# ANAKAPALLE COOP. AGRL. & INDUSTRIAL SOCIETY . LID. ETC. ETC v. UNION OF INDIA & OTHERS

- **Citation:** [1973] 2 S.C.R. 882
- **Court:** Supreme Court of India
- **Decided:** 1972-11-06
- **Case number:** Writ Petitions Nos. 279-283, 293, 296, 297, 300, 303, 304 & 306 of 1972
- **Bench:** J. M. Shelat, A. N. Grover, K. K. Mathew, A. K. Mukherjea, Y. V. Chandrachud
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/anakapalle-coop-agrl-industrial-society-lid-etc-etc-v-union-of-india-others-5914
- **Pages:** 29

## Headnote

Essential Commodities Act (10 of 1955) s. 3 (3C) and Levy Sugar
S11pply Control Order, 1971r-Fixation of price of lev,y sugar-If correct
principles applied-1972-0rder, if invalid.
n
The Levy Sugar Supply Control Order, 1972, fixing the price of levy
C
sugar was made under s. 3 of the Essential Commodities Act. Its validity was challenged in petitions under Art. 32.
Dismissing the petitions,
HELD: (1) (a) Sub-section 3(3C) of the Act is not conJined to levy
sugar only. Fair price under tb.e sub-section has to be determined
in
respect of the entire produce, ensuring to the industry a reasonable return
on the capital employed in the business of manufacturing sugar, and, in
D
considering whether a reason11ble return has been allowed the profit on
the free sale of sugar can be taken into account. [887 A-BJ
Panipat Co-operatfre Sugar Mills v. Union [1973] 2 S.C.R. 860 followed.
(b) Section 3(3C) clearly envisages and contemplates the fixation of
Jifferent prices for different areas. It hardly matters if areas are called
zones.
The constitution or zones for price fixation is not an innovation
and goes back to 1959 when the Tariff Commission made a detailed report
tin the cost structure of sugar and the fair price payable to the industry.
[887 F-GJ
(2) (a) Tfie Tariff Commission, 1969, however, recommended
the
constitution of 15 zones largely on State-\vise basis with exceptions
in
case of U.P., Bihar which \Vere divided into 3 and '.! zones respectively,
after an elaborate inquiry into the \Vorking of the Zonal system. There
'Vas thus -ample and abundant justification for Continuing and sustaining
the zonal system.
There is no basis for the contention that the
price
fixation has to be made \Vith reference to the cost of each
individual
unit in the z0ne.
The basis of a fair price for sugar would have to be
built on a reasonable efficient and representative cross-section
on whose
1'"0rking' cost-schedules will have to be worked out and price determined
hy the Government under s. 3 (3C) of the Act. doing justice to the woak
and strong alike.
Any loss to the petitioners 1nay be due to mismanagen1ent, lack of efficiency and following a \vrong investment policy which
have nothin_g to do \vith the zonal system.
Not a single expert body countenanced the suggestion that price control should be unit-wise, and even
before the Tariff Commission no such point of vie\v was pressed by the
sugar industry. [892 E-F; 893 F-G; 894 D. F-G; 896 G-H]
Panipat Co-operative Sugar Mill.< v. Union [19731 2 S.C.R. 860 1972,
followed.
(b) It is futile to sav that the zoning system should not have been
done State-wise, especially when climatic and agro-econom'ic conditions
have been taken into con~ideration 'vhile constituting the zones.
If any
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ANAKAPALLE COOP. SOCIETY V. UNION
883
other system had been followed it would have become impossible to work
out a proper cost-schedule for the zone. It would have created several
problems and difficulties particularly with reference to the tax.es, duties
etc_ which are levied by each State and the wagzs which are pay&ble to
the workers in the different States which vary from State to State_ [897 H;
898 C-El
(c) Jn the present cases, while classifying zones on geographical-cumagro-economic considerations, there has been no discrimination made nor
does the price fixation according to each zone, taking into account all
the relevant factors, give rise to any such i:liscrimination as would attract
Art. :4. Once it is recognised that prices could be fixed according to the
zones, the cost schedules that have been worked out by the Commission
have necessarily to be different for each zone, because, the various items
·vhich go into cost differ 'irom zooe to zone. [899 D-F]
(3) (a) Sub-section (3C) lays down the various components for determining the price of sugar.
Clauses (a), (b) and (c) relate to the total
cost which consists of the minimum price of sugar cane as fixed by the
Government, the manufacturing

## Text

_Characters 0–39,983 of 82,029. This is a partial read: ask again with offset=39983 for what follows._

882
ANAKAPALLE COOP. AGRL. & INDUSTRIAL SOCIETY
. LID. ETC. ETC.
v.
UNION OF INDIA & OTHERS
November 6, 1972
[J. M. SHELAT, A. N. GROVER, K. K. MATHEW,
A. K. MUKHERJEA AND Y. V. CHANDRACHUD, JJ.J
Essential Commodities Act (10 of 1955) s. 3 (3C) and Levy Sugar
S11pply Control Order, 1971r-Fixation of price of lev,y sugar-If correct
principles applied-1972-0rder, if invalid.
n
The Levy Sugar Supply Control Order, 1972, fixing the price of levy
C
sugar was made under s. 3 of the Essential Commodities Act. Its validity was challenged in petitions under Art. 32.
