UNION OF INDIA v. STATE OF U P — 1998 DIGILAW 986 (ALL)

RAVI S. DHAVAN, J. These large number of the writ petitions raise issues in public law. The issue has been precipitated by the State of U. P. in taxing the Union of India and, thus, giving rise to the main question whether the property of Union of India is exempt from State taxation ? The State of U. P. does not accept the proposition in the affirmative. In fact, it has taken a stand that it can tax the Union of India. In the circumstances, when the case began a preliminary issue was raised that this Court cannot adjudicate upon the matter and that the Union of India should be relegated to the alternative remedies under the State enactment. The State enactment is the U. P. Trade Tax Act, 1948 before amendments in 1994, it was known as the U. P. Sales Tax Act, 1948. The reference hereinafter to this enactment will be as "the Act". 2. The facts are simple. The Government of India, its Department of Telecommunication, has been assumed to be in trade and business by the Trade Tax Department, and the gross revenues of the Telecommunication Department collected from subscribers, using the telephone facility, have been subjected to trade tax by the State of U. P. Prior to the Constitution being enacted, the Sales Tax Department did not tax the Government of India on the revenues collected for providing telephone services. On these facts, there is no issue. About the year 1988, the Department of Trade Tax, the Ministry of Institutional Finance, Uttar Pradesh, came to the conclusion that the Union of India, the Department of Telecommunication, on its gross turnover had not filed a return which it should have. It was presumed that, in this context, the Union of India is a "dealer" in business, and as a dealer liable to pay the trade tax. The District Manager (Telecommunication), of the districts concerned, was held as liable to pay tax with an obligation to file return under section 7 of the Act. But, as no return had been filed by the Union of India, its Department of Telecommunication, the assessing authority took recourse to the provisions of this section under sub-clause (3), that as no return was submitted by the "dealer" within the prescribed period, then, on the principle of best judgment tax was determined. But, as no return had been filed by the Union of India, its Department of Telecommunication, the assessing authority took recourse to the provisions of this section under sub-clause (3), that as no return was submitted by the "dealer" within the prescribed period, then, on the principle of best judgment tax was determined. The Union of India, on the assumption that it was a dealer who had not filed return was assessed to pay trade tax. The assessments were ex parte (Writ Petitions Nos. 347, 975, 1186 and 1680 of 1993, 601, 738 and 1081 of 1994, 115 and 116 of 1995 and 262, 263 and 264 of 1998) and, in one case, the Union of India filed an appeal against the ex parte order. The appeal was dismissed (Writ Petition No. 1982 of 1994 ). 3. At the time of hearing a preliminary objection was raised by learned Standing Counsel, U. P. , to the effect, that all these petitions ought to be dismissed on the ground of an alternate remedy so provided under the Act. It was also contended that in one matter (Writ Petition No. 802 of 1995 : Sub-Divisional Officer, Telegraph, Basti v. State of Uttar Pradesh decided on July 10, 1995), a writ petition was filed by the Union of India but it was dismissed in limine on the ground that against the assessment order, the Union of India on the trade tax determined may take recourse to an appeal under the Act. It is accepted by the Standing Counsel that no notice was issued on that writ petitions nor pleadings were exchanged, unlike the present cases. The circumstances were, thus, different. In the present cases, which have remained pending for quite sometime, parties, that is to say, the Union of India and the State of U. P. have exchanged pleadings and the record of the cases are ready for hearing. The circumstances were, thus, different. In the present cases, which have remained pending for quite sometime, parties, that is to say, the Union of India and the State of U. P. have exchanged pleadings and the record of the cases are ready for hearing. At this stage, it would be appropriate for the court to refer to a very recent judgment of the Supreme Court (Paradip Port Trust v. Sales Tax Officer [1999] 114 STC 178; (1998) 4 JT 483 ), where on issues raised between the competence of a State to impose sales tax and on the High Court dismissing the writ petitions in limine on the ground of alternate remedy, the Supreme Court, in no uncertain terms, observed : "we are of the view that the High Court should have entertained the writ petitions and should have considered the said question instead of requiring the appellant to avail the remedy of appeal under the Sales Tax Act". After allowing the appeal and setting aside the judgment of the High Court, the matters were remitted to the High Court for consideration. In the circumstances, any petition which may have been dismissed in limine without issue of notice, is on a very different footing as there is no exchange of pleadings and the circumstances are not such which can be said that the petition has been considered, heard, pleadings exchanged and decided to enter judgment. With pleadings exchanged, it would only be appropriate that such issue of conflict between the Federal and the State Government ought to be decided on merits without delay. In similar circumstances, a decision of the Supreme Court required it so. 4. At the outset when the hearing began, the court has asked learned Standing Counsel for the State of U. P. to take instructions for a statement whether, at any time prior to coming of the Constitution, such tax, i. e. , sales tax or trade tax as it is called today, was levied on the telephone department assessing turnovers or the revenues or fee collected in providing telephone facilities to subscribers. The answer, upon instructions, was in the negative. This is the first time since the Republic that the sales or trade tax is being imposed by a Provincial Government, i. e. , the State of U. P. on the Government of India. The answer, upon instructions, was in the negative. This is the first time since the Republic that the sales or trade tax is being imposed by a Provincial Government, i. e. , the State of U. P. on the Government of India. The simple question is, does the Constitution of India permit this ? 5. As the facts are as brief as have been narrated, the contention of the State of U. P. as a justification for taxing the Union of India needs to be reiterated. It is contended that the Government of India is a "dealer" within the meaning of the Act and, thus, it was obliged to file a return which it did not do. Consequently, it was taxed on the gross revenues earned in each telecommunication district. It is further contended that imposition of tax has been based on the newly amended section, permitting the State of U. P. to tax the right to use any goods for any purpose for cash, deferred payment or other valuable consideration or transfer of property. This is followed by a submission that in so far as the expression "dealer" is concerned, the Act clearly mentions that it includes "a Government" which, in the course of its business or otherwise, in effect, sells, supplies or distributes goods directly for cash, deferred payment, remuneration or other valuable consideration. This is the basis of the argument on which the Government of India has been subjected to tax. This is justified by the fact that the State of U. P. is permitted to "tax on the sale and purchase of goods" and that this is to be understood with its various meanings and cognate expressions as under clause (29a) of article 366 of the Constitution of India, the Act has been amended with the insertion of section 3-F. 6. These, thus, are the short facts and submissions on which the State of U. P. , recently, resorted to tax the