M-S U.P. ASBESTOS LIMITED v. STATE OF RAJASTHAN & OTHERS

Citation: 2025 INSC 1154, [2025] 9 S.C.R. 1419

Court: Supreme Court of India

Bench: B.V. Nagarathna and K.V. Viswanathan, JJ.

Judgment text

SUPREME COURT OF INDIA M/s U. P. Asbestos Limited v. State of Rajasthan & Others Civil Appeal No. 3577 of 2008 [2025] 9 S. C. R. 1419 : 2025 INSC 1154 M/s U. P. Asbestos Limited v. State of Rajasthan & Others (Civil Appeal No. 3577 of 2008) 24 September 2025 [B. V. Nagarathna* and K. V. Viswanathan, JJ. ] Issue for Consideration Issue arose as regards the validity of the Notification No. S. O. 377, dated 09. 03. 2007, issued by the Government of Rajasthan in exercise of its powers conferred by s. 8(3) of the Rajasthan Value Added Tax Act, 2003 granting exemption from payment of Value Added Tax on sale of asbestos cement sheets and bricks, manufactured in the State of Rajasthan, having contents of fly ash 25% or more by weight subject to specific conditions, is violative of Art.

304(a) of the Constitution of India being discriminatory vis-à-vis goods imported from outside the State of Rajasthan; and whether the High Court was right in dismissing the writ petitions filed by the appellants-manufacturers of asbestos cement sheets and bricks by holding that the impugned notification dated 09. 03. 2007 did not violate Art. 301(a) of the Constitution. Headnotes† Constitution of India - Art. 301(a), 304 - Rajasthan Value Added Tax Act, 2003 - s. 8(3) - Value Added Tax exemption on sale of asbestos cement sheets, if violative of Art. 304(a) - Notification No. S. O. 377, dated 09. 03. 2007 issued by the Government of Rajasthan granting exemption from payment of Value Added Tax on sale of asbestos cement sheets and bricks, manufactured in the State of Rajasthan, having contents of fly ash 25% or more by weight subject to specific conditions - Notification restricted the exemption to those dealers who commenced commercial production in the State by 31. 12.

2006 and the exemption was available up to 23. 01. 2010,and later extended upto 23. 1. 2016 - Appellants-engaged in the business of manufacture and sale of fly ash based asbestos cement products and did not have their manufacturing units in * Author 1420 Rajasthan, but had their sales depots over there - Notification, if violative of Art. 304(a) being discriminatory vis-à-vis goods imported from outside the State of Rajasthan: Held: Notification dated 09. 03. 2007 violative of Art.

304(a) as it is discriminatory in nature - Impugned notification is bereft of any reason or justification - Impugned notification is not restricted to any specific district or a set of districts within the State of Rajasthan, rather, the notifications provide exemption to any dealer commencing production anywhere in the State - As regards the criterion of 'non-hostile discrimination, the contours of discrimination of hostile nature, can be reduced to whether there are sufficient reasons to term such discrimination as 'differentiation' - If a legislation is discriminatory and discriminates one person or class of persons against others similarly situated and denies to the former the privileges that are enjoyed by the latter, it has to be regarded as "hostile" in the sense that it affects injuriously the interests of that person or class - High Court erred in holding that the instant case falls in the exceptional category covered by the case of Video Electronics, wherein the exemption was granted to new industries for a specified period - Said finding is incorrect inasmuch as the exemption was not granted to new industries and neither was it given for a limited period of time - Exemption was granted to those asbestos sheet and bricks manufacturers in the State of Rajasthan utilizing fly ash as its main raw material on the conditions namely that such fly ash constituted 25% or more in the contents by weight; and that the unit commenced commercial production by 31.

12. 2001 - First condition is an ingredient specific criterion - This would mean that any asbestos sheet product containing 25% fly ash manufactured outside the State of Rajasthan and sold in the said State would not have the benefit of the exemption - This would mean that the source of fly ash is not really the basis for the exemption - Asbestos products could be manufactured in the State of Rajasthan with fly ash obtained from outside the State and sold within the State - If the object of the exemption was to utilise the fly ash available in the State of Rajasthan itself, it should have been so spelt out in the impugned notification - Otherwise, a discrimination is found between asbestos products manufactured in the State of Rajasthan and manufactured outside, having content of fly ash to an extent of 25% when sold in the State of Rajasthan, on the other hand, if the notification had prescribed a condition that fly M/s U. P. Asbestos Limited v.

State of Rajasthan & Others ash sourced from State of Rajasthan and products sold in the State, irrespective of their place of manufacture would have the benefit of such exemption, there would not have been any discrimination between products manufactured outside the State of Rajasthan sold within the said State and those manufactured within the State, both having the benefit of exemption as both categories of products would have utilised fly ash available in the State of Rajasthan - This approach would have also met the objective of utilising the available fly ash in the State of Rajasthan - However, that is not so in the instant case - Under Art.

304(a), a State Legislature may tax goods imported from other States or Union Territories but in the process ought not to discriminate against them vis-à-vis goods manufactured locally - Thus, there cannot be tax barriers or fiscal barriers in the interest of free trade, commerce and intercourse throughout the territory of India guaranteed by Art. 301 - Weapon of taxation cannot be used to discriminate against the imported goods vis-à-vis the locally manufactured goods - Impugned notification is quashed. [Paras 12-12. 20] Case Law Cited Jindal Stainless Ltd. v. State of Haryana [2016] 10 SCR 1 : (2017) 12 SCC 1 - followed. Video Electronics Pvt. Ltd. v. State of Punjab [1989] Supp. 2 SCR 731 - distinguished. State of U. P. v. Jaiprakash Associates Ltd. [2013] 11 SCR 943 : (2014) 4 SCC 720 - held applicable. Firm A. T. B. Mehtab Majid and Co. v. State of Madras [1963] Supp. 2 SCR 435; Shree Mahavir Oil Mills v. State of J&K [1996] Supp. 9 SCR 356; State of U. P. v.

M/s Laxmi Paper Mart [1997] 1 SCR 914; Loharn Steel Industries Ltd. v. State of Andhra Pradesh [1996] Supp. 10 SCR 898; Video Electronics and Shree Digvijay Cement Co. Ltd. v. State of Rajasthan [1999] Supp. 5 SCR 428; Anand Commercial Agencies v. Commercial Tax Officer VI Circle Hyderabad [1997] Supp. 5 SCR 76 : (1998) 1 SCC 101; Atiabari Tea Co. Ltd. v. State of Assam [1961] 1 SCR 809 : AIR 1961 SC 232; Mohinder Singh Gill v. Chief Election Commissioner [1978] 2 SCR 272 : (1978) 1 SCC 405; Ramjilal v. Income Tax Officer [1951] 1 SCR 128 : AIR 1951 SC 97; Automobile (Rajasthan) Transport Ltd. v. State of Rajasthan [1963] 1 SCR 491 : AIR 1962 1422 SC 1406; Kalyani Stores v. State of Orissa [1966] 1 SCR 865 : AIR 1966 SC 1686; Weston Electronics v. State of Gujarat [1988] 3 SCR 768 : (1988) 2 SCC 568; H. Anraj v. Government of Tamil Nadu [1985] Supp. 3 SCR 342 : (1986) 1 SCC 414; A. Hajee Abdul Shakoor & Co. v. State of Madras [1964] 8 SCR 217 : AIR 1964 SC 1729; State of Madras v. N.

K. Nataraja [1968] 3 SCR 829 : AIR 1969 SC 147; Andhra Sugars Ltd. v. State of Andhra Pradesh [1968] 1 SCR 705 : AIR 1968 SC 599; V. Guruviah Naidu & Sons v. State of Tamil Nadu [1977] 1 SCR 1065 : AIR 1977 SC 548; Shri Digvijay Cement Co. v. State of Rajasthan [1997] 3 SCR 184 : AIR 1997 SC 2609; W. B. Hosiery Assn. v. State of Bihar [1988] Supp. 2 SCR 378 : (1988) 4 SCC 134; Kathi Raning Rawat v. State of Saurashtra [1952] 1 SCR 435 : AIR 1952 SC 123; State of West Bengal v. Anwar Ali Sarkar [1952] 1 SCR 284 : (1952) 1 SCC 1; Twyford Tea Co. Ltd. v. State of Kerala [1970] 3 SCR 383 : (1970) 1 SCC 189; Vijay Lakshmi v. Punjab University [2003] Supp. 3 SCR 1034 : (2003) 8 SCC 440; State of J&K v. Triloki Nath Khosa [1974] 1 SCR 771 : (1974) 1 SCC 19; Commissioner of Police v. Gordhandas Bhanji [1952] 1 SCR 135 : AIR 1952 SC 16 - referred to. Cole v. Whitfield (1988) HCA 18 - referred to.

