29 November 1996
Supreme Court


Case number: C.A. No.-014996-014996 / 1996
Diary number: 18700 / 1995






DATE OF JUDGMENT:       29/11/1996




JUDGMENT:                THE 29TH DAY OF NOVEMBER, 1996 Present:                 Hon‘ble Mr.Justice B.P. Jeevan Reddy                 Hon’ble Mr.Justice S.C. Sen      Harish N.Salve,  Sr.Adv. Ms.Bina  Gupta, Alok  Agarwal, Ramesh  Singh,  Ms.Rakhi  Verma,  Advs.  with  him  for  the Appellant.      M.L.Verma, Sr Adv, J.Manhas and Pawan Kumar, Advs. with him for State                       J U D G M E N T      The following Judgment of the Court was delivered:      B.P.JEEVAN REDDY,J.      Leave granted.      The State  of Jammu  & Kashmir  seeks to  encourage and promote the  industrialisation of  the State  -  like  every other State in the country. Edible oil industry is one such. Because of certain inherent problems, the cost of production of edible  oil in  Jammu & Kashmir is said to be higher than the cost  of production  of similar  edible in the adjoining States with  the result that the manufacturers of edible oil in the  adjoining State  are able  to sell their products in Jammu & Kashmir at a price lower than the price at which the local manufacturers  are able  to sell. This is said to have created a  situation where  the  local  industries  are  the prospect of  closure; at  any rates  they were  not able  to compete with  the out-State  manufacturers. They  approached their government, which is seeking to protect their interest by inter  alia exempting them totally from the levy of sales tax on  the sale  of their  products. That has given rise to the writ  petition from  which the  present appeal arises on the  Jammu  and  Kashmir  High  Court  dismissing  the  writ petition, they have approached this Court.      The  Jammu  &  Kashmir  Sales  Tax  Act  contains  four Schedules. Each  of the  Schedules carries a particular rate of sales  tax.  Edible  oils  were  previously  included  in Schedule-D which prescribes the rate of tax at four percent. On  December   20,  1993,  edible  oils  were  shifted  from Schedule-D to  Schedule-C, which  prescribes the rate of the tax at  eight percent.  (It is stated that S.R.O.213 of 1993 issued  on  December  3,  1993  shifting  edible  oils  from



Schedule-D to  Schedule-C was  rescinded within about a week thereafter but  was re-issued  as S.R.O.124  of 1994  on May 27,1994).      With a  view to  protect the local edible oil industry, the Government of Jammu & Kashmir issued S.R.O.93 of 1991 on March 7,  l991 under  Section 5 of the Jammu & Kashmir Sales Tax Acts,  1962 directing  that "the goods manufactured by a dealer operating  as a  small scale  industrial unit  in the State  and   registered  with  Director  of  Industries  and Commerce, Handicrafts  or Handloom  Development, subject  to the conditions  specified  belows  shall  be  exempted  from payment of tax to the extent and for the period specified in the   Schedule    forming   Annexure-A".   All   the   units manufacturing edible  oil  in  the  State  are  small  scale industrial  units   as  defined   by  the  Jammu  &  Kashmir Government. (It  appears that  initially the  limit  was  an investment of  Rupees ten  lakhs according to which one unit in the  State did  not qualify  as a  small scale industrial unit. Subsequently, it is stated the limit of investment was raised to Rupees thirty lakhs, as a result of which the said unit also  fell under  the definition  of small scale unit). The exemption was total and the period of exemption was five years-which, has later been extended by another five years.      The result  of the orders aforementioned was that while until December,  1993/May, 1994, the manufacturers of edible oil in  other States  were obliged  to pay  sales tax on the sales effected  by them  in the  State of Jammu & Kashmir at the rate  of four  percent,  the  local  manufacturers  were totally exempted therefrom. In December, 1993/May. 1994, the rate of  tax was  raised from four percent to eight percent, as stated  above. With  the raising of the rate of sales tax to eight  percent, the outside manufacturers were obliged to pay at  eight percent  while the  local  manufacturers  were exempt fully.  It is  them local  manufaturers  were  exempt fully It  is then  that some  of the  outside  manufacturers including the  appellants herein,  approached  the  Jammu  & Kashmir High  Court by  way of  writ  petitions  which  were dismissed by  a learned  Single Judge.  The  Letters  Patent Appeals preferred by the appellants have also been dismissed by the  Division Bench  relying mainly  upon the decision of this Court  in Video  Electronics Private  Limited [190  (3) S.C.C.87].      Sri Harish  Salve, learned  counsel for the appellants, assailed the  correctness of  the judgment of the High Count on several grounds. Counsel submitted that the orders of the Government of  Jammu &  Kashmir exempting all the edible oil industries  in   the  State   from  payment   of  sales  tax unconditionally amounts  to discriminating  against the out- State manufacturers  which is prohibited by Articles 301 and 304 of the Constitution. Counsel submitted that Part-XIII of the Constitution prohibits raising of fiscal barriers by the States, for  such barriers  are bound  to interfere with the free movement of trade and commerce throughout the territory of India.  Raising of  protective walls  may be justified in international trade.  The Government  of India  can and  has been providing several such protectionist measures all these years  to   encourage  the   growth  and   establishment  of industries,  in   the  country  and  to  protect  them  from competition from  foreign manufactures. But similar measures cannot be  provided by  the  State  governments  internally, i.e., within  the country.  The Parliament can, no doubt, be such measures  but not  the State  Government, and certainly not without  the prior  sanction/assent of  the President of India. Learned  counsel submitted that the decision in Video Electronics has  not been  correctly understood  by the High



