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130

HOECHST PHARMACEUTICALS LTD.

AND ANOTHER ETC.

v.

STATE OF BIHAR AND OTHERS

May 6, 1983

(A.P. SEN, E.S. VENKATARAM!AH AND

R.B. MISRA, JJ.]

Bihar Finance Act,.1981-Sub-ss. (/)and (3) of s. 5-Levy of surcharge

on sales tax and prohibition from passing on liability thereof to purchasers­

Whether l'oid 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 the seller must have

right to pass

it on to

~nsumer ?-Whether classification of dealers on the basis

of'gross turnover' as defined ins. 2( j) invalid?

,-

Constitution of India-Art. 246-State Legislature's Power to 111ake law

with respect to matters enumerated in List II-Whether subject to Parliament's

power to make

law in

re~pect of matters enumerated in List 111 ?-Doctrine of

'pith and substance' a~d the principle of' Federal Sufremacy".

E Constitution of India-Art. 254(i)-Can repugna11cy between a Stale lair

F

and a law made by Parliament arise outside the Concurrent field?

Constitution of India-Arts. 200 and 201-Governor's decision lo refer a

Bill to President-Whelher subject to Court's scrutiny?-• Assent of Presfden_t'-­

Whether justiciable'?

Sub-section (I) of s. S of the Bihar Finance Act, 1981 provides for the

levy of a surCharge in addition to the tax payable, On every dealei whose gross

turnover during a year exceeds

Rs. 5 lakhs and,

sub-,s. (3) thereof prohibits

such a dealer from collecting amount of surcharge payabie by him from the

purchn.sers. In exercise of the pow~r· conferred by this _seCtion, the State

G Government fixed the rate of surcharge at 10 per cent of the total amount of

tax payable by a dealer.

H

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/stockists appointed in

_almost all tl)e districts of

the State and their gross turnover within the State during the relevant period

ran into crores ofrupees.-Most of.the medicines and drugs sold by them

were ~overed ~ tte Drn~s (frice Control) Crder, 1979 iss¥•11 up~er 1ub·B. (I) Q(

.A

HOECHST V. BIHAR 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

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,

1981at10 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 Kera/a, [1979] I S.C.R. 121.

It was contended on behalf of the appellants: (i) that sub-s. (3) ofs. 5

of the Act which is a State Jaw relatable to Entry 54 of List JI of the Sev<nth

Schedule to the Constitution and which provides that no de'11er shaU be

en titled to collect the surcharge levied on him

is void in ternis of the opening

words

of Art. 246(3) of the Constitution' as it is in direct conflict with

para­

graph 21 of the Drugs (Price Control) order, 1979, issued under sub-s. (I) 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 ntanufacturer or producer of

drugs

to pass on the liability to pay sales tax to the consumer; (ii} that the words

•·a -law n1ade 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. 254; (iii) that it both sub-s. (1) and sub-s. (3) of s. 5 were relatable 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 i:s

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 sate prices and absorb the surcharge and since sub-s.

(3)

of s. 5 treats

"unequals as equals" it is arbitraiy and irrational and therefore

violative of Art.

14 of the Constitution: (v) that sales tax. being esscntiaJly an

indirect

tax, the legislature was not competent to make a provision prohibiting

.,the dealer fro1n c._ollecting 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 restricti9n upon the freedom

of trade guaranteed under Art. 19(1)(g); (vi) that sub-s. (3) of s. 5 of the Act

which

is a State law being repugnant to

p;;iragraph 21 of the Drugs (Price

Control) Order which is issued under _a Union law, the latter must prevail in

view of the non obstant: clause ins. 6 of the Essential Comn1odities 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]

1 S.C.R. 380; and (Vii) that in view of the decision in A. V. Fernandez v. State

of Kera/a, [195]] S.C.R. 837, sub-s. (I) of s. 5 of the Act which makes Jhe

"gross turnover" ns defined in s. 2,( .0 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 u,ltra vires the State Legislature,

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132 SUPREME COURT RBPORTS 11983} "3 s.c.R.

. Dismissing the appeals,

HELD: I. (a) It cannot be doubted that the surcharge partakes of the

nature of sales tax and therefore.

it was within the competence of the

Stat•:

Legislatl.:Jre 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 ~gislature had competence to levy tax on sale at purchase of

goods under Entry 54 of List II of the Seventh Schedule it was equally compe·

tent 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. 5 prohibit·

ing the dealers liable to pay the surcharge under sub-s.(l) thereof from recover­

ina the same from the purchaser. (156 H-157 BJ

(b) The po,,ler of the State Legislature to make a law with respect to

the .levy and jmposition

of

·a tax on sale or purchase-of goods relatable to

Entry 54 of List II and to make 'anciliary 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 wan:ant 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 11. Otherwise, Entry 54 of List II will have to be read as:

"Taxes on sale or purchase of goods other than the essential com111odities, 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-BJ

(c) The Constitution effects a complete separation of the taxing power

~f the Union and of the States under Art. 246 The various entries in the

three lists are Ilot 'powers' of legislation, but 'fields' of legislation. The power

to legislate is given· by Art. 246 and other Arti.cles of the Constitution.

Taxation

is considered to be a distinct matter for purposes of legislative

com~

petence. I-Jenee, the power to tax cannot be deduced from a general legisla­

tive 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. [184 E-GJ

(d) A scrutiny of Lists I and II would show that there is no overlapping

anyv.,·here in the taxing power and that the Constitution gives independent

sources

of taxation to the

Union and the States. There is a distinction made

bet-Ween general subjects of legislation and taxation and th.,se are dealt with

iit separate groups of entries: in List l, Entries 1 to 81 deal with general

subjects of legislattion 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

bf the fact that ~n I...ist irr; th<;:re i§ ~o ~ntry ~li;tting_ to a tax; it only

'

HOECHST v. BIHAR 133

Cnntains an entry relating to levy of fees. Thus, in our Constitution, a con­

flict of taidng power of the Union and of the States cannot .arise. The two

laws viz., sub·s. (3) of s. 5 of the Act and paragraph 21 of the Drugs (Price

Control) Order issued under SUb·S. (1) of s. 3 or the Essential Commodities

Act operate on two separate and distinct

fi.elds and both are capable of b.eing

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: Consti~utional Law of lndia,

1

3rd Ed., Vol, I, pp. 81-82, referred

to.

(e) 'The words 'Notwithstanding anything contained in els. (2) and (3)'

in cl. (I) of Art. 246 and the words "Subject to els. (1) and t2)" 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 enume~

rated in List I shall prevail over the State power as enum•.::ratcd in.Lists 11 and

Ill, and in case of overlapping between Lists 11 and 111, the fOrmer shall prevail.

But the principle

of

·Federal S.upr~macy laid dOwn in Art. 246 cannot be

resorted

to unless there is aii 'irreconcilable' conflict between the Entr:ies in the Union and State Lists. The non obstante clause in cl. (1) of Art. 246 must

operale only

if reconciliation should prove in1possible. 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 ~tnder one List, and encroachment upon·another List is on1y incidental.

[165 A-E]

(f) The true principle applicable in judging the constitutional validity

of sub·s. (3) of s. 5 of the Act is to determine whether in its pith a11d 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 consti­

tutionality of thC 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 pennitted 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 t~1c 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

1nust be looked at from the point

of view of.determining the quest!on of validity of the impugned Act. It is

within the competence <?f the State Legislature under Ar!. 246(3) to provide for

?1a~ters whi~h, tho~gh wi.thin. the com~etence of Pit.rliament, are necessarily

1nc1dental to effective leg1slat1on by the State Legislature on the subject of legis­

lation expressly enumerated in List II. [162 B, 171D,177 C-Ej

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SuP!l.EME COURT REPORTS (1~83) j s.c.ft.

Jn the Central Provinces and Berar Sales of Motor Spirit and Lubric,ants

Taxation ·Act, 1938, [1939] F.C.R, 18; Citizen lnsurance Con1pany v. Willia1n

·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.

·Subrahmanyan Chettiar v .. Muttuswami Goundan, [1940] F.C.R .. 188; Governor

General in COuncU v. Province of Mudras, .[ 1945] F.C.R. 179; The Province of

Madras v. Messers Boddu Paidanna & Sons, [1942] F.C.R. 90; Prafulla Kumar

Mukh,,jee & Ors. v. Bank of Commerce Ltd., Khulna, A.I.R. [1947] P.C. 60; and

Grand Ttunk Railway· Company of Canada v. Attorney General of Ctlnada, L.R.

[1907] 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 lhe

matters.enumerated in the Concurrent List

and there

is direct conflict between

the two laws. It is only when~ both these requirements are fuUiJled that the

State law will, to the exteht of repugnaucy become void. Art. 254(1) has·.no

applicatiol! to cases of repugnancy due to overlapping found between List JI

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 cl<iuse,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 th8.t the expression "a Jaw made by Parliament

which Parliament is competent to enact" in Art. 254(1) is susceptible of a

c·onstruction that repugnance between a State law and a law made by Parlia­

ment may take place outside the Concurrent sphere because Parliament ~s

competent to enact Jaw with respect to subjects included in List 111 as well as

List I. But, if Art. 254(1) is read as a whole, it will be seen that it is expressl,y

made subject to cl. (2) which i:nakes reference to ·repugnancy in the field of

Concurrent List. Jn other words, if cl. (2) is to b~ the guide in the dett.::rrnina­

tion of the scope of cl. (I), the repugnancy bCtween Union -and State law must

be taken to refer only to th.e Concurrent field. Art. 254(1) speaks of a Stati~

law.being repri:gnant 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 aity

provision of an existing law. The underlying principle is that the question of

repugnancy adses only when both the legislatures are competent to legislate irn

the sam~ field, i.e., with respect -to One of the matters enumerated the Con~

current List. [181 G-182 A, B-CJ.

