Hoechst Pharmaceuticals Ltd. & ANR
Vs. State of Bihar & Ors [1983] INSC 63 (6 May 1983)
SEN, A.P. (J) SEN, A.P. (J) VENKATARAMIAH,
E.S. (J) MISRA, R.B. (J)
CITATION: 1983 AIR 1019 1983 SCR (3) 130 1983
SCC (4) 45 1983 SCALE (1)723
CITATOR INFO :
R 1985 SC 12 (13) RF 1986 SC1085 (14) F 1987
SC 494 (6) F 1988 SC 322 (4) RF 1988 SC 329 (14) RF 1988 SC1708 (24) R 1990
SC1637 (21) RF 1990 SC2072 (11,46) R 1992 SC1310 (7) RF 1992 SC2169 (15)
ACT:
Bihar Finance Act, 1981-Sub-ss. (I) and (3)
of s. 5- Levy of surcharge on sales tax and prohibition from passing on
liability thereof to purchasers- Whether void in terms of opening words of Art.
246(3)for being in conflict with Paragraph 21 of Drugs (Price Control) order,
1979 issued under s. 3(1) of Essential Commodities Act?-whether violative of
Arts. 14 and 19(1) (g) ?- Whether it is an essential characteristic of Sales
Tax that these seller must have right to pass it on to consumer 7-Whether
classification of dealers on the basis of 'gross turnover' as defined in s.
2(j) invalid ? Constitution of India-Art. 246-State Legislatures Power to make
law with respect to matters enumerated in List 11- Whether subject to
Parliaments power to make law in respect of matters enumerated in List 111
?-Doctrine of 'pith and substance' and the principle of 'Federal Supremacy'.
Constitution of India-Art. 254(i)-Can
repugnancy between a State law and a law made by Parliament arise outside the
Concurrent field ? Constitution of India-Arts. 200 and 201-Governor's decision
to refer a Bill t o President-Whether subject to Court s scrutiny ?-'Assent of
President '- Whether justifiable ?
HEADNOTE:
Sub-section (l) of s. S of the Bihar Finance
Act, 1981 provides for the levy of a surcharge in addition to the tax payable,
on every dealer whose gross turnover during a year exceeds Rs. 5 lakhs and,
sub-s. (3) thereof prohibits such a dealer from collecting amount of surcharge
payable by him from the purchaser. In exercise of the power conferred by this
section, the State Government fixed the rate of surcharge at 10 per cent of the
total amount of tax payable by a dealer.
Two of the appellants in this batch of
appeals were companies engaged in the manufacture and sale of the medicines
throughout India whose branches sales depots in Bihar were registered as
dealers. Their products were sold through wholesale distributors/ stockiest
appointed in almost all the districts of the Slate and their gross turnover
within the State during the relevant period ran into crores of rupees. Most of
the medicines and drugs sold by them were covered by the Drugs (Price Control)
Order, 1919 issued under sub-s. (l) of 131 s. 3 of the Essential Commodities
Act in terms of which they were expressly prohibited from selling those
medicines and drugs in excess of the controlled A price fixed by the Central
Government from time to time but were allowed to pass on the liability to the
consumer. During the assessment years 1980-81 and 1981-82 they had to pay the
surcharge under s. 5(1) of the Bihar Finance Act, 1981 at 10 per cent of the
tax payable by them.
The appellants challenged the Constitutional
validity of sub-s. (3) of s. 5 but the same was repelled by the High Court
relying on the decision in S. Kodar. v. State of Kerala, [1979]1 S.C.R. 121.
It was contended on behalf of the appellants:
(i) that sub-s. (3) of s. S of the Act which is a State law relatable to Entry
54 of List 11 of the Seventh Schedule to the Constitution and which provides
that no dealer shall be entitled to collect the surcharge levied on him is void
in terms of the opening words of Art. 246(3) of the Constitution as it is in
direct conflict with paragraph 21 of the Drugs (Price Control) order 1979,
issued under sub-s.
(1) of s. 3 of the essential Commodities Act,
1955 which is a Union Law relatable to Entry 33 of List III and which enables
the manufacturer or producer of drugs to pass on the liability to pay sales tax
to the consumer; (ii) that the words "a law Mads by Parliament which
Parliament is competent to enact ' contained in Art. 254(1) must be construed
to mean not only a law made by Parliament with respect to one of the matters
enumerated in the Concurrent List but also to include a law made by Parliament
with respect to any of the matters enumerated in the Union List and therefore
sub-s. (3) of s. 5 of the Act being repugnant to Paragraph 21 of the Control
order is void under Art.
(iii) that if both sub-s. (1) and sub-s. (3)
of s. 5 were relaxable to Entry 54 of List II, there was no need for the
Governor to have referred the Bihar Finance Bill, 1981 to the President for his
assent and that the President's assent is justiciable; (iv) that dealers of
essential commodities who cannot raise their sale prices beyond the controlled
price cannot be equated with other dealers who can raise their sale prices and
absorb the surcharge and since sub-s.
(3) of s. S treats "unequals as
equals" it is arbitrary and irrational and therefore Violative of Art. 14
of the Constitution: (v) that sales tax being essentially an indirect tax, the
legislature was not competent to make a provision prohibiting the dealer from
collecting the amount of surcharge and that the true nature and character of
surcharge being virtually a tax on income, sub-s. (3) of s. 5. is
unconstitutional as it imposes an unreasonable restriction upon the freedom of
trade guaranteed under Art.
19(1)(g). (vi) that sub-s. (3) of s. S of the
Act which is a State law being repugnant to paragraph 21 of the Drugs (Price
Control) Order which is issued under a Union law, the latter must prevail in
view of the non obstants clause in s.
6 of the Essential Commodities Act and the
former which is inconsistent therewith should be by-passed in terms of the
decision in Hari Shankar Bagla and Anr. v. State of Madhya Pradesh, [1955] I
S.C.R. 380. and (vii) that in view of the decision in A. V fernandez v. State
of Kerala.[1957] S.C.R.
837, sub-s. (1) of s. 5 of the Act which
makes the "gross turnover" as defined in s. 2(j) of the Act which
includes transactions taking place in the course of inter-state or
International Commerce to be the basis for the levy of surcharge is ultra vires
the State Legislature, 132 Dismissing the appeals,
HELD: 1. (a) It cannot be doubted that the
surcharge partakes of the nature of sales tax and therefore it was within the
competence of the State Legislature to enact sub- s. (1) of s. 5 of the Act for
the purpose of levying surcharge on certain class of dealers in addition to the
tax payable by them. When the State Legislature had competence to levy tax on
sale or purchase of goods under Entry 54 of List II of the Seventh Schedule it
was equally competent to select the class of dealers on whom the charge would
fall.
If that be so, the State Legislature could
undoubtedly have enacted sub-s. (3) of s. S prohibiting the dealers liable to
pay the surcharge under sub-s.(l) thereof from recovering the same from the
purchaser. [156 H-157 B] (b) The power of the State Legislature to make a law
with respect to the levy and imposition of a tax on sale or purchase of goods
relatable to Entry 54 of List II and to make ancillary provisions in that
behalf is plenary and is not subject to the power of Parliament to make a law
under Entry 33 of List III. There is no warrant for projecting the power of
Parliament to make a law under Entry 33 of List III into the State s power of
taxation under Entry 54 of List II. Otherwise, Entry 54 of List II will have to
be read as:
"Taxes on sale or purchase of goods
other than the essential commodities, etc." When one entry is made
'subject to' another entry, all that it means is that out of the scope of the
former entry, a field of legislation covered by the latter entry has been
reserved to be specially dealt with by the appropriate legislature. Entry 54 of
List II is only subject to Entry 92A of List I and there can be no further
curtailment of the State's power of taxation.
[183 F-H, 184 A-B] (c) The Constitution
effects a complete separation of the taxing power of the Union and of the
States under Art.
246 The various entries in the three lists are
not 'powers of legislation, but 'fields of legislation. The power to legislate
is given by Art. 246 and other Articles of the Constitution. Taxation is
considered to be a distinct matter for purposes of legislative competence.
Hence, the power to tax cannot be deduced from a general legislative entry as
an ancillary power. Further, the element of tax does not directly flow from the
power to regulate trade or commerce in, and the production supply and
distribution of essential commodities under Entry 33 of List II, although the
liability to pay tax may be a matter incidental to the Centre's power of price
control. [184 E-G] (d) A scrutiny of Lists I and II would show that there is no
overlapping anywhere in the taxing power and that the Constitution gives
independent sources of taxation to the Union and the States. There is a
distinction made between general subjects of legislation and taxation and these
are dealt with in separate groups of entries: in List I, Entries I to 81 deal
with general subjects of legislation and entries 82 to 92A deal with taxes; in
List II Entries I to 44 deal with general subjects of legislation and Entries
45 to 63 deal with taxes. This mutual exclusiveness is also brought out by the
fact that in List III, there is no entry relating to a tax it only 133 contains
an entry relating to levy of fees. Thus, in our Constitution, a conflict of
taxing power of the Union and of the States cannot arise. The two A laws viz.,
sub-s. (3) of s. S of the Act and paragraph 21 of the Drugs (Price Control)
order issued under sub-s (I) of s. 3 of the Essential Commodities Act operate
on two separate and distinct fields and both are capable of being obeyed. There
is no question of any clash between them. [184 H-185 F] M.P. Sundararamier and
Co. v. State of Andhra Pradesh and Anr., [1958] S.C.R. 1422, referred to. Seervai:
Constitutional Law of India, 3rd Ed., Vol, I, pp. 81-82, referred to.
(e) The words `Notwithstanding anything
contained in cls. (2) and (3) in cl. (1) of Art. 246 and the words "Subject
to cls. (1) and (2)" in cl. (3) thereof lay down the principle of Federal
Supremacy viz., that in case of inevitable conflict between Union and State
powers, the Union power as enumerated in List I shall prevail over the State
power as enumerated in Lists ll and III, and in case of overlapping between
Lists li and III, the former shall prevail. But the principle of Federal
Supremacy laid down in Art. 246 cannot be resorted to unless there is an
'irreconcilable' conflict between the Entries in the Union and State Lists. The
non obstante clause in cl. (I) of Art.
246 must operate only if reconciliation
should prove impossible. However, no question of conflict between the two Lists
will arise is the impugned legislation, by the application of the doctrine of
'pith and substance' appears to fall exclusively under one List, and
encroachment upon another List is only incidental [165 A-E] (f ) The true
principle applicable in judging the constitutional validity of sub-s. (3) of s.
S of the Act is to determine whether in its pith and substance it is a law
relatable to Entry 54 of List II and not whether there is repugnancy between it
and paragraph 21 of the Drugs (Price Control) order The constitutionality of
the law has to be judged by its real subject matter and. not by its incidental
effect upon any topic of legislation in another field. Once it is found that in
pith and substance the impugned Act is a law on a permitted field any
incidental encroachment on a forbidden field does not affect the competence of the
legislature to enact that Act. No doubt, in many cases it can be said that the
enactment which is under consideration may be regarded from more than one angle
and as operating in more than one field. If, however, the matter dealt with
comes within any of the classes of subjects enumerated in List II, then, under
the terms of Art. 246(3) it is not to be deemed to come within the classes of
subjects assigned exclusively to Parliament under Art. 246(1) even though the
classes of subjects looked at singly overlap in many respects. The whole
distribution of powers must be looked at from the point of view of determining
the question of validity of the impugned Act. It is within the competence of
the State Legislature under Art. 246(3) to provide for matters which though
within the competence of Parliament, are necessarily incidental to effective
legislation by the State Legislature on the subject of legislation expressly
enumerated in List II. [162 B, 171 D, 177 C-E] 134 In the Central Provinces and
Berar Sales of Motor Spirit and Lubricants Taxation Act, 1938, [1939] F.C.R,
18;
Citizen Insurance Company v. William Parsons,
L.R. [1882] 7 A.C. 96; Attorney General for the Province of ontario v. Attorney
General for the Dominion of Canada, L.R. [1912] A.C. 571; A.L.S.P.P.L.
Subrahmanyam Chettiar v. Muttuswami Goundan, [1940] F.C.R. 188; Governor
General in Council v. Province of Madras, [1945] F.C.R. 179; The Province of
Madras v. Messers Boddu Paidanna & Sons, [1942] F.C.R. 90, Prafulla Kumar
Mukherjee & Ors v. Bank of Commerce Ltd., Khulna, A.I.R. [1947] P.C. 60;
and Grand Trunk Railway Company of Canada v. Attorney General of Canada, L R
[19071 A.C. 65, referred to.
2.(a) The question of repugnancy under Art.
254(1) between a law made by Parliament and a law made by the State Legislature
arises only in case both the legislations occupy the same field with respect to
one of the matters enumerated in the Concurrent List and there is direct
conflict between the two laws. It is only when both these requirements are
fulfilled that the State law will, to the extent of repugnancy become void.
Art. 254(1) has no application to cases of repugnancy due to overlapping found
between List ll on the one hand and List I and List Ill on the other. If such
overlapping exists in any particular case, the State law will be ultra Vires
because of the non obstante clause in Art. 246(1) read with the opening words
'Subject to' in Art 246(3). In such a case, the State law will fail not because
of repugnance to the Union law but due to want of legislative competence. [145
C, 181 F] (b) It is no doubt true that the expression "a law made by
Parliament which Parliament is competent to enact" in Art. 254(1) is
susceptible of a construction that repugnance between a State law and a law
made by Parliament may take place outside the Concurrent sphere because
Parliament is competent to enact law with respect to subjects included in List
III as well as List I. But, if Art. 254(1) is read as a whole, it will be seen
that it is expressly made subject to cl. (2) which makes reference to
repugnancy in the field o Concurrent List. In other words, if cl. (2) is to be
the guide in the determination of the scope of cl. (l), the repugnancy between
Union and State law must be taken to refer only to the Concurrent field. Art.
254(1) speaks of a State law being repugnant to a law made by Parliament or an
existing law. The words "with respect to qualify both the clauses in Art.
254(1) viz., a law made by Parliament which Parliament is competent to enact as
well as any provision of an existing law. The underlying principle is that the
question of repugnancy arises only when both the legislatures are competent to
legislate in the same field, i.e., with respect to one of the matters
enumerated the Con- current List. [181 G-182 A, R-C] Deep Chand v. State of
Uttar Pradesh & Ors [1959] Supp.
2 S.C.R. 8 Ch. Tika Ramji & ors v. State
of Uttar Pradesh & Ors., [1956] S.C.R. 393 zaverbhai Amidas v. State of
Bombay, [1955] I S.C.R. 799; M. Karunanidhi v. Union of India, [1979] 3 S.C.R.
254; T. Barai v. Henry Ah Hoe, [1983] I S.C.C. 177; A. S. Krishna v. State of
Madras, [1957] S.C.R. ; Clyde Engineering Cø. Ltd. v. Cowburn, [1926] 37 Com.
L.R. 465; Ex Parte Mclean, [1930] 43 135 Com.
L R. 472; and Stock Motor Ploughs Limited v. Forsyth, [1932] Com. L.R. 128,
referred to.
(c) Entry 54 of List II is a tax entry and
therefore there is no question of repugnancy between sub-s. (3) of s. 5 of the
Act and paragraph 21 of the Control order. The question of repugnancy can only arise
in connection with the subjects enumerated in the Concurrent List as regards
which both the Union and the State Legislatures have concurrent powers. [178
G-179 B] B
3. It is clear from Arts. 200 and 201 that a
Bill passed by the State Assembly may become law if the Governor gives his
assent to it or if, having been reserved by the Governor for the consideration
of the President, it is assented to by the President. There is no provision in
the Constitution which lays down that a Bill which has been assented to by the
President would be ineffective as an Act if there was no compelling necessity
for the Governor to reserve it for the assent of the President. It is for the
Governor to exercise his discretion and to decide whether he should assent to
the Bill or should reserve it for consideration of the President to avoid any
future complication. Even if it ultimately turns out that there was no
necessity for the Governor to have reserved a Bill for the consideration of the
President still he having done so and obtained the assent of the President, the
Act so passed cannot be held to be unconstitutional on the ground of want of
proper assent. This aspect of the matter, as the law now stands, is not open to
scrutiny by the Courts. In the instant case, the Finance Bill which ultimately
became the Act in question was a consolidating Act relating the Different
subjects and perhaps the Governor felt that it was necessary to reserve it for
the assent of the President The assent of the President is not justifiable and
the Court cannot spell out any infirmity arising out of his decision to give
such assent. [193 A-194 B] Teh Chang Poh @ Char Meh. v. Public Prosecutor.,
Malaysia, L.R. [1980] A.C 458. referred to.
4. (a) There is no ground for holding that
sub-s. (3) of s. 5 of the Act is arbitrary or irrational or that it treats
"unequals as equals" or that it imposes a disproportionate burden on
a certain class of dealers. A surcharge in its true nature and character is
nothing but a higher rate of tax to raise revenue for general purposes.
The levy of surcharge under sub-s. (l) of s.
S falls uniformly on a certain class of dealers depending upon their capacity
to bear the additional burden. The economic wisdom of a tax is within the
exclusive province of the legislature. The only question for the Court to
consider is whether there is rationality in the behalf of the legislature that
capacity to pay the tax increases by and large with an increase of receipts.
