TMI Blog1968 (3) TMI 98X X X X Extracts X X X X X X X X Extracts X X X X ..... y virtue of section 8(2) to Central taxation, they would certainly have the effect of discriminating between the goods of one State and the goods of another and might affect the free flow of trade in such goods as between the States and that further sub-sections (2A) and (5) of section 8 only aggravated the discrimination. Nevertheless that case is sought to be distinguished by stating that the assessees in these cases are not questioning the scheme of the Act on any argument that the Central sales tax rate should be single or uniform throughout India but contend that the amendment to section 8(2)(b) by Act 31 of 1958 is void. The scope of the argument on their behalf is limited to the specific ground that sub-section (2)(b) is void in so far as it provides for the inter-State tax at a rate higher than that of the State multi-point tax. They admit that sub-section (1) prescribing the rate of two per cent. till 30th June, 1966, and three per cent. thereafter is valid as to the sales to the Government and registered dealers subject to sub-section (2A). They do not also object to sub-section (4) but accept it as valid in so far as it prescribes declaration in Form C and certificate in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wanted time for their production. In the alternative the petitioner offered to prove to the satisfaction of the Assessing Officer on the basis of the records relating to the sales that they were all made to the Government departments. The petitioner says that the 1st respondent, who was the Assessing Officer, without considering its reasonable request, finalised the assessment in haste and made an order on 31st December, 1966, which was actually served on 10th February, 1967. An appeal to the 2nd respondent filed against the order of assessment is said to be pending disposal. But on account of the fact that he is not competent to decide the constitutional validity of the provisions and the question cannot be raised by the assessees even in this Court in a tax case arising out of the order, the petitioner has invoked the jurisdiction of this Court under Article 226 of the Constitution. We may add, as alleged by it, the petitioner filed before the 1st respondent D Form in respect of a turnover of Rs. 8,53,692.50 on 3rd February, 1967, which were received from respondents 5 to 7 after repeated reminders. But the 1st respondent ignored them and served upon the petitioner the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er rate applied. Time has been refused to correct the alleged defects and produce the forms. It appears the forms filed also were refused to be handed back for rectification. The assessees charge that this has been deliberately done with a view to mulct them with the higher rate of tax. The third class represented by W.P. No. 84 of 1967 consists of a case of registered dealers who in another State make contracts for local delivery there and are assessed to tax by that State but all the same the Madras authorities decide or propose to decide that the transactions are inter-State sales subject to higher rate of tax in the absence of C Forms. The assessees maintain that in the nature of things there may be no question of C Forms as the sales were all outside sales. Larsen and Toubro Ltd. v. Joint Commercial Tax Officer[1967] 20 S.T.C. 150. has in detail narrated the scheme of taxation on sale of goods before and after the Constitution and under the Central Sales Tax Act, 1956. We do not think it necessary to reiterate and cover the entire field over again. Briefly the position was this. Prior to the Constitution, each State on the basis of local territorial nexus with one or more ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. Article 301 forged a further limitation on the power of the States to tax sale or purchase of goods by declaring that subject to the other provisions of Part XIII, trade, commerce and intercourse throughout the territory of India shall be free. Parliament has, however, been given by Article 302 the authority to impose restrictions on the freedom of trade, commerce or intercourse if they are required in public interest. Nevertheless, the Parliament and the Legislature of a State have no power, as mentioned in Article 303(1), to make laws which make a preference or discrimination as between the States. But this limitation upon the power of the Parliament will not apply under Article 303(2) to a law made by it which makes any such preference or discrimination if it is declared by that law that it is necessary to do so for the purpose of dealing with a situation arising from scarcity of goods in any part of the territory of India. By Article 304 the State Legislature is at liberty to impose non-discriminatory taxes on goods imported from other States and also to impose reasonable restrictions on the freedom of trade, commerce or intercourse with or within that State as may be requir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the strength of The State of Bombay v. United Motors (India) Ltd.[1953] 4 S.T.C. 133, The Ordinance and the Validation Act were intended to relieve the States from the consequences of Bengal Immunity Co. Ltd. v. The State of Bihar[1955] 6 S.T.C. 446. on their respective finances and to avoid refund of taxes levied and collected between 1st April, 1951, and 6th September, 1955, on the basis of the Explanation as interpreted by the State of Bombay v. United Motors (India) Ltd.