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PETITIONER: PREMIER AUTOMOBILES LTD. & ANR.  ETC.

       Vs.

RESPONDENT: UNION OF INDIA

DATE OF JUDGMENT24/11/1971

BENCH: GROVER, A.N. BENCH: GROVER, A.N. HEGDE, K.S. KHANNA, HANS RAJ

CITATION:  1972 AIR 1690            1972 SCR  (2) 526  CITATOR INFO :  E          1973 SC 734  (34,38,41)  E&D        1974 SC 366  (63,64)  RF         1975 SC 460  (14)  RF         1978 SC1296  (34,65,69)  RF         1986 SC1999  (11)  F          1987 SC1802  (9)  R          1990 SC1851  (36)  RF         1992 SC1033  (33)

ACT: Motor Car  (Distribution and Sale) Control (Amendment) Order 1969  passed  under  s.  18G  Industries  (Development   and Regulation)  Act,  1951--Fixation of ex  factory  prices  of motor  cars produced in India-Recommendations of  Commission of  Inquiry-Production  capacity  determination  of-Expenses relating  to warranty and bonus whether to be excluded  from the   ex-works  cost-Adoption  of  ’historical  method’   by commission for fixing cost for September 1969, propriety of- Escalation  clause,  necessity  of-Fair  return,  what   is- Depreciation of plant and machinery whether to be allowed on basis of original cost or replacement, value.

HEADNOTE: On the basis of the recommendation of the Tariff  Commission the   Government   of  India  promulgated  the   Motor   Car (Distribution and Sale) Control (Amendment) Order 1969 under s.  18G of the Industries (Development and Regulation)  Act, 1951.   By  this order the Government  fixed  the  exfactory prices  of  the  three cars  manufactured  in  India  namely Hindustan  Ambassador,  Fiat 1100-D and  Standard  Herald  4 Door.   These prices were inclusive of  dealers’  commission but did not include the excise duties, Central Sales-tax and local   taxes,   if  any,  and   transport   charges.    The manufacturers  or  dealers were prohibited from  selling  or offering for sale or otherwise transferring or disposing  of the motor cars for a price exceeding the price given in  the order.  The manufacturers of these vehicles and two of their dealers filed writ petitions in this Court under Art. 32  of the  Constitution  challenging the price fixed.  On  May  5, 1970  this  Court  after  partly  hearing  the   petitioners recommended  to the Government to appoint a  commission  for the purpose of suggesting a fair price for the three cars by

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taking  into  consideration all the relevant  matters.   The Government  accordingly  appointed  a  Commission  of  three members  headed  by  a retired High Court  Judge  and  by  a notification  dated June 5, 1970 all the provisions  of  the Commission  of Enquiry Act 1952 were made applicable to  the Commission.   The  Commission, decided to recommend  a  fair price  for two periods, (1) as in September 1969 and (2)  as in July 1970.  It was considered necessary to determine  the price  in  September  1969 because the  impugned  order  was promulgated at that time.  For the September 1969 prices the computation  was done according to the ’historical  method’, which meant that not only the prices in September 1969  were kept  in  view but also the value of pending stocks  of  raw materials  and the average of the price at  which  purchases had been effected at that time were taken into account.  The prices  for  July  1970 were computed on the  basis  of  the actual cost obtaining in the month of July 1970.  The report of the Commission suggesting fair prices for the three  cars in question was filed before the court.  The findings of the Commission  were criticised by the writ petitioners  on  the following  grounds : (1) That the Commission had  taken  the production  capacity  at an excessive figure  and  had  thus artificially  reduced the cost; (ii) that cost and  expenses on account of warranty and statutory bonus had been  wrongly excluded  from the ex-works cost; (iii) that in  fixing  the cost for September 1969 even the actual admitted cost  found by  the Commission had not been taken into account  and  the price  had  been fixed on the historical cost,  whereas  in. fixing  the price for July 1970 the projected and  estimated cost for July 1970 had been ignored; (iv) that no pro-vision had 527 been  made for an escalation clause in order to ensure  that the  prices  fixed would ensure for a reasonable  period  of time; (v) that the return which bad been allowed was  wholly inadequate  on the admitted and proved facts, and (vi)  that the depreciation of plant and machinery had been allowed  on the  basis  of  original cost whereas it  should  have  been allowed on the replacement value or on the peculiar facts of the  case.   It was common ground that  deviation  from  the report  of the Commission which was an expert body  presided over  by a former judge of a High Court should  be  directed only when it was shown that there had been a departure  from established principles or the conclusions of the  Commission were shown to be demonstrably wrong or erroneous. HELD  :  (By the Court) (i) The very concept of  fair  price vhich can be fixed under s. 18 G of the Act takes in all the elements,  which make it ’fair’ for the consumer  leaving  a reasonable  margin  of profit to  the  manufacturcr  without which  no  one  will engage in  any  manufacturing  activity Capacity  utilisation of a manufacturing unit,  the  quality oil its product, and the maintenance of proper standards  at various  levels of production are all relevant  factors  for the  determination of the price.  Capacity utilisation,  has to  be  on  the basis of what  can  be  reasonably  achieved keeping in view always the practical side. [549 H-550 A] Within regard to the Premier Automobiles at no stage  except for  the  second half of the year April 1970 to  March  1971 import licences had been granted for production of more than 1200 cars.  It was only in that year that for the first half it  was  granted for 6050 cars and for the second  half  for 7000  cars.  From the practical point of view therefore  the achievable  capacity for September 1969 could not have  been fixed  for  more than 12000 cars a year The  Commission  was right in fixing the achievable capacity for July 1970 at the

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figure of 14000 cats per year.  In regard to Standard Motors that  Commission  was not justified in  departing  from  the recommendations  of its technical committee and  fixing  the production  capacity  at  4000  cars,  and  1000  commercial vehicles  per  annum.  , On  an  overall  consideration  the capacity  of Standard,, Motors would be 3400. cars and  1000 trucks  as found by the technical team. [552 B-C;  553  A-B; 555 G] As  regards Hindustan Motors the production capacity  should have been assessed at the figure given by the technical team namely 30000 cars, and 5000 trucks per year.  The Commission was wrong in relying on the applications for import licences made  by Hindustan Motors and on their basis  assessing  the production   capacity   for  trucks  at  10500.    In   such applications  the  estimates given are likely to  be  Mated. The  technical  committee  had proceeded  on  the  basis  of independent  physical  checking  and  verification  in   all respects.   There  was no justification  for  rejecting  the opinion of the experts especially when no member of the team was  examined as a witness for finding out those  facts  and data  which the Commission had sought to use  for  rejecting the technical team’s report. [557 H-558 D] (ii) (a)  As  laid  down in the  order  promulgated  by  the Government in March 1968 under s. 16 of the Act all  defects due to faulty manufacture of workmanship shall be  rectified and  defective  parts replaced during  the  warranty  period without passing any part of the burden including  incidental charges to the consumer.  The effect of the above  direction cannot  be ignored although it may not be conclusive in  the matter  of  fixing  a  fair price.   The  statement  of  the Commission  that if the warranty was to be made out  of  the profits  every manufacturer would try to  minimise  warranty cost   by  improving  the  quality:  of  his   product   was unexceptionable.   If it is to be included in  the  ex-works cost it would 528 mean virtually passing it on to the consumer. [538 G-539 Al (b)  The  question  whether bonus is linked with  profit  or cost  stands  concluded by the provisions of the  Bonus  Act itself  as also the decision of this Court in Jalan  Trading Co.’s case.  The object of the Bonus Act as observed in that case  is  to make an equitable distribution of  the  surplus profits  of the establishment with a view to maintain  peace and harmony between the three agencies (capital,  management and labour) which contribute to the earning of profits.  The Commission  came  to the correct conclusion  that  bonus  is connected with profits and it cannot be included in ex-works cost. [540 E; 541 E] Jalan  Trading Co. (P) Ltd. v. Mill Mazdoor Union, [1967]  1 S.C.R. 15, referred to. (iii)     There  was no authority or principle on which  the method of calculating the ex-works cost on historical  basis could  be  justifiably  adopted for September  1969  when  a different  method was adopted for July 1970 cost.   The  ex- works  cost for September 1969 should have  been  determined according  to the current prices as was done with regard  to July 1970. [541 H] (iv) In  view of the rising prices of  components  provision for escalation and  de-escalation     of     car      prices was_necessary,  [Directions given] [543 A-D; 562 H] (v)  The  quantum  of return has essentially  to  vary  from industry  to  industry.  The Commission  took  figures  from authentic  sources  i.e. the report of the Reserve  Bank  of India  and  an  analysis carried out  by  the  Economic  and Scientific  Research  Foundation with regard to  the  return

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which  was  being  earned by the various  companies  on  the capital employed.  After taking the maximum return which  an investor  can expect from fixed deposits and other  relevant factors  into consideration the commission was of  the  view that  a  dividend  of 10% to the  equity  shareholder  after providing  for  the tax liability of the company  and  other outgoing  would be fair and reasonable.. The outgoing  which are to be met out of the return are (1) the actual  interest on  borrowings; (2) the minimum bonus; (3)  other  financial charges;  (4)  warranty  charges  and  in  case  of  Premier Automobiles the guarantee commission paid on loans  obtained from  foreign  sources and differences in  exchange.   After making  provision  for  these  outgoing  the  dividends   on preference shares, if any, the tax liability of the  company and  a return of 10% on the equity share capital, the  total profit  of the company as a whole was calculated which  when related to the capital employed of the respective  companies worked out to 15.43% in the case of Hindustan Motors, 16.22% in  that  of  Premier Automobiles  and  17.36%  in  Standard Motors.   Considering the above and taking an over all  view of  the  car  industry 16% return on  capital  employed  was considered   to  give  a  reasonable  return  to   the   car manufacturer. [545 E546 A] At  first  sight  it may appear that return of  16%  on  the capital  employed  is a very large return  but  this  return includes  numerous  items  which reduce the  return  to  the equity shareholder to a percentage which, even according  to the  Commission, on an average cannot exceed 10%.  The  plea of the car manufacturers for exclusion of warranty and bonus charges  from the return and for their inclusion in the  ex- works  cost  could not be accepted.  At the  same  time  the return  of  12%  recommended by the  Tariff  Commission  was wholly  inadequate  when all the items that  the  Car  Price Commission had mentioned had to be paid out of it. 529 The return of 16% granted by the Commission was a reasonable one  keeping  in  view the entire  circumstances.   A  total return of 16% will leave some margin if proper economies are effected   by   the  manufacturers   for   replacement   and rehabilitation  and improvement of the plant and  machinery. The  main  objective  is  to project  the  interest  of  the consumer while at the same time provide a reasonable  margin of profit to the producers.  The general approach has to  be to  determine  the ex-works cost and then to arrive  at  the fair price after examining other claims of the industry  and providing a reasonable return.  There was no principle which had been demonstrated to be wrong in the report of the  Com- mission so far as the fixation of the return was  concerned. [546 D-H] Even though the return to the equity shareholders of all the there companies may not be uniformly 10% it was not possible to make any distinction or discrimination between the  three manufacturers.  A separate rate of return for each could not be fixed when dealing with the automobile car industry as  a whole. [546 B-C] (vi) The  Commission was right in allowing  depreciation  on the  actual  cost  and not on the  replacement  value.   The depreciation  which  is allowed under the tax laws  is  very liberal and there is 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.   There was no serious infirmity or  flaw  in the  reasoning  or the conclusion of the Commission  on  the question of depreciation.  [548 A-C] ALSO HELD : (1) The amount payable on account of royalty per

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car  in  the  case  of  Standard  Motors  pursuant  to   the collaboration  agreement  the  renewal  of  which  had  been approved by the Government of India must be included in  the ex-works cost for July 1970 [562 E-F] (2)  The  conclusion  of  the  Commission  relating  to  the percentage of the local steel sheets by the Hindustan Motors was correct. [562 F] (3)  The  dealers, shall, for the present, be entitled  only to  the  mark  up in terms of  the  recommendations  of  the Commission. [562 G] On the relationship between taxation and the high prices  of cars  the  Court observed : It will not be out of  place  to notice  a few observations of expert bodies  about  taxation which  forms at least one third part of the price of a  car. The Tariff Commission in its third report published in  1968 recorded that high prices of the vehicles were due mostly to the existing multiple taxes on the automobiles at  different stages  of  production  and  sale.   It  had  recommended  a reduction  in  the burden of taxation which  would  lead  to reduction  in  the prices of cars.  The  Jha  Committee  bad emphasized  the  same  in  1960 and  had  pointed  out  that taxation  was  a burden on the consumer rather than  on  the producer.  The Car Price Enquiry Commission has said in  its main  report at page 292 :"The incidence of tax on a car  is very heavy inasmuch as it constitutes46%   of   the   ex- factory price. The car is no longer an item of luxuryand under the existing conditions it is fast becoming an item of necessity.   That being so, there is a case for giving  some relief  out of the excise duties and other levies which  are by  their nature multi-point taxes causing  hardship."  [436 F--537 A] Per Khanna, J. (Partly dissenting) The  production capacity which has to be taken into  account is  the achievable capacity of a plant run in  a  reasonably efficient manner.  Concerted effort has to be made to attain a  high  level of production for two obvious reasons  :  (1) supply  of new cars falls considerably short of  the  demand and the intending purchasers have to be kept on the  waiting list 530 for  inordinate length of time and (2) increased  production would bring down the ex-works costs of the car.  Although it would  not be practicable and realistic to insist  upon  the highest  or absolute efficiency, it would be equally  unjust and  inequitable  to throw the burden of inefficiency  of  a manufacturer  on the consumer in working out the  figure  of ’fair  price’  of  the  article  manufactured.   To  put  it differently,  the  authority concerned in  determining  fair price should not demand from the manufacturer the paragon of excellence in the matter of volume of production but at  the same  time the authority should not make the  consumer  bear the  margin  of  high  cost  resulting  from  avoiding   low production.   It  is,  of  course,  implicit  in  that  that reasonable facilities would be afforded to the  manufacturer for  procuring material like imported parts and steel  which is under the Government control so as to be in a position to manufacture  the requisite number of cars.  The  concept  of ’fair  price’ postulates that the price should be  fair  not only  to  the producer but also to the  consumer;  the  goal should be to arrive at just and reasonable rates. [566 E-H] No  case  had been made for interfering with the  July  1970 price  of Standard Herald as found by the Commission on  the ground  that  the production capacity of that  company  from July  onwards  was  3400 and riot  4000  cars.   The  latter estimate   made   by  the  Commission  was   not   excessive

