ANAKAPALLE COOP. AGRL. & INDUSTRIAL SOCIETY LTD. ETC. ETC. versus UNION OF INDIA & OTHERS

ANAKAPALLE COOP. AGRL. & INDUSTRIAL SOCIETY . LID. ETC. ETC. v. UNION OF INDIA & OTHERS November 6, 1972 [J. M. SHELAT, A. N. GROVER, K. K. MATHEW, A. K. MUKHERJEA AND Y. V. CHANDRACHUD, JJ.J

Essential Commodities Act (10 of 1955) s. 3 (3C) and Levy Sugar S11pply Control Order, 1971r-Fixation of price of lev,y sugar-If correct principles applied-1972-0rder, if invalid.

n The Levy Sugar Supply Control Order, 1972, fixing the price of levy sugar was made under s. 3 of the Essential Commodities Act. Its vali- dity was challenged in petitions under Art. 32.

Dismissing the petitions, HELD: (1) (a) Sub-section 3(3C) of the Act is not conJined to levy sugar only. Fair price under tb.e sub-section has to be determined in respect of the entire produce, ensuring to the industry a reasonable return on the capital employed in the business of manufacturing sugar, and, in considering whether a reason11ble return has been allowed the profit on the free sale of sugar can be taken into account. [887 A-BJ Panipat Co-operatfre Sugar Mills v. Union [1973] 2 S.C.R. 860 followed. (b) Section 3(3C) clearly envisages and contemplates the fixation of Jifferent prices for different areas. It hardly matters if areas are called zones.

The constitution or zones for price fixation is not an innovation and goes back to 1959 when the Tariff Commission made a detailed report tin the cost structure of sugar and the fair price payable to the industry. [887 F-GJ

(2) (a) Tfie Tariff Commission, 1969, however, recommended the constitution of 15 zones largely on State-\vise basis with exceptions in case of U.P., Bihar which \Vere divided into 3 and '.! zones respectively, after an elaborate inquiry into the \Vorking of the Zonal system. There 'Vas thus -ample and abundant justification for Continuing and sustaining the zonal system.

There is no basis for the contention that the price fixation has to be made \Vith reference to the cost of each individual unit in the z0ne. The basis of a fair price for sugar would have to be

built on a reasonable efficient and representative cross-section on whose 1'"0rking' cost-schedules will have to be worked out and price determined hy the Government under s. 3 (3C) of the Act. doing justice to the woak and strong alike.

Any loss to the petitioners 1nay be due to mismanage- n1ent, lack of efficiency and following a \vrong investment policy which have nothin_g to do \vith the zonal system. Not a single expert body coun-

tenanced the suggestion that price control should be unit-wise, and even before the Tariff Commission no such point of vie\v was pressed by the sugar industry. [892 E-F; 893 F-G; 894 D. F-G; 896 G-H]

Panipat Co-operative Sugar Mill.< v. Union [19731 2 S.C.R. 860 1972, followed. (b) It is futile to sav that the zoning system should not have been done State-wise, especially when climatic and agro-econom'ic conditions have been taken into con~ideration 'vhile constituting the zones. If any

c c ANAKAPALLE COOP. SOCIETY V. UNION other system had been followed it would have become impossible to work out a proper cost-schedule for the zone. It would have created several problems and difficulties particularly with reference to the tax.es, duties etc_ which are levied by each State and the wagzs which are pay&ble to the workers in the different States which vary from State to State_ [897 H; 898 C-El

(c) Jn the present cases, while classifying zones on geographical-cum- agro-economic considerations, there has been no discrimination made nor does the price fixation according to each zone, taking into account all the relevant factors, give rise to any such i:liscrimination as would attract Art. :4. Once it is recognised that prices could be fixed according to the zones, the cost schedules that have been worked out by the Commission have necessarily to be different for each zone, because, the various items ·vhich go into cost differ 'irom zooe to zone. [899 D-F]

(3) (a) Sub-section (3C) lays down the various components for deter- mining the price of sugar. Clauses (a), (b) and (c) relate to the total cost which consists of the minimum price of sugar cane as fixed by the Government, the manufacturing cost and the duty or tax.

Clause (d) relates to the return on the capital employed. The very fact that cl. (a) provides that the minimum price fixed for sugar cane has to be taken into account shows that the actual cost ·is immaterial.

Moreover, while fixing prices according to zones, it is impossible to take the actual cost of each manufacturer or producer and fix the price accordingly. Hence, the methods followed by the Tariff Commission, which have stood the test of time and have been incorporated in the sub-section, have been followed in the fixation of price of sugar. The fact that in some cases their actual cost may be in excess of the price fixed cannot be a ground for striking down the price fixed for the entire zone in accordance with accepted prin- ciples.

It may be that uneconomic units may suffer losses, but what they cannot achieve in the open market they cannot insist on where price has to be fixed by the Government. The Sugar Enquiry Commission, in its 1965-report, expressed the view that 'Cost-plus'

basi~ of price-fixation perpetuates inefficiency in the industry and hence cannot always be the proper basis for price fixation. [899 F-H; 900 H; 901 A-El (b) The Tariff Commission had however rerommended that as

a ~easu.rc ?f neutralising relat.ive cost advantages and for rectifying the dispanty m the ex-factory pnce structure, a graded slab system of excise duty may be introduced in place of the present fiat rate. It is for the Governrnent to take -an early decision with regard to the recommendatiorl but as ~he G·over!1n:i-ent is. not bound to accept every recommendation of the Tanff Comm1ss1on, this Court cannot strike down the Price Control Order. [901 H; 902 A-CJ

( c) _The Tariff Commission, which was in full possession of all facts "W'as. satisfied that tnc requirements of the sugar industry could be mor~ equitably met by the departure from the conventronal method of giving a return ?n the basis of a _certain percentage on the capital employed, and by adopting instead a uniform amount of Rs. 10.50 per quintal as the margin to be added to the other cost in arriving· at a fair price of the sugar. The working of th_e _Tanff Commission in arriving at the figure also sho"'.s that the Co~mission had allowed addition on acc-ount of the tncre~se 1n the .rate of interest on money borrowed.

It is true that in Prenuer Automobiles v. ·Union of India, A.I.R: 1972 SC 1690 16% retcrn on the capital employed was considered to be reas~n-able but o:t of that. return, the car manufacturers, unlike the sugar produc~rs were made hable to pay minimum bonus, interest on borrowing

fi~ancial charges, warranty charges and guarantee comm'ssion. [902 C F-H· 903 H· 904 A-Fl 5-L521 Sup.Court/73 [1973] 2 S.C.R, (4)(a) The Tariff Commission had decided in favour of continuing the existing method of computing the quantum of depreciation on the basis of zonal averages of the costed units; and it was added that the figure so adopted was automatically to undergo an upward revision if and when the revision contemplated by the draft rules seeking to liberalise the depre- ciation to be earned under the Income tax law was brought into effect. The statement furnished by the Government shows that the increase in depreciation has been allowed in accordance with the new rate of depre- . ciaiion under the Income-tax Rules. (905 E-H: 906 A-C]

Premier Automobilies case, A.LR. 1972 S.C. 1690, followed. (b) The Tariff Commission in 1959 and the Sugar Enquiry Commis- sion in 1965 considered that no provision need be made for the purpose of rehabilitation and modernisation; but the Tariff Commission in 1969, made a recommendation. The conditions which prevailed in 1959 and 1965 were different and the latest view expressed in 1969, ought to have received serious consideration by the Government.

But, merely because Rs. 2.00 per quintal, as recommended by the Commission, had not been h'<en account while fixing the price of· 1evy sugar, the price as fixed Jttould not 'be struck down, because. its non~inc!usion is in no way viola· tive of s. 3 and 3A of the Act. [906 E-F; 907 A-B, G; 908 B-D] [The 'Government should, however, give serious and immediate consi- deration to the matter and take a decision

without further delay] (908 D] (5) There is no serious inaccuracy or infirmity, factually or other- wise, in the escalations allowed by the Tariff Commission and accepted by the Government in fixing the price of sugar. (908 G]

(6) There is nothing to show that payment of gratuity or liability therefor had not been taken into account while fixing the price for levy sugar. (909 C-DJ As regards bonus, the rate of minimum bonus had been raised from 4% to 8.33% by the Payment of Bonus Amendment O"rdinance, 1972, but as the Bonus Ordinance was promulgated after the prices were fixed by the impugned Order, that Order cannot be struck down on the ground that the prices fixed by it did not take into account the changes in the rate of minimum bonus made by the Ordinance. Even so, in the changed circumstances the Government ought to make appropriate modifications in the impugned Order in respect of the prices of levy sugar. [91 O B-E] ORIGINAL JURISDICTION : Writ Petitions Nos. 279-283, 293,

296, 297, 300, 303, 304 & 306 of 1972. Under Article 32 of the Constitution of India for the en- forcement of Fundamental Rights . . S. V. G11pte, K. Srinivasamurthy, Naunit Lal and M.

