TaxTMI 
TaxTMI 
2011 (9) TMI 71
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....) in Form-B1 and a Bottling Licence for bottling liquor for sale issued under section 17(1)(d) of the Act in Form FL-3. The Brewery was carrying on the manufacturing of beer and bottling of beer in bond, under the said Licences. 3. The Excise Inspector in-charge of the Brewery maintains a Register of manufacture and issue of beer in Form B-16. The Excise Inspector is required to examine the accounts of the brewery and take stock of the beer in hand in the brewery, on the last working day of every calendar month (prior to 19.7.1975, such examination was required to be done at the end of each quarter) after all the issues for that day are made. If he found that the actual quantity of beer in stock in the brewery was less than the quantity shown in the stock account, but the deficiency did not exceed 9%, he had to disregard the same as allowance upto 9% was permitted to cover the losses due to evaporation, sullage and other contingencies. But where the deficiency exceeded 9%, he was required to enquire into the cause and submit a report of the result to the Excise Commissioner in that behalf. The Excise Inspector in-charge, was accordingly sending reports to the Excise Commissioner w....
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....d that as the wort is placed in the fermentation tanks and the yeast is added to it, fermentation starts immediately with the conversion of sugar into alcohol. After the addition of yeast when alcohol is first formed, the liquid in the fermentation tank becomes alcoholic liquor for human consumption. It is pointed out that Entry 51 of List II of Seventh Schedule uses the words "alcoholic liquor for human consumption" and not "alcoholic liquor fit for human consumption" and therefore, beer is manufactured' when the fermenting agents are added to the wort and fermentation process commences. The State contended that excise duty is leviable on the manufacture and production of goods; and that the stage at which it should be imposed, the manner of collection thereof and the rate at which it is to be imposed, are matters within the discretion of the State. It is lastly submitted that the power to impose a tax or duty implicitly carries with it the power to provide against evasion thereof. It is submitted that what is in issue is not levy of excise duty, but the validity of measures introduced to identify the unauthorised or illegal diversion of beer resulting in evasion of excise duty. ....
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....ne on the quantity of beer which is wasted in the manufacturing process before it become exigible to excise duty. It is contended that the legislative competence to levy excise duty under Entry 51(a) of List II of Seventh Schedule to Constitution of India is with reference to alcoholic liquors for human consumption'. As the wort solution cannot be described as alcoholic liquor for human consumption at the stage of fermentation and filtration, the state government cannot levy any excise duty or additional duty equal to excise duty, in regard to wastage which occurs with reference a material which is not alcoholic liquor for human consumption'. It is contended that the levy of excise duty/additional duty by the Excise Commissioner was on the deficiency, that is, the difference between the quantities of wort and finished product (beer), which comprises of the scum, yeast cells brought on top of fermenting wort, carbon-di-oxide evolved, sullage etc., settled at the bottom of vats which impurities are to be eliminated before beer could be said to be manufactured or could be described as an alcoholic liquor for human consumption. It is contended that the Excise authorities had calculated....
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....ods cannot be termed as excisable article. [Vide para 93(b)]" Questions for consideration 9. On the contentions urged, the following two questions arise for our consideration: (i) At what stage does the beer manufactured is exigible to duty? (ii) Whether the procedure adopted by the appellants for ascertaining excess manufacturing wastage (excess deficiency) is proper? To appreciate these issues and find answers to the questions, it is necessary to refer to the process of manufacture of beer, the relevant provisions of the UP Excise Act, 1910 (For short the Act') and the relevant Brewery Rules. Process of manufacture of Beer 10. Encyclopaedia Britannica (15th Edition, Vol.14, Page 739) describes the stages of brewing process thus: "Beer production involves malting, milling, mashing, extract separation, hop addition and boiling, removal of hops and precipitates, cooling and aeration, fermentation, separation of yeast from young beer, aging, maturing, and packaging. The object of the entire process is to convert grain starches to sugar, extract it with water, and then ferment it with yeast to produce the alcoholic, ligh....
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.... a source of bitterness, flavour and aroma. Hops may be added at more than one point during the boil. The longer the hops are boiled, the more bitterness they contribute, but the less hop flavour and aroma remains in the beer. After boiling, the hopped wort is now cooled, ready for the yeast. In some breweries, the hopped wort may pass through a hopback, which is a small vat filled with hops, to add aromatic hop flavouring and to act as a filter; but usually the hopped wort is simply cooled for the fermenter, where the yeast is added. During fermentation, the wort becomes beer in a process which requires a week to months depending on the type of yeast and strength of the beer. In addition to producing alcohol, fine particulate matter suspended in the wort settles during fermentation. Once fermentation is complete, the yeast also settles, leaving the beer clear. Fermentation is sometimes carried out in two stages, primary and secondary. Once most of the alcohol has been produced during primary fermentation, the beer is transferred to a new vessel and allowed a period of secondary fermentation. Secondary fermentation is used when the beer requires long storage bef....
