http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 8  

CASE NO.: Appeal (civil) 4726-4728  of  1994

PETITIONER: SOLOMON ANTONY & ORS.

       Vs.

RESPONDENT: STATE OF KERALA & ORS.

DATE OF JUDGMENT:       22/02/2001

BENCH: CJI, S. Rajendra Babu & R.C. Lahoti

JUDGMENT:

L...I...T.......T.......T.......T.......T.......T.......T..J     [With   C.A.Nos.4729-37,  4738,   4739,  4740-42,  4743, 4744-45,  4746-50,  4751-65, 4790, 4791-97,  4883,  4884-86, 4887,  4888, 6111-12, 6113 of 1994, 94/95, 4115-16, 6679-82, 6815 of 1995, SLP(C) No.4122/98]

J U D G M E N T

RAJENDRA BABU, J. :

   For  the  excise year 1992-93 the State had monopoly  in the  matter  of supply of arrack.  The privilege of  vending the  arrack was obtained through a licence and the licensees got  their supply only through the State owned or controlled distilleries.  Such licensees were not allowed to import any arrack  or rectified spirit from outside the State.  In  the excise  year 1993-94 commencing from April 1, 1993 the State modified  the  policy  in  this regard  by  G.O.   (MS)  No. 18/93/TD dated February 8, 1993.  The modifications effected in the policy are as follows :-

   (a) Abkari shops were to be auctioned groupwise.

   (b)  In  the matter of supply of rectified  spirit,  the existing system was to be discontinued, instead permits will be  given  to  the  contractors   (licensees)  to  bring  a designated  quantum  of  rectified   spirit  determined   in relation to the auction amount.

   (c)  The Board of Revenue was to ensure, before issue of permits,  that adequate arrangements are made for the timely collection   of   duties,  taxes,   etc.   (d)  Fool   proof arrangements  were to be made for enforcing equality and  no release  of arrack was to be authorised till the  contractor satisfied the department about the required quality.

   Pursuant  to this policy amendments were made to Rule  8 of  the Disposal in Auction Rules on March 4, 1993 and again on  March 31, 1993.  Under amended Rule 8(1) it was provided that  before  the starting of the auction for each group  of

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 8  

arrack  shops  the auctioning officer shall announce in  the auction  hall that permits will be issued to the contractors to  import  or  purchase a designated quantum of  duty  paid rectified   spirit.   The  contractors   will  be  given  No Objection Certificates for import or transport permits based on   their  requests  by   the  concerned  Assistant  Excise Commissioner.   The contractors shall remit the excise  duty on the designated quantum of rectified spirit in each month. The  licensee  could obtain the duty paid  rectified  spirit either  from  the  distilleries  in the State  or  from  the distilleries  in other States.  Sub-rule (6) was substituted to  enable the contractors for opening godowns to store duty paid  rectified  spirit  for manufacturing  arrack  and  for storage  of manufactured arrack on payment of the amounts of annual rental prescribed.  Similarly here the licensee could purchase   the   duty  paid   rectified  spirit   from   the distilleries  in  the State or import it  from  distilleries from  outside  the  State.    Sub-rule  11  was  substituted prescribing the procedure for remittance of duty.  Rule 8(1) was amended on March 31, 1993.

   payment  of  excise  Writ petitions were  filed  on  the demand  made by the State for duty on the designated quantum of rectified spirit and additionally a contention was raised that  the  increase in excise duty on arrack from Rs.  5  to Rs.  10 per bulk litre by a notification issued on March 25, 1993  was also invalid.  The contractors challenged the levy of excise duty on the designated quantum of rectified spirit not  actually imported as ultra vires Sections 17 and 18  of the  Abkari  Act  rectified  spirit was not  fit  for  human consumption  and, therefore, levy was outside the purview of Entry  51  of  List  II  of  the  Seventh  Schedule  to  the Constitution.   It  was further contended that no  rectified spirit  was  produced within the State and,  therefore,  the levy of countervailing duty on imported rectified spirit was impermissible in law.

