2005 (5) TMI 308 - SC - VAT and Sales Tax

Whether the incidence of excise duty, having regard to the provision of the Kerala Abkari Act and the relevant Rules, falls upon the manufacturer/distiller such as the respondents herein and therefore includable in their turnover for the purpose of levy of turnover tax? Whether the incidence of excise duty falls on the Kerala State Beverages (Manufacturing and Marketing) Corporation Limited, a Government company which alone is liable to pay the excise duty on Indian-made foreign liquor, and consequently the said component is not includable in the turnover of the respondents/distillers? Held that - Appeal partly allowed and it is declared that the respondents-manufacturers/ distillers are liable to pay turnover tax. It is declared that the respondents-manufacturers are liable to include in their turnover the amount of duty paid to them by KSBC and included in the consideration for sale of IMFL to the aforesaid Corporation with effect from January 5, 1999 and pay the turnover tax accordingly

Issues Involved:
1. Incidence of excise duty under the Kerala Abkari Act and its inclusion in the turnover for levy of turnover tax.
2. Constitutional validity of Section 2(xxvii) of the Kerala General Sales Tax Act and Section 5(2C) as amended by the Finance Act of 2001.
3. Interpretation of relevant provisions of the Kerala Abkari Act and the Kerala General Sales Tax Act.
4. Impact of the policy decision of the Government of Kerala to create a State monopoly in the manufacture, wholesale purchase, and sale of Indian-made foreign liquor (IMFL).
5. Applicability of judicial precedents and their binding nature on the High Court's decisions.
6. Retrospective effect of the amendment to Section 5(2C) of the Kerala General Sales Tax Act.

Detailed Analysis:

1. Incidence of Excise Duty and Its Inclusion in Turnover:
The primary issue was whether the excise duty under the Kerala Abkari Act should be included in the turnover of the manufacturer/distiller for the purpose of turnover tax. The High Court had previously ruled in favor of the respondents (manufacturers/distillers), stating that the excise duty paid by the Kerala State Beverages Corporation (KSBC) did not form part of their turnover. The Supreme Court examined the provisions of the Kerala Abkari Act, particularly Sections 17 and 18, and the relevant rules, concluding that the excise duty was not a duty of excise in the traditional sense but rather a privilege price for the State's exclusive right to sell liquor. Therefore, the duty paid by KSBC did not form part of the manufacturers' turnover.

2. Constitutional Validity of Section 2(xxvii) and Section 5(2C):
The High Court had declared Section 2(xxvii) of the Kerala General Sales Tax Act, which authorized the levy of turnover tax on excise duty amounts paid by KSBC, as unconstitutional. The Supreme Court upheld this decision, noting that the amendment to Section 5(2C) did not cure the inherent constitutional defect. The amendment clarified that the turnover tax should include excise duty paid by either the manufacturer or KSBC, but since the duty was not a traditional excise duty, this inclusion was invalid.

3. Interpretation of Relevant Provisions:
The Supreme Court analyzed the Kerala Abkari Act and the relevant rules, emphasizing that the duty imposed under Section 17 was not necessarily connected with the manufacture of liquor. The duty, described as a "duty of excise," was in fact a privilege price for the State's exclusive right to trade in liquor. The Court concluded that the duty paid by KSBC was not part of the manufacturers' turnover, as it was not a duty on manufacture but a price for the State's privilege.

4. Impact of State Monopoly Policy:
The Court considered the policy decision of the Government of Kerala to create a State monopoly in the manufacture, wholesale purchase, and sale of IMFL. This policy led to the establishment of KSBC as the sole marketing agency, which paid the excise duty when removing liquor from bonded warehouses. The Supreme Court held that this arrangement did not transfer the excise duty liability to the manufacturers, and the duty paid by KSBC was not includable in the manufacturers' turnover.

5. Applicability of Judicial Precedents:
The Supreme Court examined the applicability of judicial precedents, including the decision in Mohan Breweries & Distilleries Ltd. v. Commercial Tax Officer, Madras, which held that excise duty is a liability of the manufacturer. However, the Court distinguished this case, noting that the duty in question was not a traditional excise duty but a privilege price. The Court also considered the decisions in A.B. Abdul Kadir v. State of Kerala, R.C. Jall Parsi v. Union of India, and Shinde Brothers v. Deputy Commissioner, Raichur, which supported the view that excise duty need not always be a liability of the manufacturer.

6. Retrospective Effect of Amendment to Section 5(2C):
The Supreme Court addressed the retrospective effect of the amendment to Section 5(2C) of the Kerala General Sales Tax Act, which was brought into effect from July 1, 1987. The Court held that the amendment did not cure the constitutional defect, as it attempted to include the excise duty paid by KSBC in the manufacturers' turnover without amending the Abkari Act to impose the duty on the manufacturers. Therefore, the retrospective application of the amendment was invalid.

Conclusion:
The Supreme Court partly allowed the appeals, holding that the respondents (manufacturers/distillers) were not liable to include the duty paid by KSBC in their turnover for the period before January 5, 1999. However, from January 5, 1999, onwards, due to the amendment in the Foreign Liquor Rules, the duty paid by KSBC formed part of the consideration for the sale of IMFL and was includable in the manufacturers' turnover. The appeals challenging the High Court's decision on the constitutional validity of Section 2(xxvii) and the retrospective amendment to Section 5(2C) were dismissed.

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