Indian
Cement & Ors Vs. State of Andhra Pradesh & Ors [1988] INSC 5 (12 January 1988)
Misra
Rangnath Misra Rangnath Dutt, M.M. (J)
CITATION:
1988 AIR 567 1988 SCR (2) 574 1988 SCC (1) 743 JT 1988 (1) 84 1988 SCALE (1)43
CITATOR
INFO : R 1988 SC1814 (6) R 1989 SC1119 (16) D 1990 SC 820 (17,30,32,35)
ACT:
Andhra
Pradesh General Sales Tax Act, 1957-Central Sales Tax Act, 1956 Challenge to
validity of notifications issued under sub-section ( I) of section 9 and
sub-section (5) of section 8-Respectively-of-As hit by provisions of Part Xlll
of the Constitution.
HEAD NOTE:
% The
State of Andhra Pradesh in exercise of powers conferred
under sub-section (1) of section 9 of the Andhra Pradesh General Sales Tax Act,
1957, made an order on January
27, 1987, reducing the
rate of tax on sale of Cement made to the manufacturing units of Cement
products in the State. On the same date, the State of Andhra pradesh made another order in
exercise of the powers conferred by sub- section (5) of section 8 of the
Central Sales Tax Act, 1956, reducing the tax leviable under the said Act in
respect of sales of Cement in the course of the inter-State trade or commerce.
The
State of Karnataka in exercise of the powers conferred
by sub-section (5) of section 8 of the Central Sales Tax Act, 1956, issued a
notification on 28.10.1987, reducing the rate of tax payable under the said Act
on the sale of Cement in the course of the inter-State trade or commerce.
The
petitioners-cement manufacturing concerns, their shareholders and their authorised
stockists-filed this writ petition, challenging the vires of section 8(5) of
the Central Sales Tax Act, 1956 (Central Act 74 of 1956) and the notifications
referred to above as ultra vires the provisions contained in Part XIII of the
Constitution providing that trade, commerce and inter-course throughout the
territory of India shall be free. According to the petitioners the three orders
referred to above created trade barriers and directly impinged upon the freedom
of trade, commerce and inter-course provided for in Article 301 of the
constitution.
Since
the vires of section 8(5) of the Central Act 74 of 1956 had been assailed,
notice had been issued to the Union of India, Attorney General, and all the
States but at the hearing of the writ petition, the 575 petitioners gave up the
challenge against section 8(5) of the Central Act. In view of that, the writ
petition was confined to the challenge against the two notification of the
State of Andhra Pradesh and the lone notification of the
State of Karnataka. The return to the rule nisi was
made on behalf of the State of Andhra Pradesh.
The State of Karnataka chose not to make any return to the
rule nisi, but its counsel joined at the hearing and contended that the order
made by the Karnataka State did not affect the provisions in Part XllI of the
Constitution. The Attorney- General confined his submission to the scope of
Part III of the Constitution and the effect of the notifications on the scheme
contained in that part.
Allowing
the writ petition, the Court, ^
HELD:
The title for Part XIII. which contains the relevant Articles 30 l, 302, 303
and 304 is "Trade Commerce and inter-course within the Territory of India." The true purpose of the provisions contained in Part
Xlll of the Constitution, as elucidated in the different decisions of the
Constitution Benches of this Court, is that the restriction provided for in
Article 301 can within the ambit be limited by law made by the Parliament and
the State legislature. No power is vested in the executive authority to act in
any manner affecting or hindering the very essence and thesis contained in the
scheme of Part XIII of the Constitution. lt is equally clear that the
declaration contained in Part XIIl of the Constitution is against the creation
of economic barriers and or pockets which stand against the free now of trade,
commerce and inter-course.
[580F;
587H; 588A-B] Taxation is a deterrent against free flow. As a result of favourable
or unfavourable treatment by way of taxation, the course of flow of trade gets
regulated either adversely or favourably. If the scheme which Part XIII
guarantees has to be preserved in national interest, it is necessary that the
provisions in the Article must be strictly complied with. One has to recall the
far-sighted observations of Gajendragadkar. J. in Atiabari Tea Co. Ltd. v. The
State of Assam & Ors., [1961] 1.S.C.R. 609 and the observations then made
obviously apply to cases of the type now before the Court.[588C-D] Under the
first notification made under section 9(1) of the Andhra Pradesh General Sales
Tax Act, the rate of tax was reduced to 4 percent in respect of the sales made
by the indigenous cement manufacturers to manufacturers of Cement products. The
Tamil Nadu producers had sales officers in Andhra Pradesh and in regard to
their sale to such manufacturers of cement products, the benefit of the reduced
rate of 576 taxation was not applicable. Two reasons were advanced by way of
justification. One was that it was beneficial to the State revenue and
secondly, that it protected the local manufacturers too. It could not be
demonstrated to the Court how the reduction in the rate of sales tax was beneificial
to the State revenue. The other justification was what the provisions of Part
XIII of the Constitution did not permit.
