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

10. As already stated, Section 8(2)(b) deals with sale of goods other than declared goods and it is confined to inter- State sale of goods to persons other than registered dealers or governments. The rate of tax prescribed is 10 per cent or the rate of tax imposed on sale or purchase of goods inside the appropriate State, whichever is higher. The report F of the Taxation Inquiry Committee would indicate that the main reason for enacting the provision was to canalize inter- State trade through registered dealers, over whom the appropriate government has a great deal of control and thus to prevent evasion of tax: G "Where transactions take place between registered dealers in one State and unregistered dealers or consumers in another, this low rate of levy will not be suitable, as it is

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

A likely to encourage avoidance of tax on more or less the same scale as the present provisions of Article 286 have done. If this is to be prevented, it is necessary that transactions of this type should be taxable at the same rates which exporting States impose on similar transactions within their own territories. The unregistered dealers and B consumers in the importing State will then find themselves be unable to secure any advantage over the consumers of locally purchased aiiicles, nor of course will they, under this system, be able to escape the taxation altogether, as many of them do at present." [See Report of the Taxation c Enquiry Commission, 1953-54, Vol. 3, p. 57] ....... In other words, it was to discourage inter-State sale to un- registered dealers that Parliament provided a high rate of tax, namely I 0 per cent. But even that might not serve the purpose if the rate applicable to intra-State sales of such goods was more than I 0 per cent. The rate of I 0 per cent would then be favourable and they would be at an advantage compared to local consumers. It is because of this that Parliament provided, as a matter oflegislative policy that the rate of tax shall be I 0 per cent or the rate applicable to intra-State sales whichever is higher. .... 11.lf prevention of evasion of tax is a measure in the public interest, there can be no doubt that Parliament is competent to make a provision for that purpose under Article 302, even if the p,rovision would impose restrictions on the inter-State F trade or commerce." (Id. at 413-414) The statutory provision was consequently upheld on the ground that as a measure for preventing the evasion of tax in the public interest, Parliament was competent to enact it under Article 302 even if it restricted inter-state trade and commerce. G

H.3.3 Construing Article 304

152Copy pinpoint152. The area which assumes a great deal of importance in the present case is whether it would be correct to postulate that taxes, save H

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and except for discriminatory taxes under Article 304( a) would lie outside A the pale and purview of Part Xlll. lfthis submission was to be accepted, the necessary consequence would be that only a discriminatory tax of the nature contemplated by Article 304(a) would offend the guarantee of freedom under A1iicle 301. A non-discriminatory tax would lie outside the purview of Part Xlll. Once a tax meets the parameters of A1iicle B 304(a), it would not breach the freedom of trade and commerce. Clauses a and b of Article 304 would- in the line of argument have to be treated in a disjunctive manner and a tax which is consistent with Clause (a) would not need to meet the requirements of Clause (b ).

153Copy pinpoint153. Justice G P Singh in his seminal treatise, 'Principles of C Statutory interpretation ' 04 states that marginal notes to constitutional provisions are, as a matter of interpretation, treated as being a part of the Constitution and as providing some guidance as to the meaning of a provision:

D "Marginal notes appended to Articles of the Constitution have been held to constitute pait of the Constitution as passed by the Constituent Assembly and therefore they have been made use of in construing the A1ticles, e.g. A1ticle 286, as furnishing 'prima facie', 'some clue as to the meaning and purpose of the A1ticle'."

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154Copy pinpoint154. In State of Bombay v. The United Motors (India) Ltd 66 , Chief Justice Patanjali Sastri, speaking for a Constitution Bench spoke of the subordination of the freedom under Article 301 to the powers of the states to levy non-discriminatory taxes. The learned Judge held :

B "11 ... .It will be seen that the principle of freedom ofinter- State trade and commerce declared in Article 301 is expressly subordinated to the State power of taxing goods imported from sister States, provided only no discrimination is made in favour of similar goods oflocal origin. Thus the c states in India have full power ofimposing what in American State Legislation is called the use tax, gross receipts tax, etc. not to speak of the familiar property tax, subject only to the condition that such tax is imposed on all goods of the same kind produced or manufactured in the taxing State, D although such taxation is undoubtedly calculated to fetter inter-State trade and commerce. In other words, the commercial unity oflndia is made to give way before the State-power of imposing "any" non-discriminatory tax on goods imported from sister Sates." (Id. at p. I 081)

155Copy pinpoint155. Article 304 begins with a non-obstante provision which takes effect notwithstanding what is contained in Articles 301 or 303. A non- obstante provision of this nature has a distinctive meaning. In Chandavarkar Sita Ratna Rao v. Ashalata S. Guram6 7, this Court F held that:

"68 .. .It is well settled that the expression 'notwithstanding' is in contradistinction to the phrase 'subject to', the latter conveying the idea of a provision yielding place to another provision or other provisions to which it is made subject." (Id. at p. 478)

"(1953) 4 SCR 1069

07 (1986) 4 sec 447 H

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In South India Corporation v. Board of Revenue 68 , while A interpreting Articles 372 and 278 of the Constitution, this Court emphasised that the phrase "notwithstanding anything in the Constitution" is equivalent to stating 'inspite of the other articles of the Constitution' or that the other articles shall not to be an impediment to the operation of that particular article. B

156Copy pinpoint156. The use of the non-obstante clause in Article 304 in its application to Article 301 has been debated. That is because while Article 301 makes the guarantee of freedom of trade and commerce subject to the other provisions of Part Xlll, Article 304 commences with a non- obstante provision which operates notwithstanding what is contained in c Article 301. A reasonable construction or meaning would have to be attributed to these two provisions. So construed, Article 304, in its non- obstante provision, must mean that it would permit what is contemplated by Clauses (a) and (b) even though it would otherwise be within the ambit of the freedom guaranteed by Article 301. Similarly, in its application to Article 303, the non-obstante clause in Article 304 indiCates that despite D the prohibition that is contained in Article 303, the state legislature is empowered to do something of the nature that falls within the ambit of the provision. The non-obstante provision of Article 304 governs both Clauses (a) and (b) that follow. By virtue of Clause (a), the legislature of a State can, despite the provisions of Article 301, impose a non- E discriminatory tax. The power to impose a tax, it must be noted, is not conferred by Clause (a) of Article 304 but is a power which is traceable to the legislative power of the states under Articles 245 and 246 of the Constitution read with the legislative entries in the State List. Article 304(a) is a clear indication that though a tax may constitute a restriction F within the meaning of Article 30 I, the imposition of a non-discriminatory tax is pennissible to the state legislature. Article 304(a) lifts an embargo that would otherwise have existed but for the non-obstante provision. Article 304(a), however, mandates that a tax which is being imposed on goods imported from other States or Union territories must be a tax to which similar goods manufactured or produced in that state are subject. G Moreover, the tax shall not discriminate between goods that are imported and goods so manufactured and produced.

" (1964) 4 SCR 280 H

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A H.3.4 Conjunctive or disjunctive: 'may'; 'and'

157Copy pinpoint157. Clauses (a) and (b) of Article 304 are separated by the use of the expression "and". The issue is whether the expression "and" is to be construed as conjunctive or disjunctive. Clause (b) contemplates B reasonable restrictions being imposed under a law enacted by the state legislature on the freedom of trade, commerce and intercourse with or within that state as are required in the public interest. The proviso operates only in relation to clause (b) and not clause (a). It stipulates that no bill or amendment for the purposes of clause (b) shall be introduced or moved c in the legislature of a state without the previous sanction of the President. The mandate of the proviso can however be cured under Article 255 which provides as follows :

"Article 255 : No Act of Parliament or of the Legislature of D a State and no provision in any such Act, shall be invalid by reason only that some recommendation or previous sanction required by this Constitution was not given, if assent to that Act was given- (a) where the recommendation required was that of the Governor, E either by the Governor or by the President; (b) where the recommendation or previous sanction required was that of the President, by the President."

F Hence even though the previous sanction which is required under the proviso to Article 304(b) before the introduction of a bill has not been obtained, this deficiency can be cured if assent to the Act passed by a legislature is given by the President.

158Copy pinpoint158. Article 304 provides that the legislature of a state may by G law (a) impose a non-discriminatory tax as provided in clause (a); and (b) impose reasonable restrictions on the freedom .of trade, commerce or intercourse. The expression 'may' in the prefatory part of Article 304 has to be read together with the expression 'and' which separates clause~ (a) and (b). The use of the expression 'may' is indicative of the H

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intent that the legislature of a state is not bound to levy an impost on A goods imported from other states ( thot.gh if it does so, the tax has to be non-discriminatory). Similarly, the state legislature has an enabling power to impose restrictions under clause (b). The legislature ·may' do so. It has the discretion whether to impose a tax or to impose a restriction and is not bound to do so. B

159Copy pinpoint159. The word 'and' is normally used in the conjunctive sense (G P Singh 011 Interpretation of Statutes 00 ). However, this is not always the case. Coupled with the use of the expression 'may, the expression ·and' in Article 304 should be construed to mean and/or. In other words, the legislature of a state may take recourse to both clauses (a) and (b) of C Article 304 or either of them.

