The article is written by Clara D’costa. It delves into the landmark case of Goodyear India Ltd vs. State of Haryana (1990), wherein the Supreme Court addressed the constitutional validity of the purchase tax imposed on raw materials used in manufacturing. The article meticulously examines the issues raised, arguments advanced by the parties and the Court’s decision, as well as the rationale behind the same. This case strikes a balance between state taxation powers and the constitutional guarantee of free trade and commerce.

Introduction

The case of Goodyear India Ltd. vs. State of Haryana (1990) saw a landmark judgement by the Supreme Court of India, addressing issues concerning the interpretation of tax laws and the definition of “sale” under The Central Sales Act, 1956. The case arose when Goodyear India Ltd., a tyre manufacturer, challenged the imposition of sales tax by the State of Haryana on certain transactions which the company contended as not constituting a “sale” as defined under the Act. At its core, this case delves into the question of whether the State of Haryana could impose a tax on goods merely consigned out of the state, despite no actual sale occurring.

This debate led the Supreme Court to embark on a detailed examination of what constitutes a “sale” and “goods” under the law. The Court’s analysis was not just about interpreting legal definitions but also about understanding the nature of the transactions and the broader legislative intent. It was a balancing act between maintaining the state’s right to levy taxes and protecting the integrity of inter-state commerce from potentially burdensome state regulations.

This judgement, while rooted in the specifics of tax law, speaks volumes about the principles of fairness, federalism, and the delicate balance of power within India’s legal framework.This case is a vivid reminder of how legal interpretations can shape the economic landscape and the importance of maintaining a clear demarcation of legislative powers.

Details of the case

• Case name: Goodyear India Ltd. vs. State of Haryana
• Name of the Parties: 

1. Petitioners: Goodyear India Ltd. Etc.
2. Respondents: State of Haryana & Anr. Etc.

• Petition numbers: 1166-72 of 1985
• Type of case: Civil Appeal
• Name of the Court: Supreme Court of India
• Bench: Justice Sabyasachi Mukharji, Justice S. Ranganathan
• Date of the judgement: 19th October, 1989
• Equivalent Citations: 1990 SCC (2) 71, 1989 SCR Supl. (1) 510, 1989, JT 1989 (4) 229
• Laws discussed: 

1. Section 50 and Section 24(3) of the Haryana General Sales Act, 1973 ,
2.  Section 13-AA of The Bombay Sales Tax Act, 1959, 
3. Section 3, Section 9(1) of the The Central States Act, 1956, 
4. Article 14, Article 245, Article 246, Article 269(1), Article 301, Article 304 (b) of the Constitution of India 1950

Facts of the case 

Goodyear India Ltd. (hereinafter referred to as appellant), was a registered dealer engaged in the production and sale of automobile tyres and tubes at its factory in Ballabgarh, Haryana. The appellant would regularly source the raw materials required for the manufacturing of automobile tyres and tubes, both from within and outside the state of Haryana. The company would manufacture and sell their goods both within and outside the state of Haryana. Goodyear India Ltd. was registered as a dealer under the Haryana General Sales Act, 1973 and The Central States Act,1956. The appellant would diligently submit their quarterly returns and pay their taxes in accordance with the rule of law.

However, in 1979, the assessing authority of Faridabad, imposed purchase tax under Section 9(1)(b) of the Haryana General Sales Act, 1973 on the returns of the years 1973-1974 and subsequently for the years 1974-1975 and 1975-1976. Further, the authority also imposed taxes on the goods used in the manufacture of any other goods dispatched outside the state of Haryana. The revenue authorities also imposed taxes on the dispatches of manufactured goods, namely, automobile tyres and tubes dispatched to the various depots of the company in other states.

The appellant therefore, challenged the imposition of purchase tax, by filing various writ petitions in the High Court of Punjab and Haryana. The Punjab and Haryana High Court on 4th December, 1982 decided the said petition in favour of the appellant. The High Court held that mere dispatch of goods to Goodyear India Ltd’s own branches outside the State, does not constitute “disposal of goods in any manner other than by way of sale”, as given under Section 9(1)(b) of the Haryana General Sales Act, 1973.

The High Court held that the above-mentioned Section only provided for imposition of purchase taxes on the disposal of manufactured goods. However, the impugned notification went further, by making a mere dispatch of goods to the dealers themselves, taxable. This created a new tax, which was not authorised by Section 9 of the Haryana General Sales Act, 1973. Therefore, it was held to be contradictory and in conflict with the provisions of Section 9 of this Act.

