Holding

Section 5(4) of the Karnataka Sales Tax Act, insofar as it pertains to Item 2 of Schedule IV with Explanation II for the period before 1‑April‑1978, is violative of Article 304(a) of the Constitution and is ultra vires.

Summary

Andhra Steel Corporation, a dealer under the Karnataka Sales Tax Act, purchased iron scrap both within and outside Karnataka to manufacture steel products. The Act's Section 5(4) together with Schedule IV, Item 2 and Explanation II (applicable before 1‑April‑1978) exempted sales of steel semis made from scrap on which tax had already been paid, but taxed similar products made from imported scrap. The corporation challenged this provision as discriminatory under Article 304(a) of the Constitution, arguing that the similarity of goods lies in their nature, not in prior tax payment. The Karnataka High Court upheld the provision, holding that any disparity was only in the quantum of tax, not in discrimination. The Supreme Court reversed, holding that the provision created hostile discrimination between locally sourced and imported raw material and thus violated Article 304(a). Consequently, the appeal was allowed and the High Court judgment set aside.

Issues considered

Whether Section 5(4) of the Karnataka Sales Tax Act, as applied to Item 2 of Schedule IV with Explanation II, discriminates between goods manufactured from locally sourced and imported raw material in violation of Article 304(a) of the Constitution.
Whether the similarity contemplated by Article 304(a) is determined by the nature and kind of goods rather than by the tax status of the raw material.

Legislation cited

Central Sales Tax Act, 1956s. 15, s. 8, s. 9
Constitution of Indias. Article 301, s. Article 303, s. Article 304(a)
Karnataka Sales Tax Act, 1957s. 5(4)

Subjects

sales taxdiscriminationArticle 304(a)Karnataka Sales Tax Actconstitutional validityinter‑state traderaw materialsteel manufacturing

Judgment

ANDHRA STEEL CORPORATION
A
v.
COMMISSIONER OF COMMERCIAL TAXES IN KARNATAKA

MARCH 30, 1990

[SABYASACHI MUKHARJI CJ., V. RAMASWAMI AND B
M.M. PUNCHHI, JJ.]

Karnataka Sales Tax Act, 1957: Section 5(4)-Schedule 4-ltelfl
2 Explanation Il(As it stood prior to 1.4. 78)-Declared goods-Levy of
sales tax-Finished goods manufactured out of imported raw mataial
subject to tai while similar goods manufactured out of locally purchased
raw materials not taxed-Held discriminatory and violative of Article c
304(a) of Constitution of India.

Constitution of India, 1950: Article 304(a): Restrictions on trade
commerce and intercourse among States-Similarity is in the nature of
quality and kind of goods and not whether they are subject to tax D
already or not-Finished goods-Iron ingots, Steel rounds and tor steel
manufactured out of locally purchased raw material, iron-scraps, not
subject to tax-Similar goods manufactured out of raw material
purchased from outside State subject to tax-Held discriminatory between
imported goods and goods produced locally.
E
The appellant, a registered dealer ·~11der the Karnataka Sales
Tax Act, 1957, was purchasing iron-scraps from dealers inside and
outside the State of Karnataka for the purpose of manufacturing iron
ingots, steel rounds and tor steel. He illed a writ petition in the High
Court challenging the Constitutional validity of Section 5(4) of the Act
in so far as it pertains to item 2 of Schedule IV to the Act read with F
Explanation II thereof in respect of its application prior to 1.4.78 as
violative of Article 304(a) Of the Constitution on the ground that it
discriminates in respect of i;ale of steel ingots manufactured out of raw
material purchased from outside the State which was subject to tax
while sale of similar goods manufactured out of locally purchased raw
material was not subjected to tax. G

The High Court dismissed the writ petition upholding the con-
stitutional validity of the impugned provisions. Hence this appeal by
special leave-

Setting aside the judgment of the High Court and allowing the H
appeal, this Court,
253
254 SUPREME COURT REPORTS [1990] 2 S.C.R.

HELD: 1. The similarity contemplated by Article 304(a) is in the
A
nature of the qnaiily and kind of the goods aod not with respect to
whether they were snbject to a tax already or not. [262AJ

2. Section 5(4) of the Act in so far it pertains to item 2 of Schedule
IV to the Act read with Explaoation II thereof in respect of its applica-
B tion for the period prior to 1.4.1978 Is violative of Article 304(a) of the
Constitution. [255C-D; 272D]

Firm A. T.B. Mehtab Majid and Co. v. State of Madras and Anr.,
[1%3) Suppl. 2 SCR 435 and A. Hajee Abdul Skakoor and Co. v. State
of Madras, [1964] 8 SCR 217, followed.

c State of Madras v. N.K. Nataraja Muda/iar, [1968] 3 SCR 1129;
Rattan Lal & Co. v. Assessing Authority, 11969] 2 SCR 544 and
Associated Tanners v. Commercial Tax Officer, Vizianagaram and Ors.,
[1986] 62 STC 1, explained.

b Mangalore Metal Hol!Se v. State of Kamataka, [1986] 63 STC
482; State of Bombay v. United Moiors (India) Ltd., [1953] SCR 1069
and Bengal Immunity Company Ltd. v. State of Bihar, [1955] 2 SCR
603, referred to.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1672-
E 74(NT) of 1990.

