Supreme Court of India

SHREE MAHAVIR OIL MILLS AND ANR.versusSTATE OF JAMMU AND KASHMIR AND ORS.

Citation: 1996 INSC 1412
Decided: 29 November 1996
Disposal: Appeal(s) allowed
Bench: B P JEEVAN REDDY

Holding

A blanket exemption of local edible‑oil manufacturers from sales tax, while taxing identical out‑of‑state goods, is unconstitutional as it amounts to discriminatory taxation prohibited by Articles 301 and 304(a).

Summary

The State of Jammu & Kashmir exempted all local edible‑oil manufacturers from sales tax for ten years, while out‑of‑state manufacturers were required to pay an 8% tax. Shree Mahavir Oil Mills and other out‑of‑state producers challenged the exemption as a violation of Articles 301 and 304(a) of the Constitution, which guarantee free trade and prohibit discriminatory taxation. The High Court dismissed the writ petition, relying on the Video Electronics case, and the appellants appealed to the Supreme Court. The Supreme Court held that the blanket exemption created a tax barrier that discriminated against imported goods and therefore contravened Articles 301 and 304(a). It rejected the State's argument that the exemption was a permissible classification or that prior acquiescence barred the challenge. The Court declared the exemption invalid, but allowed it to remain in force until 31 March 1997 and denied any refund claim. The appeal was allowed.

Issues considered

Whether a total sales‑tax exemption for local edible‑oil manufacturers, while imposing tax on identical out‑of‑state goods, violates Articles 301 and 304(a) of the Constitution.
Whether the classification under Article 14 can justify the differential tax treatment.
Whether the limited exception carved out in Video Electronics Pvt. Ltd. v. State of Punjab applies to the present case.
Whether the appellants' failure to challenge the exemption when the tax rate was 4% bars them from challenging it after the rate was raised to 8%.

Legislation cited

Jammu & Kashmir Sales Tax Act, 1962s. 5

Subjects

Article 301Article 304(a)discriminatory taxationfreedom of tradesales tax exemptionstate taxationconstitutional lawinterstate commerceclassificationVideo Electronics exceptionJammu & Kashmiredible oil industry

Judgment

A SHREE MAHAVIR OIL MILLS AND ANR.
v.
STATE OF JAMMU AND KASHMIR AND ORS.

NOVEMBER 29, 1996
B
[~P. JEE.VAN REDDY AND S.C. SEN, JJ.]

Constitution of India, 1951>-Part XIII, Articles 301 & 304 (aT-f'ree
movement of Trade-Discriminatory taxation-Between imported goods from
C other states and similar goods manufactured within the stat,,_P/ea that it is
in order to promote th'e growth of industries within state-field, Article 304
(a) deals with prohibition of discrimination by means of taxation and not
beyond it-17ierefore states are free to promote the establishment and growth
of industries within their states only by appropriate authority and in ap~
propriate mannel'-/3ut in that process, it cannot bring about discrimination
D by means of taxation.

Articles 14, 301 & 304 (a}-Principle of Classification-Whether ap-
plicable to Article 301 & 304 (a}-ffeld, the concept of classification.cannot
be read into clause (a) of Article 304 to undo the precise object and purpose
underlying the clause.
E
Article 301 & 304 (aHnterT'elation between-Article 304 (a) is not an
exception to Article 301, but a restatement of a fact of the very freedom
guarallteed by Article 301. •

F ,, - Article 304 (a rPurpose of-The idea b~hind the Article was not really
to empower the State legislature to levy tax on imported goods, but to prohibit
the State from creating tax baniers.

The· State of Jammu & Kashmir, with a view to protect edible oil
industry of the State, exempted the manufacturers totally from levy of sales
G tax for a period of 5 years which was further extended by 5 years, while the
out State industries were to pay the tax at the rate of 4%. Further the rate
of tax was raised to 8% against which the out State manufactures including
the appellant filed writ petition before High Court, which was dismissed.
The writ appeal against the judgment of Single Judge was also dismissed
H relying in Video Electronics case.
356
SHREEMAHAVIROILMILLSv. STATE 357
'
In appeal to this Court, the appellant contended that the order of A
the Government exempting edible oil industries unconditionally, amounts
to discriminating against outside manufacturers, which is prohibited by
Article 301 & 304 of the Constitution, and that Part XIII of the Constitu-
tion prohibits raising fiscal barriers and such barriers are bound to
interfere with free movement of trade and commerce. The State Govern-
B
ment contended that the exemption was justified as it was in order to
protect the local manufacturers. The appellant cannot be allowed to ques-
tion exemption when the rate of tax was raised to 8%, as they bad not
attacked the exemption when the rate of tax was 4%; that the exemption
had really not hurt the appellant as the volume of their turnover continues
to rise despite the exemption; that the principle of classification under C
Article 14 is equally applicable under Article 301 and 304 (a). [376-B]

