Narrowing the Video Electronics Exception under Article 304(a): Rajasthan’s Fly-Ash VAT Exemption Struck Down for Want of Reasoned, Non‑Hostile Design

Introduction

In M/s U.P. Asbestos Limited v. State of Rajasthan & Others (2025 INSC 1154), a two‑Judge Bench of the Supreme Court of India (B.V. Nagarathna and K.V. Viswanathan, JJ.) invalidated a Rajasthan VAT exemption that favoured in‑State manufacture of asbestos cement sheets and bricks with 25% or more fly ash content. The crux was whether Notification S.O. 377 dated 09 March 2007—continued (with modifications) up to 23 January 2016—discriminated against “imported” goods (i.e., goods brought from other States) in violation of Article 304(a) of the Constitution.

The appellants—U.P. Asbestos Ltd. and Everest Industries Ltd.—manufactured fly ash–based asbestos products outside Rajasthan but sold within the State through registered depots. They challenged the State’s exemption for local manufacturers (subject to certain conditions), arguing that it erected a fiscal barrier against out‑of‑State goods contrary to Part XIII (Articles 301–304) of the Constitution. The Rajasthan High Court had dismissed their writ petitions, leaning heavily on the Supreme Court’s decision in Video Electronics Pvt. Ltd. v. State of Punjab (1989) and treating the impugned exemption as a permissible, time‑bound, class‑specific incentive.

The Supreme Court reversed. In doing so, it:

Reaffirmed the nine‑Judge ruling in Jindal Stainless Ltd. v. State of Haryana (2017) that only discriminatory taxes fall foul of Part XIII;
Cabined the narrow “incentive” safe harbour from Video Electronics to truly reasoned, time‑bound, non‑hostile, backward‑area‑linked measures; and
Insisted that justifications must be evident on the face of the notification itself—drawing upon Mohinder Singh Gill and Gordhandas Bhanji to reject post‑hoc rationalisations in affidavits.

Summary of the Judgment

The Court held that Rajasthan’s VAT exemption for asbestos products “manufactured in the State” with ≥25% fly ash violated Article 304(a) because:

It discriminated against similar goods manufactured outside the State and sold within Rajasthan;
It did not fit the Video Electronics exception: the exemption was not restricted to “new” units, was not tethered to backward areas, and spanned up to ten years across successive notifications without contemporaneous, stated reasons;
Its ostensible environmental/utilisation purpose (use of local fly ash) was not reflected in the text: the notification did not require sourcing fly ash from Rajasthan, nor did it extend the benefit to goods made outside Rajasthan using Rajasthan fly ash; and
The State’s purposes cannot be supplied by counter‑affidavit; public orders must speak for themselves (Mohinder Singh Gill; Gordhandas Bhanji).

Accordingly, Notification S.O. 377 (09.03.2007), as extended by the 28.12.2010 amendment, was quashed. On restitution, the Court directed a pass‑through inquiry: if dealers had not passed the burden to consumers, they would be entitled to refund of the amounts deposited in Court with 6% interest from deposit till realisation.

Factual Background

Rajasthan issued a series of sales tax/VAT exemptions for asbestos cement sheets and bricks containing ≥25% fly ash:

24.01.2000 (under the 1994 Sales Tax Act): exemption for units commencing commercial production up to 31.12.2001; operative till 23.01.2010.
16.03.2005 (superseding 2000 notification): similar exemption; extended eligibility to units commencing by 31.12.2006; operative till 23.01.2010.
01.06.2006 and 05.07.2006 (under the 2003 Rajasthan VAT Act): to carry forward exemptions post‑VAT introduction; one withdrawn.
09.03.2007 (impugned): exemption for sales of locally manufactured asbestos products with ≥25% fly ash for units with production commenced by 31.12.2006; operative till 23.01.2010.
28.12.2010 amendment: exemption available for 10 years from commencement of first commercial production, but in no case post 23.01.2016.

The High Court (relying on its earlier decision in Hyderabad Industries) upheld the regime by invoking Video Electronics and promissory estoppel, reasoning that the State could incentivise local use of fly ash—a by‑product from thermal plants—by offering time‑bound tax relief to in‑State units.

Issues

Whether the VAT exemption for goods “manufactured in the State” with ≥25% fly ash discriminated against imported (inter‑State) goods in violation of Article 304(a) read with Article 301.
Whether the High Court correctly applied Video Electronics to uphold Rajasthan’s notification as a valid, limited, developmental incentive.

