http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 24  

PETITIONER: STATE OF MADRAS

       Vs.

RESPONDENT: N. K. NATARAJA MUDALIAR

DATE OF JUDGMENT: 18/04/1968

BENCH: SHAH, J.C. BENCH: SHAH, J.C. BACHAWAT, R.S. MITTER, G.K. VAIDYIALINGAM, C.A. HEGDE, K.S.

CITATION:  1969 AIR  147            1968 SCR  (3) 829  CITATOR INFO :  R          1970 SC 508  (15)  F          1970 SC1742  (14)  RF         1970 SC1912  (7)  R          1974 SC1505  (12)  RF         1974 SC1660  (4)  RF         1975 SC 583  (27)  R          1976 SC 182  (17)  RF         1976 SC1016  (18)  E          1984 SC1194  (18)  R          1986 SC  63  (36)  F          1987 SC1922  (7,10,13)  RF         1988 SC 567  (11)  R          1989 SC1119  (13)  RF         1990 SC 781  (74)  F          1990 SC 820  (15,17,21,22)

ACT: Central  Sales  Tax  Act, 1956--Different rates  of  tax  in different   States  under  s.  8  sub-cls.  (2),  (2A)   and (5)--These  provisions whether void for contravention  Arts. 301  and  303 of the Constitution--Computation  of  turnover under  s. 9(3) of Act--Must be in the same manner  as  under State  law  of sales tax--Excise Duty must  be  excluded  if State law so provides. Constitution   of   India,   Arts.   301,   302,   303   and 304--Differential  rates of Central Sales Tax  in  different States  under  s. 8, sub-cls. (2), (2A) and (5)  of  Central Sales  Tax Act, 1956--Freedom of trade and commerce  whether hampered--Discrimination  between  one  State  and   another whether results.

HEADNOTE: The  respondent claimed before the Commercial  Tax  Officer, Madras  that some of his goods had been sent from Madras  to his  depot  in Andhra Pradesh and that the  sales  of  those goods  were intra-State sales in Andhra Pradesh  where  they had been taxed as such.  The Commercial Tax Officer  however held that the goods had been moved from the State of  Madras under contracts of sale and were therefore taxable as inter-

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 24  

State  sales  under the Central Sales Tax  Act,  1956.   The respondent   filed  a  petition  under  Art.  226   of   the Constitution.   The High Court did not determine the  nature of the transactions, but held that sub-ss. (2), (2A) and (5) of  s. 8 of the Central Sales Tax Act as they stood  at  the relevant time  imposed  or  authorised  the  imposition   of varying rates of tax in different  States on similar  inter- State  transactions  and the ’resultant  inequality  in  the burden  of  tax  affected  and  impeded  inter-State  trade, commerce and intercourse and thereby offended Arts. 301  and 303(1)  of the Constitution.  The application of s. 9(3)  of the  Act  was  also considered.  Against  the  High  Court’s judgment the State appealed. - HELD  : (i) Restrictions or impediments which  directly  and immediately  impede  or  hamper  the  free  flow  of  trade, commerce and intercourse whether inter-State or  intra-State fall within the prohibition imposed by Art. 301 and  subject to  other provisions may be regarded as void.  A tax may  in certain  cases directly and immediately restrict  or  hamper the  flow of trade but every imposition of tax does  not  do so. [840 D] Atiabari  Tea  Co. Ltd. v. State of Assam &  Ors.  [1961]  1 S.C.R.  809, Automobile Transport (Rajasthan) Ltd. v.  State of  Rajasthan  & Ors., [1963] 1 S.C.R. 491 and  Firm  A.T.B. Mehtab Majid and Co. v. State of Madras & Anr. [1963]  Supp. 2 S.C.R. 435, relied on. (ii) Tax,  under  the Central Sales Tax Act  on  inter-State sales  is in its essence a tax which encumbers  movement  of trade  and commerce, since by the definition in s. 3 of  the Act a sale or purchase of the goods is deemed to take  place in the course of inter-State trade, if it-(a) occasions the: movement  of  goods  ’from  one State  to  another;  (b)  is effected  by a transfer of documents of title to  the  goods during the movement from one State to another.  But the  tax in  the present case was saved by the operation of Art.  302 of  the Constitution whereby Parliament is,  notwithstanding the protection conferred by Art. 301 authorised to impose 830 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. [841 C-E] The  expression  ’between one State and  another’  does  not imply that the power under Art. 302 can be exercised only in respect  of  trade  between one State  and  another  as  two entities.  The Article expressly provides that  restrictions may be imposed not only as between one State and another but also  within any part of the territory of India.   There  is also no doubt that exercise of the power to tax may normally be presumed to be in the public interest. [841 F-H] (iii)     The  Central Sales Tax Act does  not  discriminate between  one  State and another within the meaning  of  Art. 303. An  Act which is merely enacted for the purpose of  imposing tax which is to be collected and to be retained by the State does not amount to 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 merely because of varying rates  of  tax between  different States.  By leaving it to the  States  to levy  sales  tax in respect of a  commodity  on  intra-State transactions   no   discrimination  is  practised   and   by authorising  the  State  from which the  movement  of  goods commences to levy on transactions of sale Central Sales Tax, at  rates  prevailing  in the,  State,  subject  to  certain

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 24  

limitations,   no  discrimination  can  be  deemed   to   be practised. [843 C-D; 846 C] 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 rates of freight, trading  ’facilities, availability of efficient transport and other facilities for carrying on trade. [843 G-H] The  King  v.  Barger, [1908] 6 C.L.R. 41 and  W.  R.  Moran Proprietary  Ltd.  v.  The Deputy  Federal  Commissioner  of Taxation (N.S.W.) & Ors., [1940] 63 C.L.R. 338. referred to. The  rate  which a State Legislature imposes in  respect  of inter-State  transactions  in a  particular  commodity  must depend  on a variety of factors-political and economic.   If the  rate  is so high as to drive away  prospective  traders from  purchasing a commodity and to resort to other  sources of  supply,  in its own interest the State will  adjust  the rate   to  attract  purchasers.   Again  in   a   democratic constitution political forces would operate against the levy of  an  unduly  high rate of tax.  Attention  must  also  be directed  to sub-s. (5) of s. 8 which authorises  the  State Government,  notwithstanding anything contained in s.  8  in the public interest to waive tax or impose tax on sales at a lower  rate on inter-State trade or commerce.  It  is  clear that  the  Legislature has contemplated that  elasticity  of rates  consistent  with economic forces may  be  maintained. [845 B-E] (iv) Article 304 (a) had no application to the present  case because there was no imposition of rates of tax on  imported goods  different from rates of tax on goods manufactured  or produced in the State. [847 F] Firm A.T.B. Mehtab Majid and Company v. State of Madras  and Another,  [1963] Supp. 2 S.C.R. 435 and State of  Mysore  v. Lakshminarasimhiah   Setty   &   Sons,   16   S.T.C.    231, distinguished. (v)  In  the matter of determining the taxable turnover  the same  rules namely the rules under the State law will  apply by  virtue of s. 9(1) of the Central Sales Tax Act,  whether the  tax is to be levied under the Central Sales Tax Act  or the Madras General Sales Tax Act.  Therefore in  calculating the turnover of inter-State transactions excise duty would 831 be  excluded as provided in the Rules made under the  Madras Act,  although  there was no such provision in  the  Central Act. [848 G-H] State  of  Mysore  v. Lakshminarasimhiah Setty  &  Sons,  16 S.T.C. 231, referred to. Per  Bachawat J. (partly dissenting),-(i) It cannot be  said that  tax  under the Central Sales Tax  Act  on  inter-State sales as defined in s. 3 of the Act is in its essence a  tax hampering  movement of trade or commerce within the  meaning of  Art.  301.  That Article makes no  distinction  between. movement from one part of the State :to another part of  the same State and movement from one State to another.  If a tax on  intra-State sales does not offend Art. 301, logically  a tax  on  inter-State sales also cannot do so.   Neither  tax operates directly or immediately on the free, flow of  trade or the free movement or the transport of goods from one part of  the country to the other.  The tax is on the sale.   The movement  is incidental and a consequence of the sale.  (851 F-H; 85Z A] Even  assuming  that  the Central Sales Tax  is  within  the mischief  of  Art.  301,  it is  certainly  a  law  made  by Parliament in the public interest and is saved by Art.  302. There  is nothing in its provisions which offends  Art.  303

