Premier Automobiles Ltd. & ANR Vs. Union of India [1971] INSC 323 (24 November 1971)
GROVER, A.N.
GROVER, A.N.
HEGDE, K.S.
KHANNA, HANS RAJ
CITATION: 1972 AIR 1690 1972 SCR (2) 526
CITATOR INFO:
E 1973 SC 734 (34,38,41) E&D 1974 SC 366 (63,64) RF 1975 SC 460 (14) RF 1978 SC1296 (34,65,69) RF 1986 SC1999 (11) F 1987 SC1802 (9) R 1990 SC1851 (36) RF 1992 SC1033 (33)
ACT:
Motor Car (Distribution and Sale) Control (Amendment) Order 1969 passed under s. 18G Industries (Development and Regulation) Act, 1951--Fixation of ex factory prices of motor cars produced in India-Recommendations of Commission of Inquiry-Production capacity determination of-Expenses relating to warranty and bonus whether to be excluded from the ex-works cost-Adoption of 'historical method' by commission for fixing cost for September 1969, propriety ofEscalation clause, necessity of-Fair return, what isDepreciation of plant and machinery whether to be allowed on basis of original cost or replacement, value.
HEADNOTE:
On the basis of the recommendation of the Tariff Commission the Government of India promulgated the Motor Car (Distribution and Sale) Control (Amendment) Order 1969 under s. 18G of the Industries (Development and Regulation) Act, 1951. By this order the Government fixed the exfactory prices of the three cars manufactured in India namely Hindustan Ambassador, Fiat 1100-D and Standard Herald 4 Door. These prices were inclusive of dealers' commission but did not include the excise duties, Central Sales-tax and local taxes, if any, and transport charges. The manufacturers or dealers were prohibited from selling or offering for sale or otherwise transferring or disposing of the motor cars for a price exceeding the price given in the order. The manufacturers of these vehicles and two of their dealers filed writ petitions in this Court under Art. 32 of the Constitution challenging the price fixed. On May 5, 1970 this Court after partly hearing the petitioners recommended to the Government to appoint a commission for the purpose of suggesting a fair price for the three cars by taking into consideration all the relevant matters. The Government accordingly appointed a Commission of three members headed by a retired High Court Judge and by a notification dated June 5, 1970 all the provisions of the Commission of Enquiry Act 1952 were made applicable to the Commission. The Commission, decided to recommend a fair price for two periods, (1) as in September 1969 and (2) as in July 1970. It was considered necessary to determine the price in September 1969 because the impugned order was promulgated at that time. For the September 1969 prices the computation was done according to the 'historical method', which meant that not only the prices in September 1969 were kept in view but also the value of pending stocks of raw materials and the average of the price at which purchases had been effected at that time were taken into account. The prices for July 1970 were computed on the basis of the actual cost obtaining in the month of July 1970. The report of the Commission suggesting fair prices for the three cars in question was filed before the court. The findings of the Commission were criticised by the writ petitioners on the following grounds : (1) That the Commission had taken the production capacity at an excessive figure and had thus artificially reduced the cost; (ii) that cost and expenses on account of warranty and statutory bonus had been wrongly excluded from the ex-works cost; (iii) that in fixing the cost for September 1969 even the actual admitted cost found by the Commission had not been taken into account and the price had been fixed on the historical cost, whereas in.
fixing the price for July 1970 the projected and estimated cost for July 1970 had been ignored; (iv) that no pro-vision had 527 been made for an escalation clause in order to ensure that the prices fixed would ensure for a reasonable period of time; (v) that the return which bad been allowed was wholly inadequate on the admitted and proved facts, and (vi) that the depreciation of plant and machinery had been allowed on the basis of original cost whereas it should have been allowed on the replacement value or on the peculiar facts of the case. It was common ground that deviation from the report of the Commission which was an expert body presided over by a former judge of a High Court should be directed only when it was shown that there had been a departure from established principles or the conclusions of the Commission were shown to be demonstrably wrong or erroneous.
HELD : (By the Court) (i) The very concept of fair price which can be fixed under s. 18 G of the Act takes in all the elements, which make it 'fair' for the consumer leaving a reasonable margin of profit to the manufacturer without which no one will engage in any manufacturing activity Capacity utilisation of a manufacturing unit, the quality oil its product, and the maintenance of proper standards at various levels of production are all relevant factors for the determination of the price. Capacity utilisation, has to be on the basis of what can be reasonably achieved keeping in view always the practical side. [549 H-550 A] Within regard to the Premier Automobiles at no stage except for the second half of the year April 1970 to March 1971 import licences had been granted for production of more than 1200 cars. It was only in that year that for the first half it was granted for 6050 cars and for the second half for 7000 cars. From the practical point of view therefore the achievable capacity for September 1969 could not have been fixed for more than 12000 cars a year The Commission was right in fixing the achievable capacity for July 1970 at the figure of 14000 cats per year. In regard to Standard Motors that Commission was not justified in departing from the recommendations of its technical committee and fixing the production capacity at 4000 cars, and 1000 commercial vehicles per annum. , On an overall consideration the capacity of Standard,, Motors would be 3400. cars and 1000 trucks as found by the technical team. [552 B-C; 553 A-B;
555 G] As regards Hindustan Motors the production capacity should have been assessed at the figure given by the technical team namely 30000 cars, and 5000 trucks per year. The Commission was wrong in relying on the applications for import licences made by Hindustan Motors and on their basis assessing the production capacity for trucks at 10500. In such applications the estimates given are likely to be Mated.
