Hoechst Pharmaceutical Ltd. and Another vs The State of Bihar and Others

Sarwar Ali, Ag. C.J.

These two writ applications have been heard one after the other and are being disposed of by a common judgment as the main points involved are basically the same.

In both these writ applications Section 5 of the Bihar Sales Tax Third Ordinance, 1980 (Ordinance No. 115 of 1980) and Section 5 of the Bihar FinanceAct, 1981, are under challenge. So also the notifications issued under the aforesaid Ordinance. The impugned provision levies a surcharge on sales or purchase tax payable by every dealer whose gross turnover during a year exceeds Rs. 5,00,000. The surcharge is not to exceed 10 per centum of the total amount of tax payable by the dealer, as may be fixed by the State Government by a notification. Annexure 1 to C.W.J.C. No. 1788 of 1981 is the notification enforcing the impugned provisions of the Sales Tax Ordinance. Annexure 2 is notification fixing the rate of surcharge at 10 per centum.

The Ordinance aforesaid was followed by successive Ordinances and now the Bihar Finance Act, 1981, has been enacted. The provisions are for the present purposes, the same. Reference need only be made to the provisions of the Ordinance. Whatever argument or decision is applicable to the Ordinance shall apply to the Bihar Finance Act, 1981, as well.

Under the Ordinance sales tax is leviable on intra-State sales. Section 3 is the charging Section. This has to be read along with Section 6. But for the purpose of computing the gross turnover not only intra-State sales, but sales made outside the State and in the course of inter-State trade or commerce or export are also taken into account. Section 5 of the Ordinance which levies the surcharge states in Sub-clause (3) that the dealer, who is liable to pay surcharge, shall not be entitled to collect the amount of such surcharge. Thus the position is that a person whose gross turnover is Rs. 5,00,000 or more is liable to pay surcharge only on intra-State sales made by him, but for the purpose of computing the gross turnover, outside sales, inter-State sales as also the sales in the course of export and import have also to be taken into account. The impugned provision of the Ordinance is said to be ultra vires on the ground of legislative incompetence and infraction of Articles 14 and 19(l)(g) of the Constitution. It was also contended that the provision of Section 5(3) of the Finance Act and the corresponding provision of the Ordinance will have no effect against the dealers who sell drugs, prices of which are governed under the Drugs (Price Control) Order, 1979 (hereinafter referred to as the Order).

Before I deal with the contentions raised in these writ applications I would refer to the decision of the Supreme Court in S. Kodar Vs. State of Kerala, . In this case the validity of the Tamil Nadu Additional Sales Tax Act, 1970, was under challenge. Two grounds were put forth on behalf of the appellant before the Supreme Court. They were:

(a) The State Legislature had no competence to enact the law.

(b) The provisions of the impugned Act were violative of the fundamental rights guaranteed under Article 19(l)(f), 19(l)(g) and Article 14 of the Constitution.

Section 2(1) of the Act aforesaid provided that in the case of a dealer whose total turnover for a year exceeds Rs. 10,00,000 the tax payable would be increased by additional tax at the rate of 5 per cent of the tax payable by the dealer. Sub-section (2) stated that the dealer shall not be entitled to collect the addititional tax payable under the sub-section. The argument was that the additional tax was a tax on the income of the dealer and as such outside the scope of entry 54 of List II of the Seventh Schedule to the Constitution. It was held that in reality it was a tax on the aggregate sales effected by a dealer during the year. It was an enhancement in the rate of sales tax when the turnover of a dealer exceeded Rs. 10,00,000 a year. It was thus a tax on sale or purchase of goods and was coverd by entry 54 aforesaid. The contention of the appellant that the additional sales tax is not a tax on sales, but on the income of the dealer was found to be without substance. The contention that the provisions of the Act were violative of the fundamental rights of the appellant under Article 19(l)(f) and 19(l)(g) was also negatived. It was held that the dealers could not pass on the incidence of the tax on sale to the purchaser did not contravene the rights of the petitioners guaranteed under the aforesaid articles of the Constitution. The Supreme Court further held that the tax was not confiscatory in the nature. It was observed in this context that "as long as a tax retains its avowed character and does not confiscate property to the State under the guise of a tax, its reasonableness is outside judicial ken. Classification of dealers on the basis of their respective turnovers for the purpose of graded imposition so long as it is based on differential criteria relevent to the legislative object to be achieved is not unconstitutional." It was explained that "the basis is that just as in taxes upon income or upon transfers at death, so also in imposts upon business, the little man, by reason of inferior capacity to pay, should bear a lighter load of taxes, relatively as well as absolutely, than is borne by the big one." It was further observed that the capacity of a dealer, in particular circumstances, to pay tax is not an irrelevent factor in fixing the rate of tax and one index of capacity is the quantum of turnover. The argument that while a dealer beyond certain limit is obliged to pay higher tax when others bear a less tax and it is consequently discriminatory, really are in a position of economic superiority by reason of their volume of business and form a class by themselves. They cannot be treated as on par with comparatively small dealers. An attempt to proportion the payment to capacity to pay and thus bring about a real and factual equality cannot be ruled out as irrelevant in levy of tax on the sale or purchase of goods. The object of a tax is not only to raise revenue but also to regulate the economic life of the society.

