TMI Blog1972 (11) TMI 100X X X X Extracts X X X X X X X X Extracts X X X X ..... tions Nos. 297 and 304 of 1972 by the Sugar producers in North Bihar zone and Writ Petitions Nos. 296 and 298 of 1972 by those in the Punjab zone. 2. The principal questions that arise for our determination are the following: (1) What is the true scope and ambit of Section 3(3C) of the Act? (2)(a) Whether the system of fixing price for each zone (the entire country having been divided into 15 zones), is justifiable and is based on correct principles? (b) Whether the State-wise Constitution of the zones is proper and justified? (c) Does the zonal system, lead to discrimination and as such is violative of Article 14 of the Constitution? (3) Is price fixation based on proper principles and have the prices been determined by following the correct methods and in accordance with Section 3(3C) of the Act? (4) What is the correct position about depreciation and rehabilitation allowance and the extent to which these have been taken into consideration in price fixation? (5) Have the escalations in various Items by which price determination is made been properly allowed? (6) Whether the Items in respect of payment of additional bonus as provided by the payment of Bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rn has beep secured' on the capital employed required by Clause (d). The Tariff Commission of 1961 has recommended a return of ₹ 10.50 per quintal of sugar. That recommendation having been accepted by the Government., (vide its resolution dated February 20, 1970) the only way, so it has been suggested on behalf of the sugar producers, to ensure that the return is to compute the cost of sugarcane, the manufacturing cast, the duty or tax payable and then add the above amount by way of return to the aggregate of the aforesaid items mentioned in Clause (a) to (c) of the sub-section. This can be done if all these items are computed unitwise and not by taking a large number of units in an area because the aforesaid items are bound to vary and the different from unit to unit. We shall have an occasion to go more fully into this matter while considering question No. (2). But we are unable to agree that the provisions of Section 3(3C) do not in any way warrant the fixation of price for the zones into which the country may be divided, the aforesaid provision clearly envisages and contemplates the fixation of different price for different areas. It hardly matters if areas are called ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er a study of the break-up cost of individual regions that cost schedules could be constructed on the basis of actual recovery and duration as pertaining to each region. It grouped the sugar factories in various States into four regions or zones based on standard schedules for a uniform recovery of 10 per cent and for duration ranging from 90 to 200 days. 8. It appears that some State Governments represented that the Northern region comprising the States of Uttar Pradesh, Bihar and Punjab was unduly large with wide internal disparities in costs. The result was that uniform price fixed for the zone showed large differences in profit margins. The sugar Enquiry Commission headed by Dr. S.R. Sen in its final report in 1965 recommended five cost schedules for the same number of zones at 10% recovery and for different durations. Assam with one factory was to be treated as a separate zone. The Government, however, fixed prices for 16 zones under the Sugar (Control) Order 1963. The number of zones kept on changing till it was increased to 23 for the years 1965-66 and 1966-67. But to, December 1967 prices were fixed for 6 zones Including Assam. The Tariff Commission in 1969 recommended t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dividual unit had a divergence ranging from 26 days to 195 days. Statewise averages indicated a range from 26 to 153 days whilst the all India weighted average came to 108 days for the costed units. In Andhra Pradesh the duration in 1966-67 which is the base year of the costed units varied from 163 days to 41 days. (iv) Only 7 units out of 19 units in Andhra Pradesh zone were selected for working out the averages. This highly involved highly disparate and unfair comparison. (v) According to table 9.3 at page 75 of the 1969 report the average of the cane actually crushed by all the 7 costed units came to 1233 tonnes per unit whereas the average of the 'cane actually crushed by all the 19 units in the State is 1065 tonnes. According to the figures supplied by the counsel for the petitioner at the time of arguments the total cane actually crushed in 1966-67 by all the 19 units in Andhra Pradesh was 16.60,000 tons. The average duration for that year being 82 days the average daily crushing of the 19 units worked out to 1065 tonnes per unit whereas the crushing capacity of 1233 tonnes per day was taken as the base. This represented an excess of 168 tonnes per day which was who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 days' duration and 8.867 recovery and ₹ 91.34 cost of cane comes to ₹ 139.52 per quintal excluding the return. After applying cost schedules to cane price duration and recovery of individual factories the results show that at least 10 factories suffer heavy losses because their cost ranges between ₹ 623.81 per quintal of the factory at Ryam to ₹ 139.83 of the factory at Chanpatiya. This is exclusive of the return of 10.50%. It may be observed here that the factory at Ryam has a duration only of 7 days which is almost a fresh figure and explains the high cost incurred by it for manufacturing sugar. But the total number of factories in North Bihar Zone is 25 and the cost of other factories varies between 138.4 to 121.89 per quintal. It is next pointed out that under the averaging technique the Central Government fixes a common price for all sugar factories