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REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 3026 OF 2004

STATE OF U.P & ORS.                   APPELLANT(S) VERSUS

JAIPRAKASH ASSOCIATES LTD     RESPONDENT(S) WITH

Civil Appeal No. 3025 of 2004

STATE OF U.P & ANR.                   APPELLANT(S) VERSUS

JAIPRAKASH ASSOCIATES LTD. & ANR.     RESPONDENT(S) WITH

Civil Appeal No. 5567 of 2004 STATE OF U.P & ORS.                   APPELLANT(S)

VERSUS DIAMOND CEMENTS            RESPONDENT(S)

WITH

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Civil Appeal No. 7190 of 2004 STATE OF U.P & ANR.                    APPELLANT(S)

VERSUS CENTURY TEXTILE & INDUSTRIES LTD. & ORS.             RESPONDENT(S)

WITH Civil Appeal No. 333 of 2006

STATE OF U.P & ORS.                   APPELLANT(S) VERSUS

MAIHER CEMENT & ORS.              RESPONDENT(S) WITH

Civil Appeal No.         of 2013 (arising out of SLP (C) No. 11305 of 2013)

STATE OF U.P & ORS.                   APPELLANT(S) VERSUS

M/s U. P. ASBESTOS LTD.               RESPONDENT(S) AND

Civil Appeal Nos.         of 2013 (arising out of SLP (C) Nos. 6815-6816 of 2005)

STATE OF U.P & ORS.                   APPELLANT(S) VERSUS

BIRLA CORPORATION LTD. & ORS.         RESPONDENT(S)

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J U D G M E N T

H.L. Dattu, J.

1. Leave granted.

2. The  substantial  question  of  law  that  requires  to  be  considered  and  decided  in  these  appeals is, whether grant of rebate of tax by the  State  Government  by  issuing  a  notification  in  exercise of its powers under Section 5 of Uttar  Pradesh Trade Tax Act, 1948 (“the Act”, for short)  discriminates  between  the  goods  imported  from  neighbouring  States  and  goods  manufactured  and  produced  in  the  State  of  Uttar  Pradesh  and  therefore contravenes the Constitutional Provisions  viz.; articles 301 and 304(a) of the Constitution  of India.

3. The lead case is Civil Appeal No. 3026 of  2004.  The appellants are public limited companies,  manufacturing cement in their manufacturing units

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in Rewa district situate in the State of Madhya  Pradesh after procuring fly-ash from the thermal  power stations in the State of Uttar Pradesh and  thereafter  selling  the  manufactured  product  viz.  Cement in the districts of State of Uttar Pradesh.  

4. The  fly-ash  is  produced  from  coal  combustion  and  normally  dispersed  into  the  atmosphere which contains toxic chemicals that can  cause  environmental  pollution  and  hazards.  Therefore for utilization of fly-ash and to control  pollution, cement projects were set up to make use  of the fly-ash generated from the power plants.  

5. To encourage manufacturers using fly-ash in  manufacturing of their products, the Government of  Uttar  Pradesh  in  exercise  of  its  powers  under  Section 5 of the Act, had issued notification dated  18.06.1997, granting “rebate of tax” to the dealers  in the State of Uttar Pradesh excluding all other  dealers manufacturing cement outside the State of

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Uttar Pradesh using fly-ash purchased in the State  of  Uttar  Pradesh.   Annexure  appended  to  the  notification provided for name of the districts and  the period for which the rebate will be allowed.  The  notification  prior  to  its  rescinding  only  specified the percentage of rebate of tax to be  granted depending on the content of fly-ash used by  the dealers in the manufacturing of cement.

6. On a finding by the Government of Uttar  Pradesh on a later date that the notification is  vaguely  worded,  has  rescinded  the  earlier  notification dated 18.06.1997, and has issued fresh  notification dated 27.02.1998, in exercise of its  powers  under  Section  5  of  the  Act.   Apart  from  others the notification provides certain conditions  which requires to be fulfilled if the manufacturing  units intend to take benefit of the notification.  The condition No. 1 of the notification specifies  that  to  avail  the  benefit  of  rebate,  the  goods  should be manufactured in a unit established in the

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State  of  Uttar  Pradesh  and  secondly,  such  goods  shall be manufactured using fly-ash purchased from  the thermal power stations situated in the State of  Uttar  Pradesh.  The  notification  specifically  enlists the areas in Uttar Pradesh districts alone  for the purpose of the grant of rebate of tax by  the Government and therefore restricted the benefit  of  rebate  only  to  the  units  manufacturing  and  producing cement using fly-ash in Uttar Pradesh.  The notifications require to be extracted.  They  are as follows:

“[S. No. 1263] Notification No. T.T.-2-1885/XI-9(226)94- U.P. Act-15-48-Order-97, dated 18-6-1997

[Published in U.P. Gazette, dated  18.06.1997]

In exercise of the power under section  5 of the Uttar Pradesh Trade Tax Act, 1948  (U.P. Act No. XV of 1948) the Governor is  pleased:-

(a) to declare the goods having fly-ash con- tents of 10 per cent of more by weight to  be notified goods for the purposes of this  section;

(b) to grant a rebate of tax of twenty five  percent on goods having fly-ash contents  between ten to thirty per cent by weight

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and a rebate of tax of fifty per cent on  the goods having fly-ash contents exceed- ing thirty percent by weight on the tax  levied under the Act in the district men- tioned  in  column-2  Annexure  given  below  for  the  period  mentioned  in  column-3  of  the said Annexure:-

ANNEXURE Serial  Number

Name of District Period for  which the  rebate of  tax will be  allowed

1 2 3 1. Banda, Hamipur, Jalaun,  

Mahoba, Jhansi,  Lalitpur and Shahuji  Nagar

Twelve  Years

2. Almora, Chamoli,  Dehradun, Fatehpur,  Jaunpur, Kanpur  (Dehat), Nanital, Fauri  Garhwal, Pithoragarh,  Sultanpur, Champawat,  Tehri Garhwal, Udham  Singh Nagar, Uttar  Kashi and Growth  Centre.

Twelve  Years

3. (i)  The  Districts  of  Azamgarh,  Ambedkar- Nagar,  Bahraich,  Ballia,  Barabanki,  Deoria,  Etah,  Etawah,  Faizabad,  Farrukhabad,  Ghazipur,  Gonda,  Hardoi,  Mainpuri,  Mathura,  Mau,  

Ten Years

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Moradabad,  Padrauna,  Pillibhit,  Pratapgarh,  Raibareili,  Rampur,  Shahjahanpur,  Sidharth  Nagar,  Sitapur,  Unnao,  Kaushambi, Jyotibaphule  Nagar,  Mahamaya  Nagar  and Shravasti (ii)  The  area  of  Allahabad  District  in  South  of  the  river  Jamuna  and  confluent  Ganga  (Excluding  the  area  included  under  Municipal  Corporation  Allahabad)

Ten Years

(iii) The Taj Trapezium  Area

Ten Years

(IV)  Greater  Noida  Industrial  Development  area

Ten Years

The  Districts  of  Agra  (excluding  Taj  Trapezium  area),  Aligarh  (excluding  Tax  Trapezium  Area),  Allahabad  (excluding  the  area  in  south  of  rivers  Jamuna  and  confluent  Ganga  but  including  the  area  included  under  Municipal  Corporation  Allahabad),  Bareilly,  Bhadohl,  Bijnor,  Firozabad  (excluding  Taj  Trapezium  area),

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Ghaziabad  (excluding  Greater  NOIDA  Industrial  Development  Area),  Gorakhpur,  Haridwar,  Kanpur  (Nagar),  Lakhimpur  Kheri,  Lucknow,  Maharajganj,  Meerut,  Muzaffarnagar,  Saharanpur,  Varanasi,  Gautam  Budh  Nagar,  Chandauli, Mirzapur and  Sonbhadra.