Dismissing the petitions,
HELD: (1) (a) Sub-section 3(3C) of the Act is not conJined to levy
sugar only. Fair price under tb.e sub-section has to be determined
in
respect of the entire produce, ensuring to the industry a reasonable return
on the capital employed in the business of manufacturing sugar, and, in
D
considering whether a reason11ble return has been allowed the profit on
the free sale of sugar can be taken into account. [887 A-BJ
Panipat Co-operatfre Sugar Mills v. Union [1973] 2 S.C.R. 860 followed.
(b) Section 3(3C) clearly envisages and contemplates the fixation of
Jifferent prices for different areas. It hardly matters if areas are called
zones.
The constitution or zones for price fixation is not an innovation
and goes back to 1959 when the Tariff Commission made a detailed report
tin the cost structure of sugar and the fair price payable to the industry.
[887 F-GJ
(2) (a) Tfie Tariff Commission, 1969, however, recommended
the
constitution of 15 zones largely on State-\vise basis with exceptions
in
case of U.P., Bihar which \Vere divided into 3 and '.! zones respectively,
after an elaborate inquiry into the \Vorking of the Zonal system. There
'Vas thus -ample and abundant justification for Continuing and sustaining
the zonal system.
There is no basis for the contention that the
price
fixation has to be made \Vith reference to the cost of each
individual
unit in the z0ne.
The basis of a fair price for sugar would have to be
built on a reasonable efficient and representative cross-section
on whose
1'"0rking' cost-schedules will have to be worked out and price determined
hy the Government under s. 3 (3C) of the Act. doing justice to the woak
and strong alike.
Any loss to the petitioners 1nay be due to mismanagen1ent, lack of efficiency and following a \vrong investment policy which
have nothin_g to do \vith the zonal system.
Not a single expert body countenanced the suggestion that price control should be unit-wise, and even
before the Tariff Commission no such point of vie\v was pressed by the
sugar industry. [892 E-F; 893 F-G; 894 D. F-G; 896 G-H]
Panipat Co-operative Sugar Mill.< v. Union [19731 2 S.C.R. 860 1972,
followed.
(b) It is futile to sav that the zoning system should not have been
done State-wise, especially when climatic and agro-econom'ic conditions
have been taken into con~ideration 'vhile constituting the zones.
If any
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ANAKAPALLE COOP. SOCIETY V. UNION
883
other system had been followed it would have become impossible to work
out a proper cost-schedule for the zone. It would have created several
problems and difficulties particularly with reference to the tax.es, duties
etc_ which are levied by each State and the wagzs which are pay&ble to
the workers in the different States which vary from State to State_ [897 H;
898 C-El
(c) Jn the present cases, while classifying zones on geographical-cumagro-economic considerations, there has been no discrimination made nor
does the price fixation according to each zone, taking into account all
the relevant factors, give rise to any such i:liscrimination as would attract
Art. :4. Once it is recognised that prices could be fixed according to the
zones, the cost schedules that have been worked out by the Commission
have necessarily to be different for each zone, because, the various items
·vhich go into cost differ 'irom zooe to zone. [899 D-F]
(3) (a) Sub-section (3C) lays down the various components for determining the price of sugar.
Clauses (a), (b) and (c) relate to the total
cost which consists of the minimum price of sugar cane as fixed by the
Government, the manufacturing cost and the duty or tax.
Clause (d)
relates to the return on the capital employed.
The very fact that cl. (a)
provides that the minimum price fixed for sugar cane has to be taken
into account shows that the actual cost ·is immaterial.
Moreover, while
fixing prices according to zones, it is impossible to take the actual cost of
each manufacturer or producer and fix the price accordingly. Hence, the
methods followed by the Tariff Commission, which have stood the test
of time and have been incorporated in the sub-section, have been followed
in the fixation of price of sugar. The fact that in some cases their actual
cost may be in excess of the price fixed cannot be a ground for striking
down the price fixed for the entire zone in accordance with accepted principles.
It may be that uneconomic units may suffer losses, but what they
cannot achieve in the open market they cannot insist on where price has
to be fixed by the Government. The Sugar Enquiry Commission, in its
1965-report, expressed the view that 'Cost-plus'
basi~ of price-fixation
perpetuates inefficiency in the industry and hence cannot always be the
proper basis for price fixation. [899 F-H; 900 H; 901 A-El
(b) The Tariff Commission had however rerommended that as
a
~easu.rc ?f neutralising relat.ive cost advantages and for rectifying the
dispanty m the ex-factory pnce structure, a graded slab system of excise
duty may be introduced in place of the present fiat rate. It is for the
Governrnent to take -an early decision with regard to the recommendatiorl
but as ~he G·over!1n:i-ent is. not bound to accept every recommendation of
the Tanff Comm1ss1on, this Court cannot strike down the Price Control
Order. [901 H; 902 A-CJ
( c) _The Tariff Commission, which was in full possession of all facts
"W'as. satisfied that tnc requirements of the sugar industry could be mor~
equitably met by the departure from the conventronal method of giving
a return ?n the basis of a _certain percentage on the capital employed, and
by adopting instead a uniform amount of Rs. 10.50 per quintal as the
margin to be added to the other cost in arriving· at a fair price of the
sugar. The working of th_e _Tanff Commission in arriving at the figure
also sho"'.s that the Co~mission had allowed addition on acc-ount of the
tncre~se 1n the .rate of interest on money borrowed.
