PETITIONER:
UNION OF INDIA
Vs.
RESPONDENT:
PALIWAL ELECTRICALS (P) LTD & ANR.
DATE OF JUDGMENT: 25/03/1996
BENCH:
JEEVAN REDDY, B.P. (J)
SEN, S.C. (J)
CITATION:
1996 SCC (3) 407 JT 1996 (3) 606
1996 SCALE (3)113
ACT
HEADNOTE
JUDGMENT
JUDGEMENTB.P.JEEVAN REDDY,J.
The Allahabad High Court has struck down Para-7 of the Exemption Notification No. 223 of 1987] on the ground of violation of Article 14 of the Constitution of India. The decision under appeal is largely influenced by and follows the decision of a learned Single Judge of the Calcutta High Court in banner and Company v. Union of India [1994 (70) E.L.T.181].
Rule 8 of the Central Excise Rules empowers the Central Government to exempt, subject to such conditions as it may specify, any excisable goods from the whole or any part of duty leviable on such goods.
By means of Notification No.175 of 1986 issued Under Rule 8 of the Central Excise Rules, exemption from excise duty was granted in favour of certain small scale industries manufacturing the goods specified in the schedule to the Notification provided their annual turnover did not exceed the limit prescribed. The relevant portions of the Notification read :
"3. Nothing contained in this
notification shall apply if the
aggregate value of clearance of all
excisable goods for home
consumptions:--
(a) by a manufacturer, from one or
more factories, or
(b) from any factory, by one or
more manufacturers, had exceeded
rupees one hundred and fifty lakh
in the preceding financial year.
4. The exemption contained in this
notification shall be applicable
only to a factory which is an
undertaking registered with the
Director of Industries in any State
or the Development Commissioner
(Small Scale Industries) as a small
scale industry under the provisions
of the Industries (Development and
Regulations) Act, 1951 (65 of
1951)...............
Explanation IV. for the purposes of
this notification, where the
specified goods manufactured by a
manufacturer, are affixed with a
brand name or trade name
(registered or not) of another
manufacturer or trade, such
specified goods shall not, merely
by reason of that fact, be deemed
to have been manufactured by such
other manufacturer or trader."
Explanation IV is of relevance. It provided that merely because the brand-name or trade-name of anther manufacturer or trader was affixed to the goods manufactured by a ’small manufacturer’ (to use a convenient expression denoting a manufacturer who is entitled to the benefit of the said Notification) such goods shall not be deemed to be the goods manufactured by such other manufacturer or trader.
The object of the notification is self-evident. It is to help that small manufacturers to service in the market which is dominated by brand-names/ trade-names. It is a matter of common knowledge that people prefer well-known brand-names. They buy them under an implicit faith that they are of reliable quality. In such a situation, a small manufacturer faces an uphill task in having his goods accepted in the market. If he prices his goods at the same level as the price of goods manufactured by a well-known brand-name, he stands no chance; he will be priced out of market in no time. It is precisely to enable him to survive him in the market that the said exemption is granted. By virtue of exemption form duty, the small manufacturer would be able to sell his goods at a cheaper price thus making them attractive in the market - and more competitive. The notification thus serves the socioeconomic objectives of helping the small manufacturers and increasing the industrial production. So far as Explanation IV is concerned, it is really classificatory in nature; it merely reiterates to principle of the decision of this Court in Union of India & Ors. v. Cibatul Limited [1985 (22) E.L.T. 302].
On September 22, 1987, Notification No. 175 of 1986 was amended by Notification No. 223 inserting Para 7 and Explanation VII therein. The inserted provisions read as follows:
"7. The exemption contained in this
notification shall not apply to the
specified goods where a
manufacturer affixed the specified
goods with a brand name or trade
name registered or not) of another
person who is not eligible for the
grant of exemption under this
notification:
Provided that nothing in this
paragraph shall be applicable in
respect of the specified goods
cleared for home consumption before
the Ist day of October, 1987.
Explanation VIII.-- Brand name or
trade name shall mean a brand name
or trade name, whether registered
or not, that is to say a name or a
mark, such as symbol, monogram
label, signature or invented word
or writing which is used in
relation to such specified goods
for the purpose of indicating, or
so as to indicate a connection in
the course of trade between such
specified goods and some person
using ’such name or mark with or
without any indication of the
identity of that person."
