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Monday, October 21, 2013

Constitutional validity of grant of rebate of tax by the State Government by issuing a notification in exercise of its powers under Section 5 of Uttar Pradesh Trade Tax Act, 1948 (“the Act”, for short) = STATE OF U.P & ORS. APPELLANT(S) VERSUS JAIPRAKASH ASSOCIATES LTD RESPONDENT(S)= judis.nic.in/supremecourt/filename=40887

Constitutional validity of grant of  rebate  of  tax  by  the State Government by issuing a notification in exercise of its powers  under Section 5 of Uttar Pradesh Trade Tax  Act,  1948  (“the  Act”,  for  short)=

whether grant of  rebate  of  tax  by  the
State Government by issuing a notification in exercise of its powers  under
Section 5 of Uttar Pradesh Trade Tax  Act,  1948  (“the  Act”,  for  short)
discriminates between the goods imported from neighbouring States and goods
manufactured and produced in the  State  of  Uttar  Pradesh  and  therefore
contravenes the Constitutional Provisions viz.; articles 301 and 304(a)  of
the Constitution of India. =

  we hold  ‘rebate  of  tax’
granted by the State Government to cement manufacturing units using fly-ash
as raw material in a unit established in the districts of  State  of  Uttar
Pradesh alone is violative of the provisions contained in articles 301  and
304(a)  of  the  Constitution  of  India.   
We  further  declare  that  the
notification would also apply to respondent(s)- cement manufacturing units.



54.         With these observations and directions, all the  civil  appeals
are disposed of. There shall be no order as to costs.

                                                                REPORTABLE



                        IN THE SUPREME COURT OF INDIA
                        CIVIL APPELLATE JURISDICTION

                        CIVIL APPEAL NO. 3026 OF 2004


STATE OF U.P & ORS.                   APPELLANT(S)
                                   VERSUS
JAIPRAKASH ASSOCIATES LTD                  RESPONDENT(S)
                                    WITH

                        Civil Appeal No. 3025 of 2004

STATE OF U.P & ANR.                   APPELLANT(S)
                                   VERSUS
JAIPRAKASH ASSOCIATES LTD. & ANR.     RESPONDENT(S)
                                    WITH

                        Civil Appeal No. 5567 of 2004
STATE OF U.P & ORS.                   APPELLANT(S)
                                   VERSUS
DIAMOND CEMENTS                              RESPONDENT(S)




                                    WITH

                        Civil Appeal No. 7190 of 2004
STATE OF U.P & ANR.                    APPELLANT(S)
                                   VERSUS
CENTURY TEXTILE & INDUSTRIES LTD.
& ORS.                                            RESPONDENT(S)

                                    WITH

                        Civil Appeal No. 333 of 2006

STATE OF U.P & ORS.                   APPELLANT(S)
                                   VERSUS
MAIHER CEMENT & ORS.                     RESPONDENT(S)

                                    WITH

                      Civil Appeal No.         of 2013
                 (arising out of SLP (C) No. 11305 of 2013)
STATE OF U.P & ORS.                   APPELLANT(S)
                                   VERSUS
M/s U. P. ASBESTOS LTD.               RESPONDENT(S)
                                     AND
                      Civil Appeal Nos.         of 2013
               (arising out of SLP (C) Nos. 6815-6816 of 2005)

STATE OF U.P & ORS.                   APPELLANT(S)
                                   VERSUS
BIRLA CORPORATION LTD. & ORS.         RESPONDENT(S)
                               J U D G M E N T

H.L. Dattu, J.



1.          Leave granted.

2.          The substantial question of law that requires to be  considered
and decided in these appeals is,
whether grant of  rebate  of  tax  by  the
State Government by issuing a notification in exercise of its powers  under
Section 5 of Uttar Pradesh Trade Tax  Act,  1948  (“the  Act”,  for  short)
discriminates between the goods imported from neighbouring States and goods
manufactured and produced in the  State  of  Uttar  Pradesh  and  therefore
contravenes the Constitutional Provisions viz.; articles 301 and 304(a)  of
the Constitution of India.


3.          The lead case is Civil Appeal No. 3026 of 2004.  The appellants
are public limited companies, manufacturing cement in  their  manufacturing
units in Rewa district  situate  in  the  State  of  Madhya  Pradesh  after
procuring fly-ash from the thermal power stations in  the  State  of  Uttar
Pradesh and thereafter selling the manufactured product viz. Cement in  the
districts of State of Uttar Pradesh.

4.          The fly-ash is  produced  from  coal  combustion  and  normally
dispersed into the atmosphere which contains toxic chemicals that can cause
environmental pollution and hazards. Therefore for utilization  of  fly-ash
and to control pollution, cement projects were set up to make  use  of  the
fly-ash generated from the power plants.


5.          To encourage manufacturers using fly-ash  in  manufacturing  of
their products, the Government of Uttar Pradesh in exercise of  its  powers
under Section 5 of the  Act,  had  issued  notification  dated  18.06.1997,
granting “rebate of tax” to the dealers  in  the  State  of  Uttar  Pradesh
excluding all other dealers manufacturing cement outside the State of Uttar
Pradesh using fly-ash purchased in the State of  Uttar  Pradesh.   Annexure
appended to the notification provided for name of  the  districts  and  the
period for which the rebate will be allowed. The notification prior to  its
rescinding only specified the percentage of rebate of  tax  to  be  granted
depending  on  the  content  of  fly-ash  used  by   the  dealers  in   the
manufacturing of cement.

6.          On a finding by the Government of Uttar Pradesh on a later date
that  the  notification  is  vaguely  worded,  has  rescinded  the  earlier
notification dated 18.06.1997, and  has  issued  fresh  notification  dated
27.02.1998, in exercise of its powers under Section 5 of  the  Act.   Apart
from others the notification provides certain conditions which requires  to
be fulfilled if the manufacturing units  intend  to  take  benefit  of  the
notification. The condition No. 1 of the  notification  specifies  that  to
avail the benefit of rebate, the goods should be  manufactured  in  a  unit
established in the State of Uttar Pradesh and secondly, such goods shall be
manufactured using  fly-ash  purchased  from  the  thermal  power  stations
situated in the State  of  Uttar  Pradesh.  The  notification  specifically
enlists the areas in Uttar Pradesh districts alone for the purpose  of  the
grant of rebate of tax by  the  Government  and  therefore  restricted  the
benefit of rebate only to the  units  manufacturing  and  producing  cement
using fly-ash in Uttar Pradesh. The notifications require to be  extracted.
They are as follows:
                               “[S. No. 1263]
      Notification No. T.T.-2-1885/XI-9(226)94-U.P. Act-15-48-Order-97,
                               dated 18-6-1997


