REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.    7403         OF 2008 [Arising out of SLP (Civil) No. 19909 of 2007]

Mohan Meakin Ltd. …Appellant

Versus

State of H.P. & Ors. …Respondents

WITH CIVIL APPEAL NO.    7421          OF 2008

[Arising out of SLP (Civil) No. 20593 of 2007]

J U D G M E N T  

S.B. SINHA, J :

1. Leave granted.

2. Constitutional  validity  of  increase  in  levy  made  by  the  State  of

Himachal Pradesh inter alia on import/ transport of rectified spirit and/ or

potable alcohol is in question in these appeals which arise out of a judgment

and order dated 27.06.2007 passed by the High Court of Himachal Pradesh,

Shimla in C.W.P. No. 251 of 1999.

3. Appellant  is  a  public  limited  company registered  and  incorporated

under the Companies Act, 1956.  It is carrying on business of manufacture

and sale of India Made Foreign Liquor (IMFL) and beer, etc.  Its distillery is

situated at Kasauli in the District of Solan.  It holds a licence in Form D-2

granted by the State of Himachal Pradesh in terms of the provisions of the

Punjab  Excise  Act,  1914  (for  short  “the  Act”)  and  the  Rules  framed

thereunder.  For the purpose of running the said distillery, it imported ‘Malt

Spirit of over proof strength’ from its distillery situated at Mohan Nagar in

the State of Uttar Pradesh.  For the said purpose, it was required to obtain

import  permit  from  the  Collector  Excise,  Himachal  Pradesh.   It  also

transported some quantities of Malt Spirit of over proof strength from M/s.

Rangar Breweries Ltd., Mehatpur, Distt. Una as well as from its distillery

situated at Mohan Nagar, Distt. Ghaziabad during the relevant years, viz.,

1997-98 and 1998-99.

4. Admittedly, prior to 1.04.1996, no payment was required to be made

for obtaining permit/ transport fee on transportation of IMFL, country spirit,

2

beer, etc.  It was directed to be levied for the first time in terms of an excise

policy for the year 1996 – 97 dated 12.03.1996.  A permit fee at the rate of

Rs. 2.50 per bulk litres on denatured spirit, Rs. 2.00 per proof litre and Rs.

1.00 per proof litre on foreign spirit and country liquor respectively became

leviable.  Such permit fee was payable at the time of grant of permission for

transportation  of  liquor.   It  was  payable  by  a  person  who  makes  an

application for grant of permission for import and/ or transport of foreign

liquor or country liquor or both.  A demand of Rs. 8,21,992/- was made by

the Excise and Taxation Officer on or about 28.10.1997 towards permit fee

on the spirit imported by the appellant during the year 1996-97.  Another

demand for a sum of Rs. 17,68,346/- was made upto 6.02.1999 for making

similar  import.   Indisputably,  no amount  towards payment  of licence fee

was due from the appellant.   It is also not in dispute that export duty at the

rate of Rs. 1.00 per proof litre on Indian Made Foreign Spirit and at the rate

of Rs. 0.50 per bulk litre on beer with alcoholic content upto 5% and at the

rate of Rs. 0.75 per bulk litre with alcoholic content exceeding 5% has been

paid by the appellant.  It has also paid import fee at the rate of Rs. 6/- per

proof litre on spirit imported by it.   

3

5. A representation  was  made by the  appellant  in  respect  of  the said

demands by a letter dated 30.01.1999 inter alia contending that the State of

Himachal Pradesh had no jurisdiction to levy such fee.  In any event,  no

services having been rendered to the appellant, quantum jump of the licence

fee in the name of such permit fee was not justified.   

The  said  representation  of  the  appellant  was  rejected  by  an  order

dated 10.02.1999.   

6. The  High  Court,  however,  by  reason  of  the  impugned  judgment

rejected the contentions of the appellant.

7. Mr. Anoop G. Chaudhary and Mr. Rakesh Dwivedi, learned senior

counsel appearing on behalf of the appellant, would submit:

(i) Transportation of industrial  alcohol and/ or rectified spirit being

not  within  the  legislative  competence  of  the  State,  it  cannot

exercise any control thereover.   

