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PETITIONER: M/S. ANAND COMMERICAL AGENCIES, M/S. ANAND COMMERICAL AGENCI

       Vs.

RESPONDENT: THE COMMERICAL TAX OFFICER,VI CIRCLE, HYDERABAD & ORS. ETC.

DATE OF JUDGMENT:       06/11/1997

BENCH: S.P. BHARUCHA, SUHAS C. SEN.

ACT:

HEADNOTE:

JUDGMENT:                THE 6TH DAY OF NOVEMBER, 1997 Present:               Hon’ble Mr. Justice S.P.Bharucha               Hon’ble Mr. Justice Suhas C.Sen R. Sundaravardhan,  Sr.Adv., R.N.Keshwani,  and  Ms.  Janaki Ramachandran, Advs. with him for the appellants.                       J U D G M E N T      The following Judgment of the Court was delivered: SEN. J.      The  appellant,  M/s.  Anand  Commerical  Agencies,  is partnership firm,  It is regularly assessed under the Andhra Pradesh General  Sales Tax  Act. The  dispute in  this  case arose in  the course  of assessment  for the assessment year 1977-78. Under  Entry 24(b)  of the  First Schedule  to that Act, tax  is payable  on groundnut  oil at the rate of 2-1/2 paise per rupee of the sale price. Under Entry 24(a), tax is payable on  groundnut  oil  or  refined  oil  obtained  from groundnut which  has not borne any tax under the A.P. Act at the rate  of 6-1/2  paise per  rupee of  the sale price. The assessee at  the relevant  period had  total turnover of Rs. 31,000/- out of which Rs. 14,76,000/- was on account of sale of groundnut  oil and  refined oil  obtained from  groundnut which had  not borne  tax under the A.P. Act because the oil was  imported   into  Andhra   Pradesh  from  the  State  of Karnataka.      The case  of the  appellant is  that the  oil had  been extracted out  of groundnuts  which had  borne tax under the Karnataka Sales Tax Act. The levy of tax on the oil imported from Karnataka  into Andhra Pradesh at a rate higher tan the rate at  which the  oil manufactured  in Andhra  Pradesh  is taxed in  discriminatroy and  violative of  the  appellant’s right of freedom of trade and commerce throughout India.      This contention  of the  assessee was  rejected by  the Sales Tax  Officer and  also by  the Assistant  Commissioner (C.T.), Appeals, Secunderabad.      The Assessee  thereafter challenged the decision of the Assistant Commissioner  by filing  a writ  petition  in  the Andhra Pradesh  High court  challenging  the  Constitutional validity of  the levy.  There was  a difference  of  opinion between the  two judges  who heard  the matter. The case was

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referred to  a third Judge who was of the view that the writ petition was without any merit and should be dismissed.      The assessee has appealed to this Court.      To appreciate  the controversy,  it is necessary to set out Entry  24 of  the First  Schedule to  the Andhra Pradesh General Sales Tax Act:- ------------------------------------------------------------ Description of goods      Point of levy      Rate of tax        (1)                    (2)               (30 ------------------------------------------------------------ 24. Groundnut oil or     refined oil:     (10240 (a) Groundnut oil or      At the point of     6-1/2 paise     refined oil not       first sale in       in the     covered by            the State.          rupee.     sub-item (b) below. (b) Groundnut oil or      At the point of     2-1/2 paise     refined oil obtained  first sale in       in the     from groundnut that   the State           rupee.     has met tax under     the Act. ------------------------------------------------------------      Entry 6 of the Third Schedule which relates to declared goods:- ------------------------------------------------------------ Description of     Point of levy           Rate of tax the goods       (1)               (2)                   (3) ------------------------------------------------------------ 6.  Ground nut or  When purchased by a     4 paise in     peanut         miller other than a     the rupee.     (Arachis        decorticating miller     Hypogaea)      in the State, at the     (3006)         point of purchase by                    such miller and in                    all other cases at                    the point of purchase                    by the last dealer who                    buys in the State. ------------------------------------------------------------      It clear  from these  entries  that  groundnut  oil  or refined oils  is liable  to be  taxed at  the rate  of 6-1/2 paise in  the rupee  at the point of first sale in the State but Under  Entry 24(b), it is liable to be taxed at the rate of 2-1/2  paise in  the rupee  if the  oil is  obtained from groundnut which  has already  suffered tax  under  the  A.P. Under Entry  6 groundnut  is liable to be taxed at the point of purchase by the last dealer in the State at the rate of 4 paise in the rupee.      On behalf  of the appellant, it has been contended that on oil obtained from groundnut purchased locally the rate of tax is  2-1/2 paise  in the rupee whereas in the case of oil imported from  other States,  the rate of tax on local sales is higher,  namely 6-1/2 paise in the rupee. Entry 24 (a) is discriminatory and  violative of Articles 301 and 304 of the Constitution of  India inasmuch as imported oil ha to bear a higher rate of tax than locally produced oil.      On behalf  of the  State of Andhra Pradesh, it has been contended that  there was  no discrimination  in the rate of tax an  oil  indigenously  produced  within  the  State  and imported oil.  It has  to be  borne in mind that there was a tax on sale of groundnut at the rate of 4 paise in the rupee under item  6 of the Third Schedule to the A.P. Act. If this is taken  into account,  a further  levy of  4 paise  in the