From the Judgment aod Order. dated 10.6.1988 of the Karnataka
High Court in W.P.Nos. 14255 to 14257 of 1983.

B. Sen, H. Raghvendra Rao aod Vineet Kumar for the -...
F Appellant.

P.R. Ramasesh for the Respondent.

The Judgment of the Court was delivered by

G V. RAMASW AMI, J. Special leave granted.

The appellant is a registered dealer under the Karnataka Sales
Tax Act (hereinafter called 'the Act'). The appellaot (hereinafter
referred to 'the assessee') purchases iron scrap from dealers inside aod
outside the State of Kamataka for the purpose of manufacturing iron
H ingots, steel rounds and tor-steel. These manufactured goods were
ANDHRA STEEL CORPN. v. COMMR. OF TAXESW. RAMASW AMI, J.] 255

sold mostly within the State. In ~ct of the Assessment Years 1972-
A
73 to 1974-75, accepting the contentions of the assessee that the goods
sold were manufactured out of tax suffered iron scrap, the Commercial
Tax Officer exempted the sales tum over of the manufactured goods.
The Deputy Commissioner of Commercial Taxes in exercise of his
powers under section 21 of the Act restricted the exemptions but
otherwise confirmed the assessment order by ·his order dated B
11.5.1979. The respondent Commissioner of Commercial Taxes, Ban-
galore initiated proceedings under section 22(A) of the Act for revising
the order of the Deputy Commissioner on the ground that the assessee had
been allowed exemption in respect of the tum over of manufactured
goods without verifying as to whether the inputs rron scrap naa
suffered taxes and that Explanation II to ·Schedule IV of the Act was
applicable or not. The appellant filed the writ petition praying for the
c
issue of a writ certiorari to quash the show cause notice issued by the
respondent under section 22(A) of the Act challenging the constitu-
tional validity of section 5(4) of the Act in so far as it pertains to item 2
of Schedule IV to the Act read with Explanation II thereof in respect
of its application for the period prior to 1.4.1978 as violative of Article D
304( a) of the Constitution. It may be pointed out at this stage that in
Mangalore Metal House v. State of Karnataka, [1986] 63 STC 482 the
High Court upheld the Explanation II to Schedule IV of the Act which
is differently worded in its application for the period subsequent to
1.4.1978. It may also be mentioned tha.t the High Court had confined
itself only to the challenge of the constitutional validity of the provi- E
sion and left open the other question on merits including the validity of
the notices to be agitated after exhausting the appellant's remedy be-
fore the Sales Tax authorities.

The High Court was of the view that the provision providing for
not levying tax, if at an earlier stage tax has been paid, is only in the F
nature of exemption and the exemption arises only on proof that the
tax has been paid at an earlier stage on the goods out of which the
goods in question were manufactured, that there is nexus between the
finished goods and the raw material used for manufacturing the same
that it is not correct to state that the tax is not payable on the finished
goods manufactured out of local raw material but the discrimination if G
at all would arise only in the quantum of tax payable, for the tax on
finished goods will be definitely higher than on the raw material. The
High Court was of the further view that there is no discrimination in
the rate of tax between the imported items and the local items of
finished goods of iron steel as such and that the variation in the
quantum of tax is on account of the scheme of taxation working diffe- H
256 SUPREME COURT REPORTS I1990] 2 S.C.R.
A rently on different dealers, those who import raw material and
manufacture and those who locally purchase and manufacture and
hence such an effect is only indirect result and not having direct or
immediate impact. In that view the High Court dismissed the writ
petition and gave liberty to the appellant to file objections before the
Commissioner of Commercial Taxes for dealing with questions on
B merits. This appeal has been filed against the said judgment of the
High Court.

The main point that was urged in this appeal was that section
5( 4) of the Act in so far as it pertains to item 2 in the IV Schedule read
with the Explanation II is violative of Article 304(a) of the Constitu-
tion as under that provision the sale of finished goods manufactured
C out of imported raw material is taxed but the sale of finished goods
manufactured out of locally purchased raw material is not taxed and
that amounts to hostile discrimination in the rate of tax or quantum of
tax.

D Section 5(4) of the Act is the charging section in respect of
declared goods and the relevant portion reads as follows:

"(4) Notwithstanding anything contained in sub-section
( 1) (or section 5 B or section 5 C) a tax under this Act shall
be levied in respect of the sale or purchase of any of the
E declared goods mentioned in column (2) of the Fourth
Schedule at the rate and only at the point specified in the
corresponding entries of columns (4) and (3) of the said
Schedule on the dealer liable to tax under this Act on his
taxable turnover of sales or purchases in each year relating
to such goods: -<i
F
Provided that where tax has been paid in respect of
the sale or purchase of any of the declared goods under this
sub-section and such goods are subsequently sold in the
course of inter-state trade or commerce, and tax has been
paid under the Central Sales Tax Act, 1956 (Central Act 74
G of 1956) in respect of the sale of such goods in the course of
inter-state trade or commerce, the tax paid under this Act
shall be reimbursed to the person making such sale in the
course of inter-state trade or commerce in such manner and
subject to such condition as may be prescribed.