The High Court referred to Section 9 and concluded that the term “disposes of” was not a specialised term and thus, looked at the definition of the same, in Webster’s Third New International Dictionary and Corpus Juris Secundum (volume 27). Thereby deciding that “disposes of” or “disposal”, cannot be equated with just sending goods to oneself. Therefore, the High Court held that the notification exceeded the scope of Section 9, which only allowed for purchase tax on the disposal of manufactured goods. As the Court granted a decision in favour of the appellant, with respect to the assessment years 1976-77 to 1979-80, Goodyear India Ltd. then filed writ petitions for the assessment years 1973-74, 1975-76 and 1980-81, in the High Court, challenging the assessment.

The High Court further held that “mere dispatch of goods to a place outside the State, in any manner otherwise than by way of sale in the course of inter-state trade of commerce” is equivalent to a consignment in inter-State trade or commerce. This is covered by Article 269(1)(h) and Entry No. 92-B of List 1 of the Seventh Schedule of the Constitution. Due to this, the authority to levy sales or purchase taxes on these consignments, along with any related matters, lies exclusively with the Parliament. The State Legislature does not have the power to impose such taxes on these transactions.

The Haryana General Sales Tax (Amendment and Validation) Act, 1983 amended Section 9(1)(b) of the the Haryana General Sales Tax, 1973 thereby levying a purchase tax on the consignment of goods outside the State and thus, it was beyond the legislative competence of the state of Haryana. Therefore, it was declared to be inoperational and void. The High Court further held that irrespective of the 46th Amendment, the attempt to tax the mere dispatch of goods outside the State, does not come under the ambit of Entry No. 54 of List II of the Seventh Schedule. The High Court decided that neither buying the raw materials, nor making them into the final product, triggers purchase tax.

These actions are not considered as taxable events. The appellant companies filed writ petitions in the High Court, challenging the orders of the assessing authority that imposed an additional tax of 2%. They also questioned the validity of section 13-AA of the Bombay Sales Tax Act, 1959, under which this additional tax was imposed. The companies argued that the 2% additional tax on raw materials, when the finished goods made using them were sent out of the State, was essentially a consignment tax, which the State Legislature did not have the power to impose.

The High Court dismissed the petitions. Aggrieved, the appellant companies challenged the High Court’s decision, by filing a joint petition before the Supreme Court. Hence, the present case.

Issues raised 

The issues raised in this case, were on the basis of the subject matter of the appeal made by Goodyear India Ltd., against the decision of the Punjab and Haryana High Court. The issues/questions raised in this case were as follows:

• Whether the dispatch of goods by a manufacturer, to its own branches outside the State, comes under the purview of Section 9(1)(b) of the Haryana General Sales Tax Act, 1973 as a taxable event?
• What is the correct interpretation of the phrase “disposal of goods in any manner other than by way of sale” under Section 9(1)(b) of the Haryana General Sales Tax Act, 1973 and does it cover the mere transfer of goods from one warehouse to another outside of the State, by the same manufacturer?
• Whether Section 13AA of the Bombay Sales Tax Act, 1959 is beyond the legislative competence of the State Legislature and violative of Article 14 and Article 301 of the Constitution?
• Does the State Legislature have the power under Entry 54 of List II of the Seventh Schedule of the Constitution, to impose purchase tax on dispatch of goods by a manufacturer, to its own branches outside the State?
• Whether Section 13AA of the Bombay Sales Tax Act, 1959 is in pith and substance and whether it levies tax on consignment and not on purchase?

Arguments of the parties

Petitioners

Adv. Raja Ram Agarwala, the learned counsel for the appellants, argued before the Supreme Court, that it was necessary to determine the exact taxable event before levying tax. He further contended that if it was proved that the taxes had been levied on mere dispatch or consignment of goods from one warehouse to the another outside the State, according to the amended provisions of Section 9(1)(b), it would be beyond the State’s authority.

The appellants emphasised that the imposition of the purchase tax in question, exceeded the legislative competence of the State Legislature under Entry 54 of list II. The counsel further argued that it restricted the freedom of trade and commerce, thereby violating Article 301 of the Constitution.

Mr. Rajaram Agarwala, representing the appellants, argued that the case of State of Tamil Nadu vs. Kandaswami (1975), which Mr. Tewatia (counsel for the respondents) cited, should be understood in the context of the specific issue it addressed. That case dealt with whether the Madras High Court was correct in saying that a sale exempted from tax could still be considered liable to tax, and if so, whether the exemption meant the tax was not payable. Mr. Agarwala emphasised that even if the taxable event was identified, it was based on the assumption that the goods were generally taxable and subject to tax under Section 7A of the Tamil Nadu General Sales Tax Act, 1959 if purchased without paying tax and then dealt with to avoid state sales/purchase tax.