The technical committee had proceeded on the basis of independent physical checking and verification in all respects. There was no justification for rejecting the opinion of the experts especially when no member of the team was examined as a witness for finding out those facts and data which the Commission had sought to use for rejecting the technical team's report. [557 H-558 D] (ii) (a) As laid down in the order promulgated by the Government in March 1968 under s. 16 of the Act all defects due to faulty manufacture of workmanship shall be rectified and defective parts replaced during the warranty period without passing any part of the burden including incidental charges to the consumer. The effect of the above direction cannot be ignored although it may not be conclusive in the matter of fixing a fair price. The statement of the Commission that if the warranty was to be made out of the profits every manufacturer would try to minimise warranty cost by improving the quality: of his product was unexceptionable. If it is to be included in the ex-works cost it would 528 mean virtually passing it on to the consumer. [538 G-539 Al (b) The question whether bonus is linked with profit or cost stands concluded by the provisions of the Bonus Act itself as also the decision of this Court in Jalan Trading Co.'s case. The object of the Bonus Act as observed in that case is to make an equitable distribution of the surplus profits of the establishment with a view to maintain peace and harmony between the three agencies (capital, management and labour) which contribute to the earning of profits. The Commission came to the correct conclusion that bonus is connected with profits and it cannot be included in ex-works cost. [540 E; 541 E] Jalan Trading Co. (P) Ltd. v. Mill Mazdoor Union, [1967] 1 S.C.R. 15, referred to.
(iii) There was no authority or principle on which the method of calculating the ex-works cost on historical basis could be justifiably adopted for September 1969 when a different method was adopted for July 1970 cost. The exworks cost for September 1969 should have been determined according to the current prices as was done with regard to July 1970. [541 H] (iv) In view of the rising prices of components provision for escalation and de-escalation of car prices was_necessary, [Directions given] [543 A-D; 562 H] (v) The quantum of return has essentially to vary from industry to industry. The Commission took figures from authentic sources i.e. the report of the Reserve Bank of India and an analysis carried out by the Economic and Scientific Research Foundation with regard to the return which was being earned by the various companies on the capital employed. After taking the maximum return which an investor can expect from fixed deposits and other relevant factors into consideration the commission was of the view that a dividend of 10% to the equity shareholder after providing for the tax liability of the company and other outgoing would be fair and reasonable.. The outgoing which are to be met out of the return are (1) the actual interest on borrowings; (2) the minimum bonus; (3) other financial charges; (4) warranty charges and in case of Premier Automobiles the guarantee commission paid on loans obtained from foreign sources and differences in exchange. After making provision for these outgoing the dividends on preference shares, if any, the tax liability of the company and a return of 10% on the equity share capital, the total profit of the company as a whole was calculated which when related to the capital employed of the respective companies worked out to 15.43% in the case of Hindustan Motors, 16.22% in that of Premier Automobiles and 17.36% in Standard Motors. Considering the above and taking an overall view of the car industry 16% return on capital employed was considered to give a reasonable return to the car manufacturer. [545 E546 A] At first sight it may appear that return of 16% on the capital employed is a very large return but this return includes numerous items which reduce the return to the equity shareholder to a percentage which, even according to the Commission, on an average cannot exceed 10%. The plea of the car manufacturers for exclusion of warranty and bonus charges from the return and for their inclusion in the exworks cost could not be accepted. At the same time the return of 12% recommended by the Tariff Commission was wholly inadequate when all the items that the Car Price Commission had mentioned had to be paid out of it.
529 The return of 16% granted by the Commission was a reasonable one keeping in view the entire circumstances. A total return of 16% will leave some margin if proper economies are affected by the manufacturers for replacement and rehabilitation and improvement of the plant and machinery.
The main objective is to project the interest of the consumer while at the same time provide a reasonable margin of profit to the producers. The general approach has to be to determine the ex-works cost and then to arrive at the fair price after examining other claims of the industry and providing a reasonable return. There was no principle which had been demonstrated to be wrong in the report of the Commission so far as the fixation of the return was concerned.
[546 D-H] Even though the return to the equity shareholders of all the three companies may not be uniformly 10% it was not possible to make any distinction or discrimination between the three manufacturers. A separate rate of return for each could not be fixed when dealing with the automobile car industry as a whole. [546 B-C] (vi) The Commission was right in allowing depreciation on the actual cost and not on the replacement value. The depreciation which is allowed under the tax laws is very liberal and there is no reason to pass on the burden to the present consumer who is not likely to get any benefit out of the replacement proposed to be provided for by the manufacturers. There was no serious infirmity or flaw in the reasoning or the conclusion of the Commission on the question of depreciation. [548 A-C]
ALSO HELD : (1) The amount payable on account of royalty per car in the case of Standard Motors pursuant to the collaboration agreement the renewal of which had been approved by the Government of India must be included in the ex-works cost for July 1970 [562 E-F] (2) The conclusion of the Commission relating to the percentage of the local steel sheets by the Hindustan Motors was correct. [562 F] (3) The dealers, shall, for the present, be entitled only to the mark up in terms of the recommendations of the Commission. [562 G] On the relationship between taxation and the high prices of cars the Court observed : It will not be out of place to notice a few observations of expert bodies about taxation which forms at least one third part of the price of a car.
The Tariff Commission in its third report published in 1968 recorded that high prices of the vehicles were due mostly to the existing multiple taxes on the automobiles at different stages of production and sale. It had recommended a reduction in the burden of taxation which would lead to reduction in the prices of cars. The Jha Committee bad emphasized the same in 1960 and had pointed out that taxation was a burden on the consumer rather than on the producer. The Car Price Enquiry Commission has said in its main report at page 292 :"The incidence of tax on a car is very heavy inasmuch as it constitutes46% of the exfactory price. The car is no longer an item of luxuryand under the existing conditions it is fast becoming an item of necessity. That being so, there is a case for giving some relief out of the excise duties and other levies which are by their nature multi-point taxes causing hardship." [436 F--537 A] Per Khanna, J. (Partly dissenting) The production capacity which has to be taken into account is the achievable capacity of a plant run in a reasonably efficient manner. Concerted effort has to be made to attain a high level of production for two obvious reasons : (1) supply of new cars falls considerably short of the demand and the intending purchasers have to be kept on the waiting list 530 for inordinate length of time and (2) increased production would bring down the ex-works costs of the car. Although it would not be practicable and realistic to insist upon the highest or absolute efficiency, it would be equally unjust and inequitable to throw the burden of inefficiency of a manufacturer on the consumer in working out the figure of 'fair price' of the article manufactured. To put it differently, the authority concerned in determining fair price should not demand from the manufacturer the paragon of excellence in the matter of volume of production but at the same time the authority should not make the consumer bear the margin of high cost resulting from avoiding low production. It is, of course, implicit in that that reasonable facilities would be afforded to the manufacturer for procuring material like imported parts and steel which is under the Government control so as to be in a position to manufacture the requisite number of cars. The concept of 'fair price' postulates that the price should be fair not only to the producer but also to the consumer; the goal should be to arrive at just and reasonable rates. [566 E-H] No case had been made for interfering with the July 1970 price of Standard Herald as found by the Commission on the ground that the production capacity of that company from July onwards was 3400 and riot 4000 cars. The latter estimate made by the Commission was not excessive considering the admissions made by the company in its applications dated 19-6-1968 and 20-12-1969 in which the company had estimated its production at 4200 cars. It is well known that admissions constitute a strong piece of evidence against the party making the admissions and it is for that party to show that the admissions are mistaken or are not true. On the material on record the company had failed to discharge that onus. The argument that the petitioner in order to obtain import licence had to give a bloated figure of estimated production did not appear to be convincing because the excess of the imported material had to be adjusted in the subsequent import licences. [570 H-571 D, F] From the Technical Team's own report it was clear that neither any physical verification could be made by the Tram nor could it make a systematic study and it had to content itself with the materials supplied by the petitioner-company. The Verghese Committee no doubt dealt with the question of capacity but in a rather general way.
