w w w . L a w y e r S e r v i c e s . i n



Patina Gold Ornaments Pvt. Ltd. v/s The Assistant Commissioner (CT), Park Road Circle, Erode & Another

    Writ Petition No. 6377 of 2010

    Decided On, 22 September 2017

    At, High Court of Judicature at Madras

    By, THE HONOURABLE MR. JUSTICE RAJIV SHAKDHER & THE HONOURABLE MR. JUSTICE R. SURESH KUMAR

    For the Petitioner: C. Natarajan, Senior Counsel, N. Inbarajan, Advocate. For the Respondents: V. Ayyadurai, A.A.G. Asst. S. Kanmani Annamalai, AGP.



Judgment Text

(Prayer:Writ petition filed under Article 226 of the Constitution of India for issuance of a Writ of Mandamus directing the First Respondent herein to forebear from relying on the provisions of Section 19(2)(ii) and Section 19(4) to reverse or recover the Input Tax Credit under Section 27(2) of the Tamil Nadu Value Added Tax Act, 2006, in respect of the purchase of the inputs entrusted to a job worker outside the State for manufacture on condition of return into the State of Tamil Nadu and found sold in the State of Tamil Nadu under Tax invoice.)

Rajiv Shakdher, J.

1.This writ petition lays in effect a challenge to Sections 19(2)(ii) and 19(4) of the Tamil Nadu Value Added Tax Act, 2006 (in short 'the 2006 Act').

1.1. The challenge to the said Sections, is based on the assertion, made by the writ petitioner, that the said provisions of the 2006 Act, violate, Articles 14, 19(1)(g), 301 and 304(a) & (b) of the Constitution.

1.2.Accordingly, the writ petitioner, seeks a direction against the respondents to forbear from relying upon the impugned provisions to reverse or recover Input Tax Credit (in short, "ITC") under Section 27(2) of the 2006 Act.

1.3.In aid of its submissions, the writ petitioner has also asserted that denial of ITC, in respect of bullion and raw material, purchased within the State of Tamil Nadu, which is converted into finished jewellery, albeit, outside the State and sold, thereafter, within the State of Tamil Nadu, is unlawful and violative of the provisions of Article 265 of the Constitution.

2.Therefore, as would be obvious, the only issue, which arises for consideration, in the writ petition is : whether the writ petitioner, ought to be denied ITC, on bullion and raw material, purchased within the State of Tamil Nadu, which is sent outside the State for being converted into finished jewellery and thereafter, brought back into the State for sale ?

2.1.The writ petitioner asserts that such denial of ITC violates its right of free trade, commerce and intercourse, as conferred upon it under Article 301 of the Constitution.

3.Before one proceeds to examine the arguments put forth on both sides, it may be useful to briefly set out the broad facts of the case:

3.1.The writ petitioner is a registered dealer, whose business is to purchase 'bullion' and 'worn-out jewellery' convert the same into new jewellery for sale to its customers. Importantly, bullion and worn-out jewellery is bought by the writ petitioner from registered dealers located within the State of Tamil Nadu, against tax invoices and after remitting requisite tax, payable on the transaction.

3.2.The tax suffered bullion and worn-out jewellery, purchased by the writ petitioner is entrusted to manufacturers such as Malabar Gold Ornament Makers (P) Limited, located in Calicut, in the State of Kerala, as well as to local manufacturers situate within the State of Tamil Nadu.

3.3.The writ petitioner claims that the reason bullion and worn-out jewellery is sent outside the State, to a place such as, Calicut for manufacturing is, that while there is market for Kerala fashion jewellery within the State of Tamil Nadu, the artisans, with requisite skills are not available within the State of Tamil Nadu.

3.4.The writ petitioner's case is that upon payment of conversion charges, the final product, that is, jewellery, is returned to it for sale within the State of Tamil Nadu, once again, against tax invoices. The sale transaction within the State of Tamil Nadu is, thus, completed after paying the requisite tax, albeit, upon claiming set off qua tax paid on bullion and worn-out jewellery.

3.5.It appears that on 13.01.2010, a notice was issued by the first respondent, calling for details from the writ petitioner, inter alia, with regard to, bullion purchased, within the State, but sent for conversion outside the State and, thereafter, sold to customers within the State. The notice sought month-wise details of such like transactions for the period spanning between 01.01.2007 and December 2009.

3.6. The writ petitioner, promptly, vide, communication dated 21.01.2010, furnished the entire information sought for by the first respondent.

3.7.Evidently, the first respondent took umbrage to the writ petitioner's claim for set off in respect of tax paid on bullion and worn-out jewellery, and accordingly, issued two separate notices of even date i.e. 21.01.2010, relating to the financial years 2008-2009 and 2009-2010.

3.8. By virtue of these notices, the writ petitioner was informed that the ITC could be claimed only on those goods, which, upon their purchase, had been used in manufacturing or processing within the State. In this behalf, notices adverted to the provisions of Section 19(2)(ii) of the 2006 Act. Thus, according to the first respondent, ITC had been wrongly availed of, by the writ petitioner, and therefore, he proposed to reverse the ITC by invoking the provisions of Section 27(2) of the 2006 Act. Furthermore, the notices also proposed to levy of penalty under Section 27(4) of the 2006 Act, equivalent to 50% of the ITC, purportedly, wrongly availed of by the writ petitioner. The notices concluded, by calling upon the writ petitioner to file its objections to the proposals made therein.

3.9. The writ petitioner filed its objections dated 03.02.2010, to the proposals made in the aforementioned notices. Since, two separate notices were served on the writ petitioner, the objections were also filed separately, though, carrying the same date and identical stand.

4. Briefly, the stand taken by the writ petitioner in its objections was as follows:

(i)It had purchased bullion from local registered dealers and worn-out jewellery from unregistered dealers. Both, the charging Section, i.e. Section 3, as also, Section 12(2) allow claim for ITC and, therefore, a machinery provision i.e. Section 19(2)(ii) could not obliterate its claim qua ITC.

(ii)The emphasis in the two notices that ITC would be available on bullion and worn-out jewellery, which is used in the manufacture of the final product, 'only' if, the manufacture takes place within the State of Tamil Nadu, is erroneous, as Section 19(2)(ii) of 2006 Act does not advert to the word 'only'.

(iii)If, Section 19(2)(ii) of 2006 Act is read, in the manner, in which, it is proposed, in the notices dated 21.01.2010, it would amount to discrimination and hence would violate the provisions of Articles, 14, 19(1)(g), 301 and 304 (a) of the Constitution.

(iv)The bullion and worn-out jewellery, which is used in the manufacture of the final product, is tax paid and duly accounted for, upon its return, and upon conversion the final product, which is, jewellery, is sold, against payment of requisite tax, within the State. The only aspect of the transaction, which occurs, outside the State, is the part related to manufacture. The execution of the transaction, in the like manner involves no revenue loss to State.

(v) There is, therefore, no jurisdiction, vested in the first respondent, to direct reversal of ITC, under Section 27(2) of the 2006 Act.

(vi)Since, the writ petitioner was under the bonafide impression, that it was eligible for ITC, no offence, as alleged, was committed wilfully, which would warrant imposition of penalty.

4.1.The objections preferred concluded with the demand for personal hearing.

5. The record shows that, notice in the captioned writ petition was issued on 31.03.2010, when, interim injunction was ordered till the returnable date. The returnable date fixed by the Court was 28.04.2010.

5.1.The record further shows that on 30.04.2010, the matter came up before the Court for hearing, when the writ petition was admitted.

5.2.Along with other connected writ petitions, this writ petition also came up before us for the first time on 21.06.2017. After arguments were heard, judgement was reserved in the matter on 22.06.2017.

Submissions of Counsels :

6.Arguments on behalf of the writ petitioner were advanced by Mr.C.Natarajan, Senior Advocate, instructed by Mr.N.Inbarajan, Advocate. Likewise, submissions on behalf of respondents were advanced by Mr.V.Ayyadurai, learned Additional Advocate General, assisted by Mr.S.Kanmani Annamalai, learned Additional Government Pleader for the State.

7. Broadly, the submissions advanced by Mr.C.Natarajan were as follows:

7.1.The writ petitioner, had purchased, bullion and worn-out jewellery from registered and unregistered dealers, inside the State of Tamil Nadu, against sellers tax invoices, upon payment of Value Added Tax (in short 'VAT').

7.2.The tax on bullion and worn-out jewellery is payable at 1%, as indicated in Serial No.1, Part A of the First Schedule of the 2006 Act. The final product, which is gold and jewellery, is also exigible to tax at the rate of 1%, albeit, as per the provisions of Serial No.2, Part B of the First Schedule to the 2006 Act. Therefore, taxes, both on purchase of raw material and sale of the final product having been paid, the writ petitioner is entitled to claim ITC against tax paid on raw material i.e bullion and worn out jewellery.

7.3.Section 9(1) of the 2006 Act opens with a non-obstante clause whereby, provision for imposition of tax on bullion and jewellery is specifically provided for, in respect of every sale made by a dealer within the State, albeit, at the rate specified in Part A of the First Schedule. Sub-section (2) of Section 9, specifically provides that a dealer, who pays tax under the said Section, shall be entitled to ITC on the goods specified in the First Schedule purchased by him within the State.

7.4.Therefore, ITC on purchase of bullion and worn-out jewellery made within the State and thereafter on conversion sold, to a vendee, albeit, within the State could not be denied.

7.5.Illustratively, the transaction undertaken by the writ petitioner, typically, adopts the following pattern : Bullion and worn-out jewellery, upon being purchased within the State is dispatched to a job work unit of an entity, known as, Malabar Gold Ornament Makers (P) Limited, situate in Calicut, in the State of Kerala. This is done to cater to the demand within the State of Tamil Nadu for Kerala Fashion Jewellery. Malabar Gold Ornament Makers (P) Limited, is an entity, which is registered under the Kerala Value Added Tax Act, 2003 (in short 'KVAT').

7.6.Given the nature of the transaction, as illustrated above, the provisions of Section 19(2)(ii) and 19(4) of the 2006 Act, cannot be triggered to seek reversal of ITC, once conditions under Section 19(10) of the 2006 Act are fulfilled.

7.7.Merely because the inputs are sent out for job work to artisans located outside the State with an obligation to return the same - whereupon, the finished product is sold within the State of Tamil Nadu and subjected to levy under Section 9 of the 2006 Act, cannot lead to denial of ITC. The construction placed by the respondents on the provisions of the 2006 Act is, plainly, contrary to its scheme.

7.8.For the respondents to allow ITC (which is in the nature of rebate), against sale of the final product, which is manufactured within the State, in terms of Section 9 of the 2006 Act, while denying the same on raw materials purchased within the State only because the final products is manufactured outside its precincts, though, sold within the State, would run, counter to the provisions of Article 304(a) of the Constitution.

7.9.The validity of the aforesaid proposition is exemplified by the following judgements (i) Firm ATB Mehtab Majid & Co Vs. State of Madras, AIR 1963 SC 928 ; (ii) Andhra Steel Corporation Vs. Commissioner of Commercial Taxes in Karnataka, 1990 (Supp) SCC 617 ; (iii) Bhoruka Steel Limited vs. The Union of India and others, (1989) 10 SISTC 19 (Mad.) ; (iv) Shree Mahavir Oil Mills Vs. State of Jammu and Kashmir, (1996) 11 SCC 39 ; and (v) State of U.P. Vs. Jaiprakash Associates Limited, (2014) 4 SCC 720.