(ii) The High Court committed a serious error as it proceeded on the

premise that there does not exist any distinction between import of

potable liquor and that of Malt Spirit of over proof strength.   

4

(iii) The element of quid pro quo being inherent in the levy of fee and

as no material was produced by the State to justify its demand, the

impugned judgment cannot be sustained.

8. Mr. Naresh K. Sharma, learned counsel  appearing on behalf  of the

respondents, on the other hand, would contend that the State has to incur a

huge expenditure towards maintenance of staff for regulating the business

of liquor.  Permit is granted for import of country spirit, beer, IMFL, etc. in

the interest of the permit holders themselves so that abuse of import by non-

permit holders can be prevented.  Business in both potable liquor as also

Malt Spirit of over proof strength is required to be regulated by the State for

which the State must have a machinery.

9. We  will  assume,  as  has  been  contended,  that  no  person  has  any

fundamental  right  to  carry  on  business  in  liquor,  it  being  res  extra

commercium.   

10. The question which would, however, arise for consideration is as to

whether  the  State  has  the  jurisdiction  to  impose  any  restriction  on  the

movement of industrial alcohol and/ or Malt Spirit of over proof strength.   

5

11. Part  XI of the Constitution of  India provides for relations between

Union and the States.  Chapter I thereof provides for legislative relations.

In  terms  of  Article  245(1)  of  the  Constitution  of  India,  ordinarily  the

Parliament has the exclusive legislative competence to make laws for the

whole or any part of the territory of India and the Legislature of a State may

make laws for the whole or any part of the State.  Article 246 provides for

the subject matter of laws made by the Parliament and by the Legislatures of

States.  Indisputably, the Parliament has the exclusive power to make laws,

in respect of the matters enumerated in List I of the Seventh Schedule of the

Constitution whereas the State has the exclusive legislative power to make

laws with respect to any of the matters enumerated in List II of the Seventh

Schedule  of  the  Constitution.   We  are  not  concerned  herein  with  the

legislative competence of the Union as also the State as contained in List III

of the Seventh Schedule of the Constitution of India.  Entry 42 of List I of

the Seventh Schedule of the Constitution provides for inter-State trade and

commerce.  Entries 52, 84 and 97 of List I of the Seventh Schedule of the

Constitution read as under:

6

“52. Industries, the control of which by the Union is declared by Parliament by law to be expedient in the public interest.

*** *** ***

84. Duties of excise on tobacco and other goods manufactured or produced in India except- (a) alcoholic liquors for human consumption. (b) opium, Indian hemp and other narcotic drugs and narcotics, but  including  medicinal  and  toilet  preparations containing  alcohol  or  any substance  included  in sub-paragraph (b) of this entry.

*** *** ***

97. Any other matter not enumerated in List II or List III including any tax not mentioned in either of those Lists.”   

12. Entry 8 of List II of the Seventh Schedule of the Constitution confers

legislative power upon the State in respect of “Intoxicating liquors, that is to

say, the production, manufacture, possession, transport, purchase and sale of

intoxicating liquors”.  Entry 51 of List II thereof provides for an exception

to  the  Parliament’s  power  to  impose  levy of  tax  on  manufacture  of  the

article, in respect of:

“(a) alcoholic liquors for human consumption; (b) opium,  Indian  hemp  and  other  narcotic drugs  and narcotics,  but  not  including  medicinal

7

and toilet  preparations  containing alcohol  or any substance  included  in  sub-paragraph  (b)  of  this entry.”

Entry 66, List II of the Seventh Schedule of the Constitution reads as

under:

“66. Fees in respect of any of the matters in this List, but not including fees taken in any court.”

13. The Act is a pre-constitutional statute.   

Section  3(18)  of  the  Act  defines  spirit  and  Section  3(14)  thereof

defines  liquor.   These definitions  cover  even denatured  spirit.   They are

broadly worded pre-constitutional definitions.  Malt spirit is said to be spirit

obtained by distillation of barley or other grain.  The strength of Malt Spirit

after distillation is said to be 66% to 70% v/v.  It is also with over proof

strength.  Proof liquor is of around 50% v/v.  Liquor which is sufficiently

below the same is termed as under proof liquor.   

