excise duty = the appellants were entitled to refund of Education Cess and Higher Education Cess which was paid along with excise duty once the excise duty itself was exempted from levy.

REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NOS. 2781-2790 OF 2010
M/S. SRD NUTRIENTS PRIVATE LIMITED .....APPELLANT(S)
VERSUS
COMMISSIONER OF CENTRAL EXCISE
GUWAHATI .....RESPONDENT(S)
W I T H
CIVIL APPEAL NO. 812 OF 2013
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J U D G M E N T
A.K. SIKRI, J.
Leave granted in the special leave petitions.
Civil Appeal Nos. 2781-2790 of 2010 & Ors. Page 4 of 27
2) In order to encourage the business community to set up
manufacturing units in industrially backward areas like the
North-Eastern States, viz. Assam, Jammu & Kashmir, Meghalaya,
Tripura, Mizoram, Manipur, Nagaland, Arunachal Pradesh as well
as Sikkim, notifications were issued by the Excise Department,
Government of India, exempting goods specified in the First
Schedule to the Central Excise Tariff Act, 1985 (other than those
mentioned in the annexure to these notifications) from payment of
excise duty in respect of the goods manufactured and cleared
from units located in the aforesaid States. The methodology
which was adopted and prescribed in these notifications was that
the manufacturer was initially supposed to pay the excise duty
leviable on such goods at the time of clearance as per the Tariff
Act and thereafter claim the refund thereof. It was also
mentioned in these notifications that exemption contained therein
shall be available subject to the condition that the manufacturer
first utilises whole of the CENVAT credit available to him on the
last date of the month under consideration for payment of duty of
goods cleared during such period and was to pay only the
balance amount in cash. It is this balance amount which was
refundable to him. Insofar as payment of the excise duty after
availing the CENVAT credit and refund thereof subsequently is
Civil Appeal Nos. 2781-2790 of 2010 & Ors. Page 5 of 27
concerned, there is no dispute about the same. We are
concerned with altogether different aspect which is associated
with the aforesaid notification granting exemption from payment
of excise duty.
3) It so happened that vide Finance Act, 2004, the Education Cess
and Higher Education Cess were also imposed, which are
surcharge on the excise duty. These Education Cess and Higher
Education Cess were also levied and collected from the
manufacturers who had set up their units in the aforesaid areas,
along with the excise duty. However, while refunding the excise
duty paid by these manufacturers, the Education Cess and the
Higher Education Cess that were paid by the manufacturers
along therewith were not refunded. The dispute, thus, which
arises for consideration in these appeals is as to whether the
Education Cess and Higher Education Cess which were paid
along with the excise duty was also liable to be refunded along
with the central excise duty in terms of the exemption
notifications. This is the issue which is common in all these
appeals and the factual background in which the matter has
travelled up to this Court is also almost the same. Therefore, for
the sake of convenience, purpose would be served in tracing the
factual events from Civil Appeal Nos. 2781-2790 of 2010.
Civil Appeal Nos. 2781-2790 of 2010 & Ors. Page 6 of 27
4) The appellant in these appeals is M/s. SRD Nutrients Private
Limited (hereinafter referred to as the ‘assessee’). It is engaged
in the manufacture and clearance of Malted Milk Food (Horlicks)
using sweetened milk powder since April 12, 2008 and has set up
its factory in the State of Assam. This unit is duly registered with
the Central Excise Department.
5) Industrial Policy dated April 01, 2007 for the North-Eastern States,
including the State of Assam, was announced by the Ministry of
Commerce and Industry (Department of Industrial Policy and
Promotion), Government of India to set up a special package for
the North-Eastern States to accelerate industrial development of
the State. As per this package, new industrial units were entitled
to 100% excise duty exemption for a period of 10 years from the
date of commencement of commercial production. Pursuant to
the said Industrial Policy, the Central Government issued
Notification No. 20/2007-Ex. dated April 25, 2007 granting
exemption from duties of excise levied under the Central Excise
Act, 1944 (hereinafter referred to as the ‘Act’) read with Section
3(3) of the Additional Duties of Excise (Goods of Special
Importance) Act, 1957 and Section 3(3) of the Additional Duties of
Excise (Textiles & Textile Articles) Act, 1978 to goods cleared
Civil Appeal Nos. 2781-2790 of 2010 & Ors. Page 7 of 27
from the notified areas within the North-Eastern States. The said
Notification provided that the assessee would be entitled to
refund of duty paid other than the duty paid by way utilization of
CENVAT credit under the CENVAT Credit Rules, 2004.
Reproduction of the first three paragraphs of this Notification
would be sufficient, which are as follows:
“NOTIFICATION: 20/2007-C.E. dated 25-Apr-2007
North-East – Exemption to all goods, except as
specified, cleared from Assam, Tripura,
Meghalaya, Mizoram, Manipur, Nagaland,
Arunachal Pradesh or Sikkim from duty paid other
than by utilisation of Cenvat Credit.
In exercise of the powers conferred by sub-section
(1) of section 5A of the Central Excise Act, 1944 (1 of
1944), the Central Government, being satisfied that it
is necessary in the public interest so to do, hereby
exempts the goods specified in the First Schedule to
the Central Excise Tariff Act, 1985 (5 of 1986) other
than those mentioned in the Annexure and cleared
from a unit located in the States of Assam or Tripura or
Meghalaya or Mizoram or Manipur or Nagaland or
Arunachal Pradesh or Sikkim, as the case may be,
from so much of the duty of excise leviable thereon
under the said Act as is equivalent to the amount of
duty paid by the manufacturer of goods other than the
amount of duty paid by utilization of CENVAT credit
under the CENVAT Credit Rules, 2004.
2. In cases where all goods produced by a
manufacturer are eligible for exemption under this
notification, the exemption contained in this notification
shall be available subject to the condition that, the
manufacturer first utilises whole of the CENVAT credit
available to him on the last day of the month under
consideration for payment of duty on goods cleared
during such and pays only the balance amount in
cash.
Civil Appeal Nos. 2781-2790 of 2010 & Ors. Page 8 of 27
3. The exemption contained in this notification shall
be given effect to in the following manner, namely:-
(a) the manufacturer shall submit a
statement of the duty paid other than the
amount of duty paid by utilisation of
CENVAT credit under the CENVAT credit
Rules, 2004, to the Assistant
Commissioner or the Deputy
Commissioner of Central Excise, as the
case may be, by the 7th of the next month
in which the duty has been paid other
than the amount of duty paid by utilization
of CENVAT credit under the CENVAT
Credit Rules, 2004;
(b) the Assistant Commissioner of Central
Excise or the Deputy Commissioner of
Central Excise, as the case may be, after
such verification, as may be deemed by
utilisation of CENVAT credit under the
CENVAT Credit Rules, 2004, during the
month under consideration to the
manufacturer by the 15th of the next
month.
Provided that in cases, where the
exemption contained in this notification is
not applicable to some of the goods
produced by a manufacturer, such refund
shall not exceed the amount of duty paid
less the amount of the CENVAT credit
availed of, in respect of the duty paid on
the inputs used in or in relation to the
manufacture of goods cleared under this
notification;
(c)if there is likely to be any delay in the
verification, Assistant Commissioner of
Central Excise or the Deputy
Commissioner of Central Excise, as the
case may be, shall refund the amount on
provisional basis by the 15th of the next
month to the month under consideration
and thereafter may adjust the amount of
refund by such amount as may be
necessary in the subsequent refunds
Civil Appeal Nos. 2781-2790 of 2010 & Ors. Page 9 of 27
admissible to the manufacturer.”
6) It may be mentioned at this stage that power to grant exemption
from payment of excise duty is conferred upon the Central
Government vide Section 5A of the Act, which authorises the
Central Government to exempt generally, either absolutely or
subject to such conditions to be fulfilled, before or after removal,
as may be specified in the notification, excisable goods of any
specified description from the whole or any part of duty of excise
leviable there, if the Central Government is satisfied that it is
necessary, in public interest, so to do. The notifications in
question have been issued in exercise of the said power
conferred by sub-section (1) of Section 5A of the Act. Thus, the
central excise duty, which is payable at the rates specified in the
Tariff Act, can be exempted, in respect of specified goods, wholly
or partly.
7) As mentioned above, the Parliament levied Education Cess by
Finance (No.2) Act, 2004. Chapter VI of the said Finance Act
deals with Education Cess. Sections 91 to 93 thereof are
relevant and are reproduced below:
“91. Education Cess. – (1) Without prejudice to the
provisions of sub-section (11) of section 2, there shall
be levied and collected, in accordance with the
provisions of this Chapter as surcharge for purposes
Civil Appeal Nos. 2781-2790 of 2010 & Ors. Page 10 of 27
of the Union, a cess to be called the Education Cess,
to fulfil the commitment of the Government to provide
and finance universalisd quality basic education.
(2) The Central Government may, after due
appropriation made by Parliament by law in this
behalf, utilise, such sums of money of the Education
Cess levied under sub-section (11) of section 2 and
this Chapter for the purposes specified in sub-section
(1), as it may consider necessary.
92. Definition. – The words and expressions used in
this Chapter and defined in the Central Excise Act,
1944 (1 of 1944), the Customs Act, 1962 (52 of 1962)
or Chapter V of the Finance Act, 1994 (32 of 1994),
shall have the meanings respectively assigned to
them in those Acts or Chapter, as the case may be.
93. Education Cess on excisable goods. – (1) The
Education Cess levied under section 91, in the case of
goods specified in the First Schedule to the Central
Excise Tariff Act, 1985 (5 of 1986), being goods
manufactured or produced, shall be a duty of excise
(in this section referred to as the Education Cess on
excisable goods), at the rate of two per cent,
calculated on the aggregate of all duties of excise
(including special duty of excise or any other duty of
excise but excluding Education Cess on excisable
goods) which are levied and collected by the Central
Government in the Ministry of Finance (Department of
Revenue), under the provisions of the Central Excise
Act, 1944 (1 of 1944) or under any other law for the
time being in force.
(2) The Education Cess on excisable goods shall be in
addition to any other duties of excise chargeable on
such goods, under the Central Excise Act, 1944 (1 of
1944) or any other law for the time being in force.
(3) The provisions of the Central Excise Act, 1944 (1 of
1944) and the rules made thereunder, including those
relating to refunds and exemptions from duties and
imposition of penalty shall, as far as may be, apply in
relation to the levy and collection of the Education
Cess on excisable goods as they apply in relation to
the levy and collection of the duties of excise on such
goods under the Central Excise Act, 1944 or the rules,
Civil Appeal Nos. 2781-2790 of 2010 & Ors. Page 11 of 27
as the case may be.”
8) As the assessee was denied refund of the Education Cess and
Higher Education Cess, he challenged the order of the Assessing
Officer by filing appeal before the Commissioner of Central
Excise and Customs (Appeals), Guwahati. However, these
appeals were dismissed by the Commissioner and the order of
the Commissioner has been upheld by the Customs Excise &
Service Tax Appellate Tribunal (CESTAT) by the impugned
judgment. Said order is the subject matter of these appeals.
9) It may be pointed out at the outset that in its brief order, the
Service Tax Appellate Tribunal (hereinafter referred to ‘Tribunal’)
has taken note of two of its earlier judgments which were relied
upon by the appellant. These are :
(i) Bharat Box Factory Ltd. v. Commissioner of C. Ex.,
Jammu1
(ii)Cyrus Surfactants Pvt. Ltd. v. Commissioner of Central
Excise, Jammu2
In both these decisions, the Delhi Bench of the Tribunal had
opined that the Education cess and Higher Education Cess were
also refundable along with the excise duty.
1 2007 (214) ELT 534 (Tri.-Del.)
2 2007 (215) ELT 55 (Tri.-Del.)
Civil Appeal Nos. 2781-2790 of 2010 & Ors. Page 12 of 27
10) The Revenue, on the other hand, had relied upon another
judgment of Tribunal in the case of Commissioner of Central
Excise, Jammu v. Jindal Drugs Ltd.3
. In this judgment which
was also rendered by the Delhi Bench of the Tribunal, a contrary
view has been taken, viz., the Excise Department was under no
obligation to refund the Education Cess and Higher Education
Cess as the notification exempted only the excise duty and,
therefore, it is the excise duty which was to be refunded.
11) The CESTAT, by impugned judgment, has preferred to
follow the view taken by the Tribunal in Jindal Drugs Ltd. case
on the ground that it is later in point of time in which earlier
judgment in Cyrus Surfactants Pvt. Ltd. case has also been
considered.
12) In the aforesaid backdrop, learned counsel for the appellant
was vehement in his criticism of the view taken by the Tribunal.
His first submission was that in case the Division Bench of the
Tribunal in Jindal Drugs Ltd. decided to differ from the view
taken by earlier Division Bench in Cyrus Surfactants Pvt. Ltd. ,
an appropriate course of action was to refer the matter to the
larger Bench. That apart, submitted the learned counsel, the view
3 2011 (267) ELT 653 (Tri.-Del.)
Civil Appeal Nos. 2781-2790 of 2010 & Ors. Page 13 of 27
taken in Cyrus Surfactants Pvt. Ltd. needs to be approved. In
this behalf, he argued that reading of the exemption Notification
dated April 25, 2007 would make it clear that there was 100%
exemption granted by the said Notification from levy of excise
duty which was clear from the reading of para 1 thereof. Para 2
of the Notification simply laid down the mechanism as to how the
said exemption was to be applied, with the specification that the
duty was to be paid first after adjusting the CENVAT credit and
thereafter claim for refund was to be made. He further submitted
that Education Cess was levied @ 2% on the excise duty. When
the levy of excise duty itself was exempted, the Education Cess
also got exempted thereby. He also submitted that Education
Cess is in the nature of surcharge and in the absence of the
primary tax (i.e. Excise), the question of payment of any
surcharge thereupon would not arise. He also referred to Circular
No. 134/3/211/ST dated April 08, 2011 issued by the Excise
Department amply clarifying that since the Education Cess is
levied and collected as percentage of service tax, no Education
Cess would be payable when and wherever service tax is Nil by
virtue of exemption. His plea was that though the aforesaid
Circular was issued in the context of service tax, the principle
accepted therein by the Department would apply in the present
Civil Appeal Nos. 2781-2790 of 2010 & Ors. Page 14 of 27
case also, more so, when Notification dated October 06, 2007
exempting service tax was pari materia. He also pointed out that
under similar circumstances, Income Tax Department has been
refunding the Education Cess. He also argued that in the
scenario where there are two divergent views and two possible
interpretations, one that is in favour of the assessee should be
followed. In support of his aforesaid arguments, apart from
relying upon the reasoning given by the Tribunal in Cyrus
Surfactants Pvt. Ltd., he referred to the judgment of this Court
Assistant Commissioner of Commercial Taxes (Asstt.)
Dharwar v. Dharmendra Trading Company Etc. Etc.4
13) He also relied upon the decision in the case of
Commissioner of Central Excise, Mangalore v. Suzlon wind
International5
rendered by Bangalore Bench of the Tribunal
which had decided the case in favour of the assessee referring to
Circular dated April 04, 2011. Even the Rajasthan High Court has
leaned in favour of the assessee in the case of Banswara
Syntex Ltd. v. Union of India6 holding that since Education Cess
in the form of surcharge is levied and collected, there was no
question of retaining this amount once the excise duty itself got
4 (1998) 3 SCC 570
5 2012-TIOL-1837-CESTAT-BANG
6 2007 (216) ELT 16 (Raj.)
Civil Appeal Nos. 2781-2790 of 2010 & Ors. Page 15 of 27
exempted.
14) He also read out the following passage from the judgment
of this Court in R.S. Joshi, Sales Tax Officer, Gujarat and
Others v. Ajit Mills Limited and Another7
:
“34. Section 37(1) uses the expressions, in relation to
forfeiture, “any sum collected by the person . . . shall
be forfeited'. What does “collected” mean here? Words
cannot be construed effectively without reference to
their context. The setting colours the sense of the
word. The spirit of the provision lends force to the
construction that “collected” means “collected and kept
as his” by the trader. If the dealer merely gathered the