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considering  the  admissions  made by  the  company  in  its applications  dated  19-6-1968 and 20-12-1969 in  which  the company  had estimated its production at 4200 cars.   It  is wellknown  that  admissions  constitute a  strong  piece  of evidence  against the party making the admissions and it  is for  that party to show that the admissions are mistaken  or are  not  true.  On the material on record the  company  had failed  to  discharge  that onus.   The  argument  that  the petitioner  in order to obtain import licence had to give  a bloated figure of estimated production did not appear to  be convincing  because the excess of the imported material  had to be adjusted in the subsequent import licences. [570 H-571 D, F] From  the  Technical  Team’s own report it  was  clear  that neither  any physical verification could be made by the  Tr- ,am  nor  could  it make a systematic study and  it  had  to content   itself   with  the  materials  supplied   by   the petitioner-company.   The Verghese Committee no doubt  dealt with  the question of capacity but in a rather general  way. There  was  nothing to indicate that any  attempt  was  made before the Committee to show that the achievable capacity of the  petitioner  company was more than what  was  stated  on behalf of the petitioner.  In these circumstances there  was no  reason to rely on the recommendations of  the  Technical Team or the Verghese Committee in preference to the findings of the Commission. [568 E, 569 A-B]

JUDGMENT: ORIGINAL  JURISDICTION : Writ Petitions Nos. 327, 330,  331, 486 and 487 of 1969. N.   A.  Palkhivala,  V. M. Tarkunde, B. G.  Murdeshwar  and A.G.  Ratnaparkhi, for the petitioners (in W.P. No.  330  of 1969). C.   R. Pattabhiraman, M. Natesan, B. G. Murdeshwar and A.G. Ratnaparkhi, for the petitioners (in W.P. No. 330 of 1969). A.C. Mitra, Dipankar Gupta, K. Khaitan, N. R. Khaitan, O.   P. Khaitan,  B.  P. Maheshwari and R. K.  Maheshwari,  for  the petitioners (in W.P. No. 331 of 1969). B.R. L. lyengar and R. B. Datar, for the petitioners  (in W.P. No. 486 of 1969). 531 V.S. Desai and R. B. Datar, for the petitioners (in W.P. No. 487 of 1969). Niren  De,  Attorney-General  for  India,  Jagadish  Swarup, Solicitor-General  of India, G. L. Sanghi, R.  N.  Sachthey’ Ram Panjwani and Sumitra Chakravarty, for the respondent (in W.P. No. 327 of 1969). Niren  De,  Attorney-General  for  India,  Jagadish  Swarup, Solicitor-General of India, G. L. Sanghi and R. N. Sachthey, for  the respondent (in W.Ps. Nos. 330, 331, 386 and 487  of 1969). Grover, J. These petitions under Art. 32 of the Constitution were  filed  by Premier Automobiles Ltd.,  Hindustan  Motors Ltd.   and   Standard   Motor  Products   of   India   Ltd., manufacturers  of Fiat, Ambassador and Standard  motor  cars respectively  and  two  of the dealers of  such  cars.   The petitioners  challenged  the fixation of fair price  of  the said three passenger cars by the Government of India by  the Motor Car (Distribution and Sale) Control (Amendment)  Order 1969 promulgated under S. 18G of the Industries (Development and Regulation) Act 1951, hereinafter called the "Order" and the "Act" respectively.  The ex-factory prices of the  three cars were fixedas follows :

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HINDUSTAN AMBASSADOR                   Rs. 15,316.00 FIAT 1100-D                            Rs. 14,325.00 STANDARD HERALD 4 Door                 Rs. 14,003.00 These  prices were inclusive of dealer’s commission but  did not  include the excise duties, Central Sales tax and  local taxes, if any, and transport charges.  The manufacturers  or dealers were prohibited from selling or offering for sale or otherwise transferring or disposing of the motor cars for  a price exceeding the price given in the Order.  The order was made after taking into consideration the recommendations  of the Tariff Commission to whom the question of  determination of  a  fair  price of motor cars had been  referred  by  the Central  Government under clause (d) of s. 12 of the  Tariff Commission Act 1951. On  May 5, 1970 after hearing the, petitions for  some  days this  Court recommended to the Government to appoint a  Com- mission  for the purpose of suggesting a fair price for  the three  cars  by  taking  into  consideration  all   relevant matters.  On May consisting of Shri Sarjoo Prasad a  retired Judge of the Patna High Court as Chairman, Shri R. K. Khanna Chartered  Accountant  and  Brig.  V.  Minhas  Director   of Inspection (Vehicles), 532 Department of Defence Production as Members.  By a notifica- tion dated June 5, 1970 all the provisions of the Commission of Enquiry Act 1952 were made applicable to the  Commission. The  Car  Price Enquiry Commission, hereinafter  called  the ’Commission’ devoted a good deal of labour and attention  to the  matter of fixing a fair price of the three  cars.   Its report  consists of two volumes.  The first volume  contains the  main  report  and  the  second  volume,  contains   the appendices. The Commission in its report has adverted to the  historical background  in which the car industry came to be  controlled in  our  country. it will be useful to  notice  the  salient facts.   Till  the year 1928 motor vehicles  were  purchased directly from abroad or through agents and dealers in India. From  1928 till the early forties General Motors India  Ltd. and Ford Motor Company of India Ltd. used to assemble trucks and  cars  from components imported from  United  States  in completely  knocked down condition called C.K.D. by  way  of abbreviation.   Hindustan  Motors  Ltd.   Calcutta  and  the Premier  Automobiles  Ltd., Bombay, two of  the  petitioners before  us, were established in 1942 and  1944  respectively with  a  programme for progressive manufacture  of  complete automobiles.    These  companies  entered   into   technical collaboration with foreign manufacturers as did the Standard Motor  Products  of  India Ltd.  In  the  industrial  Policy Resolution  of 1949 of the Government of  India  automobiles and trucks were classed among industries of importance which would  be subject to regulation and control by  the  Central Government.  In 1949 the Government decided that the  import of vehicles should be allowed only in C.K.D. condition.   In March  1952  the Government asked the Tariff  Commission  to enquire  into  the question of grant of  protection  to  the automobile   industry  in  India.   The  Tariff   Commission submitted  its report in 1953 recommending that  only  those companies  which  had an  approved  manufacturing  programme should  be  allowed  to  continue  their  operations   which recommendation  was accepted by the Government.   In  August 1955 the Government of India asked the Tariff Commission  to enquire  into  and recommend the fair ex-works  and  selling prices of the automobiles.  The Tariff Commission  submitted its  report in October 1956.  According to that  report  the margin  between the current net dealer’s price and  ex-works

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cost  of  the  cars  and trucks  produced  by  the  approved manufacturers  could  not  be  regarded  as  excessive.   it considered  that  a rigid system of price  control  was  not likely  to have a healthy effect on the development  of  the industry.   The interest of the consumers could be  properly protected   if  investigations  were  held   after   certain intervals  in  order to see that excessive prices  were  not actually  charged although the manufacturers were left  free to 533 charge  prices at their discretion.  The Government  took  a decision   to  enforce  an  "informal  price   control"   on automobiles  which was accepted by the  manufacturers.   The manufacturer was free to revise the price from time to  time according  to  the variation in the cost but had to  give  a month’s notice of any variation to the Government so that if the  change  proposed  was  prima  facie  unreasonable   the Government could intervene.  The net dealer’s price was  not to exceed the ex-works cost by more than 10%.  Within a  few years  of the imposition of the informal price  control  the situation  in the country changed owing to the  scarcity  of foreign  exchange.   The Government had to  curtail  foreign exchange allocation for the import of automobile  components with the result that only three out of the then existing six models  of passenger cars were left in  regular  production. The  Government  considered  it  necessary  to  introduce  a Distribution  Control  Order which required  the  dealer  to deliver  vehicles in the order of registration  and  without discrimination.   A  committee was appointed  consisting  of Shri  L. K. Jha as Chairman and other experts to review  the progress  of  the  automobile  industry  and  to.  recommend measures  in the matter of reduction of cost etc.   The  Jha Committee  submitted its report in January 1960.   According to the findings of that Committee there had been neglect and inefficiency  in production owing to there being hardly  any competition.  The Committee felt that greater discipline was called  for both so far as ancillary and the main  producers were concerned. As regards the taxation policy the Committee felt  that  "lower  level  of  taxation  per  vehicle  would stimulate more demand for them". The Government in May 1966 remitted the question of  further continuance  of protection being accorded to the  automobile industry  to  the Tariff Commission and also  directed  that Commission  to enquire into the cost structure and the  fair selling price of different types of automobiles.  The Tariff Commission made comprehensive recommendations and it was  on the  basis of its recommendations that the Order was  issued in  September 1969 fixing the prices of the three cars.   In July 1967 the Government had also directed an  investigation under s. 15 of the Act into the quality of the three cars by a Committee headed by Shri G. Pande.  The Commission was  to look  into  the  complaints  relating  to  deterioration  in quality and other allied matters including the part.  played by the ancillary and other industries.  The Pande  Committee submitted its report in December 1967.  It recommended inter alia  that  there should be a separate Quality  Control  and Inspection  Department  and  that  components  carrying  IST certification  marks should be preferred.  In November  1968 the Government set up a team of experts headed by Dr. A.  N. Ghosh  the  then Director-General of  the  Indian  Standards Institution. 534 This  team  was required to examine  the  "internal  experts organisation"   of  the  three  car  makers  and   to   make recommendations for strengthening them.  The Ghosh Committee

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endorsed the view of the earlier Pande Committee with regard to the establishment of technical audit cells.  These  cells were  to  be established for watching the  interest  of  the consumers and ensuring improvement in quality of cars  which were being manufactured by the, three petitioners. The  procedure  followed by the Commission  may  be  briefly noticed.   It invited by means of a  detailed  questionnaire full  information  from  the  car  manufacturers,   dealers, consumers   and  others  interested  in  the  inquiry.    It appointed  a  team of Cost Accountants and another  team  of technical  experts  besides a Chartered  Accountant.   These teams  studied  and collected data from each  of  the  three manufacturing   units  and  examined   their   manufacturing processes.  The cost structure and activities of some of the ancillary  producers  and dealers of automobiles  were  also studied  apart from visits to the manufacturing units.   The Commission examined witnesses who were produced by the Union of India, the consumers, the dealers and the manufacturers. We  may next refer to the principles and methods of  costing which were followed by the Commission.  The cost of a commo- dity  consists of these elements : direct  material,  direct wages,    services,    depreciation    and    manufacturing, administrative  and  selling  overheads.   In  case  of   an automobile  a  large  number  of  components  which  undergo different manufacturing processes have also to be taken into account.   The Commission decided to recommend a fair  price for two periods, (1) as in September 1969 and (2) as in July 1970.  It was considered necessary to determine the price in September 1969 because the impugned order was promulgated at that  time.  It,, however, adopted two different  principles in  the  matter of computing the cost on the  aforesaid  two dates.   For the September 1969 prices the  computation  was done according to what may be called the historical  method. This  meant that not only the prices in September 1969  were kept  in  view but also the value of pending stocks  of  raw materials  and the average of the price at  which  purchases had  been  effected at that time were taken  into,  account. The  prices for July 1970 were computed on the basis of  the actual cost obtaining in the month of July 1970. The following principal factors were considered relevant for the fixing of a fair selling price : (1)  capacity of production. (2)   quality. (3)  norms of rejection. 535 (4)  depreciation. (5)  bonus. (6)  warranty. (7)  interest on borrowings. (8)  return. The Commission finally came to the conclusion that the  fair prices of the three cars should be the following. FIAT                            September 1969       July 1970 Ex-works cost          Rs.12,283.00        13,564.00 Return                 Rs.1,168.00          Rs.1,223.00                      ------------------------------------- Ex-factory             Rs.13,451.00     Rs.14,787.00 Price STANDARD HERALD                           September 1969         July 1970 Ex-works cost          Rs.13,236.00     Rs.13,989.00 Return                 Rs.1,274.00          Rs.1,231.00                      ------------------------------------- ex-factory             Rs.14,510.00     Rs.15,220.00