H Provided further that in respect of the sale of cereals
ANDHRASTEELCORPN. v. COMMR.OFTAXES [V.RAMASWAMI,J.J 257

mentioned in serial number 9 of the Fourth Schedule, made A
by any person to a procurement agent appointed by the
Government of Karnataka or to any sub-agent of such
procurement agent in pursuance of the Karnataka Rice
Procurement (Levy) Order, 1981 or any other foodgrains.
procurement (Levy) Order of the Government of Kama-
taka for the time being in force, such sale shall not be B
deemed to be, but the subsequent sale by the said procure-
ment agent or sub-agent shall be and shall be deemed to be
the point at which the tax under this Act shall be levied.

Provided also that where tax has been paid under this
sub-section on the purchase gf paddy and such paddy is c
either subsequently sold to or is hulled and the resultant
rice is sold to a procurement agent appointed by the
Government of Karnataka or to any sub-agent of such
procurement agent in pursuance of the Karnataka Rice
Procurement (Levy) Order, 1984 or any other Foodgrains
Procurement (Levy) Order of the Government of Karna- D
taka for the time being in force, the tax paid under this Act
on the purchase of such paddy shall be reimbursed to the
person making such sale to such procurement agent or his
sub-agent, as the case may be, in such manner and subject
to such conditions as may be prescribed."
E
The IV Schedule to the Act contains a list of declared goods specifying
the point of levy and the rate of tax. Item 2 of this Schedule relates to
iron steel since the interpretation of this item is in question the rele-
vant portion of item 2 may be extracted and reads as follows:

"FOUR1H SCHEDULE F

-~-- SI. Description of the goods Point of Rate of
No. levy tax

1. G
Ir·
2. (i) pig iron and cast iron including Sale by the first
ingotmoulds, bottom plates, iron or earliest succes-
scrap, cast iron scrap runner 'sive dealer in the
'-f scrap and iron skull scrap. state, liable to tax
under this Act.
H
258 SUPREME COURT REPORTS [ 1990] 2 S.C.R.

A (ii) steelsemis (ingots, slabs, blooms
and billets of all qualities,
shapes and sizes). -.,.....-
(iii) skelp bars, tin bars, sheet bars,
hoebars and sleeper bars.
B
(iv) Steelbars(rounds,rods,squares 4 percent
fiats, octagons and hexagons,
plain and ribbed or twisted, in coil ~
form as well as straight lengths). ~-

c (v) Steel structurals (angles, joists,
channels tees, sheet piling sections
or any other rolled sections)

(vi) sheets, hoops, strips and skelp, ~

both black and galvanised, hot
D
and cold rolled, plain and cor-
rugated, in all qualities, in
straight lengths and in coil from as
rolled and in revitted condition.

(vii) plates both plain and cheque-red
E in qualities.

(viii) discs, rings forgins and steel 3 percent
castings.
~
(ix) tool, alloy and special steels
F of any of the above categories.

(x) steel melting scrap in all forms
including steel skulls, turnings
""'""-·
and borings.

G (xi) steel tubes, both welded and
seamless of all diameters and
lengths, including tube fittings.
~
(xii) tin-plates, both not dipped and
electrolytic and tin free plates.
H ;
ANDHRA STEELCORPN. v. COMMR. OF TAXES [V. RAMASWAMJ,J.] 259

(xiii) fish plate bars, bearing plate bars,
A
crossing sleeper bars, fish plates,
bearing plates, crossing sleepers
and pressed steel sleepers, rails-
heavy and light crane rails.

(xiv) wheels, tyres axles and wheel sets. B

(xv) wire rods and wires-rolled,
drawn, galvanised, aluminised,
tinned or coated such as by Copper.

(xvi) defectives, rejects, currings or
end pieces of any of the above c
categories.

)..., By Karnataka act 13 of 1982 Explanation II was added to item 2 of the
IV Schedule with retrospective effect from 1.10.1957 and to be effec-
tive till 31.3.1978 and that Explanation reads as follows: D

"Explanation II: Where tax has been paid in respect of the
sale or purchase of:

(i) iron scrap, cast iron scrap, runner scrap and iron skull
scrap referred to in entry (i) of serial number 2 or in respect E
~ of steel melting scrap in all forms including steel skull turn-
ings and borings referred to in entry (x) of serial number 2
and out of the said scrap, steel semis (ingots, slabs, blooms
and billets of all qualities, shapes and sizes) referred to.in
,. entry (ii) of serial number 2 are manufactured and sold; or
;
F
(ii) steel semis (ingots, slabs, blooms and billets of all qua-
. ....-' lilies, shapes and sizes) referred to in entry (ii) of serial
number 2 and out of the said steel semis any re-rolled
products of iron and steel referred to in anyone or more of
the entries at (iii), (v), (vii) and (xv) serial No. 2 are
manufactured and sold, no tax shall be leviable on the sale G
of the said steel semis or the re-rolled products as the case
maybe.

~ Provided that .the dealer claiming ·exemption of tax
under this explanation furnished before the assessing
authority concerned proof of levy .and payment of t.ax by H
260 SUPREME COURT REPORTS 11990] 2 S.C.ll.

the previous or earliest of successive dealers on the said
scrap or steel semis used in the manufacture of the steel
semis re-rolled products, as the case may be.

Provided further that in respect of the said steel semis
or the said re-rolled products of iron and steel, no amount
B was collected by the dealer from his customers by way of
tax or purporting to be by way of tax."