Shroff, for the petitioners (in W.P. No. 279/72). K. Srinivasamurthy, Naunit Lal and M. N. Shroff, for the petitioners (in W.P. Nos. 280-283 & 303/72). P. Ram Reddv; S. Kanda/a Rao and G. N. Rao. for the

petitioner (in W.P. No. 293172). A. K. Sen, N. R. Khaitan and O.P. Khaitan for the petitioner (in.W.P. No. 296/72). L. M. Singhvi. N. R. Khaitmz and 0. P. Khaitan, for the petitioner (in W.P. No. 297 /72).

c c ANAKAPALLE COOP, SOCIETY v. UNION (Grover, 1.) C. K. Daphtary, R. K. P. Shankardass, R. N. Banerjee, H. K. Puri and S. K. Dhingra, for the petitioner (in W.P. No. 298/72). A. Subba Rao, for the petitioner (in W.P. No. 300/72).

L. M. Singhvi, N. R. Khaitan, 0. P. Khaitan and A. T. Patra, for the petitioner (in W.P. No. 304/72). G. S. Rama Rao, for the petitioner (in W.P. No. 306/72). L. N. Sinha, Solicitor-General of India, G. L. Sanghi

and S. P. Nayar, for the respondent (in W.P. Nos. 279-283/72). L. N. Sinha, Solicitor General of India, and S. P. Nayar. for the respondents (in W.P. Nos. 293, 296, 297 298, 300, 303, 304, & 306 of 1972).

B. Sen, Leila Sheth and B. P. Maheshwari, for the intervener (Upper Ganges Sugar Mills). A. Subba Rao and B. K. Seshu, for interveners (Nizamabad Co.-opt Sugar Factory & Nizam Sugar Factory).

M. C. Setalvad, P. N. Tiwari, 1. B. Dadachanji and 0. C. Mathur, for the intervener (Mahalaxmi Sugar Mills). C. K. Daphtary, J. B. Dadachanji, 0. C. Mathur and P. N. Tiwari for the intervener (M/s. Hindustan Sugar Mi!ls Ltd.) V. S. Desai, J. B. Dadachanji. 0, C, Mathur and P. N. Tiwari, for the intervener (Delhi Cloth & General Mills Ltd,).

P, N. Tiwari, J. B. Dadachanji, and 0. C. Mathur, for the intervener (Ganga Sugar Corpn. Ltd.). The Judgment of the Court was delivered by GROVER, J. These petitions under Art. 32 of the Constitu-

tion have been brought by· or on behalf of the various factories, cooperative societies and Mills which carry on the business of manufacturing and selling sugar (hereinafter called compendiously the ">ugar producers") challenging the validity and legality of the Levy Sugar Supply Control Order 1972 made under s. 3 of the Essential Commodit;es Act, 1955, hereinafter called the "Act", fixing the price of levy sugar in the different ZO!les in the country and praying for various reliefs. Writ Petitions Nos. 279 to 283, 293, 300, 303 and 306 of 1972 are by the sugar producers in Andhra Pradesh zone; Writ Petitions No. 297 and 304 of 19"?2 by the sugar producers in North Bihar zone and Writ Petitions Nos. 296 and 298 of 1972 by those in the Punjab zone.

The principal questions that arise for our determination are the following : (1) What is the true scope and ambit of s. 3 (3C) of the Act? (2) (a) Whether the system of fixing price for each zone

(the entire country having been divided into 15 zones), is justifiable and is based on correct prin- ciples? (b) Whether the statewise constitution of the zones is proper and justified?

(c) Does the zonal system lead to discrimination and as such is. violative of Art. 14 of the Constitu· tion? (3) Is price fixation based on proper principles and have the prices been determined 'Jy following the correct

methods and in accordance withs. 3 (3C) of the Act? (4) What is the correct position about depreciation and rehabilitation allowance and the extent to which these have: been taken into consideration in price fixation ?

( 5) Have the escalation in various items by which price determination is made been properly allowed ? (6) Whether the items in respect of payment of additional bonus as provided by the Payment of Bonus Amend-

ment Ordinance 1972 and gratuity are taken into account? The history of control over sugar production, its distribution and the method followed in the fixation of the fair or levy price of sugar has been set out in the connected case (Civil Appeal Nos. 1357 to 1369 of 1972) judgment in which also has been delivered today and the same ground need not be traversed again.

The first question. formulated by us which arises in these writ petitions can be divided into two parts. The first part mvolves the point whether sub-s. (3C) of s. 3 of the Act deals with levy sugar only and is confined to it alone, particularly, in the matter of deter- mination of a reasonable return as provided by clause (d) of that sub-section.

In the writ petitions the argument on behaH of. the sugar producers has been that the whole object of having a scheme of partial control under which 60. to 703 sugar has to be sold in accordance with the orders made by the Gov.ernment under s. 3 (f) of the Act for which levy price is payable and the balance is saleable in the free market would be defeated. The result of accept- ing an interpretation that profit on the free sale of sugar can be taken into account while considering whether a reasonable return has been allowed on the capital employed by the sugar producers would, it has been stressed, be contrary to the scheme and purpose pf the sub-section in question. This aspect of the matter has been c

ANAKAPALLB COOP. SOCIETY v. UNION (Grover, I.) fully dealt with in the above connected case. We have held that fair price has to re <let.ermined in respect of the entire produce ensuring to the industry a reasonable return on the capital em- ployed in the business of manufacturing sugar. In other words the contentions of the suga.r producers have been repelled. c

The second pari of the first question is whether price fixation according to zones and not unitwise (we shall call this "the Zonal system") is permissible under s. 3(3C) of the Act. According to that provision different prices may be determined from time to

time for different areas or for different factories or for different kinds of sugar. It has been sought to be established from clauses (a) to ( d) of the same sub-section that what is contemplated is the price fixation of each unit or factory; otherwis~ it will not be possiblll to ensure that a reasonable return has been secured on the capital employed as required by clause

(d). The Tariff Commission of 1969 has recommended a roturn of Rs. 10.50 per quintal of sugar. That recommendation having been accepted by the Government ( vide its Resolution dated February 20, 1970) '!he only way, so it has b.een suggested on behalf of the sugar pro- ducers, to ensure that return is to compute the cost of sugarcane, the manufacturing cost, the duty or tax payable and then add the above amount by way of return to the aggregate of the aforesaid irems mentioned in clauses (a) to ( c) of the sub-section. This

can be done if all these items are computed unitwise and not by taking a large number of units in an area because the aforesaid items are bound to vary and be different from unit to unit. We

shall have an occasion to go more fully into matter while consider- ing question No. (2). But we are unable to agree that the pro- visions of s. 3(3C) do not in any way warrant the fixation of price for ,the zones into which the country may be divided.

The afore- said provision clearly envisages and contemplates the fixation of different prices for different areas. · It hardly matters if areas are called zones. The previous history, as will b~ presently seen,

also fully supports such a view. The Constitution of zones for price fixation is not an innovation and goes back to 1959 when the Tariff Commission made a detailed report on the cost struc- ture of sugar and the fair price payable to the sugar industry. It will be useful to note certain preliminary matters before the various aspects of question No. 2 are ~onsidcred. In 1930 when the Tariff Board appointed by the Government 'of India investigated for the first time the claim for protection from the

sugar i.ndustry there were only. 29 factories producing sugar. Protect10n was granted to the mdustry in 1932, Thereafter the growth of the industry was rapid. By 1938-39. the number of

sugar factories rose to 139. According to the Tariff Commission report 1959, the number of operatinl\ factories at that time was [1973] 2·s.c.R. 157 with a total output of 1.98 million tonnes.

In 1969 when the Tariff Commission made its report th~re were 205 factories with a capacity for production of 34.69 lakbs tons. The num- ber of factories is stated to have now increased to 221.

As the production of sugar depends on sugarcane, a number of steps have been taken _f9r the development of sugarcane. The supply of ~ugarcane of good quality and a fairly long S'~ason of production are two pre-requisites for maintaining the production· of sugar. The duration of the season in the sugar industry means the period from the date of the start of the crushing by tl}e factory to the date of finaly closing it, and it_ varies from region to region as it depends on two factors, (i) availability of sufficient quantity of cane and (ii) period for which reasonably good quality of cane giving economic recovey of sugar is available.

Sugar recovery depends mainly on three factors : (i) the quality of sugarcane, (ii) length of the crushing season and (iii) the overall operating efficiency of the sugar factory concerned.

