PETITIONER:
INDIAN CEMENT AND ORS.
Vs.
RESPONDENT:
STATE OF ANDHRA PRADESH AND ORS.
DATE OF JUDGMENT12/01/1988
BENCH:
MISRA RANGNATH
DUTT, M.M. (J)
CITATION:
1988 AIR 567 1988 SCR (2) 574
1988 SCC (1) 743 JT 1988 (1) 84
1988 SCALE (1)43
ACT
Andhra Pradesh General Sales Tax Act, 1957-Central Sales Tax Act, 1956 Challenge to validity of notifications issued under sub-section ( I) of section 9 and sub-section (5) of section 8-Respectively-of-As hit by provisions of Part Xlll of the Constitution.
HEADNOTE
%
The State of Andhra Pradesh in exercise of powers conferred under sub-section (1) of section 9 of the Andhra Pradesh General Sales Tax Act, 1957, made an order on January 27, 1987, reducing the rate of tax on sale of Cement made to the manufacturing units of Cement products in the State. On the same date, the State of Andhra pradesh made another order in exercise of the powers conferred by subsection (5) of section 8 of the Central Sales Tax Act, 1956, reducing the tax leviable under the said Act in respect of sales of Cement in the course of the inter-State trade or commerce.
The State of Karnataka in exercise of the powers conferred by sub-section (5) of section 8 of the Central Sales Tax Act, 1956, issued a notification on 28.10.1987, reducing the rate of tax payable under the said Act on the sale of Cement in the course of the inter-State trade or commerce.
The petitioners-cement manufacturing concerns, their shareholders and their authorised stockists-filed this writ petition, challenging the vires of section 8(5) of the Central Sales Tax Act, 1956 (Central Act 74 of 1956) and the notifications referred to above as ultra vires the provisions contained in Part XIII of the Constitution providing that trade, commerce and inter-course throughout the territory of India shall be free. According to the petitioners the three orders referred to above created trade barriers and directly impinged upon the freedom of trade, commerce and inter-course provided for in Article 301 of the constitution.
Since the vires of section 8(5) of the Central Act 74 of 1956 had been assailed, notice had been issued to the Union of India, Attorney General, and all the States but at the hearing of the writ petition, the 575 petitioners gave up the challenge against section 8(5) of the Central Act. In view of that, the writ petition was confined to the challenge against the two notification of the State of Andhra Pradesh and the lone notification of the State of Karnataka. The return to the rule nisi was made on behalf of the State of Andhra Pradesh. The State of Karnataka chose not to make any return to the rule nisi, but its counsel joined at the hearing and contended that the order made by the Karnataka State did not affect the provisions in Part XllI of the Constitution. The Attorney- General confined his submission to the scope of Part III of the Constitution and the effect of the notifications on the scheme contained in that part.
Allowing the writ petition, the Court, ^
HELD: The title for Part XIII. which contains the relevant Articles 30 l, 302, 303 and 304 is "Trade Commerce and inter-course within the Territory of India." The true purpose of the provisions contained in Part Xlll of the Constitution, as elucidated in the different decisions of the Constitution Benches of this Court, is that the restriction provided for in Article 301 can within the ambit be limited by law made by the Parliament and the State legislature. No power is vested in the executive authority to act in any manner affecting or hindering the very essence and thesis contained in the scheme of Part XIII of the Constitution. lt is equally clear that the declaration contained in Part XIIl of the Constitution is against the creation of economic barriers and or pockets which stand against the free now of trade, commerce and inter-course. [580F; 587H; 588A-B]
Taxation is a deterrent against free flow. As a result of favourable or unfavourable treatment by way of taxation, the course of flow of trade gets regulated either adversely or favourably. If the scheme which Part XIII guarantees has to be preserved in national interest, it is necessary that the provisions in the Article must be strictly complied with. One has to recall the far-sighted observations of Gajendragadkar. J. in Atiabari Tea Co. Ltd. v. The State of Assam & Ors., [1961] 1.S.C.R. 609 and the observations then made obviously apply to cases of the type now before the Court.[588C-D]
