2003 Supreme(SC) 1042

2003(8) Supreme 165
SUPREME COURT OF INDIA
(From Allahabad High Court)
Mrs. Ruma Pal & B.N. Srikrishna, JJ.
State of U.P. & Ors. -Appellants
versus
Vam Organic Chemicals Ltd. & Ors. -Respondents
Civil Appeal Nos. 5416-5424 of 2000
With
C.A. Nos. 5425-5426 and 5427-5435 of 2000
And
C.A. No. 8382 of 2003
(Arising out of SLP (C) No. 981 of 2001)
Decided on 17-10-2003
Counsel for the Parties :
For the Appearing Parties : R.N. Trivedi, Mukul Rohatgi, Additional Solicitor Generals, Subodh Markandya, Ashok Desai, D.A. Dave, Rakesh Dwivedi, P.P. Malhotra, Sr. Advocates, Ashok K. Srivastava, Rajeev Kumar Dubey, Kamlendra Misra, Ashok Srivastava, Ms. D. Bharati Reddy, G. Venugopal, Ms. Manik Karanjawala, Dhruv Agarwal, Ms. Nandini Gore, Vivek Sharma, Ms. Jasmine Damkewala, R.N. Karanjawala, Ravindra Kumar, Abhisekh Chaudhary, C.V.S. Rao, B.K. Prasad, B.V. Balram Das, Dhruv Mehta, Mohit Chaudhary, Ms. Shalini Gupta, K.L. Mehta and Ajay K. Agrawal, Advocates.

IMPORTANT POINT
The State cannot legislate on industrial alcohol despite the fact that such industrial alcohol has the potential to be used to manufacture alcoholic liquor.

Headnote:Excise-U.P. Excise Act, 1910-Sections 3(9), (11), (13) and 41-U.P. Licences for the Possession of Denatured Spirit and Specially Denatured Spirit Rules, 1976-Rule 3(a)-Notification dated 13.1.1990 whereby licence fee of 15 paise per litre was sought to be imposed and quality of specially denatured spirit (SDS) obtained from distilleries in Uttar Pradesh -Validity of-Respondent-company manufactures organic chemicals such as Acetic Acid, Acetic Anhydride and Vinyl Acetate at its chemical plant-Main raw material for manufacture of these organic chemicals is Ethyl alcohol (industrial grade) which is produced from molasses-In 1982, respondent set up its own distillery for producing industrial alcohol-Entire production of industrial alcohol at respondents distillery as well as industrial alcohol from outside sources is used at its chemical plant for producing organic, chemicals -Entire quantity of underground alcohol is denatured which is subjected to disputed levy-Whether State legislature had legislative competence to legislate on denatured spirit-(No)-Whether fee sought to be levied was a tax in the garb of a regulatory fee-(Yes).

       Held : Article 246 gives to the Parliament exclusive power to make laws with respect to the matters enumerated in List I in the Seventh Schedule. Entry 84 of List I and Entry 51 of List II were construed by this Court in Synthetic s case to hold that Parliament alone has the exclusive power to legislate and levy excise tax in respect of industrial alcohol. It is unnecessary to refer to the law with regard to the comparative competence of the Union and the States with regard to levy of excise, regulation and control of industrial alcohol prior to the decision of the Constitution Bench in Synthetics. Whatever the law was earlier, the decision in Synthetics now holds the field. In that decision the State s power to levy excise duty was held to be limited by Entry 51 to tax on alcoholic liquors for human consumption. It was also held that Section 2 of the Industries (Development and Regulation) Act, 1951 as well as Serial No. 26 of the First Schedule to that Act covered the whole field on industrial alcohol and its products. Therefore since the coming into force of the IDR Act on 8th May 1952 the State Legislatures are constitutionally incompetent to levy any tax on industrial alcohol. The principle was succinctly reiterated in State of U.P. v. Modi Distillery (1995) 5 SCC 753 where it was said that the State s power to levy excise duty was limited to alcoholic liquor for human consumption and "that the framers of the Constitution, when they used the expression `alcohol liquors for human consumption , meant, and the expression still means, that liquor which, as it is, is consumable in the sense that it is capable of being taken by human beings as such as a beverage or drink" ... Dictionaries and technical books showed that rectified spirit (95 per cent) was an industrial alcohol and not potable as such..." Therefore even if ethyl alcohol (95 per cent) could be used as a raw material or input, after processing and substantial dilution, in the production of whisky, gin, country liquor, etc. nevertheless it was not `intoxicating liquor which expression meant only that liquor which was consumable by human beings as it was". Thus the State cannot legislate on industrial alcohol despite the fact that such industrial alcohol has the potential to be used to manufacture alcoholic liquor. (Paras 22 & 23)

       The State s power is thus limited to (i) the regulation of non potable alcohol for the limited purpose of preventing its use as alcoholic liquor and (ii) the charging of fees based on quid pro quo. The question then is, - is the levy under Rule 3(a) of the 1976 rules justifiable as such fee? (Para 28)

       Considering the various authorities cited, we are of the view that the State Government is competent to levy fee for the purpose of ensuring that industrial alcohol is not surreptitiously converted into potable alcohol so that the State is deprived of revenue on the sale of such potable alcohol and the public is protected from consuming such illicit liquor. But this power stops with the denaturation of the industrial alcohol. Denatured spirit has been held in Vam Organics I, to be outside the seisin of the State Legislature. Assuming that denatured spirit may by whatever process be renatured, (a proposition which is seriously disputed by the respondents) and then converted into potable liquor this would not give the State the power to regulate it. Even according to the demarcation of the fields of legislative competence as envisaged in Bihar Distillery, industrial alcohol for industrial purposes falls within the exclusive control of the Union and according to Bihar Distillery "denatured spirit, of course, is wholly and exclusively industrial alcohol". (Para 41)

       The State has not produced any material to show that it was incurring any additional cost for any further regulation of denatured spirit. Any trace of a lingering doubt as to the propriety of the levy under Rule 3(a) must be taken to have been noted off effectively with the order passed by three Judges of this Court in the Writ Petition filed by Synthetics challenging the same levy as we have noted earlier. That order has resulted in granting Synthetics & Chemicals Ltd. relief from payment under Rule 3(a). The only distinction between the present respondents cases and Synthetics was that the respondents chose to challenge the levy before the High Court. That could be no rational basis for denying the respondents who are otherwise identically situated, the same relief. [See: Anil Kumar Neotia v. Union of India (1998) 2 SCC 587]. In the absence of any such correlation the fee under Rule 3 is not a fee at all levied for the purpose of additional regulation or for any service rendered but is really a tax in the garb of a fee. (Para 43)