Full Judgment Text
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CASE NO.:
Appeal (civil) 2249-2257 of 2000
PETITIONER:
State of Kerala and Ors.
RESPONDENT:
Maharashtra Distilleries Ltd. and Ors
DATE OF JUDGMENT: 06/05/2005
BENCH:
N. Santosh Hegde & S.N. Variava & B.P. Singh & H.K. Sema & S.B. Sinha
JUDGMENT:
JUDGMENT
B.P. Singh, J.
Leave granted in Special Leave Petition (C) No. 1032 of 2003.
In these two batches of appeals, a common question arises, inter alia for
consideration by this Court, namely - Whether the incidence of excise duty,
having regard to the provision of the Kerala Abkari Act and the relevant
Rules, falls upon the manufacturer/distiller such as the respondents herein
and therefore includable in their turnover for the purpose of levy of
turnover tax, or whether the incidence of excise duty falls on the Kerala
State Beverages (Manufacturing and Marketing) Corporation Limited, a
Government company which alone is liable to pay the excise duty on Indian
Made Foreign Liquor, and consequently the said component is not includable
in the turnover of the respondents/distillers?
These appeals came up for hearing before a 3 Judge Bench of this Court.
After hearing the parties for sometime, by order dated October 17, 2001, it
was observed that the point involved was an important one and it would be
appropriate if the cases are heard by a Larger bench. The referring Bench
observed thus :-
"The question which arises for consideration in these cases is,
whether the excise duty levied under the provisions of the Kerala
Abkari Act on Indian Made Foreign Liquor which is manufactured
forms part of the turn over of the manufacturer for the purpose of
levy of turn over tax under the relevant provisions of the Kerala
Sales Tax Act?
The liquor which is manufactured by the respondents has to be sold
to the Beverages Corporation which can be regarded as sole selling
agent or the canalizing agency. The liquor manufactured is removed
to the bonded warehouse of the Beverages Corporation. At the time
when the liquor is removed from that bonded warehouse, the excise
duty is paid by the Beverages Corporation.
In the notices which were sent to the respondents, it was stated
that this excise duty which was paid by the Beverages Corporation
really forms part of the turn over of the respondents in the sale
of liquor by them to the Beverages Corporation and, therefore, turn
over tax was payable on this element as well. The contention of the
State was that this excise duty was really an obligation of the
manufacturer and merely because the obligation was discharged by
the Beverages Corporation would not mean that the same would not
form part of the turn over of the manufacturer.
The High Court, on a challenge being made by the respondents,
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decided in their favour and came to the conclusion that this excise
duty which was in fact paid by the Beverages Corporation would not
be regarded as being part of their turn over for the purpose of
levy of turn over tax.
Mr. T.L.V. Iyer, learned senior counsel has drawn our attention to
a decision of this Court in the case of Mohan Breweries &
Distilleries Ltd. v. Commercial Tax Officer, Madras and Ors.,
[1997] 7 SCC 542. In that case this Court was concerned with the
levy of turn over tax in respect of liquor which was produced and
sold to the State Marketing Corporation. It is the contention of
Mr. Iyer that the provisions of the law in Tamil Nadu relating to
the levy of this tax is more or less parimateria with the
corresponding provisions of law in Kerala. In particular, reliance
was placed on paragraph 7 of the aforesaid decision which reads as
follows:
‘7. Excise duty is levied upon goods manufactured or produced
(Entry 84 of List I and Entry 51 of List II of the Seventh Schedule
to the Constitution). Its incidence falls, therefore, on the
manufacturer or producer of the goods. The collection of excise
duty may be deferred to such later stage as is, administratively or
otherwise, most convenient’.
Basing itself on the aforesaid observations, this Court concluded
that even if Rule 22 of the Tamil Nadu Rules provides for
realization of the excise duty from the Corporation that was only a
convenient method of collection, the primary obligation to pay
excise duty being only of the manufacturer. Mr. Iyer, therefore,
contended that following the said decision the appeals should be
allowed.
Mr. F.S. Nariman, learned senior counsel for the respondents has
drawn our attention to three Constitution Bench decisions of this
Court. In the case of A.B. Abdulkadir and Ors. v. The State of
Kerala and Anr., [1967] Supp. 2 SCR 741, where at page 751 it was
observed as follows :
‘It may also be accepted that generally speaking the tax is on the
manufacturer or the producer, though it cannot be denied that laws
are to be found which impose a duty of excise at stages subsequent
to the manufacture or production.’
(emphasis added)
In R.C. Jall v. Union of India, [1962] Supp. 3 SCR 436, at page
451, it was contended that the excise duty cannot be legally levied
on the consignee who had nothing to do with the manufacture or
production of coal. This argument was repelled and at page 451, it
was observed as follows :
‘Excise duty is primarily a duty on the production or manufacture
of goods produced or manufactured within the country. It is an
indirect duty which the manufacturer or producer passes on to the
ultimate consumer, that is, its ultimate incidence will always be
on the consumer. Therefore, subject always to the legislative
competence of the taxing authority, the said tax can be levied at a
convenient stage so long as the character of the impost, that is,
it is a duty on the manufacture or production, is not lost. The
method of collection does not affect the essence of the duty but
only relates to the machinery of collection for administrative
convenience.’
In M/s. Guruswamy & Co. Etc. v. State of Mysore and Ors., [1967] 1
SCR 548, at page 562, another Constitution Bench held as follows :
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‘These cases establish that in order to be an excise duty (a) the
levy must be upon ‘goods’ and (b) the taxable event must be the
manufacture or production of goods. Further the levy need not be
imposed at the stage of production or manufacture but may be
imposed later."
(Emphasis added)
Relying upon the aforesaid observations of this Court, in cases
referred to hereinabove, Mr. Nariman contends that the observations
of this Court in Mohan Breweries’ case (supra) seem to run counter
to the earlier decisions of the Constitution Benches. He submits
that the Constitution Benches have laid down in no uncertain terms
that an excise duty need not necessarily be regarded as being a
levy only on the manufacturer and it is possible for a law to
provide that excise duty may be levied not on the manufacturer but
at a later point of time. He, therefore, contends that the
observation to the contrary in Mohan Breweries ‘ case does not
reflect the position in law correctly and he submits that in the
present cases, on a correct interpretation of Sections 17 and 18 of
the Abkari Act of Kerala, it must be held that the levy of excise
duty, is not on the manufacturer but is at the stage when the
liquor is removed by the Beverages Corporation from the warehouse
and therefore the same cannot form part of the respondents’ turn
over.
In our opinion, the point involved is an important one and it would
be appropriate if this and the connected cases are heard by a
larger Bench.
We direct, the papers be laid before Hon’ble the Chief Justice for
appropriate orders."
That is how these appeals have been placed by the Hon’ble Chief Justice
before this Bench for disposal.
The first batch of appeals arise out of writ petitions filed in the years
1998 - 1999 which were disposed of by a common judgment and order of a
Division Bench of the High Court dated 27th November, 1999 in OP Nos.
23008-23903/98, 818, 2255, 2264, 12893, 3283; 7437 and 19686/99 whereby the
High Court allowed the writ petitions filed by the respondents/distillers
holding inter alia that under the Scheme of the Kerala Abkari Act and the
Rules, the incidence of excise duty on the manufacture of Indian Made
Foreign Liquor was required by law to be borne by the Kerala Beverages
Corporation to whom the liquor was sold at a price which did not include
the element of excise duty. Consequently the State of Kerala and its
officers were not entitled to levy turnover tax on the
respondents/distillers by including in their turnover the excise duty
payable on the liquor manufactured and sold by the respondents/distillers
to the Kerala State Beverages Corporation. The High Court also declared
that Section 2(xxvii) of the Kerala General Sales Tax Act authorizing the
levy of turnover tax on the amounts of excise duty paid by the Kerala State
Beverages Corporation on the distillers was unconstitutional and void.
After the judgment of the High Court in the first batch of writ petitions,
and while the appeals against the said judgment and order were pending
before this Court, on 1.4.2001 the State of Kerala amended Section 5(2C) of
the Kerala General Sales Tax Act, by the Finance Act of 2001, by adding an
explanation which was brought into effect retrospectively from July 1, 1987
which reads as follows :-
"Explanation : For the removal of doubt it is hereby clarified that any
distillery in the State which sells liquor manufactured by it within the
State to the Kerala State Beverages Corporation shall be liable to pay
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turnover tax on the turnover of sale of liquor by it to the said
Corporation and the turnover for the purpose of this sub-section shall
include any duty of excise liable on such liquor at the hands of such
manufacturer whether such duty is paid by the manufacturer or by the said
Corporation."
Since the Sales Tax authorities issued notices to the
respondents/distillers proposing to provisionally assess the turnover tax
payable by the manufacturers from April 2001 at various rates, the
respondents/distillers filed several writ petitions challenging the
validity of Section 5(2C) of the Kerala General Sales Tax Act read with
Section 3A of the Kerala Finance Act, 2001 as being unconstitutional, both
in its retrospective and prospective operation. They also challenged the
consequent actions initiated against them by the Sales Tax authorities. A
Division Bench of the Kerala High Court allowed these writ petitions by a
common judgment and order of August 9, 2002 in OP Nos. 3736, 5139, 1705,
4464, 6075, 6113, 6116, 6122, 6239, 6336, 7639, 7666 of 2002 and 31153 of
2001. The Division Bench disposing of the aforesaid writ petitions did not
agree in principle with the law as laid down in the earlier judgment
disposing of the first batch of writ petitions and was of the view that the
incidence of excise duty fell squarely on the respondents/distillers and as
such was includable in their total turnover for purpose of computation of
turnover tax under the Kerala General Sales Tax Act. However, the Division
Bench held itself bound by the earlier decision rendered by the High Court
and, therefore, following the earlier decision held that by adding an
explanation to Section 5(2C) by the Kerala General Sales Tax Act the
constitutional lacuna pointed out in the earlier judgment had not been
removed by appropriate amendment to the Kerala Abkari Act. By merely adding
the explanation to Section 5(2C) of the Kerala General Sales Tax Act, the
excise duty element paid by the Corporation could not be added to the
turnover of the respondents/distillers since it had been held in the
earlier judgment that excise duty was leviable only on the purchaser,
namely, the Kerala State Beverages Corporation.
In this view of the matter the High Court allowed the writ petitions and
declared that the explanation appended to Section 5(2C) of the Kerala
General Sales Tax Act was unconstitutional and invalid both in its
prospective operation from 1st April, 2001 and in its retrospective effect
from 1st July, 1987.
OP No. 14771/2002 out of which C.A. No. 7954 of 2003 arises was also
disposed of in the same terms by the High Court by its order dated August
12, 2002.
To appreciate the rival contentions of the parties it is necessary to refer
to the relevant provisions of the Kerala Abkari Act and the relevant Rules
as also the provisions of the Kerala General Sales Tax Act, 1963. The
provisions have to be viewed in the light of the policy decision of the
Government of Kerala to create a State monopoly in manufacture, wholesale
purchase and sale of Indian Made Foreign Liquor (IMFL) with effect from
1.4.1984. A Government company was incorporated, namely Kerala State
Beverages (Manufacturing and Marketing) Corporation Limited (Kerala
Beverages Corporation). Necessary amendments to the Abkari Act and the
relevant Rules were made with a view to effectuate this policy. The
respondents/distillers could not, in view of the monopoly created in favour
of the Kerala State Beverages Corporation, sell IMFL manufactured by them
to anyone, and had to deliver the same to the Kerala State Beverages
Corporation for which purpose they had to submit tenders each year for the
various brands of IMFL manufactured by them. The Kerala State Beverages
Corporation was granted licence in Forms BW1 and FL9 under the Bond Rules.