14. Appellant  herein contends that  it  had imported Malt  Spirit  of over

proof strength and the application for grant of permit vis-à-vis levy of fee

8

pertained  only thereto.   It  has  furthermore been contended that  the Malt

Spirit  imported  by  it  being  rectified  spirit,  it  is  not  potable  as  per  ISI

Specifications.  It is not bought and sold in the market as potable liquor.  It

is used as a raw material for blending to manufacture IMFL.  Contention of

the  appellant,  therefore,  is  that  it  is  not  an  excisable  article  within  the

meaning of the provisions of Section 3(6) of the Act.  

Section 16 of the Act restricts import,  export  and transportation of

intoxicants,  except  upon payment  of  any duty or  execution of  a bond or

compliance  with  such  conditions  as  the  State  Government  may  impose.

Section 18 provides for issuance of passes for import, export and transport

to be granted in terms of Section 19 thereof.  Sub-section (2) of Section 20

forbids  construction  or  working  of  any  distillery  or  brewery,  save  and

except under the authority and subject to the terms and conditions of the

licence granted in that behalf by the Financial Commissioner under Section

21 of the Act, which reads as under:

“21. The  Financial  Commissioner,  subject  to such  restrictions  or  conditions  as  the  State Government may impose, may –  (a) establish a distillery in which spirit may be manufactured  under  a  license  granted  under section 20;

9

*** *** *** (d) make rules regarding -  

*** *** *** (11) any  other  matters  connected  with  the working of distilleries or breweries.”

The rule making power is conferred upon the Financial Commissioner

by reason of Section 59 of the Act, which reads as under:

“59. The  Financial  Commissioner  may,  by notification, make rules –  (a) *** (b) *** (c) *** (d) prescribing the scale of fees or the manner of fixing the fees payable in respect of any license, permit or pass or in respect of the storing of any intoxicant; (e) regulating  the  time,  place  and  manner  of payment of any duty or fee; (f) prescribing the authority by, the restrictions under  and the  conditions  on  which,  any license, permit or pass may be granted - ”

15. Pursuant  to  or  in  furtherance  of  the  said  power,  the  Financial

Commissioner  made rules  known as  the  Punjab  Liquor  Permit  and  Pass

Rules, 1932 (for short “the Rules).  The Rules are applicable subject to such

10

modifications  as  has  been  made  in  the  State  of  Himachal  Pradesh,  the

relevant provisions whereof are as under:

“7.2 Subject to the provisions of order 23 of the Himachal  Pradesh  Liquor  Import,  Export, Transport and Possession Orders, 1965, a person importing,  exporting  or  transporting  foreign liquor, country spirit, rectified spirit or denatured spirit must obtain –  (a) a permit in form L-32 in the case of import and transport or  corresponding permit  in case of export  from the  officer  authorized  to  grant  such permits in the district, State or Union territory of destination; and (b) a pass in form L-34 for export and transport and  a  corresponding  pass  for  import  from  the officer authorized to grant such passes in the place of issue;

Provided that a pass for the removal of spirit and beer from a licensed distillery or brewery or a warehouse  issued  in  accordance  with  the  rules made  by  the  Financial  Commissioner,  shall  be deemed to be a pass for the purpose of this rule;

Provided further that a permit shall  not  be required  for  the  transport  or  foreign  liquor, country  spirit,  rectified  spirit  or  denatured  spirit within a district,  except  when denatured spirit  is transported  from  the  bonded  warehouse  of  a licensed distillery;

Provided  further  that  the  members  of  the diplomatic  staff  of  a  foreign  embassy located  in the State of H.P. shall not be required to obtain a permit for import and transport of imported liquor.

11

7.2A. A fee at  the rate of (a) Rs. 2.00 per proof litre of foreign liquor (excluding beer, secremental wine, wine and cider) and (b) Re. 1.00 per proof litre of country spirit shall be payable by a person who  makes  an  application  for  the  grant  of permission  to  import  and/  or  transport  of  the foreign liquor; (excluding beer secremental wine, wine and cider) or country liquor or both:

Provided that in the case of events covered by the second proviso to clause (b) of rule 2, the fee shall also be payable at these rates  by a licensee who makes an application for the grant of permission to transport  foreign  liquor  (excluding  beer, secremental  wine  and cider)  or  country  spirit  or both:

Provided further no fee shall be payable on the  quantity  of  Foreign  liquor  (excluding  beer secremental wine, wine and cider) on which such fee  has  already  been  paid  and  recovered previously in Himachal Pradesh.

