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Tuesday, August 18, 2015

We clarify that there was no justification for the Appellant State or its Excise Department to collect charges at the rate of [pic]1/- after it had been quashed by the learned Single Judge. Keeping in perceptive the absence of diligence by the Respondent Distilleries from seeking timely variations or modification of Orders passed by the Court, we desist from directing that the collection of charges over and above 50 paise per bulk litre should be refunded. 11 However, in view of the concurrent failure of the Appellant State in this litigation, it shall be liable to pay the costs incurred by the


                        IN THE SUPREME COURT OF INDIA

                        CIVIL APPELLATE JURISDICTION

                     CIVIL APPEAL NOs. 1028-1037 OF 2005

STATE OF TAMIL NADU & ANR.                        …..APPELLANTS


 & ORS.                                                  …..RESPONDENTS

                           J  U  D  G  M  E  N  T


1       The  Appellants  before  us  have  laid  siege  to  the   concurrent
conclusions of the learned Single Judge, as well as the  Division  Bench  of
the High  Court  of  Judicature  at  Madras  in  a  matter  where  the  writ
petitioners, i.e. the Respondents before us, have assailed the  legality  of
a demand of [pic].1/- per bulk litre of industrial alcohol  manufactured  by
them.  Earlier, the Respondents had unsuccessfully assailed  the  impost  of
50 paise per bulk  litre  of  industrial  alcohol  but  that  challenge  was
primarily predicated on the legislative competence of  the  State  of  Tamil
Nadu to make that demand.   In the said writ petitions, the ten  petitioners
therein had prayed for a  declaration  that  Rule  5-A  of  the  Tamil  Nadu
Distillery Rules introduced by G.O.M. No.662  issued  by  Home,  Prohibition
and Excise(III) Department, dated 4.6.1990, and the amendment  to  the  said
Rule brought into effect  by  G.O.M.  No.64,  Home  Prohibition  and  Excise
(XIII) Department,  dated  12.04.2000,  are  unconstitutional,  illegal  and
void.  The learned Single Judge noted that the  decision  of  a  Seven-Judge
Bench of this Court in the case of Synthetics and Chemicals  Ltd.  v.  State
of U.P. (1990) 1 SCC 109; AIR 1990 SC  1927  concluded  the  conundrum.   In
that case it was held that the sundry States of the Union of India  are  not
competent to impose taxes/levies on industrial alcohol or rectified  spirit.
  This Court, however, clarified that the States are empowered  under  Entry
8 of List II of the  Seventh  Schedule  to  the  Constitution  of  India  to
regulate this business and ensure that industrial alcohol  is  not  diverted
as potable alcohol, and in carrying  out  this  exercise,  States  would  be
fully competent to collect administrative/regulating service fee.  The  writ
petitioners’ first foray in the  Writ  Court  did  not  meet  with  success.
Accordingly, the State of Tamil Nadu appears to have collected 50 paise  per
bulk litre towards its administrative fees for almost a decade.