List of Acts Rajasthan Value Added Tax Act, 2003; Constitution of India; Rajasthan Sales Tax Act, 1994. List of Keywords Value Added Tax exemption; Sale of asbestos cement sheets; Violation of Art. 304(a); Notification No. S. O. 377, dated 09. 03. 2007; Government of Rajasthan; Exemption from payment of Value Added Tax on sale of asbestos cement sheets and bricks, manufactured in State of Rajasthan; Contents of fly ash 25%; Commercial production; Manufacture and sale of fly ash based asbestos cement products; Notification discriminatory vis-à-vis goods imported from outside the State of Rajasthan; Criterion of 'non-hostile discrimination; Differentiation; Exceptional category; Tax barriers or fiscal barriers; Interest of free trade, commerce and intercourse. M/s U. P. Asbestos Limited v. State of Rajasthan & Others Case Arising From CIVIL ORIGINAL JURISDICTION: Civil Appeal No. 3577 of 2008 From the Judgment and Order dated 02. 08.

2007 of the High Court of Judicature for Rajasthan at Jaipur in CWP No. 3580 of 2007 With Civil Appeal No. 3578 of 2008 and Civil Appeal No. 2692 of 2013 Appearances for Parties Advs. for the Appellant: Ms. Kavita Jha, Nikhil Goel, Sr. Advs. , Siddhartha Chowdhury, Shammi Kapoor, Ms. Swati Agarwal, Shaffi Mather, Ashutosh Ghade, Ms. Riddhi Jain, Ms. Saloni Meshram, Adithya Koshy Roy. Advs. for the Respondents: Dr. Manish Singhvi, Sr. Adv. , Apurv Singhvi, Ms. Shalini Haldar, Milind Kumar, Ms. Nidhi Jaswal, Punit Dutt Tyagi. Judgment / Order of the Supreme Court Judgment Nagarathna, J. INDEX* Bird's Eye View of the Controversy: ...................................... 4 Factual Background: ................................................................ 6 Submissions: ............................................................................ 12 Points for Consideration: ........................................................

21 Relevant Constitutional Provisions: ....................................... 21 Atiabari Tea Co. Ltd. : ............................................................... 23 Automobile Transport Ltd. : ..................................................... 32 Firm Mehtab Majid: ................................................................... 35 Kalyani Stores: .......................................................................... 39 * Ed. Note: Pagination as per the original Judgment. Weston Electronics: .................................................................. 41 Video Electronics: ..................................................................... 43 Shree Mahavir Oil Mills: ........................................................... 51 Loharn Steel Industries Ltd. : ................................................... 57 Laxmi Paper Mart: .....................................................................

58 Digvijay Cements: ..................................................................... 59 Jaiprakash Associates: ............................................................ 61 Jindal Stainless Ltd. : ................................................................ 67 Discussion from Overseas Case Law: ................................... 83 Application of the Analysis to the Present Case: ................. 87 Since these Civil Appeals involve common questions of facts and law, they have been heard and are disposed of by this common judgment. 2. The instant appeals have been preferred by the appellants-assessees against the following three separate orders of the High Court of Judicature for Rajasthan at Jaipur: i) Order dated 02. 08. 2007 in D. B. Civil Writ Petition No. 3580/2007; ii) Order dated 23. 08. 2007 in D. B. Civil Writ Petition No. 2222/2007; and iii) Order dated 05. 09. 2012 in D. B. Civil Writ Petition No. 4447/2011. 2.

1 All the three Writ Petitions were dismissed on the basis of reasons given in judgment and order dated 02. 08. 2007 in D. B. Civil Writ Petition No. 3506/2007 titled M/s. Hyderabad Industries Ltd. vs. State of Rajasthan and Ors. ("Hyderabad Industries") passed by the High Court of Judicature for Rajasthan. Aggrieved by the orders of dismissal, the appellants are before this Court. Bird's Eye View of the Controversy: 3. Briefly stated, the issue for determination in these appeals concern the validity of the impugned Notification No. S. O. 377, dated 09. 03. 2007, M/s U. P. Asbestos Limited v. State of Rajasthan & Others issued by the Government of Rajasthan in exercise of its powers conferred by Section 8(3) of the Rajasthan Value Added Tax Act, 2003 ("2003 Act", for short). Specifically, the issue concerns whether Notification No. S. O. 377 dated 09. 03.

2007 issued by Respondent State granting exemption from payment of Value Added Tax on sale of asbestos cement sheets and bricks, manufactured in the State of Rajasthan, having contents of fly ash 25% or more by weight subject to specific conditions, is violative of Article 304(a) of the Constitution of India being discriminatory vis-à-vis goods imported from outside the State of Rajasthan. 3. 1 The notification, in effect, exempted from tax the manufacturers within the State of Rajasthan of asbestos cement sheets and bricks having content of fly ash 25% or more. Specifically, the challenge concerned sub-clauses (ii) and (iii) of the above notification, on the ground, inter alia, that they violate free movement of trade and commerce as envisaged in Articles 301 to 304 of the Constitution of India. 3. 2 For immediate reference, the notification dated 09. 03. 2007 is extracted below: "FINANCE DEPARTMENT (TAX DIVISION) NOTIFICATION JAIPUR, MARCH 9, 2007 S. O.

377 - In exercise of the powers conferred by sub- section (3) of section 8 of the Rajasthan Value Added Tax Act, 2003 (Rajasthan Act No. 4 of 2003), the State Government being of the opinion that it is expedient in the public interest so to do, hereby exempts from payment of tax the sale of asbestos cement sheets and bricks manufactured in the State having contents of fly ash twenty five percent or more by weight, on the following conditions, namely:- (i) that the goods shall be entered in the registration certificate of the selling dealer. (ii) that the exemption shall be for such goods manufactured by the dealer who commenced 1426 commercial production in the State by 31. 12. 2006; and (iii) that the exemption shall be available up to 23. 01. 2010. No. F. 12 (28) FD/Tax/2007/141) By Order of the Governor (Arun Gupta) Deputy Secretary to Government" (emphasis supplied by us) 3.

3 In the course of the determination, this Court is also required to examine the applicability of the judgment of this Court in Video Electronics Pvt. Ltd. vs. State of Punjab, (1989) Supp. 2 SCR 731 ("Video Electronics") to the facts of this case, especially in light of the nine-Judge Constitution Bench judgment of this Court in Jindal Stainless Ltd. vs. State of Haryana, (2017) 12 SCC 1("Jindal Stainless Ltd. "). Factual Background: 4. The facts emanating from all the three appeals are similar. The appellants herein are engaged in the business of manufacture and sale of fly ash based asbestos cement products. They do not have their manufacturing units in the State of Rajasthan, but have their sales depots in the State. These sales depots are duly registered with the Commercial Tax Department under Central and local State Tax Acts. 4. 1 Initially, the State of Rajasthan issued a notification dated 24. 01.

2000 under the erstwhile Section 15 of the Rajasthan Sales Tax Act, 1994 (hereinafter "1994 Act") in the form of exemption from sales tax, to encourage industries of asbestos cement sheets and bricks manufactured in the State by an industrial unit having fly ash as its main raw material on certain conditions mentioned therein. The benefit was given to industries starting commercial production upto 31. 12. 2001 and the notification was to remain in force upto 23. 01. 2010. 4. 2 In supersession of the above notification dated 24. 01. 2000, another notification dated 16. 03. 2005 was issued to exempt from M/s U. P. Asbestos Limited v. State of Rajasthan & Others tax the sale of asbestos cement sheets and bricks manufactured in the State by an industrial unit having fly ash as its main raw material on the condition that such fly ash shall constitute 25% or more in content by weight of such asbestos cement sheets or bricks.

