Case Summary
| Citation | |
| Keywords | |
| Facts | |
| Issues | |
| Contentions | |
| Law Points | |
| Judgement | |
| Ratio Decidendi & Case Authority |
Full Case Details
LB-301-Constitutional Law-I |2022
B.P. JEEVAN REDDY, J.: 2. The State of Jammu and Kashmir seeks to encourage and promote the industrialisation of the State – like every other State in the country. Edible oil industry is one such. Because of certain inherent problems, the cost of production of edible oil in Jammu and Kashmir is said to be higher than the cost of production of similar edible oil in the adjoining States with the result that the manufacturers of edible oil in the adjoining States are able to sell their products in Jammu and Kashmir at a price lower than the price at which the local manufacturers are able to sell. This is said to have created a situation where the local industries faced the prospect of closure; at any rate, they were not able to compete with the out- State manufacturers. They approached their Government, which is seeking to protect their interest by inter alia exempting them totally from the levy of sales tax on the sale of their products. That has given rise to the writ petition from which the present appeal arises. On the Jammu and Kashmir High Court dismissing the writ petition, they have approached this Court.
3. The Jammu and Kashmir General Sales Tax Act contains four Schedules. Each of the Schedules carries a particular rate of sales tax. Edible oils were previously included inSchedule D which prescribes the rate of tax at four per cent. On 20-12-1993, edible oils were shifted from Schedule D to Schedule C, which prescribes the rate of tax at eight per cent. (It isstated that SRO 213 of 1993 issued on 3-12-1993 shifting edible oils from Schedule D to Schedule C was rescinded within about a week thereafter but was reissued as SRO 124 of 1994 on 27-5-1994.)
4. With a view to protect the local edible oil industry, the Government of Jammu and Kashmir issued SRO 93 of 1991 on 7-3-1991 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 Director of Industries and Commerce, Handicrafts or Handloom Development, subject to the conditions specified below, shall be exempted from payment of tax to the extent and for the period specified in the Schedule forming Annexure A”. All the units manufacturing edible oil in the State are small- scale industrial units as defined by the Jammu and Kashmir Government. (It appears that initially the limit was an investment of rupees ten lakhs according to which one unit in the State did not qualify as a small-scale industrial unit. Subsequently, it is stated, the limit of investment was raised to rupees thirty lakhs, as a result of which the said unit also fell under the definition of small-scale unit.) The exemption was total and the period of exemption was five years – which has later been extended by another five years.
5. The result of the orders aforementioned was that while until December 1993/May 1994, the manufacturers of edible oil in other States were 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, the local manufacturers were totally exempted therefrom. In December 1993/May 1994, the rate of tax was raised from four per cent to eight per cent, as stated above. With the raising of the rate of
358 Shree Mahavir Oil Mills v. State of J. & K.
sales tax to eight per cent, the outside manufacturers were obliged to pay at eight per cent while the local manufacturers were exempt fully. It is then that some of the outside manufacturers including the appellants herein, approached the Jammu and Kashmir High Court by way of writ petitions which were dismissed by a learned Single Judge. The letters patent appeals preferred by the appellants have also been dismissed by the Division Bench relying mainly upon the decision of this Court in Video Electronics (P) Ltd. v. State of Punjab [(1990) 3 SCC 87].
6. Shri Harish Salve, learned counsel for the appellants, assailed the correctness of the judgment of the High Court on several grounds. Counsel submitted that the orders of the Government of Jammu and Kashmir exempting all the edible oil industries in the State from payment of sales tax unconditionally amounts to discriminating against the out-State manufacturers which is prohibited by Articles 301 and 304 of the Constitution. Counsel submitted that Part XIII of the Constitution prohibits raising of fiscal barriers by the States, for such barriers are bound to interfere with the free movement of trade and commerce throughout the territory of India. Raising of protective walls may be justified in international trade. The Government of India can and has been providing several such protectionist measures all these years to encourage the growth and establishment of industries in thecountry and to protect them from competition from foreign manufacturers. But similar measures cannot be provided by the State Governments internally, i.e., within the country. Parliament can, no doubt, provide such measures but not the State Governments and certainly not without the prior sanction/assent of the President of India. Learned counsel submitted that the decision in Video Electronics has not been correctly understood by the High Court and that it does not purport to support the impugned measure. Learned counsel relied upon severaldecisions rendered by this Court under Part XIII in support of his submissions.
