http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 12  

PETITIONER: STATE OF U.P. AND ORS.

       Vs.

RESPONDENT: DELHI CLOTH MILLS & ANR.

DATE OF JUDGMENT09/10/1990

BENCH: SAIKIA, K.N. (J) BENCH: SAIKIA, K.N. (J) AGRAWAL, S.C. (J)

CITATION:  1991 AIR  735            1990 SCR  Supl. (2) 168  1991 SCC  (1) 454        JT 1990 (4)   131  1990 SCALE  (2)719

ACT:     U.P. Excise Act, 1910---Sections 28 and 29 and Notifica- tion  dated  26th  March  1979--Excise  duty--Countervailing excise duty--Minimum limits of wastage in transit--Provision for--Charging  up of duty on excess wastage--And  imposition of excise duty on liquor before its issue from the  distill- ery--Whether valid.

HEADNOTE:     The  respondents  are  manufacturers  of  high  strength spirit.  They also used to manufacture and  bottle  military rum  under  a  licence and supply the same  to  the  defence personnel  inside and outside the State of U.P.  The  excise duty  on  military rum for export was Rs.7  per  L.P.  Litre while  the rate for consumption within the State  was  Rs.21 per L .P. Litre. An allowance upto 0.5 per cent for  wastage during  transit by leakage, evaporation etc.  was  provided. Against a proper permit the respondents supplied rum to  the Officer Commanding Rail Road Depot. A.S.C., Pathankot at the distillery  premises and the consignments were taken by  the consignees  under  the seal of the  railway  authorities  to their respective destinations.     By a notification dated March 26, 1979, issued in super- session to earlier notification, the Governor was pleased to direct  that  with effect from April 1, 1970 duty  shall  be imposed  on  country spirit at the rates  mentioned  in  the schedule and that the duty was payable before issue from the distillery or bonded warehouse concerned save in the case of issued  under bond. Accordingly a notice was issued  to  the respondents demanding Rs.4,295.55P on the wastage which  was termed as "excess transit wastage" of rum calculated at  the maximum  rate of Rs.21 per L .P. Litre.  The  representation against  the demand having been rejected, they filed a  writ petition  before the High Court challenging the validity  of the  orders and praying for a mandamus commanding the  State of U.P. not to realise or adjust any amount of duty  towards wastage  from  the  respondents’ advance  duty  account  and restraining them from giving effect to the impugned orders.     The  High Court allowed the respondents’  writ  petition holding  that the State of U.P. and the  Excise  authorities were not entitled to levy

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 12  

169 excise duty on the wastage of liquor in transit. Hence  this appeal by the State.     On the question, whether differential duty is  leviable. under the Act and the Rules. Allowing the appeal, this Court,     HELD:  The Act having provided for fixed wastage  allow- ance  also  in  effect provided that the  excess  above  the allowable wastage will be taxed. It cannot therefore be said that no such charging up of excise duty on the excess  wast- age in transit could be validly made. [179E]     Absolute  equality  and  justice is  not  attainable  in taxing  laws. Legislature must be left to decide  the  State policy within constitutional limitations. [179F]     Rules  636 and 814 are of regulatory character and  they are  precautionary  against  perpetration of  fraud  on  the excise  revenue of the exporting State. A statute has to  be construed  in the light of the mischief it was  designed  to remedy. [180D]     In  the instant case, the military rum was obtained  for the purpose of export and the lower export duty was paid and only  when the rum did not result in export the question  of imposing  the  differential duty arose. The  notion  of  the excise  duty being changed or cancelled on account  of  what transpires later is not foreign to excise law. [182H]     Drawback  means the repayment of duties or taxes  previ- ously  charged on commodities, from which they are  relieved on exportation. [183B]     The  system  of charging up the duty on  the  subsequent event  of non export cannot, therefore, be said to be  irre- spective of production or manufacture. [183C]     In the instant case, if it is proved to the satisfaction of the appropriate authorities that counter-vailing duty had been  paid  on the entire consignment  irrespective  of  the wastage  then  the question would arise as  to  whether  the wastage  could be ignored altogether by the exporting  State as was done by the importing State. [183D]     A.B. Abdulkadir v. State of Kerala, [1962] 2 Suppl.  SCR 741;  Bimal  Chandra Banerjee v. State  of  Madhya  Pradesh, [1970] 2 SCC 170 467;  State  of Mysore & Ors. v. M/s. D.  Cawasji  and  Co., [1970] 3 SCC 710; M/s. Mohan Meakin Breweries Ltd. v. Excise JUDGMENT: M/s.  Mc Dowell and Co. Ltd. v. Commercial Tax Officer,  VII Circle, Hyderabad, [1977] 1 SCR 914; Kalyani Stores v. State of  Orissa and Ors., [1966] 1 SCR 865; Excise  Commissioner, U.P.  v.  Ram Kumar, [1976] 3 SCC 540 and  State  of  Madhya Pradesh v. Firm Gappulal, AIR 1976 SC 633, referred to.     Mls.  Ajudhia  Distillery Rajaka, Sahaspur v.  State  of U.P. and Anr., [1980] Taxation Law Repons 2262, overruled.

