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CASE NO.: Appeal (civil)  2700-2701 of 2000

PETITIONER: M/s. Gupta Modern Breweries

RESPONDENT: State of Jammu & Kashmir & Ors

DATE OF JUDGMENT: 19/04/2007

BENCH: H.K. SEMA & V.S. SIRPURKAR

JUDGMENT: J U D G M E N T (with Civil Appeal No.2702 of 2000)

H.K. SEMA,J.

               These appeals have a chequered history.  We shall,  however, notice few facts leading to the filing of the present  appeals, strictly for the purpose of disposal of these appeals.   

               The Jammu and Kashmir Excise Act, 1901  (hereinafter the Act) was passed on 4.12.1901.                  The Jammu and Kashmir Distillery Rules 1946  (hereinafter the Rules) were framed on 29.6.1946.                  On 5.9.1973, an order was passed by the Excise  Commissioner under Rule 17 of the Rules that charges on  account of salary of Excise Department staff were to be  recovered from management at 50% of total expenses.  This  order was, however, withdrawn on 1.4.1974.  On 13.8.1981,  the Excise Commissioner, withdrew the exemption granted by  an order dated 5-9-1973.  By an order dated 10.9.1981, the  Excise Commissioner made a demand for payment of salaries  of Excise personnel posted at appellant’s distillery.   Notice of  demand was issued on 6.10.1988.  On 28.9.1981, the  appellant filed first OWP No. 549 of 1981 challenging Rule 17  as being ultra vires the Act.   The High Court stayed the  recovery proceedings.  The appellant has also filed Writ  Petition No. 1208 of 1989 challenging the demand made on  October 6, 1989 on account of staff charges, which was  dismissed by the learned Single Judge by its order dated 27th  September, 1990.    Aggrieved thereby, the appellant preferred    LPA (W) No.159 of 1990, which was dismissed by the Division  Bench by the impugned order.  Hence the present appeals.                  Section 25 of the Act empowers the Government to  frame rules. The relevant portion for the present purpose  reads:- "25. The Government may from time to time  frame rules-                 \005\005\005\005\005\005\005\005\005\005\005..                 \005\005\005\005\005\005\005\005\005\005\005..

               (g) for the inspection and  supervision of stills, distilleries, private  warehouses and breweries;

               (o)  generally to carry out the  provisions of this Act or of any other law for  the time being in force and relating to the

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Excise revenue."   

               Rule 17 of the Rules is claimed to stream from  Section 25, which has been assailed as ultra vires the Act  reads:-  "The licensee shall, if required by the Excise  and Taxation Commissioner, make into the  Government treasury such payment as may be  demanded on account of the salaries of the  Government excise establishment posted to  the distillery, but he shall not make any direct  payment to any member of such  establishment."                                                   The validity of the Rules has been challenged before  the learned Single Judge, before the LPA Bench and before  this Court on the grounds that (a) Rule does not have the  statutory backing; (b) Rule is in excess of the rule making  power in Section 25 of the Act and suffers from excessive  delegation; (c) Rule seeks to get breweries to pay for the  salaries and costs of the government officials involved in  revenue collection and it is manifestly unjust and arbitrary;   (d) Rule imposes a tax not a fee without the authority of law  and, therefore, contrary to Article 265 of the Constitution; and  lastly (e) The Rule is unreasonable and arbitrary and hence  contrary to Article 14 of the Constitution.                      Before we proceed further to answer the aforesaid  questions, we may at this stage, point out that this Court held  that a trade in liquor is res extra commercium and,  therefore, not entitled to the protection of Article 19(1)(g), but  any licensing, regulation or imposition in respect of the liquor  trade cannot be arbitrary and discriminatory.                 In Khoday Distilleries Ltd. vs. State of  Karnataka, (1995) 1 SCC 574, it is said that the State can  adopt any mode of selling the licenses for trade or business  with a view to maximize its revenue so long as the method  adopted is not discriminatory."                 In Khoday Distilleries  Ltd. vs. State of  Karnataka, (1996) 10 SCC 304, it is said in paragraph 13:  

