CENTRAL UNIVERSITY OF SOUTH BIHAR

GAYA-824236

SCHOOL OF LAW AND GOVERNANCE

Constitutional Law - II

Case Comment on
Hoechst Pharmaceutical vs. State of Bihar (AIR 1983 SC 297)
SUBMITTED TO:
Mrs. Poonam Kumari
Assistant Professor
SCHOOL OF LAW AND GOVERNANCE
CENTRAL UNIVERSITY OF SOUTH BIHAR.

SUBMITTED BY:
Sudhanshu Sachan
B.A.LL.B (HONS.) 3RD SEM
ENROLLMENT NO:-CUSB1813125106
SCHOOL OF LAW AND GOVERNANCE
CENTRAL UNIVERSITY OF SOUTH BIHAR

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 Declaration

I hereby declare that the work reported in this project report entitled “Case
Comment on Hoechst Pharmaceutical v. State of Bihar AIR 1983 SC 297
submitted at SCHOOL OF LAW AND GOVERNANCE, CENTRAL
UNIVERSITY OF SOUTH BIHAR is an outcome of my hard work carried out
under the supervision of my course instructor and guide Mrs. Poonam Kumari,
Assistant Professor, School of Law and Governance (CUSB).
I have duly acknowledged all the sources from which the ideas and extracts
have been taken. To the best of my understanding, the project is free from any
plagiarism issue.

(Signature of Student)

NAME: SUDHANSHU SACHAN

CUSB1813125106
SCHOOL OF LAW AND GOVERNANCE
CENTRAL UNIVERSITY OF SOUTH BIHAR

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 ACKNOWLEDGEMENT

It is a great pleasure to express my deep sense of thanks and gratitude to my course instructor
and guide Mrs. Poonam Kumari, Assistant Professor, School of Law and Governance
(CUSB) for his dedication and keen interest above all and his overwhelming attitude to help
all his students, had been solely and mainly responsible for completing my work. His
scholarly and timely advice, meticulous scrutiny, and her logical approach have helped me to
a very great extent to accomplish my project in an excellent manner.

I owe a deep sense of gratitude to all my, parents and my friends for all their support, golden
advices and encouragement throughout my research period. Finally I would like to thank all
our Professors and Member staffs of this university for making us assure that we are provided
with best facilities and surroundings to fetch the best out of ourselves.

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 TABLE OF CONTENT

S.NO HEADING PAGE NO.

1. DECLARATION 2
2. ACKNOWLEDGEMENT 3
3. PART 1 5
Introduction and Intrinsic details of the case
4. PART 2 6
Facts of the case and issues
5. PART 3 7
Explanation to relevant provisions and doctrine
5. PART 4 8-10
Contention from the appellant’s side
6. PART 5 8-10
Contention from the respondent’s side
7. PART 6 11-12
Cases referred

8. PART 7 13
Judgment – obiter dicta and ratio decedendi
9. PART 8 14
Conclusion, opinion and suggestion
10. BIBLIOGRAPHY 15

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INTRODUCTION

The case is a landmark judgement which involves issues of equality, freedom of movement
and trade, economic justice, federal supremacy, questions of repugnancy etc. It is pertinent to
note that the High Court of Bihar had upheld state’s contention. On appeal to the Supreme
Court, the court upheld the High Court’s decision. In this case, the Supreme Court reiterated
its judgement from the case of S.Kodar v. State of Kerela1. Both cases were quite similar
and were decided in the same way. The court went through all the intricacies of the case and
the contention of the appellants could not move the court. This case comment includes
explanations of important statutory provisions relevant to the case along with the important
statutory provisions. It also includes the logical and highly appealing contentions of the
counsels. The judgment is clear and seems to have no ambiguity.

Parties involved –

Appellants: Hoechst Pharmaceuticals Ltd. and Ors.

Respondent: State of Bihar and Ors.

Courts - High Court of Bihar, Supreme Court of India

Judges - A.P. Sen, E.S. Venkataramiah and R.B. Misra, JJ

Counsels:
For Appellant/Petitioner/plaintiff: A.B. Divan, K. Sen, Shankar Ghose, P.R.
Mridul and Hardev Singh, Advs

For Respondents/Defendant: K. Parasaran, Solicitor General, R.B. Mahto,Addl. Advocate

General,Bihar, Pramod Swarup and U.S. Prasad, Advs.

Acts/Rules/Orders:

Constitution of India Article 14, Article 168, Article 19(1)(g), Article 200, Article 201,
Article 246, Article 246(1), Article 246(3), Article 254, Article 254(1), Article 254(2), Article
286, Article 304(b), Article 31(3);

Essential Commodities Act, 1955 - Section 2(a), Section 3, Section 3(1), Section 3(2)(c),
Section 3(3C), Section 6.