&     CIVIL  APPELLATE JURISDICTION: Civil Appeal No. 4297  of 1983.     From  the  Judgment and Order dated  26.10.1979  of  the Allahabad High Court in C.M.W. No. 7168 of 1972. Raja Ram Agarwal and A.K. Srivastava for the Appellants.     K.K.  Venugopal, Rajinder Sachher, Satish Chandra,  K.C. Dua, and J.P. Misra for the Respondents. The Judgment of the Court was delivered by     K.N.  SAIKIA,  J.  The State of U.P.  by  special  leave appeals  from  the Judgment of the High Court  of  Allahabad

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 12  

dated  26.10.1979, allowing the respondents’  writ  petition and  holding that the State of U.P. and the Excise  authori- ties were not entitled to levy excise duty on the wastage of liquor in transit. The respondents are manufacturers of high strength  spirit  classified as other sorts  of  spirit  not otherwise  specified’ under Section 28 of the  United  Prov- inces  Excise  Act, 19 10, hereinafter referred to  as  ’the Act’.  After manufacture they transport those spirit in  big containers from the distilleries to their warehouses, trans- porting  them on passes issued under section 16 of the  Act. In  the  bonded warehouses the same are  sometimes  diluted, separately  bottled and sold. They also used to  manufacture and bottle military rum under a licence and supply the  same to  the  defence personnel inside and outside the  State  of U.P. The Officer Commanding Rail Head Depot A.S.C.,  Pathan- kot having obtained permits from the State of Punjab for the import  of military rum, against those permits the  respond- ents  exported  military rum from  their  distillery,  under different passes. The excise duty on military rum for export was  Rs.7  per  L.P. Litre while the  rate  for  consumption within the State was 171 Rs.21 per L.P. Litre. If the exported military rum was under bond thereupon duty was realised by the importing State from the  importer thereof. The respondents bottled the  rum  ac- cording to rules and supplied the same to the consignees  at the  distillery premises and the consignments were taken  by the consignees under the seal of the railway authorities  to their respective destinations.     It  appears  by  Notification dated March  26,  1979  in exercise of the powers under Sections 28 and 29 of the  Act, read with section 21 of the U.P. General Clauses Act,  1904, and  in supersession of the earlier Government  Notification the  Governor  was pleased to direct that with  effect  from April 1, 1979 duty shall be imposed on country spirit at the rates  specified  in the schedule thereto and the  duty  was payable  "before  the issue from the  distillery  or  bonded warehouse concerned save in the case of issued under  bond". By order dated 13.10.1970 notice was issued to the  respond- ents demanding Rs.4,295.55p. on the wastage which was termed as "excess transit wastage" of rum calculated at the maximum rate  of Rs.21 per L.P. Litre. A representation of  the  re- spondents dated November 9, 1970 was rejected by order dated 15.1.1972.  Another  representation through  the  All  India Distillers  Association  was also rejected  by  order  dated August 28, 1972.     Several  writ petitions challenging similar orders  were filed by others before the Allahabad High Court for quashing the  orders. The respondents also filed Civil  Miscellaneous Writ No. 7168 of 1972 under Article 226 of the  constitution of  India praying for appropriate writ, order  or  direction quashing  the impugned orders dated  13.10.1970,  9.11.1970, 15.1.1972  and 28.8.1972 and for a mandamus  commanding  the State  of U.P. not to realise or adjust any amount  of  duty towards  wastage from the respondents’ advance duty  account otherwise  than in accordance with law and restraining  them from giving effect to the impugned orders. The High Court by the impugned judgment dated 26.10.1979 relying on an earlier Division Bench decision of the same High Court in M/s. Mohan Meakin Breweries Ltd. and Anr. v. State of Uttar Pradesh and Ors., (Writ Petition No. 2604 of 1973, decided on 11.9.1979) allowed  the writ petition and quashed the  impugned  orders thereby holding that no excise duty could legally be  levied on  the excess wastage the occurred during the transport  of liquor  in  course of export, that is, taking  out  of  U.P.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 12  

