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TMI Blog2017 (10) TMI 185X X X X Extracts X X X X X X X X Extracts X X X X ..... petitioner has also asserted that denial of ITC, in respect of bullion and raw material, purchased within the State of Tamil Nadu, which is converted into finished jewellery, albeit, outside the State and sold, thereafter, within the State of Tamil Nadu, is unlawful and violative of the provisions of Article 265 of the Constitution. 2. Therefore, as would be obvious, the only issue, which arises for consideration, in the writ petition is : whether the writ petitioner, ought to be denied ITC, on bullion and raw material, purchased within the State of Tamil Nadu, which is sent outside the State for being converted into finished jewellery and thereafter, brought back into the State for sale ? 2.1. The writ petitioner asserts that such denial of ITC violates its right of free trade, commerce and intercourse, as conferred upon it under Article 301 of the Constitution. 3. Before one proceeds to examine the arguments put forth on both sides, it may be useful to briefly set out the broad facts of the case: 3.1. The writ petitioner is a registered dealer, whose business is to purchase bullion and worn-out jewellery convert the same into new jewellery for sale to its customers. Important ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respondent, ITC had been wrongly availed of, by the writ petitioner, and therefore, he proposed to reverse the ITC by invoking the provisions of Section 27(2) of the 2006 Act. Furthermore, the notices also proposed to levy of penalty under Section 27(4) of the 2006 Act, equivalent to 50% of the ITC, purportedly, wrongly availed of by the writ petitioner. The notices concluded, by calling upon the writ petitioner to file its objections to the proposals made therein. 3.9. The writ petitioner filed its objections dated 03.02.2010, to the proposals made in the aforementioned notices. Since, two separate notices were served on the writ petitioner, the objections were also filed separately, though, carrying the same date and identical stand. 4. Briefly, the stand taken by the writ petitioner in its objections was as follows: (i) It had purchased bullion from local registered dealers and worn-out jewellery from unregistered dealers. Both, the charging Section, i.e. Section 3, as also, Section 12(2) allow claim for ITC and, therefore, a machinery provision i.e. Section 19(2)(ii) could not obliterate its claim qua ITC. (ii) The emphasis in the two notices that ITC would be available on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ased, bullion and worn-out jewellery from registered and unregistered dealers, inside the State of Tamil Nadu, against sellers tax invoices, upon payment of Value Added Tax (in short 'VAT'). 7.2. The tax on bullion and worn-out jewellery is payable at 1%, as indicated in Serial No.1, Part A of the First Schedule of the 2006 Act. The final product, which is gold and jewellery, is also exigible to tax at the rate of 1%, albeit, as per the provisions of Serial No.2, Part B of the First Schedule to the 2006 Act. Therefore, taxes, both on purchase of raw material and sale of the final product having been paid, the writ petitioner is entitled to claim ITC against tax paid on raw material i.e bullion and worn out jewellery. 7.3. Section 9(1) of the 2006 Act opens with a non-obstante clause whereby, provision for imposition of tax on bullion and jewellery is specifically provided for, in respect of every sale made by a dealer within the State, albeit, at the rate specified in Part A of the First Schedule. Sub-section (2) of Section 9, specifically provides that a dealer, who pays tax under the said Section, shall be entitled to ITC on the goods specified in the First Schedule pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n jewellery/gold, which are manufactured outside the State, but which are brought back and sold within the State of Tamil Nadu, will result in a discriminatory tax burden. The Statute, therefore, has to be construed in a manner that the Legislative power remains within the limitations and restrictions put upon it by the Constitution; an aspect which is articulated in the following judgements and commentary (i) Jothi Timber Mart Vs. The Corporation of Calicut, AIR 1970 SC 264; (ii) New India Sugar Mills Limited Vs. Commissioner of Sales Tax, Bihar, AIR 1963 SC 1207; (iii) Hotel Balaji Vs. State of Pradesh, AIR 1993 SC 1048; and (iv) on the observations made in the book : Principles of Statutory Interpretation", authored by G.P.Singh, 12 Edition (2010) at Pages 593 and 594. 8.1. Section 19(4) of the 2006 Act cannot be read in isolation or in the abstract, the said provision visualises or provides for ITC in excess of 3% (as it then stood) qua goods purchased within the State which are : either transferred to a place outside the State, otherwise than by way of sale, or used in manufacture of other goods and transferred to a place outside the State, otherwise than by way of sale. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be attracted only in circumstances where goods cease to exist or cease to be available in the State for sale or purchase, are the following : (i) Hotel Balaji and others Vs. State of Andhra Pradesh, (1993) Supp (4) SCC 536; (ii) Assistant Commissioner (Intelligence) Vs. Nandanam Construction Company 1998 (8) SCC 69; and (iii) Malabar Fruit Products Company Vs. Sales Tax Officer (1973) 30 STC 537 (Ker.). 