imported goods and  goods  produced locally.

HEADNOTE:     The  appellant, a registered dealer under the  Karnataka Sales Tax Act, 1957, was purchasing iron-scraps from dealers inside and outside the State of Karnataka for the purpose of manufacturing  iron ingots, steel rounds and for  steel.  He filed  a  writ petition in the High  Court  challenging  the Constitutional validity of Section 5(4) of the Act in so far as it pertains to item 2 of Schedule IV to the Act read with Explanation  II thereof in respect of its application  prior to 1.4.78 as violative of Article 304(a) of the Constitution on  the ground that it discriminates in respect of  sale  of steel ingots manufactured out of raw material purchased from outside  the  State which was subject to tax while  sale  of similar  goods  manufactured out of  locally  purchased  raw material was not subjected to tax.     The High Court dismissed the writ petition upholding the constitutional  validity of the impugned  provisions.  Hence this appeal by special leave.     Setting aside the judgment of the High Court and  allow- ing the appeal, this Court, 253

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 14  

   HELD:  1. The similarity contemplated by Article  304(a) is  in the nature of the quality and kind of the  goods  and not  with  respect  to whether they were subject  to  a  tax already or not. [262A]     2. Section 5(4) of the Act in so far it pertains to item 2 of Schedule IV to the Act read with Explanation II thereof in  respect  of  its application for  the  period  prior  to 1.4.1978 is violative of Article 304(a) of the Constitution. [255C-D; 272D]     Firm  A.T.B.  Mehtab Majid and Co. v.  State  of  Madras andAnr., [1963] Suppl. 2 SCR 435 and A. Hajee Abdul  Skakoor and Co. v. State of Madras, [1964] 8 SCR 217, followed.     State  of Madras v.N.K. Nataraja Mudaliar, [19681 3  SCR 829;  Rattan Lal & Co. v. Assessing Authority, [1969] 2  SCR 544 and Associated Tanners v. Commercial Tax Officer,  Vizi- anagaram and Ors., [1986] 62 STC 1, explained.     Mangalore  Metal House v. State of Karnataka, [1986]  63 STC  482;  State of Bombay v. United  Motors  (India)  Ltd., [1953] SCR 1069 and Bengal Immunity Company Ltd. v. State of Bihar, [1955] 2 SCR 603, referred to.

JUDGMENT:     CIVIL   APPELLATE   JURISDICTION:   Civil   Appeal   No. 167274(NT) of 1990.     From  the  Judgment  and Order dated  10.6.1988  of  the Karnataka High Court in W.P. Nos. 14255 to 14257 of 1983.     B.  Sen,  H.  Raghvendra Rao and Vineet  Kumar  for  the Appellant. P.R. Ramasesh for the Respondent. The Judgment of the Court was delivered by V. RAMASWAMI, J. Special leave granted.     The appellant is a registered dealer under the Karnataka Sales Tax Act (hereinafter called ’the Act’). The  appellant (hereinafter  referred  to ’the assessee ’)  purchases  iron scrap from dealers inside and outside the State of Karnataka for  the purpose of manufacturing iron ingots, steel  rounds and tot-steel. These manufactured goods were 254 sold  mostly within the State. In respect of the  Assessment Years  1972-73 to 1974-75, accepting the contentions of  the assessee  that the goods sold were manufactured out  of  tax suffered iron scrap, the Commercial Tax Officer exempted the sales  turn over of the manufactured goods. The Deputy  Com- missioner  of  Commercial Taxes in exercise  of  his  powers under  section 21 of the Act restricted the  exemptions  but otherwise confirmed the assessment order by his order  dated 11.5. 1979. The respondent Commissioner of Commercial Taxes, Bangalore  initiated proceedings under section 22(A) of  the Act for revising the order of the Deputy Commissioner on the ground  that  the  assessee had been  allowed  exemption  in respect  of  the  turn over of  manufactured  goods  without verifying  as to whether the inputs iron scrap nag  suffered taxes and that Explanation II to Schedule IV of the Act  was applicable  or  not. The appellant filed the  writ  petition praying for the issue of a writ certiorari to quash the show cause notice issued by the respondent under section 22(A) of the  Act challenging the constitutional validity of  section 5(4) of the Act in so far as it pertains to item 2 of Sched- ule  IV to the Act read with Explanation II thereof  in  re- spect  of its application for the period prior to 1.4.  1978 as  violative of Article 304(a) of the Constitution. It  may be  pointed out at this stage that in Mangalore Metal  House v.  State  of Karnataka, [1986] 63 STC 482  the  High  Court

