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PETITIONER:

M/S. ANAND COMMERICAL AGENCIES, M/S. ANAND COMMERICAL AGENCI

Vs.

RESPONDENT:

THE COMMERICAL TAX OFFICER,VI CIRCLE, HYDERABAD & ORS. ETC.

DATE OF JUDGMENT: 06/11/1997

BENCH:

S.P. BHARUCHA, SUHAS C. SEN.

ACT:

HEADNOTE:

JUDGMENT:

THE 6TH DAY OF NOVEMBER, 1997

Present:

Hon'ble Mr. Justice S.P.Bharucha

Hon'ble Mr. Justice Suhas C.Sen

R. Sundaravardhan, Sr.Adv., R.N.Keshwani, and Ms. Janaki

Ramachandran, Advs. with him for the appellants.

J U D G M E N T

The following Judgment of the Court was delivered:

SEN. J.

The appellant, M/s. Anand Commerical Agencies, is

partnership firm, It is regularly assessed under the Andhra

Pradesh General Sales Tax Act. The dispute in this case

arose in the course of assessment for the assessment year

1977-78. Under Entry 24(b) of the First Schedule to that

Act, tax is payable on groundnut oil at the rate of 2-1/2

paise per rupee of the sale price. Under Entry 24(a), tax is

payable on groundnut oil or refined oil obtained from

groundnut which has not borne any tax under the A.P. Act at

the rate of 6-1/2 paise per rupee of the sale price. The

assessee at the relevant period had total turnover of Rs.

31,000/- out of which Rs. 14,76,000/- was on account of sale

of groundnut oil and refined oil obtained from groundnut

which had not borne tax under the A.P. Act because the oil

was imported into Andhra Pradesh from the State of

Karnataka.

The case of the appellant is that the oil had been

extracted out of groundnuts which had borne tax under the

Karnataka Sales Tax Act. The levy of tax on the oil imported

from Karnataka into Andhra Pradesh at a rate higher tan the

rate at which the oil manufactured in Andhra Pradesh is

taxed in discriminatroy and violative of the appellant's

right of freedom of trade and commerce throughout India.

This contention of the assessee was rejected by the

Sales Tax Officer and also by the Assistant Commissioner

(C.T.), Appeals, Secunderabad.

The Assessee thereafter challenged the decision of the

Assistant Commissioner by filing a writ petition in the

Andhra Pradesh High court challenging the Constitutional

validity of the levy. There was a difference of opinion

between the two judges who heard the matter. The case was

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referred to a third Judge who was of the view that the writ

petition was without any merit and should be dismissed.

The assessee has appealed to this Court.

To appreciate the controversy, it is necessary to set

out Entry 24 of the First Schedule to the Andhra Pradesh

General Sales Tax Act:-

------------------------------------------------------------

Description of goods Point of levy Rate of tax

(1) (2) (30

------------------------------------------------------------

24. Groundnut oil or

refined oil:

(10240

(a) Groundnut oil or At the point of 6-1/2 paise

refined oil not first sale in in the

covered by the State. rupee.

sub-item (b) below.

(b) Groundnut oil or At the point of 2-1/2 paise

refined oil obtained first sale in in the

from groundnut that the State rupee.

has met tax under

the Act.

------------------------------------------------------------

Entry 6 of the Third Schedule which relates to declared

goods:-

------------------------------------------------------------

Description of Point of levy Rate of tax

the goods

(1) (2) (3)

------------------------------------------------------------

6. Ground nut or When purchased by a 4 paise in

peanut miller other than a the rupee.

(Arachis decorticating miller

Hypogaea) in the State, at the

(3006) point of purchase by

such miller and in

all other cases at

the point of purchase

by the last dealer who

buys in the State.

------------------------------------------------------------

It clear from these entries that groundnut oil or

refined oils is liable to be taxed at the rate of 6-1/2

paise in the rupee at the point of first sale in the State

but Under Entry 24(b), it is liable to be taxed at the rate

of 2-1/2 paise in the rupee if the oil is obtained from

groundnut which has already suffered tax under the A.P.

Under Entry 6 groundnut is liable to be taxed at the point

of purchase by the last dealer in the State at the rate of 4

paise in the rupee.

On behalf of the appellant, it has been contended that

on oil obtained from groundnut purchased locally the rate of

tax is 2-1/2 paise in the rupee whereas in the case of oil

imported from other States, the rate of tax on local sales

is higher, namely 6-1/2 paise in the rupee. Entry 24 (a) is

discriminatory and violative of Articles 301 and 304 of the

Constitution of India inasmuch as imported oil ha to bear a

higher rate of tax than locally produced oil.