The view taken by the Court in kodar's case that, to make the tax of a large
dealer heavier is not arbitrary discrimination, but an attempt to proportion
the payment to capacity to pay, and thus to arrive at a more genuine equality,
is in consonance with social justice in an egalitarian State. [186 H-187 A, 191
B, 191 A] S. Kodar v. State of Kerala, [1975] I S.C.R. 121, relied on.
136 (b) There is no basis for the submission
that the Court was wrong in Podar's case. The contention that ability to pay is
not a relevant criterion for upholding the validity of sub-s. (3) of s. 5 of
the Act in question cannot be accepted. On questions of economic regulations
and related matters, the Court must defer to the legislative judgment.
When the power to tax exists, the extent of
the burden is a matter for the discretion of the law-makers It is not the
function of the Court to consider the propriety or justness of a tax or enter
upon the realm of legislative policy. If the evident intent and general
operation of the tax legislation is to adjust the burden with a fair and reasonable
degree of equality, the constitutional requirement is satisfied The equality
clause in Art. 14 does not take away from the State the power to classify a
class of persons who must bear the heavier burden of tax. The classification
having some reasonable basis does not offend against that clause merely because
it is not made with mathematical nicety or because in practice it results in
some inequalities. [189 H-190 G] (c) There is no lacteal foundation laid to
support the contention that the levy of surcharge imposes a disproportionate
burden on a certain class of dealers such as manufacturers or producers of
drugs, etc. The business carried on by the appellants in the State of Bihar
alone is of such magnitude that they have the capacity to bear the additional
burden of surcharge That apart under the scheme of the Control order the profit
margins of manufacturers and producers of medicines and drugs is considerably
higher than that of wholesalers. If the appellants find that the levy of
surcharge cannot be borne within the present price structure of medicines and
drugs, they have the right to apply to the Centrals Government for revision as
the retail price of 'formulations under paragraph I S of the Control order.
[186 F, 187 G, 189 G]
5. It is no doubt true that a sales tax is,
according to the accepted notions, intended to be passed on to the buyer, and
the provisions authorising and regulating the collection of sales tax by the
seller from the purchaser are a usual feature of sales tax legislation. However,
it is not an essential characteristic of sales tax that the seller must have
the right to pass it on to the consumer; nor is the power of the legislature to
impose a tax on sales conditional on its making a provision for sellers to
collect the tax from the purchasers Whether a law should be enacted, imposing a
sales tax, or validating the imposition of sales tax, when the seller is not in
a position to pass it on to the consumer, is a matter of policy and does not
affect the competence of the legislature. The contention based on Art.
19(1)(g) cannot therefore be sustained. [191
E-H] The Tata Iron & Steel Co., Ltd. v. The State of Bihar, [1958] S.C.R.
1355; M/s. J. K Judge Mills Co. Ltd. v. 'The State of Uttar Pradesh, 1962, 2
S.C.R. 1 and S. Kodar v.
State of Kerla, [1975] I S.C.R. 121, referred
to.
6. (a) The appellants being manufacturers or
producers of 'formulations' are not governed by paragraph 21 of the Control
order but by paragraph 24 thereof and therefore the price chargeable by them to
wholesaler or distributor is inclusive of sales tax. There being no conflict
between sub- s. (3) of 137 s. 5 of the Act and paragraph 24 of the Control
order, the question of the non obstante clause to s. 6 of the Essential
Commodities Act coming into play does A not arise. [158 G] Hari Shankar Bagla
& Anr. v. State of Madhya Pradesh, [1955] 1 S.C.R. 380, referred to.
(b) Even otherwise, i.e., if some of the
appellants were governed by paragraph 21 of the Control order, that would
hardly make any difference. Under the scheme of the Act, a dealer is free to
pass on the liability to pay sales tax payable under s. 3 and additional sales
tax payable under s. 6 to the purchasers. Sub-s. (3) of s. 5 however imposes a
limitation on dealers liable to pay surcharge under sub-s. (I) thereof from
collecting the amount of surcharge payable by them from the purchasers which
only means that surcharge payable by such dealers under sub-s.
(I) of s. 5 will cut into the profits earned
by such dealers. The controlled price or retail price of medicines and drugs
under paragraph 21 remains the same, and the consumer interest is taken care of
inasmuch as the liability to pay surcharge; under sub-s. (3) of s. 5 cannot be
passed on. That being so, there is no conflict between sub-s. (3) of s. 5 of
the Act and paragraph 21 of the Control order.
[158 H-159 C] The predominant object of
issuing a control order under sub-s. (I) of s. 3 of the Essential Commodities
Act is to secure the equitable distribution and availability of essential commodities
at fair prices to the consumers, and the mere circumstance that some of those
engaged in the field of industry, trade or commerce may suffer a loss is no
ground for treating such a regulatory law to be unreasonable, unrest the basis
adopted for price fixation is so unreasonable as to be in excess of the lower
to fix the price, or there is a statutory obligation to ensure a fair return to
the industry. [159 G-H] Shree Meenakshi Mills Ltd. v. Union of India, [1974] 2
S.C.R. 398; and Prag Ice & oil Mills v. Union of India, [1978] 3 S.C.R.
293. referred to
7. The decision in Fernandez's case is an
authority for the proposition that the State Legislature, notwithstanding Art.
286 of the Constitution, while r making a law under Entry 54 of the List II can,
for purposes of registration of a dealer and submission of returns of sales
tax, include the transactions covered by Art. 286. That being so, the
constitutional validity of sub s. (I) of s. 5 which provides for the
classification of dealers whose gross turnover during a year exceeds Rs. 5
lakhs for the purpose of levy of surcharge in addition to the tax payable by
them, is not assailable. So long as sales in the course of inter-State trade
and Commerce or sales outside the State and sales in the course of import into,
or export out of the territory of India are not taxed there is nothing to
prevent the State Legislature while making a law for the levy of surcharge
under Entry 54 of the List II to take into account the total turnover of the
dealer within the State and provide that if the gross turnover of such dealer
exceeds Rs. 5 lakhs in a year he shall, in addition to the tax, also pay a
surcharge at such rate not exceeding 10% of the tax as may be provided. The
liability to pay the surcharge is not on the Gross turnover 138 including the
transactions covered by Art. 286 but is only on inside sales and A the
surcharged is sought to be levied on dealers who have a position of economic
superiority. The definition of gross turnover in s. 2(j) is adopted not for the
purpose of bringing to surcharge inter-State sales etc., but is only for the
purpose or classifying dealers within the State and to identify the class of
dealers liable to pay such surcharge. There is sufficient territorial nexus
between the persons sought to be charged and the State seeking to tax them.
[196 F-197 D] A. V. Fernandez v. State of
Kerala, [1957] S.C.R. 837;
State of Bombay v. R.M.D. Chamarbaugwala,
[1957] S.C.R. 874;
The Tata Iron and Steel Company Ltd. v. State
of Bihar, [1958] S.C.R. 1355; and International Tourist Corporation etc. v.
State of Haryana and Ors., [1981] 2 S.C.R. 364, referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeals
Nos. 2567, 2818-20, 2648, 3277, 2817, 2918, 3079-83, 3001-04, 3543-48, 2810-16,
3375, 2864-2917, 2989-3000, 3084-3088, 3268-71, 3253-54, 3399-3400 of 1982.
Appeals by special leave from the Judgments
and orders dated the 30th April, 1982, 5th, 6th, 7th, 10th, 11th, 12th, 13th,
15th, May, 1982, 3rd, 17th, 23rd, August, 1982 of the Patna High Court in
C.W.J.C Nos. 1788, 3726, 3727, 4529 of 1981, 253, 688, 1473 of 1982, 2771/81,
96/82, 1233, 1498, 1907, 1986 of 81, 1042, 1043, 1121, 1044 of 1982, 3198,
3197, 3195, 3147, 3146, 3148, 1573, 1377, 1802, 1852, 1800, 1950, 1776 of 1981,
1038 of 1982, 1300, 1301, 1303, 1329, 1334, 1383, 1648 of 1981, 255 of 1982,
1193, 1198, 1204, 1206, 1209, 1211, 1213, 1214, 1262-64, 1273, 1282, 1283,
1287, 1331, 1355 1382, 1384, 1386, 1431, 1432, 1484, 1488, 1489, 1548, 1645,
1734, 1833 of 1981, 78 of 1982, 1154, 1160, 1168, 1169. 1186, 1187, 1191, 1549,
1556, 1557-58, 1415, 1461, 1465, 1487 of 1981, 251 of 1982, 228, 1321 of 1981,
394, 1478 of 1982, 1320/81, 902, 565/82, 1775, 1177, 1801 of 1981, 503/82,
1804/81, 1, 3, 4, 6 & 7 of 1982, 3079, 3528 of 1981, 1947/82, 1254/82,
2922/81, 1372/82, 1408 & 1482 of 1981.
AND Special Leave Petitions Nos. 10744-53,
9554-58, 9788, 9821-22, 10907, 9095, 1202-05, 9886-88, 9500-02, 9753, 9523,
10912, 11069, 10754-56, 10797-10812, 10891, 9702, 9782, 9561, 14001, 14364-66
of 1982, 1393-96, 1422-23, 1472-73 of 1983.
From the Judgments and orders dated the 30th
April, 1982, 3rd May, 5th, 6th, 7th, 10th, 11th, 12th, 13th May, 19th August
9th & 15th September, 8th & 18th October 1982, 20th & 21st January,
1983 of the Patna High Court in C.W.J.C. Nos. 1176, 1516 139 1435, 1177, 1618,
1469 & 1252 of 1982, 3398/81, 1355/82, 525182, 3640, 3641, 3642, 3743 &
3745 of 1982, 1326, 1784, 1405, 1854, 3337, A 1656 of 1981, 349, 1108, 1148,
4073, 4074, 4075 of 1982, 3118, 3080, 1161, 1374, 2804, 3035 of 1981, 4213/82,
1517/82, 1278, 1414, 1290, 1291, 1292, 1297, 1306, 1200, 1212, 1256, 1276,
1277, 1485 of 1981, 484, 509/82, 1517, 1578, 1450, 4037, 2944, 1788, 2889 of
1981, 1547, 506, 507, 508, 4931, 1253, 1431, 1432, 207 & 214 of 1982 &
182 & 203 of 1983.
WITH Writ Petitions Nos. 9266, 10055-56,
7002-09, 7019-23, 7024, 7921-22, 7996.97, 8508-10, 9680-92, 9322, 7647-53,
8005, 8067, 7160 of 1982, 415 76-78, 640-41, 652 of 1983 (Under article 32 of
the Constitution of India) A.B. Divan, A.K. Sen, Shankar Ghose, P.R. Mridul,
Hardev Singh & S.T. Deasi, Talat Ansari, Ashok Sagar, Sandeep Thakore, Ms.
Rainu Walia, D.N. Misra, D.P.
Mukherjee, B.R. Agarwala, Miss Vijayalakshmi
Menon, U.P.
Singh, B.B. Singh. B.S. Chauhan, Anil Kumar
Sharma, Praveen Kumar, A.T. Patra, Vineet Kumar, A.K. Jha, M.P. Jha, R.S.
Sodhi, A. Minocha, Mrs. Indu Goswamy, S.K.
Sinha, Vinoo Bhagat, P.N. Misra, KK. Jain and Pramod Dayal for the Appellants.
K Parasaran, Solicitor General, R.B. Mahto,
Addl.
Advocate General. Bihar. Pramod Swarup and
U.S. Prasad for the Respondents.
The Judgment of the Court was delivered by
SEN, J. These are appeals by special leave from a judgment and order of the
High Court of Patna dated April 30, 1982 by which the High Court upheld the
constitutional validity of sub-s. (I) of s.5 of the Bihar Finance Act, 1981
("Act' for short) which provides for the levy of a surcharge on every
dealer whose gross turnover during a year exceeds Rs. 5 lakhs, in addition to
the tax payable by him, at such rate not exceeding 10 per centum of the total
amount of tax, and of sub-s. (3) of s. 5 of the Act which prohibits such dealer
from collecting the amount of surcharge payable by him from the purchasers.
140 The Bihar Finance Act 1981, is not only
an Act for the levy A of a tax on the sale or purchase of goods but also is an
Act to consolidate and amend various other laws. We are here concerned with s.
S of the Act which finds place in Part I of the Act which bears the heading
"Levy of tax on the sale and, purchase of goods in Bihar and is relatable
to Entry 54 of List II of the Seventh Schedule. By two separate notifications
dated January 15, 1981 the State Government of Bihar in exercise of the powers
conferred by sub-s. (I) s. S of the Act appointed January, IS; 1981 to be the date
from which surcharge under s. 5 shall be leviable and fixed the rate of
surcharge at 10 per centum of the total amount of the tax payable by a dealer
whose gross turnover during a year exceeds Rs. 5 lakhs, in addition to the tax
payable by him. The Act was reserved for the previous assent of the President
and received his assent on April 20, 1981. There is no point raised as regards
the validity of the notifications in question and therefore there is no need
for us to deal with it.
The principal contention advanced by the
appellants in these appeals is that the field of price fixation of essential
commodities in general, and drugs and formulations in particular, is an
occupied field by virtue of various control orders issued by the Central
Government from time to time under sub-s. (I) of s. 3 of the Essential
Commodities Act, 1955 which allows the manufacturer of producer of goods to
pass on the tax liability to the consumer and therefore the State Legislature
of Bihar had no legislative competence to enact sub-s. (3) of s. S of the Act
which interdicts that no dealer liable to pay a surcharge, in addition to the tax
payable by him, shall be entitled to collect the amount of surcharge, and
thereby trenches upon a field occupied by a law made by Parliament.
Alternatively, the submission is that if sub-s (3) of s. 5 of the Act were to
cover all sales including sales of essential commodities whose prices are fixed
by the Central Government by various control orders issued under the Essential
commodities Act, then there will be repugnancy between the State law and the
various control orders which according to s. 6 of the Essential Commodities Act
must prevail. There is also a subsidiary contention put forward on behalf of
the appellants that sub-s. (I) of s. S of the Act is ultra vires the State
Legislature in as much as the liability to pay surcharge is on a dealer whose
gross turnover during a year exceeds Rs. 5 lakhes or more i.e. inclusive of
transactions relating to Sale or purchase of goods which have taken place in
the course of inter-state trade or commerce or outside the State or in the
course of import into, or 141 export of goods outside the territory of India.
The submission is that such transactions are covered by Art. 286 of the
Constitution and A therefore are outside the purview of the Act and thus they
cannot be taken into consideration for computation of the gross turnover as
defined in s. 2 (j) of the Act for the purpose of bearing the incidence of
surcharge under sub-s. (1) of s. 5 of the Act.
It will be convenient, having regard to the
course taken in the arguments, to briefly refer to the facts as are discernible
from the records in Civil Appeal No. 2567 of 1982 - Messrs Hoechst
Pharmaceuticals Limited & Another v. The State of Bihar & others, and
Civil Appeal No. 3277 of 1982 - Messrs Glaxo laboratories (India) Limited v.
The State of Bihar & others. Messrs Hoechst Pharmaceuticals Limited and
Messrs Glaxo Laboratories (India) Limited are companies incorporated under the Companies
Act, 1956 engaged in the manufacture and sale of various medicines and life
saving drugs throughout India including the State of Bihar.
They have their branch or sales depot at
Patna registered as a dealer under s. 14 of the Act and effect sales of their
manufactured products through wholesale distributors or stockists appointed in
almost all the districts of Bihar who, in their turn, sell them to retailers
through whom the medicines and drugs reach the consumers. Almost 94% of the
medicines and drugs sold by them are at the controlled price exclusive of local
taxes under the Drugs (Price Control) order, 1979 issued by the Central
Government under sub-s.
(1) of s. 3 of the Essential Commodities Act
and they are expressly prohibited from selling these medicines and drugs in
excess of the controlled price so fixed by the Central Government from time to
time which allows the manufacturer or producer to pass on the tax liability to
the consumer.
The appellants have placed on record their
printed price- lists of their well-known medicines and drugs manufactured by
them showing the price at which they sell to the retailers as also the retail
price, both inclusive of excise duty. It appears there from that one of the
terms of their contract is that sales tax and local taxes will be charged
wherever applicable.
These appellants have also placed on record
their orders of assessment together with notices of demand, for the assessment
years 1980-81 and 1981-82. For the assessment year 1980-81, the Commercial
Taxes officer, Patna Circle, Patna determined the gross turnover of sales in
the State of Bihar through their branch office at Patna of Messrs Hoechst
Pharmaceuticals Limited on the basis of the return 142 filed by them at Rs.
3,13,69,598,12p. and the tax payable thereon at Rs. 19,65,137.52.p. The tax
liability for the period from January 15, 1981 to March 31, 1981 comes to Rs. 3,85,023.33.p.
and the surcharge thereon at 10% amounts to Rs. 38,503.33p. Thus the total tax
assessed of Messrs Hoechst Pharmaceuticals Limited including surcharge for the
assessment year 1980-81 amounts to Rs. 20,03,640.85p. The figures for the
assessment year 1981-82 are not available.
Foe the assessment years 1980-81 and 1981-82
the annual returns filed by Messrs Glaxo Laboratories (India) Limited show the
gross turnover of their sales in the State of Bihar through their branch at
Patna at Rs. 5,17,83,985.76p. and Rs. 5,89,22,346.64p. respectively. They have
paid tax along with the return amounting to Rs. 34,06,809.80p. and Rs.
