Constitutional Law

Hoechst Pharmaceuticals Ltd. v. State of Bihar

AIR 1983 SC 1019; (1983) 4 SCC 45

Facts

The Bihar Finance Act, 1981 imposed a surcharge upon dealers whose annual gross turnover exceeded ₹5 lakh.
The surcharge could be fixed at a rate not exceeding ten per cent of the sales tax payable.
Section 5(3) prohibited liable dealers from separately collecting the surcharge from purchasers.
Hoechst Pharmaceuticals and other manufacturers sold medicines whose prices were controlled under the Drugs (Prices Control) Order issued under the Essential Commodities Act, 1955.
They argued that because they could not increase the controlled price, they had to bear the surcharge from their own profits.
They challenged the Bihar provisions on several constitutional grounds, including:
lack of State legislative competence;
repugnancy with the Central price-control law;
discrimination; and
improper consideration of interstate and outside sales in computing gross turnover.

Whether the surcharge was a tax on the sale of goods within Entry 54 of List II.
Whether the State law was repugnant to the Drugs (Prices Control) Order under Article 254.
Whether Article 254 applies where the State and Union laws fall under different legislative lists.
Whether outside and interstate turnover could be considered for classifying dealers liable to pay surcharge.
Whether prohibiting recovery of the surcharge from consumers was unconstitutional.

A surcharge upon sales tax is itself in the nature of an additional sales tax.
The State’s competence under Entry 54 includes power to:
select the class of dealers liable; and
prohibit the dealer from passing the tax to the purchaser.
Article 254 concerns repugnancy only where both Parliament and the State Legislature legislate upon the same matter in the Concurrent List.
Where a State law under List II overlaps with a Union or Concurrent field, the question is one of:
legislative competence; and
pith and substance, not repugnancy under Article 254.
State legislation may consider wider turnover for classification, provided the actual tax is imposed only upon constitutionally taxable sales and a sufficient territorial nexus exists.

The surcharge was calculated as a percentage of the sales tax payable.
Its true character was therefore an additional tax on sales, not a tax upon income or profits.
The State Legislature was competent under Entry 54 of List II.
The Central law and the Bihar law served different purposes:
the Drugs (Prices Control) Order regulated the maximum price and distribution of essential medicines;
the Bihar Act raised State revenue through sales taxation.
The prohibition on passing the surcharge to purchasers did not alter the controlled price fixed by the Central Order.
It merely required the manufacturer or dealer to absorb the additional tax.
The two laws could operate simultaneously.
Article 254 did not apply because the Bihar surcharge arose under the exclusive State taxing entry, while the Central price-control measure arose under Entry 33 of the Concurrent List.
The Court also upheld the use of gross turnover, including certain interstate or outside transactions, to identify financially stronger dealers.
Those outside sales were not themselves taxed.
They were used only to determine whether the dealer crossed the ₹5 lakh threshold.
The actual surcharge remained confined to taxable sales within Bihar.
Because the appellants carried on substantial business within Bihar, the required territorial nexus existed.
No evidence showed that the burden was confiscatory or that the classification was irrational.