TaxTMI 
TaxTMI 
2011 (3) TMI 1526
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.... are the public limited companies in terms of the Companies Act, 1956 and are engaged in the business of manufacturing sugar by vacuum pan process and to sugar factories, distilleries are also attached. Molasses, is the bye-product of the sugar mill owned by the petitioners' company which is the raw material for distilleries and is utilized at the distilleries for captive/own consumption. In all the afore-captioned writ petitions, the petitioners have questioned the validity of clauses 2(d1), 8(4) and 8(5) of the U.P. Sheera Niyantran Adhiniyam (hereinafter referred to as, "the impugned Act" for the sake of brevity) as amended by the U.P. Act No. 10 of 2009, therefore, all the writ petitions have been clubbed together and are being disposed of by this common judgment. By these petitions, the petitioners have assailed the levy of "administrative charges" on the molasses, which is carried outside the premises of the sugar factories, may be for own distilleries located at distinct places. According to the petitioners, the following amendments have been made in the principal Act, i.e., the U.P. Sheera Niyantran Adhiniyam, 1964: (i) A new clause (d)(i) "molasses for captive consu....
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....upply and sale of molasses by the sugar factories. Accordingly, the Molasses Policy for the year 2008-09 was issued by respondent No. 2 vide order dated January 31, 2009. As per this policy, the sugar factories are required to supply 30 per cent of molasses produced by them to the distilleries for the manufacture of country liquor. Prior to the year 2007-08, the Molasses Policy used to provide that sugar factories were liable to supply molasses to the distilleries engaged in the manufacture of country liquor, irrespective of their own need. This controversy has been set at rest by the Supreme Court vide its judgment dated September 24, 2007 in the case of Dhampur Sugar Mills Ltd. v. State of Uttar Pradesh [2007] 8 SCC 338. It has been vehemently argued on behalf of the petitioners that with an avowed view to negate the directions contained in the aforesaid decision of the apex court, the State Government brought in the legislation to amend the U.P. Sheera Niyantran Adhiniyam, 1964 and the impugned Act was promulgated which is against the pronouncement of the apex court made in S.R. Bhagwat v. State of Mysore [1995] 6 SCC 16 that it is now wellsettled by a catena of decisions of th....
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....purchase of goods (molasses) and not on the transfer of such goods (molasses) as the same does not resemble the character of "sale" as recognized by general law and/ or defined in the Sale of Goods Act, 1930. In such circumstance, since the State Legislature is empowered to impose tax only on sale and purchase of goods other than newspapers, therefore, the impugned amendment imposing tax (administrative charges) on such transfer of molasses is not only arbitrary and illegal but ultra vires to the Constitution of India and thus unsustainable. The next contention of the petitioner's counsel is that the power of the State to impose a tax stands enshrined in entries 52-62 of List II of the Seventh Schedule to the Constitution of India; a perusal of the aforementioned entries clearly establishes that none of them could be read as empowering the State to levy a tax on stock transfer or captive consumption. The provisions of article 366(29A) of the Constitution of India are also not attracted. A stock transfer of molasses or captive consumption thereof is neither a sale nor a purchase of goods and therefore, the State clearly lacks the legislative competence to subject the administra....
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....ted by the said amendment and is, therefore, constitutionally invalid. The definition "molasses for captive consumption" is also clearly discriminatory and violative of articles 14, 19(1)(g), and 300A of the Constitution of India, inasmuch as there is no rational basis for differentiating between (i) a distillery which may be situated in the same premises as the sugar factory and a distillery which may be situated in different premises as the sugar factory and a distillery outside the premises of a sugar factory, but under the same ownership and management, i.e., belonging to one and same company. Secondly, the words sold or supplied clearly did not envisage levy of administrative charge on self-consumption and rightly so, and if the same were deemed to include transfer for captive consumption, it would have clearly transgressed the legislative competence of the State. The administrative charge is a tax, as held by the honourable apex court in the case of Commissioner of Central Excise, Lucknow, U.P. v. Chhata Sugar Co. Ltd. reported in [2004] 2 RC 614; [2004] 3 SCC 466, is sought to be levied on molasses transferred or captively consumed in the distillery belonging to the same c....