Bihar Finance Act, 1981.

1
. S.Kodar v. State of Kerela, 1974 AIR 2272
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Facts

Two companies namely Messers Hoechst Pharmaceuticals Limited and Another and Messers
Glaxo Laboratories (India) Limited were incorporated under The Companies Act, 1956.
These companies manufacture and sale various medicines and lifesaving drugs in India
including the State of Bihar. The medicines they sell (almost 94% of them) are sold at
controlled prices. Sub-Section (1) of Section 3 of the Essential Commodities Act empowers
the central government to issue notifications from time to time to control the prices.
According to the Drugs (Price Control) Order, 1979, these prices are exclusive of the local
taxes but are inclusive of the excise taxes. These companies are expressly prohibited from
selling the medicines and drugs above the notified prices. The notifications empower the
companies to pass their tax liability on the consumers. The sales tax and local taxes will be
charged wherever applicable. The producers can pass the tax liability to the consumers. The
Government of Bihar passed The Bihar Finance Act, 1981 (hereinafter referred to as “act”)
under Entry 54 of List II of the Seventh Schedule. The act was reserved for the previous
assent of the President and it received the assent on April 20, 1981. According to Sub-section
(1) of Section 5 of the Bihar Finance Act, the government can impose a surcharge of 10% on
every dealer whose gross turnover exceeds Rupees 5 lakh a year. This tax is the additional tax
levied on the company. By a notification dated January 15, 1981 the rate of surcharge at 10
per cent of the total amount of the tax payable by a dealer whose gross turnover during a year
exceeds Rupees 5 lakhs, in addition to the tax payable by him. This surcharge cannot be
passed on to the consumers.

Issues involved-

1. Some provisions of the act are in conflict with the constitutional provisions. The Act
is void.
2. There is violation of Right to Equality of the traders.
3. Their fundamental right of doing free business, trade and commerce under Article
19(1)(f) has been infringed.
4. The state legislature is incompetent to enact such Act.

These were some issues that the Supreme Court needed to ponder upon and decide.

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Explanation to relevant statutes and doctrines-

Doctrine of repugnancy- Article 254 of the Constitution of India deals with repugnancy. If
the central government and the state government have enacted a law on a subject mentioned
in the concurrent list, and the laws are in conflict with each other then in such scenario the
central government law will prevail. The state law will be repugnant to the extent of the
conflict and after that it will also be applicable. However, if the state has taken the assent of
the President then in such states the state law will prevail.

The provision clause of Article 254 states that even after attaining the assent, if the Central
government brings any la on that subject then that law will override the law of the state on
that subject.

Right to equality- Article 14 to 18 of the Constitution of India gives us the right to equality
as a basic and fundamental right. Equality means absence of privilege and “like should be
treated alike”. In India, there is equality before law and equal protection of laws. One says
that in the eyes of law all people are equal while the other says that the law also takes care of
the circumstances of the person. Article 15 provides that there should be no discrimination on
the basis of sex, caste, religion, race and place of birth. Article 16 provides reservation to the
socially and economically backward classes for their upliftment so that they could also come
into the mainstream of the society. Article 17 provides for abolition of untouchability while
Article 18 provides us with abolition of titles. No one should hold title except academicians
and military persons.

Right to free profession, occupation, business and trade- Article 19(1)(f) of the
Constitution of India provides us with the fundamental right freely trade and commerce.
Article 19 (1) (g) guarantees that all citizens shall have the right to practice any profession, or
to carry on occupation, trade or business. However, the right to carry on a profession, trade or
business is not unqualified. It can be restricted and regulated by authority of law. Thus the
state can under clause (6) of article 19 may make any law. whereas article 301 of the
Constitution of India declared that trade commerce and intercourse to out if the territory of
India shall be free. A constitutional guarantee of the right to take up the profession, calling,
trade or business of one’s choice is indeed a significant aid to the building up of a dynamic
and democratic society! The framers of the Constitution have done well to incorporate these
rights in the chapter on Fundamental Rights and have thereby helped the evolution of a truly
democratic society.

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Arguments from the appellant side:

1. Competency of the state legislature is challenged.

The principal contention that was put forward from the appellant side was that the
essential goods in general, and drugs and formulations in particular, an occupied field
by virtue of various orders issued by the central government. Sub-section 1 of
Section 3 of the Essential Commodities Act, 1955 empowers the central government
to issue orders. The tax liability on these goods can be passed to the consumer. The
state government of Bihar has no legislative competence to enact such act.