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.... it is allowed to come into active fermentation before addition to the fermenting vessel. Yeast food, if any is needed is in a few hours is at its height as can be seen by the maximum temperature reached and is allowed to continue for 5 to 8 days. The following description of the practice in India is of interest: Pitching of the wort - The fermentation vats usually have a capacity of 3,000 gallons, which is equivalent to 140 bushels of malt (having a sugar content of 40 per cent). The cooled hopped wort from the malt is mixed at this stage with 300 lb. of sugar and = lb. of ammonium sulphate followed by 60 lb. of yeast in suspension (containing 85 per cent moisture) and allowed to ferment for 5-6 days. The peak of the fermentation is reached in 36 hours. At the end of the fermentation, the vats are slowly aerated by Sterilized air'. Fermentation of beer is conducted by employing top fermentation yeast. This and the atmosphere of CO on the top of the vat prevent any bacteria gaining access to the beer. The fermentation is carried on until the gravity of the wort falls down to 1.042, when the wort is run off into fining vessels so as to settle and clarify. Throughout the fermenting....
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....e, dissolving bittering constitutents of hops and imparting aromatic flavour of hops flowers. The spent hops are separated from the boiled wort which is cooled and passed into fermentation vats. Brewers yeast is "pitched" to initiate fermentation. The fermentation is carried on at low temperature. Lot of frothing takes place, the yeast cells multiply and bring up dirty heads with resins of hops etc., at the top which are cleared out, the convertible sugars are decomposed into alcohol and carbon dioxide gas; the hanging particles in the wort settled down with coagulated albuminous substances and yeast cells during the process of fermentation which is carried on for 8 to 10 days. The fermented wort is racked into settling tanks or storage tanks leaving the sullage or sludge at the bottom of fermentation vats. At this stage also (i.e. in storage vats) some yeast cells are present in the fermented wort and secondary fermentation takes place besides some residuary particles in the bulk of fermented wort settling at the bottom of the storage vats. To eliminate secondary fermentation and haze from this, it is passed through filte....
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....in cases:- (1) Where the quantity of spirit or beer in a brewery is found, on examination by such officer of the Excise Department as may be authorised by the Excise Commissioner in this behalf to exceed the quantity in hand as shown in the stock account, the brewery shall be liable to pay duty on such excess at the ordinary rates fixed under Section 28. (2) Where the quantity of spirit or beer is less than that shown in the stock account on such examination and deficiency exceeds ten per cent; (allowance to that extent being made to cover losses due to evaporation, sullage and other contingencies within the brewery, and also to cover loss in bottling and storage) the Excise Commissioner shall levy an additional duty at the rate of one hundred per cent of ordinary rates of duty in respect of such deficit as exceeds ten per cent over and above the ordinary rates of duty." Section 29. Manner in which duty may be levied - Subject to Such rules, as the Excise Commissioner may prescribe to regulate to the time, place and manner of payment, such duty may be levied in one or more of the following ways as the State Government may ....
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.... Rule 53 of the Brewery Rules (para 912 of the Excise Manual) as substituted on 19.7.1975 reads as under: "912. On the last working day of every calendar month after all the issues for that day are made, the Officer-in-charge shall examine the accounts of brewery and take the stock of beer in hand in the brewery. if the quantity of the beer in stock in the brewery on such examination be found to exceed the quantity shown as in hand in the stock account the brewer shall be liable to pay duty on such excess at the rate prescribed for ordinary issue if the quantity be found less than that shown in the stock account and such deficiency does not exceed nine per cent of the total stock of beer in the month the same may be disregarded allowances to that extent being made to cover losses due to evaporation, sullage and other contingencies within the brewery. But if the deficiency in stock be found to exceed nine per cent the cause shall be enquired into and the result reported to the Excise Commissioner who may direct the levy of duty on such deficiency as may be found in excess of nine percent at the rate prescribed for ordinary issue. This nine per ....
