Mohan Meakin Ltd. Vs.
State of H.P. & Ors.  INSC 2221 (18 December 2008)
IN THE SUPREME COURT
OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 7403 OF 2008 [Arising
out of SLP (Civil) No. 19909 of 2007] Mohan Meakin Ltd. ...Appellant Versus
State of H.P. & Ors. ...Respondents WITH
CIVIL APPEAL NO. 7421 OF 2008 [Arising out of SLP (Civil) No. 20593 of 2007]
S.B. SINHA, J :
validity of increase in levy made by the State of Himachal Pradesh inter alia
on import/ transport of rectified spirit and/ or potable alcohol is in question
in these appeals which arise out of a judgment 2 and order dated 27.06.2007
passed by the High Court of Himachal Pradesh, Shimla in C.W.P. No. 251 of 1999.
is a public limited company registered and incorporated under the Companies
Act, 1956. It is carrying on business of manufacture and sale of India Made
Foreign Liquor (IMFL) and beer, etc. Its distillery is situated at Kasauli in
the District of Solan. It holds a licence in Form D-2 granted by the State of
Himachal Pradesh in terms of the provisions of the Punjab Excise Act, 1914 (for
short "the Act") and the Rules framed thereunder. For the purpose of
running the said distillery, it imported `Malt Spirit of over proof strength'
from its distillery situated at Mohan Nagar in the State of Uttar Pradesh. For
the said purpose, it was required to obtain import permit from the Collector
Excise, Himachal Pradesh. It also transported some quantities of Malt Spirit of
over proof strength from M/s. Rangar Breweries Ltd., Mehatpur, Distt. Una as
well as from its distillery situated at Mohan Nagar, Distt. Ghaziabad during
the relevant years, viz., 1997-98 and 1998-99.
prior to 1.04.1996, no payment was required to be made for obtaining permit/
transport fee on transportation of IMFL, country spirit, 3 beer, etc. It was
directed to be levied for the first time in terms of an excise policy for the
year 1996 - 97 dated 12.03.1996. A permit fee at the rate of Rs. 2.50 per bulk
litres on denatured spirit, Rs. 2.00 per proof litre and Rs. 1.00 per proof
litre on foreign spirit and country liquor respectively became leviable. Such
permit fee was payable at the time of grant of permission for transportation of
liquor. It was payable by a person who makes an application for grant of
permission for import and/ or transport of foreign liquor or country liquor or
both. A demand of Rs. 8,21,992/- was made by the Excise and Taxation Officer on
or about 28.10.1997 towards permit fee on the spirit imported by the appellant
during the year 1996-97. Another demand for a sum of Rs. 17,68,346/- was made
upto 6.02.1999 for making similar import. Indisputably, no amount towards
payment of licence fee was due from the appellant. It is also not in dispute
that export duty at the rate of Rs. 1.00 per proof litre on Indian Made Foreign
Spirit and at the rate of Rs. 0.50 per bulk litre on beer with alcoholic
content upto 5% and at the rate of Rs. 0.75 per bulk litre with alcoholic
content exceeding 5% has been paid by the appellant. It has also paid import
fee at the rate of Rs. 6/- per proof litre on spirit imported by it.
representation was made by the appellant in respect of the said demands by a
letter dated 30.01.1999 inter alia contending that the State of Himachal
Pradesh had no jurisdiction to levy such fee. In any event, no services having
been rendered to the appellant, quantum jump of the licence fee in the name of
such permit fee was not justified.
The said representation
of the appellant was rejected by an order dated 10.02.1999.
High Court, however, by reason of the impugned judgment rejected the
contentions of the appellant.
Anoop G. Chaudhary and Mr. Rakesh Dwivedi, learned senior counsel appearing on
behalf of the appellant, would submit:
(i) Transportation of
industrial alcohol and/ or rectified spirit being not within the legislative
competence of the State, it cannot exercise any control thereover.
(ii) The High Court
committed a serious error as it proceeded on the premise that there does not
exist any distinction between import of potable liquor and that of Malt Spirit
of over proof strength.
