PETITIONER:
V. GURUVIAH NAIDU AND SONS ETC.
Vs.
RESPONDENT:
STATE OF TAMIL NADU AND ANR. ETC.
DATE OF JUDGMENT02/11/1976
BENCH:
KHANNA, HANS RAJ
KRISHNAIYER, V.R.
CITATION:
1977 AIR 548 1977 SCR (1)1065
1977 SCC (1) 234
ACT
Madras General Sales Tax Act, 1959, Schedule II, items
7(a) and (b)--If ultra vires.
HEADNOTE
Raw as well as dressed hides and skins are declared
goods under Central Sales Tax Act, 1956. Section 4 of the
Madras General Sales Tax Act, 1959, provides that the tax
shall be payable by a dealer, on the sale or purchase of
declared goods inside the State, at the rate and only at the
point specified in the Second Schedule to the Act, on the
turnover ’in such goods. Item 7(a) of the Schedule provides
that with respect to raw hides and skins, the rate of tax
shall be at 3% and the point of levy shall be at the point
of last purchase in the State. Item 7(b) provides that
with respect to dressed hides and skins (which were not
subjected to tax under the Act as raw hides and skins), the
rate of tax shall be 1-1/2% and the point of levy shall be
at the point of first sale in the State.
The appellants are dealers in hides and skins. They
purchase raw hides and skins locally as well as in the
course of inter-state trade and commerce, convert them into
dressed hides and skins and sell them either locally or in
the course of export. The appellants challenged the validi-
ty of items 7(a) and 7(b). The challenge to item 7(a) was
that the item would also cover inter-state sales and as such
was beyond the competence of the State Legislature; and the
challenge to item 7(b) was that it was violative of Art. 304
(a) of the Constitution on the ground that whereas dressed
hides and skins sold locally, but which have been made out
of imported raw-hides and skins, are subject to tax under
the item similar sale of dressed hides and skins made out of
raw hides and skins which have been subjected to tax at the
purchase stage are not subject to tax under the item.
HELD: (1) Item 7(a) relates only to intra state sales
and not to inter-state sales. This is clear from the lan-
guage used in the item, especially the words "purchase in
the State". Assuming the language is ambiguous it should be
so construed as would sustain its, constitutional validity.
[1067 F]
(2) 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. The object is to prevent discrimination
against imported goods by imposing tax on such goods at a
rate higher than that borne by local goods since the
difference between the two rates would constitute a fiscal
barrier and thus impede the free flow of inter-state trade
and commerce. The scheme of items 7(a) and (b) is that in
the case of raw hides and skins which are purchased locally
in the State, the levy of tax would be at the rate of 3%.
When such locally purchased raw hides and skins are tanned
and sold locally as dressed hides and skins no levy would
be made on such sales, as those hides and skins have already
been subjected to tax at 3% when purchased in the raw
form. On the other hand, in the case of hides and skins
imported from other States in the raw form, thereafter
tanned, and then sold inside the State as dressed hides
and skins, the levy of tax is at 11/2%. This levy however,
cannot be considered discriminatory because the Legislature,
while prescribing the rate in item 7(b) at half that levied
under item 7(a) took into account the higher price of
dressed hides and skins (nearly double) as compared to the
price of raw hides and skins, and the fact that no tax
under the State Act has been paid in respect of imported raw
hides and skins. Even though dressed hides and skins are
treated as a. separate commodity there is a clear nexus
between hides
1066
and skins in the raw form and those in the dressed form; and
hence, there is no infirmity in the legislative provision,
which, while levying tax on the sale of dressed hides and
skins takes into account the levy in respect of raw hides
and skins. [1070 D-H] .
The onus of showing that there would be
discrimination .between raw hides and skins purchased local-
ly and then tanned, and raw hides and skins imported and
then tanned is on the appellant, and the appellant has not
discharged the onus. [1070 C]
Firm A. T. B. Mehtab Majid & Co. v. The State of Madras
& Anr. 14 S.T.C. 355 and .4. Hajee Abdul Shukoor & Co. v.
The State of Madras 15 S.T.C. 719, explained and distin-
guished.
JUDGMENT
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 1577 and
1579 of 1971.
Appeal from the judgment and Orders dated 23-3-1971
and 22-4-1971 of the Madras High Court in Writ Petitions
Nos. 1088/70 and 1316/71.
