TaxTMI 
TaxTMI 
2015 (1) TMI 1273
X X X X Extracts X X X X
X X X X Extracts X X X X
....f commercial production. This benefit of tax concession has also been extended to a dealer registered under the VAT Act if he has purchased from such manufacturer and also extends the benefit to a second registered dealer purchaser. A concessional rate of tax at four per cent. only on the two items has also been extended to other manufacturers in the State whose total capital investment in plant and machinery does not exceed ten crores before depreciation up to March 31, 2014, and industrial units commencing production on or after April 1, 2014 up to date of commercial production. The normal rate of tax payable under the VAT Act for manufacturers outside the State and others within the State but outside the two exempted categories is five per cent. The first ground of challenge to the notification is that it contravenes articles 301 and 304(a) of the Constitution of India, as it hinders freedom of inter-State trade and commerce by putting manufacturers outside the State of Chhattisgarh at a disadvantage by having to pay five per cent. tax thus making their goods more expensive and uncompetitive directly affecting and impeding the inflow of outside goods into the State. The secon....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ries were assailed as being completely unsustainable, entering into the arena of pure commercial transactions having no nexus with providing impetus to industrialization. The tax on manufacturers outside the State was kept at five per cent. putting them at great disadvantage making their products costlier and uncompetitive directly affecting the inflow of those goods from outside the State thereby impeding and hindering inter-State trade and commerce. It was submitted that Parliament alone was competent under article 302 of the Constitution to impose restrictions on inter-State trade in public interest. Shri Datar further submitted that of the sixteen items of iron and steel products under section 14 of the Central Act, there was no basis or justification for classification of two class of goods only for concessional rate of tax to the specified categories only, and how it alone would give the desired impetus to industrialization in the State. Under section 15B of the VAT Act exemption could be granted only to any class of dealers, to any goods or class of goods. The first notification dated March 30, 2013 was valid as it partly exempted a whole class of goods being steel bars (ex....
X X X X Extracts X X X X
X X X X Extracts X X X X
....in support of the submission that the consistent view has been that a State is not entitled to tax locally made goods at a lower rate while taxing similar goods manufactured in other States at a higher rate. Shri Datar relied on [2013] 65 VST 423 (SC); [2014] 4 SCC 720 (State of U. P. v. Jaiprakash Associates Ltd.) to submit that grant of a concessional rate of tax would contravene article 304(a) putting manufacturers outside the State at a disadvantage making their products expensive and uncompetitive affecting the inflow of their goods into the State. Article 304(a) ensures equality of tax for incoming goods. If incoming goods are taxed at a different rate from indigenous goods or the latter is given a concessional rate of tax article 304(a) stands violated as it naturally affects inter-State trade, commerce and intercourse by impeding inflow of outside goods into the State. Elaborating further Shri Datar contended that a concession in tax had the effect of a reduced rate of tax. If the rebate or concession is granted on the full amount of the tax levied on any specific point extended to the limits of the State only, with the State Government having power to refund or discount ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mitted that the State was rich in natural resources but was otherwise a backward State. The need was felt to provide incentive to small and medium scale industries and to industries having an investment up to 10 crores by grant of a concessional rate of tax for a limited period on specified items, to give an impetus to industrialization in the State. The concession was motivated to spur accelerated industrial growth. It was not intended to be a concession in a permanent form. Article 304(a) was not attracted as there has been no imposition of higher tax on goods imported into the State as compared to similar goods manufactured inside the State. A concessional rate of tax had only been provided for specified categories of manufacturers in the State of the two products. It was next submitted that the intention of a taxation provision is to be gathered from the language of the notification only especially if it is plain and unambiguous. The economic result is not relevant in interpreting a fiscal notification. Words cannot be added or substituted to the notification. The three components for a valid tax was the subject of tax, the person liable to pay the tax and the rate at which it....
X X X X Extracts X X X X
X X X X Extracts X X X X
....State of Jammu and Kashmir) to submit that Video Electronics [1990] 77 STC 82 (SC); [1990] 3 SCC 87 was also noticed and followed therein as also in Jaiprakash Associates [2013] 65 VST 423 (SC); [2014] 4 SCC 720. Shri Bharat further contended that there has been no hostile discrimination under article 14 of the Constitution as the three categories of manufacturers inside the State, small and medium industrial units, those having investment up to ten crores and those manufacturing in the State but falling outside the aforesaid two categories constituted separate classes. The former two required support while the latter did not. There shall be a presumption that the State Government had duly applied its mind to all aspects of the matter, considered all issues and arrived at the conclusion that the nature of incentive or concession granted was required for spurring economic and social growth. If the petitioners contend that such concession would not spur economic growth or was not necessary for the purpose, it is for them to demonstrate and not for the respondents to prove relying on [1992] 86 STC 305 (Karn); AIR 1992 Karnataka 215 (Galaxy Theatre v. State of Karnataka). In reply le....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... intercourse among States. -Notwithstanding anything in article 301 or article 303, the Legislature of a State may by law- (a) impose on goods imported from other States (or the Union territories) any tax to which similar goods manufactured or produced in that State are subject, so, however, as not to discriminate between goods so imported and goods so manufactured or produced;" The Constitutional protection to freedom of inter-State trade and commerce throughout the territory of India in article 301 of the Constitution is but an embodiment of the guarantee in the Preamble of the Constitution for economic justice which in turn would promote social justice and equality of opportunity. Nonetheless, Parliament has power under article 302 to impose restrictions in public interest. Article 303 prohibits the Parliament or Legislature of the State to make any law giving preference to one State over another or discrimination between one State and another with regard to trade and commerce. The importance given to Part XIII of the Constitution is reflected in the Constitutional power of the Parliament to appoint an authority under article 307 for carrying out the purposes of the Chapter. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r as the two specified categories are concerned. But the inevitable result is that similar goods imported from outside the State become subject to a higher rate of tax. Will grant of such concession amount to an imposition by subjecting goods manufactured outside the State to a higher rate of tax ? Does it then operate in effect as directly and immediately affecting trade and movement of the goods is the question for our consideration. Does it put manufacturers outside the State at a disadvantage by subjecting them to a higher rate of tax making their products uncompetitive in the State affecting the inflow of their goods into the State. Will it be permissible to do indirectly what is not permissible directly applying "the effect of the law test". In [1963] 48 ITR (SC) 21; [1963] 3 SCR 809 (Khandige Sham Bhat v. Agricultural Income-tax Officer) with regard to the effect of the law test it was observed as follows (page 26 in 48 ITR): ". . . It will then be the duty of the court to scrutinise the effect of the law carefully to ascertain its real impact on the persons or property similarly situated. Conversely, a law may treat persons who appear to be similarly situate differently;....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r States if similar goods in the State are subjected to similar taxes, so as not to discriminate between the goods manufactured or produced in that State and the goods which are imported from other States. This means that if the effect of the sales tax on tanned hides or skins imported from outside is that the latter becomes subject to a higher tax by the application of the proviso to sub-rule (2) of rule 16 of the Rules, then the tax is discriminatory and unconstitutional and must be struck down." In Weston Electroniks [1988] 70 STC 52 (SC); [1988] 2 SCC 568 relied upon by the petitioners, electronic goods manufactured in Delhi were sold all over the country including Gujarat. Sales tax was levied by the State of Gujarat at the rate of 15 per cent. in respect of manufacturers within the State or imported from outside. The State Government while reducing the tax on imported goods from 15 per cent. to 10 per cent. further reduced it for local manufacturers to one per cent. It was contended that by lowering the rate of tax in respect of goods manufactured within the State, the State Government has created an invidious discrimination adversely affecting the free-flow of inter-State t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....c viability and survival of these industries in the State. The grounds urged were found to be cogent and intelligible reasons of economic encouragement and growth. There was rationale in the ground urged clearly discernible holding that the exemption was based on natural and business factors not involving in intentional bias. Under these circumstances it was additionally noticed that the exemption was for a limited period. It was further noticed that general rate of tax to which outsiders were subjected was the same for those within the State not falling in the exempted category. In so far as the State of Punjab was concerned, the differential rate of sales tax for manufacturers outside the State, was declined interference noticing that except for the exempted category which were few in number, an overwhelmingly large number of local manufacturers of similar goods were also subject to sales tax at par with manufacturers from outside the State. Crucial is the discussion at paragraph 35 that naked blanket preference by grant of exemption to locally manufactured goods compared to those coming from outside the State without any reason or concession in favour of indigenous manufactured ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nnot be widened or expanded to cover cases of a different kind." The effect of a concession in trade tax discriminating between goods imported from outside and those manufactured in the State and whether it contravenes articles 301 and 304(a) of the Constitution was considered in Jaiprakash Associates [2013] 65 VST 423 (SC); [2014] 4 SCC 720. The question related to grant of rebate to cement manufacturers inside the State of Uttar Pradesh using fly-ash while denying it to cement manufacturers outside the State but using fly-ash procured from inside the State of Uttar Pradesh. It was observed (paras 27, 38 and 40, pages 440, 445 and 446 in 65 VST): "29. 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 imp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....and commerce. The conclusions were based on the fact that there was no material before the court that the higher rate of tax had caused the trade to decline. [2000] 117 STC 395 (SC); [2000] 1 SCC 688 (Shree Digvijay Cement Co. Ltd. v. State of Rajasthan) related to reduction of sales tax on inter-State sale of cement by any dealer from the State of Rajasthan to four per cent. thereby reducing the cost of cement manufactured in State of Rajasthan making it more competitive for sale in the neighbouring State to their disadvantage. It was held on facts that contrary to the challenge it had actually promoted inter-State trade resulting in increasing movement from State of Rajasthan to other States. In the present case, a specific ground of challenge by the petitioners who are manufacturers outside the State, to the grant of concession in tax for local manufacturers, is that the respondents have not placed any cogent material or rationale on basis of a study carried out supported by empirical data how the grant of such concession in tax was necessary to encourage growth of these industries. How local manufacturers of the two products only falling in the two specified categories ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....from doing business in the State putting them at a competitive disadvantage, contravenes articles 301 and 304(a) of the Constitution. The effect of granting exemption to the specified category of manufacturers only is to raise the rate of tax for manufacturers from outside the State. It is not necessary that this discrimination must be only by a positive act of imposition and it can well be by a negative effect of exemption. The effect of such exemption is to subject the local exempted category to a different rate of tax from those outside the State. It shall be the test of the effect of the exemption which shall be crucial to decide if it impedes free-flow of inter- State trade and commerce. The second ground of challenge to the notification for exemption is by manufacturers of steel bars (excluding in coil form) and steel structural within the State who do not fall in the category of small and medium scale industrial unit and have investment beyond ten crores. Those manufacturing the two specified products in the State form a class. Article 14 of the Constitution permits classification but prohibits class legislation. In [1984] 4 SCC 251 (Prabodh Verma v. State of Uttar Pradesh)....