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PETITIONER: INDIAN MICA & MICANITE INDUSTRIES LTD.

       Vs.

RESPONDENT: STATE OF BIHAR & ORS

DATE OF JUDGMENT02/04/1971

BENCH: HEGDE, K.S. BENCH: HEGDE, K.S. SIKRI, S.M. (CJ) MITTER, G.K. GROVER, A.N. REDDY, P. JAGANMOHAN

CITATION:  1971 AIR 1182            1971 SCR  319  CITATOR INFO :  R          1973 SC 724  (30)  AFR        1980 SC   1  (13)  R          1980 SC1008  (18)  R          1981 SC1863  (23,28)  RF         1990 SC1927  (41,67,68,74,88)  RF         1992 SC 165  (50)

ACT: Bihar  and  Orissa Excise Act, 1915, s. 90  and  rules  made thereunder,  r.  111-Levy of licence fee for  possession  of liquor-Whether  fee  commensurate with service  rendered  by State-Immunity from prosecution on payment of licence fee-If quid pro quo.

HEADNOTE: The appellant was using denatured spirit in the  manufacture of  micanite.   It challenged the vires of r.  III-  of  the Rules framed under s. 90 of the Bihar and Orissa Excise Act, 1915,  by  which a fee for a licence  to  possess  denatured spirit  was imposed.  The.  High Court upheld the levy as  a fee for services rendered by the Government. In appeal to this Court, HELD:     (1)  Denatured  spirit being  intoxicating  liquor (though unfit for human consumption), the State  Legislature has power to levy a fee.  But, before the levy can be upheld as  a fee it must be shown that the levy was a quid pro  quo for  services  rendered by the  Government.   An  arithmetic exactitude is not expected but correlationship of a  general character must be established. [32ID-F] in  the present case, the only services rendered  were  that the Excise Department was maintaining an elaborate staff for the purpose of ensuring that denaturing was done properly by the  manufacturer  and for, the purpose of seeing  that  the subsequent  possession  of  the  denatured  spirit  was  not misused by converting the denatured spirit into alcohol  fit for human consumption. [326H; 327A-B] (a)  So  far as the manufacturing process is  concerned  the appellant  had  nothing  to  do with  it.   It  was  only  a purchaser  of  the denatured spirit and hence  the  cost  of supervising  the  manufacturing process  or  any  assistance

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rendered  to the manufacturers could not be  recovered  from consumers  like  the appellant.  Further, under, r.  9  the. actual cost of supervision of the manufacturing process  was required to be born by the manufacturer and there could  not be a double levy in that ergard [327B-C] (b)  Assuming that the possession of the denatured spirit in the  hands of various persons required close  and  effective supervision  because  of  the  risk  being  converted  into. potable  liquor, in Providing against misuse the  State  was not rendering any service to the consumer. [327D] (c)  The appellant had alleged that the State was collecting the  amount  without rendering any service in  return.   The correlationship  between the services rendered and  the  fee levied is essentially a question of act.  Prima facie in the present case the levy was excessive, even if the state could be said to be rendering some service to the licensees.   The State  was  in  possession  of material  from  which  ’  the correlationship  between the levy and the services  rendered could  be, established at least in a general way,  but  the State  had  not  placed’  any  material  before  the  Court. Therefore,  the levy under the impugned ’rule could  not  be justified, [327E-G] 320 Commissioner,  Hindu  Religious Endowments,  Madras  v.  Sri Lakshmindra  Thirtha  Swamiar  of Sri  Shirur  Mutt,  [1954] S.C.R.  1005,  Mahant Sri Jagannath Ramanuj Das  &  Anr.  v. State  of  Orissa  &  Anr.,  [1954]  S.C.R..  1046,  Ratilal Panachand  Gandhi v. State of Bombay & Ors.,  [1954]  S.C.R. 1055, Hingir Rampur Coal Co. Ltd. v. State of Orissa & Ors., [1961]  2  S.C.R. 537, H. B. Sudhundra  Thirtha  Swamiar  v. Commissioner of Hindi,( Religious and Charitable Endowments, Mysore, [1963] Supp, 2 S.C.R. 302. Corporation of Calcutta & Anr. v. Liberty Cinema, [1965] 2 S.C.R. 477 and Delhi  Cloth JUDGMENT: [1970] 2 S.C.R 348, followed. (2)  The  High  Court  erred  in  observing  that  when  the manufacturers  wanted  to keep in their possession  a  large quantity  of  denatured spirit for  manufacturing  purposes, they wanted a privilege and immunity from prosecution,  that the  payment  of  the requisite licence  fee  was  for  that purpose and that it operated as the quid pro quo. [325C-D] (a)  The granting of a license generally does not confer any privilege or benefit on anyone, except in those cases, where a  permit  or  licence  is granted  to  someone  to  exploit Government  property.  The requirement to take a licence  is prescribed  to  safeguard public interest  by  regulating  a trade,.  business  or  profession and not  as  a  source  of revenue. [325F-G] (b)  What is made punishable is either a person’s failure to take a licence or a breach of the conditions of the licence, and  the  Government  could  not barter  away  its  duty  to prosecute  an  offender for consideration.. Any  fee  levied could only be for services rendered. [325E-F] [Since the State may suffer considerable financial loss  the matter  was.  remanded  to  the  High  Court  with   further opportunity to the State to place the necessary material and show the correlationship.] [328A]

