HOECHST PHARMACEUTICALS LTD. AND ANOTHER ETC. v. STATE OF BIHAR AND OTHERS

Citation: [1983] 3 S.C.R. 130

Court: Supreme Court of India

Bench: A.P. SEN, E.S. VENKATARAMIAH, R.B. MISRA

Case summary

It is therefore submitted that there is no question of repugnancy and it can be avoided by the principle of reconcilation. As regards the manufacturers and producers of medicines and drugs, the High Court held that there was no irreconciliable conflict between sub-s.

Judgment text

HOECHST PHARMACEUTICALS LTD. AND ANOTHER ETC. v. STATE OF BIHAR AND OTHERS May 6, 1983 (A. P. SEN, E. S. VENKATARAM! AH AND R. B. MISRA, JJ. ] Bihar Finance Act,. 1981-Sub-ss. (/)and (3) of s. 5-Levy of surcharge on sales tax and prohibition from passing on liability thereof to purchasers- Whether l'oid in terms ofopening words ofArt. 246(3) for being in conflict with . A Paragraph 21 of Drugs (Price Control) Order, 1979 issued under s. 3(1) of Essential Commodities Act ? -Whether violative of Arts. 14 and 19(1) (g) ? - Whether it is an essential characteristic of Sales Tax that the seller must have right to pass it on to ~nsumer ? -Whether classification ofdealers on the basis of'gross turnover' as defined ins. 2( j) invalid? ,- Constitution of India-Art. 246-State Legislature's Power to 111ake law with respect to matters enumerated in List II-Whether subject to Parliament's power to make law in re~pect of matters enumerated in List 111 ?

-Doctrine of 'pith and substance' a~d the principle of'Federal Sufremacy". Constitution ofIndia-Art. 254(i)-Can repugna11cy between a Stale lair and a law made by Parliament arise outside the Concurrent field? Constitution ofIndia-Arts. 200 and 201-Governor's decision lo refer a Bill to President-Whelher subject to Court's scrutiny? -• Assent of Presfden_t'-- Whether justiciable'? Sub-section (I) of s. S of the Bihar Finance Act, 1981 provides for the levy of a surCharge in addition to the tax payable, On every dealei whose gross turnover during a year exceeds Rs. 5 lakhs and, sub-,s. (3) thereof prohibits such a dealer from collecting amount of surcharge payabie by him from the purchn. sers. In exercise of the pow~r· conferred by this _seCtion, the State Government fixed the rate of surcharge at 10 per cent of the total amount of tax payable by a dealer.

Two of the appellants in this batch of appeals were companies engaged in the manufacture and sale of the medicines throughout India whose branches! sales depots in Bihar were registered as dealers. Their products were sold through wholesale distributors/stockists appointed in_almost all tl)e districts of the State and their gross turnover within the State during the relevant period ran into crores ofrupees. -Most of. the medicines and drugs sold by them were ~overed ~ tte Drn~s (frice Control) Crder, 1979 iss¥•11 up~er 1ub·B. (I) Q( HOECHST V. BIHAR 131 s. 3 of the Essential Commodities Act in terms of which they were expressly prohibited from selling those medicines and drugs in excess of the controlled price·fixed- by the Central Government from time to time but were allowed to pass on the liability to the consumer. -During the assessment years 1980.. 81 and 1981-82 they had to pay the surcharge under s. 5(1) of the Bihar Finance Act, 1981at10 per cent of the tax payable by them.

The appellants challenged the Constitutional validity of sub-s. (3) of s. 5 but the same was repelled by the High _Court relying on the decision in S. Kodar v. State of Kera/a, [1979] I S. C. R. 121. It was contended on behalf of the appellants: (i) that sub-s. (3) ofs. 5 of the Act which is a State Jaw relatable to Entry 54 of List JI of the Sev absorb the surcharge levied under sub-s. (I) 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, thana State law which treats both classes equally and visits them with different burdens, would be violative of Art. 14. The State can,10t by treating unequals as equals impose different burden on different classes. (4) The restriction imposed by sub·s. ·(3) of s. 5 of the Act which prevents the manufacturers of 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 guarnteed under Art. 19 (! ) (g). (5) Sub.. s.. (! ) s. 5 of the Act is ultra vires the State Legislature of Bihar insofar a. fq_r the purpose of the levy of surcharge ·on a certain class of dealers, it takes into account his gross turnover as defined in s.. 2 (j) of the Act. It is urged that the State Legislature was not competent under Ent. ry 54 of List II of the Seventh Schedule to enact a . provision like sub-s. (! ) of s. 5 of the Act which makes the grass • turnover of a dealer as defined in s. 2 (j) to be the basis for the levy of a surcharge i. e. inclusive of transactions relating to sale ·or purchase of goods which have taken place in the course of inter-State trade or commerce or outside the territory of India.