There was nothing to indicate that any attempt was made before the Committee to show that the achievable capacity of the petitioner company was more than what was stated on behalf of the petitioner. In these circumstances there was no reason to rely on the recommendations of the Technical Team or the Verghese Committee in preference to the findings of the Commission. [568 E, 569 A-B]
ORIGINAL JURISDICTION : Writ Petitions Nos. 327, 330, 331, 486 and 487 of 1969.
N. A. Palkhivala, V. M. Tarkunde, B. G. Murdeshwar and A.G. Ratnaparkhi, for the petitioners (in W.P. No. 330 of 1969).
C. R. Pattabhiraman, M. Natesan, B. G. Murdeshwar and A.G. Ratnaparkhi, for the petitioners (in W.P. No. 330 of 1969).
A.C. Mitra, Dipankar Gupta, K. Khaitan, N. R. Khaitan, O. P. Khaitan, B. P. Maheshwari and R. K. Maheshwari, for the petitioners (in W.P. No. 331 of 1969).
B.R. L. lyengar and R. B. Datar, for the petitioners (in W.P. No. 486 of 1969).
531 V.S. Desai and R. B. Datar, for the petitioners (in W.P. No.487 of 1969).
Niren De, Attorney-General for India, Jagadish Swarup, Solicitor-General of India, G. L. Sanghi, R. N. Sachthey' Ram Panjwani and Sumitra Chakravarty, for the respondent (in W.P. No. 327 of 1969).
Niren De, Attorney-General for India, Jagadish Swarup, Solicitor-General of India, G. L. Sanghi and R. N. Sachthey, for the respondent (in W.Ps. Nos. 330, 331, 386 and 487 of 1969).
Grover, J. These petitions under Art. 32 of the Constitution were filed by Premier Automobiles Ltd., Hindustan Motors Ltd. and Standard Motor Products of India Ltd., manufacturers of Fiat, Ambassador and Standard motor cars respectively and two of the dealers of such cars. The petitioners challenged the fixation of fair price of the said three passenger cars by the Government of India by the Motor Car (Distribution and Sale) Control (Amendment) Order 1969 promulgated under S. 18G of the Industries (Development and Regulation) Act 1951, hereinafter called the "Order" and the "Act" respectively. The ex-factory prices of the three cars were fixedas follows :
HINDUSTAN AMBASSADOR Rs. 15,316.00 FIAT 1100-D Rs. 14,325.00 STANDARD HERALD 4 Door Rs. 14,003.00 These prices were inclusive of dealer's commission but did not include the excise duties, Central Sales tax and local taxes, if any, and transport charges. The manufacturers or dealers were prohibited from selling or offering for sale or otherwise transferring or disposing of the motor cars for a price exceeding the price given in the Order. The order was made after taking into consideration the recommendations of the Tariff Commission to whom the question of determination of a fair price of motor cars had been referred by the Central Government under clause (d) of s. 12 of the Tariff Commission Act 1951.
On May 5, 1970 after hearing the, petitions for some days this Court recommended to the Government to appoint a Commission for the purpose of suggesting a fair price for the three cars by taking into consideration all relevant matters. On May consisting of Shri Sarjoo Prasad a retired Judge of the Patna High Court as Chairman, Shri R. K. Khanna Chartered Accountant and Brig. V. Minhas Director of Inspection (Vehicles), 532 Department of Defence Production as Members. By a notification dated June 5, 1970 all the provisions of the Commission of Enquiry Act 1952 were made applicable to the Commission.
The Car Price Enquiry Commission, hereinafter called the 'Commission' devoted a good deal of labour and attention to the matter of fixing a fair price of the three cars. Its report consists of two volumes. The first volume contains the main report and the second volume, contains the appendices.
The Commission in its report has adverted to the historical background in which the car industry came to be controlled in our country. it will be useful to notice the salient facts. Till the year 1928 motor vehicles were purchased directly from abroad or through agents and dealers in India.
From 1928 till the early forties General Motors India Ltd.
