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PETITIONER: INDIAN CEMENT AND ORS.

       Vs.

RESPONDENT: STATE OF ANDHRA PRADESH AND ORS.

DATE OF JUDGMENT12/01/1988

BENCH: MISRA RANGNATH BENCH: MISRA RANGNATH DUTT, M.M. (J)

CITATION:  1988 AIR  567            1988 SCR  (2) 574  1988 SCC  (1) 743        JT 1988 (1)    84  1988 SCALE  (1)43  CITATOR INFO :  R          1988 SC1814  (6)  R          1989 SC1119  (16)  D          1990 SC 820  (17,30,32,35)

ACT:      Andhra Pradesh  General  Sales  Tax  Act,  1957-Central Sales Tax  Act, 1956  Challenge to validity of notifications issued under  sub-section (  I) of section 9 and sub-section (5) of  section 8-Respectively-of-As  hit by  provisions  of Part Xlll of the Constitution.

HEADNOTE: %      The State  of Andhra  Pradesh  in  exercise  of  powers conferred under  sub-section (1)  of section 9 of the Andhra Pradesh General  Sales Tax  Act,  1957,  made  an  order  on January 27, 1987, reducing the rate of tax on sale of Cement made to  the manufacturing  units of  Cement products in the State. On  the same  date, the  State of Andhra pradesh made another order  in exercise  of the  powers conferred by sub- section (5) of section 8 of the Central Sales Tax Act, 1956, reducing the  tax leviable  under the said Act in respect of sales of  Cement in  the course  of the inter-State trade or commerce.      The State  of  Karnataka  in  exercise  of  the  powers conferred by  sub-section (5)  of section  8 of  the Central Sales Tax  Act, 1956,  issued a  notification on 28.10.1987, reducing the  rate of  tax payable under the said Act on the sale of  Cement in  the course  of the  inter-State trade or commerce.      The petitioners-cement  manufacturing  concerns,  their shareholders and  their authorised stockists-filed this writ petition, challenging  the vires  of  section  8(5)  of  the Central Sales Tax Act, 1956 (Central Act 74 of 1956) and the notifications  referred   to  above   as  ultra   vires  the provisions  contained  in  Part  XIII  of  the  Constitution providing that  trade, commerce  and inter-course throughout the territory  of India  shall be  free.  According  to  the petitioners the three orders referred to above created trade barriers and  directly impinged  upon the  freedom of trade, commerce and inter-course provided for in Article 301 of the

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constitution.      Since the  vires of  section 8(5) of the Central Act 74 of 1956  had been  assailed, notice  had been  issued to the Union of  India, Attorney General, and all the States but at the hearing of the writ petition, the 575 petitioners gave  up the  challenge against  section 8(5) of the Central  Act. In  view of  that, the  writ petition  was confined to  the challenge  against the  two notification of the State of Andhra Pradesh and the lone notification of the State of  Karnataka. The return to the rule nisi was made on behalf  of  the  State  of  Andhra  Pradesh.  The  State  of Karnataka chose not to make any return to the rule nisi, but its counsel  joined at  the hearing  and contended  that the order made  by  the  Karnataka  State  did  not  affect  the provisions in  Part XllI  of the Constitution. The Attorney- General confined  his submission to the scope of Part III of the Constitution  and the effect of the notifications on the scheme contained in that part.      Allowing the writ petition, the Court, ^      HELD: The  title for  Part  XIII.  which  contains  the relevant Articles  30 l, 302, 303 and 304 is "Trade Commerce and inter-course  within the  Territory of  India." The true purpose of  the provisions  contained in  Part Xlll  of  the Constitution, as  elucidated in  the different  decisions of the  Constitution   Benches  of  this  Court,  is  that  the restriction provided for in Article 301 can within the ambit be limited  by law  made by  the Parliament  and  the  State legislature. No  power is  vested in the executive authority to act in any manner affecting or hindering the very essence and thesis  contained in  the scheme  of Part  XIII  of  the Constitution. lt  is  equally  clear  that  the  declaration contained in  Part XIIl  of the  Constitution is against the creation of  economic barriers  and or  pockets which  stand against the  free now  of trade,  commerce and inter-course. [580F; 587H; 588A-B]      Taxation is  a deterrent against free flow. As a result of favourable  or unfavourable treatment by way of taxation, the course  of flow of trade gets regulated either adversely or favourably.  If the scheme which Part XIII guarantees has to be  preserved in  national interest, it is necessary that the provisions  in the  Article must  be  strictly  complied with. One  has to  recall the  far-sighted  observations  of Gajendragadkar. J.  in Atiabari Tea Co. Ltd. v. The State of Assam &  Ors., [1961] 1.S.C.R. 609 and the observations then made obviously  apply to  cases of  the type  now before the Court.[588C-D]      Under the first notification made under section 9(1) of the Andhra  Pradesh General  Sales Tax  Act, the rate of tax was reduced to 4 percent in respect of the sales made by the indigenous cement  manufacturers to  manufacturers of Cement products. The  Tamil Nadu  producers had  sales officers  in Andhra  Pradesh   and  in  regard  to  their  sale  to  such manufacturers of cement products, the benefit of the reduced rate of 576 taxation was  not applicable.  Two reasons  were advanced by way of  justification. One was that it was beneficial to the State revenue  and secondly,  that it  protected  the  local manufacturers too. It could not be demonstrated to the Court how the  reduction in  the rate of sales tax was beneificial to the  State revenue.  The other justification was what the provisions of  Part XIII of the Constitution did not permit. The reasonable restriction contemplated in Part XIII have to