Respondent 

Adv. Tewatia, the learned counsel for the State, put forth a different perspective. He stated that the state of Haryana came into being, as a result of the Punjab State Reorganisation Act, 1966. Consequently, the legislative history of the taxing statute is shared by both Haryana and Punjab. The learned counsel further highlighted the development of the purchase tax in Punjab, which was introduced by the East Punjab General Sales Tax (Amendment) Act, 1958. This Act, under Section 2(f), defined “purchase” and expanded the definition of “dealer” to include purchasers of goods. Dealers, specifically those involved in crushing oil-seeds, were required to pay purchase tax on raw materials and the term “taxable turnover” was also revised through this amendment.

Mr. Tewatia referred to observations in the case of State of Tamil Nadu vs. Kandaswami (1975), to further support points made in the case of Malabar Fruit Products Company and Ors vs The Sales Tax Officer and Ors. (1972), where Justice Poti of the Kerala High Court decided that the taxable event was the purchase/sale of goods, and not their dispatch.

He further contended that initially, Punjab exempted dealers from paying purchase tax on raw materials if they were manufactured and sold within the State. The idea behind this exemption was to increase the state revenue, through sales tax on the goods manufactured and sold within the State. However, dealers found ways to escape this condition and hence, this amendment subjected the goods listed in Schedule C, to purchase tax, thereby removing the tax exemption for manufacturers. The State further argued that no tax was payable under the Haryana Act, when goods were exported outside the State, whether through inter-State sales or international export. They asserted that tax liability only arose when goods were dispatched to certain designated depots, especially those of the Food Corporation of India (FCI), located in other states.

Mr. Tewatia, in his arguments, referred to the observations made by this Court, in the case of State of Tamil Nadu vs. Kandaswami (1975), wherein the High Court addressed Section 7A of the Tamil Nadu General Sales Tax Act, (1959).

The counsel for the State further explained the provision under Section 9(1) of the Central Sales Act, 1956 which levied purchase tax on dealers, for purchase of goods within the State, when goods are not listed in Schedule B and are used to produce Schedule B goods, or if the manufactured goods are not sold within the State, involved in inter-State trade or commerce, exported outside India, or if the purchased goods are exported outside the state.

It was further argued that the taxable event was the purchase of goods in Haryana, with the obligation to pay tax deferred until certain conditions are met. This can be avoided by the dealer by submitting a declaration in the S.T. Form as given under Section 24 of the Haryana General Sales Act, 1974. It was further argued that if the conditions mentioned in Section 9 of the Central Sales Tax of the Act are not met, the tax obligation is revived. The tax was on purchase of goods and it fell within the ambit of Entry 54 of List II and the State Legislature had the authority to impose the purchase tax under the provisions of the Constitution.

The State maintained that the tax was levied on the purchase of raw materials and not on the process of manufacturing the goods. The legislative intent and language of the state clearly stated that the tax aligned with the legislative powers of the State. Further, it was argued that Section 9(1)(c) stated that no tax was payable on exports outside the state. However, tax is levied on goods dispatched to depots in another state.

The State argued that goods under different parts of the Act, particularly under Section 13AA, were justified based on the objective of encouraging resale within the state and preventing tax evasion.

Mr. Dholakia argued that the Act primarily imposes a tax on purchases, rather than on consignments. He referred to a previous judgement by the Supreme Court in the case of State of Karnataka vs. Shri Ranganatha Reddy (1978) to support his point. In this case, the court clarified the nature of such taxes. Mr. Dholakia emphasised that Section 13-AA of the Act, deals specifically with the consignment of manufactured goods. He pointed out that no tax is actually imposed under Section 13AA for these manufactured goods, suggesting that the focus of the legislation is not on taxing consignments.

The State defended their contentions regarding the authority of the legislation to impose taxes under Entry 54 of List II of the Seventh Schedule of the Constitution. The respondents argued that interference into matters assigned to other legislatures should be evaluated under the doctrine of pith and substance.

Laws involved in Goodyear India Ltd vs. State of Haryana (1990)

The case of Goodyear India Ltd. vs. State of Haryana (1990) referred extensively to these legal provisions and constitutional articles to determine the constitutionality, validity, and application of the Haryana General Sales Tax Act, 1973 in relation to inter-state trade, taxation of goods, procedural compliance, and protection of fundamental rights. 

The arguments and decisions were shaped by interpretations of these laws and constitutional principles to ensure adherence to legal norms and principles of justice.