The
reasonable restriction contemplated in Part XIII have to be backed by law and
not by executive action, provided the same are within the limitations
prescribed under the Scheme of Part XIII.[588D-H] The second notification
related to the inter-State transactions. Variation of the rate of inter-State
sales tax does affect free trade and commerce and creates a local preference
which is contrary to the scheme of Part XIII of the Constitution. The
notification extended the benefit even to the unregistered dealers. Both the
notifications of the Andhra Pradesh Government were bad and hit by the
provisions of Part Xlll of the Constitution. They could not be sustained in
law.[592D] In the case of the notification of the Karnataka State, as already
said, no return had been made and no attempt had been made to place the facts
and circumstances to justify the action. The notification suffered from the
same vice as the second notification of the State of Andhra Pradesh suffered, and no distinction could
be drawn. The notification of the Karnataka Government was also bad in law.
[597E-F] The writ petition succeeded and the two impugned notifications of the
Andhra Pradesh Government and the impugned notification of the Karnataka
Government were quashed. [592G] Atiabari Tea Co. Ltd. v. The State of Assam
& Ors., [1961] 1 S.C.R. 609; The Automobile Transport (Rajasthan) Limited
v. The State of Rajasthan & Ors., [1963] S.C.R. 491;
State
of Madras v. N.K. Nataraja Mudaliar., [1968]
3 S.C.R. 829; Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. v.
The Assistant Commissioner of Sales Tax & Ors., [1974] 2 S.C.R. 879 and
State of Tamil Nadu, etc. v. Sitalakshmi Mills, etc., [1974] S.C.R. 1, referred
to.
ORIGINAL
JURISDICTION: Writ Petition (Civil) No. 422 of 1987.
(Under
Article 32 of the Constitution of India).
Dr.
Y.S. Chitale, K.J. John, Atul Chitale and Miss Naina for the Petitioners.
577 K.
Parasaran, Attorney General, T.S. Krishnamoorthy Iyer, G.A. Shah, V. Jagannatha
Rao Advocate General, B.B. Ahuja, Miss A. Subhashini, T.V.S.N. Chari, Miss Vrinda
Grover, Badri Nath, Dr. N.M. Ghatate, M. Veerappa, A.M. Khanwilkar, A.S. Bhasme,
R. Mohan, R. Ayyam Perumal, A. Subha Rao, M.N. Shroff, J.R. Das, D.K. Sinha,
S.N. Khare, T.C. Sharma, S.K. Bhattacharya, Kailash Vasudev and Probir Choudhary
for the Respondents.
The
Judgment of the Court was delivered by RANGANATH MISRA, J. The India Cement
Limited, Chettinad Cement Corporation, Dalmia Cement (Bharat) Limited and Tamil
Nadu Cement Corporation Limited being petitioners 1, 6, 9 and 12 in this
application under Article 32 of the Constitution are manufacturers of cement,
each of them having its manufacturing unit as also registered offices located
within the State of Tamil Nadu; petitioners 2, 7, and 10 are shareholders of
petitioners 1, 6 and 9 respectively and are citizens of India, while the
remaining petitioners are authorised stockists of the different manufacturers
having their places of business at different places located in the States of
Karnataka, Kerala and Tamil Nadu. Manufacturer-petitioners have been selling
their cement in the States of Karnataka and Kerala and for such purpose they
have places of business within those States.
The
State of Andhra Pradesh in exercise of powers conferred under sub-section ( 1)
of Section 9 of the Andhra Pradesh General Sales Tax Act, 1957 made an order on
January 27, 1987 (Annexure-A) reducing the rate of tax on sale of cement made
to the manufacturing units of cement products in the State of Andhra Pradesh.