Allowing the appeal, this Court

HELD : 1.1. The exemption granted to local manufac-
turers/producers of edible oil is violative of the provisions contained in D
Articles 301 and 304 (a). [376-A-Bl

1.2. That by exempting unconditionally the edible oil produced within
the State of Jammu and Kashmir altogether from Sales tax, even if it is
for period of 10 years, while subjecting the edible oil produced in other E
State of Sales tax at eight percent, the State of Jammu and Kashmir has
brought about discrimination by taxation prohibited by Article 304 (a) of
the Constitution. [375-A-B]

1.3. The States are certainly free to exercise the power to levy taxes
on goods imported from other States/Union territories but this freedom, or F
power, shall not be exercised as to bring about a discrimination between
the imported goods and the similar goods manufactured or produced in
that State. Clause (a) of Article 304 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 G
means 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-a-vis
similar goods manufactured/produced within that State and sold within
that State. Prohibition is against discriminatory taxation by the States. It H
358 SUPREME COURT REPORTS [1996] SUPP. 9 S.C.R.
A matters not how this discrimination is brought about. A limited exception
cannot be enlarged lest it eat up the main provision. So far as the present '
I<
case is concerned, it does not fall within the limited exception. [374-E-H]

A. T.B. Mehtab Majid & Co. v. State of Madras, [1963] Suppl. 2 SCR
435; India Cement & Ors. v. State of Andhra Pradesh & Ors., [1988] 1 SCC
B 743; West Bengal Hosiery Association v. State of Bihar, [1988] 4 SCC 134
and Weston Electronics v. State of Gujrat, [1988] 2 SCC 568, relied on.

Videa Electronics Pvt. Ltd. v. State of Punjab, [1990] 3 SCC 87,
distinguished.

c Atiabari Tea Company Ltd. v. State of Assam, [1961] 1 SCR 809;
Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan, [1963] 1 SCR
491; State of Madras v. N.K Nataraja Mudaliar, [1968] 3 SCR 829; State of
Tamil Nadu v. Sita Laxmi Mills, [1974] 3SCR1 andH. Anraj v. Government
of Tamil Nadu, [1985] Suppl. 3 SCR 342, referred to.
D
West Lynn Creamery Inc. v. Jonathan Healy, Commissioner of Mas-
sachusetts Department of Food and Agriculture, Bacchus Imports Limited v.
Dias, (1984) 460 U.S. 263, referred to.

1.4. The concept of classification cannot be read into clause (a) of
E Article 304 to undo the precise object and purpose underlying the clause.
It is agreed that the object underlying the impugned measure 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 undeveloped
State, besides being a disturbed State, but the measures necessary in that
behalf have to be taken by the appropriate authority and in the ap-
F propriate 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. [375-F-H]

G 1.5. 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 a fact of the very freedom guaranteed by Article 301, viz,
power of taxation by the States; [365-B-C]

1.6. The idea behind Article 304 (a) was not really to empower the
H State Legislature to levy taxation on imported goods from other states and
SHREEMAHAVIROILM!LlSv.STATE[B.P.JEEVANREDDY,J.] 359

Union territories - that they are already empowered by other provisions in A
the Constitntion - but to declare that power shall not be exercised as to
discriminate against the imported goods vis-a-vis locally manufactured
goods. The clause though worked in positive language has a negative aspect.
It is, in truth, a provisio prohibiting discrimination against the imported
goods. The clause bars the States from creating tax barriers - or fiscal
barriers around themselves and/or insulate themselves from the remaining
B
territories oflndia by erecting such 'tariff walls'. [364-E-F; 365-A-C]

1.7. With regard to the contention that the appellants cannot be
allowed to question the exemption when the rate of tax was raised. to 8%
not having challenged the exemption, when the rate of tax was 4%, there C
can be no question of any acquiescence in matters affecting constitutional
rights or limitations. [375-C]

1.8. The Contention that the trade of the appellant has not shown
downward trend insptie of the exemption, is immaterial. (375-D]
D
s:rvrL APPELLATE JURISDICTION: Civil Appeal No. 14996 of
1996.

