THE STATE OF JHARKHAND & ORS. versus M/S AJANTA BOTTLERS & BLENDERS PVT. LTD. on 2 July 2019

[2019] 8 S.C.R. 1071

THE STATE OF JHARKHAND & ORS.

v.

M/S AJANTA BOTTLERS & BLENDERS PVT. LTD.

(Civil Appeal No. 5138 of 2019)

JULY 02, 2019

[A. M. KHANWILKAR AND AJAY RASTOGI, JJ.]

Jharkhand Excise Act, 1915 – s.90 – Revenue Boardnotification dated 06.11.2012 – r.106 (Tha) – Levy of import fee onrectified spirit – The Board of Revenue in exercise of power conferredu/s.90 of the Act inserted the Rule 106 (Tha) and levied fee on theimport of rectified spirit by notification dated 06.11.2012 – WritPetition – High Court held that the State had no legislativecompetence to levy tax/fee on the import of rectified spirit, as it is anon-potable liquor i.e. alcohol not fit for human consumption –Appellant-State contended that import fee was not on rectified spiritin its raw form as such, but on pure alcoholic liter ‘LPL’ in the formof potable liquor – On appeal, held: On perusal of the impugnedprovision as a whole, it follows that the substance of the provisionis to levy charges on the product Indian Made Foreign Liquor (IMFL)produced or manufactured by use of imported rectified spirit – Inthat sense, the levy is not on the input (imported rectified spirit) ofthe final product as such but is on the manufactured or producedproduct being potable alcohol palatable to human consumption –For the purposes of computing the levy, the yardstick of Rs.6 LPLon the total quantity of imported rectified spirit utilized for productionof IMFL is reckoned – Thus, the impost is not on the importedrectified spirit as such but only on the produced foreign liquor beforeit is bottled for sale in the wholesale or retail market, as the casemay be – It is a case of legislation in respect of potable alcohol, theState is competent to legislate in that regard and levy charges-be itfor regulating the same or impost for parting with its rights regardingmanufacture, storage, export, sale and possession thereof.

Jharkhand Excise Act, 1915 – s.90 – Revenue Boardnotification dated 06.11.2012 – r.106 (Tha) – Nature of tax or exciseduty – The Board of Revenue u/s.90 of the Act chose to levy fee on

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Athe import of rectified spirit by notification dated 06.11.2012 –Appellant-State contended that the levy of charges or impost isneither in the nature of a tax nor excise duty – Held: There is meritin the contention of appellant-State that the impost is neither in thenature of a tax nor excise duty but it is towards the charges bywhatever name, for regulating the production of potable liquor toBpreserve public health and morality including for parting with itsrights or privileges regarding manufacture, supply or sale of potableliquor or intoxicating liquor and to regulate the use of importedrectified spirit for production and sale of potable liquor – In such acase, the State need bear no quid pro quo to the services rendered to Cthe licencee for production of foreign liquor (IMFA).

Allowing the appeal, the Court

Conclusion

HELD : 1. The Rule 106 (Tha) noted in the notificationdated 06.11.2012, makes it amply clear that the levy or impostfructifies only upon completion of distillation process (in twoDstages-first from rectified spirit to Extra Neutral Alcohol (ENA)and then from ENA to Indian Made Foreign Liquor (IMFL)) andin particular converting into a final product “IMFL”. Thecollection of impost is, however, deferred until the bottling ofthat product. In other words, the levy is not at the stage of importEof rectified spirit within the State; nor at the stage of initialdistillation thereof to ENA and not until the product IMFL isready for bottling as such. Thus, the levy under the impugnedrule ripens or fructifies only after the original raw material(imported rectified spirit) has undergone distillation process attwo different stages and transmute and mutate into an intoxicantFor potable alcohol palatable to human consumption, but its(impost) collection is effected just before bottling it in that form(potable liquor). Indeed, the levy predicated in this rule is on thetotal quantity of imported rectified spirit utilised for mutating itin the form of IMFL, a new produce. The last part of the ruleGstipulates the quantum of charges to be levied on such utilizedimported rectified spirit for production of the foreign liquor. Forthat limited purpose, the quantity of imported rectified spiritutilized in the production of potable liquor, is reckoned.[Para 10] [1086-D-H; 1087-A]

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2. Reading the impugned provision as a whole and line byline or word by word in this perspective, it must follow that thesubstance of the provision is to levy charges on the product IMFLproduced or manufactured by use of imported rectified spirit. Inthat sense, the levy is not on the input (imported rectified spirit)of the final product as such but is on the manufactured or producedproduct being potable alcohol palatable to human consumption.For the purposes of computing the levy, the yardstick of Rs.6per LPL on the total quantity of imported rectified spirit utilizedfor production of IMFL is reckoned. Thus, the impost is not onthe imported rectified spirit as such but only on the producedforeign liquor before it is bottled for sale in the wholesale orretail market, as the case may be. If so understood, the wholeedifice of the argument of respondents regarding theinterpretation of the impugned rule must collapse. For, thechallenge to the impugned rule is on the assumption that it permitsthe competent authority to levy charges on the imported rectifiedspirit and not fit for human consumption but which has the potencyof being used for producing intoxicants or potable liquor thoughexclusively meant for industrial purposes. Once that assumptionis discounted or disregarded, nothing more survives forconsideration. This Court says so because, it is well establishedthat the State may pass any legislation in the nature of prohibitionof potable liquor referable to Entry 6 and 8 of List II and may alsolaydown regulations to ensure that non-potable alcohol is notdiverted and misused as a substitute for potable alcohol. Had itbeen the case of levy on non-potable alcohol (imported rectifiedspirit) per se, only then the question about the competency of theState Legislature or the justness of the levy on the doctrine ofquid pro quo may become relevant. However, if it is a case oflegislation in respect of potable alcohol, as has been noted bythis Court hitherto, the State would be competent to legislate inthat regard and levy charges – be it for regulating the same orimpost for parting with its rights regarding manufacture, storage,export, sale and possession thereof. [Para 11] [1087-B-G]

3. The next question is whether the levy is in the nature oftax or excise duty. If it is a case of excise duty on potable liquor AB

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[2019] 8 S.C.R.

