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Report No. 158

Chapter II

The Emerging of Several Practical Problems as a Sequel to The Decision of The Constitution Bench

2.1. Browsing of the Problem.-

The State of U.P. levied, inter alia, a fee called 'Vend Fee' on the sale of liquor manufactured in that State. The rule imposing Vend Fee made no distinction between the liquor sold for obtaining country liquor or for manufacturing liquors for human consumption or liquors sold to industries (other than those engaged in the manufacture of liquors for human consumption). A company called Synthetics and Chemicals Limited (Synthetics) filed a writ petition in the Allahabad High Court challenging the levy of Vend Fee on the liquors sold for industrial purposes.

Its contention was that by virtue of Item 26 of the First Schedule to the IDR Act, the State of U.P. is not competent (after 1956) to levy any duty, tax or fee on denatured spirit, which it was dealing in. (Denatured spirit by its very nature is liquor rendered unfit for human consumption). Its contention was that Parliament alone is entitled to make any law and levy any duty, tax or fee on the denatured spirit. The writ petition was dismissed by the High Court holding that expression "intoxicating liquors" occurring in Entry 8 of List II of the Seventh Schedule to the Constitution included within its ambit denatured spirit as a whole and, therefore, the State was perfectly competent to levy the impugned fee.

Synthetics carried the matter in appeal to the Supreme Court which was dismissed in the year 1980. The decision is reported in (1980) 2 SCC 441: (1980) 2 SCR 531. The Supreme Court referred to the history of State Excise Laws in this country and to the wide definition of liquor in these enactments and observed that while enacting the Government of India Act, 1935, the British Parliament must have been aware and must be deemed to have accepted the said wide definition. (It may be mentioned that the relevant Entries in the Seventh Schedule to the Government of India Act, 1935 and in the Seventh Schedule to the Constitution are identical). The Supreme Court held as follows:-

"11 Dealing with the meaning of word 'liquor', the Court referred to the various Abkari cases in several provinces and found that all the Provincial Acts of this country have consistently included liquor containing alcohol in the definition of 'liquor' and 'intoxicating liquor' and, therefore, the framers of the Government of India Act, 1935 could not have been entirely ignorant of the accepted sense in which the word 'liquor' has been used in the various excise Acts of this country and concluded that the word 'liquor' covers not only those alcoholic liquids which are generally used for beverage purposes and produce intoxication, but also all liquids containing alcohol. In the context it is clear that the decisions proceeded on the basis that the word 'intoxicating liquor' is not confined to potable liquor alone but would include all liquor which contain alcohol."

Synthetics , however, was not satisfied with the judgment. It filed a review petition in the Supreme Court which remained pending for quite some time. Meanwhile, several other writ petitions were filed in the Supreme Court raising the very same contention. All these matters including the review petition filed by Synthetics were referred to a larger Constitution Bench of seven-Judges which rendered its judgment on 25.10.1989 [reported in (1990) 1 SCC 109: (1989) Supp 1 SCR 6231 The Constitution Bench held that the expression "intoxicating liquors" occurring in Entry 8 of List II means and refers only to potable liquors i.e., liquors fit for human consumption and that potability is determined by the standards specified by the Indian Standards Institute viz., the alcohol content should not exceed 43% v/v.

Entry 51 of List II, it held, is also similarly limited to potable liquors. The Bench held that the power of the States to legislate in respect of liquors was restricted to potable liquors only. The Bench held further that "rectified spirit" - which expression was used interchangeably with the expression "ethyl alcohol" and "industrial alcohol" - is of 95% and above purity and cannot, therefore, be tfeated as potable liquor. It held that rectified spirit falls exclusively within the power of the Union by virtue of the IDR Act. The Bench observed that after the 1956 amendment to the IDR Act bringing alcohol industries (under fermentation industries) as Item 26 of the First Schedule to the IDR Act, the control of this industry has vested exclusively in the Union. It thus held as follows:-

"85. After the 1956 amendment to the IDR Act bringing alcohol industries (under fermentation industries) as Item 26 in the First Schedule to IDR Act the control of this industry has vested exclusively in the Union. Thereafter, licences to manufacture both potable and non-potable alcohol is vested in the Central Government. Distilleries are manufacturing alcohol under the Central licences under IDR Act. No privilege for manufacture even if one existed, has been transferred to the distilleries by the State. The State cannot itself manufacture industrial alcohol without the permission of the Central Government.

The States cannot claim to pass a right which they do not possess. Nor can the States claim exclusive right to produce and manufacture industrial alcohol which are manufactured under the grant of licence from the Central Government. Industrial alcohol cannot upon coming into existence under such grant be amenable to States' claim of exclusive possession of privilege. The State can neither rely on Entry 8 of List II nor Entry 33 of List III as a basis for such a claim.

The State cannot claim that under Entry 33 of List III, it can regulate industrial alcohol as a product of the scheduled industry, because the Union, under section 18G of the IDR Act, has evinced clear intention to occupy the whole field. Even otherwise sections like sections 24A and 24B of the U.P. Act do not constitute any regulation in respect of the industrial alcohol as product of the scheduled industry. On the contrary, these purport to deal with the so-called transfer of privilege regarding manufacturing and sale. This power, admittedly, has been exercised by the State purporting to act under Entry 8 of List II and not under Entry 33 of List III.

86. The position with regard to the control of alcohol industry has undergone material and significant change after the amendment of 1956 to the IDR Act. After the amendment, the State is left with only the following powers to legislate in respect of alcohol:

(a) It may pass any legislation in the nature of prohibition of potable liquor referable to Entry 6 of List II and regulating powers.

(b) It may lay down regulations to ensure that non-potable alcohol is not diverted and misused as a substitute for potable alcohol .

(c) The State may charge excise duty on potable alcohol and sales tax under Entry 52 of List II. However, sales tax cannot be charged on industrial alcohol in the present case, because under the Ethyl Alcohol (Price Control) Orders, sales tax cannot be charged by the State on industrial alcohol.

(d) However, in case State is rendering any service, as distinct from its claim of so-called grant of privilege, it may charge fees based on quid pro quo. See in this connection, the observations of Indian Mica case (AIR 1971 SC 1182).






88. On an analysis of the aforesaid decisions and practice, we are clearly of the opinion that in respect of industrial alcohol the States are not authorised to impose the impost they have purported to do. In that view of the matter, the contentions of the petitioners must succeed and such impositions and imposts must go as being invalid in law so far as industrial alcohol is concerned. We make it clear that this will not affect any impost so far as potable alcohol as commonly understood is concerned. It will also not affect any imposition of levy on industrial alcohol fee where there are circumstances to establish that there was quid pro quo for the fee sought to be imposed. This will not affect any regulating measure as such."

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