TaxTMI 
TaxTMI 
1981 (9) TMI 275
X X X X Extracts X X X X
X X X X Extracts X X X X
....d 16 of the Kerala Rectified Spirit Rules, 1972. The main question in the appeal is as to the legislative competence of the State to enact a law relating to medicinal and toilet preparations containing alcohol under Entry 8, List II of the Seventh Schedule to the Constitution. The appellants, by virtue of a licence in Form 25 granted under the Drugs and Cosmetics Act, 1940 and a licence in Form Ll granted under the Medicinal and Toilet Preparations (Excise Duties) Act, 1955 (hereinafter referred to as 'the Central Act') are entitled to manufacture the drugs specified therein. They filed a writ petition in the High Court complaining that they were entitled to the supply of alcohol free of duty for the manufacture of their medicinal and toilet preparations under r. 21 of the Medicinal and Toilet Preparations A (Excise Duties) Rules, 1956 (hereinafter referred to as 'the Central Rules'), and r. 8 of the Kerala Rectified Spirit Rules, 1972, and challenged the validity of the impugned provisions mainly on the ground that the State Legislature has no power to enact the law relating to medicinal and toilet preparations as the topic of legislation is within the exclusive....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Chemical Examiner to the Government, two representatives each one of them shall be a non-official, of the Allopathic, Indigenous and Homoeopathic systems of medicine appointed by the Government, and an officer of the Excise Department not below the rank of Deputy Commissioner; and the Committee shall advise the Commissioner (a) as to whether a medicinal preparation is a bona fide medical preparation or not; and (b) as to the total requirements of medicinal preparations containing liquor or intoxicating drugs or in which alcohol is self-generated during the process of their manufacture, for the whole of the State during one year. Before this Court the constitutional validity of the impugned provisions was mainly challenged on these grounds, namely: (I) The State Legislature had no legislative competence to enact the impugned provisions because the field was occupied by the provisions of the A Medicinal and Toilet Preparations (Excise Duties) Act, 1955 (the Central Act) and the Medicinal and Toilet Preparations (Excise Duties ) Rules, 1956 (the Central Rules), and alternatively, the impugned provisions are violative of the fundamental right guaranteed in Art. 19(1) (g) of the Constit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....orm Bl with sufficient security as laid down in r. 96, towards due payment of duty and observance of the rules. It is submitted that the State Legislature has no power to make any such law imposing restrictions on a person carrying on the business of manufacture and sale of medicinal and toilet preparations containing alcohol in as much as the matter relates to an occupied field. There is no merit in these contentions. The enactment of the Medicinal and Toilet Preparations (Excise Duties) Act, 1955 by Parliament under Entry 84, List I of the Seventh Schedule of the Constitution, or the framing of the Medicinal and Toilet Preparations (Excise Duties) Rules, 1956 by the Central Government in exercise of their rule-making power under s. 19 of the Act, for the purpose of levying duties of excise on medicinal and toilet preparations containing alcohol etc., do not prevent the State Legislature from making a law under Entry 8, List II of the Seventh Schedule to the Constitution with respect to 'intoxicating liquors', or a law under Entry 51, List II for levying excise duties on alcoholic liquor for human consumption. In order to appreciate the contention regarding the applicabili....