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be backed  by law  and not by executive action, provided the same are  within the limitations prescribed under the Scheme of Part XIII.[588D-H]      The second  notification  related  to  the  inter-State transactions. Variation of the rate of inter-State sales tax does affect  free trade  and commerce  and creates  a  local preference which  is contrary  to the scheme of Part XIII of the Constitution. The notification extended the benefit even to the  unregistered dealers.  Both the notifications of the Andhra Pradesh Government were bad and hit by the provisions of  Part  Xlll  of  the  Constitution.  They  could  not  be sustained in law.[592D]      In the case of the notification of the Karnataka State, as already  said, no return had been made and no attempt had been made  to place  the facts  and circumstances to justify the action.  The notification suffered from the same vice as the second  notification of  the  State  of  Andhra  Pradesh suffered,  and   no  distinction   could   be   drawn.   The notification of  the Karnataka  Government was  also bad  in law. [597E-F]      The  writ  petition  succeeded  and  the  two  impugned notifications of  the  Andhra  Pradesh  Government  and  the impugned  notification  of  the  Karnataka  Government  were quashed. [592G]      Atiabari Tea  Co. Ltd.  v. The  State of  Assam & Ors., [1961] 1  S.C.R. 609;  The Automobile  Transport (Rajasthan) Limited v. The State of Rajasthan & Ors., [1963] S.C.R. 491; State of  Madras v. N.K. Nataraja Mudaliar., [1968] 3 S.C.R. 829;  Gwalior  Rayon  Silk  Mfg.  (Wvg.)  Co.  Ltd.  v.  The Assistant Commissioner  of Sales Tax & Ors., [1974] 2 S.C.R. 879 and  State of  Tamil Nadu,  etc. v.  Sitalakshmi  Mills, etc., [1974] S.C.R. 1, referred to.

JUDGMENT:      ORIGINAL JURISDICTION: Writ Petition (Civil) No. 422 of 1987.      (Under Article 32 of the Constitution of India).      Dr. Y.S.  Chitale, K.J.  John, Atul  Chitale  and  Miss Naina for the Petitioners. 577      K. Parasaran,  Attorney  General,  T.S.  Krishnamoorthy Iyer, G.A.  Shah, V.  Jagannatha Rao  Advocate General, B.B. Ahuja, Miss  A.  Subhashini,  T.V.S.N.  Chari,  Miss  Vrinda Grover, Badri  Nath, Dr.  N.M. Ghatate,  M.  Veerappa,  A.M. Khanwilkar, A.S.  Bhasme, R.  Mohan, R.  Ayyam  Perumal,  A. Subha Rao,  M.N. Shroff,  J.R. Das,  D.K. Sinha, S.N. Khare, T.C. Sharma,  S.K. Bhattacharya,  Kailash Vasudev and Probir Choudhary for the Respondents.      The Judgment of the Court was delivered by      RANGANATH MISRA, J. The India Cement Limited, Chettinad Cement Corporation, Dalmia Cement (Bharat) Limited and Tamil Nadu Cement  Corporation Limited  being petitioners  1, 6, 9 and  12   in  this  application  under  Article  32  of  the Constitution are  manufacturers  of  cement,  each  of  them having its  manufacturing unit  as also  registered  offices located within  the State  of Tamil  Nadu; petitioners 2, 7, and  10   are  shareholders   of  petitioners  1,  6  and  9 respectively and  are citizens of India, while the remaining petitioners  are   authorised  stockists  of  the  different manufacturers having  their places  of business at different places located  in the States of Karnataka, Kerala and Tamil Nadu.  Manufacturer-petitioners   have  been  selling  their cement in  the States  of Karnataka  and Kerala and for such