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 14  

upheld the Explanation II to Schedule IV of the Act which is differently worded in its application for the period  subse- quent  to 1.4.1978. It may also be mentioned that  the  High Court  had  confined  itself only to the  challenge  of  the constitutional  validity of the provision and left open  the other  question  on  merits including the  validity  of  the notices  to  be agitated after  exhausting  the  appellant’s remedy before the Sales Tax authorities.     The  High Court was of the view that the provision  pro- viding  for not levying tax, if at an earlier stage tax  has been paid, is only in the nature of exemption and the exemp- tion  arises only on proof that the tax has been paid at  an earlier  stage on the goods out of which the goods in  ques- tion  were  manufactured, that there is  nexus  between  the finished  goods and the raw material used for  manufacturing the same that it is not correct to state that the tax is not payable on the finished goods manufactured out of local  raw material  but the discrimination if at all would arise  only in the quantum of tax payable, for the tax on finished goods will be definitely higher than on the raw material. The High Court  was of the further view that there is no  discrimina- tion  in the rate of tax between the imported items and  the local items of finished goods of iron steel as such and that the  variation  in the quantum of tax is on account  of  the scheme of taxation working diffe- 255 rently  on different dealers, those who import raw  material and manufacture and those who locally purchase and  manufac- ture  and hence such an effect is only indirect  result  and not having direct or immediate impact. In that view the High Court  dismissed the writ petition and gave liberty  to  the appellant  to  file objections before  the  Commissioner  of Commercial Taxes for dealing with questions on merits.  This appeal has been filed against the said judgment of the  High Court.     The  main point that was urged in this appeal  was  that section  5(4) of the Act in so far as it pertains to item  2 in the IV Schedule read with the Explanation II is violative of  Article 304(a) of the Constitution as under that  provi- sion the sale of finished goods manufactured out of imported raw  material is taxed but the sale of finished goods  manu- factured out of locally purchased raw material is not  taxed and  that amounts to hostile discrimination in the  rate  of tax or quantum of tax.     Section  5(4)  of  the Act is the  charging  section  in respect of declared goods and the relevant portion reads  as follows: "(4)  Notwithstanding anything contained in sub-section  (1) (or  section 5 B or section 5 C) a tax under this Act  shall be  levied in respect of the sale or purchase of any of  the declared goods mentioned in column (2) of the Fourth  Sched- ule  at  the  rate and only at the point  specified  in  the corresponding  entries  of columns (4) and (3) of  the  said Schedule  on the dealer liable to tax under this Act on  his taxable turnover of sales or purchases in each year relating to such goods:          Provided that where tax has been paid in respect of the sale or purchase of any of the declared goods under this sub-section  and  such goods are subsequently  sold  in  the course  of inter-state trade or commerce, and tax  has  been paid  under the Central Sales Tax Act, 1956 (Central Act  74 of 1956) in respect of the sale of such goods in the  course of  inter-state trade or commerce, the tax paid  under  this Act  shall be reimbursed to the person making such  sale  in the  course of inter-state trade or commerce in such  manner

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 14  

and subject to such condition as may be prescribed. Provided further that in respect of the sale of cereals 256 mentioned in serial number 9 of the Fourth Schedule, made by any  person to a procurement agent appointed by the  Govern- ment  of Karnataka or to any sub-agent of  such  procurement agent in pursuance of the Karnataka Rice Procurement  (Levy) Order,  1981  or any other  foodgrains.  procurement  (Levy) Order  of the Government of Karnataka for the time being  in force,  such sale shall not be deemed to be, but the  subse- quent  sale by the said procurement agent or sub-agent  shah be and shah be deemed to be the point at which the tax under this Act shah be levied.           Provided  also that where tax has been paid  under this sub-section on the purchase of paddy and such paddy  is either  subsequently sold to or is hulled and the  resultant rice is sold to a procurement agent appointed by the Govern- ment  of Karnataka or to any sub-agent of  such  procurement agent in pursuance of the Karnataka Rice Procurement  (Levy) Order, 1984 or any other Foodgrains Procurement (Levy) Order of the Government of Karnataka for the time being in  force, the  tax paid under this Act on the purchase of  such  paddy shah  be reimbursed to the person making such sale  to  such procurement  agent or his sub-agent, as the case may be,  in such  manner and subject to such conditions as may  be  pre- scribed." The IV Schedule to the Act contains a list of declared goods specifying the point of levy and the rate of tax. Item 2  of this Schedule relates to iron steel since the interpretation of  this item is in question the relevant portion of item  2 may be extracted and reads as follows:                     "FOURTH SCHEDULE S1.     Description of the goods      Point of      Rate of No.                                   levy          tax 1. 2. (i) pig iron and cast iron including    Sale by the first     ingot  moulds, bottom plates, iron    or earliest succes     scrap, cast iron scrap runner         sive dealer in the      scrap and iron skull scrap.        state, liable to tax                                            under this Act. 257 (ii)  steelsemis (ingots, slabs, blooms and billets  of  all qualifies, shapes and sizes). (iii) skelp bars, tin bars, sheet bars, hoebars and  sleeper bars. (iv) Steel bars (rounds, rods, squares             4 percent    fiats, octagons and hexagons,    plain and ribbed or twisted, in coil    form as well as straight lengths). (v) Steel structurals (angles, joists, channels tees,  sheet piling sections or any other rolled sections) (vi) sheets, hoops, strips and skelp, both black and  galva- nised,  hot  and cold robed, plain and  corrugated,  in  all qualifies,  in straight lengths and in coil from  as  rolled and in revitted condition. (vii) plates both plain and cheque-red in qualities. (viii) discs, rings forgings and steel             3 percent castings. (ix) tool, alloy and special steels       of any of the above categories. (x) steel melting scrap in all forms including steel skulls, turnings and borings. (xi) steel tubes, both welded and seamless of all  diameters and lengths, including tube fittings. (xii)  tin-plates, both not dipped and electrolytic and  tin

