Full Judgment Text
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 7403 OF 2008
[Arising out of SLP (Civil) No. 19909 of 2007]
Mohan Meakin Ltd. …Appellant
Versus
State of H.P. & Ors. …Respondents
WITH
CIVIL APPEAL NO. 7421 OF 2008
[Arising out of SLP (Civil) No. 20593 of 2007]
J U D G M E N T
S.B. SINHA, J :
1. Leave granted.
2. Constitutional validity of increase in levy made by the State of
Himachal Pradesh inter alia on import/ transport of rectified spirit and/ or
potable alcohol is in question in these appeals which arise out of a judgment
2
and order dated 27.06.2007 passed by the High Court of Himachal Pradesh,
Shimla in C.W.P. No. 251 of 1999.
3. Appellant is a public limited company registered and incorporated
under the Companies Act, 1956. It is carrying on business of manufacture
and sale of India Made Foreign Liquor (IMFL) and beer, etc. Its distillery is
situated at Kasauli in the District of Solan. It holds a licence in Form D-2
granted by the State of Himachal Pradesh in terms of the provisions of the
Punjab Excise Act, 1914 (for short “the Act”) and the Rules framed
thereunder. For the purpose of running the said distillery, it imported ‘Malt
Spirit of over proof strength’ from its distillery situated at Mohan Nagar in
the State of Uttar Pradesh. For the said purpose, it was required to obtain
import permit from the Collector Excise, Himachal Pradesh. It also
transported some quantities of Malt Spirit of over proof strength from M/s.
Rangar Breweries Ltd., Mehatpur, Distt. Una as well as from its distillery
situated at Mohan Nagar, Distt. Ghaziabad during the relevant years, viz.,
1997-98 and 1998-99.
4. Admittedly, prior to 1.04.1996, no payment was required to be made
for obtaining permit/ transport fee on transportation of IMFL, country spirit,
3
beer, etc. It was directed to be levied for the first time in terms of an excise
policy for the year 1996 – 97 dated 12.03.1996. A permit fee at the rate of
Rs. 2.50 per bulk litres on denatured spirit, Rs. 2.00 per proof litre and Rs.
1.00 per proof litre on foreign spirit and country liquor respectively became
leviable. Such permit fee was payable at the time of grant of permission for
transportation of liquor. It was payable by a person who makes an
application for grant of permission for import and/ or transport of foreign
liquor or country liquor or both. A demand of Rs. 8,21,992/- was made by
the Excise and Taxation Officer on or about 28.10.1997 towards permit fee
on the spirit imported by the appellant during the year 1996-97. Another
demand for a sum of Rs. 17,68,346/- was made upto 6.02.1999 for making
similar import. Indisputably, no amount towards payment of licence fee
was due from the appellant. It is also not in dispute that export duty at the
rate of Rs. 1.00 per proof litre on Indian Made Foreign Spirit and at the rate
of Rs. 0.50 per bulk litre on beer with alcoholic content upto 5% and at the
rate of Rs. 0.75 per bulk litre with alcoholic content exceeding 5% has been
paid by the appellant. It has also paid import fee at the rate of Rs. 6/- per
proof litre on spirit imported by it.
4
5. A representation was made by the appellant in respect of the said
demands by a letter dated 30.01.1999 inter alia contending that the State of
Himachal Pradesh had no jurisdiction to levy such fee. In any event, no
services having been rendered to the appellant, quantum jump of the licence
fee in the name of such permit fee was not justified.
The said representation of the appellant was rejected by an order
dated 10.02.1999.
6. The High Court, however, by reason of the impugned judgment
rejected the contentions of the appellant.
7. Mr. Anoop G. Chaudhary and Mr. Rakesh Dwivedi, learned senior
counsel appearing on behalf of the appellant, would submit:
(i) Transportation of industrial alcohol and/ or rectified spirit being
not within the legislative competence of the State, it cannot
exercise any control thereover.
