EAST INDIA TOBACCO CO versus STATE OF ANDHRA PRADESH

VENKATARAMA ArYAR, J.-Thcse are appeals against the judgment of the High. Court of Andhra. Pradesh in petitions Nos. 1172 of 1956 and 56 of 1957 filed under Art. 226 of the Constitution ques. tioning the validity of the Andhra Act XIV of 1955 insofar as it imposes a ta.x on the sale of Virginia tobacco. The appellants are firms doing business in the export of tobacco. The usual course of thiit business is stated to be that they first enter into contracts with their customers a.broad for the sale of' tobacco, that thereafter they purchase the requisite quantities of goods locally and then export them to the foreign purchasers in perfor. mance of thAir contracts. Prior to October l, 1953, the arAa wherein the appellants aarried on business formed part of the State of Madras, and on that date the State of Andhra was constituted, and the area in question fell within that State. The law relating to sales tax in force in that area. ia the Madras General Sales '.J,'ax Act, IX of 1939. Section 5 of this Act provides for exemption of tax on sales of goods specified therein and s. 6 confers on the State Government power to exempt the tax payable on the ea.le of a.ny specified class of goods or by any apecified class of persons. In exercise of the powers conferred by s. 6 the Government of Madras issued on March 31, 195 ;, a notification No. 144 exempting the sales of unmanufactured tobacco from sales tax. After the Andhra State came into existence, the Legislature of that State enacted Act XIV of 195.1) hereinafter referred to as ''the Amendment Act" wherebv it amended s. 5 of the Madras General Sales 'Tax Act by adding as item (viii) the following:-

pp. 406–407

''(viii) raw tobacco (except country variety thereof) whether cured or uncured, shall be liable to tax under Se"tion 3, Sub Section 1 Oiily at the point of the first purchase effected in the State of Andhra by a dealer who is not exempt from taxation under Section 3, Sub Section 3 but at the rata of seven .and half pies for every rupee on his turnover.

p. 407

Explanation :-For the purpose of this item, country variety of tobacco means variety of tobacco other than Virginia and

p. 407

ot.her similar varieties of tobacco". As a result of this enactment exemption from tax was limited to sales of what is known as country tobacco (Nattu tobacco) and so far as sales of Virginia. tobacco are concerned, they became liable to be taxed. Pur1mant to the Amendment Act, the Andhra. Government issued on November 4, 1955, a notification No. 711 cancelling the earlier notification No; 144 dated March 31, 1953.

p. 407

Acting undAr the provision~ of the Amendment Act, the Additional Commercial Tax Officer, Guntur, issued notices to the appelJants to prod11ce the account books relating to their business in tobacco for the purpose of assessing sales tax. To this the appellants replied by filing petitions under Art. 226 of the Constitution in the High Court of Andhra Pradesh challenging the constitutionality of the Amendment Act on the grounds inf.er alia that in taxing sales of Virginia tobacco and exemp· ting from tax s•des of other tobacco, the Act was discriminatory, and that in consequen ~ it was obnoxious t.o Art. 14 of the Constitution and that further ·it was in contravention of Art. 286 (I) (b) as it was really a tax on sales in the course of export of tobacco. They accordingly prayed that a mandamus might be issued directing the respondents to forbear from making an assessment on the sales of tobacco. The learned Judges disagreed with these contentions and dismissed the petitions, holding that the impugned Act did not infringe any con3tit.utional provisions, but granted ce1 tificates under Art. 133 of the Constitution. That is how these appeals come before us.

pp. 407–408

On the arguments addressed to us, two questions arise for our determination :

p. 408

(I) Is the impugned Act repugnant to Art. 14 for the reason that it singles out Virginia tobacco for taxation ?

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(2) Is the impugned legislation in contravention of Art. 286 (I) (bl as imposing a tax on sales in the course of export ?

p. 408

( l) On the first question the contention of the appellants miiy be thus stated. All laws must satisfy the requirements of Art. 14. Taxation laws are no exception to it. In imposing a tax on the sales of Virginia tobacco and not on other kinds of tohacco the impugned Act is on the face of it discriminatory. It is therefore obnoxious to Art. 14 and is void,

p. 408

It is not in dispute that taxation laws must a]so pass the test of Art. 14. That has been laid down recently by this Court in M oopil Nair v. 'I'he 8f,afie of Kerala (1). But in deciding whether a taxa· tion law is discriminatory or not it is necessary to bear in mind that the State has a wide discretion in selecting the persons or objects it will tax, and tha.t a statute is not open to attack on the ground that it taxes some persons or obje<Jts and not others. It is on]y when within the range of its selection, the law operates unequally, and that cannot be justified on the basis of any va~id classification, that it would be violative of Art. 14. The following statement of the law in Willis on "Constitutional Law" page 587, would correctly represent the position with reference to taxing statutes under our Constitution :-

