TMI Blog1983 (5) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 provision for sellers to collect the tax from the purchasers. - - - - - Dated:- 6-5-1983 - E.S. VENKATARAMAIAH., A.P. SEN., R.B. MISRA JUDGMENT SEN J., These are appeals by special leave from a judgment and order of the High Court of Patna dated April 30, 1982 (Hoechst Pharmaceutical Ltd. v. State of Bihar [1982] 51 STC 66), by which the High Court upheld the constitutional validity of sub-s. (1) 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 ₹ 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-s. (3) of s. 5 of the Act which prohibits such dealer from collecting the amount of surcharge payable by him ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manufacturer or producer to pass on the tax liability to the consumer. The appellants have placed on record their 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. These appellants have also placed on record their orders of assessment together with notices of demand, if any, for the assessment years 1980-81 and 1981-82. For the assessment year 1980-81, the CTO, Patna Circle, Patna, determined the gross turnover of sales in the State of Bihar through their branch office at Patna of M/s. Hoechst Pharmaceuticals Ltd. on the basis of the return filed by them at ₹ 3,13,69,598.12 and the tax payable thereon at ₹ 19,65,137.52. The tax liability for the period from January 15, 1981, to March 31, 1981, comes to ₹ 3,85,023.33 and the surcharge thereon at 10% amounts to ₹ 38,502.33. Thus, the total tax assessed of M/s. Hoechst Pharmaceuticals Ltd. including surcharge for the assessment year 1980-8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (3) of s. 5 imposes an unreasonable restriction on the fundamental right guaranteed under art. 19(1)(g). As regards the manufacturers and producers of medicines and drugs, the High Court held that there was no irreconcilable conflict between sub-s. (3) of s. 5 of the Act and para. 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 [1975] 1 SCR 121 ; [1974] 34 STC 73; AIR 1974 SC 2272, the appellants have challenged the constitutional validity of subs. (3) of s. 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 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 ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... modities 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 control orders. The class of dealers who can raise their sale prices and absorb the surcharge levied under sub-s. (1) 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, then a State law which treats both classes equally and visits them with different burdens, would be violative of art. 14. The State cannot by treating unequals as equals impose different burdens on different classes. (4) The restriction imposed by sub-s. (3) of s. 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 art. 19(1)(g). (5) Sub-section (1) of s. 5 of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Govt. under subs. (1) of s. 3 of the 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 surcharge under sub-s. (1) of s. 5 of the Act will cut into the profits of the manufacturer 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-s. (3) of s. 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-s. (1) of s. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et out the relevant statutory provisions. The Act provides by s. 3 for the imposition of a tax on sale or purchase of goods, by s. 6 for the imposition of an additional tax and by s. 5 for the imposition of a surcharge. There are thus three taxes that are levied, (1) sales tax, (2) additional sales tax, and (3) surcharge. Sub-section (1) of s. 5 of the Act provides for the levy of surcharge on every dealer whose gross turnover during a year exceeds ₹ 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 turno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is necessary or expedient so to do for maintaining or increasing supplies of any essential commodity or for securing their equitable distribution and 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-section (2) lays down that without prejudice to the generality of the powers conferred by sub-s. (1), an order made therein may provide for the matters enumerated in cls. (a) to (f). Clause (c) of sub-s. (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Official Gazette in this behalf. `P.M. ' means the cost of packing material including process loss thereon 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. `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 cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 shortfall. Paragraph 19 interdicts that every manufacturer or importer of 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 premises. It is, however, necessary to reproduce paras. 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 pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... digenously manufactured bulk drug specified in the First Schedule or the Second Schedule and making it available at a fair price and subject to the provisions of sub-para. (2) and after making 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-para. (1), the Government may take into account the average cost of production of each bulk drug manufactured by efficient manufacturers 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 bulk drug at a price exceeding the price notified under sub-para. (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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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 State Legislature to enact sub-s. (1) of s. 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-s. (3) of s. 5 of the Act prohibiting the dealers liable to pay a surcharge under sub-s. (1) thereof from recovering the same 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 para. 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 prohibits such manufacturers or producers from recovering the surcharge and, therefore, it is constitutionally voi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that after an order is made under s. 3 of that Act, s. 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; AIR 1954 SC 465, 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 para. 21. It is further urged that para. 21 of the Control Order having been issued by the Central Government under sub-s. (1) 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 para. 21 of the Control Order but by para. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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-s. (3) of s. 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-s. (3) of s. 5 of the Act and para. 21 of the Drugs (Price Control) Order made under sub-s. (1) of s. 3 of the Essential Commodities Act, is, therefore, void. In dealing with the question, we must set out art. 246 of the Constitution which is based on s. 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 power to make laws with respect to any of the matters enumerated in List III in the Seventh Schedule (in this Constitu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iament and a law made by the Legislature of a State with respect to matter falling in the Concurrent List and it reads : 254. (1) If any provision of a law made by the Legislature of State is repugnant to any provision of a law made by Parliament which Parliament is competent to enact, or to any provision of any 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 repugnant 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 consideration of the President and has received his assent, prevail in that State : Provided that nothing in this clause shall prevent Pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 art. 