M/s U.P. Asbestos Limited v. State of Rajasthan & Others

M/s U.P. Asbestos Limited v. State of Rajasthan & Others

absolute but is subject to the provisions of Part XIII. 76.2. Article 302 which appears in Part XIII empowers Parliament to impose restrictions on trade, commerce and intercourse in public interest. 76.3. The restrictions which Parliament may impose in terms of Article 302 cannot however give any preference to one State over another by virtue of any entry relating to trade and commerce in any of the Lists in the Seventh Schedule. 76.4. The restriction that Parliament may impose in terms of Article 302 may extend to giving of preference or permitting discrimination between one State over another only if Parliament by law declares that a situation arising out of scarcity of goods warrants such discrimination or preference. 76.5. Article 304(a) recognises the availability of the power to impose taxes on goods imported from other States, the legislative power to do so being found in Articles 245 and 246 of the Constitution. 76.6. Such power to levy taxes is however subject to the condition that similar goods manufactured or produced in the State levying the tax are also subjected to tax and that there is no discrimination on that account between goods so imported and goods so manufactured or produced. 76.7. The limitation on the power to levy taxes is entirely covered by clause (a) of Article 304 which exhausts the universe insofar as the State Legislature’s power to levy of taxes is concerned.

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76.8. Resultantly, a discriminatory tax on the import of goods from other States alone will work as an impediment on free trade, commerce and intercourse within the meaning of Article 301. 76.9. Reasonable restrictions in public interest referred to in clause (b) of Article 304 do not comprehend levy of taxes as a restriction especially when taxes are presumed to be both reasonable and in public interest.” 10.12.7 Thus, it was held that Article 304(b) of the Constitution does not deal with taxes as restrictions. That those restrictions referred to in that provision are non- fiscal in nature. Therefore, any constitutional validity of any taxing statute has to be tested only on the anvil of Article 304(a) and if the law is found to be non-discriminatory, it can be declared to be constitutionally valid without the legislation having to go through the test of the process envisaged by Article 304(b). Should, however, the statute fail the test of non-discrimination under Article 304(a), it must be struck down for the same cannot be sustained even if it had gone through the process stipulated by Article 304(b). This is because what is constitutionally impermissible in terms of Article 304(a) cannot be validated and sanctioned through the medium of Article 304(b). Any challenge to a fiscal enactment on the touchstone of Article 304(a) must be tested by the same standard as in the decision of this Court in Kathi Raning Rawat vs. State of Saurashtra, AIR 1952 SC 123. The Court ought to examine whether the differentiation made is intended or inspired by an element of unfavourable bias in favour of the goods produced or manufactured in the State as against those imported from outside. If the answer be in the affirmative, the differentiation would fall foul of Article 304(a) and may tantamount to discrimination. Conversely, if the

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Court were to find that there is no such element of intentional bias favouring the locally produced goods as against those from outside, it must go further and see whether the differentiation would be supported by valid reasons. This is because discrimination without reason would be unconstitutional whereas discrimination with reason may be legally acceptable. 10.12.8 Regarding the decision in Video Electronics, it was observed that the differentiation made was supported by reasons. It was observed that power to grant exemption is a part of the sovereign power to levy taxes which cannot be taken away from the States that are otherwise competent to impose taxes and duties. It was further observed that Video Electronics, therefore, correctly states the legal position as regards the approach to be adopted by the courts while examining the validity of levies. So long as the differentiation made by the States is not intended to create an unfavourable bias and so long as the differentiation is intended to benefit a distinct class of industries and the life of the benefit is limited in terms of period, the benefit must be held to flow from a legitimate desire to promote industries within its territory. In this context, Shree Mahavir Oil Mills was held distinguishable inasmuch as the manufacturers of edible oil therein were exempt totally and unconditionally while other manufacturers from outside the State were not so exempt. Referring to several other decisions, in paragraph 144 of the judgment, it was observed that so long as the intention behind the grant of exemption/adjustment/credit is to equalise the fall of the fiscal burden on the goods from within the State and those from outside the State, such exemption or setoff will not amount to hostile discrimination offensive to Article 304(a). 10.12.9 Bobde, J. (as he then was) concurred with Thakur, C.J. and SK Singh, J. and observed that to muster compliance with Part XIII of the Constitution, the