Such transactions are outside the purview· of the Act and therefore they cannot be taj{e'n HOECHST v. BIHAR (Sen, J. ) 145 into consideration for computation of the gross turnover as ·defined in s. 2 (j) of the Act for the purpose of bearing the indcidence of surcharge. The contention to the contrary advanced by the learned Solicitor General appearing on· behalf of the. State of Bihar is that_ there is no inconsistency between sub-s. (3} of s. 5 of the Act and paragraph 21 of the Control Order and both the laws are capable of being obeyed. According to him, the question of repugnancy under Art. 254(1) between a law made by Parliament and a law made by the State Legislature arises only in case both the legisla-. tions occupy the same field with respect to one of the ,matters enumerated in the Concurrent List, and there is direct conflict between the two laws. It is only when both these requirements are fulfilled that the S\ate law will to the extent of repugnancy, become void.

The learned Solicitor General contends that the question has to be determined not by the application of the dootrine of occupied field but by the rule of 'pith and substance'. He further contends that the appellants being manufacturers or producers of drugs are not governed by paragraph 21 of the Control Order which. relates to retail sale but by paragraph 24 thereof which deals with sale by a manufacturer or producer to wholesale distri- , btitor. Under paragraph 24 of the Control Order, the manufacturer or producer is not entitled to pass on the liability to pay sales tax· and the price that he charges to the wholesaler or distributor. is inclusive of sales tax. He also contends that the controlled price of an essential commodity particularly of medicines and drugs fixed by a control order issued by the Central Government under sub-s. (l) of s.

3 of ihe 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 surc)large under sub-s. (I) of s. 5 of the Act will cut into the profits of the manufacturer or producer but that will not make the State law inconsist~nt 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. {I) of s. 5 of the Act would impose a \mnjen 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 only those appellants who arc dealears in essential commodities, the controlled price of which is exclusive of sales tax as fixed ·by control orders·issued by the Central Government under sub·s. (1) of s. 3 of the Essential Commodities Act, but cannot be availed of by the other appellants who are dealers in other commodities. The case of such appellants would be squarely ·governed by the decision of this Court in S. Kodar's case, supra, and . their liability to pay surcharge. under sub-s. (I) of s. 5 of the Act must be upheld, irrespective of the 'contentions raised in these appeals, on based. on the opening words "Subject to clauses (1) and (2)" in Art. 246(3) of the Constitution and on s. 6 of the Essential Commodities Act.

It is therefore necessary to first deal with the principles laid down in Kadar's case;supra. lit Kodar's case, supra, this Court upheld the Constitution validity of the Tamil Nadu Additional Sales Tax Act, 1970 which imposes additional sales tax at 5% on a dealer whose annual gross turnover exceeds Rs. 10 lakhs. The charging provision in sub-s. (I) of s. 2 of that Act is in terms similar to sub-s. (I) of s. 5 of the Act, r and provides that the tax payable by a dealer whose turnover for :1 year exceeds Rs. IO lakhs shall be increased by an additional taJt @ 5% of the tax payable by him. Sub-s. (2) of that Act is in pari materia with sub-s. (3) of s. 5 of the Act and provides that no dealer referred to in sub-s. (I) shall be entitled to collect the additional taJt payable by him. The Court laid down that : (I) The additional ta~: levied u. nder sub-s. (I) of s.

2 of that Act was in reality a tax on tht1 aggregate of sales effectect by a dealer during a year and thereforn the additional tax was really a tax on the sale of goods and not "' tax on the income of a dealer and therefore falls within the scope' of Entry 54 of List II of the Seventh Schedule. (2) Generally speak.. ing, the amount or rate of tax is a matter exclusively within the } . legislative judgment and so long as a tax retains its avowed character and does not confiscate property to the State . under the guise of a tax, its reasonableness cannot be questioned by the Court · The imposition of additional tax on a dealer whose annual turnover exceeds Rs. JO lakhs is not an unreasonable restriction on the fundamental rights ~aranteed un \ HOECHST v. BIHAR (Sen, i. )' 147 is upon the sale of goods and was not shown to be confiscatory.

