Case: Hoechst Pharmaceuticals Ltd. And Another Etc Vs. State Of Bihar And Others

cake sold inside the State and. deducting only the value of the copra relatable to the oil sold inside the State. It was contended by the assessee that in the calculation of the net turnover, he was entitled to include the total value of the oil sold by him, both inside and outside the State, and deduct therefrom the total value of the copra purchased by him and further, under the overriding provision of s. 26 of the Act, he was entitled to have the value of the oil sold outside the State deducted. The main controversy between the parties centered around the method of computation of the net turnover. The contention advanced by the assessee was rejected by the High Court, which limited the deduction to purchase of copra relatable to the sales inside the State. In affirming that decision, this Court observed that so far as sales of coconut oil outside the State were concerned, they were, as it were, by reason of s. 26 of the Act read in conjunction with Art. 286, taken out of the purview of the Act, and that they had the effect of setting at naught and obliterating in regard thereto the provisions contained in the Act relating to the imposition of tax on the sale or purchase of such goods and in particular the provision contained in the charging section, 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 Fernandezs case, supra, 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 computation e of the turnover liable to tax thereunder, observed:"This position is not at all affected by the provision with regard to registration and submissions of returns of the 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 purposes of the registration of a dealer and submission of the returns of sales tax include these transactions in the dealers turnover. Such inclusion, however, for the purposes aforesaid would not affect the non-liability of these transactions to levy or imposition of sales tax by virtue of the provisions of Art. 286 of the Constitution and the corresponding pro vision enacted in the Act, as above."34. The decision in Fernandezs case, supra, is therefore clearly an authority for the proposition that the- State Legislature notwithstanding Art. 286 of the Constitution while making a law under Entry 54 of List II of the Seventh Schedule can, for purposes of the registration of a dealer and submission of returns of sales tax, include the transactions covered by Art. 286 of the Constitution That being so, the constitutional validity of sub-s. (1) of s. 5 of the Act which provides for the classification of dealers whose gross turnover during a year exceeds Rs. 5 lakhs for the purpose of levy of surcharge, in addition to the tax payable by him, is not assailable. So long as sales in the course of inter-State trade and commerce or sales out side the State and sales in the course of import into, or export out of the territory of India are not taxed, there is nothing to prevent the State Legislature while making a law for the levy of a surcharge under Entry 54 of List II of the Seventh Schedule to take into account the total turnover of the dealer within the State and provide, as has been done by sub-s. (1) of s. 5 of the Act, that if the gross turnover of such dealer exceeds Rs. 5 lakhs in a year, he shall, in addition to the tax, also pay a surcharge at such rate not exceeding 10 per centum of the tax as may be provided. The liability to pay a surcharge is not on the gross turnover including the transactions covered by Art. 286 but is only on inside sales an d the surcharge is sought to be levied on dealers who have a position of economic superiority. The definition of gross turnover in s. 2(j) of the Act is adopted not for the purpose of bringing to surcharge inter- State sales or outside sales or sales in the course of import into, or export of goods out of the territory of India, but is only for the purpose of classifying dealers within the State and to identify the class of dealers liable to pay such surcharge. The underlying obje ct is to classify dealers into those who are economically superior and those who are not. That is to say, the imposition of surcharge is on those who have the capacity to bear the burden of additional tax. There is sufficient territorial nexus between the persons sought to be charged and the State seeking to tax them. Sufficiency of territorial nexus involves a consideration of two elements viz.: (a) the connection must be real and not illusory, and (b) the liabil ity sought to be imposed must be pertinent to that territorial connection: State of Bombay v. R.M.D. Chamarbaugwala(1), The Tata Iron &Steel Co. Ltd. v. State of Bihar(2), and International Tourist Corporation etc. etc. v. State of Haryan a & Ors.(3) The gross turnover of a dealer is taken into account in sub-s. (1) of s. 5 of the Act for the purpose of identifying the class of dealers liable to pay a surcharge not on the gross turnover but on the tax payable by them. Fo

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

Explanation:
