2025 (9) TMI 1602 - SC - VAT / Sales Tax

Notification limiting VAT exemption to in-state asbestos cement manufacturers with =25% fly ash violates Article 304(a), struck down

M/s. U.P. Asbestos Limited, M/s. Everest Industries Limited Versus State of Rajasthan & Others.

SC held the Rajasthan notification granting VAT exemption for asbestos cement products containing =25% fly ash, limited to manufacturers who commenced ... Constitutional validity of N/N. S.O.377, dated 09.03.2007, issued by the Government of Rajasthan in exercise of its powers conferred by Section 8(3) of the Rajasthan Value Added Tax Act, 2003 - Grant of exemption from payment of Value Added Tax on sale of asbestos cement sheets and bricks, manufactured in the State of Rajasthan, having contents of fly ash 25% or more by weight subject to specific conditions - violative of Article 304(a) of the Constitution of India being discriminatory vis-à-vis goods imported from outside the State of Rajasthan or not - violation of free movement of trade and commerce - Interpretation of Articles 301 to 304 - HELD THAT:- In Atiabari Tea Co. Ltd. [1960 (9) TMI 94 - SUPREME COURT], the constitutionality of the Assam Taxation (on Goods Carried by Roads or Inland Waterways) Act (Assam Act) 13 of 1954 was questioned in a petition filed under Article 32 of the Constitution before this Court. The question that fell for determination in this case was, whether, the said Act infringed the provisions of Part XIII of the Constitution, with particular reference to Article 301. While analysing Part XIII of the Constitution, it was observed that Article 301 was subject to other provisions of Part XIII and not subject to other provisions of the Constitution and the generality of the words used in Article 301 is cut down only by the provisions of the other Articles of Part XIII ending with Article 307 - Also, analysing Article 304(a), it was observed that a tax could be levied by a State Legislature on goods manufactured or produced or imported in the State and thereby reasonable restrictions can be placed on the freedom of trade either with another State or between different areas of the same State. Tax legislation, thus authorised, must therefore be deemed to be included in Article 301, for that is the obvious inference from the use of the non-obstante clause - the Assam Act had imposed a direct restriction on the freedom of trade and since it had not complied with the provision of Article 304(b), it was declared to be void. A seven-Judge Bench of this Court in Automobile (Rajasthan) Transport Ltd. vs. State of Rajasthan, [1962 (4) TMI 91 - SUPREME COURT] heard the appeals having regard to the importance of the constitutional issues involved and the views expressed in Atiabari Tea Co. Ltd. while considering the validity of Rajasthan Motor Vehicles Taxation Act, 1951. The contours of the freedom envisaged under Article 301 was considered inasmuch as the question, whether, regulatory measures or compensatory taxes were restrictions on the freedom of trade came up for consideration and more particularly, the State law imposing tax on motor vehicles carrying passengers and goods within or throughout the State - A regulation of trade and commerce, on the other hand, may achieve some public purpose which affects trade and commerce incidentally but without impairing the freedom. It was observed that the tax is evidently not a fee for administrative purposes. Therefore, it cannot be justified as representing payment of services. Its object is the raising of revenue. Therefore, such a tax is neither a compensatory tax nor a regulatory Act. It was further held that the said tax offended Article 301 of the Constitution and since resort to the procedure prescribed by Article 304(b) was not taken, it was ultra vires the Constitution. In Kalyani Stores vs. State of Orissa, [1965 (9) TMI 48 - SUPREME COURT] the notifications issued under Section 27 of the Bihar and Orissa Excise Act, 1915, imposing countervailing duty on foreign liquor imported into the State and later enhancing the duty by another notification, were assailed. The contention of the appellant therein was that the State could levy under Section 27 of the said Act duty on excisable articles produced or manufactured in the State and a countervailing duty on excisable articles imported into the State, imposed with a view to equalize the burden on the imported articles with the burden on manufactured articles in the State, but no countervailing duty on liquor imported could be levied if there was in the year of licence no liquor similar to the imported liquor manufactured within the State and as there was no distillery in the State manufacturing 'foreign liquor', the levy of countervailing duty was without authority of law. Whether clauses (a) and (b) of Article 304 have to be read conjunctively or disjunctively was also considered? - HELD THAT:- Article 304(b) of the Constitution does not deal with taxes as restrictions. That those restrictions referred to in that provision are non-fiscal in nature. Therefore, any constitutional validity of any taxing statute has to be tested only on the anvil of Article 304(a) and if the law is found to be non-discriminatory, it can be declared to be constitutionally valid without the legislation having to go through the test of the process envisaged by Article 304(b). Should, however, the statute fail the test of non-discrimination under Article 304(a), it must be struck down for the same cannot be sustained even if it had gone through the process stipulated by Article 304(b). Admittedly, the impugned notification restricted the exemption from payment of tax to a specified class of dealers, namely, those who manufactured asbestos cement sheets and bricks having contents of fly ash 25% or more by weight. We also find that, as regards the time period, the impugned notification