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

242. The above provisions are part of our Constitutional Scheme E and could not be wished away by saying that such provisions impinge upon the sovereign power of the State. Power of a State Legislature to the above extent is expressly limited by Constitutional Scheme. Article 304(b) proviso is one of such Constitutional Schemes where the State power is restricted and limited to the above extent. The Constituent F Assembly Debates, as noticed above, clearly bring about the rationale of introduction of the requirement of Presidential assent in respect of certain laws by which State Legislature'!Jut restriction on the freedom of trade, commerce and intercourse. We have noted above that in the Constituent Assembly there was serious objection raised against clause (b) of Article 304 and amendment was moved for deletion of clause (b) G from the Constitution. The above amendment after great discussion was negatived by approving the limited restraint put on the State Legislature as engrafted in Article 304(b) proviso.

243. A Constitution Bench of this Court in Kaiser-I-Hind Pvt. Ltd. and another vs. National Textile Corpn. (Maharashtra North) H

JINDAL STAINLESS LTD. v. STATE OF HARYANA 787

[ASHOK BHVSHAN, J.]

Ltd. and others, (2002) 8 SCC 182, has held that the power exercised A by the President under Article 304(b) is in consonance with the federal strncture of the Constitution. Doraiswamy Raju, J. agreeing with majority judgment stated following in paragraph 77:

B ".... The powers actually exercised by the President, at any rate under Articles 31-A, 31-C, 254(2) and 304(h) are a special constituent power vested with the Head of the Union, as the protector and defender of the. Constitution and safety valve to safeguard the fundamental rights of citizens and federal structure of c the country:~ polity as adopted in the Constitution ..... "

244. The Sarkaria Commission was constituted to have re-look over the Centre-State relations under the Constitution oflndia. Sarkaria D Commission dealt with "Legislative Relations" in Chapter II. The objections of State Governments were noted in para 2.40.01 to the following effect:

"2.40.01 Some State Governments and a political party have asked for omission of Article 304, and, in the alternative, for deletion of the Proviso to Article 304(b). The arguments advanced are: "Whether the restrictions imposed by an Act of a State Legislature 011 the fi"eedom of trade and commerce are reasonable and whether they are in the public interest for purposes of Article 304(b) are questions to he decided ultimately by the High Court or Supreme Court. If the High Court finds that the restrictions are unreasonable or opposed to the public interest, previous sanction of the President or his subsequent assent cannot cure the infirmity. If the legislation is otherwise valid and the restrictions are reasonable and in the public interest, his previous sanction will he a superfluity. Jn any case the requirement relating to the previous H

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

A sanction of the President direct~v encroaches on the .field assigned to the State Legislature ... ".

245. The objects of Article 304(b) and its contents were noted in para 2.40.06 to the following effect: B

"2.40. 06 The broad object of the provisions of Articles 301 and 304 is to ensure that the commercial unity of India is not broken up by physical and.fiscal barriers c erected by the State Legislatures through parochial or discriminatory exercise of their powers. The proviso to Article 304(h) enahles the President to ensure, at the initial stage, that the State Legislation does not, by imposing unreasonable restrictions on trade, commerce or intercourse, endanger the commercial unity of the nation. It is true that clause (b) is not co11;fined to inter- State trading activities, it extends to trade within the State, also. But intra-State trading activities often have a close and substantial relation to inter-State trade and commerce. State laws, though purporting to regulate trade within a State, may have inter-State implications. They may impose discriminatory taxes or unreasonable restrictions which impede the freedom of inter-State trade and commerce. That is why, both inter-State and intra-State trade have been made the subject of limitations on State legislative power under Article 304(b) ...

246. The Sarkaria Commission in para 2.40.07 has also recorded : "However, no instance of a Bill reserved under the Proviso to clause G (b) of Article 304, which might have been vetoed by the President, has been cited." In para 2.40.08 it was concluded: "2.40. 08. For these reasons, we cannot support the demand for amendment of Article 304, or omission of the Proviso to its clause (b) . .. H

JINDAL STAINLESS LTD. v. STATE OF HARYANA 789

[ASHOK BHUSHAN, J.]

247. The Sarkaria Commission after hearing the States' point of A view had specifically adverted to on Constitutional provisions contained in Part XIII of the Constitution. After elaborate consideration on the subject in Part XIII "trade, commerce and intercourse within the Te!Titory oflndia" in paragraph 18.3.14 and 18.3.15 following was stated: B "18.3.14. We have observed in the Chapter on "Legislative Relations" that intra-State trading activities often have a close and substantial relation to inter-State trade and commerce. State laws though purporting to regulate intra-State trade, may have implications for c inter-State trade and commerce. These may impose discriminatory taxes or unreasonable restrictions, impeding the.freedom of intra-State trade and commerce. If clause (h) of Article 304 is deleted, the commercial and economic unity of the country may he broken up hy State laws setting up harriers to free fl.ow of trade an inter-course through parochial or discriminatory use of their powers. The suggestion of the State Government i.~ not workable even from a fimctional standpoint.

18.3.15. From a broad conceptual angle, the suggestion for excluding intra-State trade and commerce from the purview of Article 302 and.for deletion of the Proviso to Article 304(/J) does not stand close scrutiny. It is not in consonance with the prevailing concept o.ffedera!ism. It presumably draws, inspiration from the antiquated and obsolete theory of federalism, according to which two levels of government were supposed to fimction in water-tight compartments in isolation from each other. Such a "dual" federalism is nowhere a.functional reality in the modern world. Even in the so-called classical federation of the United States of America federalism is now a dynamic process ofgovernment, a system ofshared responsibilities and cooperative action between the three tiers of government. The Constitution~framers were conscious of this reality. Indeed, the very scheme of Articles 301 to 304 which imposes limitations on the H

790 SUPREME CUURT REPORTS (2016] 10 S.C.R.

A legislative powers of the Union and of the States, both with respect of inter-State and intra-State commerce and intercourse, is expected to he worked in cooperation by the Union and the States. The mere fact that Article 303(2) gives an exclusive power to Parliament to m ake B a discriminatory law for dealing with a situation of scarcity of goods, or that the Proviso to Article 304(b) gives a supervisory power to the President (i.e. Union Council of Ministers) over a State legislation seeking to impose restrictions on inter-State or intra-State trade, is not a good enough argument to hold that these are c anti:federal features making unjustifiahle encroachment - on the autonomy of the States. No doubt, these features give due weightage to the Union. But the scheme of the Articles in Part XIII considered as a whole, is well- halanced. ft reconciles the imperative of economic unity D of the Nation with interests of State autonomy by carving out in clauses (a) and (h) of Article 304, two exceptions in favour of State legislature to the freedom guaranteed under Article 301."

E 248. Now one more limb of submissions with regard to Article 304(b) needs to be considered. The submission on behalfof the States is that Article 304 sub-clause (b) does not contemplate taxing legislation. It is contended that Article 304(a) has specifically used word 'tax' and absence of word 'tax' in Article 304(b) clearly indicates that the F Constitution framers have intended to cover restrictions other than tax. Learned counsel for the petitioners have refuted the submission and their contention is that word 'restrictions' used in Article 304(b) is vide enough to include tax legislation. Gajendragadkar, J. speaking for majority in Atiabari Tea Co.Ltd. (supra) has expressly held at page 856 "how G tax can be levied on internal goods, is, however, provided by Article 304(b )". Shri P.P. Rao, learned senior counsel appearing for the States, in the context of the above observation submits that the above observations made in majority judgment are only obiter. neither the issue was before the Court nor it can be said that after due consideration the law was laid down. In GK. Krishnan & ors. v.~. State of Tamil Nadu H

JINDAL STAINLESS LTD. v. STATE OF HARYANA 791

[ASHOK BHUSHAN, J.]

(.mpra) a doubt was expressed by Justice Mathew that as to whether A Article 304(b) would include levy by a non-discriminatory tax was a matter on which there was scope for difference of opinion. Justice Mathew did not express his opinion that tax legislation is not included in Article 304(b ).

249. Article 304(a) as noted above is only with regard to the B imposition of tax on goods imported from other States. Article 304(a) does not refer to taxes imposed on the local goods. In the event, the State Legislature imposes restrictions on the freedom of trade and commerce by taxing legislation covering local goods, whether the validity of it cannot be tested on anvil of Article 30 l. Further, State in public c interest requires imposition of reasonable restriction by imposing tax on the local goods, what procedure it has to follow so as to not impede Article 30 I. There cannot be any dispute that power to legislate including tax legislation is the power allocated to State Legislature under the Constitutional Scheme under A1ticle 245 and 246. Article 304 is not a source of power of legislation by State rather as the heading of the section indicates that it is a "Restriction on trade, commerce and intercourse among States." As we have noted above, Article 304(a) only deals with goods imported from other States hence for imposing reasonable restrictions in the public interest on trade, commerce and intercourse with regard to local goods, only way out for a State to save its legislation is to go through the route as provided under Article 304(b). We cannot imagine that merely because State Legislature has competence to frame tax law with regard to local goods, it can impose taxes which amount to impeding the freedom of trade and commerce, whereas the Constitution does not provide any exemption to State F Legislature in that regard.

