Background:

In Shalimar Chemical Works Ltd., a manufacturer of aromatic oils such as citronella oil, sourced agricultural produce (like citronella grass) from various places, including outside the regulated market areas. The company did not sell or purchase raw agricultural produce in any notified market area but processed it at its manufacturing facility into finished products. Despite this, the Agricultural Market Committee demanded market fees under the state Agricultural Produce Marketing (Regulation) Act, claiming that the use of agricultural produce even for processing made the company liable to pay. Shalimar challenged this demand, arguing that it was neither engaged in direct marketing activities in a notified area nor had availed any services from the Market Committee. The matter reached the Supreme Court, which had to decide whether such a manufacturer could be legally compelled to pay market fees despite no transaction of agricultural produce taking place in a regulated market.

Issues:

Whether a manufacturer be liable to pay market fees on processed agricultural products when they are not engaged in direct sale/purchase of raw agricultural produce in the market area?

Observations:

The Court made the following observations:

• • The Court held that market fees can only be levied if the sale or purchase of agricultural produce takes place within a notified market area.
• • Merely using agricultural produce as a raw material for manufacturing or processing does not constitute a market transaction under the APMC Act.
• • A fee can only be charged when the Market Committee renders a service in relation to the transaction; in this case, no service was provided.
• • The Court reiterated that a fee must be compensatory and linked to a service; otherwise, it becomes a tax in disguise, which is not permitted under the APMC Act.
• • Transactions or processes done outside the notified area do not fall under the purview of the market committee’s regulatory powers.

Decision:

The Supreme Court ruled in favour of Shalimar Chemical Works Ltd. The Court held that:

• • No market fee was payable by the manufacturer as the transactions did not occur within the regulated market.
• • The Court also held that the products were not direct sales of agricultural produce.

Why this case matters?

This case is a landmark judgment in Indian legal jurisprudence as the Supreme Court, in this case, clearly defined the limits of the powers of Agricultural Produce Market Committees (APMCs), holding that market fees cannot be levied unless there is an actual transaction of agricultural produce within a notified market area. It drew a critical distinction between manufacturing or processing activities and market transactions, thereby protecting manufacturers from arbitrary fee impositions. The Court also reinforced the constitutional principle that a fee must be linked to a service rendered, not function as an indirect tax.