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PETITIONER: HOECHST PHARMACEUTICALS LTD. AND ANOTHER ETC.

       Vs.

RESPONDENT: STATE OF BIHAR AND OTHERS

DATE OF JUDGMENT06/05/1983

BENCH: SEN, A.P. (J) BENCH: SEN, A.P. (J) VENKATARAMIAH, E.S. (J) MISRA, R.B. (J)

CITATION:  1983 AIR 1019            1983 SCR  (3) 130  1983 SCC  (4)  45        1983 SCALE  (1)723  CITATOR INFO :  R          1985 SC  12  (13)  RF         1986 SC1085  (14)  F          1987 SC 494  (6)  F          1988 SC 322  (4)  RF         1988 SC 329  (14)  RF         1988 SC1708  (24)  R          1990 SC1637  (21)  RF         1990 SC2072  (11,46)  R          1992 SC1310  (7)  RF         1992 SC2169  (15)

ACT:      Bihar Finance  Act, 1981-Sub-ss.  (I) and  (3) of s. 5- Levy of  surcharge on sales tax and prohibition from passing on liability thereof to purchasers- Whether void in terms of opening words  of Art.  246(3)for  being  in  conflict  with 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 these seller must have  right   to  pass   it   on   to   consumer   7-Whether classification of  dealers on  the basis of ’gross turnover’ as defined in s. 2(j) invalid ?      Constitution of India-Art. 246-State Legislatures Power to make  law with  respect to matters enumerated in List 11- Whether subject  to Parliaments power to make law in respect of matters  enumerated in  List 111  ?-Doctrine of ’pith and substance’ and the principle of ’Federal Supremacy ’.      Constitution  of   India-Art.   254(i)-Can   repugnancy between a  State law  and a  law made  by  Parliament  arise outside the Concurrent field ?      Constitution  of  India-Arts.  200  and  201-Governor’s decision to  refer a  Bill t  o President-Whether subject to Court  s   scrutiny  ?-’Assent   of  President   ’-  Whether justiciable ?

HEADNOTE:      Sub-section (l)  of s. S of the Bihar Finance Act, 1981 provides for  the levy of a surcharge in addition to the tax payable, on  every dealer whose gross turnover during a year exceeds Rs. 5 lakhs and, sub-s. (3) thereof prohibits such a

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dealer from  collecting amount  of surcharge  payable by him from the  purchaser. In  exercise of  the power 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 the  districts of  the Slate  and their  gross  turnover within the  State during the relevant period ran into crores of rupees. Most of the medicines and drugs sold by them were covered by  the Drugs  (Price Control)  Order,  1919  issued under sub-s. (l) of 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  A 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, 1981 at 10 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 Kerala, [1979]1 S.C.R. 121.      It was  contended on behalf of the appellants: (i) that sub-s. (3) of s. S of the Act which is a State law relatable to Entry  54 of  List 11  of the  Seventh  Schedule  to  the Constitution and  which provides  that no  dealer  shall  be entitled to  collect the  surcharge levied on him is void in terms  of   the  opening   words  of   Art.  246(3)  of  the Constitution as  it is  in direct conflict with paragraph 21 of the Drugs (Price Control) order 1979, issued under sub-s. (1) of  s. 3 of the essential Commodities Act, 1955 which is a Union  Law relatable  to Entry  33 of  List III  and which enables the manufacturer or producer of drugs to pass on the liability to  pay sales  tax to  the consumer; (ii) that the words  "a   law  Mads  by  Parliament  which  Parliament  is competent to  enact ’  contained  in  Art.  254(1)  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  also to  include a  law made  by  Parliament  with respect to  any of  the matters enumerated in the Union List and therefore  sub-s. (3) of s. 5 of the Act being repugnant to Paragraph  21 of  the Control  order is  void under  Art. 254(iii) that if both sub-s. (1) and sub-s. (3) of s. 5 were relaxable to  Entry 54 of List II, there was no need for the Governor to  have referred  the Bihar  Finance Bill, 1981 to the President for his assent and that the President’s assent is justiciable;  (iv) that  dealers of essential commodities who cannot  raise their  sale prices  beyond the  controlled price cannot  be equated  with other  dealers who  can raise their sale  prices and absorb the surcharge and since sub-s. (3) of  s. S treats "unequals as equals" it is arbitrary and irrational  and  therefore  Violative  of  Art.  14  of  the Constitution:  (v)  that  sales  tax  being  essentially  an indirect tax,  the legislature  was not  competent to make a provision prohibiting  the dealer from collecting the amount of surcharge  and that  the true  nature  and  character  of surcharge being  virtually a tax on income, sub-s. (3) of s. 5.  is   unconstitutional  as  it  imposes  an  unreasonable restriction upon  the freedom of trade guaranteed under Art.

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19(1)(g). (vi) that sub-s. (3) of s. S of the Act which is a State law  being repugnant  to paragraph  21  of  the  Drugs (Price Control) Order which is issued under a Union law, the latter must prevail in view of the non obstants clause in s. 6 of  the Essential  Commodities Act and the former which is inconsistent therewith  should be  by-passed in terms of the decision in  Hari Shankar  Bagla and Anr. v. State of Madhya Pradesh, [1955]  I S.C.R. 380. and (vii) that in view of the decision in  A. V fernandez v. State of Kerala.[1957] S.C.R. 837, sub-s.  (1) of  s. 5  of the Act which makes the "gross turnover" as  defined in  s. 2(j)  of the Act which includes transactions taking  place in  the course  of inter-state or International Commerce  to be  the basis  for  the  levy  of surcharge is ultra vires the State Legislature, 132      Dismissing the appeals, ^      HELD: 1.  (a) It  cannot be  doubted that the surcharge partakes of  the nature  of sales  tax and  therefore it was within the competence of the State Legislature to enact sub- s. (1)  of s.  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 purchase of goods under Entry 54 of List II  of the Seventh Schedule it was equally competent to select the  class of  dealers on whom the charge would fall. If that  be so, the State Legislature could undoubtedly have enacted sub-s. (3) of s. S prohibiting the dealers liable to pay the  surcharge under  sub-s.(l) thereof  from recovering the same from the purchaser. [156 H-157 B]      (b) The  power of  the State  Legislature to make a law with respect  to the levy and imposition of a tax on sale or purchase of  goods relatable  to Entry  54 of List II 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 of  taxation under Entry 54 of List II. Otherwise,  Entry 54 of List II will have to be read as: "Taxes on sale or purchase of goods other than the essential commodities, etc."  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  is only subject to  Entry 92A  of List I and there can be no further curtailment of the State’s power of taxation.                                           [183 F-H, 184 A-B]      (c) The  Constitution effects  a complete separation of the taxing  power of  the Union and of the States under Art. 246 The  various entries  in the three lists are not ’powers of legislation,  but ’fields  of legislation.  The power  to legislate is  given by  Art. 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  II,  although  the liability to  pay tax  may be  a matter  incidental  to  the Centre’s power of price control. [184 E-G]      (d) A  scrutiny of Lists I and II would show that there is no  overlapping anywhere in the taxing power and that the Constitution gives  independent sources  of taxation  to the

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Union and  the States.  There is  a distinction made between general subjects  of legislation  and taxation and these are dealt with in separate groups of entries: in List I, Entries I to  81 deal  with  general  subjects  of  legislation  and entries 82  to 92A  deal with taxes; in List II Entries I to 44 deal  with general subjects of legislation and Entries 45 to 63  deal with  taxes. This  mutual exclusiveness  is also brought out  by the fact that in List III, there is no entry relating to a tax it only 133 contains an  entry relating  to levy  of fees.  Thus, in our Constitution, a conflict of taxing power of the Union and of the States  cannot arise. The two A laws viz., sub-s. (3) of s. S  of the  Act and  paragraph  21  of  the  Drugs  (Price Control) order  issued under  sub-s  (I)  of  s.  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 them. [184 H-185 F]      M.P. Sundararamier  and Co.  v. State of Andhra Pradesh and Anr., [1958] S.C.R. 1422, referred to.      Seervai: Constitutional  Law of India, 3rd Ed., Vol, I, pp. 81-82, referred to.      (e) The  words ‘Notwithstanding  anything contained  in cls. (2)  and (3)  in cl.  (1) of  Art. 246  and  the  words "Subject to  cls. (1)  and (2)"  in cl. (3) thereof 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 ll and III, and in case of overlapping  between Lists  li and  III, the former shall prevail. But the principle of Federal Supremacy laid down in Art.  246   cannot  be   resorted  to  unless  there  is  an ’irreconcilable’ conflict  between the  Entries in the Union and State  Lists. The non obstante clause in cl. (I) of Art. 246  must   operate  only  if  reconciliation  should  prove impossible. However, no question of conflict between the two Lists  will  arise  is  the  impugned  legislation,  by  the application of  the doctrine of ’pith and substance’ appears to fall  exclusively under  one List,  and encroachment upon another List is only incidental [165 A-E]      (f )  The true  principle  applicable  in  judging  the constitutional validity  of sub-s. (3) of s. S of the Act is to determine  whether in  its pith and substance it is a law relatable to  Entry 54  of List  II and not whether there is repugnancy between  it and  paragraph 21 of the Drugs (Price Control) order  The constitutionality  of the  law has to be judged by its real subject matter and. not by its incidental effect upon  any topic of legislation in another field. Once it is found that in pith and substance the impugned Act is a law on  a permitted  field any  incidental encroachment on a forbidden field  does  not  affect  the  competence  of  the legislature to  enact that  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, under  the terms of Art. 246(3) it is not to be deemed  to come  within the  classes of subjects assigned exclusively to  Parliament under Art. 246(1) even though the classes  of  subjects  looked  at  singly  overlap  in  many respects. The whole distribution of powers must be looked at from the  point of  view  of  determining  the  question  of validity of the impugned Act. It is within the competence of the State  Legislature under  Art.  246(3)  to  provide  for matters which  though within  the competence  of Parliament,

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are necessarily  incidental to  effective legislation by the State Legislature  on the  subject of  legislation expressly enumerated in List II. [162 B, 171 D, 177 C-E] 134      In the  Central Provinces  and  Berar  Sales  of  Motor Spirit and  Lubricants Taxation Act, 1938, [1939] F.C.R, 18; Citizen Insurance  Company v. William Parsons, L.R. [1882] 7 A.C. 96;  Attorney General  for the  Province of  ontario v. Attorney General  for the  Dominion of  Canada, L.R.  [1912] A.C. 571;  A.L.S.P.P.L. Subrahmanyam  Chettiar v. Muttuswami Goundan, [1940]  F.C.R. 188; Governor     General in Council v. Province  of Madras,  [1945] F.C.R.  179; The Province of Madras v.  Messers Boddu  Paidanna & Sons, [1942] F.C.R. 90, Prafulla Kumar  Mukherjee &  Ors v.  Bank of  Commerce Ltd., Khulna, A.I.R.  [1947] P.C.  60;  and  Grand  Trunk  Railway Company of  Canada v. Attorney General of Canada, L R [19071 A.C. 65, referred to.      2.(a) 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 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. Art.  254(1) has  no application to cases of repugnancy due to overlapping found between List ll on the  one hand  and List  I and  List Ill 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 Art.  246(1) read  with the opening words ’Subject to’ in Art 246(3).  In such  a case,  the State  law will  fail not because of  repugnance to  the Union  law but due to want of legislative competence. [145 C, 181 F]      (b) It is no doubt true that the expression "a law made by Parliament  which Parliament  is competent  to enact"  in Art. 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 Art. 254(1) is read as a whole, it  will be seen that it is expressly made subject to cl. (2)  which makes  reference to repugnancy in the field o Concurrent List.  In other  words, if  cl. (2)  is to be the guide in  the determination  of the  scope of  cl. (l),  the repugnancy between  Union and  State law  must be  taken  to refer only  to the Concurrent field. Art. 254(1) speaks of a State law  being repugnant to a law made by Parliament or an existing law.  The words  "with respect  to qualify both the clauses in  Art. 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 the Con- current List. [181 G-182 A, R-C]      Deep Chand v. State of Uttar Pradesh & Ors [1959] Supp. 2 S.C.R.  8 Ch. Tika Ramji & ors v. State of Uttar Pradesh & Ors., [1956] S.C.R. 393 zaverbhai Amidas v. State of Bombay, [1955] I  S.C.R. 799;  M. Karunanidhi  v.  Union  of  India, [1979] 3  S.C.R. 254;  T. Barai  v. Henry  Ah Hoe,  [1983] I S.C.C. 177;  A. S. Krishna v. State of Madras, [1957] S.C.R. 399; Clyde  Engineering Cø.  Ltd. v. Cowburn, [1926] 37 Com. L.R. 465; Ex Parte Mclean, [1930] 43 135 Com. L  R. 472;  and Stock Motor Ploughs Limited v. Forsyth,