2     By G.O.M. No.64, dated 12.04.2000, Home Prohibition and Excise  (XIII)
Department, the Appellant State Government has amended Rule 5-A and  thereby
increased administrative service  fees  to  [pic].1/-  per  bulk  litre  for
industrial alcohol produced by  the  sundry  distilleries  located  in  that
State.   The stance of the State Government  was  that  administrative  fees
related strictly to the establishment charges occurred in  the  distilleries
themselves together with other expenses incurred by  the  State  to  enforce
the  Regulation.      In  their  second  salvo,  the  Petitioners  have  not
challenged the power of the State to recover administrative fees,  but  have
contended that this exercise  had  to  be  meticulously  calculated  on  the
premise of quid pro quo.   Relying on  Synthetics  and  Chemicals  Ltd.  the
learned Single Judge came to the conclusion that the subject impost was,  in
pith and substance, an endeavour to raise  revenues  for  the  State.    The
Writ Court also applied the ratios of  Shri  Bileshwar  Khand  Udyog  Khedut
Sahakari Mandali  Ltd.  v.  State  of  Gujarat  (1992)  2  SCC  42,  Gujchem
Distillers India Ltd. v. State of  Gujarat,  (1992)  2  SCC  399  and  Bihar
Distillery v. Union of India AIR 1997 SC 1208.   It opined  that  the  State
had the power to comprehensively regulate  and  monitor  the  production  of
industrial alcohol in order to ensure that there was no misuse or  diversion
of this product for its conversion to potable alcohol.  The Writ Court  then
went on to consider the second question,  viz.  whether  the  levy  or  fees
impost must per force be confined and founded on the rule of quid  pro  quo.
  Relying on the decision of this Court in  Sreenivasa  General  Traders  v.
State of Andhra Pradesh (1983) 4 SCC 353, it  was  reiterated  that  by  and
large the principle of quid  pro  quo  governs  the  quantification  of  the
service rendered, but not necessarily with mathematical  exactitude;  it  is
necessary that a reasonable relationship  between  the  collection  and  the
services rendered must be evident.   It was also reiterated  that  the  test
of correlation is to be reckoned at the  aggregate  level  and  not  at  the
individual level as was clarified in P.  M.  Ashwathanarayana  v.  State  of
Karnataka (1989) Supp.1 SCC  696.   In  this  conspectus  of  the  law,  the
learned Single Judge reached the conclusion that  the  State  was  competent
and justified in recovering expenses for ensuring the prevention of  illegal
diversion of industrial alcohol within  the  premises  of  the  distilleries
themselves, as  also  expenses  incurred  for  supervising  the  transit  of
industrial alcohol from the distilleries to the  trader.    The  Writ  Court
then adverted to the decision in Vam Organic Chemicals Ltd. v. State  of  UP
(1997)  2  SCC  715,  as  well  as  Secunderabad  Hyderabad  Hotel   Owners’
Association v. Hyderabad Municipal Corporation (1992) 2  SCC  274.    It  is
important to note that the learned Single  Judge,  after  carrying  out  the
said analysis of the law, pithly observed that the Appellant State  had  not
furnished the relevant and requisite particulars and material  to  establish
that the impost indeed had the character of quid pro quo.  Referring to  the
quantum of recoveries made on the basis of  50  paise  per  bulk  litre  for
almost one decade, it was noted that this  collection  roughly  corresponded
to one-third of the total expenses incurred by the Excise Department,  which
per se was not excessive; and that there can be no cavil that in  regulating
the trade of potable liquor the State is gathering considerable income.   So
far as the increased  demand  of  [pic]1/-  per  bulk  litre  of  industrial
alcohol is concerned, the learned  Single  Judge  concluded  that  it  would
amount to effecting an increase in recovery from 1/3rd  to  2/3rd  of  total
expenses incurred by the Excise Department which, therefore,  ceased  to  be
based on the principle of  quid  pro  quo.   By  this  directive,  the  writ
petitions were dismissed, making it  legal  for  the  State  to  impose  and
collect only 50 paise per bulk litre.  G.O.M.  No.64  Home  Prohibition  and
Excise (XIII) Department dated  12.4.2000  was  quashed.   It  appears  that
despite this ruling the State has coerced the writ petitioners  into  paying
the so called administrative regulatory charges at [pic]1/- per bulk  litre.