and Ford Motor Company of India Ltd. used to assemble trucks and cars from components imported from United States in completely knocked down condition called C.K.D. by way of abbreviation. Hindustan Motors Ltd. Calcutta and the Premier Automobiles Ltd., Bombay, two of the petitioners before us, were established in 1942 and 1944 respectively with a programme for progressive manufacture of complete automobiles. These companies entered into technical collaboration with foreign manufacturers as did the Standard Motor Products of India Ltd. In the industrial Policy Resolution of 1949 of the Government of India automobiles and trucks were classed among industries of importance which would be subject to regulation and control by the Central Government. In 1949 the Government decided that the import of vehicles should be allowed only in C.K.D. condition. In March 1952 the Government asked the Tariff Commission to enquire into the question of grant of protection to the automobile industry in India. The Tariff Commission submitted its report in 1953 recommending that only those companies which had an approved manufacturing programme should be allowed to continue their operations which recommendation was accepted by the Government. In August 1955 the Government of India asked the Tariff Commission to enquire into and recommend the fair ex-works and selling prices of the automobiles. The Tariff Commission submitted its report in October 1956. According to that report the margin between the current net dealer's price and ex-works cost of the cars and trucks produced by the approved manufacturers could not be regarded as excessive. it considered that a rigid system of price control was not likely to have a healthy effect on the development of the industry. The interest of the consumers could be properly protected if investigations were held after certain intervals in order to see that excessive prices were not actually charged although the manufacturers were left free to 533 charge prices at their discretion. The Government took a decision to enforce an "informal price control" on automobiles which was accepted by the manufacturers. The manufacturer was free to revise the price from time to time according to the variation in the cost but had to give a month's notice of any variation to the Government so that if the change proposed was prima facie unreasonable the Government could intervene. The net dealer's price was not to exceed the ex-works cost by more than 10%. Within a few years of the imposition of the informal price control the situation in the country changed owing to the scarcity of foreign exchange. The Government had to curtail foreign exchange allocation for the import of automobile components with the result that only three out of the then existing six models of passenger cars were left in regular production.
The Government considered it necessary to introduce a Distribution Control Order which required the dealer to deliver vehicles in the order of registration and without discrimination. A committee was appointed consisting of Shri L. K. Jha as Chairman and other experts to review the progress of the automobile industry and to. recommend measures in the matter of reduction of cost etc. The Jha Committee submitted its report in January 1960. According to the findings of that Committee there had been neglect and inefficiency in production owing to there being hardly any competition. The Committee felt that greater discipline was called for both so far as ancillary and the main producers were concerned. As regards the taxation policy the Committee felt that "lower level of taxation per vehicle would stimulate more demand for them".
The Government in May 1966 remitted the question of further continuance of protection being accorded to the automobile industry to the Tariff Commission and also directed that Commission to enquire into the cost structure and the fair selling price of different types of automobiles. The Tariff Commission made comprehensive recommendations and it was on the basis of its recommendations that the Order was issued in September 1969 fixing the prices of the three cars. In July 1967 the Government had also directed an investigation under s. 15 of the Act into the quality of the three cars by a Committee headed by Shri G. Pande. The Commission was to look into the complaints relating to deterioration in quality and other allied matters including the part. played by the ancillary and other industries. The Pande Committee submitted its report in December 1967. It recommended inter alia that there should be a separate Quality Control and Inspection Department and that components carrying IST certification marks should be preferred. In November 1968 the Government set up a team of experts headed by Dr. A. N. Ghosh the then Director-General of the Indian Standards Institution.
534 This team was required to examine the "internal experts organisation" of the three car makers and to make recommendations for strengthening them. The Ghosh Committee endorsed the view of the earlier Pande Committee with regard to the establishment of technical audit cells. These cells were to be established for watching the interest of the consumers and ensuring improvement in quality of cars which were being manufactured by the, three petitioners.
The procedure followed by the Commission may be briefly noticed. It invited by means of a detailed questionnaire full information from the car manufacturers, dealers, consumers and others interested in the inquiry. It appointed a team of Cost Accountants and another team of technical experts besides a Chartered Accountant. These teams studied and collected data from each of the three manufacturing units and examined their manufacturing processes. The cost structure and activities of some of the ancillary producers and dealers of automobiles were also studied apart from visits to the manufacturing units. The Commission examined witnesses who were produced by the Union of India, the consumers, the dealers and the manufacturers.
We may next refer to the principles and methods of costing which were followed by the Commission. The cost of a commodity consists of these elements : direct material, direct wages, services, depreciation and manufacturing, administrative and selling overheads. In case of an automobile a large number of components which undergo different manufacturing processes have also to be taken into account. The Commission decided to recommend a fair price for two periods, (1) as in September 1969 and (2) as in July 1970. It was considered necessary to determine the price in September 1969 because the impugned order was promulgated at that time. It,, however, adopted two different principles in the matter of computing the cost on the aforesaid two dates. For the September 1969 prices the computation was done according to what may be called the historical method.
This meant that not only the prices in September 1969 were kept in view but also the value of pending stocks of raw materials and the average of the price at which purchases had been effected at that time were taken into, account.
The prices for July 1970 were computed on the basis of the actual cost obtaining in the month of July 1970.
The following principal factors were considered relevant for the fixing of a fair selling price :
(1) capacity of production.
(2) quality.
(3) norms of rejection.
535 (4) depreciation.
(5) bonus.
(6) warranty.
(7) interest on borrowings.
(8) return.
The Commission finally came to the conclusion that the fair prices of the three cars should be the following.
FIAT September 1969 July 1970 Ex-works cost Rs.12,283.00 13,564.00 Return Rs.1,168.00 Rs.1,223.00 ------------------------------------Ex-factory Rs.13,451.00 Rs.14,787.00 Price STANDARD HERALD September 1969 July 1970 Ex-works cost Rs.13,236.00 Rs.13,989.00 Return Rs.1,274.00 Rs.1,231.00 ------------------------------------ex-factory Rs.14,510.00 Rs.15,220.00 price AMBASSADOR.
September 1969 July 1970 Ex-works cost Rs.12,152.00 Rs.14,299 00 return Rs.1,364.00 Rs.1,470.00 -------------------------------------Total ex-factory price Rs.13,516 .00 Rs. 15,769 .00 We may at this stage state certain preliminary matters which will facilitate the comprehension of our discussion on various points. Firstly, certain terms may be explained.
'Ex-workS' cost means the cost incurred in the factory of the manufacturer including all materials, parts and components. 'Return' means the total return to the manufacturer on the capital employed. 'Ex-factory Price' consists of the ex-works cost plus the return. 'Retail Price' would be the price arrived at by adding the dealer's commission or what is called 'mark up'. The consumer has further to pay excise duty, surcharge and sales tax.
Counsel for all the parties and the learned Attorney General are agreed that irrespective of the technical or leGal points that may be involved we should base our judgment on examination of correct and rational principles and should direct deviation from the report of the Commission which was an expert body presided over by a former judge of a High Court only when it is, shown that there has been a departure from established principles or the conclusions of the Commission are shown to be demonstrably wrong or erroneous.
