TaxTMI 
TaxTMI 
2013 (12) TMI 385
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....titution of India. 3. The lead case is Civil Appeal No. 3026 of 2004. The appellants are public limited companies, manufacturing cement in their manufacturing units in Rewa district situate in the State of Madhya Pradesh after procuring fly-ash from the thermal power stations in the State of Uttar Pradesh and thereafter selling the manufactured product viz. Cement in the districts of State of Uttar Pradesh. 4. The fly-ash is produced from coal combustion and normally dispersed into the atmosphere which contains toxic chemicals that can cause environmental pollution and hazards. Therefore for utilization of fly-ash and to control pollution, cement projects were set up to make use of the fly-ash generated from the power plants. 5. To encourage manufacturers using fly-ash in manufacturing of their products, the Government of Uttar Pradesh in exercise of its powers under Section 5 of the Act, had issued notification dated 18.06.1997, granting "rebate of tax" to the dealers in the State of Uttar Pradesh excluding all other dealers manufacturing cement outside the State of Uttar Pradesh using fly-ash purchased in the State of Uttar Pradesh. Annexure appended to the notification ....
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....rs 2. Almora, Chamoli, Dehradun, Fatehpur, Jaunpur, Kanpur (Dehat), Nanital, Fauri Garhwal, Pithoragarh, Sultanpur, Champawat, Tehri Garhwal, Udham Singh Nagar, Uttar Kashi and Growth Centre. Twelve Years 3. (i) The Districts of Azamgarh, Ambedkar- Nagar, Bahraich, Ballia, Barabanki, Deoria, Etah, Etawah, Faizabad, Farrukhabad, Ghazipur, Gonda, Hardoi, Mainpuri, Mathura, Mau, Moradabad, Padrauna, Pillibhit, Pratapgarh, Raibareili, Rampur, Shahjahanpur, Sidharth Nagar, Sitapur, Unnao, Kaushambi, Jyotibaphule Nagar, Mahamaya Nagar and Shravasti Ten Years (ii) The area of Allahabad District in South of the river Jamuna and confluent Ganga (Excluding the area included under Municipal Corporation Allahabad) Ten Years (iii) The Taj Trapezium Area Ten Years (IV) Greater Noida Industrial Development area The Districts of Agra (excluding Taj Trapezium area), Aligarh (excluding Tax Trapezium Area), Allahabad (excluding the area in south of rivers Jamuna and confluent Ganga but including the area included under Municipal Corporation Allahabad), Bareilly, Bhadohl, Bijnor, Firozabad (excluding Taj Trapezium area), Ghaziabad (excludi....
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....t orders issued in this behalf from time to time." 8. To complete the narration, it is apropos to state that the aforesaid notification is rescinded by the State Government with effect from 14.10.2004 by issuing notification dated 14.10.2004. 9. The cement industries situated in the neighbouring States aggrieved by the notification of the Government of Uttar Pradesh, dated 27.02.1998 had approached the High Court by filing Writ Petitions. In that they had sought for quashing of the notification, dated 27.02.1998 insofar as Condition No. 1 (as extracted above) of the notification and other consequential reliefs. 10. The High Court has come to a finding on two broad issues; firstly, whether Condition No. 1 of the notification i.e. the grant of rebate of tax on the sale of cement in the Districts of Uttar Pradesh alone contravenes articles 301 and 304(a) of the Constitution of India. On the aforesaid issue, the Court has concluded that the grant of rebate of tax by the State Government discriminated between the imported goods and the goods manufactured in Uttar Pradesh restricting the free movement of goods from one State to the other and therefore impinges articles 301 and 3....
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.... Constitution of India. Rebate, on the other hand, is repayment or refund of an amount and therefore it may not be a subsidy but it is in the form of an incentive or a grant. He further would point out that imposition of tax is different from collection or repayment of tax. In other words, he would submit that there are two different stages:- one would be the imposition and levy of taxes and the other is collection and repayment of taxes. Rebate of tax as such is a repayment of taxes and is certainly not a part of levy or imposition of taxes. He would further submit that for rebate of tax as against non-imposition or exemption at point of tax being common, Part XIII of the Constitution will not apply. 14. In the second limb of the argument, the learned counsel would submit that there are two crutches in the notification, if one of them is taken away the other cannot function independently. Therefore, he would submit that because the respondents have not challenged Clause(2) and have only challenged Clause(1) of the notification, then while granting relief if one of the condition is declared invalid then both the clauses of the notification are to be struck down. 15. Thirdly, ....