"\005.Although the protection of Article 19(1)(g)  may not be available to the appellants, the  rules must, undoubtedly, satisfy the test of  Article 14, which is a guarantee against  arbitrary action. However, one must bear in  mind that what is being challenged here under  Article 14 is not executive action but delegated  legislation. The tests of arbitrary action which  apply to executive actions do not necessarily  apply to delegated legislation. In order that  delegated legislation can be struck down, such  legislation must be manifestly arbitrary; a law  which could not be reasonably expected to  emanate from an authority delegated with the  lawmaking power\005"                                                         (emphasis supplied)

It is, therefore, clear that even in dealing with the liquor trade,  the government cannot be manifestly unjust or arbitrary.                  Dr. Rajeev Dhawan, learned senior counsel,  appearing for the appellants, contended that the concept of  reasonableness applicable to delegated legislation and more  generally to actions under Articles 14 and 21 is that the action

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should not be manifestly unjust and arbitrary. According to  him, Rule 17 suffers from excessive delegation and is  manifestly unjust and arbitrary.                   Per contra Mr.S.R. Singh, learned senior counsel,  appearing for the respondents, contended that such payment  postulated under Rule 17 is neither fee nor tax but such  payment is being demanded in lieu of for parting with the  exclusive right and privileges granted to the appellant for the  services rendered to the appellant.                   We may at this stage notice that both the learned  Single Judge and the Division Bench erroneously relied on the  decision rendered by this Court in      Government of Andhra  Pradesh   vs.  M/s Anabeshahi Wine and Distilleries Pvt.  Ltd., (1988) 2 SCC 25.  In Anabeshahi’s case (supra) the fee  was imposed by Section 28(2) of the A.P. Excise Act, 1968  itself.  Section 28 reads as under:-     28. Form and conditions of licence etc.: (1)  Every permit issued or licence granted under  this Act shall be issued or granted on payment  of such fees, for such period, subject to such  restrictions and conditions, and shall be in such  form and shall contain such particulars, as may  be prescribed. (2) The conditions prescribed under Sub-section  (1) may include provisions of accommodation by  the licensee to excise officers at the licenced  premises on the payment of rent or other  charges for such accommodation at or near the  licensed premises and the payment of the costs,  charges and expenses (including the salaries  and allowances of the excise officers) which the  Government may incur in connection with the  supervision to ensure compliance with the  provisions of this Act, the rules made  thereunder and the licence.

Similarly, Rule 15 was framed consistent with Section 28 of  the Act.  Rule 15 reads: 15. (a) The licensee shall, if required by the  Commissioner provide within the premises of  the distillery or at such site as may be  approved by the Commissioner buildings for  the office and residence of the staff posted  under Rule 14. (b) The licensee shall, if required by the  Commissioner, deposit into the Government  Treasury such amount as may be demanded  towards the salaries and allowances of the  Government establishment posted at the  distillery, but he shall not make any direct  payment to any member of such  establishment.

A perusal of the aforesaid provisions, it clearly appears that  Sections and Rules provides that the salary and allowances  described as establishment charges which were sought to be  recovered as such under the impugned notice of demand.                  Admittedly, in the present case there is no such  provision in the Act or Rules.  Therefore, the decision in  Anabeshahi’s case (supra) is not applicable in the facts of the  case at hand.                 In the case of M/s Gujchem Distillers India Ltd.    Vs.  State of Gujarat, (1992) 2 SCC 399, the levy of  supervisory charges is traceable to Section 58-A of the

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Bombay Prohibition Act of 1949.  There is no such provision in  the J & K Excise Act.                        Dr. Dhawan referring to Rule 17 contended that it  suffers from excessive delegation, as it is manifestly unjust  and arbitrary.   In this connection he contended that Section  25(o) required that the rules should seek to carry out the  provisions of the Act or of any other law relating to the excise  revenue.  It is his say, that a disjunctive reading would be  violative of both the grammar and the intent if the word  ’generally’ is given too wide an interpretation and the word  ’and’ is read as ’or’.  Section 25(o) would become wholly and  completely unguided and applicable to just about anything.   The restraining element in Section 25(o) is the fact that it must  relate to "excise revenue".                   Excise revenue is defined in Section 3 of the Act.  It  reads: "’Excise revenue’ means revenue derived or  derivable from any duty, fee, tax, fine or  confiscation imposed or ordered under the  provisions of this Act\005"                                      