The IMFL supplied by the respondents/distillers was stored in bonded
warehouses maintained by the Kerala State Beverages Corporation in
accordance with the Bond Rules. The Kerala State Beverages Corporation also
executed an agreement in Form - A under which it was obliged to observe the
provisions of the Abkari Act and not to remove goods without payment of
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duty. The price paid by the Kerala State Beverages Corporation to the
respondents/distillers did not include the element of excise duty which was
later paid by the Kerala State Beverages Corporation when the liquor moved
out of its warehouses.
In view of the policy to create a State monopoly, and having regard to the
Scheme of the Kerala Abkari Act and the relevant Rules, the
respondents/distillers contended that the Kerala Abkari Act did not impose
a liability on the respondents/distillers to pay excise duty since such a
liability was imposed only on the Kerala State Beverages Corporation which
actually paid excise duty payable on the IMFL. Consequently the element of
excise duty did not form part of the turnover of the respondents/distillers
and was therefore not includable in the total turnover of the
respondents/distillers for purpose of computation of turnover tax payable
by them under the Kerala General Sales Tax Act.
The Kerala Abkari Act was formerly known as Cochin Abkari Act enacted in
the year 1902. It applied to the territories comprised within the State of
Cochin but with effect from 11th July, 1967, by Act 10 of 1967, the
provisions of the Act were extended to the whole of the State of Kerala.
Chapter IV of the Act deals with manufacture, possession and sale of
liquor. The relevant part of Section 12 reads as follows :-
"12. (1) Manufacture of liquor or intoxicating drug prohibited except under
the provisions of this Act:- No liquor or intoxicating drug shall be
manufactured.
..... ..... ...
except under the authority and subject to the terms and conditions of a
licence granted by the Commissioner in that behalf, or under the provisions
of Section 21;
..... ..... ...
Section 14 deals with establishment and control of distilleries, Beverages,
warehouses etc. and provides as follows :-
"14. Establishment and control of distilleries, breweries, warehouses, etc.
:- The Commissioner may, with the previous approval of the Government :-
(a) establish public distilleries, breweries or wineries, or authorize the
establishment of private distilleries, breweries, wineries or other
manufactories in which liquor may be manufactured under a license granted
under this Act;
(b) establish public warehouse or authorize the establishment of private
warehouses wherein liquor may be deposited and kept without payment of duty
under a license granted under this Act;
(c) discontinue any public or private distillery, brewery, winery or other
manufactory or warehouse so established;
(d) prescribe the mode of supervision that may be necessary in a
distillery, brewery, winery or other manufactory or warehouse so
established, or in any other manufactory where preparation containing
liquor or intoxicating drugs are manufactured, to ensure the proper
collection of duties; taxes and other dues payable under this Act or the
proper utilization of liquor or intoxicating drugs;
..... ..... ...
Chapter V of the Act deals with duties, taxes and rentals. Sections 17 and
18, which are relevant, provide as follows :-
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"17. Duty on liquor or intoxicating drugs :- A duty of excise or luxury tax
or both shall, if the Government so direct, be levied on all liquor and
intoxicating drugs
(a) permitted to be imported under Section 6; or
(b) permitted to be exported under Section 7; or
(c) permitted under Section 11 to be transported ; or
(d) manufactured under any licence granted under Section 12; or
(e) manufactured at any distillery, brewery, winery or other
manufactory established under Section 14; or
(f) issued from a distillery, brewery, winery or other manufactory or
warehouse licensed or established under Section 12 or Section 14; or
(g) sold in any part of the State ;
Provided that no duty or gallonage fee or vend fee or other taxes shall be
levied under this Act on rectified spirit including absolute alcohol which
is not intended to be used for the manufacture of potable liquor meant for
human consumption.
Explanation :- For the purpose of this section and Section 18, the
expression "duty of excise", with reference to liquor or intoxicating
drugs, include countervailing duty on such goods manufactured or produced
elsewhere in India and brought into the State."
"18. How duty may be imposed :- (1) Such duty of excise may be levied :
(a) in the case of spirits or beer, either on the quantity produced in or
passed out of a distillery, brewery or warehouse licensed or established
under Section 12 or Section 14 as the case may be or in accordance with
such scale of equivalents, calculated on the quantity of materials used or
by the degree of attenuation of the wash or wort or on the value of the
liquor as the case may be as the Government may prescribe ;
.... .... .....
.... .... .....
Section 18A of the Act provides as follows :-
"18A. Grant of exclusive or other privilege of manufacture, etc., on
payment of rentals :- (1) it shall be lawful for the Government to grant to
any person or persons, on such conditions and for such period as may deem
fit, the exclusive or other privilege-
(i) of manufacturing or supplying by wholesale; or
(ii) of selling by retail; or
(iii) of manufacturing or supplying by wholesale and selling by retail,
any liquor or intoxicating drugs within any local area on his or their
payment to the Government of any amount as rental in consideration of the
grant of such privilege. The amount of rental may be settled by auction,
negotiation or by any other method as may be determined by the Government
from time to time, and may be collected to the exclusion of, or in
addition, to the duty or tax leviable under Sections 17 and 18.
(2) No grantee of any privilege under sub-section (1) shall exercise the
same until he has received a licence in that behalf from the Commissioner.
(3) In such cases, if the Government shall by notification so direct, the
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provisions of Section 12 relating to toddy and toddy producing trees shall
not apply."
We may notice at this stage that Section 17 has been amended with effect
from April 1, 2003, to the effect that the words "if the Government so
directs", and clauses (b), (c), (f) and (g) stand deleted.
In exercise of powers conferred by Section 29 of the Abkari Act the
Government of Kerala has framed Rules for the establishment and working of
Distilleries, Warehouses and Excise Depots for regulating the issue and
transport of spirits known as the Kerala Distillery and Warehouse Rules,
1968. Rule 47 which deals with removal of spirits from distilleries and
warehouses provides as follows :-
"47. Removal of spirits from distilleries and warehouses. - Spirits may be
issued from distilleries and warehouses.
(1) Under bond
(a) for export to any other State in India or to any place out of India
or to any other licensee subject to such restrictions and to payment of
such amounts as may be prescribed by the Government from time to time.
(b) for transport to another distillery or warehouse, licensed under
these rules or to the warehouse licensed under the Foreign Liquor Storage
in Bond Rules, 1961.
(2) On payment of duty or gallonage fee or vending fee or other taxes, for
consumption within the State to licensees authorized to purchase the same.
(3) Without payment of duty and without bond or on payment of such reduced
rates of duty, taxes or fee as may, from time to time, be prescribed by the
Government (in the case of spirits other than denatured spirits) if sold to
officers of Government or other persons specially exempted from payment of
duty or taxes or fees in full or part and empowered to purchase them.
(4) From distilleries, only, free of duty but on payment of gallonage fee
or vending fee or taxes as may be prescribed by the Government, after
denaturation under the rules prescribed under the Act."
Rule 50 deals with removal under Bond and reads as follows :-
"50. Removals under bond. - When spirits are removed from the distillery or
warehouse without payment of duty, the distiller or warehouse keepers shall
execute bond for the payment of duty on them at the prescribed rate in case
of his failure to account for them to the satisfaction of the Commissioner.
In the case of spirits exported, bond shall be executed with one or more
sureties."
The relevant part of Rule 52 provides as follows :-
"52. To whom issues for local consumption may be made. - (1) Indian Made
Foreign Spirit may be issued for consumption within the State only to the
FL9 licensees in the State.
.... .... .....
Foreign Liquor Rules, 1953 have also been framed under Sections 10, 24 and
29 of the Cochin Abkari Act. Rule 13 sub-rule 9 which deals with issue of
licenses in Form FL9 reads as follows :-
"(9) License for possession and supply of foreign liquor in wholesale by
the Bonded Warehouse Licensees to Foreign Liquor-1 Licensees, Foreign
Liquor-3 Hotel Restaurant Licensees, Foreign Liquor-4 Club Licensees,
Foreign Liquor-4A Club Licensees, Foreign Liquor 11 Beer/Wine parlour
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licensees and Foreign Liquor-12 Beer retail sale outlet licensees in the
State :- Licenses in Form FL9 shall be issued by the Excise Commissioner,
only to the Kerala State Beverages (Manufacturing and Marketing)
Corporation Ltd., possession licenses in Form BW1 under the Foreign Liquor
(Storage in Bond) Rules, 1961 on payment of an annual rental of
Rs.25,00,000 (Rupees twenty five lakhs only)......"
The aforesaid sub-rule was amended by the Government of Kerala by
Notification dated 5th January, 1999. By the said amendment in the heading
the words "by the Bonded Warehouse licensees" were omitted. Similarly in
the first sentence the words "possessing licences in Form BW1 under the
Foreign Liquor (Storage in Bond) Rules, 1961" were omitted. In Form FL9 in
the heading, the words "BY THE BONDED WAREHOUSE" were omitted. This
amendment was brought about by the Government to avoid duplication of work.
Under the unamended provision the KSBC had to keep the stock of IMFL in the
Bonded Warehouses and when the stock was taken out for supply to other
licensees excise duty had to be paid by the aforesaid Corporation. This
system was done away with and by amendment of sub-rule 9 of Rule 13 the
KSBC was obliged to pay the excise duty on the IMFL to the manufacturer and
thereafter stock duty paid liquor for supply to other licensees.
This fact has been noticed by the High Court in its judgment in the first
batch of writ petitions. The Court after noticing the said amendment
observed that with effect from 5th January, 1999, in view of the amendment
of the Foreign Liquor Rules, the KSBC had been purchasing IMFL from the
manufacturers after payment of excise duty. All sales of liquor by the
manufacturers to the Corporation took place after the excise duty had been
remitted by the KSBC with the result that the system of Bonded Warehouse in
so far as IMFL is concerned was done away with. The KSBC paid excise duty
on IMFL before it purchased the same from the concerned manufacturer and
therefore the amount of excise duty was paid by the Corporation when it
purchased IMFL from the manufacturer. The amount of excise duty paid formed
part of consideration for which the property in the goods viz. IMFL was
purchased by the Corporation from the manufacturer concerned. It was only
after payment of the excise duty that the goods were consigned to the
concerned FL9 licensed premises owned and controlled by the KSBC.
The Rules next to be noticed are the Foreign Liquor (Storage in Bond)
Rules, 1961 which have been framed under Sections 14(d) and 29(2) of the
Cochin Abkari Act. Under the Rules "bonded warehouse" means a warehouse
where foreign liquor is stored in bond. Sub-section (vi) of Section 2
explains the words "to store foreign liquor in bond" as under :-
"with all its grammatical variations means to store, deposit or keep
foreign liquor in a bonded warehouse without payment of the excise duty
payable thereon."
Rule 3 provides as follows :-
"3 (a) Any person desiring to store in bond foreign liquor shall make an
application for a licence in that behalf to the Commissioner of Excise
through the concerned officer-in-charge of the Excise Division. The
application shall contain the following particulars namely :-
(1) name and address of the applicant in the case of a firm or
company, the names and addresses of the partners or directors
should be furnished ;
(2) name and address of the place where foreign liquor is to be
stored or bond together with the description and the correct plan
of the building or rooms to be used as a warehouse in triplicate;
(3) the maximum quantity of each kind of foreign liquor required to
be stored in bond at any one time ;
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(4) the date from which the applicant desires to store foreign
liquor in bond ;
(5) whether the applicant is prepared to deposit the amount of
security fixed by the Commissioner of Excise as a guarantee for the
observance of the provisions of the Act and the Rules and orders
made hereunder;
(6) whether the applicant holds a wholesale licence granted under
the Cochin Foreign Liquor Rules.
(b) the applicant shall execute an agreement in Form A undertaking to abide
by the provisions of the Act and the Rules and orders made thereunder and
the conditions of the licence and also agreeing to pay the prescribed duty
therefor.
(c) the applicant shall take out a licence in Form FL.9 appended to the
Rule for the levy of gallonage fee, etc. and for the issue of licences for
the sale of foreign liquor, punished under Notification No. S.R.4
1859/52/RD dated 17.1.1953, as subsequently amended, for the supply of
foreign liquor in wholesale to the other foreign liquor licensees.