That order runs thus:
"In
exercise of the powers conferred by sub- section ( 1) of Section 9 of the
Andhra Pradesh General Sales Tax Act, 1957 (Andhra Pradesh Act, No. VI of
1957), the Governor of Andhra Pradesh hereby directs that the tax leviable
under clause (a) of sub-section (2) of Section 5 read with Item 18 in the First
Schedule to the said Act, shall, in respect of Cement manufactured by Cement
Factories situated in the State and sold to the manufacturing units situated
within the State for the purpose of manufacture of Cement products such as
Cement sheets, Asbestos Sheets, Cement flooring stones, Cement concrete pipes, hume
pipes, Cement water and sanitary fitting, concrete poles and other Cement
products, be at the reduced rate of four paise in the rupee at the point of
first sale in the State with effect on 578 and from the Ist January,
1987." On the same day, another order was made to the following effect:
"In
exercise of the powers conferred by sub- section (5) of Section 8 of the
Central Sales Tax Act, 1956 (Central Act 74 of 1956), Governor of Andhra
Pradesh hereby directs that the tax leviable under the said Act, shall, in
respect of the sales of cement in the course of inter-State trade or commerce
be at a lower rate of two per cent with or without 'C' Form, with effect from
1st January, 1987." The State of Karnataka issued the following notification on 28.2.1987:
"In
exercise of the powers conferred by sub- section (5) of Section 8 of the
Central Sales Tax Act, 1956 (Central Act 74 of 1956), the Government of
Karnataka, being satisfied that it is necessary so to do in public interest,
hereby reduces with immediate effect the rate of tax payable under the said Act
on the sale of cement made in the course of inter-State trade or commerce from
15% to 2%." Petitioners in this application challenge the vires of Section
8(5) of the Central Sales Tax Act, 1956 (Central Act 74 of 1956) and the
notifications referred to above as ultra vires the provisions contained in Part
XIII of the Constitution providing that trade, commerce and inter-course
throughout the territory of India shall be free. According to the petitioners
the three orders referred to above create trade barriers and directly impinge
upon the freedom of trade, commerce and inter course provided for in Article
301 of the Constitution.
Since
the vires of Section 8(5) of the Central Act 74 of 1956 had been assailed,
notice had been issued to the Union of India and learned Attorney General.
Notice was also directed to all the States. Pursuant to the notice, the State
of Madhya Pradesh and Sikkim have filed their affidavits with reference to the challenge
against Section 8(5) of the Act. At the hearing of the writ petition, however,
learned counsel for the petitioners gave up that challenge. In that view of the
matter, reference to the counter-affidavits of the States of Madhya Pradesh and
Sikkim becomes irrelevant and the petition
has to be con- fined to the challenge against the two notifications of the
State of T 579 Andhra Pradesh and the lone notification of the State of Karnataka.
The
return to the rule nisi on behalf of the State of Andhra Pradesh is made by the Commercial Tax
officer, Company Circle 11, Hyderabad. He
has stated that the State of Andhra Pradesh
has surplus production of cement. In 1986- 87, the production of cement was
around six million tonnes out of which local consumption was to the tune of
about three million tonnes. In 1987-88 and 1988-89, production was likely to go
up by 1.5 million tonnes and three million tonnes respectively and the local
consumption was estimated to be within the range of 40% of the production. 60%
of the manufactured cement had, therefore, to be marketed out.
Within
the State there were certain bulk consumers of cement who use the commodity as
raw-material for manufacturing Cement sheets, Asbestos sheets, hume pipes,
Cement bricks, tiles etc. Such bulk consumers found products of cement from
outside the State to be cheaper in view of the higher incidence of local State
tax. In this background Government considered it necessary to reduce the tax
rate under the Andhra Pradesh General Sales Tax Act to help the Cement
Industries in easing out their marketing difficulty. Keeping in view the fact
that marketing of indigenous cement had to be inside the State, Government
decided to reduce the rate of tax under the Andhra Pradesh General Sales Tax
Act to 4%.
That
is how the first notification was made reducing the rate of tax in respect of
sale of cement to local manufacturers as aforesaid. Government by the second
notification reduced the rate of tax leviable under the Central Sales Tax Act
in course of inter-State trade or commerce to 2% with or without 'C' Form with
effect from 1.1.1987. In another place of the same affidavit, it has been
pleaded:
"
The classification of the manufacturers and dealers in cement of Andhra Pradesh
vis-a-vis the other States is a reasonable classification and it is not violative
of Articles 14 and 19(1)(g)".
"The
concession in the rate of tax extended by the State of Andhra Pradesh to the manufacturers and dealers of
Andhra Pradesh is well within the statutory powers of the State. It does not effect
the business interest of the manufacturers and dealers of other States. It is
the policy of the State of Andhra Pradesh
to help the cement Industries to organise the marketability of their full
production to improve the overall industrial activity of the country. Hence
this contention tenable".
580
"As already mentioned earlier, the notifications were issued in public
interest and in the interest of State revenue".
Yet at
another place in the return. it has been stated:
"The
contention that the policy of the Legislature is to promote sales only through
registered dealers is not based on correct appreciation of the law. Any law to
that effect would impose a restriction on the rights of the common man and
would result in the violation of the provisions of the Constitution which
ensures certain fundamental rights to the common man.'' The State of Karnataka
chose not to make any return to the rule nisi but its counsel joined at the
hearing and contended that the order made by the Karnataka State did not affect
the provisions in Part XIII of the Constitution.
