TaxTMI 
TaxTMI 
1996 (11) TMI 358
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....manufacturers of edible oil in the adjoining States are able to sell their products in Jammu and Kashmir at a price lower than the price at which the local manufacturers are able to sell. This is said to have created a situation where the local industries faced the prospect of closure; at any rate, they were not able to compete with the out-State manufacturers. They approached their Government, which is seeking to protect their interest by, inter alia, exempting them totally from the levy of sales tax on the sale of their products. That has given rise to the writ petition from which the present appeal arises. On the Jammu and Kashmir High Court dismissing the writ petition, they have approached this Court. The Jammu and Kashmir General Sales Tax Act contains four Schedules. Each of the Schedules carries a particular rate of sales tax. Edible oils were previously included in Schedule D which prescribes the rate of tax at four per cent. On December 20, 1993, edible oils were shifted from Schedule D to Schedule C, which prescribes the rate of tax at eight per cent. (It is stated that S.R.O. 213 of 1993 issued on December 3, 1993, shifting edible oils from Schedule D to Schedule C wa....
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....veral grounds. Counsel submitted that the orders of the Government of Jammu and Kashmir exempting all the edible oil industries in the State from payment of sales tax unconditionally amounts to discriminating against the out-State manufacturers which is prohibited by articles 301 and 304 of the Constitution. Counsel submitted that Part XIII of the Constitution prohibits raising of fiscal barriers by the States, for such barriers are bound to interfere with the free movement of trade and commerce throughout the territory of India. Raising of protective walls may be justified in international trade. The Government of India can and has been providing several such protectionist measures all these years to encourage the growth and establishment of industries in the country and to protect them from competition from foreign manufacturers. But similar measures cannot be provided by the State Governments internally, i.e., within the country. The Parliament can, no doubt, provide such measures but not the State Governments and certainly not without the prior sanction/assent of the President of India. Learned counsel submitted that the decision in Video Electronics [1990] 77 STC 82 (SC); (199....
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....levant under article 14 has been held by this Court to be equally applicable under article 304 and if so, it must be held that the classification made between local and out-State manufacturers is a reasonable one and designed to further the aforesaid laudable object. Article 301 declares that "subject to the other provisions of this Part, trade, commerce and intercourse throughout the territory of India shall be free". An exception is, however, provided in favour of Parliament by article 302 which says that "Parliament may by law impose such restrictions on the freedom of trade, commerce or intercourse between one State and another or within any part of the territory of India, as may be required in the public interest". The power conferred upon the Parliament by article 302 is, however, qualified by a rider provided in clause (1) of article 303 which says that the power conferred upon the Parliament by article 302 shall not, however, empower the Parliament-or the Legislature of a State-"to make any law giving, or authorising the giving of, any preference to one State over another, or making, or authorising the making of, any discrimination between one State or another, by virtue ....
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....that process, discriminate against them vis-a-vis goods manufactured locally". In short, the clause says: levy of tax on both ought to be at the same rate. This was and is a ringing declaration against the States creating what may be called "tax barriers"-or "fiscal barriers", It is not very clear why clause (1) of article 303 uses the words "nor the Legislature of a State" when article 302 does not refer to the Legislature of a State at all. Probably, the idea was to declare affirmatively-in the interest of removing any doubt-that even a Legislature of a State shall not have the power to make any law giving or authorising the giving of any preference to one State over another or making or authorising the making of any discrimination between one State and another by virtue of their power to make a law with reference to the entries relating to trade and commerce in the Seventh Schedule. Further, the addition of words "by virtue of any entry relating to trade and commerce in any of the Lists in the Seventh Schedule" at the end of the clause have also given rise to a goods amount of controversy, which we shall refer to later, to the extent relevant. as they may be called-at or along....
