PETITIONER:
STATE OF TAMIL NADU, ETC.
Vs.
RESPONDENT:
SITALAKSHMI MILLS, ETC.
DATE OF JUDGMENT21/12/1973
BENCH:
MATHEW, KUTTYIL KURIEN
BENCH:
MATHEW, KUTTYIL KURIEN
RAY, A.N. (CJ)
KHANNA, HANS RAJ
ALAGIRISWAMI, A.
BHAGWATI, P.N.
CITATION:
1974 AIR 1505 1974 SCR (3) 1
1974 SCC (4) 408
CITATOR INFO :
RF 1975 SC1604 (3)
RF 1988 SC 567 (14)
ACT:
Central Sales Tax Act–S. 8(2)(b)–If violative of arts.
301, 302 and 303(1) of the Constitution.
HEADNOTE:
Clause (b) of s. 8(2) of the Central Sales-tax Act, 1956
enacts that in the case of goods other than declared goods
sold to persons other than registered dealers or government,
sales-tax shall be calculated at the rate of 10 per cent or
at the rate applicable to the sale or purchase of such goods
inside the appropriate State, whichever is higher. Art. 301
provides that, subject to the other provisions of Part XIII,
trade, commerce and intercourse throughout the territory of
India shall be free. Article 302 provides 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. Art. 303 (1) provides that
notwithstanding anything in art. 302 neither Parliament nor
the Legislature of a State shall have power to make any law
giving or authorizing the giving of any preference to one
State over another or making or authorizing 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.
The respondents claimed (i) that they were not liable to be
taxed at the higher rate prescribed in s. 8 (2)(b) of the
Central Sales-tax Act, 1956 on the turnover of their sales
in the course of interstate trade to government on the
ground that s.8(2)(b) is violative of arts. 301 and 303(1)
of the Constitution and, therefore void ; (ii) that there
will be varying rates of tax on interstate sales in
different States depending upon their rates of sales-tax for
intrastate sales and that that will lead to the imposition
of dissimilar tax on the sale of the same or similar
commodities and so the section is violative of art. 303(1).
The High Court allowed the writ petitions.
Allowing the appeals to this Court by the State,
HELD : (1) (a) There is no reason to hold that s. 8(2)(b) is
bad for the reason that it violates art. 301. If prevention
of evasion of tax is a measure in the public interest them
can be no doubt that Parliament is competent to make a
provision for that purpose under art. 302 even if the
provision would impose restrictions on the interstate trade
or commerce. [7 A, D]
(b) It cannot be presumed that because the rate of tax was
10 per cent at the material time on this class of
transactions or the rate fixed by the appropriate State in
respect of intrastate sales, whichever is higher, the
imposition of this rate was not in the public interest. [7
C]
Therefore, in any view of the matter, Parliament was
competent to enact s. 8(2)(b) of the Act.
(2) . There is no merit in the contention that s.8(2)(b) of
the Act offends tile provisions of art. 303(1). In N. K.
Nataraja Mudaliar’s case the court held that the existence
of different rates of tax on the sale of the same or similar
commodity in different States by itself would not be
discriminatory as the flow of trade does not necessarily
depend upon the rates of sales-tax ; it depends upon a
variety of factor such as the source of supply, place of
consumption, existence of trade channels, the rate of
freight, trade facilities, availability of efficient
transport and other facilities for carrying on the trade. (7
F)
State of Madras v. N. K. Nataraja Mudaliar, [1968] 3 S.C.R.
829 followed.
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 2547-2549
of 1969.
2
From the judgment and order dated the 1st March 1968 of the
Madras High Court at Madras in Writ Petition Nos. 84 and
2356 of 1967 and Tax No. 228 of 1964.
CIVIL APPEAL Nos. 105-106 OF 1970.
From ,he Judgment and Order, dated the 1st March, and 1st
April, 1968 of the Madras High_Court in Writ Petition Nos.
983 and 687 of 1967.
S. V. Gupte and A. V. Rangam, for the appellants (in C.A.
Nos. 2457-49/69 and 105 & 106/70)
B. Sen, S. D. Sharma and S. P. Nayar, for respondent No. 2
(in 2547/69 1105 & 106/70) and respondent no. 3 (in 105/70).
C. B. Aggarwala and Saroja Gopalakrishnan, for respondent
no. 1 (in 2547/69 & J,05/70).
N. Natesan, V. Nataraj and D. N. Gupta, for respondent No.
1 (in 106/70).
O.P. Rana, for respondent no. 5 (in 105/70).