7. The second notification, dated 27.02.1998  issued  by  the  Government  of  Uttar  Pradesh  is  extracted and reads as under:-

“[S. No. 1289] Notification No. T.T.-2-592/XI-9(226)94-

U.P. Act-15-48 Order-98, dated 27-2-1998

Whereas,  the  State  Government  is  satisfied  that  it  is  expedient  in  the  public interest so to do:

Now,  therefore,  in  exercise  of  the  powers under section 5 of the Uttar Pradesh  Trade Tax Act, 1948 (U.P. Act No. XV of  1948), read with Section 21 of the Uttar  Pradesh General Clauses Act, 1904 (U.P. Act  No. 1 of 1904), the Governor, with effect  from March 1, 1998 is pleased:-

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(a) to rescind the Notification No. T.T.- 2-1885/XI-9(226)94-U.P.  Act-15-48  Or- der-97, dated June 18, 1997;

(b) to  grant  a  rebate  of  tax  of  twenty  five percent on goods having fly-ash  contents  between  ten  to  thirty  per  cent by weight and a rebate of tax of  fifty  per  cent  on  the  goods  having  fly-ash contents exceeding thirty per- cent by weight on the tax levied under  the Act in the districts mentioned in  column-2 Annexure given below for the  period  mentioned  in  column-3  of  the  said Annexure subject to the following  condition:-

CONDITIONS

(i) Such goods shall be manufactured in a    unit established in the area mentioned  in column-2 of the Annexure;

(ii) Such goods shall be manufactured using  fly-ash, purchase or received from the  thermal power stations situated in Ut- tar Pradesh;

(iii) the dealer claiming rebate of tax under  this notification shall keep records in  which  following  information  will  be  shown:

(a) date;

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(b) name  of  thermal  power  stations  from which fly-ash is purchased or  received;

(c) weight of fly-ash; (d) name of manufactured goods; (e) weight of manufactured goods (f) weight of fly-ash used in manu-

facturing of such goods (g) weight  of  other  goods  used  in  

manufacture of such goods;

(iv) the total weight of manufactured goods  and percentage of fly-ash used, should  be  mentioned  on  goods  of  packing  of  such goods as far as possible.  

ANNEXURE (Supra)

Explanation:-  The  verification  of  percentage of fly-ash used by  fly-ash  based  industries  shall be made on the basis of  Government  orders  issued  in  this  behalf  from  time  to  time.”

8. To complete the narration, it is apropos to  state that the aforesaid notification is rescinded

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by the State Government with effect from 14.10.2004  by issuing notification dated 14.10.2004.

9. The  cement  industries  situated  in  the  neighbouring States aggrieved by the notification  of  the  Government  of  Uttar  Pradesh,  dated  27.02.1998 had approached the High Court by filing  Writ  Petitions.  In  that  they  had  sought  for  quashing  of  the  notification,  dated  27.02.1998  insofar as Condition No. 1 (as extracted above) of  the notification and other consequential reliefs.  

10. The High Court has come to a finding on two  broad issues; firstly, whether Condition No. 1 of  the notification i.e. the grant of rebate of tax on  the  sale  of  cement  in  the  Districts  of  Uttar  Pradesh alone contravenes articles 301 and 304(a)  of  the  Constitution  of  India.  On  the  aforesaid  issue, the Court has concluded that the grant of  rebate of tax by the State Government discriminated  between  the  imported  goods  and  the  goods  manufactured in Uttar Pradesh restricting the free

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movement of goods from one State to the other and  therefore impinges articles 301 and 304(a) of the  Constitution of India.

11. The Second question that is considered and  decided by the High Court, is, whether doctrine of  severability will apply and therefore if Condition  No. 1 in the notification violates articles 301 and  304(a)  of  the  Constitution  of  India;  should  the  notification  be  struck  down  in  its  entirety  or  merely the impinging condition in the notification.  The High Court has relied on the decision of this  Court in Loharn Steel Industries v. State of Andhra  Pradesh,  (1997)  2  SCC  37,  and  has  come  to  the  conclusion  that  if  certain  conditions  in  the  notification violate freedom of trade and commerce,  then that portion of the notification restricting  rebate of tax to the districts in State of Uttar  Pradesh  alone  is  severable.  Therefore,  the  High  Court for the reasons stated above has declared the  Condition  No.1  of  the  notification  as  illegal,

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arbitrary  and  discriminatory,  accordingly  has  quashed the Condition No.1 of the notification and  also granted consequential relief in the form of  rebate to the respondents-herein and further has  directed that deposits made by the respondents in  excess of what was payable was to be refunded with  an interest of 10% per annum.

12. Being  aggrieved,  the  Revenue  calls  in  question the correctness or otherwise of the common  judgment and order passed by the High Court in a  batch of Writ Petitions dated 29.01.2004.

13. Shri  Sunil  Gupta,  learned  senior  counsel  appearing  for  the  appellants  contended  that  the  notification issued by the Government provides for  grant of rebate to an industry which manufactures  cement  by  using  fly-ash  as  a  raw  material.  The  rebate is granted by the Government to encourage  industries in removing and re-using fly-ash. Since  the notification only provides for rebate, it would

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not fall within the meaning ascribed to ‘any tax’  under article 304(a) of the Constitution and would  therefore  does  not  contravene  the  Constitutional  Provisions. In aid of his submission, the counsel  would heavily rely on the decision of this Court in  the case of Video Electronics Pvt. Ltd. v. State of  Punjab, (1990) 3 SCC 87. The learned counsel would  further argue that rebate and imposition/ exemption  are  two  different  concepts.  Exemption  is  an  antithesis of ‘imposition’ and it belongs to the  realm of imposition of tax and therefore exemption  simpliciter  without  reason  is  barred  by  article  304(a) of the Constitution of India. Rebate, on the  other hand, is repayment or refund of an amount and  therefore it may not be a subsidy but it is in the  form of an incentive or a grant.  He further would  point out that imposition of tax is different from  collection or repayment of tax.  In other words, he  would submit that there are two different stages:-  one would be the imposition and levy of taxes and  the  other  is  collection  and  repayment  of  taxes.

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Rebate of tax as such is a repayment of taxes and  is certainly not a part of levy or imposition of  taxes. He would further submit that for rebate of  tax as against non-imposition or exemption at point  of tax being common, Part XIII of the Constitution  will not apply.  

14. In the second limb of the argument, the  learned  counsel  would  submit  that  there  are  two  crutches in the notification, if one of them is  taken away the other cannot function independently.  Therefore,  he  would  submit  that  because  the  respondents have not challenged Clause(2) and have  only challenged Clause(1) of the notification, then  while granting relief if one of the condition is  declared  invalid  then  both  the  clauses  of  the  notification are to be struck down.   

15. Thirdly, the learned counsel would contend  that the State of Uttar Pradesh has no territorial  jurisdiction  over  the  industrial  units  situate  outside the State of Uttar Pradesh and therefore,

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the  notification  also  inherently  does  not  and  cannot give the Uttar Pradesh Authorities any extra  territorial  jurisdiction.  Therefore,  it  is  nigh  impossible  for  the  accessing  authorities  to  effectively  enforce  machinery  and  procedural  provisions. This aspect of the matter is not taken  note of is the submission of the learned counsel.  Finally  concludes,  that,  rebate  is  outside  the  scope  of  Part  XIII  and  article  304(a)  of  the  Constitution of India, and Section 5 of the Act is  a beneficial legislation passed in public interest  by  the  State  Government  and  therefore  a  liberal  approach requires to be adopted by this Court.  