Court and  that it  does not purport to support the impugned measure.  Learner  counsel  relied  upon  several  decisions rendered by  this Court  under Part-XIII  in support  of his submissions.      On the  other hand,  Sri M.L.Verma. learned counsel for the State  of Jammu  & Kashmir,  placed strong reliance upon the ratio  and  upon  certain  observations  made  in  Video Electronics.  Notwithstanding   certain  minor  differences, learned  counsel   submitted,  the  principle  of  the  said decision clearly  applies to  the facts  of this  case.  Sri Verma submitted  that when  the rate of tax was four percent and the  exemption in  favour  of  local  manufacturers  was operating, the  appellants never  protested. Only  when  the rate of  tax was raised from four to eight percents with the exemption in  favour of  local manufacturers continuing, the appellants came  forward with  writ petitions.  If they were not aggrieved  when the  rate was  four percents they cannot equally be  aggrieved merely  because the  rate is raised to eight percent. Counsel brought to our notice certain figures relating to  turn-over of the appellants within the state of Jammu & Kashmir and emphasised that the impugned measure has not really hurt the appellants‘ business and that the volume of their  turn-over continues  to rise  notwithstanding  the impugned measure.  The submission is that the appellants can have no  real or  genuine grievance  in the  matter. Coupled with this,  Sri Verma  submitted, is the need for protecting the local manufacturers. Because of the peculiar economic conditions prevailing  in the  State, the cost of production of the  local manufacturers is substantially higher than the cost of  production of edible oil in the adjoining States or in  other   States  in  the  country.  Unless  the  impugned protective measure  is provided  to the local manufacturers, Sri Verma  submitted, it  was not  possible  for  the  local manufacturers to survive in the market. They would have been eliminated from  their business  and trade  by the out-State manufacturers who  are able  to sell their goods at a lesser price. The  purpose  of  the  impugned  measure,  Sri  Verma submitted, is,  therefore,  laudable.  It  is  not  directed against the  out-State manufacturers but only towards saving the local  ones.  Even  otherwise,  counsel  submitted,  the principle of  classification relevant  under Article  14 has been held  by this  Court to  be  equally  applicable  under Article  304   and  if   so,  it   must  be  held  that  the classification   made    between   local    and    out-State manufacturers is  a reasonable  one and  designed to further the aforesaid laudable object.      Article  301   declares  that  "subject  to  the  other provisions of  this part,  trade, commerce  and  intercourse throughout  the  territory  of  India  shall  be  free".  An exception is,  however, provided  in favour of Parliament by Article 302  which says  that "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".  The  power  conferred  upon  the  Parliament  by Article 302  is, however,  qualified by  a rider provided in clause  (1)  of  Article  303  which  says  that  the  power conferred upon  the Parliament  by  Article  302  shall  not however, empower  the Parliament  - or  the  legislature  of State -  "to make  any law giving, or authorising the giving of, any preference to one State over another, or  making, or authorising the  mating of  any discrimination  between  one State or  another, by  virtue of any entry relating to trade and commerce  in any of the Lists in the Seventh Schedule".* Clause (2) of Article 303, is in the



