FREEDOM OF TRADE COMMERCE AND INTERCOURSE

 Consti. Makers --> Country -> single economic unit-> less restraint on trade-> economic unity
and integration
 Art. 301--> the trade and commerce shall be free--> Sec. 92 of the Australian constitution
 Difference between two
 Sec. 92 immunizes interstate trade while Art. 301 includes inter and intra
state trade
 Section 92 makes freedom of trade’ absolutely ‘free but in India exceptions
to Article 301 has been laid down in Article 302-304.
o Definition of trade, commerce and business. Commerce ---> transmission or movement
in which profit may not be the intention.
o Intercourse means commercial as well as non-commercial intercourse. Trade is a
species of intercourse where the dominant element is to earn profit.
o All obstructions to free flow of trade would offend Article 301. The object of this
provision to break down any barrier between States and within the State so that India
maintains economic unity for sustained economic growth.
o Exceptions-->
 Restriction in public interest-> Art. 302
 Anti discrimination clause --> between states--> Art. 303(1)
 Where permissible--> in case of famine or scarcity of goods In any part of
India--> Art. 303(2)
 A state may impose tax on goods imported from another states if similar goods
are manufactured in the state --> Art. 304(a)
 A state may by law impose reasonable restriction on the freedom of trade and
commerce and intercourse in the public interest. But this power is subject to
certain restrictions:
 State legislature cannot make a law with respect to trade and commerce
which discriminates between the states --> Art. 303(1)
 A bill imposing restrictions on trade, commerce or intercourse shall not be
introduced in the state legislature without the previous sanction of the
president
 State of Bombay v. RMDC
 article 301 is confined to such activities as may be regarded a lawful trading
activity and does not extend to activities which are res extra commercial
(activities which could not be said to be trade or commerce or business)
 Brief facts of the case-->
 the Bombay lotteries and Prize Competitions Control and Tax
(amendment) Act, 1952, imposing restrictions on prize competition
was upheld as not violative of article 301 for, being of gambling
nature, holding of lotteries and prize competitions, could not be
regarded as trade or commerce.
 Lotteries--> only element of chance, no skill--> not trade-> falls
outside the res extra commercium--> the central lotteries (regulation)
act under which power is conferred on states to ban sale of lotteries
of other states does not violate articles 301-303 of the constitution
and is, thus, valid.
 Compensatory taxes or regulatory measures-->THE TEST OF DIRECT AND
IMMEDIATE RESTRICTION
 If directly restrict then prohibited, indirectly or incidental not prohibited. It
should not be a colorable measure
 ATIABARI TEA CO LTD v STATE OF ASSAM, AIR 1961 SC 232( A five judge
bench decision
 In this case the Supreme Court was concerned with the Assam
Taxation (on goods carried by Roads and Inland Waterways) Act 1954
which was passed under Entry 56 of List II of the seventh Schedule of
the Constitution. The appellants carried on the business of growing
tea and exporting it to Calcutta via Assam. In the course of passing
through Assam the tea was liable to tax under the Act.
 The appellants contended that the Act had violated the freedom of
trade guaranteed by Article 301as it had obstructed free flow of trade
and as it was not passed after obtaining the sanction of the President
as required by Article 304 (b) it was ultra vires.
 Held: If directly impedes the movement or restricts the trade then it
attracts the provision under Article 301 and validity can only be
sustained if it satisfied the requirement of Art. 304(b).
 However, regulatory measures like traffic regulations, licensing
of vehicles, marketing and health regulations, price control,
economic and social planning , prescribing minimum wages only
indirectly impeded the free flow of trade--> only promote and
facilitate trade and are permissible for an orderly society.
 Impugned act not satisfied the requirements, hence,
unconstitutional
 The Concept of Compensatory tax-->AUTOMOBILE TRANSPORT CO v STATE
OF RAJASTHAN AIR 1962 SC 925( A seven judge bench decision
 Held that regulatory measures or compensatory taxes for the use of
trading facilities did not hamper trade, commerce and intercourse and