Section 13AA of The Bombay Sales Tax Act, 1959

Section 13AA classifies goods for the purpose of taxation, within the state of Bombay (now Maharashtra). It divides goods into two categories- Part I includes the goods that are meant for resale within the State, and Part II includes goods used in manufacturing of new taxable goods.

This Section prescribes a 2% purchase tax for certain non-declared goods mentioned under Part I of Schedule C. This tax is to be paid by a liable dealer or the commission agent, on purchase from either registered or non-registered dealers. It comes into play only when the taxable goods are manufactured and sent outside the State. Further, it is to be noted that this 2% purchase tax, is in addition to any other purchase or sales tax that has been paid or is payable.

As Section 13AA classified goods into two categories based on their use, it directly impacted how goods are taxed under the Bombay Sales Tax Act, influencing exemptions and liabilities. In the present case, this provision was relevant in understanding how goods were categorised for tax purposes under state law, potentially affecting the tax liabilities of Goodyear India Ltd.

Section 3 of the The Central States Act, 1956

Section 3 defines what constitutes an inter-state sale or purchase, which is crucial to determine the application of the Central Sales Tax (CST). It ensures clarity in tax imposition across state borders. A sale or purchase takes place in the course of inter-state trade or commerce if 

• The goods are moved from one State to another, or
• The sale or purchase is affected by a transfer of documents of title of goods, in the course of their movement from one State to another.

This Section aims to prevent ambiguity and disputes regarding what constitutes inter-state sales or purchase. It provides a legal framework for levying CST and establishes procedural clarity for taxpayers and tax administrators.

In this case, Section 3 was pivotal in determining whether Goodyear’s transfer of goods transfer as inter-state sales and thus, subjected to CST.

Section 9(1) of the The Central States Act, 1956

This Section outlines the circumstances under which tax is levied and the exemptions for the sales to registered dealers, exports and specific transactions. This section determined the tax liability of goods sold across state borders.

It has been stated that the Government of India will levy and collect taxes from any dealer who sells goods in the course of inter-state trade or commerce. The State in which this will be collected, is the one from where the movement of the goods began. After the first sale, in case of a subsequent sale of goods from one state to another

• If it is carried out by a registered dealer, the tax is collected from the state where the dealer must have obtained the necessary form for the purchase of the goods.
• If it is carried out by an unregistered dealer, the tax is collected from the state where the subsequent sale took place.

The provisions of Section 9(1) are aligned with the principles under Article 269(1), which regulates taxes on inter-state trade and commerce. This thereby ensures that CST is imposed in a manner that respects constitutional provisions of equality and fairness of taxation.

This Section was pivotal in determining whether the transfer of goods by Goodyear Ltd. qualified for the exemptions under CST provisions.

Section 24(3) of the Haryana General Sales Act, 1974

Section 24(3) focused on procedural requirements involving declarations required for claiming exemptions and refunds, to ensure that taxpayers comply with administrative rules to receive tax benefits accurately and efficiently.

This provision stated that if a dealer purchases goods, without paying tax as per sub-section (1), those goods must be utilised for the specific purpose laid down in that sub-section. If the dealer fails to do so, tax must be paid on the purchase value of the goods. The rate of tax will be as prescribed under Section 15 of the Act. In case the goods are already subjected to tax under any other provision of this Act, the tax under this Section, shall not be levied.

This Section enhanced the efficiency of tax administration in processing CST exemptions and refunds. It provided taxpayers and authorities with the documentation and evidence required to support claims, minimising disputes and delays.

In the present case, Section 24(3) was referred to, in order to assess if Goodyear India Ltd. complied with these procedural requirements to be exempted from CST or to get refunds for their inter-state transactions.

(This Section has now been omitted.)

Article 269(1) of the Indian Constitution

This Article states that taxes on the sale, purchase or consignment of goods, are levied and collected  by the Government of India. However, on and after 1st April, 1996 these taxes shall be assigned to the State, with respect to matters as specified under clause (2).

Article 301 of the Indian Constitution

Article 301 ensures freedom of trade, commerce, and movement of goods across India, without restrictions. It aims to remove barriers to trade and promote economic unity by ensuring that there are no restrictions on the movement of goods and services across states.

Courts interpret Article 301 to eliminate laws or regulations that create barriers to trade between states, unless such restrictions are justified under other provisions of the Constitution, such as Article 304.

Article 304(b) of the Indian Constitution

Article 304(b) permits states to impose reasonable restrictions on inter-state trade, to safeguard public interest, while still ensuring that such restrictions do not unduly inhibit trade. It tries to find a balance between ensuring the regulatory powers of states and preventing unreasonable barriers to trade between states.