Explanation - 1. In  this  rule,  the expression  “transport”  shall  not  include  the transport  of  Foreign  Spirit  or  country  spirit  in course  of  ‘export’  inter  –  State  or  across  the customs frontier of India.

2. The  fee  specified  in  this  rule  shall  not  be payable  on  denatured  spirit  rectified  spirit  or perfumed spirit.”

By reason of notifications dated 1.04.1997 and 1.04.1998, the rates of

fees mentioned in Rule 7.2-A were modified.     

12

16. Rule 7.9 of the Rules reads as under:

“7.9 All  passes  granted  to  cover  the  import  of country spirit and foreign liquor, shall be subject to  the  condition  that  no  consignment  shall  be brought into use until it has been examined by the excise inspector or sub-inspector of the district of destination,  to whom intimation of the arrival  of the consignment shall be given; such examination shall be conducted within seven days of the receipt of the intimation which shall be dispatched by the importer  on the day following the receipt  of  the consignment.”

17. The Financial  Commissioner also made the Excise Barriers’  Rules,

1939; Rules 19.1 and 19.2 thereof read as under:

“19.1 The Financial Commissioner may establish excise outposts at such places as he may think fit on any road, or at any ferry, for the prevention of the smuggling of excisable articles or opium, and may depute Excise Inspectors to be in charge of such outposts.

19.2 The  driver  of  any vehicle  or  laden animal arriving at an excise post shall stop his vehicle or animal  or  arrival  at  the  outpost  until  the  excise officer  has  conducted  his  search.   The  excise officer will proceed with the search forthwith.”

13

18. Indisputably, the State has the exclusive authority to grant  licence.

Our attention has been drawn to one of the conditions of the licence granted

in favour of the appellant in Form D-2 which reads as under:

“1. The licensee shall observe the provisions of the  Punjab  Excise  Act,  1  of  1914  and  all  rules made  thereunder  and  all  rules  made  under  any other law for the time being in force applicable to the manufacture, issue and sale of spirit.”

19. Indisputably, the appellant being a licensee must abide by the terms

and conditions of licence.  It is also bound to follow the rules framed in this

behalf.  A subordinate legislation which, however, is beyond the legislative

competence of the State would be ultra vires.  Furthermore, there cannot be

any doubt that the State possesses the right to have complete control over all

aspects of intoxicants, viz., manufacture, collection, sale and consumption,

etc.  It also has the exclusive right to manufacture and sell  liquor and to

transfer the said right with a view to raise revenue.  Right to fix the amount

of consideration for grant  of said privilege for manufacturing or  vending

liquor is also beyond any doubt or dispute.   

14

20. The State has to make distinction between a Malt Spirit of over proof

strength and potable liquor.  Entries 8, 51 and 66 of List II of the Seventh

Schedule of the Constitution of India confer jurisdiction upon the State only

to exercise its  legislative control  in respect  of matters which are covered

thereby.  Industrial alcohol or spirit having regard to Entry 52 of List I of

the Seventh Schedule of the Constitution of India cannot be subject matter

of any regulation or control by the State; it being not alcoholic liquor for

human consumption.   