0[ds]We find it difficult to subscribe to the proposition advanced on behalf of the appellants that merely because of the opening words of Art. 246(3) of the Constitution "Subject to clauses (I) and (2)" and the non-obstante clause in Art. . 246(1) Notwithstanding . anything in clauses (2) and (3)", sub-s. (3) of s. 5 of the Act which provides that no dealer shall be entitled to collect the amount of surcharge must be struck down as ultra vires the State Legislature inasmuch as it is in consistent with paragraph 21 of the drugs (Price Control) order issued by the Central Government under sub-s. (I) of s. 3 of the Essential Commodities Act which enables the manufacturer or producer of drugs to pass on the liability to pay sales tax to the consumer. The submission is that sub-s. (3) of s. 5 of the Act enacted by the State Legislature while making a law under Entry 54 of List II of the Seventh Schedule which interdicts that a dealer liable to pay surcharge under sub-s. (1) of s. 5 of the Act shall not be entitled to collect it from the purchaser, directly trenches upon Union power to legislate with respect to fixation of price of essential commodities under Entry 33 of List Ill. It is said that if both are valid, then ex hypothesi the law made by Parliament must prevail and the State law protanto must yield. We are afraid, the contention cannot prevail in view of the well accepted principles,The words "Notwithstanding anything contained in clauses (2) and (3)  in Art. 246 (l) and the words "Subject to clauses A (I.) and (2)" in Art. 246(3) lay down the principle of Federal supremacy viz. that in case of inevitable conflict between Union and State powers, the Union power as enumerated in List T shall prevail over the State power as enumerated in List II and III. and in case of overlapping between List 11 and III, the 13 former shall prevail. But the principle of Federal supremacy laid down in Art. 246 of the Constitution cannot be resorted to unless there is an "irreconcilable" conflict between the Entries in the Union and State Lists. In the case of a seeming conflict between the Entries in the two lists, the Entries should be read together without giving a narrow and restricted sense to either of them. Secondly, an attempt should be made to see whether the two Entries cannot be reconciled so as to avoid a conflict of jurisdiction. It should be considered whether a fair reconciliation can be achieved by giving to the language or the Union Legislative List a meaning which, if less wide than it night 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(l) 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 anoth er list is onlywe have endeavoured so far, thequestion raised as to the constitutional validity ofsub-s. (3) of s. S of the Acthas to be determined by application of the rule of the pith and substance whether or not theof the impugned legislation was competently enacted under Art. 246, and therefore the question of repugnancy under Art. 254 was not a matter inissue. The submission put forward on behalf of the appellants however is that there is direct collision and/or irreconciliable 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 paragraph 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 t o Entry 33 of List III. It is sought to be argued that the words "a law made by Parliament which Parliament is competent to enact" must be construed to mean not only a law made by Parliament with respect to one of the matters enumerated in the Concurrent List but they are wide enough to include a law made by Parliament with respect to any of the matters enumerated in the Union List. The argument was put in this form. Inconsidering whether a State law is repugnant to a law made by Parliament, two questions arise: First, is the law made by Parliament viz. the Essential Commodities Act, a valid law ? For, if it is not, no question of repugnancy to a State law can arise. If however it is a valid law, the question as to what constitutes repugnancy directly arises. The Second question turns on a construction of the words "a law made by Parliament which Parliament is competent to enact" in Art. 254(1).Strong reliance is placed on the judgment of the High Court of Australia in Clyde Engineering Company Limited v. Cowburn(1) and to a passage in Australian Federal Constitutional Law by Colin Howard, 2nd edn. at pp. 34-35. Our attention is also drawn to two other decisions of the High Court of Australia: Ex parte Mc Lean(2) and Stock Motor Ploughs Limited v. Forsyth.(3) The decision in Clyde Engineering Companys cases, supra, is an authority for the proposition that two enactments may be inconsistent where one statute takes away the rights conferred by the other although obedience to each one of them may be possible without disobeying the other. The contention is that paragraph 21 of the Control order confers a right on the manufacturers and producers of medicines a nd drugs to pass on the liability for sales tax while sub-s. (3) of s. 5 of the Act prohibits such manufacturers or producers from passing on such liability. The argument cannot prevail for two obvious reasons viz (1) Entry 54 of List II is a tax entry and therefore there is no question of repugnancy between sub-s. (3) of s. 5 of the Act which is a law made by the State Legislature for the imposition of tax on sale or purchase of goods relatable to Entry 54 and paragraph 21 o f the Control order issued by the Central Government under