Gujarat High Court
Bharat Petroleum Corporation ... vs State Of Guajrat & on 9 June, 2017
Bench: M.R. Shah, B.N. Karia
C/SCA/16304/2013 CAV JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
SPECIAL CIVIL APPLICATION NO. 16304 of 2013
With
SPECIAL CIVIL APPLICATION NO. 16305 of 2013
With
SPECIAL CIVIL APPLICATION NO. 13046 of 2012
With
SPECIAL CIVIL APPLICATION NO. 13642 of 2016
With
SPECIAL CIVIL APPLICATION NO. 13222 of 2016
For Approval and Signature:
HONOURABLE MR.JUSTICE M.R. SHAH Sd/
and
HONOURABLE MR.JUSTICE B.N. KARIA Sd/
=============================================
1 Whether Reporters of Local Papers may be allowed to see No the judgment ?
2 To be referred to the Reporter or not ? No
3 Whether their Lordships wish to see the fair copy of the No
judgment ?
4 Whether this case involves a substantial question of law as No
to the interpretation of the Constitution of India or any order made thereunder ?
============================================= BHARAT PETROLEUM CORPORATION LIMITED.KOYALI INSTALLATION, JAWAHARNAGAR, DIST. VADODARA....Petitioner(s) Versus STATE OF GUAJRAT & 1....Respondent(s) ============================================= Appearance:
Special Civil Application No.16304 of 2013 :
MR MANISH R BHATT, Senior Advocate with MS POONAM MATHUR, Advocate for Singhi & Company for the Petitioner MR KAMAL TRIVEDI, Advocate General with Ms Sangita Vishen, Asstt. Government Pleader for the respondents Special Civil Application No.16305 of 2013 :
MR MANISH R BHATT, Senior Advocate with MS POONAM MATHUR, Advocate for Singhi & Company for the Petitioner MR KAMAL TRIVEDI, Advocate General with Ms Sangita Vishen, Asstt. Government Pleader for the respondents Special Civil Application No.13046 of 2012 :
MR MANISH R BHATT, Senior Advocate with MS MAUNA BHATT, ADVOCATE for the Petitioner Page 1 of 39 HC-NIC Page 1 of 39 Created On Sat Aug 12 06:34:30 IST 2017 C/SCA/16304/2013 CAV JUDGMENT MR KAMAL TRIVEDI, Advocate General with Ms Sangita Vishen, Asstt. Government Pleader for the respondents Special Civil Application No.13642 of 2016 :
MR DHAVAL SHAH, ADVOCATE for the Petitioner MR KAMAL TRIVEDI, Advocate General with Ms Sangita Vishen, Asstt. Government Pleader for the respondents Special Civil Application No.13222 of 2016 :
MR RS SANJANWALA, SENIOR ADVOCATE with MS NIYATI SHAH, ADVOCATE with MR DK PUJ, ADVOCATE for the Petitioner MR KAMAL TRIVEDI, Advocate General with Ms Sangita Vishen, Asstt. Government Pleader for the respondents ========================================== === CORAM: HONOURABLE MR.JUSTICE M.R. SHAH and HONOURABLE MR.JUSTICE B.N. KARIA Date : 09/06/2017 COMMON CAV JUDGMENT (PER : HONOURABLE MR.JUSTICE M.R. SHAH) [1.0] As common question of law and facts arise in this group of petitions, all these petitions are heard, decided and disposed of together by this common judgment and order.
[2.0] Special Civil Application No.13046/2012 has been preferred by the petitioner - Indian Oil Corporation Limited. Special Civil Application No.16304/2013 has been preferred by the petitioner - Bharat Petroleum Corporation Limited. Special Civil Application No.16305/2013 is also preferred by the petitioner - Bharat Petroleum Corporation Limited. Special Civil Application No.13222/2016 has been preferred by the petitioner - M/s. Nagindas Hiralal Bhayani claiming to be the wholesale dealer of Denatured Spirit. Special Civil Application No.13642/2016 has been preferred by one ACCRA PAC India Pvt. Ltd. claiming to be possessing the license to store alcohol and manufacture the products dutiable under the Medicinal and Toilet Preparations (Excise Duties) Act, 1955 and who uses the Denatured Ethanol Alcohol (nonpotable Page 2 of 39 HC-NIC Page 2 of 39 Created On Sat Aug 12 06:34:30 IST 2017 C/SCA/16304/2013 CAV JUDGMENT Alcohol or industrial alcohol) in the manufacture of the final products.
[3.0] In all these petitions under Article 226 of the Constitution of India, the respective petitioners have challenged Rule 52 of the Gujarat Bombay Denatured Spirit Rules, 1959 (hereinafter referred to as "Rules, 1959") insofar as it purports to impose an import fee of Rs.3 per liter in case of import of Denatured Ethanol. The respective petitioners have also challenged the consequential demand made by the respondents towards such import fee from a retrospective date.
[4.0] For the sake of convenience, Special Civil Application No.16304/2013 preferred by the Bharat Petroleum Corporation Limited is treated as a lead matter and for the sake of convenience, facts in Special Civil Application No.16304/2013 are narrated.
Special Civil Application Nos.16304/2013 [5.0] It is the case on behalf of the petitioner that the petitioner is one of the India's largest Public Sector Undertaking companies in petroleum sector. That the petitioner was granted license for possession and use of Denatured Ethanol by the respondent No.2 on 04.12.2002. That the petitioner was also given permission by the respondent No.2 - Superintendent, Prohibition Excise Department, Vadodara to import Denatured Ethanol from other States including State of Maharashtra vide communication dated 04.12.2002.
[5.1] It is the case on behalf of the petitioner that the Government of India, Ministry of Petroleum and Natural Gas mandated sale of 5% Ethanol doped improved gasoline. That one of the main factors for use of Ethanol in petrol is to improve the air quality by reducing air pollution due to lesser harmful emission such as carbon monoxide. That the petrol Page 3 of 39 HC-NIC Page 3 of 39 Created On Sat Aug 12 06:34:30 IST 2017 C/SCA/16304/2013 CAV JUDGMENT blended with Ethanol is regarded as "Green Fuel" as it is more environmental friendly. It is the case on behalf of the petitioner that Ethanol also results in reduction in the use of crude oil, a nonrenewable resource, thereby, saving valuable foreign exchange for the country. Based on the above, the petitioner issued public tenders for procurement of certain quantity of Ethanol for various locations in Gujarat State for a period of three years. It is the case on behalf of the petitioner that the quantities offered by the Gujarat based vendors in the tenders did not meet the fuel requirements for Gujarat and therefore, to meet with the shortfall, supplies from Maharashtra based Ethanol suppliers were considered.
[5.2] It is further case on behalf of the petitioner that on 25.10.2004, the State Government issued Notification amending Rule 52 of the Rules, 1959 by imposing import fee at the rate of Rs.3 per liter on import of Denatured Ethanol.
That at the instance of certain Maharashtra based Ethanol suppliers, writ petitions were filed before this Court in the year 2005. That in the said petitions, orders came to be passed on 19.10.2005 and 29.11.2005 granting interim relief to the said petitioners. It is the case on behalf of the petitioner that accordingly, offers received from Maharashtra based Ethanol suppliers were considered and the implication of import and export duty was not taken into consideration as the matter was subjudice. It is the case on behalf of the petitioner that accordingly, the procurement of Ethanol was obtained from Maharashtra based suppliers with Nil import and export fee basis and accordingly the said Ethanol was supplied to various Gujarat based locations on net delivery basis. It is the case on behalf of the petitioner that as the said Ethanol was procured at Nil import and export fee basis, the retail selling price of petrol was fixed for the State of Gujarat which Page 4 of 39 HC-NIC Page 4 of 39 Created On Sat Aug 12 06:34:30 IST 2017 C/SCA/16304/2013 CAV JUDGMENT did not include the element of import and export fee as the same was not demanded from the petitioner. It is further case on behalf of the petitioner that as a corollary, import / export fee not being considered in the retail selling price of petrol in the State of Gujarat was not recovered from the customers through the retail selling price structure of petrol in the State of Gujarat. It is the case on behalf of the petitioner that as per the procedure followed by the Prohibition Department, import passes were issued by the said Department without levying the import fee and all the oil companies including the petitioner were permitted by the Department to uplift Ethanol without payment of import fee into the State of Gujarat.
[5.3] That thereafter the Maharashtra based suppliers withdrew the aforesaid writ petitions somewhere in February, 2010. That thereafter on 24.02.2012, the respondent No.2 issued notice calling upon the petitioner to deposit fee of Rs.24 lakh, on import of Denatured Ethanol from the State of Maharashtra with retrospective effect from 25.10.2004. That the petitioner replied to the aforesaid notice vide communication dated 03.02.2012 requesting waiver of import duty on Denatured Ethanol, releasing fresh passes for import and renewing the license. However, the respondent No.2 issued similar notice again calling upon the petitioner to deposit fee of Rs.24 lakh, on import of Denatured Ethanol from the State of Maharashtra with retrospective effect from 25.10.2004. That thereafter various other demand notices have been issued which are also the subject matter of the present petition.
