KRISHNA IYER - (1.) THE core of the contention urged by the appellants in these various appeals filed by certificate under Article 133(1)(a) and (c) of the Constitution is that the excise duty on matches sought to be levied on these medium sized manufacturers of Shivakashi wears the mask of equality but in its true face bears the marks of unequal justice violative of Article 14 of the Constitution of India.
(2.) SHRI Chitale, learned counsel for the appellants, has focused his arguments on one grievance only - and, we think, with good reason - that the discriminatory fiscal treatment of his clients is unconstitutional, the vice being treatment of dissimilar categories similarly. To compress his whole argument in a single sentence, it is that the appellants, small manufacturers of matches, have been subjected by the impugned notification to excise duty at the same onerous rate as has been applied to larger producers, wilfully indifferent to a historically well-recognised classification between the smaller and the larger group of match manufacturers, and the injury sustained flows from this failure to classify and deal differentially with sets of producers who are unequal in their economic capabilities in the matter of production and marketing - a sort of traumatic egality. In brief, equal treatment of unequal groups may spell invisible yet substantial discrimination with consequences of unconstitutionality. That dissimilar things should not be treated similarly in the name of equal justice is of Aristotelian vintage and has been, by implication, enshrined in our Constitution. The facts which unfold the case of the appellants may now be set out. The match industry in India has grown over the decades and Shivakashi occupies an important place in the production geography of matches. From the point of view of manufacturing techniques, the safety match industry in our country comprises two distinct categories - the mechanised sector occupied by a few big whales and the non-mechanised sector comprising varying sizes of production units ranging from the small fry organised on a cottage industry basis to considerable producers who have developed manufacturing and marketing muscles sufficient to compete with the power-using big four - the WIMCO, the AMCO, the ESAVI, and the Pioneer. The Tariff Commission Report on this Industry has stated : "Unlike units in the mechanised sector which have power-driven equipment for carrying out all the important operations including manufacture of splints and veneers, frame filling, dipping, box making, etc., those in categories "B" and "C" follow almost identical manufacturing process, obtaining their splints and veneers from outside suppliers and getting such important operations as box-making and frame filling done by outside domestic labour on piece-rate basis. Only such of the processes as dipping, box filling, banderolling and packing which under Excise or Explosive Act regulations cannot be entrusted to outside labour are carried out in the factory sheds of the units and the workers employed for these also are mostly paid on price-rate basis. All the operations, whether undertaken in the factory premises or passed on to outside piece-work labour to be carried out in the homes of the latter conjointly with other members of the family, are done by manual process. The same system is followed by "D" category units as well, except those sponsored by K. and V. I.C. some of which manufacture their own splints and veneers." Classified on the basis of quantity, turnout and other germane factors, a fourfold categorisation into "A" , "B", "C" and "D" was extant in the industry roughly corresponding to the techniques of production and the use of power adopted by each. The Tariff Commission explained this aspect and reported on the operation of the differential excise levy system on production and trade practices. Counsel for the appellants has rested his case of discrimination by subversive equality or rather non-discrimination where a deserving differentiation is the desideratum, on the findings of the Tariff Commission Report. We might as well give copious but relevant excerpts from it to discern the foundation of the argument. The report runs on to state: "As indicated in Appendix II, according to the excise tariff classification, units in the match industry now stand grouped into four classes, namely, 'A', 'B', 'C' and 'D' not on any technological differentiation but on the basis of output - 'A' class comprising factories whose annual output exceeds 4, 000 million match sticks, 'B' class comprising factories whose annual output exceeds 500 million match sticks but does not exceed 4,000 million match sticks, 'C' class comprising factories whose annual output exceeds 50 million match sticks but does not exceed 500 million match sticks and 'D' class comprising factories whose annual output does not exceed 50 million match sticks. According to this classification the factories belonging to WIMCO, AMCO and ESAVI fall under category "A", the rest comprising the units in the non-mechanical sector fall under the other three categories, namely, 'B', 'C' and 'D'." "Selling system : (iv) Small producers - The system of selling adopted by these manufacturers varied according to their status and financial resources. The system almost universally followed by such producers is to make outright sales, without any discount or commission to wholesalers, both out-station and local. The bigger, among such producers belonging to category 'B' are reported in some cases to sell as well through dealers and sole selling agents. Many of them have also got their own depots and regular stockists in a limited number of out-station centers. As regards 'C' and 'D' class producers, the system of sales covers the following variants according to facilities available to them; (i) outright sales to wholesale merchants, local or out-station; (ii) sales through joint schemes of depots which stock different brands from