sub-s. (1) of s. 3 of the Essential Commodities Act which is a law made by Parliament relatable to Entry 33 of List III. And (2). The question of repugnancy can only arise in connection with the subjects enumerated in the Concurrent List as regards which both the Union and the State Legislatures have concurrent powers so that the question of conflict between laws made by both Legislatures relating to the same subject mayis no ground whatever for holding that sub-s. (3) of s. 5 of the Act is arbitrary or irrational or that it treats unequals as equals, or that it imposes a disproportionate burden on a certain class of dealers. It must be remembered that sub-s. (1) of s. 5 of the Act provides for the levy of a surcharge having a gross turnover of Rs 5 lakhs or more in a year at a uniform rate of 10 per centum of the tax payable by them, irrespective whether they are dealers in essential commodities or not. A surcharge in its true nature and character is nothing but a higher rate of tax to raise revenue for general purposes. The levy of surcharge under sub-s. (1) of s. 5 of the Act falls uniformly on a certain class of dealers depending upon their capacity to bear the additional burden. From a fiscal point of view, a sales tax on a manufacturer or producer involves the complication of price-structure. It is apt to increase the price of the commodity, and tends to be shifted forward to the consumer. The manufacturers or producers often formulate the ir prices in terms of certain profit targets. Their initial response would be to raise prices by the full amount of the tax. Where the conventional mark-up leaves substantial unrealized profits, successful tax shifting is possible regardless of the nature of the tax. If, on the other hand, the tax cannot be passed on to the consumer, it must be shifted backwards to ownerscontention that sub-s. (3) of s. 5 of the Act imposes an unreasonable restriction upon the freedom of trade guaranteed under Art. 19 (1) (g) of the Constitution proceeds on the basis that sales tax being essentially an indirect tax, it was not competent for the Legislature to make a provision prohibiting the dealer from collecting the amount of surcharge cannot prevail. It is urged that the surcharge does not retain its avowed character as sales tax but in its true gature and character is virtually 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 not doubt true that a sales tax is, according to the accepted notions, intended to be passed on to the buyer, and the provisions authorising an d regulating the collection of sales tax by the seller from the purchaser are a usual feature of sales tax legislation. But it is not an essential characteristic of a sales tax that the seller must have the right to pass it on to the consumer, nor is the power of the Legislature to impose a tax on sales conditional on its making a provision for sellers to collect the tax from the purchasers. Whether a law should be enacted, imposing a sales tax, or validating the imposition of sales t ax, when the seller is not in a position to pass it on to the consumer, is a matter of policy and does not effect the competence of the legislature: see: The Tata Iron &Steel Co. Ltd. v. The State of Bihar(1): M/s. J.K. Jute Mills Co. Ltd. v. The State of Uttar Pradesh &Anr.(2) 5. Kodar v. State of Kerala.(3) The contention based on the Art. 19 (1) (g) cannot therefore be sustained.There was quite some discussion at the Bar as to whether the assent of the President is justiciable. It was submitted that since not only sub-s. (1) of s. 5 of the Act which provides for the levy of a surcharge on dealers having a gross turnover of Rs. 5 lakhs in a year but also sub-s. (3) thereof which interdicts that no such dealer shall be entitled to recover the amount of surcharge collected from him, are both relatable to Entry 54 of List II of the Seventh Schedule, there was no occasion for the Governor to have referred the Bill under Art. 200 to the President for his assent. It is some what strange that this argument should be advanced for the first time after a lapse of 30 years of the inauguration of the Constitution. Immediate provocation for this argument appears to be an obiter dictum of Lord Diplock while delivering the judgment of the Judicial Committee in Teh Cheng Poh @, Char Meh v. Public Prosecutor, Malaysia(1) that "the Courts are not powerless when there is a failure to exercise the power of revocation of a Proclamation of Emergency "issued by the Ruler of Malaysia under s. 47 (2) of the Internal Security Act. The ultimate decision of the Privy Council was that since by virtue of s 47 (2) of that Act the security area proclamation remained lawful until revoked b y resolutions of both Houses of Parliament or by the Ruler, it could not be deemed to lapse because the conditions upon which the Ruler had exercised his discretion to make the Proclamation were no longer in existence. That being so, the decision in Teh Cheng Pohs case, supra, is not an authority for the proposition that the assent of the President is justiciable nor can it be spelled out that that Court can enquire into the reasons why the Bill was reserved by the Governor under Art. 20 0 for the assent of the President nor whether the President applied his mind to the