Article 304(a) discrimination in sales tax exemption invalidated where identical finished goods were treated differently by scrap source.

Section 5(4) of the Karnataka Sales Tax Act, read with Explanation II to item 2 of the Fourth Schedule, was treated as discriminatory because it denied exemption to finished goods manufactured from iron scrap that had not suffered tax and thus favoured goods made from locally purchased tax-suffered scrap over identical goods made from imported scrap. The Court held that this was differential treatment based on the source of the raw material, not a mere difference in tax burden, and that a State law cannot impose unequal tax treatment on similar goods manufactured in the State and similar goods brought in from outside. The provision was therefore held violative of article 304(a) and ultra vires.

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Issues: Whether section 5(4) of the Karnataka Sales Tax Act read with Explanation II to item 2 of the Fourth Schedule, insofar as it denied exemption to finished goods manufactured from iron scrap that had not suffered tax and thus differentiated between locally procured and imported scrap, violated article 304(a) of the Constitution of India.

Analysis: The impugned provision exempted steel semis and rerolled products only where tax had already been paid on the specified scrap or steel semis used as inputs and proof of prior tax payment was furnished. That scheme meant that finished goods manufactured from locally purchased tax-suffered scrap were exempt, while identical finished goods manufactured from scrap brought from outside the State were taxed. The Court held that this created discrimination between similar goods based on the source of the raw material and was not a mere difference in the quantum of burden arising from the tax structure. The earlier decisions dealing with hides and skins and with inter-State sales were distinguished, since those cases concerned different statutory settings and did not dilute the principle that a State law cannot impose differential tax treatment on similar goods manufactured or produced in the State and similar goods imported into the State.

Conclusion: The impugned provision was held to be violative of article 304(a) and ultra vires, and the assessee succeeded.

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