Hoechst Pharmaceuticals Ltd. v. State of Bihar (1983) 4 SCC 45;

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LB-301-Constitutional Law-I |2022

The Bihar Finance Act, 1981, (‘Act’ for short) under Section 5 provided for the imposition of a surcharge at 10 per cent of the total amount of the tax payable by a dealer whose gross turnover during a year exceeded Rs. 5 lakhs, in addition to the tax payable by him.

The facts in Civil Appeal No. 2567 / 1982 as gathered from the judgment are as follows.

Messrs Hoechst Pharmaceuticals Limited and Messrs Glaxo Laboratories (India) Limited are companies incorporated under the Companies Act, 1956 engaged in the manufacture and sale of various medicines and life-saving drugs throughout India including the State of Bihar. They have their branch or sales depot at Patna registered as a dealer under Section 14 of the Act and effect sales of their products through wholesale distributors or stockists appointed in Bihar who, in their turn, sell them to retailers through whom the medicines and drugs reach the consumers. Almost 94 per cent of the medicines and drugs sold by them are at the controlled price exclusive of local taxes under the Drugs (Prices Control) Order, 1979 issued by the Central Government under sub-section (1) of Section 3 of the Essential Commodities Act and they are 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. The appellants have their printed price- lists of their medicines and drugs showing the price at which they sell to the retailers as also the retail price, both inclusive of excise duty. One of the terms of their contract is that sales tax and local taxes will be charged wherever applicable.

The appellants produced in the Court the orders of assessment together with notices of demand, for the assessment years 1980-81 and 1981-82. These figures showed the magnitude of the business carried on by these appellants in the State of Bihar alone and their capacity to bear the additional burden of surcharge levied under sub-section (1) of Section 5 of the Bihar Finance Act, 1981.

The High Court referred to the decision in S. Kodar v. State of Kerala [AIR 1974 SC 2272] where this court upheld the constitutional validity of sub-section (2) of Section 2 of the Tamil Nadu Additional Sales Tax Act, 1970 which is in pari materia with sub-section (3) of Section 5 of the Act and which interdicts that no dealer referred to in sub-section (1) shall be entitled to collect the additional tax payable by him. It held that the surcharge levied under sub-section (1) of Section 5 is in reality an additional tax on the aggregate of sales effected by a dealer during a year and that it was not necessary that the dealer should be enabled to passon the incidence of tax on sale to the purchaser in order that it might be a tax on the sale of goods. Merely because the dealer is prevented by sub-section (3) of Section 5 of the Act from collecting the surcharge, it does not cease to be a surcharge on sales tax. Relying on Kodar case, the Court held that:

● the charge under sub-section (1) of Section 5 of the Act falls at a uniform rate of 10 percent of the tax on all dealers falling within the class specified therein i.e. whose gross turnover during a year exceeds Rs. 5 lakhs, and is therefore not discriminatory and violative of Article 14 of the Constitution,

343 Hoechst Pharmaceuticals Ltd. v. State of Bihar

● nor is it possible to say that because a dealer is disabled from passing on the incidence of surcharge to the purchaser, sub-section (3) of Section 5 imposes an unreasonable restriction on the fundamental right guaranteed under Article 19(1) (g).

As regards the manufacturers and producers of medicines and drugs, the High Court held

● that there was no irreconcilable conflict between sub-section (3) of Section 5 of the Act and Paragraph 21 of the Drugs (Prices Control) Order, 1979 and both the laws are capable of being obeyed.

In spite of the decision of the Supreme Court in Kodar case, the appellants challenged the constitutional validity of sub-section (3) of Section 5 of the Act on the ground that the court in that case did not consider the effect of price fixation of essential commodities by the Central Government under sub-section (1) of Section 3 of the Essential Commodities Act which, by reason of Section 6 of that Act, has an overriding effect notwithstanding any other law inconsistent therewith.

A. P. SEN, J. – 3. The principal contention advanced by the appellants in these appeals is that the field of price fixation of essential commodities in general, and drugs and formulationsin particular, is an occupied field by virtue of various control orders issued by the Central Government from time to time under sub-section (1) of Section 3 of the Essential Commodities Act, 1955 which allows the manufacturer or producer of goods to pass on thetax liability to the consumer and therefore the State legislature of Bihar had no legislative competence to enact sub-section (3) of Section 5 of the Act which interdicts that no dealer liable to pay a surcharge, in addition to the tax payable by him, shall be entitled to collect the amount of surcharge, and thereby trenches upon a field occupied by a law made by Parliament. Alternatively, the submission is that if sub-section (3) of Section 5 of the Act were to cover all sales including sales of essential commodities whose prices are fixed by the Central Government by various control orders issued under the Essential Commodities Act, then there will be repugnancy between the State law and the various control orders which according to Section 6 of the Essential Commodities Act must prevail. There is also a subsidiary contention put forward on behalf of the appellants that sub-section (1) of Section 5 of the Act is ultra vires the State legislature inasmuch as the liability to pay surcharge is on a dealer whose gross turnover during a year exceeds Rs. 5 lakhs or more 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 State or in the course of import into, or export of goods outside the territory of India. The submission is that such transactions are covered by Article 286 of the Constitution and therefore are outside the purview of the Act and thus they cannot be taken into consideration for computation of the gross turnover as defined in Section 2(j) of the Act for the purpose of bearing the incidence of surcharge under sub-section (1) of Section 5 of the Act.