Now, what does Para 7 provide and why? It provides that the benefit of Notification No. 175 shall not be available to a small manufacturer, who affixes the brand-name or trade-name (registered or not) of another person, who is not eligible for the grant of exemption under the said notification. Explanation VIII defines the expressions "brand-name or trade-name". The explanatory note appended to the notification states that "(T)his amendment seeks to deny small scale exemption in respect of specified goods affixed with the brand-name/trade-name of a person who is not eligible for the exemption under Notification NO. 175/86-CE dated 1.8.86." The object underlying Para 7 is self-evident. If a small manufacturer who affixes the brand-name or tradename of an ’ineligible manufacturer’ (a convenient expression to denote a manufacturer outside the purview of Notification No. 175 of 1986 and who owns or entitled to use a brand-name or trade-name), the very reason d’etre for granting the exemption disappears. The exemption is designed to enable the small manufacturer to survive in the market in competition with the ineligible manufacturer but if he joins, or identifies himself with, the ineligible manufacturer, his goods become one with the goods or such ineligible manufacturer. They become indistinguishable. In the market, they will all be understood as one and the same goods. They no longer need the benefit under the Notification. It must be remembered that by extending the benefit of exemption, the State is foregoing public revenue to which it is entitled under the Act. The loss to public revenue is supposed to be compensated by helping along the small manufacturers to survive in the market and continue to produce. Once he becomes one with his competitor, the need for supporting crutches disappears. There is no reason why in such a case the State should forego the revenue due to it under the Act. It is the insufficient appreciation of this basic aspect that has led both the Allahabad and Calcutta High Courts astray. But before we deal with their approach and reasoning, it would be appropriate to deal with the nature and character of the power of exemption under Rule 8 of the Central Excise Rules.
The power of exemption is a potent weapon in the hands of the Central Government to regulate and manage the economy and to achieve the various social and economic objectives of the State. As observed by this Court in Union of India & Ors. v. M/s. Jalyan Udyog & Anr. [1994 (1) S.C.C. 319] dealing with Section 25 of the Customs Act which is in pari materia with Rule 8:
"It is a power given to the Central
Government to be exercised in
public interest. Such a provision
has become a standard feature in
several enactments and in
particular, taxing enactments. It
is equally well settled by now that
the power the taxation can be used
not merely for raising revenue but
also to regulate the economy, to
encourage or discourage as the
situation may call for, the import
and export of certain goods as also
for serving the social objectives
of the State [Vide Elel Hotels and
Investments Ltd. v. Union of India
(1989) 3 SCC 698, Sri Srinivasa
Theatre v. Government of T.N.
(1992) 2 SCC 643 and Subhash
Photographics v. Union of India
[(1993) Suppl. 3 SCC 323 : JT
(1993) 4 SC 116]. Since the
Parliament cannot constantly
monitor the needs of and the
emerging trends in the economy and
is in no position to engage itself
in day-to-day regulation and
adjustment of import-export trade
accordingly, power is conferred
upon the Central Government to
provide for exemption from duty of
goods, either wholly or partly, and
with or without conditions, as may
be called for in public interest.
We see no warrant for reading any
limitation into this power. If the
public interest demands that the
exemption should be absolute, the
Central Government can do so.
Similarly, if the public interest
demands that the exemption should
be granted only subject to certain
conditions. Then again if the
public interest demands that
conditions specified should relate
to a stage subsequent to the date
of clearance it can do so. The
guiding factor is the public
interest."
Though Rule 8 does not use the expression "public interest" unlike Section 25 of the Customs Act, both the powers are conceived in public interest. See the Constitution Bench decision in Orient Weaving Mills v. Union of India [A.I.R. 1963 S.C. 98 = (1962) Supp. 3 S.C.R. 481] upholding the constitutional validity of Rule 8. It is observed therein:
"The Act recognizes and only gives
effect to the well established
principle that there must be a
great deal of flexibility in the
incidence of taxation of a
particular kind. It must vary from
time to time, as also in respect of
goods produced by different
agencies..............It is a
function of the State, in order to
raise revenue for State purposes,
to determine what kind of taxes
shall be levied and in what manner.
