TMI Blog1972 (11) TMI 91X X X X Extracts X X X X X X X X Extracts X X X X ..... at taking the picture as a whole the Haryana factories got in any event a reasonable return on the capital employed. Thus on the construction of sub-section 3C adopted by us and such of the materials produced before us, we are of the opinion that no case for quashing the impugned order has been made out, nor has the price fixed by Government been shown to be inconsistent with the sub-section. Appeal dismissed. - Civil Appeals Nos. 1357 to 1359 of 1972 - - - Dated:- 6-11-1972 - SHELAT, J.M. GROVER, A.N. MATHEW, KUTTYIL KURIEN MUKHERJEA, B.K. AND CHANDRACHUD, Y.V., JJ. H. L. Sibal and Bishamber Lal, for the appellant L. N. Sinha, Solicitor-General of India, G. L. Sanghi and S. P. Nayar, for the respondent. JUDGMENT SHELAT, J. These three appeals, by certificate, arise out of three writ petitions filed in the High Court of Delhi for quashing the Sugar (Price Determination) Order, 1971 made under s. 3(3C) of the Essential Commodities Act, 10 of 1955, and for a direction requiring the Central Government to refix the ex-factory price for 1970-71 in respect of sugar required to be sold to Government under s. 3 (2) (f) of the Act. The High Court dismissed the wr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tutory control was once more imposed under which ex-factory price of ₹ 76.35 per quintal for D-24 grade was fixed, as during that year sugar production declined. There was also a substantial diversion of cane to gur and khandsari industry. Control over sugar was relaxed in 1950 in that production over 90% of the total production of each factory was allowed free sale. This policy was subsequently modified and 95% of the average production of each factory during the two preceding years was fixed as basic quota and half of the production in excess of that quota was allowed free sale, while the other half together with the basic quota was reserved for sale at controlled prices.- Since conditions appeared to improve, control was taken off in 1952-1953, except that a small portion of production was reserved for sale at controlled prices. But as prices spiraled, Government in April 1954 requisitioned 25% of the stock for distribution on a tender basis. During 1954-55 to 1956-57 no controlled prices were fixed. By 1958 the prices began to soar and the Government once more decided to impose control. During, 1958 Government requested the Tariff Commission to examine the cost structu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n at 12 per cent on capital employed. In doing so, it took into consideration factors such as the dependence of the industry on an agricultural raw material, the supply of which is affected by several imponderables, e.g., weather and pests and diseases. A number of factories located in favorable regions have made ample profits. In fact, the sample factories earned as much as 15.69 per cent in 1963-64-Sizeable expansions in capacity have taken place. The Commission is satisfied that the rate of return of 12 per cent is not unreasonable and should encourage expansion of the industry. The Commission is aware that the rate of return indicated will not be realised by each individual unit in each zone. Majority of the units in a zone, however, should be able to earn this return if they maintain a reasonable degree of efficiency. The method adopted and followed by the Commission in assessing the working capital is the same as was adopted by the Tariff Commission in its 1959 Inquiry. There were two criteria for fixation of ex-factory prices; (1) estimated cost of production determined according to the cost schedules prepared by the Tariff Commission in 1959 and adjusted from time to ti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to ₹ 104.43. This figure took into account the actual price paid for cane, which was often higher than the minimum price fixed by Government, harvesting charges where incurred,. transport, cess/purchase tax, and factory conversion charges which included salaries/wages, power, fuel, stores, repairs, maintenance, packing and other overheads. These average costs represented the average costs of sugar covering all grades. But the factories in different States had different durations depending on the availability of sugar cane in adequate supplies and different recoveries of sugar differ- ing from factory to factory. A direct comparison of actual costs between factories or States would, therefore, have led to unrealistic results. These differing factors had, therefore, to be reduced to a common measure. For these purposes the Commission took into account five years average recovery and duration of a region as the base. Having regard to the wide disparity in duration and recovery of sugar, the costs were initially reduced to a standard duration of 120 days (of 22 hours each) with a uniform recovery of 10 per cent so as to have a