Anakapalle Coop. Agrl. &
Industrial Society ltd. Vs. Union of India & Ors  INSC 271 (6
MATHEW, KUTTYIL KURIEN MUKHERJEA, B.K.
CITATION: 1973 AIR 734 1973 SCR (2) 882 1973
SCC (3) 435
CITATOR INFO :
RF 1974 SC 366 (62) RF 1978 SC1296 (64) RF
1983 SC1019 (34) E 1987 SC1802 (9) F 1987 SC2351 (9,12) 1990 SC1277
(2,5,6,7,11,12,13,54,61) E 1990 SC1851 (28) R 1991 SC 724 (13)
Essential Commodities Act (10 of 1955) s. 3
(3C) and Levy Sugar Supply Control Order, 1972-Fixation of price of levy
sugar-It correct principles applied-1972-Order, if invalid.
The Levy Sugar Supply Control Order, 1972,
fixing the price of levy sugar was made under s. 3 of the Essential Commodities
Act. Its validity was challenged in petitions under Art. 32.
Dismissing the petitions,
HELD : (1) (a) Sub-section 3(3C) of the Act
is not confined to levy sugar only. Fair price under the sub-Section has to be
determined in respect of the entire produce, ensuring to the industry a
reasonable return on the capital employed in the business of manufacturing
sugar, and, in considering whether a reason-able return has been allowed the
profit on the free sale of sugar can be taken into account. [887 A-B] Panipat Co-operative
Sugar Mills v. Union  2 S.C.R.
(b)Section 3(3C) clearly envisages and
contemplates the fixation of different prices for different areas. It hardly
matters if areas are called zones. The constitution of zones for price fixation
is not an innovation and goes back to 1959, when the Tariff Commission made a
detailed report on the cost structure of sugar and the fair price payable to
the industry. [887 F-G] (2)(a) The Tariff Commission, 1969, however,
recommended the constitution of 15 zones largely on State-wise basis with
exceptions in case of U.P., Bihar which were divided into 3 and 2 zones
respectively, after an elaborate inquiry into the working of the Zonal system.
There was thus ample and abundant justification for continuing and sustaining
the zonal system. There is no basis for the contention that the price fixation
has to be made with reference to the cost of each individual unit in the zone.
The basis of a fair price for sugar would have to be built an a reasonable efficient
and representative cross-section on whose working costschedules will have to be
worked out and price determined by the Government under s. 3(3C) of the Act,
doing justice to the weak and strong alike. Any loss to the petitioners may be
due to mismanagement, lack of efficiency and following a wrong investment
policy which have nothing to do with the zonal system. Not a single expert body
countenanced the suggestion that price control should be unit-wise, and even
before the Tariff Commission no such point of view was pressed by the sugar
industry. [892 E-F; 893 F-G; 894 D, FG; 896 G-H] Panipat Co-operative Sugar
Mills v. Union  2 S.C.R.
860 1972, followed.
(b)It is futile to say that the zoning system
should not have been done State-wise, especially when climatic and
agro-economic condition,-, have been taken 'into consideration while
constituting the zones. If any 883 other system had been followed it would have
become impossible to work out a proper cost-schedule for the zone.
It would have created several problems and
difficulties particularly with reference to the taxes, duties etc. which are
levied by each State and the wages which are payable to the workers in the
different States which vary from State to State. [897 H; 898 C-E] (c)In the present
cases, while classifying zones on geographical cum agro-economic
considerations, there has been no discrimination made nor does the price
fixation according to each zone, taking into account all the relevant factors,
give rise to any such discrimination as would attract Art.
14. Once it is recognised that prices could
be fixed according to the zones, the cost schedules that have been worked out
by the Commission have necessarily to be different for each zone, because, the
various items which go into cost differ from zone to zone. [899 D-F] (3)(a)
Sub-section (3C) lays down the various components for determining the price of
sugar. Clauses (a), (b) and (c) relate to the total cost which consists of the
minimum price of sugar cane as fixed by the Government, the manufacturing cost
and the duty or tax. Clause (d) relates to the return on the capital employed.
The very fact that cl. (a) provides that the minimum price fixed for sugar cane
has to be taken into account shows that the actual cost is immaterial.
Moreover, while fixing prices according to zones, it is impossible to take the
actual cost of each manufacturer or producer and fix the price accordingly.
Hence, the methods followed by the Tariff
Commission, which have stood the test of time and have been incorporated in the
sub-section, have been followed in the fixation of price of sugar. The fact
that in some cases their actual cost may be in excess of the price fixed cannot
be a ground for striking down the price fixed for the entire zone in accordance
with accepted principles. It may be that uneconomic units may suffer losses,
but what they cannot achieve in the open market they cannot insist on where
price has to be fixed by the Government. The Sugar Enquiry Commission, in its
1965-report, expressed the view that 'Cost-plus' basis of price-fixation
perpetuates inefficiency in the industry and hence cannot always be the proper
basis for price fixation. [899 F-H; 900 H; 901 A-E] (b)The Tariff Commission
had however recommended that as a measure of neutralising relative cost
advantages and for rectifying the disparity in the ex-factory price structure,
a graded slab system of excise duty may be introduced in place of the present
flat rate. It is for the Government to take an early decision with regard to
the recommendation, but as the Government is not bound to accept every
recommendation of the Tariff Commission, this Court cannot strike down the
Price Control Order. [901 H; 902 A-C] (c)The Tariff Commission, which was in
full possession of all facts, was satisfied that the requirements of the sugar
industry could be more equitably met by the departure from the conventional
method of giving a return on the basis of a certain percentage on the capital
employed, and by adopting instead a uniform amount of Rs. 10.50 per quintal as
the margin to be added to the other cost in arriving at a fair price of the
sugar. The working of the Tariff Commission in arriving at the figure also
shows that the Commission had allowed addition on account of the increase in the
rate of interest on money borrowed. It is true that in Premier Automobiles v.
Union of India, A.I.R. 1972 S.C. 1690, 16% return on the capital employed was
considered to be reasonable, but out of that return, the car manufacturers,
unlike the sugar producers, were made liable to pay minimum bonus, interest on
borrowing, financial charges, warranty charges and guarantee commission. [902
C, F-H; 903 H; 904 AF] 5--L521 Sup. Court/73 884 (4)(a) The Tariff Commission
had decided in favour of continuing the existing method of computing the
quantum of depreciation on the basis of zonal averages of the costed units; and
it was added that the figure so adopted was automatically to undergo an upward
revision if and when the revision contemplated by the draft rules seeking to
liberalise the depreciation to be earned-under the Income tax law was brought
into effect. The statement furnished by the Government shows that the increase
in depreciation has been allowed in accordance with the new rate of
depreciation under the Income-tax Rules. [905 E-H 906 A-C] Premier Automobilies
case, A.I.R., 1972 S.C. 1690, followed.
(b)The Tariff Commission in 1959 and the
Sugar Enquiry Commission in 1965 considered that no provision need be made for
the purpose of rehabilitation and modernisation; but the Tariff Commission in
1969, made a recommendation. The conditions which prevailed in 1959 and 1965
were different and the latest view expressed in 1969, 'Ought to have received
serious consideration by the Government. But, merely because Rs. 2.00 per
quintal, as recommended by the Commission, had not been taken account while
fixing the price of levy sugar, the price as fixed would not be struck down,
because. its non-inclusion is in no way violative of s. 3 and 3A of the Act.
[906 E-F; 907 A-B, G; 908 B-D] [The Government should, however, give serious
and immediate consideration to the matter and take a decision without further
delay] [908 D] (5)There is no serious inaccuracy or infirmity, factually or
otherwise, in the escalations allowed by the Tariff Commission and accepted by
the Government in fixing the price of sugar. [908 G] (6)There is nothing to
show that payment of gratuity or liability there for had not been taken into
account while fixing the price for levy sugar. [L909 C-D] As regards bonus, the
rate of minimum bonus had been raised from 4% to 8.33% by the Payment of Bonus
Amendment Ordinance, 1972, but as the Bonus Ordinance was promulgated after the
prices were fixed by the impugned Order, that Order cannot be struck down on the
ground that the prices fixed by it did not take into account the changes in the
rate of minimum bonus made by the Ordinance. Even so, in the changed
circumstances the Government ought to make appropriate modifications in the
impugned Order in respect of the prices of levy sugar. [910 B-E]
ORIGINAL JURISDICTION: Writ Petitions Nos.
