Holding

The notifications reducing cement tax rates were unconstitutional, ultra vires Part XIII of the Constitution, and were quashed.

Summary

The petitioners, cement manufacturers and their stockists, challenged three tax notifications—two by Andhra Pradesh (under its General Sales Tax Act and the Central Sales Tax Act) and one by Karnataka—reducing the sales tax rate on cement. They argued that the notifications created discriminatory preferences and violated the constitutional guarantee of free trade under Part XIII. The petitioners withdrew their challenge to the validity of Section 8(5) of the Central Sales Tax Act, limiting the case to the notifications themselves. The Supreme Court held that the executive notifications, by granting preferential tax rates to local manufacturers and extending benefits to unregistered dealers, erected economic barriers contrary to Articles 301‑304 of the Constitution. Consequently, the notifications were declared ultra vires and quashed, and the writ petition was allowed with costs.

Issues considered

The validity of the Andhra Pradesh notifications under Section 9(1) of the Andhra Pradesh General Sales Tax Act, 1957, in light of Article 301‑304 of the Constitution.
The validity of the Andhra Pradesh and Karnataka notifications issued under Section 8(5) of the Central Sales Tax Act, 1956, concerning discriminatory tax rates.
Whether executive notifications can create preferences without legislative backing under Part XIII of the Constitution.
Whether the reduced tax rates constitute an impermissible restriction on the free flow of inter‑state trade and commerce.

Legislation cited

Andhra Pradesh General Sales Tax Act, 1957s. 9(1)
Central Sales Tax Act, 1956s. 8(5)

Subjects

freedom of tradeinterstate commercetaxationconstitutional lawPart XIIIArticle 301discriminationsales taxcement industrycentral sales taxstate taxationultra virespublic interestnotificationexecutive action

Judgment

A INDIAN CEMENT AND ORS.
v. y.
STATE OF ANDHRA PRADESH AND ORS.

JANUARY 12. !988

B [RANGANATH MISRA AND MURARI MOHON DUTT. JJ.]

Andhra Pradesh General Sales Tax Act, 1957-Central Sales Tax
Act, 1956--Challenge to validity of notifications issued under sub-section
(I) of section 9 and sub-section (5) of section 8-Respective/y-Of-As
hit by provisions of Part Xlll of the Constitution.
c The State of Andhra Pradesh in exercise of powers conferred
-
nnder sub-section (I) of section 9 of the Andhra Pradesh General Sales
Tax Act, 1957, made an order on January 27, 1987, reducing the rate of
tax on sale of Cement made to the manufacturing units of Cement
products in the State. On the same date, the State of Andhra Pradesh
D made another order in exercise of the powers conferred by sub-section
(5) of section 8 of the Central Sales Tax Act, !956, reducing the tax
leviable under the said Act in respect of sales of Cement in the course of
the inter-State trade or commerce.

The State of Karnataka in exercise of the powers conferred by
E sub-section (5) of section 8 of the Central Sales Tax Act, 1956, issued a
notification on 28.10.1987, reducing the rate of tax payable under the y
said Act on the sale of Cement in the course of the inter-State trade or
commerce.

The petitioners-cement manufacturing concerns, their share-
-
F holders and their authorised stockists-filed this writ petition, challeng-
ing the vires of section 8(5) of the Central Sales Tax Act, 1956 (Central
Act 74 of 1956) and the notifications referred to above as ultra vires the
provisions contained in Part XIII of the Constitution providing that
trade, commerce and inter-course throughout the territory of India
shall be free. According to the petitioners the three orders referred to
G above created trade barriers and directly impinged upon the freedom of
trade, commerce and inter-course provided for in Article 30! of the
Constitution.

Since the vires of section 8(5) of the Central Act 74 of 1956 had
been assailed, notice had been issued to the Union of India, Attorncy-
H General, and all the States but at the hearing of the writ petition, the
574
INDIAN CEMENT v. STATE OF ANDHRA PRADESH 575

petitioners gave up the challenge against section 8(5) of the Central Act.
A
. )
In view of that, the writ petition was confined to the challenge against
the two notification of the State of Andhra Pradesh and the lone notifi-
cation of the State of Karnataka. The return to the rule nisi was made
on behalf of the State of Andhra Pradesh. The S\ate of Karnataka chose
not to make any return to the rule nisi, but its counsel joined at the
hearing aud contended that the order made by the Karnataka State did B
not affect the provisions in Part XIII of the Constitution. The
Attorney-General confined his submission to the scope of Part Ill of
the Constitution and the effect of the notifications on the scheme con-
tained in that part.

Allowing the writ petition, the Court,
c
HELD: The title for Part XIII, which contains the relevant Arti-
cles 30 I, 302, 303 and 304 is "Trade Commerce and inter-course within
the Territory of India." The true purpose of the provisions contained in
Part XIII of the Constitution, as elucidated in the different decisions of
the Constitution Benches of this Court, is that the restriction provided D
for in Article 301 can within the ambit be limited by law made by the
Parliament and the State legislature. No power is vested in the executive
authority to act in any manner affecting or hindering the very essence and
thesis contained in the scheme of Part XIII of the Constitution. It is equally
clear that the declaration contained in Part XIII of the Constitution is
'( against the creation of economic barriers and or pockets which stand against E

