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TMI Blog2011 (9) TMI 71X X X X Extracts X X X X X X X X Extracts X X X X ..... ngh 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. - 4708-4709 of 2002, 4710, 4711, 4712 and 4713 of 2002 - - - Dated:- 23-9-2011 - R.V. Raveendran and P. Sathasivam, JJ. JUDGMENT R.V. Raveendran, J 1. Civil Appeal Nos.4708-4709 of 2002 are filed by the State of Uttar Pradesh aggrieved by the common order dated 15.3.2002 of the Allahabad High Court allowing CMWP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and an equal amount as additional duty in regard to the deficiency in excess of 9% of the total stock of beer (10% prior to 19.7.1975). The said orders were challenged by the first respondent by filing a revision before the state government. The state government by order dated 12.4.1978 dismissed the revision petition and upheld the demands by the Excise Commissioner. 4. The first respondent challenged the orders of the Excise Commissioner and the state government in Civil Misc. Writ Petition No.3968 of 1978. A Division Bench of the High Court allowed the said writ petition with other connected petitions by a common order dated 15.3.2002. It quashed the revision order dated 12.4.1978 and directed the state government to decide the revision afresh "after calculating the stock of beer for the purpose of original Rule 53 of UP Brewery Rules 1961 (Para 912 of UP Excise Manual as it then existed) and section 28-A of the UP Excise Act, when after filtration the same has assumed the shape as a finished product which is normally consumed by human beings as beverage or drink". In short the High Court has held that the point at which the liquor manufactured by the brewery was exigible to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 the dip and gravity of the wort is taken. As fermentation starts simultaneously the quantity determined by dip and gravity is taken to be beer produced. On the register in Form B-4 the Brewers put in their initials. It is denied that process of manufacture of beer ends when sullage and yeast calls are removed by filtration. In fact quantity of yeast and sullage filtered out may vary from one filtration to another in different process. Even after filter beer contains both some yeast and sullage and petitioner cannot say that he is only entitled to pay excise duty on such quantity after excluding all such yeast and sullage. The filtration is only a process to make it more marketable in this competitive business but could not be part of manufacture. The event of excisable article going into human consumption has no connection with the taxable event in the case of excise duty and excise duty is imposed at the stage of manufacture of goods and not at the stage of excisable article going into human consumption. 7. The Brewery contended that the stage for levy and realisation of excise duty on beer was the stage of issue of beer from the brewery/bottling bonded warehouse after complyi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion ceases and the manufactured bulk beer is ready to be transferred: (a) for bottling in bond; and (b) to casks for sale and human consumption as draught beer. [Vide para 8 of the WP]. (ii) The method adopted by the Excise department in working out the deficiency in stock is erroneous. What was required under paragraph 912 of Excise Manual was to compare the stock of manufactured beer as mentioned in the stock account of beer and the actual stock of beer giving allowance for the quantity issued. What has been done in the instant case is to assume certain quantity as part of the stock account of beer which was not beer and was undergoing the process of manufacture into beer. Similarly the quantity of beer issued from the Brewery has not been taken in its entirety to be the quantity of beer issued. The quantity issued has been equated with the quantity actually bottled with the result that the quantity of beer which has been wasted in the process of bottling has been treated to be part of the stock of beer in the beer account. [Vide para 61] (iii) If the quantity of beer which is actually issued for bottling from the brewery is taken into account in its entirety for purp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... coholic beverage known as beer in a fermentation process effected by yeast. The first step, where the wort is prepared by mixing the starch source (normally malted barley) with hot water, is known as "mashing". Hot water (known as "liquor" in brewing terms) is mixed with crushed malt or malts (known as "grist") in a mash tun. The mashing process takes around 1 to 2 hours, during which the starches are converted to sugars, and then the sweet wort is drained off the grains. The grains are now washed in a process known as "sparging". This washing allows the brewer to gather as much of the fermentable liquid from the grains as possible. The process of filtering the spent grain from the wort and sparge water is called wort separation. The traditional process for wort separation is lautering, in which the grain bed itself serves as the filter medium. Some modern breweries prefer the use of filter frames which allow a more finely ground grist. Most modern breweries use a continuous sparge, collecting the original wort and the sparge water together. However, it is possible to collect a second or even third wash with the not quite spent grains as separate batches. Each run would produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of these products is termed "brewing". Lager beers - The beers mentioned above are prepared by what is known as a top fermentation process; the yeasts employed are designated top yeasts and the products top fermentation