Provided that nothing contained in sub-rule (c) shall be applicable
to the applicant for a licence in Form BW1(A).
Rule 3(b) refers to the execution of an agreement in Form A. The relevant
part of Appendix incorporated therein is as follows :-
"Now the condition of this bond is that if the obliger(s) shall
observe all the provisions of Abkari Act, the Rules, Notifications
and Orders thereunder and the Foreign Liquor (Storage in Bond)
Rules, 1961 and in particular shall deposit all Foreign Liquor
allowed to be imported to the bonded warehouse in a storeroom or
other place of storage approved by the Commissioner (hereinafter
referred to as "licensed premises") and shall not remove or issue
from the licensed premises before the proper duty or fee, if any
has been paid, any Foreign Liquor except as provided for in the
said Rules.
And if the obliger(s) pay/pays into the Government Treasury all
dues whether excise duty or fees payable by the obliger(s) under
the provisions of the Cochin Abkari Act 1 of 1077 and the Rules and
Orders made thereunder and complies with dirth (sic) all the
provisions of the said Act, the said Rules and the Orders and
Notifications issued thereunder.
This obligation shall be void but otherwise and on breach in the
performance of all or any of the terms and conditions herein
contained the same shall be in full force.
.... .... .....
Rules 11 and 14 are also relevant which read as follows :-
"11. (1) Foreign liquor stored in the bonded warehouse shall be removed
only to the premises licensed under the F.L. 9 licence referred to in sub-
rule (c) of Rule 3, held by the bonded warehouse licensee, and such removal
shall be only under cover of a pass granted in that behalf and on payment
of the Excise duty due. Foreign Liquor intended for export to foreign
countries on the strength of the export authorization from the Government
of India shall also be brought and stored in the Bonded Warehouse and the
removal therefrom shall be only under cover of a pass granted in that
behalf. The pass shall be granted on the execution a bond to pay excise
duty at full rate payable on the quantity not exported as evidenced from
the certificate from the "customs authority" of the port of export.
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Provided that nothing contained in sub-rule (1) shall be applicable to the
licensee in Form BW 1(A).
(2) If the licensee wants to issue or remove any quantity of foreign liquor
from the bonded warehouse, he shall make an application to the Officer-in-
Charge of the Excise Division through the Officer-in-Charge in that
behalf."
"14. A licence in Form BW1 shall be granted to the Kerala State Beverages
(Manufacturing and Marketing) Corporation Limited and a licence in Form BW1
(A) shall be granted to the Canteen Stores Department, Ministry of Defence
for the purpose of storage in Bond and supply of Foreign Liquor including
beer in wholesale to the FL-9 licensees and FL-8 licensees respectively
under the Foreign Liquor Rules, 1953."
Under the Kerala Abkari Shops (Disposal in Auction) Rules, 1974 as amended
with effect from 1st April, 1989, Rule 3(1A) provides as follows :-
"3(1A). The Kerala State Beverages (Manufacturing and Marketing)
Corporation Limited shall have the exclusive privilege to obtain FL-9
Licence for the purpose of distribution of Foreign Liquor to Foreign Liquor
1 Licensee, Foreign Liquor 3 hotel (Restaurant) Licensees, Foreign Liquor 4
Club Licensees, Foreign Liquor 4A Club Licensees, Foreign Liquor 11
beer/wine parlour Licensees, Foreign Liquor 12 Beer Retail Sale Outlet
Licensees and Foreign Liquor, 6 Special Licensees in the State."
From the above provisions it will be seen that the Kerala State Beverages
(Manufacturing and Marketing) Corporation Limited have the exclusive
privilege to obtain FL-9 licence for the purpose of distribution of IMFL. A
licence in Form BW1 is also required to be granted only to the said
Corporation. The aforesaid Corporation has also executed an agreement in
Form A as contemplated by Rule 3(b) of the Bond Rules, 1961. To give effect
to the monopoly created in favour of the Kerala State Beverages
(Manufacturing and Marketing) Corporation Limited the
respondents/distillers are required to supply IMFL to the said Corporation
under a rate contract. Offers are required to be made in sealed covers
which are subject to certain conditions. The format in which the offers are
to be made is titled ‘Data Sheet’ which includes all necessary particulars.
A clause in the data sheet provides as follows:-
"The above rate includes freight, insurance, export duty, CST, B-deposit,
packing charges, handling charges, unloading charges, warehouse, other
levies etc., but does not include Kerala Import Duty, Kerala Excise Duty
and Kerala Sales Tax."
As we have noticed earlier, with effect from January 5, 1999, by amendment
of the Foreign Liquor Rules, KSBC was required to pay to the
distillers/manufacturers, the duty element levied under Section 17, before
removing the IMFL to its licensed premises.
We may now briefly refer to the facts of the cases before us. The
representative facts are taken from the writ petition filed by M/s. Kerala
Distilleries and Allied Products Ltd., now renamed as Maharashtra
Distilleries Limited as per the Scheme of Amalgamation sanctioned by the
High Court of Kerala. The aforesaid petitioner is engaged in the
manufacture and sale of IMFL. It is registered as dealer both under the
Kerala General Sales Tax Act. 1963 and the Central Sales Tax Act, 1956.
Pursuant to the policy of the Government creating a monopoly in favour of
the Kerala State Beverages (Manufacturing and Marketing) Corporation
Limited, the petitioner has been submitting tenders as required for sale
and supply of IMFL. The prices quoted of the various brands of IMFL do not
include the sales tax or the excise duty since it was only the Kerala State
Beverages Corporation which was liable to pay the tax. Excise duty was not
paid by the petitioner (respondent herein) since the IMFL was required to
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be delivered to the Kerala State Beverages Corporation and no excise duty
was payable by the petitioner (respondent herein). The offer made as per
the requirement of the tender document clearly stipulated that the price
quoted did not include excise duty.
Accordingly assessments were made from time to time on the basis that
liability to pay sales tax and excise duty was on the Kerala State
Beverages Corporation. The petitioner (respondent herein) paid turnover tax
on the basis of price paid to it by the Kerala State Beverages Corporation.
It, therefore, did not include the excise duty element while computing its
total turnover having regard to the entry at Sl. No.53 of the First
Schedule of the Kerala General Sales Tax Act. Some of the assessments were
finalized upto the year 1995-96. However, Sales Tax authorities on 19th
July, 1998 called upon the petitioner to submit revised returns including
element of excise duty paid by the Corporation. A notice was also issued
proposing to impose penalty for less payment of turnover tax having regard
the fact that the turn over did not include the element of excise duty
payable on the IMFL. The petitioner filed its objections on 15th September,
1998 but without giving serious consideration, an order of the assessment
for the period April to July, 1998 was made and order imposing penalty was
also passed. Thereafter the Deputy Commissioner of Commercial Tax issued a
notice on 28th September, 1998 for the years 1991-92 to 1995-1996 in
exercise of powers under Section 35 of the Kerala General Sales Tax Act on
the ground that the assessments made were prejudicial to the interest of
the revenue inasmuch as the assessing authority did not take into account
the element of excise duty paid by the fourth respondent, namely the Kerala
State Beverages (Manufacturing and Marketing) Corporation Limited and did
not levy turnover tax on the petitioner. A follow-up notice was issued
calling upon the petitioner (respondent herein) to produce books of account
relating to the years in question. In these circumstances the petitioner
(respondent herein) filed the writ petition praying for quashing of the
proceedings and for declaration that it was not liable to pay the turnover
tax on the amount of excise duty paid by the Kerala State Beverages
Corporation on IMFL sold by it to the Corporation. The levy of turnover tax
on such amount of excise duty was sought to be quashed as being ultra vires
and beyond the legislative competence and therefore unconstitutional.
The State in its counter-affidavit contended inter alia that the excise
duty paid by the Kerala State Beverages Corporation formed part of the sale
turnover of the manufacturer, since it is the obligation of the
manufacturer to pay excise duty, though it may be discharged by others.
Relying upon the decision of this Court in Mohan Breweries and Distilleries
Limited v. Commercial Tax Officer, Madras and Ors., [1997] 7 SCC 542 it was
contended that excise duty element formed part of the total turnover which
was chargeable to turnover tax under Section 5(2C) of the Kerala General
Sales Tax Act, 1963.
The Kerala State Beverages Corporation which was respondent No.4 in the
writ petition accepted the fact that the excise duty on IMFL purchased by
it from the petitioner (respondent herein) was paid by it and the same is
included in its price which it realized as a wholesale dealer from its
purchasers, and the turnover of the Corporation is computed on that basis
and the turnover tax paid accordingly.
The turnover tax was introduced with effect from July 1, 1987 by amendment
of the Kerala General Sales Tax Act, 1963. The turnover tax was then
payable only by those dealers who were not liable to pay sales tax on any
goods under Section 5(1) of the Act. However, by amendment of August 1,
1991 turnover tax was made payable by every dealer in foreign liquor on the
turnover as specified at all points. Section 5(2A) of the Act was
renumbered as Section 5(2C) with effect from April 1, 1998 which provided
that every dealer in Foreign Liquor (Indian Made) shall pay turnover tax on
the turnover of goods as specified in entries against Serial Nos. 53 and 54
of the First Schedule @ 5 % on the turnover at all points.
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At this stage we may notice the relevant provisions of the Kerala General
Sales Tax Act, 1963. "Turnover" has been defined under the Act and the
relevant part thereof reads as follows :-
" ‘turnover’ means the aggregate amount for which goods are either bought
or sold, supplied or distributed by a dealer, either directly or through
another, on his own account or on account of others, whether for cash, or
for deferred payment or other valuable consideration, provided that the
proceeds of the sale by a person of agricultural or horticultural products,
grown by himself or grown on any land in which he has an interest whether
as owner, usufructuary, mortgage, tenant or otherwise, shall be excluded
from his turnover."
Section 5 provides for the levy of tax on sale/purchase of goods with which
we are not directly concerned but the relevant part thereof may be noticed
:-
"5. Levy of tax on sale or purchase of goods :- (1) Every dealer (other
than a casual trader or agent of a non-resident dealer) whose total
turnover for a year is not less than ‘two lakh rupees and every casual
trader or agent of a non-resident dealer, whatever be his total turnover
for the year, shall pay tax on his taxable turnover for that year.
(i) in the case of goods specified in the First or Second Schedule, at the
rates and only at the points specified against such goods in the said
Schedules;
..... ..... ....."
The relevant part of Section 5(2C) reads as follows :-
"5(2C) (i) Notwithstanding anything contained in this Act or the Rules made
thereunder every dealer shall pay turnover tax on the turnover of goods as
specified hereunder, namely :-
(a) by an oil company defined in the Explanation under serial number 97
of the First Schedule to this Act whose total turnover in a year exceeds
rupees fifty lakhs at the rate of three percent on the turnover from the
1st day of April, 1991 till 31st day of July, 1991 and thereafter at the
rate of four percent on the turnover ;
(b) by any dealer in Foreign Liquor (Indian made) or Foreign Liquor
(Foreign made) as specified in entries against serial numbers 53 and 54 of
the First Schedule at the rate of five percent on the turnover at all
points;
.... ....
....."
The entry against Serial No.53, which is relevant is to the following
effect :-
"53. Foreign liquor At the point of sale by the Kerala State
(Indian Made) Beverages (Manufacturing and Marketing)
Corporation Limited and at the point of first sale in the State by
a dealer who is liable to tax under Section 5 (except where the
sale is to the Kerala State Beverages (Manufacturing and Marketing)
Corporation Ltd."
In the first batch of writ petitions which were disposed of by a Division
Bench by its judgment and order of November 27, 1999 it was held that Entry
51 of List II of the 7th Schedule of the Constitution of India is only the
source of power for the legislature concerned empowering it to enact a law
for the levy of excise duty on consumable alcohol manufactured within the
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State. Excise duty, though an incidence of the manufacture of goods, it was
not axiomatic that the manufacture of goods would immediately result in a
liability of excise duty merely on the wording of Entry 51 in List II. The
liability of excise duty depended on the charging provision in the statute
providing for such levy.