10. In Kodar case [S. Kodar v. State of Kerala, AIR 1974 SC 2272], this court upheld the constitutional validity of the Tamil Nadu Additional Sales Tax Act, 1970 which imposes additional sales tax at 5 per cent on a dealer whose annual gross turnover exceeds Rs. 10 lakhs. The charging provision in subsection (1) of Section 2 of that Act is in terms similar to sub-section (1) of Section 5 of the Act, and provides that the tax payable by a dealer whose turnover for a year exceeds Rs. 10 lakhs shall be increased by an additional tax at the rate of 5

344 Hoechst Pharmaceuticals Ltd. v. State of Bihar

per cent of the tax payable by him. Sub-section (2) of that Act is in pari materia with sub- section (3) of Section 5 of the Act and provides that no dealer referred to in sub-section (1) shall be entitled to collect the additional tax payable by him. The court laid down that:

(1) The additional tax levied under sub-section (1) of Section 2 of that Act was in reality a tax on the aggregate of sales effected by a dealer during a year and therefore the additional tax was really a tax on the sale of goods and not a 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 speaking, 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. 10 lakhs is not an unreasonable restriction on the fundamental rights guaranteed under Article 19(1) (g) or (f) as the tax is upon the sale of goods and was not shown to be confiscatory.

(3) 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 Legislature to impose a tax on sales conditional on its making a provision for seller to collect the tax from the purchasers. Merely because sub-section (2) of Section 2 of that Act prevented a dealer from passing on the incidence of additional tax to the purchaser, it cannot be said that the Act imposes an unreasonable restriction upon the fundamental rights under Article 19(l)(g) or (f). The Act was not violative of Article 14 of the Constitution as classification of dealers on the basis of their turnover for the purpose of levy of additional tax was based on the capacity of dealers who occupy a position of economic superiority by reason of their greater volume of business
i.e. on capacity to pay and such classification for purposes of the levy was not unreasonable.

12. Sub-section (1) of Section 5 of the Act provides for the levy of surcharge on every dealer whose gross turnover during a year exceeds Rs. 5 lakhs and the material provisions of which are in the following terms:

5. Surcharge. (1) Every dealer whose grosss turn over during a year exceeds rupees five lakhs shall, in addition to the tax payable by him under this Part, also pay a surcharge at such rate not exceeding 10 per cent of the total amount of the tax payable by him, as may be fixed by the State Government by a notification published in the Official Gazette….

Sub-section (3) of section 5 of the Act, the constitutional validity of which is challenged provides:

Notwithstanding anything to the contrary contained in this Part, no dealer mentioned in sub- section (1), who is liable to pay surcharge, shall be entitled to collect the amount of this surcharge.

13. It is fairly conceded that not only sub-section (1) of Section 5 of the Act which provides for the levy of surcharge on dealers whose gross turnover during a year exceeds Rs. 5 lakhs, but also sub-section (3) of Section 5 of the Act which enjoins that no dealer who is liable to pay a surcharge under sub-section (1) shall be entitled to collect the amount of surcharge payable by him, are both relatable to Entry 54 of List II of the Seventh Schedule which reads:

54. Taxes on the sale or purchase of goods other than newspapers, subject to the provisions of Entry 92A of List I.

345 Hoechst Pharmaceuticals Ltd. v. State of Bihar

14. TherecanbenodoubtthattheCentralandtheStatelegislationsoperateintwodifferent and distinct fields. The Essential Commodities Act provides for the regulation, production, supply, distribution and pricing of essential commodities and is relatable to Entry 33 of List III of the Seventh Schedule which reads:

33. Trade and commerce in, and the production, supply and distribution of,—

(a) the products of any industry where the control of such industry by the Union is declared by Parliament by law to be expedient in the public interest, and imported goods of the same kind as such products;

17. We are here concerned with the impact of sub-section (3) of Section 5 of the Act on the price structure of formulations, but nonetheless much stress was laid on fixation of priceof bulk drugs under Paragraph 3(2) which allows a reasonable return to the manufacturer under sub-paragraph (3) thereof. A manufacturer or producer of such bulk drugs is entitled to sell it at a price exceeding the price notified under sub-paragraph (1), plus local taxes, if any, payable.