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tax must pass the twin tests embodied in Article 304(a) i.e., (i) similar goods produced locally must also be subjected to similar tax; and (ii) such State action should not attract the vice of discrimination between the two varieties of goods. 10.12.10 In paragraph 262 of the judgment, Ramana, J. (as he then was) observed that the object is to prevent discrimination against imported goods by imposing tax on such goods at a rate higher than that borne by local goods since the difference between the two rates would constitute a tariff wall or fiscal barrier and thus impede the free flow of inter-State trade and commerce. It does not prohibit levy of tax as such in the situation wherein the goods are not produced or manufactured in the State itself and does not affect the authority of the State to tax the imported goods. It only bars discrimination on the basis of taxing the products manufactured within the State vis-à-vis imported goods which will only occur if the precondition of manufacturing in the taxing State is satisfied. 10.12.11 Banumathi, J. while agreeing with Thakur, C.J. observed that decisions in Atiabari Tea Co. Ltd. and Automobile Transport Ltd. to the extent they declare that taxes generally are restrictions on the freedom of trade, commerce and intercourse ought to be overruled. Further, non-discriminatory taxes do not constitute infraction of Article 301 of the Constitution. The law laid down in Video Electronics was also endorsed. 10.12.12 By contrast, Dr. Chandrachud, J. (as he then was), firstly stated that a discriminatory tax is prohibited under Article 304(a) in the context of exemptions and incentives as held in the judgments of this Court in Video Electronics and Shree Mahavir Oil Mills. It was observed that in Video Electronics, this Court considered the validity of the notifications issued under the Uttar Pradesh Sales Tax Act,

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1948, as well as under the Punjab General Sales Tax Act. Under the notification issued under the Uttar Pradesh legislation, an exemption from the payment of sales tax was granted for goods manufactured in new industrial units, where the date of commencement of production fell between two stipulated dates. The exemption was for a stipulated period reckoned from the date of first sale if such sale took place not later than six months from the commencement of production. The period of exemption was confined for a specified period of three to seven years. Insofar as the State of Punjab was concerned, sales tax at the rate of 12% was provided on electronic goods sold within the State irrespective of their manufacture. In pursuance of a notification issued under the Sales Tax law, the rate of sales tax payable by electronic manufacturing units producing goods specified thereunder was brought down from 12% to 1%. This was justified on the ground that it was an incentive to a backward industrial State. A Bench of three learned Judges in Video Electronics observed that this was not a case involving “a naked blanket preference in favour of locally manufactured goods, as against goods coming from outside the State”. This Court therefore held that there was no discrimination under both the notifications against goods manufactured outside the State. In Video Electronics, this Court distinguished the judgment in Weston Electronics. Dr. Chandrachud, J. (as he then was) observed that the substratum of the judgment in Video Electronics clearly is that Article 304(a) would not be breached by a classification brought about by a carefully structured notification which grants incentives to local industry of a specified class of units, with reference to a specific category of manufactured goods and for a stipulated period. The judgment in Video Electronics was distinguished on the ground that in that case, the notifications

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of the States of Uttar Pradesh and Punjab were carefully circumscribed. 10.12.13 Referring to paragraphs 22 and 23 of the judgment of this Court in Shree Mahavir Oil Mills, Dr. Chandrachud, J. (as he then was) observed that “the Court cautioned that a limited exception which had been carved out in Video Electronics should not be enlarged “lest it eat up the main provision””. An unconditional exemption in the case of edible oil produced within the State from sales tax while subjecting similar goods produced in other States to sales tax at 8% was held to violate Article 304(a) of the Constitution. In Shree Mahavir Oil Mills, an exemption from the payment of sales tax altogether granted to local industry was set aside as violating Article 304(a). The earlier decision in Video Electronics was distinguished on the ground that it related to a case not involving a blanket preference. In this regard, in paragraph 693, Dr. Chandrachud, J. (as he then was) observed as under: “693. A close reading of the judgment in Video Electronics would thus indicate that both sets of notifications involving the States of Uttar Pradesh and Punjab were carefully structured to cover one or more of the following circumstances: (i) Availability of a reduced rate of sales tax to new industrial units; (ii) Applicability of a reduced rate of sales tax to producers of certain specified goods, such as electronic goods; (iii) Limitation of the period during which the reduced rate of tax could operate; and (iv) Applicability of the general rate of sales tax to an overwhelmingly large