.. the free flow of trade, commerce and inter-course. [580F; 587H; 588A-B I

Taxation is a deterrent against free fiow. As a result of favourable
or unfavourable treatment by way of taxation, the course of flow of
trade gets regulated either adversely or favourably. If the scheme which
Part XIII guarantees has to be preserved in national interest, it is F
necessary that the provisions in the Article must be strictly complied
with. One has to recall the far-sighted observations of Gajendragadkar.
J. in Atiabari Tea Co. Ltd. v. The State of Assam & Ors., [1961]
l.S.C.R. 609 and the observations then made obviously apply to cases of
the type now before the Court. [588C-D I
G
Under the first notification made under section 9( I) of the Andhra
Pradesh General Sales Tax Act, the rate of tax was reduced to 4 per cent
in respect of the sales made by the indigenous cement manufacturers to
.. manufacturers of Cement products. The Tamil Nadu producers had
sales officers in Andhra Pradesh and in regard to their sale to such
manufacturers of cement products, the benefit of the reduced rate of H

!'''
576 SUPREME COURT REPORTS [1988) 2 S.C.R.

taxation was not applicable. Two reasons were advanced by way of
A
justification. One was that it was beneficial to the State revenue and ""
secondly, that it protected the local mannfacturers too. It could not be
demonstrated to the Court how the reduction in the rate of sales tax was ' "'
beneficial to the State revenue. The other justification was what the
provisions of Part XIII of the Constitution did not permit. The reason-
B able restriction contemplated in Part XIII have to be backed by law and
not by executive action, provided the same are within the limitations ·y'
prescribed under the Scheme of Part XIII. l588D-HI
r
The second notification related to the inter-State transactions. ,
Variation of the rate of inter-State sales tax does affect free trade and ,
c commerce and creates a local preference which is contrary to the
scheme of Part XIII of the Constitution. The notification extended the
1
benefit even to the unregistered dealers. Both the notifications of the -r
Andhra Pradesh Government were bad and hit by the provisions of
Part XIII of the Constitution. They could not be sustained in law. [5920 I

D In the case of the notification of the Karnataka State, as already
said, no return had been made and no attempt had been made to place
the facts and circumstances to justify the action, The notification suf-
fered from the same vice as the second notification of the State of
Andhra Pradesh suffered, and no distinction could be drawn. The
notification of the Karnataka Government was also bad in law. l592E-F)
E :r
The writ petition succeeded and the two impugned notifications of
the Andhra Pradesh Government and the impugned notification of the
Karnataka Government were quashed. [592G I '
-
Atiabari Tea Co. Ltd. v. The State of Assam & Ors., [1961) l
F
S.C.R. 609; The Automobile Transport (Rajasthan) Limited v. The -~
State of Rajasthan & Ors., (1963) S.C.R. 491; State of Madras v. N.K. ~
Nataraja Mudaliar., (1968) 3 S.C.R. 829; Gwalior Rayon Silk Mfg.
(Wvg.) Co. Ltd. v. The Assistant Commissioner of Sales Tax & Ors.,
(1974] 2 S.C.R. 879 and State of Tamil Nadu, etc. v. Sitalakshmi Mills,
etc., [1974] 1 S.C.R. l, referred to.
G r
ORIGINAL JURISDICTION: Writ Petition (Civil) No. 422 of
1987.
T
(Under Article 32 of the Constitution of India).

Dr. Y.S. Chitale, K.J. John, Atul Chitale and Miss Naina for the
H Petitioners.
INDIAN CEMENT v. STATE OF ANDHRA PRADESH [MISRA, J.[ 577
i K. Parasaran, Attorney General, T.S. Krishnamoorthy Iyer, A
G.A. Shah, V. Jagannatha Rao Advocate General, B.B. Ahuja, Miss
... ' A. Subhashini, T.V.S.N. Chari, Miss Vrinda Grover, Badri Nath, Dr.
N.M. Ghatate, M. Veerappa, A.M. Khanwilkar, A.S. Bhasme, R.
Mohan, R. Ayyam Perumal, A. Subha Rao, M.N. Shroff, J.R. Das,
D.K. Sinha, S.N. Khare, T.C. Sharma, S.K. Bhattacharya, Kailash
Vasudev and Probir Choudhary for the Respondents. B
-t
~
The J udgment of the Court was delivered by

~
RANGANATH MISRA, J. The India Cement Limited, Chet-
tinad Cement Corporation, Dalmia Cement (Bharat) Limited and
~ Tamil Nadu Cement Corporation Limited being petitioners l, 6, 9 and
12 in this application under Article 32 of the Constitution are man-
c
"!'·
ufacturers of cement, each of them having its manufacturing unit as
also registered offices located within the State of Tamil Nadu; petition-
ers 2, 7, and 10 are shareholders of petitioners 1, 6 and 9 respectively
and are citizens of India, while the remaining petitioners are autho-
rised stockists of the different manufacturers having their places of D
" business at different places located in the States of Karnataka, Kerala
and Tamil Nadu. Manufacturer-petitioners have been selling their
cement in the States of Karnataka and Kerala and for such purpose
they have places of business within those States. The State of Andhra
y Pradesh in exercise of powers conferred under sub-section (I) of Sec-
tion 9 of the Andhra Pradesh General Sales Tax Act, 1957 made an E
.. .).
order on January 27, 1987 (Annexure-A) reducing the rate of tax on
sale of cement made to the manufacturing units of cement products in
the State of Andhra Pradesh. That order runs thus:
:I
~- "In exercise of the powers conferred by sub-section ( 1) of
Section 9 of the Andhra Pradesh General Sales Tax Act, F
> 1957 (Andhra Pradesh Act, No. VI of 1957), the Governor
of Andhra Pradesh hereby directs that the tax leviable un-
der clause (a) of sub-section (2) of Section 5 read with Item
18 in the First Schedule to the said Act, shall, in respect of
Cement manufactured by Cement Factories situated in the
~
State and sold to the manufacturing units situated within G
y- the State for the purpose of manufacture of Cement pro- _
ducts such as Cement sheets, Asbestos Sheets, Cement
flooring stones, Cement concrete pipes, hume pipes,
"'! Cement water and sanitary fitting, concrete poles and other
Cement products, be at the reduced rate of four paise in the
rupee at the point of first sale in the State with effect on H
578 SUPREME COURT REPORTS [1988] 2 S.C.R.