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 24  

[851 F] Per- Hegde, J.-(i) A taxing statute is not outside the scope of  Art.  301  of the Constitution.   But  before  a  taxing statute  is held to be violative of that article it must  be shown  that  it  has a direct or immediate,  impact  on  the freedom  of  trade,  commerce  and  intercourse  within  the country.  A mere remote or incidental impact is insufficient to hold that Art. 301    has been contravened. [85Z B] (ii) The  power  conferred  on Parliament  by  Art.  302  is extremely wide and  the only limitation placed on that power is  that the law in question must be required in the  public interest.   Primarily it is for Parliament to determine  the requirement  as to public interest, and its decision is  not easy to challenge.  In addition there is the presumption  of the constitutionality of a statute. [852 D] (iii)     Mere  difference  in  rates  is  neither   showing preference  nor making discrimination within the meaning  of Art. 303(1).  But other things being equal the difference in rates  would re-suit in showing preference to.  some  States and making discrimination against others.  Hence difference, in  rates  is  a  prima facie proof  of  the  preference  or discrimination complained of.  Once the difference in  rates is shown it is for the State to, show that the same has  not resulted  in  showing preference to one or  more  States  or making discrimination against one or more States over others in  the  matter  of inter-State  trade.   No  interpretation should  be  placed on Art. 303(1), which would  render  that provision  purposeless.   The State, must place  before  the Court  its reasons for making the enactment and’ satisfy  it that Art. 303(1) has not been contravened. [852 F-853 C] On an examination of the material placed before the Court in the  present case it was clear that the differences  in  the rates we’re in public interest and those differences did not materially  affect  the tree flow of trade in  the  country. [853 C] [The  impugned  sections of the Act having been held  to  be valid,  the  case  was  remanded  to  the  High  Court   for determining the nature of the transactions]

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeal No. 763 of 1967. 832 Appeal  from the judgment and order dated April 7,  1967  of the Madras High Court in Writ Petition No. 836 of 1966. Bishan Narain and A. Y. Rangam, for the appellant. M.   R.  M.  Abdul Karim, K. Rajendra Choudhury  and  K.  R. Choudhury, for the respondents. R.   Thiagarajan, for intervener No. 1. R.   Gopalakrishnan, for intervener No. 2. A.   N. Singh and D. N. Gupta, for intervener No. 3. B.   R.  L.  Iyengar, R. N. Sachthey and S. P.  Nayyar,  for intervener No. 4. B.   Sen,  G. S. Chatterjee for P. K. Bose,  for  intervener No. 5. C.   B. Agarwala and O. P. Rana, for intervener No. 6. Lal  Narain Sinha, Advocate-General for the State of  Bihar, R. K. Garg, S. C. Agarwala, Anil Kumar and S. P. Singh,  for intervener No. 7. Naunit Lal, for intervener No. 8. K.   Baldev Mehta, for intervener No. 9. M.   R. K. Pillai, for intervener No. 10. The  Judgment  of  SHAH, MITTER and  VAIDIALINGAM,  JJ.  was delivered by SHAH, J. BACHAWAT, J. partly dissented.  HEGDE,

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 24  

J. ,delivered a separate opinion. Shah,  J--In a proceeding for assessment of tax for  1963-64 under the Central Sales Tax Act, 1956, the Deputy Commercial Tax  Officer rejected the contention of the assessee that  a part of the turnover of his business in matches arose out of intra-State  sale  transactions at the assessee’s  depot  at Ongole  (in the State of Andhra Pradesh) to which depot  the goods  were despatched by him from his place of business  in the  State  of Madras.  The .Deputy Commercial  Tax  Officer held  that the goods were moved from "the godown  stock’  of the  assessee  in  execution  of  contracts  of  sale   with merchants  outside the State of Madras, and on that  account the turnover from sales was liable to tax under the  Central Sales Tax Act.  The assessee moved the High Court of  Madras under  Art.  226  of  the Constitution  seeking  a  writ  of certiorari  ,quashing  the  order  of  assessment,  on   the grounds,  that the provisions of the Central Sales  Tax  Act which  permitted levy of tax at varying rates  in  different States  were invalid, and that the transactions  brought  to tax  were not in truth inter-State transactions.   The  High Court did not determine the nature of the transactions  ’but held that sub-s. (2), (2A) and (5) of s..8 of the Central                             833 Sales  Tax  Act,  1956, in operation at  the  relevant  time imposed or authorised the imposition of varying rates of tax in different States on similar inter-State transactions  and the  resultant inequality in the burden of tax affected  and impeded  inter-State  trade. commerce and  intercourse,  and thereby  offended Arts. 301 and 303(1) of the  Constitution. The  High  Court rejected the plea of the assessee  that  S. 9(3) of the Act was ultra vires.  The State has appealed  to this  Court  with  certificate granted  by  the  High  Court against the order declaring sub-ss. (2), (2A) and (5) of S.   8 of the Central Sales Tax Act, 1956, invalid. A  brief review of the developments in the law  relating  to imposition  of tax on ’transactions of sale and  its  inter- relation  with the constitutional provisions leading to  the enactment   of  the  Central  Sales  Tax  Act,  1956,   will facilitate  appreciation of the competing views put  forward before us at the Bar.  The Government of India Act, 1935, by List  II  entry 48 of the Seventh Schedule  conferred  power exclusively  upon the Provinces to legislate on the  subject of  "tax  on the sale of goods and  on  advertisement".   In exercise  of that power the Provincial Legislatures  enacted sales tax laws for their respective Provinces acting on  the principle of "territorial nexus", and picked out one or more ingredients  constituting  a sale and made it  or  them  the basis  of  imposing  liability for tax.   This  exercise  of taxing  power by the Provinces led to multiple  taxation  of the  same transaction by many provinces, the burden  of  tax falling ultimately on the consuming public. In  order to remove this burden imposed upon the  consumers, Art. 286 was incorporated in the Constitution inter alia for the  regulation  of inter-State  sales  transactions.   This Court  in  The  State of Bombay  v.  United  Motors  (India) Ltd.(1) held that under the Bombay Sales Tax Act 24 of  1952 sales  effected in Bombay in respect of goods exported  from the  State were not taxable by the State of Bombay, but  the importing State was competent to levy tax on transactions of sale  in  the  course of inter-State trade  or  commerce  on persons  who were resident outside its  territory,  provided that the goods were delivered in the importing State for the purpose  of  consumption therein.  This  decision  made  the dealer carrying on business in the exporting State  amenable to  the sales tax law of the importing State.  The  question

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 24  

was  reconsidered by this Court in Bengal  Immunity  Company Ltd. v. State of Bihar(1).  The Court held that the sales or purchases  made by an assessee which actually took place  in the  course  of inter-State trade or commerce could  not  be taxed by any State until by law it was otherwise provided by Parliament.   The judgment in Bengal Immunity Co.’s  case(2) removed, by making inter-State (1)  [1953] S. C. R. 1069. (2) [1955] 2 S. C. R. 603. 834 sales  immune  from  taxation, the  difficulties  till  then experienced  by  the  trading community  but  the  importing States  which had imposed tax on inter-State sales  by  non- resident dealers, relying on them principle of the  judgment in United Motors case(1) were faced with innumerable  claims for  restitution  of the tax realized.  The  President  then promulgated  Ordinance  No.  III of  1956  which  was  later replaced by the "Sales Tax Laws Validation Act VII of  1956" with the object of restoring for the period specified in the Act the decision in United Motors case(1). The  problem  of  tax  on  inter-State  sales  was,  in  the meanwhile, examined by the Taxation Enquiry Commission.  The report  of  the  Commission  led to  the  enactment  of  the Constitution Amendment) Act, 1956.  By that amendment  entry 92A  was added in Union List in the Seventh Schedule to  the Constitution conferring power upon the Union to legislate in respect  of  "taxes on the sale or purchase of  goods  other than newspapers, where such sale or purchase takes place  in the course of inter-State trade or commerce"; and for  entry 54 in the State List, the following entry was substituted : "Taxes  on  the  sale  or  purchase  of  goods  other   than newspapers,  subject to the provisions of entry 92A of  List I." Explanation to cl. (1) of Art. 286 was omitted, and cls. (2) & (3)     were  substituted by fresh clauses: by  the  newly enacted cl. (2)     the Parliament was authorised by law  to formulate principles for determining when a sale or purchase of  goods  takes place in any of the ways mentioned  in  cl. (1),  and by cl. (3) it was enacted that any law of a  State shall, in so far as it imposes or authorises the  imposition of,  a  tax  on the sale or purchase of  goods  declared  by Parliament by law to be of special importance in inter-State trade  or  commerce,  be subject to  such  restrictions  and conditions in regard to the system of levy, rates and  other incidents  of the tax as Parliament may by law specify.   In Art. 269(1) clause (g) was added authorising the  Government of  India  to collect tax on the sale or purchase  of  goods other  than  newspapers, where such sale or  purchase  takes place  in  the course of inter-State trade or  commerce  and making it obligatory upon the Government of India- to assign the tax to the States in the manner provided in cl. (2).  By cl. (3) it was enacted that "Parliament may by law formulate principles for  determining when  a sale or purchase of goods takes place in the  course of inter-State trade or commerce." In  exercise  of  authority conferred  by  the  Constitution (Sixth  Amendment)        Act,     1956,     the  Parliament enacted on (1)  [1953] S.C.R. 1069. 835 December  21, 1956, the Central Sales Tax Act, 1956, with  a view to formulate principles (a) for determining when a sale or  purchase  of goods takes place in the course  of  inter- State trade or commerce or outside a State or in the  course of  import into or export from India; (b) providing for  the levy, collection and distribution of taxes on sales of goods