16. Per  Contra,  Shri  Dhruv  Agarwal,  learned  senior counsel would contend, that, by reason of  the notification all the sales of the Cement in  Uttar  Pradesh  manufactured  by  cement  industries  using  fly  ash  for  such  manufacture  outside  the  State of Uttar Pradesh are subjected to levy of  sales tax at the rate of 12.5 per cent, whereas the

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sales  of  the  cement  manufactured  by  cement  industries in Uttar Pradesh are granted rebate of  tax from such levy and thus the cement industries  outside  the  State  of  Uttar  Pradesh  are  clearly  discriminated against.  It is submitted that this  discrimination violates the provisions of articles  301 and 304(a) of the Constitution of India.  It is  further  contended  that  article  304(a)  of  the  Constitution speaks of imposition of tax and rebate  of tax is nothing but a facet of imposition of tax  and therefore the provision of article 304(a) of  the Constitution is attracted.  He would further  contend that article 304(a) of the Constitution is  not meant to be blanket legislation and that grant  of  incentives  and  subsidies  for  backward  areas  given under the provisions of the Act are different  from rebate of tax given under the notification. He  would rely on  Shree Mahavir Oils and another v.  State of Jammu and Kashmir, (1996) 11 SCC 39, and  would submit that the aforesaid case clarified the  observations  made  in  the  Video  Electronics  case

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(Supra),  wherein  it  is  observed  that  exemption  without  reasons  is  discriminatory  and  would  directly hit by article 304(a) of the Constitution  of India. He would further point out that rebate of  tax would have the same effects of an exemption  because it would mean refunding the full amount of  tax collected.  Therefore, rebate is nothing but a  concessional rate of tax.  

17. The learned counsel, would further argue on  the point of severability that while severing, the  scope of the provision is enlarged and therefore if  the  invalid  portion  of  the  notification  viz.  Condition No.1 of the notification can be severed  from the valid portion of the notification without  changing  the  object  of  the  notification,  then  relying on the principles of D.S. Nakara v. Union  of  India,  1983  2  SCR  165,  the  doctrine  of  severability should be made applicable. Lastly it  is submitted that the constitutional validity of a  taxing  provision  cannot  be  tested  on  the  touch

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stone  of  inability  in  enforcing  machinery  provision.

18. Shri Ashok H. Desai, learned senior counsel  would  argue  that  the  primary  question  for  consideration  is  whether  the  rebate  of  tax  introduced  by  the  Government  of  Uttar  Pradesh  creates a trade barrier/ fiscal barrier or in other  words the Government has further insulated itself  by  creating  tariff  walls,  therefore,  impinging  article 301 and article 304(a) of the Constitution  of India. He would therefore make an effort to show  the legislative history and scope of article 304(a)  read with article 301 of the Constitution of India.  To  date  back  to  the  historical  genesis  of  the  aforesaid articles, he would submit that they were  introduced to remove the trade blocks/ barrier that  existed  between  princely  States  prior  to  independence  but  subsequently  to  foster  economic  development in the whole of India and to preserve  its unity, such economic barriers were restricted

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which  were  discriminatory  in  nature.  He  would  further submit that to understand whether any such  tax introduced by the Government is discriminatory  or  not,  the  effect  and  the  result  of  such  tax  imposed is to be seen. If the overall result or  such effect restricts the free movement of goods  between the States then it would violate articles  301 and 304(a) of the Constitution of India.  

19. He further submits that it is undoubtedly  true  that  it  is  the  prerogative  of  the  State  Government to encourage the backward areas in its  State by way of incentives but in the instant case  the  State  of  Uttar  Pradesh  does  not  segregate  between  backward  and  developed  districts  in  the  State but have rather extended the rebate of tax to  even  the  industrially  advanced  districts  in  the  State of Uttar Pradesh and further the rebate of  tax  is  in  the  nature  of  exemption/  concessional  rate of tax and the overall effect of such rebate  is  that  it  altogether  exempts  the  dealer

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manufacturing and producing cement by using fly-ash  in  Uttar  Pradesh  from  the  payment  of  tax  and  therefore  rebate  qualifies  as  any  such  ‘tax’  imposed under article 304(a) of the Constitution  that would give a discriminatory treatment to two  different goods, one originating within the State  and the other as the out-of–State goods.   

20. The learned counsel would further contend  that the concept of rebate of tax is within the  realm of taxation and whether it is exemption or  repayment by way of a rebate of tax, the only test  is,  one  has  to  be  mindful  of  its  impact  as  to  whether  it  is  a  trade  barrier  thereby  impinging  article  304(a)  of  the  Constitution  of  India.  He  would further point his finger to Section 5 of the  Act and submit that Section 5 of the Act is couched  in a manner so as to reflect that it is a rebate of  tax.  Therefore,  the  intention  of  the  framers  of  article  304(a)  of  the  Constitution  cannot  be  overlooked which was only to restrict trade barrier

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irrespective of their nomenclature used to shield  such levy or imposition of tax. It is therefore, he  would submit that it is not the words used but the  impact on the manufacturer(s). Article 304(a) of  the  Constitution  is  therefore  a  constitutional  limitation  in  itself  that  prevents  a  State  from  discriminating between the goods so imported and  the  goods  so  manufactured  or  produced  by  the  dealers within the State unless the State in public  interest  impose  reasonable  restriction  under  article 304(b) of the Constitution after obtaining  Presidential  assent.  Shri  Desai,  would  therefore  submits  that  the  amendment  in  the  notification  brought by the Government further does not satisfy  the requirements of the aforesaid articles by not  obtaining Presidential assent if the legislation is  made in public interest.

21. There  are  three  broad  issues  for  our  consideration:  

• firstly, whether the grant of rebate of tax

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is hit by constitutional limitation on the  State legislature under article 304(a) read  with  article  301  of  the  Constitution  of  India, as and when it discriminates between  the  imported  goods  and  the  goods  manufactured   and  produced  outside  the  State.   

• the second issue that arises is, whether  the grant of rebate, directly or indirectly  restrict the free flow of trade, commerce  and  intercourse  among  States  by  assuming  the  effects  of  an  exemption/  concession  which is nothing but a concept within the  scope of taxation.  

• The  third  issue  is,  can  only  the  first  condition of the notification be severed  if it is found to be violative of article  304(a)  of  the  Constitution  of  India  without  striking  down  the  whole  of  the  notification.

