.JINDAL STA!NLESS TTD. & ANR. v. STATE OF HARYANA & ORS.

4. Jn case answer to Question No.3 is in the negative, would any interpretation of provisions of Article 301 of the Constitution that makes the power to make laws and D levy taxes subservient to Article 301 have the effect of denuding the States of their sovereign power and affecting the federal structure envisaged by the Constitution?

5. ls levy of taxes presumed to he in public interest? E

6. If answer to Question No.5 is in the affirmative, can levy of taxes he justified as reasonable restrictions imposed in public interest?

7. If levy of taxes under Article 304(h) were permissible F onzy with the previous sanction of the President, would such levies not come under judicial scrutiny for determining whether the levy is reasonable and in public interest?

8. If answer to the Question No. 7 is in the affirmative, would it not affect the separation of powers between the legislature on the one hand and the judiciary on the other?

9. In the absence of anything to show that Article 301 H

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[ASl-IOK BHUSHAN. J.]

excludes only such taxes as are compensatory in nature, A would the compensatory tax theory not bring about a dichotomy that is inconsistent with the language employed in Article 301?

22. Learned counsel for the parties have made their respective submissions in reference to the above questions framed by this Bench. B PART II ATIABARI TEA CO. LTD.

23. The Constitution Bench of this Court, by majority opinion, delivered by P.B. Gajendragadkar J. had considered various aspects of C Part Xlll of the Constitution oflndia. especially Article 301. The challenge before this Court was to the provisions of Assam Taxation (on goods carried by Roads and Inland Waterways) Act, 1954 (hereinafter referred to as "the Assam Act. 1954''). Under the Assam Act. 1954, appellants who were growers of tea in the West Bengal or in Assam and carried out their tea to the market in Calcutta were asked to pay tax on goods in their journey in part of territory of Assam.

24. The appellant had challenged the vires of the Assam Act, 1954 before the Assam High Court on various grounds including the ground that provisions of the Assam Act, 1954 are violative of rights given under Article 301 of Constitution oflndia. The Assam High Court repelled the challenge by dismissing the writ petition. Three appeals were filed on certificate granted by the High Court: two writ petitions were directly filed under Article 32, challenging the vires of the Assam Act, 1954. Both the appeals and the writ petitions were heard by the Constitution Bench. The majority opinion was expressed by P.B. F Gajendragadkar J.: B.P. Sinha, C.J. and J.C. Shah, J. delivered separate opinions. Before the Constitution Bench, the principal submission which was made by the appellants/petitioners was. that Article 30 I of the Constitution of India grants the freedom of trade, commerce and intercourse throughout the territory of India and the Assam Act, 1954 G levies tax on carrying out the tea throughout the State of Assam, and it had the effect of interfering with the above freedom. The respondent contended that the Act in pith and substance, a legislature to levy tax on certain classes of types of goods carried by road or inland. waterways strictly within entry of the State List, the Assam Act, 1954 was not H

692 SUPREME COURT REPORTS [2016] 10 S.C.R.

A within the prohibition contained under Article 301 of the Constitution of India. One of the submissions pressed before the Constitution Bench was that taxing power having been conferred on the State by Article 245 to 248 read with relevant Entries in List II, Part XIII cannot be held to be attracted on the taxing statue.

B 25. P.B. Gajendragadkar J. rejected the arguments that the tax laws are outside Part XIII. Following was observed as under:-

" ....... Thus the intrinsic evidence furnished by some of the Articles of Part XIII shows that taxing laws are not c excluded.from the operation of Art.301; which means that tax laws can and do amount to restrictions freedom from which is guaranteed to trade under the said part ..... "

26. Further, question posed by P.B. Gajendragadkar J. was that whether all tax laws attract the provisions of Part XIII? Whether their impact on trade or its movement is direct and immediate or indirect and remote? Answering the said questions, it was observed as under:- E " ....... Thus considered we think it would be reasonable and proper to hold that restrictions freedom from which is guaranteed by Article 301, would he such restrictions as direc#y and immediately restrict or impede the free flow or movement of trade. Taxes may and do amount to restrictions; but it is on~y such taxes as directly and immediately restrict trade that would fall within the purview of Article 301. The argument that all taxes should he governed by Article 301 ·whether or not their impact on trade is immediate or mediate, direct or remote, adopts, in our opinion, an extreme approach which cannot be upheld ..... " Further, it was observed that:- ......... We are, therefore, satisfied that in determining the H

JINDAL STAINLESS LTD. v. STATE OF HARYANA 693

[ASHOK BHUSHAN, J.]

limits of the width and amplitude of the freedom A guaranteed by Article 30i a rational and workable test to apply would be: Does the impugned restriction operate directly or immediately on trade or its movement? ..... " B

27. After laying down the relevant proposition on interpretation of Part Xlll and after applying the said propositions to the Assam Act, 1954, following was observed in the majority opinion:-

c " ...... .it purports to put a restraint in the.form of taxation on the movement of trade. and if the movement of trade is regarded as an integral part of trade itself. the Act in substance puts a restriction on trade itself The effect of the Act on the movement of trade is direct and D immediate; it is not indirect or remote; and so legislation under the said Entry must be held to fall directly under Article 30i as legislation in respect of trade and commerce ... .. .

28. B.P. Sinha, C.J. in his minority opinion held that freedom declared by Article 30 I does not mean freedom of taxation simpliciter but it does mean freedom from taxation which has the effect of directly impeding the free flow of trade, commerce and intercourse.

29. Sinha J. also held that iflegislature imposes a tax, which is an F impediment to the free flow of trade, commerce and intercourse, such law assumes character of trade barrier which is contrary to freedom granted under Article 301. Following was observed by Sinha J.

G " ...... if a law is passed by the Legislature imposing a tax which in its true nature and effect is meant to impose an impediment to the free flow of trade, commerce and intercourse, for example, by imposing a high tar!ff wall, or by preventing imports into or exports out of a State. H.

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A such a law is outside the sign(jlcance of taxation, as such. but assumes the character of a trade barrier which it was the intention of the Constitution- makers to abolish by Part XIJJ ... ... "

30. Sinha J. upheld the Assam Act, 1954. The third opinion of the Constitution Bench was expressed by Shah J. Shah J. held that taxation was one of the restrictions from the imposition of which by the guarantee of Article 30 I trade, commerce and intercourse was declared free. Shah J. expressed his conclusion in following words:- c "....... On a careful review of the various Articles, in my judgment, by Part XIII, restrictions have been imposed upon the legislative power granted by Articles 245, 246 and 248 and the lists in the seventh schedule to the D Parliament and the Stale Legislatures and those restrictions inc/tide burdens (?f the nature of taxation. Therefore. the power to tax commercial intercourse vested by the legislative fists in the Parliament or the State Legislatures, is circumscribed by Part Xlll of the E Constitution and {f the exercise of that power does not conform to the requirements of Part XI!l. it would be regarded as invalid...... "

31. As noted above, by the majority opinion expressed by F G~jendragadkar, J. with whom Shah J. concurred, the provisions ofAssam Act, l 954 were held to be infringing the Article 30 I and since the Bill had not received the assent of President as required under Article 304(b) proviso, the Act was declared void.

G The Automobile Transport (Rajasthan) Ltd.

32. The writ petitions were filed before the Rajasthan High Court challenging the demand of payment of tax due on their registered motor vehicles under the Rajasthan Motor Vehicles Taxation Act, l 951 (hereinafter referred to as 'the Act'). H

JINDAL STAINLESS LTD. v. STATE OF HARYANA 695

[ASHOK BHUSHAN, J.]

33. In the writ petitions, principal contention raised before the A High Court was that the provision of the Act imposing tax on their motor vehicles was unconstitutional and void as they contravened the freedom of trade, commerce and intercourse throughoutthe territory oflndia as guaranteed by A1ticle 301 of the Constitution oflndia.

34. The Division Bench of the High Court referred the matter to B the Full Bench. The Full Bench took the view that taxation under the aforesaid Act cannot be said to offend Article 30 I for its effect on trade, commerce is only indirect and consequential and it may be regarded only as remote.

35. The matter was taken to this Court and heard by a Constitution C Bench of five Judges which felt that having regard to the importance of the Constitutional issues involved and the views expressed by this Court in case "Atiabari Tea Co. Ltd. Vs. The State of Assam and Others" reported in (1961) 1 SCR 809, the appeals should be heard by a larger Bench. The appeals were consequently placed for hearing before the D Bench of seven Judges. Three opinions came to be delivered in the larger Bench. S.K. Das, J. delivered the judgment for himself, J.L. Kapur, J., A.K. Sarkar J. and K. Subba Rao, J. delivered separate opinion concurring with the opinion expressed by Das J.

36. Justice M. Hidayatullah delivered minority judgment on behalf of himself and N. Rajagopala Ayyangar, J., J.R. Mudholkar, J., Dass J. and SubbaRao J. Das, J. upheld the provisions of the Act, upholding the provisions of the Act as regulatory and compensatory. However, while upholding the provisions of the Act, the majority judgment approved the earlier Constitution Bench Judgment in Atiabari Tea Co. Ltd (supra) with one clarification, in following words:

"The interpretation which was accepted by the majority in the Atiabari Tea Co. case is correct, but subject to this clarification. Regulatory measures or measures imposing compensatory taxes for the use of trading facilities do not come within the purview of the restrictions contemplated by Art.301 and such measures H

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A need not compZv with the requirements of the proviso to Art.304(h) of the Constitution." 3 7. Das, J. held that tax for use of a road or for the use of bridge is not ba1Tier or burden or deterrent to traders. It was held that such taxes are compensatory taxes which do not hinder anybody's freedom. B Following was observed by Das, J.:-

"...... The collection of a toll or a tax for the use of a road or for the use of a bridge or for the use of an aerodrome is no harrier or burden or deterrent to traders c who, in their absence, may have to take a longer or less convenient or more expensive route. Such compensatory taxes are no hindrance to anybody s freedom so long as they remain reasonable: hut they could of course be converted into a hindrance to the freedom of trade. If the authorities concerned really wanted to hamper anybody '.1· trade, they could easily raise the amount of tax or toll to an amount which would be prohibitive or deterrent or create other impediments which instead offacilitating trade and commerce would hamper them. It is here that the contrast, between ''.freedom" (Article 301) and "restrictions"' (Articles 302 and 304) clearly appears: that which in reality facilitates trade and commerce is not a restriction, and that which in reality hampers or burdens trade and commerce is a restriction. It is the reality or substance of the matter that has to be determined. It is not possible a priori to drqw a dividing line between that which would really be a charge for a facili~v provided and that which would really he a deterrent to a trade: hut the distinction: !fit has to be drawn, is real and clear. For the tax to become G a prohibited tax it has to he a direct tax the effect of which is to hinder the movement part of trade. So long as a tax remains compensatory or regulatory it cannot operate as a hindrance ..... "

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38. Das, J. did not accept the arguments that restrictions in Part A Xlll of the Constitution do not apply to taxation laws.

