: May 08, 2010 |
: Company Law
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The great problem of any federal structure is to prevent the growth of local and regional interests which are not conducive to the interest of the nation as a whole. In order to avoid such commercial rivalries and jealousies among the units, the framer of the federal constitution takes it as absolutely necessary to incorporate a free trade clause which would ensure the economic unity within the country. Generally speaking, trade means buying and selling of goods while the term commerce includes all forms of transportation such as by land, air or water. In other words, organised activities with a view to earning profits are termed trade or commerce. However, right to trade definitely not mean right to commit crime. Therefore, activities like hiring out criminal to commit murder, selling obscene pictures or trafficking of human being cannot properly enter into the concept of trade and commerce. Nevertheless, there are certain issues, regarding the nature and scope of the terms trade and commerce; which have created difficulties for the court because of several variables. In one hand, precedent serve as a binding source of law and judges generally apply it whereas; on the other hand some judges try to follow the sociological school of thought and therefore attempt to harmonise the individual interest with the interest of the contemporary society. Further, if one analyses, the Realist jurisprudential thought, he will easily find out how social status, background and experiences of the judges influence the judgements.
This paper seeks to analyse the scope of free trade and commerce in India. In this regard, the conditions prevalent in the pre-independence era as well as the present position have been discussed in the light of the constitution and the decisions of the Supreme Court of India. Further, for the purpose of comparison, Australian Constitution has been referred as the free trade clause in the Indian Constitution has been borrowed almost verbatim from the Australian Constitution.
Freedom Of Trade And Commerce Under Australian Constitution
The legislative power of the Commonwealth relating to trade and commerce is contained in Sections 51(i) and 98 which lays down the Parliament has power to make laws with respect to trade and commerce with other countries and among the States and it extends to navigation and shipping and railway property of any State respectively subject to the other provisions of the Constitution. In this context Sections 99 and 100 provided that the law relating to trade and commerce shall not give preference to any State or part thereof and the Commonwealth shall not curtailed the right of a State or the residents to the use of water or river for the purpose of navigation or irrigation. In addition to this general legislative power relating to trade and commerce the constitution contains legislative power with respect to certain specific subjects of trade and commerce such as currency and coinage, banking, insurance, bills of exchange etc. These apart, there is a free trade clause under Section 92 which provides that “on the imposition of uniform duties of customs, trade, commerce and intercourse among the States whether by means of internal carriage or ocean navigation, shall be absolutely free”
So, Section 92 added the word “intercourse” along with trade and commerce which are present in Section 51(i). Intercourse includes commercial as well as non-commercial intercourse. Once the act of the inter-state trade, commerce or intercourse has begun, the protection of Sec. 92 came into operation and continues till the completion of the act. However, the difficulty arises in determination of the commencement and completion of the act.
Scope of Section 92
The cases on Section 92 have evolved two dimensions of choice namely individual right theory and free trade theory. That is, formulating the principles which delimit the concept of freedom and applying those principles to factual situations. Much of the early litigations were dominated by the first kind of choice like in W and A Mc Arthur Ltd. vs. Queensland, a Queensland statute fixing maximum price for goods was declared invalid as the law purported to operate on a contract of sale, which required goods to move inter-state. In this case individual right theory was adopted, though there was some reference to the possibility of a state favouring its own industries against those of another state by fixing prices to give a local advantage. On the other hand, the decision given by Justice Evatt in the case of Milk Board (NSW) vs. Metropolitan Cream Pvt. Ltd. supported free trade theory. In this case, a scheme for marketing of milk was held valid even though it expropriated the milk for the purpose of controlling both inter-state and intra-state trade and fixed the price at which milk from another state was to be sold. In fact, till the end of 1930s, the decisions tended to conform to free trade theory.
But the Bank Nationalisation case and Hughes and Vales case conforms to the re-emergence of individual right view. Justice Dixon was the supporter of individual right theory and during that time number of legislations which had a considerable economic or practical effect on inter-state trade was upheld as indirectly affecting that trade only. Consequently, the restriction placed on the production of margarine was held valid and importation from abroad of an aircraft was held valid as inter-state trade began after importation of aircraft. However, Justice Barwick who succeeded Justice Dixon stated that the object of Sec. 92 was to preserve the common market of Australia being hampered by the State action and the right of the individual to trade and move inter-state was derived from this object. Thus, in his theory, both the free trade approach and individual right approach appear to merge.
