Facts in Brief

The Appellant was a company engaged in the manufacture and sale of various medicines and life-saving drugs throughout India, including in the State of Bihar. It had a branch or sales depot at Patna, registered as a dealer, and effected sales of its manufactured products through wholesale distributors/stockists in the districts of Bihar, who in turn sold them to retailers, through whom the medicines and drugs reached consumers. Almost 94% of the medicines and drugs sold by the company were at controlled prices, exclusive of local taxes, under the Drugs (Price Control) Order, 1979, issued by the Central Government under Section 3(1) of the Essential Commodities Act. The company was expressly prohibited from selling these medicines and drugs in excess of the controlled price fixed by the Central Government from time to time, which allowed the manufacturer or producer to pass on the tax liability to the consumer.

Sub-section (1) of Section 5 of the Bihar Finance Act, 1981 provided for the levy of a surcharge on every dealer whose gross turnover during a year exceeded ₹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. Sub-section (3) of Section 5 prohibited such a dealer from collecting the amount of surcharge payable by him from purchasers. The Appellant challenged the constitutional validity of these sections, placing on record printed price-lists of its well-known medicines and drugs, showing the price at which it sold to retailers as also the retail price, both inclusive of excise duty. It appeared from the terms of the contract that sales tax and local taxes would be charged wherever applicable. The High Court upheld the constitutional validity, and the same was challenged in appeal.

Arguments

The Appellants argued:

• Sub-section (3) of Section 5 of the Act, providing that no dealer shall be entitled to collect the surcharge levied on him, must yield to Section 6 of the Essential Commodities Act, which provided that any order made under Section 3 of that Act shall have effect notwithstanding anything inconsistent contained in any other enactment. Applying the doctrine of occupied field and the concept of federal supremacy, it was clear that the Union legislation should prevail in a case of conflict between List II and List III.
• Sub-section (3) of Section 5, which provided that no dealer shall be entitled to collect the amount of surcharge levied on him, clearly fell within Entry 54 of List II of Schedule VII and was repugnant to the scheme of the Drugs (Price Control) Order, 1979, insofar as price fixation of drugs was concerned, and particularly to para 21, which enabled the manufacturer of drugs to pass on the liability to pay sales tax to the consumer. In the event of such repugnance between the Control Order (made under Section 6 of the Essential Commodities Act, a Central enactment) and the State law, the Central law must prevail.
• The provision contained in Sub-section (3) of Section 5 was ex facie and patently discriminatory.
• The restriction imposed by Sub-section (3) of Section 5, which prevented manufacturers/producers of medicines and drugs from passing on the liability to pay surcharge, was confiscatory and cast a disproportionate burden on such manufacturers/producers, stipulating an unreasonable restriction on the freedom to carry on their business guaranteed under Article 19(1)(g).
• Sub-section (1) of Section 5 was ultra vires the State Legislature of Bihar, insofar as it took into account the manufacturer’s gross turnover as defined in Section 2(j) of the Act, which included transactions relating to the sale or purchase of goods that had taken place in the course of inter-State trade or commerce, or outside the territory of India.

The State, submitting that there was no inconsistency between Sub-section (3) of Section 5 and para 21 of the Control Order, and that both laws were capable of being obeyed, argued that the question of repugnance under Article 254(1) between a law made by Parliament and a law made by a State Legislature arose only where both legislations occupied the same field with respect to one of the matters enumerated in the Concurrent List, and there was a direct conflict between the two laws. It was only where both requirements were fulfilled that the State law would, to the extent of repugnance, become void. Since this was not the case, the question was to be determined not by the “doctrine of occupied field” but by the rule of “pith and substance.”

It was further submitted that the Appellants, being manufacturers or producers of drugs, were not governed by para 21 of the Control Order (which related to retail sale) but by para 24 thereof, which dealt with sale by a manufacturer/producer to a wholesale distributor. Under para 24 of the Control Order, the manufacturer/producer was not entitled to pass on the liability to pay sales tax, and the price charged to the wholesale distributor was inclusive of sales tax.

It was argued that since the rationale of controlled prices of an essential commodity fixed by a Control Order by the Central Government under the Essential Commodities Act was only to fix the maximum price of the commodities, and there was nothing to prevent a manufacturer or producer of medicines and drugs from selling at a price lower than the controlled price, a levy of surcharge under Sub-section (1) of Section 5 of the Bihar Act would only cut down the profits of the manufacturer/producer, but that would not make the State law inconsistent with the Central law. Since the surcharge was borne by the manufacturers/producers under Sub-section (3) of Section 5, the controlled price of such medicines and drugs to the consumer remained the same.

Judgment

The Apex Court held that the constitutional validity of Sub-section (1) of Section 5 of the Bihar Act — which provided for the classification of dealers whose gross turnover during a year exceeded ₹5 lakhs for the purpose of levy of surcharge in addition to the tax payable by them — was not assailable. So long as sales in the course of inter-State trade and commerce, sales outside the State, and sales in the course of import into or export out of the territory of India were not taxed, there was nothing to prevent the State Legislature, while making a law for the levy of surcharge under Entry 54 of List II of the Seventh Schedule, from taking into account the total turnover of the dealer within the State and providing, as had been done by Sub-section (1) of Section 5.

The Court also observed that since the liability to pay a surcharge was not on the gross turnover including transactions covered by Article 286, but only on sales within the State, and the surcharge was sought to be levied on dealers who had a position of economic superiority, the provision was valid. Since the definition of “gross turnover” in the Bihar Act was adopted not for the purpose of bringing to surcharge inter-State sales, outside sales, or sales in the course of import into or export out of the territory of India, but only for the purpose of classifying dealers within the State and identifying the class of dealers liable to pay such surcharge, it was not ultra vires — the underlying object being to classify dealers into those who were economically superior and those who were not.

Declaring that the sufficiency of territorial nexus involved a consideration of two elements — (a) the connection must be real and not illusory, and (b) the liability sought to be imposed must be pertinent to that territorial connection — the Court held that there was sufficient territorial nexus between the persons sought to be charged and the State seeking to tax them.

For the Common Man

The Apex Court declared that the doctrine of pith and substance, employed to ascertain legislative competence, was applicable only to legislations under List III of Schedule VII. Therefore, the decision whether a law was repugnant to a State law was to be determined only by ascertaining the character of the legislation by reference to the Doctrine of Pith and Substance.