    It is not very clear why clause (1) of Article 303 uses the words  "nor the legislature of a State" when Article 302 does not  refer to  the  legislature  of  a  State  at  all. Probably, the  idea was  to  declare  affirmatively  in  the interest of  removing any doubt - that even a legislature of a State  shall not  have the power to make any law giving or authorizing the  giving of any preference to one estate over another  or   making  or   authorising  the  making  of  any discrimination between  one state  and another  by virtue of their power  to make  a law  with reference  to the  entries relating to  trade and  commerce in  the  Seventh  schedule. Further, the  additional of  words "by  virtue of  any entry relating to  trade and  commerce of  any of the Lists in the Seventh Schedule"  at the  end of the clause have also given rise to  a good  amount of controversy, which we shall refer to later, to the extent relevant.      nature of  a classification.  It says  that "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". Article 304  deals with the power of the State legislatures. It  begins   with  a  non-obstante  clause  "Notwithstanding anything in  article 301  or article  303". Article  303 was also referred  to in  this non-obstante clause evidently for the reason  that clause  (1) of  Article 303  refers to "the legislature of  a State"  besides referring  to  Parliament. Article 304  contains two  clauses. Clause  (a) states  that "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".  The   wording  of  this  clause  is  of  crucial significance. The  first half  of the  clause would  make it appear at first flush that it merely states the obvious: one may indeed  say that the power to levy tax on goods imported from other  States or  Union territories  flows from Article 246 read  with Lists  II and III in the Seventh Schedule and not from  this clause.  That is of course so, but then there is a meaning and a very significant principle underlying the clauses if  one reads  it in  its entirety. The idea was not really to  empower the  State legislatures  to levy  tax  on goods imported  from other  States and  Union territories  - that they  are already  empowered by other provisions in the Constitution -  but to  declare that  power shall  not be so exercised to  discriminate against the imported goods vis-a- vis locally manufactured goods. The clauses though worded in positive language  has negative  aspect. It  is, in truth, a provision prohibiting  discrimination against  the  imported goods. In  the matter of levy of tax - and this is important to bear  in mind - the clause tells the State Legislatures - ’tax you  may the  goods imported  from  other  States/Union Territories  but  do  not,  in  that  processs  discriminate against  them  vis-a-vis  goods  manufactured  locally’.  In short, the  clause says  levy of  tax on both ought to be at the same rate. This was and is a ringing declaration against the States  creating what  may be called "tax barriers" - or fiscal barrier",  as they  may be called - at or along their boundaries in the interest of freedom of trade, commerce and intercourse throughout the territory of India, guaranteed by Article 301.  As we  shall presently  point out, this clause does not  prevent in  any manner the States from encouraging



or promoting  the local  industries in  such manner  as they think fit  so long as they do not use the weapon of taxation to discriminate  against the  imported goods  vis-a-vis  the locally manufactured  goods. To  repeat, the clause bars the States from  creating tax  barriers - or fiscal barriers, as they can  be called  -  around  themselves  and/or  insulate themselves  from  the  remaining  territories  of  India  by erecting such ’tariff walls’. Part-XIII is premised upon the assumption that  so long  as a State taxes its residents and the  residents  of  other  States  uniformly,  there  is  no infringement   of the  freedom guaranteed by Article 301; no State would  tax its  people at a higher level merely with a view to tax the people of other States at that level. And it is this clause which has a crucial bearing on this case. Now coming to  clause (b),  it empowers  the legislature  of the State to make a law and "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 Dill  or amendment  for  the  purposes  of clause (b)  shall be  introduced or moved in the Legislature of a  State without the previous sanction of the President". (This proviso  has, of course, to be read along with Article 255 which  says that  if the  Act receives the assent of the Presidents  the   non-compliance  with  the  requirement  of obtaining the  previous sanction  to the introduction of the Bill is  cured.) Though in appearance this clause reads like conferring on  the State  Legislatures a  power akin  to the power conferred  upon the  Parliament by  Article 302, there are certain  distinctions. Firstly,  while Article 302, does not  use   the  expression   "reasonable"  before  the  word "restrictions," this  clause does.  Secondly, this power can be  exercised   by  the  State  Legislature  only  with  the "previous sanction"  of the  President-which means the Union Ministry, or  with the assent of the President, as explained above.  It  is  probably  our  history  which  impelled  the founding fathers  to lay  store by the Central Government in the  matter   of  imposing   restrictions,   or   reasonable restrictions, as  the case may be on the freedom guaranteed, it is  worthy of  notice, is  "throughout the  territory  of India" and  not merely  between  the  States  as  such;  the emphasis is  upon the  oneness of  the territory  of  India. Part-XIII starts  with this  concept of  oneness but then it provides exceptions  to that  rule, as stated above, to meet certain emerging  situations. As  a matter  of fact,  it can well be said that clause (a) of Article 304 is not really an exception to  Article 301,  notwithstanding the non-obstante clause in Article 304 and that it is but a re-statement of a facet of  the very  freedom guaranteed by Article 301, viz., power of  taxation by  the States. (We need not refer to the other articles in Part-XIII for the purposes of this case).      Having noticed the scheme of Part-XIII, we may now turn to decided  cases  to  see  how  these  articles  have  been understood over the last fifty years.      The first  decision to  be noticed  is, of  course,  in Atiabari Tea  Co. Ltd.  v. State  of Assam  [1961 (10 S.C.R. 809]. The  legislature of  Assam enacted  the Assam taxation [on goods  carried by  Roads or  Inland Waterways] Act, 1954 providing for  levy of  tax on certain goods carried by road or  inland   waterways  in   the   State   of   Assam.   Its constitutionality was  questioned by  a large  number of tea companies who  sold most  of their produce outside the State of Assam  after transporting it by road or waterways to West Bengal   and    other   States.    The   majority    opinion [Gajendragadkar, Wanchoo  and Das  Gupta, JJ.]  stated their conclusion in the following words:



    "Our conclusion, therefore, is that      when Art.301  provides  that  trade      shall  be   free   throughout   the      territory of  India it  means  that      the flow  of trade shall run smooth      and unhampered  by any  restriction      either at  the  boundaries  of  the      States  or   at  any  other  points      inside the States themselves. It is      the free  movement or the transport      of  goods  from  one  part  of  the      country  to   the  other   that  is      intended to  be saved,  and if  any      Act imposed any direct restrictions      on the  very movement of such goods      it attracts  the provisions of Art.      301,  and   its  validity   can  be      sustained only  if it satisfies the      requirements of  Art.302 or Art.304      of Part  XIII.  At  this  stage  we      think it  is  necessary  to  repeat      that  when  it  is  said  that  the      freedom of  the movement  of  trade      cannot   be    subject    to    any      restrictions in  the form  of taxes      imposed on the carriage of goods or      their movement all that is meant is      that the  said restrictions  can be      imposed by  the State  Legislatures      only    after     satisfying    the      requirements of  Art.304(b). It  is      not as  if no  restrictions at  all      can be imposed on the free movement      of trade."      It was also held:      "Thus considered  we think it would      be reasonable  and proper  to  hold      that  restrictions   freedom   from      which is  guaranteed by  Art.  301,      would  be   such  restrictions   as      directly and  immediately  restrict      or impede the free flow or movement      of trade.  Taxes may  and do amount      to restrictions;  but  it  is  only      such   taxes    as   directly   and      immediately  restrict   trade  that      would fall  within the  purview  of      Art.301....We    are,    therefore,      satisfied that  in determining  the      limits of  the width  and amplitude      of  the   freedom   guaranteed   by      Art.301  a  rational  and  workable      test to  apply would  be: Does  the      impugned    restriction     operate      directly or immediately on trade or      its movement?"      In Automobile  Transport [Rajasthan]  Ltd. v.  State of Rajasthan [1963  (1) S.C.R.491]  validity of Section 4(1) of the  Rajasthan   Motor  Vehicles   Taxation  Act,  1951  was challenged. The  section levied  a tax on all motor vehicles used in  any public  place or  kept for  use  at  the  rates specified in  the  Schedules.  Violation  of  the  provision invited  penalties   provided  under   Section  11.  Certain operators challenged  the Act  as violative  of Articles 301 and 304(b). Since serious doubts were expressed with respect



to the  propositions enunciated by the majority and by Shah, J. in  Atiabari tea Co. Ltd., the matters were referred to a larger Constitution  Bench of  seven Judges By a majority of 4:3,  (S.K.Das,   Kapur  and  Sarkaria,JJ  joined  by  Subba Rao,J.], this  Court upheld the constitutionality of the Act on the  ground that  the taxes levied by it are compensatory in nature  and, therefore,  outside the  purview of  Article 301. Once  outside the  purview of Article 301, it was held, Article  304   was  also  not  attracted.  The  propositions emerging  from  the  opinion  of  Das,J.  have  been  neatly summarised in  the head-note of the Supreme Court Reports in the following words:      "(i)  The  concept  of  freedom  of      trade,  commerce   and  intercourse      postulated  by   Art.301  must   be      understood in  the  context  of  an      ordinary society  and as  part of a      Constitution  which   envisaged   a      distribution of  powers between the      States and  the Union,  and  if  so      understood,   the    concept   must      recognise the  need and  legitimacy      of  some   degree   of   regulatory      control, whether  by the  Union  or      the States.  Regulatory measures or      measures   imposing    compensatory      taxes  for   the  use   of  trading      facilities did  not  hamper  trade,      commerce and intercourse but rather      facilitated  them  and,  therefore,      were  not   hit  by   the   freedom      declared by  Art.301; such measures      need   not    comply    with    the      requirements of  the provisions  of      Art.304(b) of the Constitution.      (2) In  view of  the provisions  of      Art. 245,  the restrictions in Part      XIII of the Constitution applied to      taxation laws; a and such laws were      not confined only to by legislation      with respect to entries relating to      trade and  commerce in  any of  the      lists in the Seventh Schedule.      (3) On a proper construction of the      Act and  the Schedules,  the  taxes      imposed were  really taxes  for the      use of  the roads  in Rajasthan. In      basing  the   taxes  on   passenger      capacity or  loading capacity,  the      legislature had  merely  evolved  a      method and  measure of compensation      demanded  by  the  State,  but  the      takes were  still compensation  and      charge for regulation."      Subba Rao, concurred with the above propositions though the learned  Judge stated  the propositions flowing from his opinion at  Pages 564-565  separately. The  majority  opined that "the  interpretation which has accepted by the majority in the Atiabari Tea Co. case is corrects but subject to this clarification.  Regulatory  measures  or  measures  imposing compensatory  taxes for the use of trading facilities do not come within  the purview of the restrictions contemplated by Art.  301  and  such  measures  need  not  comply  with  the requirements  of   the  proviso   to   Art.   304   (b)   of Constitution."[Emphasis supplied]