279-283, 293, 296, 297, 300, 303, 304 & 306 of 1972.
Under Article 32 of the Constitution of India
for the enforcement of Fundamental Rights.
S.V. Gupte, K. Srinivasamurthy, Naunit Lal
and M. N.Shroff, for the petitioners (in W.P. No. 279/72).
K.Srinivasamurthy, Naunit Lal and M. N.
Shroff, for the petitioners (in W.P. Nos. 280-283 & 303/72).
P.Ram Reddy, S. Kondala Rao and G. N. Rao,
for the petitioner (in W.P. No. 293/72).
A.K. Sen, N. R. Khaitan and O.P. Khaitan for
the petitioner (in W.P. No. 296/72).
L.M. Singhvi, N. R. Khaitan and O. P.
Khaitan, for the petitioner (in W.P. No. 297/72).
885 C.K. Daphtary, R. K. P. Shankardass, R.
N. Banerjee, H. K. Puri and S. K. Dhingra, for the petitioner (in W.P. No. 298/72).
A. Subba Rao, for the petitioner (in W.P. No.
L. M. Singhvi, N. R. Khaitan, O. P. Khaitan
and A. T.
Patra, for the petitioner (in W.P. No.
G. S. Rama Rao, for the petitioner (in W.P.
L. N. Sinha, Solicitor-General of India, G.
L. Sanghi and S. P. Nayar, for the respondent (in W.P. Nos. 279-283/72).
L.N. Sinha, Solicitor General of India, and
S. P. Nayar, for the respondents, (in W.P. Nos. 293, 296, 297 298, 300, 303,
304, & 306 of 1972).
B.Sen, Leila Sheth and B. P. Maheshwari, for
the intervener (Upper Ganges Sugar Mills).
A.Subba Rao and B. K. Seshu, for interveners
(Nizamabad Co.-opt Sugar Factory & Nizam Sugar Factory).
M.C. Setalvad, P. N. Tiwari, J. B. Dadachanji
and O. C.Mathur, for the intervener (Mahalaxmi Sugar Mills).
C. K. Daphtary, J. B. Dadachanji, O. C.
Mathur and P.N.Tiwarifor the intervener (M/s. Hindustan Sugar Mills Ltd.) V. S.
Desai, J. B. Dadachanji, O. C. Mathur and P. N.Tiwari, for the intervener
(Delhi Cloth & General Mills Ltd.).
P.N. Tiwari, J. B. Dadachanji, and O. C.
Mathur, for the intervener (Ganga Sugar Corpn. Ltd.).
The Judgment of the Court was delivered by
GROVER, J. These petitions under Art. 32 of the Constitution have been brought
by or on behalf of the various factories, cooperative societies and Mills which
carry on the business of manufacturing and selling sugar (hereinafter called
compendiously the "sugar producers") challenging the validity and
legality of the Levy Sugar Supply Control Order 1972 made under s. 3 of the Essential
Commodities Act, 1955, hereinafter called the "Act" fixing the price
of levy sugar in the different zones in the country and praying for various
reliefs. Writ Petitions Nos. 279 to 283, 293, 300, 303 and 306 of 1972 are by
the sugar producers in Andhra Pradesh zone; Writ Petitions No. 297 and 304 of
1972 by the sugar producers in North Bihar zone and Writ Petitions Nos. 296 and
298 of 1972 by those in the Punjab zone.
The principal questions that arise for our
determination are, The following:
886 (1) What is the true scope and ambit of
S. 3 (3 C) of the Act ? (2) (a) Whether the system of fixing price for each
zone (the entire country having been divided into 15 zones), is justifiable and
is based on correct principles ? (b) Whether the state-wise constitution of the
zones is proper and justified? (c) Does the zonal system lead to discrimination
and as such is violative of Art. 14 of the Constitution? (3) Is price fixation
based on proper principles and have the prices been determined by following the
correct methods and in accordance with s. 3 (3C) of the Act ? (4) What is the
correct position about depreciation and rehabilitation allowance and the extent
to which these have been taken into consideration in price fixation ? (5) Have
the escalation in various items by which price determination is made been
properly allowed ? (6) Whether the items in respect of payment of additional
bonus as provided by the Payment of Bonus Amendment Ordinance 1972 and gratuity
are taken into account ? The history of control over sugar production, its
distribution and the method followed in the fixation of the fair or levy price
of sugar has been set out in the connected case (Civil Appeal Nos. 1357 to 1369
of 1972) judgment in which also has been delivered today and the same ground
need not be traversed again.
The first question-formulated by us which
arises in these writ petitions can be divided into two parts. The first part
involves the point whether sub-s. (3C) of s. 3 of the Act deals with levy sugar
only and is confined to it alone, particularly, in the matter of determination
of a reasonable return as provided by clause (d) of that sub-section. In the
writ petitions the argument on behalf of the sugar producers has been that the
whole object of having a scheme of partial control under which 60 to 70%, sugar
has to be sold in accordance with the orders made by the Government under S. 3
(f) of the Act for which levy price is payable and the balance is saleable in
the free market would be defeated. The result of accepting an interpretation
that profit on the free sale of sugar can be taken into account while
considering whet-her a reasonable return has been allowed on the capital
employed by the sugar producers would, it has been stressed, be contrary to the
scheme and purpose of the sub-section in question. This aspect of the matter
has been 887 fully dealt with in the above connected case. We have held that
fair price has to be determined in respect of the entire produce ensuring to
the industry a reasonable return on the capital employed in the business of
manufacturing sugar. In other words the contentions of the sugar producers have
The second part of the first question is
whether price fixation according to zones and not unit-wise (we shall call this
"the Zonal system") is permissible under s. 3(3C) of the Act.
According to that provision different prices may be determined from time to
time for different areas or for different factories or for different kinds of
sugar. It has been sought to be established from clauses (a') to (d) of the
same sub-section that what is contemplated is the price fixation of each unit
or factory; otherwise it win not be possible to ensure that a reasonable return
has been secured on the capital employed as required by clause (d). The Tariff
Commission of 1969 has recommended a return of Rs.10.50 per quintal of sugar.
That recommendation having been accepted by the Government (vide its Resolution
dated February 20, 1970) the only way,, so it has been suggested on behalf of
the sugar producers, to ensure that return is to compute the cost of sugarcane,
the manufacturing cost, the duty or tax payable and then add the above amount
by way of return to the aggregate of the aforesaid items mentioned in clauses
(a) to (c) of the sub-section. This can be done if all these items are computed
unit wise and not, by taking a large number of units in an area because the
aforesaid items are bound to vary and be different from unit to unit.
We shall have an occasion to go more fully
into matter while considering question No. (2). But we are unable to agree that
the provisions of s.. 3 (3C) do not in any way warrant the fixation of price
for the zones into which the country may be divided. The aforesaid provision
clearly envisages and contemplates the fixation of different prices for
different areas. It hardly matters if areas are called zones. The previous
history, as will be presently seen, also fully supports such a view. The
Constitution of zones for price fixation is not an innovation and goes back to
1959 when the Tariff Commission made a detailed report on the cost structure of
sugar and the fair, price payable to the sugar industry.
It will be useful to note certain preliminary
matters before the various aspects of question No. 2 are considered. In 1930
when the Tariff Board appointed by the Government of India investigated for the
first time the claim for protection from the sugar industry there were only 29
factories producing sugar. Protection was granted to the industry in 1932.
Thereafter the growth of the industry was rapid. By 1938-39, the number of
sugar factories rose to 139. According to the Tariff Commission report 1959,
the number of operating factories at that time was 888 157 with a total output
of 1.98 million tonnes. In 1969 when the Tariff Commission made its report
there were 205 factories with a capacity for production of 34.69 lakhs tons.
