Important point
The incidence of excise duty, having regard to the provision of the Kerala Abkari Act and the relevant Rules, falls upon the manufacturer/distiller, therefore, includable in their turnover for the purpose of levy of turnover tax.

Headnote:Kerala Abkari Act—Sections 17 and 18A—Kerala General Sales Tax Act, 1963—Section 5(2C)—Levy of tax on sale or purchase of goods—Liability to pay excise duty—Whether incidence of excise duty falls upon the manufacturer/distiller or upon the Kerala State Beverages (Manufacturing and Marketing) Corporation Ltd., a Government Company—Liquor which is manufactured by the respondents has to be sold to Beverages Corporation which can be regarded as sole selling agent—Liquor manufactured is removed to bonded warehouse of Beverages Corporation—At the time when the liquor is removed from that bonded warehouse, excise duty is paid by Beverages Corporation—Notices were sent to respondents stating that excise duty which was paid by the Beverages Corporation forms part of turnover of respondents in the sale of liquor by them to the Corporation and, therefore, turnover tax was payable on this element as well—On challenge, High Court decided in favour of respondents—High Court allowed writ petitions filed by respondents/distillers holding that incidence of excise duty on manufacture of Indian Made Foreign Liquor was required to be borne by Kerala Beverages Corporation—Division Bench of the High Court held that incidence of excise duty fell squarely on respondents/distillers—Amendment of Section 5(2C) of Kerala Sales Tax Act by the Finance Act of 2001 retrospectively from 1.7.1987—Whether respondents manufacturers are liable to pay turnover tax—(Yes)—Respondents are liable to include in their turnover the amount of duty paid to them by KSBC and pay the turnover accordingly.
       Held : Section 17 of the Kerala Abkari Act deals with imposition of duty not necessarily connected with manufacture of liquor and, therefore, the duty levied must in each case be examined before coming to a conclusion as to whether it is in reality a duty of excise. The use of the words “duty of excise” in Section 17 of the Act is not conclusive and it is for the Courts to examine in each case as to whether it is in fact a “duty of excise”. In order that a duty may be characterized as “duty of excise” it must be shown that it is a duty on manufacture of goods. If it is unrelated to the manufacture of goods, it may be any other impost permitted by law, but would not qualify as a duty of excise. Section 18A of the Act permits the State of Kerala to grant exclusive or other privilege of manufacture etc. on payment of rentals which includes the privilege of supplying liquor by wholesale or by retail. The annual rental payable under Section 18A may be collected to the exclusion of or in addition to duty or tax leviable under Sections 17 and 18 of the Act. That the State of Kerala by amendment of the Act and the relevant Rules created a monopoly in favour of the Kerala State Beverages Corporation. Licences in Form FL9 and BW1 have been given exclusively to the aforesaid Corporation which has also executed an agreement in Form A undertaking to pay the duty. A monopoly has been created in favour of the aforesaid Corporation in the wholesale trade of IMFL. In view of Rule 11 of the (Storage in Bond) Rules duty is payable on the movement of IMFL from the bonded warehouse of the Beverages Corporation to the FL9 licensed premises. It is payable when IMFL is issued from the bonded warehouse of the Corporation. The levy of duty on IMFL issued from a bonded warehouse licensed or established under Section 12 or Section 14 of the Act is referable to the duty levied under Section 17(f) of the Kerala Abkari Act. The Notifications issued by the Government relate both to goods manufactured in the area or imported into the area. The duty levied is on goods and not on manufacture. Taking all these factors into account and having regard to the Scheme of monopoly introduced by the State of Kerala in the year 1984 we must hold that the levy of duty is not a levy in the nature of ‘duty of excise’ but is the privilege price payable by KSBC in consideration of the State parting with its exclusive privilege of wholesale trade in IMFL in favour of the aforesaid Corporation. (Paras 77 and 78)
       Admittedly, the Respondents are dealers who are liable to pay tax under Section 5. They only get exempt from paying tax under Section 5(1)(b) because the sales tax is to be paid “at the rates” and “only at points specified against the goods in the First Schedule”. Under column (3) of the First Schedule in entries 53 and 54 the points of levy are (a) for the Kerala State Beverages Corporation the point of levy is at time of sale, (b) by a dealer, who is liable to tax under Section 5, the levy is at point of first sale. However, if the first sale is to Kerala State Beverages Corporation then at that point there is no levy under Section 5(1)(b) because the charging Section provide that the levy is to be as per the Schedule. Section 5(2C)(i) does not lay down that tax is to be paid at the point and at the rate specified against the goods in the Schedule. Under Section 5(2C)(i) the tax is at the rate of 5 on the turnover at all points. Thus the Respondent would in any event be liable to pay turnover tax on their turnover. (Paras 86 and 87)
       The High Court, however, held that the amendment of Section 5(2C) of the Kerala General Sales Tax Act by adding an explanation which was brought into effect retrospectively from July 1, 1987, did not remove the constitutional invalidity in the statute because in view of the finding recorded by the High Court that the manufacturers were not liable to pay excise duty, an amendment to the Sales Tax Act could serve no purpose unless lacuna was removed by appropriate amendment to the Abkari Act. We find ourselves in complete agreement with the view of the High Court because if the Act imposing the levy did not impose upon the manufacturers the liability to pay excise duty, by an amendment of the Sales Tax Act the same could not be included in their turnover. (Para 88)