   The  learned  Single  Judge  who  dealt  with  the  writ petitions upheld these contentions.  He was of the view that (1)  the levy of excise duty on rectified spirit was without legislative competence and, therefore, the levy of such duty is   void;    (2)  the  levy  of  excise   duty   which   is countervailing duty on rectified spirit is illegal;  (3) the excise  duty  on undrawn rectified spirit or the quantum  of rectified  spirit  not  supplied to the  contractors  levied pursuant  to  sub-rule  (1) of Rule 8 of the  Kerala  Abkari Shops (Disposal in Auction) Amendment Rules 1993 is illegal, and  (4) excise duty levied and collected on the quantity of rectified  spirit  actually  supplied  to or  drawn  by  the contractors is valid.  Further, it was held that increase in excise  duty  from  Rs.   5 to Rs.  10  per  bulk  litre  of rectified spirit is arbitrary and, therefore, illegal.

   The  State carried the matter in appeal.  The Full Bench of  the High Court took the view that from the nature of the duty  imposed  it  is  clear  that  it  forms  part  of  the consideration  for  parting with the privilege conferred  on the  licensees under the Abkari policy for the year  1993-94 and,  therefore, the collection is good;  that till the year 1992-  93 it was the State monopoly in the matter of vending the  arrack  and  it only allotted the quota  of  arrack  or rectified  spirit to the contractors;  that as the State was unable  to  meet  the  requirements  in  full  resulting  in substantial  loss  to  the revenue because  of  large  scale clandestine  operations  carried on by the contractors,  the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 8  

policy  was,  therefore, changed;  that the State fixed  the quantum by the policy which could be imported with reference to the kist payable for the year 1992-93 and the contractors were  called  upon  to pay the excise duty on  that  quantum permitted  to be imported;  that this step was taken by  the State  to augment the revenue of the State;  that there  was no  obligation upon the State to supply rectified spirit  to the  contractors having limited its obligation to the  issue of  No Objection Certificates and permits for import of  the designated   quantum   of  rectified   spirit;    that   the contractors  who had participated in the auction pursuant to the  auction  notice did so with full notice that the  State was  not  undertaking  any  obligation to  supply  them  any rectified  spirit;   that the State obligation was  only  to issue  No  Objection Certificates and permits to import  the designated  quantum and no more;  that the State is entitled to  sell  exclusive  privilege  in  regard  to  manufacture, storage,  export, import, sale or possession of  intoxicants liquor and alcohol and, therefore, as provided under Section 18A  of the Arrack Act, it was lawful for the Government  to grant  to  any person exclusive privilege to sell liquor  by retail  within any local area on payment to Government of an amount  as  rental  in consideration of the  grant  of  such privilege;   that  the  amount  of rental may  be  fixed  by auction  or  negotiations or by any other method as  may  be determined  by  the  Government from time to time  and  such amount  may be collected to the exclusion of or in  addition to  the duty or tax leviable under Sections 17 and 18;  that the  amount  that  may be collected under  Section  18A  for granting the privilege is exclusive of or in addition to the duties or tax payable under Sections 17 and 18 of the Arrack Act;   that  for  the  abkari year  1993-94  the  Government granted  two privileges (i) the privilege of vending  arrack and, (ii) the privilege to procure the necessary quantity of arrack from outside the State for sale;  that to procure the requisite  quantity of rectified spirit for a  consideration which  the  contractor  had  agreed is a  privilege  of  the Government  and  to part with such privilege the rental  was fixed  in the auction and the amount which was described  as excise  duty on the designated quantum of rectified spirit was  allowed  to  be  imported.    The  totality  of   these circumstances   indicated  that  these   amounts  were   the consideration for the grant of the two privileges and formed part   of  the  consideration   which  is  indivisible   and integrated one for the grant of both these privileges.

   Thus  summing  up the position the Full Bench held  that what   the   contractors  are  required   to  pay   is   the consideration payable to the State for being granted the two privileges  as  stated earlier and are, therefore, bound  to pay  the  amount which in its measure is equivalent  to  the excise  duty payable on the designated quantum of  rectified spirit  under  the terms of Rule 8 and as undertaken in  the agreements executed by the contractors.  The High Court also noticed  that the enhancement of duty from Rs.  5 to Rs.  10 per  bulk litre was also valid after finding that there  was nothing  arbitrary in the enhancement.  The High Court  felt that  what  is collected by the Government was only  in  the nature  of  a  fee for privilege granted and not a  levy  of excise  duty on rectified spirit and, therefore, question of legislative competence would not arise.  Therefore, the Full Bench  of the High Court allowed the writ appeal by  setting aside  the  order made by the learned Single  Judge.   Hence these appeals by special leave.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 8  

