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PETITIONER: ANAKAPALLE COOP.  AGRL. & INDUSTRIAL SOCIETYLTD.  ETC.  ETC.

       Vs.

RESPONDENT: UNION OF INDIA & OTHERS

DATE OF JUDGMENT06/11/1972

BENCH: GROVER, A.N. BENCH: GROVER, A.N. SHELAT, J.M. MATHEW, KUTTYIL KURIEN MUKHERJEA, B.K. CHANDRACHUD, Y.V.

CITATION:  1973 AIR  734            1973 SCR  (2) 882  1973 SCC  (3) 435  CITATOR INFO :  RF         1974 SC 366  (62)  RF         1978 SC1296  (64)  RF         1983 SC1019  (34)  E          1987 SC1802  (9)  F          1987 SC2351  (9,12)             1990 SC1277  (2,5,6,7,11,12,13,54,61)  E          1990 SC1851  (28)  R          1991 SC 724  (13)

ACT: Essential  Commodities Act (10 of 1955) s. 3 (3C)  and  Levy Sugar  Supply Control Order, 1972-Fixation of price of  levy sugar-It correct principles applied-1972-Order, if invalid.

HEADNOTE: The Levy Sugar Supply Control Order, 1972, fixing the  price of  levy  sugar  was  made  under  s.  3  of  the  Essential Commodities  Act.  Its validity was challenged in  petitions under Art. 32. Dismissing the petitions, HELD : (1) (a) Sub-section 3(3C) of the Act is not  confined to levy sugar only.  Fair price under the sub-Section has to be determined in respect of the entire produce, ensuring  to the industry a reasonable return on the capital employed  in the  business  of manufacturing sugar, and,  in  considering whether a reason-able return has been allowed the profit  on the free sale of sugar can be taken into account. [887 A-B] Panipat  Co-operative Sugar Mills v. Union [1973]  2  S.C.R. 860 followed. (b)Section  3(3C) clearly envisages and  contemplates  the fixation of different prices for different areas.  It hardly matters  if  areas are called zones.   The  constitution  of zones for price fixation is not an innovation and goes  back to  1959, when the Tariff Commission made a detailed  report on the cost structure of sugar and the fair price payable to the industry. [887 F-G] (2)(a) The Tariff Commission, 1969, however, recommended the constitution  of 15 zones largely on State-wise  basis  with exceptions in case of U.P., Bihar which were divided into  3

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and  2 zones respectively, after an elaborate  inquiry  into the  working of the Zonal system.  There was thus ample  and abundant  justification  for continuing and  sustaining  the zonal system.  There is no basis for the contention that the price fixation has to be made with reference to the cost  of each individual unit in the zone.  The basis of a fair price for  sugar would have to be built an a reasonable  efficient and  representative  cross-section on  whose  working  cost- schedules will have to be worked out and price determined by the  Government under s. 3(3C) of the Act, doing justice  to the weak and strong alike.  Any loss to the petitioners  may be due to mismanagement, lack of efficiency and following  a wrong  investment policy which have nothing to do  with  the zonal  system.   Not a single expert body  countenanced  the suggestion that price control should be unit-wise, and  even before  the  Tariff  Commission no such point  of  view  was pressed by the sugar industry. [892 E-F; 893 F-G; 894 D,  F- G; 896 G-H] Panipat  Co-operative Sugar Mills v. Union [1973]  2  S.C.R. 860 1972, followed. (b)It  is futile to say that the zoning system should  not have  been  done State-wise, especially  when  climatic  and agro-economic    condition,-,   have   been   taken    ’into consideration while constituting the zones.  If any 883 other  system  had  been  followed  it  would  have   become impossible to work out a proper cost-schedule for the  zone. It  would  have created several  problems  and  difficulties particularly with reference to the taxes, duties etc.  which are levied by each State and the wages which are payable  to the workers in the different States which vary from State to State. [897 H; 898 C-E] (c)In  the  present  cases,  while  classifying  zones  on geographical cumagro-economic considerations, there has been no discrimination made nor does the price fixation according to each zone, taking into account all the relevant  factors, give  rise to any such discrimination as would attract  Art. 14.   Once  it  is recognised that  prices  could  be  fixed according  to the zones, the cost schedules that  have  been worked  out  by  the  Commission  have  necessarily  to   be different for each zone, because, the various items which go into cost differ from zone to zone. [899 D-F] (3)(a)  Sub-section (3C) lays down the various  components for  determining the price of sugar.  Clauses (a),  (b)  and (c)  relate to the total cost which consists of the  minimum price  of  sugar  cane  as  fixed  by  the  Government,  the manufacturing cost and the duty or tax.  Clause (d)  relates to  the return on the capital employed.  The very fact  that cl. (a) provides that the minimum price fixed for sugar cane has  to be taken into account shows that the actual cost  is immaterial.   Moreover,  while fixing  prices  according  to zones,  it  is impossible to take the actual  cost  of  each manufacturer  or  producer and fix  the  price  accordingly. Hence, the methods followed by the Tariff Commission,  which have  stood the test of time and have been  incorporated  in the sub-section, have been followed in the fixation of price of sugar.  The fact that in some cases their actual cost may be  in  excess  of the price fixed cannot be  a  ground  for striking  down  the  price  fixed for  the  entire  zone  in accordance  with  accepted  principles.   It  may  be   that uneconomic  units  may suffer losses, but what  they  cannot achieve in the open market they cannot insist on where price has  to  be  fixed by the  Government.   The  Sugar  Enquiry Commission,  in  its 1965-report, expressed  the  view  that ’Cost-plus’ basis of price-fixation perpetuates inefficiency

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in the industry and hence cannot always be the proper  basis for price fixation. [899 F-H; 900 H; 901 A-E] (b)The Tariff Commission had however recommended that as a measure  of  neutralising relative cost advantages  and  for rectifying the disparity in the ex-factory price  structure, a  graded  slab system of excise duty may be  introduced  in place of the present flat rate.  It is for the Government to take an early decision with regard to the  recommendation, but  as  the  Government  is  not  bound  to  accept   every recommendation  of the Tariff Commission, this Court  cannot strike down the Price Control Order. [901 H; 902 A-C] (c)The Tariff Commission, which was in full possession  of all facts, was satisfied that the requirements of the  sugar industry  could be more equitably met by the departure  from the conventional method of giving a return on the basis of a certain percentage on the capital employed, and by  adopting instead  a  uniform amount of Rs. 10.50 per quintal  as  the margin  to be added to the other cost in arriving at a  fair price of the sugar.  The working of the Tariff Commission in arriving  at the figure also shows that the  Commission  had allowed  addition on account of the increase in the rate  of interest  on  money borrowed.  It is true  that  in  Premier Automobiles  v. Union of India, A.I.R. 1972 S.C.  1690,  16% return  on  the  capital  employed  was  considered  to   be reasonable,  but out of that return, the car  manufacturers, unlike the sugar producers, were made liable to pay  minimum bonus,  interest on borrowing, financial  charges,  warranty charges and guarantee commission. [902 C, F-H; 903 H; 904 A- F] 5--L521 Sup.Court/73 884 (4)(a)  The  Tariff  Commission had  decided  in  favour  of continuing  the existing method of computing the quantum  of depreciation  on the basis of zonal averages of  the  costed units;  and  it  was added that the figure  so  adopted  was automatically to undergo an upward revision if and when  the revision   contemplated  by  the  draft  rules  seeking   to liberalise  the depreciation to be earned-under  the  Income tax law was brought into effect.  The statement furnished by the  Government shows that the increase in depreciation  has been allowed in accordance with the new rate of depreciation under the Income-tax Rules. [905 E-H 906 A-C] Premier Automobilies case, A.I.R., 1972 S.C. 1690, followed. (b)The  Tariff  Commission in 1959 and the  Sugar  Enquiry Commission in 1965 considered that no provision need be made for the purpose of rehabilitation and modernisation; but the Tariff  Commission  in  1969, made  a  recommendation.   The conditions  which prevailed in 1959 and 1965 were  different and  the  latest  view expressed in  1969,  ’Ought  to  have received  serious  consideration by  the  Government.   But, merely  because Rs. 2.00 per quintal, as recommended by  the Commission,  had  not been taken account  while  fixing  the price of levy sugar, the price as fixed would not be  struck down,  because. its non-inclusion is in no way violative  of s. 3 and 3A of the Act. [906 E-F; 907 A-B, G; 908 B-D] [The Government should, however, give serious and  immediate consideration  to  the matter and take  a  decision  without further delay] [908 D] (5)There is no serious inaccuracy or infirmity,  factually or  otherwise,  in  the escalations allowed  by  the  Tariff Commission  and  accepted by the Government  in  fixing  the price of sugar. [908 G] (6)There  is nothing to show that payment of  gratuity  or liability  therefor  had not been taken into  account  while fixing the price for levy sugar.  [L909 C-D]

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As regards bonus, the rate of minimum bonus had been  raised from  4%  to  8.33%  by  the  Payment  of  Bonus   Amendment Ordinance, 1972, but as the Bonus Ordinance was  promulgated after  the  prices were fixed by the  impugned  Order,  that Order  cannot be struck down on the ground that  the  prices fixed  by  it did not take into account the changes  in  the rate  of minimum bonus made by the Ordinance.  Even  so,  in the  changed  circumstances  the Government  ought  to  make appropriate  modifications in the impugned Order in  respect of the prices of levy sugar. [910 B-E]