There is yet another shift in the interpretation of Section 92 when Justice Mason, Justice Stephen and Justice Jacobs have mentioned factors like the nature of the regulation, the mischief it was designed to remedy, the goal it seeks to achieve and the effect that legislation has on the relevant inter-state trade that have to be taken into account in determining the reasonableness of a regulation. Later on, in Uebergang vs. Australian Wheat Board, Justice Murphy was of the opinion that the Commonwealth Parliament has sufficient power to override or negate any State legislation inimical to national commerce.
In short, Section 92 was undoubtedly intended to achieve a degree of economic unity and a common market. But this doctrine of free trade could not be considered in isolation without taking into consideration the right of the individual. Individual right was not the object of Section 92 but it can be regarded as a means to achieve the object declared by Section 92 i.e; freedom of trade and commerce among the States.
Freedom Of Trade And Commerce In India
Pre-Constitutional Provision – The Indian federal structure was evolved from a colonial unitary state. Prior to the integration of India and the framing of the constitution, there were in existence a large number of Indian States which, in exercise of their sovereign power, had erected custom barriers between themselves and the rest of India, thus hindering at several points the free flow of trade. India had a thoroughly unitary constitution until the Government of India Act, 1935. However, experimentation in the direction towards federalism was already started under the Government of India Act, 1919, though the introduction of the system of Diarchy was not federal in the true sense as it did not provide for division of powers between the Centre and the States on the pattern of other federal countries like the United States or Canada. Further, it also did not include the Indian States at all and in British India also, the provinces were no more than administrative units and derived their power as a grant made by the Central Legislature to the provinces. Therefore, provincial government was assigned with subjects which were less important and of local nature such as local government, public health, police station, education etc. and the residuary power fell to the Centre. Moreover, the provincial enactments could become law only on receiving the assent of the Governor General. Thereafter in 1927, Simon Commission recommended for a federal form of government and was also against the taxes levied by the provinces on the free flow of trade and commerce. Soon after the Commission’s Report; there were three Round Table Conferences which suggested that the federal structure is the only solution to the Indian Constitutional problem. In the third session of the Conference, the member agreed that the federal legislature was to be entrusted with the exclusive power over foreign trade and it could impose terminal taxes on goods and passengers carried by rail, water or air. The provincial legislature could legislate with respect to the control of production, supply distribution of commodities and trade and commerce within the province. Finally, in April, 1933, a Joint Committee was appointed to examine the working basis of the new Indian Constitution.
On the basis of the Joint Committee’s Report, the Government of India Act, 1935 was passed which introduced federal form of Government and recognises three lists namely; federal list, provincial list and concurrent list and the residuary power was vested to the Governor-General. In this Act, trade and commerce was given to provinces under Entry 27 of List II. But, none of the list provided for the power over inter-provincial trade and commerce and it could be regulated by the Governor-General under his residuary powers, vested under Section 104. Further, Section 297 of the 1935 Act imposed limitation on the legislative as well as the executive power of the provincial government in two ways –
1) It prohibited the provinces from imposing trade barriers on the entry and export of goods and
2) It also prohibited them from levying taxes which discriminated between goods manufactured and produced in the province and goods not so manufactured and produced.
Though the purpose of Section 297 was to achieve a free flow of trade within India, its application was limited to British Indian Provinces only. The Princely States could and did levy export and import duties at their custom frontiers. Another weak point in this Section was that 297(1)(a) had no application to laws made under any Entry in List II and List III other than Entry 27 or Entry 29 of List II. In Bhola Prasad vs. R, a provincial law prohibiting the possession, sale, import, export of intoxicating liquor was challenged on the ground that it contravened Section 297. The Federal Court held that as the Provincial Legislature had exercised its power under Entry 31 of the Provincial List, Section 297 had no application. Hence, the Provincial Law was held to be valid. Thus Section 297 of the Act was not sufficient to meet the need to achieve economic unity throughout the territory of India and thus it was left to the framers of the Constitution of independent India to find out means for maintaining commercial unity in the country.
Post-Independence – In Constituent Assembly Debate, initially, trade and commerce was inserted under the fundamental right which was borrowed from Section 92 of the Australian Constitution. Later on, on the recommendations of the Committee headed by Alladi Krishnaswami Ayyar, several changes were made and after a long discussion, in a final report, the freedom of trade and commerce appeared under Part XIII of the Constitution, covering Article 301 to 307.