The idea of preparing the cost schedule for sugar manufacture dates back to 1937. The first schedule was prepared in 1937 by the Director of the Indian Institute of Su_gar Technology, Kanpur. The Tariff Commission in 1959 was of the view that to construct the cost schedule for the entire country at a uniform percentage of recovery and identical range of duration will only result in inflating the All India cost. The Commission arrived at the con- clusion after a study of the break-up cost of individual regions that cost schedules could be constructed on the basis of actual recovery and duration as pertaining to each region.

It grouped the sugar factories in various States into four regions or zones b~sed on standard schedules for a uniform recovery of 10 per cent and for duration ranging from 90 to 200 days.

It appears that some State Governments represented that the Northern region comprising the States of Uttar Pradesh, Bihar and Punjab was unduly large with wide internal dispartfos in costs. The result wa~ that uniform price fixed for the zone showed large differences in profit margins.

The sugar Enquiry Commission headed by Dr. S. R. Sen in its final report in 1965 recommended five cost schedules for the same number of zones at 10% recovery and for different durations.

Assam with one factory was to be treated as a separate zone. The Government, however, fixed orices for 16 zones under the Sugar (Control) Order T963. The number of zones kept on changing till it was increased to 23 for the years 1965-96 and 1966-67. But in December 1967 prices were fixed for 6 zones including Assam. The Tariff Commission in 1969 recommended the Constitution of 15 zones which sug- gestion was finally accepted (see page 67, Tariff Commission Report 1969).

c ' ' ' c ANAKAPALLE COOP, SOCIETY v. UNION (Grover, J.) We may first take up the group of petitions of the sugar pro- ducers in the Andhra Pradesh Zone. The position about price of levy sugar in zone 2 in which

the sugar producers in Andhra Pradesh are functioning was that for the sugar produced in 1968-69, the price fixed was Rs. 161.14 per quintal for D-29 quality. After the creation of lifteen zones m February 1970, the price for levy sugar for the Andhra Pradesh zone was iixed at Rs. 150.43 per quimal inclusive o! excise duty. In May 1971 sugar was decontrolled which continued till Decem- ber 1971.

From that time till June 1972 when partial control was reimposed, a scheme of voluntary control of Sugar was in force. By agreement between the Government and the sugar producers 60% of the sugar released every month had to be

placed at the disposal of the Government at Rs. 150 I – per qumtal exclusive of excise duty for D-30 quality. Under the impugned order the price of Rs. 121.97 per quintal was fixed for D-29 grade and Rs. 122.82 for D-30 quality for the Andhra Pradesh zone. One of the main grievances of the sugar producers is that the above price was far below the price payable even under the volun- tary scheme of distribution and so far as the actual cost of pro- duction of the various petitioning units is concerned the same was greatly in excess of the price of levy sugar fixed by the impugned order.

Thus the sugar producers in this zone were being made to suffer huge losses instead of getting a reasonable return as provided by clause ( d) of s. 3 (3C) of the Act. All this was at- tributed to the zonal system which is stated to suffer from the following serious defects apart from others :

(i) The sugar producers in Andhra Pradesh varied greatly in economic viability; some units were very large and.some very small, e.g., crushing capacity of 3750 tonnes at Vayyliru and 800 tonnes at Seetha-

nagaran:i respectively out of the costed units (see App~nd1x 32, page 207, 1969 report, Tariff Com- m1ss10n). (ii) A uniform pric~ has been fi~ed _fo~ all units although th~ manufacturmg cost vanes. widely from unit to

umt. (iii) The extreme disparity was evident from para 9 .5 .1 of th.e 1969 report which showed that the actual crus~m~ .reason . (based on 22 hours per day) for the mdlVldual umt had a dh:ergence ranging from 26

days to 195 days. Statew1se averages indicated a range from 26 to 153 days whilst the all India weighted average came to 108 days for the costed units. In Andhra Pradesh the duration in 1966-67

[ 1973] 2 S.C.R, which is ,he base year of the costed units varied from 163 days to 41 days. (iv) Only 7 units out of 19 units in Andhra Pradesh zone were selected for working out the averages.

This highly involved highly disparate and unfair com- parison. (v) According to table 9.3 at page 75 of the 1969 re- · B port the average of the cane actuaJly crushed by all the 7 costed units came to 1233 tonnes per unit

whereas the average of the cane actu~lly crushed by all the 19 units in the State is l 065 tonnes. Ac- cording to the figures supplied by the counsel for the petitioner at the time of arguments the total cane

ac.tually crushed in 1966-67 by all the 19 units in Andhra Pradesh was 16,60,000 tons. The average duration for that year being 82 days the average daily crushing of the 19 unit> worked out to 1065

tonnes per unit whereas the crushing capacity of 1233 tonnes per day was taken as the base. This repre- seated an excess of 168 tonnes per day which was wholly unjustifiable and which would make a lot of

difference in the matter of computation of price. (vi) The conversion cost given at pages 209 and 210, Appendix 33 of the 1969 report worked out to Rs. 25.86 per quintal which is the conversion cost for

1233 tonnes relating to 7 costed units but the aver- age daily crushing of all the 19 units being 1065 tonnes the actual conversion cost will work out to Rs. 29.94. Thus the difference in conversicn cost

would be Rs. 4.08 per quintal for sugar. (vii) The weighted average were on a very restricted basis r and hand-picked units could not furnish proper guidance. The weighted average were farcical and

were in no way· different from the ordinary averages. (viii) No account has been taken of the admitted fact that duration and recovery often depend on vagaries of nature or unforeseen events.

For instance m the case of the sugar producers in Writ Petition No. 283 /72 the duration was 162 days in 1969-70, the recovery being 9.493% but it came down to 78 days in I 971-72 because the sugdrcane crops were dam-

aged by a highly distructive disease. In the North Bihar group of petitions of which writ petition 297 /72 mav be otaken to be representative points similar to the above have· been raised.

For the North Bihar zone, the prices- .A ·C .D .E ANAKAPALLE COOP. SOCIETY v. UNION (Grover, J.) fixed by the impugned order were Rs. 157.55 for D-30 a_nd Rs. 155.85 per quintal for D-29 qualities respectively: Acccrdmg to the sugar producer its own cost of produ.ction comes to ~s. 181.96 per quintal without any return. Owmg to the faulty price fixation, this unit was suffering a heavy loss, the accumulated amount of Joss having reached the figure of Rs. 9 .• 50 lakh~. Ac- cording 10 the statements and tables prepared and subm1t~ed to us ·in the North Bihar zone the cost factors of <he costed umts arc so' disparate and unequal that five out of the 8 costed units. do not even get their actual cost, leave aside any return.

The tables relating to the weighted averages are meant to show ·that there is no particularity or charm about. the weighted averages. It is not an average which tends to remove the dis-

parity between the various units in a zone. In the table showing the ex-works price of sugar based on minimum price of the cane, duration and recovery for North Bihar zone compared with indi- vidual units for the season 1971-72 the zonal average cost on the basis of 66 days' duration and 8 .86% recovery and Rs. 91_.34 cost of cane comes to Rs. 139. 52 per quintal excluding the re- turn.

After applying cost schedules to cane price duration and recovery of individual factories the results show that at least 10 factories suffer heavy losses because their cost ranges between Rs. 623.81 per quintal of the factory at Ryam to Rs .. 139.83 of the factory at Chanpatiya.

This is exclusiw of the return 0f 10. 50%. It may be observed here that the factory at Ryam has a duration only of 7 days which is almost a freak figure anrl ex- plains the high cost incurred by it for manufacturing sugar. But the total number of factories in North Bihar zone is 25 and the cost of other factories varies between 138.44 to 121.89 per quin- tal. It is next pointed out that under the averaging technique th~ Central Government fixes a common price for all sugar factories in every State or price zone by averaging extraordinary cost dis- parities. The average cost formulae ignore disparity in (a) cane cost per quintal; (b) duration; (c) recovery, (d) daily crushing: capacity and ( e) capital employed by one fadory and the other in each zone.

a .Writ Petition No. 298/72 is :epr_esentative of. the Punjub .,r?up. There are five ~ugar factones m the Punjab zone. The pnce o_f levy sugar. was fixed under the impugned order at 147.71 p~r qumtal. .. _Details of the audited manufacturing cost were filed w11h the pe~mon for the 1971-72 season. It was claimed that the manufact~nng c.ost for that season, came to Rs. 208.22 per quin- ta] exclusive of mtere~t on caoital employed which work~d out to another 16.40 per qu~ntal. Thus the cost including interest came to Rs. 224.62 per qumtal. The total loss on stock as on July 1 1972 would come to Rs. 9,74,350.77. It was stated that

th~ . [1973] 2 S.C.R. petitioner had recovered an average price of Rs. 245.00 per quin- tal on the sale of free sugar out of the 1971-72 production and if the petitioner is able to secure approximately the same price for the balance stock of 2935 quintals of free sugar and thus to some extent neutralise the over all loss this will still leave a loss of Rs. 87 .17 per quintal to be made up on the sale of its present stock of levy sugar.