The Judgment of the Court was delivered by
MATHEW J.-Before the High Court of Madras, the respondents
claimed that they were not liable to be taxed at the higher
rate prescribed in s. 8(2) (b) of the Central Sales Tax Act,
1956 (hereinafter called the Act on the turnover of their
sales in the course of inter-State trade to government or
unregistered dealers even though they had not obtained ‘C’
or ‘D’ forms, as the case may be, for the reason that s.
8(2)(b) is violative of articles 501 and 303(1) of the
Constitution and was, therefore, bad. The High Court
accepted the claims by a common judgment. These appeals are
preferred against the judgment on the basis of certificates
granted by the High Court and they raise the common
question, name1y, whether s.8(2)(b) or the Act is bad for
the reason that the provisions thereof offend articles 301
and 303(1) of the Constitution.
In Larsen and Toubro Ltd. v. Joint Commercial Tax Officer
(1), the High Court of Madras held that sub-sections (2),
(2A) and (5) of s. 8 of the Act were bad for the reason that
they violated the provisions of articles 301 and 303(1) of
the Constitution This was on the basis that the different
rates of tax and exemptions in the sales tax law of the
various States placed an unequal burden on the sale of same
or similar goods which impeded their free flow and movement
in inter.State trade and commerce. In the appeal preferred
from the decision, this Court set aside the decision of the
High Court (see State of Madras v. N. K. Nataraja Mudaliar
(2)). The question whether s.8 (2) (b) is violative of the
provisions of article 301 or 303(1) was not specifically
considered in either the majority judgment delivered by
Shah, J. or in the concurring judgment of Bachawat, J.
Hegde, J., however, made certain observations in his
judgment that s. 8(2)(b) was enacted to check evasion of
sales tax and the restriction imposed
by it was in the public interest.
(1) 20 S.T.C. 150.
(2) [1968 ] 3 S.C. R. 829.
3
Sales tax has been one of the most important sources of
revenue for the States. The framers of the Constitution
realised that this power of taxation was being exercised by
the States in a manner prejudicial to the free flow of trade
and commerce throughout the country as. each State, relying
upon some ingredient of sale which had a territorial nexus,
levied the tax which led to multiple taxation of interState
sales. This multiple taxation increased the burden on the
consuming public. The Constitution-makers, therefore, while
retaining sales tax as a source of revenue for the States,
imposed restrictions on the taxing power of the States.
Article 286 of the Constitution was one of the articles
enacted for that purpose. As framed, the article sought to
put restraints upon.the legislative power of the States ;
but the language in Which the article and particularly the
Explanation was couched, instead of clarifying the intention
of the Constituent Assembly, only darkened it. The scope of
article 286 was considered by this Court in The State of
Bombay v. United Motors (India) Ltd. (1) in an appeal to
this Court in which the validity of the provisions ,of the
Bombay Sales Tax Act, 1952, was challenged. The majority of
the judges who heard the appeal held that article 286(1)(a)
prohibited taxation of sales or purchases involving inter-
State elements by all States except the State in which the
goods were actually delivered for the purpose of consumption
therein and that the effect of the Explanation thereto was
to convert interstate transactions into intraState
transactions and to remove them from the operation of clause
2. This interpretation of article 286 was not accepted by a
larger Bench of this Court which heard. and decided The
Bengal lmmunity Company Limited v. The State of Bihar and
Others(2). That case held that the ban imposed by article
286 of the Constitution on the taxing powers of the States
were independent and separate and each one of them had to be
got over before a State legislature could impose tax on
transactions of sale or purchase. of goods. The case
further held that the Explanation to article 286(1)(a)
determined by the legal fiction created therein the situs of
the sale in the case of transactions coming within that
category and that once it is determined by the application
of the Explanation that a transaction is outside the State,
it followed that the State, with reference to which the
transaction can thus be predicated to be outside it, can
never tax the transaction. The Constitution was thereafter
amended, Explanation 1 of article 286 was deleted and
clauses (2) and (3) thereto were altered by the amendment.
Simultaneously, item 92A was incorporated in List I of the
Seventh Schedule authorising Parliament to legislate for
levying tax on the sale or purchase of goods other than
newspapers, where such sale or purchase took place in the
course of interstate trade or commerce and item 54 of List
II was amended to exclude taxation of inter-State sales from
the competence of the State legislatures. Article 269,
clause 1(g) was also amended by clause 3 to that article and
after the amendment it reads :
“Parliament may by law formulate principles
for determining when a sale or purchase of
goods takes place in the course of inter-State
trade or commerce”.
(1)[1953] S.C.R. 1069.
(2) [1955] 2 S.C.R. 603.