In the instant case, Bonded Warehousing Licence in Form FL9 had been issued
only to the Beverages Corporation which was constituted as the sole
marketing agency for the purchase and distribution of IMFL. Rule 11 of the
Storage in Bond Rules permitted removal of IMFL from bonded warehouse only
to premises licensed under FL9 Licence, under cover of a pass on payment of
excise duty due. Levy of excise duty was, therefore, traceable to Section
17(f) of the Act. These two provisions have to be read together.
The Beverages Corporation had executed a bond under which it had bound
itself to pay excise duty payable on the IMFL. Therefore, the statutory
provisions read together do not contemplate payment of excise duty on IMFL
by the manufacturer within the State at any stage prior to the removal from
the warehouse of the Beverages Corporation. Under such circumstances it was
impossible for the manufacturers to pay the excise duty at any stage after
the manufacture of goods and before its removal from the distillery to the
bonded warehouse of the Beverages Corporation in course of sale effected in
favour of the said Corporation. The manufacturer lost control over the
goods in question and property passed on from the distillery to the
Beverages Corporation.
The levy of excise duty in terms of Section 17(f) of the Act read with Rule
11 of the Storage in Bond Rules constituting the charging provision of the
excise duty under the Abkari Act came into operation at a stage after the
property in the goods, namely the IMFL manufactured by the distillers had
been transferred in favour of the Beverages Corporation. In other words the
charging provision under the Act came into operation at a point of time
subsequent to the transfer of property in goods in favour of the Beverages
Corporation. Under such circumstances it was difficult to accept the
argument that the amount payable by way of excise duty necessarily became
part of the turnover of the manufacturers.
On such reasoning the High Court held that the manufacturers/ distillers
were not required to pay excise duty which never formed part of their
turnover. The finding of the High Court has been summarized in paragraph 41
of the judgment, which is as follows:-
"(i) that a duty of excise is leviable under Section 17 either at the point
of manufacture or at the point of issue from a manufacturer or warehouse.
The choice is that of the Government.
(ii) that the duty may be imposed either on the quantity produced or passed
out from a distillery, brewery or warehouse.
(iii) for ad-valorem the value is such at which the Fourth respondent
purchases from the suppliers.
(iv) The petitioner does not have any license except for Compounding,
Blending and Bottling in Form No.1 in Form No.2 and Form 4.
(v) The fourth respondent is the exclusive marketing organization in the
State of Kerala and all sales have to take place to the said organization.
(vi) The fourth respondent alone holds license in FL9 and is alone
competent to have a Bonded Warehouse granted under BW1. They have executed
requisite Bond in Form A and entered into an agreement with the Government
for payment of duty of excise.
(vii) Duty is imposed and collected when the 4th respondent removes goods
from its Bonded warehouse under Rule 11(1) of the Bond Rules. At that point
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duty is paid by the fourth respondent in discharge of its statutory
liability to pay the duty.
(viii) Under the provisions of Section 5 read with Serial No.53 of the
First Schedule of KGST Act, the sale by the fourth respondent is the first
sale attracting tax. In other words the sale by the petitioner to the
Fourth respondent is not treated as a sale liable to tax.
(ix) That there is no necessity to submit monthly/ Quarter/Half yearly or
Annual Returns to the Excise Authorities on the part of the petitioner. In
other words the petitioner is not subjected to any assessment made under
the provisions of the Kerala Abkari Act or Rules made thereunder."
The High Court, therefore, allowed the writ petitions.
The State of Kerala preferred the instant appeals before this Court but
pending the disposal of the appeals, it amended Section 5(2C) of the Kerala
General Sales Tax Act by the Finance Act of 2001 adding an explanation with
a view to remove any doubt. We have earlier quoted the explanation which
was brought into effect retrospectively from July 1, 1987 and which
clarified that any distillery in the State which sells liquor manufactured
by it within the State to the Kerala State Beverages Corporation shall be
liable to pay turnover tax on the turnover of sale of liquor by it to the
said Corporation and the turnover for the purpose of this sub-section shall
include any duty of excise liable on such liquor at the hands of such
manufacturer whether such duty is paid by the manufacturer or by the said
Corporation. In view of the amended provision, proceedings were again
initiated by the Sales Tax authorities and the same were again challenged
before the High Court.
The second batch of writ petitions was disposed of by a common judgment
and order of the High Court dated August 9, 2002. The High Court while
disposing of the second batch of writ petitions considered the binding
precedents on the subject and observed that irrespective of the manner in
which the rules and agreements between the parties changed the point of
collection, excise duty in its true character is always a duty payable by
the manufacturer of an article and remains the liability of the
manufacturer. If as a result of the rules and the agreements it is
discharged by someone else such discharge must be held on account of the
manufacturer himself. The learned Judges referred to the decision of this
Court in Mohan Breweries and Distilleries Limited (supra) which according
to the learned Judges squarely governed the case. After noticing several
judgments of this Court the learned Judges were not inclined to agree with
the view of the earlier Bench on this aspect of the matter, but finding
themselves bound by the earlier decision, they proceeded to dispose of the
writ petitions on the basis that the manufacturers/distillers were not
liable to pay turnover tax under the Abkari Act. It held that the earlier
judgment could not be said to have been rendered per incuriam because the
judgment was rendered after considering the binding judgments of the
Supreme Court. The High Court also noticed the fact that appeals were
pending before this Court against the judgment in the first batch of writ
petitions.
Having held itself bound by the judgment of the High Court in the first
batch of writ petitions, it held that the explanation to Section 5(2C) of
the Act did not advance the case of the State because once it is held that
the provisions of the Abkari Act read with the Rules framed thereunder did
not cast the liability for payment of excise duty on foreign liquor sold in
the state of Kerala on the manufacturers and that the payment of excise
duty was the liability of the Beverages Corporation, the explanation added
to Section 5(2C) did not change the legal position unless the Abkari Act
was suitably amended so as to impose the liability of payment of excise
duty on the manufacturers/ distillers. The explanation introduced by way of
amendment was a futile attempt to revalidate the levy without curing the
inherent constitutional disability.
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It, however, negatived the plea of the manufacturers/distillers that the
levy of turnover tax under Section 5(2C) of the Act in so far as it deals
with foreign liquor can only be on the sale / turnover of the dealers as
specified in Entry 60 of the First Schedule (corresponding to Entry 53). It
held that the reference to Serial No. 60 (Serial No. 53 in the first batch
of writ petitions) of the First Schedule is only with a view to
ascertaining the description of the type of foreign liquor sold. The words
"as specified hereunder" under Section 5(2C) of the Act must be read as
qualifying the substantive goods and not as qualifying the substantive
dealer. This was because the said entry in the First Schedule describe the
person on whom the levy falls and the points at which the levy falls. The
rates were also prescribed. Moreover sub-section (2C) started with a non
obstante clause "notwithstanding anything contained in this Act or the
Rules made thereunder". Thus the payment of turnover tax under sub-section
(2C) was not subject to restrictions enumerated in sub-section (1) and sub-
section (2) of Section 5 of the Act. One such restriction pertains to the
number of points at which the levy can be made. On an interpretation of the
aforesaid provision it recorded a categoric finding that the contention of
the manufacturers/distillers that the levy of turnover tax fall on the
Beverages Corporation and not on them was not acceptable.
Learned counsel appearing on behalf of the State of Kerala drew our
attention to the provisions of the Abkari Act and the various other Rules
which have been noticed earlier in the judgment. He submitted that it is
not in dispute that upto 1.4.1984 the excise duty on the manufacture of
liquor was being paid by the distillers/manufacturers like the respondents.
With effect from 1.4.1984 the KSBC came into existence and a monopoly was
created in its favour for wholesale marketing in foreign liquor. The
manufacturers/distillers were obliged to sell their products to the
aforesaid Corporation which distributed the same to the retailers all over
the State. In view of the powers conferred by Section 17 of the Abkari Act
Notifications levying the excise duty were issued from time to time which
cast the liability to pay excise duty on the distillers/manufacturers under
the Abkari Act. He has drawn our attention, in particular, to 2
Notifications being SRO No. 60/61 dated 18.3.1961 and SRO No. 330/96 which
came into force on 1st April, 1996. The first of these Notifications shorn
of unnecessary details is to the effect that in exercise of the powers
conferred by Section 17 of the Abkari Act, the Government of Kerala
directed that the duty under the said Section shall be levied on the
following kind of liquors manufactured in the area where the said Act is in
force or manufactured elsewhere in India and imported into the said area by
land or under bond by sea, at the rates mentioned against each kind of
liquor. The first item mentioned is Indian Made Foreign Spirits except
Indian Made Foreign Spirits consumed by Defence Services. The second
Notification is in similar terms wherein in exercise of powers conferred by
the Sections 6, 7, 17 and 18 of the Abkari Act the Government of Kerala
directed that the import and export fees, the excise duty and luxury tax
under the said sections shall be levied on the following kinds of liquors
manufactured in the State and exported outside the State under bond in
force or manufactured elsewhere in India and imported into the State by
land, air or sea under bond, at the rates mentioned against each kind of
liquor. The first item mentioned under the heading - kind of liquor - is
"Indian Made Foreign Liquor including beer except those consumed by Defence
Service". He submitted that similar Notifications were issued in exercise
of powers conferred by Section 17 of the Abkari Act which leave no room for
doubt that the levy of excise duty was on the manufacture of liquor in the
State. He, therefore, pointed out that having regard to the Notifications
issued in exercise of powers conferred under Section 17 of the Abkari Act,
what was levied was excise duty on IMFL manufactured in the State. The
liability to pay excise duty, therefore, was that of the manufacturer. He
relied upon Rule 47 of the Kerala Distillery and Warehouse Rules, 1968
whereunder no liquor could move out of the distillery premises except on
payment of excise duty or under bond executed by the distillery undertaking
to pay the excise duty. The incidence of execution of bond was itself proof
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of the fact that the liability to pay excise duty was cast on the
distillers or the manufacturers. Relying upon sub-rule (1) of Rule 16 of
the Kerala Distillery and Warehouse Rules, 1968 it was submitted that the
definition of "warehouse" clearly meant that part of a distillery where
spirits for issue are kept. The warehouse referred to in Rule 47 related to
the warehouse in the distillery where the distillery kept liquor produced
by it before it was removed therefrom. After the monopoly was created in
favour of KSBC with effect from 1.4.1984 the liquor stored in the warehouse
of the distillery was removed under bond to the Corporation bonded
warehouse licenced in Form BW1 under the Storage and Bond Rules.
Corporation also was required to execute a bond in Form A undertaking to
pay the excise duty. He, therefore, submitted that the liability to pay
excise duty was clearly on the manufacturers/ distillers. The amendment
made to the Rules only enabled the KSBC to procure IMFL from the
manufacturers without payment of excise duty and stock the same in its
bonded warehouses. The liability to pay excise duty which was cast on the
manufacturer was never shifted. That liability arose at the point of
manufacture and there was no amendment to the relevant statutory provision
whereby the liability to pay excise duty was shifted from the manufacturers
to the KSBC. As a matter of convenience the amended rules provided for
payment of excise duty, which was the primary liability of the
manufacturers, by the KSBC and therefore it was the liability of the
manufacturer which was discharged by the KSBC. Reliance was placed on a
decision of this Court in Mohan Breweries and Distilleries Limited (supra)
and Modowell & Co. Ltd. v. C.T.O., [1985] 3 SCC 230 and State of Kerala v.
Madras Rubber Factory, [1998] 1 SCC 616 and Deputy Commissioner of Sales
Tax (Law), Board of Revenue (Taxes), Ernakulam v. Hindustan Petroleum
Corporation, [2000] 10 SCC 535. Reliance was also placed on a Full Bench
decision of the Kerala High Court in Hindustan Petroleum Corporation v.