8.6. Pertinently, the view taken in Malabar Fruit Products was approved by the Supreme Court in : State of Tamil Nadu Vs. M.K.Kandaswamy, (1975) 36 STC 191. 8.7. Furthermore, the interpretation rendered by the Supreme Court in respect of provisions, which are pari materia, with Section 19(4) of the 2006 Act, is contained in the following judgements : (i) Diamond Sugar Mills Limited Vs. State of U.P. AIR 1961 SC 652 and (ii) Ahmed G.H.Ariff and others Vs. Commissioner of Wealth Tax and Others (1970) 76 ITR 471 (SC). 8.8. The Statute has to be read in a holistic manner, the Legislature does not intend to grant benefit with one hand and take away the same with another. Reference in this regard be had to the judgement of the Supreme Court in CIT Vs. Hindustan Bulk Carriers, (2003) 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edit is like a concession granted to an assessee which requires fulfilment of conditions contemplated under Section 19(2)(ii) of the 2006 Act. The provision of these conditions, are not discriminatory, as alleged or at all. The 2006 Act, denies ITC, to those, who procure goods from outside the State or carry out manufacturing activity, qua, goods purchased within the State, albeit, outside the territorial jurisdiction of the State. The condition prescribed in Section 19(2)(ii) of the 2006 Act is provided to further economic development of the State and to provide job opportunities. Therefore, the assessee who purchases, tax suffered goods, within the State, and uses them for manufacture of final products within the State, form a class, different from those who either procure or manufacture goods outside the State or even those who procure the goods within the State but use them for manufacturing a commodity (which is, different from the raw material), albeit, outside the State. Therefore, no violation, as alleged, of Articles 14, 19(1)(g) or 301 of the Constitution can said to have taken place in respect of these transactions as, clearly, they fall in a different class altogether. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and transferred to a place outside the State, otherwise, than, by way of sale. In other words, the State under Section 19(4) of the 2006 Act, retains 3% of the tax and provides ITC in respect of tax paid or payable in excess of 3%. 9.7. If, the submissions of the writ petitioner were to be accepted, the conditions for availment of ITC provided in other sub-sections of Section 19(2) would be rendered otiose. Because the writ petitioner, wrongly availed of ITC, the Assessing Officer, had rightly proposed reversal of ITC by invoking provisions under Section 27(2) of the Act and, further, proposed levy of penalty. 9.8. The learned Additional Advocate General, in support of his submissions, relies upon the judgement rendered by the Supreme Court in : Jindal Stainless Limited. REASONS 10. We have heard the counsel for parties at great length, and also, perused the record, however, before we proceed further, it may be relevant to refer to certain judgements, which, in our view, are pertinent to the issues, raised in the present case. The reason we proceed to examine the law on the subject at hand, in the first instance, as against facts, is on account of the nature of transaction. F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and skins, out of which, tanned hides and skins were produced. 11.3. The Supreme Court, while declaring Rule 16(2) as invalid, made the following crucial observations: "......10. It is therefore now well settled that taxing laws can be restrictions on trade, commerce and intercourse, if they hamper the flow of trade and if they are not what can be termed to be compensatory taxes or regulatory measures. Sales tax, of the kind under consideration here, cannot be said to be a measure regulating any trade or a compensatory tax levied for the use of trading facilities. Sales tax, which has the effect of discriminating between goods of one State and goods of another, may affect the free flow of trade and it will then offend against Art.301 and will be valid only if it comes within the terms of Art.304(a). 11. Article 304(a) enables the Legislature of a State to make laws affecting trade, commerce and intercourse. It enables the imposition of taxes on goods from other States if similar goods in the State are subjected to similar taxes, so as not to discriminate between the goods manufactured or produced in that State and the goods which are imported from others States. This means that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns. The tax is levied from the dealer who is the last purchaser in the State. Its vires is not challenged. Clause (i) of sub-r. (2) provides for the levying of tax on the sale of hides and skins which had been tanned outside the State. The tax is levied from the dealer who in the State, is the first seller of such hide or skins. The result is that a dealer in hides or skins which have been tanned outside the State has to pay the tax on the amount for which such hides or skins are sold by him. Clause (ii) of this sub-rule is in identical terms with respect to the sale of tanned hides or skins which have been tanned within the State. The tax is to be levied from the person who is the first dealer in such hides or skins and is levied on the amount for which they are sold. The discrimination, it is argued, comes in on account of the proviso to this sub-cl.