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Tuesday, August 18, 2015

We uphold the 1971 Rules and find that the Respondent State had the these impositions partake of a totally different character, transferring it power to enact these Rules. However, we strike down Rule 15 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, into a tax. These Appeals are disposed of in these terms.


                        IN THE SUPREME COURT OF INDIA

                        CIVIL APPELLATE JURISDICTION

                        CIVIL APPEAL No. 5020 OF 2005

M/S K.C.P. LTD.                                           … APPELLANT
GOVERNMENT OF A.P. & ORS                            … RESPONDENTS


                     CIVIL APPEAL NOS.5021-5022 OF 2005

                           J  U  D  G  M  E  N  T


1     The Appellants before us assail the  impugned  Judgment  of  the  High
Court of Andhra Pradesh, which had upheld the  legality  of  Andhra  Pradesh
Rectified Spirits Rules, 1971 (1971 Rules for brevity)  and  had  found  the
requirement of obtaining a licence and the payment of Excise duty  and  Pass
fee for exporting rectified spirit to be legal.

2     The Appellants have  distilleries  which  produce  various  grades  of
industrial alcohol from molasses, also known as ethyl  alcohol  or  ethanol.
In exercise of powers conferred under  Section  72  of  the  Andhra  Pradesh
Excise Act, 1968, the Respondent State enacted the 1971 Rules.  Rules 4,  13
and 15 are laid out herein for the facility of reference; although in  these
Appeals it is Rule 15 which is in focus --

Rule 4: Rectified spirit  shall  not  be  issued  from  a  distillery  or  a
warehouse without pre-payment of administrative  fee  meant  for  industrial
purposes. In case of potable purposes, rectified spirit shall not be  issued
from a distillery or a warehouse without pre-payment of Excise  Duty  except
when rectified spirit is moved in bound or when payment of Excise  Duty  has
been exempted.

Rule 13: (1) No person shall be granted license for possession  and  use  of
rectified spirit for industrial purposes unless the applicant:
(a)  deposits as security for the fulfillment of all the conditions  of  his
license such sum as may be fixed by the Government from time to  time  which
shall not be less than Rs. 15,000 in cash in the Government treasury; and
(b) executes an agreement in Form R.S.-V for payment of the  costs,  charges
and expenses including salaries and allowances of such Excise staff  as  may
be determined by the Commissioner  or  his  nominee  to  be  posted  at  the
manufactory of the licensee in connection with  the  supervision  to  ensure
compliance with the provisions of the  Act,  the  rules  and  terms  of  the
license. The staff shall  be  under  the  supervision  and  control  of  the
Commissioner or the Authorised Officer.

Rule 15: (1) No rectified spirit shall be  exported  save  under  an  export
permit and in accordance with these rules.
(2) Any person manufacturing  or  possessing  rectified  spirit  desires  to
export (herein-after referred to as the exporter) it for the purpose of  its
exportation to any area outside the State, shall apply in Form ARS-V to  the
Commissioner for export permit in that behalf. No such application shall  be
entertained unless  rectified  spirit  is  in  surplus  in  the  State.  The
application shall be accompanied by an import  permit,  or  a  no  objection
certificate or an import license issued by  a  competent  authority  of  the
place to which the rectified spirit is to be exported.
      (3) (i) on receipt of  the  application  for  permit  to  export,  the
Commissioner shall make such enquiry  as  he  considers  necessary  and  may
grant in accordance with these rules as export permit,  on  payment  of  the
export permit fee of  Rupees  Ten  per  bulk  litre  in  Form  R.S.  VII  in
(ii) Such permit shall not be granted unless  an  Indemnity  Bond  shall  be
submitted by the Exporter  total  quantity  of  Proof  litres  permitted  to
export, binding himself severally to pay the full  duty  at  Rs.  15-40  per
Proof litre on all losses, by way of drainage, short delivery,  non-delivery
of rectified spirit or otherwise over and above the  admissible  loss  limit
of 0.5% towards transit wastage with interest on all losses in transit.

3      The  Appellants  before  the  High  Court  contended  that  they  had
previously supplied to the Government  a  major  portion  of  the  rectified
spirit which they had produced, which was thereafter used by the  latter  as
raw material for manufacturing  potable  alcohol  and  Indian  Made  Foreign
Liquor (IMFL).  As a consequence of  the  imposition  of  prohibition,  this
demand within the State of Andhra Pradesh was drastically reduced;  and  the
Appellants were left with no alternative but to export  the  said  rectified
spirit to other States.  However, due to the higher power  tariffs,  licence
fees, duties, etc. in Andhra Pradesh, the Appellants could not compete  with
the prices of rectified  spirit  produced  in  some  of  the  other  States,
further leaving them with no alternative but to explore the  possibility  of
exporting their said product to other countries.  In  this  factual  matrix,
the  Appellants  filed  writ  petitions  before  the  High  Court  with  the
following prayer:
“For the reasons stated above it is prayed that this Hon’ble  Court  may  be
pleased to issue a writ or order or direction declaring the A.P.R.S.  Rules,
1971 in so far as they pertain to Rectified  Spirit  (Industrial  Grade)  as
illegal, ultra vires the  Constitution,  null  and  void;  (2)  declare  the
action of the  respondents  in  insisting  upon  the  petitioner  to  obtain
licence, pay excise  duty  and  pass  fee  for  exporting  Rectified  Spirit
(Industrial Grade) as illegal, ultra vires, unconstitutional  and  violative
of the petitioner rights guaranteed under Art. 14, 19(1)(g), 265 and 301  of
the Constitution  of  India  and  consequently  issue  a  writ  of  Mandamus
directing the respondents not to interfere with the export of  R.S.  by  the
petitioners and pass such order or orders as this Hon’ble  Court  deems  fit
and proper.”