250. There are few more reasons due to which we are of the <;>pinion that word 'restriction' uses in Article 304(b) also includes taxation iaw. . 251. A State Legislature in exercise of its legislative power G referable to any of the Entries of List II can frame law both fiscal or non-fiscal. When Article 304 uses words "by law" and the law is a wider tenn which embraces both fiscal and non-fiscal legislation with regard to clause (b ), it cannot be limited as only non-fiscal law. If we have to hold that Article 304(b) does not refer to tax law, we have to H

792 SUPREMF :::OURT REPORTS [2016] 10 S.C.R.

A give different meaning to words "by law" used in the beginning ofArticle 304 which governs both clauses (a) and (b). The mere fact that clause (a) uses the words 'any tax' and clause (b) does not use the word 'tax' is not of much significance since the word restrictions used in clause (b) is wide enough to cover any kind of restriction by fiscal law. Neither Article 302 nor Article 303 uses the word 'tax'. Both Articles are dealing B with freedom of trade and commerce, non-use of word 'tax' in Article 304(b) is also inconsequential. We thus are of the opinion that the word 'restrictions' under Article 304(b) is vi de enough to include restrictions placed both by fiscal or non-fiscal law.

c 252. At this stage, we will like to clarify one aspect of the matter, the submission has been advanced by learned counsel for the State that in the event, it is accepted that word 'restriction' in Article 304(b) includes taxation, it will be a serious restraint on the legislative power of the State, which is plenary and sovereign power. It is to be clarified that Article 304(b) does not cover each and every legislative exercise of a D State. The legislation which contains restriction on freedom of trade, commerce and intercourse only need to be routed through Article 304(b ). In the event, a State legislation does not contain any restriction to freedom of trade, commerce and intercourse, there is no necessity of routing through Article 304(b) in which, case Article 304(b) is not at all required to be resorted to. The State legislation, when it impedes the freedom of trade, commerce and intercourse and imposes reasonable restrictions by fiscal or non-fiscal legislation it needs to go through the routes of Article 304(b) to insulate it from the wrath of Article 30 I. ~ ··

253. Article 304(b) thus operates in a very limited field, as explained above and plenary legislative power of the State, in no manner, is restricted by Article 304(b). We are thus of the view that apprehension of the learned counsel for the State that Article 304(b) operates serious restraint on the legislative power is misplaced. We thus conclude that word 'restriction' as used in Part Xlll as well as in Article 304(b) at the Constitution includes tax legislation also. G

254. With reference to Article 304(a), one of the aspects on which learned counsel for the parties have taken different stand is as to whether exemptions granted in tax by a State Legislature to the local goods does or does not violate Article 304(a). Shri Salve while elaborating his challenge to Entry Tax legislation of different States has referred to the H

JINDAL STAINLESS LTD. v. STATE OF HARYANA 793

[ASHOK BHUSHAN, J.]

second group of enactments in which an entry tax is imposed on the goods coming from outside and local goods but legislation contains device by which there is set off/ exemptions to the local goods which result in non-imposition of Entry Tax to the local goods leading to discrimination violating A1ticle 304(a). On the other hand, counsel appearing for the States submit that a State is not, in any manner, precluded from granting exemption to specified class of goods to give a helping hand for development of a 'particular industry specially in a State which is not so developed and State patronage for development is necessary. It is contended that all States are not equal in its economic and industrial development and backward State needs a special treatment by way of exemption in tax in deserving cases for coming up at level playing field with other States. It is contended that State's protection by way of exemption/set off in such cases cannot be tenned as discrimination. It is contended that discrimination is one when it is a hostile discrimination.

255. Learned counsel for the parties have placed reliance on various pronouncements of this Comt in support of their respective submissions which we shall notice hereinafter.

256. A Constitution Bench of this Court in Firm A.T.B. Mehtab Majid and Co. vs. State of Madras and another, (1963) Suppl (2) SCR 435, had occasion to consider Article 301 and Article 304 in the context of Madras General Sales Tax Act, 1939 and Madras General E Sales Tax Rules, 1939. The writ petition was filed under Article 32 by a dealer who was dealing in hides and skins tanned outside the State of Madras, as well as those tanned inside the State. The dealer was assessed to sales tax for the year 1955-56 representing the sales of tanned hides and skins which were obtained from the outside of the State of Madras. F Rule 16 was challenged by the petitioner raising following contention:

"6. It is contended.for the petitioner that the effect of this Rule is that tanned hides or skins imported from outside the State and sold within the State are subject G to a higher rate of tax than the tax imposed on hides or skins tanned and sold within the state, inasmuch as sales tax on the imported hides or skins tanned outside the State is on their sale price while the tax on hides or H

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

A skins tanned within the State, though ostensibly on their sale price, is, in view of the proviso to clause (ii) of sub-rule (2) of Rule 16, real~y on the sale price of these hides or skins when they are purchased in the raw condition and which is substantially less than the sale B price of tanned hides or skins, Further, for similar reasons, hides or skins imported.from outside the State after purchase in their raw condition and then tanned inside the State are also subject to higher taxation than hides or skins purchased in the raw condition in the State and tanned within the State, as the tax on the c former is on the sale price of the tanned hides or skins and on the latter is on the sale price of the raw hides or skins. Such a discriminatory taxation is said to offend the provisions of Article 304(a) of the Constitution. Similar are the contentions for the interveners in the D case.

257. This Court after considering the respective submissions held that tax on hides and skins imported from outside being higher, it is discriminatory and unconstitutional. Following was held: E

"10. It is therefore now well settled that taxing laws can he restrictions on trade, commerce and intercourse, !f they hamper the .fl.ow of trade and !f they are not F what can be termed to be compensatory taxes or regulatory measures. Sales tax, of the kind under consideration here, cannot he said to be a measure regulating any trade or a compensatory tax levied for the use of trading facilities. Sales tax, which has the e.ffect ql discriminating he tween good~ qf one State and G good1· of another, may affect the free .fl.ow of trade and it will then qffend against Article 301 and will he valid on~v if it comes within the terms qf Article 304(a).

11. Article 304(a) enables the legislature qf a State to make laws a,jfecting trade, commerce and intercourse. H

JINDAL STAINLESS LTD. v. STATE OF HARYANA 795

[ASHOK BHUSHAN, J.]

It enables the imposition of taxes on goods from other A States ifsimilar good~ in the State are subjected to similar taxes, so as not to discriminate between the goods mant{factured or produced in that State and the goods which are imported.from other States. This means that if the effect of the sales tax on tanned hides or skins B imported.from outside is that the latter becomes subject to a higher tax by the application of the proviso to sub- ru le of Rule 16 of the Rules, then the tax is discriminatory and unconstitutional and must be struck down. " c

258. Petitioners rely on Weston Electronics and another vs. State of Gujarat and others, (1988) 2 SCC 568. Under Section 49 sub- Section (2) of Gujarat Sales Act, 1969 the State was empowered to exempt, in the public interest, any specified class of sales from sales tax. D ln 1981, while the rate for electronic goods entering the Gujarat State for sale therein was maintained at 15%, the rate in respect of locally manufactured goods was reduced to 6% by notification. By further notification in the year 1986, the rate of tax on imported television was reduced from 15% to 10% whereas rate of tax on manufactured television within the State was reduced from 6% to 1%.The petitioners, manufacturers of electronic goods including televisions whose factories are located at Delhi, and goods are sold in all over India including Gujarat, challenged the exemption granted to the goods manufactured in the State of Gujarat as violative of Article 301and304.

259. The State submitted before this Court that the rate of tax was reduced in the case of goods manufactured locally in order to provide an incentive for encouraging local manufacturing units. This Court referring to earlier judgments of this Court held that discrimination by applying different rates of tax is not sustainable, following was stated: G

"6. In answer to the writ petition. the respondents point out that the rate of tax was reduced in the case of goods manufactured localzv in order to provide an incentive for encouraging local manufacturing units. Reference H

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

A is made to clauses (b) and (c) of Article 39 of the Constitution. We do not think that any support can be derivedfrom the two clauses of Article 39. Clause (a) of Article 304 is clear in meaning. An exception to the mandate declared in Article 301 and the prohibition contained in clause (1) of Article 303 can be sustained B on the basis of clause (a) of Article 304 only if the conditions contained in the latter provision are satisfied.

7. In the result, the discrimination effected by app~ying different rates of tax between good~ imported into the c State of Gujarat and goods manufactured within that State must be struck down. "

260. Another two Judge Bench judgment in Indian Cement and others vs. State of Andhra Pradesh and others, (I988) I SCC 743, D had a occasion to consider notification issued under Section 9( 1) ofAndhra Pradesh General Sales Tax Act, 1957 whereby rate of tax in respect of sales made by indigenous cement manufacturers to manufacturers of cement products in the State ofAndhraPradesh was reduced. Notification tmderSection 8(5) of Central Sales Tax Act, 1956 was also issued reducing rate of tax on the sale of cement made in the course of inter-State trade or commerce. Two Judge Bench of this Court referring to Atiabari Tea Co. Ltd. and Automobile Transport Ltd. Stated following in paragraph 12: "12. There can be no dispute that taxation is a deterrent against free flow. As a result of favourable or unfavourahle treatment by way of taxation, the course of.flow of trade gets regulated either adversely or favourably. If the scheme which Part XIII guarantees has to be preserved in national interest. it is necessary that the provisions in the article must be strictly complied with. One has to recall the farsighted observations of Gajendragadkar, J. in Atiabari Tea Co. case [AIR 1961 SC 232 : (1961) I SCR 809] and the observations then made obviously apply to cases of the type which is now before us. " H

JINDAL STAINLESS LTD. v. STATE OF HARYANA 797

[ASHOK BHUSHAN, J.]

251. This Court held both the notifications issued by Andhra A Pradesh Government unsustainable in law. Following was stated in paragrph 14:

"14 ... .. Variation of the rate of interstate sales tax does B affect free trade and commerce and creates a local r·e.ference which is contrary to the scheme of Part XIII of the Constitution. The notification extends the bene.fit even to unregistered dealers and the observations of Hegde, J. on this aspect of the matter are relevant. Both the notifications of the Andhra Pradesh Government c are, therefore, bad and are hit by the provisions of Part Xlll of the Constitution. They cannot he sustained in law."

262. Now, we come to a three Judge Bench judgment on which much reliance has been placed by the counsel for the State, i.e. Video Electronics Pvt. Ltd. And another vs. State of Pubjab and another, (1990) 3 SCC 87. In the above case this Court had occasion to consider notifications issued by Uttar Pradesh Government under Section 4-A of Uttar Pradesh Sales Act, 1948. Constitutional validity of Section 4-A of the Act and Section 8(5) of Central Sales Tax, 1956 was also challenged. The petitioner carry on the business of selling cinematographic films and other equipments like projectors, sound films, photo films etc. manufactured outside the State of Uttar Pradesh. New units of manufacturer as defined in 1948 Act in the State of U.P. were exempted for different periods ranging from 3 to 7 years on conditions set out in the notification. Petitioner challenged the notification as violative of rights guaranteed under Part Xlll as well as Article 14 and 19(1 )(g) of the Constitution.