(3) It is not an essential chracteristic of a ,sales tax· that the >eller must have the right to pass it usly manufactured bulk drug specified in the First Schedule or the Second Schedule and making it available at a fair price and subject to ihe provisions of sub-paragraph (2) and after m~king such inquiry as it deems fit, fix from time to time, by notification in th~ Official Gazette, the maximum price at which such bulk drug. shall be sold. Sub-paragraph (2) enjoins that whil~ fixing the price of a bulk drug under sub-paragraph (I), the Government m"ay take into accouni the average cost of production of each bulk drug manufactured by efficient manufacturer and allow a reasonable return on net-worth. Explanatfon 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 i~· the p'rnductiol).

of such bulk drug. Sub-paragraph (3) pro- . vides tl;at n persol). shall sell a bulk drug at a price exceeding the .. 'l . , r - . price notified 11nder sub-paragraph (1), J? lus local taxes, if any,· payable. It is urge r •• is a matter enumerated in the State List. " It is obvious that Art. 246 imposes limitations on the legisltitive • powers of the Union and State Legislatures and it_s ultimate analysis would reveal tl:ie following essentials : · k I: Parliament has exclusive power to legislate with respect' to any of the matters eirnmerated in List T HOEGHST v. B! HAR (Sen, J. ) 163 notwithstanding anything contained in els, (2) and (3). The non-obstante clause in A. rt. 246(1) provides for predominance or supremacy of Union Legislature. This power is not encumbered by anything contained in els. (2) and (3) for these clauses them~ selves are expressly limited and made subject to the non-obstante clause in Art.. 246(I). The combined effecl'of the different clauses contained.

in Art. 246 is no more and no less than this : that in respect of any matter falling within List I, Parliame. n~ has exclusive power of legislation. 2. The State ·Legislature has"exclusive power to make laws for such State or ·any part thereof with respect \o any of the matters enumerated in List II of the Seventh Schedule and it also has ·the power to ma) qtentiol! cannot prevail in view of t)W well accepted principles, ·. iloECHST v. BIHAR (Sen, J. ) The words "Notwithstanding anything contained in clauses (2). and (3)" in Art. 246 (I) and the words "Subject to clauses (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 I sball prevail over the State power as enumerated in List II and UL and in case of overlapping between List Il and III, the n 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"couflict 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 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 nonobstante 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. 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 Law on a subject enumerated in List III, the State· law must yield to the Central law unless it has been reserved for the assent of the President and has received his assent under Art. 254(2). The question of repugnancy arises only when both the Legislatures are competent to legislate in the same field i. e. when both the Union · .

and the State laws relate to a subject specfiied in List III and occupy · the same field. · As regards the distribntion of legislative ·powers between the Union and the States, Art. 246 adopts with immaterial alterations the scheme for the distribution of legislative powers contained in s. 100 of the Government of India Act, 1935. Our Constitution wa:; not written on a clean slate because a Federal Consti(ution ·had been established by the Government of Ii\. dia Act, 1935 and it still remains the framework on which the present Constitution is built. The provisions of the Constitution must accordingly· ·be read in the light c\f the provisions of the. Government of India Act, 1935 and the . principles laid down in connection with the nature and interpretation · ). of legislative power contained in the Government of India Act, 1935 are applicable, and have in fact been applied, to the interpretation of the Constitution. .

'In the matter of the Central Provinces & Berat Sales ofMotor Spirit anil Lubricants Taxation Act, 1938(') Gwyer, c. J. referred to the two decision of the Pnvy Council in Citizen Insurance Company V; Wiliam Parsons(') and Attorney Genera/for the Province ofOntario v. Attorney General for the Dominion of Canada(') which in his opinion had laid down 'most clearly the principles which should be applied by Coutts in the matter of deciding upon the competence of the two rival Legislatures that have been set up under the Indian Federal system. ' · With regard to the interpretation of the non-obstante clause in s. JOO(•! ) of the ·Government of India Act, 1935 Gwyer, C. J. obsetved : "It is a fundamental assumptio1i that the legislative powers of the Centre and Provinces could not have been intended to be in conflict with one another and, therefore, we must read them together, and interpret or modify the language in which one is expressed by the language of the other.

" "In all cases of this kind the question before the Court", according to the learned Chief Justice is not "how the two legislatiye powers are theoretically capable ofbeing construed, but how they are to be ' construed here and now. '' The general scheme of the British North America ·Act, 1867 with regard to •the distribution of legislative powers, and the general (I) [19391 F. C. ll. I. (2) L. R. [188217 A. C. 96 at p. 108. (3) L. R. [19121 A. C. 571 at p. 583.. iioECHST v. BIHAR (Sen, J. ) scope and effect of ss. 91 and 92, and their relations to each other were fully considered and commented upon in the case of Citizen Insurance Company's case, supra.