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price AMBASSADOR.                           September 1969         July 1970 Ex-works cost          Rs.12,152.00     Rs.14,299 00 return                 Rs.1,364.00          Rs.1,470.00                     -------------------------------------- Total ex-factory price                  Rs.13,516 .00         Rs. 15,769 .00 We may at this stage state certain preliminary matters which will  facilitate  the  comprehension of  our  discussion  on various  points.  Firstly, certain terms may  be  explained. ’Ex-workS’  cost means the cost incurred in the  factory  of the   manufacturer  including  all  materials,   parts   and components.    ’Return’  means  the  total  return  to   the manufacturer  on the capital employed.   ’Ex-factory  Price’ consists  of  the ex-works cost plus  the  return.   ’Retail Price’ would be the price arrived at by adding the  dealer’s commission  or what is called ’mark up’.  The  consumer  has further to pay excise duty, surcharge and sales tax. Counsel for all the parties and the learned Attorney General are  agreed  that  irrespective of the  technical  or  leGal points  that may be involved we should base our judgment  on examination  of correct and rational principles  and  should direct deviation from the report of the Commission which was an  expert  body presided over by a former judge of  a  High Court only when it is, shown that there has been a departure from  established  principles  or  the  conclusions  of  the Commission are shown to be demonstrably wrong or erroneous. 536 The following table will illustrate the price of Fiat car in Bombay  based on July 1970 figure payable by a  consumer  as also the comparison with the prices contended for by Premier Automobiles and the government. ----------------------------------------------------------- Description    As recommen-     As per       As contended               ded by the        submissions  by the               Commission        made by the  government                                 Petitioner                                 Premier                                 Automobiles) ----------------------------------------------------------- Ex-factory price      Rs.14,787.00      Rs.15,793.00     Rs.14,017.00 dealer’s mark-up   Rs.900.00            Rs.900.00   Rs.900.00 Retail price Rs.15,687.00 Rs.16,693.00     Rs.14,917.00 excise duty on built-up car Rs.1,478.70 Rs.1,579.00      Rs.1,401.70 Surcharge on excise duty    Rs.492.90       Rs.526.00   Rs.467.23 Maharashtra sales tax on built-up car  Rs.2,011.03  Rs.2,147.84   Rs.1,906.31                      --------------------------------------- PRICE TO THE CONSUMER        Rs.19,669.63 Rs.20,946.57     Rs.18,692.24                  -------------------------------------------- It  has  not  been disputed that 46% of  the  ex-works  (ex- factory,  according to the Commission) cost payable  by  the consumer is accounted for by excise duties and taxes  levied by the Central and the State Governments including those  on the  components.   Out  of the total price  payable  by  the consumer 30% goes into duties and taxes. There is also a general impression that it is the car  manu- facturers that are responsible for the seemingly  exorbitant

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prices of the cars.  It will not be out of place to notice a few  observations of expert bodies about taxation which,  as noticed above, forms at least one third part of the price of a car.  The Tariff Commission in its third report  published in  1968 recorded that high prices of the vehicles were  due mostly to the existing multiple taxes on the automobiles  at different stages of production and sale.  It had recommended a  reduction in the burden of taxation which would  lead  to reduction  in  the prices of cars.  The  Jha  Committee  had emphasized  the  same  in  1960 and  had  pointed  out  that taxation  was  a burden on the consumer rather than  on  the producer.   The  Commission has said in its main  report  at page 292 :               "The  incidence of tax on a car is very  heavy               inasmuch  as  it constitutes 46%  of  the  ex-               factory  price.  The car is no longer an  item               of luxury and under the existing conditions it               is fast becoming an item of necessity.               537               That being so, there is a case for giving some               relief  out  of the excise  duties  and  other               levies which are by their nature,  multi-point               taxes causing hardship". The  following  main points have been raised by  Mr.  N.  A. Palkhivala  and  have been adopted by the  counsel  for  the other  petitioners.   The  figures  etc.  as  given  by  the Commission have not been disputed.               1.The  Commission  has  taken  the  production               capacity  at an excessive figure and has  thus               artificially reduced the cost.               2.    Cost and expenses on account of warranty               and statutory bonus have been wrongly excluded               from the ex-works cost.               3.    In  fixing the cost for  September  1969               even  the  actual admitted cost found  by  the               Commission has not been taken into account and               the  price  has been fixed on  the  historical               cost.   In fixing the price for July 1970  the               projected  and estimated cost for  the  future               has been ignored.               4.    No  provision  has  been  made  for   an               escalation clause in order to ensure that  the               prices  fixed  will ensure  for  a  reasonable               period of time.                5.The return which has been allowed is wholly               inadequate on the admitted and proved facts.               6.    Depreciation of plant and machinery  has               been  allowed  on the basis of  original  cost               whereas  it  should have been allowed  on  the               replacement value or on the peculiar facts  of               the case. We propose to deal with the first point relating to  produc- tion  capacity last.  On point no. 2 the Commission  was  of the   view   that  warranty  expenses   and   bonus   should appropriately  be included in the return and not in the  ex- works cost.  It is well known that the car manufacturers  in India  as  elsewhere furnish a warranty  covering  the  cars sold.   Under the warranty all defects on account of  faulty manufacture  in  workmanship have to be set  right  and  the defective  parts  have to be replaced, free of cost  by  the manufacturer  or his dealer Within a specified period  or  a given  distance traveled by the car.  During the  period  of warranty which is now for one year three free services  have to  be  rendered.   The car owner has to  pay  the  cost  of consumable items like oil, grease, packing etc. during those

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free   services.   The  car  manufacturers  enter  into   an agreement with the manufacturers of components providing for a warranty so far as the components 538             . supplied are concerned.  As has been rightly observed by the Commission the whole object behind the warranty is that  the consumer  who  has  to make a  heavy  investment  should  be assured  of  a  proper  performance of  the  vehicle  "in  a trouble-free manner for a reasonable length of time." On  behalf  of  the  petitioners  it  has  been  urged  that according  to  various  experts  on  costing  including  the Costing team appointed by the Commission the expenses  which ’are  to  be  incurred on account  of  the  warranty  should appropriately be included in the ex-works cost. (Vide  Rufus Wixon, Professor and Chairman of the Accounting  Department, Wharton  School  of  Finance  and  Commerce,  University  of Pennsylvania  in  "The Accountants’ Hand Book’,  and  N.  K. Prasad  in "Principles and Practice of Cost  Accounting"  as also B. K. Bhar, Lecturer in Cost Accountancy, the Institute of  Cost  &  Works Accounts of  India  in  "Cost  Accounting Methods & Problems"). The  Commission was of the view that many of  the  ancillary manufacturers cover their supplies to the car  manufacturers with  a  warranty and are liable to  replace  the  defective parts  free of cost.  The manufacturers are expected to  use only  those components which are of a standard quality.   By improving  the  method of quality control and  incidence  of expense  on account of warranty can be reduced and. can,  be absorbed  in the return.  According to the learned  Attorney General the matter relating to inclusion of warranty charges in the ex-works cost  is no longer res-integra.  The report, of  the  Motor Car Quality Inquiry Committee (known  as  the Pande  Committee), made a recommendation that  the  warranty should  be made uniform for all the three motor cars and  no cost  of replacement including incidentals should be  passed on  to  the  customer.  This Committee was  appointed  by  a resolution  of  the Government of India dated  February  12, 1968  in  exercise of the powers conferred by s. 15  of  the Act.   Pursuant to the recommendation of this  Committee  an order  was  promulgated by the Central Government  in  March 1968  under  S.  16 of the Act which was  to  the  following effect               "The  warranty with which cars are sold  shall               be,  uniformly  valid for a-  period  of,  12,               months or, a distance covered. of 16,000 kms.,               whichever occurs earlier.  All defects, due to                             faulty  manufacture  of  workmanship shall  be               rectified and defective parts replaced  during               this  period without passing any part  of  the               burden  including  incident  charges  to   the               customer". The effect of the above direction cannot be ignored although it  may  not be conclusive in the matter of  fixing  a  fair price.    We   find   the  statement   of   the   Commission unexceptionable that if the 539 warranty is to be made out of the profits every manufacturer will try to minimise warranty cost by improving the  quality of  his  product.  If it is to be included in  the  ex-works cost it means virtually passing it on to the consumer. A  good  deal has been said on behalf of the  Premier  Auto- mobiles  with regard to figures taken by the  Commission  as warranty charges.  It has been pointed out that although the cost of parts amounting to Rs. 80/- or 81/- per car has been

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taken  into  account in the return but  the  labour  charges which would amount to Rs. 120/- per car and which, according to  the  Commission’s  report,  have  to  be  borne  by  the manufacturer  have not been taken into account even  in  the return.  It has been urged that if the manufacturers have to bear  the  labour charges the amount of Rs,  120/-  per  car should have. been taken into account.  The position is  much simpler about the Standard Motors because there the cost  as well  as the labour charges amount to Rs. 80/-per  car.   As regards  the  Ambassador it was claimed that a  sum  of  Rs. 176/-  per car was the cost of the parts alone but  the  was being  supplied  by  the dealers.  As  we  agree,  with  the Commission  that the entire cost on account of warranty  in. elusive   of   labour  charges  should  be  borne   by   the manufacturers,  it is wholly unnecessary for us to refer  to any  specific  figures  except that  while  considering  the question of return the general idea relating to cost to  the manufacturers  would  certainly be borne in mind  and  taken into consideration. We  shall next deal with the, question of bonus  payable  to the  employees which has been included in the return by  the Commission.  The case of the manufacturers is that bonus  is an expense which is necessarily incurred in the  manufacture and it should be treated as part of, the ex-works cost.   It has been so treated under the Income tax Act 1961 as well as under the Companies Act 1956.  Even if the ’entire amount of bonus is not allowed as part of the cost the  manufacturers’ claim   that  the  minimum  bonus  which,  at  present,   is compulsorily  payable at the rate of 4% under s. 10  of  the Payment of Bonus Act 1965 should be allowed as a part of the cost  because  the manufacturers have to pay the  same  even when they do not make any profits.  The Tariff Commission in its  recent report on the Price Structure of Man-Made  Fibre and  Yarn Industry has accepted the view that  entire  bonus upto the limits prescribed should form part of the  ex-works cost. The  Hindustan  Motors  have made a  settlement  with    the workmen regarding   the payment of bonus for the years 1969- 70, 1970-71.  In the year 1969-70 the amount payable to  the workmen under that settlement comes: to 8 % of the wages and salaries  and  for the year 1970-71 it works out  to  9%.The bonus, it 540 has been pointed out, in the present context is an  integral part  of the wage structure and must be treated as  part  of the  cost  of production.  Reliance has been placed  on  the working  of  the Commission’s Cost  Accounting  Team  itself according  to which bonus was included as item no. 7 in  the various items which made up the ex-works cost.  In the study prepared  in collaboration with the Institute  of  Chartered Accountants  of  India  called  "Price  Fixation  In  Indian Industry"  it  is  stated  that bonus  to  employees  is  in practice  regarded  both  by them and  by  the  Adjudicating Tribunal as additional emoluments legitimately forming  part of the wage structure. According  to  the Government in the past  bonus  was  never Allowed  as  a  part of the cost  of  manufacture.   In  the previous Tariff Commission Report on the Fair Selling  Price of Automobiles 1968, bonus was included in the return.   The Tariff  Commission has been dealing with various  industries according  to the circumstances peculiar to  that  industry. It  accepted minimum bonus as part of cost in the Fibre  and Rayon  industry.   But it included it in the return  in  its report on alcohol and catguts.  It is said that if bonus  is added  to the cost it will be a part of the working  capital

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and so the manufacturer will get the benefit twice over. In  our judgment the question whether bonus is  linked  with profits  or cost stands concluded by the, provisions of  the Bonus Act itself as also the decision of this court in Jalan Trading Co (P) Ltd. v. Mill Mazdoor Union(1).  According  to s.  10 of that Act every employer shall be bound to  pay  to every  employee in an accounting year a minimum bonus  which shall  be  4  % of the .salary or the  wage  earned  by  the employee   during  the  accounting  year  or  forty   rupees whichever  is  higher  whether  there  are  profits  in  the accounting  year  or  not.  Under s.  1  1  where  allocable surplus exceeds the minimum amount payable under s. 10 it is payable  in proportion to the salary or wage earned  by  the employee  during  the accounting- year,  the  maximum  limit being  20%.  In computing the allocable surplus  the  amount set on ,or the amount set off under the provisions of s.  15 has  to be taken into account.  According to s. 2(b) 60%  of the  available .surplus falls within the allocable  surplus. Available surplus has to be computed under s. 5. Under  that section  the available surplus in respect of any  accounting year shall be the gross profit for that year after deducting therefrom  the sums referred to in s. 6. Section 6  provides for  the deduction from the gross profits as prior  charges. These deductions consist mainly of depreciation, development rebate  and  such. sums as are specified in respect  of  the employer  in the third schedule.  The companies are  further entitled to deduct dividends payable to preference (1)  [1967] 1 S.C.R. 15. 541 shareholders and a specified percentage of reserves from the gross  profits.  Section 15 deals with set off and  set  on. Where  allocable surplus exceeds the maximum amount  payable under  s. 11 the excess has to be carried forward for  being set  on  in the succeeding year upto the  fourth  accounting year.  Where there is no available surplus in an  accounting year  or  the allocable surplus falls short of  the  minimum bonus payable (4%) and there is no sufficient amount carried forward and set on from which minimum bonus can be paid, the same  shall  be  carried forward for being set  off  in  the succeeding  year according to the fourth schedule.   Section 10  of  the  Bonus Act at first sight may  appear  to  be  a provision for granting additional wage to employees but that section is an integral part of a scheme for payment of bonus at  rates which do not widely fluctuate from year  to  year. This Act has thus provided that bonus in a given year  shall not  exceed one-fifth and shall not be less than  1/25th  of the total earning of an employee.  It has been ensured  that the  excess share shall be carried forward to the next  year and  that  the  amount  paid by way  of  minimum  bonus  not absorbed  by the available profits shall be carried  to  the next  year and shall be set off against the profits  of  the succeeding year.  The object of the Bonus Act is to make  an equitable  distribution  of  the  surplus  profits  of   the establishment with a view to maintain peace and harmony bet- ween  the  three agencies, (capital management  and  labour) which  contribute  to  the earning  of  profits  (See  Jalan Trading  Co.  (P)  Ltd.  v.  Mill  Mazdoor  Union(1).    The Commission  came  to the correct conclusion  that  bonus  is connected with profits and it cannot be included in the  ex- works cost. A good deal of criticism has been levelled on behalf of  the manufacturers  on the method followed by the Commission  for determining  the  ex-works cost in September 1969  and  July 1970.   It  has been submitted that for September  1969  the cost  has  been  worked  out  on  what  may  be  called  the