263. This Court held that the power to grant exemption is always inherent in all taxing statutes. The reasons for notification as submitted on behalf of the State i.e. economic encouragement and growth found favour and it was held that exemption do not violate Article 304. This Court laid down following in paragraph 26 at page 108:

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

A "26 . .......... Economic unity of India is one of the constitutional aspirations of India and safeguarding the attainment and maintenance of that unity. are objectives of the Indian Constitution. It would he wrong, howeve1; to assume that India as a whole is already an economic B unit. Economic uni~v can only be achieved if all parts of whole of Union of India develop equally, economicalZv. Indeed, in the affidavits of opposition various ground~ have heen indicated on heha(f of the respondents suggesting the need for incentives and exemptions, and these were suggested to he absolutely c necessary for economic viability and survival for these industries in these States. These were hayed on cogent and intelligihle reasons of economic encouragement and growth. There was a rationale in these which is discernible. The power to grant exemption is always inherent in all taxing statutes. If the suggestions/ submissions as advanced hy the petitioners are accepted, it was averred, and in our opinion rightly, that it will destroy completeZv or make nugatory the plenary powers of the States. If the exemption is hased on natural and business factors and does not involve any intentional hias, the impugned notifications to grant exemption of limited period on certain specific conditions cannot he. held to be had. Judged hy that yardYtick, the present notifications cannot he held to be violative of the constitutional provisions. An F examination of Article 304(a) would reveal that what is being prohibited hy this article which is really an exception to Article 301 will not apply if Article 301 does not apply. "

264. This Court further held that grant of exemption to specified class for limited period, such granting of exemption cannot be held to be contrary to the concept of economic unit. Following was stated:

JINDAL STAINLESS LTD. v. STATE OF HARYANA 799

[ASHOK BHUSHAN, J.]

"28. Concept of economic barrier must be adopted in A a dynamic sense with changing conditions. What constitutes an economic barrier at one point of time often ceases to he so at another point of time. It will he wrong to denude the people of the State of the right to grant exemptions which flow from the plenary powers B of legislative head~ in List II of the Seventh Schedule of the Constitution. In a federal polity, all the States having powers to grant exemption to specified class for limited period, such granting of exemption cannot he held to be contrary to the concept of economic uni~y. The contents (sic concept) of economic unity by the c people of India would necessarily include the power to grant exemption or to reduce the rate of tax in special cases for achieving the industrial development or to provide tax incentives to attain economic equali(y in growth and development. When all the States have such provisions to exempt or reduce rates the question of economic war between the States inter se or economic disintegration of-the country as such does not arise. It . is not open to any parry to say that this should he done and this should not he done by either one way or the other. It cannot be disputed that it is open to the States to realise tax and thereafter remit the same or pay hack to the local manufacturers in the shape of subsidies and that would neither discriminate nor be hit by Article 304(a) of the Constitution. In this case and as in all constitutional adjudications the substance of the matter has to be looked into to .find out whether there is any discrimination in violation of the constitutional mandate.''

265. This Court also referred to Article 38 and 39. Earlier two judgments in Indian Cement Ltd. (supra) and Weston Electronics (.mpra) were noticed by this Court and it was held that these cases were not at all concerned to a special class, had a specific condition of maintaining the general rate of tax, hence they were not applicable. This H

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

A Court further held that if the power of exemption is in exercise of colourable manner to create unfavourable bias by prescribing general lower rate on locally manufactured goods either in the shape of general exemption to locally manufactured goods or in the shape of lower rate of tax, such an exercise of power can always be struck down by the B Courts.

266. The Court also considered the notification issued by the Punjab Government whereby two different rates of tax were provided differentiating between the manufacturers of electronic goods outside the State and within the State. In paragraph 36 following was stated: c "36. It has to be reiterated that sales tax laws in all the States provide for exemption. It is well settled that the different entries in Lists I, II and III of the Seventh Schedule deal with the field~ of legislation, and these should he construed widely, liberally and harmoniously. And these entries have been construed to include ancillary or incidental power. Power to grant exemption is inherent in all taxing legislations. Economic unity is a desired goal, economic equilibrium and prosperity is also the goal. Development on parity is one of the commitments of the Constitution. Directive principles enshrined in Articles 38 and 39 must be harmonised with economic unity as well as economic development of developed and under developed areas. In that light on Article 14 of the Constitution, it is necessary that the prohibitions in Article 301 and the scope of Article 304(a) and (h) should he understood and construed. Constitution is a living organism and the latent meaning of the expressions used can he given effect to only if a particular situation arises. It is not that with changing times the meaning changes but changing times illustrate and illuminate the meaning of the expressions used. The connotation of the expressions used takes its shape and colour in evolving dynamic situations. A backward State or a disturbed State cannot with parity engage in competition with advanced or developed States. Even H

JINDAL STAINLESS LTD. v. STATE OF HARYANA 801

[ASHOK BHUSHAN, J.]

within a State, there are often backward areas which can he developed onzy if some special incentives are granted. If the incentives in the form of subsidies or grant are given to any part of ~~ic or) units of a State so that it may come out of its limping or infancy to compete as equals with others, that, in our opinion, does not and cannot contravene the spirit and the letter of Part XIII of the Constitution. However, this is permissible only !f there is a valid reason, that is to say, !f there are justifiable and rational reasons for differentiation. /.f there is none, it will amount to hostile discrimination. Judged in this light, despite the submissions of Mr c Sanjay Parikh and Mr Vaidyanathan, we are unable to accept the contentions that the petitioners sought to urge in this application

D The three Judge Bench, thus, upheld the exemption in both the notifications as noted above.

267. In the judgment of Video Electro11ics the opinion was expressed by Sabyasachi Mukherji, CJ. Soon after the judgment of Video Electronics (supra) a three Judge Bench of this Comt also consisting of Sabyasachi Mukherji, CJ in Andhra Steel Corporation vs. Commissioner of Commercial Taxes in Karnataka, 1990 (Suppl.) sec 617, had occasion to consider exemption granted under Kamataka Sales Tax Act. ln the above case the assessee purchases iron scrap from inside and outside the State of Karnataka for the purpose of manufacturing iron ingots, iron steel rounds and tor-steel. The main point urged before this Court challenging the exemption as violative Article 304(a) was noted in paragraph 4 to the following effect:

"4. The main point was urged in this appeal was that G Section 5(4) of the Act insofar as it pertains to Item 2 in Schedule IV read with the Explanation II is violative of Article 304(a) of the Constitution as under that provision the sale of.finished goods manufactured out of imported raw material is taxed but the sale of finished goods H

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

A manufactured out of locally purchased raw material is not taxed and that amounts to hostile discrimination in the rate of tax or quantum of tax."

This Court took the view that the case in hand was fully covered B by the decision of A. T.B. Mehtab Majid (supra). Following was stated in paragraph 22 and 23:

"22. ............ The tax was levied under the State Act in c respect of steel semis. The State Act exempted steel semis which have been manufactured out of iron scrap which have Sl!ffered tax but not the other categories where the scrap had not suffered tax at that stage. This is directly covered by the decision in A. TB. Mehtab case [1963 Supp 2 SCR 435: AIR 1963 SC 928: (1963) D 14 STC 355} and that decision has not been dissented in Nataraja Mudaliar case[(l968) 3 SCR 829 : AIR 1969 SC 147: (1968) 22 STC 376} or Rattan Lal & Co. case [(1969) 2 SCR 544: AIR 1970 SC 1742: (1970) 25 STC 136}. The decision in A. T.B. Mehtab case [1963 E Supp 2 SCR 435 : AIR 1963 SC 928 : (1963) 14 STC 355} is by a Constitution Bench and had not been dissented so far in any case. The ratio of the judgment being fully applicable, the judgment of the High Court under appeal is not acceptable.

F 23. We accordingly hold that the provision which is impugned in this case is ultra vires and according~y set aside the judgment of the High Court and allow the writ petition filed by the assessee in the High Court. There will be no order as to costs. G

268. Now we come to two Judge Bench judgment of this Court in Shree Mahavir Oil Mills and another vs. State of J & Kand others, (1996) 11 SCC 39. In the above case notification under Section 5 of the J & K General Sales Tax Act, 1962 dated 7.3.1991 was issued H

JINDAL STAINLESS LTD. v. STATE OF HARYANA 803

[ASHOK BHUSHAN, J.]

exempting small scale industrial units in the State for a period of five years. The rate of sales tax was 4% which was raised to 8%. The manufacturers brining edible oil from outside the State found tax discriminatory in so far as exemption was granted to all small scale industrial units in the State. The writ petitions and letters patent appeals filed before the High Court were dismissed and the matter was carried to this Court.

269. After noticing the scheme under Part Xlll and specifically Article 304, this Court while interpreting Article 304(a) stated following:

"8 ...... The wording of this clause is of crucial c significance. The .first half of the clause would make it appear at the.first blush that it merezv states the obvious: one may indeed say that the power to levy tax on goods imported.from other States or Union Territories flows from Article 246 read with Lists II and Ill in the Seventh D Schedule and not from this clause. That is of course so, but then there is a meaning and a very sign(ficanl principle under~ving the clause, if one reads it in its entirezv The idea was not real~v to empower the State Legislatures to levy tax 011 goods imported fi'om other E States and Union Territories - that they are already empowered by other provisions in the Constitution - but to declare that that power shall not be so exercised as to discriminate against the imported goods vis-a-vis locally manufactured goods. The clause, though worded in positive language has a negative aspect. It is, in truth, F a provision prohibiting discrimination against the imported goodv. In the matter of levy of tax - and this is important to bear in mind - the clause tells the State Legislatures - "tax you may the goods imported.from other States/Union Territories but do not, in that process, G discriminate against them vis-a-vis goods manufactured localzv ". In short, the clause says: levy of tax on both ought to he at the same rate. This was and is a ringing declaration against the States creating what may he called "tax harriers" - or "fiscal harriers"', as they H

804 SUPREME COURT REPORTS [2016) 10 S.C.R.

A may he called - at or along their boundaries in the interest o.ffreedom of trade, commerce and intercourse throughout the territory of India, guaranteed by Article

301. As we shall present~v point out, this clause does not prevent in any manner the States from encouraging B or promoting the local industries in such manner as they think fit so long as they do not use the weapon of taxation to discriminate against the imported goods vis- a-vis the locally manufactured goods. To repeat, the clause bars the States from creating tax harriers - or fiscal harriers, as they can he called - around c themselves and/or insulate themselves from the remaining territories of India by erecting such "tariff walls". Part Xlll is premised upon the .assumption that so long as a State taxes its residents and the residents of other States uniformly, there is no infringement of D the freedom guaranteed by Article 301; no State would tax its people at a higher level mere~v with a view to tax the people of other States at that level. And it is this clause which has a crucial hearing on this case ..... "

E 270. Two Judge Bench noticed earlier cases as well as three Judge Bench judgment in Video Electronics (supra). In paragraph 23 this Court came to the conclusion that the total exemption granted in favour of small-scale industries in Jammu & Kashmir producing edible oil is not sustainable in law. The Court held that States are free to F encourage and promote the establishment and growth of industries within their States by all such means as they think proper but they cannot, in that process, subject the goods imported from other States to a discriminatory rate of taxation, i.e., a higher rate of sales tax vis-a-vis similar goods manufactured/produced within that State. This Court noticed that although a limited exception has no doubt been carved out in G Video Electronics but that exception cannot be enlarged lest it eat up the main provision. The Court while declaring the exemption as violative of Article 304(a) directed in paragraph 27 as follows:

JINDAL STAINLESS LTD. v. STATE OF HARYANA 805

[ASHOK BHUSHAN, J.]

