Supreme Court of India

SHRI DIGVIJAY CEMENT CO. ETC.versusSTATE OF RAJASTHAN AND ORS. ETC.

Citation: 1997 INSC 305
Decided: 21 March 1997
Disposal: Leave Granted & Allowed
Bench: A M AHMADI

Holding

The notifications issued by the State of Rajasthan under Section 8(5) of the Central Sales Tax Act were illegal, void and quashed.

Summary

The appellants, Gujarat cement manufacturers, challenged three Rajasthan notifications that reduced the Central Sales Tax on inter‑state cement sales to 7% and later 4% and dispensed with the mandatory Form C declaration. They argued that the notifications were not issued in public interest, violated Articles 301, 302, 303 and 304 of the Constitution by giving preference to Rajasthan cement and discriminating against Gujarat cement, and facilitated tax evasion. The Supreme Court held that the State had failed to demonstrate that the measures were necessary in public interest and that the reduction of tax rates and removal of the Form C requirement directly impeded the free flow of trade and encouraged evasion, thereby breaching constitutional provisions. Consequently, the notifications were declared void and quashed. The Court allowed the appeals.

Issues considered

The validity of the Rajasthan notifications issued under Section 8(5) of the Central Sales Tax Act, 1956 on the ground that they were not issued in public interest.
Whether the notifications, by reducing CST rates and dispensing with Form C, violated Articles 301, 302, 303 and 304 of the Constitution by giving preference to Rajasthan cement and discriminating against Gujarat cement.
Whether the removal of the Form C declaration facilitated tax evasion, contravening the scheme of Chapter XIII of the Constitution.
Whether the High Court erred in dismissing the writ petitions on the basis of insufficient evidence.

Legislation cited

Central Sales Tax Act, 1956s. Section 5, s. Section 8(4), s. Section 8(5)
Constitution of Indias. Article 301, s. Article 302, s. Article 303, s. Article 304
Rajasthan Sales Tax Rules, 1955s. Rule 62(c)

Subjects

Central Sales TaxPublic interestDiscriminationFree tradeInter‑state commerceTax evasionConstitutional lawArticles 301‑304CST ActForm CCement industry

Judgment

A SHRI DIGVIJAY CEMENT .CO. ETC.
v.
STATE OF RAJASTHAN AND ORS. ETC.

MARCH Ll, 1997

B [A. M. AHMADI, 0. AND G.T. NANAVATI AND
S.P. KURDUKAR, JJ.)

Central Sales Tax Act, 1956/Central Sales Tax (Registration and Tum-
ove1) Rule;~ 1957/Section 8 (5)-Ru/e 12 (1}-Exercise of power in "Public
C Interest''-Scope of-Notifications dated 8.1.1990, 27.6.1990 and 7.3.1994
reducing rates of tax on inters(ate sales of cement as well as dispensing with
fumishing of declaration in Fann C-Held : Illegal-Not issued in public
interest-Facilitating evasion of P.ayment of t~Adversely affecting free flow
of trade, increasing dispatch of cement from Rajasthan to Gujarat and
D decreasing local sales of cement manufactured in Gujarat-Cannot be sus-
tained merely on account of increase in Rajasthan State Revenue.

Rajasthan Sales Tax Rules, 1955--Rule 62 (c), Fann ST 18 C-Re-
quirement of fumishing declaration-Not applicable-Cement being " notified
goods" exempted from fumishing any f onn of declaration.
E Constitution of India, 1950-Articles 301, 304--Notification having
adverse effect 011 free flow of trade-Violative of Co11stitutional provisio11s.

The appellants were manufacturers of cement in Gujarat. They
challenged before the High Court the notification dated 8.1.90, 27.6.90 and
F 7.3.94 issued by the State of Rajasthan under Section 8 (5) of the Central
Sales Tax Act, 1956, reducing the rates of tax on interstate sales of cement
from 16% to 7% and then to 4% as well as dispensing with the requirement
of furnishing declaration in Form 'C'. The appellants contended that due
to reduction of the rate of sales tax by the impugned notifications, the
cement from Rajasthan was being sold on a larger scale in Gujarat at a
G cheaper rate and thereby the interest of the cement manufacturers in
Gujarat was prejudicially affected. The notifications were also challenged
on the ground that lowering of the rate of tax was not in 'public interest'
as contemplated under section 8 (5) of the Central Sales Tax Act, 1956 and
they were also violative of Articles 301 and 303 of the Constitution of India
H as they had the effect of giving preference to cement manufactured in
184
DIGVIJAYCEMENTCO. v. STATE 185

Rajasthan and discriminate against the cement manufactured in Gujarat. A
The High Court dismissed the writ petitions holding that the petitioners
failed to establish that the effect of the impugned notification was to
impede or adversely affect the free flow of inter-state trade and commerce;
Hence these appeals.