8.The denial of ITC on jewellery/gold, which are manufactured outside the State, but which are brought back and sold within the State of Tamil Nadu, will result in a discriminatory tax burden. The Statute, therefore, has to be construed in a manner that the Legislative power remains within the limitations and restrictions put upon it by the Constitution; an aspect which is articulated in the following judgements and commentary (i) Jothi Timber Mart Vs. The Corporation of Calicut, AIR 1970 SC 264; (ii) New India Sugar Mills Limited Vs. Commissioner of Sales Tax, Bihar, AIR 1963 SC 1207; (iii) Hotel Balaji Vs. State of Pradesh, AIR 1993 SC 1048; and (iv) on the observations made in the book : 'Principles of Statutory Interpretation", authored by G.P.Singh, 12 Edition – (2010) at Pages 593 and 594.

8.1. Section 19(4) of the 2006 Act cannot be read in isolation or in the abstract, the said provision visualises or provides for ITC in excess of 3% (as it then stood) qua goods purchased within the State which are : either transferred to a place outside the State, otherwise than by way of sale, or used in manufacture of other goods and transferred to a place outside the State, otherwise than by way of sale. The provision, thus, visualises a transfer of such goods purchased within the State, because of which, the goods either cease to exist or cease to be available for the purpose of sale or purchase attracting VAT within the State. By its very construction, Section 19(4) excludes goods which are delivered for job work under bailment to be returned to the writ petitioner after undergoing a manufacturing process. Therefore, the transaction in issue, will be governed by Sections 148 and 160 of the Indian Contract Act, 1872 (in short 'the Contract Act').

8.2.The statutory regime in other States such as Kerala and Karnataka, which allow for availment of ITC, in such like situations have provided for its reversal only where finished goods are not returned. In the case of State of Kerala, period of return is prescribed, while, the State of Karnataka does not even provide a specific period for return. As long goods are returned, assessee would be entitled to ITC. Reference, in this regard, be made to Rule 15 (3A) of the Kerala Value Added Tax Rules, 2005, and the circular bearing No.KNA.CR.311/2005-06, dated 09.06.2006, issued by the Government of Karnataka, Commercial Taxes Department.

8.3.The scheme of the Act as discernible upon reading the provisions of Section 12(1)(c) and Section 12(2) read with Sections 19(1) and 19(4) make it clear that the intent of the Legislature was not to deny set off in respect of tax paid on purchases made within the State, against output taxes paid on sales, made within the State of Tamil Nadu. Credit of tax paid under the scheme of the 2006 Act, cannot be denied merely on account of the fact that goods are despatched to a place outside the State. Thus, the Court should adopt a purposive interpretation so as to carry forward the object of the Statute i.e. 2006 Act.

8.4. A perusal of the provision of Section 19(4) of the 2006 Act, makes it clear, that it is attracted only when the transfer of goods takes place to a place outside the State, which are lost permanently to the stream of sale within the State of Tamil Nadu. In the instant case, the transit of worn-out jewellery or bullion takes place temporarily - as an obligation is cast on the job workers to return the ornaments to the writ petitioner, which are then sold, within the State of Tamil Nadu.

8.5.The judgements, which have, articulated this position, that is, tax will be attracted only in circumstances where goods cease to exist or cease to be available in the State for sale or purchase, are the following : (i) Hotel Balaji and others Vs. State of Andhra Pradesh, (1993) Supp (4) SCC 536; (ii) Assistant Commissioner (Intelligence) Vs. Nandanam Construction Company 1998 (8) SCC 69; and (iii) Malabar Fruit Products Company Vs. Sales Tax Officer (1973) 30 STC 537 (Ker.).

8.6.Pertinently, the view taken in Malabar Fruit Products was approved by the Supreme Court in : State of Tamil Nadu Vs. M.K.Kandaswamy, (1975) 36 STC 191.

8.7.Furthermore, the interpretation rendered by the Supreme Court in respect of provisions, which are pari materia, with Section 19(4) of the 2006 Act, is contained in the following judgements : (i) Diamond Sugar Mills Limited Vs. State of U.P. AIR 1961 SC 652 and (ii) Ahmed G.H.Ariff and others Vs. Commissioner of Wealth Tax and Others (1970) 76 ITR 471 (SC).

8.8.The Statute has to be read in a holistic manner, the Legislature does not intend to grant benefit with one hand and take away the same with another. Reference in this regard be had to the judgement of the Supreme Court in CIT Vs. Hindustan Bulk Carriers, (2003) 3 SCC 57.

8.9.Without prejudice to what is stated above, even if, the Court were to go on to hold that tax paid on bullion and worn-out jewellery was to be disallowed on account of final product being manufactured outside the State, by reason of provisions of Sections 19(2)(ii) and 19(4) of the 2006 Act, it would make little difference to the relief claimed by the writ petitioner. The reason for the same is that the respondents then would have to ensure that there is parity in tax treatment between assessees who sell articles of jewellery within the State, though manufactured outside the State, and those who manufacture and sell articles of jewellery within the State. The common factor being that both set of assessees employ inputs which have suffered local VAT. Reference in this behalf be had to the following judgements : (i) Shree Mahavir Oil Mills and Anr. Vs. State of Jammu and Kashmir and Ors. (1996) 2 SCC 39; (ii) Jindal Stainless Limited Vs. State of Haryana and Others 2016 (11) SCALE 1; (iii) State of Uttar Pradesh Vs. Jaiprakash Associates Limited, 2014 (4) SCC 720; and (iv) Loharn Steel Industries Limited Vs. State of Andhra Pradesh, 1997 (105) STC 30.

9. As against this, Mr.V.Ayyadurai, learned Additional Advocate General, broadly, advanced the following submissions:

9.1. The writ petitioner had misconstrued the scheme of the 2006 Act, which, while, being akin to multi point taxation system, in a sense, differs from the same. In other words, while 2006 Act imposes tax every time a transaction of sale or purchase takes place, and credit is provided to the extent tax is paid on purchase of goods from local registered dealers, the credit qua tax is given based on conditions provided in the relevant provisions. In so far as gold and bullion are concerned, while purchasing the same, tax at the rate of 1% under Serial No.1, Part A of First Schedule of 2006 Act is paid. The credit of such tax, when, paid, is available only if the following two conditions are fulfilled : First, the purchases should have been made from a registered dealer located within the State. Second, the goods purchased should be used in the manufacture of a final product, which is sold, within the State. Upon sale, admittedly, the final product i.e. jewellery, suffers tax at the rate of 1% under Serial No.2, Part B of the First Schedule of the 2006 Act.

9.2.Therefore, the tax credit is like a concession granted to an assessee which requires fulfilment of conditions contemplated under Section 19(2)(ii) of the 2006 Act. The provision of these conditions, are not discriminatory, as alleged or at all. The 2006 Act, denies ITC, to those, who procure goods from outside the State or carry out manufacturing activity, qua, goods purchased within the State, albeit, outside the territorial jurisdiction of the State. The condition prescribed in Section 19(2)(ii) of the 2006 Act is provided to further economic development of the State and to provide job opportunities. Therefore, the assessee who purchases, tax suffered goods, within the State, and uses them for manufacture of final products within the State, form a class, different from those who either procure or manufacture goods outside the State or even those who procure the goods within the State but use them for manufacturing a commodity (which is, different from the raw material), albeit, outside the State. Therefore, no violation, as alleged, of Articles 14, 19(1)(g) or 301 of the Constitution can said to have taken place in respect of these transactions as, clearly, they fall in a different class altogether.

9.3.There is no violation of Article 301 of the Constitution as alleged or at all. Violation of Article 301 of the Constitution can only take place, if, it is established that the provisions of Section 19(2)(ii) of the 2006 Act directly or immediately impede free trade, commerce and movement of goods. Section 19(2)(ii) does not impose any tax, it only provides for concession to dealers who purchase goods within the State and use them for manufacturing final products within the State. The utilisation of the goods procured or manufactured outside the State, as against goods procured and manufactured within the State, makes a dealer ineligible for availing ITC. The impugned provision does not offend Article 301 of the Constitution.

9.4. The impugned provision makes no distinction between persons residing outside the State of Tamil Nadu and those residing within the State of Tamil Nadu and hence there is no violation of the provisions of Articles 301 and / or 304(a) of the Constitution or, even Article 14 of the Constitution.

9.5. The State Legislature has undisputedly the power to select persons / transactions or objects and therefore has the power to apply different methods and different rates of tax to deal with different situations. It is settled that Legislatures needs to be vested with greater amount of latitude in picking and choosing the objects, the methods and/or even the rates of taxation, so long as, the power exercised in that behalf is reasonable. Since, there is no differential treatment visualised in the charging provision, the allegation of discrimination is baseless. There is, in fact, no difference in the rate of tax. The availment of concession is based on fulfilment of conditions provided by the Legislature.

9.6.Sections 19(2)(ii) and 19(4) of the 2006 Act are not repugnant to each other. These two provisions operate in separate spheres. It is not correct to state that ITC is denied only on the basis of place of manufacture. The impugned provision provides that both purchase of goods and manufacturing activities should take place within the State for availing ITC. Section 19(4) allows ITC in respect of tax paid or payable in excess of 3%, provided, the following two conditions are fulfilled: (i) transfer of goods takes place to a place outside the State, otherwise than by way of sale or, (ii) goods are used in manufacture of other goods and transferred to a place outside the State, otherwise, than, by way of sale. In other words, the State under Section 19(4) of the 2006 Act, retains 3% of the tax and provides ITC in respect of tax paid or payable in excess of 3%.

9.7.If, the submissions of the writ petitioner were to be accepted, the conditions for availment of ITC provided in other sub-sections of Section 19(2) would be rendered otiose. Because the writ petitioner, wrongly availed of ITC, the Assessing Officer, had rightly proposed reversal of ITC by invoking provisions under Section 27(2) of the Act and, further, proposed levy of penalty.

9.8. The learned Additional Advocate General, in support of his submissions, relies upon the judgement rendered by the Supreme Court in : Jindal Stainless Limited.

REASONS

10.We have heard the counsel for parties at great length, and also, perused the record, however, before we proceed further, it may be relevant to refer to certain judgements, which, in our view, are pertinent to the issues, raised in the present case. The reason we proceed to examine the law on the subject at hand, in the first instance, as against facts, is on account of the nature of transaction. Furthermore, the facts not being in dispute, what we need to ascertain is how the transaction gets impacted by the impugned provisions in the light of the law on the subject.

11.The first in line is the judgement of the Supreme Court in: Firm ATB Mehtab Majid & Co. Vs. State of Madras, AIR 1963 SC 928.

11.1.In this case, challenge was laid to Rule 16 of the Madras General Sales Tax (Turnover & Assessment) Rules, 1939. The petitioner, before the Court, had filed an action under Article 32 of the Constitution, assailing the said Rule, on the ground that the effect of the Rule was such that tanned hides or skins, imported from outside the State and sold within the State, were subjected to a higher rate of tax, than, those hides or skins tanned and sold within the State. The relevant Rule read as follows:

'16.(1) In the case of untanned hides and/or skins the tax under section 3(1) shall be levied from the dealer who is the last purchaser in the State not exempt from taxation under section 3(3) on the amount for which they are bought by him.