Sir Montague Smith delivering the judgment for the Board evolved the rule of reconciliation observing : "In these cases it is the duty qf the Courts, however 8 difficult it may be, to ascertain in what degree and to what extent, authority to deal with matters falling within these classes of subjects• ex;sts in each legislature, and to define in the particular case before them the limits of· their respective power. 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 Section, 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-Genera/ for the Province of Ontario's case, (supra) observed that in the interpretation of ss. 91 and 92 of the British North America Act : "If the text is explicit, the text is conclusive aliki> for what it directs and what it forbids. " When the text is ambiguous, as for example when the words establishing two mutually exclusive jurisdictions are wide enough to bring a particular power withh1 either, recour! e must be had to the context and scheme of the Act. In A. L. S. P. P. Subrahmanyan Chettiar v. " Muttuswami •Goundan(') . G Gwyer, C. J. reiterated that the principles laid down by the Privy · Council in a long line of. decisions in the interpretation of ss. 91 and 92 of the British North America Act, 1867 must be accepted as a guide for the interpretation of s. I00 of the Government of India Act, 1935: [I) [19401 F. C. R. 188.

"It must inevitably happen from time to time that legislation, though purporting to deal with a subject in one list, touches also on a subject in another list, and the different provisions of the enactment may be w closely intertwined that blind adherance to a strictly verbal interpretation w6uld result in a large number of statutes being declared invalid because the Legislature enacting them may appear to have legislated in a forbidden sphere. · Hence the rule which has been evolved by the Judicial Committee wh. ereby the impugnep statute is examined to ·ascertain its 'pith and substance' or its true nature and ·character for the purpose of determining whether it 1s legislation in respect of matters in this list or in that. " It has already been stated that where the two lists appear to conflict with each other, an endeavour should be made to reconcile them by reading them together and applying the doctrine of pith and substance.

It is only when such attempt to reconcile fails that the non·obstante clause in Art. 246(1) should be applied as a matter of last resort. For, in the Words of Gwyer, C. J. il1 C. P. & Berar T"xation Act's case, supra·: "For the clause ought to be regarded as a last re· source, a witness to the imperfections of human expression and the fallibility of legal draftsmanship. " The observations made by the Privy Council in the Citiun's In• surance Company's case, supra, were quoted with approval by Gwyer, C. J. in C. P. & Berar Taxation Act's case, supra, and he observed that an endeavour should be made to reconcile apparently conflicting provisions and tha! the general power ought not to be comtrued 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 1he Privy Council in Gol'etnor-General in Council v.

Province ofMadras(') : "For in a Federal constitution, in which there i; a division of legislative powers between Central and Pro· vincial Legislatures, it appears to be inevitable that controversy should arise whether orie or other legislature (I) [19451 F. C. R. 179, lloECHST v. BIHAR (Sen, i. ) 169 is not exceeding its own, and encroaching on the other's constitutional legislative power, and in such a contro· versy 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 subs· tance" as it has sometimes been said, which must deter· mine into what category it falls. " Their Lordships approved of the decision . of the Federal Court in The Province of Madras v. Messrs Boddu Paidanna 8'; Sons(') where it was held that when there were apparently conflicting entries the correct.

approach to the question was to see whether it was possible to' effect a reconciliation between the two entries so as to avoid a conflict and overlapping. ·In Prafulla Kumar Mukherjee & Ors. v. Bank of Commerce Ltd. , Khulna('). Lord Porter delivering the judgment of the Board laid down that in di1ting~ishing between the powers of the divided jurisdictions under List I, II and III of the Seventh Schedule to the Government of India Act, 1935 it is not possible to make a clean cut between the powers of the various Legislatures. They are bound to overlap from time to time, and the rule which has been evolved by the Judicial Committee whereby an impugned statute is examined to ascertain its pith and substance or its true character for the pur· pose of determining in which particular list the legislation falls, applies to Tndian as well as to Dominion legislation.