(iii) The element of
quid pro quo being inherent in the levy of fee and as no material was produced
by the State to justify its demand, the impugned judgment cannot be sustained.
Naresh K. Sharma, learned counsel appearing on behalf of the respondents, on
the other hand, would contend that the State has to incur a huge expenditure
towards maintenance of staff for regulating the business of liquor. Permit is
granted for import of country spirit, beer, IMFL, etc. in the interest of the
permit holders themselves so that abuse of import by non- permit holders can be
prevented. Business in both potable liquor as also Malt Spirit of over proof
strength is required to be regulated by the State for which the State must have
will assume, as has been contended, that no person has any fundamental right to
carry on business in liquor, it being res extra commercium.
question which would, however, arise for consideration is as to whether the
State has the jurisdiction to impose any restriction on the movement of
industrial alcohol and/ or Malt Spirit of over proof strength.
XI of the Constitution of India provides for relations between Union and the
States. Chapter I thereof provides for legislative relations.
In terms of Article
245(1) of the Constitution of India, ordinarily the Parliament has the
exclusive legislative competence to make laws for the whole or any part of the
territory of India and the Legislature of a State may make laws for the whole
or any part of the State. Article 246 provides for the subject matter of laws
made by the Parliament and by the Legislatures of States. Indisputably, the
Parliament has the exclusive power to make laws, in respect of the matters
enumerated in List I of the Seventh Schedule of the Constitution whereas the
State has the exclusive legislative power to make laws with respect to any of
the matters enumerated in List II of the Seventh Schedule of the Constitution.
We are not concerned herein with the legislative competence of the Union as
also the State as contained in List III of the Seventh Schedule of the
Constitution of India. Entry 42 of List I of the Seventh Schedule of the
Constitution provides for inter-State trade and commerce. Entries 52, 84 and 97
of List I of the Seventh Schedule of the Constitution read as under:
Industries, the control of which by the Union is declared by Parliament by law
to be expedient in the public interest.
*** *** ***
84. Duties of excise
on tobacco and other goods manufactured or produced in India except- (a)
alcoholic liquors for human consumption.
(b) opium, Indian
hemp and other narcotic drugs and narcotics, but including medicinal and toilet
preparations containing alcohol or any substance included in sub-paragraph (b)
of this entry.
*** *** ***
97. Any other matter
not enumerated in List II or List III including any tax not mentioned in either
of those Lists."
8 of List II of the Seventh Schedule of the Constitution confers legislative
power upon the State in respect of "Intoxicating liquors, that is to say,
the production, manufacture, possession, transport, purchase and sale of
intoxicating liquors". Entry 51 of List II thereof provides for an
exception to the Parliament's power to impose levy of tax on manufacture of the
article, in respect of:
liquors for human consumption;
(b) opium, Indian
hemp and other narcotic drugs and narcotics, but not including medicinal and
toilet preparations containing alcohol or any substance included in
sub-paragraph (b) of this entry."
Entry 66, List II of
the Seventh Schedule of the Constitution reads as under:
"66. Fees in
respect of any of the matters in this List, but not including fees taken in any
Act is a pre-constitutional statute.
Section 3(18) of the
Act defines spirit and Section 3(14) thereof defines liquor. These definitions
cover even denatured spirit. They are broadly worded pre-constitutional
definitions. Malt spirit is said to be spirit obtained by distillation of
barley or other grain. The strength of Malt Spirit after distillation is said
to be 66% to 70% v/v. It is also with over proof strength. Proof liquor is of
around 50% v/v. Liquor which is sufficiently below the same is termed as under
herein contends that it had imported Malt Spirit of over proof strength and the
application for grant of permit vis-`-vis levy of fee pertained only thereto.
It has furthermore been contended that the Malt Spirit imported by it being
rectified spirit, it is not potable as per ISI Specifications. It is not bought
and sold in the market as potable liquor. It is used as a raw material for
blending to manufacture IMFL. Contention of the appellant, therefore, is that
it is not an excisable article within the meaning of the provisions of Section
3(6) of the Act.