According to Dr. Dhawan, the term fee as defined in Section 3  is not the kind of fee that falls under Rule 17 and therefore,  the fee for the purpose of Rule 17 is not authorised by the Act.   He also referred to various sections under the Act where the  terms duty and fee are mentioned and their collection is  specifically authorised:         Section 5(a) Payment of duty for import Section 6 Payment of fee or duty for  export Sections 8-10 Permits for transport Sections 11-A \026 12-A Licenses for possession Section 16 Imposition of duty Section 17(d) Imposition of duty by fees for  manufacture Section 18 Framing of duties Section 22(a) Fee or duty for licenses Section 24 Recovery of duties Section 24-B Refund of duty, tax or fee           

He, therefore, contended that when the legislation intended  the Act itself indicates where a fee or duty or tax may be  charged.  He, therefore, argued that to include in Section 25(o)  the power to impose any independent fee not authorised by  statute, makes Section 25(o) overbroad and without any  guidelines whatsoever.  He further contended that Rule 17 is  also traceable to Section 25(g), which deals with inspection  and supervision of distilleries, private warehouses and  breweries and does not contain any provision for the  imposition of a duty, tax or fee.           It is now well settled principle of law that the regulatory  powers are generally to be widely construed.  However,  empowering the State Government to impose taxes, fees or  duties and such demands must be authorised by the Statute

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and must contain sufficient guidelines.    

       In the case of A.N. Parasuraman vs. State of Tamil  Nadu, (1989) 4 SCC 683, this Court pointed out as under:- "The point dealing with legislative delegation  has been considered in numerous cases of this  Court, and it is not necessary to discuss this  aspect at length.  It is well established that  determination of legislative policy and  formulation of rule of conduct are essential  legislative functions which cannot be  delegated.  What is permissible is to leave to  the delegated authority the task of  implementing the object of the Act after the  legislature lays down adequate guidelines for  the exercise of power."  

               (emphasis supplied)  

               In the case of Kunj Behari Lal Butail   vs.  State of  H.P., (2000) 3 SCC 40, it was pointed out in Paragraph 14 as  under: "14. We are also of the opinion that a delegated  power to legislate by making rules for carrying  out the purposes of the Act" is a general  delegation without, laying down any  guidelines; it cannot be so exercised as to  bring into existence substantive rights or  obligations or disabilities not contemplated by  the provisions of the Act itself".

              In the case of Devi Das Gopal Krishnan    vs.  State  of Punjab, (1967) 3 SCR 557, it was pointed out at 565-566 as  under:  "Under that section the Legislature practically  effaced itself in the matter of fixation of rates  and it did not give any guidance either under  that section or under any other provisions of  the Act-no other provision was brought to our  notice. The argument of the learned counsel;  that such a policy could be gathered from the  constitutional provisions cannot be accepted,  for, if accepted, it would destroy the doctrine of  excessive delegation. It would also sanction  conferment of power by Legislature on the  executive Government without laying down  any guide-lines in the Act. The minimum we  expect of the Legislature is to lay down in the  Act conferring such a power of fixation of rates  clear legislative policy or guide-lines in that  regard. As the Act did not prescribe any such  policy, it must be held that section 5 of the  said Act, as it stood before the amendment,  was void."

In the cases aforesaid where fees akin to Rule 17 were  imposed were cases where the imposition was specifically  imposed by the statute.  It is, therefore, clear that Rule 17 has  no statutory backing.                  The case of the respondents is that Rule 17  intended that in lieu of parting with exclusive right and  privileges granted to the appellant and for the services

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rendered and therefore it is neither fee nor tax.  It is contended  that the Government was rendering service to the appellant by  deputing excise staff not only for the purpose of ensuring that  the denaturing of spirit is done properly by the manufacturer  but also for the purpose of specifically seeing that the de- natured spirit does not go out of the hands, either of the  distillery owner or a retail seller or any licensee or per holder  contrary to law.  It is further argued that there was co- relationship between the services rendered and the fee levied  was essential.                  The question as to whether the tax payers or license  holders would have to pay for the official staff of the State for  supervising collection of the revenue, has been set at rest by  the Constitution Bench of this Court in the case of  Indian  Mica Micanite Industries   vs.  The State of Bihar, 1971(2)  SCC 236.  It is held in paragraph 17 as under:  "\005..the only services rendered by the  Government to the appellant and to other  similar licensees is that the Excise Department  have to maintain an elaborate staff not only for  the purposes of ensuring that denaturing 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 cannot be  recovered from the consumers like the  appellant. Further under Rule 9 of the Board’s  rules, the actual cost of supervision of the  manufacturing process by the Excise  Department is required to be borne 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 palatable liquor and thus  evading heavy duty. Assuming this conclusion  to be correct, by doing so, the State is  rendering no service to the consumer. It is  merely protecting its own rights. Further in  this case, the State which was in a position to  place material before the Court to show what  services had been rendered by it to the  appellant and other similar licensees, the costs  or at any rate the probable costs that can be  said to have been incurred for rendering those  services and the amount realised as fees has  failed to do so. On the side of the appellant, it  is alleged that the State is collecting huge  amount as fees and that it is rendering little or  no service in return. The co-relationship