State of Kerala : (1989) STC 106. Counsel also placed reliance on two
Division Bench decisions of the Kerala High Court in TRC No. 92 of 1987
M/s. South Travancore Distilleries and Allied Products, Trivandrum v. State
of Kerala, dated 2nd August, 1989 wherein it was held that the liability to
pay excise duty was on the manufacturer which has not been shifted by law
from the manufacturer to the KSBC. The duty discharged by the KSBC would
still formed part of the deposit and total sale turnover of the
manufacturers. According to him this judgment was approved by this Court by
dismissal of CA No. 3020 of 1990 by order dated October 24, 1990. This
Court held :
"On our aforesaid finding that the demand of sales tax on excise duty which
would have merged into price to be charged by the manufacturer to the
Corporation, the liability for tax on excise duty should be taken as final
against the appellant."
Reliance was placed on the decision of the Division Bench in OP No.9295 of
1989 decided on April 12, 1991. He, therefore, submitted that the law is
well settled that excise duty is a tax on the manufacture of goods and this
liability falls on the manufacturer though its collection may be deferred
to a later stage upto the stage of consumption. He also relied upon various
decisions of this Court in support of this proposition. He further
submitted that the use of the words "if the Government so directs" in
Section 17 of the Abkari Act only gives to the Government the discretion to
levy or not to levy the excise duty. It has no relation to the stage at
which the excise duty was to be levied or collected. The liability arose
once the Government directs to levy the duty and issues Notification in
that regard. The collection may be at one or the other points referred to
in clauses (c) to (g). The charging section itself imposes the liability on
all those mentioned in clauses (c) to (g) all of which are related to
manufacture. According to him all that is required is for the Government to
evince its intention by levying the duty by appropriate Notification. Such
Notifications have been issued from time and time and those Notifications
specified that duty is imposed on the manufacturer of IMFL. That the excise
duty liability is of distiller is also evident from the fact that the duty
payable is on the value/sale price of the liquor sold by the distillery to
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the KSBC and not on the basis of the sale price of the KSBC to retailers.
He, therefore, submitted that the amendment of the Rules, particularly the
(Storage in Bond) Rules, did not shift the liability of the manufacturer
under the Notification issued under Section 17 of the Abkari Act. It only
enabled the IMFL to be removed from the distillers warehouse to the
premises of the FL9 licensees namely, the KSBC under the cover of a pass
granted in that behalf and on payment of excise duty. The excise duty
liability has never been obliterated or dispensed with by statutory
provision. The liability continued and only the collection was postponed in
cases where the liquor was removed from the bonded warehouses of the
distillers to the bonded warehouses of the KSBC without payment of excise
duty.
He further submitted that in view of the Government’s order dated 5th
January, 1999 the Foreign Liquor Rules were amended and, thereafter the
KSBC was obliged to pay the excise duty at the time of purchase itself so
that what was stocked in the premises of the KSBC was duty paid IMFL. There
could be no doubt that thereafter the excise duty element formed part of
the sale price of the distillers yet the High Court in the first batch of
writ petitions granted relief in very broad terms ignoring this aspect of
the matter. He further submitted that the tax did not offend Article 311 of
the Constitution of India and there was no violation of Article 304(1)
inasmuch as there was no discriminatory levy on liquor imported from
outside the State, to which locally manufactured liquor was not subject. It
was also submitted that what was levied under the Act was excise duty and
not price paid for the privilege of grant of exclusive right to manufacture
and market liquor. Lastly it was submitted that Entry 53 of the First
Schedule to the Kerala General Sales Tax Act read with Section 5(2C) of the
Act levied turnover tax on sales of IMFL at all points by the dealers.
Entry 53 did not govern Section 5(2C) which began with a non obstante
clause and reference to Entry 53 in the aforesaid Section is only to the
definition of foreign liquor in that entry. The section applied to the
goods referred to in Entry 53 and had no reference to the dealers by whom
tax was payable because the turnover tax on foreign liquor was payable by
all dealers on all points of sale.
Mr. Nariman appearing on behalf of the respondents submitted that the levy
of duty on liquor was not referable to Entry 51 of List II but falls under
Entry 8 of List II of the Seventh Schedule. He submitted that a close
examination of Section 17 of the Abkari Act will reveal that the Government
has a discretion to impose the levy, and the taxable events are those
enumerated in clauses (a) to (g) which include levy on liquor permitted to
be imported or exported or transported or manufactured under any licence
granted under Section 12 or manufactured at any distillery, brewery, winery
or other manufactory established under Section 14 or issued from a
distillery. brewery, winery or other manufactory or warehouse licensed or
established under Section 12 or Section 14, or sold in any part of the
State. He submitted that the duty of excise is levied on the manufacture of
the goods. The levy contemplated by clauses (a) to (g) of Section 17 is not
necessarily connected with manufacture of liquor, as it also envisaged the
levy of duty on liquor exported or transported under clauses (b) and (c) or
even issued from the distillery as contemplated by clause (f) or sold in
any part of the State as contemplated by clause (g). Levy under these
clauses cannot be characterized as levy of excise duty because they are not
related to the manufacture of goods. Section 18 prescribes how duty can be
imposed and in essence the basis of duty under the Abkari Act is either on
the quantity produced in, or passed out of, a distillery, brewery or
warehouse. The Section, therefore, gives a discretion to the State to
impose such duty either on a distillery or brewery or warehouse. Excise
duty in essence is a duty on manufacture but Section 18(A) of the Act also
contemplates grant of exclusive or other privilege of manufacturing or
supplying by wholesale on payment of rentals. Section 18(A) is an enabling
provision and apparently the levy under Section 18(A) which was inserted in
1964 must fall under Entry 8 of List II. The State is enabled to part with
its privilege of manufacturing or supplying liquor in wholesale or of
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selling in retail. Since the levy is relatable to Entry 8 of List II it
cannot be construed as a levy of excise duty on manufacture in terms of
Entry 51 of List II of the Seventh Schedule of the Constitution of India.
He, therefore, submitted that the levy under Section 17 or 18(A) of the
Abkari Act is not levy of excise duty stricto sensu though it is loosely so
described in the Abkari Act.
He submitted that there is a line of decisions which holds that ordinarily
excise duty is the liability of the manufacturer unless the law provides
otherwise. These decisions were, however, rendered in the context of excise
duty properly so-called. The character of a levy is not to be determined
merely by the words used in a statute but in a wider sense i.e. the nature
of the levy. Relying upon the decisions of this Court in Southern
Pharmaceuticals and Chemicals v. State of Kerala, AIR (1981) SC 1863 and
Synthetic and Chemicals Ltd. and Ors. v. State of U.P. and Ors., [1990] 1
SCC 109 and of the Kerala High Court in Moni Simon v. State of Kerala,
(1984) KLT 1060, he submitted that these cases disclose an approach which
was different while dealing with a duty under Section 17 of the Abkari Act,
than while dealing with the levy of excise duty stricto sensu. The levy
under Section 17 not being strictly speaking in the nature of duty of
excise, the liability of the Corporation has not to be determined on any
preconceived notion of levy of excise duty i.e. the liability must fall on
the manufacturer, but on the language of Section 17 which makes it clear
that it does not fall under Entry 51 of List II. At best the levy is
relatable to Entry 8 of List II. There can be no excise duty on sale or
supply as contemplated by Section 17. Therefore, the liability to pay the
duty was on the KSBC and not on the manufacturer. He also referred to the
Notifications issued by the State which went on to show that the levy was
not in the nature of excise duty. An essential element of excise duty is
uniformity of incidence which cannot vary from Notification to
Notification. The Scheme of the Act itself supports the inference that
though it is imposed under the Abkari Act, yet it is not a duty of excise
on manufacture, but a consideration for parting with State’s privilege,
referable to Entry 8 of List II.
Before the High Court the same submission was advanced on behalf of the
Respondents which is noticed in paragraphs 44 and 46 of the judgment, but
no finding has been recorded by the High Court on this aspect of the
matter.
Alternatively, and assuming without conceding, that the duty imposed is
excise duty, Mr. Nariman submitted that the observations in Mohan Breweries
(supra) that the incidence of excise duty falls on the manufacturer or
producer of the goods is not a rule of universal application, as it must
depend upon the words the statute employs. He relied upon decisions of this
Court in support of his submission that the incidence of excise duty may
fall on a person other than the manufacturer, if the statute so provides.
In the present case, he submitted that upto the time the Abkari Act was
amended in 2003, it gave an option to the Government to levy excise duty on
liquor either on the manufacturer who was licensed under Section 14 or on
the issue of the liquor from the warehouse of the licensed warehouse
keeper. According to him, the licensed warehouse keeper referred to in
Section 14(f) means the KSBC. According to him the KSBC being the sole and
exclusive warehouse keeper under the Government order of February 1, 1984
read with Rule 11 of the (Storage in Bond) Rules, it was the KSBC on which
the duty to pay the duty was imposed. Under Rule 11(1) of the aforesaid
Rules the foreign liquor stored in the Bonded Warehouse could be removed
only to the premises licensed under the FL9 licence, and the FL9 licence
could be issued only in favour of the KSBC. Since the primary obligation to
pay excise duty under the Abkari Act is that of the licensee of the foreign
liquor bonded warehouse and the License in Form FL9 could be issued only to
the KSBC, the liability was squarely on the aforesaid Corporation. Rule
3(1)(b) of the (Storage in Bond) Rules, 1961 imposes the primary obligation
to pay the duty under the Abkari Act on the licensee of a foreign liquor
bonded warehouse. Only the KSBC held the licence in Form FL9 as also BW1 ,
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and also executed an agreement in Form A agreeing to pay the prescribed
duty. The aforesaid Rules constitute the direction contemplated by Section
17 of the Abkari Act. The liability to pay the duty is clearly cast on the
KSBC.
He submitted that a close examination of Section 17 of the Act would reveal
that the duty imposed under it is not necessarily leviable on the
manufacturer. There are so many other categories. Sections 17 and 18 also
give to the Government an option as to how the duty is to be imposed and on
whom, whether on the distillers/manufacturers or warehouse owners. He
relied upon the provisions of the Abkari Act and the relevant Rules and
submitted that the Government has chosen to impose the liability on the
KSBC and not on the manufacturer. The Government had the power to do so.
The licence issued to the KSBC obliged it to pay all excise duties which
was a condition of the licence and, therefore, the payment of excise duty
by the KSBC was not on behalf of anyone else but in terms of its own
licence.
He further submitted that if payment of excise duty made by the Corporation
is treated as made on behalf of the manufacturer on the hypothesis that the
excise duty liability is that of the manufacturer, it must follow that the
payment of turnover tax by the Corporation must be similarly treated as
having been made on behalf of the manufacturer. He submitted that if the
turnover tax on excise duty is paid by the Corporation on its own behalf,
then it cannot be treated as part of the turnover of the manufacturer.
However, if the excise duty is to be treated as paid on behalf of the
manufacturer, then it must follow that the turnover tax on that duty must
also be treated as having been paid on behalf of the manufacturer.
Therefore, there could be no additional liability on the manufacturer to
pay turnover tax since the same had already been paid by the Corporation.
Mr. Ashok Desai, Senior Advocate appearing on behalf of some of the
respondents supplemented the arguments advanced by Shri Nariman and
submitted that having regard to the scheme of the Abkari Act and the Rules,
the exigibility to the duty of excise was on KSBC which has the sole
marketing and monopolistic rights as from 1st April, 1984. In fact that is
how the authorities also understood the law till the judgment in Mohan
Breweries (supra) case. According to him under the legal frame work the
duty of excise can be paid only by the Corporation and not by the
distillers. He also referred to the various provisions of the Act and the
relevant Rules in support of his arguments. He also submitted that on a
strict construction of the taxing statute there can be no levy of turnover
tax at all on the manufacturers. Reading Sections 5(1) and 5(2C) of Kerala
General Sales Tax Act with the Schedule to the said Act he submitted that
the manufacturer was not liable to pay turnover tax by including in his
turnover the amount of excise duty payable by KSBC. Relying upon the
judgment of this Court in State of Punjab and Anr v. M/s. Devans Modern
Breweries and Anr., (2003) JT (10) 485, he also submitted that all the
rights relating to liquor are vested in the State and the State may part
with the privilege for a consideration. The levy of duty by the State of
Kerala in the instant case was really the consideration for which the State
parted with its privilege in favour of the aforesaid Corporation.
