# PREMIER AUTOMOBILES LTD. & ANR. ETC v. UNION OF INDIA

- **Citation:** [1972] 2 S.C.R. 526
- **Court:** Supreme Court of India
- **Decided:** 1971-11-24
- **Case number:** Writ Petitions Nos. 327, 330, 331, 486 and 487 of 1969
- **Bench:** K. S. Hegde, Grover, H. R. Khanna
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/premier-automobiles-ltd-anr-etc-v-union-of-india-5673
- **Pages:** 46

## Headnote

Motor Car (Distribution and Sale) Control (Amendment) Order 1969
passed under s. 18G Industries (Develop1nent and Regulation) Act, 1951Fixation of ex- factory prices of motor cars produced in
Jndia-Recom~
mendations of Commission of Inquiry-Production capacity deter1nination
of-Expenses relating to warranty and bonus
lvhether to he exc!Uded
from the ex-works cost-Adoption of ·'historical method' by commission
for fixing cost for September 1969, propriety of-Escalation clause, necessity of-Fair return, ·what
is-DcpreciaNon of
plant and
machinery
whether to be allowed on basis of originc..1 cost or replacemen( value.
On the basis of the recommendation of the Tariff Commission the
Government of India promulgated the Motor Car (Distribution and SaleJ
Control· (Amendment) Order 1969 under s. lSG of the Industries (Deve'
lopment and Regulation) Act, 1951. By this order the Government fixed
the ex-factory Drices of the three cars manufactured in India namely
Hindmtan 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 manufactnff~rs' or dealers \vere p'rohibited fro1n selling or offering for
sa'le or otherwise transferring or disposing of thr~ motor C'1fS for a price
exceeding th·~ price given in the ·Order.
The manufacturers of
these
vehicles and two of their dealers fil:ed writ petitions in this Court under
Art. 32 of the Constitution ch,.Uehging the price fixed.
On May 5,
1970 this Court after partly hearing the pditione'rs recommended to the
Government to appoint a commission for the purpose of suggesting a
fair price fer the three cars by taking into consideration all. the relevant
matters.
The Governrn·~nt ac
1cordingly appointed a Commission of three
members headed by a ntired High Court Judge ~nd by a notification
dated June 5, 1970 all the provisions of the Commission of Enquiry
Act !952 were made applicable to the Commission.
The Commission
decided to recommend a fair price for two J>'riods, (1) as in September
1969 and (2) as in July 1970. It was considered necessary to determine
the price in September 1969 because the in1pugned crder \Vas pro:nulgated at that time.
For the September 1969 prices the computation was
done accQrdinO' to the 'historical method', \Vhich n1eant th'3t not only th~
prices in Septe:imber 1969 were kept in view but also the value of pending
stocks of raw materials and the r.v~'rnge of the prio:: at \vhich pt1rchages
had bcc!1 effected at that "tin1e \Vere tiiken into account. The prices for
July 1970 \vere computed on the basis of the actual cost obtaining in the
month of July 1970. The report of the Con1n1ission suggesting fair_ price~
for the three cars in question was filed before the court. The findings ot
the Conunission were criticised bv the \vrit 'C'~titioners on the folkn\"in_g
grounds :
( 1) That the CommisSion ~a~ taken ~he production c.~p:-tcity
at nn excessive figure and had thus arhflc1ally reduced the cost: (n) that
-:ort nnd -expenses on account of \Varrnnty nnd st-:ltu.tory ~onus had b~en
wrongly excluded from the ex-works cost: (iii) that m fixing the co:t tor
Septen1ber 1969 even the actual ndmitted c?st found hv the C0nun1ss1?n
had not been tuken into account and the price hild been fixed 011. th..: historical cost. \Vhercas in fixin~ the price for Julv 1970 the pro!e.c~~d :-tnd
estimated cost for July 1970 had hccn ignored: (iv) that no rrom,011 had
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PREMIER AUTOMOBILES LTD. v. UNION
527
been made for an escalation clause in order to ensure that the prices fixed
would ensur< for a reasonable period of time; (v) that the return wbtch
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 fact

## Text

_Characters 0–39,444 of 129,279. This is a partial read: ask again with offset=39444 for what follows._

526
PREMIER AUTOMOBILES LTD. & ANR. ETC.
v.