Doctrine of pith and substance.

The doctrine of pith and substance is a principle used in constitutional law, to determine the true nature of a legislation, focusing on its main purpose and effect, rather than its incidental aspects, to establish whether it falls within the legislative competence of the enacting authority.

Article 245 divides the legislative powers between the Union and State legislature. The Parliament may make laws for the whole of or any part of India, while State Legislatures may make laws for the whole of or any part of a state.  

Article 246 specifies the subjects that the Parliament and the State Legislatures, may legislate on. The Parliament holds the exclusive power to make laws relating to the matter mentioned under List I in the Seventh Schedule (Union List). The State Legislatures possess the exclusive power to make laws relating to matters mentioned under List II in the Seventh Schedule (State List). Both the Parliament and the State Legislatures have the authority to make laws relating to matter mentioned under List III in the Seventh Schedule (Concurrent List)

These provisions give effect to the doctrine of pith and substance. They determine a law’s purpose and the legislative competence, when it overlaps between the Union and State lists, guiding constitutional interpretations.

These Articles separate the powers of the Union and State legislature and determine the true nature of a law. This doctrine of pith and substance is used to determine the true nature and competence of a legislature when they act upon the matters that fall under the jurisdiction of both levels of legislature. It clarifies the scope of authority and establishes which subjects fall under the exclusive or concurrent jurisdiction of each level of government, aiding in the interpretation and enactment of new laws.

Courts apply Articles 245 and 246, along with the doctrine of pith and substance, to determine whether a law is within the legislative competence of the enacting authority. This includes assessing whether a state law encroaches upon matters reserved for the Union or or vice versa, ensuring that each legislative body operates within its constitutionally defined boundaries.

Judgement in Goodyear India Ltd vs. State of Haryana (1990)

In the case of Goodyear India Ltd. vs. State of Haryana and Anr (1990), the Supreme Court of India adjudicated upon the application of the Haryana General Sales Tax Act, 1973, to transactions involving Goodyear India Ltd. The Court analysed whether the imposition of sales tax under the Act, infringed upon constitutional provisions, particularly Article 301, which guarantees freedom of trade, commerce, and movement of goods across India. It clarified the taxable event under the Act, deciding whether it dealt with the sale itself or the transfer of property. The Court further upheld the validity of the imposition of sales tax, provided it did not restrict interstate trade without any reasonable grounds. The judgement stressed on the balance between state taxation powers and constitutional guarantees of economic freedom, ultimately upholding the constitutional validity of the sales tax as applied to Goodyear India Ltd. Therefore, the present appeal was dismissed.

Rationale behind the judgement

The Court, while granting the decision, stated that it was necessary to determine whether the tax imposed by the legislature was in pith and substance. The Court stated that the nomenclature given by the Haryana Legislature in this case, was not decisive and needs to be decided after a deep study of all aspects.

The Court stated that there was no hesitation in holding that the tax was imposed on dispatch between states. It was, however, to be noted that it is of great importance that imposition of consignment tax has taken place after an in-depth consideration of all the aspects and consensus among the concerned states. The rates, grant of exemption and the ratio relating to the distribution of proceeds amongst the states, should be considered. Although reaching an agreeable solution may take time, this does not mean that such a tax should be delayed or suspended. The states should not claim the need to impose this tax due to potential evasion or revenue shortages.

Justice Ranganathan agreed with the decision of the High Court of Punjab and Haryana and further observed that the issues mentioned in these appeals were complex. According to his observations, Section 9 of the Haryana General Sales Tax Act,1973 and Section 13AA of the Bombay Sales Tax Act, 1959 appeared to impose a purchase tax. This tax is, however, triggered after the purchase, when the purchaser or buyer uses the goods as raw materials to manufacture taxable goods, and moves the manufactured goods, not by way of sale, to a location not within the state. It is to be noted that the tax is imposed on the purchase price of the raw materials and not on the value of the finished goods sent out of the state.

Justice Ranganathan further agreed with Justice Mukherjee that it was reasonable, after further consideration, that the tax imposed in issue, is distinct from the standard purchase tax, as it applies to different categories of goods. Further, it was observed that the category of goods mentioned, was triggered by an event that was not concerned with the purchase of goods. The event that is taxable here, is the consignment of manufactured goods and not the purchase of goods.

The Court further agreed that the decision given in the State of Tamil Nadu vs. Kandaswami (1975) did not address the specific issues mentioned in this case, thereby rejecting the arguments of the respondents. 