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historical  method and for July 1970 the actual prices  have been taken into account but the projected and estimated cost for  the future has been ignored.  It has been  pointed  out that  historical  costs are determined on the basis  of  the material which is already in the pipeline and which has been acquired  at  cheaper rates.  Such a method has  never  been adopted and there is absolutely no justification for  making a  discrimination  between  the methods to  be  adopted  for ascertaining the ex-works cost in September 1969 and in July 1970.  The method which has always been adopted is of either taking the current prices or the projected prices.  We  have not  been  shown  any authority or principle  on  which  the method of calculating the ex-works cost on historical  basis could  be  justifiably  adopted for September  1969  when  a different method was adopted for July (1) [1967] 1 S.C.R. 15. L643SupCI/72 542 1970  cost.  We are of the view that the ex-works  cost  for September 1969 should have, been determined according to the current prices as was done with regard to July 1970. As regards the projected cost which means a reasonable esti- mate of the rising cost in the minimum future (roughly 3  to 6 months) over and above the cost existing on a certain date a  lot  of  criticism  has  been  made  on  behalf  of   the manufacturers  with regard to the Commission having  totally ignored  this  principle.  We have not been  shown  anything from the reports of the Tariff Commission nor does it appear that  it was seriously pressed before the Commission  itself that  the  principle of projected costs  should  be  applied while determining the ex-works cost of the cars in question. In  view  of  the provisions which we shall  be  making  for fixing  the  price  and also for  escalation  the  principle canvassed  for  on the basis of the projected  cost  becomes immaterial  and even otherwise in the circumstances  of  the case it cannot be applied. We  shall  now  deal with the necessity  for  an  escalation clause.  It has been pointed out by Mr. Palkhivala that  the prices of direct materials alone rose by Rs. 140/- per  Fiat car in a couple of months.  A comparison of the prices fixed for September 1969 and July 1970 further reveal how  steeply the  prices  rose during the short period  of  nine  months. According to Mr. Palkhivala price fixation of the cars  will be wholly futile unless there is a provision for  escalation which means that the prices should be increased or decreased periodically  according to the rise or decrease in the  cost as  also  the various other factors which enter  into  price fixation.   For  instance, in the Tariff  Commission  report 1965 on the revision of ceiling price of alcohol it has been observed that future estimates of costs of receified  spirit has  been prepared for a period of the next three  years  on the  basis  of the actual cost.  In  the  Tariff  Commission report  on the fair selling price on Antimony provision  was stated to have been made for enhancement in respect of wages and  salary  as also for anticipated  increase  in  Dearness Allowance.  Similar provision for escalation was made in the Tariff  Commission  report 1966 on the  price  structure  of catgut ball bearing and several other industries.  There are a  number  of increases, according to  the  manufacturer,,;, over  which they have absolutely no control.   Mostly  these consist  of increases in excise duties, taxes,  increase  in the  cost  of  imported  and  indigenous  steel,  in  wages, dearness  allowance,  contributions to the  provident  fund, gratuity, employees State insurance and other emoluments  to the  employees who are governed by the Industrial  law.   In

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addition to the increases in the cost of materials the  cost of bought out components electricity, income 543 tax  etc.  have also to be taken  into  consideration.   The manufacturers  have  pointed out with a good deal  of  force that  they have -no control whatsoever over the increase  in the  prices  of components which they have to buy  from  the ancillary manufacturers as the same are not subject to price control.   The Verghese Committee which was appointed  under s.  15 of the Act for investigation into the working of  the Standard  Motors observed in its report that  general  price level has been increasing in recent years and therefore  the control  of  car prices without a matching  control  of  the prices of the components would squeeze the manufacturers out unless they are compensated substantially by an  enhancement of the car price.  Indeed it has not been disputed on behalf of  the Government and the Attorney General  quite  properly and fairly accepts that some proper method should be devised for  escalation  or de-escalation, as the case may  be.   We have  been suggested a number of formulae on behalf  of  the manufacturers  as also the government but we shall  indicate at  a later stage what, in our opinion, is the best and  the simplest   method  of  providing  for  escalation  and   de- escalation.   We  are satisfied, however, that  a  provision should be made and ought to have been made by the Commission in this behalf. The next point which is fairly controversial relates to  the return which has been allowed by the Commission.  The  manu- facturers are unanimous in saying that the return  suggested by  the Commission is wholly inadequate for the survival  of the industry leaving aside its development.  The case of the Premier  Automobiles is that the return does not permit  any margin  for repaying the heavy indebtedness of the  company. Owing  to the inadequate price fixed by the government  even under  the  informal  price control  the  company  has  been running  into  losses.  Its total indebtedness on  June  30. 1970  came to Rs. 7.29 crores.  This indebtedness has to  be paid  or at least provision made for it by the  creation  of reserves.   Unless  reserves are created and  the  financial position of the company improves it may not be possible  for it to get any further loans because up till now it has  been carrying  on  its business mainly on  the  borrowings.   The return  leaves  no margin for wiping  out  the  depreciation which  comes  to Rs. 750.74 lakhs according  to  income  tax rates  and Rs. 583.64 lakhs according to book  depreciation. The   Commission  has  not  taken  into  consideration   any provision  for  a cushion for the proposed increase  in  the rate  of  minimum bonus for which a persistent  dialogue  is going  on  all  the time between the trade  unions  and  the government.  This will leave no return on the equity capital and  would result in the company getting a net dealer  price which  would  be less than its actual  cost  of  production. Since the Premier Automobiles will have to pay the  warranty charges  there will be an additional liability of Rs.  120/- per car on account 544 of  labour charges which when taken out of the  return  will reduce it substantially.  The calculation made, according to the company on the figures worked out by the Commission, was that   the   surplus  left  will  provide  a   dividend   of approximately 7% on the equity capital. The additional argument on behalf of the Hindustan Motors is that in computing the return the Commission has accepted the position that the following outgoing should go out therefrom :  (a) interest on borrowings; (b) minimum bonus of 4%;  (c)

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other  financial charges; (d) warranty claims; (e)  dividend on  preference shares; (f) tax liability.  According to  the Commission  if  a return of 16% on the capital  employed  is given the corresponding dividend to the equity  shareholders will work out at 10%.  The Hindustan Motors has to pay total bonus  for  the  years 1969-70 at the rate  of  8%.   It  is essential that the company sets aside a minimum of 3% on the capital   employed  for  the  purpose  of  replacement   and rehabilitation for which no provision has been made.   After taking  out all these items it will be impossible to give  a 10% dividend to the equity shareholders. The  Standard Motors have put in a chart showing that  after ,deducting all the items in accordance with the method  laid down by the Commission for working out the return only  such amount  will be left as will enable the payment of  dividend at  the rate of 9.2% on the equity capital allocable to  the car activity.  This statement, however, has been arrived  at on the basis of the capacity of 4,000 cars and 1,000  trucks as determined by the Commission.  If, however, the  capacity is reduced to 3,400 cars and 1,000 trucks as claimed by  the company the dividend payable to the equity shareholder  will be  at the rate of 12% but then there will be  no  provision for  development and future expansion or for wiping off  the arrears of depreciation which amount to Rs. 42.32 lacs. The  learned Attorney General while agreeing that a  reason- able  return  must  be  allowed  to  the  manufacturers  has submitted that the entire background in which the automobile industry in India came to receive protection and the way  it has  developed as also the defects which have been found  in its  working together with the unsatisfactory nature of  the quality  of cars produced and the gradual  deterioration  of their  performance must be taken into account  while  fixing the  return.   The main outlines of the  special  historical background  are  :  (a)  protection-external  and   internal resulting  in monopoly of the three cars manufacturers;  (b) government  policy to develop the automobile industry  as  a whole  relating  to the three  car  manufacturers  including cars, trucks, components and spare parts.  All these involve large outlay of 5 45 foreign exchange and the object must be to conserve the same in the interest of the country; (c) necessity of  efficiency and  economy  in the production and control over  prices  in that behalf; (d) necessity of improvement of the quality  of product and of services to the consumers.  According to  the informal  price  control the factory price  charged  to  the dealers could not exceed the ex-works cost by more than 10%. This  necessarily  included all the items which  are  to  be found  as  constituting  the return in  the  report  of  the Commission.   Our  attention has been drawn  to  reports  of various Commissions according to which there were defects in production and there was neglect of economy and  efficiency. The  accounts  were  also not being maintained  by  all  the manufacturers  on a proper basis from which costs  could  be worked  out  satisfactorily.  A large  number  of  unskilled workers  were being employed.  The Tariff Commission in  its report  of  1968  in  respect  of  fair  selling  price   of automobiles  considered that a return of 12% of the  capital employed  would be reasonable and fair.  The Commission  was of the view that profit margin to be allowed to an  industry has little or no direct relation to the cost of the product. If the profit is determined as a percentage on the  ex-works cost  the  higher the cost the higher will  be  the  profit. This  will leave little or no incentive to  manufacturer  to effect  economies  in  the cost of  production  or  exercise

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control  over the manufacturer’s expense.  In determining  a fair  margin of profit consideration has to be given to  the capital  employed  and  a  fair  return  for  such   capital including  a provision for outgoing like interest on  loans, minimum  bonus etc. must be assured.  The quantum of  return has  essentially  to vary from industry to  industry.   This would require ascertainment of capital employed with  regard to production of cars.  The Commission took the figures from authentic  sources  i.e. the report of the Reserve  Bank  of India  and  an  analysis carried out  by  the  Economic  and Scientific  Research  Foundation with regard to  the  return which  was being earned by the various public  companies  on the capital employed.  After taking the maximum return which an  investor  can  expect  from  fixed  deposits  and  other relevant  factors into consideration the Commission  was  of the  view that a dividend of 10% to the  equity  shareholder after  providing  for the tax liability of the  company  and other  outgoing would be fair and reasonable.  The  outgoing which  are  to be met out of the return are (1)  the  actual interest  on  borrowings; (2) the minimum bonus;  (3)  other financial  charges;  (4)  warranty charges and  in  case  of Premier  Automobiles the guarantee commission paid on  loans obtained  from foreign sources and difference  in  exchange. After making provision for these outgoing, the dividends  on preference  shares, if any the tax liability of the  company and  a  return  of 10% on equity share  capital,  the  total profit  of the company as a whole was calculated which  when related to the capital employed of the 546 respective  companies  worked out to 15.43% in the  case  of Hindustan Motors, 16.22% in that of Premier Automobiles  and 17-36% in Standard Motors.  Considering the above and taking an  over all view of the car industry 16% return on  capital employed  was considered to give a reasonable return to  the car manufacturer. We  have already referred to the criticism of the car  manu- facturers with regard to the manner in which the return  has been  worked out.  It is true that the return to the  equity shareholders   of  all  the  three  companies  may  not   be uniformally 10% and may be considerably less in the case  of Premier  Automobiles  but  it is not possible  to  make  any distinction    or   discrimination   between    the    three manufacturers.   We do not consider that a separate rate  of return should be fixed when dealing with the automobile  car industry as a whole. At  first  sight it may appear that a return of 16%  on  the capital  employed  is  a very large return but  as  we  have pointed  out,  this  return includes  numerous  items  which reduce  the ultimate return to the equity shareholder  to  a percentage  which, even according to the Commission,  on  an average  cannot exceed 10%.  Learned counsel  appearing  for the car manufacturers have vehemently pressed for  exclusion of warranty and bonus charges from the return and for  their inclusion in the ex-works cost.  It was ultimately stated at the  bar  that if that was done the return as fixed  by  the Commission would be acceptable.  We are, however, unable  to accede  to  this  submission.  We  have  given  our  careful thought to the principles which the Commission has  followed in fixing the return and in our judgment the return  granted is  a  reasonable one keeping in view  the  entire  circums- tances.   At the same time we consider return at 12%  wholly inadequate  when  all  the items  that  the  Commission  has mentioned  have  to  be paid out of it.   Moreover  a  total return at 16% will leave some margin if proper economies are effected   by   the  manufacturers   for   replacement   and

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rehabilitation  and improvement of the plant and  machinery. According to the principles discussed or to be discussed  in the  matter of fixing of a fair price the main objective  is to  protect the interest of the consumer while at  the  same time provide a reasonable margin of profit to the  producer. The  general  approach has to be to determine  the  ex-works cost  and then to arrive at the fair price  after  examining other  claims  of the industry and  providing  a  reasonable return.   We,  therefore, find no such principle  which  has been  demonstrated  to  be  wrong  in  the  report  of   the Commission  so  far  as  the  fixation  of  the  return   is concerned. The  next  question is whether the Commission has  erred  in allowing  depreciation  on the actual cost and  not  on  the replace- 547 ment value.  Depreciation, it has been pointed out, has been allowed  in  accordance with the formula laid  down  in  the Indian Income tax Act 1961 but the provisions of the Act are inadequate  to provide funds for replacement of the  assets. Since  the provision of depreciation is intended  to  enable replacement of the worn out assets it is argued on behalf of the  car  manufacturers that the Commission  ought  to  have allowed  depreciation at the rate which would  have  enabled the replacement of the assets.  This is particularly so when prices  are  rising.  The Tariff Commission has  in  certain cases  allowed special depreciation in lieu  of  replacement cost.   In  "Price  Fixation in Indian  Industry"  to  which reference  has already been made at an earlier stage it  has been  mentioned  that special depreciation  was  allowed  in addition  to  the normal depreciation in case of  pig  iron, steel,  cement  and  rubber tyre and  tubes  by  the  Tariff Commission; (see pages 179, 180, 183 and 190). The Tariff Commission Review Committee in its report made in August 1967 dealt with the topic of calculation of deprecia- tion  on the basis of replacement cost particularly in  view of  the  rising prices.  It was pointed out that  there  are practical   difficulties  in  adopting  the   principle   of replacement  cost.  One of these is the absence of  reliable and  accurate indices of changes in the replacement cost  of machinery and plant.  That Commission, therefore,  generally did  not favour deviating from the practice adopted by  the. income tax authorities in calculation of depreciation.   The Commission  was of the view that depreciation on account  of the  use of the assets in any undertaking is quite  distinct and  separate  from rehabilitation replacement.   The  whole question, according to the Commission, has to be  determined with  reference to the context or the purpose for which  the deprecation  is  being computed.  For working out  the  fair price of the car the expenses incurred by the  manufacturers in  producing their products have to be taken  into  account and  therefore  only the actual cost and not  the  estimated replacement cost can be considered.  The Commission was  not satisfied  that on account of rise in the prices  of  assets the manufacturers would not be in a position to replace  the plant  and  machinery  with funds available  to  them.   The Commission said "if the manufacturers were to keep apart not only  the  amount of depreciation but also  the  development rebate  and other reserves to which they are entitled  under the various tax and other laws and invest them separately or even  in  their  business the question of  there  being  any difficulty later on does not arise.  Depreciation funds with the  amount thus provided for can be built up and these  can be  invested whether inside or outside the business";  (main report  p. 65).  The Commission referred to the  opinion  of

