1996 (11) TMI 358 - SC - VAT and Sales Tax

Exemption totally from the levy of sales tax on the sale of edible oil claimed Held that - Appeal allowed. The exemption granted by Notification No. S.R.O. 93 of 1991 to local manufacturers/producers of edible oil is violative of the provisions contained in articles 301 and 304(a). At the same time, we direct that (a) the appellants shall not be entitled to claim any amounts by way of refund or otherwise by virtue of or, as a consequence of, the declaration contained herein and (b) that the declaration of invalidity of the impugned notification shall take effect on and from April 1, 1977. Till that date, i.e., up to and inclusive of 31st March, 1977, the impugned notification shall continue to be effective and operative.

Issues Involved:
1. Constitutionality of the exemption from sales tax granted to local edible oil manufacturers in Jammu and Kashmir.
2. Alleged discrimination against out-State manufacturers under Articles 301 and 304 of the Indian Constitution.
3. Interpretation and application of Articles 301, 302, 303, and 304 in the context of sales tax exemptions.
4. Validity of the Jammu and Kashmir High Court's reliance on the decision in Video Electronics Pvt. Ltd.
5. The principle of classification under Article 14 vis-`a-vis Articles 301 and 304(a).

Detailed Analysis:

1. Constitutionality of the Exemption from Sales Tax:
The State of Jammu and Kashmir issued S.R.O. 93 of 1991, exempting local small-scale edible oil manufacturers from sales tax. This exemption aimed to protect local industries facing higher production costs compared to neighboring states. The exemption was total and initially for five years, later extended by another five years. The Supreme Court examined whether this exemption violated constitutional provisions, specifically Articles 301 and 304(a).

2. Alleged Discrimination Against Out-State Manufacturers:
The appellants argued that the exemption discriminated against out-State manufacturers, violating Articles 301 and 304(a) of the Constitution. Article 301 ensures free trade, commerce, and intercourse throughout India, while Article 304(a) prohibits discrimination against goods imported from other states by means of taxation. The appellants contended that the exemption created a fiscal barrier, impeding free trade.

3. Interpretation and Application of Articles 301, 302, 303, and 304:
The Court discussed the constitutional scheme under Part XIII:
- Article 301: Guarantees free trade across India.
- Article 302: Allows Parliament to impose restrictions on trade in the public interest.
- Article 303: Prohibits Parliament and State Legislatures from giving preference to one state over another or discriminating between states in matters of trade and commerce.
- Article 304(a): Permits states to levy taxes on imported goods, provided they do not discriminate against similar local goods.

The Court emphasized that Article 304(a) prohibits states from imposing discriminatory taxes on imported goods compared to locally produced goods. The exemption granted by Jammu and Kashmir was found to contravene this provision by creating a tax disparity.

4. Validity of the Jammu and Kashmir High Court's Reliance on Video Electronics Pvt. Ltd.:
The High Court had relied on the decision in Video Electronics Pvt. Ltd. to uphold the exemption. However, the Supreme Court clarified that the limited exception in Video Electronics applied to specific conditions, such as new industries and limited periods, which did not extend to a blanket exemption for all small-scale industries. The exemption in Jammu and Kashmir was neither confined to new industries nor limited by specific conditions, thus falling outside the scope of the exception in Video Electronics.

5. Principle of Classification under Article 14 vis-`a-vis Articles 301 and 304(a):
The respondent-State argued that the classification between local and out-State manufacturers was reasonable under Article 14, which allows for reasonable classification. However, the Court held that while Article 14 speaks of equality, Article 301 guarantees freedom of trade, and Article 304(a) mandates uniform taxation. The Court found that the classification did not justify the tax exemption, as it violated the non-discrimination principle under Article 304(a).

Conclusion:
The Supreme Court declared that the exemption granted by S.R.O. 93 of 1991 to local edible oil manufacturers in Jammu and Kashmir violated Articles 301 and 304(a) of the Constitution. The Court directed that the declaration of invalidity would take effect from April 1, 1977, allowing the impugned notification to remain effective until March 31, 1977. The appeal was allowed, with no order as to costs.

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