(ii) The High Court committed a serious error as it proceeded on the
premise that there does not exist any distinction between import of
potable liquor and that of Malt Spirit of over proof strength.
5
(iii) The element of quid pro quo being inherent in the levy of fee and
as no material was produced by the State to justify its demand, the
impugned judgment cannot be sustained.
8. Mr. Naresh K. Sharma, learned counsel appearing on behalf of the
respondents, on the other hand, would contend that the State has to incur a
huge expenditure towards maintenance of staff for regulating the business
of liquor. Permit is granted for import of country spirit, beer, IMFL, etc. in
the interest of the permit holders themselves so that abuse of import by non-
permit holders can be prevented. Business in both potable liquor as also
Malt Spirit of over proof strength is required to be regulated by the State for
which the State must have a machinery.
9. We will assume, as has been contended, that no person has any
fundamental right to carry on business in liquor, it being res extra
commercium.
10. The question which would, however, arise for consideration is as to
whether the State has the jurisdiction to impose any restriction on the
movement of industrial alcohol and/ or Malt Spirit of over proof strength.
6
11. Part XI of the Constitution of India provides for relations between
Union and the States. Chapter I thereof provides for legislative relations.
In terms of Article 245(1) of the Constitution of India, ordinarily the
Parliament has the exclusive legislative competence to make laws for the
whole or any part of the territory of India and the Legislature of a State may
make laws for the whole or any part of the State. Article 246 provides for
the subject matter of laws made by the Parliament and by the Legislatures of
States. Indisputably, the Parliament has the exclusive power to make laws,
in respect of the matters enumerated in List I of the Seventh Schedule of the
Constitution whereas the State has the exclusive legislative power to make
laws with respect to any of the matters enumerated in List II of the Seventh
Schedule of the Constitution. We are not concerned herein with the
legislative competence of the Union as also the State as contained in List III
of the Seventh Schedule of the Constitution of India. Entry 42 of List I of
the Seventh Schedule of the Constitution provides for inter-State trade and
commerce. Entries 52, 84 and 97 of List I of the Seventh Schedule of the
Constitution read as under:
7
“52. Industries, the control of which by the Union
is declared by Parliament by law to be expedient in
the public interest.
*
84. Duties of excise on tobacco and other goods
manufactured or produced in India except-
(a) alcoholic liquors for human consumption.
(b) opium, Indian hemp and other narcotic drugs
and narcotics,
but including medicinal and toilet preparations
containing alcohol or any substance included in
sub-paragraph (b) of this entry.
*
97. Any other matter not enumerated in List II or
List III including any tax not mentioned in either
of those Lists.”
12. Entry 8 of List II of the Seventh Schedule of the Constitution confers
legislative power upon the State in respect of “Intoxicating liquors, that is to
say, the production, manufacture, possession, transport, purchase and sale of
intoxicating liquors”. Entry 51 of List II thereof provides for an exception
to the Parliament’s power to impose levy of tax on manufacture of the
article, in respect of:
“(a) alcoholic liquors for human consumption;
(b) opium, Indian hemp and other narcotic
drugs and narcotics, but not including medicinal
8
and toilet preparations containing alcohol or any
substance included in sub-paragraph (b) of this
entry.”
Entry 66, List II of the Seventh Schedule of the Constitution reads as
under:
“66. Fees in respect of any of the matters in this
List, but not including fees taken in any court.”
13. The Act is a pre-constitutional statute.
Section 3(18) of the Act defines spirit and Section 3(14) thereof
defines liquor. These definitions cover even denatured spirit. They are
broadly worded pre-constitutional definitions. Malt spirit is said to be spirit
obtained by distillation of barley or other grain. The strength of Malt Spirit
after distillation is said to be 66% to 70% v/v. It is also with over proof
strength. Proof liquor is of around 50% v/v. Liquor which is sufficiently
below the same is termed as under proof liquor.
