1977 (1) TMI 157 - HC - VAT and Sales Tax

Summary

Issues Involved:

1. Competence of the State of Uttar Pradesh to levy export duty on rectified spirit.
2. Legality of the levy of export duty on liquors under the Constitution and the U.P. Excise Act.
3. Whether the levy of export duty violates Article 301 of the Constitution.

Detailed Analysis:

1. Competence of the State of Uttar Pradesh to Levy Export Duty on Rectified Spirit:

The court referenced the decision in *Delhi Cloth and General Mills Co. Ltd. vs. Excise Commissioner U.P.* which held that rectified spirit is not meant for human consumption and does not fall under the ambit of "alcoholic liquor for human consumption" as per Entry No. 51 of List II of the Seventh Schedule to the Constitution. Consequently, the State Legislature lacks the competence to impose excise duty on rectified spirit. The court dismissed the arguments by the Advocate General that rectified spirit, despite not being fit for human consumption in its original form, could be taxed because it can be rendered fit for human consumption or misused for drinking. The court emphasized that unless the spirit is fit for human consumption, it cannot be taxed by the State Legislature under Entry No. 51. Therefore, the levy of export duty on rectified spirit by the State of Uttar Pradesh was deemed unsustainable.

2. Legality of the Levy of Export Duty on Liquors:

The court examined the relevant provisions of the Constitution, the U.P. Excise Act, and the Rules made thereunder. Entry No. 51 of List II of the Seventh Schedule to the Constitution allows the State to levy duties of excise on alcoholic liquors for human consumption manufactured or produced within the State. The court noted that excise duty, being a duty on production or manufacture, can be levied at any convenient stage, including at the point of export. The court rejected the petitioners' assertion that both still head duty and export duty were being levied on liquors exported to other States, clarifying that only export duty is payable, and still head duty, if already paid, would be refunded or adjusted. The court also dismissed the argument that an inter-State agreement from 1923, which suggested that excise duty should follow consumption, limited the legislative competence of the State. The court held that such an agreement does not affect the validity of the levy of excise duty by the State in which liquors are manufactured, as the State has legislative competence under Entry No. 51.

3. Violation of Article 301 of the Constitution:

Article 301 guarantees the freedom of trade, commerce, and intercourse throughout the territory of India. The petitioners argued that the export duty impedes the free flow of trade. However, the court held that the duty, though termed as export duty, is essentially an excise duty on production, levied at the stage of export for administrative convenience. The court cited Supreme Court judgments to support the view that excise duty can be levied at any convenient stage as long as it is related to manufacture or production. The court concluded that the levy of export duty at a lower rate than still head duty does not impede the free flow of trade but rather encourages export by providing more favorable treatment to exported liquors compared to those consumed within the State. Therefore, the levy of export duty does not violate Article 301.

Conclusion:

The petitions succeeded only in challenging the levy of export duty on rectified spirit. The court quashed the notifications to the extent they sought to levy export duty on rectified spirit and restrained the State from collecting such duty, directing refunds for amounts already collected. In other respects, the petitions were dismissed, and the interim orders restraining the collection of export duty on liquors exported to other States were vacated. Each party was directed to bear their own costs.