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purpose they  have places  of business  within those States. The State  of Andhra Pradesh in exercise of powers conferred under sub-section  ( 1)  of Section  9 of the Andhra Pradesh General Sales  Tax Act,  1957 made  an order  on January 27, 1987 (Annexure-A) reducing the rate of tax on sale of cement made to  the manufacturing  units of  cement products in the State of Andhra Pradesh. That order runs thus:           "In exercise  of  the  powers  conferred  by  sub-           section (  1) of  Section 9  of the Andhra Pradesh           General Sales  Tax Act,  1957 (Andhra Pradesh Act,           No. VI  of 1957),  the Governor  of Andhra Pradesh           hereby directs  that the tax leviable under clause           (a) of sub-section (2) of Section 5 read with Item           18 in  the First  Schedule to the said Act, shall,           in  respect   of  Cement  manufactured  by  Cement           Factories situated  in the  State and  sold to the           manufacturing units  situated within the State for           the purpose of manufacture of Cement products such           as Cement sheets, Asbestos Sheets, Cement flooring           stones, Cement  concrete pipes, hume pipes, Cement           water and  sanitary fitting,  concrete  poles  and           other Cement  products, be  at the reduced rate of           four paise in the rupee at the point of first sale           in the State with effect on 578           and from the Ist January, 1987."      On  the  same  day,  another  order  was  made  to  the following effect:           "In exercise  of  the  powers  conferred  by  sub-           section (5)  of Section 8 of the Central Sales Tax           Act, 1956  (Central Act  74 of  1956), Governor of           Andhra  Pradesh   hereby  directs   that  the  tax           leviable under  the said Act, shall, in respect of           the sales  of cement  in the course of inter-State           trade or  commerce be  at a  lower rate of two per           cent with  or without  ’C’ Form,  with effect from           1st January, 1987."      The   State   of   Karnataka   issued   the   following notification on 28.2.1987:           "In exercise  of  the  powers  conferred  by  sub-           section (5)  of Section 8 of the Central Sales Tax           Act, 1956 (Central Act 74 of 1956), the Government           of Karnataka, being satisfied that it is necessary           so to  do in  public interest, hereby reduces with           immediate effect the rate of tax payable under the           said Act  on the sale of cement made in the course           of inter-State trade or commerce from 15% to 2%."      Petitioners in  this application challenge the vires of Section 8(5) of the Central Sales Tax Act, 1956 (Central Act 74 of 1956) and the notifications referred to above as ultra vires  the   provisions  contained   in  Part  XIII  of  the Constitution providing that trade, commerce and inter-course throughout the  territory of  India shall be free. According to the petitioners the three orders referred to above create trade barriers  and directly  impinge upon  the  freedom  of trade, commerce and inter course provided for in Article 301 of the Constitution.      Since the  vires of  Section 8(5) of the Central Act 74 of 1956  had been  assailed, notice  had been  issued to the Union of India and learned Attorney General. Notice was also directed to  all the  States. Pursuant  to the  notice,  the State  of   Madhya  Pradesh  and  Sikkim  have  filed  their affidavits with  reference to  the challenge against Section 8(5) of  the Act.  At the  hearing  of  the  writ  petition, however, learned  counsel for  the petitioners  gave up that

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challenge. In  that view  of the  matter, reference  to  the counter-affidavits of  the  States  of  Madhya  Pradesh  and Sikkim becomes  irrelevant and  the petition  has to be con- fined to  the challenge against the two notifications of the State of T 579 Andhra Pradesh  and the  lone notification  of the  State of Karnataka.      The return  to the  rule nisi on behalf of the State of Andhra Pradesh  is  made  by  the  Commercial  Tax  officer, Company Circle  11, Hyderabad.  He has stated that the State of Andhra Pradesh has surplus production of cement. In 1986- 87, the  production of  cement was around six million tonnes out of  which local  consumption was  to the  tune of  about three million tonnes. In 1987-88 and 1988-89, production was likely to  go up  by 1.5  million tonnes  and three  million tonnes respectively  and the local consumption was estimated to be  within the range of 40% of the production. 60% of the manufactured cement  had, therefore,  to  be  marketed  out. Within the State there were certain bulk consumers of cement who use  the commodity  as  raw-material  for  manufacturing Cement sheets,  Asbestos sheets,  hume pipes, Cement bricks, tiles etc. Such bulk consumers found products of cement from outside the  State to  be cheaper  in  view  of  the  higher incidence of  local State tax. In this background Government considered it  necessary to  reduce the  tax rate  under the Andhra Pradesh  General Sales  Tax Act  to help  the  Cement Industries in easing out their marketing difficulty. Keeping in view  the fact that marketing of indigenous cement had to be inside  the State,  Government decided to reduce the rate of tax under the Andhra Pradesh General Sales Tax Act to 4%. That is  how the  first notification  was made  reducing the rate  of   tax  in  respect  of  sale  of  cement  to  local manufacturers  as   aforesaid.  Government   by  the  second notification reduced  the rate  of tax  leviable  under  the Central Sales  Tax Act  in course  of inter-State  trade  or commerce to  2% with  or without  ’C’ Form  with effect from 1.1.1987. In  another place  of the  same affidavit,  it has been pleaded: "         The  classification   of  the   manufacturers  and           dealers in  cement of Andhra Pradesh vis-a-vis the           other States is a reasonable classification and it           is not violative of Articles 14 and 19(1)(g)".           "The concession in the rate of tax extended by the           State of  Andhra Pradesh  to the manufacturers and           dealers of  Andhra  Pradesh  is  well  within  the           statutory powers  of the State. It does not effect           the business  interest of  the  manufacturers  and           dealers of  other States.  It is the policy of the           State  of   Andhra  Pradesh  to  help  the  cement           Industries to  organise the marketability of their           full production  to improve the overall industrial           activity of  the country.  Hence  this  contention           tenable". 580           "As already  mentioned earlier,  the notifications           were issued in public interest and in the interest           of State revenue".      Yet at another place in the return. it has been stated:           "The contention that the policy of the Legislature           is  to   promote  sales  only  through  registered           dealers is  not based  on correct  appreciation of           the law.  Any law  to that  effect would  impose a           restriction on  the rights  of the  common man and           would result in the violation of the provisions of