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 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 la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... slative powers, and the general scope and effect of ss. 91 and 92, and their relations to each other were fully considered and commented upon in the case of Citizens Insurance Company [1881] 7 App Cas 96 (PC). Sir Montague Smith delivering the judgment for the Board evolved the rule of reconciliation observing (pp. 108, 109) : 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 language of the sections, so as to reconcile the respective powers they contain, and give effect to all of them. Earl Loreburn L.C., delivering the judgment of the judicial Committee in Attorney-Gene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C.P. Berar Taxation Act's case [1939] 1 FCR 18; AIR 1939 FC I ; [1938] 1 STC 1, 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] FCR 179; AIR 1945 PC 98, 99; 1 STC 135, 137: 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 said, which must determine into what category it falls. Their Lordships approved of the decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f these questions could not be asked, much beneficent legislation would be stifled at birth, and many of the subjects entrusted to Provincial Legislation could never effectively be dealt with. The invasion of the provinces into subjects in the Federal List , in the words of Lord Proter (p. 65), 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 concerned 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 pith and substance of the impugned Act is not money-lending but promissory notes or banking ? Once that question is determined the Act falls on one or the other side of the line and can be seen as valid or invalid according to its true content. It would, therefore, appear that the constitutionality of the law is to be judged by its real subject-matter and not by its incidental effect on any topic of legislation i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4] AC 31 (PC)seems to establish these two propositions : First, that there can be 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 Attoyney-General for Canada v. Attorney-General for British Columbia [1930] AC 111, Lord Tomlin summarised 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdinarily, 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 Concurrent. List, but it can be cured by resort to art. 254(2). As we have endeavoured so far, the question raised as to the constitutional validity of sub-s. (3) of s. 5 of the Act has to be determined by an application of the rule of pith and substance whether or not the subjectmatter of the impugned legislation was competently enacted under art. 246, and, therefore, the question of repugnancy under art. 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-s. (3) of s. 5 of the Act which is relatable to entry 54 of List II of the Seventh Schedule and para. 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 List III. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cy 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] Suppl 2 SCR 8 ; AIR 1959 SC 648, the result of the authorities was thus stated by Subba Rao J. (p. 665 of AIR SC): Nicholas in his Australian Constitution, 2nd Edn., p. 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; AIR 1956 SC 676, the court accepted the above thre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) read with the opening words Subject to in art. 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 expression a law made by Parliament which Parliament is competent 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 as well as List I . But if art. 254(1) is read as a whole, it will be seen that it is expressly made subject to cl. (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 the scope of cl. (1), the repugnancy between the Union and the 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 art. 254(1), viz., a law made by Parliament which Parliament is competent to enact as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view that in cases of overlapping 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 Rao J., speaking for a Constitution Bench in Deep Chand's case, AIR 1959 SC 648, interpreted art. 254(1) in these terms (p. 665): Article 254(1) lays down a general rule. Clause (2) is an exception to that article and the proviso qualifies the exception. If there is repugnancy between the law made by the State and that made by 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-s. (3) of s. 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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s an ancillary power. Further, the element of, tax does not directly flow 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 Pp. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs who can raise their sale prices and absorb the surcharge levied under sub-s. (1) of s. 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 art. 14. The State 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 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 ₹ 5 lakhs or more in a year and, therefore, liable to pay surcharge, in addition to the tax payable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rding 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 formulae, 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-s. (3) of s. 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-s. (1) of s. 5 of the Act. It roughly works out to one paisa per rupee of the sale price of the manufactured commodity. There is no material pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n-ethical drugs, and the wholesaler has a margin of 2 per cent. in either case when he sells to a retailer. In contrast, the profit margins of manufacturers or 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 para. 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 para. 11 to include distribution cost, outward freight, promotional expenses, manufacturer's margin and trade commission. Clauses (1) to (3) of the 'third Schedule show that the mark-up ranges from 40% in the case of 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. If the appellants find that the levy of surcharge under sub-s. (1) 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 Gove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly a tax on income, by reason of the limitation contained in sub-s. (3) of s. 5 of the Act. We are not impressed with the argument. Merely because a dealer falling within the class defined under sub-s. (1) of s. 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-s. (3) of s. 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 provision for sellers to collect the tax from the purchasers. Whether 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 affect the competence of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... constitutional position of a Governor is clearly defined. The Governor is made a component part of the Legislature of a State under art. 168 because every Bill passed by the State Legislature has to be reserved for the assent of the Governor under art. 200. Under that article, the Governor can adopt one of throe 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 art. 201. The first proviso to art. 200 deals with a situation where the Governor is bound to give his assent and the Bill is reconsidered and passed by the Assembly. The, second proviso to that article makes the reservation for the consideration of the President obligatory where the Bill would, if it becomes law, derogate from the powers of the Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 following passage in the judgment of this court in Fernandez v. State of Kerala [1957] SCR 837, 852-3; 8 STC 561, 574; AIR 1957 SC 657, 663: 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 exempted from taxation altogether. The Legislature cannot enact a law imposing or authorising 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rchase of such goods and in 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. In the penultimate paragraph in Fernandez's case, [1957] SCR 837; 8 STC 561 ; AIR 1957 SC 657, the court after laying down that the non obstante 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 the computation of the turnover liable to tax thereunder, observed (p. 575 of 8 STC): This position is not at all affected by the provisions with regard to registration and submissions of returns of sales tax by the dealers under the Act. The Legislature, in spite of its disability in the matter of the imposition of sales tax by virtue of the provisions of art. 286 of the Constitution, may for the purpose of the registration of a dealer and submission of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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