and from the lstJ anuary, 1987."
A
On the same day, another order was made to the following ' ....
effect:

"In exercise of the powers conferred by sub-section (5) of
B Section 8 of the Central Sales Tax Act, 1956 (Central Act
74 of 1956), Governor of Andhra Pradesh hereby directs )-
that the tax leviable under the said Act, shall, in respect of r
the sales of cement in the course of inter-State trade or
·commerce be at a lower rate of two per cent with or without
'C' Form, with effect from lst January, 1987."
c The State of Karnataka issued the following notification on
28.2.1987:

"In exercise of the powers conferred by sub-section (5) of
Section 8 of the Central Sales Tax Act, 1956 (Central Act
D 74 of 1956), the Government of Karnataka, being satisfied
that it is necessary so to do in public interest, hereby
reduces with immediate effect the rate of tax payable under
the said Act on the sale of cement made in the course of
inter-State trade or commerce from 15% to 2%."

E Petitioners in this application challenge the vires of Section 8(5)
of the Central Sales Tax Act, 1956 (Central Act 74 of 1956) and the
notifications referred to above as ultra vires the provisions contained in .._
Part XIII of the Constitution providing that trade, commerce and
inter-course throughout the territory of India shall be free. According to
the petitioners the three orders referred to above create trade barriers . ~
F and directly impinge upon the freedom of trade, commerce and inter- ~
course provided for in Article 301 of the Constitution.

Since the vires of Section 8(5) of the Central Act 74 of 1956 had
been assailed, notice had been issued to the Union of India and
learned Attorney General. Notice was also directed to all the States.
r
G Pursuant to the notice, the State of Madhya Pradesh and Sikkim have
filed their affidavits with reference to the challenge against Section
8(5) of the Act. At the hearing of the writ petition, however, learned
counsel for the petitioners gave up that challenge. In that view of the
matter, reference to the counter-affidavits of the States of Madhya
Pradesh and Sikkim becomes irrelevant and the petition has to be con-
H fined to the challenge against the two notifications of the State of
INDIAN CEMENT v. STATE OF ANDHRA PRADESH [MISRA, J.I 579

'!'. Andhra Pradesh and the lone notification of the State of Karnataka.
A
"7'
., The return to the rule nisi on behalf of the State of Andhra
Pradesh is made by the Commercial Tax Officer, Company Circle II,
Hyderabad. He has stated that the State of Andhra Pradesh has surp-
!us production of cement. In 1986-87, the production of cement was
around six million tonnes out of which local consumption was to the B
-r tune of about three million tonnes. In 1987-88 and 1988-89, production
was likely to go up by 1.5 million tonnes and three million tonnes

......
' respectively and the local consumption was estimated to be within the
range of 40% of the production. 60% of the manufactured cement
had, therefore, to be marketed out. Within the State there were cer-
~
. ' lain bulk consumers of cement who use the commodity as raw-material
for manufacturing Cement sheets, Asbestos sheets, hume pipes,
c
"(•
Cement bricks, tiles etc. Such bulk consumers found products of ce-
men! from outside the State to be cheaper in view of the higher inci-
dence of local State tax. In this background Government considered it
necessary to reduce the tax rate under the Andhra Pradesh General
Sales Tax Act to help the Cement Industries in easing out their D
-. marketing difficulty. Keeping in view the fact that marketing of indi-
genous cement had to be inside the State, Government decided to
reduce the rate of tax under the Andhra Pradesh General Sales Tax
Act to 4%. That is how the first notification was made reducing the
y rate of tax in respect of sale of cement to local manufacturers as
aforesaid. Government by the second notification reduced the rate of E
tax leviable under the Central Sales Tax Act in course of inter-State
• trade or commerce to 2% with or without 'C' Form with effect from
-> 1.1.1987. In another place of the same affidavit, it has been pleaded:

"The classification of the manufacturers and dealers in
f- cement of Andhra Pradesh vis-a-vis the other States is a F
>- reasonable classification and it is not violative of Articles
14 and 19(1)(g)".

"The concession in the rate of tax extended by the State of
Andhra Pradesh to the manufacturers and dealers of
~ Andhra Pradesh is well within the statutory powers of the G
State. It does not effect the business interest of the man-
'I ufacturers and dealers of other States. It is the policy of the
State of Andhra Pradesh to help the cement Industries to
organise the marketability of their full production to
improve the overall industrial activity of the country. Hence
this contention tenable". H
580 SUPREME COURT REPORTS I19881 2 S.C.R.
'
"As already mentioned earlier, the notifications were
y
A
issued in public interest and in the interest of State revenue".