160Copy pinpoint160. The nuances of statutory interpretation when the expressions 'may' and 'and' are used together, have been succinctly summarised in "Statutory Interpretation" by Ruth Sullivan. The statement of legal position is thus: D "2) ''And" and "Or" a) Joint or Joint and Several "'and" Both "and'' and "or" are inherently ambiguous. "And" is always conjunctive in the sense that it always signals the E cumulation of the possibilities listed before and after the "and". However, ''and" is ambiguous in that it may be joint or joint and several. In the case of a joint ''and", every listed possibility must be included: both (a) and (b); all of (a), (b), and (c). In the case of a joint and several "and", all the possibilities may be, but need not be, included: (a) or (b) F or both; (a) or (b) or (c), or any two, or all three. In other words, the joint and several "and'' is equivalent to "and/ or" ..... Which meaning is appropriate depends on the context. When "and" is used before ihe final item in a list of powers, for G example, it is joint and s.:1 era!: To carry out the purposes of this Act, the Governor in Council 9 " ld. at p. 530 H

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A may make regulations respecting (a) the conditions on which licences may be issued; (b) the infonnation and fees that fireann vendors may be required to furnish; and B ( c) the annual fees that firearm owners may be charged ...... . In this provision the Governor in Council is empowered to make regulations on any one or more of the listed subjects. However, notice what happens if "may" is replaced by c "shall". If the Governor in Council is obliged to make regulations respecting (a) conditions (b) information and (c) fees, the joint and several "and" becomes joint".

In the context of Article 304(a) the use of the expression 'may' in the prefatory part together with 'and' which separates clauses (a) and (b) indicates that the true meaning and intent is conveyed by the joint and several and/or. The state legislature may impose a tax falling under clause (a) as well as a reasonable restriction falling under clause (b). Alternately it may impose one of them. These being enabling provisions, the legislature may not take recourse to either. However, when it imposes a tax and/or a restriction, the state legislature has to abide by the conditions of clauses (a) and (b) respectively.

H.3.S Article 304(a) not the universe of taxation F

161Copy pinpoint161. The submission of the states is that Article 304(a) is the only provision which deals expressly with a tax measure and that clause (b) can never be construed to cover the imposition of a tax. This submission has been founded on more than one rationale. First, it has been submitted G that when Article 304 uses separate expressions, taxes and restrictions, there is no reason or justification to bring taxes within the ambit of restrictions. Second, it has been submitted that clause (b) of Article 304(a) contemplates the imposition of a reasonable restriction in the public interest. Taxation, it has been urged is presumed to be in the public interest. Third, it has been submitted that in the context of Article H

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19, judgments of this Court which have held that the guarantee under A Article 19( l )(g) does not confer an immunity from taxation.

162Copy pinpoint162. A discriminatory tax is prohibited by Artie le 304(a). There is intrinsic material in the constitutional text to indicate that Article 304(a) does not exhaust the universe of taxation for the purposes of Part Xlll. First, Article 304(a) provides that the legislature of a state may by law B impose on goods imported from other states or union territories any tax to which similar goods manufactured or produced in that state are subject. The ambit of clause (a) is a tax on goods, the origin of the goods being a state other than the state which is imposing the tax. Article 30 I (over vvhich the non-obstante clause contained in Article 304 operates) has a c geographical coverage which extends throughout the territory of India. Article 3 0 I guarantees the freedom of trade and commerce not only across state boundaries but equally freedom within any part of the territory of India. If the freedom of trade and commerce is restricted by a discriminatory tax-as Article 304(a) postulates is the case-the imposition of a discriminatory tax on internal movement within a state must by the same logic breach the freedom guaranteed by Article 301. Since Article 304(a) covers only a tax on goods imported from other states, a discriminatory tax on goods which do not traverse state boundaries would not fall within the ~mbit of Article 304(a). Yet it would offend Article 30 l. A state may conceivably have a justification in the public interest in doing so or for imposing such a tax and if it were to do so, it must meet the requirements of Article 304(b). If Article 304 (b) were to be construed to not include taxes, such a course of action would be barred, however legitimate be the state interest.

163Copy pinpoint163. There is a second reason why the language and scheme of F Part XIll must lead to the conclusion that it is not only discriminatory taxes of the nature contemplated by Article 304(a) which fall within the ambit of the Part. Article 304(a) only covers a tax on goods (goods imported from other states as seen above). A tax imposed by the state legislature otherwise than on goods, does not fall within the ambit of G Article 304(a). The taxing entries of List ll of the Seventh Schedule include various taxes that fall within the legislative competence of the state legislatures other than a tax on goods. Among the -taxing entries of List II (entries 46 to 62) are several which deal with aspects of taxation of goods. They include Entry 51 (providing for duties of excise on (i) I-I

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A alcoholic liquors for human consumption: and (ii) opium. hemp and oth.:r narcotics drugs and narcotic manufactured and prndueed in the state and countervailing duties on similar goods manufactun:d or produced elsewhere in India): Entry 52 (taxes on the entry of goods into a local area for consumption, use or sale); Entry 53 (taxes on the consumption and sale of electricity); Entry 54 (taxes on the sale or purchase of goods B other than newspapers subject to Entry 92A of List I); Entry 56 (taxes on goods carried by road or on inland waterways); Entry 57 (taxes on vehicles, whether mechanically propelled or not, suitable for use on roads subject to Entry 35 of List Ill) and Entry 58 (taxes on boats). Entries which deal with taxes other than on goods arc Entry 56 (taxes c inter alia on passengers carried by road or on inland waterways): Entry 59 (tolls): Entry 60 (tax on profe;,sions, trades, callings and employments): Entry 61 (capitation taxes) and Entry 62 (taxes on luxuries. including: taxes on entertainments. arnu~:ernents, betting and gambling). Artide 304(a) applies only to taxes on goods. A tax which is not on goods or on D aspects bearing on goods is not governed by Article 304(a). A discriminatory tax which is not on goods is not within the prohibition of that article. For instance, a discriminatory tax on luxuries. entertainments, amusements, betting and gambling will not be governed by Article 304(a). Similarly, Article 304(a) will not apply to a tax on passengers carried on roads or inland wakrways under Entry 56. Since the ambit of Article E 304(a) is a non-discriminatory tax on goods imported from other states, it is evident that !his provision is not exhaustive even of those discriminatory taxes which will olfend Article 301. There are taxes which fall within the legislative competence of the states, other than on goods, which are outside the purview of Article 304(a). lfthose taxes impede the freedom of trade, commerce and intercourse they would infringe Article 30 I though they do not fall within Article 304(a).

164Copy pinpoint164. Third, Article 302 has been held to enable Parliament to impose Central Sales 'fox (Sitolakshmi Mills) (supra). The expression "restrictions'' in Article 302 has been construed not to exclude a restriction by way of a taxing measure. If the expression ·restriction' for the purposes ofA1ticle 302 does not exclude a legislative measure by way of a fiscal imposition, it cannot evidently be excluded from the ambit of the phrase 'restrictions· in Article 304.

JINDAL STAINLESS LT'D. v. S"TATE OF HARYANA 609 [DR. D. Y. CHANDRACHUD, J.]

165Copy pinpoint165. Fourth, this condusion is buttressed by the non-obstante provision contained in Article 304. The plain meaning of the non-obstante provision is that state legislal.urc.; m.·.i cn~1ct legislation in exercise of their law making authority u:1der Articles 245 and 246, of the nature contemplated by clauses (a) and (b) of Article 304, despite the fact that such a legislative measure \r<iuld otherwise fall within the ambit and purview of Atticle 301. The non-obstante provision in Article 304(a) refers to Article 30 I. Obviously, unless something falls within the ambit of Article 30 I, there is no reason to incorporate the non-obstante clause in Article 304(a). In other words, what Article 304(a) does is to indicate that despite the fact that a legislative measure falls under Article 30 I, it is permissible if it adheres to Article 304. Despite Article 30 I, it is c permissible in view of Article 304(a). Artide 304(a) lifts the embargo.

166Copy pinpoint166. The use of the dause ofsubjection in Artick 30 l and the non-obstante provision in Article 304 liavl: been criticised as a case of inartistic draftsmanship. A clause which makes a constitutional provision or, for that matter, a statutory provision subject to another makes the D provision in which that clause is contained subordinate to the provision to which it is subjected. On the other hand, a non-obstante provision commencing with the word 'notwithstanding' is intended to indicate that the text in which the provision is contained overrides another. The criticism is that the expressions "subject to the other provisions of this Part'' in E Article 301 and "notwithstanding anything in Article 30 \ '' in Article 304(a) are incongruous. For, the former expression subjects Article 30 I to the other provisions of Part XIII [including Article 304(a)]. Hence, it was unnecessary to use a non-obstante clause in Article 304(a).

167Copy pinpoint167. Having noticed this er;ticism, it is necessary to harmonise the text of Article 301 with Article 304. The guarantee of freedom under Article 30 I is subject to Part XIII. Attic le 304 enables a state legislature in the exercise of its legislatiYe power (under Articles 245 and 246) to enact a law despite the fact that it may otherwise fall within the ambit of Articles 30 I or 303. Article 303 contains the mandate that neither Parliament nor the legislature of the state can grant preferences to one state over another or discriminate between one state and another by virtue of the entries relating to trade and commerce in the lists of the Seventh Schedule. Article 303 postulates (in relation to Parliament) that

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A the power conferred upon Parliament under Article 302 to impose restrictions on the freedom of trade, commerce or intercourse, in the public interest between one state and another or over any part of the territory of India cannot be exercised so as to grant preferences or to discriminate between one state and another. However, this embargo is lifted by clause (2) of Article 303 when Parliament is dealing with a B situation of scarcity of goods in any part of the territory of India. In relation to the legislature of the state, Article 303(1) imposes the same mandate against the grant of preferences between states or the making of any discrimination. However, clause (2) ofArticle 303 does not apply to the state legislatures. Clause (1) of Article 303 is a restraint on c discriminating between one state over another or from granting preferences between them. In other words, the treatment which is extended to one state has to be extended to every other state. The grant of preferences or the making of discrimination is proscribed. Article 303(1) is akin to a provision in international trade parlance conferring a D 'most favoured nation' treatment. Under such an 'mfn 'clause, treatment extended to one nation state has to be extended to the other. Article 303(1) embodies a similar principle inter se between the states so as to ensure a unifonnity of treatment between states when Parliament or the state legislatures enact a law in exercise of their law making power. A state legislature which enacts a law is required to confer a parity of treatment to other states and is prevented from granting preferences to one state over another or from making discrimination between one state and another, by the operation of Article 303(1). Article 304(a), however, allows the legislature of a state to impose a tax on goods imported from other states or union territories so long as the tax is one which is imposed on similar goods manufactured or produced in that state. Article 304 (a) in other words has the effect of lifting an embargo which would arise under Article 30 I. The clause of subjection in Article 30 I and the non- obstante clause of A11icle 304 can hence be hannonised.