therefore were not hit by Article 301.
 Rajasthan Motor Vehicles Taxation Act 1951 provided that no one
could use or keep for use a motor vehicle in Rajasthan without paying
an appropriate tax.--> relied upon Atiabari case--> contended that
since the previous sanction of the President was not obtained the Act
was invalid
 Attached clarification to Atiabari case--> Regulatory measures or
measures imposing compensatory taxes for the use of trading facilities
do not come within the purview of restrictions contemplated by
Article 301 and such measures need not comply with the
requirements of the proviso to Article 304(b) of the Constitution.
 Thus the State was charging from the users of motor vehicles nearly
50% of the cost incurred by the State in maintaining and making
roads. It was explained by the Court that the State had to find funds
for making and maintaining roads and fund could only be raised
through taxation, It was further clarified that tax so collected for
providing trading facilities need not be kept in a separate fund.
 When does Compensatory tax becomes Confiscatory tax-->
 So excessive and prohibitive becomes impediment in the free flow
 Burden disproportionate to costs
 No facilities are provided -> tax fiscal in nature
 No machinery provided for assessment and levy
 The tax is discriminatory
But it will not be discriminatory merely it is increased retrospectively.
Octroi duty and toll tax cannot be equated with general tax.
 Restrictions upon the freedom of trade and commerce
 Restrictions under the later provisions can be imposed only by the law,
cannot be taken away by any executive action-->Dy.
Collector verses Ibrahim & Co.
 Can be taken if the power is delegated by the legislature (Govt. of
Tamilnadu v. Salem Association)
 Can be imposed in public interest(Art. 302)
 Discriminatory provisions can be made by parliament--> to deal
with scarcity of goods arising in any part of India(Art. 303(2)
 Non discriminatory taxes may be imposed if goods imported ->
similarly as goods produced within the state.[Art. 304(a)].
 Reasonable restriction may be imposed in the public interest.[Art.
304(b)]
 restrictions imposed by “existing law” (an act passed before the
commencement of the constitution) and laws providing for state
monopolies to continue except in so far as provided otherwise by an
order of the president [article 305].
 Article 307 --> parliament to appoint by law such authority, as it
considers appropriate for carrying out the purposes of articles
301-304.
 Interpretation of Term Public interest-->
 to prevent evasion of tax, to canalize inter-state trade through
registered or licensed dealers (State of T.N. verses Seetalakshmi
Mills)
 The debate btw. Narrow view and wider view of Part XIII
 In Automobile ltd. case, the Supreme Court observed that neither
the wide interpretation nor the narrow view is correct. “In our view,
the concept of freedom of trade and commerce postulated by article
301 must be understood in the context of an orderly society and as
part of a constitution which envisages a distribution of powers
between states and union, and if so understood, the concept must
recognize the need and legitimacy of some degree of regulatory
control, whether by the union or the states; this is irrespective of the
restrictions imposed by other articles in part 13”.
 Thus, the Supreme Court in automobile case held that tax laws are not
outside the comprehension of article 301 but
regulatory/compensatory taxes do not come within the purview of the
restrictions contemplated by article 301. Only the taxes which directly
impede the flow of trade or commerce are violative of the freedom
guaranteed under article 301.
 Conclusions
(1) Taxes have been held to be generally outside the purview of art. 301 (viz.
compensatory/regulatory taxes) unless the tax is shown to be a mere
pretext designed to injure inter-state trade, commerce, etc., i.e. directly
impedes the flow of trade.
(2) Every state has power under entry 56 and entry 57 of list ii to impose
taxes to compensate it for the services, benefits and facilities provided by it.
Thus, courts have rejected a construction of article 304 which would have
rendered entries 56 and 57 otiose or inoperative without the consent of
union executive.
 (3) The word ‘restriction’ in article 304(b) has been held not to include
regulation. Therefore, taxes or other measures which are regulatory will not
come within article 304(b).