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the Institute of Chartered Accountants in England which  was against the proposal to base the charge for 548 depreciation on replacement cost.  The Tariff Commission had also  not accepted the contention of the manufacturers  that depreciation  allowance should be calculated on  replacement cost.  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.  Moreover capital reserves with the Hindustan Motors  and the Standard Motors are  substantial.   Although the position of the Premier Automobiles is different and  it can hardly draw upon its reserves but the Commission was  an expert  body  and  it did not choose  rightly  to  make  any distinction   between   the  three  manufacturers   as   the principles  should  be  such as are applicable  to  the  car industry  as  a whole.  We are unable to  find  any  serious infirmity or flaw in the reasoning or the conclusion of  the Commission on the question of depreciation. We  shall  now  proceed  to consider  the  question  of  the capacity  of  production.   Two rival views  have  been  put forward  on this point.  On behalf of the car  manufacturers it  has been maintained that for the purpose of  fixing  the fair  price  under s. 18G of the Act the actual  figures  of production should alone be taken into consideration and  the optimum  capacity for production must be disregarded  as  an irrelevant factor.  On the other hand it has been maintained on  behalf of the government that it is always essential  in the  matter  of  fixation of fair  price  to  determine  the capacity  of production which must mean at least  achievable capacity  even if not the maximum capacity.  Section  15  of the   Act   empowers  the  Central   Government   to   cause investigation  to  be made into  the  scheduled  industries, automobile industry being one of them.  Clause (a) (i) of s. 15  provides  for full investigation to be  made  where  the Central Government is of the opinion that there has been  or is  likely  to  be  a substantial  fall  in  the  volume  of production   for  which,  having  regard  to  the   economic conditions prevailing, there is no justification.  Under  s. 16  the  Central Government on completion  of  investigation under  s.  15 can issue such directions  to  the  industrial undertakings  as  may be appropriate in  the  circumstances. Clause (a) of sub-s. (1) relates to directions which can  be issued for regulating the production of any article or class of  articles  by the industrial undertaking and  fixing  the standard of production.  According to Mr. Palkhivala if  the Central  Government  was  of the view that  there  has  been substantial  fall in the volume of production  investigation could be caused to be made under s. 15 and directions  could be  issued  under s. 16.  Section 18G confers power  in  the matter of control, supply, distribution, fair price etc.  of articles relatable to any scheduled industry.  Under  sub-s. (2)  a notified order may provide for controlling the  price at which any such 549 article  or  class  thereof may be bought  or  sold.   While fixing a fair price under S. 18G no question can arise about the optimum or achievable capacity of production which would be  relevant  only for the purpose of ss. 15 and 16  of  the Act.   A  lot of emphasis has been placed on  the  different objects   and  purposes  for  which  ss.  15,  16  and   18G respectively have been enacted.  This provision, it is said, is  meant  to prevent profiteering and what is  intended  is that the actual production and the quality of articles which

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are being produced have alone to be taken into consideration and a fair price has to be fixed accordingly. The  learned  Attorney  General says that s.  18G  does  not contain any limitations which have been suggested on  behalf of  the car manufacturers.  It is to be found as  the  first section in Chapter III-B which is headed "control of supply, distribution,  price etc. of certain articles".  In  a  free market  the position is quite different but when fair  price has to be fixed the cost of production has to be taken  into account  and the price should be such that a fair return  is provided for.  The cost of production must be with a view to economy and efficiency.  Moreover the non-obstante clause in s.  18G(1)  shows that this section stands by  itself.   The history of price fixation in India is now new.  The  Defence of India Rules provided for it Rule 8 1 (2) (b) as far  back as 1939.  These rules ceased to have effect on September 30, 1946.   The Essential Supplies (Temporary powers)  Ordinance 1946 was enacted on September 25, 1946 which was followed by the Act of 1946.  There are numerous Acts which were enacted for  the  purpose of fixation of prices,  e.g.,  Supply  and Prices of Goods Act 1950, Tariff Commission Act 1951 and the Act.   The  Essential  Commodities  Act  1955  was   enacted containing the provisions in which under s. 3(2) the  prices of essential commodities could be controlled.  The  function of  ss.  15 and 16 of the Act is different from that  of  s. 18G.  Those sections deal with specific matters on which the government  can  cause  investigation to  be  made  for  the purpose of issuing appropriate directions including  control of  prices  and those two sections are meant  primarily  for development and regulation of an industry. There  is a good deal of force in what the Attorney  General says.   But in our opinion it is unnecessary to express  our view in any great detail in the matter.  In our judgment the very  concept of fair price which can be fixed under s.  18G takes  in  all  the elements which make it  ’fair’  for  the consumer  leaving  a  reasonable margin  of  profit  to  the manufacturer  without  which  no  one  will  engage  in  any manufacturing   activity.    Capacity   utilisation   of   a manufacturing unit, the quality of its product and 550 the  maintenance  of proper standards at various  levels  of production are all relevant factors for the determination of the price.  Capacity utilisation, however, has to be on  the basis  of  what can be reasonably achieved keeping  in  view always  the  practical side. it is common  ground  that  the achievable  capacity  for production will  be  an  important factor in the matter of fixation of fair price.  The  larger the production the less the cost and vice versa.  We  shall, therefore, have to determine whether the conclusions of  the Commission  with regard to the capacity of the  three  manu- facturing  units  for  production are  based  on  a  correct appraisal of material facts and principles. As  regards  the  Premier  Automobiles  the  Commission  has assumed,  erroneously,  accordingly to  Mr.  Palkhivala,  an achievable  capacity for production of 13,300 cars per  year in  September  1969  and 14,000 cars in July  1970.   It  is claimed that the cost has been reduced by the above  process by  Rs.  301/-  per car for July 1970.   On  behalf  of  the Premier Automobiles it had been urged before the  Commission that  its  average level of production per year  was  12,000 cars and 5,000 commercial vehicles and this was likely to be the  future  capacity so long as there was no  expansion  of plant and machinery.  According to the government,  however, the  existing capacity of Premier Automobiles was  not  less than 15,000 to 16,000 cars and 7,000 commercial vehicles per

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year.   The Commission relied mainly on certain letters  and applications  addressed  by the Premier Automobiles  in  the matter of obtaining licenses for import etc. from  September 1969  to  October  1970 as also the  evidence  of  Brigadier Subramaniam the General Manager of the Company.  The Commis- sion fixed the capacity of production of commercial vehicles at  6,000  and  that of cars at 14,000 for  July  1970.   As regards  September  1969  it considered  that  the  capacity should  be  fixed at the level which was 5%  less  than  the level  determined for July 1970.  The figures thus  came  to 13,300 cars and 5.700 commercial vehicles per annum. It appears to us that the Commission ignored material  facts and circumstances in arriving at the conclusion relating  to the capacity for September 1969.  In matters of such  nature the  figures given in the applications for grant  of  import licence  etc. can hardly be decisive.  There is a good  deal of force in the suggestion of Mr. Palkhivala that when  such applications are made the applicant is prone to give  higher figures in order to obtain the maximum permissible  quantity of  the  material sought to be imported.   The  figures  are sometimes exaggerated as it is anticipated that they are not likely  to be accepted and the license would be issued  only for  a lesser quantity.  For the purpose of determining  the capacity it is essential that for the material period 551 it  should be ascertained for how many cars import  licenses were granted.  If they were granted for only 12,000 cars per year  it will be futile to assess the capacity at  a  higher figure  because  in the very nature of things  it  would  be impossible for the manufacturer to produce more cars.   From the statements which have been produced under our directions relating to the applications which were made and the  import licenses  which were granted the position appears to  be  as follows : The Premier Automobiles asked for the material on the  basis of  production  of 4,500 cars for the first half  year  from April 1966 March 1967.  This application was made on May 13, 1966.  Later on in the course of correspondence the Director General, Transport Department, was informed that it was pro- posed  to  raise the production of cars to 1,000  per  month from  February  1967.  The import  licenses  are  admittedly granted  on  the  basis of the recommendation  made  by  the Development   Wing   of  the  aforesaid   department.    The recommendation by the Development Wing was that the  license should be granted for production of a minimum of 4,500  cars in  six  months.   On  July  14,  1967  an  application  was submitted for grant of certain components for production  of 18,000 cars.  This was for the second half year 1966-67.  It has been submitted and that explanation in the circumstances appears  to  be correct that the Italian  collaborators  had offered  a  special  credit and in order to  avail  of  that credit  licence for import had been sought for 18,000  cars. But  it  was stated in the application that  production  was being planned at 1,000 cars per month.  This application was granted.  During the first half of April 1968 to March  1969 an  application was made on July 23, 1968.  It was  confined only  to those components and raw materials which  were  not covered by the components imported for 18,000 cars under the special  credit scheme.  The production, it was stated,  was again   being  planned  at  1,000  cars  per  month.    This application  was  also  granted.  On February  28,  1969  an application  was made for the second half of the year  April 1968 to March 1969 for 7,200 cars on the basis of 1,200 cars per month.  The Development Wing recommended grant for 6,000 cars only, the total minimum being 12,000 cars.  On November

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28,  1969 an application was made for the first half of  the year  April  1969  to March 1970.  This is stated  to  be  a balancing  application for 6,000 cars.  On July 28, 1970  an application was made for the production of 7,000 cars in six months  for  the first half year April 1970 to  March  1971. The  recommendation  of the Development Wing  was  only  for 6,050  cars and the license was apparently granted  for  the same.   On October 28, 1970 an application was made for  the second half of the year April 1970 to March 1971 for produc- 552 tion of 7,000 cars in six months.  This time the recommenda- tion was accepted for 7,000 cars and licence for  components was granted on August 28, 1971. It  is quite apparent from the above statement of facts  and figures  that at no stage except for the second half of  the year  April  1970  to March 1971  import  license  had  been granted  for  production of more than 12,000 cars.   It  was only in that year that for the first half it was granted for 6,050 cars and for the second half for 7,000 cars.  In  this situation  it  is wholly incomprehensible  how  the  Premier Automobiles  could have actually produced more  than  12,000 cars per year even if the achievable capacity was more.   As has  been observed before the achievable capacity  does  not mean  a  capacity which should be completely  divorced  from existing  and admitted facts.  It has to be achievable  from the  practical  point of view.  We have no manner  of  doubt that for the above reason alone the achievable capacity  for September  1969  could  not have been fixed  for  more  than 12,000 cars per year. In para 3 of the affidavit of Mr. S. R. Kapur, Under  Secre- tary  to the Government of India, made on June 27,  1970  it was  stated that in the report of the Tariff  Commission  on the  fair  selling prices of automobiles it  had  originally recommended  prices  on the basis of  annual  production  of 9,000  cars by Premier Automobiles.  In May  1969,  however, the Government requested the Tariff Commission to rework the prices  on  the basis of annual production  of  12,000  Fiat Cars.   The  technical  team appointed  by  the  Car  Prices Commission  had come to the conclusion that the company  had an annual potential capacity to manufacture 12,300 cars  and 5,000 commercial vehicles.  As we have already held that the Premier  Automobiles were not in a position  to  manufacture more  than 12,000 cars owing to the grant of import  licence being  confined  to that figure we do not consider  that  it would  be fair to take the capacity for production  for  the purpose  of working out the ex-works cost in September  1969 at a figure higher than 12,000 cars per year. The  next  question is the capacity for the  production  for computing the ex-works cost in July 1970.  According to  the technical  team the achievable capacity was 12,300 cars  per year.   But  as  pointed out by the  Commission  the  latest figures  given  by  the company in  October  1970  were  for production  of  7,000 cars in six months and  these  figures were accepted as correct by the Development Wing and licence for  components was admittedly granted on that  basis.   The license  for  steel  has still not been issued  and  we  are informed that it is likely to be issued very shortly.  These figures were furnished by the company at a time 553 when  hearing of the proceedings before the  Commission  was taking place and all relevant matters including the question of   capacity  were  under  active  consideration.   It   is difficult to understand why its achievable capacity for July 1970  should not be fixed at the figure of 14,000  cars  per year.  Even if the license for steel had not yet been issued