Article 301 containing the free trade clause guarantees freedom to an activity which amounts to trade or commerce or intercourse. However, this freedom is limited by the other provisions of Part XIII of the Constitution. Thus, it seems that the purpose of Article 301 is to ensure the free flow of trade and commerce in general and not to confer any primary right on any individual. In this respect, Chief Justice Das observed in the case of State of Bombay vs. R.M.D. Chamarbaugwala that Article 301 looks at the matter from the point of view of the country’s trade and commerce as a whole, as distinct from the individual’s interest of the citizens and it relates to trade, commerce or intercourse both with or within the States. However, when it comes to give effect to such purpose it is obvious that the person who is engaged in such activities regarding which freedom is ensured will approach the Court against its infringement. In the case of Fatehchand vs. State of Maharashtra, Chamarbaugwala approach was followed. In this case, Krishna Iyer observed that “every systematic, profit-oriented activity, however, sinister, suppressive or socially diabolic, cannot ipso facto, exalt itself into a trade” and treated money lending as extra commercium and held that “money lending may be ancillary to commercial activity and benignant in its effect, but money lending may also be ghastly when it facilitates a flow of trade….but merely stagnates rural economy, stagnates the borrowing community and turns malignant in its repercussions. The former may surely be trade, but the latter…..is not trade”
However later on the ruling of H. Anraj vs. Govt. of Tamil Nadu is relevant where the Court goes against the approach of Chamarbaugwala case and held that the dealers in lottery tickets were considered as traders and the activity of selling lottery ticket could get protection of Article 301 and Article 304(a). Besides, one must also appreciate the fact that it is highly impractical to say that Article 301 cannot be said to be violated until and unless the total volume of the trade and commerce is affected. In this context, it is worth referring the observation of the Judicial Committee of Privy Council relating to Section 92 of the Australian Constitution as 301 is borrowed almost verbatim form Section 92 of the Australian Constitution. The Committee observed that Section 92 does not create any new juristic rights but it does give the citizens of State or Commonwealth as the case may be, the right to ignore and if necessary, to call on the judicial power to help him to resist, legislative or executive action which offends against Section 92.
Thus the Court involved in a bit of controversy as to which activities are worthy of constitutional protection and which are not. This question should be handled by the Legislature rather than by the judiciary as the subjective opinion of the judge based of the contemporary values and experience, would create uncertainty in law. Thus, the better approach would be to consider all the trading activities excluding criminal activities, within the concept of trade and business and then subject them to reasonable restrictions, imposed by the State especially so, when the Constitution expressly equips the State in the widest possible terms under Article 19(2) to (6) to put restriction on such activities and the role of the Judiciary should be confined to the scrutinise the reasonableness of restriction. For that purpose it has to take into consideration the socio-economic factor, Directive Principles of the State Policy, public order, public health, public safety, public morals etc.
Regarding the interpretation of the term “intercourse”, generally speaking it means movement of goods from one place to another. Seervai is of opinion that the term ‘intercourse’ in Article 301 should be interpreted ejusdem generis with the words ‘trade and commerce’ so that it would mean only commercial transaction. His argument is based on the fact that since the term ‘intercourse’ is not included in any of the legislative Lists and Article 301 is a limitation on legislative powers, so it must mean only commercial transaction. However, Seervai’s opinion is far from satisfactory as the entries like Entry 29, List III deals with prevention of extension of contagious diseases and Entry 81, List I dealing with inter-state quarantine are regarded as non-commercial intercourse. In fact in Constituent Assembly Debate, R. N. Rau justified on conferring power on the State to impose reasonable restriction in the public interest on the ground that the State may have to restrict the freedom of intercourse with the inhabitants of a neighbouring State on the outbreak of epidemic diseases like plague. This shows that the framers of the Constitution intended it to be non-commercial intercourse also. Similarly, even in Australia and USA the word ‘intercourse’ covers both commercial and non-commercial intercourse. In Australian National Airways Pvt. Ltd. and others vs. Commonwealth, Dixon Justice observed that there was much covered by the word ‘intercourse’ that fell outside commerce and it would mean actual movement of goods and persons among the State.
