TMI Blog2017 (10) TMI 185X X X X Extracts X X X X X X X X Extracts X X X X ..... ls such as bullion and / or worn out jewellery converted into final products (i.e. jewellery) by having them manufactured / processed in units situate outside the State of Tamil Nadu, even though, the final product is sold, upon payment of tax within the State of Tamil Nadu - Consequently, the final product (i.e. jewellery) manufactured by the assessee within the State from tax paid raw materials purchased within the State upon sale, within the State, gets the benefit of ITC, whereas, those goods which are manufactured outside the State, though by use of tax suffered raw materials purchased, within the State, do not get that benefit. Clearly, if the impact test is applied, goods manufactured outside the State, upon being brought within the State, for sale, would be costlier, as against those, which are, manufactured within the State. Section 19(4) of the 2006 Act provides intrinsic evidence that ITC cannot be disallowed merely because transfer of goods takes place outside the State. Section 19(4) allows for ITC on tax paid or payable, albeit, (in excess of 3%)* in respect of goods purchased in the State in two situations: (i) First, where transfer takes the goods to a place outs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 06 (in short 'the 2006 Act'). 1.1. The challenge to the said Sections, is based on the assertion, made by the writ petitioner, that the said provisions of the 2006 Act, violate, Articles 14, 19(1)(g), 301 and 304(a) (b) of the Constitution. 1.2. Accordingly, the writ petitioner, seeks a direction against the respondents to forbear from relying upon the impugned provisions to reverse or recover Input Tax Credit (in short, ITC ) under Section 27(2) of the 2006 Act. 1.3. In aid of its submissions, the writ petitioner has also asserted that denial of ITC, in respect of bullion and raw material, purchased within the State of Tamil Nadu, which is converted into finished jewellery, albeit, outside the State and sold, thereafter, within the State of Tamil Nadu, is unlawful and violative of the provisions of Article 265 of the Constitution. 2. Therefore, as would be obvious, the only issue, which arises for consideration, in the writ petition is : whether the writ petitioner, ought to be denied ITC, on bullion and raw material, purchased within the State of Tamil Nadu, which is sent outside the State for being converted into finished jewellery and thereafter, brought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itioner's claim for set off in respect of tax paid on bullion and worn-out jewellery, and accordingly, issued two separate notices of even date i.e. 21.01.2010, relating to the financial years 2008-2009 and 2009-2010. 3.8. By virtue of these notices, the writ petitioner was informed that the ITC could be claimed only on those goods, which, upon their purchase, had been used in manufacturing or processing within the State. In this behalf, notices adverted to the provisions of Section 19(2)(ii) of the 2006 Act. Thus, according to the first respondent, ITC had been wrongly availed of, by the writ petitioner, and therefore, he proposed to reverse the ITC by invoking the provisions of Section 27(2) of the 2006 Act. Furthermore, the notices also proposed to levy of penalty under Section 27(4) of the 2006 Act, equivalent to 50% of the ITC, purportedly, wrongly availed of by the writ petitioner. The notices concluded, by calling upon the writ petitioner to file its objections to the proposals made therein. 3.9. The writ petitioner filed its objections dated 03.02.2010, to the proposals made in the aforementioned notices. Since, two separate notices were served on the writ petitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 21.06.2017. After arguments were heard, judgement was reserved in the matter on 22.06.2017. Submissions of Counsels : 6. Arguments on behalf of the writ petitioner were advanced by Mr.C.Natarajan, Senior Advocate, instructed by Mr.N.Inbarajan, Advocate. Likewise, submissions on behalf of respondents were advanced by Mr.V.Ayyadurai, learned Additional Advocate General, assisted by Mr.S.Kanmani Annamalai, learned Additional Government Pleader for the State. 7. Broadly, the submissions advanced by Mr.C.Natarajan were as follows: 7.1. The writ petitioner, had purchased, bullion and worn-out jewellery from registered and unregistered dealers, inside the State of Tamil Nadu, against sellers tax invoices, upon payment of Value Added Tax (in short 'VAT'). 7.2. The tax on bullion and worn-out jewellery is payable at 1%, as indicated in Serial No.1, Part A of the First Schedule of the 2006 Act. The final product, which is gold and jewellery, is also exigible to tax at the rate of 1%, albeit, as per the provisions of Serial No.2, Part B of the First Schedule to the 2006 Act. Therefore, taxes, both on purchase of raw material and sale of the final product having been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounter to the provisions of Article 304(a) of the Constitution. 7.9. The validity of the aforesaid proposition is exemplified by the following judgements (i) Firm ATB Mehtab Majid Co Vs. State of Madras, AIR 1963 SC 928 ; (ii) Andhra Steel Corporation Vs. Commissioner of Commercial Taxes in Karnataka, 1990 (Supp) SCC 617 ; (iii) Bhoruka Steel Limited vs. The Union of India and others, (1989) 10 SISTC 19 (Mad.) ; (iv) Shree Mahavir Oil Mills Vs. State of Jammu and Kashmir, (1996) 11 SCC 39 ; and (v) State of U.P. Vs. Jaiprakash Associates Limited, (2014) 4 SCC 720. 