[1953] 4 S.T.C. 133. The national aspects of sales tax, the exigencies of foreign trade, the disadvantage the exporting States suffered on account of the Explanation to Article 286(1), which linked sales tax with consumption, and the bewildering variety of problems of interpretation and their effects upon the budgets of the States made it obviously necessary to take measures to bring about uniformity in the enforcement and incidence of sales tax law relating to inter-State sales or purchases, particularly from the standpoint of the dealer and consumer placed in different States and to make it more equitable for the exporting States which, as the legal position then stood, had no share in the proceeds of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... came into force from 5th January, 1957, except section 15, the actual levy and collection of taxes on inter-State sales or purchases began to be made only from 1st July, 1957. The scope of this Act has been elaborately dealt with by this Court in Larsen and Toubro Ltd. v. Joint Commercial Tax Officer(1) and we do not propose to reiterate it. The major change-over is to locate the situs of an inter-State sale or purchase for purposes of Central tax in the exporting State which is the converse of the position under the Explanation to Article 286(1). We mentioned earlier that the Explanation fixed the situs in the importing State where the goods as the direct result of the sale were delivered for consumption. Larsen and Toubro, Ltd. v. Joint Commercial Tax Officer[1967] 20 S.T.C. 150 at 185. observed: "An inside sale or an outside sale is related to its situs and if the situs of an inside sale is fixed on certain tests, what is not an inside sale will be an outside sale provided there is a completed contract of sale of goods ..... In our opinion, having regard to the definitions of 'appropriate State' and 'place of business' and the language employed by sections 3 and 4, a sale or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ates of tax on sales in the course of inter-State trade or commerce as to conform to the freedom of trade, commerce and intercourse throughout the territory of India guaranteed by Article 301 and avoid unequal incidence or burden in interState taxation just as sections 3, 4 and 6 have to keep in view Articles 286 and 269(3). The rate of tax prescribed by section 8 is linked with registration of the dealer and the class of goods as declared or non-declared goods specified in the certificate of registration of a registered dealer as well as the specific purpose of the purchase of the goods by the dealer either as intended for resale by him or for use by him in the manufacture of goods for sale or in the execution of any contract. The original rate of tax applied to inter-State transactions between registered dealers in such goods was one per cent. but if the State rate for local transactions in similar goods was lower than one per cent. or nil, that should prevail. But if the inter-State transactions were between persons or dealers other than registered dealers, the State rate should apply to them as if they were inside sales. The scheme of section 8 is, therefore, that the rate of o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te of one per cent. proposed above would apply only to the transactions between the registered dealers in one State and the registered dealers in another ..... Where transactions take place between registered dealers in one State and unregistered dealers or consumers in another, this low rate of levy will not be suitable as it is likely to encourage avoidance of tax on more or less the same scale as the present provisions of Article 286 have done. If this is to be prevented, it is necessary that transactions of this type should be taxable at the same rates which exporting States impose on similar transactions within their own territories. The unregistered dealers and consumers in the importing State will then find themselves unable to secure any advantage over the consumers of locally purchased articles; nor of course will they, under this system, be able to escape the taxation altogether, as many of them do at present." We make reference to these observations from the Reports of the Taxation Enquiry Commission and the Second Finance Commission only to highlight the landmarks of the history of the origin for the Sixth Amendment of the Constitution and the enactment of the Central ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t sale during the inter-State movement of goods following a sale of the description under section 3(1) has been exempted from tax subject to certain conditions. Sub-sections (1), (2) and (4) of section 8 have been substituted by fresh provisions but within the existing framework under section 8 as it stood before the amendment. But the changes are of far-reaching importance. Sub-section (1) as amended brings within its scope also sales to Government of any goods, not merely of the goods referred to in the certificate of registration of the dealer. If an inter-State transaction is not as between a registered dealer and Government or a registered dealer, the rate of tax shall be the same in case it relates to declared goods as that applicable to the sale or purchase of such goods inside the exporting State. But the rate will be calculated at seven per cent. or the State rate whichever is higher in case it relates to other goods. The proviso to section 8 was omitted but has been substantially re-enacted in the form of sub-section (2A) with an explanation. The effect of the new provision is to extend the exemption or the rate lower than one per cent. obtaining in the local law of the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er-State rate of taxation as it was first enacted does show that the inter-State rate in relation to transactions between registered dealers in any goods was lower than the State rate on local transactions in such goods and in case of other inter-State transactions, inter-State rate should be the same as intrastate rate applicable if they were local transactions. The rate prescribed for inter-State transactions between registered dealers could, therefore, be regarded as a concessional rate. But the concession was made available subject to the condition that the inter-State sale was by a registered dealer to a