UNION OF INDIA
November 24, 1971
[K. S. HEGDE, A. N, GROVER AND H. R. KHANNA, JJ.]
Motor Car (Distribution and Sale) Control (Amendment) Order 1969
passed under s. 18G Industries (Develop1nent and Regulation) Act, 1951Fixation of ex- factory prices of motor cars produced in
Jndia-Recom~
mendations of Commission of Inquiry-Production capacity deter1nination
of-Expenses relating to warranty and bonus
lvhether to he exc!Uded
from the ex-works cost-Adoption of ·'historical method' by commission
for fixing cost for September 1969, propriety of-Escalation clause, necessity of-Fair return, ·what
is-DcpreciaNon of
plant and
machinery
whether to be allowed on basis of originc..1 cost or replacemen( value.
On the basis of the recommendation of the Tariff Commission the
Government of India promulgated the Motor Car (Distribution and SaleJ
Control· (Amendment) Order 1969 under s. lSG of the Industries (Deve'
lopment and Regulation) Act, 1951. By this order the Government fixed
the ex-factory Drices of the three cars manufactured in India namely
Hindmtan 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 manufactnff~rs' or dealers \vere p'rohibited fro1n selling or offering for
sa'le or otherwise transferring or disposing of thr~ motor C'1fS for a price
exceeding th·~ price given in the ·Order.
The manufacturers of
these
vehicles and two of their dealers fil:ed writ petitions in this Court under
Art. 32 of the Constitution ch,.Uehging the price fixed.
On May 5,
1970 this Court after partly hearing the pditione'rs recommended to the
Government to appoint a commission for the purpose of suggesting a
fair price fer the three cars by taking into consideration all. the relevant
matters.
The Governrn·~nt ac
1cordingly appointed a Commission of three
members headed by a ntired High Court Judge ~nd by a notification
dated June 5, 1970 all the provisions of the Commission of Enquiry
Act !952 were made applicable to the Commission.
The Commission
decided to recommend a fair price for two J>'riods, (1) as in September
1969 and (2) as in July 1970. It was considered necessary to determine
the price in September 1969 because the in1pugned crder \Vas pro:nulgated at that time.
For the September 1969 prices the computation was
done accQrdinO' to the 'historical method', \Vhich n1eant th'3t not only th~
prices in Septe:imber 1969 were kept in view but also the value of pending
stocks of raw materials and the r.v~'rnge of the prio:: at \vhich pt1rchages
had bcc!1 effected at that "tin1e \Vere tiiken into account. The prices for
July 1970 \vere computed on the basis of the actual cost obtaining in the
month of July 1970. The report of the Con1n1ission suggesting fair_ price~
for the three cars in question was filed before the court. The findings ot
the Conunission were criticised bv the \vrit 'C'~titioners on the folkn\"in_g
grounds :
( 1) That the CommisSion ~a~ taken ~he production c.~p:-tcity
at nn excessive figure and had thus arhflc1ally reduced the cost: (n) that
-:ort nnd -expenses on account of \Varrnnty nnd st-:ltu.tory ~onus had b~en
wrongly excluded from the ex-works cost: (iii) that m fixing the co:t tor
Septen1ber 1969 even the actual ndmitted c?st found hv the C0nun1ss1?n
had not been tuken into account and the price hild been fixed 011. th..: historical cost. \Vhercas in fixin~ the price for Julv 1970 the pro!e.c~~d :-tnd
estimated cost for July 1970 had hccn ignored: (iv) that no rrom,011 had
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PREMIER AUTOMOBILES LTD. v. UNION
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been made for an escalation clause in order to ensure that the prices fixed
would ensur< for a reasonable period of time; (v) that the return wbtch
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 c~se. It ~as
common ground that deviation from the report of the Comnussion 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 bad been a departure from established principles or the conclusions of the Commission
were shO\VO to be demonstrabJy wrong or erroneous.