In
view of the fact that counsel for petitioners gave up the challenge to the vires
of Section 8(5) of the Central Sales Tax Act, learned Attorney General confined
his submissions to-the scope of Part XIII of the Constitution and the effect of
the notifications on the scheme contained in that part.
In
case the notifications operate against the provisions of Article 3o1 of the
Constitution, they have got to satisfy the requirements contained in that Part.
We shall now refer to the relevant Articles and to several decisions of this
Court which are binding precedents. The title for Part XIII is "Trade, Commerce
and Inter-course within the Territory of India." The relevant Articles in
that Part are 30 1, 302, 303 and 304. We may now reproduce them:
"3o1.
Subject to the other provisions of this part, trade, commerce and intercourse
throughout the territory of India shall be free.
302.
Parliament may by law impose such restrictions on the freedom of trade,
commerce or intercourse between one State and another or within any part of the
territory of India as may be required in the public interest (underlining is
ours) 303 . ( 1) Notwithstanding anything in Article 302, 581 neither
Parliament nor the legislature of a State shall have power to make any law
giving, or authorising the giving, or any preference to one State over another,
or making, or authorising the making of, any discrimination between one State
and another, by virtue of any entry relating to trade and commerce in any of
the Lists in the Seventh Schedule.
(2)
Nothing in clause (1) shall prevent Parliament from making any law giving, or authorising
the giving of. any preference or making, or authorising the making of. any
discrimination if it is declared by such law that it is necessary to do so for
the purpose of dealing with a situation arising from scarcity of goods in any
part of the territory of India.
304.
Notwithstanding anything in Article 30 1 or Article 303, the Legislature of a
State may by law:
(a)
impose on goods imported from other States or the Union territories any tax to
which similar goods manufactured or produced in that State are subject, so,
however, as not to discriminate between goods so imported and goods so
manufactured or produced; and (b) impose such reasonable restrictions on the
freedom of trade, commerce or intercourse with or within that State as may be
required in the public interest:
Provided
that no Bill or amendment for the purpose of clause (b) shall be introduced or
moved in the Legislature of a State without the previous sanction of the
President. " Judicial authority in regard to interpretation of this Part
of the Constitution is abundant. We shall presently refer to some of the
decisions of this Court . In Ataibari Tea Co. Ltd. v. The State of Assam & Ors., [1961] I SCR 609 a
Constitution Bench of this Court was testing the validity of the provisions of
the Assam Taxation (on goods carried by Roads and Inland Waterways) Act, 1954
by applying the provisions of this Part of the Constitution. At page 830 of the
Reports. Sinha, CJ, stated:
"Article
301,with which part III commences, con- 582 tains the crucial words shall be
free and provides the key to the solution of the problems posed by the whole
Part. The freedom declared by this Article is not an absolute freedom from all
legislations. As already indicated, the several entries in the three Lists
would suggest that both Parliament and State Legislatures have been given the
power to legislate in respect of trade, commerce and intercourse, but it is
equally clear that legislation should not have the effect of putting
impediments in the way of free flow of trade and commerce. In my opinion, it is
equally clear that the freedom envisaged by the Article is not an absolute
freedom from the incidence of taxation in respect of trade, commerce and
intercourse, as shown by entries 89 and 92A in the List I, entries 52, 54 and
56 to 6() in List II and entry 35 in List III. All these entries in terms speak
of taxation in relation to different aspects of trade, commerce and
intercourse. The Union and State Legislature, therefore,
have the power to legislate by way of taxation in respect of trade, commerce
and intercourse, so as not to erect trade barriers, tariff walls or imposts,
which have a deleterious effect on the free flow of trade, commerce and
intercourse. That freedom has further been circumscribed by the power vested in
Parliament or in the Legislature of a State to impose restrictions in public
interest. Parliament has further been authorised to legislate in the way of
giving preference or making discrimination in certain strictly limited
circumstances indicated in clause (2) of Article 303. Thus, on a fair
construction of the provisions of Part XIII, the following propositions emerge:
(1) trade,
commerce and intercourse throughout the territory of India are not absolutely free, but are
subject to certain powers of legislation by Parliament or the Legislature of a
State;
(2)
the freedom declared by Article 301 does not mean freedom from taxation simpliciter,
but does not mean freedom from taxation which has the effect of directly
impeding the free flow of trade, commerce and intercourse;
(3) the
freedom envisaged in Article 301 is subject to non-discriminatory restrictions
imposed by Parliament in public interest (Article 302);
(4) even
discriminatory or preferential legislation may be made by Parliament for the
purpose of dealing with an emergency like a scarcity of goods in any part of India (Article 303(2));
(5) reasonable
restrictions may be imposed by the Legislature of a State in the public
interest 583 (Article 304(b));
(6)
non-discriminatory taxes may be imposed by the Legislature of a State on goods
imported from another State or other States, if similar taxes are imposed on
goods produced or manufactured in that State (Article 304(a)); and lastly
(7) restrictions
imposed by existing laws have been continued, except in so far as the President
may by order otherwise direct (Article 305)";
Gajendragadkar,
J., as he then was, at page 843 of the Reports observed:
"In
drafting the relevant Articles of Part XIII, the makers of the Constitution
were fully conscious that economic unity was absolutely essential for the
stability and progress of the federal policy which had been adopted by the
Constitution for the governance of the country.
