Indian Mica & Micanite Industries
Ltd. Vs. State of Bihar & Ors  INSC 106 (2 April 1971)
SIKRI, S.M. (CJ) MITTER, G.K.
REDDY, P. JAGANMOHAN
CITATION: 1971 AIR 1182 1971 SCR 319
R 1973 SC 724 (30) AFR 1980 SC 1 (13) R 1980
SC1008 (18) R 1981 SC1863 (23,28) RF 1990 SC1927 (41,67,68,74,88) RF 1992 SC
Bihar and Orissa Excise Act, 1915, s. 90 and
rules made there under, r. 111-Levy of licence fee for possession of
liquor-Whether fee commensurate with service rendered by State-Immunity from
prosecution on payment of licence fee-If quid pro quo.
The appellant was using denatured spirit in
the manufacture of micanite. It challenged the vires of r. IIIof the Rules
framed under s. 90 of the Bihar and Orissa Excise Act, 1915, by which a fee for
a licence to possess denatured spirit was imposed. The. High Court upheld the
levy as a fee for services rendered by the Government.
In appeal to this Court,
HELD: (1) Denatured spirit being intoxicating
liquor (though unfit for human consumption), the State Legislature has power to
levy a fee. But, before the levy can be upheld as a fee it must be shown that
the levy was a quid pro quo for services rendered by the Government. An
arithmetic exactitude is not expected but correlation ship of a general
character must be established. [32ID-F] in the present case, the only services
rendered were that the Excise Department was maintaining an elaborate staff for
the purpose of ensuring that denaturing was done properly by the manufacturer
and for, the purpose of seeing that the subsequent possession of the denatured
spirit was not misused by converting the denatured spirit into alcohol fit for
human consumption. [326H; 327A-B] (a) So far as the manufacturing process is
concerned the appellant had nothing to do with it. It was only a purchaser of
the denatured spirit and hence the cost of supervising the manufacturing
process or any assistance rendered to the manufacturers could not be recovered
from consumers like the appellant. Further, under, r. 9 the actual cost of
supervision of the manufacturing process was required to be borne by the
manufacturer and there could not be a double levy in that regard [327B-C] (b)
Assuming that the possession of the denatured spirit in the hands of various
persons required close and effective supervision because of the risk being
potable liquor, in Providing against misuse
the State was not rendering any service to the consumer. [327D] (c) The
appellant had alleged that the State was collecting the amount without
rendering any service in return. The correlation ship between the services
rendered and the fee levied is essentially a question of act. Prima facie in
the present case the levy was excessive, even if the state could be said to be
rendering some service to the licensees. The State was in possession of
material from which ' the correlation ship between the levy and the services
rendered could be, established at least in a general way, but the State had not
placed' any material before the Court.
Therefore, the levy under the impugned 'rule
could not be justified, [327E-G] 320 Commissioner, Hindu Religious Endowments,
Madras v. Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt,  S.C.R.
1005, Mahant Sri Jagannath Ramanuj Das & Anr. v. State of Orissa &
Anr.,  S.C.R.. 1046, Ratilal Panachand Gandhi v. State of Bombay &
Ors.,  S.C.R.
1055, Hingir Rampur Coal Co. Ltd. v. State of
Orissa & Ors.,  2 S.C.R. 537, H. B. Sudhundra Thirtha Swamiar v.Commissioner
of Hindi,( Religious and Charitable Endowments, Mysore,  Supp, 2 S.C.R.
302. Corporation of Calcutta & Anr. v. Liberty Cinema,  2 S.C.R. 477
and Delhi Cloth
 2 S.C.R 348, followed.
(2) The High Court erred in observing that
when the manufacturers wanted to keep in their possession a large quantity of
denatured spirit for manufacturing purposes, they wanted a privilege and
immunity from prosecution, that the payment of the requisite licence fee was
for that purpose and that it operated as the quid pro quo. [325C-D] (a) The
granting of a license generally does not confer any privilege or benefit on
anyone, except in those cases, where a permit or licence is granted to someone
to exploit Government property. The requirement to take a licence is prescribed
to safeguard public interest by regulating a trade,. business or profession and
not as a source of revenue. [325F-G] (b) What is made punishable is either a
person's failure to take a licence or a breach of the conditions of the
licence, and the Government could not barter away its duty to prosecute an
offender for consideration.. Any fee levied could only be for services
rendered. [325E-F] [Since the State may suffer considerable financial loss the
matter was. remanded to the High Court with further opportunity to the State to
place the necessary material and show the correlation ship.] [328A] & CIVIL
APPELLATE JURISDICTION : Civil Appeal No. 770 of 1967.
