TMI Blog2015 (1) TMI 1273X X X X Extracts X X X X X X X X Extracts X X X X ..... he State who will naturally prefer to purchase it from those granted exemption in the State whose price and costs shall naturally be lesser and lower. No details have been furnished with regard to specified areas, or the number of unit falling in the exempted category situated in the State who have availed of the benefits since it was first introduced on March 30, 2013 and how it has contributed to the economic growth of the State. The respondents have not furnished any data for distinguishing one per cent tax between the two exempted categories of small and medium scale enterprises and an investment limit of 10 lacs. No material has been brought on record that despite grant of exemption manufacturers outside the State have not been put at disadvantage and are continuing to do business. Likewise there is no data with regard to number of industrial units falling outside the exempted category in the State and whether they had been affected or not by the grant of concession. How the exempted category alone had given the desired impetus to industrialisation and how it was necessary to do so and the manner in which it would give a economic boost to the State. Therefore, the impug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 is held to be bad on both counts of contravening articles 301 and 304(a) of the Constitution as also violating the equality clause under article 14 of the Constitution. The notification is therefore struck down. - Decided in favour of petitioner - Writ Petition (T) Nos. 143 to 150 of 2014 - - - Dated:- 9-1-2015 - Navin Sinha and Pritinker Diwaker, JJ. For the Petitioner : Arvind P. Datar, Senior Advocate assisted by Lalit K. Ahluwalia and Neelabh Dubey For the respondents : Prafull N. Bharat, Additional Advocate-General ORDER The petitioners challenge notification dated May 30, 2014 under section 15B of the Chhattisgarh Value Added Tax Act, 2005 (hereinafter called the VAT Act ). It levies a concessional rate of three per cent. tax only under the VAT Act on steel bars (excluding in coil form) and steel structural as defined in section 14(iv)(iv) and (v) of the Central Sales Tax Act, 1956 (hereinafter called the Central Act ) on manufacture within the State by a small or medium scale industrial unit with total capital investment in plant and machinery not exceeding ten crores before depreciation up to March 31, 2014, and industrial units commencing product ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... confined to three per cent. concessional tax on the two items to manufacturers within the State only and which were a small and medium scale industrial unit in which up to March 31, 2014 or after April 1, 2014 till date of production the total investment in plant and machinery before depreciation did not exceed ten crores. The period of exemption was extended from March 31, 2014 to March 31, 2015. The rate of tax for manufacturers outside the State and other manufacturers in the State remained at five per cent. The impugned notification dated May 30, 2014 was then issued. Retaining the concessional rate of tax at three per cent. for small and medium scale units manufacturers within the State, the benefit was now also extended to a registered dealer purchasing from such manufacturer and also to a subsequent purchaser from such registered dealer purchaser. An additional benefit of four per cent. concessional tax was also extended to those manufacturers within the State whose investment did not exceed ten crores as specified and also to registered purchasers from such manufacturer or the subsequent purchaser also. The extension of concessional tax to a purchaser from the manufactur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x between them along with how it would achieve the desired result of boosting the State economy. No data had been placed of the number of units in each category and those outside it within the State and what benefits had been reaped since the new tax regime was introduced. Shri Datar further submitted that that the effect of law test shall have to be applied in considering if the tax concession granted contravened article 304(a). The twin test of imposition and subjecting to tax will have to be applied. Even if there has been no imposition of higher rate of tax on similar goods from outside the State, but if grant of concessional tax on goods inside the State puts those from outside the State at a disadvantage resulting in subjecting them to a higher rate of tax than the goods manufactured in the State, effectively it amounts to imposition of tax at higher rate on goods imported into the State, prohibited by the Constitution. If the tax structure affects the inflow of goods from outside the State article 304(a) would stand contravened. What could not be done directly cannot be permitted to be done indirectly. Reliance was placed on [1997] 107 STC 586 (SC) (Anand Commerc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate, their market share as compared to others manufacturing within the State to conclude that the former alone were sufficient to provide the needed boost to economic growth, and how it may or may not affect those manufacturing within the State but falling outside the categories granted concession. The grant of a concession has to be based on certain data reflecting aims and objects in the form of policy identifying items and persons as necessary and sufficient for growth. Invoking section 106 of the Evidence Act it was submitted that these were facts specifically within the knowledge of the State authorities and the onus lay on them to provide the empirical data. The bald contention of the