(2) (i) In the case of hides or skins which have been tanned outside the State the tax under section 3(1) shall be levied from the dealer who in the State is the first dealer in such hides or skins not exempt from taxation under section 3(3) on the amount for which they are sold by him.

(ii)In the case of tanned hides or skins which have been tanned within the State, the tax under section 3(1) shall be levied from a person who is the first dealer in such hides or skins not exempt from taxation under section 3(3) on the amount for which they are sold by him:

Provided that, if he proves that the tax has already been levied under sub-rule (1) on the untanned hides and skins out of which the tanned hides and skins had been produced, he shall not be so liable.

(3)The burden of proving that a transaction is not liable to taxation under this rule shall be on the dealer.'

11.2.As would be obvious, upon reading Rule 16(2)(ii) along with the proviso, is that a person, who was the first dealer, in tanned hides and skins which were tanned within the concerned State (and such person was not exempt from taxation under Section 3(3) of the given Act), was liable to pay tax under Section 3(1) of the very same Act, unless he was able to prove that he had already been subjected to tax under Sub-rule (1) of Rule 16 on untanned hides and skins, out of which, tanned hides and skins were produced.

11.3.The Supreme Court, while declaring Rule 16(2) as invalid, made the following crucial observations:

'......10. It is therefore now well settled that taxing laws can be restrictions on trade, commerce and intercourse, if they hamper the flow of trade and if they are not what can be termed to be compensatory taxes or regulatory measures. Sales tax, of the kind under consideration here, cannot be said to be a measure regulating any trade or a compensatory tax levied for the use of trading facilities. Sales tax, which has the effect of discriminating between goods of one State and goods of another, may affect the free flow of trade and it will then offend against Art.301 and will be valid only if it comes within the terms of Art.304(a).

11. Article 304(a) enables the Legislature of a State to make laws affecting trade, commerce and intercourse. It enables the imposition of taxes on goods from other States if similar goods in the State are 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 others States. This means that if the affect of the sales-tax on tanned hides or skins imported from outside is that the latter becomes subject to a higher tax by the application of the proviso to sub-rule of r.16 of the Rules, then the tax is discriminatory and unconstitutional and must be struck down.

12. We do not agree with the contentions for the respondents. The contention that Art.304(a) is attracted only when the impost is at the border, i.e., when the goods enter the State on crossing the border of the State, is not sound. Art.304(a) allows the Legislature of a State to impose taxes on goods imported from other States and does not support the contention that the imposition must be at the point of entry only.

13. Section 5 (vi) provides that the sale of hides or skins, whether tanned or untanned, shall be liable to tax under s. 3(1) only at such single point in the series of sales by successive dealers as may be prescribed. 'Prescribed' means 'Prescribed by rules made under the Act.' Rule 16 prescribes such single point. This rule was made by the Governor in the exercise of power confer-red on him under s. 19 of the Act and would therefore have statutory force. In fact, sub- s. (5) of s. 19 provides that the rules shall have effect as if enacted in the Act. We therefore do not agree that r. 16 is not a law which would fall within a law made by the State Legislature.

14. It is true that the impugned rule, by itself, does not impose the tax, but fixes the single point at which the tax imposed by ss. 3 and 5 is to be levied. What the rule provides is a step necessary for the imposition of the tax, in view of ss. 3 and 5 and therefore the impugned rule is a part of the enactment which imposes the tax.

15. The fact that the impugned rule was made in order to prescribe the single point in the series of sales by successive dealers at which the tax on sale of hides or skins was to be levied, in view of ss. 3 and 5 of the Act, does not justify the making of such a rule which discriminates between the tax imposed on goods imported from outside the State and the goods produced or manufactured in the State.

16. Now, the only question that remains for consideration is whether this rule discriminates between hides or skins imported from outside the State and those manufactured or produced in the State.

17. Sub-rule (1) of the rule deals with the sale of raw hides and skins. The tax is levied from the dealer who is the last purchaser in the State. Its vires is not challenged. Clause (i) of sub-r. (2) provides for the levying of tax on the sale of hides and skins which had been tanned outside the State. The tax is levied from the dealer who in the State, is the first seller of such hide or skins. The result is that a dealer in hides or skins which have been tanned outside the State has to pay the tax on the amount for which such hides or skins are sold by him. Clause (ii) of this sub-rule is in identical terms with respect to the sale of tanned hides or skins which have been tanned within the State. The tax is to be levied from the person who is the first dealer in such hides or skins and is levied on the amount for which they are sold. The discrimination, it is argued, comes in on account of the proviso to this sub-cl.(ii). The proviso is to the effect that if the dealer of hides or skins which had been tanned within the State proves that tax had already been levied on those hide or skins in their raw condition, in accordance with sub-r. (1)., he will not be liable to the tax under sub-cl. (ii) of sub-r. (2). The result therefore is that the sale of hides or skins which had been purchased in the State and then tanned within the State is not subject to any further tax. Hides and skins tanned within the State are mostly those which had been purchased in their raw condition in the State and therefore on which tax had already been levied on the price paid by the purchaser at the time of their sale in the raw condition. If the quantum of tax had been the same, there might have been no case for grievance by the dealer of the tanned hides and skins which had been tanned outside the State. The grievance arises on account of the amount of tax levied being different on account of the existence of a substantial disparity in the price of the raw hides or skins and of those hides or skins after they had been tanned, though the rate is the same under s. 3 (1) (b) of the Act. If the dealer has purchased the raw hide or skin in the State, he does not pay on the sale price of the tanned hides or skins, he pays on the purchase price only. If the dealer purchases raw hides or skins from outside the State and tans them within the State, he will be liable to pay sales-tax on the sale price of the tanned hides or skins. He too will have to pay more for tax even though the hides and skins are tanned within the State, merely on account of his having imported the hides and skins from outside-, and having not therefore paid any tax under sub-r. (1). It is true that dealers, though few, selling hides and skins which had been tanned within the State will also have to pay similar tax if no tax had been paid previously, they having not purchased the raw hides and skins at all as they were from the carcasses of animals owned by them; but this does not affect the discriminatory nature of the tax as already indicated.

18. It is urged for the respondent State that to consider discrimination between the imported goods and goods produced or manufactured in the State, circumstances and situations at the taxable point must be similar and that the circumstance of hides or skins tanned within the State and on which tax had been paid earlier at the time of their purchase in the raw condition is sufficient to consider such hides or skins to be different from the hides or skins which had been tanned outside the State. We do not consider that the mere circumstance of a tax having been paid on the sale of such hides or skins in their raw condition justifies their forming goods of a different kind from the tanned hides or skins which had been imported from outside. At the time of sale of those hides or skins in the tanned state, there was no difference between them as goods and the hides or skins tanned outside the State as goods. The similarity contemplated by Art.304(a) is in the nature of the quality and kind of the goods and not with respect to whether they were subject of a tax already or not.

19. We are therefore of opinion that the provisions of r. 16 (2) discriminate against the imported hides or skins which had been purchased or tanned outside the State and that therefore they contravene the provisions of Art.304(a) of the Constitution.....'

(emphasis is ours)

12.The next case, which is of relevance is: Andhra Steel Corporation Vs. Commissioner of Commercial Taxes in Karnataka, 1990 (Supp) SCC 617.

12.1.The appellant, before the Court, was a manufacturer of iron ingots, steel rounds and tor-steel. These products were manufactured by the appellant, from iron scrap, purchased from dealers, who were situate both within and outside the State of Karnataka. Most of the goods manufactured from such iron scrap, were sold, within the State of Karnataka. The issue, which came up for consideration before the Court was whether Section 5(4) of the Karnataka Sales Tax Act 1957, in so far as, it pertained to Item 2 in Schedule IV read with Explanation II violated the provisions of Article 304(a) of the Constitution.

12.2.The effect of this provision, was that finished goods manufactured from imported raw materials, when sold, were taxed, while finished goods, manufactured from local goods, were not subjected to sales tax.

12.3.It was urged before the Supreme Court that this amounted to a hostile discrimination vis-a-vis the rate or quantum of tax. The Supreme Court also examined a series of judgement, cited on behalf of State of Karnataka, which laid down that every imposition of tax did not amount to a restriction or impediment in the free flow of trade or commerce, but, that levy, which directly and immediately impedes or hampers the free flow of trade or commerce would fall foul of Article 301 of the Constitution. The judgements also inter alia held that free flow of trade did not necessarily depend on rates of tax, it depended upon variety of factors, such as source of supply, place of consumption, existence of trade channels, the rates of freight, trading facilities, availability of efficient transport and other facilities for carrying out trade.

12.4.It also took note of the observation of the Court in earlier judgements that, where the taxing-State was not imposing rates of tax on imported goods, different from the rates of tax on the same kind of goods manufactured or produced within the State, Article 304(a) of the Constitution had no application.

12.5.These observations, to which, we have made a reference above, were found in the judgement of the Supreme Court in State of Madras Vs. N.K.Natarajan Mudaliar, AIR 1969 SC 147.

12.6.The Supreme Court also noted its own judgement in Rattan Lal & Co. Vs. Assessing Authority, AIR 1970 SC 1742, wherein, it, inter alia, had observed that as long as rates of tax on goods manufactured and produced within the State and those which were imported into the State were same, the mere fact when the rate was applied, the resulting quantum of tax was higher, would not offend Article 304 of the Constitution.

12.7.Furthermore, the Court also took note of another one of its own judgement rendered in: Associated Tanners Vs. CTO, (1986) 2 SCC 479. The Supreme Court, after adverting to these judgements and upon application of the ratio laid down in A.T.B. Mehtab Majid and Co.'s case, which was followed in Hajee Abdul Shakoor and Co. Vs. State of Madras, AIR 1964 SC 1729, distinguished those cases, as those cases dealt with inter-State sales. The Court in this context noted that the levy of sales tax was under the Central Sales Tax Act in those cases, though for the purposes of arriving at rates at which tax is to be imposed, the rate which is applicable to local sales is adopted, subject to the maximum provided in Section 8(2) of the Central Act. The ratio, being that the State Legislatures could not tax inter-State sales, and therefore, that aspect could only to be dealt with by the Parliament. The Court went on to say that the instant case was covered by the ratio of the decision in A.T.B. Mehtab Majid case. The crucial observations, to that effect, made in paragraphs 22 and 23 of the judgement are extracted hereafter :

'22. It may be seen from these passages cited that the ratio of the decision as in the case of Nataraja Mudaliar, case (supra) was that in the case of inter-State sale the levy of tax is under the Central Sales Tax only though for the purposes of rates of tax that rate which is applicable to local sales is adopted subject to the maximum mentioned in Section 8(2) of the Central Act and these decisions have no application to a case where the discrimination pleaded with reference to a provision in State law imposing taxes with reference to local as well as in respect of the imported goods. As we have already noticed the States have no legislative power to tax inter-State sales and it is only the Parliament that could make law. The Central Act is the law relating to tax on inter-State sales made by Parliament. The State from which the movement of goods commences in the course of inter-State sale collects the tax as agent of the Central Government. On sale of declared goods tax was to be levied and collected at the rate applicable to the sale or purchase of such goods inside the appropriate State subject to the maximum prescribed under Section 15 and the restriction relating to taxing it at single point. This is also further subjected to the rates prevailing for local sales. It is with respect to these provisions, in the three decisions in Nataraja Mudaliar case, Rattan Lal & Co. case and Associated Tanner case this Court held that so long the rates applicable are in accordance with Section 8 no discrimination would arise and none of the provisions of part XIII of the Constitution could be said to have been offended. But the case on hand is not one arising out of Central Act. The tax was levied under the State Act in respect of steel semis. The State Act exempted steel semis which have been manufactured out of iron scrap which have suffered tax but not the other categories where the scrap had not suffered tax at that stage. This is directly covered by the decision in A.T.B. Mehtab's case (supra) and that decision has not been dissented in Nataraja Mudaliar case (supra) or Rattan Lal & Co's case (supra). The decision in A.T.B. Mehtab's case (supra) is by a Constitution Bench and had not been dissented so far in any case. The ratio of the judgment being fully applicable, the judgment of the High Court under appeal is not acceptable.

