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PETITIONER:

SHRI DIGVIJAY CEMENT CO., ETC.

Vs.

RESPONDENT:

STATE OF RAJASTHAN & ORS., ETC

DATE OF JUDGMENT: 21/03/1997

BENCH:

CJI, G.T. NANAVATI, S.P. KURDUKAR

ACT:

HEADNOTE:

JUDGMENT:

(With Civil Appeal Nos. 2146 to 2149 of 1997 arising out of

SLP(C) Nos. 4734, 5036, 5070 and 8087 of 1995)

J U D G M E N T

NANAVATI, J.

Leave granted.

The appellants in these appeals are manufactures of

cement and they have their manufacturing units/factories in

the State of Gujrat. The cement manufactured by them is sold

throughout India through a network of stockists and dealers.

They filed Civil Writ petition Nos. 656, 788, 803, 2644 and

2644 of 1994 in the High Court Rajasthan challenging the

notifications dated 8.1.1990, 27.6.1990 and 7.3.1994 issued

by the State of Rajasthan under Section 8(5) of the Central

Sales Tax Act (for Short 'CST Act'). The High Court

dismissed those writ petitions. Therefore the appellants

have filed these appeals.

Prior to the issuance of the impugned notifications of

the rate of tax payable under Section 5 of the Rajasthan

Sales Tax Act on sales of cement was 16% Even in respect of

inter-State sales of cement to unregistered dealers the

rate of tax was 16%. By the Notification dated 8.1.90 the

State of Rajasthan in exercise of the power conferred by

sub-section (5) of Section 8 of the CST Act directed that

the tax payable under sub-sections (1) and (2) of Section 8

by any dealer having his place of business in the State, in

respect of the sale by him, from any such place of business

in the course of inter-State trade and commerce, of cement,

to any Central of State Government undertaking or

Corporation or an autonomous body under the Government shall

be calculated at the rate of 7%. By the second Notification

dated 27.6.90 the State of Rajasthan directed that the tax

payable by any such dealer to any/all dealers or any person

situated outside the State of Rajasthan shall be taxed at

the rate of 7%, if the conditions specified therein were

satisfied. The said conditions were:

"(i) The selling dealer shall

submit the certificate appended

hereto duly filled in and signed by

him to his assessing authority

within 10 days from the date of

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delivery of such cement to the

carrier.

(ii) The selling dealer shall also

enclose with the said certificate,

the attested photostat copy of the

Railway receipt/Good receipt, as

the case may be.

(iii) In case the goods are

being carried through raod

transport, a copy of the aid

certificate shall also be handed

over at the exit check-post of the

State of Rajasthan.

CERTIFICATE

I/We (name of the

firm/company/other status) having

Registration No. (RST Act/CST Act)

under the jurisdiction of the

Assessing Authority .... certify

that ... bags of cement amounting

to Rs.... Covered by the

Challan/cash memo (s) No. and the

date .... .. .. Have been

manufactured by me/us and are

despatch in the course of inter-

state trade and commerce vide RR/GR

No. .... (Specify the number with

date).... to Shri/M/S ........(full

addresss of the purchaser)

Signature.... Name .....Designation

.....Seal ......Dated...."

By the third notification dated 7.3.94 the State of

Rajasthan superseded the earlier Notification dated 27.6.90

and directed that in respect of inter-State sales of cement

made by such dealers tax payable shall be calculated at the

rate of 4% without furnishing of declaration in from C or

certificate in form D on fulfilment of the following

conditions:

"(1) that the dealer shall record

the name and full and complete

address of the purchaser in the

bill or each memorandum of such

inter-State sale to be issued by

him;

(ii) that the burden to prove that

the transaction was in the nature

of inter-State sale, shall be on

the dealer; and

(iii) that the dealer making

inter-State sales under this

notification shall not be eligible

to claim benefit provided for by

the notification No. F. 4(72)

FD/Gr.IV/81-8, dated 6-5-86 as

amended from time to time."