8. The denial of ITC on jewellery/gold, which are manufactured outside the State, but which are brought back and sold within the State of Tamil Nadu, will result in a discriminatory tax burden. The Statute, therefore, has to be construed in a manner that the Legislative power remains within the limitations and restrictions put upon it by the Constitution; an aspect which is articulated in the following judgements and commentary (i) Jothi Timber Mart Vs. The Corporation of Calicut, AIR 1970 SC 264; (ii) New India Sugar Mills Limited Vs. Commissioner of Sales Tax, Bihar, AIR 1963 SC 1207; (iii) Hotel Balaji Vs. Stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of the Statute i.e. 2006 Act. 8.4. A perusal of the provision of Section 19(4) of the 2006 Act, makes it clear, that it is attracted only when the transfer of goods takes place to a place outside the State, which are lost permanently to the stream of sale within the State of Tamil Nadu. In the instant case, the transit of worn-out jewellery or bullion takes place temporarily - as an obligation is cast on the job workers to return the ornaments to the writ petitioner, which are then sold, within the State of Tamil Nadu. 8.5. The judgements, which have, articulated this position, that is, tax will be attracted only in circumstances where goods cease to exist or cease to be available in the State for sale or purchase, are the following : (i) Hotel Balaji and others Vs. State of Andhra Pradesh, (1993) Supp (4) SCC 536; (ii) Assistant Commissioner (Intelligence) Vs. Nandanam Construction Company 1998 (8) SCC 69; and (iii) Malabar Fruit Products Company Vs. Sales Tax Officer (1973) 30 STC 537 (Ker.). 8.6. Pertinently, the view taken in Malabar Fruit Products was approved by the Supreme Court in : State of Tamil Nadu Vs. M.K.Kandaswamy, (1975) 36 STC 191. 8.7. Furthermore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion are concerned, while purchasing the same, tax at the rate of 1% under Serial No.1, Part A of First Schedule of 2006 Act is paid. The credit of such tax, when, paid, is available only if the following two conditions are fulfilled : First, the purchases should have been made from a registered dealer located within the State. Second, the goods purchased should be used in the manufacture of a final product, which is sold, within the State. Upon sale, admittedly, the final product i.e. jewellery, suffers tax at the rate of 1% under Serial No.2, Part B of the First Schedule of the 2006 Act. 9.2. Therefore, the tax credit is like a concession granted to an assessee which requires fulfilment of conditions contemplated under Section 19(2)(ii) of the 2006 Act. The provision of these conditions, are not discriminatory, as alleged or at all. The 2006 Act, denies ITC, to those, who procure goods from outside the State or carry out manufacturing activity, qua, goods purchased within the State, albeit, outside the territorial jurisdiction of the State. The condition prescribed in Section 19(2)(ii) of the 2006 Act is provided to further economic development of the State and to provide job o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions 19(2)(ii) and 19(4) of the 2006 Act are not repugnant to each other. These two provisions operate in separate spheres. It is not correct to state that ITC is denied only on the basis of place of manufacture. The impugned provision provides that both purchase of goods and manufacturing activities should take place within the State for availing ITC. Section 19(4) allows ITC in respect of tax paid or payable in excess of 3%, provided, the following two conditions are fulfilled: (i) transfer of goods takes place to a place outside the State, otherwise than by way of sale or, (ii) goods are used in manufacture of other goods and transferred to a place outside the State, otherwise, than, by way of sale. In other words, the State under Section 19(4) of the 2006 Act, retains 3% of the tax and provides ITC in respect of tax paid or payable in excess of 3%. 9.7. If, the submissions of the writ petitioner were to be accepted, the conditions for availment of ITC provided in other sub-sections of Section 19(2) would be rendered otiose. Because the writ petitioner, wrongly availed of ITC, the Assessing Officer, had rightly proposed reversal of ITC by invoking provisions under Section 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out of which the tanned hides and skins had been produced, he shall not be so liable. (3)The burden of proving that a transaction is not liable to taxation under this rule shall be on the dealer. 11.2. As would be obvious, upon reading Rule 16(2)(ii) along with the proviso, is that a person, who was the first dealer, in tanned hides and skins which were tanned within the concerned State (and such person was not exempt from taxation under Section 3(3) of the given Act), was liable to pay tax under Section 3(1) of the very same Act, unless he was able to prove that he had already been subjected to tax under Sub-rule (1) of Rule 16 on untanned hides and skins, out of which, tanned hides and skins were produced. 11.3. The Supreme Court, while declaring Rule 16(2) as invalid, made the following crucial observations: ......