SITALAKSHMI MILLS LIMITED TIRUNAGAR MADURAI Vs. DEPUTY COMMERCIAL TAX OFFICER NO IX TEPPAKULAM NEW COLONY MADURAI

JUDGEMENT

(1.) IN this batch of cases the constitutional validity of clause (b) of sub-section (2) of section 8 of the Central Sales Tax Act, 1956, and of the opening words of sub-section (4) of that section, which make sub-section (1) inapplicable in certain contingencies is raised. IN Larsen and toubro Ltd. v. Joint Commercial Tax Officer to which one of us was a party, this Court struck down sub-sections (2), (2a) and (5) of section 8 on the ground that they violated Articles 301 and 303 (1) of the Constitution. This was on the view that the differential rates or exemptions in various States had an unequal burden on same or similar goods which affected their free movement or flow of inter-State trade and commerce. It was pointed out that the differential rates or exemptions obtaining in the several States if automatically applied by virtue of section 8 (2) to Central taxation, they would certainly have the effect of discriminating between the goods of one State and the goods of another and might affect the free flow of trade in such goods as between the States and that further sub-sections (2a) and (5) of section 8 only aggravated the discrimination. Nevertheless that case is sought to be distinguished by stating that the assessees in these cases are not questioning the scheme of the Act on any argument that the Central sales tax rate should be single or uniform throughout INdia but contend that the amendment to section 8 (2) (b) by Act 31 of 1958 is void. The scope of the argument on their behalf is limited to the specific ground that sub-section (2) (b) is void in so far as it provides for the inter-State tax at a rate higher than that of the State multi-point tax. They admit that sub-section (1) prescribing the rate of two per cent. till 30th June, 1966 , and three per cent. thereafter is valid as to the sales to the Government and registered dealers subject to sub-section (2a ). They do not also object to sub-section (4) but accept it as valid in so far as it prescribes declaration in Form C and certificate in Form D. But they contend that sub-section (4) is invalid only in so far as it makes sub-section (1) inapplicable if C and D forms are not produced. This is so because, according to the assessees, the rate under sub-section (1) being prescribed for particular types of transactions, it must be open to them to prove their character and show the sales to be to registered dealers and Government otherwise than by production of C or d Form. The effect of these contentions is that the State of Madras may validly levy under sub-section (2) (b) tax on sales not shown to be to a registered dealer or Government or sales to consumers at the rate of 2 per cent. up to 30th June, 1966, at the rate of 2 1/2 per cent. between 1st July, 1966, and 30th June, 1967, and at the rate of 3 per cent. from 1st July, 1967. Before we proceed further, we shall notice the facts in these cases and refer to the salient statutory provisions at different stages which will enable a full and proper appreciation of the questions raised. IN W. P. No. 983 of 1967 the petitioner is a limited liability company started with the collaboration of messrs London Rubber Company, London, stated to be one of the biggest manufacturers of contraceptives and birth control appliances known all over the world under the name and style "durez" and "durapac". We are told that they are used all over INdia in the family planning programme of various Governments. The sales made by the petitioner of its manufactured goods to various Government departments were on the basis of orders placed with it by the Directorates of Health of various States'Family Planning Units. For the year 1965-66, the petitioner returned under the provisions of the Central Sales tax Act a turnover of Rs. 27, 11, 514. 79 representing inter-State sales of contraceptives manufactured by it. Out of this amount, exemption was claimed for a sum of Rs. 1, 15, 147. 50 on the ground that the relative sales were cancelled and did not in fact take place. But this claim was disallowed. A turnover of Rs. 9, 45, 802 was charged to tax at 2 per cent. , as it was covered by C and D Forms which were produced. As for the remaining turnover of Rs. 17, 65, 712. 