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PETITIONER: STATE OF U.P. & ORS.

       Vs.

RESPONDENT: M/S. MODI DISTILLERY ETC.

DATE OF JUDGMENT29/08/1995

BENCH: BHARUCHA S.P. (J) BENCH: BHARUCHA S.P. (J) FAIZAN UDDIN (J) MAJMUDAR S.B. (J)

CITATION:  1995 SCC  (5) 753        JT 1995 (6)   523  1995 SCALE  (5)59

ACT:

HEADNOTE:

JUDGMENT:                             WITH                 CIVIL APPEAL NO.5818 OF 1983                             WITH    (C.A.No.4277-79/83, 4298-4300/83, 4296/83, 4285-95/83,     4323/83, & 7725/95(Arising)out of SLP(C)No.8704/80) State of U.P. & ors. VS M/s. Ajudhia Distillery                       J U D G M E N T BHARUCHA. J.      Leave granted.      These are  appeals filed  by the State of Uttar Pradesh against judgments  and orders  of the  Allahabad High  Court dated 9th  March 1979 and 11th October,1979, and orders that followed the  same. The  High Court  allowed writ  petitions filed by  the respondents,  who are  manufacturers of Indian made  foreign   liquor,  and  quashed  the  orders  impugned demanding excise duty from them.      The High Court in the judgment dated 11th October,1979, categorized the  demands into  four groups. In Group ‘A’ the demands for  excise duty  were on the wastage of Indian made foreign liquor  (IMFL) which  was exported outside the State of Uttar  Pradesh. Group  ‘B’ related  to demands  made  for excise duty on wastage, during transportation in containers, of high  strength spirit,  of 80  to 85%, from distillery to warehouse. Group  ‘C’ related to the demand of   excise duty on obscuration  . Group ‘D’ related to excise duty sought to be levied  on pipeline  wastage. The  judgment of  the  High Court dated  9th  March,  1979,  related  only  to  duty  on obscuration (i.e.,Group ‘C’).      It is  convenient to  state immediately  that the issue relating to  Group ‘A’  that is, the demands for excise duty on the  wastage of  IMFL exported  outside the State, is now covered in its favour by the judgment of this Court in State

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of U.P.  and ors.  vs. Delhi  Cloth Mills  and anr.,  1991-1 S.C.C. 454,and this is not disputed by the manufacturers.      In regard to Groups B. C and D, the High Court took the view that  the stage  at which  the State  could levy excise duty had not been reached.           Mr.  Sehgal,   learned  counsel   for  the  State, submitted that  the State  was competent to levy excise duty on liquor  for human  consumption. It  was  the  content  of liquor in the IMFL which was exigible. Therefore, wastage of liquor from  the time  the process  of manufacture  of  IMFL began was  exigible to  excise duty. In the alternative, Mr. Sehgal submitted  that if  it was  the  IMFL,  the  ultimate beverage,  which   alone  was   exigible,  the   process  of determining wastage  and ,levying  excise duty  thereon  was only regulatory and, therefore, permissible. Learned counsel for the  manufacturers supported  the view taken by the High Court.      Entry 51  of List  II of  the Seventh  Schedule to  the Constitution empowers  the State  to levy  excise  duty  on’ alcoholic liquors for human consumption Section 3(22-a)  was introduced  into the  U.P. Excise  Act, 1910, in  1950, that  is, with  the coming into force of the Constitution, and it states that "excisable article"      means :      "(a)  any  alcoholic  liquor  for  human      consumption; or      (b) any intoxicating drug."           Sub-sections 8, 9 and 11 of Section      3 and  Section 28  of the  said Act read      thus :      "(8) ’sprit’ means any liquor containing      alcohol   obtained    by   distillation,      whether it is denatured or not;      (9)‘denatured’ means  rendered unfit for      human consumption  in such manner as may      be prescribed by the State Government by      notification in  this behalf. When it is      proved  that  any  spirit  contains  any      quantity of  any substance prescribed by      the State  Government for the purpose of      denaturation the  court may presume that      such spirit  is or  contains or has been      derived from denatured spirit:      (11) ‘liquor’  means intoxicating liquor      and includes  spirits of  wine,  spirts,      wine, tari, pachwai, beer and all liquid      consisting of or containing alcohol,also      any substance which the State Government      may by notification declare to be liquor      for the purposes of this Act;      28. Duty  on excisable articles - (1) An      excise duty or a countervailing duty, as      the case  may be,  at such rate or rates      as the  State Government  shall  direct,      may be  imposed, either generally or for      any  specified   local  area,   on   any      excisable article-      (a)  imported  in  accordance  with  the      provisions of Section 12(1); or      (b)  exported  in  accordance  with  the      provisions of Section 13; or      (c) transported; or      (d) manufactured,cultivated or collected      under any  licence granted under Section      17; or