Deep Chand v. State of Uttar Pradesh & Ors., [1959] Supp. 2 S.C.R.,$;

Ch_Tika Ramji & Ors. v. Slate of Uttar Prade.ih & Ors., [1956] S.C.R. 393;'

Zaverbhai Amidas v. Stale of Bombay, [1955] 1 S.C.R. 799; M. Karunanidhi v.

Union of India, [1979] 3 S.C.R. 254; T. Barai v. Henry Ah Hoe, [1983] l S.C.C'.

177; A. S. Krishna v. State of Madr:as, '[1957] S.C.R. 399; Clyde Engineering

Co. Ltd. v. Cnwburn, [1926] 37 Com. L.R. 465; Ex Parle Mclean, [1930] 43

T

..

iloEciisr v. 1n1™t 135

Com. LR. 472; and Stock Motor Ploughs Limited ~v. Forsyth, [1932] Com. L.R.

128, referred to.

(c) _Entry 54 of List II is a tax ~ntry 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 _rarise 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·l 79 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, h.lving

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

A

B

Jays down that a Bill which has been assented to by the President would be ' C

ineffective as an Act if there was no compelling necessity fof the Governor to

reserve it for tne assent of the President. It is for the Governor to exercise

his discretion and to decide w:1ether

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, thf' Finance Bill which ultimately became the Act in ques-

tion 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. (3f o.f 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. (1) of s. 5 falls

uni(ormly On a certain class of dealers depending upon their capacity to bear

the additional burdeil. The economic wisdom of a tax is within the exclusive

province

of. the

legisla~ure. 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 fhe 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~l87 A, 191 B, 191 A]

S. Kodar v. State of Kera/a, (1975] 1 S.C.R. 121, relied on,

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SUPREME COURT REPORTS · (1983) 3 S.C.R.

(b) There is no basf$-for the submission that the Court was wrong·in

Kodar's case. The contention that ability to pay is not a relevant criterion for

upholdin& 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

{

5 not

the function of the Court to cOnsider the propriety or justn.ess of a t~x or enter

upon ·the reabn of legislative policy. If the evident intent and general opera­

.tion 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 hot tak~ a\vay from the State the power to classify a

class of persons who n1ust beat the heavier burden of tax. The clasSification

having some reasonable basis does not offend against that clause merely

becnuse it is not made with mathematical nicety or because in .practice it results

in some inequalities.

[189

H-190 G]

(c) There is no factual 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 burde~ of surCharge, That apart,

under the

iCheme of the Control

Order the profit margins of manufacturers and

producers of medicines and drugs

is considerably higher than that of

whole~

salers. If the appellants find that the levy of surcharge cannot be borne within

the present price structure of nledicines and drugs, they have the right

to apply

to the Central

Governillent for revision of the retail price of 'formulations'·

under paragraph 15 of the Control Order. [186 F, 187 G, 189 G]

5 .. It is no doubt.true that a sales tax is, according to the accepti::d

notions intended to be passed on to the buyer, and the provisions authorising

and reg~lating 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 charac­

teristic.of sales tax t"l?at the seller must have the right to, pass it on to the con-·

sumer; nor is the power of the legislature to impose a tax o.n sales conditional·

on its making a provision for sellers to collect the tax from the purchasers ..

Whether a.law should

be enacted; imp_osing 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 m.atter of policy

and~ does not affect the competence of t~te

legislature. The contention based on P~rt. 19(l)(g) cannot therefore be

sustained-

[191 E-H]

Tire Tata Iron. & Steel Co., Ltd. v. The Sta~e of Bihar, {1958] S.C.R. 1355;

M/s. J. K. Jute Mills Co. Ltd. v. The State of Uttar Pradesh, [1962] 2 _S.C.R.

I ands. Kodar v. State of Kera/a, [1975] 1 ~.C.R. 12J, referred to.

6

.. (a) .The appellants being manufacturers or

~reducers of 'fotmula­

f ns' ire not govenied by paragr~Ph 21 of the Control Order but by paragraph

d~ thereof and therefore the price chargeable by them to wholesaler or distri··

butor is inclusive of sales tax. There-being no ·conflct bet_ween sub-s. (3) of

-

'r

(

...

liOECl!ST V, BIHAR

. s. 5 of the Act and paragraph 24 of th~· Control_ Order, the question ofthe:non-

obstante clause to s. 6 of the E~sentjaJ Coinmodities Act coming into play does A

not arise. [158 G]

Hari Shankar Bag/a & •Anr. v. State of Madl1ya 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

purchaseu. Sub~s. (3) of s. 5 however irriposes a f1mitation on dealers liable

to pay sm:charge·undcr sub-s. (1) .thereof from collecting the amourit of sur­

charge payable by the1n from the purchasers which only means that surcharge

payable by such dealers under sub-s.

(1) 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 inascnuch as the liability lO pay surcharge under sub-s. (3) of s. 5 cannot

be passed on. That being so, there is no confiict between sub-s. (3) of s. 5 of

the Act and paragraph 21 of the Control Order. [158 H-159 CJ

The predominant object of issuing a contiol order under sub~s. (1) of

s. 3 of the Essential Commodities Act is to secure the equitable distribution

and availability

of essential commodities at fair prices to the

~consun1crs, and

the mere circu1nstance that some

of those engaged in the field of industry, trade

or corrimercc may suffer a loss is no ground

fOr treating such a regulittory law

to be unreasonable, unless the basis adopted for price fixation is so unreason­

able 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 Afeenakshi Mills Ltd'. v. Union of ~ndia, [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 c;ase is an authority for the proposition

that the State Legislature, notwithstanding Art. 286 of the Constitution, while

making a law under Entry

54 of the List JI. can, for purposes of registration

of a dealer and submission of returns

of sales tax, include the transactions

co\·ercd by Art. 286. That being so, the constitutional validity of sub·S. (1) of

s. 5 which provides for the clnssification of dealers whose gross turnover during

a year exceeds Rs. 5 lakhs for the purpose of le·vy 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 Comn1erce or sales outside the State and sales in the

course

of import into, or export out of the territory of India are not

t'axed

there is nothing to prevent the State Legislatuie ·while making a law for th~

levy of surcharge under Entry 54 of the List I[ to take into--accouut the total

turnover of the dealer within the State and provide that if the gross turnover

of such dealer exceeds R_s. 5 Iakhs in a year he shall in addition to the tax

also pay a Surcharge at Such rate not exceeding 10% of the tax as m'ay b;

provided. The liability to pay the surcharge is not on the gross turnover

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138 SUPREME COURT REPORTS [19S3J 3 s.c.i.

including the transactions covered by Art. 286 but is only on inside sales and

the surcharged is sought to be levied on dealers who have a . position of eco­

nomic 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 of 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 DJ

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 lnternaJional Tourist Corpora/ion

etc.

v.

Strite 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;34·00

of 1982:

Appeals

by special leave from the Judgments and

Orders dated

the 30th April, 1982, 5th, 6th, 7th, 10th, 11th, 12th, _13th, 18th,

May,

1982, 3rd, 17th, 23rd, August, 1982 of the

Patna High Court

in C.W.J.C Nos.

1788, 3726, 3727, 4529of1981, 253, 688, 1473 of

1982, 2771/81, 96/82, 1233, 1498,

1907, J9C6 of 81, 1042, 1043, 1121,

1044of1982, 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, Jl98, 1204,

1206, 1209, 1211, 1213, 1214, 1262-64, 1273, 1282, 1283, 1287, 1331,

1351, 1382, 1384,

1386, 1431,

1432, 1484, 1488, 1489, 1548, 1645,

1734,

1833 ofl981, 78of1982,

1154, 1160, 1168, 1169, 1186, 1187,

1191, 1549, 1556, 1557-58, 1415,

1461, 1465, 1487 of 1981, 251 of

1982, 228, 1321of1981, 394, 1478 of 1982,

1320/810 902, 565/82,

1775,

J.177,

1801of1981, 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, 11202-05, 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, 1472-73of1983.

From the Judgments and Orders dated the 30th April, 1982,

3rd May, 5th, 6th, 7th, 10th, 11th, 12th, 13th May, 19th Augus.t

9th

& 15th September, 8th & 18th

October 1982, 20th & 21st

January,

1983 of the

Patna High Court in C.W.J.C. Nos. 1176, 1516

1

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HOECHST v. BIHAR (Sen, J.)

1435, 1177, 1618, 1469 & 1252 of 1982, 3398/81, 1355/82, 525/82,

3640, 3641, 3642, 3743 & 3745 of 1982, 1326, 1784, 1405, 1854, 3337,

1656 of 1981, 349, 1108, 1148, 4073, 4074, 4075 of 1982, 3118, 3080,

1161, 1374, 2804, 3035of1981, 4213/82, 1517/82, 1278, 1414, 1290,

1291, 1292, 1297, 1306, 1200, 1212, 1256, 1276, )277 & 1485of1981,

484, 509/82, 1517, 1578, 1450, 4037, 2944, 1788, 2889 of]981, 1547,

506, 507, 508, 4931_, 1253, 1431, 1432, 207 & 214 of 1982 & 182 &

203 of 1983.

WITH

A

Writ Petitions Nos. 9266, 10055-56, 7002-09,' 7019-23, 7024, C

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 Walla, D.N. Misra, D.P. Mukherjee,. B.R. Agarwafa,

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. lndu Goswamy,

S.K. Sinha, Vinoo Bhagat, P.N. Misra, K.K. Jain and Pramod Dayal

for the Appellants.