39. After laying down the relevant test for examining the validity of taxing statue, Das J. noted various provision of the Act. It was held that Section 4 of the Act makes it clear that tax is imposed on a motor vehicle which is to be used in any public place or kept to be used for in B the State ofRajasthan. What should be the test to enquire as to whether a tax is a compensatory or not, following was stated as under:-

"..... It seems to us that a working test for deciding whether a tax is compensatory or not is to enquire c whether the trades people are having the use of certain facilities for the helter conduct of their husiness and paying not patently much more than what is required for providing the facilities. ft would he impossible to judge the compensatory nature of a tax hy a meticulous D test, and in the nature of things that cannot be done ..... '·'

40. Ultimately, Das, J. held that the Act does not violate the provision of Article 301 and the tax imposed under the Act are compensato1y E taxes which did not hinder the freedom of trade, commerce and intercourse assured by Article 301. Taxes imposed were legal and High Court had rightly dismissed the writ petitions. Subba Rao J., agreed with the conclusion arrived by Das, J.

41. It was held, that the arguments cannot be accepted that law F of taxation is outside the scope of freedom enshrined under Article 30 I of the Constitution. Subba Rao, J. also laid down that the doctrine of "direct and immediate effect" is the most important doctrine to find out whether there is restriction on the free movement of trade. It was further held that compensatory or regulatory tax cannot be treated as restriction. G

42. Hidyatullah, J. also expressed a view that all taxes or taxing laws are not outside the reach of Part XIII. It was further held that tax is a restriction when it is placed upon a trade directly and immediately. But the tax being generally paid by tradesman in common with others, cannot be held to be infringing freedom of trade under Article 301. H

698 SUPREME COURT REPORTS [2016] 10 S.C.R.

A Following observations were made as under:-

"...... That a tax is a restriction when it is placed upon a trade direct~y and immediately may he admitted. But there is a difference between a tax which burdens a B trader in this manner and a tax, which being general, is paid hy tradesmen in common with others. The.first is a levy from the trade hy reason of its being trade, the other is levied from all, and tradesmen pay it because every one has to pay it. There is a vital d([ference c hetween the two, viewed from the angle of freedom of trade and commerce. The first is an impost on trade as such, and may he said to restrict it; the second may burden the trader, but it is not a ''restriction " of the trade. To refuse to draw such a distinction would mean that there is no taxing ent1y in Lists I and JI which is not subject to Articles 301 and 304, however general the tax and however non-discriminatory its imposition. To bring all the taxes within the reach of Article 301 and thus to bring them also within the reach of Article 304 is to overlook the concept of a Federation, which allows freedom of action to the States, subject, however, to the needs of the unity of India. Just as unity cannot he allowed to he frittered away hy insular action, the existence of separate States is not to he sacrificed hy a fusion beyond what the Constitution envisages. No F doubt, Part XIII ensures economic unity to India and combines the federating States into the larger State called India. The Constitution also permits independent powers of taxation. What the Constitution does not permit is that trade, commerce and intercourse should be rendered "urifree ". Trade and commerce remain free G even when general taxes are paid hy tradesmen in common with non-tradesmen ...... "

43. Hidyatullah, J. held that taxes which are imposed by the Act H by Schedules II, III and IV operates restriction on trade and commerce

JINDAL STAINLESS LTD. v. STATE OF HARYANA 699

[ASHOK BHUSHAN, J.]

directly. Hence, the provisions have to be held offending Article 30 I and A resort to the procedure prescribed by Article 304(b) having not been taken, the Act is ultra vires to the Constitution of India.

PART III B SUBMISSIONS

44. The arguments on behalf of the petitioners. who have challenged various Entry Tax Legislations, have been led by Shri Harish Salve, learned senior counsel. For the petitioners, we have also heard several other eminent Senior Advocates and other counsel who have c additionally made substantial submissions, however, to avoid repetition of submissions while referring to the submissions of other counsel we have not noted the submissions which have already been covered by Shri Harish Salve.

45. The arguments on behalfofdifferent States have been led by D Shri P.P. Rao and Shri Rakesh Dwivedi, Senior Advocates. Several other counsel have also made submissions, however. to avoid repetition, we have noted only those submissions which were not covered by Shri P.P. Rao and Shri Rakesh Dwivedi. Shri Mukul Rohatagi, learned Attorney General has also made his submissions. E

46. Shri Harish Salve, learned senior counsel leading the arguments on behalf of the petitioner made elaborate submissions on various aspects of Part XIII of the Constitution of India. Shri Salve traced the legislative history of Part XIII of Constitution by referring to the Government of India Act 1919 and Government of India Act, 1935. F It is submitted by Shri Salve that a Tax commonly known as "Octroi" was enforced in 190 l even before the. Government of India Act, 1935.

47. It is contended that Article 301 of the Constitution of India was originally framed as Draft Article 16 which was included in the Chapter of Fundamental Rights which clearly indicates that framers of G the Constitution intended to guarantee freedom of trade, commerce and intercourse as a fundamental right. He has taken us to the discussion in the Constituent Assembly. He submitted that provisions of Article 304 Sub-clause (b) was thread-ware discussed and the constituent assembly consciously decided not to make any change in the scheme as delineated 1-1

700 SUPREME COURT REPORTS [2016] 10 S.C.R.

A by Article 304 Sub-clause (b) proviso. In our Constitution we avoided American pattern which only declared rights, rather our constitution has a strict balance between powers granted to Parliament and State to frame law. It is contended that there is a clear federal slant in favour of Union which is clear from the scheme of the Constitution.

B 48. Shri Salve contended that tax legislations were also contemplated to be covered by Part XIII of the Constitution. He submitted that textual reading of various articles in Part XIII indicate that framers of the Constitution clearly intended that Part XIII shall also operate on tax legislation. He contended that had tax legislation was not included in c Part XIII there was no occasion for specific mention of tax in Article 304(a) andArticle 306 [as it was before the Constitution (7'11 Amendment) Act 1956] of the Constitution oflndia. He, however, contended that the freedom from the tax law or any other law was guaranteed under the Article 301 only to the extent when the tax legislation or any other law impeded trade, commerce and intercourse throughout the territory. He D submitted that historically there were various tax barriers in different independent states prior to enforcement of the Constitution and to remove the barriers, the freedom of trade, commerce and intercourse was included in Part XIII.

49. Referring to majority view in Atiabari case (supra) he E contended that the tax laws are covered by Part XIII of the Constitution. He submitted that above majority view in Atiabari was not doubted by subsequent 7 Judges Bench in Automobile Transport (supra). Shri Salve however submitted that various statutes regulating trade and commerce may not impede trade and commerce like laws pe1taining to traffic rules. F Taxes, regulatory in nature may not be hit by Article 301. However, it is contended that taxes which have effect directly and immediately on the trade, commerce and intercourse violates Article 301. He contended that Entry Tax under Entry 52 of List II of VII'h Schedule of the Constitution is one subject which directly impede Freedom of trade and G commerce.

50. Answering Question No. 1, Shri Salve contends that in a set of circumstances non-discriminatory tax may violate Article 301. Shri Salve coming to incidental questions contended that taxation is an attribute of the sovereignty however differences lie in a case where legislative power is limited by Constitution. He contends that source oflegislative H

JINDAL STAINLESS LTD. v. STATE OF HARYANA 701

[ASHOK BHUSHAN, J.]

power is Article 245 (1) which is "subject to the provisions of the A Constitution''. It is contended that express constitutional limitation is clearly laid down in Article 245 (I), and the legislative powers have to be exercised by Parliament or State subject to the provisions of this Constitution. Article 246 is division of legislative powers between the Parliament and the State which shall always be subject to general limitation B as contained in Article 245 Sub-article (I).

51. Answering to subsidiary Question No. 2, Shri Salve submits that A1iicle 246 of the Constitution recognizes the sovereign powers of the State to make laws including laws levying taxes on such matters elaborated in List 11 of Vll'h Schedule. c

52. Answering to subsidiary Question No. 3, he contends that powers to make laws and levying of taxes reserved in favour 9f the State under A1iicle 246 read with List ll ofVIl'h Schedule are subject to Part Xlll of the Constitution.

53. Replying to the incidental Question 4, he contends that freedom guaranteed under Article 301 is a limitation envisaged in the Constitutional Scheme and the States are free to legislate as contemplated by Article 301 and the limitation contained in 304(b) is with larger object to achieve the economic unity of the country. There is no question of surrender of sovereign power by the State but legislative power can always be limited by the express provision of the Constitution. Referring to provision of A1iicle 285 and 286 of the Constitution, Shri Salve contended that those are provisions of the Constitution which work as limitation on the legislative power of the State. There are various provisions in the Constitution which work as limitation on the legislative power of the state and limitation envisaged by different provisions of the Constitution being part of the F Constitutional scheme it cannot be said that States are denuded with their sovereign power.

54. Answering to incidental Question No. 5 and 6 Shri Salve contends that taxes are always presumed to be in public interest, but however, the levy of taxes are restrictions imposed in public interest is a G question which has be decided by considering the individual legislation. Levy of taxes may or may not be reasonable restrictions.