In laying down that principle, the Privy Council ~bserved : "Moreover, the British· Parliament when enacting the Indian Constitution had a Jong experience of the working of the British North America Act and the Au. stralian Commonwealth Act and must have known that it is not in practice possible to ensure that the powers entrusted to the several legislatures will never overlap. " The Privy Council quoted with approval the observations of Gwyer, C. J. 1n Subramanyan Chettiat's case, supra, quoted above, and observed : (I) [1942] F. C. R. 90. (3) A. I. R. 1942 P. C. 60 at 65. "No doubt experience of past difficulties has made the provisions of the . Indi~n Act more exact in some particulars, and the existence of the Concurrent List has made it easier to distinguish between those matters which are essential in determining to which list particular provision should be attributed and those which are merely incidental.

But the overlapping of subject•matter is not avoided by substituting three lists for two, or even by arranging for a hierarchy of jurisdictions. Subjects must still pve11ap, and where they do, the question must ·be asked what in pith and substance is the effect of the enactment ·of which complaint is inade, and in ·what list is ·its true . nature arid character to be found. If 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. '' It would therefore appear that apparent corrflict with the Federal power had to be resolved by . apphcation of the·doctrine of pith . and substance and incidental encroachment. ·Once it is found that a law made by the Provincial Legislature was with respect. to one of the matters enumerated jn the Provincial List, the degree or extent of the invasion into the forbidden field was immaterial.

"The invasion of the provinces into subjects in the Federal List", in the words of· . Lord Porter, "•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 covered with Provincial matters, but the question is not, has it trespassed more or Jess, but is the trespass, whatever it be, such as to show that the pit! J. and substance of the impugned Act is not money-lending but promissory notes or banking ? Once that question is determined tlie Act falls on one or the other side of the line and can be seen as valid or invalid according to its true content. '' The passage quoted above places the precedence according to the three lists in its proper perspective. In answering the objection that lli>ECHST v. B! HAR (Sen, i.

) i71 view does not give sufficient effect to the non-obstante clause in s. 100(1) oft. he Governmeat of India Act, 1935, as between the three lists, the Privy Council observed : "Where they come in conflict, List I has priority over Lists III and II and List III has priority. over List II. " . ' A But added: "The priority of the Federal Legislature would not prevent the Provincial Legislature from dealing with any matter within List JI . though it may 'incidentally affect any item in List I. ". It would therefore appear thaf the constitutionality of the law is to be judged by its real subject matter and not by its illcidental effect on any topic of legislation in another field. The decision of the Privy nly incidental or ancillary to one of the classes of subjects enumerated ·in s. 91 and is properly within one of the subjects enume· rated in s. 92, then legisiation by the Province is comeptent unless and until the _Dominion Parliament chooses to occupy the field by /egis/atian.

" (Emphasis supplied. ) Lord Maugham's reference to the year 1894 points to 'the decision of the Privy Council in Attorney-Genera/ for Ontario v. , Attorney-General for Canada, supra. In Attorney-Genera/for Canada v. Attorney-General for the 8 Province of Quebed,( ) Lord Porter in delivering the judgment of the Board drew attention to these principles and then observed: (I) L. R. [1899] A. C. 580. (2) L. R. [1943] A. C. 356. (3) [1946] A C. 33, 176 &UPREME COURT REPORTS [1983] 3 s. c. 1t . "In calling attention to these principles the,ir Lordships are but repeating what has many times been set forth in the judgments of the Board, and it only remahis to apply them to the individual case under consideration.. , Tne rule of pith and substance laid down by the Privy Council was reaffirmed by Viscount Simon in Attorney-Genera/ of . . Sasketchewan v. Attorney-General ofCanada &'Ors.

(') This was emphasized very clearly by Lord Atkin while dealing with the validity of the Milk and Milk Products Act (! \'orthern Ireland) which was impugned as violating s. 4 of the Government of 2 Ireland Act, 1920 in Ga/lahagher v. Lynn( ) in his own terse language: '. 'It is well established that you are to look at the . "true nature and character" of the legislation; Russell v. The Queen(') "the pith and substance of the. legislation". 'If on the view of the statute as whole, you find that the substance of the legislation is within the express powers, then it is now invalidated if incidentally it affects matters which are outside the authorized field. " . Much stress is laid on the fourth propo>tition formulated by Lord Tomlin in Attorney-General for Canada v. Attorney-Genera/ for British Columbia & Ors.. (rnpra) based on the dictum of Lord Dunedin in Grand Trunk Railway Company of Canada's case, supra, which, even at the cost of repetition, we may set out below : . F "4.