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number of local manufacturers, on a par with imported goods.” 10.12.14 Thus, Dr. Chandrachud J. (as he then was) opined that the judgment in Shree Mahavir Oil Mills left open the correctness of the view in Video Electronics. Shree Mahavir Oil Mills is a judgment rendered by a two-Judge Bench comprising B.P. Jeevan Reddy, J. and S.C. Sen, J. while Video Electronics was a judgment of three Judges of this Court. The decision in Video Electronics was distinguished on the ground that it related to a case not involving a blanket preference. 10.12.15 Ashok Bhushan, J. in his dissenting opinion but concurring on some issues, speaking about the three-Judge Bench decision of this Court in Video Electronics, observed that the exemption therein was upheld as it was granted to a special class for limited period on specific conditions of maintaining the general rate of tax on the goods manufactured by all those producers in the State who do not fall within that category. That Video Electronics, however, further states that if tax is imposed in a colourable manner, intentionally or purposely to create unfavourable bias by prescribing a general lower rate on locally manufactured goods either in the shape of general exemption to locally manufactured goods or in the shape of lower rate of tax, such an exercise of power can always be struck down by the courts. However, in Shree Mahavir Oil Mills, it was observed that exception carved out in Video Electronics cannot be widened or expanded to cover cases of a different kind. That in Video Electronics, the exemption notification was upheld because it was limited to a specified type with short period. Therefore, even in Video Electronics, general exemption of a wider nature was not approved. In other words, the exemption cannot be used as a measure of discrimination between goods imported

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from other States and goods manufactured or produced in the State. The exemption has to be a limited exemption to the tax which is imposed on the similar goods. In the event such exemption is total and general in nature, the said exemption is clearly violative of Article 304(a). Similarly, set-off of a particular tax which is general and not limited to specified category has also to be disapproved. Therefore, Ashok Bhushan, J. held that the ratio of the three-Judge Bench judgment in Video Electronics has to be read to the above extent and with the limitation as noticed above. Hence, the State Legislature in exercise of its taxing power can grant exemption/set-off to local goods, only to a limited extent based on intelligible differentia which is not in the nature of general/unspecified exemption. The exemption/set-off which tend to become a general exemption violates Article 304(a) of the Constitution.

Discussion from Overseas Case Law:

11. At this instance, it is relevant to discuss a similar provision in Section 51(ii) and Section 92 of the Commonwealth of Australia Constitution Act, 1900, also known as the Australian Constitution. Sections 51(ii) and 92 provide as follows: “51. Legislative powers of the Parliament The Parliament shall, subject to tis Constitution, have power to make laws for the peace, order, and good government of the Commonwealth with respect to: xxx (ii) taxation; but so as not to discriminate between States or parts of States; xxx

92. Trade within the Commonwealth to be free On the imposition of uniform duties of customs, trade, commerce, and intercourse among the States, whether

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by means of internal carriage or ocean navigation, shall be absolutely free.” (emphasis supplied)

11.1 A bare reading of the above provision would instantly draw our attention to Articles 301 and 304 of our Constitution. 11.2 It appears that the interpretation of Section 92 of the Australian Constitution, specifically as to ‘what should the imposition be free from?’, has been a subject matter of conflicting opinions. It was the decision of the High Court of Australia in Cole vs. Whitfield, (1988) HCA 18 that clarified its scope. The High Court of Australia, through a unanimous opinion, and relying on Australian federal movement, held that section 92 of the Australian Constitution prohibits measures that discriminate against interstate trade and commerce with the purpose or effect of protecting intrastate trade or industry against competition from other States. 11.3 The High Court specifically held: “25. The task which has confronted the Court is to construe the unexpressed; to formulate in legal propositions, so far as the text of s.92 admits, the criteria for distinguishing between the burdens (including restrictions, controls and standards) to which inter-State trade and commerce may be subjected by the exercise of legislative or executive power and the burdens from which inter-State trade and commerce is immune. The history of s.92 points to the elimination of protection as the object of s.92 in its application to trade and commerce. The means by which that object is achieved is the prohibition of measures which burden inter-State trade and commerce and which also have the effect of conferring protection on intra-State trade and commerce of the same kind. The general hallmark of measures which contravene s.92 in this way is their effect as discriminatory against inter-State trade and commerce in that protectionist sense. xxx