The Court also emphasised on the importance of Article 301. The Supreme Court agreed that imposition of a tax that effectively hinders a free flow of trade across the state borders, must be scrutinised closely. Article 301 guarantees freedom of trade, commerce, and movement of goods throughout the territory of India, emphasising the need to prevent any restrictions that could hinder economic unity. Article 304(b) permits states to impose reasonable restrictions on trade in the public interest, provided these do not unduly inhibit inter-state commerce. Article 269(1) deals specifically with taxes on inter-state trade and commerce, aiming to ensure uniformity and fairness in tax collection across states.

In the present case, these provisions were interpreted to safeguard against state tax laws that hold the potential of burdening interstate commerce or violating the fundamental freedom of trade enshrined in Article 301. The Court sought to strike a balance between the financial independence of states and the national interest of promoting economic unity.

It was further reasoned by the Court that, although the actual imposition of the tax might take some time until an agreeable solution is found, the delay does not cause the consignment tax to be suspended. It further led them to hold that a tax declared as a consignment tax, is recognized as such. This is done in order to prevent any evasion of taxes. It was observed and concluded by the Court, that these amendments prove that there were indeed attempts made by people in trade, to avoid sales tax. They did so by moving goods made from raw materials purchased locally, to other states as consignments, rather than selling them within the state, since it would attract a tax liability. The Supreme Court invalidated the tax provisions under the Haryana General Sales Tax Act, 1973, as unconstitutional. The Court emphasised the need to balance state taxation powers with the constitutional guarantee of free trade and commerce across India, thereby upholding the principle of a unified national market.

The Court stated in its opinion that, Mr. Dholakia correctly argued that the requirement to maintain accounts in a specific manner, is not a valid criterion or evidence for determining when the liability arises. The Court went on to observe that the interpretation of specific laws that create the tax, is what is required to determine the obligation to pay tax. As per the doctrine of pith and substance, The same has been stated in the  Kerala State Electricity Board vs. Indian Aluminium Co. (1975) and Prafulla Kumar Mukherjee vs. Bank of Commerce Ltd. AIR (1947) . 

Therefore, the Court stated its opinions regarding the contention about the penalties under the Haryana General Sales Act, 1973 by declaring these proceedings as unsuccessful. 

Relevant judgements referred to in the case

The Supreme Court referred to a number of precedents in order to interpret the various provisions of the Haryana General Sales Tax Act, 1973 particularly concerning the definition and meaning of “sale”, “purchase” and the conditions to impose purchase or sales tax.

The State of Tamil Nadu vs. Kandaswami (1975)

The Supreme Court held that the decision granted in this case did not constitute as a warrant to the idea that a mere dispatch of goods from one warehouse to the other, fell under the ambit of the goods being disposed of. The Supreme Court held that it did not guarantee that the meaning of the expression ‘dispatch’ and ‘to disposal’ are similar. Rather, the expression “disposal” of goods is separate and distinct from the expression ‘dispatch’. 

The Court in this case noted that this Section functions both as a charging and a remedial provision, aimed primarily at preventing tax leaks and evasion. While analysing legal provisions, interpretations which defeat the purpose, must be avoided. If there exists multiple interpretations, the one which is the most effective and functional, must be chosen. It was emphasised that tax laws must be interpreted strictly. The meanings of the words used in these laws, must be taken at face value, without any assumptions. Further, the Court found that the wording of Section 7A was unclear about its intent and did not address what constituted the taxable event.

It’s well-established, that a legal precedent only serves as authority for the specific decision it makes, not for any implications that might logically follow. This principle is also supported by the cases of Quinn vs. Leathem (1901) and State of Orissa vs. Sudhansu Sekhar Misra (1967). Therefore, the ruling in the Kandaswami case does not directly apply to interpreting Section 9(1)(b), to determine the taxable event in the present case. 

Bata India Ltd. vs. The State of Haryana & Anr. (1983)

In Bata India Ltd. vs. The State of Haryana & Anr. (1983), the High Court of Punjab and Haryana ruled that sending goods outside the State, not through a sale by inter-state trade, falls under the consignment of goods, as defined under Article 269(1)(h) and Entry No. 92-B of List 1 of the Seventh Schedule to the Constitution. This means that the authority to levy sales or purchase tax on such dispatches or consignments, and related matters, lies exclusively with Parliament, excluding State Legislatures.

Therefore, Section 9(1)(b) of the Haryana General Sales Tax Act, 1973, as amended by the Haryana General Sales Tax (Amendment & Validation) Act, 1983, which imposed purchase tax on goods consigned outside the State by inter-state trade, was held void for exceeding Haryana’s legislative competence. The court also nullified the retrospective validation of the 19th July, 1974 notification and actions taken under it.