The appellants challenged the said Notifications on the

ground that they created artifical barriers and had the

effect of giving preference in the matter of inter-State

trade and commerce to the manufactures and dealers of cement

in the State of Rajasthan over the dealers and manufacturers

of cement in the State of Gujarat. The rate of tax on sales

of cement in Gujarat under the Gujarat Sales Tax Act Being

16%, as a result of the impugned Notifications, the

manufacturers of cement in Gujarat including the appellants

were but to disadvantageous position as the purchasers in

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Gujarat could purchase cement in the inter-State trade or

commerce on payment of sales tax at a much lower rate from

the dealers in Rajasthan wheres in they purchased cement

from dealers in Gujarat they had to pay tax at the rate of

16%. One of the appellants (M/S. Saurashtra Cement &

Chemical Co. Ltd.) in its writ petition had given details

regarding the increase in despatches from Rajasthan to

Gujarat during the years 192-93 and 1993-94 to support its

plea. It was also stated in its petition that taking

advantage of the impugned Notifications and lowering of the

rate of tax the semi-Government companies and corporation in

Gujarat and also unregistered dealers had opted to purchase

or increased their purchases of cement from Rajasthan. The

notifications were further challenged on the ground that

lowering the rate of Tax was not in public interest as

contemplated by Section 8(5) the CST Act and the they were

also violative of Articles 301 and 303 of the Constitution

inasmuch as they had the effect of giving preference to

cement manufactured and sold in Rajasthan and discriminated

against cement manufactured and sold in Gujarat. On these

grounds the writ petitioners wanted the High Court to quash

the said Notifications and restrain the State of Rajasthan

from issuing such/Similar notifications in future.

Union of India, though jointed as a party-respondent in

the Writ petitions, did not chose to appear. The State of

Gujarat was one of the respondents in two writ petitions and

it substantially supported the writ petitioners by

contending that the impugned Notifications created a

preference in favour of the manufacturers of cement in

Rajasthan. The State of Rajasthan disputed the correctness

of the figures given by the Writ petitioners regarding

increase in despatches of cement from Rajasthan to Gujarat

and also disputed that the cement sold by the manufacturers

and dealers in Rajasthan was available at a cheaper rate to

the purchasers in the State of Gujarat. It defined that the

impugned Notifications violated any of the constitution

provisions or section 8(5) of the CST Act.

The High Court held that the Notifications dated 8.1.90

and 27.6.90 having having been superseded they were no

longer operative and the writ petitions had become

infructuous to that extent and the challenge to those

Notifications did not survive. It, therefore, confined its

consideration to the legality and validity of the last

Notification dated 7.3.94. The High Court was of the view

that it was for the writ petitioners to establish the

because of reduction in the rate of sales tax by the

impugned Notifications the cement from Rajasthan was being

sold in Gujarat on a large scale and at a cheaper rate and

thereby the interest of cement manufacturers in Gujarat was

being prejudicially affected. It considered the facts and

figures relating to increased despatches of cement from

Rajasthan to Gujarat and the preference shown by the semi-

Government bodies and unregistered dealers or the cement

manufactures sole in Rajasthan,, as ipse dixit of the writ

petitioners and, therefore, not credible and trustworthy.

Taking this view it held that the writ petitioners had

failed to establish that the effect of the impugned

Notifications was to impede or adversely affect the free

flow of inter-State trade and commerce. The high Court

distinguished the decision of this Court in the Indian

Cement Vs. State of A.P. 1988(1) SCC 743 on the Ground that

the facts in that case were altogether different from the

facts of these cases inasmuch as in that case the rate of

Central Sales Tax was reduced to 2% in order to augment the

State revenue and to protect the local manufacturers and the

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notification which were under challenge did not contain the

conditions which are imposed by the Notification date

7.3.94. It was also distinguished on the ground that this

Court had not considered the effect of transportation

charges and handling charges in respect of cement

manufactured in one State and sold in another. Taking this

view, the High Court dismissed the writ petitions.

Mr. Sorabjee, learned Senior Counsel appearing for the

appellants has raised two contentions. His first contention

was that the impugned notifications were not legal as they

were not issued in public interest which is condition

precedent for exercise of power under Section 8(5) of the

CST Act. The second contention was that the notifications by

reducing the rates of sales tax from 16% to 7% and then to

4% were violative of Articles 301 and 303 of the

Constitution as they had the effect of giving preference to

goods manufactured and sold in Rajasthan and discriminate

against goods manufactured and sold in Gujarat.

We will deal with the first contention first. He

invited our attention to sub-section (5) of Section 8 of the

CST Act which permits the State Government, if it is

satisfied that it is necessary so to do in public interest,

do direct that no tax, under the CST Act shall be payable or

that they shall be payable at lower rates by any dealer

having his place of business in the Sate in respect of Sales

made by him, in the course of inter-State trade or commerce.