"27. We declare that the exemption granted by A Notification No.SRO 93 of 1991 to local manufacturers/ producers of edible oil is violative of the provisions contained in Articles 301 and 304(a). At the same time, we direct that: (a) the appellants shall not he entitled to claim any amounts by way of refund or otherwise by B virtue of or, as a consequence of. the declaration contained herein and (b) that the declaration of invalidity of the impugned notification shall take effect on and from 1-4-1997. Till that date, i.e., up to and inclusive of 31.3.1997, the impugned notification shall continue to be effective and operative. Appeal allowed c in the above terms. "

271. The State exercises legislative power under Article 246 read with List 11 which is plenary in nature, when it has power to levy tax it D is also entitled to grant of exemption/remission of tax. There cannot be any dispute to the power of a State Legislature in providing for exemption/ remission in tax to a specified class based on an intelligible differentia. A Constitution Bench in State of Madhaya Pradesh vs. Abdeali, AIR 1963 SC 1237 need also to be noted. E

272. In the above case, in exercise of power under Section 4(3) of Madhya Bharat Sales Tax Act, 1950 exemption was granted from payment of Sales Tax in the following manner:

"2 ............ In exercise of the powers conferred by Section F 4, sub-section (3) of the Madhya Bharat Sales Tax Act, Samvat 2007 the Rajpramukh in supersession of the Notification 59(c)(t) P.R. 412-54, dated 27-5-1955 of this department has exempted from the payment of sales tax, in case of sale by the manufacturer or any member of his G family, the sale of all such shoes, chappals, country shoes and footwears which are hand-made and which are not manufactured on power machine and whose sale price does , not exceed Rs 12-8-0."

806 SUPREME . dl!RT REPORTS [2016] 10 S.CR.

A 2 73. The respondent was carrying on business of importing and selling different style of footwear in the State ofMadhaya Pradesh. The respondent contended before the Sales Tax Officer that he was not liable to pay any sales tax on sale of hand-made shoes, chappals and other types of footwear whose sale price did not exceed Rs 12-8-0 per pair. The claim of the respondent was rejected that the respondent does B not fulfill the conditions of the notification. In the writ petition filed by the respondent in the High Com1 one of the contentions was raised to the following effect:

c "3 ................ ..... The respondent further averred that if the exemption were held to he in favour of sales by a manufacturer or a member of his family and not on sales by an importer, then the notification would be discriminatory in nature and would contravene the D provisions of Article 304(a) of the Constitution. On these grounds the respondent prayed that the assessment order dated March 25, 1958 be quashed and the Sales Tax Officer be directed to exempt from tax such sales by the respondent as were covered by the exemption granted by the notification dated January 28, 1956. In E their reply to the writ petition the appellants pointed out that the notification dated January 28, 1956 did not in any way discriminate between footwear manufactured or produced in the State of Madhya Pradesh and footwear imported from outside, because F the conditions laid down in the notification were equally applicable to both types of goods and one of these conditions was that the sale which was to he exempted from tax must he by the manufacturer or a member of his family" G

274. The High Court allowed the writ petition. The State carried the matter to this Court. This Court noted that notification dated January 28, 1956 makes no discrimination between footwear manufactured or produced in the State of Madhya Pradesh and footwear imported from H

JINDAL STAINLESS LTD. v. STATE OF HARYANA 807

[ASHOK BHUSHAN, J.]

other States and the exemption granted by the notification depends on the fulfillment of three conditions mentioned therein. Following was held by this Court in paragraph 8:

"8. We now proceed to consider these alternative submissions of learned counsel for the appellants. We do not think that the notification dated Janumy 28, 1956 makes any such discrimination between foonvear manufactured or produced in the State of Madhya Pradesh and footwear imported from other States as is prohibited by Article 304(a) of the Constitution. We have c already pointed out that the exemption granted by the notification in question depend~ on the fulfillment of three conditions and all the three conditions are equally applicahle to footwear manufactured or produced in the State andfootlvear imported.from other States. It is D ohvious that the exemption is for the protection and benefit of small manufacturers who make hand-made shoes of small value and who may he unahle to compete with large-scale manufacturers o.ffootwear made on machines. Such a classification in the interests of small manufacturers has often heen made and upheld hy this E Court. (See Orient Weaving Mills (P) Ltd 1~ Union of India [Petition No. 110 of 1961 decided on February 28, 1962.}; and British India Corporation Ltd. v. Collector of Central Excise, Allahabad [Petition No. 94 of 1955 decided on August 20, 1962.]." F

275. In the above case submission of the assessee was that in the event benefit of exemption is not granted to the asses see the exemption notification may itself be invalid creating a discrimination between similar manufacturer of outside the State traveling in the State and selling hand- G made shoes wherein small manufacturer has not to travel in order to get the benefit of the exemption. The Comi rejected the above argument stating that it is really an argument ofinconvenience. In any view of the matter, this Court in the above case held that assessee did not fulfill the H

808 SUPREME CJURT REPORTS [2016] 10 S.C.R.

A condition of the notification, i.e., sale was exempted only when it is by a manufacturer or a family member of his family. Hence, there was no error in assessing him to the tax. The issue whether it was pem1issible to grant exemption to local goods and not to grant such exemption to the goods coming from outside was not the issue in the above case. In the B above case, this Court has noticed that there was no discrimination with regard to the exemption in regard to the goods manufactured outside the State or within the State. The above case, thus, does not decide the issue which has cropped up before us.

276. The power of exemption flows from legislation enacted by tl~eState Legislature, wherever exemptions are granted, nommlly, statutes c so provide with legislative policy. What is exemption, has been succinctly explained by this Court in Union ofIndia and others vs. Wood Papers Ltd. And another, 1990(4) SCC 256 following was stated in paragraph 4:

D "4 ..... Literally exemption is freedom from liability. tax or duty. Fiscally it may assume varying shapes, specially, in a growing economy. For instance tax holiday to new units, concessional rate of tax to goods or persons for limited period or with the specific objective etc. That is why its construction, unlike charging provis,ion, has to be tested on different touchstone. In fact an exemption provision is like an exception and on normal principle of construction or interpretation of statutes it is construed strictly either because of lr!gislative intention or on economic justification of inequitable burden or progressive approach of.fiscal provisions intended to augment State revenue.

277. Reverting to provision of304(a), for a legislation to be within four comers of 304(a), two conditions are necessary to be fulfilled (1) State can impose on goods imported from other States any tax to which similar goods manufactured or produced are subject, (2) so however, as · not to discriminate between goods so imported and goods so manufactured H

JINDAL STAINLESS LTD. v. STATE OF HARYANA 809

[ASHOK BHUSHAN, J.]

or produced. The first condition is that goods manufactured or produced in the State are subject to tax, when exemption is granted in payment of tax to a specified category on fulfillment of certain condition, it pre- supposes that goods are subject to tax. The exemption granted on a specified class of goods, subject to condition, does not militate against the tax to which the goods are subject. Thus in cases of grant of exemption to a specified category on conditions mentioned therein, first condition as noted above is not breached. Now coming to the second condition i.e. so, however, as not to discriminate goods exported and goods locally manufactured or produced. Goods exempted fall in a different category then the bulk of goods produced and manufactured in the State. Exemptions under different statutes have been upheld due to legislative c policy as delineated in a particular statute. In the Video Electronics, three Judge Bench upheld the exemption noticing the fact that the exemption granted was to a special class for limited period on specific conditions of maintaining the general rate of tax on the goods manufactured by all those producers in the State who do not fall within that category. Video Electronics, however, further states that if tax is imposed in a colourable manner intentionally or purposely to create unfavourable bias by prescribing a general lower rate on locally manufactured goods either in the shape either of general exemption to locally manufactured goods or in the shape oflower rate of tax, such an exercise of power can always be struck down by the Courts. Following was observed in paragraph 30:

"These cases were not at all concerned with granting of exemption to a special class for a limited period on specific conditions of maintaining the general rate of tax on the good1· manufactured by all those producers in the State who do not.fall within the exempted category at par with the rate applicable to import- ed goods as we have read these cases. Hence, it was not necessary in those decisions to consider the problem in its present aspect. I(. however, the said power is exercised in a colourahle manner intentionally or purpose~v to create unfavorable bias by prescribing a general lower rate on locallv manufactured goods either in the shape of H

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

A general exemption to local~v manufactured goods or in the shape of lower rate of tax, such an exercise ofpower can always be struck down by the courts. That is not the situation in the instant cases. The aforesaid decisions, therefore, are not authorities for the general proposition B that while, maintaining the general rate at par, special rates for certain industries for a limited period could not be prescribed by the States. "

278. Two Judge Bench in Shree Mahavir Oil Mills had noticed c earlier cases including Video Electronics. It was observed that exception carved out in Video Electronics cannot be widened or expanded to cover cases of a different kind, following observation was made in Shree Mahavir Oil Mills in paragraph 23:

D "For the purpose of this case, it is not necessary for us to say anything about the correctness of Video Electronics. Suffice it to say that the limited exception carved out therein cannot be widened or expanded to cover cases of a different kind. It must be held that the E total exemption granted in favour of small scale industries in Jammu & Kashmir producing edible oil [there are no large scale industries in that State producing edible oil] is not sustainable in law. "

279. The exception carved out in Video Electronics upheld exemption notification where it is limited to specified type with short period. The general exemption and exemption in wider ten11 has never been approved. The ratio of Video Electronics has to be read as justifying only exemption limited to a specified category for a short period. G Exemption in general terms of unlimited in nature cannot be approved. The exemption cannot be used as measure of discrimination between goods imported from other States and goods manufactured or produced in the State. The exemption has to be a limited exemption to the tax which is imposed on the similar goods. ln the event exemption is total H

JINDAL STAINLESS LTD. v. STATE OF HARYANA 81 I [ASHOK Bl-IUSHAN, J.]

and general in nature, the said exemption is clearly violative of Article A 304(a). Similarly, set off of a paiiicular tax which is general and not limited to specified category has also to be disapproved. In view of above, the ratio of three Judge Bench judgment in Video Electronics have to be read to the above extent and with the limitation as noticed above.

