TMI Blog1983 (5) TMI 214X X X X Extracts X X X X X X X X Extracts X X X X ..... in rule 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. - Civil Appeal No. 2567, 2818, 2819, 2820, 2648, of 1982 - - - Dated:- 6-5-1983 - SEN A.P. AND VENKATARAMIAH E.S. AND MISRA R.B. JJ. Civil Appeal No. 2567, Civil Appeal No. 2818, Civil Appeal No. 2819, Civil Appeal No. 2820, Civil Appeal No. 2648, Civil Appeal No. 3277, Civil Appeal No. 2817, Civil Appeal No. 2918, Civil Appeal No. 3079, Civil Appeal No. 3080, Civil Appeal No. 3081, Civil Appeal No. 3082, Civil Appeal No. 3083, Civil Appeal No. 3001, Civil Appeal No. 3002, Civil Appeal No. 3003, Civil Appeal No. 3004, Civil Appeal No. 3543, Civil Appeal No. 3544, Civil Appeal No. 3545, Civil Appeal No. 3546, Civil Appeal No. 3547, Civil Appeal No. 3548, Civil Appeal No. 2810, Civil Appeal No. 2811, Civil Appeal No. 2812, Civil Appeal No. 2813, Civil Appeal No. 2814, Civil Appeal No. 2815, Civil Appeal No. 2816, Civil Appeal No. 3375, Civil Appeal No. 2864, Civil Appeal No. 2865, Civil Appeal No. 2866, Civil Appeal No. 2867, Civil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pecial Leave Petition No. 11202, Special Leave Petition No. 11203, Special Leave Petition No. 11204, Special Leave Petition No. 11205, Special Leave Petition No. 9886, Special Leave Petition No. 9887, Special Leave Petition No. 9888, Special Leave Petition No. 9500, Special Leave Petition No. 9501, Special Leave Petition No. 9502, Special Leave Petition No. 9753, Special Leave Petition No. 9523, Special Leave Petition No. 10912, Special Leave Petition No. 11069, Special Leave Petition No. 10754, Special Leave Petition No. 10755, Special Leave Petition No. 10756, Special Leave Petition No. 10797, S.L.P. Nos. 10798, S.L.P. Nos. 10799, S.L.P. Nos. 10800, S.L.P. Nos. 10801, S.L.P. Nos. 10802, S.L.P. Nos. 10803, S.L.P. Nos. 10804, S.L.P. Nos. 10805, S.L.P. Nos. 10806, S.L.P. Nos. 10807, S.L.P. Nos. 10808, S.L.P. Nos. 10809, S.L.P. Nos. 10810, S.L.P. Nos. 10811, S.L.P. Nos. 10812, S.L.P. Nos. 10891, S.L.P. Nos. 9782, S.L.P. Nos. 9561, S.L.P. Nos. 14001, S.L.P. Nos. 14364, S.L.P. Nos. 14365, S.L.P. Nos. 14366 of 1982, S.L.P. Nos. 1393, S.L.P. Nos. 1394, S.L.P. Nos. 1395, S.L.P. Nos. 1396, S.L.P. Nos. 1422, S.L.P. Nos. 1423, S.L.P. Nos. 1472, S.L.P. Nos. 1473 of 1983, Writ Petition No. 926 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 1981 ("Act" for short), which provides for the levy of a surcharge on every dealer whose gross turnover during a year exceeds Rs. 5 lakhs, in addition to the tax payable by him, at such rate not exceeding 10 per centum of the total amount of the tax, and of sub-section (3) of section 5 of the Act which prohibits such dealer from collecting the amount of surcharge payable by him from the purchasers. The Bihar Finance Act, 1981, is not only an Act for the levy of a tax on the sale or purchase of goods but also is an Act to consolidate and amend various other laws. We are here concerned with section 5 of the Act which finds place in Part I of the Act which bears the heading "Levy of tax on the sale and, purchase of goods in Bihar" and is relatable to entry 54 of List II of the Seventh Schedule. By two separate notifications dated January 15, 1981, the State Government of Bihar in exercise of the powers conferred by sub-section (1) of section 5 of the Act appointed January 15, 1981, to be the date from which surcharge under section 5 shall be leviable and fixed the rate of surcharge at 10 per centum of the total amount of the tax payable by a dealer whose gross turnover during a ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the State of Bihar through their branch office at Patna of Messrs. Hoechst Pharmaceuticals Limited on the basis of the return filed by them at Rs. 3,13,69,598.12 and the tax payable thereon at Rs. 19,65,137.52. The tax liability for the period from January 15, 1981, to March 31, 1981, comes to Rs. 3,85,023.33 and the surcharge thereon at 10 per cent amounts to Rs. 38,503.33. Thus the total tax assessed of Messrs. Hoechst Pharmaceuticals Limited including surcharge for the assessment year 1980-81 amounts to Rs. 20,03,640.85. The figures for the assessment year 1981-82 are not available. For the assessment years 1980-81 and 1981-82 the annual returns filed by Messrs. Glaxo Laboratories (India) Limited show the gross turnover of their sales in the State of Bihar through their branch at Patna at Rs. 5,17,83,985.76 and Rs. 5,89,22,346.64 respectively. They have paid tax along with the return amounting to Rs. 34,06,809.80 and Rs. 40,13,057.28 inclusive of surcharge at 10 per cent of the tax for the period from January 15, 1981, to March 31, 1981, and April, 1981, to January 19, 1982, amounting to Rs. 34,877.62 and Rs. 3,09,955.86 respectively. There is excess payment of Rs. 55,383.98 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the court in that case did not consider the effect of price fixation of essential