Aproduced by use of imported rectified spirit, the State hasjurisdiction to legislate in respect of duty on the production ormanufacture of such goods produced or manufactured within theState. In the present case, there is merit in the submissions ofthe appellant State that the impost is neither in the nature of atax nor excise duty but it is towards the charges by whateverBname, for regulating the production of potable liquor to preservepublic health and morality including for parting with its rights orprivileges regarding manufacture, supply or sale of potable liquoror intoxicating liquor and to regulate the use of imported rectifiedspirit for production and sale of potable liquor. In such a case,Cthe State need bear no quid pro quo to the services rendered tothe licencee for production of foreign liquor (IMFA). [Para 14][1092-F-G; 1093-A]

4. The fact that the manufacturer-respondent has alreadyobtained requisite licences for import of rectified spirit andDproduction of foreign liquor (IMFA) on payment of fixed ratesdoes not mean that the State has surrendered all facets of itsrights in respect of every form of activity in relation to potableliquor – its manufacture, storage, export, import, sale andpossession. The amended provision is an enabling provisionauthorising the State to levy charges or impost for ceding its oneEor more of the activity in respect of foreign liquor (IMFL)produced by use of imported rectified spirit. Such impost can bein addition to the general power of the State to issue licence onpayment of fees for production and sale of potable liquor. Asobserved in Har Shankar case, the State need bear no quid proFquo to the services rendered to the licensees of producer offoreign liquor. [Para 15] [1093-B-D]

Har Shankar and Ors. v. The Dy. Excise and TaxationCommissioner and Ors. (1975) 1 SCC 737 : [1975] 3SCR 254 – followed.

GDeccan Sugar & Abkari Co. Ltd. v. Commissioner ofExcise, A.P. (2004) 1 SCC 243 – relied on.

State of U.P. & Ors. v. Vam Organic Chemicals Ltd. andOrs. (2004) 1 SCC 225 : [2003] 4 Suppl. SCR 957 ;Synthetics and Chemicals Ltd. and Ors. v. State of U.P.

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and Ors. (1990) 1 SCC 109 : [1989] 1 Suppl. SCR 623 – referred to.

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Case Law Reference

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CIVIL APPELLATE JURISDICTION : Civil Appeal No. 5138of 2019.

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From the Judgment and Order dated 25.07.2013 of the High Courtof Jharkhand in Writ Petition (T) No. 7499 of 2012.

Tapesh Kumar Singh, Kumar Anurag Singh, Aditya Pratap Singh,Advs. for the Appellants.

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Rakesh Dwivedi, Sr. Adv., Satyabir Bharti, Arun K. Sinha, RakeshSingh, Sansriti Pathak, Eklavya Dwivedi, Siddharth Iyer, Advs. for theRespondent.

The Judgment of the Court was delivered by

A. M. KHANWILKAR, J. 1. Leave granted.

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2. This appeal takes exception to the impugned judgment and orderof the High Court of Jharkhand at Ranchi in Writ Petition (T) No.7499of 2012 dated 25[th] July, 2013, whereby the writ petition filed by therespondent to assail the notification dated 6[th] November, 2012, as publishedin the official gazette on 10[th] November, 2012, issued by the Board ofFRevenue, Jharkhand in exercise of powers conferred under Section 90of the Jharkhand Excise Act, 1915 came to be allowed on the groundthat the State had no legislative competence to levy tax/fee on the importof rectified spirit, as it is a non-potable liquor i.e. alcohol not fit for humanconsumption. Additionally, the High Court opined that the appellant-Statehad failed to justify the impugned levy on rectified spirit on the basis ofGservices provided by the State in lieu thereof or being in the nature ofquid pro quo. The original notification is in Hindi, the same reads thus:

la[;k&1@uhfr&40&21@2012&926@jk0i0&>kj[k.M

la[;k&1@uhfr&40&21@2012&926@jk0i0&>kj[k.M

mRikn vf/kfu;e 1915 ¼vf/fu;e&2] 1915½ dh /kkjk&90 }kjk iznRr“kfDr;ksa dk iz;ksx djrs gq,] jktLo i’kZn] >kj[k.M] i’kZn vf/klwpukla[;k&23&137&2] fnukad 29 vizSy] 1919 ds vUrxZr cukbZ xbZ fu;ekoyhfu;e&106 ¼V½ ds ckn ,d u;k fu;e&106 ¼B½ fuEu izdkj tksM+rh gS%&

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fu;e&106 ¼B½ %&^^vf/klwpuk la[;k&470 ,Q- fnukad 15tuojh] 1915 ds dafMdk&3 ds “kh’kZ ^fons”kh “kjkc^ dk mi “kh’kZ ¼d½ dsvUrxZr mn~?kksf’kr fons”kh “kjkc ftldk fofuekZ.k mRikn vf/kfu;e dh/kkjk&2 ¼15½ (iii) ds vuq:i fd;k tk,xk ds mRiknu gsrq vk;kfrrlq’ko@la”kksf/kr lq’ko] ftldk mi;ksx loZizFke iqujklou fof/k ls bZ-,u-,- ds fofuekZ.k esa fd;k tk,xk] ds fons”kh efnjk esa is; iz;kstukFkZifjorZu ds le; ijUrq efnjk ds cksrycanh ds iwoZ] bl mn~ns”; ls vk;krdh x;h lq’ko@la”kksf/kr lq’ko dh dqy ek=k ij 6@& : izfr ,y-ih-yhVj dh nj ls vk;kr “kqYd tek fd;k tk,xkA**

