AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2013 (12) TMI 385
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.... 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 provided for name of the districts and the pe....
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....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 (excluding Greater NOIDA Industrial Development Area), Gorakhpur, Haridwar, Kanpur (Nagar), Lakhimpur Kheri, Luckno....
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....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 304(a) of the Constitution of India. 11. The Second question that is considered and decided by the High Court, is, whether doctrine of severability will apply ....
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.... 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, the learned counsel would contend that the State of Uttar Pradesh has no territorial jurisdiction over the industrial units situate outside the State of Uttar Pradesh an....
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....nsel, 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 make an effort to show the legislative history and scope of article 304(a) read with article 301 of the Constitution of India. To date back to the historical genesis of the a....
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....r(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 arises is, whether the grant of rebate, directly or indirectly restrict the free flow of trade, commerce and intercourse among States by assuming the effects of an exemption/ concession w....
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.... 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 processes as may be prescribed;] [(ee) 'Manufacturer' in relation to any goods means the dealer who makes the first sale of such goods in the State after their manufacture and includes:-- (i) a dealer who sells bicycl....
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....vernment 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 effect from a date prior to the notification. 24. Section 5 of the Act is in three parts. Firstly, it authorizes the State Government that if it is satisfied that grant of rebate of tax is expedient in the public interest it may do so by issuing the no....
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....at 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 goods and domestic goods and restrict free movement of goods between States. The broad issue whether article 304(a) is an exception to article 301 of the Constitution of India is discussed in the case of Atiabari Tea Co. Ltd. v. The State of Assam and Ors; AIR (1961) SC 23....
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....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 choose any system of taxation they deem appropriate provided that they do not impose on foreign products taxes in excess of those imposed on like products. The effect of tax should not be such that two like goods are given discriminatory treatment. 31. At the same time, it can....
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....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 nature of such rebate of tax introduced by the legislature. The legislation in respect of a rebate has taken different forms, one of them is a partial rebate in the tax, where the deduction is given partially on the gross amount and the other is the power reserved for the Government to permit re....
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....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 manufacturers were favored against the outside manufacturers and further the exemption was granted for a limited period of five years. The above case also laid down that while judging whether a particular exemption granted by the State offends articles 301 and 304, it is necessary to take into....
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....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 observation made in Congressional Budget and Fiscal Operations, 2 U.S.C.A.§ 622 , where exemptions is understood to have been in the category known as "tax expenditures" because the revenues lost by such exemptions are similar to direct expenditures made by the government, the only difference being t....
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....o 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 of this rule is to be seen. The result therefore is that the sale of hides or skins which had been purchased in the State and then tanned within the State is not subject to any further tax. Hides and skins tanned within the State are mostly those which had been purchased in their raw condition in the Stat....
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....r 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 Paper Mart and others, AIR 1997 SC 950 has explained that exempting the exercise books made from paper purchases within Uttar Pradesh produced within the State and the levying of the tax on the exercise books produced outside Uttar Pradesh and sold in Uttar Pradesh at the rate of 5% is discriminatory and offends....
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....tate 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 India. ISSUE 3:- 48. To decide the third issue, the concept of severability needs to be noticed. Doctrine of severability provides that if an enactment cannot be saved by construing it consistent with its constitutionality, it may be seen whether it can be partly saved. The doctrine of severability was considere....
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....out 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. We do not agree. The explanation appended to the notification authorises the assessing authorities to verify the claim that may be made by the manufacturers including the fact whether an assessee(s) satisfy the conditions prescribed in the notification. If they do not fall within the parameters of the notification the asse....