commodities by the Central Government under sub-section (1) of section 3 of the Essential Commodities Act which, by reason of section 6 of that Act, has an overriding effect notwithstanding any other law inconsistent therewith. These appeals were argued with much learning and resource particularly with respect to federal supremacy and conflict of powers between the Union and State Legislatures and as to how if there is such conflict, their respective powers can be fairly reconciled. In support of these appeals, the learned counsel for the appellants have advanced the following contentions, viz: (1) The opening words of article 246(3) of Constitution "Subject to clauses (1) and (2)" make the power of the legislature of any State to make laws for such State or any part thereof with respect to any of the matters enumerated in List II of the Seventh Schedule subject to the Union power to legislate with respect to any of the matters enumerated in List I or List III. That is to say, sub-section (3) of section 5 of the Act which provides that no dealer shall be entitled to collect the surcharge levie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of different classes being separate is taken, then a State law which treats both classes equally and visits them with different burdens, would be violative of article 14. The State cannot by treating unequals as equals impose different burdens on different classes. (4) The restriction imposed by sub-section (3) of section 5 of the Act which prevents the manufacturers or producers of medicines and drugs from passing on the liability to pay surcharge is confiscatory and casts a disproportionate burden on such manufacturers and producers and constitutes an unreasonable restriction on the freedom to carry on their business guaranteed under article 19(1)(g). (5) Sub-section (1) of section 5 of the Act is ultra vires the State Legislature of Bihar in so far as for the purpose of the levy of surcharge on a certain class of dealers, it takes into account his gross turnover as defined in section 2(j) of the Act. It is urged that the State Legislature was not competent under entry 54 of List II of the Seventh Schedule to enact a provision like sub-section (1) of section 5 of the Act which makes the gross turnover of a dealer as defined in section 2(j) to be the basis for the levy of a sur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r or producer but that will not make the State law inconsistent with the Central law. As regards medicines and drugs, the surcharge being borne by the manufacturers or producers under sub-section (3) of section 5 of the Act, the controlled price of such medicines and drugs to the consumer will remain the same. Lastly, the Solicitor-General submits that there is no material placed by the appellants to show that the levy of surcharge under sub-section (1) of section 5 of the Act would impose a burden disproportionate to the profits 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 are dealers in essential commodities, the controlled price of which is exclusive of sales tax as fixed by the control orders issued by the Central Government under sub-section (1) of section 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f a surcharge. There are thus three taxes that are levied: (1) sales tax (2) additional sales tax and (3) surcharge. Sub-section (1) of section 5 of the Act provides for the levy of surcharge on every dealer whose gross turnover during a year exceeds Rs. 5 lakhs and is in the following terms: "5. Surcharge.-(1) Every dealer whose gross turnover during a year exceeds rupees five lakhs shall, in addition to the tax payable by him under this Part, also pay a surcharge at such rate not exceeding ten per centum of the total amount of the tax payable by him, as may be fixed by the State Government by a notification published in the Official Gazette: Provided that the aggregate of the tax and surcharge payable under this Part shall not exceed, in respect of goods declared to be of special importance in inter-State trade or commerce, by section 14 of the Central Sales Tax Act, 1956 (Act 74 of 1956), the rate fixed by section 15 of the said Act:.............." The expression "gross turnover" as defined in section 2(j) of the Act in so far as material reads: "2. (j) 'gross turnover' means- (i) for the purposes of levy of sales tax, aggregate of sale prices received and receivab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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-section (2) lays down that without prejudice to the generality of the powers conferred by sub-section (1), an order made therein may provide for the matters enumerated in clauses (a) to (f). Clause (c) of sub-section (2) provides: "For controlling the price at which any essential commodity may be bought or sold." Section 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 notwithstanding anything inconsistent therewith contained in any enactment other than this Act or any instrument having effect by virtue of any enactment other than this Act. " The Drugs (Price Control) Order, 1979, issued by the Central Government in exercise of the powers conferred under section 3 of the Essential Commodities Act, 1955, provides for a comprehensive scheme of price fixa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with such norms as may by specified by the Government from time to time by notification in the Official Gazette in this behalf. 