23. We accordingly hold that the provision which is impugned in this case is ultra vires and accordingly set aside the judgment of the High Court and allow the writ petition filed by the assessee in the High Court. There will be no order as to costs.'

(emphasis is ours)

13.The next case, which is relevant, for our purpose, is the judgement of the Supreme Court in Anand Commercial Agencies Vs. The Commercial Tax Officer, VI Circle, Hyderabad and others, (1998) 1 SCC 101. This is a case where the appellant before the Supreme Court challenged the difference in rates of tax imposed for sale of groundnut oil and refined oil manufactured from groundnut which had suffered tax under the Andhra Pradesh General Sales Tax Act, 1957, as against groundnut oil or refined oil, imported into the State. The rate of tax on the former was only 2 paise in a rupee, whereas, in the case of oil imported from other States, the rate of tax on local sales was 6 paise in a rupee.

13.1.The challenge was laid on the ground that the difference in rate led to discrimination and therefore violated the appellant's right to freedom of trade and commerce throughout India.

13.2. The following observations being apposite are extracted hereafter:

'.....12. Freedom of trade, commerce and intercourse guaranteed by Article 301 means freedom to carry on business throughout the territory of India without any obstruction and hindrance. The question whether a fiscal barrier will amount to interference with the right to carry on trade, commerce and intercourse throughout the territory of India is not an easy question to answer. Every State has a right to impose tax on subjects which fall within its jurisdiction under List-II of the Seventh Schedule to the Constitution. This includes taxes on sale or purchase of goods other than newspaper. Fiscal powers of the State can be utilised not only to collect revenue but also to regulate economic development of a State. A backward State may try to encourage development of industries within the State by grant of subsidy and also by low rate of tax on goods manufactured by local industries. If small newly set up industries in the State have to compete with big industries, small units may not survive at all. In such a case, the State is entitled to prop up the local industries by taking fiscal measures. This may be done by providing subsidies or by imposing low rate of sales tax on the goods manufactured within the State. This aspect was explained in the case of M/s.Video Electronics Pvt. Ltd. Vs. State of Punjab, AIR 1990 SC 820. by Sabyasachi Mukharji, C.J., in the following words:-

"It is manifest that free flow of trade between two States does not necessarily or generally depend upon the rate of tax alone. Many factors including the cost of goods play an important role in the movement of goods from one State to another. Hence the mere fact that there is a difference in the rate of tax on goods locally manufactured and those imported would not amount to hampering of trade between the two States within the meaning of Art.301 of the Constitution. As is manifest, Art.304 is an exception to Art.301 of the Constitution. The need of taking resort to exception will arise only if the tax impugned is hit by Arts. 301 and 303 or the Constitution. If it is not then Art.304 of the Constitution will not come into picture at all."

13. But barring special circumstances, as stated herein above, the view of this Court has consistently been that a State is not entitled to tax locally made goods at a lower rate while taxing similar goods manufactured in other States at a higher rate.

***

18. In the case of Video Electronics (P) Ltd. Vs. State of Punjab, the constitutional validity of notifications issued by the Government of Uttar Pradesh was challenged by the writ petitioners who carried on the business of selling cinematographic films and other equipments like Projectors, sound recording and reproducing equipment, industrial X-ray films, graphic art films, photo films, etc. in the State of Uttar Pradesh and Delhi. The petitioners sold these goods after receiving them from the manufacturers from outside the State of Uttar Pradesh. They were dealers of Hindustan Photo Films Manufacturing Co. Ltd., a Government of India undertaking. In Uttar Pradesh, there was single point levy of sales tax. The State of Uttar Pradesh had issued two notification under the U.P. Sales Tax Act and Central Sales Tax Act exempting new units of manufacturers as defined in the Act in respect of the various goods for different periods ranging from 3 to 7 years as the case may be, from payment of any sales tax. The benefit of the notifications could be availed of by the new industries set up in the State which were divided into two categories - (1) units with capital investment not exceeding three lakhs of rupees and (2) units with capital investment exceeding three lakhs of rupees. The period of exemption varied fro 3 to 7 years in different districts.

***

20. After an elaborate review of the case law, it was held :

"Where the general rate applicable to the goods locally made and on those imported from other States is the same nothing more normally and generally is to be shown by the State to dispel the argument of discrimination under Art.304(a), even though the resultant tax amount on imported goods may be different. Here, reference may be made to Ratan Lal's case (AIR 1970 SC 1742) (supra). In the instant writ petition, in the State of U.P. those producers or manufacturers who do not come within the ambit of notifications, have to pay tax on their goods at the general rate prescribed and there is no differentiation or discrimination qua the imported goods. The question naturally arises whether the power to grant exemption to specified class of manufacturers for a limited period on certain conditions as provided by S.4A of the U.P. Sales Tax Act of violative of Art.304(a)."

21. The Court ultimately held that if the general rate of tax imposed upon the locally made goods and the imported goods was the same, the State, in order to give incentives to certain industries, could lawfully reduce the rate of tax for a limited period of time. In the facts of that case, the period of exemption from tax for certain type of goods was from three to seven years. Sabyasachi Mukharji, C.J. held that granting of such exemption for a limited period only to certain industries in the State from payment of sales tax was not violative for the provisions of Article 301 because the general rate of tax payable on these goods manufactured by other units were the same as the rate applicable to goods imported from outside the State.

22. This question was once again examined in the case of Shree Mahavir Oil Mills and Anr. v. State of Jammu & Kashmir & Ors., JT 1996 (10) S.C.837. In that case, with a view to protect local edible oil industry, Government of Jammu & Kashmir issued an order exempting goods manufactured by small scale dealers within the State from payment of sales tax for a specified period. The rate of sales tax payable for other industries including manufacturers of the adjoining States was four per cent. A subsequent notification was issued on December 20, 1993 as a result of which the general rate of sales tax payable on edible oil became 8%. The manufacturers of edible oil from the adjoining States claimed that the exemption granted from payment of tax to the local industries was discriminatory. The exemption given by the Government of Jammu & Kashmir to the manufacturers of the edible oil was total and the period of exemption was five years - which was later extended by another five years. It was held that the unconditional exemption granted to edible oil industries and at the same time subjecting edible oil industries from other State to Sales Tax at 8% was discriminatory and violative of Article 304 (a) of the Constitution.

23. In the case before us, exemption has not been granted to a new industry or specially handicapped industry for any special reason for a limited period of time. Groundnut oil manufacturers within the State have been generally given the benefit of a lower rate of tax whereas the importers will have to pay sales tax at a higher rate. It is not even the case of the State that if imported oil was manufactured out of tax paid groundnut the rate of tax on imported oil would be lower.

***

28. Clause (a) of Entry 24 of the First Schedule to the Andhra Pradesh General Sales Tax Act is declared violative of the previsions of Articles 301 to 304 in so far as it imposes a higher rate of tax on groundnut oil or refined oil which has been obtained from groundnut that have not been taxed under the Andhra Pradesh Act. It is declared that the groundnut oil imported by the appellant from Karnataka for sale in Andhra Pradesh cannot be taxed at a rate higher than the rate prescribed in clause (b) of Entry 24 of the First Schedule to the Andhra Pradesh Act.' (emphasis is ours)

14. The other case, which is, important, is the judgement of a Division Bench of this Court in: Bhoruka Steel Limited Vs. The Union of India and Ors, (1989) 10 SISTC 19 (Mad.).

14.1.This was a case where the petitioner, before the Court, was in the business of manufacturing bars and M.S.Rods. For this purpose, the petitioner, purchased raw material viz., iron and steel scraps in Tamil Nadu which was subjected to tax. The raw material then was carried by the petitioner to his factory in Bangalore, in the State of Karnataka. After conversion, the final product was brought back for sale within the State of Tamil Nadu. The impugned Government Orders (G.Os.) exempted from tax, those end products, which were manufactured in the State of Tamil Nadu from tax suffered raw materials.

14.2.The Division Bench, distinguished the judgements of the Supreme Court rendered in N.K.Nataraja Mudaliar case and Rattan Lal & Co case and applied the ratio laid down by the Supreme Court in A.T.B.Mehtab Majid & Co case. The Division Bench, finally read down, the impugned Government Notifications, on the ground that G.Os. discriminated in granting exemption based on whether the manufacture of end product took place, within or outside the State of Tamil Nadu.

14.3.The following crucial observations were made by the learned Judges, which, for the sake of convenience, are extracted hereafter:

'.....6. It may be seen from the facts that except the discrimination was found in a rule and not in the case of an exemption as in this case and that the case before the Supreme Court related to tanned hides and skins, whereas, in our case, it related to iron and steel, the end-product of scrap, there is not much of difference and the ratio of the judgment would clearly apply to the facts in this case. In fact, here is an added circumstance which makes the ratio of the judgment a fortiori, and that, the goods were purchased locally, tax paid under the Tamil Nadu General Sales Tax Act, 1959, the dealer had carried the goods to another State as his own, manufacture it in his own factory, brought it back to Madras to his depot and sold it. Therefore, it may not even amount to an import of goods from outside the State. The decision of the Supreme Court was rendered on 22nd November, 1962. On 10th of June, 1963, the Governor of Madras promulgated Madras Ordinance 3 of 1963. The explanatory statement attached to the said Ordinance stated that the decision of the Supreme Court in Firm A.T.B.Mahtab Majid & Co. V. State of Madras (1963) 14 STC 355 (SC) will result in claims for refund of tax being preferred by dealers in hides and skins already assessed under the impugned rule thereby resulting in huge loss of revenue and will also result in administrative complications. It is, therefore, considered necessary to avoid these difficulties by receiving the discrimination in the matter of levy of tax on hides and skins pointed out by the Supreme Court and to provide for the assessment or reassessment and collection of the tax from the dealers in hides and skins without any discrimination by levying the tax in all cases on the basis of the purchase price of the hides and skins in the untanned condition. It is not necessary to note the details of the Ordinance, but it may, however, be stated that the Supreme Court held that sub-section (1) of Section 2 of the Act discriminates against imported hides and skins which were sold upto the 1st of August, 1957, upto which date the tax on sale of raw hides and skins was at the rate of 3 paise per rupee or 19/16th per cent.