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26. In relation to both fiscal and non-fiscal measures, history and context alike favour the approach that the freedom guaranteed to inter-State trade and commerce under s.92 is freedom from discriminatory burdens in the protectionist sense already mentioned.” 11.4 The High Court further explained that the concept of discrimination, so far as it relates to inter-State trade and commerce, embraces both factual as well as legal discrimination. By factual, the Court meant the operation of a law producing a disability or a disadvantage, and by legal, the Court meant the provisions, on the face of it. The Court however noted that the section accommodates laws that genuinely regulate intra-State and inter-State trade in a non- protective manner. 11.5 Finally, the Court concluded that a general law enacted under Section 51(i) of their Constitution may offend Section 92 if its effect is discriminatory and the discrimination is upon protectionist grounds. That whether such a law is discriminatory in effect and whether the discrimination is of a protectionist character are questions raising issues of fact and degree. That such answer to those questions may, in the ultimate, depend upon judicial determination. 11.6 While we are aware of the dangers involved in importing an interpretation from a judgment of a foreign jurisdiction, it is relevant to note from Australian jurisprudence that when the Court therein was called upon to interpret Section 92 of their Constitution, specifically to answer what should the imposition of uniform duties of customs, trade, commerce, and intercourse among their States be free from, the Court answered that they should be free from discrimination of a protectionist character. Their emphasis on the protectionist nature is of relevance to us, for the insertion of Part XIII in our Constitution was also to prevent the growth of sectional and local interests which are inimical to the interests of the nation as a whole.

Application of the Analysis to the Present Case:

12. On a perusal of the facts of the present cases and the judicial dicta relating to Articles 301 and 304(a) of the Constitution of India, we

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find that the issue herein could be decided by determining if the impugned notification falls within the parameters of the exception provided for in Video Electronics. In other words, if the impugned notification could be justified as falling within the parameters of the dictum in Video Electronics, it could be upheld. Otherwise, it would have to be struck down as unconstitutional. Thus, the dictum in Video Electronics has to be juxtaposed with the facts of the present cases as well as in light of other judicial dicta discussed above. 12.1 On a perusal of the judgment of this Court in Jindal Stainless Ltd. as regards Video Electronics, the position of law as to when a tax merely differentiates and not discriminates, appears to be as follows: (i) Clauses (a) and (b) of Article 304 are to be read disjunctively, and hence, a tax cannot be said to merely differentiate only if the procedure under Article 304(b) is satisfied, but not Article 304(a) of the Constitution; (ii) A tax imposed on goods imported from another state would not be discriminatory if no similar goods are produced within that State; (iii) States are at liberty to design their fiscal legislations in such a manner to ensure that the tax burden on goods imported from other States is equal to the tax burden on those goods produced within the State. Therefore, a tax designed to impose equal burdens cannot be said to be discriminatory. However, whether the tax burden falls equally is a question of fact to be determined in each case when the question arises; (iv) Further, a tax rebate or other relief in the form of incentives or set-off which is: ● granted to a specified class of dealers; ● for a limited period of time; ● in a non-hostile fashion; ● with a view to developing economically backward areas; ● would not be held to be discriminatory.

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(v) However, the question whether a tax fulfils the above criteria is a question of fact to be determined depending upon the facts of each case. 12.2 Before applying the aforementioned law to the facts of this case, it is relevant to note that our analysis is not restricted to the impugned notification alone. Rather, it will be looked at in the context of the preceding and succeeding notifications issued by the State of Rajasthan. This is necessary because the impugned notification is merely one of the notifications out of a series of notifications effected to grant tax exemptions to the sale of asbestos cement sheets and bricks having contents of fly ash 25% or more by weight, manufactured in the State of Rajasthan. However, we make it clear that our decision would be restricted to the validity of the impugned notification only. 12.3 Applying the criteria provided for as above, we find that admittedly, the impugned notification restricted the exemption from payment of tax to a specified class of dealers, namely, those who manufactured asbestos cement sheets and bricks having contents of fly ash 25% or more by weight. We also find that, as regards the time period, the impugned notification restricted the exemption to those dealers who commenced commercial production in the State by 31.12.2006 and the exemption was available up to 23.01.2010. 12.4 However, a combined reading of the notifications dated 24.01.2000, 16.03.2005, 05.07.2006 and 28.12.2010 suggests that, initially, the benefit was restricted to dealers who commenced commercial production in the State of Rajasthan by 31.12.2001 and the benefit was upto 23.01.2010. Later, it was extended to those who commenced production by 31.12.2006. While initially the benefit was upto 23.01.2010, by notification dated 28.12.2010, the benefit was made available for ten years from the date of commencement of first commercial production, but with an outer cut-off date of 23.1.2016. There is nothing on record to suggest that the exemption was granted thereafter as well. 12.5 As far as duration is concerned, it can be observed that the maximum benefit a dealer would have obtained under these notifications was ten years. There were no serious arguments