Yet at another place in the return, it has been stated:

"The contention that the policy of the Legislature is to
B promote sales only through registered dealers is not based on
correct appreciation of the law. Any law to that effect
would impose a restriction on the rights of the common
+
man and would result in the violation of the provisions of r
the Constitution which ensures certain fundamental rights
to the common man."
-
c The State of Karnataka chose not to make any return to the rule
nisi but its counsel joined at the hearing and contended that the order T
made by the Karnataka State did not affect the provisions in Part XIII
of the Constitution.

D In view of the fact that counsel for petitioners gave up the
challenge to the vires of Section 8(5) of the Central Sales Tax Act,
learned Attorney General confined his submissions to the scope of
Part XIII of the Constitution and the effect of the notifications on the
scheme contained in that part.

E In case the notifications operate against the provisions of Article
30 1 of the Constitution, they have got to satisfy the requirements
contained in that Part. We shall now refer to the relevant Articles and •
to several decisions of this Court which are binding precedents. The
title for Part XIII is ''Trade, Commerce and Inter-course within the
Territory of India." The relevant Articles in that Part are 30 I, 302, 303 _ -1
F and 304. We may now reproduce them: .{

"301. Subject to the other provisions of this part,
trade, commerce and intercourse throughout the territory
of India shall be free.

G 302. Parliament may by law impose such restrictions
on the freedom of trade, commerce or intercourse between
one State and another or within any part of the territory of
India as may be required in the public interest (underlining
is ours)

H 303. (I) Notwithstanding anything in Article 302,
INDIAN CEMENT v. STATE OF ANDHRA PRADESH [MISRA. J.[ 581
'(
neither Parliament nor the legislature of a State shall have
A
,... ' power to make any law giving, or authorising the giving of.
any preference to one State over another, or making, or
authorising the making of, any discrimination between one
State and another, by virtue of any entry relating to trade
and commerce in any of the Lists in the Seventh Schedule.
B
t (2) Nothing in clause (!) shall prevent Parliament
'I from making any law giving, or authorising the giving of,
... any preference or making, or authorising the making of,
.,.' any discrimination if it is declared by such law that it is
necessary to do so for the purpose of dealing with a situa-
tion arising from scarcity of goods in any part of the territ-
y ory of India.
c
304. Notwithstanding anything in Article 301 or Arti-
de 303, the Legislature of a State may by law:

(a) impose on goods imported from other States or D
the Union territories any tax to which similar goods man-
ufactured or produced in that State are subject, so, how-
ever, as not to discriminate between goods so imported and
goods so manufactured or produced; and
y
(b) impose such reasonable restrictions on the free- E
--.. dom 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 purpose

t' of clause (b) shall be introduced or moved in the Legisla-
lure of a State without the previous sanction of the
President."
F

Judicial authority in regard to interpretation of this Part of the
Constitution is abundant. We shall presently refer to some of the
~
decisions of this Court. In Ataibari Tea Co. Ltd. v. The State of Assam
& Ors., [ 1961] 1 SCR 609 a Constitution Bench of this Court was G
testing the validity of the provisions of the Assam Taxation (on goods
~
carried by Roads and Inland Waterways) Act, 1954 by applying the
provisions of this Part of the Constitution. At page 830 of the Reports,
Sinha, CJ, stated:

"Article 301, with which Part XIII commences, con- H
582 SUPREME COURT REPORTS [1988) 2 S.C.R.

tains the crucial words shall be free and provides the key to
A
the solution of the problems posed by the whole Part. The
freedom declared by this Article is not an absolute freedom
from all legislations. As already indicated, the several
entries in the three Lists would suggest that both Parlia-
ment and State Legislatures have been given the power to
B legislate in respect of trade, commerce and intercourse, but· 'f
it is equally clear that legislation should not have the effect
of putting impediments in the way of free flow of trade and
commerce. In my opinion, it is equally clear that the free-
dom envisaged by the Article is not an absolute freedom
from the incidence of taxation in respect of trade, com-
-
merce and intercourse, as shown by entries 89 and 92A in
c the List I, entries 52, 54 and 56 to 60 in List II and entry 35
in List III. All these entries in terms speak of taxation in
relation to different aspects of trade, commerce and inter-
course. The Union and State Legislature, therefore, have
the power to legislate by way of taxation in respect of
D trade, commerce and intercourse, so as not to erect trade
barriers, tariff walls or imposts, which have a deleterious
effect on the free flow of trade, commerce and intercourse.
That freedom bas further been circumscribed by the power
vested in Parliament or in the Legislature of a State to
impose restrictions in public interest. Parliament bas
further been authorised to legislate in the way of giving

..
E
preference or making discrimination in certain strictly
limited circumstances indicated in clause (2) of Article 303.
Thus, on a fair construction of the provisions of Part XIII,
the following propositions emerge: (!) trade, commerce
and intercourse throughout the territory of India are not
F absolutely free, but are subject to certain powers of legisla-
tion by Parliament or the Legislature of a State; (2) the
freedom declared by Article 301 does not mean freedom
from taxation simpliciter, but does not mean freedom from
taxation which has the effect of directly impeding the free
flow of trade, commerce and intercourse; (3) the freedom
G envisaged in Article 301 is subject to non-discriminatory
restrictions imposed by Parliament in public interest (Arti-
cle 302); (4) even discriminatory or preferential legislation
may be made by Parliament for the purpose of dealing with
an emergency like a scarcity of goods in any part of India
(Article 303(2)); (5) reasonable restrictions may be
H imposed by the Legislature of a State in the public interest
INDIAN CEMENT v. STATE OF ANDHRA PRADESH [MISRA, J.[ 583