The High Court further clarified that simply manufacturing and consigning goods outside the State, by a manufacturer, for themselves, does not constitute a sale or disposal under Entry No. 54 of List II of the Seventh Schedule of the Constitution. Thus, both before and after the 46th Amendment, attempts to tax the mere consignment or dispatch of manufactured goods outside the State by inter-state trade, does not fall within the scope of State Legislatures’ authority, but rather under the Parliament’s jurisdiction, according to Article 248 (residuary powers of legislation) and Entry No. 97 of List I.

The court emphasised that neither the original purchase of goods, nor their manufacture into finished products alone, attracts purchase tax. The true taxable event under section 9(1)(b) of the Act, is the disposal of manufactured goods in any manner other than by sale within the State.

Atiabari Tea Co. Ltd vs. The State of Assam & Ors. (1961)

The Supreme Court, in its judgement in the present case, referred to the decision in Atiabari Tea Co. Ltd. vs. The State of Assam & Ors. (1960). This landmark judgement established principles regarding the constitutional limits on state taxation powers concerning inter-state trade. It was found that not all taxes infringe upon Article 301, but only those taxes that directly and immediately impede interstate transfer of goods.

The reference to the Atiabari case, focussed on the principles laid down regarding the interpretation of Article 301. It highlighted that while states have the authority to levy taxes, such laws must not unreasonably burden or obstruct inter-state trade and commerce, as guaranteed by the Constitution.

The Supreme Court aimed to ensure that the imposition of sales tax in the Goodyear case was in compliance with constitutional principles, particularly with respect to Article 301 and its implications on economic freedom and inter-state commerce.

Kalyani Stores vs. The State of Orissa & Ors (1966)

In determining whether a provision amounts to a restriction on the free movement of trade or commerce under Article 301 of the Constitution of India, the Supreme Court, as observed in Kalyani Stores vs. The State of Orissa & Ors (1966), emphasised that not every imposition of duty or tax constitutes a violation of Article 301. Only those measures that directly and immediately impede the free flow of trade are prohibited by Article 301.

The Court explained that the imposition of a tax may hinder trade in some cases, but each situation must be evaluated on the basis of its specific circumstances. It stressed that for a tax to contravene Article 301, it must significantly obstruct trade or commerce movement without justification.

In the case at hand, where the taxed goods do not leave the state as raw materials, but undergo processing within the state, there was no direct, immediate, or substantial hindrance to the free flow of trade. Therefore, the Court agreed with the High Court’s finding that the challenge to the tax imposition under Article 301 was not sustainable. Consequently, there was no need to address whether the tax imposition could be saved under Article 304(b) of the Constitution, which allows states to impose taxes on imported goods subject to certain conditions.

This approach underscores the Court’s careful consideration of each case’s factual context to determine if there is a violation of Article 301, thereby upholding the principles of economic freedom and interstate commerce guaranteed by the Constitution.

Andhra Sugars Ltd. & Anr. vs. The State of Andhra Pradesh (1968)

The Court stated that to levy a purchase tax on goods described in a specific manner, as seen in cases like Andhra Sugars Ltd. & Anr. vs. The State of Andhra Pradesh (1968), differs significantly from the present case. Here, the tax, although labelled as a purchase tax, applies to an entirely different category of goods and only triggers upon an event unrelated to the act of purchase. In this context, if one were to identify a “taxable event,” it would be the consignment of manufactured goods rather than the act of purchase itself.

Kerala State Electricity Board vs. Indian Aluminium Co. (1975)

In the Kerala State Electricity Board case, the Court discussed the extent of the state’s power to impose taxes and the boundaries within which such powers must be exercised. The reference was used to support the argument that states cannot extend their tax laws beyond their constitutional mandate, particularly when such laws impact inter-state trade and commerce.

Prafulla Kumar Mukherjee vs. Bank of Commerce Ltd. AIR (1947)

In this case, the court emphasised on the doctrine of pith and substance, which is used to determine the true nature and character of legislation. The Privy Council explained that when evaluating the validity of a law, one must look at its substance rather than its form. This doctrine helps in identifying whether a particular legislative action falls within the competence of the enacting body. The reference was pertinent to establishing that the consignment tax imposed by the Haryana General Sales Tax Act, 1973, was essentially a tax on inter-state trade, which falls under the purview of the Central Government, not the State.