Under the first notification made under section 9(1) of the Andhra Pradesh General Sales Tax Act, the rate of tax was reduced to 4 percent in respect of the sales made by the indigenous cement manufacturers to manufacturers of Cement products. The Tamil Nadu producers had sales officers in Andhra Pradesh and in regard to their sale to such manufacturers of cement products, the benefit of the reduced rate of 576 taxation was not applicable. Two reasons were advanced by way of justification. One was that it was beneficial to the State revenue and secondly, that it protected the local manufacturers too. It could not be demonstrated to the Court how the reduction in the rate of sales tax was beneificial to the State revenue. The other justification was what the provisions of Part XIII of the Constitution did not permit. The reasonable restriction contemplated in Part XIII have to be backed by law and not by executive action, provided the same are within the limitations prescribed under the Scheme of Part XIII.[588D-H]
The second notification related to the inter-State transactions. Variation of the rate of inter-State sales tax does affect free trade and commerce and creates a local preference which is contrary to the scheme of Part XIII of the Constitution. The notification extended the benefit even to the unregistered dealers. Both the notifications of the Andhra Pradesh Government were bad and hit by the provisions of Part Xlll of the Constitution. They could not be sustained in law.[592D]
In the case of the notification of the Karnataka State, as already said, no return had been made and no attempt had been made to place the facts and circumstances to justify the action. The notification suffered from the same vice as the second notification of the State of Andhra Pradesh suffered, and no distinction could be drawn. The notification of the Karnataka Government was also bad in law. [597E-F]
The writ petition succeeded and the two impugned notifications of the Andhra Pradesh Government and the impugned notification of the Karnataka Government were quashed. [592G]
Atiabari Tea Co. Ltd. v. The State of Assam & Ors., [1961] 1 S.C.R. 609; The Automobile Transport (Rajasthan) Limited v. The State of Rajasthan & Ors., [1963] S.C.R. 491; State of Madras v. N.K. Nataraja Mudaliar., [1968] 3 S.C.R. 829; Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. v. The Assistant Commissioner of Sales Tax & Ors., [1974] 2 S.C.R. 879 and State of Tamil Nadu, etc. v. Sitalakshmi Mills, etc., [1974] S.C.R. 1, referred to.
JUDGMENT
ORIGINAL JURISDICTION: Writ Petition (Civil) No. 422 of 1987.
(Under Article 32 of the Constitution of India).
Dr. Y.S. Chitale, K.J. John, Atul Chitale and Miss Naina for the Petitioners. 577
K. Parasaran, Attorney General, T.S. Krishnamoorthy Iyer, G.A. Shah, V. Jagannatha Rao Advocate General, B.B. Ahuja, Miss A. Subhashini, T.V.S.N. Chari, Miss Vrinda Grover, Badri Nath, Dr. N.M. Ghatate, M. Veerappa, A.M. Khanwilkar, A.S. Bhasme, R. Mohan, R. Ayyam Perumal, A. Subha Rao, M.N. Shroff, J.R. Das, D.K. Sinha, S.N. Khare, T.C. Sharma, S.K. Bhattacharya, Kailash Vasudev and Probir Choudhary for the Respondents.
The Judgment of the Court was delivered by
RANGANATH MISRA, J. The India Cement Limited, Chettinad Cement Corporation, Dalmia Cement (Bharat) Limited and Tamil Nadu Cement Corporation Limited being petitioners 1, 6, 9 and 12 in this application under Article 32 of the Constitution are manufacturers of cement, each of them having its manufacturing unit as also registered offices located within the State of Tamil Nadu; petitioners 2, 7, and 10 are shareholders of petitioners 1, 6 and 9 respectively and are citizens of India, while the remaining petitioners are authorised stockists of the different manufacturers having their places of business at different places located in the States of Karnataka, Kerala and Tamil Nadu. Manufacturer-petitioners have been selling their cement in the States of Karnataka and Kerala and for such purpose they have places of business within those States. The State of Andhra Pradesh in exercise of powers conferred under sub-section ( 1) of Section 9 of the Andhra Pradesh General Sales Tax Act, 1957 made an order on January 27, 1987 (Annexure-A) reducing the rate of tax on sale of cement made to the manufacturing units of cement products in the State of Andhra Pradesh. That order runs thus:
"In exercise of the powers conferred by sub-
section ( 1) of Section 9 of the Andhra Pradesh
General Sales Tax Act, 1957 (Andhra Pradesh Act,
No. VI of 1957), the Governor of Andhra Pradesh
hereby directs that the tax leviable under clause
(a) of sub-section (2) of Section 5 read with Item
18 in the First Schedule to the said Act, shall,
in respect of Cement manufactured by Cement
Factories situated in the State and sold to the
manufacturing units situated within the State for
the purpose of manufacture of Cement products such
as Cement sheets, Asbestos Sheets, Cement flooring
stones, Cement concrete pipes, hume pipes, Cement
water and sanitary fitting, concrete poles and
other Cement products, be at the reduced rate of
four paise in the rupee at the point of first sale
in the State with effect on 578
and from the Ist January, 1987."