4
The effect of these amendments made by the
Constitution .(Sixth Amendment) Act, 1956, was to invest the
Parliament with exclusive authority to enact laws imposing
tax on sale or purchase of goods where such sale or purchase
takes place in the course of inter-State trade or commerce,
and the tax collected by the States was to be assigned in
the manner provided by clause (2) of article 269 to the
States within which the tax was leviable.
In exercise of authority conferred upon the Parliament by
article 286 and article 269, clause 3, Parliament enacted
the Central Sales Tax Act (74 of 1956). By Chapter 3 of the
Act, detailed provisions were made for imposing liability to
pay, tax on inter-State sales, for registration of dealers,
fixing rates of tax and for levy and collection of tax and
for imposing penalties for breach of the provisions of the
Act relating to levy and collection of inter-State sales
tax. By s. 5, every dealer was made liable to pay tax on
all sales effected by him in the course of inter-State trade
or commerce. The material part of s. 8 provides :
“8 (1) Every dealer, who in the course of
inter-State trade or trade or commerce-
(a) sells to the Government any goods ; or
(b) sells to a registered dealer other than
the Government goods of the description
referred to in sub-section (3) ;
shall be liable to pay tax under this Act,
which shall be three per cent of his turnover.
(2) The tax payable by any dealer on his
turnover in so far as the turnover or any part
thereof relates to the sale of goods in the
course of inter-State trade or commerce not
falling within sub-section (1)-
(a) in the case of declared goods, shall be
calculated at the rate applicable to the sale
or purchase of such goods inside the
appropriate State ; and
(b) in the case of goods other than declared
goods, shall be calculated at the rate of ten
per cent or at the rate applicable to the sale
or purchase of such goods inside the
appropriate State, whichever is higher;
and for the purpose of making any such
calculation any such dealer shall be deemed to
be a dealer liable to pay tax under the sales
tax law of the appropriate State,
notwithstanding that he, in fact, may not be
so liable under that law.”
Thus, the transactions in goods which were made subject to
tax in the course of inter-State trade or commence fall into
three broad classes : (1) transactions falling within s.8(1)
ie. all sales to Government and sales to a registered dealer
other than the Government of goods referred to in sub-
section (3) of s. 8; (2) transactions falling within s.-
8(2)(a) i.e. sales in respect of declared goods and (3)
tran-
5
sactions falling within s.8(2)(b) i.e. sales (not falling
within (1)) in respect of goods other than declared goods.
Sales of goods in category (1) were declared exigible to a
tax of 3 per cent on the turnover. On sales of declared
goods, tax was to be calculated at the rate applicable to
the sale or purchase of such goods inside the appropriate
State. On turnover of sale of goods not falling within
categories (1) and (2), the rate was ten per cent or the
rate applicable to the sale or purchase of such goods in-
side the appropriate State, whichever was higher.
Article 301 provides
“Subject to the other provisions of this Part
(Part XIII), trade, commerce and intercourse
throughout the territory of India shall be
free”.
The freedom of trade so declared is against the imposition
of barriers or obstructions within the State as well as
inter-State: all restrictions which directly and immediately
affect the movement of trade are declared by article 301 to
be ineffective. In other words, article 301 imposes a
general limitation on all legislative power in order to
secure that trade, commerce and intercourse in the territory
of India shall be free. That general limitation is relaxed
in favour of Parliament by article 302 which provides:
“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”.
In Atiabari Tea Co. Ltd. v. The State of Assam and Others
(1) Gajendragadkar, J. speaking for himself Wanchoo and Das
Gupta, JJ. observed :
We think it would be reasonable and proper to
hold restrictions, freedom from which is
guaranteed by article would be such
restrictions as directly and immediately or
impede the free flow or movement of trade.”
In Automobile Transport (Rajasthan) Ltd. v. The State of
Rajasthan and Others (2), the Court practically agreed with
the view of the majority in Atiabari Tea Co. Ltd.’s case but
added a clarification that a regulatory measure or a measure
imposing a compensatory tax for the using of trading
facilities would not come within the purview of restrictions
contemplated by article 301. Normally, a tax on sale of
goods does not directly interfere with the free flow or
movement of trade. But a tax can be such that because of
its rate or other features, it might operate to impede the
free movement of goods. The majority judgment delivered by
Shah, J. in State of Madras v. N. K. Nataraja Mudaliar
(supra) proceeds on the basis that tax under the Central
Sales
(1) [1961] 1 S.C.R. 809.
(2) [1963] Supp. 2 S.C.R. 435.