On behalf of the State of Andhra Pradesh, it has been

contended that there was no discrimination in the rate of

tax an oil indigenously produced within the State and

imported oil. It has to be borne in mind that there was a

tax on sale of groundnut at the rate of 4 paise in the rupee

under item 6 of the Third Schedule to the A.P. Act. If this

is taken into account, a further levy of 4 paise in the

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rupee in effect amounts to a total levy of 6-1/2 paise per

rupee which is levied to the tax imposed on the imported

oil.

The majority view in the High Court was that having

regard to the tax levied on groundnut in the State which was

4 paise in the rupee, the tax on imported oil and

indigenously produced oil within the State was the same,

i.e., 6-1/2 piase in the rupee. It was observed:-

"Under Entry 6 of the Third

Schedule tax is levied at the rate

of 4 paise in a rupee on groundnut

at the point of purchase by the

last dealer. Groundnut is the

material from which groundnut oil

is obtained. It is in respect of

oil obtained from groundnut that

suffered that tax, Entry 24(b)

prescribes a rate of 2-1/2 paise in

the rupee on the first sale.

Otherwise, groundnut oil whether

imported or made from groundnut

locally tax is leviable at the rate

of 6-1/2 paise in the rupee. Take

for instance a dealer who sells oil

which had been obtained from

groundnut which has not suffered

tax, he having not purchased the

groundnut at all as it was from his

own field or grown by him. Such

sale are also liable to be taxed at

the rate of 6-1/2 paise in the

rupee. The discrimination if at

all is because of Entry 24(b).

Since the groundnut from which the

oil is obtained had already

suffered tax which is the maximum

that can be levied under the

Central Sales Tax Act in the State

at the rate of 4 paise in the rupee

at the purchase point by the last

dealer, it is subjected to lesser

rate. Though groundnut oil is to be

treated separate commodity from

groundnuts there is a clear nexus

between groundnuts and groundnut

oil."

Raghuvir, J. in his dissenting judgment took the view

that the argument that groundnut oil or refined oil in the

State of Andhra Pradesh is not taxed at the rate of 6-1/2

paise in the rupee because the groundnuts have been

subjected to tax at the rate of 4 paise in the rupee is an

argument without any substance. The imported groundnut oil

or refined oil was tax at 6-1/2 paise in the rupee, even

when groundnuts out of which such oil was extracted had met

sales tax under the local Sales Tax laws of the State from

which oil was imported. Reghuvir, J. was of the view that to

argue that refined oil processed in the State is in effect

taxed at the rate 6-1/2 paise in the rupee is to overlook

the issue that imported oil has been extracted out of the

groundnuts which were also taxed under the local tax laws.

Articles 301, 302, 303 and 304 are relevant for the

purposes of deciding this controversy:-

"301. Freedom of trade, commerce

and intercourse.-Subject to the

other provisions of this pat,

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trade, commerce and intercourse

throughout the territory of India

shall be free.

302. Power of Parliament to impose

restrictions on trade, commerce and

intercourse. Parliament may by law

impose such restriction 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.

303. Restriction on the legislative

powers of the Union and of the

States with regard to trade and

commerce.- (1) Notwithstanding

anything in article 302, neither

Parliament nor the Legislature of

State shall have power to make any

law giving, or authorising the

giving of, any preference to one

State over another, or making, or

authorising the making of, any

discrimination between one State

and another, by virtue of any entry

relating to trade and commerce in

any of the Lists in the Seventh

Schedule.

(2) Nothing in clause (1) shall

prevent Parliament from making any

law giving, or authorising the

giving of, any preference or

making, or authorising the making

of, any discrimination if it is

declared by such law that it is

necessary to do so far purpose of

dealing with a situation arising

from scarcity of goods in any part

of the territory of India.

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 State 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

restriction 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 purpose of clause (b) shall

be introduced or moved in the

Legislature of a State without the

previous sanction of the

President."

Freedom of trade, commerce and intercourse guaranteed

by Article 301 means freedom to carry on business throughout

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the territory of India without any obstruction and

hindrance. The question whether a fiscal barrier will amount

to interference with the right to carry on trade, commerce

and intercourse throughout the territory of India is not an

easy question to answer. Every State has a right to impose

tax on subjects which fall within its jurisdiction under

List-II of the Seventh Schedule to the Constitution. This

includes taxes on sale or purchase of goods other than

newspaper. Fiscal powers of the State can be utilised not

only to collect revenue but also to regulate economic

development of a State. A backward State may try to

encourage development of industries within the State by

grant of subsidy and also by low rate of tax on goods

manufactured by local industries. If small newly set up

industries in the State have to compete with big industries,

small units may not survive at all. In such a case, the

State is entitled to prop up the local industries by taking

fiscal measures. This may be done by providing subsidies or

by imposing low rate of sales tax on the goods manufactured

within the State. This aspect was explained in the case of

M/s. Video Electronics Pvt. Ltd. v. State of Punjab, AIR

1990 SC 820. by Sabyasachi Mukharji, C.J., in the following

words:-

"It is manifest that free flow of

trade between two States does not

necessarily or generally depend

upon the rate of tax alone. Many

factors including the cost of goods

play an important role in the

movement of goods from one State to

another. Hence the mere fact that

there is a difference in the rate

of tax on goods locally

manufactured and those imported

would not amount to hampering of

trade between the two States within

the meaning of Art. 301 of the

Constitution. As is manifest, Art.

