FACTS IN BRIEF :- The Appellant was a company engaged in the manufacture and sale of various medicines and life saving drugs throughout India including the State of Bihar . It had branch or sales depot at Patna registered as a dealer and effected sales of their 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 the consumers. Almost 94% of the medicines and drugs sold by them were at the controlled price 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 and they were expressly prohibited from selling these medicines and drugs in excess of the controlled price so fixed by the Central Government from time to time which allows 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 surcharge on every dealer whose gross turnover during a year exceeds Rs. 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, and of Sub-section (3) of Section 5 of the Act which prohibited such dealer from collecting the amount of surcharge payable by him from the purchasers. The Appellant challenged the constitutional validity of the said sections, placing on record their printed price-lists of their well-known medicines and drugs manufactured by them showing the price at which they sell to the 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,
ï‚· 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 the Act shall have effect notwithstanding anything inconsistent therewith contained in any enactment. It was argued that applying the doctrine of occupied field and the concept of federal supremacy, it was clear that the Union legislation shall prevail in a case of conflict between List II and List III.
ï‚· Sub-section (3) of Section 5 of the Act, which provided that no dealer shall be entitled to collect the amount of surcharge levied on him, clearly falls within Entry 54 of List II of Schedule VII and was repugnant to the scheme of the Drug (Price Control) Order 1979 so far as price fixation of drugs was concerned and particularly with para 21 which enabled the manufacturer of drugs to pass on the liability to pay sales tax to the consumer. In this event of repugnance between the Control Order (made under Section 6 of the Essential Commodities Act i.e. a central enactment) State law must prevail.
ï‚· The provision contained in Sub-section (3) of Section 5 of the Act were ex facie and patently discriminatory.
ï‚· The restriction imposed by Sub-section (3) of Section 5 of the Act which prevented the manufacturers/producers of medicines and drugs from passing on liability to pay surcharge was confiscatory and casted a disproportionate burden on such manufacturers/producers and stipulated an unreasonable restriction on the freedom to carry on their business guaranteed under Article 19(1)(g).
 Sub-section (1) of Section 5 of the Act was ultra varies the State Legislature of Bihar in so far as it took into account the manufacturer’s gross turnover as defined in Section 2(j) of the Act, which included transactions relating to sale or purchase of goods which had taken place in the course of inter-State trade or commerce or outside the territory of India.
Submitting that there was no inconsistency between Sub-section (3) of Section 5 of the Act and para 21 of the Control Order and both the laws are capable of being obeyed, the State argued that the question of repugnance under Article 254(1) between a law made by Parliament and a law made by the State Legislature arose only in case both the legislations occupied the same field with respect to one of the matters enumerated in the Concurrent List, and there is direct conflict between the two laws and it was only where both there requirements were fulfilled that the State law would, to the extent of repugnance, become void and 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 submitted that the appellants being manufacturers or producers of drugs were not governed by para 21 of the Control Order which relates 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 wholesaler 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 Govt. 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 to sell it 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 and since the surcharge was borne by the manufacturers/producers under Sub-section (3) of Section 5 of the Act, 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 Rs. 5 lakhs for the purpose of levy of surcharge in addition to the tax payable by him, was not assailable. So long as sales in the course of inter State trade and commerce or sales outside the State and sales in the cause of import into, or export out of the territory of India was not taxed, there was nothing to prevent the State Legislature while making a law for the levy of surcharge under entry 54 of the List II of the Seventh Schedule to take into account the total turnover of the dealer within the State and provide, as has been done by Sub-section (1) of Section 5 of the Act. The Court also observed that since the liability to pay a surcharge was not on the gross turnover including the transaction covered by Article 286 but was only on sales within the state, and the surcharge was sought to be levied on dealers who had a position of economic superiority. Since the definition of "gross turnover" in the Bihar Act was 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 was only for the purpose of classifying dealers within the State and to identify the class of dealers liable to pay such surcharge, it was not hit ultra vires, the underlying object being to classify dealers into those who were economically superior and those who were not. Also declaring that sufficiency of territorial nexus involved 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, the Court held that there was sufficient territorial nexus between the persons sought to be charged and the State seeking to tax them.
FOR 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 the Schedule VII. Therefore the decision that a law was repugnant to state was to be held valid only by ascertaining the character of the legislation by reference to the Doctrine of Pith and Substance.
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