We shall first take up for consideration the submission urged on behalf of
the State of Kerala that the levy of duty in the insant case is really a
levy of duty of excise under Section 17 of the Abkari Act. The scheme under
the Rules, after KSBC was constituted, provided for collection of the said
excise duty from the aforesaid Corporation as a matter of administrative
convenience. Liability, therefore, remained that of the
distillers/manufacturers and only the stage of collection of the said
excise duty was deferred. On the other hand counsel for the respondents
submitted that the levy of duty in the instant case, though under Section
17 of the Abkari Act was not levy of duty of excise, though loosely so
called. It was in effect the consideration for parting with exclusive
privilege of the State of Kerala in favour of KSBC for wholesale trade in
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the business of liquor permissible under Section 18A of the Abkari Act and,
therefore, payable only by the KSBC.
Mr. Nariman contended that even if the submission advanced by Mr. T.L.V.
Iyer. that the collection of the duty of excise may be deferred to a later
stage for the sake of convenience, may not be disputed, yet it must first
be shown that the duty levied is in reality a duty of excise. The mere fact
that it has been described as a duty of excise is not conclusive unless it
is also shown that the duty is on manufacture. There is force in his
contention because the mere fact that a duty is described as a duty of
excise in a statute may not be conclusive, particularly when there is a
competing entry under which such a duty may be levied. It is, therefore,
always a question for the Court to consider under which entry the tax
falls. In Synthetics and Chemicals Ltd. and Ors. v. State of U.P. and Ors
., [1990] 1 SCC 109 this Court has taken judicial notice of the fact that
in many statutes excise duty and price of privilege were regarded as one
and the same. This Court in paragraph 87 of the report observed :-
"87. On an analysis of the various Abkari Acts and Excise Act, it appears
that various provinces/States reserve to themselves in their respective
States the right to transfer exclusive or other privileges only in respect
of manufacture and sale of alcohol and not in respect of possession and
use. Not all but some of the States have provided such reservation in their
favour. The price charged as a consideration for the grant of exclusive and
other privileges was generally regarded as an excise duty. In other words,
excise duty and price for privileges were regarded as one and the same
thing. So-called privilege was reserved by the State mostly in respect of
country liquor and not foreign liquor which included denatured spirit."
Learned counsel for the parties have referred to several decisions of this
Court on the question as to what is the nature of a duty of excise. It may
be useful to refer to some of the decisions.
In Re : Central Provinces and Berar Sales of Motor Spirit and Lubricants
Taxation Act, (1938) AIR 1939 FC 1 after considering the meaning usually
given to the term ‘duty of excise’ this Federal Court concluded :-
"But its primary and fundamental meaning in English is still that of a tax
on articles produced or manufactured in the taxing country and intended for
home consumption. I am satisfied that that is also its primary and
fundamental meaning in India ; and no one has suggested that it has any
other meaning in Entry (45)........."
"The expression ‘duties of excise’, taken by itself, conveys no suggestion
with regard to the time or place of their collection. Only the context in
which the expression is used can tell us whether any reference to the time
or manner of collection is to be implied. It is not denied that laws are to
be found which impose duties of excise at stages subsequent to manufacture
or production; but, so far as I am aware, in none of the cases in which any
question with regard to such a law has arisen was it necessary to consider
the existence of a competing legislative power, such as appears in entry
(48)."
Here again it was emphasized that the Courts are entitled to look at the
real substance of the Act imposing the duty, and what it does and not
merely what it says in order to ascertain the true nature of the tax.
In The Province of Madras v. Messrs. Boddu Paidanna and sons : AIR (1942)
FC 33 the Federal Court observed as under :-
"There is in theory nothing to prevent the Central Legislature from
imposing a duty of excise on a commodity as soon as it comes into
existence, no matter what happens to it afterwords, whether it be sold,
consumed, destroyed or given away. A taxing authority will not ordinarily
impose such a duty, because it is much more convenient administratively to
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collect the duty (as in the case of most of the Excise Acts) when the
commodity leaves the factory for the first time, and also because the duty
is intended to be an indirect duty which the manufacturer or producer is to
pass on to the ultimate consumer, which he could not do if the commodity
had, for example, been destroyed in the factory itself. It is the fact of
manufacture which attracts the duty, even though it may be collected
later."
In Governor-General in Council v. Province of Madras, AIR (1945) PC 98 the
Privy Council noticed the earlier decisions of the Federal Court and
rejected the contention before it that the power to impose a duty of
excise, which is given to the Federal Legislature alone by Entry No. 45 of
the Federal List, entitles that Legislature and no other to impose a tax
on first sales of goods manufactured or produced in India. Their Lordships
observed
"To their Lordships this contention does not appear well-founded. The term
"duty of excise" is a somewhat flexible one : it may, no doubt, cover a tax
on first and perhaps on other sales ; it may in a proper context have an
even wider meaning. An exhaustive discussion of this subject, from which
their Lordships have obtained valuable assistance, is to be found in the
judgment of the Federal Court in 1939 F.C.R. 18. Consistently with this
decision, their Lordships are of opinion that a duty of excise is primarily
a duty levied upon a manufacturer or producer in respect of the commodity
manufactured or produced. It is a tax upon goods not upon sales or the
proceeds of sale of goods. Here again their Lordships find themselves in
complete accord with the reasoning and conclusions of the Federal Court in
the Boddu Paidanna case. The two taxes, the one levied upon a manufacturer
in respect of his goods, the other upon a vendor in respect of his sales,
may, as is there pointed out, in one sense overlap. But in law there is no
overlapping. The taxes are separate and distinct imposts. If in fact they
overlap, that may be because the taxing authority, imposing a duty of
excise, finds it convenient to impose that duty at the moment when the
exciseable article leaves the factory or workshop for the first time upon
the occasion of its sale. But that method of collecting the tax is an
accident of administration : it is not of the essence of the duty of excise
which is attracted by the manufacture itself."
In R.C. Jall v. Union of India, [1962] Sppl 3 SCR 436 this Court noticed
the earlier three decisions referred above and laid down the principle as
follows :-
"With great respect, we accept the principles laid down by the said three
decisions in the matter of levy of an excise duty and the machinery for
collection thereof. Excise duty is primarily a duty on the production or
manufacture of goods produced or manufactured within the country. It is an
indirect duty which the manufacturer or producer passes on to the ultimate
consumer, that is, its ultimate incidence will always be on consumer.
Therefore, subject always to the legislative competence of the taxing
authority, the said tax can be levied at a convenient stage so long as the
character of the impost, that is, it is a duty on the manufacture or
production, is not lost. The method of collection does not affect the
essence of the duty, but only relates to the machinery of collection for
administrative convenience. Whether in a particular case the tax ceases to
be in essence an excise duty, and the rational connection between the duty
and the person on whom it is imposed ceased to exist, is to be decided on a
fair construction of the provisions of a particular Act."
The next decision of this Court which may be noticed is the decision of the
Full Court in Re : The bill to amend Section 20 of the Sea Customs Act,
1878 and Section 3 of the Central Excises and Salt Act, 1944 [1963] 3 SCR
787 in which the law was stated in the following words :-
"This will show that the taxable event in the case of duties of excise is
the manufacture of goods and the duty is not directly on the goods but on
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the manufacture thereof. We may in this connection contrast sales tax which
is also imposed with reference to goods sold, where the taxable event is
the act of sale. Therefore, though both excise duty and sales-tax are
levied with reference to goods, the two are very different imposts ; in one
case the impositions is on the act of manufacture or production while in
the other it is on the act of sale. In neither case therefore can it be
said that the excise duty or sale tax is a tax directly on the goods for in
that event they will really become the same tax. It would thus appear that
duties of excise partake of the nature of indirect taxes as known to
standard works on economics and are to be distinguished from direct taxes
like taxes on property and income."
The principle was stated in some what similar terms in M/s. Guruswamy and
Co. etc. v. State of Mysore and Ors., [1967] 1 SCR 548 which is as follows
:-
"These cases establish that in order to be an excise duty (a) the levy must
be upon ‘goods’ and (b) the taxable event must be the manufacture or
production of goods. Further the levy need not be imposed at the stage of
production or manufacture but may be imposed later."
The same principles have been reiterated in M/s. Mcdowell & Co. Ltd. v.
C.T.O., [1977] 1 SCC 441 ; M/s. Mcdowell & Co. Ltd. v. C.T.O., [1985] 3 SCC
230 ; Mohan Breweries & Distilleries Ltd. v. Commercial Tax Officer, [1997]
7 SCC 542 and State of Kerala v. Madras Rubbery Factory Ltd., [1998] 1 SCC
616.
We shall deal with the submissions urged on the basis of the decisions of
this Court in Mohan Breweries (supra) and Madras Rubber Factory, (supra)
later.
In the light of these principles we now proceed to examine the question as
to whether the imposition of duty in the instant case under Section 17 of
the Abkari Act was really a ‘duty of excise’.
As we have noticed earlier the duty on liquor is imposed under Section 17
of the Abkari Act. There is no doubt that it is described as a ‘duty of
excise’. The Government has a discretion to levy or not to levy such duty
on all liquor and intoxicating drugs in cases covered by clauses (a) to (g)
of Section 17. Clauses (d) and (e) which relate to liquor manufactured
under any licence granted under Section 12 or manufactured at any
distillery, brewery, winery or other manufactory established under Section
14, no doubt relate to imposition of duty of excise properly so called
because the duty levied on liquor manufactured under a licence granted
under Section 12 or 14 is duty on manufacture and will squarely falls
within the meaning of the term ‘duty of excise’. However, clauses (b), (c),
(f) and (g) contemplate events which are not related to manufacture, such
as liquor permitted to be exported or permitted to be transported under
clauses (b) and (c) or liquor issued from a distillery under clause (f) or
sold in any part of the State under clause (g). If the duty of excise is
levied under Section 17 read with clauses (b), (c), (f) and (g) it may not
be possible to contend that what is levied is a duty of excise since the
taxing event envisaged under the aforesaid clauses do not relate to
manufacture. Learned counsel for the respondents, in particular, emphasized
clause (f) of Section 17 because it is their contention that in the instant
case the levy of duty is under clause (f) of Section 17 since the State
intended to recover duty from KSBC on the issue of liquor from its
warehouses in course of its monopoly wholesale trade. It was further
emphasized that Section 18A which related to grant of exclusive or other
privilege of manufacturing or supply by wholesale etc. enabled the State to
grant such privilege on the basis of annual rental by way of consideration
for the grant of such privilege and the rental could be collected to the
exclusion of or in addition to the duty or tax leviable under Sections 17
and 18.
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So viewed there can be no doubt that the levy of duty under Section 17 need
not necessarily be a duty of excise stricto sensu. In each case the Court
has to consider whether, having regard to the nature of levy, it is a duty
of excise or other impost.
We have earlier noticed that under Rule 11 of the Foreign Liquor (Storage
in Bond) Rules, 1961, foreign liquor stored in the bonded warehouse can be
removed only to the premises licensed under FL 9 licence held by a bonded
warehouse licensee and such removal shall be under cover of a pass granted
in that behalf and on payment of excise duty due. The same Rules provide
that any person desiring to store in bond foreign liquor shall make an
application for licence in that behalf to the Commissioner of Excise
containing the particulars mentioned therein. It also obliges the applicant
to execute an agreement in Form A undertaking to abide by the provisions of
the Act, the Rules and orders made thereunder and the conditions of the
licence and also agrees to pay the prescribed duty therefor. Rule 14 of the
Rules provides for the issuance of a licence in Form BW1 to KSBC for the
purpose of storage in bond and supply of foreign liquor in wholesale to FL9
licensee under the Foreign Liquor Rules, 1953. Rule 13(9) of the Foreign
Liquor Rules mandates that licence in Form FL9 shall be issued by the
Excise Commissioner only to KSBC possessing licence in Form BW1 under the
Foreign Liquor (Storage in Bond) Rules, 1961.