The benefit was given to industries starting commercial production by 31. 12. 2006 and the notification was to remain in force upto 23. 01. 2010. Admittedly, the above notifications dated 24. 01. 2000 and 16. 03. 2005 were never challenged by the appellants herein before any forum. 4. 3 From 01. 04. 2006, the Rajasthan Value Added Tax Act, 2003 (hereinafter "VAT Act") came into operation on repeal of the 1994 Act. In order to continue the operation of the abovementioned notifications issued under the 1994 Act, the State issued notifications dated 01. 06. 2006 and 05. 07. 2006 under Section 8 of the VAT Act which are in pari materia to Section 15 of the 1994 Act. 4. 4 The above notifications dated 01. 06. 2006 and 05. 07. 2006 were challenged by one of the appellants herein before the Rajasthan High Court in W. P. No. 7149 of 2006. While the matter was pending, the State Government withdrew the notification dated 05. 07. 2006 and issued the impugned notification dated 09. 03. 2007.

It is relevant to note that, under this notification also, the benefit was given to industries starting commercial production by 31. 12. 2006 and the notification was to remain in force upto 23. 01. 2010. This notification was challenged before the Rajasthan High Court in D. B. Civil Writ Petition Nos. 3580/2007 and 2222/2007 and the impugned judgments were passed on 02. 08. 2007 and 23. 08. 2007 respectively. 4. 5 While the present appeals were pending before this Court, the State by way of notification dated 28. 12. 2010 amended clause (iii) of the impugned notification dated 09. 03. 2007 as follows: "(iii) that maximum exemption benefits shall be available for 10 years from the date of commencement of first commercial production, but in no case exemption shall be available after 23. 1. 2016. " 4. 6 One of the appellants herein, namely M/s. U. P. Asbestos Ltd. , filed a writ petition being D. B. Civil Writ Petition No. 4447/2011 1428 challenging the notification dated 28. 10. 2010.

The said writ petition was also dismissed by way of impugned order dated 05. 09. 2012. 4. 7 As the High Court dismissed all the three writ petitions by the impugned orders based on the judgment of that Court in Hyderabad Industries,it is necessary to dilate the reasoning provided therein. 4. 8 The High Court in Hyderabad Industries first discussed the judgments of this Court in Firm A. T. B. Mehtab Majid and Co. vs. State of Madras, (1963) Supp. 2 SCR 435 ("Firm Mehtab Majid"); Shree Mahavir Oil Mills vs. State of J&K, (1996) Supp. 9 SCR 356 ("Shree Mahavir Oil Mills"); State of U. P. vs. M/s Laxmi Paper Mart, (1997) 1 SCR 914 ("Laxmi Paper Mart"); Loharn Steel Industries Ltd. vs. State of Andhra Pradesh, (1996) Supp. 10 SCR 898 ("Loharn Steel Industries Ltd. "); Video Electronics and Shree Digvijay Cement Co. Ltd. vs. State of Rajasthan, (1999) Supp. 5 SCR 428 ("Digvijay Cements"). 4.

9 Based on a reading of the above judgments, the High Court opined that the decision on the question whether, there has been discrimination between the imported and the local goods depends on diverse factors. That where there is no intentional discrimination but the concession from sales tax is given in respect of goods manufactured in a particular State which is not so developed, in furtherance of economic development and where such concession is granted to new industries for a specific time which came into existence for a specific period, such concession or exemption may not offend Part XIII of the Constitution of India. 4. 10 The High Court also observed that there was no challenge either to the constitutional validity of Section 8 of the VAT Act or to the notifications dated 24. 01. 2000 and 16. 03. 2005 which were on identical terms to the impugned notification.

That there is no dispute that fly ash coming out of thermal power plants is abundantly available in the State of Rajasthan and is not unreasonable to presume that the State Government gave incentives for asbestos manufacturing plants within the State M/s U. P. Asbestos Limited v. State of Rajasthan & Others of Rajasthan to promote the use of fly ash as raw material for the production of asbestos cement sheets and bricks. 4. 11 The High Court further noted that it was for the above reason that way back in the year 2000, the State Government passed the notification dated 24. 01. 2000 and that the benefit was extended from time to time. It accepted the stand of the State that it was bound even otherwise by the principle of promissory estoppel to continue with the exemption since in the notification dated 24. 01. 2000 itself, the benefit was to continue until 23. 01. 2010. 4. 12 The High Court acknowledged that this Court in Shree Mahavir Oil Millsdistinguished Video Electronics.

However, the High Court noted that Shree Mahavir Oil Mills justified the decision in Video Electronicsto grant exemption to a special class for a limited period on specific conditions when there are justifiable and national reasons for differentiation. 4. 13 Hence, the High Court held that the impugned notification, in the backdrop of earlier notifications dated 24. 01. 2000 and 16. 03. 2005, fell within the exceptional category covered in Video Electronicsand hence cannot be held to be offending Article 304(a) of the Constitution of India. Therefore, the question would also arise as to whether the Rajasthan High Court decided Hyderabad Industries correctly. Submissions: 5. Learned senior counsel Sri Nikhil Goel appearing for the appellant M/s U. P. Asbestos Ltd. and Smt. Kavita Jha appearing for appellant M/s. Everest Industries Ltd. , strenuously argued that the impugned notification was unconstitutional and violated Article 304(a) of the Constitution of India.

To substantiate, the following submissions were put forth: 5. 1 That the impugned notification is discriminatory in nature and falls foul of Article 304(a) of the Constitution of India as it did not provide for any reason for the blanket exemption from payment of tax provided to locally manufactured goods in the State of Rajasthan as compared to goods imported from outside the State. In this regard, they relied on Shree Mahavir Oil 1430 Mills, Laxmi Paper Mart, and Anand Commercial Agencies vs. Commercial Tax Officer VI Circle, Hyderabad, (1998) 1 SCC 101. 5. 2 Referring to the text of the impugned notification, it was contended that it does not require the industries within the State to only manufacture or procure fly ash from within the State. That the lack of such a requirement ex-facie falsifies the justification of the State that the exemption provided for in the impugned notification was to encourage industries to utilise the excess fly ash from the State.

They further contended that arguendo, even if the impugned notification required the fly ash to be purchased within the State of Rajasthan, the notification would still have to be quashed in light of the judgment of this Court in State of U. P. vs. Jaiprakash Associates Ltd. , (2014) 4 SCC 720("Jaiprakash Associates"). 5. 3 Reliance was placed on the observations of the nine-Judge bench judgment in Jindal Stainless Ltd. to contend that the differentiation made through the impugned notification was intended or inspired by an element of unfavourable bias in favour of the goods produced or manufactured in the State of Rajasthan as against those imposed from outside. They submitted that, in Jindal Stainless Ltd. , this Court held that every differentiation is discrimination if it involved an element of "intentional and unfavourable bias". Learned senior counsel Ms. Kavita Jha also provided us a summary of the relevant observations in Jindal Stainless Ltd.

which we shall discuss later in this judgment. 5. 4 That the High Court was not right in relying on Video Electronics as the facts of that case are distinguishable. They highlighted that in Video Electronics,this Court upheld the notifications impugned therein on the ground that they related to a specific class of industrial units and that the benefit under the same was admissible only for a limited period of time. However, in the present case, the restriction was not limited to a specific class or period, but such exemption has been extended from time to time from the year 2000 till the year 2016, to all the old and new dealers of asbestos sheets, without assigning any reason. Hence, the finding in paragraph 17 of the judgment in Hyderabad M/s U. P. Asbestos Limited v. State of Rajasthan & Others Industriesthat the exemption was only to a limited class, i. e. those who commenced production by 31. 12. 2006 and was only for a limited period, i. e. till 23. 01. 2010 was not accurate.

Rather, they contended that the facts of the present case are akin to that in Shree Mahavir Oil Mills and Jaiprakash Associates. 5. 5 Learned senior counsel also sought to repel the objection that the appellants herein had not challenged the earlier notifications by relying on the dictum in Shree Mahavir Oil Mills that there can be no estoppel or acquiescence in a matter relating to constitutional rights of citizens. 5. 6 Referring to the submission of the State in its reply before the High Court, they contended that the only justification put forth by them was that it was empowered to grant exemption to a class of industries to boost industrialisation within its State. The learned senior counsel questioned this rationale by submitting that if the same was accepted as a general proposition justifying discrimination between two States while applying a tax regime, such proposition would practically nullify the entire Chapter XIII of the Constitution.

