1960 PLP 599 (PTD)

but not including medicinal and toilet preparations containing alcohol or any substance included in sub‑paragraph (b) of this entry". What, therefore, Article 304 (a) intended to prescribe was that the countervailing duties on goods imported from other States should not exceed the excise duty on goods manufactured or produced in the State. We are not, however, prepared to place such a limited or narrow interpretation of Article 304 (a). That Article occurs in Part XIII of the Constitution which deals with trade, commerce and intercourse within the territory of India and should prima facie comprehend every kind of disability which would be imposed by the legislature of a State on the sale of the products of other States. Article 301 declares that inter‑State trade, commerce and intercourse would be free subject to the provisions following in that part. Taxation is a recognised means of giving protection and preventing free trade. Article 304 (a) should not, therefore, be so construed as to nullify practically the declaration contained‑ in Article

301. Neither the terms of Article 304 (a) nor the context of the law prior to the Constitution would support the contention. Section 297 (1) (b) of the Government of India Act, 1935, imposed restrictions in respect of legislative, as well as executive action of the Provinces, in regard to inter‑Provincial exports and imports and also imposition of discriminatory taxes as against the goods produced or manufactured in other Provinces. Section 297 (1) (b) of that Act stated :‑ "No Provincial Legislature or Government shall . . . . . . (b) by virtue of anything in this Act have power to impose any tax, cess, toll, or due which, as between goods manufactured or produced in the Province and similar goods not so manufactured or produced, discriminates in favour of the former, or which, in the case of goods manufactured or produced out side the Province, discriminates between goods manufactured or produced in one locality and similar goods manufactured or produced in another locality". The Government of India Act, 1935, did not contain a guarantee of free trade like Article 301 under the Constitution. The prohibition imposed by section 297 (1) (b) limited only the powers of legislature etc. of the Provinces and not of the Centre. That section prohibited discriminatory tax by a Province as against the goods produced or manufactured in other Provinces, and such prohibition was not confined to import taxes alone. In Bharat Automobiles v. State of Assam ((1957) 8 S T C 537), the validity of a provision in the Assam Sales Tax Act, 1947, namely section 29, arose for consideration. Under that section, a dealer, who would not be liable to tax on the sale of goods if he had obtained the same within the Province, was made liable to a tax in respect of the goods obtained outside the Province. The learned Judges held that that provision contravened section 297 of the Government of India Act, and observed at page 547; "The tax, therefore, which purports to be levied on the dealer who sells goods obtained from outside the State, under section 29 of the Act is, in substance, a tax on those goods, and directly attracts the inhibitions prescribed by section 297 of the Government of India Act, 1935, or Article 304 of the present Constitution, because of its discriminatory character in favour of goods produced or manufactured in the State. I am, therefore, constrained to hold that section 29 of the Act is ultra vires." That was a case where there was no tax liability on the sale of goods having their origin in that Province, while the tax was imposed on goods bought from outside the Province. Section 297 of the Government of India Act, 1935, was not understood in the limited sense now contended for but was held to invalidate a discriminatory sales tax based with reference to the origin of the goods. Under the Constitution inter‑State free trade is placed on‑a firmer footing in the declaration in Article 301, and even Parliament cannot interfere with free trade except in a very limited class of cases. The decision of the Assam High Court dealt with a case where there was no levy of tax on indigenous goods while one was imposed on sale of goods brought from another State. The same principle would apply to a case where the rate of tax on the goods having their origin in a State is different from the rate of tax levied on goods bought from outside the State, for a higher tax on the latter class of goods would impede their free flow. Article 304 (a) prohibits levy of any tax of discriminatory character as between the goods manufactured or produced in the State and those imported from outside that State. The words "manufactured or produced" would exhaust all categories of goods that can be found in a State other than the goods imported and should be understood as contra‑distinguished from goods imported from outside the State. They cannot be limited to goods in respect of which excise