It is true that in
Prenuer Automobiles v. ·Union of India, A.I.R: 1972 SC 1690 16%
retcrn on the capital employed was considered to be reas~n-able but o:t
of that. return, the car manufacturers, unlike the sugar produc~rs were
made hable to pay minimum bonus, interest on borrowing
fi~ancial
charges, warranty charges and guarantee comm'ssion. [902 C F-H· 903 H·
904 A-Fl
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5-L521 Sup.Court/73
884
SUPREME COURT REPORTS
[1973] 2 S.C.R,
(4)(a) The Tariff Commission had decided in favour of continuing
the existing method of computing the quantum of depreciation on the
basis of zonal averages of the costed units; and it was added that the figure
so adopted was automatically to undergo an upward revision if and when
the revision contemplated by the draft rules seeking to liberalise the depreciation to be earned under the Income tax law was brought into effect.
The statement furnished by the Government shows that the increase in
depreciation has been allowed in accordance with the new rate of depre-
. ciaiion under the Income-tax Rules. (905 E-H: 906 A-C]
Premier Automobilies case, A.LR. 1972 S.C. 1690, followed.
(b) The Tariff Commission in 1959 and the Sugar Enquiry Commission in 1965 considered that no provision need be made for the purpose
of rehabilitation and modernisation; but the Tariff Commission in 1969,
made a recommendation. The conditions which prevailed in 1959 and
1965 were different and the latest view expressed in 1969, ought to have
received serious consideration by the Government.
But, merely because
Rs. 2.00 per quintal, as recommended by the Commission, had not been
h'<en account while fixing the price of· 1evy sugar, the price as
fixed
Jttould not 'be struck down, because. its non~inc!usion is in no way viola·
tive of s. 3 and 3A of the Act. [906 E-F; 907 A-B, G; 908 B-D]
[The 'Government should, however, give serious and immediate consideration to the matter and take a decision
without further delay]
(908 D]
(5) There is no serious inaccuracy or infirmity, factually or otherwise, in the escalations allowed by the Tariff Commission and accepted
by the Government in fixing the price of sugar. (908 G]
(6) There is nothing to show that payment of gratuity or liability
therefor had not been taken into account while fixing the price for levy
sugar. (909 C-DJ
As regards bonus, the rate of minimum bonus had been raised from
4% to 8.33% by the Payment of Bonus Amendment O"rdinance, 1972,
but as the Bonus Ordinance was promulgated after the prices were fixed
by the impugned Order, that Order cannot be struck down on the ground
that the prices fixed by it did not take into account the changes in the
rate of minimum bonus made by the Ordinance. Even so, in the changed
circumstances the Government ought to make appropriate modifications
in the impugned Order in respect of the prices of levy sugar. [91 O B-E]
ORIGINAL JURISDICTION : Writ Petitions Nos. 279-283, 293,
296, 297, 300, 303, 304 & 306 of 1972.
Under Article 32 of the Constitution of India for the enforcement of Fundamental Rights .
. S. V. G11pte, K. Srinivasamurthy, Naunit Lal and M.
N.
Shroff, for the petitioners (in W.P. No. 279/72).
K. Srinivasamurthy, Naunit Lal and
M. N. Shroff,
for the
petitioners (in W.P. Nos. 280-283 & 303/72).
P. Ram Reddv; S. Kanda/a Rao and G. N. Rao. for the
petitioner (in W.P. No. 293172).
A. K. Sen, N. R. Khaitan and O.P. Khaitan for the petitioner
(in.W.P. No. 296/72).
L. M. Singhvi. N. R. Khaitmz and 0. P.
Khaitan, for the
petitioner (in W.P. No. 297 /72).
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ANAKAPALLE COOP, SOCIETY v. UNION (Grover, 1.)
885
C. K. Daphtary, R. K. P. Shankardass, R. N. Banerjee, H. K.
Puri and S. K. Dhingra, for the petitioner (in W.P. No. 298/72).
A. Subba Rao, for the petitioner (in W.P. No. 300/72).
L. M. Singhvi, N. R. Khaitan, 0. P. Khaitan and A. T. Patra,
for the petitioner (in W.P. No. 304/72).
G. S. Rama Rao, for the petitioner (in W.P. No. 306/72).
L. N. Sinha, Solicitor-General of India, G. L. Sanghi
and
S. P. Nayar, for the respondent (in W.P. Nos. 279-283/72).
L. N. Sinha, Solicitor General of India, and S. P. Nayar. for
the respondents (in W.P. Nos. 293, 296, 297 298, 300, 303,
304, & 306 of 1972).
B. Sen, Leila Sheth and B. P. Maheshwari, for the intervener
(Upper Ganges Sugar Mills).
A. Subba Rao and B. K. Seshu, for interveners (Nizamabad
Co.-opt Sugar Factory & Nizam Sugar Factory).