The question is well-settled in view of the decision of a Seven-Judge

Bench of this Court in Synthetics and Chemicals Ltd. and Others v. State of

U.P. and Others [(1990) 1 SCC 109] wherein it was categorically held:

“53. It was further submitted by the State that the State has exclusive right to deal in liquor. This power according to the counsel for the State, is reserved by and/or derived under Articles  19(6) and 19(6)(ii)  of the Constitution. For parting with that right a charge is  levied.  It  was  emphasised  that  in  a  series  of decisions  some  of  which  have  been  referred  to hereinbefore,  it  has  been  ruled  that  the  charge  is neither a fee nor a tax and termed it as privilege. The levy is on the manufacture, possession of alcohol. The rate of levy differs on its use, according to the State of U.P. The impost is also stipulated under the trading

15

powers  of  the  State  under  Article  298  and  it  was contended that the petitioners and/or appellants were bound by the terms of their licence. It was submitted that  the  Parliament  has  no  power  to  legislate  on industrial  alcohol,  since  industrial  alcohol  was  also alcoholic liquor for human consumption. Entry 84 in List I expressly excludes alcoholic liquor for human consumption;  and  due  to  express  exclusion  of alcoholic liquor for human consumption from List I, the residuary Entry 97 in  List  I  will  not  operate  as against its own legislative interest. These submissions have  been  made  on  the  assumption  that  industrial liquor or ethyl alcohol is for human consumption. It is important  to  emphasise  that  the  expression  of  a constitution  must be  understood in  its  common and normal sense. Industrial alcohol as it is, is incapable of  being  consumed by a  normal  human being.  The expression ‘consumption’ must also be understood in the sense of direct physical intake by human beings in this context. It is true that utilisation in some form or the  other  is  consumption  for  the  benefit  of  human beings if industrial alcohol is utilised for production of rubber, tyres used. The utilisation of those tyres in the vehicle of man cannot in the context in which the expression  has  been  used  in  the  Constitution,  be understood  to  mean  that  the  alcohol  has  been  for human consumption.

54. We  have  no  doubt  that  the  framers  of  the Constitution when they used the expression ‘alcoholic liquor  for  human  consumption’  they  meant  at  that time and still the expression means that liquor which as it is is consumable in the sense  capable of being taken by human beings as such as beverage of drinks. Hence, the expression under Entry 84, List I must be understood  in  that  light.  We  were  taken  through various  dictionary  and  other  meanings  and  also invited  to  the  process  of  manufacture  of  alcohol  in order  to  induce  us  to  accept  the  position  that denatured spirit can also be by appropriate cultivation or application or admixture with water or with others,

16

be  transformed  into  ‘alcoholic  liquor  for  human consumption’ and as such transformation would not entail any process of manufacture as such. There will not  be  any  organic  or  fundamental  change  in  this transformation,  we  were  told.  We  are,  however, unable to enter into this examination. Constitutional provisions specially dealing with the delimitation of powers  in  a federal  polity must  be understood in  a broad commonsense point of view as understood by common people for whom the Constitution is made. In terminology, as understood by the framers of the Constitution, and also as viewed at the relevant time of  its  interpretation,  it  is  not  possible  to  proceed otherwise;  alcoholic  or  intoxicating  liquors  must  be understood as these are, not what these are capable of or able to become. It is also not possible to accept the submission that vend fee in U.P. is a pre-Constitution imposition and would not be subject to Article 245 of the Constitution. The present extent of imposition of vend fee is not a pre-Constitution imposition, as we noticed from the change of rate from time to time.”

21. The doctrine  of  res  extra  commercium as  applied  by this  Court  in

respect  of  potable  alcohol  in  its  various  judgments  including  Khoday

Distilleries Ltd. and Others v. State of Karnataka and Others [(1995) 1 SCC

574] and State of Punjab and Another v. Devans Modern Breweries Ltd. and

Another [(2004) 11 SCC 26] would have no application to industrial alcohol

which is produced in an industry controlled and regulated in terms of Entry

52,  List  I  of  the  Seventh  Schedule  of  the  Constitution  of  India.   If

manufacture and transport of industrial alcohol and/ or Malt Spirit of over

17

proof strength is not res extra commercium in view of the binding decisions

of this Court in  Synthetics and Chemicals Ltd. (supra), it is axiomatic that

the provisions  of  Article  301 of  the  Constitution  of  India  shall  apply in

relation to inter-State trade.  The State’s power to exercise control of inter-

State transport which is within the exclusive legislative competence of the

Parliament having regard to Entry 42, List I of the Seventh Schedule of the

Constitution  of  India  would,  thus,  be  limited.   Its  power  to  impose

compensatory tax and/ or fee would also be limited as envisaged by Article

304(b) of the Constitution of India.   