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22. Before  dealing  with  the  respective  contentions raised before us, we shall set out the  relevant  Provisions  of  the  Act.   The  dictionary  clause  defines  ‘dealer’,  ‘manufacturer’,  ‘tax’  ‘trade  tax’  etc.  The  definitions  are  therefore  extracted and it reads as under:   

“(bb)  “Trade  Tax” means  a  tax  payable  under this Act on sales or purchases of  goods, as the case may be; (c)  “dealer” means any person who carries  on in Uttar Pradesh (whether regularly or  otherwise)  the  business  of  buying,  selling, supplying or distributing goods  directly  or  indirectly,  for  cash  or  deferred  payment  or  for  commission,  remuneration  or  other  valuable  consideration and includes –  

(i) a  local  authority,  body,  corporate,  company,  any  co-operative  society or other society, club, firm,  Hindu  undivided  family  or  other  association  of  persons  which  carries  on such business; (ii)a  factor,  broker,  arhati,  commission  agent,  del  credere agent,  or  any  other  mercantile  agent,  by  whatever  name  called  and  whether  of  the same description as herein before

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mentioned or not, who carries on the  business of buying, selling, supplying  or distributing goods belonging to any  principal, whether disclosed or not; (iii) an auctioneer who carries on  the business of selling or auctioning  goods  belonging  to  any  principal,  whether disclosed or not, and whether  the offer of the intending purchaser  is accepted by him or by the principal  or nominee of the principal;  (iv) a Government which, whether in  the course of business or otherwise,  buys,  sells,  supplies  or  distributes  goods, directly or otherwise, for cash  or  for  deferred  payment  or  for  commission,  remuneration  or  other  valuable consideration;  (v) every person who acts within the  State as an agent of a dealer residing  outside  the  State,  and  buys,  sells,  supplies or distributes goods in the  State or acts on behalf of such dealer  as-  

(a) a mercantile agent as defined  in Sale of Goods Act, 1930; or   (b)   an  agent  for  handling  of  goods  or  documents  of  title  relating to goods; or  (c)  an agent for the collection  or the payment of the sale price  of  goods  or  as  a  guarantor  for  such collection or such payment;  (vi) a firm or a company or other  body  corporate,  the  principal

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office or headquarters whereof is  outside  the  State,  having  a  branch or office in the State, in  respect  of  purchases  or  sales,  supplies or distribution of goods  through such branch or office;  [(vii)  every  person  who  carries  on  the  business  of  transfer  of  property  in  goods  (whether  as  goods  or  in  some  other  form)  involved  in  the  execution  of  a  works contract;  

(viii) every person who carries  on  the  business  of  transfer  of  the  right  to  use  any  goods  for  any purpose (whether or not for a  specified  period)  for  cash,  deferred  payment  or  other  valuable consideration;

[(n) “tax” includes an additional tax and  the  composition  money  accepted  under  Section 7-D]; [(e-1)  “manufacture”  means  producing  making , mining, collecting, extracting,  altering,  ornamenting  ,  finishing,  or  otherwise processing, treating or adapting  any  goods;  but  does  not  include  such  manufactures or manufacturing processes as  may be prescribed;] [(ee)  'Manufacturer'  in  relation  to  any  goods means the dealer who makes the first  sale  of  such  goods  in  the  State  after  their manufacture and includes:--

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(i)  a  dealer  who  sells  bicycles  in  completely knocked down form;

(ii) a dealer who makes purchases from  any other dealer not liable to tax on  his  sale  under  the  Act  other  than  sales exempted under Sections 4, 4-A  and 4-AAA.]

[(h) 'Sale',  with  its  grammatical  variations  and cognate expressions, means any transfer of  property in goods (otherwise than by way of a  mortgage, hypothecation, charge or pledge) for  cash or deferred payment or other valuable con- sideration, and includes—

(i) a transfer, otherwise than in pursu- ance  of  a  contract  of  property  in  any  goods for cash, deferred payment or other  valuable consideration;

(ii)  a  transfer  of  property  in  goods  (whether as goods, or in some other form)  involved in the execution of a works con- tract;

(iii) the delivery of goods on hire pur- chase or any system of payment by instal- ments;

(iv) a transfer of the right to use any  goods for any purpose (whether or not for  a  specified  period)  for  cash,  deferred  payment or other valuable consideration;

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(v) the supply of goods by any unincorpor- ated association or body of persons to a  member thereof for cash, deferred payment  or other valuable consideration; and

(vi) the supply, by way of or as part of  any service or in any other manner whatso- ever, of goods, being food or any other  article for human consumption or any drink  (whether or not intoxicating) where such  supply or service is for cash or deferred  payment or other valuable consideration;]”

23. Section  3  of  the  Act  is  the  charging  provision. Section 3-A provides for the rate of tax  payable by a dealer under the Act.  Section 4 of  the Act provides for grant of general exemption for  the purposes of the Act. Section 4-A of the Act  provides for grant of exemption from trade tax when  the State Government is of the opinion that it is  necessary so to do for increasing the production of  any goods or for promoting the development of any  industry in the State. Section 4–AA provides for  concession in the rate of tax to certain industrial  units  not  exceeding  twenty-five  per  cent  on  the  sale of goods manufactured by such industrial unit

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which provides employment to the persons belonging  to  the  scheduled  caste  and  scheduled  tribe,  and  other backward classes.  Section 4AAA authorizes  the State Government to grant special concession to  certain  industrial  undertakings  in  special  situations and circumstances. Section 5 of the Act  authorizes the State Government to grant rebate of  tax  on  certain  purchases  or  sales  if  it  is  satisfied that it is in the public interest so to  do by issuing a notification allow a rebate up to  the full amount of tax on the sale or purchase of  any goods or the sale or purchase of such goods by  such person or class of persons as may be specified  in the notification. Section 5 is relevant for the  purpose  of  this  case  and  therefore  the  same  is  extracted: “Sec. 5 – Rebate of tax on certain purchases or  sale:

1.  Where  the  State  Government  is  satisfied that it is expedient in the  public interest so to do, it may by  notification,  and  subject  to  such  conditions and restrictions as may be  specified therein, allow a rebate up

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to the full amount to ; (a) the  sale  or  purchase  of  any  

goods, (b) the  sale  or  purchase  of  such  

goods  by  such  person  or  class  or  persons as may be specified in the  said notification.

2. The  rebate  under  sub-Section  (1)  may  be  allowed  with  effect  from  a  date prior to the notification.

  24. Section 5 of the Act is in three parts.  Firstly, it authorizes the State Government that if  it  is  satisfied  that  grant  of  rebate  of  tax  is  expedient in the public interest it may do so by  issuing  the  notification  and  secondly,  that  the  notification  may  allow  a  rebate  up  to  the  full  amount of tax levied on a specified point of sale  or purchase of any goods or the sale or purchase of  such  goods  by  such  person  or  class  of  persons.  Lastly,  the  notification  may  also  impose  such  conditions or restriction for availing the benefit  under the notification.

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25. In  exercise  of  such  power,  as  we  have  already noticed, the State Government has issued  notification  dated  27.02.1998  reducing  the  tax  liability of the dealers by twenty five per cent on  goods having fly-ash contents between 10 to 30 per  cent weight and has reduced the tax liability of  the  dealer  by  fifty  per  cent  on  goods  having  fly-ash  contents  exceeding  thirty  per  cent  by  weight.  Further, the notification states that such  reduction is available in the districts mentioned  in the column 2 and for the period mentioned in the  column  3  of  the  annexure  to  the  notification.  A tax rebate/ tax cut is a reduction in taxes.  The  immediate  effect  of  such  rebate  or  tax  cut  decreases the real revenue of the Government and an  increase in the real income of those whose tax rate  has been lowered.

26. To appreciate the first issue before us, it  is necessary to extract articles 301 and 304 of the  Constitution of India.  The said articles are as

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under:-

“301.  Freedom  of  trade,  commerce  and  intercourse.—Subject  to  the  other  provisions of this Part, trade, commerce  and intercourse throughout the territory  of India shall be free.  304. Restrictions on trade, commerce and  intercourse  among  States  —  Notwithstanding anything in article 301  or  article  303,  the  Legislature  of  a  State may by law—  

(a) impose on goods imported from  other States or the Union territories  any  tax  to  which  similar  goods  manufactured  or  produced  in  that  State  are  subject,  so,  however,  as  not to discriminate between goods so  imported and goods so manufactured or  produced; and  

(b)  impose  such  reasonable  restrictions on the freedom of trade,  commerce  or  intercourse  with  or  within that State as may be required  in the public interest:  Provided  that  no  Bill  or  amendment  

for the purposes of clause (b) shall be  introduced or moved in the Legislature of  a State without the previous sanction of  the President.”  