[5.4] Feeling aggrieved and dissatisfied with the Notification dated 25.10.2004 amending Rule 52 of the Rules, 1959 and insofar as it purports to impose import fee at the rate of Rs.3 per liter on import of Denatured Ethanol and challenging the impugned demand notices, the Page 5 of 39 HC-NIC Page 5 of 39 Created On Sat Aug 12 06:34:30 IST 2017 C/SCA/16304/2013 CAV JUDGMENT petitioner Bharat Petroleum Corporation Limited has preferred Special Civil Application Nos.16304/2013 and 16305/2013.
[5.5] Similar challenges have been made by respective petitioners in Special Civil Application Nos.13046/2012, 16304/2013, 13222/2016 and 13642/2016.
[6.0] Shri Manish R. Bhatt, learned Senior Advocate has appeared on behalf of the petitioner in Special Civil Application Nos.13046/2012, 16304/2013 and 16305/2013. Shri R.S. Sanjanwala, learned Senior Advocate has appeared on behalf of the petitioner in Special Civil Application No.13222/2016 and Shri Dhaval Shah, learned Advocate has appeared on behalf of the petitioner in Special Civil Application No.13642/2016. Shri Kamal Trivedi, learned Advocate General with Ms. Sangita Vishen, learned Assistant Government Pleader has appeared on behalf of the State in all the petitions.
[7.0] Shri Manish Bhatt, learned Senior Advocate has vehemently submitted that the impugned levy of import fee on Denatured Ethanol is absolutely illegal, arbitrary and without the authority under the law and beyond the legislative competence of the State to levy import fee on import of Denatured Ethanol.
[7.1] Shri Bhatt, learned Senior Advocate has vehemently submitted that the Denatured Spirit cannot be renatured. It is submitted that Denatured itself means subjected to a process prescribed for the purpose of rendering unfit for human consumption. It is submitted that Denatured spirit is ethanol to which denaturants are added to make it poisonous, bad tasting, foul smelling or nauseating, to discourage recreational consumption. It is submitted that Pyridine, methanol or Page 6 of 39 HC-NIC Page 6 of 39 Created On Sat Aug 12 06:34:30 IST 2017 C/SCA/16304/2013 CAV JUDGMENT copper sulphate can be added to make denatured ethanol poisonous and denatonium can be added to make it bitter. It is submitted that Ethanol is mixed with other chemical to form an undrinkable solution. It is submitted that once the rectified spirit is denatured, the same cannot be renatured again so as to divert the same for potable use. It is submitted that the denaturant added in the same are not separable by any means. Therefore, once the rectified spirit is denatured, it cannot be renatured and cannot be used for human consumption. It is submitted that therefore the contention on behalf of the State that denatured spirit can be renatured is not true and is baseless. In support of his above submissions, Shri Bhatt, learned Senior Advocate has taken us to the definition of "Denatured" contained in section 2(10), definition of "excisable liquor" contained in section 2(13), definition of "intoxicant" in section 2(22) and the definition of "liquor" contained in section 2(24) of the Bombay Prohibition Act, 1949 (hereinafter referred to as "Prohibition Act"). Relying upon above definitions, it is submitted that the definition of "denatured" itself makes it clear that once the process of denaturation is done, it is unfit for human consumption.
[7.2] It is further submitted by Shri Bhatt, learned Senior Advocate appearing on behalf of the petitioner that the State Government has no legislative competence to levy fee / import fee on the denatured spirit manufactured and used for industrial purpose because the said subject does not fall under any of the entries of List II of Schedule 7 of the Constitution of India. It is submitted that process of denaturation makes the same unfit for human consumption. It is submitted that the State Government can only impose tax or levy fee on potable alcohol i.e. alcohol used for human consumption.
[7.3] It is further submitted by Shri Bhatt, learned Senior Advocate Page 7 of 39 HC-NIC Page 7 of 39 Created On Sat Aug 12 06:34:30 IST 2017 C/SCA/16304/2013 CAV JUDGMENT appearing on behalf of the petitioner that the denatured ethanol does not fall under Entry 6, 8, 24, 51 and 68 of List II and Entry 33 of List III of Schedule 7 of the Constitution of India. It is vehemently submitted by Shri Bhatt, learned Senior Advocate appearing on behalf of the petitioner that Entry 6 of List II pertains to public health and sanitation; hospitals and dispensaries. Entry 8 of List II pertains to production, manufacture, possession, transport, purchase and sale of intoxicating liquor. It is submitted that the said Entry apart from it being not pertaining to industrial alcohol, is also not a taxing entry. It is submitted that since Entry 8 is not a taxing entry, no tax can be imposed thereunder by the State Legislature.
[7.4] It is further submitted by Shri Bhatt, learned Senior Advocate appearing on behalf of the petitioner that Entry 51 pertains to duties of excise on alcoholic liquor meant for human consumption and authorises the State Legislature to levy tax and duties on alcoholic liquor. It is submitted that therefore the said entry also does not support the present levy.
[7.5] It is further submitted by Shri Bhatt, learned Senior Advocate appearing on behalf of the petitioner that Entry 66 of List II refers to fees in respect of any of the matters in the State List and not any other matters and therefore the matters which do not fall in the said List do not allow the State to recover any fees. It is submitted that the State cannot impose fees in respect of item which is not intoxicating liquor fit for human consumption and therefore question of recovering any import fee on absolute denatured spirit or ethanol by the State Government does not survive.
[7.6] It is further submitted by Shri Bhatt, learned Senior Advocate Page 8 of 39 HC-NIC Page 8 of 39 Created On Sat Aug 12 06:34:30 IST 2017 C/SCA/16304/2013 CAV JUDGMENT appearing on behalf of the petitioner that Entry 33 of List III refers to trade and commerce in and the production, supply and distribution of products of any industry where the control of such industry by the Unit is declared by the Parliament by law to be expedient. It is submitted that State cannot claim that under Entry 33 of List III, it can regulate industrial alcohol as a product of scheduled industry. It is submitted that therefore the State's contention that levy of tax on industrial alcohol is competent under Entry 33 of List III of Schedule VII has to be rejected as the same has been specifically negatived by the Hon'ble Supreme Court in the case of Synthetics and Chemicals Limited and Ors. vs. State of U.P. and Ors. reported in (1990) 1 SCC 109.
[7.7] It is submitted that therefore the impugned notifications are contrary to the ratio laid down in the Constitutional Bench Judgment of Hon'ble Supreme Court in the case of Synthetics and Chemicals Limited (Supra). It is submitted that as the denatured ethanol does not fall under any of the Entries referred to above and relied upon by the State Government, the State Government has no competence to levy import fee at Rs.3 per liter on import of denatured ethanol by the petitioner from outside State.
[7.8] Shri Bhatt, learned Senior Advocate appearing on behalf of the petitioner has heavily relied upon the following decisions of the Hon'ble Supreme Court in support of his submission that State has no legislative competence to levy the import fee on import of denatured ethanol.
1. (1990) 1 SCC 109 (Paras 2, 3, 54, 55, 57, 61, 63, 64, 74, 75, 77, 80, 8289, 101, 103, 107110) Synthetics and Chemicals Limited and Ors. vs. State of U.P. and Ors.
2. AIR 1997 SC 1208 (Para 24) Bihar Distillery & Anr. vs. Union of India and Ors.
Page 9 of 39HC-NIC Page 9 of 39 Created On Sat Aug 12 06:34:30 IST 2017 C/SCA/16304/2013 CAV JUDGMENT
3. AIR 2003 SC 4650 (Paras 2, 7, 18, 21, 22, 26, 34, 36, 37, 39, 41
44) Vam Organic Chemicals Ltd. and Ors. vs. State of U.P. & Ors.
4. (2009) 3 SCC 157 (Paras 30, 32) Mohan Meakin Ltd. vs. State of Himachal Pradesh & Anr.
5. AIR 2011 SC 2709 (Para 13) Kesar Enterprise Ltd. vs. State of U.P. and Ors.
6. 2012 (1) ILR 658 (Paras 12, 22 to 25, 27) Industrial Organics Ltd. vs. State of Punjab & Ors.
[7.9] It is further submitted by Shri Bhatt, learned Senior Advocate appearing on behalf of the petitioner that even if it is presumed that the State Government has legislative competence to levy the fees, there is nothing to show that there has been any deployment of any additional staff to oversee the possibility of renaturation of the denatured spirit or that any expenses are incurred by the State Government towards it. It is submitted that the State Government is competent to levy fee for the purpose of ensuring that the industrial alcohol is not surreptitiously converted into potable alcohol, but this power stops with the denaturation of industrial alcohol. It is submitted that once the industrial alcohol is denatured, the same cannot be used as potable alcohol because the denaturants such as denatonium is often added to give the substance an extremely bitter flavour. It is further submitted therefore, no supervision as such is required for checking if denatured spirit is renatured in any case.