Its function, therefore, is to
raise revenues for public purposes.
The State naturally is interested
in raising all the revenue
necessary for public purposes,
without sacrificing the legitimate
interests of persons and groups,
who deserve special treatment at
the hands of the State for reasons,
which the State may determine,
entitling them to be placed in a
special case."
We are of the opinion that while examining the challenge to an Exemption Notification under the Central Excise Act, the observations in the decisions aforesaid should be kept in mind. It should also be remembered that generally speaking the Exemption Notification and the terms and conditions prescribed therein represent the policies of the government evolved to subserve public interest and public revenue. A very heavy murder, lies upon the person who challenges them on the ground of Article 14. Unless otherwise established, the court must presume that the said amendment was found by the Central Government to be necessary for giving effect to its policy [underlying the notification] on the basis of the working of the said Notification and that such an amendment was found necessary to prevent persons from taking unfair advantage of the concession. In fact, in this cases the explanatory note appended to amending Notification says so in so many words. If necessary, the Court could have called upon the Central Government to establish the reasons behind the amendment. [It did not think it fit to do so.] It is equally necessary to bear in mind, as pointed out repeatedly by this Court that in economic and taxation sphere, a large latitude should be allowed to the Legislature. The Courts should bear in mind the following observations made by a Constitution Bench of this Court in R.K.Garg v. Union of India [1982 (1) S.C.R. 947] :
"Another rule of equal importance
is that laws relating to economic
activities should be viewed with
greater latitude than laws touching
civil rights such as freedom of
speech, religion etc. It has been
said by no less a person than
Holmes,J. that the legislature
should be allowed some play in the
Joints, it has to deal with complex
which do not admit of solution
through any doctrinaire or straight
jacket formula and this is
particularly true in case of
legislation dealing with economic
matters, where, having regard to
the nature of the problems required
to be dealt with, greater play in
the joints problems allowed to the
legislature. should feel more
inclined to The Court give judge
judgment regulation than in other
areas where fundamental human
rights are involved. Nowhere has
this admonition been more
felicitiously expressed than in
Morey v. Doud* (1957) 354 U. S. 457
where Frankfurter,J. said in his
inimitable style:
’In the utilities, tax and
economic regulation cases,
there are good reasons for
judicial self--restraint if
not judicial difference to
legislative judgment. The
legislature after all has the
affirmative responsibility.
The courts have only the
power to destroy, not these
are added to the complexity of
economic regulation, the
uncertainty, the liability to
the experts, and the number of
times the judges have been
overruled by events-self-
limitation can be seen to be
the path of judicial wisdom
and institutional and
stability. ----------------------------------------------------------- *It is true that Mory v. Daud was overruled later by the United States Supreme Court in New Orleans v. Dukes (1976) 427 U.S. 297, but the said fact does not detract from the validity of the said rule stated in Morey v. Daud nor does it in any manner affect the principle stated by this Court.
The Court must always remember
that legislation is directed to
practical problems, that the
economic mechanism is highly
sensitive and complex, that many
problems are singular and
contingent, that laws are not
abstract propositions and do not
relate to abstract units and are
not to be measured by abstract
symmetry’ that exact wisdom and
nice adaptation of remedy are not
always possible and that ’judgment
is largely a prophecy based on
meagre and uninterrupted
experience’. Every legislation
particularly in economic matters is
essentially empiric and it is based
on experimentation or what one may
call trial and error method and
therefore it cannot provide for all
possible situations or anticipate
all possible abuses. There may be
crudities and inequities in
complicated experimental economic
legislation but on that account
alone it cannot be struck down as
invalid. The Courts cannot, as
pointed out by the United States
Supreme Court in Secy. of
Agriculture v. Central Reig.
Refining Co. (1950) 94 L.ed.381, be
converted into tribunals for relief
from such crudities and inequities.
There may even be possibilities of
abuse, but that too cannot of
itself be a ground for invalidating
the legislation, because it is not
possible for any legislature to
anticipate as if by some divine
prescience, distortions and abuses
of its legislation which may be
made by those subject to its
provisions and to provide against
such distortions and abuses.