registered dealer of goods described in the registration certificate of the seller and intended for the use or purpose mentioned therein. But when the concessional rate was raised to two per cent. and later to three per cent., it is said, it ceases to be a concession because it found its level with the intrastate rate. That being the case, it is argued (1) that there is no longer any justification for the requirement that inter-State transactions to qualify for the so-called concessional rates should be as between registered dealers and that the goods should be of specific d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the specific purpose or use. Where the inter-State sales are admittedly by registered dealers to Governments, it may appear to be unreasonable to subject such dealers to a higher rate for non-production of the certificates in Form D because of delays on the part of the Governments and for no fault of theirs. But this situation arises not because of any inherent defect in section 8(1) and (4) requiring production of certificates in Form D but because of extraneous causes like delays on the part of Governments. We are, therefore, unable to regard the higher rate even in such cases as unreasonable or as a penalty. We decline to hold the opening words of sub-section (4) of section 8 to the effect that unless the conditions are satisfied sub-section (1) shall not apply to be invalid on that ground. We, however, observe that the Union Government may consider, where inter-State sales are made by registered dealers to Governments and there is clear proof otherwise than by production of the required certificates in Form D, of that fact, that of the required particulars, whether the higher rate should nevertheless and necessarily be applied to them and a modification of the law in that re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bstance of the law is within the legislative head or power, its incidental effect, in our opinion, will not take it out of the scope of such power. Section 8(2)(b) is in its pith and substance a provision prescribing a higher rate of inter-State sales tax in certain events and is, therefore, a law on taxes on the sale or purchase of goods that takes place in the course of inter-State trade or commerce. We think that merely because the rate of tax is such that it may possibly discourage the taxable event, it will not per se cease to be a law with respect to taxation. Supposing the rate of tax on income is so high that it retards or brings to a standstill the incentive to make or earn income, can it be said that because of that effect, the law is not one relating to income-tax but one which prohibits or inhibits the taxable event? We think not, and likewise in the present instance relating to sales tax. Further, such effect does not directly flow, as it seems to us, from section 8(2)(b). Also its object is to be in aid of effectuating the scheme of inter-State taxation under section 8(1) read with sub-sections (3) and (4). In our view, therefore, section 8(2)(b) is within the compete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t will seriously impede, if not altogether stop, the interState sales or purchases as between a local dealer and out of State unregistered dealer or consumer in respect of all goods other than declared goods. The scope and intendment of Articles 301 to 304 of the Constitution were recently examined by this Court in Larsen and Toubro Ltd. v. Joint Commercial Tax Officer[1967] 20 S.T.C. 150 at p. 165. in the light of Atiabari Tea Co. Ltd. v. State of AssamA.I.R. 1961 S.C. 232., Automobile Transport Ltd. v. State of RajasthanA.I.R. 1962 S.C. 1406. and State of Madhya Pradesh v. Bhailal Bhai[1964] 15 S.T.C. 450; A.I.R. 1964 S.C. 1006., and the conclusions were summed up thus: "It must be taken to have been well-settled by the two majority opinions of the Supreme Court referred to: (1) that the freedom guaranteed by Article 301 is not to be interpreted as to its scope and ambit in the light of the other provisions of Part XIII but the freedom is wide and absolute except for such restrictions subject to specified conditions as are to be found in the provisions other than Article 301 in Part XIII; (2) that the fiscal laws clearly fall within the ambit of Article 301; (3) that the restri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ential or unequal burden on inter-State trade, commerce and intercourse as between the States, one basic principle, which runs through them, is that different and varying State rates extended to inter-State taxation on similar goods resulted deliberately or not in placing one State in an advantageous or disadvantageous position over another or rest of the States in inter-State trade, commerce and intercourse, which necessarily and inevitably impedes or destroys the freedom guaranteed by Article 301. In the instant case, the unequal burden on intra-State and inter-State dealings as between unregistered dealers or between unregistered dealers and consumers results from imposition of floor rate on such inter-State transactions which is higher than the local or State multi-point rate on intra-State transactions in nondeclared goods. As regards dealings in declared goods, no such question arises. Where the inter-State rate is lower than the State single or multi-point rate in respect of inside sales, notwithstanding the differential or unequal rates they do not or are not likely to impede the free flow of inter-State trade, commerce and intercourse. On the other hand, they may help free ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be in conflict with the scheme of single point taxation envisaged by the Central Act, especially section 9(3) as interpreted by State of Mysore v. Lakshminarasimhiah Setty and Sons[1965] 16 S.T.C. 231. But on the view we have expressed on the constitutional validity of section 8(2)(b), we do not think it necessary to express our final