The number of factories is stated to have now increased to 221. As the
production of sugar depends on sugarcane, a number of steps have been taken for
the development of sugarcane. The supply of sugarcane of good quality and a
fairly long, season of production are two prerequisites for maintaining the
production of sugar. The duration of the season in the sugar industry means the
period from the date of the start of the crushing by the factory to the date of
finally closing it, and it varies from region to region as it depends on two
factors, (i) availability of sufficient quantity of cane and (ii) period for
which reasonably good quality of cane giving economic recovery of sugar is
available. Sugar recovery depends mainly on three factors : (i) the quality of
sugarcane, (ii) length of the crushing season and (iii) the overall operating
efficiency of the sugar factory concerned.
The idea of preparing the cost schedule for
sugar manufacture dates back to 1937. The first schedule was prepared in 1937
by the Director of the Indian Institute of Sugar Technology, Kanpur. The Tariff
Commission in 1959 was of the view that to construct the cost schedule for the
entire country at a uniform' 'Percentage of recovery and identical range of
duration will only result in inflating the All India cost. The Commission
arrived at the conclusion after a study of the break-up cost of individual
regions that cost schedules could be constructed on the basis of actual
recovery and duration as pertaining to each region. It grouped the sugar
factories in various States into four regions or zones based on standard
schedules for a uniform recovery of 10 per cent and for duration ranging from
90 to 200 days.
It appears that some State Governments
represented that the Northern region comprising the States of Uttar Pradesh, Bihar
and Punjab was unduly large with wide internal disparities in costs. The result
was that uniform price fixed for the zone showed large differences in profit
margins. The sugar Enquiry Commission headed by Dr. S. R. Sen in its final
report in 1965 recommended five cost schedules for the same number of zones at
10% recovery and for different durations. Assam with one factory was to be
treated as a separate zone. The Government, however, fixed prices for 16 zones
under the Sugar (Control) Order 1963.
The number of zones kept on changing till it
was increased to 23 for the years 1965-66 and 1966-67. But in December 1967
prices .were fixed for 6 zones including Assam. The Tariff Commission in 1969
recommended the Constitution of 15 zones which suggestion was finally accepted
(see page 67, Tariff Commission Report 1969).
889 We may first take up the group of
petitions of the sugar producers in the Andhra Pradesh Zone.
The position about price of levy sugar in
zone 2 in which the sugar producers in Andhra Pradesh are functioning was that
for the sugar produced in 1968-69, the price-fixed was Rs. 161.14 per quintal
for D-29 quality. After the creation of fifteen zones in February 1970, the
price for levy sugar for the Andhra Pradesh zone was fixed at Rs. 150.43 per
quintal inclusive of excise duty. In May 1971 sugar was decontrolled which
continued till December 1971. From that time till June 1972 when partial
control was re imposed, a scheme of voluntary control of Sugar was in force. By
agreement between the Government and the sugar producers 60% of the sugar
released every month had to be placed at the disposal of the Government at Rs.
150/per quintal exclusive of excise duty for D-30 quality. Under the impugned
order the price of Rs. 121.97 per quintal was fixed for D-29 grade and Rs.
122.82 for D-30 quality for the Andhra Pradesh zone.
One of the main grievances of the sugar
producers is that the above price was far below the price payable even under
the voluntary scheme of distribution and so far as the actual cost of
production of the various petitioning units is concerned the same was greatly
in excess of the price of levy sugar fixed by the impugned order. Thus the
sugar producers in this zone were being made to suffer huge losses instead of
getting a reasonable return as provided by clause (d) of s. 3 (3C) of the Act.
All this was attributed to the zonal system which is stated to suffer from the
following serious defects apart from others:
(i) The sugar producers in Andhra Pradesh
varied greatly in economic viability; some units were very large and some very
small, e.g., crushing capacity of 3750 tonnes at Vayyuru and 800 tonnes at
Seethanagaram respectively out of the costed, units (see Appendix 32, page 207,
1969 report, Tariff Commission).
(ii) A uniform price has been fixed for all
units although the manufacturing cost varieswidely from unit to unit.
(iii)The extreme disparity was evident from
para 9.5.1 of the 1969 report which showed that the actual crushing reason
(based on 22 hours per day) for the individual unit had a divergence ranging
from 26 days to 195 days.
State-wise averages indicated a range from 26
to 153 days whilst the all India weighted average came to 108 days for the
In Andhra Pradesh the duration in 1966-67 890
which is the base year of the costed units varied from 163 days to 41 days.
(iv) Only 7 units out of 19 units in Andhra
Pradesh zone were selected for working out the averages. This highly involved
highly disparate and unfair comparison.
(v) According to table 9.3 at page 75 of the
1969 report the average of the cane actually crushed by all the 7 costed units
came to 1233 tonnes per unit whereas the average of the cane actually crushed
by all the 19 units in the State is 1065 tonnes. According to the figures
supplied by the counsel for the petitioner at the time of arguments the total
cane actually crushed in 1966-67 by all the 19 units in Andhra Pradesh was
The average duration for that year being 82
days the average daily crushing of the 19 units worked out to 1065 tonnes per
unit whereas the crushing capacity of 1233 tonnes per day wits taken as the
base. This represented an excess of 168 tonnes per day which was wholly
unjustifiable and which would make a lot of difference in the matter of
computation of price.
(vi) The conversion cost given at pages 209
and 210, Appendix 33 of the 1969 report worked out to Rs. 25.86 per quintal
which is the conversion cost for 1233 tonnes relating to 7 costed units but the
average daily crushing of all the 19 units being 1065 tonnes the actual
conversion cost will work out-to Rs. 29.94.
Thus the difference in conversion cost would
be Rs. 4.08 per quintal for sugar.
(vii)The weighted average were on a very
restricted basis and hand-picked units could not furnish proper guidance The
weighted average were farcical and were in no way different from the ordinary
(viii)No account has been taken of the
admitted fact that duration and recovery often depend on vagaries of nature or
unforeseen events. For instance in the case of the sugar producers in Writ
Petition No. 283/72 the duration was 162 days in 1969-70, the recovery being
9.493% but it came down to 78 days in 1971-72 because the sugarcane crops were
damaged by a highly distructive disease.
In the North Bihar group,, of petitions of
which writ petition 297/72 may 'be taken to be representative points similar to
the above have been raised. For the North Bihar zone, the prices891 fixed by
the impugned order were Rs. 157.55 for D-30 and, Rs. 155.85 per quintal for
D-29 qualities respectively.
According to the sugar producer its own cost
of production comes to Rs. 181.96 per quintal without any return. Owing to the
faulty price fixation, this unit was suffering a heavy loss, the accumulated
amount of loss having reached the figure of Rs. 9.50 lakhs. According to the
statements and tables prepared and submitted to us, in the North Bihar zone the
cost factors of the costed units are so disparate and unequal that five out of
the 8 costed unit$, do not even get their actual cost, leave aside any return.
The tables relating to the weighted averages
are meant to show that there is no particularity or charm about the weighted
averages. It is not an average which tends to remove the disparity between the,
various units in a zone.
In the table showing the ex-works price of
sugar based on minimum price of the cane, duration and recovery for North Bihar
zone compared with individual units for the season 1971-72 the zonal average
cost on the basis of 66 days' duration and 8.86% recovery and Rs. 91.34 cost of
cane comes to Rs. 139.52 per quintal excluding the return. After applying cost
schedules to cane price duration and recovery of individual factories the
results show that at least 10 factories suffer heavy losses because their cost
ranges between Rs. 623. 81 per quintal of the factory at Ryam to Rs. 139. 83 of
the factory at Chanpatiya. This is exclusive of the return of 10. 50%. It may
be observed here that the factory at Ryam has a duration only of 7 days which
is almost 'a freak figure and explains the high cost incurred by it for
manufacturing sugar. But the total number of factories in North Bihar zone is
25 and the cost of other factories varies between 138.44 to 121.89 per quintal.
It is next pointed out that under the averaging technique the Central
Government fixes a common price for all sugar factories in every State or price
zone by averaging extraordinary cost disparities. The average cost formulae
ignore disparity in (a) cane cost per quintal; (b) duration;
(c) recovery, (d) daily crushing capacity and
(e) capital employed by one factory and the other in each zone.
Writ Petition No. 298/72 is representative of
the Punjab group. There are five sugar factories in the Punjab zone.
The price of levy sugar was fixed under the
impugned order at 147.71 per quintal. Details of the audited manufacturing cost
were filed with the petition for the 1971-72 season.