From the Judgment and Order dated 1.9.95 of the Jammu & Kashmir
High Court in L.P.A.No.234 of 1994.
E
Harish N. Salve, Ms. Bina Gupta, Alok Agarwal, Ramesh Singh and
Ms. Rakhi Verma for the Appellants.

M.L. Verma, J.S. Manhas and Pawan Kumar for State.

The Judgment of ~lie Court was delivered by F
B.P. JEEVAN REDDY, J. Leave granted.

The State of Janunu & 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 G
production of edible oil in Jammu & 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 & 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; H
360 SUPREME COURT REPORTS (1996] SUPP. 9 S.C.R.

A at any rate, they were not able to compete with the out-State manufac-
turers. 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 & Kashmir High Court
dismissing the writ petition, they have approached this Court.
B
The Jammu & Kashmir Sales Tax Act contains four Schedules. Each
of the Schedules carries a particular rate of sales tax. Edible oils were
previously included in Schedule-D which prescribes the rate of tax at four
percent. On December 20, 1993, edible oils were shifted from Schedule-D
C to Schedule-C, which prescribes the rate of tax at eight percent. (It is stated
that S.R.0.213 of 1993 issued on December 3, 1993 shilling edible oils from
Schedule-D to Schedule-C was rescinded within about a week thereafter
but was re-issued as S.R.0.124 of 1994 on May 27, 1994).

With a view to protect the local edible oil industry, the Government
D of Jammu & Kashmir issued S.R.0.93 of 1991 on March 7, 1991 under
Section 5 of the Jammu & Kashmir 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
E 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 J ammu & Kashmir Govermnent. (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. Sub-
F sequently, 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.

The result of the orders aforementioned was that while until Decem-
G ber, 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 J ammu
& Kashmir at the rate of four percent, the local manufacturers were totally
exempted therefrom. In December, 1993/May, 1994, the rate of tax was
raised from four percent to eight percent, as stated above. With the raising
H of the rate of sales tax to eight percent, the outside manufacturers were
SHREEMAHAVIROILMILLSv.STATE[B.P.JEEVANREDDY,J.] 361

obliged to pay at eight percent while the local manufacturers were exempt A
fully. It is then that some of the outside manufacturers including the
appellants herein, approached the Jammu & 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 dis-
missed by the Division Bench relying mainly upon the decision of this Court B
in Video Electronics Private Limited, (1990] 3 SCC 87.

Sri 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 & Kashmir ex-
empting all the edible oil industries in the State from payment of sales tax C
unconditionally amounts to discriminating against the out-State manufac-
turers 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 D
India. Raising of protective walls may be justified in international trade.
The Government of India can and has been providing several such protec-
tionist measures all these years to encourage the growth and establishment
of industries in the country and to protect them from competition from
foreign manufacturers. But similar measure cannot be provided by the
State governments internally, i.e., within the country. The Parliament can, E
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 several F
decisions rendered by this Court under Part-XIII in support of his sub-
missions.

On the other hand, Sri M. L. Verma, learned counsel for the State
of Jammu & Kashmir, placed strong reliance upon the ratio and upon
certain observation made in Video Electronics. Notwithstanding certain G
minor differences, learned counsel submitted, the principle of the said
decision clearly applies to the facts of this case. Sri Verma submitted that
when the rate of tax was four percent and the exemption in favour of local
manufacturers was operating, the appellants never protested. Only when
the rate of tax was raised from four to eight percent, with the exemption H
362 SUPREME COURT REPORTS (1996] SUPP. 9 S.C.R.

A in favour of local manufacturers continuing, the appellants came forward
with writ petitions. If they were not aggrieved when the rate was four
percent, they cannot equally be aggrieved merely because the rate is raised
to eight percent. Counsel brought to our notice certain figures relating to
turn-over of the appellants within the State of Jammu & Kashmir and
B emphasised that the impugned measure has not really hurt the appellants'
business and that the volume of their turn-over continues to rise not-
withstanding the impugned measure. The submission is that the appellants
can have no real or genuine grievance in the matter. Coupled with this, Sri
Verma submitted, is the need for protecting the local manufacturers.
Because of the peculiar economic conditions prevailing in the State, the
C cost of production of the local manufactures is substantially higher 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, Sri Verma submitted, it was not possible for the local
manufacturers to survive in the market. They would have been eliminated
D 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,
Sri 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
E 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.