22. […] The amount credited to the Drugs Prices Equalisation Account is meant to compensate a manufacturer, importer or distributor the shortfall between his retention price and the common selling price or, as the case may be, the pooled price for the purpose of increasing the production, or securing the equitable distribution and availability at fair prices, of drugs after meeting the expenses incurred by the Government in connection therewith. Every manufacturer, importer or distributor is entitled to make a claim for being compensatedfor the shortfall.

25. Much emphasis was laid on fixation of price of bulk drugs under Paragraph 3 which provides by sub-paragraph (1) that the Government may, with a view to regulating the equitable distribution of an indigenously manufactured bulk drug specified in the First Schedule or the Second Schedule and making it available at a fair price and subject to the provisions of sub- paragraph (2) and after making such enquiry as it deems fit, fix from time totime, by notification in the official Gazette, the maximum price at which such bulk drug shall be sold. Sub-paragraph (2) enjoins that while fixing the price of a bulk drug under sub- paragraph (1), the Government may take into account the average cost of production of each bulk drug manufactured by efficient manufacturer and allow a reasonable return on net worth.Explanation 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 in the production of such bulk drug. Sub-paragraph (3) provides that no person shall sell a bulk drug at a price exceeding the price notified under sub-paragraph (1), plus local taxes, if any, payable.

28. It cannot be doubted that a surcharge partakes of the nature of sales tax and therefore it was within the competence of the State legislature to enact sub-section (1) of Section 5 of the Act for the purpose of levying surcharge on certain class of dealers in addition to the tax payable by them. When the State legislature had competence to levy tax on sale or purchaseof goods under Entry 54, it was equally competent to select the class of dealers on whom the charge will fall. If that be so, the State legislature could undoubtedly have enacted sub-section
(3) of Section 5 of the Act prohibiting the dealers liable to pay a surcharge under sub-section

346 Hoechst Pharmaceuticals Ltd. v. State of Bihar

(1) thereof from recovering the same from the purchaser. It is fairly conceded that sub-section (3) of Section 5 of the Act is also relatable to Entry 54. The contention however is that there is conflict between Paragraph 21 of the Control Order which allows a manufacturer or producer of drugs to pass on the liability to pay sales tax and sub-section (3) of Section 5 of the Act which prohibits such manufacturers or producers from recovering the surcharge and therefore it is constitutionally void. It is said that the courts should try to adopt the rule of harmonious construction and give effect to Paragraph 21 of the Control Order as the impact of sub-section (3) of Section 5 of the Act is on fixation of price of drugs under the Drugs (Prices Control) Order and therefore by reason of Section 6 of the Essential Commodities Act, Paragraph 21 of the Control Order which provides for the passing on of tax liability must prevail. Thesubmission rests on a construction of Article 246(3) of the Constitution and it is said that the power of the State legislature to enact a law with respect to any subject in List II is subject to the power of Parliament to legislate with respect to matters enumerated in Lists I and III.

29. It is convenient at this stage to deal with the contention of the appellants that if sub- section (3) of Section 5 of the Act were to cover all sales including sales of essential commodities whose prices are controlled by the Central Government under the various control orders issued under sub-section (1) of Section 3 of the Essential Commodities Act, then there will be repugnancy between the State law and such control orders which according to Section 6 of the Essential Commodities Act must prevail. In such a case, the State law mustyield to the extent of the repugnancy. In Harishankar Bagla v. State of M.P. [AIR 1954 SC 465], the court had occasion to deal with the non obstante clause in Section 6 of the Essential Supplies (Temporary Powers) Act, 1946 which was in pari materia with Section 6 of the Essential Commodities Act and it was observed:

The effect of Section 6 certainly is not to repeal any one of those laws or abrogate them. Its object is simply to by-pass them where they are inconsistent with the provisions of the Essential Supplies (Temporary Powers) Act, 1946, or the orders made thereunder. In other words, the orders made under Section 3 would be operative in regard to the essential commodity covered by the Textile Control Order wherever there is repugnancy in this Order with the existing laws and to that extent the existing laws with regard to those commodities will not operate. By- passing a certain law does not necessarily amount to repeal or abrogation of that law. That law remains unrepealed but during the continuance of the order made under Section 3 it does not operate in that field for the time being.

The court added that after an order is made under Section 3 of that Act, Section 6 then steps in wherein Parliament has declared that as soon as such an order comes into being that will have effect notwithstanding any inconsistency therewith contained in any enactment other than that Act.