There can be a domain in which provincial and Dominioi:i legislation may overlap, in which case neither legislation will be ultra vires if the field is plear, b4t,if the field is not clear and the two legislations meet the Dominion legislation must prevail : see Grand . Trunk ·R.. of Canada v. Attorney:Genera/ of Canada, (supra). " ) The question is whether the field is not clear and·the two legis,lations meet and therefore on the doctrjne of Federal supremac~ sub·s (3) , (1) L. R. [1949] A. C. 110. (2) L. R. [1937) A. C. at p. 870. (3) L. R. [1882! 7 A. C. 829, HOECHST v. BIHAR (Sen, J. ) 177 of s. 5 of the Act must be struck down as· ultra vires The principle ' deducible from the dictum of Lord Dunedin as applied to the distribution of legislative powers under Art 246 of the Consititution, ·is that when the validity of an Act is challenged as ultra vires, the answer lies to the question, what is the pith and substance of the impugned Act ?

No doubt, in many cases it can be said that the enact• ment which is under considerat_ion inay be regarded from more than one angle and as operating in more than one field. If however, the matter dealt with comes within any of the clas'es of subjects enumerated in List II, then it is under the terms of Art. 246 (3) not to be deemed to come. within the classes of subjects assigned exclusively to Parliament under Art. 246 (I) even though the classes of subjects looked at signly overlap in many respects. The whole distribution of powers must be looked at iis Gwyer, C. J. observed in C. P. & Berar Taxation Act's·case, supra, in determining the question of validity of the Act in question. Moreover, as Gwyer, C. J. laid dov;n in Subrahmanyaif Chettiar's case, (supra), and affirmed by their Lordships of the Privy Council in Prafulla Kumar Mukh~rjee's case, (supra) it is within the competence of the State Legislature under Art.

246 (3) to provide for matters which, though within the competence of Parliament, are necessarily incidental to effective legislation by the State Legislature on the subject of legislation expressly enumerate. ct in List II. We must then pass on to the contention advanced by learned counsel foi the appellants that there is repugnancy between rnb-s (3) of s. 5 of the Act and paragraph 21 of the Drugs (Price Control) Order and therefore sub-s. (3) of s. 5 of the Act is void t. o that extent. Ordinarily, 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 Conc;irrent List but it can be cured by resort to Art. 254 (2).

· As we have endeavoured so far, the question raised as to the constititutional validity of sub·s. (3) of s. 5 of the Act has to be determined by application of the rule of the . pith and substance whether or not the subject-matter of the impugned legislation was comp~tently enacted under Art. 246, and therefore tho question of repugnancy under Art. 254 was not a matter in issue, The submission ' put forward on behalf of tbe appellants however is that there is direct collision and/or irreconci! iable 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 to Entry 33 of Li! it 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. . In considering 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 ii 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 (! ). Strong reliance is placed on the judgment of the .

High Court of Australia in Clyde Engineering Company Limited v. Cowburn(') 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 : E. ~ parte Mc Lean(') and Stock Motor Ploughs Limited v. Forsyth. \') The deeis;on in Clyde .. Engineering Company's cases, supra, is an authority for the proposi- . tion 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 1 contention is that paragraph 21 of the Control Order confers a right on the manufacturers and producers of medicines and 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 : ) (I) Entry 54 of List His a tax entry and therefore there ·is no question of repugnacy between sub-s. (3) of s. 5 of the Act which is a (I) [1926] 37 Com. L. R. 466. (2) [1930] 43 Com. L. R. 472. (3) (1932j 48 Com, L. R. 12~, HOECHST v. BIHAR (Sen, J. ) 179 law made by the State Legislature for the imposition of tax on sale or purchase of goods relatable to Entry 54 and paragraph 21. of the Control Order issued by the Central Government under sub-s. '(! ) 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 enumera' ted 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 io the same subject may arise.

This Court has considered the question of repugnancy in several cases and in Deep Chand v. The State of Uttar Pradesh & Ors,(') the result of the authorities was thus stated by Subba Rao, J. : "Nicholas in his Australian Constitution, 2nd edn. , p. 303, refers to three tests of inconsistency or repugnancy : I. 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 Jaw, 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 & Ors. v. The State of Uttar Pradesh &. Ors. (') the Court accepted the above three rules evolved by Nicholas, among (j others, as useful guides to test the question of repugnancy. ,( Art.