That every State would then exempt local manufacturers from tax simply by saying that it wants to boost industrial growth. They submitted that Article 301 of the Constitution cannot be stretched to its unnatural limits to justify such a vague rationale. 6. In response to the above submissions, learned senior counsel Dr. Manish Singhvi made the following submissions: 6. 1 Highlighting the implications of the Constitution Bench judgment in Jindal Stainless Ltd. , it was contended that the plenary power to tax under Articles 245 and 246 of the Constitution read in conjunction with the Entries in the Seventh Schedule to the Constitution is per se not subject to Article 301 of the Constitution. That the plenary power is restrained only if it discriminates in terms of Article 304(a) of the Constitution. 6. 2 That, in Jindal Stainless Ltd. , this Court upheld the ratio laid down in Video Electronics.

He highlighted that, so long as the differentiation made by the States is not intended to create an unfavourable bias and so long as the differentiation is intended to benefit a distinct class of industries and the life 1432 of the benefit is limited in terms of period, the benefit must be held to flow from a legitimate desire to promote industries within its territories. That this Court also distinguished Shree Mahavir Oil Mills by noting that if the incentive/exemption in taxation to spur industrialisation was for a limited period and for achieving some objective, then it shall not be violative of Article 304(a) of the Constitution. 6. 3 Our attention was drawn to the observations of this Court in Digvijay Cements wherein this Court stated that all States have powers to grant exemption to specified class of goods for a limited period and that such grant of exemption cannot be held to be contrary to the concept of economic unity.

It was submitted that the power to grant exemptions is thus a dynamic concept and they must be viewed at keeping in mind the overall objectives sought to be achieved. 6. 4 Learned senior counsel for the State of Rajasthan submitted that, after the judgment in Jindal Stainless Ltd. , it is not clear if the ratio in Jaiprakash Associates still holds field. He referred to paragraph 32 of the judgment in Jaiprakash Associatesto contend that it relied on the judgment rendered in Atiabari Tea Co. Ltd. vs. State of Assam, AIR 1961 SC 232 ("Atiabari Tea Co. Ltd. "), which was partly overruled in Jindal Stainless Ltd. 6. 5 Dealing with the facts of the case, learned senior counsel submitted that prior to the notification dated 24. 01. 2000, there was no asbestos sheet plant/industry in the State of Rajasthan.

That fly ash is an abundant raw material available in the State and the intention of the exemption from sales tax was to promote the use of fly ash coming out of thermal power plants as a raw material for the production of asbestos cement sheets and bricks for which there was no manufacturing plant in the State. He also submitted that various notifications issued by the Ministry of Environment and Forests required the compulsory use of fly ash and hence the exemption as provided in the impugned notification was envisaged. That additionally, having contents of fly ash twenty five percent or more in asbestos sheets by weight also improves the environment which was another laudable objective. M/s U. P. Asbestos Limited v. State of Rajasthan & Others 6.

6 Learned senior counsel also submitted that if such an exemption was not granted, then no asbestos sheet industry would have come to the State of Rajasthan and the fly ash in the State would go unutilised/unused, considering huge transportation costs associated with transporting fly ash. That the economics of transportation itself would repel any argument that the notifications did not specifically require the manufacturers to utilise the fly ash generated in the State. He also submitted that, it was not the case of the appellants herein that they would use the fly ash manufactured in the State of Rajasthan, despite having manufacturing units elsewhere. 6. 7 For the above reasons, Dr. Manish Singhvi emphasised that the exemption provided for in the notification qualifies as 'differentiation', rather than discrimination and is saved as per Article 304(a) of the Constitution. 6.

8 To our query that the reasons for the notification could not be found in the notification itself, learned senior counsel submitted that the reasons for the notification can be discerned from the records available and the counter affidavit filed before the High Court. He therefore drew our attention to the relevant portions in the counter-affidavit filed by the State before the High Court where the reasons mentioned above were elucidated. He submitted that there is presumption of constitutionality of any law enacted by a State and that the State, though could have provided the reasons for such an enactment in the notification itself, was not incumbent to so spell out and the same could always be gathered by surrounding circumstances. 6. 9 In response to the submissions of learned senior counsel Dr. Manish Singhvi, learned senior counsel Ms.

Kavita Jha added that the object behind the impugned notification, as stated by the learned senior counsel in his submissions, was not provided/ expressed in the impugned notification. That from its bare perusal, no object, purpose or rationale was mentioned to provide impetus to any industry but on the other hand to discriminate among indigenous goods and imported goods. 7. Learned senior counsel for the appellants relied on the judgment of this Court in Mohinder Singh Gill vs. Chief Election Commissioner, (1978) 1 SCC 405 ("Mohinder Singh Gill") to substantiate that 1434 any order passed by any public authority exercising administrative/ executive or statutory powers must be judged by the reasons so mentioned in that order and cannot be supplemented by fresh reasons in the shape of an affidavit or otherwise. Points for Consideration: 8.

The following points would arise for our consideration: (i) Whether the High Court was right in dismissing the writ petitions filed by the appellants herein by holding that the impugned notification dated 09. 03. 2007 did not violate Article 301(a) of the Constitution of India? (ii) If the answer to point No. (i) is in the negative, then, what order? Relevant Constitutional Provisions: 9. Articles 301 to 304, which are under Part XIII of the Constitution are relevant for our discussion and are extracted as under: "301. Freedom of trade, commerce and intercourse. - Subject to the other provisions of this Part, trade, commerce and intercourse throughout the territory of India shall be free. 302. Power of Parliament to impose restrictions on trade, commerce and intercourse. --Parliament may by law impose such restrictions on the freedom of trade, commerce or intercourse between one State and another or within any part of the territory of India as may be required in the public interest.

303. Restrictions on the legislative powers of the Union and of the States with regard to trade and commerce. --(1) Notwithstanding anything in article 302, neither Parliament nor the Legislature of a State shall have power to make any law giving, or authorising the giving of, any preference to one State over another, or making, or authorising the making of, any discrimination between one State and another, by virtue of any entry relating to trade and commerce in any of the Lists in the Seventh Schedule. M/s U. P. Asbestos Limited v. State of Rajasthan & Others (2) Nothing in clause (1) shall prevent Parliament from making any law giving, or authorising the giving of, any preference or making, or authorising the making of, any discrimination if it is declared by such 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. 304. Restrictions on trade, commerce and intercourse among States.

- Notwithstanding anything in article 301 or article 303, the Legislature of a State may by law-- (a) impose on goods imported from other States or the Union territories any tax to which similar goods manufactured or produced in that State are subject, so, however, as not to discriminate between goods so imported and goods so manufactured or produced; and (b) impose such reasonable restrictions on the freedom of trade, commerce or intercourse with or within that State as may be required in the public interest: Provided that no Bill or amendment for the purposes of clause (b) shall be introduced or moved in the Legislature of a State without the previous sanction of the President. " 10. The significant judgments of this Court on the interpretation of Articles 301 to 304 could be discussed at this stage. Atiabari Tea Co. Ltd. : 10. 1 In Atiabari Tea Co. Ltd.

, the constitutionality of the Assam Taxation (on Goods Carried by Roads or Inland Waterways) Act (Assam Act) 13 of 1954 was questioned in a petition filed under Article 32 of the Constitution before this Court. The question that fell for determination in this case was, whether, the said Act infringed the provisions of Part XIII of the Constitution, with particular reference to Article 301. While analysing Part XIII of the Constitution, it was observed that Article 301 was subject to other provisions of Part XIII and not subject to other provisions of the Constitution and the generality of the words used in Article 301 is cut down only by the provisions of the other Articles of Part XIII ending 1436 with Article 307. Article 301 emphatically declares that trade, commerce and intercourse throughout the territory of India is free, but there is wide divergence of views on the answer to the question "free from what".

It was observed that having regard to the divergence and nature of States in pre-Constitution India, it was necessary for the abolition of all those trade barriers and tariff walls so that the entire country was knit into one political unit in the interest of national solidarity, economic and cultural unity as also of freedom of trade, commerce and intercourse. 10. 1. 1Adverting to Article 304, it was observed that the said Article would show that it is divided into two parts, namely, (i) dealing with imposition of nondiscriminatory taxes by a State Legislature; and (ii) relating to imposition of reasonable restrictions, thus showing that imposition of taxes is a class apart from imposition of reasonable restrictions on freedom of trade, commerce and intercourse. 10. 1.