HELD :. (llv the Court) (i) The very concept 'of fair pric~ which ca.n
be fixed under s. 18 G of the Act takes in all the elements, which make 1t
'fair' for the consumer leaving a reasonable margin of profit to the manu·
facturer without which no one will engage i11 any manufacturing activity.
Capacity utilisation of a manufacturing unit, the quality of its product. and
the maintenance of proper standards at various levels of production are all
1 elevant factors for the ·determination of the price.
Capacity 'utilisation,
'.iu\vevc:, 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 '.lt no stage except for the
second half of th., year April 1970 to March 1971 import licences
had
been grant•od for production of more than 1200 cars.
It was only in
that year that for the first half 't w•s granted for 6050 cars and for the
second half for 700Q cars.
From the practical point of view therefore
the achievable capacity for September 1969 could not have !;,en fixed
for more than 12000 car~ a year.
The Commission was right 'in fixing
the achievable capacity. for July 1970 at the figure of 14000 cars per
re::tr.
In fi.!gafd to Standard, Motors that Commission WJS not juStifted
in (}::parting ·from the recommendations of its technical committee _an.d
fixing the production capacity at 4000 cars and 1000 commercial Yehicles
per annum.
On an over-all consideration the
capacity ·of Standard
Motors would be 3400 cars and 1000 trucks. as found by the technical
team. [552 B-C; 55l 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,
c;id 5000 trucks per year .. Th.o Commission was wrong in relyin!l on
the applications ldr import licences made by Hindustan Motors and on
their basis assessing the production capacity for trucks at 10500.
In
such applications the estimates given sre likely to be inflated.
The
technical committee had proceed·ed on the basis of independent physiciil
checking and verification. in all respects.
There was no justification for
rejecting the opinion of the experts especially \vhen no member of the
team was examined as a \Vitness for finding_ out those facts and data
which the Commission had sought · to use for vojecting the
technical
team's report. [557 H-558 DJ
.
(ii) (a) As laid. down in the .order promulgated by the Government
m Marr'h 1968 under s. 16 of the Act all defects due to faulty manufacture of workm'.ln' hip shall be rectified and defective {>arts ·replaced
during the wa'rranty period wi!hout passing any part of -the burden indudin.g incidental
ch~rges to the consumer.
The effect of the above
directwn
oon~ot be
~gnoo'd although it may not be correlu•ive in the·
matter .of fixmg a fair price. The statement of the Commission th~t if
the w11nnty was· to be made out of the .profits every manufacturer would
try to mm1mFe warranty cost by improving the quality of his product
was unexceptionable. If it is to \Je included in the ex-works cost it would
528
SUPREME COURT REPORTS•
(1972] :! S.C.R.
mean virtually passing it on to the consumer. L538 G-539 A]
(b) The question whether bonus is Jinked with profit or ·cost stands
concluded by the provisions of the Bonus Act itself as also the decision
of Ibis 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 BJ
Jalan Trading Co. (P) Ltd. v, Mill Mazdoor Union, H967] 1 S.C.R.
15, referred to.
A
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(iii) There was no authority or principle on which the method of cal·
culating the ex-works cost on historical basis could be justifiably adopted for
C
September 1969 when a different method was adopted for July 1970 cost.
The ex-works cost for September 1969 should have been detormined
according to the curtent prices as was done with regard to July 1970.