Indeed, howsoever great may be the
care bestowed on its framing, it is
difficult to conceive of a
legislation which is not capable
abused by perverted human
ingenuity. The Court must therefore
adjudge the constitutionality of
such legislation by the generality
of its provisions and not by its
crudities or inequities or
possibilities of abuse come to
light the legislature can always
step in and enact suitable
amendatory legislation. That is the
essence of pragmatic approach which
must guide and inspire the
legislature in dealing with complex
economic issues.
The same principle should hold good in the matter of Exemption Notifications as well, for the said power is part and parcel of the enactment and is supposed to be employed to further the objects of enactment - subject, of course, to the condition that the Notification is not ultra vires the Act, and/or Article 14 of the Constitution of India. (See P.J. Irani v. State of Madras A.I.R. (1961) S.C. 1731 = 1962 (2) S.C.R. 169).
We are of the opinion that the judgment under appeal is erroneous for the reason that it has not borne in mind the aforementioned relevant consideration. It is equally in error in saying that the classification it brings about - assuming that it does so - is not reasonable or that it has no nexus with the object underlying the Notification. Not only is Para 7 consistent with the object underlying the Notification, it indeed promotes it, as explained hereinbefore. We are constrained to say that the High Court has not bestowed the care and consideration which is expected of it before it strikes down such a Notification - or, for that matter, any statutory provision. For the very reason, the decision of the learned Single Judge of the Calcutta High court in Banner & Co. v. Union of India [(1994) 70 E.L.T.181] must also be held to have been wrongly decided.
Before we conclude, we must deal with one more aspect. The decision under appeal quotes extensively from, and relies upon, the decision of the Calcutta High Court in Banner and Company. The Calcutta High Court relied upon the decisions of the High Courts in Bush (India) Limited v. Union of India & Ors. [(1980) 6 E.L.T.258], Bata (India) Limled v. Aissistant Collector of Central Excise, Patna [(1978) 2 E.L.T.211], Bapalal and Company v. Government of India & Ors. [(1931) 8 E.L.T.581], Carona Sahu Company Limited v. Superintendent, Central Excise & Ors. [(1981) 8 E.L.T.730] besides the decisions of this Court in Cibatul [supra] and Joint Secretary to Government of India v. Food Specialities Limited [(1985) 22 E.L.T.324 (S.C.)]. We may briefly refer to the said decisions and see whether any of them supports the decision arrived at by Calcutta and Allahabad High Courts.
Bush (India) Limited was concerned with the meaning and scope of the definition of "manufacture" in Section 2(f) and not with any Exemption Notification, much less with the Notifications, concerned herein. The question there was whether merely by placing the Garrard Record Changer Decks on a wooden base with cover and selling it under the tradename of ’Bush Auto-Changer’, can it be regarded that a process of manufacture has taken place. It was held that mere placing of a ready-to-use article on a wooden base, with or without a cover, with a view to make it more saleable does not amount to process of manufacture within the meaning of Section 2(f). Bata (India) Limited merely says that just because ’Bata’ places it brand-name on the footwear manufactured by another, Bata cannot be treated as manufacturer of the said goods. Bapalal and Company deals with Notification No. 119 of 1975 dealing with job works and the exemption granted to job workers. The decision in Carona Sahu Company Limited is similar to the (India) Limited. We are unable to see any relevance these decisions have on the question at issue herein. We have already referred to the ratio of Cibatul. Food Specialities manufactured certain goods whereupon it affixed the brand-name of Nestle under an agreement with the latter and sold them to Nestle. The question was as to how to value the said goods. The Revenue contended that the value should be determined on the basis of wholesale price at which Nestle sold those goods. The plea was rejected by this Court holding that the wholesale price at which Food Specialities sold the said goods to Nestle should be the basis for determining the value.
For all the above reasons, we are of the opinion that the decision under appeal is unsustainable in law. For the same reasons, the decision of the Calcutta High Court in Banner and Company is also held to be wrongly decided [We are, of course, not told whether any Letters Patent Appeal was preferred against the said judgment and if so, what was the result?]
The appeal is accordingly allowed. There shall be no order as to costs as respondents though served is not represented.