M. C. Setalvad, P. N. Tiwari, 1. B. Dadachanji and 0. C.
Mathur, for the intervener (Mahalaxmi Sugar Mills).
C. K. Daphtary, J. B. Dadachanji, 0. C. Mathur and P. N.
Tiwari for the intervener (M/s. Hindustan Sugar Mi!ls Ltd.)
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V. S. Desai, J. B. Dadachanji. 0, C, Mathur and P. N. Tiwari,
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for the intervener (Delhi Cloth & General Mills Ltd,).
P, N. Tiwari, J. B. Dadachanji, and 0. C. Mathur, for the
intervener (Ganga Sugar Corpn. Ltd.).
The Judgment of the Court was delivered by
GROVER, J. These petitions under Art. 32 of the Constitution have been brought by· or on behalf of the various factories,
cooperative societies and Mills which carry on the business of
manufacturing and selling sugar (hereinafter called compendiously
the ">ugar producers") challenging the validity and legality of the
Levy Sugar Supply Control Order 1972 made under s. 3 of the
Essential Commodit;es Act, 1955, hereinafter called the "Act",
fixing the price of levy sugar in the different ZO!les in the country
and praying for various reliefs. Writ Petitions Nos. 279 to 283,
293, 300, 303 and 306 of 1972 are by the sugar producers in
Andhra Pradesh zone; Writ Petitions No. 297 and 304 of 19"?2
by the sugar producers in North Bihar zone and Writ Petitions
Nos. 296 and 298 of 1972 by those in the Punjab zone.
The principal questions that arise for our determination are
the following :
886
SUPREME COURT REPORTS
[1973] 2 S.C.R.
(1) What is the true scope and ambit of s. 3 (3C) of the
Act?
(2) (a) Whether the system of fixing price for each zone
(the entire country having been divided into 15
zones), is justifiable and is based on correct principles?
(b) Whether the statewise constitution of the zones is
proper and justified?
(c) Does the zonal system lead to discrimination and
as such is. violative of Art. 14 of the Constitu·
tion?
(3) Is price fixation based on proper principles and have
the prices been determined 'Jy following the correct
methods and in accordance withs. 3 (3C) of the Act?
(4) What is the correct position about depreciation and
rehabilitation allowance and the extent to which these
have: been taken into consideration in price fixation ?
( 5) Have the escalation in various items by which price
determination is made been properly allowed ?
(6) Whether the items in respect of payment of additional
bonus as provided by the Payment of Bonus Amendment Ordinance 1972 and gratuity are taken into
account?
The history of control over sugar production, its distribution
and the method followed in the fixation of the fair or levy price
of sugar has been set out in the connected case (Civil Appeal Nos.
1357 to 1369 of 1972) judgment in which also has been delivered
today and the same ground need not be traversed again.
The first question. formulated by us which arises in these writ
petitions can be divided into two parts. The first part mvolves the
point whether sub-s. (3C) of s. 3 of the Act deals with levy sugar
only and is confined to it alone, particularly, in the matter of determination of a reasonable return as provided by clause (d) of that
sub-section.
In the writ petitions the argument on behaH of. the
sugar producers has been that the whole object of having a scheme
of partial control under which 60. to 703 sugar has to be sold
in accordance with the orders made by the Gov.ernment under s. 3
(f) of the Act for which levy price is payable and the balance is
saleable in the free market would be defeated. The result of accepting an interpretation that profit on the free sale of sugar can be
taken into account while considering whether a reasonable return
has been allowed on the capital employed by the sugar producers
would, it has been stressed, be contrary to the scheme and purpose
pf the sub-section in question. This aspect of the matter has been
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ANAKAPALLB COOP. SOCIETY v. UNION (Grover, I.)
881
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fully dealt with in the above connected case. We have held that
fair price has to re <let.ermined in respect of the entire produce
ensuring to the industry a reasonable return on the capital employed in the business of manufacturing sugar. In other words
the contentions of the suga.r producers have been repelled.
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The second pari of the first question is whether price fixation
according to zones and not unitwise (we shall call this "the Zonal
system") is permissible under s. 3(3C) of the Act. According to
that provision different prices may be determined from time
to
time for different areas or for different factories or for different
kinds of sugar.
It has been sought to be established from clauses
(a) to ( d) of the same sub-section that what is contemplated is
the price fixation of each unit or factory; otherwis~ it will not be
possiblll to ensure that a reasonable return has been secured on
the capital employed as required by clause
(d). The Tariff
Commission of 1969 has recommended a roturn of Rs. 10.50 per
quintal of sugar.
That recommendation having been accepted by
the Government ( vide its Resolution dated February 20, 1970)
'!he only way, so it has b.een suggested on behalf of the sugar producers, to ensure that return is to compute the cost of sugarcane,
the manufacturing cost, the duty or tax payable and then add the
above amount by way of return to the aggregate of the aforesaid
irems mentioned in clauses (a) to ( c) of the sub-section.
This
can be done if all these items are computed unitwise and not by
taking a large number of units in an area because the aforesaid
items are bound to vary and be different from unit to unit.