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         the Constitution which ensures certain fundamental           rights to the common man.’’      The State  of Karnataka chose not to make any return to the rule  nisi but  its counsel  joined at  the hearing  and contended that the order made by the Karnataka State did not affect the provisions in Part XIII of the Constitution.      In view  of the  fact that counsel for petitioners gave up the challenge to the vires of Section 8(5) of the Central Sales  Tax   Act,  learned  Attorney  General  confined  his submissions to-the  scope of  Part XIII  of the Constitution and the  effect of the notifications on the scheme contained in that part.      In  case   the  notifications   operate   against   the provisions of Article 3o1 of the Constitution, they have got to satisfy the requirements contained in that Part. We shall now refer  to the relevant Articles and to several decisions of this  Court which  are binding  precedents. The title for Part XIII  is "Trade,  Commerce and  Inter-course within the Territory of  India." The relevant Articles in that Part are 30 1, 302, 303 and 304. We may now reproduce them:                "3o1. Subject to the other provisions of this           part, trade,  commerce and  intercourse throughout           the territory of India shall be free.                302.  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 (underlining is           ours)                303  .   (  1)  Notwithstanding  anything  in                Article 302, 581                neither Parliament  nor the  legislature of a                State  shall  have  power  to  make  any  law                giving, or  authorising the  giving,  or  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. 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 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 purpose of clause (b) shall be introduced

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              or  moved  in  the  Legislature  of  a  State                without  the   previous   sanction   of   the                President. "      Judicial authority  in regard to interpretation of this Part of  the Constitution  is abundant.  We shall  presently refer to  some of  the decisions of this Court . In Ataibari Tea Co.  Ltd. v. The State of Assam & Ors., [1961] I SCR 609 a Constitution  Bench of this Court was testing the validity of the provisions of the Assam Taxation (on goods carried by Roads and  Inland  Waterways)  Act,  1954  by  applying  the provisions of  this Part of the Constitution. At page 830 of the Reports. Sinha, CJ, stated:              "Article 301,with which part III commences,con- 582           tains    the  crucial  words  shall  be  free  and           provides the  key to  the solution of the problems           posed by  the whole  Part. The freedom declared by           this Article  is not  an absolute freedom from all           legislations. As  already indicated,  the  several           entries in the three Lists would suggest that both           Parliament and  State Legislatures have been given           the  power  to  legislate  in  respect  of  trade,           commerce and  intercourse, but it is equally clear           that legislation  should not  have the  effect  of           putting impediments  in the  way of  free flow  of           trade and  commerce. In  my opinion, it is equally           clear that the freedom envisaged by the Article is           not an  absolute freedom  from  the  incidence  of           taxation  in   respect  of   trade,  commerce  and           intercourse, as shown by entries 89 and 92A in the           List I,  entries 52,  54 and  56 to 6() in List II           and entry  35 in  List III.  All these  entries in           terms speak  of taxation  in relation to different           aspects of  trade, commerce  and intercourse.  The           Union and  State Legislature,  therefore, 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. That freedom           has further been circumscribed by the power vested           in Parliament  or in the Legislature of a State to           impose restrictions in public interest. Parliament           has further  been authorised  to legislate  in the           way of  giving preference or making discrimination           in   certain    strictly   limited   circumstances           indicated in clause (2) of Article 303. Thus, on a           fair construction  of the provisions of Part XIII,           the  following  propositions  emerge:  (1)  trade,           commerce and  intercourse throughout the territory           of India  are not absolutely free, but are subject           to certain  powers of legislation by Parliament or           the  Legislature  of  a  State;  (2)  the  freedom           declared by Article 301 does not mean freedom from           taxation simpliciter,  but does  not mean  freedom           from taxation  which has  the effect  of  directly           impeding the  free flow  of  trade,  commerce  and           intercourse; (3)  the freedom envisaged in Article           301 is  subject to non-discriminatory restrictions           imposed by  Parliament in public interest (Article           302);  (4)  even  discriminatory  or  preferential           legislation may  be made  by  Parliament  for  the           purpose  of  dealing  with  an  emergency  like  a           scarcity of  goods in  any part  of India (Article           303(2));  (5)   reasonable  restrictions   may  be