    Firm A.T.B. Mehtab Majid & Co. v. State of Madras [1963 Suppl. (2)  S.C.R.435] arose  under the Madras general Sales Tax Act.  The effect  of Section 3 of the Act read with Rule 16 was that tanned hides and skins imported from outside the State of  Madras 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. Similarly, hides or skins imported from  outside the State after purchase in their raw condition and then tanned inside the State were also subject to higher  rate of  tax than hides or skins purchased in raw condition in  the State  and tanned  within the  state. This distinction was  attacked as  violative of  Articles 301 and 304(a) of  the Constitution.  Following the law laid down in Atiabari  Tea   Co.Ltd.  and   Rajasthan  Automobiles,   the Constitution Bench held:      "It is  therefore now  well settled      that    taxing    laws    can    be      restrictions on trade, commerce and      intercourses  if  they  hamper  the      flow of  trade and  if they are not      what   can    be   termed   to   be      compensatory  taxes  or  regulatory      measures. Sales  tax, of  the  kind      under consideration  here cannot be      said to be a measure regulating any      trade or  a compensatory tax levied      for the  use of trading facilities.      Sales   tax which has the effect of      discriminating between goods of one      State and  goods  of  anothers  may      affect the  free flow  of trade and      it will then offend against Art.301      and will  be valid only if it comes      within the terms of Art.304(a).      Article    304(a)    enables    the      Legislature of a State to make laws      effecting   trades   commerce   and      intercourse.   It    enables    the      imposition of  taxes on  goods from      other States  if similar  goods  in      the State  are subjected to similar      taxes, so  as not  to  discriminate      between the  goods manufactured  or      produced  in  that  State  and  the      goods which are imported from other      States.  This  means  that  if  the      effect of sales-tax on tanned hides      or skins  imported from  outside is      that the  latter becomes subject to      a higher  tax by the application of      the proviso  to sub-rule of r.16 of      the  Rules,   then   the   tax   is      discriminatory and unconstitutional      and must be struck down."      State of  Madras v.  N.K.Nataraja  Mudaliar  [1968  (3) S.C.R.829] considered  the validity of sub-sections (2),2(A) and (  )  of  Section  8  of  the  Central  Sales  Act.  The respondent‘s case  was that  they were violative of Articles 301, 302,  303 and 304. It was held by Shah,J. [speaking for himself, Mitter and Vaidyalingam,JJ.] that while the Central sales tax imposed under Section 3 violates Article 301 being a tax on movement of goods, it was saved by Article 302. The levy of different rates by sub-section (2A) was justified on the ground  that the  Act was  meant for  imposing tax to be collected and  retained by the State and that in such a case



the provision  does not  amount to  a  law  contemplated  by clause (1) of Article 303. For the same reason, it was held, leaving it to the States to levy tax at different rates also does  not   amount  to  practising  discrimination.  Article 304(a), it  is significant  to note,  was said  to  have  no application for  the reason that it was not a case where tax was imposed  on imported goods at a  different rate from the rate  leviable   on  goods   manufactured  locally.  Certain observations made  by Shah,j. are relied upon by the learned counsel for Jammu & Kashmir and must, therefore, be set out:      "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,  existence   of  trade      channels,  the  rated  of  freight,      trading facilities, availability of      efficient   transport   and   other      facilities for  carrying on  trade.      Instances can easily be imagined of      cases in  which notwithstanding the      lower rate  of tax  in a particular      part of  the counts  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      another  State  may  have  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      business 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."            [ Emphasis added ]      It is  significant to  notice that  these  observations were made  in the  context of  the argument  that  different rates of  Central sales  tax in  different States on sale of similar goods  is discriminatory. It was not a case like the present one where a State is levying a different/higher rate of tax  on goods  imported from  other States  than the rate applicable to  sales of  similiar goods  manufactured within that State. We are unable to see how these observations help the State.      Hedge,J. concurred with Shah,J.      State of  Tamil Nadu  v. Sita  Lakshmi Mills  [1974 (3) S.C.R.1] holds  that Section  8(2) of  the Central Sales Tax Act is not violative of Articles 301, 302 and 303.      H.Anraj v.  Government of  Tamil Nadu  [1985  Suppl.(3) S.C.R.342] is  a decision  af a Bench of two learned Judges.



