Hyderabad Chemical and Pharmaceutical Works Ltd. vs State of Andhra Pradesh and Ors.

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

Court: supreme-court

Case Number: 399-403/1962

Decision Date: 20 March 1964

Coram: K.N. Wanchoo, P.B. Gajendragadkar, J.C. Shah, N. Rajagopala Ayyangar, S.M. Sikri

In this case the Supreme Court of India delivered its judgment on 20 March 1964. The matter was titled Hyderabad Chemical and Pharmaceutical Works Ltd. and others versus State of Andhra Pradesh and others. The bench that heard the appeal consisted of Justices K. N. Wanchoo, P. B. Gajendragadkar, J. C. Shah, N. Rajagopala Ayyangar and S. M. Sikri. The petitioners were Hyderabad Chemical and Pharmaceutical Works Ltd. together with several other companies, while the respondents were the State of Andhra Pradesh and additional parties. The decision was reported in 1964 AIR 1870 and in the Supreme Court Reporter at 1964 SCR (7) 376. The legal question centered on the Medicinal and Toilet Preparation (Excise Duties) Act No 16 of 1955, specifically section 21, and whether that provision repealed rule 36 that had been framed under the Hyderabad Abkari Act. The issue also involved the constitutional provision article 277, entry 84 of list I in the seventh schedule, and the Hyderabad Medical Preparations and Spirituous Rules 1345 F, rule 36.

The petitioners were manufacturers of medicines that required the use of alcohol in their production processes. Under rule 36 of the Medical Preparation and Spirituous Rules 1345 F, which had been created pursuant to the Hyderabad Abkari Act of 1316 F, the petitioners were required to pay a fee to the State Government for supervision of the alcohol used in their manufacturing. When the Medicinal and Toilet Preparations (Excise Duties) Act of 1955 and the rules made under that Act came into force, the petitioners contended that rule 36 had been repealed by the new legislation, and therefore they should no longer be liable to pay the supervisory fee. The State Government rejected this contention and continued to demand the fee. Consequently, the petitioners instituted writ petitions before the High Court, challenging the State’s authority to impose the fee. The High Court examined the matter and concluded that rule 36 had not been repealed; it dismissed the writ petitions. Unsatisfied with that outcome, the petitioners obtained certificates from the High Court and appealed the decision before this Court.

During the proceedings before the Supreme Court, counsel for the petitioners argued that section 21 of the 1955 Act, by its terms, repealed any corresponding State law, and consequently rule 36 no longer had any legal effect. The State, through its counsel, advanced several counter‑arguments. First, it asserted that the proviso attached to section 21 preserved all earlier rules that were not inconsistent with the Act, and therefore rule 36 should be regarded as still operative. Second, the State maintained that rule 36 remained valid because it was intended to serve the general purpose of the Hyderabad Abkari Act, which was a broad statute dealing with alcohol and intoxicating drugs.

The Court delivered its holding on the first point. It observed that, by virtue of entry 84 of list I in the seventh schedule to the Constitution, no charge could be imposed on the manufacture of medicinal preparations except by the Union of India. Because the 1955 Act qualified as a law “made otherwise by Parliament” within the meaning of article 277, the duties and other charges that had previously been levied by the State in connection with medicinal preparations could not be continued. The Court further explained that the effect of section 21 was to deem the Hyderabad Act, insofar as it applied to the use of alcohol in the manufacture of medicinal and toilet preparations, to have been repealed. Held: (i) By virtue of entry 84 list I of the seventh schedule to the Constitution no charge could be levied on the manufacture of medicinal preparations except by the Union of India and since the 1955 Act is a law made otherwise by Parliament within the meaning of article 277 the duties and other charges which used to be levied by the State in connection with medicinal preparations could no