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the  Premier Automobiles had enough stock.  As we stated  in the application dated October 28, 1970 the stock position on the  date  of the application was for  production  of  4,000 cars.   The firm principle which we have all along  followed is  that  the report of an expert body like  the  Commission should  be accepted except where it has been shown  to  have demonstrably fallen in err-or on a question of principle  or has  completely ignored vital and material facts  which,  if taken  into  consideration, would have led  to  a  different conclusion.   We are not satisfied that with regard to  July 1970  taking  an over all and general view  apart  from  the material on the record the Commission was wrong in assessing the capacity of production with regard to July 1970 although its  conclusion in respect of production for the purpose  of assessing ex-works cost in September 1969 has been shown  to be demonstrably erroneous and cannot be accepted. We  shall next deal with the capacity of production  of  the Standard  Motors and Hindustan Motors.  It is common  ground that  so  far as these two manufacturers are  concerned  the prices  for  September 1969 need not have  been  determined. The  case  of  Premier Automobiles  stands  on  a  different footing  because it had taken certain undertakings from  the dealers and the customers with regard to the payment of  the difference  in  price  which will be  determined  after  the judgment of this Court and the one fixed in the order.   The other   two   manufacturers   have  not   taken   any   such undertakings.   It  is  common  ground  that  it  is  wholly unnecessary  to  determine the price for September  1969  in their  case.   The price fixed in July 1970,  however,  will form the base for fixing a fair price by the Government by a fresh order after our judgment. As regards the Standard Motors it has been submitted by  Mr. Natesan,  learned  counsel for that company  that  upto  the beginning  of 1968 it was manufacturing a two  door  saloon. It  suffered  losses from 1968 onwards and no  dividend  was paid  even  to  the preference shareholders.   There  was  a strike from September 12, 1969 to November 6, 1969 which was declared illegal, followed by a tool-down strike in February 1970.   The factory had to be closed down on May  22,  1970. It was reopened on February 22, 1971.  When the factory  was closed a committee which we have already called the Verghese Committee 554 was appointed under s. 15 of the Act for investigation.   It submitted  its report on October 16, 1970.  It made  a  full investigation  and also looked into the complaint  that  the associated concerns of this company which were producing the components had been shown undue favour at the expense of the parent  firm.   According  to  the  Verghese  Committee  the transactions  with  the subsidiaries appeared to be  in  the normal  course of business and the allegation of  unfairness was not justified.  The Verghese Committee while considering the question of viability of the company had made a detailed examination  of the capacity and had held that  the  maximum capacity  of  the plant was for production of  3,000  Herald cars apart from 1,000 trucks based on six days working week. The  technical committee of the Commission found that  based on a six day working week of two shifts of 8 hours each  the capacity   of   the  factory  at  the   present   level   of indigenisation  was  3,400 cars and 1,000  trucks.   In  the matter  of assessing capacity it has been pointed  out  that the car production is bound to be less if the production  of other parts is increased and that is what has been done from 1965   onwards.   According  to  the  observations  of   the technical  team of the Commission the drop in the  installed

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capacity from 1968 (3400 cars to 2500 cars) in 1970 was  due to the increased depletion in the Press Shops.  After  going into  the  matter  fully the technical  team  indicated  its revised calculations which were that working on a two  shift 5  day working week (nine hours per shift) the machine  shop had  an  annual  capacity for 3400  Herald  cars  and  1,000 trucks.  It was suggested that the company should operate on a  six day working week with daily shifts of 8  hours  each. In  that way it was concluded that the capacity of  Standard Motors would be 3,400 cars and 1,000 trucks. Mr. Natesan has emphasised that if the production has to  be achieved  at the figure suggested by the technical  team  it would  be necessary to import certain machinery  which  will involve,  an  additional cost and for which  import  licence would  be  necessary.   It  must  not  also  be  overlooked, according  to Mr. Natesan, that the car which is  now  being produced  is  no  longer  a two door  model  and  that  also involves  a  decrease  in  the  rate  of  production.    The Commission  relied mostly on the letters which the  Standard Motors  had  been  writing  claiming  that  its   production capacity was for 4,000 cars or more.  Before the  Commission it  had been contended on behalf of the Government that  the capacity of the company on a five day working week should be taken  at 3,400 cars and 1,000 trucks and if  this  capacity was  converted  to  a six day  working  week  the  company’s capacity could be rounded off at the level of 4,000 cars and 1,000  trucks.  The Commission was inclined to  accept  this contention broadly and observed that 555 since the company had decided on a six day working week  the figures on that basis would work out to 3,630 cars and  1070 trucks annually.  There was some scope for an increase which could  be  estimated  at 5% and  after  allowing  a  capital addition  of 2.5 lacs towards tooling it was  reasonable  to assume  that  the company could easily reach  the  level  of production  of 4,000 cars and 1,000 commercial vehicles  per annum.  The report of the technical team was not accepted on the ground that when the technical team made the  assessment the  factory was closed and all the relevant data  were  not available. There is an obvious error in the working out of the  figures by  the  Commission.   It is not disputed that  a  five  day working week meant 45 hours at the rate of 9 hours per  day; whereas six day working week meant 48 hours per week at  the rate  of  8 hours a day.  The increase would be of  3  hours only during the week.  It has not been demonstrated how this would  justify  the  conclusion  of  the  Commission.    The Verghese Committee in its report was of the view that with a 48  hours  week, the capacity of the  heat  treatment  shops would go upto 3200 cars and 1062 trucks.  But the Press Shop with  a limited capacity of 3000 cars and 1000 trucks  would still  be  a  limiting  factor.   If  some  of  the  pressed components  were  farmed  out to the  ancillaries  an  extra capacity  of 200 cars could be realised in the  press  shop. But as Standard 20 trucks are not being manufactured in U.K. the  imported  components  would have  to  be  progressively indigenised.   This is what the Verghese  Committee  finally concluded               "On  an overall assessment we felt it safe  to               estimate the installed capacity of the factory               at 3000 Herald and 1000 Standard 20s".  (pages               76-77  of the Verghese Committee Report  dated               16th October 1970) It  is  true that owing to the closure of  the  factory  the technical  team could not make verification on the spot  and

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tried to depend largely on the data supplied by the Company. But  in  the  background  of  the  report  of  the  Verghese Committee which had made full and thorough investigation  we are  unable to uphold the Commission’s view.  On an  overall consideration,  however, we would hold that the capacity  of Standard Motors would be 3400 cars and 1000 trucks as  found by the technical team. The Car Prices Inquiry Commission has excluded the incidence of Royalty from July 1970 cost in view of the fact that  the collaboration agreement between the company and its  foreign collaborators  expired in 1970.  It has been brought to  our notice  by  Mr. Natesan that since then  the  Government  of India  have given their approval to renew the  collaboration agreement  on  the basis of Royalty at pound  6.00  per  car (i.e. Rs. 112 per car at the 556 current rate of exchange).  It is submitted that this amount of  Rs.  112/- being royalty payable per vehicle  which  has been recognised by the Commission as an element of cost,  be ordered  to  be  included while computing the  cost  of  the vehicle for future price fixation." This is correct and  the amount  on  account of royalty must be included in  the  ex- works cost for July 1970. As  regards  Hindustan Motors it was stated  on  its  behalf before  the Commission that the present  installed  capacity was for 38,400 cars and 10,500 commercial vehicles per year. In respect of cars, however, it was stated that due to rapid indigenisation  undertaken  by  the  company  its   original installed  capacity had become imbalanced and at present  it could  not manufacture more than 24,000 cars per annum.   In order  to balance this capacity once again at the  level  of 38,400 cars per annum it would require additional plant  and machinery  costing 5.75 crores and replacement  of  existing dies  at  the  cost  of Rs.  4.05  crores.   The  Commission referred to the estimates furnished by the Hindustan  Motors and  the  Tariff Commission in 1966 and to the  evidence  of Shri  Lahuty  who  was  produced as witness  no.  7  by  it. According to him the company expected to produce 30,000 cars in 1967-68, 36,000 cars in 1968-69 and 40,000 cars in  1969- 70.   The  technical  officers of the  Director  General  of Technical Development, namely N. T. Gopala Iyengar and B. S. V.  Rao, Development Officer had also visited the  plant  of Hindustan Motors from time to time between February 1969 and January  1970  and  during this  period  various  data  were furnished  by the Hindustan Motors relating to its  capacity which  were  contained  in  a  "Brown  Folder".   From   the information   given  to  these  experts  the   manufacturing capacity  came  to 38,400 cars per year.   The  letters  and applications  which were written in the matter  of  licenses also  unmistakably  pointed  to  the  conclusion  that   the achievable  capacity  was not less than  30,000  cars.   The technical  team  had  made an assessment  on  the  spot  and according  to it the existing capacity was 30,000  cars  and 5,000  commercial  vehicles after providing  some  balancing equipment  worth about Rs. 74 lakhs.  The Commission was  of the  view  that  the  data  regarding  the  standard  timing furnished to technical team was different from that provided to  the  experts,  namely, Messrs.  Iyengar  and  Rao.   The Commission  felt it was safer to rely on the  manufacturer’s own  statement  made from time to time.  It  was  considered fair and equitable to fix the production capacity at  30,000 cars per annum and that of trucks at 10,500 per annum. Mr.  Mitra  on behalf of the Hindustan  Motors  has  rightly stressed the point that in a matter of technical  assessment the  report of the technical team and the experts should  be

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accepted 557 and  should  not  be  rejected unless  the  members  of  the technical  team  had  been examined by  the  Commission  and called upon to explain any facts or circumstances which have been used by the Commission for rejecting their report.   It is  pointed  out  that the Third Tariff  Commission  in  its report  on  August  1968 came to  the  conclusion  that  the costing  in  respect of the company should be  done  on  the basis  of 22,000 and 13,600 trucks per year.  This  estimate of  capacity  was not accepted by the government who,  by  a letter dated May 12, 1969 suggested to the Tariff Commission to rework the ex-works cost of Ambassador cars on the  basis of  an  annual production figure of 24,000 cars  and  12,000 trucks.   The  Tariff Commission then reworked the  cost  on that basis.  Messrs.  Iyengar and Rao had visited the  plant of  the  company in view of the observations of  the  Tariff Commission  in  its  report in 1968 on  the  continuance  of protection to the automobile industry that it was  necessary that the company’s capacity should be technically  assessed. It  is submitted by Mr. Mitra that although  the  Commission took into consideration the information and data supplied by the Hindustan Motors contained in what is called the  "Brown Folder"  but the Commission failed to ask the Government  to produce  the  report made by those  experts.   The  Attorney General  has produced that report before us which  is  dated January  29, 1970.  It was mentioned in that report or  note that  the  capacity of Hindustan Motors  for  production  of passenger  cars  might  be assessed at the  level  of  about 25,000 per annum on double shift working which was based  on the  norms and the standard referred to in the note.   There were certain factors by which the position could be improved and  a higher order of production could be reached by  about 10 to 15%. The technical team went into the matter in great detail  and its findings were: (a)  The capacity of the company’s plant was 24,000 cars and 14,400 trucks subject to installation of new equipment  then being done. (b)  for  the purpose of costing the number of trucks  might be taken at 5,000 trucks per annum. (c)  some  of the spare capacity, due to non-production,  of the plant 9,400 trucks could be diverted for car production. (d)  by  acquiring  certain machine tools and jigs  (of  the value of 81 lakhs) and by working the third shift for a  few operations the production could be increased to 30,000  cars and 5,000 trucks per year.  The technical team had proceeded on  the  basis  of the  independent  physical  checking  and verification  in all respects.  It has been stated and  that statement  has not been challenged that the  technical  team stayed in the company’s plant for L4543 Sup CI/72 558 a  little  over  two months.  With regard  to  the  Standard timing  required  for  various  parts  which  were  directly relevant  to the question of capacity the technical team  is stated  to have made actual test checks and  their  findings are to be found in its report. We are unable to concur in the reasoning or the approach  of the Commission in the matter of assessing capacity.  We have already observed that much reliance cannot be placed on  any figures supplied for applications for the import licence  or mentioned  in letters to the government for the  purpose  of obtaining additional facilities because the estimates  which are  given are likely to be inflated.  We see no  reason  or

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justification  for  rejecting the opinion  of  the  experts, namely,   M/s  Iyengar  and  Rao  and  the  technical   team especially  when  no member of that team was examined  as  a witness  for  finding  out those facts and  data  which  the Commission  has  sought to use for rejecting  the  technical team’s  report.   We  are,  therefore  satisfied  that   the capacity for production of Hindustan Motors should have been assessed at the figure given by the technical team,  namely, 30,000  cars  and 5,000 trucks per year.   Import  licenses, which  were  granted have also not been shown to  have  been given  on the basis of the figures of production  determined by  the  Commission.  For the first half  year  1970-71  the recommendation was for the grant of 11,075 cars although  in the  application the estimated production was stated  to  be 15,000  cars.  It was only for the second half year  1970-71 that  the  import license was recommended  and  granted  for 15,000 cars.  There is no difficulty, therefore, in arriving at the figure of production of cars, namely, 30,000 cars but the  departure  which the Commission made in the  matter  of production  of trucks has been seriously disputed on  behalf of  the  Hindustan Motors.  For the reasons that  have  been stated  the  correct  figures would  be  those-  which  were determined by the technical team of the Commission,  namely, 30,000 cars and 5,000 trucks. There  are  a few minor matters which Mr. Mitra  has  argued relating   to   Hindustan  Motors.   The  only   one   worth considering  relates  to  the  consumption  of  local  steel sheets.   The  Commission  in  its  report  has  taken  that consumption  at  20% as against 6% by reason  of  the  total requirements  adopted  earlier by the  Commission’s  Costing Team and has thereby deducted a sum of Rs. 88/- per car  for July  1970 cost.  It is stated the company had informed  the Commission’s  Cost Accounting Team that the  consumption  of local  steel sheets purchases could be taken at 50  kg.  per car.  This figure which works out to a total of 12,000  tons in a year had been rejected by the Commission on the  ground that  the company had, in the year 1968-69,  purchased  4149 tons of steel locally and that Shri Lahuty, who appeared  as one of its, 559 witnesses,  could  not  give  any  satisfactory  explanation regarding the same.  According to Mr. Mitra this finding  of the Commission is based on no evidence and has been  arrived at  in disregard of material evidence placed by the  company before  the Commission.  It is pointed out that Shri  Lahuty had  stated in his deposition that the figure of  4149  tons might include locally purchased imported steel and this  had to  be  checked  up.  On checking it  found  that  the  said quantity  included  1954 tons of  imported  steel  purchased locally.   A statement showing reconciliation of figures  is said to have been submitted by the company to the Commission as  also the original documents relating to  imported  steel purchased  locally.  It is submitted that  the  Commission’s conclusions taking 20% as utilisation of local steel  merely on the basis that this is utilised in the case of Fiat  cars is arbitrary.  The Commission has pointed out that Hindustan Motors  had  neither kept any regular day to day  record  of issue of its raw material nor had any quality wise record in this regard been kept.  In fact steel, both imported as well as  locally purchased, had been put under one  category  and consumption  had been shown on the standard adopted  by  the company.  In view of the fact that the company had not  kept any regular record of data it was not possible to  determine accurately  the use of locally purchased and imported  steel separately.  In these circumstances we do not consider  that