40,13,057.28p. inclusive of surcharge at 10%
of the tax for the period from January 15, 1981 to March 31, 1981 and April
1981 to January 19, 1982 amounting to Rs. 34,877.62p. and Rs. 3,09,955.86p.
respectively. There is excess payment of Rs. 55,383.98p. in the assessment year
1980-81 and Rs. 13,112.35p. in the year 1981-82. These figures show the
magnitude of the business carried on by these appellants in the State of Bihar
alone and their capacity to bear the additional burden of surcharge levied
under sub-s. (I) of s. 5 of the Act.
The High Court referred to the decision in S.
Kodar v. State of Kerala(1) where this Court upheld the constitutional validity
of sub-s. (2) of s. 2 of the Tamil Nadu Additional Sales Tax Act, 1970 which is
in pari materia with sub-s. 3 of s. S of the Act and which interdicts that no
dealer referred to in sub-s. (l) shall be entitled to collect the additional
tax payable by him. It held that the surcharge levied under sub-s. (1) of s. 5
is in reality an additional tax on the aggregate of sales effected by a dealer
during a year and that it was not necessary that the dealer should be enabled
to pass on the incidence of tax on sale to the purchaser in order that it night
be a tax on the sale of goods. Merely because the dealer is prevented by sub-s.
(3) of s. 5 of the Act from collecting the surcharge, it does not cease to be a
surcharge on sales tax. It held relying on Kodar's case, supra, that the charge
under sub-s.
(I) of s. 5 of the Act falls at a uniform
rate of 10 per centum of the tax on all dealers falling within the class
specified therein i. e. whose gross turnover during a year exceeds Rs. 5 lakhs,
and is therefore not discriminatory and violative of Art. 14 of the
Constitution, nor is it possible to say that 143 because a dealer is disabled
from passing on the incidence of surcharge to the purchaser, sub-s. (3) of s. 5
imposes an unreasonable A restriction on the fundamental right guaranteed under
Art. 19 (1) (g). As regards the manufacturers and producers of medicines and
drugs, the High Court held that there was no irreconcilable conflict between
sub-s. (3) of s. 5 of the Act and paragraph 21 of the Drugs (Price Control)
order 1979 and both the laws are capable of being obeyed. Undeterred by the
decision of this Court in Kodar's case, supra, the appellants have challenged
the constitutional validity of sub-s. (3) of s. 5 of the Act in these appeals
on the ground that the Court in that case did not consider the effect of price
fixation of essential commodities by the Central Government under sub-s (I) of
s.
3 of the Essential Commodities Act which, by
reason of s. 6 of that Act, has an overriding effect notwithstanding any other
law inconsistent therewith.
These appeals were argued with much learning
and resource particularly with respect to federal supremacy and conflict of
powers between the Union and State Legislatures and as to how if there is such
conflict, their respective powers can be fairly reconciled. In support of these
appeals, learned counsel for the appellants have advanced the following contentions
viz: (1) The opening words of Art.
246 (3) of the Constitution "Subject to
clauses (1) and (2)" make the power of the Legislature of any State to
make laws for such State or any part thereof with respect to any of the matters
enumerated in List II of the Seventh Schedule subject to the Union power to
legislate with respect to any of the matters enumerated in List I or List III.
That is to say, sub-s. (3) of s. 5 of the Act which provides that no dealer
shall be entitled to collect the surcharge levied on him must therefore yield
to s. 6 of the Essential Commodities Act which provides that any order made
under s.
3 of the Act shall have effect
notwithstanding anything inconsistent therewith contained in any enactment
other then the Act or any instrument having effect by virtue of any enactment
other than the Act. The entire submission proceeds on the doctrine of occupied
field and the concept of federal supremacy. In short, the contention is that
the Union power shall prevail in a case of conflict between List II and List
III. (2) sub-s. (3) of s. 5 of the Act which provides that no dealer shall be
entitled to collect the amount of surcharge levied on him, clearly falls within
Entry 54 of List II of the Seventh Schedule and it collides with, and or is
inconsistent with, or repugnant to, the scheme of Drugs (Price Control) order?
1979 generally so far as 144 price fixation of drugs is concerned and
particularly with paragraph 21 which enables the manufacturer or producer of
drugs to pass on the liability to pay sales tax to the consumer. If that be so,
then there will be repugnancy between the State law and the Control order which
according to s. 6 of the Essential Commodities Act, must prevail. It is the
duty of the Court to adopt the rule of harmonious construction to prevent a
conflict between both the laws and care should be taken to see that both can
operate in different fields without encroachment. It is therefore submitted
that there is no question of repugnancy and it can be avoided by the principle
of reconciliation. That is only possible by giving full effect to the non
obstante clause in s. 6 of the Essential Commodities Act. (3) The provisions
contained in sub-s. (3) of s. 5 of the Act is ex facie and patently
discriminatory. The Essential Commodities Act treats certain controlled
commodities and their sellers in a special manner by fixing controlled prices.
The sellers so treated by this Central law are so circumstanced that they
cannot be equated with other sellers not effected by any control orders. The
class of dealers who can raise their sale prices and absorb the surcharge
levied under sub-s. (1) of s. 5 and a class of dealers like the manufacturers
andproducers of medicines and drugs who cannot raise their sale prices beyond
the controlled price are treated similarly. Once the fact of different classes
being separate is taken, than a State law which treats both classes equally and
visits them with different burdens, would be violative of Art. 14. The State
cannot by treating unequals as equals impose different burden on different
classes. (4) The restriction imposed by sub-s. (3) of s. 5 of the Act which
prevents the manufacturers of producers of medicines and drugs from passing on
the liability to pay surcharge is confiscatory and casts a disproportionate
burden on such manufacturers and producers and constitutes an unreasonable
restriction on the freedom to carry on their business guaranteed under Art. 19
(1) (g). (5) Sub-s (1) s. 5 of the Act is ultra vires the State Legislature of
Bihar insofar as for the purpose of the levy of surcharge on a certain class of
dealers, it takes into account his gross turnover as defined in s. 2 (j) of the
Act. It is urged that the State Legislature was not competent under Entry 54 of
List II of the Seventh Schedule to enact a provision like sub-s. (1) of s. S of
the Act which makes the grass turnover of a dealer as defined in s. 2 (j) to be
the basis for the levy of a surcharge i. e. inclusive of transactions relating
to sale or purchase of goods which have taken place in the course of
inter-state trade or commerce or outside the territory of India. Such
transactions are outside the purview of the Act and therefore they cannot be
taken 145 into consideration for computation of the gross turnover as defined
in s. 2 (j) of the Act for the purpose of bearing the incidence of surcharge.
The contention to the contrary advanced by
the learned Solicitor General appearing on behalf of the State of Bihar is that
there is no inconsistency between sub-s. (3) of s. 5 of the Act and paragraph
21 of the Control order and both the laws are capable of being obeyed.
According to him, the question of repugnancy under Art. 254(1) between a law
made by Parliament and a IdW made by the State Legislature arises only in case
both the legislations occupy the same field with respect to one of the matters
enumerated in the Concurrent list, and there is direct conflict between the two
laws. It is only when both these requirements are fulfilled that the State law
will to the extent of repugnancy, become void. The learned Solicitor General
contends that the question has to be determined not by the application of the
doctrine of occupied field but by the rule of 'pith and substance'. He further
contends that the appellants being manufacturers or producers of drugs are not
governed by paragraph 21 of the Control order which relates to retail sale but
by paragraph 24 thereof which deals with sale by a manufacturer or producer to
wholesale distributor.
Under paragraph 24 of the Control order, the
manufacturer or producer is not entitled to pass on the liability to pay sales
tax and the price that he charges to the wholesaler or distributor is inclusive
of sales tax. He also contends that the controlled price of an essential commodity
particularly of medicines and drugs fixed by a control order issued by the
Central Government under sub-s. (1) of s: 3 of the Essential Commodities Act is
only the maximum price thereof and there is nothing to prevent a manufacturer
or producer of medicines and drugs to sell it at a price lower than the
controlled price. All that will happen, the learned Solicitor General reasons,
is that the levy of surcharge under sub-s. (1) of s. 5 of the Act will cut into
the profits of the manufacturer or producer but that will not make the State
law inconsistent with the Central law. As regards medicines and drugs, the
surcharge being borne by the manufacturers or producers under sub-s. (3) of s.
5 of the Act, the controlled price of such medicines and drug to the consumer
will remain the same. Lastly, the Solicitor General submits that there is no
material placed by the, appellants to show that the levy of surcharge under
sub-s.
(I) of s. 5 of the act would impose a burden
disproportionate to the profits 146 earned by them or that it is confiscatory
in nature. There is, our opinion, considerable force in these submissions.
Before proceeding further it is necessary to
mention that the contentions raised on behalf of manufacturers and producers of
medicines and drugs can govern only those appellants who are dealers in
essential commodities, the controlled price of which is exclusive of sales tax
as filed by control orders issued by the Central Government under sub-s. (1) of
s. 3 of the Essential Commodities Act, but cannot be availed of by the other
appellants who are dealers in other commodities. The case of such appellants would
be squarely governed by the decision of this Court in Kodar's case, supra, and
their liability to pay surcharge under sub- s. (1) of s. 5 of the Act must be
upheld, irrespective of the contentions raised in these appeals, on based on
the opening words "Subject to clauses (1) and (2)" in Art.
246(3) of the Constitution and on s. 6 of the
Essential Commodities Act. It is therefore necessary to first deal with the
principle laid down in Kodar's case, supra.
In Kodar's case, supra, this Court upheld tho
Constitution validity of the Tamil Nadu Additional Sales Tax Act, 1970 which
imposes additional sales tax at 5% on a dealer whose annual gross turnover
exceeds Rs. 10 lakhs. The charging provision in sub-s. (1) of s. 2 of that Act
is in terms similar to sub-s. (1) of s. 5 of the Act, and provides that the tax
payable by a dealer whose turnover for a year exceeds Rs. 10 lakhs shall be
increased by an additional tax 5% of the tax payable by him. Sub-s. (2) of that
Act is in pari materia with sub-s. (3) of s. 5 of the Act and provides that no
dealer referred to in sub-s. (I) shall be entitled to collect the additional
tax payable by him. The Court laid down that: (l) The additional tax levied
under sub-s. (I) of s. 2 of that Act was in reality a tax on the aggregate of
sales effected by a dealer during a year and therefore the additional tax was
really a tax on the sale of goods and not a tax on the income of a dealer and
therefore falls within the scope of Entry 54 of List II of the Seventh
Schedule.
(2) Generally Speaking, the amount or rate of
tax is a matter exclusively within the legislative judgment and so long as a tax
retains its avowed character and does not confiscate property to the State
under the guise of a tax, its reasonableness cannot be questioned by the Court
The imposition of additional tax on a dealer whose annual turnover exceeds Rs.
10 lakhs is not an unreasonable restriction on the fundamental rights
guaranteed under Art.
19(1)(g) or (f) as the tax 147 is upon the
sale of goods and was not shown to be confiscatory. (3) It is not an essential
chracteristic of a sales tax that the seller must have the right to pass it on
to the consumer, nor is the power of the Legislature to impose a tax on sales
conditional on its making a provision for seller to collect the tax from the
purchasers. Merely because sub-s. (2) of s. 2 of that Act prevented a dealer
from passing on the incidence of additional tax to the purchaser, it cannot be
said that the Act imposes an unreasonable restriction upon the fundamental
rights under Art. 19(1)(g) or (f). The Act was not violative of Art. 14 of the
Constitution as classification of dealers on the basis of their turnover for
the purpose of levy of additional tax was passed on the capacity of dealers who
occupy position of economic superiority by reason of their greater volume of
businesses i.e. On capacity to pay and such classification for purposes of the
levy was not unreasonable.
In order to appreciate the implications of
the wide ranging contentions advanced before us, it is necessary to set out the
relevant statutory provisions.
Sub-s. (1) of s. 5 of the Act provides for
the levy of surcharge on every dealer whose gross turnover during a year
exceeds Rs. 5 lakhs and, the material provisions of which are in the following
terms:
"5. Surcharge (I) Every dealer whose
gross turnover during a year exceeds rupees five lakhs shall, in addition to
the tax payable by him under this Part, also pay a surcharge at such rate not
exceeding ten per centum of the total amount of the tax payable by him, as may
be fixed by the State Government by a notification published in the official
Gazette:
Provided that the aggregate of the tax and
surcharge payable under this Part shall not exceed, in respect of goods
declared to be of special importance in inter-State trade or commerce by
section 14 of the central Sales Tax Act, 1256 (Act 74 of 1956), the rate fixed
by section 15 of the said Act:
The expression "gross turnover" as
defined in s. 2(j) Of the Act insofar as material reads: - 148 "2(j)
"gross turnover" means- (i) for the purposes of levy of sales tax,
aggregate of sale prices received and receivable by a dealer, during any given
period, in respect of sale of goods (including the sale of goods made outside
the State or in the course of inter-State trade or commerce or export) but does
not include sale prices of goods or class or classes or description of goods
which have borne the incidence of purchase tax under section 4." Sub-s.
(3) of s. 5 of the Act, the constitutional validity of which is challenged,
provides:
"5(3) Notwithstanding anything to the
contrary contained in this Part, no dealer mentioned in sub-s. (1), who is
liable to pay surcharge shall be entitled to collect the amount of this
surcharge." It is fairly conceded that not only sub-s. (1) of s. 5 of the
Act which provides for the levy of surcharge on dealers whose gross turnover
during a year exceeds Rs. 5 lakhs, but also sub-s. (3) of s. 5 of the Act which
enjoins that no dealer who is liable to pay a surcharge under sub-s.
(I) shall be entitled to collect the amount
of surcharge payable by him, are both relatable to Entry 54 of List II of the
Seventh Schedule which reads:
"54. Taxes on the sale or purchase of
goods other than newspapers, subject to the provisions of Entry 92A of List
I." There can be no doubt that the Central and the State legislations
operate in two different and distinct fields.
The Essential Commodities Act provides for
the regulation, production, a supply distribution and pricing of essential
commodities and is relatable to Entry 33 of List III of the Seventh Schedule
which reads:
"33. Trade and commerce in, and the
production, supply and distribution of,- .
(a) the products of any industry where the
control of such industry by the Union is declared by Parliament 149 by law to
be expedient in the public interest, and imported goods of the same kind as
such products." The definition of "essential commodities" in s.
2(a) of the Essential Commodities Act now includes 'drugs' by the insertion of
cl. (iva) therein by Act 30 of 1974. Sub-s. (I) of s. 3 of the Essential
Commodities Act provides: B "3. Powers to control production, supply,
distribution, etc., of essential commodities- (1) If the Central Government is
of opinion that it is necessary or expedient so to do for maintaining or
increasing supplies of any essential commodity or for securing their equitable
distribution and availability at fair prices, or for securing any essential
commodity for the defence of India or the efficient conduct of military
operations it may, by order, provide for regulating or prohibiting the
production, supply and distribution thereof. and trade and commerce therein."
Sub-s. (2) lays down without prejudice to the generality of the powers
conferred by sub-s. (1), an order made therein may provide for the matters
enumerated in cls. (a) to (f).
Cl. (c) of sub-s. (2) provides:
"For controlling the price at which an
essential com modify may be bought or sold." S. 6 of the Essential
Commodities Act which has an important bearing on these appeals is in these
terms:
"6. Effect of orders inconsistent with
other enactments- Any order made under section 3 shall have effect not
withstanding anything inconsistent therewith contained in any enactment other
than this Act or any instrument having effect by virtue of any enactment other
than this Act." The Drugs (Price Control) order, 1979 issued by the
Central Government in exercise of the powers conferred under s. 3 of the Essential
Commodities Act, 1955 provides for a comprehensive scheme of price fixation
both as regards bulk drugs as well as 150 formulations. The expressions
"bulk drug" and "formulation" are A defined in paragraph
2(a) and 2(f ) as:
"2. In the order, unless the context
otherwise requires,- (a) "bulk drug" means any substance including
pharmaceutical, chemical, biological or plant product or medicinal gas
conforming to pharmacopoeal or other standards accepted under the Drugs and
Cosmetics Act, 1940, which is used as such or as an ingredient in any
formulations;
(f) "formulations" means a medicine
processed out of, or containing one or more bulk drug or drugs, with or without
the use of any pharmaceutical aids for internal or external use for, or in the
.
diagnosis, treatment, mitigation or
prevention of disease in human beings or animals, but shall not include- We are
here concerned with the impact of sub-s. (3) of s. 5 of the Act on the price
structure of formulation, but none the less much stress was laid on fixation of
price of bulk drugs under paragraph 3(2) which allows a reasonable return to
the manufacture under sub paragraph (3) thereof. A manufacturer or producer of
such bulk drugs is entitled to sell it at a price exceeding the price notified
under sub- paragraph (1), plus local taxes, if any, payable.
What is of essence is the price fixation of
formulations and the relevant provisions are contained in paragraph, 10 to 15,
17, 20, 21 and 24. Paragraph 10 provides for a formula according to which the
retail price of formulation shall be calculated and it reads:
"10. Calculation of retail price of
formulations-The retail price of a formulation shall be calculated in
accordance with the following formula, namely:
R.P.=(M.C+C.C+P.M.+P.C) X 1 + MU / 100 + ED
Where- "R.P." means retail price.