   Shri  Joseph  Vellapalli, the learned  senior  Advocate, submitted  that the consideration in a contract for sale  of goods  or  privilege is entirely a matter between the  buyer and  the seller and it is not open to the court to find  out the quantum claimed by the buyer as duty at different stages and  whether the same constitutes consideration by parting with any privilege.  In the present case, the subject matter of  sale of rectified spirit by auction was the privilege to vend  arrack  in specified shops and the obligation  to  pay duty  on the designated quantum of rectified spirit would at best  be  described as a condition of the  contract.   The Legislature  having specifically enacted Section 18A of  the Arrack  Act  authorising  the  Executive to  grant  or  sell exclusive  privilege  of selling liquor, there is  no  other part  left with the Executive to grant privilege in  respect of  import of liquor.  The obligation to pay duty on  import of  rectified  spirit having been imposed under the law,  it necessarily  follows that the contractors liability to  pay such  duty can be determined only in terms of and within the strict  letter  of  law.  The obligation imposed  under  the relevant  Rules and the tender condition to pay duty on  the designated  quantum of rectified spirit has to be  construed as an obligation to pay the duty as per the Act and no more. Shri D.D.  Thakur, the learned senior Advocate appearing for some  of the appellants, supported the contentions raised by Shri  Joseph Vellapalli and submitted that the character  of demand  in the present case will clearly indicate that it is in  the nature of a tax or a duty which could not be  levied on  rectified spirit.  Shri P.  Krishnamoorthy, the  learned senior  Advocate,  submitted  that even assuming  it  to  be correct  that  the State granted two privileges, namely,  to vend  in retail alcohol and to import the rectified  spirit, the  levy on rectified spirit is not permissible in view  of the  decision of this Court in Synthetics and Chemicals Ltd. and  ors.   v.   State  of U.P.  & Ors.,  1990(1)  SCC  109, inasmuch as rectified spirit is not potable alcohol.

   The  learned  Solicitor General appearing for the  State submitted  that the State can impose excise duty in terms of Entry  51  of  List  II  on  alcoholic  liquors  for   human consumption.   The entire field of legislation in regard  to intoxicants liquors the production, manufacture, possession, etc.   are  covered by Entry 8 of List II.  The  policy  had been  set out by the Government on February 18, 1993 and the notice  in regard to sale of privilege of vending liquor had been given subject to the conditions set forth in the Kerala Abkari  Shops (Disposal in Auction) Rules, 1974 [hereinafter referred  to as the Rules] and Rule in this regard clearly enabled  the  State  to  collect  the  excise  duty  on  the designated quantum of rectified liquor in each month and the licensee shall purchase or import duty paid rectified spirit from  the distilleries in the State or from the distilleries in other States.  Under the Kerala Abkari Shops (Disposal in Auction)  Amendment  Rules,  1993  Form No.   ii  under  the heading  Agreement  was  amended so that the  kist  amount would  include  the excise duty on designated  quantum  of rectified  spirit  on  the establishment.   He,  therefore, contended that what was collected was only the kist amount which  was  not only to vend in retail alcohol but  also  to import  rectified  spirit for conversion to alcohol and  the measure  of  such  kist  amount was partly  based  upon  the quantum  of rectified spirit.  He further submitted that the rate  Rs.  5 per bulk litre had been amended to Rs.  10  per bulk  litre  by  a notification dated March  29,  1993  well

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 8  

before  the  rates came into force and to be  effected  from April  1,  1993 and, therefore, the variations in  the  rate would also be justified.

   The  undisputed facts are as follows:  On March 4, 1993, notice  [G.O.(P) No.  32/93/TD] was published in the  Kerala Gazette  regarding  the sale of privilege of vending  toddy, arrack   and  foreign  liquor   including   coco-brandy   in independent  retail shops.  It was made clear in the  notice that the auction sale will be held subject to the conditions set  forth  in  the Rules.  The Abkari Policy for  the  year 1993-94  was  announced  to the effect that  the  system  of tender-cum-  auction  would  continue and in the  matter  of supply  of  rectified  spirit the existing  system  will  be discontinued  and  instead  permits  will be  given  to  the contractors  to  bring  a designated  quantum  of  rectified spirit  determined in relation to the auction amount amongst other factors.