restricted the exemption to those dealers who commenced commercial production in the State by 31.12.2006 and the exemption was available up to 23.01.2010 - a combined reading of the notifications dated 24.01.2000, 16.03.2005, 05.07.2006 and 28.12.2010 suggests that, initially, the benefit was restricted to dealers who commenced commercial production in the State of Rajasthan by 31.12.2001 and the benefit was upto 23.01.2010. Later, it was extended to those who commenced production by 31.12.2006. While initially the benefit was upto 23.01.2010, by notification dated 28.12.2010, the benefit was made available for ten years from the date of commencement of first commercial production, but with an outer cut-off date of 23.1.2016. There is nothing on record to suggest that the exemption was granted thereafter as well. In State of West Bengal vs. Anwar Ali Sarkar, [1952 (1) TMI 19 - SUPREME COURT], this Court noted that the expressions “discriminatory” and “hostile” are found to be used by American Judges often simultaneously in connection with discussions on the equal protection clause. That if a legislation is discriminatory and discriminates one person or class of persons against others similarly situated and denies to the former the privileges that are enjoyed by the latter, it has to be regarded as “hostile” in the sense that it affects injuriously the interests of that person or class. On a survey of the judicial dicta of this Court, what emerges is that in Atiabari Tea Co. Ltd., the object and purpose of Part XIII of the Constitution of India and particularly Article 301 was considered and it was observed that while determining the width and amplitude of the freedom guaranteed by the said Article, a rational and workable test should be applied and only if the restrictions impede free flow of trade, it would be barred. Otherwise, taxes imposed on goods would not by themselves impede trade and commerce in the said case, the Assam Act was held to be void as it had not complied with Article 304(b) of the Constitution. While interpreting Article 304(a), it was observed that the State Legislatures have the power to impose tax on the import of goods to which similar goods manufactured or produced in the State are subject, provided that by taxing the goods imported from another State or Union Territory, no discrimination is practised. Therefore, the notification impugned in these cases dated 09.03.2007 is violative of Article 304(a) of the Constitution. Consequently, the impugned notification is quashed. The civil appeals are hence allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether a State notification exempting from tax the sale of specified asbestos cement products manufactured within the State (subject to a 25% fly-ash content and other conditions) violates Article 304(a) of the Constitution by discriminating against like goods manufactured outside the State. 2. Whether the impugned notification falls within the limited exception permitting targeted, time-bound fiscal incentives to a specified class of local producers (the 'Video Electronics' exception) as clarified by later authoritative precedent. 3. Whether extrinsic materials (e.g., counter-affidavits) can be relied upon to supply reasons for an executive tax exemption notification where the notification itself states only a generic 'expedient in public interest'. 4. Consequential relief: entitlement to refund (with interest) of differential amounts deposited with the Court if such amounts were not ultimately collected from customers. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Constitutionality under Article 304(a): Legal framework: Article 301 guarantees freedom of trade, subject to Part XIII; Article 304(a) permits a State to tax goods imported from other States provided similar goods manufactured in that State are subject to like tax and there is no discrimination between imported and local goods. Levy of taxes per se is not barred; discriminatory taxes (hostile/protectionist) that create fiscal barriers are. Precedent treatment: The jurisprudence distinguishes (a) taxes that are compensatory/regulatory or non-discriminatory and therefore permissible; (b) discriminatory levies, exemptions or rebates that operate as tariff walls and are unconstitutional. Earlier decisions have struck down notifications that granted total or general exemptions to local goods while taxing identical imported goods at higher effective incidence. Interpretation and reasoning: The Court examined the text and conditions of the impugned notification. Although it limits exemption to products manufactured in the State and to those with =25% fly-ash content and to units commencing production by a cut-off date, the notification contains no requirement that the fly-ash be sourced from within the State. Consequently, identically composed products manufactured outside the State are excluded from the benefit solely because of place of manufacture, producing a difference in treatment that operates as discrimination between local and imported like goods. The notification thus functions not as a neutral incentive tied to use of State-sourced inputs but as a place-based fiscal advantage to local producers. Ratio vs. Obiter: Ratio - A State notification that grants tax exemption to goods manufactured within the State while excluding identical goods manufactured elsewhere (without a legitimate, discernible reason such as sourcing of inputs from the State) constitutes discrimination under Article 304(a) and is invalid. Obiter - General observations on the economic desirability of utilising fly-ash and transportation costs, insofar as not reflected in the notification, are not determinative. Conclusion: The impugned notification is violative of Article 304(a) because it discriminates against like goods manufactured outside the State by conferring a fiscal