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 24  

in  the  course  of  inter-State  trade  or  commerce;   (c) declaring  certain  goods to ’be of  special  importance  in inter-State   trade   or   commerce   and   specifying   the restrictions  and  conditions to which State  laws  imposing taxes  on  the  sale or purchase of such  goods  of  special importance  shall  be  subject.   By  s.  3  of  the  Act  a definition  of sale or purchase of goods said to take  place in the course of inter-State trade or commerce was  devised. By s. 4 conditions in which a sale or purchase of goods  was to  be  deemed  to have taken place  outside  a  State  were specified.   By.s.  5  the conditions in  which  a  sale  or purchase  of goods taking place in the course of  import  or export were specified.  By Ch.  III (ss. 6 to 13) provisions were  enacted for declaring a charge of tax  on  inter-State sales  and  for  setting up machinery for levy  of  tax  and incidental matters.  Section 6 imposed a charge on all sales effected  by a dealer in the course of inter-State trade  or commerce  during any year.  By s. 7 provision was  made  for registration  of  dealers.   Section 8,  insofar  as  it  is material, and as amended by Act 31 of 1958, read as follows               "(1) Every dealer, who in the course of inter-               State trade or commerce-               (a)   sells to the Government any goods; or               (b)   sells to a registered dealer other  than               the   Government  goods  of  the   description               referred to in sub-section (3) :               shall  be  liable to pay tax under  this  Act,               which shall be two per cent. of his turnover.               (2)   The  tax  payable by any dealer  on  his               turnover in so far as the turnover or any part               thereof  relates to the sale of goods  in  the               course  of inter-State trade or  commerce  not               falling within sub-section (1)-               (a)   in the case of declared goods, shall  be               calculated at the rate applicable to the  sale               or   purchase   of  such  goods   inside   the               appropriate State; and               (b)   in the case of goods other than declared               goods,  shall  be calculated at  the  rate  of               seven per cent., or at the rate applicable  to               the sale or purchase of such goods inside  the               appropriate State, whichever is higher;               and   for  the  purpose  of-making  any   such               calculation any such dealer shall be deemed to               be a dealer liable to pay               836               tax under the sales tax law of the appropriate               State,  notwithstanding that he, in fact,  may               not be so liable under that law.               (2A)  Notwithstanding  anything  contained  in               subsection  (1) or sub-section (2),  if  under               the sales tax law of the appropriate State the               sale  or purchase, as the case may be, of  any               goods by a dealer is exempt from tax generally               or is subject to tax generally at a rate which                             is  lower than two per cent. (whether called  a               tax  or  fee or by any other  name),  the  tax               payable. under this Act on his turnover in  so               far  as  the  turnover  or  any  part  thereof               relates  to  the sale of such goods  shall  be               nil,  or,  as  the  case  may  be,  shall   be               calculated at the lower rate.               Explanation.--For  the  purpose of  this  sub-               section a sale or purchase of goods shall  not

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 24  

             be  deemed  to be exempt  from  tax  generally               under  the  sales tax law of  the  appropriate               State  if under that law it is exempt only  in               specified  circumstances  or  under  specified               conditions or in relation to which the tax  is               levied  at specified stages or otherwise  than               with reference to the turnover of the goods.               (3)               (4)               (5)   Notwithstanding  anything  contained  in               this section, the State Government may, if  it               is satisfied that it is necessary so to do  in               the  public interest, by notification  in  the               Official  Gazette, direct that in  respect  of               such  goods  or  classes of goods  as  may  be               mentioned  in the notification and subject  to               such conditions as it may think fit to impose,               no tax under this Act shall be payable by  any               dealer  having  his place of business  in  the               State  in respect of the sale by him from  any               such  place of business of any such  goods  in               the course of inter-State trade or commerce or               that the tax on such sales shall be calculated               at  such lower rates than those  specified  in               sub-section  (1) or sub-section (2) as may  be               mentioned in the notification."               By  S.  9 machinery was set up  for  levy  and               collection  of tax and penalties.  Insofar  as               it is material, it provided :               "(1) The tax payable by any dealer under  this               Act  on sales of goods effected by him in  the               course of interState trade or commerce whether               such  sales fall within clause (a)  or  clause               (b) of section 3 shall be levied and                                    837               collected  by the Government of India  in  the               manner  provided  in sub-section  (3)  in  the               State  from  which the movement of  the  goods               commenced:               Provided               (2)               (3)   The  authorities  for  the  time   being               empowered  to  assess,  collect  and   enforce               payment of any tax under the general sales tax               law of the appropriate State shall, on  behalf               of the Government of India and subject to  any               rules made under this Act, assess, collect and               enforce  payment  of any  tax,  including  any               penalty, payable by a dealer under this Act in               the  same  manner as the tax on  the  sale  or               purchase of goods under the general sales  tax               law  of  the  State  is  assessed,  paid   and               collected;  and  for  this  purpose  they  may               exercise  all or any of the, powers they  have               under the general sales tax law of the  State,               and  the  provisions of  such  law,  including               provisions   relating  to  returns,   appeals,               reviews, revisions, references, penalties  and               compounding    of   offences,   shall    apply               accordingly               Provided               (4)   The  proceeds in any financial  year  of               any  tax,  including any penalty,  levied  and               collected  under this Act in any State  (other               than  a  Union  territory) on  behalf  of  the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 9 of 24  

             Government of India shall be assigned to  that               State  and  shall be retained by it;  and  the               proceeds  attributable  to  Union  territories               shall  form part of the Consolidated  Fund  of               India."               By  Ch.  IV (ss. 14 & 15) provision  was  made               for  levy  of tax at specially  low  rates  on               goods  of  special importance  in  inter-State               trade  or  commerce.  By S. 14  certain  goods               were  declared to be of special importance  in               inter-State trade or commerce, and by, s. 15,               as amended by Act 31 of 1958, it was provided:               "Every  sales tax law of a State shall, in  so               far as it imposes or authorises the imposition               of  a tax on the sale or purchase of  declared               goods,    be   subject   to   the    following               restrictions and conditions, namely :-               (a)   the  tax  payable  under  that  law   in               respect of any sale or    purchase   of   such               goods  inside the State shall not’ exceed  two               per  cent.  of  the  sale  or  purchase  price               thereof,  and such tax shall not be levied  at               more than one stage;               838               (b)   where  a tax has been levied under  that               law in respect of the sale or purchase  inside               the State of any declared goods and such goods               are  sold %in the course of inter-State  trade               or  commerce,  the  tax so  levied  shall  not                             exceed  two  per cent of the sale  or  purchase               subject to such conditions as may be  provided               in any law in force in that State." The  scheme  of the Act was first to devise  definitions  of ’interState  sales’ and ’sales outside the State’, and  then to  declare interState sales subject to tax, and to  set  up machinery  for  levying and collecting tax on  those  sales. Transactions in goods which were made subject to tax in  the course of inter-State trade or commerce were classified into three broad categories-(1) transactions falling within s.  8 (1) i.e. all sales to Government, and sales to a  registered dealer  other  than the Government of goods referred  to  in sub-s. (3) of s. 8; (2) transactions falling within S. 8 (2) (a)  i.e.,  sales  in respect of  declared  goods;  and  (3) transactions  falling  within S. 8 (2) (b) i.e.  sales  [not falling  within  (  1  )  in respect  of  goods  other  than declared  goods.   Sales  of goods in category (  1  )  were declared  liable, at the relevant time to pay a tax  of  two per  cent. on the turnover.  On sales of declared goods  tax Was  to be calculated at the rate applicable to the sale  or purchase of such goods inside the appropriate State.  But by S.  15 the tax payable under a State law in respect  of  any sale or purchase of declared goods inside the State was  not to  exceed  two  per cent. of the  sale  or  purchase  price thereof,  and was not leviable at more than one  stage.   On turnover  from sale of goods not failing  within  categories (1)  &  (2)  the  rate  was seven  per  cent.  or  the  rate applicable to the sale or purchase of such goods inside  the appropriate State, whichever was higher.  But by sub-s. (2A) of  s.  2  it was  provided  that  notwithstanding  anything contained  in sub-s. (1) or sub-s. (2), if under  the  sales tax  law of the appropriate State the sale or  purchase,  as the case may be, of any goods by a dealer is exempt from tax generally or is subject to tax generally at a rate which  is lower  than two per cent. the tax payable under the  Act  on