As already stated the appellant purchases iron scrap both from
local registered dealers and also from. the dealers outside the State of
Karnataka and manufactures ingots and sells the same mostly witnin
the State of Karnataka. The constitutional validity of the above said
c provision is challenged on the ground that while the appellant's sale of
ingots manufactured out of locally purchased scrap will not be sub-
jected to tax, the appellant's sale of ingots manufactured out of scrap
purchased from outside the State of Kamataka would be subjected to
tax.
D
In the Firm A. T.B. Mehtab Majid and Co. v. State of Madras and
Anr., [1963] (Suppl.) 2 SCR 435 this Court considered the constitu-
tional validity of Rule 16 of the Madras General Sales Tax Rules. Rule
16 of the Rules which was impugned ill the case read as follows:

E "16.(1) In the case of untanned hides and/or skins the tax
under section 3( 1) shall be levied from the dealer who is the
A
last purchaser in the State not exempt from taxation under
section 3(3) on the amount for which they are brought by
him. .~

(2)(i) In the case of hides or skins which have been tanned
""
F
outside the State the tax under section 3(1) shall be levied
from tne dealer who in the State is the first dealer in such . "4..
hides or skins not exempt from taxation under section '3(3)
on the amount for which they are sold by him.

G (ii) In the case of tanned hides or skins which have been
tanned within the State, the tax under section 3(1) shall be
levied from a person who is the first dealer in such hides or
skins not exempt from taxation under section 3(3) on the
amount for which they are sold hy him: ~

H Provided that, if he proves that the tax has already
ANDHRA STEELCORPN. v. COMMR. OF TAXES [V. RAMASWAMI, J.] 261

been levied under sub-rule (1) on the untanned hides and
A
skins out of which the tanned hides and skins had been
produced, he shall not be so liable.

(3) The burden of proving that a transaction is not liable to
taxation under this rule shall be on the dealer,"
B
It was contended for the petitioner in that case that the effect of
this rule was that tanned hides or skins imported from outside the
·}- State and sold within the State are subject to a higher rate of tax than
,. the tax imposed on hides or skins tanned and sold within the State,
inasmuch as sales tax on the imported hides or skins tanned outside the
State is on their sale price while the tax on hides or skins tanned within
the State, though ostensibly on their sale price, is, in view of the c
proviso to Clause (ii) of sub-rule (2) of rule 16, really on the sale price
of these hides or skins when they are purchased in the raw condition
.,.__ and which is substantfally less than the sale price of tanned hides or
skins. It was further contended for similar reasons, hides or skins
imported from outside the State after purchase in their raw condition D
and then tanned inside the State are also subject to higher taxation
that hides or skins purchased in the raw condition in the State and
tanned within the State, as the tax on the former is on the sale price of
the tanned hides or skins and on the latter is on the sale price of the
raw hides or skins. Such a discriminatory taxation was said to offend
....__ the provisions of Article 304(a) of the Constitution. E

This Court pointed out that if the dealer has purchased the raw
hide or skin in the State, he does not pay tax on the sale price of the
~ tanned hides or skins. He pays on the purchase price of untanned hides
~
or skins, only. If on the other hand, dealer purchases raw hides or
skins from outside the State and tans them within the State, he will be F
liable to pay sales tax on the sale price of the tanned hides or skins. He
.L~ will have to pay {Dore 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 and having not paid any tax under sub-
J. rule (1). This is one of the reasons on which this Court held that rule
- 16(2) discriminated against the imported hides or skins which had been G
purchased or tanned outside the State and that therefore they
contravene the provisions of Article 304(a) of the Constitution. The
. =,t next ground on which this Court invalidated the Rule was that mere
circumstance of a tax having been paid on the sale of such hides or
skins in the raw condition did not justify their forming goods of a
different kind from the tanned hides or skins which had been imported H
262 SUPREME COURT REPORTS [1990) 2 S.C.R.

A from outside. At the time of sale of those hides or skins in the tanned
state, there was no difference between them as goods and the hides or
skins tanned outside the State as goods. The similarity contemplated ·~
by Article 304(a) is in the natµre of the quality and kind of the good
and not with respect to whether they were subject of a tax already or
not.
B
On the ground that the decision of this Court in A. T.B. Mehtab's
case (supra) will result in claims for refund of tax being preferred by
dealers in hides and skins already assessed under the impugned Rule
thereby resulting in huge loss of revenue and will also result in ad-
ministrative complications, the Madras General Salex Tax (Special
C Provisions) Act, 1963 was made. That Act provides that:

"(l) Notwithstanding anything contained in Madras Gen-
eral Sales Tax Act, 1939 (Madras Act IX of 1939) (herein-
after referred to as the said Act), or in the rules made
thereunder (hereinafter referred to as the said rules),
D during the period commencing on the 1st April, 1955 and
ending on the 31st March, 1959, in respect of sale of dres-
sed hides and skins (which were not subjected to tax under
the said Act as raw hides and skins), the tax under the said
Act shall be levied from the dealer who in the .State is the
first seller in such hides and skins not exempt from taxation
E under sub-section (3) of section 3 of the said Act at the rate
of two per cent of the amount for which such hides and
skins were last purchased in the untanned condition."