Allowing the appeals, this Court B

HELD :1.1. The impugned notifications were illegal as they were not
issued in public interest which is a condition precedent for exercise of
power under Section 8 (5) of the Central Sales Tax Act, 1956. Section 8 (5)
of the Act which is in the nature of an exception permits the State C
Government to do what it otherwise could not have done, but only if it is
likely to subserve public interest. Therefore, when exercise of such power
was challenged before the High Court, it was for the State to justify the
same by explaining how it had become necessary to subject all inter-state
sales of cement to any person or dealer to payment of tax at 4% only and
also to explain how it had become necessary for it to dispense with the D
requirement of furnishing declaration in Form 'C' contemplated by sub-
section (4) of Section 8 of the Act to the prescribed authority in the
prescribed manner. No such attempt was made by the State before the
High Court as to how the impugned notifications were necessary to be
issued in public interest. [194-F-H] E
1.2. Public interest in Section 8 (5) of the Act has to be interpreted
in the context of the Act and Articles 301-304 of the Constitution of India,
aiming at prevention of evasion of tax and prevention of adverse effect on
the free flow of inter-State trade and commerce respectively. The State
failed to justify the notification under these grounds. The only justification F
advanced by the State was that as a result of the impugned notification
reducing the rate of tax in respect of inter-State sales of cement, the State
revenue had increased and the increased revenue could be utilised for the
public of the State and therefore the same could be said to be in 'public
interest'. This cannot be regarded as sufficient and valid justification as G
the said notifications had the effect of creating a preference to sale of
cement manufactured in Rajasthan and disadvantage in the sale of cement
manufactured in Gujarat and thus had the direct and immediate adverse
effect on free flow of trade. [194-D; 200-E-H]

India Cement v. State of A.P., [1988] 1 SCC 743; Weston Electronics H
186 SUPREME COURT REPORTS [1997] 3 S.C.R.

A v. State of Gujarat, (1988] 2 SCC 568 and Finn A. T.B., Mehtab Majid and
Co. v. State of Madras, [1963] Supp 2 SCR 435, relied on.

State of T.N. v. Sitalakshmi Mills, [1974] 4 SCC 408; State of Madras
v. N.K. Nataraja Mudaliar, [1968] 3 SCR 829; Anuit Banaspati Co. Ltd., v.
State of Assam, [1961] 1 SCR 809; State of Kerala v. A.B. Abdul Khadir,
B [1970] 1 SCR 700 and Video Electronics Pvt. Ltd. v. State of Punjab, (1989]
Supp. 2 SCR 731, referred to.
-ll.l.
1.3. The High Court was wrong in brushing aside the facts and figures
produced by the petitioners which were sufficient to show, prima facie, that ~
C consequent to the notification dispatches of cement from the State ofRajas-
than to the State of Gujarat had increased considerably and that the
Cement manufacturers in Gujarat were thus prejudicially affected and put
in a disadvantageous position. The High Court was wrong in observing that
the sales of Cement manufactured in Rajasthan might have increased
D because of the quality of cement, intensive publicity and such other factors.
That was not even the case of the State of Rajasthan. In view of the clear
and credible material placed on record by the Writ petitioners it was
incumbent upon the State of Rajasthan to justify that what it had done was
really required in public interest, which the State failed to do.
[197-F-H; 198-A-C]
E
2. The impugned notifications, by dispensing with the requirement of
furnishing declaration in Form 'C' had the effect of facilitating evasion of
payment of tax and were, therefore violative of the scheme of the provisions
contained in Chapter XIII of the Constitution oflndia. The requirement of
furnishing declaration in Form ST 18 C under Rule 62 (c) of the Rajasthan
F Sales Tax Rules is also not applicable in case of cement, because the proviso
to Sub Rule (1) lays down that no such form is required to be furnished in
respect of goods notified by the State. Cement falls under notified goods;
therefore, Rule 62 (c) will obviously have no application. No other provision
was pointed out by the State requiring a dealer in cement in Rajasthan to
obtain any certificate from the purchaser or even otherwise make a decla-
G ration to the Sales Tax authorities in respect of the inter-state sales made
by him. It is therefore difficult to 11ppreciate how the State could have
effectively checked and prevented evasion of payment of tax on inter-State
sales of cement. On this ground alone the imp.ugned notifications dated
27.6.90 and 7.3.94 are required to be declared as bad. The impugned
H notifications are void and therefore quashed. [200-E; 195-B-E; 201-B]
DIGVIJAYCEMENTCO. v. STATE[NANAVATI,J.] 187

State of T.N. v. Sitalakshmi Mills, (1974] 4 SCC 408; State of Rajasthan A
v. Sarvotam Vegetables Products, [1996] 8 SCC 639 and State of Madras v.
N.K. Natraja Mudaliar, [1968] 3 SCR 829, referred to.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 2145 of
1997 Etc.
B
From the Judgment and Order dated 20.9.94 of the Rajasthan High
Court in W.P. No. 656 of 1994.

Soli J. Sorabjee, P.S. Sarin, Amit Prabhat, R.K. Sanghi, S. Atreya for
the Appellants.
c
Aruneshwar Gupta, M.K. Das, S.N. Nath, K.S. Bhati for the Respon-
dents.

D.A. Dave, U.A. Rana, Rajiv Tyagi, S. Tripathi, Gagrat & Co., for
the Intervenors.
D
Yashank Adhyaru for Ms. H. Wahi for the State of Gujarat.·

The Judgment of the Court was delivered by

NANAVATI, J. Leave granted.