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 14  

free plates. 258   (xiii)  fish  plate  bars, beating  plate  bars,  crossing sleeper bars, fish plates, bearing plates, crossing sleepers and  pressed  steel  sleepers, railsheavy  and  light  crane rails. (xiv) wheels, tyres axles and wheel sets.  (xv) wire rods and wires-rolled, drawn, galvanised,  alumi- nised, tinned or coated such as by Copper.  (xvi) defectives, rejects, cuttings or end pieces of any of the above categories. By Karnataka act 13 of 1982 Explanation II was added to item 2  of the IV Schedule with retrospective effect  from  1.10. 1957  and to be effective tilt 31.3. 1978 and that  Explana- tion reads as follows: "Explanation  11: Where tax has been paid in respect of  the sale or purchase of: (i) iron scrap, cast iron scrap, runner scrap and iron skull scrap  referred  to in entry (i) of serial number  2  or  in respect of steel melting scrap in all forms including  steel skull  turnings  and  borings referred to in  entry  (x)  of serial  number  2  and out of the said  scrap,  steel  semis (ingots, slabs, blooms and billets of all qualities,  shapes and sizes) referred to. m’ entry (ii) of serial number 2 are manufactured and sold; or (ii)  steel semis (ingots, slabs, blooms and billets of  all qualities,  shapes and sizes) referred to in entry  (ii)  of serial  number  2 and out of the said steel  semis  any  re- rolled  products of iron and steel referred to in anyone  or more of the entries at (iii), (v), (vii) and (xv) serial No. 2 are manufactured and sold, no tax shall be leviable on the sale  of the said steel semis or the re-rolled  products  as the case may be.         Provided  that the dealer claiming exemption of  tax under  this explanation furnished before the  assessing  au- thority concerned proof of levy and payment of tax by 259 the  previous or earliest of successive dealers on the  said scrap  or steel semis used in the manufacture of  the  steel semis re-rolled products, as the case may be.           Provided further that in respect of the said steel semis  or the said re-rolled products of iron and steel,  no amount was collected by the dealer from his customers by way of tax or purporting to be by way of tax."     As  already  stated the appellant purchases  iron  scrap both from local registered dealers and also from the dealers outside  the State of Karnataka and manufactures ingots  and sells  the  same mostly within the State of  Karnataka.  The constitutional  validity  of  the above  said  provision  is challenged on the ground that while the appellant’s sale  of ingots manufactured out of locally purchased scrap will  not be subjected to tax, the appellant’s sale of ingots manufac- tured  out  of  scrap purchased from outside  the  State  of Karnataka would be subjected to tax.     In  the  Firm A.T.B. Mehtab Majid and Co.  v.  State  of Madras  and Anr., [1963] (Suppl.) 2 SCR 435 this Court  con- sidered the constitutional validity of Rule 16 of the Madras General  Sales  Tax Rules. Rule 16 of the  Rules  which  was impugned in the case read as follows: "16.(1)  In the case of untanned hides and/or skins the  tax under  section 3(1) shall be levied from the dealer  who  is the  last  purchaser in the State not exempt  from  taxation under section 3(3) on the amount for which they are  brought by him. (2)(i) In the case of hides or skins which have been  tanned