[7.10] It is further submitted by Shri Bhatt, learned Senior Advocate appearing on behalf of the petitioner that assuming without admitting that the denatured spirit may by whatever process be renatured, cannot be subject to levy tax in the garb of fee by the State Government, there has to be a direct corelation between services Page 10 of 39 HC-NIC Page 10 of 39 Created On Sat Aug 12 06:34:30 IST 2017 C/SCA/16304/2013 CAV JUDGMENT rendered by the State to the petitioner and that too for the limited purpose of ensuring that denatured spirit is not converted as potable alcohol. It is submitted that details of expenses given by the State in para 17 of the affidavit in reply has no direct corelation with such services. It is submitted that instead, the alleged expenses may be towards the State's aim under Article 47 of Constitution of India, which is not permissible since in that event, it tantamounts to tax and not fee. In support of his above submissions, Shri Bhatt, learned Senior Advocate appearing on behalf of the petitioner has heavily relied upon the following decisions of the Hon'ble Supreme Court.
1. AIR 2003 SC 4650 (Para 44) Vam Organic Chemicals Ltd. and Ors. vs. State of U.P. & Ors.
2. (1971) 2 SCC 236 (Paras 3, 15, 16, 17) Indian Mica & Micanite Industries vs. State of Bihar & Ors.
3. (1997) 2 SCC 715 Vam Organic Chemicals Ltd. and Ors. vs. State of U.P. & Ors.
4. (2007) 6 SCC 317 (Paras 26, 28, 31, 33, 34, 37) Gupta Modern Breweries vs. State of J&K and Ors.
5. (2015) 13 SCC 765 (Paras 4, 6, 7, 8) K.C.P. Limited vs. State of Andhra Pradesh & Ors.
7. 2011 SCC Bombay 616 (Paras 2, 9 to 13, 17, 31, 46, 50) Sahakar Maharshi Shankarrao vs. State of Maharashtra [7.11] It is further submitted by Shri Bhatt, learned Senior Advocate appearing on behalf of the petitioner that once it is held that the State has no power to levy any fee on the import of ethanol in the guise of administrative charges, the said demand cannot be enforced. It is submitted that procedure on import of ethanol is regulated under Rule Page 11 of 39 HC-NIC Page 11 of 39 Created On Sat Aug 12 06:34:30 IST 2017 C/SCA/16304/2013 CAV JUDGMENT 51 onwards of the Rules, 1959. It is submitted that therefore, no administrative expenses are being incurred by the State so as to maintain the demand of import fee at Rs.3 per liter of ethanol in the guise of reimbursement of the administrative expenses.
[7.12] It is further submitted by Shri Bhatt, learned Senior Advocate appearing on behalf of the petitioner that even assuming without admitting that the import fee is in the nature of administrative charges towards supervision, the said amount is not in consonance with the actual expenditure incurred by the State for the said purpose. It is submitted that neither the State has legislative competence to levy import fee nor the State has provided any kind of data to show that staff has been employed by the State Government for supervising that the denatured ethanol is not renatured in any manner or that expenses of any nature are being incurred by the State to supervise the process of denaturation. It is submitted that therefore the element of quid pro quo is not satisfied.
[7.13] It is further submitted by Shri Bhatt, learned Senior Advocate appearing on behalf of the petitioner that infact the State had filed its affidavit in respect of Special Civil Application No.13046/2012. That in the said affidavit, a contention has been raised that the imposition of import fee on denatured ethanol being imported from the other States was to safeguard the interest of Distilleries working in the State of Gujarat in consonance with the Directive principles of the State Policy enumerated under Article 47 of the Constitution of India. It is submitted that thereafter a further affidavit is filed by the State in the said Special Civil Application and an affidavit in reply is also filed in the present petitions. It is submitted that in the further affidavits / affidavit in reply, it has been stated that import fee was levied with a view to Page 12 of 39 HC-NIC Page 12 of 39 Created On Sat Aug 12 06:34:30 IST 2017 C/SCA/16304/2013 CAV JUDGMENT safeguard the prohibition policy in the State of Gujarat. It is submitted that therefore the stand taken by the State Government in both the affidavits filed in Special Civil Application No.13046/2012 is contradictory and no clarification has been given in the further affidavit filed in Special Civil Application No.13046/2012.
Making above submissions and relying upon above decisions, it is requested to allow the present petitions and set aside the impugned levy of fees on import of denatured ethanol.
[8.0] Shri R.S. Sanjanwala, learned Senior Advocate appearing on behalf of the petitioner of Special Civil Application No.13222/2016 has as such made the similar submissions which are made by Shri Bhatt, learned Counsel appearing on behalf of the petitioner of Special Civil Application No.13046/2012.
[8.1] Shri Sanjanwala, learned Counsel has submitted that the State has power to levy duty or fees on alcoholic beverages for even consumption including to regulate the rectified spirit, which can be diverted for potable purpose. It is submitted that however, that power of the State to regulate and control comes to an end, the moment the spirit is denatured. It is submitted that denatured spirit is not fit for human consumption as the chemicals described under the Rules, 1959 are added so as to make it unfit for human consumption. It is submitted that once the rectified spirit is denatured, the same cannot be renatured again so as to divert the same for potable purpose.
[8.2] It is submitted that in the year 1956, the Industries (Development and Regulation) Act, 1951 (hereinafter referred to as "Act, 1951") came to be amended, whereby, Item No.26 to 1st Schedule was added and the Union of India was given control of alcohol and and other products of Page 13 of 39 HC-NIC Page 13 of 39 Created On Sat Aug 12 06:34:30 IST 2017 C/SCA/16304/2013 CAV JUDGMENT fermentation industries which completely came under the control of Union of India. That the import of denatured spirit by the petitioner in the State of Gujarat is covered by Item No.26 of the 1 st Schedule of the Act, 1951 and therefore, the State has no power to make any regulatory measures and charge import fee on the same. In support of his above submissions he has also relied upon the following decisions of the Hon'ble Supreme Court.
1. Synthetic and Chemicals vs. State of U.P. (1990) 1 SCC 109
2. Bihar Distellery and Ors. vs. Union of India and Ors. AIR 1997 SC 1208
3. State of U.P. and Ors. vs. Vam Organic Chemicals Ltd. & Ors. AIR 2003 SC 4650
4. Mohan Makin Limited vs. State of Gujarat (2009) 3 SCC 157 Relying upon the above decisions it is vehemently submitted that as the industrial alcohol and the denatured spirit are not fit for human consumption, it would not fall in the State List but it falls in List 1 and Entry 52 of Schedule 7 and therefore, the State has no legislative competence to make any regulation in this behalf.
[8.3] It is further submitted by Shri Sanjanwala, learned Counsel that even in exercise of powers under Section 105 and 143(2)(b), (c) and (u) of the Prohibition Act, the State Government cannot charge the fees, as it talks of excise duties and makes it clear that excise duty and countervailing duty, as the case may be, at such rates or the rates as the State Government shall direct, may be imposed on alcoholic liquor for human consumption and any intoxicating drug or hemp. It is submitted that since the denatured absolute alcohol is not fit for human Page 14 of 39 HC-NIC Page 14 of 39 Created On Sat Aug 12 06:34:30 IST 2017 C/SCA/16304/2013 CAV JUDGMENT consumption, there is no question of levy of any duty by the State.
[8.4] It is further submitted by Shri Sanjanwala, learned Counsel appearing on behalf of the petitioner that even Rule 143(2)(b) does not empower the State to make Rules in order to regulate the import / export, etc. of any intoxicant, Denatured Spirit preparation, etc. It is submitted that therefore, the decision of this Court relied upon by the State in the case of Gujarat Spirit Dealers Association vs. State of Gujarat in Special Civil Application No.1377/2000 decided on 14.06.2000 shall not be applicable to the facts of the case on hand more particularly against which the appeal is pending before this Court. It is submitted that even otherwise in the said decision the Notification dated 25.10.2004 as well as Circular dated 28.07.2010 were not under challenge.
Relying upon the decision of the Hon'ble Supreme Court in the case of Vam Organics Chemicals Ltd. (Supra), more particularly para 42, it is submitted that as held by the Hon'ble Supreme Court in the said decision, the State Government is competent to levy fee for the purpose of ensuring that the industrial alcohol is not surreptitiously converted into potable alcohol so that the State is deprived of revenue on the sale of such potable alcohol and public is protected from consuming illicit liquor. It is submitted that however the said power stops with the denaturation of the industrial alcohol. It is submitted that as held by the Hon'ble Supreme Court in the case of Vam Organics - I, denatured spirit is outside the seisin in the State legislature. It is submitted that assuming that denatured spirit may by whatever process be denatured and then converted into potable liquor, this would not give State the power to regulate it.
[8.5] It is further submitted by Shri Sanjanwala, learned Counsel Page 15 of 39 HC-NIC Page 15 of 39 Created On Sat Aug 12 06:34:30 IST 2017 C/SCA/16304/2013 CAV JUDGMENT appearing on behalf of the petitioner that even the State has taken conflicting stand in different affidavits in reply filed. It is submitted that in the earlier affidavits, the respondent No.2 referred to and relied upon section 105 of the Prohibition Act, whereas in the second affidavit in reply he has referred to and relied upon section 107 of the Prohibition Act.