From any such place of business of any such goods or classes

of goods or to any person or class of person as may be

specified in the notification. He also drew our attention to

the observation made by this court in State of Tamil Nadu

vs. Seethalakshmi Mills that the policy of the law is to

discourage inter-State trade to unregistered dealers and

that the report of the Taxation Enquiry committee would

indicate that "the main reason for enacting the provision

was to canalise the inter-State trade through registered

dealers over whom the appropriate Government has a great

deal of control and thus to prevent evasion of Tax". He

submitted that by dispensing with the requirement of

furnishing declaration in From C the impugned Notification

dated 7.3.94, in effect, removed an essential safeguard to

check and prevent evasion of sales tax. In order to show the

importance of the requirement to furnish From C the invited

our attention to the decision of this Court in State of

Rajasthan vs. Sarvotam Vegetables Products (1996 (3) Scale

469) Wherein this Court has observed that " the purpose of

the C-From is obvious: the Parliament wants to tax specified

goods purchased for specified purpose (sub-section (3) of

Section 8) at a lower rate but anyone wishing to avail of

the said lower rate must obtain from his purchasing dealer

the 'C' form and produce it before his assessing officer.

Thus, clause (b) of sub-section (1), sub-section (3) and

sub-section (4) go together. (Similarly, Section 8(1)(a) and

sub-section (4) go together.) The reason why the "C' form

requires several particulars to be stated is to ensure that

the concessional rate prescribed by Section 8(1)(b) is not

misused or abused. With the help of those particulars the

appropriate authority or authorities can verify the truth

and correctness of the transaction. Both the selling dealer

and purchasing dealer are under an obligation to abide by

the said requirements of law; otherwise the very scheme

under lying the said provision breaks down. This crucial

significance of the 'C' form needs to be kept in mind." He

submitted that the conditions specified in the Notification

dated 7.3.94 are not at all an effective substitute for C

Form. Condition No. 1 does not cast any obligation on the

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dealer to send the record made by him to the sales tax

authorities. Conditions No. 2 and 3 have no bearing at all

upon the issue of preventing or checking evasion. The High

Court failed to appreciate that under the notification dated

7-3-94, cement could be sold by a manufacturer/dealer in

Rajasthan to a person in Gujarat who is an unregistered

dealer or to a consumer who is not a dealer at all. He also

submitted that this challenge was casually rejected by the

High Court by observing that conditions No.1 and 2 in the

Notification dated 7-3-94 were sufficient to take due care

of such remote possibility of tax avoidance/evasion on a

large scale and that the "Revenue is the best judge of its

interest". The High Court failed to appreciate that sub-

section (5) of Section 8, as observed by this court in

Sarvotam Vegetable Products case (supra), is an integral

part of Section * and the Act as such. The said power has to

exercised in public interest. The power of exemption is to

be guided by and consistent with the provisions of the Act.

The object of the relevant provisions contained in CST Act

is "to canalize inter-State trade through registered

dealers, over whom the appropriate Government has a great

deal of control and thus to prevent evasion of tax "and"

prevention of evasion of tax is a measure in the public

interest" as observed by this Court in Seethalakshmi Mills

case (supra) and in State of Madras vs. N.K. Nataraj

Mudaliar. 1968 (3) SCR 829. In view of this correct legal

position, it was no answer to say that the Revenue is the

best judge of its interest. Public interest being the

essential Pre-requisite to exercise of power under sub-

section (5) of Section 8, the State can exercise it only if

it is likely to subserve the public interest.

It was, on the other hand, contended by Mr. Aruneshwar

Gupta, Learned counsel appearing for the State of Rajasthan

that when a State makes law it has to be presumed hat it is

made in 'public interest'. Moreover, it was specifically

stated in the impugned notifications that the power under

Section 8(5) was being exercised in 'public interest' and,

therefore, it was for the appellant to prove that the said

power was in fact exercised in public interest. In support

of his submission. the learned counsel relied upon of India

(1995(3) SCC 335). Mr. Adhyaru, learned counsel for the

State of Gujarat, however, is right in his submission that

though such a presumption can be raised when the exercise of

power is challenged on the ground that is was no exercised i

public interest it would become necessary for the State to

disclose how it is in public interest.