On the same day, another order was made to the following effect:
"In exercise of the powers conferred by sub-
section (5) of Section 8 of the Central Sales Tax
Act, 1956 (Central Act 74 of 1956), Governor of
Andhra Pradesh hereby directs that the tax
leviable under the said Act, shall, in respect of
the sales of cement in the course of inter-State
trade or commerce be at a lower rate of two per
cent with or without ’C’ Form, with effect from
1st January, 1987."
The State of Karnataka issued the following notification on 28.2.1987:
"In exercise of the powers conferred by sub-
section (5) of Section 8 of the Central Sales Tax
Act, 1956 (Central Act 74 of 1956), the Government
of Karnataka, being satisfied that it is necessary
so to do in public interest, hereby reduces with
immediate effect the rate of tax payable under the
said Act on the sale of cement made in the course
of inter-State trade or commerce from 15% to 2%."
Petitioners in this application challenge the vires of Section 8(5) of the Central Sales Tax Act, 1956 (Central Act 74 of 1956) and the notifications referred to above as ultra vires the provisions contained in Part XIII of the Constitution providing that trade, commerce and inter-course throughout the territory of India shall be free. According to the petitioners the three orders referred to above create trade barriers and directly impinge upon the freedom of trade, commerce and inter course provided for in Article 301 of the Constitution.
Since the vires of Section 8(5) of the Central Act 74 of 1956 had been assailed, notice had been issued to the Union of India and learned Attorney General. Notice was also directed to all the States. Pursuant to the notice, the State of Madhya Pradesh and Sikkim have filed their affidavits with reference to the challenge against Section 8(5) of the Act. At the hearing of the writ petition, however, learned counsel for the petitioners gave up that challenge. In that view of the matter, reference to the counter-affidavits of the States of Madhya Pradesh and Sikkim becomes irrelevant and the petition has to be confined to the challenge against the two notifications of the State of T 579 Andhra Pradesh and the lone notification of the State of Karnataka.
The return to the rule nisi on behalf of the State of Andhra Pradesh is made by the Commercial Tax officer, Company Circle 11, Hyderabad. He has stated that the State of Andhra Pradesh has surplus production of cement. In 1986- 87, the production of cement was around six million tonnes out of which local consumption was to the tune of about three million tonnes. In 1987-88 and 1988-89, production was likely to go up by 1.5 million tonnes and three million tonnes respectively and the local consumption was estimated to be within the range of 40% of the production. 60% of the manufactured cement had, therefore, to be marketed out. Within the State there were certain bulk consumers of cement who use the commodity as raw-material for manufacturing Cement sheets, Asbestos sheets, hume pipes, Cement bricks, tiles etc. Such bulk consumers found products of cement from outside the State to be cheaper in view of the higher incidence of local State tax. In this background Government considered it necessary to reduce the tax rate under the Andhra Pradesh General Sales Tax Act to help the Cement Industries in easing out their marketing difficulty. Keeping in view the fact that marketing of indigenous cement had to be inside the State, Government decided to reduce the rate of tax under the Andhra Pradesh General Sales Tax Act to 4%. That is how the first notification was made reducing the rate of tax in respect of sale of cement to local manufacturers as aforesaid. Government by the second notification reduced the rate of tax leviable under the Central Sales Tax Act in course of inter-State trade or commerce to 2% with or without ’C’ Form with effect from 1.1.1987. In another place of the same affidavit, it has been pleaded: " The classification of the manufacturers and
dealers in cement of Andhra Pradesh vis-a-vis the
other States is a reasonable classification and it
is not violative of Articles 14 and 19(1)(g)".
"The concession in the rate of tax extended by the
State of Andhra Pradesh to the manufacturers and
dealers of Andhra Pradesh is well within the
statutory powers of the State. It does not effect
the business interest of the manufacturers and
dealers of other States. It is the policy of the
State of Andhra Pradesh to help the cement
Industries to organise the marketability of their
full production to improve the overall industrial
activity of the country. Hence this contention
tenable". 580
"As already mentioned earlier, the notifications
were issued in public interest and in the interest
of State revenue".
Yet at another place in the return. it has been stated:
"The contention that the policy of the Legislature
is to promote sales only through registered
dealers is not based on correct appreciation of
the law. Any law to that effect would impose a
restriction on the rights of the common man and
would result in the violation of the provisions of
the Constitution which ensures certain fundamental
rights to the common man.’’
