.JINDAL STA!NLESS TTD. & ANR. v. STATE OF HARYANA & ORS.

199,812,341 while Kerala is 33,406,061, as per Census 2011. 27 Literacy A Rate in Kerala is 94% while in Bihar its 61 %. 28 Sex ratio in Kerala is 1084 while in Haryana is 879.' 9 In Andhra Pradesh 12.04% live in slums whereas in Assam only 0.63% live in slums."' The Utility of the Union to attain political and economic prosperity does not reflect in the figures or statistics so portrayed above. All is not lost in what we have achieved. B We have stood with each other and for what is right? We have enacted laws and struck them down for right reasons. We have been beaten down but never gave up. We have braved poverty and hunger. We have cared about neighbors and have strived to be a welfare State. We have constructed great many things and achieved many more. We have advanced on scientific fronts and reached distances in universe which c were unfathomable five decades back. We have earned a respectable name in the international scenario. We have produced great artists, many leaders and great men. We were not scared so easily by any adverse situation. First step in solving any problem troubling the present is recognizing that there is one India but India as a union of States. States D being independent entities under the Constitution require resource to perform their duties under the Constitution. 5.6 Before a detailed discussion on legal fronts of this Case it is necessary to consider certain Constitutional principles and ethos. On considering the scheme of the Constitution, the power of Union and State E are parallel. The Parliament as a super-legislature over State assemblies cannot be accepted. On legislative front, demarcation of power is apparent from the language of Article 246 read with VII Schedule of the Constitution. People have vested the power in States to administer and provide welfare measures. For this process it is the State 27 Uttar Pradesh. Census of111dia (last visited 011 15. I0.20 16) F http://c~nsusindia.gov. i n/20 11 census/ccnsusi nfodashboard/slock/pro fi Ics/en/ IND009 Uttar%20Pradcsh.pdf Kerala http:/ /censusind ia. gov. in/2011 census!ccnsusin fodashboard/stock/profi !cs/en/ !ND032 Keraln.pdf "(last visited on 15.10.2016) http://ccnsusindia.gov.i11/201 l-prov-rcsulls/data Jiles/ india/Final PPT 2011 chapter6.pdf G 29 Kcrala Slate Profile. Census of India (last visited 011 15.10.2016) http:// census ind i a. gov. i n/20 I I census/census in fodash board/stock/pro fi ks/ en/ IND032 Kcrala.pdf Haryana state profile, Census of India http://censusindia.gov. in/20 11 ccnsusiccnsusin fodash board/stock/profi ks/en/ IND006 Haryana.pdf 30 H (Last visited on 15.10.2016) htlp://www.ccnsus2011.co.in/slums.php.

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A Government which has been elected by the people to administer by taking into consideration priorities and peculiarities of that particul.ar region.

H 31 Constituent Assembly Debate, Vol. IX, September 8, 1949.

JINDAL STAINLESS LTD. v. STATE OF HARYANA 321

[N. V. RAMANA, J.]

in the Indian federal structure. can beJ:Ound in the speeches of Hon'blc A P.S. Deshmukh, Shri. ...T.... -T. Krishnamachari and Hon'ble Dr. B. R . ~ ;

Ambedkar32 before the Constituent Assembly. Common philosophy which runs through our Constitution is that both Center and States have been vested with the substantial powers which are necessary to preserve our unique federation wit~ clear demarcation of power. Calling B India as quasi-federal might not be advisable as our features are unique and quite different from other Countries like United States of America etc. Courts in India should strive to preserve this unique balance which our framers envisaged, any interference into this balancing act would be detrimental for grand vision proscribed by our makers. 33 Amphibious nature of our federalism has been even noted by the Sarkaria c Commission Report on Center-State relationship. Co-operative federalism envisaged under our Constitution is a result of pick and choose policy which our framers abstracted from the wisdom of working experience of other Constitutions. Some Judgments which are illustrative of nature of federalism in India are (i)West Bengal (6 Judge Bench), a D case relating to the power of Union to acquire land and right in and over the land, which are vested in State. This case produced two There is on~v one point ofConstitutional import to which I propose to make a rejerence. 32

A serious co1nplaint is nlade on the ground that there is too niuch ofcentralization and that the States have been reduced to Mu11ic1j1alities. ft is clear that this view is not only an exaggeration. but is also founded on a misunderstanding of what exoctly the E Constitution contrives to do. As to the relation belll'een the center and the States. it is necessary to bear in mind the fundamental principle on which it rests. The bf/sic principle o(Federa/ism is that the legislative and executive a11tlwritv is partitioned betwee11 the center 111111 the States not bv 1111r law to be made hi' the center but the Co11stitutio11 itself.This is wit at the Constitution does. Tlte States, under our Co11stitutio11. are i11 no wav dependent upon the center for tlteir legislative or executive authoritr. The center mu/ t/Je States are CO·EOUAI. in this matter.It is difficult to see !tow such a F Co11stit11tio11 can be called centralism. It may be that the Constitution assigns to the center too large afield/or the operation ofit.1· legislative and executive authority than is to befotmd in any other Federal Constitution. ft may be that the residua~v po¹,.ers are given to the center and 110/ to the States. But these features do not form the essence ojfederalism. The chi~f'mark offederalism, as I said lies in the partition a/the legislative and executive authority benveen the centre and the Units by the Constitution This is tl1e G principle embodied in our Constitution. (Emphasis Supplied) 13 • State of West Bengal v. Union of India. [1964[ I S.C.R 371 [herei1111/ter 'fl'est

Bengal'), S. R. Bommai, State of Karnataka v. Union of India and Anr.. [1978) 2 S.C.RI. (Special Reference No. l of 1964) AIR I 965 SC 745. ITC Ltd. v. Agricultural Produce Market Committee and Ors, (2002) I S.C.R 441 [hereinajier 'ITC']. H

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A opinions, one by"t. J. B.P. Sinha (majority opinion) and other by K. Subba Rao J. (dissenting opinion). As per the majority, there is undoubtedly distribution of powers between the Union and the States in matters legislative and executive; but distribution of powers is not always an index of political sovereignty. The exercise of powers legislative and executive in the allotted fields is hedged in by numerous B restrictions, so that the powers of the States are not coordinate with the Union and are not in many respects independent. Minority Judgment held that the Indian Constitution accepts the federal concept and distributes the sovereign powers between the co-ordinate constitutional entities, namely, the Union and the States. This concept implies that one c cannot encroach upon the governmental functions or instrumentalities of the other, unless the Constitution expressly provides for such interference. ln (ii) Kesavanada Bharathi v. State of Kera/a [hereinafter 'Keshvanada Bharathi']34, majority held that the power conferred under Article 368 of the Constitution was not absolute. They D took the view that by an amendment, the basic structure of the Constitution cannot be damaged or destroyed. And, as to what are the basic structures of the Constitution, illustrations were given by each of these Judges. They include supremacy of the Constitution, democratic, republican fonn of Government, secular character of the Constitution, separation of powers among the legislature, executive and judiciary, the federal character of the Constitution, Rule of Law, equality of status and of opportunity; justice, social, economic and political; unity and integrity of the nation and the dignity of the individual secured by the various provisions of the Constitution. ln (iii) S.R. Bommai, this Court while detennining the constitutional validity of emergency proclamations issued by the Centre in various States observed that federalism, as understood by the American Scholars is absent in Indian Constitution which is more of a hybrid of pure federalist character and pure unitary character. However, the distribution of powers must not be rubbished out as being absent. It was observed by Ahmadi J. that in order to maintain the unity and integrity of the nation our founding fathers appear to have leaned in favour of a strong Centre while distributing the powers and functions between Centre and the States. But the essential characteristics can be understood by knowing the "effects" of such a system. As per Sawant and Kuldip Singh JJ: The features in the 14 1973 (4) S.C.C 225 H

JINDAL STAINLESS LTD. v. STATE OF HARYANA 323

[N. V. RAMANA, J.]

Constitution which provide the Centre with overriding powers A over the states is only an exception and are not normal features of the Constitution. K. Ramaswamy J., observed that Indian Federalism places the nation as a whole under control of a national Government, while States are allowed to exercise their sovereign power within their legislative sphere. As per Jeevan Reddy and Agrawal, JJ. B the bias in favour of the Centre does not make the states mere appendages of the Centre. States are supreme in the sphere allotted to them. The ultimate conclusion reached by this Court was that the fundamental feature of federalism being that irrespective of each list, each legislature is supreme. In (iv) ITC, the majority led by Justice Ruma Pal held that the Constitution of India deserves to be interpreted in a c manner that· it does not whittle down the powers of State Legislatures and preserves the federalism while also upholding the central supremacy as contemplated by some of the Articles. In (v) State of West Bengal v. Kesoram Industries Ltd. 35 , it was concerned with Entries 52, 54 and 97 in List I and Entries 23, 49, 50 and 66 in List II of the Seventh D Schedule to the Constitution of India as also the extent and purport of the residuary power of legislation vested in the Union of India. Wherein it was observed therein that federalism is one of the basic pillars of the Indian Constitution and that having regard to Articles 245, 248, 250, 256, 257, 356 and Entry 97 in list I of the seventh Schedule of the Constitution, E it is not possible to say that India is not a subscriber to federalism but although having unique federal character it can, be said to be quasi- federal or hybrid federal State. Thus constitutional courts have interpreted that India has a federal polity and that each State has independent constitutional existence assigned with important role of Constitutional governance. F