otherwise  than across a customs frontier as defined by  the Central Government.     Mr. Raja Ram Agarwal, the learned counsel for the appel- lants, submits that the duty has been levied keeping in mind the fact that in 172 U.P.  excise  duty is levied at two  different  rates--at  a higher rate when the liquor is sold inside the State, and at a lower rate when it is exported outside the State. Counter- vailing duty is paid by the importer on the quantity actual- ly  received  in  the importing State. If  there  is  excess wastage on transit the result is that the quantity  actually received by the destination State is less than the  quantity on  which  the State of U .P. charged the  lower  rate  and, therefore,  on  the quantity shown as wastage the  State  of U.P.  ought  to  recoup its differential  duty  by  charging excise  duty  at the higher rate; and that this  is  clearly envisaged by the Act and the United Provinces Excise  Manual Rules,  hereinafter  referred  to as  ’the  Rules’.  Counsel further submits that it has a wholesome purpose, namely,  to discourage evasion of duty and that there is no question  of levying  excise duty twice on the same article  inasmuch  as the  amount of export duty actually paid is always  deducted from the demand; and that it is a duty of regulatory charac- ter  meant to guard against perpetration of fraud or  decep- tion  on excise revenue which the State is entitled  to  re- ceive. It is said to be a realisation of escaped duty justi- fied by the implied presumption.     Mr. K.K. Venugopal, the learned counsel for the respond- ents,  submits that in this case while the exporting  State, that is, U.P., levied export duty at a concessional rate the importing  State levied countervailing duty on the  quantity of rum imported; and the quantity exported and subjected  to excise  duty  by the exporting State being the same  as  the quantity  whereupon countervailing duty was imposed  by  the importing  State, there could be no question  of  collecting differential  duty  on the excess wastage by  the  exporting State  and if that was done it would amount to double  taxa- tion. Explaining the procedure for export from U.P.  counsel states that after export duty is paid, the exporter gets the alcohol released and transport it to the importing States in bottles or casks. In the importing State countervailing duty is paid on full consignment at its destination and the seals of  the bottles transported are intact. So the  entire  con- signment  is  taxed less the wastage.  The  impugned  demand notices  have, submits counsel, rightly been quashed by  the High  Court and the appellants have rightly been  restrained from  levying  such differential duty on excess  wastage  on transit in course of export.     The  only question to be decided, therefore, is  whether the  differential  duty is leviable under the  Act  and  the Rules.  For answering the question we may refer to  the  Act and the Rules. Included in Chapter V of the Act, which deals with duties and fees, Section 28 of the Act provides that an excise duty or a countervailing duty, as the 173 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 stated in that section.     "Excise  duty" and "countervailing duty" as  defined  in Section  3(3a)  of  the Act means any such  excise  duty  or countervailing duty, as the case may be, as is mentioned  in entry 51 of List II in the Seventh Schedule to the Constitu- tion. That entry reads as follows:

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 12  

"51. Duties of excise on the following goods manufactured or produced in the State and countervailing duties at the  same or  lower  rates on similar goods manufactured  or  produced elsewhere in India: (a) alcoholic liquors for human consumption; (b) opium, Indian hemp and other narcotic drugs and  narcot- ics;  but  not including medicinal and  toilet  preparations containing alcohol or any substance included in subparagraph (b) of this entry."     The  original Section 28 of the Act now  re-numbered  as subsection (1) thereof, and sub-sections 2 and 3 inserted by section  2 of the U.P. Act 7 of 1970 clearly  covers  Indian made foreign liquors. There could be no dispute as to  mili- tary  rum being one of the Indian made foreign  liquors  ex- cisable under the Act. A duty of excise under Section 28  is primarily levied upon a manufacturer or producer in  respect of  the excisable commodity manufactured or  produced  irre- spective  of its sale. Firstly, it is a duty upon  excisable goods, not upon sale or proceeds of sale of the goods. It is related to production or manufacture of excisable goods. The taxable  event is the production or manufacture of the  liq- uor.  Secondly, as was held in A.B. Abdulkadir v. The  State of Kerala. reported in 1962 (2) Suppl. SCR 741: AIR 1962  SC 922,  an excise duty imposed on the manufacture and  produc- tion  of  excisable  goods does not cease to  be  so  merely because the duty is levied at a stage subsequent to manufac- ture  or production. That was a case on Central Excise,  but the principle is equally applicable here. It does not  cease to  be excise duty because it is collected at the  stage  of issue  of the liquor out of the distillery or at the  subse- quent  stage of declaration of excess  wastage.  Legislative competence under entry 51 of list II on levy of excise  duty relates only to goods manufactured or produced in the  State as  was  held in Bimal Chandra Banerjee v. State  of  Madhya Pradesh, [1970] 2 SCC 467. In the instant case there is no 174 dispute  that the military rum exported was produced in  the State of U.P. In State of Mysore & Ors. v. M/s. D. Cawasji & Co.,  [1970] 3 SCC 7 10, which was on Mysore Excise Act,  it was  held  that the excise duty must be closely  related  to production or manufacture of excisable goods and it did  not matter if the levy was made not at the moment of  production or  manufacture  but  at a later stage and even  if  it  was collected  from retailer. The differential duty in  the  in- stant  case, therefore, did not cease to be an  excise  duty even  it  was levied on the exporter  after  declaration  of excess  wastage. The taxable event was still the  production or manufacture.     It is settled law as was held in Bimal Chandra  Banerjee v. State of Madhya Pradesh (supra), a case under the  Madhya Pradesh  Excise Act, that no tax can be levied by the  State Government  in  the  absence of  specific  authorisation  by statute.  In that case the levy of duty on liquor which  the contractor  failed to lift was held to have been an  attempt to  exercise  a  power which the State  Government  did  not possess.     Mr. Agarwal refers us to Rule 636 of the Rules which  at the relevant time said:          "636.  A  distiller holding licences  for  bottling Indianmade  foreign  liquor of his own manufacture  and  for selling  it  by  wholesale may export  such  foreign  liquor bottled  on  his wholesale premises, to any other  State  or Union  Territory  in India subject to the  following  condi- tions:          (1)  The exporter shall obtain from the importer  a

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 12  

permit  authorizing the import signed by the  Chief  Revenue Authority of the importing State or Union Territory or by an officer duly authorized in this behalf. (2) The permit shall specify: (a) the name and address of the person of firm authorized to import; (b) the description and quantity of the foreign liquor to be imported; (c)  the rate of duty chargeable in the importing  State  or Union Territory in case the Indian-made foreign 175 liquor  is imported in State or Union territory  with  which the  state  of  Uttar Pradesh has  entered  into  reciprocal arrangements  for the adjustment of the excise duty by  book transfer. (d) the rate of duty charged in the importing State or Union Territory and the fact that it has been realized in  advance in cases of import other than those covered by clause (c).     (3) On receipt of the permit the exporter shall  deposit into the treasury; (a)  Export duty on the total quantity of liquor to  be  ex- ported; and (b)  Where the export is made to a State or Union  Territory with  which  the State of Uttar Pradesh has entered  into  a reciprocal arrangement for the adjustment of the excise duty by book transfer, and the rate higher than that enforced in the State of Uttar Pradesh, and that  payable in the importing State or Union  Territory  on the total quantity of liquor to be exported.     (4)  On receipt of the permit and the  treasury  receipt the wholesale vendor shall prepare a pass in form F.L. 23 in quadruplicate  and  submit it to the Excise  Inspector,  in- charge  of the distillery. The Excise Inspector shall  after satisfying  himself that duty has been  correctly  realized, affix  his  signature to the pass. The exporter  shall  then send  one copy of the pass to the Collector of the  district of  export, one copy to the Chief Revenue Authority  of  the place  of import or such other officer as may be  authorised in  this behalf. One copy to the consignee and shall  retain the fourth copy. The treasury receipt shall always accompany the copy of the pass sent to the Collector of the  exporting districts. (5) The pass in form F.L. 23 shall state clearly: (a) the name and address of the consignor; 176 (b) the name and address of the consignee; (c)  the  exact  description and quantity of  each  kind  of foreign liquor despatched under the pass; (d) the route by which it is despatched; (e) the date of despatch; and (f)  in  case of export against duty paid permit,  the  fact that the duty has been prepaid in the State of import.          (6) A separate pass in form F.L. 23 shall be issued in respect of each consignment. The Chief Revenue  Authority or other officer of the place of import should send the copy of  the  pass received by him, duly  countersigned,  to  the Excise Commissioner, Uttar Pradesh, in support of the  claim for’  refund of duty annually after the close of the  excise year.          (7) Should the rate of duty in the importing  State be lower than that in force in Uttar Pradesh, exporter shall be  entitled to a refund of the difference in duty.  If  the duty has been prepaid in the State of import at the rate  in force  at  the time of issuing import permit,  the  exporter shall  be entitled to a refund of duty deposited by  him  in