55. Answering to incidental Question No. 7, Shri Salve contends that under Article 304(b) a State is empowered to legislate imposing H

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A reasonable restriction on the freedom of trade and commerce and intercourse in the public interest subject to obtaining previous sanction of the President. The State thus is free to legislate with one limitation that the Bill is to be moved with the previous sanction of the President. State autonomy is in no manner affected. The judicial review being a B basic structure of the Constitution, the Court is fully empowered to examine whether a law framed by State complies with Part XIII of the Constitution. He submits that there is no question of affecting separation of powers merely on the ground that State Legislation can be judicially scrutinized regarding compliance of Part XIII of the Constitution.

c 56. Answering to the subsidiary Question No. 9, Shri Salve contends that Comp6nsatory Tax Theory is not consistent with the language implied in Article 301. He submits that Compensatory Ta,\. Theory is a theory which has been judicially evolved in A11tomobile Transport case (rnpra). However, Compensatory Tax Theory is not consistent with the Scheme of Part XIII of the Constitution nor it can be said that if a tax is compensatory, it goes beyond the purview of Article 301.

57. Shri Salve answering Question Nos.2 and 3 contends that tax which is said to be compensatory may also fall foul ofArticle 301. It is contended that compensatory theory has not worked well and it has created more problem than solved. All States ·have picked up compensatory theory and have made statements in the statute that Entry Tax collected shall be spent for the benefit of the trader. The statutes have only made facial compliance. The test as approved by A11tomobile Transport that is "direct and immediate effect" has to be applied to find out as to whether a particular statute impedes the trade. Compensatory tax is mixing of two constitutional concepts namely tax and fee.

58. Coming to Question No.4, Shri Salve contends that Article 304(a) is not a source of power of the statute, rather it is one of the exceptions carved out to Article 301 where the State can legislate. He G further submits that Article 304 sub-clause (a) only covers inter-State trade and does not cover intra-State trade. The provision of Article 304 sub-clause (b) proviso was limitation which was consciously put in the larger interest by the economic unity of India. The President nonnally does not veto any tax proposed by the State under Article 304(b) nor any such instances before the Court has come, to come the conclusion H

JINDAL STAINLESS LTD. v. STATE OF HARYANA 703

[ASHOK BHUSHAN, J.]

that a State's autonomy in legislation has in any manner affected. Power A given under Article 304(b) proviso is the power to oversee the restrictions put 'by the State viz larger object and purpose. Although Article 304(b) uses the words restrictions on the freedom of trade, commerce or intercourse, the said restrictions may also include restriction by way of taxing statute. He submits that movement of goods from one local area B of a State to local area of another State does not fall under Article 304(a) but it falls under A1ticle 304(b).

59. Justice Hidyatullah 's views in Automobile Transport case be accepted that tax to be compensatory is not the way out from Article

301. He further submitted that any tax viz. by its legal structure and c practical effect may impede the trade and have a immediate and direct effect. Shri Salve also posed a question as to whether goods imported from other countries entering into a local area are liable to pay Entry Tax under legislation covered by Entry 52 List II ? He submits that in the above case the Entry Tax, if any, has to be justified under Article 304(b). Goods not covered by Article 304(a) should satisfy Article 304(b). D The pre-condition pennitting Entry Tax under Article 304(a) is that similar goods of that very State have to be taxed first.

60. Shri Salve in support of his submissions has also placed reliance on various judgments of this Court as well as judgments of the Australian High Court, Privy Council and US Supreme Court which shall be referred E to while considering the submissions in detail.

61. Shri A.K.Ganguly, learned senior counsel, submitted at very outset that reference to this larger bench to reconsider the decisions in Atiabari and Automobile is not warranted. F

62. Relying on Constitution Bench judgment in Keshav Mills case(Keshav Mills Vs. Commissioner of Income Tax 1965 (2) SCR 908) he submits that when this court decides questions oflaw which are binding under Article 141 on all courts, it must be constant endeavor and concern of this court to introduce and maintain an element of certainty and continuity. ln the interpretation oflaw in the continuity, he submits G that review excise is to be undertaken only when earlier decision was clearly erroneous. The Constitution Bench in Jindal Stainless .Ltd(supra) without any appropriate reason has made a reference for constituting a larger bench for reconsideration of the judgment of this H

704 SUPREME COURT REPORTS (2016] 10 S.C.R.

A Court in Atiabari Tea Co. and Automobile Transport, Rajasthan ltd.(supra).

63. He further submitted that reliance on observation of Mathew Jin GK.Krishnan Vs. State of Tamil Nadu 1975 (1) SCC 375 which was only an Obiter could not have been basis for making a reference to B larger bench.

64. The compensatory theory as evolved by Automobile Transport. has worked well and need not be touched. However, he submits that there should be broad co-relation between the compensatory tax and facilities extended to traders. c 65. Referring to Article 304(a) and 304(b ), Shri Ganguly submits that both the above sub-clauses of Article 304 are gateway to go out from the clutches of Article 301.Article 304(b) is a federal check and has come due to the historical reasons. Sh. Ganguly has also referred to 'Sarkaria Commission's Report' which rejected the demand of certain D State for omission of Article 304(b) from the Constitution. He further submitted that the procedure on referring to State bills to the President as contemplated by Article 304(b) ensures that the obligation oflndia that it owes international com1mmity are met.

66. Shri T.R. Andhyarujina, learned senior counsel submits that sub-clauses (a) and (b) of Article 304 are not disjunctive. Hence, even if a State law is not discriminatory under Article 304(a), it is still required to comply with the requirement of Article 304(b).

67. Shri Andhyarujina submitted that one of the tests to be applied for finding out as to whether the tax poses any tariff barrier is that when the tax is more than the value of the goods, it is a tariff barrier which is hit by Article 301.

68. Shri S.K. Bagaria, learned senior counsel submits that under Article 304(a) tax can be imposed on inter-State trade, whereas when goods move from one local area to other local area within a State, tax can be covered only under Article 304(b ). He submits that the question whether a tax is a tariff barrier or not cannot be decided quantitatively but can be decided qualitatively.

69. Shri Bagaria submits that he appears for Steel Authority of India in some cases. He stated that Bhilai is maintained by Steel Authority H

JINDAL STAINLESS LTD. v. STATE OF HARYANA 705

[ASHOK BHUSHAN, J.]

oflndia and all expenditures for maintaining it and all civic amenities in township are being provided by Steel Authority of India. In township in Bhilai, there are no facilities being provided by the State. He referred to the details of expenditures spent by Steel Authority of India during the years 1995-96 to 2008-2009. He submits that the State Government do not provide any facility and expenditure currently is more than 200 crores every year. He submits that the State not providing municipal/civil facilities is not entitled to levy Entry Tax as a tax compensatory in nature.

70. Shri Arvind P. Datar, learned senior counsel contends that the concept of compensatory tax as judicially evolved in Automobile Transport has to go. He submits that concept of compensatory tax is c anomalous, tax being compulsory extraction and all taxes are to be utilized for public good. He suggests that proper test is whether there is 'Appreciable Adverse Effect' on trade and commerce, which can be determined by the manner in which trade and commerce was carried out before the impugned law and the manner in which it is carried on after the impugned enactment. He submits that the restrictions as referred to in Part Xlll can be of multiple applications. They can be fiscal, environmental, commercial and in the forn1 of labour law. Entry Tax cannot be levied on entry of the goods in the State. Referring to the word 'and' used in Article 304(a) and 304(b), he submits that 'and' be interpreted as joint and several. He submits that a non-discriminatory tax which does not violate Article 304(a) may still violate Article 304(b) if it has discriminatory procedural provisions.

71. The ultimate effect on trade and commerce has to be seen even if it is not direct and immediate. No State is an Island, law in one State has its effect on other States also. The State is not the final Judge F of restriction which is contained in the statute framed by it. Hence, Presidential assent is required. There are various provisions in the Constitution like A1ticle 3 lA, 200, 201, 213, 254, 361 and Sixth Schedule where Presidential assent is required. In Article 204, 255, 304 and 349 the Presidential sanction is required. G

72. Mr. V. Laxmikumaran, learned senior counsel, contends that free trade, commerce and intercourse means free movement of goods, services, persons and capital(investment). Article 304(a) relates to tax on goods and Article 304(b) relates to other taxes and measures. Article 304(a) mandates that a state can impose tax on goods imported H

706 SUPREME COURT REPORTS [2016] IO S.C.R.

A from other states less than or equal to taxes imposed on like-goods manufactured or produced in that state. The tax referred to in Article 304(a) should be read with general exceptions, set-off, credit etc available to goods as manufactured or produced in that state. Learned counsel has also referred to General Agreement of Tariff and Trade, 194 7 (GATT, 1947) of which India is a founding member. The whole purpose ofGATT, B 194 7 was to encourage free trade among the GATT members by eliminating tariff and non-tariff barriers. Learned counsel further submitted that even if a tax levied by the state is non-discriminatory, it may impede right guaranteed under Article 301. Learned counsel supports his submission by giving an illustration. In a state laptops and I-pads are c manufactured. A State which wants to encourage the manufacturing of laptop has put only 0.5 % tax on laptop but has imposed 50 % tax on I- pad with an intent to discourage the import of 1-pad. The said state's above action may not be violating Article 304(a), however, procedure prescribed in Article304(b) has to be applied with. Another example where state, although, complies with Article 304(a) but violates Article 304(b) given by learned counsel is; the State of Maharashtra imposed Entry Tax exactly equal to the local taxes but puts conditions: (i) All goods to Maharashtra should enter only through Balharshah; (ii) Finished goods manufactured in Maharashtra should have at least 75% local content. Learned counsel thus contends that while imposing tax by the state both the Articles 304(a) and 304(b) have to be complied with.

73. Shri Jagdeep Dhankar, learned senior counsel, contends that Part Xlll of the Constitution is a basic structure of the Constitution. He contends that nothing can be more basic than economic unity of the country. Learned senior counsel submitted that compensatory theory cannot be supported which shall only lead to right to litigate. Words "tax" and "restrictions" are employed in Part Xlll separately. These are not interchangeable and there can be no component of tax in the restrictions adverted in Part Xlll. He submitted that the Preamble of the Constitution is to be relied and looked into while interpreting the constitutional question.