p. 409

''A State does not have to tax everything in order to tax something. It is allowed to pick and choose districts, objects, persons, methods and even rates for taxation if it does so reasonably ........................ The Supreme Court has been practical and has permitted a very wide latitude . in classification for

p. 409

taxation',, In the light of these principles, we may now proceed to discuss whether the impugned Act is repug· nant to Ar~. 14 of the Constitution. The point for consideration is whether there is in fact a real distinotion between Virginia tobacco and other tobacco called country tobacco 'Nattu tobacco,. If there is, then the Act is valid, if not it must be held to be unconstitutional. The finding of learned Judges on this point is as follows :-

p. 409

" Broadly, there are two types,Virginia and Nattu, differing in taste, light, colour and texture ............... There are obvious c. differences between the two categories of tobacco, in the nomenclature used, in the process of growing, curing and grading, in the market facilities foreign and inland, in the price and in the variety of uses to which they are put and also the class of cmstomers

pp. 409–410

that take to them." Thus it will be seen that Virginia tobacco has features which distinguiMh it from countary tobacco, and can be treated as a class in itself. It will therefore be within the power of the State to impose a tax on the sales of Virginia tobacco while exempting the count~y tobacco.

p. 410

It it argu1id for the appellants that to repel the charge of dUicrimination in taxing only Virginia tobacco, and not the country tobacco, it is not sufficient merely to 1how that there are differences between the two varieties, but that it must further be shown, as held in Budhan Clwudhry v. The St,ate of Bihar ( and Shri Ram Krishna Dalmia v. Shri Justice 8. R. Tendolkar ('), that the differtntia bas reasonable relation to the object of the legislation. The differences betwee11 the Virginia tobacco and the country tobacco, as found be the learned Judged, are not, it is argued, germane to the levy of sales tax, and so there is no valid claBBification. We are unable to agree with this contention. If a State can validly pick and chose one commodity for taxation and that is not open to attack under Art. 14, the same result must follow when the State vicks out one eategory of goods and subjects it to taxation.

p. 410

It should, in t.his connection, be remembered that under the law it is for the person who assails a legislation a discriminatory to established that it is not based on a valid classification and it is well settled that this burden is all the heavier when l s.c.R. s.c.R. the legiidation u:nder attack is a taxing statute. ''In taxation eyen more than in other fields" it was observed by the Supremo Court of United States in Mad<Uin v. Kentucky (1) "Legislatures possess the greatest freedom in classification. The burden is on tile one attacking the le~ishtive arrangement to .negative every conceivable basis which might snp:port it". How wide the powers of the Legislature are in classifying objects for purposes of taxa1tion will be seen from the following resume of the law given by Rottschaefer, in his "Constitutional Law" p. 668 :-

pp. 410–411

'1The :Federal Supreme Court has seldom any classification made in connection with the levying of property taxes. ft has sustained the le-vy of a heavier burden of taxation upon motor vehicles using the public high ways than that levied upQn other forms of property, and the imposition of a heavier tax upon oil than upon other property. The equal prot;ection clause does not prohibit the levy of a. tHi.x on ores which is not imposed upon similar interests in quarries, forests and other forms of wasting asset, nor even the imposition of a. tax upon anthracite that is not levied upon bituminous coal. A statute providing for the assessment of one type of intangible at its actual value while other intangibles a.re assessed at their face value does not deny e:qua.1 protection even when both a.re subject. to the same rate of tax. The decision of the Supreme Court in this field have permitted a State legislature to exercise an extremely wide discretion in classifying property for tax purposes so long a.s it refrained from clear and hostile discrimination Against particular persons or classes".

p. 411

A decision near to the present case on the facts is 0. Hei.~ler v. ThomJJs Colliery Company (2).

p. 411

There the question was whether a law imposiug a tax Anthracite coal and not upon bituminous coal wns uncon8titutional as violating the equal protection of laws guaranteed by the 14th Amendment to the Federal Constitution. In upholding the validity of the Jaw, Justice Mckenna observed as follows:-

p. 412

"The fact of competition may be accepted. Both coals, being compositions of carbon are of course capable of combustion and may be used as fuels but under different conditions and manifestations and the difference determines a. choice between them as fuels. By disregarding that difference and the greater ones which exist and by dwelling on competition alone, it is easy to erect an argument of strength against the taxation of one and not of the other- But this may not be done. The differences between them are a just basis for their different classification; and the differences are great and important. They differ even as fuels, they differ fundamentally in other particulars. Anthracite coal has no sutshntial use beyond a fuel; bituminous coal has other uses. Products of utility are obtained from it. The fact is not denied and the products are enumerated that the extent of their use. They are therefore incentives to industries that the State in natural policy might well hesitate to obstruct or burden and to yield to the policy or consider it is well within the concession or the power of the State expressed in the cases we have cited. The distinction in the treatment of the respec- . tive coals being within the power conceded by the cases to the State it has logical and legal justification and is' necessarily, not unreasonable or arbitrary". '

p. 412

In our Judgment the differences which exist between the Virginia and 'Nattu' oountry tobaooo, I S.0.R. SUPREME COURT R~POR'rS as found by the learned Judgea, a.re materials on which the State could treat Virginia tobacco as forming a class by itself for purpose of taxation, and the impugned legislation must be held to be not obnoxious to Art. 14 of the Constitution.

