Report No. 61

3.2. Position before the Constitution.-

It may be stated that in the period prior to the Constitution, the authority of a province to levy a tax on transactions of sale was not subject to limitations of the nature laid down in Article 286 of the Constitution. The provinces had power to levy a tax on the sale of goods and on advertisements under the Government of India Act, 1935, Seventh Schedule, Provincial List, entry 48.

There was no express provision in the Government of India Act prohibiting the provinces from levying a tax on sales which took place in the course of import or export or in the course of inter state trade or commerce, or on transactions which took place outside their respective territories. Of course, as regards the legislative power of the provinces, the general limitation that they could legislate only "for the province or any part thereof", was always applicable. A Provincial Legislature could not pass laws having extra-territorial operation. But this did not limit legislative competence (as to a tax on the sale of goods) to sales concluded within the boundaries of the province.1 A sufficient territorial nexus between the taxing state and the sale2 was enough to maintain the validity of the law.

1. Popatlal Shah v. State of Madras, (1953) 4 STC 188: AIR 1953 SC 274: 1953 SCR 677.

2. Sundararamier & Co. v. State of Andhra Pradesh AIR 1958 SC 468 (479, 493): 1968 SCJ 459.

3.2A. Judgment of the Federal Court.-

In this connection, a judgement of the Federal Court is of interest. In 1942, the Federal Court had to consider the question1 whether a tax levied by a province on the first sale by the manufacturer or the producer could be said to be an excise and, therefore, outside the competence of the State. The Federal Court upheld the validity of the tax, on the ground that the tax was on the occasion of sale and not on the occasion of manufacture. In the course of the arguments, the well-known American case of Brown v. State of Maryland, (1827) 12 Wheat 419., was cited, where an act of the state of Maryland, prohibiting the importers of foreign goods from selling their goods without taking a licence, for which 50 dollars had to be paid, was held to be repugnant to the provision in the Constitution of the U.S.A. which provides that: "no state shall, without the consent of Congress, allow any imposts or duties on imports or exports, except what may be absolutely necessary for executing its inspection laws."

The Federal Court pointed out that provisions which were being considered in the American case were very different from the provisions of the Government of India Act. One of the points of difference emphasised by the Federal Court was that the American Constitution also provides that Congress alone has power "to regulate commerce with foreign nations, among the several states, and with the Indian tribes"; and it was held that the Maryland tax was not less repugnant to this provision also: Marshall, C.J. asked:

"To what purposes should the power to allow importation be given, unaccompanied with the power to authorise the sale of the thing imported? Congress has a right, not only to authorise importation, but to authorise the importer to sell what does the importer purchase, if he does not purchase the privilege to sell?" The Federal Court added:

"On this view of the Commerce clause, it would indeed be difficult to recognise the right of the State to impose a tax upon the first sale of the commodity, at any rate so long as it remained in the importer's hands. In the Indian Constitution Act no such question arises;2 and the right of the Provincial Legislatures to levy a tax on sales can be considered without any reference to so formidable a power vested in the Central Government.

Lastly, the prohibition in the American Constitution is against the laying of "any imports or duties on imports or exports"; the prohibition is not merely against the laying of duties of customs, but is expressed in what we conceive to be far wider terms; and it does not appear to us that it would necessarily follow from the principle of the Maryland decision that in India the payment of customs duty on goods imported from abroad or the payment of an excise duty on goods manufactured or produced in India can be regarded as conferring some kind of licence or title on the importer or manufacturer to sell his goods to any purchaser without incurring a further liability to tax. That was the view which commended itself to the Court in (1827) 12 Wheat 4193 and it was view adopted and argued before us. The analogy with the American case is an attractive one; but, for the reasons which we have given we are wholly unable to accept it."

1. Emphasis Supplied.

2. Brown v. State of Maryland, (1827) 12 Wheat 419.