168Copy pinpoint168. Article 306 of the Constitution (prior to its repeal by the G Constitution (Seventh Amendment) Act, 1956) dealt with the power of certain states in Part B of the First Schedule to impose restrictions on trade and commerce. Article 306 before its deletion provided as follows: "306. Notwithstanding anything in the foregoing provisions of this Part or in any other provisions of this Constitution, H

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any State specified in Part B of the First Schedule which A before the commencement of this Constitution was levying any tax or dutv on the import of goods into the State from other States or on the export of goods from the State to other States may, if an agreement in that behalf has been entered into between the Government of India and the B Government of that State, continue to levy and collect such tax or duty subject to the terms of such agreement and for such period not exceeding ten years as may be specified in the agreement :Provided that the President may at any time after the expiration of five years from such eomrneneernent terminate or modify any such agreement if, after c consideration of the report of the Finance Commission constituted under Article 280, he thinks it necessary to do so.. r

D The above provision clearly envisages that taxes and duties which were being levied on imports into and exports from Patt B states were restrictions. Hence, a specific provision was incorporated, to provide for their continuance for a stipulated period. That such taxes and duties would otherwise have infringed Article 301 is evident from the non- obstante provision permitting their continuance. E

169Copy pinpoint169. Article 306 as it was originally incorporated into the Constitution provided a clear indicator that the founding fathers did not intend to use the expression ·restrictions· in contradistinction to taxes or duties on the import or export of goods between states.

170Copy pinpoint170. Article 304(a) elaborates that a particular form of taxation-. a non-discriminatory tax on goods - shall not be construed to violate Article 301. But Article 304(a) is not exhaustive of the universe of taxation. Article 304(a) has three defining characteristics. The first is that the tax is a tax on goods. The second is that it is a tax on goods imported from other states. The third is the non-discrimination norm in relation to similar goods produced or manufactured in the state. A tax. which fails to meet the yardstick embodied in Atticle 304(a) will violate Article 301. But Article 304(a) cannot be a basis for holding that every H

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A fiscal measure (apait from a discriminatory tax) lies outside the purview of Part XIII. For one thing, the rate of tax is but one element of taxation. There are other elements in a fiscal exaction including assessment, the machinery for collection and set offs and exemptions which can have an important bearing on whether the tax operates in a manner that impedes the freedom of interstate trade and commerce. Moreover, as we have B noticed earlier, a discriminatory tax otherwise than on goods, does not attract the provisions of Article 304(a). Finally, a non-discriminatory tax may also become an impediment on the freedom of trade and commerce where the tax is so high as to render it confiscatory. Hence, a discriminatory fiscal imposition of the nature which offondsArticle 304(a) c is illustrative of but not exhaustive of fiscal impediments on the freedom of trade and commerce.

171Copy pinpoint171. The Constituent Assembly, while adopting Article 304 incorporated a marginal note which describes the ambit of the provision as : ;'restrictions on trade, commerce and intercourse amongst states". D The marginal note is a broad indicator of constitutional intent. lt is a constitutional indicator of the position that a restriction on the freedom of trade and commerce can be fiscal or non-fiscal in origin. The marginal note evidently utilizes the expression ';restrictions" in relation to the entirety of the article. Though a marginal note cannot override constitutional E text nor can it control the specific meaning of the words used in the text, it is a broad indicator or pointer to the meaning intended. l 72. For these reasons, it would be untenable to postulate as a general principle that it is only a discriminatory tax falling within the ambit of Article 304(a) that is subject to Part XIII of the Constitution. F

I Tax legislation - Judicial review and Part XIII 1.1 Taxation and Part XII

173Copy pinpoint173. In early decisions of this Court, the issue as to whether the G legislative power to tax was subject to constitutional control independent of Article 265 was analysed. The initial view was that the power of taxation was subject to exclusively to Article 265 under which a tax can be imposed only with the authority of law. Consequently, a Constitution Bench of this Court in Ramjilal v. Income Tax Officer, H

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Mohindargarh 70 , held that the protection against imposition and collection of taxes save by authority of law directly comes from Article 265 and is not secured by clause (I) of Article 31: "l l ... If collection of taxes amounts to deprivation of property within the meaning of Article 31 (I), then there was no point in making a separate provision again as has been made in Article 265. It, therefore, follows that clause ( l) of Article 31 must be regarded as concerned with deprivation of property otherwise than by the imposition or collection of tax, for otherwise Article 265 becomes wholly redundant. In the United States of America, the power of taxation is regarded as distinct from the exercise of police power or eminent domain. Our Constitution evidently has also treated taxation as distinct from compulsory acquisition of prope1ty and has made independent provision giving protection against taxation save by authority of law.'' D l 74. However, in Kunnathat Thathunni Moopil Nair v. The State ofKerala 71 , Chief Justice Sinha speaking for a Constitution Bench rejected the submission that Article 265 of the Constitution was "a complete answer" to the validity of a state taxing law (The Travanc.ore- Cochin Land Tax, 1955).The Constitution Bench held that Article 265 imposes a limitation by which a tax cannot be levied or collected by a E mere executive fiat. Under Article 265, a tax can be imposed only with the authority oflaw which, it was held, must mean a valid law. For a law to be valid, it must be enacted by a legislature which possesseslegislative competence and the tax must accord with Article 13. Hence, the Constitution Bench ruled that if the enactment imposing a tax violates F Article 14, it would have to be struck down since the guarantee of equal protection of law must extend even to taxing statutes. Another Constitution Bench in Balaji v. Income Tax Officer, Special Investigation Officer 72 , rejected the submission that taxing legislation was immune to a challenge on the ground ofa violation of Article 19. In G Chhotabhai Jethabhai Patel & Co. v. Union ofindia 73 , a Constitution Bench ruled that the judgment in Ramjilal could not have meant that if 70(1951)2 SCR 127 11 1961 (3) SCR 77

" 1962 (2) SCR 983 1.1 (1962) Supp. (2) SCR I H

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A a law imposing a tax is outside the legislative competence of the legislature enacting it, it could be a law under which a person could be deprived of property under A11icle 31 or regarding which the Supreme Court could not be approached for relief under Article 32. The Constitution Bench held that it was also not possible to accept a more limited proposition that once a tax law is covered by an entry in the legislative lists and does B not contravene a direct prohibition such as Article 276(2) or Article 286, such a law is immune from a challenge under Part lll of the Constitution. A taxing legislation could be impugned on the ground of: (i) lack of legislative competence; (ii) violation of a prohibition under a specific article of the Constitution; or (iii) repugnancy to the fundamental rights c guaranteed by Pai1 JJl.

175Copy pinpoint175. In Raja Jagannath Baksh Singh v. State of U. P. 74 ,the Constitution Bench held that though inRamjilal (supra) there were general observations which indicated that the fundamental rights guaranteed in Part 1Il could not be invoked in respect of a taxing statute, a consensus had emerged in subsequent decisions of this Court that a law imposing a tax could be challenged not only for want oflegislative competence but also on the ground of its violating the freedoms contained in Part Ill.

176Copy pinpoint176. A law which imposes a tax is not immune from constitutional challenge merely because taxation is a manifestation of the sovereign power of the state or because there is a presumption that a tax is imposed by the legislature in public interest. Taxing legislation is subject to constitutional restraints originating in the legislative competence of the legislature to enact the law, the guarantees of fundamental freedoms contained in Part Ill and constitutional limitations originating in the provisions of the Constitution.

1.2 The standard of judicial review

177Copy pinpoint177. The standard of judicial review in relation to taxing legislation however recognizes that there inheres in the legislature the power to determine the objects on which a tax should be levied and to classify persons or properties for the purposes of the levy. If the classification is rational, a taxing statute cannot be challenged merely because different

" (I 963) I SCR 220 H

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[DR. D. Y. CHANDRACHUD, J.]

rates of taxation are prescribed for different categories of persons or objects. The validity of a taxing statute cannot be challenged merely on the ground that the rate of taxation is excessive. However, if the statute is a colourable piece of legislation or a fraud on legislative power, it would be open to challenge on the ground that while enacting the law, the legislature has adopted a cloak or devise to confiscate the property of a citizen who is taxed. But such a conclusion cannot be reached merely on a finding that the tax which is imposed is unreasonably high or excessive.