536 The following table will illustrate the price of Fiat car in Bombay based on July 1970 figure payable by a consumer as also the comparison with the prices contended for by Premier Automobiles and the government.
----------------------------------------------------------Description As recommend As per As contended ded by the submissions by the Commission made by the government Petitioner Premier Automobiles) ----------------------------------------------------------Ex-factory price Rs.14,787.00 Rs.15,793.00 Rs.14,017.00 dealer's mark-up Rs.900.00 Rs.900.00 Rs.900.00 Retail price Rs.15,687.00 Rs.16,693.00 Rs.14,917.00 excise duty on built-up car Rs.1,478.70 Rs.1,579.00 Rs.1,401.70 Surcharge on excise duty Rs.492.90 Rs.526.00 Rs.467.23 Maharashtra sales tax on built-up car Rs.2,011.03 Rs.2,147.84 Rs.1,906.31 --------------------------------------PRICE TO THE CONSUMER Rs.19,669.63 Rs.20,946.57 Rs.18,692.24 -------------------------------------------It has not been disputed that 46% of the ex-works (exfactory, according to the Commission) cost payable by the consumer is accounted for by excise duties and taxes levied by the Central and the State Governments including those on the components. Out of the total price payable by the consumer 30% goes into duties and taxes.
There is also a general impression that it is the car manufacturers that are responsible for the seemingly exorbitant prices of the cars. It will not be out of place to notice a few observations of expert bodies about taxation which, as noticed above, forms at least one third part of the price of a car. The Tariff Commission in its third report published in 1968 recorded that high prices of the vehicles were due mostly to the existing multiple taxes on the automobiles at different stages of production and sale. It had recommended a reduction in the burden of taxation which would lead to reduction in the prices of cars. The Jha Committee had emphasized the same in 1960 and had pointed out that taxation was a burden on the consumer rather than on the producer. The Commission has said in its main report at page 292 :
"The incidence of tax on a car is very heavy inasmuch as it constitutes 46% of the exfactory price. The car is no longer an item of luxury and under the existing conditions it is fast becoming an item of necessity.
537 That being so, there is a case for giving some relief out of the excise duties and other levies which are by their nature, multi-point taxes causing hardship".
The following main points have been raised by Mr. N. A. Palkhivala and have been adopted by the counsel for the other petitioners. The figures etc. as given by the Commission have not been disputed.
1.The Commission has taken the production capacity at an excessive figure and has thus artificially reduced the cost.
2. Cost and expenses on account of warranty and statutory bonus have been wrongly excluded from the ex-works cost.
3. In fixing the cost for September 1969 even the actual admitted cost found by the Commission has not been taken into account and the price has been fixed on the historical cost. In fixing the price for July 1970 the projected and estimated cost for the future has been ignored.
4. No provision has been made for an escalation clause in order to ensure that the prices fixed will ensure for a reasonable period of time.
5.The return which has been allowed is wholly inadequate on the admitted and proved facts.
6. Depreciation of plant and machinery has been allowed on the basis of original cost whereas it should have been allowed on the replacement value or on the peculiar facts of the case.
We propose to deal with the first point relating to production capacity last. On point no. 2 the Commission was of the view that warranty expenses and bonus should appropriately be included in the return and not in the ex works cost. It is well known that the car manufacturers in India as elsewhere furnish a warranty covering the cars sold. Under the warranty all defects on account of faulty manufacture in workmanship have to be set right and the defective parts have to be replaced, free of cost by the manufacturer or his dealer Within a specified period or a given distance traveled by the car. During the period of warranty which is now for one year three free services have to be rendered. The car owner has to pay the cost of consumable items like oil, grease, packing etc. during those free services. The car manufacturers enter into an agreement with the manufacturers of components providing for a warranty so far as the components 538 .
supplied are concerned. As has been rightly observed by the Commission the whole object behind the warranty is that the consumer who has to make a heavy investment should be assured of a proper performance of the vehicle "in a trouble-free manner for a reasonable length of time." On behalf of the petitioners it has been urged that according to various experts on costing including the Costing team appointed by the Commission the expenses which 'are to be incurred on account of the warranty should appropriately be included in the ex-works cost. (Vide Rufus Wixon, Professor and Chairman of the Accounting Department, Wharton School of Finance and Commerce, University of Pennsylvania in "The Accountants' Hand Book', and N. K.Prasad in "Principles and Practice of Cost Accounting" as also B. K. Bhar, Lecturer in Cost Accountancy, the Institute of Cost & Works Accounts of India in "Cost Accounting Methods & Problems").
The Commission was of the view that many of the ancillary manufacturers cover their supplies to the car manufacturers with a warranty and are liable to replace the defective parts free of cost. The manufacturers are expected to use only those components which are of a standard quality. By improving the method of quality control and incidence of expense on account of warranty can be reduced and. can, be absorbed in the return. According to the learned Attorney General the matter relating to inclusion of warranty charges in the ex-works cost is no longer res-integra. The report, of the Motor Car Quality Inquiry Committee (known as the Pande Committee), made a recommendation that the warranty should be made uniform for all the three motor cars and no cost of replacement including incidentals should be passed on to the customer. This Committee was appointed by a resolution of the Government of India dated February 12, 1968 in exercise of the powers conferred by s. 15 of the Act. Pursuant to the recommendation of this Committee an order was promulgated by the Central Government in March 1968 under S. 16 of the Act which was to the following effect "The warranty with which cars are sold shall be, uniformly valid for aperiod of, 12, months or, a distance covered. of 16,000 kms., whichever occurs earlier. All defects, due to faulty manufacture of workmanship shall be rectified and defective parts replaced during this period without passing any part of the burden including incident charges to the customer".
The effect of the above direction cannot be ignored although it may not be conclusive in the matter of fixing a fair price. We find the statement of the Commission unexceptionable that if the 539 warranty is to be made out of the profits every manufacturer will try to minimise warranty cost by improving the quality of his product. If it is to be included in the ex-works cost it means virtually passing it on to the consumer.