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[1932] Com. L.R. 128, referred to.      (c) Entry  54 of  List II  is a tax entry and therefore there is  no question of repugnancy between sub-s. (3) of s. 5 of  the Act  and paragraph  21 of  the Control  order. The question of repugnancy can only arise in connection with the subjects enumerated  in the Concurrent List as regards which both the  Union and  the State  Legislatures have concurrent powers. [178 G-179 B] B      3. It  is clear  from Arts.  200 and  201 that  a  Bill passed by  the State Assembly may become law if the Governor gives his  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 which  lays down  that a  Bill which  has  been assented to  by the President would be ineffective as an Act if there  was no  compelling necessity  for the  Governor to reserve it  for the  assent of  the President. 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  future complication. Even if it ultimately turns out that there was no necessity  for the  Governor to  have reserved 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 unconstitutional on the ground of want of proper  assent. This aspect of the matter, as the law now stands, is  not open  to scrutiny  by  the  Courts.  In  the instant case,  the Finance  Bill which ultimately became the Act  in  question  was  a  consolidating  Act  relating  the Different subjects and perhaps the Governor felt that it was necessary to  reserve it for the assent of the President The assent of  the President  is not  justifiable and  the Court cannot spell  out any  infirmity arising out of his decision to give such assent. [193 A-194 B]      Teh Chang  Poh  @  Char  Meh.  v.  Public  Prosecutor., Malaysia, L.R. [1980] A.C 458. referred to.      4. (a)  There is  no ground for holding that sub-s. (3) of s.  5 of  the Act  is arbitrary  or irrational or that it treats  "unequals   as  equals"   or  that   it  imposes   a disproportionate burden  on a  certain class  of dealers.  A surcharge in  its true nature and character is nothing but a higher rate  of tax  to raise  revenue for general purposes. The levy  of surcharge  under  sub-s.  (l)  of  s.  S  falls uniformly on a certain class of dealers depending upon their capacity to  bear the additional burden. The economic wisdom of  a   tax  is   within  the   exclusive  province  of  the legislature. The  only question for the Court to consider is whether  there   is  rationality   in  the   behalf  of  the legislature that  capacity to  pay the  tax increases by and large with  an increase  of receipts.  The view taken by the Court in  kodar’s case  that, to  make the  tax of  a  large dealer heavier  is  not  arbitrary  discrimination,  but  an attempt to  proportion the  payment to  capacity to pay, and thus to  arrive at a more genuine equality, is in consonance with social  justice in  an egalitarian State. [186 H-187 A, 191 B, 191 A]      S. Kodar  v. State  of Kerala,  [1975]  I  S.C.R.  121, relied on. 136      (b) There is no basis for the submission that the Court was wrong  in Podar’s  case. The  contention that ability to pay is  not a  relevant criterion for upholding the validity of sub-s.  (3) of  s. 5  of the  Act in  question cannot  be accepted. On  questions of  economic regulations and related matters, the  Court must  defer to the legislative judgment.

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When the  power to tax exists, the extent of the burden is a matter for  the discretion  of the  law-makers It is not the function of  the Court to consider the propriety or justness of a  tax or  enter upon the realm of legislative policy. If the  evident   intent  and  general  operation  of  the  tax legislation  is  to  adjust  the  burden  with  a  fair  and reasonable   degree    of   equality,   the   constitutional requirement is satisfied The equality clause in Art. 14 does not take  away from  the State the power to classify a class of persons  who must  bear the  heavier burden  of tax.  The classification having  some reasonable basis does not offend against that  clause merely  because it  is  not  made  with mathematical nicety  or because  in practice  it results  in some inequalities. [189 H-190 G]      (c) There  is no lacteal foundation laid to support the contention  that   the   levy   of   surcharge   imposes   a disproportionate burden  on a  certain class of dealers such as manufacturers  or producers  of drugs,  etc. The business carried on  by the appellants in the State of Bihar alone is of such  magnitude that  they have  the capacity to bear the additional burden  of surcharge  That apart under the scheme of the Control order the profit margins of manufacturers and producers of medicines and drugs is considerably higher than that of wholesalers. If the appellants find that the levy of surcharge cannot be borne within the present price structure of medicines  and drugs, they have the right to apply to the Centrals Government  for revision  as the  retail  price  of ’formulations   under paragraph  I S  of the  Control order. [186 F, 187 G, 189 G]      5. It  is no  doubt true that a sales tax is, according to the  accepted notions,  intended to  be passed  on to the buyer, and  the provisions  authorising and  regulating  the collection of sales tax by the seller from the purchaser are a usual feature of sales tax legislation. However, it is not an essential  characteristic of  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 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 affect the competence of  the legislature. The contention based on Art. 19(1)(g) cannot therefore be  sustained. [191 E-H]      The Tata  Iron & Steel Co., Ltd. v. The State of Bihar, [1958] S.C.R.  1355; M/s.  J. K Judge Mills Co. Ltd. v. ’The State of  Uttar Pradesh,  1962, 2  S.C.R. 1  and S. Kodar v. State of Kerla, [1975] I S.C.R. 121, referred to.      6. (a)  The 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 wholesaler  or distributor  is inclusive of sales tax. There being no conflict between sub- s. (3) of 137 s. 5  of the  Act and paragraph 24 of the Control order, the question of the non obstante clause to s. 6 of the Essential Commodities Act coming into play does A not arise. [158 G]      Hari Shankar  Bagla &  Anr. v. State of Madhya Pradesh, [1955] 1 S.C.R. 380, referred to.      (b) 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 s.  3 and  additional sales  tax  payable

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under s.  6 to  the purchasers.  Sub-s. (3)  of s. 5 however imposes a  limitation on  dealers liable  to  pay  surcharge under sub-s.  (I) thereof  from  collecting  the  amount  of surcharge payable  by them  from the  purchasers which  only means that  surcharge payable  by such  dealers under sub-s. (I) of  s. 5  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 sub-s. (3) of s. 5 cannot be passed on. That  being so,  there is no conflict between sub-s. (3) of s.  5 of  the Act  and paragraph 21 of the Control order. [158 H-159 C]      The predominant object of issuing a control order under sub-s. (I)  of s.  3 of  the Essential Commodities 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 or commerce may suffer a loss is no ground  for   treating  such   a  regulatory   law   to   be unreasonable, unrest the basis adopted for price fixation is so unreasonable  as to  be in excess of the lower to fix the price, or  there is  a statutory obligation to ensure a fair return to the industry. [159 G-H]      Shree Meenakshi  Mills Ltd. v. Union of India, [1974] 2 S.C.R. 398;  and Prag  Ice &  oil Mills  v. Union  of India, [1978] 3 S.C.R. 293. referred to      7. The decision in Fernandez’s case is an authority for the proposition  that the State Legislature, notwithstanding Art. 286  of the  Constitution, while  r making  a law under Entry 54 of the List II can, for purposes of registration of a dealer and submission of returns of sales tax, include the transactions  covered  by  Art.  286.  That  being  so,  the constitutional validity of sub s. (I) of s. 5 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  them, 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 surcharge under Entry 54 of the List II to take into account the total turnover of  the dealer within the State and provide 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  10%  of  the  tax  as  may  be provided. The  liability to  pay the surcharge is not on the Gross turnover 138 including the  transactions covered  by Art. 286 but is only on inside  sales and A the surcharged is sought to be levied on dealers  who have a position of economic superiority. The definition of  gross turnover  in s. 2(j) is adopted not for the purpose of bringing to surcharge inter-State sales etc., but is  only for  the purpose  or classifying dealers within the State and to identify the class of dealers liable to pay such  surcharge.   There  is  sufficient  territorial  nexus between the  persons sought  to be  charged  and  the  State seeking to tax them.                                                [196 F-197 D]      A. V.  Fernandez v. State of Kerala, [1957] S.C.R. 837; State of Bombay v. R.M.D. Chamarbaugwala, [1957] S.C.R. 874; The Tata  Iron and  Steel Company  Ltd. v.  State of  Bihar, [1958] S.C.R.  1355; and  International Tourist  Corporation

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etc. v.  State of  Haryana and  Ors., [1981]  2 S.C.R.  364, referred to.

JUDGMENT:      CIVIL APPELLATE  JURISDICTION: Civil Appeals Nos. 2567, 2818-20, 2648,  3277, 2817, 2918, 3079-83, 3001-04, 3543-48, 2810-16, 3375,  2864-2917,  2989-3000,  3084-3088,  3268-71, 3253-54, 3399-3400 of 1982.      Appeals by  special leave from the Judgments and orders dated the 30th April, 1982, 5th, 6th, 7th, 10th, 11th, 12th, 13th, 15th,  May, 1982, 3rd, 17th, 23rd, August, 1982 of the Patna High  Court in  C.W.J.C Nos. 1788, 3726, 3727, 4529 of 1981, 253,  688, 1473  of 1982,  2771/81, 96/82, 1233, 1498, 1907, 1986  of 81,  1042, 1043,  1121, 1044  of 1982,  3198, 3197, 3195,  3147, 3146, 3148, 1573, 1377, 1802, 1852, 1800, 1950, 1776  of 1981,  1038 of  1982, 1300, 1301, 1303, 1329, 1334, 1383,  1648 of  1981, 255  of 1982,  1193, 1198, 1204, 1206, 1209,  1211, 1213,  1214, 1262-64,  1273, 1282,  1283, 1287, 1331,  1355 1382,  1384, 1386, 1431, 1432, 1484, 1488, 1489, 1548,  1645, 1734,  1833 of  1981, 78  of 1982,  1154, 1160, 1168,  1169. 1186,  1187, 1191,  1549, 1556,  1557-58, 1415, 1461,  1465, 1487  of 1981,  251 of 1982, 228, 1321 of 1981, 394,  1478 of  1982, 1320/81, 902, 565/82, 1775, 1177, 1801 of 1981, 503/82, 1804/81, 1, 3, 4, 6 & 7 of 1982, 3079, 3528 of  1981, 1947/82,  1254/82, 2922/81,  1372/82, 1408  & 1482 of 1981.                             AND      Special Leave  Petitions Nos.  10744-53, 9554-58, 9788, 9821-22, 10907, 9095, 1202-05, 9886-88, 9500-02, 9753, 9523, 10912, 11069,  10754-56,  10797-10812,  10891,  9702,  9782, 9561, 14001,  14364-66 of 1982, 1393-96, 1422-23, 1472-73 of 1983.      From the  Judgments and  orders dated  the 30th  April, 1982, 3rd  May, 5th,  6th, 7th,  10th, 11th, 12th, 13th May, 19th August  9th &  15th September, 8th & 18th October 1982, 20th &  21st January,  1983  of  the  Patna  High  Court  in C.W.J.C. Nos. 1176, 1516 139 1435, 1177,  1618, 1469  & 1252  of 1982,  3398/81, 1355/82, 525182, 3640,  3641, 3642,  3743 & 3745 of 1982, 1326, 1784, 1405, 1854,  3337, A  1656 of  1981, 349,  1108, 1148, 4073, 4074, 4075  of 1982,  3118, 3080,  1161, 1374, 2804, 3035 of 1981, 4213/82,  1517/82, 1278, 1414, 1290, 1291, 1292, 1297, 1306, 1200,  1212, 1256,  1276, 1277,  1485  of  1981,  484, 509/82, 1517,  1578, 1450,  4037, 2944,  1788, 2889 of 1981, 1547, 506,  507, 508,  4931, 1253,  1431, 1432, 207 & 214 of 1982 & 182 & 203 of 1983.                             WITH      Writ Petitions  Nos. 9266,  10055-56, 7002-09, 7019-23, 7024, 7921-22,  7996.97, 8508-10,  9680-92,  9322,  7647-53, 8005, 8067, 7160 of 1982, 415 76-78, 640-41, 652 of 1983       (Under article 32 of the Constitution of India)      A.B. Divan,  A.K.  Sen,  Shankar  Ghose,  P.R.  Mridul, Hardev Singh  &  S.T.  Deasi,  Talat  Ansari,  Ashok  Sagar, Sandeep  Thakore,   Ms.  Rainu   Walia,  D.N.   Misra,  D.P. Mukherjee, B.R.  Agarwala, Miss  Vijayalakshmi  Menon,  U.P. Singh, B.B.  Singh. B.S. Chauhan, Anil Kumar Sharma, Praveen Kumar, A.T.  Patra, Vineet  Kumar, A.K.  Jha, M.P. Jha, R.S. Sodhi, A.  Minocha, Mrs.  Indu Goswamy,  S.K.  Sinha,  Vinoo Bhagat, P.N.  Misra, KK.  Jain  and  Pramod  Dayal  for  the Appellants.      K  Parasaran,  Solicitor  General,  R.B.  Mahto,  Addl. Advocate General.  Bihar. Pramod  Swarup and U.S. Prasad for

