9911796707
TMI Blog2003 (10) TMI 635X X X X Extracts X X X X X X X X Extracts X X X X ..... n. The respondent - company manufactures organic chemicals such as Acetic Acid, Acetic Anhydride and vinyl Acetate at its chemical plant. The main raw material for manufacture of these organic chemicals is Ethyl alcohol (industrial grade) which in turn is produced from molasses. In 1982, the respondent set up its own distillery for producing the industrial alcohol. The distillery is registered under the provisions of the Industries (Development and Regulation) Act, 1951. The entire production of industrial alcohol at the respondents' distillery as well as industrial alcohol from outside sources is used at its chemical plant for producing the organic chemicals mentioned earlier. The entire quantity of industrial alcohol is "denatured" before it leaves the respondents distillery and carried in pipes to the chemical plant. It is this denatured industrial alcohol which is subjected to the disputed levy. The levy of the disputed licence fee is legislatively traceable to the UP Excise Act, 1910. This Act provides for the control of and levy of excise duty on intoxicating liquor and on intoxicating drugs in the State of Uttar Pradesh. The word "intoxicant" has been defined under Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tured spirit for use in industries in which the alcohol is destroyed or converted chemically in the process into any other product and the product does not contain alcohol such as Either, Styrene, Butadiene, Acetone Polythene etc. The fee for licences in form FL-39 is imposable under Rule 3(a) which initially read : "3(a) The fee for a licence in Form F.L. 39 shall be at a rate prescribed for industry to industry by the Excise Commissioner per litre, payable on the quantity of specially denatured spirit obtained from any distillery in Uttar Pradesh. The fee shall be realised by the Excise Inspector Incharge of the Distillery from the licensee before making issues of the specially denatured spirit from the distillery and shall be deposited in the Treasury under the Head "X-State Excise Miscellaneous Confiscation and Miscellaneous (a) Contribution towards Establishment." In 1979 by notification No. 951/Licence-3, dated 31st May, 1979 Rule 3(a) was amended and the fee for licence in form FL-39 was fixed for the first time at a rate of 10 paise per litre of specially denatured spirit (SDS). It was made clear that "the fee shall be realised by the Excise Inspector in charge of the di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stitution Bench decision was to operate prospectively it was directed that while Synthetic & Chemicals Ltd. would not be entitled to any refund for the amounts already paid to the State "there would be no liability prospectively from the date of judgment and the demand by the State of Uttar Pradesh would not be levied thereafter". The State filed an application for modification and clarification of this Order on the ground that only the vend fee on industrial alcohol had been struck down by the Constitution Bench and vend fee was entirely different from the licence fee which was imposed on FL-39 licensees. The State's plea was that "the order dated 6.5.1991 is being treated as a precedent and the levies of licence fees to regulate issue of alcohol for industrial purposes are being challenged in the High Court and the stay order are being issued by the Hon'ble High Court of Allahabad on the basis of the aforesaid order of 6.5.1991". While dismissing the State's application on 25.4.1994, this Court said : "Mr. D.V. Sehgal, learned senior advocate appearing for the respondent State, states that licence fee has been challenged by various parties in the High Court. The Stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore the High Court. The challenge was on the ground, that the State had no power to legislate in respect of industrial alcohol or to levy tax in respect thereof and that the levy not being based on quid pro quo was otherwise bad. The High Court dismissed the distillers' writ petitions. The appeals from the decision of the High Court were also disallowed by this Court in Vam Organic Chemicals Ltd. and Another v. State of U.P. and Others, [1997] 2 SCC 715 (referred to hereafter as "Vam Organics - 1"). We now come to the present appeals which arise from Writ Petitions filed by the respondents in the High Court between 1982 to 2000 challenging the levy of denaturation fee under Rule 3(a) on the ground, that the State legislature did not have the legislative competence to legislate on denatured spirit and that the fee of 15 paise per litre was in the nature of tax and in any event excessive. The State countered the challenge and submitted that it had the power to impose the fee in exercise of its regulatory powers since it was necessary to see that the denatured spirit was not re-natured into potable alcohol. It was also contended that unless the State took steps to prevent diversi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... harged unless the fee was expropriatory or excessive in which case the burden of proof would be on the assessee to show that the fee was excessive. According to the appellants, the word 'industry' has been construed by the Constitution Bench in ITC Ltd. v. Agricultural Produce Market Committee & Ors., [2002] 9 SCC 232 para 136 to mean only manufacture and production. Therefore, the State was legislatively competent under the provisions of Entry 33 List III of the Seventh Schedule to the Constitution to regulate the products of an industry which was declared to be controlled industry under Entry 52 of List -I. Since there was no central legislation occupying the field, the State law must be held to be valid. The respondents have supported the decision of the High Court and submitted that once industrial alcohol is denatured, it is permanently unfit for human consumption. They have referred to the definition of denatured spirit in IS :324/1959 which says "spirit with added denaturants to render it effectively and permanently unfit for human consumption". A reference is also made to the "Encyclopedia of Chemical Processing and Design" which defines denaturing as a permanent p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hole field on industrial alcohol and its products. Therefore since the coming into force of the IDR Act on 8th May 1952 the State Legislatures are constitutionally incompetent to levy any tax on industrial alcohol. The principle was succinctly reiterated in State of U.P. v. Modi Distillery, [1995] 5 SCC 753 where it was said that the State's power to levy excise duty was limited to alcohol of liquor for human consumption and "that the framers of the Constitution, when they used the expression 'alcohol liquors for human consumption', meant, and the expression still means, that liquor which, as it is, is consumable in the sense that it is capable of being taken by human beings as such as a beverage or drink"..........."Dictionaries and technical books showed that rectified spirit (95 per cent) was an industrial alcohol and not potable as such..." Therefore even if ethyl alcohol (95 per cent) could be used as a raw material or input, after processing and substantial dilution, in the production of whisky gin, country liquor, etc. nevertheless it was not 'intoxicating liquor' which expression meant only that liquor which was consumable by human beings as it was". Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nch said : "The position with regard to the control of alcohol industry has undergone material and significant change after the 1. Deccan Sugar & Abkari Co. Ltd. v. Commissioner of Excise, A.P.C.A. No. 4355 of 1985 unreported decision dated 13th February, 2002 amendment of 1956 to the IDR Act. After the amendment, the State is left with only the following powers to legislate in respect of alcohol : (a) It may pass any legislation in the nature of prohibition of potable liquor referable to Entry 6 of List II and regulating powers. (b) It may lay down regulations to ensure that non-potable alcohol is not diverted and misused as a substitute for potable alcohol. (c) The State may charge excise duty on potable alcohol and sales tax under Entry 52 of List II. However, sales tax cannot be charged on industrial alcohol in the present case, because under the Ethyl Alcohol (Price Control) Orders, sales tax cannot be charged by the State on industrial alcohol. (d) However, in case State is rendering any service, as distinct from its claim of so-called grant of privilege, it may charge fees based on quid pro quo. See in this connection, the observations of Indian Mica case [1971] 2 SCC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribution under the provision of section 76 and in these circumstances the theory of a return or counter payment or quid pro quo cannot have any possible application to this case." The word "service" in the context of a fee could, therefore, include therefore a levy for a compulsory measure undertaken vis-a-viz the payer in the interest of the public. This 'coercive' measure has been subsequently judicially clarified to mean a 'regulatory measure'. But in the case of both kinds of services whether compulsorily imposed or voluntarily accepted, there would have to be a correlation between the levy imposed and the"counter payment or quid pro quo" However, correlationship between the levy and the services rendered is one of general character and not of mathematical exactitude. All that is necessary is that there should be a reasonable 'relationship' between levy of the fee and the service rendered"2. Contrariwise when there is no such correlation, the levy, despite its nomenclature is in fact a tax. In The Corporation of Calcutta v. Liberty Cinema, AIR (1965) SC 1107. The licence fee charged under Section 548 of the Calcutta Municipal Act 1951 had been challenge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to taxation and other laws. A tax cannot be levied under a general entry". It was also held that the power to tax is neither incidental nor subsidiary to the power to legislate on a matter or topic. Since there was no such specific entry allowing the State to tax industrial alcohol it could not derive the power from any other entry. It was said that the state cannot also claim that, it can regulate industrial alcohol and a product of the scheduled industry, under Entry 33 of List III because the Union, under Section 18G or the IDR Act, has evinced clear intention to occupy the whole field. Given this clear enunciation of the law, the submission of the State must be rejected. Both the sides have relied heavily on the decision of this Court in Vam Organic Chemicals Ltd. and Another v. The State of Uttar Pradesh and Others, [1996] 2 SCC 715. Since the decision has basically and briefly affirmed the reasoning of the High Court, we take up the High Court's decision for consideration before determining what this Court has in fact held. The subject matter of challenge in Vam Organic-I was the notification amending Rule 2 of the Rules by which licence fee @ 7 paise per litre was s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lic health (Entry 6 of List II). It is also a law with respect to possession and sale of intoxicating liquors-Entry 8 of List II. The High Court was also of the view that Section 18-G of the IDR Act did not operate on different fields. The reasoning of the High Court in Vam Organics I has been adopted by the same learned Judge and Bihar Distillery's case. We have already noted that the reading in construction and consequent limitation of Synthetics in Bihar Distillery has been disapproved and can safely be said not to represent the law. However, Vam Organics I also had held that the State was competent to regulate industrial alcohol so that it was not converted into potable liquor, the High Court also found that the State was competent to levy a fee for the purpose. It was held that the fee could be levied not only for services rendered but also towards the cost of regulation. In the first case, the element of quid pro quo is necessary but in the second case, the fee must be reasonable. The High Court then said : "The question then arises, how to judge the reasonableness of such a fee. In our opinion, it would be appropriate, in such a case, to look to the expenditure which t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... control and keep duty on the various kinds of intoxicants under the Act. Having regard to the decision in Vam Organics I, we must also assume that apart from the normal strength, additional officers and staff were appointed to regulate the denaturation of the industrial alcohol. There is nothing to show that there has been any deployment of any additional staff to over-see the possibility of renaturation of the denatured spirit. The question is (to borrow the language is Synthetics) whether in the garb of regulations a legislation which is in pith and substance, as we look upon the instant legislation, a fee or levy which has no connection with the cost or expenses administering the regulation, can be imposed purely as a regulatory measure. Judged by the pith and substance of the impugned legislation, we are definitely of the opinion that these levies cannot be treated as part of regulatory measures." The State has not produced any material to show that it was incurring any additional cost for any further regulation of denatured spirit. Any trace of a lingering doubt as to the propriety of the levy under Rule 3(a) must be taken to have been noted off effectively with the order pa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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