7. It may be seen from these cases that the ratio of the judgment is directly applicable to the facts in this case and, if that is so, the condition in the G.O., discriminating the end-products on the basis of manufacture by the Steel Rolling Mills in Tamil Nadu or outside Tamil Nadu could not be enforced in respect of the petitioner.

***

11. On the basis of the ratio of the judgement in Firm A.T.B.Mehtab Majid & Co. v. State of Madras (1963) 14 STC 355 (SC) we have to hold that the discrimination on the ground of manufacture in Tamil Nadu and manufacture outside Tamil Nadu offends Article 301 of the Constitution.

12. The petitioner has prayed for the issue of a writ of declaration declaring that the impugned order of the Government in so far as it required the re-rolling to be carried out inside Tamil Nadu for the benefit of getting exemption is illegal, discriminatory and unconstitutional and to that extent it is invalid. However, we think that it is not necessary to hold that the condition is invalid, but wherever that condition could be satisfied also, the benefit will be given. But even if that condition is not satisfied, the benefit of the G.O. will have to be given to all those persons who have manufactured the end-products out of the raw-materials which had already suffered tax under the Tamil Nadu General Sales Tax Act, 1959.' (emphasis is ours)

15. The next case, which is, of relevance, is the judgement of the Supreme Court, in: Shree Mahavir Oil Mills and Another Vs. State of J and K and others, (1996) 11 SCC 39.

15.1.Briefly, this was a case, where, manufacturers outside the State selling edible oil within the State of J & K, were subjected to higher rate of tax. The State of J & K defended the position on the ground that the impugned regime was put in place to encourage and promote industrialisation in the State. The State also submitted that because of inherent problems, the cost of production of edible oil, in the State of J & K, was higher than the cost of production of a similar kind of edible oil manufactured in the adjoining States. With the result it was submitted, outside manufacturers were able to sell edible oil in the State at prices lower than the local manufactures. Since, this price difference, had led to closure of local edible oil industries, the State Government had decided to exempt payment of tax by the local manufacturers, to the extent and for the period specified in the relevant schedule. This power was evidently, exercised by issuance of a notification under Section 5 of the J & K General Sales Tax Act, 1962.

15.2.The following observations, being relevant, are extracted:

'.....22. Video Electronics (P) Ltd. v. State of Punjab [1990 (3) S.C.C. 87]: inasmuch as strong and almost exclusive reliance is placed by the learned counsel for the State of Jammu & Kashmir on this decision, it is necessary to examine the facts of and the law laid down in this decision (rendered by a Bench of three learned Judges) a little more closely. In is decision, notifications issued by two States, viz., Uttar Pradesh and Punjab were considered. The notification issued by the Government of Uttar Pradesh provided an exemption in favour of new units established in specified areas and for the prescribed period [three to seven years] specified therein. It was further stipulated that the said benefit shall be available only to those new units which have commenced their production between the two dates specified by the government. The Punjab notification provided that "rate of the sales tax payable by an electronic manufacturing unit existing in Punjab in cases of electronic goods specified in Annexure-A was prescribed at one per cent as against the normal 12 per cent". [This is how the purport of the provision has been set out in the decision.] Both notifications were impugned as violative of Articles 301 and 304. The Bench comprising Mukharji,CJ, Ranganathan and Verma,JJ. upheld both the notifications. So far as the Uttar Pradesh notification was concerned, it was held that inasmuch as it was a case of grant of exemption "to a special class for a limited period on specific conditions" and was not extended to all the producers of those goods, it does not offend the freedom guaranteed by Article 301. Similarly, in the case of Punjab notification, it was held that since the exemption is for certain specified goods and also because "an overwhelmingly large number of local manufacturers of similar goods are subject to sales tax", it cannot be said that local manufacturers were favoured as against the outside manufacturers. In the course of their judgment, the Bench made certain observations which are strongly relied upon by Shri M.L.Verma,J. The observations are to the effect that while judging whether a particular exemption granted by the State offends Articles 301 and 304, it is necessary to take into account various factors. A State which is technically and economically weak on account of various factors should be allowed to develop economically by granting concessions, exemptions and subsidies to new industries. All parts of the country are not equally developed, industrially and economically. The concept of economic unity is an ever-changing one; it cannot be imprisoned in a strait-jacket. India is not already an economic unit. Economic unity is possible only when all the units of the country develop equally. The power to grant exemption is inherent in all taxing statutes end the Government cannot be deprived of this power by invoking Articles 301 and 304. The concept of economic barriers must be understood in a dynamic sense. The concept of economic unity or economic barriers must be read along with the power of exemption inhering in the State Governments. Where every State is exempting or reducing the rates of sales tax, there can be no question of an economic war between them.

"A backward State or a disturbed State cannot with parity engage in competition with advanced or developed States. Even within a State there are often backward areas which can be developed only if some special incentives are granted. If the incentives in the form of subsidies or grant are given to any part of (sic or) units of a State so that it may come out of its limping or infancy to compete as equals with others, that in our opinion, does not and cannot contravene the spirit and the letter of Part XIII of the Constitution. However, this is permissible only if there is a valid reason, that is to say, if there are justifiable and rational reasons for differentiation. If there is none, it will amount to hostile discrimination."

23. All the above observations were made to justify (1) grant of incentives and subsidies and (2) exemption granted to new industries, of a specified type [small scale industries commencing production within the two specified dates] and for a short period. They were not meant to nor can they be read as justifying a blanket exemption to all small scale industries in the State irrespective of their date of establishment. The case before us clearly falls within the ratio of the Constitution Bench decision A.T.M.Mehtab Majid and the decisions in India Cement, West Bengal Hosiery Association and Weston Electronics. The limited exception created in Video Electronics does not help the State herein for the reason that exemption concerned herein is neither confined to "new industries", nor is circumscribed by other conditions of the nature stipulated in the Uttar Pradesh notification. It is not possible to go on extending the limited exception created in the said judgment, by stages, which would have the effect of robbing the salutory principle underlying Part-XIII of its substance. Indeed, it has been the contention of Sri Salve that, on principle, the exception carved out in Video Electronics unsustainable. For the purpose of this case, it is not necessary for us to say anything about the correctness of Video Electronics. Suffice it to say that the limited exception carved out therein cannot be widened or expanded to cover cases of a different kind. It must be held that the total exemption granted in favour of small scale industries in Jammu & Kashmir producing edible oil [there are no large scale industries in that State producing edible oil] is not sustainable in law.

***

25. Now, what is the ratio of the decisions of this Court so far as clause (a) of Article 304 is concerned? In our opinion, it is this: the States are certainly free to exercise the power to levy taxes on goods imported from other States/Union territories but this freedom, or power shall not be so exercised as to bring about a discrimination between the imported goods and the similar goods manufactured or produced in that State. The clause deals only with discrimination by means of taxation; it prohibits it. The prohibition cannot be extended beyond the power of taxation. It means in the immediate context that States are free to encourage and promoted the establishment and growth or industries within their States by all such means as they think proper but they cannot, in that process, subject the goods imported from other States to a discriminatory rate of taxation, i.e., a higher rated to sales tax vis-a-vis similar goods manufactured/produced within that State and sold within that State. Prohibition is against discriminatory taxation by the States. It matters not how this discrimination is brought about. A limited exception has no doubt been carved out in Video Electronics but, as indicated hereinbefore, that exception cannot be enlarged lest it eat up the main provision. So far as the present case is concerned it does not fall within the limited exception aforesaid; it falls within the ratio of A.T.M.Mehtab Majid and the other cases following it. It must be held that by exempting unconditionally the edible oil produced within the State of Jammu & Kashmir altogether from sales tax, even if it is for a period of ten years, while subjecting the edible oil produced in other States to sales tax at eight percents the State of Jammu s Kashmir has brought about discrimination by taxation prohibited by Article 304(a) of the Constitution.

26. We are unable to see any substance in the objection raised by Sri Verma that not having attacked the exemption notification when the rate of tax was four percents the appellants should not be allowed to question the same when the rate of tax has climbed to eight percent. There can be no question of any acquiescence in matters affecting constitutional rights or limitations. Similarly the argument that the volume of trade of the appellants has not shown a downward trend in spite of the said exemption is equally immaterial apart from the fact that an explanation is offered therefor by Sri Salve. Yet another contention of Sri Verma that the principle of classification applicable under Article 14 is equally applicable under Articles 301 and 304(a) is of little help to the respondent-State. Article 14 speaks of equality; Article 301speaks of freedom and Article 304(a) speaks of uniform taxation of both the imported goods and the locally produced goods by the States. According to Sri Verma, edible oil produced and sold in the State of Jammu & Kashmir and the edible oil, produced in other States and sold in the State of Jammu & Kashmir fall in two different classes and that the said classification is designed to achieve the objective of industrialisation of the State. We find it difficult to appreciate how can the concept of classification be read into clause (a) of Article 304 to undo the precise object and purpose underlying the clause. Sri Verma repeatedly stressed that the object underlying the impugned measure is a laudable one and that it seeks to serve and promote the interest of the State of Jammu & Kashmir which is economically and industrially an undeveloped State besides being a disturbed State. We may agree on this score but then the measures necessary in that behalf have to be taken by the appropriate authority and in the appropriate manner. Part-XIII of the Constitution itself contains adequate provisions to remedy such a situation and there is no reason why the necessary measures cannot be taken to protect the edible oil industry in the State in accordance with the provisions of the said Part. Keeping the said aspect in view, we invoke our power under Article 142 of the Constitution and mould the relief to suit the exigencies of the situation.'

(emphasis is ours)

16.The next judgement, which is relevant, is the judgement of the Supreme Court in: Loharn Steel Industries Ltd and another Vs. State of Andhra Pradesh and another, (1997) 105 STC 30 (SC).

16.1.In this case, the appellant, before the Supreme Court, was a dealer in iron and steel, and was registered under the A.P. General Sales Tax Act, 1957. The appellant No.1 would purchase tax suffered iron and steel scrap and ingots in the State of Andhra Pradesh and have them sent to its re-rolling Mill situate in the State of Karnataka. The re-rolled products were brought back to A.P. and sold therein.

16.2.By virtue of the Government Order in G.O.Ms.No.88, Revenue, dated 28.01.1977, w.e.f 01.04.1976, re-rolled finished products of steel sold in Andhra Pradesh were given exemption from Andhra Pradesh General Sales Tax Act, 1957 (in short 'APGST') provided tax had already been levied on the sale or purchase of any of the materials specified in Item No.2 of the Third Schedule of the said Act; which, included the raw materials purchased by appellant No.1.

16.3.By a subsequent notification i.e. G.O.Ms.No.1373, (Revenue), dated 28.08.1981, amendment was made to G.O.Ms.No.88. By virtue of this amendment, exemption available under G.O.Ms.No.88 became available only to those re-rolled finished products of steel re-rollers, which were situate in the State of Andhra Pradesh.

16.4.G.O.Ms.No.88 was cancelled w.e.f 04.02.1982. Thereafter, another notification was issued bearing G.O.Ms.No.498, dated 20.03.1984, whereby, exemption from APGST was granted only to those re-rolled finished products, which, were manufactured in steel plants-cum-re-rollers situate in the State of Andhra Pradesh and sold within the said State.