14. Appellant herein contends that it had imported Malt Spirit of over
proof strength and the application for grant of permit vis-à-vis levy of fee
9
pertained only thereto. It has furthermore been contended that the Malt
Spirit imported by it being rectified spirit, it is not potable as per ISI
Specifications. It is not bought and sold in the market as potable liquor. It
is used as a raw material for blending to manufacture IMFL. Contention of
the appellant, therefore, is that it is not an excisable article within the
meaning of the provisions of Section 3(6) of the Act.
Section 16 of the Act restricts import, export and transportation of
intoxicants, except upon payment of any duty or execution of a bond or
compliance with such conditions as the State Government may impose.
Section 18 provides for issuance of passes for import, export and transport
to be granted in terms of Section 19 thereof. Sub-section (2) of Section 20
forbids construction or working of any distillery or brewery, save and
except under the authority and subject to the terms and conditions of the
licence granted in that behalf by the Financial Commissioner under Section
21 of the Act, which reads as under:
“21. The Financial Commissioner, subject to
such restrictions or conditions as the State
Government may impose, may –
(a) establish a distillery in which spirit may be
manufactured under a license granted under
section 20;
10
*
(d) make rules regarding -
*
(11) any other matters connected with the
working of distilleries or breweries.”
The rule making power is conferred upon the Financial Commissioner
by reason of Section 59 of the Act, which reads as under:
“59. The Financial Commissioner may, by
notification, make rules –
(a) *
(b) *
(c) *
(d) prescribing the scale of fees or the manner
of fixing the fees payable in respect of any license,
permit or pass or in respect of the storing of any
intoxicant;
(e) regulating the time, place and manner of
payment of any duty or fee;
(f) prescribing the authority by, the restrictions
under and the conditions on which, any license,
permit or pass may be granted - ”
15. Pursuant to or in furtherance of the said power, the Financial
Commissioner made rules known as the Punjab Liquor Permit and Pass
Rules, 1932 (for short “the Rules). The Rules are applicable subject to such
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modifications as has been made in the State of Himachal Pradesh, the
relevant provisions whereof are as under:
“7.2 Subject to the provisions of order 23 of the
Himachal Pradesh Liquor Import, Export,
Transport and Possession Orders, 1965, a person
importing, exporting or transporting foreign
liquor, country spirit, rectified spirit or denatured
spirit must obtain –
(a) a permit in form L-32 in the case of import
and transport or corresponding permit in case of
export from the officer authorized to grant such
permits in the district, State or Union territory of
destination; and
(b) a pass in form L-34 for export and transport
and a corresponding pass for import from the
officer authorized to grant such passes in the place
of issue;
Provided that a pass for the removal of spirit
and beer from a licensed distillery or brewery or a
warehouse issued in accordance with the rules
made by the Financial Commissioner, shall be
deemed to be a pass for the purpose of this rule;
Provided further that a permit shall not be
required for the transport or foreign liquor,
country spirit, rectified spirit or denatured spirit
within a district, except when denatured spirit is
transported from the bonded warehouse of a
licensed distillery;
Provided further that the members of the
diplomatic staff of a foreign embassy located in
the State of H.P. shall not be required to obtain a
permit for import and transport of imported liquor.
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7.2A. A fee at the rate of (a) Rs. 2.00 per proof
litre of foreign liquor (excluding beer, secremental
wine, wine and cider) and (b) Re. 1.00 per proof
litre of country spirit shall be payable by a person
who makes an application for the grant of
permission to import and/ or transport of the
foreign liquor; (excluding beer secremental wine,
wine and cider) or country liquor or both:
Provided that in the case of events covered by the
second proviso to clause (b) of rule 2, the fee shall
also be payable at these rates by a licensee who
makes an application for the grant of permission to
transport foreign liquor (excluding beer,
secremental wine and cider) or country spirit or
both:
Provided further no fee shall be payable on
the quantity of Foreign liquor (excluding beer
secremental wine, wine and cider) on which such
fee has already been paid and recovered
previously in Himachal Pradesh.