27. Article 304(a) of the Constitution is an  exception  to  article  301  of  the  Constitution  of

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India. Article 304(a) does not prevent levy of tax  on goods; what is prohibited is such levy of tax on  goods  as  would  result  in  discrimination  between  goods imported from other States and similar goods  manufactured  or  produced  within  the  State.  The  object  is  to  prevent  imported  goods  being  discriminated  against  by  imposing  a  higher  tax  thereon than on local goods. What article 304(a)  demands is that the rate of taxation on local as  well as imported goods must be the same. This is  designed to discourage States from creating State  barriers  or  fiscal  barriers  at  the  boundaries.  Article  304(a)  of  the  Constitution  empowers  the  State to levy tax, with an intent that Part XIII of  the  Constitution  does  not  affect  the  power  of  taxation given under Part XII of the Constitution.  It is to preserve and protect the broad object of  article  301  of  the  Constitution,  article  304(a)  only limits the power of the State legislature from  imposing such taxes that would discriminate between  imported goods and domestic goods and restrict free

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movement of goods between States. The broad issue  whether article 304(a) is an exception to article  301 of the Constitution of India is discussed in  the case of Atiabari Tea Co. Ltd. v. The State of  Assam and Ors; AIR (1961) SC 232; it was about the  Constitutionality of the Assam Taxation (on goods  carried  by  Roads  or  Inland  Waterways)  Act,  1954  (Act  XIII  of  1954)  which  was  challenged  by  the  appellants from whom tax was demanded under the Act  for  carriage  of  tea  in  chests,  from  Sibsagar  district  in  Assam  and  from  Jalpaiguri  in  West  Bengal,  to  Calcutta  over  the  waterways  of  State  of  Assam.  The  constitutional  objection  against  the  Act  was  that  it  was  covered  by  the  inhibition  implied  by  the  freedom  enunciated  in  article 301 and that it could be saved from being  struck  down  only  if  it  satisfied  the  condition  prescribed in article 304(b).

28.   In the majority judgment, Gajendragadkar, J.,  as he then was, accepted the appellant’s contention

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that article 301 embraced freedom from all kinds of  impediments and burdens on commerce including those  imposed by tax laws; and a tax law also, in order  to survive, must, satisfy the conditions laid down  in clause (b) of article 304.  As the learned Judge  pointed out, there was ample evidence in the text  of  Part  XIII  itself  to  show  that  it  dealt  with  impediments caused by taxation as well as in other  ways.  Article 304(a) saved certain taxes on goods  from  the  operation  of  articles  301  and  303,  implying  thereby  that  in  the  absence  of  the  provision in article 304(a) those laws would be hit  by article 301 or 303 of the Constitution of India.  Justice  Hidayatullah,  in  the  Atiabari  Case  dissented and observed:  “Article 304(a) imposes no  ban but lifts the ban imposed by articles 301 and  303 subject to one condition.” This observation led  to controversy and the use of the word ‘ban’ was  understood as giving enormous power to the State to  legislate  overlooking  the  economic  unity  of  the  nation which was prioritized in article 301 of the

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Constitution of India.  Therefore, in the case of  State  of  Kerala  v.  Abdul  Kadir; it  was  further  clarified  that  only  on  a  finding  that  the  tax  offended article 301 the question whether it was  saved by article 304(a) arose.

29. Again, article 304(a) of the Constitution  admits  two  exception  in  favour  of  the  State  legislature to the rule that trade, commerce, and  intercourse throughout the territory of India shall  be  free.  Clause(b)  to  article  304(a)  is  an  exception  which  enables  a  State  legislature  to  impose  such  “reasonable  restrictions”  on  the  freedom of trade, commerce and intercourse as may  be required in the “public interest”. But no bill  or amendment for the purpose of clause(b) shall be  introduced or moved in the legislature of a State  without the previous sanction of the President.

30. The Principle of ‘non- Discriminatory tax’  as provided in article 304(a) of the Constitution

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of  India  is  a  sine-qua–non  to  free  movement  of  goods  between  nations/States  in  several  jurisdictions and also in international trade and  policy.  Discrimination  as  explained  under  World  Trade Organization (“WTO”, for short) jurisprudence  is  spoken  of  in  terms  of  effect  and  intention  behind such discrimination. Intent is referred to  as  ‘aim’  or  ‘motive’  or  ‘purpose’  of  such  discrimination  and  the  other  factor  commonly  associated with discrimination is ‘effect’ that is  whether  a  measure  has  a  discriminatory  effect  (also  known  as  the  disparate  impact)  against  imports (as explained in the famous case of  Japan  v. Alcohol, panel report). WTO members are free to  choose any system of taxation they deem appropriate  provided  that  they  do  not  impose  on  foreign  products taxes in excess of those imposed on like  products. The effect of tax should not be such that  two like goods are given discriminatory treatment.  

31. At the same time, it cannot be doubted that

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rising  of  protective  walls  may  be  justified  in  international  trade.  The  Government  can  and  has  been  providing  such  protectionist  measures  all  these  years  to  encourage  the  growth  and  establishment of industries in the country and to  protect  them  from  competition  from  foreign  manufacturers. But unlike the international trade  policies and the commerce clause in United States  Constitution,  our  Constitution  provides  for  regulating  inter-State  trade  and  commerce.  The  Parliament can take all protective measures under  article 302 of the Constitution of India as may be  required in public interest. But there are certain  obvious differences between the powers conferred to  the  Parliament  under  article  302  and  State  legislature  under  article  304(a)  of  the  Constitution.  The  powers  given  to  the  State  legislature are not unrestricted and are bound to  function  within  limitations  stipulated  under  article 304(a) of the Constitution of India. The  powers  even  under  article  304(b)  are  to  be

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exercised sparingly and after fulfilling all the  conditions of article 304 of the Constitution of  India.  The  power  conferred  under  article  304(a)  although  an  exception  to  article  301  of  the  Constitution, but is not a blanket power intended  to be conferred to the State legislature.  

32. To  decide  the  issue  at  hand,  it  is  pertinent to discuss, whether rebate of tax has the  same effects of concessional rate of tax.  

33. Article 304(a) ensures only equal rate of  tax for incoming goods.  So if such goods are taxed  at a higher rate or where they are taxed at any  rate when indigenous goods enjoy concessional rate  of  tax,  article  304(a)  is  attracted.   They  are  simple cases of hostile discrimination.  Therefore,  whether a particular tax is discriminatory within  the meaning of this clause, the effect of the tax  on the flow of goods from outside the taxing State  has  to  be  taken  into  consideration  and,  if  the

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overall effects of rebate of tax is such that they  fall within the meaning concessional rate of tax. A  detailed  discussion  on  the  effects  and  scope  of  rebate is done in the following paragraphs under  the head Issue 2 in the judgment.

ISSUE 2

34.     To answer the second issue we need to  discuss  the  concept  of  ‘rebate  of  tax’  and  its  overall  impact  on  the  trade,  commerce  and  intercourse in the context of the case pleaded by  the parties.