comparison of costs as between units in a zone. Als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h would be equivalent to 12.5 % on the zonal averages of capital employed. According to Appendix 37 to the report, the average return at 12.5% on capital employed on the units in Haryana worked out at ₹ 10.40 per quintal to be added to the fair price worked out for that region. By adopting the standardised figure of ₹ 10.50 per quintal the range of variations from region to region was expected to be narrowed down from ₹ 11.88 in the case of South Bihar to ₹ 16.94 in the case of Orissa, Kerala, Assam and West Bengal. It is quite clear that what the Commission did was to con- struct cost schedules and fair price of the entire production and not merely of the levy sugar. The return and rehabilitation also were worked out on the basis of the capital employed in the entire production and not the capital employed for the production of levy sugar. Thus, in Table 9.6 at page 80 of its report, the Commission included ₹ 12.50 (being return and rehabilitation) in the ex-works price of sugar. There is nothing in that table which would suggest that it was confined to levy sugar. Indeed Ch. 9 in which this table appears is headed Cost Structure and Price Fixation , ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urn on capital employed and excise duty. The Government did not accept the recommendation as to rehabilitation and deferred its decision thereon for reasons stated in its resolution dated February 20, 1970, by which it accepted the other recommendations as also the cost-schedules worked out by the Commission, the number of zones, return of a fixed sum of ₹ 10.50, etc. The history of control over sugar set out above shows that right from 1958 and even earlier, ex-factory prices of sugar were worked out on the basis of cost-schedules prepared by expert bodies appointed for that purpose, that such prices and cost schedules were prepared in respect of the entire production and not in relation only to that part of it which was required to be sold to Government, although partial control in one form or the other was in vogue for some periods before 1967, that such cost schedules were prepared on the basis of average duration and recovery,, the minimum price of cane, the averaged cost of production in the various zones, taxes, and lastly, a return on the capital employed, which as stated above was fixed at the static figure of ₹ 10.50 per quintal, that being the amount consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3), the price at which the foodstuff shall be sold in the locality in compliance with an order made under sub-sec. 2(f) shall be regulated in accordance with the provisions of this sub-section. When after the issue of a notification under this subsection, any person sells foodstuff of the kind and in the locality specified therein, in compliance with an order made with reference to sub-sec. 2 cl. (f), there shall be paid to the seller as the price therefore (a) the agreed price consistently with the controlled price, if any, (b) the price calculated with reference to the controlled price, if any, where no such agreement can be reached, or (c) where neither cl. (a), nor cl. (b) applies, the price calculated with reference to the average market rate as provided therein. Under sub-sec. 3B, where a person is required to sell any food-grains, edible oilseeds, or edible oils to the Central or a State Government, or to a person authorised in that behalf, and no notification in respect of such food-grains, oilseeds or oils has been issued under sub-sec. 3A or is in force, there shall be paid as the price for such food-grains, oilseeds or oils, (i) the controlled price, if any, or (ii) wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are distinct and much of the confusion in interpreting the sub-section would be dispelled if they were seen distinctly. The words amount therefore mean the amount to be paid to the manufacturer in respect of such quantity of his stock as is required to be sold under an order made with reference to sub-sec. 2(f). That amount is, therefore, referable to the stock of sugar specified in such order, that is to say, the levy sugar. The words such price of sugar , relate to the price which the Central Government has to determine having regard to cls. (a), (b), (c) and (d). The price to be so determined is not relatable or confined to the stock required to be sold, for the words are such price of sugar and not the price for such sugar . This construction is fortified by the penultimate part of The sub-section which authorises the Central Government to determine zonal or unit-wise prices or prices for different kinds of sugar. The price to be determined by the Central Government is to be the rate at which the amount payable to the producer of such of his stock as is :required to be sold is to be calculated. There is