& CIVIL APPELLATE JURISDICTION : Civil Appeal No. 770 of 1967. Appeal from the judgment and order dated September 14,  1966 of the Patna High Court in Civil Writ Jurisdiction Case  No- 887 of 1965.

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Sarjoo  Pravad,  K.  K.  Sinha and  B.  B.  Sinha,  for  the appellant. S.   C. Agarwala, R. K. Garg, V.J. Francis, Narayana  Netter and S. P. Singh, for the respondents. The Judgment of the Court was delivered by Hegde J. In    this appeal by certificate. the vires of Rule III of the Rules framed  under  Section 90 of the Bihar  and Orissa Excise Act, 1915 is    in  issue.   ’The.  appellant, Indian  Mica & Micanite Industries contends that  the   said Rule  is  ultra vires the Constitution.  The High  Court  of Patna rejected that contention. In the High Court various contentions came up for considera- tion.   The High Court has come to the conclusion  that  the levy  made under the impugned rule is a fee.   That  finding was not                             321 challenged before us by any of the parties.  Therefore all that we have to see is whether the fee levied is, within the permissible  limit.   In  other  words  whether  there,   is sufficient quid pro quo for the levy in question. The  appellant  is  a  consumer  of  denatured  spirit.   It purchases  denatured  spirit  from the  wholesalers  or  the manufacturers  for  the purpose of  manufacturing  micanite. The Bihar and Orissa Excise Act, 1915 (Bihar & Orissa Act  2 of  1915) came into force on January 19, 1916. In  pursuance of the provisions of that Act the impugned Rule   was framed by the Board of Revenue for levying licence fee.  The    fee for the licence to possess denatured spirit in 1919 was only Rs.  2  per  annum  irrespective  of  the  quantity  in  the possession of a person.  This’ rate continued to be in force till  1937.  At this stage it may be remembered  that  under sub-section  (2) of Section 143 of the Government  of  India Act, 1935, the Provinces were authorised to continue to levy tax, duties, cesses or fees which were being lawfully levied prior  to the commencement of that Act.  Under the 1935  Act as under our present Constitution, the power to levy  duties on alcoholic liquor fit for human consumption was  allocated to the Provincial Legislature whereas the power to levy duty on  alcoholic  liquor  not fit  for  human  consumption  was allocated  to  the Central  Legislature.   Denatured  spirit though   an   alcoholic  liquor  is  not   fit   for   human ’consumption.  The power to levy duty on the same was and is given  to  the  Central Legislature.   But  the  same  being intoxicating  liquor, the Provincial Legislature  under  the 1935  Act and at present the State Legislature has power  to levy  fee.   The power of- any Legislature to  levy  fee  is conditioned by the fact that it must by and large a quid pro quo for the services rendered.  If a levy purporting to be a fee is found to be an exaction without doing any service, or if  it is found that the levy is wholly disproportionate  to the services rendered then the levy becomes invalid. The distinction between fee and levy’ came up for the  first time  for consideration by this Court in  The  Commissioner, Hindu  Religious  Endowments’  Madras  v.  Sri   Lakshmindra Thirtha  Swamiar of Sri Shirur Mutt(1).  Therein this  Court speaking through Mukherjea, J. (as he then was) quoted  with approval  the definition of ’tax’ given by Latham C.  J.  of the  High  Court  of  Australia  in  Matthews  v.   Chicory, Marketing  Board.(2) In that case the learned Chief  Justice observed :               " "A tax" is a compulsory exaction of money by               public    authority   for   public    purposes               enforceable  by  law and is  not  payment  for               services rendered."               (1)  [1954]  S.C.R.  1005.             (2)  60