in every State or price zone by averaging extraordinary cost disparities. The average cost formulae ignore disparity in (a) cane cost per quintal; (b) duration (c) recovery, (d) daily crushing capacity and (e) capital employed by one factory and the other in each zone. 13. Writ Petition No. 298/72 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ption only in case of Uttar Pradesh and Bihar. Uttar Pradesh was divided into three zones and Bihar into two. The Tariff Commission had been specifically requested to inquire into the working of the zonal system, the main point for inquiry being the zones into which the sugar producers should be grouped having regard to the basis of classification to be recommended by the Commission. The view of the Commission was that on the whole the number of price zones should be fifteen which would reduce, though not eliminate, the inter se anomalies in the cost structure without resorting to the extreme of the fixation of price for each unit or a single or at the most two, one for the sub-tropical and other for the tropical one. The Tariff Commission hoped that in the course of time conditions would be created making the operation of the second alternative feasible. From Chart IV relating to production of sugar to be found in the report of the Sugar Enquiry Commission, 1965, the All India production arose from 12,00,000 tons to 32,00,000 tons in 1964-65. This notwithstanding the fact that the prices were being fixed on the basis of regions. In para 19.7 at page 127 of the said report the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent. The essence of the matter is that a commercial concern can be a success only if there is proper planning and efficient management The argument on behalf of the sugar producers which claim that they have been running into looses because of this zonal system our hardly be sustained on the evidence or the material produced by them. It is true that in a few cases all the data and the details of costs etc. were set out in the petition and were supported by statements made out from audited accounts but in most cases it was at the stage of rejoinder or at the time of arguments that elaborate statements were prepared showing figures of losses into which these units are running owing to the fixation of price by the impugned Order. The Government in these circumstances could possibly have had no opportunity to check up the correctness of all the figures and even if that could be done as weekly returns are submitted on prescribed forms to the authorities concerned it would still not be possible for the Government to determine their accuracy without a complete investigation being carried out. Nor could it be ascertained without a prolonged investigation what the real causes for some of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It was further stated that the cost Accounts Officers of the Commission made a detailed scrutiny of the accounts in the selected units and worked out costs in a fair and equitable manner to enable the Commission to determine appropriate costs for each unit for detailed cost investigation. The 66 units which were costed out of 68 selected for the purposes accounted for nearly 34% of the total capacity and 37% of the total production of sugar in 1966-67. The average duration of the costed units was 101 days with a recovery amounting, to 9.73% as compared to All India figure of 95 days and 9.91% recovery respectively. The Commission was the best judge of selecting the units for cost study and for working out the average cost. The reasons given by it for selecting the costed units do not suffer from any disregard of the recognised principles of costing. It is true that the selection of some units out of all the units in a particular zone can lead to the anomalies and the hardships which have been pointed out on behalf of the sugar producers. To take an illustration the averages with regard to crushing capacity in the Andhra Pradesh zone might have been different if all the units had be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a simple average. 22. We may next deal with the harsh and unjust results to which the 'zonal system adopted by the Commission is stated to lead. The figures given about the actual cost of the petitioning units worked but according to the tables and the formulae given in the Tariff Commission's report have been produced to demonstrate the extent and magnitude of the financial loss to which the petitioners are being put or will be put. The stress has been oh the utter disregard of the principle embodied in Sub-section (3C) of Section 3 of the Act that a producer is entitled to a reasonable return on the capital employed in the business of manufacturing sugar. The petitioners have sought to establish that instead of earning my return they are actually out of packet in the matter of cost owing to the price fixation by the government worked out in accordance with the tables given in the report. Apart from what has previously been noticed about the various factors which may be responsible for incurring of high cost we are unable to agree that the price fixation has to be made with reference to the cost of each individual unit in the zone. As pointed out in out judgment in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion during the year in question was 78 days the recovery being 8.929%. Its crushing capacity' is 850 tonnes per day as compared with the Nizam Sugar Factory Ltd. which has a duration of 111 days, recovery of 11.181 and crushing capacity of 4500 tonnes per day. This Bobbili factory is a pigmy as against the giant. Its actual cost per quintal is ₹ 184.65 where as the cost of Nizam Sugar Factory is ₹ 117.00. Total production of the petitioner factory is 50,000 odd tonnes whereas that of the Nizam Factory would be about 5 lakh tonnes odd. The levy price for both