Judgment

B.P. Singh, J.—Leave granted in Special Leave Petition (C) No. 1032 of 2003.

2. In these two batches of appeals, a common question arises, inter alia for consideration by this Court, namely- Whether the incidence of excise duty, having regard to the provision of the Kerala Abkari Act and the relevant Rules, falls upon the manufacturer/distiller such as the respondents herein and therefore includable in their turnover for the purpose of levy of turnover tax, or whether the incidence of excise duty falls on the Kerala State Beverages (Manufacturing and Marketing) Corporation Limited, a Government company which alone is liable to pay the excise duty on Indian Made Foreign Liquor, and consequently the said component is not includable in the turnover of the respondents/distillers?

3. These appeals came up for hearing before a 3 Judge Bench of this Court. After hearing the parties for sometime, by order dated October 17, 2001, it was observed that the point involved was an important one and it would be appropriate if the cases are heard by a Larger bench. The referring Bench observed thus:-

“The question which arises for consideration in these cases is, whether the excise duty levied under the provisions of the Kerala Abkari Act on Indian Made Foreign Liquor which is manufactured forms part of the turn over of the manufacturer for the purpose of levy of turn over tax under the relevant provisions of the Kerala Sales Tax Act?

The liquor which is manufactured by the respondents has to be sold to the Beverages Corporation which can be regarded as sole selling agent or the cannalizing agency. The liquor manufactured is removed to the bonded warehouse of the Beverages Corporation. At the time when the liquor is removed from that bonded warehouse, the excise duty is paid by the Beverages Corporation.

In the notices which were sent to the respondents, it was stated that this excise duty which was paid by the Beverages Corporation really forms part of the turn over of the respondents in the sale of liquor by them to the Beverages Corporation and, therefore, turn over tax was payable on this element as well. The contention of the State was that this excise duty was really an obligation of the manufacturer and merely because the obligation was discharged by the Beverages Corporation would not mean that the same would not form part of the turn over of the manufacturer.

The High Court, on a challenge being made by the respondents, decided in their favour and came to the conclusion that this excise duty which was in fact paid by the Beverages Corporation would not be regarded as being part of their turn over for the purpose of levy of turn over tax.

Mr. T.L.V. Iyer, learned senior counsel has drawn our attention to a decision of this Court in the case of Mohan Breweries & Distilleries Ltd. Vs. Commercial Tax Officer, Madras & Ors.: (1997) 7 SCC 542. In that case this Court was concerned with the levy of turn over tax in respect of liquor which was produced and sold to the State Marketing Corporation. It is the contention of Mr. Iyer that the provisions of the law in Tamil Nadu relating to the levy of this tax is more or less pari materia with the corresponding provisions of law in Kerala. In particular, reliance was placed on paragraph 7 of the aforesaid decision which reads as follows:

‘7. Excise duty is levied upon goods manufactured or produced (Entry 84 of List I and Entry 51 of List II of the Seventh Schedule to the Constitution). Its incidence falls, therefore, on the manufacturer or producer of the goods. The collection of excise duty may be deferred to such later stage as is, administratively or otherwise, most convenient.’

Basing itself on the aforesaid observations, this Court concluded that even if Rule 22 of the Tamil Nadu Rules provides for realization of the excise duty from the Corporation that was only a convenient method of collection, the primary obligation to pay excise duty being only of the manufacturer. Mr. Iyer, therefore,

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2005 Supreme(SC) 809

Important pointThe incidence of excise duty, having regard to the provision of the Kerala Abkari Act and the relevant Rules, falls upon the manufacturer/distiller, therefore, includable in their turnover for the purpose of levy of turnover tax.

Cases Referred (13)

Important point
The incidence of excise duty, having regard to the provision of the Kerala Abkari Act and the relevant Rules, falls upon the manufacturer/distiller, therefore, includable in their turnover for the purpose of levy of turnover tax.