Supreme Court Upholds Excise Duty on Liquor Destroyed in Fire Due to Negligence: State of UP vs. M/S McDowell and Company Limited (2022) INSC 13

Date of the Judgment: 05 January 2022
Citation: 2022 INSC 13
Judges: A.M. Khanwilkar, J., Dinesh Maheshwari, J., Krishna Murari, J.
Can a distillery be held liable for excise duty on liquor destroyed in a fire, even if the fire wasn’t intentional? The Supreme Court of India recently addressed this question, focusing on whether negligence played a role in the incident. This case examines the interplay between excise laws, responsibility for stored goods, and the concept of ‘act of God’. The judgment was delivered by a three-judge bench comprising Justices A.M. Khanwilkar, Dinesh Maheshwari, and Krishna Murari, with Justice Dinesh Maheshwari authoring the opinion for the bench.

Case Background

M/s McDowell and Company Limited, the respondent, operated a distillery in Shahjahanpur, Uttar Pradesh, under a license granted in Form PD-2. They also held licenses for wholesale vending of Indian Made Foreign Liquor (IMFL) in Forms FL-3 and FL-3A. On April 10, 2003, a fire broke out in one of the distillery’s godowns, destroying 35,642 cases of IMFL. Initial reports suggested a short circuit as the possible cause of the fire. The Excise Department, based on the destruction of liquor, sought to recover the excise duty from the company. The company contended there was no negligence on their part and hence, they were not liable to pay the excise duty.

Timeline

Course of Proceedings

Initially, the Excise Commissioner ordered the respondent company to pay Rs. 6,39,32,449.44 towards the loss of excise revenue. The company challenged this order in the High Court of Judicature at Allahabad, Lucknow Bench. The High Court, through an interim order, stayed the recovery proceedings, subject to the company depositing Rs. 3 crores. The High Court ultimately allowed the writ petition, setting aside the demand for excise duty, stating that the incident was an act of God and there was no negligence on the part of the company. The State of Uttar Pradesh and its officers then appealed to the Supreme Court.

Legal Framework

The case revolves around the interpretation of the following key legal provisions:

• Section 17 of the U.P. Excise Act, 1910: This section prohibits the manufacture of intoxicants, including bottling of liquor for sale, except under the authority and terms of a license.
• Section 18 of the U.P. Excise Act, 1910: This section empowers the Excise Commissioner to establish or license distilleries and warehouses for the manufacture and storage of spirit.
• Section 19 of the U.P. Excise Act, 1910: This section states that no intoxicant can be removed from any distillery, brewery, warehouse or place of storage, unless the duty has been paid or a bond has been executed for the payment thereof.
• Section 28 of the U.P. Excise Act, 1910: This section empowers the State Government to impose excise duty on excisable articles, including those manufactured in a distillery. It states that,
  “An excise duty or a countervailing duty, as the case may be at such rate or rates as the State Government shall direct may be imposed, either generally or for any specified local area, on any excisable article – (a)imported in accordance with the provisions of Section 12(1); or (b)exported in accordance with the provisions of Section 13; or (c)transported; or (d)manufactured, cultivated or collected under any licence granted under Section 17; or (e)manufactured in any distillery established, or any distillery or brewery licensed, under Section 18”
• Section 29 of the U.P. Excise Act, 1910: This section outlines the manner in which duty may be levied, including a rate charged upon the quantity produced or issued from the distillery. It states that,
  “Subject to such rules as the Excise Commissioner may prescribe to regulate the time, place and manner of payment, such duty may be levied in one or more of the following ways as the State Government may by notification direct : (e)in the case of spirit or beer manufactured in any distillery established or any distillery brewery or manufactory licensed under Section 18-(i)by a rate charged upon the quantity produced or issued from the distillery brewery or manufactory, as the case may be, or issued from a warehouse established or licensed under Section 18 (d);”
• Rule 7(11)(a) of the Uttar Pradesh Bottling of Foreign Liquor Rules, 1969: This rule allows a 1% allowance on the total quantity of spirit stored during a month for actual loss in bottling and storage. The licensee is responsible for payment of duty on wastage in excess of 1%.
• Rule 708 of the Uttar Pradesh Excise Manual: This rule states that the Government is not liable for any loss of spirit stored in distilleries due to fire or any other cause.
• Rule 709 of the Uttar Pradesh Excise Manual: This rule holds distillers responsible for the safe custody of stock of spirit and liable for any loss of revenue due to their negligence.
• Rule 813 of the Uttar Pradesh Excise Manual: This rule provides for free wastage allowance for different kinds of spirit stored in a distillery with the specific exclusion of bottled spirit.