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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses the tax. 15. The fact that the impugned rule was made in order to prescribe the single point in the series of sales by successive dealers at which the tax on sale of hides or skins was to be levied, in view of ss. 3 and 5 of the Act, does not justify the making of such a rule which discriminates between the tax imposed on goods imported from outside the State and the goods produced or manufactured in the State. 16. Now, the only question that remains for consideration is whether this rule discriminates between hides or skins imported from outside the State and those manufactured or produced in the State. 17. Sub-rule (1) of the rule deals with the sale of raw hides and skins. The tax is levied from the dealer who is the last purchaser in the State. Its vires is not challenged. Clause (i) of sub-r. (2) provides for the levying of tax on the sale of hides and skins which had been tanned outside the State. The tax is levied from the dealer who in the State, is the first seller of such hide or skins. The result is that a dealer in hides or skins which have been tanned outside the State has to pay the tax on the amount for which such hides or skins are sold by him. Cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es not affect the discriminatory nature of the tax as already indicated. 18. It is urged for the respondent State that to consider discrimination between the imported goods and goods produced or manufactured in the State, circumstances and situations at the taxable point must be similar and that the circumstance of hides or skins tanned within the State and on which tax had been paid earlier at the time of their purchase in the raw condition is sufficient to consider such hides or skins to be different from the hides or skins which had been tanned outside the State. We do not consider that the mere circumstance of a tax having been paid on the sale of such hides or skins in their raw condition justifies their forming goods of a different kind from the tanned hides or skins which had been imported from outside. At the time of sale of those hides or skins in the tanned state, there was no difference between them as goods and the hides or skins tanned outside the State as goods. The similarity contemplated by Art.304(a) is in the nature of the quality and kind of the goods and not with respect to whether they were subject of a tax already or not. 19. We are therefore of opin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12.5. These observations, to which, we have made a reference above, were found in the judgement of the Supreme Court in State of Madras Vs. N.K.Natarajan Mudaliar, AIR 1969 SC 147. 12.6. The Supreme Court also noted its own judgement in Rattan Lal Co. Vs. Assessing Authority, AIR 1970 SC 1742, wherein, it, inter alia, had observed that as long as rates of tax on goods manufactured and produced within the State and those which were imported into the State were same, the mere fact when the rate was applied, the resulting quantum of tax was higher, would not offend Article 304 of the Constitution. 12.7. Furthermore, the Court also took note of another one of its own judgement rendered in: Associated Tanners Vs. CTO, (1986) 2 SCC 479. The Supreme Court, after adverting to these judgements and upon application of the ratio laid down in A.T.B. Mehtab Majid and Co.'s case, which was followed in Hajee Abdul Shakoor and Co. Vs. State of Madras, AIR 1964 SC 1729, distinguished those cases, as those cases dealt with inter-State sales. The Court in this context noted that the levy of sales tax was under the Central Sales Tax Act in those cases, though for the purposes of arriving a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich have suffered tax but not the other categories where the scrap had not suffered tax at that stage. This is directly covered by the decision in A.T.B. Mehtab's case (supra) and that decision has not been dissented in Nataraja Mudaliar case (supra) or Rattan Lal Co's case (supra). The decision in A.T.B. Mehtab's case (supra) is by a Constitution Bench and had not been dissented so far in any case. The ratio of the judgment being fully applicable, the judgment of the High Court under appeal is not acceptable. 23. We accordingly hold that the provision which is impugned in this case is ultra vires and accordingly set aside the judgment of the High Court and allow the writ petition filed by the assessee in the High Court. There will be no order as to costs. (emphasis is ours) 13. The next case, which is relevant, for our purpose, is the judgement of the Supreme Court in Anand Commercial Agencies Vs. The Commercial Tax Officer, VI Circle, Hyderabad and others, (1998) 1 SCC 101. This is a case where the appellant before the Supreme Court challenged the difference in rates of tax imposed for sale of groundnut oil and refined oil manufactured from groundnut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the two States within the meaning of Art.301 of the Constitution. As is manifest, Art.304 is an exception to Art.301 of the Constitution. The need of taking resort to exception will arise only if the tax impugned is hit by Arts. 301 and 303 or the Constitution. If it is not then Art.304 of the Constitution will not come into picture at all. 13. But barring special circumstances, as stated herein above, the view of this Court has consistently 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. *** 18. In the case of Video Electronics (P) Ltd. Vs. State of Punjab, the constitutional validity of notifications issued by the Government of Uttar Pradesh was challenged by the writ petitioners who carried on the business of selling cinematographic films and other equipments like Projectors, sound recording and reproducing equipment, industrial X-ray films, graphic art films, photo films, etc. in the State of Uttar Pradesh and Delhi. The petitioners sold these goods after receiving them from the manufacturers from outside the State of Uttar Pradesh. They were dealers of Hindust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by other units were the same as the rate applicable to goods imported from outside the State. 