280. We, thus, come to the conclusion that State Legislature in B exercise of its taxing power can grant exemption/set off to local goods. only to a limited extent based on intelligible differentia which is not in the nature of general/unspecified exemption. The exemption/set off which tend to become general exemption violates Article 304(a). c G. ENTRY 52 OF LIST II OF VIITH SCHEDULE OF THE CONSTITUTION

281. Legislative field under State List, Entry 52 is 'taxes on the entry of goods into a local area for consumption, use or sale therein'. D The Entry 52 itself demonstrate that there are inherent limitations as regard the nature and character of the levy. ln order to have a levy of tax to come within the purview of Entry 52, such levy has to satisfy three conditions: (i) The levy under the State Entry must be 'on the entry of goods' E which constitutes the taxable events. (ii) The levy in question must be in respect of'into a local area'. The local area has been defined as ' an area administered by local body like a municipality, a district board, a local board, a union board, a panchayat or the like'. F (iii) The goods must enter into the local area for the purpose of 'consumption. use or sale therein'.

282. The expression Entry Tax has to be understood in its plain meaning and also in the backdrop of historical imposition of taxes of this kind. The tax commonly known as octroi was in force in l 90 I and it G was subsequently included in VI1 1h Schedule of List II of Government of India Act, 1935. The Constitution oflndia does not use the word octroi. List I Entry 89 provides for 'terminal tax on goods and passengers carried by railways, sea or air; taxes on railway fares and flights'. H

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

A 283. Taxes levied under Entry 52 is commonly known as entry tax. While noticing the Constituent Assembly debates, we have seen that freedom of trade and commerce was envisaged as freedom from border taxes, custom barriers etc., which was prevalent in Indian States. Section 297of1935 Act had contained a prohibition for imposing tax.es B on entry of goods from other States. The Constitution framers decided that States have to be conceded some taxing powers for revenue purposes and for purpose of carrying out various development projects. Article 301 provides freedom of trade, commerce and intercourse throughout the.ten-itory of India, simultaneously, exception to such freedom have been engrafted in Article 302 - 306. 284. Article 304(a), although c pennits the State to levy tax but it is hedged with two important conditions, which we have already noticed above. Article 304(a) thus expressly pem1its the State to impose any tax which includes entry tax also subject to conditions mentioned therein.

285. The Entry Tax is related to movement of goods. Movement D of goods have been treated to be an integral part of trade and commerce. InAtiabari, referring to the content of freedom provided by Article 301, it was held that it certainly includes movement of trade following was observed by Gajendragadkar, J., at Page 859:

E "the conclusion appears to us to be inevitable that the content of.freedom provided for by Article 301 was larger than the freedom contemplated by s. 297 of the Constitution Act of 1935, and whatever else it may or may not include, it certainly includes movement of trade F which is of the very essence of all trade and is its integral part. lf the transport or the movement of goods is taxed solely on the basis that goods are thus carried or transported that. in our opinion. directly affects the freedom of trade as contemplated by Article 301." G

286. This Court, while construing the Karnataka tax on entry of goods into local area for consumption, use or sale therein Act, 1979 in State of Karnataka Vs. Hansa Corporation 1980 4 SCC 697 has held that the tax on the entry of goods falls within the inhibition of H

JINDAL STAINLESS LTD. v. STATE OF HARYANA 813

[ASHOK BHUSHAN, J.]

Article 301. Following was observed: A

"To the extent the impugned tax is levied on the entry of goods in a local area it cannot be gainsaid that its immediate impact would be on movement of goods and the measure would fall within the inhibition of Article 301."

287. A law, made under the subject matter of Entry 52 List II, would thus clearly be a tax on the movement of goods and thus would fall within the purview of the inhibition of Article 301 and the said law can only be saved if it complies with the Article 304. Learned counsel for the States have contended that Entry Tax does not prohibit the entry of goods and tax is collected, only subsequently and nonnally, on the basis of returns filed by the persons taking the goods into a local area. D Hence, there is no restriction on the borders of a State or border of a local area. It is contended that on the entry of goods merely a transit slip is given hence there is no barrier to the flow of goods. It is well settled that there is a clear distinction between incidence of a levy and the machinery provisions contained in law to give effect to such levy. The incidence oflevy is on entry of goods hence incidence of tax is complete as the goods enters into the local area, whether the tax. is collected immediately or subsequently has no relevance with th.e incidence of taxation.

288. The trade and commerce being contemplated to be free .. throughout the territory of India, any restriction on movement of goods per se has to be treated as violating Article 301 unless the tax is saved by exceptions provide(fin )'art Xlll. However, there may be a tax which though complies Article 304(a) but still contains the restriction to trade and commerce which is an area where much difficulty has been felt. We have already concluded that all taxes which comply with Article G 304(a) need not to be routed through Article 304(b) and it is only those taxes which contain restrictions on trade, commerce and intercourse which need to be routed through 304(b). This can be demonstrated by taking a simple example. An Entry tax legislation is passed complying Article 304(a) levying Entry Tax on goods imported from outside the H

814 SUPREME COURT REPORTS [2016] I 0 S.C.R.

A State as well as local goods at the rate of one percent of value of goods. Normally, such levy cannot be treated as any restriction on the trade and commerce and shall pass muster of Article 304(a) and need no compliance of A1iicle 304(b ). But in a case where, Entry Tax is levied to the extent of hundred per cent of the value of goods both on imported goods and B locally produced or manufactured goods, the said levy is clear restril.:tion on trade and commerce and has to be routed through Article 304(b). For taking out such levy, from the effect of Article 301 both 304(a) and 304(b) needs to be complied with.

289. We thus conclude that Entry Tax legislation which is a tax on c movement of goods, trade and commerce is inhibited by Article 30 I and such State legislation can be saved under Article 304. Whether a paiiicular Entry Tax Legislation is valid and does not contravene Part XIII of the Constitution, can be decided only after looking into the nature, content and extent of legislation and its impact on trade. commerce and intercourse. D

H. MEANING OF "RESTRICTION" AS USED IN PART XIII

290. Freedom of trade, commerce and intercourse throughout the territory of India is guaranteed under Article 301. The framers of the Constitution were conscious that the freedom cannot be absolute and it may be necessary in several circumstances to restrict the freedom in public interest. Article 302 - 3 06 enumerates exceptions to the freedom as guaranteed under A1iicle 30 l. What is the meaning and contents of word 'restriction' as used in Paii XIII? The word 'restriction' has also been used under Article 19 (2) to 19 (6) while empowering the State to impose reasonable restrictions on the fundamental rights guaranteed under A1iicle 19( I )(a) to 19 (I )(g). The word 'restriction' is defined- in New Webster Dictionary in the following manner:

"The act of restricting, or state of being restricted; 1ha1 which restricts: a restraint: limitatio11."

JINDAL STAINLESS LTD. v. STATE OF HARYANA 815

[ASHOK BHUSHAN, J.]

291. The Black's Law Dictionary also defines 'restriction' in A following manner:

"restriction. I. Confinement within hound1· or limits; a limitation or qualification. 2.A limitation (esp. in a deed) B placed on the use or enjoyment of property. "

292. The restriction thus is an act to limit, confine and restrain. The 'restriction', in Part XIII has been used in the context of restriction to freedom of trade, commerce and intercourse. The law, which restrict C or limit such right are called restrictions.

293. In the present case, since we are concerned with the taxing legislation, our discussions shall confine to find out the nature ofreshiction which can be put on the freedom of trade and commerce by tax legislation. The Constitution Bench of this Court in Firm A. T.B. Mehtab and Majid D and Company V. State of Madras and Others 1963 2 SCR 435 at P. 442 has stated 'it is, therefore, now well settled that taxing laws can be restrictions if they hamper the flow of trade and if there are not what can be tenned to be compensatory tax or regulatory measures ........... ". In Indian Cement and Others V. State of Andhra Pradesh 1988 1 E SCC 743 this Court has held that as a result of favourable or unfavourable treatment by way of taxation the course of flow of trade gets restricted:- either adversely or favourably. Following observations were made in para 12, 14:- "12. There can he no di.1pute that taxation is a deterrent against free flow. As a result of favourable or unfavourable treatment hy way of taxation, the course of.flow of trade gets regulated either adversely or favourably. lf the scheme which Part Xlll guarantees has to be preserved in national interest, it is necessary that the provisions in the article must he strictly complied with. One has to recall the farsighted observations of Gajendragadkar, J. in Atiabari Tea Co. case and the observations then made ohvious~y apply to cases of the type which is now hefore us. " H

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

A "14. Variation of the rate of interstate sales tax does affect free trade and commerce and creates a local preference which is contrary to the scheme of Part XIII of the Constitution. The notification extend~ the benefit even to unregistered dealers and B the observations of Hegde, J. on this aspect of the matter are relevant. Both the notifications of the Andhra Pradesh Government are, therefore, had and are hit hy the provisions of Part XIII of the Constitution. They cannot he sustained in law. "

c 294. Now, we proceed to efamine Pait Xlll of the Constitution in so far as it expressly refer to various acts, actions which are treated to be restrictions in freedom of trade and commerce. Article 302 - 306 contain provisions, by which restriction can be put on the freedom of trade and commerce. Some restrictions have been expressly mentioned in said articles. Article 303 provides for 'restrictions on the legislative powers of the Union and of the States with regard to the trade and commerce'. As per Article 303, sub-article Clause 1 following are treated to be restrictions:- (i) Any law giving or authorising the giving of any preference to one State over another, (ii) Any law making or authorising the making of, any discrimination between one State and another.