The Government  of Tamil  Nadu exempted  the lottery tickets issued by  it totally  while levying  tax on lottery tickets issued by  other governments  and sold  in Tamil  Nadu.  The Court  held   that  laws   imposing  taxes   can  amount  to restriction on  trade,  commerce  and  intercourse  if  they hampered the free flow of trade unless they are compensatory in nature  and that  the sales  tax which  had the effect of discriminating between  goods of  one State  and another may affect free  flow of trade and would be offensive to Article 301 unless  saved by  Article 304(a).  It was  held that the direct and  immediate result  of  the  notification  was  to impose an unfavourable and discriminatory tax.      India Cement  & Ors.  v. State of Andhra Pradesh & Ors. [1986 (1)  S.C.C.743] is  also a  decision  of  two  learned Judges. The  Government of  Andhra Pradesh  had  issued  two notifications, one under Section 9{1) of the State Sales Tax Act and  the other  under Section  8(5) of the Central Sales Tax Act.  Under the first notification, sales tax on sale of "cement manufactured  by cement  factories situated  in  the State and  sold to  the manufacturing  units situated within the State  for the  purpose of........  " was  reduced  from 13.5% to 4% Under the second notifications the Central sales tax was  reduced to two percent. The Government of Karnataka also issued  a similar  notification  reducing  in  similiar situations Central  sales tax  from 15%  to 2%.  These  were challenged as  violative of  Articles 301  and 304  and  the challenge was  upheld, The  first ground upheld was that the "reasonable restrictions" contemplated by Article 304(b) can be imposed by a law made by legislature of the State and not by the orders of the Government, i.e., by executive action.* The second  ground given,  by the Bench [Ranganath Misra and M.M.Dutt,JJ.] is  that "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"  and hence  bad. In the course of discussion, the Bench observed:      "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      preserved in  national interest, it      is necessary that the provisions in      the  Article   must   be   strictly      complied with.  One had  to  recall      the farsighted      This ground  appears to  be  of  doubtful  validity  as pointed out  by a  Three-Judge-Bench in Video Electronics v. State of Punjab [1990 (3) S.C.C.87].      observations  of  Gajendragadkar,J.      in Atiabari  Tea Co.  case and  the      observations  then  made  obviously      apply to cases to the type which is      now before us."      The facts  in Weston  Electronics v.  State of  Gujarat [1988 (2)  S.C.C.568] are  similar. Until  1981, the  tax on sale of electronic goods under the Gujarat Sales Tax Act was fifteen percent  whether the  goods were manufactured within the State  of Gujarat  and sold or imported from outside. In 1981 -  and again  in 1986  however, a  distinction was made between locally  manufactured goods  and those imported into



the State.  A lower rate was prescribed for the former. This was held  to be discriminatory and offensive to Articles 301 and 304.      In West  Bengal Hosiery  Association. v. State of Bihar [1988 (4)  S.C.C.134], the  facts are practically similar to those in Weston Electronics as also the conclusion.      Video Electronics (P) Ltd. v. State of Punjab (1990 (3) S.C.C.87]: inasmuch  as strong and almost exclusive reliance is placed  by the  learned counsel  for the State of Jammu & Kashmir on  this decision,  it is  necessary to  examine the facts of and the law laid down in this decision (rendered by a Bench of three learned Judges) alittle more closely. In is decision, notifications  issued by  two States,  viz., Uttar Pradesh and  Punjab were considered. The notification issued by the  Government of Uttar Pradesh provided an exemption in favour of  new units  established in specified areas and for the prescribed  period  [three  to  seven  years]  specified therein. It  was further  stipulated that  the said  benefit shall be  available only  to  those  new  units  which  have commenced their  production between  the two dates specified by the  government. The  Punjab notification  provided  that "rate  of   the  sales   tax  payable   by   an   electronic manufacturing unit existing in Punjab in cases of electronic goods specified in Annexure-A was prescribed at one per cent as against the normal 12 per cent". [This is how the purport of the  provision has  been set  out in  the decision.] Both notifications were impugned as violative of Articles 301 and 304.  The  Bench  comprising  Mukharji,CJ,  Ranganathan  and Verma,JJ. upheld both the notifications. So far as the Uttar Pradesh  notification   was  concerned,  it  was  held  that inasmuch as  it was  a case  of grant  of  exemption  "to  a special class  for a  limited period on specific conditions" and was  not extended  to all the  producers of those goods, it does  not offend  the freedom  guaranteed by Article 301. Similarly, in  the case  of Punjab notification, it was held that since  the exemption is for certain specified goods and also  because  "an  overwhelmingly  large  number  of  local manufacturers of similar goods are subject to sales tax", it cannot be  said that  local manufacturers  were favoured  as against the  outside manufacturers.  In the  course of their judgment, the  Bench made  certain  observations  which  are strongly relied  upon by  Shri M.L.Verma,J. The observations are to  the effect  that while  judging whether a particular exemption granted by the State offends Articles 301 and 304, it is  necessary to  take into  account various  factors.  A State which  is technically and economically weak on account of various factors should be allowed to develop economically by granting  concessions, exemptions  and subsidies  to  new industries.  All  parts  of  the  country  are  not  equally developed, industrially  and economically.  The  concept  of economic  unity  is  an  ever-changing  one;  it  cannot  be imprisoned in  a strait-jacket.  India  is  not  already  an economic unit.  Economic unity is possible only when all the units of  the country  develop equally.  The power  to grant exemption  is  inherent  in  all  taxing  statutes  end  the Government cannot  be deprived  of this  power  by  invoking Articles 301  and 304. The concept of economic barriers must be understood  in a  dynamic sense.  The concept of economic unity or economic barriers must be read along with the power of exemption  inhering in the State Governments. Where every State is exempting or reducing the rates of sales tax, there can be  no question  of an  economic war  between  them.  "A backward State  or a  disturbed  State  cannot  with  parity engage in  competition with  advanced or  developed  States. Even within a State there are often backward areas which can



