A bench comprising Justice HL Dattu and SJ Mukhopadhaya held as discriminatory the ‘rebate of tax’ granted by the UP government to cement manufacturing units using fly-ash as raw material in a unit established in its districts alone. It said that such rebate is violative of Articles 301 and 304(a) of the Constitution, which envisages free trade across India.
By this order, five companies — Jaiprakash Associates, Diamond Cements, Century Textile & Industries, Maiher Cement and UP Asbestos Ltd — which have manufacturing units in Madhya Pradesh, stand to benefit by around R500 crore.
JAL counsel Sharmila Upadhyay said the company alone would benefit by around R300 crore, as it has paid some part of the tax amount by cash and also furnished bank guarantee.
The apex court rejected the stand of the state government that the benefit under the notification cannot be extended to cement manufacturers using fly-ash outside its territory since its assessing authorities would not be in a position to verify the claims. “We do not agree. The explanation appended to the notification authorises the assessing authorities to verify the claim that may be made by the manufacturers including the fact whether an assessee(s) satisfy the conditions prescribed in the notification. If they do not fall within the parameters of the notification the assessing authority can always reject the claim of the manufacturers,” it said.
In this batch of petitions, the companies were manufacturing cement in Madhya Pradesh after procuring fly-ash from the thermal power stations in UP and thereafter selling cement in various districts of Uttar Pradesh.
For utilisation of fly-ash produced from coal combustion and to control environmental pollution, the Uttar Pradesh government under Section 5 of Uttar Pradesh Trade Tax Act, 1948 issued a notification in June 1997 granting “rebate of tax” to the dealers in UP excluding other dealers manufacturing cement outside the state using fly-ash purchased in the state. Later, the state government issued a fresh notification in February 1998 reducing the tax liability of the dealers by 25% on goods having fly-ash contents between 10 to 30% weight and has reduced the tax liability of the dealer by 50% on goods having fly-ash contents exceeding 30% by weight.
The notification restricted the benefit of rebate only to the units manufacturing and producing cement using fly-ash in UP.
The cement industries sought quashing of the notification in the High Court, which held that the grant of rebate of tax by the state government discriminated between the imported goods and the goods manufactured in the state, restricting the free movement of goods and, therefore, impinges articles 301 and 304(a) of the Constitution of India.
Besides, the HC declared a portion of the notification as arbitrary and illegal that violated freedom of trade and commerce and restricted tax rebate to the districts in UP alone.