Case: Panipat Co-Operative Sugar Mills etc Vs. Union of India

stocks lying unrealeased with the factories both in the case of levy as well as free sugar, with the result that the factories had to bear additional interest on the working capital involved in such unreleased stocks. The usual period of six months for the release of stock on the basis of which the return on capital at the static figure of Rs. 10.50 a quintal had actually become unrealistic. The result, therefore, was that the factories could not expect to get the said return on the capital employed.40. Since the question was an important one we called upon the Government to disclose the correspondence, if any, which it had in this connection with the Tariff Commission. Thereupon the Government produced the relevant correspondence. It appears from that correspondence that on March 26, 1970 the Indian Sugar Mills Association had made a representation for addition in the return of Rs. 10.50 on the ground that the 1969-70 years 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 Rs. 10.50 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.41. 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 the unconventional method of granting a fixed return of Rs. 10.50 was that these two factors would enable the manufacturer to pay a higher cane price. The figures supplied to us by Government called out from the returns filed by the factories would also suggest that the claim for Rs. 2.29 per quintal was not warranted. The total production by the Haryana factories during 1970-71 was of the tune of 82,756 tonnes. Despatches upto May 24, 1971, when sugar was decontrolled, of free sugar were 7,065 tonnes at Rs. 139.70 per quintal. Despatches of levy sugar, upto the date of the interim order of stay dated April 8, 1971 were 2,380 tonnes and from April 8, 1971 to May 24, 1971, 4,194 tonnes at Rupees 158.02 per quintal. The balance of stock lying with the factories as on June 1, 1971 was 6911.7 tonnes. Despatches during the decontrol period, i.e., from June 1, 1971 to December 31, 1971 were 63,023 tonnes at the rate of Rs. 151.39 per quintal, leaving a balance in hand of 6094 tonnes. It may be mentioned that on June 30, 1972 the stock lying on hand came to 427 tonnes only. Since this was the position, the claim for additional interest at Rs. 2.29 per quintal does not appear to be sustainable, nor also the claim for deterioration of stock owing to the stock lying stored up beyond the normal period, the loss by way of deterioration during such period being the normal incidence of the trade which the manufacturer must anticipate.42. Regarding the claim of 63 paise owing to increase in freightage (i.e., of 54 paise by road and 9 paise by rail), the Tariff Commission refused to concede that claim. Even before us there are no adequate materials to come to any precise conclusion as to the extra burden which the appellants had actually to bear, though increase in freightage during the year is admitted.43. Have the Haryana factories then not received in fact during 1970-71 the reasonable return as envisaged by sub-section (3C) ?44. The actual figures of the year for duration and recovery were not in dispute. They were 162 days and 8.69% respectively. On that basis, the cost, according to the cost-schedule worked out for Haryana by the Commission, would come to Rs. 126.61, including Rs. 10.50. To that amount may be added the following, even assuming that they are all allowable : (1) increase in wages, Re. 1.05, (2) increase in depreciation, 56 paise, (3) deterioration in quality, 10 paise, (4) insurance and godown costs, 7 paise, (5) increase in cost of consumable stores, 12 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, Rs. 2.84 and (9) selling expenses, 45 paise (total Rs. 7.18 = Rs. 133.79). But for the reasons given above, items 3, 7 and 8 (total Rs. 3,66) must go and therefore the figure would come to Rs. 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 Rupees 124.63 and 70,650 quintals at the average rate of Rs. 136.49. The average price thus realised comes to Rs. 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 Rs. 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.45. 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.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]20. 