The appellants in these appeals are manufacturers of cement and
E
they have their manufacturing units/factories in the State of Gujarat. The
cement manufactured by them is sold throughout India through a network
of stockists and dealers. They filed Civil Writ Petition Nos. 656, 788, 803,
2644 and 2645 of 1994 in the High Court of Rajasthan challenging the
notifications dated 8.1.1990, 27.6.1990 and 7.3.1994 issued by the State of F
Rajasthan under Section 8 (5) of the Central Sales Tax Act (for short 'CST
Act'). The High Court dismissed those writ petitions. Therefore, the ap-
pellants have filed these appeals.

Prior to the issuance of the impugned Notifications the rate of tax
payable under Section 5 of the Rajasthan Sales Tax Act on sales of cement G
was 16%. Even in respect of the inter-State sales of cement to unregistered
dealers the rate of tax was 16%. By the Notification dated 8.1.90 the State
of Rajasthan in exercise of the powers conferred by sub-section (5) of
Sectfon 8 of the CST Act directed that the tax payable under sub-sections
(1) and (2) of Section 8 by any dealer having his place of business in the H
188 SUPREME COURT REPORTS [1997] 3 S.C.R.

A State, in respect of the sale by him, from any such place of business in the
course of inter-State trade and commerce, of cement, to any Central· or
State Government undertaking or Corporation or an autonomous body
under the Government shall be calculated at the rate of 7%. By the second
Notification dated 27.6.90 the State of Rajasthan directed that the tax
B payable by any such dealer to any/all dealers or any person situated outside
the State of Rajasthan shall be taxed at the rate of 7%, if the conditions
specified therein were satisfied. The said conditions were:

"(i) The selling dealer shall submit the certificate appended hereto
l
duly filled in and signed by him to his assessing authority within
C lO days from the date of delivery of such cement to the carrier.

(ii) The selling dealer shall also enclose with the said certificate,
the attested photostat copy of the Railway receipt/Goods receipt,
as the case may be.

D (iii) In case the goods are being carried through road transport,
a copy of the said certificate shall also be handed over at the exit
check-post of the State of Rajasthan.

CERTIFICATE
E I/We....... :............ (name of the firm/Company/other status) having
Registration No. (RST Act/CST Act) .......... under the jurisdiction
of the Assessing Authority............ certify that .......... bags of cement
amounting to Rs ......... covered by the Challan/cash memo (s) No.
and the date............. have been manufactured by me/us and are
F dispatched in the course of inter-state trade and commerce vide
RR/GR No .......... (Specify the number with date) ......... to
Shri/M/s .................. (full address of the purchaser) Signa- 1

ture ............. Name ........... Desiguation............. Seal Dated .......... "

By the third Notification dated 7.3.94 the State of Rajasthan super-
G seded the earlier Notification dated 27.6.90 and directed that in respect of
inter-State sales of cement made by such dealers tax payable shall be
calculated at the rate of 4% without furnishing of declaration in form C or
certificate in form D on fulfilment of the following conditions:

H "(i) that the dealer shall record the name and full and complete
I
,
/
DJGVIJAYCEMENTCO. v. STATE[NANAVATI,J.] 189

address of the purchaser in the bill or each memorandum for such A
inter-State sale to be issued by him;

(ii) that the burden to prove that the transaction was in the
nature of inter-State sale, shall be on the dealer; and

(iii) that the dealer making inter-State sales under this notifica- B
tion shall not be eligible to claim benefit provided for by the
notification No. F. 4 (72) FD/Gr. IV/81-8, dated 6-5-86, as
amended from time to time."

The appellants challenged the said Notifications on the ground that
they created artificial barriers and had the effect of giving preference in C
the matter of inter-State trade and commerce to the manufacturers and
dealers of cement in the State of Rajasthan over the dealers and manufac-
turers of cement in the State of Gujarat. The rate of tax on sales of cement
in Gujarat under the Gujarat Sales Tax Act being 16%, as a result of the
impugned Notifications, the manufacturers of cement in Gujarat including D
the appellants were put to disadvantageous position as the purchasers in
Gujarat could purchase cement in the inter-State trade or commerce on
payment of sales tax at a much lower rate from the dealers in Rajasthan
whereas if they purchased cement from dealers in Gujaratthey had to pay
tax at the rate of 16%. One of the appellants (M/s. Saurashtra Cement &
Chemical Co. Ltd.) in its writ petition had given details regarding the E
increase in despatches from Rajasthan to Gujarat during the years 1992-93
and 1993-94 to support its plea. It was also stated in its petition that taking
advantage of the impugned Notifications and lowering of the rate of tax
the semi-Government companies and corporations in Gujarat and also
unregistered dealers had opted to purchase or increased their purchases F
of cement from Rajasthan. The notifications were further challenged on
the i,rround that lowering the rate of tax was not in public interest as
contemplated by Section 8 (5) of the CST Act and that they were also
violative. of Articles 301 and 303 of the Constitution inasmuch as they had
the effect of giving preference to cement manufactured and sold in Rajas- G
than and discriminate against cement manufactured and sold in Gujarat.
On these grounds the writ petitioners wanted the High Court to quash the
said Notifications and restrain the State of Rajasthan from issuing
such/similar notifications in future.