During the month of December 1971 the duration was seriously affected by the lndo-Pakistan hostilities- an important factor which has not been taken into consideration by the government.

Servshri M. C. Setalvad, B. Sen and V. S. Desai who have apreared for the Interveners Nos. 6, 3 _and 7 in Writ Petition No. 297 of 1972 respectively do not support the argumen~s chal- lenging the zonal system. On the contrary a strong case has been made by them in favour of the zonal system.

The lnterveners whom they re::iresent are obviously the low cost units and are in favour of the zonal system b~ing retained. The tug of war in res- pect of the zonal system is between the high cost units and the low cost ones; the former are against it and the latter in favour of it.

The system of fixing the prices, according to certain regions or zones, is not a new one. The tariff Commission in 1959 favoured the formation of four zones. In the report of the Sugar Enquiry Commission 1965 it was pointed out that the Govern- ment had acutally fixed the prices for 22 zones which meant that from four zones the number had been increased to twenty two or more.

The commission was of the· view that there should be five zones only in addition to Assam. The Tariff Commission, 1969; however recommended the constitution of fifteen zones largely on Slate-wise basis with an exception only in case of Uttar Pradesh and Bihar.

Uttar Pradesh was divided into three zones and Bihar into two. The Tariff Commission had been specificially requested to inquire into the working of the zonal system, the main point for inquiry being the zones into which the sugar pro- ducers should be grouped having regard to the basis of classifica- tion to be recommended by the Commission.

The view of· the Commission was that on the whole. the number of price zones should be fifteen which would reduce, though not !lliminate, the inter-se anomalies in the cost structure without resorting to the extreme of the fixation of price for each unit or a single or at the most two, one for the sub-tropical and other for th_(? tr?pital on~. The Tariff Commission hoped that in the course of time condi- tions would be created maKing the operation of the second alter- native feasible.

From Chart· IV relating to production of sugar to bj! found in the report of the Sugar Enquiry Commission 1965, the All India production arose from 12,00,000 tons. to 32,00,?00 tons. in 1964-65.

This notwithstanding the fact that the pnces c ~I \"c c r ANAKAPALLE COOP. SOCIETY v. UNION (Grover, J.) were being fixed on the basis of regions. In para 19.7 at page· 127 of the said report the Commission made some very useful observations. It rejected the industry's contention that under the system of determining price on the principle of average for a zone there was no incentive for heavy investment in block.

It was pointed out that in recent years of contror on sugar in spite of the sugar prices having bee11 fixed on a zonal system there h~d been a substantial addition to the capacity even in the sub:-trop1cal belt It was stated :

"Further, a study of the cost structure of the old and new factories reveals that in the total cost there is hard- Ty much difference between the cost of proouction in the o!d factories where the element of depreciation is very

low and that in the new factories where its incidence is fairly heavy. While in an old unit the capital cost is lower, the recurring cost is often higher, in a new unit of comparable capacity, it tends to be opposite.

What the industry ought to be concerned with is tf1e untimate ex-factory price. To take out of context one element of cost that goes into the total cost an.d then to plead that because the incide!JCe in respect of that ele-

ment of ·cost is low in tlie case of old plants some allowance should be given to the industry as a whole, is not justifiable." It is somewhat difficult to accept the argument of those who· are opposed to the zonal system that the loss alleged to have re- sulted to some of the sugar producers can be attribuied to the prices having been fixed zone-wise.

For instance, in the Punjab zone the crushing capacity of all the factories is. practically the same i.e. about 1,000 tons per day. The prices which were fixed' by the Government were on the basis of 67 days duration with .a recovery of 8. 7 5 % . In. the case of Malva Sugar Mills the actual duration was 95 days, the recovery being 8.78%.

Qrdinafily and in the normal course profits shlluld have .been made by the said unit and it should not have incurred losses. . The reasons for incurring losses can be many including mismanagement, lack of efficiency and following a. wrong investment policy which liave nothing to do with the zonal system.

This system. by and large leads to efficiency and affords an incentive to cut down the cost. It is only when there is keen competition between the units in the same zone that a real effort will be made by each unit to reduce its cost and make the working and running of the unit more effi- cient.· The essence of the matter is that a commercial concern can be a success only if there is proper planning and efficient management.

The argument on behalf of the suga" producers whicl, claim that they have been running into losses because of SL'PRF.ME COURT REPORTS (1973] 2 S.C.R. the zonai ;ystem can hardly be sustained on the evidence on the materia! produced by them. It is true that in a few cases all the dat:i and the details of costs etc. were set uut in the petition and were supµorted by statements !I'ade out from <iudited accounts but in most cases it w~s at the st~,:;e of rejoinder or at the time of arguments tha! elaborate statements were prepar"d showing

figures of losses into which th,se units are running owing to the fixation of prke by tli'l impugned Order. The government in these circumstances could possibly t<tr had no opportunity to check up the correctness of all the figures and even if that could be do'1e as weekly returns are st•bmitteci on pressribed'°forms to the authorities concer:ied it would still not !:>e possible· for the g0vermnent to determine their accuracy without a complete in- vestigation bei:1g carried out.

Nor could it be escertained with ·out a p1olonged inves!igation what the real causes were for some of the sugar producers incurring nuch heavier costs than the vtllers. The extreme position taken up or; behalf of some of the peti- tioners that the prices should have been fixed unit-wise and on the ba>is of actual costs incurred by each unit could hardly be tenable.

Apart from the impracticability of fixing the prices for each unit in the whole country the entire object and purpose ot controlling prices would be Gefeated by the adoption of such a system. It must be remembered that during the earlie: period of price control the price was fixed on an all India basis

That still is the obje.ctive and if such an objective can be achieved it cannot be doubted that it will be highly conducive to proper benefit be- ing conferred on the consumers. According to the Commission

the objective to be achieved should be to have only two regions in the whole country, 'lamely, sub,tropical and tropic'aI. Not a .single expert body appointed by the Government of India from time to time countenanced the

suggestion that price control should be unitwise. It appears that even before the Tariff Com- mission such a point of view was understandably not pressed on behalf of the sugar industry.

The low cost units demanded the fomiation of the larger zones. The high cost units asked for the formation of smaller zones. No material has been placed before us to show that 1here was any serious demand for prices being fixed unit-wise. Even in the arguments it was almost common ground with the exception of one or two dissentient voices that zoning is unavoidable in our country in the matter of fixing of the price of sugar.

We may now advert to some of the salient flaws and infirmities which have been sought to be shown with the assistance of various facts and figures from which the zonal system is said to suffer. Firstly the method of selection of the units for the purpose of c

f c ANAKAPALLE COOP. SOCIETY v. UNION (Grover,/.) 8~5- costing and taking of the averages has been subjected to severe criticisn1 . • '\s stated in para 9 .1 of Chapter IX of the 1969 report the findings of the Commission were based on 66 costed units out of 200 w0rking units in the industry. It was also mentioned in nara 9 .1.1 that on a scrutiny of the cost forms it was found that the information furnished bv most of the non-costed units was not satisfactory.

The defects "noticed were "in regard to allocation of costs under the various heads and inclusion of certain items. which should ordinarily have constituted a part of the return. It was further statej that the cost Accounts Officers of the Com- mission made a detailed scrutiny of the accounts in the selected units r.nd w""''ed out costs in a fair ?nd equitable manner to en- able the Commission to determine appropuate costs for each unit for detailed cost inve>tigation.

The 66 units which were costed out of 68 selected for the purposes accounted fo~ nearly 34% of the tNal capacity and 37% d the total production of sugar in 1966-67. The werage duration of the costed units was 101 days with a recovery amounting to 9.73% as compared to All India figure cf 95 days and 9.91 % recovery respectively. The commission was tte best judgP of selecting the unb for. cost study and for working out the average cost. The reasons given by it for sekc! ing the costed units do not suffer from any disregard of the re cognised principles ot costing. It is true that the select.ion of some units out of au the units in a particular mne can lead to the ano· malies and the hardships which· have been pointed out on behalf of the sugar producers. To take an illustration the average with regard to crushing capacity in 1he Andhra Pradesli Zone· might have bew different if &ii "the units rad been taken into considera- tion. Brt the Commissio.n could not have taken the averages of all the units u.iless it had selected them for costing which in\ the very nature of things was not pra~tical and which for the reasons given by the Commission itself could not be done because o~ the unsatisfaj(_tory nature of the information furnished by must of the non-costed units. Indeed the petitioner Tri Writ l>etition No. 279 did not even . eplv cr-~sfod any memoranda to the Commision although the questionaries were sent to it.