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the Respondents.      The Judgment of the Court was delivered by      SEN, J.  These are  appeals by  special  leave  from  a judgment and  order of  the High  Court of Patna dated April 30, 1982  by which  the High Court upheld the constitutional validity of sub-s. (I) of s.5 of the Bihar Finance Act, 1981 ("Act’ for short) which provides for the levy of a 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 tax, and of  sub-s. (3)  of s.  5 of the Act which prohibits such dealer from  collecting the  amount of  surcharge payable by him from the purchasers. 140      The Bihar  Finance Act 1981, is not only an Act for the levy A of a tax on the sale or purchase of goods but also is an Act  to consolidate  and amend various other laws. We are here concerned  with s.  S of  the Act  which finds place in Part I  of the  Act which  bears the heading "Levy of tax on the sale and, purchase of goods in Bihar and is relatable to Entry 54 of List II of the Seventh Schedule. By two separate notifications dated January 15, 1981 the State Government of Bihar in exercise of the powers conferred by sub-s. (I) s. S of the  Act appointed  January, IS; 1981 to be the date from which surcharge  under s.  5 shall be leviable and fixed the rate of  surcharge at  10 per  centum of the total amount of the tax  payable by  a dealer  whose gross turnover during a year exceeds  Rs. 5 lakhs, in addition to the tax payable by him. The  Act was  reserved for  the previous  assent of the President and  received his  assent on April 20, 1981. There is  no   point  raised   as  regards  the  validity  of  the notifications in  question and  therefore there  is no  need for us to deal with it.      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 formulations in particular,  is an  occupied field  by virtue  of various control orders issued by the Central Government from time to time under  sub-s. (I)  of s. 3 of the Essential Commodities Act, 1955 which allows the manufacturer of producer of goods to pass  on the  tax liability to the consumer and therefore the State Legislature of Bihar had no legislative competence to enact sub-s. (3) of s. S 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-s (3) of s. 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 s. 6 of the Essential Commodities Act must  prevail. There is also a subsidiary contention put forward on  behalf of the appellants that sub-s. (I) of s. S of the  Act is  ultra vires the State Legislature in as much as the liability to pay surcharge is on a dealer whose gross turnover during  a year  exceeds Rs.  5 lakhes  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 141 export  of   goods  outside  the  territory  of  India.  The submission is that such transactions are covered by Art. 286

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of the  Constitution and A 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 s. 2 (j) of the  Act for  the purpose  of bearing  the  incidence  of surcharge under sub-s. (1) of s. 5 of the Act.      It will  be convenient,  having regard  to  the  course taken in the arguments, to briefly refer to the facts as are discernible from  the records  in Civil  Appeal No.  2567 of 1982 -  Messrs Hoechst  Pharmaceuticals Limited & Another v. The State  of Bihar  & others,  and Civil Appeal No. 3277 of 1982 -  Messrs Glaxo  laboratories (India)  Limited  v.  The State of  Bihar &  others.  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 s.  14 of  the Act and effect sales of their manufactured  products  through  wholesale  distributors  or stockists appointed  in almost  all the  districts of  Bihar who, in  their turn, sell them to retailers through whom the medicines and  drugs reach  the consumers. Almost 94% of the medicines and drugs sold by them are at the controlled price exclusive of  local taxes  under the  Drugs (Price  Control) order, 1979  issued by  the Central  Government under sub-s. (1) of  s. 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 placed  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  appears therefrom  that one  of the terms of their contract is  that sales  tax and local taxes will be charged wherever applicable.       These  appellants have  also placed  on  record  their orders of  assessment together  with notices  of demand, for the assessment years 1980-81 and 1981-82. For the assessment year 1980-81,  the Commercial  Taxes officer,  Patna Circle, Patna determined the gross turnover of sales in the State of Bihar through their branch office at Patna of Messrs Hoechst Pharmaceuticals Limited on the basis of the return 142 filed by  them at  Rs. 3,13,69,598,12p.  and the tax payable thereon at  Rs. 19,65,137.52.p.  The tax  liability for  the period from  January 15, 1981 to March 31, 1981 comes to Rs. 3,85,023.33.p. and  the surcharge  thereon at 10% amounts to Rs. 38,503.33p.  Thus  the  total  tax  assessed  of  Messrs Hoechst Pharmaceuticals  Limited including surcharge for the assessment year  1980-81 amounts  to Rs.  20,03,640.85p. The figures for  the assessment  year 1981-82 are not available. Foe the  assessment years  1980-81 and  1981-82  the  annual returns filed  by Messrs  Glaxo Laboratories (India) Limited show the gross turnover of their sales in the State of Bihar through their  branch at  Patna at  Rs. 5,17,83,985.76p. and Rs. 5,89,22,346.64p.  respectively. They have paid tax along with the  return amounting  to Rs.  34,06,809.80p.  and  Rs. 40,13,057.28p. inclusive  of surcharge at 10% of the tax for the period from January 15, 1981 to March 31, 1981 and April 1981 to  January 19,  1982 amounting  to Rs. 34,877.62p. and Rs. 3,09,955.86p.  respectively. There  is excess payment of Rs. 55,383.98p.  in the  assessment  year  1980-81  and  Rs. 13,112.35p. in  the year  1981-82. These  figures  show  the

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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-s. (I) of s. 5 of the Act.      The High  Court referred to the decision in S. Kodar v. State   of   Kerala(1)   where   this   Court   upheld   the constitutional validity  of sub-s.  (2) of s. 2 of the Tamil Nadu Additional Sales Tax Act, 1970 which is in pari materia with sub-s.  3 of  s. S of the Act and which interdicts that no dealer  referred to  in sub-s.  (l) shall  be entitled to collect the  additional tax payable by him. It held that the surcharge levied  under sub-s.  (1) of s. 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 pass on the incidence of tax on sale to the purchaser in order that it night be a tax on the sale of  goods. Merely  because the  dealer is  prevented by sub-s. (3) of s. 5 of the Act from collecting the surcharge, it does  not cease  to be  a surcharge on sales tax. It held relying on Kodar’s case, supra, that the charge under sub-s. (I) of  s. 5  of the  Act falls  at a uniform rate of 10 per centum 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 Art. 14 of the Constitution, nor is it possible to say that 143 because a  dealer is  disabled from passing on the incidence of surcharge to the purchaser, sub-s. (3) of s. 5 imposes an unreasonable  A   restriction  on   the  fundamental   right guaranteed  under   Art.  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-s. (3)  of s. 5 of the Act and paragraph 21 of the Drugs (Price Control)  order 1979 and both the laws are capable of being obeyed.  Undeterred by  the decision  of this Court in Kodar’s case,  supra, the  appellants  have  challenged  the constitutional validity  of sub-s. (3) of s. 5 of the Act in these appeals  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-s (I) of s. 3 of  the Essential Commodities Act which, by reason of s. 6 of that  Act, has  an overriding  effect notwithstanding any other law inconsistent therewith.      These  appeals  were  argued  with  much  learning  and resource particularly  with respect to federal supremacy and conflict of  powers between the Union and State Legislatures and as  to how  if there  is such conflict, their respective powers  can  be  fairly  reconciled.  In  support  of  these appeals, learned  counsel for  the appellants  have advanced the following contentions viz: (1) The opening words of Art. 246 (3) of the Constitution "Subject to clauses (1) and (2)" make the  power of the Legislature of any State 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 subject to  the Union power to legislate with respect to any of the  matters enumerated in List I or List III. That is to say, sub-s.  (3) of  s. 5  of the Act which provides that no dealer shall  be entitled to collect the surcharge levied on him  must   therefore  yield   to  s.  6  of  the  Essential Commodities Act  which provides that any order made under s. 3 of  the Act  shall have  effect  notwithstanding  anything inconsistent therewith contained in any enactment other then the Act  or any  instrument having  effect by  virtue of any enactment other than the Act. The entire submission proceeds

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on the doctrine of occupied field and the concept of federal supremacy. In  short, the contention is that the Union power shall prevail in a case of conflict between List II and List III. (2)  sub-s. (3)  of s. 5 of the Act which provides that no dealer  shall  be  entitled  to  collect  the  amount  of surcharge levied  on him,  clearly falls  within Entry 54 of List II of the Seventh Schedule and it collides with, and or is inconsistent  with, or  repugnant to, the scheme of Drugs (Price Control) order? 1979 generally so far as 144 price fixation  of drugs  is concerned and particularly with paragraph 21  which enables  the manufacturer or producer of drugs to  pass on  the liability  to pay  sales tax  to  the consumer. If  that be  so, then  there  will  be  repugnancy between the  State law and the Control order which according to s.  6 of  the Essential Commodities Act, must prevail. It is the  duty of  the Court  to adopt  the rule of harmonious construction to prevent a conflict between both the laws and care should  be taken  to  see  that  both  can  operate  in different  fields  without  encroachment.  It  is  therefore submitted that there is no question of repugnancy and it can be avoided  by the principle of reconciliation. That is only possible by giving full effect to the non obstante clause in s. 6  of the  Essential Commodities  Act. (3) The provisions contained in  sub-s. (3)  of s. 5 of the Act is ex facie and patently  discriminatory.   The  Essential  Commodities  Act treats certain controlled commodities and their sellers in a special manner  by fixing  controlled prices. The sellers so treated by  this Central  law are so circumstanced that they cannot be  equated with  other sellers  not effected  by any control orders.  The class  of dealers  who can  raise their sale prices and absorb the surcharge levied under sub-s. (1) of s.  5 and  a class  of  dealers  like  the  manufacturers andproducers 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, than a State law which treats both classes equally and visits  them with  different burdens, would be violative of Art.  14. The State cannot 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 guaranteed under  Art. 19 (1) (g). (5) Sub-s (1) s. 5 of the Act is ultra vires the State Legislature of Bihar insofar as for 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 Entry 54 of List II of the Seventh Schedule to enact a provision like sub-s. (1) of s. S  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 taken 145 into consideration  for computation of the gross turnover as defined in  s. 2  (j) of  the Act for the purpose of bearing the incidence of surcharge.      The contention  to the contrary advanced by the learned

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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 IdW 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.  The  learned  Solicitor  General contends that  the question  has to be determined not by the application of  the doctrine  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 distributor. 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. (1)  of s:  3  of  the 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  surcharge under sub-s.  (1) of  s. 5  of the  Act will  cut  into  the profits of  the manufacturer  or producer  but that will not make the  State law  inconsistent 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 drug 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   burden disproportionate to the profits 146 earned by  them or  that it is confiscatory in nature. There is, 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  are dealers  in essential  commodities,  the controlled price of which is exclusive of sales tax as filed 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 Kodar’s case, supra, and their liability to pay surcharge under sub- s. (1)  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 principle laid down in Kodar’s case, supra.      In  Kodar’s   case,  supra,   this  Court   upheld  tho Constitution validity of the Tamil Nadu Additional Sales Tax Act, 1970  which imposes  additional sales  tax at  5% on  a

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dealer whose annual gross turnover exceeds Rs. 10 lakhs. The charging provision  in sub-s.  (1) of s. 2 of that Act is in terms similar to sub-s. (1) of s. 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 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 tax payable by him. The Court laid down that: (l) The additional tax levied under sub-s. (I) of s. 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 Art. 19(1)(g) or (f) as the tax 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 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-s.  (2) of  s. 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 Art. 19(1)(g)  or (f).  The Act was not violative of Art. 14 of the  Constitution as  classification of  dealers  on  the basis  of   their  turnover  for  the  purpose  of  levy  of additional tax  was passed  on the  capacity of  dealers who occupy position  of economic  superiority by reason of their greater volume  of businesses  i.e. On  capacity to  pay and such  classification  for  purposes  of  the  levy  was  not unreasonable.      In order  to appreciate  the implications  of the  wide ranging contentions  advanced before  us, it is necessary to set out the relevant statutory provisions.      Sub-s. (1)  of s. 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   (I)  Every   dealer  whose  gross      turnover 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 ten per      centum 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:           Provided  that   the  aggregate  of  the  tax  and      surcharge payable  under this Part shall not exceed, in      respect of  goods declared  to be of special importance      in inter-State  trade or  commerce by section 14 of the      central Sales  Tax Act, 1256 (Act 74 of 1956), the rate      fixed by section 15 of the said Act: The expression "gross turnover" as defined in s. 2(j) Of the Act insofar as material reads: -