178Copy pinpoint178. Conceptually, the availability of judicial review in regard to taxing legislation is distinct from the standard ofjudicial review. Taxing C legislation is not immune from constitutional challenges based on a lack oflegislative competence, a breach of fundamental rights or a violation of a constitutional limitation or provision. But the standard of judicial review in relation to fiscal statutes recognizes that the legislature must possess a wide latitude to classify person§ or objects for the purposes of ilie~~ D

179Copy pinpoint179. ln Federation of Hotel and Restaurant Association of India v. Union of India 75, the Constitution Bench applied the test of palpable arbitrariness when a fiscal statute is challenged on the ground of Article 14. The Court held: E

"46. It is now well settled though taxing laws are not outside Article 14, however, having regard to the wide variety of diverse economic criteria that go into the formulation of a fiscal policy,the legislature enjoys a wide latitude in the matter of selection of persons, subjectmatter, events, etc., for taxation. The tests of the vice of discrimination in a taxing law are, accordingly, less rigorous. In examining the allegations of a hostile, discriminatory treatment what is looked into is not its phraseology, but the real effect of its provisions. A legislature does not, as an old saying goes, have to tax everything in order to be able to tax something. If there is equality and uniformity within each group, the

" (I 989) 3 sec 634 H

616 SUPREME COURT REPORTS [20 l 6) l 0 S.C.R.

A law would not be discriminatory. Decisions of this Court on the matter have permitted the legislatures to exercise an extremely wide discretion in classifying items for tax purposes, so long as it refrains from clear and hostile discrimination against particular persons or classes.·· (Id. at p. 658-659) B

1.3 Limitations of Sinha CJ's view in Atiabari l 80. Part XIII of the Constitution uses the expression '"law"' in Articles 302, 303 and 304, among others. There is no reasonable basis c for holding that Pat1 Xlll includes all laws enacted by Parliament or the State legislatures except laws falling under Entries 82 to 96C of the Union List and Entries 46 to 62 of the State List. The judgment of Chief Justice Sinha in Atiabari broadly enunciated four reasons for excluding taxes from Part XIII of the Constitution: D

i) imposition of taxes is a manifestation of the sovereign power of the state which possess the inherent power to impose taxes to raise revenues; ii) taxation is specifically governed by Part XII which is a self- contained code and the validity of a taxing statute cannot be assessed with reference to a provision outside Pat1 XII; iii) taxes provide for resources to improve facilities for trade and do not constitute a restriction on the movement of trade; and iv) the concept of public purpose being implicit in every tax law, it cannot form a part of Article 30 I.

With the greatest of deference to the view of the learned Chief G Justice, it is difficult to subscribe to the general proposition that tax laws per se lie outside the ambit of Pm1 XIII. Taxation is indeed a manifestation of the sovereign power of the state to raise revenues for public purposes. But the exercise of sovereignty is subject to the constitutional limitations of a written constitution. Enactment of law by a law making body which possess a legislative competence over the subject matter upon which it H

JINDAL STAINLESS LTD. v. STATE OF HARYANA 617

[DR. D. Y. CHANDRACHUD, J.]

legislates is one of the constitutional limitations. The Constitution distributes legislative powers between the Union and States. While doing so it carves out fields oflegislation which are reserved to the Union and the States respectively. Legislative powers in relation to taxation are also distributed between the Union and the States. Hence, all legislative power (of which the legislative power to impose a tax is a part) is subject to the distribution provided in the Constitution. Exercise of sovereign power is governed by the norms of a written Constitution. Taxing statutes, like other legislation, are subject to constitutional limitations including those contained in Part XIII. Hence, the general notion that taxation is a manifestation of sovereign powers must also comprehend within that conceptualisation, the limitations which the Constitution imposes upon c all legislative power of which the taxing power is a part.

181Copy pinpoint181. The second ground which weighed in the decision of Chief Justice Sinha in Atiabari has been considered earlier. Article 245 mandates that all laws are subject to the provisions of the Constitution. From that basic premise, it must follow that the limitations on the taxing D power are not only those which are referable to Pait Xll.Asubject such as taxation may be referable to a specific part of the Constitution, such as Part XII. This does not mean that its validity must be assessed only with reference to the provisions of that Part. The provisions of the Constitution are not isolated or watertight compartments. Constitutional E provisions do not rest in silos.

182Copy pinpoint182. As regards the third rationale undoubtedly, the revenues which the state raises from fiscal exactions generate resources which are also utilized to augment trade and commerce. This, however, does not confer an immunity from a challenge that a law which is enacted in pursuance of the taxing power breaches specific provisions of the Constitution.

183Copy pinpoint183. While the concept of public purpose is implicit in tax law, it IS also implicit in all legislation which is presumed to be in the public interest. Yet the presumption of constitutionality or oflegislation being in the public interest does not confer a protection or immunity against a specific challenge on the ground that it violates a constitutional limitation such as that originating in legislative competence, the fundamental rights or constitutional provisions.

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

A 1.4 Presidential sanction : the proviso to Article 304(b)

184Copy pinpoint184. There is an aspect of the submission of the states bearing on the impact of the requirement of Presidential sanction under the proviso to Article 304(b), which requires close scrutiny. The submission is that B if "reasonable restrictions" on the freedom of trade, commerce or intercourse with or within a state are construed to include a legislative measure imposing a tax, this would constitute a substantial encroachment on the power of the states to impose taxes. The requirement of obtaining prior Presidential sanction to a bill which is to be introduced or moved in c the legislature of a state it is urged will, it is urged dilute the sovereign power of the states to impose taxes in the fields reserved for them and make them subservient to the Union.

185Copy pinpoint185. While evaluating this submission, it must be emphasised.that the proviso attaches to clause b of Article 304. Article 303 prohibits both Parliament and the legislature of a state from enacting laws granting preferences to one state over another or making discrimination between one state over another.

186Copy pinpoint186. Article 303(2) makes an exception in respect of Union legislation enacted to deal with a situation of scarcity of goods in any part of the territory of India. The prohibition contained in clause l of Article 303 is, hence, lifted in the case of Parliament by clause 2. In the case of a state legislature, Article 303(1) is attracted where it grants preferences or makes adiscrimination between one state and another. Article 304 in its non-obstante clause refers inter alia to Article 303. F Consequently, where a state legislature seeks to enact legislation granting a preference to one state over another or to make a discrimination of the nature referred to in Article 303(1 ), it must comply with the requirements of a Presidential sanction under the proviso to Article 304(b). Where the law enacted by the state legislature would result in a preference or discrimination prohibited under Article 303(1 ), the embargo can be lifted G upon obtaining the previous sanction of the President under the proviso to Article 304(b ). J Article 304(a) ; The principle of non-discrimination

187Copy pinpoint187. Article 304(a) has been analysed and applied in judicial H

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[DR. D. Y. CHANDRACHUD, J.]

precedent over the last six decades. The context in which each of the decided cases arose for decision has undoubtedly shaped and refined the jurisprudence on the subject. Successive Benches have fleshed out the content of its language. While understanding Article 304 (a), this Court has to analyse the meaning of the expressions (i) 'goods imported from other states'; (ii) 'any tax to which similar goods manufactured or produced in that state are subject'; and (iii) 'so, however, as not to discriminate between goods so imported and goods so manufactured'. While defining the meaning of these expressions, judicial review is confronted with the basic question of when Article 304(a) would apply and the situations in which the requirement of a non-discriminatory tax is fulfilled. An important aspect of Aiticle 304(a) is whether it pem1its a c classification by the state legislature based on the need to achieve the economic development of the state. If development is a legitimate priority, to what extent does A1ticle 304(a) condition the power of the state legislature to encourage the growth of its own industries by the grant of incentives, rebates and exemptions through fiscal legislation? D

J.1 Precedent : 1963 to 1980

188Copy pinpoint188. An early decision arose in State of Madhya Pradesh v. Abdeali 76 . The state government issued a notification under the Madhya E Bharat Sales Tax Act, 1950, exempting the sale of footwear from the payment of sales tax subject to three conditions: (i)The foot-wear had to be hand-made and not manufactured on a power machine; (ii) The sale price should not exceed a stipulated amount; and F (iii)The sale must be by a manufacturer or a member of his family.

189Copy pinpoint189. A Constitution Bench of this Court held that the notification did not discriminate between foot-wear manufactured or produced in G the state and that which was imported from other states since the three conditions of the notification equally applied to all foot-wear irrespective of its origin. A notification granting an exemption for the benefit of small "AIR (1963) SC 1237 H

620 SUPREME COURT REPORTS [2016) IO S.C.R.

A manufacturers making hand-made shoes of a small value who may be unable to compete with large manufacturers was valid. Sigi1ificantly, in relation to Article 304(a) it was held that the exemption notification made no discrimination between out-of state manufacturers and in-state manufacturers since its conditions applied equally to both. A manufacturer B situated outside the state could also claim the benefit of the exemption upon fulfilling the conditions of the exemption. Hence Article 304(a) was held not to have been breached.

190Copy pinpoint190. In Firm A.T.B. Mehtab Majid v. State of Madras 77 , the validity of Rule 16 of the rules framed under the Madras General Sales c Tax Act, 1939 was challenged by the petitioner who was a dealer in hides and skins. The petitioner sold material which was tanned outside the state as well as what was tanned inside. The contention was that tanned hides and skins imported from outside the state and sold within were subject to a higher rate of tax than the tax imposed on hides and skins tanned and sold within the state. Moreover, hides or skins imported from outside the state after purchase in a raw condition and then tanned inside the state were subject to higher taxes than those purchased in a raw condition within the state and tanned there. The Constitution Bench rejected the submission that Article 304(a) is attracted only when the goods enter the state while crossing its border. In other words, the imposition provided under clause (a) must not be only at the point of entry. The plea of discrimination was upheld by this Court since the sale of hides or skins which had been purchased in the state and then tanned within the state was not subject to any further tax. This Court found that there was a breach ofArticle 304(a) for the following reasons: F "17 .... .If the dealer has purchased the raw hide or skin in the State; he does not pay on the sale price of the tanned hides or skins; he pays on the purchase price only. If the dealer purchases raw hides or skins from outside the State and tans them within the State, he will be liable to pay sales G tax on the sale price of the tanned hides or skins. He too will have to pay more for tax even though the hides and skins are tanned within the State, merely on account of his

11 (1963) Suppl.(2) SCR 435 H

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[DR. D. Y. CHANDRACHUD, J.]

