Article 286 and inter-State sales limits: constitutional restriction applied to Part C States, barring tax on outside-State sales.

Article 286 was read as applying to Part C States during the relevant period because the constitutional context and object of preventing multiple taxation and protecting free trade required a wider meaning of "State" than the definition clause in Article 264(b). On that basis, sales of goods delivered outside the State as a direct result of sales for consumption outside the State fell within the constitutional restriction and could not be taxed. Despatches covered by the reference were treated similarly, regardless of whether characterised as transfers or sales. The note states that the disputed turnover in Vindhya Pradesh was therefore outside sales tax.

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Issues: (i) Whether Article 286 of the Constitution applied to Part C States during the material assessment period. (ii) Whether the sales and despatches of bidis were liable to sales tax in view of Article 286.

Issue (i): Whether Article 286 of the Constitution applied to Part C States during the material assessment period.

Analysis: Article 264(b) defined "State" for Part XII as excluding a Part C State, unless the context otherwise required. Reading Article 286 with the object of preventing multiple taxation and safeguarding the free flow of trade, the Court held that the context of Article 286 compelled a wider meaning. The restriction on the taxing power of States would otherwise be seriously undermined if Part C States were excluded. The Court also drew support from the Sales Tax Laws Validation Act, 1956 and the legislative treatment of Part C State sales laws.

Conclusion: Article 286 applied to Part C States.

Issue (ii): Whether the sales and despatches of bidis were liable to sales tax in view of Article 286.

Analysis: Once Article 286 was held applicable, sales of goods delivered outside the State as a direct result of sale for consumption outside the State fell within the constitutional restriction and could not be taxed. The same consequence followed in respect of the despatches covered by the reference, irrespective of whether they were treated as transfers or sales, because the Tribunal's decision had rested on the erroneous view that Article 286 did not apply.

Conclusion: The challenged sales and despatches were not liable to sales tax.

Final Conclusion: The reference was answered by holding that the constitutional restriction applied in Vindhya Pradesh, with the result that the disputed turnover could not be subjected to sales tax.

Ratio Decidendi: Where the context and object of a constitutional provision require it, an interpretation clause excluding Part C States will not control the provision, and sales occurring outside the State for consumption outside the State cannot be taxed contrary to Article 286.

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