Before the High court, the State Rajasthan does not

appear to have stated anything in this behalf except that

the conditions imposed by the notification were adequate to

prevent evasion of tax. In the counter affidavit filed

before this Court, it is stated that the said notifications

being based upon policy decision were issued in public

interest. In the additional affidavit filed on its behalf it

is stated that reduction of rate of sale tax under the

impugned notifications was "very much beneficial to the

State revenue inasmuch as the respondent-State has increase

earnings of the additional revenue percentage of States Tax

on cement over the previous years i.e. from 1985 to 1995".

It is further stated that : "it is respectfully submitted

that after issuing of the Notification dated. 8.1.90,

whereby the rate of tax on sale made in inter-State sales

was reduced and levied at the rate of 7% the State

Government in the financial year 190-91 earned revenue of

Rs. 3195.33 lakhs as compared to the previous year i.e.

1989-90 which was Rs. 2710.55 lakhs. The State Government

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has collected additional revenue of Rs. 484.78 lakhs for the

financial year 1990-91. Keeping in view the additional

revenue earned by the State in the public interest, the

State Government vide Notification dated 27.6.90, in

supersession of the earlier Notification dated 3.1.90,

further liberalized the inter-State sales to cement which

was earlier restricted to Central or State Government, Under

taking or Corporation or Autonomous body under the

Government ......It is respectfully submitted that after

reduction of sales-tax on inter-State sales from 7% to 4%

vide Notification dated 7.3.94 the State had collected

revenue to the tune of Rs. 7000 lakhs as compared to the

previous year i.e. 1992-93, which was Rs. 6069.82 lakhs

thereby earned an additional revenue Rs. 900.18 lakhs for

the year 1994-95. The percentage of sales-tax revenue of

cement for the year 1994-95 was increased to 15.32%

(increase of 4% approximately)." In the last affidavit filed

by the public interest sought to be subserved by the

impugned Notifications is stated in these terms : " It

common knowledge that the material for production of cement

i.e. Limestone is available in abundance in the State of

Rajasthan and in view of availability of raw material the

production of cement in the State of Rajasthan is also much

higher. Therefore, if the power under Section 8(5) of the

Central Sales Tax Act, 1956 is exercised by the State of

Rajasthan by providing different rate of tax in respect of

inter-State sale and such power is perfectly in public

interest and would in fact achieve free flow of trade rather

than hampering it."

Thus the State of Rajasthan has shifted its stand from

time to time as regards the public purpose, for achieving

which, the reduction in rate of tax was made. The learned

counsel for the State of Rajasthan submitted that public

interest contemplated by Section 8(5), in so far as the

State of Rajasthan is concerned would mean interest of the

public of Rajasthan and as the increased revenue could be

used for the benefit of the people of Rajasthan, the

impugned exercise of power must be regarded as in public

interest. We cannot accept this contention because public

interest in Section 8(5) will have to be interpreted in the

context of the CST Act and Articles 301 to 304 of the

Constitution . Though increase in revenue and its

utilisation for the public of the State can generally be

regarded in public interest, in the context in which it is

required to be considered, that by itself cannot be regarded

as sufficient, if it has the effect of going against the

policy of the CST Act and object of the constitutional

provisions.

We have already stated above the object of the

constitutional provisions and the policy of the CST Act.

Sub-section(5) of Section 8 which is in a nature of an

exception permits the State Government to do that which it

otherwise could not have done, but only if it is in public

interest, Therefore, when exercise of such powers was

challenged it was for the State to justify the same by

explaining how it had become necessary to subject all inter-

State sales to any person of dealer to payment of tax at 4%

only and also to explain how it had become necessary for it

to dispense with the furnishing of the declaration

contemplated by sub-section (4) of Section 8 to the

prescribed authority in the prescribed manner. No such

attempt was made by the State of Rajasthan before the High

Court. Reduction of the rate of tax in respect of all inter-

State sales to any dealer and person was sought to be

justified by the learned counsel for the State of Rajasthan

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by submitting that it was likely to increase the revenue of