Government of India, its Department of Telecommunication. If each telecommunication district under the administrative charge of the District Manager (Telecommunication) had been assessed to and levied similar tax, as has been done in some of the cases, the sovereign functions of the Union in providing public utility services, under an Act of Parliament, would be subject to tax. If each telecommunication district under the administrative charge of the District Manager (Telecommunication) had been assessed to and levied similar tax, as has been done in some of the cases, the sovereign functions of the Union in providing public utility services, under an Act of Parliament, would be subject to tax. It is on record that the exercise to tax the Government of India was not taken to its logical conclusion as would have been done in the case of an ordinary trader who is obliged to file a trade tax return and consequently, pay a tax which if not paid would be realised by distress and attachment of the properties or the estate of the Union; in the present case, the Trader Tax Department of the State made an assessment on the Union of India and then fell short of the exercise not realising the tax by execution proceedings. No answer could be given to the court why this exercise of realising the trade tax by attachment and coercive process was not taken to its logical conclusion. The hesitation of putting the Union under distress is the answer to the issues. 7. The merits of the matter will be considered on two aspects - (1) whether the Government of India could be a trade tax assessee under the Act, and (2) can a Federal Government, like the Government of India, be taxed by a Provincial Government and whether the Constitution of India permits such an exercise ? 8. These are the only two broad issues in the present writ petitions and on this, at least, in so far as the issues are concerned, there are no issues between the Standing Counsel of the Union of India or the State of U. P. The State Counsel says that the State of U. P. can tax the Union. Counsel for the Union says that this cannot happen. 9. On the first aspect, whether the Government of India could be Subjected to trade tax under the Act, the contention on behalf of the State of U. P. is that the Government of India is a "dealer". It is contended that the expression "dealer" has been defined in section 2 (c) of the Act and the Act itself mentions that a Government, also, can be a dealer. It is contended that the expression "dealer" has been defined in section 2 (c) of the Act and the Act itself mentions that a Government, also, can be a dealer. The expression "dealer" and the reference to the Government being a dealer, as prescribed under the Act, says, that "dealer. . . . . . . . . . . includes - (iv) a Government which, whether in the course of business or otherwise buys, sells, supplies or distributes goods, directly or otherwise for cash or for deferred payment or for commission, remuneration or other valuable consideration. " 10. Thereafter, it is contended that as the Government of India is treated as a dealer indulging in the business of providing telephone facilities to subscribers, the Government of India was obliged to file a return under the Act and as no return was forthcoming, it left the assessing authority with no option but to make an assessment on a best judgment basis. To explain this on record, the assessment orders are referred to. The assessment orders have been passed under section 7 of the Act. As the trade tax return was not filed, it is contended, under sub-section (3) of section 7 of the Act, the assessing authority proceeded to assess the Union, its Department of Telecommunications, of fees and consideration collected from its subscribers on its turnover. The tax was thus computed. Sub-section (3) of section 7 of the Act, reads as under : " If no return is submitted by the dealer under sub-section (1) within the period prescribed in that behalf or if the return submitted by him appears to the assessing authority to be incorrect or incomplete, the assessing authority shall, after making such inquiry as he considers necessary, determine the turnover of the dealer to the best of his judgment and assess the tax on the basis thereof : Provided that before taking action under this sub-section the dealer shall be given a reasonable opportunity of proving the correctness and completeness of any return submitted by him. " 11. " 11. The basis of the assessment is explained on the newly added (substituted by the U. P. Act No. XXXI of 1995) section 3-F by drawing the attention of the court to clauses (a) and (b) of sub-section (1) which, in effect, required an assessee to pay a tax on the turnover on transfer of any right to use any goods for any purpose for cash, deferred payment, or other valuable consideration or transfer of property of any goods. 12. The submission continues to explain that the section was amended to incorporate the definition clause in clause (29a) of article 366 of the Constitution of India, which provides for "tax on the sale and purchase of the goods" and like synonymous situations. A nexus is being explained to the court between clause (29a) of article 366 of the Constitution of India and the amendment incorporated in section 3-F of the Act. 13. In so far as reference to article 366 is concerned, the court is dealing with it straightaway. Article 366 is not providing a legislative field, as is commonly understood, and was so submitted in the present case. Article 366 of the Constitution of India is contained in Part XIX of the Constitution of India under the Chapter titled "miscellaneous". Of certain expressions, as are used in the Constitution, or which need to be clarified as having been used in a statute, like any statute contains a section for definitions, article 366 is that section of the Constitution which assigns meanings to expressions. Of circumstances and situations which may need to be explained the expression, "a tax on the sale and purchase of the goods", which includes six other variations, has also been explained. There is neither any issue nor doubt that the phrase "a tax on sale and purchase of goods" includes the themes enumerated in sub-clauses (a) to (f) of clause (29a) of article 366. For instance, it was contended that sub-clause (d) mentions that a tax may be provided on a transfer of the right to use any goods for any purpose for cash, deferred payment or other valuable consideration, so be it. This only means that the tax on the sale and purchase of the goods has also been explained as tax on the turnover of the right to use goods for any purpose on consideration of payment made or payment deferred. This only means that the tax on the sale and purchase of the goods has also been explained as tax on the turnover of the right to use goods for any purpose on consideration of payment made or payment deferred. This article does not provide a legislative field. It only explains situations or expressions. For instance, though not relevant, in the context of this case but it does help to see the whole of article 366, no matter what the expression "anglo Indian" may mean, but, in so far as the expression "anglo Indian" is referred to in the Constitution, or any other law, its meaning will be as provided in article 366 and no other meaning. This reference to article 366 would only explain like expressions used in other enactments. For the purpose of taking recourse to explaining like expressions under section 3-F of the Act, certainly, the meaning of the expression "tax on the sale and purchase of the goods", will be as is referred to in the Constitution, and no other. But, this would not help to resolve the issue before the court : Whether a Federal Government can be taxed by a Provincial or State Government ? 