30. Placing reliance on the observations in Harishankar Bagla case, it is urged that the effect of the non obstante clause in Section 6 of the Essential Commodities Act is to give an overriding effect to the provisions of Paragraph 21. It is further urged that Paragraph 21 of the Control Order having been issued by the Central Government under sub-section (1) of Section 3 of the Essential Commodities Act which permits the manufacturer or producer to pass on the liability to pay sales tax must prevail and sub-section (3) of Section 5 of the Act which is inconsistent therewith is by-passed. The contention appears to be misconceived. The

347 Hoechst Pharmaceuticals Ltd. v. State of Bihar

appellants being manufacturers or producers of formulations are not governed by Paragraph 21 of the Control Order but by Paragraph 24 thereof and therefore the price chargeable by them to a wholesaler or distributor is inclusive of sales tax. There being no conflict between sub- section (3) of Section 5 of the Act and Paragraph 24 of the Control Order, the question of non obstante clause to Section 6 of the Essential Commodities Act coming into play does not arise.

31. Even otherwise i.e. if some of the appellants were governed by Paragraph 21 of the Control Order that would hardly make any difference. Under the scheme of the Act, a dealer is free to pass on the liability to pay sales tax payable under Section 3 and additional sales tax payable under Section 6 to the purchasers. Sub-section (3) of Section 5 of the Act however imposes a limitation on dealers liable to pay surcharge under sub-section (1) thereof from collecting the amount of surcharge payable by them from the purchasers which only means that surcharge payable by such dealers under sub-section (1) of Section 5 of the Act will cut into the profits earned by such dealers. The controlled price or retail price of medicines and drugs under Paragraph 21 remains the same, and the consumer interest is taken care of inasmuch as the liability to pay surcharge under subsection (3) of Section 5 cannot be passed on. That being so, there is no conflict between sub-section (3) of Section 5 of the Act and Paragraph 21 of the Control Order. The entire submission advanced by learned counsel for theappellants proceeds on the hypothesis that the various control orders issued under sub-section
(1) of Section 3 of the Essential Commodities Act are for the protection of the manufacturer or producer. There is an obvious fallacy in the argument which fails to take into account the purpose of the legislation.

32. Where the fixation of price of an essential commodity is necessary to protect the interests of consumers in view of the scarcity of supply, such restriction cannot be challenged as unreasonable on the ground that it would result in the elimination of middleman for whom it would be unprofitable to carry on business at fixed rate or that it does not ensure a reasonable return to the manufacturer or producer on the capital employed in the business of manufacturing or producing such an essential commodity.

33. The contention that in the field of fixation of price by a control order issued under sub- section (1) of Section 3 of the Essential Commodities Act, the Central Government must have due regard to the securing of a reasonable return on the capital employed in the business of manufacturing or producing an essential commodity is entirely misconceived. The predominant object of issuing a control order under sub-section (1) of Section 3 of the Act is to secure the equitable distribution and availability of essential commodities at fair prices to the consumers, and the mere circumstance that some of those engaged in the field of industry, trade and commerce may suffer a loss is no ground for treating such a regulatory law to be unreasonable, unless the basis adopted for price fixation is so unreasonable as to be in excess of the power to fix the price, or there is a statutory obligation to ensure a fair return to the industry. In Shree Meenakshi Mills Ltd. v. Union of India [A1R 1974 SC 366] Ray, C. J. speaking for the court rejected the contention that the controlled price must ensure a reasonable return on the capital employed in the business of manufacturing or producing essential commodities…

348 Hoechst Pharmaceuticals Ltd. v. State of Bihar

36. The principal point in controversy is: Whether there is repugnancy between sub- section (3) of Section 5 of the Act and Paragraph 21 of the Control Order and therefore sub- section (3) of Section 5 must yield to that extent. The submission is that if Parliament chooses to occupy the field and there is price fixation of an essential commodity with liberty to pass on the burden of tax to the consumer by a law made by Parliament under Entry 33 of List III of the Seventh Schedule, then it is not competent for the State legislature to enact a provision like sub-section (3) of Section 5 of the Act while enacting a law under Entry 54 of List II prohibiting the passing on of liability of tax to the purchaser.

37. The true principle applicable in judging the constitutional validity of sub-section (3) of Section 5 of the Act is to determine whether in its pith and substance it is a law relatable to Entry 54 of List II of the Seventh Schedule and not, whether there is repugnancy between sub- section (3) of Section 5 of the Act and Paragraph 21 of the Drugs (Prices Control) Order made under sub-section (1) of Section 3 of the Essential Commodities Act, is therefore void. In dealing with the question, we must set out Article 246 of the Constitution which is basedon Section 100 of the Government of India Act, 1935….