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 14  

outside the State the tax under section 3(1) shall be levied from the dealer who in the State is the first dealer in such hides  or skins not exempt from taxation under section  3(3) on the amount for which they are sold by him. (ii)  In the case of tanned hides or skins which  have  been tanned within the State, the tax under section 3(1) shall be levied  from a person who is the first dealer in such  hides or skins not exempt from taxation under section 3(3) on  the amount for which they are sold by him: Provided that, if he proves that the tax has already 260 been  levied  under sub-rule (1) on the untanned  hides  and skins  out  of  which the tanned hides and  skins  had  been produced, he shall not be so liable. (3)  The burden of proving that a transaction is not  liable to taxation under this rule shall be on the dealer."     It  was contended for the petitioner in that  case  that the  effect  of  this rule was that tanned  hides  or  skins imported  from outside the State and sold within  the  State are 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 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, is, 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 are purchased in the raw condition and which is substantially less than the sale price of tanned hides or skins.  It was further contended for similar reasons,  hides or  skins imported from outside the State after purchase  in their  raw  condition and then tanned inside the  State  are also  subject  to higher taxation that hides or  skins  pur- chased  in the raw condition in the State and tanned  within the State, as the tax on the former is on the sale price  of the  tanned hides or skins and on the latter is on the  sale price  of  the  raw hides or skins.  Such  a  discriminatory taxation was said to offend the provisions of Article 304(a) of the Constitution.     This Court pointed out that if the dealer has  purchased the  raw hide or skin in the State, he does not pay  tax  on the sale price of the tanned hides or skins. He pays on  the purchase  price of untanned hides or skins, only. If on  the other hand, dealer purchases raw hides or skins from outside the State and tans them within the State, he will be  liable to  pay sales tax on the sale price of the tanned  hides  or skins.  He  will have to pay more for tax  even  though  the hides  and  skins  are tanned within the  State,  merely  on account  of  his having imported the hides  and  skins  from outside and having not paid any tax under subrule (1).  This is  one  of the reasons on which this Court held  that  rule 16(2)  discriminated  against the imported  hides  or  skins which  had  been purchased or tanned outside the  State  and that  therefore  they contravene the provisions  of  Article 304(a)  of *,he Constitution. The next ground on which  this Court  invalidated the Rule was that mere circumstance Of  a tax  having been paid on the sale of such hides or skins  in the  raw condition did not justify their forming goods of  a different kind from the tanned hides or skins which had been imported 261 from outside. At the time of sale of those hides or skins in the  tanned state, there was no difference between  them  as goods  and  the hides or skins tanned outside the  State  as goods.  The similarity contemplated by Article 304(a) is  in the nature of the quality and kind of the good and not  with

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 14  

respect  to  whether they were subject of a tax  already  or not.     On the ground that the decision of this Court in  A.T.B. Mehtab’s  case (supra) will result in claims for  refund  of tax  being preferred by dealers in hides and  skins  already assessed  under the impugned Rule thereby resulting in  huge loss  of  revenue  and will also  result  in  administrative complications, the Madras General Sales Tax (Special  Provi- sions) Act, 1963 was made. That Act provides that: "(1)  Notwithstanding anything contained in  Madras  General Sales  Tax  Act, 1939 (Madras Act IX of  1939)  (hereinafter referred to as the said Act), or in the rules made  thereun- der (hereinafter referred to as the said rules), during  the period  commencing on the 1st April, 1955 and ending on  the 31st  March, 1959, in respect of sale of dressed  hides  and skins (which were not subjected to tax under the said Act as raw  hides and skins), the tax under the said Act  shall  be levied from the dealer who in the State is the first  seller in such hides and skins not exempt from taxation under  sub- section (3) of section 3 of the said Act at the rate of  two per  cent of the amount for which such hides and skins  were last purchased in the untanned condition."     This  was  challenged in this Court by way  of  petition under  Article  32  of the Constitution in  A.  Majee  Abdul Shakoor and Company v. State of Madras, [1964] 8 SCR 2 17 on the ground that the persons who had purchased raw hides  and skins  in  the State of Madras in the relevant  period  paid sales  tax at 3 pies per rupee and paid no further tax  with those  hides  after being tanned were not sold  whereas  the petitioners  having purchased raw hides and skins from  out- side the State did not at the time paid tax at that rate  on the  purchase price of the raw hides and skins but were  not now  liable under the impugned provision to pay tax  at  the rate  of 2 per cent of the amount for which such  hides  and skins  were last purchased in untanned condition.  Thus  the contention  was that the petitioners would pay a higher  tax than  what was paid by the seller of dressed hide and  skins purchased in the State in raw condition and then tanned  and sold  and that, therefore, the impugned provisions  set  out above discriminate against imported untanned hides 262 and skins. Accepting this contention after referring to  the decision  in  A.T.B. Mehtab’s case (supra)  this  Court  ob- served: "In  the earlier case, discrimination was brought  about  on account  of sale price of the tanned hides and skins  to  be higher  than  the sale price of untanned  hides  and  skins, though  the rate of tax was the same, while in  the  present case,  the discrimination does not arise on account of  dif- ference  of the price on which the tax is levied as the  tax on  the tanned hides and’ skins is levied on the amount  for which  those  hides  and skins were last  purchased  in  the untanned condition, but on account of the fact that the rate of tax on the sale of tanned hides and skins is higher  than that on the sale of untamed hides and skins. The rate of tax on  the sale of tanned hides and skins is 2 per cent on  the purchase  price  of those hides and skins  in  the  untanned condition while the rate of tax on the sale of raw hides and skins in the State during 1955 to 1957 is 3 pies per ,rupee. The  difference in tax works out to 7/16 paise of  a  rupee, i.e.,  a little less than 1/2 naye paise per rupee.  Such  a discrimination  would  affect the taxation upto the  1st  of August  1957 when the rate of tax on the sale of  raw  hides and skins was raised to 2 per cent of the sale price."     Prima facie the ratio of these two decisions applies  to