several producers; (iii) sales by sending goods in their own vans in bulk to distributors and dealers in nearby States; and (iv) sales through their own salesmen who deliver goods in local markets on the shopkeepers on bicycles (a special feature of 'D' class units). From the replies received by us from units in the small scale sector it would appear that those in category 'B' situated in the Sivakasi/Sattur/Kovilpatti area have over some years in the past established contacts and developed a fairly wide selling system enabling them to cater to the markets in distant States including West Bengal, U.P., Delhi, Gujarat and practically all the States in the South. The size of their operations has all along enabled them to undertake supply in wagon-loads at the concessional rates, which is an important consideration for developing distant markets to be served by rail transport." "Although they are not comparable to WIMCO in having a countrywide distributive organisation, these units evinced till recently all the symptoms of a steady and healthy development, some of them having reached the maximum limit (400 million sticks) of Category 'B' with a reputation for their brands in far off markets. They had the resources to support this progressive development and a few of them have represented that with an improvement of the climate of the trade which has been completely vitiated by the slab system of excise duties and given necessary facilities they would be able to re-established the markets they had assiduously built up and even initiate a scheme of gradual mechanisation of important processes in their factories for the betterment of the quality of their products. In the present context, it is worth taking note of the fact that the credit for an expanding market for matches produced in the non-mechanised sector is attributable largely to the sales endeavours of factories which had grown to be 'B' class units that had necessary resources for the purpose and were able to maintain quality." "In contrast to the 'B' class units, the selling system of those in category 'C' betokens a position of serious weakness. Except the 'C' class units which have been brought into existence by fragmentation of bigger units and still operate under the protecting wing of the sponsor, the new-comers in this class, who have no tradition, functions mostly with meager financial resources and have no comparable advantage. Unable to sell their output in wagon loads they are compelled to dispose of it to local financing-cum-trading agencies at rock bottom prices dictated by the latter for what has now come to be called consignments of "Assorted labels". This, in effect, involves a complete surrender by the 'C' class producers to the benefit of differential excise rebate allowed to them to the detriment of others as well. The low purchase prices of the goods enable such agencies to sent consignments of mixed brands to distant places in wagon-loads and find a market by offering to the wholesalers there extremely competitive rates vis-a-vis the usual rates charged by 'B' class units, the retail selling prices being the same for both. Our examination of the problem of the small scale units in category "C" indicates that basically their problem is not different from other small industries suffering similar exploitation by middlemen. As in other cases they can best be extricated from the grip of the middleman by the establishment of suitable sales co-operatives. We draw the attention of the State Governments to this problem for initiating necessary measures for the purpose particularly of the Government of Madras, as the concentration of such units is in that State, where the problem presents itself in the most acute form, but offers favourable prospects for the establishment of several full-fledged sales co-operatives with adequate member-ship. "There is sufficient, evidence to indicate that the effects have been quite widespread and recourse has been taken to fragmentation on a fairly extensive scale." "The Sivakasi Chamber has stated as follows : "In the face of such unhealthy competition from 'C' factories and the disadvantages over 'A', the 'B' is unable to market its production resulting in heavy accumulation of stocks. It is now felt by 'B' class factories that there is no other salvation for them except to convert 'B' into 'C' class factories in benami names, as few have since done. It may be pointed out that 16 long established 'B' factories have reduced themselves to 'C' class with effect from 1/04/1963 in this Division alone in addition to the numerous factories who have already converted from 'B' to 'C' as regards similar fragmentation of the larger units in category 'C' almost identical views have been expressed by the Tirunelevely Match Association, representing 150 'C' class match factories, in the following words : "In view of the vast difference of excise duty between 1st and 3rd slab of excise duty in 'C' class there is a tendency and practice among the manufacturers to work in the first slab only and to stop therewith. In this way starting of small new units with the motive to enjoy rebate in the first slab of excise duty has become common and this has clearly resulted in loss of revenue, as well as working of units in less than the permitted capacity." It has been brought to our notice that the situation has deteriorated to such an extent as a result of the slab system that some erstwhile 'B' units have suspended their manufacturing activities altogether and instead found it more profitable to patronage a number of newly established 'C' class units. Their taking over the products of the latter in their new role as a trading-cum-financing agency has been facilitated by their established market connection and resourcefulness. Instances of 'B' category units owned by individual proprietors downgrading themselves into category 'C' and having a number of 'C' class units set up in the name of near relations have also been noticed by us