16.5. These notifications, were challenged by the appellants, before the Supreme Court, on the ground that they were violative of Article 304(a) of the Constitution. The Supreme Court, following its own judgements in (i) Firm A.T.B. Mehtab Majid & Co case and (ii) Andhra Pradesh Steel Corporation case, struck down, that part of the Notification, which, excluded the benefit of exemption from tax to those re-rolled finished products, which were manufactured, outside the State.

16.6.The observations made in that behalf which are contained in paragraphs 10 and 11 are extracted hereafter:

'....10. In the present case the appellants have purchased the raw material in the State of Andhra Pradesh and tax has been paid under the Andhra Pradesh General Sales Tax on this raw material. We do not see any reason why the finished products from the re-rolled mills which are sold in Andhra Pradesh should be subjected to discrimination on the ground that these products have been manufactured outside the State and not inside the State. There is clear violation of Article 304(a) in the present case.

11. It was, however, contended before us by the department that the exemption notification must be read as a whole and, therefore, if we find the exemption notification to be violative of Article 304(a) the entire exemption notification will have to be struck down and not just a portion of it which is discriminatory as contended by the appellants. This question in relation to a taxing statute has been considered by this Court as far back as in 1953 in the case of The State of Bombay and Anr. v. The United Motors (India) Ltd. and Ors. [1953] SCR 1069 at 1097. If the taxing statute imposes tax on subjects which are divisible in their nature and if the covered subjects which are exempted by the Constitution are wrongly taxed, the entire taxing statute need not be declared as ultra vires because it is feasible to separate taxes levied on authorised subjects from those levied on exempt subjects and to exclude the latter in the assessment to tax. In such cases this Court has said the statute itself should be allowed to stand. The taxing authority can be prevented by injunction from imposing the tax on subjects exempted by the Constitution. In the present case the exemption notification as it originally stood exempted all re-rolled finished products sold in the State of Andhra Pradesh from tax provided tax had been paid in the State of Andhra Pradesh on the raw material. This exemption is still available to re-rolled products which are manufactured within the State. No exception can be taken to this part of the notification. Only the portion of exemption notification which discriminates against goods manufactured outsides the State violates the provisions of Articles 304(a). In fact the words denying this exemption to goods manufactured outsides the State were expressly and specifically added to the original exemption notification by the amending G.O.Ms. No.1373 of 28.3.1981. It is this amendment alone, which is clearly severable, that offends Article 304(a). It can, therefore, be struck down. The subsequent notification of 20.3.1984 proceeds on the same basis.There is no need, therefore, to strike down the entire tax exemption which is granted to all re-rolled steel products sold in the State of Andhra Pradesh and manufactured out of tax paid raw material purchased in the State of Andhra Pradesh. The discriminatory provision is clearly severally and can be struck down.' (emphasis is ours)

17. A similar issue arose for consideration in the decision rendered in State of Uttar Pradesh and others Vs. Jaiprakash Associates Limited, (2014) 4 SCC 720.

17.1.This was a case where the State of U.P. issued Notifications under Section 5 of the U.P.Trade Tax Act, 1948 (in short '1948 Act') to grant rebate to those cement plants which used fly ash from thermal power stations situate in the State of U.P., provided the manufacturing units were also located in the State. The rebate given was calibrated in line with the fly ash content in the cement. The higher the fly ash content, the higher was the rebate.

17.2.The respondents before the Supreme Court were assessees who had their manufacturing units located in the Reva district situate in the State of Madhya Pradesh. It may also be necessary to note that the notification issued under the 1948 Act granting rebate, named Districts and the period for which rebate was available to the units located in the relevant districts.

17.3.The Supreme Court declared that the rebate in tax granted by U.P. State Government to cement manufacturing units using fly ash in a unit established in the designated district of the State as violative of Article 301 and 304(a) of the Constitution. The Court further declared that the impugned notification would also apply to the manufacturing units of the respondents which were located outside the State of U.P.

17.4.While coming to this conclusion, the Bench, inter alia, made the following observations, which are contained in paragraphs 52 to 57 of the judgement. For the sake of convenience, the same are extracted hereunder:

'.....52. Exemption as we normally understand has two-fold impact. First, exemptions/ concessional rate of tax affect consumer choice by impacting relative pricing and, thus, materially altering the economic balance. It is because consumption will tend to shift towards untaxed items, the prices of those items and the items used to produce them will increase while the prices of taxed items will decrease relatively. Second, such exemptions unfairly burden some businesses either within the same industry or in other competing industries.

53. Rebate is another such device used by the Government which when given on the rate of tax to the full amount of tax levied, it gives favourable treatment to one class of dealers situated within the state barring the dealers similarly placed outside the State manufacturing goods using the same raw material. The grant of such rebate has the colour of exemption/ concessional rate of tax along with the same deleterious effects of an exemption.

54. Therefore, the test to be applied to determine whether rebate is within the realm of tax defined in Article 304(a) of the Constitution of India so as to say that it discriminates between the two class of goods: locally manufactured goods and the imported goods when both the class of dealers meet the conditions required to qualify for the grant of rebate i.e. the use of fly-ash, is the overall effect or impact of such rebate on the manufacturer.

55. This issue is no longer res-integra and is discussed in several cases including in the case of Firm A.T.B. Mehta Masjid & Co v. State of Madras and Anr., AIR 1963 SC 928, where the question for consideration was whether Rule 16 of the Madras General Sale Tax Rules, 1939 subjected tanned hides and skins outside the State, and sold within the State to a higher rate of tax than the tax imposed on hides or skins tanned and sold within the state and therefore violating Article 304(a) of the Constitution. This Court observed that to determine whether the rule was discriminatory, the effect of this rule is to be seen. The result therefore is that the sale of hides or skins which had been purchased in the State and then tanned within the State is not subject to any further tax. Hides and skins tanned within the State are mostly those which had been purchased in their raw condition in the State and therefore on which tax had already been levied on the price paid by the purchaser at the time of their sale in the raw condition. If the quantum of tax had been the same, there might have been no case for grievance by the dealer of the tanned hides and skins which had been tanned outside the State. The grievance arises on account of the amount of tax levied being different on account of the existence of a substantial disparity in the price of the raw hides or skins and of those hides or skins after they had been tanned, though the rate is the same under Section 3(1)(b) of the Act. If the dealer has purchased the raw hide or skin in the State, he does not pay on the sale price of the tanned hides or skins, he pays on the purchase price only. If the dealer purchases raw hides or skins from outside the State and tans them within the State, he will be liable to pay sales-tax on the sale price of the tanned hides or skins. He too will have to pay more for tax even though the hides and skins are tanned within the State, merely on account of his having imported the hides and skins from outside. Therefore, the Court held that this rule on this ground alone is discriminatory of Article 304(a) of the Constitution of India.

56.The above principle was re-iterated in the case of W.B.Hosiery Association and others v. State of Bihar; (1988) 4 SCC 134 and in the case of H. Anraj v Government of Tamil Nadu; (1986) 1 SCC 414; wherein the effect of an exemption was discussed. The issue before the Court was that the locally manufactured goods within the State were exempted but those manufactured in other States and imported into the State were subjected to a high rate of tax. The hosiery manufacturers and dealers in the State of West Bengal in their prayer in the writ petition asked for a direction asking the respondents to forbear from levying or imposing or collecting any sales tax on the sale of hosiery goods imported into Bihar from other States. The State Government by a notification exempted dealers from sales tax of hosiery goods manufactured and produced in the State of Bihar whereas levied sales tax on the dealers outside the State. This Court opined that from the commercial or normal point of view, such a discriminatory levy of sales tax would have an effect that would be bound to affect the free flow of hosiery goods from outside State into the State of Bihar and would therefore violate Article 301 read with Article 304(a) of the Constitution of India.

57. The above decision is also followed in the case of Western Electronics and Another v. State of Gujarat and others, 1988 2 SCC 568; and in the case of Loharn Steel Industries v. State of Andhra Pradesh; (1997) 2 SCC 37 wherein the impact of exemption on the manufacturer was such that the manufactures outside Andhra Pradesh had to pay a higher rate of tax as compared to the manufacturers in Andhra Pradesh because of the entire tax exemption granted to the all re-rolled steel products sold in the Andhra Pradesh and manufactured out of tax paid raw-material purchased in the State of Andhra Pradesh. Therefore, the notification in this case was considered to be violating Article 304(a) of the Constitution of India.'

17.5.To be noted, in this case, the Supreme Court severed condition No.1 of the impugned notification, which required that, for grant of rebate of tax, the manufacturing unit had to be located in the State of Uttar Pradesh.

18.In so far as the scope, ambit, width and amplitude of the provisions of Article 301 to 304 of the Constitution are concerned, they have been, more recently, deliberated upon in a Nine-Judge Bench judgement of the Supreme Court in the matter of Jindal Stainless Ltd. and another V. State of Haryana and Others, 2016 (11) Scale 1.

18.1.The majority judgement has been authored by Hon'ble Mr.Justice T.S.Thakur, Chief Justice of India (as he then was), for himself and Hon'ble Mr.Justice A.K.Sikri and Hon'ble Mr.Justice A.M.Khanwilkar. The majority judgement framed the following four questions of law, with the help of the counsels who appeared in that matter, which, according to learned Judges, fell for determination :

"1. Can the levy of a non-discriminatory tax per se constitute infraction of Article 301 of the Constitution of India?

2. If answer to question No. 1 is in the affirmative, can a tax which is compensatory in nature also fall foul of Article 301 of the Constitution of India?

3. What are the tests for determining whether the tax or levy is compensatory in nature?

4. Is the Entry Tax levied by the States in the present batch of cases violative of Article 301 of the Constitution and in particular have the impugned State enactments relating to entry tax to be tested with reference to both Articles 304(a) and 304(b) of the Constitution for determining their validity?

18.2.The conclusion, which, the Court reached, with regard to its deliberation qua Articles 301 to 304, is summarised in paragraphs 72 of the judgement. The said observation, for the sake of convenience, are extracted hereafter :

"72. The sum total of what we have said above regarding Articles 301, 302, 303 & 304 may be summarized as under:

1. Freedom of trade, commerce and intercourse in terms of Article 301 is not absolute but is subject to the Provisions of Part XIII.

2. Article 302 which appears in Part XIII empowers the Parliament to impose restrictions on trade, commerce and intercourse in public interest.

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.

4. The restriction that the 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.

5. Article 304(a) recognizes 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.

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.

7. The limitation on the power to levy taxes is entirely covered by Clause (a) of Article 304 which exhausts the universe in so far as the State legislature’s power to levy of taxes is concerned.

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.

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."

19. The important take away from the judgement is that, the majority view sustained the contention that the levy of non-discriminatory tax was not violative of Article 301 read with Article 304(a) of the Constitution.

19.1.The majority judgement, thus, held that it is only discriminatory tax which if imposed on goods imported from other States that impedes free trade, commerce and intercourse, as contemplated under Article 301 of the Constitution. Furthermore, the Court overruled its earlier judgements rendered in Atiabari Tea Co. Ltd. V. State of Assam and Others, AIR 1961 SC 232 and Automobile Transport (Rajasthan) Ltd. V. State of Rajasthan, AIR 1962 SC 1406. The majority judgement further held that the theory of compensatory taxes evolved and propounded in the majority judgement rendered in Automobile Transport (Rajasthan) Limited case, had no constitutional basis.