'P.C.' means packing charges worked out in accordance with such norms as may be specified by the Government from time to time by notification in the Official Gazette in this behalf. 'M.U.' means mark-up referred to in paragraph 11. 'E.D.' means excise duty: Provided that in the case of an imported formulation the landed cost shall form the basis for fixing its price along with such margin as the Government may allow from time to time. Provided further that where an imported formulation is re-packed, its landed cost plus the cost of packing materials and packing charges as worked out in accordance with such norms as may be specified by the Government from time to time, by notification in the Official Gazette, shall form the basis for fixing its price. Explanation .-For the purposes of this paragraph, 'landed cost' shall mean the cost of import of drug inclusive of customs duty and clearing charges." The expression "mark-up " referred to above is dealt with in paragraph 11 and it provides: "11. Mark-up referred to in paragraph 10 includes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Every manufacturer, importer or distributor is entitled to make a claim for being compensated for the short-fall. Paragraph 19 interdicts that every manufacturer or importer of a formulation intended for sale shall furnish to the dealers, the State Drug Controllers and the Government, a price list showing the price at which the formulation is sold to a retailer inclusive of excise duty. Every such manufacturer or retailer has to give effect to the change in prices as approved by the Government. Every dealer is required to display the price list at a conspicuous part of the permises. It is, however, necessary to reproduce paragraphs 20, 21 and 24 as they are of considerable importance for our purposes and they read: "20. Retail price to be displayed on label of container .-Every manufacturer, importer or distributor of a formulation intended for sale shall display in indelible print mark on the label of the container of the formulation or the minimum pack thereof offered for retail sale, the maximum retail price of that formulation with the words 'retail price not to exceed' preceding it, and 'local taxes extra' succeeding it." "21. Control of sale prices of formulations s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king such inquiry as it deems fit, fix from time to time, by notification in the Official Gazette, the maximum price at which such bulk drug shall be sold. Sub-paragraph (2) enjoins that while fixing the price of a bulk drug under sub- paragraph (1), the Government may take into account the average cost of production of each bulk drug manufactured by efficient manufacturer and allow a reasonable return on net-worth. Explanation thereto defines the expression "efficient manufacturer" to mean a manufacturer (i) whose production of such bulk drug in relation to the total production of such bulk drug in the country is large, or (ii) who employs efficient technology in the production of such bulk drug. Sub-paragraph (3) provides that no person shall sell a bulk drug at a price exceeding the price notified under sub-paragraph (1), plus local taxes, if any, payable. It is urged that while fixing the price of bulk drug, the Government has to take into account the average cost of production of that bulk drug by a particular manufacturer, by taking into consideration the cost to a manufacturer who employs efficient methods and allowing a reasonable return on the net-worth of the drug manuf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... surcharge partakes of the nature of sales tax and therefore it was within the competence of the State Legislature to enact sub-section (1) of section 5 of the Act for the purpose of levying surcharge on certain class of dealers in addition to the tax payable by them. When the State legislature had competence to levy tax on sale or purchase of goods under entry 54, 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-section (3) of section 5 of the Act prohibiting the dealers liable to pay a surcharge under sub-section (1) thereof from recovering the same from the purchaser. It is fairly conceded that sub-section (3) of section 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-section (3) of section 5 of the Act which prohibits such manufacturers or producers from recovering the surcharge and therefore it is constitutionally void. It is said that the courts