Report No. 61

9.3. Section 8(2)(b).-

There is a constitutional question concerning section 8(2)(b), which requires to be considered. Under section 8(2)(b), 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), shall, in the case of goods other than declared goods, be calculated at the rate of ten per cent. or at the rate applicable to the sale or purchase of such goods inside the appropriate State, whichever is higher. The expression 'appropriate State', as defined in the Act1 means, roughly, the State in which the place or business of the dealer is situated.

1. Section 2(a).

9.4. Now, a question has arisen about the constitutionality of this provision. The argument is to the effect that the provision for ten per cent. rate violates the freedom of trade, in cases where the State rate is lower than ten per cent. Several other arguments have been put forth, but only the above one has succeeded.-and that too only in the Madras High Court.1 We have, while discussing2 section 9 referred to certain decisions which discuss section 8(2)(b) also. By imposing a higher rate for inter-State sale, it is stated, Parliament discriminates against importing States. The exporting State charge only the lower rate for internal sales while charging ten per cent. for inter-State sales, which is unfair to the importing State.

1. Case-law on the subject is discussed infra (para. 9.10) and also in paras. 4.13A to 4.13F, supra.

2. Paras. 4.13A to 4.13F, supra.

9.5. A Supreme Court case State of Madras v. N.K. Nataraja Mudaliar, (1968) 22 STC 376 (SC) (Shah, J.)., on the subject may be discussed first. The background of that case was as follows:-

In an earlier case, Larsen and Toubro Ltd. v. J.C.T.O., (1967) 20 STC 150 (Mad) (Veeraswami, J.), the Madras High Court (Veeraswami, J.) had struck down sub-sections (2) and (2A) and (5) of section 8 of the Central Sales Tax Act, on the ground that they violated Articles 301 and 303(1) of the Constitution, inasmuch as the differential rates or exemptions in various States had an unequal burden on same or similar goods, and this affected their free movement or flow of inter-State trade and commerce. In State of Madras v. N.K. Nataraja Mudaliar, (1968) 22 STC 376 (SC)., the Supreme Court reversed the Madras High Court decision, and upheld the validity of the various sub-sections. Shah J, delivering the judgment of the Supreme Court (for himself, Mitter and Vaidyalingam JJ.) held:

"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 scheme was "obviously quite discriminatory and considerably affected the freedom of trade, commerce and "intercourse", the differential rates or exemptions in various States 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 factors1 Instances can easily be imagined of cases in which, notwithstanding the lower rate of tax in a particular part of the country, goods may be purchased from another part, where a higher rate of tax prevails The rates of tax in force at the date when the Central Sales Tax Act was enacted have again not become crystalised. The rate which the State Legislature determines, subject to the maximum prescribed for goods referred to in section 8(1) and (2) are the operative rates for these transactions; in respect of transactions falling within section 8(2)(b) the 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 on 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 or consumers within 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 democratic constitution, political forces would operate against the levy of an unduly higher 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-section (5) of section 8 which authorises the State Government, notwithstanding anything contained in section 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 is clearly intended to be maintained. The Central Sales Tax, though levied for and collected in the name of 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 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 the limitation already set out, in our judgment, no discrimination can be deemed to be practised. 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 sections 8(2), 8(2A) and 8(5) infringe Article 301 and Article 303(1) cannot be sustained."

1. Emphasis supplied.

9.6. Before this judgment of the Supreme Court was delivered, the question of validity of section 8(2)(b) had come up before the Madras High Court in another case. There,1 the High Court held section 8(2)(b) of the Central Sales Tax Act, 1956, to be void and ultra vires Article 301 of the Constitution. Section 8(2)(b) provides that certain inter-State sales are subject to a fixed rate of tax or the intra-State tax, whichever is higher. The Madras High Court held that the provision for differential rates of taxation, provided in section 8, was unconstitutional and violative of the freedom of trade, commerce and intercourse guaranteed by Article 301. This was also the High Court's decision in Larsen & Toubro Ltd. v. Joint Commercial Tax Officer, (1967) 20 STC 150 (Mad)., which was over-ruled later by the Supreme Court in State of Madras v. N.K. Nataraj Mudaliar, (1968) 22 STC 376 (SC) (Shah, J.),2 But the Supreme Court judgment in State of Madras v. N.K. Nataraj Mudaliar was pronounced after the Madras judgment in the present case.

1. Sitalakshmi Mills Ltd. v. Deputy C.T.O., (1968) 22 STC 436 (Mad) (DB).

2. Para. 9.5, supra.

9.7. In a Delhi case1, the Delhi High Court upheld the validity of section 8(2)(b), following the reasoning in the Supreme Court decision in State of Madras v. A.K. Nataraja Mudaliar, and declined to follow the decision in the Sitalakshmi Mills Ltd. case, decided by the Madras High Court.2

1. General Agencies (India) Ltd. v. Sales Tax Officer, (1962) 29 STC 270 (273, 274, 277) (Del).

2. Sitalakshmi Mills Ltd. v. Deputy C.T.O., (1968) 22 STC 436 (Mad) (DB), para. 9.6, supra.