74. Shri Ravindra Srivastava, learned senior counsel, submitted that as a concept compensatory tax cannot be supported. Compensatory tax is a misnomer and it was unnecessary. He submitted that taxes which have direct and immediate effect are hit by Article 301. Relying H

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on opinion of Justice Hidayatullah in A11tomobile case, he contended that if a tax is imposed solely on the basis of movement of goods, it is violative of Article 301, however, ifit is a common burden it does not violate Article 301. Elaborating the concept of tax he submitted that there are two concepts for imposition of tax that are (i) "Ability-to-Pay Principle" and (ii) "Benefit Principle". He submitted that examination of each legislation I tax legislation is necessary having regard to the provisions of a particular Act to arrive at conclusion whether the tax amounts to restriction and if so, whether it is saved under Article 304. Learned counsel for the petitioner referring to SLP(C) No. 23990 of 2009 Steel Authority of India Ltd. contends that the quantum of Entry Tax varies from 0.5% to 50% which clearly demonstrate that it is an c impediment in the trade and hit by Article 301.

75. Shri N. Venkataraman, learned senior counsel, submits that Constitution of India is designed in such a way that State's power to legislate is restricted in many ways. Legislative power in different entries of List II are subject to legislative power of the Union under List I. He D has referred to power under Entry 54 List II, which is made subject to the power of the Union under Entry 92A, List I.

76. He further submits that Article 254 clarifies State's power of taxation. Further, Article 286 sub-clause (3)(a) and (3)(b) restricts the State's power of taxation. Similarly, Part Xlll is restriction on the State E legislative power. Articles 302 to 304 also contain various restrictions on the powers of Parliament and the States in making laws.

77. Referring to the Constitution (One Hundred and Twenty Second Amendment)Bill, 2014 he submits that Union and State have reached to a conversion where both are entitled to legislate. He has referred to F Article 246A of the Bill. There is consensus between Union and the States to abolish all the taxes including Entry Tax and is now to be subsumed in two taxes that is services and goods. The above Bill indicates that we have now moved to real economic unity. G

78. Shri Dhruv Agrawal, learned senior counsel, submits that freedom of trade, commerce and intercourse is a basic structure of the Constitution. Referring to the Preamble of the Constitution learned senior counsel submits that the unity and integrity of the Nation is a basic feature of the constitutional structure. Part XIII has been inserted in the H

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A Constitution to achieve the economic unity of the country. ShriAgrawal has also referred to the Constituent Assembly Debates.

79. Shri Gopal Jain, learned senior counsel appearing for the appellants in C.A.No.3453 of2002 submits thatthe Constitutional Scheme is a well crafted architecture which must be read holistically. A B Constitutional provision has to be interpreted from the reading of the whole of the Constitution to ensure that overall objectives are achieved.

80. Shri Dilip Tandon, learned counsel referring to judgment of this Court in Automobile Transport contended that the opinion expressed by Justice Hidayatullah be accepted. Shri Tandon submitted that he adopts the arguments ofShri Harish Salve and Shri Ravindra Srivastava, learned senior counsel.

81. Smt. Suruchi Aggarwal, learned counsel submitted that Article 301 is a restriction on the legislative power of the State. Referring to Article 304(a) she contends that Article 304(a) is resorted since it is presumed that the law would be a restriction under A11icle 301. She refe1Ting to provisions of the Haryana Local Area Development Tax Act, 2000 contends that manner of collecting Entry Tax violates Article

286Copy pinpoint286. She submits that liability and pay-ability of Entry Tax is different which is nothing but a discrimination.

E 82. Shri Tushar Mehta, learned Additional Solicitor General appearing on behalf of the Indian Oil Corporation submits that judgment in Automobile Tramport case has held the field since 1964 and need not be disturbed. He submits that Entry Tax would invariably impede inter-State trade. Hence,they must, therefore, pass the test of clause (a) F and clause (b) cumulatively. Article 304(a) does not apply to goods imported into India and not manufactured or produced in any other State.

83. Coming to the Entry Tax levied to Indian Oil Corporation, Shri Mehta submits that Indian Oil Corporation transports crude oil from its own underground pipelines from A to B State. The States are not G manufacturing crude oil but they are still demanding Entry Tax. The States where Indian Oil Corporation has its own refinery have levied the Entry Tax. Referring to Mathura refinery situated in the State of U .P., . he contends that the State ofU.P. does not produce any crude oil hence, Entry Tax cannot be demanded under Article 304(a). Demand of Entry Tax is clearly discriminatory. Learned ASG, however, fairly conceded H

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that there is no pleading to the above effect taken before the High Court A by the Indian Oil Corporation. He further submits that during the course of the submission he will bring on record necessary pleading on behalf of the Indian Oil Corporation in the appeal before this Court.

84. Shri Mukul Rohatgi, learned Attorney General has made his submissions. Shri Rohatgi submitted that power to tax in List II is B Sovereign and Plenary Power which can be curtailed only by express provisions of the Constitution oflndia. Part XIII of the Constitution does not deal generally with tax except, in so far as, it makes reference under Article 304(a). Entire ethos of Part XIII of the Constitution is a discrimination and that too a deliberate discrimination. A1ticle 304(a) c and A1ticle 304(b) are disjunctive. Article 304(a) applies to taxes whereas Article 304(b) applies to non-fiscal measures. Taxes are assumed to be in public interest and are reasonable. Under sub-clause(b) of Article 304, President cannot be made super adjudicator. India is a Federation and the sovereign power of the State cannot be subjected to an implied control. D

85. Shri Rohatgi submitted that federal stmcture is a basic feature of our Constitution. Though India is described as a Quasi-Federal or a Federation with strong central bias, this does not militate from the fact that states are sovereign in the field which is left to them under the Constitution. Shri Rohatgi submitted that Constitution is to be read as a E whole. Part XIII of the Constitution must be interpreted with reference to other parts of the Constitution, including Part Ill of the Constitution, Part XII and Article 38 and Article 39 of the Directive Principles of State Policy.

86. Referring to A1ticle 245 and Article 246 learned Attorney F General submitted that Article 245 is the source of legislative power, whereas, Article 246 provides for distribution of legislative functions between the Union and the states. He submitted that Article 245 begins with the express provision 'subjects to the provisions of this Constitution' which phrase has also to be read under A1ticle 246. Learned Attorney G General submitted that GST Bill having been passed on 3rd August, 2016 in the Raj ya Sabha, after ratification by the states, the only issue relevant in the present batch of cases shall be with regard to Entry Tax as was enforced in past. Entry 52 List II providing for Entry Tax shall stand deleted after Bill becomes a Law. He submitted that passing of the GST H

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A Bill indicates that we have proceeded to economic unity. 8 7. What is prohibited by Part XIII is pernicious or hostile discrimination by or between States. Freedom of trade, commerce and intercourse is not absolute as is evident from various provisions of Part Xlll of the Constitution. Restrictions on the power of Parliament and B the State Legislature as referred to in Article 303, is confined to the powers under the entries relating to trade and commerce only. The restrictions thus do not include tax. Entries relating to tax in List II that is Entries 46 to 63 were never contemplated under Article 303.

88. Part Xlll deals with "Restrictions" and "Taxes" differently. A c clear dichotomy was intended between taxes on the one hand and restrictions on the other hand. Article 302 does not refer to tax, whereas, concept of tax is well known to the Constitution and has been used in Part XII in several articles. Article 304(b) does not refer to taxes, word "Tax" is found in Ai1icle 304(a) which cannot be imported in Article D 304(b). It is obvious that reference under Article 304(b) is to "restrictions" other than tax. Coming to the Compensatory Tax learned Attorney General submits that since we are at the fag end of Entry Tax Regime, it shall be appropriate to stick with Compensatory Tax Theory.

89. Shri P. P. Rao, learned senior counsel, has made his E submissions on behalf of States of Madhya Pradesh and Andhra Pradesh. Shri Rao submits that it is well settled that a Constitution must not be construed in any narrow and pedantic sense and the construction which is most beneficial to the widest possible amplitude of its power must be adopted. He further submits that no entry in the Vll'1' Schedule of the Constitution should be so read as to rob the entry of its content. He F submits that in a federal system of governance, the power to levy tax is an inherent attribute of a sovereign function of a State.

90. Clause( a) and Clause(b) of Article 304 are mutually exclusive. Taxes are c 0vered in Clause(a) whereas restrictions other than taxes are covered in Clause(b ). It is only discriminatory taxes vis-a-vis goods G of other States and Union Territories which restrict the freedom of trade in Article 30 I and all other taxes do not obstruct the said freedom. The federal character of the Constitution is a part of the basic structure. The power to levy Entry tax under Entry 52 of the State is not subject to any restriction. H

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91. The framers of the Constitution never intended that the exclusive power of State to levy tax on the entry of goods be subject to requirement of obtaining the previous sanction of the President mention in proviso of Aiiicle 304(b ). For imposing a tax on goods coming from other State, it is not essential that similar goods produced and manufactured in the State should be taxed. The only restriction is that the tax shall not be discriminatory. Taxes per se are not restrictions. Only taxes which suffer from the vice of protectionist discrimination ·vis-a-vis goods imported from other States and Union Territories interfere with the freedom of trade, commerce and intercourse mentioned inArticle 30 I. The whole scheme of Part XIII is that the discriminatory tax interferes with the trade, commerce and intercourse. A Non- c discriminatory tax does not interfere with the freedom of trade, commerce and intercourse.

92. The framers of the Constitution intended minimum inroads in power of taxation in the State. Learned Counsel has referred to various passages from Atiabari and Automobile Tramport case. Referring to D observations made by Gajendragadkar J. that "how a tax can be levied on internal goods is, however, provided by Article 304(b) .... ",he submits that the above observations cannot be said to laying down a law since the issue never arose in the above case. He submits that the above observations are not the ratio decidendi and do not constitute a E precedent. Shri Rao further submits that the concept of compensatory taxes as laid down in Automobile Transport case is alien to the Constitution and is unsustainable. The discrimination which is referred to in Article 304(a) is hostile discrimination.

93. Shri Shyam Divan, learned senior counsel has appeared on behalf of the State of Haryana. Shri Divan submitted that the core constitutional value of Part XIII of the Constitution is creating an economic unity across India.