the State and as the increased revenue could be utilised for

the public of Rajasthan, the same can be said to be in

public interest. As regards dispensing with the requirement

of furnishing declaration in C Form he submitted that apart

from Condition No. 1 contained in Notification dated 7.3.94

a selling dealer in Rajasthan had to fill in Form St 18 and

a dealer - consigner had to submit a declaration in From St

18A. The said forms contain sufficient particulars as to

prevent any evasion of payment of tax. He drew our attention

to Rule 620 of the Rajasthan Sales Tax Rules which provides

that a registered dealer by whom any goods are despatched

from within the State t place outside the State for sale

outside the State shall furnish of cause to be furnished

particulars in respect of his registration certificate, and

the goods so leaving the State limits in Form ST 18C. What

is overlooked by him is the proviso to sub-rule (1) which

lays down that no such from is required to be furnished in

respect of the goods notified by the Sate Government.

Admittedly, cement is notified 'goods". Therefore, Rule 620

will obviously have no application. No other provision was

pointed out by the learned counsel requiring a dealer of

cement in Rajasthan to obtain from the purchaser or even

otherwise make a declaration to the sales tax authorities in

respect of the inter-State sales made by him. It is

therefore difficult to appreciate how the State of Rajasthan

could have effectively checked or prevented evasion of

payment of tax on inter-State sales of cement. On this

ground alone the impugned notifications dated 27.6.90 and

7.3.94 are required to be declared as bad.

As regards the second contention that the impugned

Notifications were violative of Articles 301 and 303 of the

Constitution is was submitted by Mr. Sorabjee that Article

301 of Constitution guarantees freedom of trade, commerce

and intercourse throughout the territory of India. Article

302, however, empowers the parliament to impose such

restrictions on the freedom of trade, commerce or

intercourse between one State and another or within any part

of the territory of India as may be required in the public

interest. This power of the Parliament and State

Legislatures is further restricted by Article 303 which

provides that neither of them 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. He

further submitted that the Notifications issued by the State

Government under Section 8(5) of the CST Act would also be

subject to the said limitations. He further submitted that

the impugned Notifications particularly the Notifications

dated 27.6.90 and 7.3.94 had the effect of giving preference

for good manufactured and sold in Rajasthan and consequent

discrimination against the goods manufactured and sold in

Gujarat. It was, therefore, incumbent upon the State of

Rajasthan to place materials before the court to justify the

cause of reason for the said preference and discrimination.

In support of his contention he relied upon the following

observations made by Hegde J. in his concurring judgment in

State of Madras vs. N.K. Nataraja Mudaliar 1968 (3) SCR 829:

"But once it is shown that a

measure prima facie gives

preference to the residence of one

State over another State or it

makes discrimination between the

residents of a State and that of

another because of the adoption of

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different rates of tax in different

States, then the matter assumes a

different complextion in view of

Article 303 (1). It should be

within the knowledge of the Union

Government why Parliament adopted

different rates in different

States. I agree that mere

difference in rates is neither

showing preference nor making

discrimination. But other things

being equal, the difference in

rates would result in showing

preference to some States and

making discrimination against

other. Hence, in may opinion,

difference in rates is a prima

facie proof of the preference or

discrimination complained of. It is

for the State to justify those

differences."

He also submitted that the justification offered by the

State is that the Notifications were issued for earning

additional revenue for the State and for increasing the sale

of cement manufactured in Rajasthan as it has abundance of

raw material necessary for manufacturing cement and

consequently production of cement in the State is much

higher. He submitted that for such reasons if giving of

preference of making discrimination is permitted then that

would lead to trade wars or creation of barriers between

different States and that would be detrimental to the

economic integrity and unity of the nation. He drew out

attention to the following observation made by

Gajendragadkar, J. in the case of Atitabari Tea Co. Ltd. vs.

The State of Assam & Ors. (1961) 1 SCR 809:

"It was realised that in

course of time different political

parties believing in different

economic theories or ideologies may

come in power in the several

constituent units of the Union, and

that may conceivably give rise to

local and regional pulls and

pressures in economic matters.