3     The Appellant State thereupon assailed the  decision  of  the  learned
Single Judge in W.A. Nos.1566 to 1571  of  2001,  but  in  the  event,  with
continued  failure.   The  Division  Bench  again  analysed   the   numerous
judgments of this Court, the foremost being  of  the  Seven-Judge  Bench  in
Synthetics and Chemicals Ltd., and noted  that  the  State  Governments  are
empowered to levy excise duty or tax  on  alcoholic  liquor  fit  for  human
consumption, but so far as industrial alcohol is concerned,  that  power  is
reposed in the Union Government alone.   However, this does  not  mean  that
the State Government was powerless to regulate the production of  industrial
alcohol so long as that activity was calculated to circumvent the  diversion
of industrial alcohol into potable alcohol.  The  Division  Bench,  however,
noted that Rule 5-A came to be  introduced  as  this  Court  in  Seven-Judge
ruling in Synthetics and Chemicals  Ltd.  had  approved  the  collection  of
administrative  service  fee,  as  indubitably  and   avowedly   the   State
Government through its Excise Department  was  incurring  expenses  for  the
purpose of blocking any attempt to  divert  industrial  alcohol  as  potable
alcohol.  Quite correctly, the Division Bench also posited on  the  strength
of the decision of this Court in Vam Organic Chemicals Ltd. that the  Excise
Department  was  effectively  conducting  recovery  measures  and  was   not
providing corresponding services to these distilleries.  Significantly,  the
Division Bench concluded that the collections made by the State  by  way  of
administrative service fee recovered even at the rate of 50 paise  per  bulk
litre corresponded to approximately 60 per cent of the total expenditure  of
the Excise Department.  The Division Bench was of  the  opinion  that  there
was only an expenditure of  [pic]93.2  lakhs  against  which  there  was  an
estimated collection of administrative  fee  aggregating  [pic]11.73  crores
which collection, therefore, was excessive.   Whilst it  seems  to  us  that
there is no scope for our interference in the  impugned  Judgment,  we  must
hasten to clarify that the charges should not be restricted  only  to  those
establishment expenses incurred by the State in the distilleries  alone,  or
that  any  collection  over  and  above  those  expenses  would  ipso  facto
tantamount to unjust  enrichment.    However,  the  fact  remains  that  the
figures noted by the  Division  Bench  were  [pic]93.20  lakhs  whereas  the
collections even  at  the  rate  of  50  paise  per  bulk  litre  aggregated
[pic]11.73 crore, which since it was not interfered with, would  undoubtedly
cover expenses over and above those  incurred  by  the  State  only  on  its
establishments/office in the respective distilleries.   The  Division  Bench
also underscored the fact that details of expenses incurred by the State  in
connection with the supervision or regulation of  production  of  industrial
alcohol, with a view to ensure that there is no diversion  thereof  for  the
purpose of or reconversion to potable alcohol,  had  not  been  provided  in
this regard.   We are in no manner of doubt  that  the  State  has  woefully
failed to furnish credible details of expenditure which,  according  to  it,
related to administrative or regulatory or service expenses.

4     We do not propose to make this Judgment prolix by once again  minutely
analyzing the several decisions of this Court,  which  have  clarified  that
administrative or service charges can be recovered,  but  nothing  over  and
above them; that  while  it  would  be  unfair  to  insist  on  mathematical
exactitude in the calculation of administrative service charges, there  must
be a perceptible correlation between the expenses and the collections;  that
it will not be permissible for the State  to  collect  fees  in  respect  of
expenses  incurred  in  its  Excise  Department,  except  those  bearing   a
reasonable nexus  with the administrative steps taken to ensure  that  there
is no misutilisation or diversion of industrial alcohol for the purposes  of
producing potable alcohol.  The  extracted  paragraph  from  Synthetics  and
Chemicals Ltd which distills the precedents  on  the  State’s  legislative’s
powers with regard to industrial alcohol, deserves careful consideration:
86. The position  with  regard  to  the  control  of  alcohol  industry  has
undergone material and significant change after the  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

5     Over the years, the inflexibility with which  the  principle  of  quid
pro quo was to be applied,  which  may  have  been  sired  from  a  pedantic
perusal  of  Synthetics  and  Chemicals  Ltd,   has   been   clarified   and
crystallized by this  Court.   We  shall  reproduce  these  paragraphs  from
B.S.E. Brokers’ Forum, Bombay and Others v. Securities  and  Exchange  Board
of  India  and  others,  (2001)  3  SCC  482  to   enable   their   fruitful