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148           "2(j) "gross turnover" means-      (i)   for the  purposes of levy of sales tax, aggregate           of  sale  prices  received  and  receivable  by  a           dealer, during  any given  period, in  respect  of           sale of  goods (including  the sale  of goods made           outside the  State or in the course of inter-State           trade or  commerce or export) but does not include           sale prices  of  goods  or  class  or  classes  or           description  of   goods  which   have  borne   the           incidence of purchase tax under section 4." Sub-s. (3)  of s.  5 of the Act, the constitutional validity of which is challenged, provides:           "5(3) Notwithstanding  anything  to  the  contrary      contained in  this Part,  no dealer mentioned in sub-s.      (1), who  is liable  to pay surcharge shall be entitled      to collect the amount of this surcharge."      It is  fairly conceded that not only sub-s. (1) of s. 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-s. (3) of s. 5 of the Act which enjoins that no dealer who is liable to pay a surcharge under sub-s. (I) 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."      There can  be no  doubt that  the Central and the State legislations operate  in two  different and distinct fields. The Essential  Commodities Act  provides for the regulation, production, a  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 149           by law to be expedient in the public interest, and           imported goods of the same kind as such products."      The definition of "essential commodities" in s. 2(a) of the Essential  Commodities Act  now includes  ’drugs’ by the insertion of cl. (iva) therein by Act 30 of 1974. Sub-s. (I) of s. 3 of the Essential Commodities Act provides: B           "3.  Powers   to   control   production,   supply,      distribution, etc., of essential commodities-      (1)  If the Central Government is of opinion that it is           necessary or expedient so to do for maintaining or           increasing supplies  of any essential commodity or           for  securing  their  equitable  distribution  and           availability at  fair prices,  or for securing any           essential commodity  for the  defence of  India or           the efficient  conduct of  military operations  it           may,  by   order,  provide   for   regulating   or           prohibiting    the    production,    supply    and           distribution  thereof.   and  trade  and  commerce           therein." Sub-s. (2)  lays down without prejudice to the generality of the powers  conferred by  sub-s. (1),  an order made therein may provide  for the  matters enumerated in cls. (a) to (f). Cl. (c) of sub-s. (2) provides:           "For controlling  the price  at which an essential      com modify may be bought or sold."

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S. 6 of the Essential Commodities Act which has an important bearing on these appeals is in these terms:      "6.     Effect  of   orders  inconsistent   with  other           enactments- Any  order made  under section 3 shall           have effect not withstanding anything inconsistent           therewith contained  in any  enactment other  than           this Act or any instrument having effect by virtue           of any enactment other than this Act."      The Drugs  (Price Control)  order, 1979  issued by  the Central Government in exercise of the powers conferred under s. 3  of the  Essential Commodities Act, 1955 provides for a comprehensive scheme  of price fixation both as regards bulk drugs as well as 150 formulations. The  expressions "bulk drug" and "formulation" are A defined in paragraph 2(a) and 2(f ) as:      "2.    In  the  order,  unless  the  context  otherwise           requires,-      (a)     "bulk  drug"   means  any  substance  including           pharmaceutical,  chemical,   biological  or  plant           product   or    medicinal   gas    conforming   to           pharmacopoeal or  other standards  accepted  under           the Drugs  and Cosmetics  Act, 1940, which is used           as such or as an ingredient in any formulations;      (f)   "formulations" means a medicine processed out of,           or containing one or more bulk drug or drugs, with           or without  the use of any pharmaceutical aids for           internal  or   external  use  for,  or  in  the  .           diagnosis, treatment,  mitigation or prevention of           disease in  human beings or animals, but shall not           include-      We are  here concerned with the impact of sub-s. (3) of s. 5  of the  Act on the price structure of formulation, but non the  less much  stress was  laid on fixation of price of bulk drugs  under paragraph  3(2) which  allows a reasonable return to the manufacture 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.      What  is   of  essence   is  the   price  fixation   of formulations and  the relevant  provisions are  contained in paragraph, 10  to 15,  17,  20,  21  and  24.  Paragraph  10 provides for  a formula  according to which the retail price of formulation shall be calculated and it reads:      "10. Calculation  of retail  price of  formulations-The           retail price  of a formulation shall be calculated           in accordance with the following formula, namely:           R.P.=(M.C+C.C+P.M.+P.C) X           1 + MU / 100 + ED           Where-           "R.P." means retail price. 151           "M C."  means material  cost and includes the-cost      of drugs and other pharmaceutical aids used including h      overages,  if   any,  and   process  loss   thereon  in      accordance with  such norms  as may be specified by the      Government  from   time  to  time  by  notification  in      official Gazette in this behalf.           "C.C."  means   conversion  cost   worked  out  in      accordance with  such norms  as may be specified by the      Government from  time to  time by  notification in  the      official Gazette in this behalf.           "P.M."  means   the  cost   of  packing   material      including process loss thereon worked out in accordance      with such  norms as  may be specified by the Government

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    from time  to time  by  notification  in  the  official      Gazette in this behalf.           "P.C."  means   packing  charges   worked  out  in      accordance with  such norms  as may be specified by the      Government from  time to  time by  notification in  the      official Gazette in this behalf.           "M.U." means mark-up referred to in paragraph 11.           "E.D." means excise duty:           Provided  that   in  the   case  of   an  imported      formulation the  landed cost  shall from  the basis for      fixing  its   price  along  with  such  margin  as  the      Government may allow from time to time.           Provided   further    that   where   an   imported      formulation is re-packed, its landed cost plus the cost      of packing  materials and packing charges as worked out      in accordance  with such  norms as  may be specified by      the Government  from time  to time,  by notification in      the official  Gazette, shall  form the basis for fixing      its price.           Explanation-For the  purposes of  this  paragraph,      "landed cost"  shall mean  the cost  of import  of drug      inclusive of customs duty and clearing charges". 152      The expression  "mark-up" referred  to above  is  dealt within A paragraph 11 and it provides:           "11. Mark-up  referred to in paragraph 10 includes      the distribution  cost,  outward  freight,  promotional      expenses, manufacturers margin and the trade commission      and shall not exceed-      (i)  forty  percent   in  the   case  of   formulations           specified in Category I of the Third Schedule;      (ii) fifty-five  percent in  the case  of  formulations           specified in Category II of the said Schedule:       (iii) one hundred per cent in the case of formulations           specified in Category III of the said Schedule."      It is  unnecessary for  our purposes  to reproduce  the provisions of paragraphs 12 to 14 which formulate a detailed scheme of price fixation.      Paragraph 15 confers power of revision of prices and it reads:           "15. Power  to revise  prices of  formulations-Not      withstanding anything contained in this order .      (a)  The   Government   may,   after   obtaining   such           information as  it may  consider necessary  from a           manufacturer or  an importer,  fix or  revise  the           retail price  of one or more formulations marketed           by such  manufacturer  or  importer,  including  a           formulation  not   -  specified   in  any  of  the           categories of the Third Schedule in such manner as           the pre-tax  return on  the sales turnover of such           manufacturer  or  importer  does  not  exceed  the           maximum pre-tax  return  specified  in  the  Fifth           Schedule;      (b)   the Government  may, if it considers necessary so           to do  in public  interest, by  order, revise  the           retail price  of any  formulation specified in any           of the categories of the Third Schedule." 153      Paragraph 17  Casts a  mandatory duty  on  the  Central Government to  maintain ’Drugs  Prices Equalisation Account’ to which shall be credited-      (a)  by the  manufacturer, importer  or distributor, as           the case may be-           (i)  the amount determined under sub-paragraph (2)                of paragraph 7;

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        (ii)  the excess of the common selling price or, as                the  case  may  be,  pooled  price  over  his                retention price;      (b)  such  other   amount  of   money  as  the  Central           Government may,  after due  appropriation made  by           Parliament by  law in this behalf, grant from time           to time. The amount credited to the Drugs Prices Equalisation Account is  meant   to  compensate   a  manufacturer,   importer  or distributor the  short-fall 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 compensated for the short-fall.      Paragraph 19  interdicts  that  every  manufacturer  or importer of a formulation intended for sale shall furnish to the dealers,  State Drug  Controllers and-the  Government, a price list  showing the  price at  which the  formulation is sold t.)  a retailer  inclusive of  excise duty.  Every such manufacturer or retailer has to give effect to the change in prices as  approved  by  the  Government.  Every  dealer  is required to  display the price list at a conspicuous part of the premises.      It is,  however, necessary  to reproduce paragraphs 20, 21 and  24 as  they are  of considerable  importance for our purposes and they read:           "20. Retail  price to  be displayed  on  label  of      container-Every manufacturer,  importer or  distributor      of a  formulation intended  for sale  shall display  in      indelible 154      print mark  on  the  label  of  the  container  of  the      formulation or  the minimum  pack thereof  offered  for      retail  sale,   the  maximum   retail  price   of  that      formulation with the words "retail price not to exceed"      preceding it, and "local taxes extra" succeeding it."           "21.  Control   of  sale  prices  of  formulations      specified in  Third Schedule-No retailer shall sell any      formulation specified  in any  of the categories in the      Third Schedule  to any  person at a price exceeding the      price specified  in the current price list or the price      indicated  on  the  label  of  the  container  or  pack      thereof, whichever  is less,  plus the  local taxes, if      any, payable.           Explanation-For the  purpose  of  this  paragraph,      "local taxes"  includes sales  tax and  octroi actually      paid by  the retailer  under any  law  in  force  in  a      particular area."      "24. Price to the wholesaler and retailer-      (a)   No manufacturer,  importer or  distributor  shall           sell  a   formulation  to   a  wholesaler   unless           otherwise permitted  under the  provisions of this           order or  any other  order made  thereunder  at  a           price higher than:           (a)   the retail  price minus 14 per cent thereof,                in the case of ethical drugs, and           (b)  the retail price minus 12 percent thereof, in                the case of non-ethical drugs.      (2)     No  manufacturer,   importer,  distributor   or           wholesaler shall  sell a formulation to a retailer           unless otherwise permitted under the provisions of           this order  or any  order made  thereunder,  at  a

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         price higher than:-           (a)  the retail price minus 12 percent thereof, in                the case of ethical drugs, and           (b)  the retail price minus 10 percent thereof, in                the case of non-ethical drugs. 155           Explanation-For the purposes of this paragraph-           (i)   "ethical  drugs"  shall  include  all  drugs                specified in  Schedule C,  entries Nos. 1, 2,                3, 7,  8 and  9 of Schedule C(l), Schedule E,                Schedule G, Schedule and Schedule L, appended                to the  Drugs and  Cosmetics Rules, 1945 made                under the  Drugs and Cosmetics Act, 1940, (23                of 1940); and           (ii) "non-ethical  drugs"  shall  mean  all  drugs                other than ethical drugs.      (3)   Notwithstanding anything  contained  in  sub-para           graphs (1)  and (2),  the  Government  may,  by  a           general or special order, fix, in public interest,           the price to the wholesaler or retailer in respect           of any  formulation the price which has been fixed           or revised under this order."      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 inquiry  as  it  deems  fit,  fix  from  time  to  time,  by notification in  the official  Gazette, the maximum price at which such  bulk  drug  shall  be  sold.  Sub-paragraph  (2) enjoins that  while filing  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 bulkdrug  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.      It is  urged- that while fixing the price of bulk drug, the Government  has to take into-account the average cost of production 156 of that  bulk drug  by a  particular manufacturer, by taking into A  consideration the cost to a manufacturer who employs efficient methods  and allowing  a reasonable  return on the net-worth  of   the  drug   manufactured.  Otherwise,  every manufacturer will show a figure as cost of production, which may not  be acceptable. The average cost of production of an efficient manufacturer  is made  the standard for fixing the price but  such fixation  of the price of bulk drug allows a reasonable return  to the  manufacturer. Under sub-paragraph (3) the  manufacturer or  producer  of  such  bulk  drug  is entitled to  sell it  at a  price not exceeding the price so fixed plus local tax if any, payable.      Much stress  is  laid  that  the  average  cost  of  an efficient manufacturer  allows a  reasonable return  on net- worth of  the drug  manufactured and  the price  so fixed is exclusive of local taxes i.e. sales tax. It is further urged that the  term "local  taxes" in sub paragraph (3) means and

