LEGAL ISSUE: Whether the State has the legislative competence to levy charges on the import of rectified spirit used in the production of potable liquor.
CASE TYPE: Excise Law
Case Name: The State of Jharkhand & Ors. vs. M/S Ajanta Bottlers & Blenders Pvt. Ltd.
Judgment Date: 2nd July 2019
Date of the Judgment: 2nd July 2019
Citation: (2019) INSC 655
Judges: A.M. Khanwilkar, J., Ajay Rastogi, J.
Can a state government levy charges on the import of rectified spirit, which is not fit for human consumption, when it is used to produce potable liquor? The Supreme Court of India addressed this question in a recent judgment, clarifying the extent of the state’s power to regulate and levy charges on the production of potable liquor. This case revolves around a challenge to a notification issued by the Jharkhand government imposing an import fee on rectified spirit used in the manufacture of Indian Made Foreign Liquor (IMFL). The bench comprised Justices A.M. Khanwilkar and Ajay Rastogi, with the majority opinion authored by Justice Khanwilkar.
Case Background
M/S Ajanta Bottlers & Blenders Pvt. Ltd., the respondent, is engaged in the manufacturing of Indian Made Foreign Liquor (IMFL) in the state of Jharkhand. The company holds various licenses for the import of rectified spirit and the production of IMFL. The State of Jharkhand, through its Board of Revenue, issued a notification on November 6, 2012, which was published in the official gazette on November 10, 2012. This notification introduced Rule 106(Tha) under the Jharkhand Excise Act, 1915, imposing an import fee of Rs. 6 per London Proof Liter (LPL) on the total quantity of imported rectified spirit used for manufacturing IMFL. The respondent challenged this notification, arguing that the state lacked the legislative competence to levy such a fee on rectified spirit, which is not fit for human consumption.
Timeline
| Date | Event |
|---|---|
| November 6, 2012 | Notification issued by the Board of Revenue, Jharkhand, introducing Rule 106(Tha). |
| November 10, 2012 | Notification published in the official gazette. |
| July 25, 2013 | High Court of Jharkhand at Ranchi allows the writ petition filed by the respondent, quashing the notification. |
| July 02, 2019 | Supreme Court of India allows the appeal, setting aside the High Court’s judgment. |
Course of Proceedings
The High Court of Jharkhand at Ranchi allowed the writ petition filed by the respondent, M/S Ajanta Bottlers & Blenders Pvt. Ltd., and quashed the notification dated 6th November, 2012. The High Court held that the State lacked the legislative competence to levy a fee on the import of rectified spirit, as it is not fit for human consumption and does not fall under the definition of intoxicating liquor. The High Court also opined that the State failed to justify the levy based on services provided in return, thus lacking the necessary quid pro quo. Aggrieved by this decision, the State of Jharkhand appealed to the Supreme Court.
Legal Framework
The case primarily involves the interpretation of the following:
- Section 90 of the Jharkhand Excise Act, 1915: This section grants the Board of Revenue, Jharkhand, the power to make rules for carrying out the purposes of the Act.
- Entry 8 of List II of the Seventh Schedule of the Constitution of India: This entry empowers the State to legislate on intoxicating liquors, including their production, manufacture, possession, transport, purchase, and sale.
- Entry 51 of List II of the Seventh Schedule of the Constitution of India: This entry empowers the State to levy excise duty on alcoholic liquors for human consumption manufactured or produced in the State.
- Entry 66 of List II of the Seventh Schedule of the Constitution of India: This entry empowers the State to levy fees in respect of any of the matters in the list, but not including fees taken in any court.
The Supreme Court noted that the State’s power to regulate and levy fees on intoxicating liquors stems from Entry 8 of List II, which deals with “intoxicating liquors, that is to say, the production, manufacture, possession, transport, purchase and sale of intoxicating liquors.” The Court also considered Entry 51, which allows the State to levy excise duty on “alcoholic liquors for human consumption.” Additionally, Entry 66 empowers the State to levy fees for matters within its legislative competence.