7. On the other hand, Shri M.L. Verma, learned counsel for the State of Jammu and Kashmir, placed strong reliance upon the ratio and upon certain observations made in Video Electronics. Notwithstanding certain minor differences, learned counsel submitted, the principle of the said decision clearly applies to the facts of this case. Shri Verma submitted that when the rate of tax was four per cent and the exemption in favour of local manufacturerswas operating, the appellants never protested. Only when the rate of tax was raised from four to eight per cent, with the exemption in favour of local manufacturers continuing, the appellants came forward with writ petitions. If they were not aggrieved when the rate wasfour per cent, they cannot equally be aggrieved merely because the rate is raised to eight per cent. Counsel brought to our notice certain figures relating to turnover of the appellants withinthe State of Jammu and Kashmir and emphasised that the impugned measure has not really hurt the appellants’ business and that the volume of their turnover continues to rise notwithstanding the impugned measure. The submission is that the appellants can have noreal or genuine grievance in the matter. Coupled with this, Shri Verma submitted, is the need for protecting the local manufacturers. Because of the peculiar economic conditions prevailing in the State, the cost of production of the local manufacturers is substantiallyhigher than the cost of production of edible oil in the adjoining States or in other States in the country. Unless the impugned protective measure is provided to the local manufacturers, Shri Verma submitted, it was not possible for the local manufacturers to survive in the market.
Shree Mahavir Oil Mills v. State of J. & K. 359
They would have been eliminated from their business and trade by the out-State manufacturers who are able to sell their goods at a lesser price. The purpose of the impugned measure, Shri Verma submitted, is, therefore, laudable. It is not directed against the out-State manufacturers but only towards saving the local ones. Even otherwise, counsel submitted, the principle of classification relevant under Article 14 has been held by this Court to be equally applicable under Article 304 and if so, it must be held that the classification made between local and out- State manufacturers is a reasonable one and designed to further the aforesaid laudable object.
8. Article 301 declares that “subject to the other provisions of this Part, trade, commerce and intercourse throughout the territory of India shall be free”. (emphasis supplied) An exception is, however, provided in favour of Parliament by Article 302 which says that “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.”(emphasis supplied) The power conferred upon Parliament by Article 302 is, however, qualified by a rider provided in clause (1) of Article 303 which says that the power conferred upon Parliament by Article 302 shall not, however, empower Parliament – or the legislature of a State – “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”. [It is not very clear why clause (1) of Article 303 uses the words “nor the legislature of a State” when Article 302 does not refer to the legislature of a State at all. Probably, the idea was to declare affirmatively – in the interest of removing any doubt – that even a legislature of a State shall not have the 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 their power to make a law with reference to the entries relating to trade and commerce in the Seventh Schedule. Further, the addition of words “by virtue of any entry relating to trade and commerce in any of the Lists in the Seventh Schedule” at the end of the clause have also given rise to a good amount of controversy, which we shall refer to later, to the extent relevant]. Clause (2) of Article 303, is in the nature of a clarification. It says that “nothing in clause (1) shall prevent Parliament from making any law giving, or authorisingthe 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”. (emphasis supplied) Article 304 deals with the power of the State Legislatures. It begins with a non obstante clause: “Notwithstanding anything in Article 301 or Article 303.” Article 303 was alsoreferred to in this non obstante clause evidently for the reason that clause (1) of Article 303 refers to “the legislature of a State” besides referring to Parliament. Article 304 contains two clauses. Clause (a) states that “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”. (emphasis supplied) The wording of this clause is of crucial significance. The first half of the clause would make itappear at the first blush that it merely states the obvious: one may indeed say that the power to