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includes sales  tax leviable  in a  State and  attention  is drawn to Explanation to paragraph 21 for that purpose. We fail to  appreciate the  relevance of  sub-paragraph (3)  of paragraph 3  which relates  to a manufacturer or producer of bulk drugs  or of  paragraph 21  of the  Control order which fixes the  controlled price of formulations specified in the Third Schedule  exclusive of local taxes i.e. sales tax. The appellants are  manufacturers or  producers of medicines and drugs and  are governed by paragraph 24. Under paragraph 24, a manufacturer  or  producer  is  not  entitled  to  sell  a formulation to  a wholesaler  at a  price  higher  than  the retail price  minus 14% thereof in case of ethical drugs and minus 12%  in case  of non-ethical  drugs. It is quite clear upon the  terms of paragraph 24 that the price chargeable by the appellants  as manufacturers  or producers  is  a  price inclusive of  sales tax. The entire argument built upon sub- paragraph (3) of paragraph 3 and paragraph 21 of the Control order showing  that the  controlled price  is  exclusive  of sales tax  and thereof is in conflict with sub-s (3) of s. S of the  Act appears  to be  wholly misconceived. It is urged that the  appellants  in  their  price  lists  have  a  term embodied  that   sales  tax   would  be  chargeable  from  a wholesaler or distributor and therefore they are entitled to recover sales  tax on  the sale of their medicines and drugs cannot possibly  prevail. Such  a term  would  be  in  clear violation of  para graph 24 of the Control order which is an offence punishable  under s.  7 of the Essential Commodities Act.      It cannot  be doubted  that a surcharge partakes of the nature  of  sales  tax  and  therefore  it  was  within  the competence of the State 157 Legislature to  enact sub-s.  (I) of s. S 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 purchase of 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-s. (3) of s. S of the Act prohibiting the dealers liable to pay  a surcharge under sub-s. (I) thereof from recovering the same from the purchaser. It is-fairly conceded that sub- s. (3) of s. S 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-s.  (3) of  s. S 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-s. (3) of s. S of the Act is  on fixation of price of drugs under the Drugs (Price Control) order  and therefore  by reason  of  s.  6  of  the Essential Commodities Act, paragraph 21 of the Control order which provides  for the  passing on  of tax  liability  must prevail. The  submission rests on a construction of Art. 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.      It is  convenient  at  this  stage  to  deal  with  the contention of  the appellants  that if sub-s. (3) of s. 5 of the Act were to cover all sales including sales of essential

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commodities whose  prices  are  controlled  by  the  Central Government under  the various  control orders  issued  under sub-s. (I)  of s.  3 of  the Essential Commodities Act, then there will  be repugnancy  between the  State law  and  such contral orders  which according  to s.  6 of  the  Essential Commodities Act  must prevail. In such a case, the State law must yield  to the extent of the repugnancy. In Hari Shankar Bagla &  Anr. v.  State of  Madhya Pradesh(1)  the Court had occasion to deal with the non-obstante clause in s. 6 of the Essential Supplies (Temporary Powers) Act, 1946 which was in pari materia  with s. 6 of the Essential Commodities Act and it was observed: 158           "The effect  of section  6  certainly  is  not  to      repeal any  one of  these 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 he 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 in  order is made under s. 3 of that Act, s. 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.      Placing reliance  on the  observations in  Hari Shankar Bagla’s case, supra, it is urged that the effect of the non- obstante clause  in s. 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-s. (1)  of s  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-s. (3) of s. S of  the Act  which is inconsistent therewith is by-passed. The contention  appears to  be misconceived.  The 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-s. (3) of s. S of the Act  and paragraph 24 of the Control order, the question of non-obstante  clause to s. 6 of the Essential Commodities Act coming into play does not arise.      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 159 on the  liability to  pay sales  tax payable  under s. 3 and additional sales  tax payable  under s. 6 to the purchasers. Sub-s. (3) of s. S of A the Act however imposes a limitation on dealers  liable to pay surcharge under sub-s. (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-s.  (I) of  s. S of the Act will cut

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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 in  as much  as the liability to pay surcharge sub-s. (3) of s.  5 cannot  be passed  on. That  being so,  there is no conflict between sub-s. (3) of s. S of the Act and paragraph 21 of  the Control order. The entire sub mission advanced by learned  counsel   for  the   appellants  proceeds   on  the hypothesis that the various control orders issued under sub- s. (1)  of s. 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.      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.      The contention  that in  the field of fixation of price by a  control order  issued under  sub-s. (1) of s. 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- s. (1)  of s.  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 160 Ltd. v.  Union of  India(l) Ray,  J speaking  for the  Court rejected the  A contention  that the  controlled price  must ensure a  reasonable return  on the  capital employed in the business of manufacturing or producing essential commodities in these words-:           "In fixing the prices, a price line has to be held      in   order    to   give   preference   or   predominant      consideration to  the interests of the consumers or the      general public over that of the producers in respect of      essential   commodities.   The   aspect   of   ensuring      availability  of   the  essential  commodities  to  the      consumer equitably  and  at  fair  price  is  the  most      important consideration."      In Prag  Ice &  Oil Mills  &  Anr.  etc.  v.  Union  of India(a) Chandrachud,  J.  (as  he  then  was)  negatived  a similar contention that fixation of a price without ensuring a  reasonable   return  to  the  producers  or  dealers  was unconstitutional. In  repelling the  contention, Chandrachud J. speaking  for the  Court referred  to the  two earlier  b decisions in  Panipat Cooperative  Sugar Mills  v. Union  of India(3)   and   Anakapalle   Cooperative   Agricultural   & Industrial Society Ltd. v. Union of India(4) and observed:           "The infirmity of this argument, as pointed out in      Meenakshi Mills’s  case, is  that these  two  decisions      turned on  the language  of s  3 (3C)  of the Essential

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    Commodities  Act   under  which   it   is   statutorily      obligatory to  the industry  a reasonable return on the      capital  employed  in  the  business  of  manufacturing      sugar.  These   decisions   can   therefore   have   no      application to  cases of  price fixation under s. 3 (1)      read with  s. 3 (2) (c) of the Act. Cases falling under      sub-ss. (3A),  (3B) and  (3C) of s. 3 of the Act belong      to a different category altogether." The learned Chief Justice then observed:           "The dominant  purpose of  these provisions  is to      ensure the availability of essential commodities to the      consumers at  a fair price. And though patent injustice      to 161      the producer  is not  to be  encouraged,  a  reasonable      return on  investment or a reasonable rate of profit is      not the sine qua non of the validity of action taken in      furtherance of  the powers conferred by s. 3 (1) and s.      3  (2)  (c)  of  the  Essential  Commodities  Act.  The      interest of  the  consumer  has  to  be  kept  ill  the      forefront and the prime consideration that an essential      commodity ought  to be made available to the common man      at a  fair price must rank in priority over every other      consideration."      The contention  advanced does  not  take  note  of  the distinction between the controlled price fixed under cl. (c) of sub-s.  (2) of  s. 3  of the  Act read  with  sub-s.  (I) thereof and  the procurement price fixed under sub-ss. (3A), (3B) and  (3C). In  fixing a procurement price under sub-ss. (3A), (3B) and (3C), there is a statutory obligation cast on the Central  Government to  ensure  a  fair  return  to  the producers or  dealers of  essential  commodities.  while  in fixing the  controlled price  under c]. (c) of sub-s. (2) of s. 3 read with sub-s. (1) thereof, the predominant factor is the  basis   to  secure   the  equitable   distribution  and availability of  essential commodities at fair prices to the consumers  and  a  reasonable  return  on  investment  or  a reasonable rate  of profit  to the  manufacturer or producer i...  not  a  relevant  criterion  although  it  should  not ordinarily  work  patent  injustice  to  a  manufacturer  or producer. Just  as the  industry cannot complain of rise and fall of  prices due  to economic  factors in open market, it cannot similarly  complain of some increase in, or reduction of, prices  as a  result of an order issued under sub-s. (I) of s.  3 of  the essential  commodities Act, or a cut in the margin of  profits brought  about by a provision like sub-s. (3) of  s. 5 of the Act which provides that a manufacture or producer shall  not be  entitled to  recover  the  surcharge levied on  him under  sub-s. (I)  of s. S of the Act because such  increase  or  reduction  is  also  based  on  economic factors.      The principal point in controversy is: Whether there is repugnancy between  sub-s. (3)  of  s.  5  of  the  Act  and paragraph 21  of the  Control order and therefore sub-s. (3) of s. 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 162 like sub-s.  (3) of  s. S  of the  Act while  enacting a law under Entry  54 of  List II  prohibiting the  passing on  of liability of tax to the purchaser.

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    The  true   principle   applicable   in   judging   the constitutional validity  of sub-s. (3) of s. S 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-s. (3) of s. S of the  Act and  paragraph 21  of the  Drugs {Price Control) order made  under sub-s.  (1)  of  s.  3  of  the  Essential Commodities Act,  is therefore  void. In  dealing  with  the question, we must set out Art. 246 of the Constitution which is based  on s. 100 of the Government of India Act, 1935 and it reads:           "246(1) Notwithstanding  anything in  clauses  (2)      and t  (3), Parliament has exclusive power to make laws      with respect to any of the matters enumerated in List I      in the  Seventh Schedule (in this Constitution referred      to as the "Union List").           (2)  Notwithstanding   anything  in   clause  (3),      Parliament, and, subject to clause (1), the Legislature      of any State also, have power to make laws with respect      to any  of the  matters enumerated  in List  III in the      Seventh Schedule  (in this  Constitution referred to as      the "Concurrent List").           (3)  Subject   to  clauses   (1)  and   (2),   the      Legislature of  any State  has exclusive  power to make      laws for such State or any part thereof with respect to      any of the matters enumerated in List II in the Seventh      Schedule (in  this  Constitution  referred  to  as  the      "State List").           (4) Parliament has power to make laws with respect      to any  matter for  any part  of the territory of India      not 9  included in  a State  notwithstanding that  such      matter is a matter enumerated in the State List."      It is  obvious that Art. 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 163           notwithstanding anything contained in cls. (2) and           (3). The  non-obstante  clause  in  Art.  246(1  )           provides for  predominance or  supremacy of  Union           Legislature.  This  power  is  not  encumbered  by           anything contained  in cls.  (2) and (3) for these           causes them  selves are expressly limited and made           subject to the non-obstante clause in Art. 246(1).           The  combined  effect  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,   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 List II has to be           exercised subject  to cl.  (l) i.e.  the exclusive           power of  Parliament to  legislate with respect to           matters enumerated  in List  I. As a con sequence,           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

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         List TI  must supersede  pro tanto the exercise of           power of the State Legislature.      3.    Both  Parliament and  the State  Legislature have           con- current powers of legislation with respect to           any of the matters enumerated in List III.      Art. 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 and it reads:           "254(1) If  any provision  of a  law made  by  the      Legislature of a State is repugnant to any provision of      a law  made by Parliament which Parliament is competent      enact, or  to any  provision of  an existing  law  with      respect  to  one  of  the  matters  enumerated  in  the      Concurrent List, then, 164      subject to  the provisions  of clause (2), the law made      by Parliament,  whether passed  before or after the law      made by  the Legislature of such State, or, as the case      may be, the existing law shall prevail and the law made      by the Legislature of the State shall, to the extent of      the repugnancy, be void.           (2) Where a law made by the Legislature of a State      with respect  to one  of the  matters enumerated in the      Concurrent List contains any provision repugnant to the      provisions of  an earlier  law made by Parliament or an      existing law with respect to that matter, then, the law      so made  by the  Legislature of  such State shall if it      has  been   reserved  for   the  consideration  of  the      President and  has received his assent, prevail in that      State.           Provided that nothing in this clause shall prevent      Parliament from  enacting at  any  time  any  law  with      respect to  the same  matter including a law adding to,      amending, varying  or repealing  the law so made by the      Legislature of the State."      We find  it difficult  to subscribe  to the proposition advanced on  behalf of the appellants that merely because of the  opening  words  of  Art.  246(3)  of  the  Constitution "Subject to clauses (I) and (2)" and the non-obstante clause in Art. . 246(1) ’’Notwithstanding . anything in clauses (2) and (3)",  sub-s. (3) of s. 5 of the Act which provides that no dealer  shall  be  entitled  to  collect  the  amount  of surcharge must  be struck  down as  ultra  vires  the  State Legislature inasmuch  as it  is in consistent with paragraph 21 of  the drugs (Price Control) order issued by the Central Government under  sub-s.  (I)  of  s.  3  of  the  Essential Commodities Act  which enables  the manufacturer or producer of drugs  to pass  on the  liability to pay sales tax to the consumer. The  submission is  that sub-s. (3) of s. 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- s. (1)  of s.  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 of  price of  essential commodities under  Entry 33  of List Ill. 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, 165      The  words   "Notwithstanding  anything   contained  in clauses (2) and (3) ’ in Art. 246 (l) and the words "Subject to clauses  A (I.)  and (2)"  in Art.  246(3) lay  down  the