   On  March  4,  1993,  the Rules were amended  so  as  to substitute  sub-rule  (1) of Rule 8 by the following:   (1) Before  starting the auction in each group of arrack  shops, the  auctioning  officer shall announce in the auction  hall that   permits  will  be  issued   to  the  contractors   to import/purchase  a designated quantum of duty paid rectified spirit.    The  contractors  will  be  given  No   Objection Certificate  and  import/transport  permits based  on  their requests,  by the Asst.  Excise Commissioner concerned.  The contractors  shall  remit the excise duty on the  designated quantum  of  rectified  spirit in each month.   The  licence shall  purchase/import  the duty paid rectified spirit  from the  distilleries  in the State or from the Distilleries  in other  States.  However, in issuing permits, preference will be  given to the contractors to lift whatever quantity  that can  be  supplied by the Public Sector Distilleries  in  the State.

   The said Rules were further amended on March 31, 1993 so as to include the following clause:

   IN  PERMANENT  AGREEMENT  FORM NO.ii under  the  heading agreement  in  the second paragraph after the words  kist amount, the following words shall be inserted namely:

   and  excise  duty  on designated quantum  of  rectified spirit on the establishment.

   On  March  29,  1993, the notification  was  amended  to enhance the rate of duty from Rs.5 per bulk litre to Rs.10/- per  bulk litre, which was to come into effect from April 1, 1990.

   If  the  contractors have agreed to participate  in  the auction  sale  in terms of the notifications issued and  the amended  rules, it would make it clear that the kist  amount would include excise duty on designated quantum of rectified spirit  on the establishment.  The argument put forth now is that  the  excise  duty on designated quantum  of  rectified spirit  is  payable only in terms of the Act and  the  rules which  is  in  the nature of a tax or a levy and  the  State Government  is  not  competent to levy such excise  duty  on rectified  spirit  which  is   non-potable  alcohol.    This argument  ignores the fact that the permit is granted to the contractors  to  import or purchase a designated quantum  of

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 8  

duty paid rectified spirit and excise duty on the designated quantum  of rectified spirit has to be paid each month which will  be  utilized for the purpose of manufacture of  arrack and the kist amount payable would include the excise duty on the  designated quantum of rectified spirit.  It means  that the  consideration for parting with the privilege of vending arrack  would include the consideration equivalent to excise duty  on the rectified spirit.  Therefore, as is often  said by  this Court, if the contractors with their eyes wide open have  accepted the terms of payment of consideration of  the Kist  inclusive  of an amount equivalent to excise  duty  on rectified  spirit,  we  find no substance  in  the  argument advanced  on  behalf of the appellants that the excise  duty payable  even by way of Kist is in the nature of a tax or  a levy and not leviable under law by the State.

   Another  facet of this contention is that even in  cases of   non-utilization  of  the   quota  of  rectified  spirit permitted  to  be imported or drawn from State  Distilleries the  State  is  demanding  the excise  duty  on  the  entire quantity.   Again, this submission loses sight of the  terms of the agreement to the effect that duty payable on unlifted quota of rectified spirit is also part of the amount payable as  kist  on  the designated quantity.   The  aforesaid  two aspects  have  been  effectively dealt with in some  of  the decisions of this Court to which we will advert now.

   In fact, in the State of Haryana & Ors.  vs.  Jage Ram & Ors., 1980(3) SCR 746, this Court had occasion to consider a somewhat  similar  question.  In that case, Jage Ram held  a retail  licence  to vend liquor on payment of a licence  fee calculated at Rs.17.60 per litre for a quota of 62.100 proof litre.  He defaulted in making the instalment payable by him and  his licence was cancelled.  Thereafter, the retail vend was re-auctioned at his risk which resulted in a loss to the State  to the extent of Rs.7,41,577.40, which amount he  was called  upon  to pay.  He filed a writ petition in the  High Court  contending  that the licence fee was not a fee but  a still  head duty or an excise duty, and the rule requiring the  payment of such duty even when no quota of alcohol  was actually lifted by the licensee was unconstitutional and the rationale  to raise this contention was that there could  be no  liability  to pay still head duty or excise duty  unless the  licensee lifted the liquor.  The High Court upheld  the contention  and  quashed the levy.  On appeal by the  State, Chandrachud  C.J.  succinctly and with his usual felicity of expression summed up the position in law as under:

   the  amount  which the respondents agreed to pay to  the State Government under the terms of the auction is neither a fee  properly so-called which would require the existence of a  quid  pro quo, nor indeed is the amount in the nature  of excise   duty,  which  by   reason  of  the   constitutional constraints  has to be primarily a duty on the production or manufacture  of  goods produced or manufactured  within  the country.   The respondents cannot, therefore, complain  that they  are  being asked to pay excise duty  or  still-head duty  on quota of liquor not taken, lifted or purchased  by them.  The respondents agreed to pay a certain sum under the terms  of  the  auction  and  the  Rules  only  prescribe  a convenient  mode whereby their liability was spread over the entire year by splitting it up into fortnightly instalments. The  Rules might as well have provided for payment of a lump sum  and  the very issuance of the licence could  have  been