19.2.Pertinently, the majority judgement also indicated that tax laws were not immune from challenge under Article 14 of the Constitution. (See paragraphs 94 and 95 of the judgement).

19.3.In so far as the first three questions are concerned, the answers given in the majority judgement are contained in paragraphs 126 to 129. These are extracted, for the sake of inconvenience, hereafter :

"126. In the light of what we have said above, we answer Question No.1 in the negative and declare that a non-discriminatory tax does not per se constitute a restriction on the right to free trade, commerce and intercourse guaranteed under Article 301. Decisions taking a contrary view in Atiabari’s case (supra) followed by a series of later decisions shall, therefore, stand overruled including the decision in Automobile Transport (supra) declaring that taxes generally are restrictions on the freedom of trade, commerce and intercourse but such of them as are compensatory in nature do not offend Article 301. Resultantly decisions of his Court in Jindal Stainless Limited and anr. v. State of Haryana and ors. (2006) 7 SCC 241 shall also stand overruled.

127. Re. Question No.2

In view of our answer to Question No.1, Question No.2 does not arise for consideration.

128. Re. Question No.3

In the light of what we have said in Question Nos. 1 and 2, this question also does not survive for consideration.

129. Re. Question No.4

This question touching the constitutional validity of the impugned State enactments can be split into two parts. The first part which can be briefly dealt with at the outset is whether the constitutional validity of the impugned legislations has to be tested by reference to both Articles 304(a) and 304(b) as contended by learned counsel for the assessees or only by reference to Article 304(a) as argued by the Page 161 161 States. In the light of what we have said while dealing with question No.1 we have no hesitation in holding that Article 304(b) does not deal with taxes as restrictions. At the risk of repetition, we may say that restrictions referred to in Article 304(b) are non-fiscal in nature. Constitutional validity of any taxing statute has, therefore, to be tested only on the anvil of Article 304(a) and if the law is found to be nondiscriminatory, it can be declared to be constitutionally valid without the legislation having to go through the test or 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). That is because what is constitutionally impermissible in terms of Article 304(a) cannot be validated and sanctioned through the medium of Article 304(b). Suffice it to say that a fiscal statute shall be open to challenge only under Article 304(a) of the Constitution without being subjected to the test of Article 304(b) either in terms of the existence of public interest or reasonableness of the levy.(emphasis is ours)

19.4.In so far question No.4 is concerned, the Court dealt with only two aspects: Whether the incentives in the form of exemption or reduced rate of duty levied by the State, in order to promote industrial development would amount to insidious discrimination, and hence, violate the provisions of Article 304(a) of the Constitution. In this behalf, the majority judgement noticed the view taken by the Court in its earlier judgements, i.e., Shree Mahavir Oil Mills and Another V. State of Jammu and Kashmir and Others, (1996) 2 SCC 39 and the judgment rendered by it in Video Electronics V. State of Punjab, (1990) 3 SCC 87. The observations made by the Court in respect of this aspect were as follow :

'130. That brings us to the second part of question No.4 viz. whether the impugned State enactments violate Article 304(a) of the Constitution. That aspect will necessarily involve a careful reading of the impugned enactments and a proper appreciation of the scheme underlying the same. While we have at some length heard learned counsel for the parties on that aspect, we do not propose to deal with all the dimensions of that challenge based on Article 304(a) except two of them that were argued at great length by learned counsel for the parties. The first of these two dimensions touches upon the State’s power to promote industrial development by granting incentives including those in the nature of exemptions or reduced rates of levy on goods locally produced or manufactured. On behalf of the assesses it was contended that grant of exemptions and incentives in favour of locally manufactured/produced goods is also one form of insidious discrimination which was impermissible in terms of article 304(a) for such exemptions and incentives had the effect of putting goods from another State at a disadvantage. Relying upon a decision of two-Judge Bench of this Court in Shree Mahavir Oil Mills and Anr. v. State of Jammu and Kashmir and Ors. (1996) 2 SCC 39 it was argued that exemptions in favour of locally produced goods from payment of taxes was constitutionally impermissible and offensive to article 304(a). That was a case where the State Government had totally exempted goods manufactured by small scale industries within the State from payment of sales tax even when the sales tax payable by other industries including manufacturers of goods in adjoining States was in the range of 8%. This exemption was questioned by manufacturers of edible oils from other States on the ground that the same was discriminatory and violative of Articles 301 and 304 of the Constitution.

131. This Court held that the exemption given to manufacturers of edible oil was total and unconditional, while producers of edible oil from industries in adjoining states had to pay sales tax @ 8%. Grant of exemption to local oil producing units thereby put the former at a disadvantage. Having said that, the Court exercised its powers under Article 142 of the Constitution and struck down the exemption by moulding the reliefs to suit the exigencies of the situation. The Court no doubt noticed a three-Judge Bench decision in Video Electronics vs. State of Punjab (1990) 3 SCC 87 in which notifications issued by the States of U.P and Punjab providing for exemptions to new units established in certain areas for a prescribed period of 3 to 7 years were assailed as discriminatory. The challenge to the exemption was in that case also based on the alleged violation of Articles 301 and 304. This Court however upheld the notifications in question on the ground that the same related to a specific class of industrial units and the benefit under the same was admissible for a limited period of time only. The Court observed that if an overwhelmingly large number of local manufacturers were subject to sales tax, it could not be said that the local manufactures were favored as a class against outsiders. Adverting to the decision in Video Electronics (supra) this Court in Mahavir (supra) held the same to be distinguishable on the ground that the Punjab and U.P notifications were qualitatively different from the one issued by the Government of Jammu and Kashmir in as much as while the former benefited only specified units and limited the benefit to a specified period, the latter was not subject to any such limitations. This declared the Court resulted in discrimination vis-a-vis. outside goods. What is important is that in Video Electronics (supra) this Court recognized the difference between differentiation and discrimination and held that every differentiation is not discrimination. This Court noted that the word discrimination was not used in Article 14 as it has been used in Article 16, Article 303 and Article 304 (a). The use of the word in 304 (a) observed this Court involved an element of 'intentional and unfavorable bias'. So long as there was no such bias evident from the measure adopted by the state, mere grant of exemption or incentives aimed at supporting local industries in their growth, development and progress did not constitute discrimination.

132. We respectfully agree with the line of reasoning adopted in Video Electronics (supra). The expression 'discrimination' has not been defined in the Constitution though the same has fallen for interpretation of this Court on several occasions. The earliest of these decisions was rendered in Kathi Raning Rawat v. The State of Saurashtra AIR 1952 SC 123, where a seven-Judge Bench of this Court held that all legislative differentiation is not necessarily discriminatory. Relying upon the meaning of the expression in Oxford Dictionary, Patanjali Sastri, CJ (as His Lordship then was) explained :

'7. All legislative differentiation is not necessarily discriminatory. In fact, the word 'discrimination' does not occur in Article 14. The expression 'discriminate against' is used in Article 15(1) and Article 16(2), and it means, according to the Oxford Dictionary, 'to make an adverse distinction with regard to; to distinguish unfavourably from others'. Discrimination thus involves an element of unfavourable bias and it is in that sense that the expression has to be understood in this context. If such bias is disclosed and is based on any of the grounds mentioned in Articles 15 and 16, it may well be that the statute will, without more, incur condemnation as violating a specific constitutional prohibition unless it is saved by one or other of the provisos to those articles. But the position under Article 14 is different. Equal protection claims under that article are examined with the presumption that the State action is reasonable and justified. This presumption of constitutionality stems from the wide power of classifi-cation which the legislature must, of necessity, possess in making laws operating differently as regards different groups of persons in order to give effect to its policies…..'

133. Fazl Ali J. in his concurring judgment explained the concept in the following words:

'19. I think that a distinction should be drawn between 'discrimination without reason' and 'discrimination with reason'. The whole doctrine of classification is based on this distinction and on the well-known fact that the circumstances which govern one set of persons or objects may not necessarily be the same as those governing another set of persons or objects, so that the question of unequal treatment does not really arise as between persons governed by different conditions and different sets of circumstances. The main objection to the West Bengal Act was that it permitted discrimination 'without reason' or without any rational basis.'

Any challenge to a fiscal enactment on the touchstone of Article 304(a) must in our opinion be tested by the same standard as in Kathi’s case (supra). 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 Court were to find that there is no such element of intentional bias favouring the locally produced goods as against those from outside, it may have to go further and see whether the differentiation would be supported by valid reasons. In the words of Fazl Ali, J. discrimination without reason would be unconstitutional whereas discrimination with reason may be legally acceptable. In Video Electronic’s case, this Court noted that the differentiation made was supported by reasons. This Court held that if economic unity of India is one of the Constitutional aspirations and if attaining and maintaining such unity is a Constitutional goal, such unity and objectives can be achieved only if all parts of the Country develop equally. There is, if we may say so, with respect considerable merit in that line of reasoning. A State which is economically and industrially backward on account of several factors must have the opportunity and the freedom to pursue and achieve development in a measure equal to other and more fortunate regions of the country which have for historical reasons, developed faster and thereby acquired an edge over its less fortunate country cousins. Economic unity from the point of view of such underdeveloped or developing states will be an illusion if they do not have the opportunity or the legal entitlement to promote industries within their respective territories by granting incentives and exemptions necessary for such growth and development. The argument that power to grant exemption cannot be used by the State even in case where such exemptions are manifestly intended to promote industrial growth or promoting industrial activity has not appealed to us. The 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. The conceptual foundation on which such exemptions and incentives have been held permissible and upheld by this Court in Video’s case is, in our opinion, juristically sound and legally unexceptionable. 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. Grant of exemptions and incentives in such cases must be deemed to have been inspired by considerations which in the larger context help achieve the Constitutional goal of economic unity.

134. Seen in the above context the decision in Mahabir Oil’s case is indeed distinguishable in as much as the manufactures of edible oil were exempt totally and unconditionally while other manufacturers from outside the State were not so exempt. Whether or not the impugned enactments in the present batch of cases satisfy the tests referred to above and elaborated in Video Electronics case is a matter on which we do not propose to express any opinion for that aspect is best left open to be considered by the regular benches hearing these matters after the reference is disposed off." (emphasis is ours)

19.5.The other aspect, on which, the majority judgement deliberated upon was to examine whether the grant of exemption / adjustment / set off/ credit given to goods produced / manufactured within the taxing State vis-a-vis those goods imported from outside the State would constitute an act of discrimination. In this behalf, the following observations are relevant :

"137. The legal position as to the approach that courts adopt towards fiscal measures while examining their constitutional validity is fairly well settled by a long line of decisions of this Court. The law on the subject is so well settled that it calls for no elaborate discussion of the same. Courts have almost universally accepted the principle that keeping in view the inherent complexities of fiscal adjustments and the diverse elements and inputs that go into such exercise a greater latitude is due to the legislature in taxation related legislations. It is unnecessary to refer to all the decisions in which this Court has conceded such play at the joints to the legislature.