Legal Framework and Precedents

Part XIII of the Constitution

Article 301: Freedom of trade, commerce and intercourse throughout India (subject to Part XIII).
Article 304(a): State may tax goods imported from other States “to which similar goods manufactured or produced in that State are subject,” “so, however, as not to discriminate.”
Article 304(b): State may impose reasonable restrictions in public interest (with Presidential sanction at the Bill stage).

Key Supreme Court authorities

Atiabari Tea (1961) and Automobile Transport (1962): Art. 301 ensures freedom; taxes are not per se barred; only those that directly impede trade (or discriminatory in Part XIII sense) offend; compensatory/regulatory charges originally treated distinctly (compensatory tax theory later rejected in Jindal Stainless).
Firm Mehtab Majid (1963): Sales tax rules that led to higher effective tax on imported tanned hides struck down under Art. 304(a); focus on real incidence and discrimination.
Kalyani Stores (1966): Countervailing duty cannot be levied when no similar local goods exist; illustrates the “similar goods” condition in Art. 304(a).
Weston Electronics (1988): Lower rate (1%) for locally manufactured TVs vs 10% for out‑of‑State TVs quashed—classic tariff wall.
Video Electronics (1989): Carefully structured, time‑bound incentives for specified classes of units (e.g., new units; electronics), in a backward/disturbed State, upheld; emphasised that “discrimination” implies intentional, unfavourable, protectionist bias.
Shree Mahavir Oil Mills (1996): Total, unconditional sales tax exemption for local edible oil, while taxing out‑of‑State oil, struck down; cautioned against enlarging Video Electronics’ “limited exception.” No estoppel or acquiescence against constitutional constraints.
Loharn Steel (1996) and Laxmi Paper Mart (1997): Exemptions confined to in‑State manufacture invalidated as discriminatory.
Digvijay Cements (1999): A reduction of CST for inter‑State sales which increases movement of goods not per se offensive to Art. 301/304.
Jaiprakash Associates (2014): Rebate confined to cement units in specified U.P. districts using fly ash held discriminatory; rebate equated to concession/exemption in effect under Art. 304(a).
Jindal Stainless (9‑J) (2017): Taxes simpliciter are not within Art. 301; only discriminatory taxes violate Art. 304(a); clauses (a) and (b) are disjunctive; approved the narrow safe harbour for time‑bound, specified‑class, non‑hostile, backward‑area incentives; rejected compensatory tax theory.
Gordhandas Bhanji (1952) and Mohinder Singh Gill (1978): Administrative/statutory orders must stand or fall by reasons in the order; post‑hoc explanations in affidavits are irrelevant.

Legal Reasoning

1) The Jindal Stainless template for Article 304(a)

The Court distilled the post‑Jindal Stainless controlling principles:

Only discriminatory taxes are prohibited by Art. 304(a); taxes are not “restrictions” under Art. 304(b); clauses (a) and (b) are disjunctive.
“Discrimination” carries a hostile/protectionist bias (akin to Cole v. Whitfield’s approach in Australia) rather than mere differentiation.
Permissible incentives must be: granted to a specified class of dealers; for a limited period; in a non‑hostile fashion; and with a view to developing economically backward areas.

2) Why Rajasthan’s exemption failed the test

No reasons on the face of the notification: The text merely said “expedient in public interest,” without articulating any policy purpose (industrial development, environmental utilisation of Rajasthan fly ash, backward‑area targeting, etc.). Per Mohinder Singh Gill and Gordhandas Bhanji, the State cannot cure this silence through counter‑affidavits. The High Court’s reliance on surrounding circumstances/promissory estoppel could not substitute for contemporaneous reasons.
Design betrayed the professed rationale: The notification did not require the fly ash to be sourced from within Rajasthan. Thus, the asserted objective—utilising locally generated fly ash—was not embedded in the instrument. Worse, the benefit was denied to goods manufactured outside Rajasthan even if they used Rajasthan fly ash, while it was available to Rajasthan‑made goods even if they used out‑of‑State fly ash.
Not circumscribed to “new”, “specified” units or backward areas: Unlike Video Electronics, the exemption was not confined to new units or to specified sectors in a backward/disturbed State. It applied State‑wide and across time to a broad class of units, ultimately up to ten years (subject to the outer cut‑off date), without contemporaneous justification.
Structural discrimination by local‑manufacture condition: The core condition—“manufactured in the State”—directly disadvantaged similar goods manufactured outside, thereby creating a tariff wall. This is the precise vice condemned in Firm Mehtab Majid, Weston Electronics, Loharn Steel, Laxmi Paper Mart, and Shree Mahavir Oil Mills.
Jaiprakash Associates applies: A rebate/exemption favouring in‑State manufacture using fly ash (or confining benefit to in‑State districts) impermissibly skews competition, altering relative prices and burdening out‑of‑State manufacturers. The Court expressly stated Jaiprakash “squarely applies,” rejecting the respondent’s suggestion that it was eclipsed by Jindal Stainless.