Similarly 1n Andhra Pradesl. Zone three other units. Arc.adalavalase Cocperati»e Agri- cultural & 1ndustria' Society Ltd. Sivakarni Sugars Ltd. and Challaoali Su~ar Ltd. did not semi any reply or memoranda as is apprarent from App"ndix Il in the report.

As r.::gards the averages and weighted averages which have been worked' out by the Commission for the purpose of fixing prices in respect of the varying figures of difierent items of cost we are unable to appreciate how these have not bee11. properly \\Orker out.. ·It may be that ii a diiferent method had been adopted than the one followed by the Co:nmission the averages worked out might have been different but the principle of

weighted average which was followed with regard to those items where it could be applied is a well recognised one and was adopt- . -ed even by the Sugar Enquiry Commission in 1965.

The method of working out the weighted averages is well .known in the determination of price and has been employed in working out· th'e cost structure of the sugar industry and fixing -of sugar prices on prior occasions also,

e.g., in 1959 by the Tariff Commission. As pointed out in Cost Accounts' Hand- book edited by Theodore Lang, 1945 Edn. the items of a series to· be averaged vary in importance in some quantitative way in addition to the importance explicitly given by the figures in the series. An illustration of weighted average occurs in pricing stores issues where different lots of raw material have been acquir- ed at different prices. In such a ca.se a simple average .of price is , usually not 'con.side red desirable.\ J:lxamples have been given in.the poolCjo s~o'W that the simp1e average . while it may be tecliriic~ly ~ciri"~c~ 1s11ractica!Jy v.a!ueless · or: 1?ositively misleading under certain circumstances. "Where -quantities as well as dollar values are to be considered, weighted averages are far more signi- ficant than a simple average.'"

c We may next deal with the harsh and unjust results to which the zonal system adopted by the Commission is stated to lead. The figures given about the act.ual cost of the petitioning units 'vorked out according to the tables and the formulae given in the Tariff Commission's report have been produced to demon- strate the extent and magnitude of the financial loss to which the petitioners are being put or will be put. The stress has been on the utter disregard of the principle embodied in sub-s. (3C) of s. 3 of the Act that a producer is entitled to a reasonable return on the capital employed in the "business of manufacturing sugar. The petitioners have sought to establish that instead of earning any return they are actually out of pocket in the matter of cost owing to the price fixation by the government worked out in accordance with the tables given in the report. Apart from what has previously been· noticed about the various factors which may be responsible for incurring of high cost we are unable to agree that the price fixation has to be made with reference to the cost of each individual unit in the zone.

As pointed out in our judg- ment in the connected case (supra) the basis of a fair price would have to be built on a reasonably efficient and representative cross- section on whose working cost schedules will have to be worked out and price determined by the government under s. 3(3C) of the Act. The cost.schedule must be such as would do justice to the weak and strong alike,

There can thus be no doubt that c ANAKAl'ALLE COOP. SOCIETY v. UNION (Grover, J.) there was ample and abundant justification for continuing and sustaining the zonal system. We shall now deal with clause (b) of question No. 2. In

Writ Petition No. 280/72 it has been pointed out that the peti- tioner factory incurred heavy Joss in spi<te o.f sale in free sugar. No sugarcane. it has been claimed, was available for more than 60 days i.e. from. December 22, 1971 to February 19, 1972. Th0 actual cost of production has come to Rs.

173.90. The recovery of this factory is 9.54 % . There is anqther. factory situ- ate 11t Rayagoda at a distance of 80 miles from the petitioner. As that happens to be in the State of Orissa the price of Rs. 152.98 per quintal has been fixed for sugar in that zone. If a division. had not taken place on linguistic basis but agro-economic and agro-climatic factors· had been taken into consideration the peti- tioner would have got a pripe of Rs. 152. 98 in the same way as the factory in the Orissa State. According to this petitioner the reasoning of the Tariff Commission as given in para 31 at page I 08 <if the report for constituting the zones on the basis of States is altogether unconvincing and highly fallacious. In Writ Peti- tion No. 283/72 (The Chittoor Coop. Sugar Ltd.) the factory is on the border of Tamil Nadu State but is within the State of Andhra Pradesh.

There are two factories in the Tamil Nadu State whith are said to be at a distance of 80 km. from this fac- tory, namely, Murgappa (Palar Sugars Ltd.) and North Arcot Juint Coop. Sugars Ltd.

The levy price fixed for Tamil Nadu zcne for 1971-72 is Rs. 134.01 per quintal. Although it can be safely presumed that these factories w;ithin such a short distance would be governed by the same agro-climatic and agro-economic conditions yet they have been grouped differently resulting in serious disparity in prices. In Writ Petition No. 293/72 the fac· tory is at Bobbili in the State of Andhra Pradesh. The duration during the year in question was 78 days, the recovery being 8.929%. Its crushing capacity is 850 tonnes per day as com- pared with the Nizam Sugar Factory Ltd. which has a duration of 111 days, recovery of 11.18 % and crushing capacity of 4500 tonnes per day. This Bqbbili factory is a pigmy as against the giant. Its actual cost per quintal is Rs. 184.65 whereas the cost of the Nizam Sugar Factory is Rs. 117 .00. Total production of the petitioner factory is 50,000 odd tonnes whereas that of the Nizam Factory would be about 5 lakh tonnes odd.

The levy price ~or. h?th these ,factories has been fixed at the same figure. All this, It IS urged, shows the gross defects in the statewise zonal system. If there are very big units and there are very small units in ~he. same zone ~ither they must be classified according to the1r size or the pnce must be fixed for each individual unit. ·The criticism that climatic and agro·economic conditions have not been taken into consideration while constituting the zones does SUPR.EME COURT REPORTS

not appear to be valid. The climatic conditions in the State of Assam West Bengal, Orissa and Kerala which are in one ,zone seem to be substantially similar. The Commission has pointed out that there is only a small number of units in each one of these States and the costs are more or less

similar. Bihar has b~er. divided into two zones and U.P. into three zones. The reasons are given in para 8.16 of Chapter VIII of the 1969 re- port. It has· been pointed out that the climatic conditions of the two areas, namely, the Meerut Division of the Western U.P., and Gorakhpur Division are different as they are separa\ed by 300 miles. 'the units in Central U.P. had also, for the same reasons, to be constituted into a separate group.

On similar basis the units in Bihar had been sub:divided into two zones, North and South. It is. therefore, altogether futile to say -that the zoning should not have been done statewise: If any other system had been followed it would have become impossible to work out

a proper cost schedule for the zone. For instance, if the Chittoor Coop. su·gars Ltd. which is in Andhra Pradesh towards the ex- tlemc end and which is very near the State of Tamil Nadu had been grouped with the factories in Tamil N adu or if the Nizam Sugar factory and the Nizamabad Coop. Sugar Ltd. which

are quite near the border of Maharashtra State had been grouped with the factories in Maharashtra, it would have created several probhlms and difficulties particularly with reference

.. to all the taxes, duties etc. which are levied by each State and also the wage> which are payable to the workers in the different States which admittedly vary from State to St~te.

Coming to clause ( c) of question No. 2, the allegations re- garding discrimination are more or less general based on the various disparities already noticed. In Writ Petition No. 279 /72 more detailed allegations have beei1 made which may be referred to briefly.

Before the constitution of 15 price zones, all th~ southern States were getting the same price except the Nizam factory and the Nizamabad Cooperative factory which were in a different zone (i.e. Zone I) though situate in Andhra Pradesh. According to the Tariff Commission, 1969. the cost structure de- pends mainly on the recovery and duration but the impugned order prescribes a higher selling price in the case of Maharashtra Mysore, Gujarat, Tamil Nadu, Uttar Pradesh etc. than Andhr~ Pradesh although the duration and recovery are higher in

the former States than the latter State. Even according to the Tariff Commission report the cosi of production in Andhra Pradesh worked to Rs. 103.07 for 1969-~0 for which a levy price of Rs 150.25 was fixed whereas for Tamil Nadu the cost of produc- tiov worked out to Rs. 97.83 while the levy price has been fixed at Rs. 166.16. Thus the classification has not been made on a c

ANAKAPALLE COOP. SOCIETY v. UNION (Grover, J.) rational basis having any nexus with the object sought to ~ achieved, i.e. fixation of a fair price. It is further stated that m case of factories with longer crushing season where l~bour ~~rks for 8 to 10 months, the retaining allowance payable 1s neg~gible or nil. This is the: case with units in Maharashtra, Gu 1arat, Mysore, Uttar Pradesh etc. In states like Andhra Pradesh where duration is much less, the management has to pay the wages to the seasonal staff by way of retaining allowance. This adds to the costs.