[8.6] It is further submitted by Shri Sanjanwala, learned Senior Advocate appearing on behalf of the petitioner that as per the respondent, levy of import duty of Rs.3 per liter of denatured spirit is related to the costs of enforcing rules and regulations. It is submitted that the same is not tenable in view of the decision of the Hon'ble Supreme Court in the case of TVL South Indian Sugar Mills Association and Ors. (Supra), wherein it is inter alia held that if the expenses incurred on administrative services are sought to be recovered from the respondents to cover nefarious activities carried out by the third parties such as smuggling and country side brewing etc. which has no casual connection with the production of industrial alcohol, or for collection of excise duties from other industries carrying out distinctly different production or manufacture, the fee would metamorphose into a tax and therefore, it will not be permissible for the State to collect fee in respect of the expenses incurred in its Excise Department, except those bearing reasonable nexus with the administrative steps taken to ensure that there is no misutilisation or diversion of industrial alcohol for the purpose of producing potable alcohol.
[8.7] It is further submitted by Shri Sanjanwala, learned Counsel appearing on behalf of the petitioner that the State Government has not undertaken any supervisory activity which would constitute quid pro quo for the imposition of the import fees at Rs.3 per liter on import of Page 16 of 39 HC-NIC Page 16 of 39 Created On Sat Aug 12 06:34:30 IST 2017 C/SCA/16304/2013 CAV JUDGMENT absolute denatured alcohol under Rule 52 of the Rules, 1959. It is submitted that any expenses incurred on such supervisory or administrative activity has perforce already been recovered or reimbursed from fees on account of issuance of license, storage or importation of ethanol alcohol and supervision thereof. It is submitted that as held by the Hon'ble Supreme Court in the case of K.C.P. Limited vs. Government of Andhra Pradesh & Ors. reported in 2015 (8) Scale 681, a tax is levied as a part of common exaction, whereas the fee is paid towards the services rendered.
[8.8] It is further submitted by Shri Sanjanwala, learned Senior Advocate appearing on behalf of the petitioner that even aforesaid also the respondents have taken stands in different matters on the very same issue. It is submitted that affidavit in reply filed in the case of IOCL, the respondents have taken the stand that the State Government has not imposed levy of tax on ethanol for the purpose of administrative expenses but it is levied for the protection of the industries working in the State of Gujarat. It is submitted that however the respondent has taken different stand while filing two affidavits in reply in the present case and it is precise stand of the respondent in the present case that for the purpose of meeting with administrative expenses, the import duty at Rs.3 per liter is levied on the import of denatured absolute alcohol from outside the State.
Relying upon the Denatured Spirit Rules, 1956 and the Gujarat Spirit Denaturing Rules, 1964, it is submitted that denatured spirit is permanently unfit for human consumption and it cannot be renatured and converted in an alcohol fit for human consumption.
[8.9] It is further submitted by Shri Sanjanwala, learned Senior Advocate appearing on behalf of the petitioner that the State Page 17 of 39 HC-NIC Page 17 of 39 Created On Sat Aug 12 06:34:30 IST 2017 C/SCA/16304/2013 CAV JUDGMENT Government has tried to justify levy of import fees by showing apprehension regarding diversion of denatured spirit for human consumption and lattha tragedy. It is further submitted that lattha tragedy in the State of Gujarat are attributed to illegal use of Methanol or Mythyl alcohol with country liquor. It is submitted that forensic science laboratories have found methanol as the culprit behind the tragedy and not ethanol. In fact, ethanol before it is denatured has been referred to as antidote in such tragedies and is advised to be used immediately for saving lives of victims. It is submitted that methanol is a highly poisonous substance produced synthetically. It is submitted that it is made up of Carbon Monoxide, Carbon Dioxide and Hydrogen.
It is further submitted that usage of Methyl Alcohol is the root cause of this tragedy. It is further submitted that the Government of Gujarat has not issued any rules so far as the transportation of methyl alcohol (i.e. methanol) and while looking to the Rules of Methanol, neither any specific provisions nor any guidelines are framed from transporting methanol, except under delivery challan which merely states the consignee and consignor's name, destination and quantity and not beyond these.
It is further submitted that Methyl Alcohol is a poisonous substance, obviously its leakage or pilferage can cause a horrible tragedy and the Government has still not framed any such rules. It is submitted that behind every such hooch tragedy that has happened in the State of Gujarat from 1977 to till date, the cause is found to be the usage of Methyl Alcohol. Therefore, it was incumbent upon the State Government to frame strict rules with regard to transportation, possession and use of Methyl Alcohol.
It is further submitted by Shri Sanjanwala, learned Senior Advocate appearing on behalf of the petitioner that because of above, Methyl Alcohol has been removed from the list of approved denaturants Page 18 of 39 HC-NIC Page 18 of 39 Created On Sat Aug 12 06:34:30 IST 2017 C/SCA/16304/2013 CAV JUDGMENT by the Prohibition and Excise Department of State of Gujarat. Therefore, Denatured Absolute Alcohol or Ethanol has no connection with hooch tragedies in Gujarat and the attempt of the State Government to justify levy on that count fails.
[8.10] Shri Sanjanwala, learned Counsel appearing on behalf of the petitioner has heavily relied upon the following decisions of various High Courts - Punjab & Haryana High Court, Jharkhand High Court, Allahabad High Court, Bombay High Court, Karnataka High Court, Madras High Court and Andhra Pradesh High Court. In support of his challenge to the levy of import fee in question by submitting that the High Courts in various States have quashed and set aside similar levies by the State Governments
1. M/s. Industrial Organics Ltd.
MANU/PH/2369/2011 (P & H High Court)
2. M/s. Ajanta Bottlers and Blenders Ltd.
MANU/JH/0869/2013 (Jharkhand High Court)
3. M/s. Bindal Agro Chemicals Ltd.
MANU/UP/2199/2004 (Uttar Pradesh High Court)
4. State of Tamilnadu vs. TVL South Sugar Mills Association MANU/SC/0853/2015
5. K.C.P. Ltd. vs. Government of A.P. MANU/SC/0855/2015 Making above submissions and relying upon above decisions, it is requested to allow the present petition.
[9.0] Present petitions are vehemently opposed by Shri Kamal Trivedi, learned Advocate General appearing on behalf of the State. [9.1] Number of affidavits in reply are filed on behalf of the State.
It is vehemently submitted by Shri Trivedi, learned Advocate Page 19 of 39 HC-NIC Page 19 of 39 Created On Sat Aug 12 06:34:30 IST 2017 C/SCA/16304/2013 CAV JUDGMENT General appearing on behalf of the State that in the facts and circumstances of the case the levy of the import fee at Rs.3 per liter on denatured spirit / ethanol is absolutely just and proper and within the legislative competence of the State. It is submitted that the impugned Notification dated 25.10.2004 to levy / impose the import fee on import of ethanol is absolutely in consonance with the powers conferred under Section 143 of the Prohibition Act read with Rules, 1959 and the Bombay Denatured Spirit (Gujarat Amendment) Rules, 2004.
[9.2] It is vehemently submitted by Shri Trivedi, learned Advocate General appearing on behalf of the State that the import fee on ethanol is imposed by the State to safeguard the business interest of the Distilleries working in the State of Gujarat. It is submitted that on supply of ethanol from Gujarat, various State Governments are imposing the import fee on ethanol and that too at different rates. It is submitted that as the Union Government has given the relaxation to mix 5% ethanol in petrol, the oil companies working in the State of Gujarat are importing ethanol from outside of the Gujarat, and therefore, the business interest of the Distilleries working in the State of Gujarat was widely affected. It is submitted that therefore under the Chairmanship of the Ministry of Industries, State of Gujarat, a meeting was convened to discuss the difficulties of the Distilleries working in the State of Gujarat. It is submitted that thereafter, after careful consideration, the State Government has imposed the import fee of Rs.3 per liter by way of amending Rule 52 of the Rules, 1959 by Notification dated 25.10.2004.
[9.3] It is further submitted by Shri Trivedi, learned Advocate General appearing on behalf of the State and so stated in the first affidavit in reply dated 24.12.2012, the State Government has imposed the import duty on ethanol in safeguarding the wider interest of Distilleries working Page 20 of 39 HC-NIC Page 20 of 39 Created On Sat Aug 12 06:34:30 IST 2017 C/SCA/16304/2013 CAV JUDGMENT in the State of Gujarat in consonance with the Directive principles of the State Policy enumerated under Article 47 of the Constitution of India. It is submitted that in view of the prohibition law in the State, the State is restricting the production, use and sale of liquor in the State of Gujarat.