Appeal from the judgment and order dated
September 14, 1966 of the Patna High Court in Civil Writ Jurisdiction Case No887
Sarjoo Pravad, K. K. Sinha and B. B. Sinha,
for the appellant.
S. C. Agarwala, R. K. Garg, V.J. Francis,
Narayana Netter and S. P. Singh, for the respondents.
The Judgment of the Court was delivered by
Hegde J. In this appeal by certificate. the vires of Rule III of the Rules
framed under Section 90 of the Bihar and Orissa Excise Act, 1915 is in issue.
'The. appellant, Indian Mica & Micanite Industries contends that the said
Rule is ultra vires the Constitution. The High Court of Patna rejected that
In the High Court various contentions came up
for consideration. The High Court has come to the conclusion that the levy made
under the impugned rule is a fee. That finding was not 321 challenged before us
by any of the parties. Therefore all that we have to see is whether the fee
levied is, within the permissible limit. In other words whether there, is
sufficient quid pro quo for the levy in question.
The appellant is a consumer of denatured
spirit. It purchases denatured spirit from the wholesalers or the manufacturers
for the purpose of manufacturing micanite.
The Bihar and Orissa Excise Act, 1915 (Bihar
& Orissa Act 2 of 1915) came into force on January 19, 1916. In pursuance
of the provisions of that Act the impugned Rule was framed by the Board of
Revenue for levying licence fee. The fee for the licence to possess denatured
spirit in 1919 was only Rs. 2 per annum irrespective of the quantity in the
possession of a person. This' rate continued to be in force till 1937. At this
stage it may be remembered that under sub-section (2) of Section 143 of the
Government of India Act, 1935, the Provinces were authorised to continue to
levy tax, duties, cesses or fees which were being lawfully levied prior to the
commencement of that Act. Under the 1935 Act as under our present Constitution,
the power to levy duties on alcoholic liquor fit for human consumption was
allocated to the Provincial Legislature whereas the power to levy duty on alcoholic
liquor not fit for human consumption was allocated to the Central Legislature.
Denatured spirit though an alcoholic liquor is not fit for human 'consumption.
The power to levy duty on the same was and is given to the Central Legislature.
But the same being intoxicating liquor, the Provincial Legislature under the
1935 Act and at present the State Legislature has power to levy fee. The power
ofany Legislature to levy fee is conditioned by the fact that it must by and
large a quid pro quo for the services rendered. If a levy purporting to be a
fee is found to be an exaction without doing any service, or if it is found
that the levy is wholly disproportionate to the services rendered then the levy
The distinction between fee and levy' came up
for the first time for consideration by this Court in The Commissioner, Hindu
Religious Endowments' Madras v. Sri Lakshmindra Thirtha Swamiar of Sri Shirur
Mutt(1). Therein this Court speaking through Mukherjea, J. (as he then was)
quoted with approval the definition of 'tax' given by Latham C. J. of the High
Court of Australia in Matthews v. Chicory, Marketing Board.(2) In that case the
learned Chief Justice observed :
" "A tax" is a compulsory
exaction of money by public authority for public purposes enforceable by law
and is not payment for services rendered." (1)  S.C.R. 1005. (2) 60
21-1 S. C. India/71 Dealing with the
distinction between "tax" and "fee" Mukherjea J. observed
thus in the abovementioned case.
"It is said that the essence of taxation
is compulsion, that is to say, it is imposed under statutory power without the
tax-payer's consent and the payment is enforced by law.
The second characteristic of tax is that it
is an imposition made for public purpose without reference to any special
benefit to be conferred on the payer of the tax. This is expressed by saying
that the levy of tax is for the purposes of general revenue, which when
collected forms part of the public revenues of the State. As the object of a
tax is not to confer any special benefit upon any particular individual, there
is, as it is said no element of quid pro quo between the tax payer and the
public authority. Another feature of taxation is that as it is a part of the
common burden, the quantum of imposition upon the tax payer depends generally
upon his capacity to pay.