2It was further observed that if a law is passed by the Legislature imposing a tax which in its true nature and effect is meant to impose an impediment to the free flow of trade, commerce and intercourse, for example, by imposing a high tariff wall, or by preventing imports into or exports out of a State, such a law is outside the significance of taxation, as such, but assumes the character of a trade barrier which it was the intention of the Constitution-makers to abolish by Part XIII, but taxation on movement of goods and passengers is not necessarily an impediment. Article 304, while recognising the power of a State Legislature to tax goods imported inter-State, insists that a similar tax is imposed on goods manufactured or produced within the State. The Article thus brings out the clear distinction between taxation as such for the purpose of revenue and taxation for purposes of making discrimination or giving preference. 10. 1. 3It was observed by Sinha, C. J.

that the Union and State Legislature have the power to legislate by way of M/s U. P. Asbestos Limited v. State of Rajasthan & Others taxation in respect of trade, commerce and intercourse, so as not to erect trade barriers, tariff walls or imposts, which have a deleterious effect on the free flow of trade, commerce and intercourse. 10. 1. 4Consequently, he did not concur with the majority of the Court by observing that his reading of Part XIII of the Constitution did not justify the inference that taxation simpliciter is within the terms of Article 301 of the Constitution. 10. 1. 5The majority judgment delivered by Gajendragadkar, J. (as he then was) referred to the constitutional background of Part XIII and observed that prior to 1950, the flow of trade and commerce was impeded at several points which constituted the boundaries of Indian States.

The main object of Article 301 obviously was to allow the free flow of the stream of trade, commerce and intercourse throughout the territory of India. The reason being that economic unity was absolutely essential for the stability and progress of the federal policy which had been adopted by the Constitution for the governance of the country. 10. 1. 6The majority then proceeded to consider whether tax laws are wholly outside the purview of Part XIII. In this regard, Cooley's Constitutional Limitations on the power of taxation was referred to observe that "the power to impose taxes is one so unlimited in force and so searching in extent, that the courts scarcely venture to declare that it is subject to any restriction whatever, except such as rest in the discretion of the authority which exercises it". (Cooley's Constitutional LimitationVol. 2, 8th Edn. , p. 986).

It was observed that the power of levying tax is essential for the very existence of the government, its exercise must inevitably be controlled by the constitutional provisions made in that behalf. It cannot be said that the power of taxation per se is outside the purview of any constitutional limitations. 1438 10. 1. 7 Referring to Ramjilal vs. Income Tax Officer, AIR 1951 SC 97, it was observed that protection against the imposition and collection of taxes, save by the authority of law, directly comes under Article 265 and cannot be said to be covered by clause (1) of Article 301. Therefore, levy of a tax per se cannot be a violation of Article 14 of the Constitution. It was also held that the power to levy tax would ultimately be based on Article 245 which deals with the extent of laws made by Parliament and by the Legislatures of States, as it begins with the words "Subject to the provisions of the Constitution".

Therefore, the power of Parliament and the Legislatures of the States to make laws including laws imposing taxes is subject to the provisions of the Constitution and therefore, the application of Part XIII also. However, Article 301 which is in Part XIII is not subject to the other provisions of the Constitution but is made subject only to other provisions of only Part XIII. Therefore, once the width and amplitude of the freedom enshrined in Article 301 are determined, they cannot be controlled by any provision outside Part XIII. The freedom guaranteed under Article 301 is made subject to the exceptions provided by the other Articles in Part XIII and is not limited by any other provisions of the Constitution outside Part XIII. It was also observed that the legislative competence of the Legislature in question would have to be judged in light of the relevant Articles of Part XIII. Hence, it was observed that the argument that tax laws are outside Part XIII, cannot be accepted. 10. 1.

8 It was noted that the freedom of trade guaranteed by Article 301 is freedom from all restrictions except those which are provided by the other Articles in Part XIII. While examining the other Articles of Part XIII, it was stated that the effect of Article 304(a) is to treat imported goods on the same basis as goods manufactured or produced in any State; and it M/s U. P. Asbestos Limited v. State of Rajasthan & Others authorises tax to be levied on such imported goods in the same manner and to the same extent as may be levied on goods manufactured or produced inside the State. In other words, taxation can be levied by the State Legislature on goods manufactured or produced within its territory and it provides that outside goods cannot be treated any worse. The non-obstante clause referring to Article 301 would go with Article 304(a) and that tax on goods would not have been permissible but for Article 304(a) with the non-obstante clause.

In other words, Article 304(a) is another exception to Article 301. 10. 1. 9 Analysing Article 304(a), it was observed that a tax could be levied by a State Legislature on goods manufactured or produced or imported in the State and thereby reasonable restrictions can be placed on the freedom of trade either with another State or between different areas of the same State. Tax legislation, thus authorised, must therefore be deemed to be included in Article 301, for that is the obvious inference from the use of the non-obstante clause. 10. 1. 10 It was concluded that while determining the limits of the width and amplitude of the freedom guaranteed by Article 301, a rational and workable test should apply and that only such restrictions as directly and immediately restrict or impede the free flow or movement of trade, are barred. Therefore, it cannot be held that all taxes should be governed by Article 301, whether or not their impact on trade is immediate or mediate, direct or remote.

Thus, an extreme approach cannot be upheld. Therefore, Article 301 envisages 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. 10. 1. 11 Consequently, it was held that the Assam Act had imposed a direct restriction on the freedom of trade 1440 and since it had not complied with the provision of Article 304(b), it was declared to be void. 10. 1. 12 In the said case, Shah, J. in his opinion observed that the power of taxation is essentially an attribute of the sovereignty of the State and is not exercised in consideration of the protection it affords or the benefit that it confers upon citizens and aliens. Its content is not measured by the apparent need of the amounts sought to be collected and its incidence does not depend upon the ability of the citizens to meet the demand. But it is still not an unrestricted power.

By Article 265 of the Constitution, the power to tax can be exercised by authority of law alone. The power of taxation has therefore to be exercised by the Legislature strictly within the limits prescribed by the Constitution and any alleged transgression either by Parliament or the State Legislature of the limits imposed by the Constitution is justiciable. 10. 1. 13 Discussing on the guarantee of freedom of trade and commerce, it was observed by Shah, J. that the guarantee is not addressed merely against prohibitions, complete or partial; it is addressed to tariffs, licensing, marketing regulations, price- control, nationalisation, economic or social planning, discriminatory tariffs, compulsory appropriation of goods, freezing or stand still orders and similar other impediments operating directly and immediately on the freedom of commercial intercourse as well.

It was clarified that what is guaranteed is freedom in its widest amplitude -- freedom from prohibition, control, burden or impediment in commercial intercourse. Not merely discriminative tariffs restricting movement of goods are included in the restrictions which are hit by Article 301, but all taxation on commercial intercourse even imposed as a measure for collection of revenue is so hit. 10. 1. 14 It was also stated that between discriminatory tariffs and trade barriers on the one hand and taxation M/s U. P. Asbestos Limited v. State of Rajasthan & Others for raising revenue on commercial intercourse, the difference is one of purpose and not of quality. Both these forms of burden on commercial intercourse trench upon the freedom guaranteed by Article 301. 10. 1.

15 While interpreting Article 304(a), it was observed that the State Legislature has the power to impose tax on the imports of goods to which similar goods manufactured or produced in the State are subject, provided that by taxing the goods imported from another State or Union Territory, no discrimination is practised. Consequently, Shah, J. held that the Assam Act was infringing the guarantee of freedom of trade and commerce under Article 301. 10. 1. 16 However, in view of the majority opinion, the writ petitions were allowed. Automobile Transport Ltd. : 10. 2 A seven-Judge Bench of this Court in Automobile (Rajasthan) Transport Ltd. vs. State of Rajasthan, AIR 1962 SC 1406 ("Automobile Transport Ltd. ") heard the appeals having regard to the importance of the constitutional issues involved and the views expressed in Atiabari Tea Co. Ltd. while considering the validity of Rajasthan Motor Vehicles Taxation Act, 1951.

The contours of the freedom envisaged under Article 301 was considered inasmuch as the question, whether, regulatory measures or compensatory taxes were restrictions on the freedom of trade came up for consideration and more particularly, the State law imposing tax on motor vehicles carrying passengers and goods within or throughout the State. The majority view was expressed through S. K. Das, J. (as he then was) who observed that the taxes imposed under the Rajasthan Motor Vehicles Taxation Act, 1951 are compensatory taxes which did not hinder the freedom of trade, commerce and intercourse assured by Article 301 and hence, the Act did not violate the provisions of that Article. This was because regulatory measures imposing taxation for use of trading facilities do not come within the purview of the restrictions contemplated under Article 301 and such measures need not 1442 comply with the requirements of the proviso to Article 304(b) of the Constitution. 10. 2.