JUDGMENT: ORIGINAL  JURISDICTION : Writ Petitions Nos.  279-283,  293, 296, 297, 300, 303, 304 & 306 of 1972. Under  Article 32 of the Constitution of India for  the  en- forcement of Fundamental Rights. S.V.  Gupte,  K. Srinivasamurthy, Naunit Lal  and  M.  N. Shroff, for the petitioners (in W.P. No. 279/72). K.Srinivasamurthy,  Naunit Lal and M. N. Shroff, for  the petitioners (in W.P. Nos. 280-283 & 303/72). P.Ram  Reddy,  S.  Kondala Rao and G.  N.  Rao,  for  the petitioner (in W.P. No. 293/72). A.K.  Sen,  N.  R.  Khaitan  and  O.P.  Khaitan  for  the petitioner (in W.P. No. 296/72). L.M.  Singhvi, N. R. Khaitan and O. P. Khaitan,  for  the petitioner (in W.P. No. 297/72). 885 C.K.  Daphtary, R. K. P. Shankardass, R. N. Banerjee,  H. K.  Puri and S. K. Dhingra, for the petitioner (in W.P.  No. 298/72). A.   Subba Rao, for the petitioner (in W.P. No. 300/72). L.   M.  Singhvi,  N. R. Khaitan, O. P. Khaitan  and  A.  T. Patra, for the petitioner (in W.P. No. 304/72). G.   S. Rama Rao, for the petitioner (in W.P. No. 306/72). L.   N. Sinha, Solicitor-General of India, G. L. Sanghi  and S.   P. Nayar, for the respondent (in W.P. Nos. 279-283/72). L.N. Sinha, Solicitor General of India, and S. P. Nayar, for the respondents, (in W.P. Nos. 293, 296, 297 298, 300,  303, 304, & 306 of 1972). B.Sen,  Leila  Sheth  and  B.  P.  Maheshwari,  for   the intervener (Upper Ganges Sugar Mills). A.Subba  Rao and B. K. Seshu, for interveners  (Nizamabad Co.-opt Sugar Factory & Nizam Sugar Factory). M.C. Setalvad, P. N. Tiwari, J. B.  Dadachanji and O.  C. Mathur, for the intervener (Mahalaxmi Sugar Mills). C.   K.  Daphtary,  J. B.  Dadachanji, O. C. Mathur  and  P. N.Tiwarifor  the intervener (M/s.  Hindustan  Sugar  Mills Ltd.) V.   S.  Desai,  J. B.  Dadachanji, O. C. Mathur and  P.  N. Tiwari,  for  the intervener (Delhi Cloth  &  General  Mills Ltd.). P.N. Tiwari, J. B. Dadachanji, and O. C. Mathur, for  the intervener (Ganga Sugar Corpn.  Ltd.). The Judgment of the Court was delivered by GROVER,  J.  These petitions under Art. 32 of the  Constitu- tion  have  been  brought by or on  behalf  of  the  various factories,  cooperative societies and Mills which  carry  on the business of manufacturing and selling sugar (hereinafter called compendiously the "sugar producers") challenging  the validity and legality of the Levy Sugar Supply Control Order 1972 made under s. 3 of the Essential Commodities Act, 1955, hereinafter called the "Act" fixing the price of levy  sugar in  the  different  zones in the  country  and  praying  for

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various reliefs.  Writ Petitions Nos. 279 to 283, 293,  300, 303  and  306 of 1972 are by the sugar producers  in  Andhra Pradesh zone; Writ Petitions No. 297 and 304 of 1972 by  the sugar producers in North Bihar zone and Writ Petitions  Nos. 296 and 298 of 1972 by those in the Punjab zone. The  principal  questions that arise for  our  determination are, The following: 886               (1)   What is the true scope and ambit of S. 3               (3 C) of the Act ?               (2)   (a)  Whether the system of fixing  price               for each zone (the entire country having  been               divided into 15 zones), is justifiable and  is               based on correct principles ?               (b)   Whether  the state-wise constitution  of               the zones is proper and justified ?               (c)   Does   the   zonal   system   lead    to               discrimination  and  as such is  violative  of               Art. 14 of the Constitution ?               (3)   Is   price  fixation  based  on   proper               principles and have the prices been determined               by  following  the  correct  methods  and   in               accordance with s. 3 (3C) of the Act ?               (4)   What  is  the  correct  position   about               depreciation and rehabilitation allowance  and               the extent to which these have been taken into               consideration in price fixation ?               (5)   Have the escalation in various items  by               which   price  determination  is   made   been               properly allowed ?               (6)   Whether the items in respect of  payment               of additional bonus as provided by the Payment               of Bonus Amendment Ordinance 1972 and gratuity               are taken into account ? The   history   of  control  over  sugar   production,   its distribution and the method followed in the fixation of  the fair  or  levy  price  of sugar has  been  set  out  in  the connected  case  (Civil Appeal Nos. 1357 to  1369  of  1972) judgment  in  which also has been delivered today  and  the same ground need not be traversed again. The  first question-formulated by us which arises  in  these writ  petitions  can be divided into two parts.   The  first part  involves the point whether sub-s. (3C) of s. 3 of  the Act deals with levy sugar only and is confined to it  alone, particularly, in the matter of determination of a reasonable return  as provided by clause (d) of that  sub-section.   In the  writ  petitions  the argument on behalf  of  the  sugar producers has been that the whole object of having a  scheme of  partial control under which 60 to 70%, sugar has  to  be sold  in accordance with the orders made by  the  Government under  S. 3 (f) of the Act for which levy price is  payable and  the  balance is saleable in the free  market  would  be defeated.   The result of accepting an  interpretation  that profit  on the free sale of sugar can be taken into  account while  considering  whet-her a reasonable  return  has  been allowed  on  the  capital employed by  the  sugar  producers would,  it has been stressed, be contrary to the scheme  and purpose of the sub-section in question.  This aspect of  the matter has been 887 fully dealt with in the above connected case.  We have  held that  fair  price  has to be determined in  respect  of  the entire produce ensuring to the industry a reasonable  return on  the  capital employed in the business  of  manufacturing sugar.   In  other  words  the  contentions  of  the   sugar

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producers have been repelled.  The  second  part of the first question  is  whether  price fixation according to zones and not unit-wise (we shall call this  "the Zonal system") is permissible under s.  3(3C)  of the  Act.  According to that provision different prices  may be  determined from time to time for different areas or  for different factories or for different kinds of sugar.  It has been  sought to be established from clauses (a’) to  (d)  of the same sub-section that what is contemplated is the  price fixation  of each unit or factory; otherwise it win  not  be possible to ensure that a reasonable return has been secured on  the  capital employed as required by  clause  (d).   The Tariff  Commission of 1969 has recommended a return  of  Rs. 10.50 per quintal of sugar.  That recommendation having been accepted  by  the  Government  (vide  its  Resolution  dated February  20, 1970) the only way,, so it has been  suggested on  behalf of the sugar producers, to ensure that return  is to  compute the cost of sugarcane, the  manufacturing  cost, the duty or tax payable and then add the above amount by way of return to the aggregate of the aforesaid items  mentioned in clauses (a) to (c) of the sub-section.  This can be  done if all these items are computed unitwise and not, by  taking a  large  number of units in an area because  the  aforesaid items are bound to vary and be different from unit to  unit. We shall have an occasion to go more fully into matter while considering  question No. (2).  But we are unable  to  agree that the provisions of s.. 3 (3C) do not in any way  warrant the  fixation of price for the zones into which the  country may  be divided.  The aforesaid provision clearly  envisages and  contemplates  the  fixation  of  different  prices  for different  areas.   It hardly matters if  areas  are  called zones.   The  previous history, as will be  presently  seen, also fully supports such a view.  The Constitution of  zones for  price  fixation is not an innovation and goes  back  to 1959  when the Tariff Commission made a detailed  report  on the  cost structure of sugar and the fair, price payable  to the sugar industry. It will be useful to note certain preliminary matters before the  various aspects of question No. 2 are  considered.   In 1930  when the Tariff Board appointed by the  Government  of India  investigated  for  the  first  time  the  claim   for protection  from  the  sugar industry  there  were  only  29 factories  producing sugar.  Protection was granted  to  the industry in 1932.  Thereafter the growth of the industry was rapid.   By 1938-39, the number of sugar factories  rose  to 139.   According to the Tariff Commission report  1959,  the number of operating factories at that time was 888 157  with  a total output of 1.98 million tonnes.   In  1969 when  the Tariff Commission made its report there  were  205 factories  with  a capacity for production  of  34.69  lakhs tons.   The  number  of  factories is  stated  to  have  now increased  to  221.  As the production of sugar  depends  on sugarcane,  a  number  of  steps have  been  taken  for  the development  of sugarcane.  The supply of sugarcane of  good quality  and  a fairly long, season of  production  are  two prerequisites for maintaining the production of sugar.   The duration  of  the  season in the sugar  industry  means  the period  from  the date of the start of the crushing  by  the factory to the date of finaly closing it, and it varies from region  to  region  as  it  depends  on  two  factors,   (i) availability of sufficient quantity of cane and (ii)  period for  which reasonably good quality of cane  giving  economic recovey  of  sugar  is available.   Sugar  recovery  depends mainly on three factors : (i) the quality of sugarcane, (ii)