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 12  

the  State  of export on verification of the  claim  by  the Excise Inspector incharge of the distillery on the basis  of export  passes  in form F.L. 23 duly  countersigned  by  the Chief  Revenue Authority of the State or Union Territory  of import  or the officer appointed in this behalf in token  of receipt of the consignment of Indian-made foreign liquor"     Rule 637 provided than the duty, other that export duty, on  foreign liquor manufactured at any distillery  in  Uttar Pradesh and exported therefrom on prepayment of duty to  any State or Union Territory of India shall be credited by  book transfer  to the Government of the importing State or  Union Territory  after  the close of the excise year.  Rule  637-A provided for registration of claims for refund or export  of Indian-made foreign liquor and provided that every distiller making  exports  of  Indian-made  foreign  liquor  to  other States,  shall submit a statement showing all  such  exports made  during the proceeding quarter, in form P.D. 31 to  the Excise Commissioner, duly 177 verified  by the officer incharge,  distillery,  despatching simultaneously  a copy thereof to the Assistant Excise  Com- missioner of the charge. Rule 37-B provided for  maintenance of  register of refunds against exports of Indian-made  for- eign  liquor and said that the Excise Inspector incharge  of the  distillery  shall enter all the details  given  by  the distillers  in the statement in form P.D. 31, in a  register to  be  maintained  by him in form P.D. 31-A.  As  and  when refunds  are  allowed by the Excise Commissioner,  he  shall make  entries  about  refund in this  register  in  relevant columns  under his signature. Similar entries shall also  be made  by  the office of the  Assistant  Excise  Commissioner concerned, on the copies of P.D. 31 statement received  from the  exporters,  and be initialled by the  Assistant  Excise Commissioner after verification.     Thus it is seen that though not specifically  mentioning charging  up of differential export duty on excess  wastage, the  above rules definitely envisaged refund of excise  duty of countervailing or equalising nature.     Mr.  Agarwal also brings to our notice R.ale 8 14  which substituted the old Rule by the Excise Commissioner’s  Noti- fication  No.  10909/IX. 241-A, dated February 8,  1978.  It provided as under: "Allowance  for loss in transit. An allowance upto  0.5  per cent will be made for the actual loss in transit by leakage, evaporation or other unavoidable cause, or spirit transport- ed or exported under bond in wooden casks or metal  vessels. The allowance to be made under this rule will be  determined by deducting from the quantity of spirit despatched from the distillery,  the quantity received at the place of  destina- tion, both quantities being stated in terms of alcohol.  The allowance  will be calculated on the quantity  contained  in each wooden cask metal vessels comprised in a consignment.          If  the report of the officer by whom the  consign- ment of spirit has been gauged and proved at its destination shows that the wastage has occurred above the limit  allowa- ble  the  person executing the bond shall be liable  to  pay duty on so much of the deficiency as in excess of the allow- ance. The rate of duty leviable shall be the highest rate of duty leviable on such spirit in this State. 178          When  the  wastage does not exceed  the  prescribed limit,  no action need be taken by the Officer-in-charge  of the Distillery or bonded warehouse, as the case may be,  but when   the   wastage  exceeds  the  allowable   limit,   the Officer-in-charge of the Distillery shall obtain the  expla-