79, the petitioner stated to the Assessing Authority that the relative sales were made to Governments which are respondents 5 to 7 and that the governments had been addressed to expedite the release of C Forms, and wanted time for their production. IN the alternative the petitioner offered to prove to the satisfaction of the Assessing Officer on the basis of the records relating to the sales that they were all made to the Government departments. The petitioner says that the 1st respondent, who was the Assessing Officer, without considering its reasonable request, finalised the assessment in haste and made an order on 31st December, 1966, which was actually served on 10th february, 1967. An appeal to the 2nd respondent filed against the order of assessment is said to be pending disposal. But on account of the fact that he is not competent to decide the constitutional validity of the provisions and the question cannot be raised by the assessees even in this Court in a tax case arising out of the order, the petitioner has invoked the jurisdiction of this court under Article 226 of the Constitution. We may add, as alleged by it, the petitioner filed before the 1st respondent D Forms in respect of a turnover of Rs. 8, 53, 692. 50 on 3rd February, 1967, which were received from respondents 5 to 7 after repeated reminders. But the 1st respondent ignored them and served upon the petitioner the assessment order as aforesaid on 10th February, 1967. IN Tax case No. 228 of 1964 with which W. P. No. 2356 of 1967 is connected, the assessee, Messrs Little's Oriental Balm and Pharmaceuticals Ltd. , has been charged to inter-State sales tax on a turnover of Rs. 1, 45, 470. 62 for the assessment year 1959-60 at the rate of 7 per cent. under section 8 (2 ). It was unsuccessful in its appeals which were dismissed on the ground that the petitioner failed to produce C or D Forms in respect of the turnover. The tax case arises from the order of the Tribunal and in the related writ petition the question of vires is raised. The assessee in W. P. No. 84 of 1967 is a staple fibre spinning mill and deals in sale of such yarn manufactured by it. Here again the petitioner is a limited liability company. It says that in order to facilitate sales of yarn expeditiously, it has opened a sales depot at Surat and that in the normal course of its business, it despatches the goods to its surat sales depot and they are sold at Surat. It is registered as a dealer both in Madras as well as in Surat. IN its return it claimed exemption in relation to a turnover of Rs. 25, 96, 577. 64 for the year 1965-66 as referable to the surat depot sales in the State of Gujarat. It claimed to have paid Rs. 58, 162. 73 as tax to the Gujarat State in respect of the depot sales at Surat. Nevertheless, says the petitioner, the 1st respondent, the Deputy Commercial tax Officer, Madurai, has in his notice dated 5th January, 1967, proposed to reject the claim and to call for objections. The petitioner prays that this court should quash the notice on the ground that the disputed turnover consisted of outside sales but the 1st respondent attempted to illegally clutch at them as if they were inter-State sales within his power to tax. IN the case of London Rubber Co. (INdia) Ltd. , there is no scope for controversy that the sales in question were inter-State in character and were all made to Government departments. IN fact the Assessing Officer himself seems to proceed on that basis. They have, however, been charged to higher rate of tax either because D forms were not furnished or they were furnished before the assessment order was made which were nevertheless not taken into account by the Assessing Officer. IN the second class of cases, as in Tax Case No. 228 of 1964, C Forms have been rejected on various grounds and the higher rate applied. Time has been refused to correct the alleged defects and produce the forms. It appears the forms filed also were refused to be handed back for rectification. The assessees charge that this has been deliberately done with a view to mulct them with the higher rate of tax. The third class represented by W. P. No. 84 of 1967 consists of a case of registered dealers who in another State make contracts for local delivery there and are assessed to tax by that State but all the same the madras authorities decide or propose to decide that the transactions are inter-State sales subject to higher rate of tax in the absence of C Forms.