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         imposed by  the Legislature  of  a  State  in  the           public interest 583           (Article 304(b)); (6) non-discriminatory taxes may           be imposed  by the Legislature of a State on goods           imported from  another State  or other  States, if           similar taxes  are imposed  on goods  produced  or           manufactured in  that State  (Article 304(a)); and           lastly (7)  restrictions imposed  by existing laws           have been  continued, except  in  so  far  as  the           President may  by order  otherwise direct (Article           305)"; Gajendragadkar, J.,  as he  then was,  at page  843  of  the Reports observed:                "In drafting  the relevant  Articles of  Part           XIII, the  makers of  the Constitution  were fully           conscious  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.           Political  freedom   which  had   been  won,   and           political unity which had been accomplished by the           Constitution, had to be sustained and strengthened           by the  bond of  economic unity.  It was  realised           that  in   course  of  time,  different  political           parties believing  in different  economic theories           or idealogies  may come  in power  in the  several           constituent units  of  the  Union,  and  that  may           conceivably give  rise to local and regional pulls           and  pressures   in  economic  matters.  Local  or           regional fears or apprehensions raised by local or           regional   problems   may   persuade   the   State           legislatures to  adopt remedial  measures intended           solely  for   the  protection   of  the   regional           interests without  due regard  to their  effect on           the economy  of the  nation as a whole. The object           of Part XIII was to avoid such a possibility. Free           movement and  exchange  of  goods  throughout  the           territory of India is essential for the economy of           the nation and for sustaining and improving living           standards of  the country. The provision contained           in Article  301 guaranting  the freedom. Of trade,           commerce and intercourse is not a declaration of a           mere platitude,  or the expression of a pious hope           of declaratory  character; it  is not  also a mere           statement  of   a  Directive  Principle  of  State           Policy; it  embodies and  enshrines a principle of           paramount importance  that the  economic unity  of           the country will provide the main sustaining force           for the  stability and  progress of  the political           and cultural unity of the country ....... " 584 Then came  the case  of The Automobile Transport (Rajasthan) Limited v.  The State  of Rajasthan  & orS.,  [1963] SCR 491 Das, J. who spoke for the Constitution Bench referred to the views expressed  in Atiabari  Tea Company’s case (supra) and proceeded to say:                "We have tried to summarise above the various           stand points and views which were canvassed before           us and  we shall  now proceed  to consider  which,           according to  us, is the correct interpretation of           the  relevant   Articles  in   Part  XIII  of  the           Constitution. We  may first  take the widest view,           the view expressed by Shah, J. in the Atiabari Tea           C0mpany’s case, a view which has been supported by

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         the appellants  and one  or two of the interveners           before us.  This view  we apprehend, is based on a           purely  textual  interpretation  of  the  relevant           Articles in Part XIII of the Constitution and this           textual interpretation  proceeds in  the following           way. Article 30 I which is in general terms and is           made subject  to the other provisions of Part XIII           imposes a  general limitation  on the  exercise of           legislative powers,  whether by  the Union  or the           States, under any of the topics-taxation topics as           well as other topics-enumerated in the three Lists           of the  Seventh Schedule, in order to make certain           ’trade commerce  and  intercourse  throughout  the           territory of India shall be free’. Having placed a           general limitation  on the exercise of legislative           powers by  Parliament and  the State Legislatures,           Article 302  relaxes that restriction in favour of           Parliament by  providing that  that authority ’may           by law  impose such restrictions on the freedom of           trade, commerce  and intercourse between one State           and another or within any part of the territory of           India as  may be required in the public interest’.           Having  relaxed  the  restriction  in  respect  of           Parliament under Article 302, a restriction is put           up on  the relaxation  by Article  303(1)  to  the           effect that Parliament shall not have the power to           make any  law giving  any preference  to  any  one           State over  another or discriminate in between one           State and  another by virtue of any entry relating           to trade  and commerce  in Lists  I and III of the           Seventh Schedule.  Articles 303( 1) which places a           ban  on   Parliament   against   the   giving   of           preferences  to  one  State  over  another  or  of           discriminating between one State and another, also           provides that  the same  kind  of  ban  should  be           placed upon the State Legislature also legislating           by virtue  of any  entry  relating  to  trade  and           commerce in Lists II and 585           III of  the Seventh Schedule. Article 303(2) again           carves out  an exception to the restriction placed           by Article  303( 1) on the powers of Parliament by           providing that  nothing in  Article  303(a)  shall           prevent Parliament  from  making  any  law  giving           preference  to   one   State   over   another   or           discriminating between  one State  and another, if           it is  necessary to  do  so  tor  the  purpose  of           dealing with  a situation arising from scarcity of           goods in  any part of the territory of India. This           exception applies  only to  Parliament and  not to           the State  Legislatures. Article 304 comprises two           clauses and  each clause  operates as a proviso to           Articles 301  and 303.  Clause (a) of that Article           provides that  the  Legislature  of  a  State  may           ’impose on  goods imported  from other  States and           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’. This clause,           therefore, permits  the levy  on goods from sister           States any  tax which similar gods manufactured or           produced in  that State  are subject  to under its           taxing laws.  In other  words, goods imported from           sister States are placed on par with similar goods           manufactured  or  produced  inside  the  State  in

