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Report No. 158

2.2.4. Emphasis on the problem being a thorny one, laid by the Supreme Court in Bihar Distillery case (infra) and the Court enunciated parameters.-

Another matter came up before the Supreme Court where a distillery situated in Bihar, which has been obtaining licences throughout under the Bihar Excise Act, sought to raise the contention - when the Bihar State Authorities proposed to cancel its licence for certain alleged violations - that the State has no power to do so because according to the decision in Synthetics, the power to grant and cancel the licence of industries engaged in the manufacture of alcohol vested exclusively in the Union. When this matter came up before the Supreme Court of India, it gave a notice to the Union of India and to all the State Governments under the following Order:

"The question arising herein is a thorny one. It is also arising frequently. The decision of the larger Constitution Bench of this Court in Synthetics & Chemicals Ltd. v. State of Uttar Pradesh, (1990) 1 SCC 109). calls for demarcation of the spheres of the Union and the States particularly in the matter of alcoholic liquors. Recently, this Court has held in State of Andhra Pradesh v. McDozvell & Co., (1996) 3 SCC 709) that so far as the intoxicating liquors/ potable liquors are concerned, it is the exclusive province of the States. But for manufacturing intoxicating liquors, or for manufacturing industrial alcohol as the case may be, one must have to manufacture or purchase alcohol.

It is only thereafter that the alcohol is either converted into industrial alcohol (by denaturing it) or into potable liquors by reducing the strength of alcohol (which is normally of 95% purity or above). Indeed, alcohol can be used for industrial purpose even without denaturing it. Saying that States step in only when alcohol becomes potable and not before it leaves a large enough room for abuse apart from difficulties of supervision and regulation.

In the matter of licensing too, problems would arise, as to who should license. such industry - whether the Centre alone or the States or both. Having regard to the importance of the question, we think that this is a proper case where notice should go to all the States who will be heard on this question. The Union of India is already a party to the writ petition."

2.2.4. (a) In response to the notice so issued, the Union Government as well as a large number of State Governments appeared and filed their submissions. They were heard through their respective advocates and judgment rendered on 29.1.1997 - reported in Bihar Distillery v. Union of India, (1997) 2 SCC 727. After discussing the earlier decisions of the Court and the several problems arising therefrom, the Court made the following observations and gave the following directions:-

"It is these and many other situations which have to be taken into consideration and provided for in the interests of law, public health, public revenue and also in the interests of proper delineation of the spheres of the Union and the States. The line of demarcation can and should be drawn at the stage of clearance/removal of the rectified spirit.

Where the removal/ clearance is for industrial purpose (other than the manufacture of potable liquor), the levy of duties of excise and all other control shall be of the Union but where the removal/clearance is for obtaining or manufacturing potable liquors, the levy of duties of excise and all other control shall be that of the States. This calls for a joint control and supervision of the process of manufacture of rectified spirit and its use and disposal. We proceed to elaborate:

(1) So far as the industries engaged in manufacturing rectified spirit meant exclusively for supply to industries (industries other than those engaged in obtaining or manufacture of potable liquors), whether after denaturing it or without denaturing it, are concerned, they shall be under the total and exclusive control of the Union and be governed by the IDR Act and the Rules and Regulations made thereunder. In other words, where the entire rectified spirit is supplied for such industrial purposes or to the extent it is so supplied as the case may be, the levy of excise duties, and all other control including establishment of distillery shall be that of the Union.

The power of the States in the case of such an industry is only to see and ensure that rectified spirit whether in the course of its manufacture or after its manufacture, is not diverted or misused for potable purposes. They can make necessary regulations requiring the industry to submit periodical statements of raw material and the finished product (rectified spirit) and are entitled to verify their correctness. For this purpose, the States will also be entitled to post their staff in the distilleries and levy a reasonable regulatory fees to defray the costs of such staff, as held by this Court in Shri Bilelshwar Khand Udyog Khedut Sahakari Mandali Ltd. v . State of Gujarat, (1992) 2 SCC 42 and Gujchem Distillers India Ltd. v. State of Gujarat, (1992) 2 SCC 399.

(2) So far as industries engaged in the manufacture of rectified spirit exclusively for the purpose of obtaining or manufacturing potable liquors - or supplying the same to the State Government or its nominees for the said purpose - are concerned, they shall be under the total and exclusive control of the States in all respects and at all stages including the establishment of the distillery. In other words, where the entire rectified spirit produced is supplied for potable purposes - or to the extent it is so supplied, as the case may be the levy of excise duties and all other control shall be that of the States. According to the State Government, most of the distilleries fall under this category.

(3) So far as industries engaged in the manufacture of rectified spirit, both for the purpose of (a) supplying it to industries (other than industries engaged in obtaining or manufacturing potable liquors/intoxicating liquors) and (b) for obtaining or manufacturing or supplying it to Governments/persons for obtaining or manufacturing potable liquors are concerned, the -1 following is the position: The power to permit the establishment and regulation of the functioning of the distillery is concerned, it shall be the exclusive domain of the Union.

But so far as the levy of excise duties is concerned, the duties on rectified spirit removed/cleared for supply to industries (other than industries engaged in obtaining or manufacturing potable liquors), shall be levied by the Union while the duties of excise on rectified spirit cleared/removed for the purposes of obtaining or manufacturing potable liquors shall be levied by the State Government concerned. The disposal, i.e., clearance and removal of rectified spirit in the case of such an industry shall be under the joint control of the Union and the State concerned to ensure evasion of excise duties on rectified spirit removed/cleared from the distillery.

It is obvious that in respect of these industries too, the power of the States to take necessary steps to ensure against the misuse or diversion of rectified spirit meant for industrial purposes (supply to industries other than those engaged in obtaining or manufacturing potable liquors) to potable purposes, both during and after the manufacture of rectified spirit, continues, unaffected. Any rectified spirit supplied, diverted or utilised for potable purposes, i.e., for obtaining or manufacturing potable liquors shall be supplied to and/or utilised, as the case may be, in accordance with the State excise enactment concerned and the rules and regulations made thereunder. If the State is so advised, it is equally competent to prohibit the use, diversion or supply of rectified spirit for potable purposes.

(4) It is advisable - nay, necessary that the Union Government makes necessary rules/regulations under the IDR Act, directing that no rectified spirit shall be supplied to industries except after denaturing it save those few industries (other than those industries which are engaged in obtaining or manufacturing potable liquors) where denatured spirit cannot be used for manufacturing purposes.

(5) So far as rectified spirit meant for being supplied to or utilised for potable purposes is concerned, it shall be under the exclusive control of the States from the moment it is cleared/removed for that purpose from the distillery - apart from other powers referred to above.

(6) The power to permit the establishment of any industry engaged in the manufacture of potable liquors including IMFLs, beer, country liquor and other intoxicating drinks is exclusively vested in the States. The power to prohibit and/or regulate the manufacture, production, sale, transport or consumption of such intoxicating liquors is equally that of the States, as held in McDowell ( (1996 ) 3 SCC 709). The writ petition is disposed of with the above directions."



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