14. The submissions as made by the State of U. P. and as pleaded in its counter-affidavit initially have been taken note of. During the course of hearing counter-affidavits were filed in certain other writ petitions. The pleadings in these counter-affidavits were different than made earlier; these counter-affidavits are the second set. 15. While examining the issues in these cases of conflict between the Government of India and the State of U. P. , the court cannot help recording academic guidance available in settled law in reported cases as precedents. But this matter was taken very lightly by the counsel for the State of U. P. All that was required was study on the subject, the scheme of the Constitution and guidelines provided by decided cases, of recently, by the Supreme Court, also. 16. The fallacy which the assessing authority fell into was to take recourse to making an assessment under the assumption that the Government of India was a dealer liable to pay trade tax under the Act. 16. The fallacy which the assessing authority fell into was to take recourse to making an assessment under the assumption that the Government of India was a dealer liable to pay trade tax under the Act. The presumption that a return was to be filed by the Government of India as a "dealer" and on its default, an assessment under sub-section (3) of section 7, the premises itself is misplaced. Is the Government of India a "dealer" within the meaning of the Act ? This is the question which the assessing authority was obliged to answer first ? This he did not do. But, straightaway proceeded to assess the Government of India, as if it was a "dealer" in business. The assessing authority proceeded to and determined the turnover of the Government of India as a "dealer" on the gross receipts on the fee from telephone subscribers, and subjected these receipts to tax. This was an error. At the expense of repetition, the basic question before the assessing authority was, is the Government of India a "dealer" ? 17. "dealer" is an expression used under section 7. It is correct that sub-section (1) of section 7 stipulates that every dealer who is liable to pay tax under the Act, shall submit a return of his turnover. The assumption was that the Government of India was a dealer and was obliged to file a return. It was on this assumption that in the absence of a return assessments were made, ex parte or otherwise, on the Department of Telecommunication. It appears that the simplest of matters are easily forgotten. The U. P. Trade Tax Act has been enacted for the purpose for which its preamble sets out its field. It says : "an Act to provide for the levy of a tax on the sale or purchase of goods in Uttar Pradesh". In the present case, it is not the case of any party that the Government of India was purchasing goods. No sale of goods has been recorded nor anything has been shown to the court. The action to assess is being justified on the ground that the Government of India is doing "business" in Uttar Pradesh and that the Government of India is a "dealer". In this regard, a reference was made to the expression "dealer" and "a Government" in the definition clause of the Act. The action to assess is being justified on the ground that the Government of India is doing "business" in Uttar Pradesh and that the Government of India is a "dealer". In this regard, a reference was made to the expression "dealer" and "a Government" in the definition clause of the Act. Both these expressions, as they occur and as were referred to, are reproduced : " (c) "dealer" means. . . . . . . . . . . . and includes - . . . . . . . . . . . . . . . . . . . . (iv) a Government which, whether in the course of business or otherwise buys, sells, supplies or distributes goods, directly or otherwise for cash or for deferred payment or for commission, remuneration or other valuable consideration; . . . . . . . . . . . . . . . . . . . " 18. And, this logic is connected with the expression under section 3-F of the Act, and argued that as the Government of India has transferred the right to use the telephone facility for cash, deferred payment or other valuable consideration, it amounts to transfer of property in goods. Consequently, it is pleaded that a tax, i. e. , trade tax, can legitimately be charged on the Government of India under section 3-F. It is correct that in the definition clause the expression "dealer" does mean a person who carries on, in Uttar Pradesh, business as may be understood in its various expressions contained in the definition clause. 19. It is also correct that the expression "dealer" may mean a Government in the course of business. In the Act and from it, reference to expressions like, "dealer", "a Government" as contained in the definition clause, or the expressions "transfer of right to use any goods" or "transfer of property in goods" as contained under section 3-F of the Act, have been torn out of their context. But, in the present case, there is neither, a sale nor a purchase, so as to attract the expression "dealer" to co-relate it with "a Government". But, in the present case, there is neither, a sale nor a purchase, so as to attract the expression "dealer" to co-relate it with "a Government". Closer home, if the argument be that a dealer may do a business of transfer of any right to use any goods to attract section 3-F of the Act, this aspect is contained in sub-clause (viii) of clause (c) of the definition clause to explain the expression "dealer" in its various meanings inasmuch as the expression "dealer" may mean a Government referred to in sub-clause (iv ). It also means every person who carries on business of transfer of the right to use any goods for any purpose for cash, or deferred payment. 20. The reference to expression "a Government" is excluded as there has been no sale or purchase in the context of the matter. If it is accepted that these matters relate to business of transfer of any right to use goods for cash, deferred payment, then such business is related to every person as is referred to in sub-clause (viii ). Sub-clause (viii) of clause (c) of section 2 of the Act reads as under : " (viii) every person who carries on business of transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration : Provided that a person who sells agricultural or horticultural produce grown by himself or grown on any land in which he has an interest, whether as an owner, usufructuary mortgagee, tenant, or otherwise, or who sells poultry or dairy products from fowls or animals kept by him shall not, in respect of such goods be treated as a dealer. " 21. Thus, a Government in business is not in the context of the case. The expression "person" has been explained in the General Clauses Act, 1897. A person may mean an individual and the reference to a juristic person may mean a company or association or body of individuals, whether incorporated or not. The word "person" as defined in the General Clauses Act, 1897, reads thus : " (42) person shall include any company or association or body of individuals, whether incorporated or not. " 22. For the purpose of interpretation of an enactment and as a step in aid, the General Clauses Act has to be resorted to. The word "person" as defined in the General Clauses Act, 1897, reads thus : " (42) person shall include any company or association or body of individuals, whether incorporated or not. " 22. For the purpose of interpretation of an enactment and as a step in aid, the General Clauses Act has to be resorted to. In the context of the Act, conspicuous by its absence where "person" is referred to reference to Government cannot be assumed. While a Government may be in business, the circumstance is specific as provided in the Act. But the business which is being attributed to the Union of India is, in the context of any person carrying on any business of transfer of right to use any goods the analogy is misplaced. In this context, the expression "person" would imply sans "a Government". Thus, while a dealer may be a Government which buys or sells, such is not the case in the matters before the court. 