TMI Blog2013 (12) TMI 385X X X X Extracts X X X X X X X X Extracts X X X X ..... eal income of those whose tax rate has been lowered. 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) ensures only equal rate of tax for incoming goods. So if such goods are taxed at a higher rate or where they are taxed at any rate when indigenous goods enjoy concessional rate of tax, article 304(a) is attracted. They are simple cases of hostile discrimination - 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 Governm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct 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. 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 - ‘rebate of tax’ granted by the State Government to cement manufacturing units using flyash as raw material in a unit established in the districts of State of Uttar Pradesh alone is violative of the provisions contained in articles 301 and 304(a) of the Constitution of India - Decided against Appellant. - Civil Appeal No. 3026 of 2004, Civil Appeal No. 3025 of 2004, Civil Appeal No. 5567 of 2004, Ci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inded the earlier notification dated 18.06.1997, and has issued fresh notification dated 27.02.1998, in exercise of its powers under Section 5 of the Act. Apart from others the notification provides certain conditions which requires to be fulfilled if the manufacturing units intend to take benefit of the notification. The condition No. 1 of the notification specifies that to avail the benefit of rebate, the goods should be manufactured in a unit established in the State of Uttar Pradesh and secondly, such goods shall be manufactured using fly-ash purchased from the thermal power stations situated in the State of Uttar Pradesh. The notification specifically enlists the areas in Uttar Pradesh districts alone for the purpose of the grant of rebate of tax by the Government and therefore restricted the benefit of rebate only to the units manufacturing and producing cement using fly-ash in Uttar Pradesh. The notifications require to be extracted. They are as follows: [S. No. 1263] Notification No. T.T.-2-1885/XI-9(226)94- U.P. Act-15-48-Order-97, dated 18-6-1997 [Published in U.P. Gazette, dated 18.06.1997] In exercise of the power under section 5 of the Uttar Pradesh Trade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Nagar), Lakhimpur Kheri, Lucknow, Maharajganj, Meerut, Muzaffarnagar, Saharanpur, Varanasi, Gautam Budh Nagar, Chandauli, Mirzapur and Sonbhadra. Ten Years 7. The second notification, dated 27.02.1998 issued by the Government of Uttar Pradesh is extracted and reads as under:- [S. No. 1289] Notification No. T.T.-2-592/XI-9(226)94- U.P. Act-15-48 Order-98, dated 27-2-1998 Whereas, the State Government is satisfied that it is expedient in the public interest so to do: Now, therefore, in exercise of the powers under section 5 of the Uttar Pradesh Trade Tax Act, 1948 (U.P. Act No. XV of 1948), read with Section 21 of the Uttar Pradesh General Clauses Act, 1904 (U.P. Act No. 1 of 1904), the Governor, with effect from March 1, 1998 is pleased:- (a) to rescind the Notification No. T.T.- 2-1885/XI-9(226)94-U.P. Act-15-48 Order- 97, dated June 18, 1997; (b) to grant a rebate of tax of twenty five percent on goods having fly-ash contents between ten to thirty per cent by weight and a rebate of tax of fifty per cent on the goods having fly-ash contents exceeding thirty percent by weight on the tax levied under the Act in the districts ment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cond question that is considered and decided by the High Court, is, whether doctrine of severability will apply and therefore if Condition No. 1 in the notification violates articles 301 and 304(a) of the Constitution of India; should the notification be struck down in its entirety or merely the impinging condition in the notification. The High Court has relied on the decision of this Court in Loharn Steel Industries v. State of Andhra Pradesh, (1997) 2 SCC 37, and has come to the conclusion that if certain conditions in the notification violate freedom of trade and commerce, then that portion of the notification restricting rebate of tax to the districts in State of Uttar Pradesh alone is severable. Therefore, the High Court for the reasons stated above has declared the Condition No.1 of the notification as illegal, arbitrary and discriminatory, accordingly has quashed the Condition No.1 of the notification and also granted consequential relief in the form of rebate to the respondents-herein and further has directed that deposits made by the respondents in excess of what was payable was to be refunded with an interest of 10% per annum. 12. Being aggrieved, the Revenue calls in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Uttar Pradesh has no territorial jurisdiction over the industrial units situate outside the State of Uttar Pradesh and therefore, the notification also inherently does not and cannot give the Uttar Pradesh Authorities any extra territorial jurisdiction. Therefore, it is nigh impossible for the accessing authorities to effectively enforce machinery and procedural provisions. This aspect of the matter is not taken note of is the submission of the learned counsel. Finally concludes, that, rebate is outside the scope of Part XIII and article 304(a) of the Constitution of India, and Section 5 of the Act is a beneficial legislation passed in public interest by the State Government and therefore a liberal approach requires to be adopted by this Court. 16. Per Contra, Shri Dhruv Agarwal, learned senior counsel would contend, that, by reason of the notification all the sales of the Cement in Uttar Pradesh manufactured by cement industries using fly ash for such manufacture outside the State of Uttar Pradesh are subjected to levy of sales tax at the rate of 12.5 per cent, whereas the sales of the cement manufactured by cement industries in Uttar Pradesh are granted rebate of tax from s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd scope of article 304(a) read with article 301 of the Constitution of India. To date back to the historical genesis of the aforesaid articles, he would submit that they were introduced to remove the trade blocks/ barrier that existed between princely States prior to independence but subsequently to foster economic development in the whole of India and to preserve its unity, such economic barriers were restricted which were discriminatory in nature. He would further submit that to understand whether any such tax introduced by the Government is discriminatory or not, the effect and the result of such tax imposed is to be seen. If the overall result or such effect restricts the free movement of goods between the States then it would violate articles 301 and 304(a) of the Constitution of India. 