(ii). The proviso is to the effect that if the dealer of hides or skins which had been tanned within the State proves that tax had already been levied on those hide or skins in their raw condition, in accordance with sub-r. (1)., he will not be liable to the tax under sub-cl. (ii) of sub-r. (2). The result therefore is that the sale o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion justifies their forming goods of a different kind from the tanned hides or skins which had been imported from outside. At the time of sale of those hides or skins in the tanned state, there was no difference between them as goods and the hides or skins tanned outside the State as goods. The similarity contemplated by Art.304(a) is in the nature of the quality and kind of the goods and not with respect to whether they were subject of a tax already or not. 19. We are therefore of opinion that the provisions of r. 16 (2) discriminate against the imported hides or skins which had been purchased or tanned outside the State and that therefore they contravene the provisions of Art.304(a) of the Constitution..... (emphasis is ours) 12. The next case, which is of relevance is: Andhra Steel Corporation Vs. Commissioner of Commercial Taxes in Karnataka, 1990 (Supp) SCC 617. 12.1. The appellant, before the Court, was a manufacturer of iron ingots, steel rounds and tor-steel. These products were manufactured by the appellant, from iron scrap, purchased from dealers, who were situate both within and outside the State of Karnataka. Most of the goods manufactured from such iron scrap, wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , (1986) 2 SCC 479. The Supreme Court, after adverting to these judgements and upon application of the ratio laid down in A.T.B. Mehtab Majid and Co.'s case, which was followed in Hajee Abdul Shakoor and Co. Vs. State of Madras, AIR 1964 SC 1729, distinguished those cases, as those cases dealt with inter-State sales. The Court in this context noted that the levy of sales tax was under the Central Sales Tax Act in those cases, though for the purposes of arriving at rates at which tax is to be imposed, the rate which is applicable to local sales is adopted, subject to the maximum provided in Section 8(2) of the Central Act. The ratio, being that the State Legislatures could not tax inter-State sales, and therefore, that aspect could only to be dealt with by the Parliament. The Court went on to say that the instant case was covered by the ratio of the decision in A.T.B. Mehtab Majid case. The crucial observations, to that effect, made in paragraphs 22 and 23 of the judgement are extracted hereafter : "22. It may be seen from these passages cited that the ratio of the decision as in the case of Nataraja Mudaliar, case (supra) was that in the case of inter-State sale the levy of ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e High Court. There will be no order as to costs." (emphasis is ours) 13. The next case, which is relevant, for our purpose, is the judgement of the Supreme Court in Anand Commercial Agencies Vs. The Commercial Tax Officer, VI Circle, Hyderabad and others, (1998) 1 SCC 101. This is a case where the appellant before the Supreme Court challenged the difference in rates of tax imposed for sale of groundnut oil and refined oil manufactured from groundnut which had suffered tax under the Andhra Pradesh General Sales Tax Act, 1957, as against groundnut oil or refined oil, imported into the State. The rate of tax on the former was only 2 = paise in a rupee, whereas, in the case of oil imported from other States, the rate of tax on local sales was 6 = paise in a rupee. 13.1. The challenge was laid on the ground that the difference in rate led to discrimination and therefore violated the appellant's right to freedom of trade and commerce throughout India. 13.2. The following observations being apposite are extracted hereafter: ".....12. Freedom of trade, commerce and intercourse guaranteed by Article 301 means freedom to carry on business throughout the territory of India without ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... desh was challenged by the writ petitioners who carried on the business of selling cinematographic films and other equipments like Projectors, sound recording and reproducing equipment, industrial X-ray films, graphic art films, photo films, etc. in the State of Uttar Pradesh and Delhi. The petitioners sold these goods after receiving them from the manufacturers from outside the State of Uttar Pradesh. They were dealers of Hindustan Photo Films Manufacturing Co. Ltd., a 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 diff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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. 23. 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. *** 28. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ales Tax Act, 1959, the dealer had carried the goods to another State as his own, manufacture it in his own factory, brought it back to Madras to his depot and sold it. Therefore, it may not even amount to an import of goods from outside the State. The decision of the Supreme Court was rendered on 22nd November, 1962. On 10th of June, 1963, the Governor of Madras promulgated Madras Ordinance 3 of 1963. The explanatory statement attached to the said Ordinance stated that the decision of the Supreme Court in Firm A.T.B.Mahtab Majid & Co. V. State of Madras (1963) 14 STC 355 (SC) will result in claims for refund of tax being preferred by dealers in hides and skins already assessed under the impugned rule thereby resulting in huge loss of revenue and will also result in administrative complications. It is, therefore, considered necessary to avoid these difficulties by receiving the discrimination in the matter of levy of tax on hides and skins pointed out by the Supreme Court and to provide for the assessment or reassessment and collection of the tax from the dealers in hides and skins without any discrimination by levying the tax in all cases on the basis of the purchase price of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... higher than the cost of production of a similar kind of edible oil manufactured in the adjoining States. With the result it was submitted, outside manufacturers were able to sell edible oil in the State at prices lower than the local manufactures. Since, this price difference, had led to closure of local edible oil industries, the State Government had decided to exempt payment of tax by the local manufacturers, to the extent and for the period specified in the relevant schedule. This power was evidently, exercised by issuance of a notification under Section 5 of the J & K General Sales Tax Act, 1962. 15.2. The following observations, being relevant, are extracted: ".....22. Video Electronics (P) Ltd. v. State of Punjab [1990 (3) S.C.C. 87]: inasmuch as strong and almost exclusive reliance is placed by the learned counsel for the State of Jammu & Kashmir on this decision, it is necessary to examine the facts of and the law laid down in this decision (rendered by a Bench of three learned Judges) a little more closely. In is decision, notifications issued by two States, viz., Uttar Pradesh and Punjab were considered. The notification issued by the Government of Uttar Pradesh provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of economic barriers must be understood in a dynamic sense. The concept of economic unity or economic barriers must be read along with the power of exemption inhering in the State Governments. Where every State is exempting or reducing the rates of sales tax, there can be no question of an economic war between them. "A backward State or a disturbed State cannot with parity engage in competition with advanced or developed States. Even within a State there are often backward areas which can be developed only if some special incentives are granted. If the incentives in the form of subsidies or grant are given to any part of (sic or) units of a State so that it may come out of its limping or infancy to compete as equals with others, that in our opinion, does not and cannot contravene the spirit and the letter of Part XIII of the Constitution. However, this is permissible only if there is a valid reason, that is to say, if there are justifiable and rational reasons for differentiation. If there is none, it will amount to hostile discrimination." 23. All the above observations were made to justify (1) grant of incentives and subsidies and (2) exemption granted to new industries, of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to a discriminatory rate of taxation, i.e., a higher rated to sales tax vis-a-vis similar goods manufactured/produced within that State and sold within that State. Prohibition is against discriminatory taxation by the States. It matters not how this discrimination is brought about. A limited exception has no doubt been carved out in Video Electronics but, as indicated hereinbefore, that exception cannot be enlarged lest it eat up the main provision. So far as the present case is concerned it does not fall within the limited exception aforesaid; it falls within the ratio of A.T.M.Mehtab Majid and the other cases following it. It must be held that by exempting unconditionally the edible oil produced within the State of Jammu & Kashmir altogether from sales tax, even if it is for a period of ten years, while subjecting the edible oil produced in other States to sales tax at eight percents the State of Jammu s Kashmir has brought about discrimination by taxation prohibited by Article 304(a) of the Constitution. 26. We are unable to see any substance in the objection raised by Sri Verma that not having attacked the exemption notification when the rate of tax was four percents the appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dealer in iron and steel, and was registered under the A.P. General Sales Tax Act, 1957. The appellant No.1 would purchase tax suffered iron and steel scrap and ingots in the State of Andhra Pradesh and have them sent to its re-rolling Mill situate in the State of Karnataka. The re-rolled products were brought back to A.P. and sold therein. 