K. Parasaran, Solicitor General, R.B. Mahto, Addi. 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

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and order of tb.e High Court of Patna dated April 30, 1982 by which G

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 H j

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~,

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i4() SUPREME COURT REPORTS it983) 3 !.c.R. -

. TheBihar Finance Act 1981, is not only an Act for the levy

of a tax on the sale or purchase of goods but also is an Act to con­

solidate and amend various other law.s. We are·here concerned with

' s. 5 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, J98J the State Gov,ern­

ment of Bihar in exercise of the powers conferred by sub-s. ( l) s. j

of the Act appointed January, 15, 1981 to. be the date from which

surcharge under

s. 5 shall be leviable and fixed

the· rate of surcharge

at IO per centum of the total amount of the tax papable by a dealer

wose gross turnover during a year exceeds Rs. 5 lakhs, in addition

to the tax payble

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 fic!J 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 tiine 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 Bili'ar had no legislativC:competence

to enact sub-s. (3) of s. 5 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 cont.rol orders

issued under the Essential commodities Act, then there

will be

repugnancy beiwcen 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.

(!)of s. 5 of the _Act is ultra vires

th1:

State Legislature in as much as the liability to pay surcharge is 011

a dealer whose gross turnover during a year exceeds Rs. 5 laks oir

more i.e. inclu.sive of transactions relating to Sale or purchase of

goods which have taken place in the conrse of inteNtate t~ade or

commerce or outside the State or in the course of unport mto, 01

. I

HOECHST v. B!HAR (Sen, J.) 141"

export of goods outside the territory of Iudia. The submissibn is that

such transactions are covered by Art. 286. 9f 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. (l) 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 Labor.atories.

(India) Limited

v. The

State of Bihar & Others. Messrs Hoechst.

Pharmaceuticals Limited and Messrs Glaxo Laboratories (ludia)

Limited are companies incorcorated 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 aff

the districts of Bihar who, in their turn, sell 'theIIJ to retailers through

whom' the medicines and drugs reach 'the consumers. Almost

94%

of the medicines and drugs sold by them are

ai the controlled price

exclusive

of local taxes under the Drugs (Price Control)

Order,

1979 issued by the Central Government under sub-s. (I) 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 tjleir 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

. therefrom

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

1980-81and1981-82. For the assessment year

1980-81, the Commer­

cial Taxes Officer, Patna Circle, Patna determined the gross turnover

of sales in the.State of Bihar through their branch

office

at Patna of

Messrs H:oechst Pharmace1,1.ticals Limited on the basis of the returo

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142

' ' /

[1983j 3 s.c.R.. SUPREME COURT REPORTS

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 Match 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 ~urcharge for the assessment year 1980·8 l amounts to

!ls. 20,03,640.85p. The figures for the assessment year 1981·82 arc

not available. Foe the assessment years 1980·81 and 1981·82 the

!mnual 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 a(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. (1) of s. 5 of the Act.

The High Court referred to the decision in S. Kodar v. State ·of

Kera/a(') where tli.is 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. 5 of the Act and which

interdicts that no dealer referred to in sub·s. (I) shall be entitled to

collect the additional tax payable

by him. It held that the surcharge levied under" suti-s. (I) 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

ilot necessary that the dealer should be enable"d to pass on

th1!

incidence of tax on sale to the purchaser in order that it might be a

tax on the sale of goods. Merely because the dealer

is prevented by shb-s. (3) of s. 5 of the Act from collecting the surcharge, it does noi: "

cease to be a surcharge on sales tax. It held relying on Kodar' s

case, supra, that the charge under sub·s. (l} of s. 5 of the Act falls

.it a unifrom 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

(1)

(197S) 1 S.C.R. 121, .

I

•

HOECHST v. BIHAR (Sen, J.) 143

because a dealer is disabled from passing on the incidence of sur­

charge to the purchaser, sub-s. (3) of s. S imposes an unreasonable

restriction on the fundamental right guarnteed under Art.

19 (!) (g).

As regards the manufacturers and producers of medicines and drugs,

the High

Court held that there was no irreconciliable conflict

between sub-s.

(3) of s. S 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 h~ve ch~llenged the constitutional validity of

sub-s. (3) ofs. 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. (1)

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.

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These appeals

were argued with much learning and resource

particularly with respect to federal supremacy and conflict

of powers, D

between the

Union and State Legislatures and as to how if there is

such conflict, iheir respective powers can be fairly 'reconciled. In

support of these appeals, learned counsel for the appellants have

advanced the following contentions

viz :

(I} The opening words of

Art. 246 (3) of the Constitution "Subject to clauses (!) and (2)"

make the power of the Legislature of any State to make laws for E

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 Ill. That

is to say, su6-s. (3) of s. S of the Act which

provides that no dealer shall be entitled to collect the surcharge

F

levied on him must therefore yield to s. 6 of the Essential Commodi-

ties 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 . G

concept of federal supremacy. In short, the contention is that the

Union power shall prevail in a case of conflict between List JI 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 H

it collides with, and or is inconsist~nt with, or repugnant to, the

s~heme of Drugs (Price Control) Order, 1979 ~enerally so far a~

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144 SUPREME COURT REPORTS [1983] 3 s.c.R.

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 Conirol

,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 harmonic)us

·

construction to prevent a conflict between both the laws and care.

should be taken to

see that both can operate in different fields

with­

out encroachment. It is therefore submitted that there is no question

of repugnancy and it can be avoided by the principle of reconcilation.

That

is only. possible by giving full effect to the

non obstanfe 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 affected

by any

contrnl

orders. The class of dealers who can raise their sale prices and

absorb the surcharge levied under sub-s. (I) of s. 5 and a class of

dealers like the-manufacturers and producers 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

can,10t 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

confisca­

tory and casts a disproportionate burden on such manufacturers and

producers and constitutes an unreasonable restriction on the freedom

· to carry on their business guarnteed under Art. 19 (!) (g). (5) Sub .. s ..

(!) s. 5 of the Act is ultra vires the State Legislature of Bihar insofar

a. fq_r 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 Ent.ry 54 of List II of the Seventh Schedule to enact a

. provision like sub-s.

(!) of

s. 5 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 pur­

chase 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 taj{e'n

•

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HOECHST v. BIHAR (Sen, J.) 145

into consideration for computation of the gross turnover as ·defined

in s. 2 (j) of the Act for the purpose of bearing the indcidence of A

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 B

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 law

made

by the

State Legislature arises only in case both the legisla-.

tions occupy the same field with respect to one of the , matters C

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

S\ate 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 dootrine of occupied field but by the rule of 'pith and substance'. D

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 distri-, btitor. Under paragraph 24 of the Control Order, the manufacturer or E

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. (l) of s. 3 of

ihe Essential Commodities Act

is only the maximum price thereof and F

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 surc)large under sub-s. (I) of s. 5 of the Act will cut into the

profits

of the manufacturer or producer but that will not make the G State law inconsist~nt 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 medi-

cines and drugs to the consumer will remain the same. Lastly, the

Solicitor General submits that there

is no material placed by the B

appellants to show that the levy of surcharge under sub-s.

{I) of s. 5

of the Act would impose a \mnjen disproportionate' to the profits

146 SUPREME COURT REPORTS (1983} 3 S.C.R.

earned by them or that it is confiscatory in nature. There is, in our

A opinion, considerable force in these submissions.

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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 arc

dealears in essential commodities, the controlled price of which is

exclusive of sales tax as fixed ·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 S. Kodar's case, supra, and

. their liability to pay surcharge. under sub-s. (I) 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

principles laid down in

Kadar'

s case; supra.

lit Kodar's case, supra, this Court upheld the 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. (I)

of s. 2 of that Act is in terms similar to sub-s. (I) of s. 5 of the Act,

and provides that the tax payable

by a dealer whose turnover

for :1

year exceeds Rs. IO lakhs shall be increased by an additional taJt

@ 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

taJt

payable by him. The Court laid down that : (I) The additional ta~:

levied u.nder sub-s. (I) of s. 2 of that Act was in reality a tax on tht1

aggregate of sales effectect by a dealer during a year and thereforn

the additional tax was really a tax on the sale of goods and not "'

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 speak ..

ing, 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.

JO lakhs is not an unreasonable restriction on the

fundamental rights ~aranteed un<ler. Art; 19,1)(~) or (f) as the ta;>

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HOECHST v. BIHAR (Sen, i.)' 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 >eller

must have the right to pass it <)!1 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

passina;

on the incidence of additional tax to the purchas.er, it .cannot be

said that the Act imposes an unreasonable restriction upon the

fundamental rignts under Art 19.(l)(g) oi (f). The Act was not

violative

of Art. 14 of the Constitution as classification of dealers

on the basis

of their turnover for the pµrpose of levy of

additionr:l

tax was bassed on the capacity of dealers who Ofcupy position of

economic superiority by reason of.their greater volume of liussiness

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. (I) 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 followin:

terms :

·-

"5. Surcharge -(!) f.very dealer whose gross turn­

over 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 notificatidn published

in the Official Gazette :

Provided that the aggregate

of the

ta.< , and, siucharge

payable under this !'art shall not exceed, in respect of

goods declared to be of special importance in inter-Stat'e

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 define<;! in s . .Z(j) of the Act

insofar as ·material reads ;

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148 SUPllEMB COURT REPORTS (1983) 3 l.C.R.

