2015 (8) TMI 588 - SC - VAT and Sales Tax

State Fees for Regulating Industrial Alcohol Must Be Reasonably Related to Services Provided

State of Tamil Nadu & Another Versus TVL. South Indian Sugar Mills Assn. & Others

The Supreme Court upheld the decisions of the Single Judge and Division Bench of the High Court of Judicature at Madras, dismissing the appeals. It ... Legality of a demand of ₹ 1/- per bulk litre of industrial alcohol manufactured - levy and collection of administrative/regulating service fee - Held that:- It was not incumbent for collections or contributions to be recovered from only those who were directly involved in the subject transactions, since the newly established administrative machinery was necessary for the smooth and legal conduct of the entire business pertaining to the securities market. - 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. SEBI Act postulated and permitted the charging of two types of fees – (i) under Section 11(2)(k) of the SEBI Act for carrying out the several and sundry purposes contained in Section 11, and (ii) for the registration of applicants under Section 12(2). It was also clarified by the Court that the said service or regulatory or administrative fee can be levied on all contributors, regardless of whether or not services were being directly rendered to them. This decision cannot be extrapolated to permit the State to make recoveries in the guise of administrative expenses of all the outgoings of its Excise Department even though they have no bearing or connection with the possible misuse and diversion of industrial alcohol to potable alcohol. 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. Respondent Distilleries did not express any discomfiture on collection of fee at the rate of 1/- per bulk litre either before this Court or any of the subordinate courts. In fact, there was a hiatus in the litigation even in the High Court where collections were made at the increased rate even though that was quashed by the High Court. We clarify that there was no justification for the Appellant State or its Excise Department to collect charges at the rate of 1/- after it had been quashed by the learned Single Judge. Keeping in perceptive the absence of diligence by the Respondent Distilleries from seeking timely variations or modification of Orders passed by the Court, we desist from directing that the collection of charges over and above 50 paise per bulk litre should be refunded. - Decided against Appellant. Issues Involved:1. Legality of the demand of Rs. 1/- per bulk litre of industrial alcohol by the State of Tamil Nadu.2. Legislative competence of the State to impose such a demand.3. Constitutionality of Rule 5-A of the Tamil Nadu Distillery Rules.4. Validity of the increase in administrative service fees from 50 paise to Rs. 1/- per bulk litre.5. Application of the principle of quid pro quo in the imposition of fees.Detailed Analysis:1. Legality of the Demand of Rs. 1/- per Bulk Litre of Industrial Alcohol:The appellants challenged the concurrent conclusions of the Single Judge and the Division Bench of the High Court of Judicature at Madras regarding the legality of the demand of Rs. 1/- per bulk litre of industrial alcohol. The respondents had previously unsuccessfully contested the impost of 50 paise per bulk litre based on the legislative competence of the State of Tamil Nadu. The Single Judge noted that the decision in Synthetics and Chemicals Ltd. v. State of U.P. concluded that states cannot impose taxes on industrial alcohol but can collect administrative fees to prevent its diversion to potable alcohol.2. Legislative Competence of the State to Impose Such a Demand:The Single Judge and Division Bench relied on the Synthetics and Chemicals Ltd. case, which clarified that states can regulate industrial alcohol to prevent its misuse as potable alcohol and can collect fees for this regulation. The Division Bench noted that the State Government could regulate the production of industrial alcohol to prevent its diversion and could collect administrative service fees for this purpose.3. Constitutionality of Rule 5-A of the Tamil Nadu Distillery Rules:The respondents sought a declaration that Rule 5-A, introduced by G.O.M. No.662 and amended by G.O.M. No.64, was unconstitutional, illegal, and void. The Single Judge concluded that the impost was an attempt to raise revenue for the State, not just administrative fees. The Division Bench upheld this view, noting that the collections made at 50 paise per bulk litre were excessive and not justified as administrative fees.4. Validity of the Increase in Administrative Service Fees from 50 paise to Rs. 1/- per Bulk Litre:The Single Judge found that the increase from 50 paise to Rs. 1/- per bulk litre was not based on the principle of quid pro quo and amounted to an unjustified increase in revenue collection. The Division Bench supported this conclusion, noting that the collections at 50 paise per bulk litre already covered a significant portion of the Excise Department's expenses, and the increase to Rs. 1/- was excessive.5. Application of the Principle of Quid Pro Quo in the Imposition of Fees:The Single Judge and Division Bench emphasized that the principle of quid pro quo requires a reasonable relationship between the fees collected and the services rendered. The Single Judge noted that the State had not provided sufficient details to establish that the increased fees were justified. The Division Bench highlighted that the collections at 50 paise per bulk litre were already substantial and that the increase to Rs. 1/- per bulk litre lacked the necessary correlation with the services rendered.Conclusion:The Supreme Court upheld the decisions of the Single Judge and Division Bench, dismissing the appeals. It was clarified that while states can collect administrative fees for regulating industrial alcohol, these fees must be reasonably related to the services provided. The increase from 50 paise to Rs. 1/- per bulk litre was found to be excessive and not justified based on the principle of quid pro quo. The State was directed to bear the costs incurred by the respondents in the litigation.