pp. 412–413

(2) It is next argued that the Amendment Act i1 ultra vires because in reality it imposes a tax on sales in the c.')urse of export and that is hit by Art. 286 (1) (b). The course of business followed by the appellants has already been set out. It may be assumed for the purpose of the present discussion that the purchases made by the appellants on which the ta::x sought to be imposed were made for the purpose of executing specHic orders which they had received from their foreign customers. The question is whether even so the sales in· question took place in the course of export for the purpose of Art. 286 (1) (b). In suppOTt of their contention that they did, the appeJlants rely on the following observations· in St,at,e of Travancore-Oochin. v. Bombay Co. Ltd. (1) :-

p. 413

"A sale by export thus involves a series of integrated activities commencing from the agreement of sale with a foreign buyer and ending with the delivery of the goods to a common carrier for transport out of the country bay la.nd or sea. Such a sale cannot be dissociated from the export without which it cannot be effectuated, and the sale and resultant export forms parts of a single transaction. Of these two integrated activities, which together constitute an export sale, whichever first occurs can well be regarded as ta.king place in the course of the other".

p. 413

Now the contention is that the agreement entered into with the foreign purchasers for sale of the Virginia tobacco, the purchase of the same [l9 52] S. C.R. 1112, Ul8. locally by the appellants for performing the contract and their subsequent export to the foreign purchasers must all be held to form one integrated trn.nsaction of sale in the course of export.

pp. 413–414

Now the observations quoted above were made in refutation of the contention that the expression "sale in the course of export or import" meant only a sale which takes place while the goods are actually in movement, in the course of export or import, as for example, when shipping documents are endorsed and delivered when the goods are in transit. This Court held that this was too narrow an interpretation to put on the words in question and that a sale which actually occasions the export or import would fall within Art. 286 (1) (b). The question whether sales which precede export are sales in the course of export within Art. 286 (1) (b) arose directly for decision in State of Trarxmcore-Oonhin v. Shanmuga VilaB Oaakew Ntl.t Factory(') and it was held that they were not. Explaining, in the course of the judgment, the true scope of the obs11rvations in State of Travancore- Oonhin'8 caae (') quoted a.hove, Patanjali Sastri, C.J. observed :-·

p. 414

"The phrase 'integrated activities' was used in the previous decision to denote that 'such a sale' (i. e., a sale which occasions the export) 'cannot be dissociated from the export without which it cannot be effectuated, and the sale and the resultant export from parts of a single transaction'. It is in that sense that the two activities-the sale ud the export-were said to be integrated .. A pur· chase for the purpose of export like production or manufacture for export, is only Ml act preparatory to export and cannot, in our opi· nion, be regarded as an act done 'in the course ~J!IMJl5.1C.(R. C.R. of the export of the goods out of the territory of India', and more than the other two activities can be so regarded."

pp. 414–415

We may refer to two other decisions of this Court where this question has been considered. In The, St,ate of Madras v. Guriviak Npidue & Co. Ltd.(1), the facts were that an assessee secured orders for the supply of untanned hides and skins from London purchasers and then, he purchased them locally in order to implement those orders and exported them, and the question was whether a tax on those purchases was hit by Art. ~86(l)(b). In holding that it was not, this Court observed :-

p. 415

"Such purchases were, it is true, for the purpose of export but such purchases did not themselves occasion the export and consequently did not fall within the exemption of Art. 286(l)(b) of the Constitution as held by this Court in The, State of Travancore-Cockin v. The Bombay Company Ltd. ((1952] S.C.R. 1112). Nor did such purchases in the State by the exporter for the purpose of export come within the ambit of Art. 286(1)(b), as held by the decision of the majority in The St,ate of Travan-

p. 415

Cochin v. Shanmuga V ilaB Caske.w Nut Factory ((1954] S.C.R. 53)."

p. 415

The point came up again .for consideration before this Court in The, 8tme of Mysore v. Mysore Spinning & Manufacturing Co. ( and it was held following the decision cited above that Art.286((l)(b) could be invoked only in :respect of the sale which occasions the export, and not of any sales precedent to it.

p. 415

On these authorities the law muat be taken· to be well settled that it ia only the sale under which the export is made that is protected by Art. 286 (l)(b), and that a purchase which precedes such a

p. 415