November 29, 2021

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Understanding constitutional provisions with respect to trade and commerce within India through case laws

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This article has been written by Oishika Banerji of Amity Law School, Kolkata. This article deals with an understanding of Articles 301-307 of the Indian Constitution using case laws. 

Table of Contents

Articles 301-307 of the Constitution of India, 1950 lay down the provisions for freedom of trade, commerce, and intercourse, which draws its roots from British India. Being influenced by Section 92 of the Australian Constitution, the framers of the Indian Constitution adopted the same to incorporate Articles 301-307, which stand corresponding to Article 19 (1) (g) of the latter. Article 301 of the Indian Constitution walks in line with the fundamental right to carry any occupation, trade, or business, as it provides that, “subject to the other provisions of this Part, trade, commerce and intercourse, throughout the territory, shall be free”. Before delving into the articles in specific, it is important to understand the meaning of the terms “trade”, “commerce” and “intercourse”. Chief Justice Marshall’s view in Gibbons v. Ogden (1824) was that although commerce is traffic, it is majorly intercourse. That is why, with the addition of the term “intercourse” under Article 301, the ambit of the same has widened. With the observation of the Supreme Court of India in the case of State of Bombay v. R.M.D.C (1957), which stated that gambling cannot be considered as a trade, it has been made clear that the terms “trade”, “commerce” and “intercourse” include only lawful trading activities. This article discusses a few case laws that will help in better understanding Articles 301-307 of the Constitution. 

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Part XIII of the Constitution of India encumbers Articles 301-307 dealing with trade, commerce and intercourse within the territory of India. The articles have been listed hereunder;

  1. Article 301: Freedom of trade, commerce and intercourse.
  2. Article 302: Power of Parliament to impose restrictions on trade, commerce and intercourse.
  3. Article 303: Restrictions on the legislative powers of the Union and of the States concerning trade and commerce.
  4. Article 304: Restrictions on trade, commerce and intercourse among States.
  5. Article 305: Saving of existing laws and laws providing for State monopolies.
  6. Article 307: Appointment of authority for carrying out the purposes of Articles 301 to 304. 

Fateh Chand v. State of Maharashtra (1977)

The Supreme Court of India while deciding the case of Fatehchand v. State of Maharashtra (1977) took into account whether the profession of money-lending could be considered as a trade or not. According to the Court, money-lending can be considered an ancillary to commercial activity and benign in its effects, but it can also be ghastly when it facilitates no flow of trade, no movement of commerce, no promotion of intercourse, no servicing of the business and instead merely stagnates rural economies, strangles the borrowing community, and turns malignant in its repercussions. The former is undoubtedly commercial, but the latter, according to the law, is not. 

G.K. Krishnan v. State of Tamil Nadu (1975)

The issue before the Supreme Court of India in the well-known case of G.K. Krishnan v. State of Tamil Nadu (1975) was whether the freedom of trade, commerce and intercourse spread over Articles 301 to 307 of the Indian Constitution provides absolute freedom or is subjected to reasonable restrictions. The Apex Court clarified that the word “free” under Article 301 of the Constitution does not signify freedom from regulation. There is a contrast between regulations that restrict people’s freedom to engage in the activities that make up commerce and laws that impose rules of proper behaviour or other limitations on those who engage in them. Regulation is the term used to describe this distinction. The true solution in any given case could be discovered by distinguishing between features of the transaction or activity that classified it as trade, commerce, or intercourse, and those features that, while invariably found in some form or another in the transaction or action, are not necessary to the conception. The difference between the core features of trade and commerce and the episodes of the transaction, which do not always give it the character of trade and commerce, is important. The Apex Court went further to state that a tax that is compensating or regulatory cannot be used to limit the freedom of trade or commerce. A compensating tax is imposed based on the nature and degree of road use, provided the profits are used to repair, maintain, and improve important roadways, and the collecting of the tax causes no significant disruption to traffic. The requirement for ensuring freedom of movement by road is that no financial burden be imposed.