[9.4] Now, so far as the submission on behalf of the petitioners that once the rectified spirit is denatured, it will become unsafe for use of human being by adding the chemicals and it is not possible to renatured the same again, it is submitted that the same is a chemical process and in modern times of science, the "Denatured Spirit" can be redistilled by a process to make safe for human use, cannot be ignored in the advance days of science. It is submitted that the chemical, in nature whether acidic or basic, if reacted with Denatured Spirit, neutrilization takes place and thereafter bitterness decreases and therefore, it may be misused as a potable in prohibition State like Gujarat. It is submitted that because of such eventuality and use of such methanol / Denatured Spirit and/or methanol is mixed in the Denatured Spirit, tragedy like Lattha Tragedy takes place and may occur. It is submitted that therefore looking to the prohibition policy of the State and considering Article 47 of the Constitution of India, the impugned levy of the fees on import of Denatured Spirit is not required to be set aside. In the affidavit in reply dated 02.12.2012 in para 19, the stand taken by the State in support of their stand that the State Government has authority to levy any fees or tax on the import of ethanol, it is submitted that the State Government has not impose the levy of tax on ethanol for the purpose of administrative expenses, but it has been levied for the production of "Distillery Industries" working in the State of Gujarat considering the fact that oil companies may purchase ethanol from the Distilleries working in the State and to protect other deterrent financial conditions.
Page 21 of 39HC-NIC Page 21 of 39 Created On Sat Aug 12 06:34:30 IST 2017 C/SCA/16304/2013 CAV JUDGMENT [9.5] It is further submitted by Shri Trivedi, learned Advocate General appearing on behalf of the State that the impugned levy of import fee on Denatured Ethanol is absolutely in consonance with Article 47 of the Constitution of India as well as Entries 51, 66 of List II of Schedule 7 of the Constitution of India and within the legislative competence of the State Government.
[9.6] It is submitted that rectified spirt is "Denatured" and become unsafe for use of human being by adding chemicals. It is submitted that this is a chemical process and in modern times of science "Denatured Spirit" can be redistilled by a process to make safe for the human use cannot be ignored in the advance days of science. It is submitted that chemicals in nature, whether acidic or basic, if react with "Denatured Spirit", neutralization takes place and thereafter bitterness decreases and therefore, it may be misused as a potable in prohibited State like Gujarat. It is submitted that by chance if, methanol is mixed in the Denatured spirit, Lattha Tragedy may occur. It is submitted that therefore, to give the effect towards the constitutional duty imposed on the State under Article 47 of the Constitution of India, imposition of such fee on import of ethanol is justifiable.
[9.7] Now, so far as the submission on behalf of the petitioners that the State has no power to levy the import fee on "Denatured Ethanol"
considering the fact that Union Government has amended Act, 1951 by the 1956 Amendment which includes the item No.26 to Schedule I and therefore, the State has no power to levy tax is concerned, it is submitted that the State has rightly levied the import duty / fees on the "Denatured Ethanol" in a wider perspective to protect and safeguard the interest of the industries working in the State where other States are charging / levying the import duty on "Ethanol" and therefore, it will be unsafe for Page 22 of 39 HC-NIC Page 22 of 39 Created On Sat Aug 12 06:34:30 IST 2017 C/SCA/16304/2013 CAV JUDGMENT the industries working in the State to run their business.
[9.8] It is further submitted by Shri Trivedi, learned Advocate General appearing on behalf of the State that the Notification dated 25.10.2004 has been issued in exercise of powers conferred by Clause (u) of sub section (2) of Section 143 of the Prohibition Act. It is submitted that section 143 of the Prohibition Act empowers the State Government to make rules for the purpose of carrying out the provisions of the Prohibition Act or any other law for the time being in force. It is submitted that Clause (u) of subsection (2) of section 143 of the Prohibition Act categorically provides for prescription of fee. It is further submitted that under section 143 of the Prohibition Act the State Government is empowered to frame Rules. It is submitted that Rules, 1959 have been amended by way of Bombay Denatured Spirit (Gujarat Amendment) Rules, 2004, which incorporated the words "and an import fee at the rate of Rs.3 per liter in the case of import of Denatured Ethanol" after the words "on a payment of fee of Rs.50" in Rule 52 of the Rules, 1959.
[9.9] Shri Trivedi, learned Advocate General appearing on behalf of the State relying upon the decision of the Hon'ble Supreme Court in the case of Synthetics and Chemicals Limited (Supra) has submitted that in the said decision the Hon'ble Supreme Court has observed and held that the State can always rely upon Entry Nos.6, 8, 24, 51 and 66 of List II of Entry No.33 of List III for the purpose of recalling the said industrial alcohol for preventing its use as alcoholic liquor and for charging fees. It is submitted that therefore the impugned levy of fees on import of Ethanol / Denatured Spirit is permissible and authorized by the State. [9.10] It is further submitted by Shri Trivedi, learned Advocate General appearing on behalf of the State that in the present case the Page 23 of 39 HC-NIC Page 23 of 39 Created On Sat Aug 12 06:34:30 IST 2017 C/SCA/16304/2013 CAV JUDGMENT import fee is of regulatory as well as compensatory nature. It is submitted that the total amount of import fee which has been collected so far for the period from 2010 to October 2016 comes to the tune of Rs.98,48,343/ on importation of Denatured Spirit from outside the State. It is submitted that as against this the total expenditure incurred for the years 201213 to 201516 comes to Rs.2449.90 lakh.
Making above submissions and for the purpose of carrying out provisions of Prohibition law in the State and with a view to see that the Denatured Spirit is not again converted into potable spirit by renaturing the same by using the chemical process, it is submitted that levy of the import fee on import of Denatured Spirit from outside the State is absolutely just and proper.
Making above submissions it is requested to dismiss the present petitions.
[10.0] Heard learned Counsel appearing on behalf of respective parties at length.
At the outset it is required to be noted that by way of these petitions under Article 226 of the Constitution of India the respective petitioners have challenged the validity of Rule 52 of the Rules, 1959 insofar as it levies the import fees at the rate of Rs.3 per liter on imported Denatured absolute alcohol and Special Denatured Spirit. The petitioners have also challenged the circular dated 28.07.2010 issued by the State Government by which it is directed that on payment of import fees at Rs.3 per liter only, on import fee of Denatured Ethanol (absolute alcohol), the pass be issued.
[10.1] It is the case on behalf of the petitioners that once the spirit is Denatured after it being subjected to a process, the Denatured Spirit is Ethanol and therefore, the same is rendered unfit for human Page 24 of 39 HC-NIC Page 24 of 39 Created On Sat Aug 12 06:34:30 IST 2017 C/SCA/16304/2013 CAV JUDGMENT consumption and the same cannot be renatured again so as to divert the same again for potable use and the same is thereafter used only for industrial purpose, the State has no legislative competence to levy fee / import fee on Denatured Spirit / industrial alcohol manufactured and used for industrial purpose because the said subject does not fall under any of the Entries of List II of Schedule 7 of the Constitution of India. Number of submissions have been made by the learned Counsel appearing on behalf of the respective parties in respect of their submissions and more particularly in support of their submission that once the spirit is Denatured and it is converted into Ethanol, the same is not thereafter possible to be renatured and will not become potable. In support of their above submissions, learned Counsel appearing on behalf of the respective petitioners have heavily relied upon the decision of the Hon'ble Supreme Court in the case of Synthetics and Chemicals Limited (Supra) as well as the decision in the case of Vam Organics Chemicals (Supra).
However, it is required to be noted that in the State of Gujarat, there is a prohibition law and considering the directive principles of the State Policy enumerated under Article 47 of the Constitution of India, it appears that the State has imposed the impugned fees on import of Denatured Spirit / Ethanol. Number of submissions have been made on behalf of the petitioners in support of their submissions that once the rectified spirit is denatured, it becomes unsafe for the use of human being by adding chemicals and therefore, the State has no authority and/or legislative competence to impose / levy import fee on such Denatured Spirit / alcohol. However, it is required to be noted that in the present petitions and while considering the legislative competence of the State Government to levy / impose the fees, the Court is not required to consider in detail whether once the rectified spirit is denatured, thereafter it can be renatured or not and whether it can be used as a Page 25 of 39 HC-NIC Page 25 of 39 Created On Sat Aug 12 06:34:30 IST 2017 C/SCA/16304/2013 CAV JUDGMENT potable or not. Considering the pith and substance of the levy of import fees on import of Denatured Spirit / Ethanol, it cannot be said that the impugned levy of fees on Denatured Ethanol is per se on the Denatured Spirit / Ethanol / industrial alcohol for which the State may not have the legislative competence. Considering Article 47 of the Constitution of India and Entry Nos. 6, 8, 24, 51 and 68 of List II and Entry 33 of List III of Schedule 7 of the Constitution of India, it cannot be said that such a levy of import fee impugned in the present petitions can be said to be beyond the legislative competence of the State. Even in the case of Synthetics and Chemicals Limited (Supra), the Hon'ble Supreme Court has observed that the State may lay down regulations to ensure that nonpotable alcohol is not diverted and misused as a substitute for a potable alcohol.