These Rules leave no manner of doubt that they create a complete monopoly
in favour of KSBC insofar as wholesale trade in IMFL is concerned. The
manufacturer must sell all their produce to KSBC which alone is entitled to
the issuance of licence in Form FL9 and which is also issued a licence in
Form BW1. The Corporation has also executed an agreement in Form A which
obliges it to pay duties payable on the liquor. In view of these Rules, it
was submitted that in effect the State of Kerala has parted with its
privilege of wholesale business in IMFL in favour of KSBC for a
consideration. The licence issued in favour of KSBC obliges it to pay the
duty and it does so not on behalf of anyone else but in terms of its own
licence.
Learned counsel for the parties have also drawn our attention to the
Notifications issued by the Government from time to time under Section 17
of the Act. The relevant portion of the Notificatiosn reads thus :-
"SRO 60/61
The Government of Kerala hereby direct that the duty under the said Section
shall be levied on the following kind of liquors manufactured in the area
where the said Act is in force or manufactured elsewhere in India and
imported into the said area by land or under bond by sea, at the rates
mentioned against each kind of liquor."
It was argued that the Notifications suggest that such duties are levied
either on goods manufactured in the area or imported into the area. It was
also submitted that an essential characteristic of ‘duty of excise’ is a
uniformity of incidence. It cannot vary from notification to notification.
From a perusal of Notification No. SOR 60/61 issued on 18th March, 1961 it
appears that different rates of duties have been prescribed for different
kinds of liquor. So far as Indian Made Foreign Spirits, except that
consumed by defence services personnel, the rate of duty prescribed was Rs.
12/- per proof litre. For the Indian Made Foreign Spirits for defence
services the rate was Rs. 3 per proof litre. This was subsequently
substituted by Notification dated 23rd April, 1964 whereunder for the
Indian Made Foreign Spirits when exported by distillers to Goa and not re-
imported into the State, the rate of duty was 45 np. per proof litre
subject to the enumerated conditions being satisfied. In other cases it was
Rs. 14/- per proof litre. However, in the case of Indian Made Foreign
Spirits for defence services personnel supplied through Canteen Stores
Department etc. the duty is Rs.3/- per proof litre. Similarly under
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Notification No. 330 of 1996 the rate of duty on Indian Made Foreign Liquor
when exported by distillers and not re-imported into the State was Rs. 5/-
per proof litre subject to the conditions being satisfied. In other cases
the rate of excise duty levied was an amount equivalent to 100 % of its
value. It is, therefore, apparent that under the same Notification
purported to be issued under Sections 6, 7, 17 and 18 of the Abkari Act
duties were levied on liquors manufactured in the State or exported outside
the State or manufactured elsewhere in India and imported into the State by
land or sea under bond. The duty levied on import of liquor would be
impermissible under Entry 51 of List II. Apparently, therefore, the duty is
referable to Entry 8 of List II. It was rightly submitted that if the duty
imposed was in the nature of excise duty on manufacture, different rates
could not have been prescribed depending upon whether it is sold in the
market or consumed by the defence services personnel.
It should also be noticed that having regard to the language of the
Notifications it cannot be said that duty is levied on manufacturer because
Notifications suggest that such duty would be levied either on the goods
manufactured in the area or imported in the area. As earlier observed, the
duty levied on import of liquor is referable only to Entry 8 of List II and
not Entry 51 thereof.
We may also notice that the stand of KSBC before the High Court and before
this Court has been that supplies were effected to it by the
manufacturers/distillers in accordance with the relevant Rules without
charging excise duty when the supplies were effected. In accordance with
the provisions of the Abkari Act and Rule 11 of the Foreign Liquor (Storage
in Bond) Rules, 1961, goods purchased by the Corporation during the
relevant period were without payment of excise duty and the excise duty
thereon was payable at the time of removal of goods from the bonded
warehouse to FL9 premises. The Corporation remitted turnover tax on the
total value of turnover of the Corporation for each year at the rate of
turnover tax prevalent during the relevant year. The turnover of the
Corporation was computed so as to include the value of the goods at which
the supplies were received by the Corporation, excise duty paid by the
Corporation, profit margin of the Corporation and sales tax paid by the
Corporation. It is thus admitted by the Corporation that under Rule 11 of
the (Storage in Bond) Rules the duty was payable when the goods moved out
from its bonded warehouse to FL9 premises. This also supports the
submission of the respondents that the duty was levied at the stage of
movement of the goods from the bonded warehouse of the Corporation to the
FL9 premises and, therefore, the levy of duty in terms of Rule 11 must
necessarily be traced to Section 17(f) which levied duty on liquor "issued
from a distillery, brewery, winery or other manufactory or warehouse
licensed or established under Section 12 or Section 14". Even the parties
understood that it was for the KSBC to pay the duty in terms of licence.
Notifications have been issued under Section 17 and not specifically under
any of the sub-clauses thereof. It would, therefore, not be correct to
contend that the duty was levied on manufacture only.
In this connection we may usefully refer to the decision of this Court in
State of Punjab and Anr. v. M/s. Devans Modern Brewaries Ltd. and Anr.,
(supra). In that case the State of Kerala was also a party. The State had
imposed tax on import of potable liquor manufactured in other States. The
stand of the State was that it was within the province of the State to
impose restriction on import of potable liquor by imposing import duty. The
aforesaid duty had not been imposed by the State in exercise of its
statutory power conferred upon it in terms of Entry 51 List II of the
Seventh Schedule to the Constitution but regulatory power as envisaged in
Entry 8 thereof. The contention raised on behalf of the respondents was
that the requirements of Articles 301 & 304 of the Constitution of India
were to be complied with in view of the fact that the duty of import must
conform to the provisions of Entry 51 of List II. The submission of the
respondents was rejected and those advanced on behalf of the State of
Kerala were accepted. This Court observed that the word ‘fee’ is not used
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in the strict sense to attract the doctrine of quid pro quo. This was the
price or consideration which the State Government had charged for parting
with its privilege and granting the same to the vendors. Therefore, the
amount charged was neither a fee nor a tax but was in the nature of price
of a privilege which the purchaser had to pay in any trading and business
in noxious article/goods. This Court held that the permissive privilege to
deal in liquor is not a ‘right’ at all. The levy charged for parting with
its privilege is neither a tax nor a fee. It is simply a levy for the act
of granting permission or for the exercise of power to part with that
privilege. This Court referred to numerous decisions of this Court which
have clearly held that the State has a right to exercise all forms of
control in relation to all aspects regarding potable alcohol and the State
Legislature has exclusive competence to frame laws in that regard. The
State has exclusive right in relation to potable liquor and there was no
fundamental right to do trade or business in intoxicants. The State in its
regulatory power has the right to prohibit absolutely every form or
activity in relation to intoxicants - its manufacture, storage, export,
import , sale and possession and all these rights are vested in the State
and indeed without such vesting there can be no effective regulation of
various forms of activities in relation to intoxicants. In Devans Modern,
case (supra) this Court held :-
"The Kerala State Beverages Corporation has licence only for wholesale and
retail and retail of liquor which will not authorize them to import liquor
and that the only licence issued to import liquor into the State is the
permit issued on payment of the import fee and, therefore, it is seen that
the levy of import fee is authorized by sections 6 and 24 of the Abkari
Act, 1077. It is not excise duty or countervailing duty referable to Entry
51 of List II. It is a collection failing under Entry 8 of List II. It is
the price paid to the State for parting with its exclusive privilege of
dealing in liquor which includes every fact of it including its import. In
my view, the State has the right to prohibit every form of activity in
relation to intoxicant including its import."
It, therefore, held that the levy was permissible and authorized under
Sections 6, 7, 17 and 18 of the Abkari Act. This decision supports the view
that the levy of so called excise duty under the Abkari Act may be
referable to Entry 8 of List II and not Entry 51 thereof.
In the passing we may observe that the majority decision has also referred
to the judgment of the Kerala High Court in the first batch of appeals
before us, and two passages from the impugned decision have been quoted
with approval in paragraph 335 of the report, which reads as under:-
"The manufacture and sale of liquor are the exclusive privilege of the
State and the State, by the process of licensing, is parting with the said
privilege and what is charged by the State is only the privilege price
through the process of licensing and it is not excise duty."
"The concept of excise duty on production and manufacture as understood in
the Central Excise Act cannot be equated in the case of excise duty under
the Abkari Act since the manufacture and the sale of liquor are the
exclusive privilege of the State and the State, by the process of licensing
is parting with the said privilege and what is charged by the State is only
the privilege price through the process of licensing the price and it is
not excise duty."
We have carefully perused the impugned judgment but we find that the
passages quoted therein were not the findings of the High Court but the
submissions advanced on behalf of the petitioners (respondents herein)
which are to be found in paragraphs 15 and 44 of the impugned judgment. In
fact as we have noticed earlier in this judgment, the High Court in the
first batch of writ petitions proceeded on the basis that the duty levied
was a duty of excise but the liability did not fall on the
manufacturers/distillers and was payable only by the KSBC after sale of the
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liquor by the manufacturers.
So far as the judgment in Mohan Breweries, (supra) is concerned it may be
noticed that the question which has been raised in this batch of appeals
was not raised therein, and the Court proceeded on the basis that the levy
was in the nature of duty of excise as is ordinarily understood. In Madras
Rubber Factory, case (supra) the charging section imposing the rubber cess
was quite clear. Sub-section (1) provided for the levy and collection as a
cess a duty of excise on all rubber produced in India at such rate not
exceeding one anna per pound of rubber so produced as the Central
Government may, by the same or a like notification, from time to time fix.
Sub-section (2) provided that the said duty of excise shall be payable by
the owner of the estate on which the rubber is produced, and shall be paid
by him to the Board within one month from the date on which he received a
notice of payment therefore from the Board. In view of the clear language
of the charging section which saddled the owner of the estate on which the
rubber is produced with the liability to pay the said duty of excise, this
Court held that the liability to pay the said amount of cess got attached
to the rubber so produced and, therefore, if the rules did not provide for
the excise duty to be paid by the producer then who ever purchased the said
rubber would be purchasing goods to which the liability of payment of duty
was attached. We do not find such a provision in the Kerala Abkari Act.
From the above discussions the following conclusions emerge:-
1. Section 17 of the Kerala Abkari Act deals with imposition of duty
not necessarily connected with manufacture of liquor and, therefore, the
duty levied must in each case be examined before coming to a conclusion as
to whether it is in reality a duty of excise.
2. The use of the words "duty of excise" in Section 17 of the Act is
not conclusive and it is for the Courts to examine in each case as to
whether it is in fact a "duty of excise".
3. In order that a duty may be characterized as "duty of excise" it
must be shown that it is a duty on manufacture of goods. If it is unrelated
to the manufacture of goods, it may be any other impost permitted by law,
but would not qualify as a duty of excise.
4. Section 18A of the Act permits the State of Kerala to grant
exclusive or other privilege of manufacture etc. on payment of rentals
which includes the privilege of supplying liquor by wholesale or by retail.
The annual rental payable under Section 18A may be collected to the
exclusion of or in addition to duty or tax leviable under Sections 17 and
18 of the Act.
5. That the State of Kerala by amendment of the Act and the relevant
Rules created a monopoly in favour of the Kerala State Beverages
Corporation. Licences in Form FL9 and BW1 have been given exclusively to
the aforesaid Corporation which has also executed an agreement in Form A
undertaking to pay the duty. A monopoly has been created in favour of the
aforesaid Corporation in the wholesale trade of IMFL. In view of Rule 11 of
the (Storage in Bond) Rules duty is payable on the movement of IMFL from
the bonded warehouse of the Beverages Corporation to the FL9 licensed
premises. It is payable when IMFL is issued from the bonded warehouse of
the Corporation.