5. 9 In view of these aspects, we need to consider the controversies in these cases and interpret relevant provisions of the Constitution in light of following rules and principles, which are-

1. That Directive Principles of State Policy should be utilized for G interpreting every part of the Constitution. and

2. In a federal Constitution, an interpretation which preserves the State's power should be preferred.

"A.LR 2005 S.C 1646 H

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A PART-VI: INTRODUCTION TO TAXATION AND ITS IMPORTANCE

6.¹ The States in the modern era are not strictly confined to political activities and law making functions. They function in a welfare B society. Such working of States was visualized by our framers also, who were aware of responsibilities a State must shoulder and discharge. This is the ve1y reason for existence of Directive Principles of State Policy and which sets normative and positive standards for the Government. When the State is burdened with such normative goals as its primary crespo11sibility, such activities are inevitably dependent on availability of monitory resources. The definition of Sovereignty has acquired a new flavor in the recent past, 'Sovereignty is responsibilitv'. In a democratic system the elected Governments are always responsible for its people. If there is any high taxation which is affecting their life. this puts pressure on the Governments to reduce taxes and e leckd Governments are answerable to public every five years. No Government can raise tax which would cause public inconvenience. In this context, Sovereignty is no more endless power, rather it is responsibility. A responsible government in a democracy should always strive to keep taxes as low as possible, so that no heavy burden is placed on the individuals. Although States are empowered to tax under the Constitution, it does not necessarily mean that they should tax at exorbitant rates. Tax is a way of apportioning the cost of government among those who in some measure are privileged to enjoy the benefits and must therefore bear its burdens. Fundamentally the exercise of sovereignty also includes lawful taxation as its incident. Assesses/dealer on the other hand stated that all powers exercised by the state such as police powers, power of eminent domain and power to tax are also incidents of sovereignty.'" There is nothing which mandates this Court to deny latitude in use of taxing powers in comparison to other similar powers. Although all powers exercised by State are incidents of sovereignty, there is need to treat taxation on a different pedestal to sustain the Government at the current level and to achieve the Constitutional goals set by our framers. "·Jaganathbaksh Singh v. State of UP. (1963) I S.C.R 220: Dena Bank v. BhikhabhaiPrabhudas Parekh & Co .. (2000) 5 S.C.C 694: Commissioner of Income I-I Tax, Udaipur, Rajasthan v. McDowell and co. Ltd .. (2009) I 0 S.C.C 755.

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[N. V. RAMANA, J.]

6.2 A tax is a burden or charge imposed by a competent legislature upon persons or property, to raise money for public purposes. 37 Important elements of a tax may be said to be first, that it is a compulso1y exaction; secondly, it is payable to the State or to some public authority on its behalf; and thirdly, that it is an exaction for purposes of public interest. Our Constitution has demarcated the taxing powers between the Center and States. Taxing power of the Union as well as the States resides in Article 245 read with 246 of the Indian Constitution. The Article 246 of the Constitution, lays down that Parliament has exclusive power to make laws with respect to any matter enumerated in Union List (List [ of schedule Vil). The States have complete power to make laws with respect to any matter enumerated c in the State List (List II of schedule Vil) and both Parliament and State Legislature have power to make laws with respect to any matter enumerated in the Concurrent List (List III of schedule VII). As per Article 265, no taxes shall be levied or collected except by the authority oflaw. It is important to note that taxation entries are to be found only D in lists I and II, indicating that in our Constitutional scheme, taxation powers of the Centre and the States are mutually exclusive. There are no Entries in the Concurrent List which gives power of taxation. This being the case, the moment the levy contained in a taxing statute transgresses into a prohibited field, it is liable to be struck down. E PART-Vil: FREEDOM OF TRADE, COMMERCE AND INTERCOURSE

7. I To consider the question as to whether the tax laws come under the ambit of Article 301 vis-a-vis freedom of trade, commerce and intercourse, it is necessa1y to refer to the constitutional provisions, F Constituent Assembly Debates and precedents. To begin with, I will first consider the relevant Articles, by extracting Part XIII verbatim.

PART XIII G TRADE, COMMERCE AND INTERCOURSE WITHIN THE TERRITORY OF INDIA

i; Cooley on taxation-volume l. 4'" ed ... Ch. 2. H

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A 301.Freedom of trade, commerce and intercourse.- Subject to the other provisions of this Part, trade, commerce and intercourse throughout the territory of India shall be free.

302. Power of Parliament to impose restrictions on B trade, commerce and intercourse.- 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. c

303. Restrictions on the legislative powers of the Union and of the States with regard to trade and commerce.- (1) Notwithstanding anything in article 302, neither D 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 authorizing 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. E (2) Nothing in clause (1) shall prevent Parliament from making any law giving, or authorizing the giving of, any preference or making, or authorizing 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 F situation arising from scarcity of goods in any part of the territory of India.

304. Restrictions on trade, commerce and intercourse among States.-notwithstanding anything in article 301 or article 303, the Legislature of a State may G 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 H

JINDAL STAINLESS LTD. v. STATE OF HARYANA 327

[N. V. RAMANA, J.]

manufactured or produced; and A (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 purposes of B clause (b) shall be introduced or moved in the Legislature of a State without the previous sanction of the President.

305. Saving of existing laws and laws providing for State monopolies.- Nothing in articles 301 and 303 shall affect the provisions c of any existing law except in so far as the. President may by order otherwise direct; and nothing in article 301 shall affect the operation of any law made before the commencement of the Constitution (Fourth Amendment) Act, 1955, in so far as it relates to, or prevent Parliament D or the Legislature of a State from making any law relating to, any such matter as is referred to in sub-clause (ii) of clause (6) of article 19. 306.[Power of certain States in Part B of the First Schedule to impose restrictions on trade and E commerce.)38 Rep. by the Constitution (Seventh Amendment) Act, 1956, s. 29 and Sch.

F " Repealed Article 306- "Notwithstanding anything in the foregoing provisions of this Part or in any other provisions of this Constitution, any State specified in Part B of the First Schedule which before the commencement of this Constitution was levying any tax or duty on the import of goods into the State from other States or on the export of goods from the State to other States may, if an agreement in that behalf has been entered into between the Government oflndia and the Government of that State, continue to levy and collect G such tax or duty subject to the tem1s of such agreement and for such period not exceeding ten years from the commencement of this Constitution as may be specified in the agreement : Provided that the President may at any time after the expiration of five years from such commencement tenninate or modify any such agreement if, after consideration of the report of the Finance Commission constituted under article 280, he thinks it necessary to do so." H

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A 307. Appointment of authority for carrying out the purposes of articles 301 to 304.- Parliament may by law appoint such authority as it considers appropriate for carrying out the purposes of articles 301, 302, 303 and 304, and confer on the authority 8 so appointed such powers and such duties as it thinks necessary.

7.2 Needless to mention that when the language of the provision is clear and unambiguous that, the intention of the law makers should c be inferred from a plain reading of the provision itself. Ordinarily, we need not go beyond the clear language of the provision to interpret the Statute. 7.³ The freedom of trade, commerce and intercourse throughout the territory of India is assured, but such freedom of trade is subject to D Part Xlll of the Constitution. When we evaluate the impact of Article 301 on the plenary taxing power of the Sovereign State, the opening words become significant. Be that as it may, Article 301 only guarantees throughoutness of trade and commerce, the freedom, however, is not absolute freedom nor is it free from regulations. E 7.4The dissection of Article 301 shows that it has three significant parts or phrases. These are, 'subject to other provisions of this part', and 'Trade, Commerce and Intercourse throughout territory of India', 'shall be.free'. Which everway one reads, the plain meaning of this is that trade, commerce and intercourse, shall be free, subject to F Articles 302 to 307 of the Constitution. The two sets of the provisions which are mainly contemplated in the phrase 'subject to other provisions' are Articles 302, 303 and 304 (a) and (b). Article 303. The Parliament may by law restrict the freedom of trade in public interest and such law would be free from Article 301. G 7 .5 Article 301 of the Constitution begins with the phrase 'Subject to other provisions of this Part'. This phrase gives an initial indication as to what to expect? The position of this phrase should be taken into consideration. Even before the declaration of freedom of Trade, Commerce and Intercourse, it is being subjected to limitations. Further H

JINDAL STAINLESS LTD. v. STATE OF HARYANA 329

[N. V. RAMANA, J.]

the opening words of Article 301, namely, 'subject to the provisions of A this part' require that all the Articles of the Part Xlll have to be read together so as to understand the width and meaning of the Part XIII. 'Subject to' is the dominant expression so far as Article 30 I is concerned. It indicates subservience to at least Articles 302, 303 and 304. Articles 302 to 304 embody a restatement of powers under Article 246 r/w the B State List under the VII Schedule. Each restated power by itself overrides the freedom of trade in Article 301. 7.6 Article 301 loses its prime place, if States make laws under any of the taxing entries, erecting reasonable restrictions or imposing tax on the free trade. Such power over-rides freedom of trade and c commerce. Thus, the general declaration by A1iicle 301 is relaxed in favor of Parliament by Article 302 and in favor of the States by Articles 303 and 304. It is interesting to note that Article 304 starts with a non- ohstante clause whereas Article 302 does not have a non-ohstante clause. As the freedom of trade in Article 301 is itself subject to 302 and 304, the intention of the framers, to my mind, appears to be clear. D The Constitution guards and protects the State legislations under Article 304(a) and (b) from overemphasized effect on freedom of trade under Article 301. 7.⁷ It is a sound principle of jurisprudence that entire statute has to be construed as a whole and not in isolation. While doing so, no clause E in any provision can be ignored especially when we interpret the Constitution which is '.rnprema lex'. The difference between the power of the Union and the States vis-a-vis Article 301 is that Article 302 does not have application to tax laws like Article 304(a), but under Article 304(a), tax can be imposed on the goods imported from other States. F From the understanding of the Articles 301, 302, 303 and 304, what emerges is summarized below-