should try to adopt the rule of harmoniou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 6 then steps in wherein Parliament has declared that as soon as such an order comes into being that will have effect notwithstanding any inconsistency therewith contained in any enactment other than that Act. Placing reliance on the observations in Harishankar Bagla's case [1955] 1 SCR 380, it is urged that the effect of the non obstante clause in section 6 of the Essential Commodities Act is to give an overriding effect to the provisions of paragraph 21. It is further urged that paragraph 21 of the Control Order having been issued by the Central Government under sub-section (1) of section 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-section (3) of section 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-section (3) of section 5 of the Act and paragr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tent for the State Legislature to enact a provision like sub- section (3) of section 5 of the Act while enacting a law under entry 54 of List II prohibiting the passing on of liability of tax to the purchaser. The true principle applicable in judging the constitutional validity of sub- section (3) of section 5 of the Act is to determine whether in its pith and substance it is a law relatable to entry 54 of List II of the Seventh Schedule and not whether there is repugnancy between sub-section (3) of section 5 of the Act and paragraph 21 of the Drugs (Price Control) Order made under sub- section (1) of section 3 of the Essential Commodities Act is therefore void. In dealing with question, we must set out article 246 of the Constitution which is based on section 100 of the Government of India Act, 1935, and it reads: "246. (1) Notwithstanding anything in clauses (2) and (3), Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule (in this Constitution referred to as the 'Union List'). (2) Notwithstanding anything in clause (3), Parliament, and, subject to clause (1), the Legislature of any State also, have po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any of the matters enumerated in List III. Article 254 provides for the method of resolving conflicts between a law made by Parliament and a law made by the Legislature of a State with respect to a matter falling in the Concurrent List and it reads: "254. (1) If any provision of a law made by the Legislature of a State is repugnant to any provision of a law made by Parliament which Parliament is competent to enact, or to any provision of an existing law with respect to one of the matters enumerated in the Concurrent List, then, subject to the provisions of clause (2), the law made by Parliament, whether passed before or after the law made by the legislature of such State, or, as the case may be, the existing law, shall prevail and the law made by the Legislature of the State shall, to the extent of the repugnancy, be void. (2) Where a law made by the Legislature of a State with respect to one of the matters enumerated in the Concurrent List contains any provision repug- nant to the provisions of an earlier law made by Parliament or an existing law with respect to that matter, then, the law so made by the Legislature of such State shall, if it has been reserved for the considera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the entries in the Union and State Lists. In the case of a seeming conflict between the entries in the two lists, the entries should be read together without giving a narrow and restricted sense to either of them. Secondly, an attempt should be made to see whether the two entries cannot be reconciled so as to avoid a conflict of jurisdiction. It should be considered whether a fair reconciliation can be achieved by giving to the language of the Union Legislative List a meaning which, if less wide than it might in another context bear, is yet one that can properly be given to it and equally giving to the language of the State Legislative List a meaning which it can properly bear. The non obstante clause in article 246(1) must operate only if such reconciliation should prove impossible. Thirdly, no question of conflict between the two lists will arise if the impugned legislation, by the application of the doctrine of "pith and substance " appears to fall exclusively under one list, and the encroachment upon another list is only incidental. The Union and State Legislatures have concurrent power with respect to subjects enumerated in List III, subject only to the provision containe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the two legislative powers are theoretically capable of being construed, but how they are to be construed here and now". The general scheme of the British North America Act, 1867, with regard to the distribution of legislative powers, and the general scope and effect of sections 91 and 92, and their relations to each other were fully considered and commented upon in the case