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             C.L.R. 263.               21-1 S. C. India/71               Dealing with the distinction between "tax" and               "fee" Mukherjea J. observed thus in the above-               mentioned case.               "It  is said that the essence of  taxation  is               compulsion,  that  is to say,  it  is  imposed               under statutory power without the  tax-payer’s               consent  and the payment is enforced  by  law.               The second characteristic of tax is that it is               an imposition made for public purpose  without               reference   to  any  special  benefit  to   be               conferred  on the payer of the tax.   This  is               expressed  by saying that the levy of  tax  is               for  the  purposes of general  revenue,  which               when  collected  forms  part  of  the   public               revenues of the State.  As the object of a tax               is not to confer any special benefit upon               any particular individual, there is, as it  is               said  no element of quid pro quo  between  the               tax  payer and the public authority.   Another               feature of taxation is that as it is a part of               the  common burden, the quantum of  imposition               upon the tax payer depends generally upon  his               capacity to pay.               Coming  now  to  fees, a  "fee"  is  generally               defined  to be a charge for a special  service               rendered  to individuals by some  governmental               agency.  The amount of fee levied is  supposed               to  be based on the expenses incurred  by  the               government in rendering the service, though in               many cases the costs are arbitrarily assessed.               Ordinarily,  the  fees  are  uniform  and   no               account  is taken of the varying abilities  of               different   recipients  to  pay.   These   are               undoubtedly     some    of     the     general               characteristics,  but as there may be  various               kinds of fees, it is not possible to formulate               a  definition that would be applicable to  all               cases.               If, as we hold, a fee is regarded as a sort of               return or consideration for services rendered,               it  is absolutely necessary that the  levy  of               fees  should  on the face of  the  legislative               provision,  be  correlated  to  the   expenses               incurred   by  government  in  rendering   the               services." The  same  view was reiterated by this Court in  Mahant  Sri Jagannath  Ramanuj Das and anr. v. The State of  Orissa  and anr.0 and in Ratilal Panchand Gandhi v. The State of  Bombay and ors. (2). The nature of "a fee" again came up for consideration before this  Court in The Hingir Rampur Coal Co. Ltd. and  ors.  v. The State of Orissa and ors.(3) Therein this Court  observed that (1) [1954] S.C.R. 1046.        (2) [1954] S.C.R. 1055. (3)  [1961] 2 S.C.R. 537. 323 -although  there can be no generic difference between a  tax and  a fee since both are compulsory exactions of  money  by public  authorities, there is this distinction between  them that  whereas  a  tax is imposed  for  public  purposes  and requires  no  consideration to support it, a fee  is  levied essentially  for  services  rendered and there  must  be  an element  of quid pro quo between the person who pays it  and