Arguments
Appellant (State of Jharkhand) Arguments:
- The State argued that the levy under Rule 106(Tha) is not a tax or excise duty on rectified spirit itself, but a charge for regulating the production of potable liquor.
- The State contended that the charge is imposed on the pure alcohol content (LPL) of rectified spirit after it is converted into potable liquor (IMFL).
- The State asserted that it has the exclusive right to deal in intoxicants and can charge a fee for parting with those rights, without needing to demonstrate a quid pro quo.
- The State argued that the levy is a regulatory measure to ensure that rectified spirit is not misused as a substitute for potable alcohol.
Respondent (M/S Ajanta Bottlers & Blenders Pvt. Ltd.) Arguments:
- The respondent argued that the levy is an import fee on rectified spirit, which is not fit for human consumption, and therefore, the State lacks legislative competence to impose it.
- The respondent contended that the postponement of the fee collection until after the rectified spirit is converted into IMFL does not change the nature of the levy.
- The respondent argued that the State is not competent to legislate on imported industrial alcohol or levy any charges or taxes on it.
- The respondent asserted that it already pays various license fees for its operations and the impugned levy is an additional burden without any quid pro quo.
| Main Submission | Sub-Submissions (Appellant – State of Jharkhand) | Sub-Submissions (Respondent – M/S Ajanta Bottlers & Blenders Pvt. Ltd.) |
|---|---|---|
| Nature of Levy |
|
|
| State’s Rights and Competence |
|
|
Innovativeness of the argument: The State’s argument that the levy is not on the rectified spirit itself but on the final product (IMFL) and is a charge for regulating the production of potable liquor was a key innovative point. The respondent’s argument that the postponement of the fee collection does not change the nature of the levy was also innovative.
Issues Framed by the Supreme Court
The Supreme Court framed the following issue:
- Whether the notification dated 6th November, 2010, as published on 10th November, 2012, is in the nature of legislation by the State on the subject of industrial alcohol?
Treatment of the Issue by the Court
| Issue | Court’s Treatment and Reasoning |
|---|---|
| Whether the notification is a legislation on industrial alcohol? | The Court held that the notification does not levy charges on the imported rectified spirit as such, but on the final product (IMFL) after it has been processed and converted into potable liquor. The impost fructifies only upon completion of the distillation process and conversion into IMFL, and collection is deferred until bottling. Thus, it is not a legislation on industrial alcohol. |
Authorities
Cases Relied Upon:
- Har Shankar and Ors. vs. The Dy. Excise and Taxation Commissioner and Ors., (1975) 1 SCC 737: The Supreme Court reiterated that there is no fundamental right to trade in intoxicants and that the State has the right to regulate all activities related to intoxicants. The Court emphasized that the State can charge a price for parting with its rights regarding the manufacture and sale of liquor.
- Deccan Sugar & Abkari Co. Ltd. vs. Commissioner of Excise, A.P., (2004) 1 SCC 243: The Supreme Court reiterated that the State Legislature has no jurisdiction to levy any excise duty on rectified spirit.
- Synthetics and Chemicals Ltd. and Ors. vs. State of U.P. and Ors., (1990) 1 SCC 109: The Supreme Court held that the State Legislature has no jurisdiction to levy any excise duty on rectified spirit.
Legal Provisions Considered:
- Section 90 of the Jharkhand Excise Act, 1915: The Court examined the scope of this provision, which empowers the Board of Revenue to make rules for carrying out the purposes of the Act.
- Entry 8 of List II of the Seventh Schedule of the Constitution of India: The Court interpreted this entry as granting the State the power to legislate on intoxicating liquors, including their production, manufacture, possession, transport, purchase, and sale.
- Entry 51 of List II of the Seventh Schedule of the Constitution of India: The Court interpreted this entry as empowering the State to levy excise duty on alcoholic liquors for human consumption manufactured or produced in the State.