22. This question was once again examined in the case of Shree Mahavir Oil Mills and Anr. v. State of Jammu Kashmir Ors., JT 1996 (10) S.C.837. In that case, with a view to protect local edible oil industry, Government of Jammu Kashmir issued an order exempting goods manufactured by small scale dealers within the State from payment of sales tax for a specified period. The rate of sales tax payable for other industries including manufacturers of the adjoining States was four per cent. A subsequent notification was issued on December 20, 1993 as a result of which the general rate of sales tax payable on edible oil became 8%. The manufacturers of edible oil from the adjoining States claimed that the exemption granted from payment of tax to the local industries was discriminatory. The exemption given by the Government of Jammu Kashmir to the manufacturers of the edible oil was total and the period of exemption was five years - which was later extended by another five years. It was held that the unconditional exemption granted to edible oil industries and at the same time subjec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the manufacture of end product took place, within or outside the State of Tamil Nadu. 14.3. The following crucial observations were made by the learned Judges, which, for the sake of convenience, are extracted hereafter: .....6. It may be seen from the facts that except the discrimination was found in a rule and not in the case of an exemption as in this case and that the case before the Supreme Court related to tanned hides and skins, whereas, in our case, it related to iron and steel, the end-product of scrap, there is not much of difference and the ratio of the judgment would clearly apply to the facts in this case. In fact, here is an added circumstance which makes the ratio of the judgment a fortiori, and that, the goods were purchased locally, tax paid under the Tamil Nadu General Sales Tax Act, 1959, the dealer had carried the goods to another State as his own, manufacture it in his own factory, brought it back to Madras to his depot and sold it. Therefore, it may not even amount to an import of goods from outside the State. The decision of the Supreme Court was rendered on 22nd November, 1962. On 10th of June, 1963, the Governor of Madras promulgated Madras Ordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the G.O. will have to be given to all those persons who have manufactured the end-products out of the raw-materials which had already suffered tax under the Tamil Nadu General Sales Tax Act, 1959. (emphasis is ours) 15. The next case, which is, of relevance, is the judgement of the Supreme Court, in: Shree Mahavir Oil Mills and Another Vs. State of J and K and others, (1996) 11 SCC 39. 15.1. Briefly, this was a case, where, manufacturers outside the State selling edible oil within the State of J K, were subjected to higher rate of tax. The State of J K defended the position on the ground that the impugned regime was put in place to encourage and promote industrialisation in the State. The State also submitted that because of inherent problems, the cost of production of edible oil, in the State of J K, was higher than the cost of production of a similar kind of edible oil manufactured in the adjoining States. With the result it was submitted, outside manufacturers were able to sell edible oil in the State at prices lower than the local manufactures. Since, this price difference, had led to closure of local edible oil industries, the State Government had decided to exem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions 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; it cannot be imprisoned in a strait-jacket. India is not already an economic unit. Economic unity is possible only when all the units of the country develop equally. The power to grant exemption is inherent in all taxing statutes end the Government cannot be deprived of this power by invoking Articles 301 and 304. The concept of economic barriers must be understood in a dynamic sense. The concept of economic unity or economic barriers must be read along with the power of exemption inhering in the State Governments. Where every State is exempting or reducing the rates of sales tax, there can be no question of an economic war between them. A backward State or a disturbed State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... *** 25. 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 promoted the establishment and growth or 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 rated to 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 Electro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urbed 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. (emphasis is ours) 16. The next judgement, which is relevant, is the judgement of the Supreme Court in: Loharn Steel Industries Ltd and another Vs. State of Andhra Pradesh and another, (1997) 105 STC 30 (SC). 