Legal Review and Analysis of  Ms UP Asbestos Limited vs State of Rajasthan & Others 2025 INSC 1154

1. Name of the Judgment

M/s. U.P. Asbestos Limited vs. State of Rajasthan & Others
Civil Appeal Nos. 3577 of 2008, 3578 of 2008, and 2692 of 2013
Decided on: September 24, 2025
Judges: Justice B.V. Nagarathna and Justice K.V. Viswanathan

Citation:
M/s. U.P. Asbestos Limited vs. State of Rajasthan & Others, (2025) INSC 1154, Civil Appeal Nos. 3577, 3578 of 2008 and 2692 of 2013 (Supreme Court of India)

2. Relevant Laws and Sections

• Constitution of India – Part XIII (Trade, Commerce, and Intercourse within the Territory of India)
  Article 301: Freedom of trade, commerce, and intercourse.
  Article 304(a): Power of a State Legislature to impose a tax on goods imported from other States, provided it does not discriminate between imported and locally manufactured goods.

• Rajasthan Value Added Tax Act, 2003 – Section 8(3) (Power of the State Government to grant exemptions).

3. Basic Details of the Case

• Appellants: Manufacturers of asbestos cement products (e.g., M/s. U.P. Asbestos Ltd., M/s. Everest Industries Ltd.) who had their manufacturing units outside the State of Rajasthan but sold their goods within the state.

• Respondent: State of Rajasthan.

• Subject of Challenge: Notification No. S.O. 377 dated March 9, 2007, issued by the Rajasthan Government.

• Nature of the Notification: It granted a full exemption from Value Added Tax (VAT) on the sale of asbestos cement sheets and bricks manufactured within Rajasthan that contained 25% or more fly ash by weight.

• Forum: Appeal against the common order of the Rajasthan High Court which had dismissed the appellants' writ petitions challenging the notification.

• Supreme Court’s Decision: Allowed the appeals and quashed the impugned notification.

4. Core Principle and In-Depth Legal Analysis

The Central Issue

Whether the State Government's notification, which granted a tax exemption exclusively to goods manufactured within the state, was discriminatory against similar goods imported from other states, thereby violating Article 304(a) of the Constitution and impeding the freedom of trade guaranteed under Article 301.

The Constitutional Framework: Articles 301 and 304(a)

The Court began by elucidating the purpose of Part XIII of the Constitution, which is to forge India into a single economic unit by ensuring the free flow of trade and commerce. Article 301 declares that trade and commerce shall be free throughout the territory of India. Article 304(a) acts as a specific limitation on the state's power to tax, allowing it to tax imported goods only if similar local goods are also taxed, and crucially, without discrimination.

The core question was whether the exemption created a "fiscal barrier" or "tariff wall" that discriminated against goods from other states.

Analysis of Judicial Precedents

The Court conducted a comprehensive review of landmark judgments to distill the legal principles governing such exemptions:

• Firm Mehtab Majid & Co. vs. State of Madras (1963): Held that a sales tax law that discriminates between goods of one state and another offends Article 301 and is only valid if it satisfies Article 304(a).

• Weston Electronics vs. State of Gujarat (1988): Struck down a notification that prescribed a lower tax rate for locally manufactured electronic goods compared to imported ones, terming it discriminatory.

• Video Electronics Pvt. Ltd. vs. State of Punjab (1990): This case created a limited exception. It upheld differential tax rates because the concession was given to a specific class of industries (new units) for a limited period with a valid justification (to boost industrial growth in a disturbed state like Punjab). The Court emphasized that not every differentiation is discrimination; it must involve an element of "intentional and unfavourable bias."

• Shree Mahavir Oil Mills vs. State of J&K (1996): Distinguished Video Electronics and struck down a blanket exemption for local edible oil manufacturers. The Court cautioned that the exception in Video Electronics could not be enlarged to rob Article 304(a) of its substance.

• *Jindal Stainless Ltd. vs. State of Haryana (2017) [9-Judge Bench]:* This was the most critical precedent. It authoritatively held that:
  A non-discriminatory tax simpliciter does not infringe Article 301.
  Article 304(a) only prohibits taxes that are discriminatory in a "hostile" or "protectionist" sense.
  Incentives or exemptions granted to a specified class, for a limited time, in a non-hostile manner to develop backward areas, may not violate Article 304(a).

Application to the Present Case: Why the Notification Failed

Applying the above principles, the Supreme Court found the Rajasthan notification unconstitutional for the following reasons:

• Lack of Justification and Hostile Intent: The notification itself stated no reason beyond "expediency in public interest." The State's attempt to justify it later through an affidavit (citing the utilization of fly ash and industrial promotion) was rejected. The Court relied on Mohinder Singh Gill vs. Chief Election Commissioner (1978), holding that an order must be judged by the reasons mentioned in it and cannot be supplemented later. The absence of a valid, stated justification pointed towards a protectionist intent.

• Not a 'Limited Exception': Unlike the situation in Video Electronics, the exemption here was not carefully tailored. It was a blanket exemption for all local manufacturers meeting the fly-ash criteria, without being restricted to new industries or specific backward areas. Furthermore, the exemption was extended multiple times from 2000 to 2016, making it a long-standing benefit rather than a limited-term incentive.

• Illogical Nexus with Stated Objective: The Court noted a fatal flaw in the notification's design. If the objective was truly to promote the use of fly ash available in Rajasthan, the exemption should have been granted to any manufacturer (inside or outside Rajasthan) who used fly ash sourced from Rajasthan. Instead, the exemption was tied solely to the place of manufacture, not the source of raw material. This clearly demonstrated that the real purpose was to protect local industries, not just promote fly ash usage.

The Court concluded that the notification created a discriminatory advantage for local goods, constituting a protectionist barrier that violated Article 304(a) and impeded the freedom of trade under Article 301.

5. Final Outcome

The Supreme Court allowed the appeals and set aside the impugned judgment of the Rajasthan High Court. It quashed the Rajasthan Government's Notification No. S.O. 377 dated March 9, 2007, as being violative of Article 304(a) of the Constitution.

The Court also directed that the differential tax amount deposited by the appellants with the Court registry be refunded to them with interest at 6% per annum, provided they had not collected it from their customers. The matter was posted for further directions to ascertain this fact.

6. MCQs Based on the Judgment

Q1. According to the Supreme Court's judgment in M/s. U.P. Asbestos Ltd. vs. State of Rajasthan, a tax exemption granted by a state will be constitutionally valid under Article 304(a) if it is?

A. Granted to all goods sold within the state, irrespective of their place of manufacture.
B. A blanket exemption for all local manufacturers to help them compete with larger industries.
C. Carefully structured for a specified class, for a limited period, with a non-protectionist justification.
D. Intended to maximize revenue collection for the state government.

Correct Answer: C
Explanation: The Court reaffirmed the principle from Jindal Stainless Ltd. and Video Electronics that an exemption must be a limited, well-justified measure to promote genuine objectives like industrial development in backward areas, without exhibiting a hostile or protectionist bias against goods from other states.

Q2. The Supreme Court quashed the Rajasthan notification primarily because?

A. The state government did not have the legislative power to issue such a notification.
B. The notification discriminated against imported goods by creating a protectionist barrier without a valid, stated justification.
C. The use of fly ash as a raw material was not an environmentally friendly practice.
D. The appellants were the only companies manufacturing asbestos sheets in India.

Correct Answer: B
Explanation: The core of the judgment is that the exemption was discriminatory. It favored local manufacturers without a logical connection to its stated objective (fly ash use) and lacked the characteristics of a permissible "differentiation" as defined by precedent, making it a protectionist measure violative of Article 304(a).