"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 ef 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 Pdrt, no dealer mentioned in sub-s. (I),

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. (I) of s. 5 of the Act

which provides for the

levy of surcharge on dealers whose gross

turn­

over during a year evceeds 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 surch~rge

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 Iegisla·

tions operate in two different and distinct fields. The Essential

Commodities Act provides for the regulation, produc1ion,

supply, distribution and pricing

of essential commodities and is

relatable

to Entry

'.l3 of List III of the Seventh Schedule which

reads:

"33. Trade and commerce iq, and the production,

H supply and distribution of,~

(a) the products of any industry where the control of

~\!ch industry by the Union ia 4~lared by Parliamen

J

HOECHST ¥. B!llAR (Sen, J.) 149

by law to be expedient in the public interest, and

imported goods of the same kind

as such

products." A

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.JO of 1974. Sub-s. (I) of s. 3 of the Essential

Commodities

Act provides :

"3. Powers to control production, supply, distribu•

lion, etc., of essential commodities-

(I) If the Central Govemment"is of opinion that it is

8

necessary or expedient so to do for maintaining or C

increasing supplies of any essential commodity or for

securing their equitable distribution anct 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

D

distribution thereof and trade and commerce

therein."

~. Sub-s. (2) lays down.without prejudice to the generality of the powers E

·' conferred by sub·S. (!), an order made therein may provide for the

matters enumerated in

els. (a) to

~f). Cl. (c) of sub·s. (2) provides :

"For controlling the price at which an essential com•

modity may be bought or sold."

S

1

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 con­

tained 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

fil'ation both as regards bulk drugs as well as

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15() SUPREME COURT REPORTS [l 983j 3 S.C.R.

formulations. The expressions "bulk drug" and "formulation" are

A defined iii paragraph 2(a) and 2(f) as :

B

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"2. In the order, unless the context otherwise requires,-

. '~ . . - '

. (a) . "blJ,lk drug" means ~ny substance including pharma ..

ceutical, chemical, biological 'or plant product . or

medicinal gas conforming to pharmacopoeal ·or other

~tandar\!.s accepted under the Drugs and Cosmetics

Act, 1940, which is used as such 0r as an ingredient

in any formulations; ·

(f) "forinufations" meani a · medicine p'rdces;ed oµt of,

0 d9ntaining one or more bulk d~µg

0

9r drugs; _with

. or withoµt the use of any phar.ma)eu,t\cal aids for

internal _or external use for, or· in the diagnosis,

treatment, mitigation or _prevention

of disease in

human

bein~s or animals, b~t s_hall not include-

We are here concerned with the impact of,_sub-s. '.(3) of s. 5

of the Act on the price structure of formulations, but nontheless much

. ' . -~ . ..

stress was laid on fixation of price of pulk drugs_ under paragraph

3(2) which allows a reasonable return to the ·manufacture under sub­

paragraph (3) 'thereof. 'A -m'anufacturer or producer of sucti bulk

drugs

is entitled to sell it at a

pdce exceeding the price notified under

. sub-paragraph (1), plus Joe~] ta~es, if' any, payable. -

·- • I ·Jr ·

What is of essence is the price fixation of formulations and

theteJevant provisions-are contained in paragraph, 10 t6 15, 17, 20,

21 and 24. Paragraph _10 provides for a formilla according to which

the retail price of formulation shall be calculat.ed a;id it reads :

"10. Calculatiolz of retail price of formulations-The retail

price of a formulation· shall be calculated ·in accor­

dance 'with the following formula, n~mely-:

-. ' . ' . ..

R.P.=(M.c+c.c+P.M.+P.C) x

MU

1+10o+ED.

• I ' i

Where-.

"R.P." means retail ptice.

·~

)

"""(

.I

.(

HOECHST '· BIHAR (Sen, J.)

"MC." means material cost and includes' the cost of

drugs and other pharmaceutical aids used including

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 accor­

dance 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 mate.rial including

process

loss thereon worked out in accordance with such

norms as may

be specified by the Government from time

to time

by notifioation . 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 ~uty :

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 wher~ an imported formula­

tion is. re-packed, its landed cost plus the cost of packing

materials and packing charges

as worked out in

accor­

dance 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 char~es''.•

isi

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SUPREME COURT REPORTS t !983] 3 s.c.R.

The expression "mark-up" referred to .above is dealt within

paragraph ll and it provides :

"II. 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 <;ategory II of the said Schedule;

(iii) one hundred per cent

in the

cas~ of formulations

specified in Category III of the said Schedule."

It is unnecessary for o:ir 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

read_s :

"15. Power to ;evise prices of formulations-Not­

withstanding anything contained in this Order :·

(a) The Government may, after obtaining such informa,.

tion as it may consider necessary from a manufac~

turer or an importer, fix or revise the retail price of·

one or more formulations marketed by such manu­

facturer or import~r, 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

s~ified 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."

-~

-~

•

lloECilsT v. BIHAR (Sen, J.) !Sl

'

Paragraph I 7 casts a mandatory duty on the Central Govern•

ment to maintain 'Drugs 1'rices Equalisation Account' to which shall

be credited-

(a) by the manufact\lrer, 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 Govern·

ment may, after due appropriation made by Parlia­

ment 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

betwoen his retention price and the common ~elling 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 intented for sale shall furnish to the dealers, State

Drug Controllers and the Government, a price list showing the price

at w:1ich th' formulation is sold to a retailer inclusive of excise duty.

Every such m1nufacturer 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 conspicuoµs 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 aisplayed on label of con·

tainer-Every manufacturer, importer or distributor of a

formulation intended for sale shall display in indelible

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SUPREME COURT REPORTS

' ~ ' ' j '

(1983} ;I S.C.R.

, •print mark on the label of the container of the formula·

' lion

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, ancl

\'local tax.es __ extra'' succeedi~g it.''

"21., Control of sale prices of formulations specified in

Thirti· Schedule-No retailer shall sell any formulation

specified

in any of the categories in the Third

Schedul~

to any person at a mice exceeding the price. specified in

the current price list or the . price indicated on the fabel

cirthe container or pack 'thereof, whichever is less, plus .

th@ local taxes, if any, payable.

Explanation-For the purpose of this paragraph,

"loc'al 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-

(~) No mcufacturer, importer or distributor shall sell

a formulation to a wholesaler unless otherwise per·

' ..

mitted 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, distr.ibutor or whole­

saler shall s.ell a formulation to a retailer unless

otherwise permitted under the provisions

of this

order or any order made thereunder, at a price .• ]ligher 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

c11se of non ·C)thical drugs.

'.

.HOECHST v. BIHAR (Sen, J.)

Explanation-For the purposes of this paragraph-

(i) · "ethical drugs" shall inelude, all drugs specified

in Schedule C, entrie~ Nos;· 1, 2, 3, 7, 8 and 9

of Schedule C(l), Schedule E, Schedule G,

Schedule

H and Schedule

L; ·appended to the

Drugs and Cosmetics Rules,

1945

made· under

the Drugs and Cosmetics ·Act, i'940, (23 of

1940);'and

(ii) "non"ethical dru"gs" 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."

155

•

Much emphasis was laid· on fixation of price of bulk drugs

under paragraph 3 which provides

by

sub-p~ragraph (1) that the

Govern_ment may, with a view to regulating the equitable distribution

of an indigen<;>usly manufactured bulk drug specified in the First

Schedule or the Second Schedule and making it available at a fair

price and subject to ihe provisions of sub-paragraph (2) and after

m~king such inquiry as it deems fit, fix from time to time, by noti­

fication in th~ Official Gazette, the maximum price at which such

bulk drug.shall be sold. Sub-paragraph (2) enjoins that whil~ fixing

the price of a bulk drug under sub-paragraph (I), the Government

m"ay take into accouni the average cost of production of each bulk

drug manufactured

by efficient manufacturer and allow a reasonable

return

on net-worth. Explanatfon thereto defines the expression

"efficient manufacturer" to mean a manufacturer (i) whose produc­

tion of such bulk drug in relation to the total production of such

bulk drug in the country is large, or (ii) who employs efficient techno­

logy i~· the p'rnductiol). of such bulk drug. Sub-paragraph (3) pro­

. vides tl;at n<;> persol). shall sell a bulk drug at a price exceeding the

.. 'l ., r - .

price notified 11nder sub-paragraph (1), J?lus local taxes, if any,·

payable.

It is urge<j that while fixing the price of bulk drull, the

Government has to take into account the average ~ost_ of production

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156 SUPllEME COURT REl'OR.TS (i983l 3 s.c.a;

of that bulk drug by a particular manufacturer, by taking into

consideration the cost to a maufacturer

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 manu··

facturer allows a reasonable return on net-worth of' the dru11

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 upoh 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. 5 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 Stat~

-

HOECHST v. BIHAR (Sen, J.) 157

Legislature to enact sub-s. (1) of s. 5 of the Act for the purpose of

levying surcharge ori 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. 5 of the Act prohibiting

the dealers liable to

pay a surcharge under sub-s.

(I)

<hereof from recovering the same·

from the purchaser. It is fairly conceded that sub-s. (3) of s. 5 of

the Act is also relatable to Entry 54. The contention however is

that _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. 5 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 Parlia­

ment 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 includiµg 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 contra! 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 Bag/a & Anr. v. State of Madhya

Pradesh(')

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 Es~ential Commodities Act and

it was observed :

\I) f1955j l S.C.R. 380,

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SUPREME COURT REPbRTS [1983) 3 :l.C.R.

'!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 inconsisterit with the

provisions

of the Essential Supplies (Temporary

Powers)

Act, 1946, or the ordersmade ther~under.' In other words,

the orders· made under section. 3 ·would be 'operative in

regard to the essential commodity cove1'ed · by the tax tile

Control Order wherever there'is repugnancy in this Order

with the existing laws and to that extent lhe existing laws

with regard to those commodities

will

not operate.