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.... be decided on a fair construction of the provisions of a particular Act." (emphasis supplied) 17. In Synthetics and Chemicals Ltd. vs. State of U.P. [1990 (1) SCC 109], this Court held that the expression "alcoholic liquor for human consumption" must be understood in its common and normal sense. The expression "consumption" must also be understood in the sense of direct physical intake by human beings and not utilisation in some other forms for the ultimate benefit of human consumption and the expression is intended to mean "liquor which as it is, could be consumed, in the sense of capable of being taken by the human beings as such as a beverage or drink". 18. In State of U.P. vs. Delhi Cloth Mills [1991 (1) SCC 454], this Court dealing with section 28 of UP Excise Act, 1910 considered the question whether the excise authorities were entitled to levy excise duty on the wastage of liquor (military rum) in transit and held that the levy of differential duty (that is charging up the duty on the report of excess wastage) did not cease to be an excise duty even if it was levied on declaration of excess wastage. The taxable event was still the production or manufacture. This Court obs....
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..... A statute has to be construed in light of the mischief it was designed to remedy. There is no dispute that excise duty is a single point duty and may be levied at one of the points mentioned in Section 28." 19. In Mohan Meakin Ltd. vs. Excise and Taxation Commissioner, H.P. [1997 (2) SCC 193], this Court examined the question as to when beer is exigible to excise duty under the Punjab Excise Act, 1914 and Punjab Breweries Rules 1932. This Court held that Beer would mean fermented liquor from malt, when it is potable or in consumable condition as beverage. The state of levying excise duty upon alcoholic liquor arises when excisable article is brought to the stage of human consumption with the requisite alcoholic strength thereof and it is only the final product which is relevant. In that case, the levy of excise duty at the stage when the manufacturing of the beer was at wort stage was challenged. This Court posed the question: Whether the levy of excise duty, on beer when it was in the process of manufacture is correct? This Court answered the question thus: "The levy of excise duty is on alcoholic liquor for human consumption, manufacture or production. At w....
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....e bottling tank. The question is: at what stage the duty is liable to be paid? Section 23 specifically envisages that until the payment of duty is made or bond is executed in that behalf as per the procedure and acceptance by the Financial Commissioner, the finished product, namely, the beer in this case, shall not be removed from the place at which finished product was stored either in a warehouse within factory premises or precinct or permitted place of usage. Under these circumstances, the point at which excise duty is exigible to duty is the time when the finished product, i.e., bear was received in bottling tank or the finished product is removed from the place of storage or warehouse etc." (emphasis supplied) 20. In Government of Haryana vs. Haryana Brewery Ltd. [2002 (4) SCC 547], this Court held: "We agree with the contention of Mr. Divan, and this is also not disputed by Mr. Anand, that the State has jurisdiction to levy excise duty only on beer after it has been brewed and has become fit for human consumption. This is the settled position as laid down by this Court in Mohan Meakin and Modi Distillery cases. The only question which, to our mind, really....
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....ermentation and filtration. It may however be noted that the said observation that beer is exigible to excise duty only when it passes through the fine filter press would apply only to the standard types of beer which is sold in bottles and cans. Beer is also supplied in casks and barrels, taken directly from fermentation vessels without undergoing any filtration or further processing, known as Draught (or Draft) beer. Such beer is unpasteurized and unfiltered (or even if filtered, only in a limited manner and not fine filtered like beer intended to be sold in bottles or cans). Para 29 of Excise Manual (Vol.V Chapter XI) notes that uncarbonated top fermentation beer, which include draught beer are racked directly from the fermenting vessel. Thus when the fermentation process of wort is completed, it becomes an alcoholic liquor for human consumption and there is no legal impediment for subjecting beer to excise duty at that stage. Therefore, the State has legislative competence to levy excise duty on beer either after the completion of the process of fermentation and filtration, or after fermentation. 23. Section 29 (e)(i) of the Act makes it clear that in the case of beer manufact....
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....sumption' means a liquor which could be taken by a human being as it is' without the need for any further process; and that in regard to beer, that stage is reached only after fermentation and filtration processes are completed. It was submitted that before filtration, the product-in-process was not an alcoholic liquor for human consumption and therefore there was no legislative competence to levy excise duty or additional duty on such product-in-process. 26. This contention ignores the fact that Entry 51 should be read not only as authorizing the imposition of an excise duty, but also as authorizing a provision which prevents evasion of excise duty. This Court in Baldeo Singh vs. CIT - 1961 (1) SCR 482, held as under: "......Under Entry 54 a law could of course be passed imposing a tax on a person on his own income. It is not disputed that under that entry a law could also be passed to prevent a person from evading the tax payable on his own income. As is well known the legislative entries have to be read in a very wide manner and so as to include all subsidiary and ancillary matters. So Entry 54 should be read not only as authorizing the imposition of a tax b....