This decision of the Supreme Court has not deterred the petitioner and others from challenging the imposition of surcharge under the impugned provisions. They say that the contentions that they are now raising have not been considered by the Supreme Court in S. Kodar Vs. State of Kerala, . They are thus entitled to challenge the provisions aforesaid. I shall now deal with the contentions that have been raised on behalf of the two petitioners. Some of the contentions are common. Some however are claimed to be applicable to the individual case.

It is contended that the State Legislature has no power to make law by which sale or purchase in the course of inter-State trade or commerce is included in the gross turnover on the basis of which the liability to pay surcharge is determined. The reason assigned is that inter-State sales and export sales are sales on which the State Legislature has no power to legislate upon. By including the said sales in the gross turnover of a dealer for the purpose of fixing his liablity to pay surcharge amounts to legislating in the forbidden field. The levy of surcharge after taking into account the inter-State sales and export sales is thus beyond the legislative competence of the State Legislature. In my opinion the contention is devoid of substance. The impugned provisions do not attempt to levy any tax on inter-State sales or export sales. Such sales are taken into account only for the purpose of selecting the class of dealers who are to be taxed. But the sales which are actually taxed (by levy of surcharge) are only intraState sales. Intra-State sales are within the taxing power of the State Legislature, irrespective of the volume of turnover. In my view, therefore, the mere fact that inter-State sales and export sales have been taken into consideration for the purpose of ascertaining the gross turnover does not amount to levy or imposition of tax on such sales. Learned counsel for the petitioners referred to the decision in A.V. Fernandez Vs. The State of Kerala, and relied on paragraph 41 of the judgment. The situation discussed therein is different from the situation in the present case. Paragraph 44 of the judgment makes it clear that for the purpose of registration of a dealer and submission of returns of sales tax such sales can be taken into consideration. This is what was observed in the said case :

This position is not at all affected by the provisions 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 Article 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 the provisions of Article 286 of the Constitution and the corresponding provision enacted in the Act, as above.

In my view, therefore, the vires of the legislation cannot be successfully challenged on the ground urged during the course of argument.

It was contended that the effect of the law is that two dealers may have intra-State sales of less than Rs. 5,00,000 yet if one of them has even a small inter-State sales so that the total of the two sales exceed Rs. 5,00,000 he shall be liable to surcharge. There is thus discrimination between two persons similarly situated having the same quantum of inter-State sales, there being no rational basis for the classification. In my view, this argument is unacceptable. The basis of classification is the gross turnover. One who has higher gross turnover and one who has lower turnover belong to two different classes or categories. The imposition of tax based on the gross turnover is, in my view, rational classification. The classification can rest on the volume of business, including nonliable sales. It is based on the capacity to pay the tax increase. The matter has been so fully discussed in S. Kodar Vs. State of Kerala, by the Supreme Court itself that any further discussion is not called for.