State of Madras v. Nataraja Mudaliar (1969)

The validity of the Central Sales Tax Act, 1956 was challenged for violation of Article 303 (1) of the Indian Constitution, in the present case of State of Madras v. Nataraja Mudaliar (1969), which appeared before the Supreme Court of India. The observations that were made by the Apex Court in the present case have been listed hereunder;

  1. Restrictions or obstructions that directly and immediately hinder or hamper the free flow of trade, commerce, and intercourse, whether interstate or intrastate, are prohibited under Article 301 and may be treated as void, subject to other rules. A tax may, in some situations, directly and instantly hinder or obstruct the flow of trade, but not every tax imposed does so. 
  2. The phrase “between one State and another” does not indicate that the power granted by Article 302 can only be used to regulate trade between two states as separate entities. The Article clearly states that limits may be imposed not only between states but also within India’s borders. There is also little dispute that the exercise of taxing power is typically regarded as being in the public interest. 
  3. Within the sense of Article 303, the Central Sales Tax Act does not discriminate between states. The Act has been enacted solely to impose a tax that is to be collected and retained by the state. Neither does it amount to law, thereby authorizing giving preference to one state over another, nor does it make or authorise the making of any discrimination between one state and another solely because of different tax rates.
  4. No discrimination is practised by leaving it to the states to levy sales tax in respect of a commodity on intra- state transactions. Further, no discrimination can be deemed to be practised by authorizing the state from which the movement of goods commences to levy Central Sales Tax at rates prevailing in the state, subject to certain limitations.
  5. The flow of trade is influenced by several factors, including the source of supply, the location of consumption, the existence of trade channels, freight rates, trading facilities, and the availability of efficient transportation and other trade-related services.

Atiabari Tea Co. Ltd. v State of Assam (1961)

The landmark case of Atiabari Tea Co. Ltd. v State of Assam (1961) that appeared before the Supreme Court of India is related to the interpretation of Article 301 of the Constitution of India, which enacts a general rule that trade, commerce and intercourse throughout the territory of India shall be free. In this case, the state of Assam’s tax on tea carriage by road or inland waterways was declared unconstitutional because “the transportation or movement of goods is taxed solely on the basis that the goods are thus carried or transported,” and thus “directly affects the freedom of trade as contemplated by Article 301.” 

The Supreme Court held that the freedom granted by Article 301 would be illusory if taxation could be used to block, obstruct, or impede the movement, transit, or carrying of commodities without meeting the standards of Articles 302 to 304. The Court did not take into account the amount of tax burden, which was far from exorbitant. The tax was found to violate Article 301 simply because it was imposed on the “movement” of commodities from one location to another. The viewpoint advocated in Atiabari was bound to have a significant negative impact on state financial autonomy. It would have eliminated their taxing power under List II (Articles 56 and 57) of the Indian Constitution.

Mehtab Majid v. State of Madras (1963)

The Supreme Court of India took into notice a petition under Article 32 of the Constitution that was filed by the petitioners, who were dealers in hides and skins in the State of Madras, in the present case of Mehtab Majid v. State of Madras (1963). The petitioners’ main argument was that, under Rule 16 of the Madras General Sales Tax Rules, tanned hides and skins imported from outside the State were subject to a higher rate of tax than hides and skins tanned and sold within the State, and therefore such discriminatory taxation violated Article 304 (a) of the Constitution. The respondents’ in return had contended that the impugned rule was not a law made by the State legislature because it does not impose the tax but fixes the single point at which the tax was to be imposed by Sections 3 and 5 of the Act. Sales tax does not fall within the purview of Article 304 (a) because it was not a tax on the importation of goods at the point of entry. The respondents’ went on to say that the contested rule was not developed with the origins of the items in mind. 

After hearing the parties to the case, the Apex Court observed that it has now been well established that taxation laws could be a restriction on trade, commerce, and intercourse if they obstruct the flow of trade. Provided they are neither compensatory taxes nor regulating measures. The Court further stated that sales tax of the type in question could not be described as a measure of regulating any trade or a compensatory tax levied for the use of trading facilities. Sales tax that has the effect of discriminating between goods from one state with that of the other may obstruct the free flow of trade. In such cases, it will violate Article 301 and will be valid only if it complies with Article 304 (a). The Court clarified that Article 304 (a) authorises a state’s legislature to levy taxes on commodities imported from other states, and does not accept the argument that the tax must be imposed at the point of entry.

Jindal Stainless Ltd. v State of Haryana (2006)

The Supreme Court of India determined the nature and character of compensatory tax and its parameters in the context of Article 301, in the present case of Jindal Stainless Ltd. v State of Haryana (2006). It also examined the source from which the concept of compensatory tax was judicially derived. The Supreme Court has observed that payout for regulation differs from revenue payment. If a taxing or non-taxing law chooses an activity as the criterion for its operation, such as trade and commerce movement, and the consequence of the law’s operation was to impede the activity, the law constitutes a limitation under Article 301. The tax is regulatory.  However, if the law established has to impose discipline or conduct under which the trade must operate, or the payment is for the regulation of conditions or occurrences of trade or production, it would not be just regulatory by nature. This was how the concept of compensation tax is reconciled with the framework of Articles 301, 302, and 304.

