Hoechst Pharmaceuticals Ltd. v. State of Bihar, AIR 1983 SC 1019 

CITATION	1983 AIR 1019
DATE OF JUDGEMENT	06/05/1983
COURT	THE SUPREME COURT OF INDIA
APPELLANT	HOECHST PHARMACEUTICALS LTD.  AND ANOTHER ETC
RESPONDENT	STATE OF BIHAR AND OTHERS
BENCH	SEN, A.P. (J) VENKATARAMIAH, E.S. (J)  MISRA, R.B. (J)

INTRODUCTION:  

The appellant in this case operated a drug manufacturing unit in Bihar, selling medicines  throughout the state. They established a wholesale unit in Patna, through which medicines were  distributed to retailers and eventually to customers. It’s important to note that a significant  portion, around 90-95%, of the medicines they sold were subject to controlled prices as per the  Drugs Order of 1979, which falls under the Essential Commodities Act of 1955. Their total  sales turnover within the state during the relevant period amounted to millions of rupees 

The appellant filed a writ petition challenging a specific section, Section 2, of the Bihar Finance  Act. This section mandated that if someone earned a profit exceeding 5 lakhs through any  commercial activity, they were required to pay an additional 10% sales tax from their income.  Importantly, they were not allowed to pass this tax burden on to their customers. 

Furthermore, Section 3(1) of the Essential Commodities Act, 1955, stated that the tax burden  could be shifted onto consumers. The appellant contested the constitutional validity of the state  legislative act, the Bihar Finance Act, 1981. They argued that Section 5 of this act violated  Article 14, Article 19(1)(f), and Article 19(1)(g) of the Indian Constitution.  

FACTS OF THE CASE 

The appellant lodged a formal petition under Article 254, contesting the constitutional validity  of Section 2 of the Bihar Finance Act in conjunction with Section 3(1) of the Essential  Commodities Act. The crux of their argument was that these provisions infringed upon their  fundamental rights as guaranteed by Article 14, Article 19(1)(f), and Article 19(1)(g) of the  Indian Constitution. Specifically, they contended that the requirement to pay additional taxes  could not be shifted onto their customers. 

The appellant also cited Article 6 of the Essential Commodities Act, which stipulates that any  law created under Section 3 of the act must align with the provisions of the act itself. They  argued that Section 5 of the Bihar Finance Act conflicted with this, as it prevented them from  passing the extra tax burden on to their customers. 

Furthermore, the appellant questioned the validity of Article 246 of the Indian Constitution,  which delineates the authority of state legislatures and the Parliament to make laws. They  argued that, despite the supremacy of laws created by the Parliament, Section 5 of the Bihar  Finance Act placed an unfair tax burden on them, even though they were selling their drugs  within the prescribed price limits. 

ISSUES RAISED  

1. Does the imposition of surcharge on sales tax and the prohibition from transferring this  liability to purchasers, as specified in subsections (1) and (3) of Section 5 of the Bihar  Finance Act, 1981, conflict with Paragraph 21 of the Drugs (Price Control) Order, 1979,  issued under Section 3(1) of the Essential Commodities Act, rendering it void? 

2. Are these provisions in violation of the constitutional rights enshrined in Articles 14  and 19(1)(g) of the Indian Constitution? 

3. Can a situation of conflict between a state law and a law passed by the Parliament occur  in areas beyond those covered by the Concurrent List, as outlined in Article 254(1) of  the Indian Constitution? 

CONTENTIONS OF APPELANT

1. The petitioner asserts that Section 2(2) of the Bihar Finance Act, 1981, is in conflict  with Section 3(1) of the Essential Commodities Act, 1955. 

2. The petitioner contends that Section 5 of the Bihar Finance Act infringes upon their  fundamental rights guaranteed under Article 14, Article 19(1)(f), and Article 19(1)(g)  of the Indian Constitution. 

3. The petitioner invokes Article 254 of the Indian Constitution, emphasizing the  supremacy of fundamental laws over state legislation in cases of contradiction within  the concurrent list of Schedule VII. 

CONTENTIONS OF RESPONDENT 

1. The respondent argues that Article 246 of the Indian Constitution grants states the  authority to formulate laws on specific matters delineated in Schedule VII. 

2. They contend that the laws enacted by the state allow for the imposition of additional  taxes from individuals who are financially capable of bearing this burden.  