35. ‘Rebate’  as  defined  in  the  New  International  Websters’  pocket  dictionary  and  Bloomsbury  Concise  English  Dictionary  is  “discount”, to allow as a deduction from a gross  amount.  It  is  a  discount  repaid  to  the  payer.  Rebate as defined in corpus Juris Secundum, Vol. 52  C.J Pg. 1189 is as under:-

“ The etymological or dictionary meaning of

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the term includes any discount or deduction  from a stipulated payment, charge, or rate  not  taken  as  in  advance  of  payment,  but  handed back to the payer after he has paid  the stipulated sum, even when such discount  or deduction is equally applied to all from  whom such payment is demandable”

36. The concept of rebate of tax in the instant  case is akin to concessional/ reduced rate of tax.  Rebate  is  though  ex-hypothesi  in  the  nature  of  subsidy  and  other  incentives  given  by  the  Government  but  conceptually  rebate  of  tax  and  incentives  are  different  and  it  needs  to  be  explained in reference to the purpose and nature of  such rebate of tax introduced by the legislature.  The legislation in respect of a rebate has taken  different forms, one of them is a partial rebate in  the tax, where the deduction is given partially on  the  gross  amount  and  the  other  is  the  power  reserved  for  the  Government  to  permit  rebate  in  respect of any goods to the full amount of the tax  levied at any point in the series of sales of such

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goods. A dealer who is entitled to a rebate under  any  notification  will  collect  the  tax  from  the  consumers at the point of purchase and then have to  pay  the  full  amount  of  sales  tax  due  on  his  turnover in that quarter; and claim rebate in terms  of  the  notification  in  accordance  with  the  provision  in  the  rules.  However,  the  claim  for  rebate need not necessarily be handed back to the  payer after he has paid the stipulated sum, it can  also be paid in advance of payment. It is nothing  but  a  remission  or  a  payment  back  or  it  is  sometimes spoken of as a discount or a drawback. It  cannot be disputed that it is the discretion of the  State Government, through its legislature, to grant  rebate to the full amount of sales tax, unless its  power  of  taxation  is  limited  by  Constitutional  provisions. In the facts of the present case, the  legislature authorizes the State Government under  Section 5 of the Act to issue notification in the  public  interest  to  grant  rebate  up  to  the  full  amount of the tax levied on any specific point in

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the series of sales/ purchase of such goods. Such  rebate is only extended to the districts in State  of Uttar Pradesh. The Government of Uttar Pradesh  has the power to refund or discount to the full  amount of rate of sales tax levied on a dealer,  provided the power to discount does not overall has  effects  of  a  weapon  of  taxation  that  would  discriminate  between  the  goods  imported  and  manufactured  in  Uttar  Pradesh  as  laid  down  in  article 304(a) of the Constitution.  

37. The  discrimination  through  a  weapon  of  taxation is explained in the case of Shree Mahavir  Oil  Mills  (supra). The  case  pertains  to  unconditional  and  total  exemption  from  tax  on  edible oil granted to in-State manufacturers by the  State  Government.  Such  an  exemption  was  held  discriminatory and violative of articles 301 and  304(a)  of  the  Constitution  of  India.  This  case  further clarifies the position in Video Electronics  case (supra). The Court observed that States are

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certainly free to impose tax on subjects which fall  under  List  II  of  the  Seventh  Schedule  of  the  Constitution, but power shall not be exercised to  bring  about  discrimination  between  the  imported  goods and the similar goods manufactured in that  State and concluded that total exemption granted in  favour  of  small-scale  industries  in  Jammu  and  Kashmir producing edible oil is not sustainable in  law. It clarified the exception carved out by the  three judges bench in the case of Video Electronics  Ltd. v. State of Punjab; 1989 SCR Supp.(2) 731,  where it explained that notification issued by two  States (Punjab and Haryana) in that case exempting  new units, established in new areas specified the  exemption to be provided to a special class to whom  exemption  was  provided  for  a  specific  period  on  specific  conditions  and  was  not  extended  to  all  producers of goods and therefore did not offend the  freedom guaranteed under articles 301 and 304 of  the Constitution. Similarly in the case of Punjab  notification, it was held that since the exemption

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is for certain specific goods and also because an  overwhelmingly large number of local manufacturers  of similar goods are subject to a sales tax; it  cannot be said that the local manufacturers were  favored  against  the  outside  manufacturers  and  further  the  exemption  was  granted  for  a  limited  period of five years. The above case also laid down  that while judging whether a particular exemption  granted by the State offends articles 301 and 304,  it is necessary to take into account the economic  backwardness  of  a  State  and  the  need  for  concessions and subsidies to such new industries  for  their  development.  Therefore,  this  case  clarified that the limited exception created in the  said  judgment,  if  extended  to  all  will  rob  the  salutary  principle  underlying  Part  XIII  of  the  Constitution and further it is not possible to go  on extending the limited exception. It is with this  observation, this Court in the above case, held the  exemption to be violating article 304(a) read with  article 301 of the Constitution of India.

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 38. Article 304(a) is a provision that deals  with taxation. It places goods imported from sister  States on a par with similar goods manufactured or  produced  within  the  State  in  regard  to  State  taxation in the allocated field.  The object of  article 304(a) was to limit the power of taxation  by States so as to prevent discrimination against  imported goods by imposing taxes on such goods as a  higher rate than is borne by indigenous goods.  The  tax  referred  to  in  article  304(a)  is  a  ‘tax  on  goods’. The word “tax” and “taxation” as said by  Justice Weaver of the Iowa Supreme Court in the  case of State v. Chicago & N. W. R. Co., 128  Wis  449,  108  N.  W. is  referred  to  as  all  sorts  of  exaction which swell the public funds. Taxation in  its broadest and most general sense, includes every  charge  or  burden  imposed  by  the  sovereign  power  upon persons, property or property right, for the  use and support of the Government and to enable it

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to discharge its appropriate functions, and in that  broad definition there is included a proportionate  levy  upon  persons  or  property  and  various  other  methods or devices  by which revenue is extracted  from persons and property.  The term ‘tax’ is to be  read  in  all-embracing  and  sweeping  sense.  Such  methods or device used by the Government from time  to  time  are  not  ordinarily  open  to  serious  questions  but  their  scope  and  application  vary  according  to  the  nature  of  the  subject  under  discussion and the circumstances under which they  are used. ‘Rebate of tax’ in the instant case is  such a device or weapon of taxation used by the  Government from time to time which is though not in  question in all situations but their validity is  tested in the touchstone of article 304(a) of the  Constitution in the circumstance under which they  are used. If the rebate of tax by way of repayment  to the full amount of tax levied qualifies within  the same meaning as that of exemption, then such  discount would a fortori mean discrimination on the

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rate of tax by repaying by way of a rebate to one  class of local dealers the whole amount of sales  tax paid and on the other hand the outside dealers  are  taxed  higher in absence of the benefit of  rebate. This situation squarely falls within the  meaning of ‘discrimination’ as contemplated under  article 304(a) of the Constitution of India.  