Coming now to fees, a "fee" is
generally defined to be a charge for a special service rendered to individuals
by some governmental agency. The amount of fee levied is supposed to be based
on the expenses incurred by the government in rendering the service, though in
many cases the costs are arbitrarily assessed.
Ordinarily, the fees are uniform and no
account is taken of the varying abilities of different recipients to pay. These
are undoubtedly some of the general characteristics, but as there may be
various kinds of fees, it is not possible to formulate a definition that would
be applicable to all cases.
If, as we hold, a fee is regarded as a sort
of return or consideration for services rendered, it is absolutely necessary
that the levy of fees should on the face of the legislative provision, be
correlated to the expenses incurred by government in rendering the
services." The same view was reiterated by this Court in Mahant Sri
Jagannath Ramanuj Das and anr. v. The State of Orissa and anr.0 and in Ratilal
Panchand Gandhi v. The State of Bombay and ors. (2).
The nature of "a fee" again came up
for consideration before this Court in The Hingir Rampur Coal Co. Ltd. and ors.
v. The State of Orissa and ors.(3) Therein this Court observed that (1) 
S.C.R. 1046. (2)  S.C.R. 1055.
(3)  2 S.C.R. 537.
323 -although there can be no generic
difference between a tax and a fee since both are compulsory exactions of money
by public authorities, there is this distinction between them that whereas a
tax is imposed for public purposes and requires no consideration to support it,
a fee is levied essentially for services rendered and there must be an element
of quid pro quo between the person who pays it and the public authority that
imposes it. While a tax invariably goes into the consolidated fund, a fee is
earmarked for the specified services in a fund created for the purpose. Whether
a cess is one or the other would naturally depend on the facts of each case. If
in the guise of a fee, the Legislature imposes a tax, it is for the Court on a
scrutiny of the scheme of the levy, to determine its Teal character. The
distinction is recognised by the Constitution which while empowering the
appropriate Legislatures to levy taxes under the Entries in the three lists
refers to their power to levy fees in respect of any such matters, except the
fees taken in court, and tests have been laid down by this Court for
determining the ,character of an impugned levy. In determining whether a levy
is a fee the true test must be whether its primary and essential purpose is to
render specific services to a specified area or class, it being of no
consequence that the State may ultimately and indirectly be benefited by it.
In H. H. Sudhundra Thirtha Swamiar v.
Commissioner for ,Hindu Religious and Charitable Endowments, Mysore,(1) this
Court was called upon to consider whether the levy impugned in that case could
be justified as a fee. It upheld the levy which was an annual contribution
levied under the amended Section 76(1) of the Madras Religious Endowments Act,
1951 on the ground that those contributions when collected went into a separate
fund and not to the consolidated fund of the State and were earmarked for defraying
the expenses for the services rendered. .Further they were not even payable to
the government but payable to the Commissioner and were levied not as a tax but
only as a fee. Therein this Court further observed that a fee does not cease to
be of that character merely because there is an element of compulsion in it,
nor is it a postulate of a fee that it must have direct relation to the actual
service rendered. Absence of uniformity is not a criterion on which alone it
can be said that the levy is of the nature of a tax.
In Corporation of Calcutta and anr. v.
Liberty Cinema the validity of the levy made under Section 548 (2) of the
Calcutta Municipal Act 1951 came up for consideration.
Therein this ,Court held that the levy in
question is not a "fee and return for services" as the Act does not
provide for any services of a special (1)  Supp. 2 S.C.R. 302. (2) 
2 S.C.R. 477.
324 kind being rendered resulting in benefits
to the person on whom it 'is imposed. Section 527 (43) permits by-laws to be framed
for regulating the inspection, supervision and control, among others, of cinema
houses but it is not obligatory to make such by-laws and therefore, there maybe
no services to render. Even the bylaw made provides only, for inspection, and
the work of inspection done by the appellant was only to see that the terms of
the licence were observed by the licensee-, It was not a service to him,.
and so, no question arises of correlating
the, amount of levy to the costs. of any service. The levy therefore is not a
fee and must be tax.