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ption; (b) opium, Indian hemp and other narcotic drugs and narcotics; but not including medicinal and toilet preparations containing alcohol or any substance included in sub- paragraph (b) of this entry. The legislative history of the Central Act is well known. Under Entry 40, List II of the Seventh Schedule to the Government of India Act, 1935, medicinal and toilet preparations containing alcohol etc., were subjected to Provincial excise duties. Under the Constitution, the entry relating to the excise duty on medicinal and toilet preparations containing alcohol was transferred to the Union List. In the light of experience gained, there was necessity to achieve a synthesis from a vast body of existing rules and regulations in force in the States having regard to the sole object of the measure, namely, to bring about uniform treatment in excise matters. This was a highly complicated subject because, firstly, the excise duty was to be collected and retained by the State Governments, and, secondly, a certain amount of flexibility in statutory operations was necessary if spurious medicines were not to defeat the policy of prohibition which is one of the Directive Principles of St....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ection 6 prohibits any person from engaging in the production or manufacture of any dutiable goods etc., except under the authority and in accordance with the terms and conditions of the licence granted under the Central Act. Section 19 (1) empowers the Central Government to make rules to carry out the purposes of the Act, and sub-s. (2) thereof specifies the various matters in respect of which such rules may be made. Section 21 provides for the repeal and savings. The Schedule to the Act contains a description of 'dutiable goods' and the rates of duty payable thereon. In exercise of the powers conferred by s. 19 (1) of the Central Act, the central Government framed the Central Rules which practically deal with all the facets of manufacture and production of medicinal and toilet preparations, as required in cls. (i) to (xxi) of sub-s. (2) thereof, with the ultimate object of providing a machinery for collection of duty on the said preparations. Chapter IV of the Central Rules deals with 'Manufacture'. Rule 18 in Chapter IV provides that rectified spirit shall ordinarily be supplied to a manufacturer from a distillery.. Of the State in which the manufactory is situat....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of excise on medicinal and toilet preparations containing alcohol. Similarly, some of the impugned provisions may be almost similar to some of the provisions of the Central Rules, but that that does not imply that the State Legislature had no competence to enact the provisions. It is sufficient to say upon the first ground that the impugned legislation is confined to 'intoxicating liquor', that is, to ensure proper utilisation of rectified spirit in the manufacture of medicinal and toilet preparations and, therefore, within the powers granted to the State Legislature under Entry 8, List II. It further seeks to regulate the manufacture of bona fide medicinal preparations and prevent misuse of rectified spirit in the manufacture of spurious medicinal and toilet preparations containing alcohol capable of being used as ordinary alcoholic beverages. It was suggested that the provisions are identical with the provisions contained in the Central Rules and, in particular, to rule 45(1) and, therefore, the legislation is in the occupied field. The answer is that the enumeration of 'intoxicating liquor' in Entry 8, List II, confers exclusive power to the State to legislat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....al Works Ltd. v. State of n Andhra Pradesh and Ors(1) which, we are afraid, is clearly distinguishable. There the Court was concerned with the question whether r. 36 of the Medical Preparations and Spirituous Rules, 1345 Fasli, framed under the Hyderabad Abkari Act, 136 Fasli which provided that "the expenses of the establishment for the supervision of the work shall be borne by the pharmaceutical laboratory (licensee) as per the decision of the Commissioner of Excise", was still enforceable having regard to s. 21 of the Central Act and r. 143 of the Central Rules. It was held that the effect of s. 21 of the Central Act was that so far as the Hyderabad Act applied to the use of alcohol in the manufacture of medicinal and toilet preparations, the Act must be deemed to have been repealed and, therefore, r. 36 could not survive. In that case, the Court was concerned with the levy of supervisory charge at the stage of manufacture of medicinal and toilet preparations, and not with the levy of supervisory charges at the stage of the supply and utilisation of rectified spirit in the manufacture of medicinal and toilet preparations. This is clear from an observation at p. 380 of the Report....