We
shall have an occasion to go more fully into matter while considering question No. (2). But we are unable to agree that the provisions of s. 3(3C) do not in any way warrant the fixation of price
for ,the zones into which the country may be divided.
The aforesaid provision clearly envisages and contemplates the fixation of
different prices for different areas. · It hardly matters if areas are
called zones.
The previous history, as will b~ presently seen,
also fully supports such a view.
The Constitution of zones for
price fixation is not an innovation and goes back to 1959 when
the Tariff Commission made a detailed report on the cost structure of sugar and the fair price payable to the sugar industry.
It will be useful to note certain preliminary matters before
the various aspects of question No. 2 are ~onsidcred. In 1930
when the Tariff Board appointed by the Government 'of India
investigated for the first time the claim for protection from
the
sugar i.ndustry there were only. 29
factories
producing sugar.
Protect10n was granted to the mdustry in 1932,
Thereafter the
growth of the industry was rapid.
By 1938-39. the number of
sugar factories rose to 139.
According to the Tariff Commission
report 1959, the number of operatinl\ factories at that time was
888
SUPREME COURT REPORTS
[1973] 2·s.c.R.
157 with a total output of 1.98 million tonnes.
In 1969 when
the Tariff Commission made its report th~re were 205 factories
with a capacity for production of 34.69 lakbs tons.
The number of factories is stated to have now increased to 221.
As the
production of sugar depends on sugarcane, a number of steps have
been taken _f9r the development of sugarcane.
The supply of
~ugarcane of good quality and a fairly long S'~ason of production
are two pre-requisites for maintaining the production· of sugar.
The duration of the season in the sugar industry means the period
from the date of the start of the crushing by tl}e factory to the
date of finaly closing it, and it_ varies from region to region as it
depends on two factors, (i) availability of sufficient quantity of
cane and (ii) period for which reasonably good quality of cane
giving economic recovey of sugar is available.
Sugar recovery
depends mainly on three factors : (i) the quality of sugarcane,
(ii) length of the crushing season and (iii) the overall operating
efficiency of the sugar factory concerned.
The idea of preparing the cost schedule for sugar manufacture
dates back to 1937. The first schedule was prepared in 1937 by
the Director of the Indian Institute of Su_gar Technology, Kanpur.
The Tariff Commission in 1959 was of the view that to construct
the cost schedule for the entire country at a uniform percentage
of recovery and identical range of duration will only result in
inflating the All India cost. The Commission arrived at the conclusion after a study of the break-up cost of individual regions
that cost schedules could be constructed on the basis of actual
recovery and duration as pertaining to each region.
It grouped
the sugar factories in various States into four regions or zones
b~sed on standard schedules for a uniform recovery of 10 per
cent and for duration ranging from 90 to 200 days.
It appears that some State Governments represented that the
Northern region comprising the States of Uttar Pradesh, Bihar and
Punjab was unduly large with wide internal dispartfos in costs.
The result wa~ that uniform price fixed for the zone showed large
differences in profit margins.
The sugar Enquiry Commission
headed by Dr. S. R. Sen in its final report in 1965 recommended
five cost schedules for the same number of zones at 10% recovery
and for different durations.
Assam with one factory was to be
treated as a separate zone.
The Government,
however,
fixed
orices for 16 zones under the Sugar (Control) Order T963. The
number of zones kept on changing till it was increased to 23 for
the years 1965-96 and 1966-67. But in December 1967 prices
were fixed for 6 zones including Assam. The Tariff Commission
in 1969 recommended the Constitution of 15 zones which suggestion was finally accepted (see page 67, Tariff Commission
Report 1969).
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ANAKAPALLE COOP, SOCIETY v. UNION (Grover, J.)
889
We may first take up the group of petitions of the sugar producers in the Andhra Pradesh Zone.
The position about price of levy sugar in zone 2 in which
the sugar producers in Andhra Pradesh are functioning was that
for the sugar produced in 1968-69, the price fixed was Rs. 161.14
per quintal for D-29 quality. After the creation of lifteen zones
m February 1970, the price for levy sugar for the Andhra Pradesh
zone was iixed at Rs. 150.43 per quimal inclusive o! excise duty.
In May 1971 sugar was decontrolled which continued till December 1971.
From that time till June 1972 when partial control
was reimposed, a scheme of voluntary control of Sugar was in
force.
By agreement between the Government and the sugar
producers 60% of the sugar released every month had to be
placed at the disposal of the Government at Rs. 150 I - per qumtal
exclusive of excise duty for D-30 quality.
Under the impugned
order the price of Rs. 121.97 per quintal was fixed for D-29 grade
and Rs. 122.82 for D-30 quality for the Andhra Pradesh zone.
One of the main grievances of the sugar producers is that the
above price was far below the price payable even under the voluntary scheme of distribution and so far as the actual cost of production of the various petitioning units is concerned the same was
greatly in excess of the price of levy sugar fixed by the impugned
order.
Thus the sugar producers in this zone were being made
to suffer huge losses instead of getting a reasonable return as
provided by clause ( d) of s. 3 (3C) of the Act. All this was attributed to the zonal system which is stated to suffer from the
following serious defects apart from others :
(i) The sugar producers in Andhra
Pradesh
varied
greatly in economic viability; some units were very
large and.some very small, e.g., crushing capacity of
3750 tonnes at Vayyliru and 800 tonnes at Seethanagaran:i respectively out of the costed units (see
App~nd1x 32, page 207, 1969 report, Tariff Comm1ss10n).