19. He further submits that it is undoubtedly true that it is the prerogative of the State Government to encourage the backward areas in its State by way of incentives but in the instant case the State of Uttar Pradesh does not segregate between backward and developed districts in the State but have rather extended the rebate of tax to even the industrially advanced districts in the State o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indirectly restrict the free flow of trade, commerce and intercourse among States by assuming the effects of an exemption/ concession which is nothing but a concept within the scope of taxation. The third issue is, can only the first condition of the notification be severed if it is found to be violative of article 304(a) of the Constitution of India without striking down the whole of the notification. 22. Before dealing with the respective contentions raised before us, we shall set out the relevant Provisions of the Act. The dictionary clause defines dealer , manufacturer , tax trade tax etc. The definitions are therefore extracted and it reads as under: (bb) Trade Tax means a tax payable under this Act on sales or purchases of goods, as the case may be; (c) dealer means any person who carries on in Uttar Pradesh (whether regularly or otherwise) the business of buying, selling, supplying or distributing goods directly or indirectly, for cash or deferred payment or for commission, remuneration or other valuable consideration and includes (i) a local authority, body, corporate, company, any co-operative society or other society, club, firm, Hindu undiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er' 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 bicycles in completely knocked down form; (ii) a dealer who makes purchases from any other dealer not liable to tax on his sale under the Act other than sales exempted under Sections 4, 4-A and 4-AAA.] [(h) 'Sale', with its grammatical variations and cognate expressions, means any transfer of property in goods (otherwise than by way of a mortgage, hypothecation, charge or pledge) for cash or deferred payment or other valuable consideration, and includes (i) a transfer, otherwise than in pursuance of a contract of property in any goods for cash, deferred payment or other valuable consideration; (ii) a transfer of property in goods (whether as goods, or in some other form) involved in the execution of a works contract; (iii) the delivery of goods on hire purchase or any system of payment by instalments; (iv) a 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; (v) the supply of goods by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 notification and secondly, that the notification may allow a rebate up to the full amount of tax levied on a specified point of sale or purchase of any goods or the sale or purchase of such goods by such person or class of persons. Lastly, the notification may also impose such conditions or restriction for availing the benefit under the notification. 25. In exercise of such power, as we have already noticed, the State Government has issued notification dated 27.02.1998 reducing the tax liability of the dealers by twenty five per cent on goods having fly-ash contents between 10 to 30 per cent weight and has reduced the tax liability of the dealer by fifty per cent on goods having fly-ash contents exceeding thirty per cent by weight. Further, the notification states that such reduction is available in the districts mentioned in the column 2 and for the period mentioned in the column 3 of the annexure to the notification. A tax rebate/ tax cut is a reduction in taxes. The immediate e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 232; it was about the Constitutionality of the Assam Taxation (on goods carried by Roads or Inland Waterways) Act, 1954 (Act XIII of 1954) which was challenged by the appellants from whom tax was demanded under the Act for carriage of tea in chests, from Sibsagar district in Assam and from Jalpaiguri in West Bengal, to Calcutta over the waterways of State of Assam. The constitutional objection against the Act was that it was covered by the inhibition implied by the freedom enunciated in article 301 and that it could be saved from being struck down only if it satisfied the condition prescribed in article 304(b). 28. In the majority judgment, Gajendragadkar, J., as he then was, accepted the appellant s contention that article 301 embraced freedom from all kinds of impediments and burdens on commerce including those imposed by tax laws; and a tax law also, in order to survive, must, satisfy the conditions laid down in clause (b) of article 304. As the learned Judge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 cannot be doubted that rising of protective walls may be justified in international trade. The Government can and has been providing such protectionist measures all these years to encourage the growth and establishment of industries in the country and to protect them from competition from foreign manufacturers. But unlike the international trade policies and the commerce clause in United States Constitution, our Constitution provides for regulating inter-State trade and commerce. The Parliament can take all protective measures under article 302 of the Constitution of India as may be required in public interest. But there are certain obvious differences between the powers conferred to the Parliament under article 302 and State legislature under article 304(a) of the Constitution. The powers given to the State legislature are not unrestricted and are bound to function within limitations stipulated under article 304(a) of the Constitution of India. The powers ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lature. 