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 10 of 24  

the  turnover  insofar as the turnover or any  part  thereof relates  to the sale of such goods shall be nil, or  as  the case may be shall be calculated at the lower rate.  There is a  slight inconsistency between s. 8 (2) and S. 8 (2A).   If the  rate  of tax under the State law is less than  two  per cent.  by virtue of S. 8 (2A), even in respect  of  turnover falling within S. 8 (2) (b), the rate of tax will not exceed the State rate : if the State rate exceeds two per cent, tax at the rate of seven per cent. or of the State, whichever is higher,  shall  prevail.   But that has no  bearing  on  the question under discussion. Tax under the Act is payable by the seller.  The State  from which  the  movement  of goods commences in  the  course  of inter- 839 State  sale  collects  the  tax  as  agent  of  the  Central Government,  and in the manner provided in sub-s. (3) of  s. 9. By sub-s. (4) of s. 9 the proceeds in any financial  year of  any  tax, including any penalty,  levied  and  collected under the Act in any State (other than a Union territory) on behalf of the Government of India are to be assigned to that State  and  are  to  be retained by  it,  and  the  proceeds attributable  to Union territories are to form part  of  the Consolidated Fund of India. The  Act and the constitutional provisions were intended  to restrict  the  imposition of multiple taxation on  a  single inter-State  .transaction  by different States,  each  State relying  upon some territorial nexus between the  State  and the  sale.  The tax though collected by the State under  the Central  Sales  Tax  Act  was as an  agent  of  the  Central Government,  it  was,  by  sub-s. (4) of  s.  9  enacted  in implementation of the principle of assignment of tax set out in  cl.  (2)  of  Art. 269,  assigned  to  the  State  which collected it. This somewhat tortuous scheme of levying tax on  inter-State transactions  and  making it available to  the  State  which levied it, in effect countenances levy of different rates of tax  on  inter-State transactions in similar goods.   It  is upon the prevalence of different rates of tax which, subject to  adjustments, and incorporated in the Central  Sales  Tax Act,  that the argument of the assessee is largely  founded. He  contends-and  his contention has found favour  with  the High  Court-that  the  liability to pay  tax  on  interState transactions,  depending upon the rate of tax prevailing  in the  exporting State, hampers trade and commerce, by  giving or  authorising the giving of preference to one  State  over another   or  by  making  or  authorising  the   making   of discrimination  between one State and another,  and  thereby violates  the  guarantee of freedom of trade,  commerce  and intercourse declared by Part XIII of the Constitution.   The assessee  primarily relies upon Arts. 301 and 303(1) of  the Constitution  in  support of his  contention.   Article  301 provides : "Subject  to  the  other provisions  of  this  Part,  trade, commerce  and intercourse throughout the territory of  India shall be free." This  Article is couched in terms of the  widest  amplitude, trade,  commerce and intercourse are thereby  declared  free and  unhampered  throughout  the territory  of  India.   The freedom  of trade so declared is against the  imposition  of barriers or obstructions within the State as well as  inter- State  :  all restrictions which  directly  and  immediately affect the movement of trade are declared by Art. 301 to  be ineffective.  The extent to which Art. 301 operates to  make trade and commerce free has been considered by this Court in

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 11 of 24  

several cases.  In Atiabari Tea Co. Ltd. v. The State Sup.  C. I./68-14 840 of  Assam  and others(1), Gajendragadkar, J.,  speaking  for himself and Wanchoo & Das Gupta, JJ., observed at p. 860:               ".......  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."               In  Automobile Transport (Rajasthan)  Ltd.  v.               The State of Rajasthan and others(1), the view               expressed  by Gajendragadkar, J., in  Atiabari                             Tea Co.’s case(1) was accepted by the majority.               Subba  Rao, J., who agreed with  the  majority               observed that the freedom .declared under Art.               301  of the Constitution of India referred  to               the  right of free movement of  trade  without               any  obstructions by way of  barriers,  inter-               State  or  intra-State, or  other  impediments               operating as such barriers.  The same view was               expressed  in Firm A. T. B. Mehtab  Majid  and               Company v. State of Madras and Another(") by a               unanimous Court.  It must be taken as  settled               law that the restrictions or impediments which               directly and immediately impede or hamper  the               free  flow of trade, commerce and  intercourse               fall  within the prohibition imposed  by  Art.               301 and subject to the other provisions of the               Constitution they may be regarded as void.               But it is said that by imposing tax on  sales,               no restriction hampering trade is imposed.  In               the Atiabari Tea Company’s               case  (1), Gajendragadkar, J., observed :               "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.  The  argument               that all taxes should be governed by Art.  301               whether  or  not  their  impact  on  trade  is               immediate   or  mediate,  direct  or   remote,               adopts,  in our opinion, an  extreme  approach               which cannot be upheld."               In  a  recent judgment of this  Court  in  The               Andhra Sugars Ltd. and Another v. The State of               Andhra  Pradesh and others(4),  Bachawat,  J.,               speaking for the Court, after referring to the               observations  made by Gajendragadkar,  J.,  in               Atiabari Tea Company’s case(1) observed               "This  interpretation of Article 301  was  not               dissented   from   in   Automobile   Transport               (Rajasthan) Ltd. v. State of Rajasthan--[1963]               I  S.C.R.  491.  Normally, a tax  on  sale  of               goods does not directly impede the free               (1)   [1961]1 S.C.R.809.               (2)   [1963] Supp. 2 S.C.R. 435.               (3)   [1963] 1 S. C. R. 491.               (4)   21 S. T. C. 212.               841               movement or transport of goods.  Section 21 is               no  exception.   It does not impede  the  free               movement  or  transport of goods  and  is  not               violative of Article 301."

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 12 of 24  

Section  21 of the Andhra Pradesh Sugar Cane (Regulation  of Supply  and  Purchase)  Act which was  referred  to  in  the judgment  authorised the State Government to levy a  tax  at such rate not exceeding five rupees per metric tonne as  may be  prescribed  on the purchase of cane  required  for  use, consumption  or sale in a factory.  It must,  therefore,  be regarded  as  settled law that a tax may  in  certain  cases directly  and  immediately restrict or hamper  the  flow  of trade, but every imposition of tax does not do so. 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 s. 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 documents 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 saved by  the operation of the other provisions of Part XIII.  Article 302 of  the  Constitution provides 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.  Thereby the Parliament is, notwithstanding the  protection conferred by Art. 301, authorised to  impose restrictions   on   the  freedom  of  trade,   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  Art. 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, Art.  301  does  not merely  protect inter-State trade or operate against  inter- State barriers : all trade is protected whether it is intra- State or interState by the prohibition imposed by Art.  301, 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  intercourse,  operative only  as  between  one State and another  as  two  entities. ’Mere is also no doubt that exercise of the power to tax may normally be presumed to be in the public interest. Article 303 provides, by the first clause:               "Notwithstanding  anything  in  article   302,               neither  Parliament nor the Legislature  of  a               State,  shall  have  power  to  make  any  law               giving,  or  authorising the  giving  of,  any               preference  to  one  State  over  another,  or               making,  or  authorising the  making  of,  any               discrimination between one State and another.,               by  virtue of an entry relating to  trade  and               commerce  in any of the Lists in  the  Seventh               Schedule." Having  conferred by Art. 302 power upon the  Parliament  to impose  restrictions  upon  freedom of  trade,  commerce  or intercourse,  the  Constitution proceeds to  impose  certain restrictions upon the power so conferred.  Reference to  the power  of the State Legislatures in Art. 303 (1 ) creates  a