Sub section 1 of Section 3 of the Essential Commodities Act, 1955 says that
3. Powers to control production, supply, distribution, etc., of essential
commodities.
(c) for controlling the price at which any essential commodity may be bought or sold;

2. Question of repugnancy between the act and the Drugs (Price Control) Order,
1979.

The other contention was that the act enacted by the legislature of Bihar would cover
all sales taking place in the state. Because of this there would be repugnancy between
the said act and various control orders issued by the central government. Sub-section
(3) of Section 5 of the Act provides that no dealer shall be entitled to collect the
amount of surcharge levied on him from the consumers, clearly falls within Entry 54
of List II of the Seventh Schedule and is repugnant to the scheme of Drugs (Price
Control) Order, 1979. Particularly with paragraph 21 which enables the manufacturer
or producer of drugs to pass on the liability to pay sales tax to the consumer. If that be
so, then there will be repugnancy between the State law and the Control Order which,
according to Section 6 of the Essential Commodities Act, must prevail. The Court
should adopt the rule of harmonious construction to prevent a conflict between both
the laws and should take care that the laws can operate in their fields and do not
encroach upon each other. It is only possible by giving full effect to the non obstante
clause in Section 6 of the Essential Commodities Act.

3. The act is ultra vires to Article 286 of the Constitution of India.

Another contention that was put forward from the appellant side was that the said act
was ultra vires. The act said that there will be an extra surcharge of 10% on those
dealers whose gross turnover of a year exceeds rupees 5, 00, 000 lakhs a year or more.
This gross turnover is inclusive of sales that has taken place outside the state. The
sales have taken place in the course of inter-state trade or commerce or outside the
State or in the case of import or export outside the territory of India. These
transactions are covered by the Article 286 of the Constitution and therefore are

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 outside the scope of this act. Therefore, they cannot be taken into consideration for
computation of the gross turnover as defined in Section 2(j) of the Act for the purpose
of bearing the incidence of surcharge under Sub-section (1) of Section 5 of the Act.

Article 286. Restrictions as to imposition of tax on the sale or purchase of

goods
(1) No law of a State shall impose, or authorise the imposition of, a tax on the sale
or purchase of goods where such sale or purchase takes place
(a) outside the State; or
(b) in the course of the import of the goods into, or export of the goods out of, the
territory of India

Bihar Finance Act, 1981 –

Surcharge and Additional Tax: Every dealer whose gross turnover exceeds rupees
ten lakh per annum is liable to pay surcharge at the rate of 10 per cent, if the
turnover is between Rs.5 lakh and R s .10 lakh and at the rate of 10 percent of
the tax if the turnover exceeds Rs.10 lakh (Section 5) .

4. The said act is in violation with Article 19(1)(g) of the Constitution of India.

The restriction imposed by Sub-section (3) of Section 5 of the Act which prevents the
manufacturers of producers of medicines and drugs from passing on the liability to
pay surcharge is confiscatory and casts a disproportionate burden on such
manufacturers and producers and constitutes an unreasonable restriction on the
freedom to carry on their business guaranteed under Article 19(1)(g).

5. Doctrine of occupied field and federal supremacy.

Their other contention was that the opening words of Article 246(3) of the
Constitution say that "Subject to Clauses (1) and (2)" the state legislature can make
laws on the matters enumerated in list II. Sub-section (3) of Section 5 of the Act
provides that no dealer shall be entitled to collect the surcharge levied on him must
therefore yield to Section 6 of the Essential Commodities Act which provides that any
order made under Section 3 of the Act shall have effect notwithstanding anything
inconsistent therewith contained in any enactment other than the Act or any
instrument having effect by virtue of any enactment other than the Act. The entire
submission proceeds on the doctrine of occupied field and the concept of federal
supremacy. In short, the contention is that the Union power shall prevail in a case of
conflict between List II and List III.

Article 246. Subject matter of laws made by Parliament and by the

Legislatures of States
(1) Notwithstanding anything in clauses ( 2 ) and ( 3 ), Parliament has exclusive
power to make laws with respect to any of the matters enumerated in List I in the
Seventh Schedule (in this Constitution referred to as the Union List
(2) Notwithstanding anything in clause ( 3 ), Parliament, and, subject to clause

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 ( 1 ), the Legislature of any State also, have power to make laws with respect to
any of the matters enumerated in List III in the Seventh Schedule (in this
Constitution referred to as the Concurrent List
(3) Parliament has power to make laws with respect to any matter for any part of
the territory of India not included (in a State) notwithstanding that such matter is a
matter enumerated in the State List.