duty can be levied. The words "any tax" would seem to indicate that it was a term of wide import, not confined to excise duty alone. It was contended by the learned Advocate‑General that the words "any tax" should be governed by what followed, that is, "goods manufactured or produced" and should therefore be taken to mean only excise duties. If that were so, there would be no necessity for Article 304 (a) at all as Article 246 read with Schedule VII, List II, entry 51, would itself enable a State Legislature only to impose countervailing duties on goods imported from other States at rates not exceeding those levied on similar goods manufactured or produced in that State. Independent of item 51 there are other entries in that list which would authorise a taxation by the State, e.g., 52 to

58. Independent of entry 51 it is possible to conceive of a State being anxious to levy a higher tax on goods from other States. It would be a reasonable construction of the Article 304 (1) to hold that it contemplated a ban on all heads where discriminatory taxation was possible, as such a construction would advance the object and prevent the mischief sought to be prohibited by Article

301. Article 301 deals with the freedom of inter‑State trade. Its undoubted purpose is to preserve the economic integrity of India by facilitating and providing for free flow of trade and commerce between the States. In the State of Bombay v. R. M. D. Chamarbaugwala (A I R 1957 S C 699) S. R. Das, C. J., observed :‑ "Our Constitution also proclaims by Article 301 the freedom of trade, commerce and intercourse throughout the territory of India subject to the provisions of Articles 302 to 305 which permit the imposition of reasonable restriction by Parliament and the State Legislature. The underlying idea in making trade, commerce and intercourse with, as well as within, the States free undoubtedly was to emphasise the unity of India and to ensure that no barriers might be set up to break up the national unity." The ordinary conception of a free trade would imply that it should be without any barriers, and that there should be no special levy on the imported goods so as to place the goods of other States passing into a State for sale in a comparatively disadvantageous position as against the goods manufactured or produced by that State. In Kutti Keya v. The State of Madras (A I R 1954 Mad. 621) the word "free" is interpreted to mean, " 'in its technical accep tation freedom from economic restrictions such 'as duties which one State levys on goods passing into it from, or out of it into, other State.' Mr. K. Rajah Iyer quoted the following definition of free trade by Prof. Bastable in Palgraves' 'Dictionary of Political Economy', Vol. II, page 143: 'Free trade is that system of commercial policy which draws no distinction between domestic and foreign commodities and, therefore, neither imposes additional burdens on the latter nor grants any special favours to the former.' That clearly is the sense which the words bear in Article 301 in so far as it relates to inter‑State trade." From the definition extracted above it is plain that impedi ments and barriers for free trade need not be solely confined to barriers at the state of import. Taxation or other impediments with reference to the origin of the goods at subsequent stages after import might well impede free trade. For example if a tax is levied on the sale of goods brought from other States at a very much higher rate than that levied on sale of local goods it would be uneconomical for the person to sell the goods brought from outside and would inevitably impede free flow of trade within India. Article 301 prohibits barriers of any kind which would stand in the way of free inter‑State trade and commerce. Barriers can take various forms. There may be direct legislation prohibiting or restricting entry of goods from other States. Indirect barriers can also be created by taxation. Article 301 relates to the former category, while Article 304 would relate to the latter. In The State of Bombay v. The United Motors (India) Ltd. ((1953) S C R 1069) Patanjali Sastri, C. J., observed at page 1081 :‑ "It will be seen that the principle of freedom of inter‑State trade and commerce declared in Article 301 is expressly subor dinated to the State's power of taxing goods imported from sister States, provided only no discrimination is made in favour of similar goods of local origin. Thus the States in India have full power of imposing what in American State legislation is called the use tax, gross receipts tax etc., not to speak of the familiar property tax, subject only to the condition that such tax is imposed on all goods of the same kind produced or manufactured to the taxing State, although such taxation is undoubtedly calculated to fetter inter‑State trade and commerce. In other words, the commercial unity of India is made to give way before the State‑power of imposing `any' non‑discriminatory tax on goods