39. It  is  for  the  aforesaid  reasons,  it  is  pertinent  to  analyze  the  nature  and  scope  of  concessional/  reduced  rate  of  tax/  exemption  by  drawing  inspiration  from  their  understanding  in  other  jurisdictions  and  under  what  circumstance  could  a  rebate  be  termed  a  hindrance  to  or  as  interfering with the freedom of trade, commerce or  intercourse.  In  appreciating  the  effects  of  an  exemption parallel to a rebate of tax, we may refer  to the observation made in Congressional Budget and  Fiscal Operations, 2 U.S.C.A.§ 622 ,  where exemptions is  understood to have been in the category known as

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“tax expenditures”  because the revenues lost by  such exemptions are similar to direct expenditures  made by the government, the only difference being  that they are made through the tax system and not  the legislative appropriations process. These tax  expenditure  programmes  are  sometimes  defined  as  “subsidies provided through the taxation systems,”  but the broadest definition includes all categories  of  “deductions,  credits,  exclusions,  exemptions,  preferential tax rates and tax deferrals.”  Justice  Wayne  in  the  case  of  Jefferson  Branch  Bank  v.  Skelly; 66 U.S. 436 while explaining the  power of  legislature  where  not  forbidden  by  Constitution  explained, that the legislature has the power to  exempt  from  taxation  according  to  its  views  of  public policy provided no constitutional provisions  are violated. The United States Constitution under  the Equality and uniformity clause mandates that  where  the  Constitution  requires  taxation  to  be  equal and uniform, it is held in most States that  the  legislature  must  tax  all  such  persons  or

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property  and cannot grant any exemptions unless  the power to exempt is expressly conferred by the  Constitution. In some states, however, the contrary  is held but even in such states it is held that  exemptions  are  not  valid  unless  including  all  property and persons of the same class whether such  person as subject to such exemption is inside the  State or situated outside the State.  

40. Exemption  as  we  normally  understand  has  two-fold  impact.  First,  exemptions/  concessional  rate  of  tax  affect  consumer  choice  by  impacting  relative pricing and, thus, materially altering the  economic balance.  It is because consumption will  tend to shift towards untaxed items, the prices of  those items and the items used to produce them will  increase  while  the  prices  of  taxed  items  will  decrease  relatively.  Second,  such  exemptions  unfairly burden some businesses either within the  same industry or in other competing industries.

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41. Rebate is another such device used by the  Government which when given on the rate of tax to  the full amount of tax levied, it gives favourable  treatment to one class of dealers situated within  the  state  barring  the  dealers  similarly  placed  outside  the  State  manufacturing  goods  using  the  same raw material.  The grant of such rebate has  the colour of exemption/ concessional rate of tax  along  with  the  same  deleterious  effects  of  an  exemption.

42. Therefore,  the  test  to  be  applied  to  determine whether rebate is within the realm of tax  defined in article 304(a) of the Constitution of  India so as to say that it discriminates between  the two class of goods: locally manufactured  goods  and  the  imported  goods  when  both  the  class  of  dealers meet the conditions required to qualify for  the grant of rebate i.e. the use of fly-ash, is the  overall  effect  or  impact  of  such  rebate  on  the

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manufacturer. This issue is no longer  res-integra  and is discussed in several cases including in the  case of  Firm A.T.B Mehta Masjid & Co v. State of  Madras  and  Anr.,  AIR  1963  SC  928, where  the  question for consideration was whether Rule 16 of  the Madras General Sale Tax Rules, 1939 subjected  tanned hides and skins outside the State, and sold  within the State to a higher rate of tax than the  tax  imposed  on  hides  or  skins  tanned  and  sold  within the state and therefore violating article  304(a)  of  the  Constitution.  This  Court  observed  that  to  determine  whether  the  rule  was  discriminatory, the effect of this rule is to be  seen. The  result  therefore  is  that  the  sale  of  hides  or  skins  which  had  been  purchased  in  the  State  and  then  tanned  within  the  State  is  not  subject to any further tax. Hides and skins tanned  within the State are mostly those which had been  purchased in their raw condition in the State and  therefore on which tax had already been levied on  the  price  paid  by  the  purchaser  at  the  time  of

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their sale in the raw condition. If the quantum of  tax had been the same, there might have been no  case  for  grievance  by  the  dealer  of  the  tanned  hides and skins which had been tanned outside the  State.  The  grievance  arises  on  account  of  the  amount of tax levied being different on account of  the  existence  of  a  substantial  disparity  in  the  price of the raw hides or skins and of those hides  or skins after they had been tanned, though the  rate is the same under Section 3(1)(b) of the Act.  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-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 having imported the hides and skins  from outside.  Therefore, the Court held that this

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rule  on  this  ground  alone  is  discriminatory  of  article 304(a) of the Constitution of India.  

43. The above principle was re-iterated in the  case  of  W.B.  Hosiery  Association  and  others  v.  State of Bihar; (1988) 4 SCC 134 and in the case of  H. Anraj v Government of Tamil Nadu; (1986) 1 SCC  414; wherein  the  effect  of  an  exemption  was  discussed. The issue before the Court was that the  locally manufactured goods within the State were  exempted but those manufactured in other States and  imported into the State were subjected to a high  rate of tax. The hosiery manufacturers and dealers  in the State of West Bengal in their prayer in the  writ  petition  asked  for  a  direction  asking  the  respondents to forbear from levying or imposing or  collecting any sales tax on the sale of hosiery  goods imported into Bihar from other States. The  State Government by a notification exempted dealers  from sales tax of hosiery goods manufactured and  produced in the State of Bihar whereas levied sales

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tax on the dealers outside the State. This Court  opined that from the commercial or normal point of  view, such a discriminatory levy of sales tax would  have an effect that would be bound to affect the  free flow of hosiery goods from outside State into  the  State  of  Bihar  and  would  therefore  violate  article  301  read  with  article  304(a)  of  the  Constitution of India.

44. The above decision is also followed in the  case of Western Electronics and Another v. State of  Gujarat and others, 1988 2 SCC 568; and in the case  of  Loharn  Steel  Industries   v.  State  of  Andhra  Pradesh; (1997)  2  SCC  37  wherein  the  impact  of  exemption  on  the  manufacturer  was  such  that  the  manufactures outside Andhra Pradesh had to pay a  higher rate of tax as compared to the manufacturers  in  Andhra  Pradesh  because  of  the  entire  tax  exemption  granted  to  the  all  re-rolled  steel  products  sold  in  the  Andhra  Pradesh  and  manufactured  out  of  tax  paid  raw-material

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purchased  in  the  State  of  Andhra  Pradesh.  Therefore,  the  notification  in  this  case  was  considered to be violating article 304(a) of the  Constitution of India.  

45. This Court in the case of State of U.P. and  another v. Laxmi Paper Mart and others, AIR 1997 SC  950 has explained that exempting the exercise books  made  from  paper  purchases  within  Uttar  Pradesh  produced within the State and the levying of the  tax on the exercise books produced outside Uttar  Pradesh and sold in Uttar Pradesh at the rate of 5%  is discriminatory and offends clause(a) of article  304  of  the  Constitution  of  India.  Again  in  Lakshman v. State of Madhya Pradesh; 1983 SCR 3124,  the  petitioner  was  nomad  grazier  belonging  to  Gujarat who wandered from place to place with his  cattle.  State of Madhya Pradesh did not like this  and imposed a higher duty for out-of-State cattle  owners.  The levy was found invalid by the Court.