[10.2] Now, so far as the reliance placed upon the decision of the Hon'ble Supreme Court in the case of TVL South Indian Sugar Mills Association and Ors. (Supra) relied upon by the learned Counsel appearing on behalf of the petitioners is concerned, on considering the said decision and challenge to the levy of fees is concerned, at the outset it is required to be noted that in the said case it was found that administrative fee / service charge was levied to regulate the production of industrial alcohol by the State Government. Even in the said decision it is observed that so long as the expenses incurred by the State Government in ensuring that the industrial alcohol is not used as potable alcohol, the recovery thereof shall be permissible. However, on facts it was found that the fee was levied for recovery of the administrative or service charges from the Distelleries to cover the nefarious activities carried by third parties such as smuggling and countryside brewing etc. which was found to have no causal connection with the production of industrial alcohol, or for collection of excise duties from other industries carrying out Page 26 of 39 HC-NIC Page 26 of 39 Created On Sat Aug 12 06:34:30 IST 2017 C/SCA/16304/2013 CAV JUDGMENT distinctly different production or manufacture and therefore, the fee was held to be metamorphose into a tax. Even in the case of Vam Organics Chemicals Ltd. (Supra) (Vam Organics Chemicals Ltd. II), it is observed that the State Government is competent to levy fee for the purpose of ensuring that industrial alcohol is not surreptitiously converted into potable alcohol so that the State is deprived of revenue on the sale of such potable alcohol and the public is protected from consuming such illicit liquor. At this stage the observations made by the Hon'ble Supreme Court in the case of Bihar Distellery & Anr. (Supra) in para 24 are required to be referred to which reads as under:
"24. We are of the respectful and considered opinion that the decision in Synthetics did not deal with the aspects which are arising for consideration herein and that it was mainly concerned with industrial alcohol, i.e., denatured rectified spirit. While holding that rectified spirit is industrial alcohol, it recognised at the same time that it can be utilised for obtaining country liquor [by diluting it] or for manufacturing l.M.F.Ls. When the decision says that rectified spirit with 95% alcohol content v/v is "toxic" it did not mean that it cannot be utilised for potable purposes either by diluting it or by blending it with other items. The undeniable fact is that rectified spirit is both industrial alcohol as well as a liquor which can be converted into country liquor just by adding water. It is also the basic substance from which I.M.F.Ls. are made. [Denatured rectified spirit, of course, is wholly and exclusively industrial alcohol.] This basic factual premise, which is not and cannot be denied by any one before us raises certain aspects for consideration herein which were not raised or considered in Synthetics.(If rectified spirit is toxic and unfit for human consumption, why is it necessary to denature it, asks the learned Additional Advocate General for the Stale of Uttar Pradesh. Denaturing is meant precisely for making what is meant for human consumption unfit for human consumption, he says.) Take a case where two industries 'A' and 'B' come forward with proposals to manufacture rectified spirit; 'A' says that it proposes to manufacture rectified spirit and then denature it immediately and sell it as industrial alcohol while 'B' says that it will manufacture rectified spirit and utilise it entirely for obtaining country liquor [arrack or by whatever other name, it may be called] or for manufacturing I.M.F.Ls. from out of it or to supply it to others for the said purpose. According to Synthetics, 'A' is under the exclusive control of the Union and the only powers of the Stale are those as are enumerated in Para 86 quoted above. But what about 'B'? The rectified spirit manufactured by it is avowedly meant only for potable purposes. Can Page 27 of 39 HC-NIC Page 27 of 39 Created On Sat Aug 12 06:34:30 IST 2017 C/SCA/16304/2013 CAV JUDGMENT it yet be called "industrial alcoho"? Can it still be said that the State concerned has no power or authority to control and regulate industry 'B' and that the Union alone will control and regulate it until the potable liquors are manufactured? The Union is certainly not interested in or concerned with manufacture or process of manufacture of country liquor or I.M.F.Ls. Does this situation not leave a large enough room for abuse and misuse of rectified spirit? It should be remembered that according to many States before us, bulk of the rectified spirit produced in their respective States is meant for and is utilised for obtaining or manufacturing potable liquOrs. Can it be said even in such a situation that the State should fold its hands and wait and watch till the potable stage is reached. Yet another and additional circumstance is this: it is not brought to our notice that any notified orders have been issued under Section 18G of the I.D.R. Act regulating the sale, disposal or use of rectified spirit for the purpose of obtaining or manufacturing potable liquors which means that by virtue of Entry 33 of ListIll, the States do have the power to legislate on this field field not occupied by any law made by the Union, it is these and many other situations which have to be taken into consideration and provided for in the interests of law, public health, public revenue and also in the interests of proper delineation of the spheres of the Union and the States. The line of demarcation can and should be drawn at the stage of clearance/renewal of the rectified spirit. Where the removal/clearance is for industrial purposes [other than the manufacture of potable liquor], the levy of duties of excise and all other control shall be of the Union but where the removal/clearance is for obtaining or manufacturing potable liquors, the levy of duties of excise and all other control shall be that of the States. This calls for a joint control and supervision of the process of manufacture of rectified spirit and its use and disposal. We proceed to elaborate:
(1) So far as industries engaged in manufacturing rectified spirit meant exclusively for supply to industries [industries other than those engaged in obtaining or manufacture of potable liquors], whether after denaturing it or without denaturing it, are concerned, they shall be under the total and exclusive control of the Union and be governed by the I.D.R. Act and the rules and regulations made thereunder. In other words, where the entire rectified spirit is supplied for such industrial purposes, or to the extent it is so supplied, as the case may be, the levy of excise duties and all other control including establishment of distillery shall be that of the Union. The power of the States in the case of such an industry is only to see and ensure that rectified spirit, whether in the course of its manufacture or after its manufacture, it (is?) not diverted or misused for potable purposes. They can make necessary regulations requiring the industry to submit periodical statements of raw material and the finished product [rectified spirit] and are entitled to verify their Page 28 of 39 HC-NIC Page 28 of 39 Created On Sat Aug 12 06:34:30 IST 2017 C/SCA/16304/2013 CAV JUDGMENT correctness. For this purpose, the States will also be entitled to post their staff in the distilleries and levy reasonable regulatory fees to defray the cost of such staff, as held by this Court in Shri Bileshwar Khand Udyog Khedut Sahakari Mandali Ltd. v. State of Gujarat, (1992) 1 SCR 391 : (1992 AIR SCW 554) and Gujchem Distelleries India Ltd. v. State of Gujarat, (1992) 1 SCR 675 : (1992 AIR SCW 1206).
(2) So far as industries engaged in the manufacture of rectified spirit exclusively for the purpose of obtaining or manufacturing potable liquors or supplying the same to the State Government or its nominees for the said purpose are concerned, they shall be under the total and exclusive control of the States in all respects and at all stages including the establishment of the distillery. In other words, where the entire rectified spirit produced is supplied for potable purposes or to the extent it is so supplied, as the case may be the levy of excise duties and all other control shall be that of the States. According to the State Governments, most of the distilleries fall under this category. (3) So far as industries engaged in the manufacture of rectified spirit, both for the purpose of (a) supplying it to industries [other than industries engaged in obtaining or manufacturing potable liquors/intoxicating liquors] and (b) for obtaining or manufacturing or supplying it to Governments/ persons for obtaining or manufacturing potable liquors are concerned, the following is the position : the power to permit the establishment and regulation of the functioning of the distillery is concerned, it shall be the exclusive domain of the Union. But so far as the levy of excise duties is concerned, the duties on rectified spirit removed/ cleared for supply to industries [other than industries engaged in obtaining or manufacturing potable liquors], shall be levied by the Union while the duties of excise on rectified spirit cleared/removed for the purposes of obtaining or manufacturing potable liquors shall be levied by the concerned State Government. The disposal, i.e., clearance and removal of rectified spirit in the case of such an industry shall be under the joint control of the Union and the concerned State to ensure evasion of excise duties on rectified spirit removed/cleared from the distillery. It is obvious that in respect of these industries too, the power of the States to take necessary steps to ensure against the misuse or diversion of rectified spirit meant for industrial purposes | supply to industries other than those engaged in obtaining or manufacturing potable liquors] to potable purposes, both during and after the manufacture of rectified spirit, continues unaffected. Any rectified spirit supplied, diverted or utilised for potable purposes, i.e., for obtaining or manufacturing potable liquors shall be supplied to and/or utilised, as the case may be, in accordance with the concerned Stale Excise Page 29 of 39 HC-NIC Page 29 of 39 Created On Sat Aug 12 06:34:30 IST 2017 C/SCA/16304/2013 CAV JUDGMENT enactment and the rules and regulations made thereunder. If the State is so advised, it is equally competent to prohibit the use, diversion or supply of rectified spirit for potable purposes. (4) It is advisable nay, necessary that the Union Government makes necessary rules/regulations under the I.D.R. Act directing that no rectified spirit shall be supplied to industries except after denaturing it save those few industries [other than those industries which are engaged in obtaining or manufacturing potable liquors] where denatured spirit cannot be used for manufacturing purposes.