94. Article 302 - 305 are in the nature of exceptions to Article

301. Article 304 being an exception to Article 301 ought to be read, narrowly. He gives an example of protectionist barrier i. e. a State wants to protect the agriculture of its own State for which, a restriction is imposed that all agriculture-based industries shall take raw-materials only from within the State. He submitted that this is an example of 'trade barrier' by a protectionist measure. Article 304(a) has a limited scope H

712 SUPREME CO~RT REPORTS [2016] 10 S.C.R.

A and ambit.

95. Power both in (a) and (b) can be exercised or either (a) or (b) can be exercised or none can be exercised. There is no necessity that powerunder 304(a) and 304(b) are to be exercised necessarily together. Shri Divan further submitted that there is difference between B differentiation and discrimination. Lastly, he contended that in tenns of 2000 Act and 2008 Act, the entire tax collected by the State under the respective statute would be utilized for the development of trade, commerce and industry in the state. c 96. Shri Rakesh Dwivedi, learned senior counsel has advanced his submissions on behalf of the States ofOrissa, Bihar, Madhya Pradesh, Tamil Nadu and West Bengal. Shri Dwivedi submits that petitioners' arguments are that the judgments of this Court in Atiabari and Automobile Transport be not revisited. Shri Dwivedi submits that there D were fundamental errors in both the above decisions. He submits that following fundamental errors are, in the above two cases : I. (i) Both the cases confined on economic unity as sole factor for trade, commerce and intercourse; E (ii) whereas, a perusal of various provisions of the Constitution indicates that economic unity depends on the continuity of political unit; and (iii) Territory of Union is nothing but States and Union F Territories. II. This Court completely ignored the concept of 'Federalism' which has now been accepted as basic feature of the Constitution after judgment of this Court in Kesavanand Bharati's case (supra).

G III. Each of their Lordships in aforesaid cases draw support from various Australian and US cases, whereas, there is no comparison of Part XIII with Australian and US Constitution. In US, States have no power to legislate except law and order, good governance and peace. These differences in our Constitution and the Constitutions of Australia and US have been completely overlooked. H

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Law as developed in Australia and US i.e. "direct and immediate A effect" for finding out impediment in the trade has now been given a go by both by Australian and US Courts. Both the Courts have moved to a "discriminatory" test. IV. In both the above cases one does not find any detailed consideration of history of Part XIII as emerging from Constituent B Assembly Debates specifically regarding economic unity. V. All the judgments considered history from the point view of Section 297 of the Government of India Act, 1935 and they conclude that it was all about trade barriers. VI. In Part Xlll "subject to the provision of this Part" was read c as "subject to only the provisions of this Part''. VII. This Court in both the above cases did not examine fully the nature of taxation. (i) Tax is an incident of sovereignty. D (ii) Tax is necessary for carrying out the welfare activities by the State. (iii) Tax can neither be imposed by implication nor taxing power can be limited by implication. E (iv) The tax can only be for a public purpose which has its roots in Attic le 265 of the Constitution. ( v) Taxing powers of the State and the Union are mutually exclusive except to the extent as mentioned in the respective Entries in List II and any other provision of Constitution. Even Parliament cannot F restrict the taxing power of a State flowing from Entries of List II. (vi) Atticle 289(2)- Even, a State doing business is not exempted from tax. Trade and business never were treated as exempted from tax.

97. Shri Dwivedi further submits that tax per se is not covered by Part Xlll. Tax is not a trade barrier and unless it is discriminatory it shall not be treated as a barrier. The right of trade, commerce and intercourse cannot be exalted as a basic feature of the Constitution.

714 SUPREME COURT REPORTS [2016] 10 S.C.R.

A 98. Shri Dwivedi submits that "Free" in Article 301 does not mean free from tax. State's power, despite the limited width of its field is plenary in nature. Wherever,exemption from taxes were contemplated they were expressly provided as under Articles 285, 287,288 and 289. Referring to Part III of the Constitution, he submits that Part III does not confer freedom from taxation. A.fortiori, Article 301, which is not a B fundamental right cannot result in conferring a freedom of trade, commerce and intercourse from tax. He submits that there are inherent limitations on taxation by a State. The imposition of tax is always for public purpose and various inherent limitations in taxation operate as limitation in taking any discriminatory or any other unreasonable c measures. Article 302 to 304 are not exceptions or provisos to Article

301. Coming to Article 304, it is submitted that both clauses (a) and (b) of Article 304 are disjunctive and freedom of trade, commerce and intercourse is subject to them. The word 'and' nonnally is conjunctive but it is often construed as disjunctive where the legislative intent as D gathered from the words of the provision and the context indicate that it was used in the disjunctive sense. Learned counsel elaborating his submissions contends that Article 304 relates to inter-State trade which is apparent from marginal heading.

99. He submits that by use of the words "within that State" E alongwith "with", it is clearly meant that the words "within that State" was used in relation to inter-State trade. He submits that inter-State does not come to an end after the entering into the State. It may have some effect and operation within the State also.

100. Shri Dwivedi further submits that the Presidential Sanction F as contemplated in Article 304(b) proviso was due to the reason that Article 304 is related to inter-State trade and it falls in Entry 42 List I. He submits that justification for requirement of obtaining Presidential sanction in proviso to Article 304(b) is the restriction which may touch the inter-State trade, which is not within the legislative power of the State. G

101. Learned counsel further submits that mere excessiveness of rate of taxes does not violate Article 14 and 19 as has been held by this Court in a large number of cases which principle has also to be applied for examining the challenge that high quantum of tax impedes the trade. H

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102. Shri Dwivedi further submits that in the event submission is A not accepted that tax is out of Article 301, alternatively tax simpliciter is outside the Article 301. He submits that this Court held in large number of cases that in the context of Part Ill of the Constitution tax per se does not violate the fundamental rights. Tax simplicitor being out of reach of Article 30 I only those taxes which substantially destroy\impede the B Trade can fall foul to Article 301. He contends that framers of the Constitution were conscious that freedom of Trade and Commerce, and Intercourse does not include freedom from tax. The tax can become a barrier if imposed preferentially and discriminately. That is why, they separately provided forrestricting the taxing power under Article 304(a). He, however, submits that there shall be an onerous burden on the c petitioner to prove that the tax is an impediment.

103. Coming to the Australian cases relied by this Court inAtiabari Tea Company Ltd and Automobiles, he submits that 'direct and immediate effect test' which was propounded in above two cases based on earlier cases of Australian High Court, including James Vs. D Commonwealth (1936) 55 CLR (1), a 7 Judges Bench of High Court of Australia in Cole Vs. Whitfield and Another reiterated in (1988)78 ALR (41) have rejected the 'direct immediate effect test' and has preferred to discriminatory test. The 7 Judges Bench held that the various interpretations of Section 92 which have attracted any support over the E years only the Fiscal Charges Theory and the Anti-Discrimination Interpretation have been favoured.

104. Coming to cases of U.S. Supreme Court, learned counsel submits that trend of cases indicates that effort is on shifting the test of discrimination. He submits that in the Complete Auto Transit Vs. Charles F R Brady 430 U.S. 274, it was held that it was not the purpose of commerce clause to relieve those engaged in interstate commerce from their just share of State tax burden, even though, it increases the cost of doing business.

105. Coming to Entry 52 List II, learned counsel contends that, G even if, we apply the Test laid down in the Automobile, the goods coming from other states come to repose in a local area and the Entry Tax is not tax on border or a tax on movement of goods. The legislative scheme of different states for which he appears indicates that no tax is collected at border and only a transit pass is given and the Entry Tax is to be paid H

716 SUPREME COURT REPORTS [2016] 10 S.C.R.

A based on self-assessment. Article 304(a) protects this type of Entry Tax.

106. Shri Dinesh Dwivedi, learned senior counsel has made his submissions on behalf of the State ofU. P. Shri Dwivedi, answering the Question No. I submits that levy of Non-Discriminatory Tax per se does not constitute infraction of Article 301. He further submits that the B question regarding the Compensatory Tax need not be answered since compensatory nature of tax is outside the Constitutional Scheme and has to be struck down. Learned counsel submits that the Constitution is a living organism and ea_ch part of it throws light on other part of the Constitution. Every part of the Constitution has to be looked into and no c part has to be interpreted de horse the other provisions of the Constitution.

107. Shri V.Giri, learned senior counsel has appeared on behalf of the State ofKerala. He submits that 383 Appeals have been filed by the State ofKerala against the Judgment ofKerala High Court striking down the Kerala Tax On Entry Of Goods Into Local Areas Act, 1994. D He submits that the High Court has struck down the Act on the ground that tax imposed is not Compensatory and it violates Article 301 of the Constitution.

108. Shri Giri submits that at the time of payment of Sales Tax, the credit of Entry Tax is to be given. He submits that with regard to goods produced and manufactured within the State and manufactured from outside the State the tax burden is almost similar and tax being non-discriminatory does not fail foul to Article 301.

109. Shri Ajit Kumar Sinha, learned senior counsel has made his submissions on behalf of State of Jharkhand. Shri Sinha submits that the Bihar Entry Tax Act, 1993, as enacted by State ofBiharwas adopted by State of Jharkhand after reorganization of the State in the year 2000. llO. He submits that although Patna High Court upheld the Act 1993 but Jharkhand High Court has struck down the enactment. One of the grounds taken by Jharkhand is that for amendments made by the G State of Jharkhand in the 1993 Act, no Presidential Sanction was obtained. He submits that for carrying out the amendments, no Presidential sanction was required.

111. Shri J ugal Kishore Gilda, learned Advocate General of the State of .Chhattisgarh has addressed his submissions on behalf of H

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[ASHOK BHUSHAN, J.]

State of Chhattisgarh. Learned Advocate General has at the very outset A stated that he adopts the submission made by Sh. P.P.Rao and Shri Rakesh Dwiwedi.

112. Shri Dev Dutt Karnath, learned Additional Advocate General has raised submissions on behalf of State of Karnataka. He submits that Constitution validity of Karnataka(Tax on entry of goods) B Act 1979 has already been upheld by this Court in 'State ofKarnataka Vs. Hansa Corporation' 1980 (4) SCC 697.