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 12  

nation  of the Distillers or the person executing  the  bond and  forward  the same together with a full  report  of  the circumstances  to the Assistant Excise Commissioner  or  the Deputy  Excise Commissioner of the charge in which the  Dis- tillery  is situated. The Assistant Excise  Commissioner  or the  Deputy Excise Commissioner shall charge duty on  excess wastage  provided that when the total wastage in a  consign- ment is within the allowable limit. Deputy/Assistant  Excise Commissioner of the charge may write off the excess  wastage in any particular wooden cask or metal vessel:           Provided  further that the Deputy  Excise  Commis- sioner  may write off the duty upto Rs.500, if he is  satis- fied that the excess wastage in a consignment was on account of  an  accident  or other unavoidable cause  but  in  other cases,  the matter shall be referred to the  Excise  Commis- sioner for orders. Cases in which the Deputy Excise  Commis- sioner  writes  off  duty shall be reported by  him  to  the Excise Commissioner." It is emphasised by Mr. Agarwal that this provision is meant to  discourage  evasion of duty. If any part  of  the  lower export duty charged liquor is not in fact exported it should be  made  to pay the higher excise duty as payable  on  home consumed  liquor.  It does not impose any new duty.  We  are inclined  to agree. This rule does not authorise  imposition of  any new tax but only authorises charging up excise  duty on  the excess wastage of liquor in course of  export  which was  charged at concessional rate. The old Rule 814  of  the Rules  was made by B.O. No. 423/V-284-B, dated September  6, 1910 and No. 20/8 V-E 980B, dated May 28, 1918 providing for allowance for Joss in transit. It said: "An  allowance will be made for the actual loss in  transit, by  leakage,  evaporation  or other  unavoidable  cause,  of spirit transported or exported under bond. The allowance  is subject to the following maximum limits." Limits  were  prescribed differently for  wooden  casks  and metal vessels, keeping in mind the duration of transport. 179     Thus,  we  find that the minimum limits  of  wastage  in transit  was  prescribed even under the old  rule.  This  by implication enjoined that the excess wastage would be  taxed as if not wasted.     The  question may arise as to the date of the  new  Rule 814, to decide whether the impugned notices would be covered by it or by the old Rule. Section 77 of the Act provides the answer. It says: "77. Publication of rules and notifications.--All rules made and notifications issued under the Act shall be published in the  Official Gazette, and shall, have effect as if  enacted in  this Act from the date of such publication or from  such other date as may be specified in that behalf." (The  two provisos are not relevant for the purpose of  this case)     Both the old and the new Rule 8 14 must, therefore, have effect from the date of publication in the Official  gazette or  from such other date as may be specified in that  behalf as if enacted in the Act. The object of this ancient  formu- la, namely, "as if enacted in this Act" was to emphasise the fact  that the notifications were to be as effective as  the Act itself. Its validity could be questioned in the same way as  the  validity of the Act could be questioned. It  is  an ancient  form of rule making still to be found in  the  Act. Thus  the  Act having provided for fixed  wastage  allowance also in effect provided that the excess above the  allowable wastage  will be taxed. It can not, therefore, be said  that no such charging up of excise duty on the excess wastage  in