of Citizens' Insurance Company's case (1881) 7 AC 96. Sir Montague Smith delivering the judgment for the Board evolved the rule of reconciliation observing: "In these cases it is the duty of the Courts, however difficult it may be, to ascertain in what degree and to what extent, authority to deal with matters falling within these classes of subjects exists in each legislature, and to define in the particular case before them the limits of their respective powers. It could not have been the intention that a conflict should exist; and in order to prevent such a result, the two sections must be read together and the language of one interpreted, and, where necessary, modified by that of the other. In this way it may, in most cases, be found possible to arrive at a reasonable and practical construction of the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e observations made by the Privy Council in the Citizens' Insurance Company's case (1881) 7 AC 96 were quoted with approval by Gwyer, C.J., in C.P. and Berar Taxation Act's case [1938] 1 STC 1 (FC); [1939] FCR 18 and he observed that an endeavour should be made to reconcile apparently conflicting provisions and that the general power ought not to be construed as to make a nullity of a particular power operating in the same field. The same duty of reconciling apparently conflicting provisions was reiterated by Lord Simonds in delivering the judgment of the Privy Council in Governor-General in Council v. Province of Madras [1945] 1 STC 135 (PC); [1945] FCR 179: "For in a federal constitution, in which there is a division of legislative powers between Central and Provincial Legislatures, it appears to be inevitable that controversy should arise whether one or other legislature is not exceeding its own, and encroaching on the other's constitutional legislative power, and, in such a controversy it is a principle, which their Lordships do not hesitate to apply in the present case, that it is not the name of the tax but its real nature, its 'pith and substance' as it has sometimes been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acter to be found. If these questions could not be asked, much beneficient legislation would be stifled at birth, and many of the subjects entrusted to Provincial legislation could never effectively be dealt with." It would therefore appear that apparent conflict with the Federal power had to be resolved by application of the doctrine of pith and substance and incidental encroachment. Once it is found that a law made by the Provincial Legislature was with respect to one of the matters enumerated in the Provincial List, the degree or extent of the invasion into the forbidden field was immaterial. "The invasion of the Provinces into subjects in the Federal List", in the words of Lord Porter, "was important": "....................not..................because the validity of an Act can be determined by discriminating between degrees of invasion, but for the purpose of determining as to what is the pith and substance of the impugned Act. Its provisions may advance so far into Federal territory as to show that its true nature is not covered with Provincial matters, but the question is not, has it trespassed more or less, but is the trespass, whatever it be, such as to show that the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s: First, that there can be a domain in which provincial and Dominion legislation may overlap, in which case neither legislation will be ultra vires, if the field is clear; and, secondly, that if the field is not clear, and in such a domain the two legislations meet, then the Dominion legislation must prevail. " In a later decision of the Privy Council in Attorney-General for Canada v. Attorney-General for British Columbia Ors. case [1930] AC 111, Lord Tomlin summarized in four propositions the result of the earlier decisions of the Board on the question of conflict between the Dominion and Provincial Legislatures. The third proposition is to the effect that it is within the competence of the Dominion Parliament to provide for matters which, though otherwise within the legislative competence of the Provincial Legislature, are necessarily incidental to effective legislation by Parliament of the Dominion upon a subject of legislation expressly enumerated in section 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 Grant Trunk Railway Company's case [1907] AC 65: "4. There can be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f obedience to them simultaneously but there may be cases in which enactments may be inconsistent although obedience to each of them may be possible without disobeying the other. The question of "repugnancy" arises only with reference to a legislation falling in the Concurrent List but it can be cured by resort to article 254(2). As we have endeavoured so far, the question raised as to the constitutional validity of sub-section (3) of section 5 of the Act has