1. Article 302 is an exception to Article 301.

2. The limitation under Article 302 is again subject to Article 303. G

3. Articles 302 and 303 do not refer to laws under taxing entries.

4. Article 304 can be an exception to be generally construed as dealing with non-tax discriminatory tax and restrictions. H

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A 7 .8 In addition to plain reading, an analysis of the relevant provisions and the legislative history of Article 301, is also relevant, in understanding the free trade clause in our Constitution. This can be considered also with reference to Constituent Assembly Debates and the legislative history which are equally important external aids. B

7 .9 In this connection, it has to be remembered that before the conunencement of the Constitution, about two-thirds of India was directly under the British rule and was called 'British India' and the remaining about one third was being directly ruled by the native Princes and was c known as 'Native States'. There were a large number of them with varying degrees of sovereignty vested in them. Those rulers had, broadly speaking, the trappings of a Sovereign State with power to impose taxes and to regulate· inter-State trade. It is well known fact that many of them had erected trade barriers seriously impeding the free flow of trade, commerce and intercourse, thereby not only shutting out but also shutting in commodities meant for mass consumption. Between the years 1947 and 1950, almost all the Indian States entered into agreements with the Government of India and merged into India as one political unit, with the result that what was called British India, broadly speaking, came under the Constitution. The native States became Part 'B' States. These Part 'B' States, in tum, were some sort of unions of small States or individual princely States. They erected, more often than not, trade barriers and customs posts even amongst themselves. lt was in this background, India for the first time, was constituted as one political unit. Hence, it was necessary to abolish all those trade barriers and custom posts in the interest of national solidarity, economic and cultural unity as also of freedom of trade.

7.10 One of the early tasks to engage the attention of the G Constituent Assembly in 1947 was freedom of trade and commerce within territories of the Union. It is important to note that in the Draft Constitution, the freedom of trade, commerce and intercourse which was a part of fundamental right, was dropped as such. Basic principles were fonnulated in the notes submitted to the sub-committee on Fundamental H

JINDAL STAINLESS LTD. v. STATE OF HARYANA 331

[N. V. RAMANA, J.]

Rights by Dr. K.M. Munshi 39 and Sir Alladi Krishnaswami Iyer'0 • The A Sub-Committee discussed Sir B.N. Rau's draft provision on the subject on March 29, 1947 and was adopted in the following form:

Subject to regulation by the law of the Union, trade, B· commerce, and intercourse among the units, whether by means of internal carriage or by ocean navigation, shall be free: Provided that any unit may by law impose reasonable restrictions thereon in the interest of public order, morality c or health.

7 .11 Commenting on the Clause when the draft of the sub- committee's report was under Consideration. Sir Alladi Krishnaswami Iyer suggested that goods entering a particular unit from other units of D the Union should not escape duties and taxes to which goods produced in the concerned unit itself were subjected to. These suggestions were accepted by the Sub-committee and incorporated in the report submitted to the Advisory Committee on April 16, 1947. On April 21, 1947 the clause came up for debate before the Advisory Committee. Shri C. E Rajgopalchari expressed his view that the units must be allowed to raise some kind of custom duties for genuine revenue purposes, for which the reply of Shri K. M. Panikkar is relevant for our discussion: K. M. Panikkar: Rajaji (C. Rajgopalchari) has raised the question of the right of the units to raise taxes, and to say F 39 B. Shiva Rao, The Framing oflndia 's Constitution, Vol.II, p. 69 (1967). [hereinafte,. 'B. Shiva Rao '] Extract from the Note and draft Articles on Fundamental Rights by Dr. K. M. Munshi, dt. March 17, 1947 - Article V- (I) Every Citizen within the limits of the law of the Union and in accordance therewith has : (i)The right of free movement and trade within the ten-itories of the Union. G 40 B. Shiva Rao, p. 68 Extract from the Note on Fundamental Rights by Alladi Krishnaswami Iyer, dt. March 14, 1947- 'The Union powers being restricted in scope, care will have to be taken to bring in (a) the freedom oflnter-state and inter-provincial trade, (b.) inter-state and inter-provincial movement. .. ' H

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A this right should not be denied. I, however, think this is dangerous power to be given to the units. This may result in creation of competing units. We have allowed two things. We have allowed the unit to tax its own industries. We also allow things brought in to be taxed, for sake of parity. But our friend wants go little further and say that the right to B impose taxes or transit duty or some kind of duty must be given to the units. That, I am afraid, will be a negation of the clause. 41 7 .12 In the interim report of the Advisory Committee c dt.23.04.194 7 placed by Shri Sardar Vallabhai Patel, the fol1owing recommendations were made :

"While agreeing in principle with this clause we reconunend that instead of being included in Fundamental Rights, it D should find a place in some other part of the Constitution."

7.13 Taking into consideration above deliberations and decisions of the Assembly, Sir B.N. Rau incorporated the following clause in his draft Constitution of October, 1947 under Part Ill-Fundamental Rights E including Directive Principles of State Policy":-

JINDAL STAINLESS LTD. v. STATE OF HARYANA 333

[N. V. RAMANA, J.]

A Provided also that nothing in this section shall preclude the Federal Parliament from imposing by Act restnct1ons Oil the freedom of trade, commerce and intercourse B among the units in the interests of public order, morality or hea Ith or in cases of emergency.

c 7 .14 With some modifications, this clause was retained in the Fundamental Rights chapter in the draft Constitution of February 21,

1948. The proviso was redrafted and included as an independent Article under a separate heading, namely, "Inter-state trade and commerce" in Part IX of the Draft Constitution pertaining to relations between the Union and the States. 43 D 7 .15 Further when the draft Constitution was published and circulated for suggestions and opinions, Sir Alladi Krishnaswami Iyer commented in the following manner:-

"Comments of AlladiKrishnaswamiAyyar: In this regard to • E

interstate trade there are three main provisions in the Draft Constitution : I. The freedom of inter-state trade secured by Article 16: II. Subject to an interference by federal law :. F !II. An interference by a provision or state law to the extent provided in item 33, 44 List II. The power of interference under Sub-clause (b) of the Article 244 is too drastic and much wider than that provided in the Original Draft. Would not this G provision practically nullify the freedom of trade 43 B. Shiva Rao, p. 524 and p. 610

" Draft of Constitution, Fcbruarv 21. 1948-Scventh Schedule. List 11- State List

33. Regulation of trade, commerce and intercourse with other states for the purposes of the provisions of Article 244 of this Constitution. H

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A secured by the Article 16 as the expression 'interests of public is vague and uncertain and cannot be subject to judicial review."

7.16 Draft Articles relating to trade and commerce were scattered B in different parts of the draft Constitution (i.e., Clause 16 and Articles 243 to 245) and the purpose was to string together all these scattered provisions under one head. Dr. Ambedkar stated before the Constituent Assembly that.:

c Sir, all that I need do at this stage is to inform the House that originally the articles dealing with freedom of trade and commerce were scattered in different parts of the Draft Constitution. One article found its place in the list of Fundamental Rights, namely, article 16, which said that trade and commerce, subject to any law made by Parliament, shall be free throughout the territory of India. The other articles, namely, 243, 244 and 245 were included in some other part of the Draft Constitution. it was found in the course of discussion that a large number of members of the House were not in a position to understand the implications of articles 243, 244 and 245, because these articles were dissociated from article 16. In order, therefore, to give the House a complete picture of all the provisions. relating to freedom of trade and commerce the Drafting Committee felt that it was much better to assemble all these different articles scattered in the different parts of the Draft Constitution into one single part and to set them out seriatim, so that at one glance it would be possible to know what are the provisions with regard to the freedom of trade and commerce throughout India. [ should also like, to say that according to the provisions contained in this part it is not the intention to make trade and commerce absolutely free, that is to say, deprive both Parliament as well as the States of any power to depart H

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[N. V. RAMANA, J.]

from the fundamental provision that trade and commerce A shall be free throughout India. 45 (Emphasis Supplied)

7.17 From the above legislative history and Constituent Assembly B Debates, four propositions would emerge:-

a. It is clear from a comparison of Clause 16, 243, 244 and 245 of the draft Constitution with Articles in Part XA (now Part XIII) that they were not merely arranged in seriatim but were c substantially altered. b. That freedom of trade, commerce and intercourse is not a fundamental right. c. That trade, commerce and intercourse in India is not absolutely D free. d. That the discriminatory tax (like erstwhile custom duties imposed by certain independent states) is harmful for the federation. E

PLAINS OF GANGES CAN NEVER BE FERTILIZED BY WATER OF MURRAY OR POTMAC RIVERS

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A to mention that during the drafting process of Article 301, foot note for the same had reference to Australian Constitution. It is no gainsaying that our framers were learned men who drew our Constitution having · hindsight of the wisdom of these great federations.