16.2. By virtue of the Government Order in G.O.Ms.No.88, Revenue, dated 28.01.1977, w.e.f 01.04.1976, re-rolled finished products of steel sold in Andhra Pradesh were given exemption from Andhra Pradesh General Sales Tax Act, 1957 (in short 'APGST') provided tax had already been levied on the sale or purchase of any of the materials specified in Item No.2 of the Third Schedule of the said Act; which, included the raw materials purchased by appellant No.1. 16.3. By a subsequent notification i.e. G.O.Ms.No.1373, (Revenue), dated 28.08.1981, amendment was made to G.O.Ms.No.88. By virtue of this amendment, exemption available under G.O.Ms.No.88 became available only to those re-rolled finished products of steel re-rollers, which were situate in the State of Andhra Pradesh. 16.4. G.O.Ms.No.88 was cancelled w.e.f 04.02.1982. Thereafter, ano ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e allowed to stand. The taxing authority can be prevented by injunction from imposing the tax on subjects exempted by the Constitution. In the present case the exemption notification as it originally stood exempted all re-rolled finished products sold in the State of Andhra Pradesh from tax provided tax had been paid in the State of Andhra Pradesh on the raw material. This exemption is still available to re-rolled products which are manufactured within the State. No exception can be taken to this part of the notification. Only the portion of exemption notification which discriminates against goods manufactured outsides the State violates the provisions of Articles 304(a). In fact the words denying this exemption to goods manufactured outsides the State were expressly and specifically added to the original exemption notification by the amending G.O.Ms. No.1373 of 28.3.1981. It is this amendment alone, which is clearly severable, that offends Article 304(a). It can, therefore, be struck down. The subsequent notification of 20.3.1984 proceeds on the same basis. There is no need, therefore, to strike down the entire tax exemption which is granted to all re-rolled steel products sold in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate is another such device used by the Government which when given on the rate of tax to the full amount of tax levied, it gives favourable treatment to one class of dealers situated within the state barring the dealers similarly placed outside the State manufacturing goods using the same raw material. The grant of such rebate has the colour of exemption/ concessional rate of tax along with the same deleterious effects of an exemption. 54. Therefore, the test to be applied to determine whether rebate is within the realm of tax defined in Article 304(a) of the Constitution of India so as to say that it discriminates between the two class of goods: locally manufactured goods and the imported goods when both the class of dealers meet the conditions required to qualify for the grant of rebate i.e. the use of fly-ash, is the overall effect or impact of such rebate on the manufacturer. 55. This issue is no longer res-integra and is discussed in several cases including in the case of Firm A.T.B. Mehta Masjid & Co v. State of Madras and Anr., AIR 1963 SC 928, where the question for consideration was whether Rule 16 of the Madras General Sale Tax Rules, 1939 subjected tanned hides and sk ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or a direction asking the respondents to forbear from levying or imposing or collecting any sales tax on the sale of hosiery goods imported into Bihar from other States. The State Government by a notification exempted dealers from sales tax of hosiery goods manufactured and produced in the State of Bihar whereas levied sales tax on the dealers outside the State. This Court opined that from the commercial or normal point of view, such a discriminatory levy of sales tax would have an effect that would be bound to affect the free flow of hosiery goods from outside State into the State of Bihar and would therefore violate Article 301 read with Article 304(a) of the Constitution of India. 57. The above decision is also followed in the case of Western Electronics and Another v. State of Gujarat and others, 1988 2 SCC 568; and in the case of Loharn Steel Industries v. State of Andhra Pradesh; (1997) 2 SCC 37 wherein the impact of exemption on the manufacturer was such that the manufactures outside Andhra Pradesh had to pay a higher rate of tax as compared to the manufacturers in Andhra Pradesh because of the entire tax exemption granted to the all re-rolled steel products sold in the And ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Parliament to impose restrictions on trade, commerce and intercourse in public interest. 3. The restrictions which Parliament may impose in terms of Article 302 cannot however give any preference to one State over another by virtue of any entry relating to trade and commerce in any of the lists in the Seventh Schedule. 4. The restriction that the Parliament may impose in terms of Article 302 may extend to giving of preference or permitting discrimination between one State over another only if Parliament by law declares that a situation arising out of scarcity of goods warrants such discrimination or preference. 