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length  of  the  crushing  season  and  (iii)  the   overall operating efficiency of the sugar factory concerned. The   idea  of  preparing  the  cost  schedule   for   sugar manufacture  dates  back to 1937.  The  first  schedule  was prepared in 1937 by the Director of the Indian Institute  of Sugar Technology, Kanpur.  The Tariff Commission in 1959 was of  the  view that to construct the cost  schedule  for  the entire  country  at a uniform’ ’Percentage of  recovery  and identical  range of duration will only result  in  inflating the  All  India cost.  The Commission arrived  at  the  con- clusion  after  a study of the break-up cost  of  individual regions  that  cost schedules could be  constructed  on  the basis of actual recovery and duration as pertaining to  each region.   It grouped the sugar factories in  various  States into four regions or zones based on standard schedules for a uniform  recovery  of 10 per cent and for  duration  ranging from 90 to 200 days. It appears that some State Governments represented that  the Northern  region  comprising the States  of  Uttar  Pradesh, Bihar  and  Punjab  was  unduly  large  with  wide  internal disparties  in  costs.  The result was  that  uniform  price fixed  for  the  zone showed  large  differences  in  profit margins.   The sugar Enquiry Commission headed by Dr. S.  R. Sen  in  its  final report in  1965  recommended  five  cost schedules  for the same number of zones at 10% recovery  and for  different durations.  Assam with one factory was to  be treated as a separate zone.  The Government, however,  fixed prices  for 16 zones under the Sugar (Control)  Order  1963. The  number of zones kept on changing till it was  increased to  23 for the years 1965-66 and 1966-67.  But  in  December 1967  prices .were fixed for 6 zones including  Assam.   The Tariff Commission in 1969 recommended the Constitution of 15 zones  which suggestion was finally accepted (see  page  67, Tariff Commission Report 1969). 889 We  may  first take up the group of petitions of  the  sugar producers in the Andhra Pradesh Zone. The  position about price of levy sugar in zone 2  in  which the  sugar producers in Andhra Pradesh are  functioning  was that for the sugar produced in 1968-69, the price-fixed  was Rs. 161.14 per quintal for D-29 quality.  After the creation of fifteen zones in February 1970, the price for levy  sugar for  the  Andhra Pradesh zone was fixed at  Rs.  150.43  per quintal  inclusive  of excise duty.  In May 1971  sugar  was decontrolled which continued till December 1971.  From  that time  till June 1972 when partial control was  reimposed,  a scheme  of  voluntary  control of Sugar was  in  force.   By agreement between the Government and the sugar producers 60% of  the sugar released every month had to be placed  at  the disposal  of  the  Government  at  Rs.  150/-  per   quintal exclusive  of  excise  duty for  D-30  quality.   Under  the impugned order the price of Rs. 121.97 per quintal was fixed for  D-29  grade  and Rs. 122.82 for D-30  quality  for  the Andhra Pradesh zone. One  of the main grievances of the sugar producers  is  that the  above price was far below the price payable even  under the  voluntary  scheme  of distribution and so  far  as  the actual  cost of production of the various petitioning  units is concerned the same was greatly in excess of the price  of levy  sugar  fixed by the impugned order.   Thus  the  sugar producers in this zone were being made to suffer huge losses instead of getting a reasonable return as provided by clause (d) of s. 3 (3C) of the Act.  All this was attributed to the zonal  system which is stated to suffer from  the  following serious defects apart from others:

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             (i)   The  sugar producers in  Andhra  Pradesh               varied  greatly  in economic  viability;  some               units  were  very large and some  very  small,               e.g.,  crushing  capacity of  3750  tonnes  at               Vayyuru   and  800  tonnes  at   Seethanagaram               respectively  out  of the costed,  units  (see               Appendix  32,  page 207, 1969  report,  Tariff               Commission).               (ii)  A  uniform price has been fixed for  all               units   although   the   manufacturing    cost               varieswidely from unit to unit.               (iii)The  extreme disparity was evident  from               para  9.5.1  of the 1969 report  which  showed               that  the actual crushing reason (based on  22               hours  per day) for the individual unit had  a               divergence  ranging from 26 days to 195  days.               State-wise averages indicated a range from  26               to  153  days whilst the  all  India  weighted               average came to 108 days for the costed units.               In Andhra Pradesh the duration in 1966-67                890               which  is  the base year of the  costed  units               varied from 163 days to 41 days.               (iv)  Only  7 units out of 19 units in  Andhra               Pradesh zone were selected for working out the               averages.    This   highly   involved   highly               disparate and unfair comparison.               (v)   According to table 9.3 at page 75 of the               1969  report the average of the cane  actually               crushed by all the 7 costed units came to 1233               tonnes  per  unit whereas the average  of  the               cane  actually crushed by all the 19 units  in               the  State is 1065 tonnes.  According  to  the               figures  supplied  by  the  counsel  for   the               petitioner at the time of arguments the  total               cane actually crushed in 1966-67 by all the 19               units  in Andhra Pradesh was  16,60,000  tons.               The  average duration for that year  being  82               days  the  average daily crushing  of  the  19               units  worked  out  to 1065  tonnes  per  unit               whereas  the crushing capacity of 1233  tonnes               per  day wits taken as the base.  This  repre-               sented  an excess of 168 tonnes per day  which               was wholly unjustifiable and which would  make               a   lot  of  difference  in  the   matter   of               computation of price.               (vi)  The  conversion cost given at pages  209               and 210, Appendix 33 of the 1969 report worked               out  to  Rs. 25.86 per quintal  which  is  the               conversion cost for 1233 tonnes relating to  7               costed units but the average daily crushing of               all the 19 units being 1065 tonnes the  actual               conversion  cost will work out-to  Rs.  29.94.               Thus  the difference in conversion cost  would               be Rs. 4.08 per quintal for sugar.               (vii)The  weighted  average were  on  a  very               restricted  basis and hand-picked units  could               not  furnish  proper  guidance  The   weighted               average  were  farcical  and were  in  no  way               different from the ordinary averages.               (viii)No  account has been taken  of  the               admitted fact that duration and recovery often               depend  on  vagaries of nature  or  unforeseen               events.  For instance in the case of the sugar               producers  in  Writ Petition  No.  283/72  the

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             duration was 162 days in 1969-70, the recovery               being  9.493% but it came down to 78  days  in               1971-72 because the sugarcane crops were  dam-               aged by a highly distructive disease. In  the  North  Bihar group,, of  petitions  of  which  writ petition  297/72 may ’be taken to be  representative  points similar to the above have been raised.  For the North  Bihar zone, the prices- 891 fixed  by the impugned order were Rs. 157.55 for  D-30  and, Rs.  155.85  per quintal for  D-29  qualities  respectively. According  to the sugar producer its own cost of  production comes  to Rs. 181.96 per quintal without any return.   Owing to  the  faulty price fixation, this unit  was  suffering  a heavy  loss, the accumulated amount of loss  having  reached the  figure of Rs. 9.50 lakhs.  According to the  statements and tables prepared and submitted to us, in the North  Bihar zone  the cost factors of the costed units are so  disparate and unequal that five out of the 8 costed unit$, do not even get their actual cost, leave aside any return. The  tables relating to the weighted averages are  meant  to show  that  there  is no particularity or  charm  about  the weighted  averages.   It is not an average  which  tends  to remove  the disparity between the, various units in a  zone. In  the table showing the ex-works price of sugar  based  on minimum  price of the cane, duration and recovery for  North Bihar  zone  compared with individual units for  the  season 1971-72  the  zonal average cost on the basis  of  66  days’ duration and 8.86% recovery and Rs. 91.34 cost of cane comes to  Rs.  139.52  per quintal excluding  the  return.   After applying cost schedules to cane price duration and  recovery of  individual factories the results show that at  least  10 factories  suffer  heavy losses because  their  cost  ranges between  Rs. 623. 81 per quintal of the factory at  Ryam  to Rs. 139. 83 of the factory at Chanpatiya.  This is exclusive of the return of 10. 50%.  It may be observed here that  the factory  at  Ryam  has a duration only of 7  days  which  is almost  ’a freak figure and explains the high cost  incurred by  it  for manufacturing sugar.  But the  total  number  of factories  in North Bihar zone is 25 and the cost  of  other factories  varies between 138.44 to 121.89 per quintal.   It is  next pointed out that under the averaging technique  the Central  Government  fixes  a common  price  for  all  sugar factories  in  every  State  or  price  zone  by   averaging extraordinary  cost disparities.  The average cost  formulae ignore disparity in (a) cane cost per quintal; (b) duration; (c)  recovery, (d) daily crushing capacity and  (e)  capital employed by one factory and the other in each zone. Writ  Petition  No. 298/72 is representative of  the  Punjab group.   There are five sugar factories in the Punjab  zone. The  price of levy sugar was fixed under the impugned  order at 147.71 per quintal.  Details of the audited manufacturing cost  were filed with the petition for the  1971-72  season. It was claimed that the manufacturing cost for that  season, came  to  Rs. 208.22 per quintal exclusive  of  interest  on capital  employed  which  worked out to  another  16.40  per quintal.   Thus  the  cost including interest  came  to  Rs. 224.62  per quintal.  The total loss on stock as on July  1, 1972 would come to Rs. 9,74,350.77. It was stated that the 892 petitioner had recovered an average price of Rs. 245.00  per quintal  on  the  sale of, free sugar  out  of  the  1971-72 production   and  if  the  petitioner  is  able  to   secure approximately  the same price for the balance stock of  2935 quintals  of free sugar and thus to some  extent  neutralise