304 is an exception to Art. 301 of

the Constitution. The need of

taking resort to exception will

arise only if the tax impugned is

hit by Arts. 301 and 303 or the

Constitution. If it is not then

Art. 304 of the Constitution will

not come into picture at all."

But barring special circumstances, as stated

hereinabove, the view of this Court has consistently been

that a State is not entitled to tax locally made goods at a

lower rate while taxing similar goods manufactured in other

States at a higher rate.

In the case of Firm A.T.B.M.Mehtab Majid & Co. vs.

State of Madras, AIR 1963 Sc 928, hides and kins imported

from outside the State were subjected to higher rate of tax

than the rate of tax imposed on hides and skins tanned and

sold within the State by Rule 16 of the Madras General Sales

Tax (Turnover and Assessment) Rules, 1939. The effect of

this Rule was that tanned hides or skins imported from

outside the State and sold within the State were subject to

a higher rate of tax than the tax imposed on hides or skins

tanned and sold within the State, inasmuch as sales tax on

the imported hides or skins tanned outside the State was on

their sale price of these hides or skins when they were

purchased in the raw condition which was substantially less

than the sale price of tanned hides or skins.

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It was held that the taxing law can be treated as

restrictions on trade, commerce and intercourse, if they

hamper the flow of trade and if they are not compensatory or

regulatory. Sales tax which had the effect of discriminating

between goods of one State and goods of another might affect

free flow of trade and offend Article 301 and could be saved

only if it came within the terms of Article 304. Government

of India undertaking. In Uttar Pradesh, there was single

point levy of sales tax. The State of Uttar Pradesh had

issued two notification under the U.P. Sales Tax Act and

Central Sales Tax Act exempting new units of manufacturers

as defined in the Act in respect of the various goods for

different periods ranging from 3 to 7 years as the case may

be, from payment of any sales tax. The benefit of the

notifications could be availed of by the new industries set

up in the State which were divided into two categories - (1)

units with capital investment not exceeding three lakhs of

rupees and (2) units with capital investment exceeding three

lakhs of rupees. The period of exemption varied fro 3 to 7

years in different districts.

The case of the writ petitioners in that case was that

the dealers had become liable to pay sales tax at 12% + 10%

surcharge under the U.P. Sales Tax Act on photographic and

graphic art material and at the rate of 8% + 10% surcharge n

medical X-ray films and minimum of 10% on their inter-State

turnover. But the manufacturers in the State of U.P. had no

tax liability by virtue of exemption granted under the

impugned notification. The Case of the petitioner was that

the goods sold by them had become costlier by 8.8% to 13.2%

depending upon the items sold compared to the goods

manufactured in the State of Uttar Pradesh. Apart from the

challenge based on Article 19(1) (g) and 14 of the

Constitution, the petitioner based their case on the

provisions of Articles 301 to 305 of Part XIII of the

Constitution of India.

After an elaborate review of the case law, it was held

:

"Where the general rate applicable

to the goods locally made and on

those imported from other States is

the same nothing more normally and

generally is to be shown by the

State to dispel the argument of

discrimination under Art. 304 (a),

even though the resultant tax

amount on imported goods may be

different. Here, reference may be

made to Ratan Lal's case (AIR 1970

SC 1742) (supra). In the instant

writ petition, in the State of U.P.

those producers or manufacturers

who do not come within the ambit of

notifications, have to pay tax on

their goods at the general rate

prescribed and there is no

differentiation or discrimination

qua the imported goods. The

discrimination qua the imported

goods. The question naturally

arises whether the power to grant

exemption to specified class of

manufacturers for a limited period

on certain conditions as provided

by S.4A of the U.P. Sales Tax Act

of violative of Art. 304 (a)."

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The Court ultimately held that if the general rate of

tax imposed upon the locally made goods and the imported

goods was the same, the State, in order to give incentives

to certain industries, could lawfully reduce the rate of tax

for a limited period of time. In the facts of that case,

the period of exemption from tax for certain type of goods

were from three to seven years. Sabyasachi Mukharji, C.J.

held that granting of such exemption for a limited period

only to certain industries in the State from payment of

sales tax was not violative for the provisions of Article

301 because the general rate of tax payable on these goods

manufactured by other units were the same as the rate

applicable to goods imported from outside the State.