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 export 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 average 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 Rs. 10.50 per quintal, that being the amount considered a fair return on capital employed in the industry. Both the Central Government and Parliament were aware of the methods followed by these expert bodies in framing cost-schedules on the basis of which ex-factory prices were fixed, the problems which the Government was faced with the securing adequate supply of sugar and its equitable distribution at reasonable price to remedy which sub-section (3C) was enacted. It is in the light of this back-ground that the provisions of that sub-section can be properly understood.Sub-section (3C), with which we are presently concerned, was inserted in Section 3 by Section 3 of Act 36 of 1967. The sub-section lays down two conditions which must exist before it applies. The first is that there must be an order made with reference to sub-section (2), clause (f), and the second is that there is no notification under sub-section (3A) or if any such notification has been issued it is no longer in force owing to efflux of time. Next, the words "notwithstanding anything contained in sub-section (3)" suggest that the amount payable to the person required to sell his stock of sugar would be with reference to the price fixed under the sub-section and not the agreed price or the market price in the absence of any controlled price under sub-section (3A). The sub-section then lays down two things; firstly, that where a producer is required by an order with reference to sub-section (2) (f) to sell any kind of sugar, there shall be paid to that producer an amount therefor, that is for such stock of sugar as is required to be sold, and secondly, that such amount shall be calculated with reference to such price of sugar as the Central Government may, by order, determine, having regard to the four factors set out in clauses (a), (b), (c) and (d). Unlike the preceding three sub-sections under which the amount payable is either to agreed price, or the controlled price, or where neither of these prices is applicable at the market or average market price, the amount in respect of sugar required to be sold is to be calculated at the price determined by the Central Government. The last words of the sub-section empower the Central Government to determine prices either from time to time or for different areas, which means that it may determine zonal or regional prices, or for different factories, i.e., unitwise, or for different kinds or grades of sugar.The fair price, therefore, has to be determined on the minimum 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 Rs. 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 phraseology while recommending Rs. 10.50 per quintal as an addition by way of a reasonable return on the capital employed in the industry. The cost-schedules prepared by these bodies were for determining a fair price in relation to the entire sugar produced by the industry and the return which should be granted to it on the capital employed in the industry and not with respect to that stock only required to be sold under sub-section (2) (f). This is clear from the heading of Ch. 9 of the Tariff Commissions report, 1969, "Cost Structure and Price Fixation.To accept these contentions would in our view mean disregarding (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) the determination by Government of a fair price during the process of which regard shall be had to the four matters set out therein, and (b) payment to the manufacturer, part of whose stock is levied, an amount "therefor" calculated with reference to "such price" as the Central Government may determine. Though the payment would of course be for the stock required to be sold to Government, there is nothing in the sub-section to suggest that the price to be determined is to be with respect of that part of the stock of a particular manufacturer which is required to be sold to Government.The basis of a fair price would have to be built on a reasonably efficient and economic representative cross-section on whose workings cost-schedules would have been worked out and the price to be determined by Government under sub-section (3C) would have to be built. A claim that such a price has to be determined unitwise and a reasonable return has to be ensured to each unit or that such a price with such a return would be in respect of that part of its stock required to be sold under sub-section (2) (f) would appear to be inconsistent with the concept of partial control, the background in which it was evolved and the object with it attempted to secure. Such a policy meant determination of a fair price on the basis of which a producer would be paid for part of his stock required to be sold to Government. Such a price would have to be determined having regard to the four factors set out in the sub-section. Though factors (a) and (c) would be static, factor (b) would largely depend on variables, such as duration and recovery, the prices of fuel, labour etc. differing from zone to zone and sometimes within the zone, necessitating averaging and costing by selecting a representative cross-section of units for that purpose and arriving at a cost-schedule which would do justice to the weak and the strong alike. If this be the true meaning of clause (b), it must mean securing a reasonable return to the industry and not to each unit, irrespective of whether it is economic or reasonably efficient or not, or only in respect of its stock required to be compulsorily sold to Government. A unitwise fixation of price, as suggested by counsel, and payment on the basis of a price so worked out would mean perpetuating inefficiency and mismanagement, and