sum by way of tax and kept it in suspense account
because of dispute about taxability or was ready to
return it if eventually it was not taxable, it was not
collected. “Collected', in an Australian Customs Tariff
Act, was held by Griffith, C.J., not “to include money
deposited under an agreement that if it was not legally
payable it will be returned' : (Words & Phrases, p.274).
We therefore semanticise “collected” not to cover
amounts gathered tentatively to be given back if found
non-exigible from the dealer.”
15) Rebutting the aforesaid arguments of the appellants, Mr.
Yashank P. Adhyaru, learned senior counsel appearing for the
Revenue commended this Court to approve the view taken by the
Tribunal in Jindal Drugs Ltd. case which has been accepted by
the High Court as well. His argument was that the exemption
notification exempts only the excise duty. However, duty has to
be paid first and along with that Education Cess and Higher
Education Cess also become payable. He also emphasised the
7 AIR 1977 SC 2279 : (1977) 40 STC 497
Civil Appeal Nos. 2781-2790 of 2010 & Ors. Page 16 of 27
fact that excise duty is payable under the Excise Act, Education
Cess and Higher Education Cess are payable under the Finance
Act, by virtue of Section 11 thereof. Therefore, the mandate and
source of charging Education Cess is altogether different. The
exemption notification which is issued under Section 5A of the
Excise Act could exempt only the excise duty payable under the
said statute and not Education Cess which is payable under a
different statute. He further submitted that since the duty is to be
paid first, education cess also becomes payable. When it comes
to refund of the excise duty in terms of Notification dated April 25,
2007, it is only excise that would be refunded and not the cess.
He also argued that circular dated April 08, 2011 was not binding
on the Court. His further submission was that even Calcutta High
Court had taken identical view in Biswanath Hosiery Mills Ltd.
& Anr. v. Union of India & Ors.8
.
16) It is clear from the arguments of the counsel for the parties
that divergent views are expressed by the CESTAT as well as
High Courts. Even one Bench of the same Tribunal has differed
from its earlier Division Bench decision. In this scenario, it
becomes important as to how the Department has viewed the
position regarding Education Cess and Higher Education Cess
8 (2017) 346 ELT 353
Civil Appeal Nos. 2781-2790 of 2010 & Ors. Page 17 of 27
which is payable as surcharge on the excise duty, once the
excise duty is exempted. Two Circulars are relevant in this
behalf, one is Circular dated August 10, 2004 which clarifies that
Education Cess is part of excise. In this Circular, certain
clarifications are given by the Ministry of Finance (Department of
Revenue), Government of India and relevant portion thereof
reads as under:
“Subject: Issues relating to imposition of
Education Cess on excisable goods and on
imported goods, as pointed out by the trade and
the field formations-reg.
The undersigned is directed to state that
subsequent to Budget 2004 announcements, a
number of representations/ references have been
received from the trade as well as from the field
formations pertaining to imposition of Education Cess
on excisable goods and on imported goods. The
points raised and the clarifications thereon are as
follows.
Issue No. (1): Whether Education Cess on
excisable goods is leviable on goods manufactured
prior to imposition of Cess but cleared after imposition
of such cess?
Clarification: Education Cess on Excisable goods
is a new levy. In similar cases, it has been held by the
Supreme Court that if a levy is not there at the time
the goods are manufactured or produced in India, it
cannot be levied at the stage of removal of the said
goods. Thus, Education Cess is not leviable on
excisable goods manufactured prior to imposition of
cess but cleared after imposition of such cess.
Issue No. (2): Whether goods that are fully
exempted from excise duty/customs duty or are
cleared without payment of excise duty/customs duty
(such as clearance under bond or fulfillment of certain
Civil Appeal Nos. 2781-2790 of 2010 & Ors. Page 18 of 27
conditions) would be subjected to Cess
Clarification: The Education Cess is leviable at the
rate of two per cent of the aggregate of all duties of
excise/customs (excluding certain duties of customs
like anti dumping duty, safe guard duty etc.), levied
and collected. If goods are fully exempted from
excise duty or customs duty, are chargeable to NIL
duty or are cleared without payment of duty under
specified procedure such as clearance under bond,
there is no collection of duty. Thus, no education cess
would be leviable on such clearances. In this regard,
letter D.O. No. 605/54/2004-DBK, dated 21st July,
2004 issued by Member (Customs) may also be
referred to.”
17) Other Circular is dated April 08, 2011 issued by the Central
Board of Excise and Customs, New Delhi on the subject
“education cess and secondary and higher education cess-reg.”.
We would like to reproduce this Circular in its entirety:
“Education Cess and Secondary and Higher
Education Cess also exempted when notifications
exempt whole of Service tax
Circular No. 134/3/2011-S.T., dated 8-4-2011
F.No. 354/42/2011-Tru
Government of India
Ministry of Finance (Department of Revenue)
Central Board of Excise & Customs, New Delhi
Subject : Education Cess and Secondary and Higher
Education Cess – Reg.
Representations have been received from the field
formations, seeking clarification regarding the
applicability of service tax exemption to Education
Cess (refers to both Education Cess leviable under
Finance (No.2) Act, 2004 and Secondary and Higher
Education Cess leviable under Finance Act, 2007),
under notifications where 'whole of service tax'
stands.exempted. Apparently the doubt arises in the
Civil Appeal Nos. 2781-2790 of 2010 & Ors. Page 19 of 27
context of Tribunal's Order in the matter of MIs.
Balasore Alloys Ltd. Vs CCE, Customs and Service
Tax, BBSR-I (2010-TIOL-16S9-CESTAT-KOL) =
2010(20)W.T.R. 506 (Tribunal).
2. The issue has been examined. Though Tribunal's
Order referred above is in favor of revenue, it is
inconsistent with the policy intention of the
Government to exempt education cess in addition to
service tax, where 'whole of service tax' stands
exempted. According to section 95(1) of Finance
(No.2) Act, 2004 and section 140(1) of Finance Act,
2007, Education Cess and Secondary and Higher
Education Cess are leviable and collected as service
tax, and when whole of service tax is exempt, the
same applies to education cess as well. Since
Education Cess is levied and collected as percentage
of Page 1 of 2 service tax, when and wherever service
tax is NIL by virtue of exemption, Educ uon Cess
would also be NIL.
3. This being the principle, field formations are
directed not to initiate proceedings to recover the
education cess, where 'whole of service tax' stands
exempted under the notification. Extending the same
principle, where education cess has been refunded to
exporters along with service tax, by virtue of
exemption notifications where 'whole of service tax' is
exempt, the same need not be recovered.
4. Field formations may be instructed accordingly.
5. Please acknowledge the receipt ofthis circular:
Hindi version to follow.
18) No doubt, it clarified the position in relation to the exemption
from payment of service tax that was given vide Notification No.
41/2007-SCT dated August 06, 2007. We have gone through that
Notification as well, which is pari material with Notification dated
April 25, 2007. What is important is that this Circular dated April
Civil Appeal Nos. 2781-2790 of 2010 & Ors. Page 20 of 27
08, 2011 refers to the judgment of the Tribunal in Balasore Alloys
Ltd. v. CCE, Customs and Service Tax, BBSR-I9 which was a
decision rendered in favour of the Revenue as it was held therein
that the Education Cess and Higher Education Cess would not be
refunded while giving back the exempted service tax.
Notwithstanding the same, the Circular mentions that the said
order of the Tribunal is in consistent with the policy intention of
the Government to exempt Education Cess in addition to service
tax, ‘whole on service tax’ stands exempted.
19) During arguments, when these circulars were referred to
and relied upon by the learned counsel for the assessees, Mr.
Adhyaru had asked for some time to seek instructions from the
Department in this behalf. In order to give him a chance to seek
the clarification, matter was directed to be listed for direction on
October 10, 2017. On that day, Mr. Adhyaru produced the copy
of letter dated October 4, 2017 addressed by the Office of the
Commissioner of Central Goods & Services Tax to The
Commissioner, Directorate of Legal Affairs, Central Board of
Excise & Customs. In this communication, it is simply stated that
refund of central excise duty has been provided by exemption
Notification dated July 8, 1999 and dated April 25, 2007 to the
9 (2010-TIOL-1659-CESTAT-KOL)
Civil Appeal Nos. 2781-2790 of 2010 & Ors. Page 21 of 27
manufacturing units in the North Eastern Region to give effect to
the North Eastern Industrial Promotion Policy 1997 (NEIPP 97).
There are no provisions for any refund/exemption of service tax.
It is further stated that in respect of income tax, exemption is
granted under Section 80IC of the Income Tax Act. When we
confronted the learned senior counsel with the fact that it does
not give specific answer to the query raised, the learned senior
counsel took further time to file written submissions by October
23, 2017. However, till date, no such written submissions are
filed nor any clarification provided.
20) One aspect that clearly emerges from the reading of these
two circulars is that the Government itself has taken the position
that where whole of excise duty or service tax is exempted, even
the Education Cess as well as Secondary and Higher Education
Cess would not be payable. These circulars are binding on the
Department.
21) Even otherwise, we are of the opinion that it is more rational
to accept the aforesaid position as clarified by the Ministry of
Finance in the aforesaid circulars. Education Cess is on excise
duty. It means that those assessees who are required to pay
excise duty have to shell out Education Cess as well. This
Civil Appeal Nos. 2781-2790 of 2010 & Ors. Page 22 of 27
Education Cess is introduced by Sections 91 to 93 of the Finance
(No.2) Act, 2004. As per Section 91 thereof, Education Cess is
the surcharge which the assessee is to pay. Section 93 makes it
clear that this Education Cess is payable on ‘excisable goods’ i.e.
in respect of goods specified in the first Schedule to the Central
Excise Tariff Act, 1985. Further, this Education Cess is to be
levied @ 2% and calculated on the aggregate of all duties of
excise which are levied and collected by the Central Government
under the provisions of Central Excise Act, 1944 or under any
other law for the time being in force. Sub-section (3) of Section
93 provides that the provisions of the Central Excise Act, 1944
and the rules made thereunder, including those related to refunds
and duties etc. shall as far as may be applied in relation to levy
and collection of Education Cess on excisable goods. A conjoint
reading of these provisions would amply demonstrate that
Education Cess as a surcharge, is levied @ 2% on the duties of
excise which are payable under the Act. It can, therefore, be
clearly inferred that when there is no excise duty payable, as it is
exempted, there would not be any Education Cess as well,
inasmuch as Education Cess @ 2% is to be calculated on the
aggregate of duties of excise. There cannot be any surcharge
when basic duty itself is Nil.
Civil Appeal Nos. 2781-2790 of 2010 & Ors. Page 23 of 27
22) It is rightly pointed out by the learned counsel for the
appellants that the CESTAT in the earlier two judgments given in
Bharat Box Factory Ltd. and Cyrus Surfactants Pvt. Ltd. held
that Education Cess and Higher Education Cess would also
refundable along with excise duty and in view thereof, another
co-ordinate Bench of CESTAT could not take a contrary view in
Jindal Drugs Ltd. Judicial discipline warranted reference of the
matter to the Larger Bench which it did not do. In the impugned
judgment, while preferring to follow the view taken in Jindal
Drugs Ltd., the Tribunal has not given any reasons for adopting
this course of action. The Rajasthan High Court in the case of
Banswara Syntex Ltd. while holding that surcharge taken in the
form of Education Cess shall also be refundable has given the
following reasons in support of the said view:
“15. The very fact that the surcharge is collected as
part of levy under three different enactments goes to
show that scheme of levy of Education Cess was by
way of collecting special funds for the purpose of
Government project towards providing and financing
universalised quality of basic education by enhancing
the burden of Central Excise Duty, Customs Duty, and
Service Tax by way of charging surcharge to be
collected for the purpose of Union. But, it was made
clear that in respect of all the three taxes, the
surcharge collected along with the tax will bear the
same character of respective taxes to which surcharge
was appended and was to be governed by the
respective enactments under which Education Cess in
the form of surcharge is levied & collected.
Civil Appeal Nos. 2781-2790 of 2010 & Ors. Page 24 of 27
16. Apparently, when at the time of collection,
surcharge has taken the character of parent levy,
whatever may be the object behind it, it becomes
subject to the provision relating to the Excise Duty
applicable to it in the manner of collecting the same
obligation of the tax payer in respect of its discharge
as well as exemption concession by way of rebate
attached with such levies. This aspect has been made
clear by combined reading of sub-sections (1), (2) &
(3) of Section 93.
xxx xxx xxx
18. The Explanation appended to Notification dated
26.6.2001 included within the ambit of Excise Duty
any special Excise Duty collected under any Finance
Act when under Finance Act, 2004 it was ordained that
Education Cess to be collected as surcharge on
Excise Duty payable on excisable goods and shall be
a Duty of Excise, it became a special Duty of Excise
by way of Education Cess chargeable and collected
under Finance Act, 2004 and fell within the ambit of
clause (3) of Explanation appended to Notification
dated 26/6/2001. Consequently, rebate became
available on collection of surcharge on Excise Duty
under Finance Act, 2004 in terms of existing
Notification dated 26/6/2001 immediately. Later
Notification including the Education Cess in
enumerative definition in the circumstances was only
clarificatory and by way of abandoned caution, but not
a new rebate in relation to Excise Duty or any part
thereof as statutorily pronounced as well as specified
Excise Duty levied and collected under the Finance
Act.”
We are in agreement with the aforesaid reasons accorded
by the Rajasthan High Court, since it is in consonance with the
legal principle enunciated by this Court. For this purpose, we
may refer to the judgment in the case of Collector of Central
Excise, Patna v. Tata Engineering and Locomotive Co.10
In
10 1997 (92) ELT 303 (SC)
Civil Appeal Nos. 2781-2790 of 2010 & Ors. Page 25 of 27
that case, issue pertained to valuation of cess which was levied
@ 1/8 per cent of ad valorem ‘value’ of the central excise duty.
The Court held that the calculation of 1/8 per cent ad valorem of
the motor vehicle for the purposes of the levy and collection of the
automobile cess must be made that was being calculated since
automobile cess was to be levied and calculated as if it was
excise duty. As a fortiorari, the Education Cess and Higher
Education Cess levied @ 2% of the excise duty would partake the
character of excise duty itself.
Insofar as judgment of Calcutta High Court in Biswanath
Hosiery Mills Ltd. case is concerned, we find that the same
would have no bearing in the present case. In the said case,
cess was payable under Section 5A of the Textiles Committee
Act, 1963. After going through the provisions of Textiles
Committee Act, 1963 and the Textile’s Committee (Cess) Rules,
1975, the High Court found that as per the scheme of Textiles
Committee Act and the rules framed therein, levy of cess was
independent of excise under the Act which was a complete code
containing all the provisions relating to levy, collection, exemption
and application of cess. Therefore, even the legislative
intendment underlying Textiles Committee (Amendment) Act and
rules read with the preamble, aims and objects of the Act was
Civil Appeal Nos. 2781-2790 of 2010 & Ors. Page 26 of 27
clearly discernable, namely, the legislature intended to levy the
cess under the Act independent of and in addition to the excise
duty which was payable under the Central Excise and Salt Act,
1944.
23) It is also trite that when two views are possible, one which
favours the assessees has to be adopted.
24) For the aforesaid reasons, we allow these appeals and hold
that the appellants were entitled to refund of Education Cess and
Higher Education Cess which was paid along with excise duty
once the excise duty itself was exempted from levy. There shall,
however, be no order as to cost.
.............................................J.
(A.K. SIKRI)
.............................................J.
(ASHOK BHUSHAN)
NEW DELHI;
NOVEMBER 10, 2017
Civil Appeal Nos. 2781-2790 of 2010 & Ors. Page 27 of 27