38. It is obvious that Article 246 imposes limitations on the legislative powers of the Union and State legislatures and its ultimate analysis would reveal the following essentials:

1. Parliament has exclusive power to legislate with respect to any of the matters enumerated in List I notwithstanding anything contained in clauses (2) and (3). The non obstante clause in Article 246(1) provides for predominance or supremacy of Union legislature. This power is not encumbered by anything contained in clauses (2) and (3) for these clauses themselves are expressly limited and made subject to the non obstante clause in Article 246 (1). The combined effect of the different clauses contained in Article 246 is no more and no less than this : that in respect of any matter falling within List I, Parliament has exclusive power of legislation.

2. The State legislature has exclusive power to make laws for such State or any part thereof with respect to any of the matters enumerated in List II of the Seventh Schedule and it also has the power to make laws with respect to any matters enumerated in List III. The exclusive power of the State legislature to legislate with respect to any of the matters enumerated in ListII has to be exercised subject to clause (1) i.e. the exclusive power of Parliament to legislate with respect to matters enumerated in List I. As a consequence, if there is a conflict between an entry in List I and an entry in List II which is not capable of reconciliation, the power of Parliament to legislate with respect to a matter enumerated in List II must supersede pro tanto the exercise of power of the State legislature.

3. Both Parliament and the State legislature have concurrent powers of legislation with respect to any of the matters enumerated in List III.

39. Article 254 provides for the method of resolving conflicts between a law made by Parliament and a law made by the legislature of a State with respect to a matter falling in the Concurrent List[…]

40. Wefinditdifficulttosubscribetothepropositionadvancedonbehalfoftheappellants that merely because of the opening words of Article 246(3) of the Constitution “subject to clauses (1) and (2)” and the non-obstante clause in Article 246(1) “notwithstanding anything in clauses (2) and (3)”, sub-section (3) of Section 5 of the Act which provides that no dealer shall be entitled to collect the amount of surcharge must be

349 Hoechst Pharmaceuticals Ltd. v. State of Bihar

struck down as ultra vires the State legislature inasmuch as it is inconsistent with Paragraph 21 of the Drugs (Prices Control) Order issued by the Central Government under sub-section (1) ofSection3oftheEssentialCommoditiesActwhichenablesthemanufacturerorproducer of drugs to pass on the liability to pay sales tax to the consumer. The submission is that sub- section (3) of Section 5 of the Act enacted by the State legislature while making a law under Entry 54 of List II of the Seventh Schedule which interdicts that a dealer liable to pay surcharge under sub-section (1) of Section 5 of the Act shall not be entitled to collect it from the purchaser, directly trenches upon Union power to legislate with respect to fixation ofprice of essential commodities under Entry 33 of List III. It is said that if both are valid, then ex hypothesi the law made by Parliament must prevail and the State law pro tanto must yield. We are afraid, the contention cannot prevail in view of the well accepted principles.

41. The words “notwithstanding anything contained in clauses (2) and (3)” in Article 246(1) and the words “subject to clauses (1) and (2)” in Article 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 shall prevail over the State power as enumerated in Lists II and III, and in case of overlapping between Lists II and III, the former shall prevail. But the principle of federal supremacy laid down in Article 246 of the Constitution cannot be resorted to unless there is an “irreconcilable” conflict 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 soas 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 non-obstante clause in Article 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.

42. Union and State legislatures have concurrent power with respect to subjects enumerated in List III, subject only to the provision contained in clause (2) of Article 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 Article 254(2).

43. As regards the distribution of legislative powers between the Union and the States, Article 246 adopts with immaterial alterations the scheme for the distribution of legislative powers contained in Section 100 of the Government of India Act, 1935. Our Constitution was not written on a clean slate because a Federal Constitution had been established by the Government of India 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 of 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

350 Hoechst Pharmaceuticals Ltd. v. State of Bihar Government of India Act, 1935 are applicable, and have in fact been applied, to the

interpretation of the Constitution.

45. With regard to the interpretation of non obstante clause in Section 100(1) of the Government of India Act, 1935 Gwyer, C.J. observed:

It is a fundamental assumption 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 ofthe other.

In all cases of this kind the question before the Court”, according to the learned Chief Justice is not “how the two legislative powers are theoretically capable of being construed, but how they are to be construed here and now”.

47. Earl Loreburn, L.C. delivering the judgment of the Judicial Committee in Attorney General for Ontario case [1912 AC 571] observed that in the interpretation of Sections 91 and 92 of the British North America Act:

If the text is explicit, the text is conclusive alike 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 within either, recourse must be had to the context and scheme of the Act.

48. In A.L.S.P.P.L. Subrahmanyan Chettiar v. Muttuswami Goundan [AIR 1941 FC 47], Gwyer, C.J. reiterated that the principles laid down by the Privy Council in a long line of decisions in the interpretation of Sections 91 and 92 of the British North America Act, 1867 must be accepted as a guide for the interpretation of Section 100 of the Government of India Act, 1935 :

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 so closely intertwined that blind adherence to a strictly verbal interpretation would 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 whereby the impugned statute is examined to ascertain its “pith and substance” or its “true nature and character”, for the purpose ofdetermining whether it is legislation with respect of matters in this list or in that.