having imported the hides and skins from outside and having not therefore paid any tax under sub-rule (1 ). " Significantly, the Constitution Bench also dealt with the submission of the state that the circumstance of hides or skins tanned within the state and on which tax had been paid earlier at the time of their purchase in a raw condition was sufficient to consider them to be different from hides or skins tanned outside the state. This Court held that: "18 ... The similarity contemplated by Article 304(a) is in the nature of the quality and kind of the goods and not with respect to whether they were subject of a tax already or not." c

191Copy pinpoint191. In a subsequent decision in A Hajce Abdul Shakoor v. State of Madras 78 , this Court held that Section 2(1) of the Madras General Sales Tax (Special Provisions) Act, 1953 discriminated against imported hides and skins sold upto 1August1957. The rate of tax on the sale of tanned hides and skins was: D

"10 ..... 2 per cent on the purchase price of those hides and skins in the untanned condition, while the rate of tax on the sale of raw hides and skins in the State during 1955 to 1957 E is 3 pies per rupee." Referring to the judgment in Mehtab Majid, this Court held that:

"10. In the earlier case, discrimination was brought about on account of sale price of tanned hides and skins to be higher than the sale price of untanned hides arid skins, though the rate of tax was the same, while in the present case, the discrimination does not arise on account of difference of the price on which the tax is levied as the tax on the tanned hides and skins is levied on the amount for which those hides and skins were last purchased in the untanned condition, but on account of the fact that the rate of tax on the sale of tanned hides and skins is higher than that on the

"AIR (1964) SC l 729 H

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

A sale of untanned hides and skins. The rate of tax on the sale of tanned hides and skins is 2% on the purchase price of those hides and skins in the untanned condition while the rate of tax on the sale of raw hides and skins in the State during 1955 is 3 pies per rupee. The difference in tax works B out to 7/l 600th of a rupee, i.e. a little less than, Y, naya paise per rupee. Such a discrimination would affect the taxation upto the 1st of August 1957 when the rate of tax on the sale of raw hides and skins was raised to 2% of the sale price."

192Copy pinpoint192. Another judgment ofa Constitution Bench in State of Madras v. N. K. Nataraja Mudaliar79 , involved a case where the provisions of the Central Sales Tax Act, 1956 were challenged on the ground that the Act pennitted the levy of tax at varying rates in different states. This D challenge was accepted by the High Court on the ground that the imposition of varying rates of tax in different states on similar inter-state transactions constituted an impediment, thereby offending Article 301. While tracing the history of the legislation Justice J.C. Shah speaking on behalf of three judges held that the enactment encumbered the movement of trade and commerce for the following reasons: E

"10. Tax under the Central Sales Tax Act on inter-State sales, it must be noticed, is in its essence a tax which encrn1.1bers movement of trade or commerce, since by the F definition in Section 3 of the Act, a sale or purchase of goods is deemed to take place in the course of inter-State trade or commerce, if it- (a) occasions the movement of goods from one State to another; (b) is effected by a transfer of documents of title to the goods during their movement from one State to another." G

However, the judgment held that the Central Sales Tax Act which was enacted for imposing a tax to be collected and retained by the state

"(1968) 3 SCR 829 H

JINDAL STAINLESS LTD. v. STATE OF HARYANA 623

[DR. D. Y. CHANDRACHUD, J.]

did not either grant a preference to one state or another or make any A discrimination merely because varying rates of tax prevailed in different states. This Court rejected the view which had prevailed in the High Court that different rates of tax on the sale of the same or similar commodities by different states placed an unequal burden on inter-state trade: B

'' 14 ... The flow of trade does not necessarily depend upon the rates of sales tax: it depends upon a variety of factors, such as the source of supply, place of consumption, existence of trade channels, the rates c of freight, trading facilities, availability of efficient transport and other facilities for carrying on trade. Instances can easily be imagined of cases in which notwithstanding the lower rate of tax in a particular part of the country and goods may be purchased from another part, D where a higher rate of tax prevails. Supposing in a paiiicular State in respect of a commodity, the rate of tax is 2 per cent but ifthe benefit of that low rate is offset by the freight which a merchant in another State may have to pay for carrying that commodity over a long distance, the merchant would be willing to purchase the goods from a nearer State, E even though the rate of tax in that State may be higher. Existence of long-standing business relations, availability of communications, credit facilities and a host of other factors - natural and business - enter into the maintenance of trade relations and the free F flow of trade cannot necessarily be deemed to have been obstructed merely because in a particular State the rate of tax on sales is higher than the rates prevailing in other States."(emphasis supplied) G The object of enacting a central legislation on the subject was explained thus:- " 17 ..... But since the power of taxation could be exercised in a manner prejudicial to the larger public interests by the H

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

A States, it was found necessary to restrict the power of taxation in respect of transactions which had an inter-State content. Amendment of Article 286 and the enactment of the Sales Tax Validation Act 1956, and the Central Sales Tax Act, 1956, were all intended to serve a dual purpose: to B maintain the source ofrevenue from sales tax to the States and at the same time to prevent the States from subjecting transactions in the course of inter-State trade so as to obstruct the free flow of trade by making commodities unduly expensive."

193Copy pinpoint193. The leading judgment held that Article 304 prohibits the imposition of differential rates of tax by the same state on goods manufactured or produced in the state and similar goods imported into the state. But where the rates of tax imposed on imported goods by a D taxing state are not different from the rates of tax on goods manufactured or produced within, Article 304(a) has no application. Consequently, the prevalence of different rates of sales tax in the states under the Central Sales Tax Act, was held not to be determinative of the giving of a preference or making of a discrimination. Justice R. S. Bachawat while agreeing with the order passed by the leading majority judgment, however, held that just as a sales tax on intra-state sales would not nom1ally offend Article 301, similarly a tax on inter-state sale would not do so. In his view, a tax on sale did not directly or immediately operate on the free flow of trade or the free movement of the transport of goods from one part of the country to another. Justice K. S. Hegde concurred with the majority the ground that the provisions of the Central Sales Tax Act had no direct or immediate impact on inter-state trade or commerce since sufficient safeguards were provided - firstly, by providing for the levy of sales tax in the state in which the goods are produced and secondly, by placing restrictions on the power of the states in fixing the rates.

194Copy pinpoint194. The judgment of the Constitution Bench in Kalyani Stores v. The State of Orissa 80 , involved a challenge to a levy imposed by the state of Orissa under the Bihar and Orissa Excise Act, 1915 at a rate of Rs. 40/- per L. P. Gallon on foreign liquor oflndian manufacture imported

'" (1966) I SCR 865 H

JINDAL STAINLESS LTD. v. STATE OF HARYANA 625

[DR. D. Y. CHANDRACHUD, J.]

into the state from other parts of the country. Subsequently, acting under the Bihar and Orissa Excise Act, 1915, the duty was enhanced to Rs.70/- per L.P. Gallon. Under Section 27 of the Bihar and Orissa Excise Act, 1915, a countervailing duty was provided on an excisable article imported into the state. Countervailing duties are provided for'in Entry 51 of List II to the Seventh Schedule to the Constitution. This Court noted that countervailing duties can only be levied if similar goods are actually produced or manufactured in the state on which excise duties are being levied:

"4 ..... The fact that countervailing duties may be imposed c at the same or lower rates suggests that they are meant to counterbalance the duties of excise imposed on goods manufactured in the State. They may be imposed at the same rate as excise duties or at a lower rate, presumably to equalise the burden after taking into account the cost of transport from the place of manufacture to the taxing State. lt seems therefore that countervailing duties are meant to equalise the burden on alcoholic liquors imported from outside the State and the burden placed by excise duties on alcoholic liquors manufactured or produced in the State. If no alcoholic liquors similar to those produced or manufactured imported into the State are produced or manufactured, the right to impose counterbalancing duties of excise levied on the goods manufactured in the State will not arise. It may therefore be accepted that countervailing duties can only be levied if similar goods are actually produced or manufactured in the State on which excise duties are being levied."

During the course of discussions, the Constitution Bench held that the restriction on the freedom guaranteed by Article 301 could only be justified ifit fell within Article 304. The reasonableness of the restriction had to be adjudged having regard to the purpose for imposing the restriction in the public interest. In that case, it was held that since no foreign liquor was produced or manufactured in the State of Orissa the H

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

A power to legislate under Article 304 (a) is not available:

"7 ... Without entering upon an exhaustive categorization of what may be deemed "required in the public interest", it may be said that restrictions which may validly be imposed B under Article 304(b) are those which seek to protect public health, safety, morals and property within the territory. Exercise of the power under Article 304(a) can only be effective ifthe tax or duty imposed on goods impotted from other States and the Tax or duty imposed on similar goods c manufactured or produced in that State are such that there is no discrimination against imported goods. As no foreign liquor is produced or manufactured in the State of Orissa. The power to legislate given by Article 304 is not available and the restriction which is declared on the freedom of trade, commerce or intercourse by Article 301 of the Constitution remains unfettered."

195Copy pinpoint195. The notification enhancing the duty was held to violate Article 301 and was found not to have complied with Articles 304(a) and (b). The judgment in Kalyani Stores was explained and confined to the facts of the case in a subsequent decision in State of Kcrala v. A. B. Abdul Khadir81 . In Abdul Khadir this Court held that the earlier decision did not intend to lay down a proposition of universal applicability that the imposition of a duty or tax in every case would per se be an infringement of Article 301 and only such restrictions which directly or immediately impede the free flow of trade fall within the prohibition of Article 301. F I 96. A Constitution Bench of this Court in Rattan Lal & Co. v. The Assessing Authority 8', applied the test formulated in N.K. Nataraja Mudaliar(supra) in the context of a challenge to the Punjab General Sales Tax (Amendment and Validation)Act, I 967 and the Punjab Sales Tax (Haryana Amendment and Validation) Act, I 967. The G Co1istitution Bench held that so long as the rate of tax is the same between goods imported from other states and similar goods, produced or manufactured within the state, Article 304 is satisfied. " (1970) 1 SCR 700 "' (1969) 2 SCR 544 H

JINDAL STAINLESS LTD. v. STATE OF HARYANA 627

[DR. D. Y. CHANDRACHUD, J.]