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;g vf/klwpuk jktdh; xtV esa izdk”ku dh frfFk ls izHkkoh gksXkkAla[;k&1@uhfr&40&21@2012&927@jk-i-&>kj[k.M mRiknvf/kfu;e] 1915 ¼vf/kfu;e&2] 1915½ dh /kkjk&90 }kjk iznRr “kfDr;ksa

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dk iz;ksx djrs gq,] jktLo i’kZn] >kj[k.M] i’kZnh; vf/klwpukla[;k&23&137&2] fnukad 29 vizSy] 1919 ds vUrxZr cukbZ xbZ fu;ekoyhfu;e&106 ¼B½ ds ckn ,d u;k fu;e&106 ¼M½ fuEu izdkj tksM+rh gS%&

fu;e&106¼M½ %& ^>kj[k.M jkT; esa ns”kh efnjk@elkysnkjns”kh efnjk ds is; iz;kstukFkZ mRiknu ds mn~ns”; ls] vk;kfrr lq”ko@la”kksf/kr lq’ko ds ns”kh efnjk ,oa elkysnkj ns”kh efnjk esa ifjorZu dsle; ijUrq efnjk ds cksrycanh vFkok lSpsfVax iwoZ] of.kZr mn~ns”; ls]vk;kr dh xbZ lq’ko@la”kksf/kr lq’ko dh dqy ek=k ij 0-25 :- ¼iPphliSlk½ izfr cYd yhVj dh nj ls vk;kr “kqYd tek fd;k tk,xkA**

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;g vf/klwpuk jktdh; xtV esa izdk”ku dh frfFk ls izHkkoh gksxkAla[;k&1@uhfr&40&21@2012&928@jk-i-&>kj[k.M mRiknvf/kfu;e] 1915 ¼vf/kfu;e&2] 1915½ dh /kkjk&90 }kjk iznRr “kfDr;ksadk iz;ksx djrs gq,] jktLo i’kZn] >kj[k.M] i’kZnh; vf/klwpukla[;k&23&137&2] fnukad 29 vizSy] 1919 ds }kjk cukbZ xbZ fu;ekoyhds vUrxZr vf/klwfpr vf/klwpuk la[;k&1@uhfr&10&33@ 2008&583]fnukad 15 ebZ] 2008 }kjk cuk;s x;s fu;e&106¼t½ esa fuEu izdkjla”kks/ku djrh gS%&

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fu;e&106¼t½ %& ^^>kj[k.M jkT; ds ckgj fdlh Hkh LFkku@{ks= lslq’ko@la”kksf/kr lq’ko@bZ-,u-,- dk] is; iz;kstukFkZ vk;kr fd;s tkusij] vk;kr dh tkusokyh ek=k ij 0-25 :- ¼iPphl iSlk½ izfr cYdyhVj dh nj ls ikjd “kqYd ¼ijfeV Qh½ >kj[k.M jkT; esa ns; gksxkA**

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;g vf/klwpuk jktdh; xtV esa izdk”ku dh frfFk ls izHkkoh gksxkA

jktLo i’kZn] >kj[k.M ds vkns”kkuqlkj]G¼g-@&½ vLi’V]mi lfpo]jktLo i’kZn] >kj[k.M] jkaphA**

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AFree translation thereof has been filed by the appellant as annexureP-2. However, during the hearing as some doubt was raised about theaccuracy of annexure P-2, we thought it appropriate to get the document(original in Hindi) translated from the official translator of this Court.That translated version, reads thus:

B“Translated version of Gazette by the Official Translator of theSupreme Court.ANNEXURE -3

No.1/ Policy-40-21/2012-928/ Ra. Pa.- In exercise of the powerconferred by section 90 of Jharkhand Excise Act 1915 (Act-2 1915), theERevenue Board, Jharkhand makes the following addition of new rule inRule 106 (Tha) after Rules Rule 106 (Ta) in Notification No. 23-137-2dated 29[th] April 1919.

Rule 106 (Tha): Foreign Liquor under sub-head (d) of head ‘ForeignLiquor’ in Para-3 of Notification No. 470 F. dated 15 January 1919,Fwhich manufacturing shall be done in accordance with section-2 (15)(iii)of Excise Act, for its manufacturing, the imported spirit/ rectified spirit,which shall be first used for manufacturing of E.N.A. through repeateddistillation, for foreign liquor beverage (at the time of conversion), butbefore bottling of liquor, for this purpose Import fee shall be deposited atthe rate of Rs. 6/- per L.P. liter on the total quantity of imported spirit/Grectified spirit.”

This notification shall come into force on the date of its publicationin the official gazette.

No.1/Policy-40-21/2012-927/Ra.Pa.- In exercise of the powerconferred by Section 90 of Jharkhand Excise Act, 1915 (Act 2, 1915),H

Board of Revenue, Jharkhand makes the addition of new Rule – 106(Da)after Rule 106(Tha) of the Rules prepared under Board NotificationNo.23-137-2 dated 29[th] April, 1919

Rule 106(Da):- With the purpose of manufacturing of country liquor/spiced country liquor beverage in the State of Jharkhand, at the time ofconversion in imported alcohol/rectified country spirit and spiced countryliquor, but before bottling and storage of liquor, with the described purpose,the import fee shall be deposited at the rate of Re.0.25 (Twenty FivePaise) per Bulk Litre on the total amount of imported spirit/rectifiedspirit.

This notification shall come into force on the date of its publicationin the Official Gazette.

No.1/Policy-40-21/2012-928/Ra.Pa. – In Exercise of the powerconferred by Section 90 of Jharkhand Excise Act, 1915 (Act 2, 1915),the Board of Revenue, Jharkhand, makes amendment in the Rule 106(Ja) made vide notified notification No.1/Policy-10-32/2008-583, dated15[th] May 2008 in the Rules made vide Board Notification No.23-137-2dated 29 April 1919:- Rule 106(Ja) :- On the import of spirit/rectified spirit/ENA beveragefrom any place/area outside the state of Jharkhand, the permit fee at therate of Re.0.25 (Twenty Five Paisa) per Bulk Litre will be payable onthe imported quantity in the State of Jharkhand.