This was challenged in this Court by way of petition under Arti-
cle 32 of the Constitution in A. Majee Abdul Shakoor and Company v.
F State of Madras, [1964] 8 SCR 217 on the ground that the persons who
had purchased raw hides and skins in the State of Madras in the rele-
vant period paid sales tax at 3 pies per rupee and paid no further tax . ..__
;

with those hides after being tanned were not sold whereas the peti-
tioners having purchased raw hides and skins from outside the State
did not at the time paid tax at that rate on the purchase price of the raw
G hides and skins but were not now liable under the impugned provision
to pay tax at the rate 'of 2 per cent of the amount for which such hides
and skins were last purchased in untanned condition. Thus the conten-
tion was that the petitioners would pay a higher tax than what was paid
by the seller of dressed hide and skins purchased in the State in raw
condition and then tanned and sold and that, therefore, the impugned
-·
~""'

H provisions set out above d'.«driw';late against imported untanned hides
ANDHRA STEELCORPN. 11. COMMR. OF TAXES [V . RAMASWAMI , J.] 263

and skins. Accepting this contention ~fter referring to the decision in
A . T. B: Mehtab's case (supra) this Court observed: A

"In the earlier case, discrimination was brought about on
account of sale price of the tanned hides and skins to be
higher than the sale price of untanned hides and skins,
though the rate of tax was the same, while in the present B
case, the discrimination does not arise on account of dif-
ference 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
utanned condition, but on account of the fact that the rate
of tax on the sale of tanned bides and skins is higher than
that on the sale of untanned hides and skins. The rate of tax c
on the sale of tanned hides and skins is 2 per cent on the
purchase price of those bides and skins in the utanned con-
dition while the rate of tax on the sale of raw hides and
skins in the State during 1955 to 1957 is 3 pies per .rupee.
The difference in tax works out to 7/16 paise of a rupee, D
i.e., a little less than 1/2 naye paise per rupee. Such a
diScri.minatioo 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 per cent of the sale price."

Prima f acie the ratio of these two decisions applies to the facts of E
- the present case. However, it was contended by the learned counsel
for the Revenue before the High Court that this Court has struck a
new or different note in the cases of State of Madras v. N.K. Nataraja
Mudaliar, (1968) 3 SCR 829; Rattan.Lal & Co. v. Assessing Authority,
(1969) 2 SCR 544 and Associated Tanners v. Commercial Tax Office;
Vizianagaram, and Others, (1986] 62 STC 1 and this argument was F
accepted and the impugned pro\risions were held valid by the High
_ Court in the decision under appeal.

The point that was raised in the State of Madras v. N.K. Nataraja
Mudaliar (supra), was that Section 8(2)(2A) and (5) of the Central
Sales Tax which permitted levy of tax on inter-State saJe at varym~ rates G
in different States were invalid. In order to understand the exact ratio
of the judgment which was noticed in the judgment itself, we have to
note the development of the law relating to imposition of tax on inter-
State sale. In exercise of the powers conferred under Entry 58 List II of
the Seventh Schedule in Government of India Act and.the correspond-
ing Entry 54 of List 2 of the Seven·· Sc:....dule to the Constitution H
264 SUPREME COURT REPORTS [1990] l S.C.R.

A which enable the State to legislature on taxes on the sale or purchase
of goods other than newspaper various States enacted sales tax laws
for the respective States acting on the principle of territorial nexus and
picked out one or more ingredients constituting a sale and made it or
them the basis of imposing liability for sales tax. This led to the imposi-
tion of multiple taxation on a single inter-State transaction by different
B States, each State relying upon some territorial nexus between the
State and the sale. The constitutional validity of these provisions were
questioned on the basis of the restriction placed on the legislative
power under the Constitution. In the State of Bombay v. United 1
Motors (India) Ltd., (1953) SCR 1069 this Court held that importing
State is competent to levy tax on transactions of sale in the course of
C inter-State sale or commerce on persons who are resident outside the
territory, provided that the goods were delivered fu the importing
State for the _purpose of consumption therein. Thus the delivery for
consumption within the State was considered to be a point at which the
tax can be levied on inter-State sale. But this decision made the dealer
carrying on business in the exporting State amenable to the sales tax
D law of the importing State. The question was again considered by this
Court in Bengpl Immunity Company Ltd. v. ~tate of Bihar, (1955} 2
SCR 603. This Court held in that case that a sale or purchase in the
course of inter-State sale, trade or commerce could not be taxed by any
State until by law it was provided otherwise by Parliament. This led to
the amendment of the Constitution by the Constitution (Sixth Amend-
E ment) Act, 1956. By that amendment Article 286 was amended. Entry
92A was added to the Union List and Entry 54 was also suitably
amended. The Parliament then enacted the Central Sales Tax Act,
1956. In respect of the certain transactions which were held by the
assessing authorities as inter-State sales the assessee moved the High
Court of Madras under Article 226 seeking a writ of certiorari quash-
F ing the order of assessment on the ground that the provisions of the
Central Sales Tax Act which permitted levy of tax at varying rates in
different States on similar inter-State transactions and thereby result:_
ing in inequality in burden of tax, affected and impeded inter-State
trade, commerce. and intercourse which are prohibited under Article
301and303(1) of the Constitution .
G
The tax under the Central Sales Tax is payable by the seller. The
State from which the movement of goods commences in the course of
inter-State sale collects the tax as agent of the Central Government but
section 9(4) provides that the tax collected under the Act in an_y State on
behalf of the Government of India are to be assigne~ to that State. The
H scheme of the Central Sales Tax Act has been neatly summarised if we
ANDHRASTEELCORPN. v. COMMR.OFTAXES[V.RAMASWAMl,J.j 265

may say so with respect. in State of Madras v. N. K. Nataraja Muda/iar
A
• (supra) and no apology, is needed to quote that passage in extenso,
which reads as follows:

"The scheme of the Act was first to devise definitions of
'inter-State sales' and 'sales outside the State', and then to
declare inter-State sales subject to tax, and to set up B
machinery for levying and collecting tax on those sales.
Transactions in goods which were made subject to tax in
the course of inter-State trade or commerce were classified
into three broad categories-( 1) transactions falling within
s. 8(1) i.e. all sales to Government, and sales to a regis-
tered dealer other than the Government of goods referred
to in sub-s (3) of s. 8(2) transactions falling within c
s. 8(2)(a) i.e., sales in respect of declared goods; and (3)
transactions falling within s. 8(2)(b) i.e. sales not falling
within (1) in respect of goods other than declared goods.
Sales of goods in category ( 1) were declared liable at the
relevant time to pay a tax of two per cent, on the turnover. D
On sales of declared goods tax was to be calculated at the
rate applicable to the sale or purchase of such goods inside
the appropriate State. But bys. 15 the tax payable under a
State law in respect of any sale or purchase of declared
goods inside the State was not to exceed two per cent of the
sale or purchase price thereof, and was not leviable at more E
than one stage. On turnover from sale of goods not falling
within categories (1) & (2) the rate was seven per cent, ;ir
the rate applicable to the sale or purchase of such goods
inside the appropriate State, whichever was higher. But by
sub-s. (2A) of s. 2 it was provided that notwithstanding
anything contained in sub-s. (1) or sub-s. (2), if under the F
sales tax law of the appropriate State the sale or purchase,
as the case may be, of any goods by a dealer is exempt from
tax gentorally or is subject to tax generally at a rate which is
lower than two per cent. the tax payable under tl<e Act on
the turnover insofar as the turnover or any part thereof
relates to the sale of such goods shall be nil, or as the case G
may be shall be calculated at the lower rate. There is a slight
inconsistency between s. 8(2) and s. 8(2A). If the rate of
tax under the State law is less than two per cent by virtue of
s. 8(2A ), even in respect of turnover falling within
s. 8(2)(b), the rate of tax will not exceed the State rate; if
the State rate exceeds two per cent, tax at the rate of seven H
266 SUPREME COURT REPORTS [1990] 2 S.C.R.

per cent or of the State, whichever is higher, shall prevail.
A But that has no bearing on the question under discussion." •
The main contention in Natara1a Muda/iar's case was that the
liability to pay tax on inter-State transaction depending upon the rate
of tax prevailing in the exporting State, hampers trade and commerce
B by giving or authorising the giving of preference to one State over
another or by making or authorising the making of discrimination
between one State and another violating the provisions of Articles 301 ..
and 303(1) of the Constitution. After noting the decisions that every
imposition of tax does not amount to restriction or impediment of. the
free flow of trade or commence but that levy which directly and im-
mediately impede or hampering the free flow of trade or commerce
c only will fall within the provisions imposed by Articles 301, this Court
considered the question whether tax imposed under sub-sections
(2)(2A) and (5) of section 8 of the Central Sales Tax Act on inter-State
sales do no amount to law giving or authorising the giving of any
preference to one State over the other on the ground of varying rates
D of tax prevailing in different States. It was argued in that case that the
rates of tax on the sale of the same or similar commodity by different
States by itself was discriminatory since it authorised the ·placing of
unequal burden on inter-State trade or commerce affecting its free flow
between the States. It was further conteilded that since the rates of tax
prevailing in different States on transactions of sale were not uniform
E the impugned provisions affected the free movement or flow of goods
in inter-State trade . .Rejecting this contention this Court held that:

"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
F trade channels, the rates of freight, trading facilities,
availability of efficient transport and other facilities for
carrying on trade. Instances can easily be imagined of
cases iri which notwithstanding the lower rate of tax in a
particular part of the country goods may be purchased from
another part where a higher rate of tax prevails. Supposing
G in a particular State in respect of a particular commodity,
the rate of tax is 2% but if the 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 dist-
ance, the merchant would be willing to purchase the goods
from a nearer State, even though the.rate of tax in that
H State may be higher. Existence of long-standing business
ANDHRA STEELCORPN. v. COMMR. OF TAXES [V. RAMASWAMl,l.] 267

relations, availability of communications, credit facilities
and a host of other factors-natural and business-enter into A
the maintenance of trade relations and the free flow of
trade cannot necessarily be deemed to have been obstruc-
ted merely because in a particular State the rate of tax on
sales is higher than the rates prevailing in other States."
B
and that

"by authorising the State from which the movement of
goods commences to levy on transactions of sale Central
Sales Tax at rates prevailing in the State subject to the
limitations already set out, in our judgment no discrimina-
tion can be deemed to be practiced." c
As may be seen from the above discussion the decision in
Nataraja Mudaliar's case (supra) related to a levy of sales tax on inter-
State sale under the Central Sales Tax Act by a State in which the
movement of goods commenced subject to certain exceptions and limi- D
tations. If the rate of tax on inter-State sale was the same as that for
inter-State sale no discrimination can he said to arise.