360 Shree Mahavir Oil Mills v. State of J. & K.
levy tax on goods imported from other States or Union Territories flows from Article 246 read with Lists II and III in the Seventh Schedule and not from this clause. That is of course so, but then there is a meaning and a very significant principle underlying the clause, if one reads it in its entirety. The idea was not really to empower the State Legislatures to levy taxon goods imported from other States and Union Territories – that they are already empowered by other provisions in the Constitution – but to declare that that power shall not be so exercised as to discriminate against the imported goods vis-à-vis locally manufactured goods. The clause, though worded in positive language has a negative aspect. It is, in truth, a provision prohibiting discrimination against the imported goods. In the matter of levy of tax – and this is important to bear in mind – the clause tells the State Legislatures – “tax you maythe goods imported from other States/Union Territories but do not, in that process, discriminate against them vis- à-vis goods manufactured locally”. In short, the clause says:levy of tax on both ought to be at the same rate. This was and is a ringing declaration against the States creating what may be called “tax barriers” – or “fiscal barriers”, as they may be called – at or along their boundaries in the interest of freedom of trade, commerce and intercourse throughout the territory of India, guaranteed by Article 301. As we shall presently point out, this clause does not prevent in any manner the States from encouraging or promoting the local industries in such manner as they think fit so long as they do not use the weapon of taxation to discriminate against the imported goods vis-à-vis the locally manufactured goods. To repeat, the clause bars the States from creating tax barriers – or fiscal barriers, as they can be called – around themselves and/or insulate themselves from the remaining territories of India by erecting such “tariff walls”. Part XIII is premised upon the assumption that so long as a State taxes its residents and the residents of other States uniformly, there is no infringement of the freedom guaranteed by Article 301; no State would tax its people at a higher level merely with a view to tax the people of other States at that level. And it is this clause which has a crucial bearing on this case. Now coming to clause (b),it empowers the legislature of the State to make a law and “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”. (This proviso has, of course, to be read along with Article 255 which says that if the Act receives the assent of the President, the non-compliance with the requirement of obtaining the previous sanction to the introduction of the Bill is cured.) Though in appearance this clause reads like conferring on the State Legislatures a power akin to the power conferred upon Parliament by Article 302, there are certain distinctions. Firstly, while Article 302 does not use the expression ‘reasonable’ before the word ‘restrictions,’ this clause does. Secondly, this power can be exercised by the State Legislature only with the “previous sanction” of the President – which means the Union Ministry, or with the assent of the President, as explained above. It is probably our history which impelled the Founding Fathers to lay store by the Central Government in the matter of imposing restrictions, or reasonable restrictions, as the case may be, on the freedom of trade, commerce and intercourse. The freedom guaranteed, it is worthy of notice, is “throughout the territory of India” and not merely between the States as such; the emphasis is upon the oneness of the territory of India. Part XIII starts with this concept of oneness but then it provides exceptions
Shree Mahavir Oil Mills v. State of J. & K. 361
to that rule, as stated above, to meet certain emerging situations. As a matter of fact, it can well be said that clause (a) of Article 304 is not really an exception to Article 301, notwithstanding the non obstante clause in Article 304 and that it is but a restatement of afacet of the very freedom guaranteed by Article 301, viz., power of taxation by the States.(We need not refer to the other articles in Part XIII for the purposes of this case.)
9. Having noticed the scheme of Part XIII, we may now turn to decided cases to see how these articles have been understood over the last fifty years.