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.... may be, on the freedom of trade, commerce and intercourse. The freedom guaranteed, it is worthy of notice, is "throughout the territory of India" and not merely between the States as such; the emphasis is upon the oneness of the territory of India. Part XIII starts with this concept of oneness but then it provides exceptions to that rule, as stated above, to meet certain emerging situations. As a matter of fact, it can well be said that clause (a) of article 304 is not really an exception to article 301, notwithstanding the non obstante clause in article 304 and that it is but a re-statement of a facet of the very freedom guaranteed by article 301, viz., power of taxation by the States. (We need not refer to the other articles in Part XIII for the purposes of this case). Having noticed the scheme of Part XIII, we may now turn to decided cases to see how these articles have been understood over the last fifty years. The first decision to be noticed is, of course, in Atiabari Tea Co. Ltd. v. State of Assam [1961] 1 SCR 809. The Legislature of Assam enacted the Assam Taxation (on Goods carried by Roads or Inland Waterways) Act, 1954, providing for levy of tax on certain goo....
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....motor vehicles used in any public place or kept for use at the rates specified in the Schedules. Violation of the provision invited penalties provided under section 11. Certain operators challenged the Act as violative of articles 301 and 304(b). Since serious doubts were expressed with respect to the propositions enunciated by the majority and by Shah, J., in Atiabari Tea Co. Ltd. [1961] 1 SCR 809, the matters were referred to a larger Constitution Bench of seven Judges. By a majority of 4:3, (S.K. Das, Kapur and Sarkaria, JJ., joined by Subba Rao, J.), this Court upheld the constitutionality of the Act on the ground that the taxes levied by it are compensatory in nature and, therefore, outside the purview of article 301. Once outside the purview of article 301, it was held, article 304 was also not attracted. The propositions emerging from the opinion of Das, J., have been neatly summarised in the headnote of the Supreme Court Reports in the following words: "(1) The concept of freedom of trade, commerce and intercourse postulated by article 301 must be understood in the context of an ordinary society and as part of a Constitution which envisaged a distribution of powers betwee....
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.... raw condition in the State and tanned within the State. This distinction was attacked as violative of articles 301 and 304(a) of the Constitution. Following the law laid down in Atiabari Tea Co. Ltd. [1961] 1 SCR 809 and Automobile Transport (Rajasthan) Ltd. [1963] 1 SCR 491, the Constitution Bench held: "It is therefore now well-settled that taxing laws can be restrictions on trade, commerce and intercourse, if they hamper the flow of trade and if they are not what can be termed to be compensatory taxes or regulatory measures. Sales tax, of the kind under consideration here, cannot be said to be a measure regulating any trade or a compensatory tax levied for the use of trading facilities. Sales tax, which has the effect of discriminating between goods of one State and goods of another, may affect the free-flow of trade and it will then offend against article 301 and will be valid only if it comes within the terms of article 304(a). Article 304(a) enables the Legislature of a State to make laws affecting trade, commerce and intercourse. It enables the imposition of taxes on goods from other States if similar goods in the State are subjected to similar taxes, so as not to discrim....
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....for carrying that commodity over a long distance, the merchant would be willing to purchase the goods from a nearer State, even though the rate of tax in that State may be higher. Existence of longstanding business relations, availability of communications, credit facilities and a host of other factors-natural and business-enter into the maintenance of trade relations and the free-flow of trade cannot necessarily be deemed to have been obstructed merely because in a particular State the rate of tax on sales is higher than the rates prevailing in other States." (Emphasis added). It is significant to notice that these observations were made in the context of the argument that different rates of Central sales tax in different States on sale of similar goods is discriminatory. It was not a case like the present one where a State is levying a different/higher rate of tax on goods imported from other States than the rate applicable to sales of similar goods manufactured within that State. We are unable to see how these observations help the State. Hegde, J. concurred with Shah, J. State of Tamil Nadu v. Sitalakshmi Mills Ltd. [1974] 33 STC 200 (SC); [1974] 3 SCR 1 holds that section 8(....
