JUDGMENT

Rajendra Babu, J.-For the excise year 1992-93 the State had monopoly in the matter of supply of arrack. The privilege of vending the arrack was obtained through a licence and the licensees got their supply only through the State owned or controlled distilleries. Such licensees were not allowed to import any arrack or rectified spirit from outside the State. In the excise year 1993-94 commencing from April 1, 1993 the State modified the policy in this regard by G.O. (MS) No. 18/93/TD dated February 8, 1993. The modifications effected in the policy are as follows :-

 (a) Abkari shops were to be auctioned groupwise.

 (b) In the matter of supply of rectified spirit, the existing system was to be discontinued, instead permits will be given to the contractors (licensees) to bring "a designated quantum of rectified spirit determined in relation to the auction amount."

 (c) The Board of Revenue was to ensure, before issue of permits, that adequate arrangements are made for the timely collection of duties, taxes, etc.                                                                                         

 (d) Fool proof arrangements were to be made for enforcing equality and no release of arrack was to be authorised till the contractor satisfied the department about the required quality."

2. Pursuant to this policy amendments were made to Rule 8 of the Disposal in Auction Rules on March 4, 1993 and again on March 31, 1993. Under amended Rule 8(1) it was provided that before the starting of the auction for each group of arrack shops the auctioning officer shall announce in the auction hall that permits will be issued to the contractors to import or purchase a designated quantum of duty paid rectified spirit. The contractors will be given No Objection Certificates for import or transport permits based on their requests by the concerned Assistant Excise Commissioner. The contractors shall remit the excise duty on the designated quantum of rectified spirit in each month. The licensee could obtain the duty paid rectified spirit either from the distilleries in the State or from the distilleries in other States. Sub-rule (6) was substituted to enable the contractors for opening godowns to store duty paid rectified spirit for manufacturing arrack and for storage of manufactured arrack on payment of the amounts of annual rental prescribed. Similarly here the licensee could purchase the duty paid rectified spirit from the distilleries in the State or import it from distilleries from outside the State. Sub-rule 11 was substituted prescribing the procedure for remittance of duty. Rule 8(1) was amended on March 31, 1993.

3. Writ petitions were filed on the demand made by the State for payment of excise duty on the designated quantum of rectified spirit and additionally a contention was raised that the increase in excise duty on arrack from Rs. 5 to Rs. 10 per bulk litre by a notification issued on March 25, 1993 was also invalid. The contractors challenged the levy of excise duly on the designated quantum of rectified spirit not actually imported as ultra vires Sections 17 and 18 of the Abkari Act rectified spirit was not fit for human consumption and, therefore, levy was outside the purview of Entry 51 of List II of the Seventh Schedule to the Constitution. It was further contended that no rectified spirit was produced within the State and, therefore, the levy of countervailing duty on imported rectified spirit was impermissible in law.

4. The learned Single Judge who dealt with the writ petitions upheld these contentions. He was of the view that (1) the levy of excise duty on rectified spirit was without legislative competence and, therefore, the levy of such duty is void; (2) the levy of excise duty which is countervailing duty on rectified spirit is illegal; (3) the excise