254 of the Constitution makes provision first, as to what would happen in the case of conflict between a Central and State •• (I) [1959] Supp. 2 S. C. R. g, (2) [1956] S. C. R. 393. law with regard to the subjects. enumerated in the Concurrent List, and secondly, for. resolving such conflict. Art. 254(1) enunciates the normal rule that in the event of a conflict between a Union and State law in the concurrent field, the former prevails over the latter. Cl. (I) lays down that ifa State law relating to a concurrent subject is 'repugnant' . to a Union law relating to that subject, then, whether the Union law is prior or later in time, the Union· law will prevail and the State law shall, to the extent of such repugnancy, be void. To the general rule laid down in cl. (I), cl. (2) engrafts an exception, viz.

, that if the President assents to a State law which has been reserved for his consideration, it will prevail notwithstanding its repugnancy to an earlier law of the Union, both laws d1:aling with a concurrent subject. In such a case, the Central Act will give way to the State Act only to the extent of inconsistency betwe1:n the two, and no more. In short, the result of obtaining the assent of the President to a State Act which is inconsistent with a previous Union law relating to a concurrent subject 'Yould be that the State Act will prevail in that State and override the provisions of the Central Act in their applicability to that State only. The predominance of the · State law may however be taken away if Parll'ament legislates under the proviso to cl. (2). The proviso to Art. 254(2) empowers the Union Parliament to repeal or amend a repugnant State law, either directly, i or by itself enacting a law repugnant to the Stat. e law with respect to the 'same matter'.

' Even though the' subsequent law made by Parliament does not expressly repeal a State law, even then, the State law will become void as soon as the subsequent Jaw of Parliament creating repugnancy is made. A State law would be repugnant to the Union law when there is direct conflict between the two laws. Such repμgnancy may also. arise where both laws operate in the same field and ,;"' the two canriot possibly stand together. : Se. e: Zaverbhai Amaidas v. State of Bombay('). M. Karunanidhi v. Union ofIndia(') and T. Barai 1 v. Henry Ah Hoe & Anr. ( ) We may briefly refer to the three Australian decisions relied upon. As stated above, the decision in Clyde Engineering Company's case (supra), lays down that inconsistency is also created when one statute takes away rights conferred by the other. In Ex Parle ) McLean's case, supra,. Dixon J. laid down ·another test viz. , two (I) [1955] l S. C. R. 799. (2) (1979] 3 S. C. R. 254. (3) \J983) 1 S. C. C. 1771 HOECHST ii. BIHAR (Sen, J.

) 181 statutes could be said to be inconsistent if they, in respect of an identical subject-matter, imposed identical duty upon the subject, but provided for different sanctions for enforcing those duties. In Stock Motor Ploughs Limited's case, supra, Evatt, J. held that even in respect of cases where two laws impose one and the same duty of obedience there may be inconsistency. As already stated the controversy in these appeals falls to be determined by the true nature and character of the impugned enactment, its pith and substance, as to whether it falls within the legislative competence of' the State Legislature under Art. 246(3) _and does not involve any question of rcpugnancy under Art. 254(1). We fail to comprehend the basis for the submission put forward on behalf of the appellants that there is repugnancy between sub-s. (3) of s.

5 of the Act which is relatable to Entry 54 of List fl of the Seventh Schedule and paragraph 21 of the Control Order issued ·by the Central Government under sub-s. _ II) of s. 3 of the Essential Commodities Act relatable to Entry. 33 of List III and therefore sub-s. (3) of s. 5 of the Act which is. a Jaw made by the State Legis- _lature is void under Art. 254(1). The question ofrepugnancy under Art. 254(1) between a law made, by Parliament and a law made by the State Legislature arises only in case both the legislations occupy . the same field with respect to one -0f the matters enumerated in the Concurrent List, and there Is direct conflict between the two laws. It is only when both these requirements are fulfilled that the State law will, to the extent of repugnancy become void. Art. 254(1) has no application to cases of repugnancy due to overlapping found between List II on the one hand and List I and List III on the other.

If such overlapping exists in any_ particular case, the State law will be ultra vires b -s. (3) of s. 5 of the Act nor does it become a tax on hi$ income. It is not doubt true that a sales tax is, according to the accepted notions, intended to be passed 011 to the buyer, and the provisions authoriz· ing and 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 Legisla· ture 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 tax, when the seller is not in a position to pass it on to the consumer, is a matter of policy and does not efiect the competence . of the Legislature : see : The Tata Iron & Steel Co. Ltd. v.

