UP Trade Tax - Fly Ash used in Cement - grant of rebate for units manufacturing cement using Fly ash in certain districts of UP alone discriminatory - 'Struck down' : Supreme Court
By TIOL News Service
NEW DELHI, OCT 23, 2013: THE substantial question of law in these appeals is, whether grant of rebate of tax by the State Government by issuing a notification in exercise of its powers under Section 5 of Uttar Pradesh Trade Tax Act, 1948 ('the Act' , for short) discriminates between the goods imported from neighbouring States and goods manufactured and produced in the State of Uttar Pradesh and therefore contravenes the Constitutional Provisions viz.; articles 301 and 304(a) of the Constitution of India.
The appellants are public limited companies, manufacturing cement in their manufacturing units in Rewa district situate in the State of Madhya Pradesh after procuring fly-ash from the thermal power stations in the State of Uttar Pradesh and thereafter selling the manufactured product viz. Cement in the districts of State of Uttar Pradesh.
The fly-ash is produced from coal combustion and normally dispersed into the atmosphere which contains toxic chemicals that can cause environmental pollution and hazards. Therefore for utilization of fly-ash and to control pollution, cement projects were set up to make use of the fly-ash generated from the power plants.
To encourage manufacturers using fly-ash in manufacturing of their products, the Government of Uttar Pradesh in exercise of its powers under Section 5 of the Act, had issued notification dated 18.06.1997, granting 'rebate of tax' to the dealers in the State of Uttar Pradesh excluding all other dealers manufacturing cement outside the State of Uttar Pradesh using fly-ash purchased in the State of Uttar Pradesh. Annexure appended to the notification provided for name of the districts and the period for which the rebate will be allowed. The notification prior to its rescinding only specified the percentage of rebate of tax to be granted depending on the content of fly-ash used by the dealers in the manufacturing of cement.
The cement industries situated in the neighbouring States aggrieved by the notification of the Government of Uttar Pradesh, dated 27.02.1998 had approached the High Court by filing Writ Petitions. In that they had sought for quashing of the notification, dated 27.02.1998 insofar as Condition No. 1 [ (i) Such goods shall be manufactured in a unit established in the area mentioned in column-2 of the Annexure; ] of the notification and other consequential reliefs.
The High Court has come to a finding on two broad issues; firstly, whether Condition No. 1 of the notification i.e. the grant of rebate of tax on the sale of cement in the Districts of Uttar Pradesh alone contravenes articles 301 and 304(a) of the Constitution of India. On the aforesaid issue, the Court has concluded that the grant of rebate of tax by the State Government discriminated between the imported goods and the goods manufactured in Uttar Pradesh restricting the free movement of goods from one State to the other and therefore impinges articles 301 and 304(a) of the Constitution of India.
The Second question that is considered and decided by the High Court, is, whether doctrine of severability will apply and therefore if Condition No. 1 in the notification violates articles 301 and 304(a) of the Constitution of India; should the notification be struck down in its entirety or merely the impinging condition in the notification. The High Court has relied on the decision of this Court in Loharn Steel Industries v. State of Andhra Pradesh, and has come to the conclusion that if certain conditions in the notification violate freedom of trade and commerce, then that portion of the notification restricting rebate of tax to the districts in State of Uttar Pradesh alone is severable. Therefore, the High Court for the reasons stated above has declared the Condition No.1 of the notification as illegal, arbitrary and discriminatory, accordingly has quashed the Condition No.1 of the notification and also granted consequential relief in the form of rebate to the respondents-herein and further has directed that deposits made by the respondents in excess of what was payable was to be refunded with an interest of 10% per annum.
Being aggrieved, the Revenue calls in question the correctness or otherwise of the common judgment and order passed by the High Court in a batch of Writ Petitions dated 29.01.2004.
The articles 301 and 304 of the Constitution of India are as under :-
"301. Freedom of trade, commerce and intercourse. - Subject to the other provisions of this Part, trade, commerce and intercourse throughout the territory of India shall be free.
304. Restrictions on trade, commerce and intercourse among States - Notwithstanding anything in article 301 or article 303, the Legislature of a State may by law -
(a) impose on goods imported from other States or the Union territories any tax to which similar goods manufactured or produced in that State are subject, so, however, as not to discriminate between goods so imported and goods so manufactured or produced; and
(b) impose such reasonable restrictions on the freedom of trade, commerce or intercourse with or within that State as may be required in the public interest:
Provided that no Bill or amendment for the purposes of clause (b) shall be introduced or moved in the Legislature of a State without the previous sanction of the President."
The Supreme Court framed three issues for consideration:
++ Firstly, whether the grant of rebate of tax is hit by constitutional limitation on the State legislature under article 304(a) read with article 301 of the Constitution of India, as and when it discriminates between the imported goods and the goods manufactured and produced outside the State.
++ The second issue that arises is, whether the grant of rebate, directly or indirectly restrict the free flow of trade, commerce and intercourse among States by assuming the effects of an exemption/ concession which is nothing but a concept within the scope of taxation.
++ The third issue is , can only the first condition of the notification be severed if it is found to be violative of article 304(a) of the Constitution of India without striking down the whole of the notification.
Supreme Court Observed:
"Article 304(a) ensures only equal rate of tax for incoming goods. So if such goods are taxed at a higher rate or where they are taxed at any rate when indigenous goods enjoy concessional rate of tax, article 304(a) is attracted. They are simple cases of hostile discrimination. Therefore, whether a particular tax is discriminatory within the meaning of this clause, the effect of the tax on the flow of goods from outside the taxing State has to be taken into consideration and, if the overall effects of rebate of tax is such that they fall within the meaning concessional rate of tax.
The exemption or rebate of tax is therefore within the purview of taxation. In the instant case, if the grant of rebate of tax by the State Government under Section 5 of the Act is to the full amount of tax levied, then for the dealers manufacturing cement using fly-ash outside the State of Uttar Pradesh but selling it in Uttar Pradesh, though the State Government contends that the rate of tax is same for the dealers inside Uttar Pradesh and outside Uttar Pradesh, but the overall effect is that there is no tax levied on the net turnover after deductions being made from the gross turnover but, on the other hand, the dealers manufacturing or producing cement using fly-ash outside Uttar Pradesh are taxed at the rate of 12.5%. Therefore, it can be said that the rebate of tax is in the nature of exemption and the instant case can be decided on the basis of catena of decisions of this Court where blanket exemption without reasons are said to be discriminatory and violating article 304(a) of the Constitution of India."
The Supreme Court held: the condition No. 1 is discriminatory and violates article 304(a) of the Constitution of India and therefore needs to be severed from the rest of the notification which can operate independently without altering the purpose and the object of the notification. 'Rebate of tax' granted by the State Government to cement manufacturing units using fly-ash as raw material in a unit established in the districts of State of Uttar Pradesh alone is violative of the provisions contained in articles 301 and 304(a) of the Constitution of India. It is further declared that the notification would also apply to respondent(s)- cement manufacturing units.
(See 2013-TIOL-55-SC-MISC)