3) How a constitutionally compliant design could have looked

The Court, notably, outlined a neutral design that could have passed muster: if the object was to promote utilisation of Rajasthan fly ash, the State could have carved the benefit around the source of raw material (fly ash sourced from Rajasthan) and extended it to goods sold in Rajasthan irrespective of the place of manufacture. Such a design directly targets the environmental/supply‑chain objective without discriminating between local and imported finished goods. This forward‑looking guidance is a practical blueprint for drafting non‑hostile, Article 304(a)‑compliant incentives.

Precedents Cited and Their Influence

Atiabari Tea and Automobile Transport

These early Constitution Bench decisions framed the overarching purpose of Part XIII: abolishing tariff walls and creating an economic union. While initially entertaining compensatory/regulatory distinctions, their enduring legacy post‑Jindal Stainless lies in recognising that not all taxes implicate Art. 301—only those with discriminatory/protectionist character in the sense relevant to Art. 304(a).

Firm Mehtab Majid, Weston Electronics, Laxmi Paper Mart, Loharn Steel

These cases provided the doctrinal bedrock for detecting discrimination under Art. 304(a) by looking past nominal rates to the effective burden and the structure of the levy/exemption. Each struck down devices privileging local manufacture against similar out‑of‑State goods—principles directly applied here.

Video Electronics (the “limited exception”)

The Court acknowledged that Video Electronics remains good law post‑Jindal Stainless—but only for carefully structured incentives: time‑bound, for specified classes (e.g., new units), in a non‑hostile fashion, typically to spur industrialisation in backward/disturbed areas. Rajasthan’s measure did not fit this mould.

Shree Mahavir Oil Mills and Jaiprakash Associates

Shree Mahavir cautioned that enlarging the Video Electronics exception would “eat up the main provision.” Total/local exemptions were struck down. Jaiprakash Associates extended the logic to rebates: a full rebate to local units is tantamount to discriminatory exemption. Both cases foreshadowed the result here.

Jindal Stainless (nine‑Judge)

The decision constitutionalised a modern test:

Taxes simpliciter are outside Art. 301; only discriminatory taxes breach Art. 304(a);
Clauses (a) and (b) are disjunctive—no need to channel taxes through Art. 304(b);
“Discrimination” denotes a hostile/protectionist differentiation; and
Validated the narrow Video Electronics safe harbour, subject to tight conditions.

The Court’s analysis here is a faithful application of that template.

Comparative Note: Cole v. Whitfield (Australia)

Echoing the High Court of Australia’s turn in Cole, the Supreme Court adopted a “protectionist discrimination” lens for Part XIII—laws may regulate trade neutrally, but may not impose protectionist burdens targeting inter‑State goods. This comparative resonance strengthens the “hostile bias” test used to separate “discrimination” from mere “differentiation.”

Impact and Implications

1) Drafting incentives post‑Jindal Stainless

State fiscal incentives must now satisfy a demanding four‑part compliance template:

Articulation: The reason and objective must be expressly stated in the notification itself (industrial development, environmental externality mitigation, backward‑area uplift, etc.). Post‑hoc affidavits will not suffice.
Targeting: Benefits should be limited to a specified class (e.g., “new industrial units,” “electronics sector”) and, where relevant, geographically tethered to backward/disturbed areas—not State‑wide.
Temporal limits: A short, definite period is critical. Rolling extensions without fresh, contemporaneous reasons risk invalidation.
Neutralisation, not protectionism: Tie the incentive to neutral policy levers (e.g., source of raw material like Rajasthan fly ash) and extend benefits to goods sold in the State irrespective of place of manufacture when the policy objective permits. This ensures equalised tax burden and avoids local‑manufacture fences.