The State of Karnataka chose not to make any return to the rule nisi but its counsel joined at the hearing and contended that the order made by the Karnataka State did not affect the provisions in Part XIII of the Constitution.
In view of the fact that counsel for petitioners gave up the challenge to the vires of Section 8(5) of the Central Sales Tax Act, learned Attorney General confined his submissions to-the scope of Part XIII of the Constitution and the effect of the notifications on the scheme contained in that part.
In case the notifications operate against the provisions of Article 3o1 of the Constitution, they have got to satisfy the requirements contained in that Part. We shall now refer to the relevant Articles and to several decisions of this Court which are binding precedents. The title for Part XIII is "Trade, Commerce and Inter-course within the Territory of India." The relevant Articles in that Part are 30 1, 302, 303 and 304. We may now reproduce them:
"3o1. Subject to the other provisions of this
part, trade, commerce and intercourse throughout
the territory of India shall be free.
302. 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 (underlining is
ours)
303 . ( 1) Notwithstanding anything in
Article 302, 581
neither Parliament nor the legislature of a
State shall have power to make any law
giving, or authorising the giving, or 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.
(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. Notwithstanding anything in Article
30 1 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 purpose of clause (b) shall be introduced
or moved in the Legislature of a State
without the previous sanction of the
President. "
Judicial authority in regard to interpretation of this Part of the Constitution is abundant. We shall presently refer to some of the decisions of this Court . In Ataibari Tea Co. Ltd. v. The State of Assam & Ors., [1961] I SCR 609 a Constitution Bench of this Court was testing the validity of the provisions of the Assam Taxation (on goods carried by Roads and Inland Waterways) Act, 1954 by applying the provisions of this Part of the Constitution. At page 830 of the Reports. Sinha, CJ, stated:
"Article 301,with which part III commences,con- 582
tains the crucial words shall be free and
provides the key to the solution of the problems
posed by the whole Part. The freedom declared by
this Article is not an absolute freedom from all
legislations. As already indicated, the several
entries in the three Lists would suggest that both
Parliament and State Legislatures have been given
the power to legislate in respect of trade,
commerce and intercourse, but it is equally clear
that legislation should not have the effect of
putting impediments in the way of free flow of
trade and commerce. In my opinion, it is equally
clear that the freedom envisaged by the Article is
not an absolute freedom from the incidence of
taxation in respect of trade, commerce and
intercourse, as shown by entries 89 and 92A in the
List I, entries 52, 54 and 56 to 6() in List II
and entry 35 in List III. All these entries in
terms speak of taxation in relation to different
aspects of trade, commerce and intercourse. The
Union and State Legislature, therefore, have the
power to legislate by way of 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. That freedom
has further been circumscribed by the power vested
in Parliament or in the Legislature of a State to
impose restrictions in public interest. Parliament
has further been authorised to legislate in the
way of giving preference or making discrimination
in certain strictly limited circumstances
indicated in clause (2) of Article 303. Thus, on a
fair construction of the provisions of Part XIII,
the following propositions emerge: (1) trade,
commerce and intercourse throughout the territory
of India are not absolutely free, but are subject
to certain powers of legislation by Parliament or
the Legislature of a State; (2) the freedom
declared by Article 301 does not mean freedom from
taxation simpliciter, but does not mean freedom
from taxation which has the effect of directly
impeding the free flow of trade, commerce and
intercourse; (3) the freedom envisaged in Article
301 is subject to non-discriminatory restrictions
imposed by Parliament in public interest (Article
302); (4) even discriminatory or preferential
legislation may be made by Parliament for the
purpose of dealing with an emergency like a
scarcity of goods in any part of India (Article
303(2)); (5) reasonable restrictions may be
imposed by the Legislature of a State in the
public interest 583
(Article 304(b)); (6) non-discriminatory taxes may
be imposed by the Legislature of a State on goods
imported from another State or other States, if
similar taxes are imposed on goods produced or
manufactured in that State (Article 304(a)); and
lastly (7) restrictions imposed by existing laws
have been continued, except in so far as the
President may by order otherwise direct (Article
305)"; Gajendragadkar, J., as he then was, at page 843 of the Reports observed:
"In drafting the relevant Articles of Part
XIII, the makers of the Constitution were fully
conscious 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.