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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  co-relationship between the levy and the  services rendered can be established at least in  a general way. But the State has not chosen to  place those materials before the Court.  Therefore the levy under the impugned Rule  cannot be justified."

                                       (emphasis supplied)

               In the case of Commissioner of Central Excise     vs.  Chhata Sugar Co.Ltd., (2004) 3 SCC 466, one of the  issues was whether the state government’s administrative  charges to collect a levy could be passed on to the person from  whom the tax, fee or levy was collected. This Court  categorically held that such an imposition would be a tax and  not a fee and must be duly authorized since it is a tax (at para  14), it is held:- "\005Hence, administrative charge under the  U.P. Act is a tax and not a fee."  

               It is, thus, clear from the aforesaid decisions that  imposition of administrative services is a tax and not a fee.   Such imposition without backing of statutes is unreasonable  and unfair.                 In the case of Corporation of Calcutta   vs.   Liberty Cinema, (1965) 2 SCR 477, it was made clear that the  nomenclature is not important.  In that case, the majority  judgment took the view that although the imposition under  the Calcutta Municipality Act, 1951 was described as a fee, it  was nevertheless a tax by stating (at pp.SCR 483, 484 & 490): "\005 Now, on the first question, that is, whether  the levy is in return for services, it is said that  it is so because section 548 uses the word  "fee". But, surely, nothing turns on words  used. The word "fee" cannot be said to have  acquired a rigid technical meaning in the  English language indicating only a levy in  return for services. No authority for such a  meaning of the word was cited.\005.. The Act,  therefore, did not intend to use the word fee as  referring only to a levy in return for services\005..  Section 548 does not use the word "fee"; it  uses the words "licence fee" and those words  do not necessarily mean a fee in return for  services. In fact in our Constitution fee for  licence and fee for services rendered are  contemplated as different kinds of levy. The  former is not intended to be a fee for services  rendered. This is apparent from a  consideration of Art. 110(2) and Art. 199(2)  where both the expressions are used indicating  thereby that they are not the same.\005The  conclusion to which we then arrive is that the  levy under section 548 is not a fee as the Act  does not provide for any services of special  kind being rendered resulting in benefits to the  person on whom it is imposed. The work of  inspection done by the Corporation which is

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only to see that the terms of the licence are  observed by the licensee is not a service to  him. No question here arises of correlating the  amount of the levy to the costs of any service.  The levy is a tax. It is not disputed, it may be  stated, that if the levy is not a fee, it must be a  tax."

         (emphasis supplied)

               In the case of M/s Lilasons Breweries (Pvt.) Ltd.     vs.  State of Madhya Pradesh, (1992) 3 SCC 293, Rule 22 of  the M.P. Breweries Rules 1970 to meet the annual expenses of  the officers was struck down as ultra vires the Act and  beyond the rule making power of the State.

WHY IT IS TAX AND NOT FEE

               Under the Constitutional scheme, taxes are distinct  from fees. Excise is a form of tax.  It is self-evident from  various constitutional provisions: (i)     The concept of a Money Bill in Articles 110(2) and  199(2) clearly postulate that taxes should be  voted on by Parliament  See Corporation of Calcutta, (1965) 2 SCR 477  at 483 (ii)    The taxes and excise in the Union List are to be  found in List I, Entries 82-92B; and  (iii)   The taxes in the State List are to be found in List  II, Entries 42-63 (iv)    Excise is specifically dealt with in List I, Entry 84  and List II, Entry 51 (v)     List II, Entry 51 specifically deals with excise on  alcohol (vi)    Fees are specifically dealt with in both these lists  (List I, Entry 96 and List II, Entry 66) and are a  distinct concept that has to be voted by  Parliament

Thus, taxes, excise and fees must be voted by  Parliament.