By-passing a certain.law does not necessarily· amount to

repe

0

al or abrogation of that Jaw.· That law remains

unrepeated hut 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 an order is made under s. 3 of that. Act,

•· 6 then steps in wherein Parliament has declared that as soon as

such an order comes into being that will have effect notwithstandini:

any inconsistency therewith contained in any enactment other than

that Act.

Placing reliance.on the observations in Hari Shankar Bag/a'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 2 l. It is further urged that paragraph

21· of the Control Order having been issued by the Central Govern·

ment under sub-s. (I) 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. 5 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. 5 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 pa_ss

HOECHST v. BIID\R (Sen, J.) 159

on the liability to pay sales tax payable under s. 3 and attditibnal

aalea tax payable under s. 6 to the purchasers. Sub-s. (3) of a. 5 of

the Act however imposes a limitation on dealers liable t~ pay sur­

charge ·under sub-a. (I) thereof from collecting the amouut of

surcharge payable by them from the purchasers which only means

that surcharge payable by such dealers under sub•s. (I) of s. 5 of the

Act

will cut

into the profits earned by such dealers. The controlled

price or reatil 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 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.· Tlie entire sub­

mission advanced .by learned counsel for the appellants proceeds on

the hypothesis that the various control ordets issued under sub-s.

(!) of a. 3 of the Essential Commodities Act are fot the protection

of the manufacturer or producer. There is an obvious faliacy in the

argument which

fails to take into account

the purpo~e 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 inanufacturing or

producing such an essential commodity.

The contention thjlt in the field of fixation of price bY a .control

ordet issued under sub-s. (I)

of s. 3

of· the Essential Cofnmoditics

Act, the Central Government must have due regard to the .securins;

of a reasonable return on the capital employed in the business of

manufacturing or producing an essential conim6dity 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

distribu­

tion and availability of essential commodities at fair prices to the

consumed, and the mere circumstance that · some of those engaged

in the

field of industry, trade and commerce may suffer

a Joss 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. Iii Shr~e Meenakshi Mills

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160 SUPREME CoURT REPORTS (1983] 3 S.C.R. '

Ltd. v. Union of India(') Ray, C.J. speaking for the Court rejected the

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 :

"Iii fixing the prices, a price line has to be held in

order to give prefernce or predominant consideration t·o

the interests of the consumers or the general public over

that of the producers in respect of essential commodities.

The aspect of ensuring availabiltiy of the · essential

commodities to the consumer equitably and at fair prict!

is the most important consideration."

In Prag Ice & Oil Mills & Anr .. etc. v. Union of India(')

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

D decisions in

Panipat Cooperative Sugar Mills v.

Union of India(') and

Anakapa//e Cooperative Agricultural & Industrial Society Ltd. v. Union

of India(') and observed :

E

F

"The infirmity of this argument, as pointed out in

Meenakshi Mil/s's case, is that these two decisions turned

on the language

of s. 3 (JC) 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 (3.C) of s. 3 of the Act belon'g to

a different category

altogether."

The learned Chief Justice then observed :

G "The dominant purpose of these prov1s10ns is to .

ensure the availability of essential commodities to the

consumers at a fair price. And though patent injustice to

H (1) [1974] 2

S.C,R. 398.

(2) [1978] 3 S.C.R. 293.

0) [1973) 3 S.C.R. 860.

(4) [1973] 2 S.C.R. 882.

J

I

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HOECHST V. B!HAR (Sell, J.)

· 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 bys. 3 (I) ands. 3 (2) (cl of the

Essential Commodities Act.

The interest of the consumer

has to

be kept in 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."

161

The contention advanced does not take note of the distinction

between the controlled price

fixed nnder 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). · Jn fixing a procurement

price under

s_ub-ss. (3A), (3B) and

(JC), there is a statutory obligation

cast on· the Central Government to ensure a fair return to the produ­

cers or dealers of essential commodities, white· in fixing the controlled

price under cl. (c) of sub-s. (2) of s. 3 read with sub-s. (I) 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

is 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

compfain of

some increase in, or reduction of, prices as a result of

an order issued under sub-s. (l) 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

sur­

charge levied on him under sub-s. (1) of s. 5 of the Act because such

increase or reduction is also based on economic factors.

The principal point in controvery

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

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162 SUPREME COURT REPORTS (1983] :l S.C.R,

like sub-s. (3) of s. 5 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. 5 of the Act

i; 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

~'etween ) ·.•

sub-s. (3) of s. 5 of the Act and paragraph 21 of the Drugs (Price

Control) Order made under sub-s. (I) of s. 3 of the Essential Com-

modities Act,

is therefore void. In dealing with

the question, we

must set out Art. 246 of the Constitution which is bassed on s. 100

of the Government of India Act, 1935 and it reads:

"246(1) Notwithstanding anything in clauses (2) and

{:i), 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), Parlia­

ment, and, subject to clause (!); 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 lo as the

"Concurrent List"). .

(3) Subject to clauses (I) 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 enmerated. 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

included in a State notwithstanding that such matt(>r

is a matter enumerated in the State List."

It is obvious that Art. 246 imposes limitations on the legisltitive

powers of the Union and State Legislatures and it_s ultimate analysis

would reveal tl:ie following essentials : ·

I: Parliament has exclusive power to legislate with

respect' to any of the matters eirnmerated in List T

•

HOEGHST v. B!HAR (Sen, J.)

notwithstanding anything contained in els, (2) and

(3). The non-obstante clause in A.rt. 246(1) provides

for predominance

or supremacy of

Union Legisla­

ture. This power is not encumbered by anything

contained in els.

(2) and (3) for these clauses

them~

selves are expressly limited and made subject to the

non-obstante clause in Art.. 246( I). The combined

effecl'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, Parliame.n~ has ex­

clusive power of legislation.

2. The State ·Legislature has" exclusive power to make laws

for such State or ·any part thereof with respect \o any

of the matters enumerated in List II of the Seventh

Schedule and it also has ·the power to ma)<e laws

with respect to any matters enumerated in· List Ill.

The exclusive power of the State Legislature to

legislate with respect to any Of the matters eUU!J1erat­

ed in List II.has lo be exercised subject to cl. (1) i.i; .

. the exclusive power

of Parliament to

ICgisfate 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

~f Parliament to legislate

with respect to a matter enumerated

in List II must

supersede

pro tanto the exercise of. power of

the State

Legislature.

3. Both Parliament and the State Legislature have con­

current powers of legisfation with respect to any of

the inatters enumerated in List Ilf.

163

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 n:iade by the Legis­

lature 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 Conc~rrent .. List, t;hen,

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164

SUPREME COURT REPORTS [1983] 3 s.c.R.

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

Jaw shall

prevail and the law made by the Legis·

lature of the State shall, to the extent of the repugnancy,

be void.

· (2) Where a law made by the Legisfature 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

Jaw with respect to that matter, then, the law so

made by the Legislature of such siate 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

addi~g 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 appel'ants 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) "Notwithsta!J.ding

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 manu­

facturer 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.

(I) 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 III. It is said that if

both are valid, then

ex hypothesi the law made by Parliament

mui;t

prevail and the State law pro tanto must yield. We are afraid, the

~<,>qtentiol! cannot prevail in view of t)W well accepted principles,

·I

. ~

·.

iloECHST v. BIHAR (Sen, J.)

The words "Notwithstanding anything contained in clauses

(2). and (3)" in Art. 246 (I) and the words "Subject to clauses

(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

I sball prevail over the State power as enumerated in List II

and UL and

in case of overlapping between

List Il and III, the

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"couflict 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. It should be

considered whether a fair reconciliation can be achieved by giving

to the language of the Union Legislative List a meaning which, if

less wide than it might .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(1) must operate only if such reconcilia­

tion 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 specfiied in List III and occupy

· the same field. ·

As regards the distribntion of legislative ·powers between the

Union and the States, Art. 246 adopts with immaterial alterations the

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166 . SUPREME COURT REPORTS (1983) ~ s.C.R •

scheme for the distribution of legislative powers contained in s. 100

of the Government of India Act, 1935. Our Constitution wa:; not

written on a clean slate because a Federal Consti(ution ·had been

established by the Government of Ii\.dia 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 c 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 & Berat Sales of Motor

Spirit anil Lubricants Taxation Act, 1938(') Gwyer, c.J. referred to

the two decision of the Pnvy Council in Citizen Insurance Company V;

Wiliam Parsons(') and Attorney Genera/for the Province of Ontario v.

Attorney General for the Dominion of Canada(') which in his opinion

had laid down 'most clearly the principles which should be applied

by Coutts 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. JOO(•!) of the ·Government of India Act, 1935 Gwyer, C.J.

obsetved :

"It is a fundamental assumptio1i 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 legislatiye 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

(I) [19391 F.C.ll. I.

(2) L.R. [188217 A.C. 96 at p. 108.

(3) L.R. [19121 A.C. 571 at p. 583 ..

,

iioECHST v. BIHAR (Sen, J.)

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 qf 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• ex;sts in each legislature, and

to define in the particular case before them the limits of·

their respective power. It could not have been the inten­

tion 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-Genera/ for the Province of Ontario's case,

(supra) observed that in the interpretation

of ss. 91 and 92 of the

British North America Act : "If the text is explicit, the text is conclusive aliki> for

what it directs and what

it

forbids."

When the text is ambiguous, as for example when the words estab­

lishing two mutually exclusive jurisdictions are wide enough to bring

a particular power

withh1 either,

recour!e must be had to the context

and scheme

of the Act.

In

A.L.S.P.P. Subrahmanyan Chettiar v." Muttuswami •Goundan(')

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.