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         regard  to   State  taxation   within  the   State           allocated field.  Thus the  States in  India  have           full powers  of imposing  what in  American  State           Legislation is  called the use tax, gross receipts           tax etc.,  not to  speak of  the familiar property           tax, subject  only to  the condition that such tax           is imposed  on all goods of the same kind produced           or manufactured in the taxing State, although such           taxation  is   undoubtedly  calculated  to  fetter           interstate trade and commerce .. Now clause (b) of           Article 304 provides that notwithstanding anything           in Article  301 or  303 the Legislature of a State           may by law imposes such reasonable restrictions on           the freedom of trade, commerce or intercourse with           or within  that State  as may  be required  in the           public interest.  The proviso  to clause  (b) says           that no  bill or  amendment  for  the  purpose  of           clause (b)  shall be  introduced or  moved in  the           Legislature  of   a  State  without  the  previous           sanction of  the President. This provision appears           to be the State analogue to the Union Parliament’s           authority defined  by Article 302, in spite of the           omission of  the word ’reasonable’ before the word           ’restrictions’  in  the  latter  Article.  Leaving           aside the  pre-requisite of  previous Presidential           sanction for the validity of State 586           Legislation  under  clause  (b)  provided  in  the           proviso   thereto,   there   are   two   important           differences between Arti cles 302 and 304(b) which           require special  mention. The  first is that while           the power  of  Parliament  under  Article  302  is           subject to  the  prohibition  of  preferences  and           discrimina tions  decreed byArticle  303(1) unless           Parliament  makes  the  declaration  contained  in           Article 303(2),  the State’s  power  contained  in           Article 304(b)  is made  expressly free  from  the           prohibition contained  in Article  303(1), because           the open  ing words  of Article  304 contain a non           obstante clause  both to  Article 30 1 and Article           303. The  second difference spr ings from the fact           that while  Parliament’s to  impose restricC tions           under Article  302 upon freedom of commerce in the           public interest  is not subject to the requirement           of reason  ableness, the  power of  the  State  to           impose restrictions  on the freedom of commerce in           the public  interest under Arti cle 304 is subject           to the condition that they are reason able". The next  authority to which we may now refer is the case of State of  Madras v. N.K. Nataraja Mudaliar, [1968] 3 SCR 829 Shah, J.,  as he  then was,  referred to  Part XIII  of  the Constitution at  page 839 of the Reports. On page 841 of the Reports, the learned Judge proceeded to say:                "Tax under the Central Sales Tax Act on inter           State sales, it must be noticed, is in its essence           a  tax   which  encumbers  movement  of  trade  or           commerce, since  by the definition in section 3 of           the Act  a sale  or purchase of goods is deemed to           take place  in the  course of inter State trade or           commerce, if  it-(a)  occasions  the  movement  of           goods from  one State  to another; (b) is effected           by a  transfer of docu ments of title to the goods           during their  movement from  one State to another.           The question  which then falls to be determined is           whether the  tax imposed  in the  present case  is

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         saved by  the operation of the other provisions of           Part  XIII.   Article  302   of  the  Constitution           provides that  Parlia ment  may by law impose such           restrictions on  the freedom of trade, commerce or           intercourse  between  one  State  and  another  or           within any  part of  the territory of India as may           be required  in the  public interest.  Thereby the           Parliament  is,   notwithstanding  the  protection           conferred by  Article 30  1, authorised  to impose           restrictions on the freedom of trade, 587           commerce or  intercourse in  the public  interest.           The expression  "between one  State  and  another’           does not  imply that it is only intended to confer           upon the  Union Parliament the power to remove the           fetter upon  legislative authority  only so  as to           keep trade,  commerce or  intercourse free between           one State  Government and  another. It is intended           to declare  trade, commerce  and intercourse  free           between residents  in one  State and  residents in           another State.  That is  clear because Article 302           expressly provides  that on  the freedom  of trade           restrictions may  be imposed  not only  as between           one State and another, but also within any part of           the  territory   of  India.  As  we  have  already           observed, Article  30I  does  not  merely  protect           inter-State trade  or operate  against inter-State           barriers: all  trade is  protected whether  it  is           intra-State  or  inter-State  by  the  prohibition           imposed by  Article 30I,  and there  is nothing in           the language  or the  context for  restricting the           power  of   the  Parliament   which  it  otherwise           possesses  in   the  public   interest  to  impose           restrictions on  the freedom of trade, commerce or           intercoursc, operative  only as  between one State           and another  as two  entities. There  is  also  no           doubt that  exercise  of  the  power  to  tax  may           normally be  presumed to be in the public interest           ........ It is worthwhile to refer to tne observations made by Hegde, J. At  page 855  of the  Reports, the learned Judge observed with reference  to section 8(5) of the Central Sales Tax Act as follows;                "Sub-section (5)  of section  8 provides  for           giving individual  exemptions in  public interest.           Such a power is there in all taxation measures. It           is to  provide for  unforeseen contingencies. Take           for example,  when there was famine in Bihar, if a           dealer in Punjab had undertaken to sell goods to a           charitable society  in that  State at a reasonable           price for distribution to those who were starving,           it would  have been  in  public  interest  if  the           Punjab Government  had exempted  that dealer  from           paying sales  tax. Such a power cannot immediately           or directly  affect the  free flow  of trade.  The           power in  question cannot  be said  to be  bad. If           there is any misuse of that power, the same can be           challenged." The true purpose of the provisions contained in Part XIII of the Constitution.  as elucidated  in the different decisions of the constitution 588 Benches, is  that the restriction provided for in Article 30 I can  within A  the ambit  be limited  by law  made by  the Parliament and  the State Legislature. No power is vested in