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the   public  authority  that  imposes  it.   While  a   tax invariably goes  into  the consolidated  fund,  a  fee  is earmarked for the specified services in a fund created  for the  purpose.   Whether  a cess is one or  the  other  would naturally depend on the facts of each case.  If in the guise of a fee, the Legislature imposes a tax, it is for the Court on  a scrutiny of the scheme of the levy, to  determine  its Teal  character.   The  distinction  is  recognised  by  the Constitution   which   while  empowering   the   appropriate Legislatures  to levy taxes under the Entries in  the  three lists  refers to their power to levy fees in respect of  any such matters, except the fees taken in court, and tests have been laid down by this Court for determining the  ,character of an impugned levy.  In determining whether a levy is a fee the  true  test must be whether its  primary  and  essential purpose  is to render specific services to a specified  area or  class,  it being of no consequence that  the  State  may ultimately and indirectly be benefited by it.  In  H.  H. Sudhundra Thirtha Swamiar  v.  Commissioner  for ,Hindu Religious and Charitable Endowments, Mysore,(1)  this Court was called upon to consider whether the levy  impugned in that case could be justified as a fee.  It  upheld  the levy  which  was  an annual contribution  levied  under  the amended  Section  76(1) of the Madras  Religious  Endowments Act,  1951  on  the ground that  those  contributions  when collected  went  into  a  separate  fund  and  not  to   the consolidated  fund  of  the State  and  were  earmarked  for defraying  the expenses for the services rendered.  .Further they were not even payable to the government but payable  to the Commissioner and were levied not as a tax but only as a fee.   Therein this Court further observed that a  fee  does not cease to be of that character merely because there is an element of compulsion in it, nor is it a postulate of a  fee that  it  must have direct relation to  the  actual  service rendered.  Absence of uniformity is not a criterion on which alone  it  can be said that the levy is of the nature  of  a tax. In  Corporation of Calcutta and anr. v. Liberty  Cinema  the validity  of  the  levy made under Section 548  (2)  of  the Calcutta  Municipal  Act  1951 came  up  for  consideration. Therein this ,Court held that the levy in question is not  a "fee  and return for services" as the Act does  not  provide for any services of a special (1) [1963] Supp. 2 S.C.R. 302.  (2) [1965] 2 S.C.R. 477. 324 kind  being rendered resulting in benefits to the person  on whom it ’is imposed.  Section 527 (43) permits by-laws to be framed  for  regulating  the  inspection,  supervision   and control,  among  others,  of cinema houses  but  it  is  not obligatory  to make such by-laws and therefore, there  maybe no  services to render.  Even the bylaw made provides  only, for  inspection,  and  the work of inspection  done  by  the appellant was only to see that the terms of the licence were observed   by the licensee-, It was not a service  to  him,. and  so,  no question arises of correlating the,  amount  of levy  to the costs. of any service.  The levy  therefore  is not a fee and must be tax. In  Delhi  Cloth & General Mills Co. Ltd. v.  Chief  Commis- sioner,  Delhi and ors.,(1) the validity of a levy as a  fee came up for consideration by this Court.  Therein this Court speaking  through Grover, J. (one of us) laid down  that  in each  case when the question arises whether the levy  is  in the  nature  of  a fee the entire scheme  of  the  statutory provisions,  the  duties  and  obligations  imposed  on  the inspecting  staff  and the nature of the work done  by  them

