Manufacture-linked tax relief restricted to in-State production was discriminatory; the offending words were severed and the rest upheld.

Tax reduction under Explanation II to Schedule IV of the Karnataka Sales Tax Act was held discriminatory to the extent it confined the benefit to goods manufactured in Karnataka from raw material purchased within the State. Denying the same relief where the taxed raw material was used to manufacture goods outside Karnataka placed locally manufactured goods and out-of-State manufactured goods on unequal footing and offended Article 304(a). The words "in Karnataka" were severed as unconstitutional, while the remainder of the provision was upheld because it could operate independently.

---

---

Issues: Whether Explanation II to Schedule IV of the Karnataka Sales Tax Act, 1957, and the denial of tax reduction for goods manufactured outside Karnataka, were discriminatory and violative of Article 304(a) of the Constitution of India, and whether the offending words could be severed while leaving the rest of the provision intact.

Analysis: The provision granted reduction of tax only where the raw material purchased within Karnataka was used to manufacture the finished goods in Karnataka, thereby denying the same benefit where the manufacturing activity took place outside the State. Such a distinction placed locally manufactured goods and goods manufactured outside the State on different footing, although the raw material had suffered tax within Karnataka. The controlling principle was that a State tax cannot discriminate against imported goods or create a barrier affecting free trade, and where only a part of a provision is unconstitutional, the offending part may be struck down if the rest can operate independently.

Conclusion: The restriction embodied in the words "in Karnataka" was unconstitutional and was deleted, while the remainder of Explanation II to Schedule IV was upheld as valid.

Ratio Decidendi: A fiscal provision that conditions tax relief on manufacture within the State, while denying the same relief for goods manufactured outside the State from locally purchased taxed raw material, is discriminatory and offends Article 304(a); the unconstitutional part alone may be severed if the residue is workable.

---