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 9 of 12  

transit could be validly made. The validity of Rule 814  had not been questioned before the High Court. Absolute equality and  justice is not attainable in taxing  laws.  Legislature must be left to decide the State policy within Constitution- al limitations.     In M/s. Mohan Meakin Breweries Ltd. v. Excise & Taxation Commissioner, Chandigarh, reported in 1976 Suppl. SCR 5  10: 1976 3 SCC 42 1, the appellant company carried on the  busi- ness  of manufacture, storage and sale of  liquors.  Between June,  1967 and April 1969,. it transported various  quanti- ties  of liquor from its distilleries in U.P. to its  bonded warehouse  at Chandigarh. On arrival, the consignments  were examined  by the Officer-in-Charge of the warehouse,  and  a shortage was found, exceeding the wastage allowance  permis- sible  under  rule 8 of the Punjab Bonded  Warehouse  Rules, 1957.  The Excise and Taxation Commissioner, exercising  the powers of the . Financial Commissioner. issued a show  cause notice and then ordered 180 the appellant to pay duty on the wastage in excess. The show cause  notice required the appellant to pay duty  on  excess wastage  in  course of import of liquor from  U.P.  and  the rules  governing  the  appellant’s licence  provided  for  a wastage  allowance  not exceeding 1% of the actual  loss  in transit  by leakage or breakage of vessels or  bottles  con- taining  liquor, and if the wastage exceeded the  prescribed limit  the  licensee  should be liable to pay  duty  at  the prescribed  rate  as if the wastage in excess  of  the  pre- scribed limit had actually been removed from the  Warehouse, and  it  was also provided that the  Financial  Commissioner could in his discretion on goods cause being shown remit the whole  or a part of the duty leviable on such  wastage,  and these  provisions were challenged. This Court held that  the impugned  rules  did not impose any new duty or  create  any liability  and that they were in essence and substance of  a regulatory character meant to guard against perpetration  of fraud  or  deception on the revenue. "They provide  for  and regulate the storage and subsequently the removal of  liquor from  the bonded warehouse, on payment or otherwise  of  the duty which is chargeable under the Fiscal Rules of 1937." We agree  with Mr. Agarwal that the instant Rules 636  and  814 are  also a regulatory character and they are  precautionary against  perpetration of fraud on the excise revenue of  the exporting State. If out of the quantity of military rum in a consignment,  a  part  or portion is claimed  to  have  been wastage  in  transit and to that extent did  not  result  in export, the State would, in the absence of reasonable expla- nation,  have  reason  to presume that the  same  have  been disposed  of otherwise than by export and impose on  it  the differential  excise duty. A statute has to be construed  in light of the mischief it was designed to remedy. There is no dispute  that excise duty is a single point duty and may  be levied at one of the points mentioned in Section 28.     The submission of the respondents that they paid duty on the  entire  quantity  of rum to be  exported  under  excise passes issued to the importer and that after payment of  the export duty the rum bottled under the conditions  enumerated in the Rules was supplied to the consignee at the distillery premises  and the consignments were taken by the  consignees under their seals and under the seal of the Railway authori- ties  and  the consignments reached their  destination  with seals intact would not go to support the contention that the State  Government was not competent to levy any duty on  the excess wastage that is shown to have occurred during transit inasmuch  as only a concessional rate of duty was levied  on

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 10 of 12  

the  liquor which was supposed to be exported out  side  the State  of  U.P.  and if the entire quantity  on  which  such concessional  duty was paid did not reach  its  destination, and the 181 shortage  is  shown as wastage in transit, it  surely  meant that the short delivery was not exported. The reason of  the wastage  would not be material so far as this conclusion  is concerned. Had this quantity been not exported but  consumed locally the State would have derived higher duty of which it has been deprived.     The  argument  that countervailing duty is paid  by  the importers  in the importing State on the  quantity  actually received,  would  also  be immaterial  for  this  conclusion though  that  may be of some importance for the  purpose  of revenue of the importing State as well as the consignee.  In case countervailing duty has been paid on the entire quanti- ty  of the consignment in the importing State there  may  be room  for  adjustment in accordance with the  provisions  of Rules  636,  637,  637-A and 637-B of the  Rules.  The  only material  question  may be whether the wastages  was  caused while  the  bottles  were on transit but  still  within  the territory  of the exporting State or in transit  inside  the importing State. If as a matter of fact it is found that the exported  liquor actually crossed the territory of  the  ex- porting State intact there may not be any justification  for demanding differential duty. That will of course be a  ques- tion  of  fact in no way affecting the right to  demand  the differential  duty. The decision in M/s. Ajudhia  Distillery Rajaka, Sahaspur v. State of Uttar Pradesh and Anr., report- ed in 1980 Taxation Law Reports 2262, quashing such a demand and holding that the exporting State had no jurisdiction  to charge duty on the liquor wastage in transit cannot be  said to have been correctly decided and the impugned judgment  in the instant case suffers from the same infirmity, and has to be set aside. Rule 814 envisages the levy of such  differen- tial duty. There is no question of double charging or multi- ple  point charging in this case. It is only a  question  of recovery  of  the difference on proof of  the  purposes  for which  lower  duty was earlier levied having  failed  to  be achieved  entailing liability to make good  the  difference. The  Rules  636,  637-A and 637 are also  relevant  to  this extent.     It  was  reiterated in M/s. Mc Dowell and  Co.  Ltd.  v. Commercial Tax Officer, VH Circle, Hyderabad, [1977] 1 SCR 9 14:  AIR  1977 SC 1459, following Abdul Kadir  (supra)  that excise  duty is a duty on the production or  manufacture  of goods  produced  or manufactured within the  country  though laws are to be found which impose a duty of excise at stages subsequent to the manufacture or production. Similarly  what was  stated  in Kalyani Stores v. The State  of  Orissa  and Ors.,  [1966] 1 SCR 865, was reiterated in M/s Mohan  Meakin Breweries  Ltd. (supra) that a countervailing duty is  meant "to counter balance; to avail 182 against with equal force or virtue; to compensate for  some- thing or serve as equivalent or substitute for". A  counter- vailing  duty is "meant to equalise the burden on  alcoholic liquors manufactured or produced in the State." They may  be imposed  at the same rate as excise duty or at a lower  rate so  as to equalise the burden after taking into account  the cost  of  transport from the place of manufacturing  to  the taxing  State. Countervailing duties are meant  to  equalise burden on alcoholic liquors imported from outside the  State and the burden placed by excise duties on alcoholic  liquors