imported from sister States." Again at page 1087 the learned Chief Justice of India observed :‑ "It is, however, reasonable to suppose that this particular form of protection to inter‑State trade and commerce provided in Article 286 (2) was not intended to have a wider operation than what is contemplated in Part XIII which enshrines the general principle of freedom of inter‑State commerce and defines the measure of Constitutional protection it should enjoy. If such protection is intended to give way before the State‑power of taxing goods imported from sister States, subject only to the condition against discrimination, it is legitimate to suppose that the ban under Article 286 (2) should not operate so as to nullify that power. True, Article 304 (a) deals with the restrictions as to imposition of tax on goods, while Article 286 deals with the restrictions as to imposition of tax on sales or purchases of goods." Bose, J. observed at page 1102 :‑ "I am with respect unable to agree that Article 286 (2) is to be interpreted in the light of Article 304 (a). In my opinion, the two articles deal with different things. Article 286 is concerned with sales and purchases, while Article 304 relates to goods imported from other States. The stress in the one case is on the transaction of sale or purchase ; in the other, on the goods themselves and on the act of import. Article 286 is related to Entry No. 54 of List II and to Entries 41 and 42 in List I. Article 304 (a) to Entries 26 and 27 of List II read with Entry 33 in List III and to Entries 51, 52 and 56 of List II. The distinction is, I think, clear . . . . . ." It is clear from the observations of the learned Judges of the Supreme Court that freedom of inter‑State trade can be fettered by taxation, and that Article 304 (a) related also to items other than item 51 of List II. Article 304 (a) prevents discrimination in the matter of taxation between the goods manufactured or produce in the State which is legislating and goods brought into that State from outside. Tax on goods in a State can be levied in two ways: (1) at the point of manufacture or production which is known as excise duty, or (2) at any late stage, as in the case of sales tax. There is no limitation in Article 246 as regards the time .at which a State Legislature can tax the goods. Therefore goods though not manufactured or produced in a State could be taxed after they come into the State. It is undoubted that a power should exist in a State to tax goods which are brought into it from outside. In State of Bombay v. The United Motors (India) Ltd. ((1953) S C R 1069) it is observed: "Does the principle of freedom of inter‑State commerce require that a State should foster such commerce to the detriment of domestic trade? It is one thing to avoid impeding inter‑State commerce by imposing discriminatory burdens upon it which internal trade does not have to bear, but quite another to place local products and local business at a disadvantage in competition with outside goods and dealers. It would be a curious perversion of the principle of freedom of inter‑State commerce to drive local custom across the border to outside dealers, and that, in our opinion, could not have been contemplated." But that power should be limited in the wider interests of the country and its unity. Article 304 (a) is, therefore, intended to safeguard the right of a State to tax goods coming into it from other States. But, at the same time, in conformity with the declaration made in Article 301, it states that the tax levied on goods brought into it from other States shall not be higher than what the State imposes on the goods, either manufactured or produced by it. Having regard to the object of Articles 301 and 504, no discriminatory power of taxation should be vested in a State, either at the point of import or at a later time. To permit levy of discriminatory tax at a stage subsequent to the actual importation of goods from the other States would, as pointed out before, have as great a retarding effect on free inter‑State trade as a levy made by way of import duty. In our opinion, it would not be open to any State to levy a tax on goods having its origin in a different State at any stage of its existence in the former State so as to discriminate it from goods of a similar kind manufactured or produced therein. The question, however, remains whether rule 16 has a discriminatory effect, as contended by the learned Advocate for the petitioner. To ascertain whether there has been any discrimi nation, the substance of the rule, and not the form, has got to be looked into. In our opinion, rule 16 is based on the principle of single point levy of tax and prescribes points for the levy according to the circumstances in which a sale may take place in the State and not on any principle with reference to the origin of the goods. Section 14 (3) of .the Central Sales Tax Act, 1956 (Act LXXIV of 1956) also treats hides and skins, whether dressed or