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....of List III, however, clearly suggests that they are meant to operate in different fields." In the backdrop of the aforesaid facts, it has been argued that the impugned amendment, i.e., provisions of sections 2(d1), 8(4) and 8(5) of the Act insofar as it purports to levy tax, namely, administrative charges on the supply/transfer of molasses from the sugar factory to the distillery owned by the same person in section 8 is bad in the eyes of law being inoperative and unworkable as the levy of such administrative charges under section 8(4) has to be made "in the manner prescribed" in rule 23 of the U.P. Sheera Niyantran Niyamavali, 1974 which does not include any transfer. The provisions of rule 23 are as follows: "Every occupier of a sugar factory shall deposit the amount of administrative charges payable on molasses sold or supplied by him in the treasury or sub-treasury of the district in which the sugar factory is situated and produce the treasury challan as evidence of such payment 'to Excise Officer-in-charge of the sugar factory' before making the actual delivery of the molasses to the purchaser." As regards the imposition of tax as per the provisions of the Constitu....
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....mount equivalent to the amount of such administrative charges, in addition to the price of molasses." The impugned Act seeks to amend the provisions of the Uttar Pradesh Sheera Niyantran Adhiniyam, 1964 which had received the assent of the President of India on October 17, 1964 under the provisions of article 254 of the Constitution of India. The background for seeking the assent of the President of India appears to have been motivated by the fact that sugar industry is a "scheduled industry", the control of which was taken over by the Union, being expedient in the public interest. The sugar industry finds mention at item No. 25 in the First Schedule to the Industries (Development and Regulation) Act, 1951 likewise molasses comes under item No. 26 in the same First Schedule. The sugar industry and its products as well as raw material are covered under the Essential Commodities Act, 1955, Sugar Control Order, 1966 and Sugarcane Control Order, 1966. Being conscious of the aforesaid facts, it appears that the said Act was reserved for and received the assent of the President of India. However, the impugned Amendment Act of 2009 has not been reserved nor it has received the assent of ....
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....o. 33 of List III of the Seventh Schedule to the Constitution of India. The U.P. Act No. 10 of 2009 is also squarely covered by the legislative field as provided under the aforesaid entry No. 33. Thus allegation of lack of legislative competence as alleged by the petitioners is wholly baseless and without substance. Scheme of the Adhiniyam would reveal that the Adhiniyam provides for regulation of supply and distribution of molasses to distilleries and other industrial establishment and all the regulatory measures are for the benefits of distilleries and industries in public interest. The regulatory nature of the Adhiniyam would be evident from reading of the relevant provisions of the said Adhiniyam, which are as under: (i) Section 3 of the Adhiniyam provides for Constitution of Advisory Committee to advice on matters relating to the control of storage, preservation, gradation, price, supply and distribution of molasses. Rule 3 of the Uttar Pradesh Molasses Advisory Committee Rules, 1965 provides for the Chairman and the Members of the Advisory Committee which consist of representative of concerned Department, representatives of distilleries and alcohol based Industries and moul....
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....and the person to whom the molasses is transferred and supplied. (x) Section 22 empowers the State Government to frame Rules. As regards control of sugar industry, it has been submitted that the "sugar industry" has been included in the First Schedule of the Industries (Development & Regulation) Act, 1951. The sugar mills produce the molasses as a by-product. Distilleries/chemical units buy molasses from the sugar factories and use it as a raw material for production of rectified spirit and other organic products. The molasses and the alcohol policies affect the farmers, who supply sugarcane and get its price from the sugar factories. The State Government has to examine the accounts of all these factories pertaining to the production including the production of molasses in a given year as well. The field of sugar industry is having been covered within the purview of clause (a) of entry 33 of List III of the Seventh Schedule. Under Chapter IIIB of the Industries (Development and Regulation) Act, 1951, the provisions of control of supply, distribution and price of certain articles are given in section 18G of the Act, which reads as under: "18G. Power of control, supply, distribut....