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principle  of   Federal  supremacy  viz.  that  in  case  of inevitable conflict  between Union  and  State  powers,  the Union power  as enumerated  in List T shall prevail over the State power as enumerated in List II and III. and in case of overlapping between  List 11  and III,  the 13  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" 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 so as to avoid a  conflict of  jurisdiction. lt  should be considered whether a  fair reconciliation  can be achieved by giving to the language  or the Union Legislative List a meaning which, if less  wide than  it night 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 Art. 246(l) 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 pro-  vision 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 specified in List III and occupy the same field.      As  regards  the  distribution  of  legislative  powers between the  Union and  the States,  Art.  246  adopts  with immaterial alterations the 166 scheme for  the distribution of legislative powers contained in s.  100 A  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 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 & Berar Sales of Motor Spirit  and Lubricants  Taxation Act,  1938(1)  Gwyer, C.J. referred  to the  two decision  of the Privy Council in Citizen Insurance  Company v. Wiliam Parsons(2) and Attorney General for  the Province of Ontario v. Attorney General for the Dominion of Canada(3) which in his opinion had laid down ’most clearly  the principles  which should  be  applied  by Courts in  the matter of deciding upon the competence of the two rival  Legislatures that  have been  set  up  under  the

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Indian Federal system.      With regard  to the  interpretation of the non-obstante clause in  s. 100(l)  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 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 legislative  powers   are  theoretically  capable  of  being 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 167 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 of  the  Courts,      however difficult  it may  be,  to  ascertain  in  what      degree and  to what  extent,  authority  to  deal  with      matters Falling within these classes of subjects exists      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-General  for the Province of Ontario’s case,  (supra) observed that in the interpretation of ss. 91 and 92 of the E: 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.      In  A.L.S.P.P.   Subrahmanyan  Chettiar  v.  Muttuswami Goundan(l) 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. 100 of the Government of India Act, 1935: 168           "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 build 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

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    is examined  to ascertain  its ’pith  and substance’ or      its true  nature  and  character  for  the  purpose  of      determining whether  it is  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. in C.P. & Berar Taxation 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 Citizen’s Insurance  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  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 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(1):           "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 169      is not  exceeding  its  own,  and  encroaching  on  the      other’s constitutional legislative power, and in such a      controversy 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 substance"  as it  has sometimes  been said,  which      must determine into what category it falls." B Their Lordships  approved of  the decision  of  the  Federal Court in  The Province  of Madras v. Messrs Boddu Paidanna & Sons(l) 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(1)  Lord Porter  delivering the judgment of the Board laid down that in distinguishing 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 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 had  a long  experience of the      working of  the  British  North  America  Act  and  the      Australian Commonwealth Act and must have known that it      is not  in practice  possible to ensure that the powers

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    entrusted  to   the  several  legislatures  will  never      overlap." The Privy  Council quoted  with approval the observations of Gwyer, C.J  in Subramanyan  Chettiar’s case,  supra,  quoted above, and observed: 170           "No doubt experience of past difficulties has made      A 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."      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  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 pro      visions 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 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 according to the three  lists in its proper perspective. In answering the objection that 171 view does  not give  sufficient effect  to the  non-obstante clause in s. 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

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field.      The decision  of the  Privy Council  in Prafulla  Kumar Mukherjee’s case, supra, 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 encroachment on a forbidden  field does  not affect  the competence  of  the legislature to enact that Act; Ralla Ram v. Province of East Punjab(2), State of Bombay v. Nerothamdas Jethabai & Anr(2), State of  Bombay v. F. N. Balsara(3), A. S. Krishna v. State of Madras(4),  M. Karunanidhi v. Union of India(5), Union of India v.  H.S. Dhillon(6)  and  Southern  Pharmaceuticals  & Chemicals Trichur  & Ors.  etc. v.  State of  Kerala &  Ors. etc.(7)      In Laskin’s  Canadian Constitutional  Law, 4th edn., it is observed  at p.  24 that  the doctrine  of paramountcy Is tied up with 172 the  "trenching"   doctrine  in   the  first   of  the  four propositions formulated  by Lord  Tomlin in Attorney-General for Canada  v.  Attorney  General  for  Britain  Columbia  & Ors.(1) case,  and then he goes into the question,: "What is the basis  of the paramountcy doctrine ?" Laskin quotes from Lefroy’s Canada’s Federal System at p. 126:           "But the  rule as to predominance of Dominion      legislation it  may be  confidently said, can only      be invoked  in  cases  of  absolutely  conflicting      legislations in  pari materia, when it would be an      impossibility to  give effect to both the Dominion      and the provincial enactments." The learned author refers two the two decisions of the Privy Council in  Attorney-General of  Ontario v. Attorney-General of  Canada(2)  and  City  of  Montreal  v.  Montreal  Street Railway(3) laying down that:           "There must  be a  real conflict  between the      two Acts,  that is,  the two enactments ’must come      into collision’.....  or ’comes into conflict ....      over a field of jurisdiction common to both’."      Laskin observes  that the  "conflict" test  espoused by these authorities seems clear enough in principle even if it raises problems  in application.  He then  at p.  26 notices that there is a recent trend in the decisions of the Supreme Court of  Canada to the strict view of paramountcy reflected in the conflict or collision test, which he describes as the test of operating incompatibility and observes at p. 27 : .           "It is  necessary to be reminded at all times      that no  issue of  paramountcy  can  arise  unless      there  is  in  existence  federal  and  provincial      legislation which, independently considered, is in      each case  valid. If  either piece of legislation,      standing alone, is invalid there is no occasion to      consider whether  the field has been occupied. The      issue that  will have  been resolved  in such case      would be  the anterior one of the "matter embraced      by the  legislation, whether  of Parliament  or of      the provincial legislature, as the case may be." 173 At p. 28, he states:           "The doctrine  of occupied field applies only      where  there   is   a   clash   between   Dominion      legislation and  provincial legislation  within an      area common to both."

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Here there is no such conflict. The Union and the State laws operate on  two different  and distinct  fields and both the laws are capable of being obeyed.      Questions  of  conflict  between  the  jurisdiction  of Parliament of the Dominion and of the Provincial Legislature have frequently  come up before the Privy Council and we may briefly refer  to the  decisions relied upon though they are of little  assistance to  the  appellants.  In  Grand  Trunk Railway Company  of Canada v. Attorney-General of Canada(1), Lord Dunedin observed:           The construction  of the  provisions  of  the      British North  America  Act  has  been  frequently      before their Lordships. It does not seem necessary      to recapitulate the decisions. But a comparison of      two cases decided in the year 1894-viz., Attorney-      General  of   Ontario  v.   Attorney  General   of      Canada(2) and  Tennant v. Union Bank of Canada(3)-      seem to  establish these  two propositions  First,      that there can be a domain in which provincial and      Dominion legislation  may overlap,  in which  case      neither legislation  will be  ultra vires,  if the      field is clear; and secondly, that if the field it      not  clear,   and  in   such  a   domain  the  two      legislations meet,  then the  Dominion legislation      must prevail."      In a  later decision  of the Privy Council in Attorney- General for  Canada v. Attorney-General for British Columbia &  Ors.   case,  supra,   Lord  Tomlin  summarized  in  four propositions the  result of  the earlier  decisions  of  the Board on  the question  of conflict between the Dominion and Provincial Legislatures.  The third  proposition is  to  the effect that  it is  within the  competence of  the  Dominion Parliament to  provide for  matters which,  though otherwise within the 174 legislative competence  of the  Provincial Legislature,  are necessarily   incidental   to   effective   legislation   by Parliament of  the Dominion  upon a  subject of  legislation expressly enumerated  in s.  91. The  fourth proposition  on which  the  entire  argument  of  learned  counsel  for  the appellants proceeds is based upon the dictum of Lord Dunedin in Grand Trunk Railway Company’s case, supra, set out above.      It is  well settled  that the validity of an Act is not affected if  lt 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.      In  Board   of  Trustees   of  the  Lethbrige  Northern Irrigation  District   &  Anr.   v.  Independent   order  of Foresters(1), Viscount, Caldecote, L.C. Observed:           "These sections  have  been  the  subject  of      repeated examination  in the  Judicial  Committee,      and there  can no  longer be  any doubt  as to the      proper   principles   to   their   interpretation,      difficult though  they may be in application. Lord      Haldane,  in   delivering  the   judgment  of  the      Judicial Committee  in, Great West Saddlary Co. v.      The King(2) said "The rule of constraction is that      general language  in the  heads of s. 92 yields to      particular expressions  in s. 91, where the latter      are unambiguous."  In  a  later  decision  of  the

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    Judicial Committee, Attorney-General for Canada v.      Attorney-General for British Columbia, supra, Lord      Tomlin summarized  in four propositions the result      of the earlier decisions of the Board on questions      of  conflict   between  the   Dominion   and   the      Provincial Legislatures.  The first proposition is      to  the   effect  that   the  legislation  of  the      Provincial Parliament  of the Dominion, so long as      it strictly  relates to  subjects  of  legislation      expressly enumerated  in s.  91, is  of  paramount      authority, even  though it  trenches upon  matters      assigned to the Provincial 175           Legislatures by  s. 92,  Lord Tomlin referred      to Tennant v.  Union Bank of Canada, supra, as the      authority for this statement." Viscount Caldecote then observed:           "In  applying   these  principles,  as  their      Lordships propose  to do, an inquiry must first be      made as  to the  "true nature and character of the      enactment in  question" Citizen  Insurance Co.  Of      Canada v.  Wiliam Parsons) (supra) or, to use Lord      Watson’s words  in delivering  the judgment of the      Judicial Committee  in Union  Colliery Company  of      British Columbia  v. Bryden(1)  as to  their "pith      and  substance".   Their  Lordships   now  address      themselves to that inquiry."      "Legislation", said  Lord  Maugham  in  delivering  the judgment  of  the  Privy  Council  in  Attorney-General  for Alberta v.  Attorney-General for  Canada,(2) "given  in pith and substance within one of the classes specially enumerated in s.  91  is  beyond  the  legislative  competence  of  the Provincial Legislature  under s.  91".  At  p.  370  of  the Report, Lord  Maugham laid  down  on  behalf  of  the  Privy Council:           "Since 1894  it has  been a settled principle      that if  a subject  of legislation by the Province      is only  incidental or  ancillary to  one  of  the      classes of  subjects enumerated  in s.  91 and  is      properly within  one of the subjects enumerated in      s.  92,   then  legislation  by  the  Province  is      competent unless and until the Dominion Parliament      chooses to occupy the field by legislation."                                         (Emphasis supplied.)      Lord Maugham’s reference to the year 1894 points to the decision  of  the  Privy  Council  in  Attorney-General  for Ontario v. Attorney-General for Canada, supra.      In Attorney-General  for Canada v. Attorney-General for the Province  of Quebed,(3)  Lord Porter  in delivering  the judgment of the Board drew attention to these principles and then observed: 176           "In calling  attention  to  these  principles      their Lordships  are but  repeating what  has many      times been  set forth  in  the  judgments  of  the      Board, and  it only  remains to  apply them to the      individual case under consideration. ’      The rule  of pith and substance laid down by the Privy- Council was reaffirmed by Viscount Simon in Attorney-General of Sasketchewan v. Attorney-General of Canada & Ors (1)      This was  emphasized very  clearly by  Lord Atkin while dealing with  the validity of the Milk and Milk Products Act (Northern Ireland)  which was  impugned as violating s. 4 of the Government  of  Ireland  Act,  1920  in  Gallahagher  v. Lynn(2) in his own terse language:

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         "It is  well established that you are to look      at  the   "true  nature   and  character"  of  the      legislation; Russell v. The Queen(3) "the pith and      substance of  the legislation".  If on the view of      the statute  a, 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  propositions formulated by  Lord Tomlin in Attorney-General for Canada v. Attorney-General for  British Columbia & Ors., (supra) 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:           "4. There can be a domain in which provincial      and Dominion  legislation may  overlap,  in  which      case neither  legislation will  be ultra  vires if      the field  is clear, but if the field is not clear      and  the   two  legislations  meet,  the  Dominion      legislation must  prevail: see  Grand Trunk  R. of      Canada v. Attorney-General of Canada, (supra)." The question  is whether  the field is not clear and the two legislations meet  and therefore  on the doctrine of Federal supremacy sub-s (3) 177 of s.  S 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 Constitution, 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 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 Art.  246 (3)  not to be deemed to come within the classes  of subjects  assigned exclusively to Parliament under Art.  246 (1)  even though  the  classes  of  subjects looked at signly overlap in many respects. The whole distri- bution of  powers must be looked at as 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  down in Subrahmaniyan Chettiar’s case, (supra), and  affirmed  by  their  Lordships  of  the  Privy Council in  Prafulla Kumar  Mukherjee’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 enumerated in List II.      We must  then pass  on to  the contention  advanced  by learned counsel  for the appellants that there is repugnancy between sub-s (3) of s. S 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 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 Art. 254 (2).