K. Srinivasan, I. Subramaniam and (Mrs.) S. Gopalakrish-
nan for the Appellants.
K. Purasaran, Advocate General for the State of Tamil
Nadu, A. V. Rangam and (Miss) A. Subhashini for the Respond-
ents.
The Judgment of the Court was delivered by
KHANNA, J. These appeals by special leave are against
the judgment of Madras High Court whereby, that court re-
pelled the challenge to the validity of items 7(a) and 7(b)
of the Second Schedule to the Madras General Sales Tax Act,
1959 (hereinafter referred to as the State Act).
The appellants are dealers in hides and skins. The
appellants purchase raw hides and skins locally as well as
in the course ’of interState trade and commerce. The raw
hides and skins are converted into dressed hides and skins
and are sold either locally or. in the course of export.
The matter relates to the assessment year 1968-69 and the
dispute between the parties arises because of the inclusion
in the turnover of the sale and purchase price of some of
the above goods. The appellants by means of writ petitions
challenged the validity of items 7(a) and 7(b) of the Second
Schedule to the State Act. The High Court, as already
mentioned, repelled the attack on the validity of those
items and dismissed the. writ petitions.
Before dealing with the contentions advanced, it may be
appropriate to refer to the relevant provisions. Section 4
of the State Act is the charging section in respect of
declared goods and reads thus:
"Tax in respect of declared
goods.--Notwithstanding anything contained in
section 3, the tax under this Act shall be
payable by a dealer on the sale or purchase
inside the State of declared goods at the rate
and only at the point specified against each
in the second schedule of the turnover in such
goods in each year, whatever the quantum of
turnover in that year."
1067
It may be mentioned that raw hides and skins as well as
dressed hides and skins are declared goods under section
14(if) of the Central Sales Tax Act, 1956 (hereinafter
referred to as the Central Act). Section 14(iii) of the
Central Act reads as under:
"’It is hereby declared that the following goods are
of special importance in inter-State trade or commerce:
......... ............. .............
......... ............. .............
(iii) hides and skins, whether in a raw or dressed
state."
Items 7(a) and 7(b) of the Second Schedule to the State Act
and read as under:
Items 7(a) and 7(b) of the Second Schedule to the State Act
read as under :--
"S. No. Description of goods Point of levy Rate
of tax
1 2 3 4
7(a) Raw hides and skins At the point of 3
last chase in
the State.
7(b) Dressed hides and At the point of 1-1/2
skins (which were 1st sale in the
not subjected to State.
tax under this
Act as raw hides and skins) ,,
So far as validity of item 7(a) of the Second Schedule
is concerned, the argument of the learned counsel for the
appellant is that this would cover also inter-State sales
and as such is beyond the competence of the State legisla-
ture. We are unable to accede to this contention as we are
of the view that item 7(a) relates only to interState sales
and not to inter-State sales. This is clear from the lan-
guage used in the item, especially the words "purchase in
the State". Assuming that the language of item 7(a) is
ambiguous, it should be so construed as would sustain the
constitutional validity of the said item. Considered in
this light the occasion. for the levy of tax under the above
item would arise only when there is intra-State sale and
not inter-State sale.
Regarding from 7(b), the learned counsel for the appel-
lants has contended that it is violative of clause (a)
article 304 of the Constitution. The said clause reads as
under:
"304. 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 foods manufactured or pro-
duced in that State are subject, so, however,
as not to discriminate between goods
18--1338sci/76
1068
so imported and goods so manufactured or
produced; and
(b) ...... ......... .... .
According to ’the learned counsel, ’there can be three types
of sale transactions in respect of dressed hides and skins:
(1 ) Dressed hides and skins imported from
outside the State of Tamil Nadu.
Tanning of the aforesaid
(2) Import of raw hides and skins from out-
side the State of Tamil Nadu and sold within
that State; raw hides and skins within the
State of Tamil Nadu and the sale of the same
within that State as dressed hides and skins;
and
(3) Purchase of raw hides and skins within the
State of Tamil Nadu and sale of the same
within that State as dressed hides and skins
after tanning those hides and skins.