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the over all loss this will still leave a loss of Rs.  87.17 per  quintal to be made up on the sale of its present  stock of  levy  sugar.   During the month  of  December  1971  the duration  was  seriously  affected  by  the   Indo-Pakistan- hostilitiesan important factor which has not been taken into consideration by the government. Servshri  M.  C. Setalvad, B. Sen and V. S. Desai  who  have appeared  for  the  Interveners  Nos. 6, 3  and  7  in  Writ Petition  No.  297 of 1972 respectively do not  support  the arguments  challenging the zonal system.  On the contrary  a strong  case  has been made by them in favour of  the  zonal system.   The Interveners whom they represent are  obviously the  low  cost units and are in favour of the  zonal  system being  retained.   The tug of war in respect  of  the  zonal system is between the high cost units and the low cost ones; the former are against it and the latter in favour of it. The  system  of  fixing the  prices,  according  to  certain regions  or zones, is not a new one.  The tariff  Commission in 1959 favored the formation of four zones.  In the  report of the Sugar Enquiry Commission 1965 it was pointed out that the  Government had actually fixed the prices for  22  zones which  meant  that  from  four zones  the  number  had  been increased to twenty two or more.  The commission was of  the view  that  there should be five zones only in  addition  to Assam.  The Tariff Commission, 1969, however recommended the constitution  of fifteen zones largely on  State-wise  basis with  an exception only in case of Uttar Pradesh and  Bihar. Uttar  Pradesh was divided into three zones and  Bihar  into two.  The Tariff Commission had been specifically  requested to  inquire into the working of the zonal system,  the  main point for inquiry being the zones into which the sugar  pro- ducers  should  be  grouped having regard to  the  basis  of classification  to  be recommended by the  Commission.   The view  of the Commission was that on the whole the number  of price zones should be fifteen which would reduce, though not eliminate,  the  inter-se anomalies in  the  cost  structure without  resorting to the extreme of the fixation  of  price for  each unit or a single or at the most two, one  for  the sub-tropical  and  other for the tropital one.   The  Tariff Commission hoped that in the course of time conditions would be  created making the operation of the  second  alternative feasible.  From Chart IV relating to production of sugar ,to be found in the report of the Sugar Enquiry Commission 1965, the  All  India  production arose from  12,00,000  tons.  to 32,00,000  tons. in 1964-65.  This notwithstanding the  fact that the prices 893 were  being fixed on the basis of regions.  In para 19.7  at page  127 of the said report the Commission made  some  very useful observations.  It rejected the industry’s  contention that under the system of determining price on the  principle of  average  for  a zone there was no  incentive  for  heavy investment  in  block.  If was, pointed out that  in  recent years  of  control-on  sugar in spite of  the  sugar  prices having  been-fixed  on  a  zonal system  there  had  been  a substantial  addition  to  the capacity  even  in  the  sub- tropical belt It was stated :               "Further, a study of the cost structure of the               old  and  new factories reveals  that  in  the               total  cost  there is hardly  much  difference               between  the  Cost of production  in  the  old               factories where the element of depreciation is               very  low and that in the new factories  where               its  incidence is fairly heavy.  While  in  an               old  unit  the  capital  cost  is  lower,  the

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             recurring cost is often higher, in a new  unit               of   comparable  capacity,  it  tends  to   be               opposite.   What  the  industry  ought  to  be               concerned  with  is  the  untimate  ex-factory               price.  To take out of context one element  of               cost that goes into the total cost and then to               plead that because the incidence in respect of               that element of cost is low in the case of old               plants  some allowance should be given to  the               industry as a whole, is not justifiable.", It is somewhat difficult to accept the argument of those who are  opposed  to the zonal system that the loss  alleged  to have  resulted  to  some  of  the  sugar  producers  can  be attributed  to the prices having been fixed zone-wise.   For instance, in the Punjabzone the crushing capacity of all the factories  is  practically the same e. about 1,000  ton  per day.  The prices which were fixed by the Government were  on the  basis of 67 days duration with a recovery of 8.75%.  In the  case  of Malva Sugar Mills the actual duration  was  95 days, the recovery being 8.78%. Ordinarily and in the normal course Profits should have been made by the said unit and it should not have incurred losses.  The reasons for  incurring losses   can  be  many  including  mismanagement,  lack   of efficiency  and  following a wrong investment  policy  which have  nothing to do with the zonal system.  This  system  by and  large leads to efficiency and affords an  incentive  to cut  down  the  cost.   It  is  only  when  there  is   keen competition  between the units in the same zone that a  real effort will be made by each unit to reduce its cost and make the  working  and running of the unit more  efficient.   The essence of the matter is that a commercial concern can be  a success  only  if  these is proper  planning  and  efficient management.   The argument on behalf of the sugar  producers which claim that they have been running into losses  because of 894 the zonal system can hardly be sustained on the evidence  on the  material  produced by them.  It is true that in  a  few cases  all the data and the details of costs etc.  were  set out  in the petition and were supported by  statements  made out  from audited accounts but in most cases it was  at  the stage  of  rejoinder  or  at  the  time  of  arguments  that elaborate statements were prepared showing figures of losses into which these units are running owing to. the fixation of price  by  the  impugned Order.   The  government  in  these circumstances  could  possibly have had  no  opportunity  to check up the correctness of all the figures and even if that could be done as, weekly returns are submitted on prescribed forms  to  the authorities concerned it would still  not  be possible  for  the government to  determine  their  accuracy without  a  complete investigation being carried  out.   Nor could  it be ascertained with out a prolonged  investigation what  the real causes were for some of the  sugar  producers incurring much heavier costs than the others. The extreme position taken up on behalf of some of the peti- tioners that the prices should have been fixed unit-wise and on  the  basis of actual costs incurred by each  unit  could hardly  be  tenable.   Apart from  the  impracticability  of fixing  the prices for ,each unit in the whole  country  the entire  object  and purpose of controlling prices  would  be defeated  by  the adoption of such a ’system.   It  must  be remembered  that during the earlier period of price  control the  price was fixed on an all India basis.  That  still  is the  objective and if such an objective can be  achieved  it cannot be doubted that it will be highly conducive to proper

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benefit being conferred on the consumers.  According to  the Commission  the objective to be achieved should be  to  have only two regions in the whole country, namely,  sub-tropical and  tropical.   Not a single expert body appointed  by  the Government  of  India  from time to  time  countenanced  the suggestion  that  price  control should  be  unit-wise.   It appears that even before the Tariff Commission such a  point of  view  was understandably not pressed on  behalf  of  the sugar  industry.  The low cost units demanded the  formation of  the  larger zones.  The high cost units  asked  for  the formation  of  smaller zones.  No material has  been  placed before  us  to show that there was any  serious  demand  for prices being fixed unit-wise.  Even in the arguments it  was almost  common  ground  with the exception  of  one  or  two dissentient voices that zoning is unavoidable in our country in the matter of fixing of the price of sugar. We  may  now  advert  to  some  of  the  salient  flaws  and infirmities  which  have been sought to be  shown  with  the assistance of various facts and figures from which the zonal system is said to suffer. Firstly the method of selection of the units for the purpose of 895 costing  and  taking of the averages has been  subjected  to severe. criticism. As  stated  in  para 9.1 of Chapter IX of  the  1969  report the  .findings  of the Commission were based  on  66  costed units  out,  of 200 working units in the industry.   It  was also mentioned in. para 9.1.1 that on a scrutiny of the cost forms it was found that the information furnished by most of the  non-costed  units was not  satisfactory.   The  defects noticed  were  in regard to allocation of  costs  under  the various  heads and inclusion of certain items  which  should ordinarily  have constituted a part of the return.   It  was further  stated  that  the cost  Accounts  Officers  of  the Commission  made a detailed scrutiny of the accounts in  the selected. units and worked out costs in a fair and equitable manner  to  enable the Commission to  determine  appropriate costs for each unit for detailed cost investigation.  The 66 units which were costed out of 68 selected for the  purposes accounted  for nearly 34% of the total capacity and  37%  of the  total  production  of sugar in  1966-67.   The  average duration  of the costed units was 101 days with  a  recovery amounting  to  9.73% as compared to All India figure  of  95 days  and 9.91% recovery respectively.  The  commission  was the best judge of selecting the units for cost study and for working  out the average cost.  The reasons given by it  for ’Selecting the costed units do not suffer from any disregard of  the recognised principles of costing.  It is  true  that the  selection  of  some units out of all  the  units  in  a particular zone can lead to the anomalies and the  hardships which-  have  been  pointed  out  on  behalf  of  the  sugar producers.  To take an illustration the average with  regard to  crushing capacity in the Andhra Pradesh Zone might  have been  different  if  all  the  units  had  been  taken  into consideration.  But the Commission could not have taken  the averages  of all the units unless it had selected  them  for costing which in the very nature of things was not practical and  which  for the reasons given by the  Commission  itself could not be done because of theunsatisfactory nature of the information  furnished  by  most of  the  non-costed  units. Indeed  the petitioner in " Writ Petition no. 279,  did  not even reply or send any memoranda to the Commission  although the  questionaries  were sent to it.   Similarly  in  Andhra Pradesh  Zone three other units.   Amadalavalase  Coperative Agricultural  &  Industrial Society Ltd.   Sivakarni  Sugars