7. 19 The main inspiration for Part Xlll has been American and B Australian models. These models present before the Constituent Assembly were re-designed and expanded by the framers of the Constitution in India according to the needs of Indians. It is important to note that the interpretation provided by other countries are just indicative. They may have persuasive value because the context and c history has been quite different as compared to India. At least in relation to Part XIII of the Constitution an indigenous interpretation should be provided without placing heavy reliance on the foreign cases as they may be subject to change which will inevitably stir the matter once again. Moreover, our constitutional structure is quite different from those provided under Australian and American Constitutions. D 7 .20 In Australia and the United States of America, giving textual meaning to the applicable Constitutional provisions, the Courts interpreted the 'commerce clause' or 'free trade clause' in such a manner that the (federal units) were completely barred to levy any taxes on inter-state trade and commerce, Fortunately offlate, in these jurisdictions, the law E . has been diluted to enable the federal units to regulate inter-state trade and commerce even by imposing levies. This would be clear by brief reference to the case law governing inter-state trade in Australia, Canada and the United States of America.

JINDAL STAINLESS LTD. v. STATE OF HARYANA 337

[N. V. RAMANA, J.]

Constitution only meant that Australia was free from those measures A which were discriminatory and protectionist burdens. Cole insisted that Section 92 proscribes both direct and indirect protectionist discrimination: -

B 'The concept of discrimination in its application to interstate trade and commerce necessarily embraces factual discrimination as well as legal operation. A law will discriminate against interstate trade or commerce if the law on its face subjects that trade or commerce to a disability or disadvantage or if the factual operation of the law c produces such a result'. 51

7.22 Earlier to this, Australian Courts have grappled to achieve unifonnity until 1988 [Cole]. Earlier Judgments had taken a right based D approach, wherein a single trader who was burdened, could claim violation of Section 92 of the Australian Constitution.51 Such wide interpretation given in the earlier case laws led to development of narrower test by the High Court in Cole. Earlier Case laws were available and were cited in the Atiabari and Automobile also. It is interesting to note that our framers drawing experience of Bank E Nationalization Case 53 , were concerned about stifling the natural growth of the Country by broad law such as Section 92 of Australian Constitution. 54 UNITED STATES OF AMERICA F 7.23 Article 1 Section 8 Clause 3 of the U.S. Constitution states that "The Congress shall have the legislative power to regulate commerce, with foreign nations and among several States, and with Indian Tribes. " This Clause also known as the 'Commerce Clause' has been under judicial scmtiny for a long time. The plain reading of this Article means that the Federal Legislature is empowered to regulate G the inter-state trade.

" Ibid, p. 399 " Common wealth v. Bank of new South Wales, (1949) 79 C.L.R 497. 53 Ibid. " Constituent Assembly Debate, Vol. IX, gth September 1949 H

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A 7.24 In Brown v. Marylancf'5, a case involving the constitutionality of a Maryland law requiring all importers and wholesalers of foreign articles to obtain a license, Chief Justice Marshall reasoned that the rationale of McCulloch 56 was "entirely applicable" to state taxation of private enterprises engaged in inter-state commerce. Thus, holding the B Maryland statute unconstitutional, Justice Marshall stated:

'We admit this power (of a State to tax its own citizens on their property within its territory) to be sacred.... We cannot admit that it may be used so as to obstruct or defeat c (Congress') power to regulate commerce. It has been observed that the powers remaining with the States may be so exercised as to come in conflict with those vested in Congress. When this happens, that which is not supreme must yield to that which is supreme'. D

7.25 The Supreme Court in Freeman v. HewitP, put a bar on the States to tax such activities which directly affected inter-state commerce as federal government was the sole authority to regulate these matters. Following extract may be relevant- E

'The Commerce Clause was not. merely an authorization to Congress to enact laws for the protection and encouragement of commerce among the States, but by its own force created an area of trade free from interference by the States. In short, the Commerce Clause even without implementing legislation by Congress is a limitation upon the power of the States .... This limitation on State power .. . does not merely forbid a State to single out interstate commerce for hostile action. A State is also precluded from taking any action which may fairly be deemed to have the effect of impeding the free flow of trade between States.

"25 U.S. (12 Wheat.) 419 (1827) 56 4 Wheat. 316 (1819) "329 U.S. 249 (1946) H

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It is immaterial that local commerce is subjected to a A similar encumbrance'.

7 .26 In 1977 in a landmark judgment in Cumplete Auto Transit vs. Brady5 8 , the Supreme Court went back on the above approach and B adopted practical effects approach, according to \Vhich, a State law which is "applied to an activity with a substantial nexus with the taxing state, fairly apportioned, non-discriminatory against inter-state commerce, and fairly related to the services provided by the State" shall not be invalidated on the ground that States lack legislative competence. Subsequently the Supreme Cowt has further empowered the States to c adopt legislations and it now only requires that there should be a fair relation or connection between the tax imposed and the general benefits provided to the taxpayers which include civic services as maintenance of public roads and running of mass transits (refer D.J!. Holmes Company Ltd. vs. Shirley 1\1cNamara 59 ). In the Commonwealth D Edison Company vs. State of Montana 60 the Supreme Court has observed that-

'when a general revenue tax does not discriminate against interstate commerce and is apportioned to activities occurring within the State. the State is free to pursue its own fiscal policies unembarrassed by the Constitution.' It is obvious from the line of cases that America has been moving towards empowering States to develop their own fiscal policy under the Commerce Clause. Our Constitution, on the other hand, has achieved directly what the US Coutts are trying to achieve by way of judicial interpretation. CANADA 7 .27 Canadian Constitution envisages freedom of trade under G Section 121 as follows 'All Articles of the Growth, Produce, or

"430 U.S. 274(1977) "'486 U.S. 24 (1988) '"453 u .s. 609 ( 1981) H

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'''Constitutional Law of Canada, Peter \V. Hogg, Vol. 1. pg. 857. "'Gold Seal Ltd. V. Alberta AG ( 1921 l 62 S.C.R 424. '" Ibid. at 456 H "Ibid. at 470.

JINDAL STAINLESS LTD. v. STATE OF HARYANA 341

[N. V. RAMANA, J.]

7.28 The Conspectus of law in Australia and the United States A of America which have federal Constitutions would show that initially the highest courts in those countries interpreted their respective constitutional provisions as totally prohibiting the States (federal Units) from levying any tax or regulating on inter-State trade and commerce, but subsequently there is a paradigm shift even in these jurisdictions and B currently the existing provisions have been interpreted so as not to deny such powers to States.

INDIAN CASE LAW 7 .29 Returning to the main controversy in the case, it may be c noted that apart from the two leading judgments on the entry tax and compensatory tax in the context of transportation Cases, we have large number of cases decided by the various High courts and this Court. It is however not necessary to refer to all cases. It would be suffice to refer to a few. D 7.30 In Atiahari, the validity of Assam Taxation (on Goods Carried by Roads and Inland Waterways) Act, 1954, which squarely comes under Entry 56 of List II fell for consideration. It was assailed as violating Article 301, and as not saved by Article 304(b ). The challenge was upheld. It is necessary to extract the following from the E Atiahari.: ' ... It is obvious that whatever may be the content of the said freedom it is not intended to be an absolute freedom; absolute freedom in matters of trade, commerce and intercourse would lead to economic confusion, if not chaos F and anarchy; and so the freedom guaranteed by A1ticle 301 is made subject to the exceptions provided by the other Articles in Part XIII. The freedom guaranteed is limited in the manner specified by the said Articles but it is not limited by any other provisions of the Constitution outside Part G Xlll. That is why it seems to us that Article 301, read in its proper context and subject to the limitations prescribed by the other relevant Articles in Part Xlll, must be regarded as imposing a constitutional limitation on the legislative

342 SUPREME COURT REPORTS [2016] 10 S.C.R.

A power of Parliament and the Legislatures of the States. What entries in the legislative lists will attract the provisions of Article 30 I is another matter; that will depend upon the content of the freedom guaranteed; but wherever it is held that Atiicle 30 I applies the legislative competence of the Legislature in question will have to be judged in the light 8 of the relevant Articles of Part XIII; this position appears to us to be inescapable.

50. Let us now revert to Article 301 and asce1tain the width and amplitude of its scope. On a careful examination of c the relevant provisions of Part XIII as a whole as well as the principle of economic unity which it is intended to safeguard by making the said provisions, the conclusion appears to us to be inevitable that the content of freedom provided for by Article 30 I ....