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raised by the appellants herein to the question whether the benefit of a maximum of ten years would qualify as ‘limited period of time’ within the criteria devised in Jindal Stainless Ltd.. Hence, we do not intend to decide on the same. 12.6 As regards the criterion of “with a view to developing economically backward areas”, admittedly, the impugned notification is not restricted to any specific district or a set of districts within the State of Rajasthan. Rather, the notifications provide exemption to any dealer commencing production anywhere in the State. 12.7 However, the criterion of ‘non-hostile fashion’ was fiercely contested by both sides, as noted earlier in the submissions. The expression ‘non-hostile’, as expressed in Jindal Stainless Ltd., relates to discrimination of a hostile nature in the protectionist sense. 12.8 In our view, the contours of such discrimination, in essence, can be reduced to whether there are sufficient reasons to term such discrimination as ‘differentiation’. In State of West Bengal vs. Anwar Ali Sarkar, (1952) 1 SCC 1, this Court noted that the expressions “discriminatory” and “hostile” are found to be used by American Judges often simultaneously in connection with discussions on the equal protection clause. That if a legislation is discriminatory and discriminates one person or class of persons against others similarly situated and denies to the former the privileges that are enjoyed by the latter, it has to be regarded as “hostile” in the sense that it affects injuriously the interests of that person or class. 12.9 Similarly, the opinion of this Court in Twyford Tea Co. Ltd. vs. State of Kerala, (1970) 1 SCC 189 on the meaning of ‘classification without unreasonably discriminating between persons similarly situated’ is relevant to this case. The Court noted then as follows: “18. What is meant by the power to classify without unreasonably discriminating between persons similarly situated, has been stated in several other cases of this Court. The same applies when the Legislature reasonably applies a uniform rate after

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equalising matters between diversely situated persons. Simply stated the law is this: Differences in treatment must be capable of being reasonably explained in the light of the object for which the particular legislation is undertaken. This must be based on some reasonable distinction between the cases differentially treated. When differential treatment is not reasonably explained and justified the treatment is discriminatory. If different subjects are equally treated there must be some basis on which the differences have been equalised otherwise discrimination will be found. To be able to succeed in the charge of discrimination, a person must establish conclusively that persons equally circumstanced have been treated unequally and vice versa.” (underlining by us)

12.10 In Vijay Lakshmi vs. Punjab University, (2003) 8 SCC 440, this Court discussed the earlier judgment in State of J&K vs. Triloki Nath Khosa, (1974) 1 SCC 19 and observed that discrimination is the essence of classification and does violence to the constitutional guarantee of equality only if it rests on an unreasonable basis. 12.11 Further, in Video Electronics, this Court noted that the word ‘discrimination’ is not used in Article 14 but is used in Articles 16, 303 and 304(a). That in the context of Article 304(a), it involves an element of intentional and purposeful differentiation. 12.12 As regards the reasons behind a public authority issuing a notification, this Court in Commissioner of Police vs. Gordhandas Bhanji, AIR 1952 SC 16 noted that: “We are clear that public orders, publicly made, in exercise of a statutory authority cannot be construed in the light of explanations subsequently given by the officer making the order of what he meant, or of what was in his mind, or what he intended to do. Public orders made by public authorities are meant

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to have public effect and are intended to affect the actings and conduct of those to whom they are addressed and must be construed objectively with reference to the language used in the order itself.” (underlining by us)

