HOECHST PHARMACEUTICALS LTD. AND ANOTHER ETC. v. STATE OF BIHAR AND OTHERS

The Judgment of the Court was delivered by

SEN, J. These are appeals by special leave from a judgment 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~,

i4() SUPREME COURT REPORTS it983) 3 !.c.R. - . TheBihar Finance Act 1981, is not only an Act for the levy A of a tax on the sale or purchase of goods but also is an Act to 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 B 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 c 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.

D 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

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 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. B 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. c 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 D 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, E 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 F 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. G

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 H 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

' ' / 142 SUPREME COURT REPORTS [1983j 3 s.c.R.. filed by them at Rs. 3,13,69,598,12p. and the tax payable" thereon at A 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 n !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 c 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 D 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 E 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 F 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: " G 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 I

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

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 c that Act, has an overriding . effect notwithstanding any other law inconsistent therewith.

These appeals were argued with much learning and resource particularly with respect to federal supremacy and conflict of powers, between the Union and State Legislatures and as to how if there is such conflict, 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 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 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~

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

price fixation of drugs is concerned and particularly with paragraph· A 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. B 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 c 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 l> 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, thana 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 H 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

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 surcharge.

The contention to the contrary advanced by the learned Solicitor General appearing on· behalf of the. State of Bihar is that_ there is no inconsistency between sub-s. (3} of s. 5 of the Act and paragraph 21 of the Control Order and both the laws are capable of being obeyed. According to him, the question of repugnancy under Art. 254(1) between a law made by Parliament and a 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 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 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 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 opinion, considerable force in these submissions.

Before proceeding further, it is necessary to mention that the contentions raised on behalf of manufacturers and producers of medicines and drugs can govern only those appellants who 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 c . 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. D

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) E 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 r 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 F 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' G 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 H 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;>\

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 A 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 c 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 I contentions advanced before us, it is necessary to set out the relevant statutory provisions.

.._ ' provides for the levy ·of surcharge Sub-s. (I) of s. 5 of the Act 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 :. 'ii The expression., "gross turnover''. as define<;! in s. .Z(j) of the Act insofar as ·material reads ;

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

"2(j) "gross turnover" means- A (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) B 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 c 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." D 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 F 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: J "33. Trade and commerce iq, and the production, supply and distribution of,~

(a) the products of any industry where the control of ~\!ch industry by the Union ia 4~lared by Parliamen\

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 : 8 "3. Powers to control production, supply, distribu• lion, etc., of essential commodities-

(I) If the Central Govemment"is of opinion that it is necessary or expedient so to do for maintaining or increasing supplies of any essential commodity or for securing their equitable distribution 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 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."

S1 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 H Essential Commodities Act, 1955 provides for a comprehensive scheme of price fil'ation both as regards bulk drugs as well as

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 : -

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

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

c (f) "forinufations" meani a · medicine p'rdces;ed oµt of, 0\ d9ntaining one or more bulk d~µg 9r drugs; _with 0

. 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- D '1

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 E 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 · -

F 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 H 1+10o+ED. • I ' i

Where-. "R.P." means retail ptice.

HOECHST '· BIHAR (Sen, J.) isi "MC." means material cost and includes' the cost of drugs and other pharmaceutical aids used including A 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. , .. .:. B "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 c 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 D 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 .I "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 F 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- G 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, H "landed cost': shall mean the cost of import of drug inclusive of customs duty and clearing char~es''.•

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; _

c {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."

D 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 : E "15. Power to ;evise prices of formulations-Not- withstanding anything contained in this Order :·

(a) The Government may, after obtaining such informa,. F 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) B of paragraph 7;

(ii) the excess of the common selling price or, as the case may be, pooled price over his retention price; c (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 F 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. · G 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· H tainer-Every manufacturer, importer or distributor of a formulation intended for sale shall display in indelible

' ~ ' ' j ' SUPREME COURT REPORTS (1983} ;I S.C.R.

, •print mark on the label of the container of the formula· A ' 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.''

B "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 . c 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." D "24. ' and retailer- Price to the wholesaler

(~) No mc\nufacturer, importer or distributor shall sell a formulation to a wholesaler unless otherwise per· E ' .. 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

F (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 G 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.) 155 Explanation-For the purposes of this paragraph- A (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 B 1940);'and '. • (ii) "non"ethical dru"gs" shall mean all drugs other than ethical drugs.

(3) . Notwithstanding anything .contained in sub-para- c 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." D

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 E 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 F 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 'l n<;> ., persol). r shall - sell a bulk drug at a price. exceeding the price notified 11nder sub-paragraph (1), J?lus local taxes, if any,· payable. E It is urge<j that while fixing the price of bulk drull, the Government has to take into account the average ~ost_ of production

156 SUPllEME COURT REl'OR.TS (i983l 3 s.c.a; of that bulk drug by a particular manufacturer, by taking into A 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 B· 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.

c 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. D 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 Ii'. 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 A 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· B 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 c 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 D 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 E 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 · F 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 G 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 : H \I) f1955j l S.C.R. 380,

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 0

repe al or abrogation of that Jaw.· That law remains c 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, D •· 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 E 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.

H 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 c 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. D

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

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 B 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." c 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 decisions in Panipat Cooperative Sugar Mills v. Union of India(') and Anakapa//e Cooperative Agricultural & Industrial Society Ltd. v. Union of India(') and observed :

"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) F 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 HOECHST V. B!HAR (Sell, J.) 161

· the producer is not to be encouraged, a reasonable return on investment or a reasonable rate of profit is not the sine· qua non of the validity of action taken in furtherance of the powers conferred 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 .B to the common man at a fair price must rank in priority over every other consideration."

The contention advanced does not take note of the distinction between the controlled price fixed 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 ..B liberty to pass on the burden of tax to the consumer by a law made by Parliament under Entry 33 of List III of the Seventh Schedule; then it is not competent for the State Legislature to enact ·.a _provision

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

like sub-s. (3) of s. 5 of the Act while enacting a law under Entry "'- , A 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 E 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 F 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 • k 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.) 163

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.

2Copy pinpoint2. The State ·Legislature has" exclusive power to make laws c 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.

3Copy pinpoint3. Both Parliament and the State Legislature have con- F current powers of legisfation with respect to any of the inatters enumerated in List Ilf.

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 G -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, H or to any provision of an existing law with respect to one of the matters enumerated in the Conc~rrent .. List, t;hen,

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

subject to the provisions of clause (2), the law made. by A 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. B · (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 c. 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 F inasmuch as it is in consistent with paragraph 21 of the drugs (Price Control) Order issued by the Central Government under sub~s. (I) ·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 G 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 H 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,

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 A (I) and \2)" in Art. 246(3) lay down the principle of Federal supremacy viz. that in case of inevitable conflict between Union and State powers, the Union power as enumerated in List 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 n 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 c 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 D 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 G 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. · H As regards the distribntion of legislative ·powers between the Union and the States, Art. 246 adopts with immaterial alterations the

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

scheme for the distribution of legislative powers contained in s. 100 A 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\f the provisions of the. Government of India Act, 1935 and the . B 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 .

c . '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 D 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. E 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, F 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 H (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 A 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 8 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 c 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 D 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." E

When the text is ambiguous, as for example when the words estab- F 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(') .G 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: H

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

\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 c 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 D 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· E 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 F 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(') : G "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 H 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 D 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· E 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 F 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." G The Privy Council quoted with approval the observations of Gwyer, C.J. 1n Subramanyan Chettiat's case, supra, quoted above, and observed : H (I) [1942] F.C.R. 90. (3) A.I.R. 1942 P.C. 60 at 65.