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1988 (1) TMI 353 - SC - VAT and Sales TaxValidity of Notification of the Andhra Pradesh Government & Karnataka State Held that - Writ petition has to succeed. Variation of the rate of inter-State sales tax does affect free trade and commerce and creates a local preference which is contrary to the scheme of Part XIII of the Constitution. The notification extends the benefit even to unregistered dealers thus both the notifications of the Andhra Pradesh Government are, therefore, bad and are hit by the provisions of Part XIII of the Constitution. They cannot be sustained in law. Now coming to the notification of the Karnataka State, we have already pointed out that no return has been made and no attempt has been made, therefore, to place facts and circumstances to justify the action. The notification suffers from the same vice as the second notification of the State of Andhra Pradesh suffers and no distinction can be drawn. Thus the notification of the Karnataka Government is also bad in law. It may be pointed out that the rate of sales tax in Karnataka is 19.5 per cent in regard to intra-State sales.
Issues Involved:
1. Vires of Section 8(5) of the Central Sales Tax Act, 1956 2. Constitutionality of notifications issued by the States of Andhra Pradesh and Karnataka under Part XIII of the Constitution Detailed Analysis: 1. Vires of Section 8(5) of the Central Sales Tax Act, 1956 The petitioners initially challenged the vires of Section 8(5) of the Central Sales Tax Act, 1956, which allows states to reduce the rate of tax on inter-State sales. However, during the hearing, the petitioners withdrew this challenge. Consequently, the court did not consider the affidavits from the States of Madhya Pradesh and Sikkim, which had been filed in response to this challenge. The focus of the petition thus shifted solely to the notifications issued by the States of Andhra Pradesh and Karnataka. 2. Constitutionality of Notifications Issued by Andhra Pradesh and Karnataka under Part XIII of the Constitution Andhra Pradesh Notifications: - First Notification: Reduced the rate of tax on cement sold by local manufacturers to local manufacturing units from 13.75% to 4%. - Second Notification: Reduced the rate of tax on inter-State sales of cement to 2%. The petitioners argued that these notifications created trade barriers and violated Article 301 of the Constitution, which mandates that "trade, commerce and intercourse throughout the territory of India shall be free." The court examined the justification provided by the State of Andhra Pradesh, which claimed that the notifications were in public interest and aimed to support local manufacturers and improve state revenue. However, the court found that the reduction in tax rates did not demonstrate any benefit to state revenue and was primarily aimed at protecting local manufacturers, which is not permissible under Part XIII of the Constitution. Karnataka Notification: - Notification: Reduced the rate of tax on inter-State sales of cement from 15% to 2%. The State of Karnataka did not file any return to the rule nisi but argued that its notification did not violate Part XIII of the Constitution. The court, however, found that the notification created a local preference and was contrary to the scheme of Part XIII, which aims to ensure economic unity and free trade across states. Judicial Precedents: The court referred to several landmark decisions to interpret the provisions of Part XIII of the Constitution, including: - Atiabari Tea Co. Ltd. v. State of Assam: Emphasized that trade, commerce, and intercourse throughout India should be free from barriers. - Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan: Clarified that restrictions on trade must be reasonable and in public interest. - State of Madras v. N.K. Nataraja Mudaliar: Highlighted that taxation should not impede the free flow of trade. - Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. v. Assistant Commissioner of Sales Tax: Discussed the legislative policy behind Section 8(2)(b) of the Central Sales Tax Act. - State of Tamil Nadu v. Sitalakshmi Mills: Addressed the issue of preventing tax evasion through legislative measures. Conclusion: The court concluded that both notifications from Andhra Pradesh and Karnataka were unconstitutional as they violated the principles enshrined in Part XIII of the Constitution. The notifications created economic barriers and local preferences, impeding the free flow of trade and commerce across state borders. Consequently, the court quashed the notifications and allowed the writ petition with costs. Final Judgment: The writ petition was allowed, and the impugned notifications from the States of Andhra Pradesh and Karnataka were quashed. The States of Andhra Pradesh and Karnataka were ordered to share the hearing fee of Rs. 5,000 equally.
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