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REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL No.   5020   OF 20  05   

M/S K.C.P. LTD.        … APPELLANT

VERSUS

GOVERNMENT OF A.P. & ORS             … RESPONDENTS

WITH

CIVIL APPEAL NOS.5021-5022 OF 2005

J  U  D  G  M  E  N  T

VIKRAMAJIT SEN,J.

 1 The  Appellants  before  us  assail  the  impugned  Judgment  of  the  High

Court  of  Andhra Pradesh,  which had upheld the legality  of  Andhra Pradesh

Rectified  Spirits  Rules,  1971  (1971  Rules  for  brevity)  and  had  found  the

requirement of obtaining a licence and the payment of Excise duty and Pass fee

for exporting rectified spirit to be legal.  

2 The  Appellants  have  distilleries  which  produce  various  grades  of

industrial alcohol from molasses, also known as ethyl alcohol or ethanol.  In

exercise of powers conferred under Section 72 of the Andhra Pradesh Excise

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Act, 1968, the Respondent State enacted the 1971 Rules.  Rules 4, 13 and 15 are

laid out herein for the facility of reference; although in these Appeals it is Rule

15 which is in focus --  

Rule 4: Rectified spirit shall not be issued from a distillery or a warehouse without pre-payment of  administrative fee meant for industrial  purposes.  In  case  of  potable  purposes,  rectified  spirit shall  not  be  issued  from  a  distillery  or  a  warehouse  without pre-payment of Excise Duty except when rectified spirit is moved in bound or when payment of Excise Duty has been exempted.

Rule 13: (1) No person shall be granted license for possession and use of rectified spirit for industrial purposes unless the applicant:

(a)  deposits as security for the fulfillment of all the conditions of his license such sum as may be fixed by the Government from time to time which shall not be less than Rs. 15,000 in cash in the Government treasury; and (b) executes an agreement in Form R.S.-V for payment of the costs, charges and expenses including salaries and allowances of  such  Excise  staff  as  may  be  determined  by  the Commissioner or his nominee to be posted at the manufactory of the licensee in connection with the supervision to ensure compliance with the provisions of the Act, the rules and terms of  the  license.  The staff  shall  be  under  the  supervision  and control of the Commissioner or the Authorised Officer.

Rule 15: (1) No rectified spirit  shall  be exported save under an export permit and in accordance with these rules.

(2) Any person manufacturing or possessing rectified spirit desires to export (herein-after referred to as the exporter) it for the purpose of its exportation to any area outside the State, shall apply in  Form ARS-V to  the  Commissioner  for  export  permit  in  that behalf.  No such application  shall  be entertained unless  rectified spirit  is  in  surplus  in  the  State.  The  application  shall  be accompanied by an import permit, or a no objection certificate or an import license issued by a competent authority of the place to which the rectified spirit is to be exported.  (3) (i) on receipt of the application for permit to export, the Commissioner shall make such enquiry as he considers necessary and may grant in accordance with these rules as export permit, on

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payment of the export permit fee of Rupees Ten per bulk litre in Form R.S. VII in triplicate.

(ii)  Such permit  shall  not  be granted unless an Indemnity Bond shall  be submitted by the Exporter total quantity of Proof litres permitted to export, binding himself severally to pay the full duty at Rs. 15-40 per Proof litre on all losses, by way of drainage, short delivery, non-delivery of rectified spirit or otherwise over and above the admissible loss limit  of 0.5% towards transit  wastage with interest on all losses in transit.

3 The Appellants before the High Court contended that they had previously

supplied to the Government a major portion of the rectified spirit which they

had  produced,  which  was  thereafter  used  by  the  latter  as  raw  material  for

manufacturing potable alcohol and Indian Made Foreign Liquor (IMFL).  As a

consequence of the imposition of prohibition, this demand within the State of

Andhra Pradesh was drastically reduced; and the Appellants were left with no

alternative but to export the said rectified spirit to other States.  However, due to

the  higher  power  tariffs,  licence  fees,  duties,  etc.  in  Andhra  Pradesh,  the

Appellants  could not  compete with the prices of  rectified spirit  produced in

some of the other States, further leaving them with no alternative but to explore

the possibility of exporting their said product to other countries.  In this factual

matrix,  the  Appellants  filed  writ  petitions  before  the  High  Court  with  the

following prayer:

“For the reasons stated above it is prayed that this Hon’ble Court may be pleased to issue a writ or order or direction declaring the A.P.R.S. Rules, 1971 in so far as they pertain to Rectified Spirit (Industrial Grade)  as  illegal,  ultra  vires  the  Constitution,  null  and  void;  (2) declare the action of the respondents in insisting upon the petitioner to obtain licence, pay excise duty and pass fee for exporting Rectified

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Spirit  (Industrial Grade) as illegal, ultra vires, unconstitutional and violative of the petitioner rights guaranteed under Art. 14, 19(1)(g), 265 and 301 of the Constitution of India and consequently issue a writ of Mandamus directing the respondents not to interfere with the export of R.S. by the petitioners and pass such order or orders as this Hon’ble Court deems fit and proper.”