to be determined by application of the rule of pith and substance whether or not the subject-matter of the impugned legislation was competently enacted under article 246, and therefore the question of repugnancy under article 254 was not a matter in issue. The submission put forward on behalf of the appellants however is that there is direct collision and/or irreconcilable conflict between sub-section (3) of section 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- section (1) of section 3 of the Essential Commodities Act which is relatable to entry 33 of List III. It is sought to be argued that the words "a law mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of "repugnancy" can only arise in connection with the subjects enumerated in the Concurrent List as regards which both the Union and the State Legislatures have concurrent powers so that the question of conflict between laws made by both legislatures relating to the same subject may arise. This Court has considered the question of repugnancy in several cases and in Deep Chand v. State of Uttar Pradesh [1959] Supp 2 SCR 8 the result of the authorities was thus stated by Subba Rao, J.: "Nicholas in his Australian Constitution, 2nd Edn. page 303, refers to three tests of inconsistency or repugnancy: 1.. There may be inconsistency in the actual terms of the competing statutes; 2.. Though there may be no direct conflict, a State law may be inoperative because the Commonwealth law, or the award of the Commonwealth Court, is intended to be a complete exhaustive code; and 3.. Even in the absence of intention, a conflict may arise when both State and Commonwealth seek to exercise their powers over the same subject- matter." In Ch. Tika Ramji v. State of Uttar Pradesh [1956] SCR 393 the court accept- ed the above three rules evolved by Nicholas, among others, as useful guides ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6(1) read with the opening words "subject to" in article 246(3). In such a case, the State law will fail not because of repugnancy to the Union law but due to want of legislative competence. It is no doubt true that the expression "a law made by Parliament which Parliament is competent to enact" in article 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 article 254(1) is read as a whole, it will be seen that it is expressly made subject to clause (2) which makes reference to repugnancy in the field of Concurrent List-in other words, if clause (2) is to be the guide in the determination of scope of clause (1), the repugnancy between the Union and State law must be taken to refer only to the concurrent field. Article 254(1) speaks of a State law being repugnant to (a) a law made by Parliament or (b) an existing law. It is now settled that the words "with respect to" qualify both the clauses in article 254(1), viz., a law made by Parliament which Parliament is compe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Lists I and III on the other, there is no question of repugnancy under article 254(1). Subba Rao, J., speaking for the court in Deep Chand's case [1959] Supp 2 SCR 8, interpreted article 254(1) in these terms: "Article 254(1) lays down a general rule. Clause (2) is an exception to that article and the proviso qualifies the said exception. If there is repugnancy between the law made by the State and that made by the parliament with respect to one of the matters enumerated in the Concurrent List, the law made by Parliament shall prevail to the extent of the repugnancy and the law made by the State shall, to the extent of such repugnancy, be void." In all fairness to the 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-section (3) of section 5 of the Act being a State law must be struck down as ultra vires as the field of fixation of price of essential commodities is an occupied field covered by a Central legislation. It is axiomatic that the power of the State Legislature to make a law with respect to the levy and imposition of a tax on sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the power to regulate trade or commerce in, and the production, supply and distribution of essential commodities under entry 33 of List III, although the liability to pay tax may be a matter incidental to the Centre's power of price control. "Legislative relations between the Union and the States inter se with reference to the three lists in Schedule VII cannot be understood fully without examining the general features disclosed by the entries contained in those Lists": Seervai in his Constitutional Law of India, 3rd Edn., Vol. 1 at pages. 