Hoechst Pharmaceuticals Ltd v State of Bihar (1983)

It is the modern statement of the doctrine of repugnancy under Art. 254, and its central holding is the one candidates most often get wrong: Art. 254 operates only within the Concurrent List. A clash between a State law traceable to List II and a central law traceable to List I or List III is not a repugnancy problem at all — it is a competence problem, resolved by Art. 246.

Section 5 of the Bihar Finance Act 1981 imposed a surcharge at ten per cent of the total tax payable by a dealer whose gross turnover in a year exceeded Rs 5 lakhs, in addition to the tax payable by him. Sub-section (3) of s. 5 prohibited such a dealer from collecting the surcharge from purchasers.

The appellants, Hoechst Pharmaceuticals Ltd and Glaxo Laboratories (India) Ltd, were companies manufacturing and selling medicines and life-saving drugs throughout India, with a branch and sales depot at Patna registered as a dealer under s. 14 of the Bihar Act. They sold through wholesale distributors and stockists, who sold to retailers.

About ninety-four per cent of their medicines and drugs were sold at a controlled price exclusive of local taxes, fixed by the Central Government under the Drugs (Prices Control) Order 1979, issued under s. 3(1) of the Essential Commodities Act. They were expressly prohibited from selling above the controlled price, though the Order allowed the manufacturer to pass on the tax liability to the consumer.

So the collision was this. The central Control Order fixed a ceiling price and allowed tax to be passed on; the State law imposed a surcharge and forbade the dealer from passing it on. The appellants said the two could not stand together and that the State provision was void under Art. 254(1).

The High Court, relying on S. Kodar v State of Kerala, had held that the surcharge under s. 5(1) was in reality an additional tax on the aggregate of sales in the year; that it was not necessary that the dealer be able to pass the incidence on for it to be a tax on the sale of goods; and that being levied at a uniform rate of ten per cent on all dealers in a defined class, it was not discriminatory or violative of Art. 14.

Is s. 5(3) of the Bihar Finance Act 1981, which is relatable to Entry 54 of List II (taxes on sale or purchase of goods), void under Art. 254(1) as repugnant to para. 21 of the Control Order, which is relatable to Entry 33 of List III?

The right question is competence, not repugnancy

The Court began by relocating the problem. The validity of s. 5(3) has to be determined by application of the rule of pith and substance, asking whether the subject matter was competently enacted under Art. 246; the question of repugnancy under Art. 254 was therefore not a matter in issue at all. That is the sentence to carry into an answer.

The scheme of Art. 254

Article 254 makes provision, first, as to what happens on a conflict between a central and a State law with regard to the subjects enumerated in the Concurrent List, and secondly for resolving that conflict.

Clause (1) states the normal rule: if a State law relating to a concurrent subject is repugnant to a Union law relating to that subject, then whether the Union law is prior or later in time, the Union law prevails and the State law is void to the extent of the repugnancy.

Clause (2) engrafts an exception: if the President assents to a State law reserved for his consideration, it prevails notwithstanding its repugnancy to an earlier Union law, both laws dealing with a concurrent subject. The central Act gives way only to the extent of the inconsistency and no more, and only in that State.

The proviso to clause (2) takes the predominance away again: Parliament may repeal or amend the repugnant State law directly, or itself enact a law repugnant to the State law with respect to the same matter. Even without an express repeal, the State law becomes void as soon as the later parliamentary law creating repugnancy is made.

When is there repugnancy?

A State law is repugnant to a Union law when there is direct conflict between the two. Repugnancy may also arise where both laws operate in the same field and the two cannot possibly stand together.

The Court adopted the three tests of inconsistency stated by Nicholas in his Australian Constitution, which had already been accepted in Ch. Tika Ramji v State of U.P. as useful guides:

1. inconsistency in the actual terms of the competing statutes;
2. no direct conflict, but the State law is inoperative because the central law is intended to be a complete exhaustive code; and
3. even without intention, a conflict arising because both legislatures seek to exercise their powers over the same subject matter.

The two conditions — and the point of the case

Article 254(1) applies only when both requirements are fulfilled: (i) both legislations occupy the same field with respect to one of the matters enumerated in the Concurrent List, and (ii) there is direct conflict between them. Only then is the State law void to the extent of the repugnancy.

Article 254(1) has no application to cases of repugnancy due to overlapping between List II on the one hand and Lists I and III on the other. Where such overlapping exists, the State law will be ultra vires because of the non obstante clause in Art. 246(1) read with the opening words "subject to" in Art. 246(3) — that is, for want of legislative competence, not for repugnance.

The Court acknowledged that the words a law made by Parliament which Parliament is competent to enact in Art. 254(1) are susceptible of a wider construction, since Parliament is competent to legislate on List I as well as List III. But Art. 254(1) is expressly made subject to clause (2), and clause (2) refers to repugnancy in the concurrent field; if clause (2) guides the scope of clause (1), the repugnancy contemplated must be confined to the concurrent field. It is now settled that the words with respect to one of the matters enumerated in the Concurrent List qualify both limbs of Art. 254(1) — a law made by Parliament, and an existing law. The underlying principle is that the question of repugnancy arises only when both legislatures are competent to legislate in the same field. The Court supported this with A. S. Krishna v State of Madras on s. 107(1) of the Government of India Act 1935.

Applying it

The State's power under Entry 54 of List II to levy a tax on the sale or purchase of goods, and to make ancillary provisions, is plenary and not subject to Parliament's power under Entry 33 of List III. There is no warrant for projecting the central power under Entry 33 into the State's taxing power under Entry 54; otherwise Entry 54 would have to be read as taxes on the sale or purchase of goods other than essential commodities, which it does not say. Where one entry is made subject to another, all that means is that a field covered by the latter is taken out of the scope of the former — no more.

Section 5(3) of the Bihar Finance Act 1981 is valid. There was no repugnancy under Art. 254(1), because the State provision falls under List II and not in the concurrent field at all.

Article 254 applies only where both the Union law and the State law are with respect to a matter in the Concurrent List and occupy the same field. Outside that, a clash is resolved by Art. 246 as a question of competence. Where Art. 254 does apply, the central law prevails whether earlier or later, subject to the Presidential assent exception in Art. 254(2) and to Parliament's power under its proviso.

• The three-step method for any repugnancy problem: (1) characterise each law by pith and substance and locate its entry; (2) if both are in List III and occupy the same field, apply Art. 254; (3) if not, apply Art. 246 — the State law fails for incompetence, or survives untouched.
• Learn Nicholas's three tests — they are the practical content of the word repugnant.
• Learn the Art. 254(2) sequence precisely: assent saves a State law against an earlier central law, only in that State, only to the extent of inconsistency, and only until Parliament legislates again.