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.

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

D 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 E 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- F 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 G 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.'' H The passage quoted above places the precedence according to the three lists in its proper perspective. In answering the objection that

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 A 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." .. ' A B 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.". c 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. D 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 E 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 F 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 . 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. H (5) [1979] 3 S.C.R. 254. (6) [1972] 2 S.C.R. 33. (7) [1982] l SC!!- 519.

i72 SUPREME COURT REPORTS [19S3].J s.c.R. the "trenching" doctrine in the first of the four propositions formu- A 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- B . 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 :

"There.must be a real conflict between tire two Acts, that is, the two enactn1ents 'must come into collision' ...... D 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 E 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: F "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 G 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." H (I) L.R. [1930] A.C. 111. (2) L.R. [18961 A.C. 348, (3) L.R. [1912] A.C. 333.

HOECHST v. BIHAR (Sen, J.) 173

At p. 28, he states : A "The doctrine of occupied field applies only where there is a clash between Dominion legislation and provincial legislation within a!! area common to both."

Here there is no such conflict. The Union and the State laws B 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 c 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 D 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 E 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." ·F 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 G 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 t H (I) L.R. [1907] A.C. 65. (2) L.R. [18941 A.C. 189. (3) L.R. [1894) A.C. 31,

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

legislative cometence of the Provincial Legislature, are necessarily A 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. 8. ·' 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 c 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, D 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 H (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 B 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 c 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 D 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 E 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." F (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. G 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: H (I) L.R. [1899] A.C. 580. (2) L.R. [1943] A.C. 356. (3) [1946] A C. 33,

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

."In calling attention to these principles the,ir A 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

B 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:

'.'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". D '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 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 : .F "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 .. G 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)

H , (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- c 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, D (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 enumera- te.ct in List II. E 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). · G

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

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 B ·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. c . 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(') E 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 F :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 1 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

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 A 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 B 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 & c 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 F 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.(') 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.

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

law with regard to the subjects. enumerated in the Concurrent List, A 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 c 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 D 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, i 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- F 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 G 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

H (I) [1955] l S.C.R. 799. (2) (1979] 3 S.C.R. 254. (3) \J983) 1 S.C.C. 1771

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 c 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 D 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 E 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 c1: seen that it is expressly made subject to (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 .

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 B 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 c 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 D 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 G; 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 :

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 IV 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 c· , 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 D said exception. If there is repugnancy between the law made by the State and ihat made by the Parliament with .tfij 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." E

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-

184 SUPREME COURT REPORTS (1983) 3s.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 c 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, D 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. E 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 F 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 G 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 .H 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. B 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 c 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 D 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 E 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 F 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 G 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 H

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

SUPERME cotiR.P REPORTS i1983j 3s.c.R.. treats "unequals as equals". It is urged that the Essential Commo- A 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 B 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 c 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- F 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. G 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 H 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• A 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 B 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 c 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 : D "The businessman ........ ·-- ..... has been skeptical regarding the entire approach of marginal cost pricing. His position has been that taxes are treated as a cost when determining prices, be it as part of a full-cost- --""'\ . pricing" rule, by application of a conventional mark-up 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

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 j __' 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 c 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- salera 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 G 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

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.

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 : D "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. E 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. H It was a startling proposition advanced by learned counsel for the appellants t)lat the court was wron!! in [(odor'~ case in

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

justifying on the basis of economic superiority the burden of addi- A 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. B 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 c 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. D 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 E 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 c 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. E (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. H (I) [1958] S.C.R. 1355. (2) [19621 2 S.C.. R I. (3) [1975] I S.C,R. 121,

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

. : There was quite some discussion at the Bar as to whether the A 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, B '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 Cl 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 E 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 t that Court can enquire into the reasons why the Bill was reserved by the Governor under Art. 200 for the assent of the President nor whether the Presi1ent applied his mind to the question whether F 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- G 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 H through unless the procedu.re indicated in the first proviso is followed

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

• 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" A- 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- B 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 c . '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 D 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. E 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 F 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 G 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 H President to avoid any furture complication Even if it ultimately turns out that there was no necessity for the Governor' to hav~

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

~eserve~ a· Bill for the consideration of the President, still he having A 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 B 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.

c 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 H 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.) 195

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 B . gross turnover as well as the net turnover on which sales (ax can be levied or imposed.

The submission appears to proceed on a misapprehension of tP,e principles laid down in Fernandez's case~ supra. c . 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 D 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- G 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- H 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

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. 'B 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 'C 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 D 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 E . 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 F 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 H 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 A 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 1O 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 B 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- D 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 E 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.

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,