It was claimed that the manufacturing cost
for that season, came to Rs. 208.22 per quintal exclusive of interest on
capital employed which worked out to another 16.40 per quintal. Thus the cost
including interest came to Rs.224.62 per quintal. The total loss on stock as on
July 1, 1972 would come to Rs. 9,74,350.77. It was stated that the 892
petitioner had recovered an average price of Rs. 245.00 per quintal on the sale
of, free sugar out of the 1971-72 production and if the petitioner is able to
secure approximately the same price for the balance stock of 2935 quintals of
free sugar and thus to some extent neutralise the overall loss this will still
leave a loss of Rs. 87.17 per quintal to be made up on the sale of its present
stock of levy sugar. During the month of December 1971 the duration was
seriously affected by the Indo-Pakistanhostilitiesan important factor which has
not been taken into consideration by the government.
Servshri M. C. Setalvad, B. Sen and V. S.
Desai who have appeared for the Interveners Nos. 6, 3 and 7 in Writ Petition
No. 297 of 1972 respectively do not support the arguments challenging the zonal
system. On the contrary a strong case has been made by them in favour of the
zonal system. The Interveners whom they represent are obviously the low cost
units and are in favour of the zonal system being retained. The tug of war in
respect of the zonal system is between the high cost units and the low cost
the former are against it and the latter in
favour of it.
The system of fixing the prices, according to
certain regions or zones, is not a new one. The tariff Commission in 1959
favored the formation of four zones. In the report of the Sugar Enquiry
Commission 1965 it was pointed out that the Government had actually fixed the
prices for 22 zones which meant that from four zones the number had been
increased to twenty two or more. The commission was of the view that there
should be five zones only in addition to Assam. The Tariff Commission, 1969,
however recommended the constitution of fifteen zones largely on State-wise
basis with an exception only in case of Uttar Pradesh and Bihar.
Uttar Pradesh was divided into three zones
and Bihar into two. The Tariff Commission had been specifically requested to
inquire into the working of the zonal system, the main point for inquiry being
the zones into which the sugar producers should be grouped having regard to the
basis of classification to be recommended by the Commission. The view of the
Commission was that on the whole the number of price zones should be fifteen
which would reduce, though not eliminate, the inter-se anomalies in the cost
structure without resorting to the extreme of the fixation of price for each
unit or a single or at the most two, one for the sub-tropical and other for the
tropital one. The Tariff Commission hoped that in the course of time conditions
would be created making the operation of the second alternative feasible. From
Chart IV relating to production of sugar ,to be found in the report of the
Sugar Enquiry Commission 1965, the All India production arose from 12,00,000
tons. to 32,00,000 tons. in 1964-65. This notwithstanding the fact that the
prices 893 were being fixed on the basis of regions. In para 19.7 at page 127
of the said report the Commission made some very useful observations. It
rejected the industry's contention that under the system of determining price on
the principle of average for a zone there was no incentive for heavy investment
in block. If was, pointed out that in recent years of control-on sugar in spite
of the sugar prices having been-fixed on a zonal system there had been a
substantial addition to the capacity even in the subtropical belt It was stated
"Further, a study of the cost structure
of the old and new factories reveals that in the total cost there is hardly
much difference between the Cost of production in the old factories where the element
of depreciation is very low and that in the new factories where its incidence
is fairly heavy. While in an old unit the capital cost is lower, the recurring
cost is often higher, in a new unit of comparable capacity, it tends to be
opposite. What the industry ought to be concerned with is the untimate
ex-factory price. To take out of context one element of cost that goes into the
total cost and then to plead that because the incidence in respect of that
element of cost is low in the case of old plants some allowance should be given
to the industry as a whole, is not justifiable.", It is somewhat difficult
to accept the argument of those who are opposed to the zonal system that the
loss alleged to have resulted to some of the sugar producers can be attributed
to the prices having been fixed zone-wise. For instance, in the Punjabzone the
crushing capacity of all the factories is practically the same e. about 1,000
ton per day. The prices which were fixed by the Government were on the basis of
67 days duration with a recovery of 8.75%. In the case of Malva Sugar Mills the
actual duration was 95 days, the recovery being 8.78%. Ordinarily and in the
normal course Profits should have been made by the said unit and it should not
have incurred losses. The reasons for incurring losses can be many including
mismanagement, lack of efficiency and following a wrong investment policy which
have nothing to do with the zonal system. This system by and large leads to
efficiency and affords an incentive to cut down the cost. It is only when there
is keen competition between the units in the same zone that a real effort will
be made by each unit to reduce its cost and make the working and running of the
unit more efficient. The essence of the matter is that a commercial concern can
be a success only if these is proper planning and efficient management. The
argument on behalf of the sugar producers which claim that they have been
running into losses because of 894 the zonal system can hardly be sustained on
the evidence on the material produced by them. It is true that in a few cases
all the data and the details of costs etc. were set out in the petition and
were supported by statements made out from audited accounts but in most cases
it was at the stage of rejoinder or at the time of arguments that elaborate
statements were prepared showing figures of losses into which these units are
running owing to. the fixation of price by the impugned Order. The government
in these circumstances could possibly have had no opportunity to check up the
correctness of all the figures and even if that could be done as, weekly
returns are submitted on prescribed forms to the authorities concerned it would
still not be possible for the government to determine their accuracy without a
complete investigation being carried out. Nor could it be ascertained with out
a prolonged investigation what the real causes were for some of the sugar
producers incurring much heavier costs than the others.
The extreme position taken up on behalf of
some of the petitioners that the prices should have been fixed unit-wise and on
the basis of actual costs incurred by each unit could hardly be tenable. Apart
from the impracticability of fixing the prices for ,each unit in the whole
country the entire object and purpose of controlling prices would be defeated
by the adoption of such a 'system. It must be remembered that during the
earlier period of price control the price was fixed on an all India basis. That
still is the objective and if such an objective can be achieved it cannot be
doubted that it will be highly conducive to proper benefit being conferred on
the consumers. According to the Commission the objective to be achieved should
be to have only two regions in the whole country, namely, sub-tropical and
tropical. Not a single expert body appointed by the Government of India from
time to time countenanced the suggestion that price control should be
unit-wise. It appears that even before the Tariff Commission such a point of
view was understandably not pressed on behalf of the sugar industry. The low
cost units demanded the formation of the larger zones. The high cost units
asked for the formation of smaller zones. No material has been placed before us
to show that there was any serious demand for prices being fixed unit-wise.
Even in the arguments it was almost common ground with the exception of one or
two dissentient voices that zoning is unavoidable in our country in the matter
of fixing of the price of sugar.
We may now advert to some of the salient
flaws and infirmities which have been sought to be shown with the assistance of
various facts and figures from which the zonal system is said to suffer.
Firstly the method of selection of the units for the purpose of 895 costing and
taking of the averages has been subjected to severe. criticism.
As stated in para 9.1 of Chapter IX of the
1969 report the .findings of the Commission were based on 66 costed units out,
of 200 working units in the industry. It was also mentioned in. para 9.1.1 that
on a scrutiny of the cost forms it was found that the information furnished by
most of the non-costed units was not satisfactory. The defects noticed were in
regard to allocation of costs under the various heads and inclusion of certain
items which should ordinarily have constituted a part of the return. It was
further stated that the cost Accounts Officers of the Commission made a
detailed scrutiny of the accounts in the selected. units and worked out costs
in a fair and equitable manner to enable the Commission to determine appropriate
costs for each unit for detailed cost investigation. The 66 units which were
costed out of 68 selected for the purposes accounted for nearly 34% of the
total capacity and 37% of the total production of sugar in 1966-67. The average
duration of the costed units was 101 days with a recovery amounting to 9.73% as
compared to All India figure of 95 days and 9.91% recovery respectively. The
commission was the best judge of selecting the units for cost study and for
working out the average cost. The reasons given by it for 'Selecting the costed
units do not suffer from any disregard of the recognised principles of costing.