In Delhi Cloth & General Mills Co. Ltd.
v. Chief Commissioner, Delhi and ors.,(1) the validity of a levy as a fee came
up for consideration by this Court. Therein this Court speaking through Grover,
J. (one of us) laid down that in each case when the question arises whether the
levy is in the nature of a fee the entire scheme of the statutory provisions,
the duties and obligations imposed on the inspecting staff and the nature of
the work done by them will have to be examined for the purpose of determining
the rendering of the services which would make the levy a fee.
After examining the various provisions of the
Factories Act, 1948 and the rules framed this Court came to the conclusion that
a large number of provisions of the Act, particularly in the Chapters dealing
with safety involve a good deal of technical knowledge and in the course of their
discharge of duties and obligations the Inspectors are expected to give proper
advice and guidance so that there may be due compliance with the provisions of
the Act. On certain occasions the factory owners are bound to receive a good
deal of benefit by being saved from the consequences. of the working of
dangerous machines or employment of such processes as involve danger to human
life by being warned at the proper time as to the defective nature of the
machinery or of the taking of precautions which are enjoined under the Act.
Similarly if a building or a machinery or plant is in such a condition that it
is dangerous to human life or safety the Inspector by serving a timely notice
on the manager saves the factory owner from all the consequences of proper
repairs not being done in time to the building or machinery. In that case the
High Court found that 60% of the amount of licence fees which were being
realised was actually spent on services rendered to the factory owners.
That finding was accepted by this Court and
on the basis of that finding this Court upheld the validity of the levy.
From the above discussion it is clear that
before any levy can be upheld as a fee, it must be shown that the, levy has
reasonable correlation ship with the services rendered by the Government. In
(1)  2 S.C.R. 348.
325 other words the levy must be proved to
be, a quid pro quo for the services rendered. But in these matters it will be
impossible to have an exact correlation ship. The correlation ship expected is
one of a general character and not as of arithmetical exactitude.
Let us now proceed to consider whether the
levy under the impugned rule can be justified as a fee on the basis of the law
as enunciated by this Court.
But before doing so, it is necessary to
dispose of one of the grounds on which the High Court upheld the levy. In
paragraph 8 of the High Court's judgment, it is observed:
"........ when a manufacturer wants to
keep in his possession large quantity of denatured spirit for manufacturing
purposes, he wants a special privilege or concession of immunity from
prosecution. For that purpose he has to obtain a licence or a pass on payment
of requisite fees. 'There is thus a quid pro quo element and the immunity from
prosecution is in the nature of a special benefit or privilege." The
implication of this observation is somewhat astounding.
These observations imply that the government
can barter away its duty to prosecute an offender for consideration. The
requirement to take a licence is prescribed to safeguard public interest and
not as a source to gather revenue. What is made punishable is either a person's
failure to take the required licence ,or the breach of the conditions of the
licence; Otherwise there would be no sanction behind the rule requiring to take
a licence. Generally speaking by granting a licence the State does not confer
any privilege or benefit on any one. All that it does is to regulate a trade,
business or profession in public interest. There may be cases where a
government which is the owner of a particular property may grant permit or
licence to someone to exploit that property for his benefit. Such a right may
be given for consideration. It is only in those cases that a licence or a
permit is a conferment of a benefit or a privilege and not in the case of grant
of a licence for carrying on any ordinary trade, business or profession. If it
is otherwise the State can sell the right to practice the profession of law in
courts or to practice the profession of medicine or any of the other numerous professions,
at exorbitant prices or may even put up those rights for auction to be given to
the highest bidder. Nothing so bad can be within the contemplation of our laws.
We are inclined to think that the learned Judges of the High Court have
misunderstood the observations of Seligman quoted in the Commissioner, Hindu
Religious Endowments, 326 Madras v. Sri Lakshmindra Thirtha Swamiar of Sri
Shirur Mutt(1) to the effect that it is a special benefit accuring to the
individual which is the reason for the payment of fee.
Let us now consider whether in the present
case the State is proved to have been rendering any service to the appellant in
lieu of the fee levied and further whether if it does render any service
whether there is reasonable correlation ship between the services rendered and
the fee levied. In other words whether the fee levied can be considered as a
quid pro quo for the services rendered.