30. This Court in the case of Sreenivasa General Traders v.  State  of  A.P.
(1983) 4 SCC 353 has taken the view that the distinction between a  tax  and
a fee lies primarily in the fact that a tax is levied as part  of  a  common
burden, while a fee is for  payment  of  a  specific  benefit  or  privilege
although the special  advantage  is  secondary  to  the  primary  motive  of
regulation in public interest. This Court said that in  determining  whether
a levy is a fee  or  not  emphasis  must  be  on  whether  its  primary  and
essential purpose is to render specific services  to  a  specified  area  or
class. In that process if it is found that the  State  ultimately  stood  to
benefit indirectly from such levy, the same is of no  consequence.  It  also
held that there is no generic difference between a tax and a  fee  and  both
are compulsory exactions of money by public authorities.  This  was  on  the
basis of the fact that the compulsion lies in the fact that the  payment  is
enforceable by law against a person in spite of his  unwillingness  or  want
of consent. It also held that a levy does not  cease  to  be  a  fee  merely
because there is an element of compulsion or  coerciveness  present  in  it,
nor is it a postulate of a fee that it must have a direct  relation  to  the
actual service rendered by the authority to each individual who obtains  the
benefit of the service. It also held that the element of  quid  pro  quo  in
the strict sense is not always a sine qua non for a fee,  and  all  that  is
necessary is that there should be  a  reasonable  relationship  between  the
levy of fee and the services rendered. That  judgment  also  held  that  the
earlier  judgment  of  this  Court  in  Kewal  Krishan  Puri  v.  State   of
Punjab(1980) 1 SCC 416 is only an obiter.....
38. As noticed  in  the  City  Corpn.  of  Calicut  (1983)  2  SCC  112  the
traditional concept of quid pro quo in  a  fee  has  undergone  considerable
transformation. From a conspectus of the ratio of the  above  judgments,  we
find that so far as the regulatory fee  is  concerned,  the  service  to  be
rendered is not a condition  precedent  and  the  same  does  not  lose  the
character of a fee provided the fee so charged is not excessive. It is  also
not necessary that the services to be rendered by the  collecting  authority
should be confined to the contributories alone.  As  held  in  Sirsilk  Ltd.
1989 Supp. (1) SCC 168 if  the  levy  is  for  the  benefit  of  the  entire
industry, there is sufficient quid pro quo between the  levy  recovered  and
services rendered to the industry as a whole. If we apply the test  as  laid
down by this Court in the abovesaid judgments to the facts of  the  case  in
hand, it can be seen that the statute under Section 11 of the  Act  requires
the Board to undertake various activities to regulate the  business  of  the
securities  market  which  requires  constant  and  continuing   supervision
including  investigation  and  instituting  legal  proceedings  against  the
offending  traders,  wherever  necessary.  Such   activities   are   clearly
regulatory activities and the Board is empowered under Section  11(2)(k)  to
charge the required fee for the said purpose, and once it is held  that  the
fee levied is also regulatory in nature then the  requirement  of  quid  pro
quo recedes to the background and the same  need  not  be  confined  to  the
contributories alone.

6     Subsequently, in State of U.P. v. Vam Organic Chemicals Ltd. (2004)  1
SC 225 (commonly referred to as “Vam Organic II’) this important  aspect  of
the law has been further crystallised thus –

34. The word “service” in the context of a fee could, therefore, include,  a
levy for  a  compulsory  measure  undertaken  vis-à-vis  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 “counterpayment 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.
Contrariwise when there is  no  such  correlation,  the  levy,  despite  its
nomenclature is in fact a tax. In Corpn. of Calcutta v. Liberty  Cinema  the
licence fee charged under Section 548 of the Calcutta  Municipal  Act,  1951
had been challenged on the ground that no service was rendered  commensurate
with the tax.

7     Considerable reliance was placed by the  learned  Senior  Counsel  for
the Appellant State on the decision of this Court in B.S.E. Brokers’  Forum,
but in our view, without justification.  Indubitably, this Court  held  that
it was not incumbent for collections or contributions to be  recovered  from
only those who were directly involved in  the  subject  transactions,  since
the newly established administrative machinery was necessary for the  smooth
and legal conduct of  the  entire  business  pertaining  to  the  securities
market.   We find this to be self-evident from a perusal of the Preamble  to
the SEBI Act:  “An Act to provide  for  the  establishment  of  a  Board  to
protect the  interests  of  investors  in  securities  and  to  promote  the
development of, and to regulate, the securities market…….”  This  Court  had
held that the SEBI Act postulated and permitted the charging  of  two  types
of fees – (i) under Section 11(2)(k) of the SEBI Act for  carrying  out  the
several and sundry purposes contained  in  Section  11,  and  (ii)  for  the
registration of applicants under Section 12(2).  It was  also  clarified  by
the Court that the said service or regulatory or administrative fee  can  be
levied on all contributors, regardless  of  whether  or  not  services  were
being directly rendered to them.  This decision cannot  be  extrapolated  to
permit the State to make recoveries in the guise of administrative  expenses
of all the outgoings of its Excise  Department  even  though  they  have  no
bearing or connection with the possible misuse and diversion  of  industrial
alcohol to potable alcohol. This Court was  concerned  with  the  imposition
and collection of fees by Securities and Exchange Board of India  (SEBI)  in
order to perform the mandates cast upon it by virtue of Section 11(2)(k)  in
addition to registration charges  under  Section  12(2)  of  the  Act.   The
proceeds of collection under Section 11(2)(k) could legitimately  meet  both
capital expenditure and costs of services.   This Court also  found  on  the
strength of  evidence  before  it  that  the  bulwark  (50%)  of  its  total
expenditure would be towards broker-related services, apart from  protecting
the interests of  the  investors,  regulating  the  acquisition  of  shares,
taking over of companies and undertaking inspections  and  audits  of  stock
exchanges, mutual funds,  insider  trading,  etc.   Most  importantly,  this
Court accepted the contention of SEBI that it had no other source of  income
other than that derived under Sections 11(2)(k) and 12.  Transactions had  a
direct bearing on  the  regulatory  expenses  of  the  Board.   Hence,  this
classification had a direct nexus with  the  object  to  be  achieved.   The
Preamble to the SEBI Act emblazons that its purpose is to  provide  for  the
establishment of a Board to  protect  the  interests  of  the  investors  in
securities  and  to  promote  the  development  of,  and  to  regulate,  the
securities market. It further noted that  stock-brokers  formed  a  distinct