Article 301 declares that "subject to the other provisions of this Part.
F trade, commerce and intercourse throughout the territory of India shall be
free". 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". The power conferred upon the Parliament by Article 302 is,
G however, qualified by a rider provided in clause (1) of Article 303 which
says that the power conferred upon the Parliament by Article 302 shall not,
however, empower the Parliament - or the legislature of a States - "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
H between one State or another, by virtue of any entry relating to trade and
SHREEMAHAVIROILMILLSv.STATE[B.P.JEEVANREDDY,J.] 363

commerce in any of the Lists in the Seventh Schedule".• Clause (2) of A
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 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 cio so for
the purpose of dealing with a situation arising from scarcity of goods in any
B
part of the territory of India". 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 also referred 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 c
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". The wording of this
clause is of crucial significance. The first half of the clause would make it D
appear at first flush that it merely states the obvious: one may indeed say
that the power to 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 under lying the clause, if one
reads it in its entirely. The idea was not really to empower the State E
legislatures to levy tax on goods imported from other States and Union
territories - that they are already empowered by other provisions in the
Constitution - but to declare that power shall not be so exercised as to
discriminate 'against the imported goods vis-a-vis locally manufactured
goods. The clause, though worded in positive language has a negative F
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
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 affim1atively-in the interest of removing any doubt-that even
a legislature of a State shall not have the power to n1ake any law giving or authorising G
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 entiy relating to
trade and con1merce 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. H
364 SUPREME COURT REPORTS (1996] SUPP. 9 S.C.R.

A in mind - the clause tells the State Legislatures - 'tax you may the goods
imported from other States/Union Territories but do not, in that process,
discriminate against them vis-a-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
B "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
C against the imported goods vis-a-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 them-
selves from the remaining territories of India by erecting such 'tariff walls'.
Part-XITI is premised upon the assumption that so long as a State taxes its
D residents and the residents of other States uniformly, there is no infringe-
ment 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,
E 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
F 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 the Parliament by
Article 302, there are certain distinctions. Firstly, while Article 302 does
not use the expression 11 reasonablen before the word 11restrictions, 11 this
G 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
H reasonable restrictions, as the case may be, on the freedom of trade,
SHREEMAHAVIROILMILLSv.STATE[B.P.JEEVANREDDY,J.] 365

commerce and intercourse. The freedom guaranteed, it is worthy of notice, A
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 to that
rule, as stated above, to meet certain emerging situations. A a matter of
fact, it can well be said that clause (a) of Article 304 is not really an B
exception to Article 301, notwithstanding the non-obstante clause in Article
304 and that it is but a re-statement of facet of the very freedom guaranteed
by Article 301, viz., power of taxation by the States. (y>le need not refer to
the other articles in Part-XIII for the purposes of this case).

Having noticed the scheme of Part-XIII, we may now turn to decided C
cases to see how these articles have been understood over the last fifty
years.

",The first decision to be noticed is, of course, inAtiabari Tea Co. Ltd.
v. State of Assam [1961] l SCR 809. The legislature of Assam enacted the D
Assam taxation (on goods carried by Roads or Inland Waterways) Act,
1954 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 E
Das Gupta, JJ.] stated their conclusion in the following words :

"Our conclusion, therefore, is that when Art. 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 restric- F
tion 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 any Act imposes any direct restrictions
on the very movement of such goods it attracts the provisions of Alt.
30I, and its validity can be sustained only if it satisfies the require- G
ments of Art. 302 or Art. 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 H
366 SUPREME COURT REPORTS [1996] SUPP. 9 S.C.R.

