Question

Guntur is an Indian District in the State of Andhra Pradesh and it is the 3 RD largest producer of
raw cotton in India. (Cotton is a controlled industry in India under Entry 52 List I) Recently the State of
Andhra Pradesh started the Swadeshi (Gandhian) Movement to encourage Indians to wear cotton fabrics
which are locally made from raw cotton (raw materials) produced in India. To further the cause of the
movement, the State Government of Andhra Pradesh has formulated Rule 6 under the Andhra Pradesh
General Sales Tax Act of 1957 (Andhra Pradesh General Sales Tax Rules of 2016) (Sales Tax)
(Entry 54 List II-Taxes on sale or purchase of goods) which provides for exemption of sales taxes on
cotton fabrics produced from raw cotton which are locally spinned and weaved in the State of Andhra
Pradesh wherelse cotton fabrics which are imported from other States into the State of Andhra Pradesh
are not entitled to such tax exemptions if their cotton fabrics are not produced from raw cotton which are
locally spinned and weaved in the State of Andhra Pradesh. The State of Maharashtra is the 2 ND largest
producer of raw cotton in India and they manufacture cotton fabrics from the raw cotton which is spinned
and weaved in their own State to save production costs. Arya Cotton & Silk Fabrics in Kalbadevi,
Mumbai is the largest distributor and supplier of cotton fabrics in the State of Maharashtra and it exports
cotton fabric on a large scale to the State of Andhra Pradesh. Arya Cotton & Silk Fabrics are made liable
to pay the Sales Tax and they alleged that Rule 6 of the Sales Tax (Impugned Enactment) gives
preference to the distributors and suppliers of cotton fabrics in the State of Andhra Pradesh over their
State and it offends the free flow of inter-state trade and commerce under the Constitution of India. The
defence of the State government of Andhra Pradesh is that the revenue collected from the taxes levied
under the Impugned Enactment is utilized for improving the spinning & weaving industry in the State of
Andhra Pradesh which facilitates trade and commerce. The Commissioner of Tax had initiated a suit
against the said company for evasion of taxes.
(A) Explain briefly how the commerce power is distributed between the Union and its constituent
parts in India which has a federal Constitution?
(B) Establish if the actions of the State of Andhra Pradesh in making such a preference of tax
exemptions offend free flow of inter-state trade & commerce under the Constitution of India?
(C) Can the taxes levied be saved under the concept of compensatory taxes?
(D) Should Arya Cotton & Silk Fabrics be subjected to pay taxes to the State of Andhra Pradesh
when they hold a registered office in the State of Maharashtra?