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 14  

the facts of the present case. However, it was contended  by the  learned counsel for the Revenue before the  High  Court that  this Court has struck a new or different note  in  the cases of State of Madras v. N.K. Nataraja Mudaliar, [1968] 3 SCR 829; Rattan. Lal & Co. v. Assessing Authority, [1969]  2 SCR  544  and Associated Tanners v. Commercial  Tax  Officer Vizianagaram, and Others, [19861 62 STC 1 and this  argument was accepted and the impugned provisions were held valid  by the High Court in the decision under appeal.     The point that was raised in the State of Madras v. N.K. Nataraja Mudaliar (supra), was that Section 8(2)(2A) and (5) of  the  Central Sales Tax which permitted levy  of  tax  on inter-State  sale at varying rates in different States  were invalid.  In  order  to understand the exact  ratio  of  the judgment  which was noticed in the judgment itself, we  have to note the development of the law relating to imposition of tax on interState sale. In exercise of the powers  conferred under Entry 58 List 11 of the Seventh Schedule in Government of India Act and the corresponding Entry 54 of List 2 of the Seventh Schedule to the Constitution 263 which  enable the State to legislature on taxes on the  sale or  purchase  of goods other than newspaper  various  States enacted  sales tax laws for the respective States acting  on the  principle  of territorial nexus and picked out  one  or more ingredients constituting a sale and made it or them the basis  of imposing liability for sales tax. This led to  the imposition  of  multiple taxation on  a  single  inter-State transaction  by  different States, each State  relying  upon some  territorial nexus between the State and the sale.  The constitutional validity of these provisions were  questioned on  the basis of the restriction placed on  the  legislative power  under  the Constitution. In the State  of  Bombay  v. United Motors (India) Ltd., [1953] SCR 1069 this Court  held that  importing State is competent to levy tax  on  transac- tions of sale in the course of inter-State sale or  commerce on persons who are resident outside the territory,  provided that the goods were delivered in the importing State for the purpose  of consumption therein. Thus the delivery for  con- sumption  within the State was considered to be a  point  at which  the tax can be levied on inter-State sale.  But  this decision made the dealer carrying on business in the export- ing  State  amenable to the sales tax law of  the  importing State.  The question was again considered by this  Court  in Bengal Immunity Company Ltd. v. State of Bihar, [1955] 2 SCR 603. This Court held in that case that a sale or purchase in the course of inter-State sale, trade or commerce could  not be taxed by any State until by law it was provided otherwise by Parliament. This led to the amendment of the Constitution by  the  Constitution (Sixth Amendment) Act, 1956.  By  that amendment  Article 286 was amended. Entry 92A was  added  to the  Union List and Entry 54 was also suitably amended.  The Parliament then enacted the Central Sales Tax Act, 1956.  In respect  of the certain transactions which were held by  the assessing  authorities  as inter-State  sales  the  assessee moved  the High Court of Madras under Article 226 seeking  a writ  of certiorari quashing the order of assessment on  the ground  that  the provisions of the Central  Sales  Tax  Act which  permitted levy of tax at varying rates  in  different States  on  similar  inter-State  transactions  and  thereby resulting  in  inequality  in burden of  tax,  affected  and impeded  inter-State trade, commerce and  intercourse  which are prohibited under Article 301 and 303(1) of the Constitu- tion.     The  tax under the Central Sales Tax is payable  by  the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 9 of 14  

