Supreme Court clarifies Excise Duty on Non-Potable Alcohol: State of Orissa & Ors. vs. M/S Utkal Distilleries Ltd. (03 March 2022)

Date of the Judgment: 03 March 2022
Citation: Civil Appeal Nos. 5666-5668 of 2009
Judges: L. Nageswara Rao, J., B.R. Gavai, J.
Can a state government impose excise duty on alcohol that is unfit for human consumption? The Supreme Court of India addressed this critical question in a case involving a distillery in Orissa. The core issue revolved around whether the state could levy excise duty on ‘weak spirit,’ a byproduct of the liquor manufacturing process deemed unsafe for drinking. This judgment clarifies the extent of the state’s power to tax alcohol, emphasizing the distinction between alcohol for human consumption and industrial alcohol. The judgment was delivered by a division bench comprising of Justice L. Nageswara Rao and Justice B.R. Gavai.

Case Background

In 1990, the Commissioner of Excise, Orissa, granted a license to M/S Utkal Distilleries Ltd. for manufacturing Indian Made Foreign Liquor (IMFL). A key condition of the license was the installation of a rectification column to purify the rectified spirit used in IMFL production. The distillery installed an Extra Natural Alcohol (ENA) column, the first of its kind in Orissa. This process generated a weak spirit, a non-potable byproduct.

The company, facing the issue of disposal of the weak spirit, which was not covered under the existing rules, made a representation to the Excise Commissioner on 19th August 1992. Consequently, a Technical Committee was formed on 21st November 1992 to examine the ENA column and the wastage during the process. The committee submitted its report on 17th June 1993, recommending a 2% loss allowance for spirit during re-distillation, similar to practices in other states.

The State of Orissa initially agreed to the 2% allowance on 11th January 1995, but later issued demand notices on 26th September 1997, claiming excise duty on the weak spirit exceeding the 2% allowance. The distillery contested this, arguing the weak spirit was unfit for consumption and therefore not subject to excise duty. Further demand notices were issued on 8th July 1998, 12th March 2003 and 20th May 2005. The distillery challenged these notices in the High Court of Orissa.

Timeline:

Course of Proceedings

The respondent-company, M/S Utkal Distilleries Ltd., initially filed a writ petition (O.J.C. No.8635 of 1994) in the High Court of Orissa, seeking a direction to the State to decide on the Technical Committee’s report. The High Court directed the State to take a decision within three months. Subsequently, after the State issued demand notices for excise duty on weak spirit exceeding 2%, the company filed another writ petition (O.J.C. No.9369 of 1998) challenging these notices. The High Court stayed these demand notices.

Two more writ petitions were filed by the respondent-company (W.P.(C) No. 3097 of 2003 and W.P.(C) No. 7108 of 2005) challenging subsequent demand notices. All three writ petitions were heard together by the High Court. The High Court of Orissa allowed the writ petitions on 5th December 2008, setting aside the demand notices issued by the appellants. The State of Orissa then appealed to the Supreme Court.

Legal Framework

The case hinges on the interpretation of the legislative powers of the Union and State governments regarding the taxation of alcohol, specifically under the Constitution of India. The relevant entries are Entry 84 of List I (Union List) and Entry 51 of List II (State List) of the Seventh Schedule of the Constitution.

Entry 84 of List I grants the Union the power to levy duties of excise on goods manufactured in India, except on alcoholic liquors for human consumption. Entry 51 of List II empowers the State to levy duties of excise on alcoholic liquors for human consumption manufactured in the State.

The Bihar and Orissa Excise Act, 1915, which was applicable at the time, defined “excisable article” under Section 2(6) as:

• (a) any alcoholic liquor for human consumption; or
• (b) Any intoxicating drug;

Section 27(1) of the said Act specifies the State’s power to impose duty on import, transport, and manufacture of excisable articles. It states:

“An excise duty or countervailing duty, as the case may be, at such rate or rates as the State Government may direct, may be imposed either generally or for any specified local area, on (a) any excisable article imported; or (b) any excisable article exported; or (c) any excisable article transported; or (d) any excisable article (other than tari) manufactured under any licence granted in respect of Clause (a) of Section 13; or (e) any hemp plant cultivated, or any portion of such plant collected, under any licence granted in respect of Clause (b) or Clause (c) of Section 13; or (f) any excisable article manufactured in any distillery or brewery licensed, established, authorised or continued under this Act.”