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    (e)  manufactured   in  any   distillery      established,  or   any   distillery   or      brewery licensed, under Section 18:      Provided as follows-      (i) duty  shall not be so imposed on any      article which  has  been  imported  into      India and was liable on such importation      to duty  under the  Indian  Tariff  Act,      1894, or the Sea Customs Act,1887.      Explanation -  Duty may be imposed under      this   section    at   different   rates      according to  the places  to  which  any      excisable article  is to  be removed for      consumption. or according to the varying      strength and quality of such article.      (2)  The   State  Government  shall,  in      imposing   an    excise   duty    or   a      countervailing  duty  as  aforesaid  and      fixing  its   rate,  be  guided  by  the      directive   principles    specified   in      Article 47 of the Constitution of India.      (3)  Such  duty  shall  not  exceed  the      maximum as provided hereinafter :-      (a)  Countervailing  duty  on  excisable      articles imported in accordance with the      provisions of Section 12 (1)- --------------------------------------------- Item  Description             Maximum No.   of                      rate of       excisable               duty       articles --------------------------------------------- 1.    Country liquor       Rs.20 per litre.       (Excepting tari) 2.    Liquor manufactured in India and       sophisticated or coloured so as to       resemble in flavour or colour liquor          imported into  India; and  rectified       spirit-       (a) Ale,beer, porter, cider 5 per cent.       and other fermented liquors       (b) Perfumed spirit (other       than medicinal and toilet       preparations)             15 per litre       (c) Wines                 8 per litre       (d) Liquors, cordials,       mixtures and other       preparations containing       spirit not otherwise       specified (other than       drugs and medicines )     70 per litre       (e) Brandy, gin, whisky,       rums,rectified spirit and       other sorts of spirit not       otherwise specified.       60 per litre                                  of alcohol. 3.    Ganja                      300 per kg. 4.    Bhang                      14 per kg. ---------------------------------------------      (b) Excise or countervailing duty on      excisable    articles     exported    in      accordance with the provisions of      Section 13- --------------------------------------------- Item Description of         Maximum rate of

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No.  excisable   articles                duty ---------------------------------------------                               Rs.  1.  Country liquor           20.00 per      (excepting tari and      litre of      other fermented          alcohol.      alcoholic                     beverages) 2.   Liquor manufactured      in India  and                      20.00      sophisticated or         per litre      coloured so  as to           of alcohol.      resemble in flavour      or colour liquor      imported into India      (excepting beer) 3.   Beer  brewed in India    2.00 per litre 4.   Ganja                    150.00 per kg. 5.   Bhang                    4.00 per kg. ---------------------------------------------      (c) Excise or countervailing duty on           excisable article transported- --------------------------------------------- Item  Description of          Maximum rate No.   excisable articles      of duty ---------------------------------------------                               Rs. 1.    Country liquor       (excepting tari)        20 per litre 2.    Liquor manufactured in India and       sophisticated or coloured so as to       resemble in flavour or colour liquor       imported into India; and rectified       spirit -       (a) Ale, beer, porter,       cider and other       fermented liquors        5 per litre       (b) Perfumed spirit       (other than medicinal       and toilet preparations) 15 per litre.       (c) Wines                8  per litre.       (d) Liquors, cordials,       mixture and other       preparations containing       spirit not otherwise       specified (other than       drugs and medicines )    70 per litre.       (e) Brandy , gin, whisky,       rum, rectified spirit       and other sorts of spirit       not othewise specified    60 per litre                                 of alcohol. 3.    Ganja                     300 per kg. 4.    Bhang                     14 per kg. ---------------------------------------------      (d)  Excise duty on excisable articles      manufactured, cultivated or collected      under any  licence granted under Section      17- --------------------------------------------- Item  Description of            Maximum rate No.   excisable articles        of duty ---------------------------------------------                                 Rs. 1.    Country liquor       (excepting tari)          20 per litre.