opinion on this aspect. The learned Advocate-General defended the validity of the higher inter-State rate in section 8(2)(b) on the ground that it is designed to avoid or check evasion which is in the public interest. It is true, as he says, that taxing power is an attribute of sovereignty and is necessarily exercised to find the wherewithal in support of Government and that the rate of tax is a matter of policy entirely within the scope of the taxing power. But there are constitutional limitations subject to which alone the Legislature can exercise the taxing power. We need not reiterate that fiscal laws should be consistent with the freedom under Article 301 except to the extent the freedom itself is qualified by the other provisions of Part XIII of the Constitution. Parliament may by law impose such restrictions on the freedom as may be required ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o referred to in entry 33 of List III in contrast with entries 26 and 27 in List II, and in entries 52, 54 and 56 in List 1. A study of the expression "public interest" as found in the various articles and legislative entries leads us to the conclusion that its scope, extent and quality should be fixed and appreciated in the particular context. In Article 302 the "public interest" is annexed to the legislative subject-matter, that is the law made by Parliament under particular heads of its powers and lies in the effects of the regulation or restriction made by such law: Canadian Federation of Agriculture v. Attorney-General for Quebec and Others[1951] A.C. 179 at 196. The subject of legislation is to tax inter-State sales and purchases and to make provision therefor. The object obviously is to raise money for the purpose of the State Governments by means of the Central Act. It has been stated for the State that the provisions of section 8 have been made with the object of enforcing the levy of tax due in respect of interState transactions and preventing clandestine transactions between individuals and traders which would have the effect of defeating the provisions of the Central ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rticle 19(6) in order to justify restrictions on the rights guaranteed by Article 19(1)(g) need not arise from the inherent nature of the particular trade such as dangerous or unhealthy trade, the public interest in Article 302, in order to justify the restriction on the freedom of trade need not directly spring from considerations based on the freedom of trade itself guaranteed by Article 301. Also the law in order that the restriction placed by it on the system of trade may be justified as being required in the public interest need not necessarily be a law on the subject of trade itself but may well be under any entry in any of the Lists of the Seventh Schedule. Article 303(1) seems to support this view. If, therefore, as we think, the public interest in Article 302 is bound up with the subject-matter and follows the object of the law made under a particular topic or head of legislative power, any restriction imposed by such law on the freedom of trade to be valid should have a nexus with such public interest. That means the public interest in the restriction will lie in its effect on the subject or purpose of the legislation. It has been stated that nowhere has it been said, n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pose of property. Realising that some of the assessees are limited companies and not citizens who alone can invoke Article 19(1) in their favour, it is urged that once the argument as to the violation of Article 19(1)(f) is accepted in respect of an assessee who is a citizen, it will be arbitrary to deprive companies of equal protection of the laws. It has been authoritatively held in Balaji v. Income-tax Officer[1961] 43 I.T.R. 393. that an attempt to prevent by legislation an evasion of just tax liability and the necessary classification to give effect to that object cannot be termed unreasonable. So too it should be regarded as beyond controversy that as no tax shall be levied except by the authority of law as provided by Article 265, the law must stand the test laid down by Article 13 of the Constitution. A tax law to be valid must not only pass the test of legislative competence but if it violates Article 19(1), it should be within the corresponding specific saving provisions contained in that article. There are numerous decisions which establish this proposition which do not need to be cited. The mere fact that the power of taxation is the sovereign right of the State does no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt; actually there was no evasion after the rate under section 8(1) was raised to two per cent. or later on to three per cent., which was the same as the State multi-point rate on inside sales. Section 8(2A) contains the general principle that the inter-State rate should be lower than the State multi-point rate which shows that by enacting section 8(2)(b), Parliament had not made a law regarding evasion and in fact no material has been placed before the Court to show that it was enacted to avoid evasion. On these grounds it is pressed upon us that the higher rate imposed by section 8(2)(b) is neither a reasonable restriction nor in the interests of the general public. We have already held that as the Act originally stood, the higher rate not exceeding the State multi-point rate for inside sales and purchases was designed to check evasion and to effectuate the scheme to channellise the inter-State transactions as between registered dealers or between registered dealers and Governments. We have no doubt that it was a reasonable restriction in the interests of the general public. In fact, the validity of the higher rate not exceeding the State local multi-point rate has not been cha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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