(ii) A uniform pric~ has been fi~ed _fo~ all units although
th~ manufacturmg cost vanes. widely from unit to
umt.
(iii) The extreme disparity was evident from para 9 .5 .1
of th.e 1969 report which showed that the actual
crus~m~ .reason . (based on 22 hours per day)
for
the mdlVldual umt had a dh:ergence ranging from 26
days to 195 days.
Statew1se averages indicated a
range from 26 to 153 days whilst
the
all
India
weighted average came to 108 days for the costed
units. In Andhra Pradesh the duration in 1966-67
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which is ,he base year of the costed units varied from
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163 days to 41 days.
(iv) Only 7 units out of 19 units in Andhra Pradesh zone
were selected for working out the averages.
This
highly involved highly disparate and unfair comparison.
(v) According to table 9.3 at page 75 of the 1969 re-
· B
port the average of the cane actuaJly crushed by all
the 7 costed units came to 1233 tonnes per unit
whereas the average of the cane actu~lly crushed by
all the 19 units in the State is l 065 tonnes.
According to the figures supplied by the counsel for the
petitioner at the time of arguments the total cane
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ac.tually crushed in 1966-67 by all the 19 units in
Andhra Pradesh was 16,60,000 tons.
The average
duration for that year being 82 days the average
daily crushing of the 19 unit> worked out to 1065
tonnes per unit whereas the crushing capacity of 1233
tonnes per day was taken as the base.
This repreD
seated an excess of 168 tonnes per day which was
wholly unjustifiable and which would make a lot of
difference in the matter of computation of price.
(vi) The conversion cost given at pages 209 and 210,
Appendix 33 of the 1969 report
worked
out to
Rs. 25.86 per quintal which is the conversion cost for
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1233 tonnes relating to 7 costed units but the average daily crushing of all the 19 units being 1065
tonnes the actual conversion cost will work out to
Rs. 29.94.
Thus the difference in conversicn cost
would be Rs. 4.08 per quintal for sugar.
(vii) The weighted average were on a very restricted basis
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and hand-picked units could not furnish proper
guidance.
The weighted average were farcical and
were in no way· different from the ordinary averages.
(viii) No account has been taken of the admitted fact that
duration and recovery often depend on vagaries of
nature or unforeseen events.
For instance m the
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case of the sugar producers in Writ Petition No.
283 /72 the duration was 162 days in 1969-70, the
recovery being 9.493% but it came down to 78 days
in I 971-72 because the sugdrcane crops were damaged by a highly distructive disease.
In the North Bihar group of petitions of which writ
petition
297 /72 mav be otaken to be representative points similar to the
above have· been raised.
For the North Bihar zone, the pricesH
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ANAKAPALLE COOP. SOCIETY v. UNION (Grover, J.)
891
fixed by the impugned order were Rs. 157.55 for D-30 a_nd
Rs. 155.85 per quintal for D-29 qualities respectively: Acccrdmg
to the sugar producer its own cost of produ.ction comes to
~s. 181.96 per quintal without any return. Owmg to the faulty
price fixation, this unit was suffering a heavy loss, the accumulated
amount of Joss having reached the figure of Rs. 9 .• 50 lakh~. According 10 the statements and tables prepared and subm1t~ed to
us ·in the North Bihar zone the cost factors of <he costed umts arc
so' disparate and unequal that five out of the 8 costed units. do
not even get their actual cost, leave aside any return.
The tables relating to the weighted averages are meant to
show ·that there is no particularity or charm about. the weighted
averages.
It is not an average which tends to remove the disparity between the various units in a zone. In the table showing
the ex-works price of sugar based on minimum price of the cane,
duration and recovery for North Bihar zone compared with individual units for the season 1971-72 the zonal average cost on the
basis of 66 days' duration and 8 .86% recovery and Rs. 91_.34
cost of cane comes to Rs. 139. 52 per quintal excluding the return.
After applying cost schedules to cane price duration and
recovery of individual factories the results show that at least 10
factories suffer heavy losses because their cost ranges between
Rs. 623.81 per quintal of the factory at Ryam to Rs .. 139.83 of
the factory at Chanpatiya.
This is exclusiw of the return 0f
10. 50%. It may be observed here that the factory at Ryam has
a duration only of 7 days which is almost a freak figure anrl explains the high cost incurred by it for manufacturing sugar. But
the total number of factories in North Bihar zone is 25 and the
cost of other factories varies between 138.44 to 121.89 per quintal. It is next pointed out that under the averaging technique th~
Central Government fixes a common price for all sugar factories
in every State or price zone by averaging extraordinary cost disparities. The average cost formulae ignore disparity in (a) cane
cost per quintal; (b) duration; (c) recovery, (d) daily crushing:
capacity and ( e) capital employed by one fadory and the other
in each zone.
a .Writ Petition No. 298/72 is :epr_esentative of. the Punjub
.,r?up. There are five ~ugar factones m the Punjab zone.