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the  conclusion arrived at by the Commission has been  shown to be demonstrably erroneous or wrong. Writ  petitions 486 and 487 of 1969 have been filed  by  the Delhi  Automobiles and the Bombay Cycle & Motor Co.  respec- tively.   They are dealers of the cars the prices  of  which are  under consideration.  The case of the dealers  is  that before  1955  the dealer’s margin was 20 to 25% of  the  ex- factory   price.   In  1956  the  First  Tariff   Commission recommended  a reduction i.e., Rs. 1,000 per car or  10%  of the  ex-factory  price  whichever was  less.   In  1957  the Government  accepted that the dealer’s margin should  be  on the  basis  of  10% ex-factory  price.   This  has  remained unchanged  during all these, years whereas  the  operational costs  have  increased.  The existing mark-up or  margin  of profit  of  the  dealer on ex-factory price of  cars  is  as follows              Fiat   :   Rs. 891.00          Standard   :   Rs. 859.00        Ambassador   :   Rs. 1044.00 The  various duties and responsibilities of the dealers  are (a)  to promote sales of vehicles concerned; (b) to  arrange for  after-sale service; (e) to arrange for the stocking  of spare  parts;  (d)  to arrange for  periodical  service  and maintenance.  Apart from these a dealer has to make  advance payment for the cars before 560 taking them over at the factory and make his own arrangement for  transporting them.  He is to carry out a detailed  pre- delivery  inspection  before  handing over the  car  to  the customer.   The agreement between the car  manufacturer  and the dealer is such that any part needing replacement  during the  warranty  period due to manufacturing  defect  will  be changed by the dealer.  The car manufacturer reimburses  the dealer’s  cost  of  the component but the  labour  cost  for replacement of the part is borne by the dealer except in the case of Standard Motors.  It is submitted that the  dealer’s cost of operation has also increased owing to higher  wages, salaries  and other contributions, increase in  rents,  bank charges,  power and water rates and higher outlay on  equip- ment. The,  Commission  referred to all the above  facts  and  the evidence of a number of witnesses examined on behalf of  the consumers   according  to  whom  the  service   and   repair facilities  offered  by  the present day  dealers  were  not satisfactory.   The Commission examined the profit and  loss account  of  a  few dealers to see the  trading  results  of passenger  cars.   It found it impossible to  segregate  the automobile  account  as the trading accounts  covered  other activities also.  In certain cases, however, where  analysis was made it appeared that no one had suffered any loss.  The Commission has observed that spare parts are not stocked  in adequate  quantities in various places by the  dealers  with the  result  that the customers have sometimes to  wait  for long  period for replacement.  The Pande Committee  in  1967 had  deprecated  the  fall in  the  standard  of  after-sale service.    The  Tariff  Commission  in  its  third   Report published  in 1968 did not accept the dealers’ claim for  an upward revision of profit margin.  The Commission felt  that the  workshops of the dealers of Fiat cars, namely,  one  in South (Sundaram Motors P. Ltd.), one in Bombay (Bombay Cycle and  Motor  Agency  Ltd.) and another in  Delhi  (Prem  Nath Motors)  had well equipped workshops with requisite type  of plant  and machinery but there was nothing to indicate  that they  were suffering any loss.  The evidence of  Sagar  Suri the Managing Director of Delhi Automobiles (P) Ltd., was not

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accepted.   The  Commission considered the  desirability  of classifying  dealers in 2 or 3 categories according  to  the standard of equipment and service facilities and fixing  the amount  of mark-up accordingly but it was realised  that  in the  very nature of things this was not feasible.   It  was, however, noticed that the Hindustan Motors charged a sum  of Rs.  50/-  out  of the latter’s  commission  on  account  of advertising charges and the Premier Automobiles also charged Rs.  10/-  from each dealer for service  facilities.   These deductions,  in  the  opinion of the  Commission,  were  un- warranted and should not be allowed to continue.  The other 561 additional factors that have been brought to our notice  are that  the  Commission has now held that the  labour  charges borne by the dealers in doing warranty jobs should be met by the  manufacturer.  This will give an additional benefit  to the dealers.  Taking into consideration all these facts  the Commission  was of the view that the existing margin  should remain   at   the  existing  level   except   for   marginal adjustment.It arrived at the following  figures   for    the dealer’s mark-up        Fiat            :   Rs. 900.00        Standard Herald :   Rs. 860.00        Ambassador      :   Rs. 1050.00 On behalf of the dealers it has been stressed that for  each car the cost of pre-delivery inspection is Rs. 50/- of three free services Rs. 125/- and the interest on investment would roughly come to Rs. 150/-.  We are, however, unable to  take these figures into account because from the data supplied to the Commission and the evidence that was produced before  it there is nothing to indicate that the dealers are  suffering any  loss and are not making a reasonable margin of  profit. The  responsibility  of the manufacturers to  reimburse  the dealers for the labour charges on account of warranty is  an additional benefit which would be derived by them now  apart from  the  directions  of the  Commission  relating  to  the advertisement  and  service  charges.  In  our  opinion  the conclusion  of  the Commission with regard to  the  dealer’s margin  or  mark up has not been shown  to  be  demonstrably wrong. The  result  of the discussion on the six  points  on  which arguments  had taken place before us may now  be  summarised :-- (1)  the production capacity of the three car  manufacturers per  annum for the purpose of working out the ex-works  cost will be as follows:- (a)  Premier Automobiles September 1969                               July 1970 12,000 cars                                  14,000 cars. 5,700 commercial vehicles   6,000 commercial vehicles. (b) Standard Motors.                                           July 1970                                           3,400 cars.                                  1,000 commercial vehicles. (c)  HindustanMotors.                                             July 1970.                                             30,000 cars.                               5,000 commercial vehicles. 562 .lm15 (2)  Cost and expenses on account of warranty and bonus have been  rightly  included  in  the return  and  could  not  be included in the ex-works cost. (3)  In fixing the cost for September 1969 which will now be relevant  only in the case of Premier Automobiles  the  same

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basis should have been adopted as for July         1970.  In other  words  the actual cost and not  the  historical  cost should  have  been  taken into account.   It  was,  however, unnecessary to take the projected and estimated cost for the future. (4)  A  provision should be made for an  escalation  clause. The  lines on which such a clause should be formulated  will be indicated hereafter. (5)  The  return which has been allowed is adequate  on  the facts proved before the Commission. (6)  Depreciation on account of plant and machinery has been allowed  on correct basis but for the purpose of  allocation the capacities indicated above will be taken into account. As  regards  the individual points raised on behalf  of  the Standard  Motors,  Hindustan  Motors  and  the  dealers  our decision is as follows :-               (i)   The amount payable on account of royalty               per  car  in  the  case  of  Standard   Motors               pursuant  to the collaboration  agreement  the               renewal  of  which has been  approved  by  the               Government  of India will be included  in  the               ex-works cost for July 1970.               (ii)  The   conclusion   of   the   Commission               relating to the percentage of the local  steel               sheets by the Hindustan Motors is correct.               (iii) The  dealers shall, for the present,  be               entitled  only to the mark-up in terms of  the               recommendation of the Commission. We  consider that the provision for the future  relating  to escalation and de-escalation should be in these terms.   The position will be reviewed by the government every six months in  the  beginning of the months of January and  July.   Six weeks  prior  to  first  January  and  first  July  the  car manufacturers shall submit all the necessary data and  proof for  determining  the increases  claimed.   The,  government shall  decide  about  the matter promptly by  the  first  of January and first of July respectively and 563 allow  the  increases, if found to be  genuine  and  correct provided  the  total amount of such  increases  exceeds  Rs. 100/- per car in ex-works cost since the last fixation.   If the government fails to do so the car manufacturers will  be entitled to increase the prices to the extent of the  actual increase  if the total increase. is more than Rs. 100/-  per car in the ex-works cost comprising all the items  mentioned in  the Commission’s report which make up the ex-works  cost since the last fixation. As regards the outgoings from the return which will be  con- fined to the minimum bonus payable under the Bonus Act 1965, interest  on  borrowings  and  income  tax  if  there  is  a significant  increase in these items, the car  manufacturers can submit their case with all the relevant data as well  as proof  to  the  government  for  claiming  a   corresponding increase  in  the  return.  The government  shall  give  its decision within 10 weeks from the date the required data and proof are supplied.  The government will also be entitled to take  into account any decreases which take place either  in the  items which make up the ex-works cost or the  aforesaid outgoings  from  the return and the prices  can  be  refixed accordingly. All  the  car manufacturers have undertaken to  furnish  the necessary  details and the relevant data to  the  government within  a fortnight after the announcement of this  judgment to enable it to promulgate a fresh Order under s. 18G of the Act refixing the prices of all the three cars in  accordance

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with  the recommendations of the Commission as  modified  by this  Court.  The Order should indicate that the  prices  as fixed are liable to be increased ,or decreased in accordance with the provision relating to escalation and  de-escalation contained in our judgment.  The goverment will take the cost as  in July 1970 as the base and will take into account  all increases  and decreases since July 1970 upto the  date,  of the  judgment in the ex-works cost and the  three  outgoings from  the return mentioned above.  Learned Attorney  General on  behalf  of  the Central Government has  agreed  to  this course.  It may be added that while furnishing the  relevant information and data to the government the car manufacturers will   give  copies  of  the  relevant  purchase   contracts including the escalation clause,if any. The car manufacturers have given an undertaking that  during the  period of two months from the date of the  announcement of  this judgment they shall continue to charge the  interim prices  which were fixed by our Order dated April  16,  1971 which  were  the  same  as  have  been  recommended  by  the Commission.   For the period September 1969 to the  date  of the  interim order Premier Automobiles have agreed that  the maximum  prices will be those which have been stipulated  in the undertakings obtained by them 564 from  the  dealers but these shall, in no case,  exceed  the price to be computed by the manufacturers in accordance with the Commission’s report as modified by our decision for  the period September 1969 to the end of June 1970 and the  price recommended for July 1970 by the Commission (this is same as fixed by our interim order) from first July 1970 till  April 16, 1971 (the date of our interim order). It  is  common ground and counsel for all  the  parties  are agreed  that as a result of our decision the impugned  Order of  September 1969 shall be inoperative and  ineffective  to the extent the prices fixed by it are not in accordance with our decision. All the writ petitions shall stand disposed of  accordingly. The parties shall be left to bear their own costs. Khanna,  J. I agree except in two matters.  One  relates  to the  production  capacity  of Standard  Motors.   The  other relates  to  the  value to be  attached  to  the  admissions regarding   the   production  capacity  contained   in   the manufacturers’ applications for import licences.  So far  as the  Standard  Motors are concerned, I have dealt  with  the second  matter  in, the discussion  relating  to  production capacity.  As regards the other two manufacturing companies, I  need not dilate upon the question of  admissions  because there was sufficient other material, which has been referred to  in  the  main judgment, in  support  of  our  conclusion regarding production capacity. Controversy  has  arisen about the July 1970  price  of  the Standard  Herald (four door model) car.  The Tarrif  Commis- sion in its Report submitted in August 1968 recommended  the net  dealer’s price of the Standard Herald (two door  model) as  Rs.  12,485/-.  The Central Government in  the  impugned notification  dated 21st of September, 1969 fixed the  price of  the Standard Herald (four door model) at Rs.  14,003/--. The  above,  according to the notification,  was  ex-factory price  inclusive of dealer’s commission but did not  include excise  duty, central sales tax and local taxes, if any  and transportation  charges.  The Car Prices Inquiry  Commission (hereinafter  referred to as the Commission) worked out  the ex-works  cost for September 1969 of Standard Herald  to  be Rs. 13.236/-. Adding a return of 565

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Rs.  1,274/-  to that amount, the ex-factory  price  of  the Standard  Herald  was found to be Rs.  14,510/-.   For  July 1970,  the  Commission  worked  out  the  ex-works  cost  of Standard Herald to be Rs. 13,989/-.  Adding a return of  Rs. 1,231/-  to  the  above  amount,  the  ex-factory  price  of Standard Herald for July 1970 was found by the Commission to be  Rs.  15,220/-.   Rs.  860/- were  added  on  account  of dealer’s  commission to the prices found for September  1969 and  July 1970.  Fair selling price of the  Standard  Herald for  September  1969 was found by the Commission to  be  Rs. 15,373/-  and for July 1970 to be Rs. 16,080/-.  In  working out  the above prices for September 1969 and July 1970,  the Commission  took  the production for September  1969  to  be 3,400  cars and 1,000 commercial vehicles and for July  1970 to be 4,000 cars and 1,000 commercial vehicles. So  far as the price fixed for September 1969 is  concerned, the  matter is now purely academic, as the  Standard  Herald cars  after September 1969 till April 1971 were sold at  the prices  fixed  in the Government notification and  no  bonds were got executed from the purchasers of the said cars.  The controversy  has  centered on the point as  to  whether  the Court should accept or not the price found by the Commission for the Standard Herald for July 1970. It would appear from the above that as against the price  of Rs. 14,003 notified in September 1969 by the Central Govern- ment  for  Standard Herald, the Commission  worked  out  the price of that car to be Rs. 15,373/- for September 1969  and Rs.  16,080/- for July 1970.  Before arriving at  the  above conclusion,  the Commission which had been appointed by  the Government  under  the  Commissions of Inquiry  Act  at  the instance  of  this Court and which included a  retired  High Court  Judge,  a  chartered  accountant  and  an  automobile engineer  visited  the different manufacturing  units.   The Commission   took   into  account   various   factors   like manufacturing capacity, quality, norms of rejection,  bonus, warranty,  interest and return and expressed its  view  with regard  to each of them.  The Commission also took  note  of the  various items of expenditure which have to be  incurred by  the manufacturer in the production of the car.  In  view of  the  detailed  inquiry  made  by  the  Commission,   the approachadopted  by  this Court, as mentioned  in  the  main judgment, has been that we should direct deviation from  the report  of the Commission only when it is shown  that  there has  been a departurefrom the established principles or  the conclusions  of the Commission are shown to be  demonstrably wrong or erroneous. The  main  ground  which has been taken on  behalf  of  the- Standard  Motor Products of India Ltd, hereinafter  referred to as 566 the  petitioner-company,  in assailing the findings  of  the Commission in regard to the July 1970 price of the  Standard Herald  car is that the Commission has worked out the  price on   the   basis  that  the  petitioner-company   would   be manufacturing 4,000 cars a year from July 1970.  It is urged that  the manufacturing capacity of the Standard Herald  car since  July 1970 by the petitioner’s factory cannot be  more than  3,400  cars a year.  The report of the  Commission  in this respect is stated to be vitiated by the above mentioned wrong assumption. It cannot be disputed that in working out the fair price  of a motor car, we have to take into account the  manufacturing capacity  or output of those cars by the  manufacturer.   As observed by Hanson in Dictionary of Economics and  Commerce, the  term  cost of production has meaning only  when  it  is