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Ltd.  and  Challapali Sugar Ltd. did not send any  reply  or memoranda as is apprarent from Appendix IT in the report. As  regards  the averages and weighted averages  which  have beer,  worked  out  by the Commission  for  the  purpose  of fixing  .prices  in  respect  of  the  varying  figures   of different  items  of cost we are unable  to  appreciate  how these have not been properly worked out.  It may be that  if a different method had been adopted than the one followed by the Commission the averages 896 worked  out might have been different but the  principle  Df weighted  average  which was followed with regard  to  those items where it could be applied is a well recognised one and was adopted even by the Sugar Enquiry Commission in 1965. The  method  of working out the weighted  averages  is  well known in the determination of price and has been employed in working  out  the cost structure of the sugar  industry  and fixing  of  sugar prices on prior occasions also,  e.g.,  in 1959  by  the  Tariff Commission.  As pointed  out  in  Cost Accounts’  Handbook edited by Theodore Lang, 1945  Edn.  the items of a series to be averaged vary in importance in  some quantitative  way in addition to the  importance  explicitly given  by  the figures in the series.   An  illustration  of weighted  average  occurs  in pricing  stores  issues  where different  lots  of  raw  material  have  been  acquired  at different prices.  In such a case a simple average of  price is  usually  not considered desirable.  Examples  have  been given  in the book to show that the simple average while  it may  be  technically  correct is  practically  valueless  or positively  misleading under certain circumstances.   "Where quantities  as well as dollar values are to  be  considered, weighted  averages  are far more significant than  a  simple average." We may next deal with the harsh and unjust results to  which the  zonal  system adopted by the Commission  is  stated  to lead.   The  figures  given about the  actual  cost  of  the petitioning units worked out according to the tables and the formulae  given in the Tariff Commissions report  have  been produced  to  demonstrate the extent and  magnitude  of  the financial  loss  to which the petitioners are being  put  or will be put.  The stress has been on the utter disregard  of the  principle  embodied in sub-s. (3C) of s. 3 of  the  Act that  a producer is entitled to a reasonable return  on  the capital  employed  in the business of  manufacturing  sugar. The  petitioners  have sought to establish that  instead  of earning  any return they are actually out of pocket  in  the matter of cost owing to the price fixation by the government worked  out  in  accordance with the  tables  given  in  the report.   Apart from what has previously been noticed  about the  various factors which may be responsible for  incurring of high cost we are unable to agree that the price  fixation has to be made with reference to the cost of each individual unit  in  the zone.  As pointed out in our judgment  in  the connected case (supra) the basis of a fair price would  have to  be  built on a reasonably efficient  and  representative cross-section  on whose working cost schedules will have  to be  worked out and price determined by the government  under s.  3(3C)  of the Act.  The cost schedule must  be  such  as would  do justice to the weak and strong alike.   There  can thus be no doubt that 897 there  was ample and abundant justification  for  continuing and sustaining the zonal system. We shall now deal with clause (b) of question No. 2. In Writ Petition  No. 280/72 it has been pointed out that the  peti-

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tioner factory incurred heavy loss in spite of sale in  free sugar No sugarcane, it has been claimed, was available’  for more  than 60 days i.e. from December 22, 1971  to  February 19,  1972.  The actual cost of production has come  to  ’Rs. 173.90.  The  recovery of this factory is  9.54%.  There  is another  factory  situate At Rayagoda at a  distance  of  80 miles  from  the petitioner.  As that happens to be  in  the State of Orissa the price of Rs. 152.98 per quintal has been fixed  for sugar in that zone.  If a division had not  taken place  on  linguistic  basis  but  agro-economic  and  agro- climatic factors-had been taken into consideration the peti- tioner would have got a price of Rs. 152.98 in the same  way as  the  factory  in the Orissa State.   According  to  this petitioner  the reasoning of the Tariff Commission as  given in  para 31 at page 108 of the report for  constituting  the zones on the basis of States is altogether unconvincing  and highly  fallacious.   In  Writ  Petition  No.  283/72   (The Chittoor Coop.  Sugar Ltd.) the factory is on the border  of Tamil Nadu State but is within the State of Andhra  Pradesh. There  are two factories in the Tamil Nadu State  which  are said  to  be  at a distance of 80  km.  from  this  factory, namely,  Murgappa (Palar Sugars Ltd.) and North Arcot  Joint Coop.  Sugars Ltd.  The levy price fixed for Tamil Nadu zone for  1971-72 is Rs. 134.01 per quintal.  Although it can  be safely  presumed  that these factories within such  a  short distance  would  be governed by the same  agro-climatic  and agro-economic   conditions  yet  they  have   been   grouped differently  resulting in serious disparity in  prices.   In Writ  Petition No. 293/72 the factory is at Bobbili  in  the State  of Andhra Pradesh.  The duration during the  year  in question  was  78  days,  the  recovery  being  8.929%.  Its crushing capacity is 850 tonnes per day as compared with the Nizam  Sugar Factory Ltd. which has a duration of III  days, recovery of 11-18% and crushing capacity of 4500 tonnes  per day.  This Bobbili factory is a pigmy as against the  giant. Its  actual cost per quintal is Rs. 184.65 whereas the  cost of  the Nizam Sugar Factory is Rs. 117.00. Total  production of the petitioner factory is 50,000 odd tonnes whereas  that of the Nizam Factory would be about 5 lakh tonnes odd.   The levy  price for both these factories has been fixed  at  the same figure.  All this, it is urged, shows the gross defects in the state-wise zonal system.  If there are very big units and there are very small units in the same zone either  they must be classified according to their size or the price must be fixed for each individual unit. The  criticism  that climatic and  agro-economic  conditions have  not been taken into consideration  while  constituting the zones does 898 not  appear  to be valid.  The climatic  conditions  in  the State of Assam, West Bengal, Orissa and Kerala which are  in one  zone seem to be substantially similar.  The  Commission has  pointed out that there is only a small number of  units in  each one of these States and the costs are more or  less similar.   Bihar has beer. divided into two zones  and  U.P. into  three zones.  The’ reasons are given in para  8.16  of Chapter  VIII of the 1969 report.  It has been  pointed  out that the climatic conditions of the’ two areas, namely,  the Meerut Division of the Western U.P., and Gorakhpur  Division are different as they are separated by 300 miles.  The units in  Central  U.P.  had also, for the same  reasons,’  to  be constituted  into  a separate group.  On similar  basis  the units  in Bihar had been sub-divided into two  zones,  North and South.  It is, therefore, altogether futile to say  that the  zoning’ should not have been done state-wise.   If  any

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other  system  had  been  followed  it  would  have   become impossible to work out a proper cost schedule for the  zone. For instance, if the Chittoor Coop.  Sugars Ltd. which is in Andhra Pradesh towards the extime end and which is very near the State of Tamil Nadu had been grouped with the  factories in  Tamil  Nadu  or  if the  Nizam  Sugar  factory  and  the Nizamabad Coop.  Sugar Ltd, which are quite near the  border of Maharashtra State had been grouped with the factories  in Maharashtra,  it  would have created  several  problems  and difficulties  particularly with reference to all the  taxes, duties etc.  which are levied by each State and  also  the wages  which  are payable to the workers  in  the  different States which admittedly vary from State to State. Coming to clause (c) of question No. 2, the allegations  re- garding discrimination are more or less general based on the various  disparities already noticed.  In Writ Petition  No. 279/72 more detailed allegations have been made which may be referred  to briefly.  Before the constitution of  15  price zones,  all the southern States were getting the same  price except  the  Nizam  factory and  the  Nizamabad  Cooperative factory Which were in a different zone (i.e. Zone 1)  though situate   in  Andhra  Pradesh.   According  to  the   Tariff Commission,  1969, the cost structure depends mainly on  the recovery  and duration but the impugned order  prescribes  a higher  selling  price in the case of  Maharashtra,  Mysore, Gujarat, Tamil Nadu, Uttar Pradesh etc. than Andhra  Pradesh although the duration and recovery are higher in the  former States than the latter State.  Even according to the  Tariff Commission  report the cost of production in Andhra  Pradesh worked  to Rs. 103.07 for 1969-70 for which a levy price  of Rs  i5O.25  was  fixed whereas for Tamil Nadu  the  cost  of production worked out to Rs. 97.83 while the levy price  has been  fixed at Rs. 166.16. Thus the classification  has  not been made on a 899 rational basis having any nexus with the object sought to be achieved,  i.e.  fixation of a fair price.   It  is  further stated that in case of factories with longer crushing season where  labour  works  for  8 to  10  months,  the  retaining allowance  payable is negligible or nil.  This is  the  case with  units in Maharashtra, Gujarat, Mysore,  Uttar  Pradesh etc.  In states like Andhra Pradesh where duration’ is  much less,  the management has to pay the wages to  the  seasonal staff  by  way  of retaining allowance.  This  adds  to  the costs. In reply it has been pointed out that the prices were  fixed in   the  different  zones  on  the  basis  of  the   Tariff Commission’s recommendations.  If there is any variation  in the  prices fixed from zone to zone it is the result of  the different  schedules  recommended for valid reasons  by  the Tariff Commission.  The incidence of retaining allowance and other costs on the working of the factories in the different zones have been taken into consideration by the Commission. In the elaborate arguments on behalf of the sugar producers. hardly  any serious attempts was made to press the  question of  alleged discrimination, particularly if the adoption  of the  zonal  system  could not be  demolished.   Once  it  is recognised that prices could be fixed according to the zones the  cost  schedules  that  have  been  worked  out  by  the Commission  have necessarily to be different for each  zone. The  various  items which go into cost differ from  zone  to zone.   It is not possible to take out only a few items  and find  discrimination,  disregarding all the other  items  or components  of  costs  on the basis of  which  price  deter- mination  has to be made.  We are unable to hold that  while