Political freedom which had been won, and
political unity which had been accomplished by the
Constitution, had to be sustained and strengthened
by the bond of economic unity. It was realised
that in course of time, different political
parties believing in different economic theories
or idealogies may come in power in the several
constituent units of the Union, and that may
conceivably give rise to local and regional pulls
and pressures in economic matters. Local or
regional fears or apprehensions raised by local or
regional problems may persuade the State
legislatures to adopt remedial measures intended
solely for the protection of the regional
interests without due regard to their effect on
the economy of the nation as a whole. The object
of Part XIII was to avoid such a possibility. Free
movement and exchange of goods throughout the
territory of India is essential for the economy of
the nation and for sustaining and improving living
standards of the country. The provision contained
in Article 301 guaranting the freedom. Of trade,
commerce and intercourse is not a declaration of a
mere platitude, or the expression of a pious hope
of declaratory character; it is not also a mere
statement of a Directive Principle of State
Policy; it embodies and enshrines a principle of
paramount importance that the economic unity of
the country will provide the main sustaining force
for the stability and progress of the political
and cultural unity of the country ....... " 584 Then came the case of The Automobile Transport (Rajasthan) Limited v. The State of Rajasthan & orS., [1963] SCR 491 Das, J. who spoke for the Constitution Bench referred to the views expressed in Atiabari Tea Company’s case (supra) and proceeded to say:
"We have tried to summarise above the various
stand points and views which were canvassed before
us and we shall now proceed to consider which,
according to us, is the correct interpretation of
the relevant Articles in Part XIII of the
Constitution. We may first take the widest view,
the view expressed by Shah, J. in the Atiabari Tea
C0mpany’s case, a view which has been supported by
the appellants and one or two of the interveners
before us. This view we apprehend, is based on a
purely textual interpretation of the relevant
Articles in Part XIII of the Constitution and this
textual interpretation proceeds in the following
way. Article 30 I which is in general terms and is
made subject to the other provisions of Part XIII
imposes a general limitation on the exercise of
legislative powers, whether by the Union or the
States, under any of the topics-taxation topics as
well as other topics-enumerated in the three Lists
of the Seventh Schedule, in order to make certain
’trade commerce and intercourse throughout the
territory of India shall be free’. Having placed a
general limitation on the exercise of legislative
powers by Parliament and the State Legislatures,
Article 302 relaxes that restriction in favour of
Parliament by providing that that authority ’may
by law impose such restrictions on the freedom of
trade, commerce and intercourse between one State
and another or within any part of the territory of
India as may be required in the public interest’.
Having relaxed the restriction in respect of
Parliament under Article 302, a restriction is put
up on the relaxation by Article 303(1) to the
effect that Parliament shall not have the power to
make any law giving any preference to any one
State over another or discriminate in between one
State and another by virtue of any entry relating
to trade and commerce in Lists I and III of the
Seventh Schedule. Articles 303( 1) which places a
ban on Parliament against the giving of
preferences to one State over another or of
discriminating between one State and another, also
provides that the same kind of ban should be
placed upon the State Legislature also legislating
by virtue of any entry relating to trade and
commerce in Lists II and 585
III of the Seventh Schedule. Article 303(2) again
carves out an exception to the restriction placed
by Article 303( 1) on the powers of Parliament by
providing that nothing in Article 303(a) shall
prevent Parliament from making any law giving
preference to one State over another or
discriminating between one State and another, if
it is necessary to do so tor the purpose of
dealing with a situation arising from scarcity of
goods in any part of the territory of India. This
exception applies only to Parliament and not to
the State Legislatures. Article 304 comprises two
clauses and each clause operates as a proviso to
Articles 301 and 303. Clause (a) of that Article
provides that the Legislature of a State may
’impose on goods imported from other States and
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’. This clause,
therefore, permits the levy on goods from sister
States any tax which similar gods manufactured or
produced in that State are subject to under its
taxing laws. In other words, goods imported from
sister States are placed on par with similar goods
manufactured or produced inside the State in
regard to State taxation within the State
allocated field. Thus the States in India have
full powers of imposing what in American State
Legislation is called the use tax, gross receipts
tax etc., not to speak of the familiar property
tax, subject only to the condition that such tax
is imposed on all goods of the same kind produced
or manufactured in the taxing State, although such
taxation is undoubtedly calculated to fetter
interstate trade and commerce .. Now clause (b) of
Article 304 provides that notwithstanding anything
in Article 301 or 303 the Legislature of a State
may by law imposes such reasonable restrictions on
the freedom of trade, commerce or intercourse with
or within that State as may be required in the
public interest. The proviso to clause (b) says
that no bill or amendment for the purpose of
clause (b) shall be introduced or moved in the
Legislature of a State without the previous