question whether there was repugnancy between the Bill reserved for his consideration and received his assent under Art. 254 (2).The constitutional position of a Governor is clearly defined. The Governor is made a component part of the Legislature of a State under Art. 168 because every Bill passed by the State Legislation has to be reserved for the assent of the Governor under Art. 200. Under t hat Article, the Governor can adopt one of the three courses, namely: (1) He may give his assent to it, in which case the Bill becomes a law; or (2) He may except in the case of a Money Bill withhold his assent therefrom, in which cases 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, dergoate from the powers of the High Court". Under Art. 201, when a Bill is reserved by the Governor for the consideration of the President, the President can adopt two courses, namely: (1) He may give his assent to it in which case again the Bill becomes a law; or (2) He may except where the Bill is not a Money Bill, direct the Governor to return the Bill to the House or, as the case may be, the Houses of the Legislature of the State together with such message as is mentioned in the first proviso to Art. 200. When a Bill is so reserved by the President, the House or Houses shall reconsider it accordingly within a period of six months from the date of receipt of such message and if it is again passed by the House or Houses with or without amendment, it shall be presented again to the President for his consideration. Thus, it is clear that a Bill passed by the State Assembly may become law if the Governor gives his assent to it or if, having been reserved by the Governor for the consideration of the President, it is assented to by the PresidentThere is no provision in the Constitution which lays down that a Bill which has been assented to by the President would be ineffective as an Act if there was no compelling necessity for the Governor to reserve it for the assent of the President. A Bill which attracts Art. 254 (2) or Art. 304 (b) where it is introduced or moved in the Legislative Assembly of a State without the previous sanction of the President or which attracted Art. 31 (3) as it was then in force, or falling under the second proviso to Art. 200 has necessarily to be reserved for the consideration of the President. There may also be a Bill passed by the State legislature where there may be a genuine doubt about the applicability of any of the provisions of the Constitution which require the assent of the President to be given to it in order that it may be effective as an Act. In such a case, it is for the Governor to exercise his discretion and to decide whether he should assent to the Bill or should reserve it for consideration of the President to avoid any furture complication Even if it ultimately turns out that there was no necessity for the Governor to have reserved a Bill for the consideration of the President, still he having done so and obtained the assent of the President, the Act so passed cannot be held to be unconstitutional on the ground of want of proper assent. This aspect of the matter, as the law now stands, is not open to scrutiny by the courts. In the instant case, the Finance Bill which ultimately became the Act in question was a consolidating Act relating to different subjects and perhaps the Governor felt that it was necessary to reserve it for the assent of the President. We have no hesitation in holding that the assent of the President is not justiciable, and we cannot spell out any infirmity arising out of his decision to give such assent.There still remains the contention that for the purpose of levying surcharge it is impermissible to take into account the method of computation of gross turnover, the turnover representing sales in the course of inter-State trade and outside the State and sales in the course of export out of India. It is urged that the non-obstante clause in s. 7 of the Act has the effect of taking these transactions out of the purview of the Act with the result that a dealer is not required nor is he entitled to include them in the calculations of his turnover liable to tax thereunder. The submission is that sub-s. (1) of s. 5 of the Act is ultra vires the State Legislature in so far as for purposes of levying the charge, the incidence of liability of a dealer to pay such surcharge depends on his gross turnover as defined in 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 A. V. Fernandez v. State ofis 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 be levied or imposed on them and they do not come within the purview of the act at all. The very fact of their non-liability to tax is sufficient to exclude them from the calculation of the gross turnover as well as the net turnover on which sales tax can be levied or imposed.The submission appears to proceed on a misapprehension of the principles laid down in Fernandezs case,understand the ratio deducible in Fernandezs case, supra, a few facts have to be stated. The business of the assessee in that case consisted in the purchase of copra, manufacture of coconut oil and cake therefrom and sale of oil and cake to parties inside the State and sale of oil to parties outside the State. In 1951, the Travancore-Cochin General