10. The first decision to be noticed is, of course, in Atiabari Tea Co. Ltd. v. State of Assam. The Legislature of Assam enacted the Assam Taxation (On Goods Carried by Roads or Inland Waterways) Act, 1961 providing for levy of tax on certain goods carried by road or inland waterways in the State of Assam. Its constitutionality was questioned by a large number of tea companies who sold most of their produce outside the State of Assam after transporting it by road or waterways to West Bengal and other States. The majority opinion (Gajendragadkar, Wanchoo and Das Gupta, JJ.) stated their conclusion in the followingwords:
“Our conclusion, therefore, is that when Article 301 provides that trade shall be free throughout the territory of India it means that the flow of trade shall run smooth and unhampered by any restriction either at the boundaries of the States or at any other points inside the States themselves. It is the free movement or the transport of goods from one part of the country to the other that is intended to be saved, and if anyAct imposes any direct restrictions on the very movement of such goods it attracts the provisions of Article 301, and its validity can be sustained only if it satisfies the requirements of Article 302 or Article 304 of Part XIII. At this stage we think it is necessary to repeat that when it is said that the freedom of the movement of trade cannot be subject to any restrictions in the form of taxes imposed on the carriage of goods or their movement all that is meant is that the said restrictions can be imposed by the State Legislatures only after satisfying the requirements of Article 304(b). It is not as if no restrictions at all can be imposed on the free movement of trade.”
It was also held:
“Thus considered we think it would be reasonable and proper to hold that
restrictions, freedom from which is guaranteed by Article 301, would be such restrictions as directly and immediately restrict or impede the free flow or movement of trade. Taxes may and do amount to restrictions; but it is only such taxes as directly and immediately restrict trade that would fall within the purview of Article 301. … We are, therefore, satisfied that in determining the limits of the width and amplitude of the freedom guaranteed by Article 301 a rational and workable test to apply would be: Does the impugned restriction operate directly or immediately on trade or its movement?”
11. In Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan validity of Section 4(1) of the Rajasthan Motor Vehicles Taxation Act, 1951 was challenged. The section levied a tax on all motor vehicles used in any public place or kept for use at the rates specified in the Schedules. Violation of the provision invited penalties provided under Section 11. Certain
362 Shree Mahavir Oil Mills v. State of J. & K.
operators challenged the Act as violative of Articles 301 and 304(b). Since serious doubts were expressed with respect to the propositions enunciated by the majority and by Shah, J. in Atiabari Tea Co. Ltd. the matters were referred to a larger Constitution Bench of seven Judges. By a majority of 4:3, (S.K. Das, Kapur and Sarkaria, JJ. joined by Subba Rao, J.), thisCourt upheld the constitutionality of the Act on the ground that the taxes levied by it are compensatory in nature and, therefore, outside the purview of Article 301. Once outside the purview of Article 301, it was held, Article 304 was also not attracted.
12. Subba Rao, J. concurred with the above propositions though the learned Judge stated the propositions flowing from his opinion at pp. 564-565 separately. The majority opined that:
“The interpretation which was accepted by the majority in the Atiabari Tea Co. case is correct, but subject to this clarification. Regulatory measures or measures imposing compensatory taxes for the use of trading facilities do not come within the purview of the restrictions contemplated by Article 301 and such measures need not comply with the requirements of the proviso to Article 304(b) of the Constitution.” (emphasis supplied)
13. A.T.B. Mehtab Majid & Co. v. State of Madras arose under the Madras General Sales Tax Act, 1939. The effect of Section 3 of the Act read with Rule 16 was that tanned hides and skins imported from outside the State of Madras and sold within the State were subject to a higher rate of tax than the tax imposed on hides or skins tanned and sold withinthe State. Similarly, hides or skins imported from outside the State after purchase in their raw condition and then tanned inside the State were also subject to higher rate of tax than hides or skins purchased in raw condition in the State and tanned within the State. This distinction wasattacked as violative of Articles 301 and 304(a) of the Constitution. Following the law laid down in Atiabari Tea Co. Ltd. and Rajasthan Automobiles the Constitution Bench held:
“It is therefore now well settled that taxing laws can be restrictions on trade, commerce and intercourse, if they hamper the flow of trade and if they are not what can be termed to be compensatory taxes or regulatory measures. Sales tax, of the kind under consideration here, cannot be said to be a measure regulating any trade or a compensatory tax levied for the use of trading facilities. Sales tax, which has the effect of discriminating between goods of one State and goods of another, may affect the free flow of trade and it will then offend against Article 301 and will be valid only if it comes within the terms of Article 304(a).