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....s legislative competence of the State Government, the State counsel has placed reliance on Ch. Tika Ramji v. State of Uttar Pradesh AIR 1956 SC 676 and SIEL Ltd. v. Union of India [1998] 7 SCC 26. In Ch. Tika Ramji's case AIR 1956 SC 676, the apex court observed in paragraph 34 of the Report as under: ". . . Even assuming that sugarcane was an article or class of articles relatable to the sugar industry within the meaning of section 18G of Act LXV of 1951, it is to be noted that no order was issued by the Central Government in exercise of the powers vested in it under that section and no question of repugnancy could ever arise because, as has been noted above, repugnancy must exist in fact and not depend merely on a possibility. The possibility of an order under section 18G being issued by the Central Government would not be enough. The existence of such an order would be the essential prerequisite before any repugnancy could ever arise." Relevant paragraphs of SIEL Ltd. [1998] 7 SCC 26, i.e., 21, 24 and 25 are reproduced hereunder: "21. In this connection our attention was drawn to the observations of this court in Ch. Tika Ramji's case AIR 1956 SC 676. The court in tha....
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....d in Chhata Sugar's case [2004] 2 RC 614; [2004] 3 SCC 466 was with regard to non-inclusion of administrative charges in the value of goods under section 4 of the Central Excise Act, 1944. He has also pointed out, in Chhata Sugar's case [2004] 2 RC 614; [2004] 3 SCC 466, the State Government was not a party and as such, factual aspects of rendering of services could not be noticed by the apex court. Further, the interpretation of law relating to admissibility or otherwise of a deduction under the Central Excise Act, 1944 has to be confined to that Act alone and cannot be applied to the U.P. Sheera Niyantran Adhiniyam which altogether is a different statute book. Similarly, the petitioners cannot derive any benefit of the judgment rendered in Dhampur Sugar Mills Ltd. v. State of U.P. [2007] 8 SCC 338 as U.P. Sheera Niyantran Adhiniyam has been amended by U.P. Act No. 10 of 2009, which is well within the legislative competence of the State Government and the amendment made therein, for the reasons discussed above, cannot be said to be violative of any provisions of the Constitution of India. State counsel has also submitted that in public interest and for proper control of s....
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....is a separate legal unit licensed under the Industries (Development & Regulation) Act, 1951 and is controlled by the occupier of the factory whereas the distillery is controlled by the distiller holding PD2 licence under the provisions of the U.P. Excise Act, 1910. Condition Nos. 1 and 9 of the licence (Form PD2), which are relevant in the present context read as under: "1. The licence shall be subject to- (1) rules relating to import, export and transport of spirit contained in Chapters VII and VIII of the Excise Manual, Volume 1: Such other Rules as may, from time to time, be made by the Excise Commissioner and the Government for security of Excise Revenue and for regulating the manufacture, sale, supply and prices of Indian-made foreign liquor including rectified spirit, denatured spirit, power and fuel alcohols. (9) Any contravention of the rules or conditions hereinbefore enumerated shall involve cancellation of the licence in addition to such other penalties as may be prescribed under the U.P. Excise Act." As the petitioner's distillery is established under PD2 licence and as such in view of the terms of licence, it is under an obligation to follow the terms and cond....