D 51. certainly includes movenie.nt of free trade which is of the very essence of all trade and is its integral part. If the transport or the movement of goods is taxed solely on the basis that the goods are thus carried or transported that in our opinion, directly affects the freedom of trade as contemplated by Article 30 I. If the movement, transpoti or the carrying of goods is allowed to be impeded, obstructed or hampered by taxation without satisfying the requirements of Paii Xlll the freedom of trade on which so much emphasis is laid by A1iicle 30 I would turn to be illusory. When Article 301 provides that trade shall be free throughout the territory of India. primarily it is the movement part of the trade that it has in mind and the movement or the transport part of trade must be free subject of course to the limitations and exceptions provided by the other Articles of Part Xlll.. .. Besides, it is not irrelevant to remember in this connection that the G Article we are construing imposes a constitutional limitation on the power of the Parliament and State Legislatures to levy taxes, and generally, but for such limitation, the power of taxation would be presumed to be for public good and would not be subject to 1-1

JINDAL STAINLESS LTD. v. S'IATE OF HARYANA 343

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judicial review or scrutinv. Thus considered we think it would be reasonable and proper to hold that restrictions freedom from which is guaranteed by Article 301, would be such restrictions as directly and immcdiatelv restrict or impede the free flow or movement of trade. Taxes may and do amount to restrictions; but it is onlv such taxes as directly and immediately restrict trade that would fall within the purview of Article 301.' (Emphasis Supplied) c 7.³¹ Tn Atiabari, Chief Justice B. P. Sinha wrote a dissenting opinion holding that any inference that the taxation simpliciter is within the terms of Article 30 I cannot be justified under the Constitution. Indeed, it is observed that, it is only such taxes which directly and immediately affect trade would fall within the purview of Article 301, [) though both the Learned Judges used different languages. the purports appears to be same. It is only such laws which operate in a restrictive manner, right to free trade that are prohibited. Be that as it is, rejecting the submission that Article 30 l must be construed as freedom from all kinds of impediments, restraints and trade barriers including freedom from all taxation, the Learned Chief Justice said as follows:

'In my opinion, there is no warrant for such an extreme position. It has to be rem.:mbcrcd that trade, commerce an intercourse include individual freedom of movement of every citizen of India from State to State, which is also guaranteed by Art.19( I)( d) of the Constitution. The three terms used in Art. 30 I include not only free buying and selling, but also the freedom of bargain and contract and transmission of information relating to such bargains and contract as also transport of goods and commodities for the purposes of production, distribution and consumption in all their aspects, that is to say, transportation by land, air or water. They must also include commerce not only in goods and commodities, but also transportation of men and H

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A animals by all means of transportation. Commerce would thus include dealings over the telegraph, telephone or wireless and every kind of contract relating to sale, purchase, exchange etc. of goods and commodities.

15. Viewed in this, all comprehensive sense, taxation on B trade, commerce and intercourse would have many ramifications and would cover almost the entire field of public taxation, both in the Union and in the State Lists. It is almost impossible to think that the makers of the Constitution intended to make trade, commerce and c intercourse free from taxation in that comprehensive sense. If that were so, all laws of taxation relating to sale and purchase of goods on can-iage of goods and commodities, men and animals, from one place to another, both inter-State and intra-State, would come within the purview of Art. 30 I and the proviso to Art. 304(b) would make it necessary that D all bills or Amendments or pre-existing Jaws shall have to go thereof the gamut prescribed by that proviso. That will be putting too great an impediment to the power of taxation vested in the States and reduce the States' limited sovereignty under the Constitution to a mere fiction. That E extreme position has, therefore, to be rejected as unsound.'

7.32 Dealing with the importance of taxing power of the State to raise money the learned Chief Justice. opined thus :-

F 'Jn my opinion, another very cogent reason for holding that taxation simpliciter is not within the tenns of Art. 301 of the Constitution is that the very connotation of taxation is the power of the State to raise money for public purposes G by compelling the payment by persons, both natural and juristic, of monies earned or possessed by them, by virtue of the facilities and protection afforded by the State. Such burdens or imposts, either direct or indirect, are in the ultimate analysis meant as a contribution by the citizens or persons residing in the State or dealing with the citizens of H

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[N. V. RAMANA, J.]

the State, for the support of the Government, with particular reference to their respective abilities to make such contributions. Thus public purpose is implicit in every taxation, as such. Therefore, when Part XIII of the Constitution speaks of imposition of reasonable restrictions in public interest, it could not have intended to include taxation within the generic term "reasonable restrictions"'

7.33 In Automobile, the challenge was to the Rajasthan Motor Vehicles Taxation Act, 1951. The Appellants were unsuccessful before the Rajasthan High Court, which upheld the said Act. By majority of C 4:3 this Court affinned the judgment of the High Court. Justice S.K.Das who wrote the lead judgment observed that Part Xlll is intended to achieve the federal economic and fiscal integration and addresses the questions of economic unity. He held that, "regulatory measures or measures imposing compensatory taxes for the use of trading facilities do not come within the purview of the restrictions contemplated by Article 301 and such measures need not comply with the requirements of the proviso to Article 304(b) of the Constitution, (and) that the relevant Articles in Part Xlll apply only to legislation in respect of the entries relating to trade and commerce in any of the lists of the Seventh Schedule. But we must advert here to one exception which we have already indicated in an earlier part of this Judgment. Such regulatory measures do not impede the freedom of trade, commerce and intercourse and compensatory taxes for the use of trading facilities are not hit by the freedom declared by Article 301. They are excluded from the purview of the provisions of Part Xlll of the Constitution for the simple reason that they do not hamper trade, commerce and intercourse but rather facilitate them". 7.34 Justice K .• Subba Rao (as his lordship then was) in a separate opinion concurred with the majority and summarized the following principles that are to be applied while testing a law under challenge as violating Article 301 of the Constitution (1) Article 301 declares a right of free movement of trade without any obstructions by way of barriers, inter-State or intra-State, or other impediments operating as such bal1'iers. (2) The said freedom is not impeded, but, on the other hand, promoted, by Regulations creating conditions for the free movement H

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A of trade, such as, police Regulations, provision for services, maintenance of roads, provision for aerodromes, wharfs etc., with or without compensation. (3) Parliament, may by law, impose restrictions on such freedom in the public interest; and the said law can be made by virtue of any entry with respect whereof Parliament has power to make a law.(4) The State also, in exercise of its legislative power, may impose B similar restrictions, subject to the two conditions laid down in Article 304(b) and subject to the proviso mentioned therein. (5) Neither Parliament nor the State Legislature can make a law giving preference to one State over another or making discrimination between one State and another, by virtue of any entry in the Lists, infringing the said c freedom. (6) This ban is lifted in the case of Parliament for the purpose of dealing with situations arising out of scarcity of goods in any part of the territory of India and also in the case of a State under Article 304(b), subject to the conditions mentioned therein; and (7) The State can impose a non-discriminatory tax on goods i111p01ted from other States D or the Union te1Titory to which similar goods manufactured or produced in that State are subject. 7.35 As discussed above, a Constitution Bench of this Court in Atiahari had struck down the Assam Act levying the tax on goods carried by road or inland waterways. Making certain additional E provisions, Assam Assembly enacted the Assam Act No. 10 of 1961, coming under Entry 56 of the State List, with the previous sanction of the President with the same nomenclature, which was impeached as unreasonable under Article 32 of the Constitution, in Khyerhari Tea Company v. State ofAssam65 • By the time, this Court took up the case, the scope and effect of provisions contained in Part XIII of the F Constitution came to be considered in Automohile. Rejecting the challenge this Court observed that the freedom can be restricted by a law satisfying the two conditions in Article 304. ln examining the constitutionality of the statute, it must be assumed that the legislature understands and appreciates the needs of the people and the laws it G enacts are directed to problems which are made manifest by experience and that the legislature enacts the laws which the people's representatives consider to be reasonable for the purpose for which they are enacted. The presumption is in favor of the constitutionality of

"(1964) 5 SCR 975: AIR 1964 SC 925 H

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[N. V. RAMANA, J.)

enactment. However, when it is shown that an Act invades the freedom A of trade, it is necessary to enquire whether the State has proved that the restrictions imposed by way of taxation are reasonable and in public interest within the meaning of Article 304(b ). It was also held that a law passed under Article 304(b) can be made to have retrospective effect. B

7.36 In Jindal (2), the law was summarized by the Constitutional Bench as under:

c 'Aliicle 30 I is binding upon the Union Legislature and the State Legislatures, but Parliament can get rid of the limitation imposed by Article 301 by enacting a law under Article 302. Similarly, a law made by the State Legislature in compliance with the conditions imposed by Article 304 D shall not be hit by Article 301. Article 301 thus provides for freedom of inter-State as well as intra-State trade and commerce subject to other provisions of Part XIII and correspondingly it imposes a general limitation on the legislative powers, which is relaxed under the following circumstances: E (a) Limitation is relaxed in favour of Parliament under Article 302, in which case Parliament can impose restrictions in public interest. Although the fetter is limited enabling Parliament to impose by Jaw restrictions on the freedom of trade in public interest under Article F 302, nonetheless, it is clarified in Clause (I) of Article 303 that notwithstanding anything contained in Article 302, Parliament is not authorised even in public interest, in the making of any law, to give preference to one State over another. However, the said clarification is subject G to one exception and that too only in favour of Parliament, where discrimination or preference is admissible to Parliament in making of laws in case of scarcity. This is provided in Clause (2) of Article 303.

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A (b) As regards the State Legislatures, apart from the limitation imposed by Article 301, Clause (I) of Article 303 imposes additional limitation, namely, that it must not give preference or make discrimination between one State or another in exercise of its powers relating to B trade and commerce under Entry 26 of List 11 or List III. However, this limitation on the State Legislatures is lifted in two cases, namely, it may impose on goods imported from sister State(s) or Union Territories any tax to which similar goods manufactured in its own State are subjected but not so as to discriminate between the c imported goods and the goods manufactured in the State [see Clause (a) of Article 304]. In other words, Clause (a) of Article 304 authorises a State Legislature to impose a non-discriminatory tax on goods imported from sister State(s), even though it interferes with the freedom of trade and commerce guaranteed by Article

301. Secondly, the ban under Article 303(1) shall stand lifted even if discriminatory restrictions are imposed by the State Legislature provided they fulfil the following three conditions, namely, that such restrictions shall be in public interest; they shall be reasonable; and lastly, they shall be subject to the procurement of prior sanction of the President before introduction of the Bill.'