I 00 of the Government of India

Act,

1935:

[I) [19401 F.C.R. 188.

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\68 SUPREME COURT REPORTS 1!98~) ~ s.C.f\.

"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

w

closely intertwined that blind adherance to a strictly verbal

interpretation w6uld 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

wh.ereby the

impugnep statute is examined to

·ascertain its 'pith and substance' or its true nature and

·character for the purpose of determining whether it 1s

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. il1 C.P. & Berar

T"xation 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 Citiun's In•

surance 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 tha! the general power ought not to

be comtrued 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 1he Privy

Council in Gol'etnor-General in Council v. Province of Madras(') :

"For in a Federal constitution, in which there i; a

division of legislative powers between Central and Pro·

vincial Legislatures, it appears to be inevitable that

controversy should arise whether

orie or other legislature

(I) [19451 F.C.R. 179,

lloECHST v. BIHAR (Sen, i.) 169

is not exceeding its own, and encroaching on the other's

constitutional legislative power, and in such a contro· A

versy 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 subs·

tance" as it has sometimes been said, which must deter·

mine 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 8'; Sons(') 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(').

Lord Porter delivering the judgment of the Board laid

down that

in

di1ting~ishing between the powers of the divided juris­

dictions 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

pur·

pose of determining in which particular list the legislation falls,

applies to Tndian as well as to Dominion legislation. In laying down

that principle, the Privy Council ~bserved :

"Moreover, the British· Parliament when enacting

the Indian Constitution had a

Jong experience of the

working

of the British North America Act and the

Au.stralian 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. 1n Subramanyan Chettiat's case, supra, quoted above, and

observed :

(I) [1942] F.C.R. 90.

(3) A.I.R. 1942 P.C.

60 at 65.

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i7o SUPREME COURT REPORTS [1983) 3 s.c.R..

"No doubt experience of past difficulties has made

the provisions of the . Indi~n 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 pve11ap, and where they do, the question must

·be asked what in pith and substance is the effect of the

enactment ·of which complaint is inade, and in ·what list

is ·its true .nature arid character to be found. If these

questions could not

be asked, much beneficent

'legislation

would-be stifled at birth, and many of the subjects entrus­

ted to provincial legislation could never effectively be

. dealt with.''

It would therefore appear that apparent corrflict with the Federal

power had to be resolved by .apphcation 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 jn 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 inva­

sion, .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

Jess, but is the trespass, whatever it be, such as

to show that the

pit!J. and substance of the impugned

Act is not money-lending but promissory notes or

banking ? Once that question is determined tlie 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

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lli>ECHST v. B!HAR (Sen, i.) i71

view does not give sufficient effect to the non-obstante clause in

s. 100(1) oft.he Governmeat 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

JI . though it may 'incidentally affect

any item

in List

I.".

It would therefore appear thaf the constitutionality of the law is to

be judged

by its real subject matter and not by its

illcidental effect

on

any topic of legislation in another field.

The decision of the

Privy <;::ouncil in Prafulla Kumar Mukherjee' "

case; supra, has been repeatedly approved by tl;le Federal Court and

this Co1;1rt as laying down the correct rule to be applied in !esolving

conflicis 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

ls

a law on a permitted field· any incidental encroachment on a for­

bidden field.does not affect the·competence of the legislature to enact

that

Act; Ral/a

Ram v. Province of East Punjaq('), State of Bombay v.

Nerothamdas Jethabai & Anr.(

2

), State of fJombay v. F. N. Balsara(•),

A. S. Krishna v. State of Madras('), .M. Karunanidhi v. Union of

India('). Union of India v. H. S. Dhillon(') and Southern Pharmaceuti­

cals & Chemicals Trichur & Ors. etc. v. State of Kerala & Ors. etc.(')

In Laskin's Canadian Constitutional Law, 4th edn., it is

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. observed at p. 24 that the doctrine of paramountcy is tied up with G

(1) [1948] F.C.R. 207 at pp. 226-27.

(2) ·[1951] S.C.R. 51 at pp. 64-65.

(3) [1951] S.C.R. 682. .

(4)

11957]

S.C.R. 399.

(5) [1979] 3 S.C.R. 254.

(6) [1972] 2 S.C.R. 33.

(7) [1982] l SC!!-519.

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i72 SUPREME COURT REPORTS [19S3].J s.c.R.

the "trenching" doctrine in the first of the four propositions formu­

lated by Lord Tomlin in Attorney-General for Canada v. Attorney

General for Britain Columbia

&

Ors.(

1

)

~ase,

and then he goes into the

question, : "What is the basis of the paramountcy doctrine ?" Laskin

quotes from L~froy's Canada's Federal System at p. 126 :

'·But the rule as to predominance of Dominion legis­

. Jatiorl 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."

C The learned author refers two the two decisions of the Privy Council

in

Attorney-General of

Ontario v. Attorney-General of Canada(') and

City of Montreal v. Montreal Street Railway(') laying down that :

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"There.must be a real conflict between tire two Acts,

that is, the two enactn1ents '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

l~gislation which, independently

considered,

is in each case valid. If either piece of legis-. lation, 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."

(I) L.R. [1930] A.C. 111.

(2) L.R. [18961 A.C. 348,

(3) L.R. [1912] A.C. 333.

t

HOECHST v. BIHAR (Sen, J.)

At p. 28, he states :

"The doctrine of occupied field applies only where

there is a clash between Dominion legislation and

provincial legislation within a!! area common to both."

173

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 tbe 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('), 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 recaptiulate the

decisions. But a .comparison

of two cases decided in the

year

1894

-viz., Attorney-General of Ontario v. Attorney­

General of Canada(') and Tennant v. Union Bank of

C11nada(

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 &

O~s. 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

Parlia­

ment to provide for matters which, though otherwise within the

(I) L.R. [1907] A.C. 65.

(2) L.R. [18941 A.C. 189.

(3) L.R. [1894) A.C. 31,

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174 SUPREME COURT REP6RTS (1983] 3 S.C.R.

legislative cometence of the Provincial Legislature, are necessarily

incidental to effective legislation by Parliament of the Dominion upon

a subject oflegislation 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 it

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('), Viscotint,

Caldccote, 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(')

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 ealier decisions of the Board on questions of con­

ftict 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 enume­

rated

ins. 91, is of paramount authority, even though

it trenches upon matters assigned to

. the Provincial

(I) L.R. [19401 A.C. 513.

(2) L.R. [1921) 2 A.C. 91, 116.

'

,

. HOECHST v. BIHAR (Sen, J.) 175

Legislatures by s. 92, Lord Tomlin referred to Tennant v.

Union Bank of Canada, supra, as the authority for · this A

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"

(Citiun Insurance Co. of Canada v. Wi/iain Parsons)

(supra) or, to use Lord Watson's ivords in delivering° the

judgment

of the Judicial Committee in Union

Colliery Com­

pany of British Co /umbia v. Bryden(') as to their "pith and

substance' Their Lordships now addres themselves to

that_ inquiry."

"Legislation", said Lord Maugham in delivering the judgment

of the Privy Council in Attorney-Genera/ for Alberta v. Attorney·

General for Canada,(') "given in pith and substance within one of the

classes specially enumerated

in s. 91 is beyond the legislative

compe·

tence 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 c>nly incidental or

ancillary to one

of the classes of subjects enumerated

·in

s. 91 and is properly within one of the subjects enume·

rated in s. 92, then legisiation by the Province is

comeptent unless and until the _Dominion Parliament chooses

to occupy the field by /egis/atian."

(Emphasis supplied.)

Lord Maugham's reference to the year 1894 points to 'the

decision

of the Privy Council in Attorney-Genera/ for

Ontario v.

Attorney-General for Canada, supra.

In Attorney-Genera/for Canada v. Attorney-General for the

Province

of Quebed,(

8

)

Lord

Porter in delivering the judgment

of the Board drew attention to these principles and then observed:

(I) L.R. [1899] A.C. 580.

(2) L.R. [1943] A.C. 356.

(3) [1946] A C. 33,

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176 &UPREME COURT REPORTS [1983] 3 s.c.1t

."In calling attention to these principles the,ir

Lordships are but repeating what has many times been set

forth in the judgments of the Board, and it only remahis

to apply them to the individual case under consideration .. ,

Tne rule of pith and substance laid down

by the

Privy Council

was reaffirmed by Viscount Simon in Attorney-Genera/ of . .

Sasketchewan v. Attorney-General of Canada &'Ors.(')

This was emphasized very clearly by Lord Atkin while dealing

with the validity

of the Milk and Milk Products Act

(!\'orthern

Ireland) which was impugned as violating s. 4 of the Government of

C Ireland Act, 1920 in Ga/lahagher v. Lynn(

2

)

in his own terse

language:

D

'.'It is well established that you are to look at the

. "true nature and character" of the legislation; Russell v.

The Queen(') "the pith and substance of the. legislation".

'If on the view of the statute as 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."

E . Much stress is laid on the fourth propo>tition formulated by

.F

G

H

Lord Tomlin in Attorney-General for Canada v. Attorney-Genera/ for

British Columbia & Ors.. (rnpra) 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

Dominioi:i legislation may overlap, in which case neither

legislation

will be ultra vires if the field is

plear, b4t,if the

field

is not clear and the two legislations

meet the

Dominion legislation must prevail : see Grand .Trunk ·R ..

of Canada v. Attorney:Genera/ of Canada, (supra)."

The question is whether the field is not clear and· the two legis,lations

meet and therefore on the doctrjne of Federal supremac~ sub·s (3)

, (1) L.R. [1949] A.C. 110.

(2) L.R. [1937) A.C. at p.870.