The major premise of the Appellants is that rectified spirit/industrial alcohol is

outside the purview of the Excise Act; that the State can only legislate with

regard to alcohol which is fit for human consumption; and that since rectified

spirit is not potable, it is only the Union Government, which is competent to

legislate this activity.

4 The High Court, upon a detailed examination of the existing case law,

found that the State cannot charge Excise duty on alcohol that is not fit  for

human consumption but it is entitled to charge a fee on a quid pro quo basis in

case  it  renders  any  monitoring  service.  Upon  considering  Synthetics  &

Chemicals Limited vs. State of U.P. (1990) 1 SCC 109, the High Court held

that where rectified spirit is removed or cleared for industrial purposes, the levy

of Excise duty and all other controls are to be with the Union, but where the use

of  rectified  spirit  is  intended  for  the  manufacture  of  potable  alcohol,  State

Governments are competent to impose any levies.  This calls for joint control,

supervision and monitoring over the process of manufacture, use and disposal of

rectified alcohol, which was in fact being carried out by the Excise Department

of  the  State  Government.   It  was  thus  well  within  the  powers  of  the  State

Government to impose a fee to cover its expenses.  The High Court noted that

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adding water to rectified spirit would make it fit for human consumption, so the

responsibility on the State was tremendous and onerous even with regard to

liquor  meant  for  industrial  purposes.  The  State  Government  was  held  to  be

entitled to post its staff at distilleries and to levy a reasonable regulatory fee to

defray the expenses of such staff.  No data was laid down by either party based

on which the Court could come to a conclusion on whether the fee levied was

reasonable or not.  It was held that the amount levied from the Appellants was in

the nature of  a fee for  services rendered,  and not by way of tax.   The writ

petitions were therefore dismissed.  

5 The Appellants have now filed these Appeals before us, challenging once

again the Constitutional validity of the 1971 Rules insofar as they are applicable

to industrial alcohol, and in the alternative, contending that the fee charged does

not satisfy the test of quid pro quo. We have contemporaneously considered the

circumstances in which administrative and service charges can be recovered by

a State Government along with the relevant case law in detail in our Judgment

of even date in the Appeal titled as State of Tamil Nadu vs. Tvl. South Indian

Sugar Mills, and shall therefore not repeat our reasoning herein in interest of

avoiding prolixity.  We merely reiterate that while  State Governments are not

competent to impose taxes/levies on industrial alcohol, fee charged for services

rendered  to  prevent  the  diversion  and  conversion  of  industrial  alcohol  for

human consumption is  permissible  and legal;  such fee  need not  be  charged

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strictly on quid pro quo basis and it will pass legal muster so long as it is not

excessive.  We therefore find that the 1971 Rules themselves are not illegal, but

rather  are  well  within the purview of the Constitutional  powers of  the State

Government.   Rules such as the administrative fee postulated in Rule 4 (supra)

are essential to defray expenses incurred by State Governments to prevent the

illegal conversion of industrial alcohol to potable alcohol.  The quantum of fee

levied has not been challenged either before us or before the High Court and no

empirical evidence in this regard is available in the Appeal records.   We shall

accordingly desist from commenting on whether the various heads of fee are

excessive, thereby metamorphosing them from a fee to a tax.  The fact that the

export permit fee was reduced from Rs. 10 to Rs. 3 and finally to Re. 1 per bulk

litre indicates that there has been due application of mind by the Respondent

State in deciding the quantum of fee.     

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

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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. Rule 15(2), which holds that export

will only be allowed if there is a surplus in the State evidences the apprehension

of  the  State  Government  that  it  may  run  short  of  industrial  alcohol.   This

sub-Rule, as well others such as Rule 15(1) which imposes the requirement of

an export permit and Rule 15(3)(ii) which adds the requirement of an indemnity

bond, are also outside the jurisdiction and powers of State Governments, as their

purpose  is  clearly not  to  prevent  industrial  alcohol  from being diverted  and

converted to potable alcohol; their purpose is to regulate, control and discourage

the export of industrial alcohol.   The imposition of a tax to regulate export

under its own head is entirely feasible, if introduced by the competent authority,

i.e.  the  Union  Government  as  held  in  Synthetics  &  Chemicals  Limited.

However, this is not the scenario before us, both for the want of vires and for the

ambiguity behind the intention of this Rule.  The Respondent State has given no

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explanation  to  justify  this  Rule,  and has  not  shown any service rendered in

return.  

7 We uphold the 1971 Rules and find that the Respondent State had the

power to enact these Rules.  However, we strike down Rule 15 dealing with the

export  of  rectified  spirit,  finding  that  it  imposes  a  tax,  not  a  fee,  on  the

Appellants and is outside the Respondent State’s legislative competence.  It has

not  been  conclusively  shown  by  the  Respondent  State  that  it  has  been

constrained  to  monitor  or  superintend that  industrial  alcohol  is  not  illegally

diverted to other uses within the State.  If industrial alcohol is exported outside

the State as industrial alcohol, these impositions partake of a totally different

character, transferring it into a tax.   These Appeals are disposed of in these

terms.  

               ............................................ ...J.

                         [VIKRAMAJIT SEN]  

                        ...............................................J.                [SHIVA KIRTI SINGH]

New Delhi; August 12, 2015.