 G K KRISHNAN v STATE OF TAMIL NADU (1975) 1 SCC 375

o In this case the writ petition challenged the validity of a notification by Government of
Tamil Nadu enhancing the motor vehicle tax on omnibuses from Rs 30 per seat per
quarter to Rs 100 per seat per quarter, The question for consideration was whether the
tax was a compensatory tax? It was found that Rs 19.51 crores had been spent not only
for maintenance of the roads but also for the construction of new ones and that the
receipt from the vehicle tax was only 16.38 crores.

o Following Autombile Transport Case (1962) the Supreme Court held that the impugned
tax was a compensatory tax and did not violate Article 301. The Court observed that
regulations like rules of traffic facilitate freedom of trade and commerce whereas
restrictions impede that freedom. The collection of tax or toll for the use of roads,
bridges, aerodromes, does not operate as barrier or hindrance to trade. For a tax to
become a prohibited tax, it has to be a direct tax effect of which is to hinder the
movement part of trade. If the tax is compensatory or regulatory it cannot operate as a
restriction on the freedom of trade and commerce. A compensatory tax need not satisfy
the requirements of Article 304(b).

o Working Test

 The Court referred to the working test enunciated in Automobile case according to
which the working test for deciding whether a tax is compensatory or not is to
enquire whether the trades people are having the use of certain facilities for the
better conduct of their business not patently paying much more than what is
required for providing the facilities.
 The very idea of a compensatory tax is service more or less commensurate with
the tax levied. The Court therefore upheld the notification enhancing the tax on
motor vehicles in Tamil Nadu as it was held to be a compensatory tax.

 THE POWER OF STATE LEGISLATURES

o CASES ON ARTICLE 304 (a)

 VIDEO ELECTRONICS (PVT) LTD V STATE OF PUNJAB (1980) 4 SCC 134

 In this case the petitioners who carried on the business of selling

cinematographic films and other equipment like projectors, sound recording
and reproducing equipment, industrial X ray films, graphic art films etc, had
challenged the notifications issued by the governments of Punjab and Uttar
Pradesh which had provided temporary exemption to the new electronic
local industries from paying sales tax. The UP notification stipulated that the
said benefit shall be available only to those units who have commenced
their production between the dates specified in the notification.
 The Punjab notification provided that the rate of sales tax payable by an
electronic manufacturer unit existing in Punjab would be one percent as
against normal twelve percent applicable to units from other States
  In the case of UP notification the Supreme Court held that in as much as it
was a case of grant of exemption to a special class for a limited period on
specified conditions and was not extended to all the products of those
goods, it did not offend the freedom of trade guaranteed by Article 301 and
304 (a)
 Similarly in the case of Punjab notification it was held that the exemption
was for certain specified goods and overwhelmingly large number of local
manufacturers of similar goods were subject to sales tax.
 It could not be said that the local manufacturers were favoured as against
outside manufacturers
 The Supreme Court upholding the validity of the impugned notifications
ruled:

“A state which is economically and technically weak on account of

various factors should be allowed to develop economically by granting
exemptions, concessions, subsidies to new industries”

 Accordingly the impugned notifications were held not violative of Article

304(a).Thus a temporary exemption from sales tax to specified goods made
within the State with a view to giving incentives and encouragement to the
local industry does not infringe Article 304(a) of the Constitution.

 SRI MAHAVIR OIL MILLS LTD v STATE OF J&K (1996) 11 SCC 39

 Under Jammu and Kashmir General Sales Tax Act the State government
issued notifications stating that as the cost of production of edible oil in the
State of Jammu and Kashmir was higher than the cost of production of
edible oil in the adjoining States the producers of edible oil in the State of
Jammu and Kashmir will be exempted from paying sales tax on edible oil.
But the manufacturers /producers of edible oil from other States were liable
to pay tax at the rate of 8%.
 The appellant challenged the constitutional validity of tax exemption as
infringing the requirement of Article 301 and 304(a) of the Constitution.
 In this case the Supreme Court invalidated the imposition of 8% sales tax by
the State of J&K on the edible oil imported from other States from which the
Edible Oil produced with in J&K was exempted. The Court rejected the
State’s plea that such arrangement was necessary to encourage the State oil
industry and to subsidize high cost of oil production within the State .By
exempting unconditionally the edible oil produced within the State of J&K
altogether from sales tax while subjecting the edible oil produced in other
States to sales tax at 8%, the State of J&K has brought about discrimination
by taxation prohibited by Article 304(a) of the Constitution.
 It was held that the exemption granted from payment of sales tax to local
manufacturers /producers of edible oil is unconstitutional and violative of
Article301 and 304(a) of the Constitution.
 Citing Video Electronics case the Supreme Court observed that a limited
exception created in that case cannot be enlarged to eat up the main
provision in Article 304(a) which totally prohibits discriminatory taxation by
a State. By exempting unconditionally the edible oil produced within the
State of Jammu and Kashmir altogether from sales tax the State had brought
about discrimination by taxation prohibited by Article 304(a).
 The notifications were held to be violative of Article 301 and Article 304(a)