22. The  State  has  not  made any distinction  between import/  export  of

spirit and potable alcohol.   

By its letter dated 28.10.1997, it was stated:

“Whereas  you  have  imported/  transported 4,46,880.00  PLs  of  spirit from R.B.L.  Mehatpur and Mohan Meakin Limited,  Mohan Nagar (UP) to  Kasauli  Distillery  for  the  year  1996-97  upon which permit fee @ Rs. 2/- per P.L. was leviable. Out of the quantity mentioned above 35,884,350 PLs  of  IMFS  was  (sic)  and  you  have  paid  the permit fee @ Rs. 2/- per PL for the said quantity.”

18

[Emphasis supplied]

The said demand was reiterated by the State in terms of its letter dated

27.01.1999.   

In its representation dated 30.01.1999, the appellant averred:

“3. Under  entry  51  of  List  II  of  Seventh Schedule  to  Constitution  of  India,  State  is empowered  to  levy  and  charge  Excise  Duty  on “Alcoholic Liquors for human consumption” and similarly  under  item  No.  66  the  State  is empowered to levy and charge fees in respect of matters  in  this  list  i.e.  on  Alcoholic  liquors  for human consumption.  Bulk spirit on which Permit/ Transport Fee is sought to be charged is  of over proof strength and is not an Alcoholic Liquor for human  consumption.   Thus,  State  is  not empowered  to  levy/  charge  permit/  transport  fee on transport of spirit of over proof strength.  Levy of any duty or fee on spirit of over proof strength is within the competence of Government of India as  mentioned  in  entry  84  and  96  of  List  I  to Seventh Schedule to the Constitution of India.  In view of  this  position  the  demand  is  illegal  and against the provision of Constitution of India.”

Appellant, in its representation dated 25.02.1999, stated:

“The permit fee is being demanded on the import/ transport of spirit of over proof strength which is

19

of  alcoholic  liquor  for  human  consumption  and does not fall within the ambit of entry 51 of List II of  VIIth  Schedule  to  Constitution  of  India  read with item 66 ibid.  The State is empowered to levy permit  fee  on  transport  of  Alcoholic  Liquor  for human consumption only.  Levy of duty or fee on spirit  of  over  proof  strength  is  within  the competence of Union of India/ Parliament of India as mentioned in entry 84 and 96 of List I to VIIth Schedule to Constitution of India.”

23. We may, on the other hand, notice the contentions of the State, in its

counter affidavit before the High Court:

“Accordingly,  grant  and  issue  of  permit  is essentially regulatory in character.  Viewed in this perspective, the permit fee is not under Entry 51, and has no linage whatsoever  with the duties  of excise  or  countervailing  duties  on  alcoholic liquors meant for human consumption.  It is, thus, not only patently incorrect but also wrong to draw a nexus between Entry 51 and the permit fee.  The object  of  permit  is  to  regulate  transport,  (which includes import as well) under Entry 8 of the said List II of the Seventh Schedule to the Constitution. Therefore, the proper linkage, for the purposes of permit fee, is between Entry 8 and Entry 66 of List II of the Seventh Schedule.”

It was furthermore stated:

20

“It  is,  therefore,  submitted  that  the  malt  spirit whether in over proof strength or in under proof strength, is meant for potable purposes and in both the  cases  it  does  not  lose  the  basic  character  of intoxicating  liquors  and  the  State  Government under Entry No. 8 and 51 read with Entry 66 of List II of Seventh Schedule to the Constitution of India  is  competent  to  legislate  and  to  levy  the duties/ fees.  Contentions of the petitioner to the contrary are denied.”

The contention of the State as would appear from its counter-affidavit

filed before us is as under:

“…It is further submitted that the fee in question is neither  a  tax  nor  duty  so  as  to  attract  the provisions  of  Entry  42  of  List  –  I  of  Seventh Schedule to the Constitution of India.  Permit fees, it is reiterated is not levied on the import of liquor rather  it  is  charged  on  every  permit  to  import/ transport the liquors whether inter – state or intra- state for the services.  Therefore, the Hon’ble High Court  is  justified  to  hold  that  the  State Government  is  empowered  to  make  rules authorizing it to levy permit fee.”