Sales Tax Act, 1125 was amended by addition of s. 26 which incorporated the ban of Art. 286 of the Constitution and was in pari materia with s. 7 of the Act. For the year 1951-52, the Sales Tax officer assessed the assessee to sales tax on a net assessable turnover by taking the value of the whole of the copra purchased by him, adding thereto the respective values of the oil and cake sold inside the State and. deducting only the value of the copra relatable to the oil sold inside the State. It was contended by the assessee that in the calculation of the net turnover, he was entitled to include the total value of the oil sold by him, both inside and outside the State, and deduct therefrom the total value of the copra purchased by him and further, under the overriding provision of s. 26 of the Act, he was entitled to have the value of the oil sold outside the State deducted. The main controversy between the parties centered around the method of computation of the net turnover. The contention advanced by the assessee was rejected by the High Court, which limited the deduction to purchase of copra relatable to the sales inside the State. In affirming that decision, this Court observed that so far as sales of coconut oil outside the State were concerned, they were, as it were, by reason of s. 26 of the Act read in conjunction with Art. 286, taken out of the purview of the Act, and that they had the effect of setting at naught and obliterating in regard thereto the provisions contained in the Act relating to the imposition of tax on the sale or purchase of such goods and in particular the provision contained in the charging section, 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 Fernandezs case, supra, 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 computation e of the turnover liable to tax thereunder,position is not at all affected by the provision with regard to registration and submissions of returns of the 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 purposes of the registration of a dealer and submission of the returns of sales tax include these transactions in the dealers turnover. Such inclusion, however, for the purposes aforesaid would not affect the non-liability of these transactions to levy or imposition of sales tax by virtue of the provisions of Art. 286 of the Constitution and the corresponding pro vision enacted in the Act, asdecision in Fernandezs case, supra, is therefore clearly an authority for the proposition that the- State Legislature notwithstanding Art. 286 of the Constitution while making a law under Entry 54 of List II of the Seventh Schedule can, for purposes of the registration of a dealer and submission of returns of sales tax, include the transactions covered by Art. 286 of the Constitution That being so, the constitutional validity of sub-s. (1) of s. 5 of the Act which provides for the classification of dealers whose gross turnover during a year exceeds Rs. 5 lakhs for the purpose of levy of surcharge, in addition to the tax payable by him, is not assailable. So long as sales in the course of inter-State trade and commerce or sales out side the State and sales in the course of import into, or export out of the territory of India are not taxed, there is nothing to prevent the State Legislature while making a law for the levy of a surcharge under Entry 54 of List II of the Seventh Schedule to take into account the total turnover of the dealer within the State and provide, as has been done by sub-s. (1) of s. 5 of the Act, that if the gross turnover of such dealer exceeds Rs. 5 lakhs in a year, he shall, in addition to the tax, also pay a surcharge at such rate not exceeding 10 per centum of the tax as may be provided. The liability to pay a surcharge is not on the gross turnover including the transactions covered by Art. 286 but is only on inside sales an d the surcharge is sought to be levied on dealers who have a position of economic superiority. The definition of gross turnover in s. 2(j) of the Act is adopted not for the purpose of bringing to surcharge inter- State sales or outside sales or sales in the course of import into, or export of goods out of the territory of India, but is only for the purpose of classifying dealers within the State and to identify the class of dealers liable to pay such surcharge. The underlying obje ct is to classify dealers into those who are economically superior and those who are not. That is to say, the imposition of surcharge is on those who have the capacity to bear the burden of additional tax. There is sufficient territorial nexus between the persons sought to be charged and the State seeking to tax them. Sufficiency of territorial nexus involves a consideration of two elements viz.: (a) the connection must be real and not illusory, and (b) the liabil ity sought to be imposed must be pertinent to that territorial connection: State of Bombay v. R.M.D. Chamarbaugwala(1), The Tata Iron &Steel Co. Ltd. v. State of Bihar(2), and International Tourist Corporation etc. etc. v. State of Haryan a & Ors.(3) The gross turnover of a dealer is taken into account in sub-s. (1) of s. 5 of the Act for the purpose of identifying the class of dealers liable to pay a surcharge not on the gross turnover but on the tax payable by them.