151 "M C." means material cost and
includes the-cost of drugs and other pharmaceutical aids used including h
overages, if any, and process loss thereon in accordance with such norms as may
be specified by the Government from time to time by notification in official
Gazette in this behalf.
"C.C." means conversion cost worked
out in accordance with such norms as may be specified by the Government from
time to time by notification in the official Gazette in this behalf.
"P.M." means the cost of packing
material including process loss thereon worked out in accordance with such
norms as may be specified by the Government from time to time by notification
in the official Gazette in this behalf.
"P.C." means packing charges worked
out in accordance with such norms as may be specified by the Government from
time to time by notification in the official Gazette in this behalf.
"M.U." means mark-up referred to in
paragraph 11.
"E.D." means excise duty:
Provided that in the case of an imported
formulation the landed cost shall from the basis for fixing its price along
with such margin as the Government may allow from time to time.
Provided further that where an imported
formulation is re-packed, its landed cost plus the cost of packing materials
and packing charges as worked out in accordance with such norms as may be
specified by the Government from time to time, by notification in the official
Gazette, shall form the basis for fixing its price.
Explanation-For the purposes of this
paragraph, "landed cost" shall mean the cost of import of drug
inclusive of customs duty and clearing charges".
152 The expression "mark-up"
referred to above is dealt within a paragraph 11 and it provides:
"11. Mark-up referred to in paragraph 10
includes the distribution cost, outward freight, promotional expenses,
manufacturers margin and the trade commission and shall not exceed- (i) forty
percent in the case of formulations specified in Category I of the Third
Schedule;
(ii) fifty-five percent in the case of
formulations specified in Category II of the said Schedule:
(iii) one hundred per cent in the case of
formulations specified in Category III of the said Schedule." It is
unnecessary for our purposes to reproduce the provisions of paragraphs 12 to 14
which formulate a detailed scheme of price fixation.
Paragraph 15 confers power of revision of
prices and it reads:
"15. Power to revise prices of
formulations-Not withstanding anything contained in this order .
(a) The Government may, after obtaining such
information as it may consider necessary from a manufacturer or an importer,
fix or revise the retail price of one or more formulations marketed by such
manufacturer or importer, including a formulation not - specified in any of the
categories of the Third Schedule in such manner as the pre-tax return on the
sales turnover of such manufacturer or importer does not exceed the maximum
pre-tax return specified in the Fifth Schedule;
(b) the Government may, if it considers
necessary so to do in public interest, by order, revise the retail price of any
formulation specified in any of the categories of the Third Schedule." 153
Paragraph 17 Casts a mandatory duty on the Central Government to maintain
'Drugs Prices Equalisation Account' to which shall be credited- (a) by the
manufacturer, importer or distributor, as the case may be- (i) the amount
determined under sub-paragraph (2) of paragraph 7;
(ii) the excess of the common selling price
or, as the case may be, pooled price over his retention price;
(b) such other amount of money as the Central
Government may, after due appropriation made by Parliament by law in this
behalf, grant from time to time.
The amount credited to the Drugs Prices
Equalisation Account is meant to compensate a manufacturer, importer or
distributor the short-fall between his retention price and the common selling
price or, as the case may be, the pooled price for the purpose of increasing
the production, or securing the equitable distribution and availability at fair
prices, of drugs after meeting the expenses incurred by the Government in
connection therewith. Every manufacturer, importer or distributor is entitled
to make a claim for being compensated for the short-fall.
Paragraph 19 interdicts that every
manufacturer or importer of a formulation intended for sale shall furnish to
the dealers, State Drug Controllers and-the Government, a price list showing
the price at which the formulation is sold t.) a retailer inclusive of excise
duty. Every such manufacturer or retailer has to give effect to the change in
prices as approved by the Government. Every dealer is required to display the
price list at a conspicuous part of the premises.
It is, however, necessary to reproduce
paragraphs 20, 21 and 24 as they are of considerable importance for our
purposes and they read:
"20. Retail price to be displayed on
label of container-Every manufacturer, importer or distributor of a formulation
intended for sale shall display in indelible 154 print mark on the label of the
container of the formulation or the minimum pack thereof offered for retail
sale, the maximum retail price of that formulation with the words "retail
price not to exceed" preceding it, and "local taxes extra"
succeeding it." "21. Control of sale prices of formulations specified
in Third Schedule-No retailer shall sell any formulation specified in any of
the categories in the Third Schedule to any person at a price exceeding the
price specified in the current price list or the price indicated on the label
of the container or pack thereof, whichever is less, plus the local taxes, if
any, payable.
Explanation-For the purpose of this
paragraph, "local taxes" includes sales tax and octroi actually paid
by the retailer under any law in force in a particular area." "24.
Price to the wholesaler and retailer- (a) No manufacturer, importer or
distributor shall sell a formulation to a wholesaler unless otherwise permitted
under the provisions of this order or any other order made thereunder at a
price higher than:
(a) The retail price minus 14 per cent
thereof, in the case of ethical drugs, and (b) the retail price minus 12
percent thereof, in the case of non-ethical drugs.
(2) No manufacturer, importer, distributor or
wholesaler shall sell a formulation to a retailer unless otherwise permitted
under the provisions of this order or any order made thereunder, at a price
higher than:- (a) the retail price minus 12 percent thereof, in the case of
ethical drugs, and (b) the retail price minus 10 percent thereof, in the case
of non-ethical drugs.
155 Explanation-For the purposes of this
paragraph- (i) "ethical drugs" shall include all drugs specified in
Schedule C, entries Nos. 1, 2, 3, 7, 8 and 9 of Schedule C(l), Schedule E,
Schedule G, Schedule and Schedule L, appended to the Drugs and Cosmetics Rules,
1945 made under the Drugs and Cosmetics Act, 1940, (23 of 1940); and (ii)
"non-ethical drugs" shall mean all drugs other than ethical drugs.
(3) Notwithstanding anything contained in
sub-para graphs (1) and (2), the Government may, by a general or special order,
fix, in public interest, the price to the wholesaler or retailer in respect of
any formulation the price which has been fixed or revised under this
order." Much emphasis was laid on fixation of price of bulk drugs under paragraph
3 which provides by sub-paragraph (1) that the Government may, with a view to
regulating the equitable distribution of an indigenously manufactured bulk drug
specified in the First Schedule or the Second Schedule and making it available
at a fair price and subject to the provisions of sub-paragraph (2) and after
making such inquiry as it deems fit, fix from time to time, by notification in
the official Gazette, the maximum price at which such bulk drug shall be sold.
Sub-paragraph (2) enjoins that while filing the price of a bulk drug under
sub-paragraph (1), the Government may take into account the average cost of
production of each bulk drug manufactured by efficient manufacturer and allow a
reasonable return on net- worth. Explanation thereto defines the expression
"efficient manufacturer" to mean a manufacturer (i) whose production
of such bulk drug in relation to the total production of such bulk drug in the
country is large, or (ii) who employs efficient technology in the production of
such bulk drug.
Sub-paragraph (3) provides that no person
shall sell a bulk drug at a price exceeding the price notified under sub-
paragraph (1), plus local taxes, if any, payable.
It is urged- that while fixing the price of
bulk drug, the Government has to take into-account the average cost of
production 156 of that bulk drug by a particular manufacturer, by taking into A
consideration the cost to a manufacturer who employs efficient methods and
allowing a reasonable return on the net-worth of the drug manufactured. Otherwise,
every manufacturer will show a figure as cost of production, which may not be
acceptable. The average cost of production of an efficient manufacturer is made
the standard for fixing the price but such fixation of the price of bulk drug
allows a reasonable return to the manufacturer. Under sub-paragraph (3) the
manufacturer or producer of such bulk drug is entitled to sell it at a price
not exceeding the price so fixed plus local tax if any, payable.
Much stress is laid that the average cost of
an efficient manufacturer allows a reasonable return on net- worth of the drug
manufactured and the price so fixed is exclusive of local taxes i.e. sales tax.
It is further urged that the term "local taxes" in sub paragraph (3)
means and includes sales tax leviable in a State and attention is drawn to
Explanation to paragraph 21 for that purpose. We fail to appreciate the
relevance of sub-paragraph (3) of paragraph 3 which relates to a manufacturer
or producer of bulk drugs or of paragraph 21 of the Control order which fixes
the controlled price of formulations specified in the Third Schedule exclusive
of local taxes i.e. sales tax. The appellants are manufacturers or producers of
medicines and drugs and are governed by paragraph 24. Under paragraph 24, a manufacturer
or producer is not entitled to sell a formulation to a wholesaler at a price
higher than the retail price minus 14% thereof in case of ethical drugs and
minus 12% in case of non-ethical drugs. It is quite clear upon the terms of
paragraph 24 that the price chargeable by the appellants as manufacturers or
producers is a price inclusive of sales tax. The entire argument built upon
sub- paragraph (3) of paragraph 3 and paragraph 21 of the Control order showing
that the controlled price is exclusive of sales tax and thereof is in conflict
with sub-s (3) of s. S of the Act appears to be wholly misconceived. It is
urged that the appellants in their price lists have a term embodied that sales
tax would be chargeable from a wholesaler or distributor and therefore they are
entitled to recover sales tax on the sale of their medicines and drugs cannot
possibly prevail. Such a term would be in clear violation of para graph 24 of
the Control order which is an offence punishable under s. 7 of the Essential
Commodities Act.
It cannot be doubted that a surcharge
partakes of the nature of sales tax and therefore it was within the competence
of the State 157 Legislature to enact sub-s. (I) of s. S of the Act for the
purpose of levying surcharge on certain class of dealers in addition to the tax
payable by them. When the State Legislature had competence to levy tax on sale
or purchase of goods under Entry 54, it was equally competent to select the
class of dealers on whom the charge will fall. If that be so, the State
Legislature could undoubtedly have enacted sub-s. (3) of s. S of the Act
prohibiting the dealers liable to pay a surcharge under sub-s. (I) thereof from
recovering the same from the purchaser. It is-fairly conceded that sub- s. (3)
of s. S of the Act is also relatable to Entry 54. The contention however that
is there is conflict between paragraph 21 of the Control order which allows a
manufacturer or producer of drugs to pass on the liability to pay sales tax and
sub-s. (3) Of s. S of the Act which prohibits such manufacturers or producers
from recovering the surcharge and therefore it is constitutionally void. It is
said that- the Courts should try to adopt the rule of harmonious construction
and give effect to paragraph 21 of the Control order as the impact of sub-s.
(3) of s. S of the Act is on fixation of price of drugs under the Drugs (Price
Control) order and therefore by reason of s. 6 of the Essential Commodities Act,
paragraph 21 of the Control order which provides for the passing on of tax
liability must prevail. The submission rests on a construction of Art. 246 (3)
of the Constitution and it is said that the power of the State Legislature to
enact a law with respect to any subject in List II is subject to the power of
Parliament to legislate with respect to matters enumerated in Lists I and III.
It is convenient at this stage to deal with
the contention of the appellants that if sub-s. (3) of s. 5 of the Act were to
cover all sales including sales of essential commodities whose prices are
controlled by the Central Government under the various control orders issued
under sub-s. (I) of s. 3 of the Essential Commodities Act, then there will be
repugnancy between the State law and such contral orders which according to s.
6 of the Essential Commodities Act must prevail. In such a case, the State law
must yield to the extent of the repugnancy. In Hari Shankar Bagla & Anr. v.
State of Madhya Pradesh(1) the Court had occasion to deal with the non-obstante
clause in s. 6 of the Essential Supplies (Temporary Powers) Act, 1946 which was
in pari materia with s. 6 of the Essential Commodities Act and it was observed:
"The effect of section 6 certainly is
not to repeal any one of these laws or abrogate them. Its object is simply to
by-pass them where they are inconsistent with the provisions of the Essential
Supplies (Temporary Powers) Act, 1946, or the orders made thereunder. In other
words, the orders made under section 3 would he operative in regard to the
essential commodity covered by the Textile Control order wherever there is repugnancy
in this order with the existing laws and to that extent the existing laws with
regard to those commodities will not operate. By-passing a certain law does not
necessarily amount to repeal or abrogation of that law. That law remains
unrepealed but during the continuance of the order made under section 3 it does
not operate in that field for the time being." The Court added that after
in order is made under s. 3 of that Act, s. 6 then steps in wherein Parliament
has declared that as soon as such an order comes into being that will have
effect notwithstanding any inconsistency therewith contained in any enactment
other than that Act.
Placing reliance on the observations in Hari
Shankar Bagla's case, supra, it is urged that the effect of the non- obstante
clause in s. 6 of the Essential Commodities Act is to give an overriding effect
to the provisions of paragraph
21. It is further urged that paragraph 21 of
the Control order having been issued by the Central Government under sub-s. (1)
of s 3 of the Essential Commodities Act which permits the manufacturer or
producer to pass on the liability to pay sales tax must prevail and sub-s. (3)
of s.
S of the Act which is inconsistent therewith
is by-passed.
The contention appears to be misconceived.
The appellants being manufacturers or producers of formulations are not
governed by paragraph 21 of the Control order but by paragraph 24 thereof and
therefore the price chargeable by them to a wholesaler or distributor is
inclusive of sales tax. There being no conflict between sub-s. (3) of s. S of
the Act and paragraph 24 of the Control order, the question of non-obstante clause
to s. 6 of the Essential Commodities Act coming into play does not arise.
Even otherwise i. e. if some of the
appellants were governed by paragraph 21 of the Control order, that would
hardly make any difference. Under the scheme of the Act, a dealer is free to
pass 159 on the liability to pay sales tax payable under s. 3 and additional
sales tax payable under s. 6 to the purchasers.
Sub-s. (3) of s. S of A the Act however
imposes a limitation on dealers liable to pay surcharge under sub-s. (1)
thereof from collecting the amount of surcharge payable by them from the
purchasers which only means that surcharge payable by such dealers under sub-s.
(I) of s. S of the Act will cut into the profits earned by such dealers. The-
controlled price or retail price of medicines and drugs under paragraph 21
remains the same, and the consumer interest is taken care of in as much as the
liability to pay surcharge sub-s. (3) of s. 5 cannot be passed on. That being
so, there is no conflict between sub-s. (3) of s. S of the Act and paragraph 21
of the Control order. The entire sub mission advanced by learned counsel for
the appellants proceeds on the hypothesis that the various control orders
issued under sub- s. (1) of s. 3 of the Essential Commodities Act are for the
protection of the manufacturer or producer. There is an obvious fallacy in the
argument which fails to take into account the purpose of the legislation.
Where the fixation of price of an essential
commodity is necessary to protect the interests of consumers in view of the
scarcity of supply, such restriction cannot be challenged as unreasonable on
the ground that it would result in the elimination of middleman for whom it
would be unprofitable to carry on business at fixed rate or that it does not
ensure a reasonable return to the manufacturer or producer on the capital
employed in the business of manufacturing or producing such an essential
commodity.
The contention that in the field of fixation
of price by a control order issued under sub-s. (1) of s. 3 of the Essential
Commodities Act, the Central Government must have due regard to the securing of
a reasonable return on the capital employed in the business of manufacturing or
producing an essential commodity is entirely misconceived.
The predominant object of issuing a control
order under sub- s. (1) of s. 3 of the Act is to secure the equitable
distribution and availability of essential commodities at fair prices to the
consumers, and the mere circumstance that some of those engaged in the field of
industry, trade and commerce may suffer a loss is no ground for treating such a
regulatory law to be unreasonable, unless the basis adopted for price fixation
is so unreasonable as to be in excess of the power to fix the price, or there is
a statutory obligation to ensure a fair return to the industry. In Shree
Meenakshi Mills 160 Ltd. v. Union of India(l) Ray, J speaking for the Court
rejected the A contention that the controlled price must ensure a reasonable
return on the capital employed in the business of manufacturing or producing
essential commodities in these words-:
"In fixing the prices, a price line has
to be held in order to give preference or predominant consideration to the
interests of the consumers or the general public over that of the producers in
respect of essential commodities. The aspect of ensuring availability of the
essential commodities to the consumer equitably and at fair price is the most
important consideration." In Prag Ice & Oil Mills & Anr. etc. v.
Union of India(a) Chandrachud, J. (as he then was) negatived a similar
contention that fixation of a price without ensuring a reasonable return to the
producers or dealers was unconstitutional. In repelling the contention,
Chandrachud J. speaking for the Court referred to the two earlier b decisions
in Panipat Cooperative Sugar Mills v. Union of India(3) and Anakapalle
Cooperative Agricultural & Industrial Society Ltd. v. Union of India(4) and
observed:
"The infirmity of this argument, as
pointed out in Meenakshi Mills's case, is that these two decisions turned on
the language of s 3 (3C) of the Essential Commodities Act under which it is
statutorily obligatory to the industry a reasonable return on the capital
employed in the business of manufacturing sugar. These decisions can therefore
have no application to cases of price fixation under s. 3 (1) read with s. 3
(2) (c) of the Act. Cases falling under sub-ss. (3A), (3B) and (3C) of s. 3 of
the Act belong to a different category altogether." The learned Chief
Justice then observed:
"The dominant purpose of these
provisions is to ensure the availability of essential commodities to the
consumers at a fair price. And though patent injustice to 161 the producer is
not to be encouraged, a reasonable return on investment or a reasonable rate of
profit is not the sine qua non of the validity of action taken in furtherance
of the powers conferred by s. 3 (1) and s.