(3) L.R. [1882! 7 A.C. 829,

)

'

HOECHST v. BIHAR (Sen, J.) 177

of s. 5 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 Consititution,

·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

enact•

ment which is under considerat_ion inay 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 clas'es 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 exclusi­

vely to Parliament under Art. 246 (I) even though the classes of

subjects looked at signly overlap in many respects. The whole distri­

bution

of powers must be looked at

iis 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

dov;n in Subrahmanyaif Chettiar's case, (supra), and affirmed by their

Lordships

of the

Privy Council in Prafulla Kumar Mukh~rjee'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 enumera­te.ct in List II.

We must then pass on to the contention advanced by learned

counsel

foi the appellants that there is repugnancy between

rnb-s (3)

of s. 5 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

t.o 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 Conc;irrent List but it can be cured by

resort to Art. 254 (2). ·

As we have endeavoured so far, the question raised as to the

constititutional validity

of

sub·s. (3) of s. 5 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 comp~tently enacted under Art. 246, and therefore tho question of

repugnancy under Art. 254 was not a matter in issue, The submission

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178 SUPREME COURT REPORTS (1983] 3 s.c.R.

'

put forward on behalf of tbe appellants however is that there is direct

collision and/or irreconci!iable 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 Li!it 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 ii 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 (!).

Strong reliance is placed on the judgment of the .High Court

of Australia in Clyde Engineering Company Limited v. Cowburn(')

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 : E.~ parte Mc Lean(')

and Stock Motor Ploughs Limited v. Forsyth.\') The deeis;on in Clyde

.. Engineering Company's cases, supra, is an authority for the proposi­

. tion 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 :

(I)

Entry 54 of List His a tax entry and therefore there ·is no ques­

tion of repugnacy between sub-s. (3) of s. 5 of the Act which is a

(I) [1926] 37 Com. L.R. 466.

(2) [1930] 43 Com. L.R. 472.

(3) (1932j 48 Com, L.R. 12~,

1

)

,(

••

HOECHST v. BIHAR (Sen, J.) 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. '(!)

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 enumera'

ted

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 io 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,(') 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 :

I. 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

Jaw,

or the award of the Commonwealth Court, is

inten­

ded 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.(')

A

B

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the Court accepted the above three rules evolved by Nicholas, among (j

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

(I) [1959] Supp. 2 S.C.R. g,

(2) [1956] S.C.R. 393.

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180 SUPREME COURT REPORTS [1983] 3 s.c.R.

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. (I) 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. (I), 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 d1:aling with

a concurrent subject.

In such a case, the Central Act will give way

to the

State Act only to the extent of inconsistency betwe1:n 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 'Yould 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 Parll'ament 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 Stat.e law with respect to

the 'same matter'.' Even though the' subsequent law made by Parlia­

ment does not expressly repeal a State law, even then, the State law

will become void as soon as the subsequent Jaw 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 repµg­

nancy may also.arise where both laws operate in the same field and

the two canriot possibly stand together. : Se.e: Zaverbhai Amaidas v.

State of Bombay('). M. Karunanidhi v. Union of India(') and T. Barai

v. Henry Ah Hoe & Anr.(

1

)

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

Parle

McLean's case, supra,. Dixon J. laid down ·another test viz., two

(I) [1955] l S.C.R. 799.

(2) (1979] 3 S.C.R. 254.

(3) \J983) 1 S.C.C. 177

1

i

,;"'

)

HOECHST ii. BIHAR (Sen, J.) 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 contro­

versy 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 Legis­

lature under Art. 246(3) _and does not involve any question of rcpug­

nancy 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

fl of the

Seventh Schedule and paragraph 21 of the Control Order issued ·by

the Central Government under sub-s._ II) 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 Jaw made by the

State Legis­

_lature is void under Art. 254(1). The question ofrepugnancy 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

-0f 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 b</ause 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

Jaw will fail

not·became 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 compe­

tent 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( I) is read as a whole, it will be

seen that it is expressly made subject to c1: (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. (I), the .

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SU~REME CoURT REPORTS [t9s3i 3 s.c.ii..

repugnancy between Union and State Jaw must be taken to refer only

to the Concurrent

field. Art. 254( 1) speaks of a

State Jaw being

repugnant to (a) a

Jaw made by Parliament or (b) .an

existing Jaw.

There was a controversy at one time as to whether the succeed­

ing words "with respect to one of the matters enumerated in the

Concurrent List" govern both (a) and (b) or (h) 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 provlsion of an existing Jaw, The

underlying principle is that the questio.n or 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 unk:ss 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 tl~e observations of

Venkatarama Ayyar, J. speaking for the Court in A. S. Krishna's

case, supra, while dealing withs. 107(1) of the. Governm<mt of India

Act,

1935 to the effect:

"For this section to apply, two conditions mu:it be ·

fulfilled : (I) 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~f 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

3 3

of List III, the test of repugnancy would be whether

Parliament

and State Legislature, in legislating on an e.ntry 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

~over the entire field, and added :

)

.tfij

'

HOECHST v. BIHAR (Sen,'/.)

"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 questicm 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 i~ cases of over­

lapping 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,

inter­

preted Art. 254( I) 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 ihat 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

lhe

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

a< 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

thdevy and

imposition

of a tax

cin sale or purchase of goods relatable to Entry

54 of List II of the Seventh Schedule and to make ancil1ary pro­

visions 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 IL Otherwise, Entry 54

. will have to be read as : 'Taxes

on the sale or purchase

of goods other than essential commodities etc-

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184 SUPREME COURT REPORTS (1983) 3 s.c.R.

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

legis­

lation 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 Lis.t l 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

capab!e of because they

·set up a machinery of Government.

The controversy which

is now raised is of serious moment to

the

St<1tes, and a matter apparently of deep interest to the Union.

But in its legal aspect, the question· lies within a very narrow com­

pass. 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 Consti:

tution, whether the State 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

"rticles of the

Constitution. Taxation

is considered to be a distinct matter for

pnrposes

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

tlie. 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 tl1e 'three lists in Schedule VII cannot be' under­

stood fully without examining the general features disd:ised by the

entries contained in those Lists : "Seervai in his Constitutional Law

of India, 3rd edn. vol. I at pp,. 81-82. A scrutiny of Lists I and II

of the Seventh Schedule would show that there is no .overlapping

iiOECHST v. BJHAR (Sen, J.) i85

anywhere in the taxing power and the Constitution gives independent

sources

of taxation to the

Union and the States. Following the A

scheme of the Government oflndia 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 F~deral Constitutions from overlapping powen of taxntion.

It would therefore appear that there is a distinction made

between general subjects

of legislation an·d taxation. The general

subjects

of legislation are dealt with in one group of entries and

power of taxation in a separate group. In

M.P. Sundararamier & Co.

v. The State .of Andhra Pradesh & Anr.(

1

) This Court dealt with the

· scheme of the separaiion of taxation powers between the Union and

the States by mutually exclusive lists. In List I, Entries I to 81 deal

with general subjects of legislation; Entries

82 to 92A deal with taxes.

In List II, Entries

I 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 III, 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

than 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 Jaw

with respect to· the levy and impo3ition 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

m1der sub-s. (l) 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

(6) [1958] S.C.R. 1422.

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SUPERME cotiR.P REPORTS i1983j 3 s.c.R..

treats "unequals as equals". It is urged that the Essential Commo­

dities 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:

(I) 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 6f 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 preve11ts 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. (!) of

s. 5 of the Act imposes a disproportionate burden on a certain class

of dealers such as manufacturers or producers of drugs and

phar­

maceuticals or dealers engaged in the business of distribution and

saie

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.

(I} of s. 5 of tlte 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

--""'

HOECHST v. BIHAR (Sen, i.) i87

commodities or not. A surcharge in its true ~ature and character

is nothing but a higher rate of tax to raise revenue for general pur•

poses. The levy of surcharge under sub-s. (I) 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 ceriain profit

targets. Their initial response would

be to raise prices by the full

amount

of the tax. Where the conventional mark-up leaves

sub­

stantial unrealized profits, successful tax shifting is possible regard­

less 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,.

busi­

nessmen always iegard 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-

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pricing" rule, by application of a conventional mark-up E

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

~o 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." F

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

G

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. (I) of s. 5 of the Act. It rough'y -

works out to one paisa per rupee of the sale price

of the

manu· H

factored commodity. There is no material placed on record that

the surcharge levied under sub-s.

(!) of s. _5 of the Act imposes a

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188 stiPREMB COURT REPORTS ti 9SJ) j S.C.R,

disproportional~ burd1:n on the appellants or that it is confiscatory

in· nature.

The argument

of arbitrariness is an argument of despair.

Sub-s.

(I) 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.

It is a general tax and

all dealers falling within the class

cfefined under sub-s. ( 1) of s. 5 of

the Act have been levied the surcharge at a uniform

rate• of JO per

centum of the tax .. It will be noticed that· first proviso to sub-s. (I)

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

com·merce by s. 14 of the

Central

Sales Tax Act, 1956, the rate fixed bys. 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

app~ar' that generally dealers having a gross

turnover

of Rs. 5 Iakhs in a year dealing in commodities covered by

s. 14 will not have to bear the burden of surcharge under sub-s. (l) 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. I 4 of

the Central

Sales Tax Act. Titat apart, the appellants as mlnufacturers or pro­

ducers of drugs under paragraph 24(1) have to bear the burden of

· sales iax on the controlled price that they can.not charge to a whole­

saler a price higher than (a) the retail price minus 14 per cent

thereof, in the case

of ethical. drugs; and (bJ the retail price minus

12 per cent thereof, in the case of non-ethical drugs.