A good deal has been said on behalf of the Premier Automobiles with regard to figures taken by the Commission as warranty charges. It has been pointed out that although the cost of parts amounting to Rs. 80/or 81/per car has been taken into account in the return but the labour charges which would amount to Rs. 120/per car and which, according to the Commission's report, have to be borne by the manufacturer have not been taken into account even in the return. It has been urged that if the manufacturers have to bear the labour charges the amount of Rs, 120/per car should have. been taken into account. The position is much simpler about the Standard Motors because there the cost as well as the labour charges amount to Rs. 80/-per car. As regards the Ambassador it was claimed that a sum of Rs.
176/per car was the cost of the parts alone but the was being supplied by the dealers. As we agree, with the Commission that the entire cost on account of warranty in.
elusive of labour charges should be borne by the manufacturers, it is wholly unnecessary for us to refer to any specific figures except that while considering the question of return the general idea relating to cost to the manufacturers would certainly be borne in mind and taken into consideration.
We shall next deal with the, question of bonus payable to the employees which has been included in the return by the Commission. The case of the manufacturers is that bonus is an expense which is necessarily incurred in the manufacture and it should be treated as part of, the ex-works cost. It has been so treated under the Income tax Act 1961 as well as under the Companies Act 1956. Even if the 'entire amount of bonus is not allowed as part of the cost the manufacturers' claim that the minimum bonus which, at present, is compulsorily payable at the rate of 4% under s. 10 of the Payment of Bonus Act 1965 should be allowed as a part of the cost because the manufacturers have to pay the same even when they do not make any profits. The Tariff Commission in its recent report on the Price Structure of Man-Made Fibre and Yarn Industry has accepted the view that entire bonus upto the limits prescribed should form part of the ex-works cost.
The Hindustan Motors have made a settlement with the workmen regarding the payment of bonus for the years 196970, 1970-71. In the year 1969-70 the amount payable to the workmen under that settlement comes: to 8 % of the wages and salaries and for the year 1970-71 it works out to 9%.The bonus, it 540 has been pointed out, in the present context is an integral part of the wage structure and must be treated as part of the cost of production. Reliance has been placed on the working of the Commission's Cost Accounting Team itself according to which bonus was included as item no. 7 in the various items which made up the ex-works cost. In the study prepared in collaboration with the Institute of Chartered Accountants of India called "Price Fixation In Indian Industry" it is stated that bonus to employees is in practice regarded both by them and by the Adjudicating Tribunal as additional emoluments legitimately forming part of the wage structure.
According to the Government in the past bonus was never Allowed as a part of the cost of manufacture. In the previous Tariff Commission Report on the Fair Selling Price of Automobiles 1968, bonus was included in the return. The Tariff Commission has been dealing with various industries according to the circumstances peculiar to that industry.
It accepted minimum bonus as part of cost in the Fibre and Rayon industry. But it included it in the return in its report on alcohol and catguts. It is said that if bonus is added to the cost it will be a part of the working capital and so the manufacturer will get the benefit twice over.
In our judgment the question whether bonus is linked with profits or cost stands concluded by the, provisions of the Bonus Act itself as also the decision of this court in Jalan Trading Co (P) Ltd. v. Mill Mazdoor Union(1). According to s. 10 of that Act every employer shall be bound to pay to every employee in an accounting year a minimum bonus which shall be 4 % of the .salary or the wage earned by the employee during the accounting year or forty rupees whichever is higher whether there are profits in the accounting year or not. Under s. 1 1 where allocable surplus exceeds the minimum amount payable under s. 10 it is payable in proportion to the salary or wage earned by the employee during the accounting year, the maximum limit being 20%. In computing the allocable surplus the amount set on ,or the amount set off under the provisions of s. 15 has to be taken into account. According to s. 2(b) 60% of the available .surplus falls within the allocable surplus.
Available surplus has to be computed under s. 5. Under that section the available surplus in respect of any accounting year shall be the gross profit for that year after deducting there from the sums referred to in s. 6. Section 6 provides for the deduction from the gross profits as prior charges.
These deductions consist mainly of depreciation, development rebate and such. sums as are specified in respect of the employer in the third schedule. The companies are further entitled to deduct dividends payable to preference (1) [1967] 1 S.C.R. 15.
541 shareholders and a specified percentage of reserves from the gross profits. Section 15 deals with set off and set on.
Where allocable surplus exceeds the maximum amount payable under s. 11 the excess has to be carried forward for being set on in the succeeding year upto the fourth accounting year. Where there is no available surplus in an accounting year or the allocable surplus falls short of the minimum bonus payable (4%) and there is no sufficient amount carried forward and set on from which minimum bonus can be paid, the same shall be carried forward for being set off in the succeeding year according to the fourth schedule. Section 10 of the Bonus Act at first sight may appear to be a provision for granting additional wage to employees but that section is an integral part of a scheme for payment of bonus at rates which do not widely fluctuate from year to year.
This Act has thus provided that bonus in a given year shall not exceed one-fifth and shall not be less than 1/25th of the total earning of an employee. It has been ensured that the excess share shall be carried forward to the next year and that the amount paid by way of minimum bonus not absorbed by the available profits shall be carried to the next year and shall be set off against the profits of the succeeding year. The object of the Bonus Act is to make an equitable distribution of the surplus profits of the establishment with a view to maintain peace and harmony between the three agencies, (capital management and labour) which contribute to the earning of profits (See Jalan Trading Co. (P) Ltd. v. Mill Mazdoor Union(1). The Commission came to the correct conclusion that bonus is connected with profits and it cannot be included in the ex works cost.
A good deal of criticism has been levelled on behalf of the manufacturers on the method followed by the Commission for determining the ex-works cost in September 1969 and July 1970. It has been submitted that for September 1969 the cost has been worked out on what may be called the historical method and for July 1970 the actual prices have been taken into account but the projected and estimated cost for the future has been ignored. It has been pointed out that historical costs are determined on the basis of the material which is already in the pipeline and which has been acquired at cheaper rates. Such a method has never been adopted and there is absolutely no justification for making a discrimination between the methods to be adopted for ascertaining the ex-works cost in September 1969 and in July 1970. The method which has always been adopted is of either taking the current prices or the projected prices. We have not been shown any authority or principle on which the method of calculating the ex-works cost on historical basis could be justifiably adopted for September 1969 when a different method was adopted for July (1) [1967] 1 S.C.R. 15.