Essential Commodities Act, 1955

Section 6. Effect of orders inconsistent with other enactment - Any order made
under section 3 shall have effect notwithstanding anything inconsistent therewith
contained in any enactment other than this Act or any instrument having effect by
virtue of any enactment other than this Act.

6. The act is in violation with Article 14 of the Constitution of India.

The provisions contained in Sub-section (3) of Section 5 of the Act is ex facie and
patently discriminatory. The Essential Commodities Act treats certain controlled
commodities and their sellers in a special manner by fixing controlled prices. Those
sellers who are involved in trade of such controlled commodities are a different class
of dealers. The class of dealers who can raise their sale prices and absorb the
surcharge levied under Sub-section (1) of Section 5 and a class of dealers like the
manufacturers and producers of medicines and drugs who cannot raise their sale
prices beyond the controlled price are treated similarly by the said act. Once the fact
of different classes being separate is taken, then a State law which treats both classes
equally and visits them with different burden, would be violative of Article 14.

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Arguments from the Respondent’s side-

1. No question of repugnancy

There is no inconsistency between Sub-section (3) of Section 5 of the Act and

paragraph 21 of the Control Order and both the laws are capable of being obeyed.
According to Article 254 of the Constitution of India, question of repugnancy can
arise only when the central government and the state government have enacted a
law on the same subject mentioned in the concurrent list. If there is head on clash
of such laws then there is a situation of repugnancy and the state law will be
declared void to the extent of repugnancy. The questions of repugnancy cannot
arise in any other case. Here, the central government and the state government
have enacted laws in their own domain in accordance with the constituent powers
conferred upon them. There seems to be no conflict between the two and both are
capable of being obeyed. He further contends that the appellants being
manufacturers or producers of drugs are not governed by paragraph 21 of the
Control Order which relates to retail sale but by paragraph 24 thereof which deals
with sale by a manufacturer or producer to wholesale distributor. Under paragraph
24 of the Control Order, the manufacturer or producer is not entitled to pass on the
liability to pay sales tax and the price that he charges to the wholesaler or
distributor is inclusive of sales tax.

2. The application of the doctrine of ‘pith and substance’.

The learned Solicitor General contends that the question has to be determined not
by the application of the doctrine of occupied field but by the rule of 'pith and
substance’. The main essence of the act should be checked and the overlap of the
fields should be ignored if the crux of the act does not comes into conflicts with
any of the fields in list I or list III or any law being in force.

3. Decrease in price does not make the laws inconsistent.

He also contends that the controlled price of an essential commodity particularly

of medicines and drugs fixed by a control order issued by the Central Government
under Sub-section (1) of Section 3 of the Essential Commodities Act is only the
maximum price. There is nothing to prevent the manufacturers or producers of
medicines and drugs to sell it at a price lower than the controlled price. The levy
of surcharge will only cut into their profits and will not make the State Law
inconsistent with the Central law. This surcharge will be borne by the
manufacturers and producers of such drugs and medicines and the consumers will
remain unaffected.

4. Decrease in profits is no burden.

It was submitted that there is no material placed by the appellants to show that this
levy of surcharge under Sub-section (1) of Section 5 of the Act would impose a
burden disproportionate to the profits earned by them. This will just cut into their
profits. It is not confiscatory in nature and it is not in conflict with any provision
of the law of the land.

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These appellants have placed on record their orders of assessment together with
notices of demand, for the assessment years 1980-81 and 1981-82.
For the assessment year 1980-81, the Commercial Taxes Officer, Patna Circle,
Patna determined the gross turnover of sales in the State of Bihar through their
branch office at Patna of Messrs Hoechst Pharmaceuticals Limited on the
basis of the return filed by them at Rs. 3,13,69,598,12p. and the tax payable
thereon at Rs. 19,65,137.52. p. The surcharge thereon at 10% amounts to Rs.
38,503.33p. Thus the total tax assessed of Messrs Hoechst Pharmaceuticals
Limited including surcharge for the assessment year 1980-81 amounts to Rs.
20,03,640.85p. The figures for the assessment year 1981-82 are not available.

For the assessment years 1980-81 and 1981-82 the annual returns filed by Messrs
Glaxo Laboratories (India) Limited show the gross turnover of their sales in
the State of Bihar through their branch at Patna at Rs. 5,17,83,985.76p. and
Rs. 5,89,22,346.64p. respectively. They have paid tax along with the return
amounting to Rs. 34,06,809.80p. and Rs. 40,13,057.28p. inclusive of surcharge at
10% of the tax for the period from January 15, 1981 to March 31, 1981 and April
1981 to January 19, 1982 amounting to Rs. 34,877.62p. and Rs. 3,09,955.86p.
respectively.
These figures show the magnitude of the business carried on by these appellants
in the State of Bihar alone and their capacity to bear the additional burden of
surcharge levied under Sub-section (1) of Section 5 of the Act.