thus a clear distinction between the amount payable to the producer w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the price determined under the formula incorporated in sub-section 3C. The fair price, therefore, has to be determined on the mini- mum price of cane fixed by Government, the manufacturing cost. on the basis of zonal cost-schedules, the tax or duty applicable in the zones and must be so structured as to leave in the ultimate result to the industry a reasonable return on the capital employed by it in the business of manufacturing sugar. It is clear from the reports of the Tariff Commission that a reasonable return recommended by that body at a fixed amount of ₹ 10.50'per quintal which worked out in 1966-67 at 12.5% per annum was not in respect of levy sugar only but on the whole, so that even if such a return was not obtainable on levy sugar but was obtainable on the whole, it would meet The requirement of cl. (d). In, this conclusion we derive a two-fold support, firstly, from the language used in cl. (d) itself, viz., a reasonable return on the capital employed in the business of manufacturing sugar, which must mean the business as a whole and not the business of manufacturing levy sugar only, and secondly, from the fact of the Commission having all along used the, same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ock, or even a deficit. Such a construction would, they argued, permit the Government to fix a price which would not leave such a return on the ground that sale of free sugar would bring in sufficient surplus to make up the deficit, if any, on the levy sugar. Counsel further urged that such a construction would also defeat the very object (if Partial control, in that, if a reasonable return was not assured to the manufacturer, lie was hardly likely to buy cane at a price higher thin the minimum fixed by Government, a purpose for which the partial control policy was evolved. To bring, in the return on free sugar for purposes of deciding whether a return guaranteed under cl. (d) was obtainable or not from the price fixed by Government would also be ushering a factor wholly extraneous to the sub-section. It would not be, therefore, right to bring into consideration free sugar which is not the subject-matter of sub-see. 3C. To accept these contentions would in our view mean dis- regarding (1) the language of the sub-section, and (2) the entire background in which it was enacted and the mischief it was intended- to remedy. As explained earlier, the sub- section provides two things: (a) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fair price was not unknown, for, it had been worked upon from as early a time as 1937. That concept did not by any account mean the actual cost of production of every individual manufacturer. It had to be arrived at by the process of costing of a representative cross-section of manufacturing units. The history of the industry shows that such a process was being practiced through various formulas, in the beginning by working out an All-India cost-schedule, and when that was found to be unrealistic by working out zonal cost-schedules beginning with four and by 1969 with 15 such zonal cost-schedules. A fair price would not thus mean the actual cost and return of every individual unit, firstly, because it would be impracticable, and secondly, because it would be rewarding the inefficient and the uneconomic. An extreme example of such a unit is to be found in the compilation prepared by Dr. Singhvi where the duration of season of that unit was only seven days, and therefore, its cost came to over ₹ 600 per quintal. If such a product were left to the mercy of a total free market and the impact of free competitiveness in it, such a unit would hardly survive. The object of the policy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n extraneous considerations or such that it does not secure a reasonable return on the capital employed in the industry. Such a fixation would at once evoke a challenge, both on the ground of its being inconsistent with the guidelines built in the sub-section and its being in contravention of Arts. 19(1)(f) and (g), and 31. The constitutionality of the sub-section not being under challenge. in these appeals, the only question left for consideration is whether the price fixed under the impugned order, i.e., ₹ 124.63, is in consonance with s. 3(3C)? The ex-works price worked out in the Tariff Commission Re- port, 1969 for Haryana zone for the next three years, i.e., 1969-70 to 1971-72, based on the average recovery and average duration of the past five years (1963-64 to 1967- 68), i.e., 8.70% and 125 days, was ₹ 128.69 per quintal. That figure was made up of the following : 1. Wages and salaries ₹ 11.70: (2) stores, fuel and power ₹ 8.49: (3) repairs and maintenance ₹ 2.63: (4) packing charges ₹ 2.57: (5) overheads ₹ 0.75: (6) cane centre and cane .development ₹ 