The
pnce o_f levy sugar. was fixed under the impugned order at 147.71
p~r qumtal. .. _Details of the audited manufacturing cost were filed
w11h the pe~mon for the 1971-72 season. It was claimed that the
manufact~nng c.ost for that season, came to Rs. 208.22 per quinta] exclusive of mtere~t on caoital employed which work~d out to
another 16.40 per qu~ntal. Thus the cost including interest came
to Rs. 224.62 per qumtal. The total loss on stock as on July 1
1972 would come to Rs. 9,74,350.77. It was stated that
th~
892
SUPREME COURT REPORTS
. [1973] 2 S.C.R.
petitioner had recovered an average price of Rs. 245.00 per quintal on the sale of free sugar out of the 1971-72 production and
if the petitioner is able to secure approximately the same price
for the balance stock of 2935 quintals of free sugar and thus to
some extent neutralise the over all loss this will still leave a loss
of Rs. 87 .17 per quintal to be made up on the sale of its present
stock of levy sugar.
During the month of December 1971 the
duration was seriously affected by the lndo-Pakistan hostilitiesan important factor which has not been taken into consideration
by the government.
Servshri M. C. Setalvad, B. Sen and V. S. Desai who have
apreared for the Interveners Nos. 6, 3 _and 7 in Writ Petition
No. 297 of 1972 respectively do not support the argumen~s challenging the zonal system. On the contrary a strong case has been
made by them in favour of the zonal system.
The lnterveners
whom they re::iresent are obviously the low cost units and are in
favour of the zonal system b~ing retained.
The tug of war in respect of the zonal system is between the high cost units and the
low cost ones; the former are against it and the latter in favour
of it.
The system of fixing the prices, according to certain regions
or zones, is not a new one. The tariff Commission in 1959
favoured the formation of four zones. In the report of the Sugar
Enquiry Commission 1965 it was pointed out that the Government had acutally fixed the prices for 22 zones which meant that
from four zones the number had been increased to twenty two
or more.
The commission was of the· view that there should be
five zones only in addition to Assam.
The Tariff Commission,
1969; however recommended the constitution of fifteen zones
largely on Slate-wise basis with an exception only in case of Uttar
Pradesh and Bihar.
Uttar Pradesh was divided into three zones
and Bihar into two. The Tariff Commission had been specificially
requested to inquire into the working of the zonal system, the
main point for inquiry being the zones into which the sugar producers should be grouped having regard to the basis of classification to be recommended by the Commission.
The view of· the
Commission was that on the whole. the number of price zones
should be fifteen which would reduce, though not !lliminate, the
inter-se anomalies in the cost structure without resorting to the
extreme of the fixation of price for each unit or a single or at the
most two, one for the sub-tropical and other for th_(? tr?pital on~.
The Tariff Commission hoped that in the course of time conditions would be created maKing the operation of the second alternative feasible.
From Chart· IV relating to production of sugar
to bj! found in the report of the Sugar Enquiry Commission 1965,
the All India production arose from 12,00,000 tons. to 32,00,?00
tons. in 1964-65.
This notwithstanding the fact that the pnces
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ANAKAPALLE COOP. SOCIETY v. UNION (Grover, J.)
893
were being fixed on the basis of regions. In para 19.7 at page·
127 of the said report the Commission made some very useful
observations. It rejected the industry's contention that under the
system of determining price on the principle of average for a zone
there was no incentive for heavy investment in block.
It was
pointed out that in recent years of contror on sugar in spite of the
sugar prices having bee11 fixed on a zonal system there h~d been
a substantial addition to the capacity even in the sub:-trop1cal belt
It was stated :
"Further, a study of the cost structure of the old and
new factories reveals that in the total cost there is hardTy much difference between the cost of proouction in the
o!d factories where the element of depreciation is very
low and that in the new factories where its incidence
is fairly heavy.
While in an old unit the capital cost
is lower, the recurring cost is often higher, in a new
unit of comparable capacity, it tends to be opposite.
What the industry ought to be concerned with is tf1e
untimate ex-factory price. To take out of context one
element of cost that goes into the total cost an.d then to
plead that because the incide!JCe in respect of that element of ·cost is low in tlie case of old plants some
allowance should be given to the industry as a whole, is
not justifiable."
It is somewhat difficult to accept the argument of those who·
are opposed to the zonal system that the loss alleged to have resulted to some of the sugar producers can be attribuied to the
prices having been fixed zone-wise.
For instance, in the Punjab
zone the crushing capacity of all the factories is. practically the
same i.e. about 1,000 tons per day. The prices which were fixed'
by the Government were on the basis of 67 days duration with .a
recovery of 8. 7 5 % . In. the case of Malva Sugar Mills the actual
duration was 95 days, the recovery being 8.78%.
Qrdinafily
and in the normal course profits shlluld have .been made by the
said unit and it should not have incurred losses. . The reasons for
incurring losses can be many including mismanagement, lack of
efficiency and following a. wrong investment policy which liave
nothing to do with the zonal system.
This system. by and large
leads to efficiency and affords an incentive to cut down the cost.