5. Article 304(a) recognizes the availability of the power to impose taxes on goods imported from other States, the legislative power to do so being found in Articles 245 and 246 of the Constitution. 6. Such power to levy taxes is however subject to the condition that similar goods manufactured or produced in the State levying the tax are also subjected to tax and that there is no discrimination on that account between goods so imported and goods so manufactured or produced. 7. The limitation on the power to levy taxes is entirely covered by Clause (a) of Article 30 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 301. Resultantly decisions of his Court in Jindal Stainless Limited and anr. v. State of Haryana and ors. (2006) 7 SCC 241 shall also stand overruled. 127. Re. Question No.2 In view of our answer to Question No.1, Question No.2 does not arise for consideration. 128. Re. Question No.3 In the light of what we have said in Question Nos. 1 and 2, this question also does not survive for consideration. 129. Re. Question No.4 This question touching the constitutional validity of the impugned State enactments can be split into two parts. The first part which can be briefly dealt with at the outset is whether the constitutional validity of the impugned legislations has to be tested by reference to both Articles 304(a) and 304(b) as contended by learned counsel for the assessees or only by reference to Article 304(a) as argued by the Page 161 161 States. In the light of what we have said while dealing with question No.1 we have no hesitation in holding that Article 304(b) does not deal with taxes as restrictions. At the risk of repetition, we may say that restrictions referred to in Article 304(b) are non-fiscal in nature. Constitutional validity of any taxing statute has, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es it was contended that grant of exemptions and incentives in favour of locally manufactured/produced goods is also one form of insidious discrimination which was impermissible in terms of article 304(a) for such exemptions and incentives had the effect of putting goods from another State at a disadvantage. Relying upon a decision of two-Judge Bench of this Court in Shree Mahavir Oil Mills and Anr. v. State of Jammu and Kashmir and Ors. (1996) 2 SCC 39 it was argued that exemptions in favour of locally produced goods from payment of taxes was constitutionally impermissible and offensive to article 304(a). That was a case where the State Government had totally exempted goods manufactured by small scale industries within the State from payment of sales tax even when the sales tax payable by other industries including manufacturers of goods in adjoining States was in the range of 8%. This exemption was questioned by manufacturers of edible oils from other States on the ground that the same was discriminatory and violative of Articles 301 and 304 of the Constitution. 131. This Court held that the exemption given to manufacturers of edible oil was total and unconditional, while produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the line of reasoning adopted in Video Electronics (supra). The expression discrimination has not been defined in the Constitution though the same has fallen for interpretation of this Court on several occasions. The earliest of these decisions was rendered in Kathi Raning Rawat v. The State of Saurashtra AIR 1952 SC 123, where a seven-Judge Bench of this Court held that all legislative differentiation is not necessarily discriminatory. Relying upon the meaning of the expression in Oxford Dictionary, Patanjali Sastri, CJ (as His Lordship then was) explained : "7. All legislative differentiation is not necessarily discriminatory. In fact, the word discrimination does not occur in Article 14. The expression discriminate against is used in Article 15(1) and Article 16(2), and it means, according to the Oxford Dictionary, to make an adverse distinction with regard to; to distinguish unfavourably from others . Discrimination thus involves an element of unfavourable bias and it is in that sense that the expression has to be understood in this context. If such bias is disclosed and is based on any of the grounds mentioned in Articles 15 and 16, it may well be that the statute will, wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pirations and if attaining and maintaining such unity is a Constitutional goal, such unity and objectives can be achieved only if all parts of the Country develop equally. There is, if we may say so, with respect considerable merit in that line of reasoning. A State which is economically and industrially backward on account of several factors must have the opportunity and the freedom to pursue and achieve development in a measure equal to other and more fortunate regions of the country which have for historical reasons, developed faster and thereby acquired an edge over its less fortunate country cousins. Economic unity from the point of view of such underdeveloped or developing states will be an illusion if they do not have the opportunity or the legal entitlement to promote industries within their respective territories by granting incentives and exemptions necessary for such growth and development. The argument that power to grant exemption cannot be used by the State even in case where such exemptions are manifestly intended to promote industrial growth or promoting industrial activity has not appealed to us. The power to grant exemption is a part of the sovereign power to levy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the diverse elements and inputs that go into such exercise a greater latitude is due to the legislature in taxation related legislations. It is unnecessary to refer to all the decisions in which this Court has conceded such play at the joints to the legislature. 