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....ch does not empower the State Government to reserve a certain percentage of molasses in favour of the distilleries for the manufacture of country liquor. Section 7A and section 8 of the Adhiniyam of 1964 envisages the making of individual orders by respondent No. 2 upon receipt of application form a distillery requiring molasses. Therefore, the order impugned in the writ petitions is wholly arbitrary and violative of the rights of the petitioners guaranteed under articles 14 and 19(1)(g) of the Constitution of India and ultra vires the provisions of the Adhiniyam and the Rules made thereunder. It is also relevant to point out that the provision in the policy regarding allotment of left over molasses meant for country liquor to manufacture Indian-made foreign liquor (IMFL) is impermissible and unjustified and is a back door method of giving advantage to the distilleries making IMFL to utilize the molasses received by them against the reserved quota for country liquor. There is no justification whatsoever for allotting the molasses meant for country liquor, for the manufacture of IMFL, which is completely free, and there is no control of any kind on its manufacture and sale. The res....
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....res it for his distillery or for any purpose of industrial development. (aa) may require the person referred to in clause (a) to utilise the molasses supplied to him under an order made under this section for the purpose specified in the application made by him under subsection (1) of section 7A and to observe all such restrictions and conditions as may be prescribed. (b) may be for the entire quantity of molasses in stock or to be produced during the year or for any portion thereof, but the proportion of molasses to be supplied from each sugar factory to its estimated total produce of molasses during the year shall be the same throughout the State save where, in the opinion of the controller a variation is necessitated by any of the following factors: (i) the requirements of distilleries within the area in which molasses may be transported from the sugar factory at a reasonable cost; (ii) the requirements for other purposes of industrial development within such area; and (iii) the availability of transport facilities in the area. (3) The controller may make such modification in the order under sub-section (1) as may be necessary to correct any error or omission or to meet a ....
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....II of the Rules deals with the supply and distribution. Rule 12 requires the occupier of the sugar factory to submit estimate of molasses to be produced in sugar factory, whereas rule 14 requires submission of consolidated statement before the advisory committee. The relevant provisions of rules 12 and 14 are reproduced as under: "12. The occupier of every sugar factory shall submit to the controller by August 31st each molasses year a statement in form M.F. 9 specifying an approximate estimate of the quantity of molasses to be produced in a sugar factory during the molasses year following, along with such other information as is required under the form. ... 14. A consolidated statement of the estimated availability of molasses will be drawn up and placed before the advisory committee, constituted under section 3(1) of the Act by the controller who may make orders regarding the sale or supply of molasses in accordance with the provisions of section 8 of the Act." Rule 23 deals with the administrative charges and it says as under: "23. Every occupier of a sugar factory shall deposit the amount of administrative charges payable on molasses sold or supplied by him in the treasury....
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....ade shall be the grade as determined at the distillery under rule 29(3). (b) When the transport of molasses is by road the grade shall be the grade as determined by the occupier of the sugar factory and recorded in the gate pass in form M.F. 4. (2) The distillery shall have to pay the price and other levies on molasses to the occupier of the sugar factory immediately at the time of taking delivery of molasses. If the sugar mill delays or causes other hindrances in delivery of molasses after payment of its price by the distillery, the occupier of the sugar factory shall be liable for penal action for breach of Rules." By U.P. Act No. 10 of 2009, U.P. Sheera Niyantran Adhiniyam, 1964 was amended which received the assent of the Governor on February 27, 2009. The statement and objects of the U.P. Sheera Niyantran (Amendment) Act, 2009 reads as under: "In Civil Appeal No. 4466 of 2007 (Dhampur Sugar Mills Ltd. v. State of U.P. [2007] 8 SCC 338), the appellant has stated before the honourable Supreme Court, that the molasses produced in his sugar mill is not sufficient for his own consumption in his distilleries and he has to purchase molasses from other sugar mills. Hence the reser....