Union of India, though joined as a party-respondent in the writ H
190 SUPREME COURT REPORTS [1997] 3 S.C.R.

A petitions, did not choose to appear. The State of Gujarat was one of the
respondents in two writ petitions and it substantially supported the writ
petitioners by contending that the impugned Notifications created a
preference in favour of the manufacturers of cement in Rajasthan. The
State of Rajasthan disputed the correctness of the figures given by the writ
B petitioners regarding increase in despatches of cement in from Rajasthan
to Gujarat and also disputed that the cement sold by the manufacturers
and dealers in Rajasthan was available at a cheaper rate to the purchasers
in the State of Gujarat. It denied that the impugned Notifications violated
any of the constitutional provisions or Section 8 (5) of the· CST Act.

C The High Court held that the Notifications dated 8.1.90 and 27.6.90
having been superseded they were no longer operative and the writ peti-
tions had become infructuous to that extent and the challenge to those
Notifications did not survive. It, therefore, confined its consideration to the
legality and validity of the last Notification dated 7.3.94. The High Court
was of the view that it was for the writ petitioners to establish that because
D of reduction in the rate of sales tax by the impugned Notifications the
cement from Rajasthan was being sold in Gujarat on a larger scale and at
a cheaper rate and thereby the interest of the cement manufacturers in
Gujarat was being prejudicially affected. It considered the facts and figures
relating to increased despatches of cement from Rajasthan to Gujarat and
E the preference shown by the semi-Government bodies and unregistered
dealers or the cement manufactures -sold in Rajasthan, as ipse dixit of the
writ petitioners and, therefore, not credible and trustworthy. Taking this
view it held that the writ petitioners had failed to establish that the effect
of the impugned Notifications was to impede or adversely affect the free
flow of inter-State trade and commerce. The High Court distinguished the
p decision of this Court in the Indian Cement v. State of A.P. [1988] 1 SCC
743 on the ground that the facts in that case were altogether different from
the facts of these cases inasmuch as in that case the rate of Central Sales
Tax was reduced to 2% in order to augment the State revenue and to
protect the local manufacturers and the notifications which were under
G challenge did not contain the conditions which are imposed by the Notifica-
tion dated 7.3.94. It was also distinguished on the ground that this Court
had not considered the effect of transportation charges and handling
charges in respect of cement manufactured in one State and sold in
another. Taking this view, the High Court dismissed the writ petitions.

H
DIGVIJAYCEMENTCO. v. STATE[NANAVATI;J.] 191

Mr. Sorabjee, learned Senior Counsel appearing for the appellants A
has raised two contentions. His first contention was that the impugned
notifications were not legal as they were not issued in puJ;ilic interest which
is a condition precedent for exercise of power under Section 8 (5) of the
CST Act. The second contention was that the notifications by reducing the
rates of sales tax from 16% to 7% and then to 4% were violative of Articles B
301 and 303 of the Constitution as they had the effect of giving preference
to goods manufactured and sold in Rajasthan and discriminate against
goods manufactured and sold in Gujarat.

We will deal with the first contention first. He invited our attention
to sub-section (5) of Section 8 of the CST Act which permits the State C
dovernment, if it is satisfied that it is necessary so to do in public interest,
to direct that no tax, under the CST Act shall be payable or that they shall
be payable at lower rates by any dealer having his place of business in the
State in respect of sales made by him, in the course of inter-State trade or
.commerce. From any such place of business of any such goods or classes D
of goods or to any person or class of person as may be specified in the
notification. He also drew our attention to the observation made by this
Court in State of Tamil Nadu v. Seethalakshmi Mills that the policy of the
law is to dis~ou!age inter-State trade to unregistered dealers and that the
report of the Taxation Enquiry Committee would indicate that "the main
reasbn for enactj:ng the provision was to canalise the inter-State trade E
through ,registered dealers over whom the appropriate Government has a
great deal of control and thus to prevent evasion of tax''. He submitted that
by dispensing with the requirement of furnishing declaration in Form C the
impugned Notification dated 7.3.94, in effect, removed an essential
safeguard to check and prevent evasion of sales tax. In order to show the F
importance of the requirement to furnish Form C he invited our attention
to the decision of this Court in State of Rajasthan v. Sarvotam Vegetables
Products ( 1996) 3 Scale 469 wherein this Court has observed that "the
purpose of the C-Form is obvious: the Parliament wants to tax specified
goods purchased for specified purposes (sub-section (3) of Section 8) at a
lower rate but anyone wishing to avail of the said lower rate must obtain G
from his purchasing dealer the 'C' form and produce it before his assessing
officer. Thus, clause (b) of sub-section (1), sub-section (3) and sub-section
(4) go together. (Similarly, Section 8 (1) (a) and sub-section (4) go
together). The-reason-why the 'C' form requires several particulars to be
stated is to ensure that the concessional rate prescribed by Section 8 (1) H
192 SUPREME COURT REPORTS (1997) 3 S.C.R.