(6) So far as rectified spirit meant for being supplied to or utilised for potable purposes is concerned, it shall be under the exclusive control of the States from the moment it is cleared/ removed for that purpose from the distillery apart from other powers referred to above.
(7) The power to permit the establishment of any industry engaged in the manufacture of potable liquors including I.M.F.Ls., beer, country liquor and other intoxicating drinks is exclusively vested in the States. The power to prohibit and/or regulate the manufacture, production, sale, transport or consumption of such intoxicating liquors is equally that of the States, as held in McDowell (1996 AIR SCW 1679)."
Considering the aforesaid facts and circumstances more particularly considering the pith and substance of the levy of fees on import of Denatured Spirit / Ethanol on import of the same from other States and considering the fact that there is a Prohibition Act in the State of Gujarat and therefore, considering Article 47 of the Constitution of India and Entry 33 of List II of Schedule 7 of the Constitution of India read with Entry Nos. 6, 8, 24, 51 and 68 of List II and Entry 33 of List III of Schedule 7 of the Constitution of India and the purpose and object for which the import fee is levied, it cannot be said that such a levy is beyond the legislative competence of the State as contended on behalf of the petitioners.
[11.0] However, the next question which is posed for consideration of this Court is while the impugned levy of fees on import of Page 30 of 39 HC-NIC Page 30 of 39 Created On Sat Aug 12 06:34:30 IST 2017 C/SCA/16304/2013 CAV JUDGMENT Denatured Spirit / Ethanol though is held to be within the legislative competence of the State, does it pass the test of quid pro quo or not? While considering the aforesaid question few decisions of the Hon'ble Supreme Court are required to be referred to and considered as under.
[11.1] In the case of K.C.P. Limited (Supra), in para 6 the Hon'ble Supreme Court has observed as under:
"6. In deciding the vires of Rule 15, the discussion must consider the distinguishing features between a fee and a tax. An analysis of the Judgments of this Court will reveal that, inter alia, a tax is levied as part of a common exaction, whereas a fee is payment towards services rendered. Thus a "fee" ostensibly collected to prevent nefarious activities such as smuggling and countryside brewing, which have no causal connection with the production of industrial alcohol, would thus metamorphose into a tax. It appears to us that that the State Government has not undertaken any supervisory activity which would constitute a quid pro quo for the imposition of the "export permit fee" charged under Rule 15(3)(i). Any expenses incurred on such supervisory or administrative activity has perforce already been recovered or reimbursed from fees on account of storage or sale transactions on industrial alcohol. These dues paid by the Appellants are channelled towards preventing the illegal activities of unrelated third parties for which the Appellants are in no way responsible. It is evident that the intention behind this "fee" is to prevent manufacturers from exporting industrial alcohol to breweries of potable alcohol in other States that would fetch them a better price than producers of other products within their own State. It is thus clearly, in reality, a tax."
[11.2] In the case of Gupta Modern Breweries (Supra), in para 33, the Hon'ble Supreme Court has observed and held as under:
"33. We have already noted that the plea of the respondents is that it was rendering service by deputing excise staff not only for the purpose of ensuring that the denaturing of spirit is done properly by the manufacturer but also for the purpose of specifically seeing that the denatured spirit does not go out of the hands, either of the distillery owner or a retail seller or any licensee or permit holder contrary to law. It is, therefore, clear that there was no co relationship between the expenses incurred by the Government and Page 31 of 39 HC-NIC Page 31 of 39 Created On Sat Aug 12 06:34:30 IST 2017 C/SCA/16304/2013 CAV JUDGMENT the fee sought to be raised under Rule 17. In other words, there is no quid pro quo between the fee charged and the services rendered. A Constitution Bench of this Court in the case of The Commissioner, Hindu Religious Endowments, Madras vs. Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt, (1954) SCR 1005 (at 1040, 1041 & 1044) held that a fee must be for a quid pro quo : "..As the object of a tax is not to confer any special benefit upon any particular individual, there is, as it is said, no element of quid pro quo between the taxpayer and the public authority. Another feature of the taxation is that as it is a part of the common burden, the quantum of imposition upon the taxpayer depends generally upon his capacity to pay.
Coming now to fees, a "fee" is generally defined to be a charge for a special service rendered to individuals by some governmental agency. The amount of fee levied is supposed to be based on the expenses incurred by the Government in rendering the service, though in many cases the costs are arbitrarily assessed. (AIR p.295, paras 4344) ... but in this case there is total absence of any corelation between the expenses incurred by the Government and the amount raised by contribution under the provision of section 76 and in these circumstances the theory of a return or counterpayment or quid pro quo cannot have any possible application to this case:
In our opinion, therefore, the High Court was right in holding that the contribution levied under section 76 is a tax and not a fee and consequently it was beyond the power of the State Legislature to enact this provision (AIR p. 296, para 49)"
(emphasis supplied)"
[11.3] In the case of Vam Organics Chemicals Ltd. II (Supra), after considering the decision of the Hon'ble Supreme Court in the case of Synthetics and Chemicals Limited (Supra), in paras 42 to 44, the Hon'ble Supreme Court has observed and held as under:
"42. Considering the various authorities cited, we are of the view that the State Government is competent to levy fee for the purpose of ensuring that industrial alcohol is not surreptitiously converted into potable alcohol so that the State is deprived of revenue on the sale of such potable alcohol and the public is protected from consuming such illicit liquor. But this power stops with the denaturation of the industrial alcohol. Denatured spirit has been held in Vam Organics I, Page 32 of 39 HC-NIC Page 32 of 39 Created On Sat Aug 12 06:34:30 IST 2017 C/SCA/16304/2013 CAV JUDGMENT to be outside the seisin of the State Legislature. Assuming that denatured spirit may by whatever process be renatured. (a proposition which is seriously disputed by the respondents) and then converted into potable liquor this would not give the State the power to regulate it. Even according to the demarcation of the filed of legislative competence as envisaged in Bihar Distillery industrial alcohol for industrial purposes falls within the exclusive control of the Union and according to Bihar Distillery "denatured spirit, of course, is wholly and exclusively industrial alcohol".
43. Besides, the fee is required to be justified with reference to the cost of such regulation. The industry is already paying a fee under Rule 2 for such regulation. Indeed the justification for levying the fee under Rule 3(a) is the identical justification given by the State for levying the fee under Rule 2. Presumably, a full complement of Excise Officers and staff are appointed by the State in the Excise Department to carry out their duties under the Act to oversee, control and keep duty on the various kinds of intoxicants under the Act. Having regard to the decision in Vam Organics I, we must also assume that apart from the normal strength, additional officers and staff were appointed to regulate the denaturation of the industrial alcohol. There is nothing to show that there has been any deployment of any additional staff to oversee the possibility of renaturation of the denatured spirit.
44. The question is (to borrow the language is Synthetics) whether in the garb of regulations a legislation which is in pith and substance, as we look upon the instant legislation, a fee or levy which has no connection with the cost or expenses administering the regulation, can be imposed purely as a regulatory measure. Judged by the pith and substance of the impugned legislation, we are definitely of the opinion that these levies cannot be treated as part of regulatory measures." The State has not produced any material to show that it was incurring any additional cost for any further regulation of denatured spirit. Any trace of a lingering doubt as to the propriety of the levy under Rule 3(a) must be taken to have been noted off effectively with the order passed by three Judges of this Court in the Writ Petition filed by Synthetics challenging the same levy as we have noted earlier. That order has resulted in granting Synthetics & Chemicals Ltd. relief from payment under Rule 3(a). The only distinction between the present respondents' cases and Synthetics was that the respondents chose to challenge the levy before the High Court. That could be no rational basis for denying the respondents who are otherwise identically situated, the same relief. (See : Anil Kumar Neotia v. Union of India [1998] 2 SCC 587). In the absence of any such correlation the fee under Rule 3 is not a fee at all levied for the purpose of additional regulation or for any service rendered but is really a tax in the garb of a fee."
Page 33 of 39HC-NIC Page 33 of 39 Created On Sat Aug 12 06:34:30 IST 2017 C/SCA/16304/2013 CAV JUDGMENT [11.4] In the case of Indian Mica and Micanite Industries (Supra), in para 17, the Hon'ble Supreme Court has observed and held as under:
"17. According to the finding of the High Court the only services rendered by the Government to the appellant and to other similar licensees is that the Excise Department have to maintain an elaborate staff not only for the purposes of ensuring that denaturing is done properly by the manufacturer but also for the purpose of seeing that the subsequent possession of denatured spirit in the hands either of a wholesale dealer or retail seller or any other licensee or permitholder is not misused by converting the denatured spirit into alcohol fit for human consumption and thereby evade payment of heavy duty. So far as the manufacturing process is concerned, the appellant or other similar licensees have nothing to do with it. They are only the purchasers of manufactured denatured spirit. Hence the cost of supervising the manufacturing process or any assistance rendered to the manufacturers can not be recovered from the consumers like the appellant. Further under rule 9 of the Board' rules, the actual cost of supervision of the manufacturing process by the Excise Department is required to be home by the manufacturer. There cannot be a double levy in that regard. In the opinion of the High Court the subsequent transfer of denatured spirit and possession of the same in the hands of various persons such as wholesale dealer, retail dealer or other manufacturers also requires close and effective supervision because of the risk of the denatured spirit being converted into potable liquor and thus evading heavy duy. Assuming this conclusion to be correct, by doing so, the State is rendering no service to the consumer. It is merely protecting its own rights. Further in this case, the State which was in a position to place material before the Court to show what services had been rendered by it to the appellant and other similar licensees, the costs or at any rate the probable costs that can be said to have been incurred for rendering those services and the amount realised as fees has failed to do so. On the side of the appellant, it is alleged that the State is collecting huge amount as fees and that it is rendering little or no service in return. The correlationship between the services rendered and the fee levied is essentially a question of fact. Prima facie, the levy appears to be excessive even if the State can be said to be rendering some service to the licensees. The State ought to be in possession of the material from which the correlationship between the levy and the services rendered can be established at least in a general way. But the State has not chosen to place those materials before the Court. Therefore the levy under the impugned Rule cannot be justified."