Article 304(a) enables the legislature of a State to make laws affecting trade, commerce and intercourse. It enables the imposition of taxes on goods from other States if similar goods in the State are 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. This means that if the effect of the sales tax on tanned hides or skins imported from outside is that the latter becomes subject to a higher tax by the application of the proviso to sub-rule of Rule 16 of the Rules, then the tax is discriminatory and unconstitutional and must be struck down.”
14. StateofMadrasv.N.K.NatarajaMudaliar[AIR1969SC147]consideredthevalidity of sub-sections (2), (2-A) and (5) of Section 8 of the Central Sales Tax Act, 1956. The respondent’s case was that they were violative of Articles 301, 302, 303 and 304. It was held by Shah, J. (speaking for himself, Mitter and Vaidyalingam, JJ.) that while the Central sales tax imposed under Section 3 violates Article 301 being a tax on movement of goods, it
Shree Mahavir Oil Mills v. State of J. & K. 363
was saved by Article 302. The levy of different rates by sub-section (2-A) was justified on the ground that the Act was meant for imposing tax to be collected and retained by the State and that in such a case the provision does not amount to a law contemplated by clause (1) of Article 303. For the same reason, it was held, leaving it to the States to levy tax at different rates also does not amount to practising discrimination. Article 304(a), it is significant to note,was said to have no application for the reason that it was not a case where tax was imposed onimported goods at a different rate from the rate leviable on goods manufactured locally. Certain observations made by Shah, J. are relied upon by the learned counsel for Jammu and Kashmir and must, therefore, be set out:
“The flow of trade does not necessarily depend upon the rates of sales tax: it depends upon a variety of factors, such as the source of supply, place of consumption, existence of trade channels, the rates of freight, trading facilities, availability of efficient transport and other facilities for carrying on trade. Instances can easily be imagined of cases in which notwithstanding the lower rate of tax in a particular part of the country goods may bepurchased from another part, where a higher rate of tax prevails. Supposing in a particular State in respect of a particular commodity, the rate of tax is 2% but if the benefit of that low rate is offset by the freight which a merchant in another State may have to pay for carryingthat commodity over a long distance, the merchant would be willing to purchase the goods from a nearer State, even though the rate of tax in that State may be higher. Existence of long-standing business relations, availability of communications, credit facilities and a host of other factors – natural and business – enter into the maintenance of trade relations and the free flow of trade cannot necessarily be deemed to have been obstructed merely because in a particular State the rate of tax on sales is higher than the rates prevailing in other States.”
15. It is significant to notice that these observations were made in the context of the argument that different rates of Central sales tax in different States on sale of similar goods is discriminatory. It was not a case like the present one where a State is levying a different/higher rate of tax on goods imported from other States than the rate applicable to sales of similar goods manufactured within that State. We are unable to see how these observations help the State.
18. H. Anraj v. Govt. of T.N. [(1986) 1 SCC 414] is a decision of a Bench of two learned Judges. The Government of Tamil Nadu exempted the lottery tickets issued by it totally while levying tax on lottery tickets issued by other Governments and sold in Tamil Nadu. The Court held that laws imposing taxes can amount to restriction on trade, commerce and intercourse if they hampered the free flow of trade unless they are compensatory in nature and that the sales tax which had the effect of discriminating between goods of one State and another may affect free flow of trade and would be offensive to Article 301 unless saved by Article 304(a). It was held that the direct and immediate result of the notification was to impose an unfavourable and discriminatory tax.