138. Reference may also be made to the Constitution bench decision of this Court in Khandige Sham Bhat v. Agrl. ITO, AIR 1963 SC 591 where this Court declared that a law may facially appear to be non discrimination and yet its impact on persons and property similarly situate may operate unequally in which event, the law would offend the equity clause. This implies that facial equality is not the only test for determining whether the law is constitutionally valid. What is equally important is the impact of the legislation. This Court held:

'7…Though a law ex facie appears to treat all that fall within a class alike, if in effect it operates unevenly on persons or property similarly situated, it may be said that the law offends the equality clause. It will then be the duty of the court to scrutinise the effect of the law carefully to ascertain its real impact on the persons or property similarly situated. Conversely, a law may treat persons who appear to be similarly situate differently; but on investigation they may be found not to be similarly situate. To state it differently, it is not the phraseology of a statute that governs the situation but the effect of the law that is decisive. If there is equality and uniformity within each group, the law will not be condemned as discriminative, though due to some fortuitous circumstance arising out of a peculiar situation some included in a class get an advantage over others, so long as they are not singled out for special treatment. Taxation law is not an exception to this doctrine vide Purshottam Govindji v. B.M. Desai, and Kunnathat Thathuni Moopil Nair v. State of Kerala. But in the application of the principles, the courts, in view of the inherent complexity of fiscal adjustment of diverse elements, permit a larger discretion to the legislature in the matter of classification, so long it adheres to the fundamental principles underlying the said doctrine. The power of the legislature to classify is of 'wide range and flexibiliy' so that it can adjust its system of taxation in all proper and reasonable ways.'

XXXXXX

141. Seen in the context of the above, we are inclined to accept the submission made on behalf of the State that so long as the intention behind the grant of exemption/adjustment/credit is to equalize the fall of the fiscal burden on the goods from within the State and those from outside the State such exemption or set off will not amount to hostile discrimination offensive to Article 304(a). Having said that, we leave open for examination by the regular benches hearing the matters whether the impugned enactment achieve the object of such equalization or lead to a situation that exposes goods from outside the state to suffer any disadvantage vis-a-vis those produced or manufactured in the taxing State." (emphasis is ours)

20. Therefore, upon a close perusal and examination of the aforesaid decisions, according to us, the following propositions get enunciated, which can briefly be summarised as follows:

(i)First, if the Constitutional validity of a taxing statute has to be tested, regard has to be had to the provisions of Article 304(a). In case the impugned law is nothing but 'non-discriminatory', it can be declared as Constitutionally valid without the said legislation having

Please Login To View The Full Judgment!

to go through the test or the process articulated in Article 304(b). The restrictions adverted to in Article 304 (b) are not fiscal in nature (SeeJindal Stainless Ltd case) (ii) Second, there is a difference between 'differentiation' and 'discrimination'. Every 'differentiation' is not 'discrimination'. Therefore, the expression 'discriminate' incorporated in Article 304(a) would take within its ambit those measures adopted by the State which are infected with 'intentional' and 'unfavourable bias'. Thus, as long as, the 'differentiation' made by the State is not intended to create an 'unfavourable bias' and as 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 the State.' (See paragraph 133 of Jindal Stainless Ltd case) (iii)Third, given the inherent complexities of fiscal Statute greater play in the joints must be provided to tax related fiscal and / or revenue legislations. Having said so, fiscal legislations can also be tested on the anvil of Article 14 though a rebuttable presumption holds in their favour that they are Constitutionally valid. In examining whether the Statute is discriminatory, in as much as, it does not operate even-handedly qua person and / or property, similarly situate, the impact of the legislation has to be ascertained. (See paragraph 138 of Jindal Stainless Ltd case). (iv) Fourth, the taxing laws do not per se impede free trade, commerce and intercourse, unless they are discriminatory in nature. (v) Fifth, tax which discriminates between goods of one State and another could affect free flow of trade and would violate provisions of Article 301 of the Constitution unless it comes within the purview of Article 304(a) of the Constitution. Article 304(a) of the Constitution empowers the State Legislatures to impose tax on goods from other States, if similar goods, in the State are subjected to similar taxes, so that, no discrimination is brought about between goods manufactured in the State and those imported into the State. Similarity adverted to in Article 304(a) pertains to quality and nature of goods. (vi)Sixth, while looking at Article 304(a) not only rate of tax has to be seen which may be identical, but also its final impact would have to be assessed. (see Firm ATB Mehtab Majid case; Andhra Steel Corporation case; Bhoruka Steel Limited case; Loharan Steel Industries Ltd case; Jaiprakash Associates Ltd case andJindal Stainless Steel). (vii)Seventh, grant of exemption for a limited period to specific / distinct class of industries may not violate Article 301 of the Constitution (See Video Electronics (P) Ltd Vs. State of Punjab, (1990) 3 SCC 87 and Jindal Stainless Steel). (viii)Eighth, while States are free within their legislative domain i.e. List II of Schedule VII of the Constitution to levy taxes on goods imported from other States and/or Union Territories, that power cannot be exercised in a manner which discriminates between imported and similar goods manufactured or produced in the State. Article 304(a) of the Constitution prohibits discrimination via taxation. The States are free to encourage development of industry within their State by all and every means available, to it, but it cannot by taking recourse to this plea, subject goods, imported into the State, to a higher rate of tax, as compared to similar goods manufactured and produced in the State. (ix)Ninth, the grant of rebate, exemption, concession or subsidy in the rate of tax which impact relative pricing of goods as between those that are imported into the State and those that are manufactured in the State, will attract the censure of Article 304(a) of the Constitution. 21.The facts which obtain in the present case, clearly, demonstrate, that ITC is not made available by the respondents, to those assessees who have had tax suffered raw materials such as bullion and / or worn out jewellery converted into final products (i.e. jewellery) by having them manufactured / processed in units situate outside the State of Tamil Nadu, even though, the final product is sold, upon payment of tax within the State of Tamil Nadu. 22. Consequently, the final product (i.e. jewellery) manufactured by the assessee within the State from tax paid raw materials purchased within the State upon sale, within the State, gets the benefit of ITC, whereas, those goods which are manufactured outside the State, though by use of tax suffered raw materials purchased, within the State, do not get that benefit. Clearly, if the impact test is applied, goods manufactured outside the State, upon being brought within the State, for sale, would be costlier, as against those, which are, manufactured within the State. 23.The argument of the respondents that the impugned provision, that is Section 19(2)(ii) of the 2006 Act, which empowers them to make such distinction was valid as it enabled the State to give a fillip to industrialisation and generation of employment, is flawed in the facts of this case. The reason we say this is because the impugned provision applies across the board, making neither a distinction between old and new business / industry nor limiting its impact to a specified period. The result is that goods which are similar in quality and nature bear a different tax burden, thus, violating Article 304(a) of the Constitution. 24.The impugned provision seeks to pivot the denial of tax credit on the basis circumstance and not on the basis of quality or nature of goods. The fact that ITC is denied on the basis of where the manufacturing unit of the assessee is located results in hostile discrimination against those who have their manufacturing unit located outside the State of Tamil Nadu. 25. As a matter of fact, in our view, Section 19(4) of the 2006 Act provides intrinsic evidence that ITC cannot be disallowed merely because transfer of goods takes place outside the State. Section 19(4) allows for ITC on tax paid or payable, albeit, (in excess of 3%)*in respect of goods purchased in the State in two situations: (i) First, where transfer takes the goods to a place outside the State, otherwise than by way of sale; or (ii) Second, where goods are used in manufacture of other goods and are transferred to a place outside the State, otherwise than by sale. 26.The provision, recognises the fact that goods purchased within the State, on which tax has been paid, can be transferred outside the State, for reasons, other than sale. However, while recognising this aspect, the provision grants credit of tax to the extent it is in excess of 3%. In other words, tax paid on purchase of goods, within the State, as rightly pointed out by the respondents is retained by the State to the extent of 3%, while the tax collected over and above 3% is passed on to the assessee, by way of credit. 27.In the case of the writ petitioner, who deals with bullion and worn-out jewellery, the rate of tax both under Sl.No.1 and 4 of Part A of the First Schedule is only 1%. Therefore, Section 19(4) of the 2006 Act cannot come to its aid. Nevertheless, in our view, it does provide intrinsic evidence that ITC cannot be denied only on account of the goods being sent on transfer to a place outside the State for manufacture, and thereafter, brought to the State for sale. The denial of ITC in such circumstances would impede directly and immediately the free trade, commerce and intercourse in such goods (i.e. jewellery), as the trade would shift to places where ITC is not denied solely on the ground that the conversion or manufacture of goods takes place outside the State. 28.The writ petitioner rightly relies upon, the position obtaining in the State of Kerala and the State of Karnataka to buttress its stand. 28.1.Rule 15(3A) of the Kerala VAT Rules gives a clue in that behalf. For the sake of convenience, the relevant Rule is extracted herein: 'Rule 15. Determination of reverse tax. – (1) ..... (2)..... (3) (3A) If the goods in respect of which input tax credit has been claimed are sent as such or after being partially processed, for further processing, testing, repair, reconditioning, or any other similar purpose and are not received back within a period of ninety days, the input tax credit attributable to such goods shall be reverse tax for the month in which the period of ninety days expires except where goods so sent are sold in the course of interstate trade and tax is paid on such interstate sale in Kerala or are exported out of the territory of India, after such processing, if any. (3B)..... 4......' (emphasis is ours) 28.2.A perusal of the Rule shows that reversal of ITC claimed, can be ordered, only, where goods, which are, sent for processing, testing, repair and reconditioning or for other similar purposes are not received back, within a definite period, i.e., 90 days. In fact, the Rule does not confine the despatch of goods for the said purposes to places within the State of Kerala. 29.Similarly, the Circular issued by the State of Karnataka, Commercial Tax Department No.KNA.CR.311/2005-06, dated 09.06.2006, which, in fact, sets out answers to what are, perhaps, Frequently Asked Questions (FAQ), provides a clue in one of its answers to the situation at hand. For the sake of convenience, the relevant part of the Circular is extracted hereafter. '2. With regard to claim of input tax rebate on goods sent outside the State for job work, as the goods are temporarily sent outside the State, there is no need to reverse the input tax rebate availed and later claim input tax rebate after receipt of goods.' 29.1.A bare perusal of the aforesaid extract would show that ITC availed of need not be reversed merely because goods purchased are sent temporarily outside the State for the purposes of job work. 30. Therefore, having regard to the foregoing discussion, we are of the view that Section 19(2)(ii) of the 2006 Act is invalid to the extent that it denies availment of ITC in respect of those units which despatch tax suffered raw materials i.e. bullion / worn-out jewellery for conversion into final product (i.e. jewellery) outside the State which upon conversion are received back and sold within the State of Tamil Nadu. Thus, according to us, the mere fact that the manufacturing unit is located outside the State of Tamil Nadu, cannot be the basis, for denial of ITC, under Section 19(1) of the 2006 Act. Clause (ii) of Sub-Section (2) of Section 19 of the 2006 Act is, thus, declared bad in law. 31.For the very same reason, we also hold that the respondents cannot retain ITC on goods purchased within the State, by invoking provision of Section 19(4) of the 2006 Act to the extent of rate of tax provided therein i.e., 3% (which was the rate provided therein at the relevant point of time), as that would make the relief inefficacious since the subject goods i.e. bullion / worn-out jewellery on which tax credit was sought by the writ petitioner was imposed at the rate of 1%. 32. The writ petition is, thus, allowed in the aforesaid terms, leaving parties to bear their own costs.
O R