2015 (8) TMI 590 - SC - VAT and Sales Tax

Legality of Andhra Pradesh Rectified Spirits Rules, 1971 - Requirement of obtaining a licence and the payment of Excise duty and Pass fee for exporting rectified spirit to be legal - Power of State Government to impose duty on rectified spirit - Held that - While State Governments are not competent to impose taxes/levies on industrial alcohol, fee charged for services rendered to prevent the diversion and conversion of industrial alcohol for human consumption is permissible and legal; such fee need not be charged strictly on quid pro quo basis and it will pass legal muster so long as it is not excessive. We therefore find that the 1971 Rules themselves are not illegal, but rather are well within the purview of the Constitutional powers of the State Government. - State Government has not undertaken any supervisory activity which would constitute a quid pro quo for the imposition of the export permit fee charged under Rule 15(3)(i). Any expenses incurred on such supervisory or administrative activity has perforce already been recovered or reimbursed from fees on account of storage or sale transactions on industrial alcohol. These dues paid by the Appellants are channelled towards preventing the illegal activities of unrelated third parties for which the Appellants are in no way responsible. It is evident that the intention behind this fee is to prevent manufacturers from exporting industrial alcohol to breweries of potable alcohol in other States that would fetch them a better price than producers of other products within their own State. Rule 15 is stroked down dealing with the export of rectified spirit, finding that it imposes a tax, not a fee, on the Appellants and is outside the Respondent State s legislative competence. It has not been conclusively shown by the Respondent State that it has been constrained to monitor or superintend that industrial alcohol is not illegally diverted to other uses within the State. If industrial alcohol is exported outside the State as industrial alcohol, these impositions partake of a totally different character, transferring it into a tax - Decided partly in favour of assessee.

Summary

Issues:
1. Challenge to the legality of Andhra Pradesh Rectified Spirits Rules, 1971
2. Constitutional validity of the requirement to obtain a license, pay excise duty, and pass fee for exporting rectified spirit
3. Distinction between fee and tax in the context of industrial alcohol regulations

Issue 1: Challenge to the legality of Andhra Pradesh Rectified Spirits Rules, 1971

The Appellants contested the legality of the Andhra Pradesh Rectified Spirits Rules, 1971, arguing that the State's jurisdiction is limited to legislating on alcohol fit for human consumption, not industrial alcohol like rectified spirit. They claimed that only the Union Government has the authority to regulate industrial alcohol. The High Court, after reviewing relevant case law, concluded that the State can charge a fee for monitoring services provided in relation to industrial alcohol, even if not fit for human consumption. The High Court emphasized the joint control required for alcohol used in potable alcohol production, allowing the State to impose levies. The State's ability to post staff at distilleries and levy regulatory fees for supervision was upheld, emphasizing the State's responsibility in preventing illegal diversion of industrial alcohol. The High Court deemed the fees charged as service fees, not taxes, and dismissed the writ petitions.

Issue 2: Constitutional validity of the requirement to obtain a license, pay excise duty, and pass fee for exporting rectified spirit

The Appellants argued that due to reduced demand within Andhra Pradesh, they had to export rectified spirit to other states. They challenged the requirement to obtain a license, pay excise duty, and pass fees for exporting industrial grade rectified spirit. The Supreme Court found that while State Governments cannot levy taxes on industrial alcohol, charging fees for services to prevent diversion for human consumption is legal. The Court emphasized that fees need not strictly adhere to quid pro quo but should not be excessive. The Court held that the 1971 Rules were constitutional, with fees like the administrative fee necessary to cover State expenses in preventing illegal conversions. The Court noted the reduction in export permit fees as evidence of reasonable fee determination.

Issue 3: Distinction between fee and tax in the context of industrial alcohol regulations

The Supreme Court analyzed the distinction between fees and taxes in the context of industrial alcohol regulations. It noted that fees are for services rendered, while taxes are common exactions. The Court found that the export permit fee under Rule 15 lacked a supervisory activity as a quid pro quo, turning it into a tax. The Court determined that various provisions under Rule 15, such as export conditions and indemnity bond requirements, aimed to regulate and control exports rather than prevent diversion for human consumption. Consequently, the Court struck down Rule 15, ruling it imposed a tax outside the State's legislative competence. The Court emphasized the lack of justification for these provisions and disposed of the Appeals accordingly.