197Copy pinpoint197. In V. Guruviah Naidu and Sons v. State of Tamil Nadux 3 , A a Bench of two Judges of this Court repelled a challenge to the validity of a tax imposed under the Madras General Sales Tax Act, 1959 on raw hides and skins and on dressed hides and skins. In that case the rate of sales tax for raw hides and skins was three per cent, whereas for dressed hides and skins it was one and a half per cent. The Court held that a B · lower rate of tax in the case of dressed hides and skins was prescribed to offset the difference between the higher price of dressed hides and skins and the lower price of raw hides and skins. No material was shown to indicate that despite this lower rate of tax, imported hides and skins were subjected to discrimination. Upholding the levy, the Division Bench held as follows:- c

"9 .... The question as to when the levy of tax would constitute discrimination would depend upon a variety of factors including the rate of tax and the item of goods in respect of the sale of which it is levied. The scheme of Items 7(a) and 7(b) of the Second Schedule to the State Act is that in case of raw hides and skins which are purchased locally in the State, the levy of tax would be at the rate of 3 per cent at the point of last purchase in the State. When those locally purchased raw hides and skins are tanned and are sold locally as dressed hides and skins, no levy would be made on such sales as those hides and· skins have already been subjected to local tax at the rate of 3 per cent when they were purchased in raw form. As against that, in the case of hides and skins which have been imported from other States in raw fonn and thereafter tanned and then sold inside the State as dressed hides and skins, the levy of the tax is at the rate of 11/2 per cent at the point of first sale in the State of the dressed hides and skins. This levy cannot be considered to be discriminatory as it takes into account the higher price of dressed hides and skins compared to the price ofraw hides and skins. It also further takes note of the fact that no tax under the State Act has been paid in respect of those hides and skins. The legislature, " (1977) 1 sec 234 H

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

A it seems, calculated the price of hides and skins in dressed condition to be doubled the price of such hides and skins in raw state. To obviate and prevent any discrimination or differential treatment in the matter of levy of tax, the legislature therefore prescribed a rate of tax for sale of B dressed hides and skins which was half of that levied under Item 7(a) in respect of raw hides and skins." (Id. at p. 239-240)

198Copy pinpoint198. A subsequent judgment of a Bench of two Judges in State of c Karuataka v. Hausa Corporation 84, involved a challenge to the constitutional validity of an entry tax legislation, namely, the Kamataka Tax on Entry of Goods Into Local Areas for Consumption, Use or Sale Therein Act, 1979. The law was enacted under Articles 245 and 246 read with Entry 52 of the State List. Explaining the ambit of Article D 304(a), this Court held that:

"30. Article 304 lifts the embargo placed on the legislative power of State to enact law which may infringe the freedom of inter-State trade and commerce if its requirements are E fulfilled. Ar1icle 304(a) imposes a restriction on the power of legislature of a State to levy tax which may be discriminatory in character by according discriminatory treatment to goods manufactured in the State and identical goods imported from outside the State. The effect of Article F 304(a) is to treat imported goods on the same basis as goods manufactured or produced in a State. This Article further enables the State to levy tax on such imported goods in the same manner and to the same extent as may be levied on the goods manufactured or produced inside the State. If a State tax law accords identical treatment in the matter of G levy and collection of tax on the goods manufactured within the State and identical goods imported from outside the State, Article 304(a) would be complied with. There is an underlying assumption in A11icle 304(a) that such a tax when .. (1980) 4 sec 697 H

JINDAL STAINLESS LTD. v. STATE OF HARYANA 629

[DR. D. Y. CHANDRACHUD, J.]

levied within the constraints of Article 304(a) would not be violative ofA1ticle 301 and State legislature has the power to levy such tax." (Id. at p. 712) The Court considered whether the Act being leviable on the entry of goods into a local area, it had a direct and immediate impact on the movement of goods thereby infringing the freedom of inter-state trade guaranteed in Article 301. In that context, the Cou1t observed thus:

"32 .... To the extent, the impugned tax is levied on the entry of goods in a local area it cannot be gainsaid that its c immediate impact would be on movement of goods and the measure would fall within the inhibition of Article 301. Can it, however, be said that this tax imposes restrictions which in the facts and circumstances of the case could not be said to be reasonable?" (Id. at p. 713) D The Court held that the petitioners were unable to establish before the High Court that the burden of the tax was so heavy as to constitute an unreasonable restriction on the freedom of trade and commerce. The Court held that a levy which was reasonable in its impact on the movement of goods and was imposed for augmenting municipal finances which had been adversely affected due to the abolition of octroi could not be held to be an impediment to Inter-state trade and commerce. Even if the tax imposed an economic impediment to the activity taxed, it was held not to be unreasonable or against public interest. The Court observed that though the Bill had not received the sanction of the President under clause (b) of Article 304, this was cured under Article 255 by the grant of Presidential assent and hence the legislation fell within the purview ofArticle 304(b). Being not discriminatory, it was held thatArticle 304(a) was not breached. The constitutional validity of the legislation was thus analysed on both the anvil of clauses (a) and (b) of Article 304 by the Bench of two Judges. G J.2 Exemptions and incentives : Video Electronics and Mahavir

199Copy pinpoint199. A Bench of two Judges of this Court in Weston Electroniks

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

A v. State of Gujarat' 5 , dealt with the validity of an exemption granted under the Gujarat Sales Tax Act, 1969. A notification was issued under Section 49(2) of the Act by which sales tax on television sets imported from outside the state was fixed at 10 per cent, whereas it was one per cent for goods manufactured within the state. Adverting to the judgment B of the Constitution Bench in Mehtab Majid, a Bench of two learned Judges noted the defence of the state that the rate of tax was reduced for locally manufactured goods by way of an incentive, placing reliance on clauses (b) and ( c) of Article 39 of the Constitution. This in the view of the Court did not provide a justification for a discrimination between imported goods and goods which were locally manufactured or produced. c The prescription of a lower rate of tax for the latter was held to be invalid. This Court held:

" ... An exception to the mandate declared in Article 301 D and the prohibition contained in clause (1) of Article 303 can be sustai~ed on the basis of clause (a) of Article 304 only if the conditions contained in the latter provision are satisfied. In the result, the discrimination effected by applying different rates of tax between goods imported into the State of Gujarat and goods manufactured within the E State must be struck down."

200Copy pinpoint200. The judgment in Weston Electroniks was considered but distinguished by a larger Bench of three Judges of this Court in Video F Electronics Pvt. Ltd. v. State of Punjab 86 . The judgment of this Court, inter alia, dealt with a challenge to the constitutional validity of notifications issued under the Uttar Pradesh Sales Tax Act, 1948, as well as under the Punjab General Sales Tax Act. Under the notification issued under the Uttar Pradesh legislation, an exemption from the payment of sales tax was granted for goods manufactured in new industrial units, G where the date of commencement of production fell between two stipulated dates. The exemption was for a stipulated period reckoned from the date of first sale if such sale to9k place not later than six months

" (1988) 2 sec 568 " (1990) 3 sec 87 H

JINDAL STAINLESS LTD. v. STATE OF HARYANA 631

[DR. D. Y. CHANDRACHUD, J.]

from the commencement of production.The period of exemption was confined for a specified period of three to seven years. Insofar as the State of Pu1~ab was concerned, sales tax at the rate of 12 per cent was provided on electronic goods sold within the state irrespective of their manufacture. In pursuance of a notification issued under the sales tax law, the rate of sales tax payable by electronic manufacturing units producing goods specified thereunder was brought down from 12 per cent to 1 per cent. The reduction in sales tax was defended on the ground that it was an incentive to a backward industrial state.While affinning the legality of the exemption notifications, a Bench of three learned Judges observed that this was not a case involving "a naked blanket preference in favour of locally manufactured goods, as against c goods coming from outside the state87 ". The Court held that the both under the notifications issued in Uttar Pradesh and in Punjab there was no discrimination against goods manufactured outside the state for the following reasons: D·

"35 ... .In case of Punjab, an overwhelmingly large number oflocal manufacturers of similar goods are subject to sales tax and, therefore, the general statement that the manufacturers within the State are favoured against the manufacturers outside the State, is incorrect. Under the E notifications in case of U.P., only newly set up units are eligible to claim the benefits thereunder for a limited period of5 years and that also only if they strictly comply with the tenns and conditions set out in the notification." (ld. at p. 113) F

201Copy pinpoint201. A close reading of the judgment in Video Electronics would thus indicate that both sets of notifications involving the States ofUttar Pradesh and Punjab were carefully structured to cover one or more of the following circumstances: G (i) Availability of a reduced rate of sales tax to new industrial units;

"(Id. at p. 112, Para 35) H

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

A (ii) Applicability of a reduced rate of sales tax to producers of certain specified goods, such as electronic goods; (iii) Limitation of the period during which the reduced rate of tax could operate; and (iv) Applicability of the general rate of sales tax to an B overwhelmingly large number of local manufacturers, at par with imported goods.