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classifying    zones    or    geographical-cum-agro-economic consideration, any discrimination was made or that the price fixation according to each zone taking into account all  the relevant  factors would give rise to such discrimination  as would attract Art. 14 of the Constitution. While examining question No. 3 learned Solicitor General has reminded  us  that "cost-plus" cannot always be  the  proper basis for price fixation.  Even if there is no price control each unit will have to compete in the market and those units which are uneconomic and whose cost is unduly high will have to compete with others which are more efficient and the cost of which is much lower.  It may be that uneconomic units may suffer  losses  but  what they cannot achieve  in  the  open market they cannot insist on where price has to be fixed  by the  government.  The Sugar Enquiry Commission in  its  1965 report  expressed the view that "cost-plus" basis  of  price fixation  perpetuates inefficiency in the industry  and  is, therefore, against the long-term interest of the country. 6--521Sup.CI/73 900 In  the  book of Cost Accounting by John G. Blocker  and  W. Keith Weltmer it has been stated that even from the point of view of the management, there are three important defects in the older types of cost analysis; the importance  attributed to  actual costs, the historical aspect of the cost  figures and the high cost of compiling actual costs.  Management  is led to believe that actual costs are the result of efficient operation,   when  in  reality  actual   costs_may   include excessive   quantities   of   material,   defective   parts, ineffective use of labour and an unnecessary amount of  time in production.  In other words the cost analysis may not  be an indicator of efficient plant operation.  Therefore.  pre- determined standard material, labour and overhead costs  are an  important aid in formulating price policies in  planning production and in measuring efficiency.. In  the book titled "Price Fixation in Indian  Industries"-a study  prepared  in  collaboration  with  the  Institute  of Chartered Accountants of India-it has been stated at page XV of  the introduction that "costs alone do not determine  the prices.  Cost is only one of the many complex factors  which together determine prices.  The only general principle  that can  be stated is that in the end there must be some  margin in  prices over total costs, if capital is to be  unimpaired and  production  maximised by the  utilisation  of  internal surpluses".  It is further stated at page (XVI) that  "while the "cost plus" pricing method is the most common, it may be argued  that it is not the best available method because  it ignores demand or fails to adequately reflect competition or is based upon a concept of cost which is not solely relevant for pricing decision in all cases.  What is essential is not so much of current or past costs but forecast of future cost with  accuracy...... Generally pricing should be such as  to increase production and sales, and secure an adequate return on capital employed".  At page 3 the problem of selection of units  for  cost  study has been  considered.   The  general practice  is to select units of average size from  different centers.   Another  determining factor in the  selection  of units  is the availability of cost data of the units  to  be selected.   In  India one hardly comes  across  standardised cost  acCounting in the manufacturing units.  In general  it may  be said that the selection of units should be  done  on the basis of availability of data, structure of industry and the objective for which the study is being made. Sub-section  3C itself lays down the various  components  of determining  the price of sugar.  Clauses (a), (b)  and  (c)

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relate to the total cost which consists of the minimum price of sugar-cane as fixed by the government, the  manufacturing cost and the duty or tax.  Clause (d) relates to the  return on the capital 901 employed. The  very fact that clause (a) provides  that the minimum price   fixed for the sugarcane has to be  taken into account shows thatthe  actual  cost  is   immaterial. Moreover under this sub-sectionprice   can   be    fixed according to certain zones.  While doing so it is altogether impossible  to take the actual cost of each manufacturer  or producer and fix the price accordingly.  In such a case  the methods  followed  by the Tariff Commission have  stood  the test  of  time and the sub-section  itself  incorporates  or embodies  the principles which have been followed  in  price fixation of sugar.  It is not therefore possible to say that the  principles  which  the Tariff  Commission  followed  in fixing  the  prices  for  different  zones  are  either  not recognised  as  valid principles for fixing prices  or  that simply because in case of some factories the actual cost was higher than the one fixed for the zone in which that factory was situate the fixation of price became illegal and was not in  accordance with the provisions of sub-s. (3C).   It  has not  been denied that the majority of sugar  producers  have made profits on the whole and have not suffered losses.   It is only some of them which assert that their actual cost  is far  in  excess of the price, fixed.  That can hardly  be  a ground for striking down the price fixed for the entire zone provided  it has been done in accordance with  the  accepted principles.   The methods employed by the Tariff  Commission 1969  in preparing the cost schedules as also  the  formulae for working out cost schedules for the future are fully  set out in the Commission’s report and have been also  discussed in the connected case (supra).  We need not go over the same matters again. There is one matter on which the criticism on behalf of  the sugar  producers is legitimate and the force of  which  even the  learned Solicitor General could not deny.   The  Tariff Commission  had  said  in para 9.14 that  after  taking  all factors  into  consideration  it had  been  discovered  that factories  with  capacities of less than 1000 tonnes  had  a disadvantage  of the order of Rs. 3/- per quintal and  those above 1500 had a relative advantage of the order of Rs.  2/- per  quintal  compared  to the  conversion  charges  of  the average capacity range which had been adopted in formulating the basic cost schedule.  The Commission proceeded to say :               "Having regard to the fact that we have recom-               mended fixation of uniform prices on the basis               of  zonal  averages it is not  practicable  to               make  the necessary adjustment for  rectifying               the   disparity   in  the   ex-factory   price               structure.  We would, however, suggest that as               a measure of neutralising these relative, cost               advantages  related to capacity a graded  slab               system  of  excise duty may be  introduced  in               place of the present flat rate". 902 This  recommendation was not accepted by the government  and it  was  stated that a decision on this  recommendation  was being deferred.  It is high time that the government took  a decision on this vital recommendation.  It cannot be  denied nor  has thee learned Solicitor General made any attempt  to do so that the aforesaid recommendation of the Commission is based  on  sound reasoning and deserves to be  accepted  and implemented.  But as the government was not bound to  accept

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every  recommendation  of the Tariff Commission  it  is  not possible for us to strike down the Price Control Order.   It is for the Government to take an early decision with  regard to the above recommendation of the Tariff Commission. On  the  question of return which has been  allowed  of  Rs. 10.50  per  quintal  a  great  deal  of  argument  has  been addressed on behalf of. the sugar producers.  Firstly it has been  submitted  that  according to  the  report  of  Tariff Commission  this  figure which was to be, static was  to  be effective for a period of 3 years only and the prices cannot be fixed on the basis of a static figure for all times.  The rate  on  which money can be borrowed from the banks  it  is pointed  out, has gone up from 9 % to II%.  There are  other charges  like  bank commitment charges etc  which  the  1969 Commission  has  not taken into account.  The value  of  the fixed assets has also gone up and that fact has been ignored by  the  Commission.  The main criticism is founded  on  the figure  of  Rs.  10.50 per quintal which, it  is  said,  was worked  out when the cost was in the region of about Rs.  96 per  quintal in 1966-67.  Even according to  the  government figures  the  cost  has gone up much  higher.   The  return, therefore,  of Rs. 10.50 per quintal which was fixed on  the basis  of cost of Rs. 96.20 per quintal could  not  possibly furnish   the  figure  of  an  adequate  return  which   was contemplated  to  be  12.5% on the  capital  employed.   The figures worked out by the learned counsel for the  producers and those of the government hardly agree and it is difficult to reach any definite conclusion whether the basis on  which the Commission recommended that a fixed return of Rs.  10.50 per  quintal  should  be  allowed  by  way  of  return   was unrealistic  and could not be adopted for the  future.   The Commission was fully in possession of all the figures of the price as also the working capital on which the return had to be  determined.  It was satisfied that the  requirements  of the  sugar  industry  could be more  equitably  met  by  the departure from the conventional method, namely, of giving  a return  on  the basis of certain percentage on  the  capital employed  and  by  adopting instead  a  uniform  amount  per quintal  as  the  margin to be added to the  other  cost  in arriving  at  a fair price of the sugar.  According  to  the calculations  made  by the Commission that would  provide  a relatively efficient unit an amount sufficient to declare  a dividend of the order of 7 to 8% on paid               903 up share capital after meeting its other commitments such as interest  and taxation.  It was stated in arriving  at  this decision  the Commission had made proforma  calculation  for return applying 12-1/2% to the zonal averages of the capital employed and the results are tabulated in Appendix 37.   The variations  ranged  from  8.23 to  Rs.  15.73  per  quintal. Adding  to  this the element of depreciation, the  over  all difference  ranged from Rs. 10.01 to Rs. 21.96. By  adopting the  standardised figure of Rs. 10.50 per quintal the  range of  variation had been narrowed down from Rs. 11. 88 to  Rs. 16.94.  This  was  considered  to  be  a  more  satisfactory alternative  not  only  from  a  producer’s  but  also   the consumer’s  point of view.It was observed that in the  areas where large number of low cost units subsist this amount  of return  available  in  terms  of money  per  unit  of  sugar produced would be relatively higher. This should provide the needed   impetus   for   further   capital   formation   for rehabilitation,  expansion and modernisation.  According  to the  statements furnished by some of the producers, e.g.  in Writ Petition No. 297 (Standard Refinery) the actual payment on  account  of interest and financial charges had  come  to