Explanation - 1. In this rule, the
expression “transport” shall not include the
transport of Foreign Spirit or country spirit in
course of ‘export’ inter – State or across the
customs frontier of India.
2. The fee specified in this rule shall not be
payable on denatured spirit rectified spirit or
perfumed spirit.”
By reason of notifications dated 1.04.1997 and 1.04.1998, the rates of
fees mentioned in Rule 7.2-A were modified.
13
16. Rule 7.9 of the Rules reads as under:
“7.9 All passes granted to cover the import of
country spirit and foreign liquor, shall be subject
to the condition that no consignment shall be
brought into use until it has been examined by the
excise inspector or sub-inspector of the district of
destination, to whom intimation of the arrival of
the consignment shall be given; such examination
shall be conducted within seven days of the receipt
of the intimation which shall be dispatched by the
importer on the day following the receipt of the
consignment.”
17. The Financial Commissioner also made the Excise Barriers’ Rules,
1939; Rules 19.1 and 19.2 thereof read as under:
“19.1 The Financial Commissioner may establish
excise outposts at such places as he may think fit
on any road, or at any ferry, for the prevention of
the smuggling of excisable articles or opium, and
may depute Excise Inspectors to be in charge of
such outposts.
19.2 The driver of any vehicle or laden animal
arriving at an excise post shall stop his vehicle or
animal or arrival at the outpost until the excise
officer has conducted his search. The excise
officer will proceed with the search forthwith.”
14
18. Indisputably, the State has the exclusive authority to grant licence.
Our attention has been drawn to one of the conditions of the licence granted
in favour of the appellant in Form D-2 which reads as under:
“1. The licensee shall observe the provisions of
the Punjab Excise Act, 1 of 1914 and all rules
made thereunder and all rules made under any
other law for the time being in force applicable to
the manufacture, issue and sale of spirit.”
19. Indisputably, the appellant being a licensee must abide by the terms
and conditions of licence. It is also bound to follow the rules framed in this
behalf. A subordinate legislation which, however, is beyond the legislative
competence of the State would be ultra vires. Furthermore, there cannot be
any doubt that the State possesses the right to have complete control over all
aspects of intoxicants, viz., manufacture, collection, sale and consumption,
etc. It also has the exclusive right to manufacture and sell liquor and to
transfer the said right with a view to raise revenue. Right to fix the amount
of consideration for grant of said privilege for manufacturing or vending
liquor is also beyond any doubt or dispute.
15
20. The State has to make distinction between a Malt Spirit of over proof
strength and potable liquor. Entries 8, 51 and 66 of List II of the Seventh
Schedule of the Constitution of India confer jurisdiction upon the State only
to exercise its legislative control in respect of matters which are covered
thereby. Industrial alcohol or spirit having regard to Entry 52 of List I of
the Seventh Schedule of the Constitution of India cannot be subject matter
of any regulation or control by the State; it being not alcoholic liquor for
human consumption.
The question is well-settled in view of the decision of a Seven-Judge
Bench of this Court in Synthetics and Chemicals Ltd. and Others v. State of
U.P. and Others [(1990) 1 SCC 109] wherein it was categorically held:
“53. It was further submitted by the State that the
State has exclusive right to deal in liquor. This power
according to the counsel for the State, is reserved by
and/or derived under Articles 19(6) and 19(6)( ii ) of
the Constitution. For parting with that right a charge
is levied. It was emphasised that in a series of
decisions some of which have been referred to
hereinbefore, it has been ruled that the charge is
neither a fee nor a tax and termed it as privilege. The
levy is on the manufacture, possession of alcohol. The
rate of levy differs on its use, according to the State
of U.P. The impost is also stipulated under the trading
16
powers of the State under Article 298 and it was
contended that the petitioners and/or appellants were
bound by the terms of their licence. It was submitted
that the Parliament has no power to legislate on
industrial alcohol, since industrial alcohol was also
alcoholic liquor for human consumption. Entry 84 in
List I expressly excludes alcoholic liquor for human
consumption; and due to express exclusion of
alcoholic liquor for human consumption from List I,
the residuary Entry 97 in List I will not operate as
against its own legislative interest. These submissions
have been made on the assumption that industrial
liquor or ethyl alcohol is for human consumption. It is
important to emphasise that the expression of a
constitution must be understood in its common and
normal sense. Industrial alcohol as it is, is incapable
of being consumed by a normal human being. The
expression ‘consumption’ must also be understood in
the sense of direct physical intake by human beings in
this context. It is true that utilisation in some form or
the other is consumption for the benefit of human
beings if industrial alcohol is utilised for production
of rubber, tyres used. The utilisation of those tyres in
the vehicle of man cannot in the context in which the
expression has been used in the Constitution, be
understood to mean that the alcohol has been for
human consumption.