Arguments

Appellants (State of Uttar Pradesh):

• Argued that the fire was not an “act of God” but a result of negligence on the part of the respondent company.
• Contended that the respondent failed to maintain proper fire safety measures and had deficiencies in electrical installations.
• Stated that the respondent company was responsible for payment of duty on wastage in excess of 1% as per Rule 7(11)(a) of the Uttar Pradesh Bottling of Foreign Liquor Rules, 1969.
• Asserted that the respondent was liable to pay excise duty on the destroyed liquor, as the duty is on manufacture and the point of collection is on issue and the company had been reimbursed for the liquor by the insurer.
• Submitted that the respondent company is liable to pay excise duty on the liquor destroyed in fire as per Rule 709 of the Uttar Pradesh Excise Manual.

Respondent (M/S McDowell and Company Limited):

• Maintained that the fire was an “act of God” and not due to any negligence on their part.
• Stated that they had taken all necessary precautions, including obtaining certificates from the Fire Department and Electrical Inspector.
• Argued that Rule 7(11) of the Uttar Pradesh Bottling of Foreign Liquor Rules, 1969 was not applicable as there was no wastage in handling operations and that Rule 709 of the Uttar Pradesh Excise Manual would apply.
• Contended that excise duty could only be collected at the point of issuance of IMFL from the distillery and not on the stock destroyed in the godown.
• Submitted that they were not liable to pay excise duty as there was no sale or transfer of property of the liquor destroyed in fire and the insurance claim was not consideration.

Submissions

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for determination:

1. Whether the demand of excise duty on the liquor lost in fire is authorized by law?
2. Whether the fire incident was an event beyond human control and no negligence could be imputed on the respondent company?
3. What would be the effect of the fact that the respondent company had taken insurance coverage only of the value of liquor (and not that of excise duty) and then, had received the insurance claim towards the value of liquor?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

How each authority was viewed by the Court?

• The Court relied on State of U.P. & Ors. v. Delhi Cloth Mills & Anr. (1991) 1 SCC 454* to affirm that the taxable event for excise duty is the production or manufacture of liquor.
• The Court referred to State of U.P. and Ors. v. M/s Mohan Meakin Brewery Ltd. and Anr. (2011) 13 SCC 588* to reiterate that the exigibility to excise duty occurs at the stage of manufacture or production.
• The Court cited Somaiya Organic (India) Pvt. Ltd. and Anr. v. State of U.P. and Anr. (2001) 5 SCC 519* to emphasize that both levy and collection of tax must be authorized by law.
• The Court applied the principles stated in Divisional Controller, KSRTC v. Mahadeva Shetty and Ors. (2003) 7 SCC 197* and Vohra Sadikbhai Rajakbhai & Ors. v. State of Gujarat and Ors (2016) 12 SCC 1* to define the term “act of God” and to conclude that the fire incident was not an “act of God.”
• The Court used the principles from Patel Roadways Limited v. Birla Yamaha Limited (2000) 4 SCC 91* to explain the negligence of common carriers, which was used to explain the negligence of the respondent company.
• The Court referred to Har Shankar and Others v. Deputy Excise & Taxation Commissioner and Others (1975) 1 SCC 737* to state that a licensee cannot wriggle out of the conditions of the license.
• The Court referred to State of U.P. and Others v. M/s Modi Distillery Etc. (1995) 5 SCC 753* regarding various features of the demand of excise duty at different stages.
• The Court used the definition of negligence given in State of Maharashtra and Ors. v. Kanchanmala Vijaysing Shirke and Ors. (1995) 5 SCC 659* to conclude that the respondent company was negligent.
• The Court applied the principle of res ipsa loquitur as explained in Shyam Sunder and Ors. v. The State of Rajasthan (1974) 1 SCC 690* and Pushpabai Purshottam Udeshi and Ors. v. M/s. Ranjit Ginning & Pressing Co. (P) Ltd. and Anr. (1977) 2 SCC 745* to conclude that the respondent company was negligent.
• The Court considered Rule 7(11)(a) of the Uttar Pradesh Bottling of Foreign Liquor Rules, 1969 to conclude that the respondent company was responsible for payment of duty on wastage in excess of 1%.
• The Court considered Rule 708 of the Uttar Pradesh Excise Manual to state that the Government is not liable for any loss of spirit stored in distilleries due to fire or any other cause.
• The Court considered Rule 709 of the Uttar Pradesh Excise Manual to hold the respondent company liable for loss of revenue due to their negligence.
• The Court considered Rule 813 of the Uttar Pradesh Excise Manual to conclude that there is no wastage allowance for bottled spirit.