(Article 304(b)); (6) non-discriminatory taxes may be A
imposed by the Legislature of a State on goods imported
from another State or other States, if similar taxes are
imposed on goods produced or manufactured in that State
(Article 304(a)); and lastly (7) restrictions imposed by
existing laws have been continued, except in so far as the
President may by order otherwise direct (Article 305)"; B
t
; Gajendragadkar, J., as he then was, at page 843 of the Reports
observed:

"In drafting the relevant Articles of Part XIII, the
makers of the Constitution were fully conscious that
economic unity was absolutely essential for the stability
c
and progress of the federal policy which had been adopted
by the Constitution for the governance of the country.
Political freedom which had been won, and political unity
which had been accomplished by the Constitution, had to
be sustained and strengthened by the bond of economic D
unity. It was realised that in course of time, different politi-
cal parties believing in different economic theories or
idealogies may come in power in the several constituent
units of the Union, and that may conceivably give rise to
local and regional pulls and pressures in economic matters.
Local or regional fears or apprehen_sions raised by local or E
regional problems may persuade the State legislatures to
adopt remedial measures intended solely for the protec-
tion of the regional interests without due regard to their
effect on the economy of the nation as a whole. The object
of Part XIII was to avoid such a possibility. Free movement
and exchange of goods throughout the territory of India is F
essential for the economy of the nation and for sustaining
and improving living standards of the country. The provi-
sion contained in Article 301 guaranting the freedom of
trade, commerce and intercourse is not a declaration of a
mere platitude, or the expression of a pious hope of
declaratory character; it is not also a mere statement of a G
Directive Principle of State Policy; it embodies and
enshrines a principle of paramount importance that the
economic unity of the country will provide the main sus-
taining force for the stability and progress of the political
and cultural unity of the country ........... "
H
584 SUPREME COURT REPORTS [1988] 2 S.C.R.

A Then came the case of The Automobile Transport (Rajasthan) Limited
v. The State of Rajasthan & Ors., [ 1963] SCR 491 Das, J. who spoke
for the Constitution Bench referred to the views expressed in Atiabari
Tea Company's case (supra) and proceeded to say:

"We have tried to summarise above the various stand
B points and views which were canvassed before us and we
shall now proceed to consider which, according to us, is the
correct interpretation of the relevant Articles in Part XIII
of the Constitution. We may first take the widest view, the
view expressed by Shah, J. in the Atiabari Tea C<>mpany's
case, a view which has been supported by the appellants
and one or two of the interveners before us. This view we
c apprehend, is based on a purely textual interpretation of
tile relevant Articles in Part XIII of the Constitution and
this textual interpretation proceeds in the following way.
Article 30 l which is in general terms and is made subject to
th~ other provisions of Part XIII imposes a general limita-
D tion on the exercise of legislative powers, whether by the
Union or the States, under any of the topics-taxation top-
ics as well as other topics-enumerated in the three Lists of
the Seventh Schedule, in order to make certain 'trade com-
merce and intercourse throughout the territory of India
shall be free'. Having placed a general limitation on the
E exercise of legislative powers by Parliament and the State
Legislatures, Article 302 relaxes that restriction in favour
of Parliament by providing that that authority 'may by law
l
impose such restrictions on the freedom of trade, com-
merce and intercourse between one State and another or
within any part of the territory of India as may be required __ ....,.
F in the public interest'. Having relaxed the restriction in ...(
respect of Parliament under Article 302, a restriction is put
up on the relaxation by Article 303( l) to the effect that
Parliament shall not have the power to make any law giving
any preference to any one State over another or discrimi-
nate in between one State and another by virtue of any
G entry relating to trade and commerce in Lists I and Ill of
the Seventh Schedule. Articles 303( 1) which places a ban
on Parliament against the giving of preferences to one State
over another or of discriminating between one State and
another, also provides that the same kind of ban should be
placed upon the State Legislature also legislating by virtue
H of any entry relating to trade and commerce in Lists II and
INDIAN CEMENT v. STATE OF ANDHRA PRADESH !MISRA, J.J 585
-f,
III of the Seventh Schedule. Article 303(2) again carves out

. l
an exception to the restriction placed by Article 303(1) on
the powers of Parliament by providing that nothing in Arti-
cle 303(a) shall prevent Parliament from making any law
A

giving preference to one State over another or discriminat-
ing between one State and another, if it is necessary to do
so tor the purpose of dealing with a situation arising from B
r scarcity of goods in any part of the territory of India. This
~
exception applies only to Parliament and not to the State
' Legislatures. Article 304 comprises two clauses and each
clause operates as a proviso to Articles 301 and 303. Clause
le (a) of that Article provides that the Legislature of a State
may 'impose on goods imported from other States and any
c
·y 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'. This clause, therefore, permits the levy on
goods from sister States any tax which similar gods man-
ufactured or produced in that State are subject to under its D
taxing laws. In other words, goods imported from sister
States are placed on par with similar goods manufactured
or produced inside the State in regard to State taxation
within the State allocated field. Thus the States in India
y have full powers of imposing what in American State Legis-
lation is called the use tax, gross receipts tax etc., not to E