these factories has been fixed at the same figure All this, it is urged, shows the gross -defects in the State wise Zonal system. If there are very big units and there are very small units in the same zone either they must be classified according to their size or the price must be fixed for each individual unit. 24. The criticism that climatic and agro-economic conditions have not been taken into consideration while constituting the zones does not appear to be valid. The climatic conditions in the State of Assam, West Bengal. Orissa and Kerala which are in one zone seem to be substantially similar. The Commis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction in Andhra Pradesh worked to ₹ 103.07 for 1969-70 for which a levy price of ₹ 150.25 was fixed whereas for Tamil Nadu the cost of production worked out to ₹ 97.83 while the levy price has been fixed at ₹ 166.16. Thus the classification has not been made on the rational basis having any nexus with the object sought to be achieved, i.e. fixation of a fair price. It is further stated that in case of factories with longer crushing season where labour works for 8 to 10 months the retaining allowance payable is negligible or nil. This is the case with units in Maharashtra, Gujarat, Mysore, Uttar Pradesh etc. In States like Andhra Pradesh where duration is much less, the management has to pay the wages to the seasonal staff by way of retaining allowance. This adds to the costs. 26. In reply it has been pointed out that the prices were fixed in the different zones on the basis of the Tariff Commission's recommendations. If there is any variation in the prices fixed from zone to zone it is the result of the different schedules recommended for valid reasons by the Tariff Commission. The incidence of retaining allowance and other costs on the working of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary amount of time in production. In other words the cost analysis may not be an indicator of efficient plant operation. Therefore pre-determined standard material labour and overhead costs are an important aid in formulating price policies in planning production and in measuring efficiency. 30. In the book titled Price Fixation in Indian Industries a study prepared in collaboration with the Institute of Chartered Accountants of India it has been stated at page XV of the introduction that costs alone do not determine the prices. Cost is only one of the many complex factors which together determine prices. The only general principle that can be. stated is that in the end there must be some margin in prices over total costs, if capital is to be unimpaired and production maximized by the utilisation of internal surpluses. It is further stated at page (XVI) that while the cost-plus pricing method is the most common, it may be argued that It is not the best available method because it ignores demand or fails to adequately reflect competition or is based upon a concept of cost which is not solely relevant for pricing decision in all cases. What is essential is not so much of cu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een done in accordance with the accepted principles. The methods employed by the Tariff Commission 1969 in preparing the cost schedules as also the formula for working out cost schedules for the future are fully set out in the Commission's report and have been also discussed in the connected case (supra). We need not go over the same matters again. 32. There is one matter on which the criticism on behalf of the sugar producers is legitimate and the force of which even the learned Solicitor General could not deny. The Tariff Commission had said in para 9.14 that after taking all factors into consideration it had been discovered -that factories with capacities of less than 1000 tonnes had a disadvantage of the order of ₹ 3/- per quintal and those above 1500 had a relative advantage of the order of ₹ 2/- per quintal compared to the conversion charges of the average capacity range which had been adopted in formulating the basic cost schedule. The Commission proceeded to say: Having regard to the fact that we have recommended fixation of uniform prices on basis of zonal averages it is not practicable to make the necessary adjustment for rectifying the disparity in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 10.50 per quintal should be allowed by way of return WHS unrealistic and could not be adopted for tin-future. The Commission was fully in possession of all the figures of the price as also the working capital on which the return had to be determined. It was satisfied that the requirements of the sugar industry could be more equitably met by the departure from the conventional method, namely, of giving a return on the basis of certain percentage on the capital employed and by adopting instead a uniform amount per quintal as the margin to be added to the other cost in arriving at a fair price of the sugar. According to the calculations made by the Commission that would provide a relatively efficient unit an amount sufficient to declare a dividend or the order of 7 to 8% on paid up share capital after meeting its other commitment such as interest and taxation. It was stated that in arriving at this decision the Commission had made pro forma calculations for return applying 12'/2% to the zonal averages of the capital employed and the results are tabulated in Appendix 37-The variations ranged from ₹ 8.23 to 15.73 per quintal. Adding to this the element of depreciation, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Automobiles v. Union of India AIR1972SC1690 , 16% return on the capital employed was considered to be reasonable. But it must be remembered that unfortunately whenever that decision has been discussed no one has taken care to understand and appreciate that out of the return the car manufacturers were made liable