               In the cases of State of Punjab   vs.  Devans  Modern Breweries Ltd., (2004) 11 SCC 26 at para 25, K.T.  Moopil Nair   vs.  State of Kerala, (1961) 3 SCR 77 at paras  89 & 91, Ahmedabad Urban Development Authority   vs.   Sharadkumar Jayantikumar Pasawalla, (1992) 3 SCC 285 at  paras 6-7, Hindustan Times   vs   State of U.P.,  (2003) 1  SCC 591 at para 30 and Bimal Chandra Banerjee   vs.  State  of M.P., 1970 (2) SCC 467 at para 14,  it has been held that a  tax under Article 265 can only be imposed by way of  legislation and it is impermissible to be imposed by way of bye- laws or rules.

WHETHER THERE IS A QUID PRO QUO BETWEEN THE FEE  CHARGED AND THE SERVICE RENDERED.    

               We have already noted that the plea of the  respondents is that it was rendering service by deputing excise  staff not only for the purpose of ensuring that the denaturing  of spirit is done properly by the manufacturer but also for the  purpose of specifically seeing that the de-natured spirit does

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not go out of the hands, either of the distillery owner or a retail  seller or any licensee or permit holder contrary to law.  It is,  therefore, clear that there was no co-relationship between the  expenses incurred by the Government and the fee sought to be  raised under Rule 17.  In other words, there is no quid pro  quo between the fee charged and the services rendered.   A  Constitution Bench of this Court in the case of The  Commissioner, Hindu Religious Endowments, Madras    vs.   Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt,  (1954) SCR 1005 (at 1040, 1041 & 1044)  held that a fee must  be for a quid pro quo :-

"..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 taxpayer and the public  authority.  Another feature of the taxation is  that as it is a part of the common burden, the  quantum of imposition upon the taxpayer  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\005\005but in  this case there is total absence of any co- relation between the expenses incurred by the  Government and the amount raised by  contribution under the provision of section 76  and in these circumstances the theory of a  return or counter-payment or quid pro quo  cannot have any possible application to this  case. In our opinion, therefore, the High Court  was right in holding that the contribution  levied under section 76 is a tax and not a fee  and consequently it was beyond the power of  the State Legislature to enact this provision\005."   

               (emphasis supplied)

               For the reasons aforestated we hold that:

(a)     Rule 17 has no statutory backing and it is  in excess of the Act.

(b)     It is manifestly unjust and arbitrary.

(c)     Provision of Rule 17 is clearly a tax and not  a fee.

(d)     Imposition of tax or fee on the citizens for  the services that the State renders to itself  and not the tax payers is clearly  impermissible, arbitrary and unjustifiable.    

This takes us to the last leg of submission of the counsel for  the respondents.  It is strenuously urged by the counsel for  the respondents that in the event this Court struck down Rule  17 being ultra vires the Act, such decision must be  prospective and the State should inter alia be permitted to  retain the fees paid by the appellant in the interregnum.  

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               In support of his contention, counsel for the  respondents, relied on the judgment of this Court rendered in  Federation of Mining Associations of Rajasthan   vs.  State  of Rajasthan, 1992 Supp.(2) SCC 239, where this Court held  that the declaration of the act unconstitutional will take effect  only from the date of judgment.  The ruling cited above is not  applicable in the facts of this case for the following reasons:                  Firstly, the interim order dated 11.9.2000 passed  by this Court clearly provided for refund in the following  terms:-  

"No stay.  In case the appeals are ultimately  allowed, the respondents shall pay, on the  refund ordered, interest at the statutory rate".

        Secondly, Section 24-B of the Act itself provides as  under: "\005Any amount of duty, tax, fine or fee paid by  any person which was not payable under this  Act shall be refunded to such person along  with interest for the period of default at the  rate of 2% per month\005."

                        We, accordingly, direct the respondents to refund  the payment so made in the interregnum with interest  calculated at the statutory rate.                    In the result, the order of the learned Single Judge  and the Division Bench passed in LPA No.159 of 1990 are set  aside.   Appeals are allowed.  In the facts and circumstances of  the case, parties are asked to bear their own costs.