excise duty = the mechanical mixing of polymer with heated bitumen does not amount to manufacture of a new commercially identifiable product and therefore, is not exigible to Excise duty under the Act. =We therefore, hold that PMB or CRMB cannot be treated as bituminous mixtures falling under CSH 27150090 and shall continue to be classified under CSH 27132000 pertaining to tariff for petroleum bitumen.

REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NOS. 4055-4056 OF 2009 COMMISSIONER OF CENTRAL EXCISE, -- APPELLANT BANGALORE-II VERSUS M/S OSNAR CHEMICAL PVT. LTD. -- RESPONDENT WITH CIVIL APPEAL NO. 5633 OF 2009 AND CIVIL APPEAL NO. 7142 OF 2010 JUDGMENT D.K. JAIN, J.: 1. This batch of appeals by the revenue, under Section 35L(b) of the Central Excise Act, 1944 (for short "the Act") arises out of final orders dated 23rd December, 2008 in Appeal No. E/379/2007; 25th September, 2008 in Appeal Nos. Excise/522 & 523/2007 and 28th October, 2009 in Appeal No. E/225/2009 1 passed by the Customs, Excise & Service Tax Appellate Tribunal South Zonal Bench, Bangalore (for short "the Tribunal"). By the impugned orders in cross-appeals by the revenue and the assessee, the Tribunal has held that the mechanical mixing of polymer with heated bitumen does not amount to manufacture of a new commercially identifiable product and therefore, is not exigible to Excise duty under the Act. 2. Since these three appeals involve a common question of law, these are being disposed of by this common judgment. However, in order to appreciate the controversy, the facts emerging from C.A. Nos. 4055-4056 of 2009, which was treated as the lead case, are being adverted to. The respondent in this appeal (for short "the assessee") is engaged in the supply of Polymer Modified Bitumen (for short "PMB"). We may note that in one of the appeals (C.A. No.5633/2009), the assessee additionally supplies Crumbled Rubber Modified Bitumen (for short "CRMB"), stated to be a different kind of modifier. The assessee entered into a contract with one M/s Afcons Infrastructure Ltd. (for short "Afcons") for 2 supply of PMB at their work site at Solur Village, Viswanathpura Post, Bangalore. As per the agreement, the base bitumen and certain additives were to be supplied by Afcons to the assessee directly at the site, where the assessee, in its mobile polymer modification plant, was required to heat the bitumen at a temperature of 1600C with the help of burners. To this hot bitumen, 1% Polymer and 0.2% additives were added under constant agitation, for improving its quality by increasing its softening point and penetration. The process of agitation was to be continued for a period of 12 to 18 hours till the mixture becomes homogenous and the required properties were met. The said bitumen in its hot agitated condition was mixed with stone aggregates which was then used for road construction. The resultant product was considered to be a superior quality binder with enhanced softening point, penetration, ductility, viscosity and elastic recovery. 3. `Bitumen' is classifiable under Chapter Sub Heading 271320.00 and `Polymers' are classifiable under Chapter Sub Heading 390190.00 of the Central Excise Tariff Act, 1985 (hereinafter referred to as "the Tariff Act"). The relevant tariff items read as follows: 3 "Tariff Item Description of goods 2713 Petroleum coke, petroleum bitumen and other residues of petroleum oil or of oils obtained from bituminous minerals. 2713 20 00 Petroleum bitumen 2715 Bituminous mixtures based on natural asphalt, on natural bitumen, on petroleum bitumen, on mineral tar or on mineral tar pitch (for example, bituminous mastics, cut backs) 2715 00 90 Other 3901 Polymers of ethylene, in primary forms 3901 90 Other " 4. The assessee had been paying Central Excise duty on the PMB processed at their factory in Mumbai but had not paid the same for the conversion done at the work site. Consequently, a show cause notice was issued to them by the Commissioner of Central Excise, Bangalore (hereinafter referred to as "the Commissioner"), demanding duty in respect of PMB falling under sub-heading 271500.90 of the Tariff Act, for the period from 18th August 2004 to 19th September 2006. The Commissioner adjudicated upon the said show cause notice 4 and vide Order-in-original, dated 23rd April 2007, held that the aforesaid process carried out by the assessee amounted to manufacture of PMB in terms of Section 2(f) of the Act, irrespective of the fact whether such process was carried out on their own account or on job work basis and therefore, was dutiable. He accordingly, confirmed the demand indicated in the show cause notice. Aggrieved thereby, the assessee filed an appeal before the Tribunal. Reversing the decision of the Commissioner, the Tribunal has come to the conclusion that since PMB cannot be bought and sold in the market as it is fit for use only in a molten condition, at a temperature around 1600C and resultantly cannot be stored unless kept in continuous agitated state @ 1000C so as to avoid separation of polymer and bitumen; the process carried out by the assessee does not amount to manufacture. A similar view has been expressed by the Tribunal in other orders which are the subject matter of these appeals by the revenue. 5. Mr. Arijit Prasad, learned counsel appearing for the revenue, vehemently argued that having regard to the nature of the process involved, PMB and CRMB are different from bitumen. According to the learned counsel, ordinary bitumen is heated 5 upto a temperature of 2000C, in the Polymer modification plant; to this heated mixture, polymer is added and samples are taken; if the samples, are found to be satisfactory, additives are added and the PMB is either stored or dispatched. It was submitted that the end products, viz. PMB and CRMB are different from bitumen, inasmuch as polymers and additives are the raw materials consumed in the process of manufacture of the said final products and are therefore, covered by the definition of the term "manufacture" in Section 2(f) of the Act. To buttress his submission that PMB and CRMB are exigible to Excise duty, both falling under a specific entry, learned counsel referred to the Tariff Act, whereunder, while bitumen is classifiable under Chapter Sub heading 271320.00, and polymer is classifiable under Chapter Sub Heading 390190.00, the finished products, PMB and CRMB are classifiable under Chapter Sub Heading 271500.90. In support of his submission that PMB and CRMB are commercially known in the market for being bought and sold and therefore, satisfy the test of marketability which is one of the essential conditions for the purpose of levy of Excise duty, learned counsel commended us to the decisions of this Court in Medley Pharmaceuticals 6 Limited Vs. Commissioner of Central Excise & Customs, Daman1 and Nicholas Piramal India Ltd. Vs. Commnr. Of Central Excise, Mumbai2. It was also urged that Circular No. 88/1/87-CX.3, dated 16th June, 1987, issued by the Department of Revenue, Ministry of Finance, clarifying that a slight modification of the grade or quality of bitumen, brought about by the process of air blowing to duty paid bitumen did not amount to manufacture, was wrongly relied upon by the Tribunal as it had subsequently been modified by Circular No. 88/1/88-CX.3, dated 1st July, 1988, wherein the said department had clarified that duty would be chargeable on blown-grade bitumen. 6. Per contra, learned counsel appearing on behalf of the assessees, led by Mr. S.K. Bagaria, senior advocate, while supporting the decision of the Tribunal, fervently submitted that based on the documents, evidence and materials on record, the Tribunal has found, as a fact, that the process of mixing an insignificant dose of polymer with duty paid bitumen only enhanced the quality of bitumen and did not amount to manufacture and therefore, in the absence of any plea of 1 2011 (263) E.L.T. 641 (SC) 2 2010 (260) E.L.T. 338 (SC) 7 perversity, the finding does not warrant any interference by this Court. In support of the proposition, learned senior counsel placed reliance on the decisions of this Court in Commissioner of Central Excise, Bangalore Vs. Ducksole (I) Ltd. & Ors.3 and Commissioner of Central Excise, Delhi-III Vs. Uni Products India Ltd. & Ors.4. 7. Learned senior counsel vehemently argued that the mechanical process of adding polymer and additives to heated bitumen to bring into existence the so-called new substance, known as PMB, did not amount to `manufacture' in terms of Section 2(f) of the Act. It was explained that by the said process, only the grade or quality of bitumen is improved by raising its softening point and penetration, for improving the quality of the road; but even with the improved quality, bitumen remained bitumen with the same end use. It was the say of the learned counsel that a mere improvement in the quality did not amount to manufacture, as `manufacture' takes place only when there is a transformation of raw materials into a new and different article, having a distinctive name, character and use, which is not the case here as the end use of 3 (2005) 10 SCC 462 4 (2009) 9 SCC 295 8 both the articles remained the same. In support of the proposition, learned senior counsel commended us to a plethora of decisions of this Court, including M/s. Tungabhadra Industries Ltd. Vs. The Commercial Tax Officer, Kurnool5, Commissioner of Central Excise, Gujarat Vs. Pan Pipes Resplendents Limited6, Crane Betel Nut Powder Works Vs. Commissioner of Customs & Central Excise, Tirupathi & Anr.7 and Union of India & Ors. Vs. Delhi Cloth & General Mills Co. Ltd. & Ors.8. 8. It was contended that since the period involved in these appeals is post substitution of clause (f) in Section 2 of the Act by Act 5 of 1986, which gives an extended meaning to the expression "manufacture" by including in terms of sub-clause (ii) to clause (f), any process "which is specified in relation to any goods in the Section or Chapter notes of the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) as amounting to manufacture", the said provision would be applicable. However, wherever the legislature intended to give an extended or artificial meaning to the said expression in 5 1961 (2) SCR 14 : AIR 1961 SC 412 6 (2006) 1 SCC 777 7 (2007) 4 SCC 155 8 1977 (1) ELT (J199) (SC) 9 relation to any goods, it has clearly specified it. According to the learned counsel, since the addition of polymer or additives to the bitumen has not been specified in the Section or Chapter notes of the Tariff Schedule as amounting to manufacture, the amended definition is of no avail to the revenue. In support of the contention, heavy reliance was placed on the decisions of this Court in Commissioner of Central Excise, New Delhi-I Vs. S.R. Tissues Pvt. Ltd.9 and Shyam Oil Cake Ltd. Vs. Collector of Central Excise, Jaipur10. 9. Relying on the two afore-mentioned Circulars, F.No. 88/1/87- CX.3, dated 16th June 1987 and F.No.88/1/88-CX.3, dated 1st July 1988, issued by the Department of Revenue, Ministry of Finance, clarifying that blown grade bitumen produced by oxidation of straight grade bitumen is not liable to duty; learned senior counsel submitted that the present case is on a much better footing than the blown grade bitumen, inasmuch as, unlike oxidation, where chemical change takes place, in the mixing of polymer and bitumen, no chemical change in bitumen takes place, and therefore, PMB cannot be subjected to Excise duty as a new commercial commodity. Additionally, 9 2005 (186) E.L.T. 385 (SC) 10 2004 (174) E.L.T. 145 (SC) 10 reliance was also placed on Circular No.623/14/2002-CX., dated 25th February, 2002, wherein the Central Board of Excise and Customs has clarified that the process of preparation of Hot Asphalt Mix used in making roads does not amount to manufacture as contemplated under Section 2(f) of the Act. 10. It was argued that merely because bitumen (the basic material) and PMB (the end material) are specified under two different headings, it cannot be presumed that the process of obtaining PMB automatically constituted manufacture, unless in fact there has been a transformation of bitumen into a new and different product or alternatively, the Section Notes or Chapter Notes created a deeming fiction by providing an artificial or extended meaning to the expression `manufacture' in respect of the goods in question. In support of the proposition, learned counsel placed reliance on the decisions of this Court in S.R. Tissues Pvt. Ltd (supra), Commissioner of Central Excise, Chennai-II Vs. Tarpaulin International11, Shyam Oil Cake Ltd. (supra), Commissioner of Central Excise, Mumbai Vs. Lalji Godhoo & Co.12, Commissioner of Central Excise Vs. 11 2010 (256) E.L.T. 481 (SC) 12 2007 (216) E.L.T. 514 (SC) 11 Indian Aluminium Co. Ltd.13 and Hindustan Zinc Ltd. Vs. Commissioner of Central Excise, Jaipur14, wherein it was held that merely because the raw materials and the finished product fall under two different tariff entries, it cannot be presumed that the process of obtaining the finished product from such raw materials automatically constituted manufacture. 11. Learned counsel also strenuously urged that even if it is assumed that the said process amounted to manufacture, still PMB cannot be subjected to excise as it is not commercially marketable. It was argued that for levy of Excise duty, the twin conditions of `manufacture' and `marketability' have to be satisfied cumulatively. In support of the proposition, reliance was placed on the decisions of this Court in Hindustan Zinc Ltd. (supra), Indian Aluminium Co. Ltd. (supra) and Lalji Godhoo & Co. (supra). Learned counsel also contended that the burden to prove that the process in question constitutes manufacture and that the goods so manufactured are marketable as new goods, known to the market, lies on the revenue and the same has not been discharged in the present case. To support the contention, reliance was placed on Lalji 13 (2006) 8 SCC 314 14 (2005) 2 SCC 662 12 Godhoo & Co. (supra), Metlex (I) (P) Ltd. Vs. Commissioner of Central Excise, New Delhi15; Hindustan Poles Corpn. Vs. Commissioner of Central Excise, Calcutta16 and HPL Chemicals Ltd. Vs. Commissioner of Central Excise, Chandigarh17. 