The Court observed that, because Entry 84 of List I of the Seventh Schedule to the Constitution reserves the power to levy charges on the manufacture of medicinal preparations to the Union, the State could no longer impose such levies after the Medicinal and Toilet Preparations (Excise Duties) Act, No 16 of 1955, came into force. The effect of section 21 of that Act was held to be that, to the extent the Hyderabad Abkari Act applied to the use of alcohol in the manufacture of medicinal and toilet preparations, the Hyderabad Act must be treated as repealed. By reference to rule 143 of the 1956 Rules, the Court concluded that rule 36 of the 1345‑F Rules was consequently repealed after the 1955 Act and the rules made under it became operative. The purpose of rule 36 was found to be fully covered by the 1955 Act and the rules made thereunder; therefore the rule could not survive the enactment of the Act and the accompanying rules in view of section 21 and rule 143. The Court further held that the proviso to section 21 could not be relied upon by the State. Moreover, the field that rule 36 addressed was completely encompassed by the rules framed under the 1955 Act, and consequently rule 36 could no longer be justified as valid under the general law relating to alcohol and intoxicating drugs, as the State had contended. The judgment therefore affirmed that rule 36 had been repealed and could not be enforced.

These observations formed part of the judgment in five connected civil appeals, numbered 399 to 403 of 1962, arising from the order dated 17 February 1961 of the Andhra Pradesh High Court in writ petitions numbered 400, 431 to 433 and 495 of 1958. Counsel for the appellants and counsel for the respondents appeared in all the appeals. The judgment was delivered on 20 March 1964 by Justice Wanchoo. The appeals concerned the same question of law and were therefore heard together. The factual background essential to the legal issue was that the appellants were manufacturers of medicines that required the use of alcohol. Prior to the passage of the Medicinal and Toilet Preparations (Excise Duties) Act, No 16 of 1955, the appellants operated under licences granted pursuant to the Hyderabad Abkari Act, No 1 of 1316‑F. Under that Act, the Medical Preparations and Spirituous Rules, 1345‑F were framed, and rule 36 of those rules stipulated that the expenses of the establishment for supervising the work were to be borne by the pharmaceutical laboratory (the licencee) according to the decision of the Commissioner of Excise. In practice, the appellants received alcohol supplies for their manufacturing processes, and the State Government posted supervisory excise staff at the appellants’ bonded factories, with rule 36 intended to recover the costs incurred by the State. When the 1955 Act took effect on 1 April 1957, the appellants began to operate under licences issued in accordance with the Act and the rules made thereunder. The appellants thereafter argued that the Act had repealed all earlier provisions relating to medicinal preparations, and therefore they were no longer liable to pay the charges prescribed under rule 36 of the 1345‑F Rules.

In the proceedings before the High Court, the appellants argued that rule 36 of the 1345‑F Rules, together with the provisions of the Hyderabad Abkari Act that related to medicinal preparations, had been repealed by the subsequent Act and the Rules framed thereunder. On that basis they maintained that the State Government could no longer require them to reimburse the expenses incurred for the supervisory establishment stationed at their bonded manufactories. Consequently, the appellants filed writ petitions in the High Court challenging the imposition of those charges. The State opposed the petitions and contended that, despite the fact that the Act and the Rules became effective on 1 April 1957, rule 36 of the 1345‑F Rules had not been repealed and remained in force. The State further asserted that it was entitled to recover the costs of the supervisory staff from the appellants. The High Court examined the submissions and held that rule 36 had not been displaced by the Act or the Rules and therefore continued to be good law. In reaching that conclusion, the Court observed that the Hyderabad Abkari Act was a comprehensive statute dealing with excise matters, including alcohol, and was not confined solely to medicinal preparations. Because alcohol, in essence, constituted liquor, the Court reasoned that the State, which supplied alcohol to the appellants for the manufacture of medicinal and toilet preparations free of duty, had a legitimate interest in ensuring that such alcohol was not diverted for any other purpose. Accordingly, the Court found that rule 36 was intended to fulfil that supervisory objective within the broader framework of excise law embodied in the Hyderabad Abkari Act, and therefore it remained valid. As a result, the High Court dismissed the writ petitions. Following the dismissal, the appellants applied for certificates of appeal to this Court, which were granted, thereby bringing the matter before the Supreme Court. The sole issue for determination before this Court was whether rule 36 of the 1345‑F Rules could continue to survive after the coming into force of the Act and the Rules. It was acknowledged that, prior to the Constitution, the Hyderabad Abkari Act was a general legislation and rule 36 would have been enforceable. However, under the Constitution, medicinal and toilet preparations fell under entry 84 of List I in the Seventh Schedule, which authorised duties of excise on tobacco and other goods manufactured in India, except for alcoholic liquors for human consumption and certain narcotic substances, but expressly included medicinal and toilet preparations containing alcohol or any narcotic substance. Consequently, after the Constitution came into effect, no charge could be levied on the manufacture of medicinal preparations except by the Union under the excise duty provided in entry 84. Despite this constitutional limitation, the State Government persisted in insisting that the appellants should pay the supervisory charges.