81-82. A scrutiny of Lists I and II of the Seventh Schedule would show that there is no overlapping anywhere in the taxing power and the Constitution gives independent sources of taxation to the Union and the States. Following the scheme of the Government of India Act, 1935, the Constitution has made the taxing power of the Union and of the States mutually exclusive and thus avoided the difficulties which have arisen in some other Federal Constitutions from overlapping powers of taxation. It would therefore appear that there is a distinction made between general subjects of legislation and taxation. The general subjects of legislation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orb the surcharge levied under sub-section (1) of section 5 of the Act and a class of dealers like manufacturers and producers of medicines and drugs and other dealers of essential commodities who cannot raise their sale prices beyond the controlled price are being treated similarly without any rational basis. Once the fact of different classes being separate is taken, then a State law which treats both classes equally and visits them with different burdens would be violative of article 14. The State cannot by treating "equals as unequals" impose different burdens on different classes. It is submitted that the restriction imposed by sub-section (3) of section 5 of the Act which prevents the manufacturers and producers of medicines and drugs and other essential commodities from passing on the liability to pay surcharge is confiscatory and imposes a disproportionate burden on such manufacturers and producers or other dealers. These two abstract questions have been canvassed 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-section (1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ..........has been skeptical regarding the entire approach of marginal cost pricing. His position has been that taxes are treated as a cost when determining prices, be it as part of a 'full-cost-pricing' rule, by application of a conventional mark-up rate defined net of tax, or by pricing to meet a net of tax target rate of return. According to these formulas, a change in tax rate leads to an adjustment in price. The profits tax becomes a quasi sales tax. The fact that such a price policy is not consistent with the usual concepts of profit maximization does not disprove its existence." Pausing here for a moment, we may observe that a surcharge being borne by the manufacturers and producers of medicines and drugs under sub-section (3) of section 5 of the Act, the controlled price of such medicines and drugs to the consumer will remain the same. From the figures set out above, it will be seen that the business carried on by the appellants in the State of Bihar alone is of such magnitude that they have the capacity to bear the additional burden of surcharge levied under sub-section (1) of section 5 of the Act. It roughly works out to one paisa per rupee of the sale price of the manu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of 14 per cent to the wholesaler in the case of ethical drugs and of 12 per cent in the case of non-ethical drugs, and the wholesaler has a margin of 2 per cent in either case when he sells to the retailer. In contrast, the profit margins of manufacturers and producers of medicines and drugs is considerably higher. Under the scheme of the Drugs (Price Control) Order, the calculation of the retail price of formulations under paragraph 10 has to be in accordance with the formula set out therein. One of the elements that enters into the price structure is the "mark-up" which is defined in paragraph 11 to include distribution cost, outward freight, promotional expenses, manufacturers margin and trade commission. Clauses (1) to (3) of the Third Schedule show that the mark-up ranges from 40 per cent in the case of formulations specified in category (i), 55 per cent in the case of formulations specified in category (ii) and 100 per cent 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. If the appellants find that the levy of surcharge under sub-section (1) of section 5 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evail. It is urged that the surcharge does not retain its avowed character as sales tax but in its true nature and character is virtually a tax on income, by reason of the limitation contained in sub-section (3) of section 5 of the Act. We are not impressed with the argument. Merely because a dealer falling within the class defined under sub-section (1) of section 5 of the Act is prevented from collecting the surcharge recovered from him, does not affect the competence of the State Legislature to make a provision like sub-section (3) of section 5 of the Act nor does it become a tax on his income. It is no doubt true that a sales tax is, according to the accepted notions, intended to be passed on to the buyer, and the provisions authorising and regulating the collection of sales tax by the seller from the purchaser are a usual feature of sales tax legislation. It is not an essential characteristic of sales tax that the seller must have the right to pass it on to the consumer, nor is the power of the legislature to impose a tax on sales conditional on its making a provision for sellers to collect the tax from the purchasers. Whether a law should