On behalf of the petitioners in C.W.J.C. No. 2771 of 1981 it was contended that in some cases dealers are liable to sales tax at the first stage of sale while in other cases it is at the last stage. Thus one class of manufacturers may have to bear the burden of the taxes while another class of manufacturers bear no such burden. But it has to be observed that the fixation of the point at which sales tax is leviable is based on numerous administrative considerations. It is not possible to levy the tax at the same stage for all goods. The law permits the fixation of tax at various stages. If the fixation of tax at different stages is permissible and that has not been challenged the mere fact that one class of manufacturer may have to bear greater burden does not make the legislation discriminatory. What the learned counsel is attempting to do is to compare those who do not have the liability to pay sales tax with those who have such liability. Such comparison for the purpose of invoking Article 14 is, in my view, impermissible.

Learned counsel contended that the percentage of tax on various goods is different. In some cases for instance it is only 3 per cent and in some as here it is 13 per cent. Thus 10 per cent of 3 per cent would be only 0.3 per cent whereas in the other case it would be 1.3 per cent. It was therefore contended that there is no rational basis for imposing a higher burden of surcharge on the petitioner. Here again what the learned counsel loses sight of is the fact that the rate of sales tax for all goods is not and need not be the same. But the percentage of the surcharge is the same. If some goods are liable to lesser percentage of sales tax surcharge would necessarily be lower. There is nothing irrational or arbitrary in this. In relation to the percentage of surcharge all are treated alike and the same percentage (10 per cent at present) has to be paid by all dealers who come within the provisions of Section 5 of the Ordinance. It is but natural that if the percentage of initial tax is lower, the net effect of the imposition of surcharge will also be lower.

It was contended by Sri Shree Nath Singh, the learned counsel appearing for the petitioners in C.W.J.C. No. 2771 of 1981, that the impugned provision is confiscatory. Reference was made to several decisions of the Supreme Court. The general proposition is not in dispute. A taxing statute is not wholly immune from attack on the ground of violation of Article 14 or 19(l)(g) of the Constitution. If it is confiscatory in character and effect it cannot be sustained. Each case will have therefore to depend on its own fact. Other cases can only be illustrative. The case of Kunnathat Thathunni Moopil Nair Vs. The State of Kerala and Another, provides an illustration of a case where the legislation was held to be confiscatory. This was patent on facts. As pointed out by the Supreme Court the liability to tax in respect of the forest lands in that case amounted to Rs. 54,000 whereas the annual income of the petitioner for the time being was only Rs. 3,100 without making any deductions for expenses of management. Such being the effect of the legislation it was held to be confiscatory. The case of Raja Jagannath Baksh Singh Vs. The State of Uttar Pradesh and Another, , is illustration of a case where the impugned provision was not held to be confiscatory. Therein the petitioner had a net income of over Rs. 65,000. The tax levy was to the extent of Rs. 14,882.86. It was held that the tax could not by any stretch of imagination be deemed to be confiscatory.

Learned counsel for the petitioners referred annexure 8 to show that the imposition of surcharge would result in the petitioner having to carry on trade and business at a loss. This makes the impugned provision confiscatory. I would only take item No. 1 from annexure 3 to illustrate the fallacy. It is accepted that the margin allowed by the manufacturer is Rs. 3,150. The surcharge, it is asserted would be Rs. 2,052. But that cannot be the criterion for judging the confiscatory nature of the provision. It is clear that the margin of gross profit on the sale of a vehicle is still Rs. 1,088. It is for the petitioner to so manage his affairs that his expenses are commensurate with the expected profit.

That apart, the basic question is different. The decision of the Supreme Court in Anakapalle Co-op. Agrl. and Industrial Society Ltd., Vs. Union of India (UOI) and Others, clarified this. That was a case where statutorily a certain quantum of profit was to be provided for the producer of sugar. The prices were to be fixed under the terms of the Essential Commodities Act after taking that into account. The Supreme Court held that the price fixation could not depend upon its impact on individual purchasers. It was the industry as such which will have to be taken into consideration for the purpose of the aforesaid fixation. Here also it is not how an individual has been managing his affairs which would affect the validity of the provision. If it could be shown that no one, in the category of business which the petitioner was carrying on, could make any profit, the position might have been different. The petitioner has not been able to show that imposition is such that no one in the situation of the petititioner could carry on trade or business without making any profit. Lest I may be misunderstood I would like to clarify that I am not suggesting that if the taxing provision is such as to make it impossible for a category of business man to make a profit the provision would be necessarily unconstitutional.