Moreover, it is well settled that there is no element of conflict or contradiction between Article 19(1)(d) which deals with freedom of movement and 19(1)(g) which provides freedom of trade, business, occupation and profession and Article 301. Article 19(1)(d) and (g) look at the matter from the point of view of right to freedom of movement of the citizen and Article 301 protects the general passage of persons and commodities from one geographical boundary to the other. Secondly, Article 19(1)(d) is applicable only for the citizen of India whereas; Article 301 applies to any person. Thirdly, in case of Article 19(5), the reasonableness of restriction is determined by the Court balancing the interest of the citizen with social control whereas; in the case of Article 301, it is determined by balancing the regional interest with that of the nation. Fourthly, Article 19(1)(d) is a Fundamental Right and writ petition under Article 32 can be filed which is not so in the case of Article 301. Finally, during the time of emergency, the enforcement of rights under Article 19(1)(d) remains suspended whereas; Article 301 can be applied to judge the constitutionality of a legislation alleged to have infringed the freedom of trade and commerce. Further, the phrase “throughout the territory of India” under Article 301 suggests that the protection of Article 301 would extend to inter as well as intra-territorial trade and commerce. Finally, the interpretation of the word “free” does mean freedom from laws or regulations. There is a clear distinction between laws interfering with freedom to carry out the activities constituting trade and law imposing rules of proper conduct or other restraints for the due and orderly manner of carrying out the activities. The distinction is known as regulation. The word ‘regulation’ has no fixed connotation. Its meanings differ according to the nature of the thing which it is applied. Thus, a purely regulatory and compensatory law cannot be regarded as violative of the freedom of trade and commerce. Such laws are intended merely to regulate trade and commerce, they tend to facilitate, and not restrict freedom or trade. Therefore, measures like traffic regulations, licensing of vehicles, charging for the maintenance of roads, marketing and health regulations, price control, economic and social planning, prescribing minimum wages are purely regulatory measures. Likewise, a law which levies a tax or toll for the use of a road or bridge is not a barrier or burden on a trade but in reality helps the free-flow of trade by enabling the provision of a more convenient and less expensive route. However, if the amount of tax is unduly high, it would hampers trade.
In this context, in the case of Atiabari Tea Co. vs, State of Assam, the validity of the Assam Taxation (on Goods Carried by Roads or Inland Waterways) Act, 1954 was challenged on the ground that it violated Article 301 of the Constitution and was not saved by Article 301 of the Constitution and was not saved by Article 304 (b). The petitioner carried on the business of growing tea and exporting it to Calcutta via Assam. While passing through Assam the tea was liable to tax under the said Act. The Supreme Court held that the impugned law undoubtedly levied tax directly and immediately on the movement of goods and therefore held void. The Court held that taxes may or do amount to restriction if they directly or immediately restrict trade. In the instant case, the tax undoubtedly affected the free-flow of trade and such taxes could only be levied if previous sanction of the President has been obtained under 304(b). Therefore, imposition of a duty or tax to every case would not amount per se to infringement of Article 301. Every case must be judged on its own facts and in its own setting of times and circumstances. Further, in a landmark judgement in Automobile Transport Ltd vs. State of Rajasthan, the Supreme Court affirmed the Atiabari’s direct and immediate effect with a clarification that regulatory measures imposing compensatory tax do not come within the purview of the restrictions contemplated in Article 301 and therefore such measures need not comply with the requirement of provisions of Article 304(b).
Thus, the majority decision in the Atiabari Tea Co’s case read with a majority judgement in the Automobile’s case laid to the following five principles relating to Article 301 as summarised by Subramaniam
1. Article 301 assures freedom of inter-state as well as intra-state trade, commerce and intercourse.
2. Trade, commerce and intercourse have the widest connotation and take in movement of goods and persons.
3. The freedom is not only from laws enacted in the exercise of the powers conferred by the legislative entries relating to trade and commerce or production, supply and distribution of goods, but also to all laws including tax laws.
4. Only those laws whose direct and immediate effect to inhibit or restrict freedom of trade and commerce will come with the mischief of Article 301.
5. Laws which are merely regulatory or which impose purely compensatory taxes, and hence intended to facilitate freedom of trade, are outside the scope of Article 301.
1. Parliament’s power to regulate trade and commerce in the public interest – Article 302 authorizes Parliament to impose such restrictions on the freedom of trade, commerce or intercourse between one state and another or within any part of the territory of India as may be required in public interest. The question whether a restriction imposed by Parliament by law is in public interest or not is a justifiable issue. In this respect, it has been held in Atiabari’s case that Parliament is given the sole power to decide what restrictions can be imposed in the public interest as authorized by Article 302. Therefore, it has been held in Surajmal Roopchand and Co. vs. State of Rajasthan, that restrictions imposed on the movement of grain under the Defence of India Rules are in the interest of general public. The power of Parliament under Article 302 is limited by 303(1). Article 303(1) provides that Parliament shall not have power to make any law giving any preference to any one State over another by virtue of any Entry relating to trade and commerce in any one of the List in the 7th Schedule. But under Clause (2) of this Article the Parliament may, however, discriminate among States if it is declared by a law that it is necessary to do so for the purpose of dealing with a situation arising from scarcity of goods in any part of the territory of India. The question whether there is a scarcity of goods in any part of India is for the Parliament to decide.