295. Thus preferences and discrimination both are treated as restriction in the context of freedom of trade and commerce. Coming to F Article 304(a) any law framed by legislature is restriction on freedom of trade and.commerce which:- a). lmposes on goods imported from other State, any tax when no such tax is imposed on similar goods manufactured or produced in that State, G b). Imposes on goods imported from other States any tax which discriminates between goods so imported and goods so manufactured or produced.

JINDAL STAINLESS LTD. v. STATE OF HARYANA 817

[ASHOK BHUSHAN, J.]

296. Again in Article 304 sub-clause(b) State is empowered to A impose reasonable restrictions in the public interest. Article 306, as it was initially enacted, contained heading 'power of certain States in Part B of the Schedule to impose restriction on trade and commerce'. Article 306 pern1itted any tax on duty on import of goods into the State from other States or on the export of goods from the State to another States B which was being imposed by a State specified in Part B to continue by an agreement between Government of India and Government of States for a period, not exceeding ten years. The article contemplates continuance of tax or duty which was treated to be restriction and was allowed to continue only with an agreement for a maximum period of ten years. c

297. We have already noticed a series of judgments of this Court holding that imposition of discriminatory taxes violates Article 304(a). Such discriminatory tax imposed by State have been struck down as being violative of Article 304(a) reference is made to the judgment of this Court in State of Madhya Pradesh V. Bhailal Bhai and Others D 1964 (6) SCR 261, Shree Mahavir Oil Mills and Another Vs. State of Jammu & Kashmir and Others 1996 11 SCC 39.

298. The restriction which can be imposed, as contemplated by above provisions oflaw, have to be such limitation on the right of freedom of trade and commerce which should not be arbitrary or of excessive nature beyond what is required in the context of the power. The Constitution Bench, speaking through Patanjali Sastri, CJ., in State of Madras Vs. V. G Row 1952 SCR 607 while considering the concept of reasonable restriction under Article 19 has stated:- "ft is important in this context to hear in mind that the test of reasonahleness. wherever prescrihed, should he applied to each individual statue impugned. and no ahstract standard, or general pattern of reasonableness can he laid down as applicahle to all cases. The nature of the right alleged to have been infringed, the underlying purpose of the restrictions imposed, .the extent and urgency of the evil sought to he remedied thereby, the disproportion of the imposition, the prevailing conditions at the time. should all enter into the judicial verdict. " H

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

299. Although the word 'restriction' may also in certain circumstances includes prohibitions but restriction is not to be understood with complete prohibition or stoppage of business, effect of tax when it hinders the trade & commerce, it becomes restriction and prohibited under Aiiicle 301. This Court in Laxmi Khandsari Etc. Vs. State of B U.P. 1981 (3) SCR 92. While considering the concept of reasonable restriction has held that reasonable restriction would depend on the nature and circumstances of the case following was laid down in page 105:

"As to what are reasonahle restrictions would naturally c depend on the nature and circumstances of the case, the character of the statute, the ohject which it seeks to serve, the existing circumstances, the extent of the evil sought to be remedied as also the nature of restraint or restriction placed on the rights of the citizen. It is difficult D to lay down any hard or.fast rule of universal application hut this Court has consistently held that in imposing such restrictions the State must adopt an objective standard amounting to a social control by restricting the rights of the citizens where the necessities of ihe situation demand. " E

300. Further, it was held in Laxmi Khandsari Etc. Etc. Vs. State of U.P. 1981 (3) SCR 107 that incun-ing of the loss in trade is not a ground to trade restrictions as un-reasonable. Following was laid down: F "Finally. in determining the reasonableness of restrictions imposed by law in the.field of industry, trade or commerce, the mere fact that some of the persons engaged in a particular trade may incur loss due to the G imposition of restrictions will not render them unreasonable hecause it is manifest that trade and industry pass through periods of prosperity and adversity on account of economic. social or political factors. Jn a free economy controls have been introduced H

JINDAL STAINLESS LTD. v. STATE OF HARYANA 819

[ASHOK BHUSHAN, J.]

to ensure availahility of consumer goods like food- A stufj.i·, cloth or the like at a fair price and the fixation of such a price cannot he said to be an unreasonable restriction in the circumstances. "

301. This Court, in G K. Krishnan and Others Vs. State of Tamil Nadu and Others, (1975) 1 SCC 375 has held that the regulation like rules of traffic facilitate the freedom of trade whereas restriction impede that freedom, it was held that a discriminatory tax against outside goods is not a tax simpliciter but is a barrier to trade and commerce. Following was laid down in para 15 and 27: c

"15. Regulations like rules of traffic facilitate freedom of trade and commerce whereas restrictions impede that freedom. The collection of toll or tax for the use of D roads, hridges, or aerodromes, etc., do not operate as harriers or hindrance to trade. For a tax to hecoine a prohihited tax, it has to be a direct ax, the effect of which is to hinder the movement part of the trade. ff the tax is compensatory or regulatory, it cannot operate as a restriction on the freedom of trade or commerce. " E

"2 7. A discriminatory tax against outside goods is not a tax simpliciter but is a barrier to trade and commerce. "

302. A Constitution Bench in Federation ofHotel and Restaurant Association of lndia, Etc. Vs. Union of lndia and Others (1989) 3 sec 634 was considering the validity of a taxing law in the context of Article 14 of the Constitution. The Constitution Bench held that legislature enjoys a wide latitude in the matter of selection of persons, subject matter, G events etc. for taxation. Further, it was held that some excessiveness of taxation or its imposition tends towards diminution of earnings or profits, does not violate rights under Article 19 (1) (g):

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

A "46. It is now well settled that though taxing laws are not outside Article 14, howeve1; having regard to the wide variezv of diverse economic criteria that go into the formulation of a fiscal policy legislature enjoys a wide latitude in the matter of selection of persons, B subject matter, events etc., for taxation. The tests of the vice of discrimination in a taxing law are, accordingly, less rigorous. " Further in para 52 following was stated: "62. Then again, the mere excessiveness of a tax or c even the circumstance that its imposition might tend toward~ the diminution of the earnings or profits of the persons of incidence does not, per se, and without more, constitute violation of the rights under Article 19(l)(g)."

303. lt is, however, relevant to note that the issue as to whether the restriction contained in any taxing statute impede the freedom of trade and commerce is a question which will vary from case to case. The, nature of restriction and the magnitude of the restriction are all relevant factors to detennine whether trade is impeded or not. It is well E settled that provisions in a statute which is regulatory in nature which facilitates the trade have not been treated as restriction impeding the freedom of trade and commerce. Traffic regulations, registration of motor vehicles for plying in the State, collection of toll have not been treated to be restriction in freedom of trade and commerce.

304. The above discussion makes it clear that what has been expressly prohibited inArticle 302- 306 are all restrictions in the freedom of trade and commerce which shall obviously contravene Article 301, but there may be other instances when a law is treated to be restriction although not expressly enumerated in Part 302 to 306. We may clarify G that Article 301 is not attracted in a legislation which does not contain any kind of restriction to the freedom of trade and commerce. The question of applicability of Part Xlll arises only when the kgislation contains restrictions which hamper, restrict, impede and adversely affect the freedom of trade and commerce directly & immediately.

JfNDAL STAINLESS Lro. v. STATE OF HARYANA 821

[ASHOK BHUSHAN. J.]

I. WHETHER 'DIRECT AND IMMEDIATE EFFECT TEST' A AS LAID DOWN IN ATIABARI AND APPROVED IN AUTOMOBILE TRANSPORT IS NO LONGER A CORRECT TEST

305. Gajendragadkar, J., speaking for majority in Atiabari Tea Company laid down that the restrictions. which directly and immediately B impede the trade are hit by Article 301. Following was held at page 860:

"Thus considered we think it would be reasonable and proper to hold that restrictions fi'eedom from which is guaranteed by Article 301, would be such restrictions c as directly and immediately restrict or impede the free .flow or movement of trade. Taxes may and do amount to restrictions; but it is only such taxes as direct~v and immediately restrict trade that would fall within the purview of Article 301." D

306. Das J .,in Automobile Transport also approved the direct and immediate effect test. Following was stated at page 523:

E " .... For the tax to become a prohibited tax it has to be a direct tax the effect of which is to hinder the movement part of trade. "

307. Subba Rao, J., concurring with the above view has also stated at page 550:

".... If a law directly and immediatefcy imposes a tax for general reFenue purposes 011 the movement of trade, it G would be violating the freedom. Qn the other hand, if the impact i11 indirect and remote. it would be unobjectionable. "

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308. Gajendragadkar, J., in Atiabari Tea Company had also referred to two Privy Council judgments, namely, James Vs. Commonwealth of Australia (1936) A.C. 578 and judgment of Lord Porter in, Commonwealth ofAustralia and Others Vs. Bank of New South Wales and Another (1950) A.C. 235. It is further relevant to note that Gajendragadkar, J., was conscious of the fact that political and B historical background of the federal polity adopted by Australian C01mnonwealth and the setting of the Constitution of India, the distribution of powers and general scheme is entirely different. The caution noted by Gajendragadkar, J., was in following words:

c "Before we conclude we would like to refer to two decisions in which the scope and effect of the provisions of S. 92 of the Australian Constitution came to he considered. We have deliheratelv not referred to these D decisions earlier because we thought it would be unreasonahle to refer to or rely on the said section or the decisions thereon for the purpose of construing the relevant Articles of Part XIII of our Constitution. It is commonplace to say that the political and historical background of the federal polity adopted by the E Australian Commonwealth, the setting of the Constitution itself, the distrihution of powers and the general scheme of the Constitution are different, and so it would not he safe to seek for guidance or assistance from the Australian decisions when we are called upon to F construe the provisions of our Constitution. "

309. It is useful to refer to observations made by Lord Porter in Commonwealth ofAustralia & others(supra), which are in following words: G

"Jn this labyrinth there is no golden thread. But it see;ns that two general propositions may he accepted; (!.) that regulation of trade, commerce and intercourse among H