1.36: (7) depreciation (Income Tax Act rates) ͅ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also added ₹ 1.05 being the estimated impact of increase in wages recommended by the Second Central Wage Board, the added depreciation allowed through changes, in the Income Tax Act and increased cost in packing materials, the total of all the three having been worked out at ₹ 2.81 per: quintal of sugar. According to this affidavit, when Government was considering the fixation of price for 1970-71, it had before it the actuals as to recovery and duration for 1969-70 as also the. estimates supplied by the factories for 1970-71. From these, the Government came to the conclusion that there would not be any material difference in recovery and duration between the two years and that was why it decided to continue the ex-factory price for 1969-70 for the year 1970-71 also. The incidence of purchase tax for 1970-71 was placed at ₹ 2.06, higher than during the preceding year, because for 1969-70 it was from April 1, 1969, while in 1970-71 it was for the whole year. The estimates for recovery and duration for 1970-71 were on the actual recovery and duration for the preceding year which came to 8.76% and 187 days, as against the estimates given for that year by the factori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llants were to be admissible, which would raise their cost of production to ₹ 133.98. This calculation is of course on the basis that the return of ₹ 10.50 per quintal was altogether met, in the sense that-it was not expected to absorb items such as interest and the profits on free sugar were not to be taken into consideration for ascertaining whether a reasonable return on the ,capital employed was actually obtained or not by the industry. The High Court, no doubt, did not hold the price of ₹ 124.63 as realistic and in view of the changes which had taken place during the year added in all ₹ 3.22, that is, ₹ 1.16 increase in wages, ₹ 56 additional depreciation and ₹ 1.20 as additional packing charges, totaling ₹ 2.92 and presumably ₹ 0.30 for increase in purchase tax. Adding ₹ 3.28 to the Government price, the High Court worked out the fair price at ₹ 127.85 instead of ₹ 124.63. We need not examine the correctness or otherwise of this addition as the Solicitor General told us that he did not ,challenge the correctness of this addition. On the basis of ₹ 127.85 being the correct price, the appellants wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made a representation for addition in the return of ₹ 10.50 on the ground that the 1969-70 year's production had come to 42 lac tonnes, an all time record and in addition thereto there was already at hand a large stock lying undisposed of resulting in the component of working capital being very much higher than that calculated by the Tariff Commission while fixing ₹ 10.60 as the return. On June 5, 1970, the Government referred this representation to the Commission. By its letter dated July 29, 1970, the Commission recommended that the question of accumulation of stocks as represented by the association required sympathetic consideration and suggested an increase in lieu of interest at 9% on the additional working capital represented by the accumulated stock. In considering this claim however two facts need to be borne in mind. The production in 1970-71 was not as high as that in 1969-70 and in fact had considerably declined. So far as the ,Haryana factories were concerned, none of them had purchased cane at a price higher than the minimum fixed by Government, although the assumption behind the policy of partial control leaving 40% of the stock for free market and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3) deterioration in quality, 19 paise, (4) insurance and godown costs, 7 paise, (5) increase in cost of consumable stores, 19 paise, (6) increase in cost of gunny bags, Re.1.20, (7) increase in freightage by road and rail, 63 paise, (8) interest on longer storage, ₹ 2.84 and (9) selling expenses, 45 paise (total ₹ 7.18=Rs. 133.79). But for the reasons given above, items 3, 7 and 8 (total ₹ 3.66) must go and therefore the figure would come to ₹ 130.13. As against this, the realisations for levy and free sugar upto the date of decontrol, i.e., May 24, 1971 were as follows : 63,741 quintals at the average rate of ₹ 124.63 and 70,650 quintals at the average rate of ₹ 136.49. The average price thus realised comes to ₹ 130.77. There is no doubt that if the sales after May 24, 1971 which were all in free market were to be taken into account, the average realised would come to much more than ₹ 130.77. There is, therefore, no doubt that taking the picture as a whole the Haryana factories got in any event a reasonable return on the capital employed. On the construction of sub-section 3C adopted by us and such of the materials produced before ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