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....effects of an exemption because it would mean refunding the full amount of tax collected. Therefore, rebate is nothing but a concessional rate of tax. 17. The learned counsel, would further argue on the point of severability that while severing, the scope of the provision is enlarged and therefore if the invalid portion of the notification viz. Condition No.1 of the notification can be severed from the valid portion of the notification without changing the object of the notification, then relying on the principles of D.S. Nakara v. Union of India, 1983 2 SCR 165, the doctrine of severability should be made applicable. Lastly it is submitted that the constitutional validity of a taxing provision cannot be tested on the touch stone of inability in enforcing machinery provision. 18. Shri Ashok H. Desai, learned senior counsel would argue that the primary question for consideration is whether the rebate of tax introduced by the Government of Uttar Pradesh creates a trade barrier/ fiscal barrier or in other words the Government has further insulated itself by creating tariff walls, therefore, impinging article 301 and article 304(a) of the Constitution of India. He would therefore....
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.... irrespective of their nomenclature used to shield such levy or imposition of tax. It is therefore, he would submit that it is not the words used but the impact on the manufacturer(s). Article 304(a) of the Constitution is therefore a constitutional limitation in itself that prevents a State from discriminating between the goods so imported and the goods so manufactured or produced by the dealers within the State unless the State in public interest impose reasonable restriction under article 304(b) of the Constitution after obtaining Presidential assent. Shri Desai, would therefore submits that the amendment in the notification brought by the Government further does not satisfy the requirements of the aforesaid articles by not obtaining Presidential assent if the legislation is made in public interest. 21. There are three broad issues for our consideration: ..firstly, whether the grant of rebate of tax is hit by constitutional limitation on the State legislature under article 304(a) read with article 301 of the Constitution of India, as and when it discriminates between the imported goods and the goods manufactured and produced outside the State. * the second issue that ar....
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....ct, 1930; or (b) an agent for handling of goods or documents of title relating to goods; or (c) an agent for the collection or the payment of the sale price of goods or as a guarantor for such collection or such payment; (vi) a firm or a company or other body corporate, the principal office or headquarters whereof is outside the State, having a branch or office in the State, in respect of purchases or sales, supplies or distribution of goods through such branch or office; [(vii) every person who carries on the business of transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract; (viii) every person who carries on the business of transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration; [(n) "tax" includes an additional tax and the composition money accepted under Section 7-D]; [(e-1) "manufacture" means producing making , mining, collecting, extracting, altering, ornamenting , finishing, or otherwise processing, treating or adapting any goods; but does not include such manufactures or manufacturing processe....
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....nd scheduled tribe, and other backward classes. Section 4AAA authorizes the State Government to grant special concession to certain industrial undertakings in special situations and circumstances. Section 5 of the Act authorizes the State Government to grant rebate of tax on certain purchases or sales if it is satisfied that it is in the public interest so to do by issuing a notification allow a rebate up to the full amount of tax on the sale or purchase of any goods or the sale or purchase of such goods by such person or class of persons as may be specified in the notification. Section 5 is relevant for the purpose of this case and therefore the same is extracted: "Sec. 5 - Rebate of tax on certain purchases or sale: 1. Where the State Government is satisfied that it is expedient in the public interest so to do, it may by notification, and subject to such conditions and restrictions as may be specified therein, allow a rebate up to the full amount to ; (a) the sale or purchase of any goods, (b) the sale or purchase of such goods by such person or class or persons as may be specified in the said notification. 2. The rebate under sub-Section (1) may be allowed with ef....