12. Lastly, the learned counsel stressed that in the light of the decisions of this Court in Commissioner of Central Excise & Customs Vs. Tikatar Industries18, Commissioner of Central Excise, Navi Mumbai Vs. Amar Bitumen & Allied Products Private Limited19 and Commissioner of Central Excise, Mumbai Vs. Tikitar Industries20, the issue raised by the revenue in these appeals is no longer res-integra, and therefore, all the appeals deserved to be dismissed. 13. Mr. Laxmi Kumaran, learned counsel appearing for the assessee in Appeal No.7142 of 2010, while adopting the arguments advanced by Mr. Bagaria, emphasised that apart from the fact that in his case the assessee was mixing the additives at the site and not in a factory, the percentage of 15 (2005) 1 SCC 271 16 (2006) 4 SCC 85 17 (2006) 5 SCC 208 18 2006 (202) E.L.T. 215 (S.C.) 19 2006 (202) E.L.T. 213 (S.C.) 20 2010 (253) E.L.T. 513 (S.C.) 13 polymer or additives added to bitumen was inconsequential for determination of the issue at hand, as the predominant test was whether the treated bitumen underwent any change in its characteristics so as to acquire a new commercial identity. In support, learned counsel referred to McNicol & Anr. Vs. Pinch21, wherein Darling J., delivering the concurring majority opinion observed that: "You can only make one thing out of another. I think the essence of making or of manufacturing is that what is made shall be different thing from that out of which it is made." In other words, the counsel submitted that the same test namely, whether the product that emerges is something different from the goods with which it is made, was observed to be the determining factor. If bitumen, after its processing with additives and modifiers, remains bitumen; although it is known as PMB, then no new product emerges. It was asserted that in the present case, the revenue had failed to prove that with the addition of polymer or additives, bitumen had undergone any change in its chemical composition and commercial identity. According to the learned counsel, if the treated bitumen is not kept at a particular 21 1906 (2) K.B. 352 14 temperature, bitumen and polymer get separated and revert to their original state, which shows that no chemical reaction takes place when both the commodities are mixed. 14. Thus, the question which falls for consideration in all these appeals is whether the addition and mixing of polymers and additives to base bitumen results in the manufacture of a new marketable commodity and as such exigible to Excise duty? 15. The expression `manufacture' defined in Section 2(f) of the Act, inter alia includes any process which is specified in relation to any goods in the Section or Chapter Notes of First Schedule to the Tariff Act. It is manifest that in order to bring a process in relation to any goods within the ambit of Section 2(f) of the Act, the same is required to be recognised by the legislature as manufacture in relation to such goods in the Section notes or Chapter notes of the First Schedule to the Tariff Act. Therefore, in order to bring petroleum bitumen, falling under CSH 27132000, within the extended or deemed meaning of the expression `manufacture', so as to fall under CSH 271500900, the process of its treatment with polymers or additives or with any other compound is required to be recognised by the 15 legislature as manufacture under the Chapter notes or Section notes to Chapter 27. 16. Dealing with the aspect of extended or artificial meaning of the expression `manufacture' in Section 2(f) of the Act in Shyam Oil Cake Ltd. (supra), this Court had held as under :- "16. Thus, the amended definition enlarges the scope of manufacture by roping in processes which may or may not strictly amount to manufacture provided those processes are specified in the Section or Chapter notes of the Tariff Schedule as amounting to manufacture. It is clear that the Legislature realised that it was not possible to put in an exhaustive list of various processes but that some methodology was required for declaring that a particular process amounted to manufacture. The language of the amended Section 2(f) indicates that what is required is not just specification of the goods but a specification of the process and a declaration that the same amounts to manufacture. Of course, the specification must be in relation to any goods. XXX XXX XXX XXX XXX XXX XXX XXX 24. In this case, neither in the Section Note nor in the Chapter Note nor in the Tariff Item do we find any indication that the process indicated is to amount to manufacture. To start with the product was edible vegetable oil. Even after the refining, it remains edible vegetable oil. As actual manufacture has not taken place, the deeming provision cannot, be brought into play in the 16 absence of it being specifically stated that the process amounts to manufacture." 17. Then again, in S.R. Tissues Pvt. Ltd. (supra), a question arose whether slitting and cutting of toilet tissue paper on aluminium foil amounted to manufacture under Section 2(f) of the Act. Answering the question in the negative, this Court had observed thus :- "15.....In order to make Section 2(f) applicable, the process of cutting/slitting is required to be recognized by the legislature as a manufacture under the chapter note or the section note to Chapter 48. For example, the cutting and slitting of thermal paper is deemed to be "manufacture" under Note 13 to Chapter 48. Similarly, Note 3 to Chapter 37 refers to cutting and slitting as amounting to manufacture in the case of photographic goods. However, slitting and cutting of toilet tissue paper on aluminium foil has not been treated as a manufacture by the legislature. In the circumstance, Section 2(f) of the Act has no application." 18. In the present case, a plain reading of the Schedule to the Act makes it clear that no such process or processes have been specified in the Section notes or Chapter notes in respect of petroleum bitumen falling under Tariff Item 27132000 or even in respect of bituminous mixtures falling under Tariff Item 27150090 to indicate that the said process amounts to 17 manufacture. Thus, it is evident that the said process of adding polymers and additives to the heated bitumen to get a better quality bitumen, viz. PMB or CRMB, cannot be given an extended meaning under the expression manufacture in terms of Section 2(f) (ii) of the Act. 19. We may now examine whether the process in question, otherwise amounts to manufacture under the expansive Section 2(f) of the Act. It is trite to state that "manufacture" can be said to have taken place only when there is transformation of raw materials into a new and different article having a different identity, characteristic and use. It is well settled that mere improvement in quality does not amount to manufacture. It is only when the change or a series of changes take the commodity to a point where commercially it can no longer be regarded as the original commodity but is instead recognized as a new and distinct article that manufacture can be said to have taken place. In this behalf the following observations by the Constitution Bench of this Court in Tungabhadra Industries (supra) are quite apposite : "In our opinion, the learned Judges of the High Court laid an undue emphasis on the addition by 18 way of the absorption of the hydrogen atoms in the process of hardening and on the consequent inter-molecular changes in the oil. The addition of the hydrogen atoms was effected in order to saturate a portion of the oleic and linoleic constituents of the oil and render the oil more stable thus improving its quality and utility. But neither mere absorption of other matter, nor inter- molecular changes necessarily affect the identity of a substance as ordinarily understood............ The change here is both additive and inter- molecular, but yet it could hardly be said that rancid groundnut oil is not groundnut oil. It would undoubtedly be very bad groundnut oil but still it would be groundnut oil and if so it does not seem to accord with logic that when the quality of the oil is improved in that its resistance to the natural processes of deterioration through oxidation is increased, it should be held not to be oil." (Emphasis supplied by us) 20. In Delhi Cloth & General Mills Co. Ltd. (supra), yet another Constitution Bench, exploring the concept of manufacture echoed the following views : "14......The word `manufacture' used as a verb is generally understood to mean as "bringing into existence a new substance" and does not mean merely "to produce some change in a substance", however minor in consequence the change may be. This distinction is well brought about in a passage thus quoted in Permanent Edition of Words and Phrases, Vol. 26, from an American judgment. The passage runs thus:- "Manufacture implies a change, but every change is not manufacture and yet every change of an article is the result of 19 treatment, labour and manipulation. But something more is necessary and there must be transformation; a new and different article must emerge having a distinctive name, character or use." (Emphasis supplied by us) 21. In S.R. Tissues Pvt. Ltd. (supra), the issue for consideration was whether the process of unwinding, cutting and slitting to sizes of jumbo rolls into toilet rolls, napkins and facial tissue papers amounted to manufacture. While holding that the said process did not amount to manufacture this Court inter-alia, held as under : "12.....However, the end-use of the tissue paper in the jumbo rolls and the end-use of the toilet rolls, the table napkins and the facial tissues remains the same, namely, for household or sanitary use. The predominant test in such a case is whether the characteristics of the tissue paper in the jumbo roll enumerated above is different from the characteristics of the tissue paper in the form of table napkin, toilet roll and facial tissue. In the present case, the Tribunal was right in holding that the characteristics of the tissue paper in the jumbo roll are not different from the characteristics of the tissue paper, after slitting and cutting, in the table napkins, in the toilet rolls and in the facial tissues." (Emphasis supplied by us) 20 22. In Deputy Commissioner Sales Tax (Law), Board of Revenue (Taxes), Ernakulam Vs. Pio Food Packers22, a three Judge Bench of this Court, while deciding whether conversion of pineapple fruit into pineapple slices for sale in sealed cans amounted to manufacture, observed as follows:- "4......Commonly, manufacture is the end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognized as a new and distinct article that a manufacture can be said to take place. Where there is no essential difference in identity between the original commodity and the processed article it is not possible to say that one commodity has been consumed in the manufacture of another. Although it has undergone a degree of processing, it must be regarded as still retaining its original identity. (Emphasis supplied by us)" 23. Having considered the matter on the touchstone of the aforesaid legal position, we are of the view that the process of mixing polymers and additives with bitumen does not amount to manufacture. Both the lower authorities have found as a fact 22 1980 (6) E.L.T. 343 (SC) 21 that the said process merely resulted in the improvement of quality of bitumen. Bitumen remained bitumen. There was no change in the characteristics or identity of bitumen and only its grade or quality was improved. The said process did not result in transformation of bitumen into a new product having a different identity, characteristic and use. The end use also remained the same, namely for mixing of aggregates for constructing the roads. 24. We also find substance in the contention urged on behalf of the assessee that the answer to the issue at hand stands concluded by the dismissal of the Civil Appeals filed by the revenue against the decision of the Tribunal in the case of Collector of Central Excise, Vadodara Vs. Tikitar Industries23. In that case the dispute was whether the process relating to improvement of the quality of bitumen by raising its softening point and penetration amounted to manufacture of a new and different commodity. The process involved in improving the quality of bitumen was oxidation, which converted straight grade bitumen into air blown bitumen. In revenue's appeal the Tribunal had inter-alia held as under : 23 2000 (118) E.L.T. 468 (Tri.) 22 "19. The duty paid bitumen received by the Assessee is boiled so that foreign substances like sand and stone settle down; thereafter the air is blown into the material for improving the quality of the bitumen by raising the softening point and penetration; this makes the bitumen suitable for intended application. It is seen from the process undertaken by the Assessees that only the quality of the product which has already suffered duty is improved......" (Emphasis supplied by us) As aforesaid, revenue's appeal was dismissed by this Court vide order dated 2nd August, 2006 in Tikatar Industries (supra). 25. We therefore, hold that PMB or CRMB cannot be treated as bituminous mixtures falling under CSH 27150090 and shall continue to be classified under CSH 27132000 pertaining to tariff for petroleum bitumen. 26. In view of the opinion expressed above, we deem it unnecessary to deal with the other grounds urged on behalf of both the sides. 27. For the foregoing reasons, no ground is made out for our interference with the impugned orders passed by the Tribunal in all the appeals mentioned in paragraph 1 supra. The 23 appeals, being bereft of any merit, are dismissed accordingly, with no order as to costs. ........................................... (D.K. JAIN, J.) ............................................ (ASOK KUMAR GANGULY, J.) NEW DELHI; JANUARY 13, 2012. RS 24

Excise duty =(i) At what stage does the beer manufactured is exigible to duty? (ii) Whether the procedure adopted by the appellants for ascertaining excess manufacturing wastage (excess deficiency) is proper? =The appeals by the state relate to imposition of duty and additional duty on excess wastage in the brewery. The appeals by the Breweries relate to imposition of duty and additional duty on excess bottling wastage. -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.