beers'. In contradistinction to the above, lager beers are prepared by employing bottom yeasts' and the process is termed bottom fermentation'. Barley - The fermenting raw material commonly used in production of beers are (a) Barley, (b) Barley Malt (or Malt), (c) other unmalted cereals such as maize or rice, which are employed as grits, broken rice or flakes and maize starch, (d) sugars derived almost exclusively from sugarcane and maize starch, such as, cane sugar, invert, etc. The latter two viz,. (c) and (d) are known as malt adjuncts' as they partially replace the malt. Manufacture of beer may be considered under the following five stages: (a) Preparation of the malt from Barley. (b) Infusion of the ground malt or grist' and straining the resultant extract or wort. (c) Boiling the wort with hops or other bitters, straining of the hops and cooling. (d) Fermenting the wort. (e) Settling, Racking, cellar treatment and bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imary fermentation during which slow changes called maturation' occur and this gives the name to the beer. Fermentation in the storage stage is due to primary yeasts carried down with the beer from the fermenting vessel. Gasing, Racking and Bottling - Although lager beer is ultimately filtered before racking into casks, clarification is an essential function of the storage. Uncarbonated top fermentation beers, which include the bulk of British draught ales are either racked directly from the fermenting vessel or settling back to which they are run down from Fermenting vessels. The settling back provides a means of further clarification by sedimentation during 2 to 12 hours. This is also used for addition of primings, colourings and sometimes finings though these are sometimes added to individual casks. The beer loses carbon dioxide and gets aerated. Dry hops are also sometime added to the settling backs. Racking in cylinders and counter pressure racking is also followed." 12. The first respondent describes (in Annexure-I to the writ petition) the process of manufacturing beer in its brewery thus: "The Process of Manufacturing of Beer - Coarsely crushed barley malt terme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... barrels, bottles or cans. The filtration, ageing and finishing are processes to remove impurities, improve the clarity, taste and increase shelf life. Relevant provisions of the Act and the Rules 14. The relevant provisions of the UP Excise Act, 1910 are extracted below: "Section 3 (3a). "Excise duty" and "countervailing duty" means any such excise duty or countervailing duty, as the case may be, as is mentioned Entry 51 of List II in the Seventh Schedule to the Constitution; Section 3 (10). "Beer" includes ale, stout, porter and all other fermented liquor made from malt; Section 3 (22a). "Excisable article" means - (a) any alcoholic liquor for human consumption; or (b). any intoxicating drug; Section 28 Duty on excisable articles-(1) An excise duty or a countervailing duty, as the case may be, at such rate or rates as the State Government shall direct, may be imposed, either generally or for any specified local area, on any excisable article- (a) imported in accordance with the provisions of Section 12 (1); or (b) exported in accordance with the provisions of Section 13; or (c) transported; or (d) manufactured, cultivated or col ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... substitution of the rule on 19.7.1975 provided for quarterly examination of stock and read as follows: "912. Quarterly Examination of Stock. - The accounts of a brewery and the stock of beer in hand in the brewery shall be examined by the Assistant Excise commissioner once a quarter. If the quantity of the beer in stock in the brewery on such examination be found to exceed the quantity shown as in hand in the stock account, the brewer shall be liable to pay duty on such excess at double the rate prescribed for ordinary issue. If the quantity be found less than that shown in the stock account, the cause of the deficiency shall be inquired into and the result reported to the Excise Commissioner, who may direct the levy of a fee not exceeding double the amount represented by the duty on such deficiency. Provided that any deficiency not exceeding 10. per cent, shall be disregarded, allowance to the extent being made to cover loss in bulk due to evaporation, sullage and other contingencies within the brewery. This allowance Shall be calculated upon the amount represented by the actual ascertained balance in hand at the date of the last stock taking, together with the total quantit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10) has been paid or until a bond under section 19 of the Act in Form B-7 or B-8 has been executed by the brewer for export of beer outside the State, direct from the brewery. Legal position enunciated by this Court 16. We may next refer to the decisions of this Court bearing on the issue in R.C. Jall Parsi vs. Union of India [AIR 1962 SC 1281], this court held: "Excise duty is primarily a duty on the production or manufacture of goods produced or manufactured within the country. It is an indirect duty which the manufacturer or producer passes on to the ultimate consumer, that is, its ultimate incidence will always be on the consumer. Therefore, subject always to the legislative competence of the taxing authority, the said tax can be levied at a convenient stage so long as the character of the impost, that is, it is a duty on the manufacture or production, is not lost. The method of collection does not affect the essence of the duty, but only relates to the machinery of collection for administrative convenience. Whether in a particular case the tax ceases to be in essence an excise duty, and the rational connection between the duty and the person on whom it is imposed cea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is no dispute that the military rum exported was produced in the State of U.P. In State of Mysore and Ors. v. M/s D. Cawasji and Co. - 1970 (3) SCC 710, which was on Mysore Excise Act, it was held that the excise duty must be closely related to production or manufacture of excisable goods and it did not matter if the levy was made not at the moment of production or manufacture but at a later stage and even if it was collected from retailer. The differential duty in the instant case, therefore, did not cease to be an excise duty even it was levied on the exporter after declaration of excess wastage. The taxable event is still the production or manufacture............ ......Rules 636 and 814 are also of regulatory character and they are precautionary against perpetration of fraud on the excise revenue of the exporting state. If out of the quantity of military rum in a consignment, a part of portion is claimed to have been wastage in transit and to that extent did not result in export, the State would, in the absence of reasonable explanation, have reason to presume that the same have been disposed of otherwise than by export and impose on it the differential excise duty. A sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arbon Dioxide Gas is made up and bulk beer is drawn for bottling. It is filed into the bottles and then last process of pasteurisation is carried out to make it ready for packing and marketing. Till the liquor is removed from the vats and undergoes the fermentation process as mentioned above the presence of alcohol is nil. Excisable article would mean any alcoholic liquor for human consumption or any intoxicating drug. The levy or impost of excise duty would be only on alcoholic liquor for human consumption or for being produced in the brewery. Beer would mean fermented liquor from malt, when it is potable or in consumable condition as beverage. It is seen that the levy is in terms of entry 51 of List II of the Seventh Schedule which envisages that duties of excise on the goods manufactured or produced in the State and countervailing duties at the same or lower rates on similar goods manufactured or produced elsewhere in India. Thus, the final product of the beer is relevant excisable article exigible to duty under Section 31 of the Act when it passes through fine filter press and received in the bottling tank. The question is: at what stage the duty is liable to be pai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... State would be authorized to impose excise duty on alcoholic liquor for human consumption which meant that the liquor, as itself, was consumable in the sense that it was capable of being taken by human beings as such as a beverage or drink. This Court in Government of Haryana vs. Haryana Breweries Ltd. and Anr.. - 2002 (4) SCC 547, held that State has jurisdiction to levy excise duty on beer only after it has been brewed and has become fit for human consumption; and having regard to section 32 of the Punjab Excise Act, 1914, the stage at which excise duty could be levied on beer was after the process of manufacture was complete and when it is issued from the brewery or warehouse. 22. This Court also reiterated the said position in Mohan Meakin Ltd. vs. Excise and Taxation Commissioner, H.P. - 1997 (2) SCC 193 but further observed that beer would be exigible to duty when it passes through the fine filter press (after fermentation) and is received in the bottling tank. The words received in the bottling tank' obviously referred to beer being received in any container or vessel for storage, after fermentation and filtration. It may however be noted that the said observation that bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assumes the shape as a finished product which is normally consumed by human beings as a beverage or drink". The real question arising for consideration in this case is not about the stage at which beer is exigible to excise duty, but 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. 25. The contention which ultimately found favour with the High Court, was based on legislative competence. The brewery contended that section 28A provided for levy of excise duty' and an equal amount as additional duty on excess wastage' or shortage in quantity manufactured; that the legislative competence to levy excise duty is derived from Entry 51 of List II of Seventh Schedule to the Constitution: "Duties of excise on .......(a) alcoholic liquors for human consumption"; that therefore, if excise duty or additional duty is to be levied under section 28A, the article that could be subjected to duty should be an alcoholic liquor for human consumption'; that the term alcoholic liquor for human consumption' means a liquor which could be taken by a human being as it is' without t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the measure was so enacted to check evasion of substantial revenue due to the state. Trade or business, results in or produce income, which can be brought to tax. In order to prevent evasion of tax legitimately due on such income', section 44-AC and section 206-C were enacted, so as to facilitate the collection of tax on that income which is bound to arise or accrue, at the very inception itself or at an anterior stage and therefore one cannot contend that the aforesaid statutory provisions lacked legislative competence. After all, statutory provisions obliging to pay advance tax' were not new and sections 44-AC and 206-C were similar. The standard by which the amount of tax was measured, being the purchase price, would not