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....(b) shall be introduced or moved in the Legislature of a State without the previous sanction of the President." 27. Article 304(a) of the Constitution is an exception to article 301 of the Constitution of India. Article 304(a) does not prevent levy of tax on goods; what is prohibited is such levy of tax on goods as would result in discrimination between goods imported from other States and similar goods manufactured or produced within the State. The object is to prevent imported goods being discriminated against by imposing a higher tax thereon than on local goods. What article 304(a) demands is that the rate of taxation on local as well as imported goods must be the same. This is designed to discourage States from creating State barriers or fiscal barriers at the boundaries. Article 304(a) of the Constitution empowers the State to levy tax, with an intent that Part XIII of the Constitution does not affect the power of taxation given under Part XII of the Constitution. It is to preserve and protect the broad object of article 301 of the Constitution, article 304(a) only limits the power of the State legislature from imposing such taxes that would discriminate between imported go....
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....intercourse throughout the territory of India shall be free. Clause(b) to article 304(a) is an exception which enables a State legislature to impose such "reasonable restrictions" on the freedom of trade, commerce and intercourse as may be required in the "public interest". But no bill or amendment for the purpose of clause(b) shall be introduced or moved in the legislature of a State without the previous sanction of the President. 30. The Principle of 'non- Discriminatory tax' as provided in article 304(a) of the Constitution of India is a sine-qua-non to free movement of goods between nations/States in several jurisdictions and also in international trade and policy. Discrimination as explained under World Trade Organization ("WTO", for short) jurisprudence is spoken of in terms of effect and intention behind such discrimination. Intent is referred to as 'aim' or 'motive' or 'purpose' of such discrimination and the other factor commonly associated with discrimination is 'effect' that is whether a measure has a discriminatory effect (also known as the disparate impact) against imports (as explained in the famous case of Japan v. Alcohol, panel report). WTO members are free to c....
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....ead Issue 2 in the judgment. ISSUE 2 34. To answer the second issue we need to discuss the concept of 'rebate of tax' and its overall impact on the trade, commerce and intercourse in the context of the case pleaded by the parties. 35. 'Rebate' as defined in the New International Websters' pocket dictionary and Bloomsbury Concise English Dictionary is "discount", to allow as a deduction from a gross amount. It is a discount repaid to the payer. Rebate as defined in corpus Juris Secundum, Vol. 52 C.J Pg. 1189 is as under:- " The etymological or dictionary meaning of the term includes any discount or deduction from a stipulated payment, charge, or rate not taken as in advance of payment, but handed back to the payer after he has paid the stipulated sum, even when such discount or deduction is equally applied to all from whom such payment is demandable" 36. The concept of rebate of tax in the instant case is akin to concessional/ reduced rate of tax. Rebate is though ex-hypothesi in the nature of subsidy and other incentives given by the Government but conceptually rebate of tax and incentives are different and it needs to be explained in reference to the purpose and nat....
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....e tax on subjects which fall under List II of the Seventh Schedule of the Constitution, but power shall not be exercised to bring about discrimination between the imported goods and the similar goods manufactured in that State and concluded that total exemption granted in favour of small-scale industries in Jammu and Kashmir producing edible oil is not sustainable in law. It clarified the exception carved out by the three judges bench in the case of Video Electronics Ltd. v. State of Punjab; 1989 SCR Supp.(2) 731, where it explained that notification issued by two States (Punjab and Haryana) in that case exempting new units, established in new areas specified the exemption to be provided to a special class to whom exemption was provided for a specific period on specific conditions and was not extended to all producers of goods and therefore did not offend the freedom guaranteed under articles 301 and 304 of the Constitution. Similarly in the case of Punjab notification, it was held that since the exemption is for certain specific goods and also because an overwhelmingly large number of local manufacturers of similar goods are subject to a sales tax; it cannot be said that the local....
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....used by the Government from time to time which is though not in question in all situations but their validity is tested in the touchstone of article 304(a) of the Constitution in the circumstance under which they are used. If the rebate of tax by way of repayment to the full amount of tax levied qualifies within the same meaning as that of exemption, then such discount would a fortori mean discrimination on the rate of tax by repaying by way of a rebate to one class of local dealers the whole amount of sales tax paid and on the other hand the outside dealers are taxed higher in absence of the benefit of rebate. This situation squarely falls within the meaning of 'discrimination' as contemplated under article 304(a) of the Constitution of India. 39. It is for the aforesaid reasons, it is pertinent to analyze the nature and scope of concessional/ reduced rate of tax/ exemption by drawing inspiration from their understanding in other jurisdictions and under what circumstance could a rebate be termed a hindrance to or as interfering with the freedom of trade, commerce or intercourse. In appreciating the effects of an exemption parallel to a rebate of tax, we may refer to the observa....
