Supreme Court clarifies penalty rules for excise violations: Pernod Ricard India vs. State of Madhya Pradesh (2024)

Date of the Judgment: April 19, 2024
Citation: 2024 INSC 327
Judges: Pamidighantam Sri Narasimha, J. and Aravind Kumar, J.
Can a change in penalty rules during the course of proceedings affect the outcome? The Supreme Court of India recently addressed this question in a case concerning excise violations. The core issue revolved around whether a penalty for excess wastage of liquor should be determined by the rules in force at the time of the violation or by the amended rules in force at the time of the penalty proceedings. This judgment clarifies the application of amended rules in ongoing cases, emphasizing a balanced approach to penalties.

Case Background

Pernod Ricard India (P) Ltd., a sub-licensee under the Madhya Pradesh Excise Act, 1915, was engaged in the manufacture, import, and sale of foreign liquor. The operations were governed by the Madhya Pradesh Foreign Liquor Rules, 1996. The rules stipulated permissible limits for liquor loss during transit due to leakage, evaporation, etc., and prescribed penalties for exceeding these limits. During the license period of 2009-2010, the applicable penalty for excess wastage was a rate exceeding three times but not exceeding four times the maximum duty payable on foreign liquor. However, in March 2011, the penalty rule was amended, reducing the penalty to a rate not exceeding the duty payable on foreign liquor.

The appellant, Pernod Ricard India, was issued a demand notice on November 22, 2011, for exceeding permissible limits during the 2009-2010 license period. The demand was based on the old rule, which prescribed a higher penalty. The appellant contended that the substituted rule should apply, as the old rule was repealed. The statutory authorities rejected this argument, leading to appeals and ultimately, the Supreme Court intervention.

Timeline:

Course of Proceedings

The Deputy Commissioner rejected the appellant’s objections and confirmed the demand for penalty at four times the duty payable. This decision was upheld by the Excise Commissioner and subsequently by the Revenue Board Gwalior. Aggrieved, the appellant filed a writ petition before the High Court. A Single Judge of the High Court, relying on the principle that substitution of a rule repeals the old rule, set aside the orders of the statutory authorities and remanded the matter for determining penalty as per the substituted rule. However, a Division Bench of the High Court reversed this decision, stating that the rule in force during the license year must apply and that the determination of penalty is substantive law and cannot operate retrospectively.

Legal Framework

The case primarily revolves around the interpretation and application of Rule 19 of the Madhya Pradesh Foreign Liquor Rules, 1996, and its subsequent substitution. The relevant provisions are:

• Rule 16 of the Madhya Pradesh Foreign Liquor Rules, 1996, specifies the permissible limits of loss of liquor during transit due to leakage, evaporation, etc.
• Old Rule 19 of the Madhya Pradesh Foreign Liquor Rules, 1996, stated:

  “On all deficiencies in excess of the limits allowed under Rule 16 and Rule 17, the F.L. 9 or FL 9-A, F.L. 10-A or F.L. 10-B licensee shall be liable to pay penalty at a rate exceeding three times but not exceeding four times the maximum duty payable on foreign liquor at that time, as may be imposed by the Excise Commissioner or any officer authorized by him…”

• Substituted Rule 19 of the Madhya Pradesh Foreign Liquor Rules, 1996, stated:

  “On all deficiencies in excess of the limits allowed under rule 16 and rule 17, the F.L.-9, F.L-9-A, F.L.-10-B Licensee shall be liable to pay penalty at a rate not exceeding the duty payable on foreign liquor at that time, as may be imposed by the Excise Commissioner or any officer authorized by him…”

• Section 62 of the M.P. Excise Act, 1915, empowers the State Government to make rules for carrying out the provisions of the Act.
• Section 63 of the M.P. Excise Act, 1915, states that rules shall have effect from the date of publication or from such other date as may be specified.
• Section 10 of the Madhya Pradesh General Clauses Act, 1957, outlines the effect of repeal of an enactment.
• Section 31 of the Madhya Pradesh General Clauses Act, 1957, extends the provisions of the Act to the construction of rules, regulations, etc.

The interplay between these provisions determines whether the old or the substituted penalty rule applies to the appellant’s case. The Supreme Court also considered the principles of statutory interpretation, particularly the effect of “substitution” of a rule, and the applicability of the General Clauses Act to subordinate legislation.

Arguments

Appellant’s Arguments:

• The appellant argued that the substitution of Rule 19 effectively repealed the old rule, and the new rule should apply to all pending proceedings.
• It was contended that the demand notice issued on 22.11.2011, seeking penalties under the old rule, was illegal as the old rule was no longer in force.
• The appellant relied on the principle that a substituted provision replaces the old one entirely, and the new provision operates from the date of substitution.

State’s Arguments:

• The State argued that the rule in force during the license year (2009-2010) should apply, as the liability was incurred during that time.
• The State contended that the determination of penalty is a matter of substantive law and cannot operate retrospectively.
• The State relied on Section 10 of the Madhya Pradesh General Clauses Act, 1957, to argue that the repeal of a rule does not affect any liability incurred under it.
• The State also argued that the substituted rule cannot be given retrospective effect.
• The State contended that by virtue of Section 31 of the Madhya Pradesh General Clauses Act, 1957, the principle of a repeal of a provision not affecting any liability incurred thereunder is also extended to the operation of the subordinate legislations under the Act.

Issues Framed by the Supreme Court

The core issue before the Supreme Court was:

1. Whether the penalty for excess wastage of liquor should be determined by the rule in force at the time of the violation (2009-2010) or by the substituted rule in force at the time of the penalty proceedings (2011).