It is true that the selection of some units out of all the units in a
particular zone can lead to the anomalies and the hardships whichhave been
pointed out on behalf of the sugar producers. To take an illustration the
average with regard to crushing capacity in the Andhra Pradesh Zone might have
been different if all the units had been taken into consideration. But the
Commission could not have taken the averages of all the units unless it had
selected them for costing which in the very nature of things was not practical
and which for the reasons given by the Commission itself could not be done
because of theunsatisfactory nature of the information furnished by most of the
Indeed the petitioner in " Writ Petition
no. 279, did not even reply or send any memoranda to the Commission although
the questionaries were sent to it. Similarly in Andhra Pradesh Zone three other
units. Amadalavalase Coperative Agricultural & Industrial Society Ltd.
Sivakarni Sugars Ltd. and Challapali Sugar Ltd. did not send any reply or
memoranda as is apprarent from Appendix IT in the report.
As regards the averages and weighted averages
which have beer, worked out by the Commission for the purpose of fixing .prices
in respect of the varying figures of different items of cost we are unable to
appreciate how these have not been properly worked out. It may be that if a
different method had been adopted than the one followed by the Commission the
averages 896 worked out might have been different but the principle Df weighted
average which was followed with regard to those items where it could be applied
is a well recognised one and was adopted even by the Sugar Enquiry Commission
The method of working out the weighted
averages is well known in the determination of price and has been employed in
working out the cost structure of the sugar industry and fixing of sugar prices
on prior occasions also, e.g., in 1959 by the Tariff Commission. As pointed out
in Cost Accounts' Handbook edited by Theodore Lang, 1945 Edn. the items of a
series to be averaged vary in importance in some quantitative way in addition
to the importance explicitly given by the figures in the series. An
illustration of weighted average occurs in pricing stores issues where
different lots of raw material have been acquired at different prices. In such
a case a simple average of price is usually not considered desirable. Examples have
been given in the book to show that the simple average while it may be
technically correct is practically valueless or positively misleading under
certain circumstances. "Where quantities as well as dollar values are to
be considered, weighted averages are far more significant than a simple
average." We may next deal with the harsh and unjust results to which the
zonal system adopted by the Commission is stated to lead. The figures given
about the actual cost of the petitioning units worked out according to the
tables and the formulae given in the Tariff Commissions report have been
produced to demonstrate the extent and magnitude of the financial loss to which
the petitioners are being put or will be put. The stress has been on the utter
disregard of the principle embodied in sub-s. (3C) of s. 3 of the Act that a
producer is entitled to a reasonable return on the capital employed in the
business of manufacturing sugar.
The petitioners have sought to establish that
instead of earning any return they are actually out of pocket in the matter of
cost owing to the price fixation by the government worked out in accordance
with the tables given in the report. Apart from what has previously been
noticed about the various factors which may be responsible for incurring of
high cost we are unable to agree that the price fixation has to be made with
reference to the cost of each individual unit in the zone. As pointed out in
our judgment in the connected case (supra) the basis of a fair price would have
to be built on a reasonably efficient and representative cross-section on whose
working cost schedules will have to be worked out and price determined by the
government under s. 3(3C) of the Act. The cost schedule must be such as would
do justice to the weak and strong alike. There can thus be no doubt that 897
there was ample and abundant justification for continuing and sustaining the
We shall now deal with clause (b) of question
No. 2. In Writ Petition No. 280/72 it has been pointed out that the petitioner
factory incurred heavy loss in spite of sale in free sugar No sugarcane, it has
been claimed, was available' for more than 60 days i.e. from December 22, 1971
to February 19, 1972. The actual cost of production has come to 'Rs. 173.90.
The recovery of this factory is 9.54%. There is another factory situate At
Rayagoda at a distance of 80 miles from the petitioner. As that happens to be
in the State of Orissa the price of Rs. 152.98 per quintal has been fixed for
sugar in that zone. If a division had not taken place on linguistic basis but
agro-economic and agroclimatic factors-had been taken into consideration the
petitioner would have got a price of Rs. 152.98 in the same way as the factory
in the Orissa State. According to this petitioner the reasoning of the Tariff
Commission as given in para 31 at page 108 of the report for constituting the
zones on the basis of States is altogether unconvincing and highly fallacious.
In Writ Petition No. 283/72 (The Chittoor Coop. Sugar Ltd.) the factory is on the
border of Tamil Nadu State but is within the State of Andhra Pradesh.
There are two factories in the Tamil Nadu
State which are said to be at a distance of 80 km. from this factory, namely,
Murgappa (Palar Sugars Ltd.) and North Arcot Joint Coop. Sugars Ltd. The levy
price fixed for Tamil Nadu zone for 1971-72 is Rs. 134.01 per quintal. Although
it can be safely presumed that these factories within such a short distance
would be governed by the same agro-climatic and agro-economic conditions yet
they have been grouped differently resulting in serious disparity in prices. In
Writ Petition No. 293/72 the factory is at Bobbili in the State of Andhra
Pradesh. The duration during the year in question was 78 days, the recovery
being 8.929%. Its crushing capacity is 850 tonnes per day as compared with the
Nizam Sugar Factory Ltd. which has a duration of III days, recovery of 11-18%
and crushing capacity of 4500 tonnes per day. This Bobbili factory is a pigmy
as against the giant.
Its actual cost per quintal is Rs. 184.65
whereas the cost of the Nizam Sugar Factory is Rs. 117.00. Total production of
the petitioner factory is 50,000 odd tonnes whereas that of the Nizam Factory
would be about 5 lakh tonnes odd. The levy price for both these factories has
been fixed at the same figure. All this, it is urged, shows the gross defects
in the state-wise zonal system. If there are very big units and there are very
small units in the same zone either they must be classified according to their
size or the price must be fixed for each individual unit.
The criticism that climatic and agro-economic
conditions have not been taken into consideration while constituting the zones
does 898 not appear to be valid. The climatic conditions in the State of Assam,
West Bengal, Orissa and Kerala which are in one zone seem to be substantially
similar. The Commission has pointed out that there is only a small number of
units in each one of these States and the costs are more or less similar. Bihar
has beer. divided into two zones and U.P.
into three zones. The' reasons are given in
para 8.16 of Chapter VIII of the 1969 report. It has been pointed out that the
climatic conditions of the' two areas, namely, the Meerut Division of the
Western U.P., and Gorakhpur Division are different as they are separated by 300
miles. The units in Central U.P. had also, for the same reasons,' to be
constituted into a separate group. On similar basis the units in Bihar had been
sub-divided into two zones, North and South. It is, therefore, altogether
futile to say that the zoning' should not have been done state-wise. If any
other system had been followed it would have become impossible to work out a
proper cost schedule for the zone.
For instance, if the Chittoor Coop. Sugars
Ltd. which is in Andhra Pradesh towards the extime end and which is very near
the State of Tamil Nadu had been grouped with the factories in Tamil Nadu or if
the Nizam Sugar factory and the Nizamabad Coop. Sugar Ltd, which are quite near
the border of Maharashtra State had been grouped with the factories in
Maharashtra, it would have created several problems and difficulties
particularly with reference to all the taxes, duties etc. which are levied by
each State and also the wages which are payable to the workers in the different
States which admittedly vary from State to State.
Coming to clause (c) of question No. 2, the
allegations regarding discrimination are more or less general based on the
various disparities already noticed. In Writ Petition No.279/72 more detailed
allegations have been made which may be referred to briefly. Before the
constitution of 15 price zones, all the southern States were getting the same
price except the Nizam factory and the Nizamabad Cooperative factory Which were
in a different zone (i.e. Zone 1) though situate in Andhra Pradesh. According
to the Tariff Commission, 1969, the cost structure depends mainly on the
recovery and duration but the impugned order prescribes a higher selling price
in the case of Maharashtra, Mysore, Gujarat, Tamil Nadu, Uttar Pradesh etc.
than Andhra Pradesh although the duration and recovery are higher in the former
States than the latter State. Even according to the Tariff Commission report
the cost of production in Andhra Pradesh worked to Rs. 103.07 for 1969-70 for
which a levy price of Rs i5O.25 was fixed whereas for Tamil Nadu the cost of
production worked out to Rs. 97.83 while the levy price has been fixed at Rs.