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....t rate or at an earlier stage will not in any way alter the nature or character of the levy since such matters are completely in the realm of legislative wisdom. What is brought to tax, though levied with reference to the purchase price and at an earlier point is nonetheless income liable to be taxed under the Income Tax Act. This Court referring to the argument about absence of legislative competence to levy tax before accrual of income, referred to Entry 82 of List I of Seventh Schedule ("Taxes on income other than agricultural income") and held as under: "...The word income occurring in Entry 82 in List I of the Seventh Schedule should be construed liberally and in a very wide manner and the power to legislate will take in all incidental and ancillary matters including the authorization to make provision to prevent evasion of tax, in any suitable manner." 28. To ensure that there is no evasion of excise duty in regard to any beer manufactured, the State is entitled to make a provision to prevent evasion of excise duty being evaded, though it is leviable at the stage of issue from the brewery. The beer brewing process shows once the wort ferments, it becomes ....
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....s wastage chargeable to duty and addl. duty (g + h) 76 Litres 29. It should be noted that recourse to section 28A of the Act will be held only when there is abnormal deficiency or shortage in the actual quantity in the brewery when compared to the quantity mentioned in the stock account, that is more than 9%, which would show evasion of excise duty. The standard procedure of levying excise duty is not on the quantity of excisable article in the fermentation vessels. The standard procedure is to levy excise duty when the beer is removed from the brewery. The State was thus collecting excise duty in the usual course with reference to the beer after the entire manufacturing process was completed when it is removed from the brewery. It resorted to section 28A, Rule 53 of Brewery Rules and Rule 7 of Bottling Rules and levied double the amount of excise duty (excise duty plus equal amount as additional duty) only in those months when the periodic examination showed excessive manufacturing wastage'. The procedure adopted was the most logical process to ensure that excisable articles were not clandestinely removed and to ensure that there is no evasion of excise duty ha....
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.... the case of every large breweries working continuously. The safety of the revenue depends on notices of all essential operations which are required to be given to the Excise. The length of notice to be given depends on the importance of the particular operation and on the facility with which the local officer can attend. One officer is, in general, in charge of a group of the smaller breweries. A brewer must give timely notice of- (1) his attention to brew; (2) the nature and amount of materials to be used; (3) the time at which he expects his mash-tun to be drained (this is to enable the officer to take a dip of the drained grains which must lie for two hours after draining or until the officer arrives). (4) his intention to mix the products of one or more brewings; (5) any modification in his routine methods of brewing; (6) any alterations he proposes to make in the position etc., of his brewing vess....
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....is on the end-product and not on the raw material. What this proviso read with Rule 35 indicates that in order to determine what is the quantity of beer manufactured which is fit for human consumption, after all the processes have been gone through, you seen what is the quantity of raw material which has been utilised for the manufacture of beer and in the process of manufacturing give an allowance for wastage of 7 per cent. After doing this, you determine the quantity of beer manufactured. An example which has been given is that a 1000 kgs. of malt should ordinary yield 6500 litres of beer. By giving an allowance of wastage which must occur during the process of the manufacture of the end-product and limiting that allowance to 7 per cent, the quantity of beer manufactured on which excise duty would be levied would be 6500 litres less 7 per cent. 14. It appears to us that the proviso to Section 32 read with Rule 35 does nothing more than to give a rough and ready method of calculating the quantum of beer which should have been manufactured in the normal process which is calculated on the basis of the raw material used. The idea, perhaps, is that full quantity of....
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....ss of manufacture; and the manufacture process is completed not when the wort is in the fermentation tank but only when the filtration process is finished. But this contention ignores the fact that when manufacturing process is complete and the beer has reached storage/bottling tanks, there is no question of any manufacturing loss. The allowance of 9% is made to cover loss due to evaporation, sullage and other contingencies within the brewery. 9% is allowed as loss in quantity because the quantity in fermentation tank is measured and taken as the base and thereafter the sullage/yeast heads are removed as sediment in the fermentation vessels or by the filtration process and there will also be certain amount of evaporation during the process of filtration, racking and storage etc. In fact, the Brewery specifically admits this position in Annexure-I to the writ petition while describing the process of manufacturing beer: "From the above brief description of manufacturing process, it will be observed that the deficiency between the quantity of wort to the point when beer is ready for bottling, occurs because of elimination of impurities" viz., yeast cells and dirty ....