113. He submits that in fact in three Civil Appeals being Civil Appeal No. 4476 of 2000, SLP(Civil) No. 16786-16788 of 2009 and SLP(Civil) No. 12789 of2009, the questions referred to this larger Bench C do not arise and he adopts the submissions made by Sh. P.P.Rao and Sh. Rakesh Dwiwedi.

114. Shri Saurabh Shyam Shamshery, learned Additional Advocate General has appeared for the State of Rajasthan. He submits that Rajasthan Tax on Entry Of Goods Into Local Areas Act, 1999 had D been upheld against which Special Leave Petition had been filed by Assesses in the year 2001. Subsequently, after the judgment of this Comi in Jindal Stainless Steel (2) division Bench dated 21" August, 2007, declared Act 1999 as 'ultra vi res· to Article 301 against which judgment the appeal has been filed by the State which is pending. E

115. Shri Harish Salve, learned senior counsel in rejoinder to the submissions made by learned Attorney General, learned counsel appearing for different States and other parties, contends that submission that taxing power is some sort of sovereignty, is not a correct preposition.

116. The earlier view that tax is out of Part Ill has been reversed. F When it is said that Part Xlll includes tax no one is asking to emasculate State's sovereignty. What is prohibited by Part Xlll is the impediment to trade and commerce, 'direct and immediate'. The sanction of President, as contemplated in Article 304(b) does not mean that such sanction affects the sovereignty of the State. The proviso to 304(b) operates in a G very narrow field.

117. Shri Salve fmiher contends that Sinha, J developed Tariff Wall The01y, as impediment of trade since he was of the opinion that taxing legislation can not be challenged under Part UL Shri Salve referring H

718 SUPREME COURT REPORTS [2016] 10 S.C.R.

A to judgment of this Court in K. K. Kochuni and Others Vs. State of Madras and Others, (1960) 3 S.C.R. 887 and K. T. Moopil Nair Vs. State of Kera/a and Others(J961) 3 S.C.R. 77, and few subsequent cases contends that taxing statute can very well be challenged on the ground of violating provisions of Part III of the Constitution. He submits B that when taxing statute can be challenged under Part III, there is no inhibition from entertaining the challenge to a taxing statute for violation of Part XllI.

118. Shri Salve to point out difference between challenge under Article 19 and Article 301, gives an example. An oil company carrying c out trade in entire country is faced with an exorbitant rate of Entry Tax in one State, the company cannot contend that freedom to carry out its profession as guaranteed under Article 19(l)(g) have been affected. Whereas a trader carrying on business in that State may be affected by an exorbitant tax and can contend that the exorbitant tax impedes the trade under Article 301. D

119. Shri Salve submits that entry tax legislations of different States in the country can be characterized in different groups. He submits that one group of the legislations which consists of States ofTamil Nadu, Andhra Pradesh, Kerala is the legislation in which Entry Tax is imposed only on the goods which are imported from different State and no tax is E imposed on locally produced/manufactured goods which is clearly discriminatory and violative of Article 304(a). He submits that second category oflegislation consists of cases where in the enactment facially Entry Tax is imposed on the goods i.e. goods coming from out of State and local goods, but legislation contains a devise by which there is set- F off\exemptions to the local goods which result in non-imposition of Entry Tax on the local goods, leading to another kind of discrimination which also violates Article 304(a). In the second category, State of Assam, Bihar, Jharkhand and few other States are included. There is third category of legislation where discrimination is practiced in several G manners, for example, manufacturers are given set-off of Entry Tax on raw-materials like State ofOrissa and Madhya Pradesh. There is fourth category oflegislation where Entry Tax is imposed by creating a special area like State of Chhattisgarh. ,

120. Shri Salve contends that the submission raised on behalf of the States that question of discrimination under Article 304(a) is to be H

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decided based upon the totality of burden of taxes and not the impact of A a particular tax, is contrary to the plain language of A1iicle 304(a) and would defeat the underlying object of Part XIII of the Constitution. Shri Salve futiher submits that Atiicle 304(a) has two parts. Under first pati of the Act 'State by law may impose on goods imported from other States, any tax to which similar goods manufactured or produced in that B State are subject.' He submits that the second part provides for non- discrimination, which is indicated by words 'as not to discriminate'. 12 l. Lastly, Shri Salve replying to the submission of unjust enrichment contends that presumption that tax has been passed on is a rebutable presumption and whether tax has been passed or not is a C question of fact and has to be considered by assessing authorities. He has also referred to judgment of this Court re po tied in (2005) 2 SCC 215 Godfrey Phillips lndia Ltd Vs·. State of U.P. With regard to capital goods he contends that there cannot be passing on of any tax.

122. Shri A. K. Ganguly, learned senior counsel, making his submission in rejoinder contends that Constitutional histo1yand Debates of the Constituent Assembly clearly indicates that Pati XIII of the Constitution contemplated taxation to be a 'restriction' on the freedom of trade, commerce and intercourse and restrictions were permitted only to a limited exemption in the form of Article 302-306. Coming to Entry 52 list II, Shri A. K. Ganguly submits that contemplated entry of goods into a local area, the framers of the Constitution were well aware of the State boundaries and did not deliberately choose entry into a State boundary. Entry 52 does not contemplate State as a unit. Incidence of levy is different from provisions relating to machinery to collect Entry Tax. Coming to Article 304(a), Shri Ganguly submits that provisions contemplate fulfillment of two conditions i.e. similar goods manufactured and produced in the State are subject to tax and further non-discriminatory taxes between the imported goods and the local goods. He further contends that other varieties of taxes not covered under 304(a) shall fall in 304(b). G

123. Shri S. K. Bagaria, Shri Arvind P. Datar, Sri Ravindra Srivastava, Sri B. Laxmikumaran and Shri N. Venkataraman have also made their submissions in rejoinder.

124. Shri S. K. Bagaria, learned senior counsel, in his rejoinder H

720 SUPREME COURT REPORTS [2016] 10 S.C.R.

A submits that Article 304(a) has two conditions. He further submits that Entry 92(a) and 92(b) of List II cover the entire interstate trade and all facets of interstate movement.

125. Shri Arvind P. Datar, learned senior counsel, in his submissions reiterated that tax laws per se are not outside the purview B of Part XIII. He further contends that Article 304(b) includes taxation. He submits that Article 304(a) refers to goods alone whereas taxes can be levied on persons, activities and things also. Article 304(a) shall not cover other parts of the taxes which necessarily has to go under Article 304(b). Entry Tax only on the goods imported from outside States and c not levying them on entry into local areas from within the State is not pern1issible. Such taxes are violative of Entry 52 List II which permits Entry Tax only on entry into "local areas". Article 304(b) could also include taxes when rate of tax is same but there were other features which are restrictions. High rate of tax may not militate Article 19( 1)(g) but it may violate Article 304(b ). He submits that the question of tax barrier, as propounded in Atiabari has to be left to case to case. Restrictions contemplated under Part XIII can both be fiscal and non- fiscal. As on date 42 per cent of taxes of Union go to the State.

126. Coming to Video Electronics, learned counsel submits that if the object of a State is economic development, the State cannot levy different taxes with regard to imported goods and local goods, the State is free to give subsidies, and other assistance to any kind of industry but providing for discriminatory taxes in the name of economic development is in the teeth of Article 304(a). Any discrimination between local goods and imported goods is per se hostile. Coming to question of unjust enrichment, learned counsel submits that the issue has to be left to be considered by the assessing authorities. He submits that the States have different laws and facts which in each case are different and have to be examined for applying the theory ofunjust enrichment. Learned counsel submits that in the event of this Court overrulingAtiabari and Automobile today, overruling of the judgments has to be prospective so that position regarding tax settled already be not disturbed. Learned counsel has also referred to certain interim orders passed by this Court wherein it was specifically mentioned that State shall not be entitled to press unjust enrichment. He submits that any amount deposited under the Court's order is not an unjust enrichment. H

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127. Shri B. Laxmikumaran, learned senior counsel in his A rejoinder reiterates that tax per se is covered under Article 30 I. Referring to Article 304(a), learned counsel submits that same tax is to be levied when the goods enter into the local areas from the other States and the local goods within the States. Equalising the total quantum of the Entry Tax levied on imported goods and some other local taxes within the B States which is not in the nature of Entry Tax, is not permissible. Various parameters are to be looked into for the purposes of understanding discrimination. He further contends that Article 304(b) can cover tax law in addition to other law.

128. Shri N. Venkataraman,learned senior counsel in his rejoinder C contends that legislative powers of both the Union and the States are subject to the provisions of the Constitution including limits thereupon and enacted therein.

129. In the end, we have again heard Shri P. P. Rao and Shri Rakesh Dwivedi in reply to some additional submissions made in rejoinder. 0

PART IV A. LEGISLATIVE HISTORY AND DEBATES IN CONSTITUENT ASSEMBLY ON FREEDOM OF TRADE, E COMMERCE AND INTRECOURSE

130. The discussion on the above subject needs to be focused on following three aspects, namely:

F a. Legislative history of freedom of trade, b. Freedom of trade as it emerges from the debates in the Constituent Assembly, c. Tax, whether was treated as 'restriction' on the freedom of trade by Constituent Assembly. G

131. During the British Rule, by the end of 19'" Century efforts for drafting a Constitution for India had begun. Under the inspiration of Shri Bal GangadharTilak, the Swaraj Bill. 1885 was the first non-official I-I

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A attempt of drafting the Constitution. The dominion status as achieved by Australia and passing of Australian Constitution Act 1900 was noticed by those associated with National Movement. Indian leaders including Members and Ex-Members of Central and Provincial Legislature had framed a Bill, namely, 'Commonwealth oflndia Bill, 1925' which was B read in House of Commons in December, 1925, contained a clause on freedom of trade to the following effect: "25. Trade, commerce and intercourse among the provinces shall be free, and there shall be no preference given to any province or provinces. " c

132. In the British India, freedom of trade was in practice with no internal provincial duties or other trade barriers whereas in the Indian States internal custom and other trade barriers were there. The above practice took statutory forn1 in Section 297 of Government of India Act, D 1935 which prohibited provincial Government from imposing barriers on trade within country. Section 297 reads as under:

"297. "(I) No Provincial Legislature or Government shall - E (a) by virtue of the entry in the Provincial Legislative List relating to trade and commerce within the Province, or the entry in that list relating to the production, supp~y. and distribution of commodities, have power to pass any law or take any executive action prohibiting or restricting the entry into, or exportfrom, the Province of goods of any class or description; or (h) hy 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 outside the Province, discriminates between good~ mam(factured or produced in one locality and similar goods H

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manl!factured or produced in another locality. A (2) Any law passed in contraverrtion of this section shall. to the extent of the contravention, he invalid. "

133. Declaration of Cabinet Mission Plan on May 16, 1946 by British Prime Minister was to ensure that India attains freedom and B .decide as to what form of Government is to replace the existing regime. The Cabinet Mission Plan laid foundation for Constitution, functioning and procedure of Constituent Assembly.