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....me raw material. The grant of such rebate has the colour of exemption/ concessional rate of tax along with the same deleterious effects of an exemption. 42. Therefore, the test to be applied to determine whether rebate is within the realm of tax defined in article 304(a) of the Constitution of India so as to say that it discriminates between the two class of goods: locally manufactured goods and the imported goods when both the class of dealers meet the conditions required to qualify for the grant of rebate i.e. the use of fly-ash, is the overall effect or impact of such rebate on the manufacturer. This issue is no longer res-integra and is discussed in several cases including in the case of Firm A.T.B Mehta Masjid & Co v. State of Madras and Anr., AIR 1963 SC 928, where the question for consideration was whether Rule 16 of the Madras General Sale Tax Rules, 1939 subjected tanned hides and skins outside the State, and sold within the State to a higher rate of tax than the tax imposed on hides or skins tanned and sold within the state and therefore violating article 304(a) of the Constitution. This Court observed that to determine whether the rule was discriminatory, the effect o....
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....e State of Bihar whereas levied sales tax on the dealers outside the State. This Court opined that from the commercial or normal point of view, such a discriminatory levy of sales tax would have an effect that would be bound to affect the free flow of hosiery goods from outside State into the State of Bihar and would therefore violate article 301 read with article 304(a) of the Constitution of India. 44. The above decision is also followed in the case of Western Electronics and Another v. State of Gujarat and others, 1988 2 SCC 568; and in the case of Loharn Steel Industries v. State of Andhra Pradesh; (1997) 2 SCC 37 wherein the impact of exemption on the manufacturer was such that the manufactures outside Andhra Pradesh had to pay a higher rate of tax as compared to the manufacturers in Andhra Pradesh because of the entire tax exemption granted to the all re-rolled steel products sold in the Andhra Pradesh and manufactured out of tax paid raw-material purchased in the State of Andhra Pradesh. Therefore, the notification in this case was considered to be violating article 304(a) of the Constitution of India. 45. This Court in the case of State of U.P. and another v. Laxmi Pa....
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....their non-liability to tax is sufficient to exclude them from the calculation of the gross turnover as well as the net turnover on which sales tax can be levied or imposed. 47. The exemption or rebate of tax is therefore within the purview of taxation. In the instant case, if the grant of rebate of tax by the State Government under Section 5 of the Act is to the full amount of tax levied, then for the dealers manufacturing cement using fly-ash outside the State of Uttar Pradesh but selling it in Uttar Pradesh, though the State Government contends that the rate of tax is same for the dealers inside Uttar Pradesh and outside Uttar Pradesh, but the overall effect is that there is no tax levied on the net turnover after deductions being made from the gross turnover but, on the other hand, the dealers manufacturing or producing cement using fly-ash outside Uttar Pradesh are taxed at the rate of 12.5%. Therefore, it can be said that the rebate of tax is in the nature of exemption and the instant case can be decided on the basis of catena of decisions of this Court where blanket exemption without reasons are said to be discriminatory and violating article 304(a) of the Constitution of ....
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....d arbitrary and having an undesirable effect of dividing homogeneous class and of introducing the discrimination, the same can be easily severed and set aside. The Court further opined that while examining a case under article 14 of the Constitution, the approach is removal of arbitrariness and if that can be brought about by severing the mischievous portion the Court ought to remove the discriminatory part retaining the beneficial portion. The Court therefore concluded that severance never limits the scope of legislation but rather enlarges it. 50. In the light of the observation made by this Court, we are of the opinion that the condition No. 1 is discriminatory and violates article 304(a) of the Constitution of India and therefore needs to be severed from the rest of the notification which can operate independently without altering the purpose and the object of the notification. 51. The learned counsel, Shri Gupta, would argue that since the assessing authorities would not be in a position to verify the claim for grant of rebate of tax by manufacturers of cement using fly-ash outside the State of Uttar Pradesh, the benefit under the notification cannot be extended to them.....