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....- '(d1) Molasses for captive consumption means the molasses transferred by an occupier of a sugar factory to a distillery or to industrial unit having the same ownership as that of sugar factory, and is situated within the same premises or in such a contiguous vicinity of the sugar factory so that the transfer or transportation of such molasses outside the premises or gates of the sugar factory, by a vehicle, is not required.' (b) after clause (h) the following clauses shall be inserted, namely- '(i) Supply shall include transfer of molasses by an occupier of a sugar factory to any distillery or industrial unit. (j) Transfer shall include transfer of molasses by an occupier of a sugar factory to any distillery or industrial unit by way of stock transfer or for captive consumption.' 3. In section 8 of the principal Act,- (a) in sub-section (1) for the words 'sell or supply' the words 'transfer or sell or supply' shall be substituted. (b) in sub-sections (4) and (5) for the words 'sold or supplied' the words 'transferred or sold or supplied' shall be substituted. 4. In section 14 of the principal Act, in sub-section (1) after cl....
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..... It is for this reason that U.P. Act No. 10 of 2009 insofar as it seeks to impose a tax on captive consumption is not protected nor referable to entry 33. The original power to levy an administrative charge is, in fact, referable only to entry 54 of List II of the Seventh Schedule to the Constitution of India and thus restricted to a sale or purchase of molasses. For this reason, the petitioner had questioned the competence of the State to levy and collect administrative charges on captive consumption under the provisions of the Adhiniyam of 1964 as it stood prior to its amendment by the impugned enactment. As averred above, entry 33 of List III speaks of trade and commerce in, and production, and supply and distribution of the products of any industry where the control of such industry by the Union is declared by the Parliament by law to be expedient in the public interest. By upholding the constitutional validity of the Act, it cannot be presumed that the taxing authority of the State Government under the said entry has also been upheld by the apex court. The general entry cannot be read for imposition of tax or introducing the incidence of tax and its realization. A tax can be....
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....other group dealing with taxation. We, however, do not mean to suggest that in regard to the validity of a taxation statute, the same, by itself, would be a determinative factor as in a case where the Parliament may legislate an enactment under several entries, one of them being a tax entry." It appears that the main object of the amendment of section 2(d1) is to make molasses available for manufacture of country liquor instead of being made available for own consumption by the distillery owned by the same company for the purpose of overcoming the judgment of the apex court in Dhampur Sugar Mills Ltd. [2007] 8 SCC 338. The last part of section 2(d1) which defines molasses for "captive consumption" excludes transportation of molasses by vehicle but if it is transported through pipeline then it is covered by definition of "captive consumption". The provision regrading mode of transportation whether by pipeline from the sugar factory to the distillery or by tanker/vehicle from the sugar mill to the distillery does not change the characteristic of captive consumption and it is wholly arbitrary and unreasonable. The effect of this amendment is that the petitionercompany shall be requir....
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....e Schedule of the IDAR Act. By virtue of the said provisions, the units/petitioners are required to obtain separate licence under the provision of the IDAR Act. They are bound to take licence under various State Excise Act purely for the purposes of meeting statutory requirement prescribed by the State Excise laws. The Karnataka High Court in T. Mahanthesh v. Additional Commissioner of Commercial Taxes [1996] 103 STC 349 (Karn) observed that holding of two type of licence under the Excise Act in respect of two units does not make any difference and transfer of stock from one unit to another holding two different type of licence does not amount to sale. Similarly, in K.C.P. Limited v. State of Andhra Pradesh [1993] 88 STC 374 (AP), the Andhra Pradesh High Court took the view that transfer of cement by the cement unit to the sugar factory and engineering unit cannot be treated as sale since each unit is part of the company. The unit as such cannot be treated as legal entity capable of transferring the goods to another person. Administrative charges, admittedly, are a tax which can be justified under entry 54 of List II of the Seventh Schedule to the Constitution, hence for the purpos....
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.... cash, deferred payment or other valuable consideration; (f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration. and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made." A careful reading of clause (29A) shows that it is an inclusive definition and has two limbs. The first limb says that tax on the sale or purchase of goods includes a tax on transactions specified in sub-cause (a) to (f) thereof. The second limb provides that such transfer, delivery or supply of any goods referred to in the first limb shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and the purchase of those goods by the person to whom such transfer, delivery or supply is made. To constitute a transaction of sale, the three essential component....