                [Published in U.P. Gazette, dated 18.06.1997]
            In exercise of the power under section 5 of  the  Uttar  Pradesh
       Trade Tax Act, 1948 (U.P.  Act  No.  XV  of  1948)  the  Governor  is
       pleased:-


   a) to declare the goods having fly-ash contents of 10 per cent of more by
      weight to be notified goods for the purposes of this section;


   b) to grant a rebate of tax of twenty five percent on goods  having  fly-
      ash contents between ten to thirty per cent by weight and a rebate  of
      tax of fifty per cent on the goods having fly-ash  contents  exceeding
      thirty percent by weight on the  tax  levied  under  the  Act  in  the
      district mentioned in column-2 Annexure given  below  for  the  period
      mentioned in column-3 of the said Annexure:-



|ANNEXURE                                                    |
|            |                               |               |
|Serial      |Name of District               |Period for     |
|Number      |                               |which the      |
|            |                               |rebate of tax  |
|            |                               |will be allowed|
|1           |2                              |3              |
|1.          |Banda, Hamipur, Jalaun, Mahoba,|Twelve Years   |
|            |Jhansi, Lalitpur and Shahuji   |               |
|            |Nagar                          |               |
|2.          |Almora, Chamoli, Dehradun,     |Twelve Years   |
|            |Fatehpur, Jaunpur, Kanpur      |               |
|            |(Dehat), Nanital, Fauri        |               |
|            |Garhwal, Pithoragarh,          |               |
|            |Sultanpur, Champawat, Tehri    |               |
|            |Garhwal, Udham Singh Nagar,    |               |
|            |Uttar Kashi and Growth Centre. |               |
|3.          |(i) The Districts of Azamgarh, |Ten Years      |
|            |Ambedkar-Nagar, Bahraich,      |               |
|            |Ballia, Barabanki, Deoria,     |               |
|            |Etah, Etawah, Faizabad,        |               |
|            |Farrukhabad, Ghazipur, Gonda,  |               |
|            |Hardoi, Mainpuri, Mathura, Mau,|               |
|            |Moradabad, Padrauna, Pillibhit,|               |
|            |Pratapgarh, Raibareili, Rampur,|               |
|            |Shahjahanpur, Sidharth Nagar,  |               |
|            |Sitapur, Unnao, Kaushambi,     |               |
|            |Jyotibaphule Nagar, Mahamaya   |               |
|            |Nagar and Shravasti            |               |
|            |(ii) The area of Allahabad     |Ten Years      |
|            |District in South of the river |               |
|            |Jamuna and confluent Ganga     |               |
|            |(Excluding the area included   |               |
|            |under Municipal Corporation    |               |
|            |Allahabad)                     |               |
|            |                               |Ten Years      |
|            |(iii) The Taj Trapezium Area   |               |
|            |                               |Ten Years      |
|            |(IV) Greater Noida Industrial  |               |
|            |Development area               |               |
|            |The Districts of Agra          |               |
|            |(excluding Taj Trapezium area),|               |
|            |Aligarh (excluding Tax         |               |
|            |Trapezium Area), Allahabad     |               |
|            |(excluding the area in south of|               |
|            |rivers Jamuna and confluent    |               |
|            |Ganga but including the area   |               |
|            |included under Municipal       |               |
|            |Corporation Allahabad),        |               |
|            |Bareilly, Bhadohl, Bijnor,     |               |
|            |Firozabad (excluding Taj       |               |
|            |Trapezium area), Ghaziabad     |               |
|            |(excluding Greater NOIDA       |               |
|            |Industrial Development Area),  |               |
|            |Gorakhpur, Haridwar, Kanpur    |               |
|            |(Nagar), Lakhimpur Kheri,      |               |
|            |Lucknow, Maharajganj, Meerut,  |               |
|            |Muzaffarnagar, Saharanpur,     |               |
|            |Varanasi, Gautam Budh Nagar,   |               |
|            |Chandauli, Mirzapur and        |               |
|            |Sonbhadra.                     |               |

7.           The  second  notification,  dated  27.02.1998  issued  by  the
Government of Uttar Pradesh is extracted and reads as under:-

                               “[S. No. 1289]
           Notification No. T.T.-2-592/XI-9(226)94-U.P. Act-15-48
                          Order-98, dated 27-2-1998


            Whereas, the State Government is satisfied that it is  expedient
      in the public interest so to do:


            Now, therefore, in exercise of the powers under section 5 of the
      Uttar Pradesh Trade Tax Act, 1948 (U.P. Act No. XV of 1948), read with
      Section 21 of the Uttar Pradesh General Clauses Act,  1904  (U.P.  Act
      No. 1 of 1904), the Governor,  with  effect  from  March  1,  1998  is
      pleased:-


        a) to rescind the Notification No. T.T.-2-1885/XI-9(226)94-U.P. Act-
           15-48 Order-97, dated June 18, 1997;


        b) to grant a rebate of tax of twenty five percent on goods  having
           fly-ash contents between ten to thirty per cent by weight and  a
           rebate of tax of fifty per cent  on  the  goods  having  fly-ash
           contents exceeding thirty percent by weight on  the  tax  levied
           under the Act in the districts mentioned  in  column-2  Annexure
           given below for the period mentioned in  column-3  of  the  said
           Annexure subject to the following condition:-




                                 CONDITIONS


       i) Such goods shall be manufactured in a unit established in the area
          mentioned in column-2 of the Annexure;


      ii) Such goods  shall  be  manufactured  using  fly-ash,  purchase  or
          received  from  the  thermal  power  stations  situated  in  Uttar
          Pradesh;


     iii) the dealer claiming rebate of tax under  this  notification  shall
          keep records in which following information will be shown:




           a) date;


           b)  name  of  thermal  power  stations  from  which  fly-ash  is
              purchased or received;


           c) weight of fly-ash;


           d) name of manufactured goods;


           e) weight of manufactured goods


           f) weight of fly-ash used in manufacturing of such goods


           g) weight of other goods used in manufacture of such goods;



      iv) the total weight of manufactured goods and percentage  of  fly-ash
          used, should be mentioned on goods of packing of such goods as far
          as possible.




      |ANNEXURE (Supra)                                                 |


      Explanation:- The verification of percentage of fly-ash used  by  fly-
                       ash based industries shall be made on the  basis  of
                       Government orders issued in this behalf from time to
                       time.”

8.          To complete the narration, it is  apropos  to  state  that  the
aforesaid notification is rescinded by the  State  Government  with  effect
from 14.10.2004 by issuing notification dated 14.10.2004.

9.          The cement  industries  situated  in  the  neighbouring  States
aggrieved by the notification of the Government  of  Uttar  Pradesh,  dated
27.02.1998 had approached the High Court by filing Writ Petitions. In  that
they had sought for quashing of the notification, dated 27.02.1998  insofar
as Condition No. 1 (as extracted  above)  of  the  notification  and  other
consequential reliefs.

10.         The High Court has come to  a  finding  on  two  broad  issues;
firstly, whether Condition No. 1 of the  notification  i.e.  the  grant  of
rebate of tax on the sale of cement in the Districts of Uttar Pradesh alone
contravenes articles 301 and 304(a) of the Constitution of  India.  On  the
aforesaid issue, the Court has concluded that the grant of rebate of tax by
the State Government discriminated between the imported goods and the goods
manufactured in Uttar Pradesh restricting the free movement of  goods  from
one State to the other and therefore impinges articles 301  and  304(a)  of
the Constitution of India.


11.         The Second question that is considered and decided by the  High
Court, is, whether doctrine of severability will  apply  and  therefore  if
Condition No. 1 in the notification violates articles 301 and 304(a) of the
Constitution of India; should  the  notification  be  struck  down  in  its
entirety or merely the impinging condition in the  notification.  The  High
Court has relied on the decision of this Court in Loharn  Steel  Industries
v. State of Andhra Pradesh, (1997) 2 SCC 37, and has come to the conclusion
that if certain conditions in the notification violate freedom of trade and
commerce, then that portion of the notification restricting rebate  of  tax
to the districts in State of Uttar Pradesh alone is  severable.  Therefore,
the High Court for the reasons stated above has declared the Condition No.1
of the notification as illegal, arbitrary and  discriminatory,  accordingly
has quashed the  Condition  No.1  of  the  notification  and  also  granted
consequential relief in the form of rebate to  the  respondents-herein  and
further has directed that deposits made by the  respondents  in  excess  of
what was payable was to be refunded with an interest of 10% per annum.




12.         Being aggrieved, the Revenue calls in question the  correctness
or otherwise of the common judgment and order passed by the High Court in a
batch of Writ Petitions dated 29.01.2004.