3 (2) (c) of the Essential Commodities Act.
The interest of the consumer has to be kept ill the forefront and the prime
consideration that an essential commodity ought to be made available to the
common man at a fair price must rank in priority over every other
consideration." The contention advanced does not take note of the
distinction between the controlled price fixed under cl. (c) of sub-s. (2) of
s. 3 of the Act read with sub-s. (I) thereof and the procurement price fixed
under sub-ss. (3A), (3B) and (3C). In fixing a procurement price under sub-ss. (3A),
(3B) and (3C), there is a statutory obligation cast on the Central Government
to ensure a fair return to the producers or dealers of essential commodities.
while in fixing the controlled price under c]. (c) of sub-s. (2) of s. 3 read
with sub-s. (1) thereof, the predominant factor is the basis to secure the
equitable distribution and availability of essential commodities at fair prices
to the consumers and a reasonable return on investment or a reasonable rate of
profit to the manufacturer or producer i... not a relevant criterion although
it should not ordinarily work patent injustice to a manufacturer or producer.
Just as the industry cannot complain of rise and fall of prices due to economic
factors in open market, it cannot similarly complain of some increase in, or
reduction of, prices as a result of an order issued under sub-s. (I) of s. 3 of
the essential commodities Act, or a cut in the margin of profits brought about
by a provision like sub-s. (3) of s. 5 of the Act which provides that a
manufacture or producer shall not be entitled to recover the surcharge levied
on him under sub-s. (I) of s. S of the Act because such increase or reduction
is also based on economic factors.
The principal point in controversy is:
Whether there is repugnancy between sub-s. (3) of s. 5 of the Act and paragraph
21 of the Control order and therefore sub-s. (3) of s. 5 must yield to that
extent. The submission is that if Parliament chooses to occupy the field and
there is price fixation of an essential commodity with liberty to pass on the
burden of tax to the consumer by a law made by Parliament under Entry 33 of List
III of the Seventh Schedule, then it is not competent for the State Legislature
to enact a provision 162 like sub-s. (3) of s. S of the Act while enacting a
law under Entry 54 of List II prohibiting the passing on of liability of tax to
the purchaser.
The true principle applicable in judging the
constitutional validity of sub-s. (3) of s. S of the Act is to determine
whether in its pith and substance it is a law relatable to Entry 54 of List II
of the Seventh Schedule and not whether there is repugnancy between sub-s. (3)
of s. S of the Act and paragraph 21 of the Drugs {Price Control) order made
under sub-s. (1) of s. 3 of the Essential Commodities Act, is therefore void.
In dealing with the question, we must set out Art. 246 of the Constitution
which is based on s. 100 of the Government of India Act, 1935 and it reads:
"246(1) Notwithstanding anything in
clauses (2) and t (3), Parliament has exclusive power to make laws with respect
to any of the matters enumerated in List I in the Seventh Schedule (in this
Constitution referred to as the "Union List").
(2) Notwithstanding anything in clause (3),
Parliament, and, subject to clause (1), the Legislature of any State also, have
power to make laws with respect to any of the matters enumerated in List III in
the Seventh Schedule (in this Constitution referred to as the "Concurrent
List").
(3) Subject to clauses (1) and (2), the
Legislature of any State has exclusive power to make laws for such State or any
part thereof with respect to any of the matters enumerated in List II in the
Seventh Schedule (in this Constitution referred to as the "State
List").
(4) Parliament has power to make laws with
respect to any matter for any part of the territory of India not 9 included in
a State notwithstanding that such matter is a matter enumerated in the State
List." It is obvious that Art. 246 imposes limitations on the legislative powers
of the Union and State Legislatures and its ultimate analysis would reveal the
following essentials:
1. Parliament has exclusive power to
legislate with respect to any of the matters enumerated in List I 163
notwithstanding anything contained in cls. (2) and (3). The non-obstante clause
in Art. 246(1 ) provides for predominance or supremacy of Union Legislature.
This power is not encumbered by anything contained in cls. (2) and (3) for
these causes themselves are expressly limited and made subject to the
non-obstante clause in Art. 246(1).
The combined effect of the different clauses
contained in Art. 246 is no more and no less than this: that in respect of any
matter falling within List I, Parliament has exclusive power of legislation.
2. The State Legislature has exclusive power
to make laws for such State or any part thereof with respect to any of the
matters enumerated in List II of the Seventh Schedule and it also has the power
to make laws with respect to any matters enumerated in List III. The exclusive
power of the State Legislature to . legislate with respect to any of the
matters enumerated in List II has to be exercised subject to cl. (l) i.e. the
exclusive power of Parliament to legislate with respect to matters enumerated
in List I. As a con sequence, if there is a conflict between an entry in List I
and an entry in List II which is not capable of reconciliation, the power of
Parliament to legislate with respect to a matter enumerated in List TI must
supersede pro tanto the exercise of power of the State Legislature.
3. Both Parliament and the State Legislature
have con- current powers of legislation with respect to any of the matters
enumerated in List III.
Art. 254 provides for the method of resolving
conflicts between a law made by Parliament and a law made by the Legislature of
a State with respect to a matter falling in the Concurrent List and it reads:
"254(1) If any provision of a law made
by the Legislature of a State is repugnant to any provision of a law made by
Parliament which Parliament is competent enact, or to any provision of an
existing law with respect to one of the matters enumerated in the Concurrent
List, then, 164 subject to the provisions of clause (2), the law made by
Parliament, whether passed before or after the law made by the Legislature of
such State, or, as the case may be, the existing law shall prevail and the law
made by the Legislature of the State shall, to the extent of the repugnancy, be
void.
(2) Where a law made by the Legislature of a
State with respect to one of the matters enumerated in the Concurrent List
contains any provision repugnant to the provisions of an earlier law made by
Parliament or an existing law with respect to that matter, then, the law so
made by the Legislature of such State shall if it has been reserved for the
consideration of the President and has received his assent, prevail in that
State.
Provided that nothing in this clause shall
prevent Parliament from enacting at any time any law with respect to the same
matter including a law adding to, amending, varying or repealing the law so
made by the Legislature of the State." We find it difficult to subscribe
to the proposition advanced on behalf of the appellants that merely because of
the opening words of Art. 246(3) of the Constitution "Subject to clauses
(I) and (2)" and the non-obstante clause in Art. . 246(1)
''Notwithstanding . anything in clauses (2) and (3)", sub-s. (3) of s. 5
of the Act which provides that no dealer shall be entitled to collect the amount
of surcharge must be struck down as ultra vires the State Legislature inasmuch
as it is in consistent with paragraph 21 of the drugs (Price Control) order
issued by the Central Government under sub-s. (I) of s. 3 of the Essential Commodities
Act which enables the manufacturer or producer of drugs to pass on the
liability to pay sales tax to the consumer. The submission is that sub-s. (3)
of s. 5 of the Act enacted by the State Legislature while making a law under
Entry 54 of List II of the Seventh Schedule which interdicts that a dealer
liable to pay surcharge under sub- s. (1) of s. 5 of the Act shall not be
entitled to collect it from the purchaser, directly trenches upon Union power
to legislate with respect to fixation of price of essential commodities under
Entry 33 of List Ill. It is said that if both are valid, then ex hypothesi the
law made by Parliament must prevail and the State law pro tanto must yield. We
are afraid, the contention cannot prevail in view of the well accepted
principles, 165 The words "Notwithstanding anything contained in clauses
(2) and (3) ' in Art. 246 (l) and the words "Subject to clauses A (I.) and
(2)" in Art. 246(3) lay down the principle of Federal supremacy viz. that
in case of inevitable conflict between Union and State powers, the Union power
as enumerated in List T shall prevail over the State power as enumerated in
List II and III. and in case of overlapping between List 11 and III, the 13
former shall prevail. But the principle of Federal supremacy laid down in Art.
246 of the Constitution cannot be resorted to unless there is an
"irreconcilable" conflict between the Entries in the Union and State
Lists. In the case of a seeming conflict between the Entries in the two lists,
the Entries should be read together without giving a narrow and restricted
sense to either of them. Secondly, an attempt should be made to see whether the
two Entries cannot be reconciled so as to avoid a conflict of jurisdiction. lt
should be considered whether a fair reconciliation can be achieved by giving to
the language or the Union Legislative List a meaning which, if less wide than
it night in another context bear, is yet one that can properly be given to it
and equally giving to the language of the State Legislative List a meaning
which it can properly bear. The non-obstante clause in Art. 246(l) must operate
only if such reconciliation should prove impossible. Thirdly, no question of
conflict between the two lists will arise if the impugned legislation, by the
application of the doctrine of "pith and substance" appears to fall
exclusively under one list, and the encroachment upon another list is only
incidental.
Union and State Legislatures have concurrent
power with respect to subjects enumerated in List III, subject only to the pro-
vision contained in cl. (2) of Art. 254 i.e.
provided the provisions of the State Act do
not conflict with those of any (Central Act on the subject. However, in case of
repugnancy between a State Act and a Union Law on a subject enumerated in List
III, the State law must yield to the Central law unless it has been reserved
for the assent of the President and has received his assent under Art.
254(2). The question of repugnancy arises
only when both the Legislatures are competent to legislate in the same field
i.e. when both the Union and the State laws relate to a subject specified in
List III and occupy the same field.
As regards the distribution of legislative
powers between the Union and the States, Art. 246 adopts with immaterial
alterations the 166 scheme for the distribution of legislative powers contained
in s. 100 A of the Government of India Act, 1935. Our Constitution was not written
on a clean slate because a Federal Constitution had been established by the
Government of India Act, 1935 and it still remains the framework on which the
present Constitution is built. The provisions of the Constitution must
accordingly be read in the light of the provisions of the Government of India
Act, 1935 and the principles laid down in connection with the nature and
interpretation of legislative power contained in the Government of India Act,
1935 are applicable, and have in fact been applied, to the interpretation of
the Constitution.
In the matter of the Central Provinces &
Berar Sales of Motor Spirit and Lubricants Taxation Act, 1938(1) Gwyer, C.J.
referred to the two decision of the Privy Council in Citizen Insurance Company
v. Wiliam Parsons(2) and Attorney General for the Province of Ontario v.
Attorney General for the Dominion of Canada(3) which in his opinion had laid
down 'most clearly the principles which should be applied by Courts in the
matter of deciding upon the competence of the two rival Legislatures that have
been set up under the Indian Federal system.
With regard to the interpretation of the
non-obstante clause in s. 100(l) of the Government of India Act, 1935 Gwyer,
C.J. observed:
"It is a fundamental assumption that the
legislative powers of the Centre and Provinces could not have been intended to
be in conflict with one another and, therefore, we must read them together, and
interpret or modify the language in which-one is expressed by the language of
the other." "In all cases of this kind the question before the
Court", according to the learned Chief Justice is not "how the two
legislative powers are theoretically capable of being construed, but how they
are to be construed here and now." The general scheme of the British North
America Act, 1867 with regard to the distribution of legislative powers, and
the general 167 scope and effect of ss. 91 and 92, and their relations to each
other were fully considered and commented upon in the case of Citizen Insurance
Company's case, supra. Sir Montague Smith delivering the judgment for the Board
evolved the rule of reconciliation observing:
"In these cases it is the duty of the
Courts, however difficult it may be, to ascertain in what degree and to what
extent, authority to deal with matters Falling within these classes of subjects
exists in each legislature, and to define in the particular case before them
the limits of their respective power.
It could not have been the intention that a
conflict should exist; and, in order to prevent such a result, the two sections
must be read together and the language of one interpreted and, where necessary,
modified by that of the other. In this way it may, in most cases, be found
possible to arrive at a reasonable and practical construction of the language
of the Section, so as to reconcile the respective powers they contain and give
effect to all of them.
Earl Loreburn, L.C. delivering the judgment
of the Judicial Committee in Attorney-General for the Province of Ontario's
case, (supra) observed that in the interpretation of ss. 91 and 92 of the E:
British North America Act:
"If the text is explicit, the text is
conclusive alike for what it directs and what it forbids." When the text
is ambiguous, as for example when the words establishing two mutually exclusive
jurisdictions are wide enough to bring a particular power within either,
recourse must be had to the context and scheme of the Act.
In A.L.S.P.P. Subrahmanyan Chettiar v.
Muttuswami Goundan(l) Gwyer, C.J. reiterated that the principles laid down by
the Privy Council in a long line of decisions in the interpretation of ss. 91
and 92 of the British North America Act, 1867 must be accepted as a guide for
the interpretation of s. 100 of the Government of India Act, 1935:
168 "It must inevitably happen from time
to time that legislation, though purporting to deal with a subject in one list,
touches also on a subject in another list, and the different provisions of the
enactment may be so closely intertwined that build adherence to a strictly verbal
interpretation would result in a large number of statutes being declared
invalid because the Legislature enacting them may appear to have legislated in
a forbidden sphere. Hence the rule which has been evolved by the Judicial
Committee whereby the impugned statute is examined to ascertain its 'pith and
substance' or its true nature and character for the purpose of determining
whether it is legislation in respect of matters in this list or in that."
It has already been stated that where the two lists appear to conflict with
each other, an endeavour should be made to reconcile them by reading them
together and applying the doctrine of pith and substance. It is only when such
attempt to reconcile fails that the non-obstante clause in Art. 246(1) should be
applied as a matter of last resort.
For, in the words of Gwyer, C.J. in C.P.
& Berar Taxation Act's case, supra:
"For the clause ought to be regarded as
a last re- source, a witness to the imperfections of human expression and the
fallibility of legal draftsmanship." The observations made by the Privy
Council in the Citizen's Insurance Company's case, supra, were quoted with
approval by Gwyer, C.J. in C.P. & Berar Taxation Act's case, supra, and he
observed that an endeavour should be made to reconcile apparently conflicting
provisions and that the general power ought not to be construed as to make a
nullity of a particular power operating in the same field. The same duty of
reconciling apparently conflicting provisions was reiterated by Lord Simonds in
delivering the judgment of the Privy Council in Governor-General in Council v.
Province of Madras(1):
"For in a Federal constitution in which
there is a division of legislative powers between Central and Provincial
Legislatures, it appears to be inevitable that controversy should arise whether
one or other legislature 169 is not exceeding its own, and encroaching on the
other's constitutional legislative power, and in such a controversy it is a
principle, which their Lordships do not hesitate to apply in the present case,
that it is not the name of the tax but its real nature, its "pith and
substance" as it has sometimes been said, which must determine into what
category it falls." B Their Lordships approved of the decision of the
Federal Court in The Province of Madras v. Messrs Boddu Paidanna & Sons(l)
where it was held that when there were apparently conflicting entries the
correct approach to the question was to see whether it was possible to effect a
reconciliation between the two entries so as to avoid a conflict and
overlapping.
In Prafulla Kumar Mukherjee & Ors. v.
Bank of Commerce Ltd., Khulna(1) Lord Porter delivering the judgment of the
Board laid down that in distinguishing between the powers of the divided
jurisdictions under list I, II and III of the Seventh Schedule to the
Government of India Act, 1935 it is not possible to make a clean cut between
the powers of the various Legislatures. They are bound to overlap from time to
time, and the rule which has. been evolved by the Judicial Committee whereby an
impugned statute is examined to ascertain its pith and substance or its true
character for the purpose of determining in which particular list the
legislation falls, applies to Indian as well as to Dominion legislation. In
laying down that principle, the Privy Council observed:
"Moreover, the British Parliament when
enacting the Indian Constitution had a long experience of the working of the
British North America Act and the Australian Commonwealth Act and must have
known that it is not in practice possible to ensure that the powers entrusted
to the several legislatures will never overlap." The Privy Council quoted
with approval the observations of Gwyer, C.J in Subramanyan Chettiar's case,
supra, quoted above, and observed:
170 "No doubt experience of past
difficulties has made A the provisions of the Indian Act more exact in some
particulars, and the existence of the Concurrent List has made it easier to
distinguish between. those matters which are essential in determining to which
list particular provision should be attributed and those which are merely
incidental. But the overlapping of subject-matter is not avoided by
substituting three lists for two, or even by arranging for a hierarchy of
jurisdictions. Subjects must still overlap, and where they do, the question
must be asked what in pith and substance is the effect of the enactment of
which complaint is made, and in what list is its true nature and character to
be found. If these questions could not be asked, much beneficent legislation would
be stifled at birth. and many of the subjects entrusted to provincial
legislation could never effectively be dealt with." It would therefore
appear that apparent conflict with the Federal power had to be resolved by
application of the doctrine of pith and substance and incidental encroachment.
Once it is found that a law made by the
Provincial Legislature was with respect to one of the matters enumerated in the
Provincial List, the degree or extent of the invasion into the forbidden field
was immaterial. "The invasion of the provinces into subjects in the
Federal List", in the words of Lord Porter, "was important":
" ... not .. because the validity of an
Act can be determined by discriminating between degrees of invasion, but for
the purpose of determining as to what is the pith and substance of the impugned
Act. Its pro visions may advance so far into federal territory as to show that
its true nature is not covered with Provincial matters, but the question is
not, has it trespassed more or less, but is the trespass, whatever it be, such
as to show that the pith and substance of the impugned Act is not money-lending
but promissory notes or banking ? once that question is determined the Act
falls on one or the other side of the line and can be seen as valid or invalid
according to its true content." The passage quoted above places the
precedence according to the three lists in its proper perspective. In answering
the objection that 171 view does not give sufficient effect to the non-obstante
clause in s. 100(1) of the Government of India Act, 1935, as between the three
lists, the Privy Council observed:
"Where they come in conflict, List I has
priority over Lists III and II and List III has priority over List II."