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....duty any wastage prior to the stage when the liquor/beer becomes fit for human consumption." A large allowance up to 9% of the total stock of beer has been provided towards wastage, only to cover the loss occurring from fermentation stage to post-filtration stage, as the quantity has been calculated with reference to the fermentation vats and there will be considerable wastage due to sullage and evaporation. Rules 37 and 53 of the Breweries Rules (paras 896 and 912 of the Excise Manual) also proceeded on that basis that the measurement would be with reference to the quantities in the fermentation vessels taken by dip and gravity method. 35. In fact, the brewery describes the nature of these losses in the brewery in Annexure I to the writ petition (in the connected WP No.1375/1978) as under: "Manufacturing Losses (i) Varying constituents of Malt viz. percentage of proteins etc. produced sludge or sullage in more or less quantity. Thus sullage to be removed will have differing percentages. (ii) Depending on the process - top and bottom fermentation etc. there may be more or less of scum and dirty heads containing yeast cel....
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....stages after that stage (that is completion of manufacture) and the allowance under Section 28A of the Act will become redundant, except for the small percentage provided for wastage during bottling and storage. 37. The Brewery placed strong reliance upon the decision of this Court in State of U.P. vs. Modi Distillery and Ors. - 1995 (5) SCC 753. In that decision, this Court was considering the validity of demand for excise duty on the wastage of high strength spirit (80% to 85%) during transportation in containers from distillery to warehouse (referred to as Group B' cases). This Court held: "In other words, ethyl alcohol (95 per cent) was not an alcoholic liquor for human consumption but could be used as a raw material or input, after processing and substantial dilution in the production of whiskey, gin, country liquor etc. In the light of experience and development, it was necessary to state that intoxicating liquor' meant only that liquor which was consumable by human beings as it was. What the State seeks to levy excise duty upon in the Group 'B' cases is the wastage of liquor after distillation, but before dilution; and, in the Group '....
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....nbsp; "Before carbonated beer is conveyed to the automatic bottling machine through pipes, the whole line is cleaned and sterilized to ensure that there are no wild bacteria which may spoil the beer passed through these pipes. Bottles which are cleaned and sterilized in Automatic Bottle Washing Plant, are fed by conveyors to the beer bottling machine. While the bottles are filled, some quantity of beer is spilt by foaming which takes place and with pressure of Co gas bottles burst in the process of bottling. The beer which is spilt is mixed with broken glass pieces, oil etc. on the conveyor belts. It is contaminated and has to go waste. To increase the shelf life of beer, the filled bottles are placed in pasteurization tanks and the water in which these bottles are immersed is gradually raised to temperature of 65O and after keeping these bottles for a fixed time in hot water, these are cooled down. With the expansion of Co gas during this process some bottles burst and the beer contained therein gets mixed up with water. Leaky bottles are also taken out from the pasteurization tanks, which are decanted for reprocessing of....
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....urpose and they are extracted below: "7. Following additional special conditions will be applicable to bottling of Indian Made Foreign liquor in bond under F.I.-3 licence: (1) to (9) x x x x x omitted as not relevant (10) On the last working, day of every calendar month, after all the transactions for that day are made, the Excise Inspector Incharge shall take the stock of unbottled and bottled spirit 3rd beer/stored in the bottling warehouse, enter into the prescribed registers and ascertain the wastage of spirit in the bottling operations and storage in the bonded warehouse. (11) (a) An allowance up to one per cent may be made on the total quantity of spirit and beer stored during a month for actual loss in bottling and storage. The licensee shall be responsible for the payment of duty on wastage in excess of one per cent, (b) when the wastage does not exceed the prescribed limit, no action need be taken by the Excise Inspector Incharge but if an excess is found at the time of monthly stock taking the Excise Inspector shall submit a statement to the Collector by the fifth day of the month in Form F.L.B. 10 showing the qu....
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....tingencies within the brewery was reduced to 9% in view of the provision in the Bottling Rules providing for an allowance of one percent for losses in bottling and storage. Section 28A was inserted by U.P. Act 9 of 1978 (with a provision that the section shall be deemed always to have been inserted) providing for an allowance to a total extent of 10% in regard to losses within the brewery and the losses in bottling and storage. It is not in dispute that the process of brewing beer and the process of bottling beer are considered to be distinct and separate processes governed respectively by the Brewery Rules and Bottling Rules. The operations connected with bottling are required to be conducted in a separate premises under a different licence. The process of bottling begins with the transfer of bulk beer from the brewery for bottling. Sub-section (2) of section 28A refers to an allowance to an extent of 10% not only in regard to losses within the brewery but also to cover losses in bottling and storage. As noticed above, Rule 53 of the Brewery Rules and Rule 7(11) of the Bottling Rules when read conjointly show that the said rules are supplementary to each other and together impleme....