When A Tax Merely Differentiates And Not Discriminates?: Supreme Court Clarifies Position Of Law

The Supreme Court has clarified the position of law as to when a tax merely differentiates and not discriminates.

The Court was deciding a batch of Civil Appeals filed by the assessees against the separate Orders of the Rajasthan High Court, Jaipur Bench in three Writ Petitions.

The two-Judge Bench comprising Justice B.V. Nagarathna and Justice K.V. Viswanathan clarified the position of law as to when a tax merely differentiates and not discriminates, as under –

(i) Clauses (a) and (b) of Article 304 are to be read disjunctively, and hence, a tax cannot be said to merely differentiate only if the procedure under Article 304(b) is satisfied, but not Article 304(a) of the Constitution;

(ii) A tax imposed on goods imported from another State would not be discriminatory if no similar goods are produced within that State;

(iii) States are at liberty to design their fiscal legislations in such a manner to ensure that the tax burden on goods imported from other States is equal to the tax burden on those goods produced within the State. Therefore, a tax designed to impose equal burdens cannot be said to be discriminatory. However, whether the tax burden falls equally is a question of fact to be determined in each case when the question arises;

(iv) Further, a tax rebate or other relief in the form of incentives or set-off which is:

• granted to a specified class of dealers;

• for a limited period of time;

• in a non-hostile fashion;

• with a view to developing economically backward areas; would not be held to be discriminatory.

(v) However, the question whether a tax fulfils the above criteria is a question of fact to be determined depending upon the facts of each case.

Senior Advocates Nikhil Goel and Kavita Jha appeared for the Appellants while Senior Advocate Manish Singhvi appeared for the Respondents.

Factual Background

The issue for determination in this case was related to the validity of the notification issued by the Rajasthan Government in exercise of its powers conferred by Section 8(3) of the Rajasthan Value Added Tax Act, 2003 (RVAT Act). The issue was whether the said notification granting exemption from payment of VAT on sale of asbestos cement sheets and bricks, manufactured in the State of Rajasthan, having contents of fly ash 25% or more by weight subject to specific conditions, is violative of Article 304(a) of the Constitution of India being discriminatory vis à-vis goods imported from outside the State of Rajasthan.

The Appellants were engaged in the business of manufacture and sale of fly ash based asbestos cement products and they did not have their manufacturing units in Rajasthan, but had their sales depots over there. The said depots were duly registered with the Commercial Tax Department under Central and local State Tax Acts. As the High Court dismissed all the three Writ Petitions filed by the Appellants herein, they filed Appeals before the Apex Court.

Reasoning

The Supreme Court in the above context of the case, observed, “As regards the criterion of “with a view to developing economically backward areas”, admittedly, the impugned notification is not restricted to any specific district or a set of districts within the State of Rajasthan. Rather, the notifications provide exemption to any dealer commencing production anywhere in the State.”

The Court noted that the criterion of “non-hostile fashion” was fiercely contested by both sides and that the expression ‘non-hostile’ relates to discrimination of a hostile nature in the protectionist sense.

“In our view, the contours of such discrimination, in essence, can be reduced to whether there are sufficient reasons to term such discrimination as ‘differentiation’. In State of West Bengal vs. Anwar Ali Sarkar, (1952), this Court noted that the expressions “discriminatory” and “hostile” are found to be used by American Judges often simultaneously in connection with discussions on the equal protection clause. That if a legislation is discriminatory and discriminates one person or class of persons against others similarly situated and denies to the former the privileges that are enjoyed by the latter, it has to be regarded as “hostile” in the sense that it affects injuriously the interests of that person or class”, it added.

The Court reiterated that any order passed by any public authority exercising administrative/executive or statutory powers must be judged by the reasons so mentioned in that order and cannot be supplemented by fresh reasons in the shape of an affidavit or otherwise.

“A perusal of the impugned notification dated 09.03.2007 would suggest that the reason stated by the State Government to exempt from payment of tax was simply that “it was expedient in the public interest so to do”. The notification states no further reason for issuing the impugned notification”, it said.

The Court was of the view that the impugned notification is bereft of any reason or justification. It further observed that if the object of the exemption was to utilise the fly ash available in the State of Rajasthan itself, it should have been so spelt out in the impugned notification.

“Otherwise, we find a discrimination between asbestos products manufactured in the State of Rajasthan and manufactured outside, having content of fly ash to an extent of 25% when sold in the State of Rajasthan. On the other hand, if the notification had prescribed a condition that fly ash sourced from State of Rajasthan and products sold in the State, irrespective of their place of manufacture would have the benefit such exemption, there would not have been any discrimination between products manufactured outside the State of Rajasthan sold within the said State and those manufactured within the State, both having the benefit of exemption as both categories of products would have utilised fly ash available in the State of Rajasthan”, it remarked.

The Court, therefore, concluded that the impugned notification violates Article 304(a) of the Constitution as it is discriminatory in nature. With regard to the interim Order passed, the Court clarified that it is necessary to ascertain whether the differential amount which has been deposited, was collected from their customers and if not, the Appellants would be entitled to refund of the amount deposited with interest @ 6% per annum from the date of deposit till realisation.

Accordingly, the Apex Court allowed the Appeals and quashed the impugned notification.

Cause Title- M/s. U.P. Asbestos Limited v. State of Rajasthan & Others (Neutral Citation: 2025 INSC 1154)

Appearance:

Appellants: Senior Advocates Nikhil Goel, Kavita Jha, AORs Siddhartha Chowdhury, Ashutosh Ghade, Advocates Shammi Kapoor, Shaffi Mathar, and Swati Agarwal.

Respondents: Senior Advocate Manish Singhvi, AORs Milind Kumar, Nidhi Jaswal, Punit Dutt Tyagi, Advocates Manish Chaubey, and Apurv Singhvi.

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