1While analysing the issues raised in the said case, it was observed that those which facilitate trade and commerce are not a restriction, and those which in reality hampers or burdens trade and commerce are a restriction. That, it is the substance of the matter that has to be considered and it is not possible a priori to draw a dividing line between that which would really be a charge for a facility provided and that which would really be a deterrent to a trade; but the distinction is real and clear. For the tax to become a prohibited tax, it has to be a direct tax, the effect of which is to hinder the movement part of trade. So long as a tax remains compensatory or regulatory, it cannot operate as a hindrance. A working test for deciding whether a tax is compensatory or not is to enquire whether the trades people are having the use of certain facilities for the better conduct of their business and paying not patently much more than what is required for providing the facilities.

It would be impossible to judge the compensatory nature of a tax by a meticulous test, and in the nature of things that cannot be done. If a statute fixes a charge for a convenience or service provided by the State or an agency of the State and imposes it upon those who choose to avail themselves of the service or convenience, the freedom of trade and commerce may well be considered unimpaired. In such a case, the imposition assumes the character of remuneration or consideration charged in respect of an advantage sought and received. 10. 2. 2The minority, speaking through Hidayatullah, J. (as he then was) observed that a law which prohibits trade, commerce and intercourse and releases them on the fulfilment of some unreasonable condition including the payment of an unreasonable or discriminatory tax will just as much be a restriction offending the freedom as a tariff wall or any other barrier. No question of pith and substance in this context arises. M/s U. P. Asbestos Limited v.

State of Rajasthan & Others Therefore, taxation laws directly impinging on trade and commerce cannot be upheld on the ground that they are regulatory. A tax which is made the condition precedent of the right to enter upon and carry on business is a restriction on the right to carry on trade and commerce and the restriction is released on the payment of the tax, which is the price of such release. A regulation of trade and commerce, on the other hand, may achieve some public purpose which affects trade and commerce incidentally but without impairing the freedom. It was observed that the tax is evidently not a fee for administrative purposes. Therefore, it cannot be justified as representing payment of services. Its object is the raising of revenue. Therefore, such a tax is neither a compensatory tax nor a regulatory Act.

It was further held that the said tax offended Article 301 of the Constitution and since resort to the procedure prescribed by Article 304(b) was not taken, it was ultra vires the Constitution. Firm Mehtab Majid: 10. 3 The validity of Rule 16 of the Madras General Sales Tax (Turnover and Assessment) Rules, 1939, (hereinafter, called "the Madras Rules") was impugned in Firm Mehtab Majid. The Constitution Bench of this Court, speaking through Raghubar Dayal, J.

noted the contention of the petitioner therein to the effect that under the impugned rule, tanned hides or skins imported from outside the State and sold within the State were subject to a higher rate of tax than the tax imposed on hides or skins tanned and sold within the State, inasmuch as sales tax on the imported hides or skins tanned outside the State is on their sale price while the tax on hides or skins tanned within the State, though ostensibly on their sale price, was, in view of the proviso to clause (ii) of sub-rule (2) of rule 16, really on the sale price of these hides or skins when they were purchased in the raw condition and which was substantially less than the sale price of tanned hides or skins.

Further, for similar reasons, hides or skins imported from outside the State after purchase in their raw condition and then tanned inside 1444 the State were also subject to higher taxation than hides or skins purchased in the raw condition in the State and tanned within the State, as the tax on the former was on the sale price of the tanned hides or skins and, on the latter, was on the sale price of the raw hides or skins. Such a discriminatory taxation was said to offend Article 304(a) of the Constitution. 10. 3. 1Taking note of the earlier decision in Atiabari Tea Co. Ltd. , it was observed that in the majority judgment in Automobile Transport Ltd. , the interpretation of the majority in Atiabari Tea Co. Ltd. was held to be correct but subject to a clarification. That, regulatory measures or measures imposing compensatory taxes for the use of trading facilities do not come within the purview of restrictions contemplated by Article 301.

That, such regulatory measures which do not impede the freedom of trade, commerce and intercourse and compensatory taxes for the use of trading facilities are not hit by the freedom declared by Article 301. They are excluded from the purview of the provisions of Part XIII of the Constitution for the simple reason that they do not hamper trade, commerce and intercourse but rather facilitate them. Subba Rao, J, had also concurred with this view in Automobile Transport Ltd. 10. 3. 2It was observed 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. On the other hand, sales tax, which has the effect of discriminating between goods of one State and goods of another, may affect the free flow of trade which offends against Article 301 and will be valid only if it comes within the terms of Article 304(a).

That Article 304(a) enables the Legislature of a State to make laws affecting trade, commerce and intercourse by imposition of taxes on goods from other States if similar goods in the State are also subjected to similar taxes, so as not to discriminate between the goods manufactured or produced in that State and the goods which are imported from other States. M/s U. P. Asbestos Limited v. State of Rajasthan & Others 10. 3. 3Applying the said principles to the said case, it was held that the effect of the sales tax on tanned hides or skins imported from outside was that the latter becomes subject to a higher tax by the application of the proviso to sub-rule (2) of rule 16 of the Rules, and was discriminatory and unconstitutional and was hence, struck down. 10. 3.

4On the aspect of whether the rule discriminated between hides or skins imported from outside the State and those manufactured or produced in the State, this Court examined the grievance ventilated on 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 was the same. It was explained that if the dealer has purchased the raw hide or skin in the State, he would have had to pay on the purchase price only. But if the dealer purchased raw hides or skins from outside the State and tanned them within the State, he would be liable to pay sales tax on the sale price of the tanned hides or skins. He too would have had to pay more tax even though the hides and skins were tanned within the State, merely on account of his having imported the hides and skins from outside and having not therefore paid any tax under sub-rule (1).

Thus, there was discriminatory nature of tax imposed. As a result, Rule 16(2) was held to discriminate against the imported hides or skins which had been purchased or tanned outside the State and therefore it contravened the provisions of Article 304(a) of the Constitution. Hence, the petition was allowed and the State was directed to refund of tax illegally collected from the petitioner. Kalyani Stores: 10. 4 In Kalyani Stores vs. State of Orissa, AIR 1966 SC 1686, ("Kalyani Stores") the notifications issued under Section 27 of the Bihar and Orissa Excise Act, 1915, imposing countervailing duty on foreign liquor imported into the State 1446 and later enhancing the duty by another notification, were assailed.

The contention of the appellant therein was that the State could levy under Section 27 of the said Act duty on excisable articles produced or manufactured in the State and a countervailing duty on excisable articles imported into the State, imposed with a view to equalize the burden on the imported articles with the burden on manufactured articles in the State, but no countervailing duty on liquor imported could be levied if there was in the year of licence no liquor similar to the imported liquor manufactured within the State and as there was no distillery in the State manufacturing "foreign liquor", the levy of countervailing duty was without authority of law. 10. 4. 1It was observed that exercise of power under Article 304(a) can only be effective if the tax or duty imposed on goods imported from other States and the tax or duty imposed on similar goods manufactured or produced in that State are such that there is no discrimination against imported goods.

As no foreign liquor was produced or manufactured in the State of Orissa, the power to legislate provided under Article 304 was not available and the restriction which is declared on the freedom of trade, commerce or intercourse by Article 301 of the Constitution remained unfettered. Hence, the appeal was partially allowed by this Court by declaring that the notification enhancing duty on foreign liquor was invalid as offending Article 304 of the Constitution and therefore unenforceable. However, the right of the State to enforce the liability against the appellants to pay duty at the rate prescribed in the earlier notification which held the field, remained however unaffected. 10. 4. 2Hidayatullah, J. (as he then was) however observed that Article 304(a) was not applicable to the case.

That, in the matter of excise duties, the State Legislature has competence even apart from Article 304(a) because the power to impose duties of excise on alcoholic liquors for human consumption produced in the State and countervailing duties on similar liquors produced outside the State in India was already conferred by the legislative list. Therefore, it was held that the M/s U. P. Asbestos Limited v. State of Rajasthan & Others notification issued in the year 1961 under Section 27 was valid and the new notification did not run against any constitutional provision. Therefore, he dismissed the appeal. However, the majority partially allowed the appeal. Weston Electronics: 10. 5 The case in Weston Electronics vs.