advantage based on place of manufacture without an objective textual basis tying the incentive to State-sourced inputs or other valid justification. Issue 2 - Applicability of the targeted/time-limited exception (Video Electronics and later clarifications): Legal framework: Precedent permits States to grant targeted incentives to a specified class of producers for limited periods, provided the differentiation is non-hostile (not protectionist), is supported by rational reasons, and does not create an economic barrier inconsistent with Article 304(a). Later authoritative pronouncements clarify that only discriminatory measures exhibiting intentional unfavourable bias are struck down; non-discriminatory differentiation with legitimate rationale and temporal limits may be upheld. Precedent treatment (followed/distinguished): The Court treated the targeted/time-limited exemption doctrine as an exception that must be narrowly applied. Where prior decisions upheld carefully structured, limited incentives, other decisions struck down broad or unconditional exemptions. A later large Bench reaffirmed that differentiation is permissible if non-hostile, limited and justified, but emphasized that Article 304(a) prohibits protectionist discrimination. Interpretation and reasoning: The Court analysed whether the impugned notification matched the exception's criteria: (i) specified class - yes (products with =25% fly-ash and units commenced by a date); (ii) limited period - on paper yes (initial expiry dates and later a ten-year cap), but in practice successive extensions resulted in extended benefit periods; (iii) non-hostile justification - absent from the notification itself. Crucially, the incentive was not conditioned on use of fly-ash sourced from within the State, undermining the asserted objective of utilising State-generated fly-ash. Because the notification did not objectively manifest the claimed public-interest rationale and operated to exclude identically constituted external products, the Court found the Video Electronics exception inapplicable. Ratio vs. Obiter: Ratio - The Video Electronics exception is limited: exemptions/set-offs must be confined, justified by clear, objective reasons and not amount to protectionist discrimination; a notification lacking those features cannot be saved by invoking that exception. Obiter - Observations on whether a ten-year maximum necessarily qualifies as a 'limited' period were left open since not contested seriously. Conclusion: The impugned notification does not fall within the narrow parameters of the targeted/time-limited exception because it lacks objective, discernible reasons in the instrument itself (or on its face), excludes identical out-of-State products without a valid nexus to State-sourced inputs, and therefore amounts to unconstitutional discrimination. Issue 3 - Reliance on extrinsic materials to supply reasons for the notification: Legal framework: Administrative action (including executive tax notifications) must be judged by the reasons stated in the public instrument itself; subsequent or extrinsic explanations (e.g., affidavits) cannot be used to supply or cure deficiencies in the stated rationale where the instrument's language is plain. Precedent treatment: Authorities require objective construction of public orders and disallow supplementation of reasons by after-the-fact justifications when the instrument contains no adequate rationale; constitutional rights cannot be defeated by extrinsic acquiescence. Interpretation and reasoning: The impugned notification simply recited that it was 'expedient in the public interest' without elaboration. The State sought to rely on the counter-affidavit and surrounding circumstances to supply reasons (utilisation of fly-ash, environmental objectives, lack of local industry). The Court held that such post-hoc materials cannot validate a notification deficient on its face under established doctrine; therefore the absence of explicated reasons in the notification itself is fatal when the instrument results in discriminatory fiscal treatment. Ratio vs. Obiter: Ratio - Reasons for executive fiscal exemptions must be ascertainable from the notification itself (or the instrumented record that properly forms part of the decision) and cannot be supplied or cured by after-the-fact affidavits when the instrument lacks objective indicia of the justification. Obiter - The maximum permissible role of surrounding circumstances where the instrument contains some indicia of purpose was not expanded. Conclusion: Extrinsic counter-affidavit material cannot rescue a facially deficient notification that affords discriminatory fiscal advantage; the notification must stand or fall by its own terms and the objective reasons it records. Issue 4 - Relief concerning deposits and refunds: Legal framework: Where an impugned fiscal measure is quashed and amounts were deposited under interim orders, equitable restitution is appropriate if the deposited sums were not ultimately collected from end customers. Interpretation and reasoning: The Court directed enquiry into whether amounts deposited pursuant to interim orders were passed on to customers; if not, appellants are entitled to refund with interest at a specified rate from date of deposit. The matter was posted for directions to determine factual entitlement. Ratio vs. Obiter: Ratio - Successful challengers are entitled to restitution of deposits (with interest) where the amount was not collected from customers; factual determination as to collection is necessary. Obiter - The specific rate and modalities are directed as a practical measure pending factual enquiry. Conclusion: Appeals allowed; impugned notification quashed for violating Article 304(a). Inquiry directed into deposit/refund with interest where appropriate; further directions to follow for implementation.