49. 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 Article 246(1) should be applied as a matter of last resort. For, in the words of Gwyer, C. J. in C.P. and Berar Taxation Act case[AIR 1939 FC 1]:

For the clause ought to be regarded as a last resource, a witness to the imperfections of human expression and the fallibility of legal draftsmanship.

50. The observations made by the Privy Council in the Citizens Insurance Company case [(1881) 7 AC 96,108], were quoted with approval by Gwyer, C.J. in C.P. and Berar Taxation Act case, and he observed that an endeavour should be made to reconcile apparently conflicting provisions and that the general power ought not to be construed as to make a nullity of a particular power operating in the same field. The same duty of reconciling

351 Hoechst Pharmaceuticals Ltd. v. State of Bihar apparently conflicting provisions was reiterated by Lord Simonds in delivering the judgment of

the Privy Council in Governor-General in Council v. Province of Madras [AIR 1945 PC 98]:

For in a Federal constitution, in which there is a division of legislative powers between Central and Provincial legislatures, it appears to be inevitable that controversy should arise whether one or other legislature is not exceeding its own, and encroaching on the other’s, constitutional legislative power, and in such a controversy it is a principle, which theirLordships 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 substance” as it has sometimes been said, which must determine into what category it falls.

Their Lordships approved of the decision of the Federal Court in Province of Madras v. Boddu Paidanna & Sons [AIR 1942 FC 33] 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.

51. In Prafulla Kumar Mukherjee v. Bank of Commerce Ltd., Khulna [AIR 1947 PC 60], Lord Porter delivering the judgment of the Board laid down that in distinguishingbetween the powers of the divided jurisdictions under Lists I, II and III of the Seventh Schedule to the Government of India Act, 1935, it is not possible to make a clean cut betweenthe 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 purpose of determining in which particular list the legislation falls, applies to Indian as well as to Dominion legislation. In laying down that principle, the Privy Council observed:

Moreover, the British Parliament when enacting the Indian Constitution Act had a long experience of the working of the British North America Act and the AustralianCommonwealth 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. in Subrahmanyan Chettiar case[ 1940 FCR 188]quoted above, and observed :

No doubt experience of past difficulties has made the provisions of the Indian 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 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. 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.

52. It would therefore appear that apparent conflict with the federal power had to be resolved by application 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 in the Provincial List, the degree or extent of the invasion into the

352 Hoechst Pharmaceuticals Ltd. v. State of Bihar forbidden field was immaterial. “The invasion of the provinces into subjects in the Federal

List,” in the words of Lord Porter, “was important”:

[…] N]ot, … because the validity of an Act can be determined by discriminating between degrees of invasion, but for the purpose of determining 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 concerned with provincial matters, but the question is not, has it trespassed more or less, but is the trespass, whatever it be, such as to show that the pith and substance of the impugned Act is not money-lending but promissory notes or banking ? Once that question is determined the 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 accorded to the three Lists in its proper perspective. In answering the objection that that view does not give sufficient effect to the non obstante clause in Section 100(1) of the Government 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.

But added:

The priority of the Federal legislature would not prevent the Provincial Legislature from dealing with any matter within List II though it may incidentally affect any item in List I.

It would therefore appear that the constitutionality of the law is to be judged by its real subject-matter and not by its incidental effect on any topic of legislation in another field.

53. The decision of the Privy Council in Prafulla Kumar Mukherjee case, has been repeatedly approved by the Federal Court and this court as laying down the correct rule to be applied in resolving conflicts which arise from overlapping powers in mutually exclusive lists.. It may be added as a corollary of the pith and substance rule that once it is found that in pith and substance an impugned Act is a law on a permitted field any incidental encroachmenton a forbidden field does not affect the competence of the legislature to enact that Act.

57. It is well settled that the validity of an Act is not affected if it incidentally trenches upon matters outside the authorized field and therefore it is necessary to inquire in each case what is the pith and substance of the Act impugned. If the Act, when so viewed, substantially falls within the powers expressly conferred upon the Legislature which enacted it, then it cannot be held to be invalid merely because it incidentally encroaches on matters which have been assigned to another Legislature.