1541 HJ
(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 HJ
D
( v) The quantum of return has essentially to \'ary 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 em-
!)loyed. After takbg the maximum return which an investor can expect
trom fixed deposits and other relevant factors into consideration the comE
mission 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 outgoings which are to be met out of the
return are (1) the actuannterest 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 diff~rences in exchange. After making provision for these
outgoings the dividends on preference shares, if any, the tax liability of
F
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
over all view of the car industry 16% return on capital employed was
considered to give a reasonable relui'n to the car manufacturer. [545 EG
546 Al
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 lo 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 ex-works cost could
H
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 Cal' Price
Commission had mentioned
had to be J",lid out of it.
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PREMIBR AUTOMOBILES LTD. V. UNION
529
The return of 16% granted by the Commission was a reasonable one
keeping in view tbe entire circumstances. A total return of 16% will
leave somo• margin if proper e~onomies are efli:cted 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
whili at the same time provide a reasonable m<1rgin 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·Hl
Even though the return to the equity shareholders of all the ibree com·
panies may not be uniformly 10% it was not possible to make any distinc·
tion or discrimination between the three manufactu.rers. A separate rate
of return for each could not be fixed when dealing with the automobile car
industry as a whok [546 B·C]
(vi) The CommiS.ion 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-CJ
ALSO HELD :
(I) The amount payable on account of royalty per
car in the case of Standard Motors pursuant to the collaboration agree·
ment 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 w~s correct. [562 F]
(3) The dealers, shall, for the present, be entilled 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 phce 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 mostiy 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
hurd~n on the consumer rather than on the producer.
The Car Price
Enqmry Commission has said in its main report at page 292 : "The incidence of tax on ~ car is very h.eavy inasmuch as it constitutes 46% of
the ex;f~ctory pr~~·· ~~ car is no l~nger ar; item of luxury and under
!he exrstmg c<;>ndrtions it IS ~a~t becommg an item of necessity.
That being so, there is a case for g1v1ng some relief out of the excise duties and
ether levies which are by their nature multi-point taxes causing hardship"
[436 P-537 Al
.
Per Khanna, J. (Partly dissonting)
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 'bas to be made to attain a high !eve.I of production for two
Ob\ious reasons : (I) supply of new cars falls considerably short of the
demand and the intending purchasers have to be kept on the waiting list
530
SUPREME COUllT .REPORTS
(1972] 2 s.c.R.
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 jigure of 'fair price' of
the article manufactured. To put it differently, the authority concerntd
in determining fair price should not demand from the manufacturer the
paragon of e"Cl'llence in the matter of volume of production but at the
saroo time the authority should not make the consumer bear the margin
of high cost resulting frorn avoiding low production.
It is, of course,
implicit in that that reasonable facilities would re afforded to the manufacturer for procuring material like impdrted 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
prjce should be fair not only to the producer but also to the consumer;
the goal should be to arrive al 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 pro.._
duction capacity of that company from· July onwards was
3400 and not
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 '.W-12-1969 in which the
company bad estimated its
production at 4~.00 tars.. It is wellknown 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 Team nor could it make a
systematic study and it had to content itself with the materials snpplicd by
the petitioner-c9!Jlpany.
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 circurnsiances there was no
reason to rely on the recommendations of the Technical Team or the
Vergheso Committee in preference to the findings of the Commission.
[568 E, 569 A-BJ
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,forthepetitioners .(in W.P. No. 330of1969).
C. R. Pa(tabhiraman1 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,
0. P. Khaitan, B. P. Maheshwari and R. K. Maheshwari, for the
petitioners (in W.P. No. 331 of 1969).
B. R. L. Iyengar and R. B. Datar, for the petitioners (in
W.P. No. 486 of 1969).
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PREMIER AUTOMOBILES LTD. v. UNION (Grover, J.)
531
V. S. Desai ai!ld 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 (i!ll W.P. No. 327
of 1969).
Niren De, Attorney,General for India, Jagadish Swarup, So!icitor-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 pct1t1ons 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 exfactory prices of the three cars were fixed as 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 sdling 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 t<:1king into consideration all relevant matters.