Section 16 of the Act
restricts import, export and transportation of intoxicants, except upon payment
of any duty or execution of a bond or compliance with such conditions as the
State Government may impose.
Section 18 provides
for issuance of passes for import, export and transport to be granted in terms
of Section 19 thereof. Sub-section (2) of Section 20 forbids construction or
working of any distillery or brewery, save and except under the authority and
subject to the terms and conditions of the licence granted in that behalf by
the Financial Commissioner under Section 21 of the Act, which reads as under:
Financial Commissioner, subject to such restrictions or conditions as the State
Government may impose, may - (a) establish a distillery in which spirit may be
manufactured under a license granted under section 20;
*** *** *** (d) make
rules regarding - *** *** *** (11) any other matters connected with the working
of distilleries or breweries."
The rule making power
is conferred upon the Financial Commissioner by reason of Section 59 of the
Act, which reads as under:
Financial Commissioner may, by notification, make rules - (a) *** (b) *** (c)
*** (d) prescribing the scale of fees or the manner of fixing the fees payable
in respect of any license, permit or pass or in respect of the storing of any
(e) regulating the
time, place and manner of payment of any duty or fee;
(f) prescribing the
authority by, the restrictions under and the conditions on which, any license,
permit or pass may be granted - "
to or in furtherance of the said power, the Financial Commissioner made rules
known as the Punjab Liquor Permit and Pass Rules, 1932 (for short "the
Rules). The Rules are applicable subject to such modifications as has been made
in the State of Himachal Pradesh, the relevant provisions whereof are as under:
"7.2 Subject to
the provisions of order 23 of the Himachal Pradesh Liquor Import, Export,
Transport and Possession Orders, 1965, a person importing, exporting or
transporting foreign liquor, country spirit, rectified spirit or denatured
spirit must obtain - (a) a permit in form L-32 in the case of import and
transport or corresponding permit in case of export from the officer authorized
to grant such permits in the district, State or Union territory of destination;
and (b) a pass in form L-34 for export and transport and a corresponding pass
for import from the officer authorized to grant such passes in the place of
Provided that a pass
for the removal of spirit and beer from a licensed distillery or brewery or a
warehouse issued in accordance with the rules made by the Financial
Commissioner, shall be deemed to be a pass for the purpose of this rule;
Provided further that
a permit shall not be required for the transport or foreign liquor, country
spirit, rectified spirit or denatured spirit within a district, except when
denatured spirit is transported from the bonded warehouse of a licensed
Provided further that
the members of the diplomatic staff of a foreign embassy located in the State
of H.P. shall not be required to obtain a permit for import and transport of
7.2A. A fee at the
rate of (a) Rs. 2.00 per proof litre of foreign liquor (excluding beer,
secremental wine, wine and cider) and (b) Re. 1.00 per proof litre of country
spirit shall be payable by a person who makes an application for the grant of
permission to import and/ or transport of the foreign liquor; (excluding beer
secremental wine, wine and cider) or country liquor or both:
Provided that in the
case of events covered by the second proviso to clause (b) of rule 2, the fee
shall also be payable at these rates by a licensee who makes an application for
the grant of permission to transport foreign liquor (excluding beer,
secremental wine and cider) or country spirit or both:
Provided further no
fee shall be payable on the quantity of Foreign liquor (excluding beer
secremental wine, wine and cider) on which such fee has already been paid and
recovered previously in Himachal Pradesh.
Explanation - 1. In
this rule, the expression "transport" shall not include the transport
of Foreign Spirit or country spirit in course of `export' inter - State or
across the customs frontier of India.
2. The fee specified
in this rule shall not be payable on denatured spirit rectified spirit or
By reason of
notifications dated 1.04.1997 and 1.04.1998, the rates of fees mentioned in
Rule 7.2-A were modified.
7.9 of the Rules reads as under:
"7.9 All passes
granted to cover the import of country spirit and foreign liquor, shall be
subject to the condition that no consignment shall be brought into use until it
has been examined by the excise inspector or sub-inspector of the district of
destination, to whom intimation of the arrival of the consignment shall be
given; such examination shall be conducted within seven days of the receipt of
the intimation which shall be dispatched by the importer on the day following
the receipt of the consignment."