In reply it has been pointed out that the prices were fixed in the different zones on the basis of the Tariff Commission's recom- mendations. If there is any variation in the prices fixed from zonr to zone it is the result of the different schedules recommend- ed for valid reasons by the Tariff Commission.

The incidence of ret 1iniQg allowance and other costs on the working of the fac- tories in the different zones have been taken into consideration by the Commission. ln the elaborate arguments on behalf of the sugar producers. hardly any serious attempts was made to press the question of alleged discrimination, particularly if the adoption of the zonal system could not be demolished.

Once it is recognised that prices could be fixed according to the zones the cost schedules that have been worked out by the Commission have necessarily to be different for each zone.

The various items which go into cost differ frnm zone to z.one. It is not possible to take out only a few items and find di.scrimination, disregarding all the other items or components of costs on the basis of which price deter- mination has to be made.

We are unable to hold that while classifying zones or geographical-cum-agro-economic considera- tion, any discrimination was made or that the price fixation ac- cording to each zone taking into account all the relevant factors would give "rise to such discrimination as would attract Art. 14 of the Constitution.

While examining question No. 3 learned Solicitor General has. reminde? us th~t "cost-plus:• canno~ always be the proper ba~1s f?r pnce fixation. Eyen tf there .1.s no price control each

umt will have to compete m the market and those units which are uneconomic and whose cost is unduly high will have to com- pete with others which are more efficient and the cost of which is much lower. It may be that uneconomic units may suffer

loss~s ~ut what th.ey c~nn<Jt achieve in the open market they can- not mSJSt on where pnce has· to be fixed by the government. The S_ugar Enquiry Commission in its 1965 report expressed the v~ew ~at "c?st-plus" basi.s of price fixat!on. perpetu.1tes ineffi- . c1ency m the industry and 1s, therefore, agamst the long-term inte- terest\ of the country.

6-521Sbp. Cl/73 In the book of Cost Accounting by John G. Blocker and W. Keith Weltmer it has been stated that even from the point of view of the management, there are three important defects in the older types of cost analysis; the importance attributed to actual costs, the historical aspect of the cost figures and the high cost of compiling actual costs. Management is led to believe that actual ccn;ts are the. result of efficient operation, when in reality actual costs may include excessive quantities of material, defective parts, ineiieC".tive use of labour and an unnecessary amount of time in production. In other words the cost analysis may not be. an indi- cator oi efficient plant operation.

Therefore pre-determined stamlard material, labour and overhead costs are an important aid in formulating price policies in planning production and in me~sl}ring efficiency. In the book titled "Price Fixation in Indian Industries"-a study prepared in coll' boration with the Institute of Chartered Accountants of India–it has been stated at page XV of the in- troduction that "costs alone do not determine the prices.

Cost is only one of the many complex factors which together determine pnces. The only general principle that can be stated is that in the end there must be some margin in prices oyer total costs, if capital is to !:le unimpaired and production maximised by the uti- lisation of internal surpluses". It is further stated at page ~XVI) that "while the "cost plus" pricing method is the most common, it may be argued that it is not th'! best available method .because it ignores demand or fails to adequately reflect competition or is based uµon a concept of cost which is· not solely relevant for pric- ing decision in all ~ases. What is essential is not so much of cur- rent or past costs but forecast of future cost with accuracy ….. . Generally pricing should be such as to increase production and sales and secure an adequate return on capital employed".

At page 3 the problem of selection of units for cost study has been considered. The general practice is to select units of average size from different centres. Another determining factor in the

selection of units is the availability of cost data of the units to be select.ed. In India one hardly comes across standardised cost ac- C'('tmting in the manufacturing units. In general it may be said

that the selection of units should be done on the basis of avail- ability of data, structure of industry and the objective for which the study is being made. Sub-section 3C itself lays down the various components of

determining the price of sugar. Clauses (a), (b) and ( c) relate to the total cost which consists of the minimum price of sugar- cane as fixed by the government, the manufacturing cost and the duty or tax. ClausP ( d) relates to the return on the capital c

c ANAKAPALLE COOP. SOCIETY v. UNION (Grover, J.) employed. The very fact that clause ( <!) provides that the mini- mum price fixed for the sugarcane has to be taken into account sh01vs that the actual cost is immaterial.

Moreover under this sub-section price can be fixed according to certain zones. While doing so it is altogether impossible to take the actual cost of eacl~ manufacturer or producer and fix the price accordingly. In such a case the methods followed by the Tariff Commission have stood the test of time and the sub-seetion itself incorporates or embodies the principles which have been followed in price fixation of sugar. It is not therefore possible to say that the principles which the Tariff Commission followed in fixing the prices for diffe- rent zones are either not recognised as valid principles for fixing prices or that simply because in case of some factories the actual cost was higher than the one fixed for the zone in which that fac- tory was situate the fixati_on of price became illegal and was not in accordance with the provisions of sub-s. (3C). It has

not been denied that the majority of sugar producers have made pro- fits on the whole and have not suffered losses. It is only some of them which assert that their actual cost is far in excess of the price_ fixed. . That can hardly be a ground for striking down the price fixed for the entire zone provided it has been done in ac- cordance with the ·accepted principles.

The methods employed by the Tariff Commission 1969 in preparing the cost schedules as also the formulae for working out cost schedules for the future are fully set out in the Commission's report and have been also dis- cussed in the connected case (supra). We need not go over the same matters again.

There is one matter on which the criticism on behalf of the sugar producers is legitimate and the force of which even the learned Solicitor General could not deny. The Tariff Commis-

sion had said in para 9 .14 that after taking all factors into con- sideration it had been discovered that factories with capacities of l~ss than 1000 tonnes had a disadvantage of the order of Rs. 3/- per quintal and those above 1500 had a relative advantaae of the order of Rs. 2/- per quintal compared to the conversi;n charges of the average capacity range which had bl!en adopted in formulating the basic cost schedule. The Commission proceeded to say :

"Having regard to the fact that we have recom- mended fixation of uniform prices on the basis of zonal ave1 ages it is not practicable to make the necessary ad- justment for rectifying the

disparity in the ~x-factory price structure. We would. however. suggest that as a measure of neu~ralising these relative cost advantages related t? capacity ~ graded slab system of excise duty

may b: mtroduced m place of the present flat rate". [1973] 2 S.C.R, This recommendation was nat accepted by the government and it was stated that a decision on this recommendation was being deferred. It is high time that the government took a decision ori this vital recommendation. It cannot be denied nor has the learned Solicitor General made any al1empt to do so that the aforesaid recommendation of the Commission is. based on sound reasoning and deserves to be accepted and implemented. But as the govern- ment was not beiund to accept every recommendation of the Taiiff Commission it is not possible for us to strike down the Price Con- trol Order. It is for the Government to take an early

~ecision with regard to the abeive recommendation of the Tariff Commis- ~ion. On the question of return which has been allowed of Rs. 10.50 per quintal a great deal of argument has been addressed on behalf of the sugar producers. Firstly it has been subtmitted that accord- ing to the report of Tariff Commission this figure which was to be static was to be effective for a period of 3 years only and the prices cannot be fixed on the basis of a static figure for all times. The rate on which money can be beirrowed from the banks, it is pointed out, has gone up from 9% to 11 % . There are other charges like bank commitment charges etc which the 1969 Com- mission has not taken into account. The value of the fixed assets has also gone up and that fact has been ignored by the Ccm- mission. The main criticism is rounded on the figure of Rs. 10.50 per quintal which, it is said, was worked out when the cost was in the region of about Rs. 96 per quintal in 1966-67.

Even according to the government figures- the cost has gone up much higher. The return, therefore, of Rs. 10.50 per quintal which was fixed on the basis of cost of Rs. 96.20 per quintal could not possibly furnish the figure of an adequate return

which was contemplated to be 12.5%on the capital employed. The figures worked out by the learned counsel for the producers and those of the government hardly agree and it is difficult to reach any definite conclusion whether the basis on which the Commission recommended that a fixed return of Rs. 10.50 per quintal should be allowed by way of return was unrealistic and could not be adopted for the future.

The Commission was fully in possession of all the figures of the price a<> also the working capital on which the return had to be determined. It was satisfied that the require- ments of the sugar industry could be more equitably met by the departure from the co'lventional method,

namely. of giving a return on the basis of certain percentage on the capital employed and by adopting ins.tead a uniform amount per quintal as the margin to be added to the other cost in arriving at a fair price of the sugar.