depriving the partial control policy of the incentives for economy and efficiency inherent in it.We are, therefore, satisfied both on the language of the sub-section, the background in which it was enacted and the mischief the legislature sought to remedy through its working that the true construction is that a fair price has to be determined in respect of the entire produce, ensuring to the industry a reasonable return on the capital employed in the business of manufacturing sugar. But this does not mean that Government can fix any arbitrary price, or a price fixed on 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.It would appear that barring the statement in the impugned order that Government had fixed the price at Rs. 124.63, the Government had not disclosed even in its return how it had worked out that price. At the instance of the appellants, the High Court, therefore, by its order dated September 14, 1971 called upon the Government to show the basis on which it had fixed the price. The Government thereupon filed an additional affidavit of the Deputy Secretary to the Ministry of Agricultural dated September 14, 1971 according to which on the available data before it the price would come to Rs: 126.93. This figure took note of the increase in the purchase tax by Haryana Government from 24 to 50 paise per quintal of cane. That was how the Government mentioned Rupees 8.003 as the price of cane per quintal instead of Rs. 7.37 which was the floor price fixed by Government for the year. Government also added Re. 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 Rs. 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 Rs. 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 factories, viz., 9.04% and 157 days. These were accepted for 1970-71 as the only actuals available to the Government on January 8, 1971 were in respect of the month of November 1970, which obviously were too meagre for acceptance for the whole year.34. Annexures II and III to this affidavit show that as against the levy price of Rs. 124.63 fixed by Government, free sugar was sold during 1969-70 at prices ranging from Rs. 126.21 to Rupees 138.01, exclusive of excise duty, and from October 1970 to May 25, 1971 when sugar was totally decontrolled at rates ranging from Rs. 132.30 to Rupees 151-38. It is undisputed that during the period of six weeks when the stay order granted by the High Court operated the appellants sold sugar at about Rs. 150.35. These figures were not accepted by the appellants, for, according to them, they sold free sugar during January 1971 to May 24, 1971 at prices ranging from Rs. 135.19 to Rs. 150.47, the average rate being Rs. 139.70 less Rs. 1.07 differential = Rs. 138.63. As against the levy price worked out by Government at Rs. 126.93, the appellants case was that on the actuals worked out for the year 1970-71, the price would be Rs. 129.42, thus causing to them a loss of Rs. 5.20 per quintal on levy sugar. The difference between the price calculated by the appellants and that calculated by the Government (Rs. 126.93) arises because of certain disparities in their respective figures, as also the percentage in recovery and duration. To the figure of Rs. 129.42, the appellants add additional cost of interest, increase is freightage by road and rail during the year, deterioration in quality, thus bringing the cost to Rs. 138.98. The loss on this calculation, according to them, would come to Rs. 3 lacs and odd on levy sugar which totalled 65,741 quintals.36. On Governments calculations based on the returns filed by the appellants, the Haryana factories realised Rs. 126.50 per quintal on levy sugar taking into account the different grades produced by them and Rs. 139.70 per quintal on free sugar upto May 25, 1971 when sugar was decontrolled. If levy sugar alone were to be taken into consideration, the loss per quintal of levy sugar would be the difference between Rs. 124.63 and Rs. 129.42, i.e., Rs. 5.20, and nearly double if the additional costs claimed by the appellants were to be admissible, which would raise their cost of production to Rs. 138.98. This calculation is of course on the basis that the return of Rs. 10.50 per quintal was altogether net, 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.37. The High Court, no doubt, did not hold the price of Rs. 124.63 as realistic and in view of the changes which had taken place during the year added in all Rs. 3.22, that is, Rs. 1.16 increase in wages, Rs. 0.56 additional depreciation and Rs. 1.20 as additional packing charges, totalling Rs. 2.92 and presumably Re. 0.30 for increase in purchase tax. Adding Rs. 3.22 to the Government price, the High Court worked out the fair price at Rs. 127.85 instead of Rs. 