Trade tax rebate discrimination: territorial restriction on local units violated free trade and was severed from the valid scheme.

A rebate notification under the U.P. Trade Tax Act, 1948 that confined the benefit to units established in Uttar Pradesh was treated as discriminatory because it distinguished between identical goods manufactured inside and outside the State. The territorial condition was found inconsistent with the constitutional guarantee of free trade and commerce under Articles 301 and 304(a), and outside the limited exception for incentives to new units. The discriminatory restriction was also held severable from the rest of the rebate scheme, since the broader object was to promote use of fly ash generally. The offending condition was therefore struck down while the valid rebate remained intact.

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Issues: (i) Whether the condition in the rebate notification restricting the benefit to units established in Uttar Pradesh was discriminatory and violative of freedom of trade under the Constitution. (ii) Whether the unconstitutional condition was severable from the rest of the rebate notification.

Issue (i): Whether the condition in the rebate notification restricting the benefit to units established in Uttar Pradesh was discriminatory and violative of freedom of trade under the Constitution.

Analysis: The rebate granted under Section 5 of the U.P. Trade Tax Act, 1948 was limited by a condition confining it to units located within specified areas of Uttar Pradesh. The restriction created a distinction between goods manufactured within the State and identical goods manufactured outside the State. Such discrimination offended the constitutional guarantee of free trade and commerce and did not fall within the narrow exception applicable to limited incentives for new units under Section 4-A of the U.P. Trade Tax Act, 1948.

Conclusion: The condition was illegal and violative of Articles 301 and 304(a) of the Constitution of India.

Issue (ii): Whether the unconstitutional condition was severable from the rest of the rebate notification.

Analysis: The earlier notification, which contained no such territorial restriction, indicated that the governmental object was to encourage use of fly ash and provide rebate on such products generally. The purpose of the concession was to promote consumption of fly ash and address wastage and storage concerns, not to confine the benefit only to local manufacturers. On that basis, the discriminatory portion was separable from the valid rebate scheme.

Conclusion: The offending territorial restriction was severable and only that part was liable to be struck down.

Final Conclusion: The rebate condition limiting the concession to units established in Uttar Pradesh was quashed, and the petitioners were held entitled to the rebate and consequential monetary relief.

Ratio Decidendi: A tax rebate or exemption cannot be confined to goods manufactured within the State where it results in discrimination against identical goods manufactured outside the State, and if the discriminatory restriction is severable, only that restriction may be struck down while preserving the valid concession.

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