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 rebate in respect of any goods to the full amount of the tax levied at any point in the series of sales of such goods. A dealer who is entitled to a rebate under any notification will collect the tax from the consumers at the point of purchase and then have to pay the full amount of sales tax due on his turnover in that quarter; and claim rebate in terms of the notification in accordance with the provision in the rules. However, the claim for rebate need not necessarily be handed back to the payer after he has paid the stipulated sum, it can also be paid in advance of payment. It is nothing but a remission or a payment back or it is sometimes spoken of as a discount or a drawback. It cannot be disputed that it is the discretion of the State Government, through its legislature, to grant rebate to the full amount of sales tax, unless its power of taxation is limited by Constitutional provisions. In the facts of the present case, the legislature a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anufacturers 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 account the economic backwardness of a State and the need for concessions and subsidies to such new industries for their development. Therefore, this case clarified that the limited exception created in the said judgment, if extended to all will rob the salutary principle underlying Part XIII of the Constitution and further it is not possible to go on extending the limited exception. It is with this observation, this Court in the above case, held the exemption to be violating article 304(a) read with article 301 of the Constitution of India. 38. Article 304(a) is a provision that deals with taxation. It places goods imported from sister States on a par with similar goods manufactured or produced within the State in regard to State taxation in the allocated field. The object of article 304(a) was to limit the power of taxation by States so as to prevent discrimination against imported goods by imposing taxes on such goods as a higher rat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ations, 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 that they are made through the tax system and not the legislative appropriations process. These tax expenditure programmes are sometimes defined as subsidies provided through the taxation systems, but the broadest definition includes all categories of deductions, credits, exclusions, exemptions, preferential tax rates and tax deferrals. Justice Wayne in the case of Jefferson Branch Bank v. Skelly; 66 U.S. 436 while explaining the power of legislature where not forbidden by Constitution explained, that the legislature has the power to exempt from taxation according to its views of public policy provided no constitutional provisions are violated. The United States Constitution under the Equality and uniformity clause mandates that where the Constitution requires taxation to be equal and uniform, it is held in most States that the legislature must tax all such persons or property and cannot grant any exemptions unless the power to exempt is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 State and therefore on which tax had already been levied on the price paid by the purchaser at the time of their sale in the raw condition. If the quantum of tax had been the same, there might have been no case for grievance by the dealer of the tanned hides and skins which had been tanned outside the State. The grievance arises on account of the amount of tax levied being different on account of the existence of a substantial disparity in the price of the raw hides or skins and of those hides or skins after they had been tanned, though the rate is the same under Section 3(1)(b) of the Act. If the dealer has purchased the raw hide or skin in the State, he does not pay on the sale price of the tanned hides or skins, he pays on the purchase price only. If the dealer purchases raw hides or skins from outside the State and tans them within the State, he will be liable to pay sales-tax on the sale price of the tanned hides or skins. He too will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 clause(a) of article 304 of the Constitution of India. Again in Lakshman v. State of Madhya Pradesh; 1983 SCR 3124, the petitioner was nomad grazier belonging to Gujarat who wandered from place to place with his cattle. State of Madhya Pradesh did not like this and imposed a higher duty for out-of-State cattle owners. The levy was found invalid by the Court. 46. Rebate, therefore, as it is defined in the case of Estate of Bernard H. Stauffer, Bonnie H. Stauffer, Executrix, v. Commissioner of Internal Revenue, 48 U.S. T.C. 277, means abatement, discount, credit, refund, or any other kind of repayment. Rebates have been normally used as justifiable incentives given by the Government to stimulate small industries or newly established industries. But to understand Rebate of tax as rebate per se would be a misnomer. Rebate of tax is the rebate on rate of tax and is essentially the arithmetic of rate. The term rate is often used ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 considered in the case of RMD Chamarbaugwala v. Union Of India, AIR 1957 SC 628; in which it was observed that when a statute is in part void, it will be enforced as against the rest, if that is severable from what is invalid . The Court also observed seven propositions of severability, out of which, one of them provided that if the valid and the invalid portions are distinct and separate that after striking out what is in-valid, what remains is in itself a complete code independent of the rest, then it will be upheld notwithstanding that the rest has become unenforceable. The principles of severability was also discussed in the case of A. K. Gopalan v. State of Madras, AIR 1950 SC 27, wherein the Court observed that what we have to see is, whether the omission of the impugned portions of the Act will change the nature or the structure or the object of the legislation . In the facts of the present case, striking down Clause (1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fication 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 assessing authority can always reject the claim of the manufacturers. 52. Further we may also refer to the submission of Shri Dhruv Agarwal, who would rely on the observations of this Court in the case of G.B. Prabharkar Rao v. State of Andhra Pradesh, 1985 Supp. SCC 432; wherein the age limit of retirement was first raised and then reduced which created an administrative chaos and therefore merely because it created an administrative chaos the provision reducing the age could not have been declared invalid. On the basis of the aforesaid submission, he would submit that the machinery provisions cannot be used to test the constitutional validity of a statute because the liability is always created through substantive provisions. We agree with the submission made by, Shri Dhruv, and are of the opinion that issue of territoriality should not be a factor to determine the constitutional validity of the notification. 53 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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