13.         Shri Sunil Gupta, learned  senior  counsel  appearing  for  the
appellants  contended  that  the  notification  issued  by  the  Government
provides for grant of rebate to an industry which  manufactures  cement  by
using fly-ash as a raw material. The rebate is granted by the Government to
encourage  industries  in  removing  and  re-using   fly-ash.   Since   the
notification only provides for rebate, it would not fall within the meaning
ascribed to ‘any tax’ under article 304(a) of the  Constitution  and  would
therefore does not contravene the Constitutional Provisions. In aid of  his
submission, the counsel would heavily rely on the decision of this Court in
the case of Video Electronics Pvt. Ltd. v. State of Punjab,  (1990)  3  SCC
87. The learned counsel would further argue  that  rebate  and  imposition/
exemption are  two  different  concepts.  Exemption  is  an  antithesis  of
‘imposition’ and it belongs to the realm of imposition of tax and therefore
exemption simpliciter without reason is barred by  article  304(a)  of  the
Constitution of India. Rebate, on the other hand, is repayment or refund of
an amount and therefore it may not be a subsidy but it is in the form of an
incentive or a grant.  He further would point out that imposition of tax is
different from collection or repayment of tax.  In other  words,  he  would
submit that there are two different stages:- one would  be  the  imposition
and levy of taxes and the other  is  collection  and  repayment  of  taxes.
Rebate of tax as such is a repayment of taxes and is certainly not  a  part
of levy or imposition of taxes. He would further submit that for rebate  of
tax as against non-imposition or exemption at point of  tax  being  common,
Part XIII of the Constitution will not apply.


14.         In the second limb of the argument, the learned  counsel  would
submit that there are two crutches in the notification, if one of  them  is
taken away the other cannot function  independently.  Therefore,  he  would
submit that because the respondents have not challenged Clause(2) and  have
only challenged Clause(1) of the notification, then while  granting  relief
if one of the condition is declared invalid then both the  clauses  of  the
notification are to be struck down.

15.         Thirdly, the learned counsel would contend that  the  State  of
Uttar Pradesh has no territorial jurisdiction  over  the  industrial  units
situate outside the State of Uttar Pradesh and therefore, the  notification
also inherently does not and cannot give the Uttar Pradesh Authorities  any
extra territorial jurisdiction. Therefore, it is nigh  impossible  for  the
accessing authorities  to  effectively  enforce  machinery  and  procedural
provisions. This aspect  of  the  matter  is  not  taken  note  of  is  the
submission of the learned  counsel.  Finally  concludes,  that,  rebate  is
outside the scope of Part XIII and article 304(a) of  the  Constitution  of
India, and Section 5 of the Act  is  a  beneficial  legislation  passed  in
public interest by the State Government and therefore  a  liberal  approach
requires to be adopted by this Court.


16.         Per Contra, Shri Dhruv Agarwal, learned  senior  counsel  would
contend, that, by reason of the notification all the sales of the Cement in
Uttar Pradesh manufactured by cement industries  using  fly  ash  for  such
manufacture outside the State of Uttar Pradesh are  subjected  to  levy  of
sales tax at the rate of 12.5 per cent, whereas the  sales  of  the  cement
manufactured by cement industries in Uttar Pradesh are  granted  rebate  of
tax from such levy and thus the cement  industries  outside  the  State  of
Uttar Pradesh are clearly discriminated against.  It is submitted that this
discrimination violates the provisions of articles 301 and  304(a)  of  the
Constitution of India.  It is further contended that article 304(a) of  the
Constitution speaks of imposition of tax and rebate of tax is nothing but a
facet of imposition of tax and therefore the provision of article 304(a) of
the Constitution is attracted.   He  would  further  contend  that  article
304(a) of the Constitution is not meant to be blanket legislation and  that
grant of incentives and  subsidies  for  backward  areas  given  under  the
provisions of the Act are different from rebate  of  tax  given  under  the
notification. He would rely on Shree Mahavir Oils and another v.  State  of
Jammu and Kashmir, (1996) 11 SCC 39, and would submit  that  the  aforesaid
case clarified the observations made in the Video Electronics case (Supra),
wherein it is observed that exemption without reasons is discriminatory and
would directly hit by article 304(a) of the Constitution of India. He would
further point out that rebate of tax would have  the  same  effects  of  an
exemption because it would mean refunding the full amount of tax collected.
 Therefore, rebate is nothing but a concessional rate of tax.

17.         The learned counsel,  would  further  argue  on  the  point  of
severability that while severing, the scope of the  provision  is  enlarged
and therefore if the invalid portion of  the  notification  viz.  Condition
No.1 of the notification can be severed  from  the  valid  portion  of  the
notification without changing the object of the notification, then  relying
on the principles of D.S. Nakara v. Union of India, 1983  2  SCR  165,  the
doctrine of severability should be made applicable. Lastly it is  submitted
that the constitutional validity of a taxing provision cannot be tested  on
the touch stone of inability in enforcing machinery provision.

18.         Shri Ashok H. Desai, learned senior counsel  would  argue  that
the primary question  for  consideration  is  whether  the  rebate  of  tax
introduced by the Government of Uttar  Pradesh  creates  a  trade  barrier/
fiscal barrier or in other  words  the  Government  has  further  insulated
itself by creating tariff  walls,  therefore,  impinging  article  301  and
article 304(a) of the Constitution of India. He  would  therefore  make  an
effort to show the legislative history and scope  of  article  304(a)  read
with article 301 of  the  Constitution  of  India.  To  date  back  to  the
historical genesis of the aforesaid articles, he  would  submit  that  they
were introduced to remove the trade blocks/ barrier  that  existed  between
princely States prior to independence but subsequently to  foster  economic
development in the whole of India and to preserve its unity, such  economic
barriers were restricted which were  discriminatory  in  nature.  He  would
further submit that to understand whether any such tax  introduced  by  the
Government is discriminatory or not, the effect and the result of such  tax
imposed is to be seen. If the overall result or such effect  restricts  the
free movement of goods between the States then it  would  violate  articles
301 and 304(a) of the Constitution of India.

19.         He further submits that it is undoubtedly true that it  is  the
prerogative of the State Government to encourage the backward areas in  its
State by way of incentives but in the  instant  case  the  State  of  Uttar
Pradesh does not segregate between backward and developed districts in  the
State but have rather extended the rebate of tax to even  the  industrially
advanced districts in the State of Uttar Pradesh and further the rebate  of
tax is in the nature of exemption/ concessional rate of tax and the overall
effect  of  such  rebate  is  that  it  altogether   exempts   the   dealer
manufacturing and producing cement by using fly-ash in Uttar  Pradesh  from
the payment of tax and therefore rebate qualifies as any such ‘tax’ imposed
under article 304(a) of the Constitution that would give  a  discriminatory
treatment to two different goods, one originating within the State and  the
other as the out-of–State goods.


20.         The learned counsel would further contend that the  concept  of
rebate of tax is within the realm of taxation and whether it  is  exemption
or repayment by way of a rebate of tax, the only test is,  one  has  to  be
mindful of its impact as to whether it is a trade barrier thereby impinging
article 304(a) of the Constitution of India. He  would  further  point  his
finger to Section 5 of the Act and submit that Section  5  of  the  Act  is
couched in a manner so as to reflect that it is a rebate of tax. Therefore,
the intention of the framers of article 304(a) of the  Constitution  cannot
be overlooked which was only to  restrict  trade  barrier  irrespective  of
their nomenclature used to shield such levy or imposition  of  tax.  It  is
therefore, he would submit that it is not the words used but the impact  on
the manufacturer(s). Article 304(a) of  the  Constitution  is  therefore  a
constitutional  limitation  in  itself   that   prevents   a   State   from
discriminating between the goods so imported and the goods so  manufactured
or produced by the dealers within the State  unless  the  State  in  public
interest  impose  reasonable  restriction  under  article  304(b)  of   the
Constitution  after  obtaining  Presidential  assent.  Shri  Desai,   would
therefore submits that the amendment in the  notification  brought  by  the
Government further does not  satisfy  the  requirements  of  the  aforesaid
articles by not obtaining Presidential assent if the legislation is made in
public interest.