On May
27, 1970 the Government of India constituted a Commission
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
SUPRBMB COURT REPORTS
[1972] 2 s.c.t.
J?epartment of Defence Production as Members.
By a notification ~ated June 5, 1970 all the povisions of the Commission of
Enquiry Act 1952 were made applicable to rthe Commission. The
<;ar, Pnce EnqUJiy Commission, hereinafter called the 'Commis•
s1on .devoted. a g?od deal of labour and attention to the matter
of fixmg a fair pnce of the three cars.
Its report consists of two
volumes.
The first yolume contains the main report and the
second volume contams the appendices.
Ue 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 protectim:r to the automobile industry in
India.
The Tariff Commissicin 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·
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PREMIER AUTOMOBILES LTD. 11. UNION (Grover,/,)
533
charge prices at their discretion.
The Government took a deci·
sion t-0 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
cJrtail 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 Govemme,nt 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 bardly 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 r.;mitted 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
comprthensive 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. Pantle.
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 Pantle
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 ISI
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.
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SUPREME COURT REPORTS
(1972] 2 S.C.R.
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 Pa_nde Committee with' regard to the establishment of technical audit cells.
These celfs 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.r 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,, howe.ver, adopted two· d!ffcrent
principles in . the matter of computing t?.e cost on the
a~oresaid
two dates.
For the SJ:ptember 1969 pnces the computat10n 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.
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PREMIER AUTOMOBILES LTD. v. UNION (Grover, /.)
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
Ex-works cost
Return
Ex-factory
Price
STANDARD HERALD
Ex-works cost
Return
ex-factory
Price
AMBASSADOR.
Ex-wotks cost
return
Tot<1I ex-factory Price
September 1%9
July 1970
. - Rs.
12,283 ·00
13,564 ·00
Rs.
1,168 ·00
Rs.
1,223 ·00
Rs.
13,451 ·00
Rs.
14,787 ·00
September 1969
July 1970
Rs.
I J,236 ·00
Rs.
13,989 ·00
Rs.
l . .27•! ·00
R~.
1,231 ·00
.
Rs.
14,510 ·00
Rs.
September l 969
J<:ly 1970
Rs.
Rs.
12,152 ·00 Rs.
1,364 ·00 Rs.
15,220 ·00
14,299 ·00
1,470 ·00
--._,-.-----------
.
Rs.
13,516 ·00
Rs.
15,i09 ·00
We may at this stage statt! 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 gf 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
arc 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.
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SUPREME COURT REPORTS
[1972] 2 S.C.R.
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 recommenAs 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
deaJer'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.
2,0II ·03 Rs.
2,i47 ·84 Rs.
1,906 ·31
PRICE TO THE
CONSUMER
Rs.
19,669.63 Rs.
20,946.57 Rs.
. 1~,692.24
It has not been disputed that 46% of the ex-works (ex-factory,
according to the Commission) cost payable by the consPmer 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 ont of place to notice a few observations of expert bodies ab6ut 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 ex-factory price. Thi::
car is no longer an item of luxury and under the existing conditions it is fast becoming an item of necessity.
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PREMIER AUTOMOBILES LTD. v. UNION (Grover, J.)
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 tQ 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 travelled 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, packinl! 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
SUPREME COURT REPORTS
[1972] 2 S.C.R.
supplied are concerned.
As has been rigl)tly 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 exworks 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 con,trol and incidence of expense on account of warranty
can be reduced and can be absorb~d in the return.
According
to the learned Attorney General the matter relating to inclusion
of warranty charges in the ex-works aost is no longer res.integra.
The report of the Mptor 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 uniformally valid for a period of 12 months or a distance
covered of 16,000 kms., whichever occurs earlier.
All
defects due to faulty manufactu,re of workmanship shall
be rectified and defective parts replaced during this
period without passing any part of th~ burden including
incidental 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
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PREMIER AUTOMOBILES LTD. v. UNION (Grover, J.)
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 oeen 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.