                                                                             Reportable 

                     IN THE SUPREME COURT OF INDIA


                      CIVIL APPELLATE JURISDICTION


                   CIVIL APPEAL NOs. 4708-4709 OF 2002




State of U.P. & Ors.                                                ... Appellants


Vs.


M/s Mohan Meakin Breweries Ltd. & Anr.                              ... Respondents




With


Civil Appeal No.4710 of 2002

Civil Appeal No.4711 of 2002

Civil Appeal No.4712 of 2002

Civil Appeal No.4713 of 2002




                                  J U D G M E N T


R. V. Raveendran J.




        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 No.3968 of 1978 and CMWP No.4043 of 1978


filed   by   two   Breweries.   Civil   Appeal   Nos.4710,   4711,   4712   and   4713   of


2002 are filed by the Breweries aggrieved by the said common order dated


15.3.2002, dismissing their writ  petitions - CMWP Nos.1375 of 1978, 3690


                                              2



of   1979,   4136/1978   and   4157/1978.   The   appeals   by   the   state   relate   to


imposition   of  duty   and   additional   duty   on   excess   wastage   in   the   brewery.


The   appeals   by   the   Breweries   relate   to   imposition   of   duty   and   additional


duty on excess bottling wastage.




Civil Appeal No.4708 of 2002




2.     The first respondent (for short the `Brewery') held  a Brewery Licence


issued under section 18(c) of the Uttar Pradesh Excise Act, 1910 (`Act' for


short) in Form-B1 and a Bottling Licence for bottling liquor for sale issued


under section 17(1)(d) of the Act  in Form FL-3. The Brewery was carrying


on  the manufacturing  of beer  and bottling  of  beer in  bond, under the  said


Licences.





3.     The Excise Inspector in-charge of the Brewery maintains a Register of


manufacture   and   issue   of   beer   in   Form   B-16.   The   Excise   Inspector   is


required to examine the accounts of the brewery and take stock of the beer in


hand in the brewery, on the last working day of every calendar month (prior


to 19.7.1975, such examination was required to be done at the end of each


quarter) after all the issues for that day are made. If he found that the actual


quantity of beer in stock in the brewery was less than the quantity shown in


                                               3



the stock account, but the deficiency did not exceed 9%, he had to disregard


the   same   as   allowance   upto   9%   was   permitted   to   cover   the   losses   due   to


evaporation,   sullage   and   other   contingencies.   But   where   the   deficiency


exceeded 9%, he was required to enquire into the cause and submit a report


of the result to the Excise Commissioner in that behalf. The Excise Inspector


in-charge,   was   accordingly   sending   reports   to   the   Excise   Commissioner


whenever   there   was   excess   wastage   in   the   case   of   the   first   respondent


brewery.   The   Excise   Commissioner   issued   show-cause   notice   giving


opportunity to the Brewery to explain the excess wastage. After considering


the   explanation,   the   Excise   Commissioner   found   that   there   was   no


satisfactory   explanation   and   made   ten   orders   between   26/28.6.1966   and


24.11.1973   in   regard   to   excess   `manufacturing   wastage'   during   the   period


September,   1963   to   March,   1973,   and   levied   and   demanded   in   all



`81,94,310/- as excise duty 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



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 duty was at the stage, when the


beer is capable of being consumed by human beings as a beverage, comes


into   existence   and   the   deficiency   should   be   worked   out   with   reference   to


measurement  at such  stage. The High Court rejected the contention of the


appellants that as soon as wort along with yeast is received in the fermenting


vessels   and   ferments,   the   process   of   manufacture   is   complete.   Feeling


aggrieved   by   the   decision   of   the   High   Court,   the   appellant   has   filed   this


appeal.


                                              5



Contention of Parties




5.     The State contends that the liquor becomes exigible to duty when the


wort   (processed   extract   of   malt)   along   with   yeast   is   received   in   the


fermenting vessels and ferments. It is contended that as the wort is placed in


the   fermentation   tanks   and   the   yeast   is   added   to   it,   fermentation   starts


immediately with the conversion of sugar into alcohol. After the addition of


yeast   when   alcohol   is   first   formed,   the   liquid   in   the   fermentation   tank


becomes   alcoholic   liquor   for   human   consumption.   It   is   pointed   out   that


Entry 51 of List II of Seventh Schedule uses the words "alcoholic liquor for


human consumption" and not "alcoholic liquor fit for human consumption"


and therefore, beer is `manufactured' when the fermenting agents are added


to the wort and fermentation process commences. The State contended that


excise duty is leviable on the manufacture and production of goods; and that


the stage at which it should be imposed, the manner of collection thereof and


the rate at which it is to be imposed, are matters within the discretion of the


State. It is lastly submitted that the power to impose a tax or duty implicitly


carries with it the power to provide against evasion thereof. It is submitted


that what is in issue is not levy of excise duty, but the validity of measures


introduced to identify the unauthorised or illegal diversion of beer resulting


in evasion of excise duty.


                                        6



6.    The case of the state government as put forth in the counter affidavit


to the writ petition is extracted thus: Wort is passed into the fermentation vat


and fermenting yeast are added to the wort by a simultaneous process. As


soon as the wort along with yeast is received in the fermenting  vessels or


fermenting vat, it ferments and process of manufacture of beer is complete.


It is gauged to find out its quantity and this quantity is entered in the resister


in Form B-4. In the said register in Form-B4 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



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   complying   with   the   statutory   provisions   and


regulations prescribed for bottling and issue for sale. It was submitted that


no   excise   duty   could   be   imposed   prior   to   the   stage   of   occurrence   of   the


excisable event, namely the issue of beer from the brewery/bottling bonded


warehouse for sale and human consumption. Alternatively, it was submitted


that beer manufactured was exigible to duty at the time or stage when the


finished   product   (beer)   is   received   in   the   storage/bottling   tanks,   after


filtration   and   not   at   any   earlier   stage   of   manufacturing   process.   It   is


submitted   that   the   system   of   collection   of   excise   duty   on   beer,   does   not


permit levy or realisation of any amount by way of excise duty or fine on the


quantity   of   beer   which   is   wasted   in   the   manufacturing   process   before   it


become   exigible   to   excise   duty.   It   is   contended   that   the   legislative


competence   to   levy   excise   duty   under   Entry   51(a)   of   List   II   of   Seventh


Schedule to Constitution of India is with reference to `alcoholic liquors for


human consumption'. As the wort solution cannot be described as alcoholic


liquor for human consumption at the stage of fermentation and filtration, the


state   government   cannot   levy   any   excise   duty   or   additional   duty   equal   to


excise   duty,   in   regard   to   wastage   which   occurs   with   reference   a   material


                                               8



which is not `alcoholic liquor for human consumption'.  It is contended that


the levy of excise duty/additional duty by the Excise Commissioner was on


the   deficiency,   that   is,   the   difference   between   the   quantities   of   wort   and


finished product (beer), which comprises of the scum, yeast cells brought on


top of fermenting wort, carbon-di-oxide evolved, sullage etc., settled at the


bottom of vats which impurities are to be eliminated  before beer could be


said   to   be   manufactured   or   could   be   described   as   an   alcoholic   liquor   for


human   consumption.   It   is   contended   that   the   Excise   authorities   had


calculated the deficiency in the stock of beer in a wrong manner; and that


while taking stock of beer in the brewery, for the purpose of calculating the


allowance the authorities have taken the product at an intermediate stage in


the process of manufacture instead of taking stock of the finished product.





8.      The   relevant   contentions   of   the   Brewery   in   the   writ   petition   are


extracted below :




(i)     The process of manufacturing  beer ends when  the sullage and  yeast


cells are removed by filtration and fermentation 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].


                                                9



(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   purposes   of   the   stock


account, the percentage of deficiency between the stock account of beer and


the actual quantity of beer found on physical verification will be below 10%


[Vide para 63].




(iv)     What   is  being  subjected   to  the  levy   of  penalty   or  penal   duty  before


becoming a manufactured saleable article is the deficiency between the wort


and the finished beer for sale, comprising of scum and yeast cells brought on


top   of   fermenting   wort,   carbon   dioxide   evolved,   sullage   etc.   settled   at   the


bottom of vats which impurities have to be eliminated etc. before beer could


become  saleable.   Thus what  has not come  to  exist  as  such  saleable  goods


cannot be termed as excisable article. [Vide para 93(b)]"


                                                     10



Questions for consideration




9.      On   the   contentions   urged,   the   following   two   questions   arise   for   our


consideration:


(i)     At what stage does the beer manufactured is exigible to duty?


(ii)    Whether   the   procedure   adopted   by   the   appellants   for   ascertaining

        excess manufacturing wastage (excess deficiency) is proper?




To appreciate these issues and find answers to the questions, it is necessary


to refer to the process of manufacture of beer, the relevant provisions of the


UP Excise Act, 1910 (For short `the Act') and the relevant Brewery Rules.




Process of manufacture of Beer




10.     Encyclopaedia   Britannica   (15th  Edition,   Vol.14,   Page   739)   describes


the stages of brewing process thus :


        "Beer   production   involves   malting,   milling,   mashing,   extract   separation,

        hop  addition   and  boiling,   removal   of  hops   and  precipitates,   cooling   and

        aeration,   fermentation,   separation   of   yeast   from   young   beer,   aging,

        maturing,   and   packaging.   The   object   of   the   entire   process   is   to   convert

        grain starches to sugar, extract it with water, and then ferment it with yeast

        to produce the alcoholic, lightly carbonated beverage."





As the description of the brewing process given in Encyclopaedia Britannica


is   detailed   and   very   lengthy,   we   have   opted   for   the   following   shorter   and


simpler   description   of   the   brewing   process   given   in   Wikipedia


                                                     11



(http://en.wikipedia.   org/wiki/Beer)   which   is   in   consonance   with   what   is


stated in Encyclopaedia Britannica :




       "The process of making beer is known as brewing. A dedicated building

       for the making of beer is called a brewery......The purpose of brewing is

       to convert the starch source into a sugary liquid called wort and to convert

       the   wort   into   the   alcoholic   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   produce   a   weaker   wort   and   thus   a

       weaker beer. This process is known as second (and third) runnings.


       The sweet wort collected from sparging is put into a kettle, or "copper",

       (so called because these vessels were traditionally made from copper) and

       boiled,   usually   for   about   one   hour.   During   boiling,   water   in   the   wort

       evaporates, but the sugars and other components of the wort remain; this

       allows  more  efficient  use  of the  starch  sources   in  the  beer.  Boiling  also

       destroys  any remaining enzymes  left over from the mashing stage. Hops

       are   added   during   boiling   as   a   source   of   bitterness,   flavour   and   aroma.

       Hops may be added at more than one point during the boil. The longer the

       hops   are   boiled,   the   more   bitterness   they   contribute,   but   the   less   hop

       flavour and aroma remains in the beer.


       After boiling, the hopped wort is now cooled, ready for the yeast. In some

       breweries, the hopped wort may pass through a hopback, which is a small

       vat filled with hops, to add aromatic hop flavouring and to act as a filter;

       but usually the hopped wort is simply cooled for the fermenter, where the

       yeast is added. During fermentation, the wort becomes beer in a process

       which   requires   a   week   to   months   depending   on   the   type   of   yeast   and


                                                    12



       strength   of   the   beer.   In   addition   to   producing   alcohol,   fine   particulate

       matter   suspended   in   the   wort   settles   during   fermentation.   Once

       fermentation is complete, the yeast also settles, leaving the beer clear.


       Fermentation   is   sometimes   carried   out   in   two   stages,   primary   and

       secondary.   Once   most  of  the   alcohol   has   been  produced   during  primary

       fermentation, the beer is transferred to a new vessel and allowed a period

       of secondary fermentation. Secondary fermentation is used when the beer

       requires long storage before packageing or greater clarity. When the beer

       has   fermented,   it   is   packaged   either   into   casks   for   cask   ale   or   kegs,

       aluminium cans, or bottles for other sorts of beer."





11.    We may next extract the definition of beer, stages of manufacture of


beer, and the fermentation process described in Chapter XI (Brewing) from


UP Excise Manual (Volume-V) :


       "Beer defined - The term `beer' as used in the Indian Excise Law, refers

       to `fermented, undistilled liquors, of which malt is the primary base, and

       are   flavoured   with   a   wholesome   bitter   usually   hops'.   Beer   therefore

       includes   ale,   beer,   black   beer,   porter,   stout,   etc.,   and   the   precise

       manufacture 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.


                                             13



    (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 bottling.


Fermentation


Unlike Whisky fermentation, fermentation of beer is conducted in England

by employing top fermentation yeast and the different systems only differ

in the flocculation and attenuating power of the yeast employed, while in

bottom   fermentation   breweries   producing   larger   beers.   The   yeast   is

generally mixed with a small quantity of wort at 65 F and poured into the

incoming wort, or if the yeast required in vogorating, it is allowed to come

into   active   fermentation   before   addition   to   the   fermenting   vessel.   Yeast

food, if any is needed is in a few hours is at its height as can be seen by the

maximum temperature reached and is allowed to continue for 5 to 8 days.