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the executive  authority to  act in any manner which affects or hinders  the very  essence and  thesis contained  in  the scheme of Part XIII of the Constitution. It is equally clear that  the   declaration  contained   in  Part  XIII  of  the Constitution is against creation of economic barriers and/or pockets which  would stand  against the  free flow of trade, commerce and intercourse      There can  be no  dispute that  taxation is a deterrent against free flow. As a result of favourable or unfavourable treatment by  way of  taxation, the  course of flow of trade gets regulated either adversely or favourably. If the scheme which Part XIII guarantees has to be pre-      served in  national interest,  it is necessary that the provisions in theArticle must be strictly complied with. One has to recall the farsighted observations of Gajendragadkar, J. in  Atiabari Tea  Co. case  (supra) and  the observations then made  obviously apply to cases of the type which is now before us.      The two  notifications of the Andhra Pradesh Government may now  be referred  to. Under  the first notification made under section  9(1) of  the Andhra Pradesh General Sales Tax Act, the  rate of  tax has  been reduced  to 4  per cent  in respect of  sales made by indigenous cement manufacturers to manufacturers of cement products. Admit-      tedly, the  Tamil Nadu producers have sales officers in Andhra  Pradeshand   in  regard   to  their   sale  to  such manufacturers of cement products the benefit of reduced rate of taxation  is not  applicable. The  prescribed rate of tax under the Andhra Act is 13.75 per cent on cement. Thus under the Andhra  Notification in  regard to  the  local  tax  the indigenous producers  of cement  have a  benefit of 9.75 per cent. The  return made  to the  Court admits of the position that preference  has been  shown to local manufacturers. Two reasons have  been advanced  by way of justification. One is that it  is beneficial  to the State revenue and secondly it protects the  local manufacturers  too. The  counsel for the State Government  has not been able to demonstrate to us how the reduction  in the rate of sales tax is beneficial to the State revenue. The other justification is what provisions of Part XIII  of the Constitution do not permit. The reasonable restrictions contemplated  in Part XIII have to be backed by law and not by executive action provided the same are within the limitations prescribed under the scheme of Part Xlll.      Coming to  the second  notification relating  to inter- state transac- 589 tions, the  justification pleaded  by the  State  of  Andhra Pradesh has  already been  extracted by  us. We may usefully refer to  the decision of the Constitution Bench in the case of Gwalior  Rayon Silk  Mfg. (Wvg) Co. Ltd. v. The Assistant Commissioner of Sales Tax & orS., [ 1974] 2 SCR 879. At page 883 of  the Reports,  Khanna,  J.  speaking  for  the  Court observed:                "It  has   been  argued   on  behalf  of  the           appellants that  the fixation  of rate of tax is a           legislative function  and as  the Parliament  has,           under section  8(2)(b) of  the Act,  not fixed the           rate of central sales tax but has adopted the rate           applicable to the sale or purchase of goods inside           the appropriate State in case such rate exceeds lO           per  cent,   the  Parliament   has  abdicated  its           legislative  function.   The  above  provision  is           consequently stated to be constitutionally invalid           because of  excessive  delegation  of  legislative           power. This  contention, in  our opinion,  is  not

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         well founded.  Section  8(2)(b)  of  the  Act  has           plainly  been  enacted  with  a  view  to  prevent           evasion of  the payment  of the central sales tax.           The Act prescribed a low rate of tax of 3 per cent           in the case of inter-State sales only if the goods           are sold  to the  Government or  to  a  registered           dealer other  than the  Government. In the case of           such a registered dealer, it is essential that the           goods should  be of  the description  mentioned in           subsection (3)  of section 8 of the Act. In order,           however, to  avail of  the benefit  of such  a low           rate of  tax under  section 8(1) of the Act, it is           also essential  that the  dealer selling the goods           should furnish  to the prescribed authority in the           prescribed manner  a declaration  duly filled  and           signed by the registered dealer, to whom the goods           are sold, containing the prescribed particulars in           prescribed  form   obtained  from  the  prescribed           authority,  or  if  the  goods  are  sold  to  the           Government  not   being  a  registered  dealer,  a           certificate in the prescribed form duly filled and           signed  by   a  duly  authorised  officer  of  the           Government. In cases not falling under sub-section           (1), the  tax payable  by any dealer in respect of           inter-State sale  of declared  goods is  the  rate           applicable to  the sale  or purchase of such goods           inside the  appropriate state vide section 8(2) of           the Act.  As regards  the  goods  other  than  the           declared goods,  section 8(2)(b) provides that the           tax payable  by any  dealer on  the sale  of  such           goods  in  the  course  of  inter-State  trade  or           commerce shall be calculated at the rate of lO per           cent or at the rate 590           applicable to  the sale  or purchase of such goods           inside the appropriate State, whichever is higher.                The question  with which  we are concerned is           whether the  Parliament is  not  fixing  the  rate           itself and  in adopting the rate applicable to the           sale or  purchase of  goods inside the appropriate           State has  not laid  down any  legislative pol icy           and has  abdicated its  legislative  function.  In           this con  nection we  are of the view that a clear           legislative policy  can be found in the provisions           of section  8(2)(b) of  the Act. The policy of the           law in  this respect  is that  in case the rate of           local sales  tax be less than 10 per cent, in such           an event  the dealer,  if the  case does  not fall           within section 8(1) of the Act, should pay central           sales tax at the rate of 10 per cent. If, however,           the rate  of local  sales tax  for the  goods  con           cerned be more than 10 per cent, in that event the           policy is  that the  rate of the central sales tax           shall also  be the same as that of the local sales           tax for  the said goods. The object of law thus is           that the rate of the central sales tax shall in no           event be less than the rate of local sales tax for           the goods  in question  though it  may exceed  the           local rate in case thas t rate  be less  than 10 per cent. For example, if the local           rate of  tax in the appropriate State for the non-           declared goods  be 6  per cent, in such an event a           dealer, whose  case is not covered by section 8(1)           of the  Act, would  have to pay cent ral sales tax           at a  rate of  lO per  cent. In case, however, the