This notification shall come into force on the date of its publicationin the official gazette.

By the order of Board of Revenue, Jharkhand Sd/-illegibleDeputy Secretary,”

3. As aforesaid, the High Court accepted the challenge to theabove-mentioned notification for the reasons noted hitherto. The relevantdiscussion in the impugned judgment in that behalf, reads thus:

“13. The State under List-II is empowered to levy fee under Entry66 in respect of any of the matters in the list but not including feestaken in any Court. Entry 66 read with entry 8 of List II thereforeprovides competence to the State to levy fee in respect ofintoxicating liquor i.e. alcoholic liquor fit for human consumptioni.e. to say on the production, manufacture, possession, transport,

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purchase and sale of intoxicating liquor. The present levy seeksto levy fee on the import of rectified spirit to be utilized forthe purpose of, firstly for manufacture of ENA through re-distillation process and then for manufacture of IMFL.Rectified spirit is not fit for human consumption and it thereforedoes not come within the meaning of intoxicating liquor as containedin Entry 8 of List II. Levy on the import of rectified spirit is not afee on intoxicating liquor i.e. fit for human consumption. By theimpugned notification, the Board of Revenue in exerciseof power conferred under section 90 of the Excise Act, 1915has chosen to levy fee on the import of rectified spirit whichis used for manufacture of ENA through re-distillationprocess and then for the purpose of manufacture of IMFLat the time before bottling @ Rs. 6.00 per LP Litre. Industrialalcohol/non-potable spirit i.e. rectified spirit being not alcoholicliquor fit for human consumption, cannot be the subject matter ofany regulation or control by the State under Entry 8, 51 and 66 ofList II of Seventh Schedule of the Constitution. The State hasthe power to levy fees under the garb of grant of privilegefrom those who deal in liquor or alcohol fit for humanconsumption i.e. potable liquor as distinct from non-potableliquor or alcoholic liquor unfit for human consumption.

Under Entry 51 of List-II, State has been empowered to levyexcise duty on alcoholic liquor fit for human consumptionmanufactured or produced in the State and countervailing duty atthe same rate or lower rates on similar goods manufactured orproduced elsewhere in India. Even under the instant Entry, therectified spirit which is non potable liquor, does not come withinthe meaning of alcoholic liquor fit for human consumption on whichthe State can levy excise duty under Entry 51 of List-II. Thelevy of import fees on rectified spirit therefore by the StateLegislature before bottling of IMFL by shifting the eventof taxation, cannot be held to be justified as in pith andsubstance, the levy is on import of rectified spirit i.e. non-potable liquor i.e. alcohol not fit for human consumption.Levy of fee on non-potable liquor i.e. unfit for human consumptionor industrial alcohol is permissible under Entry 52 of List-I ofSeventh Schedule of the Constitution. Under Entry 84 of List-I, excise duty on tobacco and other goods manufactured or producedin India can be levied except on alcoholic liquor for humanconsumption; opium, Indian hemp and other narcotic drugs andnarcotics. In the wake of such clear demarcation of legislativefields between Union and State Legislature, the impugnednotification levying import fees on rectified spirit i.e. non potableliquor or alcoholic liquor unfit for human consumption by applyingthe rule of pith and substance, 18 cannot come within the legislativecompetence of the State Legislature. The impugned levytherefore is beyond the legislative competence of the StateLegislature and consequentially also beyond the rulemaking power of the Board of Revenue.”

And again…………….

“16. The respondent State sought to justify the levy as a regulatorymeasure for supervision and control of potable liquor to protectpublic health and morality. However, there are no materialsbrought on record by the respondent State to justify thatany services in lieu thereof are provided in the nature ofquid pro quo to justify the imposition of such a levy. Thepetitioner is already having various licences granted by the ExciseDepartment, Government of Jharkhand in Form- 19, 19(B), 20,25 and 28(A) prescribed by the Board of Revenue and is payingthe licence fee for grant of such licences. Under Form-19 a licencefor compounding and blending of foreign liquor is given. In Form-19(B), petitioner has been granted licence for the manufacture offoreign liquor / beer as also for the sale of foreign liquor / beerthrough licencee distributors as also to import or transport thesame under bond. The petitioner has a licence for bottling of potableforeign liquor under Form-20 for which it pays fees in advance ofRs. 50,000/- for the year. In Form-25 it has been granted licenceto manufacture denatured spirit at its distillery / warehouse. Thepetitioner also has a licence under Form-28(A) to manufacturespirit in distillery not used in the manufacture of potable liquor forwhich it also pays a licence fees. It is the contention of the petitionerthat it is paying establishment charges on the posting of exciseofficial at its premises. Therefore, the respondent State have

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not been able to justify the impugned levy on rectified spiriton the basis of services provided in lieu thereof. Besidesthis, the petitioner has been paying licence fee for issuanceof licence under different forms in the nature of a regulatoryfee. The impugned levy therefore, is not justifiable on thisaccount as well.

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17. In these circumstances, levy of import fee on rectified spiritwhich is impermissible for the State Legislature, also has the effectof impeding the inter-State trade and commerce as guaranteedunder Article 301 of the Constitution of India. At the same time, itis within the exclusive legislative competence of Parliament tolevy any duty or tax on rectified spirit i.e. industrial alcohol. Suchaction therefore, is in teeth of the Article 301 of the Constitutionof India.

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18. In view of the aforesaid reasons and discussions and in viewof the settled law laid down by the judgments of the Hon’bleSupreme Court referred to herein above, the notification dated10th November 2012 issued by the Board of Revenue, Jharkhandin exercise of powers conferred under section 90 of the JharkhandExcise Act, 1915, cannot be sustained in law and it is accordinglyquashed. Consequentially, the demand raised vide notice dated24th November 2012 (Annexure-4) for deposit of import fees onrectified spirit, is also quashed. Petitioner shall be entitled to refundof any such import fees deposited under the impugned notification.