16.1. In this case, the appellant, before the Supreme Court, was a dealer in iron and steel, and was registered under the A.P. General Sales Tax Act, 1957. The appellant No.1 would purchase tax suffered iron and steel scrap and ingots in the State of Andhra Pradesh and have them sent to its re-rolling Mill situate in the State of Karnataka. The re-rolled products were brought back to A.P. and sold t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we find the exemption notification to be violative of Article 304(a) the entire exemption notification will have to be struck down and not just a portion of it which is discriminatory as contended by the appellants. This question in relation to a taxing statute has been considered by this Court as far back as in 1953 in the case of The State of Bombay and Anr. v. The United Motors (India) Ltd. and Ors. [1953] SCR 1069 at 1097. If the taxing statute imposes tax on subjects which are divisible in their nature and if the covered subjects which are exempted by the Constitution are wrongly taxed, the entire taxing statute need not be declared as ultra vires because it is feasible to separate taxes levied on authorised subjects from those levied on exempt subjects and to exclude the latter in the assessment to tax. In such cases this Court has said the statute itself should be allowed to stand. The taxing authority can be prevented by injunction from imposing the tax on subjects exempted by the Constitution. In the present case the exemption notification as it originally stood exempted all re-rolled finished products sold in the State of Andhra Pradesh from tax provided tax had been paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notification would also apply to the manufacturing units of the respondents which were located outside the State of U.P. 17.4. While coming to this conclusion, the Bench, inter alia, made the following observations, which are contained in paragraphs 52 to 57 of the judgement. For the sake of convenience, the same are extracted hereunder: .....52. Exemption as we normally understand has two-fold 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. 53. Rebate is another such device used by the Government which when given on the rate of tax to the full amount of tax levied, it gives favourable treatment to one class of dealers situated within the state barring the dealers similarly placed outside the State manufacturing goods using the same raw materi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e sale price of the tanned hides or skins. He too will have to pay more for tax even though the hides and skins are tanned within the State, merely on account of his having imported the hides and skins from outside. Therefore, the Court held that this rule on this ground alone is discriminatory of Article 304(a) of the Constitution of India. 56. The above principle was re-iterated in the case of W.B.Hosiery Association and others v. State of Bihar; (1988) 4 SCC 134 and in the case of H. Anraj v Government of Tamil Nadu; (1986) 1 SCC 414; wherein the effect of an exemption was discussed. The issue before the Court was that the locally manufactured goods within the State were exempted but those manufactured in other States and imported into the State were subjected to a high rate of tax. The hosiery manufacturers and dealers in the State of West Bengal in their prayer in the writ petition asked for a direction asking the respondents to forbear from levying or imposing or collecting any sales tax on the sale of hosiery goods imported into Bihar from other States. The State Government by a notification exempted dealers from sales tax of hosiery goods manufactured and produced in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... What are the tests for determining whether the tax or levy is compensatory in nature? 4. Is the Entry Tax levied by the States in the present batch of cases violative of Article 301 of the Constitution and in particular have the impugned State enactments relating to entry tax to be tested with reference to both Articles 304(a) and 304(b) of the Constitution for determining their validity? 18.2. The conclusion, which, the Court reached, with regard to its deliberation qua Articles 301 to 304, is summarised in paragraphs 72 of the judgement. The said observation, for the sake of convenience, are extracted hereafter : 72. The sum total of what we have said above regarding Articles 301, 302, 303 304 may be summarized as under: 1. Freedom of trade, commerce and intercourse in terms of Article 301 is not absolute but is subject to the Provisions of Part XIII. 2. Article 302 which appears in Part XIII empowers the Parliament to impose restrictions on trade, commerce and intercourse in public interest. 3. The restrictions which Parliament may impose in terms of Article 302 cannot however give any preference to one State over another by virtue of any entr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly, the majority judgement also indicated that tax laws were not immune from challenge under Article 14 of the Constitution. (See paragraphs 94 and 95 of the judgement). 