seller. The State from which the movement of goods commences in the course of inter-State sale collects the tax as  agent of the Central Government but section 9(4) provides that the tax  collected under the Act in any State on behalf  of  the Government  of India are to be assigned to that  State.  The scheme  of the Central Sales Tax Act has been neatly  summa- rised if we 264 may say so with respect, in State of Madras v.N.K.  Nataraja Mudaliar  (supra)  and no apology, is needed to  quote  that passage in extenso, which reads as follows: "The  scheme of the Act was first to devise  definitions  of ’inter-State sales’ and ’sales outside the State’, and  then to declare inter-State sales subject to tax, and to ’set  up machinery  for  levying and collecting tax on  those  sales. Transactions in goods which were made subject to tax in  the course of inter-State trade or commerce were classified into three  broad categories--(1) transactions falling within  s. 8(1) i.e. all sales to Government, and sales to a registered dealer  other  than the Government of goods referred  to  in sub-s (3) of s. 8(2) transactions falling within s.  8(2)(a) i.e.,  sales in respect of declared goods; and (3)  transac- tions  falling  within  s. 8(2)(b) i.e.  sales  not  falling within  (1) in respect of goods other than  declared  goods. Sales  of goods in category (1) were declared liable at  the relevant time to pay a tax of two per cent, on the turnover. On  sales of declared goods tax was to be calculated at  the rate applicable to the sale or purchase of such goods inside the appropriate State. But by s. 15 the tax payable under  a State  law  in respect of any sale or purchase  of  declared goods inside the State was not to exceed two per cent of the sale or purchase price thereof, and was not leviable at more than  one stage. On turnover from sale of goods not  falling within categories (1) & (2) the rate was seven per cent,  or the  rate applicable to the sale or purchase of  such  goods inside  the appropriate State, whichever was higher. But  by sub-s.  (2A)  of s. 2 it was provided  that  notwithstanding anything contained in sub-s. (1) or sub-s. (2), if under the sales tax law of the appropriate State the sale or purchase, as the case may be, of any goods by a dealer is exempt  from tax generally or is subject to tax generally at a rate which is lower than two per cent. the tax payable under the Act on the  turnover insofar as the turnover or any part  therefore relates  to the sale of such goods shall be nil, or  as  the case may be shall be calculated at the lower rate. There  is a slight inconsistency between s. 8(2) and s. 8(2A). if  the rate of tax under the State law is less than two per cent by virtue  of  s. 8(2A), even in respect  of  turnover  falling within s. 8(2)(b), the rate of tax will not exceed the State rate;  if  the State rate exceeds two per cent, tax  at  the rate of seven 265 per  cent or of the State, whichever is higher,  shall  pre- vail. But that has no beating on the question under  discus- sion."     The main contention in Nataraja Mudaliar’s case was that the liability to pay tax on inter-State transaction  depend- ing upon the rate of tax prevailing in the exporting  State, hampers  trade  and commerce by giving  or  authorising  the giving of preference to one State over another or by  making or  authorising  the making of  discrimination  between  one State and another violating the provisions of Articles 30  1 and  303(1) of the Constitution. After noting the  decisions that every imposition of tax does not amount to  restriction or impediment of the free flow of trade or commence but that

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 10 of 14  

levy which directly and immediately impede or hampering  the free  flow  of trade or commerce only will fail  within  the provisions  imposed by Articles 301, this  Court  considered the question whether tax imposed under sub-sections  (2)(2A) and (5) of section 8 of the Central Sales Tax Act on  inter- State  sales do no amount to law giving or  authorising  the giving of any preference to one State over the other on  the ground  of  varying  rates of tax  prevailing  in  different States. It was argued in that case that the rates of tax  on the  sale  of  the same or similar  commodity  by  different States by itself was discriminatory since it authorised  the placing  of unequal burden on inter-State trade or  commerce affecting  its free flow between the States. It was  further contended that since the rates of tax prevailing in  differ- ent  States  on transactions of sale were  not  uniform  the impugned  provisions affected the free movement or  flow  of goods  in inter-State trade. Rejecting this contention  this Court held that: "The  flow  of trade does not necessarily  depend  upon  the rates  of sales tax: it depends upon a variety  of  factors, such  as the source of supply, place of consumption.  exist- ence of trade channels, the rates of freight, trading facil- ities, availability of efficient .transport and other facil- ities  for carrying on trade. Instances can easily be  imag- ined of cases in which notwithstanding the lower rate of tax in  a particular part of the country goods may be  purchased from  another  part  where a higher rate  of  tax  prevails. Supposing  in a particular State in respect of a  particular commodity, the rate of tax is 2% but if the benefit of  that low rate is offset by the freight which a merchant in anoth- er State may have to pay for carrying that commodity over  a long distance, the merchant would be willing to purchase the goods  from a nearer State, even though the rate of  tax  in that  State may be higher. Existence of long-standing  busi- ness 266 relations, availability of communications, credit facilities and a host of other factors-natural and business-enter  into the  maintenance  of trade relations and the  free  flow  of trade  cannot necessarily be deemed to have been  obstructed merely  because  in a particular State the rate  of  tax  on sales is higher than the rates prevailing in other States." and that "by  authorising the State from which the movement of  goods commences to levy on transactions of sale Central Sales  Tax at rates prevailing in the State subject to the  limitations already  set out, in our judgment no discrimination  can  be deemed to be practiced."     As may be seen from the above discussion the decision in Nataraja Mudaliar’s case (supra) related to a levy of  sales tax on interState sale under the Central Sales Tax Act by  a State  in which the movement of goods commenced  subject  to certain  exceptions and limitations. If the rate of  tax  on inter-State  sale was the same as that for inter-State  sale no discrimination can be said to arise.     After referring to the decisions in Nataraja  Mudaliar’s case  (supra)  and Hajee Abdul Shakoor’s  case  (supra)  and distinguishing the same this Court further observed: "In  the two cases the differential treatment violated  Art. 304(a) of the Constitution, which authorises the Legislature of a State notwithstanding anything in Arts. 30 1 and 303 by law  to "impose on goods imported from other States  or  the Union  territories any tax to which similar  goods  manufac- tured or produced in that State are subject, so however,  as not  to discriminate between goods so imported and goods  so