In this case, the Court observed that Article 277 of the Constitution provides that any tax, duty, cession or fee that was lawfully levied by a State government immediately before the Constitution came into force may continue to be imposed notwithstanding its inclusion in the Union List, until Parliament enacts a law to the contrary. Accordingly, all duties and charges that the State had been levying on the manufacture of medicinal preparations prior to the Constitution’s commencement could continue only so long as Parliament had not legislated otherwise. The Court noted that the Hyderabad Abkari Act became operative on 1 April 1957 and that it represented a law made by Parliament within the meaning of Article 277. Consequently, the State could no longer impose duties or other charges in relation to medicinal preparations after that date. The Court further highlighted that Section 21 of the Act expressly provides that any law in any State that corresponds to the Act and was in force immediately before the Act’s commencement is repealed by the Act. While it is true that the Hyderabad Abkari Act was a general statute covering liquor and intoxicating drugs, and therefore applied to alcohol used in the manufacture of medicinal preparations, the effect of Section 21 is to deem the Act repealed, to the extent it dealt with such use of alcohol, insofar as it was treated as liquor. The State relied on the proviso to Section 21, which states that all rules made under any repealed law shall, insofar as they are not inconsistent with the new Act, retain the same force as if they had been made under the Act. On this basis, the State contended that Rule 36 of the 1345‑F Rules should continue to operate. The Court rejected this contention, holding that no merit lay in the argument. The Rules framed under the Act in 1956, including Rule 143, came into force together with the Act. Rule 143 expressly provides that all rules made under any law corresponding to the Act in any State are repealed, except with respect to actions taken before such repeal. Hence, all rules previously framed for the manufacture of medicinal preparations, including Rule 36 of the 1345‑F Rules, were terminated by virtue of Rule 143 of the 1956 Rules. Accordingly, Rule 36 of the 1345‑F Rules can no longer be regarded as good law as far as medicinal preparations are concerned.

The Court considered that Rule 36 must be deemed repealed once the Act and the Rules made under it came into force. The proviso to section 21, which the State relied upon, could not alter the effect of the new Rules framed in 1956 concerning medicinal preparations. According to the Court, the moment the 1956 Rules became operative, the earlier rules were required to fall away, and a specific provision—Rule 143—explicitly states that all rules made under any law corresponding to the Act are hereby repealed. Turning to the wording of Rule 36 of the 1345‑F Rules, the Court observed that the rule provided that the expenses of the establishment for supervising the work shall be borne by the pharmaceutical laboratory. The “establishment” referred to in Rule 36 therefore meant the supervisory apparatus for the work carried out by pharmaceutical laboratories, and the work of such laboratories is the manufacture of medicinal preparations. Consequently, Rule 36 required that the expenses of the supervisory establishment for overseeing the manufacture of medicinal preparations by the laboratory be paid by that laboratory. The supervisory staff contemplated in the rule was intended solely for supervising the manufacture of medicinal preparations, and the rule’s purpose was thus fully covered by the Act and the Rules made thereunder. Accordingly, the Court held that the rule could not survive the enactment of the Act and the 1956 Rules in view of section 21 and Rule 143, and the proviso to section 21 could not be invoked by the State. The Court then examined the State’s alternative contention that the rule remained valid because it purported to further the general purpose of the Hyderabad Abkari Act, namely to prevent the unauthorised sale of alcohol for human consumption by the laboratory receiving it for medicinal preparation manufacture. The Court rejected this argument, noting that the primary object of the supervisory staff mentioned in Rule 36 was to supervise the manufacture of medicinal preparations. In that capacity, the supervisory staff would naturally ensure that any alcohol supplied was used solely for the intended purpose and not diverted elsewhere. Thus, Rule 36 was concerned only with guaranteeing that the manufacture of medicinal preparations was carried out properly under the supervision of the establishment attached to each laboratory, and any incidental oversight of alcohol usage did not render the rule applicable under the broader Hyderabad Abkari Act, which deals with alcohol and intoxicating drugs generally.