166.16. Thus the classification has not been made on a 899 rational basis
having any nexus with the object sought to be achieved, i.e. fixation of a fair
price. It is further stated that in case of factories with longer crushing
season where labour works for 8 to 10 months, the retaining allowance payable
is negligible or nil. This is the case with units in Maharashtra, Gujarat,
Mysore, Uttar Pradesh etc. In states like Andhra Pradesh where duration' is
much less, the management has to pay the wages to the seasonal staff by way of
retaining allowance. This adds to the costs.
In reply it has been pointed out that the
prices were fixed in the different zones on the basis of the Tariff
Commission's recommendations. If there is any variation in the prices fixed
from zone to zone it is the result of the different schedules recommended for
valid reasons by the Tariff Commission. The incidence of retaining allowance
and other costs on the working of the factories in the different zones have
been taken into consideration by the Commission.
In the elaborate arguments on behalf of the
hardly any serious attempts was made to press
the question of alleged discrimination, particularly if the adoption of the
zonal system could not be demolished. Once it is recognised that prices could
be fixed according to the zones the cost schedules that have been worked out by
the Commission have necessarily to be different for each zone.
The various items which go into cost differ
from zone to zone. It is not possible to take out only a few items and find
discrimination, disregarding all the other items or components of costs on the
basis of which price determination has to be made. We are unable to hold that
while classifying zones or geographical-cum-agro-economic consideration, any
discrimination was made or that the price fixation according to each zone
taking into account all the relevant factors would give rise to such
discrimination as would attract Art. 14 of the Constitution.
While examining question No. 3 learned
Solicitor General has reminded us that "cost-plus" cannot always be
the proper basis for price fixation. Even if there is no price control each
unit will have to compete in the market and those units which are uneconomic
and whose cost is unduly high will have to compete with others which are more
efficient and the cost of which is much lower. It may be that uneconomic units
may suffer losses but what they cannot achieve in the open market they cannot
insist on where price has to be fixed by the government. The Sugar Enquiry
Commission in its 1965 report expressed the view that "cost-plus"
basis of price fixation perpetuates inefficiency in the industry and is,
therefore, against the long-term interest of the country.
6--521Sup.CI/73 900 In the book of Cost
Accounting by John G. Blocker and W. Keith Weltmer it has been stated that even
from the point of view of the management, there are three important defects in
the older types of cost analysis; the importance attributed to actual costs,
the historical aspect of the cost figures and the high cost of compiling actual
costs. Management is led to believe that actual costs are the result of
efficient operation, when in reality actual costs may include excessive
quantities of material, defective parts, ineffective use of labour and an
unnecessary amount of time in production. In other words the cost analysis may
not be an indicator of efficient plant operation. Therefore. predetermined
standard material, labour and overhead costs are an important aid in
formulating price policies in planning production and in measuring efficiency..
In the book titled "Price Fixation in
Indian Industries"-a study prepared in collaboration with the Institute of
Chartered Accountants of India-it has been stated at page XV of the
introduction that "costs alone do not determine the prices. Cost is only
one of the many complex factors which together determine prices. The only
general principle that can be stated is that in the end there must be some
margin in prices over total costs, if capital is to be unimpaired and
production maximised by the utilisation of internal surpluses". It is
further stated at page (XVI) that "while the "cost plus" pricing
method is the most common, it may be argued that it is not the best available
method because it ignores demand or fails to adequately reflect competition or
is based upon a concept of cost which is not solely relevant for pricing
decision in all cases. What is essential is not so much of current or past
costs but forecast of future cost with accuracy...... Generally pricing should
be such as to increase production and sales, and secure an adequate return on
capital employed". At page 3 the problem of selection of units for cost
study has been considered. The general practice is to select units of average
size from different centers. Another determining factor in the selection of
units is the availability of cost data of the units to be selected. In India
one hardly comes across standardised cost accounting in the manufacturing
units. In general it may be said that the selection of units should be done on
the basis of availability of data, structure of industry and the objective for
which the study is being made.
Sub-section 3C itself lays down the various
components of determining the price of sugar. Clauses (a), (b) and (c) relate
to the total cost which consists of the minimum price of sugar-cane as fixed by
the government, the manufacturing cost and the duty or tax. Clause (d) relates
to the return on the capital 901 employed. The very fact that clause (a)
provides that the minimum price fixed for the sugarcane has to be taken into
account shows that he actual cost is immaterial.
Moreover under this sub-section price can be
fixed according to certain zones. While doing so it is altogether impossible to
take the actual cost of each manufacturer or producer and fix the price
accordingly. In such a case the methods followed by the Tariff Commission have
stood the test of time and the sub-section itself incorporates or embodies the
principles which have been followed in price fixation of sugar. It is not
therefore possible to say that the principles which the Tariff Commission
followed in fixing the prices for different zones are either not recognised as
valid principles for fixing prices or that simply because in case of some
factories the actual cost was higher than the one fixed for the zone in which
that factory was situate the fixation of price became illegal and was not in
accordance with the provisions of sub-s. (3C). It has not been denied that the
majority of sugar producers have made profits on the whole and have not
suffered losses. It is only some of them which assert that their actual cost is
far in excess of the price, fixed. That can hardly be a ground for striking
down the price fixed for the entire zone provided it has been done in
accordance with the accepted principles. The methods employed by the Tariff
Commission 1969 in preparing the cost schedules as also the formulae for
working out cost schedules for the future are fully set out in the Commission's
report and have been also discussed in the connected case (supra). We need not
go over the same matters again.
There is one matter on which the criticism on
behalf of the sugar producers is legitimate and the force of which even the
learned Solicitor General could not deny. The Tariff Commission had said in
para 9.14 that after taking all factors into consideration it had been
discovered that factories with capacities of less than 1000 tonnes had a
disadvantage of the order of Rs. 3/per quintal and those above 1500 had a
relative advantage of the order of Rs. 2/per quintal compared to the conversion
charges of the average capacity range which had been adopted in formulating the
basic cost schedule. The Commission proceeded to say :
"Having regard to the fact that we have
recommended fixation of uniform prices on the basis of zonal averages it is not
practicable to make the necessary adjustment for rectifying the disparity in
the ex-factory price structure. We would, however, suggest that as a measure of
neutralising these relative, cost advantages related to capacity a graded slab
system of excise duty may be introduced in place of the present flat
902 This recommendation was not accepted by
the government and it was stated that a decision on this recommendation was
being deferred. It is high time that the government took a decision on this vital
recommendation. It cannot be denied nor has thee learned Solicitor General made
any attempt to do so that the aforesaid recommendation of the Commission is
based on sound reasoning and deserves to be accepted and implemented. But as
the government was not bound to accept every recommendation of the Tariff
Commission it is not possible for us to strike down the Price Control Order. It
is for the Government to take an early decision with regard to the above
recommendation of the Tariff Commission.
On the question of return which has been
allowed of Rs.10.50 per quintal a great deal of argument has been addressed on
behalf of. the sugar producers. Firstly it has been submitted that according to
the report of Tariff Commission this figure which was to be, static was to be
effective for a period of 3 years only and the prices cannot be fixed on the
basis of a static figure for all times. The rate on which money can be borrowed
from the banks it is pointed out, has gone up from 9 % to II%. There are other
charges like bank commitment charges etc which the 1969 Commission has not
taken into account. The value of the fixed assets has also gone up and that
fact has been ignored by the Commission. The main criticism is founded on the
figure of Rs. 10.50 per quintal which, it is said, was worked out when the cost
was in the region of about Rs. 96 per quintal in 1966-67. Even according to the
government figures the cost has gone up much higher. The return, therefore, of
Rs. 10.50 per quintal which was fixed on the basis of cost of Rs. 96.20 per
quintal could not possibly furnish the figure of an adequate return which was
contemplated to be 12.5% on the capital employed. The figures worked out by the
learned counsel for the producers and those of the government hardly agree and
it is difficult to reach any definite conclusion whether the basis on which the
Commission recommended that a fixed return of Rs. 10.50 per quintal should be
allowed by way of return was unrealistic and could not be adopted for the
future. The Commission was fully in possession of all the figures of the price
as also the working capital on which the return had to be determined. It was
satisfied that the requirements of the sugar industry could be more equitably
met by the departure from the conventional method, namely, of giving a return
on the basis of certain percentage on the capital employed and by adopting
instead a uniform amount per quintal as the margin to be added to the other
cost in arriving at a fair price of the sugar. According to the calculations
made by the Commission that would provide a relatively efficient unit an amount
sufficient to declare a dividend of the order of 7 to 8% on paid 903 up share
capital after meeting its other commitments such as interest and taxation. It
was stated in arriving at this decision the Commission had made proforma
calculation for return applying 12-1/2% to the zonal averages of the capital
employed and the results are tabulated in Appendix 37. The variations ranged
from 8.23 to Rs. 15.73 per quintal.