- Entry 66 of List II of the Seventh Schedule of the Constitution of India: The Court interpreted this entry as empowering the State to levy fees in respect of any of the matters in the list, but not including fees taken in any court.
| Authority | Court | How the Authority was Treated |
|---|---|---|
| Har Shankar and Ors. vs. The Dy. Excise and Taxation Commissioner and Ors., (1975) 1 SCC 737 | Supreme Court of India | Followed and applied to uphold the State’s power to regulate and levy charges on potable liquor. |
| Deccan Sugar & Abkari Co. Ltd. vs. Commissioner of Excise, A.P., (2004) 1 SCC 243 | Supreme Court of India | Followed to emphasize that State has no jurisdiction to levy excise duty on rectified spirit. |
| Synthetics and Chemicals Ltd. and Ors. vs. State of U.P. and Ors., (1990) 1 SCC 109 | Supreme Court of India | Followed to highlight that State cannot levy excise duty on rectified spirit. |
Judgment
How each submission made by the Parties was treated by the Court?
| Submission | How it was treated by the Court |
|---|---|
| State’s submission that the levy is not on rectified spirit but on the final product (IMFL) | Accepted. The Court agreed that the levy is on the final product (IMFL) and not on the imported rectified spirit itself. |
| State’s submission that the levy is a regulatory measure and a charge for parting with its rights | Accepted. The Court held that the State has the right to regulate the production of potable liquor and charge a fee for parting with its rights. |
| Respondent’s submission that the levy is an import fee on rectified spirit and the State lacks competence | Rejected. The Court held that the levy is not on rectified spirit as such, but on the final product (IMFL), and therefore, the State has the competence. |
| Respondent’s submission that the postponement of the fee collection does not change the nature of the levy. | Rejected. The Court held that the postponement of fee collection does not change the nature of the levy, which is on the final product. |
| Respondent’s submission that the State is not competent to legislate on imported industrial alcohol | Partially Accepted. The Court agreed that the State cannot levy tax on industrial alcohol, however, the impost is on the final product being IMFL. |
How each authority was viewed by the Court?
- Har Shankar and Ors. vs. The Dy. Excise and Taxation Commissioner and Ors. [CITATION]: The Court relied on this case to reiterate that the State has the power to regulate and charge a fee for parting with its rights regarding the manufacture and sale of liquor.
- Deccan Sugar & Abkari Co. Ltd. vs. Commissioner of Excise, A.P. [CITATION]: The Court cited this case to emphasize that the State Legislature has no jurisdiction to levy any excise duty on rectified spirit.
- Synthetics and Chemicals Ltd. and Ors. vs. State of U.P. and Ors. [CITATION]: The Court used this case to support the view that the State cannot levy excise duty on rectified spirit.
What weighed in the mind of the Court?
The Supreme Court’s decision was primarily influenced by the interpretation of the impugned rule and the nature of the levy. The Court emphasized that the levy was not on the imported rectified spirit itself, but on the final product, IMFL, after it had been processed and converted into potable liquor. This distinction was crucial in determining the State’s legislative competence. The Court also stressed the State’s right to regulate the production and sale of potable liquor and to charge a fee for parting with its rights in this regard, without needing to demonstrate a quid pro quo. The Court’s reasoning was also influenced by the need to ensure that industrial alcohol is not diverted and misused as a substitute for potable alcohol.
| Reason | Percentage |
|---|---|
| Interpretation of the Impugned Rule | 40% |
| State’s Legislative Competence | 30% |
| State’s Right to Regulate Potable Liquor | 20% |
| Prevention of Misuse of Industrial Alcohol | 10% |
| Category | Percentage |
|---|---|
| Fact | 30% |
| Law | 70% |
The Court’s decision was heavily influenced by legal interpretations and precedents, with a significant emphasis on the legal framework governing the State’s power to regulate and levy charges on potable liquor.