A State Legislatures only after satisfying the requirements of Art.
304(b). It is not as if no restrictions at all can be imposed on the
free movement of trade."
-
It was also held ;

B "Thus considered we think it would be reasonable and proper to
hold that restrictions freedom from which is guarllllteed by Act. 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
c Art. 301.. ... we are, therefore, satisfied that in determining the limits
of the width and amplitude of the freedom guaranteed by Art. 301
a rational and workable test to apply would be : Does the impugned
restriction operate directly or immediately on trade or its move-
ment?"
D
In Automobile Transport Rajasthan v. State of Rajasthan [1963]1 SCR
491 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.
E Violation of the provision invited penalties provided under Section 11.
Certain operators challenged the Act as violative of Articles 301 and
304(b). Since serious doubts were expressed with respect to the proposi-
tions 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
F Rao, J. ], this Court 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. The propositions
emerging from the opinion of Das, J. have been neatly summarised in the
G head-note of the Supreme Court Reports in the following words :

"(1) The concept of freedom of trade, commerce and intercourse
postulated by Art. 301 must be understood in the context o f an
ordinary society and as part of a Constitution which envisaged a
distribution of powers between the States and the Union, and if
H so understood, the concept must recognise the need and legitimacy
SHREEMAHAVIROILMILLSv.STATE(B.P.JEEVANREDDY,J.] 367

of some degree of regulatory control, whether by the Union or A
the States. Regulatory measures or measures imposing compen-
satory taxes for the use of trading facilities did not hamper trade,
commerce and intercourse but rather facilitated them and, there-
fore, were not hit by the freedom declared by Act. 301; such
measures need not comply with the requirements of the provisions
B
of Act. 304(b) of the Constitution.

(2) In view of the provisions of Art. 245, the restrictions in Part
XIII of the Constitution applied to taxation laws; and such laws
were not confined only to legislation with respect to entries relating
to trade and commerce in any of the lists in the Seventh Schedule. C
(3) On a proper construction of the Act and the Schedule, the
taxes imposed were really taxes for the use of the roads in Rajas-
than. In basing the taxes on passenger capacity loading capacity,
the legislature had merely evolved a method and measure of
compensation demanded by the State, but the taxes were still D
compensation and charge for regulation."

Subba Rao, J. concurred with the above propositions though the
learned Judge stated the prnposition flowing from the opinion at Pages
564-565 separately. The majority opined that "the interpretation which was E
accepted by the majority in the Atiabari Tea Co. case is correct, but subject
to this clarification. Regulatory measures or measures imposing compen-
satory taxes for the use of trading facilities do not come within the purview of
the restriction contemplated by Art. 301 and such measures need not comply
with the requirements of the proviso to Art. 304(b) of the Constitution."
F
(Emphasis supplied)

FirmA. T.B. Mehtab Majid & Co. v. State of Madras, [1963] Suppl. (2)
SCR 435; arose under the Madras General Sales Tax Act. 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 G
subject to a higher rate of tax than the tax imposed on hides or skins tanned
and sold within the 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 H
368 SUPREME COURT REPORTS [1996) SUPP. 9 S.C.R.
A was attacked 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 trucing laws can be restrictions
on trade, commerce and intercourse, if they hamper the flow of
B trade and if they are· not what can be termed to be compensatory
taxes or regulatory measures. Sales tax, of the kind under con-
sideration here, cannot be said to be a measure regulating anf
trade or a compensatory tax levied for the use of trading facilities.
Sales tax, which has the effect of discriminating between goods of
c one State and goods of another, may affect the free flow of trade
and it will then offend against Art. 301 and will be valid only if it
comes within the terms of Art. 304(a).

Article 304(a) enables the Legislature of a State to make laws
affecting trade, commerce and intercourse. It enables the imposi-
D
tion of taxes on goods from other States if similar goods in the
State are subjected to similiar 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
E outside is that the latter becomes subject to a higher tax by the
application of the proviso to sub-rnle of r. 16 of the Rules, then the
tax is discriminatory f'nd unconstitutional and must be strnck down."

State of Madras v. N.K Nataraja Mudaliar, [1968) 3 SCR 829; con-
F sidered the validity of sub-section (2), 2(A) and (5) of Section 8 of the
Central Sales Tax Act. 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 was saved by Article 302. The levy of different rates by sub-
G section (2A) was justifies 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.
H Article 304(a), it is significant to note, was said to have no application for
SHREEMAHAVIROILMILLSv.STATE(B.P.JEEVANREDDY,J.] 369

the reason that it was not a case where tax was imposed on imported goods A
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 & 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 B
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 be purchased from C
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 carrying
that commodity over a long distance, the merchant would be willing
to purchase the goods from a nearer State, even though the rate D
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 E
pa1ticular State the rate of tax on sales is higlier than the rates
prevailing in other States."