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Writ petition is accordingly allowed.”

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The correctness of the view so taken by the High Court is thesubject matter of challenge in this appeal, at the instance of the State. Indefending the notification before the High Court, the appellant-State hadasserted that the rule inserted by the subject notification being Rule 106(Tha), is an impost and is merely described as an import fee. Because, itGis reckoned on the basis of quantity of pure alcohol content of rectifiedspirit (which is known as “London Proof Liter”), imported for the purposesof manufacture of potable Foreign Liquor after the process ofcompounding, blending and reduction of strength of spirit from over proofstrength to under proof strength is complete. Further, the unit for chargingimport fee is London Proof Liter (for short, “LPL”) because, it does not H

change even after the spirit has undergone through the process ofcompounding, blending & reduction of strength. Indisputably, nothingcan be nor will be charged in advance, so long as the imported rectifiedspirit is non-potable and till it is in the form of raw material. In otherwords, nothing is charged on industrial alcohol. Thus, it is neither a violationof provisions of the Constitution nor is it an arbitrary use of power underSection 90(7) by the Board of Revenue who was competent to issue thesame towards levy of any kind of fee on potable liquor. In substance, thestand of the appellant-State is that the stated import fee is not on rectifiedspirit in its raw form as such, but on pure alcoholic liter “LPL” in theform of potable liquor. Further, it is a regulatory fee only for supervisionand control of production of potable liquor to protect public health andmorality. It was further asserted that no right inheres in any person fordoing business in intoxicants. That right exclusively belongs to the State.Resultantly, it is open to the State to part with those rights for aconsideration on conditions as may be deemed appropriate. There is noneed for the State to establish commensurate services rendered by it toapply the doctrine of quid pro quo, in respect of impost of any kind offee on potable liquors.

4. The High Court, however, was not impressed by the stand takenby the State and proceeded to answer the matters in issue against theState for reasons afore-quoted, in the extracted portion of the impugnedjudgment.

5. The appellant-State has approached this Court to assail theview so taken by the High Court. More or less, the State has reiteratedits stand as was taken before the High Court. In that, the charge interms of the impugned Rule 106(Tha) to the licensees was neither in thenature of a tax nor excise duty. The impost is a normal incidence of atrading or business transaction in respect of the rights exclusively inheringin the State - with regard to production and manufacture of intoxicatingliquor covered by Entry 8 of list II of the Seventh Schedule of theConstitution of India. The levy is, essentially, to regulate and ensure thatthe imported rectified spirit is not diverted and misused as a substitutefor potable alcohol. It is open to the State to deal in intoxicants itsmanufacture, possession, sale, transport, import, export, consumption onpremises of hotel and restaurants etc. Further, the State has exclusiverights and privileges of manufacturing and selling liquor. It is urged thatthe approach of the High Court is completely wrong and against thesettled legal position.

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A6. Per contra, the respondents have supported the conclusionsreached by the High Court and would contend that a close reading ofRule 106(Tha) clearly indicates that it purports to levy “import fee” onimported rectified spirit, used for production of Indian Made ForeignLiquor (for short, “IMFL”) manufactured in the respondent factoryunder a valid licence for import and also to manufacture of the productB(IMFL). It is urged that the provision regarding collection of the feeafter the rectified spirit has been used to first produce ENA and thenpotable liquor, would not alter the character of the levy being impost onthe imported rectified spirit. The State is not competent to legislate onimported industrial liquor or levy any charge or tax thereon as such. TheCpostponement of realization of charges predicated in the impugned rulewould not alter the efficacy of the rule, providing for levy of import feeon rectified spirit. Relying on the decisions of this Court it was urgedthat rectified spirit is highly intoxicating and cannot be consumed byhumans. It is industrial alcohol on which the State is not competent tolegislate or levy taxes in the garb of duty or fee. The imported rectifiedDspirit, in that form, would not attract excise duty. That can primarily beimposed on the happening of production or manufacture of goodsproduced or manufactured within the State. It is then urged that therespondent is engaged in production of “IMFL” for which it has obtainedall essential licences prescribed by the Board of Revenue on payment ofElicensing fees for grant of such licenses such as “Form 19” forcompounding and blending of foreign liquor, Form19-B for manufactureof foreign liquor/beer as also for the sale of foreign liquor/beer throughlicensee distributors as also to import or transport the same, Form 20 forbottling of potable foreign liquor, Form 25 for manufacture denaturedspirit at its distillery/ warehouse, Form 28(A) for manufacture of spirit inFdistillery not used in the manufacture of potable liquor. In that view ofthe matter, it is not open to the State to levy impugned charges in thegarb of import duty, or excise duty, as the case may be, on the importedrectified spirit, for production of “IMFL”. The respondent prays that theappeal be dismissed being devoid of merits and the decision of the HighGCourt be affirmed.

7. We have heard learned counsel for the parties. Additionally,they have filed written submissions.

8. The seminal issue to be answered in this appeal is about thepurport of the notification dated 6[th] November, 2010 as published on 10[th]H

November, 2012 and whether it is in the nature of legislation by the Stateon the subject of industrial alcohol. Alcohol can generally be classifiedinto the following categories:

“I. Isopropyl alcohol (or IPA or isopropanol) is acompound with the chemical formula CH3CHOHCH3.It is a colourless, flammable chemical compound with astrong odour. As an isopropyl group linked to a hydroxylgroup, it is the simplest example of a secondary alcohol,where the alcohol carbon atom is attached to two othercarbon atoms. If consumed, Isopropanol is convertedinto acetone in the liver, which makes it extremely toxic.Often used for disinfecting skin an antiseptic.

II. Methyl Alcohol (or Methanol): Chemical Formula –CH3OH: Not for human consumption. If consumed,can cause blindness and death. Methanol acquired thename wood alcohol because it was once producedchiefly by the destructive distillation of wood. Today,methanol is mainly produced industrially byhydrogenation of carbon monoxide.