JINDAL STAINLESS LTD. v. STATE OF HARYANA 823

[ASHOK BHUSHAN, J.]

the States is compatible with its absolute freedom, and A (2.) that s.92 is violated only when a legislative o,. executive act operates to restrict such trade, commerce and intercourse directly and immediately as distinct.from creating some indirect or consequential impediment which may fair~v be regarded as remote. " B

310. Shri Rakesh Dwivedi, learned Senior Advocate has contended that the Australian cases laying down 'direct and immediate effect test', which were relied by this Court in Atiabari, having been subsequently not followed by Australia High Court itself, the direct and immediate c effect test should not be recognised for purposes of Article 301. Shri Dwivedi has referred to Cole Vs. Whitfield (1988) 78 ALR 42. He submits that 7-Judges Bench in Cole Vs. Whitfield has held that the operation test has failed to achieve unanimity. Shri Dwivedi submits that now the test which has been approved both by Australian High Court D and U.S. Supreme Court is non-discriminatory test. He submits that preventing preferences and discrimination is the main factor for achieving the goal of creating free trade as accepted in Cole Vs. Whitfield. He submits that in Cole Vs. Whitfield following observations were made by the Court: E

"Jn relation to hath fiscal and non~fiscal measures, history and context alike favour the approach that the freedom guaranteed to interstate trade and commerce under s. 92 is freedom from discriminatory burdens in the protectionist sense already mentioned. .,

311. James Vs. Commonwealth ofAustralia (supra) was treated to have provided support for the development of the doctrine of criteria of operation. Cole Vs. Whitfield gave various reasons for disapproving the operation theory. Some of the reasons given are as follows: "First, in some respects the protection which it offers to interstate trade is too wide. Instead of placing interstate trade on an equal footing with intrastate trade, the H

824 SUPREME C0URT REPORTS [2016] 10 S.C.R.

A doctrine keeps interstate trade on a privileged or preferred.footing. immune from burdens to which other trade is subject. "

"The second major reason for rejecting the doctrine as B an acceptable interpretation of s. 92 is that it fails to make any accommodation for the need for laws genuinezy regulating intrastate and interstate trade. The history of the movement for abolition of colonial protection and for the achievement of intercolonial free c trade does not indicate that it was intended to prohibit genuine non-protective regulation of intercolonial or interstate trade. The criterion of operation makes no concession to this aspect of the section '.I· history. Jn :he result there has been a continuing tension between the D general application of the formula and the validity of laws which are purezy regulatory in character. Judged by reference to the doctrine, the validity of a regulatory law hinged on whether it imposed a burden on an essential attribute or on a mere incident of trade or commerce. E

312. As noted above, our Constitution framers were well aware of the provisions of the Australian Constitution and the difficulties which arose in the Australia and different views expressed on the interpretation of Section 92, the Constitution framers though took inspiration from Section 92 but they did not stop there, rather they expressly provided for qualification to the right and freedom guaranteed under Article 30 I by Article 302 - 306. Learned counsel for the State also in their submissions have contended that the Australian judgments pertaining to Constitution of Australia as well as the judgments of the U. S. Supreme Court are not directly applicable with regard to the interpretation of Part Xlll. However, now it is contended by Shri Dwivedi that since the Australian High Court has now abandoned the operation test, this Court may also review the test as was laid down in Atiabari.

JINDAL STAINLESS LTD. v. STATE OF HARYANA 825

[ASHOK BHUSHAN, J.]

313. We have already noticed that in Atiabari in all the three opinions expressed by Sinha, C.J., and Gajendragadkar, J., and Shah, J., it was noted that in our Constitution, there is a departure from Australian Constitution and the Australian judgments are not relevant. Justice Gajendragadkar, has refen-ed to two Privy Council judgments dealing with Australian Constitution to know how judicial minds have responded to the challenge presented by similar provisions. In the above spirit, references of those two Privy Council judgments were made. Thus Gajendragadkar, J ., did not base his judgment on the test, which was laid down in the Australian judgments but found justification for his conclusion from the aforesaid judgments. Further, the primary reason why the Australian High Comi in Cole v.~. Whitfield rejected the 'trade and c immediate effect test' is, that because the freedom guaranteed under Section 92 applies only "between the States" i.e. to the interstate trade, i.e., The doctrine accordingly ended up discriminating against intrastate trade as it provided some sort of immunity to interstate transactions which intrastate transaction did not enjoy. We have already extracted D the reasons given by Cole Vs. Whitfield, whereas in Part Xlll of the Constitution, the Constitution framers had provided for non-discriminatory taxation between the intrastate and interstate trade with provision for dealing with all situation including a case whether restriction has to be imposed, on both interstate or intrastate trade that is Article 304(b). E Although the Australian High Court rejected the idea of 'direct and immediate effect test' as being artificial, this Court has continued to adopt the said doctrine whenever legislation is decided on the touchstone ofreasonable restriction and the doctrine has been applied consistently in the vast number of cases for decades which have stood the test of time. F

314. Shri Dwivedi has also referred to American cases and contends that free trade immunity, which was propounded in Spector Motor Services, Inc. Vs. O'Connor 430 U.S. 289(1951) had been overruled in Complete Auto Transit Vs. Brady 430 U.S. 274(1977). Shri Dwivedi submits that in Complete Auto, it was held that 'it was not G the purpose of the commerce class to relieve those engaged in interstate commerce from their just share of State tax burden even though it increases the cost of doing business'. Shri Dwivedi, further relies on State of Maryland v.~. State of Louisiana 451 U.S. 725 where it was observed, "one of the fundamental principles of commerce class H

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

A jurisprudence is that no State, consistent with the commerce class, may or impose tax which discriminates against interstate commerce .......". Shri Dwivedi submits that the U.S. Supreme Court has also moved to non-discriminatory test. He submits that even in Cole Vs. Whitfield, the Complete Auto Transit Vs. Brady was noticed. The commerce class of the American Constitution Article 1, Section 8, Clause 3 provides "to B regulate commerce with foreign nations and among the several States and with the Indian tribes;" Part Xlll of the Constitution has not adopted the American model and the interpretation on the commerce class is hardly relevant for interpretation of Part Xlll.

315. Non-discriminatory taxation by State in reference to interstate and intrastate trade is ingrained in Atticle 304(a) itself, and no abstract theory needs to be referred to for following Non-discriminatory Theory.

316. We are thus of the view, that the concept as evolved in Australia and America with regard to freedom of trade and commerce, D cannot be adopted in respect of interpretation of our Constitution, despite arguing against the relevance of foreign judgments, the States themselves are now relying on the foreign judgments in context of 'direct and immediate effect test theory'. The change in the legal position in Australia and America does not have any bearing on the Indian legal position as our Constitutional framework is different from those countries. E

317. It is further contended before us that sometimes, it becomes difficult to draw a line as and when, legislation/taxation shall impede freedom of trade, commerce and intercourse and it becomes difficult for Court to apply any objective criteria for finding out the demarcation line. No hard and fast fommla can be laid down to determine as to F whether a particular legislation/taxation violates ,rights of freedom of trade and commerce under Article 301. It is for the Court to examine facts of each case and come to a conclusion. In this context, observation ofSubba Rao, J., is pertinent to be referred to. Referring to observation of Dixson, C.J., following was stated by Subba Rao, J.: G

"Dixon, C.J., in Commonwealth Freighters Proprietary Limited v. Sneddon, gives a very cogent answer to such an argument in a different context. The learned chief Justice said: H

JINDAL STAINLESS LTD. v. STATE OF HARYANA 827

[ASHOK BHUSHAN, J.]

"Highly inconvenient as it may he, it is true of some legislative powers limited hy definition, whether according to subject-matter to purpose or otherwise, that the validity of the exercise of the power must sometimes depend on facts, facts which some how must he ascertained hy the court responsible for deciding the validity of the law...... All that is necessary is to make the point that if a criterion of constitutional validity consists in matter of fact, the fact must he ascertained hy the court as hest it can, when the court is called upon to pronounce upon validity. " c I entirely agree with these observations. It is common place to point out that intricate prohlems come he/ore a court involving decision on different and complicated a.1pects of human activity. Questions involving science, medicine, engineering, geology, biology, economics, Psychology, etc. all come for judicial scrutiny, and I D have never heard any court saying that it is difficult to decide upon such a question and, there.fore, the proceeding raising such a question is outside the jurisdiction of such a court. Jn saying this, I am not ignoring the difficulties inherent in a problem offzxing the rate of taxes hy a court. Experience shows that the court applies certain presumptions, such as that of the wisdom, knowledge and the good intentions of the Legislature, and does not also meticulousZv go in to the question, hut onzv looks at the hroad features. On the argument of learned counsel when it is permissible and possihle for a court to ascertain whether a tax is fiscal or regulatory, I do not see how it hecomes impossible, though it may he difficult, to hold whether a .fiscal tax is reasonahle or not. The distinction lies not in the nature of the enquiry hut -only in degree. That apart, no restriction, if it is unreasonahle, can be more deleterious to the freedom than the imposition of.fiscal burden on it, which may in certain circumstances destroy the very freedom." H

828 SUPREME COURT REPORTS [2016] I 0 S.C.R.

318. In view of foregoing discussion. we are of the view that submission raised on behalf of the learned counsel for the State that 'direct and immediate effect test' is no longer a correct test, cannot be accepted. As observed above. each case has to be determined on facts of each case. The 'direct and immediate effect test' as laid down in B Atiabari and approved in Automobile Tramport still holds good.

J. COMPENSATORY TAX THEORY 3 19. Two related issues pertaining to a tax which is compensatory c in nature have been framed by us in the beginning of hearing. Those are a part of Question No.2, i.e., ''Can a tax which is compensatory in nature also fall foul Article 30 l of the Constitution?" and "What are the tests for determining whether the tax or levy is compensatory in nature''? Learned counsel appearing for the parties have made elaborate submissions on the concept of compensatory tax and either related issues. D Most of the learned counsel appearing: for the petitioners as well as respondents-States have expressed their reservation. regarding compensato1y tax theory. Majority of counsel are at agreement that judicial evaluation of compensatory tax theory was uncalled for and the compensatory tax theory is not compatible with a constitutional provision of Part XIII. It is submitted that compensatory theory has been judicially evolved by Seven Judge Bench in Automobile Transport case (supra) and the majority opinion had upheld the provisions of Rajasthan Motor Vehicles Taxation Act, 1951 holding it to be compensatory tax. In view of the serious reservation expressed by the learned counsel for the parties on the compensatory tax theory, it is necessa1y for us to examine the concept in some detail.