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will have to be examined for the purpose of determining  the rendering  of the services which would make the levy a  fee. After examining the various provisions of the Factories Act, 1948 and the rules framed this Court came to the  conclusion that  a large number of provisions of the Act,  particularly in  the Chapters dealing with safety involve a good deal  of technical knowledge and in the course of their discharge  of duties  and obligations the Inspectors are expected to  give proper  advice  and  guidance  so  that  there  may  be  due compliance  with  the  provisions of the  Act.   On  certain occasions  the  factory owners are bound to receive  a  good deal of benefit by being saved from the consequences. of the working   of  dangerous  machines  or  employment  of   such processes as involve danger to human life by being warned at the proper time as to the defective nature of the  machinery or of the taking of precautions which are enjoined under the Act.  Similarly if a building or a machinery or plant is  in such  a  condition  that it is dangerous to  human  life  or safety  the  Inspector  by serving a timely  notice  on  the manager saves the factory owner from all the consequences of proper  repairs  not being done in time to the  building  or machinery.   In that case the High Court found that  60%  of the  amount  of licence fees which were being  realised  was actually  spent on services rendered to the factory  owners. That finding was accepted by this Court and on the basis  of that finding this Court upheld the validity of the levy. From  the above discussion it is clear that before any  levy can be upheld as a fee, it must be shown that the, levy  has reasonable correlationship with the services rendered by the Government.  In (1)  [1970] 2 S.C.R. 348. 325 other  words the levy must be proved to be, a quid  pro  quo for the services rendered.  But in these matters it will  be impossible    to   have   an    exact    correlationship.The correlationship  expected is one of a general character  and not as of arithmetical exactitude. Let  us now proceed to consider whether the levy  under  the impugned rule can be justified as a fee on the basis of  the law as enunciated by this Court. But  before doing so, it is necessary to dispose of  one  of the  grounds  on which the High Court upheld the  levy.   In paragraph 8 of the High Court’s judgment, it is observed:               "........ when a manufacturer wants to keep in               his  possession  large quantity  of  denatured               spirit for manufacturing purposes, he wants  a               special  privilege or concession  of  immunity               from prosecution.  For that purpose he has  to               obtain  a  licence  or a pass  on  payment  of               requisite fees.  ’There is thus a quid pro quo               element  and the immunity from prosecution  is               in   the  nature  of  a  special  benefit   or               privilege." The implication of this observation is somewhat  astounding. These observations imply that the government can barter away its  duty to prosecute an offender for  consideration.   The requirement  to  take a licence is prescribed  to  safeguard public interest and not as a source to gather revenue.  What is made punishable is either a person’s failure to take  the required  licence  ,or the breach of the conditions  of  the licence;  Otherwise  there would be no sanction  behind  the rule  requiring  to take a licence.  Generally  speaking  by granting  a licence the State does not confer any  privilege or  benefit on any one.  All that it does is to  regulate  a trade, business or profession in public interest.  There may

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be cases  where  a  government  which  is  the  owner  of  a particular property may  grant permit or licence to  someone to exploit that property for his benefit.  Such a right  may be given for consideration.   It is only in those cases that a  licence  or a permit is a conferment of a  benefit  or  a privilege  and  not in the case of grant of  a  licence  for carrying on any ordinary trade, business or profession.   If it is otherwise the State can sell the right to practice the profession of law in courts or to practice the profession of medicine  or  any  of the  other  numerous  professions,  at exorbitant  prices  or  may even put  up  those  rights  for auction  to be given to the highest bidder.  Nothing so  bad can  be  within  the  contemplation of  our  laws.   We  are inclined to think that the learned Judges of the High  Court have  misunderstood the observations of Seligman  quoted  in the Commissioner, Hindu Religious Endowments, 326 Madras  v.  Sri Lakshmindra Thirtha  Swamiar of  Sri  Shirur Mutt(1) to the effect that it is a special benefit  accuring to  the  individual which is the reason for the  payment  of fee. Let us now consider whether in the present case the State is proved  to have been rendering any service to the  appellant in  lieu  of the fee levied and further whether if  it  does render    any   service   whether   there   is    reasonable correlationship  between the services rendered and  the  fee levied.   In  other  words whether the  fee  levied  can  be considered as a quid pro quo for the services rendered. The averments of the respondents in their  counter-affidavit that are relevant on this aspect of the case are those found in paragraph 10 of the counter-affidavit.  They read :               "   To  denature  spirit  and  issue   it   to               Licensees,  proper supervision and control  is               needed vide Board’s rules 63 to 68 at page 177               to  181 of Excise Manual Volume 11.  There  is               every  risk  that any person  may  attempt  to               render   denatured   spirit  fit   for   human               consumption which is punishable under  section               49 of the Excise Act.               Besides  the above rules of the Board  certain               instructions have been issued in paragraph 187               to 196 of the Excise Manual, Volume III  (page               67-71) for the process of denaturing and issue               of  denatured spirit to the licensees.   State               Government  have to employ  supervisory  staff               and  chemical  examiner  to  carry  out  these               obligations of Supervision and control.               It  may be added that Excise  Department  does               not   only   supervise   and   control   these               intoxicating liquors in the interest of public               policy but renders services to the  petitioner               by   getting  alcohol  manufactured   at   the               distillery  by  supplying raw  materials  like               molasses  and  coal  to  these  distilles   at               controlled  cheap  rates.  This  is  the  only               reason of getting spirit distillery at a  very               cheap  cost  by the  licensees  including  the               petitioner.   And  hence levy of  fee  by  the               Excise authorities is not a duty or tax but it               is clearly fee in return for services rendered               as well as for proper supervision, control and               regulation   of   an   activity   which    the               legislature desires to control." According to the finding of the High Court the only services rendered  by  the Government to the appellant and  to  other