respondents in the counter-affidavit that a reasonable classification had been made keeping in mind the industrial backwardness of the State or that industries would not come or would shift out of the State if such concession was not granted was insufficient if the classification made was irrational not based on intelligible differentia to distinguish those within the group from those outside. Indeed it was a sub-classification clearly impermissible under the Constitution. Shri Prafull N. Bha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onstitution as it does not impede or restrict freedom of inter-State trade and commerce by preventing manufacturers outside the State of the aforesaid two items from selling their products in the State of Chhattisgarh. The ultimate object of the Constitution is to develop the economic unity of India spread across all States with an equal opportunity of growth and which is what the impugned notification purports to do. Sri Bharat submitted that the concession granted did not violate article 301 or 304(a) of the Constitution as those manufacturing outside the State were not prohibited from selling within the State and neither could it be said that the concession was of a nature directly and immediately impeding movement of goods inter-State relying on AIR 1970 SC 1912 (State of Kerala v. A. B. Abdul Kadir) and [1986] 63 STC 1 (SC); AIR 1986 SC 1085 (Vrajlal Manilal Co. v. State of Madhya Pradesh). The grant of concession in tax to local manufacturers could not ipso facto be considered as impeding inter-State trade and commerce for which reliance was placed on [2000] 117 STC 395 (SC); [2000] 1 SCC 688 (Shree Digvijay Cement Co. Ltd. v. State of Rajasthan). Reliance was next pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Lastly learned senior counsel Shri Datar submitted that the argument to justify the concession as having been granted for one year only was not sustainable in absence of any empirical data how grant of such concession for this extremely limited duration would achieve the desired industrial and social growth. If it had been a concession granted for ten years or five years to all iron and steel manufacturing units in the State the matter would have been different. A consideration of the rival submissions necessitates to first notice section 15B of the VAT Act in its relevant extract which reads as follows: 15B. Saving.-The State Government may, by notification and subject to such restrictions and conditions as may be specified therein, exempt whether prospectively or retrospectively,- (i)(a) any class of dealers; or (b) any goods or class of goods, in whole or in part, from the payment of tax under this Act for such period as may be specified in the notifications; Articles 301 and 304(a) in Part XIII of the Constitution read as follows: 301. Freedom of trade, commerce and intercourse.-Subject to the other provisions of this Part, trade, commerce and intercour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ? 52. . . . Our conclusion, therefore, is that when article 301 provides that trade shall be free throughout the territory of India it means that the flow of trade shall run smooth and unhampered by any restriction either at the boundaries of the States or at any other points inside the States themselves. It is the free movement or the transport of goods from one part of the country to the other that is intended to be saved, and if any Act imposes any direct restrictions on the very movement of such goods it attracts the provisions of article 301, and its validity can be sustained only if it satisfies the requirements of article 302 or article 304 of Part XIII . . . The rate of tax under the VAT Act is five per cent. for the two specified iron and steel products imported from outside the State while for manufacturers within the State falling in the two specified categories it is at a concessional rate of three per cent. and four per cent., respectively. There has been no imposition of a higher rate of ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... right is direct and inevitable, then a fortiori it must be presumed to have been intended by the authority taking the action and hence this doctrine of direct and inevitable effect has been described by some jurists as the doctrine of intended and real effect. . . That taxing laws could also impede the Constitutional guarantee for freedom of inter-State trade was considered in Mehtab Majid [1963] 14 STC 355 (SC); AIR 1963 SC 928; [1963] Supp 2 SCR 435 observing as follows (page 360 in 14 STC): 10. 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 termed to be compensatory taxes or regulatory measures. Sales tax, of the kind under consideration here, cannot be said to be a measure regulating any trade or a compensatory tax levied for the use of trading facilities. Sales tax, which has the effect of discriminating between goods of one State and goods of another, may affect the free flow of trade and it will then offend against article 301 and will be valid only if it comes within the terms of article 304(a). 