Political
freedom which had been won, and political unity which had been accomplished by
the Constitution, had to be sustained and strengthened by the bond of economic
unity. It was realised that in course of time, different political parties
believing in different economic theories or idealogies may come in power in the
several constituent units of the Union,
and that may conceivably give rise to local and regional pulls and pressures in
economic matters. Local or regional fears or apprehensions raised by local or
regional problems may persuade the State legislatures to adopt remedial measures
intended solely for the protection of the regional interests without due regard
to their effect on the economy of the nation as a whole. The object of Part
XIII was to avoid such a possibility. Free movement and exchange of goods
throughout the territory of India is essential for the economy of the nation and for
sustaining and improving living standards of the country. The provision
contained in Article 301 guaranting the freedom. Of trade, commerce and
intercourse is not a declaration of a mere platitude, or the expression of a
pious hope of declaratory character; it is not also a mere statement of a
Directive Principle of State Policy; it embodies and enshrines a principle of
paramount importance that the economic unity of the country will provide the
main sustaining force for the stability and progress of the political and
cultural unity of the country ....... " 584 Then came the case of The
Automobile Transport (Rajasthan) Limited v. The State of Rajasthan & orS., [1963] SCR 491 Das, J.
who spoke for the Constitution Bench referred to the views expressed in Atiabari
Tea Company's case (supra) and proceeded to say:
"We
have tried to summarise above the various stand points and views which were
canvassed before us and we shall now proceed to consider which, according to
us, is the correct interpretation of the relevant Articles in Part XIII of the
Constitution. We may first take the widest view, the view expressed by Shah, J.
in the Atiabari Tea C0mpany's case, a view which has been supported by the appellants
and one or two of the interveners before us. This view we apprehend, is based
on a purely textual interpretation of the relevant Articles in Part XIII of the
Constitution and this textual interpretation proceeds in the following way.
Article 30 I which is in general terms and is made subject to the other
provisions of Part XIII imposes a general limitation on the exercise of
legislative powers, whether by the Union or the States, under any of the
topics-taxation topics as well as other topics-enumerated in the three Lists of
the Seventh Schedule, in order to make certain 'trade commerce and intercourse
throughout the territory of India shall be free'. Having placed a general
limitation on the exercise of legislative powers by Parliament and the State
Legislatures, Article 302 relaxes that restriction in favour of Parliament by
providing that that authority 'may by law impose such restrictions on the
freedom of trade, commerce and intercourse between one State and another or
within any part of the territory of India as may be required in the public
interest'.
Having
relaxed the restriction in respect of Parliament under Article 302, a
restriction is put up on the relaxation by Article 303(1) to the effect that
Parliament shall not have the power to make any law giving any preference to
any one State over another or discriminate in between one State and another by
virtue of any entry relating to trade and commerce in Lists I and III of the
Seventh Schedule. Articles 303( 1) which places a ban on Parliament against the
giving of preferences to one State over another or of discriminating between
one State and another, also provides that the same kind of ban should be placed
upon the State Legislature also legislating by virtue of any entry relating to
trade and commerce in Lists II and 585 III of the Seventh Schedule. Article
303(2) again carves out an exception to the restriction placed by Article 303(
1) on the powers of Parliament by providing that nothing in Article 303(a)
shall prevent Parliament from making any law giving preference to one State
over another or discriminating between one State and another, if it is
necessary to do so tor the purpose of dealing with a situation arising from
scarcity of goods in any part of the territory of India. This exception applies
only to Parliament and not to the State Legislatures. Article 304 comprises two
clauses and each clause operates as a proviso to Articles 301 and 303. Clause
(a) of that Article provides that the Legislature of a State may 'impose on goods
imported from other States and any tax to which similar goods manufactured or
produced in that State are subject so, however, as not to discriminate between
goods so imported and goods so manufactured or produced'. This clause,
therefore, permits the levy on goods from sister States any tax which similar
gods manufactured or produced in that State are subject to under its taxing
laws. In other words, goods imported from sister States are placed on par with
similar goods manufactured or produced inside the State in regard to State
taxation within the State allocated field. Thus the States in India have full
powers of imposing what in American State Legislation is called the use tax,
gross receipts tax etc., not to speak of the familiar property tax, subject only
to the condition that such tax is imposed on all goods of the same kind
produced or manufactured in the taxing State, although such taxation is
undoubtedly calculated to fetter interstate trade and commerce .. Now clause
(b) of Article 304 provides that notwithstanding anything in Article 301 or 303
the Legislature of a State may by law imposes such reasonable restrictions on