A (b) is not misused or abused. With the help of those particulars, the
appropriate authority or authorities can verify the truth and correctness of
the transaction. Both the selling dealer and purchasing dealer are under
an obligation to abide by the said requirements of law; otherwise the very
scheme underlying the said provisions breaks down. This crucial sig-
B nificance of the 'C' form needs to be kept in mind." He submitted that the
conditions specified in the Notification dated 7.3.94 are not at all an
effective substitute for C Form. Condition No. 1 does not cast any obliga-
tion on the dealer to send the record made by him to the sales tax
authorities. Conditions Nos. 2 and 3 have no bearing at all upon the issue
of preventing or checking evasion. The High Court failed to appreciate that
C under the notification dated 7-3-94, cement could be sold by a manufac-
turer/dealer in Rajasthan to a person in Gujarat who is an unregistered
dealer or to a consumer who is not a dealer at all. He also submitted that
this challenge was casually rejected by the High Court by observing that
,..(
conditions No. 1 and 2 in the Notification dated 7-3-94 were suffident to
D take due care of such remote possibility of tax avoidance/evasion on a large
scale and that the "Revenue is the best judge of its interests". The High
Court failed to appreciate that sub-section (5) of Section 8, as observed by
this Court in Sarvotam Vegetable Products case (supra), is an integral part
of Section 8 and the Act as such. The said power has to be exercised in
public interest. The power of exemption is to be guided by and be consis-
E tent with the provisions of the Act. The object of the relevant provisions
contained in CST Act is "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 "and" ·prevention of evasion of tax is a
measure in the public interest" as observed by this Court in Seethalakshmi
F Mills case (supra) and in State of Madras v. N.K Nataraj Mudaliar, (1968)
3 SCR 829. In view of this correct legal position, it was no answer to say
that the Revenue is the best judge of its interest. Public interest being the .
essential pre-requisite for exercise of power under sub-section (5) of
Section 8, the State can exercise it only if it is likely to subserve the public
interest.
G
It was, on the other hand, contended by Mr. Aruneshwar Gupta,
learned counsel appearing for the State of Rajasthan that when a State
makes law it has to be presumed that it is made in 'public interest'.
Moreover, it was specifically stated in the impugned notifications that the
H power under Section 8 (5) was being exercised in 'public interest' and,
DIGVUAYCEMENTCO. v. STATE[NANAVATI,J.] 193

therefore, it was for the appellants to prove that the said power, was in fact A
not exercised in public interest. In support of his submissi,on, the learned
counsel relied upon the decision in Amrit Banaspati Co. Ltd. v. Union of
India, [1995] 3 SCC 335. Mr. Adhyaru, learned counsel for the State of
Gujarat, however, is right in his submission that though such a presumption
can be raised, when the exercise of power is challenged on the ground that B
it was not exercised in public interest it would become necessary for the
State to disclose how it is in public interest.

Before the High Court, the State of Rajasthan does not appear to
have stated anything in this behalf except that the conditions imposed by
the notification were adequate to prevent evasion of tax. In the counter-af- C
fidvit filed before this Court, it is stated that the said notifications being
based upon policy decision were issued in public interest. In the additional
affidavit filed on its behalf it is stated that reduction of rate of sale tax
under the impugned notifications was "very much beneficial to the State
revenue inasmuch as the respondent-State has increased earnings of the D
additional revenue percentage of States Tax on cement over the previous
years i.e., from 1985 to 1995". It is further stated that : "It is respectfully
submitted that after issuing of the Notification dated 8.1.90, whereby the
rate of tax on sale made in inter-State sales was reduced and levied at the
rate of 7% the State Government in the financial year 1990-91 earned
revenue of Rs. 3195.33 lakhs as compared to the previous year i.e., 1989-90 E
which was Rs. 2710.55 lakhs. The State Government had collected addi-
tional revenue of Rs. 484.78 lakhs for the financial year 1990-91. Keeping
in view the additional revenue earned by the State in the public interest,
the Sta1:e Government vide Notification dated 27.6.90, in supersession of
the earlier Notification dated 3.1.90, further liberalized the inter-State sales p
of cement which was earlier restricted to Central or State Government,
Undertaking or Corporation or Autonomous Body under the Govern-
ment... ........ It is respectfully submitted that after reduction of sales-tax on
inter-State sales from 7% to 4% vide Notification dated 7.3.94 the State
had collected revenue to the tune of Rs. 7000 lakhs as compared to the
previous year i.e. 1992-93, which was Rs. 6069.82 lakhs thereby earned an G
additional revenue Rs. 900.18 lakhs for the year 1994-95. The percentage
of sales-tax revenue of cement for the year 1994-95 was increased to
. 15.32% as compared to the financial year 1993-94 which was 11.52%
(increase of 4% approximately)". In the last affidavit filed by it the public
interest sought to be subserved by the impugned Notifications is stated in H
194 SUPREME COURT REPORTS [1997] 3 S.C.R.

A these terms : "It is common knowledge that the material for production of
.-
cement i.e. Limestone is available in abundance in the State of Rajasthan
' •
and in view of availability of raw material the production of cement in the
State of Rajasthan is also much higher. Therefore, if the power under
Section 8 (5) of the Central Sales Tax Act, 1956 is exercised by the State
B of Rajasthan by providing different rate of tax in respect of inter-State sale
and such power is perfectly in public interest and would in fact achieve
free flow of trade rather than hampering it".

