Rajasthan VAT Exemption For Fly‑ash Asbestos Products Is Quashed For Discrimination Between Local And Inter‑State Goods

A bench of Justice B.V. Nagarathna and Justice K.V. Viswanathan heard appeals by manufacturers challenging a Rajasthan Finance Department notification (S.O.377 dated 09.03.2007) that exempted Value Added Tax on asbestos cement sheets and bricks “having contents of fly ash twenty five percent or more by weight” manufactured in Rajasthan. The appeals questioned whether the notification discriminated against identical goods manufactured outside the State and thus violated Article 304(a) of the Constitution.

The Supreme Court allowed the appeals and set aside the notification, holding that the measure operated as discriminatory fiscal treatment of imported goods vis‑à‑vis locally manufactured goods and therefore offended Article 304(a). The Court reviewed the line of precedents from Atiabari Tea, Automobile Transport, Video Electronics, Shree Mahavir Oil Mills, Jaiprakash Associates and the nine‑Judge Jindal Stainless decision, and applied the tests laid down for distinguishing lawful differentiation from unconstitutional discrimination. The Court, in its reasoning, observed: Background The dispute arose from a sequence of Rajasthan sales/VAT notifications beginning in 2000 and continued through 2005–2007 that granted tax exemption to asbestos cement sheets and bricks containing at least 25% fly ash, subject to conditions (entry in dealer registration, commencement of commercial production by a cut‑off date, and temporal limits). The appellants — makers/distributors of fly‑ash asbestos products with manufacturing outside Rajasthan but sales depots inside the State — challenged the 09.03.2007 notification (continued under the VAT regime) as discriminatory because identical products manufactured outside Rajasthan did not receive the exemption. The Rajasthan High Court dismissed writ petitions relying on its earlier decision (Hyderabad Industries) and Video Electronics, treating the exemption as a permissible, time‑limited incentive to industry. The State later amended the notification to allow maximum exemption for ten years from first production (but no later than 23.01.2016). The Supreme Court examined whether the exemption amounted to permissible differentiation (incentives to a defined class for a limited period) or to forbidden discrimination under Article 304(a). Applying the tests in Jindal Stainless and Jaiprakash Associates, the Court found the notification lacked objective justification in its text, did not require use of fly ash sourced from Rajasthan, and thus treated locally manufactured goods more favourably than identical inter‑state goods. It concluded the exemption violated Article 304(a) and quashed the impugned notification. The Court directed parties to address the effect of an interim deposit: if the differential tax paid to the State was not passed on to customers, appellants could claim a refund with interest at 6% per annum from date of deposit; the appeals were posted for further directions. No costs were imposed.

Case Details: Case No.: CIVIL APPEAL NO.3577 OF 2008; CIVIL APPEAL NO.3578 OF 2008; CIVIL APPEAL NO.2692 OF 2013 Case Title: M/s. U.P. Asbestos Ltd. v. State of Rajasthan & Others; M/s. Everest Industries Ltd. v. State of Rajasthan & Others Appearances: For the Petitioner(s): Sri Nikhil Goel, Senior Counsel; Smt. Kavita Jha, Senior Counsel For the Respondent(s): Dr. Manish Singhvi, Senior Counsel (for State of Rajasthan)