to pay the minimum bonus of 4 %, the interest, on borrowings, financial charges, warranty charges and in some cases the guarantee commission. In the return which has been allowed to the sugar producers neither the minimum bonus nor additional amounts of warranty and guarantee charges are payable by them. 35. In the letter of 8th October, 1970 the Commission pointed out that in order to arrive at the figure of the return on the capital employed of ₹ 10.50 per quintal the Commission had made a study of the various figures in respect of the costed period average of 5 years' duration and recovery and pro forma calculation for the capital employed. Thereafter the capital employed had been computed on a uniform basis taking into account the written down value of assets and working capital equal to six months' cost of production including depreciation. After deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mission stated that the majority of the units in Sugar industry were more than 30 years old At 9% depreciation for plant and machinery and 2 1/2% for buildings most of the original assets have been written off. To calculate the amount of depreciation that would have accrued to individual units during the course of the last 30 years or so on replacement basis year by year and simultaneously to revalue the assets in order to arrive at the present assets was not an easy task. After taking the necessary figures the Commission found that comparatively speaking a large number of units required rehabilitation having depreciation much lower than the average of the industry. The Commission felt that as it was making recommendation only for a period of three years it would not be advisable to work out depreciation on replacement value for that short period when that practice had not been followed in the past. The Commission decided in favour of continuing the existing method of computing the quantum of depreciation on the basis of zonal averages of the costed units. It was added that the figure so adopted was automatically to undergo an upward revision if and when the revision contemplated b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d with the report of the Gundu Rao Committee that there was need for providing special loan assistance to the industry for the purpose of rehabilitation and modernisation. It was suggested that the Government could provide finances for rehabilitation and modernisation through the existing financial institutions such, as Industrial Development Bank and Industrial Finance Corporation. In the 1959 report of the Tariff Commission the principle that a uniform allowance for rehabilitation to all units in the sugar industry had been held to be unwarranted since such a provisory , according to the Commission, while giving necessary resources to the needy ones would accrue as an extra enlargement of profit to others. The reason given was that generally the average life of a sugar plant and machinery is 20 to 25 years. Therefore the units which had gone into production in recent times should have no problem, of rehabilitation for some years to come. Those units which had carried out substantial expansion arid had in the process effected renovation and modernisation of their existing equipment would not require the same amount for further rehabilitation as the units which were established in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... schedules which were prepared the amount of ₹ 2/- per quintal was added by way of rehabilitation for determining the ex-works price of sugar. 41. In the resolution February 20, 1970 of the India the above noticed but it was stated the a decision on that, matter had been deferred pending consultation with the concerned interests. A part from relying on the discussion in the reports of 1959 and 1965 the Solicitor General his referred to the observations of this Court in the Premier Automobiles case AIR1972SC1690 (Supra) in which the question of depreciation principle that it should on replacement basis was not accepted. According to report of the Car Prices Enquiry, Commission, if the Manufacture ware in keep part not only the amount of description but also the development rebate and other reserves to which they were entitled under the various tax and other laws and invest them separately or even in their business, depreciation funds with the amount thus provided for could be built up and these could be invested whether inside or outside the business. 42. It is unfortunate that nothing has been done to implement the recommendation of the Commission in respect of rehabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m bonus has been raised from 4% to 8.33%. It has been urged that when the prices were fixed by the impugned order the additional amount could not be taken into account while determining the cost of production. As the producers will be bound to pay the bonus at the enhanced rate they will be put to a good deal of loss until some provision is made for addition of that amount for the purpose of working out the levy prices. So far as gratuity is concerned it has been pointed out by the Solicitor General that in Form V appearing at page 192 under 'Salaries and Wages' item 11 relates to gratuity and therefore gratuity had been included. There are hardly any clear pleadings in the writ petitions on this point from which it can be established and gratuity has not been included. We are unable to accept the contention that payment of gratuity or liability thereof has not been taken into account while fixing the price for levy sugar. 45. The Payment of Bonus Amendment Ordinance 1972 which has been promulgated recently was published in the Government of India Gazette dated September 23, 1972. Section 3 of the Ordinance provides: Section 3 Section 10 of the principal Act shall be ..... 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