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rupee in  effect amounts  to a total levy of 6-1/2 paise per rupee which  is levied  to the  tax imposed  on the imported oil.      The majority  view in  the High  Court was  that having regard to the tax levied on groundnut in the State which was 4  paise   in  the  rupee,  the  tax  on  imported  oil  and indigenously produced  oil within  the State  was the  same, i.e., 6-1/2 piase in the rupee. It was observed:-      "Under  Entry   6  of   the   Third      Schedule tax  is levied at the rate      of 4  paise in a rupee on groundnut      at the  point of  purchase  by  the      last  dealer.   Groundnut  is   the      material from  which groundnut  oil      is obtained.  It is  in respect  of      oil obtained  from  groundnut  that      suffered  that   tax,  Entry  24(b)      prescribes a rate of 2-1/2 paise in      the  rupee   on  the   first  sale.      Otherwise,  groundnut  oil  whether      imported  or  made  from  groundnut      locally tax is leviable at the rate      of 6-1/2  paise in  the rupee. Take      for instance a dealer who sells oil      which  had   been   obtained   from      groundnut which  has  not  suffered      tax, he  having not  purchased  the      groundnut at all as it was from his      own field  or grown  by  him.  Such      sale are also liable to be taxed at      the rate  of  6-1/2  paise  in  the      rupee. The  discrimination   if  at      all  is  because  of  Entry  24(b).      Since the  groundnut from which the      oil   is   obtained   had   already      suffered tax  which is  the maximum      that  can   be  levied   under  the      Central Sales  Tax Act in the State      at the rate of 4 paise in the rupee      at the  purchase point  by the last      dealer, it  is subjected  to lesser      rate. Though groundnut oil is to be      treated  separate   commodity  from      groundnuts there  is a  clear nexus      between  groundnuts  and  groundnut      oil."      Raghuvir, J.  in his  dissenting judgment took the view that the  argument that  groundnut oil or refined oil in the State of  Andhra Pradesh  is not  taxed at the rate of 6-1/2 paise  in   the  rupee  because  the  groundnuts  have  been subjected to  tax at  the rate of 4 paise in the rupee is an argument without  any substance.  The imported groundnut oil or refined  oil was  tax at  6-1/2 paise  in the rupee, even when groundnuts  out of which such oil was extracted had met sales tax  under the  local Sales Tax laws of the State from which oil was imported. Reghuvir, J. was of the view that to argue that  refined oil  processed in the State is in effect taxed at  the rate  6-1/2 paise  in the rupee is to overlook the issue  that imported  oil has  been extracted out of the groundnuts which were also taxed under the local tax laws.      Articles 301,  302, 303  and 304  are relevant  for the purposes of deciding this controversy:-      "301. Freedom  of  trade,  commerce      and  intercourse.-Subject   to  the      other  provisions   of  this   pat,