the freedom of trade, commerce or intercourse with or within that State as may
be required in the public interest. The proviso to clause (b) says that no bill
or amendment for the purpose of clause (b) shall be introduced or moved in the
Legislature of a State without the previous sanction of the President. This
provision appears to be the State analogue to the Union Parliament's authority
defined by Article 302, in spite of the omission of the word 'reasonable'
before the word 'restrictions' in the latter Article. Leaving aside the
pre-requisite of previous Presidential sanction for the validity of State 586
Legislation under clause (b) provided in the proviso thereto, there are two
important differences between Articles 302 and 304(b) which require special
mention. The first is that while the power of Parliament under Article 302 is
subject to the prohibition of preferences and discrimina tions decreed by Article
303(1) unless Parliament makes the declaration contained in Article 303(2), the
State's power contained in Article 304(b) is made expressly free from the
prohibition contained in Article 303(1), because the open ing words of Article
304 contain a non obstante clause both to Article 30 1 and Article 303. The
second difference springs from the fact that while Parliament's to impose
restrictions under Article 302 upon freedom of commerce in the public interest
is not subject to the requirement of reason ableness, the power of the State to
impose restrictions on the freedom of commerce in the public interest under Arti
cle 304 is subject to the condition that they are reason able".
The
next authority to which we may now refer is the case of State of Madras v. N.K.
Nataraja Mudaliar, [1968] 3 SCR 829 Shah, J., as he then was, referred to Part
XIII of the Constitution at page 839 of the Reports. On page 841 of the
Reports, the learned Judge proceeded to say:
"Tax
under the Central Sales Tax Act on inter State sales, it must be noticed, is in
its essence a tax which encumbers movement of trade or commerce, since by the
definition in section 3 of the Act a sale or purchase of goods is deemed to
take place in the course of inter State trade or commerce, if it-
(a) occasions
the movement of goods from one State to another;
(b) is
effected by a transfer of 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 Article 30 1, authorised to impose restrictions on the freedom of trade, 587
commerce or intercourse in the public interest.
The
expression "between one State and another' does not imply that it is only
intended to confer upon the Union Parliament the power to remove the fetter
upon legislative authority only so as to keep trade, commerce or intercourse
free between one State Government and another. It is intended to declare trade,
commerce and intercourse free between residents in one State and residents in
another State. That is clear because Article 302 expressly provides that on the
freedom of trade restrictions may be imposed not only as between one State and
another, but also within any part of the territory of India. As we have already observed,
Article 30I does not merely protect inter-State trade or operate against inter-State
barriers: all trade is protected whether it is intra-State or inter-State by
the prohibition imposed by Article 30I, and there is nothing in the language or
the context for restricting the power of the Parliament which it otherwise
possesses in the public interest to impose restrictions on the freedom of
trade, commerce or intercoursc, operative only as between one State and another
as two entities. There is also no doubt that exercise of the power to tax may
normally be presumed to be in the public interest ........
It is
worthwhile to refer to tne observations made by Hegde, J. At page 855 of the
Reports, the learned Judge observed with reference to section 8(5) of the
Central Sales Tax Act as follows;
"Sub-section
(5) of section 8 provides for giving individual exemptions in public interest.
Such a
power is there in all taxation measures. It is to provide for unforeseen
contingencies. Take for example, when there was famine in Bihar, if a dealer in Punjab had undertaken to sell goods to a charitable society in that State at a
reasonable price for distribution to those who were starving, it would have
been in public interest if the Punjab Government had exempted that dealer from
paying sales tax. Such a power cannot immediately or directly affect the free
flow of trade. The power in question cannot be said to be bad. If there is any
misuse of that power, the same can be challenged." The true purpose of the
provisions contained in Part XIII of the Constitution. as elucidated in the
different decisions of the constitution 588 Benches, is that the restriction
provided for in Article 30 I can within A the ambit be limited by law made by
the Parliament and the State Legislature. No power is vested in the executive
authority to act in any manner which affects or hinders the very essence and
thesis contained in the scheme of Part XIII of the Constitution. It is equally
clear that the declaration contained in Part XIII of the Constitution is
against creation of economic barriers and/or pockets which would stand against
the free flow of trade, commerce and intercourse There can be no dispute that
taxation is a deterrent against free flow. As a result of favourable or unfavourable
treatment by way of taxation, the course of flow of trade gets regulated either
adversely or favourably. If the scheme which Part XIII guarantees has to be
pre- served in national interest, it is necessary that the provisions in theArticle
must be strictly complied with. One has to recall the farsighted observations
of Gajendragadkar, J. in Atiabari Tea Co. case (supra) and the observations
then made obviously apply to cases of the type which is now before us.