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....on" and hence bad. In the course of discussion, the Bench observed: "There can be no dispute that taxation is a deterrent against free-flow. As a result of favourable or unfavourable treatment by way of taxation, the course of flow of trade gets regulated either adversely or favourably. If the scheme which Part XIII guarantees has to be preserved in national interest, it is necessary that the provisions in the article must be strictly complied with. One has to recall the far-sighted observations of Gajendragadkar, J., in Atiabari Tea Co. case [1961] 1 SCR 809 and the observations then made obviously apply to cases to the type which is now before us." The facts in Weston Electroniks v. State of Gujarat [1988] 70 STC 52 (SC); (1988) 2 SCC 568 are similar. Until 1981, the tax on sale of electronic goods under the Gujarat Sales Tax Act was fifteen per cent whether the goods were manufactured within the State of Gujarat and sold or imported from outside. In 1981-and again in 1986-however, a distinction was made between locally manufactured goods and those imported into the State. A lower rate was prescribed for the former. This was held to be discriminatory and offensive to art....
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.... whether a particular exemption granted by the State offends articles 301 and 304, it is necessary to take into account various factors. A State which is technically and economically weak on account of various factors should be allowed to develop economically by granting concessions, exemptions and subsidies to new industries. All parts of the country are not equally developed, industrially and economically. The concept of economic unity is an ever-changing one; it cannot be imprisoned in a strait-jacket. India is not already an economic unit. Economic unity is possible only when all the units of the country develop equally. The power to grant exemption is inherent in all taxing statues and the Government cannot be deprived of this power by invoking articles 301 and 304. The concept of economic barriers must be understood in a dynamic sense. The concept of economic unity or economic barriers must be read along with the power of exemption inhering in the State Governments. Where every State is exempting or reducing the rates of sales tax, there can be no question of an economic war between them. "A backward State or a disturbed State cannot with parity engage in competition with ....
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....cover cases of a different kind. It must be held that the total exemption granted in favour of small-scale industries in Jammu and Kashmir producing edible oil (there are no large scale industries in that State producing edible oil) is not sustainable in law. Sri Salve has brought to our notice a recent decision of the Supreme Court of U.S.A. in West Lynn Creamery Inc. v. Jonathan Healey, Commissioner of Massachusetts Department of Food and Agriculture-judgment rendered on June 17, 1994, in Case No. 93-141. The petitioner was a milk dealer licenced to do business in the State of Massachusetts. Most of the milk consumed in that State was imported from other States. In 1992, the Government declared a State of emergency in view of declining trend in the price of raw milk. It found that the cost of production of milk in Massachusetts is higher than the cost of production in other States and that to preserve and protect the milk industry in Massachusetts, it is necessary to take certain measures. Accordingly, an order was issued soon after the declaration of emergency which created the Massachusetts Dairy Equalization Fund. A levy was imposed upon all the milk sold in the State. At th....
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....tes by all such means as they think proper but they cannot, in that process, subject the goods imported from other States to a discriminatory rate of taxation, i.e., a higher rate of sales tax vis-a-vis similar goods manufactured/produced within that State and sold within that State. Prohibition is against discriminatory taxation by the States. It matters not how this discrimination is brought about. A limited exception has no doubt been carved out in Video Electronics [1990] 77 STC 82 (SC); (1990) 3 SCC 87, but, as indicated hereinbefore, that exception cannot be enlarged lest it eat up the main provision. So far as the present case is concerned, it does not fall within the limited exception aforesaid; it falls within the ratio of Firm A.T.B. Mehtab Majid [1963] 14 STC 355 (SC); [1963] Suppl 2 SCR 435 and the other cases following it. It must be held that by exempting unconditionally the edible oil produced within the State of Jammu and Kashmir altogether from sales tax, even if it is for a period of ten years, while subjecting the edible oil produced in other States to sales tax at eight per cent, the State of Jammu and Kashmir has brought about discrimination by taxation prohibi....