It is urged that in respect of hides and skins covered by
the third category, the local sales of dressed hides and
skins will not be liable to tax under ’State Act as the
purchase of the raw hides and skins has already been sub-
jected to tax under item 7(a). Regarding hides and skins
mentioned at (1) and (2) above, the local sales of dressed
hides and skins would be subjected to tax at the rate of 1-
1/2 per cent under item 7(b) as there was no levy of tax
under the State Act in respect of those hides and skins.
Learned counsel accordingly concludes from the above that
imported hides and skins are subject to tax when sold as
dressed hides and skins at the rate of 11/2 per cent,
whereas hides and skins purchased in raw form locally and
dressed thereafter are not subject to tax under the State
Act when sold as dressed hides and skins. The contention,
mother words, is that whereas dressed hides and skins sold
locally but which have been made out of imported raw hides
and skins are subject to tax, similar sales of dressed hides
and skins made out of raw hides and skins which have
suffered tax at purchase stage are not subject to tax under
item 7(b) of the Second Schedule of the State Act. Item
7(b) is therefore stated to be discriminatory and violative
of article 304(a). Reliance in this connection is placed
upon two decisions of this Court in the cases of Firm A.T.B.
Mehtab Majid & Co. v. The State of Madras & Anr. (1) and
A. Hajee Abdul Shukoor & Co. v. The State of Madras.(2)
In the case of Mehtab this Court held that the provi-
sions of rule 16 of the Madras General Sales Tax (Turnover
and Assessment) Rules, 1939 discriminate between hides and
skins imported from outside the State and those manufac-
tured or produced inside the State and therefore they con-
travene the provisions of article 304(a) of the Constitu-
tion. Perusal of the facts of that case goes to show that
the real grievance of the appellant in that case was that
though there was a substantial disparity in the price of raw
hides and skins and the price of dressed hides and skins,
the same rate of tax was levied
(1) 14 S.T.C. 355.
(2) 15 S.T.C. 719.
1069
in respect of both types of hides and skins under section
3(1) (b) of the State Act. This is clear from the following
observations in that case:
"The grievance arises on account of the
amount of tax levied being different on ac-
count of the existence of a substantial dis-
parity in the price of the raw hides or skins
and of those hides or skins after they had
been tanned, though the rate is the same under
section 3(1) (b) of the Act. If the dealer has
purchased the raw. hides or skin in the State,
he does not pay on the sale price of the
tanned hides or skins he pays on the purchase
price only. If the dealer purchases raw hides
or skins from outside the State and tane them
within the State, he will be liable to pay
sales tax o, the sale price of the tanned
hides or skins."
In the case of Hajee Abdul Shukoor this Court held
that Subsection (1) of section 2 of the Madras General
Sales Tax (Special Provisions) Act, 1963 discriminates
against imported hides and skins which were sold up to
August 1, 1957. The rate of tax on the sale of tanned
hides and skins, as would appear from that judgment, was "2
per cent on the purchase price of those hides and skins in
the untanned condition, while the rate of tax on the sale of
raw hides and skins in the State during 1955 to 1957 is 3
pies per rupee". The Court in this context referred to
Mehtab’s case and observed:
"In the earlier case, discrimination was
brought about on account of sale price of
tanned hides and skins to be higher than the
sale price of untanned hides and skins,
though the rate of tax was the same, while in
the present case, the discrimination does not
arise on account of difference of the price
o.n which the tax is levied as the tax on the
tanned hides and skins is levied on the amount
for which those hides and skins were last
purchased in the untanned condition, but on
account of the fact that the rate of tax the
sale of tanned hides and skins is higher than
that on the sale of untanned hides and skins.
The rate of tax on the sale of tanned hides
and skins is 2% on the purchase price of these
hides and skins in the untanned condition
while the rate of tax on the sale of raw hides
and skins on the State during 1955 to 1957 is
3 pies per rupee. The difference in tax works
out to 7/1600th of a rupee, i.e., a little
less than 1/2 naya paise per rupee. Such a
discrimination would affect the taxation up to
the 1st of August, 1957, when the rate of tax
on the sale of raw hides and skins was raised
to 2% of the sale price."