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15.28%  per  quintal.  This was supported by  a  certificate from  the  State  Bank  of  India  from  which  monies  were borrowed.  Similarly in the case of Writ Petition No. 298/72 (Jagatjit  Sugar  Mills)  it was  claimed  that  the  actual interest  charges  incurred worked out at the  rate  of  Rs. 10.40 per quintal which entirely wiped out the provision for a return of Rs. 10.50 per quintal on the capital employed. The cases of individual units can hardly furnish a guide for standardising  items of cost, the capital employed  and  the return  in  the  matter of price fixation for a  zone  or  a region  as a whole.  Nor can charges on account of  interest incurred  by some units in the entire zone reflect a  proper working and management of all the units in that zone.   When prices  have  to  be  fixed not for  each  unit  but  for  a particular  region  or  zone  the  method  employed  by  the Commission was the only practical one and even if some units because  of circumstances peculiar to them suffered  a  loss the  price  could not be so fixed as to  cover  their  loss. That  cannot  possibly be the intention  of  the  Parliament while enacting sub-s.3C of s.3 of the Act.  If that were  so the price fixation on zonal or regional basis would have  to be completely eliminated.  In other words the entire  system of  price  control  which is contemplated  will  break  down because  fixation  of price for each unit apart  from  being impractical  would have no meaning whatsoever and would  not be conducive to the interest of the consumer.  We may  point out  that  in the case of Premier Automobiles  v.  Union  of India(1)  16% return on the capital employed was  considered to be reason- (1)  A.I.R. 1972 S.C. 1690. 904 able.   But,  it  must  be  remembered  that   unfortunately whenever  that decision has been discussed no one has  taken care  to under stand and appreciate that out of  the  return the  car  manufacturer were made liable to pay  the  minimum bonus of 4%, the interest of borrowings, financial  charges, warranty charges and in some cases the gurantee  commission. In the return which has been allowed to the sugar  producers neither the minimum bonus not additional amounts of warranty and guarantee charges are payable by them. In the letter of 8th October 1970 the Commission pointed out that the order to arrive at the figure of the return on  the capital  employed of Rs. 10.50 per quintal the.   Commission had  made a study of the various figures in respect  of  the costed period average of 5 years’ duration and recovery  and proforma  calculation for the capital employed.   Thereafter the  capital employed had been computed on a  uniform  basis taking  into  account the written down value of  assets  and working  capital  equal to six months’  cost  of  production including  depreciation.   After deducting the  average  net fixed assets- from the capital employed the working  capital came  to Rs. 55 per quintal.  It was stated that instead  of the  figures indicated in para 9.13 of the 1969  report  the working capital should be taken at the figure of Rs. 55  per quintal  for regulating additional interest due to  carrying on larger stock on account of increased production.  It  may be,  mentioned  that in the 1969 report the  figure  of  Rs. 42.40  per  quintal had been calculated by  way  of  working capital  (vide  para 9.13 of the report).   This  meets  the criticism made on behalf of the producers that although  the rate  of  interest  has increased, the  Commission  has  not allowed any addition on that account. Coming to question No. 4 a good deal of attack has been made on the depreciation allowed by the Commission.  Depreciation is  essentially a part of the conversion costs.   Under  the

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terms  of reference the Tariff Commission 1969 was asked  to indicate  the basis on which the provision for  depreciation should be made.  The question was whether depreciation to be allowed  in  the  cost structure  should  be  calculated  on replacement value or on written down value of the assets and how individual factories which modernise the plant or expand their  capacity  should be compensated  for  the  investment made.   The  Sugar Enquiry Commission 1965  had  recommended depreciation  on written down value but had  also  suggested rehabilitation  within a specified period.  On  the  general question  of depreciation the Boothalingam Committee in  its report   on  rationalisation  and  simplification   of   tax structure  came  to the conclusion that over the  period  of years depreciation should be allowed in such a way that  20% more than the original cost is provided for.  The 905 various    bodies   which   either   appeared     or    sent representations  to the Tariff Commission 1-969 put  forward different  points of view.  The Commission after  referring, to  the practice followed in other countries pointed out  in para 9.9.4 that in the past a few departures from the normal practice of allowing depreciation on the written down  value adopted  for  income,  tax assessment had  been  made.   For instance,  in  the  case of steel  prices  report  1962  the Commission  adopted  a standard block and  a  straight  line method.  In the report on Rubber Tyre and Tube 1965  special depreciation  was allowed in addition to the normal  amount. ’In  para 9.9.6 the Commission stated that the majority,  of units in sugar industry were more than 30 years old.  At  9% depreciation  for plant and machinery and 21% for  buildings most  of  the original ’assets have been  written  off.   To calculate the amount of depreciation that would have accrued to  individual units during the course of the last 30  years or  so on replacement basis year by year and  simultaneously to  revalue  the assets in order to arrive  at  the  present assets  was  not an easy task.  After taking  the  necessary figures  the Commission found that comparatively speaking  a large   number  of  units  required  rehabilitation   having depreciation  much lower than the average of  the  industry. The,  Commission felt that as it was  making  recommendation only  for a period of three years it would not be  advisable to  work  out depreciation on replacement value     for that short period when that practice had not been followed in the past.   The Commission decided in favour of  continuing  the existing method of computing the quantum of depreciation  on the  basis  of zonal averages of the costed units.   It  was added  that  the  figure so  adopted  was  automatically  to undergo  an  upward  revision  if  and  when  the   revision contemplated by   The darft rules seeking to  liberalise the depreciation  to  be  earned under the Income  tax  law  was brought into effect. On behalf of the sugar producers it has been stated that the Tariff  Commission has merely taken the formulae  under  the Income  tax  law of the written down value but has  made  no provision  for  adding  the value  of  new  improvements  or additions. It  appears from the letter of the Traiff  Commission  dated July 29, 1970 from which extracts have been furnished ’to us by  the  learned Solicitor General that in  accordance  with what  was said in para 9.4.6 of 1969 report  the  commission has  recalculated the figure in respect of  depreciation  in accordance with the amended provisions of the income tax law and  the  rates  have been revised for  different  class  of assets  for  the period of the estimate.  On behalf  of  the government a statement has been furnished to us showing  the

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impact  of  variation as a result of introduction  of  new rates of depreciation under the 906 Income  tax Rules per quintal of sugar over the  basic  cost schedule  in the 1969 report.  It is quite clear, from  that statement  that  the  increase  in  depreciation  has-  been allowed  in  accordance with the new  rate  of  depreciation under  the Income tax Rules and the criticism on  behalf  of the,  producers on this point does not appear to be,  valid. It  is  pertinent  to  note that  in  the  case  of  Premier Automobiles case (supra) also this Court upheld depreciation being  allowed on the basis provided for by the  income  tax law   and  did  not  accept  the  contention  of   the   car manufacturers   that   depreciation  allowance   should   be calculated on replacement cost.  The following  observations may be reproduced :               "The  depreciation which is allowed under  the               tax laws is very liberal and we see no  reason               to pass on the burden to the present  consumer               who,  is not likely to get any benefit out  of               the replacement proposed to be provided for by               the manufacturers". As  regards  rehabilitation  the  Government  of  India  had appointed  a committee in June 1963 to examine the  question of   rehabilitation  and  modernisation  of  the   old   and uneconomic   units   in  the  sugar   industry   under   the Chairmanship  of  Shri  S. N.  Gundu  Rao.   That  Committee submitted  its  report in 1965 and  recommended  on  various matters including the assessment of need for  rehabilitation modernisation and expansion of uneconomic units.  The  Sugar Enquiry Commission 1965 agreed with the report of the  Gundu Rao Committee that there was need for providing special loan assistance to the industry for the purpose of rehabilitation and  modernisation.  ’It was suggested that  the  Government could provide finances for rehabilitation and  modernisation through   the  existing  financial  institutions   such   as Industrial   Development   Bank   and   Industrial   Finance Corporation.   In the 1959 report of the  Tariff  Commission the principle that a uniform allowance for rehabilitation to all  units  in  the  sugar industry  had  been  held  to  be unwarranted  since  such  a  provision,  according  to   the Commission,  while giving necessary resources to  the  needy ones  would accrue as an extra element of profit to  others. The  reason given was that generally the average life  of  a sugar plant and machinery is 20 to 25 years.  Therefore  the units which had gone into production in recent times  should have  no problem of rehabilitation for some years  to  come. Those units which had carried out substantial expansion  and had in the process effected renovation and modernisation  of their  existing equipment would not require the same  amount for   further  rehabilitation  as  the  units   which   were established in prewar years and had carried out no expansion and  no rehabilitation.  The Commission had found  that  the industry had done well during the four years preceding the 907 report   It had, therefore, resources which could have  been utilised  for  rehabilitation and modernisation of  the  old plant  and,  equipment.   In  other words  in  1959  it  was considered  that  nothing need be given by  way  of  uniform allowance  for rehabilitation in the fair selling  price  of sugar.   The government, it was suggested, should  make  the necessary   arrangement  for  making   available   financial assistance  lo the units in sugar industry on similar  lines as those made for the cotton and jute textile  manufacturing industry for the purpose of renovation and modernisation  of