21.         There are three broad issues for our consideration:
         •  firstly,  whether  the  grant  of  rebate  of  tax  is  hit  by
           constitutional limitation on the State legislature under article
           304(a) read with article 301 of the Constitution  of  India,  as
           and when it discriminates between the  imported  goods  and  the
           goods manufactured  and produced outside the State.
         • the second issue that arises is, whether  the grant  of  rebate,
           directly or indirectly restrict the free flow of trade, commerce
           and intercourse among States  by  assuming  the  effects  of  an
           exemption/ concession which is nothing but a concept within  the
           scope of taxation.
          • The third  issue  is,  can  only  the  first  condition  of  the
            notification be severed if  it  is  found  to  be  violative  of
            article 304(a) of the Constitution  of  India  without  striking
            down the whole of the notification.


22.         Before dealing with the respective  contentions  raised  before
us, we shall set out the relevant Provisions of the  Act.   The  dictionary
clause  defines  ‘dealer’,  ‘manufacturer’,  ‘tax’  ‘trade  tax’  etc.  The
definitions are therefore extracted and it reads as under:

       “(bb) “Trade Tax” means a tax payable under  this  Act  on  sales  or
       purchases of goods, as the case may be;


       (c)  “dealer” means any  person  who  carries  on  in  Uttar  Pradesh
       (whether regularly or otherwise) the  business  of  buying,  selling,
       supplying or distributing goods directly or indirectly, for  cash  or
       deferred payment or for commission, remuneration  or  other  valuable
       consideration and includes –


           (i)   a local  authority,  body,  corporate,  company,  any  co-
           operative society or other society, club, firm, Hindu  undivided
           family or other association of persons  which  carries  on  such
           business;


           (ii)  a factor, broker, arhati, commission  agent,  del  credere
           agent, or any other mercantile agent, by  whatever  name  called
           and whether of the same description as herein  before  mentioned
           or  not,  who  carries  on  the  business  of  buying,  selling,
           supplying or distributing  goods  belonging  to  any  principal,
           whether disclosed or not;


           (iii)       an auctioneer who carries on the business of selling
           or  auctioning  goods  belonging  to  any   principal,   whether
           disclosed or  not,  and  whether  the  offer  of  the  intending
           purchaser is accepted by him or by the principal or  nominee  of
           the principal;


           (iv)  a Government which, whether in the course of  business  or
           otherwise, buys, sells, supplies or distributes goods,  directly
           or  otherwise,  for  cash  or  for  deferred  payment   or   for
           commission, remuneration or other valuable consideration;


           (v)   every person who acts within the State as an  agent  of  a
           dealer residing outside the State, and buys, sells, supplies  or
           distributes goods in the State or acts on behalf of such  dealer
           as-
                (a) a mercantile agent as defined  in  Sale  of  Goods  Act,
                1930; or


                (b)  an agent for handling of goods or  documents  of  title
                relating to goods; or


                (c)  an agent for the collection or the payment of the  sale
                price of goods or as a guarantor for such collection or such
                payment;


                (vi)   a firm or a company  or  other  body  corporate,  the
                principal office or  headquarters  whereof  is  outside  the
                State, having a branch or office in the State, in respect of
                purchases  or  sales,  supplies  or  distribution  of  goods
                through such branch or office;


                [(vii) every person who carries on the business of  transfer
                of property in goods (whether as  goods  or  in  some  other
                form) involved in the execution of a works contract;




                (viii)       every person who carries  on  the  business  of
                transfer of the right to  use  any  goods  for  any  purpose
                (whether or not for a specified period) for  cash,  deferred
                payment or other valuable consideration;


       [(n) “tax” includes an  additional  tax  and  the  composition  money
       accepted under Section 7-D];


       [(e-1) “manufacture” means producing  making  ,  mining,  collecting,
       extracting,  altering,  ornamenting   ,   finishing,   or   otherwise
       processing, treating or adapting any goods; but does not include such
       manufactures or manufacturing processes as may be prescribed;]

       [(ee) 'Manufacturer' in relation to any goods means  the  dealer  who
       makes the  first  sale  of  such  goods  in  the  State  after  their
       manufacture and includes:--


           (i) a dealer who sells bicycles in completely knocked down form;


           (ii) a dealer who makes purchases  from  any  other  dealer  not
           liable to tax on  his  sale  under  the  Act  other  than  sales
           exempted under Sections 4, 4-A and 4-AAA.]


      [(h) 'Sale', with its grammatical variations and cognate  expressions,
      means any transfer of property in goods (otherwise than by  way  of  a
      mortgage, hypothecation,  charge  or  pledge)  for  cash  or  deferred
      payment or other valuable consideration, and includes—






           (i) a transfer, otherwise than in pursuance  of  a  contract  of
           property in any  goods  for  cash,  deferred  payment  or  other
           valuable consideration;


           (ii) a transfer of property in goods (whether as  goods,  or  in
           some other form) involved in the execution of a works contract;


           (iii) the delivery of goods on hire purchase or  any  system  of
           payment by instalments;


           (iv) a transfer of the right to use any goods  for  any  purpose
           (whether or not for  a  specified  period)  for  cash,  deferred
           payment or other valuable consideration;


           (v) the supply of goods by  any  unincorporated  association  or
           body of persons to a member thereof for cash,  deferred  payment
           or other valuable consideration; and


           (vi) the supply, by way of or as part of any service or  in  any
           other manner whatsoever, of  goods,  being  food  or  any  other
           article for human consumption  or  any  drink  (whether  or  not
           intoxicating) where such  supply  or  service  is  for  cash  or
           deferred payment or other valuable consideration;]”


23.         Section 3 of the Act is the  charging  provision.  Section  3-A
provides for the rate of tax payable by a dealer under the Act.  Section  4
of the Act provides for grant of general exemption for the purposes of  the
Act. Section 4-A of the Act provides for grant of exemption from trade  tax
when the State Government is of the opinion that it is necessary so  to  do
for increasing the production of any goods or for promoting the development
of any industry in the State. Section 4–AA provides for concession  in  the
rate of tax to certain industrial units not exceeding twenty-five per  cent
on the sale of goods manufactured by such industrial  unit  which  provides
employment to the persons belonging to the scheduled  caste  and  scheduled
tribe, and other backward  classes.   Section  4AAA  authorizes  the  State
Government to grant special concession to certain  industrial  undertakings
in special situations and circumstances. Section 5 of  the  Act  authorizes
the State Government to grant rebate of tax on certain purchases  or  sales
if it is satisfied that it is in the public interest so to do by issuing  a
notification allow a rebate up to the full amount of tax  on  the  sale  or
purchase of any goods or the sale or purchase of such goods by such  person
or class of persons as may be specified in the notification. Section  5  is
relevant for the purpose of this case and therefore the same is extracted:
“Sec. 5 – Rebate of tax on certain purchases or sale:

           1. Where the State Government is satisfied that it is  expedient
           in the public interest so to do, it  may  by  notification,  and
           subject to such conditions and restrictions as may be  specified
           therein, allow a rebate up to the full amount to ;


            a) the sale or purchase of any goods,
            b) the sale or purchase of such goods by such  person  or  class
               or persons as may be specified in the said notification.


            2.   The rebate under  sub-Section  (1)  may  be  allowed  with
            effect from a date prior to the notification.





24.         Section 5 of the Act is in three parts.  Firstly, it authorizes
the State Government that if it is satisfied that grant of rebate of tax is
expedient in the public interest it may do so by issuing  the  notification
and secondly, that the notification may allow  a  rebate  up  to  the  full
amount of tax levied on a specified point of sale or purchase of any  goods
or the sale or purchase of such goods by such person or class  of  persons.
Lastly, the notification may also impose such conditions or restriction for
availing the benefit under the notification.