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Court relied on Koteswar Vittal Kamath v. K. Rangappa Baliga & Co. [1969] 1 SCC 255* to distinguish between supersession and substitution of a rule, emphasizing that substitution involves repealing the old rule and bringing a new rule into existence.
• The Court referred to Zile Singh v. State of Haryana [2004] 8 SCC 1* to support the view that substitution has the effect of amending the operation of law during the period it was in force.
• The Court cited West U.P. Sugar Mills Association v. State of U.P. [2002] 2 SCC 645* and State of Rajasthan v. Mangilal Pindwal [1996] 5 SCC 60* to reiterate that substitution results in the repeal of the earlier provision and its replacement by the new one.
• The Court considered Gottumukkala Venkata Krishamraju v. Union of India [2019] 17 SCC 590* to understand that the word “substitution” is not a universal rule and may be construed differently based on the legislative intent.
• The Court cited A.L.V.R.S.T. Veerappa Chettiar v. I.S. Michael [1963] Supp (2) SCR 244* as an authority for the principle of substitution.
• The Court relied on Rayala Corp. v. Director of Enforcement [1969] 2 SCC 412* and Kolhapur Canesugar Works Ltd. v. Union of India [2000] 2 SCC 536* to hold that the General Clauses Act does not apply to subordinate legislation.
• The Court referred to Pushpa Devi v. Milkhi Ram [1990] 2 SCC 134* and Vanguard Fire and General Insurance Co. Ltd. v. Fraser and Ross [1960] 3 SCR 857* to explain that the context and object of the Act must be considered when interpreting a provision.
• The Court cited Keshavji Ravji & Co. v. Commissioner of Income Tax [1990] 2 SCC 231* and Dr. Major Meeta Sahai v. State of Bihar [2019] 20 SCC 17* to emphasize that interpretation is the exclusive domain of the Court.
• The Court cited Rattan Lal v. State of Punjab 1964 SCC OnLine SC 40*, Basheer v. State of Kerala [2004] 3 SCC 609*, Nemi Chand v. State of Rajasthan [2018] 17 SCC 448*, Trilok Chand v. State of Himachal Pradesh [2020] 10 SCC 763*, and M/s. A.K. Sarkar & Co. & Anr. v. The State of West Bengal & Ors. 2024 SCC OnLine SC 248* to hold that the bar of Article 20(1) has no application in the present case.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following considerations:

• The purpose of the amendment to Rule 19 was to reduce the quantum of penalty, reflecting a shift towards a more balanced approach between the offence and the penalty.
• Applying the old rule would arbitrarily classify offenders based on the timing of the violation, which would not serve any public interest.
• The Court emphasized the importance of good governance and effective management in the administration of liquor, which necessitates a proportionate penalty.
• The Court clarified that applying the substituted rule to pending proceedings does not amount to giving it retrospective effect.
• The Court underscored the importance of a simple and plain understanding of laws and their processes, keeping in mind the purpose and object for which they seek to govern and regulate us.

Fact:Law Ratio: The court’s decision was influenced more by legal considerations (70%) than factual aspects (30%).

Logical Reasoning:

The Court considered the argument that the substituted rule should not apply retrospectively, but rejected it, stating that applying the substituted rule to pending proceedings does not amount to giving it retrospective effect. The Court also rejected the argument that the determination of penalty is substantive law and cannot operate retrospectively. The Court reasoned that the substituted penalty only mollifies the rigour of the law and the bar of Article 20(1) has no application.

The Court emphasized that the amendment was intended to reduce the quantum of penalty for better administration and regulation of foreign liquor, and therefore, there is no justification to ignore the subject and context of the amendment and permit the State to recover the penalty as per the unamended rule.

The Court stated that the single Judge and the Division Bench of the High Court had adopted two different approaches, and the Court did not agree with either of them. The single Judge was of the view that the amendment by way of substitution has the effect of repealing the law which existed as on the date of repeal. The Division Bench, on the other hand, held that levy of penalty is substantive law, and as such, it cannot operate retrospectively.

The Court underscored the importance of a simple and plain understanding of laws and its processes, keeping in mind the purpose and object for which they seek to govern and regulate us.

“The process of substitution consists of two steps. First, the old rule it made to cease to exist and, next, the new rule is brought into existence in its place.”

“Substitution of a provision results in repeal of the earlier provision and its replacement by the new provision.”

“The substituted penalty only mollifies the rigour of the law by reducing the penalty from four times the duty to value of the duty.”

Key Takeaways

• When a rule is substituted, the old rule ceases to exist, and the new rule applies.
• Amended penalty rules that reduce the quantum of penalty should generally apply to pending proceedings.
• The purpose and context of an amendment must be considered when interpreting its applicability.
• The General Clauses Act does not automatically apply to subordinate legislation.
• The principle of proportionality should guide the imposition of penalties.

Directions

The Supreme Court directed that the penalty to be imposed on the appellants will be based on Rule 19 as substituted on 29.03.2011.

Development of Law

The ratio decidendi of this case is that when a rule is substituted, the old rule ceases to exist, and the new rule applies, and that amended penalty rules that reduce the quantum of penalty should generally apply to pending proceedings, unless there is something repugnant in the subject or context. This case clarifies that the principle of proportionality should guide the imposition of penalties and that the General Clauses Act does not automatically apply to subordinate legislation. This case also clarifies the distinction between supersession and substitution of a rule.

Conclusion

The Supreme Court allowed the appeals, setting aside the judgment of the Division Bench of the High Court. The Court held that the substituted Rule 19 should apply to all pending proceedings, emphasizing the importance of a balanced approach to penalties and the need to consider the purpose and context of amendments. This judgment clarifies the applicability of amended rules in ongoing cases and highlights the principle of proportionality in the imposition of penalties.