Financial Commissioner also made the Excise Barriers' Rules, 1939; Rules 19.1
and 19.2 thereof read as under:
Financial Commissioner may establish excise outposts at such places as he may
think fit on any road, or at any ferry, for the prevention of the smuggling of
excisable articles or opium, and may depute Excise Inspectors to be in charge
of such outposts.
19.2 The driver of
any vehicle or laden animal arriving at an excise post shall stop his vehicle
or animal or arrival at the outpost until the excise officer has conducted his
search. The excise officer will proceed with the search forthwith."
the State has the exclusive authority to grant licence.
Our attention has
been drawn to one of the conditions of the licence granted in favour of the
appellant in Form D-2 which reads as under:
"1. The licensee
shall observe the provisions of the Punjab Excise Act, 1 of 1914 and all rules
made thereunder and all rules made under any other law for the time being in force
applicable to the manufacture, issue and sale of spirit."
the appellant being a licensee must abide by the terms and conditions of
licence. It is also bound to follow the rules framed in this behalf. A
subordinate legislation which, however, is beyond the legislative competence of
the State would be ultra vires. Furthermore, there cannot be any doubt that the
State possesses the right to have complete control over all aspects of
intoxicants, viz., manufacture, collection, sale and consumption, etc. It also
has the exclusive right to manufacture and sell liquor and to transfer the said
right with a view to raise revenue. Right to fix the amount of consideration
for grant of said privilege for manufacturing or vending liquor is also beyond any
doubt or dispute.
State has to make distinction between a Malt Spirit of over proof strength and
potable liquor. Entries 8, 51 and 66 of List II of the Seventh Schedule of the
Constitution of India confer jurisdiction upon the State only to exercise its
legislative control in respect of matters which are covered thereby. Industrial
alcohol or spirit having regard to Entry 52 of List I of the Seventh Schedule
of the Constitution of India cannot be subject matter of any regulation or
control by the State; it being not alcoholic liquor for human consumption.
The question is
well-settled in view of the decision of a Seven-Judge Bench of this Court in
Synthetics and Chemicals Ltd. and Others v. State of U.P. and Others [(1990) 1
SCC 109] wherein it was categorically held:
"53. It was
further submitted by the State that the State has exclusive right to deal in
liquor. This power according to the counsel for the State, is reserved by
and/or derived under Articles 19(6) and 19(6)(ii) of the Constitution. For
parting with that right a charge is levied. It was emphasised that in a series
of decisions some of which have been referred to hereinbefore, it has been
ruled that the charge is neither a fee nor a tax and termed it as privilege.
The levy is on the manufacture, possession of alcohol. The rate of levy differs
on its use, according to the State of U.P. The impost is also stipulated under
the trading 16 powers of the State under Article 298 and it was contended that
the petitioners and/or appellants were bound by the terms of their licence. It
was submitted that the Parliament has no power to legislate on industrial
alcohol, since industrial alcohol was also alcoholic liquor for human
consumption. Entry 84 in List I expressly excludes alcoholic liquor for human
consumption; and due to express exclusion of alcoholic liquor for human
consumption from List I, the residuary Entry 97 in List I will not operate as
against its own legislative interest. These submissions have been made on the
assumption that industrial liquor or ethyl alcohol is for human consumption. It
is important to emphasise that the expression of a constitution must be
understood in its common and normal sense. Industrial alcohol as it is, is
incapable of being consumed by a normal human being. The expression
`consumption' must also be understood in the sense of direct physical intake by
human beings in this context. It is true that utilisation in some form or the
other is consumption for the benefit of human beings if industrial alcohol is utilised
for production of rubber, tyres used. The utilisation of those tyres in the
vehicle of man cannot in the context in which the expression has been used in
the Constitution, be understood to mean that the alcohol has been for human
54. We have no doubt
that the framers of the Constitution when they used the expression `alcoholic
liquor for human consumption' they meant at that time and still the expression
means that liquor which as it is is consumable in the sense capable of being
taken by human beings as such as beverage of drinks.