11. Article 304(a) enables the Legislature of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have contended relying on Shree Mahavir Oil Mills [1997] 104 STC 148 (SC); [1996] 11 SCC 39 that it has to be read as confined to its own facts and not as a generalised proposition for the goal of industrial equality of States. By notification dated December 26, 1985, the State of Uttar Pradesh provided complete tax exemption to any goods manufactured in a new industrial unit fulfilling requirements for a specified period. It was challenged as violative of the freedom of inter-State trade and commerce under the Constitution by similar manufacturers outside the State. It was opined that economic development of a State for ensuring economic equality of States and thereby develop the economic unity of India was a vital goal to be achieved. Taxes which did not directly or immediately restrict or interfere with trade, commerce and intercourse would be excluded from ambit of article 301. It was observed that imposition of sales tax, only had an indirect effect on trade and commerce. Considering the question whether power to grant exemption to specified class of manufacturers for limited period on certain conditions, the court relied upon the averment on behalf of the respondents urging ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... State of J K making it uncompetitive compared to edible oil imported from outside the State, to promote industrialization the State Government granted complete exemption from sales tax on locally manufactured edible oil for five years later extended to another five years for units with an investment of 10 lacs subsequently increased to 30 lacs. Manufacturers outside the State were required to pay tax at the rate of eight per cent. It was contended on their behalf that raising of this fiscal barrier violated the freedom of inter-State trade as it put them at a disadvantage making their products more expensive and uncompetitive. The Supreme Court held that States are free to levy taxes on goods imported from other States so long as they do not discriminate between goods imported and those manufactured in the State. The laudable object of the State to encourage and promote establishment and growth of industries could not be a justification to subject goods from outside the State to a discriminatory rate of tax. Referring to Video Electronics [1990] 77 STC 82 (SC); [1990] 3 SCC 87 it was observed that the limited exception carved out therein cannot be enlarged to cover cases of diff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oods. The tax referred to in article 304(a) is a 'tax on goods'. . . 52. Exemption as we normally understand has twofold impact. First, exemptions/concessional rate of tax affect consumer choice by impacting relative pricing and, thus, materially altering the economic balance. It is because consumption will tend to shift towards untaxed items, the prices of those items and the items used to produce them will increase while the prices of taxed items will decrease relatively. Second, such exemptions unfairly burden some businesses either within the same industry or in other competing industries. AIR 1970 SC 1912 (State of Kerala v. Abdul Kadir) relied upon by the respondents reiterates that it was only such restrictions or impediment which directly or immediately impede the free flow of trade, commerce and intercourse which would contravene article 301 of the Constitution and that every tax would not be automatically amount to doing so holding that every case had to be judged on its own facts and in its own setting of time and circumstances with regard to the effect of law. Likewise in AIR 1986 SC 1085 (Vrajlal Manilal Co. v. State of Madhya Pradesh) relied upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heir products in the State who will naturally prefer to purchase it from those granted exemption in the State whose price and costs shall naturally be lesser and lower. No details have been furnished with regard to specified areas, or the number of unit falling in the exempted category situated in the State who have availed of the benefits since it was first introduced on March 30, 2013 and how it has contributed to the economic growth of the State. The respondents have not furnished any data for distinguishing one per cent. tax between the two exempted categories of small and medium scale enterprises and an investment limit of 10 lacs. No material has been brought on record that despite grant of exemption manufacturers outside the State have not been put at disadvantage and are continuing to do business. Likewise there is no data with regard to number of industrial units falling outside the exempted category in the State and whether they had been affected or not by the grant of concession. How the exempted category alone had given the desired impetus to industrialisation and how it was necessary to do so and the manner in which it would give a economic boost to the State. We ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the legislation. In order to pass the test, two conditions have to be fulfilled, namely, (1) that the classification must be founded on an intelligible differentia which distinguishes those that are grouped together from others, and (2) the differentia must have a rational nexus or relation to the object sought to be achieved by the legislation. There is no intelligible differentia discernible in creation of these two categories of manufacturers and purchasers from them as a separate favoured class having any nexus with any object of quick industrialisation to be achieved by rationale. No empirical data has been placed with regard to the number of units in each of the two exempted categories, or how many of them had closed down and dealerships surrendered in absence of concessions in recent preceding years. The number of industrial units falling outside the exempted categories and that grant of concessions had not affected them in any manner and none had closed down. Levying of a higher rate of tax on other local manufacturers may well sound the death knell for them in the State rendering them unproductive and uncompetetive. Section 15B of the VAT Act has rightly been urged t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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