23. In so far as section 3-F is concerned, the text of this section was lost sight of. Section 3-F does not stand in isolation as has been pleaded on behalf of the State of U. P. , while attempting to justify the action to tax the Federal Government in the Union. The Union of India, its Department of Telecommunication, has been taxed as if it is a dealer which has (a) transferred the right to use any goods, or (b) transferred the property in goods. It appears that the State of U. P. has forgotten the context of section 3-F. Only that dealer will be taxed on the transfer of property in goods which are qualified as having been involved in the execution of a works contract. It appears that the State of U. P. has forgotten the context of section 3-F. Only that dealer will be taxed on the transfer of property in goods which are qualified as having been involved in the execution of a works contract. For this purpose, the sub-section (1) of section 3-F, as it stands, needs to be noticed : " 3-F. Tax on the right to use any goods or goods involved in the execution of works contract.- (1) Notwithstanding anything contained in section 3-A or section 3-AAA or section 3-D, but subject to the provisions of sections 14 and 15 of the Central Sales Tax Act, 1956, every dealer shall, for each assessment year, pay a tax on the net turnover of - (a) transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration; or (b) transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract; at such rate not exceeding fifteen per cent as the State Government may, by notification, declare and different rates may be declared for different goods or different classes of dealers. " 24. The justification of the State of U. P. to tax the Union of India as a dealer which has indulged in the transfer of any right to use any goods or has transferred the property in goods, is not the end of the matter. This section is very clear when it says that it attracts the net turnover of right to use any goods or the goods involved in execution of works contract. The heading of the section itself says so. The context of goods in use in the execution of a works contract cannot be eliminated in assessing tax in reference to the context. Further, even in sub-section (1), the aspect of transfer of property in goods is in the context of execution of a works contract. Section 3-F cannot be seen in isolation. In the present, it is nobodys case, not even of the assessing authority, that there was a works contract which involved the Government of India in the execution of it by the Department of Telecommunication. The right to use the telephone is not consequential to the execution of a works contract, nor incidental to it. In the present, it is nobodys case, not even of the assessing authority, that there was a works contract which involved the Government of India in the execution of it by the Department of Telecommunication. The right to use the telephone is not consequential to the execution of a works contract, nor incidental to it. The reference to section 3-F for the purpose for which the Government of India was taxed, was itself out of context. 25. Now that this Court is considering the pleadings of the State of U. P. in having misapplied, its powers to tax the Government of India, it appears that its functionaries did not even apply its mind to the fact that the tax which was being imposed was beyond its legislative field. The Trade Tax Department was charging trade tax on the Department of Telecommunication which takes its authority from an Act of Parliament, known as the Indian Telegraph Act, 1885. While making the assessment, or, for that matter, answering the writ petition or making submissions before the High Court, no in-depth study has been made on the delicacy of taxing the Government of India by a Provincial Government. At one stage, the court had made it clear, in no uncertain terms, to learned Standing Counsel for the State that this matter needs re-examination as the Constitution of India does not envisage taxation by the State of U. P. on the Government of India. The only answer received from the Standing Counsel was that he was under instructions to oppose the writ petition. This, then was the end of the matter that the State of U. P. was not even prepared, nor examined that the conflict created is avoided by the Constitution of India. 26. Coming straight to the circumstances of these cases, the State of U. P. forgot that the legislative field is a subject for the Federal Government; of Parliament. The services utilised and as provided by the Department of Telephones has been made the subject of taxation by the Finance Act, 1994. Chapter V of the Finance Act, 1994 has been amended by the Finance Act, 1997. A new Chapter was inserted, entitled "service Tax". Service tax was to be imposed by the modalities indicated under the definition clause section 65. "taxable service" was explained in sub-section (41) of section 65. Chapter V of the Finance Act, 1994 has been amended by the Finance Act, 1997. A new Chapter was inserted, entitled "service Tax". Service tax was to be imposed by the modalities indicated under the definition clause section 65. "taxable service" was explained in sub-section (41) of section 65. By clause (b), a tax was to be paid by a subscriber receiving a telephone connection and service provided by the telegraph authority. Sub-section (42) defines "telegraph authority" and has the meaning assigned to it under the Indian Telegraph Act, 1885. In fact, this controversy ought to have ended, if not earlier, at least, when the Government of India imposed service tax by the Finance Act, 1994. By now, it is clear that the same subject-matter is being taxed by two Governments. By the Union on the subscriber. By the State on the Union as provider to the subscriber. This is not possible. The Constitution of India does not permit it. The issue was taken to such an extent that even arguments under article 285 of the Constitution of India had not been addressed on behalf of the State of U. P. It was the desire of the court, in these circumstances, that the State of U. P. must look into the matter seriously as the symmetry and geometry of the Constitution strikes a clear cut balance. The Constitution of India has provided certain immunity to the Government of India. 27. The Constitution of India has dealt with the situation of States taxing the Federal Government. What the State of U. P. has done, is an exercise leading to interference with Federal instrumentality. In this regard, an observation in 31 Harvard Law Review 321 at 327, on the conduct between the Federal and the Provincial Government is relevant : " The doctrine that a State cannot tax an instrumentality of the Federal Government is not based on any express provision in the Constitution. It is said to rest upon necessary implication and to be upheld by the great law of self-preservation : as any Government, whose means employed in conducting its operations, if subject to the control of another and distinct Government, can exist only at the mercy of that Government. The soundness of the principle must be universally conceded. The only room for difference of opinion lies in its application. " 28. The soundness of the principle must be universally conceded. The only room for difference of opinion lies in its application. " 28. In so far as the Constitution of India is concerned, the difference between when the Government of India can tax and to what extent a Provincial Government may tax, has been clearly provided in the two articles of the Constitution of India, i. e. , article 285 and article 289. These occur in Part XII of the Constitution of India. Right at the beginning of Part XII, Chapter 1, entitled "finance". Article 265 announces that no tax shall be collected or levied except by authority of law. 29. When article 285 clearly stipulates that the property of the Union shall be exempt from taxation, except when the Parliament provides for it, then the authority of the State of U. P. to tax the Government of India is questionable. The corollary which follows is to what extent a State may be taxed ? This question is answered by the Constitution of India. Article 285 says : " 285. Exemption of property of the Union from State taxation.