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46. Rebate, therefore, as it is defined in the  case of  Estate of Bernard H. Stauffer, Bonnie H.  Stauffer,  Executrix,  v.  Commissioner  of  Internal  

Revenue,  48  U.S.  T.C.  277,  means  abatement,  discount,  credit,  refund,  or  any  other  kind  of  repayment.  Rebates  have  been  normally  used  as  justifiable incentives given by the Government to  stimulate  small  industries  or  newly  established  industries.  But  to  understand  Rebate  of  tax  as  rebate per se would be a misnomer. Rebate of tax is  the rebate on rate of tax and is essentially the  arithmetic of rate. The term ‘rate’ is often used  in the sense of standard or measure. It is the tax  imposed at a certain measure or standard on the  total turnover of the goods. Rate, in other words  is the relation between the taxable turnover and  the  tax  charged.  Rebate  of  tax  or  exemption  is  distinguished from non-imposition or non-liability  in  the  case  of  A.V.  Fernandez  v.  The  State  of  Kerala; AIR 1957 SC 657 wherein the Court held that

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in rebate of tax, the sales or purchases would have  to be included in the gross turnover of the dealer  because they are prima facie liable to tax and the  only thing which dealer is entitled to in respect  thereof is the deduction from the gross turnover in  order to arrive at the net turnover on which the  tax can be imposed. On the other hand, in the case  of  non-imposition  or  non-liablity,  the  sales  or  purchases  are  exempted  from  taxation  altogether.  The  Legislature  cannot  enact  a  law  imposing  or  authorizing the imposition of a tax thereupon as  they are not liable to any such imposition of tax.  If they are thus not liable to tax, no tax can be  levied  or  imposed  on  them  and  they  do  not  come  within the purview of the Act at all. The very fact  of  their  non-liability  to  tax  is  sufficient  to  exclude  them  from  the  calculation  of  the  gross  turnover as well as the net turnover on which sales  tax can be levied or imposed.

47. The exemption or rebate of tax is therefore

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within  the  purview  of  taxation.  In  the  instant  case, if the grant of rebate of tax by the State  Government under Section 5 of the Act is to the  full amount of tax levied, then for the dealers  manufacturing  cement  using  fly-ash  outside  the  State  of  Uttar  Pradesh  but  selling  it  in  Uttar  Pradesh, though the State Government contends that  the  rate  of  tax  is  same  for  the  dealers  inside  Uttar Pradesh and outside Uttar Pradesh, but the  overall effect is that there is no tax levied on  the net turnover after deductions being made from  the gross turnover but, on the other hand,  the  dealers  manufacturing  or  producing  cement  using  fly-ash outside Uttar Pradesh are taxed at the rate  of 12.5%. Therefore, it can be said that the rebate  of  tax  is  in  the  nature  of  exemption  and  the  instant case can be decided on the basis of catena  of decisions of this Court where blanket exemption  without reasons are said to be discriminatory and  violating  article  304(a)  of  the  Constitution  of  India.

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 ISSUE 3:-

48. To decide the third issue, the concept of  severability  needs  to  be  noticed.  Doctrine  of  severability provides that if an enactment cannot  be  saved  by  construing  it  consistent  with  its  constitutionality, it may be seen whether it can be  partly  saved.  The  doctrine  of  severability  was  considered in  the case  of  RMD  Chamarbaugwala v.  Union Of India,  AIR 1957 SC 628; in which it was  observed that “when a statute is in part void, it  will be enforced as against the rest, if that is  severable  from  what  is  invalid”.  The  Court  also  observed seven propositions of severability, out of  which, one of them provided that if the valid and  the invalid portions are distinct and separate that  after striking out what is in-valid, what remains  is in itself a complete code independent of the  rest, then it will be upheld notwithstanding that  the rest has become unenforceable. The principles  of severability was also discussed in the case of

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A. K. Gopalan v. State of Madras, AIR 1950 SC 27,  wherein the Court observed that what we have to see  is, whether the omission of the impugned portions  of the Act will "change the nature or the structure  or the object of the legislation". In the facts of  the present case, striking down Clause (1) of the  notification alone does not change the object of  the  legislation.  It  is  a  notification  passed  in  public interest and therefore even if Clause (1) of  the notification is expunged, leaving behind the  rest of the notification intact, the purpose of the  Government to grant rebate to provide incentive to  the manufacturing units using fly-ash is not lost.

49. This doctrine was also enunciated in the  case  of  D.S.  Nakara  (supra).  The  question  that  arose was whether, for the purpose of application  of the liberalized pension rules, the Government of  India could stipulate March 31, 1979 as the date  for dividing Government employees into two classes:  one class who had retired before March 31, 1979 who

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would  not  be  entitled  to  the  benefits  of  the  liberalized pension rules and the other class who  retired after March 31, 1979 who would be entitled  to such benefits.  One of the questions that came  up for consideration is whether a specified date  could  be  severed  if  it  is  found  to  be  wholly  irrelevant and arbitrary. This Court observed that,  if the event is certain but its occurrence at a  point of time is considered wholly irrelevant and  arbitrary  and  having  an  undesirable  effect  of  dividing homogeneous class and of introducing the  discrimination, the same can be easily severed and  set aside.  The Court further opined that while  examining  a  case  under  article  14  of  the  Constitution,  the  approach  is  removal  of  arbitrariness and if that can be brought about by  severing the mischievous portion the Court ought to  remove  the  discriminatory  part  retaining  the  beneficial portion.  The Court therefore concluded  that  severance  never  limits  the  scope  of  legislation but rather enlarges it.  

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50. In the light of the observation made by  this  Court,  we  are  of  the  opinion  that  the  condition  No.  1  is  discriminatory  and  violates  article  304(a)  of  the  Constitution  of  India  and  therefore needs to be severed from the rest of the  notification  which  can  operate  independently  without altering the purpose and the object of the  notification. 51. The  learned  counsel,  Shri  Gupta,  would  argue that since the assessing authorities would  not be in a position to verify the claim for grant  of rebate of tax by manufacturers of cement using  fly-ash  outside  the  State  of  Uttar  Pradesh,  the  benefit under the notification cannot be extended  to  them.   We  do  not  agree.   The  explanation  appended  to  the  notification  authorises  the  assessing authorities to verify the claim that may  be  made  by  the  manufacturers  including  the  fact  whether  an  assessee(s)  satisfy  the  conditions  prescribed in the notification.  If they do not

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fall within the parameters of the notification the  assessing authority can always reject the claim of  the manufacturers.

52. Further we may also refer to the submission  of  Shri  Dhruv  Agarwal,  who  would  rely  on  the  observations  of  this  Court  in  the  case  of  G.B.  Prabharkar  Rao  v.  State  of  Andhra  Pradesh,  1985  Supp. SCC 432;  wherein the age limit of retirement  was first raised and then reduced  which  created  an  administrative  chaos  and  therefore  merely  because  it  created  an  administrative  chaos  the  provision  reducing  the  age  could  not  have  been  declared  invalid.  On  the  basis  of  the  aforesaid  submission,  he  would  submit  that  the  machinery  provisions  cannot  be  used  to  test  the  constitutional validity of a statute because the  liability  is  always  created  through  substantive  provisions. We agree with the submission made by,  Shri Dhruv, and are of the opinion that issue of  territoriality should not be a factor to determine

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the constitutional validity of the notification.

53. In  view  of  the  aforesaid  discussion,  we  hold  ‘rebate  of  tax’  granted  by  the  State  Government to cement manufacturing units using fly- ash as raw material in a unit established in the  districts  of  State  of  Uttar  Pradesh  alone  is  violative of the provisions contained in articles  301 and 304(a) of the Constitution of India.  We  further declare that the notification would also  apply to respondent(s)- cement manufacturing units.  

54. With these observations and directions, all  the civil appeals are disposed of. There shall be  no order as to costs.   

Ordered accordingly.

..........................J. (H. L. DATTU)

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..........................J. (SUDHANSU JYOTI MUKHOPADHAYA)

NEW DELHI; OCTOBER 18, 2013.