The following description of the practice in India is of interest:


Pitching of the wort  -  The fermentation vats usually have a capacity of

3,000 gallons, which is equivalent to 140 bushels of malt (having a sugar

content of 40 per cent). The cooled hopped wort from the malt is mixed at

this stage with 300 lb. of sugar and = lb. of ammonium sulphate followed

by   60   lb.   of   yeast   in   suspension   (containing   85   per   cent   moisture)   and

allowed to ferment for 5-6 days. The peak of the fermentation is reached

in 36 hours. At the end of the fermentation, the vats are slowly aerated by

`Sterilized   air'.   Fermentation   of   beer   is   conducted   by   employing   top

fermentation yeast. This and the atmosphere of CO on the top of the vat

prevent any bacteria gaining access to the beer. The fermentation is carried

on until the gravity of the wort falls down to 1.042, when the wort is run

off   into   fining   vessels   so   as   to   settle   and   clarify.   Throughout   the

fermenting stage the temperature of the wort is regulated by coils of piping

called at temperature through which cold water is passed.


Fermentation of lager beers.  - Bottom fermentation processes used for

lager   beer   differ   from   top   fermentation   adopted   for   ales   in   that   the

temperature   ranges   between   41   degree   Fahrenheit   and   56   degree

Fahrenheit, while the yeast settles as a firm black cover at the bottom of

the fermenting vessel. The primary fermentation also lasts for 7 to days at

the higher temperature or 12 to 14 days at lower temperatures as the rate

of fermentation is considerably slower than in top fermentation  systems.

Bottom fermentation beer is usually lagered or stored for periods varying

from   1   to   9   months   (generally   6   to   8   weeks)   after   this   primary

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.


                                                    14



       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

       termed   "grist"   added   with   cooked   maize   and   rice   clakes   is   boiled   at   a

       specific   temperature   in   treated   water   in   the   vessel   called   mashtun   by

       which   the   starches   present   in   the   grain   are   converted   into   sugars.   The

       extract   from   the   grain   called   wort   is   drawn   into   another   vessel   called

       `copper'   to   which   hops   flowers   and   sugar   is   added   and   boiled   with   the

       purpose of sterilizing the wort, separating wastable proteins in the form of

       precipitate,   dissolving   bittering   constitutents   of   hops   and   imparting

       aromatic flavour of hops flowers. The spent hops are separated from the

       boiled wort which is cooled and passed into fermentation vats.


       Brewers   yeast   is   "pitched"   to   initiate   fermentation.   The   fermentation   is

       carried on at low temperature. Lot of frothing takes place, the yeast cells

       multiply and bring up dirty heads with resins of hops etc., at the top which

       are   cleared  out,  the  convertible   sugars  are   decomposed   into  alcohol  and

       carbon   dioxide   gas;   the   hanging   particles   in   the   wort   settled   down   with

       coagulated   albuminous   substances   and   yeast   cells   during   the   process   of

       fermentation which is carried on for 8 to 10 days.


       The fermented wort is racked into settling tanks or storage tanks leaving

       the sullage or sludge at the bottom of fermentation vats. At this stage also

       (i.e. in storage vats) some yeast cells are present in the fermented wort and

       secondary fermentation takes place besides some residuary particles in the

       bulk of fermented wort settling at the bottom of the storage vats.


                                                      15



        To   eliminate   secondary   fermentation   and   haze   from   this,   it   is   passed

        through   filter   machines   in  which   100  to  150  filter  sheets  are   fixed.  The

        filterate   is   transferred   to   bottling   tanks   for   bottling   beer   in   a   separate

        bonded   warehouse,   which   is   carried   on   under   the   supervision   of   the

        officer-in-charge of the warehouse."





13.     It is thus evident that the process of brewing beer involves malting,


mashing, boiling, fermentation, separation of yeast from the beer, ageing and


finishing.   The   fermented   alcoholic   liquor   that   can   be   identified   as   `beer'


comes into existence on completion of the process of fermentation. Ageing


is   carried   out   only   in   the   manufacture   of  certain   types   of  beer,   by   storing


beer   in   storage   tanks   for   certain   period.   Filtration   removes   the   remaining


yeast (the major portion settles as sediment in the fermentation vats and is


removed   as   sullage)   and   then   packed   into   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;


                                            16





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   collected   under   any   licence   granted

          under Section 17; or

    (e)  manufactured   in   any   distillery   established   or   any   distillery   or

          brewery licensed, under Section 18:


x  x x x x x


Section   28A   -   Imposition   of   additional   duty   in   certain   cases  -   (1)

Where the quantity of spirit or beer in a brewery is found, on examination

by   such   officer   of   the   Excise   Department   as   may   be   authorised   by   the

Excise   Commissioner   in   this   behalf   to   exceed   the   quantity   in   hand   as

shown in the stock account, the brewery shall be liable to pay duty on such

excess at the ordinary rates fixed under Section 28.


(2) Where the quantity of spirit or beer is less than that shown in the stock

account   on   such   examination   and   deficiency   exceeds   ten   per   cent;

(allowance to that extent being made to cover losses due to evaporation,

sullage and other contingencies within the brewery, and also to cover loss

in bottling and storage) the Excise Commissioner shall levy an additional

duty at the rate of one hundred per cent of ordinary rates of duty in respect

of such deficit as exceeds ten per cent over and above the ordinary rates of

duty."


Section   29.     Manner   in   which   duty   may   be   levied  -   Subject   to   Such

rules, as the Excise Commissioner may prescribe to regulate to the time,

place and manner of payment, such duty may be levied in one or more of

the following ways as the State Government may by notification direct:


(a) to (d) ...(omitted as not relevant)


(e) in the case of spirit or beer manufactured in any distillery established

or any distillery or brewery licensed under Section 18 -


                                                     17



           (i)  by a rate charged upon the quantity produced or issued from the

                distillery   or   brewery,   as   the   case   may   be,   or   issued   from   a

                warehouse established or licensed , under Section 18 (d);


           (ii) by   a   rate   charged   in   accordance   with   such   scale   of   equivalents,

                calculated   on   the   quantity   of   materials   used   or   by   the   degree   of

                attenuation of the wash or wort, as the case may be, as the State

                Government may prescribe :


       Provided that, where payment is made upon issued of an excisable article

       for sale from a warehouse established or licensed under Section 18(d), it

       shall   be  at   the  rate  of  duty which   is   in  force   on  that  article  on  the   date

       when it is issued from the warehouse."





15.    Rule 53 of the UP Brewery Rules, 1961 (Paragraph 912 of the Excise


Manual) as it stood prior to 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   quantity   since

       manufactured or received, as shown in column 2 and 3 of the register of

       manufacture and issue (form B-16).





Rule 53 of the Brewery Rules (para 912 of the Excise Manual) as substituted


on 19.7.1975 reads as under:


                                                     18



      "912. On the last working day of every calendar month after all the issues

      for that day are made, the Officer-in-charge shall examine the accounts of

      brewery and take the stock of beer in hand in the brewery. 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   the   rate   prescribed   for   ordinary

      issue if the quantity be found less than that shown in the stock account and

      such deficiency does not exceed nine per cent of the total stock of beer in

      the  month  the same  may be disregarded  allowances  to  that extent  being

      made to cover losses due to evaporation, sullage and other contingencies

      within the brewery. But if the deficiency in stock be found to exceed nine

      per   cent   the   cause   shall   be   enquired   into   and   the   result   reported   to   the

      Excise Commissioner who may direct the levy of duty on such deficiency

      as   may   be   found   in   excess   of   nine   percent   at   the   rate   prescribed   for

      ordinary issue. This nine per cent free allowance shall be calculated up on

      the quantity represented by the actual ascertained balances in hand at the

      close   of   the   last   stock   taking   together   with   the   total   quantity   since

      manufactured or received, as shown in columns 2 and 3 of the register of

      manufacture and issue (Form B-1).




Rule 37 of the Brewery Rules (para 896 of the Excise Manual) reads thus:


      "896. Worts  to be drawn off in the order of production: All worts shall

      be   removed   successively,   and   in   the   customary   order   of   brewing   to   the

      under   back,   coppers,   coolers   and   fermenting   vessels,   and   shall   not   be

      removed from the last named vessel until an account has been taken by the

      officer   incharge   or   until   after   the   expiry   of   twenty   four   hours   from   the

      time at which the worts are collected in these vessels."





Rule 41 of the Brewery Rules (para 900 of Excise Manual) deals with issue


of beer and is extracted below:


      "900.  Beer   not   to   be   issued   until   duty   paid   or   bond   executed  -

      [Rule   41].   No   beer   shall   be   removed   from   a   brewery   until   the   duty

      imposed under section 28 of the UP Excise Act, 1910 (Act No.IV of 1910)

      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.


                                                     19



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   ceased   to   exist,   is   to   be   decided   on   a   fair   construction   of   the

       provisions of a particular Act."

                                                                          (emphasis supplied)  





17.    In  Synthetics   and   Chemicals   Ltd.   vs.   State   of   U.P.   [1990   (1)   SCC


109],   this   Court   held   that   the   expression   "alcoholic   liquor   for   human


consumption"   must   be   understood   in   its   common   and   normal   sense.   The


expression   "consumption"   must   also   be   understood   in   the   sense   of   direct


physical intake by human beings and not utilisation in some other forms for


the ultimate benefit of human consumption and the expression is intended to


mean "liquor which as it is, could be consumed, in the sense of capable of


being taken by the human beings as such as a beverage or drink".


                                                      20



18.     In State of U.P. vs. Delhi Cloth Mills [1991 (1) SCC 454], this Court


dealing   with   section   28   of   UP   Excise   Act,   1910   considered   the   question


whether   the   excise   authorities   were   entitled   to   levy   excise   duty   on   the


wastage   of   liquor   (military   rum)   in   transit   and   held   that   the   levy   of


differential   duty   (that   is   charging   up   the   duty   on   the   report   of   excess


wastage)   did   not   cease   to   be   an   excise   duty   even   if   it   was   levied   on


declaration of excess wastage. The taxable event was still the production or


manufacture. This Court observed:


        "A   duty   of   excise   under   Section   28   is   primarily   levied   upon   a

        manufacturer   or   producer   in   respect   of   the   excisable   commodity

        manufactured or produced irrespective of its sale. Firstly, it is a duty upon

        excisable   goods,   not   upon   sale   or   proceeds   of   sale   of   the   goods.   It   is

        related to production or manufacture of excisable goods. The taxable event

        is the production or manufacture of the liquor. Secondly, as was held in A.

        B.   Abdulkadir   v.   The   State   of  Kerala   -   AIR1962SC922,   an   excise   duty

        imposed on the manufacture and production of excisable goods docs not

        cease to be so merely because the duly is levied at a stage subsequent to

        manufacture   or   production.   That   was   a   case   on   Central   Excise,   but   the

        principle   is   equally   applicable   here.   It   does   not   cease   to   be   excise   duty

        because it is collected at the stage of issue of the liquor out of the distillery

        or   at   the   subsequent   stage   of   declaration   of   excess   wastage.   Legislative

        competence under entry 51 of List II on levy of excise duty relates only to

        goods   manufactured   or   produced   in   the   State   as   was   held   in  Bimal

        Chandra Banerjee v. State of Madhya Pradesh  - 1970 (2) SCC 467. In the

        instant   case   there   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 & 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............


                                                       21



        ......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

        statute   has   to   be   construed   in   light   of   the   mischief   it   was   designed   to

        remedy. There is no dispute that excise duty is a single point duty and may

        be levied at one of the points mentioned in Section 28."





19.     In  Mohan   Meakin   Ltd.   vs.   Excise   &   Taxation   Commissioner,   H.P.


[1997 (2) SCC  193],  this Court  examined  the  question  as to  when beer  is


exigible   to   excise   duty   under   the   Punjab   Excise   Act,   1914   and   Punjab


Breweries   Rules   1932.   This   Court   held   that   Beer   would   mean   fermented


liquor from malt, when it is potable or in consumable condition as beverage.


The state of levying excise duty upon alcoholic liquor arises when excisable


article   is   brought   to   the   stage   of   human   consumption   with   the   requisite


alcoholic strength thereof and it is only the final product which is relevant.


In that case, the levy of excise duty at the stage when the manufacturing of


the beer was at wort stage was challenged. This Court posed the question:


Whether   the   levy   of   excise   duty,   on   beer   when   it   was   in   the   process   of


manufacture is correct? This Court answered the question thus :




        "The levy of excise duty is on alcoholic  liquor for human  consumption,

        manufacture  or production. At what stage beer is  exigible  to duty is  the

        question. The process of manufacture of beer is described as under:


                                                22



       The   first   stage   brewing   process   is   the   feeding   of   Malt   and

       adjuncts into a vessel known as Mash Tun. There it is mixed with

       hot water and maintained at certain temperature. The objective of

       this process is to convert the starches of the malt into fermentable

       sugar.


       The   extract   is   drawn   from   the   Mash   Tun   and   boiled   with   the

       addition   of   hops   for   one   to   two   hours   after   which   it   is

       contrifuged,   cooled   and   received   in   the   receiving   wats.   At   this

       stage,   it   is   called   "Wort"   and   contains   only  fermentable   sugars

       and   no   alcohol.   After   this   it   is   transferred   to   the   fermentation

       tanks where Yeast is added and primary fermentation is carried

       out   at   controlled   temperature.   After   attenuation   (Diminution   of

       density of "Wort" resulting from its fermentation) is reached for

       fermented wort is centrifuged and transferred to the storage vats

       for secondary fermentation. After secondary fermentation is over

       in   the   storage   vats,   it   is   filtered   twice-first   through   the   rough

       filter press and then through the fine filter press and received in

       the   bottling   tanks.   It   is   in   bottling   tanks   that   the   loss   of   the

       Carbon   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 paid? Section 23 specifically envisages that until the payment

of duty is made or bond is executed in that behalf as per the procedure and

acceptance by the Financial Commissioner, the finished product, namely,

the beer in this case, shall not be removed from the place at which finished

product   was   stored   either   in   a   warehouse   within   factory   premises   or

precinct or permitted place of usage. Under these circumstances, the point

at   which   excise   duty   is   exigible   to   duty   is   the   time   when   the   finished


                                                         23



        product, i.e., bear was received in bottling tank or the finished product is

        removed from the place of storage or warehouse etc."