The core issue is whether the weak spirit, deemed unfit for human consumption, falls under the definition of “excisable article” that the State can tax.

Arguments

Appellants’ (State of Orissa) Arguments:

• The Technical Committee was constituted based on the respondent-company’s representation.
• The Committee recommended allowing a wastage of only 2%.
• The respondent-company cannot now challenge the excise duty demand on weak spirit exceeding 2%.
• The High Court erred in allowing the writ petitions.

Respondent’s (M/S Utkal Distilleries Ltd.) Arguments:

• The issue is not res integra, as the Constitution Bench of the Supreme Court in Synthetics and Chemicals Ltd. vs. State of U.P. (1990) 1 SCC 109 has held that the State Legislature cannot levy duty on industrial alcohol unfit for human consumption.
• The weak spirit generated during the rectification process is not fit for human consumption.
• The State Government has no authority to impose excise duty on the weak spirit.

The respondent relied on the judgment of the Constitution Bench in Synthetics and Chemicals Ltd. vs. State of U.P. (1990) 1 SCC 109, arguing that the state’s power to levy excise duty is limited to alcoholic liquors meant for human consumption. The state’s argument is based on the technical committee report that was constituted at the request of the respondent.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue before the court was:

• Whether the State of Orissa can levy excise duty on weak spirit, a byproduct of the IMFL manufacturing process, which is unfit for human consumption.

Treatment of the Issue by the Court

Authorities

The Supreme Court relied on the following authorities:

• Synthetics and Chemicals Ltd. and others vs. State of U.P. and others (1990) 1 SCC 109 – Constitution Bench, Supreme Court of India. This case established that states cannot levy excise duty on industrial alcohol unfit for human consumption.
• State of U.P. and others vs. Modi Distillery and others (1995) 5 SCC 753 – Three Judge Bench, Supreme Court of India. This case reiterated that states can only levy excise duty on alcoholic liquor for human consumption and not on wastage of liquor after distillation.

The court also considered the following legal provisions:

• Entry 84, List I of the Seventh Schedule of the Constitution of India – Grants the Union power to levy excise duty on goods manufactured in India, except alcoholic liquors for human consumption.
• Entry 51, List II of the Seventh Schedule of the Constitution of India – Empowers the State to levy excise duty on alcoholic liquors for human consumption manufactured in the State.
• Section 2(6) of the Bihar and Orissa Excise Act, 1915 – Defines “excisable article” as any alcoholic liquor for human consumption or any intoxicating drug.
• Section 27(1) of the Bihar and Orissa Excise Act, 1915 – Specifies the State’s power to impose duty on import, transport, and manufacture of excisable articles.

Judgment

How each authority was viewed by the Court?

• Synthetics and Chemicals Ltd. vs. State of U.P. (1990) 1 SCC 109*: The Supreme Court followed this Constitution Bench judgment, which clearly demarcated the taxing powers of the Union and State governments concerning alcohol. It established that states cannot levy excise duty on industrial alcohol unfit for human consumption.
• State of U.P. vs. Modi Distillery (1995) 5 SCC 753*: The Court relied on this three-judge bench decision, which reiterated that states can only levy excise duty on alcoholic liquor for human consumption and not on wastage of liquor after distillation.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the constitutional division of powers between the Union and the States regarding taxation on alcohol. The court emphasized that the state’s power to levy excise duty is limited to alcoholic liquors meant for human consumption. The fact that the weak spirit was found to be unfit for human consumption, as evidenced by the Chemical Examiner’s report, was a crucial factor in the court’s reasoning. The court also relied heavily on the precedent set by the Constitution Bench in Synthetics and Chemicals Ltd. vs. State of U.P. (1990) 1 SCC 109, which clearly demarcated the taxing powers of the Union and State governments concerning alcohol.

The court’s reasoning was as follows:

The court rejected the argument that the technical committee’s report and the 2% allowance could permit the state to levy duty on the excess weak spirit. The court stated that the state’s power to levy excise duty is limited to alcoholic liquors meant for human consumption.