It has also to be borne in mind that private contracts between dealers, or dealers and manufacturers, cannot control the power of legislation, particularly in regard to imposition of taxes. If it were so it would be always possible for persons in trade and business to so frame their contracts as to make it impossible to impose taxes. The parties must adjust or readjust their dealings or contracts taking into account the provision of law including taxing statutes. So far as the present case is concerned the petitioner has not been able to show that the imposition of tax is such as to amount to confiscation or even serious detriment in carrying on the trade or business.

A contention was raised on behalf of the petitioners in C. W. J. C. No. 1788 of 1981 that there is inconsistency between the Drugs (Price Control) Order made under the provisions of the Essential Commodities Act and the impugned provision. Section 5(3) of the Finance Act and the corresponding provision of the Ordinance can have no effect against the petitioner-dealer who sells drugs, price of which are governed by the Order. The Order aforesaid has been promulgated in exercise of the power u/s 3 of the Essential Commodities Act. The Government has been given the power under Clause 3 of the said Order to fix the maximum price at which bulk drugs specified in the First and Second Schedules of the Order have to be sold. In fixing the price the Government takes into consideration the average of cost of production of such bulk drugs manufactured by an efficient manufacturer and allows a reasonable return on the share capital of the company plus free reserve, if any. The Central Government also fixes the retail price of the formulations according to the cost as laid down under Clause 10 of the said Order. Clause 21 permits the retailer to realise from the purchaser local tax which includes sales tax apart from the price. Similar power to charge the local tax in respect of bulk drugs is given under Clause 3(3) of the said Control Order. Thus in the case of drugs which the petitioner manufactures and sells the price is determined on the basis of cost and a fair return. Section 5(3) of the Ordinance imposes prohibition to collect the amount of surcharge. The petitioner cannot thus add to the cost of the price by including the surcharge.This has to be paid out of the fair return on the manufactured goods which is allowed by the Drug Controller under the Order. The argument of the learned counsel, therefore, is that in view of the conflict between the Drugs Control Order and Section 5(3) of the Ordinance, the latter will have no effect. Moreover if effect is to be given it would amount to unreasonable restriction on the petitioners'' right to carry on business as guaranteed under Article 19(l)(g).

So far as the first limb of argument is concerned it has to be appreciated that the impugned legislation falls entirely within the State list. It is wholly effective even though there may be some conflict or overlapping with the Central law. It would be sufficient only to refer to the decision of the Privy Council in AIR 1947 60 (Privy Council) . Therein there was direct conflict between the provisions under the Negotiable Instruments Act (relating to interest) on the one hand and the Bengal Moneylenders Act on the other. It was pointed out by the Privy Council "subjects must still overlap and where they do, the question must be asked what in pith and substance is the effect of the enactment of which complaint is made and in what list is its true nature and character to be found". It was pointed out that it was only where its provision advances so far into Federal territory as to show that its true nature is not concerned with the Provincial matter that the provision can be said to be transgressing constitutionally permissible limit. Here, in my view, the impugned provision is squarely within the law making power of the State Legislature in entry 54 of List II of the Seventh Schedule of the Constitution. Any incidental encroachment has to be ignored. Full effect has to be given to the provision, being constitutionally valid and all incidental encroachment and overlaping are of no consequence (see also A.S. Krishna Vs. State of Madras, ). Moreover the provision relied upon by the learned counsel merely makes it permissible for the seller to pass on burden of local taxes. It does not compel him to do so. There is thus no question of disobedience of a mandatory direction under the Central Act. It has also to be observed that Clause 16 of the Order vests the relevant authority with the power to revise the price. The petitioner can approach the relevant authority for the same. But the mere fact that the profit is to some extent adversely affected by the impugned provision does not amount to imposition of unreasonable restriction on the right of the petitioner to carry on trade or business. Indeed that profit at any point of time is reduced with the imposition of higher or further tax. If the contention of the petitioner is accepted it would mean that the taxing power would have to be obliterated or mutilated to a great extent. Such is not the position under our constitutional scheme. It has not been shown that the impact of the surcharge is such as to make it impossible for persons in drug business to carry on trade or business because of the impugned imposition. The argument of the learned counsel cannot, therefore, be accepted.

In my view, therefore, the challenge to the impugned provision fails. These writ applications are accordingly dismissed but in the circumstances without costs.

U.C. Sharma, J.

I agree.