The  State  furthermore  asserts  its  right  to  regulate  the  business  of

liquor including over proof spirit in terms of the provisions of the Act and

the Rules framed thereunder.

21

24. We have noticed hereinbefore that even in terms of the explanation

appended to  Rule  7.2A of  the Rules,  the fees  specified  in  the said  Rule

would not be payable on denatured spirit, rectified spirit or perfumed spirit

and the transport shall not include the transport of Foreign Spirit or Country

Spirit in course of export inter-State or across the customs frontier of India.

The levy, therefore, ex facie could not have been imposed on rectified

spirit.   

The jurisdiction of the State to impose such a levy is limited.  It has

been so held in State of U.P. and Others v. Vam Organic Chemicals Ltd. and

Others [(2004) 1 SCC 225] in the following terms:

“29.  The State’s  power is  thus  limited to  (i)  the regulation  of  non-potable  alcohol  for  the  limited purpose of preventing its use as alcoholic liquor, and  (ii)  the  charging  of  fees  based  on  quid  pro quo.”

It was furthermore held:

“43. Considering the various authorities cited, we are  of  the  view  that  the  State  Government  is competent to levy fee for the purpose of ensuring that  industrial  alcohol  is  not  surreptitiously converted into potable alcohol so that the State is

22

deprived  of  revenue  on the  sale  of  such potable alcohol  and  the  public  is  protected  from consuming such illicit liquor. But this power stops with  the  denaturation  of  the  industrial  alcohol. Denatured spirit has been held in Vam Organics-I to  be outside  the seisin  of  the  State  Legislature. Assuming that  denatured spirit  may by whatever process  be  renatured  (a  proposition  which  is seriously  disputed  by  the  respondents)  and  then converted into potable liquor, this would not give the State the power to regulate it. Even according to  the  demarcation  of  the  fields  of  legislative competence  as  envisaged  in  Bihar  Distillery industrial  alcohol  for  industrial  purposes  falls within  the  exclusive  control  of  the  Union  and according to Bihar Distillery “denatured rectified spirit,  of  course,  is  wholly  and  exclusively industrial alcohol” (SCC p. 742, para 23).”

As regards imposition of fee, it was opined:

“44.  Besides,  the  fee  is  required  to  be  justified with reference to the cost of such regulation. The industry is already paying a fee under Rule 2 for such  regulation.  Indeed,  the  justification  for levying  the  fee  under  Rule  3(a)  is  the  identical justification given by the State for levying the fee under Rule  2.  Presumably, a full  complement of excise officers and staff are appointed by the State in the Excise Department to carry out their duties under the Act to oversee, control and keep duty on the  various  kinds  of  intoxicants  under  the  Act. Having regard to the decision in Vam Organics-I we must  also assume that  apart  from the normal strength,  additional  officers  and  staff  were appointed  to  regulate  the  denaturation  of  the industrial  alcohol.  There is  nothing  to  show that

23

there has been any deployment of any additional staff  to oversee the possibility of renaturation of the denatured spirit.”

25. The question as regards ‘aspects of power to levy fee vis-à-vis tax’

came up for consideration before this Court in Jindal Stainless Ltd. (2) and

Another v.  State of Haryana and Others [(2006) 7 SCC 241] wherein this

Court held:

“38. In the generic sense, tax, toll, subsidies, etc. are  manifestations  of  the  exercise  of  the  taxing power. The primary purpose of a taxing statute is the  collection  of  revenue.  On  the  other  hand, regulation  extends  to  administrative  acts  which produces  regulative  effects  on  trade  and commerce.  The difficulty arises  because taxation is also used as a measure of regulation. There is a working test to decide whether the law impugned is the result of the exercise of regulatory power or whether  it  is  the  product  of  the  exercise  of  the taxing power. If the impugned law seeks to control the conditions under which an activity like trade is to take place then such law is regulatory. Payment for  regulation  is  different  from  payment  for revenue. If the impugned taxing or non-taxing law chooses  an activity,  say,  movement  of  trade  and commerce as the criterion of its  operation and if the  effect  of  the  operation  of  such  a  law  is  to impede the activity,  then  the law is  a restriction under Article 301. However, if the law enacted is to enforce discipline or conduct  under which the trade  has  to  perform  or  if  the  payment  is  for regulation  of  conditions  or  incidents  of  trade  or manufacture then the levy is regulatory. This is the