12.13 Similarly, as submitted by learned counsel for the appellants, the Constitution Bench of this Court in Mohinder Singh Gill observed that any order passed by any public authority exercising administrative/executive or statutory powers must be judged by the reasons so mentioned in that order and cannot be supplemented by fresh reasons in the shape of an affidavit or otherwise. 12.14 A perusal of the impugned notification dated 09.03.2007 would suggest that the reason stated by the State Government to exempt from payment of tax was simply that “it was expedient in the public interest so to do”. The notification states no further reason for issuing the impugned notification. The exemption from payment of tax on the sale of asbestos sheets and bricks subject to the following conditions: (i) That the asbestos sheets and bricks are manufactured in the State of Rajasthan; and (ii) They have 25% content of fly ash or more by weight. Further, the following condition would apply, namely – (i) that the goods shall be entered in the registration certificate of the selling dealer. (ii) that the exemption shall be for such goods manufactured by the dealer who commenced commercial production in the State by 31.12.2006; and (iii) that the exemption shall be available up to 23.01.2010. Therefore, with respect to the goods manufactured by the dealer who commenced commercial production in the State before 31.12.2006 the exemption was upto 21.03.2010. Thereafter, by subsequent notification, the benefit was extended upto 23.01.2016.

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12.15 There is also nothing on record to suggest that the notification was issued pursuant to, say, an industrial policy or otherwise. During the course of submissions, we had asked the learned senior counsel for the respondent State if there are any policies of the State as regards setting up of asbestos sheet or cement industry, pursuant to which the notifications were issued, the learned senior counsel could not take us to any such background policy, but submitted that the reasons for the notification can be discerned from the counter affidavit filed before the High Court. In light of the dictum of this Court in Mohinder Singh Gill, we are not able to accept the contention of the learned senior counsel for the State of Rajasthan that the reasons for the notification can be discerned from the counter affidavit filed before the High Court. 12.16 Keeping aside the dictum in Mohinder Singh Gill, even otherwise, the counter affidavit filed before the High Court attempts to provide reasons as to why the notification dated 24.01.2000 was issued. The reason stated was to promote the use of fly ash as a raw material from the production of asbestos cement sheets and bricks with the intention of utilization of fly ash coming out of thermal power plant and to promote the production of asbestos cement sheets for which there was no manufacturing plant in Rajasthan. There is no other reason stated for why the impugned notification is issued. Admittedly, the impugned notification can be said to be a continuation of the earlier notifications, including the notification dated 24.01.2000. However, there are no reasons stated even in the counter-affidavit as to why the benefit was extended to those who commenced production beyond 31.12.2001 through the impugned notification. The State ought to have explained, for e.g., the effect of the earlier notifications, the inadequacy, if any, of the notification in fulfilling the intended objectives, if any, and the consequent need for issuing the subsequent notification. 12.17 In the absence of any such explanation, we cannot, but conclude, that the impugned notification is bereft of any reason or justification. The High Court in the impugned judgment relied upon the reasoning in Video Electronics to arrive at the conclusion that the stand of the State of Rajasthan was

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supported by the reasoning in the aforesaid case. While acknowledging that in Shree Mahavir Oil Mills, this Court had explained and distinguished the dictum in Video Electronics wherein the exemption was granted to new industries for a specified period, the High Court in our view, fell in error in holding that the present case also falls in the exceptional category covered by the case of Video Electronics. We observe that the said finding is incorrect inasmuch as the exemption was not granted to new industries and neither was it given for a limited period of time. The exemption was granted initially upto 23.01.2010 and later extended upto 23.01.2016. The exemption was granted to those asbestos sheet and bricks manufacturers in the State of Rajasthan utilizing fly ash as its main raw material on the conditions namely, (i) that such fly ash constituted 25% or more in the contents by weight; and (ii) that the unit commenced commercial production by 31.12.2001. 12.17.1 The first condition is an ingredient specific criterion. This would mean that any asbestos sheet product containing 25% fly ash manufactured outside the State of Rajasthan and sold in the said State would not have the benefit of the exemption. This would mean that the source of fly ash is not really the basis for the exemption. The asbestos products could be manufactured in the State of Rajasthan with fly ash obtained from outside the State and sold within the State. If the object of the exemption was to utilise the fly ash available in the State of Rajasthan itself, it should have been so spelt out in the impugned notification. Otherwise, we find a discrimination between asbestos products manufactured in the State of Rajasthan and manufactured outside, having content of fly ash to an extent of 25% when sold in the State of Rajasthan. On the other hand, if the notification had prescribed a condition that fly ash sourced from State of Rajasthan and products sold in the State, irrespective of their place of manufacture would have the benefit such exemption, there would not have been any discrimination