This question was once again examined in the case of

Shree Mahavir Oil Mills and Anr. v. State of Jammu & Kashmir

& Ors., JT 1996 (10) S.C.837. In that case, with a view to

protect local edible oil industry, Government of Jammu &

Kashmir issued an order exempting goods manufactured by

small scale dealers within the State from payment of sales

tax for a specified period. The rate of sales tax payable

for other industries including manufacturers of the

adjoining States was four per cent. A subsequent

notification was issued on December 20, 1993 as a result of

which the general rate of sales tax payable on edible oil

became 8%. The manufacturers of edible oil from the

adjoining States claimed that the exemption granted from

payment of tax to the local industries was discriminatory.

The exemption given by the Government of Jammu & Kashmir to

the manufacturers of the edible oil was total and the period

of exemption was five years - which was later extended by

another five years. It was held that the unconditional

exemption granted to edible oil industries and at the same

time subjecting edible oil industries from other State to

Sales Tax at 8% was discriminatory and violative of Article

304 (a) of the Constitution.

In the case before us, exemption has not been granted

to a new industry or specially handicapped industry for any

special reason for a limited period of time. Groundnut oil

manufacturers within the State have been generally given the

benefit of a lower rate of tax whereas the importers will

have to pay sales tax at a higher rate. It is not even the

case of the State that if imported oil was manufactured out

of tax paid groundnut the rate of tax on imported oil would

be lower.

On behalf of the State, it has been argued that if a

manufacturer of oil not purchase groundnut from the market

but has his own supply of groundnut he pays tax at 6-1/2

paise in the rupee which is the rate at which imported oil

is taxed. This s the rate of tax applicable to locally

manufactured oil as well as on imported oil. The distinction

lies only in the case of oil manufactured out of groundnut

which has borne tax at the rate of 4% in A.P. In such a

case, the tax is at the rate of 2-1/2 paise in the rupee as

tax in all. Therefore, no discrimination is being practised

by taxing the imported oil at the rate of 6-1/2 paise in the

rupee.

This has been countered by the appellants by contending

that the groundnuts sold in Karnataka also bear sales tax.

When oil manufacturers purchase groundnuts in Karnataka and

manufacture oil, they pay sales tax on the groundnuts first

and then they pay 6-1/2 paise in the rupee as sales tax

under the A.P. Act when the goods are sold in A.P.

We are of the view that the contention of the appellant

is not without substance. What has been done appellant is

not without substance. What has been done by Entry 24 of the

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First Schedule is to impose a lower rate of duty on

groundnut oil or refined oil obtained from groundnuts that

have been taxed under the A.P. Act. The contention that

groundnut oil manufactured in Andhra Pradesh has not

generally been charged at a lower rate of tax has not been

substantiated by any fact of figure. It is not the case of

the State that only a small portion of the oil manufactured

by local manufacturers is produced from groundnuts purchased

in Andhra Pradesh. Unless that can be established, it cannot

be held that groundnut oil or refined oil within the State

is generally charged at the same rate as the imported oil.

The only justification that has been made out for this

discrimination is that groundnut out of which the oil is

manufactured locally has already borne tax. The appellant's

contention, which has not been denied by the State, is that

the oil manufactured in Karnataka which was imposed into

Andhra Pradesh was manufactured out of groundnuts which had

also borne tax under the Karnataka Sales Tax Act. Therefore,

it cannot be said that oil manufacturers in Andhra Pradesh

are in disadvantageous position and had to be compensated by

a lower rate of tax. The State of Andhra Pradesh has not

been able to make out any special case for imposing a lower

rate of tax on groundnut oil produced within the State.

In that view of the matter and having regard to the

interpretation given to Article 301 to 304 of the

Constitution by the Courts in the various decisions referred

to hereinabove, we are of the view that the appeal must

succeed.

Clause (a) of Entry 24 of the First Schedule to the

Andhra Pradesh General Sales Tax Act is declared violative

of the previsions of Articles 301 to 304 in so far as it

imposes a higher rate of tax on groundnut oil or refined oil

which has been obtained from groundnuts that have not been

taxed under the Andhra Pradesh Act. It is declared that the

groundnut oil imported by the appellant from Karnataka for

sale in Andhra Pradesh cannot be taxed at a rate higher than

the rate prescribed in clause (b) of Entry 24 of the First

Schedule to the Andhra Pradesh Act.

The appeal is, therefore, allowed. The judgment and

order under appeal dated 25.9.97 passed by the Andhra

Pradesh High Court is set aside. Civil Appeal Nos.8343-8344

of 1995 are also also allowed. There will be no order as to

costs.