54. We have no doubt that the framers of the
Constitution when they used the expression ‘alcoholic
liquor for human consumption’ they meant at that
time and still the expression means that liquor which
as it is is consumable in the sense capable of being
taken by human beings as such as beverage of drinks.
Hence, the expression under Entry 84, List I must be
understood in that light. We were taken through
various dictionary and other meanings and also
invited to the process of manufacture of alcohol in
order to induce us to accept the position that
denatured spirit can also be by appropriate cultivation
or application or admixture with water or with others,
17
be transformed into ‘alcoholic liquor for human
consumption’ and as such transformation would not
entail any process of manufacture as such. There will
not be any organic or fundamental change in this
transformation, we were told. We are, however,
unable to enter into this examination. Constitutional
provisions specially dealing with the delimitation of
powers in a federal polity must be understood in a
broad commonsense point of view as understood by
common people for whom the Constitution is made.
In terminology, as understood by the framers of the
Constitution, and also as viewed at the relevant time
of its interpretation, it is not possible to proceed
otherwise; alcoholic or intoxicating liquors must be
understood as these are, not what these are capable of
or able to become. It is also not possible to accept the
submission that vend fee in U.P. is a pre-Constitution
imposition and would not be subject to Article 245 of
the Constitution. The present extent of imposition of
vend fee is not a pre-Constitution imposition, as we
noticed from the change of rate from time to time.”
21. The doctrine of res extra commercium as applied by this Court in
respect of potable alcohol in its various judgments including Khoday
Distilleries Ltd. and Others v. State of Karnataka and Others [(1995) 1 SCC
574] and State of Punjab and Another v. Devans Modern Breweries Ltd. and
Another [(2004) 11 SCC 26] would have no application to industrial alcohol
which is produced in an industry controlled and regulated in terms of Entry
52, List I of the Seventh Schedule of the Constitution of India. If
manufacture and transport of industrial alcohol and/ or Malt Spirit of over
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proof strength is not res extra commercium in view of the binding decisions
of this Court in Synthetics and Chemicals Ltd. (supra), it is axiomatic that
the provisions of Article 301 of the Constitution of India shall apply in
relation to inter-State trade. The State’s power to exercise control of inter-
State transport which is within the exclusive legislative competence of the
Parliament having regard to Entry 42, List I of the Seventh Schedule of the
Constitution of India would, thus, be limited. Its power to impose
compensatory tax and/ or fee would also be limited as envisaged by Article
304(b) of the Constitution of India.
22. The State has not made any distinction between import/ export of
spirit and potable alcohol.
By its letter dated 28.10.1997, it was stated:
“Whereas you have imported/ transported
4,46,880.00 PLs of spirit from R.B.L. Mehatpur
and Mohan Meakin Limited, Mohan Nagar (UP)
to Kasauli Distillery for the year 1996-97 upon
which permit fee @ Rs. 2/- per P.L. was leviable.
Out of the quantity mentioned above 35,884,350
PLs of IMFS was (sic) and you have paid the
permit fee @ Rs. 2/- per PL for the said quantity.”
