REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL No. 5020 OF 2005
M/S K.C.P. LTD. … APPELLANT
VERSUS
GOVERNMENT OF A.P. & ORS … RESPONDENTS
WITH
CIVIL APPEAL NOS.5021-5022 OF 2005
J U D G M E N T
VIKRAMAJIT SEN,J.
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
triplicate.
(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.
...............................................J.
[VIKRAMAJIT SEN]
...............................................J.
[SHIVA KIRTI SINGH]
New Delhi;
August 12, 2015.
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL No. 5020 OF 2005
M/S K.C.P. LTD. … APPELLANT
VERSUS
GOVERNMENT OF A.P. & ORS … RESPONDENTS
WITH
CIVIL APPEAL NOS.5021-5022 OF 2005
J U D G M E N T
VIKRAMAJIT SEN,J.
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
triplicate.
(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.
...............................................J.
[VIKRAMAJIT SEN]
...............................................J.
[SHIVA KIRTI SINGH]
New Delhi;
August 12, 2015.