Hence, the expression
under Entry 84, List I must be understood in that light. We were taken through
various dictionary and other meanings and also invited to the process of
manufacture of alcohol in order to induce us to accept the position that
denatured spirit can also be by appropriate cultivation or application or
admixture with water or with others, 17 be transformed into `alcoholic liquor
for human consumption' and as such transformation would not entail any process
of manufacture as such. There will not be any organic or fundamental change in
this transformation, we were told. We are, however, unable to enter into this
examination. Constitutional provisions specially dealing with the delimitation
of powers in a federal polity must be understood in a broad commonsense point
of view as understood by common people for whom the Constitution is made.
In terminology, as
understood by the framers of the Constitution, and also as viewed at the
relevant time of its interpretation, it is not possible to proceed otherwise;
alcoholic or intoxicating liquors must be understood as these are, not what
these are capable of or able to become. It is also not possible to accept the
submission that vend fee in U.P. is a pre-Constitution imposition and would not
be subject to Article 245 of the Constitution. The present extent of imposition
of vend fee is not a pre-Constitution imposition, as we noticed from the change
of rate from time to time."
doctrine of res extra commercium as applied by this Court in respect of potable
alcohol in its various judgments including Khoday Distilleries Ltd. and Others
v. State of Karnataka and Others [(1995) 1 SCC 574] and State of Punjab and
Another v. Devans Modern Breweries Ltd. and Another [(2004) 11 SCC 26] would
have no application to industrial alcohol which is produced in an industry
controlled and regulated in terms of Entry 52, List I of the Seventh Schedule
of the Constitution of India. If manufacture and transport of industrial
alcohol and/ or Malt Spirit of over 18 proof strength is not res extra
commercium in view of the binding decisions of this Court in Synthetics and
Chemicals Ltd. (supra), it is axiomatic that the provisions of Article 301 of
the Constitution of India shall apply in relation to inter-State trade. The
State's power to exercise control of inter- State transport which is within the
exclusive legislative competence of the Parliament having regard to Entry 42,
List I of the Seventh Schedule of the Constitution of India would, thus, be
limited. Its power to impose compensatory tax and/ or fee would also be limited
as envisaged by Article 304(b) of the Constitution of India.
State has not made any distinction between import/ export of spirit and potable
By its letter dated
28.10.1997, it was stated:
have imported/ transported 4,46,880.00 PLs of spirit from R.B.L. Mehatpur and
Mohan Meakin Limited, Mohan Nagar (UP) to Kasauli Distillery for the year
1996-97 upon which permit fee @ Rs. 2/- per P.L. was leviable.
Out of the quantity
mentioned above 35,884,350 PLs of IMFS was (sic) and you have paid the permit
fee @ Rs. 2/- per PL for the said quantity."
supplied] The said demand was reiterated by the State in terms of its letter
In its representation
dated 30.01.1999, the appellant averred:
"3. Under entry
51 of List II of Seventh Schedule to Constitution of India, State is empowered
to levy and charge Excise Duty on "Alcoholic Liquors for human consumption"
and similarly under item No. 66 the State is empowered to levy and charge fees
in respect of matters in this list i.e. on Alcoholic liquors for human
consumption. Bulk spirit on which Permit/ Transport Fee is sought to be charged
is of over proof strength and is not an Alcoholic Liquor for human consumption.
Thus, State is not empowered to levy/ charge permit/ transport fee on transport
of spirit of over proof strength. Levy of any duty or fee on spirit of over
proof strength is within the competence of Government of India as mentioned in
entry 84 and 96 of List I to Seventh Schedule to the Constitution of India. In
view of this position the demand is illegal and against the provision of
Constitution of India."