The
two notifications of the Andhra Pradesh Government may now be referred to.
Under the first notification made under section 9(1) of the Andhra Pradesh
General Sales Tax Act, the rate of tax has been reduced to 4 per cent in
respect of sales made by indigenous cement manufacturers to manufacturers of
cement products. Admit- tedly, the Tamil Nadu producers have sales officers in
Andhra Pradeshand in regard to their sale to such manufacturers of cement
products the benefit of reduced rate of taxation is not applicable. The
prescribed rate of tax under the Andhra Act is 13.75 per cent on cement. Thus
under the Andhra Notification in regard to the local tax the indigenous
producers of cement have a benefit of 9.75 per cent. The return made to the
Court admits of the position that preference has been shown to local
manufacturers. Two reasons have been advanced by way of justification. One is
that it is beneficial to the State revenue and secondly it protects the local
manufacturers too. The counsel for the State Government has not been able to
demonstrate to us how the reduction in the rate of sales tax is beneficial to
the State revenue. The other justification is what provisions of Part XIII of
the Constitution do not permit. The reasonable restrictions contemplated in
Part XIII have to be backed by law and not by executive action provided the
same are within the limitations prescribed under the scheme of Part Xlll.
Coming
to the second notification relating to inter- state transac- 589 tions, the
justification pleaded by the State of Andhra Pradesh has already been extracted by us. We may usefully refer to
the decision of the Constitution Bench in the case of Gwalior Rayon Silk Mfg. (Wvg)
Co. Ltd. v. The Assistant Commissioner of Sales Tax & orS., [ 1974] 2 SCR
879. At page 883 of the Reports, Khanna, J. speaking for the Court observed:
"It
has been argued on behalf of the appellants that the fixation of rate of tax is
a legislative function and as the Parliament has, under section 8(2)(b) of the
Act, not fixed the rate of central sales tax but has adopted the rate
applicable to the sale or purchase of goods inside the appropriate State in
case such rate exceeds lO per cent, the Parliament has abdicated its
legislative function. The above provision is consequently stated to be
constitutionally invalid because of excessive delegation of legislative power.
This contention, in our opinion, is not well founded. Section 8(2)(b) of the
Act has plainly been enacted with a view to prevent evasion of the payment of
the central sales tax.
The
Act prescribed a low rate of tax of 3 per cent in the case of inter-State sales
only if the goods are sold to the Government or to a registered dealer other
than the Government. In the case of such a registered dealer, it is essential
that the goods should be of the description mentioned in subsection (3) of
section 8 of the Act. In order, however, to avail of the benefit of such a low
rate of tax under section 8(1) of the Act, it is also essential that the dealer
selling the goods should furnish to the prescribed authority in the prescribed
manner a declaration duly filled and signed by the registered dealer, to whom
the goods are sold, containing the prescribed particulars in prescribed form
obtained from the prescribed authority, or if the goods are sold to the
Government not being a registered dealer, a certificate in the prescribed form
duly filled and signed by a duly authorised officer of the Government. In cases
not falling under sub-section (1), the tax payable by any dealer in respect of
inter-State sale of declared goods is the rate applicable to the sale or
purchase of such goods inside the appropriate state vide section 8(2) of the
Act. As regards the goods other than the declared goods, section 8(2)(b)
provides that the tax payable by any dealer on the sale of such goods in the
course of inter-State trade or commerce shall be calculated at the rate of lO
per cent or at the rate 590 applicable to the sale or purchase of such goods
inside the appropriate State, whichever is higher.
The
question with which we are concerned is whether the Parliament is not fixing
the rate itself and in adopting the rate applicable to the sale or purchase of
goods inside the appropriate State has not laid down any legislative pol icy
and has abdicated its legislative function. In this con nection we are of the
view that a clear legislative policy can be found in the provisions of section
8(2)(b) of the Act. The policy of the law in this respect is that in case the
rate of local sales tax be less than 10 per cent, in such an event the dealer,
if the case does not fall within section 8(1) of the Act, should pay central
sales tax at the rate of 10 per cent. If, however, the rate of local sales tax
for the goods con cerned be more than 10 per cent, in that event the policy is
that the rate of the central sales tax shall also be the same as that of the
local sales tax for the said goods. The object of law thus is that the rate of
the central sales tax shall in no event be less than the rate of local sales
tax for the goods in question though it may exceed the local rate in case thas
t rate be less than 10 per cent. For example, if the local rate of tax in the
appropriate State for the non- declared goods be 6 per cent, in such an event a
dealer, whose case is not covered by section 8(1) of the Act, would have to pay
cent ral sales tax at a rate of lO per cent. In case, however, the rate of
local sales tax for such goods be 12 per cent, the rate of central sales tax
would also be 12 per cent because otherwise, if the rate of central sales tax
were only lO per cent, the unregistered dealer who purchases goods in the
course of inter-State trade would be in a better position than an intra-State
purchaser and there would be no disin centive to the dealers to desist from
selling goods to unre gistered purchasers in the course of inter-State trade.