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    As we  have endeavoured  so far, the question raised as to the  constitutional validity of sub-s. (3) of s. S 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 competently enacted under Art. 246, and therefore  tho question of repugnancy under Art. 254 was not a matter in issue. The submission 178 put forward  on behalf  of the  appellants however  is  that there is  direct collision  and/or irreconciliable  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 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 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  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 Art. 254 (1).      Strong reliance  is placed  on the judgment of the High Court of  Australia in  Clyde Engineering Company Limited v. Cowburn(1)  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: Ex parte Mc Lean(2) and Stock Motor Ploughs  Limited   v.  Forsyth.(3)  The  decision  in  Clyde Engineering Company’s  cases, supra, is an authority for the proposition 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  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  (1) Entry  54 of  List II is a tax entry and  therefore there  is  no  question  of  repugnancy between sub-s. (3) of s. 5 of the Act which is a 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.  (1)  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 enumerated in  the Concurrent List as regards which both the Union and  the State  Legislatures have concurrent powers so that the  question af  conflict between  laws made  by  both Legislatures relating to 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.(1) the  result of  the authorities  was thus

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stated by Subba Rao, J.:           "Nicholas in his Australian Constitution, 2nd      edn.,  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      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.(2)  the Court  accepted the above three rules evolved by Nicholas,  among 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 180 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 a State law in the concurrent field, the former prevails over the latter. Cl. (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 cl. (1), 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 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  cl.  (2).  The proviso to  Art. 254(2)  empowers the  Union  Parliament  to repeal or  amend a  repugnant State law, either directly, or by itself  enacting a  law 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.: See: Zaverbhai Amaidas v. State  of Bombay(1),  M. Karunanidhi v. Union of India(2) and T. Barai v. Henry Ah Hoe d: Anr.(2)      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 Parte McLean’s case,

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supra, Dixon J. laid down another test viz., two 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 repugnancy 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 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 relatable to  Entry 33  of List III and therefore sub-s. (3) of s.  5 of  the Act  which is  a  law  made  by  the  State Legislature is  void under  Art.  254(1).  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 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. 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 because of the non-obstante clause in Art.  246(1) read  with the opening words "Subject to" in Art. 246(3).  In such  a case,  the State  law will fail not because of  repugnance 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  Art. 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  Art. 254(1) is read as a whole, it will be seen that it  is  expressly  made  subject  to  cl.  (2)  which  makes reference to  repugnancy in  the field of Concurrent List-in other words, if cl. (2)  is   to  be   the  guide   in   the determination of scope of cl. (1), the 182 repugnancy between  Union and  State law  must be  taken  to refer only  to the Concurrent field. Art. 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 Art. 254(1) viz. a law made by Parliament which Parliament is competent to enact as well as any  provision  of  an  existing  law.  The  under  lying principle is  that the  question of  repugnancy arises  only when both the Legislatures are competent to legislate in the

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same  field   i.e.  with  respect  to  one  of  the  matters enumerated in  the Con  current List. Hence, Art. 254(1) can not apply unless both the Union and the State laws relate to a subject specified in the Con current List, and they occupy the same field.      This  construction   of  ours   is  supported   by  the observations of Venkatarama Ayyar, J. speaking for the Court in A. S. Krishna’s case, supra, while dealing with s. 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."      In Ch.  Tika Ramji’s  case, supra,  the Court  observed that no  question  of  repugnancy  under  Art.  254  of  the Constitution could arise where parliamentary legislation and State legislation  occupy different  fields  and  deal  with separate and  distinct matters  even though of a cognate and allied character  and that where, as in that case, there was no inconsistency  in the actual terms of the Acts enacted by Parliament and  the State  Legislature relatable to Entry 33 of List  III,  the  test  of  repugnancy  would  be  whether Parliament and State Legislature, in legislating on an entry in the Concurrent List, exercised their powers over the same subject-matter or  whether the  laws enacted  by  Parliament were intended  to be exhausted as to cover the entire field, and added: 183           "The pith  and substance  argument cannot  be      imported here  for the  simple reason  that,  when      both the  Centre as well as the State Legislatures      were operating in the con current field, there was      no question  of any  trespass upon  the  exclusive      jurisdiction of  the Centre under Entry 52 of List      I, the  only question which survived being whether      put in  both the  pieces of legislation enacted by      the Centre  and the  State Legislature,  there was      any such repugnancy." This observation  lends support to the view that in cases of overlapping between  List II on the one hand and Lists I and III on  the other,  there is no question of repugnancy under Art. 254(1).  Subba Rao.  J. speaking  for the Court in Deep Chand’s case, supra, interpreted Art. 254(1) in these terms:           "Art. 254(1) lays down a general rule. Clause      (2) is  an  exception  to  that  Article  and  the      proviso qualified  the said exception. If there is      repugnancy between  the law  made by the State and      that made by the Parliament with respect to one of      the matters  enumerated in  the Con  current List,      the law  made by  Parliament shall  prevail to the      extent of the repugnancy and law made by the State      shall, to the extent of such repugnancy, be void." In all  fairness to  learned counsel  for the appellants, it must be  stated that  they did  not  pursue  the  point  any further in view of these pronouncements.      We are  unable to appreciate the contention that sub-s. (3) of s. 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  axiomatic that the power of the

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State Legislature to make a law with respect to the levy and imposition of  a tax  on sale or purchase of goods relatable to Entry  54 of  List 11 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 of  taxation 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 etc 184 cetra’. 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 Entry  92A 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 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.      The controversy  which is  now  raised  is  of  serious moment to  the States,  and  a  matter  apparently  of  deep interest of 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  Art.  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  one  of  the  matters enumerated in  the Concurrent  List. The contention fails to take into  account that  the Constitution effects a complete separation of  the taxing  power of  the Union  and  of  the States under Art. 246.      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 Art. 246 and  other   Articles  of   the  Constitution.  Taxation  is considered to  be a distinct matter for purposes of legisla- tive 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.      "Legislative relations between the Union and the States inter se  with reference  to the three lists in Schedule VII cannot be  under stood  fully without  examining the general features disclosed  by the entries contained in those Lists: "Seervai in his Constitutional Law of India, 3rd edn. vol. 1 at pp.  81-82. A  scrutiny of  Lists I and II of the Seventh Schedule would show that there is no overlapping 185 anywhere in  the taxing  power and  the  Constitution  gives independent sources of taxation to the Union and the States. Following the  scheme of  the Government of India Act, 1935, the Constitution  has made the taxing power of the Union and of the  States  mutually  exclusive  and  thus  avoided  the difficulties  which   have  arisen  in  some  other  Federal Constitutions from overlapping powers of taxation.

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    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 ill a separate group. In M.P. Sundararamier & Co. v. The State of Andhra Pradesh & Anr.(1) 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 92A deal with taxes.  In List  11, 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 Ill, 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  then 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  54 of  List  II  of  the  Seventh Schedule. It follows that the two laws viz. sub-s. (3) of s. 5 of the Act and paragraph 21 of the Control order issued by the Central  Government under  sub-s. (1)  of s.  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.      The  remaining   part  of   the  case  presents  little difficulty.  It   would  be  convenient  to  deal  with  the contention  based  on  Arts.  14  and  19  (1)  (g)  of  the Constitution  together  as  the  submissions  more  or  less proceed on the similar lines. It is urged that the provision contained in  sub-s. (3)  of s. 5 of the act is violative of Art. 14  of  the  Constitution  inasmuch  as  it  is  wholly arbitrary and irrational and it 186 treats "unequals  as equals". It is urged that the Essential Commodities Act  treats certain  controlled commodities  and their sellers  in a  special  manner  by  fixing  controlled prices. The  dealers so  treated by  this Central law are so circumstanced that they cannot be equated with other dealers who can  raise their  sale prices  and absorb  the surcharge levied under  sub-s. (1)  of s.  5 of the act and a class of dealers like  manufacturers and  producers of  medicines and drugs and  other dealers of essential commodities who cannot raise their  sale prices  beyond the  controlled  price  are being treated similarly without any rational basis. Once the fact of  different classes  being separate  is taken, then a State law  which treats both classes equally and visits them with different  burdens would  be violative  of Art. 14. The State  cannot   by  treating  ’equals  as  unequals’  impose different burdens on different classes. It is submitted that the restriction imposed by sub-s. 3 of s. 5 of the act which prevents the  manufacturers and  producers of  medicines and drugs and  other essential  commodities from  passing on the liability to  pay surcharge  is confiscatory  and imposes  a disproportionate burden  on such manufacturers and producers or other dealers.      These two abstract questions have been convassed on the basis that  each of  the appellants  was a  dealer having  a gross turnover  of Rs.  5  lakhs  or  more  in  a  year  and therefore liable  to pay  surcharge, in  addition to the tax

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payable by  him, under  sub-s. (1) of s. 5 of the Act. It is lamentable that  there is  no  factual  foundation  laid  to support the contention that the levy of surcharge under sub- s. (1)  of s. 5 of the Act imposes a disproportionate burden on a  certain class  of dealers  such  as  manufacturers  or producers of drugs and pharmaceuticals or dealers engaged in the business  of distribution  and sale of motor-trucks etc. to support  the assertion that sub-s. (3) of s. 5 of the Act which prohibits  such persons  from passing on the liability to pay  surcharge is  arbitrary or  irrational, or  that  it treats ’unequals  as equals’  and thus  infringes Art. 14 of the Constitution or is confiscatory in nature.      There is no ground whatever for holding that sub-s. (3) of s.  5 of  the Act  is arbitrary  or irrational or that it treats  ’unequals   as  equals’,   or  that   it  imposes  a disproportionate burden  on a  certain class  of dealers. It must be  remembered that  sub-s. (1)  of s.  5  of  the  Act provides for the levy of a surcharge having a gross turnover of Rs  5 lakhs or more in a year at a uniform rate of 10 per centum of the tax payable by them, irrespective whether they are dealers in essential 187 commodities or  not. A  surcharge in  its  true  nature  and character is  nothing but  a higher  rate of  tax  to  raise revenue for  general purposes.  The levy  of surcharge under sub-s. (1)  of s.  5 of the Act falls uniformly on a certain class of  dealers depending  upon their capacity to bear the additional burden.  From a fiscal point of view, a sales tax on a  manufacturer or  producer involves the complication of price-structure. It  is apt  to increase  the price  of  the commodity, and  tends to be shifted forward to the consumer. The manufacturers  or producers often formulate their prices in terms  of certain  profit targets. Their initial response would be  to raise  prices by  the full  amount of  the tax. Where the conventional mark-up leaves substantial unrealized profits, successful  tax shifting  is possible regardless of the nature of the tax. If, on the other hand, the tax cannot be passed  on to  the consumer, it must be shifted backwards to  owners   inputs.   Despite   theoretical   approach   of economists, businessmen  always Regard the tax as a cost and make adjustments  accordingly, and  this is  brought out  by John C. Winfrey on Public Finance at p. 402 in the following passage:           "The businessman  ..  ...  ...  ..  has  been      skeptical  regarding   the  entire   approach   of      marginal cost  pricing. His position has been that      taxes are  treated  as  a  cost  when  determining      prices, be  it as  part of  a  full-cost  pricing"      rule? by  application of  a  conventional  mark-up      rate defined  net of  tax, or by pricing to meet a      net of  tax target  rate of  return. According  to      these formulas,  a change  in tax rate leads to an      adjustment in  price. The  profits tax  becomes  a      quasi sales tax. The fact that such a price policy      is not  consistent  with  the  usual  concepts  of      profit  maximization   does   not   disprove   its      existence."      Pausing here  for a  moment,  we  may  observe  that  a surcharge being  borne by the manufacturers and producers of medicines and drugs 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.  From the  figures set  out above, it will be  seen that the business carried on by the appellants in the  State of  Bihar alone is of such magnitude that they have the capacity to bear the additional burden of surcharge