2. State’s Power to regulate trade and commerce – Article 304(a) empowers the State to impose any tax on goods imported from other State if similar goods in the State are subject to similar tax so as to discriminate between goods so imported and goods manufactured or produced in the State. In State of Madhya Pradesh vs. Bhailal Bhai, a State of law imposed sales tax on imported tobacco but locally produced tobacco was not subject to such sales tax. The Court invalidated the tax as discriminatory. Clause (2) of this Article authorizes the State to impose such reasonable restrictions on the freedom of trade, commerce and intercourse as may be required in the public interest. But no Bill or amendment for this purpose can be introduced in the legislature of State without the previous sanction of the President. A law passed by a State to regulate inter-state trade and commerce must satisfy the following time conditions under Article 304(b)
i) Previous sanction of the President must be obtained;
ii) The law must be in the public interest and
iii) Restrictions imposed by such a law must be reasonable.
3) Saving of Existing Laws – Article 305 saves existing laws and laws providing for State monopolies in so far as the President may by order otherwise direct and Article 307 empowers Parliament to appoint such authority as it considers appropriate for carrying out purposes of Articles 301 to 304. It can confer on such authority such powers and duties as it think necessary.
Thus, the general idea inspiring Part XIII of the Indian Constitution is the removal or prevention of local barriers to economic activity as well as to passage of persons and goods from region to another. But at the same time the framers of the Constitution did not intend to restrict the power of the States to regulate purely intra-state commerce. The object was to remove geographical barriers.
Comparisons Between Australia And India
Though Article 301 of the Indian Constitution has been adopted from Section 92 of the Constitution, still there are some apparent distinctions between the two. Firstly, in the historical context, Section 92 of the Australian Constitution was intended to abolish State custom barriers. However, as a result of judicial decisions, it applies to both the Commonwealth as well as the States. This was recognised in the decision of James vs. Commonwealth of Australia, in which a Commonwealth statute requiring a licence for inter-state shipments of dried fruits was declared unconstitutional by the Privy Council. On the other hand, in India, Article 301 of the Constitution includes both the freedom of inter-state and intra-state i.e; within the territory of State trade and commerce. That is, it imposes a restriction on the legislative power of both Parliament and the State Legislature. Secondly, the presence of the word “absolutely free” in the Australian Constitution presented many difficulties. Trade and commerce could not be regulated by the centre. The restriction was to be spelled out by the Court whereas; in India the Constitution itself lays down restrictions on Article 301. The restrictions are contained in Article 302 to 305. This is necessary because no freedom is absolute but regulated and relative. Thirdly, Australian Constitution did not have any provision like 19(1)(g) of the Indian Constitution.
Free movement and exchange of goods throughout the territory of the country is essential for the economic unity of the nation which alone could sustain the progress of the country. This has become more important after the globalisation of the economy. Therefore in all federation an attempt is made through constitutional provisions to create and preserve a national economic fabric to remove and prevent local barriers to economic activity, to remove the impediments in the way of inter-state trade and commerce and thus to make the country as one single economic resources of all the various units may be utilized to the common advantage of all. In other words, proper regulations of the trade promote equality and unity among the regions.
 “The parliament shall, subject to this Constitution, have power to make laws for the peace, order and good government of the Commonwealth with respect to Trade and Commerce with other countries and among the States”
 “The power of parliament to make laws with respect to trade and Commerce extends to navigation and shipping, and to railways property of any State”
 “The Commonwealth shall not, by any law or regulation of trade, commerce or revenue, give preference to one State or any part thereof over another state or any part thereof”
 “The Commonwealth shall not by any law or regulation of trade or commerce abridge the right of a state or of the residents therein to the reasonable use of the waters or rivers for conservation or irrigation”
 (1920) 28 CLR 530
 (1939) 62 CLR 116
 (1949) 79 CLR 477
 (1953) 87 CLR 49
 Grannall vs. Marrickville Margarine Pvt. Ltd. (1955) 93 CLR 55
 R.V. Anderson : ex parte Ipec-Air Pvt. Ltd. (1965) 113 CLR 177. This case was affirmed in Ansett Transport Industries vs. Commonwealth (1977) 139 CLR 54
 (1980) 145 CLR 266
 (1942) F.C.R. 17
 “Subject to the other provisions of this part (Part XIII) trade, commerce and intercourse throughout the territory of India shall be free”
 AIR 1957 SC 699
 AIR 1977 SC 1825
 AIR 1986 SC 63
 (1946)71 C.L.R. 29 P. 81
 WRITE ART. 19 (1)(D)
 AIR 1961 SC 232
 AIR 1962 SC 1906
 N.A. Subramaniam, case law on the Indian Constitution, p. 226 (1969)
 AIR 1967 Raj. 104
 AIR 1964 SC1006
 (1936) AC 578
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