The State 1 of Bihar( ): M/s. J. K. Jute Mills Co. Ltd. v. The State of . Uttar Pradesh & Anr. (') S. Kodar v. State of Kera/a. (') The contention based on the Art. 19 (1) (g) cannot therefore be sustained. (I) [1958] S. C. R. 1355. (2) [19621 2 S. C.. R I. (3) [1975] I S. C,R. 121, (1983) 3 s. c. R. . :There was quite some discussion at the Bar as to whether the assent of the President is justiciable. ·1t was submitted that since not only sub-s. (I} of s. 5 of the Act which provides for the levy of a surcharge on dealers having a gross turnover of Rs. 5 Jakhs in a year but a! so sub-s. (3) thereof which interdicts that no such dealer shall he entitled to recover the amount of surcharge collected. from him, 'are both relatable to Entry 54 of List H of the Seventh Schedule, there was no occas;on 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 ·Consititution. Immediate provocation for this argument appears to be r,n obiter dictum of Lord Cl Diplock while delivering the judgment of the Judicial Committee in Teh Cheng Poh@ Char Meh v. Public Prosecutor, Malaysia(! ) 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 hy resolutions of both Houses of Parliament or hy 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 Poh's case, supra, is not an authority for the proposition· that t 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. 200 for the assent of the President nor whether the Presi1ent applied his mind to the question whether there was repugnancy between ihe Bi11 reserved for his consideration and received his assent under Art. 254 (2). The constitutional positiJn of a Governor is clearly defined. The Governor is made a comrilponent part of the Legislaiure of a State under Art. 168 because every Bill passed by the State Legislation has to be reserved for the assent of the Governor u'iider Art. 200.

Under that 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' withbold his assent therefrom; in which cases the Bill falls through unless the procedu. re indicated in the first proviso is followed (I) L. R. [1980] A. C. 458 at 473. • HOECHST v. B! HAR (Sen, J. ) 193 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" res. erve 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 Biil 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, v. ;hen a Bill is reserved by the Governor for the consideration of the President, the President can adopt two courses, namely : (I) 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 . '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 Bill passed by the State Assembly may become law if the Governor gives bis assent to it or if, having been reserved by the Governor for the consideration of the President, it is assented to by the President. There is no provision in the Constitution wl)ich lays down that a Bill which has been assented to by the President would b. e 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 fallip. g 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 hy 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 hav~ ·'~ ~eserve~ 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 unconstitutfonal on the ground of want of proper' assent. This aspect of the matter, as the Jaw now stands, is not open to scrutiny by the courts. Jn 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 i' not justiciable, and we cannot spell out any infirmity arising out of his decbion to give such assent. There still remains the contention that for the purpo,,e of levying surcharge it is impermissible to take into account the method· of computation of gross turnover, the turnover representing safos 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. i 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. Ferna11dez v. State of Kera/a(') : "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 or 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 tlte only thing which the dealer is entitled to in respect tJ:iereof 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 • ~I) . p957j S. C. R. 837 at p, 852-3, t HOECHEST v. B! HAR (Sen, J. ) 195 sales. or purchases are exempted from taxation altogether.

The Legislaiure cannot enact a law imposing or autho· rising 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 (ax can be levied or imposed. The submission appears to proceed on a misapprehension of tP,e principles laid down in Fernandez's case~ supra. . To understand the ratio deducible in Femandez's 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 irisidb 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 yalue of the oil sold outside the State deducted. The main controversy between the parties centred around the method of computation ofthe 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 tl:e imposi_tion 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.

'B In the penultimate pargraph in Fernandez's case, supra, the Court after laying down that the non-obstanre 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 of the turnover liable to tax thereunder, observed: 'C "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 dealer's 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 t)le provisions of { Art. 286 of the Constitution and the corresponding provision enacted in the Act, as above. " The decision in Fernandez's case, supra, is therefore cfoarly 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 purpose's 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. (l) of s. S 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 outside 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 surcb! lr! le μn Eclist f. BIHAR (Sen, J. ) 197 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 1O 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 and 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 object is to clas-ify dealers into those who are economically superior and those who arc not.. That is to say, the imposition. of surcharge is on those who have the capacity to bear the burderi of addit. ional 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 liability sought to be imposed must be pertinent to that territorial connection : State 1 of Bombay v. R. M. D. Chamarbaugwa! a( }, The Tata Iron & Steel Co. Ltd. v.

State of Bihar('), and lnternotiona/ Tourist Corporation 8 etc. etc. v. State of Haryana & Ors. ( ) The gross turnover of dealer is taken into account in sub-s. (I} 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. For these reasons, these aPPeals and the connected writ petitions and special leave petitions are dismissed with no order as to costs. H. L. C. (I) [19571 S. C. R. 874. (2) [19581 S. C. R. 1355. (3) [1981)2 S. C. R. 364,