be enacted, imposing a sales tax, or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nor whether the President applied his mind to the question whether there was repugnancy between the Bill reserved for his consideration and received his assent under article 254(2). The constitutional position of a Governor is clearly defined. The Governor is made a component part of the Legislature of a State under article 168 because every Bill passed by the State Legislature has to be reserved for the assent of the Governor under article 200. Under that article, the Governor can adopt one of the three courses, namely: (1) He may give his assent to it, in which case the Bill becomes a law; or (2) He may except in the case of a "Money Bill" withhold his assent therefrom, in which case the Bill falls through unless the procedure indicated in the first proviso is followed, i.e., return the Bill to the Assembly for consideration with a message; or (3) He may "on the advice of the Council of Ministers" reserve the Bill for the consideration of the President, in which case the President will adopt the procedure laid down in article 201. The first proviso to article 200 deals with a situation where the Governor is bound to give his assent and the Bill is reconsidered and pas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r liable to tax thereunder. The submission is that subsection (1) of section 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 section 2(j) of the Act. In support of the contention, reliance was placed on the following passage in the judgment of this Court in A.V. Fernandez v. State of Kerala [1957] 8 STC 561 at 574 (SC); [1957] SCR 837 at 852-3: "There is a broad distinction between the provisions contained in the statute in regard to the exemptions of tax or refund or rebate of tax on the one hand and in regard to the non-liability to tax or non-imposition of tax on the other. In the former case, but for the provisions as regards the exemptions or refund or rebate of tax, the sales or purchases would have to be included in the gross turnover of the dealer because they are prima facie liable to tax and the only thing which the dealer is entitled to in respect thereof is the deduction from the gross turnover in order to arrive at the net turnover on which the tax can be imposed. In the latter case, the sales or purchases are exe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on with article 286, taken out of the purview of the Act, and that they had the effect of setting at naught and obliterating in regard thereto the provisions contained in the Act relating to the imposition of tax on the sale or purchase of such goods and in particular the provision contained in the charging section, section 3, and the provisions contained in rule 20(2) and other provisions which were incidental to the process of levying such tax. The aforementioned passage relied upon cannot be read out of context in which it appears and if so read, it is hardly of any assistance to the appellants. In the penultimate paragraph in Fernandez's case [1957] 8 STC 561 (SC); [1957] SCR 837, the court after laying down that the non obstante clause in section 26 had the effect of taking sales in the course of inter-State trade and out- side the State out of the purview of the Act with the result that the dealer was not required nor entitled to include them in computation of the turnover liable to tax thereunder, observed: "This position is not at all affected by the provisions with regard to registration and submissions of returns of the sales tax by the dealers under the Act. The legi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt of goods out of the territory of India, but is only for the purpose of classifying dealers within the State and to identify the class of dealers liable to pay such surcharge. The underlying object is to classify dealers into those who are economically superior and those who are not. That is to say, the imposition of surcharge is on those who have the capacity to bear the burden of additional tax. There is sufficient territorial nexus between the persons sought to be charged and the State seeking to tax them. Sufficiency of territorial nexus involves a consideration of two elements, viz.: (a) the connection must be real and not illusory, and (b) the liability 'sought to be imposed must be pertinent to that territorial connection: State of Bombay v. R.M.D. Chamarbaugwala [1957] SCR 874, Tata Iron Steel Co. Ltd. v. State of Bihar [1958] 9 STC 267 (SC); [1958] SCR 1355 and International Tourist Corporation v. State of Haryana [1981] 2 SCR 364. The gross turnover of a dealer is taken into account in sub-section (1) of section 5 of the Act for the purpose of identifying the class of dealers liable to pay a surcharge not on the gross turnover but on the tax payable by them.' ..... X X X X Extracts X X X X X X X X Extracts X X X X
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