2) Environmental and circular‑economy incentives

The Court’s “design alternative” is particularly significant for environmental policy. If a State wants to promote utilisation of a problematic by‑product (fly ash), it can:

Condition tax relief on proving use of State‑sourced fly ash (or on demonstrable reduction of local environmental burden); and
Apply the benefit to all goods sold within the State meeting the condition, regardless of where they are manufactured.

This aligns fiscal tools with environmental outcomes without crossing Art. 304(a)’s anti‑protectionist boundary.

3) GST era and beyond

While the case arises from a pre‑GST VAT regime, the principles remain salient:

States continue to legislate taxes outside GST (e.g., excise on alcohol, electricity duty) and issue remission/exemption notifications.
Even within the GST architecture, differential incentives via non‑tax instruments must avoid protectionist bias against inter‑State goods.

Expect audits and legal challenges to legacy and current State incentive schemes using this decision’s criteria.

4) Litigation and restitution

The Court’s pass‑through direction—refund only if incidence not passed to consumers (with 6% interest)—signals a calibrated restitution approach common in indirect tax litigation. Assessees should be prepared to demonstrate incidence to claim refunds.

Complex Concepts Simplified

Part XIII (Articles 301–304): Think of India as a single market. States can tax goods, but cannot use taxes to disadvantage goods from other States.
Article 304(a) “Discrimination” vs “Differentiation”: Differentiation is permissible if it is not protectionist/hostile. Discrimination, in this context, means creating a tariff/fiscal wall to favour local goods over out‑of‑State goods.
Video Electronics exception (narrow): States may grant time‑bound, reasoned incentives to a specified class of units, typically in backward/disturbed areas, to develop the economy. Blanket, open‑ended, State‑wide preferences are out.
Reasons must appear on the face: Notifications must disclose their purpose and rationale. Later explanations in court filings cannot cure silence in the notification.
Rebate vs Exemption: A “rebate” that effectively nullifies tax for local units works like an exemption; courts look at effect, not label.

Why the High Court’s Approach Was Wrong

Over‑reliance on Video Electronics: The High Court equated Rajasthan’s broad, State‑wide, multi‑year exemption with the carefully circumscribed incentives in Video Electronics. The Supreme Court corrected this by emphasising the narrowness of the exception.
Promissory estoppel cannot trump the Constitution: There is no estoppel or acquiescence against the enforcement of constitutional limitations (per Shree Mahavir Oil Mills).
Ignoring the “face of the order” requirement: Accepting ex post reasons via affidavits contravened Mohinder Singh Gill and Gordhandas Bhanji.

Practical Checklist for Policy‑Makers

State the specific objective in the notification (industrial/sectoral development; environmental mitigation; backward‑area uplift).
Define a specified class (e.g., “new units established between X and Y dates,” or “electronics/renewables sector”).
Confine to backward/disturbed areas where appropriate; avoid State‑wide blanket preferences.
Impose a short, definite time window; avoid rolling extensions without a fresh, stated rationale.
Where objective relates to raw material sourced in the State, tie benefit to use of that raw material and apply to all goods sold in the State meeting the condition, irrespective of manufacture location.
Ensure parity of burden between local and imported goods; conduct and record a tax‑incidence analysis.

Conclusion

The Supreme Court’s decision in U.P. Asbestos v. State of Rajasthan is a significant restatement of Article 304(a) doctrine in the post‑Jindal Stainless era. It narrows the ambit of the Video Electronics exception to truly reasoned, time‑bound, non‑hostile, backward‑area‑driven incentives and insists that such justifications must be evident on the face of the notification. By striking down a State‑wide, manufacture‑location‑based exemption untethered to its professed environmental rationale, the Court reinforced the constitutional guarantee of a common market under Part XIII and provided a practical drafting roadmap for States to pursue legitimate developmental or environmental goals without erecting protectionist barriers.

Key takeaways:

Only discriminatory taxes are barred by Article 304(a), but “discrimination” includes design features that favour local manufacture in a protectionist sense.
Reasons must be embedded in the instrument; affidavits cannot rescue silent notifications.
Incentives must be tightly targeted (class‑specific, time‑limited, backward‑area linked) and neutral in design; where feasible, tie benefits to raw‑material sourcing rather than manufacture location.
Jaiprakash Associates remains good law; rebates functioning as exemptions can be discriminatory.

The judgment advances both the unity of India’s common market and the discipline of reasoned fiscal policymaking. States can, and should, continue to innovate with incentives—but on constitutionally even ground.