British India Corporation Ltd vs Collector Of Central Excise

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Petition No. 94-of 1955

Decision Date: 20 August 1962

Coram: M. Hidayatullah, S.K. Das, J.L. Kapur, A.K. Sarkar, Raghubar Dayal

In this matter the Supreme Court of India rendered its decision on 20 August 1962. The case was styled British India Corporation Ltd. versus Collector of Central Excise. The bench that heard the petition consisted of Justices M Hidayatullah, S K Das, J L Kapur, A K Sarkar and Raghubar Dayal. The petitioner was British India Corporation Ltd., a public limited company, and the respondent was the Collector of Central Excise. The judgment was recorded under citation 1963 AIR 104 and 1963 SCR (3) 642, with additional reference numbers RF 1963 SC1237 (8). The legal provision under consideration was Item 17 of the Schedule to the Central Excises and Salt Act, 1944, which imposed excise duty on footwear manufactured in factories employing fifty or more work‑men and using power in excess of two horsepower. The petitioner challenged the constitutional validity of this provision on the ground that it discriminated against larger manufacturers, arguing that there was no reasonable basis for distinguishing manufacturers by the number of workers employed or by the amount of power used, and that the heavy duty would create competition severe enough to drive big manufacturers out of business. The Court examined the contention that the classification was arbitrary and evaluated whether the distinction served a legitimate policy purpose.

The Court held that Item 17 of the Schedule was founded upon a reasonable classification and was therefore validly enacted. It observed that manufacturers employing fifty or more workers formed a clearly defined class, just as manufacturers using power exceeding two horsepower formed another distinct class. The Court explained that the legislative intent behind imposing the duty was to create an exemption favourable to small manufacturers, who might find the duty more burdensome than larger firms. Such a classification was seen as a means of supporting cooperative societies, cottage industries and small manufacturers, thereby preventing their annihilation by competition from large‑scale industry. The Court cited the decision in Orient Weaving Mills (P) Ltd. v. Union of India (1962) Supp. 3 SCR 481 as persuasive authority for this approach. The judgment originated in the original jurisdiction under Petition No. 94 of 1955, filed under Article 32 of the Constitution for the enforcement of fundamental rights. The petition sought relief against the imposition of excise duty on footwear under Item 17 of the First Schedule to the Central Excises and Salt Act, 1944, effective from 28 February 1954, and additionally challenged the method of calculating the duty ad valorem by including freight, packing and distribution charges in the price. The Court’s opinion was delivered by Justice Hidayatullah, addressing the constitutional challenge and the statutory scheme governing the duty.

In the present case the petitioner, a public limited company, had taken over other enterprises and amalgamated them, among which were Cooper Allan & Company Ltd. and the North West Tannery Company Ltd., both situated at Kanpur. These two companies manufactured shoes and other leather articles and operated as a single unit producing the well‑known “F L E X” brand of shoes. As a consequence of the financial proposals of the Central Government for the financial year 1952‑55, a bill numbered 9 of 1954 was introduced in Parliament on 27 February 1954. Under element 8 of that Bill, footwear were proposed to be taxed at ten per cent ad valorem if they were produced in any factory as defined in the Factories Act, 1948 (63 of 1948). When the Finance Act, 1954 (17 of 1954) was enacted, the Central Excises and Salt Act, 1954 was amended by the inclusion of item 17 in the Schedule, although the wording differed slightly from the Bill. The item as finally enacted read as follows: “17. FOOTWEAR, produced in any factory including the precincts thereof whereon fifty or more workers are working or were working on any day of the preceding twelve months, and in any part of which manufacturing process is being carried on with the aid of power or is ordinarily so carried on, the total equivalent of such power exceeding two horse‑power. ‘Footwear’ includes all varieties of footwear, whether known boots shoes, sandals, chappals, or by any other name.” The rate specified was ten per cent ad valorem. Under the provisions of the Provisional Collection of Taxes Act, 1931 (XVI of 1931), the duty became leviable from 28 February 1954 by virtue of a declaration contained in the Bill. On the preceding day the Superintendent of Central Excise at Kanpur deputed an inspector of his department to obtain from the petitioner a declaration of all stock of footwear and to seek permission to verify those stocks for the purpose of levying the excise duty from 28 February 1954. As a result of the levy, the petitioner was required to pay during the remaining ten months of 1954 a sum of Rs 9,47,630 as excise duty. The petitioner produced, in the two units mentioned above, footwear both for sale to the public and for supply to the Government for use by the Army and the Police. The petitioner contended that, although the excise duty it paid could be passed on to the consumer, it could not incorporate that duty in the price of shoes sold to the public because of intense competition from manufacturers who were free of such duty, whereas it did include the duty in the price of footwear supplied to the Government. Accordingly, about Rs 2 lakh was passed on to the Government but roughly Rs 7 lakh was borne by the company itself. The petitioner further argued before the Collector of Central Excise, Allahabad, that the calculation of the ad valorem duty should not be based on a price that included freight, packing and distribution charges paid to it, by its …