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 Rs. 127.85 being the correct price, the appellants would lose Rs. 3.22 per quintal on levy sugar, if the price realised on levy sugar alone were to be taken into consideration. The Solicitor General also conceded that purchase tax on cane in Haryana was increased during the year 1970-71 from 24 paise to 50 paise per quintal with effect from April 1, 1970 and that increase according to para. 11 of the return, dated May 1971 was not taken into account as the Government was of the opinion that the price of 1969-70, which was adopted for 1970-71, contained sufficient cushion to absorb the impact of this increase. This opinion was based on the fact that the working results for the year 1969-70 turned out to be actually very much better than estimated.As already stated, the increase in purchase tax appears to be included in Rs. 3.22, granted by the High Court for otherwise the three increases stated in the judgment, viz., increase in wages, increase in depreciation and increase in packing charges, would make the total of Rupees 2.92 only.39. The largest addition in the price claimed by the appellants was Rs. 2.29 per quintal by way of additional interest. The basis for the claim was that owing to the production of sugar in 1969-70 being the all time highest, there were larger stocks lying unrealeased with the factories both in the case of levy as well as free sugar, with the result that the factories had to bear additional interest on the working capital involved in such unreleased stocks. The usual period of six months for the release of stock on the basis of which the return on capital at the static figure of Rs. 10.50 a quintal had actually become unrealistic. The result, therefore, was that the factories could not expect to get the said return on the capital employed.40. Since the question was an important one we called upon the Government to disclose the correspondence, if any, which it had in this connection with the Tariff Commission. Thereupon the Government produced the relevant correspondence. It appears from that correspondence that on March 26, 1970 the Indian Sugar Mills Association had made a representation for addition in the return of Rs. 10.50 on the ground that the 1969-70 years 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 Rs. 10.50 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.41. 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 the unconventional method of granting a fixed return of Rs. 10.50 was that these two factors would enable the manufacturer to pay a higher cane price. The figures supplied to us by Government called out from the returns filed by the factories would also suggest that the claim for Rs. 2.29 per quintal was not warranted. The total production by the Haryana factories during 1970-71 was of the tune of 82,756 tonnes. Despatches upto May 24, 1971, when sugar was decontrolled, of free sugar were 7,065 tonnes at Rs. 139.70 per quintal. Despatches of levy sugar, upto the date of the interim order of stay dated April 8, 1971 were 2,380 tonnes and from April 8, 1971 to May 24, 1971, 4,194 tonnes at Rupees 158.02 per quintal. The balance of stock lying with the factories as on June 1, 1971 was 6911.7 tonnes. Despatches during the decontrol period, i.e., from June 1, 1971 to December 31, 1971 were 63,023 tonnes at the rate of Rs. 151.39 per quintal, leaving a balance in hand of 6094 tonnes. It may be mentioned that on June 30, 1972 the stock lying on hand came to 427 tonnes only. Since this was the position, the claim for additional interest at Rs. 2.29 per quintal does not appear to be sustainable, nor also the claim for deterioration of stock owing to the stock lying stored up beyond the normal period, the loss by way of deterioration during such period being the normal incidence of the trade which the manufacturer must anticipate.42. Regarding the claim of 63 paise owing to increase in freightage (i.e., of 54 paise by road and 9 paise by rail), the Tariff Commission refused to concede that claim. Even before us there are no adequate materials to come to any precise conclusion as to the extra burden which the appellants had actually to bear, though increase in freightage during the year is admitted.The actual figures of the year for duration and recovery were not in dispute. They were 162 days and 8.69% respectively. On that basis, the cost, according to the cost-schedule worked out for Haryana by the Commission, would come to Rs. 126.61, including Rs. 10.50. To that amount may be added the following, even assuming that they are all allowable : (1) increase in wages, Re. 1.05, (2) increase in depreciation, 56 paise, (3) deterioration in quality, 10 paise, (4) insurance and godown costs, 7 paise, (5) increase in cost of consumable stores, 12 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, Rs. 2.84 and (9) selling expenses, 45 paise (total Rs. 7.18 = Rs. 133.79). But for the reasons given above, items 3, 7 and 8 (total Rs. 3,66) must go and therefore the figure would come to Rs. 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 Rupees 124.63 and 70,650 quintals at the average rate of Rs. 136.49. The average price thus realised comes to Rs. 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 Rs. 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.45. 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.