After referring to the decisions in Nataraja Mudaliar's case
(supra) and Hajee Abdul Shakoor's case (supra) and distinguishing
-~ the same this Court further observed: E

"In the two cases the differential treatment violated Art.
304(a) of the Constitution, which authorises the Legisla-
ture of a State notwithstanding anything in Arts. 301 and
303 by law to "impose on goods imported from other States
or the Union territories any tax to which similar goods F
manufactured or produced in that State are subject, so
however, as not to discriminate between goods so imported
and goods so manufactured or produced.". Imposition of
differential rates of tax by the same State on goods
manufactured or produced in the State and similar goods

- imported in the State is prohibited by that clause. But
where the taxing State is not imposing rates of tax on
imported goods different from rates of tax on goods
G

manufactured or produced, Art. 304(a) has no application.
Article 303 prohibits the making of law which gives, or
authorises the giving of, any preference to one State over
another, or makes, or authorises the making of, and dis- H
268 SUPREME COURT REPORTS [1990] 2 S.C.R.

A crimination between one State and another. Prevalence of
different rates of sales-tax in the State which have been
adopted by the Central Sales Tax Act for the purpose of ·r
levy of tax under that Act is, as already mentioned, not
determinative of the giving of preference or making a
discrimination.''
B
What is relevant is that A.T.B. Mehtab's case (supra) and Hajee
Abdul Shakoor's case (supra) are concerned with hides and skins
tanned inside the State but by reason of the raw material having
suffered the tax· the goods tanned out such raw material was exempted
from tax which in effect means not taxable goods or the tax is nil.
C That is how the discrimination arose in those two cases. We may also
mention that Nataraja Mudaliar's case (supra) did not dissent from the
ratio of the judgment in Mehtab Majid & Co's case (supra) or Hajee
Adbul Shakoor's case (supra).

In Rattan Lal & Co. & Anr. v. The Assessing Authority & Anr.
D
(supra) the discrimination pleaded was that in fixing the stage of tax
for declared goods section 5(3) of the Act made a discrimination bet-
ween imported goods and local goods. That provision reads as follows:

"(3) Notwithstanding anything contained in this Act-
E
(a) in respect of declared goods tax shall be levied at one
stage and that stage shall be-

(i) in the case of goods liable to sales tax, the stage of sale
of such goods by the last dealer liable to pay tax under this
Act;
F
(ii) in the case of goods liable to purchase tax, the stage of
purchase of such goods by the last dealer liable to pay tax · ..././
under this Act;

The argument was that there is a discrimination between the first
G purchase in the case of imported goods and last sale in the case of local
goods. Since the imported goods might be more expensive by reason of
freight etc. or intermediary sales having taken place, it was said, that
the burden of tax will be heavier and, therefore, this will offend
against the equality clause under Article 304 of the Constitution.
Overruling this objection this Court held:
H
ANDHRA STEELCORPN. v. COMMR. OF TAXES IV. RAMASWAMI,J.] 269

\ 'The rate of tax is same in every case. In State of Madras v.
A

~
N.K Nataraja Mudaliar, [1969] 1 SCR, this Court stated
t)lat the essence of Arts. 301 and 303 is to enable the State
by a law "to impose on goods imported from other States
or the Union territories any tax to which similar goods
manufactured or produced in the State and subject, so,
however as not to discriminate between goods so imported B
and goods so manufactured or produced." It was pointed
out by this Court that "imposition of differential rates of
-;x_., tax by the same State on goods manufactured or produced
in the State and similar goods imported in the State is pro-
hibited by that clause. But where the taxing State is not
imposing rates of tax on imported goods different from rates
of tax on goods manufactured or produced, Art. 304 has no c
application.

>- Here also the tax is at the same rate and therefore the
tax cannot be said to be higher in the case of imported
goods. It may be that when the rate is applied the resulting D
tax is somewhat higher but that does not offend against the
equality contemplated by Art. 304. That is the conse-
quence of ad valorem tax being levied at a particular rate.
So long as the rate is the same Art. 304 is satisfied. Even in
the case of local manufactures if their cost of production
~~, varies, the net tax collected will be more or less in some E
cases but that does not create any inequality because
inequality is not the result of the tax but results from the
cost of production of the goods or the cost of their impor-
tation. This ground, therefore, has also no substance.
>-
In Associated Tannerse v. Commercial Tax Officer Vizianagaram F
& Ors. (supra) the facts were these, The assessee was a tanner who
... .>. · had a tannery at Vizianagaram and was at the material time a dealer
under the Andhra Pradesh General Sales Tax Act, 1957 (hereinafter
called the 'State Act') as well as the Central Sales Tax Act, 1956
(hereinafter called the 'Central Act'). The assessee purchased raw
hides and skins in the State of Andhra Pradesh and tanned the same. G
He was selling mostly the tanned hides and skins in the course of
inter-State trade. The assessing officer assessed the assessee's inter_-
...... State sales under the Central Act. The assessee filed a writ petition in
the High Court questioning the constitutional validity of item 9(b) of
Schedule III of the Andhra Pradesh General Sales Tax Act as uncon-
stitutional and void and for a further declaration that no tax could be H
270 SUPREME COURT REPORTS [1990] 2 S.C.R.