19. Indian Cement v. State of A.P. [(1988) 1 SCC 743] is also a decision of two learned Judges. The Government of Andhra Pradesh had issued two notifications, one under Section 9(1) of the A.P. General State Sales Tax Act, 1957 and the other under Section 8(5) of the Central Sales Tax Act. Under the first notification, sales tax on sale of
“cement manufactured by cement factories situated in the State and sold to the manufacturing units situated within the State for the purpose of…”
364 Shree Mahavir Oil Mills v. State of J. & K.
was reduced from 13.5% to 4%. Under the second notification, the Central sales tax was reduced to two per cent. The Government of Karnataka also issued a similar notification reducing in similar situation, Central sales tax from 15% to 2%. These were challenged as violative of Articles 301 and 304 and the challenge was upheld. The first ground upheld was that the “reasonable restrictions” contemplated by Article 304(b) can be imposed by a law made by the legislature of the State and not by the orders of the Government, i.e., by executive action. The second ground given by the Bench (Ranganath Misra and M.M. Dutt, JJ.) is that “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.” and hence bad. In the course of discussion, the Bench observed:
“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 preserved in national interest, it is necessary that the provisions in the article must be strictly complied with. One has to recall the farsighted observations of Gajendragadkar, J. in Atiabari Tea Co. case and the observations then made obviously apply to cases to the type which is now before us.”
20. The facts in Weston Electroniks v. State of Gujarat [(1988) 2 SCC 568] are similar. Until 1981, the tax on sale of electronic goods under the Gujarat Sales Tax Act was fifteen per cent whether the goods were manufactured within the State of Gujarat and sold or imported from outside. In 1981 – and again in 1986 – however, a distinction was made between locally manufactured goods and those imported into the State. A lower rate was prescribed for the former. This was held to be discriminatory and offensive to Articles 301 and 304.
22. Video Electronics (P) Ltd. v. State of Punjab: [(1988) 4 SCC 134] inasmuch as strong and almost exclusive reliance is placed by the learned counsel for the State of Jammu and Kashmir on this decision, it is necessary to examine the facts of and the law laid down in this decision (rendered by a Bench of three learned Judges) a little more closely. In this decision, notifications issued by two States, viz., Uttar Pradesh and Punjab were considered. The notification issued by the Government of Uttar Pradesh provided an exemption in favour of new units, established in specified areas and for the prescribed period (three to seven years) specified therein. It was further stipulated that the said benefit shall be available only to those new units which have commenced their production between the two dates specified by the Government. The Punjab notification provided that “rate of the sales tax payable by an electronic manufacturing unit existing in Punjab in cases of electronic goods specified in Annexure A was prescribed at one per cent as against the normal 12 per cent”. (This is how the purport of the provision has been set out in the decision.) Both notifications were impugned as violative of Articles 301 and 304. The Bench comprising Mukharji, C.J., Ranganathan and Verma, JJ. upheld both the notifications. So far as the Uttar Pradeshnotification was concerned, it was held that inasmuch as it was a case of grant of exemption “to a special class for a limited period on specific conditions” and was not extended to all the producers of those goods, it does not offend the freedom guaranteed by Article 301. Similarly,in the case of Punjab notification, it was held that since the exemption is for certain specified goods and also because “an overwhelmingly large number of local manufacturers of similar goods are subject to sales tax”, it cannot be said that local manufacturers were favoured as
Shree Mahavir Oil Mills v. State of J. & K. 365
against the outside manufacturers. In the course of their judgment, the Bench made certain observations which are strongly relied upon by Shri M.L. Verma, J. The observations are to the effect that while judging whether a particular exemption granted by the State offends Articles 301 and 304, it is necessary to take into account various factors. A State which is technically and economically weak on account of various factors should be allowed to develop economically by granting concessions, exemptions and subsidies to new industries. All parts of the country are not equally developed, industrially and economically. The conceptof economic unity is an ever-changing one; it cannot be imprisoned in a strait-jacket. India is not already an economic unit. Economic unity is possible only when all the units of the country develop equally. The power to grant exemption is inherent in all taxing statutes and the Government cannot be deprived of this power by invoking Articles 301 and 304. The concept of economic barriers must be understood in a dynamic sense. The concept of economic unity or economic barriers must be read along with the power of exemptioninhering in the State Governments. Where every State is exempting or reducing the rates of sales tax, there can be no question of an economic war between them.