7.37 One need to note that Atiabari dealt with the challenge to an enactment which squarely comes under Entry 56 whereas Automobile is a case concerned with the challenge to Rajasthan Motor Vehicle Taxation Act. Taxes on motor vehicles is a subject which falls under Enny 57. The cases which were subsequently decided by this court in relation to Part Xlll, were decided by this Court were not concerned with Entries 56 and 57. Be that as it may, deviating a little, G Jet me now examine the scope of Entry 52 and the nature of the tax contemplated there under. Entry 52 of the State list deals with 'taxes on the entry of the goods for consumption use or sale therein'. A law made under this entry like various Acts which are impugned in these appeals levy tax on entry of goods from one State to other. The taxable H

JINDAL STAINLESS LTD. v. STATE OF HARYANA 349

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event is the entry into local area in another State. As defined in Concise A Oxford Dictionary the verb 'enter' means 'to come or go into and entry as a noun is act of coming or going'. "There is a palpable difference between the entiy of goods and sale of goods. Many enactments levying tax on sale define the sale as 'transfer of property from one person to another in course of business for cash or defen-ed payment.' When B goods enter the State it may be for consumption, use or sale. The factum of entry and sale may not happen at the same time and, therefore, entry of goods is one thing and consumption, use or sale is another thing. Therefore, the mere fact that the goods are intended for sale is no significance to the taxable event in law on the entry of goods. c 7.38 In Han.rn Corp. 67 , the Constitutional validity of Kamataka Tax on Entry of Goods into Local Areas for Consumption, Use or Sale Therein Act, 1979 was challenged before this Court. This Court upheld the validity of the Act and pointed out that the fonnulation in Atiahari and Automobile was even applicable for Entry Tax under Entry 52 of the State List. This Court summed up the position of law as below- D

'Entry 52 in State List read with Article 246 of the Constitution confers power on the State legislature to enact a law to levy tax on the entry of goods into a local area for consumption, use or sale therein. This tax in common parlance is known as 'octroi'. Octroi was leviable by the municipality under the power delegated to it under various laws providing for setting up of and administration of municipal corporations and municipalities. Octroi thus understood was being levied by various municipalities and municipal corporations in Kamataka State. Since some time a feeling had grown that octroi was obnoxious in character and impeded the development of trade and commerce and there was a clamour for its abolition. Taking note of the resentment of the business community, Kamataka State G abolished octroi with effect from April 1, 1979. However, no one was in doubt that octroi was a major source of

"'Concise Oxford Dictionary, p. 474 (10•" Ed.) "' 1980 (4) s.c.c 463 H

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A revenue to municipalities and its abolition would cause such a dent on municipal finances that compensation for the loss would be inevitable. Accordingly, the State Government undertook a policy of compensating the municipalities year by year. For generating funds for this compensation, rates B of sales tax were raised and in some cases a surcharge was levied. The amount so collected was not sufficient to bridge the gap in municipal budget. To further augment the fmances for compensating the municipalities, additional fund was sought to be generated by levy of tax under the impugned legislation. No doubt, the tax levied was one on c entry of scheduled goods in local areas meaning thereby it had an the broad features of octroi, yet the manner of levy, the method of collection and the persons liable to pay the same were so devised by the impugned Act as to remove the obnoxious features of octroi. As the charging section D shows, the tax was to be levied on entry of scheduled goods in a local area at a rate to be specified by the Government not exceeding 2% ad valorem. The taxing event would be the entry of scheduled goods in a local area. In fact, octroi was being levied on almost all conceivable goods entering into a local area for consumption, use or sale therein. There E appears to be a discernible policy in selecting the goods set out in the schedule, the entry of which in a local area would provide the taxing event. The goods selected for levy are textiles, tobacco and sugar. Way back in 1957 there was a demand for abolition of sales tax on the scheduled goods and at the instance of the Union Government the State Gove1m11ents agreed to forego their right to levy sales tax on the aforementioned scheduled goods on the condition that the Union Government would levy additional excise duty on them and distribute the net proceeds of such duty amongst the consenting States. Parliament accordingly has enacted the Additional Duties on Goods (Goods of Special Importance) Act, 1957. Therefore, while raising rates of sales tax and levying surcharge in respect of some other items the State Government could not have levied sales tax on the scheduled goods. They were, therefore, selected for H

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[N. V. RAMANA, J.]

the levy of the tax under the impugned Act on their entry into a local area'. xxx 'On a conspectus of these decisions it appears well settled that if a tax is compensatory in character it would be immune from the challenge under Article 301. If on the other hand the tax is not shown to be compensatory in character it would be necessary for the party seeking to sustain the validity of the tax law to show that the requirements of Article 304 have been satisfied'. c 7.39 In Atiahari, majority held that the legislative competence of the legislature will have to be judged in the light of relevant Articles of Part Xlll and that what entries will attract Article 301 will depend on the content of freedom guaranteed. In Jaiprakash, this Court ruled D that concept of compensatory tax evolved in Automobile does not apply to general notion of entry tax. As pointed out earlier Atiahari is a case dealing with tax under Entry 56, whereas Automobile is a case under Entry 57. In view of this it would not be safe to apply the majority opinion in Atiahari and Automobile while dealing with entry tax. I am therefore compelled to hold that tax law simpliciter is not contemplated in Article E 30 I of the Constitution. 7.40 There is no gainsaying that the law made by Parliament or State legislature is subject to Constitutional limitations. A law which abridges fundamental rights is rendered void by reason of Article 13. A law by the Union or the States relating to a subject matter outside the powers assigned under Articles 245 read with Article 246 and relevant legislative entries in the Seventh Schedule would be ultra vires as legislatively incompetent. Apart from these limitations, the law of the Union or the States is also subject to other Constitutional limitations. The provisions of Part XIII, especially, Article 304(a) and (b) also act as a limitation on the legislative jurisdiction of the Union and the States. The power endowed under Articles 245 and Article 246 to a competent legislature to make laws is 'subject to the provisions of the Constitution. Nonetheless, if a State makes law under Article 245(1) r/w. Article 246(3) in respect of the subjects enumerated in Entries 45 to 63 of List H

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A II in the Seventh Schedule, it is doubtful whether it can be invalidated only on the ground that it does not comply with Articles 301 and 304(a). Indeed various provisions of the Constitution dealing with fiscal measures in Part XII, for instance Articles 265, 269, 276 and 286, specifically deal with taxes, but in Part XIII, except Article 304(a), no other Article deals B with taxes. Further Chapter I of Part XII of the Constitution specifically deals with provisions regarding 'Finance', whereas Part XIII deals with 'Trade, Commerce and Intercourse' within the ten-itory of India. Thus, these two Parts are kept distinctly separate. Though every law is made subject to all provisions of the Constitution, it does not mean that every tax law made by the State must be made answerable to the general c provisions relating to trade, commerce and intercourse. The provisions of the Constitution, the Constituent Assembly Debates and the precedents, lead us to such a conclusion. The reasons for this conclusion are summarized as below-

D First, Taxation is an incident of sovereignty, which cannot be curtailed by any implied limitations. 68 Secondly, It is part of any sovereign government to ensure a welfare State. To achieve the same, tax is the only course E available to the government to generate revenue for purposes of welfare activities. Courts, therefore, cannot abridge the taxing power of the sovereign State. Thirdly, the very conception of Part Xlll was only to prevent discriminatory taxes under Article 304(a). F Fourthly, argument of inconvenience cannot affect the interpretation of Article 30 I to bring in new tests and expand the provision beyond what was imagined by the framers of our Constitution. Article 304 (a) is an isolated provision which only deals with the discriminatory taxes. G Existence of such provision cannot furnish evidence to say that Article 301 is not subject to taxing power of the State. Fifthly, the taxing entries are specifically provided for in the Seventh Schedule. lt is settled principle under our

" Maharaj Umeg Singh v. State of Bombay, A.LR 1955 S.C 540. I-I

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[N. V. RAMANA, J.]