134. The Constituent Assembly was well aware of the Constitution of Australia, USA and other Constitutions of world. On the freedom of C trade the Constituent Assembly preferred the Australian model from Sections 92 and 99 of the Australian Constitution, which were to the following effect:

"92. Trade within the Commonwealth to be free D On the imposition of un(form duties of customs, trade, commerce, and intercourse among the States, whether by means of internal carriage or ocean navigation, shall he absolutely free .... " "99. Commonwealth not to give preference E

The Commonwealth shall not, by ai~y law or regulation of trade, commerce, or revenue, give preference to one State or any part thereof over another State or any part thereof " F

135. The Privy Council in James vs. Commonwealth of Australia, (1936) AC 578, had occasion to consider the freedom of trade as granted under Section 92 of the Constitution of the Australia. Following was stated by the Privy Council: G

"Thus reference may he made to the sections dealing in the mid~t of which s.92 is placed. It is well known that one of the objects which the.federation sought to achieve H

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A was the abolition of restrictions on trade between the Colonies, and of the diversity in the different States of tar!ff~ and border regulations; this was described as "the old inter-colonial trade war. "

136. Section 92 was interpreted as to mean "free trade means,in B ordinary parlance freedom from tariffs". Professor David P. Derham, of Melbourne University dealing on the subject; "Some Constitutional problems arising under Part Xlll of the Indian Constitution" has expressed his views on Section 92 of the Australian Constitution in following manner: c "Jn its Australian origins there is no doubt whatever that freedom of trade, commerce and intercourse means at least.freedom.from taxation. One of the main motives of the federal movement in Australia was the D desire to do away with what had become knowii as "border barbarism "-the operation of customs harriers on the State borders. Section 92 of the Australian Constitution was one of the provisions drawn to achieve this purpose, to ensure the economic unity of Australia, E to prevent the continuance of competing State fiscal .1ystems. "

13 7. The framers of the lndian Constitution although took inspiration from Section 92 above, but even at initial stages the freedom of trade F was contemplated with restriction and with pennission to levy only certain taxes. The Sub-Committee on fundamental rights submitted a report dated 16.04.1947 to the Advisory C01mnittee in Para 6 of which following was stated:

G "6. We are of the opinion that every citizen is entitled to free trade, commerce and intercourse within the territories of the Union unburdened by any internal duties or taxes of customs. At the same time, we realise that many Indian States depend upon such duties and H

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taxes for a considerahle part of their revenue and cannot do without it all at once. Similar difficulties have arisen in the framing of the constitutions of other countries and unless there is a scheme for a smooth transition to free trade in the Union friction will inevitab(v arise. Some agreement will therefore have to he made with those States in the light of their existing rights with a view to their ultimate elimination within a period to be prescribed hy the Constitution. Thereafter, there will he untrammeled free trade within the Union." 138 ..The Advisory Committee considered the report of the sub- c committee on fundamental rights. Shri Sardar Vallabhbhai Patel, Chainnan Advisory Committee sent report dated 23'a April, 194 7 to the Constituent Assembly, in paragraph 5 of which following was stated:

"5. Clause JO deals with the freedom, throughout the D Union, of trade, commerce and intercourse hetween the citizens. Jn dealing with this clause we have taken into accoum the fact that several Indian States depend upon internal customs.for a considerable part of their revenue and it may not be easy for them to abolish such duties immediately on the coming into force of the Constitution Act. We, therefore, consider that it would be reasonahle for the Union to enter into agreements with such States, in the light of their existing rights, with a view to giving them time, up to a maximum period to be prescribed hy the Constitution, hy which internal customs could he eliminated and complete free trade estahlished within the Union."

139. Constituent Assembly on 1" May 1947 considered the report on fundamental rights.

140. Shri K. M. Munshi made following statement with regard to Custom Duties and Taxes:

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A "The proviso contemplates that a Unit can impose certain customs duty with a view to hring up the level of the price of goods imported to the level of the price of the goods manufactured in the Unit itself Otherwise, the goods produced in other Units will flood that B particular Unit. With that view only has this proviso been added. Provinces, therefore, can impose certain duties and taxes on goods imported from other units with a view to bring up the value to the level of good manufactured in the Unit itself But it was felt, Sir, that this was incomplete. Such regulations and conditions c may be made as to favour the goods produced in the Unit and therefore, the words 'and under regulations and conditions which are non-discriminatory' have to he added, so that conditions must not be such as to force up the price of the goods imported. Therefore, the D whole point is that there should not he any regulation or any conditions of such a nature which would.favour the goods produced in the Unit as against those produced and imported.from outside." Certain amendments on 01" May 1947 were adopted. E

141. In the Draft Constitution finalized by Drafting Committee, freedom of trade, commerce and intercourse throughout the territory of India was incorporated as one of the fundamental rights in Clause 16 in following words: F

"16. Subject to provisions of Article 244 of this Constitution and any law made by Parliament, trade, commerce and intercourse throughout the territory of G India shall he free. ··

142. Another set of articles under heading 'inter-State trade and commerce' where articles 243, 244 and 245 which were to the following effect: H

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243. No preference shall be given to one State over A Prohibition of another nor shall any discrimination be made preference or between one State and another by any law or discrimination regulation relating to trade or commerce, whether to one State carried hy land. water or air. over another by any/aw or The committee is of opinion that the provisions B regulation contained in articles 243 and 244 should more relating to appropriately he included in this Chapter than I trade or Part III dealing with Fundamental Rights. commerce.

244. Notwithstanding anything contained in article 16 C Restriction on or in the last preceding article of this Constitution, trade, it shall he lmvful for any State-- commerce and intercourse (a) to impose 011 goods imported.from other States between States. any tax to which similar goods manufactured or produced in that State are suhject, so, however, as D not to discriminate he tween goods so imported and goods so manufactured or produced; and (b) to impose by land such reasonable restrictions on the.freedom of trade, commerce or intercourse with that State as may be required in the public inter es ts: E Provided that during a period ofjive years from the commencement of this Constitution the provisions of clause (b) of this article shall not apply to trade or commerce in any ofthe commodities mentioned in clause (a) of article 306 of this Constitution. F

245. Parliament shall hy law appoint such authority as it Appointment of considers appropriate.for the carryin}? out of the authority to provisions of articles 243 and 244 of this carryout the Constitution and confer on the authority so provisions of appointed such powers and such duties as it thanks G articles 243 necessary. and 244. I Draft Article 16 came for discussion before the Constituent Assembly on 03'd December 1948. H

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A 143. Shri C. Subramaniam raised the objection to the effect that powers given to the State Legislature have been in respect of interstate trade and commerce to impose certain taxes and Article 16 being subject to the law of the Parliament, how it can be fundamental right and whether there is any right at all reserved.

B 144. Dr. B. R. Ambedkar replied the objections of Shri Subramaniam and explained as to why Article 16 was placed in fundamental rights. Dr. Ambedkar stated that Constituent Assembly when began its task, there were limitations since the States were to join the Union only on three subjects, namely, foreign affairs, defence and c communication, said Dr. Ambedkar that it was realized that there would be no use and purpose in forming an All India Union if trade and commerce throughout India was not free. Hence it was decided to put article in fundamental rights. Following was stated by Dr. Ambedkar:

D "But I shall explain to him why it was found necessary to include this matter in the .fundamental rights. My friend, Mr. Suhramaniam will remember that when the Constituent Assembly began, we began under certain limitations. One of the limitations was that the Indian E States would join the Union only 011 three subjects- .foreign affairs, defence and communications. On no other matter they would agree to permit the Union Parliament to extend its legislative and executive jurisdiction. So he will realise that the Constituent Assembly, as well as the Drafting Committee, was placed under a very serious limitation. On the one hand it was realised that there would he no use and no purpose served in forming an All-India Union if trade and commerce throughout India was not free. That was the general view. On the other hand, it was found that so far as the position of the States was concerned, to which I have already made a reference, they were not prepared to allow trade and commerce throughout India to be made subject to the legislative authority of the Union Parliament. Or to put it briefly and in a different language, they were not prepared to allow trade and H

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commerce to be included as an entry in List No. 1. If it was possible for us to include trade and commerce in List I, which means that Parliament will have the executive authority to make laws with regard to trade and commerce throughout India, we would not have found it necessary to bring trade and commerce under article 16, in the .fimdamental rights. But as that door was blocked, on account of the basic considerations which operated at the beginning of the Constituent Assembly, we had to find some place for the pu1pose of uniformity in. the matter of trade and commerce throughout India, under some head After exercising c considerable amount of ingenuity, the only method we found of giving effect to the desire of a large majority of our people that trade and commerce should be free throughout India, was to bring it under fundamental rights. " · D

145. One more impo1tant statement made by Dr. Ambedkar was to the following effect:

E "Yes, but reasonable restrictions do not mean that the restrictions can be such as to altogether destroy the freedom and equality of trade. It does not mean that at all. " F

146. The Constituent Assembly resolved to adopt the motion making Article 16 as a part of the Constitution. On 08 1h September 1949, Dr. Ambedkar moved a motion for inserting a Part XA consisting of Article 274A, 274B, 274C, 274D and 274E. Part XA included provisions as contained in Article 16 as Article 274Aas was passed in the fundamental G rights and Article 274B to 274E as was earlier contained in provisions of Article 244- 245 in the Draft Constitution. Dr. Ambedkar, while moving a motion stated that articles dealing with the freedom 'Of trade and commerce were scattered in different parts of tlte Draft Constitution, as H

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A article 16 was under fundamental rights and article 243, 244 and 245 were in Part IX. Various amendments were proposed by Pandit Thakur Das Bhargava and other members. After a great discussion Part XA was passed to be included in the Constitution with certain minor amendments.