19
[Emphasis supplied]
The said demand was reiterated by the State in terms of its letter dated
27.01.1999.
In its representation dated 30.01.1999, the appellant averred:
“3. Under entry 51 of List II of Seventh
Schedule to Constitution of India, State is
empowered to levy and charge Excise Duty on
“Alcoholic Liquors for human consumption” and
similarly under item No. 66 the State is
empowered to levy and charge fees in respect of
matters in this list i.e. on Alcoholic liquors for
human consumption. Bulk spirit on which Permit/
Transport Fee is sought to be charged is of over
proof strength and is not an Alcoholic Liquor for
human consumption. Thus, State is not
empowered to levy/ charge permit/ transport fee
on transport of spirit of over proof strength. Levy
of any duty or fee on spirit of over proof strength
is within the competence of Government of India
as mentioned in entry 84 and 96 of List I to
Seventh Schedule to the Constitution of India. In
view of this position the demand is illegal and
against the provision of Constitution of India.”
Appellant, in its representation dated 25.02.1999, stated:
“The permit fee is being demanded on the import/
transport of spirit of over proof strength which is
20
of alcoholic liquor for human consumption and
does not fall within the ambit of entry 51 of List II
of VIIth Schedule to Constitution of India read
with item 66 ibid. The State is empowered to levy
permit fee on transport of Alcoholic Liquor for
human consumption only. Levy of duty or fee on
spirit of over proof strength is within the
competence of Union of India/ Parliament of India
as mentioned in entry 84 and 96 of List I to VIIth
Schedule to Constitution of India.”
23. We may, on the other hand, notice the contentions of the State, in its
counter affidavit before the High Court:
“Accordingly, grant and issue of permit is
essentially regulatory in character. Viewed in this
perspective, the permit fee is not under Entry 51,
and has no linage whatsoever with the duties of
excise or countervailing duties on alcoholic
liquors meant for human consumption. It is, thus,
not only patently incorrect but also wrong to draw
a nexus between Entry 51 and the permit fee. The
object of permit is to regulate transport, (which
includes import as well) under Entry 8 of the said
List II of the Seventh Schedule to the Constitution.
Therefore, the proper linkage, for the purposes of
permit fee, is between Entry 8 and Entry 66 of List
II of the Seventh Schedule.”
It was furthermore stated:
21
“It is, therefore, submitted that the malt spirit
whether in over proof strength or in under proof
strength, is meant for potable purposes and in both
the cases it does not lose the basic character of
intoxicating liquors and the State Government
under Entry No. 8 and 51 read with Entry 66 of
List II of Seventh Schedule to the Constitution of
India is competent to legislate and to levy the
duties/ fees. Contentions of the petitioner to the
contrary are denied.”
The contention of the State as would appear from its counter-affidavit
filed before us is as under:
“…It is further submitted that the fee in question is
neither a tax nor duty so as to attract the
provisions of Entry 42 of List – I of Seventh
Schedule to the Constitution of India. Permit fees,
it is reiterated is not levied on the import of liquor
rather it is charged on every permit to import/
transport the liquors whether inter – state or intra-
state for the services. Therefore, the Hon’ble High
Court is justified to hold that the State
Government is empowered to make rules
authorizing it to levy permit fee.”
The State furthermore asserts its right to regulate the business of
liquor including over proof spirit in terms of the provisions of the Act and
the Rules framed thereunder.
22
24. We have noticed hereinbefore that even in terms of the explanation
appended to Rule 7.2A of the Rules, the fees specified in the said Rule
would not be payable on denatured spirit, rectified spirit or perfumed spirit
and the transport shall not include the transport of Foreign Spirit or Country
Spirit in course of export inter-State or across the customs frontier of India.
The levy, therefore, ex facie could not have been imposed on rectified
spirit.