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similar  licensees  is that the Excise  Department  have  to maintain  an  elaborate staff not only for the  purposes  of ensuring that denaturing (1)  [1954] S.C.R. 1005. 327 is  done  properly  by the manufacturer  but  also  for  the purpose   of  seeing  that  the  subsequent  possession   of denatured  spirit in the hands either of a wholesale  dealer or  retail seller or any other licensee or permit-holder  is not misused by converting the denatured spirit into  alcohol fit for human consumption and thereby evade payment of heavy duty.  So far as the manufacturing process is concerned, the appellant or other similar licensees have nothing to do with it.  They are only the purchasers of manufactured  denatured spirit.   Hence  the cost of supervising  the  manufacturing process or any assistance rendered to the manufacturers can- not  be  recovered from the consumers  like  the  appellant. Further under rule 9 of the Board’ rules, the actual cost of supervision  of  the  manufacturing process  by  the  Excise Department  is  required  to be home  by  the  manufacturer. There  cannot  be  a double levy in  that  regard.   In  the opinion  of  the  High  Court  the  subsequent  transfer  of denatured spirit and possession of the same in the hands  of various persons such as whole-sale dealer, retail dealer  or other  manufacturers  also  requires  close  and   effective supervision  because  of the risk of  the  denatured  spirit being  converted into potable liquor and thus evading  heavy duy.   Assuming this conclusion to be correct, by doing  so, the  State is rendering no service to the consumer.   It  is merely protecting its own rights.  Further in this case, the State  which was in a position to place material before  the Court  to show what services had been rendered by it to  the appellant  and other similar licensees, the costs or at  any rate  the  probable  costs that can be  said  to  have  been incurred  for  rendering  those  services  and  the   amount realised  as fees has failed to do so.  On the side  of  the appellant,  it is alleged that the State is collecting  huge amount as fees and that it is rendering little or no service in   return.   The  correlationship  between  the   services rendered  and  the fee levied is essentially a  question  of fact.  Prima facie, the levy appears to be excessive even if the  State can be said to be rendering some service  to  the licensees.   The  State  ought to be in  possession  of  the material from which the correlationship between the levy and the  services  rendered  can be established at  least  in  a general  way.  But the State has not chosen to  place  those materials  before the Court.  Therefore the levy  under  the impugned Rule cannot be justified. In   this  Court  Counsel  for  the  State  prayed  for   an opportunity  to  place  material to show that  the  levy  in question  is  not  disproportionate  to  the  value  of  the services  rendered  by the State.  Ordinarily we  would  not have  acceded to that request coming at such a  late  stage, particularly  in  view of fact that the legal  position  had been  clarified by a long chain of decisions of this  Court. There  is  no doubt that the State has failed to  place  the necessary  material  before the Court to justify  the  levy. But the fact remains that because of the negligence of those in-charge of the defence of the 328 State, the State may suffer considerable, financial loss, if we  hold  that  the impugned Rule is  void.   Hence  we  are constrained to give the State a further chance to prove  its case. In  the result we allow the appeal, sat aside the  order  of

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the  High  Court and remit the case to the  High  Court  for disposal according to law in the light of this decision.   A further opportunity be given to the State to place  material before  that  court to show that the value of  the  services rendered  by the State has reasonable  correlationship  with the fee charged.  If the State adduces additional  evidence, the appellant be given an opportunity to rebut the same.  As the   further  enquiry  is  necessitated  because   of   the negligence  of  the State, it should pay the  costs  of  the appellant both in this Court and in the High Court and  bear its own costs up to this stage. V.P.S.                                   Appeal allowed. 329