III. Ethyl alcohol, (also known as Ethanol and abbreviatedas EtOH), is a colourless, volatile, and flammable liquidthat is soluable in water. Its chemical formula is C2H6O,or can be written as CHOH or CHCHOH. It has2532one methyl (-CH3) group, one methylene (-CH2-) group,and one hydroxyl (-OH[-]) group.”

The first two categories are poisonous, toxic and fatal for humanconsumption, rendering its use only for industrial purposes. It is statedthat Isopropanol and methanol, because of their inherent chemicalproperties, cannot be purified and used for the production of ‘intoxicatingliquor’ or ‘potable liquor’ by adopting ‘physical means’ like decantation,filtration, redistillation, fractional distillation etc. The third category namely,Ethyl Alcohol or Ethanol (in India is usually produced from molassesderived from sugarcane) in its concentrated form and it is also known as“Rectified Spirit” and its strength measured in LPL signifies the strengthof alcohol by volume, 13 parts of which weigh exactly equal to 12 partsof water at 51 degrees Fahrenheit.

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A9. Be that as it may, rectified spirit after it undergoes certain‘physical changes’ by adopting ‘physical means’ like re-distillation,rectification (repeated or fractional distillation) to remove impurities, itbecomes purer and is known as Extra Neutral Alcohol (ENA). Thereafter,by addition and mixing of colouring and flavouring agents (compounding),as well as after dilution with water, ENA is left for maturation, to beBbottled and used as ‘intoxicating liquor’ or ‘potable liquor’ known asIndian Made Foreign Liquor (IMFL). Whereas the country liquor, alsoknown as ‘Desi Sharab’ is prepared from rectified spirit or low gradeENA having alcohol content below 40% (as decided by different StateGovernments) which may be coloured (by caramel) and may be spicedCtoo. Notably, the chemical composition of Ethyl alcohol or Ethanol(C2H6O or C2H5OH or CH3CH2OH) remains the same in the entireprocess, though addition of colouring and flavouring agents makes it amild concoction/mixture/solution (in chemical parlance a solution ofalcohol is known as ‘tincture’) which renders it more palatable to humanconsumption.D

10. We have adverted to the above-mentioned process, noted inthe written submissions filed by the appellant, so as to give properinterpretation to the impugned notification and the subject rules, inparticular Rule 106(Tha). English version of the said rule noted in thenotification (as translated by the official translator of this CourtEreproduced in paragraph 2 above), in our opinion, makes it amply clearthat the levy or impost fructifies only upon completion of distillation process(in two stages- first from rectified spirit to ENA and then from ENA toIMFL) and in particular converting into a final product “IMFL”. Thecollection of impost is, however, deferred until the bottling of that product.

FIn other words, the levy is not at the stage of import of rectified spiritwithin the State; nor at the stage of initial distillation thereof to ExtraNeutral Alcohol (ENA) and not until the product IMFL is ready forbottling as such. Thus, the levy under the impugned rule ripens or fructifiesonly after the original raw material (imported rectified spirit) hasundergone distillation process at two different stages and transmute andGmutate into an intoxicant or potable alcohol palatable to humanconsumption, but its (impost) collection is effected just before bottling itin that form (potable liquor). Indeed, the levy predicated in this rule is onthe total quantity of imported rectified spirit utilised for mutating it in the form of IMFL, a new produce. The last part of the rule stipulates thequantum of charges to be levied on such utilized imported rectified spiritfor production of the foreign liquor. For that limited purpose, the quantityof imported rectified spirit utilized in the production of potable liquor, isreckoned.

11. Reading the impugned provision as a whole and line by line orword by word in this perspective, it must follow that the substance of theprovision is to levy charges on the product IMFL produced ormanufactured by use of imported rectified spirit. In that sense, the levyis not on the input (imported rectified spirit) of the final product as suchbut is on the manufactured or produced product being potable alcoholpalatable to human consumption. For the purposes of computing thelevy, the yardstick of Rs.6 per LPL on the total quantity of importedrectified spirit utilized for production of IMFL is reckoned. Thus, theimpost is not on the imported rectified spirit as such but only on theproduced foreign liquor before it is bottled for sale in the wholesale orretail market, as the case may be. If so understood, the whole edifice ofthe argument of respondents regarding the interpretation of the impugnedrule must collapse. For, the challenge to the impugned rule is on theassumption that it permits the competent authority to levy charges onthe imported rectified spirit and not fit for human consumption but whichhas the potency of being used for producing intoxicants or potable liquorthough exclusively meant for industrial purposes. Once that assumptionis discounted or disregarded, nothing more survives for consideration.We say so because, it is well established that the State may pass anylegislation in the nature of prohibition of potable liquor referable to Entry6 and 8 of List II and may also laydown regulations to ensure that non-potable alcohol is not diverted and misused as a substitute for potablealcohol. Had it been the case of levy on non-potable alcohol (importedrectified spirit) per se, only then the question about the competency ofthe State Legislature or the justness of the levy on the doctrine of quidpro quo may become relevant. However, if it is a case of legislation inrespect of potable alcohol, as has been noted by us hitherto, the Statewould be competent to legislate in that regard and levy charges – be itfor regulating the same or impost for parting with its rights regardingmanufacture, storage, export, sale and possession thereof.