“A backward State or a disturbed State 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 (sic or) units of a State so that it may come out of its limping or infancy to compete as equals with others, that, in our opinion, does not and cannot contravene the spirit and the letter of Part XIII of the Constitution. However, this is permissible only if there is a valid reason, that is to say, if there are justifiable and rational reasons for differentiation. If there is none, it will amount to hostile discrimination.”
23. All the above observations were made to justify (1) grant of incentives and subsidies and (2) exemption granted to new industries, of a specified type (small-scale industries commencing production within the two specified dates) and for a short period. They were not meant to nor can they be read as justifying a blanket exemption to all small-scale industries in the State irrespective of their date of establishment. The case before us clearly falls within the ratio of the Constitution Bench decision in A.T.B. Mehtab Majid and the decisions in Indian Cement, W.B. Hosiery Assn. and Weston Electroniks. The limited exception created in Video Electronics does not help the State herein 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. 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. Indeed, it has been the contention of Shri Salve that, on principle, the exception carved out in Video Electronics is unsustainable. For the purpose of this case, it is not necessary for us to say anything about the correctness of Video Electronics. Suffice it to say that the limited exception carved out therein cannot be widened or expanded to cover cases of a different kind. It must be held that the totalexemption granted in favour of small-scale industries in Jammu and Kashmir producingedible oil (there are no large-scale industries in that State producing edible oil) is not sustainable in law.
24. Shri Salve has brought to our notice a recent decision of the Supreme Court of USA in
West Lynn Creamery, Inc. v. Jonathan Healy, Commr. of Massachusetts Deptt. of Food
366 Shree Mahavir Oil Mills v. State of J. & K.
and Agriculture [Cases Nos. 93-141 rendered on 17-6-1994]. The petitioner was a milk dealer licensed to do business in the State of Massachusetts. Most of the milk consumed in that State was imported from other States. In 1992, the Government declared a State of emergency in view of declining trend in the price of raw milk. It found that the cost of production of milk in Massachusetts is higher than the cost of production in other States and that to preserve and protect the milk industry in Massachusetts, it is necessary to take certain measures. Accordingly, an order was issued soon after the declaration of emergency which created the Massachusetts Dairy Equalisation Fund. A levy was imposed upon all the milk sold in the State. At the end of each month, the proceeds of such levy were distributed among the producers of milk in Massachusetts alone. This order was attacked as violative of the Commerce Clause contained in Article 1(8) of the United States Constitution, which reads: “The Congress shall have power – to regulate Commerce with Foreign nations and among the several States, and with the Indian Tribes.” The Court held (with one learned Judge, Scalia, J.,concurring with the conclusion but on a reasoning different from that of the majority) that the order is bad. The majority observed that the “ ‘negative’ aspect of the Commerce Clause prohibits economic protectionism – that is, regulatory measures designed to benefit in-State economic interests by burdening out-of-State competitors Thus, State statutes that clearly
discriminate against inter-State commerce are routinely struck down … unless thediscrimination is demonstrably justified by a valid factor unrelated to economic protectionism.” The Court observed that the avowed purpose and undisputed effect of the order is to enable higher cost Massachusetts dairy farmers to compete with lower cost dairy farmers in other States and that the premium payments are effectively a tax which makes milkproduced out of State more expensive. The Court further observed that a pure subsidy funded out of general revenues ordinarily imposes no burden on inter-State commerce and that it merely assists local business. The impugned order, however, the Court pointed out, was “funded principally from taxes on the sale of milk produced in other States ”. To the same
effect is the decision in Bacchus Imports Ltd. v. Dias [460 US 263 (1984)].