Kalyani Stores v. the State of Orissa (1966)

The Supreme Court of India was hearing a petition under Article 226 of the Indian Constitution that challenged the imposition of excise duty on ‘foreign liquor’ imported into the state in the case of Kalyani Stores v. State of Orissa (1966). The excise duty had been levied at Rs. 40/- per L.P. Gallon until March 31, 1961, under a notification issued in 1937 under Section 27 of the Bihar and Orissa Excise Act, 1915. It was increased w.e.f. April 1, 1961, by a fresh notification. On behalf of the appellant, it was argued that because no foreign liquor was manufactured within the state, and thus no excise duty was levied on any locally manufactured “foreign liquor,” no countervailing duty could be imposed on liquor imported from outside the state, as this would violate Articles 301, 303, and 304 of the Constitution.

The Apex Court observed that a restriction on the freedom of trade, commerce, and intercourse throughout India, as indicated by Article 301, can only be justified if it falls under Article 304. The exercise of power under Article 304(a) can only be effective if there is no discrimination between the tax or duty imposed on goods imported from other countries and the tax or duty levied on identical items manufactured or produced in that country. Article 304 protection was not available in this case since no foreign liquor was produced or made within the state.

Automobile Transport (Rajasthan) Ltd. v. the State of Rajasthan (1962)

The respondents, in the present case of Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan (1962), had claimed that taxation to raise revenue for maintaining roads, was not covered by Article 301. The Supreme Court of India had observed that the Rajasthan Motor Vehicles Taxation Act of 1951 did not breach the terms of Article 301 of the Indian Constitution, and the taxes imposed under it were compensatory or regulatory taxes that did not obstruct the freedom of trade, commerce, and intercourse guaranteed by that Article. As a result, such taxes were legal. The Court observed that Article 301’s concept of freedom of trade, commerce, and intercourse must be understood in the context of ordinary society and as part of a Constitution that envisaged distribution of powers between the States and the Union; if so understood, the concept must acknowledge the need and legitimacy of some degree of regulatory control, whether by the Union or the States. Regulatory or compensatory tariffs imposed on the use of commercial facilities did not impede trade, commerce, or intercourse, but rather facilitated it, and were thus exempt from the freedom guaranteed by Article 301.

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Khyerbari Tea Co. v. the State of Assam (1964)

In the present case of Khyerbari Tea Co. v. State of Assam (1964), the petitioner challenged the constitutional validity of the Assam Taxation (on Goods carried by Road or on Inland Waterways) Act, 1961. The Apex Court had observed that a statute adopted under Article 304(b) with the President’s prior approval does not necessarily deprive the Court of its power to evaluate whether the restrictions imposed are reasonable and in the public interest. In the present case, the observation made in the Atiabari Tea Company case was regarded not to be a conclusive one. There was a presumption in favour of a statute’s constitutionality, and if it was proven that it infringes the fundamental rights under Article 19(1), then the burden of proof would have shifted on the State. The State was to then defend its validity under Article 19(1) (6). But in the present case, the onus under Article 304(b) was still more in favour of the citizen as it purports to restrict the freedom of trade.

Trade and commerce play a significant role in the development of a State. While on one hand, the Constitution of India guarantees fundamental freedom of occupation, trade and commerce to only the citizens under Article 19 (1)(g), under Article 301, the Constitution vests the right to freedom of trade, commerce and intercourse to all persons within the Indian territory. This tells us the importance of trade and commerce for India as a democratic nation. The case laws act as an additional guide for the articles of the Constitution dealing specifically with trade, commerce and intercourse. 

  1. https://www.lawcolumn.in/freedom-of-trade-commerce-and-intercourse-article-301-307/
  2. http://www.legalservicesindia.com/article/2009/Trade,-Commerce-and-Intercourse.html
  3. https://blog.ipleaders.in/freedom-trade-commerce-intercourse-articles-301-307-indian-constitution/#:~:text=The%20 freedom%20of%20 trade%2C%20 commerce,which%20trade%20is%20subjected%20to.
  4. http://epgp.inflibnet.ac.in/epgpdata/uploads/epgp_content/S000020LA/P001305/M010083/ET/1513748847etext.pdf

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