But added:
"The priority of the Federal Legislature
would not prevent the Provincial Legislature from dealing with any matter
within List II though it may incidentally affect any item in List I." It
would therefore appear that the constitutionality of the law is to be judged by
its real subject matter and not by its incidental effect on any topic of
legislation in another field.
The decision of the Privy Council in Prafulla
Kumar Mukherjee's case, supra, has been repeatedly approved by the Federal
Court and this Court as laying down the correct rule to be applied in resolving
conflicts which arise from overlapping powers in mutually exclusive lists. It
may be added as a corollary of the pith and substance rule that once it is
found that in pith and substance an impugned Act is a law on a permitted field
any incidental encroachment on a forbidden field does not affect the competence
of the legislature to enact that Act; Ralla Ram v. Province of East Punjab(2),
State of Bombay v. Nerothamdas Jethabai & Anr(2), State of Bombay v. F. N.
Balsara(3), A. S. Krishna v. State of Madras(4), M. Karunanidhi v. Union of
India(5), Union of India v. H.S. Dhillon(6) and Southern Pharmaceuticals &
Chemicals Trichur & Ors. etc. v. State of Kerala & Ors. etc.(7) In
Laskin's Canadian Constitutional Law, 4th edn., it is observed at p. 24 that
the doctrine of paramountcy Is tied up with 172 the "trenching"
doctrine in the first of the four propositions formulated by Lord Tomlin in
Attorney-General for Canada v. Attorney General for Britain Columbia &
Ors.(1) case, and then he goes into the question,: "What is the basis of
the paramountcy doctrine ?" Laskin quotes from Lefroy's Canada's Federal
System at p. 126:
"But the rule as to predominance of
Dominion legislation it may be confidently said, can only be invoked in cases
of absolutely conflicting legislations in pari materia, when it would be an
impossibility to give effect to both the Dominion and the provincial
enactments." The learned author refers to the two decisions of the Privy
Council in Attorney-General of Ontario v. Attorney-General of Canada(2) and
City of Montreal v. Montreal Street Railway(3) laying down that:
"There must be a real conflict between
the two Acts, that is, the two enactments 'must come into collision'..... or
'comes into conflict ....
over a field of jurisdiction common to
both'." Laskin observes that the "conflict" test espoused by
these authorities seems clear enough in principle even if it raises problems in
application. He then at p. 26 notices that there is a recent trend in the
decisions of the Supreme Court of Canada to the strict view of paramountcy
reflected in the conflict or collision test, which he describes as the test of
operating incompatibility and observes at p. 27 : .
"It is necessary to be reminded at all
times that no issue of paramountcy can arise unless there is in existence
federal and provincial legislation which, independently considered, is in each
case valid. If either piece of legislation, standing alone, is invalid there is
no occasion to consider whether the field has been occupied. The issue that
will have been resolved in such case would be the anterior one of the
"matter embraced by the legislation, whether of Parliament or of the
provincial legislature, as the case may be." 173 At p. 28, he states:
"The doctrine of occupied field applies
only where there is a clash between Dominion legislation and provincial
legislation within an area common to both." Here there is no such
conflict. The Union and the State laws operate on two different and distinct
fields and both the laws are capable of being obeyed.
Questions of conflict between the
jurisdiction of Parliament of the Dominion and of the Provincial Legislature
have frequently come up before the Privy Council and we may briefly refer to
the decisions relied upon though they are of little assistance to the
appellants. In Grand Trunk Railway Company of Canada v. Attorney-General of
Canada(1), Lord Dunedin observed:
The construction of the provisions of the
British North America Act has been frequently before their Lordships. It does
not seem necessary to recapitulate the decisions. But a comparison of two cases
decided in the year 1894-viz., Attorney- General of Ontario v. Attorney General
of Canada(2) and Tennant v. Union Bank of Canada(3)- seem to establish these two
propositions First, that there can be a domain in which provincial and Dominion
legislation may overlap, in which case neither legislation will be ultra vires,
if the field is clear; and secondly, that if the field it not clear, and in
such a domain the two legislations meet, then the Dominion legislation must
prevail." In a later decision of the Privy Council in Attorney- General
for Canada v. Attorney-General for British Columbia & Ors. case, supra,
Lord Tomlin summarized in four propositions the result of the earlier decisions
of the Board on the question of conflict between the Dominion and Provincial
Legislatures. The third proposition is to the effect that it is within the
competence of the Dominion Parliament to provide for matters which, though otherwise
within the 174 legislative competence of the Provincial Legislature, are
necessarily incidental to effective legislation by Parliament of the Dominion
upon a subject of legislation expressly enumerated in s. 91. The fourth
proposition on which the entire argument of learned counsel for the appellants
proceeds is based upon the dictum of Lord Dunedin in Grand Trunk Railway
Company's case, supra, set out above.
It is well settled that the validity of an
Act is not affected if lt incidentally trenches upon matters outside the
authorized field and therefore it is necessary to inquire in each case what is
the pith and substance of the Act impugned. If the Act, when so viewed,
substantially falls within the powers expressly conferred upon the legislature
which enacted it, then it cannot be held to be invalid merely because it
incidentally encroaches on matters which have been assigned to another
Legislature.
In Board of Trustees of the Lethbrige
Northern Irrigation District & Anr. v. Independent order of Foresters(1),
Viscount, Caldecote, L.C. Observed:
"These sections have been the subject of
repeated examination in the Judicial Committee, and there can no longer be any
doubt as to the proper principles to their interpretation, difficult though
they may be in application. Lord Haldane, in delivering the judgment of the
Judicial Committee in, Great West Saddlary Co. v. The King(2) said "The
rule of constraction is that general language in the heads of s. 92 yields to
particular expressions in s. 91, where the latter are unambiguous." In a
later decision of the Judicial Committee, Attorney-General for Canada v. Attorney-General
for British Columbia, supra, Lord Tomlin summarized in four propositions the
result of the earlier decisions of the Board on questions of conflict between
the Dominion and the Provincial Legislatures. The first proposition is to the
effect that the legislation of the Provincial Parliament of the Dominion, so
long as it strictly relates to subjects of legislation expressly enumerated in
s. 91, is of paramount authority, even though it trenches upon matters assigned
to the Provincial 175 Legislatures by s. 92, Lord Tomlin referred to Tennant v.
Union Bank of Canada, supra, as the authority for this statement."
Viscount Caldecote then observed:
"In applying these principles, as their
Lordships propose to do, an inquiry must first be made as to the "true
nature and character of the enactment in question" Citizen Insurance Co.
Of Canada v. Wiliam Parsons) (supra) or, to use Lord Watson's words in
delivering the judgment of the Judicial Committee in Union Colliery Company of
British Columbia v. Bryden(1) as to their "pith and substance". Their
Lordships now address themselves to that inquiry."
"Legislation", said Lord Maugham in delivering the judgment of the
Privy Council in Attorney-General for Alberta v. Attorney-General for
Canada,(2) "given in pith and substance within one of the classes
specially enumerated in s. 91 is beyond the legislative competence of the
Provincial Legislature under s. 91". At p. 370 of the Report, Lord Maugham
laid down on behalf of the Privy Council:
"Since 1894 it has been a settled
principle that if a subject of legislation by the Province is only incidental
or ancillary to one of the classes of subjects enumerated in s. 91 and is
properly within one of the subjects enumerated in s. 92, then legislation by
the Province is competent unless and until the Dominion Parliament chooses to
occupy the field by legislation." (Emphasis supplied.) Lord Maugham's reference
to the year 1894 points to the decision of the Privy Council in
Attorney-General for Ontario v. Attorney-General for Canada, supra.
In Attorney-General for Canada v.
Attorney-General for the Province of Quebed,(3) Lord Porter in delivering the
judgment of the Board drew attention to these principles and then observed:
176 "In calling attention to these
principles their Lordships are but repeating what has many times been set forth
in the judgments of the Board, and it only remains to apply them to the individual
case under consideration. ' The rule of pith and substance laid down by the
Privy- Council was reaffirmed by Viscount Simon in Attorney-General of
Sasketchewan v. Attorney-General of Canada & Ors (1) This was emphasized
very clearly by Lord Atkin while dealing with the validity of the Milk and Milk
Products Act (Northern Ireland) which was impugned as violating s. 4 of the
Government of Ireland Act, 1920 in Gallahagher v. Lynn(2) in his own terse
language:
"It is well established that you are to look
at the "true nature and character" of the legislation; Russell v. The
Queen(3) "the pith and substance of the legislation". If on the view
of the statute a, whole, you find that the substance of the legislation is
within the express powers, then it is now invalidated if incidentally it
affects matters which are outside the authorized field." Much stress is
laid on the fourth propositions formulated by Lord Tomlin in Attorney-General
for Canada v.
Attorney-General for British Columbia &
Ors., (supra) based on the dictum of Lord Dunedin in Grand Trunk Railway
Company of Canada's case, supra, which, even at the cost of repetition, we may
set out below:
"4. There can be a domain in which
provincial and Dominion legislation may overlap, in which case neither
legislation will be ultra vires if the field is clear, but if the field is not
clear and the two legislations meet, the Dominion legislation must prevail: see
Grand Trunk R. of Canada v. Attorney-General of Canada, (supra)." The
question is whether the field is not clear and the two legislations meet and
therefore on the doctrine of Federal supremacy sub-s (3) 177 of s. S of the Act
must be struck down as ultra vires The principle deducible from the dictum of
Lord Dunedin as applied to the distribution of legislative powers under Art 246
of the Constitution, is that when the validity of an Act is challenged as ultra
vires, the answer lies to the question, what is the pith and substance of the
impugned Act ? No doubt, in many cases it can be said that the enactment which
is under consideration may be regarded from more than one angle and as
operating in more than one field. If however, the matter dealt with comes
within any of the classes of subjects enumerated in List II, then it is under
the terms of Art. 246 (3) not to be deemed to come within the classes of
subjects assigned exclusively to Parliament under Art. 246 (1) even though the
classes of subjects looked at signly overlap in many respects. The whole
distri- bution of powers must be looked at as Gwyer, C. J. Observed in C.P.
& Berar Taxation Act's case, supra, in determining the question of validity
of the Act in question. Moreover, as Gwyer, C.J. Laid down in Subrahmaniyan
Chettiar's case, (supra), and affirmed by their Lordships of the Privy Council
in Prafulla Kumar Mukherjee's case, (supra) it is within the competence of the
State Legislature under Art.
246 (3) to provide for matters which, though
within the competence of Parliament, are necessarily incidental to effective
legislation by the State Legislature on the subject of legislation expressly
enumerated in List II.
We must then pass on to the contention
advanced by learned counsel for the appellants that there is repugnancy between
sub-s (3) of s. S of the Act and paragraph 21 of the Drugs (Price Control)
order and therefore sub-s. (3) of s. 5 of the Act is void to that extent.
Ordinarily, the laws could be said to be repugnant when they involve
impossibility of obedience to them simultaneously but there may be cases in
which enactments may be inconsistent although obedience to each of them may be
possible without disobeying the other. The question of "repugnancy"
arises only with reference to a legislation falling in the Concurrent List but
it can be cured by resort to Art. 254 (2).
As we have endeavoured so far, the question
raised as to the constitutional validity of sub-s. (3) of s. S of the Act has
to be determined by application of the rule of the pith and substance whether
or not the subject-matter of the impugned legislation was competently enacted
under Art. 246, and therefore tho question of repugnancy under Art. 254 was not
a matter in issue. The submission 178 put forward on behalf of the appellants
however is that there is direct collision and/or irreconciliable conflict
between sub-s. (3) of s. 5 of the Act which is relatable to Entry 54 of List II
of the Seventh Schedule and paragraph 21 of the Control order issued by the
Central Government under sub-s. (1) of s. 3 of the Essential Commodities Act
which is relatable to Entry 33 of List III. It is sought to be argued that the
words "a law made by Parliament which Parliament is competent to
enact" must be construed to mean not only a law made by Parliament with respect
to one of the matters enumerated in the Concurrent List but they are wide
enough to include a law made by Parliament with respect to any of the matters
enumerated in the Union List. The argument was put in this form. In considering
whether a State law is repugnant to a law made by Parliament, two questions
arise:
First, is the law made by Parliament viz. the
Essential Commodities Act, a valid law ? For, if it is not, no question of
repugnancy to a State law can arise. If however it is a valid law, the question
as to what constitutes repugnancy directly arises. The Second question turns on
a construction of the words "a law made by Parliament which Parliament is
competent to enact" in Art. 254 (1).
Strong reliance is placed on the judgment of
the High Court of Australia in Clyde Engineering Company Limited v. Cowburn(1)
and to a passage in Australian Federal Constitutional Law by Colin Howard, 2nd
edn. at pp. 34-35.
Our attention is also drawn to two other
decisions of the High Court of Australia: Ex parte Mc Lean(2) and Stock Motor
Ploughs Limited v. Forsyth.(3) The decision in Clyde Engineering Company's
cases, supra, is an authority for the proposition that two enactments may be
inconsistent where one statute takes away the rights conferred by the other
although obedience to each one of them may be possible without disobeying the
other. The contention is that paragraph 21 of the Control order confers a right
on the manufacturers and producers of medicines and drugs to pass on the
liability for sales tax while sub-s. (3) of s. 5 of the Act prohibits such
manufacturers or producers from passing on such liability. The argument cannot
prevail for two obvious reasons viz (1) Entry 54 of List II is a tax entry and
therefore there is no question of repugnancy between sub-s. (3) of s. 5 of the
Act which is a 179 law made by the State Legislature for the imposition of tax
on sale or purchase of goods relatable to Entry 54 and paragraph 21 of the
Control order issued by the Central Government under sub-s. (1) of s. 3 of the Essential
Commodities Act which is a law made by Parliament relatable to Entry 33 of List
III. And (2). The question of 'repugnancy' can only arise in connection with
the subjects enumerated in the Concurrent List as regards which both the Union
and the State Legislatures have concurrent powers so that the question of
conflict between laws made by both Legislatures relating to the same subject
may arise.
This Court has considered the question of
repugnancy in several cases and in Deep Chand v. The State of Uttar Pradesh
& Ors.(1) the result of the authorities was thus stated by Subba Rao, J.:
"Nicholas in his Australian
Constitution, 2nd edn., p. 303, refers to three tests of inconsistency or
repugnancy:
1. There may be inconsistency in the actual
terms of the competing statutes;
2. Though there may be no direct conflict, a
State law may be inoperative because the Commonwealth law, or the award of the
Commonwealth Court, is intended to be a complete exhaustive Code; and
3. Even in the absence of intention, a
conflict may arise when both State and Commonwealth seek to exercise their
powers over the same subject-matter." In Ch. Tika Ramji & Ors. v. The
State of Uttar Pradesh & Ors.(2) the Court accepted the above three rules
evolved by Nicholas, among others, as useful guides to test the question of
repugnancy.
Art. 254 of the Constitution makes provision
first, as to what would happen in the case of conflict between a Central and
State 180 law with regard to the subjects enumerated in the Concurrent List,
and secondly, for resolving such conflict. Art. 254(1) enunciates the normal
rule that in the event of a conflict between a Union and a State law in the
concurrent field, the former prevails over the latter. Cl. (1) lays down that
if a State law relating to a concurrent subject is 'repugnant' to a Union law
relating to that subject, then, whether the Union law is prior or later in
time, the Union law will prevail and the State law shall, to the extent of such
repugnancy, be void. To the general rule laid down in cl.
(1), cl. (2) engrafts an exception, viz.,
that if the President assents to a State law which has been reserved for his
consideration, it will prevail notwithstanding its repugnancy to an earlier law
of the Union, both laws dealing with a concurrent subject. In such a case, the
Central Act will give way to the State Act only to the extent of inconsistency
between the two, and no more. In short, the result of obtaining the assent of
the President to a State Act which is inconsistent with a previous Union law
relating to a concurrent subject would be that the State Act will prevail in
that State and override the provisions of the Central Act in their
applicability to that State only. The predominance of the State law may however
be taken away if Parliament legislates under the proviso to cl. (2). The
proviso to Art. 254(2) empowers the Union Parliament to repeal or amend a
repugnant State law, either directly, or by itself enacting a law repugnant to
the State law with respect to the 'same matter'. Even though the subsequent law
made by Parliament does not expressly repeal a State law, even then, the State
law will become void as soon as the subsequent law of Parliament creating
repugnancy is made. A State law would be repugnant to the Union law when there
is direct conflict between the two laws. Such repugnancy may also arise where
both laws operate in the same field and the two cannot possibly stand
together.: See: Zaverbhai Amaidas v. State of Bombay(1), M. Karunanidhi v.
Union of India(2) and T. Barai v. Henry Ah Hoe d: Anr.(2) We may briefly refer
to the three Australian decisions relied upon. As stated above, the decision in
Clyde Engineering Company's case (supra), lays down that inconsistency is also
created when one statute takes away rights conferred by the other. In Ex Parte
McLean's case, supra, Dixon J. laid down another test viz., two 181 statutes
could be said to be inconsistent if they, in respect of an identical
subject-matter, imposed identical duty upon the subject, but provided for
different sanctions for enforcing those duties. In Stock Motor Ploughs
Limited's case, supra, Evatt, J. held that even in respect of cases where two
laws impose one and the same duty of obedience there may be inconsistency. As
already stated the controversy in these appeals falls to be determined by the
true nature and character of the impugned enactment, its pith and substance, as
to whether it falls within the legislative competence of the State Legislature
under Art.