None of the circumstances which led this Court to strike
down the relevant provisions in the above mentioned two
cases exists in the present case. In Mehtab’s case discrimi-
nation was found to exist because of the fact that tax was
being levied at the same rate in respect of both raw hides
and skins’ as well as dressed hides and skins, even though
1070
the price of dressed hides and skins was much higher. The
position was worse in the vase of Hajee Abdul Shukoor be-
cause in that case the sales tax was found to have been
charged at a higher fate in respect of dressed hides and
skins than that on the sale of raw hides and skins in spite
of the fact that the price of dressed hides and skins was
higher than that of raw hides and skins. The position in
the present case is materially different, for here the rate
of sales tax for raw hides and skins is 3 per cent, while
that for dressed hides and skins is 11/2 r cent. It is
plain that the lower rate of tax in the case of dressed
hides and skins has been prescribed with a view to offset
the difference between the higher price of dressed hides
and skins and lower price of raw hides and skins. No mate-
rial has been brought on the record to show that despite the
lower rate of sales tax for dressed_ hides and skins, the
imported hides and skins are being subjected to discrimina-
tion. The onus to show that there would be discrimination
between the hides and skins which were purchased locally in
the raw form and thereafter tanned and the hides and skins
which were imported from other States was upon the appel-
lant. The appellant, we find, has failed to discharge such
onus.
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. The object is to prevent discrimination against
imported goods by imposing tax on such goods at a rate
higher than that borne by local goods since the differ-
ence between the two rates would constitute a tariff wall or
fiscal barrier and thus impede the free flow of inter-State
trade and commerce. 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 scheme of
items 7(a) and 7(b) of the Second Schedule to the State Act
is that in case of raw hides and skins which are purchased
locally in the State, the levy of tax would be at the rate
of 3 per cent at the point of last purchase in the State.
When those locally purchased raw hides and skins are tanned
and are sold locally as dressed hides and skins, no levy
would be made on such sales as those hides and skins have
already been subjected to local tax at the fate of 3 per
cent when they were purchased in raw form. As against
that, in the case of hides and skins which have been import-
ed from other States in raw form and are thereafter tanned
and then sold inside the State as dressed hides and skins,
the levy of tax is at the rate of 1-1/2 per cent at the
point of first sale in the State of the dressed hides and
skins. This levy cannot be considered to be discriminatory
as it takes into account the higher price of dressed hides
and skins compared to the price of raw hides and skins. It
also further takes note of the fact that no tax under the
State Act has been paid in respect of those hides and skins.
The Legislature, it seems, calculated the price of hides and
skins in dressed condition to be double the price of such
hides and skins ’in raw state, To obviate and prevent any
discrimination or differential treatment in the matter of
levy of tax, the Legislature therefore prescribed a rate of
tax for sale of dressed hides and skins which was half of
that levied under item 7(a) in respect of raw hides and
skins.
1071
Lastly, it has been argued that dressed hides and skins
are a commodity distinct and separate from raw hides and
skins and that item 7(b) of the Second Schedule makes a
discrimination between ’the sales of locally processed
dressed hides and skins and those imported from other
States. In this respect we find that it is not the case of
the appellants that they import dressed hides and skins from
other States and sell them as such in Tamil Nadu. On the
contrary, the case of the appellants is that what they
_import from other States are only raw hides and skins which
are thereafter tanned and sold as dressed hides and skins.
In the circumstances, it is not clear as to what grievance
the appellants can have on the score that there is discrimi-
nation between imported dresed hides and skins and the
dressed hides and skins produced and manufactured within the
State.
Apart that it seems to us that even though dressed hides
and skins have been treated as separate commodity, there is
a clear nexus between hides and skins in raw form and those
in dressed form. So far as the Central Act is concerned,
both the raw as well as the dressed hides and skins are
specified together in clause (iii) of section 14. It has to
be borne in mind that it is raw hides and skins which after
being subjected to processing or tanning take the shape of
dressed hides and skins. Dressed hides and skins cannot,
therefore, be considered in isolation and we find no infirm-
ity in a legislative provision which while levying tax on
the sale of dressed hides and skins takes into account the
levy of tax in respect of the purchase of raw hides and
skins. Looked at in this light there appears to be no
warrant for the proposition that preferential treatment has
been shown to dressed hides and skins prepared from locally
purchased raw hides and skins compared to the treatment
accorded to imported hides and skins.
We are therefore, of the view that the attack on the
validity of item 7(b) of the Second Schedule to the State
Act is not well founded. We accordingly dismiss the ap-
peals, but in the circumstances without costs.
V.P.S. Appeal dismissed.
1072