- :.. speak of the familiar property tax, subject only to the con-
dition that such tax is imposed on all goods of the same
kind produced or manufactured in the taxing State,
although such taxation is undoubtedly calculated to fetter
interstate trade and commerce ...... Now clause (b) of
f- Article 304 provides that notwithstanding anything in Arti- F
t- cle 30 I or 303 the Legislature of a State may by law imposes
such reasonable restrictions on the freedom of trade, corn-
merce or intercourse with or within that State as may be
required in the public interest. The proviso to clause (b)
... says that no bill or amendment for the purpose of clause (b)
shall be introduced or moved in the Legislature of a State G
without the previous sanction of the President. This provi-
y sion appears to be the State analogue to the Union Parlia-
ment's authority defined by Article 302, in spite of the
omission of the word 'reasonable' before the word 'restric-
tions' in the latter Article. Leaving aside the pre-requisite
of previous Presidential sanction for the validity of State H
586 SUPREME COURT REPORTS [19881 2 S.C.R.

Legislation under clause (b) provided in the proviso \.-
A
thereto, there are two important differences between Arti-
cles 302 and 304(b) which require special mention. The first
is that while the power of Parliament under Article 302 is ' ....
subject to the prohibition of preferences and discrimina-
tions decreed byArticle 303( 1) unless Parliament makes the
B declaration contained in Article 303(2), the State's power
contained in Article 304(b) is made expressly free from the •'f
prohibition contained in Article 303( 1), because the open- '
ing ~ords of Article 304 contain a non obstante clause both r
to Article 301 and Article 303. The second difference spr-
ings from the fact that while Parliament's to impose restric-
tions under Article 302 upon freedom of commerce in the -j
--
c public interest is not subject to the requirement of reason-
ableness, the power of the State to impose restrictions on
.,.
the freedom of commerce in the public interest under Arti-
cle 304 is subject to the condition that they are reason-
able".
D
The next authority to which we may now refer is the case of State of f
Madras v. N.K. Nataraja Mudaliar, [1968] 3 SCR 829 Shah, J., as he
then was, referred to Part XIII of the Constitution at page 839 of the
Reports. On page 841 of the Reports, the learned Judge proceeded to
say:
'(
E
"Tax under the Central Sales Tax Act on inter State
sales, it must be noticed, is in ns essence a tax which
encumbers movement of trade or commerce, since by the .; -
definition in section 3 of the Act a sale or purchase of goods
is deemed to take place in the course of inter State trade or
F commerce, if it-(a) occasions the movement of goods from -1)
one State to another; (b) is effected by a transfer of docu-
ments of title to the goods during their movement from one '
State to another. The question which then falls to be
determined is whether the tax imposed in the present case
is 'saved by the operation of the other provisions of Part
G XIII. Article 302 of the Constitution provides that Parlia- t ~

ment may by law impose such restrictions on the freedom
of trade, commerce or intercourse between one State and '(
another or within any part of the territory of India as may
be required in the public interest. Thereby the Parliament
is, notwithstanding the protection conferred by Article 301,
H authorised to impose restrictions on the freedom of trade,
INDIAN CEMENT v. STATE OF ANDHRA PRADESH [MISRA, J.[ 587

i commerce or intercourse in the public interest. The expres- A
sion "between one State and another" does not imply that
_, )> it is only intended to confer upon the Union Parliament the
power to remove the fetter upon legislative authority only
so as to keep trade, commerce or intercourse free between
one State Government and another. It is intended to
declare trade, commerce and intercourse free between resi- B
dents in one State and residents in another State. That is
r clear because Article 302 expressly provides that on the
~ freedom of trade restrictions may be imposed not only as

- ·~
between one State and another, but also within any part of
the territory of India. As we have already observed, Article
301 does not merely protect inter-State trade or operate
c
against inter-State barriers: all trade is protected whether it
y is intra-State or inter-State by the prohibition imposed by
Article 301, and there is nothing in the language or the
context for restricting the power of the Parliament which it
otherwise possesses in the public interest to impose restric-
tions on the freedom of trade, commerce or intercourse. D
operative only as between one State and another as two
entities. There is also no doubt that exercise of the power
to tax may normally be presumed to be in the public in-
terest ........ "

t' It is worthwhile to refer to the observations made by Hegde, J. At E
page 855 of the Reports, the learned Judge observed with reference to
- .. section 8(5) of the Central Sales Tax Act as follows;

"Sub-section (5) of section 8 provides for giving indi-
vidual exemptions in public interest. Such a power is there
f.- in all taxation measures. It is to provide for unforeseen F
;. contingencies. Take for example, when there was famine in
Bihar, if a dealer in Punjab had undertaken to sell goods to
a charitable society in that State at a reasonable price for
distribution to those who were starving, it would have been
in public interest if the Punjab Government had exempted
that dealer from paying sales tax. Such a power cannot G
"' ' immediately or directly affect the free flow of trade. The
y power in question cannot be said to be bad. If there is any
misuse of that power, the same can be challenged."

