2022 (3) TMI 270 - SC - VAT and Sales Tax

Supreme Court Affirms State Lacks Power to Tax Non-Potable Alcohol

The Supreme Court upheld the High Court's decision, dismissing the appeals and affirming that the State lacked authority to levy excise duty on ... Levy of Excise Duty - weak spirit, which was more than 2% allowable wastage - industrial alcohol not fit for human consumption - loss arising during the process of re-distillation in the State of Orissa - HELD THAT:- It is not in dispute that the license, which was granted to the respondent-Company, is for the purpose of manufacturing, bottling, blending and reduction of IMFL. It is also not in dispute that as required under the license, the respondent-Company has installed one ENA column to rectify the rectified spirit to be used in the manufacturing of IMFL. It is also not in dispute that the sample of wastage generated in the manufacturing process was sent for examination to the State Drugs Testing and Research Laboratory, Orissa - It is thus clear that the wastage generated has been found to be unfit and unsafe for potable purpose. The Constitution Bench of this Court in the case of SYNTHETICS & CHEMICALS LTD., ETC. VERSUS STATE OF UP. [1989 (10) TMI 214 - SUPREME COURT] was considering the issue, as to whether the States are entitled to levy excise duty in respect of industrial alcohol. Different legislations in the different States dealing with such a power of the State Government came up for consideration before the Constitution Bench of this Court in the said case. The Constitution Bench observed thus Constitution makers distributed the term ‘alcohol liquor’ into two heads, viz., (a) for human consumption; and (b) other than for human consumption. It has been held that the alcoholic liquors, which are for human consumption, are put in Entry 51 List II authorizing the State Legislature to levy tax on them, whereas alcoholic liquors other than for human consumption have been left to the Central Legislature under Entry 84 for levy of duty of excise. It has been held that what has been excluded in Entry 84 has specifically been put within the authority of the State for purposes of taxation. The Constitution Bench clearly held that the State Legislature had no authority to levy duty or tax on alcohol, which is not for human consumption as that could be levied only by the Centre. A three Judge Bench of this Court in the case of STATE OF UP. & ORS. VERSUS M/S. MODI DISTILLERY ETC. AND M/S. AJUDHIA DISTILLERY [1995 (8) TMI 300 - SUPREME COURT] was considering the power of the State Government to levy excise duty on wastage of liquor after distillation. Following the judgment of the Constitution Bench of this Court in the case of Synthetics and Chemicals Ltd., this Court observed that this Court held that the State was only empowered to levy excise duty on alcoholic liquor for human consumption. This Court held that the State has no power to levy excise duty on wastage of liquor after distillation. Perusal of Section 27(1) of the said Act would reveal that the State’s power to impose duty on import, export, transport and manufacture is only in respect of any excisable articles imported, exported, transported and manufactured. ‘Excisable article’ has been defined to be any alcoholic liquor for human consumption or any intoxicating drug. It is thus clear that even under the relevant statute, the State has power to levy excise duty only in respect of the alcoholic liquor for human consumption. There are no reason to interfere with the impugned judgment and order. The appeals, therefore, are found to be without merit and as such, dismissed. Issues Involved:1. Legality of the demand notices issued by the appellants.2. Determination of excise duty on weak spirit generated during the manufacturing process.3. Authority of the State to levy excise duty on non-potable alcohol.4. Compliance with the conditions of the manufacturing license by the respondent-Company.Issue-wise Detailed Analysis:1. Legality of the demand notices issued by the appellants:The appeals challenge the High Court's judgment which set aside the demand notices issued by the appellants. The respondent-Company was issued demand notices to pay excise duty on weak spirit exceeding the allowable 2% wastage. The High Court had stayed these notices, and the final judgment quashed them, prompting the current appeals.2. Determination of excise duty on weak spirit generated during the manufacturing process:The respondent-Company installed an Extra Natural Alcohol Column (ENA Column) as required by its license to rectify spirit for manufacturing Indian Made Foreign Liquor (IMFL). The manufacturing process generated weak spirit, deemed non-potable. The Committee constituted by the appellants recommended a 2% allowable loss during re-distillation, aligning with practices in other states. Despite this, the appellants issued demand notices for excise duty on weak spirit exceeding the 2% threshold, which the respondent-Company contested.3. Authority of the State to levy excise duty on non-potable alcohol:The legal crux revolves around whether the State can levy excise duty on weak spirit, which is not fit for human consumption. The Constitution Bench in Synthetics and Chemicals Ltd. vs. State of U.P. held that the State Legislature could only levy duty on alcoholic liquors for human consumption, while industrial alcohol falls under the Central Government's purview. The weak spirit in question, tested and found unfit for human consumption, falls outside the State's excise duty jurisdiction.4. Compliance with the conditions of the manufacturing license by the respondent-Company:The respondent-Company complied with the license condition by installing the ENA Column. The Committee's investigation and subsequent chemical analysis confirmed that the weak spirit was non-potable. The High Court's judgment emphasized that the State's demand for excise duty on non-potable weak spirit was beyond its authority, as established in the Synthetics and Chemicals Ltd. case.Conclusion:The Supreme Court upheld the High Court's decision, affirming that the State lacked authority to levy excise duty on non-potable alcohol. The appeals were dismissed, reinforcing the legal precedent that only the Central Government can tax industrial alcohol. The judgment clarified the demarcation of taxing powers between the State and the Centre concerning alcoholic liquors for human consumption versus industrial alcohol.