TMI Blog1996 (11) TMI 358X X X X Extracts X X X X X X X X Extracts X X X X ..... ents. Harish N. Salve, Senior Advocate (Ms. Bina Gupta, Alok Agarwal, Ramesh Singh and Ms. Rakhi Verma, Advocates, with him), for the respondents. -------------------------------------------------- The judgment of the Court was delivered by B.P. JEEVAN REDDY, J.- Leave granted. The State of Jammu and Kashmir seeks to encourage and promote the industrialisation of the State-like every other State in the country. Edible oil industry is one such. Because of certain inherent problems, the cost of production of edible oil in Jammu and Kashmir is said to be higher than the cost of production of similar edible oil in the adjoining States with the result that the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of the rate of sales tax to eight per cent, the outside manufacturers were obliged to pay at eight per cent while the local manufacturers were exempt fully. It is then that some of the outside manufacturers including the appellants herein, approached the Jammu and Kashmir High Court by way of writ petitions which were dismissed by a learned single Judge. The Letters Patent Appeals preferred by the appellants have also been dismissed by the Division Bench relying mainly upon the decision of this Court in Video Electronics Pvt. Ltd. [1990] 77 STC 82; (1990) 3 SCC 87. Sri Harish Salve, learned counsel for the appellants, assailed the correctness of the judgment of the High Court on several 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 thr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turers is substantially higher than the cost of production of edible oil in the adjoining States or in other States in the country. Unless the impugned protective measure is provided to the local manufacturers, Sri Verma submitted, it was not possible for the local manufacturers to survive in the market. They would have been eliminated from their business and trade by the out-State manufacturers who are able to sell their goods at a lesser price. The purpose of the impugned measure, Sri Verma submitted, is, therefore, laudable. It is not directed against the out-State manufacturers but only towards saving the local ones. Even otherwise, counsel submitted, the principle of classification relevant 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s it in its entirety. The idea was not really to empower the State Legislatures to levy tax on goods imported from other States and Union territories-that they are already empowered by other provisions in the Constitution-but to declare that power shall not be so exercised as to discriminate against the imported goods vis-a-vis locally manufactured goods. The clause, though worded in positive language has a negative aspect. It is, in truth, a provision prohibiting discrimination against the imported goods. In the matter of levy of tax-and this is important to bear in mind-the clause tells the State Legislatures-"tax you may the goods imported from other States/Union territories but do not, in 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-i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Bill is cured). Though in appearance this clause reads like conferring on the State Legislatures a power akin to the power conferred upon the Parliament by article 302, there are certain distinctions. Firstly, while article 302 does not use the expression "reasonable" before the word "restrictions", this clause does. Secondly, this power can be exercised by the State Legislature only with the "previous sanction" of the President-which means the Union Ministry, or with the assent of the President, as explained above. It is probably our history which impelled the founding fathers to lay store by the Central Government in the matter of imposing restrictions, or reasonable restrictions, as the case 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... immediately restrict or impede the free-flow or movement of trade. Taxes may and do amount to restrictions; but it is only such taxes as directly and immediately restrict trade that would fall within the purview of article 301........We are, therefore, satisfied that in determining the limits of the width and amplitude of the freedom guaranteed by article 301 a rational and workable test to apply would be: Does the impugned restriction operate directly or immediately on trade or its movement." In Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan [1963] 1 SCR 491 validity of section 4(1) of the Rajasthan Motor Vehicles Taxation Act, 1951, was challenged. The section levied a tax on all 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comply with the requirements of the proviso to article 304(b) of the Constitution." (Emphasis supplied). Firm A.T.B. Mehtab Majid Co. v. State of Madras [1963] 14 STC 355 (SC); [1963] Suppl 2 SCR 435 arose under the Madras General Sales Tax Act. The effect of section 3 of the Act read with rule 16 was that tanned hides and skins imported from outside the State of Madras and sold within the State were subject to a higher rate of tax than the tax imposed on hides or skins tanned and sold within the State. Similarly, hides or skins imported from outside the State after purchase in their raw condition and then tanned inside the State were also subject to higher rate of tax than hides or skins purchased in 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 te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f