According to the calculations made by the Com- mission that would provide a relatively efficient unit an amount sufficient to declare a dividend of the order of 7 to 8 % on paid c

II c ANAKAPALLE COOP. SOCIETY v. UNION (Grover, I.) up share capital after meeting its other comm°i!mcnts such as interest and taxation. It was ·stated in arriving at this decision

the Commission had made profonna calculation for return apply- ing 12!% to the zonal averages of the capital employed and the results are tabulated in Appendix 37. The variations ranged

from 8.23 to Rs. 15.73 per quintal. Adding to this the element of depreciation, the over all difference ranged from Rs. 10.01 to Rs. 21.96. By adopting the standardised figure of Rs. 10.50 per quintal the range of variation had been narrowed down from Rs. 11.88 to Rs. 16.94. This was considered to be a more satisfac- tory alternative not only from a producer's but also the consumer's point of view. It was observed that in the areas where large number of low cost units subsist this amount of return available in 1crms o,f money per unit of sugar produc~ would be relatively high- er. This should provide the needed impetus for further capital for- mation for. rehabilitation, expansion and modernisation. Accord- ing to the statements furnished by some of the producers. e.g. in Writ Petition No. 297 (Standard Refinery) the actual payment on account of interest and financial charges had come to 15.28% per quintal. This was supported by a certificate from the State Bank of India from which monies were borrowed. Similarly in the case of Writ Petition No. 298172 (Jagatjit Sugar Mills) it was claimed that the actual interest charges incurred worked out at the rate of Rs. I 0.40 per quill'tal which entirely wiped out the provision for a return of Rs. 10.50 per quintal on the capital employed.

The cases of individual units can hardly furnish a guide for standardising items of cost, the capital employed and the return in the matter of price fixation for a zone or a region as a whole. Nor can charges on account of interest incurred by some units in the eintire zone reflect a proper working and management of all the units in that zone. When prices have to be fixed not for each unit but for a particular region or zone the method employed by the Commission was the only practical one and even if some units be- cause of circumstances peculiar to them suffered a loss the price could not be so fixed as to cover their loss. That cannot possibly be the intention of the Parliament while enacting sub-s.3C of s.3 of the Act. If that were so the price fixation on zonal or regional basis would have to be completely eliminated.

In other words the entire system of price control which is contemplated will break down because fixation of price for each unit apart from being impractical would have no meaning whatsoever and would not be conducive to the interest of the consumer. We may point out that in the case of Premier Automobiles v. Union of Tlldia(') J 6% return on the capital employed was considered to be reason- (I) A.J.R. 1972 S.C. 169-0.

(1973] 2 s.c.r… able. But it must be remembered that unfortunatey whenever that decision has been discuss00 no one has taken care to under- stand and appreciate that out of the return the car manufacturers were made liable to pay the minimum bonus of 4 % , the interest on borrowings, financial charges, warranty charges and in some cases the gurantee commission.

In the return which has been allowed to othe sugar producers neither the minimum bonus nor additional amounts of .warranty and guarantee charges are payable by them. In the letter of 8th October 1970 the Commission pointed

out that the order to arrive at the figure of the return on the capital employed of Rs.' 10.50 per quintal the Commission had made a study of the various figures in respect of the costed period average of 5 years' duration and recovery and prciorma calcu- l~tion for the capital employed. Thereafter the capital employed had been computed on a uniform basis taking into account the written down value of assets and wqrking capital equal to six months' cost of production including depreciation. After deduct- ing the average net fixed assets from the capital employed the

working capital came to Rs. 55 per quintal. It was stated that instead of the figures indicated in para 9.13 of the 1969 report the working capital should bie taken at the figure of Rs. 55 per quintal for regulating additional interest due to carrying on larger stock on account of increased production. H may be mentioned that in the 1969 report the figure of Rs. 42.40 per quintal had been calculated by way of working capital ( i·ide para 9.13 of the report).

This meets the cririciSin made !OD' behalf of the producers that although the rate of interest has increased. the Commission has nor allowed any addition on that account. Coming to question No. 4 a good deal of attack has been

made on the depreciation allowed bly the Com1J1ission. Depre- ciation is essentially a part of the conversion costs. Under the terms of reference the Tariff Commission 1969 was asked to .indicate the basis on which the provision for depreciation should be made.

The question was whether depreciation to be allowed in the cost structure should be calculated on replacement value or on written down value of the assets and how individual factories which modernise the plant or expand their capacity should be compensated for the investment

made. The Sugar Enquiry Commission 1965 had recommended depreci3'tion on written down value but had also suggested rehabilitation within a specified period. On the general question of depreciation the

B90thalingam Committee in its report on rationalisation and simplification of tax structure came to the conclusion that over the period of years depreciation should be allowed in such a way that 20~; more than the original cost is provided for.

The c c ANAKAPALLB COOP, SOCIETY v. UNION (Grover,/.) 9~5 various bodies which either appeared or sent representations to the Tariff Commission 1969 put forward different points of view.

The Commission after referring to the practice followed in other countries pointed out in para 9.9.4 that in the past a few departures from the normal practice ct allowing deprecia- tion on the written down value adopted for income tax essess- ment had been made.

For in~tance, in the case of steel prices report 1962 the Con'"''''·cion adopted a standard block and a straight lir.e rr:~•heu. In the report on Rubber Tyre and Tube I 965 spec:~l depreciation was allowed in addition to the normal amoull't.

In para 9.9.6 the Commission stated that the majority· of units in sugar industry were more than 30 years old. At 9% d·epreciation for plant and machinery and 2! % for build- ings most of the original assets have

been written off. To calculate the amount of depreciation that would have accrued to individual units during the course of the lasr 30 years or so on replacement basis year by year and simultaneously to revalue the assets in order to arrive at the present assets was not an easy task.

After taking the necessary figures the Commission found !hat comparatively speaking a large number of uni1s required rehabilitation having depreciation much lower than the average of the industry.

The Commission feH that as it was making recommendation only for a period of three years it would not be advisable to work out depreciation on replacement value E. for that short period when that practice had not been .followed in the past.

The ·Commission decided in favour of continuing the existing method oi computing the quantum of deprecia- tion on the basis oi zonal avera~es of the costed units. It was added that the figure so adopted was autcmatically to undergo an upward revision if and when the revision contemplated by 1he darft rules seeking to liberalise the depreciation to be earned under the Income tax law was brought into effect.

On behalt of the sugar producers i1 has been stated that the Tariff Commission has merely taken the formulae under the Income tax law of the written down value but has made no provision for adding the value of new improvements or additions. It appears from the letter of the Traill Commission dated

July 29, 1970 from which extracts have been furnished to us by the learned Solicitor General that in accordance with what was said in para 9.4.6 of 1969 report the commission has recalcula1ed the figure in respect of depreciation in accordance' with the amended prnvisions o.f the income tax law and the rates have been revised for different class of assets for the period of the estimate.

On behalf of the government a statement has been furnished to us showing the impact of variation as a result of introduction of new rates of depreciation under the (1973) 2 S.C.R.

Income tax Rules per quintal of sugar over the basic cost schedule in the 1969 report. It is. q!lite clear from that statement that the increase in depreciation ~a~ been allowed in accordance with the new rate of

deprec1at1on under . the Income tax Rules and the criticism on beh_alf of t~e prod~cers on this point does not appear 1? hie valid: It is pertment to note that in the case of Premier Automobiles case (su;ira_) also this Court upheld depreciation being all?wed on the basis provided for by the income tax law and did n?"l . accept

the contention of the car manufacturers that deprec1ahon allowance should be calculated on replacement ooot The following observations mav be reproduced : "The depreciation which is allowed under the tax

Jaws is very liberal and we see no reason to pass on the burden 10 the present consumer who is not likely to get any benefit out of the replacement proposed to be provided for PY the manufacturers",