19.3. In so far as the first three questions are concerned, the answers given in the majority judgement are contained in paragraphs 126 to 129. These are extracted, for the sake of inconvenience, hereafter : 126. In the light of what we have said above, we answer Question No.1 in the negative and declare that a non-discriminatory tax does not per se constitute a restriction on the right to free trade, commerce and intercourse guaranteed under Article 301. Decisions taking a contrary view in Atiabari s case (supra) followed by a series of later decisions shall, therefore, stand overruled including the decision in Automobile Transport (supra) declaring that taxes generally are restrictions on the freedom of trade, commerce and intercourse but such of them as are compensatory in nature do not offend Article 301. Resultantly decisions of his Court in Jindal Stainless Limited and anr. v. State of Haryana and ors. (2006) 7 SCC 241 shall also stand overruled. 127. Re. Question No.2 In view of our answe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mu and Kashmir and Others, (1996) 2 SCC 39 and the judgment rendered by it in Video Electronics V. State of Punjab, (1990) 3 SCC 87. The observations made by the Court in respect of this aspect were as follow : 130. That brings us to the second part of question No.4 viz. whether the impugned State enactments violate Article 304(a) of the Constitution. That aspect will necessarily involve a careful reading of the impugned enactments and a proper appreciation of the scheme underlying the same. While we have at some length heard learned counsel for the parties on that aspect, we do not propose to deal with all the dimensions of that challenge based on Article 304(a) except two of them that were argued at great length by learned counsel for the parties. The first of these two dimensions touches upon the State s power to promote industrial development by granting incentives including those in the nature of exemptions or reduced rates of levy on goods locally produced or manufactured. On behalf of the assesses it was contended that grant of exemptions and incentives in favour of locally manufactured/produced goods is also one form of insidious discrimination which was impermissible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tatively different from the one issued by the Government of Jammu and Kashmir in as much as while the former benefited only specified units and limited the benefit to a specified period, the latter was not subject to any such limitations. This declared the Court resulted in discrimination vis-a-vis. outside goods. What is important is that in Video Electronics (supra) this Court recognized the difference between differentiation and discrimination and held that every differentiation is not discrimination. This Court noted that the word discrimination was not used in Article 14 as it has been used in Article 16, Article 303 and Article 304 (a). The use of the word in 304 (a) observed this Court involved an element of intentional and unfavorable bias . So long as there was no such bias evident from the measure adopted by the state, mere grant of exemption or incentives aimed at supporting local industries in their growth, development and progress did not constitute discrimination. 132. We respectfully agree with the line of reasoning adopted in Video Electronics (supra). The expression discrimination has not been defined in the Constitution though the same has fallen for interpr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the touchstone of Article 304(a) must in our opinion be tested by the same standard as in Kathi s case (supra). The Court ought to examine whether the differentiation made is intended or inspired by an element of unfavourable bias in favour of the goods produced or manufactured in the State as against those imported from outside. If the answer be in the affirmative, the differentiation would fall foul of Article 304(a) and may tantamount to discrimination. Conversely, if the Court were to find that there is no such element of intentional bias favouring the locally produced goods as against those from outside, it may have to go further and see whether the differentiation would be supported by valid reasons. In the words of Fazl Ali, J. discrimination without reason would be unconstitutional whereas discrimination with reason may be legally acceptable. In Video Electronic s case, this Court noted that the differentiation made was supported by reasons. This Court held that if economic unity of India is one of the Constitutional aspirations and if attaining and maintaining such unity is a Constitutional goal, such unity and objectives can be achieved only if all parts of the Country ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bove and elaborated in Video Electronics case is a matter on which we do not propose to express any opinion for that aspect is best left open to be considered by the regular benches hearing these matters after the reference is disposed off. (emphasis is ours) 19.5. The other aspect, on which, the majority judgement deliberated upon was to examine whether the grant of exemption / adjustment / set off/ credit given to goods produced / manufactured within the taxing State vis-a-vis those goods imported from outside the State would constitute an act of discrimination. In this behalf, the following observations are relevant : 137. The legal position as to the approach that courts adopt towards fiscal measures while examining their constitutional validity is fairly well settled by a long line of decisions of this Court. The law on the subject is so well settled that it calls for no elaborate discussion of the same. Courts have almost universally accepted the principle that keeping in view the inherent complexities of fiscal adjustments and the diverse elements and inputs that go into such exercise a greater latitude is due to the legislature in taxation related legislations. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of exemption/adjustment/credit is to equalize the fall of the fiscal burden on the goods from within the State and those from outside the State such exemption or set off will not amount to hostile discrimination offensive to Article 304(a). Having said that, we leave open for examination by the regular benches hearing the matters whether the impugned enactment achieve the object of such equalization or lead to a situation that exposes goods from outside the state to suffer any disadvantage vis-a-vis those produced or manufactured in the taxing State. (emphasis is ours) 20. Therefore, upon a close perusal and examination of the aforesaid decisions, according to us, the following propositions get enunciated, which can briefly be summarised as follows: (i) First, if the Constitutional validity of a taxing statute has to be tested, regard has to be had to the provisions of Article 304(a). In case the impugned law is nothing but non-discriminatory , it can be declared as Constitutionally valid without the said legislation having to go through the test or the process articulated in Article 304(b). The restrictions adverted to in Article 304 (b) are not fiscal in nature (See Jind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciates Ltd case and Jindal Stainless Steel). (vii) Seventh, grant of exemption for a limited period to specific / distinct class of industries may not violate Article 301 of the Constitution (See Video Electronics (P) Ltd Vs. State of Punjab, (1990) 3 SCC 87 and Jindal Stainless Steel). (viii) Eighth, while States are free within their legislative domain i.e. List II of Schedule VII of the Constitution to levy taxes on goods imported from other States and/or Union Territories, that power cannot be exercised in a manner which discriminates between imported and similar goods manufactured or produced in the State. Article 304(a) of the Constitution prohibits discrimination via taxation. The States are free to encourage development of industry within their State by all and every means available, to it, but it cannot by taking recourse to this plea, subject goods, imported into the State, to a higher rate of tax, as compared to similar goods manufactured and produced in the State. (ix) Ninth, the grant of rebate, exemption, concession or subsidy in the rate of tax which impact relative pricing of goods as between those that are imported into the State and those that are m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 3%)* in respect of goods purchased in the State in two situations: (i) First, where transfer takes the goods to a place outside the State, otherwise than by way of sale; or (ii) Second, where goods are used in manufacture of other goods and are transferred to a place outside the State, otherwise than by sale. 26. The provision, recognises the fact that goods purchased within the State, on which tax has been paid, can be transferred outside the State, for reasons, other than sale. However, while recognising this aspect, the provision grants credit of tax to the extent it is in excess of 3%. In other words, tax paid on purchase of goods, within the State, as rightly pointed out by the respondents is retained by the State to the extent of 3%, while the tax collected over and above 3% is passed on to the assessee, by way of credit. 27. In the case of the writ petitioner, who deals with bullion and worn-out jewellery, the rate of tax both under Sl.No.1 and 4 of Part A of the First Schedule is only 1%. Therefore, Section 19(4) of the 2006 Act cannot come to its aid. Nevertheless, in our view, it does provide intrinsic evidence that ITC cannot be denied only on account of the good ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd later claim input tax rebate after receipt of goods. 29.1. A bare perusal of the aforesaid extract would show that ITC availed of need not be reversed merely because goods purchased are sent temporarily outside the State for the purposes of job work. 30. Therefore, having regard to the foregoing discussion, we are of the view that Section 19(2)(ii) of the 2006 Act is invalid to the extent that it denies availment of ITC in respect of those units which despatch tax suffered raw materials i.e. bullion / worn-out jewellery for conversion into final product (i.e. jewellery) outside the State which upon conversion are received back and sold within the State of Tamil Nadu. Thus, according to us, the mere fact that the manufacturing unit is located outside the State of Tamil Nadu, cannot be the basis, for denial of ITC, under Section 19(1) of the 2006 Act. Clause (ii) of Sub-Section (2) of Section 19 of the 2006 Act is, thus, declared bad in law. 31. For the very same reason, we also hold that the respondents cannot retain ITC on goods purchased within the State, by invoking provision of Section 19(4) of the 2006 Act to the extent of rate of tax provided therein i.e., 3% (wh ..... X X X X Extracts X X X X X X X X Extracts X X X X
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