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 11 of 14  

manufactured or produced.". Imposition of differential rates of  tax by the same State on goods manufactured or  produced in  the  State and similar goods imported in  the  State  is prohibited by that clause. But where the taxing State is not imposing rates of tax on imported goods different from rates of tax on goods manufactured or produced, Art. 304(a) has no application.  Article 303 prohibits the making of law  which gives,  or authorises the giving of, any preference  to  one State  over another, or makes, or authorises the making  of, and dis- 267 crimination  between  one State and another.  Prevalence  of different  rates of sales-tax in the State which  have  been adopted by the Central Sales Tax Act for the purpose of levy of tax under that Act is, as already mentioned, not,  deter- minative of the giving of preference or making a discrimina- tion."     What  is relevant is that A.T.B. Mehtab’s  case  (supra) and  Hajee Abdul Shakoor’s case (supra) are  concerned  with hides and skins tanned inside the State but by reason of the raw  material having suffered the tax, the goods tanned  out such  raw  material was exempted from tax  which  in  effect means  not taxable goods or the tax is nil. That is how  the discrimination arose in those two cases. We may also mention that  Nataraja Mudaliar’s case (supra) did not dissent  from the  ratio  of  the judgment in Mehtab  Majid  &  Co’s  case (supra) or Hajee Adbul Shakoor’s case (supra).     In Rattan Lal & Co. & Anr. v. The Assessing Authority  & Anr.  (supra) the discrimination pleaded was that in  fixing the stage of tax for declared goods section 5(3) of the  Act made  a  discrimination  between imported  goods  and  local goods. That provision reads as follows: "(3) Notwithstanding anything contained in this Act-- (a) in respect of declared goods tax shall be levied at  one stage and that stage shall be-- (i)  in the case of goods liable to sales tax, the stage  of sale  of  such goods by the last dealer liable  to  pay  tax under this Act; (ii) in the case of goods liable to purchase tax, the  stage of  purchase of such goods by the last dealer liable to  pay tax under this Act;     The argument was that there is a discrimination  between the  first purchase in the case of imported goods  and  last sale  in the case of local goods. Since the  imported  goods might be more expensive by reason of freight etc. or  inter- mediary  sales  having taken place, it was  said,  that  the burden  of  tax will be heavier and,  therefore,  this  will offend against the equality clause under Article 304 of  the Constitution. Overruling this objection this Court held: 268 "The  rate of tax is same in every case. In State of  Madras v.  N.K Nataraja Mudaliar, [1969] 1 SCR, this  Court  stated that  the  essence of Arts. 30 1 and 303 is  to  enable  the State  by  a  law "to impose on goods  imported  from  other States  or  the Union territories any tax to  which  similar goods manufactured or produced in the State and subject, so, however as not to discriminate between goods so imported and goods  so manufactured or produced." It was pointed  out  by this Court that "imposition of differential rates of tax  by the  same  State on goods manufactured or  produced  in  the State and similar goods imported in the State is  prohibited by  that clause. But where the taxing State is not  imposing rates  of tax on imported goods different from rates of  tax on   goods  manufactured  or  produced,  Art.  304  has   no application.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 12 of 14  

         Here  also the tax is at the same rate and  there- fore  the  tax cannot be said to be higher in  the  case  of imported goods. It may be that when the rate is applied  the resulting  tax is somewhat higher but that does  not  offend against  the equality contemplated by Art. 304. That is  the consequence  of ad valorem tax being levied at a  particular rate. So long as the rate is the same Art. 304 is satisfied. Even  in  the case of local manufactures if  their  cost  of production  varies,  the net tax collected will be  more  or less  in some cases but that does not create any  inequality because inequality is not the result of the tax but  results from  the  cost of production of the goods or  the  cost  of their  importation.  This  ground, therefore,  has  also  no substance.     In  Associated Tannerse v. Commercial Tax Officer  Vizi- anagaram  & Ors. (supra) the facts were these. The  assessee was  a tanner who had a tannery at Vizianagaram and  was  at the material time a dealer under the Andhra Pradesh  General Sales Tax Act, 1957 (hereinafter called the ’State Act’)  as well as the Central Sales Tax Act, 1956 (hereinafter  called the  ’Central  Act’). The assessee purchased raw  hides  and skins in the State of Andhra Pradesh and tanned the same. He was selling mostly the tanned hides and skins in the  course of  inter-State  trade. The assessing officer  assessed  the assessee’s  interState  sales  under the  Central  Act.  The assessee filed a writ petition in the High Court questioning the constitutional validity of item 9(b) of Schedule III  of the Andhra Pradesh General Sales Tax Act as unconstitutional and void and for a further declaration that no tax could be 269 levied  or was leviable under the Central Sales Tax  Act  on inter-State sales of tanned hides which had already suffered tax at the untanned stage. Thus the question for  considera- tion  was whether tanned hides and skins which  has  already suffered tax at the untanned stage when sold in  inter-State sale was liable for levy of tax under the Central Act.  This was raised in this form because tanned hides and skins which were not subjected to tax as untanned hides and skins  alone was liable for the levy under items 9(b) of Schedule III  of the  State Act. The High Court dismissed the  writ  petition relying on the Nataraja Mudaliar case (supra) and Rattan Lal &  Co.  case (supra). The assessee preferred  an  appeal  by special  leave.  This Court was of the view that  the  point involved  in  the case was no longer res integra and  it  is covered  by the decision in Nataraja Mudaliar case and  held since  "the  rate of tax was the same, both  for  the  goods brought from outside as well as local goods and it cannot be said that the taxation did directly and immediately restrict or  hamper the free flow of trade, commerce, or  intercourse and  it  offended Article 304 (a)." But it is  pertinent  to point  out  the further passages appearing in  the  judgment which  actually show the ratio of the judgment. The  learned Judges observed: "It further appears to us that there is another aspect.  The levy  by the State Act is in consonance with the  scheme  of the  Central  Act. By sub-section (2) of section  8  of  the Central  Act, the tax payable by any dealer on his  turnover in so far as the turnover or any part thereof relates to the sale of goods in the course of inter-State trade or commerce not  falling  under sub-section (1), shall be  at  the  rate specified in sub-section (2) of section 8." and this Court further observed: "The  effect of an imposition of tax might work  differently upon  different  dealers,  namely, those  who  use  imported tanned  goods and those who purchase these locally  and  tan