levied or was leviable under the Central Sales Tax Act on inter-State
A
sales of tanned hides which had already suffered tax at the untanned
stage. Thus the question for consideration was whether tanned hides
and skins which has already suffered tax at the untanned stage when
sold in inter-State sale was liable for levy of tax under the Central Act.
This was raised in this fonn because tanned hides and skins which were
B not subjected to tax as untanned hides and skins alone was liable for
the levy under items 9(b )'of Schedule III of the State Act. The High
Court dismissed the writ petition relying on the Nataraja Mudaliar case
(supra) and Rattan Lal & Co. case (supra). The assessee preferred an
appeal by special leave. This Court was of the view that the point
involved in the case was no longer res integra and it is covered by the
C decision in Nataraja Mudaliar case and held since "the rate of tax was
the same, both for the goods brought from outside as well as local
goods and it cannot be said that the taxation did directly and
immediately restrict or hamper the free flow of trade, commerce, or
intercourse and it offended Article 304 (a)." But it is pertinent to point
out the further passages appearing in the judgment which actually
D show the ratio of the judgment. The learned Judges observed:

"It further appears to us that there is another aspect. The
levy by the State Act is in consonance with the scheme of
the Central Act. By sub-section (2) of section 8 of the
Central Act, the tax payable by any dealer on his turnover
E in so far as the turnover or any part thereof relates to the J...
sale of goods in the course of inter-State trade or commerce
not falling under sub-section (1), shall be at the rate
specified in sub-section (2) of section 8."

and this Court further observed:
F
"The effect of an imposition of tax might work differently
upon different dealers, namely, those who use imported ·
tanned goods and those who purchase these locally and tan
these locally and then sell in the course of inter-State sales.
But that effect cannot be said to be arising directly, or as an
G immediate effect of the imposition of the tax. Therefore
there cannot be any question of violation of article 304( a)
of the Constitution.

There is another aspect of the matter. The imposition in
this case was in implementation of the Central Act and it
H was submitted on behalf of the respondent that there was
ANDHRA STEEL CORPN. v. COMMR. OF TAXES IV. RAMASWAMI, J.] 271

no prohibition under article 304 of the Constitution on the
A
Parliament for imposition of any law. The embargo that

- was placed by article 304 of the Constitution was on the
Legislature of a State.

Sub-article (a) of article 304 of the Constitution reads as follows:
B
"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 manufac-
tured or produced in that State was subject, so, however,
c
as not to discriminate between goods so imported and
goods so manufactured or produced."

Therefore the prohibition was not on the Parliament.
But in the view we have taken on the first aspect of the D
matter and in view of the decisions of this Court in the
cases of State of Madras v. N.K. Nataraja Mudaliar, [1968]
22 STC 376 (SC); ( 1968) 3 SCR 829 and Rattan Lal & Co.
v. Assessing Authority, [1970] 25 STC 136 (SC): (1969) 2
SCR 544, it is not necessary for us to discuss this aspect any
further." E

It may be seen from these· passages cited that the ratio of the
decision as in the case of Nataraja Mudaliar, case (supra) was that in
the case of inter-State sale the levy of tax is under the Central Sales Tax
onlv though for the purposes of rates of tax that rate which is applic-
abl~· to local sales is adopted subject to the maximum mentioned\ in F
section 8(2) of the Central Act and these decisions have no application
tO a case where the discrimination pleaded wjth reference to a provi-
sion in State law imposing taxes with reference to local as well as in
respect of the imported goods. As we have already noticed the States
.have no legislative power to tax inter-State sales and it is only the
Parliament that could make law. The Central Act is the law relating to G
tax on inter-State sales made by Parliament. The State from which the
movement of goods commences in the course of inter-State sale collects
the tax as agent of the Central Government. On sale of declared goods
tax was to be levied and collected at the rate applicable to the sale or
purchase of such goods inside the appropriate State subject to the
maximum prescribed under section 15 and the restriction relating to H
.:72 SUPREME COURT REPORTS [1990] 2 S.C.R.

A taxing it at single point. This is also further subjected to the rates
prevailing for local sales. It is with respect to these provisions, in the

.-
three decisions in Nataraja Mudaliar case, Rattan Lal & Co. case and
',.-.-
Associated Tanner case this Court held that so long the rates applic-
able are in accordance with section 8 no discrimination would arise
and none of the provisions of part XIII of the Constitution could be
B
said to have been offended. But the case on hand is not one arising out
of Central Act. The tax was levied under the State Act in respect of
steel semis. The State Act exempted steel semis which have been
manufactured out of iron scrap which have suffered tax but not the.
~.-
other categories where the scrap had not suffered tax at that stage.
This is directly covered by the decision in A. T.B. Mehtab's case
c (supra) and that decision has not been dissented in Nataraja Muda/iar
case (supra) or Rattan Lal & Co's case (supra). The decision in A. T.B.
Mehtab's case (supra) is by a Constitution Bench and had not been
dissented so far in any case. The ratio of the judgment being fully
applicable, the judgment of the High Court under appeal is not
acceptable.
D
We accordingly hold that the provision which is impugned in this
case is ultra vires and accordingly set aside the judgment of the High
Court and allow the writ petition filed by the assessee in the High
Court. There will be no order as to costs.

T.N.A. Appeals allowed.