X X X X Extracts X X X X
X X X X Extracts X X X X
....reparations containing alcohol. There can be no doubt that the impugned Act is relatable to Entry 8, List II of the Seventh Schedule. In Balsara's case(1) the Court held that the expression 'liquor' in Entry 31, List II of the Seventh Schedule to the Government of India Act, 1935, took within its sweep all liquids containing alcohol. In dealing with the question, Fazal Ali, J. Observed: The framers of the Government of India Act, 1935, could not have been entirely ignorant of the accepted sense in which the word 'liquor' has been used in the various excise Acts of this country and, accordingly I consider the appropriate conclusion to be that the word 'liquor' covers not only those alcoholic liquids which are generally used for beverage purposes and produce intoxication, but also all liquids containing alcohol. It may be that the latter meaning is not the meaning which is attributed to the word 'liquor' in common parlance especially when that word is prefixed by the qualifying word 'intoxicating', but in my opinion having regard to the numerous statutory definitions of that word, such a meaning could not have been intended to be excl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sidered intoxicating within the meaning of the term 'intoxicating liquor', is the capability of the article in question tor use as a beverage. The impugned provisions have been enacted to ensure that rectified spirit is not misused under the pretext of being used for medicinal and toilet preparations containing alcohol. Such regulation is a necessary concomitant of the police power of the State to regulate such trade or business which is inherently dangerous to public health. Section 12A of the Act provides that no preparation to which liquor or intoxicating drug is added during the process of its manufacture or in which alcohol is self- generated during such process shall be manufactured in excess of the quantity specified by the Commissioner: Provided that in specifying the quantity of a medicinal preparation, the Commissioner shall have due regard to the total requirement of that preparation for consumption or use in the State. Section 12 provides that no person shall utilise liquor or intoxicating drug in the manufacture of any preparation, in excess of the quantity specified by the Commissioner and except under and in accordance with the terms and conditions of a licen....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rer, if the manufactured product has a market outside the State. As a corollary, it must result in the consequence that in the case of medicinal and toilet preparations which are capable of being misused as alcoholic beverages, or which are not bona fide medicinal preparations in the opinion of the Expert Committee, the Commissioner may totally prohibit the manufacture of such preparations. The restrictions imposed by s. 12B as to the alcoholic content of medicinal and toilet preparations and the requirement that they shall not be manufactured except and in accordance with the terms and conditions of a licence granted by him, are nothing but reasonable restrictions within the meaning of Art. 19(6). The impugned provisions, therefore, cannot be struck down as offending Art. (1) (g) of the Constitution. As regards the second ground, the contention that Parliament having made the requisite declaration in s. 2 of the Industries (Development and Regulation) Act, 1951 declaring "drugs and pharmaceuticals" to be a scheduled industry, being item 22 of Schedule I thereof, the State Legislature was denuded of its competence to enact the impugned provisions under Entry 8, List II, cannot b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....h supervision and the cost of establishment and other incidental charges in connection with such supervision to be realised from the licensee. There is no f' warrant for the submission that the framing of such an incidental provision like r. 45(1) of the Central Rules takes away the State's power to recover supervisory charges from the licensee. There still remains the question whether the levy of supervisory charges must be regarded as a fee and, therefore, cannot be sustained, there being no quid pro quo. In support of the contention, reliance is placed on the decision in Indian Mica Micanite Industries v. The State of Bihar and Ors.(1) The distinction between a 'tax' and a 'fee' is well- settled. The question came up for consideration for the first time in this Court in the Commissioner, H.R.E. Madras v. Lakshmindra Thirtha Swamiar of Shirur Mutt.(2) Therein, the Court speaking through Mukherjee, J. quoted with approval the definition of 'tax' given by Latham, C.J. in Matthews v. Chickoory Marketing Board(3). In that case, the learned Chief Justice observed: A tax is a compulsory exaction of money by public authority for public purposes e....
X X X X Extracts X X X X
X X X X Extracts X X X X
....vilege or benefit conferred, or service rendered or to meet the expenses connected therewith. Thus, fees are nothing but payment for some special privilege granted or service rendered. Taxes and taxation are, therefore, distinguishable from various other contributions, charges, or burdens paid or imposed for particular purposes and under particular powers or functions of the Government. It is now increasingly realised that merely because the collections for the services rendered or grant of a privilege or licence, are taken to the consolidated fund of the State and are not separately appropriated towards the expenditure for rendering the service is not by itself decisive. That is because the Constitution did not contemplate it to be an essential element of a fee that it should be credited to J a separate fund and not to the consolidated fund. It is also increasingly realised that the element of quid pro quo stricto senso is not always a sine qua non of a fee. It is needless to stress that the element of quid pro quo is not necessarily absent in every tax. We may, Din this connection, refer with profit to the observations of Seervai in his Costitutional Law, to the effect: (1) It is....