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their plant and equipment. Before  the  1969 Tariff Commission the Sugar  industry  had pressed for the grant of rehabilitation allowance equivalent to  the amount of difference between the  replacement  value and  the historical depreciation.  After giving the  various figures  in para 9.10.2 the Commission considered  that  the depreciation  rate would come to Rs. 4.22 per quintal.   The Commission,  however, proceeded to say  that  rehabilitation should  not  be  linked  to  the  replacement  cost  or  the difference   between   depreciation   at   replacement   and historical  cost.   At  the same time it  was  necessary  to ensure that in the interest of the maintenance of continuity of  sugar  production at an appropriate level  such  of  the units  which  could  be  brought to  a  standard  of  normal efficiency should be helped to rehabilitate themselves.   In the  assessment of prices by region as well as  fixation  of price on the basis of zonal schedules it was not possible to take into consideration the needs of individual units.   The best  that could be done was to provide for a join fund  for the entire industry.  In para 9.10.4 the Commission accepted the  case  for allowing for the next 3 to 5 years  at  least half this amount or Rs. 2/- per quintal in round figures  by way of rehabilitation grant to the industry either by way of direct addition to the controlled price or if so  preferred, in  the  interest  of the consumer  indirectly  by  suitable adjustment  in the burden of taxation.  With the  amount  so generated a fund could be, established only for meeting the cost   including  the  cost  of  finance   for.creation   of additional  assets to improve the productive  efficiency  of the  deserving  units.   In the cost  schedules  which  were prepared the amount of Rs. 2/- per quintal was added by  way of  rehabilitation  for determining the  ex-works  price  of sugar. In the resolution dated February 20, 1970 of the  Government of  India  the above recommendation was noticed but  it  was stated  that  a decision on that matter  had  been  deferred pending  consultation with the concerned  interests.   Apart from  relying on the discussion in the reports of  1959  and 1965 the Solicitor General has referred to the  observations of  this  Court in the Premier Automobiles case  (supra)  in which  while  considering the question of  depreciation  the principle that it should be allowed on replacement basis was not accepted.  According to report of the Car Prices 908 Enquiry  Commission if the manufacturers were to keep  apart not only the amount of depreciation but also the development rebate and other reserves to. which they were entitled under various  tax  and other laws and invest them  separately  or even  in their business, depreciation funds with the  amount thus  provided  for  could be built up and  these  could  be invested whether inside or outside the business. It  is unfortunate that nothing has been done  to  implement the   recommendation  of  the  Commission  in   respect   of rehabilitation presumably, we are told, because the question of    nationalisation   of   sugar   industry   was    under consideration.   The conditions which prevailed at the  time of  the 1959 report and the 1965 report were  different  and the  latest view expressed in the 1969 report ought to  have received  serious consideration.  But we are unable to  hold that merely because Rs. 2 per quintal as recommended by  the Commission has not been taken into account while fixing  the price  of  levy sugar the price as fixed  should  be  struck down.   The  non-inclusion  of  this amount  is  in  no  way violative of the provisions of sub-s. 3A of s. 3 of the Act. We  have  however, no doubt that the  government  will  give

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serious and immediate consideration to this matter and  take a decision on it without any further delay. We may now refer to the escalations (question No. 5) on  the wages, cost of packing, electricity duty, transport  charges on cane etc.  These matters are all dealt with in the latest note  of the Tariff Commission on the cost increase  in  the sugar  industry  a copy of which has been  produced  by  the Solicitor  General  and  in  which  escalations  have   been allowed.    The  Tariff  Commission  did  not  consider   it necessary to allow increase in the cost of power, fuel,  and consumable  stores as it was considered that  the  estimated provision  of 3% increase per annum in the cost  of,  stores and repair should take care of the increase for the  current price  period.  As regards the incidence due to increase  in road  transport cost it was stated that the  Commission  had taken the same into account while recommending the  schedule of  price for the period ending 1971-72.  We have  not  been shown  any  serious  inaccuracy or  infirmity  factually  or otherwise in the escalations allowed by the Commission which have  been  worked  out by the experts  except  the  general ’argument  which  we have not accepted  that  the  increases allowed are not commensurate with the actual cost of some of the units. A  few other matters (covered by question No. 6) may now  be considered  which were brought to our notice.  The first  is about  gratuity.  The first Wage Board had recommended  that it  should be paid by the sugar producers to its  employees. The 909       complaint  of  the producers was that no  account  had been  taken  by  the Tariff Commission of  this  item.   Our attention  has  been  drawn  to  the  enactment  of   recent legislation  under which the rate of minimum bonus has  been raised  from  4% to 8.33%. it has been urged that  when  the prices  were  fixed  by the impugned  order  the  additional amount could not be taken into account  while    determining the cost of production.  As the producers will be bound  to pay  the bonus at the enhanced rate they will be, put  to  a good deal of loss until some provision is made for  addition ,of  that amount for the purpose of working out  the  levy prices.. So far as gratuity is concerned it has been pointed out by the Solicitor General that in Form appearing at  page 192  under ’Salaries and Wages’ item 11 relates to  gratuity and therefore gratuity had been included.  There are  hardly any  clear  pleadings’ in the writ petitions on  this  point from  which it can be established and gratuity has not  been included.   We  are  unable to accept  the  contention  that payment of gratuity or liability thereof has not been  taken into account while fixing the price for levy sugar.      The Payment of Bonus Amendment Ordinance 1972 which has been promulgated recently was published in the Government of India  Gazette dated September 23, 1972.  Section 3  of  the Ordinance provides :- s.3 "Section 10 of the principal Act shall be renumbered as. sub-section (1) thereof, and               (i).............................               (ii)...............................               (2)   Notwithstanding  anything  contained  in               subsection (1), but subject to’ the provisions               of  section 8 and 13, every employer shall  be               bound  to pay to every employee in respect  of               the  accounting year commencing on any day  in               the  year 1971 a minimum bonus which shall  be               eight and one-third per cent of the salary  or               wage  earned  by  the  employee  during   that

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             accounting year or eighty rupees whichever  is               higher  whether  there  are  profits  in  that               accounting     year    or    not:     Provided               that.................. On behalf of the sugar producers it has been urged that  the liability to pay the additional amount of minimum bonus will commence in respect of the accounting year commencing on any date  in the year 1971.  It will, therefore, cover the  year 1971-72 for which the prices of sugar have been fixed by the impugned order.  Since the additional amount has to go  into the manu- 910 facturing cost the price as fixed cannot be held to be valid and  legal.   The learned Solicitor General,  on  the  other hand, says that since the Ordinance has come into force  now it  was  neither  practicable  nor  possible  to  take   its provisions  into account while fixing the prices under  the impugned order and the same cannot be rendered illegal by  a subsequent  legislation  which  has  come  into  force  only recently.   In  our  opinion  the prices  as  fixed  by  the impugned  order  cannot be struck down because of  the  pro- mulgation  of the Ordinance by which the amount  of  minimum bonus  has  been raised from 4% to 8.33% of  the  salary  or wages earned by the employees during the accounting year  or Rs.  80 whichever is higher.  But there can be no manner  of doubt  that the government will have to take some  immediate action by either .making some ad-hoc provision in respect of the prices or taking some such other step which may be  open to it to give the necessary relief to the sugar producers in this behalf. As the Bonus Ordinance has been promulgated after the prices were  fixed  by  the impugned order that  Order  cannot  be struck  ,down on the ground that the prices fixed by it  did not  take  into account the changes in the rate  of  minimum bonus  made  by  the Ordinance.  Even so,  in  the  changed circumstances, the Government ought to make modifications in the impugned order in respect of the prices of levy sugar so as  to adjust them in accordance with the provisions of  the Ordinance.   Except for the above the writ  petitions  shall stand  dismissed with no order as to costs.  Liberty to  the parties  to file applications for directions in  respect  of the  Bank Guarantees furnished by them in pursuance of  stay orders passed by this Court. V.P.S.                  Petitions dismissed. 911