25.         In exercise of such power, as  we  have  already  noticed,  the
State Government has issued notification dated 27.02.1998 reducing the  tax
liability of the dealers by twenty five per cent on  goods  having  fly-ash
contents between 10 to 30 per cent weight and has reduced the tax liability
of the dealer by  fifty  per  cent  on  goods  having     fly-ash  contents
exceeding thirty per cent by weight.  Further, the notification states that
such reduction is available in the districts mentioned in the column 2  and
for  the  period  mentioned  in  the  column  3  of  the  annexure  to  the
notification.      A tax rebate/ tax cut is  a  reduction  in  taxes.   The
immediate effect of such rebate or tax cut decreases the  real  revenue  of
the Government and an increase in the real income of those whose  tax  rate
has been lowered.


26.         To appreciate the first issue before us,  it  is  necessary  to
extract articles 301 and 304  of  the  Constitution  of  India.   The  said
articles are as under:-

       “301. Freedom of trade,  commerce  and  intercourse.—Subject  to  the
       other provisions  of  this  Part,  trade,  commerce  and  intercourse
       throughout the territory of India shall be free.


       304. Restrictions on trade, commerce and intercourse among  States  —
       Notwithstanding  anything  in  article  301  or  article   303,   the
       Legislature of a State may by law—


                 (a) impose on goods imported from other States or the Union
           territories any tax  to  which  similar  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; and


                 (b) impose such reasonable restrictions on the  freedom  of
           trade, commerce or intercourse with or within that State as  may
           be required in the public interest:


           Provided that no Bill or amendment for the  purposes  of  clause
       (b) shall be introduced or  moved  in  the  Legislature  of  a  State
       without the previous sanction of the President.”






27.         Article 304(a) of the Constitution is an exception  to  article
301 of the Constitution of India. Article 304(a) does not prevent  levy  of
tax on goods; what is prohibited is such levy of  tax  on  goods  as  would
result in discrimination between  goods  imported  from  other  States  and
similar goods manufactured or produced within the State. The object  is  to
prevent imported goods being discriminated against by imposing a higher tax
thereon than on local goods. What article 304(a) demands is that  the  rate
of taxation on local as well as imported goods must be the  same.  This  is
designed to discourage  States  from  creating  State  barriers  or  fiscal
barriers at the boundaries. Article 304(a) of the Constitution empowers the
State to levy tax, with an intent that Part XIII of the  Constitution  does
not affect the power of taxation given under Part XII of the  Constitution.
It is to preserve and protect the  broad  object  of  article  301  of  the
Constitution, article 304(a) only limits the power of the State legislature
from imposing such taxes that would discriminate between imported goods and
domestic goods and restrict free movement  of  goods  between  States.  The
broad issue whether article 304(a) is an exception to article  301  of  the
Constitution of India is discussed in the case of Atiabari Tea Co. Ltd.  v.
The State  of  Assam  and  Ors;  AIR  (1961)  SC  232;  it  was  about  the
Constitutionality of the Assam Taxation  (on  goods  carried  by  Roads  or
Inland Waterways) Act, 1954 (Act XIII of 1954) which was challenged by  the
appellants from whom tax was demanded under the Act for carriage of tea  in
chests, from Sibsagar district in Assam and from Jalpaiguri in         West
Bengal,  to  Calcutta  over  the  waterways  of   State   of   Assam.   The
constitutional objection against the Act was that it  was  covered  by  the
inhibition implied by the freedom enunciated in article  301  and  that  it
could be saved from being struck down only if it  satisfied  the  condition
prescribed in article 304(b).


28.     In the majority judgment,  Gajendragadkar,  J.,  as  he  then  was,
accepted the appellant’s contention that article 301 embraced freedom  from
all kinds of impediments and burdens on commerce including those imposed by
tax laws; and a tax law also,  in  order  to  survive,  must,  satisfy  the
conditions laid down in clause (b) of article 304.  As  the  learned  Judge
pointed out, there was ample evidence in the text of Part  XIII  itself  to
show that it dealt with impediments caused by taxation as well as in  other
ways.  Article 304(a) saved certain taxes on goods from  the  operation  of
articles 301 and 303, implying thereby that in the absence of the provision
in article 304(a) those laws would be hit by article  301  or  303  of  the
Constitution  of  India.   Justice  Hidayatullah,  in  the  Atiabari   Case
dissented and observed:  “Article 304(a) imposes no ban but lifts  the  ban
imposed by articles 301 and 303 subject to one condition.” This observation
led to controversy and the use of the word ‘ban’ was understood  as  giving
enormous power to the State to legislate overlooking the economic unity  of
the nation which was prioritized in article  301  of  the  Constitution  of
India.  Therefore, in the case of State of Kerala v. Abdul  Kadir;  it  was
further clarified that only on a finding that the tax offended article  301
the question whether it was saved by article 304(a) arose.


29.         Again, article 304(a) of the Constitution admits two  exception
in favour of the State legislature to the rule that  trade,  commerce,  and
intercourse throughout the territory of India shall be free.  Clause(b)  to
article 304(a) is an exception which enables a State legislature to  impose
such “reasonable restrictions”  on  the  freedom  of  trade,  commerce  and
intercourse as may be required in the “public interest”.  But  no  bill  or
amendment for the purpose of clause(b) shall be introduced or moved in  the
legislature of a State without the previous sanction of the President.


30.         The Principle of  ‘non-  Discriminatory  tax’  as  provided  in
article 304(a) of the Constitution of  India  is  a  sine-qua–non  to  free
movement of goods between nations/States in several jurisdictions and  also
in international trade and policy. Discrimination as explained under  World
Trade Organization (“WTO”, for short) jurisprudence is spoken of  in  terms
of effect and intention behind such discrimination. Intent is  referred  to
as ‘aim’ or ‘motive’ or ‘purpose’ of  such  discrimination  and  the  other
factor commonly associated with discrimination is ‘effect’ that is  whether
a measure has a discriminatory effect  (also known as the disparate impact)
against imports (as explained in the famous case of Japan v. Alcohol, panel
report). WTO members are free to choose any system of  taxation  they  deem
appropriate provided that they do not impose on foreign products  taxes  in
excess of those imposed on like products. The effect of tax should  not  be
such that two like goods are given discriminatory treatment.


31.         At  the  same  time,  it  cannot  be  doubted  that  rising  of
protective walls may be justified in international  trade.  The  Government
can and has been providing such protectionist 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  unlike  the
international trade policies and  the  commerce  clause  in  United  States
Constitution, our Constitution provides for  regulating  inter-State  trade
and commerce. The Parliament can take all protective measures under article
302 of the Constitution of India as may be required in public interest. But
there are certain obvious differences between the powers conferred  to  the
Parliament under article 302 and State legislature under article 304(a)  of
the Constitution. The  powers  given  to  the  State  legislature  are  not
unrestricted and are bound to function within limitations stipulated  under
article 304(a) of the Constitution of India. The powers even under  article
304(b)  are  to  be  exercised  sparingly  and  after  fulfilling  all  the
conditions of article 304 of the Constitution of India. The power conferred
under  article  304(a)  although  an  exception  to  article  301  of   the
Constitution, but is not a blanket power intended to be  conferred  to  the
State legislature.

32.         To decide the issue  at  hand,  it  is  pertinent  to  discuss,
whether rebate of tax has the same effects of concessional rate of tax.