6. The levy of duty on IMFL issued from a bonded warehouse licensed or
established under Section 12 or Section 14 of the Act is referable to the
duty levied under Section 17(f) of the Kerala Abkari Act.
7. The Notifications issued by the Government relate both to goods
manufactured in the area or imported into the area .
8. The duty levied is on goods and not on manufacture.
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Taking all these factors into account and having regard to the Scheme of
monopoly introduced by the State of Kerala in the year 1984 we must hold
that the levy of duty is not a levy in the nature of ‘duty of excise’ but
is the privilege price payable by KSBC in consideration of the State
parting with its exclusive privilege of wholesale trade in IMFL in favour
of the aforesaid Corporation.
It was alternatively submitted on behalf of the State that even if it is
held that what is levied is privilege price it will still form part of the
sale price of the liquor sold by the distillers to the Beverages
Corporation and hence part of the taxable turnover for the purpose of levy
of turnover tax. The respondents on the other hand contend that by its very
nature the privilege price must be paid by the beneficiary and is not
capable of being transferred to the manufacturers/distillers from whom the
IMFL is purchased for wholesale trade.
We are of the view that if the privilege price is a part of the
consideration payable by the Corporation to the manufacturers for supply of
IMFL to the Corporation it will certainly be a component of the sale price
of the liquor sold by the manufacturers to the Beverages Corporation. If it
is not so, then the respondents are right in contending that having regard
to its very nature, privilege price is a price which the beneficiary, in
whose favour the State parts with its privilege, must pay. In this case
since the State has parted with its exclusive privilege of wholesale trade
in IMFL and that right has been conferred exclusively on the Beverages
Corporation, it is the Beverages Corporation which must pay the privilege
price in addition to the annual rental payable by it.
In view of our above finding, it is not necessary to consider the
alternative submission of Mr. Nariman that even if the levy is found to be
a duty of excise, its incidence did not fall on the manufacturer or the
producer.
In view of our finding that the duty imposed is not a duty of excise but
represents the privilege price charged by the Government from KSBC as a
consideration for parting with its exclusive privilege to sell liquor by
wholesale in the State of Kerala, the respondents are not liable to include
that duty paid by the Beverages Corporation in their turnover. However, the
position changed radically with effect from January 5, 1999. The High Court
noticed this fact in paragraph 67 of the judgment, namely - that with
effect from January 5, 1999 in view of the amendment to Foreign Liquor
Rules, the KSBC could not purchase IMFL from the manufacturers/distillers
without payment of duty. In view of the amendment, the KSBC had to pay duty
before it could lift the stock of IMFL from the manufacturers’ warehouse to
its own licensed premises. Thus the KSBC paid to the manufacturers the duty
payable in respect of IMFL and consequently the amount of duty paid formed
part of the consideration for which the property in goods passed to the
KSBC. We have earlier noticed the amendments made to the Foreign Liquor
Rules which leave no room for doubt that with effect from January 5, 1999
the manufacturers/ distillers (respondents herein) were bound to include in
their turnover the amount paid to them by the KSBC by way of duty levied
under the Abkari Act together with the price of the liquor purchased from
them. The learned Judges noticed this fact but granted relief in broad
terms as prayed for by the respondents. In our view the High Court fell
into an error in doing so. It ought to have held that in any event with
effect from January 5, 1999 the respondents - manufacturers/distillers were
bound to include in their turnover the amount of duty paid to them by the
KSBC since that formed part of the consideration for sale of IMFL to the
said Corporation. We, therefore, hold that from January 5, 1999, the date
with effect from which the KSBC started paying duty to the
manufacturers/distillers before lifting the stock of IMFL to its own
licensed premises, the amount of duty paid formed part of the consideration
paid by the Corporation to the manufacturers and consequently it formed
part of the turnover of the manufacturers.
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Mr. Ashok Desai, Senior Advocate appearing on behalf of some of the
respondents strenuously urged before us that in view of the provisions of
Section 5(1) and Section 5(2C) of the Kerala General Sales Tax Act, there
was no liability on the manufacturer of liquor to pay turnover tax on the
sale of IMFL. We find no merit in this submission.
The levy of tax under the Kerala General Sales Tax Act, 1963 is by virtue
of Section 5. Section 5(1) deals with levy of Sales Tax, whilst Section
5(2C)(i) deals with turnover tax. The relevant portion of this Section
reads as follows :-
"5. Levy of tax on sale or purchase of goods :- (1) Every dealer (other
than a casual trader or agent of a non-resident dealer) whose total
turnover for a year is not less than ‘two lakh rupees and every casual
trader or agent of a non-resident dealer, whatever be his total turnover
for the year, shall pay tax on his taxable turnover for that year,-
(i) in the case of goods specified in the First or Second Schedule, at the
rates and only at the points specified against such goods in the said
Schedules."
"5(2C)(i) Notwithstanding anything contained in this Act or the Rules made
thereunder every dealer shall pay turnover tax on the turnover of goods as
specified hereunder, namely :-
..... .....
.....
(b) by any dealer in Foreign Liquor (Indian made) or Foreign Liquor
(Foreign made) as specified in entries against serial numbers 53 and 54 of
the First Schedule at the rate of five percent on the turnover at all
points."
Thus under Section 5(1)(i) tax is payable (a) on goods specified in the
First and Second Schedule, (b) at the rates and (c) at the points specified
against such goods in the said Schedules. However, under Section 5(2C)
which is the charging Section "Notwithstanding anything contained in this
Act or the Rules" "every dealer shall pay turnover tax." Thus, no dealer is
exempted from paying turnover tax. The turnover tax is to be paid "as
specified hereunder", and not at rates and at points specified in the First
Schedule. The rate is specified in (2C)(i)(b) at 5% on the turnover at all
points. Thus under Section 5(2C)(i) every dealer has to pay at the rate of
5% at all points. The opening part of Section 5(2C)(i)(b), i.e., the words
"by any dealer in Foreign Liquor (Indian made) or Foreign Liquor (Foreign
made) as specified in entries against serial numbers 53 and 54 of the First
Schedule", do not detract from this portion. Here also the tax is to be
paid by "any dealer", "as specified in entries against serial numbers 53
and 54 of the First Schedule" go with the words "in Foreign Liquor (Indian
made) or Foreign Liquor (Foreign made)". It is the Foreign Liquor which is
specified in entries 53 and 54. The words "By any dealer" only go with "in
Foreign Liquor (Indian made) or Foreign Liquor (Foreign made)". In other
words, it is the goods, which are specified in entries 53 and 54 of the
First Schedule. This becomes very clear if one looks at the First Schedule.
The First Schedule deals with "goods in respect of which a single point of
tax is leviable under sub-section (1) or sub-section (2) of Section 5". The
four columns in the First Schedule set out (1) the Serial Number, (2)
Description of goods, (3) Point of levy and (4) Rate of Tax - %. In the
First Schedule there is no column for dealer. The reference to a dealer is
only in column (3) which will indicate the point of time at which a dealer
will pay tax. If under the charging Section the point of time is not to be
as per the First Schedule, then one will not consider column (3) at all.
This is clear as the only items are "goods", "point of levy" and "Rate of
Tax - %". With this in mind if one now look at Section 5(1)(i) it becomes
clear that thereunder the Sales Tax is payable on the "goods", "at the
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points" and "at the rates" specified in the Schedules. Whilst considering
point and rate at which levy is to be made under Section 5(1)(i) the levy
and rate will be as per the First Schedule but under Section 5(2C)(i)(b)
the levy is at all points and at 5% of the turnover. It is only if one has
to see at what point and at what rate the levy is to be made that one will
take columns (3) and (4) of the First Schedule into consideration. As
against this under Section 5(2C)(i) the turnover tax is on "Foreign Liquor"
specified in entries 53 and 54, i.e., in column (2) of entries 53 and 54.
The turnover tax is at the fixed rate of 5% on the turnover at all points.
Thus, in Section 5(2C)(i) there is no reference to columns (3) and (4) of
the First Schedule. This is clear from the fact that under Section 5(2C),
which is the charging Section, turnover tax is payable by "all dealers".
The term "dealer" is defined in Section 2(viii) and admittedly covers the
Respondents. If the interpretation sought to be placed by the Respondents
is accepted then there would be a conflict between Section 5(2C)(i) which
prescribed rate of 5% on the turnover at all points and columns (3) and (4)
of the First Schedule under which tax is only at point of first sale in the
State and at rate of 75%. It must, therefore, follows that the words "goods
as specified" in Section 5(2C)(i), has reference only to the description of
goods under Entry 53 of Schedule I, namely "Foreign Liquor (Indian made)".
In the case of inconsistency, Section 5(2C)(i) must prevail over the
Schedule in view of the non obstante clause.
If submission on behalf of the Respondents is accepted and it is held that
the words "as specified in entries against serial numbers 53 and 54 of the
First Schedule" go with the words "by any dealer", even then under column
(3) of Entries 53 and 54 of the First Schedule the relevant words are "by a
dealer who is liable to pay tax under Section 5". Admittedly, the
Respondents are dealers who are liable to pay tax under Section 5. They
only get exempt from paying tax under Section 5(1)(b) because the sales tax
is to be paid "at the rates" and "only at points specified against the
goods in the First Schedule". Under column (3) of the First Schedule in
entries 53 and 54 the points of levy are (a) for the Kerala State Beverages
Corporation the point of levy is at time of sale, (b) by a dealer, who is
liable to tax under Section 5, the levy is at point of first sale. However,
if the first sale is to Kerala State Beverages Corporation then at that
point there is no levy under Section 5(1)(b) because the charging Section
provide that the levy is to be as per the Schedule. Section 5(2C)(i) does
not lay down that tax is to be paid at the point and at the rate specified
against the goods in the Schedule. Under Section 5(2C)(i) the tax is at the
rate of 5% on the turnover at all points.
Thus the Respondent would in any event be liable to pay turnover tax on
their turnover. Further, in the 1st judgment there is no discussion on this
aspect at all. In the 2nd judgment the decision is against the Respondents
on this aspect against which they have filed no Appeal. We entirely concur
with the view of the High Court in the second batch of writ petitions on
this aspect of the matter.
The High Court, however, held that the amendment of Section 5(2C) of the
Kerala General Sales Tax Act by adding an explanation which was brought
into effect retrospectively from July 1, 1987, did not remove the
constitutional invalidity in the statute because in view of the finding
recorded by the High Court that the manufacturers were not liable to pay
excise duty, an amendment to the Sales Tax Act could serve no purpose
unless lacuna was removed by appropriate amendment to the Abkari Act. We
find ourselves in complete agreement with the view of the High Court
because if the Act imposing the levy did not impose upon the manufacturers
the liability to pay excise duty, by an amendment of the Sales Tax Act the
same could not be included in their turnover.
In the result Civil Appeal Nos.2249-2257 of 2000 are partly allowed and it
is declared that the respondents - manufacturers/ distillers are liable to
pay turnover tax. It is declared that the respondents - manufacturers are
liable to include in their turnover the amount of duty paid to them by KSBC
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and included in the consideration for sale of IMFL to the aforesaid
Corporation with effect from January 5, 1999 and pay the turnover tax
accordingly.
Civil Appeal Nos. 95 of 2003; 102 of 2003 ; 622 of 2003 ; Appeal arising
out of SLP (c) No. 1032 of 2003 ; Civil Appeal Nos. 5099 of 2003 ; 5100 of
2003 ; 5101 of 2003 ; 5102 of 2003 ; 5103 of 2003 ; 6515 of 2003 ; 6516 of
2003 ; 7952 of 2003 and 7954 of 2003 are dismissed.
No order as to costs.