Thus the State of Rajasthan has shifted its stand from time to time
as regards the public purpose, for achieving which, the reduction in rate
C of tax was made. The learned counsel for the State of Rajasthan submitted
that public interest contemplated by Section 8 {5), in so far as the State of
Rajasthan is concerned, would mean interest of the public of Rajasthan
and as the increased revenue could be used for the benefit of the people
of Rajasthan, the impugned exercise of power must be regarded as in
D public interest. We cannot accept this contention because public interest
in Section 8 (5) will have to ·be interpreted in the context of the CST Act
and Articles 301 to 304 of the Constitution. Though increase in revenue
and its utilisation for the public of the State can generally be regarded in
public interest, in the context in which it is required to be considered, that
by itself cannot be regarded as sufficient, if it has the effect of going against
E the policy of the CST Act and object of the constitutional provisions.

We have already stated above the object of the Constitutional
provisions and the policy of the CST Act. Sub-section (5) of Section 8
which is in a nature of an exception, permits the State Government to· do
p that which it otherwise could not have done, but only if it is in public
interest. Therefore, when exercise of such powers was challenged it was for
the State to justify the same by explaining how it had become necessary to
subject all inter-State sales to any person or dealer to payment of tax at
4% only and also to explain how it had become necessary for it to dispense
with the furnishing of the declaration contemplated by sub-section (4) of
G Section 8 to the prescribed authority in the prescribed manner. No such•
attempt was made by the State of Rajasthan before the High Court. ·
Reduction of the rate of tax in respect of all inter-State sales to any dealer
and person was sought to be justified by the learned counsel for the State
of Rajasthan by submitting that it was likely to increase the revenue of the
H State and as the increased revenue could be utilised for the public of
DIGVIJAYCEMENTCO. v. STATE(NANAVATI,J.] 195

Rajasthan, the same can be said to be in public interest. As regards A
dispensing with the requirement of furnishing declaration in C Form he
submitted that apart from Condition No. 1 contained in the Notification
dated 7.3.94 a selling dealer in Rajasthan had to fill in Form ST 18 ·and a
dealer-consigner had to submit a declaration in Form ST 18A. The said
forms contain sufficient particulars as to prevent any 'evasion of payment B
of tax. He drew our attention to Rule 62C of the Rajasthan Sales Tax Rules
which provides that a registered dealer by whom any goods are despatched
from within the State to place outside the State for sale outside the State
shall furnish or cause to be furnished particulars in respect of his registra-
tion certificate, and the goods so leaving the State limits in Form ST 18C.
What is overlooked by him is the proviso to sub-rule (1) which lays down C
that no such form is required to be furnished in respect' of the goods
notified by the State Government. Admittedly, cement is notified 'goods'.
Therefore, Rule 62C will obviously have no application. No other provision
)
was pointed out by the learned counsel requiring a dealer of cement in
Rajasthan to obtain from the purchaser or even otherwise make a decla- D
ration to the sales tax authorities in respect of the inter-State sales made
by him. It is therefore difficult to appreciate how the State of Rajasthan
could have effectively checked or prevented evasion of payment of tax on
inter-State sales of cement. On this ground alone the impugned Notifica-
tions dated 27.6.90 and 7.3.94 are required to be declared as bad.
E
As regards the second contention that the impugned Notifications
were violative of Articles 301 and 303 of the Constitution it was submitted
by Mr. Sorabjee that Article 301 of the Constitution guarantees freedom
of trade, commerce and intercourse throughout the territory of India.
Article 302; however, empowers the Parliament to impose such restrictions p
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. This power of the Parliament and the State Legislatures
is further restricted by Article 303 which provides that neither of them shall
have power to make any law giving, or authorizing the giving of, any
preference to one State over another, or making, or authorising the making G
of, any discrimination between one State and another. He further sub-
mitted that the Notifications issued by the State G·overnments under Sec-
tion 8 (5) of the CST Act would also be subject to the said limitations. He
further submitted that the impugned Notifications particularly the Notifica-
tions dated 27.6.90 and 7.3.94 had the effect of giving preference for goods H
196 SUPREME COURT REPORTS [1997] 3 S.C.R.

A manufactured and sold in Rajasthan and consequent discrimination against
the goods manufactured and sold in Gujarat. It was, therefore, incumbent 1
upon the State of Rajasthan to place materials before the court to justify
the cause or reason for the said preference and discrimination. In support
of his contention he relied upon the following observations made by Hegde ...
B J. in his concurring judgment in State of Madras v. N.K Nataraja Mudaliar,
[1968] 3 SCR 829:
/
"But once it is shown that a measure prima facie gives
preference to the residents of one State over another State or it
makes discrimination between the residents of a State and that of
c another because of the adoption of different rates of tax in different
States, then the matter assumes a different complexion in view of
Article 303 (1). It should be within the knowledge of the Union
Government why Parliament adopted different rates in different
States. I agree that mere difference in rates is neither showing
preference nor making discrimination. But other things being
D equal, the difference in rates would result in showing preference
to some States and making discrimination against others. Hence,
in my opinion, difference in rates is a prima facie proof of the
preference or discrimination complained of. It is for the State to
justify those differences".
E
He also submitted that the justification offered by the State is that
the Notifications were issued for earning additional revenue for the State
and for increasing the sale of cement manufactured in Rajasthan as it has
abundance of raw material necessary for manufacturing cement and con-
F sequently production of cement in the State is much higher. He submitted
that for such reasons if giving of preference or making discrimination is
permitted then that would lead to trade wars or creation of barriers
between different States and that would be detrimental to the economic
integrity and unity of the nation. He drew our attention to the following
observation made by Gajendragadkar, J. in the case of Atiabari Tea Co.
G Ltd. v. The State of Assam & Ors., [1961] 1 SCR 809:

"It was realised that in course of time different political parties
believing in different economic theories or ideologies may come
in power in the several constituent units of the Union, and that
H may conceivably give rise tolocal and regional pulls and pressures
DIGVUAYCEMENTCO. v. STATE[NANAVATI,J.] 197

in economic matters. Local or regional fears or apprehensions A
raised by local or regional problems may persuade the State
Legislatures to adopt remedial meausures intended solely for the
protection of regional interests without due regard to their effect
on the economy of the nation as a whole. The object of Part XIII
was to avoid such a possibility. Free movement and exchange of B
goods throughout the territory of India is essential for the economy
of the nation and for sustaining and improving living standards of
the country. The provision contained in Article 301 guaranteeing
the freedom of trade, commerce and intercourse is not a declara-
tion of a mere platitude, or the expression of a pious hope of a
declaratory chara~ter; it not also a mere statement of a directive C
principle of State policy, it embodies and enshrines a principle of
paramount importance that the economic unit of the country will
provide the main sustaining force for the stability and progress of
the political and cultural unit of the country''.
D
He also invited our attention to the averments made in the petitions,
particularly the petition filed by Saurashtra Cement Company and the facts
and figures given therein. He submitted that the State of Rajasthan in its
counter affidavit filed in the High Court had not denied the correctl).ess of
those facts and figures and the only reply given by it was that they were
not admitted and were not verifiable. The High Court also accepted this E
contention of the State of Rajasthan and held th,at the petitioners had failed
to establish that the impugned Notifications had the effect of impeding or
obstructing the free flow of movement of goods between the States in the
course of inter-State trade and commerce,
F
We have already observed earlier that the High Court has very lightly
brushed aside the said facts and figures. Some of the facts and figures were
stated on the basis of the statistics available with the cement manufacturers
of India. Detailed statements showing the names of the parties and quan-
tities of cement purchased by some of them monthwise were filed along
with writ petition. It is, therefore, difficult to appreciate how the said facts G
were not verifiable or could be regarded as not reliable. The facts and
figures were sufficient to show, prima facie, that despatches of cement from
the State of Rajasthan to State of Gujarat had increased considerably and
that cement produced in the State of Gujarat was placed in a disad-
vantageous position. It was not proper for the High Court to brush aside H
198 SUPREME COURT REPORTS [1997] 3 S.C.R.

A that material and hold that the petitioners had failed to establish that
because of reduction in the rate of sales tax on inter-State sales of cement
by the impugned Notifications preference was created in favour of the
cement manufactured and sold in Gujarat and that the cement manufac-
turers in Gujarat were thus prejudicially affected and put in a disad-
B vantageous position. The High Court had observed that the sales of cement
manufactured and sold in Rajasthan might have increased because of the
quality of cement, intensive publicity and such other factors. That was not
even the case of the State of Rajasthan. In view of the clear and credible
material placed on record by the writ petitioners it was incumbent upon
the State of Rajasthan to justify that what it had done was really required
C in the public interest. While conceding that varying rates of tax can prevail
in different States and that by itself cannot be said to be violative of Article
303 he submitted that the differentiation can be justified if that is done on
account of natural and business factors such as existence of Jong standing
business relations, availability of communications, credit facilities and such
D other fa".tors. He submitted that this Court in Nataraja Mudaliar's case
(supra) has adopted the reasoning of the Australian High Court in .The
King v. Barger, (1908) 6 CLR 41 that if the pervading idea is the preference
of locality merely because it is lcicality, and because it is a particular part
of a particular State and the preference was not based on other considera-
tions, which are dependent on natural or business circumstances, and may
E operate with more or Jess force in different localities and has held that
where differentiation is based on consideration not dependent upon
natural or business factors which operate with more or less force in
different localities than the Parliament is prohibited from making such
discrimination.
F
What the learned counsel for the State of Rajasthan submitted was
that unless it was shown that the impugned notifications directly and
adversely affected the free flow of trade and business or that the tax
reduction was so prohibitive as to become an impediment in the free flow,
they could not have been regarded as violative of Articles 301 and 303. In
G support of .his submission he relied upon the decisions of this Court in
Atiabari Tea Co. Ltd. v. 171e State of Assam, [1961] 1 SCR 809 and Amrit
Banaspati Co. Ltd. v. Union of India, [1995] 3 SCC 335. He also submitted
that mere imposing or reduction of tai.: by the State Legislature leading to
varying rates of sales tax cannot be regarded as giving preference or making
1-1 discrimination prohibited by Articles 301 and 304 because the free flow of
DIGVUAYCEMENTCO. v. STATE[NANAVATI,J.) 199