The major premise of the  Appellants  is  that  rectified  spirit/industrial
alcohol is outside the purview of the Excise Act; that the  State  can  only
legislate with regard to alcohol which is fit  for  human  consumption;  and
that  since  rectified  spirit  is  not  potable,  it  is  only  the   Union
Government, which is competent to legislate this activity.

4     The High Court, upon a detailed examination of the existing case  law,
found that the State cannot charge Excise duty on alcohol that  is  not  fit
for human consumption but it is entitled to charge a fee on a quid  pro  quo
basis  in  case  it  renders  any  monitoring  service.   Upon   considering
Synthetics & Chemicals Limited vs. State of U.P. (1990) 1 SCC 109, the  High
Court  held    that  where  rectified  spirit  is  removed  or  cleared  for
industrial purposes, the levy of Excise duty and all other controls  are  to
be with the Union, but where the use of rectified  spirit  is  intended  for
the manufacture of potable  alcohol,  State  Governments  are  competent  to
impose  any  levies.   This  calls  for  joint  control,   supervision   and
monitoring over the process of manufacture, use and  disposal  of  rectified
alcohol, which was in fact being carried out by  the  Excise  Department  of
the State Government.  It was thus well  within  the  powers  of  the  State
Government to impose a fee to cover its  expenses.   The  High  Court  noted
that  adding  water  to  rectified  spirit  would  make  it  fit  for  human
consumption, so the responsibility on the State was tremendous  and  onerous
even with  regard  to  liquor  meant  for  industrial  purposes.  The  State
Government was held to be entitled to post its staff at distilleries and  to
levy a reasonable regulatory fee to defray the expenses of such  staff.   No
data was laid down by either party based on which the Court could come to  a
conclusion on whether the fee levied was reasonable or  not.   It  was  held
that the amount levied from the Appellants was in the nature of  a  fee  for
services rendered,  and  not  by  way  of  tax.   The  writ  petitions  were
therefore dismissed.

5     The Appellants have now filed these  Appeals  before  us,  challenging
once again the Constitutional validity of the 1971  Rules  insofar  as  they
are applicable to industrial alcohol, and  in  the  alternative,  contending
that the fee charged does not satisfy the test of  quid  pro  quo.  We  have
contemporaneously considered the circumstances in which  administrative  and
service charges can be recovered  by  a  State  Government  along  with  the
relevant case law in detail in our Judgment  of  even  date  in  the  Appeal
titled as State of Tamil Nadu vs. Tvl. South Indian Sugar Mills,  and  shall
therefore  not  repeat  our  reasoning  herein  in  interest   of   avoiding
prolixity.  We  merely  reiterate  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.    Rules  such  as   the
administrative fee postulated in Rule 4  (supra)  are  essential  to  defray
expenses incurred by State Governments to prevent the illegal conversion  of
industrial alcohol to potable alcohol.  The quantum of fee  levied  has  not
been challenged either before us or before the High Court and  no  empirical
evidence in this regard is available  in  the  Appeal  records.    We  shall
accordingly desist from commenting on whether the various heads of  fee  are
excessive, thereby metamorphosing them from a fee to a tax.  The  fact  that
the export permit fee was reduced from Rs. 10 to Rs. 3 and finally to Re.  1
per bulk litre indicates that there has been due application of mind by  the
Respondent State in deciding the quantum of fee.

6      In deciding the vires of Rule 15, the discussion  must  consider  the
distinguishing features between a  fee  and  a  tax.   An  analysis  of  the
Judgments of this Court will reveal that, inter alia, a  tax  is  levied  as
part of a common  exaction,  whereas  a  fee  is  payment  towards  services
rendered. Thus a “fee” ostensibly collected to prevent nefarious  activities
such as smuggling and countryside brewing, which have no  causal  connection
with the production of industrial alcohol, would thus  metamorphose  into  a
tax.  It appears to us that that the 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.  It is thus clearly,  in  reality,
a tax. Rule 15(2), which holds that export will only be allowed if there  is
a surplus in the State evidences the apprehension of  the  State  Government
that it may run short of industrial alcohol.  This sub-Rule, as well  others
such as Rule 15(1) which imposes the requirement of  an  export  permit  and
Rule 15(3)(ii) which adds the requirement of an  indemnity  bond,  are  also
outside the jurisdiction and powers of State Governments, as  their  purpose
is clearly not  to  prevent  industrial  alcohol  from  being  diverted  and
converted to potable alcohol; their purpose  is  to  regulate,  control  and
discourage the export of industrial alcohol.   The imposition of  a  tax  to
regulate export under its own head is entirely feasible,  if  introduced  by
the competent authority, i.e. the Union Government as held in  Synthetics  &
Chemicals Limited.   However, this is not the scenario before us,  both  for
the want of vires and for the ambiguity behind the intention of  this  Rule.
The Respondent State has given no explanation to justify this Rule, and  has
not shown any service rendered in return.

7     We uphold the 1971 Rules and find that the Respondent  State  had  the
these impositions partake of a totally different character, transferring  it
power to enact these Rules.  However, we strike down Rule  15  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,
into a tax.   These Appeals are disposed of in these terms.

                                                 [VIKRAMAJIT SEN]

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

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