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    trade,  commerce   and  intercourse      throughout the  territory of  India      shall be free.      302. Power  of Parliament to impose      restrictions on trade, commerce and      intercourse. Parliament  may by law      impose  such   restriction  on  the      freedom  of   trade,  commerce   or      intercourse between  one State  and      another or  within any  part of the      territory  of   India  as   may  be      required in the public interest.      303. Restriction on the legislative      powers of  the  Union  and  of  the      States with  regard  to  trade  and      commerce.-   (1)    Notwithstanding      anything in  article  302,  neither      Parliament nor  the Legislature  of      State shall  have power to make any      law  giving,   or  authorising  the      giving of,  any preference  to  one      State over  another, or  making, or      authorising  the   making  of,  any      discrimination  between  one  State      and another, by virtue of any entry      relating to  trade and  commerce in      any of  the Lists  in  the  Seventh      Schedule.      (2) Nothing  in  clause  (1)  shall      prevent Parliament  from making any      law  giving,   or  authorising  the      giving  of,   any   preference   or      making, or  authorising the  making      of, any  discrimination  if  it  is      declared by  such law  that  it  is      necessary to  do so  far purpose of      dealing with  a  situation  arising      from scarcity  of goods in any part      of the territory of India.      304.   Restrictions    on    trade,      commerce  and   intercourse   among      States,-  Notwithstanding  anything      in article  301 or article 303, the      Legislature of a State may by law-      (a) impose  on goods  imported from      other   State    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      restriction  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   or  moved  in  the      Legislature of  a State without the      previous    sanction     of     the      President."      Freedom of  trade, commerce  and intercourse guaranteed by Article 301 means freedom to carry on business throughout

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the  territory   of  India    without  any  obstruction  and hindrance. The question whether a fiscal barrier will amount to interference  with the  right to carry on trade, commerce and intercourse  throughout the territory of India is not an easy question  to answer.  Every State has a right to impose tax on  subjects which  fall within  its jurisdiction  under List-II of  the Seventh  Schedule to  the Constitution. This includes taxes  on sale  or purchase  of  goods  other  than newspaper. Fiscal  powers of  the State  can be utilised not only to  collect  revenue  but  also  to  regulate  economic development  of  a  State.  A  backward  State  may  try  to encourage development  of industries  within  the  State  by grant of  subsidy and  also by  low rate  of  tax  on  goods manufactured by  local industries.  If small  newly  set  up industries in the State have to compete with big industries, small units  may not  survive at  all. In  such a  case, the State is  entitled to prop up the local industries by taking fiscal measures.  This may be done by providing subsidies or by imposing  low rate of sales tax on the goods manufactured within the  State. This  aspect was explained in the case of M/s. Video  Electronics Pvt.  Ltd. v.  State of  Punjab, AIR 1990 SC  820. by Sabyasachi Mukharji, C.J., in the following words:-      "It is  manifest that  free flow of      trade between  two States  does not      necessarily  or   generally  depend      upon the  rate of  tax alone.  Many      factors including the cost of goods      play  an   important  role  in  the      movement of goods from one State to      another. Hence  the mere  fact that      there is  a difference  in the rate      of    tax    on    goods    locally      manufactured  and   those  imported      would not  amount to  hampering  of      trade between the two States within      the meaning  of  Art.  301  of  the      Constitution. As  is manifest, Art.      304 is an exception to Art.  301 of      the  Constitution.   The  need   of      taking  resort  to  exception  will      arise only  if the  tax impugned is      hit by  Arts. 301  and 303  or  the      Constitution. If  it  is  not  then      Art. 304  of the  Constitution will      not come into picture at all."      But   barring    special   circumstances,   as   stated hereinabove, the  view of  this Court  has consistently been that a  State is not entitled to tax locally made goods at a lower rate  while taxing similar goods manufactured in other States at a higher rate.      In the  case of  Firm A.T.B.M.Mehtab  Majid &  Co.  vs. State of  Madras, AIR  1963 Sc  928, hides and kins imported from outside  the State were subjected to higher rate of tax than the  rate of  tax imposed on hides and skins tanned and sold within the State by Rule 16 of the Madras General Sales Tax (Turnover  and Assessment)  Rules, 1939.  The effect  of this Rule  was that  tanned hides  or  skins  imported  from outside the  State and sold within the State were subject to a higher  rate of tax than the tax imposed on hides or skins tanned and  sold within  the State, inasmuch as sales tax on the imported  hides or skins tanned outside the State was on their sale  price of  these hides  or skins  when they  were purchased in  the raw condition which was substantially less than the sale price of tanned hides or skins.