in any way alter the nature and basis of the levy viz., that the tax imposed was a tax on income and it could not be labelled as a tax on purchase of goods. The charge for the levy of the income that accrued or arose is laid by the charging sections viz., sections 5 to 9 and not by virtue of section 44-AC or section 206-C. The fact that the income was levied at a flat rate or at an earlier stage will not in any way alter the nature or character of the levy si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Wastage in manufacture (difference between quantity shown in stock account and actual quantity in the brewery) 400 Litres h. Wastage allowable at 9%* of the total stock of beer in the month(3600 litres) under Rule 53 of Brewery 324 Litres *(9% is the allowance towards losses due to evaporation, sullage and other contingencies within the brewery). i. Excess wastage chargeable to duty and addl. duty (g + h) 76 Litres 29. It should be noted that recourse to section 28A of the Act will be held only when there is abnormal deficiency or shortage in the actual quantity in the brewery when compared to the quantity mentioned in the stock account, that is more than 9%, which would show evasion of excise duty. The standard procedure of levying excise duty is not on the quantity of excisable article in the fermentation vessels. The standard procedure is to levy excise duty when the beer is removed from the brewery. The State was thus collecting excise duty in the usual course with reference to the beer after the entire manufacturing process was completed when it is removed from the brewery. It resorted to section 28A, Rule 53 of Brewery R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s extracted below: "42. The attenuation method of charging duty on beer:- In the United Kingdom, the duty is levied on beer in proportion to the original gravity of the wort. Really speaking, the Excise control of breweries is much less stringent than in the case of distilleries. No excise locks are used. The constant presence of an officer is only considered necessary in the case of every large breweries working continuously. The safety of the revenue depends on notices of all essential operations which are required to be given to the Excise. The length of notice to be given depends on the importance of the particular operation and on the facility with which the local officer can attend. One officer is, in general, in charge of a group of the smaller breweries. A brewer must give timely notice of- (1) his attention to brew; (2) the nature and amount of materials to be used; (3) the time at which he expects his mash-tun to be drained (this is to enable the officer to take a dip of the drained grains which must lie for two hours after draining or until the officer arrives). (4) his intention to mix the products of one or more brewi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d-product with reference tot he raw material which has been used in the input. The tax is on the end-product and not on the raw material. What this proviso read with Rule 35 indicates that in order to determine what is the quantity of beer manufactured which is fit for human consumption, after all the processes have been gone through, you seen what is the quantity of raw material which has been utilised for the manufacture of beer and in the process of manufacturing give an allowance for wastage of 7 per cent. After doing this, you determine the quantity of beer manufactured. An example which has been given is that a 1000 kgs. of malt should ordinary yield 6500 litres of beer. By giving an allowance of wastage which must occur during the process of the manufacture of the end-product and limiting that allowance to 7 per cent, the quantity of beer manufactured on which excise duty would be levied would be 6500 litres less 7 per cent. 14. It appears to us that the proviso to Section 32 read with Rule 35 does nothing more than to give a rough and ready method of calculating the quantum of beer which should have been manufactured in the normal process which is calculated on the ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only when the manufacture is complete and not when it is still in the process of manufacture; and the manufacture process is completed not when the wort is in the fermentation tank but only when the filtration process is finished. But this contention ignores the fact that when manufacturing process is complete and the beer has reached storage/bottling tanks, there is no question of any manufacturing loss. The allowance of 9% is made to cover loss due to evaporation, sullage and other contingencies within the brewery. 9% is allowed as loss in quantity because the quantity in fermentation tank is measured and taken as the base and thereafter the sullage/yeast heads are removed as sediment in the fermentation vessels or by the filtration process and there will also be certain amount of evaporation during the process of filtration, racking and storage etc. In fact, the Brewery specifically admits this position in Annexure-I to the writ petition while describing the process of manufacturing beer: "From the above brief description of manufacturing process, it will be observed that the deficiency between the quantity of wort to the point when beer is ready for bottling, occurs becau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the purposes of levy of excise duty/additional duty any wastage prior to the stage when the liquor/beer becomes fit for human consumption." A large allowance up to 9% of the total stock of beer has been provided towards wastage, only to cover the loss occurring from fermentation stage to post-filtration stage, as the quantity has been calculated with reference to the fermentation vats and there will be considerable wastage due to sullage and evaporation. Rules 37 and 53 of the Breweries Rules (paras 896 and 912 of the Excise Manual) also proceeded on that basis that the measurement would be with reference to the quantities in the fermentation vessels taken by dip and gravity method. 