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levied under sub-s. (1) of s. 5 of the Act. It roughly works out to  one paisa  per  rupee  of  the  sale  price  of  the manufactured commodity.  There  is  no  material  placed  on record that the surcharge levied under sub-s. (1) of s. 5 of the Act imposes a 188 disproportionate burden  on the  appellants or  that  it  is confiscatory in nature.      The  argument   of  arbitrariness  is  an  argument  of despair. Sub-s.  (1) of  s. Of  the Act  levies surcharge on dealers whose  gross turnover  in a year exceeds Rs. 5 lakhs irrespective of  whether  such  dealers  deal  in  essential commodities or  not. lt  is a  general tax  and all  dealers falling within the class defined under sub-s. (1) of s. 5 of the Act  have been levied the surcharge at a uniform rate of 10 per  centum of  the tax.  It will  be noticed  that first proviso to  sub-s. (1) of s. 5 enjoins that the aggregate of the tax  and surcharge  payable  under  the  Act  shall  not exceed, in  respect of  goods  declared  to  be  of  special importance in  inter-State trade or commerce by s. 14 of the Central Sales  Tax Act,  1956,  the  rate  fixed  by  s.  15 thereof. Under  s. 14  of the  Act, almost  all  commodities which are  essential  to  the  life  of  the  community  are declared to  be goods  of special  importance in inter-State trade or  commerce  and  therefore  the  maximum  sales  tax leviable on  sale or  purchase of such goods cannot exceed 4 per cent.  It would  therefore appear that generally dealers having a  gross turnover of Rs. 5 lakhs in a year dealing in commodities covered  by s.  14 will  not have  to  bear  the burden of  surcharge under sub-s. (1) of s. 5 of the Act. It is the  misfortune of  these appellants  that medicines  and drugs are  not declared  to  be  of  special  importance  in respect of  inter-State trade  or commerce  by s.  14 of the Central  Sales  Tax  Act.  That  apart,  the  appellants  as manufacturers or  producers of  drugs under  paragraph 24(1) have to bear the burden of sales tax on the controlled price that they  cannot charge to a wholesaler a price higher than (a) the  retail price minus 14 per cent thereof, in the case of ethical drugs; and (b) the retail price minus 12 per cent thereof, in  the case  of non-ethical drugs. Under paragraph 24(2) they  cannot sell to a retailer at a price higher than (a) the  retail price minus 12 per cent thereof, in the case of ethical drugs; and (b) the retail price minus 10 per cent thereof, in  the case of non-ethical drugs. These provisions merely indicate that there is a margin of 14 per cent to the wholesaler in  the case  of ethical drugs and of 12 per cent in the  case of non-ethical drugs,. and the wholesaler has a margin of  2 per  cent in  either case  when he sells to the retailer. In  contrast, the  profit margins of manufacturers and producers of medicines and drugs is considerably higher. Under the  scheme of  the Drugs  (Price Control)  order, the calculation  of  the  retail  price  of  formulations  under paragraph 10  has to  be accordance with the formula set out therein. One of the elements that enters 189 into the  price structure  is the ’mark-up’ which is defined in  paragraph  11  to  include  distribution  cost,  outward freight,  promotional  expenses,  manufacturers  margin  and trade commission.  Clauses (1)  to (3) of the Third Schedule show  that   the  mark-up   ranges  from  40%  in  the  case formulations specified  in category  (i), 55% in the case of formulations specified in category (ii) and 100% in the case of formulations  specified in  category (iii). This gives an indication  of   the  extent   of  profits   earned  by  the manufacturers and producers of formulations.

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    In Market  situations where  uncertainty  about  demand prevails  and   mark-up  pricing  is  practised,  the  usual response is  to attempt  to shift  taxes  to  the  consumer. Musgrave in  his  Public  Finance  in  Theory  and  Practice observes that economists like to think of business behaviour as being  rational, in  the sense  of following a maximising rule, but  businessmen may  not act  rationally. They regard the tax as a cost and make adjustments accordingly:           "One of  these is  the practice  of markup or      margin  pricing.   Under  this   rule,  costs  are      "marked-up" to  allow for  a  customary  ratio  of      profits to costs, or price is set such as to leave      profits  (i.e.,  sales  minus  cost)  a  customary      fraction of  sales. Whether  this  gives  rise  to      shifting depends  on how  costs  and  margins  are      defined. Shifting occurs if the tax is included as      a cost, or if the margin if defined net of tax." It would  therefore appear  that businessmen  are  skeptical regarding the  entire approach  of  marginal  cost  pricing. their position  is that  taxes are  treated as  a cost  when determining prices,  be it  as part of a "full-cost-pricing" rule, by  application of a conventional mark-up rate defined net of  tax, or  by pricing to meet a net of tax target rate of return. According to these formulae, a change in tax rate leads to an adjustment in price. If the appellants find that the levy of surcharge under sub-s. Of s. 5 of the Act cannot be borne within the present price structure of medicines and drugs,  they   have  the  right  to  apply  to  the  Central Government for  revision of the retail price of formulations under paragraph 15 of the Control order.      It was  a startling  proposition  advanced  by  learned counsel for  the appellants  that the  Court  was  wrong  in Kodar’s case in 190 justifying on  the basis  of economic superiority the burden of additional  sales tax  on a  certain class of dealers. It was held by the Court relying upon the dissenting opinion of Cardozo, J.  in Stewart Dry Goods Co. v. Lewis [1935] 294 US 550 that  a gross  sales tax  graduated at  increasing rates with the  volume of sales on a certain class of dealers does not  offend   against  Art.  14  of  the  Constitution.  The contention that  ability to  pay is not a relevant criterion for upholding the validity of sub-s. (3) of s. 5. Of the Act cannot be  accepted. To say the least, there is no basis for this submission.  It is beyond the scope of this judgment to enter into intricacies of public finance viz. Objectives and criteria of a tax, problems of shifting et cetera. Nor is it necessary for us to enter into a discussion of the so called benefit principle, or the alternative approach of ability to pay. There  is probably  widespread agreement now that taxes that fall on the ’better-off’ rather than the worse-off’ and are  progressive   rather  tean   proportional,  are  to  be preferred. The  concept  of  ’ability-to-pay’  implies  both equal  treatment  of  people  with  equal  ability,  however measured, and  the progressive rate structure. The ’ability- to-pay’ doctrine has strong affinities to egalitarian social philosophy,  both   support  measures   designed  to  reduce inequalities of wealth and income.      On  questions   of  economic  regulations  and  related matters, the  Court must  defer to the legislative judgment. When the  power to tax exists, the extent of the burden is a matter for  discretion of  the law-makers.  It  is  not  the function of  the Court to consider the propriety or justness of the  tax, or  enter upon the realm of legislative policy. If the  evident intent  and general  operation  of  the  tax

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legislation  is  to  adjust  the  burden  with  a  fair  and reasonable   degree    of   equality,   the   constitutional requirement is  satisfied. The  equality clause  in Art.  14 does not  take-from the  State power  to classify a class of persons who  must  bear  the  heavier  burden  of  tax.  The classification having  some reasonable basis does not offend against that  clause merely  because it  is  not  made  with mathematical nicety  or because  in practice  it results  in some inequalities.      In Kodar’s  case, supra, the constitutional validity of a similar  levy was  upheld on  the capacity  to pay. It was observed:           "The large  dealer occupies  a  possition  of      economic superiority  by  reason  of  his  greater      volume of  his  business.  And  to  make  his  tax      heavier, both  absolutely and  relatively, is  Dot      arbitrary discrimination,, but an attempt 191      to proportion  the payment  to capacity to pay and      thus  to   arrive  in  the  end  at  more  genuine      equality."      The economic  wisdom of  a tax  is within the exclusive province of the Legislature. The only question for the Court to consider is whether there is rationality in the belief of the Legislature  that capacity  to pay  the tax increases by and large  with an  increase of  receipts. The view taken by the Court  in Kodar’s  case, supra,  is in  consonance  with social justice  in an  egalitarian State  and therefore  the contention based on Art. 14 of the Constitution must fail.      The contention  that sub-s.  (3) of  s. 5  of  the  Act imposes an  unreasonable restriction  upon  the  freedom  of trade guaranteed  under Art.  19 (1) (g) of the Constitution proceeds on  the basis  that sales  tax being essentially an indirect tax,  it was  not competent  for the Legislature to make a  provision prohibiting the dealer from collecting the amount of  surcharge cannot  prevail. It  is urged  that the surcharge does  not retain its avowed character as sales tax but in  its true  gature and character is virtually a tax on income, by  reason of the limitation contained in sub-s. (3) of s.  5 of the Act. We are not impressed with the argument. Merely because  a dealer  falling within  the class  defined under sub-s.  (1) of  s. 5  of the  Act  is  prevented  from collecting the surcharge recovered from him, does not affect the competence  of the State Legislature to make a provision like sub-s.  (3) of s. 5 of the Act nor does it become a tax on his  income. It  is not  doubt true  that a sales tax is, according to  the accepted notions, intended to be passed on to the  buyer, and the provisions authorising 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  Legislature 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 effect the competence of the legislature: see: The Tata Iron & Steel  Co. Ltd.  v. The  State of Bihar(1): M/s. J.K. Jute Mills Co.  Ltd. v.  The State  of Uttar Pradesh & Anr.(2) 5. Kodar v.  State of  Kerala.(3) The  contention based  on the Art. 19 (1) (g) cannot therefore be sustained. 192      There was  quite some  discussion  at  the  Bar  as  to

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whether the  assent of  the President is justiciable. rt was submitted that  since not only sub-s. (1) of s. 5 of the Act which provides for the levy of a surcharge on dealers having a gross  turnover of  Rs. 5  lakhs in a year but also sub-s. (3) thereof  which interdicts  that no  such dealer shall be entitled to  recover the  amount of surcharge collected from him, are  both relatable  to Entry  54 of  List  II  of  the Seventh Schedule,  there was no occasion 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  Constitution.  Immediate provocation for this argument appears to be an obiter dictum of  Lord  Diplock  while  delivering  the  judgment  of  the Judicial Committee  in Teh  Cheng Poh  @, Char Meh v. Public Prosecutor, Malaysia(1)  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 by resolutions of both Houses  of Parliament  or by 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  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 President applied his mind to the question whether there was repugnancy between  the Bill  reserved for his consideration and received his assent under Art. 254 (2).      The constitutional  position of  a Governor  is clearly defined. The  Governor is  made  a  component  part  of  the Legislature of  a State  under Art.  168 because  every Bill passed by  the State  Legislation has to be reserved for the assent of  the Governor  under 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’ withhold his assent therefrom, in which cases the Bill falls through unless  the procedure indicated in the first proviso is followed 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" reserve  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 Bill 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, when  a   Bill  is   reserved  by   the  Governor   for  the consideration of  the President, the President can adopt two courses, namely:  (1) 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 a ’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.

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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 a Bill passed by the State  Assembly may become law if the Governor gives his 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 which lays down that a Bill which has been assented to by the President would be  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  falling 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  by 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 have 194 reserved 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 unconstitutional on  the ground  of want  of proper  assent. This aspect  of the  matter, as  the law  now stands, is not open to  scrutiny by  the courts.  In 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 is not justiciable, and we  cannot spell  out any  infirmity arising  out of his decision to give such assent.      There still remains the contention that for the purpose of levying  surcharge  it  is  impermissible  to  take  into account the  method of  computation of  gross turnover,  the turnover representing  sales 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. 7  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. Fernandez v. State of Kerala(1):           "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

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    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  of 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 the only thing which      the dealer  is entitled  to in  respect thereof 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 195      sales or  purchases  are  exempted  from  taxation      altogether. The  legislature cannot  enact  a  law      imposing or  authorising 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 tax can be levied or imposed.      The submission  appears to proceed on a misapprehension of the principles laid down in Fernandez’s case, supra.      To understand  the ratio deducible in Fernandez’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 inside 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 value of the oil sold outside the State deducted. The  main controversy between the parties centered around the  method of  computation of  the 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 the  imposition of  tax on  the sale  or purchase of such goods and in 196 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

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is hardly of any assistance to the appellants.      In  the  penultimate  paragraph  in  Fernandez’s  case, supra, the  Court after  laying down  that the  non-obstante 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 e of the turnover liable to tax thereunder, observed:           "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  the      provisions of Art. 286 of the Constitution and the      corresponding pro  vision enacted  in the  Act, as      above."      The decision  in Fernandez’s  case, supra, is therefore clearly 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 purposes  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. (1) of s. 5 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 surcharge under Entry 54 of List II of the Seventh 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 10  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 classify dealers into  those who  are economically superior and those who are  not. That is to say, the imposition of surcharge is on those  who have  the  capacity  to  bear  the  burden  of additional  tax.   There  is  sufficient  territorial  nexus between the  persons sought  to be  charged  and  the  State

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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   of   Bombay   v.   R.M.D. Chamarbaugwala(1), The  Tata Iron  & Steel Co. Ltd. v. State of Bihar(2), and International Tourist Corporation etc. etc. v. State of Haryana & Ors.(3) The gross turnover of a dealer is taken  into account  in sub-s. (1) 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.                                    Appeals dismissed. 198