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Cases Referred-

S. Kodar v. State of Kerela2

The Tamil Nadu Additional Sales-tax Act, 1970 imposed additional sales-tax of 5% on
those dealers whose annual total turnover exceeded Rupees 10 lakhs. Writ petitions
questioning the constitutional validity of the Act were dismissed by the High Court.

In appeal it was contended that

(i) the State Legislature has no power to enact as it is outside the scope of Entry 54 of list II
of the Seventh Schedule

(ii) that the provisions of the Act violated the fundamental rights of the appellant under Art.
19(1)(f) and (g) of the Constitution of India

(iii) that the provisions were violative of Article 14 of the Constitution of India.

The appeal was dismissed.

The contention of the appellants that the additional sales-tax is not a tax on sales but on the
income of the dealers is without any basis. The additional tax is being imposed only when the
dealers make an annual turnover over rupees 10 lakhs. It is in reality a tax on the aggregate of
sales by a dealer during a year.

In Kilikar v. Sales Tax Officer3 and A. S. Ramachandra Rao V. State of Andhra

Pradesh4 it was approved that, the amount or rate of tax is a matter exclusively within
legislative judgment and as long as a tax retains its avowed character and does not
confiscate the property to the State under the guise of a tax, its reasonableness is
outside the judicial ken.

It is not possible to say that because a dealer is disabled from passing on the incidence of tax
to the purchaser to provisions of the Act impose unreasonable restriction upon the
fundamental rights of the appellants under Article 19(1) (f) or 19(1) (g).

An attempt to proportion the payment to capacity to pay and thus bring about a real and
factual equality cannot be ruled out as irrelevant in levy of tax on the sale of purchase of
goods. The object of a tax is not only to raise revenue but also to regulate the economic life
of the society.

2
. S.Kodar v. State of Kerela, 1974 AIR 2272
3
. Kilikar v. Sales Tax Officer, 1968 21 STC 252 Ker
4
. A. S. Ramachandra Rao V. State of Andhra Pradesh, 2000 (2) ALD 652

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Judgement

Ratio Decedendi - The Supreme Court dismissed the appeal.

Obiter Dicta- All the issues were taken into account carefully by the Supreme Court and
were resolved. The court did not find any problem with the act and declared it valid. There
was no repugnancy with the said act.

Opinion

A particularly same case has been decided by the Supreme Court. And this case is just a
reiteration of the previous case. The case has been correctly decided in my opinion.

Conclusion

This judgment is a very important precedent. This case correctly establishes the true meaning
of the doctrine of repugnancy. The doctrine of repugnancy is applicable only when the laws
are made on a subject mentioned in the concurrent list. There is no violation of Right to
Equality. As correctly said in the case of S Kodar v. State of Kerela “A large dealer
occupies a position of economic superiority by reason of his volume of business and to make
the tax heavier on him both absolutely and relatively is not arbitrary discrimination but an
attempt to proportion the payment to capacity to pay and thus arrive in the end at a more
genuine equality. The capacity of a dealer, in particular circumstances, to pay tax is not an
irrelevant factor in fixing the rate of tax and one index of capacity is the quantum of turnover.
The argument that while a dealer beyond certain limit is ,obliged to pay higher tax, when
others bear a less tax, and it is consequently discriminatory, really misses the point namely
that the former kind of dealers are in a position of economic superiority by reason of their
volume of business and form a class by themselves. They cannot, be treated as on a par with
comparatively small dealers. An attempt to proportion the payment to capacity to pay and
thus bring about a real and factual equality cannot be ruled out as irrelevant in levy of tax on
the sale or purchase of goods. The object of a tax is not only to, raise revenue but also to
regulate the economic life of the society”.

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Bibliography

1. file:///C:/Users/hp/Desktop/constitution%20project%20sudhanshu/Hoechst_Pharmaceutica
ls_Ltd_and_Ors_vs_State_of_Bihar_and_Ors_06051983__SC_1.htm
2. https://indiankanoon.org/search/?formInput=Bihar%20Finance%20Act%201981
3. https://indiankanoon.org/doc/703764/
4. https://www.casemine.com/judgement/in/5609ac10e4b014971140ded1
5. https://india.lawi.asia/hoechst-pharmaceuticals-ltd-and-anr-v-state-of-bihar-and-ors-5/
6. https://www.lawyerservices.in/Hoechst-Pharmaceutical-Ltd-Versus-The-State-of-Bihar-
1982-04-30

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