35. In fact, the brewery describes the nature of these losses in the brewery in Annexure I to the writ petition (in the connected WP No.1375/1978) as under: "Manufacturing Losses (i) Varying constituents of Malt viz. percentage of proteins etc. produced sludge or sullage in more or less quantity. Thus sullage to be removed will have differing percentages. (ii) Depending on the process - top and bottom fermentation etc. there may be more or less of scum and dirty heads containing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act will become redundant, except for the small percentage provided for wastage during bottling and storage. 37. The Brewery placed strong reliance upon the decision of this Court in State of U.P. vs. Modi Distillery and Ors. - 1995 (5) SCC 753. In that decision, this Court was considering the validity of demand for excise duty on the wastage of high strength spirit (80% to 85%) during transportation in containers from distillery to warehouse (referred to as Group B' cases). This Court held: "In other words, ethyl alcohol (95 per cent) was not an alcoholic liquor for human consumption but could be used as a raw material or input, after processing and substantial dilution in the production of whiskey, gin, country liquor etc. In the light of experience and development, it was necessary to state that intoxicating liquor' meant only that liquor which was consumable by human beings as it was. What the State seeks to levy excise duty upon in the Group 'B' cases is the wastage of liquor after distillation, but before dilution; and, in the Group 'D' cases, the pipeline loss of liquor during the process of manufacture, before dilution. It is clear, therefore, that what the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sure that there are no wild bacteria which may spoil the beer passed through these pipes. Bottles which are cleaned and sterilized in Automatic Bottle Washing Plant, are fed by conveyors to the beer bottling machine. While the bottles are filled, some quantity of beer is spilt by foaming which takes place and with pressure of Co gas bottles burst in the process of bottling. The beer which is spilt is mixed with broken glass pieces, oil etc. on the conveyor belts. It is contaminated and has to go waste. To increase the shelf life of beer, the filled bottles are placed in pasteurization tanks and the water in which these bottles are immersed is gradually raised to temperature of 65O and after keeping these bottles for a fixed time in hot water, these are cooled down. With the expansion of Co gas during this process some bottles burst and the beer contained therein gets mixed up with water. Leaky bottles are also taken out from the pasteurization tanks, which are decanted for reprocessing of their contents. Some wastage occurs in the process of decanting. After pasteurization of filled bottles, capsuling, labeling and packing is done, in which some bottles brea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actions for that day are made, the Excise Inspector Incharge shall take the stock of unbottled and bottled spirit 3rd beer/stored in the bottling warehouse, enter into the prescribed registers and ascertain the wastage of spirit in the bottling operations and storage in the bonded warehouse. (11) (a) An allowance up to one per cent may be made on the total quantity of spirit and beer stored during a month for actual loss in bottling and storage. The licensee shall be responsible for the payment of duty on wastage in excess of one per cent, (b) when the wastage does not exceed the prescribed limit, no action need be taken by the Excise Inspector Incharge but if an excess is found at the time of monthly stock taking the Excise Inspector shall submit a statement to the Collector by the fifth day of the month in Form F.L.B. 10 showing the quantity of actual wastage and the duty to be paid by the licensee on the excess wastage. On receipt of the statement the Collector shall recover the duty from the licensee at the full rate of duty leviable on Indian made foreign spirit and beer." 41. The appellants contended that section 28A provides for an allowance of 10% to cover losses du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of 10% in regard to losses within the brewery and the losses in bottling and storage. It is not in dispute that the process of brewing beer and the process of bottling beer are considered to be distinct and separate processes governed respectively by the Brewery Rules and Bottling Rules. The operations connected with bottling are required to be conducted in a separate premises under a different licence. The process of bottling begins with the transfer of bulk beer from the brewery for bottling. Sub-section (2) of section 28A refers to an allowance to an extent of 10% not only in regard to losses within the brewery but also to cover losses in bottling and storage. As noticed above, Rule 53 of the Brewery Rules and Rule 7(11) of the Bottling Rules when read conjointly show that the said rules are supplementary to each other and together implement section 28A of the Act. At all events, the validity of neither Rule 53 of Brewery Rules nor Rule 7(11) of Bottling Rules is under challenge. Be that as it may. 43. 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 Rul ..... X X X X Extracts X X X X X X X X Extracts X X X X
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