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    It was  held that  the taxing  law can  be  treated  as restrictions on  trade, commerce  and intercourse,  if  they hamper the flow of trade and if they are not compensatory or regulatory. Sales tax which had the effect of discriminating between goods of one State and goods of another might affect free flow of trade and offend Article 301 and could be saved only if  it came within the terms of Article 304. Government of India  undertaking. In  Uttar Pradesh,  there was  single point levy  of sales  tax. The  State of  Uttar Pradesh  had issued two  notification under  the U.P.  Sales Tax  Act and Central Sales  Tax Act  exempting new units of manufacturers as defined  in the  Act in  respect of the various goods for different periods  ranging from 3 to 7 years as the case may be, from  payment of  any sales  tax.  The  benefit  of  the notifications could  be availed of by the new industries set up in the State which were divided into two categories - (1) units with  capital investment  not exceeding three lakhs of rupees and (2) units with capital investment exceeding three lakhs of  rupees. The  period of exemption varied fro 3 to 7 years in different  districts.      The case  of the writ petitioners in that case was that the dealers  had become liable to pay sales tax at 12% + 10% surcharge under  the U.P.  Sales Tax Act on photographic and graphic art material and at the rate of 8% + 10% surcharge n medical X-ray  films and minimum of 10% on their inter-State turnover. But  the manufacturers in the State of U.P. had no tax liability  by virtue  of  exemption  granted  under  the impugned notification.  The Case  of the petitioner was that the goods  sold by them had become costlier by 8.8% to 13.2% depending upon    the  items  sold  compared  to  the  goods manufactured in  the State  of Uttar Pradesh. Apart from the challenge  based   on  Article  19(1)  (g)  and  14  of  the Constitution,  the   petitioner  based  their  case  on  the provisions of  Articles 301  to 305  of  Part  XIII  of  the Constitution of India.      After an  elaborate review of the case law, it was held :      "Where the  general rate applicable      to the  goods locally  made and  on      those imported from other States is      the same  nothing more normally and      generally is  to be  shown  by  the      State to  dispel  the  argument  of      discrimination under  Art. 304 (a),      even  though   the  resultant   tax      amount on  imported  goods  may  be      different. Here,  reference may  be      made to  Ratan Lal’s case (AIR 1970      SC 1742)  (supra). In  the  instant      writ petition, in the State of U.P.      those  producers  or  manufacturers      who do not come within the ambit of      notifications, have  to pay  tax on      their goods  at  the  general  rate      prescribed   and    there   is   no      differentiation  or  discrimination      qua   the   imported   goods.   The      discrimination  qua   the  imported      goods.   The   question   naturally      arises whether  the power  to grant      exemption  to  specified  class  of      manufacturers for  a limited period      on certain  conditions as  provided      by S.4A  of the  U.P. Sales Tax Act      of violative of Art. 304 (a)."