Local or regional rears or

apprehensions raised by local or

regional problems may persuade the

State Legislatures to adopt

remedial measures intended solely

for the protections raised by local

or regional problems may persuade

the State Legislatures to adopt

remedial measures intended solely

for the protection of regional

interest without due regard to

their effect on the economy of the

nation as a whole. The object of

Part XIII was to avoid such a

possibility. Free movement and

exchange of goods throughout the

territory of India is essential

for the economy of the nation and

essential for the economy of the

nation and for sustaining and

improving living standards of the

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country. The provisions contained

in Article 301 guaranteeing the

freedom of trade, commerce and

intercourse is not a declaration of

a mere platitude or the expression

of a pious hope of a declaratory

character; it is not also a mere

statement of directive principle of

State policy, it embodies and

enshrines a principle of paramount

importance that the economic unit

of the country will provide the

main sustaining force for the

stability and progress of the

political and cultural unit of the

country."

He also invited out attention to the averments made in

the petitions, particularly the petitions filed by

Saurashtra Cement Company and the facts and figures given

therein. He submitted that the State of Rajasthan in its

counter affidavit filed in the High Court had not denied the

correctness of those facts and figures and the only reply

given by it was that they were not admitted and were not

verifiable. The High Court also accepted this contention of

the State of Rajasthan and held that the petitioners had

failed to establish that the impugned Notifications had the

effect of impeding or obstructing the free flow movement

goods between the State in the course of inter-State trade

and commerce.

We have already observed earlier that the High Court

has very lightly brushed aside the said facts and figures.

Some of the facts and figures were stated on the basis of

the statistics available with the cement manufacturers of

India. Detailed statements showing the names of the parties

and quantities of cement purchased by some of them monthwise

were filed along with writ petition. It is, therefore,

difficult to appreciate how the said facts were not

verifiable or could be regard as not reliable. The facts and

figures were sufficient to show, prima facie, that

despatches of cement from the State of Rajasthan to State of

Gujarat and increased considerably and that cement produced

in the State of Rajasthan to State of Gujarat had increased

considerably and that cement produced i the State of Gujarat

was placed in a disadvantageous position. It was not proper

for the High Court to brush aside that material and hold

that the petitioners had failed to establish that because of

reduction in the rate of sales tax on inter-State sales of

cement by the impugned Notifications preference was created

in favour of the cement manufactured and sold in Gujarat and

that the cement manufacturers in Gujarat were thus

prejudicially affected and put in disadvantageous position.

The High Court had observed that the sales of cement

manufactured and sold in Rajasthan might have increased

because of the quality of cement, intensive publicity and

such other factors. That was not even the case of the State

of Rajasthan. In view of the clear and credible material

placed on record by the writ petitioners it was incumbent

upon the State of Rajasthan to justify that what it had done

was really required in the public interest. While conceding

that varying rates of tax can prevail in different States

and that by itself cannot be said to be violative of Article

303 he submitted that the differentiation can be justified

if that is done one account of natural and business factors

such as existence of along standing business relations.

availability of communications, credit facilities and such

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other factors. He submitted that this court in Nataraja

Mudaliar's case (supra" has adopted the reasoning of

Australian High Court in The King vs. Barger 1908 (6) CLR 41

that if the pervading idea is the preference of locality

merely because it is locality and because it is a particular

part of a particular Sate and the preference was not based

on other considerations, which are dependent on natural or

business circumstances, and may operate with more or less

force in different localities and has held that where

differentiation is based on consideration not dependent upon

natural or business factors which operate with more or less

force in different localities than the Parliament is

prohibited from making such discrimination.

What the learned counsel for the State of Rajasthan

submitted was that unless it was shown that the impugned

notifications directly and adversely affected the free flow

of trade and business or that the tax reduction was so

prohibitive as to become an impediment in the free flow,

they could not have been regarded as violative of Articles

301. In support of his submission he relied upon the

decisions of this Court in Atitabar Tea Co. Ltd. vs. The

State of Assam 1961 (1) SCR 803 and Amrit Banaspati Co. Ltd.

vs. Union of India 1995 (3) SCC 335. He also submitted that

mere imposing or reduction of tax by the State Legislature

leading to varying rates of sales tax cannot be regarded as

giving preference or making discrimination prohibited by

Article 301 and 304 because the free flow of trade between

different States depends not necessarily upon the rates of

sales tax, but upon a variety of other factors, such as the

source of supply, place of consumption, existence of trade

channels, trading facilities, rates of freight, availability

of efficient transport and the like. In support of this

proposition he cited the decisions of this Court in State

of Madras Vs. N.K. Nataraja Mudaliar 1968(3) SCR 829, State

of Kerala vs. A.B. Abdul Khadir 1970(1) SCR 700, State of

Tamil Nadu vs. Sitalakshmi Mills, etc. 1974(3) SCR 1 and

video Electronics Pvt. Ltd. vs. State of Punjab 1989 Supp.