raw, as a single commodity. To bring it under the taxing provisions of the Sales Tax Act, it is necessary that a point in the course of its sale in the State will have to be fixed. It may happen that goods are bought in other States and brought into the State. The purchase having been completed outside the State cannot be taxed. If subsequently a sale takes place inside the State in the tanned or untanned condition, a point for levy has to be fixed. There would therefore be a necessity for fixing alternative points, so that sales of either tanned or untanned skins might be brought within the Sales Tax Act. In the case of untanned hides and skins, the point is fixed at the last purchase in the State. In the case of tanned hides and skins, the point is fixed at the first sale by the tanner, with exemption in a case where he has paid tax on the skins in their raw condition. Since skins, tanned or untanned, constitute only one class of goods, and the sale of that class of goods can be taxed only at a single point, obviously there can be no tax on a sale of tanned goods, if tax has already been paid on an earlier transaction when those skins were untanned ; thus in substance the points of levy on transactions in untanned skins and tanned skins are mutually exclusive. The points fixed are not with respect to the origin of the goods, but with respect to a single point available to the State in the circumstances of a case. That no exemption would be available where the goods were tanned outside the State is due to the fact that the goods were not in existence in the State at an earlier stage and no tax could be levied while there was a sale in its raw state. Further, the tax on the sale of tanned hides and skins is not only on those imported from other States. Even in regard to hides and skins produced in this State, if no tax was levied or leviable in their raw state, the assessment will be made only on the basis of its sale after being tanned. By way of illustration, let us take for instance a case where a dealer is not liable to assessment by reason of the turnover in raw hides and skins bought within the State being less than Rs. 10,000 ; if he tans them and the tanned goods are sold and the turnover therein exceeds Rs. 10,000 he would be liable to tax on the price of the tanned goods sold. Take again a case where a tanner owns a flock, slaughters, skins and tans, all within the State, he would be liable to pay only on the tanned goods as there was no purchase by him of untanned hides and skins. The levy on the sale of tanned goods is therefore not only in respect of goods bought outside the State but would also be in respect of the goods in the State. Therefore the two points of taxation alternatively fixed in rule 16 would apply irrespective of the place of origin of the goods according to the earliest point in the sale available for taxation. In that view it is unnecessary to consider whether even if Article 304 (a) were to apply, Article 305 would validate the rules as the Madras General Sales Tax Act was an existing law within the latter Article ; or whether a rule under the enactment could be deemed to be a statute law within the meaning of Article 304 (a). In our opinion, rule 16 as re‑enacted does not contravene Article 304 (a) and is valid. Even before we took up this case for delivering judgment, the learned counsel for the petitioner brought to our notice that in C. M. P. No. 5527 of 1959 permission had been sought to raise additional grounds. When the writ petition itself was heard and judgment reserved, it was not brought to our notice that the petitioner proposed to rely upon the additional grounds to raise which permission was sought in C. M. P. No. 5527 of 1959. But this morning when we took up the case for delivering judgment which had been prepared, the learned counsel pointed out that orders had to be passed in C. M. P. No. 5527 of 1959 and that if permission is granted a decision would have to be given on the basis of the additional grounds also. The questions raised in C. M. P. No. 5527 of 1959 are identical with those in other petitions which stand posted to 21st October 1959, for disposal Therefore further proceedings in this case will stand to 21st October 1959. This case along with C. M. P. No. 5527 of 1959 coming on for further hearing along with W. A. No. 40 of 1958 and W. P. No. 282 of 1957 on Thursday the 12th and Fridays the 13th days of November 1959, and having stood over for consideration this day the Court made the following order. In our judgment in W. A. 40 of 1958 in which we considered W. P. 400 of 1957, also we upheld the validity of rule 16 of the Turnover and Assessment Rules the only point reserved for decision. In accordance with our directions in that judgment we direct that this petition be dismissed and rule nisi be dis charged. The respondent will be entitled to his costs. Counsel's fee Rs. 250 as fixed in the consolidated judgment in W. A. 40 of 1958 etc. Petition dismissed.