What weighed in the mind of the Court?

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

• The fact that the taxable event for excise duty is the production or manufacture of liquor, not its sale.
• The fact that the fire incident was not an “act of God” but a result of negligence.
• The fact that the respondent company was responsible for the safe custody of the liquor and had failed to maintain proper fire safety measures.
• The fact that the respondent company had taken insurance coverage only of the value of liquor and not of the excise duty, which showed their negligence.

Fact:Law Ratio

The Court’s reasoning was based on a combination of legal principles, statutory provisions, and factual analysis. The Court emphasized that the excise duty was leviable on the production or manufacture of liquor and not just at the point of sale. The Court also emphasized the responsibility of the distiller to ensure the safe custody of the liquor and the fact that the fire was not an “act of God.” The Court also highlighted the fact that the respondent had taken insurance coverage for the value of the liquor, but not for the excise duty.

The Court also considered the principle of res ipsa loquitur, which states that the facts of an accident may themselves constitute evidence of negligence. The Court found that the fire incident was more consistent with negligence on the part of the respondent than with any other cause. The Court also stated that, “the fire incident in question had not taken place due to operation of any forces of nature. It has also not been the case that the fire was a result of any mischief by any person.”

The Court stated that, “when the respondent had not been able to protect the goods in question from fire within the warehouse and when all other factors, as noticed above, are taken into account, the negligence as contemplated in Rule 709 of the Excise Manual is directly attributable to the respondent company.” The Court also stated that, “receiving of insurance claim over the value of goods by the respondent related back to the date of fire and the respondent became liable to pay excise duty at the rate which was in force on the date of fire, which would be deemed tohave been the date of issuance of the liquor.”

Conclusion

The Supreme Court allowed the appeals filed by the State of Uttar Pradesh and its officers, setting aside the judgment and order of the High Court. The Court upheld the Excise Commissioner’s order for the recovery of excise duty from the respondent company. The Court concluded that the respondent company was liable to pay excise duty on the liquor destroyed in the fire because the fire was not an ‘act of God’ and was a result of negligence on the part of the respondent company. The Court emphasized that the taxable event for excise duty was the production or manufacture of liquor, not its sale.

Dissenting Opinion

There was no dissenting opinion in this case.

Implications

This judgment has significant implications for distillers and other manufacturers of excisable goods. It clarifies that:

• Excise duty is levied on the production or manufacture of goods, not just at the point of sale.
• Distillers are responsible for the safe custody of their goods and are liable for any loss of revenue due to their negligence.
• A fire incident is not necessarily an “act of God” and can be attributed to negligence if proper safety measures are not in place.
• Insurance coverage for the value of goods does not absolve the distiller from the liability of paying excise duty.

The Supreme Court’s ruling reinforces the principle that manufacturers of excisable goods must exercise due diligence in the storage and handling of their products. It also highlights the importance of having comprehensive insurance coverage that includes not only the value of the goods but also the excise duty payable on them. This case serves as a reminder that the burden of proof lies on the distiller to show that the loss was not due to negligence on their part.

Key Takeaways

• Taxable Event: Excise duty is levied on the production or manufacture of goods.
• Responsibility: Distillers are responsible for the safe custody of their goods.
• Negligence: Distillers are liable for loss of revenue due to negligence.
• Act of God: Fire incidents are not always considered “acts of God.”
• Insurance: Comprehensive insurance coverage is essential.