sanction of the President. This provision appears
to be the State analogue to the Union Parliament’s
authority defined by Article 302, in spite of the
omission of the word ’reasonable’ before the word
’restrictions’ in the latter Article. Leaving
aside the pre-requisite of previous Presidential
sanction for the validity of State 586
Legislation under clause (b) provided in the
proviso thereto, there are two important
differences between Arti cles 302 and 304(b) which
require special mention. The first is that while
the power of Parliament under Article 302 is
subject to the prohibition of preferences and
discrimina tions decreed byArticle 303(1) unless
Parliament makes the declaration contained in
Article 303(2), the State’s power contained in
Article 304(b) is made expressly free from the
prohibition contained in Article 303(1), because
the open ing words of Article 304 contain a non
obstante clause both to Article 30 1 and Article
303. The second difference spr ings from the fact
that while Parliament’s to impose restricC tions
under Article 302 upon freedom of commerce in the
public interest is not subject to the requirement
of reason ableness, the power of the State to
impose restrictions on the freedom of commerce in
the public interest under Arti cle 304 is subject
to the condition that they are reason able". The next authority to which we may now refer is the case of State of Madras v. N.K. Nataraja Mudaliar, [1968] 3 SCR 829 Shah, J., as he then was, referred to Part XIII of the Constitution at page 839 of the Reports. On page 841 of the Reports, the learned Judge proceeded to say:
"Tax under the Central Sales Tax Act on inter
State sales, it must be noticed, is in its essence
a tax which encumbers movement of trade or
commerce, since by the definition in section 3 of
the Act a sale or purchase of goods is deemed to
take place in the course of inter State trade or
commerce, if it-(a) occasions the movement of
goods from one State to another; (b) is effected
by a transfer of docu ments of title to the goods
during their movement from one State to another.
The question which then falls to be determined is
whether the tax imposed in the present case is
saved by the operation of the other provisions of
Part XIII. Article 302 of the Constitution
provides that Parlia ment 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. Thereby the
Parliament is, notwithstanding the protection
conferred by Article 30 1, authorised to impose
restrictions on the freedom of trade, 587
commerce or intercourse in the public interest.
The expression "between one State and another’
does not imply that it is only intended to confer
upon the Union Parliament the power to remove the
fetter upon legislative authority only so as to
keep trade, commerce or intercourse free between
one State Government and another. It is intended
to declare trade, commerce and intercourse free
between residents in one State and residents in
another State. That is clear because Article 302
expressly provides that on the freedom of trade
restrictions may be imposed not only as between
one State and another, but also within any part of
the territory of India. As we have already
observed, Article 30I does not merely protect
inter-State trade or operate against inter-State
barriers: all trade is protected whether it is
intra-State or inter-State by the prohibition
imposed by Article 30I, and there is nothing in
the language or the context for restricting the
power of the Parliament which it otherwise
possesses in the public interest to impose
restrictions on the freedom of trade, commerce or
intercoursc, operative only as between one State
and another as two entities. There is also no
doubt that exercise of the power to tax may
normally be presumed to be in the public interest
........ It is worthwhile to refer to tne observations made by Hegde, J. At page 855 of the Reports, the learned Judge observed with reference to section 8(5) of the Central Sales Tax Act as follows;
"Sub-section (5) of section 8 provides for
giving individual exemptions in public interest.
Such a power is there in all taxation measures. It
is to provide for unforeseen contingencies. Take
for example, when there was famine in Bihar, if a
dealer in Punjab had undertaken to sell goods to a
charitable society in that State at a reasonable
price for distribution to those who were starving,
it would have been in public interest if the
Punjab Government had exempted that dealer from
paying sales tax. Such a power cannot immediately
or directly affect the free flow of trade. The
power in question cannot be said to be bad. If
there is any misuse of that power, the same can be
challenged." The true purpose of the provisions contained in Part XIII of the Constitution. as elucidated in the different decisions of the constitution 588 Benches, is that the restriction provided for in Article 30 I can within A the ambit be limited by law made by the Parliament and the State Legislature. No power is vested in the executive authority to act in any manner which affects or hinders the very essence and thesis contained in the scheme of Part XIII of the Constitution. It is equally clear that the declaration contained in Part XIII of the Constitution is against creation of economic barriers and/or pockets which would stand against the free flow of trade, commerce and intercourse
There can be no dispute that taxation is a deterrent against free flow. As a result of favourable or unfavourable treatment by way of taxation, the course of flow of trade gets regulated either adversely or favourably. If the scheme which Part XIII guarantees has to be pre-
served in national interest, it is necessary that the provisions in theArticle must be strictly complied with. One has to recall the farsighted observations of Gajendragadkar, J. in Atiabari Tea Co. case (supra) and the observations then made obviously apply to cases of the type which is now before us.