L643SupCI/72 542 1970 cost. We are of the view that the ex-works cost for September 1969 should have, been determined according to the current prices as was done with regard to July 1970.
As regards the projected cost which means a reasonable estimate of the rising cost in the minimum future (roughly 3 to 6 months) over and above the cost existing on a certain date a lot of criticism has been made on behalf of the manufacturers with regard to the Commission having totally ignored this principle. We have not been shown anything from the reports of the Tariff Commission nor does it appear that it was seriously pressed before the Commission itself that the principle of projected costs should be applied while determining the ex-works cost of the cars in question.
In view of the provisions which we shall be making for fixing the price and also for escalation the principle canvassed for on the basis of the projected cost becomes immaterial and even otherwise in the circumstances of the case it cannot be applied.
We shall now deal with the necessity for an escalation clause. It has been pointed out by Mr. Palkhivala that the prices of direct materials alone rose by Rs. 140/per Fiat car in a couple of months. A comparison of the prices fixed for September 1969 and July 1970 further reveal how steeply the prices rose during the short period of nine months.
According to Mr. Palkhivala price fixation of the cars will be wholly futile unless there is a provision for escalation which means that the prices should be increased or decreased periodically according to the rise or decrease in the cost as also the various other factors which enter into price fixation. For instance, in the Tariff Commission report 1965 on the revision of ceiling price of alcohol it has been observed that future estimates of costs of receified spirit has been prepared for a period of the next three years on the basis of the actual cost. In the Tariff Commission report on the fair selling price on Antimony provision was stated to have been made for enhancement in respect of wages and salary as also for anticipated increase in Dearness Allowance. Similar provision for escalation was made in the Tariff Commission report 1966 on the price structure of catgut ball bearing and several other industries. There are a number of increases, according to the manufacturer,,;, over which they have absolutely no control. Mostly these consist of increases in excise duties, taxes, increase in the cost of imported and indigenous steel, in wages, dearness allowance, contributions to the provident fund, gratuity, employees State insurance and other emoluments to the employees who are governed by the Industrial law. In addition to the increases in the cost of materials the cost of bought out components electricity, income 543 tax etc. have also to be taken into consideration. The manufacturers have pointed out with a good deal of force that they have -no control whatsoever over the increase in the prices of components which they have to buy from the ancillary manufacturers as the same are not subject to price control. The Verghese Committee which was appointed under s. 15 of the Act for investigation into the working of the Standard Motors observed in its report that general price level has been increasing in recent years and therefore the control of car prices without a matching control of the prices of the components would squeeze the manufacturers out unless they are compensated substantially by an enhancement of the car price. Indeed it has not been disputed on behalf of the Government and the Attorney General quite properly and fairly accepts that some proper method should be devised for escalation or de-escalation, as the case may be. We have been suggested a number of formulae on behalf of the manufacturers as also the government but we shall indicate at a later stage what, in our opinion, is the best and the simplest method of providing for escalation and deescalation. We are satisfied, however, that a provision should be made and ought to have been made by the Commission in this behalf.
The next point which is fairly controversial relates to the return which has been allowed by the Commission. The manufacturers are unanimous in saying that the return suggested by the Commission is wholly inadequate for the survival of the industry leaving aside its development. The case of the Premier Automobiles is that the return does not permit any margin for repaying the heavy indebtedness of the company.
Owing to the inadequate price fixed by the government even under the informal price control the company has been running into losses. Its total indebtedness on June 30.
1970 came to Rs. 7.29 crores. This indebtedness has to be paid or at least provision made for it by the creation of reserves. Unless reserves are created and the financial position of the company improves it may not be possible for it to get any further loans because up till now it has been carrying on its business mainly on the borrowings. The return leaves no margin for wiping out the depreciation which comes to Rs. 750.74 lakhs according to income tax rates and Rs. 583.64 lakhs according to book depreciation.
The Commission has not taken into consideration any provision for a cushion for the proposed increase in the rate of minimum bonus for which a persistent dialogue is going on all the time between the trade unions and the government. This will leave no return on the equity capital and would result in the company getting a net dealer price which would be less than its actual cost of production.
Since the Premier Automobiles will have to pay the warranty charges there will be an additional liability of Rs. 120/per car on account 544 of labour charges which when taken out of the return will reduce it substantially. The calculation made, according to the company on the figures worked out by the Commission, was that the surplus left will provide a dividend of approximately 7% on the equity capital.
The additional argument on behalf of the Hindustan Motors is that in computing the return the Commission has accepted the position that the following outgoing should go out there from : (a) interest on borrowings; (b) minimum bonus of 4%; (c) other financial charges; (d) warranty claims; (e) dividend on preference shares; (f) tax liability. According to the Commission if a return of 16% on the capital employed is given the corresponding dividend to the equity shareholders will work out at 10%. The Hindustan Motors has to pay total bonus for the years 1969-70 at the rate of 8%. It is essential that the company sets aside a minimum of 3% on the capital employed for the purpose of replacement and rehabilitation for which no provision has been made. After taking out all these items it will be impossible to give a 10% dividend to the equity shareholders.
The Standard Motors have put in a chart showing that after ,deducting all the items in accordance with the method laid down by the Commission for working out the return only such amount will be left as will enable the payment of dividend at the rate of 9.2% on the equity capital allocable to the car activity. This statement, however, has been arrived at on the basis of the capacity of 4,000 cars and 1,000 trucks as determined by the Commission. If, however, the capacity is reduced to 3,400 cars and 1,000 trucks as claimed by the company the dividend payable to the equity shareholder will be at the rate of 12% but then there will be no provision for development and future expansion or for wiping off the arrears of depreciation which amount to Rs. 42.32 lacs.
The learned Attorney General while agreeing that a reasonable return must be allowed to the manufacturers has submitted that the entire background in which the automobile industry in India came to receive protection and the way it has developed as also the defects which have been found in its working together with the unsatisfactory nature of the quality of cars produced and the gradual deterioration of their performance must be taken into account while fixing the return. The main outlines of the special historical background are : (a) protection-external and internal resulting in monopoly of the three cars manufacturers; (b) government policy to develop the automobile industry as a whole relating to the three car manufacturers including cars, trucks, components and spare parts. All these involve large outlay of 5 45 foreign exchange and the object must be to conserve the same in the interest of the country; (c) necessity of efficiency and economy in the production and control over prices in that behalf; (d) necessity of improvement of the quality of product and of services to the consumers. According to the informal price control the factory price charged to the dealers could not exceed the ex-works cost by more than 10%.