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 11 of 12  

manufactured or produced in the State. Countervailing duties can only be levied if similar goods are actually produced or manufactured  in the State on which excise duties are  being levied.  Thus,  countervailing duty paid  in  the  importing State  does not ipso facto affect the excise revenue of  the exporting State.     The  fact that the importer is required to pay  counter- vailing duty on the imported military rum could,  therefore, ipso  facto be no ground for opposing the levy of  differen- tial  duty on the excess wastage of exported rum  that  duty being levied with a view to safeguard the excise revenue  of the exporting State. If the excess wastage was actually lost to  consumers while in the importing State no  justification of such a duty may arise, that, however, would be an entire- ly  different  question  without in any  way  affecting  the competence  of  the legislature of the  exporting  State  to impose  such a duty. The fact that the exported rum  was  on payment of export duty or on bond would not again be materi- al  inasmuch as when the rum meant for export failed  to  be exported, there may be a presumption, may be rebuttable one, that  what is shown as the excess has merged in mass of  rum consumed within the State and was not separated from such  a mass. The imposition of differential duty was only  deferred to  this moment and it still continued to be a duty on  pro- duction or manufacture of rum. It could not be regarded as a duty not connected with the taxable event of manufacture  or production.     There is also no similarity with the excise duty  sought to  be  levied only on the unlifted quantity  of  liquor  by contractors  which was held to be impermissible  under  Sec- tions  28 and 29 of the Act in Excise Commissioner, U.P.  v. Ram  Kumar, [1976] 3 SCC 540 and State of Madhya Pradesh  v. Firm  Gappulal, AIR 1976 SC 633: 1976 (2) SCR 1041.  In  the instant  case the military rum was obtained for the  purpose of  export and the lower export duty was paid and only  when the  rum did not result in export the question  of  imposing the  differential duty arose. The notion of the excise  duty being  changed  or cancelled on account of  what  transpires later is not foreign to excise law. Generally speaking 183 the  imposing of the differential duty i.e. charging up  the duty on the report of the excess wastage is the opposite  of the  system of drawback prevalent in some systems.  Drawback means the repayment of duties or taxes previously charged on commodities,  from which they are relieved  on  exportation. For example, in the customs laws of some countries an allow- ance  is made by the Government upon the duties due  on  im- ported merchandise when the importer, instead of selling  it within the country-re-exports it, and then the difference of duty  is  refunded, if already paid. Similarly,  in  England there  is  a provision of refund of duties on  British  wine when the wine incidentally is spoilt or otherwise unfit  for use or when delivered to another person has been returned to the  maker as so spoilt or unfit. The system of charging  up the  duty  on the subsequent event of non  export  can  not, therefore,  be  said  to be irrespective  of  production  or manufacture.     In the instant case if it is proved to the  satisfaction of the appropriate authorities that countervailing duty  had been  paid  on the entire consignment  irrespective  of  the wastage  then  the question would arise as  to  whether  the wastage  could be ignored altogether by the exporting  State as was done by the importing State. Counsel for the  parties had  no  objection to the idea that if the  explanation  for wastage  was  satisfactory and the countervailing  duty  was

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 12 of 12  

paid in the importing State on the entire consignment  irre- spective of the wastage, there would be room for  adjustment by reducing the duty to similar extent.     For the foregoing reasons, the impugned Judgment is  set aside  and  the appeal is allowed, but under the  facts  and circumstances of the case, without any order as to costs. Y.  Lal                                               Appeal allowed. 184