- (1) The property of the Union shall, save in so far as Parliament may by law otherwise provide, be exempt from all taxes imposed by a State or by any authority within a State. (2) Nothing in clause (1) shall, until Parliament by law otherwise provides, prevent any authority within a State from levying any tax on any property of the Union to which such property was immediately before the commencement of this Constitution liable or treated as liable, so long as that tax continues to be levied in that State. " 30. Plainly, article 285 sets out that the property of the Union is immune from taxation. The Government of India enjoys immunity from taxation. The only saving clause is that should a tax be levied on the property of the Union, only Parliament will provide for it. The second exception is that until Parliament by law otherwise provides, if it is a tax levied by an authority within the State immediately before the commencement of the Constitution, such tax may be charged so long as that tax continues to be levied in that State. 31. The second exception is that until Parliament by law otherwise provides, if it is a tax levied by an authority within the State immediately before the commencement of the Constitution, such tax may be charged so long as that tax continues to be levied in that State. 31. In so far as the States within the Union are concerned, i. e. , the Provincial Governments, the liability to tax the property of a State by the Union, is referred to in article 289. This article reads thus " 289. Exemption of property and income of a State from Union taxation.- (1) The property and income of a State shall be exempt from Union taxation. (2) Nothing in clause (1) shall prevent the Union from imposing, or authorising the imposition of, any tax to such extent, if any, as Parliament may by law provide in respect of a trade or business of any kind carried on by, or on behalf of, the Government of a State, or any operations connected therewith, or any property used or occupied for the purposes of such trade or business, or any income accruing or arising in connection therewith. (3) Nothing in clause (2) shall apply to any trade or business, or to any class of trade or business, which Parliament may by law declare to be incidental to the ordinary functions of Government. " 32. In the first instance, the Constitution provides that the property and income of the State shall be exempt from the Union taxation but the immunity is not absolute as in the case of taxation on the property of the Union. The immunity is not absolute in the sense that on taxing the property and income of the State Parliament may legislate to exempt in respect of a trade, business of any kind carried on by or on behalf of a State or any operation connected with it. Thus, between article 285 and article 289, the understanding which the Constitution spells out is that the immunity to tax the Union of India from being subjected to State taxation, is absolute. Imposition of tax on a property or a tax on the income of a State, is normally exempt unless Parliament enacts a law authorising the Union from imposing tax in respect of the subjects mentioned in the article itself. 33. Imposition of tax on a property or a tax on the income of a State, is normally exempt unless Parliament enacts a law authorising the Union from imposing tax in respect of the subjects mentioned in the article itself. 33. This aspect has been the subject-matter of interpretation by the Supreme Court leaving no room for any doubt on any misapplied tax by the States on the Union. The last the Supreme Court reflected on this aspect is by a Constitution Bench of nine Judges, In re : New Delhi Municipal Committee v. State of Punjab AIR 1997 SC 2847 . This Court brought this decision to the notice of the parties. Again this in itself should have ended the matter because after the Supreme Court has interpreted the provisions of the Constitution, State Governments and its constituents ought not to be permitted to linger issues put at rest by the Supreme Court. The court does not appreciate the belligerence on behalf of the State of U. P. that despite being intimated of the decision New Delhi Municipal Committee v. State of Punjab AIR 1997 SC 2847 , the Standing Counsel was instructed to read out the minority judgment. The court received the reading. Ultimately, the court brought to the notice of the Standing Counsel that not to be overlooked was the judgment as was delivered by the Honourable B. P. Jeevan Reddy, J. , for himself, and on behalf of honourable Dr. A. S. Anand, honourable Suhas C. Sen, honourable K. S. Paripoornan and honourable B. N. Kirpal, JJ. , being the opinion of the Supreme Court carried by majority. Such was the judgment and law by the Constitution. The Standing Counsel submitted that he had instructions from the department to oppose the writ petitions of the Union of India. The Standing Counsel for the State stated more than once that the Advocate-General, U. P. would appear. The Advocate-General, U. P. , did not appear and rightly. Who gave these instructions ? Prior to this, the court had also brought to the notice of the Standing Counsel of the very origin of the controversy which took place 100 years ago in a decision In re : Mc Culloch v. Maryland (1819) 4 Wheat (US) 315. 429; (18. 19) 4 L Ed 579, in the United States of America of immunity to the Federal Government from State taxation. 429; (18. 19) 4 L Ed 579, in the United States of America of immunity to the Federal Government from State taxation. The reason was that this case itself was mentioned by the Supreme Court on more, than one occasion and the ratio decidendi of this case was a contributing factor before the constituent Assembly in making of the Constitution on taxation in between the Union and the States. The judgment In re : New Delhi Municipal Committee v. State of Punjab AIR 1997 SC 2847 , answers the issues which have been pleaded by the State of U. P. in its counter-affidavit to oppose the Union of India. For the purposes of this case, the essential precipitate of the decision is to be found in the following observations : " 141. A Federation presupposes two coalescing units; the Federal Government/centre and the States/provinces. Each is supposed to be supreme in the sphere allotted to it/them. Power to tax is an incident of sovereignty. Basic premise is that one sovereign cannot tax the other sovereign". 34. After the Supreme Court had declared that there is no way a State Legislature can levy a tax on the property of a Union, this proposition ought to have been accepted gracefully by the State of U. P. The Supreme Court had already declared that the ban to tax the Federal Government is absolute and in emphatic terms. The present is not a case of any attempt by the Union of India to tax the State. Therefore, any reference to the cases cited on behalf of the State of U. P. under article 289 are not relevant. The issue before the court is of the State of U. P. imposing a tax on the Government of India. The context is of article 285. Several cases were cited by learned Standing Counsel upon instructions on the interpretation of article 289. In so far as article 289 is concerned, firstly, it does not apply to the context of the present case and, secondly, what does apply is article 285. This balance has been mandated by the Constitution of India, which prescription is not accepted by the State of U. P. 35. Even in cases where a sale had taken place and so made by a department of the Union, the Supreme Court held that such sales were immune from taxation under the State. This balance has been mandated by the Constitution of India, which prescription is not accepted by the State of U. P. 35. Even in cases where a sale had taken place and so made by a department of the Union, the Supreme Court held that such sales were immune from taxation under the State. In the matter of the State of Punjab v. Union of India [1990] 79 STC 437, the Supreme Court in a very short but meaningful decision answered two questions. The Catering department of the Indian Railways on the sales made at the platform of Indian Railways found itself subjected to sales tax by the State of Punjab. There was no issue that the goods were purchased by the Railways and were sold by the Railways and that the tax was imposed on the sales of goods. The Supreme Court held that at the time of sales, the goods belonged to the Railways and in view of article 285 (1) of the Constitution, such sales were immune from taxation by the State. The appeal of the State of Punjab before the Supreme Court was dismissed. 