3. The substantial overpayment of Rs. 55,383.98 during the assessment year 1980-81 and  Rs. 13,112.35 in the year 1981-82 serves as a clear indicator of the extensive scale of  operations conducted by these appellants solely within the State of Bihar. It underscores  their capability to absorb the additional surcharge burden imposed under subsection (1)  of Section 5 of the Act 

JUDGEMENT 

The court made its findings and addressed several important concerns in its opinion. First, it  confirmed that Entry 54 of List II of the Seventh Schedule of the Constitution, which gives  states the right to impose taxes on the sale or purchase of goods, gave the State Legislature the  authority to enact subsection (1) of Section 5 of the Bihar Finance Act, 1981, which imposed a  surcharge in addition to the sales tax. 

Second, the court made it clear that the State Legislature’s capacity to legislate on subjects  relating to taxes under Entry 54 of List II was separate from Parliament’s jurisdiction under  Entry 33 of List III, highlighting the fact that the state’s taxing authority was independent of  Parliament.

The court further discussed the idea of repugnancy between state and federal laws, emphasizing  that it only occurs when two laws that are on the Concurrent List that are directly at odds with  one another are related to the same issue. This rule does not apply when List II and Lists I and  III overlap since in those cases the state law would be deemed extra-vires due to a lack of  legislative competence. 

Regarding the President’s assent, the court emphasized that there is no provision in the  Constitution for judicial review of the President’s decision, and that once a bill passed by a state  legislature receives the President’s assent, it becomes law. 

The court further maintained that judicial review cannot be used to challenge the Governor’s  decision to reserve a bill for the President’s consideration. The court also confirmed the legality  of Section 5’s sub-section (1), which introduced a classification of dealers in order to levy a  surcharge based on their gross turnover. It said that this classification was appropriate since it  sought to modify the tax burden in accordance with the dealers’ financial capacity. The court  highlighted that the ability of the seller to pass the sales tax on to the customer was not a  requirement for the authority to levy a sales tax. 

The court ruled that paragraph 21 of the Drugs (Price Control) Order, 1979, issued in  accordance with the Essential Commodities Act, did not contradict with subsection (3) of  Section 5 of the law. These clauses did not conflict because they operated in different fields. 

Last but not least, the court noted that the main goal of the Control Order was to guarantee the  fair distribution and availability of necessities for customers at reasonable rates. It was pointed  out that any monetary loss suffered by any industry members was not sufficient justification  for labeling the law as unreasonable. Finally, the court dismissed the petitioner’s claims to the  constitutionality of the Bihar Finance Act, 1981, upholding its validity. 

CONCLUSION 

In conclusion, the Hoechst Pharmaceuticals case verdict addressed a number of crucial  problems and offered precise, conclusive decisions. It underlined the independence of the  state’s taxing rights derived from Entry 54 of List II, independent from Parliament’s authority  under Entry 33 of List III, and reaffirmed the legislative competence of the State Legislature  to adopt subsection (1) of Section 5 of the Bihar Finance Act, 1981. The concept of repugnancy  between state and union laws was explained by the court, which emphasized that it only applies  when both laws are directly at odds with one another in the Concurrent List. The Governor’s discretion in this situation was sustained because it was determined that the President’s  approval of a state measure was beyond the scope of judicial review. 

The classification proposed in sub-section (1) of Section 5 based on dealers’ gross turnover was  also accepted by the court as legal because it was deemed acceptable in lowering the tax burden.  The court emphasized that the ability of the seller to pass the sales tax on to customers was not  a requirement for the imposition of a sales tax. The court also explained that because they  functioned in different regulatory domains, sub-section (3) of Section 5 did not conflict with  paragraph 21 of the Drugs (Price Control) Order, 1979. 

The Control Order’s main goal, which is to ensure that consumers are treated fairly in the  distribution and availability of necessities, was emphasized by the court. It was decided that  any monetary damages suffered by specific industry players did not make the legislation  unreasonable. 

In summary, the court dismissed the petitioner’s claims and affirmed the constitutionality of the  Bihar Finance Act, 1981, establishing crucial legal concepts and interpretations in the process. 

REFERENCE 

https://main.sci.gov.in/

This Case summary is written by Pulugam Devaki, Intern at Legal Vidhiya for the month of  October