The Court observed that the requirement for the establishment to ensure that the alcohol supplied is not used for any purpose other than the manufacture of medicinal preparations is merely an incidental aspect of the rule. This incidental requirement does not render the rule valid under the Hyderabad Abkari Act, which addresses alcohol and intoxicating drugs in a general sense. The Court noted that the substance of this observation is confirmed by an examination of the 1956 Rules. Rule 20 of those rules provides that, in cases of manufacture in bond – the situation relevant to the present appeals – alcohol on which duty has not been paid must be used under the supervision of the excise authority. Rule 42 further provides that the Excise Commissioner may determine the size of the supervisory staff in consultation with the licencee. Consequently, under the 1956 Rules the supervisory staff is attached to bonded manufactories that produce medicinal preparations, which is also the purpose of Rule 36.

The Court continued by referring to Rule 141, which obliges the licencee of a bonded manufactory or warehouse, when required by the Excise Commissioner, to furnish suitable lodging for the officer and staff posted to the manufactory or warehouse. The rent for such accommodation may not exceed ten per cent of the pay of each officer accommodated, and if the licencee is unable to provide the accommodation, the licencee must arrange suitable accommodation satisfactory to the Excise Commissioner, again charging only ten per cent of the occupant’s pay. Moreover, Rule 45 states that the officer in charge shall exercise supervision necessary to ensure that alcohol issued for a particular preparation is added only to the materials used to make that preparation and that no portion of such alcohol is diverted to any other purpose.

From these provisions, the Court concluded that the supervisory staff attached to a bonded manufactory is tasked with supervising the proper conduct of the manufacture and with preventing the diversion of alcohol supplied for that manufacture. Accordingly, the Court could not accept the argument that, merely because the supervisory staff must ensure that the alcohol supplied – assuming it to be liquor – is not misused, Rule 36 remains valid as a means of enforcing the general law relating to alcohol and intoxicating drugs contained in the Hyderabad Abkari Act. The 1956 Rules demonstrate that the supervisory staff’s duty is limited to ensuring that the manufacture is properly carried out and that the alcohol supplied is not diverted to any use other than the manufacture of the intended preparation. Consequently, the levy imposed under Rule 36 of the 1345‑F Rules cannot be justified on the ground that the rule requires the supervisory staff to uphold the general law relating to alcohol and intoxicating drugs. The Court affirmed that there is no doubt that the purpose of the 1956 Rules precludes such justification.

The Court observed that the subject matter addressed by rule 36 of the 1345‑F Rules is fully encompassed by the Rules that have been made under the Act. Consequently, the Court held that rule 36 can no longer be justified as a provision that is consistent with the general law governing alcohol and intoxicating drugs. The Court further noted that neither the Act nor the 1956 Rules contain any provision authorising a charge of the kind that is created by rule 36 of the 1345‑F Rules. The legislative intention, according to the Court, was that the duty imposed by the Act would defray all expenses required for its enforcement. The Court stated that the fact that members of the supervisory staff are employees of the respondent does not alter the analysis, because they operate under the Act and its Rules, not under the Hyderabad Abkari Act. After construing section 21 of the Act together with rule 143 of the Rules made thereunder, the Court concluded that rule 36 of the 1345‑F Rules had been implicitly repealed. The Court also found that the proviso to section 21 does not preserve rule 36 against repeal. Accordingly, the Court allowed the appeals, set aside the orders of the High Court, and directed that the writs sought by the petitioners be issued. The Court ordered that the respondents pay the costs of the appellants, specifying that one set of hearing costs would be awarded. In sum, the Court concluded that the appeals were to be allowed and that the relief sought by the appellants would be granted.