The true purpose of the provisions contained in Part XIII of the Con-
stitution, as elucidated in the different decisions of the Constitution H
588 SUPREME COURT REPORTS I1988) 2 S.C.R.
Benches, is that the restriction provided for in Article 30 I can within t-
A
the ambit be limited by law made by the Parliament and the State
Legislature. No power is vested in the executive authority to act in any K ,..,
manner which affects or hinders the very essence and thesis contained
in the scheme of Part XIII of the Constitution. It is equally clear that
the declaration contained in Part XIII of the Constitution is against
B creation of economic barriers and/or pockets which would stand
against the free flow of trade, commerce and intercourse 'i'
There can be no dispute that taxation is a deterrent against free .
flow. As a result of favourable or unfavourable treatment by way of
taxation, the course of flow of trade gets regulated either adversely or -
c
favourably. If the scheme which Part XIII guarantees has to be pre-
served in national interest, it is necessary that the provisions in the
1
Article must be strictly complied with. One has to recall the farsighted
observations of Gajendragadkar, J. in Atiabari Tea Co. case (supra)
';...
and the observations then made obviously apply to cases of the type
which is now before us.
D
The two notifications of the Andhra Pradesh Government may ,.
now be referred to. Under the first notification made under section
9( l) of the Andhra Pradesh General Sales Tax Act, the rate of tax has

E
been reduced to 4 per cent in respect of sales made by indigenous
cement manufacturers to manufacturers of cement products. Admit-
tedly, the Tamil Nadu producers have sales officers in Andhra Pradesh
.,
and in regard to their sale to such manufacturers of cement products
the benefit of reduced rate of taxation is not applicable. The pres-
cribed rate of tax under the Andhra Act is 13. 75 per cent on cement. . "'
Thus under the Andhra Notification in regard to the local tax the
indigenous producers of cement have a benefit of 9.75 per cent. The
F return made to the Court admits of the position that preference has ·~
been shown to local manufacturers. Two reasons have been advanced ~
by way of justification. One is that it is beneficial to the State revenue
and secondly it protects the local manufacturers too. The counsel for
the State Government has not been able to demonstrate to us how the
reduction in the rate of sales tax is beneficial to the State revenue. The
G other justification is what provisions of Part XIII of the Constitution '
~

do not permit. The reasonable restrictions contemplated in Part XIII
y
have to be backed by law and not by executive action provided the
same are within the limitations prescribed under the scheme of Part
XIII.

H Coming to the second notification relating to inter-state transac-
INDIAN CEMENT v. STATE OF ANDHRA PRADES!-1 [MISRA, J.J 589

-{ tions, the justification pleaded by the State of Andhra Pradesh has A
already been extracted by us. We may usefully refer to the decision of
) the Constitution Bench in the case of Gwalior Rayon Silk Mfg. (Wvg)
"" Co. Ltd. v. The Assistant Commissioner of Sales Tax & Ors., [1974] 2
SCR 879. At page 883 of the Reports, Khanna, J. speaking for the
Court observed:
B
t' "It has been argued on behalf of the appellants that
the fixation of rate of tax is a legislative function and as the
~ Parliament has, under section 8(2)(b) of the Act, not fixed
~ the rate of central sales tax but has adopted the rate applic-

I \· y
able to the sale or purchase of goods inside the appropriate
State in case such rate exceeds 10 per cent, the Parliament
has abdicated its legislative function. The above provision
is consequently stated to be constitutionally invalid because
c
of excessive delegation of legislative power. This conten-
tion, in our opinion, is not well founded. Section 8(2)(b) of
the Act has plainly been enacted with a view to prevent
evasion of the payment of the central sales tax. The Act D
prescribed a low rate of tax of 3 per cent in the case of
inter-State sales only if the goods are sold to the Govern-
ment or to a registered dealer other than the Government.
In the case of such a registered dealer, it is essential that
the goods should be of the description mentioned in sub-
y
section (3) of section 8 of the Act. In order, however, to E
avail of the benefit of such a low rate of tax under section
8( 1) of the Act, it is also essential that the dealer selling the
• goods should furnish to the prescribed authority in the pre-
scribed manner a declaration duly filled and signed by the
registered dealer, to whom the goods are sold, containing
'
~ the prescribed particulars in prescribed form obtained from F
t the prescribed authority, or if the goods are sold to the
Government not being a registered dealer, a certificate in
the prescribed form duly filled and signed by a duly
authorised officer of the Government. In cases not falling
under sub-section (1), the tax payable by any dealer in
respect of inter-State sale of declared goods is the rate G
' applicable to the sale or purchase of such goods inside the
'r appropriate state vide section 8(2) of the Act. As regards
the goods other than the declared goods, section 8(2)(b)
provides that the tax payable by any dealer on the sale of
such goods in the course of inter-State trade or commerce
shall be calculated at the rate of 10 per cent or at the rate H
590 SUPREME COURT REPORTS [1988] 2 S.C.R.
\-
applicable to the sale or purchase of such goods inside the
A
appropriate State, whichever is higher.
' ,,...
The question with which we are concerned is whether
the Parliament is not fixing the rate itself and in adopting
the rate applicable to the sale or purchase of goods inside
B the appropriate State has not laid down any legislative po!- I
icy and has abdicated its legislative function. In this con- '+'
nection we are of the view that a clear legislative policy can
be found in the provisions of section 8(2)(b) of the Act. .
The policy of the law in this respect is that in case the rate