Constitution that taxing power cannot be derived from a A general entry. 69 In light of this principle the Constituent Assembly passed the Articles and Entries in the following time line: On 13 June, 1949 present Article 245 which was Article 217 (in the draft Constitution) was passed. On September 02, 1949 Entry 52 of State List (which was entry B 61 in the draft Constitution) was passed. On September 08, 1949 PART Xlll (which was PART XA in the draft Constitution) was passed. This shows that our Constitution framers are presumed to be aware of the inter-play of taxing provisions. Therefore, the only explicit limitation imposed on the taxing power of the State is Article 304(a) c of the Constitution. Sixthly, we cannot ignore the legislative journey of Article 301 in Part Xlll. At the stage of drafting, free trade, commerce and intercourse was in fact sought to be made a fundamental right but it was not accepted. Ultimately it D was resolved to bring all the provisions relating to free trade, commerce and intercourse at one place. What started as a fundamental right came to be enacted as a constitutional right? Thus, there is abundant guidance from the legislative history in regard to incorporation of Article E 301 only as a constitutional right. Seventhly, That Article 306 cannot have an impact on the interpretation of Article 301, as it only saved certain discriminatory taxes. Since the framers wanted to preserve the imposition of such discriminatory taxes for a limited F period, which otherwise would have been beyond the competence of State legislature to impose tax on import or on export of goods. Therefore taxes are not covered under the Article 301 only inter-state discriminatory taxes are barred under Article 304(a) of the Indian Constitution. G Eighthly, Tax management is a province of political sphere. Judiciary should provide certain latitude for the government as taxes are lifeline of the Governments. " M.P.V. Sundararamier & Co. vs. The State ofAndhra Pradesh andAnr.,AIR 1958 SC %8 H

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A Ninthly, Article 301 of the Indian Constitution uses the tem¹ 'free'. The word 'free' means 'which is not confined or restricted'. Either the trade is 'free or not free'. To state that trade, commerce and intercourse throughout the territory in India is free and then qualify this Article 301 B with subsequent Articles under 302, 303 and 304 only portrays that Article 301 is merely clarificatory in nature. If trade was, indeed, free then majority of Articles in the Constitution would have been redundant. From the history, context and interpretation it is clear that Article 301 is just a fonn to be understood subject to other provisions of Part c Xlll. If no other motive for its insertion can be suggested, a sufficient one is found in the desire to remove all doubts i.e., the wordings of Article 301 is beyond any doubt a clarificatory provision and the extent of freedom is limited to those discriminatory taxes, restrictions (other than taxation simpliciter) and prohibitions provided explicitly under Articles 302, 303 and 304.

7.⁴¹ In Atiahari and Automobile this Court relied on a 11011- obsta11te clause in Article 304 to hold that, by necessary implication, tax law come within the purview of Article 301. This view is not sound because one has to read the text and context while interpreting the constitutional provisions. In this regard, I respectfully agree with the reasoning and conclusions reached by Hon'ble the Chief Justice that non-obstante clause in Article 304 (a) is not determinative in the interpretation of Article 30 I.

PART-VIII: ARTICLE 304 OF THE CONSTITUTION 8.¹ Whether a law levying tax on entry of goods needs to be tested with reference to Article 304(a) and (b) of the Constitution? In order to appreciate the implication of Article 304 of the Constitution, it is necessary to bear in mind that historical background of these provisions. The Government of India Act, 1935 envisaged a federal Constitution for the whole of British India. The Government imposed restriction on the legislature of the States to legislate in relation to internal H

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trade under Section 297 in the following tem1s:- A

'297. (!)No Provincial Legislature or Government shall. (a) by virtue of the entry in the Provincial Legislative List relation to trade and commerce within the Province, or the B entry in that list relating to the production, supply, and distribution of commodities, have power to pass any law or take any executive action prohibiting or restricting the entry into or export from, the Province of goods of any class or description; or c (b) by virtue of anything in this Act have power to impose any tax, cess, toll, or due which, as between goods manufactured, or produced in the Province and similar goods not so manufactured or produced, discriminates in favour of the former or which, in the case of goods D manufactured or produced outside that Province, discriminates between goods manufactured or produced in another locality. (2)Any law passed in contravention of this section shall, to the extent of the contravention, be invalid.' E

8 .2 It may be noticed that prohibition contained in the section quoted above applied only to Provincial Governments and Provincial legislatures with reference to entries in the legislative list relating to trade and c01m11erce and to production, supply and distribution of c01mnodities. F This section dealt with prohibitions or restrictions in respect of import into or export from a Province, of goods generally. It also dealt with the power to impose taxes etc. and prohibited discrimination against goods manufactured or produced outside a Province or goods produced in different localities. G 8.³ The Sub Committee on Fundamental Rights comprising of Shri. K. M. Munshi, Sir Alladi Krishnaswami Iyer and Sir. B. N. Rau on March, 29 1947 introduced Clause 13 in the following form:-

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A 'Subject to regulation by the law of the Union, trade, commerce and intercourse among the units, whether by means of internal carriage or by Ocean Navigation, shall be free: Provided that anv unit may bv law impose reasonable B restrictions thereon in the interest of public order. moralitv or health.''" (Emphasis supplied)

c 8.4 The proviso herein above empowered the 'Unit' to impose by law, reasonable restrictions in the interest of the public order, morality or health. Sir B. N. Rau in his comments to the aforesaid draft discussed by the Sub Committee stated that 'the first paragraph of Clause 13 is adopted from the Australian Constitution (Sec. 92) while the proviso was ne\\1. Further, Sir Alladi Krishnaswami Iyer in his comments on Draft D Report of 10'", 14"'& 15'" April, 1947, in relation to Clause 13 suggested that it must be made clear that :

'( l) Goods from other parts of India than in the units' E concerned coming into the units cannot escape duties and taxes to which the goods produced in the units in themselves are subject. (2) lt must also be open to the unit in an emergency to place restrictions on the rights declared by the clause"'' F

8.5 The suggestions of Sir. Alladi Krishnaswami Iyer were accepted and the Clause was accordingly modified and incorporated as Clause 14 as below:

G 14. (1) Subject to regulation by the law of the Union trade, commerce and intercourse among the units by and between the citizens shall be free:

"'B. Shiva Rao. Framing. of India's Constitution. A Study (2"' Ed.), p. 699 to 707 "fbid .. p. 157-161 H

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Provided that any unit may by law impose reasonable restrictions in the interest of public order, morality or health or in an emergency: Provided that nothing in this Section shall prevent any unit from imposing on goods imported from other units the same duties and taxes to which the goods produced in the unit are subject: Provided further that no preference shall be given by any regulation of commerce or revenue by unit to one unit over another. 72 c 8.6 It may be relevant to note that while imposing reasonable restriction in the first Proviso, the imposition of non-discriminatory tax was· in the second Proviso. The third Proviso was a pre-cursor of Article 303. On 21.04.1947, the aforesaid Clause 14 came up for D consideration of the Advisory Committee. Explaining the purpose of enabling a State to impose reasonable restr·iction in the interest of public order, morality, health or in emergency, Sir Alladi Krishnaswamy Iyer said:

E 'Suppose there is a general famine and people are starved that is what is meant here to be dealt with' The advisory Committee accepted the recommendation of the Sub-Committee in relation to Clause 14 with 'one change; the sub-clause providing for central regulation of F trade by or with non-citizens was dropped as being vague and unnecessary. 73 8.⁷ The Advisory Committee submitted its report on 23.04.1947 wherein Clause 10 provided as under: G

'10. Subject to regulation by the law of the Union, trade, commerce and intercourse among the units by and between "Ibid. 73 Ibid., p. 253 H

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A the citizens shall be free: Provided that any unit may by law impose reasonable restrictions in the interest of public order, morality or health or in any emergency: Provided that nothing in this section shall prevent any unit B from imposing on goods imported from other units the same duties and taxes to which the goods produced in the unit are subject: Provided further that no preference shall be given by any regulation of commerce or revenue by a unit to one unit c over the another'. 74

8.8 On 01.05.1947 certain amendments were suggested which were adopted by the Constituent Assembly. Clause 10, as amended, D reads as follows:

'10. Subject to regulation by the law of the Union, trade, commerce, and intercourse among the units by and between the citizens shall be free: E Provided that any unit may by law impose reasonable restrictions in the interest of public order, morality or health or m any emergency: Provided that nothing in this section shall prevent any unit f from imposing on goods imported from other units the same duties and taxes to which the goods produced in the unit are subject: Provided further that no preference shall be given by any regulation of commerce or revenue by a unit to one unit G over another.

8. 9 In the first Draft Constitution of October, 194 7, Clause 17 reads as follows: " Ibid., P. 297 H

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'17. Subject to the provisions of any Federal Law, trade, A commerce and intercourse among the units shall, if between the citizens of the federation, be free: Provided that nothing in this section shall prevent ny unit from imposing goods imported from other unit from imposing goods imported from other units any tax to which similar B .goods manufactured or produced in that unit are subject, so, however, as not to discriminate between goods so imported and goods so manufactured or produced: Provided further that no preference shall be given by any regulation of trade, commerce or revenue to one unit over c another: Provided also that nothing in this section shall preclude the Federal Parliament from imposing by Act restrictions on the freedom of trade, commerce and intercourse among the units in the interests of public order, morality or health or in cases of emergency'. 75

8.10 On 01.11.1947, the Drafting Committee considered Clause 17 and was of the opinion that 'the first and second provisos to this clause should be transfeJTed as independent clauses in the chapter dealing with relations between the different States and the third proviso was unnecessary. 76

8.11 On 28.¹.1948, the Drafting Committee decided to introduce three new clauses, namely Clause 192 E, 192 F & 192 G, relating to trade, commerce and intercourse. Clause 192 E, 192 F and 192 G as introduced by the Drafting Committee on 28.¹.1948, reads as follows:

G 'l 92E. No Preference shall be given by any regulation of trade, commerce or revenue to one State or any part

7; B. Shiva Rao, Framing oflndia's Constitution, Vol. III, p. 9 (2"' Ed.) "Ibid, p. 330 H