trade between different States depends not necessarily upon the rates of A
sales tax, but upon a variety of other factors, such as the source of supply,
place of consumption, existence of trade channels, trading facilities, rates
of freight, availability of efficient transport and the like. In support of this
proposition he cited the decisions of this Court in State of Madras v. N.K
Nataraja Mudaliar, (1968] 3 SCR 829, State of Kera/a v. A.B. Abdul Khadir, B
[1970] 1 SCR 700, State of Tamil Nadu v. Sitalakshmi Mills, etc., (1974] 3
SCR 1 and Video Electronics Pvt. Ltd. v. State of Punjab, [1989] Supp. 2
SCR 731.

The scope and ambit of the freedom of trade and commerce
throughout India has been examined by this Court in many cases, starting C
with Atiabari Tea Co. (supra), This Court in Video Electronics Pvt. Ltd. v.
State of Punjab, [1990] 3 SCC 87 reviewed the previous case law and in the
context of power to grant exemption from payment of sales tax, has held
that the taxes which do not directly or immediately restrict or interfere with
trade, commerce and intercourse throughout the territory of India are
excluded from the ambit of Article 301. It was held that : "It has to be D
borne in mind that there may be differentiations based on consideration of
natural or business factors which are more or less in force in different
localities. A State might be allowed to impose a higher rate of tax on a
commodity either when it is not consumed within the State, or if it is felt
that the burden falling on consumers within the State will be more than E
that and large benefit is derived by the revenue. The imposition of a rate
of a sales tax is influenced by various political, economic and social factors.
Prevalence of differential rate of tax on sales of the same commodity
cannot be regarded in isolation as determinative of the object to dis-
criminate between one State and another. This Court has also held that p
"However the power under Article 304 if found to have been exercised in
a colourable manner intentionally or purposely to create unfavourable bias
by prescribing a general lower rate on locally manufactured goods or in
the shape of lower rate of tax, such an exercise of power can always be
struck down by the courts".
G
Reiterating that every differentiation is not discrimination this Court
further held that if discrimination is made without a valid reason, that is to
say, if there are not justifiable and reasonable reasons for differentiation,
then that would amount to hostile discrimination. Again, in Amrit
Banaspati Co. Ltd.'s. case (supra) this Court emphasised that it is only H
200 SUPREME COURT REPORTS (1997] 3 S.C.R.

A when the intra-State or inter-State movement of the persons or goods are
impeded directly and immediately as distinct from creating some indirect .
or inconsequential impediment, by any legislative or executive action,
infringement of the freedom envisaged by Article 301 can arise. Without
anything more, a tax law, per se, may not impair the said freedom. At the
same time, it should be stated that a fiscal measure is not outside the
B

~
purview of Article 301 of the Constitution.

We have, therefore, to examine the validity of the impugned Notifica-
.
tions in the context of this settled legal position. As already pointed out .

above the only reason or justification given by the State of Rajasthan for
C making the differentiation between the rate of tax on inter-State sales and
inter-State sales of cement was that the said reduction was likely to lead
and had led to increase in sales of cement and increase in revenue earnings.
So the question to be considered is whether those considerations alone can
be.regarded as sufficient to make the impugned Notifications immune from
D the challenge of hostile discrimination. In the case of Indian Cement
(supra) this Court has held that the plea that reduction in the rate of sales
tax is beneficial to the State Revenue cannot be regarded as sufficient
justification for making the discrimination and it would not amount to a
reasonable restriction contemplated by Article 304.

E In the case of Indian Cement (supra) this Court also held that
reduction in the rate of tax .in order to protect the local manufacturers
cannot be regarded as a justification permitted by Part XIII of the Con-
stitution. So also in Western Electronics v. State of Gujarat, (1988] 2 SCC
568 this Court has held that reduction in the case of goods manufactured
F locally in order to provide an incentive for encouraging local manufacturing
units cannot be sustained if it adversely affects the free flow of inter-State
trade and commerce. We are also of the view that the justification ad-
vanced by the State of Rajasthan that as a result of .the impugned notifica-
tions the State Revenue had increased and thus they were beneficial to the
State Revenue, is not valid as the said notifications had the effect of
G creating a preference to cement manufactured and sold in Rajasthan and
disadvantage for the sale of cement manufactured and sold in Gujarat and
thus had the direct and immediate adverse effect on the free flow of trade.
The said notifications, by dispensing with the requirements of furnishing
declaration in C Form, had the effect of facilitating evasion of payment of
H tax and were, therefore, also violative of the scheme of the constitutional
DIGVUAYCEMENTCO. v. STATE[NANAVATI,J.] 201

provisions contained in Chapter XIII. A 5-Judge Bench of this Court in A
Finn A. T.B. Mehtab v. State of Madras, (1963] supp. SCR 435 has also held
that 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 would be
violative of Article 301.

We, therefore, hold that the impugned notifications were void and, B
therefore, they are hereby quashed. These appeals are accordingly allowed.
In view of the facts and circumstances of the case there shall be no ordei;
as to costs.

M.K. Appeals allowed

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