25. Now, what is the ratio of the decisions of this Court so far as clause (a) of Article 304 is concerned? In our opinion, it is this: the States are certainly free to exercise the power to levy taxes on goods imported from other States/Union Territories but this freedom, or power, shall not be so exercised as to bring about a discrimination between the imported goods and the similar goods manufactured or produced in that State. The clause deals only with discrimination by means of taxation; it prohibits it. The prohibition cannot be extended beyond the power of taxation. It means in the immediate context that States are free to encourage and 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. Prohibition is against discriminatory taxation by the States. It matters not how this discrimination is brought about. A limited exception has no doubt been carved out in Video Electronics but, as indicated hereinbefore, that exception cannot be enlarged lest it eat up the main provision. So far as the present case is concerned, it does not fall within the limited exception aforesaid; it falls within the ratio of A.T.B. Mehtab Majid and the other cases following it. It must be held that by exempting unconditionally the edible oil produced within the State of Jammu and
Shree Mahavir Oil Mills v. State of J. & K. 367
Kashmir altogether from sales tax, even if it is for a period of ten years, while subjecting the edible oil produced in other States to sales tax at eight per cent, the State of Jammu and Kashmir has brought about discrimination by taxation prohibited by Article 304(a) of the Constitution.
26. We are unable to see any substance in the objection raised by Shri Verma that not having attacked the exemption notification when the rate of tax was four per cent, the appellants should not be allowed to question the same when the rate of tax has climbed to eight per cent. There can be no question of any acquiescence in matters affecting constitutional rights or limitations. Similarly, the argument that the volume of trade of the appellants has not shown a downward trend in spite of the said exemption is equally immaterial apart from the fact that an explanation is offered therefor by Shri Salve. Yet another contention of Shri Verma that the principle of classification applicable under Article 14 is equally applicable under Articles 301 and 304(a) is of little help to the respondent-State. Article 14 speaks of equality; 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. According to Shri Verma, edible oil produced and sold in the State of Jammu and Kashmirand the edible oil produced in other States and sold in the State of Jammu and Kashmir fall in two different classes and that the said classification is designed to achieve the objective of industrialisation of the State. We find it difficult to appreciate how can the concept ofclassification be read into clause (a) of Article 304 to undo the precise object and purpose underlying the clause. Shri Verma repeatedly stressed that the object underlying the impugnedmeasure is a laudable one and that it seeks to serve and promote the interest of the State of Jammu and Kashmir which is economically and industrially an undeveloped State, besides being a disturbed State. We may agree on this score but then the measures necessary in that behalf have to be taken by the appropriate authority and in the appropriate manner. Part XIII of the Constitution itself contains adequate provisions to remedy such a situation and there is no reason why the necessary measures cannot be taken to protect the edible oil industry in the State in accordance with the provisions of the said Part. Keeping the said aspect in view, we invoke our power under Article 142 of the Constitution and mould the relief to suit the exigencies of the situation.
27. We declare that the exemption granted by Notification No. SRO 93 of 1991 to local manufacturers/producers of edible oil is violative of the provisions contained in Articles 301 and 304(a). At the same time, we direct that: (a) the appellants shall not be entitled to claim any amounts by way of refund or otherwise by virtue of or, as a consequence of, thedeclaration contained herein and (b) that the declaration of invalidity of the impugned notification shall take effect on and from 1-4-1997. Till that date, i.e., up to and inclusive of 31-3-1997, the impugned notification shall continue to be effective and operative. Appeal allowed in the above terms.