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A thereof over another State or any part thereof. 192-F. Notwithstanding anything contained in Article 17 or in the last preceding Article of this Constitution, it shall be lawful for any state- To impose on goods imported from other State any tax to B 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 To impose by law any restrictions on the freedom of trade, c commerce or intercourse with that State in the interests of public order, morality and health or in cases of emergency. *The committee is of opinion that the provisions contained in Articles 192-E and 192-F should more appropriately be included in this Chapter than in Part Ill dealing with fundamental rights. 192-G (1) there shall be an Inter-State Commerce Commission consisting of such members as the president may think fit to appoint for the execution and maintenance within the territory of India of the provisions of this Constitution relating to Trade and Commerce. (2) The term of the office of the members of the commission, and the remuneration to be paid to them shall be such as the President may by Order detennine. F (3) The procedure of the commission shall be defined by the President by the Order and the Commission shall have such powers including the power of adjudication as the President may, from time to time, by Order, confer on it. G (4) It shall be the duty of the Commission to decide any dispute relating to Trade or Commerce between the States referred to it by the President for adjudication and the decision of the Commission shall be final and shall not be questioned in any Court'. H

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On 29.¹.1948, the said clause was further revised and the revised clause reads as follows:

'*192-E. No preference shall be given to nor shall any discrimination be made between one state or any part thereof and another State or any part thereof by ay regulation of trade or commerce, whether by means of internal carriage through roads, railways or rivers or by means of navigation through seas. * 192-F Notwithstanding anything contained in Article 17 or in the last preceding Article of this Constitution, it shall be c lawful for any State- (a) to impose on goods imported from other State any tax to which similar goods manufactured or produced in that State are subject, so, however, as not to discriminate D between goods so imported and goods so manufactured or produced; and (b) To impose by law such reasonable restrictions on the freedom of trade, commerce or intercourse with that State as may be required in the public interests. E *The committee is of opinion that the provisions contained in Articles 192-E and 192-F should more appropriately be included in this Chapter than in Part-III dealing with the fundamental rights. * 192-G. Parliament shall by law appoint such authority as F it considers appropriate for the carrying out of the provisions of Article 192-E and 192-F of this Constitution and confer on the authority so appointed such powers and such duties as it thinks necessary. G In the Draft Constitution of 1948, Clause 16 was incorporated in the Fundamental rights Chapter which reads as under:

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A '16. Subject to the provisions of Article 244 of this Constitution and of any law made by the Parliament, trade; commerce and intercourse throughout the ten'itory of India shall be free.

B Inter-State trade and Commerce was dealt with in Article 243, Article 244 and Article 245 which reads as below:

'*243. No preference shall be given to one State over c another nor shall any discrimination be made between one state and another by any law or regulation relating to trade or commerce, whether carried by land, water or air. *244. Notwithstanding anything contained in Article 16 or in the last preceding Article of this Constitution, it shall be lawful for any State- ( a) to impose on goods impmted from other States 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) To impose by land such reasonable restrictions on the freedom of trade, commerce or intercourse with that State as may be required in public interests: Provided that during a period of five years from the commencement of this Constitution the provisions of Clause (b) of this Article shall not apply to trade or commerce in any of the Commodities mentioned in Clause (a) of Article 306 of this Constitution.

245. Parliament shall by law appoint such authority as it considers appropriate for the carrying out of the provisions of Articles 243 and 244 of this Constitution and confer on the authority so appointed such powers and such duties as it thinks necessary. 77 77 Ibid., p. 453 to 454 H

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8.12 In the comments and suggestions to the Draft Constitution A of February, 1948, the note to the comment of the Ministry of Industry and Supply is relevant. The Ministry of Industry and Supply has expressed the view that Clause (b) of Article 244 is open to serious objection on principle and should be deleted altogether. The Ministry has pointed out that it is not possible to foresee the circumstances in which B the freedom of trade, commerce or intercourse with a State will need to be interfered with by the State in the Public interest, unless it be on the basis of discrimination between the residents of one State and another, and this would be wholly contrary to the spirit of the Constitution. 78 c 8.13 On 08.09.1949, Hon'ble Dr. Ambedkar moved for the deletion of these Articles and the motion was adopted by the Constituent Assembly without any opposition. The substance of these Articles was however, embodied in another amendment moved by Hon'ble Dr. Ambedkar inunediately thereafter on the same day. All these Articles were added in Part XA. The events at the stage of drafting the D Constitution, especially Pru¹ XIII would show the following which I may summarize at the cost of repetition:

First, initially the right to free trade was a Fundamental Right, E but it was not accepted by the Advisory Committee and not even moved in the Constituent Assembly for adoption. Second, though the precursor clause to Article 304 underwent repeated changes before the Advisory Committee and the Drafting Committee, never it was suggested that freedom of trade was meant to be freedom from payment of taxes. Third, the power offederal unit to levy tax on the goods imported from other units was specifically adumbrated to dispel any doubt about taxing power of the State. The logical conclusion is that the power of the State to levy any tax on goods imported is specifically saved and declared in the final clause, therefore it would be impennissible to test a law imposing entry tax with reference to Article 304(b).

"B. Shiva Rao, The Framing of India's Constitution, Vol. IV, pg. 329 H

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A Fourth, taxes were never intended to be a restriction on freedom of trade.

8.14 Another important question which needs to be answered as a part of this reference is whether State enactments relating to levy of B entry tax have to be tested with reference to both clauses (a) and (b) of Article 304 or only with reference to clause (a) of Article 304 of the Constitution? In other words is Clause (a) and (b) of Article 304 is conjunctive or disjunctive? The answer must be that the history, the context and the plain words indicate that Article 304 (a) and (b) are c disjunctive in nature. A levy of tax need not be tested with reference to Article 304 (b) of the Constitution. Following are the reasons for reading Article 304 (a) and (b) of the Indian Constitution disjunctively.

First, the legislative history and the intention of the framers as elucidated above clearly point out that taxes were never treated as restrictions in the first place. Secondly, Article 304(a) does not bar or limit State power to levy non-discriminatory taxes on the goods imported from other States. What is restricted is levy of discriminatory tax only, so to say, similar goods manufactured or produced in that State are also subjected to tax, so as not to discriminate between the goods imported and goods manufactured or produced in the State. Thirdly, the two clauses of Article 304 are connected by the word F 'and'. Sub-clause (a) puts a restriction on the State to not impose a discriminatory tax, whereas sub-clause (b) deals with other restrictions relating to trade, commerce and intercourse. Fourthly, Article 304 (a) and (b), on a careful reading would show that Article 304 (a) and (b) are disjunctive. This is made clear G by the proviso, which is to the effect that a Bill for the purpose of Article 304 (b) can be moved by the Legislature of the States, only by the previous sanction of the President. If Clauses (a) and (b) are not disjunctive, then the language of the proviso would have been certainly different and the Bill for the purpose for Clause (a) would have been mentioned. Conspicuous absence of H

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reference to 304(a) in the proviso would certainly lend support A to the view that Clause (a) and (b) of Article 304 are distinct and disjunctive. The proviso, it is well settled, is intended to explain the main operating part of the Article. It is never used or interpreted as expanding the operative part of the provision. Fifthly, if one reads Clauses (a) and (b) of Article 304 B conjunctively, then it would not subserve the federal nature of the Constitution which is a basic structure.

8.15 I will now deal with the purport and scope of the word "discrimination" used in Article 304(a) by making some general c observations. Article 304(a) should be interpreted keeping in mind the balanced development of the country, which is an important part of economic integration. To achieve the economic unity of the country, allowing trade and commerce without imposing taxes is not the only solution but it can also be achieved by bringing in overall prosperity. Part D XIII of the Constituti0n permits some forms of differentiation, for example, to encourage a backward region or to create a level playing field for parts of the Country that may not have reached the desired level of economic development. Therefore, Part Xlll envisions a twofold object: (i) facilitation of a common market through ease of trade, E commerce and intercourse by erasing barriers; and (ii) regulations (or restrictions) which may be necessary for development of backward regions or in public interest. A brief reference to the Constituent Assembly debates would amply demonstrate the same. Hon'ble Member Shri P. S. Deshmukh said: F

'How pompously did we decide that there shall be "free trade" everywhere! It is not such an easy thing as that and [ hope advancement and progress of the various units of the Union varies considerably. Some of them are backward G like Assam or Orissa where there are very few industries and very little trade is in the hands, at least of the indigenous population. We may have probably to give them some protection in order that they mav rapidlv come on par with other units. It may be necessary also from time H

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A to time to varv our provisions so far as aid and concessions to industries and other things are concerned. I therefore do not think that is right to bar all discrimination, as it is called (in fact it is not),barring all possibility of help to those who are B backward and who are unabk to compete with the more advanced, and who therefore stand in need of assistance. From that point of view, my amendment seeks to give Parliament a blank cheque and leave to it entirely the determination of the policy with regard to trade and commerce not only of the whole Union or in regard to any c particular State or States, but so far as all States and their trade and commerce inter se is concerned. Therefore, 1 have proposed a very simple provision as has been embodied in my amendment No. 340'. (emphasis supplied) D

Sir Alladi Krishnaswami lyer stated: 'My friend Mr. Krishnamachari has pointed out that this freedom clause in the Australian Constitution has given rise to considerable trouble and to conflicting decisions of the highest Court. There has been a foeling in those paiis of Australia which depend for their well-being on agricultural conditions that their interests are being sacrificed to manufacturing regions, and there has been rivalry between manufacturing and agricultural interests. Therefore, in a federation what you have to do is. first, you will have to take into account the larger interests of India and permit freedom of trade and intercourse as far as possible. Secondly, you cannot ignore altogether regional interests. Thirdly, there must be the power intervention of the Centre G in any case of crisis to deal with peculiar problems that might arise in any part of India. All these three factors are taken into account in the scheme that has been placed before you'.