In this case the petitioner submitted that the duty should be measured on the price received by the distributors in the remote parts of India, and that the Collector of Central Excise had refused to accept this submission. After the Collector’s refusal, the petitioner appealed to the Central Board of Revenue. Before that appeal could be determined, the petitioner instituted a writ petition under Article 32 of the Constitution. The petition prayed for writs to set aside the order of the Collector of Central Excise, Allahabad, and for writs to restrain the Union Government, the Central Board of Revenue, the Collector and the Superintendent of Central Excise from enforcing the provisions of Item 17 against the petitioner and from collecting the excise duty imposed thereunder. The petitioner asserted that Item 17 creates a distinction between manufacturers of footwear who employ more than fifty workers or who use power exceeding two horsepower and those manufacturers who do not meet either condition. According to the petitioner, this distinction is discriminatory because there is no reasonable basis for separating manufacturers on the ground of the number of workers employed or the amount of power used. The petitioner maintained that the essential nature of footwear manufacturing is identical whether a factory employs fifty workers or fewer. A larger workforce is required only to achieve a higher output; the increase in head‑count does not alter the nature of the operations or the method of production. Likewise, the need for power above two horsepower arises only when a larger number of machines must be driven, and there is no essential difference between a large manufacturer and a small manufacturer merely because one uses more power than the other. Consequently, the petitioner contended that imposing a higher excise duty on larger manufacturers creates an unjust and non‑discernible discrimination in trade and violates Article 14 of the Constitution. The petitioner claimed that the levy is both illegal and unconstitutional. As a further consequence, the petitioner, already operating at a loss because of competition, is now additionally burdened by a heavy excise duty that it cannot pass on to consumers due to competitors who pay no duty, which may force the petitioner out of business. The petitioner argued that this situation also breaches Articles 19(1)(f), 19(1)(g) and 31 of the Constitution. Moreover, the petitioner asserted that the ad valorem duty should be calculated on the ex‑factory price rather than on the price charged to distributors, which subsumes packing costs, freight charges and distribution commissions. The petitioner described this as an error apparent on the face of the Collector’s order and argued that the order should be set aside by a writ of certiorari or any other appropriate writ. Lastly, it is contended that the

The Court observed that the Finance Act of 1954 obtained the President’s assent on 27 April 1954 and consequently became operative from that day. It was argued by the petitioner that any collection of excise duty that had been made in March 1954, i.e., before the Act became law, was illegal. The Court indicated that it would consider these contentions only briefly because most of the issues raised had already been examined and decided in earlier decisions of this Court. The petition also alleged that the duty in question could not be classified as an excise duty because the petitioner was unable to pass the duty on to the consumer. The Court noted that this particular argument had not been previously raised before it; it was merely mentioned in the petition. The Court explained that an excise duty is a duty imposed on production. Although economists describe it as an indirect tax that can be shifted to the consumer as part of the price, the mere ability to shift the tax is not an essential characteristic of an excise duty. Even when the duty is ultimately borne by the producer or manufacturer, it does not cease to be an excise duty. The nature of an excise duty had been explained in the very first case of the Federal Court and subsequently in later decisions of the Federal Court, the Privy Council and this Court, yet the petitioner continued to raise the same ground, which the Court found surprising. Regarding the contention that the duty could not be collected before the Finance Act of 1954 was enacted, the Court referred to an extensive discussion of that issue in the recent case of M/s Chotabhai Jethabhai Patel and Co. vs. Union of India. The Court accepted that, in view of that decision, the point was no longer open. The Court also accepted that the question of whether, for the purpose of calculating ad valorem duty, the Collector of Excise was justified in adding to the price the cost of packing, freight charges and distribution commissions, is a matter for the authorities created under the Act, subject to the normal hierarchy of appeals and revisions, and not a question for direct consideration under Article 32 of the Constitution. This view was reinforced by the recent decision of this Court in Smt Ujjam Bai vs. State of U.P., Civil Miscellaneous Petition No. 79 of 1959, decided on 10 April 1962. The Court pointed out that the present petition was filed while an appeal before the Board of Revenue was still pending and while a further right of revision to the Central Government remained available. Consequently, the petition left open a true challenge under Articles 14, 19 and 31 of the Constitution. The arguments raised under each of those articles were based on the same factual matrix, merely viewed from different constitutional perspectives. The petitioner contended that a discrimination existed between large footwear manufacturers and small manufacturers, a discrimination that was not founded on any substantive differential, and that this discrimination resulted in a heavy tax burden on the large manufacturers together with a corresponding exemption for the small manufacturers.