The Supreme Court’s decision was unanimous, with both judges concurring. The judgment emphasized the importance of adhering to the constitutional framework and the precedents set by larger benches of the court. The court’s decision was based on legal principles and constitutional provisions, and it did not introduce any new legal doctrines or principles.

The court quoted the following from the judgment in Synthetics and Chemicals Ltd. vs. State of U.P. (1990) 1 SCC 109:

“Under these circumstances therefore it is clear that the State legislature had no authority to levy duty or tax on alcohol which is not for human consumption as that could only be levied by the Centre.”

The court also quoted the following from the judgment in State of U.P. vs. Modi Distillery (1995) 5 SCC 753:

“The State is not empowered to levy excise duty on the raw material or input that is in the process of being made into alcoholic liquor for human consumption.”

The Court further observed:

“Perusal of Section 27(1) of the said Act would reveal that the State’s power to impose duty on import, export, transport and manufacture is only in respect of any excisable articles imported, exported, transported and manufactured. ‘Excisable article’ has been defined to be any alcoholic liquor for human consumption or any intoxicating drug. It is thus clear that even under the relevant statute, the State has power to levy excise duty only in respect of the alcoholic liquor for human consumption.”

Key Takeaways

• State governments cannot impose excise duty on alcohol that is unfit for human consumption.
• The power to levy excise duty on industrial alcohol rests with the Union government.
• The definition of “excisable article” under the Bihar and Orissa Excise Act, 1915, is limited to alcoholic liquors for human consumption.
• The State’s power to levy excise duty is restricted to alcoholic liquors intended for human consumption.

Directions

The Supreme Court dismissed the appeals filed by the State of Orissa, upholding the High Court’s decision to set aside the demand notices.

Development of Law

The ratio decidendi of this case is that the State Legislature has no authority to levy duty or tax on alcohol which is not for human consumption. This judgment reinforces the principle established in Synthetics and Chemicals Ltd. vs. State of U.P. (1990) 1 SCC 109 and State of U.P. vs. Modi Distillery (1995) 5 SCC 753, clarifying that the state’s power to levy excise duty is limited to alcoholic liquors meant for human consumption. There is no change in the previous position of law, but it clarifies the position of the State’s power to levy excise duty.

Conclusion

The Supreme Court’s judgment in State of Orissa vs. Utkal Distilleries Ltd. reaffirms the constitutional division of powers regarding the taxation of alcohol. The court held that the State of Orissa could not levy excise duty on the weak spirit, a byproduct of IMFL manufacturing, as it was unfit for human consumption. This decision clarifies that states can only impose excise duty on alcohol intended for human consumption, reinforcing the principles established in previous landmark judgments.

Category:

• Constitutional Law
  • Entry 84, List I, Seventh Schedule
  • Entry 51, List II, Seventh Schedule
• Excise Law
  • Bihar and Orissa Excise Act, 1915
  • Section 2(6), Bihar and Orissa Excise Act, 1915
  • Section 27(1), Bihar and Orissa Excise Act, 1915
• Taxation Law
  • Excise Duty
  • Tax on Alcohol

FAQ

Q: Can a state government tax all types of alcohol?
A: No, a state government can only tax alcoholic liquors that are meant for human consumption. It cannot tax industrial alcohol or alcohol that is unfit for human consumption.

Q: What is ‘weak spirit’ in the context of this case?
A: ‘Weak spirit’ is a byproduct of the liquor manufacturing process that is not fit for human consumption. It is considered a waste product.

Q: What was the main issue in this case?
A: The main issue was whether the State of Orissa could levy excise duty on ‘weak spirit,’ which was a byproduct of the liquor manufacturing process and unfit for human consumption.

Q: What did the Supreme Court decide in this case?
A: The Supreme Court decided that the State of Orissa could not levy excise duty on the weak spirit because it was not meant for human consumption. The power to tax such alcohol lies with the Union government.

Q: What is the significance of the Synthetics and Chemicals Ltd. case in this judgment?
A: The Synthetics and Chemicals Ltd. case established the principle that states cannot levy excise duty on industrial alcohol that is unfit for human consumption. The Supreme Court relied on this precedent in its decision.