It is only when there is keen competition between the units in the
same zone that a real effort will be made by each unit to reduce
its cost and make the working and running of the unit more efficient.· The essence of the matter is that a commercial concern
can be a success only if there is proper planning and efficient
management.
The argument on behalf of the suga" producers
whicl, claim that they have been running into losses because of
894
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(1973] 2 S.C.R.
the zonai ;ystem can hardly be sustained on the evidence on the
materia! produced by them. It is true that in a few cases all the
dat:i and the details of costs etc. were set uut in the petition and
were supμorted by statements !I'ade out from <iudited accounts
but in most cases it w~s at the st~,:;e of rejoinder or at the time of
arguments tha! elaborate statements were prepar"d showing
figures of losses into which th,se units are running owing to the
fixation of prke by tli'l impugned Order.
The government in
these circumstances could possibly t<tr had no opportunity to
check up the correctness of all the figures and even if that could
be do'1e as weekly returns are st•bmitteci on pressribed'°forms to
the authorities concer:ied it would still not !:>e possible· for the
g0vermnent to determine their accuracy without a complete investigation bei:1g carried out.
Nor could it be escertained with
·out a p1olonged inves!igation what the real causes were for some
of the sugar producers incurring nuch heavier costs than the
vtllers.
The extreme position taken up or; behalf of some of the petitioners that the prices should have been fixed unit-wise and on
the ba>is of actual costs incurred by each unit could hardly be
tenable.
Apart from the impracticability of fixing the prices for
each unit in the whole country the entire object and purpose ot
controlling prices would be Gefeated by the adoption of such a
system. It must be remembered that during the earlie: period of
price control the price was fixed on an all India basis
That still
is the obje.ctive and if such an objective can be achieved it cannot
be doubted that it will be highly conducive to proper benefit being conferred on the consumers.
According to the Commission
the objective to be achieved should be to have only two regions
in the whole country, 'lamely, sub,tropical and tropic'aI.
Not a
.single expert body appointed by the Government of India from
time to time countenanced the
suggestion that
price control
should be unitwise. It appears that even before the Tariff Commission such a point of view was understandably not pressed on
behalf of the sugar industry.
The low cost units demanded the
fomiation of the larger zones. The high cost units asked for the
formation of smaller zones.
No material has been placed before
us to show that 1here was any serious demand for prices being fixed
unit-wise. Even in the arguments it was almost common ground
with the exception of one or two dissentient voices that zoning
is unavoidable in our country in the matter of fixing of the price
of sugar.
We may now advert to some of the salient flaws and infirmities
which have been sought to be shown with the assistance of various
facts and figures from which the zonal system is said to suffer.
Firstly the method of selection of the units for the purpose of
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ANAKAPALLE COOP. SOCIETY v. UNION (Grover,/.)
8~5costing and taking of the averages has been subjected to severe
criticisn1 .
• '\s stated in para 9 .1 of Chapter IX of the 1969 report the
findings of the Commission were based on 66 costed units out
of 200 w0rking units in the industry. It was also mentioned in
nara 9 .1.1 that on a scrutiny of the cost forms it was found that
the information furnished bv most of the non-costed units was not
satisfactory.
The defects "noticed were "in regard to allocation
of costs under the various heads and inclusion of certain items.
which should ordinarily have constituted a part of the return. It
was further statej that the cost Accounts Officers of the Commission made a detailed scrutiny of the accounts in the selected
units r.nd w""''ed out costs in a fair ?nd equitable manner to enable the Commission to determine appropuate costs for each unit
for detailed cost inve>tigation.
The 66 units which were costed
out of 68 selected for the purposes accounted fo~ nearly 34% of
the tNal capacity and 37% d the total production of sugar in
1966-67. The werage duration of the costed units was 101 days
with a recovery amounting to 9.73% as compared to All India
figure cf 95 days and 9.91 % recovery respectively. The commission
was tte best judgP of selecting the unb for. cost study and for
working out the average cost. The reasons given by it for sekc!
ing the costed units do not suffer from any disregard of the re
cognised principles ot costing. It is true that the select.ion of some
units out of au the units in a particular mne can lead to the ano·
malies and the hardships which· have been pointed out on behalf
of the sugar producers. To take an illustration the average with
regard to crushing capacity in 1he Andhra Pradesli Zone· might
have bew different if &ii "the units rad been taken into consideration. Brt the Commissio.n could not have taken the averages of
all the units u.iless it had selected them for costing which in\ the
very nature of things was not pra~tical and which for the reasons
given by the Commission itself could not be done because o~ the
unsatisfaj(_tory nature of the information furnished by must of the
non-costed units. Indeed the petitioner Tri Writ l>etition No. 279
did not even . eplv cr-~sfod any memoranda to the Commision
although the questionaries were sent to it.
Similarly 1n Andhra
Pradesl. Zone three other units. Arc.adalavalase Cocperati»e Agricultural & 1ndustria' Society Ltd. Sivakarni Sugars
Ltd.
and
Challaoali Su~ar Ltd. did not semi any reply or memoranda as
is apprarent from App"ndix Il in the report.
As r.::gards the averages and weighted averages which
have
been worked' out by the Commission for the purpose of fixing
prices in respect of the varying figures of difierent items of cost
we are unable to appreciate how these have not bee11.