8     We may also, with short shrift, reject  an  argument  put  forward  on
behalf of one of the Respondents, namely,  Tvl.  Chemplast  Sanmar  Limited,
that its production of industrial alcohol was entirely captive for  its  own
activity of manufacture of PVC.   Even assuming this  to  be  so,  there  is
always a brooding and omnipresent possibility  of  diversion  of  industrial
alcohol to potable alcohol.

9     It seems to us, facially, that if administrative  or  service  charges
are sought to  be  recovered  from  the  Respondent  Distilleries  to  cover
nefarious activities carried out by third  parties  such  as  smuggling  and
countryside  brewing  etc.  which  have  no  causal  connection   with   the
production of industrial alcohol, or for collection of  excise  duties  from
other  industries  carrying   out   distinctly   different   production   or
manufacture, the fee would metamorphose into  a  tax.   We  must  hasten  to
explicate that the illegal or  illicit  diversion  of  industrial  or  ethyl
alcohol is possible at the stage where it is rectified spirit or  industrial
alcohol, contrary to the argument of the Respondents.   Therefore,  so  long
as  expenses  are  incurred  by  the  State  Government  in  ensuring   that
industrial alcohol is not used as potable alcohol,  recovery  thereof  shall
be  permissible.    The  Process  Chart  submitted  by  the   Appellant   is
reproduced for the facility of clarification:


                      +                                    tation


10    A fervent prayer had been made by the Respondents before  us  that  in
the event of our preferring the view that the Appeals are  sans  merit,  the
collection of administrative/service charges at the  rate  of  [pic]1/-  per
bulk litre should be refunded along with interest.  On  the  first  date  of
hearing, this Court had directed maintenance of status quo  and  this  being
the position, no party can be made to suffer.   It is  apposite  to  observe
that the  Respondent  Distilleries  did  not  express  any  discomfiture  on
collection of fee at the rate of [pic]1/- per bulk litre either before  this
Court or any of the subordinate courts.  In fact, there was a hiatus in  the
litigation even in the  High  Court  where  collections  were  made  at  the
increased rate even though that was quashed by the High Court.   We  clarify
that there was no justification  for  the  Appellant  State  or  its  Excise
Department to collect charges at the rate of  [pic]1/-  after  it  had  been
quashed by the learned Single Judge.   Keeping in perceptive the absence  of
diligence by the Respondent Distilleries from seeking timely  variations  or
modification of Orders passed by the Court, we desist  from  directing  that
the collection of charges over and above 50 paise per bulk litre  should  be

11    However, in view of the concurrent failure of the Appellant  State  in
this litigation, it shall be  liable  to  pay  the  costs  incurred  by  the
Respondents in the litigation,  not  only  before  the  High  Court  but  in
present Appeals as well.    The Appeals are accordingly dismissed.

                                      [VIKRAMAJIT SEN]

                                      [SHIVA KIRTI SINGH]
New Delhi;
August 12, 2015

                     (may contain about 35 to 55% Sugar)

                       Fermented Wash (8% of Alcohol)

                                YEAST CULTURE

                            (10% Sugar Solution)


                              Rectified Spirit/
                             Industrial Alcohol
                        (95% Ethyl Alcohol or Ethanol)

                            Country Spirit/Liquor


     Denatured Spirit for Industrial purposes (90-95% of Ethyl Alcohol)
              (commonly denatured with Methanol and/or Pyridine

     Neural Spirit for Potable purposes – IMFS (94-96% of Ethyl Alcohol)


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