The averments of the respondents in their
counter-affidavit that are relevant on this aspect of the case are those found
in paragraph 10 of the counter-affidavit. They read :
" To denature spirit and issue it to
Licensees, proper supervision and control is needed vide Board's rules 63 to 68
at page 177 to 181 of Excise Manual Volume 11. There is every risk that any
person may attempt to render denatured spirit fit for human consumption which
is punishable under section 49 of the Excise Act.
Besides the above rules of the Board certain
instructions have been issued in paragraph 187 to 196 of the Excise Manual, Volume
III (page 67-71) for the process of denaturing and issue of denatured spirit to
the licensees. State Government have to employ supervisory staff and chemical
examiner to carry out these obligations of Supervision and control.
It may be added that Excise Department does
not only supervise and control these intoxicating liquors in the interest of
public policy but renders services to the petitioner by getting alcohol
manufactured at the distillery by supplying raw materials like molasses and
coal to these distilles at controlled cheap rates. This is the only reason of
getting spirit distillery at a very cheap cost by the licensees including the
petitioner. And hence levy of fee by the Excise authorities is not a duty or
tax but it is clearly fee in return for services rendered as well as for proper
supervision, control and regulation of an activity which the legislature
desires to control." According to the finding of the High Court the only
services rendered by the Government to the appellant and to other similar
licensees is that the Excise Department have to maintain an elaborate staff not
only for the purposes of ensuring that denaturing (1)  S.C.R. 1005.
327 is done properly by the manufacturer but
also for the purpose of seeing that the subsequent possession of denatured
spirit in the hands either of a wholesale dealer or retail seller or any other
licensee or permit-holder is not misused by converting the denatured spirit
into alcohol fit for human consumption and thereby evade payment of heavy duty.
So far as the manufacturing process is concerned, the appellant or other
similar licensees have nothing to do with it. They are only the purchasers of
manufactured denatured spirit. Hence the cost of supervising the manufacturing
process or any assistance rendered to the manufacturers cannot be recovered
from the consumers like the appellant.
Further under rule 9 of the Board' rules, the
actual cost of supervision of the manufacturing process by the Excise
Department is required to be home by the manufacturer.
There cannot be a double levy in that regard.
In the opinion of the High Court the subsequent transfer of denatured spirit
and possession of the same in the hands of various persons such as whole-sale
dealer, retail dealer or other manufacturers also requires close and effective
supervision because of the risk of the denatured spirit being converted into
potable liquor and thus evading heavy duty. Assuming this conclusion to be
correct, by doing so, the State is rendering no service to the consumer. It is
merely protecting its own rights. Further in this case, the State which was in
a position to place material before the Court to show what services had been
rendered by it to the appellant and other similar licensees, the costs or at
any rate the probable costs that can be said to have been incurred for
rendering those services and the amount realised as fees has failed to do so.
On the side of the appellant, it is alleged that the State is collecting huge
amount as fees and that it is rendering little or no service in return. The
correlation ship between the services rendered and the fee levied is
essentially a question of fact. Prima facie, the levy appears to be excessive
even if the State can be said to be rendering some service to the licensees.
The State ought to be in possession of the material from which the correlation ship
between the levy and the services rendered can be established at least in a
general way. But the State has not chosen to place those materials before the
Court. Therefore the levy under the impugned Rule cannot be justified.
In this Court Counsel for the State prayed
for an opportunity to place material to show that the levy in question is not
disproportionate to the value of the services rendered by the State. Ordinarily
we would not have acceded to that request coming at such a late stage,
particularly in view of fact that the legal position had been clarified by a
long chain of decisions of this Court.
There is no doubt that the State has failed
to place the necessary material before the Court to justify the levy.
But the fact remains that because of the
negligence of those in-charge of the defence of the 328 State, the State may
suffer considerable, financial loss, if we hold that the impugned Rule is void.
Hence we are constrained to give the State a further chance to prove its case.
In the result we allow the appeal, sat aside
the order of the High Court and remit the case to the High Court for disposal
according to law in the light of this decision. A further opportunity be given
to the State to place material before that court to show that the value of the
services rendered by the State has reasonable correlation ship with the fee
charged. If the State adduces additional evidence, the appellant be given an
opportunity to rebut the same. As the further enquiry is necessitated because
of the negligence of the State, it should pay the costs of the appellant both
in this Court and in the High Court and bear its own costs up to this stage.
V.P.S. Appeal allowed.