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2.    Liquor manufactured       in India and       sophisticated or coloured       so as to resemble in       flavour or colour liquor       imported into India;       and rectified spirit-      (a) Ale, beer, porter,      cider and other      fermented liquors            5per litre.      (b) Perfumed spirit      (other than medicinal      and toilet preparations)    15per litre.      (c) Wines                    8per litre.      (d) Liquors, cordials,       mixtures and other       preparations containing       spirit not otherwise       specified (other than       drugs and medicines)       70per litre.       (e) Brandy , gin,       whisky, rum, rectified       spirit and other sorts       of spirit not otherwise       specified                   60per litre                                   of alcohol. 3.    Ganja                       300 per kg. 4.    Bhang                       25 per kg. ---------------------------------------------      (e) Excise duty on excisable articles      manufactured in any distillery      establsihed, or any distillery or      brewery licensed, under Section 18- --------------------------------------------- Item Description of           Maximum rate No.  excisable articles       of duty --------------------------------------------- 1.   Country liquor           20 per litre.      (excepting tari and      other fermented alcoholic      beverages) 2.   Liquor manufactured      in India and sophisticated      or coloured so as to      resemble in flavour or      colour liquor imported      into India; and rectified      spirit-      (a) Ale, beer, porter,      cider and other fermented      liquors                      5per litre.      (b) Perfumed spirit (other      than medicinal and toilet      preparations)               15per litre.      (c)  Wines                  8 per litre.      (d) Liquors, cordials,      mixtures and other      preparations containing      spirit not otherwise      specified (other than      drugs and medicines)         70per litre      (e)Brandy, gin, whisky,      rum, rectified spirit      and other sorts of spirit      not otherwise specified.     60per litre

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                                 of alcohol. --------------------------------------------- (4)  Notwithstanding  anything  contained  in      sub-section (3),  the  maximum  rate  of      duty on  Ale, beer,  porter,  cider  and      other   fermented    liquors   occurring      against  item  2(a)  in  the  table,  in      clause (e)  of sub-section  (3) shall be      deemed to  be Rupees  5 per  litre  with      effect  from   June  4,   1975  and  any      notification issued  on or after June 4,      1975   which is  in conformity  with the      provisions of  this sub-section shall be      deemed to  be, and  always to  have been      valid and lawful as if the provisions of      this sub-section  were in  force at  all      material times."      It is convenient now to note the judgment of a bench of seven  learned  Judges  of  this  Court  in  Synthetics  and Chemicals Ltd  and ors.  vs. State  of U.P. and ors., 1990-1 S.C.C. 109.  This Court stated that it had no doubt that the framers of  the Constitution,  when they used the expression ’alcoholic liquors  for human  consumption’, meant  and  the expression still  means, that  liquor which,  as it  is,  is consumable in the sense that it is capable of being taken by human beings  as such  as a  beverage or drink. Alcoholic or intoxicating liquors  had to be understood as they were, not what they  were capable  of or  able to  become. Entry 51 at list II  was the  counterpart of  Entry 84  of  List  I.  It authorised the State to impose duties of excise on alcoholic liquors for  human consumption  manufactured or  produced in the State.  It was  clear that all duties of excise save and except the items specifically excepted in Entry 84 of List I were generally  within  the  taxing  power  of  the  Central Legislature. The  State Legislature  had  limited  power  to impose excise  duties. That  power was  circumscribed  under Entry 51  of List  II. It  had to  be borne in mind that, by common standards,  ethyl alcohol  (which  had  95  per  cent strength) was  an industrial  alcohol and  was not  fit  for human consumption.  The ISI specifications had divided ethyl alcohol (as  known in  the  trade)  into  several  kinds  of alcohol. Beverages  and industrial alcohols were clearly and differently  treated.   Rectified  spirit   for   industrial purposes was  defined as  spirit  purified  by  distillation having a  strength not  less than  95 per  cent by volume of ethyl alcohol.  Dictionaries and technical books showed that rectified spirit  (95 per  cent ) was an  industrial alcohol and not  potable  as  such.  It  appeared,  therefore,  that industrial alcohol,  which was  ethyl alcohol (95 per cent), by itself was not only non-potable but was highly toxic. The range of  potable alcohol  varied  from  country  spirit  to whisky and the ethyl alcohol content thereof  varied between 19 to about 43 percent, according to the ISI specifications. In other  words, ethyl  alcohol (95  per cent)  was  not  an alcoholic liquor  for human consumption but could be used as a raw  material or  input, after  processing and substantial dilution, in  the production of whisky, gin, country liquor, etc. In  the light  of experience  and development,  it  was necessary to  state that  "intoxicating liquor"  meant  only that liquor which was consumable by human beings as it was.      What the  State seeks  to levy  excise duty upon in the Gruop ’B’ cases is the wastage of liquor after distillation, but before dilution; and in the Group ’D’ case, the pipeline loss of  liquor during  the process  of manufacture,  before dilution. It  is clear, therefore, that what the State seeks