202Copy pinpoint202. While sustaining the grant of a reduced rate of sales tax, this c Court distinguished, inter alia, the judgment in Weston Electroniks (supra) and similar cases in the following observations:

"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 goods manufactured by all those producers in the State who do not fall within the exempted category at par with the rate applicable to imported goods as we have read these cases. Hence, it was not necessary in those decisions to consider the problem in its present aspect. If, however, the said power is exercised 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 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 courts. That is not the situation in the instant cases." (Id. at p. 110) (emphasis supplied)

G However, in the same judgment, the following observations have been made: "20 ..... In our opinion, Part Xlll of the Constitution cannot be read in isolation. It is part and parcel of a single H

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constitutional instrument envisaging a federal scheme and A containing general scheme conferring legislative powers in respect of the matters relating to List II of the Seventh Schedule on the States. It also confers plenary powers on States to raise revenue for its purposes and does not require that every legislation of the State must obtain assent of the B President. Constitution of India is an organic document. ...... . Hence, the economic development of States to bring these into equality with all other States and thereby develop the economic unity of India is one of the major commitments c or goals of the constitutional aspirations of this land. For working of an orderly society, economic equality of all the State is as much vital as economic unity." (Id at p. 104)

203Copy pinpoint203. The substratum of the judgment in Video Electronics, clearly D is that Article 304(a) would not be breached by a classification brought about by a carefully structured notification which grants incentives to local industry of a specified class of units, with reference to a specific category of rnanufactured goods and for a stipulated period.If the observations in paragraph 20 (quoted above) are however, construed to set a broad principle, that would defeat the primary objective underlying E Article 304( a) of the Constitution. This was noticed in a subsequent decision in Shrec Mahavir Oil Mills v. State of J & K 88 . In that case, under the J & K General Sales Tax Act, 1962, sales tax on edible oil was prescribed at 4 per cent. However, in order to protect the local edible oil industry, the state government issued a notification directing that the F goods manufactured by a dealer operating as a small-scale industrial unit in the state would be exempted from the payment of tax to the extent and for the period specified. Subsequently, edible oils in general were shifted from Schedule D to Schedule C attracting tax at 8 per cent. There were in fact no large industries in Jammu and Kashmir G producing edible oil. Out-of state manufacturers unsuccessfully impugned the notification before the High Court. Explaining the ambit of Article 304, the Bench of two learned Judges observed thus:

"(1996) 11 sec 39 H

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A "8 .... The idea was not really to empower the State Legislatures to levy tax on goods imported from other 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 B 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, a provision prohibiting discrimination against the imported goods. 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 c goods imported from other States/Union Territories but do not, in that process, discriminate against them vis-a-vis goods manufactured locally". In short, the clause says: levy of tax on both ought to be at the same rate. This was and is a ringing declaration against the States creating what may be called "tax barriers" - or "fiscal barriers", as they may be called - at or along their boundaries in the interest of freedom of trade, commerce and intercourse throughout the territory of India, guaranteed by Article 301. As we shall presently point out, this clause does not prevent in any manner the States from encouraging 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 barriers - or fiscal barriers, as they can be called -around themselves and/or insulate themselves from the remaining .territories of India by erecting such "tariff walls." (Id. at p. 45)

204Copy pinpoint204. The judgment in Video Electronics was distinguished on the ground that in that case the notifications of the States ofUttar Pradesh and Punjab were carefully circumscribed: "22 ..... So far as the Uttar Pradesh notification was concerned, it was held that in as much as it was a case of grant of exemption "to a special class for a limited period H

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on specific conditions" and was not extended to all the producers of those goods, it does. not offend the freedom guaranteed by Article 301. Similarly, in the case of Punjab notification, it was held that since the exemption is for certain specified goods and also because "an overwhelmingly large number oflocal manufacturers of similar goods are subject to sales tax", it cannot be said that local manufacturers were favoured as against the outside manufacturers." (Id. at p. 51)

Again, it was held that:

"23 .All the above observations were made to justify ( 1) c grant of incentives and subsidies and (2) exemption granted to new industries, ofa specified type (small-scale industries commencing production within the two specified dates) and for a short period. They were not meant to nor can they be read as justifying a blanket exemption to all small-scale industries in the State irrespective of their date of establishment. The case before us clearly falls within the ratio of the Constitution Bench decision in A.T.B. Mehtab Majid and the decisions in Indian Cement, W.B. Hosiery Assn. and Weston Electroniks.The limited exception created in Video Electronics does not help the State herein for the reason that exemption concerned herein is neither confined to "new industries", nor is circumscribed by other conditions of the nature stipulated in the Uttar Pradesh notification. It is not possible to go on extending the limited exception created in the said judgment, by stages, which would have the effect of robbing the salutary principle underlying Part Xlll of its substance. Indeed, it has been the contention of Shri Salve that, on principle, the exception carved out in Video Electronics is unsustainable. 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 total exemption granted in favour of small- scale industries in Jammu and Kashmir producing edible oil H

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A (there are no large-scale industries in that State producing edible oil) is not sustainable in law." (Id. at p. 52)

205Copy pinpoint205. The Court cautioned that a limited exception which had beeri B carved out in Video Electronics should not be enlarged "lest it eat up the main provision." An unconditional exemption in the case of edible oil produced within the state from sales tax while subjecting similar goods produced in other states to sales tax at 8 per cent was held to violate Article 304(a) of the Constitution.

206Copy pinpoint206. The judgment in Shree Mahavir Oil Mills expressly left open the correctness of the view in Video Electronics. In Shree Mahavir Oil Mills an exemption from the payment of sales tax altogether granted to local industry was set aside as violating Article 304(a). The earlier decision in Video Electronics was distinguished on the ground that it related to a case not involving a blanket preference.

J.3 Article 304(a) and reasonable classification

207Copy pinpoint207. Does Article 304(a) prohibit a state from making a reasonable classification? Article 303 contains a prohibition on the legislature of a state granting a preference to one state over another and for making a discrimination. Article 304 operates, inter alia, as an exception to the norm contained in Article 303 as a result of its non-obstante provision. Under clause (a) of Article 304 a state may impose on goods which are imported from other states "any tax" to which similar goods manufactured or produced in that state are subject. This is followed by the further requirement that the imposition of such a tax shall "so however" not discriminate between goods so imported and goods so manufactured or produced. The principle which underlies clause (a) of Article 304 is non-discrimination between goods imported from another state and goods produced or manufactured within. Clause (a) enables the state legislature to impose a tax on goods imported, in the exercise ofits legislative power, so long as that tax is imposed also on similar goods manufactured or produced within. The latter part of clause (a) which contains a mandate against discrimination must have some meaning. In drafting the provision, H

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the founding fathers evidently did not confine it merely to a nonn providing A a parity of taxes between imported goods and similar goods produced or manufactured within.While stipulating that "any tax" to which similar goods produced or manufactured in the state are subject can be imposed on goods imported into the state from other states, clause (a) contains the mandate that there should be no discrimination between goods, that B are imported and goods that are manufactured within. The judgment in Video Electronics construed Article 304(a) as not precludin·g a state from taking steps to promote the growth of its own nascent industry. In the case of the State of Punjab, the defence of the State was that a reduced rate of sales tax was imposed to boost the electronics manufacturing industry and to stop existing industrial units shifting to c neighbouring states, particularly having regard to "the prevailing peculiar circumstances of Punjab". Moreover, while states, such as Gujarat and Maharashtra were fully developed industrial states, Punjab at that stage was backward in ten11S of industrial growth. These factors undoubtedly weighed with this Court in sustaining the notification. D

208Copy pinpoint208. A state does have a legitimate concern and interest in ensuring the growth and development of its own industry. Levels of industrial growth and economic development are not uniform across the country. A state legislature can have a legitimate interest, in the exercise of its law making power, to ensure balanced development and growth of its industry, paiticularly, in the nascent stage of industrial development. Yet, while doing so and granting incentives the legislature or as its delegate, the state government must ensure that the grant of incentives is carefully structured so as not to defeat the underlying spirit and object of Article 304(a). Moreover, when the grant of such an incentive is challenged, it is for the state to justify it with reference to circumstances which have a bearing on legitimate state interest.

J.3.1 Formal and substantive equality G

209Copy pinpoint209. Equality and non-discrimination are elements of the same universe. Equality has both a fo1mal and substantive content. In a formal sense, equality perceives of governance under the same legal regime and the application of the same legal principles. Unifonn application of law fulfils the nonn of fonnal equality. Substantive equality looks beyond H

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

A fonnal equality. That which may satisfy the requirements of formal equality may be inadequate and insufficient to meet the vision of substantive equality. Substantive equality recognises that there are histories of discrimination based on social background, gender and access to resources. They detennine the pursuit of opportunity. Hence, formal equality may not necessarily result in just outcomes. Treating all individuals alike may perpetuate deprivation and denial of economic opportunity to those for whom the social order has not provided equal access to education or to the resources necessary for economic advancement. Hence, substantive equality is premised on the foundation that in order to produce just outcomes and a real equality between individuals who are unequally situated, the legal regime must comprehend ml understanding of their past histories of discrimination, disability and injustice.

210Copy pinpoint210. Regions within a nation are not equal in a real sense in tem1s of economic advancement and social development. Typically, economic development has spread along areas which developed around the availability of infrastructure and resources. As ports and railways developed over the last century and a half, the benefits of development permeated to regions where economic opportunity was available. Yet, other areas of the country have remained in a state of comparative under-development as a result of circumstances such as geographical isolation and the absence of developed means of communication. Many regions have suffered from the absence of education and unavailability of access to health and sanitation. Social deprivation and discrimination have been the defining characteristic of large swathes of the nation. In this background, substantive equality like its mirror image-non- discrimination-construes the need for development in ten11S of mitigating regional histories of suffering and strife, and of denial, deprivation and discrimination.