246(3) and does not involve any question of
repugnancy under Art. 254(1).
We fail to comprehend the basis for the
submission put forward on behalf of the appellants that there is repugnancy
between sub-s. (3) of s. 5 of the Act which is relatable to Entry 54 of List II
of the Seventh Schedule and paragraph 21 of the Control order issued by the
Central Government under sub-s. (1) of s. 3 of the Essential Commodities Act
relatable to Entry 33 of List III and therefore sub-s. (3) of s. 5 of the Act
which is a law made by the State Legislature is void under Art. 254(1). The
question of repugnancy under Art. 254(1) between a law made by Parliament and a
law made by the State Legislature arises only in case both the legislations
occupy the same field with respect to one of the matters enumerated in the
Concurrent List, and there is direct conflict between the two laws. It is only
when both these requirements are fulfilled that the State law will, to the
extent of repugnancy become void. Art. 254(1) has no application to cases of
repugnancy due to overlapping found between List II on the one hand and List I
and List III on the other. If such overlapping exists in any particular case,
the State law will be ultra vires because of the non-obstante clause in Art.
246(1) read with the opening words "Subject to" in Art. 246(3). In
such a case, the State law will fail not because of repugnance to the Union law
but due to want of legislative competence. It is no doubt true that the
expression "a law made by Parliament which Parliament is competent to
enact" in Art. 254(1) is susceptible of a construction that repugnance
between a State law and a law made by Parliament may take place outside the concurrent
sphere because Parliament is competent to enact law with respect to subjects
included in List III as well as 'List I" But if Art. 254(1) is read as a
whole, it will be seen that it is expressly made subject to cl. (2) which makes
reference to repugnancy in the field of Concurrent List-in other words, if cl.
(2) is to be the guide in the determination of scope of cl. (1), the 182
repugnancy between Union and State law must be taken to refer only to the
Concurrent field. Art. 254(1) speaks of a State law being repugnant to (a) a
law made by Parliament or (b) an existing law.
There was a controversy at one time as to
whether the succeeding words "with respect to one of the matters
enumerated in the Concurrent List" govern both (a) and (b) or (b) alone.
It is now settled that the words "with respect to" qualify both the
clauses in Art. 254(1) viz. a law made by Parliament which Parliament is
competent to enact as well as any provision of an existing law. The under lying
principle is that the question of repugnancy arises only when both the
Legislatures are competent to legislate in the same field i.e. with respect to
one of the matters enumerated in the Con current List. Hence, Art. 254(1) can
not apply unless both the Union and the State laws relate to a subject specified
in the Con current List, and they occupy the same field.
This construction of ours is supported by the
observations of Venkatarama Ayyar, J. speaking for the Court in A. S. Krishna's
case, supra, while dealing with s. 107(1) of the Government of India Act, 1935
to the effect:
"For this section to apply, two
conditions must be fulfilled: (1) The provisions of the Provincial law and
those of the Central legislation must both be in respect of a matter which is
enumerated in the Concurrent List, and (2) they must be repugnant to each
other, It is only when both these requirements are satisfied that the
Provincial law will, to the extent of the repugnancy, become void." In Ch.
Tika Ramji's case, supra, the Court observed that no question of repugnancy
under Art. 254 of the Constitution could arise where parliamentary legislation
and State legislation occupy different fields and deal with separate and
distinct matters even though of a cognate and allied character and that where,
as in that case, there was no inconsistency in the actual terms of the Acts
enacted by Parliament and the State Legislature relatable to Entry 33 of List
III, the test of repugnancy would be whether Parliament and State Legislature,
in legislating on an entry in the Concurrent List, exercised their powers over
the same subject-matter or whether the laws enacted by Parliament were intended
to be exhausted as to cover the entire field, and added:
183 "The pith and substance argument
cannot be imported here for the simple reason that, when both the Centre as
well as the State Legislatures were operating in the con current field, there
was no question of any trespass upon the exclusive jurisdiction of the Centre
under Entry 52 of List I, the only question which survived being whether put in
both the pieces of legislation enacted by the Centre and the State Legislature,
there was any such repugnancy." This observation lends support to the view
that in cases of overlapping between List II on the one hand and Lists I and
III on the other, there is no question of repugnancy under Art. 254(1). Subba
Rao. J. speaking for the Court in Deep Chand's case, supra, interpreted Art.
254(1) in these terms:
"Art. 254(1) lays down a general rule.
Clause (2) is an exception to that Article and the proviso qualified the said
exception. If there is repugnancy between the law made by the State and that
made by the Parliament with respect to one of the matters enumerated in the Con
current List, the law made by Parliament shall prevail to the extent of the repugnancy
and law made by the State shall, to the extent of such repugnancy, be
void." In all fairness to learned counsel for the appellants, it must be
stated that they did not pursue the point any further in view of these
pronouncements.
We are unable to appreciate the contention
that sub-s.
(3) of s. 5 of the Act being a State law must
be struck down as ultra vires as the field of fixation of price of essential
commodities is an occupied field covered by a central legislation. It is
axiomatic that the power of the State Legislature to make a law with respect to
the levy and imposition of a tax on sale or purchase of goods relatable to
Entry 54 of List 11 of the Seventh Schedule and to make ancillary provisions in
that behalf, is plenary and is not subject to the power of Parliament to make a
law under Entry 33 of List III. There is no warrant for projecting the power of
Parliament to make a law under. Entry 33 of List III into the State's power of
taxation under Entry 54 of List II.
Otherwise, Entry 54 will have to be read as:
'Taxes on the sale or purchase of goods other than essential commodities etc
184 cetra'. When one entry is made 'subject to' another entry, all that it
means is that out of the scope of the former entry, a field of legislation covered
by the latter entry has been reserved to be specially dealt with by the
appropriate Legislature. Entry 54 of List II of the Seventh Schedule is only
subject to Entry 92A of List I and there can be no further curtailment of the
State's power of taxation. It is a well established rule of construction that
the entries in the three lists must be read in a broad and liberal sense and
must be given the widest scope which their meaning is fairly capable of because
they set up a machinery of Government.
The controversy which is now raised is of
serious moment to the States, and a matter apparently of deep interest of the
Union. But in its legal aspect, the question lies within a very narrow compass.
The duty of the Court is simply to determine as a matter of law, according to
the true construction of Art. 246(3) of the Constitution, whether the State's
power of taxation of sale of goods under Entry 54 of List II and to make
ancillary provisions in regard thereto, is capable of being encroached upon by
a law made by Parliament with respect to one of the matters enumerated in the
Concurrent List. The contention fails to take into account that the
Constitution effects a complete separation of the taxing power of the Union and
of the States under Art. 246.
It is equally well settled that the various
entries in the three lists are not 'powers of legislation, but 'fields' of
legislation. The power to legislate is given by Art. 246 and other Articles of
the Constitution. Taxation is considered to be a distinct matter for purposes
of legisla- tive competence. Hence, the power to tax cannot be deduced from a
general legislative entry as an ancillary power.
Further, the element of tax does not directly
flow from the power to regulate trade or commerce in, and the production,
supply and distribution of essential commodities under Entry 33 of List III,
although the liability to pay tax may be a matter incidental to the Centre's
power of price control.
"Legislative relations between the Union
and the States inter se with reference to the three lists in Schedule VII
cannot be under stood fully without examining the general features disclosed by
the entries contained in those Lists:
"Seervai in his Constitutional Law of
India, 3rd edn. vol. 1 at pp. 81-82. A scrutiny of Lists I and II of the
Seventh Schedule would show that there is no overlapping 185 anywhere in the
taxing power and the Constitution gives independent sources of taxation to the
Union and the States.
Following the scheme of the Government of
India Act, 1935, the Constitution has made the taxing power of the Union and of
the States mutually exclusive and thus avoided the difficulties which have
arisen in some other Federal Constitutions from overlapping powers of taxation.
It would therefore appear that there is a
distinction made between general subjects of legislation and taxation.
The general subjects of legislation are dealt
with in one group of entries and power of taxation ill a separate group.
In M.P. Sundararamier & Co. v. The State
of Andhra Pradesh & Anr.(1) This Court dealt with the scheme of the
separation of taxation powers between the Union and the States by mutually
exclusive lists. In List I, Entries 1 to 81 deal with general subjects of
legislation; Entries 82 to 92A deal with taxes. In List 11, Entries 1 to 44
deal with general subjects of legislation; Entries 45 to 63 deal With taxes.
This mutual exclusiveness is also brought out
by the fact that in List Ill, the Concurrent Legislative List, there is no
entry relating to a tax, but it only contains an entry relating to levy of fees
in respect of matters given in that list other then court-fees. Thus, in our
Constitution, a conflict of the taxing power of the Union and of the States
cannot arise. That being so, it is difficult to comprehend the submission that
there can be intrusion by a law made by Parliament under Entry 33 of List III
into a forbidden field viz. the State s exclusive power to make a law with
respect to the levy and imposition of a tax on sale or purchase of goods
relatable to Entry 54 of List II of the Seventh Schedule. It follows that the
two laws viz. sub-s. (3) of s. 5 of the Act and paragraph 21 of the Control
order issued by the Central Government under sub-s. (1) of s. 3 of the Essential
Commodities Act, operate on two separate and distinct fields and both are
capable of being obeyed. There is no question of any clash between the two laws
and the question of repugnancy does not come into play.
The remaining part of the case presents
little difficulty. It would be convenient to deal with the contention based on
Arts. 14 and 19 (1) (g) of the Constitution together as the submissions more or
less proceed on the similar lines. It is urged that the provision contained in
sub-s. (3) of s. 5 of the act is violative of Art. 14 of the Constitution
inasmuch as it is wholly arbitrary and irrational and it 186 treats
"unequals as equals". It is urged that the Essential Commodities Act
treats certain controlled commodities and their sellers in a special manner by
fixing controlled prices. The dealers so treated by this Central law are so
circumstanced that they cannot be equated with other dealers who can raise
their sale prices and absorb the surcharge levied under sub-s. (1) of s. 5 of
the act and a class of dealers like manufacturers and producers of medicines
and drugs and other dealers of essential commodities who cannot raise their
sale prices beyond the controlled price are being treated similarly without any
rational basis. Once the fact of different classes being separate is taken,
then a State law which treats both classes equally and visits them with
different burdens would be violative of Art. 14. The State cannot by treating
'equals as unequals' impose different burdens on different classes. It is
submitted that the restriction imposed by sub-s. 3 of s. 5 of the act which
prevents the manufacturers and producers of medicines and drugs and other
essential commodities from passing on the liability to pay surcharge is
confiscatory and imposes a disproportionate burden on such manufacturers and
producers or other dealers.
These two abstract questions have been
convassed on the basis that each of the appellants was a dealer having a gross
turnover of Rs. 5 lakhs or more in a year and therefore liable to pay
surcharge, in addition to the tax payable by him, under sub-s. (1) of s. 5 of
the Act. It is lamentable that there is no factual foundation laid to support
the contention that the levy of surcharge under sub- s. (1) of s. 5 of the Act
imposes a disproportionate burden on a certain class of dealers such as
manufacturers or producers of drugs and pharmaceuticals or dealers engaged in
the business of distribution and sale of motor-trucks etc.
to support the assertion that sub-s. (3) of
s. 5 of the Act which prohibits such persons from passing on the liability to
pay surcharge is arbitrary or irrational, or that it treats 'unequals as
equals' and thus infringes Art. 14 of the Constitution or is confiscatory in
nature.
There is no ground whatever for holding that
sub-s. (3) of s. 5 of the Act is arbitrary or irrational or that it treats
'unequals as equals', or that it imposes a disproportionate burden on a certain
class of dealers. It must be remembered that sub-s. (1) of s. 5 of the Act
provides for the levy of a surcharge having a gross turnover of Rs 5 lakhs or
more in a year at a uniform rate of 10 per centum of the tax payable by them,
irrespective whether they are dealers in essential 187 commodities or not. A
surcharge in its true nature and character is nothing but a higher rate of tax
to raise revenue for general purposes. The levy of surcharge under sub-s. (1)
of s. 5 of the Act falls uniformly on a certain class of dealers depending upon
their capacity to bear the additional burden. From a fiscal point of view, a
sales tax on a manufacturer or producer involves the complication of
price-structure. It is apt to increase the price of the commodity, and tends to
be shifted forward to the consumer.
The manufacturers or producers often
formulate their prices in terms of certain profit targets. Their initial
response would be to raise prices by the full amount of the tax.
Where the conventional mark-up leaves
substantial unrealized profits, successful tax shifting is possible regardless
of the nature of the tax. If, on the other hand, the tax cannot be passed on to
the consumer, it must be shifted backwards to owners inputs. Despite
theoretical approach of economists, businessmen always Regard the tax as a cost
and make adjustments accordingly, and this is brought out by John C. Winfrey on
Public Finance at p. 402 in the following passage:
"The businessman .. ... ... .. has been
skeptical regarding the entire approach of marginal cost pricing. His position
has been that taxes are treated as a cost when determining prices, be it as
part of a full-cost pricing" rule? by application of a conventional
mark-up rate defined net of tax, or by pricing to meet a net of tax target rate
of return. According to these formulas, a change in tax rate leads to an
adjustment in price. The profits tax becomes a quasi sales tax. The fact that
such a price policy is not consistent with the usual concepts of profit
maximization does not disprove its existence." Pausing here for a moment,
we may observe that a surcharge being borne by the manufacturers and producers
of medicines and drugs under sub-s. (3) of s. 5 of the Act, the controlled
price of such medicines and drugs to the consumer will remain the same. From
the figures set out above, it will be seen that the business carried on by the
appellants in the State of Bihar alone is of such magnitude that they have the
capacity to bear the additional burden of surcharge levied under sub-s. (1) of
s. 5 of the Act. It roughly works out to one paisa per rupee of the sale price
of the manufactured commodity. There is no material placed on record that the surcharge
levied under sub-s. (1) of s. 5 of the Act imposes a 188 disproportionate
burden on the appellants or that it is confiscatory in nature.
The argument of arbitrariness is an argument
of despair. Sub-s. (1) of s. Of the Act levies surcharge on dealers whose gross
turnover in a year exceeds Rs. 5 lakhs irrespective of whether such dealers
deal in essential commodities or not. lt is a general tax and all dealers
falling within the class defined under sub-s. (1) of s. 5 of the Act have been
levied the surcharge at a uniform rate of 10 per centum of the tax. It will be
noticed that first proviso to sub-s. (1) of s. 5 enjoins that the aggregate of
the tax and surcharge payable under the Act shall not exceed, in respect of
goods declared to be of special importance in inter-State trade or commerce by
s. 14 of the Central Sales Tax Act, 1956, the rate fixed by s. 15 thereof.
Under s. 14 of the Act, almost all commodities which are essential to the life
of the community are declared to be goods of special importance in inter-State
trade or commerce and therefore the maximum sales tax leviable on sale or
purchase of such goods cannot exceed 4 per cent. It would therefore appear that
generally dealers having a gross turnover of Rs. 5 lakhs in a year dealing in
commodities covered by s. 14 will not have to bear the burden of surcharge
under sub-s. (1) of s. 5 of the Act. It is the misfortune of these appellants
that medicines and drugs are not declared to be of special importance in
respect of inter-State trade or commerce by s. 14 of the Central Sales Tax Act.
That apart, the appellants as manufacturers or producers of drugs under
paragraph 24(1) have to bear the burden of sales tax on the controlled price
that they cannot charge to a wholesaler a price higher than (a) the retail
price minus 14 per cent thereof, in the case of ethical drugs; and (b) the
retail price minus 12 per cent thereof, in the case of non-ethical drugs. Under
paragraph 24(2) they cannot sell to a retailer at a price higher than (a) the
retail price minus 12 per cent thereof, in the case of ethical drugs; and (b)
the retail price minus 10 per cent thereof, in the case of non-ethical drugs.
These provisions merely indicate that there is a margin of 14 per cent to the
wholesaler in the case of ethical drugs and of 12 per cent in the case of
non-ethical drugs,. and the wholesaler has a margin of 2 per cent in either
case when he sells to the retailer. In contrast, the profit margins of
manufacturers and producers of medicines and drugs is considerably higher.
Under the scheme of the Drugs (Price Control)
order, the calculation of the retail price of formulations under paragraph 10
has to be accordance with the formula set out therein. One of the elements that
enters 189 into the price structure is the 'mark-up' which is defined in
paragraph 11 to include distribution cost, outward freight, promotional expenses,
manufacturers margin and trade commission. Clauses (1) to (3) of the Third
Schedule show that the mark-up ranges from 40% in the case formulations
specified in category (i), 55% in the case of formulations specified in
category (ii) and 100% in the case of formulations specified in category (iii).
This gives an indication of the extent of profits earned by the manufacturers
and producers of formulations.
In Market situations where uncertainty about
demand prevails and mark-up pricing is practised, the usual response is to
attempt to shift taxes to the consumer.