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 13 of 14  

these  locally  and then sell in the course  of  inter-State sales. But that effect cannot be said to be arising  direct- ly, or as an immediate effect of the imposition of the  tax. Therefore  there  cannot  be any question  of  violation  of article 304(a) of the Constitution. There  is  another aspect of the matter. The  imposition  in this  case was in implementation of the Central Act  and  it was submitted on behalf of the respondent that there was 270 no prohibition under article 304 of the Constitution on  the Parliament  for imposition of any law. The embargo that  was placed by article 304 of the Constitution was on the  Legis- lature of a State. Sub-article (a) of article 304 of the Constitution reads  as follows: "304. Restrictions on trade, commerce and intercourse  among States.--Notwithstanding anything in article 30 1 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 was subject, so, however, as not  to discriminate between goods so imported and goods so manufac- tured or produced."           Therefore  the prohibition was not on the  Parlia- ment.  But in the view we have taken on the first aspect  of the matter and in view of the decisions of this Court in the cases of State of Madras v.N.K. Nataraja Mudaliar, [1968] 22 STC  376  (SC);  (1968) 3 SCR 829 and Rattan Lal  &  Co.  v. Assessing  Authority, [1970] 25 STC 136 (SC): (1969)  2  SCR 544,  it is not necessary for us to discuss this aspect  any further. ’ ’     It may be seen from these passages cited that the  ratio of  the decision as in the case of Nataraja  Mudaliar,  case (supra) was that in the case of inter-State sale the levy of tax  is  under  the Central Sales Tax only  though  for  the purposes  of rates of tax that rate which is  applicable  to local  sales is adopted subject to the maximum mentioned  in section 8(2) of the Central Act and these decisions have  no application to a case where the discrimination pleaded  with reference  to a provision in State law imposing  taxes  with reference  to  local as well as in respect of  the  imported goods. As we have already noticed the States have no  legis- lative  power  to tax inter-State sales and it is  only  the Parliament  that could make law. The Central Act is the  law relating to tax on inter-State sales made by Parliament. The State  from  which the movement of goods  commences  in  the course of inter-State sale collects the tax as agent of  the Central Government. On sale of declared goods tax was to  be levied  and collected at the rate applicable to the sale  or purchase of such goods inside the appropriate State  subject to the maximum prescribed under section 15 and the  restric- tion relating to 271 taxing it at single point. This is also further subjected to the rates prevailing for local sales. It is with respect  to these provisions, in the three decisions in Nataraja Mudali- ar  case, Rattan Lal & Co. case and Associated  Tanner  case this  Court  held that so long the rates applicable  are  in accordance with section 8 no discrimination would arise  and none  of  the provisions of part XIII  of  the  Constitution could be said to have been offended. But the case on hand is not one arising out of Central Act. The tax was levied under the  State  Act  in respect of steel semis.  The  State  Act exempted  steel  semis which have been manufactured  out  of iron scrap which have suffered tax but not the other catego-

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 14 of 14  

ries  where  the scrap had not suffered tax at  that  stage. This is directly covered by the decision in A.T.B.  Mehtab’s case  (supra)  and that decision has not been  dissented  in Nataraja  Mudaliar  case (supra) or Rattan Lal &  Co’s  case (supra). The decision in A.T.B. Mehtab’s case (supra) is  by a  Constitution Bench and had not been dissented so  far  in any case. The ratio of the judgment being fully  applicable, the  judgment of the High Court under appeal is not  accept- able.     We accordingly hold that the provision which is impugned in  this case is ultra vires and accordingly set  aside  the judgment of the High Court and allow the writ petition filed by the assessee in the High Court. There will be no order as to costs. T.N.A.                                               Appeals allowed. 272