211Copy pinpoint211. Article 304(a) is an amalgam of fonnal as well as substantive nom1s of equality. At a formal level, the provision requires that when a state imposes a tax on imported goods, the tax must likewise be imposed on similar goods which are manufactured or produced in the state. Parity of tax between domestic goods produced and manufactured in a state with those which are imported from other states is the first and fonnal requirement. But beyond this, Article 304(a) brings into focus substantive principles by embodying a norm of non-discrimination in its latter H

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[DR. D. Y. CHANDRACHUD, J.]

stipulation. Non-discrimination in a substantive sense requires a level playing-field. Two states in the nation may not be comparable in tenns of social development and economic advancement. One state may be industrialised with a growth of capital investment in urban infrastructure while another state may be predominantly agricultural. Article 304(a) does not prohibit a state from taking steps that are necessary for development and growth within its tenitories. But the submission is that while a state is at libe1ty to adopt policies which lead to its own economic advancement, it cannot utilise tax treatment as a measure to do so in a manner that would be forbidden by Article 304(a). This submission undoubtedly carries a degree of weight. But equally, parity of tax treatment between goods produced and manufactured in a state and c those which are imported from other states must be balanced with the need to produce a state of non-discrimination in a substantive as opposed to fonnal sense. Hence, the judgment of this Court in Shree Mahavir 0 Oil Mills v. State of J & K~ , while construing the earlier decisions in Video Electronics, held that the limited exception carved out in the latter decision should not consume the rule. Video Electronics was a situation where a rebate of sales tax was carefully structured to cover industrial units of a well-defined class over a measurable period of time and for rational reasons. This was not an unrestricted or blanket preference to domestic goods. A1ticle 304(a) was intended to protect freedom of trade and commerce from protectionism and parochial demands in the interest of the economic unity of the nation. Hence, while Article 304(a) cannot be read to prohibit a classification, it cannot be read to allow states to pursue policies of protectionism that destroy the essential freedom of trade and commerce. F

J.4 Production and manufacture within the home state

212Copy pinpoint212. Another aspect which needs close analysis is whether under Article 304(a), it is necessary that a state must actually produce or manufacture goods similar to goods imported from other states which G are sought to be taxed. The crucial words are "any tax to which similar goods manufactured or produced in that state are subject". Article 304(a) is not in the nature of a countervailing duty. Entry 51 of List II of the

"(1996) 11sec39 H

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A Seventh Schedule on the other hand, provides for countervailing duties and is as follows :

"51. Duties of excise on the following goods manufactured or produced in the State and countervailing duties at the same or lower rates on similar goods manufactured or produced elsewhere in India- (a) Alcoholic liquors for human consumption; (b) Opium, Indian hemp and other narcotic drugs and narcotics; But not including medicinal and toilet preparations containing alcohol or any substance included in sub-paragraph (b) of this entry."

213Copy pinpoint213. The words "similar goods manufactured or produced" are common to both Article 304(a) and Entry 51. However, the notion of a countervailing duty under Entry 51 (as the judgment in Kalyani Stores explains) is intended to counter balance the duty of excise levied on articles which are produced or manufactured in the state. The E countervailing duty is imposed on articles which are produced or manufactured elsewhere in India. In the context of a countervailing duty, this Court in Kalyani Stores held that it postulates the actual production or manufacture of goods. This principle cannot be extrapolated to Article 304(a) where the tax which is imposed is not in the nature of a F countervailing duty. Article 304(a), when it refers to a tax on goods, covers taxes on any aspect of goods which fall within the legislative competence of the state legislature. The latter part of Article 304(a) which contains the words "so however as not to discriminate between goods so imported and goods so manufactured and produced" is not a surplusage. The object of the latter part is to ensure that there is no G discrimination between goods which are produced or manufactured in the state and goods which are imported from other states. If a particular rate of duty is levied on goods which are produced or manufactured in a state, a higher rate of duty cannot be levied on goods imported from other states. This, however, does not preclude a state from imposing a H

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duty on imported goods where it does not actually produce or manufacture goods of that description. The observations of this Court in Kalyani Stores were made in the context of a countervailing duty under Entry 51 of List 11 which is distinguishable. A state, in other words, is not confind by Atticle 304(a) to impose a tax on imported goods, confined only to the basket of goods actually produced or manufactured within that state. To take an example, if motor vehicles are manufactured in six states, Article 304(a) does not restrict the power of the state legislatures of the other states to impose a tax (in the exercise of the legislative power) with respect to motor vehicles. Any other construction would lead to the unintended, if not absurd, consequence that a tax on goods which are impo1ted from other states can be levied only by those states c which actually manufacture similar goods within the state. If a state does not manufacture or produce goods similar to the imported goods on which a tax is imposed, no question of discrimination will arise. The object of A1ticle 304(a) is to prevent disparity of treatment between goods that are produced or manufactured in a state and goods which a D state imports from other states. Where a state does not actually produce onnanufacture goods of that description. no issue of discrimination qua Article 304(a) would arise.

K Entry Tax E

214Copy pinpoint214. Entry 52 of List II to the Seventh Schedule of the Constitution provides for : "52. Taxes on the entry of goods into a local area for consumption, use or sale therein." F Entry 89 of List I provides for terminal taxes on goods or passengers, cauied by railway, sea or air; taxes on railway fares and freights.

G K.1 Octrois and Terminal taxes

215Copy pinpoint215. The legislative history suuounding the incorporation of Entry 52 is a significant guide to interpreting its provisions. Section 80A of the Government of India Act, 1915 defined the powers of the provincial legislatures. Under the Devolution Rules, the following provisions were H

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

A contained in Item Nos. 7 and 8 of the Second Schedule :

"Item No. 7. An octroi Item No. 8. A Terminal tax on goods imported into or B expo1ied from a local area save where such tax is first imposed in a local area in which an octroi was not levied on or before 6 July, 1917."

In the Government oflndiaAct, 1935, Entry 49 of the legislative c lists (list II) provided as follows : "49.Cesses on entry of goods into a local area for consumption, use or sale therein. Tern1inal taxes were placed in List I."

216Copy pinpoint216. In the Government oflndia Act, 1935, Entry 49 used the expression "entry of goods into a local area for consumption, use or sale therein", instead and in place of"octroi" (as contained in the Devolution Rules under the Act of 1915). The Constitution incorporated Entry 52 in E List II in language which corresponds to Entry 49 of List II under the Government oflndiaAct, 1935 but with the difference that the expression 'taxes' is used instead of 'cesses'.

217Copy pinpoint217. The imposition of octroi has a historical significance both in India and elsewhere. Tracing its history, a Constitution Bench of this F CoUli in Diamond Sugar Mills Ltd. v. The State of Uttar Pradesh 90 , explained the meaning of octroi thus :

"Octroi is an old and well known tenn describing a tax on the entry of goods into a town or a city or a similar area for G consumption, sale or use therein. According to the Encyclopaedia Britannica octroi is an indirect or consumption tax levied by a local political unit, nomrnlly the

00(1961) 3 SCR 242 H

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commune or municipal authority, on certain categories of A goods on their entry into its area." (Id. at p. 252)

218Copy pinpoint218. Octroi was a tax levied on the entry of goods into areas which were administered by local bodies. When the draftsmen of the Constit~ition incorporated Entry 52 in List II, it was with the knowledge that the expression 'local area' had been used in the Government of B India Act, 1935. Moreover, it could not but have been present to the minds of the framers that the expression 'octroi' which was used in the Devolution Rules had been replaced subsequently in Entry 49 of List II in the Government of India Act of 1935 with a description rather than label : the label being descriptive of the entry of goods into a local area; C the purpose being consumption, use or sale therein. The expression 'therein' also indicates that the goods enter for the purpose of being used, consumed or sold within the local area.

219Copy pinpoint219. The situation that fell for consideration before the Constitution Bench in Diamond Sugar Mills arose under Section 3 of the UP Sugar D Cane Cess Act, 1956 under which the State Government was empowered to impose a cess not exceeding a stipulated amount on the entry of sugarcane into the premises of a factory for use, consumption or sale therein. The legislative competence of the state legislature was questioned on the ground that the premises of a factory did not constitute a local area within the meaning of Entry 52. The Constitution Bench held thus: E "The etymological meaning of the word "local" is "relating to" or "pertaining to" a place. It may be first observed that whether or notthe whole of the State can be a "local area", for the purpose of Entry 52, it is clear that to be a "local area" for this purpose it must be an area within the State. F On behalf of the respondents, it is argued that "local area" in Entry 52 should therefore be taken to mean "any part of the State in any place therein". So, the argument runs, a single factory being a part of the State in a place in the State is a "local area". In other words, "local area" means G "any specified area inside the State". The obvious fallacy of this argument is that it draws no distinction between the word "area" standing by itself and the phrase "local area". Ii the Entry had been "entry of goods into any area of the State ......... " some area would be specified for the purpose H

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

A of the law levying the cess on enhy. If the Constitution makers were empowering the State Legislatures to levy a cess on entry of goods into any specified area inside the state, the proper words to use would have been "entry of goods into any area .......... " It would be meaningless and B indeed incorrect to use the words they did use "entry of goods into a local area". The use of the words "local area" instead of the word "area" cannot but be due to the intention of the Constitution-makers to make sure that the power to make laws relating to levy on entry of goods would not extend to cases of entry of goods into any and every part c of the state from outside that part but only to entry from outside into such portions of the state as satisfied the description of"local area". (Id. at p. 250)

D In holding that a factory could not be a local area, the Constitution Bench observed that :

"It was with the knowledge of the previous history of the legislation that the Constitution-makers set about their task in preparing the lists in the seventh Schedule. There can be little doubt therefore that in using the words "tax on the entry of goods into a local area for consumption, use or sale therein", they wanted to express by the words "local area" primarily area in respect of which an octroi was leviable under item 7 of the Schedule tax rules, 1920-that is, the area administered by a local authority such as a municipality, a district Board, a local Board or a Union Board, a Panchayat or some body constituted under the Jaw for the governance of the local affairs of any part of the State. Whether the entire area of the State, as an area administered by the State Government, was also intended to be included in the phrase "local area", we need not consider in the present case." (Id. at p. 253)