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between products manufactured outside the State of Rajasthan sold within the said State and those manufactured within the State, both having the benefit of exemption as both categories of products would have utilised fly ash available in the State of Rajasthan. This approach would have also met the objective of utilising the available fly ash in the State of Rajasthan. But, that is not so in the present case. Hence, we have no hesitation in holding that the impugned notification violates Article 304(a) of the Constitution as it is discriminatory in nature. 12.17.2 The impugned notification initially was to remain operative upto 23.01.2010 only. The time for commencement of commercial production was extended from time to time and by the notification issued on 16.03.2005, the State Government extended the commencement of production by 31.12.2006. It was submitted that the notification dated 09.03.2007 impugned in the writ petition before the High Court came to be issued by the State Government after coming into force of the Rajasthan VAT Act so as to continue with the discriminatory exemption. 12.18 On a survey of the judicial dicta of this Court, what emerges is that in Atiabari Tea Co. Ltd., the object and purpose of Part XIII of the Constitution of India and particularly Article 301 was considered and it was observed that while determining the width and amplitude of the freedom guaranteed by the said Article, a rational and workable test should be applied and only if the restrictions impede free flow of trade, it would be barred. Otherwise, taxes imposed on goods would not by themselves impede trade and commerce in the said case, the Assam Act was held to be void as it had not complied with Article 304(b) of the Constitution. While interpreting Article 304(a), it was observed that the State Legislatures have the power to impose tax on the import of goods to which similar goods manufactured or produced in the State are subject, provided that by taxing the goods imported from another State or Union Territory, no discrimination is practised.

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12.18.1 Automobile Transport Ltd. also concerned Article 304(b) of the Constitution. It was observed that a tax to become a prohibited tax, has to be a direct tax, the effect of which is to hinder the movement of trade. So long as a tax remains compensatory or regulatory, it cannot operate as a hindrance. Taxation which impedes trade and commerce cannot be upheld on the ground that they are regulatory. A regulation of trade and commerce, on the other hand, may achieve some public purpose which affects trade and commerce incidentally but not impairing the freedom. In the said case, it was observed that the tax offended Article 301 of the Constitution since resort to the procedure prescribed by Article 304(b) was not taken. 12.18.2 In Firm Mehtab Majid, referring to the aforesaid decisions, it was held that sales tax which has the effect of discriminating between goods of one State and goods of another State may affect the free flow of trade which offends Article 301 and will be valid if it comes within the terms of Article 304(a). Thus, Article 304(a) enables the Legislature of a State to make laws by imposition of taxes on goods from other States if similar goods in the State are also subjected to similar taxes, so as not to discriminate between the goods manufactured or produced in that State and the goods which are imported from other States. In the said case, the writ petition was allowed as the sales tax was held to be discriminatory in nature and the State was directed to refund the tax illegally collected from the petitioner therein. 12.18.3 Similarly, in Weston Electronics, the reduction on the rate of sales tax on television sets manufactured within the State to 1% whereas television sets imported from outside the State of Gujarat being at 10% was held to be discriminatory in nature and therefore, struck down.

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12.18.4 The judgment in Video Electronics by a three- Judge Bench of this Court is a watershed in the line of precedent on the interpretation of Chapter XIII of the Constitution. In this case, the imposition of differential rate of tax on sales of the commodity imported from outside the State as compared to the same commodity manufactured within the State and sold in the State was upheld as being not discriminatory in nature. It was observed that the expression “discrimination” in Article 304(a) of the Constitution involves an element of intentional and purposeful discrimination thereby creating an economic barrier and involves an element of unfavourable bias. Insofar as the State of Punjab was concerned, it was reasoned that the lower rate of tax on those electronic goods manufactured in the State of Punjab was due to the prevailing peculiar circumstances in the said case, namely, terrorist activity. In order to attract new entrepreneurs from other States and to encourage manufacturers within the State of Punjab, incentives were provided for growth of industry in the State of Punjab which had already shifted to other States, therefore, the concessional rate of tax introduced for goods manufactured within the State of Punjab was held to be non-discriminatory. The aforesaid reasoning was given having regard to the situation then prevailing in the State of Punjab as it was observed that a disturbed State cannot with parity engage in competition with advanced or developed States. Therefore, the differential rate of taxation was upheld in the said case. The emphasis was on goods manufactured in the State having a concessional rate of tax irrespective of who manufactured the goods. The object was to attract industrial activity in the State as it was passing through a difficult phase and hence the need for a focus on economic development. Such a reason is conspicuous by its absence in the present case.