62. […]The question is whether the field is not clear and the two legislations meet and therefore on the doctrine of federal supremacy sub-section (3) of Section 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 Article 246 of the Constitution is that when the validity of an Act is challenged as ultra vires, the answer lies to the question, what isthe pith and substance of the impugned Act ? No doubt, in many cases it can be said that the enactment which is under consideration may 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 classes of subjects enumerated in List II, then it is under the terms of Article 246(3) not to be

353 Hoechst Pharmaceuticals Ltd. v. State of Bihar

deemed to come within the classes of subjects assigned exclusively to Parliament under Article 246(1) even though the classes of subjects looked at singly overlap in many respects. The whole distribution of powers must be looked at as Gwyer, C.J. observed in C.P. and Berar Taxation Act case, in determining the question of validity of the Act in question. Moreover, as Gwyer, C.J. laid down in Subrahmanyan Chettiar case, and affirmed by Their Lordships of the Privy Council in Prafulla Kumar Mukherjee case, it is within the competence of the State legislature under Article 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 enumerated in List II.

63. Wemustthenpassontothecontentionadvancedbylearnedcounselfortheappellants that there is repugnancy between sub-section (3) of Section 5 of the Act and Paragraph 21 of the Drugs (Prices Control) Order and therefore sub-section (3) of Section 5 ofthe Act is void to 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 Concurrent List but it can be cured by resort to Article 254(2).

64. As we have endeavoured so far, the question raised as to the constitutional validity of sub-section (3) of Section 5 of the Act has to be determined by application of the rule of pith and substance whether or not the subject-matter of the impugned legislation was competently enacted under Article 246, and therefore the question of repugnancy under Article 254 was not a matter in issue. The submission put forward on behalf of the appellants however is that there is direct collision and/or irreconcilable conflict between sub-section (3) of Section 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-section (1) of Section 3 of the Essential Commodities Act which is relatable to Entry 33 of List 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 wasput 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 it 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 Article 254(1).

66. Nicholas in his Australian Constitution, 2nd Edition, p. 303, refers to three tests of inconsistency or repugnancy :

1. 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 law, or the award of the Commonwealth Court, is intended to be a complete exhaustive code; and

354 Hoechst Pharmaceuticals Ltd. v. State of Bihar 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 v. State of U.P. [AIR 1956 SC 676], the court accepted the above three rules evolved by Nicholas, among others, as useful guides to test the question of repugnancy.

67. Article 254 of the Constitution makes provision first, as to what would happen in the case of conflict between a Central and State law with regard to the subjects enumerated in the Concurrent List, and secondly, for resolving such conflict. Article 254(1) enunciates the normal rule that in the event of a conflict between a Union and a State law in the concurrent field, the former prevails over the latter. Clause (1) lays down that if a 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 clause (1), clause (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 dealing with a concurrent subject. In such a case, the Central Act, will give way to the State Act only to the extent of inconsistency between 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 would 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 Parliament legislates under the proviso to clause (2). The proviso to Article 254(2) empowers the Union Parliament to repeal or amend a repugnant State law, either directly, or by itself enacting alaw repugnant to the State 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 law 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 repugnancy may also arise where both laws operate in the same field and the two cannot possibly stand together.

69. We fail to comprehend the basis for the submission put forward on behalf of the appellants that there is repugnancy between sub-section (3) of Section 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-section (1) of Section 3 of the Essential Commodities Act relatable to Entry 33 of List III and therefore sub-section (3) of Section 5 of the Act which is a law made by the State legislature is void under Article 254(1). The question of repugnancy under Article 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 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 State law will, to the extent of repugnancy, become void. Article 254(1) has no application to cases of repugnancy due to overlapping found between List II on the one hand and Lists I and III on the other. If such overlapping exists in any particular case, the State law will be ultra vires because of the non obstante clause in Article 246(1) read with the opening words “subject to” in Article 246(3). In such a case, the State law will fail not because of repugnance

355 Hoechst Pharmaceuticals Ltd. v. State of Bihar

to the Union law but due to want of legislative competence. It is no doubt true that the expression “a law made by Parliament which Parliament is competent to enact” in Article 254(1) is susceptible of a construction that repugnance between a State law and a law made by Parliament may take place outside the concurrent sphere because Parliament is competent to enact law with respect to subjects included in List III as well as “List I”. But if Article 254(1) is read as a whole, it will be seen that it is expressly made subject to clause (2) which makes reference to repugnancy in the field of Concurrent List – in other words, if clause (2) is to be the guide in the determination of scope of clause (1), the repugnancy between Union andState law must be taken to refer only to the Concurrent field. Article 254(1) speaks of a State law being repugnant to (a) a law made by Parliament or (b) an existing law. There was a controversy at one time as to whether the succeeding words “with respect to one of the matters enumerated in the Concurrent List” govern both (a) and (b) or (b) alone. It is now settled that the words “with respect to” qualify both the clauses in Article 254(1) viz, a law made by Parliament which Parliament is competent to enact as well as any provision of an existing law. The underlying principle is that the question of repugnancy arises only when both the legislatures are competent to legislate in the same field i.e. with respect to one of the matters enumerated in the Concurrent List. Hence, Article 254(1) cannot apply unless boththe Union and the State laws relate to a subject specified in the Concurrent List, and they occupy the same field.