c
of local sales tax be less than 10 per cent, in such an event
the dealer, if the case does not fall within section 8( 1) of the
Act, should pay central sales tax at the rate o{ 10 per cent.
If, however, the rate of local sales tax for the goods con-
tl
y
cerned be more than 10 per cent, in that event the policy is
that the rate of the central sales tax shall also be the same
as that of the local sales tax for the said goods. The object
D of law thus is that the rate of the central sales tax shall in no
event be less than the rate of local sales tax for the goods in •
question though it may exceed the local rate in case that
rate be less than 10 per cent. For example, if the local rate
of tax in the appropriate State for the non-declared goods
be 6 per cent, in such an event a dealer, whose case is not
"'!'
-
E covered by section 8( !) of the Act, would have to pay cent-
ral sales tax at a rate of 10 per cent. In case, however, the
w
rate of local sales tax for such goods be 12 per cent, the rate
of central sales tax would also be 12 per cent because •
otherwise, if the rate of central sales tax were only 10 per
cent, the unregistered dealer who purchases goods in the _,.,
F course of inter-State trade would be in a better position
..{
than an intra-State purchaser and there would be no disin-
centive to the dealers to desist from selling goods to unre-
gistered purchasers in the course of inter-State trade. The
object of the law apparently is to deter inter-State sales to

G
unregistered dealers as such inter-State sales would facili-
late evasion of tax. It is also not possible to fix the max-
,
imum rate under section 8(2)(b) because the rate of local
y
sales tax varies from State to State. The rate of local sales
tax can also be changed by the State legislatures from time
to time. It is not within the competence of the Parliament
to fix the maximum rate of local sales tax. The fixation of
H the rate of local sales tax is essentially a matter for the State
INDIAN CEMENT v. STATE OF ANDHRA PRADESH [MISRA, J.J 591

", Legislatures and the Parliament does not have any control
A
in the matter. The Parliament has therefore necessarily, if
,.., ) it wants to prevent evasion of payment of central sales ~ax,
to tag the rate of such tax with that of local sales tax, in case
the rate of local sales tax exceeds a particular limit."

Reference may also be made to another decision of the Constitution B
"t' Bench in the case of State of Tamil Nadu etc. v. Sitalakshmi Mills etc.,
[ 1974] l SCR l. At page 6 ofihe Reports, Mathew, J. stated:
~
"As already stated, section 8(2){b) deals with sale of
goods other than declared goods and it i' confined to inter-
'
..-- State sale of goods to persons other than registered dealers
c
or Governments. The rate of tax prescribed is 10 per cent
1 or the rate of tax imposed on sale or purchase of goods
inside the appropriate State, whichever is higher. The
report of the Taxation Inquiry Committee would indicate
that the main reason for electing the provision was to
canalize inter-State trade through registered dealers, over D
whom the appropriate Government has a great deal of con-
trol and thus to prevent evasion of tax:

'Where transactions take place between registered
dealers in one State and unregistered dealers or con-
r sumers in another, this low rate of levy will not be E

- suitable, as it is likely to encourage avoidance of tax
on more or less the same scale as the present provi-
sions of Article 286 have done. If this is to be pre-

•
vented, it is necessary that transactions of this type
should be taxable at the same rates which exporting
States impose on similar transactions within their own F
! territories. The unregistered dealers and consumers
in the importing States will then find themselves
unable to secure any advantage over the consumers of
locally purchased articles; nor of course will they,
, under this system, be able to escape the taxation
altogether, as many of them do at present." (See G
Report of the Taxation Enquiry Commission, 1953-
)"
54, Vol.3, p. 57)

In other words it was to discourage inter-State sale
to unregistered dealers that Parliament provided a high
rate of tax, namely, 10%. But even that might not serve the H
592 SUPREME COURT REPORTS [1988) 2 S.C.R.
).
purpose if the rate applicable to intra-State of such goods
A
was more than 10%. The rate of !0% would then be favour-
(
able and they would be at an advantage compared to local ""'
cosumers. It is because of this that Parliament provided, as
a matter of legislative policy that the rate of tax shall be
10% or the rate applicable to intra-State sales whichever is
B higher.
't r
If prevention of evasion of tax is a measure in the
~
public interest, there can be no doubt that Parliament is
competent to make a provision for that purpose under Arti-

c
cle 302 even if the provision would impose restrictions on
the inter-State trade or commerce. -i
Variation of the rate of inter-State sales tax does affect free trade and r
commerce and creates a local preference which is contrary to the
scheme of Part XIII of the Constitution. The notification extends the
benefit even to unregistered dealers and the observations of Hegde, J.
D on this aspect of the matter are relevant. Both the notifications of the
Andhra Pradesh Government are, therefore, bad and are hit by the
.,
provisions of Part XIII of the Constitution. They cannot be sustained
in law.

Now coming to the notification of the Karnataka State, we have 1
E already pointed out that no return has been made and no attempt has
been made, therefore, to place facts and circumstances to justify the
action. The notification suffers from the same vice as the second notifi- ""'
cation of the State of Andhra Pradesh suffers and no distinction can be
drawn. We accordingly hold that the notification of the Karnataka

F
Government is also bad in law. It may be pointed out that the rate of
sales tax in Karnataka is 19.5 per cent in regard to intra-State sales.

In view of what we have indicated above, the writ petition has to
1
succeed and the two impugned notifications of the Andhra Pradesh
Government and the impugned notification of the Karnataka Govern-
ment are quashed. The writ petition is accordingly allowed with costs.
G Hearing fees is assessed at Rs.5,000 and this shall be shared equally by •
the States of Andhra Pradesh and Karnataka.
--r
S.L. Petition allowed.