Under para­

graph 24(2) they cannot sell t? 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

IO 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

IO has to be accordance

with the formula set out therein.

One of the elements that enters

j _ _'

HOECHST v. Bil!Aa (Sen, J.) 189

into the price ftructure is the 'ma1k-up' which is defined in para­

graph I-1 to include _distribution cost, outward freight, promotional

expenses, manufacturers margin and trade commission. Clauses

(!)

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.

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In Market situations where uncertainty about demand

pre­

vails and .mark-up pri_cing is practised, the usual response is to

attempt

to shift taxes to the consumer. Musgrave in his Public . C

Finance in Theory and Practice observes that economists like to

think of business behaviour

as being rational, in the sense of follow-

ing a maximising rule, but businessmen. may not act

~ationally.

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

custo­

mary fraction of sales. Whether this gives rise to

shifting depends on ho;,, 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 . regard­

ing the entire approach of marginal cost pricing. 1 heir position

is that taxes are treated as a cost when determining prices, be it as

part ofa "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

t)lat the court was wron!! in [(odor'~ case in

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190 SUPREMe COURT REPORTS [1983] 3 S.C.R

justifying on the basis of economic superiority the burden of addi­

tional 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

ori a certain

class

of dealers does not offend against Art. 14 of the Costitution.

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 s~bmission.

It is beyond the scope of this judgment to enter into Intricacies of

public finance viz. objectives and criteria of a tax, problems of shift­

ing 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 ihe 'better-off' rather than the worse-off' and arc

progressive rather tean proportional, are to

be preferred. The

con­

cept of 'abil.ity-to-pay' irnplies 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

sociaf philosophy, both support measures designed to reduce in­

equalities of wealth and income.

On questions of economic regulations and related mailers, the

Court must defer to the legislative judgment. Wher. the power to

tax exists, the extent

of the burden is a matter for discretion of the

law-makers. It

is

~ot the function of the Court to consider the

propriety or justness

of the tax, or enter upon the realm of

legisla­

tive 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 reqqirement 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 oliserved :

"The large dealer.occupies a possition-of economic

superiority

by reason of his greater volume of his

busi­

ness. An:d to make his tax heavier, both abi.ollltely and

relatively,

is

n~t arbitrary discri!l1ination,, but an attempt

(

HOECHST v. BIHA~ (Sen, J.) 191

to proportion the payment to capacity to pay and thus to

arrive in the end at more genuine equality." A

The economic wisdom of a tax is within the exclusive proYince

~ of the Legislature. The only question for the Court to .consider is

whether there is rationality in the belief of the Legislature tha.t

capacity to P.aY the tax increases by and large with. an .increase of B

receipts. The view taken by .the Conrt 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

tliat sub·s. (3) of s. 5 of the Act imposes an

unreasonable restricition

upon the freedom of trade guaranteed

under Art.

19

(I) (g) of the Costitution proceeds on the basis that

iales tax being essentially an in direct tax, it was not compeient for

the Legislature to make a provision prohibiting ·the dealer from

collecting

the amount of surcharge cannot prevail. It

\s 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

reMon

of the limitation contained in sub·.s. (3) of s. 5 pf the. Act. We are

not impressed with the argument. Merely because a de~ler falling

wihin the class defined under sub·s. (!) of s. 5 of the Act is preve11ted

from collecting the surcharge recovered from him, does not affect the

competence

of the

State Legislature to make a provision like sul;>-s.

(3) of s. 5 of the Act nor does it become a tax on hi$ income. It is

not doubt true that a sales tax is, according to the accepted notions,

intended to

be passed

011 to the buyer, and the provisions authoriz·

ing 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 Legisla·

ture 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 efiect 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.(') S. Kodar v. State of Kera/a.(') The contention

based

on the Art. 19 (1) (g) cannot therefore be sustained. (I) [1958] S.C.R. 1355.

(2)

[19621 2

S.C .. R I.

(3) [1975] I S.C,R. 121,

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192 SUPREME

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. : There was quite some discussion at the Bar as to whether the

assent of the President is justiciable. ·1t was submitted that since not

only sub-s. (I} of s. 5 of the Act which provides for the levy of a

surcharge on dealers having a gross turnover

of Rs. 5 Jakhs in a year

but a!so sub-s.

(3)

thereof which interdicts that no such dealer shall

he entitled to recover the amount of surcharge collected. from him,

'are both relatable to Entry 54 of List H of the Seventh Schedule,

there was no occas;on for the Governor to have referred ·the Bill

· under Art. 200 to the President for his assent. It is some what strange

that this argument should be advanced for the first time after a lapse

of

30 years of the inauguration of the ·Consititution. Immediate

provocation for this argument appears to be r,n obiter dictum of Lord

Diplock while delivering the judgment

of the Judicial

Committee in

Teh Cheng Poh@ Char Meh v. Public Prosecutor, Malaysia(!) 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

hy resolutions of both Houses of

Parliament or hy the

Ruler, it could not be deemed to lapse because the conditions upon

which the Ruler had exercised his discretion to make the Proclama­

tion 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 A rt. 200 for the assent of the President nor

whether the Presi1ent applied his mind to the question whether

there was repugnancy between ihe

Bi11 reserved for his consideration

and received his assent under Art.

254 (2).

The constitutional

positiJn of a Governor is clearly defined.

The Governor

is made a

comrilponent part of the Legislaiure of a

State under Art. 168 because every Bill passed by the State Legisla­

tion has to be reserved for the assent of the Governor u'iider 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' withbold his assent therefrom; in which cases the Bill falls

through unless the procedu.re indicated in the first proviso

is followed

(I) L.R. [1980] A.C. 458 at 473.

t

•

HOECHST v. B!HAR (Sen, J.) 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"

res.erve 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 Biil is reconsidered and passed by

the Assembly. The second proviso to that Article makes the reserva­

tion 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, v.;hen a Bill is reserved by the Governor for

the consideration

of the

President, the President can adopt two

courses, namely :

(I) 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 toge­

ther 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 bis 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 wl)ich lays down that

a

Bill which has been assented to by the

President would b.e ineffec­

tive

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

fallip.g 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 hy the State Legislature where there may be a genuine

doubt about the applicability of

any of the. provisions of the Constitu­

tion 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

hav~

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194 SUPREME COURT REPORTS (1983) 3 s.c.R.

~eserve~ 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 unconstitutfonal

on the ground of want of

proper' assent. This aspect of the matter, as the Jaw now stands, is

not open to scrutiny by the courts. Jn 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

i' not

justiciable, and

we cannot spell out any infirmity arising out of his decbion to give such assent.

There still remains the contention that for the purpo,,e

of

levying surcharge it is impermissible to take into account the method·

of computation of gross turnover, the turnover representing

safos 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.

i 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

follow­

ing passage in the judgment.of this Court in A. V. Ferna11dez v. State

of Kera/a(') :

"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

provi­

sions as regards the exemptions or refund or rebate or

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 tlte only thing which the dealer

is entitled to in respect

tJ:iereof 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

•

~I) . p957j S.C.R. 837 at p, 852-3,

·'~

t

HOECHEST v. B!HAR (Sen, J.)

sales. or purchases are exempted from taxation altogether.

The Legislaiure cannot enact a law imposing or autho·

rising 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

(ax can be levied or imposed.

195

The submission appears to proceed on a misapprehension of tP,e

principles laid down in Fernandez's case~ supra.

.

To understand the ratio deducible in Femandez'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 therefrom 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 irisidb 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 therefrom 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 yalue of the oil sold

outside the State deducted. The main controversy between the

parties centred around the method of computation of the net turn­

over. The contention advanced by the assessee was rejected by the

High Court, which limited the deduction ·to purchase of copra rela­

table 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 obliter­

ating in regard thereto_ the provisions contained in the Act relating

to tl:e

imposi_tion of tax on the sale or purchase of such goods and in

B

c

D

E

F

G

H

'B

'C

D

E

F

H

196 SUPREME

COURT REPORTS [198:1) 3 s.c.R. ·

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 pargraph in Fernandez's case, supra, the

Court after laying

down that the non-obstanre 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

of the turnover liable to tax thereunder, 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 t)le 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 cfoarly an

authority for the proposition that the State Legislature notwith­

standing Art. 286 of the Constitution while making a law under

Entry

54 of List II of the

Seventh Schedule can, for purpose's of the

registration of a dealer and submission

of returns of sales tax,

in­

clude the transactions covered by Art. 286 of the Constitution.

That

being· so, the constitutional validity of sub-s. ( l) of s. S 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 surcb!lr!le µn<ler Entry 54 pf i,ist ll of the :Seve11til

•

lii>Eclist f. BIHAR (Sen, J.) 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 1

O 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 clas-ify dealers into those who are economically superior and

those

who arc not.. That is to say, the imposition. of surcharge is on

those who

have the capacity to bear the burderi of addit.ional tax.

There is sufficient territorial nexus between the persons sought to

be charged and the State seeking to tax them. Sufficiency of terri­

torial 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. Chamarbaugwa!a(

1

}, The Tata

Iron & Steel

Co. Ltd. v. State of Bihar('), and lnternotiona/ Tourist Corporation

etc. etc.

v.

State of Haryana & Ors.(

8

) The gross turnover of a

dealer

is taken into account in sub-s.

(I} of s. 5 of the Act for the

purpose

of identifying the class of dealers liable to pay a

sur­

charge not. on the gross turnover but on the tax payable by them.

A

B

D

E

For these reasons, these aPPeals and the connected writ F

petitions and special leave petitions are dismissed with no order as

to costs.

H.L.C .

(I) [19571 S.C.R. 874.

(2) [19581 S.C.R. 1355.

(3) [1981)2 S.C.R. 364,