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         rate of  local sales  tax for such goods be 12 per           cent, the  rate of central sales tax would also be           12 per  cent because  otherwise, if  the  rate  of           central sales  tax were  only  lO  per  cent,  the           unregistered dealer  who purchases  goods  in  the           course of  inter-State trade  would be in a better           position than  an intra-State  purchaser and there           would be no disin centive to the dealers to desist           from selling  goods to unre gistered purchasers in           the course of inter-State trade. The object of the           law apparently  is to  deter inter-State  sales to           unregistered dealers  as  such  inter-State  sales           would faciliG  tate evasion of tax. It is also not           possible to  fix the  max imum  rate under section           8(2)(b) because the rate of local sales tax varies           from State  to State.  The rate of local sales tax           can also be changed by the State legislatures from           time to  time. It  is not within the competence of           the Parliament  to fix  the maximum  rate of local           sales tax. The fixation of the rate of local sales           tax is essentially a matter for the State 591           Legislatures and  the Parliament does not have any           control  in   the  matter.   The  Parliament   has           therefore necessarily,  if  it  wants  to  prevent           evasion of  payment of  central sales  tax, to tag           the rate of such tax with that of local sales tax,           in case  the rate  of local  sales tax  exceeds  a           particular limit." Reference may  also be  made  to  another  decision  of  the Constitution Bench  in the  case of State of Tamil Nadu etc. v. Sitalakshmi  Mills etc.,[1974]1 1 SCR 1. At page 6 of the Reports, Mathew, J. stated:                "As already  stated,  section  8(2)(b)  deals           with sale  of goods  other than declared goods and           it is  confined to  interState sale  of  goods  to           persons   other   than   registered   dealers   or           Governments. The  rate of tax prescribed is 10 per           cent or  the  rate  of  tax  imposed  on  sale  or           purchase of  goods inside  the appropriate  State,           whichever is  higher. The  report of  the Taxation           Inquiry Committee  would indicate  that  the  main           reason for  electing the provision was to canalize           inter-State trade through registered dealers, over           whom the  appropriate Government  has a great deal           of control and thus to prevent evasion of tax:                Where   transactions   take   place   between                registered   dealers   in   one   State   and                unregistered dealers or consumers in another,                this low  rate of  levy will not be suitable,                as it is likely to encourage avoidance of tax                on more or less the same scale as the present                provisions of  Article 286 have done. If this                is to  be prevented,  it  is  necessary  that                transactions of  this type  should be taxable                at the  same  rates  which  exporting  States                impose on  similar transactions  within their                own territories. The unregistered dealers and                consumers in  the importing  States will then                find  themselves   unable   to   secure   any                advantage  over   the  consumers  of  locally                purchased articles;  nor of course will they,                under this  system, be  able  to  escape  the                taxation altogether,  as many  of them  do at                present." (See Report of the Taxation Enquiry

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              Commission, 195354, Vol.3, p. 57)                In other  words it  was to  discourage inter-           State sale to unregistered dealers that Parliament           provided a high rate of tax, namely, IO%. But even           that might not serve the 592           purpose if  the rate  applicable to intra-State of           such goods  was more  than 10%.  The rate  of  10%           would then  be favour able and they would be at an           advantage  compared   to  local  cosumers.  It  is           because of  this that  Parliament provided,  as  a           matter of  legislative policy that the rate of tax           shall be 10% or the rate applicable to intra-State           sales whichever is higher.                If prevention of evasiorl of tax is a measure           in the public interest, there can be no doubt that           Parliament is  competent to  make a  provision for           that  purpose   under  Article  302  even  if  the           provision would  impose restrictions on the inter-           State trade or commerce. Variation of  the rate  of inter-State sales tax does affect free trade and commerce and creates a local preference which is contrary  to the scheme of Part XIII of the Constitution. The notification  extends the  benefit even  to unregistered dealers and  the observations of Hegde, J. on this aspect of the matter  are relevant.  Both  the  notifications  of  the Andhra Pradesh Government are, therefore, bad and are hit by the provisions of Part XIII of the Constitution. They cannot be sustained in law.      Now coming to. the notification of the Karnataka State, we have already pointed out that no return has been made and no attempt  has been  made, therefore,  to place  facts  and circumstances  to   justify  the  action.  The  notification suffers from the same vice as the second notification of the State of  Andhra Pradesh  suffers and  no distinction can be drawn. We  accordingly hold  that the  notification  of  the Karnataka Government  is also  bad in law. It may be pointed out that  the rate  of sales  tax in  Karnataka is  19.5 per cent.in regard to intra-State sales.      In view  of what  we have  indicated  above,  the  writ petition has  to succeed  and the two impugned notifications of  the   Andhra  Pradesh   Government  and   the   impugned notification of  the Karnataka  Government are  quashed. The writ petition  is accordingly  allowed with  costs.  Hearing fees is  assessed at  Rs.5,OOO  and  this  shall  be  shared equally by the States of Andhra Pradesh and Karnataka. S. L.                                     Petition allowed. 593