70. This construction of ours is supported by the observations of Venkatarama Ayyar, J. speaking for the court in A.S. Krishna case [A.S. Krishna v. State of Madras, AIR 1957 SC 297] while dealing with Section 107(1) of the Government of India Act, 1935 to the effect:

For this section to apply, two conditions must be fulfilled : (1) The provisions of the Provincial law and those of the Central legislation must both be in respect of a matter which is enumerated in the Concurrent List, and (2) they must be repugnant to each other. It is only when both these requirements are satisfied that the Provincial law will, to the extent of the repugnancy, become void.

72. We are unable to appreciate the contention that sub-section (3) of Section 5 of the Act being a State law must be struck down as ultra vires as the field of fixation of price of essential commodities is an occupied field covered by a Central legislation. It is axiomaticthat the power of the State legislature to make a law with respect to the levy and imposition ofa tax on sale or purchase of goods relatable to Entry 54 of List II of the Seventh Schedule and to make ancillary provisions in that behalf, is plenary and is not subject to the power of Parliament to make a law under Entry 33 of List III. There is no warrant for projecting the power of Parliament to make a law under Entry 33 of List III into the State’s power oftaxation under Entry 54 of List II. Otherwise, Entry 54 will have to be read as : ‘Taxes on the sale or purchase of goods other than essential commodities et cetera’. When one entry is made ‘subject to’ another entry, all that it means is that out of the scope of the former entry, a field of legislation covered by the latter entry has been reserved to be specially dealt with by the appropriate legislature. Entry 54 of List II of the Seventh Schedule is only subject to Entry92A of List I and there can be no further curtailment of the State’s power of taxation. It is a well established rule of construction that the entries in the three lists must be read in a broad

356 Hoechst Pharmaceuticals Ltd. v. State of Bihar and liberal sense and must be given the widest scope which their meaning is fairly capable of

because they set up a machinery of Government.

73. The controversy which is now raised is of serious moment to the States, and a matter apparently of deep interest to the Union. But in its legal aspect, the question lies within a very narrow compass. The duty of the court is simply to determine as a matter of law, according to the true construction of Article 246(3) of the Constitution, whether the State’s power of taxation of sale of goods under Entry 54 of List II and to make ancillary provisions in regard thereto, is capable of being encroached upon by a law made by Parliament with respect to oneof the matters enumerated in the Concurrent List. The contention fails to take into accountthat the Constitution effects a complete separation of the taxing power of the Union and of theStates under Article 246.

74. It is equally well settled that the various entries in the three Lists are not ‘powers’ of legislation, but ‘fields’ of legislation. The power to legislate is given by Article 246 and other Articles of the Constitution. Taxation is considered to be a distinct matter for purposes of legislative competence. Hence, the power to tax cannot be deduced from a general legislative entry as an ancillary power. Further, the element of tax does not directly flow from the power to regulate trade or commerce in, and the production, supply and distribution of essential commodities under Entry 33 of List III, although the liability to pay tax may be a matter incidental to the Centre’s power of price control.

76. It would therefore appear that there is a distinction made between general subjects of legislation and taxation. The general subjects of legislation are dealt with in one group of entries and power of taxation in a separate group. In M.P.V. Sundararamier & Co. v. State of
A.P. [AIR 1958 SC 468] this court dealt with the scheme of the separation of taxation powers between the Union and the States by mutually exclusive lists. In List I, Entries 1 to 81 deal with general subjects of legislation; Entries 82 to 92-A deal with taxes. In List II, Entries 1 to 44 deal with general subjects of legislation; Entries 45 to 63 deal with taxes. This mutual exclusiveness is also brought out by the fact that in List III, the Concurrent Legislative List, there is no entry relating to a tax, but it only contains an entry relating to levy of fees in respect of matters given in that list other than court-fees. Thus, in our Constitution, a conflict of the taxing power of the Union and of the States cannot arise. That being so, it is difficult to comprehend the submission that there can be intrusion by a law made by Parliament under Entry 33 of List III into a forbidden field viz. the State’s exclusive power to make a law with respect to the levy and imposition of a tax on sale or purchase of goods relatable to Entry 54of List II of the Seventh Schedule. It follows that the two laws viz. sub-section (3) of Section5 of the Act and Paragraph 21 of the Control Order issued by the Central Government under sub-section (1) of Section 3 of the Essential Commodities Act, operate on two separate and distinct fields and both are capable of being obeyed. There is no question of any clash between the two laws and the question of repugnancy does not come into play.