Musgrave in his Public Finance in Theory and
Practice observes that economists like to think of business behaviour as being
rational, in the sense of following a maximising rule, but businessmen may not
act rationally. They regard the tax as a cost and make adjustments accordingly:
"One of these is the practice of markup
or margin pricing. Under this rule, costs are "marked-up" to allow
for a customary ratio of profits to costs, or price is set such as to leave
profits (i.e., sales minus cost) a customary fraction of sales. Whether this
gives rise to shifting depends on how costs and margins are defined. Shifting
occurs if the tax is included as a cost, or if the margin if defined net of
tax." It would therefore appear that businessmen are skeptical regarding
the entire approach of marginal cost pricing.
their position is that taxes are treated as a
cost when determining prices, be it as part of a "full-cost-pricing"
rule, by application of a conventional mark-up rate defined net of tax, or by
pricing to meet a net of tax target rate of return. According to these
formulae, a change in tax rate leads to an adjustment in price. If the
appellants find that the levy of surcharge under sub-s. Of s. 5 of the Act
cannot be borne within the present price structure of medicines and drugs, they
have the right to apply to the Central Government for revision of the retail
price of formulations under paragraph 15 of the Control order.
It was a startling proposition advanced by
learned counsel for the appellants that the Court was wrong in Kodar's case in
190 justifying on the basis of economic superiority the burden of additional
sales tax on a certain class of dealers. It was held by the Court relying upon
the dissenting opinion of Cardozo, J. in Stewart Dry Goods Co. v. Lewis [1935]
294 US 550 that a gross sales tax graduated at increasing rates with the volume
of sales on a certain class of dealers does not offend against Art. 14 of the
Constitution. The contention that ability to pay is not a relevant criterion
for upholding the validity of sub-s. (3) of s. 5. Of the Act cannot be
accepted. To say the least, there is no basis for this submission. It is beyond
the scope of this judgment to enter into intricacies of public finance viz.
Objectives and criteria of a tax, problems of shifting et cetera. Nor is it
necessary for us to enter into a discussion of the so called benefit principle,
or the alternative approach of ability to pay. There is probably widespread agreement
now that taxes that fall on the 'better-off' rather than the worse-off' and are
progressive rather tean proportional, are to be preferred. The concept of
'ability-to-pay' implies both equal treatment of people with equal ability,
however measured, and the progressive rate structure. The 'ability- to-pay'
doctrine has strong affinities to egalitarian social philosophy, both support
measures designed to reduce inequalities of wealth and income.
On questions of economic regulations and
related matters, the Court must defer to the legislative judgment.
When the power to tax exists, the extent of
the burden is a matter for discretion of the law-makers. It is not the function
of the Court to consider the propriety or justness of the tax, or enter upon the
realm of legislative policy.
If the evident intent and general operation
of the tax legislation is to adjust the burden with a fair and reasonable
degree of equality, the constitutional requirement is satisfied. The equality
clause in Art. 14 does not take-from the State power to classify a class of
persons who must bear the heavier burden of tax. The classification having some
reasonable basis does not offend against that clause merely because it is not
made with mathematical nicety or because in practice it results in some
inequalities.
In Kodar's case, supra, the constitutional
validity of a similar levy was upheld on the capacity to pay. It was observed:
"The large dealer occupies a possition
of economic superiority by reason of his greater volume of his business. And to
make his tax heavier, both absolutely and relatively, is Dot arbitrary
discrimination,, but an attempt 191 to proportion the payment to capacity to
pay and thus to arrive in the end at more genuine equality." The economic
wisdom of a tax is within the exclusive province of the Legislature. The only
question for the Court to consider is whether there is rationality in the
belief of the Legislature that capacity to pay the tax increases by and large
with an increase of receipts. The view taken by the Court in Kodar's case,
supra, is in consonance with social justice in an egalitarian State and
therefore the contention based on Art. 14 of the Constitution must fail.
The contention that sub-s. (3) of s. 5 of the
Act imposes an unreasonable restriction upon the freedom of trade guaranteed
under Art. 19 (1) (g) of the Constitution proceeds on the basis that sales tax
being essentially an indirect tax, it was not competent for the Legislature to
make a provision prohibiting the dealer from collecting the amount of surcharge
cannot prevail. It is urged that the surcharge does not retain its avowed
character as sales tax but in its true gature and character is virtually a tax
on income, by reason of the limitation contained in sub-s. (3) of s. 5 of the
Act. We are not impressed with the argument.
Merely because a dealer falling within the
class defined under sub-s. (1) of s. 5 of the Act is prevented from collecting
the surcharge recovered from him, does not affect the competence of the State Legislature
to make a provision like sub-s. (3) of s. 5 of the Act nor does it become a tax
on his income. It is not doubt true that a sales tax is, according to the
accepted notions, intended to be passed on to the buyer, and the provisions
authorising and regulating the collection of sales tax by the seller from the
purchaser are a usual feature of sales tax legislation. But it is not an
essential characteristic of a sales tax that the seller must have the right to
pass it on to the consumer, nor is the power of the Legislature to impose a tax
on sales conditional on its making a provision for sellers to collect the tax
from the purchasers. Whether a law should be enacted, imposing a sales tax, or
validating the imposition of sales tax, when the seller is not in a position to
pass it on to the consumer, is a matter of policy and does not effect the
competence of the legislature: see: The Tata Iron & Steel Co. Ltd. v. The
State of Bihar(1): M/s. J.K. Jute Mills Co. Ltd. v. The State of Uttar Pradesh &
Anr.(2) 5.
Kodar v. State of Kerala.(3) The contention
based on the Art. 19 (1) (g) cannot therefore be sustained.
192 There was quite some discussion at the
Bar as to whether the assent of the President is justiciable. rt was submitted
that since not only sub-s. (1) of s. 5 of the Act which provides for the levy
of a surcharge on dealers having a gross turnover of Rs. 5 lakhs in a year but
also sub-s.
(3) thereof which interdicts that no such
dealer shall be entitled to recover the amount of surcharge collected from him,
are both relatable to Entry 54 of List II of the Seventh Schedule, there was no
occasion for the Governor to have referred the Bill under Art. 200 to the
President for his assent. It is somewhat strange that this argument should be
advanced for the first time after a lapse of 30 years of the inauguration of
the Constitution. Immediate provocation for this argument appears to be an orbiter
dictum of Lord Diplock while delivering the judgment of the Judicial Committee
in Teh Cheng Poh @, Char Meh v. Public Prosecutor, Malaysia(1) that "the
Courts are not powerless when there is a failure to exercise the power of
revocation of a Proclamation of Emergency "issued by the Ruler of Malaysia
under s. 47 (2) of the Internal Security Act. The ultimate decision of the
Privy Council was that since by virtue of s 47 (2) of that Act the security
area proclamation remained lawful until revoked by resolutions of both Houses
of Parliament or by the Ruler, it could not be deemed to lapse because the
conditions upon which the Ruler had exercised his discretion to make the
Proclamation were no longer in existence. That being so, the decision in Teh
Cheng Poh's case, supra, is not an authority for the proposition that the
assent of the President is justiciable nor can it be spelled out that that
Court can enquire into the reasons why the Bill was reserved by the Governor
under Art. 200 for the assent of the President nor whether the President
applied his mind to the question whether there was repugnancy between the Bill
reserved for his consideration and received his assent under Art. 254 (2).
The constitutional position of a Governor is
clearly defined. The Governor is made a component part of the Legislature of a
State under Art. 168 because every Bill passed by the State Legislation has to
be reserved for the assent of the Governor under Art. 200. Under that Article,
the Governor can adopt one of the three courses, namely: (1) He may give his
assent to it, in which case the Bill becomes a law; or (2) He may except in the
case of a 'Money Bill' withhold his assent therefrom, in which cases the Bill
falls through unless the procedure indicated in the first proviso is followed
193 i. e. return the Bill to the Assembly for consideration with a message, or
(3) He may "on the advice of the Council of Ministers" reserve the
Bill for the consideration of the President, in which case the President will
adopt the procedure laid down in Art. 201. The first proviso to Art.
200 deals with a situation where the Governor
is bound to give his assent and the Bill is reconsidered and passed by the
Assembly. The second proviso to that Article makes the reservation for the
Consideration of the President obligatory where the Bill would, "if it
becomes law, dergoate from the powers of the High Court". Under Art. 201,
when a Bill is reserved by the Governor for the consideration of the President,
the President can adopt two courses, namely: (1) He may give his assent to it
in which case again the Bill becomes a law; or (2) He may except where the Bill
is not a 'Money Bill', direct the Governor to return the Bill to the House or,
as the case may be, the Houses of the Legislature of the State together with
such message as is mentioned in the first proviso to Art. 200.
When a Bill is so reserved by the President,
the House or Houses shall reconsider it accordingly within a period of six
months from the date of receipt of such message and if it is again passed by
the House or Houses with or without amendment, it shall be presented again to
the President for his consideration. Thus, it is clear that a Bill passed by
the State Assembly may become law if the Governor gives his assent to it or if,
having been reserved by the Governor for the consideration of the President, it
is assented to by the President There is no provision in the Constitution which
lays down that a Bill which has been assented to by the President would be
ineffective as an Act if there was no compelling necessity for the Governor to
reserve it for the assent of the President. A Bill which attracts Art. 254 (2)
or Art.
304 (b) where it is introduced or moved in
the Legislative Assembly of a State without the previous sanction of the
President or which attracted Art. 31 (3) as it was then in force, or falling
under the second proviso to Art. 200 has necessarily to be reserved for the
consideration of the President. There may also be a Bill passed by the State
legislature where there may be a genuine doubt about the applicability of any
of the provisions of the Constitution which require the assent of the President
to be given to it in order that it may be effective as an Act. In such a case,
it is for the Governor to exercise his discretion and to decide whether he
should assent to the Bill or should reserve it for consideration of the
President to avoid any furture complication Even if it ultimately turns out
that there was no necessity for the Governor to have 194 reserved a Bill for
the consideration of the President, still he having done so and obtained the
assent of the President, the Act so passed cannot be held to be
unconstitutional on the ground of want of proper assent.
This aspect of the matter, as the law now
stands, is not open to scrutiny by the courts. In the instant case, the Finance
Bill which ultimately became the Act in question was a consolidating Act
relating to different subjects and perhaps the Governor felt that it was
necessary to reserve it for the assent of the President. We have no hesitation
in holding that the assent of the President is not justiciable, and we cannot
spell out any infirmity arising out of his decision to give such assent.
There still remains the contention that for
the purpose of levying surcharge it is impermissible to take into account the
method of computation of gross turnover, the turnover representing sales in the
course of inter-State trade and outside the State and sales in the course of
export out of India. It is urged that the non-obstante clause in s. 7 of the
Act has the effect of taking these transactions out of the purview of the Act
with the result that a dealer is not required nor is he entitled to include
them in the calculations of his turnover liable to tax thereunder. The
submission is that sub-s. (1) of s. 5 of the Act is ultra vires the State
Legislature in so far as for purposes of levying the charge, the incidence of
liability of a dealer to pay such surcharge depends on his gross turnover as
defined in s. 2 (j) of the Act. In support of the contention, reliance was
placed on the following passage in the judgment of this Court in A. V.
Fernandez v. State of Kerala(1):
"There is a broad distinction between
the provisions contained in the statute in regard to the exemptions of tax or
refund or rebate of tax on the one hand and in regard to the non-liability to
tax or non-imposition of tax on the other. In the former case, but for the
provisions as regards the exemptions or refund or rebate of tax, the sales or
purchases would have to be included in the gross turnover of the dealer because
they are prima facie liable to tax and the only thing which the dealer is
entitled to in respect thereof is the deduction from the gross turnover in
order to arrive at the net turnover on which the tax can be imposed. In the
latter case, the 195 sales or purchases are exempted from taxation altogether.
The legislature cannot enact a law imposing or authorising the imposition of a
tax thereupon and they are not liable to any such imposition of tax. If they
are thus not liable to tax, no tax can be levied or imposed on them and they do
not come within the purview of the act at all. The very fact of their
non-liability to tax is sufficient to exclude them from the calculation of the
gross turnover as well as the net turnover on which sales tax can be levied or
imposed.
The submission appears to proceed on a
misapprehension of the principles laid down in Fernandez's case, supra.
To understand the ratio deducible in
Fernandez's case, supra, a few facts have to be stated. The business of the
assessee in that case consisted in the purchase of copra, manufacture of
coconut oil and cake there from and sale of oil and cake to parties inside the
State and sale of oil to parties outside the State. In 1951, the
Travancore-Cochin General Sales Tax Act, 1125 was amended by addition of s. 26
which incorporated the ban of Art. 286 of the Constitution and was in pari
materia with s. 7 of the Act. For the year 1951-52, the Sales Tax officer
assessed the assessee to sales tax on a net assessable turnover by taking the
value of the whole of the copra purchased by him, adding thereto the respective
values of the oil and cake sold inside the State and. deducting only the value
of the copra relatable to the oil sold inside the State. It was contended by
the assessee that in the calculation of the net turnover, he was entitled to
include the total value of the oil sold by him, both inside and outside the
State, and deduct there from the total value of the copra purchased by him and
further, under the overriding provision of s. 26 of the Act, he was entitled to
have the value of the oil sold outside the State deducted. The main controversy
between the parties centered around the method of computation of the net
turnover. The contention advanced by the assessee was rejected by the High
Court, which limited the deduction to purchase of copra relatable to the sales
inside the State. In affirming that decision, this Court observed that so far
as sales of coconut oil outside the State were concerned, they were, as it
were, by reason of s. 26 of the Act read in conjunction with Art. 286, taken
out of the purview of the Act, and that they had the effect of setting at
naught and obliterating in regard thereto the provisions contained in the Act
relating to the imposition of tax on the sale or purchase of such goods and in
196 particular the provision contained in the charging section, s. 3, and the
provisions contained in r. 20(2) and other provisions which were incidental to
the process of levying such tax. The aforementioned passage relied upon cannot
be read out of context in which it appears and if so read, it is hardly of any
assistance to the appellants.
In the penultimate paragraph in Fernandez's
case, supra, the Court after laying down that the non-obstante clause in s. 26
had the effect of taking sales in the course of inter-State trade and outside
the State out of the purview of the Act with the result that the dealer was not
required nor entitled to include them in computation e of the turnover liable
to tax there under, observed:
"This position is not at all affected by
the provision with regard to registration and submissions of returns of the
sales tax by the dealers under the Act. The legislature, in spite of its
disability in the matter of the imposition of sales tax by virtue of the
provisions of Art.
286 of the Constitution, may for the purposes
of the registration of a dealer and submission of the returns of sales tax
include these transactions in the dealer's turnover. Such inclusion, however,
for the purposes aforesaid would not affect the non-liability of these transactions
to levy or imposition of sales tax by virtue of the provisions of Art. 286 of
the Constitution and the corresponding pro vision enacted in the Act, as
above." The decision in Fernandez's case, supra, is therefore clearly an
authority for the proposition that the- State Legislature notwithstanding Art.
286 of the Constitution while making a law under Entry 54 of List II of the
Seventh Schedule can, for purposes of the registration of a dealer and
submission of returns of sales tax, include the transactions covered by Art.
286 of the Constitution That being so, the constitutional validity of sub-s.
(1) of s. 5 of the Act which provides for the classification of dealers whose
gross turnover during a year exceeds Rs. 5 lakhs for the purpose of levy of surcharge,
in addition to the tax payable by him, is not assailable. So long as sales in
the course of inter-State trade and commerce or sales outside the State and
sales in the course of import into, or export out of the territory of India are
not taxed, there is nothing to prevent the State Legislature while making a law
for the levy of a surcharge under Entry 54 of List II of the Seventh 197
Schedule to take into account the total turnover of the dealer within the State
and provide, as has been done by sub-s. (1) of s. 5 of the Act, that if the
gross turnover of such dealer exceeds Rs. 5 lakhs in a year, he shall, in
addition to the tax, also pay a surcharge at such rate not exceeding 10 per
centum of the tax as may be provided. The liability to pay a surcharge is not
on the gross turnover including the transactions covered by Art. 286 but is
only on inside sales and the surcharge is sought to be levied on dealers who
have a position of economic superiority. The definition of gross turnover in s.
2(j) of the Act is adopted not for the purpose of bringing to surcharge inter-
State sales or outside sales or sales in the course of import into, or export
of goods out of the territory of India, but is only for the purpose of
classifying dealers within the State and to identify the class of dealers
liable to pay such surcharge. The underlying object is to classify dealers into
those who are economically superior and those who are not. That is to say, the
imposition of surcharge is on those who have the capacity to bear the burden of
additional tax. There is sufficient territorial nexus between the persons
sought to be charged and the State seeking to tax them. Sufficiency of
territorial nexus involves a consideration of two elements viz.: (a) the
connection must be real and not illusory, and (b) the liability sought to be
imposed must be pertinent to that territorial connection: State of Bombay v.
R.M.D. Chamarbaugwala (1), The Tata Iron & Steel Co. Ltd. v. State of
Bihar(2), and International Tourist Corporation etc. etc. v. State of Haryana
& Ors.(3) The gross turnover of a dealer is taken into account in sub-s.
(1) of s. 5 of the Act for the purpose of identifying the class of dealers
liable to pay a surcharge not on the gross turnover but on the tax payable by them.
For these reasons, these appeals and the
connected writ petitions and special leave petitions are dismissed with no
order as to costs.
H.L.C. Appeals dismissed.
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