33.         Article 304(a) ensures only equal  rate  of  tax  for  incoming
goods.  So if such goods are taxed at a higher rate or where they are taxed
at any rate when indigenous goods enjoy concessional rate of  tax,  article
304(a) is attracted.  They are  simple  cases  of  hostile  discrimination.
Therefore, whether a particular tax is discriminatory within the meaning of
this clause, the effect of the tax on the flow of goods  from  outside  the
taxing State has to be taken into consideration and, if the overall effects
of rebate of tax is such that they fall  within  the  meaning  concessional
rate of tax. A detailed discussion on the effects and scope  of  rebate  is
done in the following paragraphs under the head Issue 2 in the judgment.

ISSUE 2

34.       To answer the second issue we need  to  discuss  the  concept  of
‘rebate of  tax’  and  its  overall  impact  on  the  trade,  commerce  and
intercourse in the context of the case pleaded by the parties.



35.         ‘Rebate’ as defined in the New International  Websters’  pocket
dictionary and Bloomsbury Concise  English  Dictionary  is  “discount”,  to
allow as a deduction from a gross amount. It is a discount  repaid  to  the
payer. Rebate as defined in corpus Juris Secundum, Vol. 52 C.J Pg. 1189  is
as under:-
      “ The etymological or dictionary meaning  of  the  term  includes  any
      discount or deduction from a stipulated payment, charge, or  rate  not
      taken as in advance of payment, but handed back to the payer after  he
      has paid the stipulated sum, even when such discount or  deduction  is
      equally applied to all from whom such payment is demandable”


36.         The concept of rebate of tax in the instant  case  is  akin  to
concessional/ reduced rate of tax. Rebate is  though  ex-hypothesi  in  the
nature of  subsidy  and  other  incentives  given  by  the  Government  but
conceptually rebate of tax and incentives are different and it needs to  be
explained in reference to the purpose and nature  of  such  rebate  of  tax
introduced by the legislature. The legislation in respect of a  rebate  has
taken different forms, one of them is a partial rebate in  the  tax,  where
the deduction is given partially on the gross amount and the other  is  the
power reserved for the Government to permit rebate in respect of any  goods
to the full amount of the tax levied at any point in the series of sales of
such goods. A dealer who is entitled to a  rebate  under  any  notification
will collect the tax from the consumers at the point of purchase  and  then
have to pay the full amount of sales  tax  due  on  his  turnover  in  that
quarter; and claim rebate in terms of the notification in  accordance  with
the provision in  the  rules.  However,  the  claim  for  rebate  need  not
necessarily be handed back to the payer after he has  paid  the  stipulated
sum, it can also be paid in  advance  of  payment.  It  is  nothing  but  a
remission or a payment back or it is sometimes spoken of as a discount or a
drawback. It cannot be disputed that it is  the  discretion  of  the  State
Government, through its legislature, to grant rebate to the full amount  of
sales tax, unless its  power  of  taxation  is  limited  by  Constitutional
provisions. In the facts of the present case,  the  legislature  authorizes
the State Government under Section 5 of the Act to  issue  notification  in
the public interest to grant rebate up to the full amount of the tax levied
on any specific point in the series of sales/ purchase of such goods.  Such
rebate is only extended to the districts in State  of  Uttar  Pradesh.  The
Government of Uttar Pradesh has the power to refund or discount to the full
amount of rate of sales tax levied on  a  dealer,  provided  the  power  to
discount does not overall has effects of a weapon of  taxation  that  would
discriminate between the goods imported and manufactured in  Uttar  Pradesh
as laid down in article 304(a) of the Constitution.

37.         The discrimination through a weapon of taxation is explained in
the case  of  Shree  Mahavir  Oil  Mills  (supra).  The  case  pertains  to
unconditional and total exemption from tax on edible  oil  granted  to  in-
State manufacturers by the State Government. Such  an  exemption  was  held
discriminatory and violative of articles 301 and 304(a) of the Constitution
of India. This case further clarifies the  position  in  Video  Electronics
case (supra). The Court observed that States are certainly free  to  impose
tax on subjects which fall under List II of the  Seventh  Schedule  of  the
Constitution,  but  power  shall  not   be   exercised   to   bring   about
discrimination  between  the  imported  goods   and   the   similar   goods
manufactured in that State and concluded that total  exemption  granted  in
favour of small-scale industries in Jammu and Kashmir producing edible  oil
is not sustainable in law. It clarified the exception  carved  out  by  the
three judges bench in the case  of  Video  Electronics  Ltd.  v.  State  of
Punjab; 1989 SCR Supp.(2) 731, where it explained that notification  issued
by two States (Punjab and  Haryana)  in  that  case  exempting  new  units,
established in new areas specified the    exemption to  be  provided  to  a
special class to whom exemption was  provided  for  a  specific  period  on
specific conditions and was not extended to  all  producers  of  goods  and
therefore did not offend the freedom guaranteed under articles 301 and  304
of the Constitution. Similarly in the case of Punjab notification,  it  was
held that since the exemption  is  for  certain  specific  goods  and  also
because an overwhelmingly large number of local  manufacturers  of  similar
goods are subject to a  sales  tax;  it  cannot  be  said  that  the  local
manufacturers were favored against the outside  manufacturers  and  further
the exemption was granted for a limited period of  five  years.  The  above
case also laid down that  while  judging  whether  a  particular  exemption
granted by the State offends articles 301 and 304, it is necessary to  take
into account the  economic  backwardness  of  a  State  and  the  need  for
concessions and subsidies to such new  industries  for  their  development.
Therefore, this case clarified that the limited exception  created  in  the
said  judgment,  if  extended  to  all  will  rob  the  salutary  principle
underlying Part XIII of the Constitution and further it is not possible  to
go on extending the limited exception. It is with  this  observation,  this
Court in the above case, held the exemption to be violating article  304(a)
read with article 301 of the Constitution of India.



38.         Article 304(a) is a provision  that  deals  with  taxation.  It
places goods imported from sister  States  on  a  par  with  similar  goods
manufactured or produced within the State in regard to  State  taxation  in
the allocated field.  The object of article 304(a) was to limit  the  power
of taxation by States so as  to  prevent  discrimination  against  imported
goods by imposing taxes on such goods as a higher rate  than  is  borne  by
indigenous goods.  The tax referred to in  article  304(a)  is  a  ‘tax  on
goods’. The word “tax” and “taxation” as said by Justice Weaver of the Iowa
Supreme Court in the case of State v. Chicago & N. W. R. Co., 128  Wis 449,
108 N. W. is referred to as all sorts of exaction which  swell  the  public
funds. Taxation in its broadest and  most  general  sense,  includes  every
charge or burden imposed by the sovereign power upon persons,  property  or
property right, for the use and support of the Government and to enable  it
to discharge its appropriate functions, and in that broad definition  there
is included a proportionate levy upon persons or property and various other
methods or devices   by  which  revenue  is  extracted   from  persons  and
property.  The term ‘tax’ is to  be  read  in  all-embracing  and  sweeping
sense. Such methods or device used by the Government from time to time  are
not ordinarily open to serious questions but their  scope  and  application
vary according to the nature  of  the  subject  under  discussion  and  the
circumstances under which they are used. ‘Rebate of  tax’  in  the  instant
case is such a device or weapon of taxation used  by  the  Government  from
time to time which is though not in question in all  situations  but  their
validity is tested in the touchstone of article 304(a) of the  Constitution
in the circumstance under which they are used. If the rebate of tax by  way
of repayment to the full amount of tax levied  qualifies  within  the  same
meaning as that of exemption, then  such  discount  would  a  fortori  mean
discrimination on the rate of tax by repaying by way of  a  rebate  to  one
class of local dealers the whole amount of sales tax paid and on the  other
hand the outside dealers are  taxed  higher in absence of  the  benefit  of
rebate.   This   situation   squarely   falls   within   the   meaning   of
‘discrimination’ as contemplated under article 304(a) of  the  Constitution
of India.