                                                                                   (emphasis supplied)





20.     In  Government   of   Haryana   vs.   Haryana   Brewery   Ltd.   [2002   (4)


SCC 547], this Court held :


        "We agree with the contention of Mr. Divan, and this is also not disputed

        by Mr. Anand, that the State  has jurisdiction to levy excise duty only on

        beer after it has been brewed and has become fit for human consumption.

        This is the settled position as laid down by this Court in  Mohan Meakin

        and Modi Distillery  cases. The only question which, to our mind,  really

        arises for consideration is how to determine the quantity of beer which is

        manufactured on which the excise duty is to be levied. Section 32 gives an

        answer to this question. The first part of the Section states that subject to

        the rules which may be made by the Financial Commissioner, Excise Duty

        is   to   be   levied,  inter   alia,  on   the   excisable   article   manufactured   in   or

        issued from a distillery, brewery or warehouse.  A reading of this Section

        leaves   no   manner   of   doubt   that   the   stage   at   which   excise   duty   can   be

        levied is only after the process of manufacture has been completed and in

        fact,   it   is   to   be   levied   when   it   is   issued   from   the   distillery,   brewery   or

        warehouse."

                                                                                  (emphasis supplied)



Re: Question No. (i)




21.     The   High   Court   has   held   that   the   point   at   which   the   liquor


manufactured by the brewery is exigible to excise duty is the stage when the


finished   product   (beer)   capable   of   being   consumed   by   human   beings   as   a


beverage   or   drink,   comes   into   existence   that   is,   after   the   process   of


fermentation   and   filtration.     In  Synthetics   and   Chemicals   Ltd   &   Ors.   vs.


State   of   U.P.   &   Ors.    -   1990   (1)   SCC   109   and  State   of   U.P.   vs.   Modi


Distillery & Ors. - 1995 (5) SCC 753, this Court held that having regard to


                                               24



Entry 51 of List II of Seventh Schedule to the Constitution, the 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. & 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   &   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   beer   is


exigible   to   excise   duty   only   when   it   passes   through   the   fine   filter   press


                                                  25



would apply only to the standard types of beer which is sold in bottles and


cans.   Beer   is   also   supplied   in   casks   and   barrels,   taken   directly   from


fermentation vessels without undergoing any filtration or further processing,


known as Draught (or Draft) beer. Such beer is unpasteurized and unfiltered


(or even if filtered, only in a limited manner and not fine filtered like beer


intended   to   be   sold   in   bottles   or   cans).   Para   29   of   Excise   Manual   (Vol.V


Chapter   XI)   notes  that   uncarbonated   top   fermentation   beer,   which   include


draught beer are racked directly from the fermenting vessel. Thus when the


fermentation process of wort is completed, it becomes an alcoholic liquor for


human consumption and there is no legal impediment for subjecting beer to


excise duty at that stage. Therefore, the State has legislative competence to


levy   excise   duty   on   beer   either   after   the   completion   of   the   process   of


fermentation and filtration, or after fermentation.





23.     Section   29   (e)(i)   of   the   Act   makes   it   clear   that   in   the   case   of   beer


manufactured   in   a   brewery,   excise   duty   may   be   levied,   by   a   rate   charged


upon   the   quantity   produced   or   issued   from   the   brewery   or   issued   from   a


warehouse. This means that in respect of beer that undergoes the process of


filtration,   the   exigibility   to   excise   duty   will   occur   either   at   the   end   of


filtration process when it is received in storage/bottling tanks or when it is


                                                 26



issued   from   the   brewery.   In   regard   to   draught   beer   drawn   directly   from


fermentation vessels, without further processing or filtration, the exigibility


to excise duty will occur either at the end of fermentation process or when it


is issued from the brewery.




Re: Question No.(ii)




24.     The High Court rejected the Brewery's contention that only such beer


which   comes   to   the   `bottling   tank'   after   filtration,   can   be   treated   as


`manufactured   beer'   and   exigible   to   excise   duty   and   wastage   allowance


could be given only with reference to such beer which has become a finished


product. But  the  High Court  allowed  the  writ petition of  the  Brewery  and


directed   that   validity   of   the   demand   should   be   decided   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   28A  of  UP   Excise  Act,  when   after  filtration  the  same   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


                                            27



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 the need for any


further process;  and that in regard to beer, that stage is reached only after


fermentation   and   filtration   processes   are   completed.   It   was   submitted   that


before   filtration,   the   product-in-process   was   not   an   alcoholic   liquor   for


human   consumption   and   therefore   there   was   no   legislative   competence   to


levy excise duty or additional duty on such product-in-process.


                                                      28



26.     This contention ignores the fact that Entry 51 should be read not only


as   authorizing   the   imposition   of   an   excise   duty,   but   also   as   authorizing   a


provision which prevents evasion of excise duty. This Court in Baldeo Singh


vs. CIT - 1961 (1) SCR 482, held as under :




        "......Under Entry 54 a law could of course be passed imposing a tax on a

        person on his own income. It is not disputed that under that entry a law

        could also be passed to prevent a person from evading the tax payable on

        his own income. As is well known the legislative entries have to be read

        in a very wide manner and so as to include all subsidiary and ancillary

        matters. So Entry 54 should be read not only as authorizing the imposition

        of   a   tax   but   also   as   authorizing   an   enactment   which   prevents   the   tax

        imposed   being   evaded.  If   it   were   not   to   be   so   read,   then   the   admitted

        power to tax a person on his own income might often be made infructuous

        by ingenious  contrivances.  Experience  has shown that  attempts  to evade

        the tax are often made."

                                                                             (emphasis supplied)





27.     In   this   context,   we   may   also   consider   the   decision   of   this   Court   in


Union of India vs. A. Sanyasi Rao and others - 1996 (3) SCC 465, this Court


considered   the   constitutionality   of   the   provisions   for   presumptive   tax   in


sections 44-AC and 206-C of the Income Tax Act, 1961 for collecting tax on


profits   and   gains   from   trading   in   alcoholic   liquor   for   human   consumption


(and other goods specified therein) at the stage of purchase on a presumptive


basis.   The   respondents   therein   contended   that   the   said   sections   lacked


legislative competence  as income tax was a tax on income,  while the levy


under   section   44-AC   was   one   on   purchase   when   no   income   had   occurred


                                                29



and   that   the   tax   was   on   a   hypothetical   income   and   not   real   income.   This


Court   held   that   the   object   in   enacting   sections   44-AC   and   206-C   was   to


enable   the   Revenue   to   collect   the   legitimate   dues   of   the   State   from   the


persons   carrying   on   particular   trades,   in   view   of   the   peculiar   difficulties


experienced in the past and 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


                                                    30



alter the nature or character of the levy since such matters are completely in


the realm of legislative wisdom.  What is brought to tax, though levied with


reference to the purchase price and at an earlier point is nonetheless income


liable   to   be   taxed   under   the   Income   Tax   Act.   This   Court   referring   to   the


argument about absence of legislative competence to levy tax before accrual


of  income,   referred  to   Entry   82   of  List   I  of  Seventh   Schedule   ("Taxes  on


income other than agricultural income") and held as under :  




        "...the   word   `income   occurring   in   Entry   82   in   List   I   of   the   Seventh

        Schedule should be construed liberally and in a very wide manner and the

        power to legislate will take in all incidental and ancillary matters including

        the   authorization   to   make   provision   to   prevent   evasion   of   tax,   in   any

        suitable manner."





28.     To ensure that there is no evasion of excise duty in regard to any beer


manufactured, the State is entitled to make a provision to prevent evasion of


excise duty being evaded, though it is leviable at the stage of issue from the


brewery.   The   beer   brewing   process   shows   once   the   wort   ferments,   it


becomes consumable, though the manufacturing process to have a finished


product   may   in   some   cases   require   filtration,   aging   carbonization   etc.   To


ensure that there is no evasion of excise duty by diversion of beer (excisable


article)   before   it   becomes   a   finished   product,   section   28A   of   the   Act   has


been enacted and that is implemented by Rule 53 of the Brewery Rules, and


                                                      31



Rule 7 of the Bottling Rules. The Excise Inspector in-charge is required to


take physical stock of the beer in hand in the brewery periodically (once a


quarter prior to the amendment of 1975 and once in a month from July 1975)


by   dip   and   gravity   of   the   quantities   in   the   fermentation   vessels.   We   may


illustrate   the   method   adopted   to   ascertain   whether   there   is   any   excess


manufacturing   wastage   (or   illegal   siphoning   of  beer)   before   it   reaches   the


bottling tanks :


a.          The opening balance (actual quantity)                                          1000 Litres


b.          Quantity brewed during the month under survey                                  2600 Litres


c.          Total stock of beer        (a + b) in the brewery                              3600 Litres


d.          Quantity of beer issued during the month                                       2600   Litres


e.          Balance quantity in hand as per stock account (c - d)                          1000 Litres


f.          Actual balance found on physical examination                                   600 Litres


g.          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 & addl. duty (g + h)                              76

                Litres


                                             32



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 Rules and Rule 7 of


Bottling Rules and levied double the amount of excise duty (excise duty plus


equal   amount   as   additional   duty)   only   in   those   months   when   the   periodic


examination   showed   excessive   manufacturing   `wastage'.   The   procedure


adopted was the most logical process to ensure that excisable articles were


not clandestinely removed  and to ensure that there is no evasion of excise


duty having regard to the brewing procedure. If the actual stock assessed is


less than the stock as per Stock Account and the difference is less than 9%,


the difference was ignored. Only if the difference exceeded 9%, the quantity


in excess of 9% was treated as the excess wastage and excise duty and an


equal amount as additional duty was charged in regard to such excess. For


                                               33



this purpose  necessarily  the quantity  in the fermentation  vessels had to be


considered. If the quantity in the bottling tanks are to be taken as the basis,


then there will be no way of finding out whether there was any siphoning off


from the fermentation vessel or during filtration process. Fermented wort is


beer and it could be removed from fermenting vessels or during storage or


filtration.   Therefore,   the   base   measurement   is   taken   in   the   fermentation


vessel and 9% standard allowance is provided to cover losses on account of


sullage etc.





30.     The Act provides that levy of excise duty on beer can not only be with


reference to the quantity produced and issued from a brewery, but can also


be   by   calculating   the   quantity   of   materials   used   or   by   the   degree   of


attenuation of the wash or wort, as the case may be, as the State Government


may prescribe. This means the excise duty on the beer manufactured can be


levied not only with reference to the actual quantity issued or removed, but


can   also   be   by   a   rate   charged   in   accordance   with   a   scale   of   equivalent,


calculated on the quantity of materials used or by the degree of attenuation


of the wash or wort prescribed by the State Government. The said alternative


method   of   levying   excise   duty   does   not   depend   upon   the   actual   quantity


manufactured   or   issued.   It   is   with   reference   to   the   deemed   quantity


                                                    34



manufactured   rather   than   the   actual   quantity   manufactured.   Such   a


procedure has been in vogue in England and it is permissible in India. Rule


42 of Chapter XI of the Excise Manual (Vol. 5) gives a detailed description


of the attenuation method of charging duty on beer and it is 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 brewings;

          (5)  any modification in his routine methods of brewing;

          (6)   any   alterations   he   proposes   to   make   in   the   position   etc.,   of   his

               brewing vessel;

          (7)  Finally and  most   important   of all,   the  brewer  is  required  to  give

               notice to the officer of his intention to `collect beer', ie., he must

               intimate as closely as possible the time when the wort will be ready

               for   pitching   with   yeast.   When   the   wort   is   collected   for

               fermentation   the   brewer   must   forthwith   take   the   specific   gravity

               with his saccharometer and also the dip, in order that the density

               and gallonage may be recorded in case the officer does not attend.

               In   cases   where   the   officer   attends   before   fermentation   has

               materially affected the gravity he is able to verify these figures and

               above   all   to   see   that   they   have   been   recorded   properly   by   the

               brewer.


                                                     35



       In order that his control may be effective, the officer must time his visits

       to the brewery so as to arrive when fermentation has not advanced too far

       for   check   and   so   that   the   brewer   has   had   reasonable   time   to   make   his

       entries of gravity and gallonage. If having had reasonable time, the brewer

       has   failed   to   make   his   entry  this   omission   is   treated   as   a  serious   excise

       offence.


       It may be asked why stress is not laid on the necessity for the attendance

       of the officer at the time of pitching the wort. This, bowever, is generally

       impracticable  seeing  that  usually brewers  `collect'  at the  same  hour and

       that the presence   of the officer at more than one brewery is impossible.

       This being so, his visits must be unexpected, the responsibility for honest

       declaration of gravity and dip being imposed on the brewer. The brewer's

       records, if confirmed by the officer, are thus the basis on which the duty is

       levied."





31.    This Court in Haryana Brewery Ltd. (supra) recognized the alternative


method   of   calculating   the   quantity   of   beer   manufactured   to   be   valid.   This


Court held:


       "The proviso to Section 32 uses the expression "provided that duty may be

       levied....." Clause (b) of the proviso state that the calculation of the  beer

       manufactured  would be according to such scale or equivalents calculated

       on  the   quantity  of  materials   used  or  by  the  degree  of  attenuation  of  the

       wash or wort. The opening part of Clause (b) of the proviso indicates as to

       how   the   beer   manufactured   is   to   be   determined.   The   proviso   is   only   a

       manner of computing the end-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.