Analysis of Goodyear India Ltd vs. State of Haryana (1990) 

This case of Goodyear India Ltd. vs. State of Haryana (1990), involved a thorough examination of Section 9(1) of the Central States Act, 1956 and Section 24(3) of the Haryana General Sales Act, 1974, with reference to Article 14, Article 245, Article 246, Article 269(1), Article 301, Article 304(b) of the Constitution of India 1950. The Supreme Court in this case, clarified the scope of state legislative powers under the Constitution of India, by distinguishing between legitimate state taxation and overreach into areas reserved for central authority. The Court’s decision reaffirmed the constitutional principle that state legislatures cannot impose taxes on transactions that do not constitute actual sales within their jurisdictions. This ruling prevents states from extending their tax laws to cover goods merely dispatched outside the state, thereby protecting the integrity of inter-state trade.

By emphasising the necessity for a clear distinction of legislative competence, the decision upheld fundamental principles of federalism. The Supreme Court highlighted that states must operate within the bounds set by the Constitution, ensuring that state legislation does not infringe upon the central domain, particularly in matters affecting interstate commerce

The Supreme Court’s approach in this judgement ensures fairness and transparency in the tax system, preventing states from imposing taxes on transactions that do not genuinely fall within their legislative competence. The judgement, therefore, upholds the rule of law by ensuring that tax laws are applied justly and equitably. It reinforced the constitutional boundaries of state taxation powers, promoted fairness in the tax system, and facilitated the free flow of inter-state trade.

Aftermath of the judgement

This case of Goodyear India Ltd. vs. State of Haryana, (1990) has been referred to in various subsequent cases by courts in India, to interpret and apply principles related to sales tax and assessment. Here are some notable instances where this case has been cited:

In State of Haryana vs. Haryana Concast Limited (2019), the Punjab and Haryana High Court had referred to this case while discussing the powers of the assessing authority to make best judgement assessments under the Haryana Value Added Tax Act, 2003. The court emphasised the need for fairness and reasonableness in such assessments.

In State of Punjab vs. Shreyans Industries Limited (2016), the Supreme Court referred to the principles laid down in the Goodyear case regarding the discretionary power of tax authorities in making best judgement assessments and the necessity of recording reasons for such assessments.

These showcase the relevance of the Goodyear India Ltd. vs. State of Haryana, (1990) case, in interpreting sales tax laws and the principles of judgement assessment across various jurisdictions in India.

Conclusion

In conclusion, Goodyear India Ltd. vs. State of Haryana (1990) was a significant decision in the trade and commerce industry. It is a crucial milestone in Indian jurisprudence, concerning inter-state trade and taxation. 

This case highlighted the importance of balancing state fiscal autonomy with economic unity and national integration. The Court further concluded that the need for states to ensure these measures do not obstruct the free movement of goods across state borders and thus, the judgement ultimately contributed to the development of taxation and constitutional law on economic matters and set a precedent to guide the courts in any future decisions relating to interstate trade and taxation.

Frequently Asked Questions (FAQs)

What separates a purchase tax and a consignment tax, according to the decision of the Court in this case? 

As per the decision of the Court in this case, a purchase tax is tax that is imposed during the purchase of goods within the state. A consignment tax is imposed when the goods are dispatched outside the state, after being used in the manufacturing process. A manufacturing tax is that which is levied on the movement of goods, rather than on the purchase of goods.

On whom is the purchase tax levied?

Purchase tax is levied on the buyer of goods. It is generally applicable when the buyer is a business, purchasing goods for use, consumption, or manufacture. The tax is imposed at the point of purchase and is in addition to the overall cost incurred by the business for acquiring the goods, impacting their operational expenses.

What is the status of purchase tax after the introduction of GST?

With the introduction of goods and services tax (GST) in India, purchase tax has been combined under this unified tax system. GST aims to consolidate various indirect taxes previously levied by the central and state governments, into a single tax structure.

As a result, purchase tax, along with several other indirect taxes such as VAT, excise duty, and service tax, are not applied separately anymore. Businesses now pay GST on their purchases (input tax), which they can offset against the GST charged on their sales (output tax). This system ensures an efficient flow of credit across the supply chain, promoting efficiency in tax administration.

Who bears the incidence of consignment tax?

Consignment tax, also known as consignment sales tax, is borne by the consignor, that is, the entity that sends goods to a consignee. In consignment transactions, the consignor retains ownership of the goods until they are sold by the consignee or returned. The consignee acts as an agent who sells the goods on behalf of the consignor.

The consignor is responsible for paying the consignment tax, which is usually based on the value of the goods sent to the consignee. This tax is imposed when goods are transferred between branches or entities across different states, ensuring that state-specific tax regulations are complied with.