24

way of  reconciling  the  concept  of  compensatory tax with the scheme of Articles 301, 302 and 304. For example,  for installation of pipeline carrying gas  from  Gujarat  to  Rajasthan,  which  passes through M.P., a fee charged to provide security to the  pipeline  will  come  in  the  category  of manifestation of regulatory power. However, a tax levied on sale or purchase of gas which flows from that very pipe is a manifestation of exercise of the taxing  power.  This  example  indicates  the difference between taxing and regulatory powers (see Essays in Taxation by Seligman). Difference  between  “a  tax”,  “a  fee”  and  “a Compensatory Tax” Parameters of Compensatory Tax 39.  As  stated  above,  in  order  to  lay  down  the parameters of a compensatory tax, we must know the concept of taxing power.”

It was observed:

“43.  In  the  context  of  Article  301,  therefore, compensatory  tax  is  a  compulsory  contribution levied broadly in proportion to the special benefits derived to defray the costs of regulation or to meet the outlay incurred for some special advantage to trade,  commerce  and  intercourse.  It  may incidentally  bring  in  net  revenue  to  the Government  but  that  circumstance  is  not  an essential ingredient of compensatory tax.”

This Court furthermore opined that the burden of proof in this behalf

would be on the State, stating:

25

“46... As soon as it is shown that the Act invades freedom of trade it is necessary to enquire whether the State has proved that the restrictions imposed by  it  by  way  of  taxation  are  reasonable  and  in public interest within the meaning of Article 304 (b)  [see  para  35  (of  AIR)  of  the  decision  in Khyerbari Tea Co. Ltd. v. State of Assam].”

Furthermore, it was held in A.P. Paper Mills Ltd. v. Govt. of A.P. and

Another [(2000)  8 SCC 167] that  even if  a  fee is  levied for  issuance of

permit, it was only for the purpose of recovering the administrative charges.

[See also  Ashok Lanka and Another v.  Rishi  Dixit  and Others (2005) 5

SCC 598]

26. This Court in Kerala Samsthana Chethu Thozhilali Union v. State of

Kerala and Others [(2006) 4 SCC 327], upon noticing  State of Kerala and

Others v.  Maharashtra  Distilleries  Ltd.  and  Others [(2005)  11  SCC  1],

opined:

“39. In  State  of  Kerala v.  Maharashtra Distilleries  Ltd. this  Court  took  notice  of  the provisions of Section 18-A of the Act. It was held that  the  State  had  no  jurisdiction  to  realise  the turnover tax from the manufacturers in the garb of exercising  its  monopoly  power.  It  was  held  that turnover tax cannot be directed to be paid either by way of excise duty or as a price of privilege.”

26

27. Even while levying a fee, a quantum jump is deprecated.

In Indian Mica Micanite Industries v. The State of Bihar and Others

[(1971) 2 SCC 236], it has been held:

“17…  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 wholesale 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 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

27

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.”

In  this  case,  the  State  in  fact  has  not  produced  any  material

whatsoever before the High Court.  

In  Commissioner of Income Tax and Another v.  Distillers Co. Ltd.

[(2007) 5 SCC 353], this Court held that even for the purpose of levy of

excise duty, the same must have a direct relationship with the manufacture

of arrack.   

28. We, therefore, are of the opinion that the impugned judgment cannot

be sustained.  It is set aside accordingly and the matter is remitted to the

High  Court  for  consideration  of  the  Writ  Petition  filed  by  the  appellant

afresh.  The parties shall be at liberty to file additional affidavits/ evidence

before the High Court, if they so desire.

The  appeals  are  allowed.   Respondents  shall  bear  the  cost  of  the

appellant.  Counsel’s fee assessed at Rs. 50,000/-.

28

………………………….J. [S.B. Sinha]

..…………………………J.     [Cyriac Joseph]

New Delhi; December 18, 2008

29