The jurisdiction of the State to impose such a levy is limited. It has
been so held in State of U.P. and Others v. Vam Organic Chemicals Ltd. and
Others [(2004) 1 SCC 225] in the following terms:
“29. The State’s power is thus limited to (i) the
regulation of non-potable alcohol for the limited
purpose of preventing its use as alcoholic liquor,
and (ii) the charging of fees based on quid pro
quo.”
It was furthermore held:
“43. Considering the various authorities cited, we
are of the view that the State Government is
competent to levy fee for the purpose of ensuring
that industrial alcohol is not surreptitiously
converted into potable alcohol so that the State is
23
deprived of revenue on the sale of such potable
alcohol and the public is protected from
consuming such illicit liquor. But this power stops
with the denaturation of the industrial alcohol.
Denatured spirit has been held in Vam Organics-I
to be outside the seisin of the State Legislature.
Assuming that denatured spirit may by whatever
process be renatured (a proposition which is
seriously disputed by the respondents) and then
converted into potable liquor, this would not give
the State the power to regulate it. Even according
to the demarcation of the fields of legislative
competence as envisaged in Bihar Distillery
industrial alcohol for industrial purposes falls
within the exclusive control of the Union and
according to Bihar Distillery “denatured rectified
spirit, of course, is wholly and exclusively
industrial alcohol” (SCC p. 742, para 23).”
As regards imposition of fee, it was opined:
“44. Besides, the fee is required to be justified
with reference to the cost of such regulation. The
industry is already paying a fee under Rule 2 for
such regulation. Indeed, the justification for
levying the fee under Rule 3(a) is the identical
justification given by the State for levying the fee
under Rule 2. Presumably, a full complement of
excise officers and staff are appointed by the State
in the Excise Department to carry out their duties
under the Act to oversee, control and keep duty on
the various kinds of intoxicants under the Act.
Having regard to the decision in Vam Organics-I
we must also assume that apart from the normal
strength, additional officers and staff were
appointed to regulate the denaturation of the
industrial alcohol. There is nothing to show that
24
there has been any deployment of any additional
staff to oversee the possibility of renaturation of
the denatured spirit.”
25. The question as regards ‘aspects of power to levy fee vis-à-vis tax’
came up for consideration before this Court in Jindal Stainless Ltd. (2) and
Another v. State of Haryana and Others [(2006) 7 SCC 241] wherein this
Court held:
“38. In the generic sense, tax, toll, subsidies, etc.
are manifestations of the exercise of the taxing
power. The primary purpose of a taxing statute is
the collection of revenue. On the other hand,
regulation extends to administrative acts which
produces regulative effects on trade and
commerce. The difficulty arises because taxation
is also used as a measure of regulation. There is a
working test to decide whether the law impugned
is the result of the exercise of regulatory power or
whether it is the product of the exercise of the
taxing power. If the impugned law seeks to control
the conditions under which an activity like trade is
to take place then such law is regulatory. Payment
for regulation is different from payment for
revenue. If the impugned taxing or non-taxing law
chooses an activity, say, movement of trade and
commerce as the criterion of its operation and if
the effect of the operation of such a law is to
impede the activity, then the law is a restriction
under Article 301. However, if the law enacted is
to enforce discipline or conduct under which the
trade has to perform or if the payment is for
regulation of conditions or incidents of trade or
manufacture then the levy is regulatory. This is the
25
way of reconciling the concept of compensatory
tax with the scheme of Articles 301, 302 and 304.
For example, for installation of pipeline carrying
gas from Gujarat to Rajasthan, which passes
through M.P., a fee charged to provide security to
the pipeline will come in the category of
manifestation of regulatory power. However, a tax
levied on sale or purchase of gas which flows from
that very pipe is a manifestation of exercise of the
taxing power. This example indicates the
difference between taxing and regulatory powers
(see Essays in Taxation by Seligman).
Difference between “a tax”, “a fee” and “a
Compensatory Tax”
Parameters of Compensatory Tax
39. As stated above, in order to lay down the
parameters of a compensatory tax, we must know
the concept of taxing power.”
