Discriminatory surcharge on imported stock was struck down for hostile treatment of out-of-State goods.

Section 3(1A) of the Kerala Surcharge on Taxes Act, 1957 was found unconstitutional because it imposed surcharge only on national or multinational retail or direct marketing chains importing at least 50% of stock from outside the State or country. The Court applied the constitutional test against hostile discrimination in taxation, holding that a levy must rest on reasonable classification and intelligible differentia and must not create an unfavourable bias against imported goods or in favour of local goods. As the measure was discriminatory in purpose and effect, the challenge succeeded and the State's appeals were rejected.

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Issues: Whether Section 3(1A) of the Kerala Surcharge on Taxes Act, 1957, which levied surcharge only on national or multinational retail or direct marketing chains importing not less than 50% of their stock from outside the State or country, was constitutionally valid under Articles 301, 304(a) and 14 of the Constitution of India.

Analysis: The surcharge was confined to a specified class of dealers and operated only where the dealer imported a substantial part of its stock from outside the State or country. The classification was not shown to be a mere fiscal differentiation with equal treatment of locally sourced goods and imported goods. Applying the principles laid down in the controlling Constitution Bench decision, a tax or levy is permissible only when it does not create hostile discrimination against imported goods or an unfavourable bias in favour of local goods. A differentiation may be sustained only where it is supported by reasonable classification and intelligible differentia, and where the measure is not discriminatory in its effect or purpose. The impugned surcharge was not limited to a temporary incentive or exemption scheme and did not operate on a non-hostile basis.

Conclusion: Section 3(1A) was held to be discriminatory and unconstitutional. The challenge to the surcharge succeeded and the State's appeals were rejected.

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