The two notifications of the Andhra Pradesh Government may now be referred to. Under the first notification made under section 9(1) of the Andhra Pradesh General Sales Tax Act, the rate of tax has been reduced to 4 per cent in respect of sales made by indigenous cement manufacturers to manufacturers of cement products. Admit-
tedly, the Tamil Nadu producers have sales officers in Andhra Pradeshand in regard to their sale to such manufacturers of cement products the benefit of reduced rate of taxation is not applicable. The prescribed rate of tax under the Andhra Act is 13.75 per cent on cement. Thus under the Andhra Notification in regard to the local tax the indigenous producers of cement have a benefit of 9.75 per cent. The return made to the Court admits of the position that preference has been shown to local manufacturers. Two reasons have been advanced by way of justification. One is that it is beneficial to the State revenue and secondly it protects the local manufacturers too. The counsel for the State Government has not been able to demonstrate to us how the reduction in the rate of sales tax is beneficial to the State revenue. The other justification is what provisions of Part XIII of the Constitution do not permit. The reasonable restrictions contemplated in Part XIII have to be backed by law and not by executive action provided the same are within the limitations prescribed under the scheme of Part Xlll.
Coming to the second notification relating to interstate transac- 589 tions, the justification pleaded by the State of Andhra Pradesh has already been extracted by us. We may usefully refer to the decision of the Constitution Bench in the case of Gwalior Rayon Silk Mfg. (Wvg) Co. Ltd. v. The Assistant Commissioner of Sales Tax & orS., [ 1974] 2 SCR 879. At page 883 of the Reports, Khanna, J. speaking for the Court observed:
"It has been argued on behalf of the
appellants that the fixation of rate of tax is a
legislative function and as the Parliament has,
under section 8(2)(b) of the Act, not fixed the
rate of central sales tax but has adopted the rate
applicable to the sale or purchase of goods inside
the appropriate State in case such rate exceeds lO
per cent, the Parliament has abdicated its
legislative function. The above provision is
consequently stated to be constitutionally invalid
because of excessive delegation of legislative
power. This contention, in our opinion, is not
well founded. Section 8(2)(b) of the Act has
plainly been enacted with a view to prevent
evasion of the payment of the central sales tax.
The Act prescribed a low rate of tax of 3 per cent
in the case of inter-State sales only if the goods
are sold to the Government or to a registered
dealer other than the Government. In the case of
such a registered dealer, it is essential that the
goods should be of the description mentioned in
subsection (3) of section 8 of the Act. In order,
however, to avail of the benefit of such a low
rate of tax under section 8(1) of the Act, it is
also essential that the dealer selling the goods
should furnish to the prescribed authority in the
prescribed manner a declaration duly filled and
signed by the registered dealer, to whom the goods
are sold, containing the prescribed particulars in
prescribed form obtained from the prescribed
authority, or if the goods are sold to the
Government not being a registered dealer, a
certificate in the prescribed form duly filled and
signed by a duly authorised officer of the
Government. In cases not falling under sub-section
(1), the tax payable by any dealer in respect of
inter-State sale of declared goods is the rate
applicable to the sale or purchase of such goods
inside the appropriate state vide section 8(2) of
the Act. As regards the goods other than the
declared goods, section 8(2)(b) provides that the
tax payable by any dealer on the sale of such
goods in the course of inter-State trade or
commerce shall be calculated at the rate of lO per
cent or at the rate 590
applicable to the sale or purchase of such goods
inside the appropriate State, whichever is higher.