B 147. Subsequently, Dr. Ambedkar on 16'11 October 1949 moved a motion for insertion of Article 274DD, which was to the following effect: 2 74DD. Notwithstanding anything contained in

Power ofcertain theforeRoinR provisions of this Part or c States in Pm·t III of in any other provisions of this the First schedule in Constitution, any State which he/ore the impose restrictions commencement of this Comtitution was on tradeand levying any tax or duty on the import of commerce hy the levy goods into the State from other States or of certain taxes and on the export ofRood~from the State to duties on the import other States may, if an agreement in of goods into or the that behalfhas been entered into export of Roods from between the such States. Government ofIndia and the Government of that State, continue to levy and collect such tax or duty sub;ect to the terms of such agreement and for such period not exceeding ten years from the commencement o(this Constitution as may be specified in the agreement: F Provided that the President may at any time after the expiration of five years from such commencement terminate or modifj; any such aweement if, after consideration of the report of the Finance Commission constituted under article 260 of this Constitution, he thinks it necessary to do so." G

148. While discussing Article 274DD, one of the Members of the Constituent Assembly Shri Raj Bahadur has expressed his concern about continuance of custom duties and taxation which according to him were H

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great restrictions to the trade and commerce. Following views were A expressed by Shri Raj Bahadur:

"Shri Raj Bahadur (United State of Matsya): I have sought this opportunity, to take a few minutes of this B House while this article is under consideration to give vent to the feeling of the common people in the States' Unions ahout these customs, .duties and taxation. As a matter of.fact, ever since political awakening dawned upon the people of the Indian States customs taxes have been a particular target of political opposition. It was c not without reason that the people of the Indian States and their movements were set against the imposition of customs duties on both imports and exports. It was hecause of a particular feeling amongst the people that this opposition was there. We have felt all through that all our trade, our industries have been crippled because of these Customs Duties. Even today we are not going to be benefited by it. Somehow or other , because these States were not viable units and they had to balance their budget the customs taxation was resorted to. Apart from that it was also supposed to be a part of the sovereign rights of the States. But so far as the interests of the people were concerned, they were not served by the imposition of these customs duties. Constituent Assembly adopted Article 274DD." F

149. The debates on draft article 264(A) (Now Article 286 in the Constitution) with regard to imposition of sales tax came for consideration on 16.10.1949 which are also relevant in the context of freedom of trade and commerce. Dr. B.R. Ambedkar stated that imposition of sales tax G has created lot of difficulties in the matter of freedom of trade and commerce. Dr. B.R. Ambedkar further stated that imposition of sales tax shall not be in conflict with provisions of Part XA (Now Part Xlll).

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A Following was stated by Dr. Ambedkar: "Sir, as everyone knows, the sales tax has created a great deal of difficul~y throughout India in the matter of.freedom of trade and commerce. It has been found that the vei:v many sales taxes which are levied by the B various Provincial Governments either cut into goods which are the subject matter of imports or exports, or cut into what is called inter-State trade or commerce. It is agreed that this kind of chaos ought not to be allowed and that while the provinces may be free to levy the c sales tax there ought to be some regulations whereby the sales tax levied by the provinces would be confined within the legitimate limits which are intended to be covered by the sales tax. It is, therefore, felt that there ought to be some specific provisions laying down certain limitations on the power of the provinces to levy sales tax. The.first thing that I would like to point out to the House is that there are certain provisions in this article 264A which are mere(y reproductions of the different parts of the Constitution. For instance, in wb-clause(l) of article 264A as proposed by me, sub-clause (b) is merely a reproduction of the article contained in the Constitution, the entry in the Legislative List that taxation of imports and exports shall be the exclusive province of the Central Government. Consequently so far as sub-clause (1) (b) is concerned there cannot be any dispute that this is in any sense an invasion of the right of provinces to levy as sales-tax. Similarly, sub-clause (2) is mere~y a reproduction of Part XA which we recently passed dealing with provisions regarding inter-State trade and commerce. Therefore so far as sub-clause(2) is concerned there is really nothing new in it. It mere~y says that if any sales tax is imposed it shall not be in conflict with the provisions of Part XA." H

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150. The moving idea and inspiration for framing relevant a1ticles A pertaining to freedom of trade and commerce was and is the realization that a federal union needs the creation and the preservation of national economic fabric and the removal of or prevention of local barriers to economic unity so that competing economic units within unions shall not threaten the stability of the nation as a whole. The Unity of India was B seen to some extent on above realization.

I 51. From what we have noted above, it is clear that the Constitution framers gave great importance to the freedom of trade and commerce. In the beginning, when States had conceded to union, only foreign affairs, defence and communication, right of freedom of trade c and commerce was placed in the Chapter of Fundamental Rights since it was thoughtthat making of All India Union will be useless iftrade and commerce is not free. Dr. Ambedkar on 08.09.1949. during the debates had stated that even though, there may be reasonable restriction on the right. however, the restriction can be such which altogether may not D destroy the freedom and equality of trade.

152. The Constitution framers were cons<..:ious of the fact that goal set-up for freedom of trade and commerce is to eliminate internal custom duties and States were conceded to impose limited taxes with restrictions as envisaged in the proposed articles. E

153. A1ticle 274DD as adopted by the Constituent Assembly, which became Article 306 of the Constitution allowed the existing taxes and duties by the States on the impon into or export of goods for a period not exceeding I 0 years clearly indicates that taxes are restrictions on trade and commerce. hence period of I 0 years was allowed to abolish the same and the State to ensure free flow of trade and commerce.

154. One more important fact is to be noticed from the Constituent Assembly Debates dated 8'11 September, 1949 in reference to A1ticle 244 (now Article 304 ), which permitted the State to impose any tax on goods imported from other States. Dr. B.R. Ambedkar referred the above Article 244 as a provision giving limited power to impose certain restrictions on the entry of goods. Dr. Ambedkar in his statement in

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A the proceeding instead of repeating the word ·tax' as specifically mentioned in Article 244 used the word ·restriction'. The above also indicates that the use of word 'restriction' included the tax also.

155. From the legislative history as noted above and the extent of freedom of trade and commerce as emerged from Constituent Assembly B Debates, it is abundantly clear that the taxes were treated as restriction on freedom of trade and commerce and it was further comprehended that restriction on freedom of trade and commerce can be put by taxation also.

c B. Nature of Federalism in Constitution of India

156. 'In the people ofindia', vests the legal sovereignty while the political sovereignty is distributed between Union and the States. We having adopted for ourselves a well thought, well deliberated written 0 Constitution, it is pertinent to know the structure of our Constitution. Learned counsel for the parties during their respective submissions have referred to the federal structure of the Constitution and one of the submissions raised before us is that while interpreting the Constitution the federal structure ofthe Constitution has to be kept in mind, since, the framers of the Constitution must have never intended to dilute the federal structure of the Constitution.

157. The Constituent Assembly of India consisting of illustrious members drawn from all parts of the country deliberated all aspects of the new Constitution and took considerable pain and caution in drafting the Constitution which may fulfill the aspirations of independent India. F Initially, it was perceived that the federal Government i.e. Union Government shall be responsible for Foreign Affairs, Defence and Communication. After declaration of Partition on yct June, 194 7, there was considerable change in the views of the Constituent Assembly. Union Constitution Committee on 61h June, 194 7 took a decision that Constitution G would be federal with a strong Centre. Granville Austin in the l11di1111 Co11stitutio11:Comers·to11e of a Nation has described the shift in the following words: "Mountbatten announced Partition on 3 June 1947. Within four days the Assembly had embarked on a H

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centralized federal union. On 5 June the Union and A Provincial Constitution Comnuttees,having spent much of the .first month of their lives marking time, met in joint session and concluded that in the light of the June Third Statement the Cahinet Mission Plan no longer applied to the Assemhlv. The following day the Union B Constitution Committee met alone. Present were Nehru. the Chairman, Prasad,Azad,Pant,Jagjivan Ram, Amhedkar. Ayyar, Munishi, Shah, S.P. Mookerjee. V T.Krishnamachari, Panikkm; N. G. Ayyangm;and P. Govinda Menon. These men took the following tentative decisions: c That the Constitution would be federal with a strong centre; That there should he three 'exhaustive' legislative lists, and that residuary powers should vest in the Union D Government; That the Princely States should he on a par with the provinces regarding the Federal List,subject to special matters; and That generally speaking the Executive authority of the E Union should be co-extensive with its legislative authority."

158. The Drafting Committee which was charged with the duty of preparing a Constitution in accordance with the decision of the Constituent Assembly on the reports made by the various Committees prepared a Draft Constitution which was made public. The Draft Constitution was placed for discussion on 4'" November, 1948. Dr. B.R. Ambedkar while placing the Draft Constitution/while moving the mqtion had deliberated over the nature of the Constitution. Dr. Ambedkar stated that the Draft Constitution is Federal Constitution in the following words: "Two principal forms of the Constitution are known to hist01y-one is called Unitary and other Federal. The two essential characteristics of a Unitary Constitution H

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A are: (1) the supremacy of the Central Polity, and (2)the absence of subsidiary Sovereign politics. Contrariwise,a Federal Constitution is marked: (1) by the existence of a Central polity and subsidiary polities side by side, and (2)by each being sovereign in the.field B assigned to it. In other word~. Federation means the establishment of a Dual Polity. The Draft Constitution is, Federal Constitution inasmuch as it establishes what may he called a Dual Polity. This Dual Polity under the proposed Constitution will consist of the Union at the Centre a.nd the States at the periphery each endowed c with sovereign powers to he exercised in the field assigned to them respectively by the Constitution."