6
Tax Act is in its essence a tax which encumbers movement of
trade and commerce, ‘but the tax imposed in the case in
question was saved .by the other provisions of Part XIII.
The Court then said that the exercise of the power to tax
would normally be presumed to be in the public interest and
as Parliament is competent under article 302 to impose
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, the tax was saved.
Bachawat , J. in his judgment in the case said that if a tax
on intraState sales does not offend article 301, logically,
a tax on inter-State sales also cannot do so, that a tax
does not operate directly or immediately on the free flow of
trade or the free movement or transport of goods from one
part of the country to the other, that the tax is on sale,
and that the movement is incidental and a consequence of the
sale. He observed further that even assuming that the
Central Sales Tax is within the mischief of article 301, it
is certainly a law made by Parliament in the public interest
and is saved by article 302.
As already stated, s. 8(2) (b) deals with sale of goods
other than declared goods and it is confined to inter-State
sale of goods to persons other than registered dealers or
governments. The rate of tax prescribed is ten 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 enacting 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 State will then
find them-selves 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”
In other words, it was to discourage inter-State sale to
unregistered dealers that Parliament provided a high rate of
tax, namely 10 percent. But even that might not serve the
purpose if the rate applicable to intrastate of such goods
was more than 10 percent. The rate of 10 percent would then
be favourable and they would be at an advantage compared to
local consumers. It is because of this that Parliament
provided, as a matter of legislative policy that the rate of
tax shall be 10 percent or the rate applicable to intra-
State sales whichever is higher.
(1) see Report of the Taxation Enquiry Commission, 1953-54,
Vol. 3, p. 57.
7
If prevention of evasion 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.
But quite apart from this, the majority judgment in State Of
Madras v. N.K.Natraja Mudaliar (supra) has categorically
stated that “the exercise of the power to tax may normally
be presumed to be in the public interest”. We do not think
it necessary to go into the question whether it is open to
the Court to conduct an enquiry whether the levy of a tax is
them imposition of a restriction on the freedom of trade and
commerce in the public interest. It cannot be presumed,
because the rate of tax was 10 percent at the material time
on this class of transaction or them rate fixed by the
appropriate State in respect of intrastate sales, whichever
was higher, the imposition of this rate was not in the
public interest Therefore, in any view of the matter.
Parliament was competent to, enact s. 8(2) (b) of the Act.
In other words, even if it be assumed that the tax at the
higher rate imposed under s.8(2) (b) places restrictions, on
the freedom of trade and commerce throughout the territory
of India, as Parliament is competent to impose restrictions
on that freedom in the public interest and as the imposition
of a tax is normally to be presumed in the public interest,
we see no reason to hold that s. 8(2) (b) is bad for the
reason that it violates article 301.
As regards the contention that s.8(2) (b) is violative of
article 303(1) in that there will be varying rates of tax on
inter-State sales in different States depending upon their
rates of sales tax for intra-State sales and that that will
lead to the imposition of dissimilar tax on them sale of
same or similar commodities, it is enough to state that
this, question has been considered by this Court in State of
Madras A,. N. K. Nataraja Mudaliar (supra) and the Court
has rejected the contention. The Court said that the
existence of different rates of tax on the sale of the same
or similar commodity in different States by itself would not
be discriminatory as the flow of trade does not necessarily
depend upon the rates of sales tax; it depends, according to
the Court, 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 the
trade. The Court referred to the observations of Isaacs, J.
in King v. Barger (1) and said :
“ The Central Sales tax though levied for
and collected in the name of the Central
Government is a part of the sales-tax levy
imposed for the benefit of the States. By
leaving it to the States to levy sales-tax in
respect of a commodity on intraState
transactions no discrimination is practised;
and by authorising the State from which the
movement of goods commences to levy on
transactions of sale Central sales-tax, at
rates prevailing in the State, subject to the
limitation already set out, in our judgment,
no discrimination can be deemed to be
practised.”
(1) (1908) 6 C. L. R. 41, at 108.
8
We think there is no merit in the contention that s.8(2) (b)
of the Act offends the provision of article 303(1).
We, therefore, set aside the decision of the High Court and
hold that s. 8(2) (b) does not offend articles 301 and 303
and is valid.
Civil Appeals No. 2547-2549 of 1969 are allowed with costs.
In Civil Appeals No. 105-106 of 1970, the respondents
submitted that they have raised other contentions before the
High Court and that those contentions were not considered by
the High Court and will have now to be considered by it. We
allow these appeals with costs and remit the cases to the
High Court for consideration of the other questions raised.
One hearing fee.
P.D.R
Appeals allotted.
9