Appellant, in its
representation dated 25.02.1999, stated:
"The permit fee
is being demanded on the import/ transport of spirit of over proof strength
which is 20 of alcoholic liquor for human consumption and does not fall within
the ambit of entry 51 of List II of VIIth Schedule to Constitution of India
read with item 66 ibid. The State is empowered to levy permit fee on transport
of Alcoholic Liquor for human consumption only. Levy of duty or fee on spirit
of over proof strength is within the competence of Union of India/ Parliament
of India as mentioned in entry 84 and 96 of List I to VIIth Schedule to
Constitution of India."
may, on the other hand, notice the contentions of the State, in its counter
affidavit before the High Court:
and issue of permit is essentially regulatory in character. Viewed in this
perspective, the permit fee is not under Entry 51, and has no linage whatsoever
with the duties of excise or countervailing duties on alcoholic liquors meant
for human consumption. It is, thus, not only patently incorrect but also wrong
to draw a nexus between Entry 51 and the permit fee. The object of permit is to
regulate transport, (which includes import as well) under Entry 8 of the said
List II of the Seventh Schedule to the Constitution.
Therefore, the proper
linkage, for the purposes of permit fee, is between Entry 8 and Entry 66 of
List II of the Seventh Schedule."
It was furthermore
therefore, submitted that the malt spirit whether in over proof strength or in
under proof strength, is meant for potable purposes and in both the cases it
does not lose the basic character of intoxicating liquors and the State
Government under Entry No. 8 and 51 read with Entry 66 of List II of Seventh
Schedule to the Constitution of India is competent to legislate and to levy the
duties/ fees. Contentions of the petitioner to the contrary are denied."
The contention of the
State as would appear from its counter-affidavit filed before us is as under:
further submitted that the fee in question is neither a tax nor duty so as to
attract the provisions of Entry 42 of List - I of Seventh Schedule to the
Constitution of India. Permit fees, it is reiterated is not levied on the
import of liquor rather it is charged on every permit to import/ transport the
liquors whether inter - state or intra- state for the services. Therefore, the
Hon'ble High Court is justified to hold that the State Government is empowered
to make rules authorizing it to levy permit fee."
The State furthermore
asserts its right to regulate the business of liquor including over proof
spirit in terms of the provisions of the Act and the Rules framed thereunder.
have noticed hereinbefore that even in terms of the explanation appended to
Rule 7.2A of the Rules, the fees specified in the said Rule would not be
payable on denatured spirit, rectified spirit or perfumed spirit and the
transport shall not include the transport of Foreign Spirit or Country Spirit
in course of export inter-State or across the customs frontier of India.
The levy, therefore,
ex facie could not have been imposed on rectified spirit.
The jurisdiction of
the State to impose such a levy is limited. It has been so held in State of
U.P. and Others v. Vam Organic Chemicals Ltd. and Others [(2004) 1 SCC 225] in
the following terms:
"29. 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."
It was furthermore
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 23
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.
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 rectified spirit, of course, is wholly and exclusively
industrial alcohol" (SCC p. 742, para 23)."
As regards imposition
of fee, it was opined:
the fee is required to be justified with reference to the cost of such
regulation. The industry is already paying a fee under Rule 2 for such
regulation. Indeed, the justification for levying the fee under Rule 3(a) is
the identical justification given by the State for levying the fee under Rule
2. Presumably, a full complement of excise officers and staff are appointed by
the State in the Excise Department to carry out their duties under the Act to
oversee, control and keep duty on the various kinds of intoxicants under the
Having regard to the
decision in Vam Organics-I we must also assume that apart from the normal
strength, additional officers and staff were appointed to regulate the
denaturation of the industrial alcohol. There is nothing to show that there
has been any deployment of any additional staff to oversee the possibility of
renaturation of the denatured spirit."
question as regards `aspects of power to levy fee vis-`-vis tax' came up for
consideration before this Court in Jindal Stainless Ltd. (2) and Another v.