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 13 of 24  

complication  which  we are not called upon in  the  present case  to  resolve.   It  is  expressly  declared  that   the Parliament  shall not have the power to make any law  giving preference to one State over another, authorising the giving of  any  preference to one State over  another,  making  any discrimination   between   one  State   and   another,   and authorising  the  making of any discrimination  between  one State and another, in exercise of or by virtue of any  entry relating  to trade and commerce in any of the Lists  in  the Seventh Schedule. It was contended on behalf of the State that the power under Art.  303  could  only be exercised so as  to  restrict  the authority  of  the Parliament which arises by virtue  of  an entry  relating  to trade and commerce  in  the  legislative lists  and  it was urged that an entry with respect  to  the levy  of  tax  on trade and commerce and  is  not  an  entry relating  to  trade and commerce and therefore there  is  no prohibition  against  the  Parliament  exercising  power  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 the exercise of taxing power.  Reliance in support of that contention was placed  upon  the judgment in Sundararamier and  Company  v. State  of Andhra Pradesh(1) in which Venkatarama Aiyar,  J., pointed out that under he scheme of entries in List I &  III of the Seventh Schedule the power of taxation exercisable in respect of any matter is a power distinct from the power  to legislate in respect of that matter.  It was also urged that the  expression "an entry relating to trade and commerce  in any of the Lists in the Seventh Schedule" was restricted  to the entries which expressly deal with the power to legislate in  respect of trade and commerce i.e., entries 41 &  42  of List I, entries 26 & 27 of List II and entry 33 of List  III in the Seventh Schedule, and (1)  [1958] S. C R. 1422. 843 extended  to no others.  On the other hand it was  contended that all legislative entries which directly affect trade and commerce  are also within the expression "entry relating  to trade and commerce". We  need  express  no opinion on the  two  questions  argued before  us.  The question whether entries relating to  trade and  commerce  in  the Lists in  the  Seventh  Schedule  are restricted to entries 41 & 42 of List I, entries 26 & 27  of List  II and entry 33 of List III, or relate to all  general entries which affect trade and commerce, is academic in  the present  case.   Nor  do we think  it  necessary  to  decide whether for the purpose of Art. 303 entries relating to  tax on sale or purchase of goods i.e., entry 92A of List I,  and entry  54  of  List II are entries  relating  to  trade  and commerce,  for,  in  our opinion, an  Act  which  is  merely enacted  for  the  purpose of imposing tax which  is  to  be collected and to be retained by the State does not amount to 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, merely because of varying rates of tax prevail in different States. It  was urged that the High Court was right in holding  that rates of tax on the sale of the same or similar commodity by different  States  by itself was  discriminatory,  since  it authorised placing of an unequal burden on inter-State trade and  commerce  affecting its free flow between  the  States. The   rates  of  tax  prevailing  in  different  States   on transactions   of  sale  in  the  diverse  commodities   are undoubtedly not uniform.  According to the High Court such a

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 14 of 24  

scheme was "obviously quite discriminatory and  considerably affected  the freedom of trade, commerce and  inter-Course", the  differential  rates or exemptions in  various  Statler, imposing  an  unequal burden on the same  or  similar  goods which  affected their free movement or flow  in  inter-State trade and commerce, and that a higher rate of tax in a State worked as a barrier to the free movement of similar goods to another State where there was no tax or a lower rate of tax, and for trade in particular goods declared or undeclared  to be  free throughout the territory of India, the rate of  tax or  exemption  as the case may be must be uniform.   We  are unable to accept the view propounded by the High Court.  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 rates 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 country goods I 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 844 rate  is offset by the freight which a merchant  in  another State.  may have to pay for carrying that commodity  over  a long distance, the merchant would be willing to purchase the goods  from a nearer State, even though the rate of  tax  in that  State  may  be  higher.   Existence  of  long-standing 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. In  The  King  v. Barger(1) the Australian  High  Court  was called  upon  to  deal with the meaning  of  the  expression "discrimination  between States or parts of States" used  in S.  51 of the Australian Constitution, Isaacs, J.,  observed at p. 108 :               ".  .  .  .  .  the  pervading  idea  is   the               preference  of locality merely because  it  is                             locality,  and because it is a particu lar  part               of a particular State.  It does not include  a               differentiation      based,      on      other               considerations, which are dependent on natural               or  business  circumstances, and  may  operate               with   more   or  less  force   in   different               localities;  and  there  is  nothing,  in   my               opinion, to prevent the Australian Parliament,               charged  with the welfare of the people  as  a               whole,  from  doing what every  State  in  the               Commonwealth has power to do for its own citi-               zens, that is to say, from basing its taxation               measures  on  considerations of  fairness  and               justice,  always observing the  constitutional               injunction  not to prefer States or  parts  of               States." In  W.  R.  Moran Proprietary Ltd.  v.  The  Deputy  Federal Commissioner   of  Taxation  (N.S.W.)  and  others(1),   the Judicial  Committee  of  the  Privy  Council  recorded   its approval  to that exposition.  It is true that the  Judicial

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 15 of 24  

Committee  was  interpreting  s. 51(ii)  of  the  Australian Constitution.   It also appears from the provisions  of  the Australian  Constitution  that  by virtue of s.  96  of  the Constitution there is to be a uniform imposition of  customs duties.  But the observations made by Isaacs, J., in King v. Barger(1) and approved by the Judicial Committee are  useful in the determination of the true principle applicable in the present case, that, it is where differentiation is based  on consideration not dependent upon natural or business factors which   operate  with  more  or  less  force  in   different localities  that the Parliament is prohibited from making  a discrimination. The rates of tax in force at the date when the Central Sales Tax  Act  was enacted have again  not  become  crystallized. The (1) [1908] 6 C. L R. 41. (2) [1940] 63 C. L. R.  338. 845 rate which the State Legislature determines, subject to  the maximum  prescribed for goods referred to in s. 8 ( 1 )  and (2)  are  the operative rates for those  transactions  :  in respect of transactions falling within S. 8 (2) (b) the rate is determined by the State rate except where the State  rate is  between the range of two and seven per cent.   The  rate which a State Legislature imposes in respect of  inter-State transactions  in a particular commodity must depend  upon  a variety  of  factors.  A State may be led to impose  a  high rate of tax on a commodity either when it is not consumed at all  within the State, or if it feels that the burden  which is  falling on consumers within the State will be more  than offset  by  the  gain in  revenue  ultimately  derived  from outside consumers.  The imposition of rates of sales tax  is normally  influenced by factors political and economic.   If the  rate is, so high as to drive away  prospective  traders from  purchasing a commodity and to resort to other  sources of  supply,  in its own interest the State will  adjust  the rate  to attract purchasers.............. Again, in a  demo- cratic  constitution political forces would operate  against the levy of an unduly high rate of tax.  The rate of tax  on sales  of  a  commodity  may  not  ordinarily  be  based  on arbitrary considerations but in the light of the facility of trade  in  a particular commodity,  the  market  conditions- internal  and external--and the likelihood of consumers  not being scared away by the price which includes a high rate of tax.  Attention must also be directed to sub-s. (5) of s.  8 which  authorises  the  State  Government,   notwithstanding anything contained in s. 8, in the public interest to  waive tax  or impose tax on sales at a lower rate  on  inter-State trade  or  commerce. it is clear that  the  legislature  has contemplated  that  elasticity  of  rates  consistent   with economic forces may be maintained. Prevalence of differential rates of tax on sales of the same commodity  cannot be regarded in isolation as  determinative of the object to discriminate between one State and another. Under  the Constitution as originally framed,  revenue  from sales-tax  was reserved to the States.  But since the  power of  taxation could be exercised in a manner  prejudicial  to the  larger  public  interests by the States  it  was  found necessary  to restrict the power of taxation in  respect  of transactions which had an inter-State content.  Amendment of Art.  286 and the enactment of the Sales Tax Validation  Act 1956, and the Central Sales Tax Act, 1956, were all intended to  serve a dual purpose: to maintain the source of  revenue from sales-tax to the States and at the same time to prevent the  States  from subjecting transactions in the  course  of