36. In a similar theme when a local body, that is to say, a municipality, attempted to levy service charge on the railway administration of the Union of India, the Supreme Court, In re : Union of India v. Purna Municipal Council (1991) 4 JT 3 , held that notwithstanding that the Indian Railways Act, 1890 may have permitted the taxation yet such a taxation on the Union of India is saved by article 285 (1 ). The Supreme Court said that the applicability of such tax was not ousted by article 285 but the rights of the local authority which may flow from the Indian Railways Act, 1890 stands preserved only if the Central Government condescends in the matter. The Supreme Court also observed that the interplay of the constitutional and legal provision being well cut and defined, it required no marked elaboration to stress the point. The local municipality was restrained from raising demands on the railway administration in regard to service charge. 37. The Supreme Court also observed that the interplay of the constitutional and legal provision being well cut and defined, it required no marked elaboration to stress the point. The local municipality was restrained from raising demands on the railway administration in regard to service charge. 37. In another case, taking recourse to the decision of the Union of India v. Purna Municipal Council (1991) 4 JT 3 , the Supreme Court, in reference to article 285 (1) of the Constitution, held that Ranchi Municipal Corporation had no right to demand service charges from the Union of India and the demand, so made, was ultra vires its powers. This was a decision In re : Union of India v. Ranchi Municipal Corporation, Ranchi (1996) 27 AIR 699 (SC ). 38. There is another aspect of the matter which has been pleaded by the State of U. P. in one of the sets of the writ petitions in which the counter-affidavit is different from the one filed in the earlier writ petitions. It may, however, be mentioned that this aspect was not submitted nor argued by learned Standing Counsel for the State of U. P. The Standing Counsel, U. P. , contended that the court may notice the pleadings as have been taken in certain writ petitions for the purposes of record. In submissions, in some counter-affidavits, the Trade Tax Department of the State, contends in the writ petition that the Telecommunication Department of the Union of India is engaged in commercial activities and is not discharging any sovereign function of a State. To make this legal argument in the counter-affidavit, reliance is placed on a decision of the Supreme Court In re General Manager (Telecom) v. S. Srinivasa Rao AIR 1998 SC 656 . 39. But what the trade tax department is now submitting the context is entirely different to the circumstances of the present cases. On this, learned Standing Counsel for the Union of India has submitted that even before the Supreme Court it had never been denied by the Union of India In re : General Manager (Telecom) v. S. Srinivas Rao AIR 1998 SC 656 , that the Telecommunication Department of the Government of India is not an industry within that definition. On this, learned Standing Counsel for the Union of India has submitted that even before the Supreme Court it had never been denied by the Union of India In re : General Manager (Telecom) v. S. Srinivas Rao AIR 1998 SC 656 , that the Telecommunication Department of the Government of India is not an industry within that definition. The reference to the context that the Department of Telecommunication is engaged in a commercial activity and is not discharging a sovereign function of a State is an aspect which has been tom from its context not connected with the field of taxation and misapplied to create a submission which the Constitution of India does not permit. The case of General Manager (Telecom) v. S. Srinivas Rao AIR 1998 SC 656 , is a matter arising out of an industrial dispute under the Industrial Disputes Act, 1947. The proposition was based on settled law on what the concept of an "industry" is. In this field relating to industrial adjudication, the law rests in identifying an industry as a systematic activity which is not casual or temporary in nature and lasts throughout the year. In so far as trade unionism is concerned between the management and the worker qua the rights of a worker, no difference was made whether the industry was run by a private enterprise, the public sector or the Government. The matter relating to the General Manager (Telecom) v. S. Srinivas Rao AIR 1998 SC 656 , itself refers to the famous case of Bangalore Water Supply and Sewerage Board v. A. Rajappa AIR 1978 SC 548 . The dominant purpose of employment by management, was being applied, as a test, by the Supreme Court. Thus, between the managers and workers, notwithstanding that an industry may be run and managed by the Government of India or otherwise, sovereign immunity is not permitted to be pleaded in industrial relations if a person is held to be a worker within the meaning of the expression "industry" of disputes under the Industrial Disputes Act, 1947. Thus, between the managers and workers, notwithstanding that an industry may be run and managed by the Government of India or otherwise, sovereign immunity is not permitted to be pleaded in industrial relations if a person is held to be a worker within the meaning of the expression "industry" of disputes under the Industrial Disputes Act, 1947. Thus, the counter-affidavit of the State of U. P. filed during the course of hearing in attempting to tell the court, in effect, that article 285 (1) of the Constitution of India has no application, is a misplaced pleading and was an ill-advised advice to put up such a pleading for the purpose justifying taxing the Union of India despite the Constitution Bench decision of nine Judges In re : New Delhi Municipal Committee AIR 1997 SC 2847 . 40. On behalf of the State of U. P. much emphasis was laid that the Union of India was acting (a) as a "dealer", and (b) had indulged in sales in arranging the transfer of telephone facilities to the subscribers. In this behalf, several cases had been cited by learned Standing Counsel. These are : (i) Union of India v. State of Andhra Pradesh [1996] 103 STC 34 (AP) [fb]; (ii) State of Andhra Pradesh v. Union of India [1997] 104 STC 1 (AP) and (iii) Food Corporation of India v. Commissioner of Sales Tax, U. P. [1988] 69 STC 374 (All.); 1987 UPTC 1258. 