(Emphasis added)

It is significant to notice that these observations were made in the F
context of the argument that different rates of Central sales tax in different
States on sale of similiar 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 G
observations help the State.

Hedge, J. concurred with Shah, J.

State of Tamil Nadu v. Sita Lakshmi Mills, (1974) 3 SCR 1; holds that
Section 8(2) of the Central Sales Tax Act is not violative of Articles 301, H
370 SUPREME COURT REPORTS (1996) SUPP. 9 S.C.R.

A 302 and 303.

H. Anraj v. Government of Tamil Nadu, (1985] Suppl. 3 SCR 342, 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
B 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
C 304(a). It was held that the direct and immediate result of the notification
was to impose an unfavourable and discriminatory tax.

India Cement & 01~. v. State ofAndhra Pradesh & Ors. (1988] 1 S.C.C.
743, is also a decision of two learned Judges. The Government of Andhra
D Pradesh had issued two notifications, one under Section 9(1) of the State
Sales Tax Act and the other under Section 8(5) of the Central Sales Tax
Act. Under the first notification, sales tax on sale of "cement n1anufactur~<l
by cement factories situated in the State and sold to the manufacturing
units situated within the State for the purpose of...." was reduced from
13.5% to 4%. Under the second notification, the Central sales tax was
E reduced to two percent. 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
restriction" contemplated by Article 304(b) can be imposed by a law made
F by 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
G 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 er unfavourable treatment by way

This ground appears to be of doubtful validity as pointed out by a Three-Judge-Bench
H in Vuieo Electronics v. State of Punjab, [1990] 3 S.C.C. 87.
SHREEMAHAVIROILMILLSv.STATE[B.P.JEEVANREDDY,J.] 371

of taxation, the course of flow of trade gets regulated either A
adversely or favaourably. 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 fafsighted observations of Gajendragadkar, J. in
Atiabaii Tea Co. case and the observations then made obviously
B
apply to cases to the type which is now before us."

The facts in Weston Electronics 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 percent whether the goods were
manufactured within the State of Gujarat and sold or imported from C
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 dis-
criminatory and offensive to Articles 301 and 304.

D
In West Bengal Hosiery Association v. State of Bi/tar, (1988] 4 S.C.C.
134, the facts are practically similar to those in Weston Electronics ils also
the conclusion.

Video Electronics (P) Ltd. v. State of Punjab, [1990] 3 SCC 87,
inasmuch as strong and almost exclusive reliance is placed by the learned E
counsel for the State of Jammu & Kashmir of 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 F
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 G
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 \he normal U 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, CJ, Ranganathan and Verma, JJ. upheld both the notifications. H
372 SUPREME COURT REPORTS (1996] SUPP. 9 S.C.R.
A So far as the Uttar Pradesh notification 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 condition" 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 ootification, it was held that
since the exemption is for certain specified goods and also because "an
B overwhelmingly large number of local manufacturers of similar goods are
subject to sales tax", it cannot be said that local manufacturers were
favoured as 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
C judging whether a particular exemption granted by the State offends Ar-
ticles 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 subsides to new industries. All parts of the country are not
D equally developed, industrially and economically. The concept of 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
E barriers must be understood in a dynamic sense. The concept of economic
unity or economic barriers must be read along with the power of exemption
inhering 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
p parity engage in competition with advanced or developed States. Even
witliin 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
G 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 national
reasons for differentiation. If there is none, it will amount to hostile
discrimination.11

H All the above observations were made to justify (1) grant of incen-
SHREEMAHAVIROILMILLSv.STATE[B.P.JEEVANREDDY,J.] 373

tives and subsidies and (2) exemption granted to new industries, of a 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 States irrespective of their date of es.tablishment. The case
before us clearly falls within the ratio of the Constitution Bench decision B
. in A. T.M. Mehtab Majid and the decision in India Cement, West Bengal
Hosie1y Association and Weston Electronics. The limited exception created
in Video Electronics does not help the State herein for the reason that
1
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 C
exception created in the said judgment, by stages, which would have the
effect of robbing the salutary principle underlying Part-XIII of its sub-
stance. Indeed, it bas been the contention of Sri 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 D
correctness of Video Electronics. Suffice it to say that th\' limited exception
carved ant therein cannot be widened or expanded to cover cases of a
different kind. It must be held that the total exemption granted in favour
or small scale industries in Jammu & Kashmir producing edible oil (there
are no large scale industries in that State producing edible oil) is not
sustainable in law. E