                                                    36



       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   basis   of   the   raw   material   used.   The

       idea,   perhaps,   is   that   full   quantity   of   beer   which   is   manufactured   is

       accounted   for.   It   will   be   seen   that   registers   are   maintained   by   the

       manufacturer and the figures are taken from there. From the records of the

       manufacturer, excise authorities  will be able to ascertain the quantum of

       raw material used. It is open to the excise authorities to accept the figure

       indicated in the records of the manufacturer of the total quantity of beer

       manufactured. Duty can be levied on this and this would be inconsonance

       with the first part of Section 32. It is, perhaps, only to cross-check whether

       the figure which is indicated in the books of the manufacturer is correct

       that a formula can be used for determining the amount of beer which could

       or should or must have been manufactured. This is by taking into account

       the quantity of raw material used, the quantity which is in the process and

       as entered in the brewing book and from there giving an allowance of 7

       per cent for wastage. It appears to us that the allowance of 7 per cent has

       to be in arriving at the figure of the manufactured beer as loss of quantity

       during   the   process   of   manufacture.   It   cannot   be   that   on   the   figure   of

       manufactured beer, arrived at on the basis of the books of the respondent,

       an allowance of 7 per cent has then to be given. If the figure taken for the

       purpose of calculating the excise duty is only of the end-product, viz., the

       beer   produced,   and   not   the   quantity   of   raw   material   used   in   the

       manufacture of beer during which loss of some quantity as wastage would

       have occurred, there cannot  be a deduction of any sum or proportion as

       wastage from the quantity of end-product in order to arrive at the quantity.

       The excisable product is the quantity of beer produced and not the quantity

       produced, and thus excisable, minus 7 per cent."





Therefore   there   is   nothing   wrong   in   adopting   the   procedure   prescribed   in


section   28A   and   Rule   53   of   Brewery   Rules   to   determine   the   excess


manufacturing wastage.





32.    The   Brewery   wants   the   wastage   allowance   to   be   given,   not   with


reference to the quantity in the fermentation tank, but with reference to the


quantity in the storage/bottling tanks (after completion of fermentation and


                                                    37



filtration   process)   when   the   manufacturing   process   is   complete   and   only


bottling remains.  The argument   of  the respondent  is that  the  measurement


should be taken 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   because   of   elimination   of

       impurities" viz., yeast cells and dirty heads brought up in fermentation at

       top,   evaporation   taking   place;   carbon   dioxide   evolved   out;   and   sullage

       settled at the bottom. The quantity of these impurities accounting for the

       said deficiency in the process of manufacture cannot be taken as beer and

       excisable   article   for   purposes   of   levy   of   duty.   For   culmination   of   these


                                                38



        impurities and other contingencies mentioned of in rule 912, an allowance

        of 10% is fixed."





33.     If   the   quantity   measured  after   the   fermentation   and   filtration


processes  should be the base figure, for purpose of allowance to cover loss


on account  of sullage,  evaporation etc., there will be no need for granting


any   allowance   because   once   it   have   passed   the   filtration   stage   the   sullage


and other impurities has been removed and the beer is ready for being filled


in barrels, casks or bottles. The 9% allowance is for the wastages occurring


during   the   stages   of   fermentation   and   filtration   and   not   in   regard   to   the


stages   between   storage   after   filtration   and   removal.   The   Brewery   has


virtually   mixed   up   the   issue   relating   to   the   question   as   to   when   beer   is


exigible   to   excise   duty   with   the   question   as   to   the   quantity   on   which   the


allowance of 9% should be granted. As noticed above, a combined reading


of rules 37 and 53 of Breweries Rules, with or without section 28A make it


clear that the allowance of 9% as losses in the brewery (10% as losses in the


course of manufacture in the brewery prior to 1975) is with reference to the


quantity in the fermentation tank and not with reference to the quantity of


beer in the storage/bottling tanks after filtration.


                                                       39



34.     We may now consider the contention on behalf of brewery  that they


are entitled to allowance upto 9% towards such wastage from the quantity


measured in the storage/bottling tanks after fermentation and filtration. We


extract   below   the   contention   of   the  Brewery   in   this   behalf   from   its   writ


petition:


        "(X)     That   section   28A(2)   in   so   far   as   it   purports   to   provide   for

        permissible   wastage   could   operate   only   from   the   stage   the   State

        Government became competent to impose excise duty/additional duty and

        till   beer   is   brought   to   such   a   stage   that   it   is   rendered   fit   for   human

        consumption, the State Legislature has no legislative competence to levy

        excise   duty/additional   duty   and   hence   the   State   Legislature   cannot   take

        into consideration for 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.


                                                          40



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 yeast cells to be removed,

thus losses will be variable at this stage.


(iii)             The removal of solids is continuously carried on at different stages in

the   manufacturing   process.   With   frequency   of   the   centrifugal   machines   or   the

Filtration Plants having to be opened depending upon the quantity and turbidity of

the   fermented   wort   or   green   beer   to   be   cleared   off   to   be   sparklingly   clear,   the

losses will be more or less. With the banking of import of quality filter sheets, the

indigenously made filter sheets have to be used which are to be more frequently

changed then the imported ones. There are losses in absorption in filter sheets and

leakage at ends of plates.


(iv)              Some quantity of fermenting wort is lost in removal of scum and dirty

heads and in removal of sullage from the bottom of the tanks.


(v)               Every   time   the   fermenting   or   fermented   wort   or   green   beer   is

transferred   by means  of  pipes, what  is   left  over  in  pipes  has   to  be drained   off,

water   and   steam   is   run   in   pipes   to   sterilize   them,   so   that   there   may   be   no

contamination to spoil beer.


         The varying losses at each stage in the manufacturing process are natural and

         unavoidable. With the above mentioned variable losses, accidental, off chance

         occurrence or those losses which are incidental to the process of manufacture

         are provided for in rule 912 under "Contingencies".


         The   contingent   losses,  a   few   of  which   are   given   below,   make   the   losses   in

         manufacturing process vary and erratic.


                                                   41



(a)         Due   to   failure   of   electricity   and   refrigeration,   there   may   be   brisk

fermentation  and wild bacterial  infection,  which may make  it sour to be turned

into vinegar, or if more spoilt, may have to be destroyed.


(b)         By sudden leakage of brine coiled pipes, the fermenting wort may be

mixed up with brine which becomes unpalatable and has to be destroyed.


(c)         With haziness persisting after filtration once, it may have to be treated

with approved chemicals and refiltered.


(d)         Bursting of transfer pipes, leakage of valves etc."





36.     If the quantity measured in the storage/bottling tanks (after filtration)


should   form   the   basis,   there   was   no   occasion   or   need   for   making   a   huge


allowance   of 9%  for  sullage,   evaporation  and  other  contingences,   as there


would be no sullage, evaporation or other wastages after that stage (that is


completion of manufacture) and the allowance under Section 28A of the 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   &   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 :


                                                      42





       "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   State   seeks   to   levy

       excise  duty upon is not alcoholic  liquor  for human  consumption  but the

       raw material or input still in process of being rendered fit for consumption

       by human beings. The State is not empowered to levy excise duty on the

       raw material or input that is in the process of being made into alcoholic

       liquor for human consumption."




The said decision will not assist the first respondent - brewery as that was a


case   of  levy  of  excise  duty  on  raw materials  or inputs  which  were  still  in


process. That matter related to distilled alcohol and not fermented beer. The


wastage considered by this Court was all with reference to alcohol that had


not   been   diluted   and   therefore   was   not   `alcoholic   liquor   for   human


consumption'. This Court held that the State is not empowered to levy duty


on the raw material  or inputs that is in the process of being made  into an


alcoholic   liquor   for   human   consumption.   The   position   is   different   here.


When the quantity of the liquid in the fermentation vessels were measured,


on   account   of   fermentation,   the   liquid   was   already   in   the   process   of


                                           43



conversion   into   an   `alcoholic   liquor   for   human   consumption',   though   had


not become a finished product of beer. Therefore, the principles in  Baldev


Singh 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.




Re : CA No.4709 of 2002 :




38.    The question arising in this appeal is the same as in CA No.4708 of


2002 and the facts are also similar to the facts of CA Nos.4708 of 2002. The


only difference in facts is that the demand in this case related to the period


3.6.1970   to   5.9.1972   and   the   amount   of   duty/additional   duty   that   was


demanded was Rs.1,40,596.89. For the reasons stated in CA No.4708/2002,


this appeal is also allowed.




Re : CA Nos.4710, 4711, 4712, 4713 of 2002




39.    All these four appeals relate to demands made upon the breweries for


duty on excess wastage in bottling and storage of beer. The first appellant


brewery has described the process of bottling of beer thus (in Annexure P2


to the writ petition - WP No.1375/1978):


                                                   44





       "Before   carbonated   beer   is   conveyed   to   the   automatic   bottling   machine

       through pipes, the whole line is cleaned and sterilized to ensure 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
                               2

       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
                                       2

       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   break.   During   the   process   of   bottling   what

       goes   waste   in   spilling   as   mentioned   above,   in   unavoidable.   It   does   not

       exist in the form of goods for sale and human consumption. Thus being

       not an excisable article is not leviable with duty."





The Breweries have also described the various instances of bottling wastages


in the writ petition as under :




       "BOTTLING WASTAGES


       The wastages occur at different stages in bottling process as under:


       (a)      Loss   of   beer   in   transfer   pipe   from   Bottling   Tank   to   bottling

       machine,  which has to be washed away to sterilize  pipes before bottling

       operations are began every day.


                                                     45



        (b)        There being pressure of CO gas in beer there is loss by bursting of
                                                    2

        bottles in filling and capping machines. With the pressure of gas foaming

        takes place and there is spillage of beer between the bottling and capping

        machines. The spilt beer cannot be recovered as it gets mixed up with oil

        on the conveyor belts and is contaminated.


        (c)        There are some breakages on conveyors between capping machine

        and pasteurization tanks.


        (d)        During pasteurization the filled bottles are immersed in water and

        the temperature  of water is gradually raised to about 650C after keeping

        for a fixed time, it is gradually colled, with the expansion of gas the bottles

        burst to a varying percentage depending on the varying quality of bottles

        from mould to mould and batch to batch and beer is mixed with water in

        the tanks.


        (e)        Some   breakages   do   occur   in   capsuling,   labelling   and   packing   of

        filled bottles.


        (f)        Sometimes rebottling may have to be done and loss on this account

        may occur.





40.     The appellant breweries are holding bottling licences in form No.FL3


to bottle beer, governed by the U.P. Bottling of Foreign Liquor Rules, 1969


(`Bottling   Rules'   for   short).   Rule   6   provides   that   every   licence   granted   in


Form No. FL3 shall be subject to the conditions enumerated therein. Rule 7


enumerates the additional special conditions applicable to bottling of India


made liquor in bond under FL3 licence. Sub-rules (10) and (11) of Rule 7


are relevant for our purpose and they are extracted below :




                 "7.   Following   additional   special   conditions   will   be   applicable   to

               bottling of Indian Made Foreign liquor in bond under F.I.-3 licence:

               (1) to (9)  x x x x x  omitted as not relevant


               (10)  On  the  last  working,  day of  every  calendar   month,   after  all   the

               transactions for that day are made, the Excise Inspector Incharge shall


                                                      46



            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 due to evaporation, sullage and other contingencies


within the brewery and also to cover losses in bottling and storage. Rule 53


of   the   Brewery   Rules   as   amended   on   19.7.1975   (Rule   912   of   the   Excise


Manual) provides for an allowance of 9% of the total stock  of beer in the


month   to  cover  losses   due  to   evaporation,  sullage   and   other  contingencies


within   the   brewery.   Rule   7(11)(a)   of   the   Bottling   Rules   provides   for   an


allowance up to one per cent of the total stock of spirit during a month, for


actual loss in bottling and storage. The appellants submitted that section 28A


did   not   make   such   a   division   of   10%   allowance,   into   9%   for   loss   in   the


brewery     and   one   percent   for   loss   in   bottling;   and   that   therefore   it   is


                                                47



impermissible   to   divide   the   wastage   under   two   separate   heads   of     9%


wastage to cover losses due to evaporation, sullage and other contingencies


within the brewery under rule 53 of the Brewery Rules, (para 912 of U.P.


Excise Manual) and only one percent for losses in bottling and storage under


the Bottling Rules. According to them the wastage in bottling can itself go to


an   extent   of   10%.   At   all   events,   if   the   total   wastage   due   to   evaporation,


sullage   and   other   contingencies   in   the   brewery   and   the   total   wastage   in


bottling and storage, together did not exceed 10%, no duty or additional duty


could be levied on the assumption that the losses in bottling and storage was


restricted only to one percent, as such division would be contrary to section


28A of the Act.





42.     Rule   53   of   Brewery   Rules   made   in   1961   (para   912   of   the   Excise


manual)   before   the   amendment   on   19.7.1975   provided   for   allowance   of   a


deficiency   not   exceeding   10%   to   cover   losses   in   bulk   due   to   evaporation,


sullage and other contingencies within the brewery. At that time a separate


licence for bottling was not contemplated. The Bottling Rules made in 1969


provided  for   an   allowance   of  one   percent   loss   in   bottling  and   storage.   On


19.7.1975,   Rule   53   (para   912   of   Excise   manual)   was   substituted   and   the


allowance   to   cover   losses   due   to   evaporation,   sullage   and   other


                                                48



contingencies   within   the   brewery   was   reduced   to   9%   in   view   of   the


provision in the Bottling Rules providing for an allowance of one percent for


losses  in  bottling  and  storage. Section  28A  was  inserted  by  U.P. Act  9  of


1978 (with a provision that the section shall be deemed always to have been


inserted)   providing   for  an   allowance   to  a   total  extent   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.


                                               49



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   Rule   and   contend   that   the   allowance   for   losses   in


bottling could be more than one percent, that is upto ten per cent. In view of


the above 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.




Conclusion :




44.     CA Nos.4708-4709/2002 are allowed and the order of the High Court


in Civil Misc. WP Nos.3968/1978 and 4043/2008 are set aside and the said


writ petitions are dismissed.




45.     CA Nos.4710, 4711, 4712 & 4713/2002 are dismissed affirming the


decision   of   the   High   Court   dismissing   C.M.   W.P.   Nos.1375/1978,


3690/1979,   4136/1978   and   4157/1978,   though   for   reasons,   somewhat


different from the reasoning of the High Court.





                                                                  .............................J

                                                                        (R. V. Raveendran)


                          50





                                .............................J

                                    (P. Sathasivam)

New Delhi;

September 23, 2011.