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....the definition of sale and purchase of goods. This is particularly apparent from the following phrase contained in the said sub-article 'such transfer, delivery or supply of any goods shall be deemed to be sale of those goods'. In other words, the operative words of the said sub-article are supply of goods and it is only supply of food and drinks and other articles for human consumption that is deemed to be a sale or purchase of goods." Thus, sale or purchase of goods has a different connotation in law which cannot be effected unless there are two or more persons as there cannot be a sale or purchase of goods by one person. It is not disputed that it is one company which owns the sugar mill as well as distillery though they are granted separate licenses and may be different units but whether a transfer of molasses from such sugar mill to its own distillery would constitute a sale, is a matter which requires consideration. Therefore, it can easily be inferred that the imposition of administrative charges on transfer of molasses by the sugar mill to its own distillery cannot be protected under entry 33 of List III nor it is governed by entry 54 of List II and is also not ref....
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....n terms of section 8(5) of the U.P. Sheera Niyantran Adhiniyam, 1964, constituted a duty or impost in the nature of a tax. The apex court after analyzing the Central Excise Act, 1944 and U.P. Sheera Niyantran Adhiniyam, 1964, U.P. Sheera Niyantran Niyamavali, 1974 and other provisions came to the conclusion that the administrative charge under the U.P. Act is a tax and not a fee. Paragraphs 13 and 14 of the report, honourable S.H. Kapadia (now honourable the Chief Justice of India) speaking for the Bench observed as under: "Before dealing with the foregoing issue, it may be noted that in this case, we are concerned with identification of the nature of levy of administrative charges under section 8(4) and section 8(5) of the U.P. Act. As stated above, the U.P. Act has been enacted with the object of regulating supply and equal distribution of molasses to distilleries and other industrial establishments. Under section 8(4) of the U.P. Act, every sugar factory is made liable to pay to the Government administrative charges at the specified rate on sale or supply of molasses to the distillery. Under section 8(5), every sugar factory is entitled to recover from the buyer administrative ....
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....Moreover, the predominant object of the U.P. Act is to maximize the revenue by way of tax while regulating storage and supply of molasses. The beneficiary under the said Act is the distillery. It is the distillery, which provides important source of revenue to the State. In our view, the said levy of administrative charges is in the nature of tax. 14. We can look at the problem from another view point. One of the tests to decide whether a levy is a tax or fee is that while tax is a compulsory exaction, fee relates to the principle of quid pro quo. This test can usefully be applied to the facts of the present case. As stated above, the beneficiary of the U.P. Act is the distillery (buyer). All regulatory measures are for the benefit of the said buyer. The sugar factory is merely a collecting agent of administrative charges for the State Government. The administrative charge is not a component of the consideration received by the sugar factory. This is clear from the provisions of section 8(5) which state that the administrative charges shall be collected in addition to the price of the molasses from the buyer-distillery. The said administrative charges do not form part of the reven....
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....unit owned by the same person is totally constitution (sic) on the principle of law laid down by apex court in the case of State of Orissa v. Titaghur Paper Mills Co. Ltd. [1985] 60 STC 213 (SC); AIR 1985 SC 1293; [1985] Supp SCC 280 wherein the apex court observed that any attempt on the part of State to impose by legislation sales tax or purchase tax in respect of what would not be sale or sale of goods under Sale of Goods Act, is unconstitutional. The relevant paragraph reads as under (page 237 in 60 STC): "47. As any attempt on the part of the State to impose by legislation sales tax or purchase tax in respect of what would not be a sale or a sale of goods or goods under the Sale of Goods Act, 1930 is unconstitutional, any attempt by it to do so in the exercise of its power of making subordinate legislation, either by way of a rule or notification, would be equally unconstitutional; and so would such an act on the part of the authorities under a Sales Tax Act purporting to be done in the exercise of powers conferred by that Act or any rule made or notification issued. . ." Even at the cost of repetition, we may point out, as averred above, that the apex court in Chhata Sugar ....