Adding to this the element of depreciation,
the overall difference ranged from Rs. 10.01 to Rs. 21.96. By adopting the
standardised figure of Rs. 10.50 per quintal the range of variation had been
narrowed down from Rs. 11. 88 to Rs. 16.94. This was considered to be a more
satisfactory alternative not only from a producer's but also the consumer's
point of view. It was observed that in the areas where large number of low cost
units subsist this amount of return available in terms of money per unit of
sugar produced would be relatively higher. This should provide the needed
impetus for further capital formation for rehabilitation, expansion and
modernisation. According to the statements furnished by some of the producers,
e.g. in Writ Petition No. 297 (Standard Refinery) the actual payment on account
of interest and financial charges had come to 15.28% per quintal. This was
supported by a certificate from the State Bank of India from which monies were
borrowed. Similarly in the case of Writ Petition No. 298/72 (Jagatjit Sugar
Mills) it was claimed that the actual interest charges incurred worked out at
the rate of Rs.10.40 per quintal which entirely wiped out the provision for a
return of Rs. 10.50 per quintal on the capital employed.
The cases of individual units can hardly
furnish a guide for standardising items of cost, the capital employed and the
return in the matter of price fixation for a zone or a region as a whole. Nor
can charges on account of interest incurred by some units in the entire zone
reflect a proper working and management of all the units in that zone. When
prices have to be fixed not for each unit but for a particular region or zone
the method employed by the Commission was the only practical one and even if
some units because of circumstances peculiar to them suffered a loss the price
could not be so fixed as to cover their loss.
That cannot possibly be the intention of the
Parliament while enacting sub-s.3C of s.3 of the Act. If that were so the price
fixation on zonal or regional basis would have to be completely eliminated. In
other words the entire system of price control which is contemplated will break
down because fixation of price for each unit apart from being impractical would
have no meaning whatsoever and would not be conducive to the interest of the
consumer. We may point out that in the case of Premier Automobiles v. Union of
India(1) 16% return on the capital employed was considered to be reason(1)
A.I.R. 1972 S.C. 1690.
904 able. But, it must be remembered that
unfortunately whenever that decision has been discussed no one has taken care
to understand and appreciate that out of the return the car manufacturer were
made liable to pay the minimum bonus of 4%, the interest of borrowings,
financial charges, warranty charges and in some cases the guarantee commission.
In the return which has been allowed to the
sugar producers neither the minimum bonus not additional amounts of warranty
and guarantee charges are payable by them.
In the letter of 8th October 1970 the
Commission pointed out that the order to arrive at the figure of the return on
the capital employed of Rs. 10.50 per quintal the. Commission had made a study
of the various figures in respect of the costed period average of 5 years'
duration and recovery and proforma calculation for the capital employed.
Thereafter the capital employed had been computed on a uniform basis taking
into account the written down value of assets and working capital equal to six
months' cost of production including depreciation. After deducting the average
net fixed assets from the capital employed the working capital came to Rs. 55
per quintal. It was stated that instead of the figures indicated in para 9.13
of the 1969 report the working capital should be taken at the figure of Rs. 55
per quintal for regulating additional interest due to carrying on larger stock
on account of increased production. It may be, mentioned that in the 1969
report the figure of Rs.
42.40 per quintal had been calculated by way
of working capital (vide para 9.13 of the report). This meets the criticism
made on behalf of the producers that although the rate of interest has
increased, the Commission has not allowed any addition on that account.
Coming to question No. 4 a good deal of
attack has been made on the depreciation allowed by the Commission.
Depreciation is essentially a part of the conversion costs. Under the terms of
reference the Tariff Commission 1969 was asked to indicate the basis on which
the provision for depreciation should be made. The question was whether
depreciation to be allowed in the cost structure should be calculated on
replacement value or on written down value of the assets and how individual
factories which modernise the plant or expand their capacity should be
compensated for the investment made. The Sugar Enquiry Commission 1965 had
recommended depreciation on written down value but had also suggested
rehabilitation within a specified period. On the general question of
depreciation the Boothalingam Committee in its report on rationalisation and
simplification of tax structure came to the conclusion that over the period of
years depreciation should be allowed in such a way that 20% more than the
original cost is provided for. The 905 various bodies which either appeared or
sent representations to the Tariff Commission 1-969 put forward different
points of view. The Commission after referring, to the practice followed in
other countries pointed out in para 9.9.4 that in the past a few departures
from the normal practice of allowing depreciation on the written down value
adopted for income, tax assessment had been made. For instance, in the case of
steel prices report 1962 the Commission adopted a standard block and a straight
line method. In the report on Rubber Tyre and Tube 1965 special depreciation
was allowed in addition to the normal amount.
'In para 9.9.6 the Commission stated that the
majority, of units in sugar industry were more than 30 years old. At 9%
depreciation for plant and machinery and 21% for buildings most of the original
'assets have been written off. To calculate the amount of depreciation that
would have accrued to individual units during the course of the last 30 years
or so on replacement basis year by year and simultaneously to revalue the
assets in order to arrive at the present assets was not an easy task. After
taking the necessary figures the Commission found that comparatively speaking a
large number of units required rehabilitation having depreciation much lower
than the average of the industry.
The, Commission felt that as it was making
recommendation only for a period of three years it would not be advisable to
work out depreciation on replacement value for that short period when that
practice had not been followed in the past. The Commission decided in favour of
continuing the existing method of computing the quantum of depreciation on the
basis of zonal averages of the costed units. It was added that the figure so
adopted was automatically to undergo an upward revision if and when the
revision contemplated by The darft rules seeking to liberalise the depreciation
to be earned under the Income tax law was brought into effect.
On behalf of the sugar producers it has been
stated that the Tariff Commission has merely taken the formulae under the
Income tax law of the written down value but has made no provision for adding
the value of new improvements or additions.
It appears from the letter of the Traiff
Commission dated July 29, 1970 from which extracts have been furnished 'to us
by the learned Solicitor General that in accordance with what was said in para
9.4.6 of 1969 report the commission has recalculated the figure in respect of
depreciation in accordance with the amended provisions of the income tax law
and the rates have been revised for different class of assets for the period of
the estimate. On behalf of the government a statement has been furnished to us
showing the impact of variation as a result of introduction of new rates of
depreciation under the 906 Income tax Rules per quintal of sugar over the basic
cost schedule in the 1969 report. It is quite clear, from that statement that
the increase in depreciation hasbeen allowed in accordance with the new rate of
depreciation under the Income tax Rules and the criticism on behalf of the,
producers on this point does not appear to be, valid.
It is pertinent to note that in the case of
Premier Automobiles case (supra) also this Court upheld depreciation being
allowed on the basis provided for by the income tax law and did not accept the
contention of the car manufacturers that depreciation allowance should be
calculated on replacement cost. The following observations may be reproduced :
"The depreciation which is allowed under
the tax laws is very liberal and we see no reason to pass on the burden to the
present consumer who, is not likely to get any benefit out of the replacement
proposed to be provided for by the manufacturers".
As regards rehabilitation the Government of
India had appointed a committee in June 1963 to examine the question of
rehabilitation and modernisation of the old and uneconomic units in the sugar
industry under the Chairmanship of Shri S. N. Gundu Rao. That Committee
submitted its report in 1965 and recommended on various matters including the
assessment of need for rehabilitation modernisation and expansion of uneconomic
units. The Sugar Enquiry Commission 1965 agreed with the report of the Gundu
Rao Committee that there was need for providing special loan assistance to the
industry for the purpose of rehabilitation and modernisation. 'It was suggested
that the Government could provide finances for rehabilitation and modernisation
through the existing financial institutions such as Industrial Development Bank
and Industrial Finance Corporation. In the 1959 report of the Tariff Commission
the principle that a uniform allowance for rehabilitation to all units in the
sugar industry had been held to be unwarranted since such a provision,
according to the Commission, while giving necessary resources to the needy ones
would accrue as an extra element of profit to others.
