This Supreme Court judgment struck down a Rajasthan VAT exemption notification for violating Article 304(a) of the Constitution. The Court held that granting a tax exemption exclusively to locally manufactured asbestos goods, without a valid justification discernible from the notification itself, constituted discriminatory protectionism against imported goods and was not a permissible differentiation.
Facts Of The Case:
The appellants, manufacturers of asbestos cement products with manufacturing units outside Rajasthan but sales depots within the state, challenged a Rajasthan Government notification dated 09.03.2007. This notification granted an exemption from Value Added Tax on the sale of asbestos cement sheets and bricks manufactured within Rajasthan, provided they contained 25% or more fly ash by weight. The appellants argued that this created a discriminatory tax barrier, as their identical products, manufactured outside the state but sold within Rajasthan, were subject to the full tax. The core legal issue was whether this local manufacturing-based exemption violated the constitutional guarantee of freedom of trade and commerce under Article 304(a) by discriminating against goods imported from other states. The Rajasthan High Court had dismissed their petitions, relying on a precedent that allowed for limited exemptions to promote local industries. The appellants appealed to the Supreme Court, contending that the exemption was not a justifiable differentiation but an unconstitutional discrimination that harmed interstate trade.
Procedural History:
The procedural history of this case began with the appellants filing writ petitions before the Rajasthan High Court, challenging the constitutional validity of the exemption notification dated 09.03.2007. The High Court, relying on its earlier judgment in M/s. Hyderabad Industries Ltd. vs. State of Rajasthan, dismissed all the writ petitions. Aggrieved by the High Court’s dismissal, the appellants preferred civil appeals before the Supreme Court of India. During the pendency of these appeals, an interim order was passed on 09.05.2008, and the differential tax amount was deposited with the Court. The Supreme Court heard the appeals on merits and, through the present judgment, allowed them, quashing the impugned notification. The Court also directed a subsequent posting to issue directions regarding the refund of the deposited tax amount.
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Court Observation:
The Supreme Court observed that the impugned notification, which granted a tax exemption solely to goods manufactured within Rajasthan, was prima facie discriminatory against imported goods. The Court emphasized that for a differentiation in tax treatment to be valid under Article 304(a), it must not be a product of a “hostile bias” and must be justified by intelligible reasons. It found the notification bereft of any such justification, as its text only cited “public interest” without explaining the objective, and subsequent affidavits could not supplement this deficiency. The Court distinguished the precedent in Video Electronics, noting that the exemption here was not carefully structured for a specific, limited purpose like revitalizing a disturbed state, but was a blanket preference for local manufacturers. Consequently, it held the notification created an unconstitutional fiscal barrier and violated the freedom of interstate trade.
Final Decision & Judgement:
The Supreme Court allowed the appeals and set aside the judgments of the Rajasthan High Court. The Court declared the impugned Notification No. S.O.377 dated 09.03.2007, issued by the State of Rajasthan, as unconstitutional and violative of Article 304(a) of the Constitution of India. Consequently, the notification was quashed. Regarding the tax amounts deposited pursuant to an interim order, the Court directed that the appeals be listed for further directions to ascertain if the deposited amount was collected from customers; if not, the appellants would be entitled to a refund with interest at 6% per annum.
Case Details:
Case Title: M/s. U.P. Asbestos Limited & Ors. vs. State of Rajasthan & Ors. Citation: 2025 INSC 1154 Appeal Number: Civil Appeal Nos. 3577 of 2008, 3578 of 2008, and 2692 of 2013 Date of Judgement: September 24, 2025 Judges/Justice Name: Justice B.V. Nagarathna and Justice K.V. Viswanathan