As regards rehabilitation the Government of India ~ad appointed a committee in June 1963 to examine the quesh~n of rehabilitation and modernisation of the old and uneconomlf units in the sugar industry under the Chairmanship of Shri S. N. Gundu Rao. That Committee submitted its report in 1965 and recommended on various matters including the assessment of need for rehabilitation modernisation and expansion of

uneconomic llllits. The Sugar Enquiry Commission 1965 agreed with the report of the Gundu Rao Committee that there was need for pro- viding special loan assistance to the. industry for the purpose of rehabilitation and modernisation. It was suggested that the Gov- ernment could provide finances for rehabilitation and modernisa- tion through the existing financial institutions such as Industrial Development Bank alld Industrial Finance Corporation. In the 1959 report of the Tariff Commission the principle that a uoifonn allowance for rehabilitation to all units in the su~ar industry had been held to be unwarranted since such a provision, according to the Commission, while giving necessary resources to the needy ones would accrue as an extra element of profit to others. The reason gi".en was that generally the average life of a sugar plant and machinery is 20 to 25 years. Therefore the units which had gone into production in recent times should have no problem of rehabilitation for some years to come. Those units which had carried out substantial expansion and had in. the process effected renovation and modernisation of their existing equipment would not require the same amount for further rehabilitation as the units which were established in pre-war years and had carried out no expansion and no rehabilitation. The Commission had found that the industry had done well during the four years preceding the c

c i= ANAKAPALLE COOP. SOCIETY \'. UNION (Grover, J.) report. It had, therefore, resources which could have bl:en utilised for rehabilitlftion and modernisation of the old plant and equip- ment. In other words in 1959 it was considered that nothing need be giver. by way of uniform allowance for rehabilitation in the fair selling price of sugar. The government, it was suggested, should make the necessary arrangement for making available financial ll

·assistance 10 the units in sugar industry on similar lines as those made for the cotton and jute textile manufacturing industry for the purpose of renovation and modernisation of their plant and equipment.

c Before the 1969 Tariff Commission the Sugar industry had pressed for the grant of rehabilitation allowance equivalent to the amount of difference between the replacement value and the his- 1orical depreciation.

After giving the various figures in para 9.10.2 the Commission considered that the depreciation rate would come to Rs. 4.22 per quintal. The Commission, however, pro- ceeded to say that rehabilitation should not be linked to the replace- ment cost or the difference between depreciation at replacement and historical cost. At the same time it was necessary to ensure that in the interest of the maintenance of cotinuity of sugar production at an appropriate level such of the units which could be brought to a standard of normal efficiency should be helped to rehabilitate themselves. In the assessment of prices by region as well as fum- tion of price on the ba>is of zonal schedules it was not possible IP take into consideration the needs of individual units.

The best that could be done was to provide for a join fund for the entire industry. In para 9.10.4 the Commission accepted the case for allowing for the next 3 to S years at least half this amount or Rs. 2/- per quintal in round figures by way of rehabilitation grant to the industry either by way of direct adliition to th~

~on..trollt,~ price or if so prelerred, in the interest of the consumer indirectiy i1y suitJble adjustment in the burden of taxation. With the amount ~ gen_era1ed a fund could be established only for meeting the cost IDcludtng the cost of finance for creation of additional assets to improve the productive efficiency of the deserying units. In the c~t schedules which were prepared the amount' of Rs. 21- per qumta! was added by way of rehabilitation for determining the e.~-works price of sugar.

In .the resolution dated February 20, 1970 of the Governmen1 of India ~e. above recommendation was noticed but it was stated th~t a d:c1s1on on that mat!er had been deferred pending consul· t~tJon :"'Ith. the concerned mterests.

Apart from relying on the d1Scuss1on m the reports of 1959 and 1965 the Solicitor qeneral has referred to the observations of this Court in the Premier Auto- mobiles case (supra) in which while considering the question of dep_reciation the principle that it should be allowed on replacement basis was not accepted.

According to report of the Car Prices (1973] 2 s.c.R. Enquiry Commission if the manufacturers were to keep apart not only the amount of depreciation but also the development rebate. and other reserves to which they were entitled under the various tax and other laws and invest them separately or even in their ~usiness, depreciation funds with the amount thµs provided for could be buik up arid these could be invested whether inside or outside the business.

It is unfortunate that ·nothing has been done to imJ;>lement the recommendation of the Commission in respect of rehab1Jitation presumably, we are told, because the question of nationalisation of sugar industry was

under consideration. The conditions which prevailed at the time of the 1959 report and the 1965 report were different and the lat~st view expressed in the : %9 report ought to have received seriOLh

c•.~'!ttcr~tion. But we are unable to hold that merely because Rs. 2 per quintal as recom- mended by the Commission has not been taken into account while fixing the price of levy sugar the price as fixed should be struck down.

The non-inclusion of this amount is in no way 1iolative of the provisions of sub-s. 3A of s. 3 of the Act. We have however, no doubt that the government will give serious and immediate consideration to this matter and take a decision on

it without any further delay. We may now refer to the escalations (question No. 5) on the wages, cost of packing, electricity duty, transport charges on cane etc. These matters are all dealt with in the latest note of

1he Tariff Commission on the cost increase in the sugar industry a copy of which has been produced by the Solicitor Gen~ral and in which escalations have ~een allowed. The Tariff Commission cl id not consider it necessary to. allow increase in the cost of

power, .fuel, and consumable stores as it was considered that the estimated provision of 3 % increase per annum in the cost of stores and repair should take care of the increase for the current price period.

As rgard:; the incidence due to increase in road transport cost it was stated that the Commission had taken the same· into account while recommending the schedule of price for the period ending 1971-72. We have not been shown any serious inaccuracy or infirmity factually or otherwise in the escalations allowed by the Commission.which have been worked out by the experts except the general argument which y;l! have not accepted that the increases allowed are not commensurate with the a .. tual cost of some of the units.

A few other matters (covered by question No. 6) may now be considered which were beought to our notice. The first is about gratuity. The first Wage Board had . recommended that it should be paid by the sugar producers to its

employees. The f c l;I ANAKAPALLE COOP. SOCIETY v. UNION (Grover, J.) 909' complaint of the producers was that no account had been taken by the Tariff Commission of. this item. Our attention has been drawn to the enactment of recent legislation under which the rate of minimum bonus has been raised from 4% to 8.33%. It has been urged that when the prices were fixed by the impugned order the additional amount could not be taken into. account while determining the cost of production. As the producers will be bound to pay the bonus at the enhanced rate they will bp put to a good deal oi loss until some provision is made for addition of that amount for the purpose of working out the levy prices. So far as gratuity is concerned it has been pointed out by the Solicitor General that in Form V apeparing at page 192 under 'Salaries and Wages' item 11 relates to gratuity and therefore gratuity had been included.

There are hardly any clear pleadings in the writ petitions on this point from which it can be establisheci and gratuity has not been included. We are unable to accept the contention that payment of gratuity or liability thereof has not been taken into account while fixing the price for levy sugar. The Payment of Bonus Amendment Ordinance 1972 which

has been promulgated recently was published in the Government of India Gazette dated September 23, 1972. Section 3 of the Ordinance provides :- s. 3 "Section l 0 of the principal Act shall be re-numbered as sub-section ( l) thereof, and

(I') …………………. (ii) ……………..•. (2) Notwithstanding anything contained in sub- section (1), but subject to the provisions o.f section 8 and 13, every employer shall be

bound to pay to every employee in respect of the accounting .year commencing on any day in the year 1971 a minimum bonus which shall be eight and '<me-third per cent of the salary or

wage earned lzy the employee during that accounting year or eighty rupees whichever is higher whether there are profits in that account- ing year o~ not : Provided that ………………………… "

On. behalf of the sugar producers it has been urged that the ltability to pay the additional amount of .minimum bonus will commence in respect of the accounting. year commencing on any date in the year 1971. It will, therefore, cover the year 1971-72 for which the prices of sugar have been fixed by the impugned order.

Since the additional amount has to go into the manu- lacturing cost the price as fixed cannot be held to * valid and legal. The learned Solicitor General, on the other hl)lld, says

that since the Ordinance has come into force now it was neither practicable nor possible to take its provisions into account while P.xing the prices under the impugned order· and the same cannot !>e rendered illegal by a subsequent legislation which has come Into force only recently.

In our opinion the prices as fixed biy the impugned order cannot be struck down because of the pro- mulgation of the Ordinance by which the amount of minimum bonus has been raised from 4% to 8.33% of. the salary or wages earned by the employees dur!ng the accounting year or Rs. 80 whichever is higher. But there can be no manner of doubt that the government will have to take some immediate action by either making some ad-hoc provision in respect of the prices or taking some such other step which may be open to it to give the necessary relief to 'the sugar producers in this behalf.

As the Bonus Ordinance has been promulgated after the prices Were fixed by the impugned order that Order cannot lie struck {fown on the ground that the prices fixed by it did not take into account the changes in the rate of minimum bonus made by the Ordinance. Even so, in the changed circumstances, the Govern- ment ought to make modifications in the impugned order in respect of the prices of levy sugar so as to adjust them in accordance wiith the provisions of. the Ordinance. Except for the above the writ petitions shall stand dismissed with no order as to costs. Liberty to the parties to file applications for directions in respect of the Bank Guarantees furnished by them in pursuance of stay orders passed by this Court.

V.P.S. · Petltions dismissed. c