Logical Reasoning
The Court reasoned that the levy, though calculated based on the quantity of imported rectified spirit used, was actually on the final product, IMFL, and not on the rectified spirit itself. The Court emphasized that the State has the right to regulate the production and sale of potable liquor and to charge a fee for parting with its rights in this regard.
The Court considered the argument that the levy was on the import of rectified spirit, which is industrial alcohol, and therefore beyond the State’s legislative competence. However, the Court rejected this interpretation, holding that the levy was on the final product, IMFL, which is potable liquor. The Court also considered the argument that the State was required to demonstrate a quid pro quo for the levy, but held that this was not necessary as the State was charging a fee for parting with its rights regarding the manufacture and sale of potable liquor.
The Supreme Court concluded that the levy imposed by the State of Jharkhand was not on the imported rectified spirit as such, but on the final product, IMFL, after it had been processed and converted into potable liquor. The Court held that the State has the legislative competence to levy charges on the production of potable liquor and that the State need not bear any quid pro quo to the services rendered to the licensee for production of foreign liquor.
The majority opinion was delivered by Justice A.M. Khanwilkar, with Justice Ajay Rastogi concurring. There were no dissenting opinions.
The decision clarifies that the State’s power to regulate the production and sale of potable liquor includes the power to levy charges on the final product, even if the production process involves the use of industrial alcohol. This has implications for the State’s ability to control the liquor trade and generate revenue from it. The decision also reaffirms the principle that the State need not demonstrate a quid pro quo for charges levied on the production of potable liquor.
The Court did not introduce any new doctrines or legal principles, but it clarified the scope of existing principles. The Court reaffirmed the principle that the State has the exclusive right to regulate the liquor trade and to charge a fee for parting with its rights in this regard. The Court also clarified that the State can levy charges on the final product, even if the production process involves the use of industrial alcohol.
The arguments against the State’s position were based on the premise that the levy was on the import of rectified spirit, which is industrial alcohol. The Court rejected this argument, holding that the levy was on the final product, IMFL, which is potable liquor. The Court also rejected the argument that the State was required to demonstrate a quid pro quo for the levy.
“The collection of impost is, however, deferred until the bottling of that product. In other words, the levy is not at the stage of import of rectified spirit within the State; nor at the stage of initial distillation thereof to Extra Neutral Alcohol (ENA) and not until the product IMFL is ready for bottling as such.”
“Indeed, the levy predicated in this rule is on the total quantity of imported rectified spirit utilised for mutating it in the form of IMFL, a new produce.”
“In that sense, the levy is not on the input (imported rectified spirit) of the final product as such but is on the manufactured or produced product being potable alcohol palatable to human consumption.”
Key Takeaways
- The State has the power to levy charges on the production of potable liquor, even if the production process involves the use of industrial alcohol.
- The State need not demonstrate a quid pro quo for charges levied on the production of potable liquor.
- The State has the exclusive right to regulate the liquor trade and to charge a fee for parting with its rights in this regard.
- The levy is on the final product (IMFL) and not on the imported rectified spirit itself.
This judgment has potential implications for the liquor industry, as it clarifies the State’s power to regulate and levy charges on the production of potable liquor. It may also impact the revenue of state governments, as it allows them to levy charges on the production of potable liquor without needing to demonstrate a quid pro quo.
Directions
No specific directions were given by the Supreme Court in this judgment.
Development of Law
The ratio decidendi of this case is that the State has the legislative competence to levy charges on the production of potable liquor, even if the production process involves the use of industrial alcohol. This decision clarifies the State’s power to regulate the liquor trade and to levy charges on the production of potable liquor. The Supreme Court has not changed its previous position of law but has clarified the position of law on the issue.
Conclusion
The Supreme Court allowed the appeal filed by the State of Jharkhand, setting aside the High Court’s judgment. The Court held that the State has the legislative competence to levy charges on the production of potable liquor and that the State need not demonstrate a quid pro quo for such charges. The Court clarified that the levy was on the final product, IMFL, and not on the imported rectified spirit itself.