be developed only if some special incentives are granted. If the incentives  in the  form of subsidies or grant are given to any part of (sic or) units of a State so that it may come out of  its limping  or infancy  to compete  as equals  with others, that  in our opinion, does not and cannot contravene the spirit  and the letter of Part XIII of the Constitution. However, this  is permissible  only  if  there  is  a  valid reason, that  is  to  say,  if  there  are  justifiable  and rational reasons  for differentiation.  If there is none, it will amount to hostile discrimination."      All the  above observations  were made  to justify  (1) grant of  incentives and subsidies and (2) exemption granted to  new   industries,  of  a  specified  type  [small  scale industries commencing  production within  the two  specified dates] and  for a  short period.  They were not meant to nor can they  be read  as justifying  a blanket exemption to all small scale  industries in  the State  irrespective of their date of  establishment. The  case before  us  clearly  falls within  the   ratio  of   the  Constitution  Bench  decision A.T.M.Mehtab Majid  and the  decisions in India Cement, West Bengal  Hosiery  Association  and  Weston  Electronics,  The limited  exception   and  Weston  Electronics.  The  limited exception created  in Video  Electronics does  not help  the State herein  for the reason that exemption concerned herein is  neither   confined   to   "new   industries",   nor   is circumscribed by  other conditions  of the nature stipulated in the  Uttar Pradesh notification. It is not possible to go on extending  the limited  exception  created  in  the  said judgment, by  stages, which would have the effect of robbing the  salutory   principle  underlying   Part-XIII   of   its substance. Indeed,  it has  been the contention of Sri Salve that, on  principle,  the  exception  carved  out  in  Video Electronics unsustainable.  For the purpose of this case, it is  not   necessary  for   us  to  say  anything  about  the correctness of Video Electronics. Suffice it to say that the limited exception  carved out  therein cannot  be widened or expanded to cover cases of a different kind. It must be held that the  total exemption  granted in  favour of small scale industries in  Jammu &  Kashmir producing  edible oil [there are no large scale industries in that State producing edible oil] is not sustainable in law.      Sri Salve  has brought  to our notice a recent decision of the  Supreme Court of U.S.A. in West Lynn Creamery, Inc., Vs. Jonathan Healy, Commissioner of Massachusetts Department of Food and Agriculture - judgment rendered on June 17, 1994 in Case No.93-141. The petitioner was a Milk dealer licenced to do  business in  the State  of Massachusetts. Most of the milk consumed  in that State was imported from other States. In 1992,  the Government  declared a  State of  emergency in view of  declining trend  in the price of raw milk. It found at the cost of production of milk in Massachusetts is higher than the  cost of  production, in  other States  and that to preserve and  protect the milk industry in Massachusetts, it is necessary to take certain measures. Accordingly, an order was issued  soon after  the declaration  of emergency  which created the  Massachusetts Dairy  Equalization Fund.  A levy was imposed  upon all the milk sold in the State. At the end of each  month, the  proceeds of  such levy were distributed among the  producers of  milk in  Massachusetts alone.  This order was  attacked as  violative  of  the  Commerce  Clause contained in Article 1(8) of the United States Constitution, which reads:  "The Congress  shall have  power - to regulate Commerce with  Foreign nations and among the several States, and with  the Indian  Tribes."  The  Court  held  [with  one learned Judge, Scalia,J., concurring with the conclusion but