The reason given was that generally the
average life of a sugar plant and machinery is 20 to 25 years. Therefore the
units which had gone into production in recent times should have no problem of
rehabilitation for some years to come.
Those units which had carried out substantial
expansion and had in the process effected renovation and modernisation of their
existing equipment would not require the same amount for further rehabilitation
as the units which were established in prewar years and had carried out no
expansion and no rehabilitation. The Commission had found that the industry had
done well during the four years preceding the 907 report It had, therefore,
resources which could have been utilised for rehabilitation and modernisation
of the old plant and, equipment. In other words in 1959 it was considered that
nothing need be given by way of uniform allowance for rehabilitation in the
fair selling price of sugar. The government, it was suggested, should make the
necessary arrangement for making available financial assistance lo the units in
sugar industry on similar lines as those made for the cotton and jute textile
manufacturing industry for the purpose of renovation and modernisation of their
plant and equipment.
Before the 1969 Tariff Commission the Sugar
industry had pressed for the grant of rehabilitation allowance equivalent to
the amount of difference between the replacement value and the historical
depreciation. After giving the various figures in para 9.10.2 the Commission considered
that the depreciation rate would come to Rs. 4.22 per quintal. The Commission,
however, proceeded to say that rehabilitation should not be linked to the
replacement cost or the difference between depreciation at replacement and
historical cost. At the same time it was necessary to ensure that in the
interest of the maintenance of continuity of sugar production at an appropriate
level such of the units which could be brought to a standard of normal
efficiency should be helped to rehabilitate themselves. In the assessment of
prices by region as well as fixation of price on the basis of zonal schedules
it was not possible to take into consideration the needs of individual units.
The best that could be done was to provide for a join fund for the entire
industry. In para 9.10.4 the Commission accepted the case for allowing for the
next 3 to 5 years at least half this amount or Rs. 2/per quintal in round
figures by way of rehabilitation grant to the industry either by way of direct
addition to the controlled price or if so preferred, in the interest of the
consumer indirectly by suitable adjustment in the burden of taxation. With the
amount so generated a fund could be, established only for meeting the cost
including the cost of finance for. Creation of additional assets to improve the
productive efficiency of the deserving units. In the cost schedules which were
prepared the amount of Rs. 2/per quintal was added by way of rehabilitation for
determining the ex-works price of sugar.
In the resolution dated February 20, 1970 of
the Government of India the above recommendation was noticed but it was stated
that a decision on that matter had been deferred pending consultation with the
concerned interests. Apart from relying on the discussion in the reports of
1959 and 1965 the Solicitor General has referred to the observations of this
Court in the Premier Automobiles case (supra) in which while considering the
question of depreciation the principle that it should be allowed on replacement
basis was not accepted. According to report of the Car Prices 908 Enquiry
Commission if the manufacturers were to keep apart not only the amount of
depreciation but also the development rebate and other reserves to. which they
were entitled under various tax and other laws and invest them separately or
even in their business, depreciation funds with the amount thus provided for
could be built up and these could be invested whether inside or outside the
It is unfortunate that nothing has been done
to implement the recommendation of the Commission in respect of rehabilitation
presumably, we are told, because the question of nationalisation of sugar
industry was under consideration. The conditions which prevailed at the time of
the 1959 report and the 1965 report were different and the latest view
expressed in the 1969 report ought to have received serious consideration. But
we are unable to hold that merely because Rs. 2 per quintal as recommended by
the Commission has not been taken into account while fixing the price of levy
sugar the price as fixed should be struck down. The non-inclusion of this
amount is in no way violative of the provisions of sub-s. 3A of s. 3 of the
We have however, no doubt that the government
will give serious and immediate consideration to this matter and take a
decision on it without any further delay.
We may now refer to the escalations (question
No. 5) on the wages, cost of packing, electricity duty, transport charges on
cane etc. These matters are all dealt with in the latest note of the Tariff
Commission on the cost increase in the sugar industry a copy of which has been
produced by the Solicitor General and in which escalations have been allowed.
The Tariff Commission did not consider it necessary to allow increase in the
cost of power, fuel, and consumable stores as it was considered that the
estimated provision of 3% increase per annum in the cost of, stores and repair
should take care of the increase for the current price period. As regards the
incidence due to increase in road transport cost it was stated that the
Commission had taken the same into account while recommending the schedule of
price for the period ending 1971-72. We have not been shown any serious
inaccuracy or infirmity factually or otherwise in the escalations allowed by
the Commission which have been worked out by the experts except the general
'argument which we have not accepted that the increases allowed are not
commensurate with the actual cost of some of the units.
A few other matters (covered by question No.
6) may now be considered which were brought to our notice. The first is about
gratuity. The first Wage Board had recommended that it should be paid by the
sugar producers to its employees.
The 909 complaint of the producers was that
no account had been taken by the Tariff Commission of this item. Our attention
has been drawn to the enactment of recent legislation under which the rate of
minimum bonus has been raised from 4% to 8.33%. it has been urged that when the
prices were fixed by the impugned order the additional amount could not be
taken into account while determining the cost of production. As the producers
will be bound to pay the bonus at the enhanced rate they will be, put to a good
deal of loss until some provision is made for addition ,of that amount for the
purpose of working out the levy prices.. So far as gratuity is concerned it has
been pointed out by the Solicitor General that in Form appearing at page 192
under 'Salaries and Wages' item 11 relates to gratuity and therefore gratuity
had been included. There are hardly any clear pleadings' in the writ petitions
on this point from which it can be established and gratuity has not been
included. We are unable to accept the contention that payment of gratuity or
liability thereof has not been taken into account while fixing the price for
The Payment of Bonus Amendment Ordinance 1972
which has been promulgated recently was published in the Government of India
Gazette dated September 23, 1972. Section 3 of the Ordinance provides :s.3
"Section 10 of the principal Act shall be renumbered as.
sub-section (1) thereof, and
(2) Notwithstanding anything contained in
subsection (1), but subject to' the provisions of section 8 and 13, every
employer shall be bound to pay to every employee in respect of the accounting
year commencing on any day in the year 1971 a minimum bonus which shall be
eight and one-third per cent of the salary or wage earned by the employee
during that accounting year or eighty rupees whichever is higher whether there
are profits in that accounting year or not: Provided that..................
On behalf of the sugar producers it has been
urged that the liability to pay the additional amount of minimum bonus will
commence in respect of the accounting year commencing on any date in the year
1971. It will, therefore, cover the year 1971-72 for which the prices of sugar
have been fixed by the impugned order. Since the additional amount has to go
into the manu910 facturing cost the price as fixed cannot be held to be valid
and legal. The learned Solicitor General, on the other hand, says that since
the Ordinance has come into force now it was neither practicable nor possible
to take its provisions into account while fixing the prices under the impugned
order and the same cannot be rendered illegal by a subsequent legislation which
has come into force only recently. In our opinion the prices as fixed by the
impugned order cannot be struck down because of the promulgation of the
Ordinance by which the amount of minimum bonus has been raised from 4% to 8.33%
of the salary or wages earned by the employees during the accounting year or
Rs. 80 whichever is higher. But there can be no manner of doubt that the
government will have to take some immediate action by either .making some
ad-hoc provision in respect of the prices or taking some such other step which
may be open to it to give the necessary relief to the sugar producers in this
As the Bonus Ordinance has been promulgated
after the prices were fixed by the impugned order that Order cannot be struck,
down on the ground that the prices fixed by it did not take into account the
changes in the rate of minimum bonus made by the Ordinance. Even so, in the
changed circumstances, the Government ought to make modifications in the
impugned order in respect of the prices of levy sugar so as to adjust them in
accordance with the provisions of the Ordinance. Except for the above the writ
petitions shall stand dismissed with no order as to costs. Liberty to the
parties to file applications for directions in respect of the Bank Guarantees
furnished by them in pursuance of stay orders passed by this Court.
V.P.S. Petitions dismissed.