2021 (10) TMI 583 - HC - VAT and Sales Tax

Constitutional validity of levy of VAT on Extra Neutral Alcohol (ENA) - post GST regime - Legislative competence of State legislature (of Uttar Pradesh) - imposition or levy of tax on sale of Extra Neutral Alcohol (ENA) after enactment of the 101st Constitution Amendment with effect from 01.07.2017 - validity of N/N. KA.NI-2-1793 dated 17 December 2019 issued under Section 74 read with Section 4(4) of the Uttar Pradesh Value Added Tax Act 2008 - HELD THAT - Insofar as the identity of the commodity is concerned there is no dispute between the parties. It is Extra Neutral Alcohol (ENA). While the petitioners contend; the same is alcohol of high purity above 90% by volume the State does not dispute the same. In its counter affidavit the State also makes pleadings to the same effect. Besides the admission made by the State it is too late in the day to dispute or deliberate as to the true character or identity or contents of ENA. The Supreme Court in the case of State of Jharkhand Others Vs. Ajanta Bottlers and Blenders Private Ltd. 2019 (7) TMI 316 - SUPREME COURT had clearly opined - industrial alcohol is broadly categorised into three categories. The first being Isopropyl alcohol (or IPA or Isopropanol). It is a compound with chemical formula CH3CHOHCH3 linked to a hydroxyl group. It is the simplest example of a secondary alcohol where alcohol carbon is attached to two other carbon atoms. If consumed Isopropanol is converted into acetone in the liver making it extremely toxic. The second category of industrial alcohol is Methyl Alcohol or Methanol with chemical formula CH3OH. Its consumption leads to blindness and death. The third category of industrial alcohol is Ethyl Alcohol also known as Ethanol having chemical formula C2H6O which may also be written as C2H5OH or CH3CH2OH. Whether IMFL or country liquor or any other liquor that may qualify as alcoholic liquor for human consumption it uses ENA as a raw material. ENA in turn is derived from Rectified Spirit. At the same time alcoholic liquor for human consumption would not arise either if ENA is left to mature for some time or in certain conditions. Neither its alcoholic content would reduce from the range 90% - 95 % to 19% - 43% nor it would otherwise render itself fit for human consumption. In fact the counter affidavit of the State itself indicates in no uncertain terms ENA is not for human consumption. It cannot be described as intoxicating liquor for that reason either. Rectified Spirit Ethanol or Extra Neutral Alcohol (ENA) having been opined by the Constitution bench of the Supreme Court (followed explained and applied in its later pronouncements) to be not alcoholic liquor for human consumption and since there is no material whatsoever to take a contrary view on facts it must be emphatically concluded ENA continues to fall outside the phrase alcoholic liquor for human consumption as it appears under Entry 54 of List II of the Seventh Schedule to the Constitution of India. Both the Parliament and the State legislatures sacrificed their pre-existing respective legislative competence to - enact laws to impose duties of excise and to tax sales of alcoholic liquors not-for human consumption at the high altar of the 101st Constitution Amendment enacted to consecrate the GST laws. The express intent of that Constitutional change appears to be one to tax all alcohols except alcoholic liquor for human consumption under the GST regime only. Thus alcoholic liquor not for human consumption or industrial alcohol or non-potable alcohol is subject to GST laws only. That Constitutional intent was unequivocally recognized by the State legislature. It resonates in perfect harmony through the instrument of incorporation of Section 174(1)(i) to the UPGST Act 2017. The State has already charged 9 percent GST on the sale of ENA with effect from 01.07.2017. Thus if it were to enforce the impugned Notification dated 17.12.2019 with effect from 09.12.2019 it necessarily would lead to an admission of collection (without authority of law) - of GST on ENA by 4 to 13 percent. We do not see what useful purpose the impugned Notification would serve if the argument of the learned AAG were to be accepted. It is declared the State lost its legislative competence to enact laws to impose tax on sales of ENA upon the enactment of the 101st Constitution Amendment. Consequently and upon considering Section 174(1)(i) of UPGST Act 2017 the impugned Notification dated 17.12.2019 insofar as it seeks to impose UPVAT on ENA Rectified Spirit and SDS is ultra vires both on account of lack of (i) legislative competence and (ii) valid delegation. It is therefore quashed. Petition allowed.

Summary

Issues Involved:
1. Legislative competence of the State to impose or levy tax on the sale of Extra Neutral Alcohol (ENA).
2. Validity of the Notification dated 17.12.2019 imposing tax on ENA.
3. Validity of assessment orders and notices issued under the UPVAT Act.
4. Adjustment of GST levied and paid on ENA against UPVAT liability.
5. Refund of UPVAT paid on ENA after 01.07.2017.

Detailed Analysis:

1. Legislative Competence of the State:
The petitioners contended that the State legislature lost its competence to impose tax on the sale of ENA after the enactment of the 101st Constitution Amendment, which introduced Article 246A and amended Entry 54 of List II of the Seventh Schedule. The Supreme Court had previously held that the State's power to levy excise duty was limited to "alcoholic liquor for human consumption" and not on industrial alcohol like ENA. The court reaffirmed that ENA is not "alcoholic liquor for human consumption" and thus falls outside the purview of the State's taxing power under the amended Entry 54.

2. Validity of the Notification dated 17.12.2019:
The court quashed the Notification dated 17.12.2019, which imposed a 5% tax on ENA under the UPVAT Act. The court held that the State legislature lacked the legislative competence to impose such a tax post the 101st Constitution Amendment. The court emphasized that ENA is not "alcoholic liquor for human consumption" and thus should be taxed under the GST regime, not under the UPVAT Act.

3. Validity of Assessment Orders and Notices:
The court quashed all assessment orders and notices issued under the UPVAT Act, including those dated 30.06.2021, 21.06.2021, 08.06.2021, 15.06.2021, 11.06.2021, and 07.07.2021. The court found these assessments to be invalid as they were based on the impugned Notification, which was itself ultra vires.

4. Adjustment of GST Levied and Paid on ENA:
The petitioners sought the adjustment of GST paid on ENA against the UPVAT liability. The court noted that since GST was already levied and paid on ENA, the State could not impose an additional tax under the UPVAT Act. The court held that the levy of UPVAT on ENA was invalid and unenforceable, thereby nullifying any need for adjustment.

5. Refund of UPVAT Paid on ENA:
The court directed that any amount deposited by the petitioners as UPVAT on ENA on or after 01.07.2017 should be refunded within one month, subject to the rule against unjust enrichment. This decision was based on the finding that the State had no legislative competence to impose such a tax after the 101st Constitution Amendment.

Conclusion:
The court allowed all writ petitions, declaring that the State lost its legislative competence to impose tax on the sale of ENA after the 101st Constitution Amendment. Consequently, the Notification dated 17.12.2019 and all related assessment orders and notices were quashed. The court also directed the refund of any UPVAT paid on ENA after 01.07.2017, subject to the rule against unjust enrichment.