State exemption limited to locally manufactured goods held discriminatory and unconstitutional for violating free trade guarantees.

A State exemption notification that limited relief to goods processed or manufactured "in the State" was held discriminatory because identical goods imported from other States, though otherwise satisfying the exemption conditions, were denied the same tax benefit. The Court applied the constitutional guarantee of free trade and held that a State exemption power cannot be used to impose a restriction that favours local goods over imported goods. The words "in the State" in clause 5 were declared unconstitutional, and the assessment orders and demand notices based on that clause were quashed; the matter was remanded for fresh decision under the exemption notification.

---

---

Issues: Whether the words "in the State" in clause 5 of the exemption notification were unconstitutional as discriminatory and violative of the freedom of trade under the Constitution, and whether the assessment orders and demand notices passed in consequence thereof were liable to be quashed.

Analysis: The exemption scheme, as amended by the later notification, confined relief to products processed or manufactured within Rajasthan, with the result that identical goods imported from outside the State but otherwise satisfying the conditions of exemption were subjected to tax. Such a classification was held to create discrimination between goods imported from other States and similar goods manufactured in the State. The Court applied the constitutional mandate that trade throughout the territory of India shall be free, and that any State tax on imported goods must not discriminate against them. The Court also held that the State's power to grant exemptions did not permit a discriminatory restriction which hampered free flow of trade.

Conclusion: The words "in the State" in clause 5 of the notification were declared unconstitutional. The assessment orders and demand notices issued pursuant to that clause were quashed, and the matter was remanded to the assessing authority for fresh decision in accordance with the exemption notification.

Ratio Decidendi: A State exemption notification that grants tax relief only to locally manufactured goods while denying the same benefit to identical imported goods, despite fulfillment of the same conditions, is discriminatory and invalid for offending the constitutional guarantee of free trade.

---