The petition argued that the tax imposed on small manufacturers created competition so intense that it would drive the larger manufacturers out of the market. It was contended that the tax was illegal and that its levy amounted to a confiscation of the petitioner’s property. Accordingly, the petitioner asserted that the imposition of the duty was first challenged under Article 14 of the Constitution as an act of discrimination, then under Article 19 as a deprivation of the right to acquire, hold, dispose of property, or to carry on a business or trade, and finally the collection of the duty was characterised as a confiscation of property without legal authority under Article 31.

The Court observed that the petitioner's argument rested on a fundamental fallacy because it presumed that manufacturers could not be classified on the basis of the number of workers employed or the amount of power used in the manufacturing process. The Court noted that manufacturers employing fifty or more workers constitute a well‑defined class, just as manufacturers whose processes are powered by equipment exceeding two horse‑power also form a distinct class. Legislation that classifies entities according to workers or power consumption is common; the Factories Act, for example, defines a factory by reference to the number of workers employed or the use of power. The contention that size makes no difference was rejected. The Court explained that larger manufacturers are able to achieve economies of scale, producing output that is both larger and faster, which enables them to undersell smaller manufacturers. Without such economies, mass production would lose its advantages. Although manufacturers now bear additional burdens such as bonuses and labour‑welfare expenses, the Court held that a well‑run large manufacturer can, through mass production, offer the same commodities at competitive prices and still absorb these burdens.

Consequently, the Court concluded that the purpose of imposing the Excise Duty was to create an exemption for small manufacturers who could not readily pay the duty, unlike larger manufacturers. The Court recognised that such classification serves the interests of co‑operative societies, cottage industries, and small manufacturers, providing them an impetus and protection from being eliminated by competition with large industry. The Court pointed out that similar classifications have never been successfully challenged on the ground of discrimination. The Court referred to its recent decision in Orient Weaving Mills (P) Ltd. v. Union of India, where an exemption granted to societies operating a few looms on a co‑operative basis, as opposed to large companies operating hundreds of looms, was held constitutional and the classification of co‑operative societies was deemed reasonable. The Court applied the same reasoning to the present case, noting that the exemption applies to very small manufacturers employing not more than fifty workers and using power not exceeding two horse‑power.

In this case the small manufacturers were described as employing a manufacturing process that used power not exceeding two horsepower. The Court explained that this limitation formed the basis of a protective measure intended for small concerns, because requiring such enterprises to pay the excise duty would inevitably force them to cease business operations. The judgment referred to the earlier decision reported in (1962) Supplement 3 of the Supreme Court Reports at page 481. The Court then examined the Schedule that had been characterized by some as discriminatory. It held that the Schedule was founded on a reasonable classification of manufacturers and that it had been validly enacted by the legislature. Accordingly, the Court concluded that if the Schedule is upheld as valid, any challenge to it on the grounds of Article 19 or Article 31 of the Constitution must also fail. On the basis of this reasoning the Court found that the petition could not succeed. Consequently, the petition was ordered to be dismissed and the petitioner was required to bear the costs of the proceedings. The final order therefore read: petition dismissed.