The object of the law apparently is to deter inter-State sales to unregistered
dealers as such inter-State sales would faciliG tate evasion of tax. It is also
not possible to fix the max imum rate under section 8(2)(b) because the rate of
local sales tax varies from State to State. The rate of local sales tax can
also be changed by the State legislatures from time to time. It is not within
the competence of the Parliament to fix the maximum rate of local sales tax.
The fixation of the rate of local sales tax is essentially a matter for the
State 591 Legislatures and the Parliament does not have any control in the
matter. The Parliament has therefore necessarily, if it wants to prevent
evasion of payment of central sales tax, to tag the rate of such tax with that
of local sales tax, in case the rate of local sales tax exceeds a particular
limit." Reference may also be made to another decision of the Constitution
Bench in the case of State of Tamil Nadu etc. v. Sitalakshmi Mills etc.,[1974]1
1 SCR 1. At page 6 of the Reports, Mathew, J. stated:
"As
already stated, section 8(2)(b) deals with sale of goods other than declared
goods and it is confined to interState sale of goods to persons other than
registered dealers or Governments. The rate of tax prescribed is 10 per cent or
the rate of tax imposed on sale or purchase of goods inside the appropriate
State, whichever is higher. The report of the Taxation Inquiry Committee would
indicate that the main reason for electing the provision was to canalize
inter-State trade through registered dealers, over whom the appropriate
Government has a great deal of control and thus to prevent evasion of tax:
Where
transactions take place between registered dealers in one State and
unregistered dealers or consumers in another, this low rate of levy will not be
suitable, as it is likely to encourage avoidance of tax on more or less the
same scale as the present provisions of Article 286 have done. If this is to be
prevented, it is necessary that transactions of this type should be taxable at
the same rates which exporting States impose on similar transactions within
their own territories. The unregistered dealers and consumers in the importing
States will then find themselves unable to secure any advantage over the
consumers of locally purchased articles; nor of course will they, under this
system, be able to escape the taxation altogether, as many of them do at
present." (See Report of the Taxation Enquiry Commission, 195354, Vol.3,
p. 57) In other words it was to discourage inter- State sale to unregistered
dealers that Parliament provided a high rate of tax, namely, IO%. But even that
might not serve the 592 purpose if the rate applicable to intra-State of such
goods was more than 10%. The rate of 10% would then be favour able and they
would be at an advantage compared to local cosumers. It is because of this that
Parliament provided, as a matter of legislative policy that the rate of tax
shall be 10% or the rate applicable to intra-State sales whichever is higher.
If
prevention of evasiorl of tax is a measure in the public interest, there can be
no doubt that Parliament is competent to make a provision for that purpose
under Article 302 even if the provision would impose restrictions on the inter-
State trade or commerce.
Variation
of the rate of inter-State sales tax does affect free trade and commerce and
creates a local preference which is contrary to the scheme of Part XIII of the
Constitution.
The
notification extends the benefit even to unregistered dealers and the
observations of Hegde, J. on this aspect of the matter are relevant. Both the
notifications of the Andhra Pradesh Government are, therefore, bad and are hit
by the provisions of Part XIII of the Constitution. They cannot be sustained in
law.
Now
coming to. the notification of the Karnataka State, we have already pointed out
that no return has been made and no attempt has been made, therefore, to place
facts and circumstances to justify the action. The notification suffers from
the same vice as the second notification of the State of Andhra Pradesh suffers
and no distinction can be drawn. We accordingly hold that the notification of
the Karnataka Government is also bad in law. It may be pointed out that the
rate of sales tax in Karnataka is 19.5 per cent.in regard to intra-State sales.
In
view of what we have indicated above, the writ petition has to succeed and the
two impugned notifications of the Andhra Pradesh Government and the impugned
notification of the Karnataka Government are quashed. The writ petition is
accordingly allowed with costs. Hearing fees is assessed at Rs.5,OOO and this
shall be shared equally by the States of Andhra Pradesh and Karnataka.
S. L.
Petition allowed.
Back