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 16 of 24  

interState trade so as to obstruct the free flow of trade by making  commodities  unduly expensive.  The  effect  of  the Constitutional  pro,visions achieved in a  somewhat  devious manner is still clear, viz. 846 to reserve sales-tax as a source of revenue for the  States. The Central Sales Tax Act is enacted under the authority  of the  Union Parliament, but the tax is collected through  the agency of the State and is levied ultimately for the benefit of  the  States and is statutorily assigned to  the  States. That  is clear from the amendments made by the  Constitution (Sixth Amendment) Act, 1956, in Art. 269, and the  enactment of cls. (1) & (4) of s. 9 of the Central Sales Tax Act.  The Central  sales-tax  though levied for and collected  in  the name  of the Central Government is a part of  the  sales-tax levy  imposed for the benefit of the States.  By leaving  it to the States to levy sales-tax in respect of a commodity on intrastate transactions no discrimination is practiced:  and by  authorising the State from which the movement  of  goods commences to levy on transactions of sale Central sales-tax, at rates prevailing in the State, subject to the  limitation already  set out, in our judgment, no discrimination can  be deemed to be practised. The  view taken by the High Court was largely influenced  by two  cases  decided by this Court on the  interpretation  of Art. 304(a).  In Firm A. T. B. Mehtab Majid & Co.’s  case(1) this  Court struck down the levy of tax on sales  of  tanned hides and skins imported from outside the State of Madras at a  rate higher, than the rate of tax on sales of  hides  and skins  tanned  and  sold  within  the  State  of  Madras  as infringing Art. 304(a).  By r. 16 framed under s. 19 of  the Madras  General Sales Tax Act, it was provided that  in  the case  of untanned hides and skins the tax under s. 3 (1)  of the  Madras General Sales Tax Act shall be levied  from  the dealer  who  is the last purchaser in the State  not  exempt from  tax  under s. 3 (3) on the amount for which  they  are brought by him.  By r. 16(2) it was provided that-(i) in the case  of  hides or skins which had been tanned  outside  the State the tax under s. 3 (1) shall be levied from the dealer who in the State is the first dealer in such hides or  skins not  exempt from tax under s. 3(3) on the amount  for  which they  are sold by him; and (ii) in the case of tanned  hides or  skins  which had been tanned within the State,  the  tax under  s.  3 (1) shall be levied from a person  who  is  the first  dealer  in such hides of skins not  exempt  from  tax under s. 3(3) on the amount for which they are sold by  him. The  taxpayer  contended  in Firm A. T.  B.  Mehtab  Majid’s case(1)  that  the  tanned hides  and  skins  imported  from outside  and sold inside the State were under r. 16  of  the Madras General Sales Tax Rules subjected to a higher rate of tax than the rate imposed on hides and skins tanned and sold within the State and this-discriminatory system of  taxation offended  Art.  304(a)  of  the  Constitution:  This   Court accepted the contention and held that r. 16(2) discriminated against imported hides or skins which had been purchased or (1)  [1963] Supp. 2 S. C. R. 435.                             847 tanned  outside and therefore it contravened Art. 304(a)  of the Constitution. Similarly  in  A. Hajee Abdul Shakoor and Co.  v.  State  of Madras(1)  the  assessees who were dealers in skins  in  the State of Madras, purchased raw skins from places both within and  outside  the State of Madras.  They  were  assessed  to sales-tax  in accordance with the provisions of  the  Madras General  Sales Tax (Turnover and Assessment) Rules,  on  the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 17 of 24  

turnover  of  hides  and skins  purchased  in  the  untanned condition outside the State and tanned within the State with respect  to the assessment years 1955-56, 1956-57 and  1957- 58.   The tax was assessed at 3 pies per rupee on the  price of tanned hides and skins for the years 1955-56 and  1956-57 and  at the rate of 2 per cent on the turnover for the  year 1957-58.  In petitions filed by the assessees in this  Court under  Art. 32 of the Constitution it was held that S.  2(1) of  the Madras General Sales Tax (Special  Provisions)  Act, 1963,  discriminated against imported hides and skins  which were  sold upto August 1, 1957, upto which date the  tax  on sale  of raw hides and skins was at the rate of 3  pies  per rupee and was therefore void. In  the two cases the differential treatment  violated  Art. 304(a) of the Constitution, which authorises the Legislature of a State notwithstanding anything in Arts. 301 and 303  by law  to "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;".   Imposition  of differential  rates  of  tax  by the  same  State  on  goods manufactured  or  produced in the State  and  similar  goods imported  in  the State is prohibited by that  clause.   But where  the  taxing  State is not  imposing  rates  of  taxon imported  goods  different  from  rates  of  tax  on   goods manufactured  or produced, Art. 304(a) has  no  application. Article  303  prohibits the making of law  which  gives,  or authorises  the giving of, any preference to one State  over another,  or  makes,  or  authorises  the  making  of,   and discrimination between one State and another.  Prevalence of different  rates of sales-tax in the State which  have  been adopted by the Central Sales Tax Act for the purpose of levy of  tax  under  that  Act  is,  as  already  mentioned,  not determinative  of  the  giving of  preference  or  making  a discrimination.   The view expressed by the High Court  that s.  8(2), 8(2A) and 8(5) infringe Art. 301 and  Art.  303(1) cannot be sustained. It  was contended before the High Court that whereas  excise duty was not liable to be included in the turnover of  goods under the Madras General Sales Tax Act, it was liable to  be included (1)  [1964] 8 S. C. R. 217. 848 in  the turnover for the purpose of Central Sales  Tax  Act. The  High  Court  in making a  general  discussion  on  this question  observed, following the judgment of this Court  in State  of Mysore v. Lakshminarasimhiah Setty & Sons(1)  that by  "levied" in s. 9(1) ,of the Central Act, what was  meant was "levied as under the State Act", that would include also the  State Rules enabling deductions in the  computation  of the  turnover.  The Court rejected the contention  that  "to the  extent the excise duty is not deductible  from  taxable turnover under the Central Act unlike under the Madras General Sales Tax Act, there is discrimination ....  between one State and another".  They observed that :               "In the matter of non-deductibility of  excise               duty  from the turnover of inter-State  sales,               the  Central  Act has  equal  application  and               makes no discrimination.  The Central Act does               not say that excise duty will be deductible in               one  State  and  not in another.   It  is  not               deductible  from  the turnover of  the  inter-               State sales and this rule is uniformly applied               to   all   inter-State   sales.    There   is,

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 18 of 24  

             therefore,   no  question  of  inequality   or               discrimination  forbidden by Art.  303(1)  and               there is no question of contravention of  Art.               301 either." But  in  dealing with the case of the assessee in  the  last paragraph  ,of  the judgment, the High Court  observed  that since no provision had been made for deduction of the excise duty  from  the turnover of inter-state sales  or  purchases under  the Central Act with the result that  unequal  burden will fall on differences in the quantum of turnover  because of allowance in the one case and disallowance in another, of deduction  of  excise duty.  This in the view  of  the  High Court  would impede the freedom of inter-State  trade,  com- merce and intercourse within the meaning of Art. 301 of  the Constitution   and   was  not  saved  by  Art.   303.    The observations so made, somewhat blur the earlier  discussion. If  under the Madras General Sales Tax Act in computing  the turnover the excise duty is not liable to be included and by virtue of S. 9 (1 ) ,of the Central Sales Tax Act has to  be levied  in the same manner as the Madras General  Sales  Tax Act,  the excise duty will not be liable to be  included  in the  turnover,  and  the  observations  made  in  the   last paragraph  ’of  the judgment under appeal  that  because  no express provision was made for exclusion of the excise  duty in  the  computation of turnover from inter-State  sales  or purchases  there  was discrimination cannot be  accepted  as correct.   We  are  of  the  view  that  in  the  matter  of determining  the taxable turnover the same rules will  apply by virtue of S. 9 (1) of the Central Sales Tax Act,  whether the  tax is to be levied under the Central Sales Tax Act  or the General Sales Tax Act. (1)  16 S. T. C. 231. 849 The  High Court proceeded to determine the case before  them only  on  the plea that the impugned provisions of  the  Act were  ultra  vires.   They  did  not  consider  whether  the transactions  in dispute were inter-State  transactions  and liable  to  tax in the hands of the assessee in  the  Madras State.   It  is the case of the assessee that  he  has  been taxed  in  the  Andhra  Pradesh  State  by  the  appropriate authority  in respect of the transactions of sale  of  goods which  are  sought  to be taxed, on  the  footing  that  the transactions  were inter-State transactions.   The  question whether the transactions were inter-State and were liable to be taxed under the Madras General Sales Tax Act has not been determined.  The case must therefore be remanded to the High Court.  The High Court will proceed to decide the  question. Since  the assessee moved the High Court by a writ  petition against  the  order  of the  sales-tax  authorities  without filing an appeal before the authority competent to deal with the questions of fact, it will be open to the High Court  to require  the assessee to have those questions determined  by the competent departmental authority. The appeal will be allowed and the order passed by the  High Court declaring the provisions of ss. 8(2), 8(2A). and  8(5) ultra vires must be set aside. The  petition out of which this appeal arises was one  of  a group  of  petitions filed before the High  Court.   Against orders passed in favour of the other assessees the State has not preferred appeals.  The amount involved in the claim  is small.  The State apparently has approached this Court  with a  view  to obtain a final determination  of  the  important question which was raised in the petitions filed before  the High Court.  We therefore direct that there will be no order as to costs in this Court and in the High Court.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 19 of 24  