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to levy  excise duty  upon is not alcoholic liquor for human consumption but  the raw  material or input still in process of being  rendered fit  for consumption by human beings. The State is  not empowered  to levy  excise  duty  on  the  raw material or  input that is in the process of being made into alcoholic liquor for human consumption.      That the  measure of  excise duty upon alcoholic liquor for human consumption is the alcoholic strength thereof does not make  any difference  is this  behalf. It  is  only  the alcoholic strength of the final product which is relevant.      The process  of obscuration, concerned in the Group ’C’ cases, needs  explanation. The  process of obscuration takes place in  the manufacture  of rum,  other  than  white  rum. Therein caremel  is added  to plain  spirit. This results in obscuration or  an apparant  but not  actual loss  of  proof gallons, that  is, of  alcoholic strength.  It is  upon this apparent loss  that the State seeks to levy excise duty. The aspect of  obscuration is dealt with in Rule 775 of the U.P. Excise Rules,  1910. This rule indicates that the caramel is added to  plain spirit.  In the  writ petition  out of which Special Leave  Petition No.3211/80  arises, it  was  averred thus: "Because  at the  stage at  which Caramel  is added no spirit is  ready or  available for  human consumption and as such no duty be levied at that stage". In the reply filed by the State  there   was no  denial of  the averment.  It  is, therefore, clear  that the  obscuration is  not of alcoholic liquor for  human consumption and the levy of excise thereon is beyond the State’s power.      Mr.   Sehgal   dreq   our   attention   to   Rule   775 aforementioned and  various other  rules in  the U.P. Excise Rules, 1910,  which indicate the mode of levy of excise duty upon  alcohol   other  than   alcoholic  liquor   for  human consumption. It will be remembered that the U.P. Excise Act, 1910, was amended in 1950 to include Section 3(22-a) whereby the power  of the  State to  levy excise duty was limited to that conferred  upon it  by Entry  51 of List II. The Rules, however wide  do not  appear to have been similarly amended. However wide  the Rules may be, they cannot extend the power of the  State to  levy excise  duty, which is limited by the Constitution  and   the  statute.   It  is,  therefore,  not necessary to refer to the Rules in any detail.      Mr. Sehgal submitted, in the alternative that if it was the ultimate  beverage which alone was exigible, the process of determining  the wastage  and levying excise duty thereon was only regulatory and, therefore, permissible, we are here concerned with  the demand of the State for excise duty. The power of  the State  to demand excise duty is limited in the manner aforementioned.  The demand  for excise duty is not a regulatory measure.  The power  of the  State to levy excise duty cannot  be expanded  with reference  to  its  power  to regulate manufacture.  We are  not required  to and  do  not express any  opinion in  regard to the power of the State to regulate the  manufacture  of  alcoholic  liquor  for  human consumption.      In the  result, the appeals are allowed only insofar as they relate  to the  levy of excise duty upon the wastage of Indian made  foreign liquor  exported outside  the State  of Utter Predesh.   The  judgments and orders of the High Court in so  far as  they hold that the State has no power to levy excise duty  upon such  wastage are set aside. For the rest, the appeals are dismissed and the judgments and orders under appeal upheld.      There shall be no order as to costs.

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