in the course of our visits to factories in the Sivakasi/Sattur/Kovilpatti area. The allegations about extensive fragmentation were not denied by anybody at the public inquiry." "The volume of evidence, both direct and indirect, that we have received in this connection fully testified to the fact that large scale fragmentation of 'B' and 'C' class units has taken place directly as a result of the slab system - all motivated by the attraction offered by the large duty differential of 65 np for the lowest slab rate under category 'C'." "From the evidence received by us 'B' and 'C' class units have to offer their match boxes generally at a discount of Rs. 2 to Rs. 3 per bundle of 5 gross boxes i.e. at about 40 to 60 np. per gross less than the price charged by WIMCO. While the quality of matches produced by 'B' class manufacturers has the reputation of being generally good and comparable to WIMCO's matches, the 'C' class units do not have such reputation in the market. The 'C' class manufacturers are handicapped by a further disadvantage on account of the lower scale of their production, inasmuch as they cannot usually offer a wagon-load of matches at a time for despatch to the upcountry markets for sale and have generally to bear the Central Sales Tax. After carefully considering all aspects of the case including estimate of costs of the manufacturers, we are of opinion that a differential of 20 np. in the rates of excise duty per gross of match boxes between 'A' and 'B' class units and a differential of 30 np. between 'B' and 'C' class manufacturers would be quite adequate to safeguard their respective interests. On similar consideration a differential of 35 np. between 'C' and 'D' class units would also be justified. For reasons stated in paragraph 11 and as stressed therein we are definitely against continuance of the slabs introduced in classes 'A', 'B' and 'C' carrying differential rates of excise duty which have entailed serious repercussions on the entire industry. We, therefore, recommend the following scales of excise duty to be levied for the four classes respectively: JUDGEMENT_428_4_1974Html1.htm
(3.) THE Tariff Commission recommended, the abolition of sub-classification for the purpose of excise duty and suggested separate scales of excise duty to be levied for the four classes of units, namely, 'A', 'B', 'C' and 'D'. Based on these recommendations, the slab system of excise duty was abandoned by Government and the category wise rate was adopted. The impact on production of the differential duty scheme was a process of splintering of the 'B' group to inhale the advantages offered to the 'C' group resulting in a reduction in total production, thanks to the thinning tendency in the 'B' group. Indeed, the fiscal misdirections, the showing concessional rates to the 'C' category as against 'B' category, generated pseudo - 'C' category producers from out of the erstwhile 'B' category so that the bona fide small scale manufacturers falling in the 'C' category were flooded out. Moreover, the genuine 'C' category manufacturers were exploited by the middlemen who snapped up the margin of tax concession for themselves, defeating the object of the concessional duty for the small producer. This dilemma induced government to revise its fiscal thinking and led to the impugned notification which withdrew the tax concession to the 'C' category and equated it with the 'B' category. Section 3 of the Central Excises and Salt Act 1944 empowers the levy and collection of duties on goods produced or manufactured in the State, the rate being set forth in the first Schedule to the Act. Item 38 in the first schedule relates to matches, Section 37 contains the rule-making power and Section 37(1) confers power on the Central Government by rules to exempt any goods from the whole or any part of the duty imposed by the Act. Under this power the Central Government issued a notification adopting a "classification" approach for extending concessional rates. Originally, a broad classification was made as between matches manufactured by use of machinery and those by other means. Among the second category a sub-classification was made as 'B', 'C' and 'D' for the purposes of concessional rates. In 1966, a uniform levy of Rs. 4.15 per gross of match boxes was made doing away with 'B' to 'D' classes. In 1967 this position was revised by notification No. 162 of 1967 which is challenged before us. It reads: "In exercise of the powers conferred by sub-rule (1) of R. 6 of the Central Excise Rules, 1955, and in supersession of the notification of the Government of India in the Ministry of Finance (Department of Revenue and Insurance) No. 115/67 Central Excise, dated the 8/06/1967 the Central Government hereby exempts matches specified in column (2) of the Table below, falling "under Item No. 38 of the First Schedule to the Central Excises and Salt Act, 1944 (1 of 1944) and cleared by an manufacturer for home consumption, from so much of the duty of excise leviable thereon as is in excess of the rate specified in the corresponding entry in column (3) of the said table : JUDGEMENT_428_4_1974Html2.htm Provided that - (1) Matches referred to in category 2 and cleared for home consumption during the financial year from a factory from which the total clearance of matches during that year is not, as per declaration made by the manufacturer under this notification, estimated to exceed 75 million matches, shall be allowed to be cleared at the rate of Rs. 3-75 per gross of boxes 50 matches each, up to 75 million matches and the quantity of matches, if any, cleared in excess, and up to 100 million matches shall be allowed to be cleared at the rate of Rs. 4.30 per gross of boxes of 50 matches each; and if the clearance in such factory exceeds 100 million matches during the financial year, the manufacturer shall be required to pay at the rate of Rs. 4.30 per gross of boxes of 50 matches each, on the entire quantity cleared during the financial year...." ;