on a reasoning different from that of the majority] that the order is  bad. The  majority observed  that the  "‘negative’ aspect   of   the   Commerce   Clause   prohibits   economic protectionism-that  is,   regulatory  measures  designed  to benefit in-state  economic interests  by  burdening  out-of- state  competitors....Thus,   state  statutes  that  clearly discriminate  against   interstate  commerce  are  routinely struck down....unless  the  discrimination  is  demonstrably justified  by   a  valid   factor  unrelated   to   economic protectionism". The  Court observed  that the avowed purpose and undisputed  effect of  the order  is to  enable her cost Massachusetts Dairy Farmers to compete with lower cost dairy farmers in  other States  and that  the premium payments are effectively a  tax which  makes milk  produced out  of state more expensive.  The Court  further  observed  that  a  pure subsidy funded out of general revenues ordinarily imposes no burden on  inter-State commerce  and that  it merely assists local business.  The  impugned  order,  however,  the  Court pointed out,  was "funded principally from taxes on the sale of milk  produced in  other  States........".  To  the  same effect is  the decision  in Bacchus  Imports Limited v. Dias [(1984) - 460 U.S.263].      Now, what  is the  ratio of the decisions of this Court so far  as clause  (a) of  Article 304  is concerned? In our opinion, it  is this:  the  States  are  certainly  free  to exercise the  power to  levy taxes  on goods  imported  from other States/Union  territories but  this freedom,  or power shall bot be so exercised as to bring about a discrimination between  the   imported  goods   and   the   similar   goods manufactured or  produced in  that State.  The clause  deals only with  discrimination by means of taxation; it prohibits it. The  prohibition cannot  be extended beyond the power of taxation. It  means in the immediate context that States are free to  encourage and promoted the establishment and growth or industries  within their States by all such means as they think proper  but they  cannot, in that process, subject the goods imported from other States to a discriminatory rate of taxation, i.e.,  a  higher  rated  to  sales  tax  vis-a-vis similar goods  manufactured/produced within  that State  and sold   within    that   State.    Prohibition   is   against discriminatory taxation  by the  States. It  matters not how this discrimination  is brought  about. A  limited exception has no  doubt been  carved out  in Video Electronics but, as indicated hereinbefore,  that exception  cannot be  enlarged lest it  eat up  the main  provision. So  far as the present case is  concerned it  does  not  fall  within  the  limited exception  aforesaid;   it  falls   within  the   ratio   of A.T.M.Mehtab Majid and the other cases following it. It must be held  that by  exempting unconditionally  the edible  oil produced within the State of Jammu & Kashmir altogether from sales tax,  even if  it is  for a period of ten years, while subjecting the  edible oil produced in other States to sales tax at  eight percents  the State  of Jammu  s  Kashmir  has brought  about  discrimination  by  taxation  prohibited  by Article 304(a) of the Constitution.      We are  unable to  see any  substance in  the objection raised by  Sri Verma  that not having attacked the exemption notification when  the rate  of tax  was four  percents  the appellants should  not be  allowed to question the same when the rate  of tax  has climbed to eight percent. There can be no  question   of  any   acquiscence  in  matters  affecting constitutional rights or limitations. Similarly the argument that the  volume of  trade of the appellants has not shown a downward trend  inspite of  the said  exemption  is  equally immaterial apart  from  the  fact  that  an  explanation  is



offered therefor by Sri Salve. Yet another contention of Sri Verma that  the principle of classification applicable under Article 14  is equally  applicable under  Articles  301  and 304(a) is of little help to the respondent-State. Article 14 speaks of  equality;  Article  301  speaks  of  freedom  and Article 304(a)  speaks  of  uniform  taxation  of  both  the imported goods and the locally produced goods by the States. According to  Sri Verma, edible oil produced and sold in the State of  Jammu &  Kashmir and  the edible  oil, produced in other States  and sold  in the State of Jammu & Kashmir fall in two different classes and that the said classification is designed to  achieve the  objective of  industrialisation of the State.  We find  it difficult  to appreciate how can the concept of classification be read into clause (a) of Article 304 to  undo the  precise object  and purpose underlying the clause.  Sri  Verma  repeatedly  stressed  that  the  object underlying the  impugned measure  is a laudable one and that it seeks  to serve  and promote the interest of the State of Jammu &  Kashmir which  is economically  and industrially an undeveloped State  besides being  a disturbed  State. We may agree on  this score but then the measures necessary in that behalf have  to be taken by the appropriate authority and in the appropriate manner. Part-XIII of the Constitution itself contains adequate  provisions to remedy such a situation and there is  no reason  why the  necessary measures  cannot  be taken to  protect the  edible oil  industry in  the State in accordance with the provisions of the said Part. Keeping the said aspect  in view,  we invoke our power under Article 142 of the  Constitution  and  mould  the  relief  to  suit  the exigencies of the situation.      We declare  that the  exemption granted by Notification No.S.R.O.93 of  1991  to  local  manufacturers/producers  of edible oil  is violative  of  the  provisions  contained  in Articles 301  and 304(a).  At the same time, we direct that: (a) the  appellants shall  not  be  entitled  to  claim  any amounts by  way of refund or otherwise by virtue of or, as a consequence of the declaration contained herein and (b) that the declaration  of invalidity  of the impugned notification shall take  effect on and from April 1,1997. Till that date, i.e., upto  and inclusive  of 31st March, 1997, the impugned notification shall  continue to  be effective and operative. Appeal allowed in the above terms.      There shall be no order as to costs.