39.         It is for the aforesaid reasons, it is pertinent to analyze the
nature and scope of concessional/ reduced rate of tax/ exemption by drawing
inspiration from their understanding in other jurisdictions and under  what
circumstance could a rebate be termed a hindrance to or as interfering with
the freedom of trade, commerce or intercourse. In appreciating the  effects
of an exemption  parallel  to  a  rebate  of  tax,  we  may  refer  to  the
observation made in Congressional Budget and Fiscal Operations, 2 U.S.C.A.§
622 ,  where exemptions is understood to have been in the category known as
“tax expenditures”  because  the  revenues  lost  by  such  exemptions  are
similar to direct expenditures made by the government, the only  difference
being that they are made through the tax system  and  not  the  legislative
appropriations process. These  tax  expenditure  programmes  are  sometimes
defined as “subsidies provided  through  the  taxation  systems,”  but  the
broadest  definition  includes  all  categories  of  “deductions,  credits,
exclusions, exemptions, preferential tax rates and tax deferrals.”  Justice
Wayne in the case of Jefferson Branch Bank v. Skelly;  66  U.S.  436  while
explaining the  power of legislature where not  forbidden  by  Constitution
explained, that the legislature has  the  power  to  exempt  from  taxation
according  to  its  views  of  public  policy  provided  no  constitutional
provisions are violated. The United States Constitution under the  Equality
and  uniformity  clause  mandates  that  where  the  Constitution  requires
taxation to be equal and uniform, it  is  held  in  most  States  that  the
legislature must tax all such persons or property   and  cannot  grant  any
exemptions unless the  power  to  exempt  is  expressly  conferred  by  the
Constitution. In some states, however, the contrary is  held  but  even  in
such states it is held that exemptions are not valid unless  including  all
property and persons of the same class whether such  person as  subject  to
such exemption is inside the State or situated outside the State.


40.         Exemption as we normally understand has two-fold impact. First,
exemptions/ concessional rate of tax affect consumer  choice  by  impacting
relative pricing and, thus, materially altering the  economic  balance.  It
is because consumption will tend to shift towards untaxed items, the prices
of those items and the items used to produce them will increase  while  the
prices of taxed items will decrease relatively.   Second,  such  exemptions
unfairly burden some businesses either within the same industry or in other
competing industries.




41.         Rebate is another such device used by the Government which when
given on the rate of tax to  the  full  amount  of  tax  levied,  it  gives
favourable treatment to one class of  dealers  situated  within  the  state
barring the dealers similarly placed outside the State manufacturing  goods
using the same raw material.  The grant of such rebate has  the  colour  of
exemption/ concessional rate of tax along with the same deleterious effects
of an exemption.


42.         Therefore, the test to be applied to determine  whether  rebate
is within the realm of tax defined in article 304(a) of the Constitution of
India so as to say that it discriminates between the two  class  of  goods:
locally manufactured  goods and the imported goods when both the  class  of
dealers meet the conditions required to qualify for  the  grant  of  rebate
i.e. the use of fly-ash, is the overall effect or impact of such rebate  on
the manufacturer. This issue is no longer res-integra and is  discussed  in
several cases including in the case of Firm A.T.B  Mehta  Masjid  &  Co  v.
State of Madras  and  Anr.,  AIR  1963  SC  928,  where  the  question  for
consideration was whether Rule 16 of the Madras  General  Sale  Tax  Rules,
1939 subjected tanned hides and skins outside the State,  and  sold  within
the State to a higher rate of tax than the tax imposed on  hides  or  skins
tanned and sold within the state and therefore violating article 304(a)  of
the Constitution. This Court observed that to determine  whether  the  rule
was discriminatory, the effect of this rule  is  to  be  seen.  The  result
therefore is that the sale of hides or skins which had  been  purchased  in
the State and then tanned within the State is not subject  to  any  further
tax. Hides and skins tanned within the State are  mostly  those  which  had
been purchased in their raw condition in the State and therefore  on  which
tax had already been levied on the price paid by the purchaser at the  time
of their sale in the raw condition. If the quantum  of  tax  had  been  the
same, there might have been no case for grievance  by  the  dealer  of  the
tanned hides and skins  which  had  been  tanned  outside  the  State.  The
grievance arises on account of the amount of tax levied being different  on
account of the existence of a substantial disparity in the price of the raw
hides or skins and of those hides or skins  after  they  had  been  tanned,
though the rate is the same under Section 3(1)(b) of the Act. If the dealer
has purchased the raw hide or skin in the State, he does  not  pay  on  the
sale price of the tanned hides or skins, he  pays  on  the  purchase  price
only. If the dealer purchases raw hides or skins from outside the State and
tans them within the State, he will be liable to pay sales-tax on the  sale
price of the tanned hides or skins. He too will have to pay  more  for  tax
even though the hides and skins are tanned  within  the  State,  merely  on
account  of  his  having  imported  the  hides  and  skins  from   outside.
Therefore,  the  Court  held  that  this  rule  on  this  ground  alone  is
discriminatory of article 304(a) of the Constitution of India.


43.         The above principle was re-iterated in the case of W.B. Hosiery
Association and others v. State of Bihar; (1988) 4 SCC 134 and in the  case
of H. Anraj v Government of Tamil Nadu;  (1986)  1  SCC  414;  wherein  the
effect of an exemption was discussed. The issue before the Court  was  that
the locally manufactured goods within the State  were  exempted  but  those
manufactured in other States and imported into the State were subjected  to
a high rate of tax. The hosiery manufacturers and dealers in the  State  of
West Bengal in their prayer in the writ  petition  asked  for  a  direction
asking the respondents to forbear from levying or  imposing  or  collecting
any sales tax on the sale of hosiery goods imported into Bihar  from  other
States. The State Government by a notification exempted dealers from  sales
tax of hosiery goods manufactured  and  produced  in  the  State  of  Bihar
whereas levied sales tax on the  dealers  outside  the  State.  This  Court
opined  that  from  the  commercial  or  normal  point  of  view,  such   a
discriminatory levy of sales tax would have an effect that would  be  bound
to affect the free flow of hosiery goods from outside State into the  State
of Bihar and would therefore violate article 301 read with  article  304(a)
of the Constitution of India.




44.         The above decision is also followed  in  the  case  of  Western
Electronics and Another v. State of Gujarat and others, 1988 2 SCC 568; and
in the case of Loharn Steel Industries  v. State of Andhra Pradesh;  (1997)
2 SCC 37 wherein the impact of exemption on the manufacturer was such  that
the manufactures outside Andhra Pradesh had to pay a higher rate of tax  as
compared to the manufacturers in Andhra Pradesh because of the  entire  tax
exemption granted to the all re-rolled steel products sold  in  the  Andhra
Pradesh and manufactured out of tax paid  raw-material   purchased  in  the
State of Andhra Pradesh. Therefore,  the  notification  in  this  case  was
considered to be violating article 304(a) of the Constitution of India.

45.         This Court in the case of State of U.P. and  another  v.  Laxmi
Paper Mart and others, AIR 1997 SC 950 has  explained  that  exempting  the
exercise books made from paper  purchases  within  Uttar  Pradesh  produced
within the State and the levying of the tax on the exercise books  produced
outside Uttar Pradesh and sold in Uttar  Pradesh  at  the  rate  of  5%  is
discriminatory and offends clause(a) of article 304 of the Constitution  of
India. Again in  Lakshman v. State of Madhya Pradesh; 1983  SCR  3124,  the
petitioner was nomad grazier belonging to Gujarat who wandered  from  place
to place with his cattle.  State of Madhya Pradesh did not  like  this  and
imposed a higher duty for out-of-State cattle owners.  The levy  was  found
invalid by the Court.