Bachawat, J. I have read the draft judgment prepared by  our learned  brother Justice Shah.  He has said that  tax  under the  Central  Sales Tax Act on inter-State sales is  in  its essence a tax hampering movement of trade or commerce, since by the definition in sec. 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; or (b) is affected by a  transfer of  documents  of title to the goods during  their  movement from  one State to another.  He is of the view that the  tax falls  within the prohibition imposed under Art. 301 of  the Constitution. In Atiabari Tea Co. Ltd. v. The State of Assam(1)  Gajendra- gadkar, J. speaking for the majority of the Court said:-               "We   are,   therefore,  satisfied   that   in               determining  the  limits  of  the  width   and               amplitude of the freedom                (1) [1961] 1 S. C. R. 809, 86D-861.               850               guaranteed  by  Article  301  a  rational  and               workable  test  to apply would  be:  Does  the               impugned   restriction  operate  directly   or               immediately on trade or its movement.... It is               the  free movement of the transport  of  goods               from one part of the country to the other that               is  intended  to  be saved,  and  if  any  Act               imposes  any direct restrictions on  the  very               movement of such goods it attracts the  provi-               sions of Article 301, and its validity can  be               sustained    only   if   it   satisfies    the               requirements  of  Art. 302 or Article  304  of               Part XIII."               This  interpretation  of Article 301  was  not               dissented   from   in   Automobile   Transport               (Rajasthan)  Ltd. v. State of Rajasthan(1)  In               The Andhra Sugars Ltd. v. The State of  Andhra               Pradesh  &  Ors. (2) this Court  rejected  the               contention that sec. 21 of the Andhra  Pradesh               Sugarcane (Regulation of Supply and  Purchase)               Act, 1961 (Andhra Pradesh Act No. 45 of  1961)               did not offend Article 301.  The Court held :               "Normally,  a  tax on sale of goods  does  not               directly impede the free movement or transport               of  goods.   Section 21 is no  exception.   It               does   not  impede  the,  free   movement   or               transport  of  goods and is not  violative  of               Article 301." This Court distinguished the case of Firm A.T. Mehtab  Majid v.  State of Madras(3) which decided that a sales tax  which discriminated against goods imported from other States might affect  the  free flow of trade and would  then  be  invalid unless  protected by Article 304(a).  It is implied in  Art. 304(a)  that  a discriminatory tax might affect  freedom  of trade. On  principle I see no distinction between a tax  on  intra- State  and a tax on inter-State sales.  An intra-State  sale may  occasion  the movement of goods from one  part  of  the State to another part of the same State.  Indeed,  normally, an  intra-State sale would occasion such  movement,  because the purchaser has to move the goods from the seller’s  place to  some  other  place.  An intra-State  sale  may  also  be affected  by a transfer of documents of title to  the  goods during their movement from one part of the State to  another part  of the same State.  But, there can be no doubt that  a tax  on  such sales would not normally offend  Article  301.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 20 of 24  

That Article makes no distinction between movement from  one part  of  the State to another part of the  same  State  and movement from one State to another.  Now, if a tax on intra- State sale does not offend Article 301, logically, I do  not see  how a tax on inter-State sale can do so.   Neither  tax operate directly or immediately on the (1) [1963] (1) S.C.R. 491, 533 (2) 21 S. T. C. 212. (3)  [1963] Supp. 2 S. C. R. 435. 851 free flow of trade or the free movement of the transport  of goods from one part of the country to the other.  The tax is on   the  sale.   The  movement  is  incidental  to  and   a consequence of the sale. In  The  Bengal Immunity Company Ltd. v. State  of  Bihar(1) Jagannadhadas, J. after referring to Art. 301 said               "Now it is not disputed that a tax on a purely               internal sale which occurs as a result of  the               transportation  of goods from a  manufacturing               centre within the State to a purchasing market               within  the same State is clearly  permissible               and  not hit by anything in the  Constitution.               If  a sale in that kind of trade can bear  the               tax  and  is not a burden on  the  freedom  of               trade,  it  is difficult to see why  a  single               point  tax  on the same kind of sale  where  a               State   boundary   intervenes   between    the               manufacturing centre and the consuming centers               need be treated as a burden, especially  where               that  tax  is ultimately to come  out  of  the               residents of the very State by which such sale               is  taxable.   Freedom of trade  and  commerce               applies as much within a State as outside  it.               It  appears to me again, with great  ’respect,               that  there is no warrant for treating such  a               tax  as  in  any way contrary  either  to  the               letter or the spirit of the freedom of  trade,               commerce   and  intercourse   provided   under               Article 301." As  at  present advised, I am inclined to agree  with  these observations.   I  am,  therefore, inclined  to  think  that normally a law imposing a tax on intra-State sales does  not offend Art. 301.  It seems to me that the Central Sales  Tax Act,  1956  is  no  exception to this  rule.   None  of  its provisions directly impede the movement of goods or the free flow of trade. I may add that even assuming that the Central Sales Tax Act, 1956  is within the mischief of Art. 301, it is certainly  a law  made by Parliament in the public interest and is  saved by  Art.  302. find nothing in the Act  which  offends  Art. 303(1). The  decision  of the High Court that section s.  8  (2),  8 (2A), and 8(5) of the Central Sales Tax Act, 1956 are  ultra vires the Constitution must therefore be set aside.  I agree to the order proposed by Shah J. Hegde, J. Though I agree with the conclusions reached by  my learned brother Shah, J., namely, sections 8(2), 8(2-A)  and 8(5)  of the Central Sales Tax Act, 1956 (No. 74  of  1956)- hereinafter  referred  to  as the Act-are  intra  vires  the Constitution,  my reasons for coming to that conclusion  are not the same as his.  Hence this note. (1)  [1955] 2 S. C. R. 603 at p. 754. 852 The  facts  of  the  case as well  as  the  history  of  the legislation are fully set out in the majority judgment.   It

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 21 of 24  

is  settled by the decisions of this Court in  Attabari  Tea Co.  Ltd.  v.  The  State of  Assam(1)  and  the  Automobile Transport (Rajasthan) Limited v. The State of Rajasthan  (2) that a taxing statute is not outside the, scope of Art.  301 of the Constitution.  But before a taxing statute is held to be violative of that Article, it must be shown that it has a direct or immediate impact on the freedom of trade, commerce and intercourse within the country.  In other words, a  mere remote  or  incidental impact is insufficient to  hold  that Art.  301  has  been  contravened.   Article  302   empowers Parliament by law to 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.  The power conferred  on Parliament is extremely wide and the only limitation  placed on  that power by Art. 302 is that the law in question  must be  required  in the public interest.  Primarily it  is  for Parliament to determine the requirements of public interest. The  decision  of Parliament in this regard is not  easy  to challenge.  Parliament is presumed to know the needs of  the people,  the requirements of the time and the  economic  and political interests of the country as a whole.  By its  very composition  it is unlikely that Parliament would  have  re- gional  bias  or  would  adopt  a  parochial  approach.   In addition, there is the presumption of the  constitutionality of  a statute.  Therefore the State undoubtedly starts  with an  advantage.   But once it is shown that a  measure  prima facie  gives preference to the residents of one  State  over another  State  or  it  makes  discrimination  between   the residents  of  a State and that of another  because  of  the adoption of different rates of tax in different States, then the  matter assumes a different complexion in view  of  Art. 303  (1).   It should be within the knowledge of  the  Union Government   why  Parliament  adopted  different  rates   in different States.  I agree that mere difference in rates  is neither  showing preference nor making discrimination.   But other  things  being equal, the difference  in  rates  would result  in  showing  preference to some  States  and  making discrimination  against  others.   Hence,  in  my   opinion, difference in rates is a prima facie proof of the preference or  discrimination  complained of.  It is for the  State  to justify  those differences.  The real question for  decision is whether the impugned provisions have given or  authorised the  giving of any preference to one State over  another  or made or authorised the making of any discrimination  between one State and another.  The word "State" in Art. 301 is used in  the  sense  of people residing in  that  State.   It  is impossible  for any ordinary person to establish  positively the preference or the (1) [1961] 1 S. C.  R. 809. (2) [1963] 1 S. C. R. 491. 853 discrimination   complained  of,  apart  from  showing   the difference  in the rates.  Once he shows the  difference  in the rates, it is for the State to show that the same has not resulted  in showing preferences to one or more States  over others  or making discrimination against one or more  States over  others in the matter of inter-State trade.  I  am  not prepared  to  place an interpretation on Art.  303(1)  which would  render that provision purposeless.  After all  it  is the State that had enacted the impugned provisions.  It must have  had  good reasons for enacting those  provisions.   It must  place before court those reasons and satisfy  it  that Art.  303(1) has not been contravened.  But on the  material placed before us, I am satisfied that the differences in the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 22 of 24  