(2.) THE assessees maintain that in the nature of things there may be no question of C forms as the sales were all outside sales. Larsen and Toubro Ltd. v. Joint Commercial Tax Officer has in detail narrated the scheme of taxation on sale of goods before and after the Constitution and under the Central Sales Tax Act, 1956. We do not think it necessary to reiterate and cover the entire field over again. Briefly the position was this. Prior to the Constitution, each State on the basis of local territorial nexus with one or more ingredients of an inter-State sale of goods sought to tax it as an inside sale. Taxation of income on the basis of nexus doctrine is a familiar proposition recognised in Raleigh Investment Company case Wallace Bros. & Co. Ltd. v. Commissioner of Income-tax, Bombay stateand A. H. Wadia v. Commissioner of Income-tax, Bombay Though at some time there was doubt whether the doctrine could be applied to sales tax legislation, it has since been resolved by Tata Iron & Steel Co. v. State of Biharthe supreme Court pointed out in this case that the applicability of the doctrine to sales tax had been recognised by Poppatlal Shah v. THE State of Madras As a consequence, an identical inter-State transaction suffered sales tax in different States with the concomitant multiple tax burden on the consumer and adverse effect on trade, both local and inter-State. Article 286 and Part XIII of the Constitution were designed to rectify the position. By Article 286, the state Legislature was prohibited from imposing a tax on the sale or purchase of goods outside that State or which took place in the course of the import of the goods into, or export of the goods out of, the territory of India. For the purpose of determining an outside sale, the article contained an explanation which defined an inside sale, that is to say, a sale or purchase directly resulting in the delivery of the goods for purposes of consumption in a State was regarded as having taken place in that State notwithstanding the fact that under the general law relating to sale of goods, the property in the goods had by reason of such sale or purchase passed in another State. THE article also forbade the State from imposing a tax on a sale or purchase taking place in the course of inter-State trade or commerce but the ban was made subject to parliamentary legislation to the contrary. Reservation was, however, made that the President could by his order keep the ban in abeyance until 31st March, 1951. THE further safeguard made by Article 286 was that the State law to tax a sale or purchase of goods declared by Parliament by law to be essential for the life of the community should have effect only if it had been reserved for the consideration of the President and had received his assent. Article 301 forged a further limitation on the power of the States to tax sale or purchase of goods by declaring that subject to the other provisions of Part XIII, trade, commerce and intercourse throughout the territory of India shall be free. Parliament has, however, been given by Article 302 the authority to impose restrictions on the freedom of trade, commerce or intercourse if they are required in public interest. Nevertheless, the Parliament and the Legislature of a State have no power, as mentioned in Article 303 (1), to make laws which make a preference or discrimination as between the States. But this limitation upon the power of the Parliament will not apply under Article 303 (2) to a law made by it which makes any such preference or discrimination if it is declared by that law that it is necessary to do so for the purpose of dealing with a situation arising from scarcity of goods in any part of the territory of India. By Article 304 the State Legislature is at liberty to impose non-discriminatory taxes on goods imported from other States and also to impose reasonable restrictions on the freedom of trade, commerce or intercourse with or within that State as may be required in the public interest, but this the Legislature can do only if the Bill has been introduced or moved in the Legislature of a state with the previous sanction of the President. THE working of these constitutional provisions for over a period of five or six years immediately following the coming into force of the Constitution disclosed that all was not well with the system of States'tax on inter-State, import and export sales or purchases of goods. THE State of Bombay v. United Motors (India) Ltd. held : "the effect of the Explanation [to Article 286 (1)] in regard to inter-State dealings is, in our view, to invest what, in truth, is an inter-State transaction with an intra-State character in relation to the state of delivery, and clause (2) can, therefore, have no application. " *

(3.) IN James v. Commonwealth of Australia ( 1936 AC 578 at pp. 583 and 584), the Judicial Committee in interpreting section 92 of the australian Constitution pointed out that the section envisaged that trade and commerce should be conducted as if the borders were not there and that trade could pass as freely between adjacent States as between adjacent countries in england and observed : "the words'freedom of trade'in section 92 mean freedom from financial impost by whomsoever imposed, and those words are meant not only to be a limitation on any legislative authority, but also upon any executive act. . . . . . The proviso to section 92 equalizes taxation : it is a limitation on the generality of section 92. " * Larsen and Toubro Ltd. v. Joint Commercial Tax Officer while noting that section 92 of the Australian Constitution has been worded differently from Article 301 of the Constitution considered that the essence of the observation of the Privy Council underlined Article 301 and stated : "article 301 of our Constitution for its purposes recognises no State borders and trade, commerce and intercourse should flow as if the State barries were not there; and the entire territory of INdia is one integral unit from economic, social and political points of view. " *