This necessarily included all the items which are to be found as constituting the return in the report of the Commission. Our attention has been drawn to reports of various Commissions according to which there were defects in production and there was neglect of economy and efficiency.
The accounts were also not being maintained by all the manufacturers on a proper basis from which costs could be worked out satisfactorily. A large number of unskilled workers were being employed. The Tariff Commission in its report of 1968 in respect of fair selling price of automobiles considered that a return of 12% of the capital employed would be reasonable and fair. The Commission was of the view that profit margin to be allowed to an industry has little or no direct relation to the cost of the product.
If the profit is determined as a percentage on the ex-works cost the higher the cost the higher will be the profit.
This will leave little or no incentive to manufacturer to affect economies in the cost of production or exercise control over the manufacturer's expense. In determining a fair margin of profit consideration has to be given to the capital employed and a fair return for such capital including a provision for outgoing like interest on loans, minimum bonus etc. must be assured. The quantum of return has essentially to vary from industry to industry. This would require ascertainment of capital employed with regard to production of cars. The Commission took the figures from authentic sources i.e. the report of the Reserve Bank of India and an analysis carried out by the Economic and Scientific Research Foundation with regard to the return which was being earned by the various public companies on the capital employed. After taking the maximum return which an investor can expect from fixed deposits and other relevant factors into consideration the Commission was of the view that a dividend of 10% to the equity shareholder after providing for the tax liability of the company and other outgoing would be fair and reasonable. The outgoing which are to be met out of the return are (1) the actual interest on borrowings; (2) the minimum bonus; (3) other financial charges; (4) warranty charges and in case of Premier Automobiles the guarantee commission paid on loans obtained from foreign sources and difference in exchange.
After making provision for these outgoing, the dividends on preference shares, if any the tax liability of the company and a return of 10% on equity share capital, the total profit of the company as a whole was calculated which when related to the capital employed of the 546 respective companies worked out to 15.43% in the case of Hindustan Motors, 16.22% in that of Premier Automobiles and 17-36% in Standard Motors. Considering the above and taking an over all view of the car industry 16% return on capital employed was considered to give a reasonable return to the car manufacturer.
We have already referred to the criticism of the car manufacturers with regard to the manner in which the return has been worked out. It is true that the return to the equity shareholders of all the three companies may not be uniformly 10% and may be considerably less in the case of Premier Automobiles but it is not possible to make any distinction or discrimination between the three manufacturers. We do not consider that a separate rate of return should be fixed when dealing with the automobile car industry as a whole.
At first sight it may appear that a return of 16% on the capital employed is a very large return but as we have pointed out, this return includes numerous items which reduce the ultimate return to the equity shareholder to a percentage which, even according to the Commission, on an average cannot exceed 10%. Learned counsel appearing for the car manufacturers have vehemently pressed for exclusion of warranty and bonus charges from the return and for their inclusion in the ex-works cost. It was ultimately stated at the bar that if that was done the return as fixed by the Commission would be acceptable. We are, however, unable to accede to this submission. We have given our careful thought to the principles which the Commission has followed in fixing the return and in our judgment the return granted is a reasonable one keeping in view the entire circumstances. At the same time we consider return at 12% wholly inadequate when all the items that the Commission has mentioned have to be paid out of it. Moreover a total return at 16% will leave some margin if proper economies are effected by the manufacturers for replacement and rehabilitation and improvement of the plant and machinery.
According to the principles discussed or to be discussed in the matter of fixing of a fair price the main objective is to protect the interest of the consumer while at the same time provide a reasonable margin of profit to the producer.
The general approach has to be to determine the ex-works cost and then to arrive at the fair price after examining other claims of the industry and providing a reasonable return. We, therefore, find no such principle which has been demonstrated to be wrong in the report of the Commission so far as the fixation of the return is concerned.
The next question is whether the Commission has erred in allowing depreciation on the actual cost and not on the replacement value. Depreciation, it has been pointed out, has been allowed in accordance with the formula laid down in the Indian Income tax Act 1961 but the provisions of the Act are inadequate to provide funds for replacement of the assets.
Since the provision of depreciation is intended to enable replacement of the worn out assets it is argued on behalf of the car manufacturers that the Commission ought to have allowed depreciation at the rate which would have enabled the replacement of the assets. This is particularly so when prices are rising. The Tariff Commission has in certain cases allowed special depreciation in lieu of replacement cost. In "Price Fixation in Indian Industry" to which reference has already been made at an earlier stage it has been mentioned that special depreciation was allowed in addition to the normal depreciation in case of pig iron, steel, cement and rubber tyre and tubes by the Tariff Commission; (see pages 179, 180, 183 and 190).
The Tariff Commission Review Committee in its report made in August 1967 dealt with the topic of calculation of depreciation on the basis of replacement cost particularly in view of the rising prices. It was pointed out that there are practical difficulties in adopting the principle of replacement cost. One of these is the absence of reliable and accurate indices of changes in the replacement cost of machinery and plant. That Commission, therefore, generally did not favour deviating from the practice adopted by the.
income tax authorities in calculation of depreciation. The Commission was of the view that depreciation on account of the use of the assets in any undertaking is quite distinct and separate from rehabilitation replacement. The whole question, according to the Commission, has to be determined with reference to the context or the purpose for which the deprecation is being computed. For working out the fair price of the car the expenses incurred by the manufacturers in producing their products have to be taken into account and therefore only the actual cost and not the estimated replacement cost can be considered. The Commission was not satisfied that on account of rise in the prices of assets the manufacturers would not be in a position to replace the plant and machinery with funds available to them. The Commission said "if the manufacturers were to keep apart not only the amount of depreciation but also the development rebate and other reserves to which they are entitled under the various tax and other laws and invest them separately or even in their business the question of there being any difficulty later on does not arise. Depreciation funds with the amount thus
