2011 (9) TMI 71 - SC - VAT and Sales Tax

Point of levy of state excise duty on liquor Held that - the point at which the liquor manufactured by the brewery is exigible to excise duty is the stage when the finished product (beer) capable of being consumed by human beings as a beverage or drink, comes into existence that is, after the process of fermentation and filtration Point of levy of state excise duty on beer held that - the State has legislative competence to levy excise duty on beer either after the completion of the process of fermentation and filtration, or after fermentation. Wastage - whether the procedure adopted by the appellant for ascertaining the excess wastage (or shortage in quantity) and levying duty and additional duty thereon, is legal and valid. Held that - When the quantity of the liquid in the fermentation vessels were measured, on account of fermentation, the liquid was already in the process of conversion into an alcoholic liquor for human consumption , though had not become a finished product of beer. Therefore, the principles in Baldev Singh and A. Sanyasi Rao, will apply and not the decision in Modi Distillery. Therefore we hold that there is no infirmity in the method adopted by the excise department to arrive at the excess wastage or in making a demand for excise duty and additional duty in regard to such excess wastage. Allowance of excess wastage - Held that - The brewery having obtained the bottling licence subject to the special conditions which include the condition in Rule 7(11) of the Bottling Rules, cannot ignore the said Rule and contend that the allowance for losses in bottling could be more than one percent, that is upto ten per cent. - there is no merit in the contention of the breweries that they are entitled to allowance of ten per cent towards losses in bottling and storage after the excisable article has left the Brewery. The appeals are therefore liable to be dismissed.

Summary

Issues Involved:
1. Stage at which beer becomes exigible to duty.
2. Legality of the procedure adopted for ascertaining excess manufacturing wastage.
3. Allowance for losses in bottling and storage.

Detailed Analysis:

Issue 1: Stage at which beer becomes exigible to duty
The High Court determined that beer becomes exigible to excise duty at the stage when the finished product, capable of being consumed by humans as a beverage, comes into existence. This is after the process of fermentation and filtration. The State, however, contended that duty should be levied as soon as the wort ferments, as this is when the liquid becomes alcoholic liquor for human consumption. The Supreme Court upheld the High Court's view, referencing previous judgments that excise duty on beer is applicable only after it has been brewed and is fit for human consumption. This means excise duty could be levied either after fermentation and filtration or directly after fermentation in the case of draught beer.

Issue 2: Legality of the procedure adopted for ascertaining excess manufacturing wastage
The High Court allowed the writ petition of the Brewery and directed that the validity of the demand should be decided afresh. The Brewery argued that the legislative competence to levy excise duty is derived from Entry 51 of List II of the Seventh Schedule to the Constitution, which pertains to alcoholic liquors for human consumption. Therefore, duty should only be levied on the finished product. The State argued that to prevent evasion of excise duty, it is necessary to monitor the manufacturing process. The Supreme Court agreed with the State, stating that the procedure adopted under Section 28A and Rule 53 of the Brewery Rules was valid. The allowance of 9% for wastage was deemed appropriate for covering losses due to evaporation, sullage, and other contingencies within the brewery.

Issue 3: Allowance for losses in bottling and storage
The Breweries contended that Section 28A of the Act did not specify a division of the 10% allowance into 9% for brewery losses and 1% for bottling losses. They argued that the total wastage in bottling could itself be up to 10%. The Supreme Court, however, noted that the Bottling Rules clearly provided for an allowance of up to 1% for losses in bottling and storage. The Court held that the Brewery, having obtained the bottling license subject to these conditions, could not claim an allowance exceeding 1% for bottling losses. The appeals by the Breweries were dismissed, affirming that the division of wastage allowances between brewery and bottling processes was valid.

Conclusion:
1. The appeals by the State (CA Nos. 4708-4709/2002) were allowed, and the High Court's order was set aside.
2. The appeals by the Breweries (CA Nos. 4710, 4711, 4712, and 4713/2002) were dismissed, affirming the High Court's decision.