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12.18.5 On the other hand in Shree Mahavir Oil Mills, it was observed that under Article 304(a), a State Legislature may tax goods imported from other States or Union Territories but in the process ought not to discriminate against them vis-à-vis goods manufactured locally. Therefore, there cannot be tax barriers or fiscal barriers in the interest of free trade, commerce and intercourse throughout the territory of India guaranteed by Article 301. Thus, the weapon of taxation cannot be used to discriminate against the imported goods vis-à-vis the locally manufactured goods. 12.18.6 Referring to Video Electronics, on which strong reliance was placed by State of Jammu and Kashmir in the aforesaid case, this Court made a distinction by observing that the said judgment created a limited exception and that it was not possible to go on extending the limited exception created in the said judgment, by stages which would have the effect of robbing the salutary principle underlying Part XIII of its substance. That States can also encourage growth of industries by all such means that are just and proper provided goods imported from other States are not discriminated against by a higher rate of sales tax being imposed. That the limited exception carved out in Video Electronics cannot be enlarged, “lest it would eat up the main provision”. Placing reliance on Firm Mehtab Majid, this Court ruled in favour of the petitioners therein. Loharn Steel Industries Ltd., Laxmi Paper Mart have followed Shree Mahavir Oil Mills. 12.18.7 In Jaiprakash Associates, while considering the question whether rebate is within the realm of tax defined under Article 304(a) so as to say that it discriminates between the two classes of goods, namely, locally manufactured goods and imported goods when both the classes of dealers meet the condition required to qualify for the grant of rebate i.e., use of fly ash, this Court noted that the overall

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effect or impact of such rebate would be on the manufacturer. Consequently, this Court held that “rebate of tax granted by the State Government to cement manufacturing units using fly ash as raw material in a unit established in the districts of the State of Uttar Pradesh alone was violative of the provisions contained in Articles 301 and 304(a) of the Constitution of India.” This judgment squarely applies to the present cases. 12.18.8 While analysing Article 304(a) of the Constitution, the majority in the nine-Judge Bench in Jindal Stainless Ltd. identified two restrictions under Article 304(a) of the Constitution which are in the use of the expressions “to which similar goods manufactured or produced in that State are subject” and “so, however, as not to discriminate between goods so imported and goods so manufactured or produced”. Therefore levy of taxes on goods imported from other States is constitutionally permissible so long as the State Legislature abides by the limitations placed on the exercise of that power. Thus, levy of taxes on import of goods from other States by itself, is not an impediment under the scheme of Part XIII of the Constitution. 12.18.9 With regard to Video Electronics, it was opined that so long as the differentiation is to benefit a distinct class of industries and not intended to create an unfavourable bias and if the differentiation is for a limited period, then, the benefit must be held to flow from a legitimate desire to promote industries within its territory. It was also held that Shree Mahavir Oil Mills was also distinguishable from Video Electronics. This was because the exemption for locally manufacturers of edible oil was discriminatory vis-à-vis other manufacturers from outside the State who had no benefit of the said exemption. 12.19 Applying the aforesaid dicta to the present cases, we find that the notification impugned in these cases are hit by the

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judgments referred to above and the judgment in Video Electronics being an exception having regard to the peculiar facts therein does not apply to the present cases. Therefore, the notification impugned in these cases dated 09.03.2007 is violative of Article 304(a) of the Constitution. Consequently, the impugned notification is quashed. The civil appeals are hence allowed. No cost. 12.20 Having regard to the interim order dated 09.05.2008 passed in these appeals, it is necessary to ascertain whether the differential amount which has been deposited before this Court was collected from their customers. If not, the appellants would be entitled to refund of the amount deposited with interest @ 6% per annum from the date of deposit till realisation. In order to ascertain this aspect, we post the appeals for directions. All pending applications, if any, shall stand disposed of.

Result of the case: Appeals allowed and posted for directions.