rates  are in public interest and those differences  do  not materially affect the free flow of trade in the country. From  the history of the legislation, it is clear  that  the subject  of  taxing  inter-State  sales  is  a   complicated process.   It has various facets.  Sales-tax is one  of  the most important sources of revenue for the States.  It was so even  under the Government of India Act, 1935.  It  was  not the intention of Parliament either to dry up that source  or to divert the same.  It wanted to retain that source for the States;  but at the same time guard against  States  levying sales  tax on inter-State sales in a manner which is  likely to be prejudicial to the free flow of trade and commerce  in the  country.  Constitutional amendments referred to in  the judgment of Shah J. have an important purpose behind.  them. Same  is  the  case as regards the provisions  in  the  Act. Before  Articles  269  and  286 were  amended  and  the  Act enacted,  a Committee known as Taxation  Enquiry  Committee, had  gone into the various aspects of inter-State trade  and commerce and made recommendations to the Union Government on that  subject.   It  was  largely  on  the  basis  of  those recommendations   that   Articles  269  and   286   of   the Constitution were amended and the Act enacted.  Therefore it is clear that the Act is not a haphazard legislation; it  is the  product  of  deep thinking and clear  analysis  of  the various  aspects of the matter.  This Court will be slow  to hold such a. measure as being either not in public  interest or  is  violative of Art. 303(1).  The  question  of  giving preference or making discrimination depends on various facts and circumstances, the tax rate being only one of them.  The views of an expert committee on a subject so complicated  as tax on interState sales is entitled to great weight.  In the very  nature  of  things,  it is  difficult  for  courts  to ascertain  the various factors that impede the free flow  of trade  or to assess their importance.  This is not the  same thing  as  saying  that  this  Court  should  abdicate   its functions in favour of an expert committee or should  unduly exaggerate  the importance of the collective knowledge  and, wisdom  of the members of Parliament.  But the fact  remains that 854 in assessing the strength of economic in a given matter  the views of persons who may be expected to be familiar with the subject  is entitled to weight and in the absence  of  clear proof  .to  the contrary or unless it is  shown  that  their conclusions are obviously wrong, it will be proper for  this Court  to proceed on the basis that the conclusions  reached by  them on facts-not on questions of law-are correct.   The Taxation Enquiry Committee has given good reasons in support of its recommendations. We  shall now examine the purposes behind s. 8 of  the  Act, which  fixes rates of tax on sales in the course  of  inter- State  trade,  commerce and intercourse.   The  Act  divides inter-State sales into four categories, namely--4i) sales to Government, (ii) sales of goods which are declared to be  of special  importance in the inter-State trade  and  commerce, (iii) sales to registered dealers, and (iv) sales to others. Good  many sales in the course of interState sales are  made to  Governments.   In  a welfare State  like  ,ours,  public sector is in-charge of various industries, which require raw material from various parts of the country.  The Governments also  require  consumer  goods  of  various  types  for  its governmental   functions  as  well  as  for   its   economic activities.   A uniform rate is fixed for those sales  under s.  8(1)(a).   Hence in respect of an important  segment  of inter-State  sales the rate is uniform, no doubt subject  to

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 23 of 24  

s.  8(2-A),  the  scope of which I shall  discuss  a  little later. Section 14 declares that goods enumerated therein are  goods ,of   special  importance  in  the  inter-State  trade   and commerce.   Section  15  prescribes  the  restrictions   and conditions under which sales tax in respect of the  turnover relating  to  those  goods  may  be  levied.   One  of   the conditions  prescribed  at the relevant time  was  that  tax should  not  be  more than two percentum  of  the  turnover. Further in respect of those goods only a single point  taxa- tion is permissible.  The declared goods constitute a  large portion  of  the  goods  sold  in  inter-State  trade.   The incidence  of taxation on those goods is such that it  could not have had any serious repercussion on inter-State trade. Section 8(1)(b) regulates the sales tax leviable on sales to registered dealers in the course of inter-State sales.   The maximum rate fixed at the relevant time was two percentum of the turnover.  All that the registered dealer has to do  _is to get included in his certificate of registration goods  of the class or ,classes which he proposes to purchase as being intended  for  resale  by  him or for  use  by  him  in  the manufacture or processing goods for sale or in the mining or is  the  generation or distribution of  electricity  or  any other form of power.  Here again the 855 incidence of taxation is so low as ordinarily not to  affect the, free flow of trade. This takes us to the remaining sales in the course of inter- State trade or commerce.  By and large these sales are  made to unregistered dealers.  Here again, so far as the declared goods  are  concerned,  tax has to be  levied  at  the  rate applicable to local sales, as provided in s. 8(2)(a).   Then we come to cl. (b) of s. 8(2), which deals with goods  other than declared goods.  Here the law at the relevant time  was that  the  tax  shall be calculated at  the  rate  of  seven percentum of the turnover or at the rate applicable to  sale or  purchase  of such goods inside  the  appropriate  State, whichever  is higher.  As could be seen from the  report  of the Taxation Enquiry Committee, the main reason for  this provisions was  to prevent as far as possible  the evasion  of  sales tax.  The Parliament  was.  anxious  that inter-State  trade  should be canalised  through  registered dealers  over  whom the appropriate government has  a  great deal of control.  It is not very easy for them to evade tax. A  measure which is intended to check the evasion of tax  is undoubtedly  a  valid measure.  Further,  inter-State  trade carried on through dealers coming within s. 8(2), must be in the  very  nature of things very little.  It  is  in  public interest to see that in the guise of freedom of trade,  they do not evade the payment of tax.  If the sales tax they have to pay is as high or even higher than intra-State sales  tax then they will be constrained to register themselves and pay the  tax legitimately due.  The impact of this provision  on inter-State trade is bound to be negligible, but at the same time it is an effective safeguard against evasion of tax. Section  8(2-A) is incorporated with a view to see that  the consumers in the States to which goods are imported are not placed at a disadvantage as compared to the consumers in the State  from  which  the goods are imported.   In  fact  this provision  is  bound to facilitate inter-State  trade.   The purpose  behind  the  section  is  to  see  that  the  State Governments  do  not place the local consumers in  a  better position than the consumers outside. Sub-section  (5)  of  s. 8 provides  for  giving  individual exemptions in public interest.  Such a power is there in all

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 24 of 24  

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 Sup C.1.168-15 856 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. It must be remembered that under the present conditions  the power  to  tax  is  not  merely  used  for  the  purpose  of collecting  revenue; it is a powerful social instrument,  in particular  an instrument which can be effectively used  for correcting  economic maladjustments.  While the  legislature must  provide  in  the law for  all  reasonably  foreseeable contingencies,  still  some discretionary power  has  to  be given to the executive to meet unexpected situations. If  we bear in mind the fact that sales tax  on  inter-State sales  is  levied  for the benefit of  the  States  and  the further  fact that each one of the State Governments in  its own interest is bound to create the best possible  condition for the growth of industry and commerce in that State, it is reasonable to assume that they will not be blind to economic forces.   All that one has to guard against is to  see  that they  do  not, by having recourse to their  taxation  power, obstruct the flow of trade into their State.  In the  normal course they will be interested in seeing that goods produced in  their  States are sold outside.   Reasonably  sufficient safeguards against the free flow of trade into a State  have been  provided  by the provisions of the  Act,  firstly,  by providing  for the levy of sales tax in the State  in  which the  goods are produced, and, secondly, by  placing  various restrictions on the power of the States in fixing the rates. None  of the impugned provisions, in my opinion, has  direct or immediate impact on inter-State trade or commerce. G.C.               Appeal allowed and remanded. 857