trade does not necessarily depend upon the rates of sales tax; it depends upon a variety of factors, such as the source of supply, place of consumption, existence of trade channels, the rates of freight, trading facilities, availability of efficient transport and other facilities for carrying on trade. Instances can easily be imagined of cases in which notwithstanding the lower rate of tax in a particular part of the country goods may be purchased from another part, where a higher rate of tax prevails. Supposing in a particular State in respect of a particular commodity, the rate of tax is 2 per cent but if the benefit of that low rate is offset by the freight which a merchant in another State may have to pay 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 particul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e were challenged as violative of articles 301 and 304 and the challenge was upheld. The first ground upheld was that the "reasonable restrictions" contemplated by article 304(b) can be imposed by a law made by Legislature of the State and not by the orders of the Government, i.e., by executive action This ground appears to be of doubtful validity as pointed out by a three-Judge Bench in Video Electronics v. State of Punjab [1990] 77 STC 82 (SC); (1990) 3 SCC 87.. The second ground given by the Bench (Ranganath Misra and M.M. Dutt, JJ.) is that "variation of the rate of inter-State sales tax does affect free trade and commerce and creates a local preference which is contrary to the scheme of Part XIII of the Constitution" 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 recal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asmuch as it was a case of grant of exemption "to a special class for a limited period on specific conditions" and was not extended to all the producers of those goods, it does not offend the freedom guaranteed by article 301. Similarly, in the case of Punjab notification, it was held that since the exemption is for certain specified goods and also because "an overwhelmingly large number of local manufacturers of similar goods are subject to sales tax", it cannot be said that local manufacturers were favoured as against the outside manufacturers. In the course of their judgment, the Bench made certain observations which are strongly relied upon by Shri M.L. Verma, J. The observations are to the effect that while judging 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; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tries", nor is circumscribed by other conditions of the nature stipulated in the Uttar Pradesh notification. It is not possible to go on extending the limited exception created in the said judgment, by stages, which would have the effect of robbing the salutory principle underlying Part XIII of its substance. Indeed, it has been the contention of Sri Salve that, on principle, the exception carved out in Video Electronics [1990] 77 STC 82 (SC); (1990) 3 SCC 87 is unsustainable. For the purpose of this case, it is not necessary for us to say anything about the correctness of Video Electronics [1990] 77 STC 82 (SC); (1990) 3 SCC 87. Suffice it to say that the limited exception carved out therein cannot be widened or expanded to 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-judgme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s (1984) 460 US 263. Now, what is the ratio of the decisions of this Court so far as clause (a) of article 304 is concerned? In our opinion, it is this: the States are certainly free to exercise the power to levy taxes on goods imported from other States/ Union territories but this freedom, or power, shall not be so exercised as to bring about a discrimination between the imported goods and the similar goods manufactured or produced in that State. The clause deals only with discrimination by means of taxation; it prohibits it. The prohibition cannot be extended beyond the power of taxation. It means in the immediate context that States are free to encourage and promote the establishment and growth of industries within their States 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e State of Jammu and Kashmir which is economically and industrially an undeveloped State, besides being a disturbed State. We may agree on this score but then the measures necessary in that behalf have to be taken by the appropriate authority and in the appropriate manner. Part XIII of the Constitution itself contains adequate provisions to remedy such a situation and there is no reason why the necessary measures cannot be taken to protect the edible oil industry in the State in accordance with the provisions of the said Part. Keeping the said aspect in view, we invoke our power under article 142 of the Constitution and mould the relief to suit the exigencies of the situation. We declare that the exemption granted by Notification No. S.R.O. 93 of 1991 to local manufacturers/producers of edible oil is violative of the provisions contained in articles 301 and 304(a). At the same time, we direct that: (a) the appellants shall not be entitled to claim any amounts by way of refund or otherwise by virtue of or, as a consequence of, the declaration contained herein and (b) that the declaration of invalidity of the impugned notification shall take effect on and from April 1, 1977. Till ..... X X X X Extracts X X X X X X X X Extracts X X X X
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