It was observed:
“43. In the context of Article 301, therefore,
compensatory tax is a compulsory contribution
levied broadly in proportion to the special benefits
derived to defray the costs of regulation or to meet
the outlay incurred for some special advantage to
trade, commerce and intercourse. It may
incidentally bring in net revenue to the
Government but that circumstance is not an
essential ingredient of compensatory tax.”
This Court furthermore opined that the burden of proof in this behalf
would be on the State, stating:
26
“46... As soon as it is shown that the Act invades
freedom of trade it is necessary to enquire whether
the State has proved that the restrictions imposed
by it by way of taxation are reasonable and in
public interest within the meaning of Article 304
(b) [see para 35 (of AIR) of the decision in
Khyerbari Tea Co. Ltd. v. State of Assam].”
Furthermore, it was held in A.P. Paper Mills Ltd. v. Govt. of A.P. and
Another [(2000) 8 SCC 167] that even if a fee is levied for issuance of
permit, it was only for the purpose of recovering the administrative charges.
[See also Ashok Lanka and Another v. Rishi Dixit and Others (2005) 5
SCC 598]
26. This Court in Kerala Samsthana Chethu Thozhilali Union v. State of
Kerala and Others [(2006) 4 SCC 327], upon noticing State of Kerala and
Others v. Maharashtra Distilleries Ltd. and Others [(2005) 11 SCC 1],
opined:
“39. In State of Kerala v. Maharashtra
Distilleries Ltd. this Court took notice of the
provisions of Section 18-A of the Act. It was held
that the State had no jurisdiction to realise the
turnover tax from the manufacturers in the garb of
exercising its monopoly power. It was held that
turnover tax cannot be directed to be paid either by
way of excise duty or as a price of privilege.”
27
27. Even while levying a fee, a quantum jump is deprecated.
In Indian Mica Micanite Industries v. The State of Bihar and Others
[(1971) 2 SCC 236], it has been held:
“17… There cannot be a double levy in that
regard. In the opinion of the High Court the
subsequent transfer of denatured spirit and
possession of the same in the hands of various
persons such as wholesale dealer, retail dealer or
other manufacturers also requires close and
effective supervision because of the risk of the
denatured spirit being converted into palatable
liquor and thus evading heavy duty. Assuming this
conclusion to be correct, by doing so, the State is
rendering no service to the consumer. It is merely
protecting its own rights. Further in this case, the
State which was in a position to place material
before the Court to show what services had been
rendered by it to the appellant and other similar
licensees, the costs or at any rate the probable
costs that can be said to have been incurred for
rendering those services and the amount realised
as fees has failed to do so. On the side of the
appellant, it is alleged that the State is collecting
huge amount as fees and that it is rendering little
or no service in return. The co-relationship
between the services rendered and the fee levied is
essentially a question of fact. Prima facie, the levy
appears to be excessive even if the State can be
said to be rendering some service to the licensees.
The State ought to be in possession of the material
28
from which the co-relationship between the levy
and the services rendered can be established at
least in a general way. But the State has not
chosen to place those materials before the Court.
Therefore the levy under the impugned Rule
cannot be justified.”
In this case, the State in fact has not produced any material
whatsoever before the High Court.
In Commissioner of Income Tax and Another v. Distillers Co. Ltd.
[(2007) 5 SCC 353], this Court held that even for the purpose of levy of
excise duty, the same must have a direct relationship with the manufacture
of arrack.
28. We, therefore, are of the opinion that the impugned judgment cannot
be sustained. It is set aside accordingly and the matter is remitted to the
High Court for consideration of the Writ Petition filed by the appellant
afresh. The parties shall be at liberty to file additional affidavits/ evidence
before the High Court, if they so desire.
The appeals are allowed. Respondents shall bear the cost of the
appellant. Counsel’s fee assessed at Rs. 50,000/-.
29
………………………….J.
[S.B. Sinha]
..…………………………J.
[Cyriac Joseph]
New Delhi;
December 18, 2008