320. The compensatory tax theory as evolved in Automobile Tra11spo11 was soon doubted by the Constitution Bench in Kflyerbari Tea Company Ltd. v. State of A.5.rnm, (1964) 5 SCR 975. Gajendragadkar, J. looking into the nature ofthe compensatory tax theory. G opined that the same is required to be reconsidered by a larger Bench. he, however, noted that since the legislation was not tried to be saved on the basis of compensatory tax theory, the question was not further pursued. Gajendragadkar, J. made following observation:

JINDAL STAINLESS LTD. v. STATE OF HARYANA 829

[ASHOK BHUSHAN, J.]

" According to the majority view in the case of Atiabari A Tea Co., if an Act is passed under Art. 304(h) and its validity is impeached, then the State may seek, to justify the Act 011 the ground that the restrictions imposed by it are reasonable and in the public interest, and in doing so, it may, for instance, re(v on the fact that the taxes B levied by the impugned Act are compensatory in character. On the other hand, according to the majority decision in the Automobile Transport (Rajasthan) case, compensatory taxation would be outside Art.301 and cannot therefore, fall under Art.304(b). If in the present case it had been urged before us that the tax levied by c the Act is compensatory in character, it would have been necessary to consider the question once again hy constituting a larger Bench. "

321. The question as to what are the tests for detennining whether a tax or levy is compensatory in nature becomes secondary when we have to examine sustainability of the compensatory theory itself.

322. What is the tax ? What are the ingredients of taxation ? Thomas M. Cooley in "A Treatise on the Constitutional Limitations" E defined the taxes in following words:

"Taxes ar~ defined to he burdens or charges imposed hv the legislative power upon persons or property, to raise money for public purposes. The power to tax rests F upon necessity, and is inherent in every sovereignty. The legislature of every .fi·ee State will possess it under the general grant of legislative power, whether particularly specified in the constitution among the powers to he exercised by it or not.. " G

323. Chief Justice, Marshall in M'Culloch vs. State ofMaryland, 17 US 316 (1819) while examining the nature of taxing power stated:

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

A "It is admitted, that the power ol taxing the people and their property, is essential to the very existence of government, and may he legitimately government may choose to carry it. The only security against the abuse of this power, is found in the structure of the government B itself In imposing a tax, the legislature acts upon its constituents. This is, in general, a sufficient security against erroneous and oppressive taxation. "

324. A Seven Judge Bench of this Court in Commissioner, Hindu c Religious Endowments, Madras vs. Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt, 1954 SCR 1005: AIR 1954 SC 282 has given definition of tax which has been repeatedly quoted and relied by this Court in large number of subsequent judgments. In paragraph 45 following was stated: D "45. A neat definition of what "tax" means has been given hy Latham, C.J. of the High Court of Australia in Matthews v. Chicory Marketing Board. "A tax", according to the learned Chief'Justice, "is a compulsory E exaction of money hy public authority for public purposes enforceable hy law and is not payment for services rendered''. This de;finition brings out, in our opinion. the essential characteristics of a tax as distinguished from other forms ol imposition which, in F a general sense, are included within it. It is said that the essence of taxation is compulsion, that is to say, it is imposed under statutory power without the taxpayer :s consent and the payment is enforced by law. The second characteristic of tax is that it is an imposition made for public purpose without ref'erence to any special benefit G to he conferred on the payer of the tax. This is expressed hy saying that the levy of tax is for the purposes of general revenue, which when collected forms part of the public revenues ol the State. As the object of a tax is not to confer any special benefit upon any particular H

JINDAL STAINLESS LTD. v. STATE OF HARYANA 831

[ASHOK BHUSHAN, J.]

individual, there is, as it is said, no element of quid pro A quo between the taxpayer and the public authority. Another feature of the taxation is that as it is a part of the common burden, the quantum of imposition upon the taxpayer depends generally upon his capacity to pay. B

325. It is an accepted proposition that one of the characteristics of tax is that it is an imposition made for public purpose without reference to any special benefit to be conferred on the payer of the tax. The taxes imposed by the Legislature, apart from being source of Revenue is also C expended for various public welfare measures and when it's object is in no way connected with the public interest or public welfare it loses its character of taxation, becomes a levy which is unconstitutional.

326. Das, J. delivering majority opinion in Automobile Transport case, in his judgment has referred to Rajasthan Motor Vehicles Taxation D Act, 1951 as compensatory with whose opinion Subba Rao, J. also concurred.

327. Das, J. for coming to the conclusion that 1951 Act is a compensatory in nature has refe1Ted to judgments of Australian High Court and the judgment of the Privy Council wherein validity of various E statutes in the context of freedom of trade and commerce granted under Section 92 of the Constitution of Australia were considered. Das, J. has referred to following judgments: (i) Duncan v. The State of Queensland, (1916) 22 C.L.R. 556; F (ii) Mc Carter v. Brodie, (1950) 80 C.L.R. 432;

(iii) Hughes and Vale Proprietary Ltd. v. State of New South Wales, (1955)A.C. 241; (iv) Armstrong v. State of Victoria No.2, (1957) 99 C.L.R. 28; G (v) Commonwealth ofAustralia v. Bank of New South Wales, (1950) A.C. 235; (vi) Commonwealth Freighters Property Ltd. v. Sneddon, (1959) 102 C.L.R. 280. H

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

328. The Australian Constitution provides under Section 92 'trade, commerce and intercourse among the States, whether by means of internal carriage or ocean navigation, shall be absolutely free'. In the above cases, Australian High Court and Privy Council had occasion to examine the challenge to various statutes framed by the States on the ground that these statutes violate freedom of trade and commerce, as B guaranteed under Section 92. Section 92 itself does not provide for any qualification or exception to the freedom, in Duncan and Others V. State of Queensland and Another (1916) 22 CLR 556. Chief Justice Griffith, while construing the expression free had made following observations: c "But the word :free' does not mean extra legam and any more than freedom means 'anarchy' we boast of being absolutely free people, but that does not mean that we are not subject to law. "

329. The most of the cases of Australian High Court which have been referred to and relied by Das, J. were the transport cases wherein various sections were enacted for registration, licensing and realisation of fee/charge from motor vehicles, goods carriages in course of inter- State and intrastate trade and commerce.

330. Justice Das has specifically referred to dissenting opinion of Fullagar, J. in McCarter and Another V. Brodie, (1950) 80 CLR 432, in which case the Parliament of Victoria had passed an Act, namely, F Transport Regulation Act, 1933-47 which provided that a commercial goods vehicle should not operate on any public highway unless licensed in accordance with Act. A fee was to be paid for license, by an amendment further fee was imposed to be calculated at an annual rate determined from time to time by referring to the load capacity of the vehicle in G respect of which license was sought to.

331. Chief Justice Latham delivered his opinion for the Court, after referring to various earlier decision of Australian High Court and Privy Council. Chief Justice held that the regulation of trade, commerce and intercourse in the States is compatible with absolute freedom H

JINDAL STAINLESS LTD. v. STATE OF HARYANA 833

[ASHOK BHUSHAN, J.]

envisaged under Section 92 and the freedom is violated only when statute operates to restrict such trade and commerce, directly and immediately, it was said:-

"This quotation follows an express statement that regulation of trade, commerce and intercourse among the States is compatible with absolute freedom and that s. 92 is violated on(v when a legislative or executive act operates to restrict such trade, commerce and i11tercourse directlv.- and immediately, . as distinct ' fi'om creating some i11direct or consequential impediment c which mayfairzv he regarded as remote. Thus the Privy Council in the Banking Case expressly rejected the proposition that s. 92 precluded Parliaments (Commo11wealth or State) from in any way regulating or controlling inter-State trade and commerce, and a D statement of the lcnv was selected for approval which defined the relevant criterion as the distinction behveen regulation which was permitted, and prohibition, which was not permitted. The result is thats. 92 does not mean that inter-State trade and commerce is to be free from control hy law. In a passage to which I have just E referred their Lord1·hips held that if laws have only an indirect effect in relation to inter-State trade and commerce they are not invalidated by s. 92. '·'

332. Justice Fullagar, who delivered a dissenting opinion had examined in detail the nature of legislation which can be terined as regulatory and those which cannot be held to be prohibiting the trade. In his opinion, His Lordship has illustrated his point by giving various G examples. He was of the view that permitted regulations as explained do not impede freedom carrying out under Section 92, however, there may be circumstances when even regulatory statutes impede the freedom. Following was observed:

834 SUPREME COURT REPORTS [2016] lQ S.C.R.

A " .... The distinction hetween what is merely permitted regulation and what is a true inte1ference with freedom of trade and commerce must often, as their Lordships observed, present a problem of great difficulty, though it does not, in my opinion, present any real difficulty in B the present case. We may hegin by taking a few examples, con.fining out attention to the suhject matter of transportation, which is now under consideration. The requirements of the Motor Car Acts o,f Victoria qfford very good examples of what is clearly permissible. Every motor car must be registered : we may note in passing c that there is no discretionary power to refi1se registration. A fee, which is not on the face of it unreasonable, must be paid on registration. Every motor car must carry lamps of a specified kind in front and at the rear, and in the hours o,f darkness these lamps must be alight if the car is being driven on a road. Every motor car must cany a warning device, such as a horn. A motor car must not be driven at a speed or in a manner which is dangerous to the public having regard to all the circumstances o,f the case. Other legislation o,f the State-Parliamentary or subordinate-prescribes other rules. Jn certain localities a motor car must not be driven at more than a certain specified speed. The weight of the load which may be carried by a motor car on a public highway is limited. The driver of a motor car must keep to the left in driving along a highway. He F must not overtake another vehicle on a curve in the road which is marked hy a double line in the centre. He .must observe certain "rules of the road" at intersections: for example, the vehic!e•on the right has the right of way. G Such examples might be multiplied indefinitely. Nobody would doubt that the application of such rules to an inter-State trader will not infringe s.92. And clear~v in such matters o,f regulation a very wide range of discretion must he allowed to the legislative body. When H we ask why such rules do not infringes. 92, I think that