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A12. We may usefully advert to the Constitution Bench decision(Five Judges) in Har Shankar and Ors. Vs. The Dy. Excise andTaxation Commissioner and Ors.[1], paragraph Nos.53 to 59, whichread thus:

“53. In our opinion, the true position governing dealings inBintoxicants is as stated and reflected in the Constitution Benchdecisions of this Court in Balsara case[2], Cooverjee case[3],Kidwai case[4], Nagendra Nath case[5], Amar Chakraborty case[6]and the R.M.D.C. case[7], as interpreted in Harinarayan Jaiswalcase[8] and Nashirwar case[9]. There is no fundamental right to dotrade or business in intoxicants. The State, under its regulatoryCpowers, has the right to prohibit absolutely every form ofactivity in relation to intoxicants — its manufacture, storage,export, import, sale and possession. In all theirmanifestations, these rights are vested in the State andindeed without such vesting there can be no effectiveDregulation of various forms of activities in relation tointoxicants. In American Jurisprudence, Vol. 30 it is statedthat while engaging in liquor traffic is not inherently unlawful,nevertheless it is a privilege and not a right, subject to governmentalcontrol (p. 538). This power of control is an incident of thesociety’s right to self-protection and it rests upon the rightEof the State to care for the health, morals and welfare of thepeople. Liquor traffic is a source of pauperism and crime(pp. 539, 540, 541).

54. It was unnecessary in Krishna Kumar Narula case[10] toexamine the question from this broader point of view, as the onlyFcontention bearing on the constitutional validity of the provisionimpugned therein was not permitted to be raised as it was notargued in the High Court. The discussion of the question whether 1 (1975) 1 SCC 7372 1951 SCR 682 : AIR 1957 SC 414G3 1954 SCR 873 : AIR 1954 SC 3184 1957 SCR 295 : AIR 1957 SC 4145 1958 SCR 1240 : AIR 1958 SC 3986 (1973) 1 SCR 533 : (1972) 2 SCC 4427 1957 SCR 874 : AIR 1957 SC 6998 (1972) 3 SCR 784 : (1972) 2 SCC 369 (1975) 1 SCC 29H10 (1967) 3 SCR 50 : AIR 1967 SC 1368

a citizen has a fundamental right to do trade or business in liquorproceeded in that case, avowedly, from a desire to clear theconfusion arising from the “different views” expressed by thetwo Judges of the High Court. This may explain why the Courtrestricted its final conclusion to holding that dealing in liquor isbusiness and the citizen has a right to do business in that commodity.The Court did not say, though such an implication may arise fromits conclusion, that the citizen has a fundamental right to do tradeor business in liquor. If we may repeat, Subba Rao, C.J. said:

“We, therefore, hold that dealing in liquor is business and acitizen has a right to do business in that commodity; but theState can make a law imposing reasonable restrictions on thesaid right, in public interests.”

It is significant that the judgment in Krishna Kumar Narulacase does not negate the right of the State to prohibitabsolutely all forms of activities in relation to intoxicants.The wider right to prohibit absolutely would include thenarrower right to permit dealings in intoxicants on suchterms of general application as the State deems expedient.

55. Since rights in regard to intoxicants belong to the State,it is open to the Government to part with those rights for aconsideration. By Article 298 of the Constitution, theexecutive power of the State extends to the carrying on ofany trade or business and to the making of contracts forany purpose. As observed in Harinarayan Jaiswal case, (SCCp. 44, para 13)

“if the Government is the exclusive owner of those privileges,reliance on Article 19(1)(g) or Article 14 becomes irrelevant.Citizens cannot have any fundamental right to trade or carryon business in the properties or rights belonging to theGovernment, nor can there be any infringement of Article 14,if the Government tries to get the best available price for itsvaluable rights.”

Section 27 of the Act recognises the right of the Government togrant a lease of its right to manufacture, supply or sell intoxicants.Section 34 of the Act read with Section 59(d) empowers theFinancial Commissioner to direct that a licence, permit or pass be

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granted under the Act on payment of such fees and subject tosuch restrictions and on such conditions as he may prescribe. Insuch a scheme, it is not of the essence whether the amount chargedto the licensees is pre-determined as in the appeals of NorthernIndia Caterers and of Green Hotel or whether it is left to bedetermined by bids offered in auctions held for granting thoserights to licensees. The power of the Government to chargea price for parting with its rights and not the mode of fixingthat price is what constitutes the essence of the matter.Nor indeed does the label affixed to the price determineeither the true nature of the charge levied by theGovernment or its right to levy the same.

56. The distinction which the Constitution makes for legislativepurposes between a “tax” and a “fee” and the characteristics ofthese two as also of “excise duty” are well-known. “A tax is acompulsory exaction of money by public authority for publicpurposes enforceable by law and is not a payment for servicesrendered”. A fee is a charge for special services rendered toindividuals by some governmental agency and such a charge hasan element in it of a quid pro quo. Excise duty is primarily a dutyon the production or manufacture of goods produced ormanufactured within the country. The amounts charged to thelicensees in the instant case are, evidently, neither in thenature of a tax nor of excise duty. But then, the “licencefee” which the State Government charged to the licenseesthrough the medium of auctions or the “fixed fee” which itcharged to the vendors of foreign liquor holding licencesin Forms L-3, L-4 and L-5 need bear no quid pro quo to theservices rendered to the licensees. The word “fee” is notused in the Act or the Rules in the technical sense of theexpression. By “licence fee” or “fixed fee” is meant theprice or consideration which the Government charges tothe licensees for parting with its privileges and grantingthem to the licensees. As the State can carry on a trade orbusiness, such a charge is the normal incident of a tradingor business transaction.

57. While on this question, we may with advantage cite a passagefrom American Jurisprudence (Vol. 30, pp. 642, 645) which is based on the decisions in Gundling v. Chicago[11], Phillips v.Mobile[12] and Richard v. Mobile[13], It says:

“the familiar principle that the imposition of licence fees onuseful and honourable occupations must not exceed the costof issuing the licence, plus the expense of inspecting andregulating the business licensed ... is not necessarily applicableto a liquor license. The liquor traffic is not something whichis licensed for the purpose of promoting it. Indeed,licence fees may be exacted in amounts intended todiscourage participation in the business. The courts havequite generally refused to hold that the licence feeimposed, merely because it is large, is a tax, where theobject is to control, regulate, and restrict, and not toencourage the liquor traffic, the revenue being the resultof the system and not the motive for its adoption . . . .The higher the fee imposed for a licence, it is sometimessaid, the better the regulation, as the effect of a high feeis to keep out the business those who are undesirable,and to keep within reasonable limits the number of thosewho may engage in it.”

