MARCH 25, 2019

By Sonal Singh, Advocate

THE jurisprudence pertaining to Part XIII of the Constitution of India, particularly Article 301-304, underwent a complete overhaul when the 9 Judge bench of the Hon'ble Supreme Court in the case of Jindal Stainless Steel Ltd. vs. State of Haryana and Ors. - 2016-TIOL-187-SC-MISC-CB discarded the principles governing the field for over five decades and held that the theory of compensatory taxes is untenable. The Hon'ble Court, in a detailed judgment, set out the true historical relevance and intention behind the insertion of Part XIII of the Constitution and also established the perimeters within which a law imposing taxes on goods imported from outside a State are required to be tested to ensure that it does not fall foul of Part XIII of the Constitution of India.

The 9-judge bench, by a 7:2 majority, opined that the freedom envisaged under Article 301 is not absolute and is subject to other provisions in Part XIII. It was, inter alia, also held that Article 304(a) recognizes the availability of the power to impose taxes on goods imported from other States. Such power to levy taxes is however subject to the condition that similar goods manufactured or produced in the State levying the tax are also subjected to tax and that there is no discrimination on that account between goods so imported and goods so manufactured or produced locally. Resultantly, it was held that, a discriminatory tax on the import of goods from other States alone will work as an impediment on free trade, commerce and intercourse within the meaning of Article 301.

Having held so, the Hon'ble Supreme Court, by placing reliance on its decisions in the cases of Shri Mahavir Oil Mills and Anr. vs. State of J&K [(1996) 2 SCC 39] and Video Electronics vs. State of Punjab [(1990) 3 SCC 87], also held that grant of exemptions and incentives by a state to locally produced/manufactured goods would be permissible so long as the differentiation made by the States is not intended to create an unfavourable bias and so long as the differentiation is intended to benefit a distinct class of industries and the life of the benefit is limited in terms of time period. The Hon'ble Court further held that 'reasonable restrictions' in public interest referred to in Clause (b) of Article 304 do not comprehend levy of taxes as a restriction, especially since taxes are presumed to be both reasonable and in public interest.

While examining the other Articles of the Constitution of India which hold relevance in the controversy pertaining to validity of taxing legislations, the Hon'ble Supreme Court held that taxing statutes are not beyond the purview of challenge under Part III and fiscal statutes are also open to challenge on the touchstone of Article 14 of the Constitution. Though the Hon'ble Supreme Court has refrained from providing an equally elaborate and comprehensive guidance on Article 14 it was noted by the Court that every person may not be taxed equally but when property of the same character has to be taxed, the taxation must be by the same standard so that the burden of taxation may fall equally on all persons holding that kind and extent of property.

Having said so, the Hon'ble Supreme Court went on to state that Article 14 does not use the term 'discrimination' and that it is fairly well settled by now that Courts show considerable deference to the legislature in the matter of quantum of tax that may be levied as also the subjects and individuals upon whom the same may be levied and therefore mere difference in rate of tax or the subject of taxation may not form basis for a levy to be held violative of Article 14.

The principles laid down by the Hon'ble Supreme Court in the case of Jindal Stainless Steel Ltd. (supra), have been applied only a few times since then to test the constitutional validity of taxing provisions. The Hon'ble Bombay High Court in the case of Belgaum District Co-operative Milk Producers' Societies Union Ltd and Ors. vs. State of Goa and Ors. ( 2017 SCC OnLine Bom 7780) held that provisions of Goa Cess on Fluid Milk (Control) Act, 2000 and the Fluid Milk (Control) Rules, 2001, in so far as they relate to the levy and collection of cess on fluid milk imported in to the State of Goa are (in the absence of cogent reasons to justify such discrimination) illegal, ultra vires and unconstitutional. Similarly, the Hon'ble Kerala High Court in the case of KR Suresh Kumar vs. State of Kerala - WA No. 476/2017 and Hon'ble Madras High Court in the case Patina Gold Ornaments Pvt Ltd. vs. The Assistant Commissioner (CT), Erode (2017-VIL-512-Mad) also followed the decision of the Hon'ble Supreme Court in Jindal, supra while holding the provisions impugned therein to be ultra vires Article 301.

While all the above-mentioned case laws restricted the scope of challenge only to the touchstone of Article 301/Part XIII of the Constitution of India, the Hon'ble Kerala High Court in the case of Fab India Overseas (P) Ltd vs. State of Kerala - 2018-TIOL-1111-HC-KERALA-CT examined the validity of taxing legislation impugned therein both under Article 301 read with Article 304 as well as Article 14 of the Constitution of India. The constitutional validity of the Section 3(1A) of the Kerala Surcharge Act, 1957 was challenged on the ground that the levy of surcharge is discriminatory and, therefore, violative of Article 301 read with Article 304(a) and Article 14 of the Constitution of India insofar as only a dealer importing more than 50% of its stock from outside the State of Kerala or the country will be subjected to the levy of surcharge where as a dealer who satisfies all other conditions except for the condition of import is not liable to pay surcharge. The Ld. Single Judge after reiterating the findings of the Hon'ble Supreme Court in the case of Jindal Stainless Steel Ltd. (supra), held that in case of challenge to a taxing statute on the touch stone of Article 304(a), the Court has to see whether the differentiation is intended or inspired by an element of unfavourable bias in favour of goods produced or manufactured in the state against those imported from outside the State.

Having held so, the Hon'ble Court took note of the findings of the Hon'ble Supreme Court in the case of Kunnathat Thathunni Moopil Nair vs. The State of Kerala reported at AIR 1961 SC 552 that fiscal statutes are also open to challenge on the touchstone of Article 14 of the Constitution of India and held that a classification done by a taxing statute can pass the test of Article 14 only if it is based on intelligible differentia that bears a rational nexus with the object sought to be achieved by the legislation. On the facts of the case, the Hon'ble High Court held that the 'differentia' or 'separate class of dealers' created by the Surcharge Act on the basis of quantum of goods imported by them from outside the State of Kerala had nothing to do with the objects of the levy, which was only augmentation of revenue. Accordingly, the provision was held to be violative of both Article 301 as well as Article 14 of the Constitution of India.

Thus, Kerala High Court has taken a step forward from the earlier decisions and sought to lay down the test to be followed while judging a taxing statute against Article 14. Now, the jurisprudence in respect of Article 301 is fairly settled by the decision of the Hon'ble Supreme Court in the case of Jindal, supra. However, it is evident that a similar clarity with regard to operation of Article 14 of the Constitution of India in testing the validity of taxing legislations is still awaited and would be welcome. It is especially so because Article 301 would be operational only in case the differentiation created by the taxing statute is between indigenous goods and goods imported from outside the State but Article 14 may have a broader base of operation.

(The author is Principal Associate, Lakshmikumaran & Sridharan, Bangalore and the views expressed are strictly personal.)