State of Haryana and Others [(2006) 7 SCC 241] wherein this Court held:
"38. In the
generic sense, tax, toll, subsidies, etc.
are manifestations of
the exercise of the taxing power. The primary purpose of a taxing statute is
the collection of revenue. On the other hand, regulation extends to administrative
acts which produces regulative effects on trade and commerce. The difficulty
arises because taxation is also used as a measure of regulation. There is a
working test to decide whether the law impugned is the result of the exercise
of regulatory power or whether it is the product of the exercise of the taxing
power. If the impugned law seeks to control the conditions under which an
activity like trade is to take place then such law is regulatory. Payment for
regulation is different from payment for revenue. If the impugned taxing or
non-taxing law chooses an activity, say, movement of trade and commerce as the
criterion of its operation and if the effect of the operation of such a law is
to impede the activity, then the law is a restriction under Article 301.
However, if the law enacted is to enforce discipline or conduct under which the
trade has to perform or if the payment is for regulation of conditions or
incidents of trade or manufacture then the levy is regulatory. This is the way
of reconciling the concept of compensatory tax with the scheme of Articles 301,
302 and 304.
For example, for
installation of pipeline carrying gas from Gujarat to Rajasthan, which passes
through M.P., a fee charged to provide security to the pipeline will come in
the category of manifestation of regulatory power. However, a tax levied on
sale or purchase of gas which flows from that very pipe is a manifestation of
exercise of the taxing power. This example indicates the difference between
taxing and regulatory powers (see Essays in Taxation by Seligman).
"a tax", "a fee" and "a Compensatory Tax"
39. As stated above,
in order to lay down the parameters of a compensatory tax, we must know the
concept of taxing power."
It was observed:
"43. In the
context of Article 301, therefore, compensatory tax is a compulsory
contribution levied broadly in proportion to the special benefits derived to
defray the costs of regulation or to meet the outlay incurred for some special
advantage to trade, commerce and intercourse. It may incidentally bring in net
revenue to the Government but that circumstance is not an essential ingredient
of compensatory tax."
furthermore opined that the burden of proof in this behalf would be on the
"46... As soon
as it is shown that the Act invades freedom of trade it is necessary to enquire
whether the State has proved that the restrictions imposed by it by way of
taxation are reasonable and in public interest within the meaning of Article
304 (b) [see para 35 (of AIR) of the decision in Khyerbari Tea Co. Ltd. v.
State of Assam]."
Furthermore, it was
held in A.P. Paper Mills Ltd. v. Govt. of A.P. and Another [(2000) 8 SCC 167]
that even if a fee is levied for issuance of permit, it was only for the
purpose of recovering the administrative charges.
[See also Ashok Lanka
and Another v. Rishi Dixit and Others (2005) 5 SCC 598]
Court in Kerala Samsthana Chethu Thozhilali Union v. State of Kerala and Others
[(2006) 4 SCC 327], upon noticing State of Kerala and Others v. Maharashtra
Distilleries Ltd. and Others [(2005) 11 SCC 1], opined:
"39. In State of
Kerala v. Maharashtra Distilleries Ltd. this Court took notice of the
provisions of Section 18-A of the Act. It was held that the State had no
jurisdiction to realise the turnover tax from the manufacturers in the garb of
exercising its monopoly power. It was held that turnover tax cannot be directed
to be paid either by way of excise duty or as a price of privilege."
while levying a fee, a quantum jump is deprecated.
In Indian Mica
Micanite Industries v. The State of Bihar and Others [(1971) 2 SCC 236], it has
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 wholesale dealer, retail dealer or other
manufacturers also requires close and effective supervision because of the risk
of the denatured spirit being converted into palatable 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 co-relationship 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
The State ought to be
in possession of the material from which the co-relationship 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 case, the
State in fact has not produced any material whatsoever before the High Court.
In Commissioner of
Income Tax and Another v. Distillers Co. Ltd.
[(2007) 5 SCC 353],
this Court held that even for the purpose of levy of excise duty, the same must
have a direct relationship with the manufacture of arrack.
therefore, are of the opinion that the impugned judgment cannot be sustained.
It is set aside accordingly and the matter is remitted to the High Court for
consideration of the Writ Petition filed by the appellant afresh. The parties
shall be at liberty to file additional affidavits/ evidence before the High
Court, if they so desire.
The appeals are
allowed. Respondents shall bear the cost of the appellant. Counsel's fee
assessed at Rs. 50,000/-.