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    The Court  ultimately held  that if the general rate of tax imposed  upon the  locally made  goods and  the imported goods was  the same,  the State, in order to give incentives to certain industries, could lawfully reduce the rate of tax for a  limited period  of time.  In the facts of that  case, the period  of exemption  from tax for certain type of goods were from  three to  seven years.  Sabyasachi Mukharji, C.J. held that  granting of  such exemption  for a limited period only to  certain industries  in the  State from  payment  of sales tax  was not  violative for  the provisions of Article 301 because  the general  rate of tax payable on these goods manufactured by  other units  were  the  same  as  the  rate applicable to goods imported from outside the State.      This question  was once  again examined  in the case of Shree Mahavir Oil Mills and Anr. v. State of Jammu & Kashmir & Ors.,  JT 1996  (10) S.C.837. In that case, with a view to protect local  edible oil  industry, Government  of Jammu  & Kashmir issued  an order  exempting  goods  manufactured  by small scale  dealers within  the State from payment of sales tax for  a specified  period. The  rate of sales tax payable for  other   industries  including   manufacturers  of   the adjoining  States   was  four   per   cent.   A   subsequent notification was  issued on December 20, 1993 as a result of which the  general rate  of sales  tax payable on edible oil became  8%.   The  manufacturers  of  edible  oil  from  the adjoining States  claimed that  the exemption  granted  from payment of  tax to  the local industries was discriminatory. The exemption  given by the Government of Jammu & Kashmir to the manufacturers of the edible oil was total and the period of exemption  was five  years -  which was later extended by another five  years. It  was  held  that  the  unconditional exemption granted  to edible  oil industries and at the same time subjecting  edible oil  industries from  other State to Sales Tax  at 8% was discriminatory and violative of Article 304 (a) of the Constitution.      In the  case before  us, exemption has not been granted to a  new industry or specially handicapped industry for any special reason  for a  limited period of time. Groundnut oil manufacturers within the State have been generally given the benefit of  a lower  rate of  tax whereas the importers will have to  pay sales  tax at a higher rate. It is not even the case of  the State that if imported oil was manufactured out of tax  paid groundnut the rate of tax on imported oil would be lower.      On behalf  of the  State, it  has been argued that if a manufacturer of  oil not  purchase groundnut from the market but has  his own  supply of  groundnut he  pays tax at 6-1/2 paise in  the rupee  which is the rate at which imported oil is taxed.  This s  the rate  of tax  applicable  to  locally manufactured oil as well as on imported oil. The distinction lies only  in the  case of oil manufactured out of groundnut which has  borne tax  at the  rate of  4% in  A.P. In such a case, the  tax is at the rate of 2-1/2 paise in the rupee as tax in  all. Therefore, no discrimination is being practised by taxing the imported oil at the rate of 6-1/2 paise in the rupee.      This has been countered by the appellants by contending that the  groundnuts sold  in Karnataka also bear sales tax. When oil  manufacturers purchase groundnuts in Karnataka and manufacture oil,  they pay sales tax on the groundnuts first and then  they pay  6-1/2 paise  in the  rupee as  sales tax under the A.P. Act when the goods are sold in A.P.      We are of the view that the contention of the appellant is not  without substance.  What has  been done appellant is not without substance. What has been done by Entry 24 of the

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First Schedule  is  to  impose  a  lower  rate  of  duty  on groundnut oil  or refined  oil obtained from groundnuts that have been  taxed under  the A.P.  Act. The  contention  that groundnut  oil   manufactured  in  Andhra  Pradesh  has  not generally been  charged at  a lower rate of tax has not been substantiated by  any fact  of figure. It is not the case of the State  that only a small portion of the oil manufactured by local manufacturers is produced from groundnuts purchased in Andhra Pradesh. Unless that can be established, it cannot be held  that groundnut  oil or refined oil within the State is generally  charged at  the same rate as the imported oil. The only  justification that  has been  made  out  for  this discrimination is  that groundnut  out of  which the  oil is manufactured locally  has already borne tax. The appellant’s contention, which  has not been denied by the State, is that the oil  manufactured in  Karnataka which  was imposed  into Andhra Pradesh  was manufactured out of groundnuts which had also borne tax under the Karnataka Sales Tax Act. Therefore, it cannot  be said  that oil manufacturers in Andhra Pradesh are in disadvantageous position and had to be compensated by a lower  rate of  tax.   The State of Andhra Pradesh has not been able  to make out any special case for imposing a lower rate of tax on groundnut oil produced within the State.      In that  view of  the matter  and having  regard to the interpretation  given   to  Article   301  to   304  of  the Constitution by the Courts in the various decisions referred to hereinabove,  we are  of the  view that  the appeal  must succeed.      Clause (a)  of Entry  24 of  the First  Schedule to the Andhra Pradesh  General Sales  Tax Act is declared violative of the  previsions of  Articles 301  to 304  in so far as it imposes a higher rate of tax on groundnut oil or refined oil which has  been obtained  from groundnuts that have not been taxed under  the Andhra Pradesh Act. It is declared that the groundnut oil  imported by  the appellant from Karnataka for sale in Andhra Pradesh cannot be taxed at a rate higher than the rate  prescribed in  clause (b) of Entry 24 of the First Schedule to the Andhra Pradesh Act.      The appeal  is, therefore,  allowed. The  judgment  and order under  appeal  dated  25.9.97  passed  by  the  Andhra Pradesh High  Court is set aside. Civil Appeal Nos.8343-8344 of 1995  are also also allowed. There will be no order as to costs.