Case: Union of India Vs. Paliwal Electricals Private Limited

The Allahabad High Court has struck down Para 7 of the Exemption Notification No. 175 of 1986, dated March 1, 1986 [Which para was inserted by the Notfn. No. 223 of 1987] on the ground of violation of Article 14 of the Constitution of India. The decision under appeal is largely influenced by and follows the decision of a learned Single Judge of the Calcutta High Court in Banner and Company v. Union of India.

Reasoning: The object underlying Para 7 is self-evident. If a small manufacturer who affixes the brand-name or trade-name of an ineligible manufacturer (a convenient expression to denote a manufacturer outside the purview of Notfn. No. 175 of 1986 and who owns or entitled to use a brand-name or trade-name), the very raison detre for granting the exemption disappears. The exemption is designed to enable the small manufacturer to survive in the market in competition with the ineligible manufacturer but if he joins, or identifies himself with, the ineligible manufacturer his goods become one with the goods of such ineligible manufacturer. They become indistinguishable. In the market, they will all be understood as one and the same goods. They no longer need the benefit under the Notification. It must be remembered that by extending the benefit of exemption, the State is foregoing public revenue to which it is entitled under the Act. The loss to public revenue is supposed to be compensated by helping along the small manufacturers to survive in the market and continue to produce. Once he becomes one with his competitor, the need for supporting crutches disappears. There is no reason why in such a case the State should forego the revenue due to it under the Act. It is the insufficient appreciation of this basic aspect that has led both the Allahabad and Calcutta High Courts astray. But before we deal with their approach and reasoning, it would be appropriate to deal with the nature and character of the power of exemption under Rule 8 of the Central Excise Rules.We are of the opinion that while examining the challenge to an Exemption Notification under the Central Excise Act, the observations in the decisions aforesaid should be kept in mind. It should also be remembered that generally speaking the Exemption Notification and the terms and conditions prescribed therein represent the policies of the government evolved to sub-serve public interest and public revenue. A very heavy burden lies upon the person who challenges them on the ground of Article 14. Unless otherwise established, the Court must presume that the said amendment was found by the Central Government to be necessary for giving effect to its policy [underlying the notification] on the basis of the working of the said Notification and that such an amendment was found necessary to prevent persons from taking unfair advantage of the concession. In fact, in this case, the explanatory note appended to amending Notification says so in so many words. If necessary, the Court could have called upon the Central Government to establish the reasons behind the amendment. [It did not think it fit to do so.] It is equally necessary to bear in mind, as pointed out repeatedly by this Court, that in economic and taxation sphere, a large latitude should be allowed to the Legislature. The Courts should bear in mind the following observations made by a Constitution Bench of this Court in R. K. Garg v. Union of India 372 :"Another rule of equal importance is that laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion etc. It has been said by no less a person than Holmes, J. that the legislature should be allowed some play in the joints, because it has to deal with complex problems which do not admit of solution through any doctrinaire or straight jacket formula and this is particularly true in case of legislation dealing with economic matters, where, having regard to the nature of the problems required to be deal with, greater play in the joints has to be allowed to the legislature. The Court should feel more inclined to give judicial deference to legislative judgment in the field of economic regulation than in other areas where fundamental human rights areCourt must always remember that legislation is directed to practical problems, that the economic mechanism is highly sensitive and complex, that many problems are singular and contingent, that laws are not abstract propositions and do not relate to abstract units and are not to be measured by abstract symmetry that exact wisdom and nice adaptation of remedy are not always possible and that judgment is largely a prophecy based on meagre and uninterpreted experience. Every legislation particularly in economic matters is essentially empiric and it is based on experimentation or what one may call trial and effort method and therefore it cannot provide for all possible situations or anticipate all possible abuses. There may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid.We are of the opinion that the judgment under appeal is erroneous for the reason that it has not borne in mind the aforementioned relevant consideration. It is equally in error in saying that the classification it brings about assuming that it does so - is not reasonable or that it has no nexus with the object underlying the Notification. Not only is Para 7 consistent with the object underlying the Notification, it indeed promotes it, as explained hereinbefore. We are constrained to say that the High Court has not bestowed the care and consideration which is expected of it before it strikes down such a Notification - or, for that matter, any statutory provision. For the very reason, the decision of the learned Single Judge of the Calcutta High Court in Banner & Co. v. Union of India must also be held to have been wrongly decided.Bush (India) Limited was concerned with the meaning and scope of the definition of "manufacture" in Section 2(f) and not with any Exemption Notification, much less with the Notifications concerned herein. The question there was whether merely by placing the Garrard Record Changer Decks on a wooden base with cover and selling it under the trade-name of Brush Auto-Changer, can it be regarded that a process of manufacture has taken place. It was held that mere placing of a ready-to-use article on a wooden base, with or without a cover, with a view to make it more saleable does not amount to process of manufacture within the meaning of Section 2(f). Bata (India) Limited merely says that just because Bata places it brand-name on the footwear manufactured by another, Bata cannot be treated as manufacturer of the said goods. Bapalal and Company deals with Notification No. 119 of 1975 dealing with job-works and the exemption granted to job workers. The decision in Carona Sahu Company Limited is similar to the decision in Bata (India) Limited. We are unable to see any relevance these decisions have on the question at issue herein. We have already referred to the ratio of Cibatul. Food Specialities Limited was a case where it manufactured certain goods whereupon it affixed the brand-name of Nestle under an agreement with the latter and sold them to Nestle. The question was as to how to value the said goods. The Revenue contended that the value should be determined on the basis of wholesale price at which Nestle sold those goods. The plea was rejected by this Court holding that the wholesale price at which Food Specialities sold the said goods to Nestle should be basis for determining the value.