State of Gujarat, (1988) 2 SCC 568("Weston Electronics") concerned manufacturers of electronic goods, including television sets, television cameras and television monitors at factories located at Delhi and the goods sold through sales organisations spread all over India, including the State of Gujarat. The petitioners therein filed a writ petition before this Court questioning the Notification dated 29. 03. 1986 under which the rate of sales tax in respect of television sets imported from outside the State was reduced from 15 per cent to 10 per cent, and for goods manufactured within the State the sales tax was reduced to 1 per cent. It was contended that there was an invidious discrimination which adversely affected the free flow of inter-State trade and commerce, resulting in a contravention of Article 301 of the Constitution. It was contended that the sale of electronic goods manufactured by the petitioner has been prejudicially affected within the State of Gujarat.

Based on the rulings of this Court in FirmMehtab Majid as well as in H. Anraj vs. Government of Tamil Nadu, (1986) 1 SCC 414 ("H. Anraj") - wherein this Court struck down the levy of tax imposed by the State of Tamil Nadu on lottery tickets issued by other States and sold within the State of Tamil Nadu while exempting from such levy lottery tickets issued by the Government of Tamil Nadu - the writ petition was allowed and Notifications dated 23. 07. 1981 and 29. 03. 1986 prescribing a lower rate of tax for local manufacturers in respect of television sets and other electronic goods were quashed. Video Electronics: 10. 6 A three-Judge Bench of this Court decided a batch of writ petitions filed under Article 32 of the Constitution of India in Video Electronics.

The focus of the said case was on the 1448 question of harmonising the power of different States in the Union of India to legislate and/or give appropriate directions within the parameters of the subjects in List II of the Seventh Schedule of the Constitution with the principle of economic unity envisaged in Part XIII of the Constitution of India. The provision of exemption/ encouragement/incentives given by different States to boost or help economic growth and development in those States and in so doing the attempt of the States to give preferential treatment to the goods manufactured or produced in those States was also considered. 10. 6. 1In one of the writ petitions, the challenge was to the constitutional validity of Notification dated 26. 12. 1985 issued by the State of Uttar Pradesh under the Uttar Pradesh Sales Tax Act, 1948 as well as subsequent notifications thereunder.

The petitioners therein stated that they carried on business of selling cinematographic films and other equipment in the State of Uttar Pradesh and in Delhi. They were dealers on behalf of the manufacturers from outside the said State. In Uttar Pradesh, there was a single point levy of sales tax. Their contention was that the Notification dated 26. 12. 1985 discriminated between the manufacturers covered by the said Notification who were entitled to sell the articles manufactured by them without liability to pay sales tax and the manufacturers in other States and non-manufacturers of the same article selling the same goods in the State who were liable to pay sales tax under the local Sales Tax Act. They contended that they were subjected to gross discrimination and their business was crippled on account of the said fact and therefore, they challenged the vires of the said notification under Articles 14 and 19(1)(g) of the Constitution.

However, this Court opined that the main question was, whether, the said notifications were valid in light of Part XIII of the Constitution. 10. 6. 2This Court speaking through Sabyasachi Mukharji, J. (as he then was) made a detailed discussion of the judgment rendered in Atiabari Tea Co. Ltd. and also the decision of this Court in Automobile Transport M/s U. P. Asbestos Limited v. State of Rajasthan & Others Ltd. This was also in the context of whether regulatory measures or measures imposing compensatory taxes for using trading facilities did not come within the purview of restrictions contemplated under Article 301. 10. 6. 3Reference was made to the case of A. Hajee Abdul Shakoor & Co. vs. State of Madras, AIR 1964 SC 1729 and to the observations of this Court in State of Madras vs. N. K. Nataraja, AIR 1969 SC 147 as well as in Andhra Sugars Ltd. vs.

State of Andhra Pradesh, AIR 1968 SC 599, wherein it was reiterated that a sales tax which discriminates against goods imported from other States may impede the free flow of trade and is invalid unless protected by Article 304(a) of the Constitution. 10. 6. 4It was observed that Part XIII of the Constitution cannot be read in isolation. That it is part and parcel of a single constitutional instrument envisaging a federal scheme and containing a general scheme conferring legislative powers in respect of the matters relating to List II of the Seventh Schedule on the States. That the economic development of States to bring in the constitutional philosophy of equality between the States and thereby developing the economic unity of India is one of the goals or commitments of the constitutional aspirations. The economic equality of all the States is as much vital as economic unity.

Thus, it held that the taxes which do not directly or immediately restrict or interfere with trade, commerce and intercourse throughout the territory of India, would therefore be excluded from the ambit of Article 301 of the Constitution. That sales tax has only an indirect effect on trade and commerce and does not directly impede the free movement of transport. On the aspect of the imposition of a rate of tax on goods, it was observed that the free flow of trade between two States does not necessarily or generally depend upon the rate of tax alone. Many factors including the cost of goods play an important role in the movement of goods from one State to another. Hence, the mere fact that there is a difference 1450 in the rate of tax on goods locally manufactured and those imported would not amount to hampering of trade between the two States within the meaning of Article 301 of the Constitution.

That, since Article 304(a) and (b) is an exception to Article 301, resort to an exception will arise only if the tax impugned is hit by Articles 301 and 303 of the Constitution. If it is not, then Article 304 will not come into picture at all. Further, the imposition of a rate of sales tax is influenced by various political, economic and social factors. Prevalence of differential rate of tax on sales of the same commodity cannot be regarded in isolation as determinative of the object to discriminate between one State and another. This Court also recalled the observations in V. Guruviah Naidu & Sons vs. State of Tamil Nadu, AIR 1977 SC 548, wherein it was observed that Article 304(a) does not prevent levy of tax on goods; what it prohibits 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.

That any discrimination in that regard would constitute a tariff wall or fiscal barrier and would thus impede the free flow of inter-State trade and commerce. 10. 6. 5This Court further noted that the question as to when the levy of tax would constitute discrimination would depend upon a variety of factors including the rate of tax and the item of goods in respect of the sale of which it is levied. The object is to prevent discrimination against the imported goods by imposing tax on such goods at a rate higher than that borne by local goods. It was observed that every differentiation is not discrimination. This was because the expression 'discrimination' in Article 304(a) involves an element of intentional and purposeful differentiation thereby creating economic barrier and involves an element of an unfavourable bias. That discrimination implies an unfair classification.

When the general rate applicable to the goods locally made and on those imported from other States is the same, nothing more is to be shown M/s U. P. Asbestos Limited v. State of Rajasthan & Others by the State to dispel the argument of discrimination under Article 304(a), even though the resultant tax amount on imported goods may be different. 10. 6. 6Further, the question, whether, the power to grant exemption to specified class of manufacturers for a limited period on certain conditions would be violative of Article 304(a) was considered. The contention was that the State should grant exemption to all goods irrespective of the fact that the goods are locally manufactured or imported from other States, else it would be violative of Article 304(a).

The aforesaid argument was contested by the respondent therein by stating that if the exemptions are based on natural and business factors which do not involve any intentional bias, the impugned notifications to grant exemption for limited period on certain specific conditions cannot be held to be bad in law. Accepting the said argument, it was held that the impugned notification was not violative of the constitutional provisions since Article 301 did not apply to the case. Then, Article 304(a), which is an exception to Article 301, would also not apply. In paragraph 27, it was noted that in the said case, the general rate applicable to locally made goods was the same as on the imported goods. Hence, it did not fall within the exception of Article 304 as it was not hit by Article 301. In paragraph 28 of the judgment, this Court observed that the concept of economic barrier must be adopted in a dynamic sense with changing conditions.

That in a federal polity, all the States have powers to grant exemption to specified class for limited period; such granting of exemption cannot be held to be contrary to the concept of economic unity. It was reasoned that the contents of economic unity by the people of India would necessarily include the power to grant exemption or to reduce the rate of tax in special cases for achieving industrial development or to provide tax incentives to attain economic equality in growth and development. When all the States have such provisions to exempt or reduce rates, the 1452 question of economic war between the States inter se or economic disintegration of the country as such did not arise. Therefore, the challenge to the exemption was upheld. 10. 6. 7In the very same case, writ petitions concerning the notification issued by the Punjab Government whereby two different rates of taxes were provided, were also considered.