46.         Rebate, therefore, as it is defined in the case  of  Estate  of
Bernard H. Stauffer, Bonnie H.  Stauffer,  Executrix,  v.  Commissioner  of
Internal Revenue, 48 U.S. T.C.  277,  means  abatement,  discount,  credit,
refund, or any other kind of repayment. Rebates have been normally used  as
justifiable  incentives  given  by  the  Government  to   stimulate   small
industries or newly established industries. But to understand Rebate of tax
as rebate per se would be a misnomer. Rebate of tax is the rebate  on  rate
of tax and is essentially the arithmetic of rate. The term ‘rate’ is  often
used in the sense of standard or measure.  It  is  the  tax  imposed  at  a
certain measure or standard on the total turnover of the  goods.  Rate,  in
other words is the relation  between  the  taxable  turnover  and  the  tax
charged. Rebate of tax or exemption is distinguished from non-imposition or
non-liability in the case of A.V. Fernandez v. The  State  of  Kerala;  AIR
1957 SC 657 wherein the Court held that in rebate  of  tax,  the  sales  or
purchases would have to be included in the gross  turnover  of  the  dealer
because they are prima facie liable to tax and the only thing which  dealer
is entitled to in respect thereof is the deduction from the gross  turnover
in order to arrive at the net turnover on which the tax can be imposed.  On
the other hand, in the case of non-imposition or non-liablity, the sales or
purchases are exempted from taxation  altogether.  The  Legislature  cannot
enact a law imposing or authorizing the imposition of a  tax  thereupon  as
they are not liable to any such imposition of tax. If  they  are  thus  not
liable to tax, no tax can be levied or imposed on them and they do not come
within the purview of the Act at all. The very fact of their  non-liability
to tax is sufficient to exclude them from  the  calculation  of  the  gross
turnover as well as the net turnover on which sales tax can  be  levied  or
imposed.


47.         The exemption or rebate of tax is therefore within the  purview
of taxation. In the instant case, if the grant of  rebate  of  tax  by  the
State Government under Section 5 of the Act is to the full  amount  of  tax
levied, then for the dealers manufacturing cement using fly-ash outside the
State of Uttar Pradesh but selling it in Uttar Pradesh,  though  the  State
Government contends that the rate of tax is same  for  the  dealers  inside
Uttar Pradesh and outside Uttar Pradesh, but the  overall  effect  is  that
there is no tax levied on the net turnover after deductions being made from
the gross turnover but, on the other hand,  the  dealers  manufacturing  or
producing cement using fly-ash outside Uttar Pradesh are taxed at the  rate
of 12.5%. Therefore, it can be said that the rebate of tax is in the nature
of exemption and the instant case can be decided on the basis of catena  of
decisions of this Court where blanket exemption without reasons are said to
be discriminatory and violating  article  304(a)  of  the  Constitution  of
India.

ISSUE 3:-

48.         To decide the third issue, the concept of severability needs  to
be noticed. Doctrine of severability provides that if  an  enactment  cannot
be saved by construing it consistent with its constitutionality, it  may  be
seen whether it can be  partly  saved.  The  doctrine  of  severability  was
considered in the case of RMD Chamarbaugwala v. Union Of India, AIR 1957  SC
628; in which it was observed that “when a statute is in part void, it  will
be enforced as  against  the  rest,  if  that  is  severable  from  what  is
invalid”. The Court also observed seven propositions  of  severability,  out
of which, one of them provided that if the valid and  the  invalid  portions
are distinct and separate that after striking out  what  is  in-valid,  what
remains is in itself a complete code independent of the rest, then  it  will
be upheld notwithstanding  that  the  rest  has  become  unenforceable.  The
principles of severability was also discussed in the case of A.  K.  Gopalan
v. State of Madras, AIR 1950 SC 27, wherein the Court observed that what  we
have to see is, whether the omission of the impugned  portions  of  the  Act
will "change the nature or the structure or the object of the  legislation".
In the  facts  of  the  present  case,  striking  down  Clause  (1)  of  the
notification alone does not change the object of the legislation.  It  is  a
notification passed in public interest and therefore even if Clause  (1)  of
the notification is expunged, leaving behind the rest  of  the  notification
intact, the purpose of the Government to grant rebate to  provide  incentive
to the manufacturing units using fly-ash is not lost.


49.         This doctrine was also enunciated in the  case  of  D.S.  Nakara
(supra).   The  question  that  arose  was  whether,  for  the  purpose   of
application of the liberalized pension rules, the Government of India  could
stipulate March 31, 1979 as the date for dividing Government employees  into
two classes: one class who had retired before March 31, 1979 who  would  not
be entitled to the benefits of the liberalized pension rules and  the  other
class who retired after March  31,  1979  who  would  be  entitled  to  such
benefits.  One of the questions that came up for consideration is whether  a
specified date could be severed if it is found to be wholly  irrelevant  and
arbitrary. This Court observed  that,  if  the  event  is  certain  but  its
occurrence at a point of time is considered wholly irrelevant and  arbitrary
and having an undesirable  effect  of  dividing  homogeneous  class  and  of
introducing the discrimination, the same  can  be  easily  severed  and  set
aside.  The Court further opined that while examining a case  under  article
14 of the Constitution, the approach is  removal  of  arbitrariness  and  if
that can be brought about by severing  the  mischievous  portion  the  Court
ought to remove the discriminatory part retaining  the  beneficial  portion.
The Court therefore concluded that  severance  never  limits  the  scope  of
legislation but rather enlarges it.


50.         In the light of the observation made by this Court,  we  are  of
the opinion that the condition No. 1 is discriminatory and violates  article
304(a) of the Constitution of India and therefore needs to be  severed  from
the rest  of  the  notification  which  can  operate  independently  without
altering the purpose and the object of the notification.
51.         The learned counsel, Shri Gupta,  would  argue  that  since  the
assessing authorities would not be in a position to  verify  the  claim  for
grant of rebate of tax by manufacturers of cement using fly-ash outside  the
State of Uttar  Pradesh,  the  benefit  under  the  notification  cannot  be
extended to them.  We  do  not  agree.   The  explanation  appended  to  the
notification authorises the assessing authorities to verify the  claim  that
may be made by the manufacturers including the fact whether  an  assessee(s)
satisfy the conditions prescribed in the notification.  If they do not  fall
within the parameters  of  the  notification  the  assessing  authority  can
always reject the claim of the manufacturers.


52.         Further we may also refer  to  the  submission  of  Shri  Dhruv
Agarwal, who would rely on the observations of this Court in  the  case  of
G.B. Prabharkar Rao v.  State  of  Andhra  Pradesh,  1985  Supp.  SCC  432;
wherein the age limit of retirement  was  first  raised  and  then  reduced
which  created an administrative chaos  and  therefore  merely  because  it
created an administrative chaos the provision reducing the  age  could  not
have been declared invalid.
On the basis of the  aforesaid  submission,  he
would submit that the machinery provisions  cannot  be  used  to  test  the
constitutional validity of  a  statute  because  the  liability  is  always
created through substantive provisions.
We agree with the  submission  made
by, Shri Dhruv, and are of the opinion that issue of territoriality  should
not  be  a  factor  to  determine  the  constitutional  validity   of   the
notification.




53.         In view of the aforesaid discussion,
we hold  ‘rebate  of  tax’
granted by the State Government to cement manufacturing units using fly-ash
as raw material in a unit established in the districts of  State  of  Uttar
Pradesh alone is violative of the provisions contained in articles 301  and
304(a)  of  the  Constitution  of  India.   
We  further  declare  that  the
notification would also apply to respondent(s)- cement manufacturing units.



54.         With these observations and directions, all the  civil  appeals
are disposed of. There shall be no order as to costs.

           Ordered accordingly.






                                                ..........................J.
                                                               (H. L. DATTU)


                                                ..........................J.
                                               (SUDHANSU JYOTI MUKHOPADHAYA)


NEW DELHI;
OCTOBER 18, 2013.

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