The question with which we are concerned is
whether the Parliament is not fixing the rate
itself and in adopting the rate applicable to the
sale or purchase of goods inside the appropriate
State has not laid down any legislative pol icy
and has abdicated its legislative function. In
this con nection we are of the view that a clear
legislative policy can be found in the provisions
of section 8(2)(b) of the Act. The policy of the
law in this respect is that in case the rate of
local sales tax be less than 10 per cent, in such
an event the dealer, if the case does not fall
within section 8(1) of the Act, should pay central
sales tax at the rate of 10 per cent. If, however,
the rate of local sales tax for the goods con
cerned be more than 10 per cent, in that event the
policy is that the rate of the central sales tax
shall also be the same as that of the local sales
tax for the said goods. The object of law thus is
that the rate of the central sales tax shall in no
event be less than the rate of local sales tax for
the goods in question though it may exceed the
local rate in case thas t rate be less than 10 per cent. For example, if the local
rate of tax in the appropriate State for the non-
declared goods be 6 per cent, in such an event a
dealer, whose case is not covered by section 8(1)
of the Act, would have to pay cent ral sales tax
at a rate of lO per cent. In case, however, the
rate of local sales tax for such goods be 12 per
cent, the rate of central sales tax would also be
12 per cent because otherwise, if the rate of
central sales tax were only lO per cent, the
unregistered dealer who purchases goods in the
course of inter-State trade would be in a better
position than an intra-State purchaser and there
would be no disin centive to the dealers to desist
from selling goods to unre gistered purchasers in
the course of inter-State trade. The object of the
law apparently is to deter inter-State sales to
unregistered dealers as such inter-State sales
would faciliG tate evasion of tax. It is also not
possible to fix the max imum rate under section
8(2)(b) because the rate of local sales tax varies
from State to State. The rate of local sales tax
can also be changed by the State legislatures from
time to time. It is not within the competence of
the Parliament to fix the maximum rate of local
sales tax. The fixation of the rate of local sales
tax is essentially a matter for the State 591
Legislatures and the Parliament does not have any
control in the matter. The Parliament has
therefore necessarily, if it wants to prevent
evasion of payment of central sales tax, to tag
the rate of such tax with that of local sales tax,
in case the rate of local sales tax exceeds a
particular limit." Reference may also be made to another decision of the Constitution Bench in the case of State of Tamil Nadu etc. v. Sitalakshmi Mills etc.,[1974]1 1 SCR 1. At page 6 of the Reports, Mathew, J. stated:
"As already stated, section 8(2)(b) deals
with sale of goods other than declared goods and
it is confined to interState sale of goods to
persons other than registered dealers or
Governments. The rate of tax prescribed is 10 per
cent or the rate of tax imposed on sale or
purchase of goods inside the appropriate State,
whichever is higher. The report of the Taxation
Inquiry Committee would indicate that the main
reason for electing the provision was to canalize
inter-State trade through registered dealers, over
whom the appropriate Government has a great deal
of control and thus to prevent evasion of tax:
Where transactions take place between
registered dealers in one State and
unregistered dealers or consumers in another,
this low rate of levy will not be suitable,
as it is likely to encourage avoidance of tax
on more or less the same scale as the present
provisions of Article 286 have done. If this
is to be prevented, it is necessary that
transactions of this type should be taxable
at the same rates which exporting States
impose on similar transactions within their
own territories. The unregistered dealers and
consumers in the importing States will then
find themselves unable to secure any
advantage over the consumers of locally
purchased articles; nor of course will they,
under this system, be able to escape the
taxation altogether, as many of them do at
present." (See Report of the Taxation Enquiry
Commission, 195354, Vol.3, p. 57)
In other words it was to discourage inter-
State sale to unregistered dealers that Parliament
provided a high rate of tax, namely, IO%. But even
that might not serve the 592
purpose if the rate applicable to intra-State of
such goods was more than 10%. The rate of 10%
would then be favour able and they would be at an
advantage compared to local cosumers. It is
because of this that Parliament provided, as a
matter of legislative policy that the rate of tax
shall be 10% or the rate applicable to intra-State
sales whichever is higher.
If prevention of evasiorl of tax is a measure
in the public interest, there can be no doubt that
Parliament is competent to make a provision for
that purpose under Article 302 even if the
provision would impose restrictions on the inter-
State trade or commerce. Variation of the rate of inter-State sales tax does affect free trade and commerce and creates a local preference which is contrary to the scheme of Part XIII of the Constitution. The notification extends the benefit even to unregistered dealers and the observations of Hegde, J. on this aspect of the matter are relevant. Both the notifications of the Andhra Pradesh Government are, therefore, bad and are hit by the provisions of Part XIII of the Constitution. They cannot be sustained in law.
Now coming to. the notification of the Karnataka State, we have already pointed out that no return has been made and no attempt has been made, therefore, to place facts and circumstances to justify the action. The notification suffers from the same vice as the second notification of the State of Andhra Pradesh suffers and no distinction can be drawn. We accordingly hold that the notification of the Karnataka Government is also bad in law. It may be pointed out that the rate of sales tax in Karnataka is 19.5 per cent.in regard to intra-State sales.
In view of what we have indicated above, the writ petition has to succeed and the two impugned notifications of the Andhra Pradesh Government and the impugned notification of the Karnataka Government are quashed. The writ petition is accordingly allowed with costs. Hearing fees is assessed at Rs.5,OOO and this shall be shared equally by the States of Andhra Pradesh and Karnataka. S. L. Petition allowed. 593