41. None of these cases apply to the context of the present case. The court will take up the last case referred to as above, first, as this case became the subject-matter of consideration, of which learned Standing Counsel was not aware, in a Supreme Court decision. The matter of the Food Corporation of India v. Commissioner of Sales Tax [1988] 69 STC 374 (All.); 1987 UPTC 1258 has been considered by the Supreme Court In re : Food Corporation of India v. State of Kerala [1997] 105 STC 4; (1997) 3 SCC 410 . The issue In re : Food Corporation of India v. Commissioner of Sales Tax [1988] 69 STC 374 (All.); 1987 UPTC 1258, affirmed by the Supreme Court, was entirely on a different context. This case was not a matter relating to taxation on the Union of India in the context of article 285 of the Constitution. The issue In re : Food Corporation of India v. Commissioner of Sales Tax [1988] 69 STC 374 (All.); 1987 UPTC 1258, affirmed by the Supreme Court, was entirely on a different context. This case was not a matter relating to taxation on the Union of India in the context of article 285 of the Constitution. This matter related to undisputedly a circumstances of clear cut sales, evidenced by consideration and transfer of the goods by the seller to the buyer. In one case the Supreme Court was considering the sale of foodgrains by the Food Corporation of India and in the other of fertilizers to the State Government under the Fertilizer (Control) Order, 1985. In this case, the Supreme Court clarified that the transactions are sale, may be under the compulsion of a statute. Whereas in one case foodgrains were being sold and bought by the U. P. Krishi Utpadan Mandi Samiti, likewise, in other cases, fertilizers were being bought and sold under the Fertilizer (Control) Order, 1985. As the tax had been paid to the Food Department and the latter may have deposited the said tax with the Sales Tax Department, the Supreme Court clarified that it could be verified and, after verification, benefit of the credit of tax will be given to the Food Corporation of India. Further in the present case, the Food Corporation as an appellant had conceded that there were sales under the transaction falling under the control order. Thus, the citation in reference to sales under the Food (Control) Order, 1985 admittedly accepted as a sale, was misplaced and does not throw any light to the issue before the court. 42. The next reliance was on the case of the Union of India v. State of Andhra Pradesh [1996] 103 STC 34 (AP) [fb]. The Customs Department of the Government of India made disposal of confiscated contraband goods as well as unclaimed goods. The Andhra Pradesh High Court had held that the Customs Department of the Government of India was acting as a dealer. The context, in this case, is also misplaced. The Customs Department of the Government of India made disposal of confiscated contraband goods as well as unclaimed goods. The Andhra Pradesh High Court had held that the Customs Department of the Government of India was acting as a dealer. The context, in this case, is also misplaced. Confiscated goods or contraband goods, in any case, carry an issue that it may not be the property of the Government of India except that the Government of India is the authority vested with the powers under special enactments to dispose of the property, Thus, on selling seized goods a sale does take place; on this there may not be any issue. The Andhra Pradesh High Court held that the sales so conducted from various shops of the Customs Department were liable to sales tax. No reliance can be placed on this case as it is nobodys case that the transaction was not a sale. Goods were sold against a price by a seller and there was a purchaser who had bought that for consideration against a transaction of sale. This is not the issue in these matters before this Court. 43. The next case is the matter of the State of Andhra Pradesh v. Union of India [1997] 104 STC 1 (AP ). It is about building material on supply by a contractor to the Military Engineering Service, under a formally drawn out works order and a contract was reckoned to be a sale and, in the circumstances, the writ of the State of Andhra Pradesh was allowed as the Military Engineering Service had an agreement with a contractor to supply the building materials, the costs of which was adjusted in the gross price of the contract and was liable to sales tax. The facts of this case are not applicable to the present case either. 44. Closer home to the issue before the court is a case also from the Andhra Pradesh High Court In re : Rashtriya Ispat Nigam Ltd. v. Commercial Tax Officer, Company Circle, Visakhapatnam [1990] 77 STC 182 (AP ). Isolated from the issue whether article 285 would apply or not, the Andhra Pradesh High Court interpreted the phrase "in the discharge of a contracted works relating to the transfer of rights to use the goods". Firstly, it must be remembered that there was a works contract in the context of this case. Isolated from the issue whether article 285 would apply or not, the Andhra Pradesh High Court interpreted the phrase "in the discharge of a contracted works relating to the transfer of rights to use the goods". Firstly, it must be remembered that there was a works contract in the context of this case. The Central Government agency had undertaken to supply machinery to the contractor for the purpose of being used in execution of the works contract and received charges for the same. The ownership of machinery was never transferred. The Andhra Pradesh High Court was of the opinion that effective control over the machinery remained with the owner and there was no transfer of the right to use and that there was no attribute of a sale and, thus, sales tax could not be charged. At best, regard being had to the definitions, as provided in article 366, and interpreting the expression "tax on the purchase and sale of goods" with its various grammatical variations, the Andhra Pradesh High Court held that there was not even a contract of bailment so that it may be construed as a transfer of goods to denote the passing of title. The court held that delivery of possession of a thing must be distinguished from its custody. The court further held that effective control of the machinery even while the machinery is in use with the contractor, remained with the Central Government agency and that the contractor was not free to make use of this machinery for other works or move it out for use elsewhere. There was no sale and hence tax could not be charged. 45. Drawing closer to the controversy is also another case on an issue whether the Sales Tax Department could levy sales tax in respect of hire charges collected by the bank for providing safe deposit lockers. The Andhra Pradesh High Court, In re : State Bank of India v. State of Andhra Pradesh [1988] 70 STC 215, examined the expression "tax on the sale and purchase of goods", as is referred to in article 366, clause (29a ). The High Court held that the hirer had no right in the property and had only an exclusive right of use during the period of agreement. The High Court held that the hirer had no right in the property and had only an exclusive right of use during the period of agreement. The Andhra Pradesh High Court held that the hire charge is inseparable, and because of the nature of use of the locker which was neither sold nor purchased, the proposal to levy tax on such hire should fail. 46. A State cannot interfere with the exercise of Federal power. This has been settled by the-Supreme Court of the United States of America in an issue brought before it in the case of Mcculloch v. State of Maryland et al 4 L. Ed 579; 4 Wheat (US) 315. To avoid conflicts on misplaced sovereignty to tax, by a State Government on the Union, the Supreme Court of the United States observed : " Before we proceed to examine this argument, and to subject it to the test of the Constitution, we must be permitted to bestow a few considerations on the nature and extent of this original right of taxation, which is acknowledged to remain with the States. It is admitted that the power of taxing the people and their property is essential to the very existence of Government, and may be legitimately exercised on the objects to which it is applicable, to the utmost extent to which the Government may choose to carry it. The only security against the abuse of this power is found in the structure of the Government itself. In imposing a tax the Legislature acts upon its constituents. This is in general a sufficient security against erroneous and oppressive taxation. The people of a State, therefore, give to their Government a right of taxing themselves and their property, and as the exigencies of Government cannot be limited, they prescribe no limits to the exercise of this right, resting confidently on the interest of the legislator, and on the influence of the constituents over their representative, to guard them against its abuse. But the means employed by the Government of the Union have no such security, nor is