[11.5] In the case of TVL South Indian Sugar Mills Association and Ors. (Supra), in para 11, the Hon'ble Supreme Court has observed and Page 34 of 39 HC-NIC Page 34 of 39 Created On Sat Aug 12 06:34:30 IST 2017 C/SCA/16304/2013 CAV JUDGMENT held as under:
"11. It seems to us, facially, that if administrative or service charges are sought to be recovered from the Respondent Distilleries to cover nefarious activities carried out by third parties such as smuggling and countryside brewing etc. which have no causal connection with the production of industrial alcohol, or for collection of excise duties from other industries carrying out distinctly different production or manufacture, the fee would metamorphose into a tax. We must hasten to explicate that the illegal or illicit diversion of industrial or ethyl alcohol is possible at the stage where it is rectified spirit or industrial alcohol, contrary to the argument of the Respondents. Therefore, so long as expenses are incurred by the State Government in ensuring that industrial alcohol is not used as potable alcohol, recovery thereof shall be permissible. The Process Chart submitted by the Appellant is reproduced for the facility of clarification:
[12.0] Applying the law laid down by the Hon'ble Supreme Court in the aforesaid decisions on the issue of "levy of fees" and quid pro quo", the impugned levy of fees on import of Denatured Ethanol and the purpose for which the same is imposed and so stated in different affidavit in replies filed on behalf of the State are required to be considered and it is required to be considered whether while imposing the levy of import fees on import of Denatured Ethanol, the test of quid pro quo is successfully passed or not?
[12.1] From the various affidavits in reply filed on behalf of the State and according to the State the import fee on Ethanol is imposed to safeguard the business interest of the Distelleries working in the State of Gujarat. It is also the case on behalf of the State that the State Government has imposed the import duty on Ethanol in safeguarding the wider interest of the policy of prohibition in the State of Gujarat, which is in consonance with the directive principles of the State Policy enumerated under Article 47 of the Constitution of India. It is the specific case on behalf of the State so stated in one of the affidavit in reply that the State Government has not imposed the levy of tax on Page 35 of 39 HC-NIC Page 35 of 39 Created On Sat Aug 12 06:34:30 IST 2017 C/SCA/16304/2013 CAV JUDGMENT Ethanol for the purpose of administrative expenses, but it has been levied for the protection of the "Distellery Industries" working in the State of Gujarat considering the fact that the oil companies may purchase Ethanol from Distelleries working in the State and to protect their deterrent financial conditions. In the further affidavit dated 27.12.2016 filed on behalf of the State it is stated that the import fee in the present case is of regulatory as well as compensatory nature. It is further stated that the total amount of import fee which has been collected so far for the period from 2010 to October 2016 comes to the tune of Rs.98,48,343/ on importation of Denatured Spirit from outside the State. It is further stated that as against this, the total expenditure incurred for the years 201213 to 201516 is as under.
(Rs. In lakhs) Sr. Particulars Year No. 201213 201314 201415 201516 1 Pay & Allowances 1,155.76 1,236.55 1,319.96 1,321.07 2 Travelling expenses 11.94 52.57 26.12 24.32 3 Office expense 90.62 70.14 92.10 646.67 4 Awareness of Prohibition 349.41 298.46 195.63 457.84 propaganda work Total 1,607.75 1,657.72 1,633.81 2,449.90 Note: Construction of Building of Nashabandhi Bhavan Total cost Rs.541.68 lakh Nothing further has been stated on the aspect of the purpose and object of the import fee on import of the Denatured Spirit outside the State.
[12.2] Thus, from the aforesaid it appears to us that the State Government has not undertaken any supervisory activity which will constitute quid pro quo for the imposition of the import fees. As observed by the Hon'ble Supreme Court in catena of decisions more particularly Page 36 of 39 HC-NIC Page 36 of 39 Created On Sat Aug 12 06:34:30 IST 2017 C/SCA/16304/2013 CAV JUDGMENT decisions referred to hereinabove, there is a distinction between a "fee" and a "tax". A tax is levied as part of a common exaction, whereas a fee is payment towards services rendered. The purpose for which the fee is being collected (so stated in the affidavits in reply) viz. to protect the interest of the Distelleries in the State of Gujarat, has no nexus with the import fees to be collected on import of Ethanol from outside Gujarat. Thus, there is no element of quid pro quo. A "fee" is generally defined to be a charge for special services rendered to individuals by some governmental agency. The amount of fee levied is supposed to be based on the expenses incurred by the government in rendering the service. In the present case there is a total absence of any corelation between the expenses incurred by the government and the amount raised by collection of import fee on import of Ethanol from outside Gujarat. Thus, quid pro quo cannot have any possible application in the present case.
[12.3] In the case of Gupta Modern Breweries (Supra), it was the case on behalf of the State that it was rendering service by deputing excise staff not only for the purpose of ensuring that the denaturing of spirit is done properly by the manufacturer but also for the purpose of specifically seeing that the denatured spirit does not go out of the hands, either of the distillery owner or a retail seller or any licensee or permit holder contrary to law and on the aforesaid the levy of license fee was sought to be justified. The Hon'ble Supreme Court held such a Rule 17 to be ultra vires and/or illegal by observing that there was no co relationship between the expenses incurred by the Government and the fee sought to be raised under Rule 17 as there is no quid pro quo between the fee charged and the services rendered.
[12.4] Even in the case of Synthetics and Chemicals Ltd. (Supra), it is observed by the Hon'ble Supreme Court that in case the State is Page 37 of 39 HC-NIC Page 37 of 39 Created On Sat Aug 12 06:34:30 IST 2017 C/SCA/16304/2013 CAV JUDGMENT rendering any service, as distinct from its claim of so called grant of privilege, it may charge fees based on quid pro quo. In the said decision in para 88 also the Hon'ble Supreme Court has observed while holding the imposition of fees on industrial alcohol in the said case as invalid, it is made clear by the Hon'ble Supreme Court that the same will not affect any impost so far as potable alcohol as commonly understood is concerned and 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 and this will not affect any regulating measure as such.
[12.5] Considering the law laid down by the Hon'ble Supreme Court in the aforesaid decisions and applying the same to the facts of the case on hand more particularly with respect to the impugned levy of import fee on import of Denatured Ethanol from outside Gujarat and the purpose and object for which the fee is sought to be levied, we are of the opinion that the impugned levy fails the test of quid pro quo. Under the circumstances, the impugned levy of import fee on import of Denatured Ethanol from outside Gujarat as per Rule 52 of the Gujarat Bombay Denatured Spirit Rules, 1959 is invalid in law and is illegal.
[13.0] In view of the above and for the reasons stated above, all these petitions succeed. Impugned levy of import fee under Rule 52 of the Gujarat Bombay Denatured Spirit Rules, 1959 is held to be invalid under the law and is hereby quashed and set aside. Consequently, the demand made by the respondent towards import fee on Denatured Ethanol and the impugned Notification dated 25.10.2004 issued by the respondent imposing import fee at Rs.3 per liter on Denatured Ethanol are hereby quashed and set aside. Necessary consequences to follow. Rule is made absolute to the aforesaid extent in each of the petitions. In Page 38 of 39 HC-NIC Page 38 of 39 Created On Sat Aug 12 06:34:30 IST 2017 C/SCA/16304/2013 CAV JUDGMENT the facts and circumstances of the case, there shall be no order as to costs.
Sd/ (M.R. SHAH, J.) Sd/ (B.N. KARIA, J.) FURTHER ORDER At this stage, Shri Kamal Trivedi, learned Advocate General has requested to stay the further implementation of the present judgment and order so as to enable the State to approach the Hon'ble Supreme Court.
In the facts and circumstances of the case, further implementation and operation of the present judgment and order is stayed till 17.07.2017.
Sd/ (M.R. SHAH, J.) Sd/ (B.N. KARIA, J.) Ajay Page 39 of 39 HC-NIC Page 39 of 39 Created On Sat Aug 12 06:34:30 IST 2017