Sri Salve has brought to our notice a recent decision of the Supreme
Court of U.S.A. in West Lynn Creamery. Inc. v. Jonathan Healy. Commis-
sioner of Massachusetts Department of Food and Agriculture - judgment
rendered on June 17, 1994 in Case No. 93-141. The petitioner was a Milk F
dealer licenced 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 G
to take certain measure. Accordingly, an order was issued soon after the
declaration of emergency which created the Massachusetts Dairy Equaliza-
tion 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 H
374 SUPREME COUKT REPORTS [1996) SUPP. 9 S.C.R.
A States Constitution, which reads : "The Congress shall have power - to
regulate Commefce 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 Clauses prohibits economic protec-
B tionism-that is, regulatory measures designed to benefit in-state economic
interests by burdening out-of-state competitors .... Thus, 'state 'statutes that
clearly discriminate against interstate commerce are routinely struck
·down.... unless the discrimination 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
.C Massachusetts Dairy Farmers to compete with lower cost dairy farmers in
other States and that the premium payments are effectively a tax which
makes milk produced out of state more expensive. The Court further
observed that a pure subsidy funded out of general revenues ordinarily
imposes no burden on inter- States commerce and that it merely assists
D 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 Limited
v. Dias, [1984] 460 U.S. 263.

Now, what is the ratio of the decisions of this Court so far as clause
E (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
F
prohibition canoot 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 canoot, in that process, subject the goods
imported from other States to a discriminatory rate of taxation, i.e., a
G higher rate' of sales tax vis-a-vis similar goods manufactured/produced .
within that State and sold within that State. Prohibition is against dis-
criminatory 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 en-
H larged lest it eat up the main provision. So far as the present case is
SHREEMAHAVIROILMILLSv.STATE(B.P.JEEVANREDDY,J.] 375

concerned, it does not fall within the limited exception aforesaid; it falls A
within the ratio of A. T.M. Melttab Majid and the other cases following it.
It must be held that by exempting unconditionally the edible oil produced
within the State of Jammu & 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 percent, the State of Jammu & Kashmir B
has brought about discrimination by taxation prohibited by Article 304(a)
of the Constitution.

We are unable to see any substance in the objection raised by Sri
Verma that not having attacked the exemption notification when the rate
of tax was four percent, the appellants should not be allowed to question c
the same when the rate of tax has climbed to eight percent. There can be
no question of any acquiscence in matters affecting constitutional rights or
limitations. Simiiarly, the argument that the volume of trade of the appel-
lants has not shown a downward trend inspite of the said exemption is
equally immaterial apart from the fact that an explanation is offered D
therefor by Sri Salve. Yet another contention of Sri 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 Sri Verma, edible oil E
produced and sold in the State of Jammu & Kashmir and the edible oil
produced in other States and sold in the State of Jamrnu & Kashmir fall
in two different classes and that the said classification is designed to
achieve the objective of industrialisation of the State. We fmd it difficult
to appreciate how can the concept of classification cannot be read into F
clause (a) of Article 304 to undo the precise object and purpose underlying
the clause. Sri Verma repeatedly stressed that the object underlying the
impugned measure is a laudable one and that it seeks to serve and promote
the interest of the State of Jammu & 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 G
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 H
376 SUPREME COURT REPORTS [1996] SUPP. 9 S.C.R.
A our power under Article 142 of the Constitution and mould the relief to
snit the exigencies of the situation.

We declare that the exemption granted by Notification No. S.R.O.
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
B direct that : (a) the appellant shall not be entitled to claim any amounts by
way of refund or otherwise by virtue of or, as a consequence of, the
declaration contained herein and (b) that the declaration of invalidity of
the impugned notification shall take effect on and from April 1, 1997. Till
that,.date, i.e., upto and inclusive of 31st March, 1997, the impugned
C notification shall continue to be effective and operative. Appeal allowed in
the above terms.

There shall be no order as to costs.

K.K.T. Appeal allowed.

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