the right of a State to tax them sustained by the same theory. Those means are not given by the people of a particular State, not given by the constituents of the Legislature, which claim the right to tax them, but by the people of * * * (429) all the States. Those means are not given by the people of a particular State, not given by the constituents of the Legislature, which claim the right to tax them, but by the people of * * * (429) all the States. They are given by * * * all for the benefit of all - and upon theory, should be subjected to that Government only which belongs to all. It may be objected to this definition, that the power of taxation is nor confined to the people and property of a State. It may be exercised upon every object brought within its jurisdiction. This is true. But to what source do we trace this right ? It is obvious that it is an incident of sovereignty, and is co-existensive with that to which it is an incident. All subjects over which the sovereign power of a State extends, are objects of taxation; but those over which it does not extend, are upon the soundest principles, exempt from taxation. This proposition may almost be pronounced self-evident. The sovereignty of a State extends to everything which exists by its own authority, or is introduced by its permission; but does it extend to those means which are employed by Congress to carry into executiori-powers conferred on that body by the people of the United States ? We think it demonstrable that it does not. Those powers are not given by the people of a single State. They are given by the people of the United States, to a Government whose laws, made in pursuance of the Constitution, are declared to be supreme. Consequently, the people of a single State cannot confer a sovereignty which will extend over them.- If we measure the power of taxation residing in a State, by the extent of sovereignty which the people of a single State possess, and can confer on its Government, we have an intelligible standard, * * * applicable to every (430) case to which the power may be applied. We have a principle which leaves the power of taxing the people and property of a State unimpaired; which leaves to a State the command of all its resources, and which places beyond its reach, all those powers which are conferred by the people of the United States on the Government of the Union, and all those mean which are given for the purpose of carrying those powers into execution. We have a principle which is safe for the States, and safe for the Union. We are relieved, as we ought to be, from clashing sovereignty; from interfering powers; from a repugnancy between a right in one Government to pull down what there is an acknowledged right in another to build and; from the incompatibility of a right in one Government to destroy what there is a right in another to preserve. We are not driven to the perplexing inquiry, so unfit for the judicial department, what degree of taxation is the legitimate use, and what degree may amount to the abuse of the power. The attempt to use it on the means employed by the Government of the Union, in pursuance of the Constitution, is itself an abuse, because it is the usurpation of a power which the people of a single State cannot give. We find, them, on just theory, a total failure of this original right to tax the means employed by the Government of the Union, for the execution of its powers. The right never existed, and the question whether it has been surrendered, cannot arise. But, waiving this theory for the present, let us resume the inquiry. . . . . . . . . . . . . whether this power can be exercised by the. . . . . . . . . . . . . . respective States, (431) consistently with a fair construction of the Constitution. That the power to tax involves the power to destroy; that the power to destroy may defeat and render useless the power to create; that there is a plain repugnance, in conferring on one Government a power to control the constitutional measures of another, which other, with respect to those very measures, is declared to be supreme over that which exerts the control, are propositions not to be denied. But all inconsistencies are to be reconciled by the magic of the word confidence. But all inconsistencies are to be reconciled by the magic of the word confidence. Taxation, it is said, does not necessarily and unavoidably destroy. To carry it to the excess of destruction would be an abuse, to presume which, would banish that confidence which is essential to all Government. " 47. Beyond the contentions, on behalf of the State of U. P. , as placed above and also as referred to in the pleadings on record, in its two counter-affidavits, nothing further had been contended except as noticed by the court. The exercise to misplace the Government of India as a dealer trading in goods, or, for that matter, participating in a works contract and, thus, being under an obligation to file a return under the Act, was a misconceived exercise. The assessment orders presupposing an obligation to file returns, are not only in excess of jurisdiction but a misplaced jurisdiction. The assessment orders violate article 285 of the Constitution of India and the obligation of the Union of India by law to provide the network of services by telephone. These assessment orders suffer from manifest errors in violating the Constitution. The Government of India cannot be taxed in the discharge of its sovereign function. In these circumstances, these assessment orders or, for that matter, any appeal which may have been dismissed as filed by the Union of India are quashed. 48. The writ petitions are allowed. 49. The court has given its anxious consideration on what should be the measure of costs in such cases and while deliberating this question the court is of the opinion that if this were an ordinary case the costs would be exemplary and the court would have no hesitation in granting it. But, in the present case, the court feels that if exemplary costs are awarded against the State of U. P. the Union of India would not get richer. The necessary corollary is that if the State of U. P. were to pay an exemplary cost to the Union of India, it would not be a loser either. No amount of costs awarded by the High Court would make the State of U. P. poor nor the Union of India gain anything. 50. The necessary corollary is that if the State of U. P. were to pay an exemplary cost to the Union of India, it would not be a loser either. No amount of costs awarded by the High Court would make the State of U. P. poor nor the Union of India gain anything. 50. But, what has constrained the court is that the State of U. P. , not sovereign under the Constitution and in its functions in juxtaposition to the Government of India was destroying the subject which it was taxing. The subject was tom out of context. It is a cardinal principle that tax is an incidence and may be extracted but not destroy the subject. The State of U. P. is not a superior sovereign power more so in the context of the Constitution of India where the delicate balance has clearly been separated on who may tax whom and with what immunity, including exemptions. The Supreme Court, in re : New Delhi Municipal Committee AIR 1997 SC 2847 , in no uncertain terms, has held that the Union of India enjoys, immunity from State taxation. The State of the Union are protected by exemptions referred to in article 289 of the Constitution of India. The delicate balance of the Constitution of India was violated by the State of U. P. In these circumstances, the court is of the opinion that a copy of this decision ought to be marked to learned Advocate-General, State of U. P. So much time of the court was observed in hearing and considering submissions on behalf of the Trade Tax Department, submissions which were an antithesis to the provisions of the Constitution of India which provide a clear balance that the Union may not be taxed and in what circumstances the State may be taxed. The petitions are allowed with costs. Petitions allowed. .