(2) SCR 731.

The scope and ambit of the freedom of trade and

commerce throughout India has been examined by this Court in

many cases, starting with Atiabari Tea Co. Ltd (supra. This

Court in Video Electronics Pvt. Ltd. vs. State of Punjab

1990(3) SCC 87 reviewed the previous case law and in the

context of power to grant exemption from payment of sales

tax, has held that the taxes which do not directly or

immediately restrict or interfere with trade, commerce and

intercourse throughout the territory of India are exclude

from the ambit of Article 301. It was held that: "it has to

be borne in mind that there may be differentiations based o

consideration of natural or business factors which are more

of less in force in different localities. A State might be

allowed to impose a higher rate of tax on a commodity either

when it is not consumed within the State, or if it is felt

that the burden falling on consumers with in the State will

be more than that and large benefit is derived by the

revenue. The imposition of a rate of sales tax is influenced

by various political rate of tax on sales of the same

commodity cannot be regarded in isolation as determinative

of the object to discriminate between one State and another.

This Court has also held that "However the power under

Article 304 if found to have been exercised in a colourable

manner intentionally or purposely to create unfavourable

bias by prescribing a general lower rate on locally

manufactured goods or in the shape of lower rate of tax,

such an exercise of power can always be struck down by the

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courts."

Reiterating that every differentiation is not

discrimination this Court further held that if

discrimination is made without a valid reason, that is to

say, if there are not justifiable and reasonable reasons for

differentiation, then that would amount to hostile

discrimination. Again, in Amrit Bansapati Co. Ltd.'s case

(supra) this Court emphasised that it is only when the

intra-State of inter-State movement of the persons of goods

are impeded directly and immediately as distinct from

creating some indirect or inconsequential impediment, by any

legislative or executive action, infringement of the freedom

envisaged by Article 301 can arise. Without anything more, a

tax law, per se, may not impair the said freedom. At the

same time, it should be stated that a fiscal measures is not

outside the purview of Article 301 of the Constitution.

We have, therefore, to examine the validity of the

impugned Notifications in the context of this settled legal

position. As already pointed out above the only reason or

justification given by the State of Rajasthan for making the

differentiation between the rate of tax on intra-State sales

and inter-State sales of cement was that the said reduction

was likely to lead and had led to increase in sales of

cement and increase in revenue earnings. So the question to

be considered is whether those considerations alone can be

regarded as sufficient to make the impugned Notification. In

the case of Indian Cement (supra) this Court has held that

the plea that reduction in the rate of sales tax is

beneficial to the State Revenue cannot be regarded as

sufficient justification for making the discrimination and

it would not amount to a reasonable restriction contemplated

by Article 304.

In the case of Indian Cement (supra) this Court also

held that reduction in the rate of tax in order to protect

the local manufacturers cannot be regarded as a

justification permitted by Part XIII of the Constitution. so

also in Weston Electronics vs. State of Gujarat 1988 (3) SCC

568 this Court has held that reduction in the case of goods

manufactured locally in order to provide an incentive for

encouraging local manufacturing units cannot be sustained if

it diversely affects the free flow of inter-State trade and

commerce. We are also of the view that the justification

advanced by the State of Rajasthan that as a result of the

impugned notifications the State Revenue and, is not valid

as the said notifications had the effect of creating a

preference to cement manufactured and sold in Rajasthan and

disadvantage for the sale of cement manufactured and sold in

Gujarat and thus had the direct and immediate adverse effect

on the free flow of trade. The said notifications, by

dispensing with the requirement of furnishing declaration in

C Form, had the effect of facilitating evasion of payment

of tax and were, therefore, also violative of the scheme of

the constitutional provisions contained in Chapter XIII. A

5-Judge Bench of this Court in Firm A.T.B. Mehtab vs. State

of Madras 1963 Supp. SCR 435 has also held that sales tax,

which has the effect of discriminating between goods of one

State of another, may affect the free flow of trade and

would be violative of Article 301.

We, therefore, hold that the impugned notifications

were void and, therefore, they are hereby quashed. These

appeals are accordingly allowed. In view of the facts and

circumstances of the case there shall be no order as to

costs.

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