There was a differentiation in the rate of tax between the manufacturers of electronic goods outside the State and those within the State of Punjab. It was reasoned that the lower rate of tax on those electronic goods manufactured in the State of Punjab was due to the prevailing peculiar circumstances of Punjab. It was to attract new entrepreneurs from other States and within the State to manufacture within the State of Punjab. Therefore, incentive was provided for growth of industry in Punjab which had already shifted to other States. 10. 6. 8In view of the above, the concessional rate of tax introduced was held to be non-discriminatory. Taking note of the situation in the State of Punjab, it was observed that a backward State or a disturbed State cannot with parity engage in competition with advanced or developed States. Even within a State, there are often backward areas which can be developed only if some special incentives are granted.

If the incentives in the form of subsidies or grant are given to any part of a State so that it may come out of its limping or infancy to compete as equals with others, that cannot contravene the spirit and the letter of Part XIII of the Constitution. However, there must be valid, justifiable and rational reasons for differentiation. If there is none, it will amount to hostile discrimination. Consequently, the notification issued by the Punjab Government under the Punjab General Sales Tax Act was also upheld. Shree Mahavir Oil Mills: 10. 7 In Shree Mahavir Oil Mills, the facts were that the cost of production of edible oil in Jammu and Kashmir was higher M/s U. P. Asbestos Limited v. State of Rajasthan & Others than in the adjoining States and as a result, the manufacturers of edible oil in the adjoining States were able to sell their products in Jammu and Kashmir at a price lower than the price at which the local manufacturers were able to sell them.

Facing the prospect of closure, the manufacturers of the edible oil in the State sought exemption from the levy of sales tax on the sale of their products. With a view to protect the local edible oil industry, the Government of Jammu and Kashmir issued SRO 93 of 1991 on 07. 03. 1991 under Section 5 of the Jammu and Kashmir General Sales Tax Act, 1962 directing that "the goods manufactured by a dealer operating as a small-scale industrial unit in the State and registered with the Director of Industries and Commerce, Handicrafts or Handloom Development, subject to certain conditions, shall be exempted from payment of tax to the extent and for the period specified in the Schedule forming Annexure A". The exemption was total and the period of exemption was five years and later extended by another five years.

This led to the manufacturers of edible oil in other States being obliged to pay sales tax on the sales effected by them in the State of Jammu and Kashmir at the rate of four per cent, while the local manufacturers were totally exempted therefrom. The rate of tax was thereafter raised from four per cent to eight per cent to be paid only by the outside manufacturers, while the local manufacturers were exempt fully. The outside manufacturers approached the Jammu and Kashmir High Court by way of writ petitions which were dismissed by both learned Single Judge as well as by the Division Bench of the High Court, based mainly on the decision of this Court in Video Electronics. 10. 7. 1B. P. Jeevan Reddy, J. observed that under Article 304(a), a State Legislature may tax goods imported from other States/Union Territories but in the process ought not to discriminate against them vis-à-vis goods manufactured locally.

Therefore, there could not be tax barriers or fiscal barriers, in the interest of freedom of trade, commerce and intercourse throughout the territory of India, guaranteed by Article 301. In other words, for the purpose of encouraging or promoting the local industries, the weapon of taxation cannot be used 1454 to discriminate against the imported goods vis-à-vis the locally manufactured goods. That, Part XIII of the Constitution would indicate that no State would tax its people at a higher level merely with a view to tax the people of other States at that level. But conversely, there cannot be "tariff walls" or fiscal barriers in so far as goods manufactured outside a State and imported into the State is concerned. 10. 7. 2It was further observed that the freedom guaranteed in Article 301 was "throughout the territory of India" and not merely between the States as such; the emphasis is upon the oneness of the territory of India.

That, Article 301 was a general provision and Article 304(a) was not really an exception to Article 301, despite the use of the non-obstante clause but a restatement of a facet of the very freedom guaranteed by Article 301, namely, power of taxation by the States. 10. 7. 3After referring to several decisions of this Court, in the context of the judgment Video Electronics on which strong reliance was placed by the State of Jammu and Kashmir, it was noted that in the said case there were two notifications impugned and as already noted above, the said notifications were upheld. Relying on the said judgment of the three-judge Bench, it was contended on behalf of the State of Jammu & Kashmir that 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. That, all parts of the country are not equally developed, industrially or economically.

Further, the power to grant exemption is inherent in all taxing statutes and the Government cannot be deprived of this power by invoking Articles 301 and 304. This is because a backward State or a disturbed State cannot be on par with advanced or developed States. Even within a State, there are often backward areas which could be developed only if some M/s U. P. Asbestos Limited v. State of Rajasthan & Others special incentives are granted. If there are justifiable and rational reasons for differentiation, then there will be no hostile discrimination. 10. 7. 4Distinguishing the judgment in Video Electronics, it was observed that the limited exception created in the said case does not help the State of Jammu & Kashmir for the reason that exemption concerned herein is neither confined to "new industries", nor is circumscribed by other conditions of the nature stipulated in the Uttar Pradesh notification.

That it is not possible to go on extending the limited exception created in the said judgment, by stages, which would have the effect of robbing the salutary principle underlying Part XIII of its substance. Consequently, it was held that the total exemption granted in favour of small-scale industries in Jammu and Kashmir producing edible oil was not sustainable in law. It was also observed that Article 304(a) of the Constitution shall not be so exercised as to bring about a discrimination between the imported goods and the similar goods manufactured or produced in a State. That the clause deals only with discrimination by means of taxation; it prohibits it. The prohibition cannot be extended beyond the power of taxation.

This means that the States are free to encourage and promote the establishment and growth of industries within their States by all such means as they think proper but they cannot, in that process, subject the goods imported from other States to a discriminatory rate of taxation, i. e. , a higher rate of sales tax vis-à-vis similar goods manufactured/produced within that State and sold within that State. The prohibition is against discriminatory taxation by the States and it matters not how this discrimination is brought about. The limited exception carved out in Video Electronics cannot be enlarged, lest it would eat up the main provision. Placing reliance on FirmMehtab Majid and the other cases, it was held that the exemption from payment of sales tax altogether was discriminatory and prohibited under Article 304(a) of the Constitution. 1456 10. 7.

5Another contention which was urged by the State of Jammu and Kashmir was to the effect that when the rate of tax was four percent there was no challenge to the sale but when the rate of tax climbed to eight per cent there was a challenge and hence a principle of acquiescence applied. This contention was repelled by stating that there can be no question of any acquiescence in matters affecting constitutional rights or limitations. Further, the contention regarding applicability of Article 14 and there being an intangible difference between locally produced edible oil and imported edible oil was also retorted. This Court observed that Article 14 speaks of equality; whereas Article 301 speaks of freedom and Article 304(a) speaks of uniform taxation of both the imported goods and the locally produced goods by the States. However, the consequential direction was that the declaration of invalidity of the impugned notification was to take effect from 01. 04.

1997 and till that date, the impugned notification was to continue to be effective and operative. Therefore, the appellants therein were not entitled to claim any amount by way of refund or otherwise. Loharn Steel Industries Ltd. : 10. 8 In Loharn Steel Industries Ltd. , the facts were that the appellant therein was a registered dealer of iron and steel in the State of Andhra Pradesh and purchased iron and steel scraps and ingots in the said State and sent to a rerolling mill in the State of Karnataka. The raw material was rerolled and brought back to the State of Andhra Pradesh and sold therein. The impugned exemption notification impugned therein, as it originally stood exempted all rerolled finished products sold in the State of Andhra Pradesh from tax provided tax had been paid in the said State on the raw material. This exemption was available to rerolled products which were manufactured even within the said State. There was no challenge to that portion of the notification.

However, the exemption notification discriminated against goods manufactured outside the State M/s U. P. Asbestos Limited v. State of Rajasthan & Others of Andhra Pradesh by denying exemption to such goods (manufactured outside the State). This portion was added by an amendment to the notification. This amendment was struck down by applying the doctrine of severability on the premise that it violated Article 304(a) of the Constitution as it was discriminatory. Laxmi Paper Mart: 10. 9 Exercise books prepared from paper purchased within the State was exempted from sales tax whereas exercise books prepared outside the State and brought and sold within the State was subjected to sales tax. This was held to be in violation of Article 304(a) of the Constitution in Laxmi Paper Mart. Referring to F