58. In the view we have taken, the argument that the Governmentcannot by contract do what it cannot do under a statute must fail.No statute forbids the Government from trading in its own rightsor privileges and the statute under consideration, far from doingso, expressly empowers it by Sections 27 and 34 to grant leasesof its rights and to issue the requisite licences, permits or passeson payment of such fees as may be prescribed by the FinancialCommissioner.

59. The argument that in Cooverjee case the impugned powerhaving been exercised in respect of a centrally administered area,the power was not fettered by legislative lists loses its relevancein the view we are taking. It is true that in that case it waspermissible to the Court to find, as in fact it did, that the fee imposedon the licensees was “more in the nature of a tax than a licencefee”. As the authority which levied the fee had the power to exact 11 44 L Ed 728

12 52 L Ed 578

13 52 L Ed 581

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1092SUPREME COURT REPORTS

Aa tax, the levy could be upheld as a tax even if it could not bejustified as a “fee”, in the constitutional sense of that term. Butthe “licence fee” or “fixed fee” in the instant case doesnot have to conform to the requirement that it must bear areasonable relationship with the services rendered to thelicensees. The amount charged to the licensees is not aBfee properly so-called nor indeed a tax but is in the natureof the price of a privilege, which the purchaser has to payin any trading or business transactions.”

C13. Indeed, if the State legislation was to provide for levy on theimported rectified spirit per se the same would be without jurisdiction,as consistently held, including by the Constitution Bench in Deccan Sugar& Abkari Co. Ltd. Vs. Commissioner of Excise, A.P.[14], paragraphNo.2 of this decision, which reads thus:

D“2. It is settled by the decision of this Court in Synthetics andChemicals Ltd. v. State of U.P. that the State Legislature has nojurisdiction to levy any excise duty on rectified spirit. The Statecan levy excise duty only on potable liquor fit for humanconsumption and as rectified spirit does not fall under that categorythe State Legislature cannot impose any excise duty. The decisionEin Synthetics and Chemicals Ltd. v. State of U.P. has beenfollowed in State of U.P. v. Modi Distillery[15]where certainwastage of ethyl alcohol was sought to be taxed. This Courtfollowing the decision in Synthetics and Chemicals Ltd. came tothe conclusion that this cannot be done.”

F14. The next question is whether the levy is in the nature of tax orexcise duty. If it is a case of excise duty on potable liquor produced byuse of imported rectified spirit, the State has jurisdiction to legislate inrespect of duty on the production or manufacture of such goods producedor manufactured within the State. In the present case, we find merits inGthe submissions of the appellant State that the impost is neither in thenature of a tax nor excise duty but it is towards the charges by whatevername, for regulating the production of potable liquor to preserve publichealth and morality including for parting with its rights or privileges 14 (2004) 1 SCC 243H15 (1995) 5 SCC 753

regarding manufacture, supply or sale of potable liquor or intoxicatingliquor and to regulate the use of imported rectified spirit for productionand sale of potable liquor. In such a case, the State need bear no quidpro quo to the services rendered to the licencee for production of foreignliquor (IMFA).

15. The fact that the manufacturer-respondent has already obtainedrequisite licences for import of rectified spirit and production of foreignliquor (IMFA) on payment of fixed rates does not mean that the Statehas surrendered all facets of its rights in respect of every form of activityin relation to potable liquor – its manufacture, storage, export, import,sale and possession. The amended provision is an enabling provisionauthorising the State to levy charges or impost for ceding its one or moreof the activity in respect of foreign liquor (IMFL) produced by use ofimported rectified spirit. Such impost can be in addition to the generalpower of the State to issue licence on payment of fees for productionand sale of potable liquor. As observed in Har Shankar (supra), inparagraph No.56, the State need bear no quid pro quo to the servicesrendered to the licensees of producer of foreign liquor.

16. The respondent, however, placed heavy reliance on the decisionin State of U.P. & Ors. Vs. Vam Organic Chemicals Ltd. and Ors.[16],to contend that the State is obliged to justify the impost based on quidpro quo. We are afraid, this decision is of no avail to the respondent. Inthat case, the Court was dealing with challenge to Rule 3(a) therein onthe ground that the State Legislature did not have legislative competenceto legislate on “denatured spirit” which is unfit for human consumption.In that context, this Court relied on the decision in Synthetics andChemicals Ltd. and Ors. Vs. State of U.P. and Ors.[17] and answeredthe issue. If the case under consideration was to be regarding legislationon imported rectified spirit as such, this decision would have come handy.However, having opined that the purport of the impugned Rule 106(Tha),is to permit impost on the final processed product being foreign liquor“IMFL”, before bottling as fit for human consumption, the State hasjurisdiction to legislate on that subject and need bear no quid pro quo tothe services rendered to the licencee of manufacturer of foreign liquor(IMFL).

16 (2004) 1 SCC 225

17 (1990) 1 SCC 109

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A17. In view of the above, we do not intend to dilate on otherarguments and reported decisions pressed into service by the respectiveparties. Suffice it to observe that the challenge to the amended Rule 106(Tha), in our opinion, is unfounded and is based on erroneous assumptionthat it purports to authorise the State to levy charges on the importedrectified spirit as such. However, upon proper interpretation of the saidBrule we hold that it purports to empower the State to levy charges on thefinal processed product being foreign liquor (IMFL) manufactured byuse of imported rectified spirit. This appeal, therefore, ought to succeed.

18. Accordingly, we allow this appeal and quash and set aside theimpugned judgment and order of the High Court dated 25[th] July, 2013Cpassed in WP(T) No.7499 of 2012. The said writ petition standsdismissed. All pending interim applications are disposed of. No order asto costs.

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Ankit Gyan

Appeal allowed.

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