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 8  

made  to depend on the payment of such sum.  If it could not be   argued  in  that  event   that  the  lump  sum  payment represented  excise  duty,  it cannot be so  argued  in  the present  event  merely  because  the  quota  for  which  the respondents gave their bid is required to be multiplied by a certain  figure  per  proof litre and  further  because  the respondents  were given the facility of paying the amount by instalments while lifting the quota from time to time.  What the  respondents agreed to pay was the price of a  privilege which  the  State  parted with  in  their  favour.[emphasis supplied]

   To  similar effect, this Court again in State of  Andhra Pradesh  v.   Y.Prabhakara Reddy, 1987 (2) SCC  136,  stated that under a public auction the licence to sell liquor might be  granted  by the State subject to (1) payment  of  rental being  the  highest bid at the auction, (2) the  requirement that  the licensee shall purchase arrack at the issue price, and  (3)  the  further requirement that the  licensee  shall purchase  a minimum guaranteed quantity of arrack, which  he has  to  make good in case of short fall.  In that case,  it was  noticed  that  the consideration for the grant  of  the privilege to sell liquor is not merely the rental to be paid by  the  contractor but also the issue price of  the  arrack supplied or treated as supplied in case of short fall, which is  also  to  be paid by the contractors.   It  was  further observed that there is no question of the contractors having to pay the excise duty though it may be that the issue price is  arrived  at  after taking into account the  excise  duty payable  and eventually held that the amount payable by  the contractors  was not excise duty on undrawn liquor, but  was part of the price which they had agreed to pay for the grant of  the  privilege  to  sell liquor.   This  view  is  again reiterated in the decision in State of Rajasthan & Ors.  vs. Nandlal & Ors., 1993 Supp.  (1) SCC 681.

   The  facts  as  stated  above make  it  clear  that  the contractors are required to pay the consideration payable to the  State  for  sale of the liquor, namely  arrack  and  by importing designated quantity of rectified spirit in respect of  which the consideration payable is equivalent to  excise duty.   Thus the High Court is justified in holding that the contractors  are bound to pay the amount which is a measured excise  duty payable on the designated quantum of  rectified spirit in terms of rule 8 of the Rules and had undertaken in the agreements executed by them.

   The other point raised is in relation to the enhancement of the rate of excise duty from Rs.5 per bulk litre to Rs.10 per  bulk  litre of arrack made on 29.3.1993.   The  learned Single  Judge  took  the view that Rule 8(9)  of  the  Rules enabled the Government to enhance the excise duty only if it is  found necessary and the learned Single Judge found  that there   was  no  necessity   for  enhancement.   While   the justification  offered  is  that  in  respect  of   imported rectified spirit the duty payable on one litre of arrack 75º proof worked out to Rs.85.73 whereas even the enhancement to Rs.10/-  imposed  only a duty of Rs.22.13.  In other  words, the  argument  was  that this enhancement was  necessary  to balance  the  duty  on imported rectified spirit.   On  this basis  the Division Bench upheld the revision in excise duty from  Rs.5 per bulk litre to Rs.10 per bulk litre of arrack. If  it  is  the  excise duty and the  Government  has  found certain  rate  to  be appropriate, we do not think  that  it would  be  open  to attack.  In this case,  explanation  was

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 8  

offered  by  the Government to make such adjustments in  the matter  of  excise  duty payable on bulk  litre  of  arrack. Therefore,  we  find no substance in the challenge  to  this enhancement.

   In  this view of the matter, we find no substance in any one  of the contentions raised on behalf of the  appellants. These  appeals  and the special leave  petition,  therefore, deserve  to be and stand dismissed.  In the circumstances of the case, there shall be no orders as to costs.

CJI. S.  RAJENDRA BABU R.C. LAHOTI

FEBRUARY  22, 2001.