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related  to  output.   The cost of  producing  a  motor  car depends on whether the manufacturer is turning out 50,  100, 500  cars per week.  The term "cost" is ambiguous  since  it has  several different meanings.  For a given output it  may be total cost, whereas for one unit of output-a single motor car,  for example-it is clearly average cost that  is  being considered.   If a firm is already producing 500 motor  cars per  week  and it decides to increase its weekly  output  to 501, the cost of producing one more motor car per week  will probably be much less than the average cost, though in other ,cases  it might be more than the average cost.  It is  also manifest  that  the  capacity which has  to  be  taken  into account  is  the  achievable capacity of a plant  run  in  a reasonably  efficient  manner.  Concerted effort has  to  be made  to attain a high level of production for  two  obvious reasons : (1) supply of new cars falls considerably short of the  demand and the intending purchasers have to be kept  on the  waiting  list for inordinate length of  time  and  (ii) increased  production would bring down the exworks costs  of the car.  Although it would not be practicable and realistic to insist upon the highest or absolute efficiency, it  would be  equally  unjust and inequitable to throw the  burden  of inefficiency  of a manufacturer on the consumer  in  working out the figure of ’fair price’ of the article  manufactured. To   put   it  differently,  the  authority   concerned   in determining   fair   price  should  not  demand   from   the manufacturer  the  paragon of excellence in  the  matter  of volume  of  production but at the same  time  the  authority should  not make the consumer bear the margin of  high  cost resulting from avoidable low production.  It is, of  course, implicit in that reasonable facilities would be afforded  to the manufacturer for procuring material like imported  parts and steel which is under the Government control so as to  be in  a position to manufacture the requisite number of  cars. The  ,-concept  of ’fair price’ postulates  that  the  price should be fair not  567 only  to  the producer but also to the  consumer;  the  goal should be to arrive at just and reasonable rates.  To  quote from Hanson’s book referred to above :               "There  is a popular idea that the price of  a               commodity  should  be fair, but  to  whom?  to               consumers or producers ? It is very  difficult               to   define  the  meaning  of  fair  in   this               connection.  If a service is deliberately  run               at  a loss, it is clearly to the advantage  of               everyone making use of the service, but  those               who  do  not use it are  having  to  subsidise               those  who do.  The free working of the  price               mechanism, with sufficient restrictions on  it               as are in the interest of the whole community,               has  even so its disadvantages, but these  are               outweighed  by the advantages where the  State               watches  the interests of the community  as  a               whole.   It  has been suggested  that  if  the               State intervenes in the market it should be to               make a price as near as possible to the  long-               run normal price in a perfect market." According  to  the  case  of  the  petitioner-company,   the original installed capacity of the petitioner’s factory  was for  the manufacture of 5,000 Herald cars and 1,500  one-ton commercial  vehicles.  As a result of gradual  deletions  of imported components, there has been a steady decline in  the petitioner-company’s  capacity  with  the  result  that  the installed  capacity  has come down to 2,500 cars  and  1,000

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commercial  vehicles  annually.  It was also  maintained  on behalf of the petitioner-company that it was not possible to increase the capacity for the manufacture of Standard Herald as  the Press Shop was a limiting factor.  It may  be  noted that  the  petitioner-company was previously working  for  5 days  in a week.  In the course of the arguments before  the Commission,  the counsel for the  petitioner-company  stated that  it  could achieve a capacity of 3,400 cars  and  1,000 commercial vehicles on a six day working week provided  some components  were transferred from one unit to the other  and the  petitioner  company was allowed an  additional  tooling cost  of Rs. 2.5 lakhs.  As against the above, the case  set up  on  behalf of the respondent before the  Commission  was that the capacity of the petitioner company should be  fixed at  a  level  of  4,000 to 5,000 cars  and  1,000  to  1,500 commercial trucks. The Commission took into account the statements made by  the petitioner-company in its various communications and  appli- cations  to  the  Government  regarding  its   manufacturing capacity.   It  was  observed  that  the  decision  of   the petitioner-company to work for 6 days in a week would result in increased production.  The Commission also expressed  the view that in the factory of 598 the  petitioner-company,  there  was  scope  for  increasing productivity   to   the  extent  of  5%.    The   Commission accordingly concluded :               "Thus  giving an allowance for  this  increase               and after taking into account the transfer  of               some  capacity  from the  commercial  vehicles               side  to  the car side, and after  allowing  a               capital  addition  of Rs.  2.5  lakhs  towards               tooling,  it is reasonable to assume that  the               Company   can  easily  reach  the   level   of               production of 4,000 cars and 1,000  commercial               vehicles per annum."               Regarding the assessment made by the technical               team, the Commission observed as under :-               "The  Technical  team of  the  Commission  had               assessed the capacity of the Company at  3,400               cars and 1,000 commercial vehicles per year on               a  six-day  week  but the  assessment  of  the               Technical  Team in case of this unit was  made               when  the  factory  was  closed  and  all  the               relevant data were not available.  The Commis-               sion has, therefore, tried to rely more on the               assessment  made by the Company itself  rather               than on the estimates of the team." It has been argued on behalf of the petitioner that the Com- mission  should  have accepted the report of  its  Technical Team  and  not  excluded it  from  consideration.   In  this respect,  I  find  that  according  to  the  report  of  the Technical Team, it felt handicapped because it found at  the time  of its visit that the production in  the  petitioner’s company had virtually come to a standstill on account of the complete  closure  of the factory and the discharge  of  the factory  employees.  The Team consequently carried  out  the investigations on the basis of available records.  Here too, the  Team faced considerable difficulties since due  to  the non-availability  of  the  concerned  staff,  even  relevant records could not be quickly traced and made available.  The visits to, the factory for study and collection of data were also rendered difficult because of demonstrations.  The Team consequently   found  it  welling  impossible  to   make   a systematic study and on the spot physical verification as is

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normally done in the case of a functioning plant.  The  Team also  mentioned  that the matters had  not  been  simplified because the petitioner-company had furnished its replies  to the  Questionnaire issued by the Commission at a  very  late stage when the Team was due to complete its work.  The  Team in  conclusion observed that its findings were based  Purely on  the records made available and the discussions with  the petitioner-company’s officers.  569 It  would  follow from the above that neither  any  physical verification  could be made by the Technical Team nor  could it make a systematic study and it had to content itself with the  material  supplied  by  the  petitioner-company.    It, therefore,  cannot be said that any  satisfactory  technical assessment   regarding  the  production  capacity   of   the petitioner-factory  was made by the Technical Team.  In  the circumstances,  there was nothing wrong in the  approach  of the Commission which included a chartered accountant and  an automobile  engineer  in  relying upon  its  own  assessment rather than that of the Technical Team. The  other assessment of the manufacturing capacity  of  the petitioner-company  upon which reliance has been  placed  on its behalf is that made by the Varghese Committee.  The said Committee in its Report observed as under -               "The  plant  capacity  as  a  whole  could  be               balanced for a production of 3,200 Heralds and               1,000 Standard 20 trucks.  Standard 20  trucks               is  not  being manufactured in  U.K.  now  and               therefore the imported components will have to               be progressively indigenised.  The  Management               felt  that some capacity should  be  earmarked               for this purpose.  On an overall assessment of               all these factors, we felt it safe to estimate               the installed capacity of the Factory at 3,000               Heralds and 1,000 Standard 20 Trucks." The above Committee presided over by Shri T.V. Varghese, Ex- Chief  Secretary  of  the  Government  of  Tamil  Nadu   was appointed  by  the  Central Government in  exercise  of  the powers   conferred   by  section  15   of   the   Industries (Development  and Regulation) Act, 1951.  The material  part of  the  order regarding the appointment of  that  Committee reads as under :-               "And whereas it has come to the notice of  the               Central   Government  that  the   volume,   of               production of the articles manufactured in the               said industrial undertaking had been gradually               going down and the production has now come  to               a  standstill consequent upon the  closure  of               the   said  industrial  undertaking   by   the               management;               And  whereas  the  Central  Government  is  of               opinion  that it is expedient to  take  urgent               measures  to remedy the situation arising  out               of   the  closure  of  the   said   industrial               undertaking  and to ensure that production  in               the said scheduled industry does not suffer to               the detriment of the public interest;               570               Now,  therefore,  in exercise  of  the  powers               conferred  by  section 15  of  the  Industries               (Development and Regulation) Act, 1951 (65  of               1951), the Central Government hereby  appoints               for the purpose of making a full and  complete               investigation  into the circumstances  of  the               case, a body of persons.......... ....

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It would thus appear that though the Varghese Committee  was asked to inquire into the gradual fall in production in  the petitioner’s factory and its ultimate closure and to suggest remedial measures in that connection, the said Committee was not called upon to determine the achievable capacity of  the factory of the petitioner-company.  The Committee, no doubt, dealt  with the question of capacity but it was rather in  a general way.  There is nothing to indicate that any  attempt was  made before the Committee to show that  the  achievable capacity  of the petitioner company was more than  what  was stated on behalf of the petitioner. As  the  fair selling price is linked  with  the  achievable capacity   of   the  manufacturer’s  factory,   the   Tariff Commission  while submitting its 1968 Report considered  the question  of production capacity of  the  petitioner-company for three years from 1968 to 1970 and came to the conclusion that  the production capacity of the petitioner-company  for Standard  Herald cars was 5,000 and of  commercial  vehicles was  1,500.  The Report of the Tariff Commission shows  that in arriving at the above figures, it got the matter adjudged by  its Cost Accounts Officer and held discussions with  the individual  units  and  with  the  Directorate  General   of Technical Development.  The Tariff Commission also took into account  the  information  conveyed  to  it  at  the  public inquiry.   The above estimate of the production capacity  of the  petitioner company made by the Tariff Commission  as  a result of inquiry and discussions with the Accounts  Officer and technical officials, in my opinion, has a direct bearing on the case and would go to show that the conclusion of  the Inquiry Commission that the petitioner-company’s  production capacity was 4,000 cars and 1,000 commercial vehicles was by no means vitiated by an excessive estimate.  Nothing on  the record has been pointed out to indicate that there would  be a  fall  in production capacity  of  the  petitioner-company because  of the manufacture of four door car as against  the previous two door car. There  are  a  number  of  communications  and  applications addressed  by the petitioner-company which also go  to  show that  the  estimate formed by the Commission  regarding  the production  capacity of the petitioner-company did not  lean on  the side of being excessive.  In its  application  dated 19-6-1968 addressed 571 by  the  petitioner-company to the  Directorate  General  of Technical Development, the petitioner-company estimated  its production for 1968 at 4,200 cars.  Again in its application dated 20th December, 1968, the petitioner-company  estimated its  production  for 1969 at 4,200  cars.   The  petitioner- company no doubt, showed its production capacity of cars  as 3,400 in its letter dated 13-12-1969 but that was after  the issue  of the impugned notification and during the  pendency of  the  present petition. 1, thus, find that  even  if  the production  figure  as admitted in  the  applications  dated 19-6-1968 and 20-12-1968 were to be taken into account,  the estimate of the Commission regarding the production capacity of  the  petitioner-company  cannot  be  considered  to   be excessive.   It is well known that admissions  constitute  a strong  piece  of  evidence against  the  party  making  the admissions  and  it  is  for that party  to  show  that  the admissions are mistaken or are not true.  On the material on record, the petitioner-company, in my opinion, has failed to discharge  that onus.  The argument that the  petitioner  in order to obtain import licence had to give a bloated  figure of  estimated  production does not appear to  be  convincing because  the  excess  of the imported  material  had  to  be

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adjusted in the subsequent import licences. The  learned Solicitor General has argued that if  the  July 1970  price of Standard Herald were to be worked out on  the basis  of  a production capacity of 3,400  cars  instead  of 4,000 cars, the price of the Standard Herald would be almost the  same  as  that of the Ambassador.   The  price  of  the Standard Herald in the past has been considerably lower than that of Ambassador and any fixation of price of the Standard Herald which would make it to be almost the same as that  of Ambassador would, in my opinion, be unrealistic. I, therefore, am of the view that no case has been made  for interfering  with the July 1970 price of Standard Herald  as found  by the Commission on the ground that  the  production capacity  of the petitioner-company from July  1970  onwards was 3,400 and not 4,000 cars.                            ORDER In  all  matters excepting the production  capacity  of  the Standard  Motors Products of India Ltd. the conclusions  and the  decision of the Court are unanimous.  In the matter  of production  by the Standard Motor Products of India Ltd.  of the Herald cars the majority decision is the decision of the Court. G.C. 572