138. Reference may also be made to the Constitution bench decision of this Court in Khandige Sham Bhat v. Agrl. ITO, AIR 1963 SC 591 where this Court declared that a law may facially appear to be non discrimination and yet its impact on persons and property similarly situate may operate unequally in which event, the law would offend the equity clause. This implies that facial equality is not the only test for determining whether the law is constitutionally valid. What is equally important is the impact of the legislation. This Court held: "7. Though a law ex facie appears to treat all that fall within a class alike, if in effect it operates unevenly on persons or property similarly situated, it may be said that the law offends the equality clause. It will then be the duty of the court to scrutinise the effect of the law carefully to ascertain its real impact on the persons or property similarly situated. Conversely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rocess articulated in Article 304(b). The restrictions adverted to in Article 304 (b) are not fiscal in nature (See Jindal Stainless Ltd case) (ii) Second, there is a difference between differentiation and discrimination . Every differentiation is not discrimination . Therefore, the expression discriminate incorporated in Article 304(a) would take within its ambit those measures adopted by the State which are infected with intentional and unfavourable bias . Thus, as long as, the differentiation made by the State is not intended to create an unfavourable bias and as long as the differentiation is intended to benefit a distinct class of industries and the life of the benefit is limited in terms of period, the benefit must be held to flow from a legitimate desire to promote industries within the State. (See paragraph 133 of Jindal Stainless Ltd case) (iii) Third, given the inherent complexities of fiscal Statute greater play in the joints must be provided to tax related fiscal and / or revenue legislations. Having said so, fiscal legislations can also be tested on the anvil of Article 14 though a rebuttable presumption holds in their favour that they are Constitutionally valid. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pricing of goods as between those that are imported into the State and those that are manufactured in the State, will attract the censure of Article 304(a) of the Constitution. 21. The facts which obtain in the present case, clearly, demonstrate, that ITC is not made available by the respondents, to those assessees who have had tax suffered raw materials such as bullion and / or worn out jewellery converted into final products (i.e. jewellery) by having them manufactured / processed in units situate outside the State of Tamil Nadu, even though, the final product is sold, upon payment of tax within the State of Tamil Nadu. 22. Consequently, the final product (i.e. jewellery) manufactured by the assessee within the State from tax paid raw materials purchased within the State upon sale, within the State, gets the benefit of ITC, whereas, those goods which are manufactured outside the State, though by use of tax suffered raw materials purchased, within the State, do not get that benefit. Clearly, if the impact test is applied, goods manufactured outside the State, upon being brought within the State, for sale, would be costlier, as against those, which are, manufactured within the S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intrinsic evidence that ITC cannot be denied only on account of the goods being sent on transfer to a place outside the State for manufacture, and thereafter, brought to the State for sale. The denial of ITC in such circumstances would impede directly and immediately the free trade, commerce and intercourse in such goods (i.e. jewellery), as the trade would shift to places where ITC is not denied solely on the ground that the conversion or manufacture of goods takes place outside the State. 28. The writ petitioner rightly relies upon, the position obtaining in the State of Kerala and the State of Karnataka to buttress its stand. 28.1. Rule 15(3A) of the Kerala VAT Rules gives a clue in that behalf. For the sake of convenience, the relevant Rule is extracted herein: "Rule 15. Determination of reverse tax. (1) ..... (2)..... (3) (3A) If the goods in respect of which input tax credit has been claimed are sent as such or after being partially processed, for further processing, testing, repair, reconditioning, or any other similar purpose and are not received back within a period of ninety days, the input tax credit attributable to such goods shall be reverse tax for the mont ..... X X X X Extracts X X X X X X X X Extracts X X X X
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