X X X X Extracts X X X X
X X X X Extracts X X X X
....se to carry on the business. If an exaction is to be classed as a duty of excise, it must, of course, be a tax; its essential distinguishing feature is that it is a tax imposed "upon" or "in respect of' or "in relation to" goods: Matthews v. Chickory Marketing Board (l). The exaction is in truth, as it purports to be, simply a fee payable as a condition of a right to carry on a business. No one has a fundamental right to the supply of rectified spirit which is an intoxicating liquor. It is up to the State to control and regulate its supply from a distillery or a spirit warehouse in the State under and in accordance with terms and conditions of a licence or permit its import from outside by grant of a privilege and charge a fee for the same. A fee may be charged for the privilege or benefit conferred, or service rendered, or to meet the expenses connected therewith. A fee may be levided to meet the cost of supervision and maybe, something more. It is in consideration for the privilege, licence or service. The State is undoubtedly entitled to levy H excise duty on the rectified spirit issued from a distillery under s. 17(f) of the Act read with r. 13 of the Kerala Rectified Sp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ey are only the purchasers of manufactured denatured spirit. Hence the cost of super vising the manufacturing process or any assistance rendered to the manufacturers cannot be recovered from the consumers like the appellant. Further, under Rule 9 of the Board's rules the actual cost of supervision of the manufacturing process by the Excise Department is required to be borne by the manufacturer, There cannot be a double levy in that regard. (emphasis added) The Court then went into the question whether there was any corelationship between the services rendered and the fee levied and whether the levy in question was not disproportionate to the value of the services rendered by the State, and observed: D 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 whole-sale dealer, retail dealer or other manufacturers also requires close and effective supervision because of the risk of the denatured spirit being converted into palatable liquor and thus evading heavy duty. Assuming this conclusion to be correct, by doing so, the State is rendering no service to the consumer. It is merely prote....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eads: (4) All the transactions in the spirit store shall be conducted only in the presence of an Excise officer not below the rank of an Excise Inspector. Such officer shall be assisted by at least two Excise Guards. The cost of establishment of such officer and the guards shall be payable by the licensee in advance in the first week of every month as per countersigned chalan to be obtained from such officer. The rate at which the cost of establishment is to be paid by the licensee shall be fixed by the Commissioner from time to time and intimated to the licensee in writing There is admittedly no provision made in the Central Rules for the recover of supervisor charges, perhaps because as the Court Observed in the Hyderabad Chemicals and Pharmaceutical's case A (supra) it was felt that the duty on medicinal and toilet preparations containing alcohol would be sufficient to defray the cost of such supervision. But the absence of such a provision in the Central Rules, as we have already indicated, does not deprive the State from making a provision in that behalf. It is true that the supervisory charges are in the nature of a compulsory exaction from a licensee and the collec....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uantity of alcohol "as is present in the finished product". The objection is to the validity of r. 13(2) in so far as it enables the levy of duty on excess wastage of alcohol. We find it difficult to appreciate the contention that r. 13(2) cannot be supported in terms of the charging provision in s. 17(f). Rule 13(2) is nothing but a corollary of r. 13(1). On a combined reading of s. 17(f) and r. 8 read with the proviso thereof, no duty is chargeable on alcohol actually used in the manufacture of medicinal and toilet preparations. The Government fully realised that some margin for wastage should be allowed and, therefore inserted the proviso to r. 13(1). It provides that the Government may, in consultation with the Drugs Controller and the Chemical Examiner, by notification in the Gazette, permit such allowance as they think fit for such wastages occurring during the manufacture. Beyond the permissible limit, the State has the right to levy a duty on excess wastage of alcohol, i.e. On alcohol not accounted for. In the connected Special Leave Petition, the petitioner, P. Krishna Wariyar, Managing Trustee, Arya Vaidyasala, Kottakkal, who is engaged in the business of manufacture for ....